Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to |
000-30419
ON Semiconductor Corporation
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Delaware
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36-3840979 | |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
5005 E. McDowell Road
Securities Registered Pursuant to Section 12(b) of the Act:
Securities Registered Pursuant to Section 12(g) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained therein, and will not be contained to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes þ No o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2.) Yes þ No o
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant is $103,818,735 as of June 28, 2002, based on the closing sale price of such stock on the Nasdaq National Market on that date. Shares held by executive officers, directors and persons owning directly or indirectly more than 10% of the outstanding common stock have been excluded from the preceding number because such persons may be deemed to be affiliates of the registrant.
The number of shares of the registrant’s common stock outstanding at March 7, 2003 was 176,448,234.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 2003 are incorporated by reference into Part III hereof.
Table of Contents
ON SEMICONDUCTOR CORPORATION
FORM 10-K
TABLE OF CONTENTS
| Page | ||||||
| PART I | ||||||
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Item 1.
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Business | 1 | ||||
| Business Overview | 1 | |||||
| Products and Technology | 4 | |||||
| Customers | 5 | |||||
| Manufacturing Operations | 7 | |||||
| Sales, Marketing and Distribution | 9 | |||||
| Patents, Trademarks, Copyrights and Other Intellectual Property | 10 | |||||
| Seasonality | 10 | |||||
| Backlog | 10 | |||||
| Competition | 11 | |||||
| Research and Development | 12 | |||||
| Government Regulation | 12 | |||||
| Employees | 13 | |||||
| Executive Officers of the Registrant | 13 | |||||
| Geographical Information | 13 | |||||
| Website Access To Information | 13 | |||||
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Item 2.
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Properties | 13 | ||||
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Item 3.
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Legal Proceedings | 14 | ||||
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Item 4.
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Submission of Matters to a Vote of Security Holders | 15 | ||||
| PART II | ||||||
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Item 5.
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Market for Registrant’s Common Equity and Related Stockholder Matters | 15 | ||||
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Item 6.
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Selected Financial Data | 15 | ||||
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||||
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk | 55 | ||||
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Item 8.
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Financial Statements and Supplementary Data | 55 | ||||
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 56 | ||||
| PART III | ||||||
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Item 10.
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Directors and Executive Officers of the Registrant | 56 | ||||
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Item 11.
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Executive Compensation | 58 | ||||
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management | 58 | ||||
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Item 13.
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Certain Relationships and Related Transactions | 59 | ||||
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Item 14.
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Controls and Procedures | 59 | ||||
| PART IV | ||||||
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Item 15.
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Exhibits, Financial Statement Schedules, and Reports on Form 8-K | 59 | ||||
| Signatures | 70 | |||||
| Certifications | 71 | |||||
Table of Contents
PART I
Item 1. Business
Business Overview
We are a global supplier of power and data management semiconductors and standard semiconductor components. We design, manufacture and market an extensive portfolio of semiconductor components that addresses the design needs of sophisticated electronic systems and products. Our power management semiconductor components distribute and monitor the supply of power to the different elements within a wide variety of electronic devices. Our data management semiconductor components provide high-performance clock management and data flow management for precision computing and communications systems. Our standard semiconductor components serve as “building block” components within virtually all electronic devices.
We serve a broad base of end-user markets including wireless communications, consumer electronics, automotive and industrial electronics and computing and networking. Applications for our products in these markets include portable electronics, computers, game stations, servers, automotive and industrial automation control systems, routers, switches, storage-area networks and automated test equipment.
We have four main product lines: power management and standard analog devices, metal oxide semiconductor (MOS) power devices, high frequency clock and data management devices and standard components. Our extensive portfolio of devices enables us to offer advanced integrated circuits and “building block” components that deliver system level functionality and design solutions. Our product portfolio currently comprises approximately 15,000 products and we shipped approximately 21.1 billion units in 2002. We specialize in micro packages, which offer increased performance characteristics while reducing the critical board space inside today’s ever shrinking electronic devices. We believe that our ability to offer a broad range of products provides our customers with single source purchasing on a cost-effective and timely basis.
We have approximately 200 direct customers worldwide, and we also service approximately 300 significant original equipment manufacturers indirectly through our distributor and electronic manufacturing service provider customers. Our direct and indirect customers include: (1) leading original equipment manufacturers in a broad variety of industries, such as Alcatel, DaimlerChrysler, Delphi, Delta Electronics, Intel, Motorola, Nokia, Siemens, Sony and Visteon; (2) electronic manufacturing service providers, such as Flextronics, Sanmina-SCI and Solectron; and (3) global distributors, such as Arrow, Avnet and Future Electronics.
We have design operations in Arizona, Rhode Island, China, Hong Kong, the Czech Republic and France, and we operate manufacturing facilities independently and through joint ventures in Arizona, Rhode Island, China, the Czech Republic, Japan, Malaysia, the Philippines and Slovakia.
Immediately prior to our August 4, 1999 recapitalization, we were a wholly-owned subsidiary of Motorola, Inc. We held and continue to hold, through direct and indirect subsidiaries and a joint venture, substantially all of the assets and operations of the Semiconductor Components Group of Motorola’s Semiconductor Products Sector. As a result of the recapitalization, an affiliate of Texas Pacific Group owned approximately 91% and Motorola owned approximately 9% of our outstanding common stock. In addition, as part of the recapitalization, 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 $209.0 million plus accrued and unpaid dividends. Motorola also received a $91 million junior subordinated note due 2011 issued by Semiconductor Components Industries, LLC, our primary domestic operating subsidiary. 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 our $875.0 million senior bank facilities and the issuance of $400.0 million of 12% senior subordinated notes due August 2009. Because Texas Pacific Group’s affiliate did not acquire substantially all of our common stock, the recapitalization did not impact the basis of our assets and liabilities for financial reporting purposes. At the time of the recapitalization, Motorola agreed to provide us with transition and manufacturing services in order to facilitate our transition to a stand-alone company independent of Motorola.
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On April 3, 2000, we acquired all of the outstanding capital stock of Cherry Semiconductor Corporation for $253.2 million in cash (including acquisition related costs), which we financed with cash on hand and borrowings of $220.0 million under our senior bank facilities. Cherry Semiconductor Corporation, which we have renamed Semiconductor Components Industries of Rhode Island, Inc., designs and manufactures analog and mixed signal integrated circuits for the power management and automotive markets. (See Note 6 “Acquisition” of the notes to our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this report.)
On May 3, 2000, we completed the initial public offering of our common stock, selling 34.5 million shares with an issue price of $16 per share. Net proceeds from the initial public offering (after deducting issuance costs) were approximately $514.8 million. The net proceeds were used to redeem all outstanding preferred stock (including accrued dividends), redeem a portion of the senior subordinated notes and prepay a portion of the loans outstanding under the senior bank facilities. (See Note 12 “Common Stock” of the notes to our audited consolidated financial statements elsewhere in this report.)
On September 7, 2001, we obtained $100.0 million ($99.2 million, net of issuance costs) through an equity investment by an affiliate of Texas Pacific Group, our principal shareholder. In this transaction, we issued 10,000 shares of mandatorily redeemable cumulative convertible preferred stock. This investment was required because we were not in compliance with certain minimum interest expense coverage ratio and leverage ratio covenants under our senior bank facilities. (See Note 9 “Long-Term Debt” and Note 11 “Redeemable Preferred Stock” of the notes to our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this report).
On May 6, 2002 we issued $300.0 million principal amount of second lien senior secured notes due 2008. The second lien senior secured notes were issued at a price of 96.902% of par and will mature on May 15, 2008. The second lien senior secured notes initially accrued interest at a rate of 12% per annum. Commencing February 6, 2003, the second lien senior secured notes began accruing interest at a rate of 13% per annum. This increased rate will remain in effect unless on or prior to August 6, 2003 we have issued common stock or certain convertible preferred stock to financial sponsors generating at least $100.0 million in gross cash proceeds to prepay indebtedness under our senior bank facilities or under any other senior credit facility secured by a first-priority lien and have permanently reduced the related loan commitments equal to the amount prepaid. Interest on the second lien senior secured notes is payable semi annually in cash. The obligations under the second lien senior secured notes are fully and unconditionally guaranteed on a joint and several basis by each of the domestic subsidiaries of ON Semiconductor Corporation (other than Semiconductor Components Industries, LLC, which is a co-issuer). The second lien senior secured notes and the guarantees thereof are secured on a second-priority basis by the assets that secure our senior bank facilities and they rank equal in right of payment with all of our and the guarantors’ existing and future senior indebtedness and senior to our and the guarantors’ existing and future senior subordinated and subordinated indebtedness and effectively junior to all of the liabilities of our subsidiaries that have not guaranteed such second lien senior secured notes. In connection with the offering of second lien senior secured notes, we amended our senior bank facilities to, among other things, permit the issuance of the second lien senior secured notes, make certain of the financial ratio maintenance requirements thereunder less restrictive and impose minimum EBITDA and cash requirements. (See Note 9 “Long-Term Debt” of the notes to our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, in each case included elsewhere in this report.) We used $278.6 million of net cash proceeds from the sale of the second lien senior secured notes to prepay a portion of our senior bank facilities. Because the remaining principal amount of loans outstanding under our senior bank facilities was reduced below $750.0 million as a result of this refinancing, the supplemental interest charges thereon (described in Note 9 “Long-Term Debt” of the notes to our audited consolidated financial statements included elsewhere in this report) were reduced from 3.0% to 1.0%. In connection with this refinancing, we wrote off $6.5 million of debt issuance costs.
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On March 3, 2003, we issued $200.0 million principal amount of first lien senior secured notes due 2010. The first lien senior secured notes were issued at a price of 95.467% of par value, bear interest at a rate of 12% per annum, payable semi-annually in cash, and will mature on March 15, 2010. The obligations under the first lien senior secured notes are fully and unconditionally guaranteed on a joint and several basis by each of the domestic subsidiaries of ON Semiconductor Corporation (other than Semiconductor Components Industries, LLC, which is a co-issuer). The first lien senior secured notes and the guarantees thereof are secured on a first-priority basis by the assets that secure our senior bank facilities and they rank equal in right of payment with all of our and the guarantors’ existing and future senior indebtedness and senior to our and the guarantors’ existing and future senior subordinated and subordinated indebtedness and effectively junior to all of the liabilities of our subsidiaries that have not guaranteed such notes. In connection with the offering of the first lien senior secured notes, we further amended our senior bank facilities to, among other things, permit the issuance of the first lien senior secured notes, remove certain of the financial ratio maintenance requirements thereunder, make the minimum EBITDA requirement thereunder less restrictive and make the maximum capital expenditure covenant more restrictive. We used $180.9 million of net cash proceeds from the sale of the first lien senior secured notes to prepay a portion of our senior bank facilities, including $25.0 million of which proceeds were used to repay borrowings under our revolving credit facility and permanently reduce the commitments thereunder by such amount. In connection with this refinancing, we wrote-off $3.5 million of debt issuance costs.
The amendment to our senior bank facilities described in the paragraph above also resulted in the conversion of $62.5 million of the outstanding loans under our revolving credit facility into a new tranche of term loans that matures on the date our revolving credit facility matures. As of March 7, 2003, $8.6 million of our $62.5 million revolving credit facility was available, reflecting outstanding loans of $37.5 million and outstanding letters of credit of $16.4 million. As of January 9, 2003, we amended our primary foreign exchange hedging agreement to provide for termination if at any time the amount available under our revolving credit facility is less than $2.5 million.
As a response to the downturn in the semiconductor industry, in the fourth quarter of 2000 and in the fourth quarter of 2002 we initiated worldwide profitability enhancement programs to better align our cost structure with our revenues. The principal elements of these programs are (1) implementing a manufacturing rationalization plan that involved, among other things, plant closures and the efficient reallocation of capacity among other facilities, the relocation or outsourcing of related operations to take advantage of lower cost labor markets and the rationalization of our product portfolio; (2) reducing non-manufacturing personnel and implementing other cost controls, in connection with which we have relocated certain of our order entry, finance, quality assurance and information technology functions to lower cost locations and simplified our overall corporate structure and our regional infrastructure; and (3) improving our liquidity by reducing capital expenditures, managing our working capital actively and reducing our cost structure through various measures, including reducing some employee compensation and spending on information technology and outside consultants. Certain elements of these programs that we commenced in June 2001 were completed in the fourth quarter of 2002, and resulted in $365.0 million of annualized cost savings, based on a comparison of our cost structure during the first quarter of 2001 to our cost structure during the third quarter of 2002. In addition, as a result of additional cost cutting commenced in the fourth quarter of 2002, which is scheduled to be completed by the end of 2003, we expect to achieve an estimated $80.0 million of cost savings in 2003 and an estimated $125.0 million of cost savings in each year thereafter, in both cases as compared to our cost structure during the third quarter of 2002. As a result of these efforts, we incurred restructuring and other charges of $27.7 million in 2002 and $150.4 million in 2001. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.
Effective January 1, 2001, we changed our accounting method for recognizing revenue on sales to distributors. Recognition of revenue and related gross profit on sales to distributors is now deferred until the distributor resells the product. We believe that this change better aligns reported results with, focuses us on, and allows investors to better understand end user demand for the products that we sell through distributors. This revenue recognition policy is commonly used in the semiconductor industry. (See Note 4 “Accounting Changes” of the notes to our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this report.)
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Products and Technology
The following table provides information regarding our primary product lines:
| Power Management and | High Frequency Clock and | ||||||||
| Standard Analog | MOS Power Devices | Data Management | Standard Components | ||||||
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Approximate total revenues*
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2002
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$363 million | $139 million | $72 million | $511 million | |||||
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2001
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$365 million | $147 million | $118 million | $585 million | |||||
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2000
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$497 million | $212 million | $296 million | $954 million | |||||
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Primary product function
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Power control and regulation in portable and high-power applications. | Power conditioning and switching in a broad range of applications. | Interfacing and synchronizing functions, such as interconnecting and routing (moving) electronic signals within electronic systems. | Power control, interface, and data protection in a broad range of products. | |||||
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Sample applications
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Intelligent power management and battery protection in portable applications, desktop computers and automotive electronics. | Power management for computers, automobiles, servers, and battery protection in portable applications. | Fast routing of signals used in communication and networking switches, high-end servers, high- performance workstations, storage networks and precision measurement test systems. | Power management and interface elements for computer, consumer and portable equipment and automotive control systems. | |||||
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Types of product
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Amplifiers, comparators, voltage regulators and references, AC-DC/ DC-DC converters. | Ignition insulated gate bipolar transistors (IGBT’s), power MOS field effect transistors (MOSFET’s). | Clock distribution, drivers/ receivers, multiplexers, phase detectors, prescalers. | MicroIntegrationTM , MiniGateTM logic, small signal transistors, zeners, rectifiers, standard logic integrated circuits, bipolar power transistors and thyristors. | |||||
| Representative original equipment manufacturers customers and end users |
Alcatel Delphi Delta Intel Motorola Nokia Philips Siemens Sony Visteon |
Delphi Ericsson Hewlett-Packard IBM Intel Microsoft Motorola Seagate Sony Visteon |
Alcatel Cisco Systems Ericsson Fujitsu Hewlett-Packard Lucent Technologies Motorola Nokia Nortel Networks Siemens |
DaimlerChrysler Delphi Delta Intel Motorola Nokia Philips Siemens Sony Visteon |
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| * | 2000 total revenues are pro forma to reflect the change in the accounting method for revenue recognition on shipments to distributors, which was effective January 1, 2001. (See Note 4 “Accounting Changes” of the notes to our audited consolidated financial statements for a discussion of the change in accounting method and see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” for a comparison of revenues on an actual and pro forma basis, each of which is included elsewhere in this report). |
Power Management and Standard Analog. One of the fastest growing segments within the analog market is power management. We are one of the largest suppliers of power management analog products. We have a complete power management portfolio in the six major product categories, which include DC/ DC converters, AC/ DC converters, linear regulators, pulse width modulation (PWM)/ power factor modulation (PFM) controllers, power factor controller (PFC) pre-regulators and battery charging/ management integrated circuits. Our products are engineered and manufactured to meet the power management needs of high-
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MOS Power Devices. We are a global supplier of power devices and ignition insulated gate bipolar transistors (IGBT’s). We have a complete power management portfolio of devices ranging from 12V up to 250V. Our products are engineered and manufactured to meet the power management needs of high-performance applications in the wireless, automotive and computing markets. We are advancing our portfolio to include multi function IC’s and multi chip modules for the automotive and computing markets.
High Frequency Clock and Data Management. Our high frequency clock and data management products consist primarily of high margin emitter-coupled logic products. We are the market leader in this area with a market share in excess of 75%. We design and deliver application-specific integrated circuits using advanced technologies that address the high-performance needs of networking infrastructure, advanced test equipment and high end computing. Our extensive clock and data management portfolio, led by our GigaComm family, is designed into state-of-the-art systems such as communication and networking switches, high-end servers, high-performance work stations, storage networks and precision measurement test systems. We enable application specific designs for today’s advanced networks, including Asynchronous Transfer Mode (ATM), Enterprise Networks, Storage Area Networks (SAN) and Internet Protocol (IP) applications.
Standard Components. We are a global supplier of standard semiconductors. We have special competencies in manufacturing surface mount packages. Our broad product line includes MicroIntegrationTM, MiniGateTM logic, small signal transistors and diodes, zeners, rectifiers, standard logic integrated circuits, bipolar power transistors and thyristors. Standard components are essential in substantially all modern pieces of electronic equipment, including computers, printers, wireless communication devices, DVD and MP3 players, video game consoles, and automotive navigation systems.
Customers
We have been doing business with 19 of our 20 largest customers for more than five years, and have entered into purchase agreements with 15 of such customers. These agreements normally are renewable every twelve months and contain certain terms and conditions with respect to payment, delivery, warranty and supply. These agreements do not require minimum purchase commitments. Our customers include original equipment manufacturers, electronic manufacturing service providers and distributors. Our products are ultimately purchased by end users for use in a variety of markets, including networking and computing, wireless communications, consumer electronics, automotive electronics and industrial electronics. Sales to Arrow, Avnet and Motorola accounted for approximately 10%, 10% and 8%, respectively, of our total revenue during 2002, compared to 7%, 8% and 8%, respectively, during 2001 and 12%, 11% and 10%, respectively, for 2000.
We generally warrant that products sold to our customers will, at the time of shipment, be free from defects in workmanship and materials and conform to our approved specifications. Subject to certain exceptions, our standard warranty extends for a period that is the greater of (1) three years from the date of shipment or (2) the period of time specified in the customer’s standard warranty (provided that the customer’s standard warranty is stated in writing and extended to purchasers at no additional charge). Warranty expense to date has been minimal. Generally, our customers may cancel orders 30 days prior to shipment without incurring a significant penalty. For additional information regarding agreements with our customers, see “Backlog” below.
The following table sets forth our principal end-user markets, the estimated percentage (based in part on information provided by our distributors and electronic manufacturing service providers) of our total revenues
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End Markets for Our Products
| Computing and | Wireless | |||||||||
| Industrial | Networking | Automotive Electronics | Consumer Electronics | Communications | ||||||
| Approximate percentage of our 2002 total revenues | 29% | 22% | 21% | 17% | 11% | |||||
| Sample applications |
• Industrial automation and control
systems • Lamp ballasts (power systems for fluorescent lights) • Large household appliances • Electric motor controllers • Power supplies for manufacturing equipment • Surge protectors • Thermostats for industrial and consumer applications |
• Routers and switches • Fiber optic networking products • Automatic test equipment • Cellular base stations and infrastructure • Computer monitors • Disk drives • Ethernet cards and other network controllers • High speed modems (cable, xDSL and ISDN) • PBX telephone systems • PC Motherborads • Network controllers |
• 4 wheel drive controllers • Airbags • Antilock braking systems • Automatic door locks and windows • Automatic transmissions • Automotive entertainment systems • Engine management and ignition systems • Fuel injection systems • GPS and other navigation systems |
• DVD players Cable decoders, set-top
boxes and satellite receivers • Home security systems • Photocopiers • Scanners • Small household appliances • Smartcards • TVs, VCRs and other audio-visual equipment |
• Cellular phones (analog and
digital) • Pagers • Wireless modems and wireless local area networks |
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| Representative original equipment manufacturer customers and end users |
Astec Delta Electronics Eaton Emerson Electric Honeywell HR Electronics Magnatek Marconi |
ACER Alcatel Cisco Compaq Ericsson Fujitsu Intel Italtel Lucent Motorola NEC Nortel Palm Seagate Siemens Tektronix Teradyne |
BMW Bosch DaimlerChrysler Delphi TRW Valeo Visteon |
Agilent Hewlett-Packard Philips Sony Toshiba Timex |
Alcatel Ericsson Motorola NEC Nokia Philips Samsung |
Original Equipment Manufacturers. Direct sales to original equipment manufacturers accounted for approximately 48% of our total revenues in 2002, approximately 47% in 2001 and approximately 44% in 2000. These customers include a variety of companies in the electronics industry such as Alcatel, Hewlett-Packard,
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Distributors. Sales to distributors accounted for approximately 41% of our total revenues in 2002, approximately 43% in 2001 and approximately 44% in 2000. Our distributors, which include Arrow, Avnet, All American, Eliteron and Future, resell to mid-sized and smaller original equipment manufacturers and to electronic manufacturing service providers and other companies. Sales to distributors are typically made pursuant to agreements that provide return rights with respect to discontinued or slow-moving products. Under certain agreements, distributors are allowed to return any product that we have removed from our price book or that is more than four years older than the manufacturing code date. In addition, agreements with our distributors typically contain standard stock rotation provisions permitting limited levels of product returns. However, since we defer recognition of revenue and gross profit on sales to distributors until the distributor resells the product, sales returns have minimal impact on our profits.
Electronic Manufacturing Service Providers. Direct sales to electronic manufacturing service providers accounted for approximately 11% of our total revenues in 2002, approximately 10% in 2001 and approximately 12% in 2000. Our largest electronic manufacturing service customers are Flextronics, Sanmina-SCI and Solectron. These customers are manufacturers who typically provide contract manufacturing services for original equipment manufacturers. Originally, these companies were involved primarily in the assembly of printed circuit boards, but they now typically provide design, supply management and manufacturing solutions as well. Many original equipment manufacturers now outsource a large part of their manufacturing to electronic manufacturing service providers in order to focus on their core competencies. We are pursuing a number of strategies to penetrate this increasingly important marketplace.
Manufacturing Operations
We operate our manufacturing facilities either directly or through a joint venture. Four of these are front-end wafer facilities located in Japan, Slovakia and the United States; two are back-end assembly and test facilities located in China and the Philippines; and two are integrated front-end and back-end facilities located in Malaysia and the Czech Republic. In addition to these manufacturing and assembly operations, our Terosil facility in Roznov, Czech Republic, manufactures raw wafers that are used by a number of our facilities. During 2001, we made the decision to shutdown our integrated facility in Guadalajara, Mexico and transfer the front-end and back-end manufacturing to other owned and contracted locations. Accordingly, the Guadalajara, Mexico facility ceased operations in the second quarter of 2002. Also during 2001, the back-end only manufacturing operation that was part of the integrated manufacturing operation at Site-2 in Seremban, Malaysia was shutdown and the related production transferred to our joint venture in Leshan, China. Front-end manufacturing remains unchanged at Site-2 and the existing back-end manufacturing remains unchanged at Site-1, also in Seremban, Malaysia. We also use third-party contract manufacturers. Our agreements with these contract manufacturers typically require us to forecast product needs and commit to purchase services consistent with these forecasts. In some cases, longer-term commitments are required in the early stages of the relationship.
The table below sets forth information with respect to the manufacturing facilities we operate either directly or through our joint venture, as well as the products produced at these facilities. The sizes of the locations represent the approximate gross square feet of each site’s building and include, among other things, manufacturing, laboratory, warehousing, office, utility, support and unused areas.
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| Size | |||||
| Location | Products | (sq. ft.) | |||
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Integrated Facilities:
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Roznov, Czech Republic (Tesla)
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Power Management and Standard Analog | 430,000 | |||
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Front-end Facilities:
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Phoenix, Arizona
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High Frequency Clock and Data Management — Standard Components | 1,600,000 | |||
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Aizu, Japan
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MOS Power Devices — Power Management and Standard Analog — Standard Components | 291,000 | |||
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Piestany, Slovakia
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Standard Components — MOS Power Devices | 915,000 | |||
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East Greenwich, Rhode Island
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Power Management and Standard Analog | 209,000 | |||
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Seremban, Malaysia (Site-2)
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Standard Components | 102,000 | |||
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Back-end Facilities:
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Leshan, China (Leshan joint venture)
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Standard Components | 264,000 | |||
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Seremban, Malaysia (Site-1)
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MOS Power Devices — Power Management and Standard Analog — Standard Components | 281,000 | |||
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Carmona, Philippines
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High Frequency Clock and Data Management — Power Management and Standard Analog — Standard Components | 192,000 | |||
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Other Facilities:
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Roznov, Czech Republic (Terosil)
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Raw wafers | 200,000 | |||
We entered into an agreement with Motorola to continue to provide manufacturing services to each other for limited periods of time following our recapitalization. We negotiated fixed prices with Motorola for the services covered by these agreements to approximate each party’s cost of providing the services. For 2002, 2001 and 2000, Motorola purchased $1.4 million, $8.2 million and $61.7 million, respectively, of manufacturing services from us with no minimum purchase commitments going forward at this time. These purchases are classified as revenues in our financial statements. We purchased $13.8 million, $86.1 million and $162.3 million of manufacturing services from Motorola in 2002, 2001 and 2000, respectively, fulfilling our minimum commitments to purchase manufacturing services from Motorola during such periods. Pursuant to a new agreement with Motorola, we have committed to purchase approximately $1.0 million of manufacturing services from Motorola in 2003.
In the Czech Republic, we operate two majority-owned subsidiaries, Tesla and Terosil. These subsidiaries are publicly traded Czech companies in which we directly own 81.6% and 75.6% equity interests as of December 31, 2002, respectively. Tesla operates an integrated front-end manufacturing and back-end assembly facility while Terosil manufactures raw wafers that are used by a number of our facilities. We purchased 95%, 88% and 77% of the total output of Terosil in 2002, 2001 and 2000, respectively, and purchased the entire output of Tesla for all three years. In 2001, we entered into new seven-year agreements with Terosil and Tesla where we provide both subsidiaries with forecasted needs on a quarterly basis with minimum commitments limited to our forecasted demand within thirty days from the start of production.
In Leshan, China, we operate a joint venture, Leshan-Phoenix Semiconductor Company Ltd. (“Leshan”), which operates a back-end manufacturing facility. We own a majority of the outstanding equity interests of the Leshan joint venture. The other shareholder is a Chinese state owned enterprise named Leshan Radio Company Ltd. Due to certain rights held by this minority shareholder, we do not exercise control over this entity normally commensurate with majority ownership and therefore, account for it using the equity method. Pursuant to the joint venture agreement, requests for production capacity are made to the board of
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We provide forecasted needs to Leshan on a periodic basis, an approximate six-month cycle, which are used to establish pricing over the forecasted period, and, as described above, we are responsible for underutilized capacity cost due to variations from our forecasted needs. As part of our manufacturing agreements with Leshan, we supply them with die used in the production process. Sales of die to Leshan are not recorded as revenue due to the related party nature of the transactions. As of December 31, 2002, we had accounts receivable and accounts payable of $9.6 million and $10.2 million, respectively, related to manufacturing activity with Leshan.
The Leshan joint venture is one of our lowest cost providers and we anticipate any future expansion plans will include this facility, including the previously announced start of construction in August 2002 of a 6-inch wafer fabrication facility at Leshan. In June 2002, we obtained approval from the Chinese government for the Leshan joint venture to invest up to $231 million for semiconductor operations, which is in addition to the $278 million originally approved. At December 31, 2002 our total investment in and advances to this joint venture was $99.3 million, including loans of $63.3 million.
Our manufacturing processes use many raw materials, including silicon wafers, copper lead frames, mold compound, ceramic packages and various chemicals and gases. We have no material agreements with any of our suppliers that impose minimum or continuing supply obligations and we obtain our raw materials and supplies from a large number of sources on a just-in-time basis. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. Although we believe that supplies of the raw materials we use are currently and will continue to be available, shortages could occur in various essential materials due to interruption of supply or increased demand in the industry.
We also use third-party contractors for some of our manufacturing activities, primarily for wafer fabrication and the assembly and testing of final goods. These contract manufacturers, including ASAT, Amkor, PSI, AIT, ASE, Hynix, Liteon, Chartered and Phenitec, accounted for approximately 30%, 31% and 40% of our cost of sales in 2002, 2001 and 2000, respectively. These reductions in the use of third-party contractors were part of our efforts to improve internal capacity utilization under our manufacturing rationalization plan.
Sales, Marketing and Distribution
As of December 31, 2002, our global sales and marketing organization consists of approximately 410 professionals operating out of approximately 50 offices and serving customers in 39 countries. We support our customers through logistics organizations and just-in-time warehouses. Global and regional distribution channels further support our customers’ needs for quick response and service. We offer efficient, cost-effective internet-based applications support from our laboratories in the Czech Republic, China and the United States. Through on-line connectivity, applications developed in one region of the world are now instantaneously available to all other regions. Pursuant to our restructuring programs, we have downsized our sales force by approximately 230 employees, closed approximately 20 of our sales offices and, in some regions, converted sales personnel to sales representatives. In addition, we have centralized and relocated our order entry functions to low cost locations. As a result of additional cost cutting measures announced in the fourth quarter of 2002, we expect further downsizing. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5 “Restructuring and Other Charges” of the notes to our audited consolidated financial statements, in each case as included elsewhere in this report).
Motorola agreed to provide us with worldwide shipping and freight services for a period of up to three years following our 1999 recapitalization. This resulted in better prices than we could obtain from third parties.
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Patents, Trademarks, Copyrights and Other Intellectual Property Rights
We market our products under our registered trademark ON Semiconductor® and our ON logo. We own rights to a number of patents, trademarks, copyrights, trade secrets, and other intellectual property directly related to and important to our business. In connection with our recapitalization, Motorola assigned, licensed, or sublicensed, as the case may be, to us certain intellectual property to support and continue the operation of our business. As of February 10, 2003, we had approximately 450 U.S. and foreign patents and approximately 160 patent applications pending worldwide. Our patents have expiration dates ranging from 2003 to 2021. None of our patents that expire in the near future materially affect our business. Additionally, we hold more than 215 U.S. and foreign trademarks and applications. Our policy is to protect our products and processes by asserting our intellectual property rights where appropriate and prudent and by obtaining patents, copyrights and other intellectual property rights used in connection with our business when practicable and appropriate.
Under an intellectual property agreement that we entered into with Motorola as part of our recapitalization, Motorola assigned approximately 295 U.S. patents and patent applications, approximately 292 foreign patents and patent applications, rights to over 50 trademarks (not including the Motorola name) previously used in connection with our products, rights in know-how relating to at least 39 semiconductor fabrication processes and rights in specified copyrightable materials. In addition, Motorola licensed on a non-exclusive, royalty-free basis other patent, trademark, copyright and know-how rights used in connection with our then existing products and products contemplated in our long-range plans. We have perpetual, royalty-free, worldwide rights under Motorola’s patent portfolio and other intellectual property, existing as of the date of our recapitalization or created in the five years thereafter (the five-year period existing only with respect to patents), as necessary to manufacture, market, and sell our then existing and long range plan product lines. Additionally, Motorola provided us with a limited indemnity umbrella to protect us from certain infringement claims by third parties who had granted Motorola licenses as of the date of our recapitalization, which will assist us in developing our own patent position and licensing program. We believe that we have the right to use all Motorola-owned technology used in connection with the products we currently offer.
Seasonality
Historically, our revenues have been affected by the seasonal trends of the semiconductor and related industries. As a result of these trends, we typically experienced sales increases in the first two quarters of the year and relatively flat sales levels in the third and fourth quarters. However, over the past three years, various events have disrupted this pattern. In the fourth quarter of 2000, and throughout 2001, revenues declined due to slowing demand in the semiconductor market and the general economic decline. In 2002, revenues were relatively flat and at this time, it is unclear when the semiconductor industry is going to return to its seasonal trends.
Backlog
Our trade sales are made primarily pursuant to standard purchase orders that are booked as far as 26 weeks in advance of delivery. Generally, prices and quantities are fixed at the time of booking. Backlog as of a given date consists of existing orders and our estimates of orders based on customer forecasts, in each case scheduled to be shipped over the 13-week period following such date. Backlog is influenced by several factors including market demand, pricing and customer order patterns in reaction to product lead times. During 2002, our backlog at the beginning of each quarter represented between 74% and 87% of actual revenues during such quarter. Our backlog has increased from $199 million as of December 31, 2001 to $211 million as of December 31, 2002.
In the semiconductor industry, backlog quantities and shipment schedules under outstanding purchase orders are frequently revised to reflect changes in customer needs. Agreements calling for the sale of specific quantities are either contractually subject to quantity revisions or, as a matter of industry practice, are often not enforced. Therefore, a significant portion of our order backlog may be cancelable. For these reasons, the amount of backlog as of any particular date may not be an accurate indicator of future results.
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We sell products to key customers pursuant to contracts that are typically annual fixed-price agreements subject, in some cases, to quarterly negotiations. These contracts allow us to schedule production capacity in advance and allow the customers to manage their inventory levels consistent with just-in-time principles while shortening the cycle times required to produce ordered product. However, these contracts are typically amended to reflect changes in customer demands and periodic price renegotiations.
Competition
The semiconductor industry, particularly the market for general-purpose semiconductor products like ours, is highly competitive. Although only a few companies compete with us in all of our product lines, we face significant competition within each of our product lines from major international semiconductor companies, as well as smaller companies focused on specific market niches. Because our components are often building block semiconductors that in some cases can be integrated into more complex integrated circuits, we also face competition from manufacturers of integrated circuits, application-specific integrated circuits and fully customized integrated circuits, as well as customers who develop their own integrated circuit products. (See “Risk Factors — Competition in our industry could prevent us from maintaining our revenues and from raising prices to offset increases in costs” elsewhere in this report.)
We compete with respect to power management and standard analog products, standard components, MOS power devices and high frequency clock and data management products in the following manner:
| Power Management and Standard Analog product line |
The principal methods of competition in this product line are new product innovation, technical performance, quality, service and price. Our competitive strengths in this product line are our strong technology and design resources, our industry recognition in applications, such as automotive, and our market share in this segment. Our significant competitors in this market include Texas Instruments, ST Microelectronics, Linear Technology, National Semiconductor, and Fairchild Semiconductor. Several of these competitors are larger in scale and size, have substantially greater financial and other resources than us with which to pursue development, engineering, manufacturing, marketing and distribution of their products and are better able to withstand adverse economic or market conditions. Our weak presence in the Japanese market presents a competitive challenge to us as it reduces our revenue stream and market share.
| Standard Components product line |
The principal methods of competition in this product line are price, technical performance, quality and service. Our competitive strengths in this product line are the breadth of our portfolio, our low cost manufacturing capability, our global market presence and our ability to service broad application market segments. The strong acceptance of ON’s MicroIntegrationTM capability (with ability to integrate both active and passive components in multi-chip or monolithic approaches) into various applications in our existing markets is an additional competitive strength in this product line. Our significant competitors in this market include Fairchild Semiconductor, Philips, Rohm, ST Microelectronics, Texas Instruments, and Toshiba. Many of these competitors are larger in scale and size, have substantially greater financial and other resources than us with which to pursue development, engineering, manufacturing, marketing and distribution of their products and are better able to withstand adverse economic or market conditions. Our weak presence in the Japanese market presents a competitive challenge to us as it reduces our revenue stream and market share. Due to the high commodity nature of the standard component market, these products have a higher susceptibility to downward price pressure in market downturns.
| MOS Power Devices product line |
The principal methods of competition in this product line are new product innovation, technical performance, price, quality and service. Our competitive strengths in this product line are our strong presence in areas such as IGBT’s and low voltage planar technology, our broad product offering and our low cost manufacturing capability. Our significant competitors in this market include Fairchild, International Rectifier, and Vishay. Some of these competitors are larger in scale and size, have substantially greater financial and other resources than us with which to pursue development, engineering, manufacturing, marketing and
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| High Frequency Clock and Data Management product line |
The principal methods of competition in this product line are new product innovation, technical performance, quality, service and price. Our competitive strengths in this product line are our leading market share as the number one supplier and the utilization of our existing products in advance high speed technology, such as Silicon Germanium. Our significant competitors in this market include Micrel, Semtech, and Motorola. Although we have a dominant share in this market, the total potential revenue has been reduced commensurate with the downturn in the networking, telecommunications and automated test equipment market segments, which currently drive the applications for this product.
Research and Development
Company-sponsored research and development costs in 2002, 2001 and 2000 were $67.9 million (6.3% of total revenues), $80.9 million (6.7% of total revenues) and $69.2 million (3.3% of total revenues), respectively. The increase between 2000 and 2001 resulted primarily from increased spending on new product development. The primary emphasis of our new product development efforts is on power management and standard analog and high frequency clock and data management solutions, the highest margin product lines within our portfolio, with 80% of our overall research and development investments currently targeted in these areas. Since our IPO in May 2000, we have introduced over 850 new products, and the portion of our revenue attributable to new products has increased over the last three years. Our target for research and development expenditures is 6% of revenues in 2003.
Government Regulation
Our manufacturing operations are subject to environmental and worker health and safety laws and regulations. These laws and regulations include those relating to emissions and discharges into the air and water; the management and disposal of hazardous substances; the release of hazardous substances into the environment at or from our facilities and at other sites; and the investigation and remediation of resulting contamination.
Our manufacturing facility in Phoenix, Arizona is located on property that is a “Superfund” site, a property listed on the National Priorities List and subject to clean-up activities under the Comprehensive Environmental Response, Compensation, and Liability Act. Motorola is actively involved in the cleanup of on-site solvent contaminated soil and groundwater and off-site contaminated groundwater pursuant to consent decrees with the State of Arizona. As part of our recapitalization, Motorola has retained responsibility for this contamination, and has agreed to indemnify us with respect to remediation costs and other costs or liabilities related to this matter.
Manufacturing facilities in Slovakia and those of our majority-owned subsidiaries in the Czech Republic have ongoing remediation projects to respond to releases of hazardous substances that occurred during the years that these facilities were operated by government-owned entities. In each case, these remediation projects consist primarily of monitoring groundwater wells located on-site and off-site with additional action plans developed to respond in the event activity levels are exceeded at each of the respective locations. The governments of the Czech Republic and Slovakia have agreed to indemnify us and the respective subsidiaries, subject to specified limitations, for remediation costs associated with this historical contamination. Based upon the information available, we do not believe that total future remediation costs to us will be material.
Our manufacturing facility in East Greenwich, Rhode Island has adjoining property that has localized soil contamination. In connection with the purchase of the facility, we entered into a Settlement Agreement and Covenant Not To Sue with the State of Rhode Island. This agreement requires that remedial actions be undertaken and a quarterly groundwater monitoring program be initiated by the former owners of the property. Based on the information available, we do not believe that any costs to us in connection with this matter will be material.
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We believe that our operations are in material compliance with applicable environmental and health and safety laws and regulations. We do not expect the cost of compliance with existing environmental and health and safety laws and regulations, and liability for currently known environmental conditions, to have a material adverse effect on our business or prospects. It is possible, however, that future developments, including changes in laws and regulations, government policies, customer specification, personnel and physical property conditions, including currently undiscovered contamination, could lead to material costs.
Employees
As of December 31, 2002, we employed approximately 9,570 worldwide, consisting of approximately 7,820 people employed directly and approximately 1,750 people employed through our joint venture in Leshan, China, most of whom are engaged in manufacturing services. We do not currently have any collective bargaining arrangements with our employees, except for those arrangements, such as works councils, that are obligatory for all employees or all employers in a particular industry under applicable foreign law. Of the total number of our employees (including our joint venture in Leshan, China) as of December 31, 2002, approximately 8,230 were engaged in manufacturing and information services, approximately 410 were engaged in our sales and marketing organization and in customer service, approximately 460 were engaged in administration and approximately 470 were engaged in research and development.
Executive Officers of the Registrant
See Part III, Item 10 of this report for information concerning executive officers.
Geographical Information
For certain geographic operating information, see Note 20, “Segment Information” of the notes to our audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, in each case, as included elsewhere in this report. For information regarding the risks associated with our foreign operations, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Trends, Risks and Uncertainties — “Our international operations subject us to risks inherent in doing business on a international level that could adversely impact our results of operations” elsewhere in this report.
Website Access to Information
We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports available, free of charge, on the “Investor Relations” section of our Internet website at http://www.onsemi.com as soon as reasonably practicable after we electronically file this material with, or furnish this material to, the Securities and Exchange Commission.
| Item 2. | Properties |
In the United States, our corporate headquarters as well as manufacturing, research and development and warehouse operations are located in approximately 1.8 million square feet of space in properties that we own in Phoenix, Arizona and East Greenwich, Rhode Island. We also lease properties around the world for use for sales offices, research and development labs, warehouses, logistic centers and trading offices. The size and/or location of these properties change from time to time based on business requirements. We operate distribution centers, which are leased or contracted through a third party, in locations including Canada, France, Japan, Singapore and Taiwan, as well as in Alabama, Indiana, Arizona, and Pennsylvania in the United States. We own our manufacturing facilities in the United States, Japan, Malaysia, Mexico, the Philippines, Slovakia and through our majority owned subsidiaries in the Czech Republic. These facilities are primarily manufacturing operations, but also include office, utility, laboratory, facilities, warehouse and unused space. Our joint venture in Leshan, China also owns manufacturing, warehouse, laboratory, office and unused space. The Guadalajara, Mexico site is currently on the market for sale and, as discussed above in this report, we have ceased manufacturing operations at this site in the second quarter of 2002.
As part of our Recapitalization, Motorola conveyed to us the surface rights to a portion of the land located at our Phoenix facility, excluding the subsurface rights, and conveyed buildings located at the Phoenix
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We believe that our facilities around the world, whether owned or leased, are well maintained. Our manufacturing facilities contain sufficient productive capacity to meet our needs for the foreseeable future.
We have pledged substantially all of our tangible and intangible assets and similar assets of each of our existing and subsequently acquired or organized domestic subsidiaries to secure our senior bank facilities, first lien secured notes, and second lien secured notes.
| Item 3. | Legal Proceedings |
We currently are involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters, including the matters described in the next paragraphs, will have a material adverse effect on our financial condition, results of operations or cash flows.
During the period July 5, 2001 through July 27, 2001, we were named as a defendant in three shareholder class action lawsuits that were filed in federal court in New York City against us and certain of our current and former officers, current directors and the underwriters for our initial public offering. The lawsuits allege violations of the federal securities laws and have been docketed in the U.S. District Court for the Southern District of New York as: Abrams v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6114; Breuer v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6287; and Cohen v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6942. On April 19, 2002, the plaintiffs filed a single consolidated amended complaint that supersedes the individual complaints originally filed. The amended complaint alleges, among other things, that the underwriters of our initial public offering improperly required their customers to pay the underwriters excessive commissions and to agree to buy additional shares of our common stock in the aftermarket as conditions of receiving shares in our initial public offering. The amended complaint further alleges that these supposed practices of the underwriters should have been disclosed in our initial public offering prospectus and registration statement. The amended complaint alleges violations of both the registration and antifraud provisions of the federal securities laws and seeks unspecified damages. We understand that various other plaintiffs have filed substantially similar class action cases against approximately 300 other publicly traded companies and their public offering underwriters in New York City, which along with the cases against us have all been transferred to a single federal district judge for purposes of coordinated case management. We believe that the claims against us are without merit and have defended, and intend to continue to defend, the litigation vigorously. The litigation process is inherently uncertain, however, and we cannot guarantee that the outcome of these claims will be favorable for us.
Accordingly, on July 15, 2002, together with the other issuer defendants, we filed a collective motion to dismiss the consolidated, amended complaints against the issuers on various legal grounds common to all or most of the issuer defendants. The underwriters also filed separate motions to dismiss the claims against them. In addition, the parties have stipulated to the voluntary dismissal without prejudice of our individual current and former officers and directors who were named as defendants in our litigation, and they are no longer parties to the lawsuit. On February 19, 2003, the Court issued its ruling on the motions to dismiss filed by the underwriter and issuer defendants. In that ruling the Court granted in part and denied in part those motions. As to the claims brought against us under the antifraud provisions of the securities laws, the Court dismissed all of these claims with prejudice, and refused to allow plaintiffs the opportunity to re-plead these claims. As to the claims brought under the registration provisions of the securities laws, which do not require that intent to defraud be pleaded, the Court denied the motion to dismiss these claims as to us and as to substantially all of the other issuer defendants as well. The Court also denied the underwriter defendants’ motion to dismiss in all respects. While we can make no promises or guarantees as to the outcome of these proceedings, we believe
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See “Government Regulations” in Item 1 above of this report for information on environmental matters.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None
PART II
| Item 5. | Market for Registrant’s Common Equity and Related Stockholder Matters |
Our common stock is currently traded on the Nasdaq SmallCap Market under the symbol ONNN. Subsequent to our initial public offering, our common stock began trading on April 28, 2000 on the Nasdaq National Market. From April 28, 2000 to October 24, 2002 our common stock traded on the Nasdaq National Market. Effective October 25, 2002, our common stock was transferred to, and began trading on, the Nasdaq SmallCap Market. The following table sets forth the quarterly high and low sale prices for our common stock as reported by the Nasdaq SmallCap Market or Nasdaq National Market, as applicable, for 2002 and 2001:
Range of Sales Price
| High | Low | |||||||
|
2002
|
||||||||
|
First Quarter
|
$ | 4.2000 | $ | 2.2500 | ||||
|
Second Quarter
|
$ | 5.9900 | $ | 1.6000 | ||||
|
Third Quarter
|
$ | 2.8100 | $ | 1.1600 | ||||
|
Fourth Quarter
|
$ | 2.6200 | $ | 0.9100 | ||||
|
2001
|
||||||||
|
First Quarter
|
$ | 8.7500 | $ | 4.5938 | ||||
|
Second Quarter
|
$ | 8.0000 | $ | 3.9375 | ||||
|
Third Quarter
|
$ | 5.0000 | $ | 1.6500 | ||||
|
Fourth Quarter
|
$ | 2.6500 | $ | 1.1200 | ||||
As of March 7, 2003, there were approximately 235 record holders of our common stock and 176,448,234 shares of common stock outstanding.
We have neither declared nor paid any cash dividends on our common stock since our initial public offering, and we do not presently intend to do so. Our future dividend policy with respect to our common stock will depend upon our earnings, capital requirements, financial condition, debt restrictions and other factors deemed relevant by our Board of Directors. Each of our senior bank facilities, senior secured first lien notes, senior secured second lien notes, senior subordinated notes and Series A Cumulative Convertible Redeemable Preferred Stock restricts our ability to pay cash dividends to our common stockholders.
Equity Compensation Plan Table
See Part III, Item 12 of this report for information regarding our current equity compensation plans as of December 31, 2002.
| Item 6. | Selected Financial Data |
The following table sets forth our selected financial data for the periods indicated. We derived the statement of operations data set forth below for the years ended December 31, 2002, 2001 and 2000 and the period from August 4, 1999 through December 31, 1999, and the balance sheet data for December 31, 2002, 2001, 2000 and 1999, from our audited post-Recapitalization consolidated financial statements. We derived the statement of operations data set forth below for the year ended December 31, 1998 and the period from January 1, 1999 through August 3, 1999, and balance sheet data as of December 31, 1998 from our audited pre-Recapitalization combined financial statements. You should read this information in conjunction with
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| Post-Recapitalization | Pre-Recapitalization | |||||||||||||||||||||||
| August 4, | January 1, | |||||||||||||||||||||||
| 1999 | 1999 | |||||||||||||||||||||||
| Year Ended December 31, | through | through | Year Ended | |||||||||||||||||||||
| December 31, | August 3, | December 31, | ||||||||||||||||||||||
| 2002 | 2001 | 2000 | 1999 | 1999 | 1998 | |||||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||||||
|
Statement of Operations data:
|
||||||||||||||||||||||||
|
Total revenues
|
$ | 1,084.5 | $ | 1,214.6 | $ | 2,073.9 | $ | 798.7 | $ | 986.4 | $ | 1,657.6 | ||||||||||||
|
Write-off of acquired in-process research and
development(1)
|
— | — | 26.9 | — | — | — | ||||||||||||||||||
|
Restructuring and other (2)
|
27.7 | 150.4 | 4.8 | 3.7 | — | 189.8 | ||||||||||||||||||
|
Extraordinary loss on debt prepayment(3)
|
(6.5 | ) | — | (17.5 | ) | — | — | — | ||||||||||||||||
|
Cumulative effect of accounting change(4)
|
— | (116.4 | ) | — | — | — | — | |||||||||||||||||
|
Revenues less direct and allocated expenses(5)
|
n/a | n/a | n/a | n/a | 104.8 | (136.3 | ) | |||||||||||||||||
|
Net income (loss) (5)
|
(141.9 | ) | (831.4 | ) | 71.1 | 29.8 | n/a | n/a | ||||||||||||||||
|
Diluted earnings per common share(6)
|
$ | (0.86 | ) | $ | (4.88 | ) | $ | 0.38 | $ | 0.13 | ||||||||||||||
| December 31, | ||||||||||||||||||||
| December 31, | ||||||||||||||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||
|
Balance Sheet data:
|
||||||||||||||||||||
|
Total assets
|
$ | 1,203.1 | $ | 1,360.4 | $ | 2,023.0 | $ | 1,616.8 | $ | 840.7 | ||||||||||
|
Long-term debt, less current portion(7)
|
1,393.9 | 1,374.5 | 1,252.7 | 1,295.3 | — | |||||||||||||||
|
Redeemable preferred stock(8)
|
110.1 | 101.6 | — | 219.6 | — | |||||||||||||||
|
Stockholders’ equity(deficit)/business
equity(9)
|
(662.1 | ) | (517.4 | ) | 337.7 | (247.7 | ) | 681.0 | ||||||||||||
| (1) | The write-off of acquired in-process research and development relates to our April 2000 acquisition of Cherry Semiconductor Corporation, and is presented net of tax. |
| (2) | Restructuring and other include charges related to the worldwide profitability enhancement programs, fixed asset write-offs in connection with these programs, and a $12.4 million gain in 2002 associated with the settlement of various contractual issues with Motorola. |
| (3) | In 2002, the charge represents the write-off of deferred debt issuance costs in connection with the prepayment of a portion of our senior bank facilities. In 2000, the charge relates to repayment penalties, redemption premiums and the write-off of deferred debt issuance costs in connection with the repayment of a portion of our senior subordinated notes from a portion of the proceeds of our initial public offering of common stock. |
| (4) | Effective January 1, 2001, we changed our accounting method for recognizing revenue on sales to distributors. Recognition of revenue and the related gross profit on sales to distributors is now deferred until the distributor resells the product to the end user. The cumulative effect of this accounting change for periods prior to January 1, 2001 was a charge of $155.2 million ($116.4 million or $0.67 per share, net of taxes). |
| (5) | Prior to our recapitalization, cost of sales, research and development expenses, selling and marketing expenses, general and administrative expenses and interest expense included amounts allocated to us by Motorola. In addition, Motorola did not allocate income tax expense to us. Net income (loss) for the pre-recapitalization periods are not provided as they do not represent meaningful amounts for comparative purposes. The net loss for 2001 includes a charge of $366.8 million to establish a valuation allowance for a portion of our deferred tax assets. |
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| (6) | Diluted earnings per common share for the years ended December 31, 2002, 2001 and 2000 and the period from August 4, 1999 to December 31, 1999 are calculated by deducting dividends on our redeemable preferred stock of $8.5 million, $2.4 million, $8.8 million and $10.6 million, respectively, and the accretion of the beneficial conversion feature on redeemable preferred stock of $13.1 million in 2001 from net income for such periods and then dividing the resulting amounts by the weighted average number of common shares outstanding (including the incremental shares issuable upon the assumed exercise of stock options and conversion of preferred stock to the extent they are not anti-dilutive) during such periods. |
| (7) | It is not meaningful to show long-term debt, less the current portion for the pre-recapitalization periods because Motorola’s cash management system was not designed to track centralized cash and related financing transactions to the specific cash requirements of our business. |
| (8) | The redeemable preferred stock outstanding at December 31, 1999 was issued to an affiliate of Texas Pacific Group and to Motorola in connection with our August 1999 recapitalization and redeemed in full with a portion of the proceeds from our initial public offering of common stock in May 2000. The redeemable preferred stock outstanding at December 31, 2001 was issued to an affiliate of Texas Pacific Group in September 2001. |
| (9) | For the pre-recapitalization periods, business equity represented Motorola’s ownership interest in our net assets. All cash transactions, accounts receivable, accounts payable in the United States, other allocations and intercompany transactions were reflected in this amount. For periods subsequent to our Recapitalization, our stockholders’ equity (deficit) consisted of our common stock, paid-in-capital, accumulated other comprehensive income (loss) and accumulated deficit. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included elsewhere in this Form 10-K. Management’s Discussion and Analysis contain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. Actual results could differ materially because of the factors discussed in “Trends, Risks and Uncertainties” in this Form 10-K.
Recent Developments
The following section highlights significant recent developments in our marketplace, our financial performance and our liquidity and capital structure. However, this section presents summary information only. For further information regarding the events summarized herein, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in its entirety.
Semiconductor Market Performance
The following table sets forth total worldwide semiconductor industry revenues and revenues in our total addressable market for the last three years:
| Total | ||||||||||||||||
| Total Worldwide | Addressable | |||||||||||||||
| Semiconductor | Market | |||||||||||||||
| Year Ended December 31, | Industry Sales(1) | % Change | Sales(1),(2) | % Change | ||||||||||||
| (in billions) | (in billions) | |||||||||||||||
|
2000
|
$ | 204.4 | $ | 29.7 | ||||||||||||
|
2001
|
$ | 139.0 | (32.0 | )% | $ | 20.9 | (29.6 | )% | ||||||||
|
2002
|
$ | 140.7 | 1.2 | % | $ | 21.7 | (3) | 3.8 | % | |||||||
| (1) | Based on shipment information published by World Semiconductor Trade Statistics (“WSTS”), an industry research firm. WSTS collects this information based on product shipments, which is different from our revenue recognition policy as described in “Critical Accounting Policies — Revenue Recognition” contained elsewhere in this report. We believe the data provided by WSTS is reliable, but we have not independently verified it. WSTS periodically revises their information. We assume no obligation to update such information. |
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| (2) | Our total addressable market comprises the following specific WSTS product categories: (a) discrete products (all discrete semiconductors other than sensors, RF and microwave power transistors/ modules, RF and microwave diodes, RF and microwave SS transistors, power FET modules, IGBT modules and optoelectronics); (b) standard analog products (amplifiers, voltage regulators and references, comparators, ASSP consumer, ASSP computer, ASSP automotive and ASSP industrial and others); and (c) standard logic products (general purpose logic and MOS general purpose logic only). Although we categorize our products as power and data management semiconductors and standard semiconductor components, WSTS uses different product categories. |
| (3) | We no longer participate in certain product categories in which we participated in 2002 and, accordingly, we will not include these product categories when determining our total addressable market in the future. If such product categories had been excluded from our total addressable market in 2002, sales in our total addressable market in 2002 would have been $20.3 billion as compared to $21.7 billion. |
Worldwide semiconductor market sales were $140.7 billion in 2002, including sales in our total addressable market of approximately $21.7 billion. In 2002, industry sales and sales in our total addressable market increased 1.2% and 3.8%, respectively, as compared to 2001. The industry is cyclical, and from 2000 to 2001 industry sales and sales in our total addressable market declined 32.0% from $204.4 billion to $139.0 billion and 29.6% from $29.7 billion to $20.9 billion, respectively. The foregoing information is based on information published by WSTS. The year 2001 was the worst single year downturn in industry history and was driven both by reduced volumes and lower average selling prices resulting from an inventory overbuild as well as excess semiconductor manufacturing capacity. This is in contrast to 2000, when industry sales and sales in our total addressable market grew 37% and 31%, respectively. Although semiconductor demand began to improve in 2002, it is uncertain when any meaningful recovery will occur. Current market conditions are characterized by excess capacity, short lead times and significant pricing pressures, particularly in a number of product lines in which we participate.
ON Financial Performance
Revenues
The following table sets forth our total revenues for 2000 through 2002:
| Year Ended December 31, | Total Revenues(1) | % Change | ||||||
| (In millions) | ||||||||
|
2000
|
$ | 1,958.7 | ||||||
|
2001
|
$ | 1,214.6 | (38.0 | )% | ||||
|
2002
|
$ | 1,084.5 | (10.7 | )% | ||||
| (1) | Revenues for the year ended December 31, 2000 are pro forma to reflect what our total revenues would have been had the change in distributor revenue recognition methods implemented effective January 1, 2001 been applied retroactively. (See Note 4 “Accounting Changes” of the notes to our audited consolidated financial statements and “— Other Significant Events — Accounting Changes,” in each case included elsewhere in this report.) We believe this presentation is useful to investors in comparing historical results and this presentation is used by our management in making historical comparisons. |
Our total revenues declined 38.0% in 2001 from 2000 while total sales in our total addressable market declined 29.6% during the same period. During that period, revenues from our high frequency clock and data management business declined $177.4 million, or 60.0%, and foundry services provided to Motorola decreased $53.5 million. Our total revenues declined 10.7% in 2002 from 2001 while total sales in our total addressable market increased by 3.8% during the same period. During this period, revenues from our high frequency clock and data management business declined further, foundry services provided to Motorola were reduced by $6.8 million, production of certain products was discontinued and certain low margin opportunities were not pursued.
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Profitability Enhancement Programs
In order to better align our cost structure with our revenues, we initiated profitability enhancement programs in the fourth quarter of 2000 and in the fourth quarter of 2002. The principal elements of these programs are a manufacturing rationalization plan, a reduction of non-manufacturing personnel and other cost controls.
The elements of the 2000 plan that we commenced in June 2001 were completed in the fourth quarter of 2002 and resulted in $365 million of annualized cost savings, based on a comparison of our cost structure during the first quarter of 2001 to our cost structure during the third quarter of 2002. We expect the 2002 plan to be completed by the end of 2003 and to result in an estimated $80 million of cost savings in 2003 and an estimated $125 million of annual cost savings thereafter, in both cases as compared to our cost structure during the third quarter of 2002. Savings from these plans include reduced employee costs resulting from staff reductions, reduced depreciation expense resulting from asset impairments and other cost savings resulting from the transfer of certain manufacturing and administrative functions to lower cost regions, renegotiation of service and supply contracts, and other actions taken to improve our manufacturing efficiency.
The following table summarizes the annual cost savings from the 2000 plan by type and by the applicable caption contained in our consolidated statement of operations (in millions):
| Reduced | Other | |||||||||||||||
| Employee | Reduced | Cost | ||||||||||||||
| Costs | Depreciation | Savings | Total | |||||||||||||
|
Cost of sales
|
$ | 75 | $ | 14 | $ | 166 | $ | 255 | ||||||||
|
Research and development
|
22 | — | 1 | 23 | ||||||||||||
|
Sales and marketing
|
18 | — | 16 | 34 | ||||||||||||
|
General and administrative
|
20 | 1 | 32 | 53 | ||||||||||||
| $ | 135 | $ | 15 | $ | 215 | $ | 365 | |||||||||
The following table summarizes the estimated annual cost savings from the 2002 plan that we expect annually following 2003 by type of cost and by the applicable caption contained in our consolidated statement of operations (in millions):
| Reduced | Other | |||||||||||
| Employee | Cost | |||||||||||
| Costs | Savings | Total | ||||||||||
|
Cost of sales
|
$ | 19 | $ | 93 | $ | 112 | ||||||
|
Research and development
|
— | — | — | |||||||||
|
Sales and marketing
|
4 | — | 4 | |||||||||
|
General and administrative
|
7 | 2 | 9 | |||||||||
| $ | 30 | $ | 95 | $ | 125 | |||||||
Manufacturing Rationalization Plan. To create operating leverage and efficiencies and to accelerate our ongoing transformation into a leading low cost producer, we have implemented and continue to implement manufacturing cost saving initiatives such as the closure of some of our plants, the relocation or outsourcing of operations to take advantage of lower cost labor markets, the consolidation of other operations, the transfer of some of our external supply to internal operations and the rationalization of our product portfolio. This plan included, among other actions, phasing out manufacturing operations at our Guadalajara, Mexico facility and transferring some of the manufacturing activities performed at our Aizu, Japan and Seremban, Malaysia facilities to some of our other facilities or to third party contractors.
In many cases, the volume from closed operations has been or is being shifted to our existing facilities in order to improve capacity utilization. Facility closures and production shifts have resulted in some reductions in our manufacturing capacity, but we do not expect these reductions to affect our ability to meet our foreseeable production needs. As part of our 2000 plan described above, we completed manufacturing rationalization actions resulting in a reduction of our manufacturing workforce by 27% from approximately 8,950 employees, as of December 31, 2000, to approximately 6,500 employees, as of December 31, 2002 and
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Reducing Non-Manufacturing Personnel and Implementing Other Cost Controls. As part of our 2000 plan described above, we reduced selling, administrative and research and development personnel from approximately 1,800, as of June 1, 2001, to approximately 1,340, as of December 31, 2002. Approximately 41% of the employees involved in this reduction were in sales or marketing-related positions, approximately 40% were salaried employees in administrative or managerial positions and 19% were employees in research and development positions. As of September 27, 2002, we had achieved annualized cost savings of approximately $110 million starting in the fourth quarter of 2002 as compared to our cost structure in the first quarter of 2001 as a result of these non-manufacturing personnel reductions and other cost controls. As part of our 2002 plan described above, we expect to further reduce selling and administrative personnel by 180 employees by the fourth quarter of 2003. By December 31, 2003, we expect to generate annualized cost savings of approximately $13 million as a result of these actions. In connection with these reductions, we have adopted a more efficient hybrid sales force structure that combines direct sales personnel with sales representatives.
The employee figures above exclude employees of our joint venture in Leshan, China.
Outlook
We expect the near term market to continue to be challenging but beginning to recover in the latter half of 2003 resulting in a 4% to 5% increase in total revenues for the year. To increase our market share in the markets we serve, we have launched several initiatives to identify new customers and new opportunities within our existing customer base in selected product areas. In addition, we have plans to accelerate our new product design in programs worldwide. We expect that our gross margins will exceed 30% per quarter by the end of the year assuming, among other things, the successful launch of new products and market share improvements. Our research and development expenses should be approximately 6% of total revenues in 2003; our sales and marketing expenses should be approximately 5% of total revenues in 2003; and, our general and administrative expenses should sequentially decline until these expenses reach approximately 6% of total revenues in the fourth quarter of 2003. We plan to record a tax provision of $3 million per quarter in 2003. Given these and certain other expectations, we continue to expect to have positive earnings per share in the fourth quarter of 2003. See “Trends, Risks and Uncertainties” elsewhere in this report.
Liquidity and Capital Structure
Cash Position and Capital Expenditures
Cash flows changed significantly in 2002 as compared to 2001. Although our cash balance at December 31, 2002 increased by only $2.6 million as compared to December 31, 2001, cash flows provided by operating activities were $30.6 million in 2002, a $167.9 million improvement from the net cash usage of $137.3 million in 2001. This increase was primarily the result of reduced costs resulting from the restructuring programs and reduced restructuring payments in 2002. We have, as part of a targeted effort to improve our liquidity, also reduced our capital expenditures from $198.8 million in 2000 to $117.9 million in 2001 and $26.5 million in 2002. We do not expect that our capital expenditure reductions will have a negative impact on our ability to service our customers, as we believe that near-term access to additional manufacturing capacity, should it be required, could be readily obtained on reasonable terms through manufacturing agreements with third parties. Capital expenditures are expected to increase to approximately $50-$60 million in 2003.
Debt Refinancing
During 2002 and the first quarter of 2003, we refinanced a portion of our senior bank facilities through the issuance of $300.0 million principal amount of our second lien senior secured notes due 2008 and $200 million
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| Actual | Actual | |||||||||||||||||||||||||||
| Maturities | 2002 Activity | Maturities | Maturities | |||||||||||||||||||||||||
| as of | as of | as Adjusted | ||||||||||||||||||||||||||
| December 31, | 2002* | December 31, | 2003** | December 31, | ||||||||||||||||||||||||
| 2001 | Additions | Repayments | Refinancing | 2002 | Refinancing | 2002 | ||||||||||||||||||||||
|
2002
|
12.4 | (9.6 | ) | (2.8 | ) | — | — | |||||||||||||||||||||
|
2003
|
13.8 | (4.5 | ) | 9.3 | (7.5 | ) | 1.8 | |||||||||||||||||||||
|
2004
|
18.3 | (6.5 | ) | 11.8 | (5.8 | ) | 6.0 | |||||||||||||||||||||
|
2005
|
290.1 | (53.2 | ) | 236.9 | (81.1 | ) | 155.8 | |||||||||||||||||||||
|
2006
|
412.3 | (131.4 | ) | 280.9 | (86.4 | ) | 194.5 | |||||||||||||||||||||
|
2007
|
258.8 | (82.0 | ) | 176.8 | — | 176.8 | ||||||||||||||||||||||
|
Thereafter
|
381.2 | 13.1 | 293.2 | 687.5 | 190.8 | 878.3 | ||||||||||||||||||||||
| 1,386.9 | 13.1 | (9.6 | ) | 12.8 | 1,403.2 | 10.0 | 1,413.2 | |||||||||||||||||||||
| * | Relates to impact on debt maturities resulting from the May 2002 issuance of the second lien senior secured notes due 2008 and prepayment of amounts outstanding under our senior bank facilities. |
| ** | Relates to impact on debt maturities resulting from the March 2003 issuance of the first-lien senior secured notes due 2010 and prepayment of amounts outstanding under our senior bank facilities. |
Because the effective interest rates on the first lien and second lien senior secured notes, which are fixed, are considerably higher than those that currently apply to our senior bank facilities, which are floating, our interest expense will increase as a result of these refinancings. At current rates that apply to our senior bank facilities, we expect net interest expense to be approximately $150 million in 2003.
Other Significant Events
| Accounting Changes |
Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” The provisions of SFAS No. 141 require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill and require that unamortized negative goodwill be written off immediately as an extraordinary gain instead of being deferred and amortized. SFAS No. 141 also requires that, upon adoption of SFAS No. 142, we reclassify the carrying amounts of certain intangible assets into or out of goodwill based on certain criteria. SFAS No. 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require that such assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired), require that reporting units be identified for the purpose of assessing potential future impairments of goodwill and remove the forty-year limitation on the amortization period of intangible assets that have finite lives. Goodwill amortization expense totaled $10.6 million in 2001.
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SFAS No. 142 requires that goodwill be tested annually for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the estimated fair value of a reporting unit with the related carrying amount including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting unit’s goodwill is not considered to be impaired and the second step of the impairment test is unnecessary. If the reporting unit’s carrying amount exceeds its estimated fair value, the second step test must be performed to measure the amount of the goodwill impairment loss, if any. The second step test compares the implied fair value of the reporting unit’s goodwill, determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of such goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
Our goodwill at January 1, 2002 totaled $77.3 million and relates to the April 2000 acquisition of Cherry Semiconductor Corporation (“Cherry”). As a result of the adoption of SFAS No. 142, we discontinued amortization of the Cherry goodwill at the beginning of 2002.
During the first quarter of 2002, we identified our various reporting units, which correspond with our four product lines, and allocated its assets and liabilities to such reporting units. The goodwill relating to the Cherry acquisition was specifically identified with and included in our Power Management and Standard Analog reporting unit. During the second quarter of 2002, we completed the first step of its transitional goodwill impairment test and determined that the estimated fair value of the Power Management and Standard Analog reporting unit as of January 1, 2002 exceeded the reporting unit’s carrying amount by a substantial amount. As a result, an impairment of the Cherry goodwill as of that date was not indicated and completion of the second step test was not required. We updated our goodwill impairment analysis during the fourth quarter of 2002 and determined that a related impairment did not exist.
As mentioned below in “Critical Accounting Policies,” effective January 1, 2001, we changed our accounting method for recognizing revenue on sales to distributors. Recognition of revenue and related gross profit on sales to distributors is now deferred until the distributor resells the product. We believe that this change better aligns reported results with, focuses us on, and allows investors to better understand end user demand for the products that we sell through distributors. Our new revenue recognition policy is commonly used in the semiconductor industry. The cumulative effect of the accounting change for periods prior to January 1, 2001 was a charge of $155.2 million ($116.4 million, or $0.67 per share, net of income taxes). The accounting change resulted in an increase in revenues of $116.6 million and a decrease in our net loss before cumulative effect of accounting change of $53.1 million, or $0.30 per share, for the year ended December 31, 2001.
Also effective January 1, 2001, we adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which establishes standards for the accounting and reporting for derivative instruments, including derivative instruments embedded in other contracts, and hedging activities. Our interest rate swaps in effect at January 1, 2001 were designated as cash flow hedges, were measured at fair value and recorded as assets or liabilities in the consolidated balance sheet. Upon adoption of SFAS No. 133, we recorded an after-tax charge of $3.4 million to accumulated other comprehensive income (loss) as of January 1, 2001. This charge consisted of a $2.1 million adjustment to record our interest rate swaps in the consolidated balance sheet at their estimated fair values as well as the write-off of an approximate $3.5 million pretax deferred charge (included in other assets in the accompanying consolidated balance sheet at December 31, 2000) relating to the payment made in December 2000 for the early termination of an interest rate protection agreement relating to a portion of the amounts outstanding under our senior bank facilities, both before income taxes of approximately $2.2 million.
In addition to hedging a portion of our interest rate exposure, we use forward foreign currency contracts to reduce our overall exposure to the effects of foreign currency fluctuations on our results of operations and cash flows. The fair value of these derivative instruments are recorded as assets or liabilities with gains and losses offsetting the gains and losses on the underlying assets or liabilities. The adoption of SFAS No. 133 did not impact our accounting and reporting for these derivative instruments.
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| Acquisition |
On April 3, 2000, we acquired all of the outstanding capital stock of Cherry Semiconductor Corporation (“Cherry”) for approximately $253.2 million in cash (including acquisition related costs), which was financed with cash on hand and borrowings of $220.0 million under our senior bank facilities. Cherry, which was renamed Semiconductor Components Industries of Rhode Island, Inc., designs and manufactures analog and mixed signal integrated circuits for the power management and automotive markets, and had revenues for its fiscal year ended February 29, 2000 of $129.1 million.
The Cherry acquisition was accounted for using the purchase method of accounting and, as a result, the purchase price and related costs were allocated to the estimated fair value of assets acquired and liabilities assumed at the time of the acquisition based on management estimates as follows (in millions):
|
Fair value of tangible net assets
|
$ | 71.3 | ||
|
Developed technology
|
59.3 | |||
|
In-process research and development
|
26.9 | |||
|
Assembled workforce
|
10.0 | |||
|
Excess of purchase price over estimated fair
value of net assets acquired (goodwill)
|
85.7 | |||
| $ | 253.2 | |||
Developed technology is being amortized on a straight-line basis over an estimated useful life of five years. Goodwill was being amortized on a straight-line basis over an estimated useful life of ten years; however, as mentioned previously, such amortization was discontinued upon the adoption of SFAS No. 142. Additionally, assembled workforce was being amortized over an estimated useful life of five years. Assembled workforce does not meet the SFAS No. 141 requirements as an intangible asset apart from goodwill. Accordingly, upon adoption of SFAS No. 142, we reclassified the unamortized balance of assembled workforce to goodwill and the related amortization was discontinued.
The fair value of the acquired in-process research and development was determined using the income approach, which discounts expected future cash flows to present value. Significant assumptions that had to be made in using this approach included revenue and operating margin projections and determination of the applicable discount rate. The fair value of the acquired in-process research and development was based on sales forecasts and cost assumptions projected to be achievable by Cherry on a stand-alone basis. Operating margins were based on cost of goods sold and selling, general and administrative expenses as a percentage of revenues. All projected revenue and cost information was based on historical results and trends and did not include any synergies or cost savings that may result from the acquisition. The rate used to discount future projected cash flows resulting from the acquired in-process research and development was 20%, which was derived from a weighted average cost of capital analysis adjusted upward to reflect additional risks inherent in the development life cycle.
At the date of acquisition, the in-process research and development consisted of sixty-five projects that had not yet reached technological feasibility and for which no alternative future uses had been identified. Accordingly, these costs were expensed as of the acquisition date. Such projects were approximately 70% to 80% complete at the date of the acquisition. The estimated cost to complete these projects at that date was approximately $4.1 million. Of the sixty-five projects in process at the date of acquisition, we completed thirty-one projects, abandoned twenty-nine projects and are in the process of completing the remaining five projects, which have an estimated completion cost of $0.5 million. Subsequent to the acquisition date, we experienced an industry downturn that required us to scale back research and development activities. Due to the decline in product demand subsequent to the acquisition, 2002 revenues associated with the completed projects were approximately $12.5 million, or 30% of the amount originally forecasted for all acquired in-process research and development projects at the date of acquisition.
Critical Accounting Policies
The accompanying discussion and analysis of our financial condition and results of operation is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note 3 “Significant Accounting Policies” of the
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Revenue. We generate revenue from sales of our semiconductor products to original equipment manufacturers, electronic manufacturing service providers, and distributors. We recognize revenue on sales to original equipment manufacturers and electronic manufacturing service providers when title passes to the customer net of provisions for related sales returns and allowances.
Prior to January 1, 2001, we recognized revenue on distributor sales when title passed to the distributor. Provisions were recorded at that time for estimated sales returns as well as for other related sales costs and allowances. Effective January 1, 2001, we changed our revenue recognition policy for distributor sales so that the related revenues are now deferred until the distributor resells the product to the end user. This change eliminated the need to provide for estimated sales returns from distributors. Title to products sold to distributors typically passes at the time of shipment by us so we record accounts receivable for the amount of the transaction, reduce our inventory for the products shipped and defer the related margin in our consolidated balance sheet. We recognize the related revenue and margin when the distributor sells the products to the end user. Although payment terms vary, most distributor agreements require payment within 30 days.
We believe that this change better aligns our reported results with, focuses us on, and enables investors to better understand, end user demand for the products we sell through distribution as our revenue is not influenced by our distributors’ stocking decisions.
Inventories. We carry our inventories at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market and record provisions for slow moving inventories based upon a regular analysis of inventory on hand compared to historical and projected end user demand. Projected end user demand is generally based on sales during the prior twelve months. These provisions can influence our results from operations. For example, when demand falls for a given part, all or a portion of the related inventory is reserved, impacting our cost of sales and gross profit. If demand recovers and the parts previously reserved are sold, we will generally recognize a higher than normal margin. However, the vast majority of product inventory that has been previously reserved is ultimately discarded. Although we do sell some products that have previously been written down, such sales have historically been relatively consistent on a quarterly basis and the related impact on our margins has not been material.
Deferred Tax Valuation Allowance. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction in which we operate. If we determine that we will not realize all or a portion of our remaining deferred tax assets, we will increase our valuation allowance with a charge to income tax expense. Conversely, if we determine that we will ultimately be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be released to income as a credit to income tax expense. In the fourth quarter of 2001, we established a valuation allowance for the majority of our deferred tax assets and throughout 2002, we have not recognized any incremental deferred tax benefits. We monitor our ability to utilize our deferred tax assets and the continuing need for a related valuation allowance on an ongoing basis.
Impairment of Long-Lived Assets. We periodically evaluate the recoverability of the carrying amount of our property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Impairment is assessed when the undiscounted expected cash flows derived for an asset are less than its carrying amount. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its fair value and are recognized in operating results. We continually apply our best judgment when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an impaired asset. The dynamic economic environment in which we operate and the resulting assumptions used to estimate future cash flows impact the outcome of our impairment tests.
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Goodwill and Other Intangibles. We evaluate our goodwill for potential impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred. SFAS No. 142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the estimated fair value of the reporting unit containing our goodwill with the related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting unit’s goodwill is not considered to be impaired and the second step of the impairment test is unnecessary. If the reporting unit’s carrying amount exceeds its estimated fair value, the second step test must be performed to measure the amount of the goodwill impairment loss, if any. The second step test compares the implied fair value of the reporting unit’s goodwill, determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of such goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
Defined Benefit Plans. We maintain pension plans covering certain of our employees. For financial reporting purposes, net periodic pension costs are calculated based upon a number of actuarial assumptions, including a discount rate for plan obligations, assumed rate of return on pension plan assets and assumed rate of compensation increase for plan employees. All of these assumptions are based upon management’s judgement, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact the future expense recognition and cash funding requirements of our pension plans.
Results of Operations
The following table summarizes certain information relating to our operating results that has been derived from our audited consolidated financial statements. The pro forma column for 2000 reflects our results as if the change in distributor revenue recognition discussed above had been applied retroactively. The pro forma results are used for comparative purposes in the following discussion of our results of operations. We believe this presentation is useful to investors in comparing historical results and this presentation is used by our management in making historical comparisons. The amounts in the following table are in millions.
| Year Ended December 31, | ||||||||||||||||||
| 2000 | ||||||||||||||||||
| 2002 | 2001 | As Reported | Pro Forma | |||||||||||||||
|
Total revenues
|
$ | 1,084.5 | $ | 1,214.6 | $ | 2,073.9 | $ | 1,958.7 | ||||||||||
|
Cost of sales
|
799.0 | 1,000.0 | 1,355.0 | 1,293.5 | ||||||||||||||
|
Gross profit
|
285.5 | 214.6 | 718.9 | 665.2 | ||||||||||||||
|
Operating expenses:
|
||||||||||||||||||
|
Research and development
|
67.9 | 80.9 | 69.2 | 69.2 | ||||||||||||||
|
Selling and marketing
|
61.2 | 74.8 | 100.1 | 100.1 | ||||||||||||||
|
General and administrative
|
102.1 | 130.9 | 233.4 | 233.4 | ||||||||||||||
|
Amortization of goodwill and other intangibles
|
11.9 | 22.6 | 16.8 | 16.8 | ||||||||||||||
|
Write-off of acquired in-process research and
development
|
— | — | 26.9 | 26.9 | ||||||||||||||
|
Restructuring and other
|
27.7 | 150.4 | 4.8 | 4.8 | ||||||||||||||
|
Total operating expenses
|
270.8 | 459.6 | 451.2 | 451.2 | ||||||||||||||
|
Operating income (loss)
|
14.7 | (245.0 | ) | 267.7 | 214.0 | |||||||||||||
|
Other income (expenses):
|
||||||||||||||||||
|
Interest expense, net
|
(145.2 | ) | (133.5 | ) | (131.2 | ) | (131.2 | ) | ||||||||||
|
Equity in earnings of joint ventures
|
3.9 | 4.0 | 4.4 | 4.4 | ||||||||||||||
|
Gain on sale of investment in joint venture
|
— | 3.1 | — | — | ||||||||||||||
|
Other income (expenses), net
|
(141.3 | ) | (126.4 | ) | (126.8 | ) | (126.8 | ) | ||||||||||
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| Year Ended December 31, | |||||||||||||||||
| 2000 | |||||||||||||||||
| 2002 | 2001 | As Reported | Pro Forma | ||||||||||||||
|
Income (loss) before income taxes, minority
interests, extraordinary loss and cumulative effect of
accounting change
|
(126.6 | ) | (371.4 | ) | 140.9 | 87.2 | |||||||||||
|
Income tax provision
|
(8.8 | ) | (345.7 | ) | (50.1 | ) | (36.7 | ) | |||||||||
|
Minority interests
|
— | 2.1 | (2.2 | ) | (2.2 | ) | |||||||||||
|
Net income (loss) before extraordinary loss
and cumulative effect of accounting change
|
(135.4 | ) | (715.0 | ) | 88.6 | 48.3 | |||||||||||
|
Extraordinary loss on debt prepayment, net of tax
|
(6.5 | ) | — | (17.5 | ) | (17.5 | ) | ||||||||||
|
Cumulative effect of accounting change, net of tax
|
— | (116.4 | ) | — | — | ||||||||||||
|
Net income (loss)
|
$ | (141.9 | ) | $ | (831.4 | ) | $ | 71.1 | $ | 30.8 | |||||||
The following table summarizes certain information relating to our operating results as a percentage of total revenues and has been derived from our audited consolidated financial statements. The pro forma column for 2000 reflects our results as if the previously mentioned change in distributor revenue recognition had been applied retroactively. The pro forma results are used for comparative purposes in the following discussion of our results of operations. We believe this presentation is useful to investors in comparing historical results and this presentation is used by our management in making historical comparisons. Certain amounts in the table may not sum due to the rounding of individual components.
| Year Ended December 31, | ||||||||||||||||||
| 2000 | ||||||||||||||||||
| 2002 | 2001 | As Reported | Pro Forma | |||||||||||||||
|
Total revenues
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
|
Cost of sales
|
73.7 | 82.3 | 65.3 | 66.0 | ||||||||||||||
|
Gross profit
|
26.3 | 17.7 | 34.7 | 34.0 | ||||||||||||||
|
Operating expenses:
|
||||||||||||||||||
|
Research and development
|
6.3 | 6.7 | 3.3 | 3.5 | ||||||||||||||
|
Selling and marketing
|
5.6 | 6.2 | 4.8 | 5.1 | ||||||||||||||
|
General and administrative
|
9.4 | 10.8 | 11.3 | 11.9 | ||||||||||||||
|
Amortization of goodwill and other intangibles
|
1.1 | 1.9 | 0.8 | 0.9 | ||||||||||||||
|
Write-off of acquired in-process research and
development
|
— | — | 1.3 | 1.4 | ||||||||||||||
|
Restructuring and other
|
2.6 | 12.4 | 0.2 | 0.2 | ||||||||||||||
|
Total operating expenses
|
25.0 | 37.8 | 21.8 | 23.0 | ||||||||||||||
|
Operating income (loss)
|
1.4 | (20.2 | ) | 12.9 | 10.9 | |||||||||||||
|
Other income (expenses):
|
||||||||||||||||||
|
Interest expense, net
|
(13.4 | ) | (11.0 | ) | (6.3 | ) | (6.7 | ) | ||||||||||
|
Equity in earnings of joint ventures
|
0.4 | 0.3 | 0.2 | 0.2 | ||||||||||||||
|
Gain on sale of investment in joint venture
|
— | 0.3 | — | — | ||||||||||||||
|
Other income (expenses), net
|
(13.0 | ) | (10.4 | ) | (6.1 | ) | (6.5 | ) | ||||||||||
|
Income (loss) before income taxes, minority
interests, extraordinary loss and cumulative effect of
accounting change
|
(11.7 | ) | (30.6 | ) | 6.8 | 4.5 | ||||||||||||
|
Income tax provision
|
(0.8 | ) | (28.5 | ) | (2.4 | ) | (1.9 | ) | ||||||||||
|
Minority interests
|
— | 0.2 | (0.1 | ) | (0.1 | ) | ||||||||||||
|
Net income (loss) before extraordinary loss
and cumulative effect of accounting change
|
(12.5 | ) | (58.9 | ) | 4.3 | 2.5 | ||||||||||||
|
Extraordinary loss on debt prepayment, net of tax
|
(0.6 | ) | — | (0.8 | ) | (0.9 | ) | |||||||||||
|
Cumulative effect of accounting change, net of tax
|
— | (9.6 | ) | — | — | |||||||||||||
|
Net income (loss)
|
(13.1 | )% | (68.5 | )% | 3.4 | % | 1.6 | % | ||||||||||
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| Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 |
Total Revenues. Total revenues decreased $130.1 million, or 10.7%, to $1,084.5 million in 2002 from $1,214.6 million in 2001 due to declines in average selling prices of approximately 10% and a reduction of foundry revenues of approximately $7 million. The percentage of billings related to new products (defined as products introduced within the prior 36 months) increased in 2002 as compared to 2001. The revenues by product line for the years ended December 31, 2002 and 2001, respectively, are as follows (dollars in millions):
| Year Ended | Year Ended | ||||||||||||||||||||||||
| December 31, | As a % | December 31, | As a % | Dollar | |||||||||||||||||||||
| 2002 | Revenue(1) | 2001 | Revenue(1) | Change | % Change | ||||||||||||||||||||
|
Power Management and Standard Analog
|
$ | 362.7 | 33.4 | % | $ | 365.4 | 30.1 | % | $ | (2.7 | ) | (0.7 | )% | ||||||||||||
|
MOS Power Devices
|
138.7 | 12.8 | % | 146.7 | 12.1 | % | (8.0 | ) | (5.5 | )% | |||||||||||||||
|
High Frequency Clock and Data Management
|
72.0 | 6.6 | % | 118.5 | 9.8 | % | (46.5 | ) | (39.2 | )% | |||||||||||||||
|
Standard Components
|
511.1 | 47.1 | % | 584.0 | 48.1 | % | (72.9 | ) | (12.5 | )% | |||||||||||||||
|
Total Revenues
|
$ | 1,084.5 | $ | 1,214.6 | $ | (130.1 | ) | ||||||||||||||||||
| (1) | Certain amounts may not total due to rounding of individual components |
On a percentage basis, the revenue decline has been the most pronounced in our high frequency clock and data management product line as unit demand from the networking and telecommunications end markets continued to decline. For our other product lines, we experienced an increase in unit demand in 2002; however, this was more than offset by decreases in average selling prices, resulting in total revenue declines in 2002.
Approximately 37%, 44% and 19% of our revenues during 2002 were derived from the Americas, Asia/ Pacific and Europe (including the Middle East), respectively, compared to 40%, 38% and 22%, respectively, during 2001. The change from prior year reflects the continuing recovery of the Asia/ Pacific markets and our growth in the China market.
Cost of Sales. Cost of sales for the year ended December 31, 2002 decreased $201.0 million, or 20.1%, to $799.0 million from $1,000.0 million in 2001. This decrease is attributable to $175.2 million of cost reduction activities and $34.9 million of lower provisions for excess inventories taken during 2002 as compared to 2001. As of the end of the third quarter of 2002, we completed actions to achieve an estimated $255 million of annual cost of sales savings as compared to our cost structure as of the first quarter of 2001. These cost savings were partially offset by an increase in freight expense of $11 million in the second half of 2002 as compared to the second half of 2001 due to the expiration of the freight sharing agreement with Motorola during 2002.
Looking forward, we anticipate additional cost savings from our restructuring programs (see Recent Developments above). Although freight expense in 2003 is expected to increase as compared to 2002, since we benefited from the Motorola freight sharing agreement during the first half of 2002, we do not expect our freight cost structure in 2003 to significantly change from that of the last two quarters of 2002.
Gross Profit. Gross profit (computed as total revenues less cost of sales) for the year ended December 31, 2002 increased $70.9 million, or 33.0%, to $285.5 million from $214.6 million in 2001. As a percentage of total revenues, gross margin increased to 26.3% during 2002 from 17.7% in 2001. To summarize the fluctuations described above, the increase in gross margin was attributable to cost improvements from restructuring efforts and lower provisions for excess inventories, offset by decreases in average selling prices and an increase in freight expense with the expiration of the freight sharing agreement with Motorola.
| Operating expenses |
Research and Development. Research and development costs decreased $13.0 million, or 16.1%, to $67.9 million in 2002 compared with $80.9 million 2001, primarily as a result of aligning our operating costs with our revenues. As a percentage of revenues, research and development costs remained fairly consistent at 6.3% in 2002 as compared to 6.7% in 2001. Our target for research and development costs in 2003 is
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Selling and Marketing. Selling and marketing expenses for the year ended December 31, 2002 decreased by $13.6 million, or 18.2%, to $61.2 million compared with $74.8 million in 2001. As a percentage of revenues, selling and marketing expenses for 2002 were 5.6% compared with 6.2% in 2001 with the decline attributable to our worldwide restructuring programs. Restructuring efforts in selling and marketing, including the downsizing of our sales force, closing of sales offices as well as our regional sales headquarters and centralizing and relocating our order entry functions to lower cost regions, were largely enacted during the second quarter of 2001. Selling and marketing expenses are targeted at approximately 5% of total revenues in 2003.
General and Administrative. General and administrative expenses decreased by $28.8 million, or 22.0%, to $102.1 million from $130.9 million in 2001, as a result of personnel reductions of approximately 30% (as compared to 2001) and the relocation of functions to lower cost regions. As a percentage of revenues, these costs decreased to 9.4% in 2002 from 10.8% in 2001. We expect our general and administrative expenses to sequentially decline until these expenses reach approximately 6% of revenues in the fourth quarter of 2003.
Amortization of Intangibles. Amortization of intangibles decreased $10.7 million to $11.9 million in 2002 from $22.6 million 2001, as a result of the adoption of SFAS 142 effective January 1, 2002, which eliminated the amortization of goodwill (see Note 3 “Significant Accounting Policies” of the notes to our audited consolidated financial statements included elsewhere in this report.)
Restructuring and Other. Restructuring and other activity decreased $122.7 million to $27.7 million in 2002 from $150.4 million in 2001, as most of our restructuring activities were initiated in 2001. We have $19.5 million accrued in relation to the 2001 and 2002 programs and expect this amount to be paid over the next year. We expect that the savings from these programs will more than offset the expected payments in 2003.
During 2002, we recorded charges of $35.2 million to cover costs associated with our worldwide profitability enhancement programs. The charges primarily relate to the consolidation of manufacturing, selling and administrative functions in the U.S. and Europe. The charges included $21.2 million to cover employee separation costs associated with the termination of approximately 451 employees, asset impairments of $9.4 million, and $4.6 million of other costs primarily related to facility closures and contract terminations. The asset impairments were charged directly against the related assets. Employee separation costs included $1.2 million of non-cash charges associated primarily with the acceleration of vesting of stock options for terminated employees. As of December 31, 2002, the remaining liability relating to this restructuring was $16.6 million. As of December 31, 2002, approximately 100 employees have been terminated under this restructuring plan.
During the second quarter of 2002, we reached a settlement of various contractual issues with Motorola in exchange for a cash payment from Motorola of $10.6 million resulting in a related gain of $12.4 million (see Note 18 “Related Party Transactions” for further details of the Motorola settlement).
In December 2002, we recorded a $4.9 million charge to cover costs associated with the separation of two of our executive officers. In connection with the separation, we reserved $2.0 million related to the cash portion of the related separation agreements. In addition, we agreed to modify the vesting and exercise period for a portion of the executives’ stock options. This modification resulted in a non-cash stock compensation charge of $2.9 million with an offsetting credit to additional paid-in capital.
See Note 5 “Restructuring and Other” of the notes to our audited consolidated financial statements included elsewhere in this report for a further discussion of these charges.
Interest Expense. Interest expense increased $11.7 million, or 8.8%, to $145.2 million for 2002 from $133.5 million in 2001. The higher interest expense was due to the increased supplemental interest charges of $4.9 million in 2002 as compared to 2001 resulting from the August 2001 amendments to our senior bank
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Equity in Earnings of Joint Ventures. Equity in earnings from our joint ventures remained relatively consistent, decreasing $0.1 million to $3.9 million in 2002 from $4.0 million in 2001.
Gain on Sale of Investment in Joint Venture. We had a 50% interest in SMP. As a part of the joint venture agreement, our joint venture partner, Philips Semiconductors International B.V. (“Philips”), had the right to purchase our interest in SMP between January 2001 and July 2002. In February 2001, Philips exercised its purchase right, acquiring our 50% interest in SMP effective December 31, 2000. This transaction resulted in proceeds of approximately $20.4 million and a pre-tax gain of approximately $3.1 million.
Income Tax Provision. We recognized an income tax provision of $8.8 million in 2002 compared with $345.7 in 2001. The 2002 provision related to income and withholding taxes of certain of our foreign operations. The 2001 amount was greatly influenced by our decision to limit the recognition of deferred tax benefits relating to our operating losses to the amount that could be recovered via carry-back. This decision resulted in an increase of $366.8 million in our valuation allowance established for our U.S. tax benefits. This was partially offset by deferred tax benefits recognized for certain operating losses incurred outside the U.S.
Minority Interests. Minority interests represent the portion of the net loss of our two majority-owned Czech subsidiaries attributable to the minority owners of each subsidiary. We consolidate these subsidiaries in our financial statements. Losses experienced by these subsidiaries declined in 2002 as compared to 2001 as a result of improved capacity utilization; therefore the elimination of minority interests were $0 in 2002 compared to $2.1 million in 2001.
Extraordinary Loss on Debt Prepayment. Extraordinary loss of $6.5 million in 2002 represents the write-off of debt issuance costs in connection with the debt refinancing that occurred in 2002.
| Year Ended December 31, 2001 Compared to Pro Forma Year Ended December 31, 2000 |
Total Revenues. Total revenues decreased $744.1 million, or 38.0%, to $1,214.6 million in 2001 from $1,958.7 million in 2000. The decrease occurred in all of our major product lines. Approximately 10% of this decrease was due to reductions in selling prices with the remaining 28% decline due to reduced volume and changes in our product mix. Foundry revenues, included in our standard components product line, decreased by $53.5 million to $8.2 million in 2001 from $61.7 million in 2000. Foundry revenues result from agreements made with Motorola during our separation and we expect that these revenues will continue to decline in the future.
The revenues by product line for the year ended December 31, 2001 compared to the pro forma revenues by product line for the year ended December 31, 2000 are as follows (dollars in millions):
| Year Ended | Year Ended | ||||||||||||||||||||||||
| December 31, | As a % | December 31, | As a % | Dollar | |||||||||||||||||||||
| 2001 | Revenue(1) | 2000 | Revenue(1) | Change | % Change | ||||||||||||||||||||
|
Power Management and Standard Analog
|
$ | 365.4 | 30.1 | % | $ | 496.7 | 25.4 | % | (131.3 | ) | (26.4 | )% | |||||||||||||
|
MOS Power
|
146.7 | 12.1 | % | 212.1 | 10.8 | % | (65.4 | ) | (30.8 | )% | |||||||||||||||
|
High Frequency Clock and Data Management
|
118.5 | 9.8 | % | 295.9 | 15.1 | % | (177.4 | ) | (60.0 | )% | |||||||||||||||
|
Standard Components
|
584.0 | 48.1 | % | 954.0 | 48.7 | % | (370.0 | ) | (38.8 | )% | |||||||||||||||
|
Total Revenues
|
$ | 1,214.6 | $ | 1,958.7 | $ | (744.1 | ) | ||||||||||||||||||
| (1) | Certain amounts may not total due to rounding of individual components |
As previously discussed, beginning in the last quarter of 2000 and continuing into 2001, we experienced slowing demand and pricing pressures for our products as customers delayed or cancelled bookings in order to
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Approximately 40%, 38% and 22% of our total revenues in 2001 were derived from the Americas, Asia/ Pacific and Europe (including the Middle East), respectively, compared to 47%, 33% and 20%, respectively, in 2000. The increase in the Asia/ Pacific region reflects our customers’ shift in production into that region.
Cost of Sales. Cost of sales decreased $293.5 million, or 22.7%, to $1,000.0 million in 2001 from $1,293.5 million in 2000, as a result of decreased sales volume. Cost of sales as a percentage of revenues increased to 82.3% in 2001 from 66.0% in 2000 due to lower factory utilization coupled with increased provisions for excess and obsolete inventory, partially offset by cost savings resulting from our restructuring programs. The restructuring programs include the implementation of ongoing cost-saving initiatives to rationalize our product portfolio, close plants and relocate or outsource related operations to take advantage of lower-cost labor markets and make our manufacturing processes more efficient.
Gross Profit. Gross profit (computed as total revenues less cost of sales) decreased $450.6 million, or 67.7%, to $214.6 million in 2001 from $665.2 million in 2000. As a percentage of total revenues, gross margin declined to 17.7% in 2001 from 34.0% in 2000. The decline in gross margin was primarily due to lower factory utilization resulting from lower customer demand, lower selling prices, and a change in mix towards lower margin devices, partially offset by cost restructuring initiatives.
Operating expenses
Research and Development. Research and development costs increased $11.7 million, or 16.9%, to $80.9 million in 2001 from $69.2 million in 2000. As a percentage of total revenues, research and development costs increased to 6.7% in 2001 from 3.5% in 2000 because of decreased revenues accompanied by increased spending on new product development. The primary emphasis of our new product development is on power management and standard analog and high frequency clock and data management solutions, which are the highest margin and fastest potential growth product lines in our portfolio. We have targeted 80% of our overall research and development investment on these products. We are committed to increase our spending on new product development in order to stay competitive in our markets. During 2001, we introduced 344 new products.
Selling and Marketing. Selling and marketing expenses decreased by $25.3 million, or 25.3%, to $74.8 million in 2001 from $100.1 million in 2000 as a result of our restructuring program. As a percentage of total revenues, however, these costs increased to 6.2% in 2001 from 5.1% in 2000 as a result of decreased total revenues that were only partially offset by cost savings resulting from our restructuring actions. These actions included the downsizing of our sales force, closing of sales offices as well as our regional sales headquarters and centralizing and relocating our order entry function to lower cost locations.
General and Administrative. General and administrative expenses decreased by $102.5 million, or 43.9% to $130.9 million in 2001 from $233.4 million in 2000, as a result of cost reduction actions from our restructuring program. The major reductions were associated with personnel reductions, simplification of our overall corporate structure and regional infrastructure, elimination of some of our employee bonuses and lower use of consultants. As a percentage of total revenues, these costs decreased to 10.8% in 2001 from 11.9% in 2000.
Write-off of Acquired In-process Research and Development. In 2000, we incurred a $26.9 million charge for the write-off of acquired in-process research and development resulting from the Cherry acquisition. No such charges were incurred in 2001.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and other intangibles was $22.6 million in 2001 compared to $16.8 million in 2000. The amortization relates to the intangible assets that were acquired with Cherry in the second quarter of 2000, including amounts related to developed technology, assembled workforce and goodwill. In 2001, we had a full year of related amortization expenses as compared to only nine months of amortization in 2000.
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Restructuring and Other. During 2001, we recorded charges of $146.6 million to cover costs associated with our worldwide profitability enhancement programs. The charges relate to the consolidation of selling and administrative functions in the U.S. and Europe, phasing out manufacturing operations at our Guadalajara, Mexico facility, transferring certain manufacturing activities performed at our Aizu, Japan and Seremban, Malaysia facilities to other facilities we own or to third party contractors and consolidation of other operations. The charges included $80.4 million to cover employee separation costs associated with the termination of approximately 4,350 employees, asset impairments of $56.2 million and $10.0 million of other costs primarily related to facility closures and contract terminations. The asset impairments were charged directly against the related assets. Employee separation costs included $1.3 million of non-cash charges associated primarily with the acceleration of vesting of stock options for terminated employees and $7.4 million for additional pension charges related to terminated employees. As of December 31, 2001, the remaining liability relating to this restructuring was $19.8 million. As of December 31, 2001, approximately 3,500 employees have been terminated under this restructuring plan.
In March 2001, we recorded a $3.8 million charge to cover costs associated with the separation of one of our executive officers. In connection with the separation, we paid the former executive officer $1.9 million. In addition, we agreed to accelerate the vesting of his remaining stock options and to allow such options to remain exercisable for the remainder of their ten-year term. We recorded a non-cash charge of $1.9 million related to the modification of these options.
During 2000, we recorded a $5.6 million charge to cover costs associated with a restructuring program at our manufacturing facility in Guadalajara, Mexico. The charge included $3.2 million to cover employee separation costs associated with the termination of approximately 500 employees and $2.4 million for asset impairments that were charged directly against the related assets. In September 2000, we completed our evaluation of costs to be incurred and released $0.8 million of the reserve for employee separation costs to income. As of December 31, 2001, there was no remaining liability relating to the 2000 restructuring program.
See Note 5 “Restructuring and Other” of the notes to our audited consolidated financial statements included elsewhere in this report for a further discussion of our restructuring activity.
Operating Income (Loss). Operating income (loss) decreased $459.0 million, or 214.5%, to a $245.0 million loss in 2001 from operating income of $214.0 million in 2000. This decrease was due to decreased gross profits resulting from reduced product revenues, lower factory utilization and inventory charges, increased research and development costs, increased amortization of goodwill and other intangibles and restructuring and other charges offset by reduced selling, marketing and general and administrative costs resulting from our restructuring actions and the lack of the acquired in-process research and development write-off which occurred in 2000. As a result of these efforts, we incurred restructuring and other charges of $150.4 million in 2001.
Interest Expense. Interest expense increased $2.3 million, or 1.8%, to $133.5 million in 2001 from $131.2 million in 2000. The increase was due to interest related to the $125.0 million drawn on our revolving line of credit in May 2001 as well as increased interest rates related to the amendments to our senior bank facilities (See “Liquidity and Capital Resources” below and Note 9 “Long-term Debt” of Notes to Consolidated Financial Statements included elsewhere in this report). The increase in interest expense was partially offset by the redemption of a portion of the senior subordinated notes and prepayment of a portion of the loans outstanding under the senior bank facilities with the proceeds from our IPO during 2000.
Equity in Earnings of Joint Ventures. Equity in earnings from joint ventures decreased $0.4 million to $4.0 million in 2001 from $4.4 million in 2000, due primarily to the sale of our interest in our Semiconductor Miniatures Products Malaysia Sdn. Bhd. (“SMP”) joint venture effective December 31, 2000, offset by an increase in earnings from our Leshan joint venture.
Gain on Sale of Investment in Joint Venture. We had a 50% interest in SMP. As a part of the joint venture agreement, our joint venture partner, Philips Semiconductors International B.V. (“Philips”), had the right to purchase our interest in SMP between January 2001 and July 2002. In February 2001, Philips exercised its purchase right, acquiring our 50% interest in SMP effective December 31, 2000. This transaction resulted in proceeds of approximately $20.4 million and a pre-tax gain of approximately $3.1 million.
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Minority Interests. Minority interests represent the portion of the net income (loss) of our two majority-owned Czech subsidiaries attributable to the minority owners of each subsidiary. We consolidate these subsidiaries in our financial statements. Minority interests in the subsidiaries’ losses (income) were $2.1 million in 2001 compared to ($2.2) million in 2000 due to lower capacity utilization during 2001.
Income Tax Provision. The provision for income taxes increased in 2001 to $345.7 million from $36.7 million in 2000. During the fourth quarter of 2001, we recorded a $366.8 million income tax charge to establish a valuation allowance for the portion of our deferred tax assets for which it is more likely than not that the related benefits will not be realized. When coupled with the tax benefits relating to the 2001 operating loss that were not recognized during the year, our valuation allowance totaled $450.6 million at December 31, 2001. We established the valuation allowance based upon management’s analysis of the information available which included, among other things, the operating loss experienced during the year as well as uncertainties surrounding the timing of the recovery in economic conditions both generally as well as with the semiconductor industry. Our 2001 effective tax rate, after valuation allowance, is 93.1% as compared to 35.6% in 2000. (See Note 10 “Income Taxes” of Notes to Consolidated Financial Statements elsewhere in this report.)
Liquidity and Capital Resources
In this section of the management discussion and analysis segment, we are going to discuss:
1) Sources and uses of cash, and significant factors that influence both;
2) Key events affecting our capital structure;
3) Our analysis of our cash flows for 2002; and
4) Our commitments and contractual obligations.
All of these factors are important to an understanding of our ability to meet our current obligations, to fund working capital, to finance expansion either by internal means or through the acquisition of other businesses, or to pay down existing debt.
To summarize our current status, our operating activities provided cash of $30.6 million in 2002 and $301.3 million in 2000 and used cash of $137.3 million in 2001. At December 31, 2002, we had $182.4 million in cash and cash equivalents, net working capital of $195.0 million, term or revolving debt of $1,403.2 million and a stockholders’ deficit of $662.1 million. Our long-term debt includes $701.6 million under our senior bank facilities; $291.4 million (net of discount) of our 12% second lien senior secured notes due 2008; $260.0 million of our 12% senior subordinated notes due 2009; $126.9 million under a 10% junior subordinated note payable to Motorola due 2011; and $23.3 million under a note payable to a Japanese bank due 2010. We were in compliance with all of the covenants contained in our various debt agreements as of December 31, 2002 and expect to remain in compliance over the next twelve months.
Sources and Uses of Cash
We require cash to fund our operating expenses, including working capital requirements and outlays for research and development, to make capital expenditures, strategic acquisitions and investments, and to pay debt service, including principal and interest and capital lease payments. Our principal sources of liquidity are cash on hand, cash generated from operations, and funds from external borrowings and equity issuances. In the near term, we expect to fund our primary cash requirements through cash generated from operations, cash and cash equivalents on hand, and targeted asset sales, including our Guadalajara, Mexico site, which is currently on the market for sale. Additionally, as part of our business strategy, we review acquisition and divestiture opportunities and proposals on a regular basis.
We believe that the key factors that could affect our internal and external sources of cash include:
| • | factors that affect our results of operations and cash flows, including reduced demand for our products resulting from the recent economic slowdown and actions taken by our customers to manage their inventories in line with incoming business, competitive pricing pressures, under-utilization of our manufacturing capacity, our ability to achieve further reductions in operating expenses, the impact of our restructuring program on our productivity, and our ability to make the research and development expenditures required to remain competitive in our business; and |
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| • | factors that affect our access to bank financing and the debt and equity capital markets that could impair our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise including interest rate fluctuations, our ability to maintain compliance with financial covenants and ratios under our existing credit facilities, other limitations imposed by our credit facilities or arising from our substantial leverage, and our move to the Nasdaq SmallCap Market, discussed further herein. |
Our ability to service our long-term debt, to remain in compliance with the various covenants and restrictions contained in our credit agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities which is subject to, among other things, our future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may beyond our control.
If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us. Although there can be no assurance, we believe that cash flow from operating activities coupled with existing cash balances will be adequate to fund our operating and capital needs as well as enable us to maintain compliance with our various debt agreements through December 31, 2003. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.
Key Events Affecting our Capital Structure
| Debt Refinancing in 2002 |
On May 6, 2002 we issued $300.0 million principal amount of second lien senior secured notes due 2008. The second lien senior secured notes were issued at a price of 96.902% of par and will mature on May 15, 2008. The second lien senior secured notes initially accrued interest at a rate of 12% per annum. Commencing February 6, 2003, the second lien senior secured notes began accruing interest at a rate of 13% per annum. This increased rate will remain in effect unless on or prior to August 6, 2003 we have issued common stock or certain convertible preferred stock to financial sponsors generating at least $100.0 million in gross cash proceeds to prepay indebtedness under our senior bank facilities or under any other senior credit facility secured by a first-priority lien and have permanently reduced the related loan commitments equal to the amount prepaid. Interest on the second lien senior secured notes is payable semi-annually in cash. The obligations under the second lien senior secured notes are fully and unconditionally guaranteed on a joint and several basis by each of the domestic subsidiaries of ON Semiconductor Corporation (other than Semiconductor Components Industries, LLC, which is a co-issuer). The second lien senior secured notes and the guarantees thereof are secured on a second-priority basis by the assets that secure our senior bank facilities and they rank equal in right of payment with all of our and the guarantors’ existing and future senior indebtedness and senior to our and the guarantors’ existing and future senior subordinated and subordinated indebtedness and effectively junior to all of the liabilities of our subsidiaries that have not guaranteed such second lien senior secured notes. In connection with the offering of second lien senior secured notes, we amended our senior bank facilities to, among other things, permit the issuance of the second lien senior secured notes, make certain of the financial ratio maintenance requirements thereunder less restrictive and impose minimum EBITDA and cash requirements. (See Note 9 “Long-Term Debt” of the notes to our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this report.) We used $278.6 million of net cash proceeds from the sale of the second lien senior secured notes to prepay a portion of our senior bank facilities. Because the remaining principal amount of loans outstanding under our senior bank facilities was reduced below $750.0 million as a result of this refinancing, the supplemental interest charges thereon (described in Note 9 “Long-Term Debt” of the notes to our audited consolidated financial statements elsewhere in this report) were reduced from 3.0% to 1.0%. In connection with this refinancing, we wrote off $6.5 million of debt issuance costs.
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| Debt Refinancing in 2003 |
On March 3, 2003, we issued $200.0 million aggregate principal amount of first lien senior secured notes due 2010. The first lien senior secured notes were issued at a price of 95.467% of par value, bear interest at a rate of 12% per annum, payable semi-annually in cash, and will mature on March 15, 2010. The obligations under the first lien senior secured notes are fully and unconditionally guaranteed on a joint and several basis by each of the domestic subsidiaries of ON Semiconductor Corporation (other than Semiconductor Components Industries, LLC, which is a co-issuer). The first lien senior secured notes and the guarantees thereof are secured on a first-priority basis by the assets that secure our senior bank facilities and they rank equal in right of payment with all of our and the guarantors’ existing and future senior indebtedness and senior to our and the guarantors’ existing and future senior subordinated and subordinated indebtedness and effectively junior to all of the liabilities of our subsidiaries that have not guaranteed such notes. In connection with the offering of the first lien senior secured notes, we further amended our senior bank facilities to, among other things:
| • | permit the issuance of the first lien senior secured notes, | |
| • | remove the requirement that we maintain certain minimum interest expense coverage ratios and do not exceed certain maximum leverage ratios, | |
| • | reduce to $140.0 million our minimum EBITDA requirement for any four consecutive fiscal quarters, | |
| • | reduce our permitted capital expenditures to $100.0 million per year (subject to certain increases for improved financial performance and carryovers from prior periods), | |
| • | permit the redemption of up to 35% of the senior secured first lien notes out of the net proceeds of equity offerings and | |
| • | convert $62.5 million of the outstanding loans under our revolving credit facility into a new tranche of term loans, as described above. |
We used $180.9 million of net cash proceeds from the sale of the notes to prepay a portion of our senior bank facilities, including $25.0 million of which proceeds were used to repay borrowings under our revolving credit facility and permanently reduce the commitments thereunder by such amount. In connection with this refinancing, we wrote-off $3.5 million of debt issuance costs.
| Issuance of Series A Cumulative Convertible Redeemable Preferred Stock |
At June 29, 2001, we were not in compliance with minimum interest expense coverage ratio and maximum leverage ratio covenants under our senior bank facilities. On August 13, 2001, we received a waiver in respect of this noncompliance at June 29, 2001 and in respect of any future noncompliance with these covenants through December 31, 2002. In connection with this waiver, we amended our senior bank facilities. The key terms of this amendment are described in Note 9 “Long-Term Debt” of the notes to our audited consolidated financial statements included elsewhere in this report. As a condition to the waiver and amendment, we were required to obtain $100.0 million through an equity investment from an affiliate of Texas Pacific Group. We satisfied this requirement on September 7, 2001, when we issued 10,000 shares of Series A Cumulative Convertible Redeemable Preferred Stock to an affiliate of Texas Pacific Group in exchange for $100 million ($99.2 million, net of issuance costs). The material terms of the preferred stock are summarized in Note 11 “Redeemable Preferred Stock” of the notes to our audited consolidated financial statements included elsewhere in this report.
| Shelf Registration |
On April 24, 2002, we filed with the Securities and Exchange Commission a shelf registration statement on Form S-3, which we amended on December 6, 2002, to register 40,000,000 shares of our common stock. We may sell the registered shares in one or more offerings depending on market and general business conditions.
| Transfer to Nasdaq SmallCap Market |
On July 9, 2002, we received a notice from Nasdaq advising us that we were not in compliance with the Nasdaq National Market’s minimum bid price requirement (Marketplace Rule 4450 (b)(4)) because our
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| Analysis of Cash Flows |
Cash flow information for the years ended December 31, 2002 and 2001 are as follows (in millions):
| Year Ended December 31, | |||||||||||
| 2002 | 2001 | ||||||||||
| (In millions) | |||||||||||
|
Cash flows from operating activities:
|
|||||||||||
|
Net loss
|
$ | (141.9 | ) | $ | (831.4 | ) | |||||
|
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
|
|||||||||||
|
Depreciation and amortization
|
133.4 | 165.8 | |||||||||
|
Extraordinary loss on debt prepayment
|
6.5 | — | |||||||||
|
Cumulative effect of accounting change
|
— | 155.2 | |||||||||
|
Amortization of debt issuance costs and debt
discount
|
8.1 | 6.0 | |||||||||
|
Provision for excess inventories
|
16.0 | 50.9 | |||||||||
|
Non-cash impairment of property, plant and
equipment
|
12.4 | 56.2 | |||||||||
|
Non-cash interest on junior subordinated note
payable to Motorola
|
11.7 | 10.7 | |||||||||
|
Undistributed earnings of unconsolidated joint
ventures
|
(3.9 | ) | (4.0 | ) | |||||||
|
Gain on sale of investment in joint venture
|
— | (3.1 | ) | ||||||||
|
Deferred income taxes
|
6.4 | 317.1 | |||||||||
|
Stock compensation expense
|
4.5 | 5.0 | |||||||||
|
Other
|
0.4 | (2.0 | ) | ||||||||
|
Changes in assets and liabilities:
|
|||||||||||
|
Receivables
|
21.4 | 129.4 | |||||||||
|
Inventories
|
8.0 | 23.1 | |||||||||
|
Other assets
|
(5.1 | ) | (4.6 | ) | |||||||
|
Accounts payable
|
(34.3 | ) | (62.8 | ) | |||||||
|
Accrued expenses
|
(6.5 | ) | (62.2 | ) | |||||||
|
Income taxes payable
|
3.1 | (13.9 | ) | ||||||||
|
Accrued interest
|
19.8 | 5.7 | |||||||||
|
Deferred income on sales to distributors
|
(28.6 | ) | (82.8 | ) | |||||||
|
Other long-term liabilities
|
(0.8 | ) | 4.4 | ||||||||
|
Net cash provided by (used in) operating
activities
|
30.6 | (137.3 | ) | ||||||||
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| Year Ended December 31, | ||||||||||
| 2002 | 2001 | |||||||||
| (In millions) | ||||||||||
|
Cash flows from investing activities:
|
||||||||||
|
Purchases of property, plant and equipment
|
(26.5 | ) | (117.9 | ) | ||||||
|
Investments in and advances to joint ventures
|
— | (5.5 | ) | |||||||
|
Acquisition of minority interests in consolidated
subsidiaries
|
— | (0.1 | ) | |||||||
|
Proceeds from sale of investment in joint venture
|
— | 20.4 | ||||||||
|
Proceeds from sales of property, plant and
equipment
|
4.5 | 13.8 | ||||||||
|
Net cash used in investing activities
|
(22.0 | ) | (89.3 | ) | ||||||
|
Cash flows from financing activities:
|
||||||||||
|
Proceeds from debt issuance
|
290.7 | — | ||||||||
|
Proceeds from senior credit facilities and other
borrowings
|
— | 125.0 | ||||||||
|
Proceeds from issuance of common stock under the
employee stock purchase plan
|
1.4 | 4.2 | ||||||||
|
Proceeds from stock option exercises
|
1.2 | 0.9 | ||||||||
|
Proceeds from issuance of redeemable preferred
stock, net of issuance costs
|
— | 99.2 | ||||||||
|
Payment of capital lease obligation
|
(1.1 | ) | (1.9 | ) | ||||||
|
Payment of debt issuance costs
|
(12.1 | ) | (5.1 | ) | ||||||
|
Repayment of senior credit facilities
|
(287.1 | ) | (5.6 | ) | ||||||
|
Net cash provided by (used in) financing
activities
|
(7.0 | ) | 216.7 | |||||||
|
Effect of exchange rate changes on cash and cash
equivalents
|
1.0 | 0.8 | ||||||||
|
Net increase (decrease) in cash and cash
equivalents
|
2.6 | (9.1 | ) | |||||||
|
Cash and cash equivalents, beginning of period
|
179.8 | 188.9 | ||||||||
|
Cash and cash equivalents, end of period
|
$ | 182.4 | $ | 179.8 | ||||||
For the years ended December 31, 2002 and 2001, we have provided $2.6 million and utilized $9.1 million in cash, respectively. However, the makeup of the cash flow from operations, investing and financing activities has been quite different in these periods. The year ended December 31, 2002, as compared to the year ended December 31, 2001, shows an improvement in cash flows from operations of $167.9 million, a reduction in the net cash used in investing activities of $67.3 million, and a decrease of $223.7 million in cash flows from financing activities.
We generated $30.6 million in cash flow from operations during 2002 relative to cash used in operations of $137.3 million in 2001. This $167.9 million improvement is primarily the result of reduced costs resulting from our restructuring program and reduced restructuring payments.
We used $22.0 million in net cash from investing activities in 2002 as compared to $89.3 million in 2001. The decline was the result of lower capital equipment spending. Our need for incremental property, plant or equipment has been significantly reduced given the current level of business. Furthermore, our senior bank facilities restrict the amount of capital equipment we can purchase within certain periods. As a result, we have been selective in purchasing new equipment.
Financing activities during 2002 have resulted in net cash used of $7.0 million versus net cash provided in 2001 of $216.7 million. During 2002, we refinanced a portion of our long term debt by issuing $300.0 million of senior secured notes and using the net cash proceeds of $278.6 million (net of discount and issuance costs) and additional funds to prepay debt principal of $283.3 million of our senior bank facilities. In contrast, in 2001 we drew on our $125.0 million revolving credit facility and received net proceeds of $99.2 million from the issuance of redeemable preferred stock to help fund the cash used in operations and equipment purchases needed at the time.
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| EBITDA |
While earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not intended to represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as an indicator of operating performance or an alternative to cash flow as a measure of liquidity, it is included herein to provide additional information with respect to our ability to meet our future debt service, capital expenditure and working capital requirements. This calculation may differ in method of calculation from similarly titled measures used by other companies. The following table sets forth our EBITDA for the years ended December 31, 2002, 2001 and 2000, with a reconciliation to cash flows from operations, the most directly comparable financial measure under generally accepted accounting principles:
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
|
Net income (loss)
|
$ | (141.9 | ) | $ | (831.4 | ) | $ | 71.1 | |||||
|
Plus:
|
|||||||||||||
|
Depreciation and amortization
|
133.4 | 165.8 | 158.9 | ||||||||||
|
Interest expense, net
|
145.2 | 133.5 | 131.2 | ||||||||||
|
Income tax provision
|
8.8 | 345.7 | 50.1 | ||||||||||
|
EBITDA
|
$ | 145.5 | $ | (186.4 | ) | $ | 411.3 | ||||||
| Reconcilation of EBITDA to Net Cash Provided by (Used in) Operating Activities: | |||||||||||||
|
EBITDA
|
$ | 145.5 | $ | (186.4 | ) | $ | 411.3 | ||||||
|
Increase (decrease):
|
|||||||||||||
|
Interest expense, net of interest income
|
(145.2 | ) | (133.5 | ) | (131.2 | ) | |||||||
|
Income tax provision (benefit)
|
(8.8 | ) | (345.7 | ) | (50.1 | ) | |||||||
|
Write-off of acquired in-process research and
development
|
— | — | 26.9 | ||||||||||
|
Extraordinary loss on debt prepayment
|
6.5 | — | 29.2 | ||||||||||
|
Cumulative effect of accounting change
|
— | 155.2 | — | ||||||||||
|
Amortization of debt issuance costs and debt
discount
|
8.1 | 6.0 | 5.9 | ||||||||||
|
Provision for excess inventories
|
16.0 | 50.9 | 44.1 | ||||||||||
|
Non-cash impairment of property, plant and
equipment
|
12.4 | 56.2 | — | ||||||||||
|
Non-cash interest on junior subordinated note
payable to Motorola
|
11.7 | 10.7 | 9.6 | ||||||||||
|
Undistributed earnings of unconsolidated joint
ventures
|
(3.9 | ) | (4.0 | ) | (4.4 | ) | |||||||
|
Gain on sale of investment in joint venture
|
— | (3.1 | ) | — | |||||||||
|
Deferred income taxes
|
6.4 | 317.1 | (11.6 | ) | |||||||||
|
Stock compensation expense
|
4.5 | 5.0 | 0.7 | ||||||||||
|
Other
|
0.4 | (2.0 | ) | 2.4 | |||||||||
|
Changes in operating assets and liabilities
|
(23.0 | ) | (63.7 | ) | (31.5 | ) | |||||||
|
Net cash provided by (used in) operations
|
30.6 | (137.3 | ) | 301.3 | |||||||||
As discussed in Note 9 “Long-Term Debt” to our audited consolidated financial statements included elsewhere in this report, our debt covenants require us to maintain minimum adjusted EBITDA levels, as defined by our credit agreement. This adjusted EBITDA computation excludes restructuring and certain other charges, and includes, among other things, the EBITDA of our Leshan, China joint venture. Therefore, EBITDA in the above table is not representative of the adjusted EBITDA used to determine our debt covenant compliance.
| Commercial Commitments and Contractual Obligations |
Our principal outstanding contractual obligations relate to our senior bank facilities, other long-term debt, operating leases, purchase obligations, pension obligations and our redeemable preferred stock. The following
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Amount of Commitment by Expiration Period
| Total | ||||||||||||||||||||||||||||
| Amounts | ||||||||||||||||||||||||||||
| Commercial Commitments | Committed | 2003 | 2004 | 2005 | 2006 | 2007 | Therafter | |||||||||||||||||||||
|
Standby letter of credit
|
$ | 19.1 | $ | 17.7 | $ | 0.8 | $ | — | $ | 0.6 | $ | — | $ | — | ||||||||||||||
|
Total commercial commitments
|
$ | 19.1 | $ | 17.7 | $ | 0.8 | $ | — | $ | 0.6 | $ | — | $ | — | ||||||||||||||
Payments Due by Period
| Contractual Obligations | Total | 2003 | 2004 | 2005 | 2006 | 2007 | Therafter | |||||||||||||||||||||
|
Long-term debt
|
$ | 1,403.2 | $ | 9.3 | $ | 11.8 | $ | 236.9 | $ | 280.9 | $ | 176.8 | $ | 687.5 | ||||||||||||||
|
Operating leases
|
17.6 | 9.4 | 4.3 | 2.5 | 1.1 | 0.3 | — | |||||||||||||||||||||
|
Purchase obligations
|
98.5 | 65.3 | 20.4 | 10.9 | 1.9 | — | — | |||||||||||||||||||||
|
Other long-term obligations — pension
plan
|
40.9 | 8.4 | 11.8 | 20.7 | — | — | — | |||||||||||||||||||||
|
Redeemable preferred stock (including future
dividends)
|
188.5 | — | — | — | — | — | 188.5 | |||||||||||||||||||||
|
Total contractual cash obligations
|
$ | 1,748.7 | $ | 92.4 | $ | 48.3 | $ | 271.0 | $ | 283.9 | $ | 177.1 | $ | 876.0 | ||||||||||||||
Our long-term debt includes $701.6 million under senior bank facilities, $291.4 million of senior secured notes (net of unamortized discount), $260.0 million of senior subordinated notes due 2009, $126.9 million under the junior subordinated note payable to Motorola, and $23.3 million under a note payable to a Japanese bank.
In the normal course of our business, we enter into various operating leases for equipment including our mainframe computer system, desktop computers, communications, foundry equipment and service agreements relating to this equipment.
In addition, we have the following purchase obligations at December 31, 2002:
| Total | 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | ||||||||||||||||||||||
|
Capital purchase obligations
|
$ | 1.5 | $ | 1.5 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
Foundry and inventory purchase obligations
|
37.4 | 34.4 | 3.0 | — | — | — | — | |||||||||||||||||||||
|
Mainframe support
|
36.3 | 14.1 | 12.5 | 7.8 | 1.9 | — | — | |||||||||||||||||||||
|
Various information technology and communication
services
|
20.2 | 13.0 | 4.2 | 3.0 | — | — | — | |||||||||||||||||||||
|
Other
|
3.1 | 2.3 | 0.7 | 0.1 | — | — | — | |||||||||||||||||||||
| $ | 98.5 | $ | 65.3 | $ | 20.4 | $ | 10.9 | $ | 1.9 | $ | — | $ | — | |||||||||||||||
Finally, our other long-term commitments consist of estimated payments relating to our U.S. and foreign pension plans. (See Note 14 “Employee Benefit Plans” of the notes to our audited consolidated financial statements included elsewhere in this report.) In regards to the U.S. pension plan, we reevaluated our current assumptions in light of the actual returns experienced, current annuity rates and the expected termination of the U.S. pension plan as of December 31, 2004 with the subsequent payment of benefits in 2005. We expect pension expense to be approximately $27 million over the remaining life of the plan with a related cash funding requirement of $36 million. Upon the termination of the U.S. pension plan, we are under an obligation to ensure that the plan has assets sufficient to pay accrued benefits.
Our Series A Cumulative Convertible Redeemable Preferred Stock is redeemable at the holder’s option anytime after September 7, 2009. The preferred stock has a cumulative dividend payable quarterly in cash, at the rate of 8.0% per annum (or, if greater during the relevant quarterly period, in an amount equal to the value of the dividends that would be paid on the common stock then issuable upon conversion of the preferred
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The table above does not include any obligations we may have in the future to purchase products from our joint venture in Leshan, China. We were obligated to purchase 85%, 81% and 86% of Leshan’s production capacity in 2002, 2001 and 2000, respectively, which resulted in purchases (including underutilization charges) from our Leshan joint venture of $88.2 million, $52.0 million and $62.0 million, of products, respectively, during such periods. For 2003, we are obligated to purchase 82% of the expected production capacity at Leshan during the year.
In November 2000, our Leshan joint venture entered into a $20.0 million loan agreement with a Chinese bank. The loan has a variable interest rate, requires quarterly interest payments and principal payments on the third anniversary of the loan draw, and is secured with certain assets of the joint venture.
In June 2002, we obtained approval from the Chinese government for our Leshan joint venture to invest up to $231 million for semiconductor operations, which is in addition to the $278 million originally approved. At December 31, 2002 our total investment in and advances to the joint venture was $99.3 million, including loans of $63.3 million. In August 2002, our joint venture began construction on a 6-inch wafer fabrication facility in Leshan. During 2003, we plan to spend approximately $5 million on construction of the fabrication building, and will determine the timing for additional capital expenditures based on end-market demand and our overall capacity utilization.
For additional information on our Leshan joint venture, see Note 8 “Investments in Joint Ventures” of the notes to our audited consolidated financial statements and Part I, Item 1 “Business — Manufacturing Operations” in each case included elsewhere in this report.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” Under this standard, asset retirement obligations will be recognized when incurred at their estimated fair value. In addition, the cost of the asset retirement obligation will be capitalized as a part of the assets’ carrying valued and depreciated over the assets’ remaining useful life. We will be required to adopt SFAS No. 143 effective January 1, 2003. We do not expect the implementation of SFAS No. 143 to have a material effect on our results of operations.
We adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” effective January 1, 2002. SFAS No. 144 requires that all long-lived assets (including discontinued operations) that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. Our adoption of SFAS No. 144 did not impact our financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002,” SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and excludes extraordinary item treatment for gains and losses associated with the extinguishment of debt that do not meet the Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” criteria. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB No. 30 for classification as an extraordinary item shall be reclassified. SFAS No. 145 also amends FASB Statement No. 13, Accounting for Leases” and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. We are required to adopt SFAS No. 145 effective January 1,
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In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost as defined in EITF No. 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated by us after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment to FAS 123.” SFAS No. 148 provides alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in annual and interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal year 2002. The interim disclosure requirements are effective for the first quarter of fiscal year 2003. We have no plans to change to the fair value based method of accounting for stock-based employee compensation.
In November 2002, the FASB issued Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 also expands the disclosures required to be made by a guarantor about its obligations under certain guarantees that it has issued. Initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified. The disclosure requirements are effective immediately and such disclosures have been included in Note 7 “Balance Sheet Information” in the notes to our audited consolidated financial statements included elsewhere in this report. We do not expect the adoption of FIN No. 45 to have a material effect on our financial condition or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied to the first interim or annual period beginning after June 15, 2003. Additionally, certain transitional disclosures are required immediately if it is reasonably possible that we will consolidate or disclose information about a variable interest entity when FIN No. 46 becomes effective. We are currently evaluating the effect that the adoption of FIN No. 46 will have on the accounting for our investment in Leshan-Phoenix Semiconductor Ltd. as well as the related impact on our results of operations and financial condition. We have included the transitional disclosures required by FIN No. 46 in Note 8, “Investment in Joint Ventures” in the notes to our audited consolidated financial statements included elsewhere in this report.
Trends, Risks and Uncertainties
This Annual Report on Form 10-K includes “forward-looking statements,” as that term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this Form 10-K are forward-looking statements, particularly statements about our plans, strategies and prospects under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”
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Table of Contents
You should carefully consider the trends, risks and uncertainties described below and other information in this Form 10-K and subsequent reports filed with the Securities and Exchange Commission before making any investment decision with respect to our securities. If any of the following trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline, and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
Effective January 1, 2001, we changed our accounting method for recognizing revenue on sales to distributors. Recognition of revenue and related gross profit on sales to distributors is now deferred until the distributor resells the product. In the risk factors set forth below, we have generally restated financial information on a pro forma basis for periods prior to 2001 to reflect the change in revenue recognition on sales to distributors.
Trends, Risks and Uncertainties Related to Our Business
We have experienced declines in revenues and operating losses, and we may experience additional declines in revenues and operating losses in the future.
Our historical financial results have been, and our future financial results are anticipated to be subject to substantial fluctuations. Our total revenues for 2002 were $1,084.5 million, compared to $1,214.6 million for 2001 and $1,958.7 million in 2000. This decline was due primarily to reduced demand for our products resulting from the current economic slowdown and declines in the average selling prices for our products. We incurred a net loss for 2002 of $141.9 million, compared to a net loss of $831.4 million for 2001 and net income of $30.8 million in 2000. The most recent downturn in our business has been most pronounced with respect to our high frequency clock and data management products. Net revenues from high frequency clock and data management products represented $72.0 million, $118.5 million and $295.9 million, or 6.6%, 9.8% and 15.1% of the total revenues, in 2002, 2001 and 2000, respectively.
Reduced end-user demand, continued price declines, underutilization of our manufacturing capacity and other factors could adversely affect our business in the near term and we may experience additional declines in revenue and operating losses in the future. In order to return to profitability, we must successfully implement our business plan, including our cost reduction initiatives. However, we also currently face an environment of uncertain demand and pricing pressure in the markets our products address. We cannot assure you that we will be able to return to profitability or that we will be able to sustain our profitability, if achieved.
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We operate in the highly cyclical semiconductor industry, which is subject to significant downturns.
The semiconductor industry is highly cyclical. The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles (for semiconductors and for the end-user products in which they are used) and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. We have experienced these conditions in our business in the past, are currently experiencing a significant and prolonged downturn and may experience such downturns in the future. The most recent downturn, which began in the fourth quarter of 2000, has been severe and prolonged, and it is uncertain when any meaningful recovery will occur. Future downturns in the semiconductor industry may also be severe and prolonged. Future downturns in the semiconductor industry, or any failure of the industry to fully recover from its recent downturn, could seriously impact our revenues and harm our business, financial condition and results of operations.
During the 1990s and continuing into 2000, the semiconductor industry enjoyed unprecedented growth, benefiting from the rapid expansion of the internet and other computing and communications technologies. During 2001, we — like many of our customers and competitors — were adversely affected by a general economic slowdown and an abrupt decline in demand for many of the end-user products that incorporate our integrated circuits and standard semiconductors. The impact of slowing end-customer demand was compounded by higher than normal levels of equipment and component inventories among our original equipment manufacturer, subcontractor and distributor customers, resulting in increasing pricing pressure. We expect that factors including, but not limited to, economic uncertainty and downturns relating to the threat or actual occurrence of armed international conflict or terrorist attacks, reduced demand for end-user products, underutilization of our manufacturing capacity and changes in our revenue mix could adversely impact our operating results in the near term.
Our gross margin is dependent on a number of factors, including our level of capacity utilization.
Semiconductor manufacturing requires significant capital investment, leading to high fixed costs, including depreciation expense. If we are unable to utilize our manufacturing and testing facilities at a high level, the fixed costs associated with these facilities will not be fully absorbed, resulting in higher average unit costs and lower gross margins. The decline in product orders and shipments in 2001 resulted in reduced capacity utilization of our facilities as we have attempted to match production with anticipated customer demand. From 2000 to 2001, gross margins declined primarily due to lower factory utilization resulting from lower customer demand, lower selling prices, and a change in product mix towards lower margin devices, partially offset by cost reduction initiatives. As a percentage of total revenues, gross margin was 26.3% for 2002, compared to 17.7% for 2001 and 34.0% in 2000. Although our gross margin has improved between 2001 and 2002, gross margin declined between the third and fourth quarters of 2002 and we anticipate a further decline of 200 to 300 basis points in the first quarter of 2003 as a result of pricing pressure. Increased competition and other factors may lead to further price erosion, lower revenues and lower margins for us in the future.
The failure to implement, as well as the completion and impact of, our profitability enhancement programs and cost reductions could adversely affect our business.
During 2000, 2001 and 2002, we implemented a number of cost reduction initiatives in response to the significant downturn in our industry. These initiatives have included accelerating our manufacturing moves into lower cost regions, transitioning higher-cost external supply to internal manufacturing, working with our material suppliers to further lower costs, personnel reductions, reductions in employee compensation, temporary shutdowns of facilities with mandatory vacation and aggressively streamlining our overhead. However, we cannot assure you that these cost reduction initiatives will, in and of themselves, return us to profitability.
We recorded restructuring charges of $4.8 million in 2000, $146.6 million in 2001 and $35.2 million in 2002 to cover costs associated with our cost reduction initiatives. These costs were primarily comprised of employee separation costs and asset impairments. The impact of these restructuring actions on our ability to effectively compete is subject to risks and uncertainties. Because our restructuring activities involve changes to
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If we are unable to implement our business strategy, our revenues and profitability may be adversely affected.
Our future financial performance and success are largely dependent on our ability to implement our business strategy successfully. Our present business strategy to build upon our position as a global supplier of power and data management semiconductors and standard semiconductor components includes, without limitation, plans to: (1) maintain and refine our product portfolio; (2) continue to develop leading edge customer support services; (3) expand further our just-in-time delivery capabilities; (4) increase our die manufacturing capacity in a cost-effective manner; (5) reduce further the number of our product platforms and process flows; (6) continue to manage our existing portfolio of products aggressively; (7) rationalize our manufacturing operations; (8) relocate manufacturing operations or outsource to lower cost regions; (9) reduce selling and administrative expenses; (10) reduce capital expenditures; (11) actively manage working capital; (12) develop new products in a more efficient manner; and (13) focus on the development of power management and standard analog and high frequency clock and data management products. We cannot assure you that we will successfully implement our business strategy or that implementing our strategy will sustain or improve our results of operations. In particular, we cannot assure you that we will be able to build our position in markets with high growth potential, increase our volume or revenue, rationalize our manufacturing operations or reduce our costs and expenses.
Our business strategy is based on our assumptions about the future demand for our current products and the new products and applications we are developing and on our ability to produce our products profitably. Each of these factors depends on our ability, among other things, to finance our operating and product development activities, maintain high quality and efficient manufacturing operations, relocate and close manufacturing facilities and reduce operating expenses as part of our ongoing cost restructuring with minimal disruption to our operations, access quality raw materials and contract manufacturing services in a cost-effective and timely manner, protect our intellectual property portfolio and attract and retain highly-skilled technical, managerial, marketing and finance personnel. Several of these and other factors that could affect our ability to implement our business strategy, such as risks associated with international operations, the threat or occurrence of armed international conflict and terrorist activities, increased competition, legal developments and general economic conditions, are beyond our control. In addition, circumstances beyond our control and changes in our business or industry may require us to change our business strategy.
We may require additional capital in the future, and additional funds may not be available on terms acceptable to us.
We believe that our existing cash and cash equivalents, together with the cash that we expect to generate from our operations and sales of assets in the ordinary course of business, will be sufficient to meet our planned capital needs for 2003. However, it is possible that we may need to raise additional capital to fund our future activities or to consummate acquisitions of other businesses, products or technologies. As of December 31, 2002 we have $7.9 million of borrowing availability under our revolving credit facility. Subject to the restrictions contained in our senior bank facilities and the indentures governing the notes, our second lien senior secured notes due 2008 and our senior subordinated notes due 2009, we may be able to raise these funds by selling securities to the public or selected investors, or by borrowing money. The transfer of our common stock from the Nasdaq National Market System to the Nasdaq SmallCap Market, which was effective as of October 25, 2002, may make it more difficult for us to raise additional capital by selling securities. We may not be able to obtain additional funds on favorable terms, or at all. If adequate funds are not available, we may be required to curtail our operations significantly, reduce planned capital expenditures and research and development, make selective dispositions of our assets or obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain technologies or potential markets, or otherwise impair our ability to remain competitive.
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We may be unable to make the substantial research and development investments required to remain competitive in our business.
The semiconductor industry requires substantial investment in research and development in order to develop and bring to market new and enhanced technologies and products. We are committed to maintaining spending on new product development in order to stay competitive in our markets. We cannot assure you that we will have sufficient resources to maintain the level of investment in research and development that is required to remain competitive. The primary emphasis of our new product development is in the power management and standard analog and high frequency clock and data management solutions, with 80% of our overall research and development investment targeted in these areas. Our long-term target for research and development expenditures is 6% of our total revenues.
Uncertainties involving the ordering and shipment of, and payment for, our products could adversely affect our business.
Our sales are typically made pursuant to individual purchase orders and we generally do not have long term supply arrangements with our customers. Generally, our terms and conditions allow our customers to cancel orders up to 30 days prior to shipment. We routinely purchase inventory based on customers’ estimates of demand for their products, which is difficult to predict. This difficulty may be compounded when we sell to original equipment manufacturers indirectly through distributors or contract manufacturers, or both, as our forecasts for demand are then based on estimates provided by multiple parties. In addition, our customers may change their inventory practices on short notice for any reason. The cancellation or deferral of product orders, the return of previously sold products or overproduction due to failure of anticipated orders to materialize could result in excess obsolete inventory, which could result in write-downs of inventory or the incurrence of significant cancellation penalties under our arrangements with our raw materials and equipment suppliers.
During 2001, the markets in which our customers operate were characterized by a dramatic decline in end-user demand and continued high levels of channel inventories, which reduced visibility of future demand for our products and, in some cases, led to delays in payments for our products. In 2002, short customer lead times prevail given the over-capacity in the industry, and we believe that these and other factors could adversely affect our revenues in the near term.
An inability to introduce new products could adversely affect us, and changing technologies or consumption patterns could reduce the demand for our products.
Rapidly changing technologies and industry standards, along with frequent new product introductions, characterize the industries that are currently the primary end-users of semiconductors. As these industries evolve and introduce new products, our success will depend on our ability to predict and adapt to these changes in a timely and cost-effective manner by designing, developing, manufacturing, marketing and providing customer support for our own new products and technologies.
We cannot assure you that we will be able to identify changes in the product markets and requirements of our customers and end-users and adapt to such changes in a timely and cost-effective manner. Nor can we assure you that products or technologies that may be developed in the future by our competitors and others will not render our products or technologies obsolete or noncompetitive. A fundamental shift in technologies or consumption patterns in our existing product markets or the product markets of our customers or end-users could have a material adverse effect on our business or prospects.
Competition in our industry could prevent us from maintaining our revenues and from raising prices to offset increases in costs.
The semiconductor industry, particularly the market for semiconductor components, is highly competitive. As a result of the recent economic downturn, competition in the markets in which we operate intensified as manufacturers of semiconductor components offered reduced prices in order to combat production overcapacity and high inventory levels. Although only a few companies compete with us in all of our product lines, we face significant competition within each of our product lines from major international semiconductor companies as well as smaller companies focused on specific market niches. In addition, companies not currently in direct competition with us may introduce competing products in the future. The semiconductor
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Many of our competitors may have certain advantages over us, including substantially greater financial and other resources with which to withstand adverse economic or market conditions and pursue development, engineering, manufacturing, marketing and distribution of their products; longer independent operating histories and presence in key markets; patent protection; and greater name recognition.
Because our components are often building block semiconductors that in some cases can be integrated into more complex integrated circuits, we also face competition from manufacturers of integrated circuits, application-specific integrated circuits and fully customized integrated circuits, as well as customers who develop their own integrated circuit products.
We compete in different product lines to various degrees on the basis of price, quality, technical performance, product features, product system compatibility, customized design, strategic relationships with customers, new product innovation, availability, delivery timing and reliability and customer sales and technical support. Gross margins in the industry vary by geographic region depending on local demand for the products in which semiconductors are used, such as personal computers, industrial and telecommunications equipment, consumer electronics and automotive goods. Our ability to compete successfully depends on elements both within and outside of our control, including industry and general economic trends.
Unless we maintain manufacturing efficiency, our future profitability could be adversely affected.
Manufacturing semiconductor components involves highly complex processes that require advanced equipment. We and our competitors continuously modify these processes in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields. Our manufacturing efficiency will be an important factor in our future profitability, and we cannot assure you that we will be able to maintain our manufacturing efficiency or increase manufacturing efficiency to the same extent as our competitors.
From time to time, we have experienced difficulty in beginning production at new facilities, transferring production to other facilities or in effecting transitions to new manufacturing processes that have caused us to suffer delays in product deliveries or reduced yields. We cannot assure you that we will not experience manufacturing problems in achieving acceptable yields or experience product delivery delays in the future as a result of, among other things, capacity constraints, construction delays, transferring production to other facilities, upgrading or expanding existing facilities or changing our process technologies, any of which could result in a loss of future revenues. Our results of operations could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenues do not increase proportionately.
We could be required to incur significant capital expenditures for manufacturing technology and equipment to remain competitive.
Semiconductor manufacturing has historically required, and in the future is likely to continue to require, a constant upgrading of process technology to remain competitive, as new and enhanced semiconductor processes are developed which permit smaller, more efficient and more powerful semiconductor devices. We maintain certain of our own manufacturing, assembly and test facilities, which have required and will continue to require significant investments in manufacturing technology and equipment. We have made substantial capital expenditures and installed significant production capacity to support new technologies and increased production volume. We have reduced our capital expenditures from $198.8 million in 2000 to $117.9 million in 2001 and $26.5 million in 2002. Capital expenditures are expected to increase to approximately $50-$60 million in 2003.
We cannot assure you that we will have sufficient capital resources to make necessary investments in manufacturing technology and equipment. In addition, our principal credit agreement limits the amount of our capital expenditures.
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If we were to lose one of our large customers, our revenues and profitability could be adversely affected.
Product sales to our ten largest customers accounted in the aggregate for approximately 52%, 46% and 53% of our total revenues in 2002, 2001 and 2000, respectively. Many of our customers operate in cyclical industries, and in the past we have experienced significant fluctuations from period to period in the volume of our products ordered. Generally, our agreements with our customers impose no minimum or continuing obligations to purchase our products. We cannot assure you that any of our customers will not significantly reduce orders or seek price reductions in the future or that the loss of one or more of our customers would not have a material adverse effect on our business or prospects.
The loss of our sources of raw materials or manufacturing services, or increases in the prices of such goods or services, could adversely affect our operations and productivity.
Our results of operations could be adversely affected if we are unable to obtain adequate supplies of raw materials in a timely manner or if the costs of our raw materials increase significantly or their quality deteriorates. Our manufacturing processes rely on many raw materials, including silicon wafers, copper lead frames, mold compound, ceramic packages and various chemicals and gases. Generally, our agreements with suppliers impose no minimum or continuing supply obligations, and we obtain our raw materials and supplies from a large number of sources on a just-in-time basis. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. Although we believe that our current supplies of raw materials are adequate, shortages could occur in various essential materials due to interruption of supply or increased demand in the industry.
In addition, for some of our products, such as our new Silicon Germanium (SiGe) technology, we are dependent upon a limited number of highly specialized suppliers for required components and materials. The number of qualified alternative suppliers for these kinds of technologies is extremely limited. We cannot assure you that we will not lose our suppliers for these key technologies or that our suppliers will be able to meet performance and quality specifications or delivery schedules. Disruption or termination of our limited supply sources for these components and materials could delay our shipments of products utilizing these technologies and damage relationships with current and prospective customers.
We also use third-party contractors for some of our manufacturing activities, primarily for wafer fabrication and the assembly and testing of final goods. These contract manufacturers, including Hynix, AIT, ASE and Phenitec, accounted for approximately 30%, 31% and 40% of our cost of sales in 2002, 2001 and 2000, respectively. Our agreements with these manufacturers typically require us to forecast product needs and commit to purchase services consistent with these forecasts, and in some cases require longer-term commitments in the early stages of the relationship. Our operations could be adversely affected if these contractual relationships were disrupted or terminated, the cost of such services increased significantly, the quality of the services provided deteriorated or our forecasts proved to be materially incorrect.
In the case of Motorola, we agreed to continue providing manufacturing services to each other (including Motorola’s manufacturing of our emitter-coupled logic products) for limited periods of time following our recapitalization. Under our agreements with Motorola, the prices of these services are fixed at levels that are intended to approximate each party’s cost of providing the services. We fulfilled our minimum commitments to purchase manufacturing services from Motorola in 2002. We could be adversely affected if we are unable to relocate these manufacturing operations to our own facilities or to other third-party manufacturers on cost-effective terms or make other satisfactory arrangements prior to the time when these agreements expire.
Acquisitions and strategic alliances may harm our operating results or cause us to incur debt or assume contingent liabilities or dilute our stockholders.
We may in the future acquire and form strategic alliances relating to other businesses, products and technologies. Successful acquisitions and alliances in the semiconductor industry are difficult to accomplish because they require, among other things, efficient integration and aligning of product offerings and manufacturing operations and coordination of sales and marketing and research and development efforts. The difficulties of integration and alignment may be increased by the necessity of coordinating geographically separated organizations, the complexity of the technologies being integrated and aligned and the necessity of
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Our international operations subject us to risks inherent in doing business on an international level that could adversely impact our results of operations.
Approximately 40%, 38% and 22% of our total revenues in 2001 and 37%, 44% and 19% of our total revenues in 2002 were derived from the Americas, the Asia/ Pacific region and Europe (including the Middle East), respectively. We maintain significant operations in Seremban, Malaysia; Carmona, the Philippines; Aizu, Japan; Leshan, China; Roznov, the Czech Republic; and Piestany, the Slovak Republic. In addition, we rely on a number of contract manufacturers whose operations are primarily located in the Asia/ Pacific region.
We cannot assure you that we will be successful in overcoming the risks that relate to or arise from operating in international markets. Risks inherent in doing business on an international level include, among others, the following:
| • | economic and political instability (including as a result of the threat or occurrence of armed international conflict or terrorist attacks); | |
| • | changes in regulatory requirements, tariffs, customs, duties and other trade barriers; | |
| • | transportation delays; | |
| • | power supply shortages and shutdowns; | |
| • | difficulties in staffing and managing foreign operations and other labor problems; | |
| • | currency convertibility and repatriation; | |
| • | taxation of our earnings and the earnings of our personnel; and | |
| • | other risks relating to the administration of or changes in, or new interpretations of, the laws, regulations and policies of the jurisdictions in which we conduct our business. |
Our activities outside the United States are subject to additional risks associated with fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. While our sales are primarily denominated in U.S. dollars, worldwide semiconductor pricing is influenced by currency rate fluctuations.
If we fail to attract and retain highly-skilled personnel, our results of operations and competitive position could deteriorate.
Our success depends upon our ability to attract and retain highly-skilled technical, managerial, marketing and finance personnel. The market for personnel with such qualifications is highly competitive. For example, analog component designers are difficult to attract and retain, and the failure to attract and retain analog component designers could compromise our ability to keep pace with our competitors in the market for analog components. We have not entered into employment agreements with all of our key personnel. As employee incentives, we issue common stock options that generally have exercise prices at the market value at time of the grant and that are subject to vesting. Recently, our stock price has declined substantially, reducing the effectiveness of these incentives. Loss of the services of, or failure to effectively recruit, qualified personnel, including senior managers and design engineers, could have a material adverse effect on our business.
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We use a significant amount of intellectual property in our business. Some of that intellectual property is currently subject to disputes with third parties, and litigation could arise in the future. If we are unable to protect the intellectual property we use, our business could be adversely affected.
We rely on patents, trade secrets, trademarks, mask works and copyrights to protect our products and technologies. Some of our products and technologies are not covered by any patents or pending patent applications, and we cannot assure you that:
| • | any of the substantial number of U.S. and foreign patents and pending patent applications that we employ in our business, including those that Motorola assigned, licensed or sublicensed to us in connection with our recapitalization, will not lapse or be invalidated, circumvented, challenged, abandoned or licensed to others; | |
| • | the license rights granted by Motorola in connection with our recapitalization will provide competitive advantages to us; | |
| • | any of our pending or future patent applications will be issued or have the coverage originally sought; | |
| • | any of the trademarks, copyrights, trade secrets, know-how or mask works that Motorola has assigned, licensed or sublicensed to us in connection with our recapitalization will not lapse or be invalidated, circumvented, challenged, abandoned or licensed to others; or | |
| • | any of our pending or future trademark, copyright, or mask work applications will be issued or have the coverage originally sought. |
In addition, our competitors or others may develop products or technologies that are similar or superior to our products or technologies, duplicate our products or technologies or design around our protected technologies. Effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in the United States and in foreign countries.
Also, we may from time to time in the future be notified of claims that we may be infringing third-party patents or other intellectual property rights. Motorola has agreed to indemnify us for a limited period of time with respect to some claims that our activities infringe on the intellectual property rights of others. If necessary or desirable, we may seek licenses under such patents or intellectual property rights. However, we cannot assure you that we will obtain such licenses or that the terms of any offered licenses will be acceptable to us. The failure to obtain a license from a third party for technologies we use could cause us to incur substantial liabilities or to suspend the manufacture or shipment of products or our use of processes requiring the technologies. Litigation could cause us to incur significant expense, by adversely affecting sales of the challenged product or technologies and diverting the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor. In the event of an adverse outcome in any such litigation, we may be required to:
| • | pay substantial damages; | |
| • | cease the manufacture, use, sale or importation of infringing products; | |
| • | expend significant resources to develop or acquire non-infringing technologies; | |
| • | discontinue the use of processes; or | |
| • | obtain licenses to the infringing technologies. |
We cannot assure you that we would be successful in any such development or acquisition or that any such licenses would be available to us on reasonable terms. Any such development, acquisition or license could require the expenditure of substantial time and other resources.
We will also seek to protect our proprietary technologies, including technologies that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors’ rights agreements with our collaborators, advisors, employees and consultants. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that persons or institutions will not assert rights to intellectual property arising out of our research.
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We are party to securities class action litigation which may be costly to defend and the outcome of which is uncertain.
In July 2001, three stockholder class action lawsuits were filed in the United States District Court for the Southern District of New York against us, certain of our current and former officers and directors and various investment banking firms who acted as underwriters in connection with our initial public offering in May 2000. In April 2002, the plaintiffs filed a consolidated, amended complaint that supersedes the individual complaints originally filed. The amended complaint generally alleges that our offering documents failed to disclose certain underwriting fees and commissions and underwriter tie-ins and other arrangements with certain customers of the underwriters that impacted the price of our common stock in the after-market. The plaintiffs are seeking unspecified damages. On July 15, 2002, together with other issuer defendants, we filed a collective motion to dismiss the class action lawsuit. This motion is currently pending, and oral argument was heard on November 1, 2002. On February 19, 2003, as to the claims brought against us under the antifraud provisions of the securities laws, the court dismissed these claims with prejudice. As to the claims brought under the registration provisions of the securities laws, the court denied the motion to dismiss these claims. We cannot guarantee that the outcome of these proceedings will be decided in our favor.
We can provide no assurance as to the outcome of this securities litigation. Any conclusion of this litigation in a manner adverse to us could have a material adverse effect on our business, financial condition and results of operations. In addition, the cost to us of defending the litigation, even if resolved in our favor, could be substantial. Such litigation could also substantially divert the attention of our management and our resources in general. Uncertainties resulting from the initiation and continuation of this litigation could harm our ability to compete in the marketplace. Because the price of our common stock has been, and may continue to be, volatile, we can provide no assurance that additional securities litigation will not be filed against us in the future.
Environmental and other regulatory matters could adversely affect our ability to conduct our business and could require expenditures that could have a material adverse affect on our results of operations and financial condition.
Our manufacturing operations are subject to various environmental laws and regulations relating to the management, disposal and remediation of hazardous substances and the emission and discharge of pollutants into the air and water. Our operations are also subject to laws and regulations relating to workplace safety and worker health, which, among other things, regulate employee exposure to hazardous substances. Motorola has agreed to indemnify us for environmental and health and safety liabilities related to the conduct or operations of our business or Motorola’s ownership, occupancy or use of real property occurring prior to the closing of our recapitalization transaction. We also have purchased environmental insurance to cover certain claims related to historical contamination and future releases of hazardous substances. However, we cannot assure you that such indemnification arrangements and insurance policy will cover all material environmental costs. In addition, the nature of our operations exposes us to the continuing risk of environmental and health and safety liabilities related to events or activities occurring after our recapitalization.
We believe that the future cost of compliance with existing environmental and health and safety laws and regulations, and any liability for currently known environmental conditions, will not have a material adverse effect on our business or prospects. However, we cannot predict:
| • | changes in environmental or health and safety laws or regulations; | |
| • | the manner in which environmental or health and safety laws or regulations will be enforced, administered or interpreted; | |
| • | our ability to enforce and collect under indemnity agreements and insurance policies relating to environmental liabilities; or | |
| • | the cost of compliance with future environmental or health and safety laws or regulations or the costs associated with any future environmental claims, including the cost of clean-up of currently unknown environmental conditions. |
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Terrorist attacks, such as the attacks that occurred in New York and Washington D.C. on September 11, 2001, or threats or occurrences of international armed conflict or other terrorist activities both in the United States and internationally may affect the markets in which our common stock trades, the markets in which we operate and our profitability.
On September 11, 2001 the United States was the target of terrorist attacks of unprecedented scope. These attacks have led to other acts of terrorism since September 11, 2001. The threat or occurrences of international armed conflict or other terrorist activities both in the United States and internationally may affect the markets in which our common stock trades, the market in which we operate and our profitability. The terrorist attacks have caused instability in the global financial markets, and contributed to downward pressure on stock prices of United States publicly traded companies, such as ours. Future or threatened terrorist attacks or occurrences of international armed conflict could result in greater economic instability and further depress stock prices, including the price of our common stock.
The September 11 attacks and other terrorist attacks have disrupted the global insurance and reinsurance industries, and we may experience delays in renewing some insurance policies and may not be able to obtain insurance at historical levels on all of our facilities. Future terrorist attacks or occurrences of international armed conflict could affect our domestic and international sales, disrupt our supply chain and impair our ability to produce and deliver our products. Such conflicts and hostilities could directly impact our physical facilities or those of our joint ventures, suppliers or customers, both in the United States and elsewhere. Our primary facilities are located in the United States, Malaysia, the Philippines, Japan, the Czech Republic and Slovakia. In connection with our joint venture, we also have facilities in China. In addition, these sorts of activities may make transportation of our supplies and products more difficult or cost prohibitive. Any impairment of our financial performance as a result of terrorist attacks or armed conflict could increase the risk of noncompliance with the financial covenants in our principal credit agreement resulting in events of default and the possible acceleration of our indebtedness.
Due to the broad and uncertain effects that terrorist attacks have had on financial and economic markets generally, we cannot provide any reliable measure of the impact that these terrorist attacks have had on our recent financial performance or any estimate as to how these sorts of attacks and activities might affect our future results.
Trends, Risks and Uncertainties Relating To Our Indebtedness
Our substantial debt could impair our financial condition and adversely affect our ability to operate our business.
We are highly leveraged and have substantial debt service obligations. As of December 31, 2002, we had total long-term indebtedness of $1,403.2 million (including current maturities, but excluding unused commitments) and interest expense of $145.2 million for the year ended December 31, 2002. Also, we may incur additional debt in the future, subject to certain limitations contained in our debt instruments.
The degree to which we are leveraged could have important consequences to you, including:
| • | our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; | |
| • | a significant portion of our cash flow from operations must be dedicated to the payment of interest and principal on our debt, which reduces the funds available to us for our operations; | |
| • | some of our debt is and will continue to be at variable rates of interest, which may result in higher interest expense in the event of increases in market interest rates; | |
| • | our debt agreements contain, and any agreements to refinance our debt likely will contain, financial and restrictive covenants, and our failure to comply with them may result in an event of default which, if not cured or waived, could have a material adverse effect on us; | |
| • | our level of indebtedness will increase our vulnerability to general economic downturns and adverse industry conditions; |
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| • | our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and the semiconductor industry; and | |
| • | our substantial leverage could place us at a competitive disadvantage vis-à-vis our competitors who have less leverage relative to their overall capital structures. |
As a condition to the August 2001 modifications to the covenants under our senior bank facilities, we agreed to specified increases in the interest rates on our outstanding borrowings and the imposition of supplemental interest charges. These supplemental interest charges decreased in May 2002 because proceeds from the sale of our second lien senior secured notes due 2008 were used to reduce total borrowings under our senior bank facilities to below $750 million.
We may incur more debt, which could exacerbate the risks described above.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The agreements relating to our outstanding indebtedness restrict us from incurring additional indebtedness, but do not fully prohibit us or our subsidiaries from doing so. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify. Some of the debt we may incur may be secured by the same collateral securing certain of our existing indebtedness.
| The agreements relating to our indebtedness may restrict our current and future operations, particularly our ability to respond to changes or to take some actions. |
Our debt agreements contain, and any future debt agreements may include a number of restrictive covenants that impose significant operating and financial restrictions on among other things, our ability to:
| • | incur additional debt, including guarantees; | |
| • | incur liens; | |
| • | sell or otherwise dispose of assets; | |
| • | make investments, loans or advances; | |
| • | make some acquisitions; | |
| • | engage in mergers or consolidations; | |
| • | make capital expenditures; | |
| • | pay dividends, redeem capital stock or make certain other restricted payments or investments; | |
| • | pay dividends from Semiconductor Components Industries, LLC to ON Semiconductor Corporation; | |
| • | engage in sale and leaseback transactions; | |
| • | enter into new lines of business; | |
| • | issue some types of preferred stock; and | |
| • | enter into transactions with our affiliates. |
In addition, our senior bank facilities require that we maintain or achieve a minimum consolidated EBITDA and a minimum amount of cash and cash equivalents. Any future debt could contain financial and other covenants more restrictive than those that are currently applicable.
| Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our operating results and our financial condition. |
If there were an event of default under any of the agreements relating to our outstanding indebtedness the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments, either upon maturity or if accelerated upon an event of default or, if we were required to repurchase any of our debt securities upon a change of control, that we would be able to refinance or restructure the payments on those debt securities. Further, if we are unable to repay,
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We may not be able to generate sufficient cash flow to meet our debt service obligations.
Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. If we do not generate sufficient cash flow from operations and proceeds from sales of assets in the ordinary course of business to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling additional assets, reducing or delaying capital investments or seeking to raise additional capital. The terms of our financing agreements contain limitations on our ability to incur additional indebtedness. As of March 7, 2003, $8.6 million of our $62.5 million revolving credit facility was available, reflecting outstanding loans of $37.5 million and outstanding letters of credit of $16.4 million. As of January 9, 2003, we amended our primary foreign exchange hedging agreement to provide for termination if at any time the amount available under our revolving credit facility is less than $2.5 million. We cannot assure you that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, or that additional financing could be obtained on acceptable terms, if at all, or would be permitted under the terms of our various debt instruments then in effect. As a result of our debt refinancing in 2003, we expect that our average interest expense will increase by approximately $13.8 million per year. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial condition and results of operations, as well as on our ability to satisfy our debt obligations.
Trends, Risks and Uncertainties Related to Our Common Stock
Fluctuations in our quarterly operating results may cause our stock price to decline.
Given the nature of the markets in which we participate, we cannot reliably predict future revenues and profitability, and unexpected changes may cause us to adjust our operations. A large portion of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs. Thus, small declines in revenues could negatively affect our operating results in any given quarter. Factors that could affect our quarterly operating results include:
| • | the timing and size of orders from our customers, including cancellations and reschedulings; | |
| • | the timing of introduction of new products; | |
| • | the gain or loss of significant customers, including as a result of industry consolidation; | |
| • | seasonality in some of our target markets; | |
| • | changes in the mix of products we sell; | |
| • | changes in demand by the end-users of our customers’ products; | |
| • | market acceptance of our current and future products; | |
| • | variability of our customers’ product life cycles; | |
| • | changes in manufacturing yields or other factors affecting the cost of goods sold, such as the cost and availability of raw materials and the extent of utilization of manufacturing capacity; | |
| • | changes in the prices of our products, which can be affected by the level of our customers’ and end-users’ demand, technological change, product obsolescence, competition, or other factors; | |
| • | cancellations, changes or delays of deliveries to us by our third-party manufacturers, including as a result of the availability of manufacturing capacity and the proposed terms of manufacturing arrangements; |
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| • | our liquidity and access to capital; and | |
| • | our research and development activities and the funding thereof. |
| Holders of our common stock may experience dilution and the price of our common stock may decline as a result of the issuance of stock in the future. |
In September 2001, we sold 10,000 shares of our Series A Cumulative Convertible Redeemable Preferred Stock to TPG ON Holdings LLC, an affiliate of the Texas Pacific Group. Each share of Series A Cumulative Convertible Redeemable Preferred Stock is convertible at the option of the holder into approximately 3,546 shares of our common stock as of the issue date, excluding shares into which the preferred stock is convertible due to accumulated and unpaid dividends and subject to customary anti-dilution adjustments. Under the anti-dilution provisions, the conversion price is subject to downward adjustment in the event we issue common stock, or derivative securities entitling the holder to subscribe for or acquire common stock, at a price below the then-current conversion price or market price. Holders of Series A Cumulative Convertible Redeemable Preferred Stock are entitled to cumulative dividends, payable quarterly in cash, at a rate of 8% per annum (or if greater during the relevant quarterly period, in an amount equal to the value of the dividends that would be paid on our common stock then issuable upon conversion of the Series A Cumulative Convertible Redeemable Preferred Stock), subject to applicable restrictions imposed by our principal credit facility. In the event dividends are not paid, the dividends will accumulate on a compounded basis and the number of shares of common stock into which the Series A Cumulative Convertible Redeemable Preferred Stock is convertible will increase proportionately.
There is a possibility that the Series A Cumulative Convertible Redeemable Preferred Stock will be converted at a price per share that is less than the then current market price of our common stock. If this were to occur, it may cause substantial dilution to our existing common stockholders. Additionally, we registered the shares of common stock issuable upon conversion of the Series A Cumulative Convertible Redeemable Preferred Stock under the Securities Act for public resale. Therefore, in the event that the Series A Cumulative Convertible Redeemable Preferred Stock is converted, a substantial number of shares of our common stock may be sold into the market, which could decrease the trading price of our common stock and encourage short sales by the selling shareholder or others. Short sales could place further downward pressure on the price of our common stock. In addition to the Series A Cumulative Convertible Redeemable Preferred Stock, we may issue more stock in the future, which may cause dilution and a decline in the price of our common stock.
| Our stock price may be volatile, which could result in substantial losses for investors in our securities. |
The stock markets in general, and the markets for high technology stocks in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
The market price of the common stock may also fluctuate significantly in response to the following factors, some of which are beyond our control:
| • | variations in our quarterly operating results; | |
| • | changes in securities analysts’ estimates of our financial performance; | |
| • | changes in market valuations of similar companies; | |
| • | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital commitments, new products or product enhancements; | |
| • | loss of a major customer or failure to complete significant transactions; and | |
| • | additions or departures of key personnel. |
As of March 7, 2002, the trading price of our common stock since our initial public offering has ranged from a high of $27.75 on May 1, 2000 to a low of $0.89 on October 4, 2002.
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| TPG, as our principal stockholder, controls our company, which will limit the ability of our other stockholders to influence the outcome of director elections and other matters submitted for a vote of the stockholders. |
Affiliates of Texas Pacific Group own 124,999,433 shares of our common stock and all of the outstanding shares of Series A Cumulative Convertible Redeemable Preferred Stock. As of March 7, 2003, these shares represented over 76% of the total voting power of our capital stock. As a result, Texas Pacific Group, through its affiliates, will be able to:
| • | elect all of our directors and, as a result, control matters requiring board approval; | |
| • | control matters submitted to a stockholder vote, including mergers and consolidations with third parties and the sale of all or substantially all of our assets; and | |
| • | otherwise control or influence our business direction and policies. |
In addition, our certificate of incorporation provides that the provisions of Section 203 of the Delaware General Corporation Law, which relate to business combinations with interested stockholders, do not apply to us.
| Our move to the Nasdaq SmallCap Market from the Nasdaq National Market could impair the marketability and liquidity of our common stock, impair our ability to raise capital and create other risks for our company. |
In July 2002, we received a notice from Nasdaq advising us that we were not in compliance with the Nasdaq National Market’s minimum bid price requirement (Marketplace Rule 4450(b)(4)). Since we did not believe we would regain compliance in a timely manner with the minimum bid price requirement, in October 2002 we requested a transfer of the listing of our common stock from the Nasdaq National Market to the Nasdaq SmallCap Market. Nasdaq approved our transfer and effective October 25, 2002, we began trading on the Nasdaq SmallCap Market. As the Nasdaq SmallCap Market does not have the same trading volume as the Nasdaq National Market, our stock may become more volatile and there can be no assurances that a ready market will exist. Certain market makers and analysts may elect not to follow us as a result of our transfer from the Nasdaq National Market to the Nasdaq SmallCap Market. Movement from the Nasdaq National Market to the Nasdaq SmallCap Market does not prevent us from issuing additional securities; however, pricing of an offering may be more difficult given the less liquid nature of the Nasdaq SmallCap Market.
| Provisions in our charter documents may delay or prevent the acquisition of our company, which could decrease the value of our stock. |
Our certificate of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. These provisions:
| • | create a board of directors with staggered terms; | |
| • | permit only our board of directors or the chairman on our board of directors to call special meetings of stockholders; | |
| • | establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting; | |
| • | prohibit stockholder action by written consent; | |
| • | authorize the issuance of “blank check” preferred stock, which is preferred stock with voting or other rights or preferences that could impede a takeover attempt and that our board of directors can create and issue without prior stockholder approval; and | |
| • | require the approval by holders of at least 66 2/3% of our outstanding common stock to amend any of these provisions in our certificate of incorporation or bylaws. |
Although we believe these provisions make a higher third-party bid more likely by requiring potential acquirors to negotiate with our board of directors, these provisions apply even if an initial offer may be considered beneficial by some stockholders.
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| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks, we utilize derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes.
At December 31, 2002, our long-term debt (including current maturities) totaled $1,403.2 million. We have no interest rate exposure to rate changes on our fixed rate debt, which totaled $701.6 million. We do have interest rate exposure with respect to the $701.6 million outstanding balance on our senior bank facilities due to its variable interest rate pricing; however, from time to time, we have entered into interest rate swaps and an interest rate cap to reduce this exposure. As of December 31, 2002, we had two interest rate swaps covering $155.0 million of our variable interest rate debt. A 50 basis point increase in interest rates would not materially change our expected annual interest expense of $150 million for the next twelve months.
A majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, as a multinational business, we also conduct certain of these activities through transactions denominated in a variety of other currencies. We use forward foreign currency contracts to hedge firm commitments and reduce our overall exposure to the effects of currency fluctuations on our results of operations and cash flows. Gains and losses on these foreign currency exposures would generally be offset by corresponding losses and gains on the related hedging instruments. This strategy reduces, but does not eliminate, the short-term impact of foreign currency exchange rate movements. For example, changes in exchange rates may affect the foreign currency sales price of our products and can lead to increases or decreases in sales volume to the extent that the sales price of comparable products of our competitors are less or more than the sales price of our products. Our 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.
Item 8. Financial Statements and Supplementary Data
Our consolidated and combined Financial Statements of the Company listed in the index appearing under Item 15(a)(1) hereof and the Financial Statement Schedules listed in the index appearing under Item 15(a)(2) hereof are filed as part of this Annual Report on Form 10-K and are hereby incorporated by reference in this Item 8.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors and persons nominated to become directors, and executive officers is incorporated by reference from the text under the captions, “Management Proposals — Proposal 1 — Election of Directors,” “The Board of Directors”, and “Section 16(a) Reporting Compliance” in our Proxy Statement for the May 21, 2003 Annual Meeting of Stockholders. Certain additional information concerning our executive officers as of March 17, 2003 is set forth below.
| Name | Age | Position | ||||
|
Keith D. Jackson
|
47 | President and Chief Executive Officer* | ||||
|
William Bradford
|
39 | Senior Vice President of Sales and Marketing* | ||||
|
Donald Colvin
|
50 | Senior Financial Director* | ||||
|
William George
|
60 | Senior Vice President, Operations* | ||||
|
John T. Kurtzweil
|
46 | Senior Vice President, Chief Financial Officer and Treasurer* | ||||
|
George H. Cave
|
45 | Vice President, Secretary and General Counsel* | ||||
|
Charlotte Diener
|
49 | Vice President and General Manager of Standard Components Division** | ||||
|
Mike Heitzman
|
41 | Vice President and General Manager of Analog and Power Management Products Division** | ||||
|
Ramesh Ramchandani
|
38 | Vice President and General Manager of Integrated Power Devices Division** | ||||
|
Peter Zdebel
|
57 | Vice President, Chief Technology Officer and General Manager of High Frequency Products Division** | ||||
| * | Executive Officers of both ON Semiconductor and Semiconductor Components Industries, LLC (“SCI, LLC”). |
| ** | Executive Officers of SCI, LLC. |
Keith D. Jackson. Mr. Jackson was appointed our President and Chief Executive Officer and became a Director on November 19, 2002. Mr. Jackson has over 20 years of semiconductor industry experience. Before joining our company, he served as Executive Vice President and General Manager, Analog, Mixed Signal, and Configurable Products Group, beginning in 1998, and more recently, was selected to head the Integrated Circuits Group for Fairchild Semiconductor Corp. From 1996 to 1998, he served as President and member of the Board of Directors of Tritech Microelectronics in Singapore, a manufacturer of analog and mixed signal products. From 1986 to 1996, Mr. Jackson worked for National Semiconductor, most recently as Vice President and General Manager of the Analog and Mixed Signal division. He also held engineering positions at Texas Instruments, Incorporated from 1973 to 1986.
William Bradford. Mr. Bradford joined ON Semiconductor and SCI, LLC as Senior Vice President of Sales and Marketing, effective March 28, 2002. He came from Cypress Semiconductor Corporation, a provider of high-performance integrated circuits for network infrastructure and access equipment. At Cypress Mr. Bradford served as the Vice President — European Sales & Marketing from 2001, as Senior Director of North American Sales — East from 1997 to 2000, and as Southeast Area Sales Manager from 1995 to 1996. Mr. Bradford was a Technical Sales Representative for Texas Instruments, Semiconductor Group from 1986 to 1991.
Donald Colvin. Mr. Colvin joined ON Semiconductor and SCI, LLC as the Senior Financial Director on March 17, 2003. Effective April 2, 2003, he will become the Senior Vice President, Chief Financial Officer and Treasurer. He came from Atmel Corporation, a manufacturer of advanced semiconductors, where he served as Vice President Finance and Chief Financial Officer, beginning in 1998. Mr. Colvin served as Chief
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William George. Dr. George has served as Senior Vice President and Chief Manufacturing Officer since August 1999. He served as Corporate Vice President and Director of Manufacturing of Motorola’s Semiconductor Components Group from June 1997 until he assumed his current position. Prior to that time, Dr. George held several executive and management positions at Motorola, including Corporate Vice President and Director of Manufacturing of Motorola’s Semiconductor Products Sector. From 1991 to 1994, he served as Executive Vice President and Chief Operations Officer of Sematech, a consortium of leading semiconductor companies. He joined Motorola in 1968.
John T. Kurtzweil. Mr. Kurtzweil joined ON Semiconductor and SCI, LLC as Senior Vice President, Chief Financial Officer and Treasurer, on April 1, 2002. He came from Read-Rite Corporation, an independent supplier of magnetic recording heads for the hard disk drive market. At Read-Rite he served as Chief Financial Officer from November 1995 to March 2002, Senior Vice President from August 1999 to March 2002, and Vice President of Finance from November 1995 to August 1999. Mr. Kurtzweil joined Read-Rite Corporation as its Corporate Controller in August 1995. Previously, Mr. Kurtzweil was with Maxtor Corporation where he held a number of finance positions including Director of Far East Finance based in Singapore. He was with Maxtor Corporation from July 1988 to August 1995. Prior to that, Mr. Kurtzweil spent 10 years with Honeywell Corporation. Mr. Kurtzweil is a CPA and CMA. Effective April 2, 2003, Mr. Kurtzweil will resign as our Senior Vice President, Chief Financial Officer and Treasurer. Mr. Kurtzweil will be replaced by Donald Colvin. (See above for information on Mr. Colvin.)
George H. Cave. Mr. Cave has served as our General Counsel and Assistant Secretary since August 1999. He was elected Secretary in March 2000 and Vice President in May 2000. In addition, since December 2002, he has been managing the Human Resources Department on an interim basis. Before his tenure with ON Semiconductor, he served for two years as the Regulatory Affairs Director for Motorola’s Semiconductor Components Group in Geneva, Switzerland. Prior to that position, Mr. Cave was Senior Counsel in the Corporate Law Department of Motorola in Phoenix, Arizona for a period of five years.
Charlotte Diener. Prior to assuming the position of Vice President and General Manager of the Standard Components Division in December 2001, Ms. Diener served as Vice President and Director of Supply Chain Management Services for SCI, LLC, beginning in August 1999. From March 1999 to August 1999, Ms. Diener was Program Manager for ON Semiconductor’s separation from Motorola. From December 1998 through February 1999, she was Director of Commodity Purchasing for TRW, Inc., an automotive electronics firm. From March 1997 through November 1998, Ms. Diener was first Corporate Sales Director and then Product Engineering Manager for TMOS for Motorola. From 1994 to 1997, Ms. Diener was Core Commodity Purchasing Manager, Electronics for Ford Motor Co.
Mike Heitzman. Mr. Heitzman assumed the position of Vice President and General Manager of Analog and Power Management Products Division for SCI, LLC in April 2002. Prior to this, he was General Manager of Analog Business Unit beginning in December 2001. From October 2000 to December 2001, Mr. Heitzman served as Director of the Standard Analog and Power Conversion Product Operations for SCI, LLC beginning in October 2000. During 1999 and 2000, Mr. Heitzman was Operations Manager for the MOS 12 wafer fabrication facility at Motorola. From 1994 to 1999, Mr. Heitzman managed the start-up and production ramp at MOS 12 as Engineering Manager at Motorola.
Ramesh Ramchandani. Mr. Ramchandani assumed the position of Vice President and General Manager of Integrated Power Devices Division for SCI, LLC in April 2002. Prior to this, Mr. Ramchandani was General Manager from December 2001 to April 2002 and Director from September 2000 to December 2001 of MOS Power Business Unit. Prior to joining SCI, LLC, Mr. Ramchandani served as Director of Worldwide Sales/ Marketing and Applications for Celeritek, Inc., a commodity supplier of semiconductor products, from March 1997 to September 2000. From March 1996 to March 1997, Mr. Ramchandani was Manager, Marketing and Technology for Mitsubishi/ QCI, a semiconductor company. Mr. Ramchandani has
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Peter Zdebel. Mr. Zdebel joined SCI, LLC as Vice President in September 2000 and served as Chief Technology Officer from September 2000 to April 2002. In July 2001, he was appointed to the position of Broadband Business General Manager, which he held until April 2002. He then assumed the position of General Manager of High Frequency Products Division in April 2002. Prior to joining the company, Mr. Zdebel was with Motorola where he held several director and management positions, including Vice President and Director of System-on-Chip Technology Strategy. He was with Motorola from 1984 until 2000.
The present term of office for the officers named above will generally expire on the earliest of their retirement, resignation or removal. There is no family relationship among any such officers.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated by reference from the text under the captions, “The Board of Directors — Compensation of Directors,” “Compensation of Executive Officers,” “Compensation Committee Report,” “Performance Graph — Stock Price Performance,” and “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement for the May 21, 2003 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning ownership of our equity stock by certain beneficial owners and management is incorporated by reference from the text under the captions, “Principal Stockholders” and “Share Ownership of Directors and Officers” in the Proxy Statement for our May 21, 2003 Annual Meeting of Stockholders. The following table provides information regarding our current equity compensation plans as of December 31, 2002:
Equity Compensation Plan Information
| Number of Securities | |||||||||||||
| Remaining Available for | |||||||||||||
| Number of Securities To be | Weighted-Average | Future Issuance Under | |||||||||||
| Issued Upon Exercise of | Exercise Price of | Equity Compensation Plans | |||||||||||
| Outstanding Options, | Outstanding Options, | (Excluding Securities | |||||||||||
| Plan Category | Warrants and Rights | Warrants and Rights | Reflected in Column(a)) | ||||||||||
| (a) | (b) | (c) | |||||||||||
|
Equity Compensation Plans Approved By
Stockholders(1)
|
22,386,886 | (2) | $ | 4.63 | 8,529,255 | (3) | |||||||
|
Equity Compensation Plans Not Approved By
Stockholders(4)
|
1,250,000 | $ | 1.90 | 0 | |||||||||
|
Total
|
23,636,886 | $ | 4.49 | 8,529,255 | |||||||||
| (1) | Consists of the 1999 Founders Stock Option Plan (“Founders Plan”), 2000 Stock Incentive Plan (“SIP”) and 2000 Employee Stock Purchase Plan (“ESPP”). |
| (2) | Excludes purchase rights accruing under the ESPP that have a shareholder approved reserve of 5,500,000 shares. Under the ESPP, each eligible employee may purchase up to the lesser of (a) 500 shares of our common stock or (b) the number derived by dividing $6,250 by 100% of the fair market value of one share of our common stock on the first day of the offering period, as defined in the ESPP, during each three-month period at a purchase price equal to 85% of the lesser of the fair market value of a share of stock on the first day of the period or the fair market value of a share of stock on the last day of the period. |
| (3) | Includes 2,233,729 shares of common stock reserved for future issuance under the ESPP and 6,295,526 shares of common stock available for issuance under the Founders Plan and the SIP. The number of securities remaining available for future issuance under these equity compensation plans increased by 7,057,596 effective January 1, 2003. This increase is not included in the above table. The increase in |
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| securities remaining available for future issuance is calculated based on 4% of the total number of outstanding shares of our common stock as of January 1, 2003. |
| (4) | This is pursuant to a warrant and warrant agreement dated as of October 11, 2001 (the “Warrant”). The Warrant was issued in partial consideration for certain consulting services provided to us by a consultant. Under the Warrant, the consultant is entitled to purchase up to 1,250,000 shares of our common stock at an exercise price of $1.90 per share, subject to certain adjustments as specified in the Warrant. The Warrant was fully vested and exercisable as of October 11, 2001. Unless earlier exercised, the Warrant expires after October 10, 2005. |
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions involving us and certain others is incorporated by reference from the text under the captions, “Compensation of Executive Officers” and “Relationships and Related Transactions” in the Proxy Statement for our May 21, 2003 Annual Meeting of Stockholders.
Item 14. Controls and Procedures
(a) Within the 90 days prior to the date of this Form 10-K, we carried out an evaluation, under the supervision and with the participation of the our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings.
(b) There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date we carried out this evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K:
| (1) Consolidated Financial Statements: |
| Page | ||||
|
ON Semiconductor Corporation and Subsidiaries
Consolidated Financial Statements:
|
||||
|
Report of Management
|
73 | |||
|
Report of Independent Accountants
|
74 | |||
|
Consolidated Balance Sheet as of
December 31, 2002 and December 31, 2001
|
75 | |||
|
Consolidated Statement of Operations for the
years ended December 31, 2002, 2001 and 2000
|
76 | |||
|
Consolidated Statement of Stockholders’
Equity (Deficit) for the years ended December 31, 2002,
2001 and 2000
|
77 | |||
|
Consolidated Statement of Cash Flows for the
years ended December 31, 2002, 2001 and 2000
|
78 | |||
|
Notes to Consolidated Financial Statements
|
79 | |||
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| (2) Consolidated Financial Statement Schedules: |
| Page | ||||
|
Report of Independent Accountants on Financial
Statement Schedule
|
123 | |||
|
Schedule II — Valuation and
Qualifying Accounts and Reserves
|
124 | |||
|
Semiconductor Components Industries, LLC and
Subsidiaries Consolidated Financial Statements as of
December 31, 2002 and December 31, 2001 and for the
years ended December 31, 2002, 2001 and 2000
|
125 | |||
|
ON Semiconductor Trading Ltd and Subsidiaries
Consolidated Financial Statements as of and for the years ended
December 31, 2002 and December 31, 2001 and for the
period from October 27, 2000 (Inception) through
December 31, 2000
|
162 | |||
|
SCG Malaysia Holdings Sdn. Bhd. and Subsidiaries
Consolidated Financial Statements as of December 31, 2002
and December 31, 2001 and for the years ended
December 31, 2002, 2001 and 2000
|
185 | |||
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or related notes.
| (3) | Exhibit Index: |
| Exhibit No. | Exhibit Description | |||
| 2 | .1 | Reorganization Agreement, dated as of May 11, 1999, among Motorola, Inc., SCG Holding Corporation and Semiconductor Components Industries LLC. (incorporated by reference from Exhibit 2.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)† | ||
| 2 | .2 | Agreement and Plan of Recapitalization and Merger, as amended, dated as of May 11, 1999, among SCG Holding Corporation, Semiconductor Components Industries, LLC, Motorola, Inc., TPG Semiconductor Holdings LLC, and TPG Semiconductor Acquisition Corp. (incorporated by reference from Exhibit 2.2 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)† | ||
| 2 | .3 | Amendment No. 1 to Agreement and Plan of Recapitalization and Merger, dated as of July 28, 1999, among SCG Holding Corporation, Semiconductor Components Industries, LLC, Motorola, Inc., TPG Semiconductor Holdings LLC, and TPG Semiconductor Acquisition Corp. (incorporated by reference from Exhibit 2.3 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)† | ||
| 3 | .1(a) | Amended and Restated Certificate of Incorporation of ON Semiconductor Corporation (as of August 9, 2000) (incorporated by reference from Exhibit 3.1 of Third Quarter 2000 Form 10-Q filed with the Commission on November 14, 2000) | ||
| 3 | .1(b) | Amended and Restated Certificate of Incorporation of ON Semiconductor Corporation as of August 1, 2002 (incorporated by reference from Exhibit 3.1(a) of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
| 3 | .1(c) | Certificate Designations relating to the Series A Cumulative Convertible Preferred Stock (incorporated by reference from Exhibit 3.1(b) of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
| 3 | .2 | Amended and Restated Bylaws of SCG Holding Corporation (incorporated by reference from Exhibit 3.2 to Registration Statement No. 333-30670 filed with the Commission on April 7, 2000) | ||
| 4 | .1 | Specimen of share certificate of Common Stock, par value $.01, SCG Holding Corporation (incorporated by reference from Exhibit 4.1 to Registration Statement No. 333-30670 filed with the Commission on April 7, 2000) | ||
| 4 | .2 | Certificate of Designations relating to the Series A Cumulative Convertible Preferred Stock (incorporated by reference from Exhibit 3.1 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001) | ||
| 4 | .3 | Specimen of Share Certificate of Series A Cumulative Convertible Preferred Stock (incorporated by reference from Exhibit 4.1 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001) | ||
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| Exhibit No. | Exhibit Description | |||
| 4 | .4 | Investment Agreement, dated as of September 7, 2001, between TPG ON Holdings LLC and ON Semiconductor Corporation (incorporated by reference from Exhibit 4.2 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001) | ||
| 4 | .5 | Registration Rights Agreement, dated as of September 7, 2001, between TPG ON Holdings LLC and ON Semiconductor Corporation (incorporated by reference from Exhibit 4.3 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001) | ||
| 4 | .6 | Subordination Agreement, dated as of September 7, 2001, by and between TPG ON Holdings LLC and ON Semiconductor Corporation, for the benefit of Senior Creditors (incorporated by reference from Exhibit 4.4 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001) | ||
| 4 | .7 | Warrant Agreement dated as of October 11, 2001, between ON Semiconductor Corporation and Bain & Company, Inc. (incorporated by reference from Exhibit 4.7 to the Corporation’s Form 10-K filed with the Commission on March 29, 2002) | ||
| 4 | .8 | Indenture, dated as of August 4, 1999 among SCG Holding Corporation, Semiconductor Components Industries, LLC, the Note Guarantors named therein and State Street Bank and Trust Company, as trustee, relating to the 12% Senior Subordinated Notes due 2009 (incorporated by reference from Exhibit 4.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
| 4 | .9 | Form of 12% Senior Subordinated Note due 2009 of SCG Holding Corporation and Semiconductor Components Industries, LLC (“Initial Note”) (included as Exhibit A to the Indenture filed as Exhibit 4.8 herein & incorporated by reference from Exhibit 4.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
| 4 | .10 | Form of 12% Senior Subordinated Note due 2009 of SCG Holding Corporation and Semiconductor Components Industries, LLC (“Exchange Note”) (included as Exhibit B to the Indenture filed as Exhibit 4.8 herein & incorporated by reference from Exhibit 4.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
| 4 | .11 | Exchange Offer and Registration Rights Agreement, dated August 4, 1999, Semiconductor Components Industries, LLC, SCG Holding Corporation, the subsidiary guarantors of SCG Holding Corporation (incorporated by reference from Exhibit 4.5 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
| 4 | .12 | Purchase Agreement, dated May 1, 2002, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, Credit Suisse First Boston Corporation, Morgan Stanley & Co., Incorporated, J.P. Morgan Securities Inc., and Salomon Smith Barney Inc., relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 4.1 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
| 4 | .13 | Indenture, dated as of May 6, 2002, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., and Semiconductor Components Industries International of Rhode Island, Inc., and Wells Fargo Bank Minnesota, National Association, as trustee, relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 4.2 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
| 4 | .14 | Form of 12% Senior Secured Note due 2008 of ON Semiconductor Corporation and Semiconductor Components Industries, LLC (“Initial Note”) (included as Exhibit A and Appendix A to the Indenture filed as Exhibit 4.2) (incorporated by reference from Exhibit 4.3 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
| 4 | .15 | Form of 12% Senior Secured Note due 2008 of ON Semiconductor Corporation and Semiconductor Components Industries, LLC (“Exchange Note”) (included as Exhibit B and Appendix A to the Indenture filed as Exhibit 4.2) (incorporated by reference from Exhibit 4.4 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
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| Exhibit No. | Exhibit Description | |||
| 4 | .16 | Registration Rights Agreement, dated May 6, 2002, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., and Semiconductor Components Industries International of Rhode Island, Inc., Credit Suisse First Boston Corporation, Morgan Stanley & Co., Incorporated, J.P. Morgan Securities Inc., and Salomon Smith Barney Inc., relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 4.5 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
| 4 | .17 | Purchase Agreement, dated February 26, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, Salomon Smith Barney Inc., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated, relating to the 12% Senior Secured Notes due 2010(1) | ||
| 4 | .18 | Indenture, dated as of March 3, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., and Semiconductor Components Industries International of Rhode Island, Inc., and Wells Fargo Bank Minnesota, National Association, as trustee, relating to the 12% Senior Secured Notes due 2010(1) | ||
| 4 | .19 | Form of 12% Senior Secured Note due 2010 of ON Semiconductor Corporation and Semiconductor Components Industries, LLC (“Initial Note”) (included as Exhibit A and Appendix A to the Indenture filed as Exhibit 4.18 hereto)(1) | ||
| 4 | .20 | Form of 12% Senior Secured Note due 2010 of ON Semiconductor Corporation and Semiconductor Components Industries, LLC (“Exchange Note”) (included as Exhibit B and Appendix A to the Indenture filed as Exhibit 4.18 hereto)(1) | ||
| 4 | .21 | Registration Rights Agreement, dated March 3, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., and Semiconductor Components Industries International of Rhode Island, Inc., Salomon Smith Barney Inc., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc., and Morgan Stanley & Co. Incorporated, relating to the 12% Senior Secured Notes due 2010(1) | ||
| 10 | .1 | Amended and Restated Credit Agreement, dated as of April 3, 2000, among SCG Holding Corporation, Semiconductor Components Industries, LLC, The Chase Manhattan Bank, as Administrative Agent, Credit Lyonnais New York Branch as Co-Documentation Agent, DLJ Capital Funding, Inc., as Co-Documentation Agent, Lehman Commercial Paper Inc., as Co-Documentation Agent and Chase Securities Inc., as Arranger and the other financial institutions party thereto (incorporated by reference from Exhibit 10.1 to Registration Statement No. 333-30670 filed with the Commission on April 7, 2000) | ||
| 10 | .2 | Guarantee Agreement, dated as of August 4, 1999, among SCG Holding Corporation, the subsidiary guarantors of SCG Holding Corporation that are signatories thereto, and The Chase Manhattan Bank, as collateral agent (incorporated by reference from Exhibit 10.3 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
| 10 | .3 | Security Agreement, dated as of August 4, 1999, among Semiconductor Components Industries, LLC, SCG Holding Corporation, the subsidiary guarantors of SCG Holding Corporation that are signatories thereto, and The Chase Manhattan Bank, as collateral agent (incorporated by reference from Exhibit 10.4 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
| 10 | .4 | Purchase Agreement, dates as of August 4, 1999, SCG Holding Corporation, Semiconductor Components Industries, LLC, Chase Securities Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc. (incorporated by reference from Exhibit 10.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
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| Exhibit No. | Exhibit Description | |||
| 10 | .5 | Stock Purchase Agreement dated March 8, 2000 among Semiconductor Components Industries, LLC, SCG Holding Corporation and The Cherry Corporation (incorporated by reference from Exhibit 10.3 to Registration Statement No. 333-30670 filed with the Commission on April 7, 2000) | ||
| 10 | .6 | Amended and Restated Intellectual Property Agreement, dated August 4, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.5 to Registration Statement No. 333-90359 filed with the Commission on January 11, 2000)†† | ||
| 10 | .7 | Transition Services Agreement, dated August 4, 1999, among Motorola, Inc., SCG Holding Corporation, and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.6 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
| 10 | .8 | Employee Matters Agreements, as amended, dated July 30, 1999, among Semiconductor Components Industries, LLC, SCG Holding Corporation and Motorola, Inc. (incorporated by reference from Exhibit 10.7 to Registration Statement No. 333-90359 filed with the Commission on January 11, 2000) | ||
| 10 | .9 | Motorola Assembly Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.8 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†† | ||
| 10 | .10 | SCG Assembly Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.9 Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†† | ||
| 10 | .11 | Motorola Foundry Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.10 Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†† | ||
| 10 | .12 | SCG Foundry Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.11 Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†† | ||
| 10 | .13 | Equipment Lease and Repurchase Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.12 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
| 10 | .14 | Equipment Passdown Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.13 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†† | ||
| 10 | .15 | SCG Holding Corporation 1999 Founders Stock Option Plan (incorporated by reference from Exhibit 10.14 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||
| 10 | .16(a) | Lease for 52nd Street property, dated July 31, 1999, among Semiconductor Components Industries, LLC as Lessor, and Motorola Inc. as Lessee (incorporated by reference from Exhibit 10.16 Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
| 10 | .16(b) | First Lease Amendment to Lease for 52nd Street property, dated April 19, 2000, between Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.14(b) to the Corporation’s Form 10-K filed with the Commission on March 29, 2002) | ||
| 10 | .17 | Lease for U.S. Locations (Mesa, Chandler, 56th Street and Tempe), dated July 31, 1999, among Motorola, Inc. as Lessor, and Semiconductor Components Industries, LLC as Lessee (incorporated by reference from Exhibit 10.15 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
| 10 | .18 | Declaration of Reciprocal Covenants, Easement of Restrictions and Options to Purchase and Lease, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.17 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
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| Exhibit No. | Exhibit Description | |||
| 10 | .19(a) | Employment Agreement, dated as of October 27, 1999, between Semiconductor Components Industries, LLC and Steve Hanson (incorporated by reference from Exhibit 10.18 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||
| 10 | .19(b) | Amendment to Employment Agreement effective as of April 15, 2002, between ON Semiconductor Corporation and Semiconductor Components Industries, LLC and Steve Hanson (incorporated by reference from Exhibit 10.2 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||
| 10 | .19(c) | Separation Agreement, made as of November 21, 2002, by and among Steven Hanson, ON Semiconductor Corporation and Semiconductor Components Industries, LLC(1)(2) | ||
| 10 | .20(a) | Employment Agreement, dated as of September 13, 1999, between Semiconductor Components Industries, LLC and Michael Rohleder (incorporated by reference from Exhibit 10.19 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||
| 10 | .20(b) | Termination Agreement made as of January 29, 2002, between Michael Rohleder and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.1(a) of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||
| 10 | .21(a) | Employment Agreement, dated as of November 8, 1999, between Semiconductor Components Industries, LLC and James Thorburn (incorporated by reference from Exhibit 10.20 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||
| 10 | .21(b) | Amendment No. 1 to Employment Agreement for James Thorburn, dated as of July 20, 2000 (incorporated by reference from Exhibit 10.2 of Third Quarter 2000 Form 10-Q filed with the Commission on November 14, 2000)(2) | ||
| 10 | .21(c) | Separation Letter Agreement dated February 28, 2001 (with attached General Release and Waiver dated March 10, 2001), between James Thorburn and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.2 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)(2) | ||
| 10 | .22(a) | Employment Agreement, dated as of October 27, 1999, between Semiconductor Components Industries, LLC and William George (incorporated by reference from Exhibit 10.21 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||
| 10 | .22(b) | Amendment to Employment Agreement, dated as of October 1, 2001, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC and William George (incorporated by reference from Exhibit 10.20(b) to the Corporation’s Form 10-K filed with the Commission on March 29, 2002)(2) | ||
| 10 | .23(a) | Employment Agreement, dated as of October 27, 1999, between Semiconductor Components Industries, LLC and Dario Sacomani (incorporated by reference from Exhibit 10.22 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||
| 10 | .23(b) | Amendment to Employment Agreement, dated as of November 28, 2001, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC and Dario Sacomani (incorporated by reference from Exhibit 10.21(b) to the Corporation’s Form 10-K filed with the Commission on March 29, 2002)(2) | ||
| 10 | .23(c) | Termination Agreement made as of May 3, 2002, between Semiconductor Components Industries, LLC and Dario Sacomani (incorporated by reference from Exhibit 10.5 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||
| 10 | .24(a) | Pledge and Security Agreement, dated as of November 8, 1999, between Semiconductor Components Industries, LLC and James Thorburn (incorporated by reference from Exhibit 10.23 to Registration Statement No. 333-90359 filed with the Commission on January 11, 2000)(2) | ||
| 10 | .24(b) | Deed of Trust, dated as of July 20, 2000, with James Thorburn as Trustee and Semiconductor Components Industries, LLC as Beneficiary (incorporated by reference from Exhibit 10.3 of Third Quarter 2000 Form 10-Q filed with the Commission on November 14, 2000)(2) | ||
| 10 | .25(a) | Promissory Note/ Security Interest, dated as of November 8, 1999, from James Thorburn to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.24 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||
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| Exhibit No. | Exhibit Description | |||
| 10 | .25(b) | Promissory Note, dated July 21, 2000, from James Thorburn to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.2 of Third Quarter 2000 Form 10-Q filed with the Commission on November 14, 2000)(2) | ||
| 10 | .25(c) | Amendment to Promissory Note, dated March 10, 2001, from James Thorburn and Jacqueline Thorburn to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.1 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)(2) | ||
| 10 | .26(a) | ON Semiconductor Amended and Restated Executive Deferred Compensation Plan (incorporated by reference from Exhibit 10.31 to Registration Statement No. 333-30670 filed with the Commission on April 25, 2000)(2) | ||
| 10 | .26(b) | Second Amendment to the ON Semiconductor Amended and Restated Executive Deferred Compensation Plan effective January 1, 2002 (incorporated by reference from Exhibit 10.7 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||
| 10 | .27 | Junior Subordinated Note Due 2011 payable to Motorola, Inc. (incorporated by reference from Exhibit 4.4 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
| 10 | .28(a) | 2000 Stock Incentive Plan amended and restated as of May 23, 2001(incorporated by reference from Exhibit 10.4 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001)(2) | ||
| 10 | .28(b) | 2000 Stock Incentive Plan — ON Ownership program grant agreement (incorporated by reference from Exhibit 10.33(b) to Registration Statement No. 333-30670 filed with the Commission on April 25, 2000)(2) | ||
| 10 | .28(c) | 2000 Stock Incentive Plan — incentive stock option agreement (incorporated by reference from Exhibit 10.35(c) to Registration Statement No. 333-30670 filed with the Commission on March 24, 2000)(2) | ||
| 10 | .28(d) | 2000 Stock Incentive Plan — non-qualified stock option agreement (incorporated by reference from Exhibit 10.35(d) to Registration Statement No. 333-30670 filed with the Commission on March 24, 2000)(2) | ||
| 10 | .29 | 2000 Employee Stock Purchase Plan amended and restated as of May 23, 2001(incorporated by reference from Exhibit 10.5 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001)(2) | ||
| 10 | .30 | ON Semiconductor Director Deferred Compensation Plan (incorporated by reference from Exhibit 10.35 to Registration Statement No. 333-30670 filed with the Commission on April 25, 2000)(2) | ||
| 10 | .31 | Form of Master Trust Agreement for the ON Semiconductor Deferred Compensation Plans (incorporated by reference from Exhibit 10.36 to Registration Statement No. 333-30670 filed with the Commission on April 25, 2000)(2) | ||
| 10 | .32 | 2000 ON Semiconductor Executive Council Bonus Incentive Plan (incorporated by reference from Exhibit 10.37 of Fourth Quarter 2000 Form 10-K filed with the Commission on March 30, 2001)(2) | ||
| 10 | .33 | 2000 Key Contributor Incentive Plan (incorporated by reference from Exhibit 10.38 of Fourth Quarter 2000 Form 10-K filed with the Commission on March 30, 2001)(2) | ||
| 10 | .34(a) | Promissory Note, dated March 9, 2001, from Michael Rohleder and Roxanne Rohleder to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.3 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)(2) | ||
| 10 | .34(b) | Deed of Trust, dated March 7, 2001, from Michael Rohleder and Roxanne Rohleder to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.4 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)(2) | ||
| 10 | .34(c) | Amendment to Promissory Note dated March 18, 2002, from Michael Rohleder and Roxanne Rohleder to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.1(b) of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||
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| Exhibit No. | Exhibit Description | |||
| 10 | .35 | Loan Facility Agreement, between Leshan-Phoenix Semiconductor Company Limited and Industrial & Commercial Bank of China, Leshan City Branch, for loan in an amount up to $36 million, dated November 17, 2000 (incorporated by reference from Exhibit 10.1 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001) | ||
| 10 | .36(a) | Loan Agreement between SCG Japan Ltd. and Development Bank of Japan, for loan in an amount up to $26.1 million, dated October 27, 2000 (incorporated by reference from Exhibit 10.2 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001) | ||
| 10 | .36(b) | Guaranty Agreement, executed by Semiconductor Components Industries, LLC on October 27, 2000, in connection with Loan Agreement between SCG Japan Ltd. and Development Bank of Japan, for loan in an amount up to $26.1 million (incorporated by reference from Exhibit 10.3 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001) | ||
| 10 | .37 | Waiver, Consent and Amendment dated as of August 13, 2001, to the Credit Agreement dated as of August 4, 1999, as amended and restated as of April 3, 2000, among ON Semiconductor Corporation (formerly known as SCG Holding Corporation), Semiconductor Components Industries, LLC, the Lenders party thereto, The Chase Manhattan Bank, as administrative agent, collateral agent and syndication agent, and Credit Lyonnais New York Branch, DLJ Capital Funding, Inc. and Lehman Commercial Paper Inc., as co-documentation agents (incorporated by reference from Exhibit 10.6 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001) | ||
| 10 | .38 | Offer Letter dated February 15, 2002, from ON Semiconductor Corporation and Semiconductor Components Industries, LLC to John T. Kurtzweil (incorporated by reference from Exhibit 10.3 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||
| 10 | .39 | Employment Agreement effective as of March 28, 2002, between Semiconductor Components Industries, LLC and William Bradford (incorporated by reference from Exhibit 10.4 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||
| 10 | .40 | Offer Letter effective as of April 1, 2002, to Syrus Madavi from ON Semiconductor Corporation (incorporated by reference from Exhibit 10.6 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002(2) | ||
| 10 | .41 | Employee Incentive Plan, January 2002 (incorporated by reference from Exhibit 10.8 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||
| 10 | .42 | ON Semiconductor 2002 Executive Incentive Plan (incorporated by reference from Exhibit 10.1 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)(2) | ||
| 10 | .43 | Employee Incentive Plan January 2002 (incorporated by reference from Exhibit 10.2 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)(2) | ||
| 10 | .44 | Amendment to Credit Agreement, dated as of April 17, 2002, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, JPMorgan Chase Bank, as administrative agent, collateral agent and syndication agent, Credit Lyonnais New York Branch, Credit Suisse First Boston and Lehman Commercial Paper Inc., as co-documentation agents, and the other financial institution parties thereto (incorporated by reference from Exhibit 10.3 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
| 10 | .45 | Intercreditor Agreement, dated as of May 6, 2002, among J.P. Morgan Chase Bank, as credit agent, Wells Fargo Bank Minnesota, National Association, as trustee, ON Semiconductor Corporation and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.4 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
| 10 | .46 | Security Agreement, dated as of May 6, 2002, among Semiconductor Components Industries, ON Semiconductor Corporation, the subsidiary guarantors of ON Semiconductor Corporation that are signatories thereto, and Wells Fargo Bank Minnesota, National Association, as trustee and collateral agent, relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 10.5 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
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| Exhibit No. | Exhibit Description | |||
| 10 | .47 | Pledge Agreement, dated as of May 6, 2002, among Semiconductor Components Industries, LLC, ON Semiconductor Corporation, the subsidiary pledgors of ON Semiconductor Corporation that are signatories thereto, and Wells Fargo Bank Minnesota, National Association, as trustee and collateral agent, relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 10.6 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
| 10 | .48 | Collateral Assignment, dated as of May 6, 2002, between Semiconductor Components Industries, LLC and Wells Fargo Bank Minnesota, National Association, as trustee and collateral agent, relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 10.7 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
| 10 | .49 | Joint Venture Contract for Leshan-Phoenix Semiconductor Company Limited, amended on June 25, 2002, among SCG (China) Holding Corporation, Leshan Radio Company Ltd, and Motorola (China) Investment Limited (incorporated by reference from Exhibit 10.8 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||
| 10 | .50(a) | Employment Agreement, dated as of November 10, 2002, between ON Semiconductor Corporation and Keith Jackson(1)(2) | ||
| 10 | .50(b) | Letter Agreement dated as of November 19, 2002, between ON Semiconductor Corporation and Keith Jackson(1)(2) | ||
| 10 | .51 | Amendment and Restatement Agreement dated as of February 14, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC and JPMorgan Chase Bank as administrative agent, under the Credit Agreement dated as of August 4, 1999, as amended and restated as of April 3, 2000, (as amended, supplemented and modified and in effect on the date hereof), among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, the Lenders party thereto, the Administrative Agent and Credit Lyonnais New York Branch, Credit Suisse First Boston and Lehman Commercial Paper, Inc., as co-documentation agents(1) | ||
| 10 | .52 | Amended and Restated Credit Agreement dated as of August 4, 1999, as Amended and Restated as of February 14, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, the Lenders party hereto, JPMorgan Chase Bank as Administrative Agent, Collateral Agent and Syndication Agent hereunder, and Credit Lyonnais New York Branch, Credit Suisse First Boston and Lehman Commercial Paper Inc., as co-documentation agents hereunder (included as Exhibit A to the Amendment and Restatement Agreement filed as Exhibit 10.51 hereto)(1) | ||
| 10 | .53 | Collateral Sharing Agreement dated as of March 3, 2003, among JPMorgan Chase Bank, as Collateral Agent, Wells Fargo Bank Minnesota, National Association, as Trustee, ON Semiconductor Corporation and Semiconductor Components Industries, LLC, relating to the 12% Senior Secured Notes due 2010(1) | ||
| 10 | .54 | Security Agreement dated as of August 4, 1999, as amended and restated as of March 3, 2003, among Semiconductor Components Industries, LLC, ON Semiconductor Corporation, the subsidiary guarantors of ON Semiconductor Corporation that are signatories thereto, and JPMorgan Chase Bank, as collateral agent for the Secured Parties, relating to the 12% Senior Secured Notes due 2010(1) | ||
| 10 | .55 | Pledge Agreement, dated as of August 4, 1999, as amended and restated as of March 3, 2003, among Semiconductor Components Industries, LLC, ON Semiconductor Corporation, the subsidiary guarantors of ON Semiconductor Corporation that are signatories thereto, and JPMorgan Chase Bank, as collateral agent for the Secured Parties, relating to the 12% Senior Secured Notes due 2010(1) | ||
| 10 | .56 | Collateral Assignment dated as of August 4, 1999, as amended and restated as of March 3, 2003, between Semiconductor Components Industries, LLC and JPMorgan Chase Bank, as collateral agent for the Secured Parties, relating to the 12% Senior Secured Notes due 2010(1) | ||
| 10 | .57 | Employment Offer Letter dated March 14, 2003, between Semiconductor Components Industries, LLC and Donald Colvin(1)(2) | ||
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| Exhibit No. | Exhibit Description | |||
| 18 | . | Letter from PricewaterhouseCoopers LLP re Change in Accounting Principles (incorporated by reference from Exhibit 18 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001) | ||
| 21 | .1 | List of Significant Subsidiaries(1) | ||
| 23 | .1 | Consent of PricewaterhouseCoopers LLP, independent accountants(1) | ||
| 24 | .1 | Powers of Attorney(1) | ||
| 99 | .1 | Stockholders Agreement dated as of August 4, 1999 among SCG Holding Corporation, TPG Semiconductor Holdings, LLC and Motorola, Inc. (incorporated by reference from Exhibit 99.5 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||
| 99 | .2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) | ||
| (1) | Filed herewith. |
| (2) | Management contract or compensatory plan, contract or arrangement. |
| † | Schedules or other attachments to these exhibits not filed herewith shall be furnished to the Commission upon request. |
| †† | Portions of these exhibits have been omitted pursuant to a request for confidential treatment |
| (b) | Reports on Form 8-K: |
| During the fourth quarter of 2002 we filed six reports on Form 8-K (1) dated September 30, 2002 and filed October 1, 2002, (2) dated and filed October 2, 2002, (3) dated November 18, 2002 and filed November 19, 2002, (4) dated and filed on November 21, 2002, (5) dated and filed on December 6, 2002, and (6) dated and filed on December 20, 2002. | |
| The September 30, 2002 report was filed pursuant to Items 5 and 7, and provided, in connection with the concurrent filing with the SEC of an exchange offer registration statement on Form S-4 for the registration of $300.0 million principal amount of 12% Senior Secured Notes due 2008, historical audited financial statements of each SCI, LLC (a wholly-owned subsidiary of the Company), ON Semiconductor Trading Ltd. (a indirect wholly-owned subsidiary of the Company) and SCG Malaysia Holdings Sdn. Bhd. (an indirect wholly-owned subsidiary of the Company) pursuant to Rule 3-16 of Regulation S-X. The September 30, 2002 report also provided revised 2001 ON Semiconductor Corporation and Subsidiaries Consolidated Financial Statements and Notes to Consolidated Financial Statements to include the supplemental disclosures required by Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” paragraph 61. | |
| The October 2, 2002 report was filed pursuant to Items 5 and 7, reported our request to transfer the listing of our common stock from the Nasdaq National Market to the Nasdaq SmallCap Market, and included as an exhibit a news release dated October 2, 2002 titled “ON Semiconductor Applies To Transfer To Nasdaq SmallCap Market.” | |
| The November 18, 2002 report was filed pursuant to Items 5 and 7, reported the naming of Keith D. Jackson as our President and CEO, and included as an exhibit a news release dated November 18, 2002 titled “Keith Jackson Named President, CEO of ON Semiconductor Corporation.” | |
| The November 21, 2002 report was filed pursuant to Items 5 and 7, reported the appointment of Emmanuel Hernandez to our Board of Directors, and included as an exhibit a news release dated November 21, 2002 titled “ON Semiconductor Elects Tech-Finance Veteran to Board of Directors.” | |
| The December 6, 2002 report was filed pursuant to Items 5 and 7, and provided in connection with the concurrent filing with the SEC of Amendment No. 1 to our exchange offer registration statement for the registration of $300.0 million principal amount of 12% Senior Secured Notes due 2008, (1) audited consolidated financial statements for certain periods or years, as applicable, ending with the fiscal year ending December 31, 2001, of each SCI, LLC (a wholly-owned subsidiary of ON Semiconductor), ON Semiconductor Trading Ltd. (an indirect wholly-owned subsidiary of ON Semiconductor) (“ON Trading”), and SCG Malaysia Holdings Sdn. Bhd. (an indirect wholly-owned subsidiary of ON |
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| Semiconductor) (“Malaysia Holdings”), pursuant to Rule 3-16 of Regulation S-X, which requires separate company financial statements for affiliates whose securities collateralize registered securities if certain significance tests are met; and (2) unaudited consolidated financial statements for SCI, LLC, ON Trading and Malaysia Holdings for the nine months ended September 27, 2002 and September 28, 2001. | |
| The December 20, 2002 report was filed pursuant to Items 5 and 7, and reported certain steps taken by On Semiconductor toward achieving profitability, as included as an exhibit a news release dated December 2002 titled “ON Semiconductor Takes the Next Step Toward Achieving Profitability with more Operations Integration and Cost Reductions.” |
| (c) | See Item 15(a)(3) above. | |
| (d) | See Item 15(a)(2) above. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 24, 2003
| ON SEMICONDUCTOR CORPORATION |
| By: | /s/ KEITH D. JACKSON |
|
|
|
| Name: Keith D. Jackson | |
| Title: President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Titles | Date | ||||
|
/s/ KEITH D. JACKSON Keith D. Jackson |
President, Chief Executive Officer and Director
(Principal Executive Officer) |
March 24, 2003 | ||||
|
/s/ JOHN T. KURTZWEIL John T. Kurtzweil |
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) | March 24, 2003 | ||||
|
* J. Daniel McCranie |
Chairman of the Board of Directors | March 24, 2003 | ||||
|
* David Bonderman |
Director | March 24, 2003 | ||||
|
* Richard W. Boyce |
Director | March 24, 2003 | ||||
|
* Justin T. Chang |
Director | March 24, 2003 | ||||
|
* Curtis Crawford |
Director | March 24, 2003 | ||||
|
* William A. Franke |
Director | March 24, 2003 | ||||
|
* Jerome N. Gregoire |
Director | March 24, 2003 | ||||
|
* Emmanuel T. Hernandez |
Director | March 24, 2003 | ||||
|
* John W. Marren |
Director | March 24, 2003 | ||||
| *By: |
/s/ JOHN T. KURTZWEIL |
Attorney in Fact | March 24, 2003 | |||
70
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Keith D. Jackson, certify that:
| 1. I have reviewed this annual report on Form 10-K of ON Semiconductor Corporation; | |
| 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
| 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
| 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | |
| b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and | |
| c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |
| b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| /s/ KEITH D. JACKSON | |
|
|
|
| Chief Executive Officer |
Date: March 24, 2003
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CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, John T. Kurtzweil, certify that:
| 1. I have reviewed this annual report on Form 10-K of ON Semiconductor Corporation; | |
| 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
| 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
| 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | |
| b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and | |
| c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |
| b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| /s/ JOHN T. KURTZWEIL | |
|
|
|
| Chief Financial Officer |
Date: March 24, 2003
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REPORT OF MANAGEMENT
To the Stockholders of ON Semiconductor Corporation:
The consolidated financial statements of ON Semiconductor Corporation published in this Annual Report on Form 10-K were prepared by Company management, who is responsible for their integrity and objectivity. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. The financial information elsewhere in this Annual Report on Form 10-K is consistent with the consolidated financial statements.
ON Semiconductor maintains a system of internal control adequate to provide reasonable assurance that its transactions are appropriately recorded and reported, its assets are protected and its established policies are followed. This system is enforced by written policies and procedures, effective internal audit and a qualified financial staff.
Our independent auditors, PricewaterhouseCoopers LLP, provide an objective independent review by audit of ON Semiconductor’s consolidated financial statements and issuance of a report thereon. Their audit is conducted in accordance with generally accepted auditing standards.
The audit committee of the board of directors, comprised solely of outside directors, meets periodically and privately with the independent auditors, internal auditors and representatives from management to appraise the adequacy and effectiveness of the audit functions, control systems and quality of our financial accounting and reporting.
|
/s/ KEITH D. JACKSON President and Chief Executive Officer February 5, 2003 |
/s/ JOHN T. KURTZWEIL Senior Vice-President, Chief Financial Officer and Treasurer February 5, 2003 |
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of ON Semiconductor Corporation and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 4 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets effective January 1, 2002 as well as its methods of accounting for sales to distributors, derivative instruments and hedging activities effective January 1, 2001.
| /s/ PRICEWATERHOUSECOOPERS LLP | |
|
|
|
| PricewaterhouseCoopers LLP |
Phoenix, Arizona
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
| December 31, | |||||||||
| 2002 | 2001 | ||||||||
| (In millions, | |||||||||
| except share data) | |||||||||
| ASSETS | |||||||||
|
Cash and cash equivalents
|
$ | 182.4 | $ | 179.8 | |||||
|
Receivables, net (including $4.7 and $21.3 due
from Motorola)
|
121.6 | 142.3 | |||||||
|
Inventories, net
|
160.0 | 183.7 | |||||||
|
Other current assets
|
36.6 | 35.8 | |||||||
|
Deferred income taxes
|
6.4 | 9.2 | |||||||
|
Total current assets
|
507.0 | 550.8 | |||||||
|
Property, plant and equipment, net
|
454.1 | 555.5 | |||||||
|
Deferred income taxes
|
— | 1.3 | |||||||
|
Investments in and advances to joint ventures
|
99.3 | 95.4 | |||||||
|
Goodwill
|
77.3 | 77.3 | |||||||
|
Intangible asset, net
|
26.7 | 38.6 | |||||||
|
Other assets
|
38.7 | 41.5 | |||||||
|
Total assets
|
$ | 1,203.1 | $ | 1,360.4 | |||||
|
LIABILITIES, MINORITY INTERESTS, REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|||||||||
|
Accounts payable (including $0.1 and $3.3 payable
to Motorola)
|
$ | 77.4 | $ | 111.5 | |||||
|
Accrued expenses (including $0.7 and $11.7
payable to Motorola)
|
99.9 | 104.5 | |||||||
|
Income taxes payable
|
11.0 | 8.0 | |||||||
|
Accrued interest
|
43.6 | 13.4 | |||||||
|
Deferred income on sales to distributors
|
70.8 | 99.4 | |||||||
|
Current portion of long-term debt
|
9.3 | 12.4 | |||||||
|
Total current liabilities
|
312.0 | 349.2 | |||||||
|
Long-term debt (including $126.9 and $115.2
payable to Motorola)
|
1,393.9 | 1,374.5 | |||||||
|
Other long-term liabilities
|
42.9 | 48.4 | |||||||
|
Deferred income taxes
|
2.2 | — | |||||||
|
Total liabilities
|
1,751.0 | 1,772.1 | |||||||
|
Commitments and contingencies (See Note 17)
|
— | — | |||||||
|
Minority interests in consolidated subsidiaries
|
4.1 | 4.1 | |||||||
|
Series A cumulative, convertible, redeemable
preferred stock ($0.01 par value 100,000 shares authorized,
10,000 shares issued and outstanding; 8% annual dividend rate;
liquidation value — $100.0 plus $10.9 and $2.4 of
accrued dividends)
|
110.1 | 101.6 | |||||||
|
Common stock ($0.01 par value, 500,000,000 shares
authorized, 176,439,900 and 174,653,586 shares issued and
outstanding)
|
1.8 | 1.7 | |||||||
|
Additional paid-in capital
|
737.4 | 738.8 | |||||||
|
Accumulated other comprehensive income (loss)
|
(34.3 | ) | (32.8 | ) | |||||
|
Accumulated deficit
|
(1,367.0 | ) | (1,225.1 | ) | |||||
|
Total stockholders’ equity (deficit)
|
(662.1 | ) | (517.4 | ) | |||||
|
Total liabilities, minority interests, redeemable
preferred stock and stockholders’ equity (deficit)
|
$ | 1,203.1 | $ | 1,360.4 | |||||
See accompanying notes to consolidated financial statements.
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
| Year Ended December 31, | |||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||
| (In millions except per share | |||||||||||||||
| data) | |||||||||||||||
|
Total revenues (including $87.7, $98.9 and $206.0
from Motorola)
|
$ | 1,084.5 | $ | 1,214.6 | $ | 2,073.9 | |||||||||
|
Cost of sales
|
799.0 | 1,000.0 | 1,355.0 | ||||||||||||
|
Gross profit
|
285.5 | 214.6 | 718.9 | ||||||||||||
|
Operating expenses:
|
|||||||||||||||
|
Research and development
|
67.9 | 80.9 | 69.2 | ||||||||||||
|
Selling and marketing
|
61.2 | 74.8 | 100.1 | ||||||||||||
|
General and administrative
|
102.1 | 130.9 | 233.4 | ||||||||||||
|
Amortization of intangibles
|
11.9 | 22.6 | 16.8 | ||||||||||||
|
Write-off of acquired in-process research and
development
|
— | — | 26.9 | ||||||||||||
|
Restructuring and other
|
27.7 | 150.4 | 4.8 | ||||||||||||
|
Total operating expenses
|
270.8 | 459.6 | 451.2 | ||||||||||||
|
Operating income (loss)
|
14.7 | (245.0 | ) | 267.7 | |||||||||||
|
Other income (expenses):
|
|||||||||||||||
|
Interest expense, net
|
(145.2 | ) | (133.5 | ) | (131.2 | ) | |||||||||
|
Equity in earnings of joint ventures
|
3.9 | 4.0 | 4.4 | ||||||||||||
|
Gain on sale of investment in joint venture
|
— | 3.1 | — | ||||||||||||
|
Other income (expenses), net
|
(141.3 | ) | (126.4 | ) | (126.8 | ) | |||||||||
|
Income (loss) before income taxes, extraordinary
loss and cumulative effect of accounting change
|
(126.6 | ) | (371.4 | ) | 140.9 | ||||||||||
|
Income tax provision
|
(8.8 | ) | (345.7 | ) | (50.1 | ) | |||||||||
|
Minority interests
|
— | 2.1 | (2.2 | ) | |||||||||||
|
Net income (loss) before extraordinary loss and
cumulative effect of accounting change
|
(135.4 | ) | (715.0 | ) | 88.6 | ||||||||||
|
Extraordinary loss on debt prepayment (net of
income taxes of $0 in 2002 and $11.7 in 2000)
|
(6.5 | ) | — | (17.5 | ) | ||||||||||
|
Cumulative effect of accounting change (net of
income taxes of $38.8)
|
— | (116.4 | ) | — | |||||||||||
|
Net income (loss)
|
(141.9 | ) | (831.4 | ) | 71.1 | ||||||||||
|
Less: Accretion of beneficial conversion feature
relating to the convertible redeemable preferred stock
|
— | (13.1 | ) | — | |||||||||||
|
Less: Redeemable preferred stock dividends
|
(8.5 | ) | (2.4 | ) | (8.8 | ) | |||||||||
|
Net income (loss) applicable to common stock
|
$ | (150.4 | ) | $ | (846.9 | ) | $ | 62.3 | |||||||
|
Earnings (loss) per common share:
|
|||||||||||||||
|
Basic:
|
|||||||||||||||
|
Net income (loss) available for common stock
before extraordinary loss and cumulative effect of accounting
change
|
$ | (0.82 | ) | $ | (4.21 | ) | $ | 0.50 | |||||||
|
Extraordinary loss on debt prepayment
|
(0.04 | ) | — | (0.11 | ) | ||||||||||
|
Cumulative effect of accounting change
|
— | (0.67 | ) | — | |||||||||||
|
Net income (loss) available for common stock
|
$ | (0.86 | ) | $ | (4.88 | ) | $ | 0.39 | |||||||
|
Diluted:
|
|||||||||||||||
|
Net income (loss) available for common stock
before extraordinary loss and cumulative effect of accounting
change
|
$ | (0.82 | ) | $ | (4.21 | ) | $ | 0.49 | |||||||
|
Extraordinary loss on debt prepayment
|
(0.04 | ) | — | (0.11 | ) | ||||||||||
|
Cumulative effect of accounting change
|
— | (0.67 | ) | — | |||||||||||
|
Net income (loss) available for common stock
|
$ | (0.86 | ) | $ | (4.88 | ) | $ | 0.38 | |||||||
|
Weighted average common shares outstanding:
|
|||||||||||||||
|
Basic
|
175.6 | 173.6 | 160.2 | ||||||||||||
|
Diluted
|
175.6 | 173.6 | 165.6 | ||||||||||||
See accompanying notes to consolidated financial statements.
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
| Common Stock | ||||||||||||||||||||||||||
| Additional | Accumulated Other | |||||||||||||||||||||||||
| Number of | At | Paid-In | Comprehensive | Accumulated | ||||||||||||||||||||||
| Shares | Par Value | Capital | Income (Loss) | Deficit | Total | |||||||||||||||||||||
| (In millions, except share data) | ||||||||||||||||||||||||||
|
Balances at December 31, 1999
|
136,666,666 | $ | 1.4 | $ | 204.2 | $ | 2.7 | $ | (456.0 | ) | $ | (247.7 | ) | |||||||||||||
|
Shares issued in connection with initial public
offering
|
34,500,000 | 0.3 | 514.4 | — | — | 514.7 | ||||||||||||||||||||
|
Stock options exercised
|
601,646 | — | 0.9 | — | — | 0.9 | ||||||||||||||||||||
|
Tax benefit of stock option exercises
|
— | — | 3.3 | — | — | 3.3 | ||||||||||||||||||||
|
Stock compensation expense
|
— | — | 0.7 | — | — | 0.7 | ||||||||||||||||||||
|
Redeemable preferred stock dividends
|
— | — | — | — | (8.8 | ) | (8.8 | ) | ||||||||||||||||||
|
Shares issued under employee stock purchase plan
|
978,123 | — | 6.9 | — | — | 6.9 | ||||||||||||||||||||
|
Comprehensive income (loss):
|
||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | 71.1 | 71.1 | ||||||||||||||||||||
|
Other comprehensive income (loss), net of tax:
|
||||||||||||||||||||||||||
|
Foreign currency translation adjustments
|
— | — | — | (3.1 | ) | — | (3.1 | ) | ||||||||||||||||||
|
Additional minimum pension liability
|
— | — | — | (0.3 | ) | — | (0.3 | ) | ||||||||||||||||||
|
Other comprehensive loss
|
— | — | — | (3.4 | ) | (3.4 | ) | |||||||||||||||||||
|
Comprehensive income
|
— | — | — | — | — | 67.7 | ||||||||||||||||||||
|
Balances at December 31, 2000
|
172,746,435 | 1.7 | 730.4 | (0.7 | ) | (393.7 | ) | 337.7 | ||||||||||||||||||
|
Stock options exercised
|
648,132 | — | 0.9 | — | — | 0.9 | ||||||||||||||||||||
|
Tax benefit of stock option exercises
|
— | — | 0.7 | — | — | 0.7 | ||||||||||||||||||||
|
Stock compensation expense
|
— | — | 5.0 | — | — | 5.0 | ||||||||||||||||||||
|
Redeemable preferred stock dividends
|
— | — | (2.4 | ) | — | — | (2.4 | ) | ||||||||||||||||||
|
Shares issued under the employee stock purchase
plan
|
1,259,019 | — | 4.2 | — | — | 4.2 | ||||||||||||||||||||
|
Beneficial conversion feature relating to
convertible redeemable preferred stock
|
— | — | 13.1 | — | — | 13.1 | ||||||||||||||||||||
|
Accretion of beneficial conversion feature
relating to convertible redeemable preferred stock
|
— | — | (13.1 | ) | — | — | (13.1 | ) | ||||||||||||||||||
|
Comprehensive income (loss):
|
||||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | (831.4 | ) | (831.4 | ) | ||||||||||||||||||
|
Other comprehensive income (loss), net of tax:
|
||||||||||||||||||||||||||
|
Foreign currency translation adjustments
|
— | — | — | (3.9 | ) | — | (3.9 | ) | ||||||||||||||||||
|
Additional minimum pension liability
|
— | — | — | (13.5 | ) | — | (13.5 | ) | ||||||||||||||||||
|
Cumulative effect of accounting change
|
— | — | — | (5.7 | ) | — | (5.7 | ) | ||||||||||||||||||
|
Effects of cash flow hedges
|
— | — | — | (9.0 | ) | — | (9.0 | ) | ||||||||||||||||||
|
Other comprehensive loss
|
— | — | — | (32.1 | ) | — | (32.1 | ) | ||||||||||||||||||
|
Comprehensive loss
|
— | — | — | — | — | (863.5 | ) | |||||||||||||||||||
|
Balances at December 31, 2001
|
174,653,586 | 1.7 | 738.8 | (32.8 | ) | (1,225.1 | ) | (517.4 | ) | |||||||||||||||||
|
Stock options exercised
|
757,185 | 0.1 | 1.1 | — | — | 1.2 | ||||||||||||||||||||
|
Tax benefit of stock option exercises
|
— | — | 0.1 | — | — | 0.1 | ||||||||||||||||||||
|
Stock compensation expense
|
— | — | 4.5 | — | — | 4.5 | ||||||||||||||||||||
|
Redeemable preferred stock dividends
|
— | — | (8.5 | ) | — | — | (8.5 | ) | ||||||||||||||||||
|
Shares issued under the employee stock purchase
plan
|
1,029,129 | — | 1.4 | — | — | 1.4 | ||||||||||||||||||||
|
Comprehensive income (loss), net of tax:
|
||||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | (141.9 | ) | (141.9 | ) | ||||||||||||||||||
|
Other comprehensive income (loss), net of tax:
|
||||||||||||||||||||||||||
|
Foreign currency translation adjustments
|
— | — | — | 2.3 | — | 2.3 | ||||||||||||||||||||
|
Additional minimum pension liability
|
— | — | — | (5.8 | ) | — | (5.8 | ) | ||||||||||||||||||
|
Unrealized losses on deferred compensation plan
investments
|
— | — | — | (0.6 | ) | — | (0.6 | ) | ||||||||||||||||||
|
Effects of cash flow hedges
|
— | — | — | 2.6 | — | 2.6 | ||||||||||||||||||||
|
Other comprehensive loss
|
(1.5 | ) | — | (1.5 | ) | |||||||||||||||||||||
|
Comprehensive loss
|
— | — | — | — | — | (143.4 | ) | |||||||||||||||||||
|
Balances at December 31, 2002
|
176,439,900 | $ | 1.8 | $ | 737.4 | $ | (34.3 | ) | $ | (1,367.0 | ) | $ | (662.1 | ) | ||||||||||||
See accompanying notes to consolidated financial statements.
77
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | |||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||
| (In millions) | |||||||||||||||
|
Cash flows from operating activities:
|
|||||||||||||||
|
Net income (loss)
|
$ | (141.9 | ) | $ | (831.4 | ) | $ | 71.1 | |||||||
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating
activities:
|
|||||||||||||||
|
Depreciation and amortization
|
133.4 | 165.8 | 158.9 | ||||||||||||
|
Write-off of acquired in-process research and
development
|
— | — | 26.9 | ||||||||||||
|
Extraordinary loss on debt prepayment
|
6.5 | — | 29.2 | ||||||||||||
|
Cumulative effect of accounting change
|
— | 155.2 | — | ||||||||||||
|
Amortization of debt issuance costs and debt
discount
|
8.1 | 6.0 | 5.9 | ||||||||||||
|
Provision for excess inventories
|
16.0 | 50.9 | 44.1 | ||||||||||||
|
Non-cash impairment of property, plant and
equipment
|
12.4 | 56.2 | — | ||||||||||||
|
Non-cash interest on junior subordinated note
payable to Motorola
|
11.7 | 10.7 | 9.6 | ||||||||||||
|
Undistributed earnings of unconsolidated joint
ventures
|
(3.9 | ) | (4.0 | ) | (4.4 | ) | |||||||||
|
Gain on sale of investment in joint venture
|
— | (3.1 | ) | — | |||||||||||
|
Deferred income taxes
|
6.4 | 317.1 | (11.6 | ) | |||||||||||
|
Stock compensation expense
|
4.5 | 5.0 | 0.7 | ||||||||||||
|
Other
|
0.4 | (2.0 | ) | 2.4 | |||||||||||
|
Changes in assets and liabilities:
|
|||||||||||||||
|
Receivables
|
21.4 | 129.4 | 0.3 | ||||||||||||
|
Inventories
|
8.0 | 23.1 | (77.2 | ) | |||||||||||
|
Other assets
|
(5.1 | ) | (4.6 | ) | (25.2 | ) | |||||||||
|
Accounts payable
|
(34.3 | ) | (62.8 | ) | 47.1 | ||||||||||
|
Accrued expenses
|
(6.5 | ) | (62.2 | ) | 44.2 | ||||||||||
|
Income taxes payable
|
3.1 | (13.9 | ) | (4.8 | ) | ||||||||||
|
Accrued interest
|
19.8 | 5.7 | (12.2 | ) | |||||||||||
|
Deferred income on sales to distributors
|
(28.6 | ) | (82.8 | ) | — | ||||||||||
|
Other long-term liabilities
|
(0.8 | ) | 4.4 | (3.7 | ) | ||||||||||
|
Net cash provided by (used in) operating
activities
|
30.6 | (137.3 | ) | 301.3 | |||||||||||
|
Cash flows from investing activities:
|
|||||||||||||||
|
Purchases of property, plant and equipment
|
(26.5 | ) | (117.9 | ) | (198.8 | ) | |||||||||
|
Investment in business, net of cash acquired
|
— | — | (253.2 | ) | |||||||||||
|
Investments in and advances to joint ventures
|
— | (5.5 | ) | (32.5 | ) | ||||||||||
|
Acquisition of minority interests in consolidated
subsidiaries
|
— | (0.1 | ) | (1.5 | ) | ||||||||||
|
Proceeds from sale of investment in joint venture
|
— | 20.4 | — | ||||||||||||
|
Proceeds from sales of property, plant and
equipment
|
4.5 | 13.8 | 18.1 | ||||||||||||
|
Net cash used in investing activities
|
(22.0 | ) | (89.3 | ) | (467.9 | ) | |||||||||
|
Cash flows from financing activities:
|
|||||||||||||||
|
Proceeds from debt issuance
|
290.7 | — | — | ||||||||||||
|
Proceeds from initial public offering, net of
offering expenses
|
— | — | 514.8 | ||||||||||||
|
Proceeds from senior credit facilities and other
borrowings
|
— | 125.0 | 226.1 | ||||||||||||
|
Proceeds from issuance of common stock under the
employee stock purchase plan
|
1.4 | 4.2 | 6.9 | ||||||||||||
|
Proceeds from stock option exercises
|
1.2 | 0.9 | 0.9 | ||||||||||||
|
Proceeds from issuance of convertible, redeemable
preferred stock, net of issuance costs
|
— | 99.2 | — | ||||||||||||
|
Payment of capital lease obligation
|
(1.1 | ) | (1.9 | ) | — | ||||||||||
|
Payment of debt issuance costs
|
(12.1 | ) | (5.1 | ) | (3.2 | ) | |||||||||
|
Repayment of senior credit facilities, including
prepayment penalty in 2000
|
(287.1 | ) | (5.6 | ) | (131.5 | ) | |||||||||
|
Repayment of senior subordinated notes, including
prepayment penalty
|
— | — | (156.8 | ) | |||||||||||
|
Redemption of redeemable preferred stock,
including accrued dividends
|
— | — | (228.4 | ) | |||||||||||
|
Net cash provided by (used in) financing
activities
|
(7.0 | ) | 216.7 | 228.8 | |||||||||||
|
Effect of exchange rate changes on cash and cash
equivalents
|
1.0 | 0.8 | (0.1 | ) | |||||||||||
|
Net increase (decrease) in cash and cash
equivalents
|
2.6 | (9.1 | ) | 62.1 | |||||||||||
|
Cash and cash equivalents, beginning of period
|
179.8 | 188.9 | 126.8 | ||||||||||||
|
Cash and cash equivalents, end of period
|
$ | 182.4 | $ | 179.8 | $ | 188.9 | |||||||||
See accompanying notes to consolidated financial statements.
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Background and Basis of Presentation
ON Semiconductor Corporation, together with its wholly and majority-owned subsidiaries (the “Company”), is one of the largest independent suppliers of semiconductor components in the world. Formerly known as the Semiconductor Components Group of the Semiconductor Products Sector of Motorola, Inc., the Company was a wholly-owned subsidiary of Motorola Inc. (“Motorola”) prior to its August 4, 1999 recapitalization (the “Recapitalization”). The Company continues to hold, through direct and indirect subsidiaries, substantially all the assets and operations of the Semiconductor Components Group of Motorola’s Semiconductor Products Sector.
On August 4, 1999, the Company was recapitalized and certain related transactions were effected pursuant to an agreement among ON Semiconductor Corporation, its principal domestic operating subsidiary, Semiconductor Components Industries, LLC (“SCI LLC”), Motorola and affiliates of Texas Pacific Group (“TPG”). As a result of the Recapitalization, an affiliate of TPG owned approximately 91% and Motorola owned approximately 9% of the outstanding common stock of the Company. In addition, as part of these transactions, TPG 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 SCI LLC. Cash payments to Motorola in connection with the Recapitalization were financed through equity investments by affiliates of TPG totaling $337.5 million, borrowings totaling $740.5 million under the Company’s $875 million senior bank facilities and the issuance of $400.0 million of 12% senior subordinated notes due August 2009. Because TPG’s affiliate did not acquire substantially all of the Company’s common stock, the basis of the Company’s assets and liabilities for financial reporting purposes was not impacted by the Recapitalization.
Note 2: Liquidity
During the year ended December 31, 2002, the Company incurred a net loss of $141.9 million compared to a net loss of $831.4 million in 2001 and net income of $71.1 million in 2000. The Company’s net results included restructuring and other of $27.7 million, $150.4 million and $4.8 million in 2002, 2001 and 2000, respectively, as well as interest expense of $145.2 million, $133.5 million and $131.2 million, respectively. The Company’s operating activities provided cash of $30.6 million in 2002 and $301.3 million in 2000 and used cash of $137.3 million in 2001.
At December 31, 2002, the Company had $182.4 million in cash and cash equivalents, net working capital of $195.0 million, term or revolving debt of $1,403.2 million and a stockholders’ deficit of $662.1 million. The Company’s long-term debt includes $701.6 million under its senior bank facilities; $291.4 million (net of discount) of its 12% senior secured notes due 2008; $260.0 million of its 12% senior subordinated notes due 2009; $126.9 million under a 10% junior subordinated note payable to Motorola due 2011; and, $23.3 million under a note payable to a Japanese bank due 2010. The Company was in compliance with all of the covenants contained in its various debt agreements as of December 31, 2002 and expects to remain in compliance over the next twelve months.
The Company’s ability to service its long-term debt, to remain in compliance with the various covenants and restrictions contained in its credit agreements and to fund working capital, capital expenditures and business development efforts will depend on its ability to generate cash from operating activities which is subject to, among other things, its future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may beyond its control.
If the Company fails to generate sufficient cash from operations, it may need to raise additional equity or borrow additional funds to achieve its longer term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to the Company. Although there can be no assurance, management believes that cash flow from operating activities coupled with existing cash balances will be adequate to fund the Company’s operating and capital needs as well as enable it to maintain compliance with its various debt agreements through December 31, 2003. To the extent that results
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
or events differ from the Company’s financial projections or business plans, its liquidity may be adversely impacted.
Note 3: Significant Accounting Policies
| Principles of Consolidation |
The accompanying consolidated financial statements include the accounts of the Company, 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 is accounted for on the equity method. As described in Note 8, the Company sold its investment in the 50%-owned joint venture effective December 31, 2000. Investments in companies that represent less than 20% of the related voting stock are accounted for on the cost basis. All material intercompany accounts and transactions have been eliminated.
| Reclassifications |
Certain amounts have been reclassified to conform with the current year presentation.
| Use of Estimates |
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates have been used by management in conjunction with the measurement of valuation allowances relating to receivables, inventories and deferred tax assets; reserves for customer incentives, warranties, restructuring charges and pension obligations; the fair values of financial instruments (including derivative financial instruments); and future cash flows associated with long-lived assets. Actual results could differ from these estimates.
| Cash Equivalents |
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
| Inventories |
Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis), or market. The Company records provisions for slow moving inventories based upon a regular analysis of inventory on hand compared to historical and projected end user demand. Projected end user demand is generally based on sales during the prior twelve months.
These provisions can influence results from operations. For example, when demand for a given part falls, all or a portion of the related inventory is reserved, impacting cost of sales and gross profit. If demand recovers and the parts previously reserved are sold, a higher than normal margin will generally be recognized. General market conditions as well as the Company’s design activities can cause certain of its products to become obsolete.
| Property, Plant and Equipment |
Property, plant and equipment are recorded at cost and are depreciated over estimated useful lives of 30-40 years for buildings and 3-20 years for machinery and equipment using accelerated and straight-line methods. A vast majority of the machinery and equipment currently in use is depreciated on a straight-line basis over a useful life of 5 years. Expenditures for maintenance and repairs are charged to operations in the year in which the expense is incurred. When assets are retired or otherwise disposed of, the related costs and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations in the period realized.
The Company evaluates the recoverability of the carrying amount of its property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Impairment is assessed when the undiscounted expected cash flows derived for an asset are less than its carrying amount. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an impaired asset. The dynamic economic environment in which the Company operates and the resulting assumptions used to estimate future cash flows impact the outcome of these impairment tests.
| Goodwill and Other Intangible Assets |
Goodwill represents the excess of the purchase price of the Cherry acquisition described in Note 6 over the estimated fair value of the net assets acquired and was being amortized on a straight line basis over its estimated useful life of ten years until January 1, 2002 when the Company adopted Statement of Financial Accounting Standards (“SFAS”) 142, “Goodwill and Other Intangible Assets.” The Company also acquired certain intangible assets in the Cherry acquisition that are being amortized on a straight line basis over estimated useful lives of five years.
Under SFAS No. 142, goodwill is evaluated for potential impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred. SFAS No. 142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the estimated fair value of the reporting unit containing goodwill with the related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting unit’s goodwill is not considered to be impaired and the second step of the impairment test is unnecessary. If the reporting unit’s carrying amount exceeds its estimated fair value, the second step test must be performed to measure the amount of the goodwill impairment loss, if any. The second step test compares the implied fair value of the reporting unit’s goodwill, determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of such goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company performs its annual impairment analysis during the fourth quarter of each year.
| Debt Issuance Costs |
Debt issuance costs are capitalized and amortized over the terms of the underlying agreements. Upon prepayment of debt, the related unamortized debt issuance costs are charged to operations. Amortization of debt issuance costs is included in interest expense while the unamortized balance is included in other assets.
| Revenue Recognition |
The Company generates revenue from sales of its semiconductor products to original equipment manufacturers, electronic manufacturing service providers, and distributors. The Company recognizes revenue on sales to original equipment manufacturers and electronic manufacturing service providers when title passes to the customer net of provisions for related sales returns and allowances.
Prior to January 1, 2001, the Company recognized revenue on distributor sales when title passed to the distributor. Provisions were recorded at that time for estimated sales returns as well as for other related sales costs and allowances. Effective January 1, 2001, the Company changed its revenue recognition policy for distributor sales so that the related revenues are now deferred until the distributor resells the product to the end user. This change eliminated the need to provide for estimated sales returns from distributors. Title to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
products sold to distributors typically passes at the time of shipment by the Company so the Company records accounts receivable for the amount of the transaction, reduces its inventory for the products shipped and defers the related margin in the consolidated balance sheet. The Company recognizes the related revenue and margin when the distributor sells the products to the end user. Although payment terms vary, most distributor agreements require payment within 30 days.
| Research and Development Costs |
Research and development costs are expensed as incurred.
| Stock-Based Compensation |
The Company accounts for employee stock options relating to its common stock in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”)”) and provides the pro forma disclosures required by SFAS No. 123 “Accounting for Stock Based Compensation” (“SFAS No. 123”). The Company measures compensation expense relating to non-employee stock awards in accordance with SFAS No. 123.
Had the Company determined employee stock compensation expense in accordance with SFAS No. 123, the Company’s net income (loss) for 2002, 2001, and 2000 would have been reduced (increased) to the pro forma amounts indicated below (in millions except share data):
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
|
Net income (loss), as reported
|
$ | (141.9 | ) | $ | (831.4 | ) | $ | 71.1 | |||||
|
Add: Stock-based employee compensation expense
included in reported net income (loss), net of related tax
effects
|
4.5 | 3.7 | 0.5 | ||||||||||
|
Less: Total stock-based employee compensation
expense determined under the fair value based method for all
awards,
net of related tax effects |
(21.3 | ) | (18.6 | ) | (7.4 | ) | |||||||
|
Pro forma net income (loss)
|
$ | (158.7 | ) | $ | (846.3 | ) | $ | 64.2 | |||||
|
Earnings per share:
|
|||||||||||||
|
Basic — as reported
|
$ | (0.86 | ) | $ | (4.88 | ) | $ | 0.39 | |||||
|
Basic — pro forma
|
$ | (0.95 | ) | $ | (4.96 | ) | $ | 0.35 | |||||
|
Diluted — as reported
|
$ | (0.86 | ) | $ | (4.88 | ) | $ | 0.38 | |||||
|
Diluted — pro forma
|
$ | (0.95 | ) | $ | (4.96 | ) | $ | 0.33 | |||||
The fair value of each option grant has been estimated at the date of grant while the fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan has been estimated at the beginning of the respective offering periods, both using a Black-Scholes option-pricing model with the following weighted-average assumptions:
| Employee Stock Options | 2002 | 2001 | 2000 | |||||||||
|
Expected life (in years)
|
5 | 5 | 5 | |||||||||
|
Risk-free interest rate
|
4.15 | % | 4.82 | % | 6.41 | % | ||||||
|
Volatility
|
0.70 | 0.70 | 0.60 | |||||||||
| Employee Stock Purchase Plan | 2002 | 2001 | 2000 | |||||||||
|
Expected life (in years)
|
0.25 | 0.25 | 0.33 | |||||||||
|
Risk-free interest rate
|
1.71 | % | 4.26 | % | 6.20 | % | ||||||
|
Volatility
|
0.70 | 0.70 | 0.60 | |||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
The weighted-average estimated fair value of employee stock options granted during 2002, 2001 and 2000 was $1.91, $3.25 and $8.04 per share, respectively. The weighted-average estimated fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan during 2002, 2001 and 2000 was $0.60, $1.24 and $3.73, respectively.
| Income Taxes |
Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the related benefits will not be realized.
In determining the amount of the valuation allowance, estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction are considered. If all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if the Company will ultimately be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be released to income as a credit to income tax expense. In the fourth quarter of 2001, a valuation allowance was established for the majority of the Company’s deferred tax assets Additionally, throughout 2002, no incremental deferred tax benefits were recognized. The Company’s ability to utilize its deferred tax assets and the continuing need for a related valuation allowance are monitored on an ongoing basis.
Foreign Currencies
Most of the Company’s foreign subsidiaries deal primarily in U.S. dollars and as a result, utilize the dollar as their functional currency. For the translation of financial statements of these subsidiaries, assets and liabilities that are receivable or payable in cash are translated at current exchange rates while inventories and other non-monetary assets are translated at historical rates. Gains and losses resulting from the translation of such financial statements are included in the operating results, as are gains and losses incurred on foreign currency transactions. The Company’s remaining foreign subsidiaries utilize the local currency as their functional currency. The assets and liabilities of these subsidiaries are translated at current exchange rates while revenues and expenses are translated at the average rates in effect for the period. The related translation gains and losses are included in accumulated other comprehensive income (loss) within stockholder’s equity (deficit).
Defined Benefit Plans
The Company maintains pension plans covering certain of its employees. For financial reporting purposes, net periodic pension costs are calculated based upon a number of actuarial assumptions, including a discount rate for plan obligations, assumed rate of return on pension plan assets and assumed rate of compensation increase for plan employees. All of these assumptions are based upon management’s judgement, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact the future expense recognition and cash funding requirements of our pension plans.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” Under this standard, asset retirement obligations will be recognized when incurred at their estimated fair value. In addition, the cost of the asset retirement obligation will be capitalized as a part of the assets’ carrying valued and depreciated over the assets’ remaining useful life. The Company
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
will be required to adopt SFAS No. 143 effective January 1, 2003. The Company does not expect the implementation of SFAS No. 143 to have a material effect on its results of operations.
The Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” effective January 1, 2002. SFAS No. 144 requires that all long-lived assets (including discontinued operations) that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company’s adoption of SFAS No. 144 did not impact its financial condition or results of operations.
In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002.” SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and excludes extraordinary item treatment for gains and losses associated with the extinguishment of debt that do not meet the Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” criteria. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB No. 30 for classification as an extraordinary item shall be reclassified. SFAS No. 145 also amends FASB Statement No. 13, “Accounting for Leases” and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company is required to adopt SFAS No. 145 effective January 1, 2003. While the adoption of SFAS No. 145 will require reclassifications of amounts within the Company’s statement of operations, there will be no impact on the Company’s financial condition, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost as defined in EITF No. 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated by the Company after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment to FAS 123.” SFAS No. 148 provides alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in annual and interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for the Company’s fiscal year 2002. The interim disclosure requirements are effective for the first quarter of fiscal year 2003. The Company has no plans to change to the fair value based method of accounting for stock-based employee compensation.
In November 2002, the FASB issued Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 also expands the disclosures required to be made
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
by a guarantor about its obligations under certain guarantees that it has issued. Initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified. The disclosure requirements are effective immediately and such disclosures have been included in Note 7 “Balance Sheet Information.” The Company does not expect the adoption of FIN No. 45 to have a material effect on its financial condition or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied to the first interim or annual period beginning after June 15, 2003. Additionally, certain transitional disclosures are required immediately if it is reasonably possible that the Company will consolidate or disclose information about a variable interest entity when FIN No. 46 becomes effective. The Company is currently evaluating the effect that the adoption of FIN No. 46 will have on the accounting for its investment in Leshan-Phoenix Semiconductor Ltd. (“Leshan”) as well as the related impact on its results of operations and financial condition. The Company has included the transitional disclosures required by FIN No. 46 in Note 8, “Investment in Joint Ventures.”
Note 4: Accounting Changes
Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” The provisions of SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require that such assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired), require that reporting units be identified for the purpose of assessing potential future impairments of goodwill and remove the forty-year limitation on the amortization period of intangible assets that have finite lives.
The Company’s goodwill at January 1, 2002 totaled $77.3 million and relates to the Cherry acquisition described in Note 6. As a result of the adoption of SFAS No. 142, the Company discontinued amortization of the Cherry goodwill at the beginning of 2002. During the first quarter of 2002, the Company identified its various reporting units, which correspond with its four product lines, and allocated its assets and liabilities to such reporting units. The goodwill relating to the Cherry acquisition was specifically identified with and included in the Company’s Power Management and Standard Analog reporting unit. During the second quarter of 2002, the Company completed the first step of its transitional goodwill impairment test and determined that the estimated fair value of the Power Management and Standard Analog reporting unit as of January 1, 2002 exceeded the reporting unit’s carrying amount by a substantial amount. As a result, an impairment of the Cherry goodwill as of that date was not indicated and completion of the second step test was not required. The Company updated its goodwill impairment analysis during the fourth quarter of 2002 and determined that a related impairment did not exist.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
The following table, with comparable actual amounts, sets forth the pro forma effects on net income (loss) and earnings per share assuming that the Company had adopted the provisions of SFAS No. 142 at the date of the Cherry acquisition in April 2000:
| Year Ended December 31, | ||||||||||||||||||||
| As reported | As reported | Pro forma | As reported | Pro forma | ||||||||||||||||
| 2002 | 2001 | 2001 | 2000 | 2000 | ||||||||||||||||
|
Reported net income (loss) before extraordinary
loss and cumulative effect of accounting change
|
$ | (135.4 | ) | $ | (715.0 | ) | $ | (715.0 | ) | $ | 88.6 | $ | 88.6 | |||||||
|
Add back: Goodwill amortization, net of tax
|
10.7 | 7.7 | ||||||||||||||||||
|
Pro forma net income (loss) before extraordinary
loss and cumulative effect of accounting change
|
$ | (704.3 | ) | $ | 96.3 | |||||||||||||||
|
Reported net income (loss)
|
$ | (141.9 | ) | $ | (831.4 | ) | $ | (831.4 | ) | $ | 71.1 | $ | 71.1 | |||||||
|
Add back: Goodwill amortization, net of tax
|
10.7 | 7.7 | ||||||||||||||||||
|
Pro forma net income (loss)
|
$ | (820.7 | ) | $ | 78.8 | |||||||||||||||
|
Reported basic earnings (loss) per share before
extraordinary loss and cumulative effect of accounting change
|
$ | (0.82 | ) | $ | (4.21 | ) | $ | (4.21 | ) | $ | 0.50 | $ | 0.50 | |||||||
|
Add back: Goodwill amortization, net of tax
|
0.06 | 0.05 | ||||||||||||||||||
|
Pro forma basic earnings (loss) per share before
extraordinary loss and cumulative effect of accounting change
|
$ | (4.15 | ) | $ | 0.55 | |||||||||||||||
|
Reported basic earnings (loss) per share
|
$ | (0.86 | ) | $ | (4.88 | ) | $ | (4.88 | ) | $ | 0.39 | $ | 0.39 | |||||||
|
Add back: Goodwill amortization, net of tax
|
0.06 | 0.05 | ||||||||||||||||||
|
Pro forma basic earnings (loss) per share
|
$ | (4.82 | ) | $ | 0.44 | |||||||||||||||
|
Reported diluted earnings (loss) per share before
extraordinary loss and cumulative effect of accounting change
|
$ | (0.82 | ) | $ | (4.21 | ) | $ | (4.21 | ) | $ | 0.49 | $ | 0.49 | |||||||
|
Add back: Goodwill amortization, net of tax
|
0.06 | 0.05 | ||||||||||||||||||
|
Pro forma diluted earnings (loss) per share
before extraordinary loss and cumulative effect of accounting
change(1)
|
$ | (4.15 | ) | $ | 0.53 | |||||||||||||||
|
Reported diluted earnings (loss) per share
|
$ | (0.86 | ) | $ | (4.88 | ) | $ | (4.88 | ) | $ | 0.38 | $ | 0.38 | |||||||
|
Add back: Goodwill amortization, net of tax
|
0.06 | 0.05 | ||||||||||||||||||
|
Pro forma diluted earnings (loss) per share(1)
|
$ | (4.82 | ) | $ | 0.42 | |||||||||||||||
| (1) | Certain amounts may not total due to rounding of individual components. |
Revenue Recognition
Sales are made to distributors under agreements that allow certain rights of return and price protections on products that are not resold by such distributors. Prior to January 1, 2001, the Company recognized revenue on distributor sales when title passed to the distributor. Provisions were also recorded at that time for estimated sales returns from our distributors on these unsold products. Effective January 1, 2001, the Company changed its revenue recognition method on sales to distributors so that such revenues are recognized at the time the distributor sells the Company’s products to the end customer. Title to products sold to distributors typically passes at the time of shipment by the Company so the Company records accounts
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
receivable for the amount of the transaction, reduces its inventory for the products shipped and defers the related margin in the consolidated balance sheet. The Company recognizes the related revenue and margin when the distributor sells the products to the end user. Although payment terms vary, most distributor agreements require payment within 30 days.
Management believes that this accounting change was to a preferable method because it better aligns reported results with, focuses the Company on, and allows investors to better understand, end user demand for the products the Company sells through distribution. Additionally, the timing of revenue recognition is no longer influenced by the distributor’s stocking decisions. This revenue recognition policy and manner of presentation is commonly used in the semiconductor industry.
The impact of the accounting change for periods prior to 2001 was a charge of $155.2 million ($116.4 million or $0.67 per share net of income taxes) and is reflected as the cumulative effect of change in accounting principle in the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2001. The accounting change resulted in an increase in revenues of $116.6 million and a reduction in net loss of $53.1 million ($0.30 per share) for the year ended December 31, 2001.
The estimated pro forma effects of the accounting change for the year ended December 31, 2000 are as follows (in millions except per share data):
|
As reported:
|
|||||
|
Revenues
|
$ | 2,073.9 | |||
|
Net income (loss) before extraordinary loss
|
88.6 | ||||
|
Net income (loss)
|
71.1 | ||||
|
Basic net income (loss) before extraordinary loss
per share
|
$ | 0.50 | |||
|
Basic net income (loss) per share
|
$ | 0.39 | |||
|
Diluted net income (loss) before extraordinary
loss per share
|
$ | 0.49 | |||
|
Diluted net income (loss) per share
|
$ | 0.38 | |||
|
Pro forma amounts reflecting the accounting
change applied retroactively:
|
|||||
|
Revenues
|
$ | 1,958.7 | |||
|
Net income (loss) before extraordinary loss
|
48.3 | ||||
|
Net income (loss)
|
30.8 | ||||
|
Basic net income (loss) before extraordinary loss
per share
|
$ | 0.25 | |||
|
Basic net income (loss) per share
|
$ | 0.14 | |||
|
Diluted net income (loss) before extraordinary
loss per share
|
$ | 0.24 | |||
|
Diluted net income (loss) per share
|
$ | 0.13 | |||
Derivatives Instruments and Hedging Activities
The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which establishes standards for the accounting and reporting for derivative instruments, including derivative instruments embedded in other contracts, and hedging activities effective January 1, 2001.
Upon the adoption, the Company recorded an after-tax charge of approximately $3.4 million to accumulated other comprehensive income (loss). This charge consisted of an approximate $2.1 million adjustment to record the Company’s interest rate swaps in the consolidated balance sheet at their estimated fair values as well as the write-off of an approximate $3.5 million deferred charge relating to the payment made in December 2000 for the early termination of an interest rate protection agreement relating to a portion of the amounts outstanding under the Company’s senior bank facilities, both before income taxes of approximately $2.2 million.
The Company uses forward foreign currency contracts to reduce its overall exposure to the effects of foreign currency fluctuations on its results of operations and cash flows. The fair value of these derivative
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instruments are recorded as assets or liabilities with gains and losses offsetting the losses and gains on the underlying assets or liabilities. The adoption of SFAS 133 did not impact the Company’s accounting and reporting for these derivative instruments.
Note 5: Restructuring and Other
The activity related to the Company’s restructuring program is as follows (in millions):
| Reserve | Reserve | Reserve | |||||||||||||||||||||||||||||||
| Balance at | 2001 | 2001 | Balance at | 2002 | 2002 | 2002 | Balance at | ||||||||||||||||||||||||||
| 12/31/2000 | Charges | Usage | 12/31/2001 | Charges | Usage | Adjustments | 12/31/02 | ||||||||||||||||||||||||||
| $ | 0.7 | $ | — | $ | (0.7 | ) | $ | — | — | — | — | $ | — | ||||||||||||||||||||
|
December 2002 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separations charges
|
10.1 | (0.2 | ) | — | 9.9 | ||||||||||||||||||||||||||||
|
Cash exit costs
|
1.8 | — | — | 1.8 | |||||||||||||||||||||||||||||
|
Non-cash fixed asset write-offs
|
1.0 | (1.0 | ) | — | — | ||||||||||||||||||||||||||||
|
December 2002 Restructuring reserve balance
|
— | — | 11.7 | ||||||||||||||||||||||||||||||
|
June 2002 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separations charges
|
— | — | — | — | 2.9 | (2.5 | ) | — | 0.4 | ||||||||||||||||||||||||
|
Cash exit costs
|
— | — | — | — | 2.8 | (1.3 | ) | — | 1.5 | ||||||||||||||||||||||||
|
Non-cash fixed asset write-offs
|
— | — | — | — | 8.4 | (8.4 | ) | — | — | ||||||||||||||||||||||||
|
Non-cash stock compensation charges
|
— | — | — | — | 1.0 | (1.0 | ) | — | — | ||||||||||||||||||||||||
|
June 2002 Restructuring reserve balance
|
— | — | 1.9 | ||||||||||||||||||||||||||||||
|
March 2002 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separations charges
|
— | — | — | — | 7.0 | (4.3 | ) | 0.3 | 3.0 | ||||||||||||||||||||||||
|
Non-cash stock compensation charges
|
— | — | — | — | 0.2 | (0.2 | ) | — | — | ||||||||||||||||||||||||
|
March 2002 Restructuring reserve balance
|
— | — | 3.0 | ||||||||||||||||||||||||||||||
|
December 2001 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separations charges
|
— | 4.0 | (1.8 | ) | 2.2 | — | (2.1 | ) | — | 0.1 | |||||||||||||||||||||||
|
Non-cash fixed asset write-offs
|
— | 11.1 | (11.1 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
Non-cash stock compensation and pension charges
|
— | 1.5 | (1.5 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
December 2001 Restructuring reserve balance
|
— | 2.2 | 0.1 | ||||||||||||||||||||||||||||||
|
June 2001 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separations charges
|
— | 36.4 | (29.6 | ) | 6.8 | — | (5.7 | ) | 0.6 | 1.7 | |||||||||||||||||||||||
|
Cash exit costs
|
— | 10.0 | — | 10.0 | — | (8.1 | ) | (0.8 | ) | 1.1 | |||||||||||||||||||||||
|
Fixed asset write-offs
|
— | 42.2 | (42.2 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
Stock compensation and pension charges
|
— | 7.2 | (7.2 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
June 2001 Restructuring reserve balance
|
— | 16.8 | 2.8 | ||||||||||||||||||||||||||||||
|
March 2001 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separations charges
|
— | 31.3 | (30.5 | ) | 0.8 | — | (0.7 | ) | (0.1 | ) | — | ||||||||||||||||||||||
|
Non-cash fixed asset write-offs
|
— | 2.9 | (2.9 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
March 2001 Restructuring reserve balance
|
— | 0.8 | — | ||||||||||||||||||||||||||||||
| $ | 0.7 | $ | 146.6 | $ | (127.5 | ) | $ | 19.8 | $ | 35.2 | $ | (35.5 | ) | $ | (0.0 | ) | $ | 19.5 | |||||||||||||||
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The following table reconciles the restructuring activity in the table above to the “Restructuring and other” caption on the Statement of Operations and Comprehensive Loss for the years ended December 31, 2002 and 2001, respectively (in millions):
| Year Ended | |||||
| December 31, 2002 | |||||
|
2002 restructuring charges
|
$ | 35.2 | |||
|
Plus: Additional charges related to Guadalajara
(June 2001 Restructuring) and France (March 2002 Restructuring)
|
1.9 | ||||
|
Less: Reserves released during the period
|
(1.9 | ) | |||
|
Plus: Charges related to the termination of
executive officers (December 2002)
|
4.9 | ||||
|
Less: Motorola gain
|
(12.4 | ) | |||
|
Restructuring and other
|
$ | 27.7 | |||
| Year Ended | |||||
| December 31, 2001 | |||||
|
2001 restructuring charges
|
$ | 146.6 | |||
|
Plus: Charges related to the termination of an
executive officer (March 2001)
|
3.8 | ||||
|
Restructuring and other
|
$ | 150.4 | |||
| December 2002 Restructuring Program |
In December 2002, the Company recorded a $12.6 million (net of a $0.6 adjustment) restructuring charge. The charge included $10.1 million to cover employee separation costs relating the termination of approximately 300 employees, $1.0 million of asset impairments and approximately $1.8 million in expected lease termination and other exit costs associated with the decommissioning of certain assets. The headcount reductions began in the first quarter of 2003 and are expected to be completed by December 2003 and will impact both manufacturing and non-manufacturing personnel mainly in the United States. The asset impairments relate to the closure of a production line and an abandoned capital equipment project in the Czech Republic. The charge also included an additional $0.3 million reserve related to headcount reduction in Toulouse, France that was part of the March 2002 restructuring program. The $0.6 adjustment related to release of previous reserves associated with our March 2001 and June 2001 restructuring programs due the Company’s analysis estimated costs to complete those programs. As of December 31, 2002 the remaining liability relating to this restructuring was $11.7 million.
In December 2002, the Company also recorded a $4.9 million charge to cover the costs associated with the separation of two of its executive officers. In connection with the separation, the Company reserved $2.0 million related to the cash portion of the related separation agreements. In addition, the Company agreed to modify the vesting and exercise period for a portion of the executives’ stock options. This modification resulted in a non-cash stock compensation charge of $2.9 million with an offsetting credit to additional paid-in capital.
| June 2002 Restructuring Program |
In June 2002, the Company recorded charges totaling $16.7 million for costs associated with its worldwide restructuring programs. The charges included $3.9 million to cover employee separation costs associated with the termination of 79 U.S. employees, $2.8 million for exit costs consisting primarily of manufacturing equipment and supply contract termination charges, and $8.4 million for equipment write-offs that were charged directly against the related assets. An additional $1.0 million in exits costs and $0.6 million in employee separation costs were accrued relating to the closure of the Company’s Guadalajara, Mexico manufacturing facility that was part of the June 2001 restructuring program described below.
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The employee separation costs reflected further reductions in general and administrative staffing levels and included $1.0 million of non-cash stock compensation charges associated with the modification of stock options for certain terminated employees. As of December 31, 2002, all impacted employees had been terminated, and the Company currently expects that the remaining employee separation cost reserve of $0.4 million will be paid out by June 30, 2003.
As a result of continuing economic conditions, the Company determined that certain manufacturing equipment purchase and supply agreements were no longer economical to complete and recorded estimated termination charges of $2.8 million during the second quarter of 2002. As of December 31, 2002, the Company had settled certain of these obligations with payments of $1.3 million and is currently in discussions to settle its remaining obligations.
During the second quarter of 2002, the Company identified certain manufacturing equipment that would no longer be used internally and recorded a charge of $7.0 million to write-down the remaining carrying value to its estimated net realizable value. Additionally, the Company determined that it would not invest the capital required to complete an equipment project and recorded a charge of $1.4 million to write-off the carrying value of the related project.
During the second quarter of 2002, the Company reached a settlement of various contractual issues with Motorola in exchange for a cash payment from Motorola of $10.6 million which resulted in a related gain of $12.4 million (see Note 18 “Related Party Transactions” for further details of the Motorola settlement). The Company also recorded a $1.2 million reversal of amounts previously provided in connection with the June 2001 restructuring program as a result of favorable negotiated contract termination costs.
| March 2002 Restructuring Program |
In March 2002, the Company recorded a $7.1 million (net of a $0.1 million adjustment) charge to cover employee separation costs relating to the termination of approximately 72 employees. Approximately $5.0 million of this charge is attributable to employee terminations resulting from the Company’s decision to relocate its European administrative functions from Toulouse, France to Roznov, Czech Republic and Piestany, Slovakia. The relocation of these functions is currently expected to be completed by June 30, 2003. The remaining $2.2 million relates to reductions in selling, general and administrative personnel primarily in the U.S. The March 2002 charge also included $0.2 million of non-cash employee stock compensation expense associated with the modification of stock options for certain terminated employees. As discussed previously, the Company recorded an additional $0.3 million in employee separation costs relating to the relocation of the administrative functions in Toulouse, France during the fourth quarter of 2002 as a result of its reevaluation of remaining costs to be incurred. As of December 31, 2002, 51 employees have been terminated under this program and the Company currently expects that the remaining terminations will be completed by June 30, 2003. As of December 31, 2002 the remaining liability relating to this restructuring was $3.0 million.
| December 2001 Restructuring Program |
In December 2001, the Company recorded charges totaling $16.6 million for costs associated with its worldwide restructuring programs. The charges included $5.5 million to cover employee separation costs associated with the termination of 50 employees as well as $11.1 million for property and equipment write-offs that were charged directly against the related assets.
The employee separation costs reflected reductions in selling, general and administrative staffing levels in the U.S., United Kingdom, Germany, France and Singapore and included $0.2 million of non-cash charges associated with the modification of stock options for certain terminated employees as well as $1.3 million for additional pension charges related to the terminated employees. (The additional pension charge is reflected in the Company’s accrued pension liability in the consolidated balance sheet.) As of December 31, 2002, all
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
impacted employees had been terminated and the Company currently expects that the remaining reserve of $0.1 million will be paid out by March 2003.
The $11.1 million charge related to the write-off of certain property and equipment located in Phoenix, Arizona that the Company determined would no longer be utilized as a result of the its restructuring activities.
| June 2001 Restructuring Program |
In June 2001, the Company recorded charges totaling $95.8 million for costs associated with its worldwide restructuring programs. These programs were in response to rapidly changing economic circumstances requiring the Company to rationalize its manufacturing and distribution operations to meet declining customer demand. The programs included the phasing out of manufacturing operations at the Company’s Guadalajara, Mexico facility by June 2002, transferring certain manufacturing activities performed at the Company’s Aizu, Japan and Seremban, Malaysia facilities to other Company-owned facilities or to third party contractors by June 2002 and December 2001, respectively, and the shutdown of the Company’s Hong Kong Distribution Center and the transfer of related functions to its Singapore Distribution Center. The charge included $36.4 million to cover employee separation costs associated with the termination of approximately 3,200 employees, $1.1 million of non-cash charges associated with the modification of stock options for certain terminated employees and $6.1 million for additional pension charges related to terminated employees. (The additional pension charge is reflected in the Company’s accrued pension liability in the consolidated balance sheet). As of December 31, 2002, all but 10 employees had been terminated under the June 2001 restructuring program. The remaining employees are located at the Company’s Guadalajara facility. Manufacturing operations in Guadalajara ceased in June 2002 as originally planned; however, various administrative activities relating to the plant closure remain. The Company currently expects that these activities will be completed by March 31, 2003.
The planned discontinuation of manufacturing activities triggered an impairment analysis of the carrying value of the related assets and resulted in the Company recording asset impairment charges totaling $42.2 million. This charge included $31.6 million related to the Guadalajara manufacturing facility, $4.2 million related to the Aizu, Japan 4-inch wafer fabrication line and $2.2 million related to the Seremban assembly and test facility. The Company measured the amount of each asset impairment by comparing the carrying value of the respective assets to the related estimated fair value. The Company estimated future net cash flows for the period of continuing manufacturing activities (June 2002 for Guadalajara and Aizu, December 31, 2001 for Seremban) for each group of assets using price, volume, cost and salvage value assumptions that management considered to be reasonable in the circumstances. The impairment charges were recorded for the amount by which the carrying value of the respective assets exceeded their estimated fair value. The related assets have been sold to third parties at amounts that approximated their estimated fair values, were transferred to other manufacturing facilities at their previously existing carrying values or are currently held for sale. The only remaining assets to be disposed of under the June 2001 restructuring program are the land and building at the Guadalajara manufacturing facility. The Company is currently evaluating offers for these assets and, based on these offers, expects that the carrying value will be fully realized. The charge also included $4.2 million for the write-off of assets that will no longer be used by the Company as a result of the June 2001 restructuring program.
The June 2001 charge also included $10.0 million to cover certain exit costs relating to facility closure and contract terminations including $2.8 million for expected facility clean up activities, $1.0 million for equipment disposal fees, $2.0 million for equipment purchase cancellations and $4.2 million for other contract cancellations. As discussed previously, the Company recorded an additional $1.0 million in exit costs and $0.6 in employee separation costs relating to the Guadalajara manufacturing facility during the second quarter of 2002 as a result of its reevaluation of remaining costs to be incurred with respect to the closure of that facility. As previously mentioned, the Company currently expects that the remaining exit activities will be completed
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
by March 31, 2003. As of December 31, 2002 the remaining liability relating to this restructuring program was $2.8 million.
| March 2001 Restructuring Program |
In March 2001, the Company recorded charges totaling $34.2 million for costs associated with its worldwide restructuring programs. The charges included $31.3 million to cover employee separation costs associated with the termination of 1,100 employees as well as $2.9 million for equipment write-offs that were charged directly against the related assets.
The employee separation costs reflected reductions in manufacturing, selling, general and administrative staffing levels in the U.S., Mexico, the Philippines and Malaysia as well as non-cash charges associated with the modification of stock options for certain terminated employees. All impacted employees had been terminated and the Company released the remaining $0.1 million reserve to income during the second quarter of 2002.
The March 2001 charge included property and equipment write downs of $2.9 million relating to assets at the previously mentioned locations that could not be utilized or transferred to other locations.
Also in March 2001, the Company recorded a $3.8 million charge to cover costs associated with the separation of one of the Company’s executive officers. In connection with the separation, the Company paid the former executive officer $1.9 million. In addition, the Company agreed to accelerate the vesting of the remaining stock options to purchase common stock and to allow such options to remain exercisable for the remainder of their ten-year term. The Company recorded a non-cash charge of $1.9 million related to modification of these options with an offsetting credit to additional paid-in capital.
| 2000 Restructuring Program |
During 2000, the Company recorded a $5.6 million charge to cover costs associated with a restructuring program at its manufacturing facility in Guadalajara, Mexico. The charge included $3.2 million to cover employee separation costs associated with the termination of approximately 500 employees and $2.4 million for asset impairments that were charged directly against the related assets. In September 2000, the Company completed its evaluation of the costs to be incurred and released $0.8 million of the remaining reserve for employee separation costs to income. As of December 31, 2001, there was no remaining liability relating to the 2000 restructuring program.
Note 6: Acquisition
On April 3, 2000, the Company acquired all of the outstanding capital stock of Cherry Semiconductor Corporation (“Cherry”) for approximately $253.2 million in cash (including acquisition related costs), which was financed with cash on hand and borrowings of $220.0 million under the Company’s senior bank facilities. Cherry, which was renamed Semiconductor Components Industries of Rhode Island, Inc., designs and manufactures analog and mixed signal integrated circuits for the power management and automotive markets, and had revenues for its fiscal year ended February 29, 2000 of $129.1 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
The Cherry acquisition was accounted for using the purchase method of accounting and, as a result, the purchase price and related costs were allocated to the estimated fair value of assets acquired and liabilities assumed at the time of the acquisition based on management estimates as follows (in millions):
|
Fair value of tangible net assets
|
$ | 71.3 | ||
|
Developed technology
|
59.3 | |||
|
In-process research and development
|
26.9 | |||
|
Assembled workforce
|
10.0 | |||
|
Excess of purchase price over estimated fair
value of net assets acquired (goodwill)
|
85.7 | |||
| $ | 253.2 | |||
Developed technology is being amortized on a straight-line basis over an estimated useful life of five years. Goodwill was being amortized on a straight-line basis over an estimated useful life of ten years; however, as mentioned previously, such amortization was discontinued January 1, 2002 upon the adoption of SFAS 142. Additionally, assembled workforce was being amortized over an estimated useful life of five years, however assembled workforce does not meet the requirements for an intangible asset apart from goodwill. Accordingly, upon adoption of SFAS 142, the Company reclassified the unamortized balance of assembled workforce to goodwill and the related amortization was discontinued.
The fair value of the acquired in-process research and development was determined using the income approach, which discounts expected future cash flows to present value. Significant assumptions that had to be made in using this approach included revenue and operating margin projections and determination of the applicable discount rate. The fair value of the acquired in-process research and development was based on sales forecasts and cost assumptions projected to be achievable by Cherry on a stand-alone basis. Operating margins were based on cost of goods sold and selling, general and administrative expenses as a percentage of revenues. All projected revenue and cost information was based on historical results and trends and did not include any synergies or cost savings that may result from the acquisition. The rate used to discount future projected cash flows resulting from the acquired in-process research and development was 20%, which was derived from a weighted average cost of capital analysis increased to reflect additional risks inherent in the development life cycle.
At the date of acquisition, in-process research and development consisted of sixty-five projects that had not yet reached technological feasibility and for which no alternative future uses had been identified. Accordingly, the estimated fair value of these projects was expensed as of the acquisition date. Such projects were approximately 70% to 80% complete at the date of the acquisition. The estimated cost to complete these projects at that date was approximately $4.1 million. Of the sixty-five projects in process at the date of acquisition, the Company completed thirty-one projects, abandoned twenty-nine projects and are in the process of completing the remaining five projects, which have an estimated completion cost of $0.5 million. Subsequent to the acquisition date, the Company experienced an industry downturn that required it to scale back research and development activities. Due to the decline in product demand subsequent to the acquisition, 2002 revenues associated with the completed projects were approximately $12.5 million, or 30% of the amount originally forecasted for all acquired in-process research and development projects at the date of acquisition.
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Note 7: Balance Sheet Information
Balance sheet information is as follows (in millions):
| December 31, | |||||||||
| 2002 | 2001 | ||||||||
|
Receivables, net:
|
|||||||||
|
Accounts receivable
|
$ | 123.5 | $ | 144.6 | |||||
|
Less: Allowance for doubtful accounts
|
(1.9 | ) | (2.3 | ) | |||||
| $ | 121.6 | $ | 142.3 | ||||||
|
Inventories, net:
|
|||||||||
|
Raw materials
|
$ | 15.5 | $ | 14.4 | |||||
|
Work in process
|
106.3 | 139.9 | |||||||
|
Finished goods
|
81.9 | 80.7 | |||||||
|
Total inventory
|
203.7 | 235.0 | |||||||
|
Less: Inventory reserves
|
(43.7 | ) | (51.3 | ) | |||||
| $ | 160.0 | $ | 183.7 | ||||||
|
Property, plant and equipment, net:
|
|||||||||
|
Land
|
$ | 11.7 | $ | 11.4 | |||||
|
Buildings
|
449.6 | 505.3 | |||||||
|
Machinery and equipment
|
793.3 | 955.2 | |||||||
|
Total property, plant and equipment
|
1,254.6 | 1,471.9 | |||||||
|
Less: Accumulated depreciation
|
(800.5 | ) | (916.4 | ) | |||||
| $ | 454.1 | $ | 555.5 | ||||||
|
Goodwill, net:
|
|||||||||
|
Goodwill
|
$ | 95.7 | $ | 95.7 | |||||
|
Less: Accumulated amortization
|
(18.4 | ) | (18.4 | ) | |||||
| $ | 77.3 | $ | 77.3 | ||||||
|
Intangible asset, net:
|
|||||||||
|
Developed technology
|
$ | 59.3 | $ | 59.3 | |||||
|
Less: Accumulated amortization
|
(32.6 | ) | (20.7 | ) | |||||
| $ | 26.7 | $ | 38.6 | ||||||
|
Other assets:
|
|||||||||
|
Debt issuance costs
|
$ | 33.7 | $ | 35.2 | |||||
|
Other
|
5.0 | 6.3 | |||||||
| $ | 38.7 | $ | 41.5 | ||||||
|
Accrued expenses:
|
|||||||||
|
Accrued payroll
|
$ | 27.5 | $ | 28.2 | |||||
|
Sales related reserves
|
14.1 | 15.0 | |||||||
|
Restructuring reserves
|
19.5 | 19.8 | |||||||
|
Other
|
38.8 | 41.5 | |||||||
| $ | 99.9 | $ | 104.5 | ||||||
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| December 31, | |||||||||
| 2002 | 2001 | ||||||||
|
Other long-term liabilities:
|
|||||||||
|
Accrued retirement benefits
|
$ | 33.7 | $ | 25.0 | |||||
|
Cash flow hedge liability
|
8.2 | 12.2 | |||||||
|
Other
|
1.0 | 11.2 | |||||||
| $ | 42.9 | $ | 48.4 | ||||||
|
Other comprehensive loss:
|
|||||||||
|
Foreign currency translation adjustments
|
$ | (2.0 | ) | $ | (4.3 | ) | |||
|
Additional minimum pension liability
|
(19.6 | ) | (13.8 | ) | |||||
|
Net unrealized losses and adjustments related to
cash flow hedges
|
(12.1 | ) | (14.7 | ) | |||||
|
Unrealized losses on deferred compensation plan
investments
|
(0.6 | ) | — | ||||||
| $ | (34.3 | ) | $ | (32.8 | ) | ||||
Depreciation expense totaled $115.2, $135.0 and 135.8 million for 2002, 2001 and 2000, respectively. Amortization expense related to the developed technology totaled $11.9, $11.6, and $9.1 million in 2002, 2001 and 2000, respectively.
Estimated amortization expense for the intangible asset is as follows:
|
Year ended December 31,
|
|||||
|
2003
|
$ | 11.9 | |||
|
2004
|
11.9 | ||||
|
2005
|
2.9 | ||||
| $ | 26.7 | ||||
The activity related to our warranty reserves for 2000, 2001 and 2002 follows:
|
Balance as of December 31, 1999
|
$ | 2.1 | ||
|
Accruals
|
2.4 | |||
|
Usages
|
(1.0 | ) | ||
|
Balance as of December 31, 2000
|
$ | 3.5 | ||
|
Accruals
|
0.1 | |||
|
Usages
|
(0.6 | ) | ||
|
Balance as of December 31, 2001
|
$ | 3.0 | ||
|
Accruals
|
0.1 | |||
|
Usages
|
(0.4 | ) | ||
|
Balance as of December 31, 2002
|
$ | 2.7 | ||
Note 8: Investments in Joint Ventures
Leshan-Phoenix Semiconductor Company Ltd. (“Leshan”) operates a back-end manufacturing facility in Leshan, China. The Company owns a majority of the outstanding equity interests in the Leshan joint venture while a Chinese state owned enterprise named Leshan Radio Company Ltd., owns the remaining interests. Due to certain rights held by this minority shareholder, the Company does not exercise control over Leshan normally commensurate with majority ownership and therefore, accounts for its investment using the equity method.
Pursuant to the joint venture agreement, requests for production capacity are made to the board of directors of Leshan by each shareholder. These requests represent a purchase commitment by the respective
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shareholders, however, each shareholder may elect to pay the cost associated with the unused capacity (generally equal to the fixed cost of the capacity), in lieu of the commitment. The Company provides forecasted needs to Leshan on a periodic basis, an approximate six-month cycle, which are used to establish pricing over the forecasted period. The Company committed to purchase 85%, 81% and 86% of the total products produced by Leshan in 2002, 2001 and 2000, respectively, and is currently committed to purchase 82% of the product produced by Leshan in 2003. In 2002, 2001 and 2000, respectively, the Company made actual purchases of 76%, 43% and 91% of Leshan’s production and, as a result, incurred $1.5 million and $6.4 million of unused capacity charges in 2002 and 2001, respectively.
The Company’s investment in Leshan was $35.7 million and $31.2 million at December 31, 2002 and 2001, respectively. The Company’s equity in Leshan’s earnings totaled $4.5 million, $4.0 million and $3.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. Summarized financial information for Leshan is as follows (in millions):
| December 31, | ||||||||
| 2002 | 2001 | |||||||
|
Current assets
|
$ | 26.0 | $ | 18.3 | ||||
|
Noncurrent assets
|
131.2 | 131.0 | ||||||
|
Total assets
|
$ | 157.2 | $ | 149.3 | ||||
|
Current liabilities
|
$ | 15.4 | $ | 14.8 | ||||
|
Noncurrent liabilities
|
83.3 | 83.3 | ||||||
|
Venture equity
|
58.6 | 51.2 | ||||||
|
Total liabilities and equity
|
$ | 157.3 | $ | 149.3 | ||||
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
|
Net sales
|
$ | 101.3 | $ | 58.0 | $ | 77.8 | ||||||
|
Gross profit
|
11.0 | 5.4 | 10.1 | |||||||||
|
Net income
|
7.3 | 6.5 | 5.4 | |||||||||
In connection with the Recapitalization described in Note 1, the Company loaned Leshan $28.3 million to refinance third-party non-recourse loans. During 2001 and 2000, the Company loaned Leshan an additional $5.0 million and $30.0 million, respectively, to finance facility expansion. Such loans, which totaled $63.3 million at December 31, 2002 and 2001, are included in the investments in and advances to joint ventures in the consolidated balance sheet. The Company’s loans to Leshan bear interest at 3.5%, payable quarterly, and mature at various dates through December 31, 2006.
At December 31, 2002, the Company’s exposure to losses related to Leshan included its $35.7 million equity investment in addition to the $63.3 million loan outstanding.
The Company had a 50% interest in Semiconductor Miniatures Products Malaysia Sdn. Bhd. (“SMP”), a joint venture with Semiconductors International B.V. (“Philips”) which operates a back-end manufacturing facility in Seremban, Malaysia. Pursuant to the terms of the joint venture agreement, the Company sold its interest in SMP to Philips on February 1, 2001, effective December 31, 2000, for $20.4 million resulting in a pre-tax gain of $3.1.
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Note 9: Long-Term Debt
Long-term debt consists of the following (dollars in millions):
| December 31, 2002 | December 31, 2001 | ||||||||||||||||||||
| Amount of | Interest | Interest | |||||||||||||||||||
| Facility | Rate | Balance | Rate | Balance | |||||||||||||||||
|
Senior Bank Facilities:
|
|||||||||||||||||||||
|
Tranche A
|
$ | 200.0 | 6.4375 | % | $ | 6.6 | 8.4375 | % | $ | 17.0 | |||||||||||
|
Tranche B
|
325.0 | 6.4375 | % | 209.9 | 8.4375 | % | 312.5 | ||||||||||||||
|
Tranche C
|
350.0 | 6.4375 | % | 226.0 | 8.4375 | % | 336.5 | ||||||||||||||
|
Tranche D
|
200.0 | 6.4375 | % | 134.1 | 8.4375 | % | 197.7 | ||||||||||||||
|
Revolver
|
150.0 | 6.4375 | % | 125.0 | 8.4375 | % | 125.0 | ||||||||||||||
| 701.6 | 988.7 | ||||||||||||||||||||
|
12% Senior Secured Notes due 2008, interest
payable semi-annually, net of debt discount of $8.6
|
291.4 | ||||||||||||||||||||
|
12% Senior Subordinated Notes due 2009, interest
payable semi-annually
|
260.0 | 260.0 | |||||||||||||||||||
|
10% Junior Subordinated Note to Motorola due
2011, interest compounded semi-annually, payable at maturity
|
126.9 | 115.2 | |||||||||||||||||||
|
2.25% Note payable to Japanese bank due 2010
|
23.3 | 21.9 | |||||||||||||||||||
|
Capital lease obligation
|
— | 1.1 | |||||||||||||||||||
| 1,403.2 | 1,386.9 | ||||||||||||||||||||
|
Less: Current maturities
|
(9.3 | ) | (12.4 | ) | |||||||||||||||||
| $ | 1,393.9 | $ | 1,374.5 | ||||||||||||||||||
Senior Bank Facilities
Borrowings under the senior bank facilities, which bear interest at rates selected by the Company based on either LIBOR or an alternative base rate, as defined, plus an interest rate spread, amortize within three to five years. As of December 31, 2002, the senior bank facilities contained a $150.0 million revolving line of credit. Borrowings of $125.0 million and letters of credit totaling $17.1 million were outstanding against the line of credit at December 31, 2002 leaving $7.9 million of availability at that date. As discussed below, $62.5 million of borrowings outstanding under the revolving line of credit were converted to a new Tranche R term loan in February 2003 pursuant to amendments to the senior bank facilities made in connection with the issuance of the Company’s 12% first-lien senior secured notes due 2010 (the “First-Lien Notes”). Additionally, the Company used $180.9 million of the net cash proceeds from the issuance of the First-Lien Notes to prepay a portion of the senior bank facilities, including $25.0 million of which proceeds were used to repay borrowings then outstanding under the revolving line of credit and permanently reduce the commitments thereunder by such amount. As described in Note 15, the Company hedges a portion of the interest rate risk associated with the senior bank facilities.
At June 29, 2001, the Company was not in compliance with the interest expense coverage and leverage ratio requirements under its senior bank facilities. On August 13, 2001, the Company received a waiver in respect to such non-compliance at June 29, 2001 and in respect of any future non-compliance with such covenants through December 31, 2002. In connection with such waiver, the Company amended its senior bank facilities to, among other things, reduce interest expense coverage and increase leverage ratio requirements through December 31, 2005, add minimum cash and EBITDA level covenants through December 31, 2002,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
require the Company to obtain $100 million through an equity investment from TPG (See Note 11), increase the required interest rate spreads applicable to outstanding borrowings (“supplemental interest”), and, to revise certain mandatory prepayment provisions contained in the original agreement.
In connection with the issuance of the 12% second-lien senior secured notes due 2008 (the “Second-Lien Notes”) described below, the Company amended its senior bank facilities on April 17, 2002 to, among other things, permit the issuance of the Second-Lien Notes, eliminate interest expense coverage and leverage ratio requirements through December 31, 2003 and to reduce the minimum interest expense coverage ratio requirement and increase the maximum leverage ratio requirements for the period from January 1, 2004 through June 30, 2006, extend the minimum cash and EBITDA level covenants through December 31, 2003, permit the redemption of up to 35% of the Second-Lien Notes with net proceeds of any equity offerings on or prior to May 15, 2005, allow certain asset sales and to permit borrowings of up to $100.0 million by or for the benefit of the Company’s Leshan joint venture so long as the related proceeds are used to prepay loans under the senior bank facilities. The Company was in compliance with the various covenants and other requirements contained in its senior bank facilities, as amended, through December 31, 2002.
In connection with the issuance of the First-Lien Notes described below, the Company amended its senior bank facilities effective as of February 14, 2003 to, among other things, permit the issuance of the First-Lien Notes, eliminate the interest expense and leverage coverage ratio requirements, reduce the minimum EBITDA level covenant (as defined in the credit agreement) to $140.0 million for any four consecutive fiscal quarters until the final maturity of the senior bank facilities, reduce permitted annual capital expenditures to $100.0 million (subject to increases in certain circumstances), permit the redemption of up to 35% of the First-Lien Notes with net proceeds of any equity offerings on or prior to March 15, 2006 and to convert $62.5 million of the amounts outstanding under the revolving credit facility to a new Tranche R term loan. Although there can be no assurances, the Company believes that it will be able to comply with the various covenants and other requirements contained in its senior bank facilities, as amended, through December 31, 2003.
Second-Lien Notes
On May 6, 2002, the Company and SCI LLC, (collectively, the “Issuers”) issued $300.0 million principal amount of Second-Lien Notes in a private offering that was exempt from the registration requirements of the federal securities laws. The Second-Lien Notes, which are callable after four years, were issued at 96.902% of par value and generated net proceeds of $278.6 million after such discount and the payment of issuance costs. The net proceeds were used to prepay a portion of the amounts outstanding under the Company’s senior bank facilities. Because the amount outstanding under the senior bank facilities was reduced below $750.0 million, the supplemental interest charges were reduced from 3.0% to 1.0%. The Company has the option to terminate the supplemental interest charges by paying the entire accrued balance of supplemental interest charges on March 31, 2003. Alternatively, the Company can elect to pay 50% of the existing accrued balance at March 31, 2003 and continue accruing supplemental interest charges through June 30, 2003, at which time all remaining supplemental interest is due. Approximately $25.7 million of supplemental interest charges had been accrued as of December 31, 2002. In connection with this prepayment, the Company wrote off $6.5 million of debt issuance costs which is reflected as an extraordinary loss in the Company’s consolidated statement of operations for the year ended December 31, 2002. The Second-Lien Notes accrued interest at the rate of 12% until February 6, 2003, when the related annual interest increased to 13%. The increased interest rate will remain in effect unless on or prior to August 6, 2003 the Company issues $100.0 million of its common stock or certain convertible preferred stock to financial sponsors and uses the net proceeds to prepay additional amounts outstanding under its senior bank facilities or under any other credit facility secured by a first-priority lien and permanently reduces the related loan commitments in an amount equal to the amount prepaid. Interest on Second-Lien Notes is payable semi-annually on May 15 and November 15.
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The Second-Lien Notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by the Company’s domestic restricted subsidiaries that are also guarantors under the 12% Senior Subordinated Notes Due 2009 (the “Senior Subordinated Notes”) described below. In addition, the Second-Lien Notes and the related guarantees are secured on a second-priority basis by the capital stock or other equity interests of the Company’s domestic subsidiaries, 65% of the capital stock or other equity interests of the Company’s first-tier foreign subsidiaries and substantially all other assets, in each case that are held by the Company or any of the guarantors, but only to the extent that obligations under its senior bank facilities are secured by a first-priority lien thereon.
The Issuers filed an exchange offer registration statement on October 1, 2002 relating to the Second-Lien Notes pursuant to a registration rights agreement. The registration statement was declared effective by the Securities and Exchange Commission on January 27, 2003.
First-Lien Notes
On March 3, 2003, the Issuers issued $200.0 million principal amount of First-Lien Notes in a private offering that was exempt from the registration requirements of the federal securities laws. The First-Lien Notes, which are callable after four years, were issued at 95.467% of par value and generated net proceeds of approximately $180.9 million after taking into consideration the discount and the payment of expected issuance costs. The net proceeds were used to prepay a portion of the amounts outstanding under the Company’s senior bank facilities, including $25.0 million relating to the Company’s revolving credit facility. In connection with the prepayment, the Company wrote off $3.5 million of debt issuance costs in the first quarter of 2003.
The First-Lien Notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by the Company’s domestic restricted subsidiaries. In addition, the First-Lien Notes and related guarantees are secured on a first-priority basis by the assets that secure the senior bank facilities and they rank equal in right of payment with all of the Company’s and the guarantors’ existing and future senior indebtedness and senior to the Company’s and the guarantors’ existing and future senior subordinated and subordinated indebtedness and effectively junior to all of the liabilities of the Company’s subsidiaries that have not guaranteed such notes.
Senior Subordinated Notes
In connection with the Recapitalization described in Note 1, the Company issued $400.0 million principal amount of Senior Subordinated Notes due 2009. Except as described below, the Senior Subordinated Notes may not be redeemed prior to August 1, 2004. Redemption prices range from 106% of the principal amount if redeemed in 2004 to 100% if redeemed in 2008 or thereafter. The Company was able to redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes prior to August 4, 2002 with the proceeds of a public equity offering at a redemption price of 112% of the amount redeemed. On May 3, 2000, the Company completed its initial public offering (IPO) of its common stock and used a portion of the proceeds to redeem $140.0 million of the Senior Subordinated Notes.
Japanese Loan
In 2000, the Company’s Japanese subsidiary entered into a yen-denominated note agreement with a Japanese bank to finance the expansion of its manufacturing facilities. The loan, which has a balance of $23.3 million at December 31, 2002 (based on the yen-to-dollar exchange rate in effect at that date) and bears interest at an annual rate of 2.25%, requires semi-annual principal and interest payments through September 2010 of approximately $1.9 million (based on the yen-to-dollar exchange rate at December 31, 2002.) The note is unsecured, however, the bank has rights under the agreement to obtain collateral in certain circumstances. In addition, the note is guaranteed by SCI, LLC the Company’s primary domestic operating subsidiary.
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Debt Issuance Costs
In connection with the Recapitalization, the Company incurred $52.6 million in costs relating to the establishment of its senior bank facilities and the issuance of its Senior Subordinated Notes. During 2002, 2001 and 2000, the Company incurred $12.1 million, $5.1 million and $3.2 million, respectively, relating to amendments under its senior bank facilities and additional borrowings. The Company wrote-off $6.5 million and $17.5 million of debt issuance costs in 2002 and 2000, respectively, in connection with the various prepayments as outlined above. Other assets at December 31, 2002 and 2001 included $33.7 million and $35.2 million, respectively, of unamortized debt issuance costs.
Annual maturities relating to the Company’s long-term debt as of December 31, 2002 are as follows (in millions):
| Actual | |||||
| Maturities | |||||
|
2003
|
$ | 9.3 | |||
|
2004
|
11.8 | ||||
|
2005
|
236.9 | ||||
|
2006
|
280.9 | ||||
|
2007
|
176.8 | ||||
|
Thereafter
|
687.5 | ||||
|
Total
|
$ | 1,403.2 | |||
The Company and SCI LLC are co-issuers of the First-Lien Notes (issued in March 2003), the Second-Lien Notes, and the Senior Subordinated Notes (collectively, “the Notes”.) The Company’s other domestic subsidiaries (collectively, the “Guarantor Subsidiaries”) fully and unconditionally guarantee on a joint and several basis, the Issuers’ obligations under the Notes. The Guarantor Subsidiaries include Semiconductor Components Industries of Rhode Island, Inc, an operating subsidiary, as well as holding companies whose net assets consist primarily of investments in the Company’s Czech subsidiaries, the Leshan joint venture and nominal equity interests in certain of the Company’s other foreign subsidiaries. The Company’s remaining subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) are not guarantors of the Notes.
The Company does not believe that the separate financial statements and other disclosures concerning the Guarantor Subsidiaries provide any additional information that would be material to investors in making an investment decision. Condensed consolidating financial information for the Issuers, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries is as follows (in millions):
| Issuers | |||||||||||||||||||||||||
| ON Semiconductor | Guarantor | Non-Guarantor | |||||||||||||||||||||||
| Corporation | SCI LLC | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||||||
|
As of December 31, 2002
|
|||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | — | $ | 121.5 | $ | — | $ | 60.9 | $ | — | $ | 182.4 | |||||||||||||
|
Receivables, net
|
— | 38.2 | — | 83.4 | — | 121.6 | |||||||||||||||||||
|
Inventories, net
|
— | 25.4 | 0.5 | 147.3 | (13.2 | ) | 160.0 | ||||||||||||||||||
|
Other current assets
|
— | 7.4 | 0.1 | 35.5 | — | 43.0 | |||||||||||||||||||
|
Total current assets
|
— | 192.5 | 0.6 | 327.1 | (13.2 | ) | 507.0 | ||||||||||||||||||
|
Property, plant and equipment, net
|
— | 104.4 | 33.5 | 320.6 | (4.4 | ) | 454.1 | ||||||||||||||||||
|
Goodwill and other intangibles, net
|
— | 8.1 | 95.9 | — | — | 104.0 | |||||||||||||||||||
|
Investments and other assets
|
(596.3 | ) | 131.3 | 47.2 | 1.3 | 554.5 | 138.0 | ||||||||||||||||||
|
Total assets
|
$ | (596.3 | ) | $ | 436.3 | $ | 177.2 | $ | 649.0 | $ | 536.9 | $ | 1,203.1 | ||||||||||||
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| Issuers | |||||||||||||||||||||||||
| ON Semiconductor | Guarantor | Non-Guarantor | |||||||||||||||||||||||
| Corporation | SCI LLC | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||||||
|
Accounts payable
|
$ | — | $ | 25.3 | $ | 1.7 | $ | 50.4 | $ | — | $ | 77.4 | |||||||||||||
|
Accrued expenses and other current liabilities
|
— | 134.9 | 1.6 | 25.4 | 1.9 | 163.8 | |||||||||||||||||||
|
Deferred income on sales to distributors
|
— | 32.3 | — | 38.5 | — | 70.8 | |||||||||||||||||||
|
Total current liabilities
|
— | 192.5 | 3.3 | 114.3 | 1.9 | 312.0 | |||||||||||||||||||
|
Long-term debt(1)
|
551.4 | 1,372.2 | — | 21.7 | (551.4 | ) | 1,393.9 | ||||||||||||||||||
|
Other long-term liabilities
|
— | 28.3 | — | 16.8 | — | 45.1 | |||||||||||||||||||
|
Intercompany(1)
|
(595.7 | ) | (558.1 | ) | 158.9 | 401.4 | 593.5 | — | |||||||||||||||||
|
Total liabilities
|
(44.3 | ) | 1,034.9 | 162.2 | 554.2 | 44.0 | 1,751.0 | ||||||||||||||||||
|
Minority interests in consolidated subsidiaries
|
— | — | — | — | 4.1 | 4.1 | |||||||||||||||||||
|
Redeemable preferred stock
|
110.1 | — | — | — | — | 110.1 | |||||||||||||||||||
|
Stockholders’ equity (deficit)
|
(662.1 | ) | (598.6 | ) | 15.0 | 94.8 | 488.8 | (662.1 | ) | ||||||||||||||||
|
Liabilities, minority interests and
stockholders’ equity (deficit)
|
$ | (596.3 | ) | $ | 436.3 | $ | 177.2 | $ | 649.0 | $ | 536.9 | $ | 1,203.1 | ||||||||||||
|
As of December 31, 2001
|
|||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | — | $ | 124.9 | $ | 0.1 | $ | 54.8 | $ | — | $ | 179.8 | |||||||||||||
|
Receivables, net
|
— | 62.4 | — | 79.9 | — | 142.3 | |||||||||||||||||||
|
Inventories, net
|
— | 25.9 | 3.1 | 158.8 | (4.1 | ) | 183.7 | ||||||||||||||||||
|
Other current assets
|
— | 6.8 | 0.1 | 38.1 | — | 45.0 | |||||||||||||||||||
|
Total current assets
|
— | 220.0 | 3.3 | 331.6 | (4.1 | ) | 550.8 | ||||||||||||||||||
|
Property, plant and equipment, net
|
— | 148.3 | 42.7 | 368.9 | (4.4 | ) | 555.5 | ||||||||||||||||||
|
Deferred income taxes
|
— | — | — | 1.3 | — | 1.3 | |||||||||||||||||||
|
Goodwill and other intangibles, net
|
— | 8.0 | 107.9 | — | — | 115.9 | |||||||||||||||||||
|
Investments and other assets
|
(453.1 | ) | 62.4 | 45.4 | 1.0 | 481.2 | 136.9 | ||||||||||||||||||
|
Total assets
|
$ | (453.1 | ) | $ | 438.7 | $ | 199.3 | $ | 702.8 | $ | 472.7 | $ | 1,360.4 | ||||||||||||
|
Accounts payable
|
$ | — | $ | 33.4 | $ | 2.4 | $ | 75.7 | $ | — | $ | 111.5 | |||||||||||||
|
Accrued expenses and other current liabilities
|
— | 101.1 | 0.2 | 37.0 | — | 138.3 | |||||||||||||||||||
|
Deferred income on sales to distributors
|
— | 43.3 | — | 56.1 | — | 99.4 | |||||||||||||||||||
|
Total current liabilities
|
— | 177.8 | 2.6 | 168.8 | — | 349.2 | |||||||||||||||||||
|
Long-term debt(1)
|
260.0 | 1,352.6 | — | 21.9 | (260.0 | ) | 1,374.5 | ||||||||||||||||||
|
Other long-term liabilities
|
— | 36.3 | — | 12.1 | — | 48.4 | |||||||||||||||||||
|
Intercompany(1)
|
(297.3 | ) | (668.2 | ) | 156.1 | 510.1 | 299.3 | — | |||||||||||||||||
|
Total liabilities
|
(37.3 | ) | 898.5 | 158.7 | 712.9 | 39.3 | 1,772.1 | ||||||||||||||||||
|
Minority interests in consolidated subsidiaries
|
— | — | — | — | 4.1 | 4.1 | |||||||||||||||||||
|
Redeemable preferred stock
|
101.6 | — | — | — | — | 101.6 | |||||||||||||||||||
|
Stockholders’ equity (deficit)
|
(517.4 | ) | (459.8 | ) | 40.6 | (10.1 | ) | 429.3 | (517.4 | ) | |||||||||||||||
|
Liabilities, minority interests and
stockholders’ equity (deficit)
|
$ | (453.1 | ) | $ | 438.7 | $ | 199.3 | $ | 702.8 | $ | 472.7 | $ | 1,360.4 | ||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
| Issuers | ||||||||||||||||||||||||
| ON Semiconductor | Guarantor | Non-Guarantor | ||||||||||||||||||||||
| Corporation | SCI LLC | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||||
|
For the year ended December 31,
2002
|
||||||||||||||||||||||||
|
Total revenues
|
$ | — | $ | 534.5 | $ | 72.0 | $ | 1,228.4 | $ | (750.4 | ) | $ | 1,084.5 | |||||||||||
|
Cost of sales
|
— | 471.2 | 55.1 | 1,014.1 | (741.4 | ) | 799.0 | |||||||||||||||||
|
Gross profit
|
— | 63.3 | 16.9 | 214.3 | (9.0 | ) | 285.5 | |||||||||||||||||
|
Research and development
|
— | 22.4 | 13.6 | 31.9 | — | 67.9 | ||||||||||||||||||
|
Selling and marketing
|
— | 32.1 | 1.6 | 27.5 | — | 61.2 | ||||||||||||||||||
|
General and administrative
|
— | 60.5 | (0.6 | ) | 42.2 | — | 102.1 | |||||||||||||||||
|
Amortization of goodwill and other intangibles
|
— | — | 11.9 | — | — | 11.9 | ||||||||||||||||||
|
Restructuring and other
|
— | 25.7 | (1.1 | ) | 3.1 | — | 27.7 | |||||||||||||||||
|
Total operating expenses
|
— | 140.7 | 25.4 | 104.7 | — | 270.8 | ||||||||||||||||||
|
Operating income (loss)
|
— | (77.4 | ) | (8.5 | ) | 109.6 | (9.0 | ) | 14.7 | |||||||||||||||
|
Interest expense, net
|
— | (89.6 | ) | (18.9 | ) | (36.7 | ) | — | (145.2 | ) | ||||||||||||||
|
Other income and expense(2)
|
— | (40.4 | ) | — | 40.4 | — | — | |||||||||||||||||
|
Equity in earnings of joint ventures
|
(141.9 | ) | 73.6 | 1.8 | 4.2 | 66.2 | 3.9 | |||||||||||||||||
|
Income (loss) before income taxes, minority
interests and extraordinary loss
|
(141.9 | ) | (133.8 | ) | (25.6 | ) | 117.5 | 57.2 | (126.6 | ) | ||||||||||||||
|
Income tax benefit (provision)
|
— | (4.6 | ) | — | (4.2 | ) | — | (8.8 | ) | |||||||||||||||
|
Minority interests
|
— | — | — | — | — | — | ||||||||||||||||||
|
Extraordinary loss on prepayment of debt (net of
income taxes)
|
— | (6.5 | ) | — | — | — | (6.5 | ) | ||||||||||||||||
|
Net income (loss)
|
$ | (141.9 | ) | $ | (144.9 | ) | $ | (25.6 | ) | $ | 113.3 | $ | 57.2 | $ | (141.9 | ) | ||||||||
|
For the year ended December 31,
2001
|
||||||||||||||||||||||||
|
Total revenues
|
$ | — | $ | 639.6 | $ | 97.5 | $ | 1,398.7 | $ | (921.2 | ) | $ | 1,214.6 | |||||||||||
|
Cost of sales
|
— | 639.9 | 71.3 | 1,264.4 | (975.6 | ) | 1,000.0 | |||||||||||||||||
|
Gross profit
|
— | (0.3 | ) | 26.2 | 134.3 | 54.4 | 214.6 | |||||||||||||||||
|
Research and development
|
— | 12.9 | 3.8 | 64.2 | — | 80.9 | ||||||||||||||||||
|
Selling and marketing
|
— | 39.1 | 4.3 | 31.4 | — | 74.8 | ||||||||||||||||||
|
General and administrative
|
— | 45.8 | — | 85.1 | — | 130.9 | ||||||||||||||||||
|
Amortization of goodwill and other intangibles
|
— | — | 22.6 | — | — | 22.6 | ||||||||||||||||||
|
Write-off of acquired in-process research and
development
|
— | — | — | — | — | — | ||||||||||||||||||
|
Restructuring and other
|
— | 56.4 | 2.5 | 91.5 | — | 150.4 | ||||||||||||||||||
|
Total operating expenses
|
— | 154.2 | 33.2 | 272.2 | — | 459.6 | ||||||||||||||||||
|
Operating income (loss)
|
— | (154.5 | ) | (7.0 | ) | (137.9 | ) | 54.4 | (245.0 | ) | ||||||||||||||
|
Interest expense, net
|
— | (71.5 | ) | (18.9 | ) | (43.1 | ) | — | (133.5 | ) | ||||||||||||||
|
Equity in earnings of joint ventures
|
(831.4 | ) | (237.2 | ) | (0.9 | ) | 0.2 | 1,073.3 | 4.0 | |||||||||||||||
|
Gain on the sale of investment in joint venture
|
— | — | 3.1 | — | — | 3.1 | ||||||||||||||||||
|
Income (loss) before income taxes, minority
interests and cumulative effect of accounting change
|
(831.4 | ) | (463.2 | ) | (23.7 | ) | (180.8 | ) | 1,127.7 | (371.4 | ) | |||||||||||||
|
Income tax benefit (provision)
|
— | (325.5 | ) | (14.8 | ) | 11.8 | (17.2 | ) | (345.7 | ) | ||||||||||||||
|
Minority interests
|
— | — | — | — | 2.1 | 2.1 | ||||||||||||||||||
|
Cumulative effect of accounting change (net of
income tax)
|
— | (44.1 | ) | — | (72.3 | ) | — | (116.4 | ) | |||||||||||||||
|
Net income (loss)
|
$ | (831.4 | ) | $ | (832.8 | ) | $ | (38.5 | ) | $ | (241.3 | ) | $ | 1,112.6 | $ | (831.4 | ) | |||||||
102
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
| Issuers | ||||||||||||||||||||||||||
| ON Semiconductor | Guarantor | Non-Guarantor | ||||||||||||||||||||||||
| Corporation | SCI LLC | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||||||
|
For the year ended December 31,
2000
|
||||||||||||||||||||||||||
|
Total revenues
|
$ | — | $ | 2,245.8 | $ | 122.4 | $ | 2,504.5 | $ | (2,798.8 | ) | $ | 2,073.9 | |||||||||||||
|
Cost of sales
|
— | 1,765.6 | 92.0 | 2,256.4 | (2,759.0 | ) | 1,355.0 | |||||||||||||||||||
|
Gross profit
|
— | 480.2 | 30.4 | 248.1 | (39.8 | ) | 718.9 | |||||||||||||||||||
|
Research and development
|
— | 36.8 | 13.0 | 19.4 | — | 69.2 | ||||||||||||||||||||
|
Selling and marketing
|
— | 56.9 | 6.4 | 36.8 | — | 100.1 | ||||||||||||||||||||
|
General and administrative
|
— | 180.7 | 5.0 | 47.7 | — | 233.4 | ||||||||||||||||||||
|
Amortization of goodwill and other intangibles
|
— | — | 16.8 | — | — | 16.8 | ||||||||||||||||||||
|
Write-off of acquired in-process research and
development
|
— | — | 26.9 | — | — | 26.9 | ||||||||||||||||||||
|
Restructuring and other
|
— | — | — | 4.8 | — | 4.8 | ||||||||||||||||||||
|
Total operating expenses
|
— | 274.4 | 68.1 | 108.7 | — | 451.2 | ||||||||||||||||||||
|
Operating income (loss)
|
— | 205.8 | (37.7 | ) | 139.4 | (39.8 | ) | 267.7 | ||||||||||||||||||
|
Interest expense, net
|
— | (78.5 | ) | (14.3 | ) | (38.4 | ) | — | (131.2 | ) | ||||||||||||||||
|
Equity in earnings of joint ventures
|
71.1 | 16.1 | 6.3 | — | (89.1 | ) | 4.4 | |||||||||||||||||||
|
Income (loss) before taxes, minority
interests and extraordinary loss
|
71.1 | 143.4 | (45.7 | ) | 101.0 | (128.9 | ) | 140.9 | ||||||||||||||||||
|
Income tax benefit (provision)
|
— | (58.9 | ) | 20.8 | (21.5 | ) | 9.5 | (50.1 | ) | |||||||||||||||||
|
Minority interests
|
— | — | — | — | (2.2 | ) | (2.2 | ) | ||||||||||||||||||
|
Extraordinary loss on prepayment of debt (net of
taxes)
|
— | (17.5 | ) | — | — | — | (17.5 | ) | ||||||||||||||||||
|
Net income (loss)
|
$ | 71.1 | $ | 67.0 | $ | (24.9 | ) | $ | 79.5 | $ | (121.6 | ) | $ | 71.1 | ||||||||||||
|
For the year ended December 31,
2002
|
||||||||||||||||||||||||||
|
Net cash provided by (used in) operating
activities
|
$ | — | $ | (187.9 | ) | $ | 0.4 | $ | 223.1 | $ | (5.0 | ) | $ | 30.6 | ||||||||||||
|
Cash flows from investing activities:
|
||||||||||||||||||||||||||
|
Purchases of property, plant and equipment
|
— | (6.7 | ) | (0.5 | ) | (19.3 | ) | — | (26.5 | ) | ||||||||||||||||
|
Equity injections from Parent
|
— | (0.5 | ) | — | — | 0.5 | — | |||||||||||||||||||
|
Proceeds from sales of property, plant and
equipment
|
— | 2.3 | — | 2.2 | — | 4.5 | ||||||||||||||||||||
|
Net cash used in investing activities
|
— | (4.9 | ) | (0.5 | ) | (17.1 | ) | 0.5 | (22.0 | ) | ||||||||||||||||
|
Cash flows from financing activities:
|
||||||||||||||||||||||||||
|
Intercompany loans
|
— | (233.0 | ) | — | 233.0 | — | — | |||||||||||||||||||
|
Intercompany loan repayments
|
— | 429.4 | — | (429.4 | ) | — | — | |||||||||||||||||||
|
Proceeds from debt issuance, net of discount
|
— | 278.6 | — | — | — | 278.6 | ||||||||||||||||||||
|
Payment of capital lease obligation
|
— | (1.1 | ) | — | — | — | (1.1 | ) | ||||||||||||||||||
|
Repayment of long term debt
|
— | (287.1 | ) | — | — | — | (287.1 | ) | ||||||||||||||||||
|
Dividends paid to affiliates
|
— | — | — | (5.0 | ) | 5.0 | — | |||||||||||||||||||
|
Equity injections from Parent
|
— | — | — | 0.5 | (0.5 | ) | — | |||||||||||||||||||
|
Proceeds from exercise of stock options and
issuance of common stock under the employee stock purchase plan
|
— | 2.6 | — | — | — | 2.6 | ||||||||||||||||||||
|
Net cash provided by financing activities
|
— | 189.4 | — | (200.9 | ) | 4.5 | (7.0 | ) | ||||||||||||||||||
103
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
| Issuers | ||||||||||||||||||||||||||
| ON Semiconductor | Guarantor | Non-Guarantor | ||||||||||||||||||||||||
| Corporation | SCI LLC | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||||||
|
Effect of exchange rate changes on cash and cash
equivalents
|
— | — | — | 1.0 | — | 1.0 | ||||||||||||||||||||
|
Net increase (decrease) in cash and cash
equivalents
|
— | (3.4 | ) | (0.1 | ) | 6.1 | — | 2.6 | ||||||||||||||||||
|
Cash and cash equivalents, beginning of period
|
— | 124.9 | 0.1 | 54.8 | — | 179.8 | ||||||||||||||||||||
|
Cash and cash equivalents, end of period
|
$ | — | $ | 121.5 | $ | — | $ | 60.9 | $ | — | $ | 182.4 | ||||||||||||||
|
For the year ended December 31,
2001
|
||||||||||||||||||||||||||
|
Net cash provided by (used in) operating
activities
|
$ | — | $ | (38.2 | ) | $ | 2.3 | $ | (101.4 | ) | $ | (0.0 | ) | $ | (137.3 | ) | ||||||||||
|
Cash flows from investing activities:
|
||||||||||||||||||||||||||
|
Purchases of property, plant and equipment
|
— | (50.4 | ) | (1.1 | ) | (66.4 | ) | — | (117.9 | ) | ||||||||||||||||
|
Investments in and advances to joint ventures
|
— | (5.5 | ) | — | — | — | (5.5 | ) | ||||||||||||||||||
|
Acquisition of minority interests in consolidated
subsidiaries
|
— | — | — | (0.1 | ) | — | (0.1 | ) | ||||||||||||||||||
|
Proceeds from sale of investment in joint venture
|
— | 20.4 | — | — | — | 20.4 | ||||||||||||||||||||
|
Proceeds from sales of property, plant and
equipment
|
— | 4.8 | — | 9.0 | — | 13.8 | ||||||||||||||||||||
|
Net cash used in investing activities
|
— | (30.7 | ) | (1.1 | ) | (57.5 | ) | — | (89.3 | ) | ||||||||||||||||
|
Cash flows from financing activities:
|
||||||||||||||||||||||||||
|
Intercompany loans
|
— | (213.5 | ) | — | 213.5 | — | — | |||||||||||||||||||
|
Intercompany loan repayments
|
— | 145.7 | — | (145.7 | ) | — | — | |||||||||||||||||||
|
Proceeds from senior credit facilities and other
borrowings
|
— | 125.0 | — | — | — | 125.0 | ||||||||||||||||||||
|
Payment of capital lease obligation
|
— | (1.9 | ) | — | — | — | (1.9 | ) | ||||||||||||||||||
|
Proceeds from convertible redeemable preferred
stock, net of issuance costs
|
— | 99.2 | — | — | — | 99.2 | ||||||||||||||||||||
|
Repayment of debt issuance costs
|
— | (5.1 | ) | — | — | — | (5.1 | ) | ||||||||||||||||||
|
Repayment of long term debt
|
— | (5.6 | ) | — | — | — | (5.6 | ) | ||||||||||||||||||
|
Proceeds from exercise of stock options and
issuance of common stock under the employee stock purchase plan
|
— | 5.1 | — | — | — | 5.1 | ||||||||||||||||||||
|
Net cash provided by financing activities
|
— | 148.9 | — | 67.8 | — | 216.7 | ||||||||||||||||||||
|
Effect of exchange rate changes on cash and cash
equivalents
|
— | — | — | 0.8 | — | 0.8 | ||||||||||||||||||||
|
Net increase (decrease) in cash and cash
equivalents
|
— | 80.0 | 1.2 | (90.3 | ) | (0.0 | ) | (9.1 | ) | |||||||||||||||||
|
Cash and cash equivalents, beginning of period
|
— | 44.9 | (1.1 | ) | 145.1 | — | 188.9 | |||||||||||||||||||
|
Cash and cash equivalents, end of period
|
$ | — | $ | 124.9 | $ | 0.1 | $ | 54.8 | $ | (0.0 | ) | $ | 179.8 | |||||||||||||
|
For the year ended December 31,
2000
|
||||||||||||||||||||||||||
|
Net cash provided by (used in) operating
activities
|
$ | — | $ | 396.1 | $ | 8.9 | $ | (103.7 | ) | $ | — | $ | 301.3 | |||||||||||||
|
Cash flows from investing activities:
|
||||||||||||||||||||||||||
|
Purchases of property, plant and equipment
|
— | (49.4 | ) | (10.0 | ) | (139.4 | ) | — | (198.8 | ) | ||||||||||||||||
|
Investment in business, net of cash acquired
|
— | (253.2 | ) | — | — | — | (253.2 | ) | ||||||||||||||||||
|
Investments in and advances to joint ventures
|
— | (32.5 | ) | — | — | — | (32.5 | ) | ||||||||||||||||||
104
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
| Issuers | ||||||||||||||||||||||||||
| ON Semiconductor | Guarantor | Non-Guarantor | ||||||||||||||||||||||||
| Corporation | SCI LLC | Subsidiaries | Subsidiaries | Eliminations | Total | |||||||||||||||||||||
|
Acquisition of minority interests in consolidated
subsidiaries
|
— | — | — | (1.5 | ) | — | (1.5 | ) | ||||||||||||||||||
|
Proceeds from sales of property, plant and
equipment
|
— | 4.8 | — | 13.3 | — | 18.1 | ||||||||||||||||||||
|
Net cash used in investing activities
|
— | (330.3 | ) | (10.0 | ) | (127.6 | ) | — | (467.9 | ) | ||||||||||||||||
|
Cash flows from financing activities:
|
||||||||||||||||||||||||||
|
Intercompany loans
|
— | (280.0 | ) | — | 280.0 | — | — | |||||||||||||||||||
|
Intercompany loan repayments
|
— | 41.5 | — | (41.5 | ) | — | — | |||||||||||||||||||
|
Proceeds from initial public offering, net of
offering expenses
|
— | 514.8 | — | — | — | 514.8 | ||||||||||||||||||||
|
Proceeds from senior credit facilities and other
borrowings
|
— | 200.0 | — | 26.1 | — | 226.1 | ||||||||||||||||||||
|
Payment of debt issuance costs
|
— | (3.2 | ) | — | — | — | (3.2 | ) | ||||||||||||||||||
|
Repayment of senior credit facilities, including
prepayment penalty
|
— | (131.5 | ) | — | — | — | (131.5 | ) | ||||||||||||||||||
|
Repayment of senior subordinated notes, including
prepayment penalty
|
— | (156.8 | ) | — | — | — | (156.8 | ) | ||||||||||||||||||
|
Redemption of redeemable preferred stock,
including accrued dividends
|
— | (228.4 | ) | — | — | — | (228.4 | ) | ||||||||||||||||||
|
Proceeds from exercise of stock options and
issuance of common stock under the employee stock purchase plan
|
— | 7.8 | — | — | — | 7.8 | ||||||||||||||||||||
|
Net cash (used in) provided by financing
activities
|
— | (35.8 | ) | — | 264.6 | — | 228.8 | |||||||||||||||||||
|
Effect of exchange rate changes on cash and cash
equivalents
|
— | — | — | (0.1 | ) | — | (0.1 | ) | ||||||||||||||||||
|
Net increase (decrease) in cash and cash
equivalents
|
— | 30.0 | (1.1 | ) | 33.2 | — | 62.1 | |||||||||||||||||||
|
Cash and cash equivalents, beginning of period
|
— | 14.9 | — | 111.9 | — | 126.8 | ||||||||||||||||||||
|
Cash and cash equivalents, end of period
|
$ | — | $ | 44.9 | $ | (1.1 | ) | $ | 145.1 | $ | — | $ | 188.9 | |||||||||||||
| (1) | For purposes of this presentation, the Senior Subordinated Notes and the Second-Lien Notes have been reflected in the condensed balance sheets of both the Company and SCI LLC with the appropriate offset reflected in the eliminations column. Interest expense has been allocated to SCI LLC only. |
| (2) | Represents the effects of an intercompany loan write-off in connection with the closure of the Company’s Guadalajara, Mexico facility. |
| (3) | The Company is a holding company and has no operations apart from those of its operating subsidiaries. Additionally, the Company does not maintain a bank account; rather, all of its cash receipts and disbursements are processed on its behalf by SCI LLC, its primary operating subsidiary. |
105
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
Note 10: Income Taxes
Geographic sources of income (loss) before income taxes, minority interests, extraordinary loss and cumulative effect of accounting change are as follows (in millions):
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
|
United States
|
$ | (222.2 | ) | $ | (186.7 | ) | $ | 65.4 | ||||
|
Foreign
|
95.6 | (184.7 | ) | 75.5 | ||||||||
| $ | (126.6 | ) | $ | (371.4 | ) | $ | 140.9 | |||||
The provision for income taxes is as follows (in millions):
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
|
Current
|
|||||||||||||
|
Federal
|
$ | — | $ | (16.5 | ) | $ | 37.1 | ||||||
|
State and local
|
0.1 | 0.5 | 4.6 | ||||||||||
|
Foreign
|
2.3 | 6.6 | 20.0 | ||||||||||
| 2.4 | (9.4 | ) | 61.7 | ||||||||||
|
Deferred
|
|||||||||||||
|
Federal
|
— | 315.8 | (8.8 | ) | |||||||||
|
State and local
|
— | 39.6 | (1.2 | ) | |||||||||
|
Foreign
|
6.4 | (0.3 | ) | (1.6 | ) | ||||||||
| 6.4 | 355.1 | (11.6 | ) | ||||||||||
| $ | 8.8 | $ | 345.7 | $ | 50.1 | ||||||||
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
|
U.S. federal statutory rate
|
(35.0 | )% | (35.0 | )% | 35.0 | % | |||||||
|
Increase (decrease) resulting from:
|
|||||||||||||
|
State and local taxes, net of federal tax benefit
|
(9.2 | ) | (3.4 | ) | 2.8 | ||||||||
|
Foreign withholding taxes
|
1.3 | 1.5 | 2.0 | ||||||||||
|
Foreign rate differential
|
(24.4 | ) | 11.4 | (3.5 | ) | ||||||||
|
Change in valuation allowance
|
73.2 | 118.2 | |||||||||||
|
Other
|
1.0 | 0.4 | (0.7 | ) | |||||||||
| 6.9 | % | 93.1 | % | 35.6 | % | ||||||||
106
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
Deferred tax assets are as follows (in millions):
| Year Ended December 31, | |||||||||
| 2002 | 2001 | ||||||||
|
Tax-deductible goodwill
|
$ | 235.2 | $ | 255.4 | |||||
|
Reserves and accruals
|
24.3 | 31.9 | |||||||
|
Inventories
|
15.1 | 29.6 | |||||||
|
Property, plant and equipment
|
16.2 | 28.9 | |||||||
|
Net operating loss and tax credit carryforwards
|
237.0 | 95.3 | |||||||
|
Other
|
18.2 | 20.0 | |||||||
|
Gross deferred tax assets
|
$ | 546.0 | $ | 461.1 | |||||
|
Valuation allowance
|
(541.8 | ) | (450.6 | ) | |||||
|
Net deferred tax asset
|
$ | 4.2 | $ | 10.5 | |||||
A valuation allowance has been recorded against the Company’s deferred tax assets, with the exception of deferred tax assets at certain foreign subsidiaries, as management believes it is more likely than not that these assets will not be realized.
As of December 31, 2002, the Company’s federal, state, and foreign net operating loss carryforwards were $541.2 million, $608.0 million, and $17.3 million, respectively. If not utilized, these net operating losses will expire in varying amounts from 2006 through 2023. The Company’s ability to utilize its federal net operating loss carryforwards may be limited in the future if the Company experiences an ownership change as defined by the Internal Revenue Code.
Income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries (approximately $87.8 million at December 31, 2002) over which it has sufficient influence to control the distribution of such earnings and has determined that such earnings have been reinvested indefinitely. These earnings could become subject to federal income tax if they are remitted as dividends, if foreign earnings are loaned to any of the Company’s domestic subsidiaries, or if the Company sells its investment in such subsidiaries. The Company estimates that repatriation of these foreign earnings would generate additional foreign withholding taxes of $13.1 million.
Note 11: Redeemable Preferred Stock
On September 7, 2001, the Company issued 10,000 shares of its Series A Cumulative Convertible Redeemable Preferred Stock (“the preferred stock”) with a stated value of $100 million to an affiliate of TPG. Net proceeds from the sale after deducting issuance costs were approximately $99.2 million. As of the issuance date, the preferred stock was convertible into 35,460,993 shares of the Company’s common stock at a price of $2.82 per share (subject to specified anti-dilution provisions) and is redeemable at the holder’s option any time after September 7, 2009. The preferred stock has a cumulative dividend payable quarterly in cash, at the rate of 8.0% per annum (or, if greater during the relevant quarterly period, in an amount equal to the value of the dividends that would be paid on the common stock then issuable upon conversion of the preferred stock), compounded to the extent not paid, and subject to restrictions under the Company’s senior bank facilities, the 12% Senior Subordinated Notes due in 2009 and other documents relating to the Company’s indebtedness.
The per share price of the Company’s common stock on the date of issuance was $3.19, which was $0.37 higher than the conversion price of $2.82, resulting in a beneficial conversion feature (“BCF”) of approximately $13.1 million. The BCF was originally recorded as a discount against the preferred shares with an offsetting increase to additional paid-in capital. However, since the preferred shares are convertible immediately and have no stated redemption date, the discount was accreted in full on the date of issuance
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effectively eliminating the originally recorded discount. The net loss applicable to common shareholders in 2001 was increased by the $13.1 million accretion for purposes of calculating earnings per share.
At any time after September 7, 2009, the holders may require that the Company redeem their shares at a redemption price equal to the greater of (i) the stated value of the preferred stock plus all accrued and unpaid dividends thereon or (ii) 50% of the then current market price of the common stock (based upon the average closing price of the common stock over the preceding 30 trading days) and other assets and property, if any, into which one share of preferred stock is then convertible. Upon a change of control, the holders of the preferred stock may “put” their shares to the Company at 101% of the stated value plus accumulated and unpaid dividends. The holders of the preferred stock were also granted registration rights in respect of the common stock underlying the preferred stock.
The holder’s right to require the Company to redeem the preferred stock is subject to, and expressly conditioned upon, limitations under the Company’s various debt agreements. The holders of the preferred stock will be entitled to vote with the holders of the Company’s common stock as a single class. As of the issuance date, each share of preferred stock was entitled to approximately 3,135 votes, subject to certain adjustments for accumulated dividends and those made in accordance with anti-dilution provisions contained in the underlying agreements.
Note 12: Common Stock
On May 3, 2000, the Company completed the initial public offering of its common stock, selling 34.5 million shares with an issue price of $16 per share. Net proceeds from the IPO (after deducting issuance costs) were approximately $514.8 million. The net proceeds were used to redeem all of the preferred stock then outstanding (including accrued dividends), redeem a portion of the 12% Senior Subordinated Notes due in 2009 and prepay a portion of the loans outstanding under the senior bank facilities. In connection with this debt prepayment, the Company incurred prepayment penalties and redemption premiums of $17.3 million and wrote off $11.9 million of debt issuance costs. These amounts, totaling $29.2 million ($17.5 million or $0.11 per share, net of income taxes), have been classified as an extraordinary loss in the accompanying consolidated statement of operations for 2000.
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Earnings (loss) per share calculations for 2002, 2001 and 2000 are as follows (in millions, except per share data):
| 2002 | 2001 | 2000 | |||||||||||
|
Net income (loss) before extraordinary loss
and cumulative effect of accounting change
|
$ | (135.4 | ) | $ | (715.0 | ) | $ | 88.6 | |||||
|
Less: Accretion of beneficial conversion feature
of redeemable preferred stock
|
— | (13.1 | ) | — | |||||||||
|
Less: Redeemable preferred stock dividends
|
(8.5 | ) | (2.4 | ) | (8.8 | ) | |||||||
|
Net income (loss) applicable to common stock
before extraordinary loss and cumulative effect of accounting
change
|
(143.9 | ) | (730.5 | ) | 79.8 | ||||||||
|
Extraordinary loss on debt prepayment
|
(6.5 | ) | — | (17.5 | ) | ||||||||
|
Cumulative effect of accounting change
|
— | (116.4 | ) | — | |||||||||
|
Net income (loss) applicable to common stock
|
$ | (150.4 | ) | $ | (846.9 | ) | $ | 62.3 | |||||
|
Basic weighted average common shares outstanding
|
175.6 | 173.6 | 160.2 | ||||||||||
|
Add: Incremental shares for :
|
|||||||||||||
|
Dilutive effect of stock options
|
— | — | 5.4 | ||||||||||
|
Convertible redeemable preferred stock
|
— | — | |||||||||||
|
Diluted weighted average common shares outstanding
|
175.6 | 173.6 | 165.6 | ||||||||||
|
Earnings per share
|
|||||||||||||
|
Basic:
|
|||||||||||||
|
Net income (loss) applicable to common stock
before extraordinary loss and cumulative effect of accounting
change
|
$ | (0.82 | ) | $ | (4.21 | ) | $ | 0.50 | |||||
|
Extraordinary loss on debt prepayment
|
(0.04 | ) | — | (0.11 | ) | ||||||||
|
Cumulative effect of accounting change
|
— | (0.67 | ) | — | |||||||||
|
Net (loss) income applicable to common stock
|
$ | (0.86 | ) | $ | (4.88 | ) | $ | 0.39 | |||||
|
Diluted:
|
|||||||||||||
|
Net income (loss) applicable to common stock
before extraordinary loss and cumulative effect of accounting
change
|
$ | (0.82 | ) | $ | (4.21 | ) | $ | 0.49 | |||||
|
Extraordinary loss on debt prepayment
|
(0.04 | ) | — | (0.11 | ) | ||||||||
|
Cumulative effect of accounting change
|
— | (0.67 | ) | — | |||||||||
|
Net (loss) income applicable to common stock
|
$ | (0.86 | ) | $ | (4.88 | ) | $ | (0.38 | ) | ||||
Basic earnings (loss) per share is computed by dividing net income (loss) available for common stock adjusted for dividends accrued on the Company’s redeemable preferred stock and the accretion of the beneficial conversion feature on the redeemable preferred stock by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share generally assumes the conversion of the convertible redeemable preferred stock into common stock and also incorporates the incremental impact of shares issuable upon the assumed exercise of stock options. The number of incremental shares from the assumed exercise of stock options is calculated by applying the treasury stock method. For 2002 and 2001, the effect of stock option shares were not included as the related impact would have been anti-dilutive as the Company generated a net loss in those periods. Had the Company generated net income in 2002 and 2001, the assumed exercise of stock options would have resulted in an additional 3.5 million shares and 5.1 million shares of diluted weighted average common shares outstanding in 2002 and 2001, respectively. This computation excludes an additional 13.3 million and 8.8 million of options outstanding at December 31, 2002 and 2001 as their exercise price exceeds the average fair market value during those years and, accordingly, the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
related impact would have been anti-dilutive. For 2002 and 2001, the assumed conversion of the redeemable preferred stock was also not included in determining diluted earnings per share as the related impact would have been anti-dilutive. The redeemable preferred stock is convertible into shares of the Company’s common stock at a price of $2.82.
On April 24, 2002, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission to register 40,000,000 shares of common stock. The Company may sell the registered shares in one or more offerings depending on market and general business conditions. Because the Company is not planning on issuing any shares in the near future, the Company has not yet requested that the shelf registration statement be declared effective.
On July 9, 2002, the Company received a notice from Nasdaq advising that it was not in compliance with the Nasdaq National Market’s minimum bid price requirement (Marketplace Rule 4450 (b)(4)) because its common stock had traded below $3.00 per share for 30 consecutive trading days and that, if the Company were unable to demonstrate compliance with this requirement by October 7, 2002, Nasdaq would provide it written notification that its securities will be delisted. Because the Company’s stock had not closed above $2.82 a share since July 9, 2002, it seemed unlikely that it would have regained compliance with the minimum bid price requirement. Therefore, on October 2, 2002 the Company requested a transfer of the listing of our common stock from the Nasdaq National Market to the Nasdaq SmallCap Market. On October 22, 2002 Nasdaq approved the transfer and effective October 25, 2002, the Company began trading on the Nasdaq SmallCap Market
Note 13: Stock Options
The Company adopted the ON Semiconductor 1999 Founders Stock Option Plan (“the 1999 Plan”), which is an incentive plan for key employees, directors and consultants. A total of 11.6 million shares of the Company’s common stock have been reserved for issuance under the 1999 Plan. The 1999 Plan is administered by the Board of Directors or a committee thereof, which is authorized to, among other things, select the key employees, directors and consultants who will receive grants and determine the exercise prices and vesting schedules of the options. Prior to the existence of a public market for the Company’s common stock, the Board of Directors determined fair market value.
On February 17, 2000, the Company adopted the 2000 Stock Incentive Plan (“the 2000 Plan”) to provide key employees, directors and consultants with various equity-based incentives as described in the plan document. During 2001, stockholders voted to amend the 2000 Plan to increase the number of shares of the Company’s common stock issuable thereunder by 3.0 million (for an aggregate of 13.0 million shares at December 31, 2001). The 2000 Plan is administered by the Board of Directors or a committee thereof, which is authorized to determine, among other things, the key employees, directors or consultants who will receive awards under the plan, the amount and type of award, exercise prices or performance criteria, if applicable, and vesting schedules.
Generally, the options granted under both plans vest over a period of four years. Under the 1999 Plan, all outstanding options and under the 2000 Plan certain outstanding options vest automatically upon a change of control, as defined, provided the option holder is employed by the Company on the date of the change in control. Under the 2000 Plan, certain other outstanding options vest upon a change of control if the Board of Directors of the Company, in its discretion, provides for acceleration of the vesting of said options. Upon the termination of an option holder’s employment, all unvested options will immediately terminate and vested options will generally remain exercisable for a period of 90 days after date of termination (one year in the case of death or disability).
There was an aggregate of 6.3 million, 4.7 million and 6.6 million shares of common stock available for grant under the 1999 Plan and the 2000 Plan at December 31, 2002, 2001 and 2000, respectively.
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Additional information with respect to the activity of the Company’s stock option plans is as follows (in millions, except per share data):
| 2002 | 2001 | 2000 | |||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | |||||||||||||||||||||||
| Average | Average | Average | |||||||||||||||||||||||
| Number of | Exercise | Number of | Exercise | Number of | Exercise | ||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | ||||||||||||||||||||
|
Outstanding at beginning of year
|
18.7 | $ | 5.91 | 14.4 | $ | 6.46 | 10.1 | $ | 1.50 | ||||||||||||||||
|
Grants
|
9.0 | 3.12 | 8.4 | 5.26 | 5.5 | 15.18 | |||||||||||||||||||
|
Exercises
|
(0.8 | ) | 1.50 | (0.6 | ) | 1.50 | (0.6 | ) | 1.67 | ||||||||||||||||
|
Cancellations
|
(4.5 | ) | 7.47 | (3.5 | ) | 7.42 | (0.6 | ) | 7.71 | ||||||||||||||||
|
Outstanding at end of year
|
22.4 | $ | 4.63 | 18.7 | $ | 5.91 | 14.4 | $ | 6.46 | ||||||||||||||||
|
Exercisable at end of year
|
8.8 | $ | 4.90 | 4.6 | $ | 4.65 | 2.6 | $ | 3.32 | ||||||||||||||||
|
Weighted average fair value of options granted
during the period
|
$ | 1.91 | $ | 3.25 | $ | 8.04 | |||||||||||||||||||
The following tables summarize options outstanding and options exercisable at December 31, 2002:
| Outstanding Options | ||||||||||||
| Weighted | Weighted | |||||||||||
| Average | Average | |||||||||||
| Number | Contractual | Exercise | ||||||||||
| Shares | Life (in years) | Price | ||||||||||
|
Range of Exercise Prices
|
||||||||||||
|
$1.25-$1.50
|
7.3 | 6.99 | $ | 1.48 | ||||||||
|
$1.80-$2.71
|
2.1 | 9.84 | 1.95 | |||||||||
|
$3.22-$4.24
|
6.8 | 8.96 | 3.61 | |||||||||
|
$5.50-$9.03
|
3.7 | 8.20 | 6.42 | |||||||||
|
$10.88-$21.38
|
2.5 | 7.38 | 15.95 | |||||||||
|
Totals
|
22.4 | $ | 4.63 | |||||||||
| Exercisable Options | ||||||||||||
| Weighted | Weighted | |||||||||||
| Average | Average | |||||||||||
| Number | Contractual | Exercise | ||||||||||
| Shares | Life (in years) | Price | ||||||||||
|
Range of Exercise Prices
|
||||||||||||
|
$1.25-$1.50
|
5.4 | 6.73 | $ | 1.50 | ||||||||
|
$3.22-$4.24
|
0.8 | 8.86 | 4.00 | |||||||||
|
$5.50-$9.03
|
1.0 | 8.10 | 6.64 | |||||||||
|
$10.88-$21.38
|
1.6 | 7.37 | 15.97 | |||||||||
|
Totals
|
8.8 | $ | 4.90 | |||||||||
These options will expire if not exercised at specific dates through November 2012.
In 2002, the Company recorded charges of $4.1 million related to the modification of option terms for employees terminated under the restructuring plan as well as the separation of an executive officer. These charges are recorded in restructuring and other charges in the consolidated statement of operations with an offsetting credit to additional paid-in capital. In 2002, the Company also recorded $0.4 million of compensa-
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
tion expense related to stock options issued to consultants and other stock option modifications to certain employees.
In 2001, the Company issued warrants to purchase 1,250,000 shares of common stock to consultants for services rendered during 2001. These warrants, which have an exercise price of $1.90 per share, were recorded at their estimated fair value of $1.3 million as a charge to general and administrative expense with an offsetting credit to additional paid-in capital. These warrants vested at the date of grant and expire in October 2005.
During 2000, an employee of the Company was granted 80,000 stock appreciation rights under the 2000 Plan with a reference price of $16.00.
In 2000, the Company granted certain consultants options to purchase approximately 91,000 shares of common stock at exercise prices ranging from $1.50 to $16.00 per share. The aggregate estimated fair value of these options of $1.2 million was recognized as general and administrative expense over the term of the respective consulting agreements, approximately $0.5 million in 2001 and $0.7 million in 2000. These grants expire at various dates through June 2003.
On February 17, 2000, the Company adopted the 2000 Employee Stock Purchase Plan. Subject to local legal requirements, each of the Company’s full-time employees has the right to elect to have up to 10% of their payroll applied towards the purchase of shares of the Company’s common stock at a price equal to 85% of the fair market value of such shares as determined under the plan. Employees will be limited to annual purchases of $25,000 under this plan. In addition, during each quarterly offering period, employees may not purchase stock exceeding the lesser of (i) 500 shares, or (ii) the number of shares equal to $6,250 divided by the fair market value of the stock on the first day of the offering period. During 2002, 2001 and 2000, employees purchased approximately 1.0 million, 1.3 million and 1.0 million shares under the plan. During 2001, shareholders voted to amend the 2000 Employee Stock Purchase Plan to increase the number of shares of the Company’s common stock issuable thereunder by 4.0 million (for an aggregate of 5.5 million shares).
Note 14: Employee Benefit Plans
Defined Benefit Plans
In connection with the Recapitalization, the Company established the ON Semiconductor Pension Plan (the “Plan”) that, after one year of service, covered most U.S. employees who were also formerly employees of Motorola. The Plan’s benefit formula was dependent upon each employee’s earnings and years of service. Benefits under the Plan are valued utilizing the projected unit credit cost method. The Company’s policy is to fund its defined benefit plans in accordance with the requirements and regulations of the Internal Revenue Code.
In November 1999, the Plan was amended so that benefit accruals under the Plan will be discontinued effective December 31, 2004 for those employees whose combined age and years of service (in complete years) equaled or exceeded 65 at August 4, 1999 (the “Grandfathered Employees”). Benefit accruals under the plan for all other employees were discontinued effective December 31, 2000. Upon termination or retirement, employees may elect to receive their benefits in the form of either an annuity contract or a lump-sum distribution. In 2000, the ON Semiconductor Grandfathered Pension Plan (the “Grandfathered Plan”) was established and the assets and accumulated benefits related to the Grandfathered Employees were transferred to the Grandfathered Plan.
Effective April 15, 2001, the Company terminated the Plan in a standard termination, which requires plan assets be sufficient to provide all benefits for participants and beneficiaries of deceased participants. Substantially all accrued benefits under the Plan were distributed to participants by December 31, 2001.
Certain of the Company’s foreign subsidiaries provide retirement plans for substantially all of their employees. Such plans conform to local practice in terms of providing minimum benefits mandated by law, collective agreements or customary practice. Benefits under all foreign pension plans are also valued using the projected unit credit cost method.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
The following is a summary of the status of the Company’s various pension plans and the net periodic pension cost (dollars in millions):
| 2002 | 2001 | ||||||||||||||||||||||||
| U.S. | Foreign | U.S. | Foreign | ||||||||||||||||||||||
| Pension | Pension | Pension | Pension | ||||||||||||||||||||||
| Plans | Plans | Total | Plans | Plans | Total | ||||||||||||||||||||
| Assumptions used to value the Company’s pension obligations are as follows: | |||||||||||||||||||||||||
|
Rate of compensation increase
|
3.00 | % | 3.17 | % | 3.00 | % | 3.77 | % | |||||||||||||||||
|
Discount rate
|
5.00 | % | 4.40 | % | 7.40 | % | 5.08 | % | |||||||||||||||||
|
Benefit obligation, beginning of period
|
$ | 41.5 | $ | 22.3 | $ | 63.8 | $ | 77.4 | $ | 32.8 | $ | 110.2 | |||||||||||||
|
Service cost
|
1.8 | 1.3 | 3.1 | 2.1 | 2.2 | 4.3 | |||||||||||||||||||
|
Interest cost
|
3.0 | 0.8 | 3.8 | 2.4 | 1.6 | 4.0 | |||||||||||||||||||
|
Curtailment gain
|
— | (0.3 | ) | (0.3 | ) | — | (0.2 | ) | (0.2 | ) | |||||||||||||||
|
Actuarial (gain) loss
|
5.3 | 1.2 | 6.5 | 18.0 | (0.5 | ) | 17.5 | ||||||||||||||||||
|
Benefits paid
|
(4.8 | ) | (6.7 | ) | (11.5 | ) | (58.4 | ) | (11.7 | ) | (70.1 | ) | |||||||||||||
|
Translation (gain) loss
|
— | 0.7 | 0.7 | — | (1.9 | ) | (1.9 | ) | |||||||||||||||||
|
Benefit obligation, end of period
|
$ | 46.8 | $ | 19.3 | $ | 66.1 | $ | 41.5 | $ | 22.3 | $ | 63.8 | |||||||||||||
|
Change in Plan Assets:
|
|||||||||||||||||||||||||
|
Fair value, beginning of period
|
$ | 10.1 | $ | 9.1 | $ | 19.2 | $ | 60.5 | $ | 18.1 | $ | 78.6 | |||||||||||||
|
Actual return on plan assets
|
(1.1 | ) | 0.3 | (0.8 | ) | 0.4 | (0.6 | ) | (0.2 | ) | |||||||||||||||
|
Employer contributions
|
13.0 | 1.3 | 14.3 | 7.6 | 4.4 | 12.0 | |||||||||||||||||||
|
Benefits paid
|
(4.8 | ) | (6.7 | ) | (11.5 | ) | (58.4 | ) | (11.7 | ) | (70.1 | ) | |||||||||||||
|
Translation gain (loss)
|
— | — | — | — | (1.1 | ) | (1.1 | ) | |||||||||||||||||
|
Fair value, end of period
|
$ | 17.2 | $ | 4.0 | $ | 21.2 | $ | 10.1 | $ | 9.1 | $ | 19.2 | |||||||||||||
|
Balances, end of period:
|
|||||||||||||||||||||||||
|
Pension benefit obligation
|
$ | (46.8 | ) | $ | (19.3 | ) | $ | (66.1 | ) | $ | (41.5 | ) | $ | (22.3 | ) | $ | (63.8 | ) | |||||||
|
Fair value of plan assets
|
17.2 | 4.0 | 21.2 | 10.1 | 9.1 | 19.2 | |||||||||||||||||||
|
Funded status
|
(29.6 | ) | (15.3 | ) | (44.9 | ) | (31.4 | ) | (13.2 | ) | (44.6 | ) | |||||||||||||
|
Unrecognized net actuarial loss (gain)
|
20.0 | 1.5 | 21.5 | 17.3 | (0.2 | ) | 17.1 | ||||||||||||||||||
|
Unrecognized prior service cost
|
0.9 | 1.9 | 2.8 | 1.3 | 2.2 | 3.5 | |||||||||||||||||||
|
Net liability recognized end of period
|
$ | (8.7 | ) | $ | (11.9 | ) | $ | (20.6 | ) | $ | (12.8 | ) | $ | (11.2 | ) | $ | (24.0 | ) | |||||||
|
The net amounts recognized in the consolidated
balance sheet consist of the following:
|
|||||||||||||||||||||||||
|
Accrued expenses
|
$ | (6.4 | ) | $ | (2.0 | ) | $ | (8.4 | ) | $ | (13.0 | ) | $ | (1.3 | ) | $ | (14.3 | ) | |||||||
|
Other long-term liabilities
|
(22.0 | ) | (11.8 | ) | (33.8 | ) | (14.9 | ) | (9.9 | ) | (24.8 | ) | |||||||||||||
|
Intangible asset
|
0.8 | 1.2 | 2.0 | 1.3 | — | 1.3 | |||||||||||||||||||
|
Accumulated other comprehensive income (loss)
|
18.9 | 0.7 | 19.6 | 13.8 | — | 13.8 | |||||||||||||||||||
|
Net liability recognized, end of period
|
$ | (8.7 | ) | $ | (11.9 | ) | $ | (20.6 | ) | $ | (12.8 | ) | $ | (11.2 | ) | $ | (24.0 | ) | |||||||
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| 2002 | 2001 | 2000 | |||||||||||||||||||||||||||||||||||
| U.S. | Foreign | U.S. | Foreign | U.S. | Foreign | ||||||||||||||||||||||||||||||||
| Pension | Pension | Pension | Pension | Pension | Pension | ||||||||||||||||||||||||||||||||
| Plans | Plans | Total | Plans | Plans | Total | Plans | Plans | Total | |||||||||||||||||||||||||||||
| Assumptions used to determine pension costs are as follows: | |||||||||||||||||||||||||||||||||||||
|
Discount rate
|
7.40 | % | 5.08 | % | 6.80 | % | 5.76 | % | 6.80 | % | 6.22 | % | |||||||||||||||||||||||||
|
Expected return on assets
|
8.50 | % | 3.17 | % | 8.50 | % | 7.46 | % | 8.50 | % | 5.15 | % | |||||||||||||||||||||||||
|
Rate of compensation increase
|
3.00 | % | 3.77 | % | 3.00 | % | 3.77 | % | 5.00 | % | 4.75 | % | |||||||||||||||||||||||||
|
Components of net periodic pension cost:
|
|||||||||||||||||||||||||||||||||||||
|
Service cost
|
$ | 1.8 | $ | 1.3 | $ | 3.1 | $ | 2.1 | $ | 2.2 | $ | 4.3 | $ | 4.7 | $ | 2.6 | $ | 7.3 | |||||||||||||||||||
|
Interest cost
|
3.0 | 0.8 | 3.8 | 2.4 | 1.6 | 4.0 | 4.5 | 2.0 | 6.5 | ||||||||||||||||||||||||||||
|
Expected return on assets
|
(1.2 | ) | (0.3 | ) | (1.5 | ) | (1.4 | ) | (1.0 | ) | (2.4 | ) | (5.2 | ) | (1.5 | ) | (6.7 | ) | |||||||||||||||||||
|
Amortization of prior service cost
|
0.1 | 0.3 | 0.4 | 0.2 | 0.4 | 0.6 | 0.2 | 0.6 | 0.8 | ||||||||||||||||||||||||||||
|
Other losses
|
4.9 | — | 4.9 | 0.3 | — | 0.3 | — | — | — | ||||||||||||||||||||||||||||
|
Settlement loss (curtailment gain)
|
0.4 | (0.3 | ) | 0.1 | 9.9 | 2.3 | 12.2 | — | — | — | |||||||||||||||||||||||||||
|
Net periodic pension cost
|
$ | 9.0 | $ | 1.8 | $ | 10.8 | $ | 13.5 | $ | 5.5 | $ | 19.0 | $ | 4.2 | $ | 3.7 | $ | 7.9 | |||||||||||||||||||
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $63.8 million, $56.8 million, and $19.6 million, respectively as of December 31, 2002 and $60.4 million, $54.6 million and $16.3 million, respectively as of December 31, 2001.
We recognize a minimum liability in our financial statements for our underfunded pension plans. The total accrued pension liability of $42.2 million and $39.1 million at December 31, 2002 and 2001, respectively and includes an additional minimum pension liability of $21.6 and $15.1 million, respectively. The additional minimum liability was offset by a $2.0 million intangible asset and a $19.6 million increase to stockholders’ deficit at December 31, 2002 compared with a $1.3 million intangible asset and a $13.8 million increase to stockholders’ deficit at December 31, 2001.
In regards to the Grandfathered Plan, the Company reevaluated its current assumptions in light of the actual returns experienced, current annuity rates and the expected discontinuation of benefits as of December 31, 2004 with the subsequent payment of benefits in 2005. The discount rate used to determine the pension obligation at December 31, 2002 and to determine future expense was lowered to 5.0% from 7.4% in the previous year. In addition, the expected return on plan assets used to determine future expense was lowered to 2.5% from 8.5%, reflecting the Company’s change in investment policy regarding the assets of the Grandfathered Plan. Upon the termination of the Grandfathered Plan, the Company is obligated to ensure that the plan has assets sufficient to pay accrued benefits.
Defined Contribution Plans
The Company has a deferred compensation plan (“the Savings Plan”) for all eligible U.S. employees established under the provisions of Section 401(k) of the Internal Revenue Code. Eligible employees may contribute a percentage of their salary subject to certain limitations. Effective January 1, 2000, the Company began a matching contribution of 100% of the first 4% of employee contributions, and 50% of the next 4% of employee contributions, as defined in the Savings Plan.
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The Company recognized $7.1 million of expense relating to matching contributions in 2000. Effective March 1, 2001 the Company amended the Savings Plan to make the matching contribution discretionary. A discretionary matching contribution was offered through April 2001, resulting in $2.2 million of related expense in 2001. Effective January 1, 2002, the Company reinstated a discretionary matching contribution of 100% of the first 3% of employee contributions and, if certain financial goals are achieved, an additional 50% of the next 6% of employee contributions. In 2002 the Company recognized $4.0 million of expense relating to matching contributions in 2002.
Certain foreign subsidiaries have defined contribution plans in which eligible employees participate. The Company recognized compensation expense of $0.4 million, $0.6 million and $1.0 million relating to these plans for the years ended 2002, 2001 and 2000, respectively.
Note 15: Financial Instruments
Foreign Currencies
As a multinational business, the Company’s transactions are denominated in a variety of currencies. When appropriate, the Company uses forward foreign currency contracts to reduce its overall exposure to the effects of currency fluctuations on its results of operations and cash flows. The Company’s policy prohibits trading in currencies for which there are no underlying exposures, or entering into trades for any currency to intentionally increase the underlying exposure.
Under the Company’s foreign exchange management program, foreign subsidiaries provide forecasts of their foreign currency exposures. The Company then aggregates the forecasted amounts and enters into foreign currency contracts in order to create an offset to the underlying exposures. Losses or gains on the underlying cash flows or investments offset gains or losses on the financial instruments. The Company primarily hedges existing assets and liabilities and cash flows associated with transactions currently on its balance sheet.
At December 31, 2002 and 2001, the Company had net outstanding foreign exchange contracts with notional amounts of $19.5 million and $33.8 million, respectively. Such contracts were obtained through financial institutions and were scheduled to mature within three months. Management believes that these financial instruments should not subject the Company to increased risks from foreign exchange movements because gains and losses on these contracts, which are included in other current liabilities, should offset losses and gains on the assets, liabilities and transactions being hedged. The following schedule shows the net foreign exchange positions in U.S. dollars as of December 31, 2002 and 2001 (in millions):
| December 31, | ||||||||
| 2002 | 2001 | |||||||
| Buy (Sell) | Buy (Sell) | |||||||
|
Japanese Yen
|
$ | (16.3 | ) | $ | (31.9 | ) | ||
|
Czech Koruna
|
2.7 | — | ||||||
|
Euro
|
(11.4 | ) | (8.0 | ) | ||||
|
Philippine Peso
|
1.8 | — | ||||||
|
Mexican Peso
|
0.3 | 2.4 | ||||||
|
British Pound
|
5.0 | 6.1 | ||||||
|
Singapore Dollar
|
1.8 | 1.5 | ||||||
|
Swedish Krona
|
1.5 | — | ||||||
|
Taiwan Dollar
|
(4.9 | ) | (3.4 | ) | ||||
|
Other
|
— | (0.5 | ) | |||||
| $ | (19.5 | ) | $ | (33.8 | ) | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
The Company is exposed to credit-related losses if counterparties to its foreign exchange contracts fail to perform their obligations. At December 31, 2002, the counterparties on the Company’s foreign exchange contracts are two highly rated financial institutions and no credit-related losses are anticipated. Amounts payable or receivable under the contracts are included in other current assets or accrued expenses in the accompanying consolidated balance sheet. For 2002, 2001, and 2000, aggregate foreign currency transaction gains/(losses) total $(0.3) million, $1.2 million and $6.9 million, respectively.
Interest Rate Agreements
At December 31, 2002, the Company had two interest rate swaps of $100.0 million and $55.0 million, which were required by its senior bank facilities. The interest rate swaps are floating-to-fixed rate agreements based on LIBOR with quarterly interest rate resets. The $100.0 million swap has a fixed rate is 5.9% and expires in December 2004 while the $55.0 million swap has a fixed rate of 6.8% and expires in September 2003. The notional amounts are used solely as the basis for which the payment streams are calculated and exchanged. The notional amount is not a measure of the exposure to the Company through the use of the swaps. Amounts to be paid or received under the contracts are recorded in either other current assets or accrued expenses in the accompanying consolidated balance sheet and as an adjustment to interest expense.
Other
At December 31, 2002, the Company had no outstanding commodity derivatives, currency swaps or options relating to either its debt instruments or investments. The Company does not hedge the value of its equity investments in its subsidiaries or affiliated companies.
Note 16: Fair Value of Financial Instruments
The Company uses the following methods to estimate the fair values of its financial instruments:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short-term maturities of such instruments.
Leshan Notes Receivable
The fair value of the Leshan notes receivable approximates its carrying amount as the interest rate on these notes approximates market.
Investment in Joint Ventures
It was not practicable to estimate the fair value of non-marketable investments because of a lack of quoted market prices and the inability to estimate fair values without incurring excessive costs. The carrying amounts of $36.0 and $32.1 at December 31, 2002 and December 31, 2001 represents the equity of investments currently owned, which management believes are not impaired.
Long-term Debt
The fair values of the Company’s long-term borrowings are determined by obtaining quoted market prices if available or market prices for comparable debt instruments.
Foreign Currency Exchange Contracts
Forward foreign exchange contracts are valued at current foreign exchange rates for contracts with similar maturities.
Interest Rate Agreements
The fair values of the Company’s interest rate swaps represent the amounts at which they could be settled and are estimated by obtaining quotes from brokers.
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Series A Cumulative Convertible Redeemable Preferred Stock
The fair value of the Company’s cumulative convertible redeemable preferred stock as of December 31, 2002 was estimated as the sum of the present value of the related future cash flows discounted at a rate for a financial instrument with similar characteristics plus the estimated fair value of the conversion option using the Black Scholes option-pricing model. As of December 31, 2001, the fair value was estimated to approximate the carrying value.
The carrying amounts and fair values of the Company’s financial instruments at December 31, 2002 and 2001 are as follows (in millions):
| December 31, 2002 | December 31, 2001 | |||||||||||||||
| Carrying | Carrying | |||||||||||||||
| Amount | Fair Value | Amount | Fair Value | |||||||||||||
|
Leshan note receivable
|
$ | 63.3 | $ | 63.3 | $ | 63.3 | $ | 63.3 | ||||||||
|
Investment in joint ventures
|
36.0 | 36.0 | 32.1 | 32.1 | ||||||||||||
|
Long-term debt
|
(1,393.9 | ) | (999.9 | ) | (1,374.5 | ) | (1,132.3 | ) | ||||||||
|
Foreign currency exchange contracts
|
(0.3 | ) | (0.3 | ) | 0.9 | 0.9 | ||||||||||
|
Interest rate agreements
|
(10.5 | ) | (10.5 | ) | (12.2 | ) | (12.2 | ) | ||||||||
|
Series A preferred stock
|
110.1 | 93.1 | 101.6 | 101.6 | ||||||||||||
Note 17: Commitments and Contingencies
Leases
The following is a schedule by year of future minimum lease obligations under non-cancelable operating leases as of December 31, 2002 (in millions):
|
Year Ending December 31,
|
||||||
|
2003
|
$ | 9.4 | ||||
|
2004
|
4.3 | |||||
|
2005
|
2.5 | |||||
|
2006
|
1.1 | |||||
|
2007
|
0.3 | |||||
|
Thereafter
|
— | |||||
|
Total
|
$ | 17.6 | ||||
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 2002, 2001, and 2000 was $12.3 million, $11.0 million, and $13.0 million, respectively.
At December 31, 2002, two letters of credit totaling $7.5 million partially secure an operating lease and a service agreement with an information technology vendor. A downgrade in the Company’s debt rating could trigger acceleration of remaining amounts due under these agreements, a portion of which would be satisfied by the letters of credit. The lease expires 2003 while the service agreement expires in 2006. These letters of credit are renewable on a yearly basis until 2005 when they expire.
Other Contingencies
The Company’s manufacturing facility in Phoenix, Arizona is located on property that is a “Superfund” site, a property listed on the National Priorities List and subject to clean-up activities under the Comprehensive Environmental Response, Compensation, and Liability Act. Motorola is actively involved in the cleanup of on-site solvent contaminated soil and groundwater and off-site contaminated groundwater pursuant to consent decrees with the State of Arizona. As part of the August 4, 1999 recapitalization, Motorola has
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued)
retained responsibility for this contamination, and has agreed to indemnify the Company with respect to remediation costs and other costs or liabilities related to this matter.
Legal Matters
The Company is involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters, including the matters described in the next paragraph, will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
During the period July 5, 2001 through July 27, 2001, the Company was named as a defendant in three shareholder class action lawsuits that were filed in federal court in New York City against the Company and certain of its current and former officers, current directors and the underwriters for its initial public offering. The lawsuits allege violations of the federal securities laws and have been docketed in the U.S. District Court for the Southern District of New York as: Abrams v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6114; Breuer v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6287; and Cohen v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6942. On April 19, 2002, the plaintiffs filed a single consolidated amended complaint that supersedes the individual complaints originally filed. The amended complaint alleges, among other things, that the underwriters of the Company’s initial public offering improperly required their customers to pay the underwriters excessive commissions and to agree to buy additional shares of the Company’s common stock in the aftermarket as conditions of receiving shares in its initial public offering. The amended complaint further alleges that these supposed practices of the underwriters should have been disclosed in the Company’s initial public offering prospectus and registration statement. The amended complaint alleges violations of both the registration and antifraud provisions of the federal securities laws and seeks unspecified damages. We understand that various other plaintiffs have filed substantially similar class action cases against approximately 300 other publicly traded companies and their public offering underwriters in New York City, which along with the cases against the Company have all been transferred to a single federal district judge for purposes of coordinated case management. The Company believes that the claims against it are without merit and have defended, and intend to continue to defend, the litigation vigorously. The litigation process is inherently uncertain, however, and the Company cannot guarantee that the outcome of these claims will be favorable.
Accordingly, on July 15, 2002, together with the other issuer defendants, the Company filed a collective motion to dismiss the consolidated, amended complaints against the issuers on various legal grounds common to all or most of the issuer defendants. The underwriters also filed separate motions to dismiss the claims against them. In addition, the parties have stipulated to the voluntary dismissal without prejudice of our individual current and former officers and directors who were named as defendants in our litigation, and they are no longer parties to the lawsuit. On February 19, 2003, the Court issued its ruling on the motions to dismiss filed by the underwriter and issuer defendants. In that ruling the Court granted in part and denied in part those motions. As to the claims brought against the Company under the antifraud provisions of the securities laws, the Court dismissed all of these claims with prejudice, and refused to allow plaintiffs the opportunity to re-plead these claims. As to the claims brought under the registration provisions of the securities laws, which do not require that intent to defraud be pleaded, the Court denied the motion to dismiss these claims as to the Company and as to substantially all of the other issuer defendants as well. The Court also denied the underwriter defendants’ motion to dismiss in all respects. While the Company can make no promises or guarantees as to the outcome of these proceedings, it believes that the final result of these actions will have no material effect on the Company’s consolidated financial condition, results of operations or cash flows.
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Note 18: Related Party Transactions
The Company agreed to pay TPG an annual management fee of up to $2.0 million. In connection with the Cherry acquisition described in Note 6, the Company paid TPG a $2.0 million advisory fee in-lieu of the annual management fee for 2000. Under the Company’s amended debt agreements, the payment of the annual management fees to TPG in cash has been deferred until certain conditions are met and no such payments occurred in 2001 or 2002. Management fees may be paid to TPG with the Company’s common stock or warrants.
In connection with the Recapitalization, Motorola assigned, licensed or sublicensed intellectual property to the Company relating to certain of the Company’s products. Motorola also agreed to continue providing manufacturing and assembly services, to continue using similar services the Company provides to them and to lease real estate to the Company. The manufacturing and assembly services that the Company and Motorola have agreed to continue to provide to each other are at prices intended to approximate each party’s cost of providing the services and are fixed throughout the term of the agreements. 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 $1.0 million 2003.
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
|
Cash paid for:
|
||||||||||||
|
Purchases of manufacturing services from Motorola
|
$ | 13.8 | $ | 86.1 | $ | 162.3 | ||||||
|
Cost of other services, rent and equipment
purchased from Motorola
|
$ | 1.5 | $ | 17.7 | $ | 96.0 | ||||||
|
Cash received for:
|
||||||||||||
|
Freight sharing agreement with Motorola
|
$ | 21.4 | $ | 21.9 | $ | 23.8 | ||||||
|
Rental of property and equipment to Motorola
|
$ | 9.1 | $ | 11.2 | $ | 11.9 | ||||||
|
Product sales to Motorola
|
$ | 98.2 | $ | 92.5 | $ | 215.8 | ||||||
Related party activity between the Company and Motorola is as follows (in millions):
On April 8, 2002, the Company and Motorola, Inc. reached agreement regarding certain post-closing payments to be made under agreements entered into in connection with the August 1999 Recapitalization. Pursuant to the agreement, Motorola paid the Company $10.6 million during the second quarter of 2002. As a result, the Company recognized a related gain of $12.4 million, which is included in restructuring and other charges in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2002.
As part of the recapitalization, Motorola agreed to provide the Company with worldwide freight services through August 4, 2002. This agreement resulted in better prices than the Company could obtain from third parties. The cost increases resulting from the expiration of this agreement, which totaled approximately $11 million in 2002 as compared to 2001, have been factored into our current operating plans.
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Note 19: Supplemental Disclosure of Cash Flow Information
The Company’s non-cash financing activities and cash payments for interest and income taxes are as follows (in millions):
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
|
Non-cash financing activities:
|
|||||||||||||
|
Equipment acquired through capital leases
|
$ | — | $ | 3.0 | $ | — | |||||||
|
Cash (received) paid for:
|
|||||||||||||
|
Interest
|
98.9 | 118.1 | 131.2 | ||||||||||
|
Income taxes
|
(0.6 | ) | (2.4 | ) | 54.2 | ||||||||
Note 20: Segment Information
The Company is engaged in the design, development, manufacture and marketing of a wide variety of semiconductor components and operates in one segment. The Company operates in various geographic locations. Sales to unaffiliated customers have little correlation with the location of manufacture. It is, therefore, not meaningful to present operating profit by geographic location. The Company conducts a substantial portion of its operations outside of the United States and is subject to risks associated with non-U.S. operations, such as political risks, currency controls and fluctuations, tariffs, import controls and air transportation.
Total revenues by geographic location and product line, including local sales and exports made by operations within each area, are summarized as follows (in millions):
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
|
United States
|
$ | 393.1 | $ | 430.6 | $ | 856.0 | ||||||
|
The Other Americas
|
8.2 | 55.1 | 109.1 | |||||||||
|
Asia/ Pacific
|
416.5 | 376.8 | 551.5 | |||||||||
|
Europe
|
201.7 | 264.0 | 414.8 | |||||||||
|
Japan
|
65.0 | 88.1 | 142.5 | |||||||||
| $ | 1,084.5 | $ | 1,214.6 | $ | 2,073.9 | |||||||
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
|
Power Management and Standard Analog
|
$ | 362.7 | $ | 365.4 | $ | 533.5 | ||||||
|
MOS Power Devices
|
138.7 | 146.7 | 221.3 | |||||||||
|
High Frequency Clock and Data Management
|
72.0 | 118.5 | 312.4 | |||||||||
|
Standard Components
|
511.1 | 584.0 | 1,006.7 | |||||||||
| $ | 1,084.5 | $ | 1,214.6 | $ | 2,073.9 | |||||||
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Property, plant and equipment by geographic location is summarized as follows (in millions):
| December 31, | ||||||||
| 2002 | 2001 | |||||||
|
The Americas*
|
$ | 148.4 | $ | 202.4 | ||||
|
Asia/ Pacific
|
135.7 | 171.3 | ||||||
|
Europe
|
97.4 | 103.3 | ||||||
|
Japan
|
72.6 | 78.5 | ||||||
| $ | 454.1 | $ | 555.5 | |||||
| * | The decrease from 2000 to 2001 relates primarily to the decision to phase-out manufacturing operations at the Company’s Guadalajara, Mexico facility and the related asset impairment charges recorded in 2001. |
Sales to Motorola and two other customers accounted for approximately 8%, 10% and 10%, respectively of the Company’s total revenue during 2002 compared to approximately 7%, 8% and 8%, respectively during 2001, and approximately 10%, 11% and 12%, respectively during 2000.
Note 21: Selected Quarterly Financial Data (unaudited):
Consolidated quarterly financial information for 2002 and 2001 follows (in millions, except per share data):
| Quarter Ended 2002 | ||||||||||||||||
| Mar. 29 | June 28(1) | Sept. 27 | Dec. 31(2) | |||||||||||||
|
Total revenues
|
$ | 269.1 | $ | 277.7 | $ | 272.0 | $ | 265.7 | ||||||||
|
Gross profit
|
58.2 | 76.0 | 78.0 | 73.3 | ||||||||||||
|
Net loss before extraordinary loss and cumulative
effect of accounting change
|
(50.0 | ) | (25.3 | ) | (20.5 | ) | (39.6 | ) | ||||||||
|
Net loss
|
(50.0 | ) | (31.8 | ) | (20.5 | ) | (39.6 | ) | ||||||||
|
Diluted net loss before extraordinary loss
cumulative effect of accounting change per common share
|
$ | (0.30 | ) | $ | (0.16 | ) | $ | (0.13 | ) | $ | (0.24 | ) | ||||
|
Diluted net loss per common share
|
$ | (0.30 | ) | $ | (0.19 | ) | $ | (0.13 | ) | $ | (0.24 | ) | ||||
| Quarter Ended 2001 | ||||||||||||||||
| Mar. 30(3) | June 29(4) | Sept. 28(5) | Dec. 31(6) | |||||||||||||
|
Total revenues
|
$ | 360.5 | $ | 310.7 | $ | 276.5 | $ | 266.9 | ||||||||
|
Gross profit
|
86.6 | 55.1 | 36.2 | 36.7 | ||||||||||||
|
Net loss before cumulative effect of accounting
change
|
(43.0 | ) | (152.2 | ) | (68.9 | ) | (450.9 | ) | ||||||||
|
Net loss
|
(159.4 | ) | (152.2 | ) | (68.9 | ) | (450.9 | ) | ||||||||
|
Diluted net loss before cumulative effect of
accounting change per common share
|
$ | (0.25 | ) | $ | (0.88 | ) | $ | (0.47 | ) | $ | (2.60 | ) | ||||
|
Diluted net loss per common share
|
$ | (0.92 | ) | $ | (0.88 | ) | $ | (0.47 | ) | $ | (2.60 | ) | ||||
| (1) | In June 2002, the Company recorded charges totaling $16.7 million for costs associated with its worldwide restructuring programs. The charges included $3.9 million to cover employee separation costs associated with the termination of 79 U.S. employees, $2.8 million for exit costs consisting primarily of manufacturing equipment and supply contract termination charges, and $8.4 million for equipment write-offs that were charged directly against the related assets. An additional $1.0 million in exits costs and $0.6 million in employee separation costs were accrued relating to the closure of the Company’s Guadalajara, Mexico manufacturing facility that was part of the June 2001 restructuring program |
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| described below. Also during the second quarter of 2002, the Company reached a settlement of various contractual issues with Motorola in exchange for a cash payment from Motorola of $10.6 million and recorded a related gain of $12.4 million. | |
| (2) | In December 2002, the Company recorded $12.6 million (net of a $0.6 adjustment) of restructuring and other charges. The charges included $10.1 million to cover employee separation costs relating the termination of approximately 300 employees, $1.0 million of asset impairments and approximately $1.8 million in expected lease termination and other exit costs associated with the decommissioning of certain assets. The Company also recorded a $4.9 million charge to cover the costs associated with the separation of two of the Company’s executive officers including $2.9 million of non-cash stock compensation relating to the modification of the vesting and exercise period for a portion of the executives’ stock options. |
| (3) | Effective January 1, 2001, the Company changed its accounting method for recognizing revenue on sales to distributors. Recognition of revenue and related gross profit on sales to distributors is now deferred until the distributor resells the product. The cumulative effect of the accounting change for periods prior to January 1, 2001 was a charge of $155.2 million ($116.4 million or $0.67 per share, net of income taxes) and was recorded during the quarter ended March 30, 2001. |
| In March 2001, the Company recorded a $34.2 million charge to cover costs associated with a worldwide restructuring program covering both manufacturing locations and selling, general and administrative functions. See Note 5 “Restructuring and Other Charges” for further discussion regarding the restructuring. The Company also recorded a $3.8 million charge to cover costs associated with the separation of an executive officer. The Company recognized a pre-tax gain of $3.1 million on the sale of its 50% interest in SMP to Philips in February 2001. |
| (4) | In June 2001, the Company recorded a $95.8 million charge to cover costs associated with a worldwide restructuring program. This program includes phasing out of manufacturing operations at the Company’s Guadalajara, Mexico facility, transferring certain manufacturing activities performed at the Company’s Aizu, Japan and Seremban, Malaysia facilities to other Company-owned facilities or to third party contractors and consolidation of other operations. |
| (5) | At June 29, 2001, the Company was not in compliance with certain of its senior credit facilities. On August 13, 2001, the Company’s lenders agreed to waive such non-compliance and to amend the related agreement to temporarily eliminate certain covenants, reduce certain covenants, add new covenants, increase interest rates applicable to outstanding borrowings and require the Company to obtain a $100 million investment from TPG. On September 7, 2001, the Company issued 10,000 shares of its Series A Cumulative Convertible Redeemable Preferred Stock to an affiliated of TPG resulting in proceeds of $99.2 million. As the preferred stock is convertible into shares of common stock at a price lower than the market price on the date of issuance there was a beneficial conversion feature (“BCF”) of $13.1 million inherent in the preferred stock. The BCF was originally recorded as a discount against the preferred shares with an offsetting increase to additional paid-in capital. However, since the preferred shares are convertible immediately and have no stated redemption date, the discount was accreted in full on the day of issuance. The net loss applicable to common shareholders increased by the $13.1 million accretion for purposes of calculating earnings per share. |
| (6) | During the fourth quarter of 2001, the Company recorded a $366.8 million income tax charge to establish a valuation allowance for the portion of its deferred taxes for which it is more likely than not that the related benefits will not be recognized. Additionally, the Company recorded a $16.6 million charge to cover costs associated with a worldwide restructuring program. The charge included $5.6 million to cover employee separation costs with the termination of approximately 50 employees and $11.0 million for asset impairments charged directly against the related assets. |
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REPORT OF INDEPENDENT ACCOUNTANTS ON
To the Board of Directors of
Our audits of the consolidated financial statements referred to in our report dated February 5, 2002, except for Note 9 for which the date is March 3, 2003, appearing in this Form 10-K of ON Semiconductor Corporation also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth herein when read in conjunction with the related consolidated financial statements.
| /s/ PRICEWATERHOUSECOOPERS LLP | |
|
|
|
| PricewaterhouseCoopers LLP |
February 5, 2003
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ON SEMICONDUCTOR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| Balance at | Charged to | Charged to | Balance at | ||||||||||||||||||
| Beginning | Costs and | Other | Deductions/ | End of | |||||||||||||||||
| Description | of Period | Expenses | Accounts | Writeoffs | Period | ||||||||||||||||
| (In millions) | |||||||||||||||||||||
|
Allowance for doubtful accounts
|
|||||||||||||||||||||
|
Year ended December 31, 2000
|
$ | 2.0 | $ | 0.8 | $ | 1.4 | (1) | $ | 1.1 | $ | 3.1 | ||||||||||
|
Year ended December 31, 2001
|
$ | 3.1 | $ | 0.5 | $ | — | $ | 1.3 | $ | 2.3 | |||||||||||
|
Year ended December 31, 2002
|
$ | 2.3 | $ | — | $ | — | $ | 0.4 | $ | 1.9 | |||||||||||
|
Inventory reserves
|
|||||||||||||||||||||
|
Year ended December 31, 2000
|
$ | 28.2 | $ | 44.1 | $ | — | $ | 49.4 | $ | 22.9 | |||||||||||
|
Year ended December 31, 2001
|
$ | 22.9 | $ | 50.9 | $ | — | $ | 22.5 | $ | 51.3 | |||||||||||
|
Year ended December 31, 2002
|
$ | 51.3 | $ | 16.0 | $ | — | $ | 23.6 | $ | 43.7 | |||||||||||
|
Allowance for deferred tax assets
|
|||||||||||||||||||||
|
Year ended December 31, 2000
|
$ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
|
Year ended December 31, 2001
|
$ | — | $ | 366.8 | $ | 83.8 | (2) | $ | — | $ | 450.6 | ||||||||||
|
Year ended December 31, 2002
|
$ | 450.6 | $ | 1.0 | $ | 90.2 | (3) | $ | — | $ | 541.8 | ||||||||||
| (1) | Represents allowance recorded in connection with the acquisition of Cherry Semiconductor. |
| (2) | Represents the valuation allowance related to the 2001 portion of the net operating loss that was not recognized during the year. |
| (3) | Represents the valuation allowance related to the 2002 net operating loss that was not recognized during the year. |
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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC
CONSOLIDATED FINANCIAL STATEMENTS
125
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REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, member’s equity (deficit) and cash flows present fairly, in all material respects, the financial position of Semiconductor Components Industries, LLC and its subsidiaries (a wholly-owned subsidiary of ON Semiconductor Corporation) at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 4 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets effective January 1, 2002 as well as its methods of accounting for sales to distributors, derivative instruments and hedging activities effective January 1, 2001.
| /s/ PRICEWATERHOUSECOOPERS LLP | |
|
|
|
| PricewaterhouseCoopers LLP |
Phoenix, Arizona
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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
| December 31 | |||||||||
| 2002 | 2001 | ||||||||
| (In millions) | |||||||||
| ASSETS | |||||||||
|
Cash and cash equivalents
|
$ | 176.4 | $ | 174.2 | |||||
|
Receivables, net (including $4.7 and $21.3 due
from Motorola)
|
121.4 | 142.2 | |||||||
|
Inventories, net
|
155.0 | 180.2 | |||||||
|
Other current assets
|
33.3 | 34.0 | |||||||
|
Deferred income taxes
|
6.4 | 7.5 | |||||||
|
Total current assets
|
492.5 | 538.1 | |||||||
|
Property, plant and equipment, net
|
389.5 | 482.8 | |||||||
|
Deferred income taxes
|
— | 0.4 | |||||||
|
Goodwill
|
77.3 | 77.3 | |||||||
|
Intangibles assets, net
|
26.7 | 38.6 | |||||||
|
Notes receivable from affiliates
|
130.6 | 131.1 | |||||||
|
Other assets
|
38.7 | 41.7 | |||||||
|
Total assets
|
$ | 1,155.3 | $ | 1,310.0 | |||||
| LIABILITIES AND MEMBER’S EQUITY (DEFICIT) | |||||||||
|
Accounts payable (including $0.1 and $3.3 payable
to Motorola)
|
$ | 74.0 | $ | 108.6 | |||||
|
Accrued expenses (including $0.7 and $11.7
payable to Motorola)
|
97.0 | 101.5 | |||||||
|
Due to affiliates, net
|
5.4 | 5.6 | |||||||
|
Income taxes payable
|
14.8 | 6.1 | |||||||
|
Accrued interest
|
43.6 | 13.4 | |||||||
|
Deferred income on sales to distributors
|
70.8 | 99.4 | |||||||
|
Current portion of long-term debt
|
9.3 | 12.4 | |||||||
|
Total current liabilities
|
314.9 | 347.0 | |||||||
|
Long-term debt (including $126.9 and $115.2
payable to Motorola)
|
1,393.9 | 1,374.5 | |||||||
|
Other long-term liabilities
|
42.9 | 48.3 | |||||||
|
Deferred income taxes
|
2.2 | — | |||||||
|
Total liabilities
|
1,753.9 | 1,769.8 | |||||||
|
Commitments and contingencies (See Note 15)
|
— | — | |||||||
|
Contributed capital
|
793.5 | 785.9 | |||||||
|
Accumulated other comprehensive income (loss)
|
(34.3 | ) | (32.8 | ) | |||||
|
Accumulated deficit
|
(1,357.8 | ) | (1,212.9 | ) | |||||
|
Total member’s equity (deficit)
|
(598.6 | ) | (459.8 | ) | |||||
|
Total liabilities and member’s equity
(deficit)
|
$ | 1,155.3 | $ | 1,310.0 | |||||
The accompanying notes are an integral part of these
127
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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
| Year Ended December 31, | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| (In millions) | ||||||||||||||
|
Total revenues (including $87.7, $98.9 and $206.0
from Motorola)
|
$ | 1,084.0 | $ | 1,213.3 | $ | 2,070.2 | ||||||||
|
Cost of sales
|
805.9 | 991.0 | 1,356.8 | |||||||||||
|
Gross profit
|
278.1 | 222.3 | 713.4 | |||||||||||
|
Operating expenses:
|
||||||||||||||
|
Research and development
|
67.9 | 80.9 | 69.2 | |||||||||||
|
Selling and marketing
|
61.2 | 74.8 | 100.1 | |||||||||||
|
General and administrative
|
102.9 | 133.8 | 233.4 | |||||||||||
|
Amortization of intangibles
|
11.9 | 22.6 | 16.8 | |||||||||||
|
Write-off of acquired in-process research and
development
|
— | — | 26.9 | |||||||||||
|
Restructuring and other
|
26.7 | 150.1 | 4.8 | |||||||||||
|
Total operating expenses
|
270.6 | 462.2 | 451.2 | |||||||||||
|
Operating income (loss)
|
7.5 | (239.9 | ) | 262.2 | ||||||||||
|
Interest expense, net
|
(138.1 | ) | (133.6 | ) | (131.2 | ) | ||||||||
|
Income (loss) before income taxes, extraordinary
loss and cumulative effect of accounting change
|
(130.6 | ) | (373.5 | ) | 131.0 | |||||||||
|
Income tax provision
|
(7.8 | ) | (342.9 | ) | (46.5 | ) | ||||||||
|
Income (loss) before extraordinary loss and
cumulative effect of accounting change
|
(138.4 | ) | (716.4 | ) | 84.5 | |||||||||
|
Extraordinary loss on debt prepayment (net of
income taxes of $0 in 2002 and $11.7 in 2000)
|
(6.5 | ) | — | (17.5 | ) | |||||||||
|
Cumulative effect of accounting change (net of
income taxes of $38.8)
|
— | (116.4 | ) | — | ||||||||||
|
Net income (loss)
|
$ | (144.9 | ) | $ | (832.8 | ) | $ | 67.0 | ||||||
The accompanying notes are an integral part of these
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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBER’S EQUITY (DEFICIT)
| Accumulated | ||||||||||||||||||
| Other | ||||||||||||||||||
| Comprehensive | ||||||||||||||||||
| Contributed | Income | Accumulated | ||||||||||||||||
| Capital | (Loss) | Deficit | Total | |||||||||||||||
| (In millions) | ||||||||||||||||||
|
Balance at December 31, 1999
|
$ | 359.5 | $ | 2.7 | $ | (447.1 | ) | $ | (84.9 | ) | ||||||||
|
Net capital contributions from Member
|
301.9 | 301.9 | ||||||||||||||||
|
Comprehensive income (loss):
|
||||||||||||||||||
|
Net income
|
— | — | 67.0 | 67.0 | ||||||||||||||
|
Other comprehensive income (loss), net of tax:
|
||||||||||||||||||
|
Foreign currency translation adjustment
|
— | (3.1 | ) | — | (3.1 | ) | ||||||||||||
|
Additional minimum pension liability
|
— | (0.3 | ) | — | (0.3 | ) | ||||||||||||
|
Other comprehensive loss
|
(3.4 | ) | (3.4 | ) | ||||||||||||||
|
Comprehensive income
|
— | 63.6 | ||||||||||||||||
|
Balance at December 31, 2000
|
661.4 | (0.7 | ) | (380.1 | ) | 280.6 | ||||||||||||
|
Net capital contributions from Member
|
124.5 | 124.5 | ||||||||||||||||
|
Comprehensive income (loss):
|
||||||||||||||||||
|
Net loss
|
— | — | (832.8 | ) | (832.8 | ) | ||||||||||||
|
Other comprehensive income (loss), net of tax:
|
||||||||||||||||||
|
Foreign currency translation adjustment
|
— | (3.9 | ) | — | (3.9 | ) | ||||||||||||
|
Additional minimum pension liability
|
— | (13.5 | ) | — | (13.5 | ) | ||||||||||||
|
Cumulative effect of accounting change
|
— | (5.7 | ) | — | (5.7 | ) | ||||||||||||
|
Effects of cash flow hedges
|
— | (9.0 | ) | — | (9.0 | ) | ||||||||||||
|
Other comprehensive loss
|
(32.1 | ) | (32.1 | ) | ||||||||||||||
|
Comprehensive loss
|
— | (864.9 | ) | |||||||||||||||
|
Balance at December 31, 2001
|
785.9 | (32.8 | ) | (1,212.9 | ) | (459.8 | ) | |||||||||||
|
Net capital contributions from Member
|
7.6 | 7.6 | ||||||||||||||||
|
Comprehensive income (loss), net of tax:
|
||||||||||||||||||
|
Net loss
|
(144.9 | ) | (144.9 | ) | ||||||||||||||
|
Other comprehensive income (loss), net of tax:
|
||||||||||||||||||
|
Foreign currency translation adjustment
|
2.3 | 2.3 | ||||||||||||||||
|
Additional minimum pension liability
|
(5.8 | ) | (5.8 | ) | ||||||||||||||
|
Unrealized losses on deferred compensation plan
investments
|
(0.6 | ) | (0.6 | ) | ||||||||||||||
|
Effects of cash flow hedges
|
2.6 | 2.6 | ||||||||||||||||
|
Other comprehensive loss
|
(1.5 | ) | (1.5 | ) | ||||||||||||||
|
Comprehensive loss
|
— | (146.4 | ) | |||||||||||||||
|
Balance at December 31, 2002
|
$ | 793.5 | $ | (34.3 | ) | $ | (1,357.8 | ) | $ | (598.6 | ) | |||||||
The accompanying notes are an integral part of these
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SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | |||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||
| (In millions) | |||||||||||||||
|
Cash flows from operating activities:
|
|||||||||||||||
|
Net income (loss)
|
$ | (144.9 | ) | $ | (832.8 | ) | $ | 67.0 | |||||||
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating
activities:
|
|||||||||||||||
|
Depreciation and amortization
|
122.3 | 153.5 | 149.4 | ||||||||||||
|
Write-off of acquired in-process research and
development
|
— | — | 26.9 | ||||||||||||
|
Extraordinary loss on debt prepayment
|
6.5 | — | 29.2 | ||||||||||||
|
Cumulative effect of accounting change
|
— | 155.2 | — | ||||||||||||
|
Amortization of debt issuance costs and debt
discount
|
8.7 | 6.0 | 5.9 | ||||||||||||
|
Provision for excess inventories
|
12.1 | 50.9 | 44.1 | ||||||||||||
|
Non-cash impairment of property, plant and
equipment
|
11.5 | 56.2 | — | ||||||||||||
|
Non-cash interest on junior subordinated note
payable to Motorola
|
11.7 | 10.7 | 9.6 | ||||||||||||
|
Stock compensation expense
|
4.5 | 5.0 | 0.7 | ||||||||||||
|
Deferred income taxes
|
5.2 | 318.5 | (9.1 | ) | |||||||||||
|
Other
|
(0.8 | ) | (2.2 | ) | (0.7 | ) | |||||||||
|
Changes in assets and liabilities:
|
|||||||||||||||
|
Receivables
|
23.0 | 129.0 | (1.6 | ) | |||||||||||
|
Inventories
|
13.4 | 17.7 | (76.0 | ) | |||||||||||
|
Other assets
|
(3.3 | ) | (1.7 | ) | (27.6 | ) | |||||||||
|
Accounts payable
|
(34.9 | ) | (60.5 | ) | 40.2 | ||||||||||
|
Accrued expenses
|
(7.7 | ) | (63.0 | ) | 46.4 | ||||||||||
|
Due to affiliates
|
0.1 | 1.7 | 7.2 | ||||||||||||
|
Income taxes payable
|
8.7 | (11.6 | ) | (13.7 | ) | ||||||||||
|
Accrued interest
|
19.2 | 5.7 | (12.2 | ) | |||||||||||
|
Deferred income on sales to distributors
|
(28.6 | ) | (82.8 | ) | — | ||||||||||
|
Other long-term liabilities
|
0.1 | 5.4 | (3.8 | ) | |||||||||||
|
Net cash provided by (used in) operating
activities
|
26.8 | (139.1 | ) | 281.9 | |||||||||||
|
Cash flows from investing activities:
|
|||||||||||||||
|
Purchases of property, plant and equipment
|
(23.9 | ) | (109.4 | ) | (176.2 | ) | |||||||||
|
Investment in business, net of cash acquired
|
— | — | (253.2 | ) | |||||||||||
|
Other investments
|
— | (0.5 | ) | (2.3 | ) | ||||||||||
|
Loans to affiliates
|
— | (5.0 | ) | (43.1 | ) | ||||||||||
|
Proceeds from repayment of loans to affiliates
|
0.5 | — | — | ||||||||||||
|
Proceeds from sales of property, plant and
equipment
|
4.8 | 13.8 | 18.1 | ||||||||||||
|
Net cash used in investing activities
|
(18.6 | ) | (101.1 | ) | (456.7 | ) | |||||||||
|
Cash flows from financing activities:
|
|||||||||||||||
|
Net capital contributions from Member
|
2.6 | 119.5 | 301.2 | ||||||||||||
|
Proceeds from debt issuance
|
290.7 | — | — | ||||||||||||
|
Proceeds from senior credit facilities and other
borrowings
|
— | 125.0 | 226.1 | ||||||||||||
|
Payment of capital lease obligation
|
(1.1 | ) | (1.9 | ) | — | ||||||||||
|
Payment of debt issuance costs
|
(12.1 | ) | (5.1 | ) | (3.2 | ) | |||||||||
|
Repayment of senior credit facilities, including
prepayment penalty in 2000
|
(287.1 | ) | (5.6 | ) | (131.5 | ) | |||||||||
|
Repayment of senior subordinated notes, including
prepayment penalty
|
— | — | (156.8 | ) | |||||||||||
|
Net cash provided by (used in) financing
activities
|
(7.0 | ) | 231.9 | 235.8 | |||||||||||
|
Effect of exchange rate changes on cash and cash
equivalents
|
1.0 | 0.8 | (0.1 | ) | |||||||||||
|
Net increase (decrease) in cash and cash
equivalents
|
2.2 | (7.5 | ) | 60.9 | |||||||||||
|
Cash and cash equivalents, beginning of period
|
174.2 | 181.7 | 120.8 | ||||||||||||
|
Cash and cash equivalents, end of period
|
$ | 176.4 | $ | 174.2 | $ | 181.7 | |||||||||
The accompanying notes are an integral part of these
130
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Note 1: Background and Basis of Presentation
Semiconductor Components Industries, LLC (“SCI LLC” or the “Company”) is a wholly-owned subsidiary of ON Semiconductor Corporation (“ON Semiconductor”). The Company is one of the largest independent suppliers of semiconductor components in the world. Formerly known as the Semiconductor Components Group of the Semiconductor Products Sector of Motorola, Inc., ON Semiconductor was a wholly-owned subsidiary of Motorola Inc. (“Motorola”) prior to its August 4, 1999 recapitalization (the “Recapitalization”). ON Semiconductor continues to hold, through direct and indirect subsidiaries, substantially all the assets and operations of the Semiconductor Components Group of Motorola’s Semiconductor Products Sector.
On August 4, 1999, ON Semiconductor was recapitalized and certain related transactions were effected pursuant to an agreement among ON Semiconductor, the Company, Motorola and affiliates of Texas Pacific Group (“TPG”). As a result of the Recapitalization, an affiliate of TPG owned approximately 91% and Motorola owned approximately 9% of the outstanding common stock of ON Semiconductor. In addition, as part of these transactions, TPG received 1,500 shares and Motorola received 590 shares of ON Semiconductor’s mandatorily redeemable preferred stock with a liquidation value of $209 million plus accrued and unpaid dividends. Motorola also received a $91 million junior subordinated note issued by the Company. Cash payments to Motorola in connection with the Recapitalization were financed through equity investments by affiliates of TPG totaling $337.5 million, borrowings totaling $740.5 million under the Company’s $875 million senior bank facilities and the issuance of $400 million of 12% senior subordinated notes due August 2009. Because TPG’s affiliate did not acquire substantially all of ON Semiconductor’s common stock, the basis of ON Semiconductor’s assets and liabilities for financial reporting purposes was not impacted by the Recapitalization.
Note 2: Liquidity
During the year ended December 31, 2002, the Company incurred a net loss of $144.9 million compared to a net loss of $832.8 million in 2001 and net income of $67.0 million in 2000. The Company’s net results included restructuring and other of $26.7 million, $150.1 million and $4.8 million in 2002, 2001 and 2000, respectively, as well as interest expense of $138.1 million, $133.6 million and $131.2 million, respectively. The Company’s operating activities provided cash of $26.8 million in 2002 and $281.9 million in 2000 and used cash of $139.1 million in 2001.
At December 31, 2002, the Company had $176.4 million in cash and cash equivalents, net working capital of $177.6 million, term or revolving debt of $1,403.2 million and a member’s deficit of $598.6 million. The Company’s long-term debt includes $701.6 million under its senior bank facilities; $291.4 million (net of discount) of its 12% senior secured notes due 2008; $260.0 million of its 12% senior subordinated notes due 2009; $126.9 million under a 10% junior subordinated note payable to Motorola due 2011; and, $23.3 million under a note payable to a Japanese bank due 2010. The Company was in compliance with all of the covenants contained in its various debt agreements as of December 31, 2002 and expects to remain in compliance over the next twelve months.
The Company’s ability to service its long-term debt, to remain in compliance with the various covenants and restrictions contained in its credit agreements and to fund working capital, capital expenditures and business development efforts will depend on its ability to generate cash from operating activities which is subject to, among other things, its future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond its control.
If the Company fails to generate sufficient cash from operations, it may need to raise additional equity or borrow additional funds to achieve its longer term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to the Company. Although there can be no assurance, management believes that cash flow from operating activities coupled with existing cash balances will be adequate to fund the Company’s operating and capital needs as well as enable it to maintain compliance with its various debt agreements through December 31, 2003. To the extent that results or events differ from the Company’s financial projections or business plans, its liquidity may be adversely impacted.
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Note 3: Significant Accounting Policies
| Principles of Consolidation |
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Investments in companies that represent less than 20% of the related voting stock are accounted for on the cost basis as the Company does not exercise significant influence. All material intercompany accounts and transactions have been eliminated.
| Reclassifications |
Certain amounts have been reclassified to conform with the current year presentation.
| Use of Estimates |
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates have been used by management in conjunction with the measurement of valuation allowances relating to receivables, inventories and deferred tax assets; reserves for customer incentives, restructuring charges and pension obligations; the fair values of financial instruments (including derivative financial instruments); and future cash flows associated with long-lived assets. Actual results could differ from these estimates.
| Cash Equivalents |
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
| Inventories |
Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis), or market. The Company records provisions for slow moving inventories based upon a regular analysis of inventory on hand compared to historical and projected end user demand. Projected end user demand is generally based on sales during the prior twelve months.
These provisions can influence results from operations. For example, when demand for a given part falls, all or a portion of the related inventory is reserved, impacting cost of sales and gross profit. If demand recovers and the parts previously reserved are sold, a higher than normal margin will generally be recognized. General market conditions as well as the Company’s design activities can cause certain of its products to become obsolete.
| Property, Plant and Equipment |
Property, plant and equipment are recorded at cost and are depreciated over estimated useful lives of 30-40 years for buildings and 3-20 years for machinery and equipment using accelerated and straight-line methods. Expenditures for maintenance and repairs are charged to operations in the year in which the expense is incurred. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations in the period realized.
The Company evaluates the recoverability of the carrying amount of its property, plant and equipment whenever events or changes in circumstances indicate that the related carrying amount of an asset may not be recoverable. Impairment is assessed when the undiscounted expected cash flows derived for an asset are less than its carrying amount. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an impaired asset. The dynamic economic environment in which the Company operates and the resulting assumptions used to estimate future cash flows impact the outcome of these impairment tests.
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Table of Contents
| Goodwill and Other Intangible Assets |
Goodwill represents the excess of the purchase price of the Cherry acquisition (described in Note 6 “Acquisition”) over the estimated fair value of the net assets acquired and was being amortized on a straight line basis over its estimated useful life of ten years until January 1, 2002 when the Company adopted Statement of Financial Accounting Standards (“SFAS”) 142, “Goodwill and Other Intangible Assets.” The Company also acquired certain intangible assets in the Cherry acquisition that are being amortized on a straight line basis over estimated useful lives of five years.
Under SFAS 142, goodwill is evaluated for potential impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred. SFAS 142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the estimated fair value of the reporting unit containing goodwill with the related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting unit’s goodwill is not considered to be impaired and the second step of the impairment test is unnecessary. If the reporting unit’s carrying amount exceeds its estimated fair value, the second step test must be performed to measure the amount of the goodwill impairment loss, if any. The second step test compares the implied fair value of the reporting unit’s goodwill, determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of such goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company performs its annual impairment analysis during the fourth quarter of each year.
| Debt Issuance Costs |
Debt issuance costs are capitalized and amortized over the terms of the underlying agreements. Upon prepayment of debt, the related unamortized debt issuance costs are charged to operations. Amortization of debt issuance costs is included in interest expense while the unamortized balance is included in other assets.
| Revenue Recognition |
The Company generates revenue from sales of its semiconductor products to original equipment manufacturers, distributors and electronic manufacturing service providers. The Company recognizes revenue on sales to original equipment manufacturers and electronic manufacturing service providers when title passes to the customer net of provisions for related sales returns and allowances.
Prior to January 1, 2001, the Company recognized revenue on distributor sales when title passed to the distributor. Provisions were also recorded at that time for estimated sales returns as well as for other related sales costs and allowances. Effective January 1, 2001, the Company changed its revenue recognition policy with respect to distributor sales so that the related revenues are now deferred until the distributor resells the product to the end user. This change eliminated the need to provide for estimated sales returns from distributors. Title to products sold to distributors typically passes at the time of shipment by the Company so the Company records accounts receivable for the amount of the transaction, reduces its inventory for the products shipped and defers the related margin in the consolidated balance sheet. The Company recognizes the related revenue and margin when the distributor sells the products to the end user. Although payment terms vary, most distributor agreements require payment within 30 days.
| Research and Development Costs |
Research and development costs are expensed as incurred.
| Stock-Based Compensation |
The Company accounts for employee stock options relating to the common stock of ON Semiconductor accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and provides the pro forma disclosures required by SFAS No. 123 “Accounting for Stock Based Compensation” (“SFAS No. 123”). The Company measures compensation expense relating to non-employee stock awards in accordance with SFAS No. 123.
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Had the Company determined employee stock compensation expense in accordance with SFAS No. 123, the Company’s net income (loss) for 2002, 2001, and 2000 would have been reduced (increased) to the pro forma amounts indicated below (in millions):
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
|
Net income (loss), as reported
|
$ | (144.9 | ) | $ | (832.8 | ) | $ | 67.0 | ||||
|
Add: Stock-based employee compensation expense
included in reported net income (loss), net of related tax
effects
|
4.5 | 3.7 | 0.5 | |||||||||
|
Less: Total stock-based employee compensation
expense determined under fair value based method for all awards,
net of related tax effects
|
(15.4 | ) | (17.9 | ) | (7.1 | ) | ||||||
|
Pro forma net income (loss)
|
$ | (155.8 | ) | $ | (847.0 | ) | $ | 60.4 | ||||
The fair value of each option grant has been estimated at the date of grant while the fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan has been estimated at the beginning of each of the respective offering periods, both using a Black-Scholes option-pricing model with the following weighted-average assumptions:
| Employee Stock Options | 2002 | 2001 | 2000 | |||||||||
|
Expected life (in years)
|
5 | 5 | 5 | |||||||||
|
Risk-free interest rate
|
4.15 | % | 4.82 | % | 6.41 | % | ||||||
|
Volatility
|
0.70 | 0.70 | 0.60 | |||||||||
| Employee Stock Purchase Plan | 2002 | 2001 | 2000 | |||||||||
|
Expected life (in years)
|
0.25 | 0.25 | 0.33 | |||||||||
|
Risk-free interest rate
|
1.71 | % | 4.26 | % | 6.20 | % | ||||||
|
Volatility
|
0.70 | 0.70 | 0.60 | |||||||||
The weighted-average estimated fair value of employee stock options granted during 2002, 2001 and 2000 was $1.83, $3.25 and $8.67 per share, respectively. The weighted-average estimated fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan during 2002, 2001 and 2000 was $0.60, $1.24 and $3.73, respectively.
| Income Taxes |
Income taxes are accounted for using the asset and liability method and are determined on a separate return basis. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the related benefits will not be realized.
In determining the amount of the valuation allowance, estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction are considered. If all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if the Company will ultimately be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be released to income as a credit to income tax expense. In the fourth quarter of 2001, a valuation allowance was established for the majority of the Company’s deferred tax assets. Additionally, throughout 2002, no incremental deferred tax benefits were recognized. The Company’s ability to utilize its deferred tax assets and the continuing need for a related valuation allowance are monitored on an ongoing basis.
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| Foreign Currencies |
Most of the Company’s foreign subsidiaries deal primarily in U.S. dollars and as a result, utilize the dollar as their functional currency. For the translation of financial statements of these subsidiaries, assets and liabilities that are receivable or payable in cash are translated at current exchange rates while inventories and other non-monetary assets are translated at historical rates. Gains and losses resulting from the translation of such financial statements are included in the operating results, as are gains and losses incurred on foreign currency transactions. The Company’s remaining foreign subsidiaries utilize the local currency as their functional currency. The assets and liabilities of these subsidiaries are translated at current exchange rates while revenues and expenses are translated at the average rates in effect for the period. The related translation gains and losses are included in accumulated other comprehensive income (loss) within member’s equity (deficit).
| Defined Benefit Plans |
The Company maintains pension plans covering certain of its employees. For financial reporting purposes, net periodic pension costs are calculated based upon a number of actuarial assumptions, including a discount rate for plan obligations, assumed rate of return on pension plan assets and assumed rate of compensation increase for plan employees. All of these assumptions are based upon management’s judgement, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact the future expense recognition and cash funding requirements of our pension plans.
| Recent Accounting Pronouncements |
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” Under this standard, asset retirement obligations will be recognized when incurred at their estimated fair value. In addition, the cost of the asset retirement obligation will be capitalized as a part of the assets’ carrying valued and depreciated over the assets’ remaining useful life. The Company will be required to adopt SFAS No. 143 effective January 1, 2003. The Company does not expect the implementation of SFAS No. 143 to have a material effect on its results of operations.
The Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” effective January 1, 2002. SFAS No. 144 requires that all long-lived assets (including discontinued operations) that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company’s adoption of SFAS No. 144 did not impact its financial condition or results of operations.
In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002”. SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and excludes extraordinary item treatment for gains and losses associated with the extinguishment of debt that do not meet the Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” criteria. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB No. 30 for classification as an extraordinary item shall be reclassified. SFAS No. 145 also amends FASB Statement No. 13, Accounting for Leases” and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company is required to adopt SFAS No. 145 effective January 1, 2003. While the adoption of SFAS 145 will require reclassifications of amounts within the Company’s statement of operations, there will be no impact on the Company’s financial condition, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or
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In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment to FAS 123.” SFAS No. 148 provides alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in annual and interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for the Company’s fiscal year 2002. The interim disclosure requirements are effective for the first quarter of fiscal year 2003. The Company has no plans to change to the fair value based method of accounting for stock-based employee compensation.
In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 also expands the disclosures required to be made by a guarantor about its obligations under certain guarantees that it has issued. Initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified. The disclosure requirements are effective immediately and such disclosures have been included in Note 7 “Balance Sheet Information”. The Company does not expect the adoption of FIN No. 45 to have a material effect on its financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “ Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created to acquired prior to February 1, 2003, the provisions of FIN 46 must be applied to the first interim or annual period beginning after June 15, 2003. The Company does not expect the adoption of FIN 46 to have an impact on its financial condition or results of operations.
Note 4: Accounting Changes
| Goodwill and Other Intangible Assets |
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”. The provisions of SFAS 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require that such assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired), require that reporting units be identified for the purpose of assessing potential future impairments of goodwill and remove the forty-year limitation on the amortization period of intangible assets that have finite lives.
The Company’s goodwill at January 1, 2002 totaled $77.3 million and relates to the Cherry acquisition described in Note 6. As a result of the adoption of SFAS No. 142, the Company discontinued amortization of the Cherry goodwill at the beginning of 2002. During the first quarter of 2002, the Company identified its various reporting units, which correspond with its four product lines, and allocated its assets and liabilities to such reporting units. The goodwill relating to the Cherry acquisition was specifically identified with and included in the Company’s Power Management and Standard Analog reporting unit. During the second
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The following table, with comparable actual amounts, sets forth the pro forma effects on net income (loss) assuming that the Company had adopted the provisions of SFAS No. 142 at the date of the Cherry acquisition in April 2000:
| Year Ended December 31, | ||||||||||||||||||||
| As | As | Pro | As | Pro | ||||||||||||||||
| Reported | Reported | Forma | Reported | Forma | ||||||||||||||||
| 2002 | 2001 | 2001 | 2000 | 2000 | ||||||||||||||||
|
Reported net income (loss) before
extraordinary loss and cumulative effect of accounting change
|
$ | (138.4 | ) | $ | (716.4 | ) | $ | (716.4 | ) | $ | 84.5 | $ | 84.5 | |||||||
|
Add Back: Goodwill amortization, net of tax
|
10.7 | 7.7 | ||||||||||||||||||
|
Pro forma net income (loss) before
extraordinary loss and cumulative effect of accounting change
|
$ | (705.7 | ) | $ | 92.2 | |||||||||||||||
|
Reported net income (loss)
|
$ | (144.9 | ) | $ | (832.8 | ) | $ | (832.8 | ) | $ | 67.0 | $ | 67.0 | |||||||
|
Add Back: Goodwill amortization, net of tax
|
10.7 | 7.7 | ||||||||||||||||||
|
Pro forma net income (loss)
|
$ | (822.1 | ) | $ | 74.7 | |||||||||||||||
| Revenue Recognition |
Sales are made to distributors under agreements that allow certain rights of return and price protection on products that are not resold by such distributors. Prior to January 1, 2001, the Company recognized revenue on distributor sales when title passed to the distributor. Provisions were also recorded at that time for estimated sales returns from our distributors on these unsold products. Effective January 1, 2001, the Company changed its revenue recognition method on sales to distributors so that such revenues are recognized at the time the distributor sells the Company’s products to the end customer. Title to products sold to distributors typically passes at the time of shipment by the Company so the Company records accounts receivable for the amount of the transaction, reduces its inventory for the products shipped and defers the related margin in the consolidated balance sheet. The Company recognizes the related revenue and margin when the distributor sells the products to the end user. Although payment terms vary, most distributor agreements require payment within 30 days.
Management believes that this accounting change was to a preferable method because it better aligns reported results with, focuses the Company on, and allows investors to better understand end user demand for the products the Company sells through distribution.
Additionally, the timing of revenue recognition is no longer influenced by the distributor’s stocking decisions. This revenue recognition policy and manner of presentation is commonly used in the semiconductor industry.
The impact of the accounting change for periods prior to 2001 was a charge of $155.2 million ($116.4 million, net of income taxes) and is reflected as the cumulative effect of change in accounting principle in the Company’s consolidated statement of operations and comprehensive loss in 2001. The accounting change resulted in an increase in revenues of $116.6 million and a reduction in net loss of $53.1 million for the year ended December 31, 2001.
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The estimated pro forma effects of the accounting change for the year ended December 31, 2000 are as follows (in millions):
| Year Ended | |||||
| December 31, | |||||
| 2000 | |||||
|
As reported:
|
|||||
|
Revenues
|
$ | 2,070.2 | |||
|
Net income before extraordinary loss
|
84.5 | ||||
|
Net income
|
67.0 | ||||
|
Pro forma effects reflecting the accounting
change applied retroactively:
|
|||||
|
Revenues
|
$ | 1,955.0 | |||
|
Net income before extraordinary loss
|
44.2 | ||||
|
Net income
|
26.7 | ||||
| Derivatives Instruments and Hedging Activities |
The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which establishes standards for the accounting and reporting for derivative instruments, including derivative instruments embedded in other contracts, and hedging activities effective January 1, 2001.
Upon adoption, the Company recorded an after-tax charge of approximately $3.4 million to accumulated other comprehensive income (loss). This charge consisted of an approximate $2.1 million adjustment to record the Company’s interest rate swaps in the consolidated balance sheet at their estimated fair values as well as the write-off of an approximate $3.5 million deferred charge relating to the payment made in December 2000 for the early termination of an interest rate protection agreement relating to a portion of the amounts outstanding under the Company’s senior bank facilities, both before income taxes of approximately $2.2 million.
The Company uses forward foreign currency contracts to reduce its overall exposure to the effects of foreign currency fluctuations on its results of operations and cash flows. The fair value of these derivative instruments are recorded as assets or liabilities with gains and losses offsetting the losses and gains on the underlying assets or liabilities. The adoption of SFAS 133 did not impact the Company’s accounting and reporting for these derivative instruments.
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Note 5: Restructuring and Other
The activity related to the Company’s restructuring program is as follows (in millions):
| Reserve | Reserve | Reserve | |||||||||||||||||||||||||||||||
| Balance at | 2001 | 2001 | Balance at | 2002 | 2002 | 2002 | Balance at | ||||||||||||||||||||||||||
| 12/31/2000 | Charges | Usage | 12/31/2001 | Charges | Usage | Adjustments | 12/31/2002 | ||||||||||||||||||||||||||
|
December 2002 Restructuring
|
$ | 0.7 | $ | — | $ | (0.7 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
Cash employee separation charges
|
— | — | — | — | 10.1 | (0.2 | ) | — | 9.9 | ||||||||||||||||||||||||
|
Cash exit costs
|
— | — | — | — | 1.8 | — | — | 1.8 | |||||||||||||||||||||||||
|
December 2002 Restructuring reserve balance
|
— | — | 11.7 | ||||||||||||||||||||||||||||||
|
June 2002 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separation charges
|
— | — | — | — | 2.9 | (2.5 | ) | — | 0.4 | ||||||||||||||||||||||||
|
Cash exit costs
|
— | — | — | — | 2.8 | (1.3 | ) | — | 1.5 | ||||||||||||||||||||||||
|
Non-cash fixed asset write-offs
|
— | — | — | — | 8.4 | (8.4 | ) | — | — | ||||||||||||||||||||||||
|
Non-cash stock compensation charges
|
— | — | — | — | 1.0 | (1.0 | ) | — | — | ||||||||||||||||||||||||
|
June 2002 Restructuring reserve balance
|
— | — | 1.9 | ||||||||||||||||||||||||||||||
|
March 2002 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separation charges
|
— | — | — | — | 7.0 | (4.3 | ) | 0.3 | 3.0 | ||||||||||||||||||||||||
|
Non-cash stock compensation charges
|
— | — | — | — | 0.2 | (0.2 | ) | — | — | ||||||||||||||||||||||||
|
March 2002 Restructuring reserve balance
|
— | — | 3.0 | ||||||||||||||||||||||||||||||
|
December 2001 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separation charges
|
— | 4.0 | (1.8 | ) | 2.2 | — | (2.1 | ) | — | 0.1 | |||||||||||||||||||||||
|
Non-cash fixed asset write-offs
|
— | 11.1 | (11.1 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
Non-cash stock compensation and pension charges
|
— | 1.5 | (1.5 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
December 2001 Restructuring reserve balance
|
— | 2.2 | 0.1 | ||||||||||||||||||||||||||||||
|
June 2001 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separation charges
|
— | 36.1 | (29.3 | ) | 6.8 | — | (5.7 | ) | 0.6 | 1.7 | |||||||||||||||||||||||
|
Cash exit costs
|
— | 10.0 | — | 10.0 | — | (8.1 | ) | (0.8 | ) | 1.1 | |||||||||||||||||||||||
|
Non-cash fixed asset write-offs
|
— | 42.2 | (42.2 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
Non-cash stock compensation and pension charges
|
— | 7.2 | (7.2 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
June 2001 Restructuring reserve balance
|
— | 16.8 | 2.8 | ||||||||||||||||||||||||||||||
|
March 2001 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separation charges
|
— | 31.3 | (30.5 | ) | 0.8 | — | (0.7 | ) | (0.1 | ) | — | ||||||||||||||||||||||
|
Non-cash fixed asset write-offs
|
— | 2.9 | (2.9 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
March 2001 Restructuring reserve balance
|
— | 0.8 | — | ||||||||||||||||||||||||||||||
| $ | 0.7 | $ | 146.3 | $ | (127.2 | ) | $ | 19.8 | $ | 34.2 | $ | (34.5 | ) | $ | (0.0 | ) | $ | 19.5 | |||||||||||||||
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The following table reconciles the restructuring activity in the tables above to the “Restructuring and other” caption on the Statement of Operations for the years ended December 31, 2002 and 2001, respectively (in millions):
| Year Ended | |||||
| December 31, 2002 | |||||
|
2002 restructuring charges
|
$ | 34.2 | |||
|
Plus: Additional charges related to Guadalajara
and France
|
1.9 | ||||
|
Less: Reserves released during the period
|
(1.9 | ) | |||
|
Plus: Other charges related to the termination of
executive officers (December 2002)
|
4.9 | ||||
|
Less: Motorola gain
|
(12.4 | ) | |||
|
Restructuring and other
|
$ | 26.7 | |||
| Year Ended | |||||
| December 31, 2001 | |||||
|
2001 restructuring charges
|
$ | 146.3 | |||
|
Plus: Other charges related to the termination of
an executive officer (March 2001)
|
3.8 | ||||
|
Restructuring and other
|
$ | 150.1 | |||
December 2002 Restructuring Program
In December 2002, the Company recorded a $11.6 million (net of a $0.6 adjustment) restructuring charge. The charge included $10.1 million to cover employee separation costs relating the termination of approximately 300 employees and approximately $1.8 million in expected lease termination and other exit costs associated with the decommissioning of certain assets. The headcount reductions began in the first quarter of 2003 and are expected to be completed by December 2003 and will impact both manufacturing and non-manufacturing personnel mainly in the United States. The charge also included an additional $0.3 million reserve related to headcount reduction in Toulouse, France that was part of the March 2002 restructuring program. The $0.6 adjustment related to release of previous reserves associated with the June 2001 restructuring programs due to the Company’s analysis of estimated costs to complete those programs. As of December 31, 2002 the remaining liability relating to this restructuring was $11.7 million.
In December 2002, the Company also recorded a $4.9 million charge to cover the costs associated with the separation of two of its executive officers. In connection with the separation, the Company reserved $2.0 million related to the cash portion of the related separation agreements. In addition, the Company agreed to modify the vesting and exercise period for a portion of the executives’ stock options. This modification resulted in a non-cash stock compensation charge of $2.9 million with an offsetting credit to additional paid-in capital.
June 2002 Restructuring Program
In June 2002, the Company recorded charges totaling $16.7 million for costs associated with its worldwide restructuring programs. The charges included $3.9 million to cover employee separation costs associated with the termination of 79 U.S. employees, $2.8 million for exit costs consisting primarily of manufacturing equipment and supply contract termination charges, and $8.4 million for equipment write-offs that were charged directly against the related assets. An additional $1.0 million in exit costs and $0.6 million in employee separation costs were accrued relating to the closure of the Company’s Guadalajara, Mexico manufacturing facility that was part of the June 2001 restructuring program described below.
The employee separation costs reflected further reductions in general and administrative staffing levels and included $1.0 million of non-cash stock compensation charges associated with the modification of stock options for certain terminated employees. As of December 31, 2002, all impacted employees had been terminated and the Company currently expects that remaining employee separation cost reserve of $0.4 million as of that date will be paid out by June 30, 2003.
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As a result of continuing economic conditions, the Company determined that certain manufacturing equipment purchase and supply agreements were no longer economical to complete and accrued estimate termination charges of $2.8 million during the second quarter of 2002. As of December 31, 2002, the Company had settled certain of these obligations with payments of $1.3 million and is currently in discussions to settle its remaining obligations.
During the second quarter of 2002, the Company identified certain manufacturing equipment that would no longer be used internally and recorded a charge of $7.0 million to write-down the remaining carrying value to its estimated net realizable value. Additionally, the Company determined that it would not invest the capital required to complete an equipment project and recorded a charge of $1.4 million to write-off the carrying value of the related project.
During the second quarter of 2002, the Company reached a settlement of various contractual issues with Motorola in exchange for a cash payment from Motorola of $10.6 million which resulted in a related gain of $12.4 million. The Company also recorded a $1.2 million reversal of amounts previously provided in connection with its June 2001 restructuring program as a result of favorable negotiated contract termination costs.
March 2002 Restructuring Program
In March 2002, the Company recorded a $7.1 million (net of a $0.1 million adjustment to the March 2001 restructuring program) charge to cover employee separation costs relating to the termination of approximately 72 employees. Approximately $5.0 million of this charge is attributable to employee terminations resulting from the Company’s decision to relocate its European administrative functions from Toulouse, France to Roznov, Czech Republic and Piestany, Slovakia. The relocation of these functions is currently expected to be completed by June 30, 2003. The remaining $2.2 million relates to reductions in selling, general and administrative functions primarily in the U.S. The March 2002 charge also included $0.2 million of non-cash employee stock compensation expense associated with the modification of stock options for certain terminated employees. The Company recorded an additional $0.3 million in employee separation costs relating to the relocation of the administrative functions in Toulouse, France during the fourth quarter of 2002 as a result of its reevaluation of remaining costs to be incurred. As of December 31, 2002, 51 employees have been terminated under this program and the Company currently expects that the remaining terminations will be completed by June 30, 2003. As of December 31, 2002 the remaining liability relating to this restructuring was $3.0 million.
December 2001 Restructuring Program
In December 2001, the Company recorded charges totaling $16.6 million for costs associated with its worldwide restructuring programs. The charges included $5.5 million to cover employee separation costs associated with the terminations of 50 employees as well as $11.1 million for property and equipment write-offs that were charged directly against the related assets.
The employee separation costs reflected reductions in selling, general and administrative staffing levels in the U.S., United Kingdom, Germany, France and Singapore and included $0.2 million of non-cash charges associated with the modification of stock options for certain terminated employees as well as $1.3 million for additional pension charges relating to the terminated employees. (The additional pension charge is reflected in the Company’s accrued pension liability in the consolidated balance sheet.) As of December 31, 2002, all impacted employees had been terminated and the Company currently expects that the remaining reserve of $0.1 million will be paid out by March 2003.
The $11.1 million charge related the write-off of certain property and equipment located in Phoenix, Arizona that would no longer be utilized as a result of the Company’s restructuring activities.
June 2001 Restructuring Program
In June 2001, the Company recorded charges totaling $95.5 million for costs associated with its worldwide restructuring programs. These programs were in response to rapidly changing economic circumstances requiring the Company to rationalize its manufacturing and distribution operations to meet declining
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The planned discontinuation of manufacturing activities triggered an impairment analysis to the carrying value of the related assets and resulted in the Company recording asset impairment charges totaling $42.2 million. This charge included $31.6 million related to the Guadalajara manufacturing facility, $4.2 million related to the Aizu, Japan 4-inch wafer fabrication line and $2.2 million related to the Seremban assembly and test facility. The Company measured the amount of each asset impairment by comparing the carrying value of the respective assets to the related estimated fair value. The Company estimated future net cash flows for the period of continuing manufacturing activities (June 2002 for Guadalajara and Aizu, December 31, 2001 for Seremban) for each group of assets using price, volume, cost, capital and salvage value assumptions that management considered to be reasonable in the circumstances. The impairment charges were recorded for the amount by which the carrying value of the respective assets exceeded their estimated fair value. The related assets have been sold to third parties at amounts that approximated their estimated fair values, were transferred to other manufacturing facilities at their previously existing carrying values or are currently held for sale. The only remaining assets to be disposed of under this restructuring program are the land and building at the Guadalajara manufacturing facility. The Company is currently evaluating offers for these assets and, based on these offers, expects that the carrying value will be fully realized. The charge also included $4.2 million for the write-off of assets that will no longer be used by the Company as a result of this restructuring program.
The June 2001 charge also included $10.0 million to cover certain exit costs relating facility closure and contract terminations. This charge included $2.8 for expected facility clean up activities, $1.0 million for equipment disposal fees, $2.0 million for equipment purchase cancellations and $4.2 million for other contract cancellations. As discussed previously, the Company recorded an additional $1.0 million in exit costs and $0.6 million in employee separation costs relating to the Guadalajara manufacturing facility during the second quarter of 2002 as a result of its reevaluation of remaining costs to be incurred with respect to the closure of that facility. As previously mentioned, the Company currently expects the remaining exit activities will be completed by March 31, 2003. As of December 31, 2002 the remaining liability relating to this restructuring program was $2.8 million.
March 2001 Restructuring Program
In March 2001, the Company recorded charges totaling $34.2 million for costs associated with its worldwide restructuring programs. The charges included $31.3 million to cover employee separation costs associated with the termination of 1,100 employees as well as $2.9 million for equipment write-offs that were charged directly against the related assets.
The employee separation costs reflected further reductions in manufacturing, selling, general and administrative staffing levels in the U.S., Mexico, the Philippines and Malaysia as well as non-cash charges associated with the modification of stock options for certain terminated employees. All impacted employees had been terminated and the Company released the remaining $0.1 million reserve to income during the second quarter of 2002.
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The March 2001 charge included property and equipment write downs of $2.9 million relating to assets at the previously mentioned locations that could not be utilized or transferred to other locations.
Also in March 2001, the Company recorded a $3.8 million charge to cover costs associated with the separation of one of the Company’s executive officers. In connection with the separation, the Company paid the former executive officer $1.9 million. In addition, the Company agreed to accelerate the vesting of the remaining stock options to purchase common stock and to allow such options to remain exercisable for the remainder of their ten-year term. The Company recorded a non-cash charge of $1.9 million related to modification of these options with an offsetting credit to additional paid-in capital.
2000 Restructuring Program
During 2000, the Company recorded a $5.6 million charge to cover costs associated with a restructuring program at its manufacturing facility in Guadalajara, Mexico. The charge included $3.2 million to cover employee separation costs associated with the termination of approximately 500 employees and $2.4 million for asset impairments that were charged directly against the related assets. In September 2000, the Company completed its evaluation of the costs to be incurred and released $0.8 million of the remaining reserve for employee separation costs to income. As of December 31, 2001, there was no remaining liability relating to the 2000 restructuring program.
Note 6: Acquisition
On April 3, 2000, the Company acquired all of the outstanding capital stock of Cherry Semiconductor Corporation (“Cherry”) for approximately $253.2 million in cash (including acquisition related costs), which was financed with cash on hand and borrowings of $220.0 million under the Company’s senior bank facilities. Cherry, which was renamed Semiconductor Components Industries of Rhode Island, Inc., designs and manufactures analog and mixed signal integrated circuits for the power management and automotive markets, and had revenues for its fiscal year ended February 29, 2000 of $129.1 million.
The Cherry acquisition was accounted for using the purchase method of accounting and, as a result, the purchase price and related costs were allocated to the estimated fair value of assets acquired and liabilities assumed at the time of the acquisition based on management estimates as follows (in millions):
|
Fair value of tangible net assets
|
$ | 71.3 | ||
|
Developed technology
|
59.3 | |||
|
In-process research and development
|
26.9 | |||
|
Assembled workforce
|
10.0 | |||
|
Excess of purchase price over estimated fair
value of net assets acquired (goodwill)
|
85.7 | |||
| $ | 253.2 | |||
Developed technology is being amortized on a straight-line basis over an estimated useful life of five years. Goodwill was being amortized on a straight-line basis over an estimated useful life of ten years; however, as mentioned previously, such amortization was discontinued January 1, 2002 upon the adoption of SFAS 142. Additionally, assembled workforce was being amortized over an estimated useful life of five years, however assembled workforce does not meet the requirements for an intangible asset apart from goodwill. Accordingly, upon adoption of SFAS 142, the Company reclassified the unamortized balance of assembled workforce to goodwill and the related amortization was discontinued.
The fair value of acquired in-process research and development was determined using the income approach, which discounts expected future cash flows to present value. Significant assumptions that had to be made in using this approach included revenue and operating margin projections and determination of the applicable discount rate. The fair value of acquired in-process research and development was based on sales forecasts and cost assumptions projected to be achievable by Cherry on a stand-alone basis. Operating margins were based on cost of goods sold and selling, general and administrative expenses as a percentage of revenues. All projected revenue and cost information was based on historical results and trends and did not include any synergies or cost savings that may result from the acquisition. The rate used to discount future projected cash flows resulting from the acquired in-process research and development was 20%, which was derived from a
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At the date of acquisition, in-process research and development consisted of sixty-five projects that had not yet reached technological feasibility and for which no alternative future uses had been identified. Accordingly, the estimated fair value of these projects was expensed as of the acquisition date. Such projects were approximately 70% to 80% complete at the date of the acquisition. The estimated cost to complete these projects at that date was approximately $4.1 million. Of the sixty-five projects in process at the date of acquisition, the Company completed thirty-one projects, abandoned twenty-nine projects and are in the process of completing the remaining five projects, which have an estimated completion cost of $0.5 million. Subsequent to the acquisition date, the Company experienced an industry downturn that required it to scale back research and development activities. Due to the decline in product demand subsequent to the acquisition, 2002 revenues associated with the completed projects were approximately $12.5 million, or 30% of the amount originally forecasted for all acquired in-process research and development projects at the date of acquisition.
Note 7: Balance Sheet Information
Balance sheet information is as follows (in millions):
| December 31, | ||||||||||
| 2002 | 2001 | |||||||||
|
Receivables, net:
|
||||||||||
|
Accounts receivable
|
$ | 123.2 | $ | 144.1 | ||||||
|
Less: Allowance for doubtful accounts
|
(1.8 | ) | (1.9 | ) | ||||||
| $ | 121.4 | $ | 142.2 | |||||||
|
Inventories, net:
|
||||||||||
|
Raw materials
|
$ | 12.3 | $ | 12.1 | ||||||
|
Work in process
|
104.6 | 138.4 | ||||||||
|
Finished goods
|
81.5 | 79.9 | ||||||||
|
Total inventories
|
198.4 | 230.4 | ||||||||
|
Less: Inventory reserves
|
(43.4 | ) | (50.2 | ) | ||||||
| $ | 155.0 | $ | 180.2 | |||||||
|
Property, plant and equipment, net:
|
||||||||||
|
Land
|
$ | 11.7 | $ | 11.4 | ||||||
|
Buildings
|
346.6 | 379.9 | ||||||||
|
Machinery and equipment
|
774.7 | 959.4 | ||||||||
|
Total property, plant and equipment
|
1,133.0 | 1,350.7 | ||||||||
|
Less: Accumulated depreciation
|
(743.5 | ) | (867.9 | ) | ||||||
| $ | 389.5 | $ | 482.8 | |||||||
|
Goodwill, net:
|
||||||||||
|
Goodwill
|
$ | 95.7 | $ | 95.7 | ||||||
|
Less: Accumulated amortization
|
(18.4 | ) | (18.4 | ) | ||||||
| $ | 77.3 | $ | 77.3 | |||||||
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| December 31, | |||||||||
| 2002 | 2001 | ||||||||
|
Intangible asset, net:
|
|||||||||
|
Developed technology
|
$ | 59.3 | $ | 59.3 | |||||
|
Less: Accumulated amortization
|
(32.6 | ) | (20.7 | ) | |||||
| $ | 26.7 | $ | 38.6 | ||||||
|
Other assets:
|
|||||||||
|
Debt issuance costs
|
$ | 33.7 | $ | 35.2 | |||||
|
Other
|
5.0 | 6.5 | |||||||
| $ | 38.7 | $ | 41.7 | ||||||
|
Accrued expenses:
|
|||||||||
|
Accrued payroll
|
$ | 27.5 | $ | 28.2 | |||||
|
Sales related reserves
|
14.1 | 15.0 | |||||||
|
Restructuring reserves
|
19.5 | 19.8 | |||||||
|
Other
|
35.9 | 38.5 | |||||||
| $ | 97.0 | $ | 101.5 | ||||||
|
Other long-term liabilities:
|
|||||||||
|
Accrued retirement benefits
|
$ | 33.7 | $ | 25.0 | |||||
|
Cash flow hedge liability
|
8.2 | 12.5 | |||||||
|
Other
|
1.0 | 10.8 | |||||||
| $ | 42.9 | $ | 48.3 | ||||||
|
Other comprehensive loss:
|
|||||||||
|
Foreign currency translation adjustments
|
$ | (2.0 | ) | $ | (4.3 | ) | |||
|
Additional minimum pension liability
|
(19.6 | ) | (13.8 | ) | |||||
|
Net unrealized losses and adjustments related to
cash flow hedges
|
(12.1 | ) | (14.7 | ) | |||||
|
Unrealized losses on deferred compensation plan
investments
|
(0.6 | ) | — | ||||||
| $ | (34.3 | ) | $ | (32.8 | ) | ||||
Depreciation expense totaled $105.1 million, $122.8 million and $126.3 million for 2002, 2001 and 2000, respectively. Amortization expense related to the developed technology totaled $11.9, $11.6, and $9.1 million in 2002, 2001 and 2000, respectively.
Estimated amortization expense of the intangible asset is as follows:
| Year Ended December 31, | ||||
|
2003
|
$ | 11.9 | ||
|
2004
|
11.9 | |||
|
2005
|
2.9 | |||
| $ | 26.7 | |||
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The activity related to the Company’s allowance for doubtful accounts, inventory reserves, allowance for deferred tax assets and warranty reserves for 2000, 2001 and 2002 follows:
| Balance at | Charged to | Charged to | Balance at | ||||||||||||||||||
| Beginning | Costs and | Other | Deductions/ | End of | |||||||||||||||||
| Description | of Period | Expenses | Accounts | Writeoffs | Period | ||||||||||||||||
|
Allowance for doubtful accounts
|
|||||||||||||||||||||
|
Year ended December 31, 2000
|
$ | 2.0 | $ | 0.8 | $ | 1.4 | (1) | $ | 1.7 | $ | 2.5 | ||||||||||
|
Year ended December 31, 2001
|
$ | 2.5 | $ | 0.5 | $ | — | $ | 1.1 | $ | 1.9 | |||||||||||
|
Year ended December 31, 2002
|
$ | 1.9 | $ | 0.2 | $ | — | $ | 0.3 | $ | 1.8 | |||||||||||
|
Inventory reserves
|
|||||||||||||||||||||
|
Year ended December 31, 2000
|
$ | 28.2 | $ | 44.1 | $ | — | $ | 49.8 | $ | 22.5 | |||||||||||
|
Year ended December 31, 2001
|
$ | 22.5 | $ | 50.9 | $ | — | $ | 23.2 | $ | 50.2 | |||||||||||
|
Year ended December 31, 2002
|
$ | 50.2 | $ | 12.1 | $ | — | $ | 18.9 | $ | 43.4 | |||||||||||
|
Allowance for deferred tax assets
|
|||||||||||||||||||||
|
Year ended December 31, 2000
|
$ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
|
Year ended December 31, 2001
|
$ | — | $ | 366.8 | $ | 83.8 | (2) | $ | — | $ | 450.6 | ||||||||||
|
Year ended December 31, 2002
|
$ | 450.6 | $ | 1.0 | $ | 86.3 | (3) | $ | — | $ | 537.9 | ||||||||||
|
Warranty reserves
|
|||||||||||||||||||||
|
Year ended December 31, 2000
|
$ | 2.1 | $ | 2.4 | $ | — | $ | 1.0 | $ | 3.5 | |||||||||||
|
Year ended December 31, 2001
|
$ | 3.5 | $ | 0.1 | $ | — | $ | 0.6 | $ | 3.0 | |||||||||||
|
Year ended December 31, 2002
|
$ | 3.0 | $ | 0.1 | $ | — | $ | 0.4 | $ | 2.7 | |||||||||||
(1) Represents allowance recorded in connection with the acquisition of Cherry Semiconductor.
| (2) | Represents the valuation allowance related to the 2001 portion of the net operating loss that was not recognized during the year. |
| (3) | Represents the valuation allowance related to the 2002 net operating loss that was not recognized during the year. |
Note 8: Long-Term Debt
Long-term debt consists of the following (dollars in millions):
| December 31, 2002 | December 31, 2001 | ||||||||||||||||||||
| Amount of | Interest | Interest | |||||||||||||||||||
| Facility | Rate | Balance | Rate | Balance | |||||||||||||||||
|
Senior Bank Facilities:
|
|||||||||||||||||||||
|
Tranche A
|
$ | 200.0 | 6.4375 | % | $ | 6.6 | 8.4375 | % | $ | 17.0 | |||||||||||
|
Tranche B
|
325.0 | 6.4375 | % | 209.9 | 8.4375 | % | 312.5 | ||||||||||||||
|
Tranche C
|
350.0 | 6.4375 | % | 226.0 | 8.4375 | % | 336.5 | ||||||||||||||
|
Tranche D
|
200.0 | 6.4375 | % | 134.1 | 8.4375 | % | 197.7 | ||||||||||||||
|
Revolver
|
150.0 | 6.4375 | % | 125.0 | 8.4375 | % | 125.0 | ||||||||||||||
| 701.6 | 988.7 | ||||||||||||||||||||
|
12% Senior Secured Notes due 2008, interest
payable semi-annually, net of debt discount of $8.6
|
291.4 | ||||||||||||||||||||
|
12% Senior Subordinated Notes due 2009, interest
payable semi-annually
|
260.0 | 260.0 | |||||||||||||||||||
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| December 31, 2002 | December 31, 2001 | |||||||||||||||||||
| Amount of | Interest | Interest | ||||||||||||||||||
| Facility | Rate | Balance | Rate | Balance | ||||||||||||||||
|
10% Junior Subordinated Note to Motorola due
2011, interest compounded semi-annually, payable at maturity
|
126.9 | 115.2 | ||||||||||||||||||
|
2.25% Note payable to Japanese bank due 2010
|
23.3 | 21.9 | ||||||||||||||||||
|
Capital lease obligation
|
— | 1.1 | ||||||||||||||||||
| 1,403.2 | 1,386.9 | |||||||||||||||||||
|
Less: Current maturities
|
(9.3 | ) | (12.4 | ) | ||||||||||||||||
| $ | 1,393.9 | $ | 1,374.5 | |||||||||||||||||
| Senior Bank Facilities |
Borrowings under the senior bank facilities, which bear interest at rates selected by the Company based on either LIBOR or an alternative base rate, as defined, plus an interest rate spread, amortize within three to five years. As of December 31, 2002, the senior bank facilities contained a $150.0 million revolving line of credit. Borrowings of $125.0 million and letters of credit totaling $17.1 million were outstanding against the line of credit at December 31, 2002 leaving $7.9 million of availability at that date. As discussed below, $62.5 million of borrowings outstanding under the revolving line of credit were converted to a new Tranche R term loan in February 2003 pursuant to amendments to the senior bank facilities made in connection with the issuance of the Company’s 12% first-lien senior secured notes due 2010 described below (the “First-Lien Notes”.) Additionally, the Company used $180.9 million of the net cash proceeds from the issuance of the First-Lien Notes to prepay a portion of the senior bank facilities, including $25.0 million of which proceeds were used to repay borrowings then outstanding under the revolving line of credit and permanently reduce the commitments thereunder by such amount. As described in Note 12, the Company hedges a portion of the interest rate risk associated with the senior bank facilities.
At June 29, 2001, the Company was not in compliance with the interest expense coverage and leverage ratio requirements under its senior bank facilities. On August 13, 2001, the Company received a waiver in respect to such non-compliance at June 29, 2001 and in respect of any future non-compliance with such covenants through December 31, 2002. In connection with such waiver, the Company amended its senior bank facilities to, among other things, reduce interest expense coverage and leverage ratio requirements through December 31, 2005, add minimum cash and EBITDA level covenants through December 31, 2002, require the Company to obtain $100 million through an equity investment from TPG, increase the required interest rate spreads applicable to outstanding borrowings (“supplemental interest”), and, to revise certain mandatory prepayment provisions contained in the original agreement.
In connection with the issuance of $300 million principal amount of 12% second-lien senior secured notes due 2008 (the “Second-Lien Notes”) described below, the Company amended its senior bank facilities on April 17, 2002 to, among other things, permit the issuance of the Second-Lien Notes, eliminate interest expense coverage and leverage ratio requirements through December 31, 2003 and to reduce the minimum interest expense coverage ratio requirement and increase the maximum leverage ratio requirements for the period from January 1, 2004 through June 30, 2006, extend the minimum cash and EBITDA level covenants through December 31, 2003, permit the redemption of up to 35% of the Second-Lien Notes with net proceeds of any equity offerings on or prior to May 15, 2005, allow certain asset sales and to permit borrowings of up to $100.0 million by or for the benefit of the Company’s Leshan joint venture so long as the related proceeds are used to prepay loans under the senior bank facilities. The Company was in compliance with the various covenants and other requirements contained in its senior bank facilities, as amended, through December 31, 2002.
In connection with the issuance of the First-Lien Notes described below, the Company amended its senior bank facilities effective as of February 14, 2003 to, among other things, permit the issuance of the First-Lien Notes, eliminate the interest expense and leverage coverage ratio requirements, reduce the minimum
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Table of Contents
| Second-Lien Notes |
On May 6, 2002, ON Semiconductor and SCI LLC, (collectively, the “Issuers”) issued $300.0 million principal amount of Second-Lien Notes in a private offering that was exempt from the registration requirements of the federal securities laws. The Second-Lien Notes, which are callable after four years, were issued at 96.902% of par value and generated net proceeds of $278.6 million after such discount and the payment of issuance costs. The net proceeds were used to prepay a portion of the amounts outstanding under the Company’s senior bank facilities. Because the amount outstanding under the senior bank facilities was reduced below $750.0 million, the supplemental interest charges were reduced from 3.0% to 1.0%. The Company has the option to terminate the supplemental interest charges by paying the entire accrued balance of supplemental interest charges on March 31, 2003. Alternatively, the Company can elect to pay 50% of the existing accrued balance at March 31, 2003 and continue accruing supplemental interest charges through June 30, 2003, at which time all remaining supplemental interest is due. Approximately $25.7 million of supplemental interest charges had been accrued as of December 31, 2002. In connection with this prepayment, the Company wrote off $6.5 million of debt issuance costs which is reflected as an extraordinary loss in the Company’s consolidated statement of operations for the year ended December 31, 2002. The Second-Lien Notes accrued interest at the rate of 12% until February 6, 2003, when the related annual interest increased to 13%. The increased interest rate will remain in effect unless on or prior to August 6, 2003 the Company issues $100.0 million of its common stock or certain convertible preferred stock to financial sponsors and uses the net proceeds to prepay additional amounts outstanding under its senior bank facilities or under any other credit facility secured by a first-priority lien and permanently reduces the related loan commitments in an amount equal to the amount prepaid. Interest on Second-Lien Notes is payable semi-annually on May 15 and November 15.
The Second-Lien Notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by the Company’s domestic restricted subsidiaries that are also guarantors under the 12% Senior Subordinated Notes Due 2009 (the “Senior Subordinated Notes”) described below. In addition, the Second-Lien Notes and the related guarantees are secured on a second-priority basis by the capital stock or other equity interests of the Company’s domestic subsidiaries, 65% of the capital stock or other equity interests of the Company’s first-tier foreign subsidiaries and substantially all other assets, in each case that are held by the Company or any of the guarantors, but only to the extent that obligations under its senior bank facilities are secured by a first-priority lien thereon.
The Issuers filed an exchange offer registration statement on October 1, 2002 relating to the Second-Lien Notes pursuant to a registration rights agreement. The registration statement was declared effective by the Securities and Exchange Commission on January 27, 2003, and the exchange offer was consummated on February 28, 2003.
| First-Lien Notes |
On March 3, 2003, the Issuers issued $200.0 million principal amount of First-Lien Notes in a private offering that was exempt from the registration requirements of the federal securities laws. The First-Lien Notes, which are callable after four years, were issued at 95.467% of par value and generated net proceeds of approximately $180.9 million after taking into consideration the discount and the payment of expected issuance costs. The net proceeds were used to prepay a portion of the amounts outstanding under the Company’s senior bank facilities, including $25.0 million relating to the Company’s revolving credit facility. In connection with the prepayment, the Company wrote off $3.5 million of debt issuance costs in the first quarter of 2003.
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Table of Contents
The First-Lien Notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by the Company’s domestic restricted subsidiaries. In addition, the First-Lien Notes and related guarantees are secured on a first-priority basis by the assets that secure the senior bank facilities and they rank equal in right of payment with all of the Company’s and the guarantors’ existing and future senior indebtedness and senior to the Company’s and the guarantors’ existing and future senior subordinated and subordinated indebtedness and effectively junior to all of the liabilities of the Company’s subsidiaries that have not guaranteed such notes.
| Senior Subordinated Notes |
In connection with the Recapitalization described in Note 1, the Company and ON Semiconductor co-issued $400.0 million principal amount of its 12% senior subordinated notes (the “Senior Subordinated Notes”) due 2009. Except as described below, the Senior Subordinated Notes may not be redeemed prior to August 1, 2004. Redemption prices range from 106% of the principal amount if redeemed in 2004 to 100% if redeemed in 2008 or thereafter. The Company was able to redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes prior to August 4, 2002 with the proceeds of a public equity offering at a redemption price of 112% of the amount redeemed. On May 3, 2000, the Company completed its initial public offering (IPO) of its common stock and a portion of the proceeds was used to redeem $140.0 million of the Senior Subordinated Notes.
| Japanese Loan |
In 2000, the Company’s Japanese subsidiary entered into a yen-denominated note agreement with a Japanese bank to finance the expansion of its manufacturing facilities. The loan, which has a balance of $23.3 million at December 31, 2002 (based on the yen-to-dollar exchange rate in effect at that date) and bears interest at an annual rate of 2.25%, requires semi-annual principal and interest payments through September 2010 of approximately $1.9 million (based on the yen-to-dollar exchange rate at December 31, 2002.) The note is unsecured, however, the bank has rights under the agreement to obtain collateral in certain circumstances. In addition, the note is guaranteed by SCI LLC the Company’s primary domestic operating subsidiary.
| Debt Issuance Costs |
In connection with the Recapitalization, the Company incurred $52.6 million in costs relating to the establishment of its senior bank facilities and the issuance of its Senior Subordinated Notes. During 2002, 2001 and 2000, the Company incurred $12.1 million, $5.1 million and $3.2 million, respectively, relating to amendments under its senior bank facilities or additional borrowings. The Company wrote-off $6.5 million and $17.5 million of debt issuance costs in 2002 and 2000, respectively, in connection with the various prepayments as outlined above. Other assets at December 31, 2002 and 2001 includes $33.7 million and $35.2 million, respectively, of unamortized debt issuance costs.
Annual maturities relating to the Company’s long-term debt as of December 31, 2002 are as follows (in millions):
| Actual Maturities | |||||
|
2003
|
9.3 | ||||
|
2004
|
11.8 | ||||
|
2005
|
236.9 | ||||
|
2006
|
280.9 | ||||
|
2007
|
176.8 | ||||
|
Thereafter
|
687.5 | ||||
|
Total
|
$ | 1,403.2 | |||
Note 9: Note Receivable from Affiliates
In connection with the Recapitalization, the Company loaned certain affiliates $83.0 million to refinance third-party non-recourse loans. During 2000 and 2001, the Company loaned these affiliates an additional $43.1 million and $5.0 million, respectively, to finance facility expansion. Such loans totaled $130.6 and $131.1
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Table of Contents
| December 31, | ||||||||||||
| Company Name | Country | 2002 | 2001 | |||||||||
|
Tesla Sezam a.s.
|
Czech Republic | $ | 54.8 | $ | 54.8 | |||||||
|
Terolsil a.s.
|
Czech Republic | 12.5 | 13.0 | |||||||||
|
Leshan-Phoenix Semiconductor Company Ltd.
|
China | 63.3 | 63.3 | |||||||||
| $ | 130.6 | $ | 131.1 | |||||||||
The loans outstanding to Leshan-Phoenix Semiconductor Company Ltd were renegotiated during the third quarter of 2002 to reduce the interest rate from 7.0% to 3.5% per annum to better align the interest rate with market rates for similar instruments in China.
Note 10: Income Taxes
Geographic sources of income (loss) before income taxes, extraordinary loss and cumulative effect of accounting change are as follows (in millions):
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
|
United States
|
$ | (227.9 | ) | $ | (196.6 | ) | $ | 63.3 | ||||
|
Foreign
|
97.3 | (176.9 | ) | 67.7 | ||||||||
| $ | (130.6 | ) | $ | (373.5 | ) | $ | 131.0 | |||||
The provision for income taxes is as follows (in millions):
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
|
Current
|
|||||||||||||
|
Federal
|
$ | — | $ | (19.5 | ) | $ | 37.1 | ||||||
|
State and local
|
0.1 | 0.1 | 4.6 | ||||||||||
|
Foreign
|
3.9 | 5.6 | 15.4 | ||||||||||
| 4.0 | (13.8 | ) | 57.1 | ||||||||||
|
Deferred
|
|||||||||||||
|
Federal
|
— | 315.8 | (8.7 | ) | |||||||||
|
State and local
|
— | 39.5 | (1.3 | ) | |||||||||
|
Foreign
|
3.8 | 1.4 | (0.6 | ) | |||||||||
| 3.8 | 356.7 | (10.6 | ) | ||||||||||
| $ | 7.8 | $ | 342.9 | $ | 46.5 | ||||||||
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A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
|
U.S. federal statutory rate
|
(35.0 | )% | (35.0 | )% | 35.0 | % | |||||||
|
Increase (decrease) resulting from:
|
|||||||||||||
|
State and local taxes, net of federal tax benefit
|
(8.9 | ) | (3.5 | ) | 3.0 | ||||||||
|
Foreign withholding taxes
|
1.3 | 1.5 | 2.2 | ||||||||||
|
Foreign rate differential
|
(22.1 | ) | 11.0 | (4.7 | ) | ||||||||
|
Change in valuation allowance
|
68.5 | 117.6 | — | ||||||||||
|
Other
|
2.1 | 0.2 | — | ||||||||||
| 5.9 | % | 91.8 | % | 35.5 | % | ||||||||
Deferred tax assets are as follows (in millions):
| Year Ended December 31, | |||||||||
| 2002 | 2001 | ||||||||
|
Tax-deductible goodwill
|
$ | 235.2 | $ | 255.4 | |||||
|
Reserves and accruals
|
24.2 | 31.7 | |||||||
|
Inventories
|
14.8 | 29.3 | |||||||
|
Property, plant and equipment
|
14.9 | 28.3 | |||||||
|
Net operating loss and tax credit carryforwards
|
234.8 | 94.2 | |||||||
|
Other
|
18.2 | 19.6 | |||||||
|
Gross deferred tax assets
|
542.1 | 458.5 | |||||||
|
Valuation allowance
|
(537.9 | ) | (450.6 | ) | |||||
|
Net deferred tax asset
|
$ | 4.2 | $ | 7.9 | |||||
A valuation allowance has been recorded against the Company’s deferred tax assets, with the exception of deferred tax assets at certain foreign subsidiaries, as management believes it is more likely than not that these assets will not be realized.
As of December 31, 2002, the Company’s federal, state, and foreign net operating loss carryforwards were $540.1 million, $606.9 million, and $44.9 million, respectively. If not utilized, these net operating losses will expire in varying amounts from 2006 through 2023. The Company’s ability to utilize its federal net operating loss carryforwards may be limited in the future if the Company experiences an ownership change as defined by the Internal Revenue Code.
Income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries (approximately $50.9 million at December 31, 2002) over which it has sufficient influence to control the distribution of such earnings and has determined that such earnings have been reinvested indefinitely. These earnings could become subject to federal income tax if they are remitted as dividends, if foreign earnings are loaned to any of the Company’s domestic subsidiaries, or if the Company sells its investment in such subsidiaries. The Company estimates that repatriation of these foreign earnings would generate additional foreign withholding taxes of $11.6 million.
Note 11: Employee Benefit Plans
Defined Benefit Plans
In connection with the Recapitalization, the Company established the ON Semiconductor pension plan (the “Plan”) that, after one year of service, covered most U.S. employees who were also formerly employees of Motorola. The Plan’s benefit formula was dependent upon employee’s earnings and years of service. Benefits under the Plan are valued utilizing the projected unit credit cost method. The Company’s policy is to fund its defined benefit plans in accordance with the requirements and regulations of the Internal Revenue Code.
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In November 1999, the Plan was amended so that benefit accruals under the Plan will be discontinued effective December 31, 2004 for those employees whose combined age and years of service (in complete years) equaled or exceeded 65 at August 4, 1999 (the “Grandfathered Employees”). Benefit accruals under the plan for all other employees were discontinued effective December 31, 2000. Upon termination or retirement, employees may elect to receive their benefits in the form of either an annuity contract or a lump-sum distribution. In 2000, the ON Semiconductor Grandfathered Pension Plan (the “Grandfathered Plan”) was established and the assets and accumulated benefits related to the Grandfathered Employees were transferred to the Grandfathered Plan.
Effective April 15, 2001, the Company terminated the Plan in a standard termination, which requires plan assets be sufficient to provide all benefits for participants and beneficiaries of deceased participants. Substantially all accrued benefits under the Plan were distributed to participants by December 31, 2001.
Certain of the Company’s foreign subsidiaries provide retirement plans for substantially all of their employees. Such plans conform to local practice in terms of providing minimum benefits mandated by law, collective agreements or customary practice. Benefits under all foreign pension plans are also valued using the projected unit credit cost method.
The following is a summary of the status of the Company’s various pension plans and the net periodic pension cost (dollars in millions):
| 2002 | 2001 | ||||||||||||||||||||||||
| U.S. | Foreign | U.S. | Foreign | ||||||||||||||||||||||
| Pension | Pension | Pension | Pension | ||||||||||||||||||||||
| Plans | Plans | Total | Plans | Plans | Total | ||||||||||||||||||||
|
Assumptions used to value the Company’s
pension obligations are as follows:
|
|||||||||||||||||||||||||
|
Rate of compensation increase
|
3.00 | % | 3.17 | % | 3.00 | % | 3.77 | % | |||||||||||||||||
|
Discount rate
|
5.00 | % | 4.40 | % | 7.40 | % | 5.08 | % | |||||||||||||||||
|
Benefit obligation, beginning of period
|
$ | 41.5 | $ | 22.3 | $ | 63.8 | $ | 77.4 | $ | 32.8 | $ | 110.2 | |||||||||||||
|
Service cost
|
1.8 | 1.3 | 3.1 | 2.1 | 2.2 | 4.3 | |||||||||||||||||||
|
Interest cost
|
3.0 | 0.8 | 3.8 | 2.4 | 1.6 | 4.0 | |||||||||||||||||||
|
Curtailment gain
|
— | (0.3 | ) | (0.3 | ) | — | (0.2 | ) | (0.2 | ) | |||||||||||||||
|
Actuarial (gain) loss
|
5.3 | 1.2 | 6.5 | 18.0 | (0.5 | ) | 17.5 | ||||||||||||||||||
|
Benefits paid
|
(4.8 | ) | (6.7 | ) | (11.5 | ) | (58.4 | ) | (11.7 | ) | (70.1 | ) | |||||||||||||
|
Translation (gain) loss
|
— | 0.7 | 0.7 | — | (1.9 | ) | (1.9 | ) | |||||||||||||||||
|
Benefit obligation, end of period
|
$ | 46.8 | $ | 19.3 | $ | 66.1 | $ | 41.5 | $ | 22.3 | $ | 63.8 | |||||||||||||
|
Change in Plan Assets:
|
|||||||||||||||||||||||||
|
Fair value, beginning of period
|
$ | 10.1 | $ | 9.1 | $ | 19.2 | $ | 60.5 | $ | 18.1 | $ | 78.6 | |||||||||||||
|
Actual return on plan assets
|
(1.1 | ) | 0.3 | (0.8 | ) | 0.4 | (0.6 | ) | (0.2 | ) | |||||||||||||||
|
Employer contributions
|
13.0 | 1.3 | 14.3 | 7.6 | 4.4 | 12.0 | |||||||||||||||||||
|
Benefits paid
|
(4.8 | ) | (6.7 | ) | (11.5 | ) | (58.4 | ) | (11.7 | ) | (70.1 | ) | |||||||||||||
|
Translation gain (loss)
|
— | — | — | — | (1.1 | ) | (1.1 | ) | |||||||||||||||||
|
Fair value, end of period
|
$ | 17.2 | $ | 4.0 | $ | 21.2 | $ | 10.1 | $ | 9.1 | $ | 19.2 | |||||||||||||
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| 2002 | 2001 | ||||||||||||||||||||||||
| U.S. | Foreign | U.S. | Foreign | ||||||||||||||||||||||
| Pension | Pension | Pension | Pension | ||||||||||||||||||||||
| Plans | Plans | Total | Plans | Plans | Total | ||||||||||||||||||||
|
Balances, end of period:
|
|||||||||||||||||||||||||
|
Pension benefit obligation
|
$ | (46.8 | ) | $ | (19.3 | ) | $ | (66.1 | ) | $ | (41.5 | ) | $ | (22.3 | ) | $ | (63.8 | ) | |||||||
|
Fair value of plan assets
|
17.2 | 4.0 | 21.2 | 10.1 | 9.1 | 19.2 | |||||||||||||||||||
|
Funded status
|
(29.6 | ) | (15.3 | ) | (44.9 | ) | (31.4 | ) | (13.2 | ) | (44.6 | ) | |||||||||||||
|
Unrecognized net actuarial loss (gain)
|
20.0 | 1.5 | 21.5 | 17.3 | (0.2 | ) | 17.1 | ||||||||||||||||||
|
Unrecognized prior service cost
|
0.9 | 1.9 | 2.8 | 1.3 | 2.2 | 3.5 | |||||||||||||||||||
|
Net liability recognized end of period
|
$ | (8.7 | ) | $ | (11.9 | ) | $ | (20.6 | ) | $ | (12.8 | ) | $ | (11.2 | ) | $ | (24.0 | ) | |||||||
|
The net amounts recognized in the consolidated
balance sheet consist of the following:
|
|||||||||||||||||||||||||
|
Accrued expenses
|
$ | (6.4 | ) | $ | (2.0 | ) | $ | (8.4 | ) | $ | (13.0 | ) | $ | (1.3 | ) | $ | (14.3 | ) | |||||||
|
Other long-term liabilities
|
(22.0 | ) | (11.8 | ) | (33.8 | ) | (14.9 | ) | (9.9 | ) | (24.8 | ) | |||||||||||||
|
Intangible asset
|
0.8 | 1.2 | 2.0 | 1.3 | — | 1.3 | |||||||||||||||||||
|
Accumulated other comprehensive income (loss)
|
18.9 | 0.7 | 19.6 | 13.8 | — | 13.8 | |||||||||||||||||||
|
Net liability recognized, end of period
|
$ | (8.7 | ) | $ | (11.9 | ) | $ | (20.6 | ) | $ | (12.8 | ) | $ | (11.2 | ) | $ | (24.0 | ) | |||||||
| 2002 | 2001 | 2000 | |||||||||||||||||||||||||||||||||||
| U.S. | Foreign | U.S. | Foreign | U.S. | Foreign | ||||||||||||||||||||||||||||||||
| Pension | Pension | Pension | Pension | Pension | Pension | ||||||||||||||||||||||||||||||||
| Plans | Plans | Total | Plans | Plans | Total | Plans | Plans | Total | |||||||||||||||||||||||||||||
|
Assumptions used to determine pension costs are
as follows:
|
|||||||||||||||||||||||||||||||||||||
|
Discount rate
|
7.40% | 5.08% | 6.80% | 5.76% | 6.80% | 6.22% | |||||||||||||||||||||||||||||||
|
Expected return on assets
|
8.50% | 3.17% | 8.50% | 7.46% | 8.50% | 5.15% | |||||||||||||||||||||||||||||||
|
Rate of compensation increase
|
3.00% | 3.77% | 3.00% | 3.77% | 5.00% | 4.75% | |||||||||||||||||||||||||||||||
|
Components of net periodic pension cost:
|
|||||||||||||||||||||||||||||||||||||
|
Service cost
|
$ | 1.8 | $ | 1.3 | $ | 3.1 | $ | 2.1 | $ | 2.2 | $ | 4.3 | $ | 4.7 | $ | 2.6 | $ | 7.3 | |||||||||||||||||||
|
Interest cost
|
3.0 | 0.8 | 3.8 | 2.4 | 1.6 | 4.0 | 4.5 | 2.0 | 6.5 | ||||||||||||||||||||||||||||
|
Expected return on assets
|
(1.2 | ) | (0.3 | ) | (1.5 | ) | (1.4 | ) | (1.0 | ) | (2.4 | ) | (5.2 | ) | (1.5 | ) | (6.7 | ) | |||||||||||||||||||
|
Amortization of prior service cost
|
0.1 | 0.3 | 0.4 | 0.2 | 0.4 | 0.6 | 0.2 | 0.6 | 0.8 | ||||||||||||||||||||||||||||
|
Other losses
|
4.9 | — | 4.9 | 0.3 | — | 0.3 | — | — | — | ||||||||||||||||||||||||||||
|
Settlement loss (curtailment gain)
|
0.4 | (0.3 | ) | 0.1 | 9.9 | 2.3 | 12.2 | — | — | — | |||||||||||||||||||||||||||
|
Net periodic pension cost
|
$ | 9.0 | $ | 1.8 | $ | 10.8 | $ | 13.5 | $ | 5.5 | $ | 19.0 | $ | 4.2 | $ | 3.7 | $ | 7.9 | |||||||||||||||||||
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $63.8 million, $56.8 million, and $19.6 million, respectively as of December 31, 2002 and $60.4 million, $54.6 million and $16.3 million, respectively as of December 31, 2001.
The Company recognizes a minimum liability in its financial statements for its underfunded pension plans. The accrued pension liability of $42.2 million and $39.1 million at December 31, 2002 and 2001, respectively includes an additional minimum liability of $21.6 million and $15.1 million, respectively. The additional minimum liability was offset by a $2.0 million intangible asset and a $19.6 increase to stockholders’
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In regards to the Grandfathered Plan, the Company reevaluated its current assumptions in light of the actual returns experienced, current annuity rates and the expected discontinuation of benefits as of December 31, 2004 with the subsequent payment of benefits in 2005. The discount rate used to determine the pension obligation at December 31, 2002 and to determine future expense was lowered to 5.0% from 7.4% in the previous year. In addition, the expected return on plan assets used to determine future expense was lowered to 2.5% from 8.5%, reflecting the Company’s change in investment policy regarding the assets of the Grandfathered Plan. Upon the termination of the Grandfathered Plan, the Company is obligated to ensure that the plan has assets sufficient to pay accrued benefits.
Defined Contribution Plans
The Company has a deferred compensation plan (“the Savings Plan”) for all eligible U.S. employees established under the provisions of Section 401(k) of the Internal Revenue Code. Eligible employees may contribute a percentage of their salary subject to certain limitations. Effective January 1, 2000, the Company began a matching contribution of 100% of the first 4% of employee contributions, and 50% of the next 4% of employee contributions, as defined in the Savings Plan.
The Company recognized $7.1 million of expense relating to matching contributions in 2000. Effective March 1, 2001 the Company amended the Savings Plan to make the matching contribution discretionary. A discretionary matching contribution was offered through April 2001, resulting in $2.2 million of related expense in 2001. Effective January 1, 2002, the Company reinstated a discretionary matching contribution of 100% of the first 3% of employee contributions and, if certain financial goals are achieved, an additional 50% of the next 6% of employee contributions. In 2002 the Company recognized $4.0 of expense relating to matching contributions in 2002.
Certain foreign subsidiaries have defined contribution plans in which eligible employees participate. The Company recognized compensation expense of $0.4 million, $0.6 million and $1.0 million relating to these plans for the years ended 2002, 2001 and 2000, respectively.
Note 12: Financial Instruments
Foreign Currencies
As a multinational business, the Company’s transactions are denominated in a variety of currencies. When appropriate, the Company uses forward foreign currency contracts to reduce its overall exposure to the effects of currency fluctuations on its results of operations and cash flows. The Company’s policy prohibits trading in currencies for which there are no underlying exposures, or entering into trades for any currency to intentionally increase the underlying exposure.
Under the Company’s foreign exchange management program, foreign subsidiaries provide forecasts of their foreign currency exposures. The Company then aggregates the forecasted amounts and enters into foreign currency contracts in order to create an offset to the underlying exposures. Losses or gains on the underlying cash flows or investments offset gains or losses on the financial instruments. The Company primarily hedges existing assets and liabilities and cash flows associated with transactions currently on its balance sheet.
At December 31, 2002 and 2001, the Company had net outstanding foreign exchange contracts with notional amounts of $19.5 million and $33.8 million, respectively. Such contracts were obtained through financial institutions and were scheduled to mature within three months. Management believes that these financial instruments should not subject the Company to increased risks from foreign exchange movements because gains and losses on these contracts, which are included in other current liabilities, should offset losses
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| December 31, | ||||||||
| 2002 | 2001 | |||||||
| Buy (Sell) | Buy (Sell) | |||||||
|
Japanese Yen
|
$ | (16.3 | ) | $ | (31.9 | ) | ||
|
Czech Koruna
|
2.7 | — | ||||||
|
Euro
|
(11.4 | ) | (8.0 | ) | ||||
|
Philippine Peso
|
1.8 | — | ||||||
|
Mexican Peso
|
0.3 | 2.4 | ||||||
|
British Pound
|
5.0 | 6.1 | ||||||
|
Singapore Dollar
|
1.8 | 1.5 | ||||||
|
Swedish Krona
|
1.5 | — | ||||||
|
Taiwan Dollar
|
(4.9 | ) | (3.4 | ) | ||||
|
Other
|
— | (0.5 | ) | |||||
| $ | (19.5 | ) | $ | (33.8 | ) | |||
The Company is exposed to credit-related losses if counterparties to its foreign exchange contracts fail to perform their obligations. At December 31, 2002, the counterparties on the Company’s foreign exchange contracts are two highly rated financial institutions and no credit-related losses are anticipated. Amounts payable or receivable under the contracts are included in other current assets or accrued expenses in the accompanying consolidated balance sheet. For 2002, 2001, and 2000, aggregate foreign currency transaction gains/(losses) total $(0.3) million, $1.2 million and $6.9 million, respectively.
| Interest Rate Agreements |
At December 31, 2002, the Company had two interest rate swaps of $100.0 million and $55.0 million, which were required by its senior bank facilities. The interest rate swaps are floating-to-fixed rate agreements based on LIBOR with quarterly interest rate resets. The $100.0 million swap has a fixed rate of 5.9% and expires in December 2004 while the $55.0 million swap has a fixed rate of 6.8% and expires in September 2003. The notional amounts are used solely as the basis for which the payment streams are calculated and exchanged. The notional amount is not a measure of the exposure to the Company through the use of the swaps. Amounts to be paid or received under the contracts are recorded in either other current assets or accrued expenses in the accompanying consolidated balance sheet and as an adjustment to interest expense.
| Other |
At December 31, 2002, the Company had no outstanding commodity derivatives, currency swaps or options relating to either its debt instruments or investments. The Company does not hedge the value of its equity investments in its subsidiaries or affiliated companies.
| Note 13: | Fair Value of Financial Instruments |
The Company uses the following methods to estimate the fair values of its financial instruments:
| Cash and Cash Equivalents |
The carrying amount approximates fair value due to the short-term maturities of such instruments.
| Notes Receivable from Affiliates |
Due to the related party nature of the notes receivable from affiliates, it was not practicable to estimate their fair values due to the inability to obtain quoted market prices or determine current market rates for similar instruments. At December 31, 2002 and 2001, the carrying value of the notes receivable from affiliates was $130.6 million and $131.1 million, respectively.
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| Long-term Debt |
The fair values of the Company’s long-term borrowings are determined by obtaining quoted market prices if available or market prices for comparable debt instruments.
| Foreign Currency Exchange Contracts |
Forward foreign exchange contracts are valued at current foreign exchange rates for contracts with similar maturities.
| Interest Rate Agreements |
The fair values of the Company’s interest rate swaps represent the amounts at which they could be settled and are estimated by obtaining quotes from brokers.
The carrying amounts and fair values of the Company’s financial instruments at December 31, 2002 and 2001 are as follows (in millions):
| December 31, 2002 | December 31, 2001 | |||||||||||||||
| Carrying | Carrying | |||||||||||||||
| Amount | Fair Value | Amount | Fair Value | |||||||||||||
|
Long-term debt
|
$ | (1,393.9 | ) | $ | (999.9 | ) | $ | (1,374.5 | ) | $ | (1,132.3 | ) | ||||
|
Foreign currency exchange contracts
|
(0.3 | ) | (0.3 | ) | 0.9 | 0.9 | ||||||||||
|
Interest rate agreements
|
(10.5 | ) | (10.5 | ) | (12.2 | ) | (12.2 | ) | ||||||||
| Note 14: | Stock Options |
Certain employees of the Company participate in the ON Semiconductor 1999 Founders Stock Option Plan (“the 1999 Plan”), which is an incentive plan for key employees, directors and consultants. A total of 11.6 million shares of ON Semiconductor’s common stock have been reserved for issuance under the 1999 Plan. The 1999 Plan is administered by the ON Semiconductor Board of Directors or a committee thereof, which is authorized to, among other things, select the key employees, directors and consultants who will receive grants and determine the exercise prices and vesting schedules of the options. Prior to the existence of a public market for ON Semiconductor’s common stock, ON Semiconductor’s Board of Directors determined the fair market value.
Company employees also participate in ON Semiconductor’s 2000 Stock Incentive Plan (“the 2000 Plan”) to provide key employees, directors and consultants with various equity-based incentives as described in the plan document. During 2001, ON Semiconductor stockholders voted to amend the 2000 Plan to increase the number of shares of its common stock issuable thereunder by 3.0 million (for an aggregate of 13.0 million shares at December 31, 2001). The 2000 Plan is administered by the ON Semiconductor Board of Directors or a committee thereof, which is authorized to determine, among other things, the key employees, directors or consultants who will receive awards under the plan, the amount and type of award, exercise prices or performance criteria, if applicable, and vesting schedules.
Generally, the options granted under both plans vest over a period of four years. Under the 1999 Plan, all outstanding options and under the 2000 Plan certain outstanding options vest automatically upon a change of control, as defined, provided the option holder is employed by the Company on the date of the change in control. Under the 2000 Plan, certain other outstanding options vest upon a change of control if the Board of Directors of ON Semiconductor, in its discretion, provides for acceleration of the vesting of said options. Upon the termination of an option holder’s employment, all unvested options will immediately terminate and vested options will generally remain exercisable for a period of 90 days after date of termination (one year in the case of death or disability).
There was an aggregate of 6.3 million, 4.7 million and 6.6 million shares of common stock available for grant under the 1999 Plan and the 2000 Plan at December 31, 2002, 2001 and 2000, respectively.
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Additional information with respect to the activity of the stock option plans as it relates to the employees of the Company is as follows (in millions, except per share data):
| 2002 | 2001 | 2000 | |||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | |||||||||||||||||||||||
| Average | Average | Average | |||||||||||||||||||||||
| Number of | Exercise | Number of | Exercise | Number of | Exercise | ||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | ||||||||||||||||||||
|
Outstanding at beginning of year
|
18.2 | $ | 5.87 | 13.8 | $ | 6.49 | 9.5 | $ | 1.50 | ||||||||||||||||
|
Grants
|
8.0 | 3.00 | 8.4 | 5.26 | 5.4 | 15.09 | |||||||||||||||||||
|
Exercises
|
(0.7 | ) | 1.50 | (0.5 | ) | 1.50 | (0.4 | ) | 1.50 | ||||||||||||||||
|
Cancellations
|
(2.6 | ) | 9.99 | (3.5 | ) | 7.42 | (0.7 | ) | 7.71 | ||||||||||||||||
|
Outstanding at end of year
|
22.9 | $ | 4.55 | 18.2 | $ | 5.87 | 13.8 | $ | 6.49 | ||||||||||||||||
|
Exercisable at end of year
|
7.9 | $ | 4.95 | 4.4 | $ | 4.74 | 2.2 | $ | 3.63 | ||||||||||||||||
|
Weighted average fair value of options granted
during the period
|
$ | 1.83 | $ | 3.25 | $ | 8.67 | |||||||||||||||||||
The following tables summarize options outstanding and options exercisable at December 31, 2002 (shares in millions):
| Outstanding Options | ||||||||||||
| Weighted | Weighted | |||||||||||
| Average | Average | |||||||||||
| Number | Contractual | Exercise | ||||||||||
| Range of Exercise Prices | Shares | Life (in years) | Price | |||||||||
|
$1.25-$1.50
|
6.9 | 7.01 | $ | 1.48 | ||||||||
|
$1.80-$2.71
|
2.1 | 9.84 | 1.95 | |||||||||
|
$3.22-$4.24
|
7.8 | 8.97 | 3.51 | |||||||||
|
$5.50-$9.03
|
3.7 | 8.20 | 6.42 | |||||||||
|
$10.88-$21.38
|
2.4 | 7.38 | 15.84 | |||||||||
|
Totals
|
22.9 | $ | 4.55 | |||||||||
| Exercisable Options | ||||||||||||
| Weighted | Weighted | |||||||||||
| Average | Average | |||||||||||
| Number | Contractual | Exercise | ||||||||||
| Range of Exercise Prices | Shares | Life (in years) | Price | |||||||||
|
$1.25-$1.50
|
5.0 | 6.73 | $ | 1.50 | ||||||||
|
$3.22-$4.24
|
0.4 | 8.54 | 3.86 | |||||||||
|
$5.50-$9.03
|
1.0 | 8.10 | 6.65 | |||||||||
|
$10.88-$21.38
|
1.5 | 7.37 | 15.85 | |||||||||
|
Totals
|
7.9 | $ | 4.95 | |||||||||
These options will expire if not exercised at specific dates through November 2012.
In 2002, the Company recorded charges of $4.1 million related to the modification of option terms for employees terminated under the restructuring plan as well as the separation of an executive officer. These charges are recorded in restructuring and other in the consolidated statement of operations with an offsetting credit to additional paid-in capital. In 2002, the Company also recorded $0.4 million of compensation expense related to stock options issued to consultants and other stock option modifications to certain employees.
In 2001, ON Semiconductor, on behalf of the Company, issued warrants to purchase 1,250,000 shares of common stock to consultants for services rendered during 2001. These warrants, which have an exercise price
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Table of Contents
During 2000, an employee of the Company was granted 80,000 stock appreciation rights under the 2000 Plan with a reference price of $16.00.
In 2000, the Company granted certain consultants options to purchase approximately 91,000 shares of common stock at exercise prices ranging from $1.50 to $16.00 per share. The aggregate estimated fair value of these options of $1.2 million was recognized as general and administrative expense over the term of the respective consulting agreements, approximately $0.5 million in 2001 and $0.7 million in 2000. These grants expire at various dates through June 2003.
The Company’s employees participate in the 2000 Employee Stock Purchase Plan sponsored by ON Semiconductor. Subject to local legal requirements, each of the Company’s full-time employees has the right to elect to have up to 10% of their payroll applied towards the purchase of shares of ON Semiconductor’s common stock at a price equal to 85% of the fair market value of such shares as determined under the plan. Employees are limited to annual purchases of $25,000 under this plan. In addition, during each quarterly offering period, employees may not purchase stock exceeding the lesser of (i) 500 shares, or (ii) the number of shares equal to $6,250 divided by the fair market value of the stock on the first day of the offering period. During 2002, 2001 and 2000, employees purchased approximately 1.0 million, 1.3 million and 1.0 million shares under the plan. During 2001, shareholders voted to amend the 2000 Employee Stock Purchase Plan to increase the number of shares of ON Semiconductor’s common stock issuable thereunder by 4.0 million (for an aggregate of 5.5 million shares).
| Note 15: | Commitments and Contingencies |
| Leases |
The following is a schedule by year of future minimum lease obligations under non-cancelable operating leases as of December 31, 2002 (in millions):
| Year Ending December 31: | ||||
|
2003
|
$ | 9.0 | ||
|
2004
|
4.1 | |||
|
2005
|
2.4 | |||
|
2006
|
1.1 | |||
|
2007
|
0.3 | |||
|
Thereafter
|
— | |||
| $ | 16.9 | |||
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 years ended December 31, 2002, 2001 and 2000 was $11.8 million, $10.5 million and $12.7 million, respectively.
At December 31, 2002, two letters of credit totaling $7.5 million partially secure an operating lease and a service agreement with an information technology vendor. A downgrade in the Company’s debt rating could trigger acceleration of remaining amounts due under these agreements, a portion of which would be satisfied by the letters of credit. The lease expires 2003 while the service agreement expires in 2006. These letters of credit are renewable on a yearly basis until 2005 when they expire.
Other Contingencies
The Company’s manufacturing facility in Phoenix, Arizona is located on property that is a “Superfund” site, a property listed on the National Priorities List and subject to clean-up activities under the Comprehensive Environmental Response, Compensation, and Liability Act. Motorola is actively involved in the cleanup of on-site solvent contaminated soil and groundwater and off-site contaminated groundwater pursuant to
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| Commitments with Affiliates |
Leshan-Phoenix Semiconductor Company Ltd. (“Leshan”), operates a back-end manufacturing facility in Leshan, China. ON Semiconductor owns a majority of the outstanding equity interests of the Leshan joint venture. Pursuant to the joint venture agreement, requests for production capacity are made to the board of directors of Leshan by each shareholder. These requests represent a purchase commitment by the respective shareholder of the Leshan joint venture; however, each shareholder may elect to pay the cost associated with the unused capacity (which is generally equal to the fixed cost of the capacity), in lieu of the commitment. The Company provides forecasted needs to Leshan on a periodic basis, an approximate six-month cycle, which are used to establish pricing over the forecasted period, and, as described above, the Company is responsible for underutilized capacity cost due to variations from our forecasted needs. The Company committed to purchase 85%, 81% and 86% of the total products produced by Leshan in 2002, 2001 and 2000, respectively, and is currently committed to purchase 82% of the product produced by Leshan in 2003. In 2002, 2001 and 2000, respectively, the Company made actual purchases of 76%, 43% and 86% of Leshan’s production and, as a result, incurred $1.5 million and $6.4 million in underutilization charges in 2002 and 2001, respectively.
| Legal Matters |
The Company and ON Semiconductor are involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters, including the matters described in the next paragraph, will have a material adverse effect on the Company or ON Semiconductor’s financial condition, results of operations or cash flows.
During the period July 5, 2001 through July 27, 2001, ON Semiconductor was named as a defendant in three shareholder class action lawsuits that were filed in federal court in New York City against ON Semiconductor and certain of its current and former officers, current directors and the underwriters for its initial public offering. The lawsuits allege violations of the federal securities laws and have been docketed in the U.S. District Court for the Southern District of New York as: Abrams v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6114; Breuer v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6287; and Cohen v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6942. On April 19, 2002, the plaintiffs filed a single consolidated amended complaint that supersedes the individual complaints originally filed. The amended complaint alleges, among other things, that the underwriters of ON Semiconductor’s initial public offering improperly required their customers to pay the underwriters excessive commissions and to agree to buy additional shares of ON Semiconductor’s common stock in the aftermarket as conditions of receiving shares in its initial public offering. The amended complaint further alleges that these supposed practices of the underwriters should have been disclosed in ON Semiconductor’s initial public offering prospectus and registration statement. The amended complaint alleges violations of both the registration and antifraud provisions of the federal securities laws and seeks unspecified damages. We understand that various other plaintiffs have filed substantially similar class action cases against approximately 300 other publicly traded companies and their public offering underwriters in New York City, which along with the cases against ON Semiconductor have all been transferred to a single federal district judge for purposes of coordinated case management. ON Semiconductor believes that the claims against it are without merit and have defended, and intend to continue to defend, the litigation vigorously. The litigation process is inherently uncertain, however, and ON Semiconductor cannot guarantee that the outcome of these claims will be favorable.
Accordingly, on July 15, 2002, together with the other issuer defendants, ON Semiconductor filed a collective motion to dismiss the consolidated, amended complaints against the issuers on various legal grounds common to all or most of the issuer defendants. The underwriters also filed separate motions to dismiss the claims against them. In addition, the parties have stipulated to the voluntary dismissal without prejudice of our individual current and former officers and directors who were named as defendants in our litigation, and they are no longer parties to the lawsuit. On February 19, 2003, the Court issued its ruling on the motions to dismiss filed by the underwriter and issuer defendants. In that ruling the Court granted in part and denied in
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| Note 16: | Related Party Transactions |
The Company agreed to pay TPG an annual management fee of up to $2.0 million. In connection with the Cherry acquisition described in Note 6, the Company paid TPG a $2.0 million advisory fee in-lieu of the annual management fee for 2000. Under the Company’s amended debt agreements, the payment of the annual management fee to TPG in cash has been waived until certain conditions are met and no such payments occurred in 2001 or 2002. Management fees may be paid to TPG with the Company’s common stock or warrants.
In connection with the Recapitalization, Motorola assigned, licensed or sublicensed intellectual property to the Company relating to certain of the Company’s products. Motorola also agreed to continue providing manufacturing and assembly services, to continue using similar services the Company provides to them and to lease real estate to the Company. The manufacturing and assembly services that the Company and Motorola have agreed to continue to provide to each other are at prices intended to approximate each party’s cost of providing the services and are fixed throughout the term of the agreements. 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 $1.0 million in 2003.
Related party activity between the Company and Motorola is as follows (in millions):
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
|
Cash paid for:
|
||||||||||||
|
Purchases of manufacturing services from Motorola
|
$ | 13.8 | $ | 86.1 | $ | 162.3 | ||||||
|
Cost of other services, rent and equipment
purchased from Motorola
|
1.5 | 17.7 | 96.0 | |||||||||
|
Cash received for:
|
||||||||||||
|
Freight sharing agreement with Motorola
|
$ | 21.4 | $ | 21.9 | $ | 23.8 | ||||||
|
Rental of property and equipment to Motorola
|
9.1 | 11.2 | 11.9 | |||||||||
|
Product sales to Motorola
|
98.2 | 92.5 | 215.8 | |||||||||
On April 8, 2002, the Company and Motorola, Inc. reached agreement regarding certain post-closing payments to be made under agreements entered into in connection with the August 1999 Recapitalization. Pursuant to the agreement, Motorola paid the Company $10.6 million during the second quarter of 2002. As a result, the Company recognized a related gain of $12.4 million, which is included in restructuring and other in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2002.
As part of the Recapitalization, Motorola agreed to provide the Company with worldwide freight services through August 4, 2002. This agreement resulted in better prices than the Company could obtain from third parties. The cost increases resulting from the expiration of this agreement, which totaled approximately $11 million in 2002 as compared to 2001, have been factored into our current operating plans.
ON Semiconductor operates two manufacturing facilities in the Czech Republic. The Company purchases the majority of the related products as follows (in millions):
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
|
Purchases of manufacturing services and inventory
|
$ | 84.3 | $ | 60.5 | $ | 77.1 | ||||||
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Note 17: Supplemental Disclosure of Cash Flow Information
The Company’s non-cash financing activities and cash payments for interest and income taxes are as follows (in millions):
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
|
Non-cash financing activities:
|
|||||||||||||
|
Equipment acquired through capital leases
|
$ | — | $ | 3.0 | $ | — | |||||||
|
Cash (received) paid for:
|
|||||||||||||
|
Interest
|
98.9 | 118.1 | 131.2 | ||||||||||
|
Income taxes
|
(0.6 | ) | (1.3 | ) | 53.6 | ||||||||
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ON SEMICONDUCTOR TRADING LTD
CONSOLIDATED FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholder’s equity (deficit) and cash flows present fairly, in all material respects, the financial position of ON Semiconductor Trading LTD and its subsidiaries (an indirect wholly-owned subsidiary of ON Semiconductor Corporation) at December 31, 2002 and 2001, and the results of their operations and their cash flows for the years ended December 31, 2002 and 2001 and for the period from October 27, 2000 through December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by our management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The Company has extensive transactions and relationships with ON Semiconductor Corporation and its affiliates. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.
As described in Note 4 to the consolidated financial statements, the Company changed its method of accounting for sales to distributors effective January 1, 2001.
| /s/ PRICEWATERHOUSECOOPERS LLP | |
|
|
|
| PricewaterhouseCoopers LLP |
Phoenix, Arizona
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ON SEMICONDUCTOR TRADING LTD
CONSOLIDATED BALANCE SHEET
| December 31, | |||||||||
| 2002 | 2001 | ||||||||
| (In millions, except | |||||||||
| share data) | |||||||||
| ASSETS | |||||||||
|
Cash and cash equivalents
|
$ | 30.8 | $ | 33.5 | |||||
|
Receivables, net
|
82.7 | 68.5 | |||||||
|
Inventories, net
|
108.6 | 152.3 | |||||||
|
Other current assets
|
16.3 | 3.9 | |||||||
|
Income taxes receivable
|
3.5 | — | |||||||
|
Due from affiliates
|
— | 96.7 | |||||||
|
Deferred income taxes
|
2.8 | 3.6 | |||||||
|
Total current assets
|
244.7 | 358.5 | |||||||
|
Property, plant and equipment, net
|
8.8 | 15.1 | |||||||
|
Deferred income taxes
|
1.3 | 1.8 | |||||||
|
Other assets
|
— | 0.1 | |||||||
|
Total assets
|
$ | 254.8 | $ | 375.5 | |||||
| LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT) | |||||||||
|
Accounts payable
|
$ | 34.2 | $ | 46.2 | |||||
|
Accrued expenses
|
21.2 | 11.2 | |||||||
|
Due to affiliates
|
76.2 | — | |||||||
|
Income taxes payable
|
— | 0.3 | |||||||
|
Deferred income on sales to distributors
|
52.9 | 61.4 | |||||||
|
Total current liabilities
|
184.5 | 119.1 | |||||||
|
Other long-term liabilities
|
2.0 | 2.4 | |||||||
|
Notes payable to parent
|
160.3 | 367.9 | |||||||
|
Total liabilities
|
346.8 | 489.4 | |||||||
|
Commitments and contingencies (See Note 12)
|
— | — | |||||||
|
Common stock ($1.00 par value, 50,000 shares
authorized, 12,000 shares issued and outstanding)
|
— | — | |||||||
|
Additional paid-in capital
|
40.4 | 40.4 | |||||||
|
Accumulated other comprehensive income
|
0.5 | 0.5 | |||||||
|
Retained earnings (accumulated deficit)
|
(132.9 | ) | (154.8 | ) | |||||
|
Total stockholder’s equity (deficit)
|
(92.0 | ) | (113.9 | ) | |||||
|
Total liabilities and stockholder’s equity
(deficit)
|
$ | 254.8 | $ | 375.5 | |||||
See accompanying notes to consolidated financial statements.
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ON SEMICONDUCTOR TRADING LTD
CONSOLIDATED STATEMENT OF OPERATIONS
| October 27, | ||||||||||||||
| 2000 | ||||||||||||||
| Year Ended | (inception) | |||||||||||||
| December 31, | through | |||||||||||||
| December 31, | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| (In millions) | ||||||||||||||
|
Revenues:
|
||||||||||||||
|
External revenues
|
$ | 690.0 | $ | 744.4 | $ | 202.2 | ||||||||
|
Revenues from affiliates
|
230.3 | 272.9 | 106.3 | |||||||||||
|
Total revenues
|
920.3 | 1,017.3 | 308.5 | |||||||||||
|
Cost of sales:
|
||||||||||||||
|
External cost of sales
|
473.5 | 598.6 | 141.1 | |||||||||||
|
Cost of sales to affiliates
|
288.1 | 341.0 | 95.9 | |||||||||||
|
Total cost of sales
|
761.6 | 939.6 | 237.0 | |||||||||||
|
Gross profit
|
158.7 | 77.7 | 71.5 | |||||||||||
|
Operating expenses:
|
||||||||||||||
|
Research and development
|
55.1 | 72.4 | 2.3 | |||||||||||
|
Selling and marketing
|
24.6 | 28.6 | 6.9 | |||||||||||
|
General and administrative
|
37.7 | 43.3 | 40.8 | |||||||||||
|
Restructuring and other
|
6.0 | 16.0 | — | |||||||||||
|
Total operating expenses
|
123.4 | 160.3 | 50.0 | |||||||||||
|
Operating income (loss)
|
35.3 | (82.6 | ) | 21.5 | ||||||||||
|
Interest expense, net
|
(12.1 | ) | (13.3 | ) | (0.8 | ) | ||||||||
|
Income (loss) before income taxes and
cumulative effect of accounting change
|
23.2 | (95.9 | ) | 20.7 | ||||||||||
|
Income tax benefit (provision)
|
(1.3 | ) | 1.2 | 0.7 | ||||||||||
|
Income (loss) before cumulative effect of
accounting change
|
21.9 | (94.7 | ) | 21.4 | ||||||||||
|
Cumulative effect of accounting change, net of tax
|
— | (81.5 | ) | — | ||||||||||
|
Net income (loss)
|
$ | 21.9 | $ | (176.2 | ) | $ | 21.4 | |||||||
See accompanying notes to consolidated financial statements.
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ON SEMICONDUCTOR TRADING LTD
CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY (DEFICIT)
| Accumulated | ||||||||||||||||||
| Other | Retained | |||||||||||||||||
| Additional | Comprehensive | Earnings | ||||||||||||||||
| Paid-In | Income | (Accumulated | ||||||||||||||||
| Capital | (Loss) | Deficit) | Total | |||||||||||||||
| (In millions) | ||||||||||||||||||
|
Contribution of interests in affiliated companies
from Parent at inception
|
$ | 40.4 | $ | — | $ | — | $ | 40.4 | ||||||||||
|
Comprehensive income:
|
||||||||||||||||||
|
Net income
|
— | — | 21.4 | 21.4 | ||||||||||||||
|
Other comprehensive income:
|
||||||||||||||||||
|
Foreign currency translation adjustment
|
— | 0.6 | — | 0.6 | ||||||||||||||
|
Other comprehensive income
|
— | 0.6 | — | 0.6 | ||||||||||||||
|
Comprehensive income
|
— | — | — | 22.0 | ||||||||||||||
|
Balance at December 31, 2000
|
40.4 | 0.6 | 21.4 | 62.4 | ||||||||||||||
|
Comprehensive loss:
|
||||||||||||||||||
|
Net loss
|
— | — | (176.2 | ) | (176.2 | ) | ||||||||||||
|
Other comprehensive loss:
|
||||||||||||||||||
|
Foreign currency translation adjustment
|
— | (0.1 | ) | — | (0.1 | ) | ||||||||||||
|
Other comprehensive loss
|
— | (0.1 | ) | — | (0.1 | ) | ||||||||||||
|
Comprehensive loss
|
— | — | — | (176.3 | ) | |||||||||||||
|
Balance at December 31, 2001
|
40.4 | 0.5 | (154.8 | ) | (113.9 | ) | ||||||||||||
|
Comprehensive income
|
||||||||||||||||||
|
Net income
|
— | — | 21.9 | 21.9 | ||||||||||||||
|
Comprehensive income
|
— | — | — | 21.9 | ||||||||||||||
|
Balance at December 31, 2002
|
$ | 40.4 | $ | 0.5 | $ | (132.9 | ) | $ | (92.0 | ) | ||||||||
See accompanying notes to consolidated financial statements.
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ON SEMICONDUCTOR TRADING LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
| October 27, 2000 | |||||||||||||||
| (inception) | |||||||||||||||
| Year Ended December 31, | through | ||||||||||||||
| December 31, | |||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||
| (In millions) | |||||||||||||||
|
Cash flows from operating activities:
|
|||||||||||||||
|
Net income (loss)
|
$ | 21.9 | $ | (176.2 | ) | $ | 21.4 | ||||||||
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating
activities:
|
|||||||||||||||
|
Depreciation and amortization
|
4.7 | 7.1 | 0.5 | ||||||||||||
|
Cumulative effect of accounting change
|
— | 81.5 | — | ||||||||||||
|
Provision for excess inventories
|
13.2 | 42.4 | 4.7 | ||||||||||||
|
Non-cash impairment of property, plant and
equipment
|
0.2 | 2.7 | — | ||||||||||||
|
Deferred income taxes
|
1.3 | 1.3 | (3.0 | ) | |||||||||||
|
Other
|
0.9 | (0.9 | ) | — | |||||||||||
|
Changes in assets and liabilities:
|
|||||||||||||||
|
Receivables
|
(14.2 | ) | 78.4 | (12.2 | ) | ||||||||||
|
Inventories
|
30.5 | 17.1 | (4.6 | ) | |||||||||||
|
Other assets
|
(12.3 | ) | 1.1 | (2.6 | ) | ||||||||||
|
Due from affiliates
|
96.7 | (93.7 | ) | — | |||||||||||
|
Accounts payable
|
(12.0 | ) | (15.2 | ) | 6.9 | ||||||||||
|
Accrued expenses
|
10.0 | (44.5 | ) | 9.9 | |||||||||||
|
Due to affiliates
|
76.8 | (71.1 | ) | (20.6 | ) | ||||||||||
|
Income taxes payable
|
(3.8 | ) | (13.4 | ) | 2.5 | ||||||||||
|
Deferred income on sales to distributors
|
(8.5 | ) | (34.3 | ) | — | ||||||||||
|
Other long-term liabilities
|
(0.4 | ) | 0.2 | 0.3 | |||||||||||
|
Net cash provided by (used in) operating
activities
|
205.0 | (217.5 | ) | 3.2 | |||||||||||
|
Cash flows from investing activities:
|
|||||||||||||||
|
Purchases of property, plant and equipment
|
(0.3 | ) | (2.5 | ) | (1.3 | ) | |||||||||
|
Proceeds from sales of property, plant and
equipment
|
0.2 | 0.3 | — | ||||||||||||
|
Net cash used in investing activities
|
(0.1 | ) | (2.2 | ) | (1.3 | ) | |||||||||
|
Cash flows from financing activities:
|
|||||||||||||||
|
Cash received in connection with contribution of
interests in affiliated companies from Parent at inception
|
— | — | 31.9 | ||||||||||||
|
Proceeds from borrowings from Parent
|
206.3 | 515.5 | 58.7 | ||||||||||||
|
Repayment of borrowings from Parent
|
(413.9 | ) | (320.0 | ) | (34.8 | ) | |||||||||
|
Net cash provided by (used in) financing
activities
|
(207.6 | ) | 195.5 | 55.8 | |||||||||||
|
Net increase (decrease) in cash and cash
equivalents
|
(2.7 | ) | (24.2 | ) | 57.7 | ||||||||||
|
Cash and cash equivalents, beginning of period
|
33.5 | 57.7 | — | ||||||||||||
|
Cash and cash equivalents, end of period
|
$ | 30.8 | $ | 33.5 | $ | 57.7 | |||||||||
See accompanying notes to consolidated financial statements.
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Note 1: Background and Basis of Presentation
ON Semiconductor Trading Ltd. (the “Company” or “ON Trading”), located in Hamilton, Bermuda, is a wholly-owned subsidiary of Semiconductor Components Industries, LLC (“SCI LLC” or “Parent”), which is a wholly-owned subsidiary of ON Semiconductor Corporation (“ON Semiconductor”). ON Trading is responsible for selling ON Semiconductor’s products outside the United States, Mexico, Brazil and Puerto Rico. ON Trading performs certain functions related to sales, procurement, data aggregation, inventory management, research and development, and managing distribution scheduling. In order to function in this capacity, ON Trading entered into a cost sharing agreement with SCI LLC during 2000, which provided ON Trading with the right to use ON Semiconductor’s intellectual property for the purpose of manufacturing, selling, importing and exporting property outside of the United States, Mexico, Brazil and Puerto Rico.
In October 2000, SCI LLC transferred the ownership of certain of its wholly-owned subsidiaries to the Company in exchange for 12,000 shares of the Company’s common stock which represents the entire ownership in the Company. These transactions were accounted for as the combination of companies under common control and have been reflected in the accompanying financial statements on the historical cost basis. The book value of the net assets transferred, which included $31.9 million of cash, was $40.4 million.
Note 2: Liquidity
The Company’s ability to fund working capital, capital expenditures and business development efforts depends on the future operating performance of its ultimate parent, ON Semiconductor. During the year ended December 31, 2002, ON Semiconductor incurred a net loss of $141.9 million compared to a net loss of $831.4 million in 2001 and net income of $71.1 million in 2000. ON Semiconductor’s net results included restructuring and other of $27.7 million, $150.4 million and $4.8 million in 2002, 2001 and 2000, respectively, as well as interest expense of $145.2 million, $133.5 million and $131.2 million, respectively. ON Semiconductor’s operating activities provided cash of $30.6 million in 2002 and $301.3 million in 2000 and used cash of $137.3 million in 2001.
At December 31, 2002, ON Semiconductor had $182.4 million in cash and cash equivalents, net working capital of $195.0 million, term or revolving debt of $1,403.2 million and a stockholders’ deficit of $662.1 million. ON Semiconductor’s long-term debt includes $701.6 million under its senior bank facilities; $291.4 million (net of discount) of its 12% senior secured notes due 2008; $260.0 million of its 12% senior subordinated notes due 2009; $126.9 million under a 10% junior subordinated note payable to Motorola due 2011; and, $23.3 million under a note payable to a Japanese bank due 2010. ON Semiconductor was in compliance with all of the covenants contained in its various debt agreements as of December 31, 2002 and expects to remain in compliance over the next twelve months.
ON Semiconductor’s ability to service its long-term debt, to remain in compliance with the various covenants and restrictions contained in its credit agreements and to fund working capital, capital expenditures and business development efforts will depend on its ability to generate cash from operating activities which is subject to, among other things, its future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may beyond its control.
If ON Semiconductor fails to generate sufficient cash from operations, it may need to raise additional equity or borrow additional funds to achieve its longer term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to ON Semiconductor. Although there can be no assurance, management believes that cash flow from operating activities coupled with existing cash balances will be adequate to fund ON Semiconductor’s operating and capital needs as well as enable it to maintain compliance with its various debt agreements through December 31, 2003. To the extent that results or events differ from ON Semiconductor’s financial projections or business plans, the Company’s liquidity may be adversely impacted.
Note 3: Significant Accounting Policies
| Principles of Consolidation |
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated.
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| Use of Estimates |
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates have been used by management in conjunction with the measurement of valuation allowances relating to receivables and inventories; reserves for customer incentives and restructuring charges; and, the fair values of financial instruments (including derivative financial instruments). Actual results could differ from these estimates.
| Cash Equivalents |
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
| Inventories |
Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis), or market. The Company records provisions for slow moving inventories based upon a regular analysis of inventory levels on hand compared to historical and projected end user demand. Projected end user demand is generally based on sales during the prior twelve months.
These provisions can influence results from operations. For example, when demand for a given part falls, all or a portion of the related inventory is reserved, impacting cost of sales and gross profit. If demand recovers and the parts previously reserved are sold, a higher than normal margin will generally be recognized. General market conditions as well as the Company’s design activities can cause certain of its products to become obsolete.
| Property and Equipment |
Property and equipment are recorded at cost and are depreciated over estimated useful lives of 3-20 years using accelerated and straight-line methods. Expenditures for maintenance and repairs are charged to operations in the year in which the expense is incurred. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations in the period realized.
The Company evaluates the recoverability of the carrying amount of its property, plant and equipment whenever events or changes in circumstances indicate that the related carrying amount of an asset may not be recoverable. Impairment is assessed when the undiscounted expected cash flows derived for an asset are less than its carrying amount. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an impaired asset. The dynamic economic environment in which the Company operates and the resulting assumptions used to estimate future cash flows impact the outcome of these impairment tests.
| Revenue Recognition |
The Company generates revenue from the sales of its semiconductor products to original equipment manufacturers, distributors and electronic manufacturing service providers as well as to affiliated companies. The Company recognizes revenue on sales to original equipment manufacturers and electronic manufacturing service providers when title passes to the customer net of provisions for related sales costs and allowances. Revenues generated from sales to affiliated companies are based on intercompany pricing agreements and recognized when title and risk of loss has passed to the affiliate.
Prior to January 1, 2001, the Company recognized revenue on all distributor sales when title passed to the distributor. Provisions were also recorded at that time for estimated sales returns from distributors as well as for other related sales costs and allowances. Effective January 1, 2001, the Company changed its revenue recognition policy with respect to distributor sales so that the related revenues are now deferred until the
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| Research and Development Costs |
Research and development costs are expensed as incurred.
| Stock-Based Compensation |
The Company accounts for employee stock options relating to the common stock of ON Semiconductor in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and provides the pro forma disclosures required by SFAS No. 123 “Accounting for Stock Based Compensation” (“SFAS No. 123”). The Company measures compensation expense relating to non-employee stock awards in accordance with SFAS No. 123.
Had the Company determined employee stock compensation expense in accordance with SFAS No. 123, the Company’s net income (loss) for 2002, 2001, and 2000 would have been reduced (increased) to the pro forma amounts indicated below (in millions):
| October 27, | ||||||||||||
| 2000 | ||||||||||||
| Year Ended | (inception) | |||||||||||
| December 31, | through | |||||||||||
| December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
|
Net income (loss), as reported
|
$ | 21.9 | $ | (176.2 | ) | $ | 21.4 | |||||
|
Less: Total stock-based employee compensation
expense determined under fair value based method for all awards,
net of related tax effects
|
(2.3 | ) | (1.9 | ) | (1.1 | ) | ||||||
|
Pro forma net income (loss)
|
$ | 19.6 | $ | (178.1 | ) | $ | 20.3 | |||||
The fair value of each option grant has been estimated at the date of grant while the fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan has been estimated at the beginning of each of the respective offering periods, both using a Black-Scholes option-pricing model with the following weighted-average assumptions:
| Employee Stock Options | 2002 | 2001 | 2000 | |||||||||
|
Expected life (in years)
|
5 | 5 | 5 | |||||||||
|
Risk-free interest rate
|
4.15 | % | 4.83 | % | 6.45 | % | ||||||
|
Volatility
|
0.70 | 0.70 | 0.60 | |||||||||
| Employee Stock Purchase Plan | 2002 | 2001 | 2000 | |||||||||
|
Expected life (in years)
|
0.25 | 0.25 | 0.33 | |||||||||
|
Risk-free interest rate
|
1.71 | % | 4.26 | % | 6.20 | % | ||||||
|
Volatility
|
0.70 | 0.70 | 0.60 | |||||||||
The weighted-average estimated fair value of employee stock options granted during 2002, 2001 and 2000 was $1.93, $3.23 and $9.67 per share, respectively. The weighted-average estimated fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan during 2002, 2001 and 2000 was $0.62, $1.24 and $3.82, respectively.
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| Income Taxes |
The Company is based in Bermuda, which does not levy taxes on income. Income taxes in the accompanying consolidated financial statements relate to the Company’s wholly-owned subsidiaries operating outside of Bermuda.
Income taxes are accounted for using the asset and liability method and are determined on a separate return basis. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the related benefits will not be realized.
In determining the amount of the valuation allowance, estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction are considered. If all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if the Company will ultimately be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be released to income as a credit to income tax expense. In the fourth quarter of 2001, a valuation allowance was established for the majority of the Company’s deferred tax assets. Additionally, throughout 2002, no incremental deferred tax benefits were recognized. The Company’s ability to utilize its deferred tax assets and the continuing need for a related valuation allowance are monitored on an ongoing basis.
| Foreign Currencies |
Most of the Company’s foreign subsidiaries deal primarily in U.S. dollars and as a result, utilize the dollar as their functional currency. For the translation of financial statements of these subsidiaries, assets and liabilities that are receivable or payable in cash are translated at current exchange rates while inventories and other non-monetary assets are translated at historical rates. Gains and losses resulting from the translation of such financial statements are included in the operating results, as are gains and losses incurred on foreign currency transactions. The Company’s remaining foreign subsidiaries utilize the local currency as their functional currency. The assets and liabilities of these subsidiaries are translated at current exchange rates while revenues and expenses are translated at the average rates in effect for the period. The related translation gains and losses are included in accumulated other comprehensive income (loss) within stockholder’s equity (deficit).
| Defined Benefit Plans |
The Company maintains pension plans covering certain of its employees. For financial reporting purposes, net periodic pension costs are calculated based upon a number of actuarial assumptions, including a discount rate for plan obligations, assumed rate of return on pension plan assets and assumed rate of compensation increase for plan employees. All of these assumptions are based upon management’s judgement, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact the future expense recognition and cash funding requirements of our pension plans.
| Reclassifications |
Certain amounts have been reclassified to conform with the current year presentation.
| Related Party Transactions |
The Company has extensive transactions and relationships with ON Semiconductor and its affiliates which include intercompany pricing agreements, an intellectual property royalty agreement and general and administrative and research and development cost sharing agreements. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.
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| Recent Accounting Pronouncements |
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” Under this standard, asset retirement obligations will be recognized when incurred at their estimated fair value. In addition, the cost of the asset retirement obligation will be capitalized as a part of the assets’ carrying valued and depreciated over the assets’ remaining useful life. The Company will be required to adopt SFAS No. 143 effective January 1, 2003. The Company does not expect the implementation of SFAS No. 143 to have a material effect on its results of operations.
The Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” effective January 1, 2002. SFAS No. 144 requires that all long-lived assets (including discontinued operations) that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company’s adoption of SFAS No. 144 did not impact its financial condition or results of operations.
In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002”. SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and excludes extraordinary item treatment for gains and losses associated with the extinguishment of debt that do not meet the Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” criteria. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB No. 30 for classification as an extraordinary item shall be reclassified. SFAS No. 145 also amends FASB Statement No. 13, “Accounting for Leases” and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company is required to adopt SFAS No. 145 effective January 1, 2003. The Company does not expect the adoption of SFAS 145 to have a material effect on its financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost as defined in EITF No. 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated by the Company after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment to FAS 123.” SFAS No. 148 provides alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in annual and interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for the Company’s fiscal year 2002. The interim disclosure requirements are effective for the first quarter of fiscal year 2003. The Company has no plans to change to the fair value based method of accounting for stock-based employee compensation.
In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 also expands the disclosures required to be made
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In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created to acquired prior to February 1, 2003, the provisions of FIN 46 must be applied to the first interim or annual period beginning after June 15, 2003. The Company does not expect the adoption of FIN 46 to have an impact on its financial condition or results of operations.
Note 4: Accounting Change
Sales are made to distributors under agreements that allow certain rights of return and price protections on products that are not resold by such distributors. Prior to January 1, 2001, the Company recognized revenue on distributor sales when title passed to the distributor. Provisions were also recorded at that time for estimated sales returns from our distributors on these unsold products. Effective January 1, 2001, the Company changed its revenue recognition method on sales to distributors so that such revenues are recognized at the time the distributor sells the Company’s products to the end customer. Title to products sold to distributors typically passes at the time of shipment by the Company so the Company records accounts receivable for the amount of the transaction, reduces its inventory for the products shipped and defers the related margin in the consolidated balance sheet. The Company recognizes the related revenue and margin when the distributor sells the products to the end user. Although payment terms vary, most distributor agreements require payment within 30 days.
Management believes that this accounting change was to a preferable method because it better aligns reported results with, focuses the Company on, and allows investors to better understand end user demand for the products the Company sells through distribution. Additionally, the timing of revenue recognition is no longer influenced by the distributor’s stocking decisions. This revenue recognition policy and manner of presentation is commonly used in the semiconductor industry.
The impact of the accounting change for periods prior to 2001 was a charge of $81.5 million and is reflected as the cumulative effect of change in accounting principle in the Company’s consolidated statement of operations and comprehensive loss for 2001. The accounting change resulted in an increase in revenues of $55.7 million and a reduction in net loss of $29.5 million for the year ended December 31, 2001.
The estimated pro forma effects of the accounting change for the period from October 27, 2000 (inception) through December 31, 2000 are as follows (in millions):
|
As reported:
|
|||||
|
Revenues
|
$ | 308.5 | |||
|
Net income
|
21.4 | ||||
|
Pro forma effects of reflecting the accounting
change applied retroactively:
|
|||||
|
Revenues
|
$ | 300.1 | |||
|
Net income
|
18.3 | ||||
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| Note 5: | Restructuring and Other |
The activity related to the Company’s restructuring reserve is as follows (in millions):
| Reserve | Reserve | Reserve | |||||||||||||||||||||||||||||||||||
| Balance at | 2001 | 2001 | Balance at | 2002 | 2002 | 2002 | Balance at | ||||||||||||||||||||||||||||||
| 12/31/2000 | Charges | Usage | Adjustments | 12/31/2001 | Charges | Usage | Adjustments | 12/31/02 | |||||||||||||||||||||||||||||
| $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||
|
June 2002 Restructuring
|
|||||||||||||||||||||||||||||||||||||
|
Cash employee separation charges
|
— | — | — | — | — | 0.6 | (0.2 | ) | — | 0.4 | |||||||||||||||||||||||||||
|
Non-cash fixed asset write-offs
|
— | — | — | — | — | 0.2 | (0.2 | ) | — | — | |||||||||||||||||||||||||||
|
June 2002 Restructuring reserve balance
|
— | — | 0.4 | ||||||||||||||||||||||||||||||||||
|
March 2002 Restructuring
|
|||||||||||||||||||||||||||||||||||||
|
Cash employee separation charges
|
— | — | — | — | — | 5.3 | (2.7 | ) | 0.3 | 2.9 | |||||||||||||||||||||||||||
|
March 2002 Restructuring reserve balance
|
— | — | 2.9 | ||||||||||||||||||||||||||||||||||
|
December 2001 Restructuring
|
|||||||||||||||||||||||||||||||||||||
|
Cash employee separation charges
|
— | 1.1 | (0.3 | ) | — | 0.8 | — | (0.8 | ) | — | — | ||||||||||||||||||||||||||
|
Non-cash fixed asset write-offs
|
— | 1.3 | (1.3 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
December 2001 Restructuring reserve balance
|
— | 0.8 | — | ||||||||||||||||||||||||||||||||||
|
June 2001 Restructuring
|
|||||||||||||||||||||||||||||||||||||
|
Cash employee separation charges
|
— | 4.8 | (4.7 | ) | (0.1 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
|
Cash exit costs
|
— | 1.3 | — | — | 1.3 | — | (0.9 | ) | (0.4 | ) | — | ||||||||||||||||||||||||||
|
Non-cash fixed asset write-offs
|
— | 1.4 | (1.4 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Non-cash stock compensation and pension charges
|
— | 0.5 | (0.5 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
June 2001 Restructuring reserve balance
|
— | 1.3 | — | ||||||||||||||||||||||||||||||||||
|
March 2001 Restructuring
|
|||||||||||||||||||||||||||||||||||||
|
Cash employee separation charges
|
— | 5.7 | (5.4 | ) | — | 0.3 | — | (0.3 | ) | — | — | ||||||||||||||||||||||||||
|
March 2001 Restructuring reserve balance
|
— | 0.3 | — | ||||||||||||||||||||||||||||||||||
| $ | — | $ | 16.1 | $ | (13.6 | ) | $ | (0.1 | ) | $ | 2.4 | $ | 6.1 | $ | (5.1 | ) | $ | (0.1 | ) | $ | 3.3 | ||||||||||||||||
The following table reconciles the restructuring activity in the tables above to the “Restructuring and other” caption on the Statements of Operations and Comprehensive Loss for the years ended December 31, 2002 and 2001, respectively (in millions):
| Year Ended | |||||
| December 31, 2002 | |||||
|
2002 restructuring charges
|
$ | 6.1 | |||
|
Less: Reserves released during the period
|
(0.1 | ) | |||
|
Restructuring and other
|
$ | 6.0 | |||
| Year Ended | |||||
| December 31, 2001 | |||||
|
2001 restructuring charges
|
$ | 16.1 | |||
|
Less: Reserves released during the period
|
(0.1 | ) | |||
|
Restructuring and other
|
$ | 16.0 | |||
| June 2002 Restructuring Program |
In June 2002, the Company recorded charges totaling $0.8 million for costs associated with its restructuring activities including $0.6 million to cover employee separation costs associated with the
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| March 2002 Restructuring Program |
In March 2002, the Company recorded a $5.3 million charge to cover employee separation costs relating to the termination of 62 employees. Approximately $5.0 million of this charge is attributable to employee terminations resulting from the Company’s decision to relocate its European administrative functions from Toulouse, France to Roznov, Czech Republic and Piestany, Slovakia. The relocation of these functions is currently expected to be completed by June 30, 2003. The remaining $0.3 million relates to reductions in selling, general and administrative functions primarily in the United Kingdom. The Company recorded an additional $0.3 in employee separation costs relating to the relocation of the administrative functions in Toulouse, France during the fourth quarter of 2002 as a result of its reevaluation of remaining costs to be incurred. As of December 31, 2002, 41 employees have been terminated under this program and the Company currently expects that the remaining terminations will be completed by June 30, 2003. As of December 31, 2002 the remaining liability relating to this restructuring was $2.9 million.
| December 2001 Restructuring Program |
In December 2001, the Company recorded charges totaling $2.4 million for costs associated with its worldwide restructuring programs. The charges included $1.1 million to cover employee separation costs associated with the terminations of 5 employees as well as $1.3 million for property and equipment write-offs that were charged directly against the related assets.
The employee separation costs reflected reductions in selling, general and administrative staffing levels. As of December 31, 2002, all impacted employees had been terminated.
The $1.3 million charge related the write-off of certain property and equipment located in France and Slovakia that would no longer be utilized as a result of the Company’s restructuring activities.
| June 2001 Restructuring Program |
In June 2001, the Company recorded charges totaling $8.0 million for costs associated with its worldwide restructuring programs. These programs were in response to rapidly changing economic circumstances requiring the Company to rationalize its operations to meet declining customer demand. The charge included $4.8 million to cover employee separation costs associated with the termination of approximately 175 employees and $0.5 million for additional pension charges related to the terminated employees. (The additional pension charge is reflected in the Company’s accrued pension liability in the consolidated balance sheet.) As of December 31, 2002, all of the employees had been terminated under this restructuring program.
The Company identified certain manufacturing equipment that would no longer be used internally and recorded a charge of $1.4 million to write-off the assets.
The June 2001 charge also included $1.3 million to cover certain exit costs relating to contract terminations. During 2002, the Company recorded a $0.4 adjustment to release reserves associated with the June 2001 restructuring programs due to the Company’s analysis of estimated costs to complete those programs. As of December 31, 2002, all exit activities have been completed.
| March 2001 Restructuring Program |
In March 2001, the Company recorded charges totaling $5.7 million for costs associated with its worldwide restructuring programs. The charges of $5.7 million cover employee separation costs associated with the termination of approximately 80 employees. The employee separation costs reflected reductions in selling, general and administrative staffing. As of December 31, 2002, all of the employees had been terminated under this restructuring program.
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| Note 6: | Balance Sheet Information |
Balance sheet information is as follows (in millions):
| December 31, | ||||||||||
| 2002 | 2001 | |||||||||
|
Receivables, net:
|
||||||||||
|
Accounts receivable
|
$ | 83.3 | $ | 69.2 | ||||||
|
Less: Allowance for doubtful accounts
|
(0.6 | ) | (0.7 | ) | ||||||
| $ | 82.7 | $ | 68.5 | |||||||
|
Inventories, net:
|
||||||||||
|
Raw materials
|
$ | 3.7 | $ | 5.2 | ||||||
|
Work in process
|
78.9 | 131.4 | ||||||||
|
Finished goods
|
67.2 | 59.3 | ||||||||
|
Total inventories
|
149.8 | 195.9 | ||||||||
|
Less: Inventory reserves
|
(41.2 | ) | (43.6 | ) | ||||||
| $ | 108.6 | $ | 152.3 | |||||||
|
Property, plant and equipment, net:
|
||||||||||
|
Buildings
|
$ | 0.6 | $ | 0.8 | ||||||
|
Machinery and equipment
|
31.3 | 41.4 | ||||||||
|
Total property, plant and equipment
|
31.9 | 42.2 | ||||||||
|
Less: Accumulated depreciation
|
(23.1 | ) | (27.1 | ) | ||||||
| $ | 8.8 | $ | 15.1 | |||||||
|
Accrued expenses:
|
||||||||||
|
Accrued payroll
|
$ | 5.9 | $ | 5.5 | ||||||
|
Sales related reserves
|
3.1 | 1.8 | ||||||||
|
Restructuring reserve
|
3.3 | 2.4 | ||||||||
|
Other
|
8.9 | 1.5 | ||||||||
| $ | 21.2 | $ | 11.2 | |||||||
|
Other comprehensive income:
|
||||||||||
|
Foreign currency translation adjustments
|
$ | 0.5 | $ | 0.5 | ||||||
Depreciation expense totaled $4.7 million and $7.1 million for the years ended December 31, 2002 and 2001 and $0.5 million for the period from October 27, 2000 (inception) through December 31, 2000.
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The activity related to the Company’s inventory reserves and warranty reserves for the period from October 27, 2000 (inception) through December 31, 2000 and for the years ended December 31, 2001 and 2002 follows:
| Balance at | Charged to | Charged to | Balance at | ||||||||||||||||||
| Beginning | Costs and | Other | Deductions/ | End of | |||||||||||||||||
| Description | of Period | Expenses | Accounts | Writeoffs | Period | ||||||||||||||||
|
Inventory reserves
|
|||||||||||||||||||||
|
Period from October 27, 2000 (inception) through
December 31, 2000
|
$ | — | $ | 4.7 | $ | 12.6 | (1) | $ | — | $ | 17.3 | ||||||||||
|
Year ended December 31, 2001
|
$ | 17.3 | $ | 42.4 | $ | — | $ | 16.1 | $ | 43.6 | |||||||||||
|
Year ended December 31, 2002
|
$ | 43.6 | $ | 13.2 | $ | — | $ | 15.6 | $ | 41.2 | |||||||||||
|
Warranty reserves
|
|||||||||||||||||||||
|
Period from October 27, 2000 (inception)
through December 31, 2000
|
$ | — | $ | 1.1 | $ | 0.9 | (1) | $ | 0.9 | $ | 1.1 | ||||||||||
|
Year ended December 31, 2001
|
$ | 1.1 | $ | — | $ | — | $ | 0.4 | $ | 0.7 | |||||||||||
|
Year ended December 31, 2002
|
$ | 0.7 | $ | 0.1 | $ | — | $ | 0.1 | $ | 0.7 | |||||||||||
| (1) | Represents reserves recorded at the Company’s inception on October 27, 2000. |
Note 7: Income Taxes
Geographic sources of income (loss) before income taxes and cumulative effect of accounting change are as follows (in millions):
| Year Ended | October 27, 2000 | |||||||||||
| December 31, | (inception) | |||||||||||
| through | ||||||||||||
| 2002 | 2001 | December 31, 2000 | ||||||||||
|
Bermuda
|
$ | 18.4 | $ | (93.3 | ) | $ | 32.3 | |||||
|
Other foreign countries
|
4.8 | (2.6 | ) | (11.6 | ) | |||||||
| $ | 23.2 | $ | (95.9 | ) | $ | 20.7 | ||||||
The provision (benefit) for income taxes for the years ended December 31, 2002 and 2001 and for the period from October 27, 2000 (inception) through December 31, 2000, all of which relates to operations outside of Bermuda, is as follows (in millions):
| Year Ended | October 27, 2000 | |||||||||||
| December 31, | (inception) | |||||||||||
| through | ||||||||||||
| 2002 | 2001 | December 31, 2000 | ||||||||||
|
Current
|
$ | (0.2 | ) | $ | (2.1 | ) | $ | 2.9 | ||||
|
Deferred
|
1.5 | 0.9 | (3.6 | ) | ||||||||
| $ | 1.3 | $ | (1.2 | ) | $ | (0.7 | ) | |||||
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A reconciliation of the Bermuda federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| Year Ended | October 27, 2000 | ||||||||||||
| December 31, | (inception) | ||||||||||||
| through | |||||||||||||
| 2002 | 2001 | December 31, 2000 | |||||||||||
|
Bermuda federal statutory rate
|
— | % | — | % | — | % | |||||||
|
Increase (decrease) resulting from:
|
|||||||||||||
|
Foreign rate differential
|
(5.0 | ) | (2.0 | ) | (3.4 | ) | |||||||
|
Change in valuation allowance
|
10.6 | 0.7 | — | ||||||||||
| 5.6 | % | (1.3 | )% | (3.4 | )% | ||||||||
Deferred tax assets are as follows (in millions):
| December 31, | ||||||||
| 2002 | 2001 | |||||||
|
Tax-deductible goodwill
|
$ | 1.3 | $ | 1.7 | ||||
|
Reserves and accruals
|
1.5 | 1.9 | ||||||
|
Inventories
|
0.1 | 0.1 | ||||||
|
Net operating loss and tax credit carryforwards
|
4.2 | 2.3 | ||||||
|
Other
|
0.1 | — | ||||||
| 7.2 | 6.0 | |||||||
|
Valuation allowance
|
(3.1 | ) | (0.6 | ) | ||||
|
Net deferred tax asset
|
$ | 4.1 | $ | 5.4 | ||||
A valuation allowance has been recorded against the portion of the Company’s deferred tax assets that management believes is more likely than not that the related tax benefits will not be realized.
As of December 31, 2002 and 2001, the Company’s foreign net operating loss carryforwards were $13.0 million and $9.0 million, respectively. If not utilized, these net operating losses will expire in varying amounts through 2007.
Income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries (approximately $68.5 million at December 31, 2002) over which it has sufficient influence to control the distribution of such earnings and has determined that such earnings have been reinvested indefinitely. These earnings could become subject to additional tax if they are remitted as dividends, if foreign earnings are loaned to any of the Company’s subsidiaries, or it the Company sells its investment in such subsidiaries. The Company estimates that repatriation of these foreign earnings would generate additional foreign withholding taxes of $5.1 million.
Note 8: Related Party Transactions
At December 31, 2002 and 2001, the total aggregate amount outstanding under various loan agreements between the Company and its Parent was $160.3 million and $367.9 million, respectively. The loan agreements expire on December 31, 2004, bear interest at a weighted average rate of 4.97% and are unsecured.
The Company consigns inventory to affiliates to perform all semiconductor manufacturing activities. The Company is charged for these activities based on intercompany pricing agreements with the respective affiliates and records the related costs in inventory. Finished goods are either sold to third-party customers outside the United States or to affiliates. Sales to affiliates are also based on intercompany transfer pricing agreements.
SCI LLC also incurs certain general and administrative and research and development costs that directly benefit the Company. General and administrative expenses that directly benefit the Company are specifically identified by management and charged to the Company by SCI LLC. Research and development costs are
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Related party activity between the Company and its affiliates is as follows (in millions):
| October 27, 2000 | ||||||||||||||
| Year Ended | Year Ended | (inception) | ||||||||||||
| December 31, | December 31, | through | ||||||||||||
| 2002 | 2001 | December 31, 2000 | ||||||||||||
|
Purchases of manufacturing services from
affiliates
|
$ | 719.4 | $ | 814.0 | $ | 447.6 | ||||||||
|
Expense allocations from SCI LLC:
|
||||||||||||||
|
General and administrative expenses
|
||||||||||||||
|
Royalties
|
$ | 10.0 | $ | 10.0 | $ | 8.5 | ||||||||
|
Other
|
22.9 | 22.0 | 3.3 | |||||||||||
| $ | 32.9 | $ | 32.0 | $ | 11.8 | |||||||||
|
Research and development
|
$ | 45.0 | $ | 59.6 | $ | 2.3 | ||||||||
Note 9: Employee Benefit Plans
| Defined Benefit Plans |
Certain of the Company’s subsidiaries provide retirement plans for substantially all of their employees. The plans conform to local practice in terms of providing minimum benefits mandated by law, collective agreements or customary practice. Benefits under these pension plans are valued using the projected unit credit cost method.
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The following is a summary of the status of the pension plans and the net periodic pension cost (dollars in millions):
| December 31, | December 31, | ||||||||
| 2002 | 2001 | ||||||||
|
Assumptions used to value the Company’s
pension obligations are as follows:
|
|||||||||
|
Rate of compensation increase
|
3.00 | % | 3.00 | % | |||||
|
Discount rate
|
5.50 | % | 5.50 | % | |||||
|
Change in Benefit Obligation:
|
|||||||||
|
Benefit obligation, beginning of period
|
$ | 2.4 | $ | 2.6 | |||||
|
Service cost
|
0.1 | 0.2 | |||||||
|
Interest cost
|
0.1 | 0.1 | |||||||
|
Curtailment gain
|
(0.3 | ) | — | ||||||
|
Actuarial (gain) loss
|
0.3 | (0.4 | ) | ||||||
|
Translation (gain) loss
|
0.4 | (0.1 | ) | ||||||
|
Benefit obligation, end of period
|
$ | 3.0 | $ | 2.4 | |||||
|
Change in Plan Assets:
|
|||||||||
|
Fair value, beginning of period
|
$ | 0.4 | $ | 0.3 | |||||
|
Actual return on plan assets
|
0.1 | 0.1 | |||||||
|
Fair value, end of period
|
$ | 0.5 | $ | 0.4 | |||||
|
Balances, end of period:
|
|||||||||
|
Pension benefit obligation
|
$ | (3.0 | ) | $ | (2.4 | ) | |||
|
Fair value of plan assets
|
0.5 | 0.4 | |||||||
|
Funded status
|
(2.5 | ) | (2.0 | ) | |||||
|
Unrecognized net actuarial gain
|
(0.1 | ) | (0.4 | ) | |||||
|
Unrecognized prior service cost
|
0.4 | 0.5 | |||||||
|
Net liability recognized, net of period
|
$ | (2.2 | ) | $ | (1.9 | ) | |||
|
The net amounts recognized in the consolidated
balance sheet consist of the following:
|
|||||||||
|
Accrued expenses
|
$ | (0.4 | ) | $ | — | ||||
|
Other long-term liabilities
|
(1.8 | ) | (1.9 | ) | |||||
|
Net liability recognized, net of period
|
$ | (2.2 | ) | $ | (1.9 | ) | |||
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| October 27, 2000 | |||||||||||||
| (inception | |||||||||||||
| December 31, | December 31, | through | |||||||||||
| 2002 | 2001 | December 31, 2000 | |||||||||||
|
Assumptions used to determine pension costs are
as follows:
|
|||||||||||||
|
Discount rate
|
5.50 | % | 6.00 | % | 6.00 | % | |||||||
|
Expected return on assets
|
5.75 | % | 6.00 | % | 6.00 | % | |||||||
|
Rate of compensation increase
|
3.00 | % | 3.00 | % | 3.00 | % | |||||||
|
Components of net periodic pension cost:
|
|||||||||||||
|
Service cost
|
$ | 0.1 | $ | 0.2 | $ | — | |||||||
|
Interest cost
|
0.1 | 0.1 | — | ||||||||||
|
Expected return on assets
|
— | — | — | ||||||||||
|
Amortization of prior service cost
|
0.1 | 0.1 | — | ||||||||||
|
Curtailment gain
|
(0.3 | ) | — | — | |||||||||
|
Net periodic pension cost
|
$ | — | $ | 0.4 | $ | — | |||||||
| Defined Contribution Plans |
Certain subsidiaries have defined contribution plans in which eligible employees participate. The Company recognized compensation expense of $0.1 million, $0.3 million and $0.1 million for the years ended December 31, 2002 and 2001 and for the period from October 27, 2000 (inception) through December 31, 2000, respectively, relating to these plans.
Note 10: Stock Options
Certain employees of the Company participate in ON Semiconductor stock option plans.
Generally, the options granted under these plans vest over a period of four years. Upon the termination of an option holder’s employment, all unvested options will immediately terminate and vested options will generally remain exercisable for a period of 90 days after date of termination (one year in the case of death or disability).
Information with respect to the activity of the stock option plans as it relates to the employees of the Company is as follows (in millions, except per share data):
| 2002 | 2001 | 2000 | |||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | |||||||||||||||||||||||
| Average | Average | Average | |||||||||||||||||||||||
| Number of | Exercise | Number of | Exercise | Number of | Exercise | ||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | ||||||||||||||||||||
|
Outstanding at beginning of year
|
2.3 | $ | 6.72 | 1.5 | $ | 7.57 | 1.0 | 1.50 | |||||||||||||||||
|
Grants
|
0.7 | 3.16 | 1.1 | 5.22 | 0.6 | 16.75 | |||||||||||||||||||
|
Exercises
|
(0.1 | ) | 1.50 | (0.1 | ) | 1.50 | (0.1 | ) | 1.50 | ||||||||||||||||
|
Cancellations
|
(0.3 | ) | 9.57 | (0.2 | ) | 6.62 | — | — | |||||||||||||||||
|
Outstanding at end of year
|
2.6 | $ | 5.53 | 2.3 | $ | 6.72 | 1.5 | $ | 7.57 | ||||||||||||||||
|
Exercisable at end of year
|
0.9 | $ | 5.81 | 0.5 | $ | 6.11 | 0.2 | $ | 3.77 | ||||||||||||||||
|
Weighted average fair value of options granted
during the period
|
$ | 1.93 | $ | 3.23 | $ | 9.67 | |||||||||||||||||||
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The following tables summarize options outstanding and options exercisable at December 31, 2002:
| Outstanding Options | ||||||||||||
| Weighted | Weighted | |||||||||||
| Average | Average | |||||||||||
| Number | Contractual | Exercise | ||||||||||
| Range of Exercise Prices | Shares | Life (in years) | Price | |||||||||
|
$1.25-$2.71
|
0.8 | 7.04 | $ | 1.58 | ||||||||
|
$3.22-$6.95
|
1.4 | 8.65 | 4.30 | |||||||||
|
$9.03-$20.25
|
0.4 | 7.42 | 16.41 | |||||||||
|
Totals
|
2.6 | $ | 5.53 | |||||||||
| Exercisable Options | ||||||||||||
| Weighted | Weighted | |||||||||||
| Average | Average | |||||||||||
| Number | Contractual | Exercise | ||||||||||
| Range of Exercise Prices | Shares | Life (in years) | Price | |||||||||
|
$1.25-$2.71
|
0.5 | 6.69 | $ | 1.50 | ||||||||
|
$3.22-$6.95
|
0.2 | 8.37 | 4.89 | |||||||||
|
$9.03-$20.25
|
0.2 | 7.42 | 16.42 | |||||||||
|
Totals
|
0.9 | $ | 5.81 | |||||||||
These options will expire if not exercised at specific dates through November 2012.
Eligible employees also participate in ON Semiconductor’s 2000 Employee Stock Purchase Plan. Subject to local legal requirements, each of the Company’s full-time employees has the right to elect to have up to 10% of their eligible earnings applied towards the purchase of shares of ON Semiconductor common stock at a price equal to 85% of the fair market value of such shares as determined under the plan. During each quarterly offering period, employees may not purchase stock exceeding the lesser of (i) 500 shares, or (ii) the number of shares equal to $6,250 divided by the fair market value of the stock on the first day of the offering period. During 2002, 2001 and 2000, employees purchased approximately 122,000, 188,000 and 104,000 shares under the plan.
| Note 11: | Foreign Currency Exchange Contracts |
The Company’s foreign currency exposures are included in ON Semiconductor’s worldwide foreign currency exposure management program. ON Semiconductor aggregates the forecasted foreign currency exposures for each of its subsidiaries on a monthly basis and enters into forward currency contracts in order to reduce its overall exposure to the effects of currency fluctuations on its results of operations and cash flows. Prior to January 1, 2001, the Company entered into its own foreign currency contracts. The Company’s net foreign currency transaction gains (losses) included in the accompanying consolidated statement of operations for the years ended December 31, 2002 and 2001 and for the period October 27, 2000 (inception) through December 31, 2000 are $2.4 million, $1.3 million and $(0.1) million, respectively.
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Table of Contents
| Note 12: | Commitments and Contingencies |
| Operating Leases |
The following is a schedule by year of future minimum lease obligations under non-cancelable operating leases as of December 31, 2002 (in millions):
|
2003
|
$ | 3.5 | ||
|
2004
|
2.3 | |||
|
2005
|
1.4 | |||
|
2006
|
0.9 | |||
|
2007
|
0.3 | |||
|
Thereafter
|
— | |||
| $ | 8.4 | |||
| Legal Matters |
ON Semiconductor is currently involved in a variety of legal matters that arose in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters will have a material adverse effect on ON Semiconductor’s financial condition, results of operations or cash flows.
| Common Stock Collateral Pledge |
On May 6, 2002, ON Semiconductor and SCI LLC (collectively, the “Issuers”) issued $300 million principal amount of second lien notes in a private offering that was exempt from registration requirements of the U.S. Federal Securities laws. The notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by ON Semiconductor’s domestic restricted subsidiaries that are guarantors under its senior subordinated notes. In addition, the notes and guarantees are secured on a second priority basis by the capital stock or other equity interests of ON Semiconductor’s domestic subsidiaries, 65% of the capital stock or other equity interests of its foreign subsidiaries, which includes the Company and certain of its affiliates, and substantially all other assets, in each case that are held by ON Semiconductor or any of the guarantors, but only to the extent that obligations under its senior bank facilities are secured by a first-priority lien thereon.
On March 3, 2003, the Issuers issued $200.0 million principal amount of first-lien senior secured notes due 2010 (the “First-Lien Notes”) in a private offering that was exempt from registration requirements of the U.S. Federal Securities laws. The obligations under the First-Lien Notes are fully and unconditionally guaranteed on a joint and several basis by each of the domestic subsidiaries of ON Semiconductor Corporation (other than SCI LLC). The First-Lien Notes and guarantees are secured on a first-priority basis the capital stock or other equity interests of ON Semiconductor’s domestic subsidiaries, 65% of the capital stock or other equity interests of its foreign subsidiaries, which includes the Company and certain of its affiliates, and substantially all other assets, in each case that are held by ON Semiconductor or any of the guarantors, but only to the extent that obligations under its senior bank facilities are secured by a first-priority lien thereon.
Note 13: Fair Value of Financial Instruments
The Company uses the following methods to estimate the fair values of its financial instruments:
| Cash and Cash Equivalents |
The carrying amount approximates fair value due to the short-term maturities of such instruments.
| Notes Payable to Parent |
Due to the related party nature of the notes payable to Parent, it was not practicable to estimate their fair values due to the inability to obtain quoted market prices or determine current market rate for similar instruments. At December 31, 2002 and 2001, the carrying value of the notes payable to Parent was $160.3 million and $367.9 million, respectively.
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Table of Contents
| Note 14: | Supplemental Disclosure of Cash Flow Information |
Cash payments for interest and income taxes for the years ended December 31, 2002 and 2001 and for the period from October 27, 2000 (inception) through December 31, 2000 are as follows (in millions):
| 2002 | 2001 | 2000 | |||||||||||
|
Cash (received) paid for:
|
|||||||||||||
|
Interest
|
$ | 14.2 | $ | 13.7 | $ | 0.4 | |||||||
|
Income taxes
|
3.2 | (10.4 | ) | 0.7 | |||||||||
184
Table of Contents
SCG MALAYSIA HOLDINGS SDN. BHD.
CONSOLIDATED FINANCIAL STATEMENTS
185
Table of Contents
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and
Stockholder of SCG Malaysia Holdings Sdn. Bhd.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholder’s equity and cash flows present fairly, in all material respects, the financial position of SCG Malaysia Holdings Sdn. Bhd. and its subsidiaries (an indirect wholly-owned subsidiary of ON Semiconductor Corporation) at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The Company has extensive transactions and relationships with ON Semiconductor Corporation and its affiliates. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.
| /s/ PRICEWATERHOUSECOOPERS LLP | |
|
|
|
| PricewaterhouseCoopers LLP |
Phoenix, Arizona
February 5, 2003, except for
186
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SCG MALAYSIA HOLDINGS SDN. BHD.
CONSOLIDATED BALANCE SHEET
| December 31, | |||||||||
| 2002 | 2001 | ||||||||
| (In millions, except | |||||||||
| share data) | |||||||||
| ASSETS | |||||||||
|
Cash and cash equivalents
|
$ | 10.7 | $ | 1.4 | |||||
|
Receivables, net
|
— | 7.5 | |||||||
|
Inventories, net
|
0.8 | 0.4 | |||||||
|
Other current assets
|
3.5 | 5.2 | |||||||
|
Due from affiliates
|
17.0 | 5.4 | |||||||
|
Income taxes receivable
|
10.4 | 7.1 | |||||||
|
Deferred income taxes
|
0.6 | 1.2 | |||||||
|
Total current assets
|
43.0 | 28.2 | |||||||
|
Property, plant and equipment, net
|
103.1 | 131.2 | |||||||
|
Total assets
|
$ | 146.1 | $ | 159.4 | |||||
| LIABILITIES AND STOCKHOLDER’S EQUITY | |||||||||
|
Accounts payable
|
$ | 6.1 | $ | 17.4 | |||||
|
Accrued expenses
|
1.6 | 3.8 | |||||||
|
Total current liabilities
|
7.7 | 21.2 | |||||||
|
Other long-term liabilities
|
4.4 | 4.1 | |||||||
|
Notes payable to affiliate
|
89.4 | 89.4 | |||||||
|
Deferred income taxes
|
1.6 | 0.7 | |||||||
|
Total liabilities
|
103.1 | 115.4 | |||||||
|
Commitments and contingencies (See Note 10)
|
— | — | |||||||
|
Common stock (200,000,000 authorized, 147,517,167
shares issued and outstanding)
|
38.8 | 38.8 | |||||||
|
Additional paid-in capital
|
11.9 | 10.0 | |||||||
|
Accumulated deficit
|
(7.7 | ) | (4.8 | ) | |||||
|
Total stockholder’s equity
|
43.0 | 44.0 | |||||||
|
Total liabilities and stockholder’s equity
|
$ | 146.1 | $ | 159.4 | |||||
See accompanying notes to consolidated financial statements.
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Table of Contents
SCG MALAYSIA HOLDINGS SDN. BHD.
CONSOLIDATED STATEMENT OF OPERATIONS
| Year Ended December 31, | ||||||||||||||
| 2002 | 2001 | 2000 | ||||||||||||
| (In millions) | ||||||||||||||
|
Sales to affiliates
|
$ | 89.1 | $ | 99.1 | $ | 359.8 | ||||||||
|
Cost of sales
|
78.7 | 86.6 | 330.9 | |||||||||||
|
Gross profit
|
10.4 | 12.5 | 28.9 | |||||||||||
|
Operating expenses:
|
||||||||||||||
|
General and administrative
|
8.0 | 8.8 | 10.3 | |||||||||||
|
Restructuring and other
|
(1.9 | ) | 9.4 | — | ||||||||||
|
Total operating expenses
|
6.1 | 18.2 | 10.3 | |||||||||||
|
Operating income (loss)
|
4.3 | (5.7 | ) | 18.6 | ||||||||||
|
Interest expense, net
|
(8.2 | ) | (8.4 | ) | (10.3 | ) | ||||||||
|
Income (loss) before income taxes
|
(3.9 | ) | (14.1 | ) | 8.3 | |||||||||
|
Income tax benefit
|
1.0 | 3.9 | 6.0 | |||||||||||
|
Net income (loss)
|
$ | (2.9 | ) | $ | (10.2 | ) | $ | 14.3 | ||||||
See accompanying notes to consolidated financial statements.
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Table of Contents
SCG MALAYSIA HOLDINGS SDN. BHD.
CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY
| Retained | |||||||||||||||||||||
| Additional | Earnings | ||||||||||||||||||||
| Common Stock | Common | Paid-In | (Accumulated | ||||||||||||||||||
| (Shares) | Stock | Capital | Deficit) | Total | |||||||||||||||||
| (In millions, except share data) | |||||||||||||||||||||
|
Balance at December 31, 1999
|
147,517,167 | $ | 38.8 | $ | 1.8 | $ | (8.9 | ) | $ | 31.7 | |||||||||||
|
Contributed services by Parent
|
— | 5.4 | — | 5.4 | |||||||||||||||||
|
Comprehensive income:
|
|||||||||||||||||||||
|
Net income
|
— | — | 14.3 | 14.3 | |||||||||||||||||
|
Comprehensive income
|
14.3 | 14.3 | |||||||||||||||||||
|
Balance at December 31, 2000
|
147,517,167 | 38.8 | 7.2 | 5.4 | 51.4 | ||||||||||||||||
|
Contributed services by Parent
|
— | 2.8 | — | 2.8 | |||||||||||||||||
|
Comprehensive income (loss):
|
|||||||||||||||||||||
|
Net loss
|
— | — | (10.2 | ) | (10.2 | ) | |||||||||||||||
|
Comprehensive loss
|
(10.2 | ) | (10.2 | ) | |||||||||||||||||
|
Balance at December 31, 2001
|
147,517,167 | 38.8 | 10.0 | (4.8 | ) | 44.0 | |||||||||||||||
|
Contributed services by Parent
|
— | 1.9 | — | 1.9 | |||||||||||||||||
|
Comprehensive income (loss):
|
|||||||||||||||||||||
|
Net loss
|
— | — | (2.9 | ) | (2.9 | ) | |||||||||||||||
|
Comprehensive loss
|
(2.9 | ) | (2.9 | ) | |||||||||||||||||
|
Balance at December 31, 2002
|
147,517,167 | $ | 38.8 | $ | 11.9 | $ | (7.7 | ) | $ | 43.0 | |||||||||||
See accompanying notes to consolidated financial statements.
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SCG MALAYSIA HOLDINGS SDN. BHD.
CONSOLIDATED STATEMENT OF CASH FLOWS
| Year Ended December 31, | |||||||||||||||
| 2002 | 2001 | 2000 | |||||||||||||
| (In millions) | |||||||||||||||
|
Cash flows from operating activities:
|
|||||||||||||||
|
Net income (loss)
|
$ | (2.9 | ) | $ | (10.2 | ) | $ | 14.3 | |||||||
|
Adjustments to reconcile net income
(loss) to net cash provided by operating activities:
|
|||||||||||||||
|
Depreciation and amortization
|
31.9 | 32.7 | 28.9 | ||||||||||||
|
Non-cash impairment of property, plant and
equipment
|
— | 0.9 | — | ||||||||||||
|
Non-cash support costs provided by Parent
|
1.9 | 2.8 | 5.4 | ||||||||||||
|
Deferred income taxes
|
1.5 | (3.1 | ) | (4.9 | ) | ||||||||||
|
Other
|
0.2 | 5.6 | 0.2 | ||||||||||||
|
Changes in assets and liabilities:
|
|||||||||||||||
|
Receivables
|
7.5 | (7.2 | ) | 1.5 | |||||||||||
|
Inventories
|
(0.4 | ) | 4.0 | 24.6 | |||||||||||
|
Other assets
|
1.7 | 1.4 | (4.7 | ) | |||||||||||
|
Due from affiliates
|
(7.6 | ) | (6.8 | ) | 7.1 | ||||||||||
|
Accounts payable
|
(11.3 | ) | 3.0 | 3.4 | |||||||||||
|
Accrued expenses
|
(2.2 | ) | 0.4 | 1.1 | |||||||||||
|
Income taxes receivable
|
(3.3 | ) | (3.0 | ) | (4.1 | ) | |||||||||
|
Other long-term liabilities
|
0.3 | (1.0 | ) | 1.5 | |||||||||||
|
Net cash provided by operating activities
|
17.3 | 19.5 | 74.3 | ||||||||||||
|
Cash flows from investing activities:
|
|||||||||||||||
|
Purchases of property, plant and equipment
|
(8.1 | ) | (47.4 | ) | (49.5 | ) | |||||||||
|
Proceeds from sales of property, plant and
equipment
|
0.1 | 1.2 | 13.0 | ||||||||||||
|
Net cash used in investing activities
|
(8.0 | ) | (46.2 | ) | (36.5 | ) | |||||||||
|
Cash flows from financing activities:
|
|||||||||||||||
|
Repayment of borrowings to affiliate
|
— | (25.0 | ) | (22.2 | ) | ||||||||||
|
Net cash provided by (used in) financing
activities
|
— | (25.0 | ) | (22.2 | ) | ||||||||||
|
Net increase (decrease) in cash and cash
equivalents
|
9.3 | (51.7 | ) | 15.6 | |||||||||||
|
Cash and cash equivalents, beginning of period
|
1.4 | 53.1 | 37.5 | ||||||||||||
|
Cash and cash equivalents, end of period
|
$ | 10.7 | $ | 1.4 | $ | 53.1 | |||||||||
See accompanying notes to consolidated financial statements.
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Note 1: Background and Basis of Presentation
SCG Malaysia Holdings Sdn. Bhd. (the “Company” or “SCG Malaysia”) is a wholly-owned subsidiary of Semiconductor Components Industries, LLC (“SCI LLC” or “Parent”), which is a wholly-owned subsidiary of ON Semiconductor Corporation (“ON Semiconductor”.) The Company and its wholly-owned subsidiary, SCG Industries Malaysia Sdn. Bhd., are located in Seremban, Malaysia and are primarily engaged in the manufacture of semiconductor products. Formerly known as the Semiconductor Components Group of the Semiconductor Products Sector of Motorola, Inc., ON Semiconductor was a wholly-owned subsidiary of Motorola Inc. (“Motorola”) prior to its August 4, 1999 recapitalization (the “Recapitalization”). ON Semiconductor continues to hold, through direct and indirect subsidiaries, substantially all the assets and operations of the Semiconductor Components Group of Motorola’s Semiconductor Products Sector. The Company was capitalized by the issuance of 147,517,167 shares of common stock to SCI LLC in connection with the Recapitalization.
On August 4, 1999, ON Semiconductor was recapitalized and certain related transactions were effected pursuant to an agreement among ON Semiconductor, the Company, Motorola and affiliates of Texas Pacific Group (“TPG”). As a result of the Recapitalization, an affiliate of TPG owned approximately 91% and Motorola owned approximately 9% of the outstanding common stock of ON Semiconductor. In addition, as part of these transactions, TPG received 1,500 shares and Motorola received 590 shares of ON Semiconductor’s mandatorily redeemable preferred stock with a liquidation value of $209 million plus accrued and unpaid dividends. Motorola also received a $91 million junior subordinated note issued by SCI LLC. Cash payments to Motorola in connection with the Recapitalization were financed through equity investments by affiliates of TPG totaling $337.5 million, borrowings totaling $740.5 million under SCI LLC’s $875 million senior bank facilities and the issuance of $400 million of 12% senior subordinated notes due August 2009. Because TPG’s affiliate did not acquire substantially all of ON Semiconductor’s common stock, the basis of ON Semiconductor’s assets and liabilities for financial reporting purposes was not impacted by the Recapitalization.
Prior to November 1, 2000, the Company produced a portion of its die requirements internally and purchased its remaining requirements from an affiliated company. The Company then converted such die into semiconductor products and then sold such products to an affiliated company. Effective November 1, 2000, the Company sold its existing inventories at a cost of $20.5 million, excluding wafers, to another affiliated company and now performs assembly and test manufacturing services for that affiliated company on a consignment basis.
SCI LLC incurs certain manufacturing and information technology support costs that directly benefit its various manufacturing affiliates including the Company. Although such costs are not recorded in the Company’s local statutory accounts and are not deductible for local tax purposes, they have been allocated to the Company and reflected in the accompanying consolidated financial statements as cost of sales with an offsetting capital contribution from SCI LLC. The allocations utilized in arriving at the amounts reflected in the accompanying consolidated financial statements are based on assumptions that management believes are reasonable in the circumstances; however, such allocations are not necessarily indicative of the costs that would have been incurred by the Company had it operated as a stand-alone entity.
Note 2: Liquidity
The Company’s ability to fund working capital, capital expenditures and business development efforts depends on the future operating performance of its ultimate parent, ON Semiconductor. During the year ended December 31, 2002, ON Semiconductor incurred a net loss of $141.9 million compared to a net loss of $831.4 million in 2001 and net income of $71.1 million in 2000. ON Semiconductor’s net results included restructuring and other of $27.7 million, $150.4 million and $4.8 million in 2002, 2001 and 2000, respectively, as well as interest expense of $145.2 million, $133.5 million and $131.2 million, respectively. ON Semiconductor’s operating activities provided cash of $30.6 million in 2002 and $301.3 million in 2000 and used cash of $137.3 million in 2001.
At December 31, 2002, ON Semiconductor had $182.4 million in cash and cash equivalents, net working capital of $195.0 million, term or revolving debt of $1,403.2 million and a stockholders’ deficit of $662.1 million. ON Semiconductor’s long-term debt includes $701.6 million under its senior bank facilities;
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ON Semiconductor’s ability to service its long-term debt, to remain in compliance with the various covenants and restrictions contained in its credit agreements and to fund working capital, capital expenditures and business development efforts will depend on its ability to generate cash from operating activities which is subject to, among other things, its future operating performance as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond its control.
If ON Semiconductor fails to generate sufficient cash from operations, it may need to raise additional equity or borrow additional funds to achieve its longer term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to ON Semiconductor. Although there can be no assurance, management believes that cash flow from operating activities coupled with existing cash balances will be adequate to fund ON Semiconductor’s operating and capital needs as well as enable it to maintain compliance with its various debt agreements through December 31, 2003. To the extent that results or events differ from ON Semiconductor’s financial projections or business plans, the Company’s liquidity may be adversely impacted.
Note 3: Significant Accounting Policies
| Principles of Consolidation |
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All material intercompany accounts and transactions have been eliminated.
| Use of Estimates |
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates have been used by management in conjunction with the measurement of valuation allowances relating to receivables and inventories; reserves for customer incentives, restructuring charges and pension obligations; and, the fair values of financial instruments (including derivative financial instruments). Actual results could differ from these estimates.
| Cash Equivalents |
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
| Inventories |
Inventories consist of raw materials and are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis), or market.
| Property, Plant and Equipment |
Property, plant and equipment are recorded at cost and are depreciated over useful lives of 30-40 years for buildings and 3-20 years for machinery and equipment using straight-line and accelerated methods. Expenditures for maintenance and repairs are charged to operations in the year in which the expense is incurred. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations in the period realized.
The Company evaluates the recoverability of the carrying amount of its property, plant and equipment whenever events or changes in circumstances indicate that the related carrying amount of an asset may not be recoverable. Impairment is assessed when the undiscounted expected cash flows derived for an asset are less than its carrying amount. Impairment losses are measured as the amount by which the carrying value of an
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| Revenue Recognition |
Prior to November 1, 2000, the Company recognized revenue when semiconductor products were delivered to the affiliated company. These revenues included the cost of raw materials inventory purchased from third-parties and affiliates plus a markup based on an intercompany transfer pricing agreement. Effective November 1, 2000, the Company recognizes revenue when assembly and test services are completed on inventory consigned in from affiliates and the related products are delivered to the affiliated company. Revenues include the cost of wafers purchased from third-parties and the assembly and test services performed plus a markup based on an intercompany transfer pricing agreement.
Stock-Based Compensation
The Company accounts for employee stock options relating to the common stock of ON Semiconductor in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and provides the pro forma disclosures required by SFAS No. 123 “Accounting for Stock Based Compensation” (“SFAS No. 123”). The Company measures compensation expense relating to non-employee stock awards in accordance with SFAS No. 123.
Had the Company determined employee stock compensation expense in accordance with SFAS No. 123, the Company’s net income (loss) for 2002, 2001, and 2000 would have been reduced (increased) to the pro forma amounts indicated below (in millions):
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
|
Net income (loss), as reported
|
$ | (2.9 | ) | $ | (10.2 | ) | $ | 14.3 | ||||
|
Less: Total stock-based employee compensation
expense determined under fair value based method for all awards,
net of related tax effects
|
(0.7 | ) | (0.7 | ) | (0.6 | ) | ||||||
|
Pro forma net income (loss)
|
$ | (3.6 | ) | $ | (10.9 | ) | $ | 13.7 | ||||
The fair value of each option grant has been estimated at the date of grant while the fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan has been estimated at the beginning of each of the respective offering periods, both using a Black-Scholes option-pricing model with the following weighted-average assumptions:
| Employee Stock Options | 2002 | 2001 | 2000 | |||||||||
|
Expected life (in years)
|
5 | 5 | 5 | |||||||||
|
Risk-free interest rate
|
4.15 | % | 4.81 | % | 6.59 | % | ||||||
|
Volatility
|
0.70 | 0.70 | 0.60 | |||||||||
| Employee Stock Purchase Plan | 2002 | 2001 | 2000 | |||||||||
|
Expected life (in years)
|
0.25 | 0.25 | 0.33 | |||||||||
|
Risk-free interest rate
|
1.71 | % | 4.26 | % | 6.20 | % | ||||||
|
Volatility
|
0.70 | 0.70 | 0.60 | |||||||||
The weighted-average estimated fair value of employee stock options granted during 2002, 2001 and 2000 was $1.98, $3.18 and $9.24 per share, respectively. The weighted-average estimated fair value of the discount on the shares sold under the 2000 Employee Stock Purchase Plan during 2002, 2001 and 2000 was $0.59, $1.09 and $3.87, respectively.
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Income Taxes
Income taxes are accounted for using the asset and liability method and are determined on a separate return basis. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the related benefits will not be realized.
Foreign Currencies
The Company utilizes the U.S. dollar as its functional currency. The net effects of gains and losses from foreign currency transactions and from the translation of foreign currency financial statements into U.S. dollars are included in current operations.
Related Party Transactions
The Company has extensive transactions and relationships with ON Semiconductor and its affiliates including intercompany pricing agreements and certain manufacturing and information technology support agreements. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.
Defined Benefit Plans
The Company maintains pension plans covering certain of its employees. For financial reporting purposes, net periodic pension costs are calculated based upon a number of actuarial assumptions, including a discount rate for plan obligations, assumed rate of return on pension plan assets and assumed rate of compensation increase for plan employees. All of these assumptions are based upon management’s judgement, considering all known trends and uncertainties. Actual results that differ from these assumptions would impact the future expense recognition and cash funding requirements of our pension plans.
Reclassifications
Certain amounts have been reclassified to conform with the current year presentation.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” Under this standard, asset retirement obligations will be recognized when incurred at their estimated fair value. In addition, the cost of the asset retirement obligation will be capitalized as a part of the assets’ carrying valued and depreciated over the assets’ remaining useful life. The Company will be required to adopt SFAS No. 143 effective January 1, 2003. The Company does not expect the implementation of SFAS No. 143 to have a material effect on its results of operations.
The Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” effective January 1, 2002. SFAS No. 144 requires that all long-lived assets (including discontinued operations) that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company’s adoption of SFAS No. 144 did not impact its financial condition or results of operations.
In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002”. SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and excludes extraordinary item treatment for gains and losses associated with the extinguish-
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In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost as defined in EITF No. 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated by the Company after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment to FAS 123.” SFAS No. 148 provides alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in annual and interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for the Company’s fiscal year 2002. The interim disclosure requirements are effective for the first quarter of fiscal year 2003. The Company has no plans to change to the fair value based method of accounting for stock-based employee compensation.
In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 also expands the disclosures required to be made by a guarantor about its obligations under certain guarantees that it has issued. Initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified. The disclosure requirements are effective immediately. The Company does not expect the adoption of FIN 45 to have a material effect on its financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created to acquired prior to February 1, 2003, the provisions of FIN 46 must be applied to the first interim or annual period beginning after June 15, 2003. The Company does not expect the adoption of FIN 46 to have an impact on its financial condition or results of operations.
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Note 4: Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31, 2002 and 2001 (in millions):
| December 31, | |||||||||
| 2002 | 2001 | ||||||||
|
Property, plant and equipment, net:
|
|||||||||
|
Buildings
|
$ | 46.6 | $ | 44.8 | |||||
|
Machinery and equipment
|
243.9 | 249.1 | |||||||
|
Total property, plant and equipment
|
290.5 | 293.9 | |||||||
|
Less: Accumulated depreciation
|
(187.4 | ) | (162.7 | ) | |||||
| $ | 103.1 | $ | 131.2 | ||||||
Depreciation expense totaled $31.9 million, $ 32.7 million and $28.9 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Note 5: Notes Payable to Affiliate
In conjunction with the Recapitalization, the Company entered into notes payable with an affiliate totaling $114.4 million. Borrowings under the notes payable bear interest at 9.3% (payable monthly) and are due July 31, 2011. As of December 31, 2002 and 2001, $89.4 million was outstanding under these notes payable.
Cash paid for interest was $8.7 million, $8.4 million and $9.1 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Note 6: Income Taxes
The income tax provision (benefit) is as follows (in millions):
| Year Ended December 31, | ||||||||||||
| 2002 | 2001 | 2000 | ||||||||||
|
Current
|
$ | (2.6 | ) | $ | (0.8 | ) | $ | (1.2 | ) | |||
|
Deferred
|
1.6 | (3.1 | ) | (4.8 | ) | |||||||
| $ | (1.0 | ) | $ | (3.9 | ) | $ | (6.0 | ) | ||||
A reconciliation of the Malaysia statutory income tax rate to the Company’s effective income tax is as follows:
| Year Ended December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
|
Malaysia statutory rate
|
(28.0 | )% | (28.0 | )% | 28.0 | % | |||||||
|
Increase (decrease) resulting from:
|
|||||||||||||
|
Reinvestment allowances
|
— | (9.6 | ) | (123.4 | ) | ||||||||
|
Non-deductible corporate expense allocation
|
— | 3.0 | 18.2 | ||||||||||
|
Income taxes of prior years
|
(187.0 | ) | 0.4 | (21.0 | ) | ||||||||
|
Foreign currency remeasurement
|
72.7 | 6.7 | 20.7 | ||||||||||
|
Other
|
6.2 | (0.2 | ) | 5.2 | |||||||||
| (136.1 | )% | (27.7 | )% | (72.3 | )% | ||||||||
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Deferred tax assets (liabilities) at December 31, 2002 and 2001 are as follows (in millions):
| Year Ended | |||||||||
| December 31, | |||||||||
| 2002 | 2001 | ||||||||
|
Reserves and accruals
|
$ | 0.3 | $ | 0.2 | |||||
|
Property, plant and equipment
|
(2.9 | ) | (0.9 | ) | |||||
|
Other
|
1.6 | 1.2 | |||||||
|
Net deferred tax asset (liability)
|
$ | (1.0 | ) | $ | 0.5 | ||||
Cash paid for income taxes was $0.8 million, $2.2 million and $3.0 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Note 7: Employee Benefit Plans
The Company has a noncontributory pension plan that covers most employees. The benefit formula is dependent upon employee earnings and years of service. The Company’s policy is to fund the plan in accordance with the requirements and regulations of Malaysian labor laws. Benefits under the pension plan are valued using the projected unit credit method.
The following is a summary of the status of the pension plan and the net periodic pension cost (dollars in millions):
| December 31, | |||||||||
| 2002 | 2001 | ||||||||
|
Assumptions used to value the Company’s
pension obligations are as follows:
|
|||||||||
|
Rate of compensation increase
|
5.50 | % | 5.50 | % | |||||
|
Discount rate
|
5.50 | % | 5.50 | % | |||||
|
Change in Benefit Obligation:
|
|||||||||
|
Benefit obligation, beginning of period
|
$ | 4.1 | $ | 5.1 | |||||
|
Service cost
|
0.4 | 0.5 | |||||||
|
Interest cost
|
0.2 | 0.3 | |||||||
|
Curtailment gain
|
— | (0.4 | ) | ||||||
|
Actuarial loss
|
0.2 | 0.1 | |||||||
|
Benefits paid
|
(0.3 | ) | (1.5 | ) | |||||
|
Benefit obligation, end of period
|
$ | 4.6 | $ | 4.1 | |||||
|
Balances, end of period:
|
|||||||||
|
Pension benefit obligation
|
$ | (4.6 | ) | $ | (4.1 | ) | |||
|
Fair value of plan assets
|
— | — | |||||||
|
Funded status
|
(4.6 | ) | (4.1 | ) | |||||
|
Unrecognized net actuarial loss
|
0.2 | — | |||||||
|
Net liability recognized, end of period
|
$ | (4.4 | ) | $ | (4.1 | ) | |||
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| December 31, | |||||||||||||
| 2002 | 2001 | 2000 | |||||||||||
|
Assumptions used to determine pension costs are
as follows:
|
|||||||||||||
|
Discount rate
|
5.50 | % | 7.00 | % | 6.50 | % | |||||||
|
Expected return on assets
|
5.50 | % | 7.00 | % | 6.50 | % | |||||||
|
Rate of compensation increase
|
5.50 | % | 7.00 | % | 6.50 | % | |||||||
|
Components of net periodic pension cost:
|
|||||||||||||
|
Service cost
|
$ | 0.4 | $ | 0.5 | $ | 0.5 | |||||||
|
Interest cost
|
0.2 | 0.3 | 0.3 | ||||||||||
|
Curtailment gain
|
— | (0.3 | ) | — | |||||||||
|
Net periodic pension cost
|
$ | 0.6 | $ | 0.5 | $ | 0.8 | |||||||
Note 8: Foreign Currency Exchange Contracts
The Company’s foreign currency exposures are included in ON Semiconductor’s worldwide foreign currency exposure management program. ON Semiconductor aggregates the forecasted foreign currency exposures for each of its subsidiaries on a monthly basis and enters into forward currency contracts in order to reduce its overall exposure to the effects of currency fluctuations on its results of operations and cash flows. Prior to January 1, 2001, the Company entered into its own foreign currency contracts. The Company’s net foreign currency transaction losses included in the accompanying consolidated statement of operations for the years ended December 31, 2002, 2001 and 2000 are $0.0 million, $0.2 million and $0.6 million, respectively. The following schedule shows the notional amounts of net foreign exchange positions in U.S. dollars as of December 31, 2000 (in millions):
| 2000 | ||||
| Buy | ||||
| (Sell) | ||||
|
Japanese Yen
|
$ | 2.3 | ||
|
Malaysian Ringgit
|
19.4 | |||
|
Euro
|
1.8 | |||
|
Other
|
2.0 | |||
| $ | 25.5 | |||
Note 9: Fair Value of Financial Instruments
The Company uses the following methods to estimate the fair values of its financial instruments:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short-term maturities of such instruments.
Notes Payable to Affiliates
Due to the related party nature of the notes payable to affiliates, it was not practicable to estimate their fair values due to the inability to obtain quoted market prices or determine current market rate for similar instruments. At December 31, 2002 and 2001, the carrying value of the notes payable to affiliates was $89.4 million respectively.
Note 10: Commitments and Contingencies
Legal Matters
ON Semiconductor is currently involved in a variety of legal matters that arose in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters will have a material adverse effect on ON Semiconductor’s financial condition, results of operations or cash flows.
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Common Stock Collateral Pledge
On May 6, 2002, ON Semiconductor and SCI LLC (collectively, the “Issuers”) issued $300 million principal amount of second lien notes in a private offering that was exempt from registration requirements of the Federal Securities laws. The notes are jointly and severally, fully and unconditionally guaranteed on a senior basis by ON Semiconductor’s domestic restricted subsidiaries that are guarantors under its senior subordinated notes. In addition, the notes and guarantees are secured on a second priority basis by the capital stock or other equity interests of ON Semiconductor’s domestic subsidiaries, 65% of the capital stock or other equity interests of its foreign subsidiaries, which includes the Company and certain of its affiliates, and substantially all other assets, in each case that are held by ON Semiconductor or any of the guarantors, but only to the extent that obligations under its senior bank facilities are secured by a first-priority lien thereon.
On March 3, 2003, the Issuers issued $200.0 million principal amount of first-lien senior secured notes due 2010 (the “First-Lien Notes”) in a private offering that was exempt from registration requirements of the Federal Securities laws. The obligations under the First-Lien Notes are fully and unconditionally guaranteed on a joint and several basis by each of the domestic subsidiaries of ON Semiconductor Corporation (other than SCI LLC). The First-Lien Notes and guarantees are secured on a first-priority basis by the capital stock or other equity interests of ON Semiconductor’s domestic subsidiaries, 65% of the capital stock or other equity interests of its foreign subsidiaries, which includes the Company and certain of its affiliates, and substantially all other assets, in each case that are held by ON Semiconductor or any of the guarantors, but only to the extent that obligations under its senior bank facilities are secured by a first-priority lien thereon.
Note 11: Restructuring and Other
The activity related to the Company’s restructuring reserve is as follows (in millions):
| Reserve | Reserve | 2002 | Reserve | ||||||||||||||||||||||||||||||
| Balance at | 2001 | 2001 | Balance at | 2002 | 2002 | Reserves | Balance at | ||||||||||||||||||||||||||
| 12/31/2000 | Charges | Usage | 12/31/2001 | Charges | Usage | Released | 12/31/2002 | ||||||||||||||||||||||||||
| $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
|
June 2001 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separation charges
|
— | 4.4 | (2.7 | ) | 1.7 | — | — | (1.7 | ) | — | |||||||||||||||||||||||
|
Cash exit costs
|
— | 0.6 | — | 0.6 | — | (0.4 | ) | (0.2 | ) | — | |||||||||||||||||||||||
|
Non-cash fixed asset write-offs
|
— | 0.9 | (0.9 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
June 2001 Restructuring reserve balance
|
— | 2.3 | — | ||||||||||||||||||||||||||||||
|
March 2001 Restructuring
|
|||||||||||||||||||||||||||||||||
|
Cash employee separation charges
|
— | 3.5 | (3.5 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
March 2001 Restructuring reserve balance
|
— | — | — | ||||||||||||||||||||||||||||||
| $ | — | $ | 9.4 | $ | (7.1 | ) | $ | 2.3 | $ | — | $ | (0.4 | ) | $ | (1.9 | ) | $ | — | |||||||||||||||
June 2001 Restructuring Program
In June 2001, the Company recorded charges totaling $5.9 million for costs associated with its restructuring programs. These programs were in response to rapidly changing economic circumstances requiring the Company to rationalize its manufacturing operations to meet declining customer demand. The programs included the transfer of certain manufacturing operations at the Company’s facility to other ON Semiconductor-owned facilities or to third party contractors by December 2001. The charge included $4.4 million to cover employee separation costs associated with the termination of approximately 700 employees. All impacted employees had been terminated and the Company released the remaining $1.7 million reserve to income during the second quarter of 2002.
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The planned discontinuation of certain manufacturing activities triggered an impairment analysis to the carrying value of the related assets and resulted in the Company recording asset impairment charges totaling $0.9 million. This charge included $0.9 million related to the Seremban assembly and test facility. The Company measured the amount of each asset impairment by comparing the carrying value of the respective assets to the related estimated fair value. The Company estimated future net cash flows for the period of continuing manufacturing activities for each group of assets using price, volume, cost, capital and salvage value assumptions that management considered to be reasonable in the circumstances. The impairment charges were recorded for the amount by which the carrying value of the respective assets exceeded their estimated fair value. The related assets have been sold to third parties at amounts that approximated their estimated fair values or were transferred to other manufacturing facilities at their previously existing carrying values.
The June 2001 charge also included $0.6 million to cover certain exit costs relating facility closure. All facility closure activities had been completed and the Company released the remaining $0.2 million reserve to income during the third quarter of 2002.
March 2001 Restructuring Program
In March 2001, the Company recorded charges totaling $3.5 million for costs associated with its restructuring programs. The charges of $3.5 million cover employee separation costs associated with the termination of approximately 350 employees. The employee separation costs reflected further reductions in manufacturing, general and administrative staffing levels in Malaysia. All impacted employees have been terminated under this restructuring program.
Note 12: Stock Options
Certain employees of the Company participate in ON Semiconductor stock option plans.
Generally, the options granted under these plans vest over a period of four years. Upon the termination of an option holder’s employment, all unvested options will immediately terminate and vested options will generally remain exercisable for a period of 90 days after date of termination (one year in the case of death or disability).
Information with respect to the activity of the stock option plans as it relates to the employees of the Company is as follows (in millions, except per share data):
| 2002 | 2001 | 2000 | |||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | |||||||||||||||||||||||
| Average | Average | Average | |||||||||||||||||||||||
| Number of | Exercise | Number of | Exercise | Number of | Exercise | ||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | ||||||||||||||||||||
|
Outstanding at beginning of year
|
0.6 | $ | 6.94 | 0.5 | $ | 8.00 | 0.3 | 1.50 | |||||||||||||||||
|
Grants
|
0.2 | 3.24 | 0.2 | 5.14 | 0.2 | 15.96 | |||||||||||||||||||
|
Exercises
|
— | — | — | — | — | — | |||||||||||||||||||
|
Cancellations
|
(0.1 | ) | 5.38 | (0.1 | ) | 12.08 | — | — | |||||||||||||||||
|
Outstanding at end of year
|
0.7 | $ | 6.12 | 0.6 | $ | 6.94 | 0.5 | $ | 8.00 | ||||||||||||||||
|
Exercisable at end of year
|
0.3 | $ | 8.17 | 0.1 | $ | 1.57 | 0.1 | $ | 1.50 | ||||||||||||||||
|
Weighted average fair value of options granted
during the period
|
$ | 1.98 | $ | 3.18 | $ | 9.24 | |||||||||||||||||||
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The following tables summarize options outstanding and options exercisable at December 31, 2002:
| Outstanding Options | ||||||||||||
| Weighted | Weighted | |||||||||||
| Average | Average | |||||||||||
| Number | Contractual | Exercise | ||||||||||
| Range of Exercise Prices | Shares | Life (in years) | Price | |||||||||
|
$1.45-$3.86
|
0.4 | 7.93 | $ | 2.50 | ||||||||
|
$5.95-$6.95
|
0.1 | 8.16 | 6.14 | |||||||||
|
$13.06-$16.00
|
0.2 | 7.32 | 15.99 | |||||||||
|
Totals
|
0.7 | $ | 6.12 | |||||||||
| Exercisable Options | ||||||||||||
| Weighted | Weighted | |||||||||||
| Average | Average | |||||||||||
| Number | Contractual | Exercise | ||||||||||
| Range of Exercise Prices | Shares | Life (in years) | Price | |||||||||
|
$1.45-$3.86
|
0.2 | 6.89 | $ | 1.68 | ||||||||
|
$13.06-$16.00
|
0.1 | 7.32 | 16.00 | |||||||||
|
Totals
|
0.3 | $ | 8.17 | |||||||||
These options will expire if not exercised at specific dates through July 2012.
Eligible employees also participate in ON Semiconductor’s 2000 Employee Stock Purchase Plan. Subject to local legal requirements, each of the Company’s full-time employees has the right to elect to have up to 10% of their payroll applied towards the purchase of shares of ON Semiconductor common stock at a price equal to 85% of the fair market value of such shares as determined under the plan. During each quarterly offering period, employees may not purchase stock exceeding the lesser of (i) 500 shares, or (ii) the number of shares equal to $6,250 divided by the fair market value of the stock on the first day of the offering period. During 2002, and 2001, employees purchased approximately 185,000 and 89,000 shares under the plan.
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Other information about ON Semiconductor Corporation may be found in our quarterly Form 10-Q and our Annual Report to Stockholders. These reports, as well as additional copies of this Form 10-K (without exhibits and certain financial statements which are excluded from our Annual Report to Stockholders pursuant to Rule 14a-3(b) of the Exchange Act of 1934), are available without charge by contacting our Director of Investor Relations at our corporate headquarters as set forth below. Further, we make our Form 10-K, quarterly Form 10-Q, current reports on Form 8-K, and all amendments to those reports available, free of charge, on the “Investor Relations” section of our Internet website at http://www.onsemi.com as soon as reasonably practicable after we electronically file this material with, or furnish this material to, the Securities and Exchange Commission.
ON Semiconductor Corporation
Table of Contents
EXHIBIT INDEX
| Exhibit | ||||||
| No. | Description | |||||
| 2 | .1 | Reorganization Agreement, dated as of May 11, 1999, among Motorola, Inc., SCG Holding Corporation and Semiconductor Components Industries LLC. (incorporated by reference from Exhibit 2.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)† | ||||
| 2 | .2 | Agreement and Plan of Recapitalization and Merger, as amended, dated as of May 11, 1999, among SCG Holding Corporation, Semiconductor Components Industries, LLC, Motorola, Inc., TPG Semiconductor Holdings LLC, and TPG Semiconductor Acquisition Corp. (incorporated by reference from Exhibit 2.2 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)† | ||||
| 2 | .3 | Amendment No. 1 to Agreement and Plan of Recapitalization and Merger, dated as of July 28, 1999, among SCG Holding Corporation, Semiconductor Components Industries, LLC, Motorola, Inc., TPG Semiconductor Holdings LLC, and TPG Semiconductor Acquisition Corp. (incorporated by reference from Exhibit 2.3 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)† | ||||
| 3 | .1(a) | Amended and Restated Certificate of Incorporation of ON Semiconductor Corporation (as of August 9, 2000) (incorporated by reference from Exhibit 3.1 of Third Quarter 2000 Form 10-Q filed with the Commission on November 14, 2000) | ||||
| 3 | .1(b) | Amended and Restated Certificate of Incorporation of ON Semiconductor Corporation as of August 1, 2002 (incorporated by reference from Exhibit 3.1(a) of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
| 3 | .1(c) | Certificate Designations relating to the Series A Cumulative Convertible Preferred Stock (incorporated by reference from Exhibit 3.1(b) of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
| 3 | .2 | Amended and Restated Bylaws of SCG Holding Corporation (incorporated by reference from Exhibit 3.2 to Registration Statement No. 333-30670 filed with the Commission on April 7, 2000) | ||||
| 4 | .1 | Specimen of share certificate of Common Stock, par value $.01, SCG Holding Corporation (incorporated by reference from Exhibit 4.1 to Registration Statement No. 333-30670 filed with the Commission on April 7, 2000) | ||||
| 4 | .2 | Certificate of Designations relating to the Series A Cumulative Convertible Preferred Stock (incorporated by reference from Exhibit 3.1 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001) | ||||
| 4 | .3 | Specimen of Share Certificate of Series A Cumulative Convertible Preferred Stock (incorporated by reference from Exhibit 4.1 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001) | ||||
| 4 | .4 | Investment Agreement, dated as of September 7, 2001, between TPG ON Holdings LLC and ON Semiconductor Corporation (incorporated by reference from Exhibit 4.2 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001) | ||||
| 4 | .5 | Registration Rights Agreement, dated as of September 7, 2001, between TPG ON Holdings LLC and ON Semiconductor Corporation (incorporated by reference from Exhibit 4.3 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001) | ||||
| 4 | .6 | Subordination Agreement, dated as of September 7, 2001, by and between TPG ON Holdings LLC and ON Semiconductor Corporation, for the benefit of Senior Creditors (incorporated by reference from Exhibit 4.4 to the Corporation’s Form 8-K Current Report filed with the Commission on September 7, 2001) | ||||
| 4 | .7 | Warrant Agreement dated as of October 11, 2001, between ON Semiconductor Corporation and Bain & Company, Inc. (incorporated by reference from Exhibit 4.7 to the Corporation’s Form 10-K filed with the Commission on March 29, 2002) | ||||
Table of Contents
| Exhibit | ||||||
| No. | Description | |||||
| 4 | .8 | Indenture, dated as of August 4, 1999 among SCG Holding Corporation, Semiconductor Components Industries, LLC, the Note Guarantors named therein and State Street Bank and Trust Company, as trustee, relating to the 12% Senior Subordinated Notes due 2009 (incorporated by reference from Exhibit 4.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 4 | .9 | Form of 12% Senior Subordinated Note due 2009 of SCG Holding Corporation and Semiconductor Components Industries, LLC (“Initial Note”) (included as Exhibit A to the Indenture filed as Exhibit 4.8 herein & incorporated by reference from Exhibit 4.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 4 | .10 | Form of 12% Senior Subordinated Note due 2009 of SCG Holding Corporation and Semiconductor Components Industries, LLC (“Exchange Note”) (included as Exhibit B to the Indenture filed as Exhibit 4.8 herein & incorporated by reference from Exhibit 4.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 4 | .11 | Exchange Offer and Registration Rights Agreement, dated August 4, 1999, Semiconductor Components Industries, LLC, SCG Holding Corporation, the subsidiary guarantors of SCG Holding Corporation (incorporated by reference from Exhibit 4.5 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 4 | .12 | Purchase Agreement, dated May 1, 2002, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, Credit Suisse First Boston Corporation, Morgan Stanley & Co., Incorporated, J.P. Morgan Securities Inc., and Salomon Smith Barney Inc., relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 4.1 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
| 4 | .13 | Indenture, dated as of May 6, 2002, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., and Semiconductor Components Industries International of Rhode Island, Inc., and Wells Fargo Bank Minnesota, National Association, as trustee, relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 4.2 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
| 4 | .14 | Form of 12% Senior Secured Note due 2008 of ON Semiconductor Corporation and Semiconductor Components Industries, LLC (“Initial Note”) (included as Exhibit A and Appendix A to the Indenture filed as Exhibit 4.2) (incorporated by reference from Exhibit 4.3 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
| 4 | .15 | Form of 12% Senior Secured Note due 2008 of ON Semiconductor Corporation and Semiconductor Components Industries, LLC (“Exchange Note”) (included as Exhibit B and Appendix A to the Indenture filed as Exhibit 4.2) (incorporated by reference from Exhibit 4.4 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
| 4 | .16 | Registration Rights Agreement, dated May 6, 2002, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., and Semiconductor Components Industries International of Rhode Island, Inc., Credit Suisse First Boston Corporation, Morgan Stanley & Co., Incorporated, J.P. Morgan Securities Inc., and Salomon Smith Barney Inc., relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 4.5 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
| 4 | .17 | Purchase Agreement, dated February 26, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, Salomon Smith Barney Inc., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated, relating to the 12% Senior Secured Notes due 2010(1) | ||||
Table of Contents
| Exhibit | ||||||
| No. | Description | |||||
| 4 | .18 | Indenture, dated as of March 3, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., and Semiconductor Components Industries International of Rhode Island, Inc., and Wells Fargo Bank Minnesota, National Association, as trustee, relating to the 12% Senior Secured Notes due 2010(1) | ||||
| 4 | .19 | Form of 12% Senior Secured Note due 2010 of ON Semiconductor Corporation and Semiconductor Components Industries, LLC (“Initial Note”) (included as Exhibit A and Appendix A to the Indenture filed as Exhibit 4.18 hereto)(1) | ||||
| 4 | .20 | Form of 12% Senior Secured Note due 2010 of ON Semiconductor Corporation and Semiconductor Components Industries, LLC (“Exchange Note”) (included as Exhibit B and Appendix A to the Indenture filed as Exhibit 4.18 hereto)(1) | ||||
| 4 | .21 | Registration Rights Agreement, dated March 3, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., and Semiconductor Components Industries International of Rhode Island, Inc., Salomon Smith Barney Inc., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc., and Morgan Stanley & Co. Incorporated, relating to the 12% Senior Secured Notes due 2010(1) | ||||
| 10 | .1 | Amended and Restated Credit Agreement, dated as of April 3, 2000, among SCG Holding Corporation, Semiconductor Components Industries, LLC, The Chase Manhattan Bank, as Administrative Agent, Credit Lyonnais New York Branch as Co-Documentation Agent, DLJ Capital Funding, Inc., as Co-Documentation Agent, Lehman Commercial Paper Inc., as Co-Documentation Agent and Chase Securities Inc., as Arranger and the other financial institutions party thereto (incorporated by reference from Exhibit 10.1 to Registration Statement No. 333-30670 filed with the Commission on April 7, 2000) | ||||
| 10 | .2 | Guarantee Agreement, dated as of August 4, 1999, among SCG Holding Corporation, the subsidiary guarantors of SCG Holding Corporation that are signatories thereto, and The Chase Manhattan Bank, as collateral agent (incorporated by reference from Exhibit 10.3 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 10 | .3 | Security Agreement, dated as of August 4, 1999, among Semiconductor Components Industries, LLC, SCG Holding Corporation, the subsidiary guarantors of SCG Holding Corporation that are signatories thereto, and The Chase Manhattan Bank, as collateral agent (incorporated by reference from Exhibit 10.4 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 10 | .4 | Purchase Agreement, dates as of August 4, 1999, SCG Holding Corporation, Semiconductor Components Industries, LLC, Chase Securities Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers Inc. (incorporated by reference from Exhibit 10.1 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 10 | .5 | Stock Purchase Agreement dated March 8, 2000 among Semiconductor Components Industries, LLC, SCG Holding Corporation and The Cherry Corporation (incorporated by reference from Exhibit 10.3 to Registration Statement No. 333-30670 filed with the Commission on April 7, 2000) | ||||
| 10 | .6 | Amended and Restated Intellectual Property Agreement, dated August 4, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.5 to Registration Statement No. 333-90359 filed with the Commission on January 11, 2000)†† | ||||
| 10 | .7 | Transition Services Agreement, dated August 4, 1999, among Motorola, Inc., SCG Holding Corporation, and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.6 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
Table of Contents
| Exhibit | ||||||
| No. | Description | |||||
| 10 | .8 | Employee Matters Agreements, as amended, dated July 30, 1999, among Semiconductor Components Industries, LLC, SCG Holding Corporation and Motorola, Inc. (incorporated by reference from Exhibit 10.7 to Registration Statement No. 333-90359 filed with the Commission on January 11, 2000) | ||||
| 10 | .9 | Motorola Assembly Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.8 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†† | ||||
| 10 | .10 | SCG Assembly Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.9 Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†† | ||||
| 10 | .11 | Motorola Foundry Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.10 Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†† | ||||
| 10 | .12 | SCG Foundry Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.11 Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†† | ||||
| 10 | .13 | Equipment Lease and Repurchase Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.12 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 10 | .14 | Equipment Passdown Agreement, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.13 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)†† | ||||
| 10 | .15 | SCG Holding Corporation 1999 Founders Stock Option Plan (incorporated by reference from Exhibit 10.14 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||||
| 10 | .16(a) | Lease for 52nd Street property, dated July 31, 1999, among Semiconductor Components Industries, LLC as Lessor, and Motorola Inc. as Lessee (incorporated by reference from Exhibit 10.16 Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 10 | .16(b) | First Lease Amendment to Lease for 52nd Street property, dated April 19, 2000, between Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.14(b) to the Corporation’s Form 10-K filed with the Commission on March 29, 2002) | ||||
| 10 | .17 | Lease for U.S. Locations (Mesa, Chandler, 56th Street and Tempe), dated July 31, 1999, among Motorola, Inc. as Lessor, and Semiconductor Components Industries, LLC as Lessee (incorporated by reference from Exhibit 10.15 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 10 | .18 | Declaration of Reciprocal Covenants, Easement of Restrictions and Options to Purchase and Lease, dated July 31, 1999, among Semiconductor Components Industries, LLC and Motorola, Inc. (incorporated by reference from Exhibit 10.17 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 10 | .19(a) | Employment Agreement, dated as of October 27, 1999, between Semiconductor Components Industries, LLC and Steve Hanson (incorporated by reference from Exhibit 10.18 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||||
| 10 | .19(b) | Amendment to Employment Agreement effective as of April 15, 2002, between ON Semiconductor Corporation and Semiconductor Components Industries, LLC and Steve Hanson (incorporated by reference from Exhibit 10.2 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||||
| 10 | .19(c) | Separation Agreement, made as of November 21, 2002, by and among Steven Hanson, ON Semiconductor Corporation and Semiconductor Components Industries, LLC(1)(2) | ||||
Table of Contents
| Exhibit | ||||||
| No. | Description | |||||
| 10 | .20(a) | Employment Agreement, dated as of September 13, 1999, between Semiconductor Components Industries, LLC and Michael Rohleder (incorporated by reference from Exhibit 10.19 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||||
| 10 | .20(b) | Termination Agreement made as of January 29, 2002, between Michael Rohleder and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.1(a) of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||||
| 10 | .21(a) | Employment Agreement, dated as of November 8, 1999, between Semiconductor Components Industries, LLC and James Thorburn (incorporated by reference from Exhibit 10.20 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||||
| 10 | .21(b) | Amendment No. 1 to Employment Agreement for James Thorburn, dated as of July 20, 2000 (incorporated by reference from Exhibit 10.2 of Third Quarter 2000 Form 10-Q filed with the Commission on November 14, 2000)(2) | ||||
| 10 | .21(c) | Separation Letter Agreement dated February 28, 2001 (with attached General Release and Waiver dated March 10, 2001), between James Thorburn and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.2 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)(2) | ||||
| 10 | .22(a) | Employment Agreement, dated as of October 27, 1999, between Semiconductor Components Industries, LLC and William George (incorporated by reference from Exhibit 10.21 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||||
| 10 | .22(b) | Amendment to Employment Agreement, dated as of October 1, 2001, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC and William George (incorporated by reference from Exhibit 10.20(b) to the Corporation’s Form 10-K filed with the Commission on March 29, 2002)(2) | ||||
| 10 | .23(a) | Employment Agreement, dated as of October 27, 1999, between Semiconductor Components Industries, LLC and Dario Sacomani (incorporated by reference from Exhibit 10.22 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||||
| 10 | .23(b) | Amendment to Employment Agreement, dated as of November 28, 2001, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC and Dario Sacomani (incorporated by reference from Exhibit 10.21(b) to the Corporation’s Form 10-K filed with the Commission on March 29, 2002)(2) | ||||
| 10 | .23(c) | Termination Agreement made as of May 3, 2002, between Semiconductor Components Industries, LLC and Dario Sacomani (incorporated by reference from Exhibit 10.5 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||||
| 10 | .24(a) | Pledge and Security Agreement, dated as of November 8, 1999, between Semiconductor Components Industries, LLC and James Thorburn (incorporated by reference from Exhibit 10.23 to Registration Statement No. 333-90359 filed with the Commission on January 11, 2000)(2) | ||||
| 10 | .24(b) | Deed of Trust, dated as of July 20, 2000, with James Thorburn as Trustee and Semiconductor Components Industries, LLC as Beneficiary (incorporated by reference from Exhibit 10.3 of Third Quarter 2000 Form 10-Q filed with the Commission on November 14, 2000)(2) | ||||
| 10 | .25(a) | Promissory Note/ Security Interest, dated as of November 8, 1999, from James Thorburn to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.24 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999)(2) | ||||
| 10 | .25(b) | Promissory Note, dated July 21, 2000, from James Thorburn to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.2 of Third Quarter 2000 Form 10-Q filed with the Commission on November 14, 2000)(2) | ||||
| 10 | .25(c) | Amendment to Promissory Note, dated March 10, 2001, from James Thorburn and Jacqueline Thorburn to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.1 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)(2) | ||||
Table of Contents
| Exhibit | ||||||
| No. | Description | |||||
| 10 | .26(a) | ON Semiconductor Amended and Restated Executive Deferred Compensation Plan (incorporated by reference from Exhibit 10.31 to Registration Statement No. 333-30670 filed with the Commission on April 25, 2000)(2) | ||||
| 10 | .26(b) | Second Amendment to the ON Semiconductor Amended and Restated Executive Deferred Compensation Plan effective January 1, 2002 (incorporated by reference from Exhibit 10.7 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||||
| 10 | .27 | Junior Subordinated Note Due 2011 payable to Motorola, Inc. (incorporated by reference from Exhibit 4.4 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 10 | .28(a) | 2000 Stock Incentive Plan amended and restated as of May 23, 2001(incorporated by reference from Exhibit 10.4 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001)(2) | ||||
| 10 | .28(b) | 2000 Stock Incentive Plan — ON Ownership program grant agreement (incorporated by reference from Exhibit 10.33(b) to Registration Statement No. 333-30670 filed with the Commission on April 25, 2000)(2) | ||||
| 10 | .28(c) | 2000 Stock Incentive Plan — incentive stock option agreement (incorporated by reference from Exhibit 10.35(c) to Registration Statement No. 333-30670 filed with the Commission on March 24, 2000)(2) | ||||
| 10 | .28(d) | 2000 Stock Incentive Plan — non-qualified stock option agreement (incorporated by reference from Exhibit 10.35(d) to Registration Statement No. 333-30670 filed with the Commission on March 24, 2000)(2) | ||||
| 10 | .29 | 2000 Employee Stock Purchase Plan amended and restated as of May 23, 2001(incorporated by reference from Exhibit 10.5 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001)(2) | ||||
| 10 | .30 | ON Semiconductor Director Deferred Compensation Plan (incorporated by reference from Exhibit 10.35 to Registration Statement No. 333-30670 filed with the Commission on April 25, 2000)(2) | ||||
| 10 | .31 | Form of Master Trust Agreement for the ON Semiconductor Deferred Compensation Plans (incorporated by reference from Exhibit 10.36 to Registration Statement No. 333-30670 filed with the Commission on April 25, 2000)(2) | ||||
| 10 | .32 | 2000 ON Semiconductor Executive Council Bonus Incentive Plan (incorporated by reference from Exhibit 10.37 of Fourth Quarter 2000 Form 10-K filed with the Commission on March 30, 2001)(2) | ||||
| 10 | .33 | 2000 Key Contributor Incentive Plan (incorporated by reference from Exhibit 10.38 of Fourth Quarter 2000 Form 10-K filed with the Commission on March 30, 2001)(2) | ||||
| 10 | .34(a) | Promissory Note, dated March 9, 2001, from Michael Rohleder and Roxanne Rohleder to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.3 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)(2) | ||||
| 10 | .34(b) | Deed of Trust, dated March 7, 2001, from Michael Rohleder and Roxanne Rohleder to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.4 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001)(2) | ||||
| 10 | .34(c) | Amendment to Promissory Note dated March 18, 2002, from Michael Rohleder and Roxanne Rohleder to Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.1(b) of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||||
| 10 | .35 | Loan Facility Agreement, between Leshan-Phoenix Semiconductor Company Limited and Industrial & Commercial Bank of China, Leshan City Branch, for loan in an amount up to $36 million, dated November 17, 2000 (incorporated by reference from Exhibit 10.1 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001) | ||||
Table of Contents
| Exhibit | ||||||
| No. | Description | |||||
| 10 | .36(a) | Loan Agreement between SCG Japan Ltd. and Development Bank of Japan, for loan in an amount up to $26.1 million, dated October 27, 2000 (incorporated by reference from Exhibit 10.2 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001) | ||||
| 10 | .36(b) | Guaranty Agreement, executed by Semiconductor Components Industries, LLC on October 27, 2000, in connection with Loan Agreement between SCG Japan Ltd. and Development Bank of Japan, for loan in an amount up to $26.1 million (incorporated by reference from Exhibit 10.3 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001) | ||||
| 10 | .37 | Waiver, Consent and Amendment dated as of August 13, 2001, to the Credit Agreement dated as of August 4, 1999, as amended and restated as of April 3, 2000, among ON Semiconductor Corporation (formerly known as SCG Holding Corporation), Semiconductor Components Industries, LLC, the Lenders party thereto, The Chase Manhattan Bank, as administrative agent, collateral agent and syndication agent, and Credit Lyonnais New York Branch, DLJ Capital Funding, Inc. and Lehman Commercial Paper Inc., as co-documentation agents (incorporated by reference from Exhibit 10.6 of Second Quarter 2001 Form 10-Q filed with the Commission on August 13, 2001) | ||||
| 10 | .38 | Offer Letter dated February 15, 2002, from ON Semiconductor Corporation and Semiconductor Components Industries, LLC to John T. Kurtzweil (incorporated by reference from Exhibit 10.3 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||||
| 10 | .39 | Employment Agreement effective as of March 28, 2002, between Semiconductor Components Industries, LLC and William Bradford (incorporated by reference from Exhibit 10.4 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||||
| 10 | .40 | Offer Letter effective as of April 1, 2002, to Syrus Madavi from ON Semiconductor Corporation (incorporated by reference from Exhibit 10.6 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002 (2) | ||||
| 10 | .41 | Employee Incentive Plan, January 2002 (incorporated by reference from Exhibit 10.8 of First Quarter 2002 Form 10-Q filed with the Commission on May 9, 2002)(2) | ||||
| 10 | .42 | ON Semiconductor 2002 Executive Incentive Plan (incorporated by reference from Exhibit 10.1 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)(2) | ||||
| 10 | .43 | Employee Incentive Plan January 2002 (incorporated by reference from Exhibit 10.2 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002)(2) | ||||
| 10 | .44 | Amendment to Credit Agreement, dated as of April 17, 2002, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, JPMorgan Chase Bank, as administrative agent, collateral agent and syndication agent, Credit Lyonnais New York Branch, Credit Suisse First Boston and Lehman Commercial Paper Inc., as co-documentation agents, and the other financial institution parties thereto (incorporated by reference from Exhibit 10.3 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
| 10 | .45 | Intercreditor Agreement, dated as of May 6, 2002, among J.P. Morgan Chase Bank, as credit agent, Wells Fargo Bank Minnesota, National Association, as trustee, ON Semiconductor Corporation and Semiconductor Components Industries, LLC (incorporated by reference from Exhibit 10.4 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
| 10 | .46 | Security Agreement, dated as of May 6, 2002, among Semiconductor Components Industries, ON Semiconductor Corporation, the subsidiary guarantors of ON Semiconductor Corporation that are signatories thereto, and Wells Fargo Bank Minnesota, National Association, as trustee and collateral agent, relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 10.5 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
Table of Contents
| Exhibit | ||||||
| No. | Description | |||||
| 10 | .47 | Pledge Agreement, dated as of May 6, 2002, among Semiconductor Components Industries, LLC, ON Semiconductor Corporation, the subsidiary pledgors of ON Semiconductor Corporation that are signatories thereto, and Wells Fargo Bank Minnesota, National Association, as trustee and collateral agent, relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 10.6 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
| 10 | .48 | Collateral Assignment, dated as of May 6, 2002, between Semiconductor Components Industries, LLC and Wells Fargo Bank Minnesota, National Association, as trustee and collateral agent, relating to the 12% Senior Secured Notes due 2008 (incorporated by reference from Exhibit 10.7 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
| 10 | .49 | Joint Venture Contract for Leshan-Phoenix Semiconductor Company Limited, amended on June 25, 2002, among SCG (China) Holding Corporation, Leshan Radio Company Ltd, and Motorola (China) Investment Limited (incorporated by reference from Exhibit 10.8 of Second Quarter 2002 Form 10-Q filed with the Commission on August 12, 2002) | ||||
| 10 | .50(a) | Employment Agreement, dated as of November 10, 2002, between ON Semiconductor Corporation and Keith Jackson (1)(2) | ||||
| 10 | .50(b) | Letter Agreement dated as of November 19, 2002, between ON Semiconductor Corporation and Keith Jackson(1)(2) | ||||
| 10 | .51 | Amendment and Restatement Agreement dated as of February 14, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC and JPMorgan Chase Bank as administrative agent, under the Credit Agreement dated as of August 4, 1999, as amended and restated as of April 3, 2000, (as amended, supplemented and modified and in effect on the date hereof), among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, the Lenders party thereto, the Administrative Agent and Credit Lyonnais New York Branch, Credit Suisse First Boston and Lehman Commercial Paper, Inc., as co-documentation agents(1) | ||||
| 10 | .52 | Amended and Restated Credit Agreement dated as of August 4, 1999, as Amended and Restated as of February 14, 2003, among ON Semiconductor Corporation, Semiconductor Components Industries, LLC, the Lenders party hereto, JPMorgan Chase Bank as Administrative Agent, Collateral Agent and Syndication Agent hereunder, and Credit Lyonnais New York Branch, Credit Suisse First Boston and Lehman Commercial Paper Inc., as co-documentation agents hereunder (included as Exhibit A to the Amendment and Restatement Agreement filed as Exhibit 10.51 hereto)(1) | ||||
| 10 | .53 | Collateral Sharing Agreement dated as of March 3, 2003, among JPMorgan Chase Bank, as Collateral Agent, Wells Fargo Bank Minnesota, National Association, as Trustee, ON Semiconductor Corporation and Semiconductor Components Industries, LLC, relating to the 12% Senior Secured Notes due 2010(1) | ||||
| 10 | .54 | Security Agreement dated as of August 4, 1999, as amended and restated as of March 3, 2003, among Semiconductor Components Industries, LLC, ON Semiconductor Corporation, the subsidiary guarantors of ON Semiconductor Corporation that are signatories thereto, and JPMorgan Chase Bank, as collateral agent for the Secured Parties, relating to the 12% Senior Secured Notes due 2010(1) | ||||
| 10 | .55 | Pledge Agreement, dated as of August 4, 1999, as amended and restated as of March 3, 2003, among Semiconductor Components Industries, LLC, ON Semiconductor Corporation, the subsidiary guarantors of ON Semiconductor Corporation that are signatories thereto, and JPMorgan Chase Bank, as collateral agent for the Secured Parties, relating to the 12% Senior Secured Notes due 2010(1) | ||||
| 10 | .56 | Collateral Assignment dated as of August 4, 1999, as amended and restated as of March 3, 2003, between Semiconductor Components Industries, LLC and JPMorgan Chase Bank, as collateral agent for the Secured Parties, relating to the 12% Senior Secured Notes due 2010(1) | ||||
Table of Contents
| Exhibit | ||||||
| No. | Description | |||||
| 10 | .57 | Employment Offer Letter dated March 14, 2003, between Semiconductor Components Industries, LLC and Donald Colvin(1)(2) | ||||
| 18 | . | Letter from PricewaterhouseCoopers LLP re Change in Accounting Principles (incorporated by reference from Exhibit 18 of First Quarter 2001 Form 10-Q filed with the Commission on May 14, 2001) | ||||
| 21 | .1 | List of Significant Subsidiaries(1) | ||||
| 23 | .1 | Consent of PricewaterhouseCoopers LLP, independent accountants(1) | ||||
| 24 | .1 | Powers of Attorney(1) | ||||
| 99 | .1 | Stockholders Agreement dated as of August 4, 1999 among SCG Holding Corporation, TPG Semiconductor Holdings, LLC and Motorola, Inc. (incorporated by reference from Exhibit 99.5 to Registration Statement No. 333-90359 filed with the Commission on November 5, 1999) | ||||
| 99 | .2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) | ||||
| (1) | Filed herewith. |
| (2) | Management contract or compensatory plan, contract or arrangement. |
| † | Schedules or other attachments to these exhibits not filed herewith shall be furnished to the Commission upon request. |
| †† | Portions of these exhibits have been omitted pursuant to a request for confidential treatment |
EXHIBIT 4.17 $200,000,000 ON SEMICONDUCTOR CORPORATION SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC 12% SENIOR SECURED NOTES DUE 2010 PURCHASE AGREEMENT February 26, 2003 SALOMON SMITH BARNEY INC., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc., and Morgan Stanley & Co. Incorporated c/o Salomon Smith Barney Inc. 388 Greenwich Street New York, N.Y. 10013 Dear Sirs: 1. Introductory. ON Semiconductor Corporation, a Delaware corporation (the "COMPANY"), and Semiconductor Components Industries, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company ("SCI LLC," and together with the Company, the "ISSUERS"), propose, subject to the terms and conditions stated herein, to issue and sell to the several initial purchasers named in Schedule A hereto (the "PURCHASERS") U.S.$200,000,000 principal amount of their 12% Senior Secured Notes due 2010 ("OFFERED SECURITIES"), to be issued under an indenture, dated as of March 3, 2003 (the "INDENTURE"), among the Issuers, the subsidiaries of the Company listed on the signature pages hereof, as guarantors (collectively, the "GUARANTORS") and Wells Fargo Bank Minnesota, National Association, as trustee (the "TRUSTEE"). The United States Securities Act of 1933 is herein referred to as the "SECURITIES ACT." Holders (including subsequent transferees) of the Offered Securities will have the registration rights set forth in the registration rights agreement (the "REGISTRATION RIGHTS AGREEMENT"), to be dated the Closing Date, in substantially the form of Exhibit I hereto, for so long as such Offered Securities constitute "TRANSFER RESTRICTED SECURITIES" (as defined in the Registration Rights Agreement). Pursuant to the Registration Rights Agreement, the Issuers and the Guarantors will agree to file with 2 the Securities and Exchange Commission (the "COMMISSION") under the circumstances set forth therein, (i) a registration statement under the Securities Act (the "EXCHANGE OFFER REGISTRATION STATEMENT") relating to the Issuers' 12% Senior Secured Notes in a like aggregate principal amount as the Issuers issued under the Indenture, identical in all material respects to the Offered Securities and registered under the Securities Act (the "EXCHANGE SECURITIES"), to be offered in exchange for the Offered Securities (such offer to exchange being referred to as the "EXCHANGE OFFER") and the Guarantees (as defined below) thereof and (ii) a shelf registration statement pursuant to Rule 415 under the Securities Act (the "SHELF REGISTRATION STATEMENT" and, together with the Exchange Offer Registration Statement, the "REGISTRATION STATEMENTS") relating to the resale by certain holders of the Offered Securities and to use their reasonable best efforts to cause such Registration Statements to be declared and remain effective and usable for the periods specified in the Registration Rights Agreement and to consummate the Exchange Offer. The Offered Securities and Exchange Securities are referred to collectively as the "SECURITIES". The Offered Securities and the guarantees of the Guarantors relating to the Offered Securities (the "GUARANTEES") will be, on the Closing Date (as hereinafter defined) or within a commercially reasonable time thereafter, secured on a first-priority basis by certain collateral (the "COLLATERAL") as described in the Offering Memorandum, and as will be more fully described in and pursuant to (i) the Collateral Sharing Agreement (the "COLLATERAL SHARING AGREEMENT") to be entered into among the Issuers, JPMorgan Chase Bank, as collateral agent (the "COLLATERAL AGENT ") and the Trustee, (ii) the Amended and Restated Credit Agreement (as defined below), (iii) a certain Pledge Agreement (the "PLEDGE AGREEMENT"), (iv) a certain Security Agreement (the "SECURITY AGREEMENT"), (v) certain Uniform Commercial Code financing statements (the "FINANCING STATEMENTS"), (vi) a certain Collateral Assignment (the "COLLATERAL ASSIGNMENT"), (vii) a certain Deed of Trust with respect to the Company's Maricopa, Arizona facility (the "AZ MORTGAGE") and (viii) a certain Mortgage with respect to the Company's East Greenwich, Rhode Island facility (the "RI MORTGAGE," and together with the AZ Mortgage, the "MORTGAGES" ), each relating to SCI LLC's existing credit agreement which is being amended and restated as described below, and each to be amended by the Issuers and the Bank Lenders (as defined below) on or prior to the closing of the sale of the Offered Securities pursuant to this Agreement to provide for the granting of a first-priority security interest in the Collateral for the benefit of the holders of the Offered Securities and the Bank Lenders (as defined below) on an equal and ratable basis (collectively, as so amended, the "SECURITY DOCUMENTS"). The offering of the Offered Securities is part of the refinancing transactions ("REFINANCING TRANSACTIONS") as described in the Offering Memorandum, pursuant to which an Amendment and Restatement Agreement dated as of February 14, 2003 (the "Amendment and Restatement Agreement") was entered into by the Issuers and certain lenders in connection with the Credit Agreement, dated as of August 4, 1999, 3 as amended and restated as of April 3, 2000 (as further amended, supplemented or otherwise modified from time to time, and together with the Amendment and Restatement Agreement, the "AMENDED AND RESTATED CREDIT AGREEMENT") by the Issuers with certain syndicate lenders. Pursuant to the Amendment and Restatement Agreement, which will have become effective on or prior to the closing of the sale of the Offered Securities pursuant to this Agreement, and the Collateral Sharing Agreement and the Security Documents, such syndicate lenders (collectively, the "BANK LENDERS") will share a first-priority security interest in the Collateral equally and ratably with the holders of the Securities. Each of the Issuers and the Guarantors hereby agrees with the several Purchasers as follows: 2. Representations, Warranties and Agreements of Each of the Issuers and the Guarantors. Each of the Issuers and the Guarantors represents and warrants to, and agrees with, the several Purchasers that: (a) A preliminary offering memorandum and an offering memorandum relating to the Offered Securities to be offered by the Purchasers have been prepared by the Issuers. Such preliminary offering memorandum (the "PRELIMINARY OFFERING MEMORANDUM") and offering memorandum (the "OFFERING MEMORANDUM"), as supplemented as of the date of this Agreement and including any and all exhibits thereto and any information incorporated by reference therein, together with the documents listed in Schedule B hereto and any other document approved by the Company for use in connection with the contemplated resale of the Offered Securities are hereinafter collectively referred to as the "OFFERING DOCUMENT." On the date of this Agreement, the Offering Document does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from the Offering Document based upon written information furnished to the Issuers by any Purchaser through Salomon Smith Barney Inc. specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(b) hereof. Except as disclosed in the Offering Document, on the date of this Agreement, the Company's Annual Report on Form 10-K most recently filed with the Securities and Exchange Commission (the "COMMISSION") and all subsequent reports (collectively, the "EXCHANGE ACT REPORTS") which have been filed by the Company with the Commission or sent to stockholders pursuant to the Securities Exchange Act of 1934 (the "EXCHANGE ACT") do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Such documents, when they were filed with the Commission, conformed in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission thereunder. 4 The documents incorporated by reference in the Preliminary Offering Memorandum and the Offering Memorandum, when filed with the Commission, did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein in order to make the statements therein, in light of the circumstances under which they were made, not misleading and conformed or will conform in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission thereunder. (b) Each of the Issuers has been duly incorporated or formed, as applicable, and is an existing corporation or limited liability company, as applicable, in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Offering Document; and each of the Issuers is duly qualified to do business as a foreign corporation or limited liability company, as applicable, in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to so qualify or have such power or authority would not, individually or in the aggregate, have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole ("MATERIAL ADVERSE EFFECT"). (c) Each subsidiary of the Company has been duly incorporated or formed and is an existing corporation or entity in good standing under the laws of the jurisdiction of its incorporation or formation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Offering Document; and each subsidiary of the Company is duly qualified to do business as a foreign corporation or limited liability company, as applicable, in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to so qualify or have such power or authority would not, individually or in the aggregate, have a Material Adverse Effect; all of the issued and outstanding capital stock or membership interests of each subsidiary of the Company has been duly authorized and validly issued and is fully paid and nonassessable; and the capital stock or membership interests of each subsidiary owned by the Company, directly or through subsidiaries, is owned free from any security interest, mortgage, pledge, lien or encumbrance, or defect (collectively, "LIENS"), except for Liens pursuant to or contemplated by the Amended and Restated Credit Agreement or the Indenture and Liens contemplated by the indenture for the Senior Secured Notes due 2008 (the "2008 NOTES INDENTURE") dated as of May 6, 2002, among the Issuers, the Guarantors and Wells Fargo Bank Minnesota, National Association, as trustee (collectively, the "PERMITTED LIENS"). (d) The Indenture has been duly authorized by each of the Issuers and the Guarantors, as applicable; the Offered Securities have been duly authorized by each of the 5 Issuers and the Guarantors, as applicable; and when the Offered Securities are delivered and paid for pursuant to this Agreement on the Closing Date (as defined below), the Indenture will have been duly executed and delivered, the Offered Securities will have been duly executed, authenticated, issued and delivered and will conform to the description thereof contained in the Offering Document and the Indenture (with respect to the Issuers and the Guarantors) and the Offered Securities (with respect to the Issuers) will constitute valid and legally binding obligations of the Issuers and the Guarantors, as applicable, enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (e) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement, the Collateral Sharing Agreement, the Security Documents and the Registration Rights Agreement by the Issuers and the Guarantors, as applicable, except (i) for the order of the Commission declaring the Exchange Offer Registration Statement or the Shelf Registration Statement (each as defined in the Registration Rights Agreement) effective or other such consents, approvals, authorizations, orders or filings as may be required to be obtained or made under the Securities Act and applicable state securities laws as provided in the Registration Rights Agreement, (ii) for such filings or recordings necessary to perfect the security interests created by the Security Documents or (iii) where the failure to obtain such consent, approval, authorization, order or filing would not have a Material Adverse Effect. (f) The execution, delivery and performance of the Indenture, this Agreement, the Collateral Sharing Agreement, the Security Documents and the Registration Rights Agreement, and the issuance and sale of the Offered Securities and compliance with the terms and provisions thereof will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and each of the Issuers has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement, except for such breaches, violations or defaults that would not have a Material Adverse Effect. (g) This Agreement, the Collateral Sharing Agreement and the Security Documents have been duly authorized, executed and delivered by each of the Issuers and the Guarantors, as applicable. 6 (h) Except as disclosed in the Offering Document, the Company and its subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from Liens, except Permitted Liens, that would materially affect the value thereof or materially interfere with the use made or to be made thereof by them; and except as disclosed in the Offering Document, the Company and its subsidiaries hold any leased real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or to be made thereof by them. (i) The Company and its subsidiaries possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to the Company or any of its subsidiaries, would have Material Adverse Effect. (j) No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Issuers, is imminent that might have a Material Adverse Effect. (k) The Company and its subsidiaries own, possess or can acquire on reasonable terms, the trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "INTELLECTUAL PROPERTY RIGHTS") necessary to conduct the business now operated by them, or presently employed by them, and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, individually or in the aggregate, is reasonably likely to result in a Material Adverse Effect. (l) Except as disclosed in the Offering Document, neither the Company nor any of its subsidiaries is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, "ENVIRONMENTAL LAWS"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would, individually or in the aggregate, have a Material Adverse Effect; and the Company is not aware of any pending investigation which is reasonably likely to lead to such a claim. 7 (m) Except as disclosed in the Offering Document, there is no pending action, suit or proceeding against or affecting the Company, any of its subsidiaries or any of their respective properties that, individually or in the aggregate, is reasonably likely to result in a Material Adverse Effect, or would materially and adversely affect the ability of the Issuers to perform their obligations under the Indenture, this Agreement, the Security Documents or the Registration Rights Agreement, or which is otherwise material in the context of the sale of the Offered Securities; and, to the Company's knowledge, there is no such action, suit or proceeding threatened. (n) The financial statements included in the Offering Document present fairly the financial position of the Company and its consolidated subsidiaries as of the dates shown and their results of operations and cash flows for the periods shown, and, except as otherwise disclosed in the Offering Document, such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis. (o) Except as disclosed in the Offering Document, since the date of the latest audited financial statements included in the Offering Document there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, and, except as disclosed in or contemplated by the Offering Document, there has been no dividend or distribution of any kind declared, paid or made by the Issuers on any class of its capital stock. (p) The Company is subject to the reporting requirements of either Section 13 or Section 15(d) of the Securities Exchange Act of 1934 and files reports with the Commission on the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. (q) Neither of the Issuers nor any of the Company's subsidiaries is an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the United States Investment Company Act of 1940 (the "INVESTMENT COMPANY ACT"); and neither of the Issuers nor any of the Company's subsidiaries is and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Offering Document, will be an "investment company" as defined in the Investment Company Act. (r) No securities of the same class (within the meaning of Rule 144A(d)(3) under the Securities Act) as the Offered Securities are listed on any national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system. 8 (s) Assuming the accuracy of the representations and warranties of the Purchasers contained in Section 4 hereof and their compliance with the agreements set forth herein, it is not necessary, in connection with the issuance and sale of the Offered Securities to the Purchasers and the offer, resale and delivery of the Offered Securities by the Purchasers in the manner contemplated by this Agreement and the Offering Memorandum, to register the Offered Securities under the Securities Act or to qualify the Indenture under the United States Trust Indenture Act of 1939, as amended (the "TRUST INDENTURE ACT"). (t) Neither of the Issuers, the Guarantors, nor any of their affiliates, nor any person acting on their behalf (i) has, within the six-month period prior to the date hereof, offered or sold in the United States or to any U.S. person (as such terms are defined in Regulation S under the Securities Act) the Offered Securities or any security of the same class or series as the Offered Securities or (ii) has offered or will offer or sell the Offered Securities (A) in the United States by means of any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act or (B) with respect to any such securities sold in reliance on Rule 903 of Regulation S, by means of any directed selling efforts within the meaning of Rule 902(c) of Regulation S. The Issuers, the Guarantors, their affiliates and any person acting on their behalf have complied and will comply with the offering restrictions requirement of Regulation S. The Issuers have not entered and will not enter into any contractual arrangement with respect to the distribution of the Offered Securities except for this Agreement. (u) PricewaterhouseCoopers LLP are independent public accountants with respect to the Issuers as required by the Securities Act and the rules and regulations of the Commission thereunder (the "SECURITIES ACT REGULATIONS"). (v) The Guarantees have been duly and validly authorized by the Guarantors, and the Guarantees, upon the execution and delivery of the Indenture by the Issuers, the Guarantors and the Trustee and the due authorization, execution and delivery of the related Offered Securities, will constitute valid and binding obligations of the Guarantors, enforceable against the Guarantors in accordance with their terms, except as such enforcement may be subject to or limited by (i) bankruptcy, receivership, conservatorship, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to creditors' rights and remedies generally and (ii) general principles of equity (regardless of whether such enforcement may be sought in a proceeding in equity or at law). The Guarantees will conform in all material respects to the description thereof contained in the Offering Memorandum. (w) On and as of the Closing Date (as defined below) or within a commercially reasonable time frame thereafter: 9 (i) The Pledge Agreement will constitute, for the ratable benefit of the holders of the Offered Securities and the Bank Lenders, a legal, valid and binding obligation of the pledgors party thereto, enforceable against them in accordance with its terms, except as enforceability may be limited by (A) bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally, (B) general equitable principles and (C) with respect to the pledge of any capital stock of any Foreign Subsidiary (as defined herein), applicable local law. (ii) Upon delivery to the Collateral Agent of the Equity Interests (as defined in the Pledge Agreement) of SCI LLC and each subsidiary that is a corporation or limited liability company, as the case may be, organized or formed, as applicable, under the laws of any jurisdiction within the United States (each, a "DOMESTIC SUBSIDIARY") and, with respect to Equity Interests not constituting certificated securities or instruments, the filing of appropriate UCC financing statements in the appropriate filing offices, the security interests granted pursuant to the Pledge Agreement will constitute a valid, perfected first-priority security interest on such pledged Equity Interest under New York law, for the equal and ratable benefit of the holders of the Offered Securities and the Bank Lenders, enforceable as such against all creditors of the respective pledgor and to Persons purporting to purchase any such pledged Equity Interest from the respective pledgor, except as the priority is subject to Permitted Liens. (iii) To the extent U.S. law is applicable, upon delivery to the Collateral Agent of the Equity Interests (as defined in the Pledge Agreement) of any first-tier non-domestic subsidiary (each, a "FOREIGN SUBSIDIARY") and, with respect to Equity Interests not constituting certificated securities or instruments, the filing of appropriate UCC financing statements in the appropriate filing offices, the security interests in the Equity Interests of each Foreign Subsidiary granted pursuant to the Pledge Agreement will constitute a valid, perfected first-priority security interest on such pledged Equity Interest, for the equal and ratable benefit of the holders of the Offered Securities and the Bank Lenders, enforceable as such against all creditors of the respective pledgor and any Persons purporting to purchase any such pledged Equity Interest from the respective pledgor, except as the priority is subject to Permitted Liens. (iv) Upon delivery to the Collateral Agent of the Pledged Debt Securities (as defined in the Pledge Agreement) the security interests in the Pledged Debt Securities granted pursuant to the Pledge Agreement will constitute a valid, perfected first-priority security interest on such Pledged Debt Securities under New York law, for the equal and ratable benefit of the holders of the Offered Securities and the Bank Lenders, enforceable as such against all creditors of the respective pledgor, except as the priority is subject to Permitted Liens. 10 (v) Each Security Document will constitute a legal, valid and binding obligation of the grantor party thereto, for the equal and ratable benefit of the holders of the Offered Securities and the Bank Lenders, enforceable against it in accordance with its terms, except as enforceability may be limited by (A) bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and (B) general equitable principles. (vi) Except with respect to the Collateral located in any facility which is not owned or leased by the Company or any of its subsidiaries and upon filing by the Collateral Agent of (A) financing statements, (B) any filings required with the United States Patent and Trademark Office and (C) any filings required with the United States Copyright Office, the security interests granted pursuant to the Security Documents will constitute valid, perfected first-priority security interests, on such Collateral described therein for the equal and ratable benefit of the holders of the Offered Securities and the Bank Lenders, enforceable as such against all creditors of any grantor and any Persons purporting to purchase any such Collateral from any grantor (except purchasers of Inventory (as defined in the Security Documents) in the ordinary course of business), except as the priority is subject to Permitted Liens. (vii) The Mortgages will be effective to grant a legal, valid and enforceable mortgage lien on all of the mortgagor's right, title and interest in the mortgaged properties thereunder. When the Mortgages are duly recorded in the proper recorders' offices and the mortgage recording fees and taxes in respect thereof are paid and compliance is otherwise had with the formal requirements of state law applicable to the recording of real estate mortgages generally, each such Mortgage shall constitute a validly perfected, first-priority security interest in the related mortgaged property, for the equal and ratable benefit of the holders of the Offered Securities and the Bank Lenders, subject only to the encumbrances and exceptions to title expressly set forth therein and except as (A) enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and (ii) general equitable principles and (B) the priority is subject to Permitted Liens. (viii) (A) Neither of the Issuers nor any of the Guarantors will hold any Accounts (as defined in the Security Agreement) with respect to which the Collateral Agent does not hold a perfected, first-priority security interest, other than such Accounts, if any, in which the Bank Lenders do not or will not hold a first-priority security interest. (B) Neither of the Issuers nor any of the Guarantors maintains any Inventory (as defined in the Security Agreement) with respect to which the Collateral Agent does not possess a perfected, first-priority security interest, other 11 than any such Inventory, if any, in which the Bank Lenders do not or will not hold a first-priority security interest. (ix) It is the ordinary business practice of each of the Issuers and the Guarantors to file with the United States Patent and Trademark Office for registration or recordation, as applicable, (A) a completed application for the registration of each trademark and patent owned by it which is material to the business of such Issuer or Guarantor and (B) an appropriate assignment to either of the Issuers or any of the Guarantors of the interest acquired by it in any trademark and patent which is material to the business of the Company and its subsidiaries taken as a whole. (x) The mortgaged properties under the Mortgages and the buildings and improvements thereon comply in all material respects with all applicable setback requirements, zoning codes, ordinances, laws and regulations, except where non-compliance would not, individually or in the aggregate, be likely to have a Material Adverse Effect. (xi) There are no pending or threatened condemnation proceedings, lawsuits, or administrative actions relating to the mortgaged properties under the Mortgages which would have, individually or in the aggregate, a Material Adverse Effect. (x) The entities listed on Schedule C hereto are the only subsidiaries, direct or indirect, of the Company. (y) On the Closing Date, the Indenture will conform in all material respects to the requirements of the TIA, and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. (z) On the Closing Date, the Exchange Securities will have been duly authorized by the Issuers; and when the Exchange Securities are issued, executed and authenticated in accordance with the terms of the Exchange Offer and the Indenture, the Exchange Securities will be entitled to the benefits of the Indenture and will be the valid and legally binding obligations of the Issuers and the Guarantors, enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (aa) The Guarantee of the Exchange Securities by each Guarantor has been duly authorized by such Guarantor; and, when issued, will have been duly executed and delivered by each such Guarantor and will conform to the description thereof contained in the Offering Document. When the Exchange Securities have been issued, 12 executed and authenticated in accordance with the terms of the Exchange Offer and the Indenture, the Guarantee of each Guarantor will constitute valid and legally binding obligations of such Guarantor, enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (bb) The Registration Rights Agreement has been duly authorized by each of the Issuers and the Guarantors and, on the Closing Date, will have been duly executed and delivered by each of the Issuers and the Guarantors. When the Registration Rights Agreement has been duly executed and delivered, the Registration Rights Agreement will be a valid and binding agreement of each of the Issuers and the Guarantors, enforceable against each of the Issuers and Guarantors in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. On the Closing Date, the Registration Rights Agreement will conform as to legal matters to the description thereof in the Offering Memorandum. (cc) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument, except for such defaults that, singularly or in the aggregate, would not reasonably be expected to have a Material Adverse Effect, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound. (dd) Except for the Registration Rights Agreement dated May 6, 2002 among the Issuers, the Guarantors and the Initial Purchasers identified therein and delivered in connection with the 2008 Notes Indenture, there are no contracts, agreements or understandings between the Issuers or any Guarantor and any person granting such person the right to require the Issuers or such Guarantor to file a registration statement under the Securities Act with respect to any debt securities of the Issuers or such Guarantor or to require the Issuers or such Guarantor to include such securities with the Securities and Guarantees registered pursuant to any Registration Statement, other than the Registration Rights Agreement contemplated hereunder. (ee) Neither the Company nor any of its subsidiaries nor any agent thereof acting on the behalf of them has taken, and none of them will take, any action that might cause this Agreement or the issuance or sale of the Offered Securities to violate Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System. 13 (ff) No "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Securities Act (i) has imposed (or has informed the Issuers or any Guarantor that it is considering imposing) any condition (financial or otherwise) on either of the Issuers' or any Guarantor's retaining any rating assigned to either of the Issuers or any Guarantor, any securities of either of the Issuers or any Guarantor or (ii) has indicated to the Issuers or any Guarantor that it is considering (A) the downgrading, suspension, or withdrawal of, or any review for a possible change that does not indicate the direction of the possible change in, any rating so assigned or (B) any change in the outlook for any rating of either of the Issuers, any Guarantor or any securities of either of the Issuers or any Guarantor. (gg) No form of general solicitation or general advertising (as defined in Regulation D under the Securities Act) was used by the Issuers, the Guarantors or any of their respective representatives (other than the Purchasers, as to whom the Issuers and the Guarantors make no representation) in connection with the offer and sale of the Offered Securities contemplated hereby, including, but not limited to, articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. No securities of the same class as the Offered Securities have been issued and sold by the Issuers within the six-month period immediately prior to the date hereof. (hh) The Offered Securities offered and sold in reliance on Regulation S have been and will be offered and sold only in offshore transactions. (ii) The sale of the Offered Securities pursuant to Regulation S is not part of a plan or scheme to evade the registration provisions of the Securities Act. 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Issuers severally and jointly agree to sell to the Purchasers, and the Purchasers agree, severally and not jointly, to purchase from the Issuers, at a purchase price of 92.717% of the principal amount thereof plus accrued interest from February 26, 2003 to the Closing Date (as defined below), the respective principal amounts set forth opposite the names of the several Purchasers in Schedule A hereto. The Issuers will deliver against payment of the purchase price the Offered Securities in the form of one or more permanent global Securities in definitive form (the "GLOBAL SECURITIES") deposited with the Trustee as custodian for The Depository Trust Company ("DTC") and registered in the name of Cede & Co., as nominee for DTC. Interests in any permanent global Securities will be held only in book-entry form through DTC, except in the limited circumstances described in the Offering Document. Payment for the Offered Securities shall be made by the Purchasers in Federal (same day) funds by 14 official check or checks or wire transfer to a bank account drawn to the order of ON Semiconductor Corporation or as the Company may direct at the office of Cleary, Gottlieb, Steen & Hamilton ("CGSH"), One Liberty Plaza, New York, NY 10006 at 10:00 A.M. (New York time), on March 3, 2003, or at such other time not later than seven full business days thereafter as Salomon Smith Barney Inc. and the Company determine, such time being herein referred to as the "CLOSING DATE," against delivery to the Trustee as custodian for DTC of the Global Securities representing all of the Securities. The Global Securities will be made available for checking at the above office of CGSH at least 24 hours prior to the Closing Date. 4. Representations by Purchasers; Resale by Purchasers. (a) Each Purchaser severally represents and warrants to the Issuers that it is an "accredited investor" within the meaning of Regulation D under the Securities Act. (b) Each Purchaser severally acknowledges that the Offered Securities have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S or pursuant to an exemption from the registration requirements of the Securities Act. Each Purchaser severally represents and agrees that it has offered and sold the Offered Securities, and will offer and sell the Offered Securities (i) as part of its distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, only in accordance with Rule 903 or Rule 144A under the Securities Act ("RULE 144A"). Accordingly, neither such Purchaser nor its affiliates, nor any persons acting on its or their behalf, have engaged or will engage in any directed selling efforts with respect to the Offered Securities, and such Purchaser, its affiliates and all persons acting on its or their behalf have complied and will comply with the offering restrictions requirement of Regulation S. Each Purchaser severally agrees that, at or prior to confirmation of sale of the Offered Securities, other than a sale pursuant to Rule 144A, such Purchaser will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases the Offered Securities from it during the restricted period a confirmation or notice to substantially the following effect: "The Securities covered hereby have not been registered under the U.S. Securities Act of 1933 (the "Securities Act") and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the date of the commencement of the offering and the closing date, except in either case in accordance with Regulation S (or Rule 144A if available) under the Securities Act. Terms used above have the meanings given to them by Regulation S." 15 Terms used in this subsection (b) have the meanings given to them by Regulation S. (c) Each Purchaser severally agrees that it and each of its affiliates has not entered and will not enter into any contractual arrangement with respect to the distribution of the Offered Securities except for any such arrangements with the other Purchasers or affiliates of the other Purchasers or with the prior written consent of the Issuers. (d) Each Purchaser severally agrees that it and each of its affiliates will not offer or sell the Offered Securities in the United States by means of any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act, including, but not limited to (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or (ii) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. Each Purchaser severally agrees, with respect to resales made in reliance on Rule 144A of any of the Offered Securities, to deliver either with the confirmation of such resale or otherwise prior to settlement of such resale a notice to the effect that the resale of such Offered Securities has been made in reliance upon the exemption from the registration requirements of the Securities Act provided by Rule 144A. (e) Each of the Purchasers severally represents and agrees that (i) it has not offered or sold and prior to the expiry of a period of six months from the Closing Date, will not offer or sell any Offered Securities to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services and Markets Act 2000 ("FSMA") with respect to anything done by it in relation to the Offered Securities in, from or otherwise involving the United Kingdom; and (iii) it has only communicated and caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any Offered Securities in circumstances in which section 21(1) of the FSMA does not apply to the Issuers or the Guarantors. (f) Each Purchaser, severally and not jointly, agrees that, prior to or simultaneously with the confirmation of sale by such Purchaser to any purchaser of any of the Offered Securities purchased by such Purchaser from the Issuers pursuant hereto, such Purchaser shall furnish to that purchaser a copy of the Offering Memorandum (and any amendment or supplement thereto that the Issuers shall have furnished to such Purchaser 16 prior to the date of such confirmation of sale). In addition to the foregoing, each Purchaser acknowledges and agrees that the Issuers and, for purposes of the opinions to be delivered to the Purchasers pursuant to Sections 6(c) and (d), counsel for the Issuers and the Purchasers, respectively, may rely upon the accuracy of the representations and warranties of the Purchasers and their compliance with the agreements contained in this Section 4, and each Purchaser hereby consents to such reliance. 5. Certain Agreements of the Issuers and the Guarantors. Each of the Issuers and the Guarantors agrees with the several Purchasers that: (a) The Issuers will furnish a copy to Salomon Smith Barney Inc. promptly of any proposal to amend or supplement the Offering Document and will not effect such amendment or supplementation to which Salomon Smith Barney Inc. shall reasonably object by notice to the Issuers after a reasonable period to review. If, at any time prior to the completion of the resale of the Offered Securities by the Purchasers, any event occurs as a result of which the Offering Document as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, the Issuers promptly will notify Salomon Smith Barney Inc. of such event and promptly will prepare, at their own expense, an amendment or supplement which will correct such statement or omission. Neither Salomon Smith Barney Inc.'s consent to, nor the Purchasers' delivery to offerees or investors of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (b) The Issuers will furnish to Salomon Smith Barney Inc. copies of any preliminary offering memorandum, the Offering Document and all amendments and supplements to such documents, in each case as soon as available and in such quantities as Salomon Smith Barney Inc. reasonably requests, and the Issuers will furnish to Salomon Smith Barney Inc. on the date hereof three copies of the Offering Document signed by a duly authorized officer of each of the Issuers, one of which will include the independent accountants' reports therein manually signed by such independent accountants. At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, the Company will promptly furnish or cause to be furnished to Salomon Smith Barney Inc. (and, upon request, to each of the other Purchasers) and, upon request of holders and prospective purchasers of the Offered Securities, to such holders and purchasers, copies of the information required to be delivered to holders and prospective purchasers of the Offered Securities pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto) in order to permit compliance with Rule 144A in connection with resales by such holders of the Offered Securities. The Issuers will pay the expenses of printing and distributing to the Purchasers all such documents. 17 (c) The Issuers will arrange for the qualification of the Offered Securities for sale and the determination of their eligibility for investment under the laws of such jurisdictions in the United States and Canada as Salomon Smith Barney Inc. designates and will continue such qualifications in effect so long as required for the resale of the Offered Securities by the Purchasers, provided, however, that neither of the Issuers will be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction. (d) During the period of two years after the Closing Date, the Issuers will, upon request, furnish to Salomon Smith Barney Inc., each of the other Purchasers and any holder of Offered Securities a copy of the restrictions on transfer applicable to the Offered Securities. (e) During the period of two years after the Closing Date, the Issuers will not, and will not permit any of their affiliates (as defined in Rule 144 under the Securities Act) to, resell any of the Offered Securities that have been reacquired by any of them, except for Offered Securities purchased by the Issuers or any of their affiliates and resold in a transaction registered under the Securities Act. (f) During the period of two years after the Closing Date, neither of the Issuers will be or become, an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act. (g) The Issuers will pay all expenses incidental to the performance of their obligations under this Agreement, the Indenture, the Security Documents and the Registration Rights Agreement, including (i) the fees and expenses of the Trustee and the Collateral Agent and their professional advisers; (ii) all expenses in connection with the execution, issue, authentication, packaging and initial delivery of the Offered Securities and, as applicable, the Exchange Securities (as defined in the Registration Rights Agreement), the preparation and printing of this Agreement, the Registration Rights Agreement, the Offered Securities, the Indenture, the Offering Document and amendments and supplements thereto, and any other document relating to the issuance, offer, sale and delivery of the Offered Securities and as applicable, the Exchange Securities; (iii) the cost of listing the Offered Securities and qualifying the Offered Securities for trading in The PORTAL(SM) Market ("PORTAL") and any expenses incidental thereto; (iv) the cost of any advertising approved by the Issuers in connection with the issue of the Offered Securities (v) any expenses (including fees and disbursements of counsel) incurred in connection with qualification of the Offered Securities or the Exchange Securities for sale under the laws of such jurisdictions in the United States and Canada as Salomon Smith Barney Inc. designates and the printing of memoranda relating thereto, (vi) any fees charged by investment rating agencies for the rating of the Securities or the Exchange Securities, (vii) the costs of preparing the 18 Security Documents and perfecting the security interests in the Collateral, and (viii) expenses incurred in distributing preliminary offering memoranda and the Offering Document (including any amendments and supplements thereto) to the Purchasers. The Issuers will also pay or reimburse the Purchasers (to the extent incurred by them) for all travel expenses of the Purchasers and the Issuers' officers and employees and any other expenses of the Purchasers and the Issuers in connection with attending or hosting meetings with prospective purchasers of the Offered Securities from the Purchasers; provided, however, that the cost of the rental of the aircraft used by the Purchasers and the Issuers' officers and employees in connection with their attendance at such meetings shall be shared equally between the Issuers and the Purchasers with the Issuers paying half of such cost and the Purchasers paying the other half of such cost. If this Agreement is terminated pursuant to Section 8 of this Agreement by reason of the default of one or more of the Purchasers, the Issuers and the Guarantors shall not be obligated to reimburse any defaulting Purchaser on account of such expenses. (h) In connection with the offering, until Salomon Smith Barney Inc. shall have notified the Issuers and the other Purchasers of the completion of the resale of the Offered Securities, neither of the Issuers nor any of their affiliates has or will, either alone or with one or more other persons, bid for or purchase for any account in which they or any of their affiliates has a beneficial interest any Offered Securities or attempt to induce any person to purchase any Offered Securities; and neither of the Issuers nor any of their affiliates will make bids or purchases for the purpose of creating actual, or apparent, active trading in, or of raising the price of, the Offered Securities. (i) For a period of 180 days after the date of the initial offering of the Offered Securities by the Purchasers, the Issuers will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any United States dollar-denominated debt securities issued or guaranteed by the Company or any of its subsidiaries and having a maturity of more than one year from the date of issue in the United States in a public offering or a Rule 144A offering, without the prior written consent of Salomon Smith Barney Inc.; provided, however, that the foregoing shall not apply to the exchange notes to be issued in exchange for the 12% Senior Secured Notes due 2008 of the Issuers pursuant to the Registration Rights Agreement dated May 6, 2002 among the Issuers, the Guarantors and the Initial Purchasers identified therein, debt securities which are convertible into equity securities or are equity linked debt securities or equity securities. Neither the Company nor any of its subsidiaries will at any time offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any securities under circumstances where such offer, sale, pledge, contract or disposition would cause the exemption afforded by Section 4(2) of the Securities Act or the safe harbor of Regulation S thereunder to cease to be applicable to the offer and sale of the Offered Securities. 19 (j) The Issuers will use the net proceeds received by them from the sale of the Offered Securities in the manner specified in the Offering Memorandum under the heading "Use of Proceeds." (k) The Issuers will use their best efforts to have the Offered Securities admitted to trading in PORTAL. (l) The Issuers will deliver to the trustee under the 2008 Notes Indenture and the Collateral Agent an officer's certificate pursuant to Section 8.19 of the Intercreditor Agreement and Section 10.10 of the 2008 Notes Indenture designating the Securities and the guarantees in respect thereof as (i) "First-Lien Credit Facilities" (as defined in the Intercreditor Agreement) for purposes of the Intercreditor Agreement and (ii) "First-Lien Credit Facilities" (as defined in the 2008 Notes Indenture) and any obligation in respect of the Securities and the guarantees in respect thereof as "Credit Agreement Obligations" (as defined in the indenture for the 2008 Notes Indenture) for purposes of the indenture for the 2008 Notes Indenture. 6. Conditions of the Obligations of the Purchasers. The obligations of the several Purchasers to purchase and pay for the Offered Securities will be subject to the accuracy of the representations and warranties on the part of the Issuers and the Guarantors herein on the date hereof and on the Closing Date, to the accuracy of the statements of each of the Issuers and the Guarantors and their respective officers made pursuant to the provisions hereof, to the performance by each of the Issuers and the Guarantors of its obligations hereunder and to the following additional conditions precedent: (a) On the date of this Agreement and on the Closing Date PricewaterhouseCoopers LLP shall have furnished to the Purchasers, at the request of the Issuers, letters, dated the respective dates of delivery thereof and addressed to the Purchasers, in customary form and covering matters of the type customarily covered in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained or incorporated by reference in the Preliminary Offering Memorandum and the Offering Memorandum as contemplated, and only if permitted, by Statement of Auditing Standards No. 72. (b) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as one enterprise which, in the judgment of a majority in interest of the Purchasers including Salomon Smith Barney Inc., is material and adverse and makes it impractical or inadvisable to proceed with completion of the offering or the sale of and payment for the Offered Securities; (ii) any downgrading in the rating of any debt securities of the Company by any "nationally 20 recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Securities Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating) or any announcement that the Company has been placed on negative outlook; (iii) any change in U.S. or international financial, political or economic conditions or currency exchange rates or exchange controls as would, in the judgment of a majority in interest of the Purchasers including Salomon Smith Barney Inc., be likely to prejudice materially the success of the proposed issue, sale or distribution of the Offered Securities, whether in the primary market or in respect of dealings in the secondary market, (iv) any material suspension or material limitation of trading in securities generally on the New York Stock Exchange, or any material setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (v) any general banking moratorium declared by U.S. Federal or, New York authorities; (vi) any major disruption of settlements of securities or clearance services in the United States or (vii) any attack on, outbreak or escalation of hostilities or act of terrorism involving the United States, any declaration of war by Congress or any other national or international calamity or emergency if, in the judgment of a majority in interest of the Purchasers including Salomon Smith Barney Inc., the effect of any such attack, outbreak, escalation, act, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the offering or sale of and payment for the Offered Securities. (c) On the Closing Date, each of the following (i) opinion of CGSH, counsel to the Issuers, (ii) letter of CGSH, (iii) opinion of George H. Cave, general counsel to the Issuers, (iv) opinion of Gust Rosenfeld, as special Arizona counsel to the Issuers and (v) opinion of Hinckley, Allen & Snyder LLP, as special Rhode Island counsel to the Issuers, shall have been furnished to the Purchasers, addressed to the Purchasers and dated the Closing Date, each in form and substance reasonably satisfactory to the Purchasers. (d) The Purchasers shall have received from Cravath, Swaine & Moore ("CS&M"), counsel for the Purchasers, such opinion or opinions, dated the Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities, the Offering Memorandum, the exemption from registration for the offer and sale of the Offered Securities by the Issuers to the several Purchasers and the resales by the several Purchasers as contemplated hereby and other related matters as Salomon Smith Barney Inc. may require, and the Issuers shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters (e) The Purchasers shall have received a certificate, dated the Closing Date and executed by Keith D. Jackson, as chief executive officer, and John T. Kurtzweil, as chief financial officer, in which such officers, to the best of their knowledge after 21 reasonable investigation, shall state that, on the date hereof and on and as of the Closing Date, the representations and warranties of each of the Issuers and Guarantors in this Agreement are true and correct, that each of the Issuers and Guarantors has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date, and that, subsequent to the dates of the most recent financial statements in the Offering Document there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole. (f) On the Closing Date, the Purchasers shall have received a counterpart of the Registration Rights Agreement which shall have been executed and delivered by duly authorized officers of the Issuers and the Guarantors. (g) On the Closing Date, the Indenture shall have been duly executed and delivered by the Issuers, the Guarantors and the Trustee, and the Offered Securities shall have been duly executed and delivered by the Issuers and duly authenticated by the Trustee. (h) The Offered Securities shall have been approved by the NASD for trading in the PORTAL market. (i) On the Closing Date or within a commercially reasonable time frame thereafter, the following documents and instruments relating to the Collateral shall have been delivered to the Purchasers: (1) a copy of the financing statements and such other instruments, including UCC financing statements, necessary to perfect the lien of, and the security interests to be created by, the Security Documents; and (2) a receipt executed on behalf of JPMorgan Chase Bank as the Administrative Agent acknowledging receipt in the State of New York of the certificates representing the pledged capital stock or other equity interests, as the case may be. (j) The Purchasers shall have received or shall receive within a commercially reasonable time frame, in respect of the Mortgages, a mortgagee's title policy of title insurance or marked-up title commitment for such insurance. Such policy or title commitment shall (i) be in an amount equal to the amount of title insurance coverage already provided to the Bank Lenders in respect of their security interest in the properties covered by such Mortgages; (ii) insure that the Mortgages insured thereby create a valid first lien on the property covered by such Mortgage, free and clear of all liens, defects and encumbrances other than Permitted Liens; (iii) provide affirmative 22 mechanic's lien coverage; (iv) name the Collateral Agent, for the benefit of the holders of the Offered Securities, as the insured thereunder; (v) be in the form of ALTA Loan Policy-1992; and (vi) contain revolving endorsements and such applicable endorsements and effective coverage as contained in the title insurance policies delivered in connection with the Amended and Restated Credit Agreement. (k) On or prior to the Closing Date, Salomon Smith Barney Inc. shall have received a completed Perfection Certificate in the form of Exhibit B dated the Closing Date and signed by an executive officer or financial officer of the Issuers together with all attachments contemplated thereby and the results of lien searches, conducted by a search service reasonably satisfactory to Salomon Smith Barney Inc., and Salomon Smith Barney Inc. shall be satisfied that no liens are outstanding on the property or assets of the Issuers and the Guarantors, other than any such Liens (i) which constitute Permitted Liens or (ii) as to which Salomon Smith Barney Inc. has received documentation reasonably satisfactory to it evidencing the termination of such Liens. (l) On or prior to the Closing Date, Salomon Smith Barney Inc. shall have received an executed copy of the Amended and Restated Credit Agreement, among the Issuers and the Bank Lenders, which shall be in full force and effect on the terms described in the Offering Document. (m) On or prior to the Closing Date, each of the duly executed Security Documents shall have been delivered to the Purchasers, and such Security Documents shall be in full force and effect on the terms described in the Offering Document. (n) On or prior to the Closing Date, the Collateral Sharing Agreement shall have been delivered to the Purchasers, and such agreement shall be in full force and effect on the terms described in the Offering Document. (o) On or prior to the Closing Date, an executed copy of the Registration Rights Agreement shall have been delivered to the Purchasers, and such agreement shall be in full force and effect on the terms described in the Offering Document. Documents described as being "in the agreed form" are documents which are in the forms which have been initialed for the purpose of identification by CS&M, copies of which are held by the Company and Salomon Smith Barney Inc., with such changes as the Company and Salomon Smith Barney Inc. may approve. The Issuers will furnish the Purchasers with such conformed copies of such opinions, certificates, letters and documents as the Purchasers reasonably request. Salomon Smith Barney Inc. may in its sole discretion waive on behalf of the Purchasers compliance with any conditions to the obligations of the Purchasers hereunder. 23 7. Indemnification and Contribution. (a) Each of the Issuers and Guarantors will jointly and severally indemnify and hold harmless each Purchaser, its partners, directors and officers and each person, if any, who controls such Purchaser within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such Purchaser may become subject, under the Securities Act or the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Offering Document, or any amendment or supplement thereto, or any related preliminary offering memorandum or the Exchange Act Reports, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, including any losses, claims, damages or liabilities arising out of or based upon the Issuers' failure to perform their obligations under Section 5(a) of this Agreement, and will reimburse each Purchaser for any legal or other expenses reasonably incurred by such Purchaser in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Issuers and Guarantors will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Issuers by any Purchaser through Salomon Smith Barney Inc. specifically for use therein, it being understood and agreed that the only such information consists of the information described as such in subsection (b) below. (b) Each Purchaser will severally and not jointly indemnify and hold harmless each of the Issuers, their directors and officers and each person, if any, who controls the Issuers within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities to which either of the Issuers may become subject, under the Securities Act or the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Offering Document, or any amendment or supplement thereto, or any related preliminary offering memorandum, or arise out of or are based upon the omission or the alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Issuers by such Purchaser through Salomon Smith Barney Inc. specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Issuers in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Purchaser consists 24 of the following information in the Offering Memorandum furnished on behalf of each Purchaser: under the caption "Plan of Distribution" paragraphs 3, 8 and 10, the first sentence of paragraph 1, the fifth sentence of paragraph 9 and the second and third sentences of paragraph 12; provided, however, that the Purchasers shall not be liable for any losses, claims, damages or liabilities arising out of or based upon the Issuers' failure to perform its obligations under Section 5(a) of this Agreement. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a) or (b) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a) or (b) above. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation unless (i) the indemnifying party has failed within a reasonable amount of time to retain counsel reasonably satisfactory to the indemnified party; (ii) the indemnified party shall have reasonably concluded that there may be legal defenses available to it that are different from or in addition to those available to the indemnifying party; or (iii) the named parties in any such proceeding (included any impleaded parties) include both the indemnifying party and the indemnified party and representations of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes (i) an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or failure to act by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative 25 benefits received by the Issuers and Guarantors on the one hand and the Purchasers on the other from the offering of the Offered Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Issuers and the Guarantors on the one hand and the Purchasers on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Issuers and the Guarantors on the one hand and the Purchasers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Issuers and the Guarantors bear to the total discounts and commissions received by the Purchasers from the Issuers under this Agreement. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuers and Guarantors or the Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Purchaser shall be required to contribute any amount in excess of the amount by which the total discounts, fees and commissions received by such Purchaser exceeds the amount of any damages which such Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The Purchasers' obligations in this subsection (d) to contribute are several in proportion to their respective purchase obligations and not joint. (e) The obligations of the Issuers and Guarantors under this Section shall be in addition to any liability which the Issuers and Guarantors may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Purchaser within the meaning of the Securities Act or the Exchange Act; and the obligations of the Purchasers under this Section shall be in addition to any liability which the respective Purchasers may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Issuers within the meaning of the Securities Act or the Exchange Act. 8. Default of Purchasers. If any Purchaser or Purchasers default in their obligations to purchase Offered Securities hereunder and the aggregate principal amount of Offered Securities that such defaulting Purchaser or Purchasers agreed but failed to purchase does not exceed 10% of the total principal amount of Offered Securities, Salomon Smith Barney Inc. may make arrangements satisfactory to the Issuers for the purchase of such Offered Securities by other persons, including any of the Purchasers, but 26 if no such arrangements are made by the Closing Date, the non-defaulting Purchasers shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Purchasers agreed but failed to purchase. If any Purchaser or Purchasers so default and the aggregate principal amount of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total principal amount of Offered Securities and arrangements satisfactory to Salomon Smith Barney Inc. and the Company for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Purchaser or the Issuers, except as provided in Section 9. As used in this Agreement, the term "Purchaser" includes any person substituted for a Purchaser under this Section. Nothing herein will relieve a defaulting Purchaser from liability for its default. 9. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Issuers and Guarantors or their officers and of the several Purchasers set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Purchaser, either of the Issuers and any Guarantors or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If for any reason the purchase of the Offered Securities by the Purchasers is not consummated, the Issuers and the Guarantors shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5 and the respective obligations of the Issuers and Guarantors and the Purchasers pursuant to Section 7 shall remain in effect. If the purchase of the Offered Securities by the Purchasers is not consummated for any reason other than solely because of the occurrence of any event specified in clause (iii), (iv), (v), (vi) or (vii) of Section 6(b), the Issuers and the Guarantors will reimburse the Purchasers for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities. 10. Notices. All communications hereunder will be in writing and, if sent to the Purchasers will be mailed, delivered or telegraphed and confirmed to the Purchasers, c/o Salomon Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, Attention: General Counsel, or, if sent to the Issuers, will be mailed, delivered or telegraphed and confirmed to it at ON Semiconductor Corporation, 5005 East McDowell Road, Phoenix, Arizona 85005, Attention: General Counsel; provided, however, that any notice to a Purchaser pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Purchaser. 11. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the controlling persons referred to in Section 7, and no other person will have any right or obligation 27 hereunder, except that holders of Offered Securities shall be entitled to enforce the agreements for their benefit contained in the second and third sentences of Section 5(b) hereof against the Issuers as if such holders were parties thereto. 12. Representation of Purchasers. You will act for the several Purchasers in connection with this purchase, and any action under this Agreement taken by you will be binding upon all the Purchasers. 13. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. The Issuers hereby submit to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. The Issuers irrevocably appoint CT Corporation System, 111 Eighth Avenue, 13th Floor, New York, NY 10011 as their authorized agent in the Borough of Manhattan in The City of New York upon which process may be served in any such suit or proceeding, and agrees that service of process upon such agent, and written notice of said service to the Issuers, by the person serving the same to the address provided in Section 10, shall be deemed in every respect effective service of process upon the Issuers in any such suit or proceeding. The Issuers further agree to take any and all action as may be necessary to maintain such designation and appointment of such agent in full force and effect for a period of seven years from the date of this Agreement. 28 If the foregoing is in accordance with the Purchasers' understanding of our agreement, kindly sign and return to us one of the counterparts hereof, whereupon it will become a binding agreement between the Issuers and the several Purchasers in accordance with its terms. Very truly yours, By: ON SEMICONDUCTOR CORPORATION, by /s/ John T. Kurtzweil --------------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, by /s/ John T. Kurtzweil --------------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SCG (MALAYSIA SMP) HOLDING CORPORATION, by /s/ John T. Kurtzweil --------------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SCG (CZECH) HOLDING CORPORATION, by /s/ John T. Kurtzweil --------------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer 29 By: SCG (CHINA) HOLDING CORPORATION, by /s/ John T. Kurtzweil --------------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SEMICONDUCTOR COMPONENTS INDUSTRIES PUERTO RICO, INC., by /s/ John T. Kurtzweil --------------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SCG INTERNATIONAL DEVELOPMENT LLC, by /s/ John T. Kurtzweil --------------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SEMICONDUCTOR COMPONENTS INDUSTRIES OF RHODE ISLAND, INC., by /s/ John T. Kurtzweil --------------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SEMICONDUCTOR COMPONENTS INDUSTRIES INTERNATIONAL OF RHODE ISLAND, INC., by /s/ John T. Kurtzweil --------------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer 30 The foregoing Purchase Agreement is hereby confirmed and accepted as of the date first above written. SALOMON SMITH BARNEY INC. By H. Allen Bouch -------------------------- Title: Managing Director Acting on behalf of itself and as the Representative of the several Purchasers SCHEDULE A
PRINCIPAL AMOUNT OF INITIAL PURCHASERS OFFERED SECURITIES ------------------ ------------------- Salomon Smith Barney Inc................................. $ 80,000,000 Credit Suisse First Boston LLC........................... 60,000,000 J.P. Morgan Securities Inc............................... 40,000,000 Morgan Stanley & Co. Incorporated........................ 20,000,000 Total........................................... $ 200,000,000 ============= SCHEDULE B NONE SCHEDULE C SCG (CZECH) HOLDING CORPORATION {DELAWARE}(1) Terosil a.s. [JV] {Czech Republic} Tesla Sezam a.s. [JV] {Czech Republic} SCG (CHINA) HOLDING CORPORATION {DELAWARE} Leshan-Phoenix Semiconductor Company Limited [JV] {Leshan, China} SCG (MALAYSIA SMP) HOLDING CORPORATION {DELAWARE} SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC {DELAWARE} Semiconductor Components Industries of Rhode Island, Inc. {Rhode Island} Semiconductor Components Industries International of Rhode Island, Inc. {Rhode Island} Semiconductor Components Industries Puerto Rico, Inc. {Delaware} ON Semiconductor Slovakia, a.s. {Slovak Republic} SCG International Development, LLC {Delaware} SCG Malaysia Holdings Sdn. Bhd. {Malaysia} SCG Industries Malaysia Sdn. Bhd. {Malaysia} ON Semiconductor Technology Malaysia Sdn. Bhd. {Malaysia} Semiconductor Components Industries (Thailand) Limited {Thailand} SCG Mexico, S.A. de C.V. {Mexico} ON Semiconductor Technology Japan Ltd. {Japan} SCG Philippines, Incorporated {Philippines} SCG Asia Capital Pte. Ltd. {Malaysia} SCG Czech Design Center s.r.o. {Czech Republic} ON Semiconductor Hong Kong Design Limited {Hong Kong, China} ON Semiconductor Japan Ltd. {Japan} ON Semiconductor Design (Shanghai) Limited {China} ON Semiconductor Trading Ltd. {Bermuda} ON Semiconductor Denmark ApS {Denmark} ON Semiconductor Hong Kong Logistics Limited {Hong Kong, China} SCG Hong Kong SAR Limited {Hong Kong, China} Semiconductor Components Industries Singapore Pte Ltd {Singapore} SCG Korea Ltd. {Korea} ON Semiconductor Canada Trading Corporation {Canada} SCG do Brasil Ltda. {Brazil} SCG Holding (Netherlands) B.V. {Netherlands} ON Semiconductor Germany GmbH {Germany} SCG France SAS {France} ON Semiconductor AB {Sweden} ON Semiconductor Mexico Trading S. de R. L. de C. V. {Mexico} SCG Italy S.r.l. {Italy} ON Semiconductor Limited {United Kingdom} - --------------------------------- (1) { } Denotes jurisdiction
EXHIBIT 4.18 ================================================================================ ON SEMICONDUCTOR CORPORATION SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC 12% Senior Secured Notes due 2010 -------------------- INDENTURE Dated as of March 3, 2003 -------------------- Wells Fargo Bank Minnesota, National Association, as Trustee ================================================================================ ii TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions..................................................................................... 1 SECTION 1.02. Other Definitions.............................................................................. 23 SECTION 1.03. Incorporation by Reference of Trust Indenture Act.............................................. 24 SECTION 1.04. Rules of Construction.......................................................................... 25 SECTION 1.05. Designated Senior Indebtedness; Designation for Purposes of Senior Secured Notes due 2008................................................................. 25 ARTICLE II THE NOTES SECTION 2.01. Amount of Notes; Issuable in Series............................................................ 25 SECTION 2.02. Form and Dating................................................................................ 26 SECTION 2.03. Execution and Authentication................................................................... 27 SECTION 2.04. Registrar and Paying Agent..................................................................... 27 SECTION 2.05. Paying Agent to Hold Money in Trust............................................................ 28 SECTION 2.06. Holder Lists................................................................................... 28 SECTION 2.07. Transfer and Exchange.......................................................................... 28 SECTION 2.08. Replacement Notes.............................................................................. 29 SECTION 2.09. Outstanding Notes.............................................................................. 29 SECTION 2.10. Temporary Notes................................................................................ 30 SECTION 2.11. Cancelation.................................................................................... 30 SECTION 2.12. Defaulted Interest............................................................................. 30 SECTION 2.13. CUSIP and "ISIN" Numbers....................................................................... 30 SECTION 2.14. Computation of Interest........................................................................ 30 ARTICLE III REDEMPTION SECTION 3.01. Notices to Trustee............................................................................. 31 SECTION 3.02. Selection of Notes To Be Redeemed.............................................................. 31 SECTION 3.03. Notice of Redemption........................................................................... 31 SECTION 3.04. Effect of Notice of Redemption................................................................. 32 SECTION 3.05. Deposit of Redemption Price.................................................................... 32 SECTION 3.06. Notes Redeemed in Part......................................................................... 32 ARTICLE IV COVENANTS iii
SECTION 4.01. Payment of Notes............................................................................... 32 SECTION 4.02. Commission Reports............................................................................. 33 SECTION 4.03. Limitation on Incurrence of Additional Indebtedness............................................ 33 SECTION 4.04. Limitation on Restricted Payments.............................................................. 36 SECTION 4.05. Limitation on Restrictions on Distributions from Restricted Subsidiaries....................... 41 SECTION 4.06. Limitation on Sales of Assets and Subsidiary Stock............................................. 42 SECTION 4.07. Limitation on Transactions with Affiliates..................................................... 45 SECTION 4.08. Repurchase of Notes at the Option of the Holder Upon a Change of Control....................... 45 SECTION 4.09. Compliance Certificate......................................................................... 47 SECTION 4.10. Further Instruments and Acts................................................................... 47 SECTION 4.11. Additional Note Guarantees and Liens........................................................... 47 SECTION 4.12. Limitation on Lines of Business................................................................ 49 SECTION 4.13. Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries................. 49 SECTION 4.14. Limitation on Liens............................................................................ 50 SECTION 4.15. Sale/Leaseback Transactions.................................................................... 50 ARTICLE V SUCCESSOR COMPANY SECTION 5.01. When Company May Merge or Transfer Assets...................................................... 50 ARTICLE VI EVENTS OF DEFAULTS AND REMEDIES SECTION 6.01. Events of Default.............................................................................. 52 SECTION 6.02. Acceleration................................................................................... 54 SECTION 6.03. Other Remedies................................................................................. 54 SECTION 6.04. Waiver of Past Defaults........................................................................ 55 SECTION 6.05. Control by Majority............................................................................ 55 SECTION 6.06. Limitation on Suits............................................................................ 55 SECTION 6.07. Rights of Holders to Receive Payment........................................................... 56 SECTION 6.08. Collection Suit by Trustee..................................................................... 56 SECTION 6.09. Trustee May File Proofs of Claim............................................................... 56 SECTION 6.10. Priorities..................................................................................... 56 SECTION 6.11. Undertaking for Costs.......................................................................... 56 SECTION 6.12. Waiver of Stay or Extension Laws............................................................... 57 ARTICLE VII TRUSTEE SECTION 7.01. Duties of Trustee.............................................................................. 57 SECTION 7.02. Rights of Trustee.............................................................................. 58 iv
SECTION 7.03. Individual Rights of Trustee................................................................... 59 SECTION 7.04. Trustee's Disclaimer........................................................................... 59 SECTION 7.05. Notice of Defaults............................................................................. 59 SECTION 7.06. Reports by Trustee to Holders.................................................................. 59 SECTION 7.07. Compensation and Indemnity..................................................................... 59 SECTION 7.08. Replacement of Trustee......................................................................... 60 SECTION 7.09. Successor Trustee by Merger.................................................................... 61 SECTION 7.10. Eligibility; Disqualification.................................................................. 61 SECTION 7.11. Preferential Collection of Claims Against the Issuers.......................................... 61 ARTICLE VIII DISCHARGE OF INDENTURE; DEFEASANCE SECTION 8.01. Discharge of Liability on Notes; Defeasance.................................................... 62 SECTION 8.02. Conditions to Defeasance....................................................................... 63 SECTION 8.03. Application of Trust Money..................................................................... 64 SECTION 8.04. Repayment to the Issuers....................................................................... 64 SECTION 8.05. Indemnity for Government Obligations........................................................... 64 SECTION 8.06. Reinstatement.................................................................................. 64 ARTICLE IX AMENDMENTS SECTION 9.01. Without Consent of Holders..................................................................... 65 SECTION 9.02. With Consent of Holders........................................................................ 66 SECTION 9.03. Compliance with Trust Indenture Act............................................................ 67 SECTION 9.04. Revocation and Effect of Consents and Waivers.................................................. 67 SECTION 9.05. Notation on or Exchange of Notes............................................................... 67 SECTION 9.06. Trustee to Sign Amendments..................................................................... 67 SECTION 9.07. Payment for Consent............................................................................ 68 ARTICLE X COLLATERAL AND SECURITY SECTION 10.01. Security Documents............................................................................ 68 SECTION 10.02. Recording and Opinions........................................................................ 69 SECTION 10.03. Release of Collateral......................................................................... 69 SECTION 10.04. Certificates and Opinions of Counsel.......................................................... 71 SECTION 10.05. Certificates of the Trustee................................................................... 71 SECTION 10.06. Authorization of Actions to Be Taken by the Trustee Under the Security Documents.............. 71 SECTION 10.07. Authorization of Receipt of Funds by the Trustee Under the Security Documents and the Collateral Sharing Agreement; Distributions by the Trustee under the Collateral Sharing Agreement and v Appendix A - Provisions Relating to Original Notes, Additional Notes, Private Exchange Notes and Exchange Notes Exhibit A - Form of Initial Note and Private Exchange Note Exhibit B - Form of Exchange Note Exhibit C - Form of Supplemental Indenture
the Intercreditor Agreement............................................................ 72 SECTION 10.08. Termination of Security Interest.............................................................. 72 SECTION 10.09. Trustee Serving as Collateral Agent; Amendments or Supplements to, or Replacements of, the Security Documents and the Collateral Sharing Agreement...................................................................... 72 SECTION 10.10. Designations.................................................................................. 73 ARTICLE XI NOTE GUARANTEES SECTION 11.01. Note Guarantees............................................................................... 73 SECTION 11.02. Limitation on Liability....................................................................... 75 SECTION 11.03. Releases of Note Guarantees................................................................... 75 SECTION 11.04. Successors and Assigns........................................................................ 76 SECTION 11.05. No Waiver..................................................................................... 76 SECTION 11.06. Modification.................................................................................. 77 SECTION 11.07. Execution of Supplemental Indenture for Future Guarantors..................................... 77 SECTION 11.08. Non-Impairment................................................................................ 77 ARTICLE XII MISCELLANEOUS SECTION 12.01. Trust Indenture Act Controls.................................................................. 77 SECTION 12.02. Notices....................................................................................... 77 SECTION 12.03. Communication by Holders with Other Holders................................................... 78 SECTION 12.04. Certificate and Opinion as to Conditions Precedent............................................ 78 SECTION 12.05. Statements Required in Certificate or Opinion................................................. 79 SECTION 12.06. When Notes Disregarded........................................................................ 79 SECTION 12.07. Rules by Trustee, Paying Agent and Registrar.................................................. 79 SECTION 12.08. Legal Holidays................................................................................ 79 SECTION 12.09. GOVERNING LAW................................................................................. 79 SECTION 12.10. No Recourse Against Others.................................................................... 80 SECTION 12.11. Successors.................................................................................... 80 SECTION 12.12. Multiple Originals............................................................................ 80 SECTION 12.13. Table of Contents; Headings................................................................... 80 INDENTURE dated as of March 3, 2003, among ON SEMICONDUCTOR CORPORATION, a Delaware corporation (the "Company"), SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company ("SCI LLC" and, together with the Company, the "Issuers"), SCG (MALAYSIA SMP) HOLDING CORPORATION, SCG (CZECH) HOLDING CORPORATION, SCG (CHINA) HOLDING CORPORATION, SEMICONDUCTOR COMPONENTS INDUSTRIES PUERTO RICO, INC., SCG INTERNATIONAL DEVELOPMENT LLC, SEMICONDUCTOR COMPONENTS INDUSTRIES OF RHODE ISLAND, INC. and SEMICONDUCTOR COMPONENTS INDUSTRIES INTERNATIONAL OF RHODE ISLAND, INC., as guarantors (collectively, the "Guarantors"), and WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of (a) the Issuers' 12% Senior Secured Notes due 2010 issued on the date hereof (the "Original Notes"), (b) any Additional Notes (as defined herein) that may be issued on any Issue Date (all such Notes in clauses (a) and (b) being referred to collectively as the "Initial Notes"), (c) if and when issued as provided in a Registration Rights Agreement (as defined in Appendix A hereto (the "Appendix")), the Issuers' 12% Senior Secured Notes due 2010 (the "Exchange Notes") issued in an Exchange Offer in exchange for any Initial Notes and (d) if and when issued as provided in a Registration Rights Agreement, the Private Exchange Notes (such term and each other term used but not defined herein has the meaning assigned to such term in Sections 1.01 and 1.02; the Private Exchange Notes, together with the Initial Notes and any Exchange Notes issued hereunder, the "Notes") issued in a Private Exchange. On the date hereof, $200,000,000 in aggregate principal amount of Notes will be initially issued. Subject to the conditions and in compliance with the covenants set forth herein, the Issuers may issue an unlimited aggregate principal amount of Additional Notes from time to time. ARTICLE I Definitions and Incorporation by Reference SECTION 1.01. Definitions. "Acquired Debt" means, with respect to any specified Person, (a) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Restricted Subsidiary of such specified Person, including Indebtedness Incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Restricted Subsidiary of such specified Person, and (b) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. 2 "Additional Assets" means (a) any property or assets (other than Indebtedness and Capital Stock) to be used by the Company or a Restricted Subsidiary in a Permitted Business; (b) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary; or (c) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary; provided, however, that any such Restricted Subsidiary described in clauses (b) or (c) above is primarily engaged in a Permitted Business. "Additional Interest" means any additional interest payable under a Registration Rights Agreement. "Additional Notes" means any 12% Senior Secured Notes due 2010, issued under the terms of this Indenture subsequent to the Closing Date. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of Sections 4.06 and 4.07 only, "Affiliate" shall also mean any beneficial owner of shares representing more than 10% of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Asset Disposition" means any sale, lease (other than an operating lease), transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (a) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary) that have a Fair Market Value in excess of $5.0 million, (b) all or substantially all the assets of any division or line of business of the Company or any Restricted Subsidiary or (c) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of (a), (b) and (c) above, (i) a disposition by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, (ii) an issuance of Capital Stock by a Subsidiary to the Company or to a Restricted Subsidiary, (iii) for purposes of Section 4.06 only, a disposition that constitutes a Restricted Payment permitted by Section 4.04, (iv) a disposition of assets with a Fair Market Value of less than $5.0 million, (v) a Sale/Leaseback Transaction with respect to any assets within 90 days of the acquisition of such assets, (vi) a disposition of Temporary Cash Investments, the proceeds of which are used within five business days to make another Permitted Investment, (vii) a disposition of obsolete, uneconomical, negligible, worn out or surplus property or equipment in the ordinary course of business and the periodic clearance of aged inventory, (viii) any exchange of like-kind property of the type described in Section 1031 of the Code for use in a Permitted Business, (ix) the sale or 3 disposition of any assets or property received as a result of a foreclosure by the Company or any of its Restricted Subsidiaries of any secured Investment or any other transfer of title with respect to any secured Investment in default, (x) the licensing of intellectual property in the ordinary course of business or in accordance with industry practice, (xi) the sale or discount, in each case without recourse, of accounts receivable arising in the ordinary course of business, but only in connection with the compromise or collection thereof and (xii) a sale of accounts receivable and related assets pursuant to a Receivables Facility. Notwithstanding the foregoing, the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole will be governed by the provisions of Sections 4.08 and/or 5.01 and not by the provisions of Section 4.06. "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate implicit in such transaction, determined in accordance with GAAP) of the total obligations of the lessee for net rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended or may be, at the option of the lessor, extended). "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the number of years obtained by dividing (a) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or scheduled redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (b) the then outstanding sum of all such payments. "Bank Indebtedness" means any and all amounts payable under or in respect of the Credit Agreement and any Refinancing Indebtedness with respect thereto, as amended from time to time, including principal, premium (if any), interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company or SCI LLC whether or not a claim for post-filing interest is allowed in such proceedings), fees, charges, expenses, reimbursement obligations, guarantees and all other amounts payable thereunder or in respect thereof. It is understood and agreed that Refinancing Indebtedness in respect of the Credit Agreement may be Incurred from time to time after termination of the Credit Agreement. "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of the Board of Directors of the Company. "Business Day" means each day which is not a Legal Holiday. "Capitalized Lease Obligations" means an obligation that is required to be classified and accounted for as a capitalized lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be prepaid by the lessee without payment of a penalty. 4 "Capital Stock" of any Person means any and all shares, partnership, membership or other interests, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock (but excluding any debt securities convertible into such equity) and any rights to purchase, warrants, options or similar interests with respect to the foregoing. "Cash Management Obligations" means, with respect to any Person, all obligations of such Person in respect of overdrafts and related liabilities owed to any other Person that arise from treasury, depositary or cash management services in connection with automated clearing house transfers of funds or any similar transactions. "Change of Control" means the occurrence of any of the following events: (a) (i) any "person" (as such term is used in Section 13(d)(3) of the Exchange Act), other than one or more Permitted Holders, becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 40% of the total voting power of the Voting Stock of the Company or SCI LLC, whether as a result of issuance of securities of the Company or SCI LLC, any merger, consolidation, liquidation or dissolution of the Company or SCI LLC, any direct or indirect transfer of securities by any Permitted Holder or otherwise, and (ii) the Permitted Holders "beneficially own" (as defined in clause (i) above), directly or indirectly, in the aggregate a lesser percentage of the total voting power of the Voting Stock of the Company or SCI LLC, than such other person and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the board of directors of the Company or the similar governing body of SCI LLC, as the case may be; (b) during any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors of the Company or the similar governing body of SCI LLC, as the case may be (together with any new directors or members of such governing body, as the case may be, whose election by such board of directors of the Company or governing body of SCI LLC, as the case may be, or whose nomination for election by the shareholders of the Company or the members of SCI LLC, as the case may be, was approved by a vote of a majority of the directors of the Company or a majority of the members of the governing body of SCI LLC, as the case may be, then still in office who were either directors or members of such governing body, as the case may be, at the beginning of such period or whose election or nomination for election was previously so approved), cease for any reason to constitute a majority of the board of directors of the Company or a majority of the members of the governing body of SCI LLC, as the case may be, then in office; (c) the adoption of a plan relating to the liquidation or dissolution of the Company or SCI LLC (other than a plan with respect to SCI LLC adopted solely for the purpose of reorganizing SCI LLC as a corporation); or (d) the merger or consolidation of the Company or SCI LLC with or into another Person or the merger of another Person with or into the Company or SCI LLC, or the sale of all 5 or substantially all the assets of the Company or SCI LLC to another Person (other than a Person that is controlled by the Permitted Holders), and, in the case of any such merger or consolidation, the securities of the Company or SCI LLC that are outstanding immediately prior to such transaction and which represent 100% of the aggregate voting power of the Voting Stock of the Company or SCI LLC are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving Person or transferee or a Person controlling such surviving Person or transferee that represent immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving Person or transferee or a Person controlling such surviving Person or transferee. "China JV" means the Company's joint venture in Leshan, China. "Closing Date" means the date of this Indenture. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral" means all property and assets of any Issuer or Guarantor with respect to which from time to time a Lien is granted as security for the Notes or the Note Guarantees pursuant to the applicable Security Documents. "Collateral Agent" means JPMorgan Chase Bank, in its capacity as collateral agent under the Security Documents and the Collateral Sharing Agreement or any successor thereto, or any Person otherwise designated as the "Collateral Agent" pursuant to the Collateral Sharing Agreement. "Collateral Assignment" means the Collateral Assignment dated August 4, 1999, as amended and restated as of March 3, 2003, between SCI LLC and the Collateral Agent. "Collateral Sharing Agreement" means (a) the Collateral Sharing Agreement dated as of March 3, 2003, among the Collateral Agent, the Trustee and the Issuers, as such agreement may be amended, supplemented or otherwise modified from time to time pursuant to the terms thereof and this Indenture and (b) any substantially identical agreement hereafter entered into pursuant to Section 10.09(c). "Commission" means the Securities and Exchange Commission. "Commodity Hedge Obligations" means with respect to any Person any commodity price protection agreement or other commodity price hedging arrangement or other similar agreement or arrangement as to which such Person is party. "Company" means the party named as such in this Indenture until a successor replaces it and, thereafter, means the successor and, for purposes of any provision contained herein and required by the TIA, each other obligor on the indenture securities. "Consolidated Coverage Ratio" as of any date of determination means the ratio of (a) the aggregate amount of EBITDA for the period of the most recent four consecutive fiscal quarters for which internal financial statements are available prior to the date of such 6 determination to (b) Consolidated Interest Expense for such four fiscal quarters; provided, however, that (i) if the Company or any Restricted Subsidiary has Incurred any Indebtedness since the beginning of such period that remains outstanding on such date of determination or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period (in each case other than Indebtedness Incurred under any revolving credit facility, in which case interest expense shall be computed based upon the average daily balance of such Indebtedness during the applicable period) and the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period, (ii) if the Company or any Restricted Subsidiary has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of such period or if any Indebtedness is to be repaid, repurchased, defeased or otherwise discharged (in each case, if such Indebtedness has been permanently repaid and has not been replaced, other than Indebtedness Incurred under any revolving credit facility unless such Indebtedness is permanently reduced, in which case interest expense shall be computed based upon the average daily balance of such Indebtedness during the applicable period) on the date of the transaction giving rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for such period shall be calculated on a pro forma basis as if such discharge had occurred on the first day of such period and as if the Company or such Restricted Subsidiary has not earned any interest income actually earned during such period in respect of cash or Temporary Cash Investments used to repay, repurchase, defease or otherwise discharge such Indebtedness, (iii) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Disposition, EBITDA for such period shall be reduced by an amount equal to EBITDA (if positive) directly attributable to the assets that are the subject of such Asset Disposition for such period or increased by an amount equal to EBITDA (if negative) directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Disposition for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale), (iv) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person that becomes a Restricted Subsidiary) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period and (v) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition or any Investment or acquisition of assets that would have required an adjustment pursuant to clause (iii) or (iv) above 7 if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition of assets occurred on the first day of such period. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company. Any such pro forma calculations shall reflect any pro forma expense and cost reductions attributable to such acquisitions, to the extent such expense and cost reduction would be permitted by the Commission to be reflected in pro forma financial statements included in a registration statement filed with the Commission. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term as at the date of determination in excess of 12 months). "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its Consolidated Restricted Subsidiaries, plus, to the extent Incurred by the Company or its Restricted Subsidiaries in such period but not included in such interest expense, without duplication: (a) interest expense attributable to Capitalized Lease Obligations and the imputed interest with respect to Attributable Debt, (b) amortization of debt discount, (c) amortization of debt issuance costs (other than any such costs associated with the Bank Indebtedness, the Initial Notes, the Exchange Notes, the Senior Secured Notes due 2008, the Senior Subordinated Notes or the Junior Subordinated Note), (d) capitalized interest, (e) noncash interest expense other than any noncash interest expense in connection with the Junior Subordinated Note, (f) commissions, discounts and other fees and charges attributable to letters of credit and bankers' acceptance financing, (g) interest accruing on any Indebtedness of any other Person to the extent such Indebtedness is Guaranteed by the Company or any Restricted Subsidiary, (h) net costs associated with Hedging Obligations (including amortization of fees) (other than any such costs associated with the Bank Indebtedness, the Initial Notes, the Exchange Notes, the Senior Secured Notes due 2008, the Senior Subordinated Notes or the Junior Subordinated Note), (i) dividends in respect of all Disqualified Stock of the Company and all Preferred Stock of any of the Restricted Subsidiaries of the Company, to the extent held by Persons other than the Company or another Restricted Subsidiary, other than accumulated but unpaid dividends on the TPG Preferred Stock, (j) interest Incurred in connection with investments in discontinued operations and (k) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Indebtedness Incurred by such plan or trust. Notwithstanding anything to the contrary contained herein, commissions, discounts, yield and other fees and charges Incurred in connection with any transaction (including in connection with a Receivables Facility) pursuant to which the Company or any Subsidiary of the Company may sell, convey or otherwise transfer or grant a security interest in any accounts receivable or related assets as contemplated by the definition of "Receivables Facility" shall be included in Consolidated Interest Expense. 8 "Consolidated Net Income" means, for any period, the net income of the Company and its Consolidated Subsidiaries for such period determined in accordance with GAAP; provided, however, that: (a) any net income of any Person (other than the Company), if such Person is not a Restricted Subsidiary, shall be excluded from such Consolidated Net Income, except that (i) subject to the limitations contained in clause (d) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution made to a Restricted Subsidiary, to the limitations contained in clause (c) below) and (ii) the Company's equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income; (b) any net income (or loss) of any Person acquired by the Company or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded from such Consolidated Net Income; (c) any net income (or loss) of any Restricted Subsidiary, to the extent that the declaration of dividends or similar distributions by such Restricted Subsidiary of that income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or is, directly or indirectly, restricted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary or its stockholders or other holders of its equity, shall be excluded from such Consolidated Net Income, except that (i) subject to the limitations contained in clause (d) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution made to another Restricted Subsidiary, to the limitation contained in this clause) and (ii) the Company's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income; (d) any gain (or loss) realized upon the sale or other disposition of any asset of the Company or its Consolidated Subsidiaries (including pursuant to any Sale/Leaseback Transaction) that is not sold or otherwise disposed of in the ordinary course of business and any gain (or loss) realized upon the sale or other disposition of any Capital Stock of any Person shall be excluded from such Consolidated Net Income (without regard to abandonments or reserves related thereto); (e) any extraordinary gain or loss shall be excluded from such Consolidated Net Income; (f) the cumulative effect of a change in accounting principles shall be excluded from such Consolidated Net Income; 9 (g) gains or losses due solely to fluctuations in currency values and the related tax effects according to GAAP shall be excluded from such Consolidated Net Income; (h) only for the purposes of the definition of EBITDA, one-time cash charges recorded in accordance with GAAP resulting from any merger, recapitalization or acquisition transaction shall be excluded from such Consolidated Net Income; and (i) the amortization of any premiums, fees or expenses incurred in connection with the Refinancing shall be excluded from such Consolidated Net Income. "Consolidation" means the consolidation of the amounts of each of the Restricted Subsidiaries with those of the Company in accordance with GAAP consistently applied; provided, however, that "Consolidation" shall not include consolidation of the accounts of any Unrestricted Subsidiary, but the interest of the Company or any Restricted Subsidiary in an Unrestricted Subsidiary shall be accounted for as an investment. The term "Consolidated" has a correlative meaning. "Credit Agreement" means the credit agreement dated as of August 4, 1999, as amended and restated as of February 14, 2003, and as subsequently amended, among SCI LLC, the Company, the lenders named therein and JPMorgan Chase Bank, as administrative agent, collateral agent and syndication agent, and Credit Lyonnais New York Branch, Credit Suisse First Boston and Lehman Commercial Paper Inc., as co-documentation agents, including any guarantees, collateral documents, instruments and agreements executed in connection therewith, and any amendments, supplements, modifications, extensions, renewals, restatements or refundings thereof (except to the extent that any such amendment, supplement, modification, extension, renewal, restatement or refunding would be prohibited by the terms of this Indenture, unless otherwise agreed to by the Holders of at least a majority in aggregate principal amount of Notes at the time outstanding) and any indentures or credit facilities or commercial paper facilities with banks or other institutional lenders that replace, refund or refinance any part of the loans, notes, other credit facilities or commitments thereunder, including any such replacement, refunding or refinancing facility or indenture that increases the amount borrowable thereunder or alters the maturity thereof. "Credit Agreement Obligations" means (a) all Bank Indebtedness and all other Indebtedness outstanding under one or more of any other First-Lien Credit Facilities that constitutes Permitted Debt or is otherwise permitted under Section 4.03 and that is designated by the Issuers as "Credit Agreement Obligations" for purposes of this Indenture and is secured by a Permitted Lien described in clause (a) or clause (e) of the definition thereof, (b) all other obligations (not constituting Indebtedness) of an Issuer or Guarantor under the Credit Agreement or any such other First-Lien Credit Facility and (c) all other obligations of an Issuer or any Guarantor to a creditor under any First-Lien Credit Facilities in respect of Hedging Obligations, Commodity Hedge Obligations or Cash Management Obligations that are designated by the Issuers to be "Credit Agreement Obligations" for purposes of this Indenture. "Credit Facilities" means one or more debt facilities (including the Credit Agreement) or commercial paper facilities, providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to lenders or to special purpose 10 entities formed to borrow from lenders against such receivables) or letters of credit, or any debt securities or other form of debt financing (including convertible or exchangeable debt instruments), in each case, as amended, supplemented, modified, extended, renewed, restated or refunded in whole or in part from time to time. "Currency Agreement" means with respect to any Person any foreign exchange contract, currency swap agreements or other similar agreement or arrangement to which such Person is a party. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Discharge of Credit Agreement Obligations" means payment in full in cash of the principal of and interest and premium, if any, on all Indebtedness outstanding under the First-Lien Credit Facilities or, with respect to Hedging Obligations, Commodity Hedge Obligations or letters of credit outstanding thereunder, delivery of cash collateral or backstop letters of credit in respect thereof in compliance with such First-Lien Credit Facility, in each case after or concurrently with termination of all commitments to extend credit thereunder, and payment in full of any other Credit Agreement Obligations that are due and payable or otherwise accrued and owing at or prior to the time such principal, interest and premium, if any, are paid. "Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable) or upon the happening of any event (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is convertible or exchangeable for Indebtedness or Disqualified Stock or (c) is redeemable at the option of the holder thereof, in whole or in part, in the case of clauses (a), (b) and (c) on or prior to 90 days after the Stated Maturity of the Notes; provided, however, that only the portion of Capital Stock that so matures or is mandatorily redeemable, is so convertible or exchangeable or is so redeemable at the option of the holder thereof prior to the Stated Maturity of the Notes shall be deemed Disqualified Stock; provided further, however, that (i) any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to 90 days after the Stated Maturity of the Notes shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the provisions of Sections 4.06 and 4.08, (ii) a class of Capital Stock shall not be Disqualified Stock hereunder solely as a result of any maturity or redemption that is conditioned upon, and subject to, compliance with the Section 4.04 and (iii) Capital Stock issued to any plan for the benefit of employees shall not constitute Disqualified Stock solely because it may be required to be repurchased by the Company in order to satisfy applicable statutory or regulatory obligations. "Domestic Subsidiary" means any Restricted Subsidiary of the Company other than a Foreign Subsidiary. "EBITDA" for any period means the Consolidated Net Income for such period, plus, without duplication, the following to the extent deducted in calculating such Consolidated 11 Net Income: (a) provision for taxes based on income or profits of the Company and its Consolidated Restricted Subsidiaries, (b) Consolidated Interest Expense, (c) depreciation expense of the Company and its Consolidated Restricted Subsidiaries, (d) amortization expense (including amortization of goodwill and other intangibles) of the Company and its Consolidated Restricted Subsidiaries (excluding amortization expense attributable to a prepaid cash item that was paid in a prior period), (e) all other noncash expenses or losses of the Company and its Consolidated Restricted Subsidiaries for such period (including but not limited to, such expenses or losses in connection with restructuring activities, whether incurred before or after the Closing Date), determined on a consolidated basis in accordance with GAAP (excluding any such charge that constitutes an accrual of or a reserve for cash charges for any future period), (f) any non-recurring fees, expenses or charges realized by the Company and its Restricted Subsidiaries for such period related to (i) any offering of Capital Stock or Incurrence of Indebtedness permitted to be Incurred under this Indenture, or (ii) during the first six months of 2002, the Profitability Enhancement Programs, provided the fees, expenses and charges referred to in this clause (ii) shall not exceed $20.0 million in the first six months of 2002, and (g) noncash dividends on TPG Preferred Stock; and minus all noncash items increasing Consolidated Net Income of such Person for such Period (excluding any items which represent the reversal of any accrual of, or cash reserve for, anticipated cash charges in any prior period). Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and noncash charges of, a Restricted Subsidiary of the Company shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended or similarly distributed to the Company by such Restricted Subsidiary without prior governmental approval (that has not been obtained) or is not, directly or indirectly, restricted by operation of the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders or other holders of its equity. "Equity Offering" means a primary offering of common stock of the Company, other than public offerings with respect to the Company's common stock registered on Form S-8. "Exchange Act" means the Securities Exchange Act of 1934. "Fair Market Value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. For all purposes of this Indenture, Fair Market Value will be determined in good faith by the Board of Directors, whose determination will be conclusive and evidenced by a resolution of the Board of Directors. "First-Lien Credit Facilities" means (a) the Credit Facilities provided pursuant to the Credit Agreement and (b) any other Credit Facility that, in the case of both clauses (a) and (b), is secured by a Permitted Lien described in clause (a) or clause (e) of the definition thereof and, except for the Credit Facilities provided pursuant to the Credit Agreement, is designated by the Issuers as a "First-Lien Credit Facility" for the purposes of this Indenture. 12 "Foreign Subsidiary" means any Restricted Subsidiary of the Company that is not organized under the laws of the United States of America or any State thereof or the District of Columbia. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time, including those set forth in (a) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (b) statements and pronouncements of the Financial Accounting Standards Board, (c) such other statements by such other entities as approved by a significant segment of the accounting profession and (d) the rules and regulations of the Commission governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the Commission. All ratios and computations based on GAAP contained in this Indenture shall be computed in conformity with GAAP. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (b) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guarantor" means any Subsidiary that has issued a Note Guarantee. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement. "Holder" means the Person in whose name a Note is registered on the Registrar's books. "Incur" means, with respect to any Indebtedness or other obligation of any Person, to issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing immediately after the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Person at the time it becomes a Subsidiary. The term "Incurrence" when used as a noun shall have a correlative meaning. The accretion of principal of a non-interest bearing or other discount security shall not be deemed the Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person on any date of determination, without duplication, the following items if and to the extent that any of them (other than items 13 specified under clauses (c), (h), (i) and (j) below) would appear as a liability or, in the case of clause (f) only, Preferred Stock on the balance sheet of such Person, prepared in accordance with GAAP, on such date: (a) the principal amount of and premium (if any) in respect of indebtedness of such Person for borrowed money; (b) the principal amount of and premium (if any) in respect of obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto but excluding obligations in respect of letters of credit issued in respect of Trade Payables); (d) all obligations of such Person to pay the deferred and unpaid purchase price of property or services (except Trade Payables), which purchase price is due more than twelve months after the date of placing such property in service or taking delivery and title thereto or the completion of such services; (e) all Capitalized Lease Obligations and all Attributable Debt of such Person; (f) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends); (g) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided, however, that the amount of Indebtedness of such Person shall be the lesser of (i) the Fair Market Value of such asset at such date of determination and (ii) the amount of such Indebtedness of such other Persons; (h) Hedging Obligations of such Person; (i) all obligations of such Person in respect of a Receivables Facility; and (j) all obligations of the type referred to in clauses (a) through (i) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations described above, at such date; provided, however, that the amount outstanding at any time of any Indebtedness issued with original issue discount will be deemed to be the face amount of such Indebtedness less the remaining unaccreted portion of the original issue discount of such Indebtedness at such time, as determined in accordance with GAAP. 14 "Indenture" means this Indenture as amended or supplemented from time to time. "Indenture Documents" means (a) this Indenture, the Notes and the Security Documents and (b) any other related document or instrument executed and delivered pursuant to any Indenture Document described in clause (a) of this definition evidencing or governing Obligations. "Intercreditor Agreement" means (a) the intercreditor agreement, dated as of May 6, 2002, among the Issuers, JPMorgan Chase Bank, as credit agent, and Wells Fargo Bank Minnesota, National Association, as trustee for the Senior Secured Notes due 2008, as amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, and (b) any substantially identical agreement hereafter entered into that is not inconsistent with this Indenture and the Collateral Sharing Agreement. "Interest Rate Agreement" means with respect to any Person any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement as to which such Person is party. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extension of credit (including by way of Guarantee or similar arrangement but excluding commission, travel and similar advances to officers, consultants and employees made in the ordinary course of business) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. For purposes of the definition of "Unrestricted Subsidiary" and Section 4.04, (a) "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to (i) the Company's "Investment" in such Subsidiary at the time of such redesignation less (ii) the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation; and (b) any property transferred to or from an Unrestricted Subsidiary shall be valued at its Fair Market Value at the time of such transfer. "Issue Date" means the date on which the Original Notes are originally issued. "Junior Subordinated Note" means the 10% junior subordinated note due 2011 issued by SCI LLC on August 4, 1999. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). 15 "Mortgaged Property" means (a) initially, the parcel of real property located at 5005 East McDowell Road, Phoenix, Arizona 85018 and the improvements thereto owned by SCI LLC and the parcel of real property located at 2000 South County Trail, East Greenwich, Rhode Island 02818 owned by Semiconductor Components Industries of Rhode Island, Inc., and (b) includes each other parcel of real property and the improvements thereto with respect to which a Mortgage is granted pursuant to Section 4.11. "Mortgages" means a mortgage, deed of trust, assignment of leases and rents, leasehold mortgage or other security document granting a Lien on any Mortgaged Property to secure the Obligations. "Net Available Cash" from an Asset Disposition means cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to the properties or assets that are the subject of such Asset Disposition or received in any other noncash form) therefrom, in each case net of (a) all direct costs relating to such Asset Disposition, including all legal, title, accounting and investment banking fees, and recording tax expenses, sales and other commissions and other fees and relocation expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be paid or accrued as a liability under GAAP, (b) all payments made on any Indebtedness that (i) is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such assets, or (ii) must, by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law, be repaid out of the proceeds from such Asset Disposition, (c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition and (d) appropriate amounts to be provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the property or other assets disposed of in such Asset Disposition and retained by the Company or any Restricted Subsidiary after such Asset Disposition. "Net Cash Proceeds", with respect to any issuance or sale of Capital Stock, means the cash proceeds of such issuance or sale net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Note Guarantee" means each Guarantee of the obligations with respect to the Notes issued by a Subsidiary of the Company pursuant to the terms of this Indenture. "Notes" means the Notes issued under this Indenture. "Obligations" means all obligations of the Issuers and the Guarantors under the Indenture, the Notes and the other Indenture Documents, including obligations to the Trustee and the Collateral Agent whether for payment of principal of, interest, including Additional Interest, if any, on the Notes and all other monetary obligations of the Issuers and the Guarantors under 16 the Indenture, the Notes and the other Indenture Documents, whether for fees, expenses, indemnification or otherwise. "Offering Memorandum" means the offering memorandum relating to the issuance of the Original Notes dated February 26, 2003. "Officer" means the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Company. "Officer" of SCI LLC and of a Guarantor has a correlative meaning. "Officers' Certificate" means a certificate signed by two Officers of each Person issuing such certificate. For the avoidance of doubt, any Officers' Certificate to be delivered by the Issuers pursuant to this Indenture shall be signed by two Officers of each Issuer. "Opinion of Counsel" means a written opinion (subject to customary assumptions and exclusions) from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company, SCI LLC, a Guarantor or the Trustee. "Permitted Business" means any business engaged in by the Issuers or any Restricted Subsidiary on the Closing Date and any Related Business. "Permitted Holders" means TPG Partners II, L.P. and its Affiliates and any Person acting in the capacity of an underwriter in connection with a public or private offering of the Company's or SCI LLC's Capital Stock. "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary (a) in the Company, a Restricted Subsidiary or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided, however, that the primary business of such Restricted Subsidiary is a Permitted Business; (b) in another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; provided, however, that such Person's primary business is a Permitted Business; (c) in Temporary Cash Investments; (d) in receivables owing to the Company or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or any such Restricted Subsidiary deems reasonable under the circumstances; (e) in payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (f) in loans or advances to employees made in the ordinary course of business permitted by law and consistent with prudent business practice and not exceeding $5.0 million in the aggregate outstanding at any one time; (g) in stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments; (h) in any Person to the extent such Investment represents the noncash portion of the consideration received for an Asset Disposition that was made pursuant to and in compliance with Section 4.06 or a transaction not constituting an Asset Disposition by reason of the $1.0 million threshold contained in the 17 definition thereof; (i) that constitutes a Hedging Obligation or commodity hedging arrangement entered into for bona fide hedging purposes of the Company in the ordinary course of business and otherwise in accordance with this Indenture; (j) in securities of any trade creditor or customer received in settlement of obligations or pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditor or customer; (k) acquired as a result of a foreclosure by the Company or such Restricted Subsidiary with respect to any secured Investment or other transfer of title with respect to any secured Investment in default; (l) existing as of the Closing Date or an Investment consisting of any extension, modification or renewal of any Investment existing as of the Closing Date (excluding any such extension, modification or renewal involving additional advances, contributions or other investments of cash or property or other increases thereof unless it is a result of the accrual or accretion of interest or original issue discount or payment-in-kind pursuant to the terms, as of the Closing Date, of the original Investment so extended, modified or renewed); (m) consisting of purchases and acquisitions of inventory, supplies, materials and equipment or licenses or leases of intellectual property, in any case, in the ordinary course of business and otherwise in accordance with this Indenture; (n) in a trust, limited liability company, special purpose entity or other similar entity in connection with a Receivables Facility permitted under Section 4.03; provided that, in the good faith determination of the Board of Directors, such Investment is necessary or advisable to effect such Receivables Facility; (o) consisting of intercompany Indebtedness permitted under Section 4.03; (p) the consideration for which consists solely of shares of common stock of the Company; and (q) so long as no Default shall have occurred and be continuing (or result therefrom), in any Person engaged in a Permitted Business having an aggregate Fair Market Value (measured on the date made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (q) that are at the time outstanding (and measured on the date made and without giving effect to subsequent changes in value), not to exceed $15.0 million. "Permitted Liens" means any of the following Liens: (a) Liens upon any property of any Issuer or Restricted Subsidiary securing any Indebtedness permitted under Section 4.03(b)(i) or 4.03(b)(xiv) hereof and all other obligations of any Issuer or Restricted Subsidiary in respect of such Indebtedness not constituting Indebtedness; (b) Liens securing the Notes and the Note Guarantees (not including any Additional Notes); (c) Liens in favor of the Company or any Restricted Subsidiary; (d) Liens on property of a Person existing at the time such Person is merged with or into or consolidated with or acquired by the Company or any Restricted Subsidiary; provided that such Liens were in existence prior to the contemplation of such merger or consolidation or acquisition and do not extend to any assets other than those of the Person merged into or consolidated with or acquired by the Company or the Restricted Subsidiary; (e) Liens to secure Indebtedness existing at the time of a consolidation or merger of another Person with or into the Company; provided that (i) such consolidation or merger is permitted under Section 5.01, (ii) such Indebtedness is not Incurred in connection with or in contemplation of such consolidation or merger, (iii) the granting of such Liens is required by the terms of such Indebtedness as a result of such consolidation or merger and (iv) such other Person is not an affiliate of the Company; (f) Liens on property existing at the time of acquisition of the property by the Company or any Restricted Subsidiary; provided that such Liens were in existence prior to the contemplation of such acquisition; (g) Liens to secure Indebtedness (including Capitalized Lease Obligations) permitted under Section 4.03(b)(x) hereof covering only the assets acquired with such Indebtedness or additions or improvements to such assets; (h) Liens for taxes, 18 assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided that any reserve or other appropriate provision as is required in conformity with GAAP has been made therefor; (i) Liens incurred in the ordinary course of business including judgment and attachment liens of the Company or any Restricted Subsidiary of the Company with respect to obligations that do not exceed in the aggregate $25.0 million at any one time outstanding and that are not incurred in connection with the borrowing of money or the obtaining of advances of credit (other than trade credit in the ordinary course of business, not evidenced by a note and not past due); (j) Liens in favor of the Trustee; (k) Liens incurred in connection with Refinancing Indebtedness, but only if such Liens extend to no more assets than the Liens securing the Indebtedness being refinanced; (l) Liens securing Hedging Obligations; (m) statutory Liens of landlords and carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's, or other like Liens (including contractual landlords liens) arising in the ordinary course of business and with respect to amounts not yet delinquent by more than 30 days or being contested in good faith by appropriate proceedings, if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (n) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (o) Liens to secure Indebtedness of any Restricted Subsidiary that is a Foreign Subsidiary; provided that such Indebtedness is used by such Restricted Subsidiary to finance operations of such Foreign Subsidiary outside the United States; (p) easements, zoning restrictions, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any of its Restricted Subsidiaries; (q) Liens on specific items of inventory or other goods and proceeds thereof of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (r) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and the property relating to such letters of credit and products and proceeds thereof; (s) any interest or title of a lessor in the property subject to any lease or arising from filing UCC financing statements regarding leases; (t) judgment Liens in respect of judgments that do not constitute an Event of Default; (u) Liens existing on the date hereof; (v) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance and return of money bonds and other obligation of a like nature incurred in the ordinary course of business; (w) Liens securing obligations in respect of Cash Management Obligations; (x) ground leases in respect of real property on which facilities owned or leased by the Company or any of its Restricted Subsidiaries are located; (y) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (z) leases or subleases granted to other Persons and not interfering in any material respect with the business of the Company and its Restricted Subsidiaries, taken as a whole; (aa) Liens in connection with a Receivables Facility incurred in compliance with Sections 4.03(b)(i) and 4.03(b)(ii) hereof; (bb) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of setoff or similar rights; (cc) Liens on the assets of the China JV securing Indebtedness incurred in compliance with Section 4.03 hereof; (dd) Liens securing the Senior Secured Notes due 2008 and the Guarantees in respect thereof; provided that such Liens are junior to the Liens securing the Notes and the Note Guarantees; and (ee) Liens that 19 secure Indebtedness permitted to be Incurred under Section 4.03; provided that (i) the grantor has granted or concurrently grants a first-priority Lien upon the property subject to such Lien as security for the Notes and the Note Guarantees and (ii) the Liens in respect of such Indebtedness are junior to the Liens securing the Notes and the Note Guarantees. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Pledge Agreement" means the Pledge Agreement dated August 4, 1999, as amended and restated as of March 3, 2003, among the Issuers, the Grantors (as defined therein) and the Collateral Agent. "Preferred Stock", as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) that is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "Profitability Enhancement Programs" mean the Profitability Enhancement Programs described in the Offering Memorandum. "Purchase Money Indebtedness" means Indebtedness (a) consisting of the deferred purchase price of an asset, conditional sale obligations, obligations under any title retention agreement and other purchase money obligations, in each case where the maturity of such Indebtedness does not exceed the anticipated useful life of the asset being financed, and (b) Incurred to finance the acquisition by the Company or a Restricted Subsidiary of all or a portion of such asset, including additions and improvements; provided, however, that such Indebtedness is Incurred within 180 days after the acquisition by the Company or such Restricted Subsidiary of such asset or the relevant addition or improvement. "Qualified Proceeds" means any of the following or any combination of the following: (a) cash, (b) Temporary Cash Investments, (c) the Fair Market Value of assets that are used or useful in the Permitted Business and (d) the Fair Market Value of the Capital Stock of any Person engaged primarily in a Permitted Business if, in connection with the receipt by the Company or any Restricted Subsidiary of the Company of such Capital Stock, (i) such Person becomes a Restricted Subsidiary or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or any Restricted Subsidiary. "Receivables Facility" means one or more receivables financing facilities, as amended from time to time, pursuant to which the Company and/or any of its Restricted Subsidiaries sells its accounts receivable to a Person that is not a Restricted Subsidiary pursuant to arrangements customary in the industry. "Refinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" shall have a correlative meaning. 20 "Refinancing" means the Company's offering and sale of the Original Notes and the application of the proceeds therefrom as described in the Offering Memorandum. "Refinancing Indebtedness" means Indebtedness that is Incurred to refund, refinance, replace, renew, repay or extend (including pursuant to any defeasance or discharge mechanism) any Indebtedness of the Company or any Restricted Subsidiary (including Indebtedness of the Company that Refinances Refinancing Indebtedness); provided, however, that (a) the Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced, (b) the Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being refinanced, (c) such Refinancing Indebtedness is Incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being Refinanced, (d) if the Indebtedness being refinanced is subordinated in right of payment to the Notes, such Refinancing Indebtedness is subordinated in right of payment to the Notes at least to the same extent as the Indebtedness being Refinanced, and (e) if the Indebtedness (other than any Indebtedness permitted to be Incurred under Section 4.03(b)(i) or 4.03(b)(xiv)) being Refinanced is secured with Liens junior to the Liens securing the Notes and the Note Guarantees, any Liens securing such Refinancing Indebtedness are junior to the Liens securing the Notes and the Note Guarantees; provided further, however, that Refinancing Indebtedness shall not include (i) Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of the Company or (ii) Indebtedness of the Company or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary. "Related Business" means any business related, ancillary or complementary to any of the businesses of the Company and the Restricted Subsidiaries on the Closing Date. "Restricted Subsidiary" means any Subsidiary of the Company (including SCI LLC) other than an Unrestricted Subsidiary. "Sale/Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired by the Company or a Restricted Subsidiary whereby the Company or a Restricted Subsidiary transfers such property to a Person and the Company or such Restricted Subsidiary leases it from such Person, other than leases between the Company and a Wholly-Owned Subsidiary or between Wholly-Owned Subsidiaries. "SCI LLC" means Semiconductor Components Industries, LLC until a successor replaces it and, thereafter, means the successor. "Securities Act" means the Securities Act of 1933. "Security Agreement" means the Security Agreement dated August 4, 1999, as amended and restated as of March 3, 2003, among the Issuers, the Grantors (as defined therein) and the Collateral Agent. "Security Documents" means (a) the Security Agreement, the Pledge Agreement, the Collateral Assignment, the Mortgages and any other document or instrument pursuant to 21 which a Lien is granted by any Issuer or any Guarantor to secure any Obligations or under which rights or remedies with respect to such Lien are governed, as such agreements may be amended, modified or supplemented from time to time and (b) substantially identical agreements hereafter entered into pursuant to Section 10.09(c). Prior to the Discharge of Credit Agreement Obligations, the "Security Documents" will mean the Security Documents among the Issuers, the Guarantors and the Collateral Agent, as such agreements may be amended, modified or supplemented from time to time in accordance with their terms, this Indenture and the Collateral Sharing Agreement. "Senior Secured Notes due 2008" means the $300.0 million aggregate principal amount of 12% senior secured notes due 2008 issued by the Company and SCI LLC on May 6, 2002 and the exchange notes issued or to be issued in exchange therefor. "Senior Subordinated Notes" means the 12% senior subordinated notes due 2009 issued by the Company and SCI LLC on July 28, 1999 and the exchange notes issued in exchange therefor. "Significant Subsidiary" means any Restricted Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the Commission. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred). "Subordinated Indebtedness" means any Indebtedness of the Company (whether outstanding on the Closing Date or thereafter Incurred) that is subordinate or junior in right of payment to the Notes pursuant to a written agreement. "Subordinated Indebtedness" of SCI LLC or a Guarantor has a correlative meaning. "Subsidiary" of any Person means any corporation, association, partnership or other business entity of which more than 50% of the total Voting Stock is at the time owned or controlled, directly or indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries of such Person or (c) one or more Subsidiaries of such Person. Notwithstanding the foregoing, with respect to the Company, the term "Subsidiary" also shall include the following Persons: Tesla Sezam, a.s., Terosil, a.s. and Leshan-Phoenix Semiconductor Co. Ltd, so long as the Company directly or indirectly owns more than 50% of the Voting Stock or economic interests of such Person. "Temporary Cash Investments" means any of the following: (a) any investment in direct obligations of the United States of America or any agency thereof or obligations Guaranteed by the United States of America or any agency thereof, (b) investments in time deposit accounts, certificates of deposit and money market deposits maturing not more than one year from the date of acquisition thereof, bankers' acceptances with maturities not exceeding one 22 year and overnight bank deposits, in each case with a bank or trust company that is organized under the laws of the United States of America, any state thereof (including any foreign branch of any of the foregoing) or any foreign country recognized by the United States of America having capital, surplus and undivided profits aggregating in excess of $250,000,000 (or the foreign currency equivalent thereof), (c) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) above or clause (e) below entered into with a bank meeting the qualifications described in clause (b) above, (d) investments in commercial paper, maturing not more than one year after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America having at the time as of which any investment therein is made one of the two highest ratings obtainable from either Moody's Investors Service, Inc. ("Moody's") or Standard and Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc. ("S&P"), (e) investments in securities with maturities of six months or less from the date of acquisition issued or fully Guaranteed by any state, commonwealth or territory of the United States of America, or by any foreign government or any state, commonwealth or territory or by any political subdivision or taxing authority thereof, and, in each case, having one of the two highest ratings obtainable from either S&P or Moody's; and (f) investments in funds investing exclusively in investments of the types described in clauses (a) and (e) above. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the Closing Date. "TPG Preferred Stock" means the preferred stock issued on September 7, 2001, and additional shares of such series issued thereafter. "Trade Payables" means, with respect to any Person, any accounts payable or any indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person arising in the ordinary course of business in connection with the acquisition of goods or services. "Trustee" means the party named as such in this Indenture until a successor replaces it and, thereafter, means the successor. "Trust Officer" means any vice president, assistant vice president or trust officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Uniform Commercial Code" means the New York Uniform Commercial Code as in effect from time to time. "Unrestricted Subsidiary" means (a) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (b) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of 23 the Subsidiary to be so designated; provided, however, that either (i) the Subsidiary to be so designated has total Consolidated assets of $1,000 or less or (ii) if such Subsidiary has Consolidated assets greater than $1,000, then such designation would be permitted under Section 4.04. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation (a) the Company could Incur $1.00 of additional Indebtedness under Section 4.03(a) and (b) no Default shall have occurred and be continuing. Any such designation of a Subsidiary as a Restricted Subsidiary or Unrestricted Subsidiary by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled at the time to vote in the election of directors, managers or trustees thereof. "Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company all the Capital Stock of which (other than directors' qualifying shares) is owned by the Company or another Wholly-Owned Subsidiary. SECTION 1.02. Other Definitions. The following terms have the definitions set forth in the Sections listed below.
Defined in Term Section - ---- ---------- "Affiliate Transaction"................... 4.07(a) "Appendix"................................ Preamble "Bankruptcy Law".......................... 6.01 "Change of Control Offer"................. 4.08(b) "covenant defeasance option".............. 8.01(b) "Custodian"............................... 6.01 "Definitive Notes"........................ Appendix "Event of Default"........................ 6.01 "Excess Proceeds"......................... 4.06(b) "Exchange Offer".......................... Appendix "Exchange Notes".......................... Preamble "Global Notes"............................ Appendix "Guaranteed Obligations".................. 11.01 "incorporated provision".................. 12.01 24 SECTION 1.03. Incorporation by Reference of Trust Indenture Act. This Indenture is subject to the mandatory provisions of the TIA, which are incorporated by reference in and made a part of this Indenture. The following TIA terms have the following meanings: "Commission" means the Commission. "indenture securities" means the Notes and the Note Guarantees. "indenture security holder" means a Holder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company, the Guarantors and any other obligor on the indenture securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by Commission rule have the meanings assigned to them by such definitions.
Defined in Term Section - ---- ---------- "Initial Notes"........................... Preamble "legal defeasance option"................. 8.01(b) "Legal Holiday"........................... 12.08 "Notes"................................... Preamble "Notes Custodian"......................... Appendix "Notice of Default"....................... 6.01 "Offer"................................... 4.06(b) "Offer Amount"............................ 4.06(c)(ii) "Offer Period"............................ 4.06(c)(ii) "Original Notes".......................... Preamble "Paying Agent"............................ 2.04 "Permitted Debt".......................... 4.03(b) "Private Exchange"........................ Appendix "Private Exchange Notes".................. Appendix "protected purchaser"..................... 2.08 "Purchase Date"........................... 4.06(c)(i) "Registrar"............................... 2.04 "Registration Rights Agreement"........... Appendix "Required Information".................... 4.02 "Restricted Payment"...................... 4.04(a) "Successor Company"....................... 5.01(a) 25 SECTION 1.04. Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) "or" is not exclusive; (d) "including" means including without limitation; (e) words in the singular include the plural and words in the plural include the singular; (f) the principal amount of any noninterest bearing or other discount security at any date shall be the principal amount thereof that would be shown on a balance sheet of the issuer dated such date prepared in accordance with GAAP; and (g) the principal amount of any Preferred Stock shall be (i) the maximum liquidation value of such Preferred Stock or (ii) the maximum mandatory redemption or mandatory repurchase price with respect to such Preferred Stock, whichever is greater. SECTION 1.05. Designated Senior Indebtedness; Designation for Purposes of Senior Secured Notes due 2008. (a) For purposes of the indenture that governs the Senior Subordinated Notes, the Notes shall constitute Designated Senior Indebtedness (as such term is defined in such indenture). (b) For purposes of the indenture governing the Senior Secured Notes due 2008 and the Intercreditor Agreement, the Issuers hereby designate the Notes and the Note Guarantees as a "First-Lien Credit Facility" (as such term is defined in the Intercreditor Agreement) and any Obligations as "Credit Agreement Obligations" (as such term is defined in the Intercreditor Agreement). ARTICLE II The Notes SECTION 2.01. Amount of Notes; Issuable in Series. The aggregate principal amount of Notes which may be authenticated and delivered under this Indenture is unlimited. The Notes may be issued in one or more series. All Notes of any one series shall be substantially identical except as to denomination. With respect to any Additional Notes issued after the Closing Date (except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes pursuant to Section 2.07, 2.08, 2.09, 2.10, 3.06, 4.06, 4.08 or the Appendix), there shall be (a) established in or pursuant to a resolution of the Board of Directors and (b) (i) 26 set forth or determined in the manner provided in an Officer's Certificate or (ii) established in one or more indentures supplemental hereto, prior to the issuance of such Additional Notes: (1) whether such Additional Notes shall be issued as part of a new or existing series of Notes and the title of such Additional Notes (which shall distinguish the Additional Notes of the series from Notes of any other series); (2) the aggregate principal amount of such Additional Notes which may be authenticated and delivered under this Indenture, which may be in an unlimited aggregate principal amount; (3) the issue price and issuance date of such Additional Notes, including the date from which interest on such Additional Notes shall accrue; provided, however, that Additional Notes may be issued only if they are fungible with the other Notes issued under this Indenture for U.S. federal income tax purposes; (4) if applicable, that such Additional Notes shall be issuable in whole or in part in the form of one or more Global Notes and, in such case, the respective depositaries for such Global Notes, the form of any legend or legends which shall be borne by such Global Notes in addition to or in lieu of those set forth in Exhibit A hereto and any circumstances in addition to or in lieu of those set forth in Section 2.3 of the Appendix in which any such Global Note may be exchanged in whole or in part for Additional Notes registered, or any transfer of such Global Note in whole or in part may be registered, in the name or names of Persons other than the depositary for such Global Note or a nominee thereof; and (5) if applicable, that such Additional Notes shall not be issued in the form of Initial Notes as set forth in Exhibit A, but shall be issued in the form of Exchange Notes as set forth in Exhibit B. If any of the terms of any Additional Notes are established by action taken pursuant to a resolution of the Board of Directors, a copy of an appropriate record of such action shall be certified by the Secretary or any Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate or the indenture supplemental hereto setting forth the terms of the Additional Notes. SECTION 2.02. Form and Dating. Provisions relating to the Original Notes, the Additional Notes, the Private Exchange Notes and the Exchange Notes are set forth in the Appendix, which is hereby incorporated in and expressly made a part of this Indenture. The (a) Original Notes and the Trustee's certificate of authentication, (b) Private Exchange Notes and the Trustee's certificate of authentication and (c) any Additional Notes (if issued as Transfer Restricted Notes) and the Trustee's certificate of authentication shall each be substantially in the form of Exhibit A hereto, which is hereby incorporated in and expressly made a part of this Indenture. The Exchange Notes and any Additional Notes issued other than as Transfer Restricted Notes and the Trustee's certificate of authentication shall each be substantially in the form of Exhibit B hereto, which is hereby incorporated in and expressly made a part of this Indenture. The Notes may have notations, legends or endorsements required by law, stock 27 exchange rule, agreements to which the Issuers or any Guarantor are subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Issuers). Each Note shall be dated the date of its authentication. The Notes shall be issuable only in registered form without interest coupons and only in denominations of $1,000 and integral multiples thereof. SECTION 2.03. Execution and Authentication. One Officer shall sign the Notes for each of the Issuers by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time the Trustee authenticates the Note, the Note shall be valid nevertheless. A Note shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Note. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee shall authenticate and make available for delivery Notes as set forth in the Appendix. The Trustee may appoint an authenticating agent reasonably acceptable to the Issuers to authenticate the Notes. Any such appointment shall be evidenced by an instrument signed by a Trust Officer, a copy of which shall be furnished to the Issuers. Unless limited by the terms of such appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Registrar, Paying Agent or agent for service of notices and demands. SECTION 2.04. Registrar and Paying Agent. (a) The Issuers shall maintain an office or agency where Notes may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Notes may be presented for payment (the "Paying Agent"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Issuers may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent, and the term "Registrar" includes any co-registrars. The Issuers initially appoint the Trustee as (i) Registrar and Paying Agent in connection with the Notes and (ii) the Notes Custodian with respect to the Global Notes. (b) The Issuers shall enter into an appropriate agency agreement with any Registrar or Paying Agent not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Issuers shall notify the Trustee of the name and address of any such agent. If the Issuers fail to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07. The Issuers or any of their domestically organized Wholly-Owned Subsidiaries may act as Paying Agent or Registrar. (c) The Issuers may remove any Registrar or Paying Agent upon written notice to such Registrar or Paying Agent and to the Trustee; provided, however, that no such removal shall become effective until (i) acceptance of an appointment by a successor as evidenced by an appropriate agreement entered into by the Issuers and such successor Registrar or Paying Agent, 28 as the case may be, and delivered to the Trustee or (ii) notification to the Trustee that the Trustee shall serve as Registrar or Paying Agent until the appointment of a successor in accordance with clause (i) above. The Registrar or Paying Agent may resign at any time upon written notice to the Issuers and the Trustee. SECTION 2.05. Paying Agent to Hold Money in Trust. Prior to each due date of the principal of and interest, including Additional Interest, if any, on any Note, the Issuers shall deposit with the Paying Agent (or if either of the Issuers or a Subsidiary of the Issuers is acting as Paying Agent, segregate and hold in trust for the benefit of the Persons entitled thereto) a sum sufficient to pay such principal and interest when so becoming due. The Issuers shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal of or interest on the Notes, shall notify the Trustee of any default by the Issuers in making any such payment. If either of the Issuers or a Subsidiary of the Issuers acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Issuers at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon complying with this Section, the Paying Agent shall have no further liability for the money delivered to the Trustee. SECTION 2.06. Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, the Issuers shall furnish, or cause the Registrar to furnish, to the Trustee, in writing at least five Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders. SECTION 2.07. Transfer and Exchange. The Notes shall be issued in registered form and shall be transferable only upon the surrender of a Note for registration of transfer and in compliance with the Appendix. When a Note is presented to the Registrar with a request to register a transfer, the Registrar shall register the transfer as requested if its requirements therefor are met. When Notes are presented to the Registrar with a request to exchange them for an equal principal amount of Notes of other denominations, the Registrar shall make the exchange as requested if the same requirements are met. To permit registration of transfers and exchanges, the Issuers shall execute and the Trustee shall authenticate Notes at the Registrar's request. The Issuers may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges in connection with any transfer or exchange pursuant to this Section. The Issuers shall not be required to make and the Registrar need not register transfers or exchanges of Notes selected for redemption (except, in the case of Notes to be redeemed in part, the portion thereof not to be redeemed) or any Notes for a period of 15 days before a selection of Notes to be redeemed. Prior to the due presentation for registration of transfer of any Note, the Issuers, the Guarantors, the Trustee, the Paying Agent, and the Registrar may deem and treat the Person in whose name a Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and (subject to paragraph 2 of the Notes) interest, if any, on such Note and for all other purposes whatsoever, whether or not such Note is overdue, and none 29 of the Issuers, any Guarantor, the Trustee, the Paying Agent, or the Registrar shall be affected by notice to the contrary. Any Holder of a Global Note shall, by acceptance of such Global Note, agree that transfers of beneficial interest in such Global Note may be effected only through a book-entry system maintained by (a) the Holder of such Global Note (or its agent) or (b) any Holder of a beneficial interest in such Global Note, and that ownership of a beneficial interest in such Global Note shall be required to be reflected in a book entry. All Notes issued upon any transfer or exchange pursuant to the terms of this Indenture will evidence the same debt and will be entitled to the same benefits under this Indenture as the Notes surrendered upon such transfer or exchange. SECTION 2.08. Replacement Notes. If a mutilated Note is surrendered to the Registrar or if the Holder of a Note claims that the Note has been lost, destroyed or wrongfully taken, the Issuers shall issue and the Trustee shall authenticate a replacement Note if the requirements of Section 8-405 of the Uniform Commercial Code are met, such that the Holder (a) satisfies the Issuers or the Trustee within a reasonable time after he has notice of such loss, destruction or wrongful taking and the Registrar does not register a transfer prior to receiving such notification, (b) makes such request to the Issuers or the Trustee prior to the Note being acquired by a protected purchaser as defined in Section 8-303 of the Uniform Commercial Code (a "protected purchaser") and (c) satisfies any other reasonable requirements of the Trustee. If required by the Trustee or the Issuers, such Holder shall furnish an indemnity bond sufficient in the judgment of the Trustee to protect the Issuers, the Trustee, the Paying Agent and the Registrar from any loss that any of them may suffer if a Note is replaced. The Issuers and the Trustee may charge the Holder for their expenses in replacing a Note. In the event any such mutilated, lost, destroyed or wrongfully taken Note has become or is about to become due and payable, the Issuers in their discretion may pay such Note instead of issuing a new Note in replacement thereof. Every replacement Note is an additional obligation of the Issuers. Upon the issuance of any replacement Note under this Section 2.08, the Issuers may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges that may be imposed in connection therewith. The provisions of this Section 2.08 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, lost, destroyed or wrongfully taken Notes. SECTION 2.09. Outstanding Notes. Notes outstanding at any time are all authenticated by the Trustee except for those canceled by it, those delivered to it for cancelation and those described in this Section as not outstanding. Subject to Section 12.06, a Note does not cease to be outstanding because the Issuers or an Affiliate of the Issuers hold the Note. If a Note is replaced pursuant to Section 2.08, it ceases to be outstanding unless the Trustee and the Issuers receive proof satisfactory to them that the replaced Note is held by a protected purchaser. 30 If the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay all principal and interest, including Additional Interest, if any, payable on that date with respect to the Notes (or portions thereof) to be redeemed or maturing, as the case may be, then on and after that date such Notes (or portions thereof) cease to be outstanding and interest on them ceases to accrue. SECTION 2.10. Temporary Notes. In the event that Definitive Notes are to be issued under the terms of this Indenture, until such Definitive Notes are ready for delivery, the Issuers may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of Definitive Notes but may have variations that the Issuers consider appropriate for temporary Notes. Without unreasonable delay, the Issuers shall prepare and the Trustee shall authenticate Definitive Notes and deliver them in exchange for temporary Notes upon surrender of such temporary Notes at the office or agency of the Issuers, without charge to the Holder. SECTION 2.11. Cancelation. The Issuers at any time may deliver Notes to the Trustee for cancelation. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment or cancelation and shall dispose of canceled Notes in accordance with its customary procedures or deliver canceled Notes to the Issuers pursuant to written direction by an Officer. The Issuers may not issue new Notes to replace Notes either of them has redeemed, paid or delivered to the Trustee for cancelation. The Trustee shall not authenticate Notes in place of canceled Notes other than pursuant to the terms of this Indenture. SECTION 2.12. Defaulted Interest. If the Issuers default in a payment of interest on the Notes, the Issuers shall pay the defaulted interest (plus interest on such defaulted interest to the extent lawful) in any lawful manner. The Issuers may pay the defaulted interest to the Persons who are Holders on a subsequent special record date. The Issuers shall fix or cause to be fixed any such special record date and payment date to the reasonable satisfaction of the Trustee and shall promptly mail or cause to be mailed to each Holder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. SECTION 2.13. CUSIP and ISIN Numbers. The Issuers in issuing the Notes may use "CUSIP" and "ISIN" numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP" and "ISIN" numbers in notices of redemption as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. SECTION 2.14. Computation of Interest. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months. 31 ARTICLE III Redemption SECTION 3.01. Notices to Trustee. If the Issuers elect to redeem Notes pursuant to paragraph 5 of the Notes, they shall notify the Trustee in writing of the redemption date and the principal amount of Notes to be redeemed. The Issuers shall give each notice to the Trustee provided for in this Section at least 45 days before the redemption date unless the Trustee consents to a shorter period. Such notice shall be accompanied by an Officers' Certificate from the Issuers to the effect that such redemption will comply with the conditions herein. Any such notice may be canceled at any time prior to notice of such redemption being mailed to any Holder and shall thereby be void and of no effect. SECTION 3.02. Selection of Notes To Be Redeemed. If fewer than all the Notes are to be redeemed, the Trustee shall select the Notes to be redeemed pro rata or by lot or by a method that the Trustee in its sole discretion shall deem to be fair and appropriate. The Trustee shall make the selection from outstanding Notes not previously called for redemption. The Trustee may select for redemption portions of the principal of Notes that have denominations larger than $1,000. Notes and portions of them the Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. The Trustee shall notify the Issuers promptly of the Notes or portions of Notes to be redeemed. SECTION 3.03. Notice of Redemption. (a) At least 30 days but not more than 60 days before a date for redemption of Notes, the Issuers shall mail a notice of redemption by first-class mail to each Holder of Notes to be redeemed at such Holder's registered address. The notice shall identify the Notes to be redeemed and shall state: (i) the redemption date; (ii) the redemption price and the amount of accrued interest to the redemption date; (iii) the name and address of the Paying Agent; (iv) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (v) if fewer than all the outstanding Notes are to be redeemed, the certificate numbers and principal amounts of the particular Notes to be redeemed; (vi) that, unless the Issuers default in making such redemption payment or the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture, interest on Notes (or portion thereof) called for redemption ceases to accrue on and after the redemption date; 32 (vii) the CUSIP or ISIN number, if any, printed on the Notes being redeemed; and (viii) that no representation is made as to the correctness or accuracy of the CUSIP or ISIN number, if any, listed in such notice or printed on the Notes. (b) At the Issuers' request, the Trustee shall give the notice of redemption in the Issuers' name and at the Issuers' expense. In such event, the Issuers shall provide the Trustee with the information required by this Section. SECTION 3.04. Effect of Notice of Redemption. Once notice of redemption is mailed, Notes called for redemption become due and payable on the redemption date and at the redemption price stated in the notice. Upon surrender to the Paying Agent, such Notes shall be paid at the redemption price stated in the notice, plus accrued interest, including Additional Interest, if any, to the redemption date; provided, however, that if the redemption date is after a regular record date and on or prior to the related interest payment date, the accrued interest and Additional Interest, if any, shall be payable to the Holder of the redeemed Notes registered on the relevant record date. Failure to give notice or any defect in the notice to any Holder shall not affect the validity of the notice to any other Holder. SECTION 3.05. Deposit of Redemption Price. Prior to 10:00 a.m. on the redemption date, the Issuers shall deposit with the Paying Agent (or, if either of the Issuers or a Subsidiary of the Issuers is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the redemption price of and accrued interest, including Additional Interest, if any, on all Notes to be redeemed on that date other than Notes or portions of Notes called for redemption that have been delivered by the Issuers to the Trustee for cancelation. On and after the redemption date, interest will cease to accrue on Notes or portions thereof called for redemption so long as the Issuers have deposited with the Paying Agent funds sufficient to pay the principal of, plus accrued and unpaid interest, including Additional Interest, if any, on the Notes to be redeemed, unless the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture. The Paying Agent shall promptly return to the Issuers upon their written request any money deposited with the Paying Agent by the Issuers that is in excess of the amounts necessary to pay the redemption price of and accrued interest, including Additional Interest, if any, on all Notes to be redeemed. SECTION 3.06. Notes Redeemed in Part. Upon surrender of a Note that is redeemed in part, the Issuers shall execute and the Trustee shall authenticate for the Holder (at the Issuers' expense) a new Note equal in principal amount to the unredeemed portion of the Note surrendered. ARTICLE IV Covenants SECTION 4.01. Payment of Notes. The Issuers shall promptly pay the principal of and interest, including Additional Interest, if any, on the Notes on the dates and in the manner provided in the Notes and in this Indenture. Principal and interest, including Additional Interest, 33 if any, shall be considered paid on the date due if on such date the Trustee or the Paying Agent holds in accordance with this Indenture money sufficient to pay all principal and interest then due and the Trustee or the Paying Agent, as the case may be, is not prohibited from paying such money to the Holders on that date pursuant to the terms of this Indenture. The Issuers shall pay interest on overdue principal at the rate specified therefor in the Notes, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. Notwithstanding anything to the contrary contained in this Indenture, the Issuers may, to the extent they are required to do so by law, deduct or withhold income or other similar taxes imposed by the United States of America from principal or interest payments hereunder. SECTION 4.02. Commission Reports. If at any time the Company is no longer subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall provide the Trustee and Holders and prospective Holders (upon request) within 15 days after it files them with the Commission (or would be required to file with the Commission), copies of its annual report and the information, documents and other reports that are specified in Section 13 and 15(d) of the Exchange Act (collectively, the "Required Information"); provided, however, that if any of the Required Information is filed with the Commission, the Company shall only be required to provide the Trustee copies of such Required Information. In addition, the Company shall furnish to the Trustee, promptly upon their becoming available, copies of the annual report to shareholders and any other information provided by the Company to its public shareholders generally. The Company also shall comply with the other provisions of TIA Section 314(a). SECTION 4.03. Limitation on Incurrence of Additional Indebtedness. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness; provided, however, that the Company, SCI LLC or any Guarantor may Incur Indebtedness if on the date of such Incurrence and after giving effect thereto, the Consolidated Coverage Ratio would be greater than 2.25:1. (b) Notwithstanding Section 4.03(a), the Company and, to the extent specified, its Restricted Subsidiaries may Incur the following Indebtedness (collectively, the "Permitted Debt"): (i) Bank Indebtedness of the Company, SCI LLC or any Guarantor, any Receivables Facility, any Indebtedness of the Company, SCI LLC or any Guarantor under any First-Lien Credit Facilities and any Additional Notes in an aggregate principal amount not to exceed $732.2 million less the lesser of (A) the sum of, without duplication, (x) the aggregate amount of all prepayments of principal applied to permanently reduce any such Indebtedness and (y) the aggregate net cash proceeds received by the Company from the issuance of the Original Notes (excluding any Additional Notes Incurred pursuant to this clause (i) of this paragraph (b)) outstanding and (B) $332.2 million; (ii) Indebtedness in respect of a Receivables Facility in an aggregate principal amount not to exceed the lesser of (1) the amount of all prepayments of principal applied to permanently reduce Indebtedness under Section 4.03(b)(i) and (2) $100.0 million; 34 (iii) Indebtedness of the Company owed to and held by any Restricted Subsidiary or Indebtedness of a Restricted Subsidiary owed to and held by the Company or any other Restricted Subsidiary; provided, however, that (1) any subsequent issuance or transfer of any Capital Stock or any other event that results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of any such Indebtedness (except to the Company or another Restricted Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the issuer thereof, (2) if the Company or SCI LLC is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations with respect to the Notes and (3) if a Guarantor is the obligor, such Indebtedness is subordinated in right of payment to the Note Guarantee of such Guarantor; (iv) Indebtedness represented by the Senior Secured Notes due 2008, the Guarantees of the Senior Secured Notes due 2008, the Senior Subordinated Notes, the Guarantees of the Senior Subordinated Notes, the Junior Subordinated Note, the Notes (not including any Additional Notes), the Note Guarantees, the Exchange Notes, Guarantees of the Exchange Notes and any replacement Notes issued pursuant to this Indenture; (v) Indebtedness outstanding on the Closing Date (other than the Indebtedness described in clause (ii), (iii) or (iv) of this Section 4.03(b)); (vi) Indebtedness consisting of Refinancing Indebtedness Incurred in respect of any Indebtedness described in Section 4.03(a) and in clauses (iv), (v), (vi), (vii), (x) and (xiii) of this Section 4.03(b); (vii) Indebtedness consisting of Guarantees of (1) any Indebtedness permitted under Section 4.03(a), so long as the Person providing the Guarantee is a Guarantor or (2) any Indebtedness permitted under this Section 4.03(b); (viii) Indebtedness of the Company or any of its Restricted Subsidiaries in respect of worker's compensation claims, self-insurance obligations, performance bonds, bankers' acceptances, letters of credit, surety, appeal or similar bonds and completion guarantees provided by the Company and the Restricted Subsidiaries in the ordinary course of their business; provided, however, that upon the drawing of letters of credit for reimbursement obligations, including with respect to workers' compensation claims, or the Incurrence of other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims, such obligations are reimbursed within 30 days following such drawing or Incurrence; (ix) Indebtedness under Interest Rate Agreements and Currency Agreements entered into for bona fide hedging purposes of the Company in the ordinary course of business; (x) Purchase Money Indebtedness, mortgage financings and Capitalized Lease Obligations, in each case Incurred by the Company, SCI LLC or any Restricted Subsidiary for the purpose of financing all or any part of the purchase price or cost of 35 construction improvement of property, plant or equipment used in a Permitted Business, and in an aggregate principal amount not in excess of $25.0 million at any one time outstanding. (xi) Indebtedness of the Company or any of its Restricted Subsidiaries arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within five business days of Incurrence; (xii) Indebtedness arising from agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, Incurred or assumed in connection with the disposition of any business, assets or Capital Stock of the Company or any Restricted Subsidiary; provided that (1) the maximum aggregate liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by the Company and its Subsidiaries in connection with such disposition and (2) such Indebtedness is not reflected in the balance sheet of the Company or any Restricted Subsidiary (contingent obligations referred to in a footnote to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this clause (2)); (xiii) Indebtedness of the Company or any of its Restricted Subsidiaries that is Acquired Debt in an aggregate principal amount at any time outstanding not to exceed $25.0 million; and (xiv) Indebtedness (other than Indebtedness permitted to be Incurred pursuant to Section 4.03(a) or any other clause of Section 4.03(b)) of the Company or any Restricted Subsidiary in an aggregate principal amount (or accreted value, as applicable) on the date of Incurrence that, when added to all other Indebtedness Incurred pursuant to this clause (xiv) and then outstanding, shall not exceed $50.0 million, of which up to $25.0 million may be Incurred by Restricted Subsidiaries that are not Guarantors. (c) Notwithstanding the foregoing, neither the Company nor SCI LLC shall Incur any Indebtedness pursuant to Section 4.03(b) above if the proceeds thereof are used, directly or indirectly, to repay, prepay, redeem, defease, retire, refund or refinance any Subordinated Indebtedness of such Person in reliance on Section 4.04(b)(ii) unless such Indebtedness shall be subordinated to the Notes to at least the same extent as such Subordinated Indebtedness. (d) Notwithstanding any other provision of this Section 4.03, the maximum amount of Indebtedness that the Company or any Restricted Subsidiary may Incur pursuant to this Section 4.03 shall not be deemed to be exceeded solely as a result of fluctuations in the exchange rates of currencies. For purposes of determining compliance with this Section 4.03, (i) Indebtedness Incurred pursuant to the Credit Agreement prior to or on the Closing Date shall be treated as Incurred pursuant to Section 4.03(b)(i), (ii) Indebtedness permitted by this Section 4.03 need not be permitted solely by reference to one provision permitting such Indebtedness but may be permitted in part by one such provision and in part by one or more other provisions of this Section 4.03 permitting such Indebtedness, (iii) in the event that 36 Indebtedness meets the criteria of more than one of the types of Indebtedness described in this Section 4.03, the Company, in its sole discretion, shall classify such Indebtedness and only be required to include the amount of such Indebtedness in one of such clauses and (iv) the aggregate amount of any Indebtedness Guaranteed pursuant to Section 4.03(b)(vii) will be included in the calculation of Indebtedness, but the corresponding amount of the Guarantee will not be so included. (e) Accrual of interest, the accretion of accreted value and the payment of interest in the form of additional Indebtedness will not be deemed to be an Incurrence of Indebtedness for purposes of this Section 4.03. (f) For purposes of determining compliance with any U.S. dollar-denominated restriction on the Incurrence of Indebtedness, the U.S. dollar-equivalent principal amount of Indebtedness denominated in a foreign currency shall be calculated based on the relevant currency exchange rate in effect on the date such Indebtedness was Incurred, in the case of term debt, or first committed, in the case of revolving credit debt; provided that (i) the U.S. dollar-equivalent principal amount of any such Indebtedness outstanding or committed on the Closing Date shall be calculated based on the relevant currency exchange rate in effect on the Issue Date, and (ii) if such Indebtedness is Incurred to Refinance other Indebtedness denominated in a foreign currency, and such Refinancing would cause the applicable U.S. dollar-denominated restriction to be exceeded if calculated at the relevant currency exchange rate in effect on the date of such Refinancing, such U.S. dollar-denominated restriction shall be deemed not to have been exceeded so long as the principal amount of such Refinancing Indebtedness does not exceed the principal amount of such Indebtedness being Refinanced. The principal amount of any Indebtedness Incurred to Refinance other Indebtedness, if Incurred in a different currency from the Indebtedness being Refinanced, shall be calculated based on the currency exchange rate applicable to the currencies in which such respective Indebtedness is denominated that is in effect on the date of such Refinancing. (g) The Company will not, and will not permit SCI LLC to, make any amendment to the Senior Secured Notes due 2008, the Senior Subordinated Notes or the Junior Subordinated Note which (i) makes either the Senior Subordinated Notes or the Junior Subordinated Note subordinated in right of payment to the Notes to a lesser extent than on the Closing Date or (ii) results or could result in any cash payment of principal, premium or interest in respect of any of the Senior Secured Notes due 2008, the Senior Subordinated Notes or the Junior Subordinated Note becoming due at any time prior to the date such payment would have been required in accordance with the terms of each of the Senior Secured Notes due 2008, the Senior Subordinated Notes or the Junior Subordinated Note as in effect on the Closing Date. SECTION 4.04. Limitation on Restricted Payments. (a) The Company shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay any dividend or make any distribution on or in respect of the Company's or any Restricted Subsidiary's Capital Stock (including any payment in connection with any merger or consolidation involving the Company) or similar payment to the direct or indirect holders of its Capital Stock except dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) and except dividends or distributions payable to the Company or another Restricted Subsidiary (and, if such Restricted Subsidiary has shareholders other than the 37 Company or other Restricted Subsidiaries, to its other shareholders on a pro rata basis), (ii) purchase, redeem, retire or otherwise acquire for value any Capital Stock of the Company or any Restricted Subsidiary held by Persons other than the Company or another Restricted Subsidiary, other than the making of a Permitted Investment, (iii) purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment any Subordinated Indebtedness or Senior Secured Notes due 2008 (other than the purchase, repurchase or other acquisition of Subordinated Indebtedness or Senior Secured Notes due 2008 purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition), (iv) make any Investment (other than a Permitted Investment) in any Person or (v) make or pay any interest or other distribution on the Junior Subordinated Note except interest or other distributions payable solely in Capital Stock (other than Disqualified Stock) or additional Junior Subordinated Notes (any such dividend, distribution, purchase, redemption, repurchase, defeasance, other acquisition, retirement or Investment described in and not excluded from clauses (i) through (v) of this Section 4.04(a) being herein referred to as a "Restricted Payment"), if at the time the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have occurred and be continuing (or would result therefrom); (2) the Company could not Incur at least $1.00 of additional Indebtedness under Section 4.03(a); or (3) the aggregate amount of such Restricted Payment and all other Restricted Payments (the amount so expended, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a resolution of the Board of Directors) declared or made subsequent to the Closing Date would exceed the sum of, without duplication: (A) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter immediately following the fiscal quarter during which the Closing Date occurs to the end of the most recent fiscal quarter for which internal financial statements are available ending prior to the date of such Restricted Payment (or, in case such Consolidated Net Income shall be a deficit, minus 100% of such deficit); (B) the aggregate Qualified Proceeds received by the Company from the issue or sale of its Capital Stock (other than Disqualified Stock) subsequent to the Closing Date (other than an issuance or sale to (x) a Subsidiary of the Company or (y) an employee stock ownership plan or other trust established by the Company or any of its Subsidiaries for the benefit of its employees to the extent that the purchase by such plan or trust is financed by Indebtedness of such plan or trust owed to the Company or any of its Subsidiaries or Indebtedness Guaranteed by the Company or any of its Subsidiaries); (C) 100% of the aggregate Qualified Proceeds received by the Company from the issuance or sale of debt securities of the Company or Disqualified Stock of the Company that after the Closing Date have been converted into or exchanged for Capital Stock 38 (other than Disqualified Stock) of the Company (other than an issuance or sale to a Subsidiary of the Company or an employee stock ownership plan or other trust established by the Company or any of its Subsidiaries for the benefit of its employees to the extent that the purchase by such plan or trust is financed by Indebtedness of such plan or trust owed to the Company or any of its Subsidiaries or Indebtedness Guaranteed by the Company or any of its Subsidiaries (less the amount of any cash or the Fair Market Value of any property distributed by the Company or any Restricted Subsidiary upon such conversion or exchange); provided, however, that no amount will be included in this clause (C) to the extent it is already included in Consolidated Net Income; (D) in the case of any Investment by the Company or any Restricted Subsidiary (other than any Permitted Investment) made after the Closing Date, the disposition of such Investment by, or repayment of such Investment to, the Company or a Restricted Subsidiary or the receipt by the Company or any Restricted Subsidiary of any dividends or distributions from such Investment, an aggregate amount equal to the lesser of (x) the aggregate amount of such Investment treated as a Restricted Payment pursuant to clause (iv) above and (y) the aggregate amount in cash received by the Company or any Restricted Subsidiary upon such disposition, repayment, dividend or distribution; provided, however, that no amount will be included in this clause (D) to the extent it is already included in Consolidated Net Income; (E) in the event the Company or any Restricted Subsidiary makes any Investment in a Person that, as a result of or in connection with such Investment, becomes a Restricted Subsidiary, an amount equal to the Company's or any Restricted Subsidiary's existing Investment in such Person that was previously treated as a Restricted Payment pursuant to clause (iv) above; provided, however, that such Person is engaged in a Permitted Business; and (F) the amount equal to the sum of (x) the net reduction in Investments in Unrestricted Subsidiaries resulting from payments of dividends, repayments of the principal of loans or advances or other transfers of assets to the Company or any Restricted Subsidiary from Unrestricted Subsidiaries and (y) the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is redesignated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any Unrestricted Subsidiary, the amount of Investments previously made by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary and treated as a Restricted Payment pursuant to clause (iv) above. (b) The provisions of Section 4.04(a) shall not prohibit: (i) any purchase, repurchase, redemption or other acquisition or retirement for value of Capital Stock of the Company or any Restricted Subsidiary made by exchange for, or out of the proceeds of the substantially concurrent sale of, other Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or other trust established by the Company or any of its Subsidiaries for the benefit of its employees to 39 the extent that the purchase by such plan or trust is financed by Indebtedness of such plan or trust owed to the Company or any of its Subsidiaries or Indebtedness Guaranteed by the Company or any of its Subsidiaries); provided, however, that (1) such Restricted Payment shall be excluded from the calculation of the amount of Restricted Payments and (2) the Net Cash Proceeds from such sale applied in the manner set forth in this clause (i) shall be excluded from the calculation of amounts under Section 4.04(a)(3)(B); (ii) any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of the Senior Secured Notes due 2008 or Subordinated Indebtedness of the Company or any Restricted Subsidiary, other than the Junior Subordinated Note, made by exchange for, or out of the proceeds of the substantially concurrent sale of, Refinancing Indebtedness that is permitted to be Incurred pursuant to Section 4.03(b)(vi); provided, however, that such purchase, repurchase, redemption, defeasance or other acquisition or retirement for value shall be excluded from the calculation of the amount of Restricted Payments; (iii) the repurchase, redemption or other acquisition or retirement for value of Disqualified Stock of the Company or any Restricted Subsidiary made by exchange for, or out of the proceeds of the substantially concurrent sale of, Disqualified Stock of the Company or any Restricted Subsidiary that is permitted to be Incurred pursuant to Section 4.03; provided, however, that such repurchase, redemption or other acquisition or retirement for value shall be excluded from the calculation of the amount of Restricted Payments; (iv) any purchase or redemption of the Senior Secured Notes due 2008 or Subordinated Indebtedness from Net Available Cash to the extent permitted by Section 4.06; provided, however, that such purchase or redemption shall be excluded from the calculation of the amount of Restricted Payments; (v) upon the occurrence of a Change of Control, any purchase of Senior Secured Notes due 2008 required pursuant to the terms thereof as a result of such Change of Control at a purchase price not to exceed 101% of the outstanding principal amount thereof, plus any accrued and unpaid interest; provided, however, that prior to or concurrently with consummating any such purchase, the Company has made the Change of Control Offer required pursuant to Section 4.08 and has purchased all Notes validly tendered in such Change of Control Offer; and provided further, however, that such purchase will be included in the calculation of the amount of Restricted Payments; (vi) upon the occurrence of a Change of Control and within 60 days after the completion of the offer to repurchase the Notes pursuant to Section 4.08 (including the purchase of the Notes tendered), any purchase or redemption of Subordinated Indebtedness required pursuant to the terms thereof as a result of such Change of Control at a purchase or redemption price not to exceed the outstanding principal amount thereof, plus any accrued and unpaid interest; provided, however, that (1) at the time of such purchase, no Default or Event of Default shall have occurred and be continuing (or would result therefrom), (2) the Company would be able to Incur at least $1.00 of additional Indebtedness under Section 4.03 (a) above after giving pro forma effect to such 40 Restricted Payment and (3) such purchase or redemption shall be included in the calculation of the amount of Restricted Payments; (vii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with Section 4.04(a); provided, however, that such dividend shall be included in the calculation of the amount of Restricted Payments (without duplication for declaration); (viii) the repurchase, redemption or other acquisition or retirement for value of Capital Stock of the Company or any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors), pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell, or are granted the option to purchase or sell, shares of such Capital Stock; provided, however, that the aggregate amount of such repurchases shall not exceed $2.0 million in any calendar year; provided further, however, that such repurchases, redemptions and other acquisitions or retirements for value shall be excluded from the calculation of the amount of Restricted Payments; (ix) the declaration and payment of any dividend (or the making of any similar distribution or redemption) to the holders of any class or series of Disqualified Stock of the Company, or SCI LLC or a Guarantor issued or Incurred after the Closing Date in accordance with Section 4.03; provided that no Default or Event of Default shall have occurred and be continuing immediately after making such declaration or payment; and provided further, that such payment will be excluded from the calculation of the amount of Restricted Payments; (x) cash payments in lieu of fractional shares issuable as dividends on Preferred Stock of the Company or any of its Restricted Subsidiaries; provided that such cash payments shall not exceed $20,000 in the aggregate in any twelve-month period and no Default or Event of Default shall have occurred and be continuing immediately after such cash payments; and provided further, that such cash payments will be excluded from the calculation of the amount of Restricted Payments; (xi) the optional redemption of up to 35% of the Senior Secured Notes due 2008 with the Net Cash Proceeds of one or more Equity Offerings by the Company provided that (1) such redemption is made at a redemption price of 112.0% and otherwise in compliance with indenture governing the Senior Secured Notes due 2008 and (2) prior to or concurrently with any such redemption, the Company has redeemed 35% of the original aggregate principal amount of the Notes (calculated giving effect to any issuance of Additional Notes) with the Net Cash Proceeds of such Equity Offerings at the price set forth in, and otherwise in compliance with, the second paragraph of paragraph 5 of the Notes; provided, however, that (1) such Restricted Payment shall be excluded from the calculation of the amount of Restricted Payments and (2) the Net Cash Proceeds applied to purchase Senior Secured Notes due 2008 in accordance with this clause (xi) shall be excluded from the calculation of the amounts under Section 4.04(a)(3)(B) above; and 41 (xii) other restricted Payments in an aggregate amount not to exceed $20.0 million. SECTION 4.05. Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock or pay any Indebtedness or other obligations owed to the Company or any of its Restricted Subsidiaries, (b) make any loans or advances to the Company or any of its Restricted Subsidiaries or (c) transfer any of its property or assets to the Company or any of its Restricted Subsidiaries, except: (i) any encumbrance or restriction pursuant to applicable law, regulation, order or an agreement in effect at or entered into on the Closing Date; (ii) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary prior to the date on which such Restricted Subsidiary was acquired by the Company (other than Indebtedness Incurred as consideration in, in contemplation of, or to provide all or any portion of the funds or credit support utilized to consummate the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was otherwise acquired by the Company) and outstanding on such date; (iii) any encumbrance or restriction pursuant to an agreement effecting a Refinancing of Indebtedness Incurred pursuant to an agreement referred to in clause (c) (i) or (c) (ii) of this Section 4.05 or this clause (iii) or contained in any amendment to an agreement referred to in clause (c)(i) or (c)(ii) of this Section 4.05 or this clause (iii); provided, however, that the encumbrances and restrictions contained in any agreement or amendment relating to such Refinancing are no less favorable to the Holders than the encumbrances and restrictions contained in the agreements relating to the Indebtedness so Refinanced; (iv) any encumbrance or restriction (1) that restricts in a customary manner the subletting, assignment or transfer of any property or asset that is subject to a lease, license or similar contract or (2) that is contained in security agreements securing Indebtedness of a Restricted Subsidiary to the extent such encumbrance or restriction restricts the transfer of the property subject to such security agreements; (v) with respect to a Restricted Subsidiary, any restriction imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition; (vi) contracts for the sale of assets containing customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary; 42 (vii) agreements for the sale of assets containing customary restrictions with respect to such assets; (viii) restrictions relating to the common stock of Unrestricted Subsidiaries or Persons other than Subsidiaries; (ix) encumbrances or restrictions existing under or by reason of provisions with respect to the disposition or distribution of assets or property in joint venture agreements and other similar agreements entered into in the ordinary course of business; (x) encumbrances or restrictions existing under or by reason of restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business; and (xi) any encumbrance or restriction existing under or by reason of a Receivables Facility or other contractual requirements of a Receivables Facility permitted pursuant to Section 4.03; provided that such restrictions apply only to such Receivables Facility. SECTION 4.06. Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, make any Asset Disposition unless (i) the Company or such Restricted Subsidiary, as the case may be, receives consideration (including by way of relief from, or by any other Person assuming sole responsibility for, any liabilities, contingent or otherwise) at the time of such Asset Disposition at least equal to the Fair Market Value of the shares and assets subject to such Asset Disposition and (ii) at least 80% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash, Temporary Cash Investments or other Qualified Proceeds (provided that the aggregate Fair Market Value of Qualified Proceeds (other than cash and Temporary Cash Investments) shall not exceed $10.0 million since the Closing Date). Within 365 days after the receipt of any Net Available Cash from such Asset Disposition, the Company or such Restricted Subsidiary may apply an amount equal to 100% of the Net Available Cash from such Asset Disposition (w) to repay or cash collateralize any Credit Agreement Obligations or the Notes, to repay Indebtedness of the Company or any of its Restricted Subsidiaries secured by assets not in the Collateral, or to repay any Indebtedness of any Restricted Subsidiary that is not a Guarantor; (x) to acquire all or substantially all of the assets of another Permitted Business; (y) to make a capital expenditure; or (z) to acquire other long-term assets that are used or useful in the Permitted Business; provided, however, that in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (x) above, the Company or such Restricted Subsidiary shall retire such Indebtedness and shall cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. For the purposes of clause (a)(ii) of this Section 4.06 only, the following are deemed to be cash: (A) the assumption of any liabilities (as shown on the Company's or a Restricted Subsidiary's most recent balance sheet) of the Company or any such Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any Note Guarantee) pursuant to a customary novation agreement that releases the 43 Company or such Restricted Subsidiary from further liability in connection with such Asset Disposition and (B) any securities or other obligations received by the Company or any Restricted Subsidiary from the transferee that are converted within 90 days of receipt by the Company or such Restricted Subsidiary into cash. Pending the final application of any Net Available Cash, the Company or such Restricted Subsidiary may temporarily reduce revolving credit borrowings or otherwise invest the Net Available Cash in any manner that is not prohibited by this Indenture. (b) Any Net Available Cash from Asset Dispositions that is not applied or invested as provided in Section 4.06(a) shall constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $15.0 million, the Issuers shall make an Asset Disposition offer (the "Offer") to all Holders of Notes and all holders of other Indebtedness that is pari passu in right of payment with the Notes (other than the Senior Secured Notes due 2008) containing provisions similar to those set forth in Section 4.06(c) with respect to offers to purchase or redeem with the proceeds of sales of assets to purchase the maximum principal amount of Notes and such other pari passu Indebtedness that may be purchased out of the Excess Proceeds. The offer price in any Offer shall be equal to 100% of principal amount plus accrued and unpaid interest, including Additional Interest, if any, to the date of purchase, and shall be payable in cash. If any Excess Proceeds remain after consummation of an Offer, the Issuers may use those Excess Proceeds for any purpose not otherwise prohibited by this Indenture. If the aggregate principal amount of Notes and other pari passu Indebtedness tendered into such Offer exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and such other pari passu Indebtedness to be purchased on a pro rata basis; provided, however, that the Issuers shall not be obligated to purchase Notes in denominations other than integral multiples of $1,000 principal amount at maturity. Upon completion of each Offer, the amount of Excess Proceeds shall be reset at zero. (c) (i) Promptly, and in any event within 10 days after the Company becomes obligated to make an Offer, the Company shall be obligated to deliver to the Trustee and send, by first-class mail to each Holder, a written notice stating that the Holder may elect to have his Notes purchased by the Company either in whole or in part (subject to prorating as hereinafter described in the event the Offer is oversubscribed) in integral multiples of $1,000 of principal amount, at the applicable purchase price. The notice shall specify a purchase date not less than 30 days nor more than 60 days after the date of such notice (the "Purchase Date") and shall contain such information concerning the business of the Company which the Company in good faith believes will enable such Holders to make an informed decision (which at a minimum shall include (1) the most recently filed Annual Report on Form 10-K (including audited consolidated financial statements) of the Company, the most recent subsequently filed Quarterly Report on Form 10-Q and any Current Report on Form 8-K of the Company filed subsequent to such Quarterly Report, other than Current Reports describing Asset Dispositions otherwise described in the offering materials (or corresponding successor reports), (2) a description of material developments in the Company's business subsequent to the date of the latest of such reports, and (3) if material, appropriate pro forma financial information) and all instructions and materials necessary to tender Notes pursuant to the Offer, together with the address referred to in clause (iii). 44 (ii) Not later than the date upon which written notice of an Offer is delivered to the Trustee as provided above, the Company shall deliver to the Trustee an Officers' Certificate as to (1) the amount of the Offer (the "Offer Amount"), (2) the allocation of the Net Available Cash from the Asset Dispositions pursuant to which such Offer is being made and (3) the compliance of such allocation with the provisions of Section 4.06(a) and (b). Not later than one Business Day before the Purchase Date, the Company shall also irrevocably deposit with the Trustee or with a paying agent (or, if the Company is acting as its own paying agent, segregate and hold in trust) an amount equal to the Offer Amount with written instructions for investment in Temporary Cash Investments and to be held for payment in accordance with the provisions of this Section 4.06. Upon the expiration of the period for which the Offer remains open (the "Offer Period"), the Company shall deliver to the Trustee for cancelation the Notes or portions thereof that have been properly tendered to and are to be accepted by the Company. The Trustee (or the Paying Agent, if not the Trustee) shall, on the date of purchase, mail or deliver payment to each tendering Holder in the amount of the purchase price. In the event that the Offer Amount delivered by the Company to the Trustee is greater than the purchase price of the Notes (and such other pari passu Indebtedness) tendered, the Trustee shall deliver the excess to the Company immediately after the expiration of the Offer Period for application in accordance with this Section 4.06. (iii) Holders electing to have a Note purchased shall be required to surrender the Note, with an appropriate form duly completed, to the Company at the address specified in the notice at least three Business Days prior to the Purchase Date. Holders shall be entitled to withdraw their election if the Trustee or the Company receives not later than one Business Day prior to the Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note or Notes which were delivered by the Holder for purchase and a statement that such Holder is withdrawing his election to have such Note or Notes purchased. If at the expiration of the Offer Period the aggregate principal amount of Notes and any such other pari passu Indebtedness included in the Offer surrendered by holders thereof exceeds the Offer Amount, the Company shall select the Notes and such other pari passu Indebtedness to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Notes and such other pari passu Indebtedness in denominations of $1,000, or integral multiples thereof, shall be purchased). Holders whose Notes are purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (iv) At the time the Company delivers Notes to the Trustee which are to be accepted for purchase, the Company shall also deliver an Officers' Certificate stating that such Notes are to be accepted by the Company pursuant to and in accordance with the terms of this Section. A Note shall be deemed to have been accepted for purchase at the time the Trustee, directly or through an agent, mails or delivers payment therefor to the surrendering Holder. (v) The Issuers shall comply in all material respects with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with each repurchase of Notes pursuant to an Offer. To the extent that the provisions of any securities laws or regulations conflict with the Asset Disposition provisions of this Indenture, the Issuers shall comply in all material respects with the applicable securities laws and regulations and shall not be deemed to 45 have breached their obligations under the Asset Disposition provisions of this Indenture by virtue of such conflict SECTION 4.07. Limitation on Transactions with Affiliates. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, enter into or conduct any transaction (including, the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate of the Company (an "Affiliate Transaction") unless such Affiliate Transaction is on terms (i) that are no less favorable (other than in immaterial respects) to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained at the time of such transaction in comparable arm's-length dealings with a Person who is not such an Affiliate, (ii) that, in the event that such Affiliate Transaction involves an aggregate amount in excess of $5.0 million, (1) are set forth in writing and (2) have been approved by a majority of the members of the Board of Directors having no personal stake in such Affiliate Transaction and (iii) that, in the event that such Affiliate Transaction involves an amount in excess of $15.0 million, have been determined by a nationally recognized appraisal or investment banking firm to be fair, from a financial standpoint, to the Company and its Restricted Subsidiaries. (b) The provisions of Section 4.07(a) shall not prohibit (i) any Restricted Payment permitted to be paid pursuant to Section 4.04, (ii) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors, (iii) the grant of stock options or similar rights to officers, employees, consultants and directors of the Company pursuant to plans approved by the Board of Directors and the payment of amounts or the issuance of securities pursuant thereto, (iv) loans or advances to employees in the ordinary course of business permitted by law and consistent with prudent business practice, but in any event not to exceed $5.0 million in the aggregate outstanding at any one time, (v) the payment of reasonable fees, compensation or employee benefit arrangements to and any indemnity provided for the benefit of directors, officers, consultants or employees of the Company or any Restricted Subsidiary in the ordinary course of business, (vi) any transaction between the Company and a Restricted Subsidiary or between Restricted Subsidiaries, (vii) the payment of management, consulting and advisory fees to TPG Partners II, L.P. or its Affiliates made pursuant to any financial advisory, financing, underwriting or placement agreement or in respect of other investment banking activities, including in connection with acquisitions or divestitures, in an amount not to exceed $2.0 million in any calendar year and any related out-of-pocket expenses, (viii) transactions with customers, suppliers, contractors, joint venture partners or purchasers or sellers of goods or services, in each case which are in the ordinary course of business (including pursuant to joint venture agreements) and otherwise in compliance with the terms of this Indenture, and which are fair to the Company or its Restricted Subsidiaries, as applicable, in the reasonable determination of the Board of Directors or the senior management of the Company or its Restricted Subsidiaries, as applicable or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party, or (ix) any transaction effected in connection with a Receivables Facility permitted under Section 4.03. SECTION 4.08. Repurchase of Notes at the Option of the Holder Upon a Change of Control. (a) Upon a Change of Control, each Holder shall have the right to require that the Issuers repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such 46 Holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, including Additional Interest, thereon, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date) in accordance with the terms contemplated in Section 4.08(b); provided, however, that notwithstanding the occurrence of a Change of Control, the Issuers shall not be obligated to purchase the Notes pursuant to this Section 4.08 in the event that they have exercised their right to redeem all the Notes under paragraph 5 of the Notes. In the event that at the time of such Change of Control the terms of the Bank Indebtedness restrict or prohibit the repurchase of Notes pursuant to this Section 4.08, then prior to the mailing of the notice to Holders provided for in Section 4.08(b) below but in any event within 30 days following any Change of Control, SCI LLC shall (i) repay in full all Bank Indebtedness or (ii) obtain the requisite consent under the agreements governing the Bank Indebtedness to permit the repurchase of the Notes as provided for in Section 4.08(b). (b) Within 30 days following any Change of Control (except as provided in the proviso to the first sentence of Section 4.08(a)), the Issuers shall mail a notice to each Holder with a copy to the Trustee (the "Change of Control Offer") stating: (i) that a Change of Control has occurred and that such Holder has the right to require the Issuers to purchase all or a portion (equal to $1,000 or an integral multiple thereof) of such Holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, including Additional Interest, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); (ii) the circumstances and relevant facts and financial information regarding such Change of Control; (iii) the repurchase date (which shall be no earlier than 30 days (or such shorter time period as may be permitted under applicable laws, rules and regulations) nor later than 60 days from the date such notice is mailed); and (iv) the instructions determined by the Issuers, consistent with this Section 4.08, that a Holder must follow in order to have its Notes purchased. (c) Holders electing to have a Note purchased shall be required to surrender the Note, with an appropriate form duly completed, to the Company at the address specified in the notice at least three Business Days prior to the purchase date. Holders shall be entitled to withdraw their election if the Trustee or the Company receives not later than one Business Day prior to the purchase date a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Note purchased. Holders whose Notes are purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered. (d) On the purchase date, all Notes purchased by the Company under this Section 4.08 shall be delivered to the Trustee for cancelation, and the Company shall pay the purchase 47 price plus accrued and unpaid interest, including Additional Interest, if any, to the Holders entitled thereto. (e) Notwithstanding the foregoing provisions of this Section 4.08, the Issuers will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in Section 4.08(b) applicable to a Change of Control Offer made by the Issuers and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. (f) In connection with any Change of Control Offer, the Company shall deliver to the Trustee an Officers' Certificate stating that all conditions precedent contained herein to the right of the Company to make such offer have been complied with. (g) The Issuers shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to this Section. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Indenture relating to Change of Control Offers, the Issuers shall comply with the applicable securities laws and regulations and shall not be deemed to have breached their obligations under this Section by virtue thereof. SECTION 4.09. Compliance Certificate. The Issuers shall deliver to the Trustee within 120 days after the end of each fiscal year of the Issuers an Officers' Certificate stating that in the course of the performance by the signers of their duties as Officers of the Issuers they would normally have knowledge of any Default and whether or not the signers know of any Default that occurred during such period. If they do, the certificate shall describe the Default, its status and what action the Issuers are taking or propose to take with respect thereto. The Issuers also shall comply with Section 314(a)(4) of the TIA. SECTION 4.10. Further Instruments and Acts. Upon request of the Trustee, the Issuers shall execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. SECTION 4.11. Additional Note Guarantees and Liens. If (x) any Domestic Subsidiary shall, after the date hereof, become a guarantor of (i) any Credit Agreement Obligations, (ii) so long as any Senior Secured Notes due 2008 are outstanding, the Senior Secured Notes due 2008, (iii) so long as any Senior Subordinated Notes are outstanding, the Senior Subordinated Notes or (iv) any other obligations, or (y) any Foreign Subsidiary shall, after the date hereof, become a guarantor of any of the Indebtedness of the Company or any Domestic Subsidiary, and the aggregate principal amount of Indebtedness of the Company and its Domestic Subsidiaries guaranteed by all Foreign Subsidiaries exceeds $25.0 million, then the Issuers shall, at the time, cause such Subsidiary to (a) execute a Guarantee of the obligations of the Issuers under the Notes substantially in the form set forth in Exhibit C hereto, (b) if such Subsidiary grants any Lien upon any of its assets and property as security for (i) any Credit Agreement Obligations, (ii) so long as any Senior Secured Notes due 2008 are outstanding, the Senior Secured Notes due 2008, (iii) so long as any Senior Subordinated Notes are outstanding, the Senior Subordinated Notes, or (iv) any other obligations (other than, in the case of this 48 clause (iv), Permitted Liens), such Subsidiary shall concurrently grant a first-priority Lien upon such assets and property as security for the Notes, the Note Guarantees and any other Obligations and execute any and all further Security Documents, financing statements, agreements and instruments, upon substantially the same terms as the Security Documents and in a form reasonably satisfactory to the Trustee, that grants the Collateral Agent a first-priority Lien upon such assets and property for the benefit of the Holders that is equal and ratable with any other first-priority Liens upon such assets and property and take all such actions (including the filing and recording of financing statements, fixture filings, Mortgages and other documents) that may be required under any applicable law, or which the Trustee or Collateral Agent may reasonably request to create such first-priority Lien, all at the expense of the Issuers, including all reasonable fees and expenses of counsel incurred by the Trustee in connection therewith and (c) deliver to the Trustee an Opinion of Counsel, reasonably satisfactory to the Trustee, that such Guarantee and any such Security Documents, as the case may be, are valid, binding and enforceable obligations of such Subsidiary, subject to customary exceptions for bankruptcy, fraudulent conveyance and equitable principles. From and after the date of this Indenture, if any Issuer or any Guarantor creates any initial or additional Lien upon any of its assets and property to secure (i) any Credit Agreement Obligations, (ii) so long as any Senior Secured Notes due 2008 are outstanding, the Senior Secured Notes due 2008, (iii) so long as any Senior Subordinated Notes are outstanding, the Senior Subordinated Notes or (iv) any other obligations (other than, in the case of this clause (iv), Permitted Liens), it shall concurrently grant a first-priority Lien upon such assets and property as security for the Notes, the Note Guarantees and any other Obligations and execute any and all further Security Documents, financing statements, agreements and instruments, upon substantially the same terms as the Security Documents and in a form reasonably satisfactory to the Trustee, that grant the Collateral Agent a first-priority Lien upon such assets and property for the benefit of the Holders that is equal and ratable with any other first-priority Liens upon such assets and property and take all such actions (including the filing and recording of financing statements, fixture filings, Mortgages and other documents) that may be required under any applicable law, or which the Trustee or Collateral Agent may reasonably request to create such first-priority Lien, all at the expense of the Issuers, including all reasonable fees and expenses of counsel incurred by the Trustee in connection therewith and deliver to the Trustee an Opinion of Counsel, reasonably satisfactory to the Trustee, that such Security Documents are valid, binding and enforceable obligations of such Issuer or Guarantor, as the case may be, subject to customary exceptions for bankruptcy, fraudulent conveyance and equitable principles. In addition, the Issuers shall, with respect to each parcel of real property in the United States owned or leased by any Issuer or Guarantor that secures (i) any Credit Agreement Obligations, (ii) so long as any Senior Secured Notes due 2008 are outstanding, the Senior Secured Notes due 2008, (iii) so long as the Senior Subordinated Notes are outstanding, the Senior Subordinated Notes or (iv) any other obligations (other than, in the case of this clause (iv), Permitted Liens), deliver to the Collateral Agent, for the benefit of or addressed to the Trustee or the Collateral Agent, as applicable, the following: (a) a fully executed, acknowledged, and recorded Mortgage that secures the Notes, the Note Guarantees and any other Obligations on a first-priority basis that is equal and ratable with any other first-priority Mortgages on such real property, subject to 49 the terms of the Collateral Sharing Agreement if the Discharge of Credit Agreement Obligations has not occurred; (b) an opinion of local counsel reasonably acceptable to the Initial Purchasers, in the case of Mortgaged Property referred to in clause (a) of the definition of Mortgaged Property, and the Trustee; (c) a fully-paid title insurance policy with no exceptions other than (i) Permitted Liens, (ii) the Lien on such property securing Credit Agreement Obligations and (iii) other changes reasonably acceptable to the Initial Purchasers, in the case of Mortgaged Property referred to in clause (a) of the definition of Mortgaged Property, and the Trustee; (d) with respect to Mortgaged Property referred to in clause (b) of the definition of Mortgaged Property, the most recent survey of each property together with either (i) an updated survey certification from the applicable surveyor stating that, based on a visual inspection of the property and the knowledge of the surveyor, there has been no change in the facts depicted in the survey or (ii) an affidavit from the Issuers stating that there has been no change, other than, in each case, changes reasonably acceptable to the Trustee, in the facts depicted in the survey; and (e) such other related deliveries and deliverables as the Trustee and, in the case of Mortgaged Property referred to in clause (a) of the definition of Mortgaged Property, the Initial Purchasers shall reasonably require. The Issuers shall provide each of the foregoing described in clauses (a) through (e) above at their own expense and shall pay all reasonable fees and expenses of counsel incurred by the Trustee in connection with each of the foregoing. Any such Lien (including any Mortgage) granted in favor of the Holders shall be subject to (i) if a Lien also is granted in favor of the holders of Credit Agreement Obligations, the Collateral Sharing Agreement and (ii) if a Lien also is granted in favor of the Senior Secured Notes due 2008, the terms of the Intercreditor Agreement. In all other cases, the Issuers, such Subsidiary, the Trustee and the agent for the holders of any other obligations secured by a Lien on such property shall enter into a customary collateral sharing or intercreditor agreement setting forth the respective rights of the Holders and the holders of such other obligations. Each Note Guarantee will be limited in amount to an amount not to exceed the maximum amount that can be guaranteed by the applicable Guarantor without rendering the Note Guarantee, as it relates to such Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. SECTION 4.12. Limitation on Lines of Business. The Company shall not, and shall not permit any Restricted Subsidiary (other than a Receivables Subsidiary) to, engage in any business, other than a Permitted Business. SECTION 4.13. Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries. The Company shall not sell or otherwise dispose of any shares of Capital Stock of 50 a Restricted Subsidiary, and shall not permit any Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any shares of its Capital Stock except: (a) to the Company or another Restricted Subsidiary; (b) if, immediately after giving effect to such issuance, sale or other disposition, neither the Company nor any of its Restricted Subsidiaries own any Capital Stock of such Restricted Subsidiary; (c) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect thereto would have been permitted to be made under Section 4.04 if made on the date of such issuance, sale or other disposition; (d) directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary; or (e) in the case of a Restricted Subsidiary other than a wholly-owned Restricted Subsidiary, the issuance by that Restricted Subsidiary of Capital Stock on a pro rata basis to the Company and its Restricted Subsidiaries, on the one hand, and minority shareholders of the Restricted Subsidiary, on the other hand (or on less than a pro rata basis to any minority shareholder if the minority holder does not acquire its pro rata amount), so long as the Company or another Restricted Subsidiary owns and controls at least the same percentage of the Voting Stock of, and economic interest in, such Restricted Subsidiary as prior to such issuance. The cash proceeds of any sale of Capital Stock permitted under clauses (b) and (c) shall be treated as Net Available Cash from an Asset Disposition and shall be applied in accordance with Section 4.06. SECTION 4.14. Limitation on Liens. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind on any asset now owned or hereafter acquired by the Company or its Restricted Subsidiaries, except Permitted Liens. SECTION 4.15. Sale/Leaseback Transactions. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, enter into any Sale/Leaseback Transaction; provided that the Company or any Restricted Subsidiary may enter into a Sale/Leaseback transaction if: (a) the Company or that Restricted Subsidiary, as applicable, could have Incurred Indebtedness in an amount equal to the Attributable Debt relating to such Sale/Leaseback Transaction under Section 4.03 hereof; (b) the gross cash proceeds of the Sale/Leaseback Transaction are at least equal to the fair market value (in the case of gross cash proceeds in excess of $5.0 million as determined in good faith by the Board of Directors and set forth in the Officers' Certificate delivered to the Trustee), of the property that is the subject of that Sale/Leaseback Transaction; and (c) the transfer of assets in that Sale/Leaseback Transaction is permitted by, and the Company applies the proceeds of such transaction in compliance with, Section 4.06 hereof. ARTICLE V Successor Company SECTION 5.01. When Company May Merge or Transfer Assets. (a) The Company and SCI LLC each shall not consolidate with or merge with or into, or convey, transfer or lease all or substantially all its assets to, any Person, unless: (i) the resulting, surviving or transferee Person (the "Successor Company") shall 51 be a corporation or, subject to the proviso below, a partnership or a limited liability company, in each case organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company (if not the Company or SCI LLC, as the case may be) shall expressly assume, by a supplemental indenture hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, all the obligations of the Company or SCI LLC, as the case may be under the Notes and this Indenture; provided, however, that at all times, at least one Issuer must be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia; (ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Company or any Restricted Subsidiary as a result of such transaction as having been Incurred by the Successor Company or such Restricted Subsidiary at the time of such transaction), no Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction, the Successor Company would be able to Incur at least $1.00 of additional Indebtedness pursuant to Section 4.03(a); and (iv) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with this Indenture. The Successor Company shall succeed to, and be substituted for, and may exercise every right and power of, the Company or SCI LLC, as the case may be, under this Indenture. (b) The Company shall not permit any Guarantor to consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its assets to any Person unless: (i) in the case of any Guarantor that is a Domestic Subsidiary, the resulting, surviving or transferee Person will be a corporation, partnership or limited liability company organized and existing under the laws of the United States of America, any State thereof or the District of Columbia, and such Person (if not such Guarantor) shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of such Guarantor under its Note Guarantee; (ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the resulting, surviving or transferee Person as a result of such transaction as having been Incurred by such Person at the time of such transaction), no Default shall have occurred and be continuing; and (iii) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with this Indenture; provided, however, that the foregoing shall not apply to any such consolidation or merger with or into, or conveyance, transfer or lease to, any Person if the resulting, surviving or transferee Person will not be a Subsidiary of the Company and the other terms of this Indenture, including Section 4.06, are complied with. 52 (c) Notwithstanding the foregoing, (i) any Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets to the Company or SCI LLC; (ii) the Company may merge with an Affiliate incorporated or organized solely for the purpose of reincorporating or reorganizing the Company in another jurisdiction to realize tax or other benefits; (iii) nothing herein shall limit any conveyance, transfer or lease of assets between or among any of the Company, SCI LLC and the Guarantors; and (iv) the foregoing clause (a)(iii) of this Section 5.01 shall not prohibit (1) a merger between the Company and a Person that owns all of the Capital Stock of the Company created solely for the purpose of holding the Capital Stock of the Company or (2) a merger between SCI LLC and a Person that owns all of the Capital Stock of SCI LLC created solely for the purpose of holding the Capital Stock of SCI LLC; provided, however, that the other terms of Section 5.01(a) are complied with. ARTICLE VI Events of Defaults and Remedies SECTION 6.01. Events of Default. An "Event of Default" occurs if: (a) the Company, SCI LLC or any Guarantor defaults in any payment of interest on any Note or in any payment of Additional Interest with respect thereto, and such default continues for a period of 30 days; (b) the Company, SCI LLC or any Guarantor (i) defaults in the payment of the principal of any Note when the same becomes due and payable at its Stated Maturity, upon required redemption or repurchase, upon declaration or otherwise, or (ii) fails to redeem or purchase Notes when required pursuant to this Indenture or the Notes; (c) the Company, SCI LLC or any Guarantor fails to comply with Section 5.01; (d) the Company, SCI LLC or any Guarantor fails to comply with Section 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.11, 4.12, 4.13, 4.14 or 4.15 (other than a failure to purchase Notes when required under Section 4.06 or 4.08) and such failure continues for 30 days after the notice specified below; (e) the Company, SCI LLC or any Guarantor fails to comply with any of its agreements in the Notes or this Indenture, any Note Guarantee, any Security Document or the Collateral Sharing Agreement (other than those referred to in (a), (b), (c) or (d) above) and such failure continues for 60 days after the notice specified below; (f) Indebtedness of the Company or any Restricted Subsidiary is not paid within any applicable grace period after final maturity or the acceleration by the holders thereof because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds $25.0 million or its foreign currency equivalent at the time and such failure continues for 10 days after the notice specified below; (g) the Company, SCI LLC or any other Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: 53 (i) commences a voluntary case; (ii) consents to the entry of an order for relief against it in an involuntary case; (iii) consents to the appointment of a Custodian of it or for any substantial part of its property; (iv) makes a general assignment for the benefit of its creditors; or (v) or takes any comparable action under any foreign laws relating to insolvency; (h) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company, SCI LLC or any other Significant Subsidiary in an involuntary case; (ii) appoints a Custodian of the Company, SCI LLC or any other Significant Subsidiary or for any substantial part of its property; or (iii) orders the winding up or liquidation of the Company, SCI LLC or any other Significant Subsidiary; or any similar relief is granted under any foreign laws and the order or decree remains unstayed and in effect for 60 days; (i) with respect to any judgment or decree for the payment of money in excess of $25.0 million or its foreign currency equivalent against the Company or any Restricted Subsidiary (i) an enforcement proceeding is commenced thereon by any creditor if such judgment or decree is final and nonappealable and the Company or such Restricted Subsidiary, as applicable, fails to stay such proceeding within 10 days thereafter or (ii) the Company or such Restricted Subsidiary, as applicable, fails to pay such judgment or decree, which judgment or decree has remained outstanding for a period of 60 days following the entry of such judgment or decree without being paid, discharged, waived or stayed; or (j) (i) except as permitted by this Indenture, any Note Guarantee of any Significant Subsidiary or any Security Document or any security interest granted thereby shall be held in any judicial proceeding to be unenforceable or invalid, or shall cease for any reason to be in full force and effect and such default continues for 10 days after written notice, or (ii) any Issuer or Guarantor that is a Significant Subsidiary, or any Person acting on behalf of such Significant Subsidiary, shall deny or disaffirm its obligations under any Note Guarantee or Security Document. The foregoing shall constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. 54 The term "Bankruptcy Law" means Title 11, United States Code, or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. A Default under clause (d), (e), (f) or (j) above is not an Event of Default until the Trustee notifies the Issuers or the Holders of at least 25% in principal amount of the outstanding Notes notify the Issuers and the Trustee of the Default and the Issuers or the relevant Guarantor, as applicable, do not cure such Default within the time specified after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default". The Issuers shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice in the form of an Officers' Certificate of any event which with the giving of notice or the lapse of time would become an Event of Default under clauses (c), (d), (e), (f), (i) or (j), its status and what action the Issuers are taking or propose to take with respect thereto. SECTION 6.02. Acceleration. (a) If an Event of Default (other than an Event of Default specified in Section 6.01(g) or (h) with respect to the Company or SCI LLC) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the outstanding Notes, by notice to the Issuers, may declare the principal of and accrued but unpaid interest on all the Notes to be due and payable. Upon such a declaration, such principal and interest shall be due and payable immediately. If an Event of Default specified in Section 6.01(g) or (h) with respect to the Company or SCI LLC occurs, the principal of and interest on all the Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. The Holders of a majority in principal amount of the Notes by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of acceleration. No such rescission shall affect any subsequent Default or impair any right consequent thereto. (b) In the event of a declaration of acceleration of the Notes because an Event of Default has occurred and is continuing as a result of the acceleration of any Indebtedness described in Section 6.01(f), the declaration of acceleration of the Notes shall be automatically annulled if the holders of any such Indebtedness have rescinded the declaration of acceleration in respect of such Indebtedness within 30 days of the date of such acceleration and if (i) the annulment of the acceleration of the Notes would not conflict with any judgment or decree of a court of competent jurisdiction and (ii) all existing Events of Default, except nonpayment of principal or interest on the Notes that became due solely because of the acceleration of the Notes, have been cured or waived. SECTION 6.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. 55 The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.04. Waiver of Past Defaults. The Holders of a majority in principal amount of the Notes by notice to the Trustee may waive on behalf of the Holders of all of the Notes an existing Default and its consequences except (a) a Default in the payment of the principal of or interest on a Note, (b) a Default arising from the failure to redeem or purchase any Note when required pursuant to the terms of this Indenture or (c) a Default in respect of a provision that under Section 9.02 cannot be amended without the consent of each Holder affected. When a Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. SECTION 6.05. Control by Majority. The Holders of a majority in principal amount of the Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.01, that the Trustee determines is unduly prejudicial to the rights of other Holders or would involve the Trustee in personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. SECTION 6.06. Limitation on Suits. (a) Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Holder may pursue any remedy with respect to this Indenture or the Notes unless: (i) the Holder gives to the Trustee written notice stating that an Event of Default is continuing; (ii) the Holders of at least 25% in principal amount of the Notes make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of security or indemnity; and (v) the Holders of a majority in principal amount of the Notes do not give the Trustee a direction inconsistent with the request during such 60-day period. (b) A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. 56 SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest, including Additional Interest, on the Notes held by such Holder, on or after the respective due dates expressed or provided for in the Notes, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. Collection Suit by Trustee. If an Event of Default specified in Section 6.01(a) or (b) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Issuers or any other obligor on the Notes for the whole amount then due and owing (together with interest on overdue principal and (to the extent lawful) on any unpaid interest at the rate provided for in the Notes) and the amounts provided for in Section 7.07. SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Holders allowed in any judicial proceedings relative to the Issuers, any Subsidiary or Guarantor, their creditors or their property and, unless prohibited by law or applicable regulations, may vote on behalf of the Holders in any election of a trustee in bankruptcy or other Person performing similar functions, and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and its counsel, and any other amounts due the Trustee under Section 7.07. SECTION 6.10. Priorities. If the Trustee collects any money or property pursuant to this Article 6, it shall pay out the money or property in the following order: FIRST: to the Trustee for amounts due under Section 7.07; SECOND: to Holders for amounts due and unpaid on the Notes for principal and interest, ratably, and any Additional Interest, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal and interest, including any Additional Interest, respectively; and THIRD: to the Issuers. The Trustee may fix a record date and payment date for any payment to Holders pursuant to this Section. At least 15 days before such record date, the Trustee shall mail to each Holder and the Issuers a notice that states the record date, the payment date and amount to be paid. SECTION 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, 57 having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in principal amount of the Notes. SECTION 6.12. Waiver of Stay or Extension Laws. Neither the Issuers nor any Guarantor (to the extent it may lawfully do so) shall at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and each Issuer and each Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VII Trustee SECTION 7.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05. (iv) No provision of this Indenture shall require the Trustee to expend or risk its 58 own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Issuers. (f) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and to the provisions of the TIA. SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; provided, however, that the Trustee's conduct does not constitute wilful misconduct or negligence. (e) The Trustee may consult with counsel, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Notes shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. (f) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, note or other paper or document unless requested in writing to do so by the Holders of not less than a majority in principal amount of the Notes at the time outstanding, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Issuers, personally or by agent or attorney. 59 SECTION 7.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Issuers or their respective Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar or co-paying agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture, any Note Guarantee or the Notes, it shall not be accountable for the Issuers' use of the proceeds from the Notes, and it shall not be responsible for any statement of the Issuers or any Guarantor in this Indenture or in any document issued in connection with the sale of the Notes or in the Notes other than the Trustee's certificate of authentication. The Trustee shall not be charged with knowledge of any Default or Event of Default under Sections 6.01(c), (d), (e), (f), (i) or (j) or of the identity of any Significant Subsidiary unless either (a) a Trust Officer shall have actual knowledge thereof or (b) the Trustee shall have received notice thereof in accordance with Section 12.02 hereof from the Issuers, any Guarantor or any Holder. SECTION 7.05. Notice of Defaults. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Holder notice of the Default within the earlier of 90 days after it occurs or 30 days after it is known to a trust officer. Except in the case of a Default in payment of principal of or interest on any Note (including payments pursuant to the redemption provisions of such Note, if any), the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Holders. SECTION 7.06. Reports by Trustee to Holders. As promptly as practicable after each May 15 beginning with May 15, 2004, the Trustee shall mail to each Holder a brief report dated as of such May 15 that complies with Section 313(a) of the TIA if and to the extent required thereby. The Trustee shall also comply with Section 313(b) of the TIA. A copy of each report at the time of its mailing to Holders shall be filed with the Commission and each stock exchange (if any) on which the Notes are listed. The Issuers agree to notify promptly the Trustee whenever the Notes become listed on any stock exchange and of any delisting thereof. SECTION 7.07. Compensation and Indemnity. The Issuers shall pay to the Trustee from time to time reasonable compensation for its services hereunder as the Issuers and the Trustee shall from time to time agree in writing. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Issuers shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Trustee's agents, counsel, accountants and experts. Each of the Issuers and each Guarantor, jointly and severally shall indemnify the Trustee against any and all loss, liability or expense (including reasonable attorneys' fees) incurred by or in connection with the administration of this trust and the performance of its duties hereunder. The Trustee shall notify the Issuers of any claim for which it may seek indemnity promptly upon obtaining actual knowledge thereof; 60 provided, however, that any failure so to notify the Issuers shall not relieve the Issuers or any Guarantor of its indemnity obligations hereunder. The Issuers shall defend the claim and the Trustee shall provide reasonable cooperation at the Issuers' expense in the defense. The Trustee may have separate counsel and the Issuers and the Guarantors, as applicable, shall pay the fees and expenses of such counsel; provided, however, that the Issuers and the Guarantors shall not be required to pay such fees and expenses if they assume the Trustee's defense and, in the reasonable judgment of the Trustee's outside counsel, there is no conflict of interest between the Issuers and the Guarantors, on the one hand, and the Trustee, on the other hand, in connection with such defense. The Issuers need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee through its own wilful misconduct, negligence or bad faith. To secure the Issuers' payment obligations in this Section, the Trustee shall have a lien prior to the Notes on all money or property held or collected by the Trustee other than money or property held in trust to pay principal of and interest and Additional Interest, if any, on particular Notes. The Issuers' payment obligations pursuant to this Section shall survive the satisfaction or discharge of this Indenture, any rejection or termination of this Indenture under any bankruptcy law or the resignation or removal of the Trustee. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses after the occurrence of a Default specified in Section 6.01(g) or (h) with respect to the Issuers, the expenses are intended to constitute expenses of administration under the Bankruptcy Law. SECTION 7.08. Replacement of Trustee. (a) The Trustee may resign at any time by so notifying the Issuers. The Holders of a majority in principal amount of the Notes may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee. The Issuers shall remove the Trustee if: (i) the Trustee fails to comply with Section 7.10; (ii) the Trustee is adjudged bankrupt or insolvent; (iii) a receiver or other public officer takes charge of the Trustee or its property; or (iv) the Trustee otherwise becomes incapable of acting. (b) If the Trustee resigns, is removed by the Issuers or by the Holders of a majority in principal amount of the Notes and such Holders do not reasonably promptly appoint a successor Trustee, or if a vacancy exists in the office of Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Issuers shall promptly appoint a successor Trustee. (c) A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Issuers. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its 61 succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07. (d) If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee or the Holders of 10% in principal amount of the Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. (e) If the Trustee fails to comply with Section 7.10, unless the Trustee's duty to resign is stayed as provided in TIA Section 310(b), any Holder who has been a bona fide holder of a Note for at least six months may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (f) Notwithstanding the replacement of the Trustee pursuant to this Section, the Issuers' obligations under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09. Successor Trustee by Merger. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee. In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have. SECTION 7.10. Eligibility; Disqualification. The Trustee shall at all times satisfy the requirements of TIA Section 310(a). The Trustee shall have a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b), subject to its right to apply for a stay of its duty to resign under the penultimate paragraph of TIA Section 310(b); provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Issuers are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. SECTION 7.11. Preferential Collection of Claims Against the Issuers. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. 62 ARTICLE VIII Discharge of Indenture; Defeasance SECTION 8.01. Discharge of Liability on Notes; Defeasance. (a) Subject to Section 8.01(c), when (i) all outstanding Notes (other than Notes replaced or paid pursuant to Section 2.08) have been canceled or delivered to the Trustee for cancelation or (ii) all outstanding Notes not previously delivered for cancelation have become due and payable, whether at maturity or as a result of the mailing of a notice of redemption pursuant to Article 3 hereof, and the Issuers irrevocably deposit with the Trustee funds in an amount sufficient or U.S. Government Obligations, the principal of and interest on which will be sufficient, or a combination thereof sufficient, in the written opinion of a nationally recognized firm of independent public accountants delivered to the Trustee (which delivery shall only be required if U.S. Government Obligations have been so deposited) to pay the principal of and interest on the outstanding Notes when due at maturity or upon redemption of, including interest thereon to maturity or such redemption date (other than Notes replaced or paid pursuant to Section 2.08) and Additional Interest, if any, and if in either case the Issuers pay all other sums payable hereunder by the Issuers, then this Indenture shall, subject to Section 8.01(c), cease to be of further effect. The Trustee shall acknowledge satisfaction and discharge of this Indenture on demand of the Issuers accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Issuers. (b) Subject to Sections 8.01(c) and 8.02, the Issuers at any time may terminate (i) all of their obligations under the Notes and this Indenture ("legal defeasance option") and (ii) their obligations under Sections 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.11, 4.12, 4.13, 4.14 or 4.15 and the operation of Section 5.01(a)(iii), 6.01(d), 6.01(e), 6.01(f), 6.01(g) (with respect to Significant Subsidiaries of the Company only), 6.01(h) (with respect to Significant Subsidiaries of the Company only) and 6.01(i) ("covenant defeasance option"). The Issuers may exercise their legal defeasance option notwithstanding their prior exercise of their covenant defeasance option. In the event that the Issuers terminate all of their obligations under the Notes and this Indenture by exercising their legal defeasance option, the obligations under the Note Guarantees shall each be terminated simultaneously with the termination of such obligations. If the Issuers exercise their legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default. If the Issuers exercise their covenant defeasance option, payment of the Notes may not be accelerated because of an Event of Default specified in Section 6.01(d), 6.01(e), 6.01(f), 6.01(g) (with respect to Significant Subsidiaries of the Company only), 6.01(h) (with respect to Significant Subsidiaries of the Company only) or 6.01(i) or because of the failure of the Company or SCI LLC to comply with Section 5.01(a)(iii). Upon satisfaction of the conditions set forth herein and upon request of the Issuers, the Trustee shall acknowledge in writing the discharge of those obligations that the Issuers terminate. (c) Notwithstanding the provisions of Sections 8.01(a) and 8.01(b), the Issuers' obligations in Sections 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 7.07, 7.08 and in this Article 8 shall 63 survive until the Notes have been paid in full. Thereafter, the Issuers' obligations in Sections 7.07, 8.04 and 8.05 shall survive. SECTION 8.02. Conditions to Defeasance. (a) The Issuers may exercise their legal defeasance option or their covenant defeasance option only if: (i) the Issuers irrevocably deposit in trust with the Trustee money in an amount sufficient or U.S. Government Obligations, the principal of and interest on which will be sufficient, or a combination thereof sufficient, to pay the principal, premium (if any) and interest on the Notes when due at maturity or redemption, as the case may be, including interest thereon to maturity or such redemption date and Additional Interest, if any; (ii) the Issuers deliver to the Trustee a certificate from a nationally recognized firm of independent accountants expressing their opinion that the payments of principal and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts as will be sufficient to pay principal and interest when due on all the Notes to maturity or redemption, as the case may be; (iii) 91 days pass after the deposit is made and during the 91-day period no Default specified in Section 6.01(g) or (h) with respect to the Issuers occurs which is continuing at the end of the period; (iv) the deposit does not constitute a default under any other agreement binding on the Issuers; (v) the Issuers deliver to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940; (vi) in the case of the legal defeasance option, the Issuers shall have delivered to the Trustee an Opinion of Counsel stating that (1) the Issuers have received from, or there has been published by, the Internal Revenue Service a ruling, or (2) since the date of this Indenture there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (vii) in the case of the covenant defeasance option, the Issuers shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (viii) the Issuers deliver to the Trustee an Officers' Certificate and an Opinion of 64 Counsel, each stating that all conditions precedent to the defeasance and discharge of the Notes as contemplated by this Article 8 have been complied with. (b) Before or after a deposit, the Issuers may make arrangements satisfactory to the Trustee for the redemption of Notes at a future date in accordance with Article 3. SECTION 8.03. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of and interest on the Notes. SECTION 8.04. Repayment to the Issuers. The Trustee and the Paying Agent shall promptly turn over to the Issuers upon request any money or U.S. Government Obligations held by either of them as provided in this Article 8 which, in the written opinion of a nationally recognized firm of independent public accountants delivered to the Trustee (which delivery shall only be required if U.S. Government Obligations have been so deposited), are in excess of the amount thereof which would then be required to be deposited to effect an equivalent discharge or defeasance in accordance with this Article 8. Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall pay to the Issuers upon written request any money held by them for the payment of principal or interest that remains unclaimed for two years, and, thereafter, Holders entitled to the money must look to the Issuers for payment as general creditors and the Trustee and the Paying Agent shall have no further liability with respect to such monies. SECTION 8.05. Indemnity for Government Obligations. The Issuers shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or the principal and interest received on such U.S. Government Obligations. SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article 8 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Issuers' obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; provided, however, that if the Issuers have made any payment of interest on or principal of any Notes because of the reinstatement of its obligations, the Issuers shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. 65 ARTICLE IX Amendments SECTION 9.01. Without Consent of Holders. (a) The Issuers, the Guarantors and the Trustee may amend or supplement this Indenture, the Notes, the Note Guarantees, the Collateral Sharing Agreement or the Security Documents without notice to or consent of any Holder: (i) to cure any ambiguity, omission, defect or inconsistency; (ii) to comply with Article 5; (iii) to provide for uncertificated Notes in addition to or in place of certificated Notes; provided, however, that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code or in a manner such that the uncertificated Notes are described in Section 163(f)(2)(B) of the Code; (iv) to add additional Note Guarantees with respect to the Notes; (v) to add to the covenants of the Issuers for the benefit of the Holders or to surrender any right or power herein conferred upon the Issuers; (vi) to make any change that does not adversely affect the rights of any Holder, subject to the provisions of this Indenture; (vii) to provide for the issuance of the Exchange Notes, Private Exchange Notes or Additional Notes, which shall have terms substantially identical in all material respects to the Original Notes (except that the transfer restrictions contained in the Original Notes shall be modified or eliminated, as appropriate), and which shall be treated, together with any outstanding Original Notes, as a single issue of securities; (viii) to comply with any requirement of the Commission in connection with qualifying, or maintaining the qualification of, this Indenture under the TIA; (ix) if necessary, in connection with any addition or release of Collateral permitted under the terms of this Indenture or the Security Documents; or (x) prior to the Discharge of Credit Agreement Obligations, to give effect to any amendment, waiver or consent in respect of any Security Document or the Collateral Sharing Agreement that does not materially affect the rights of the Holders. The Issuers shall also be entitled to releases of the Collateral or the Note Guarantees as described in Sections 10.03 and 11.03 hereof. If the Issuers wish under other circumstances to obtain an amendment or waiver or seek a consent under the Collateral Sharing Agreement, any Security Document or Note Guarantee that otherwise would require the consent of the Holders of a majority in principal amount of the Notes then outstanding, the Issuers may mail a written notice of their request to the Trustee and the Holders, specifying the amendment, 66 waiver or consent, the reason it is being sought and any other information requested for the Holders to reasonably consider such matter. If the Issuers do not receive written objections from Holders of at least 25% in aggregate principal amount of the Notes within 20 Business Days after such mailing, such amendment, waiver or consent shall be deemed granted; provided, however, that if such amendment, waiver or consent is requested prior to the Discharge of Credit Agreement Obligations, such amendment, waiver or consent shall not be inconsistent with the terms of the Collateral Sharing Agreement. If the Issuers receive such objections, then they shall not be entitled to effect such amendment or waiver, and such consent shall not be effective, unless the Issuers obtain the consent of the Holders of a majority in outstanding principal amount of the Notes then outstanding voting as a single class (including consents obtained in connection with a tender offer or exchange offer for, or purchase of, the Notes). (b) After an amendment under this Section becomes effective, the Issuers shall mail to Holders a notice briefly describing such amendment. The failure to give such notice to all Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section 9.01. SECTION 9.02. With Consent of Holders. (a) The Issuers, the Guarantors and the Trustee may amend this Indenture, the Notes, the Note Guarantees, the Collateral Sharing Agreement or the Security Documents without notice to any Holder but with the written consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including consents obtained in connection with a tender offer or exchange for the Notes). However, without the consent of each Holder affected, an amendment may not: (i) reduce the amount of Notes whose Holders must consent to an amendment; (ii) reduce the rate of or extend the time for payment of interest or any Additional Interest on any Note; (iii) reduce the principal of or extend the Stated Maturity of any Note; (iv) reduce the premium payable upon the redemption of any Note or change the time at which any Note may be redeemed in accordance with Article 3; (v) make any Note payable in money other than that stated in the Note; (vi) impair the right of any Holder to receive payment of principal of, and interest, including Additional Interest, on, such Holder's Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such Holder's Notes; (vii) make any change in Section 6.04 or 6.07 or the second sentence of this Section 9.02; or (viii) modify the Note Guarantees in any manner adverse to the Holders. 67 The consent of the Holders under this Section 9.02 shall not be necessary to approve the particular form of any proposed amendment. It shall be sufficient if such consent approves the substance thereof. After an amendment under this Section 9.02 becomes effective, the Issuers shall mail to Holders a notice briefly describing such amendment. The failure to give such notice to all Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section 9.02. SECTION 9.03. Compliance with Trust Indenture Act. Every amendment to this Indenture or the Notes shall comply with the TIA as then in effect. SECTION 9.04. Revocation and Effect of Consents and Waivers. (a) A consent to an amendment or a waiver by a Holder of a Note shall bind the Holder and every subsequent Holder of that Note or portion of the Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent or waiver is not made on the Note. However, any such Holder or subsequent Holder may revoke the consent or waiver as to such Holder's Note or portion of the Note if the Trustee receives the notice of revocation before the date on which the Trustee receives an Officers' Certificate from the Issuers certifying that the requisite number of consents have been received. After an amendment or waiver becomes effective, it shall bind every Holder. An amendment or waiver becomes effective upon the (i) receipt by the Issuers or the Trustee of the requisite number of consents, (ii) satisfaction of conditions to effectiveness as set forth in this Indenture and any indenture supplemental hereto containing such amendment or waiver and (iii) execution of such amendment or waiver (or supplemental indenture) by the Issuers and the Trustee. (b) The Issuers may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 120 days after such record date. SECTION 9.05. Notation on or Exchange of Notes. If an amendment changes the terms of a Note, the Trustee may require the Holder of the Note to deliver it to the Trustee. The Trustee may place an appropriate notation on the Note regarding the changed terms and return it to the Holder. Alternatively, if the Issuers or the Trustee so determines, the Issuers in exchange for the Note shall issue and the Trustee shall authenticate a new Note that reflects the changed terms. Failure to make the appropriate notation or to issue a new Note shall not affect the validity of such amendment. SECTION 9.06. Trustee to Sign Amendments. The Trustee shall sign any amendment authorized pursuant to this Article 9 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may but need not sign it. In signing such amendment the Trustee shall be entitled to receive indemnity reasonably 68 satisfactory to it and to receive, and (subject to Section 7.01) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture and that such amendment is the legal, valid and binding obligation of the Issuers and the Guarantors enforceable against them in accordance with its terms, subject to customary exceptions, and complies with the provisions hereof (including Section 9.03). SECTION 9.07. Payment for Consent. Neither the Issuers nor any Affiliate of the Issuers shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Notes unless such consideration is offered to be paid to all Holders that so consent, waive or agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement. ARTICLE X Collateral and Security SECTION 10.01. Security Documents. The due and punctual payment of the principal of and interest and Additional Interest, if any, on the Notes when and as the same shall be due and payable, whether on an interest payment date, at maturity, by acceleration, repurchase, redemption or otherwise, and interest on the overdue principal of and interest and Additional Interest, if any, on the Notes and performance of all other Obligations of the Issuers and the Guarantors to the Holders or the Trustee under this Indenture and the Notes, according to the terms hereunder or thereunder, are secured as provided in the Security Documents which define the terms of the Liens that secure the Obligations and provide that the Liens granted thereunder secure the Obligations on a first-priority basis equally and ratably with all Credit Agreement Obligations, subject to the terms of the Collateral Sharing Agreement. Each Holder, by its acceptance of a Note, consents and agrees to all of the terms of the Security Documents and the Collateral Sharing Agreement (including the provisions providing for the exercise of remedies and release of Collateral) as the same may be in effect or may be amended from time to time in accordance with their terms, and authorizes and directs the Trustee to enter into the Security Documents and the Collateral Sharing Agreement and to perform its obligations and exercise its rights thereunder in accordance therewith. The Issuers shall deliver to the Trustee (if it is not itself then the Collateral Agent) copies of all documents delivered to the Collateral Agent pursuant to the Security Documents and the Collateral Sharing Agreement, and will do or cause to be done all such acts and things as may be required by the next sentence of this Section 10.01, to assure and confirm to the Trustee the Liens upon the Collateral contemplated hereby, by the Security Documents or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture and of the Obligations secured hereby, according to the intent and purposes herein expressed. The Issuers shall take, and shall cause their Restricted Subsidiaries to take, any and all actions reasonably required to cause the Security Documents to create and maintain, as security for the Obligations of the Issuers and the Guarantors hereunder, a valid and enforceable perfected first-priority Lien on all the Collateral, in favor of the Collateral Agent for the ratable benefit of the Holders, after the Discharge of Credit Agreement Obligations, and if the Discharge of Credit Agreement Obligations has not occurred, for the ratable benefit of the Secured Parties (as defined in the Collateral Sharing 69 Agreement), equal in priority (subject to Permitted Liens) to any and all Liens at any time granted upon the Collateral to secure Credit Agreement Obligations or any other first-priority Liens. The Trustee and the Issuers hereby acknowledge and agree that the Collateral Agent holds the Collateral for the ratable benefit of the Holders and the Trustee and the other Secured Parties (as defined in the Collateral Sharing Agreement) pursuant to the terms of the Security Documents and subject to the terms of the Collateral Sharing Agreement. SECTION 10.02. Recording and Opinions. (a) The Issuers will furnish to the Trustee on May 15 in each year beginning with May 15, 2004, an Opinion of Counsel, which may be rendered by internal counsel to the Issuers, dated as of such date, either: (i) (A) stating that, in the opinion of such counsel, action has been taken with respect to the recording, registering, filing, re-recording, re-registering and re-filing of all supplemental indentures, financing statements, continuation statements or other instruments of further assurance as is necessary to maintain and perfect the Lien of the Security Documents and reciting with respect to the Liens on the Collateral the details of such action or referring to prior Opinions of Counsel in which such details are given, and (B) stating that, in the opinion of such counsel, based on relevant laws as in effect on the date of such Opinion of Counsel, all financing statements and continuation statements have been executed and filed that are necessary as of such date and during the succeeding 12 months fully to preserve, perfect and protect, to the extent such protection and preservation are possible by filing, the rights of the Holders and the Trustee hereunder and the rights of the Holders, the Trustee and the Collateral Agent under the Security Documents and the Collateral Sharing Agreement with respect to the Liens on the Collateral; or (ii) stating that, in the opinion of such counsel, no such action is necessary to maintain and perfect such Lien and assignment. (b) The Issuers will otherwise comply with the provisions of TIA Section 314(b). SECTION 10.03. Release of Collateral. (a) Subject to subsections (b), (c) and (d) of this Section 10.03, Collateral may be released from the Lien and security interest created by the Security Documents at any time or from time to time in accordance with the provisions of the Security Documents, the Collateral Sharing Agreement, or as provided hereby. Whether prior to or after the Discharge of Credit Agreement Obligations, upon the request of the Issuers pursuant to an Officers' Certificate certifying that all conditions precedent hereunder have been met and without the consent of any Holder, the Issuers and the Guarantors will be entitled to releases of assets included in the Collateral from the Liens securing the Notes under any one or more of the following circumstances: (i) (A) if the aggregate principal amount of all Credit Agreement Obligations outstanding, after giving effect to such release and any transactions related thereto, is equal to or exceeds the aggregate principal amount of the Notes then outstanding, if all other Liens on that asset securing Credit Agreement Obligations (including all commitments thereunder) then secured by that asset are released, provided that the Senior Secured Notes due 2008 are not secured by a Lien on that asset; or (B) if the aggregate 70 principal amount of all Credit Agreement Obligations then outstanding is less than the aggregate principal amount of Notes then outstanding, if all other Liens on that asset securing Credit Agreement Obligations (including all commitments thereunder) then secured by that asset are released, provided that (1) the release is not made as direct or indirect consideration for any prior, concurrent or contemplated repayment, prepayment, refinancing or reduction in commitments under the Credit Agreement Obligations and (2) the Senior Secured Notes due 2008 are not secured by a Lien on that asset; (ii) if such asset is sold, transferred, leased or otherwise disposed of in a transaction that is permitted or not prohibited by (a) the "asset sale" covenant of the Credit Agreement and (b) Section 4.06; (iii) to enable the Issuers or any Guarantor to consummate any sale, lease, conveyance or other disposition of any assets or rights permitted or not prohibited under Section 4.06; (iv) if the Issuers provide substitute collateral with at least an equivalent fair value, as determined in good faith by the Board of Directors; (v) in respect of assets subject to a permitted purchase money lien; (vi) if all of the stock of any Subsidiary of the Company that is pledged to the Collateral Agent is released or if any Subsidiary that is a Note Guarantor is released from its Note Guarantee (in each case, in accordance with the terms of this Indenture and the Security Documents), such Subsidiary's assets will also be released; (vii) in respect of assets included in the Collateral with a fair value, as determined in good faith by the Board of Directors, of up to $2.0 million in any calendar year, subject to a cumulative carryover for any amount not used in any prior calendar year; or (viii) pursuant to an amendment, waiver or supplement in accordance with Article 9 hereof. Upon receipt of such Officers' Certificate, the Trustee shall, if at such time it is the Collateral Agent, or otherwise shall direct the Collateral Agent, to execute, deliver or acknowledge any necessary or proper instruments of termination, satisfaction or release to evidence the release of any Collateral permitted to be released pursuant to this Indenture, the Security Documents and the Collateral Sharing Agreement. (b) Except as otherwise provided in the Collateral Sharing Agreement, no Collateral may be released from the Lien and security interest created by the Security Documents pursuant to the provisions of the Security Documents unless the Officers' Certificate required by this Section 10.03 has been delivered to the Collateral Agent. (c) At any time when a Default or Event of Default has occurred and is continuing and the maturity of the Notes has been accelerated (whether by declaration or otherwise) and the Trustee has delivered a notice of acceleration to the Collateral Agent, no 71 release of Collateral pursuant to the provisions of the Security Documents will be effective as against the Holders, except as otherwise provided in the Collateral Sharing Agreement. (d) The release of any Collateral from the terms of this Indenture and the Security Documents shall not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Collateral is released pursuant to the terms of the Security Documents, the Collateral Sharing Agreement and this Indenture. To the extent applicable, the Issuers will cause TIA Section 313(b), relating to reports, and TIA Section 314(d), relating to the release of property or securities from the Lien and security interest of the Security Documents, the Collateral Sharing Agreement and relating to the substitution therefor of any property or securities to be subjected to the Lien and security interest of the Security Documents, to be complied with. Any certificate or opinion required by TIA Section 314(d) may be made by an Officer of the Issuers except in cases where TIA Section 314(d) requires that such certificate or opinion be made by an independent Person, which Person will be an independent engineer, appraiser or other expert selected or approved by the Trustee and the Collateral Agent in the exercise of reasonable care. SECTION 10.04. Certificates and Opinions of Counsel. To the extent applicable, the Issuers will furnish to the Trustee and the Collateral Agent, prior to each proposed release of Collateral pursuant to the Security Documents and the Collateral Sharing Agreement: (a) all documents required by TIA Section 314(d); and (b) an Opinion of Counsel, which may be rendered by internal counsel to the Issuers, to the effect that such accompanying documents constitute all documents required by TIA Section 314(d). The Trustee may, to the extent permitted by Sections 7.01 and 7.02 hereof, accept as conclusive evidence of compliance with the foregoing provisions the appropriate statements contained in such documents and such Opinion of Counsel. SECTION 10.05. Certificates of the Trustee. In the event that the Issuers wish to release Collateral in accordance with the Security Documents at a time when the Trustee is not itself also the Collateral Agent and have delivered the certificates and documents required by the Security Documents and Sections 10.03 and 10.04 hereof, the Trustee will determine whether it has received all documentation required by TIA Section 314(d) in connection with such release and, based on such determination and the Opinion of Counsel delivered pursuant to Section 10.04(b), will deliver a certificate to the Collateral Agent setting forth such determination. SECTION 10.06. Authorization of Actions to Be Taken by the Trustee Under the Security Documents and the Collateral Sharing Agreement. Subject to the provisions of Section 7.01 and 7.02 hereof and the Collateral Sharing Agreement, the Trustee may, in its sole discretion and without the consent of the Holders, take, on behalf of the Holders, or direct, on behalf of the Holders, the Collateral Agent to take, all actions it deems necessary or appropriate in order to: (a) enforce any of the terms of the Security Documents and the Collateral Sharing Agreement; and 72 (b) collect and receive any and all amounts payable in respect of the Obligations of the Issuers and the Guarantors hereunder. Subject to Section 3 of the Collateral Sharing Agreement, the Trustee will have power to institute and maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral by any acts that may be unlawful or in violation of the Security Documents or this Indenture, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest hereunder or be prejudicial to the interests of the Holders or of the Trustee). SECTION 10.07. Authorization of Receipt and Distribution of Funds by the Trustee Under the Security Documents and the Collateral Sharing Agreement. The Trustee is authorized to receive any funds for the benefit of the Holders distributed under the Security Documents and the Collateral Sharing Agreement, and to make further distributions of such funds to the Holders according to the provisions of this Indenture. SECTION 10.08. Termination of Security Interest. The Trustee will, at the request of the Issuers, deliver a certificate to the Collateral Agent stating that such Obligations have been paid in full, and instruct the Collateral Agent to release the Liens securing the Obligations pursuant to this Indenture and the Security Documents upon (1) payment in full of the principal of, accrued and unpaid interest and Additional Interest, if any, on the Notes and all other Obligations under this Indenture, the Note Guarantees and the Security Documents that are due and payable at or prior to the time such principal, accrued and unpaid interest and Additional Interest, if any, are paid, (2) a satisfaction and discharge of this Indenture as described in Article 8 or (3) a legal defeasance or covenant defeasance as described in Article 8. Upon receipt of such instruction, the Trustee, if it is the Collateral Agent, shall, or, if it is not the Collateral Agent, shall request the Collateral Agent to, execute, deliver or acknowledge any necessary or proper instruments of termination, satisfaction or release to evidence the release of all such Liens. SECTION 10.09. Trustee Serving as Collateral Agent; Amendments or Supplements to, or Replacements of, the Security Documents and the Collateral Agency Agreement. (a) If the Trustee shall become the Collateral Agent, it shall be authorized to appoint co-Collateral Agents as necessary in its sole discretion. Except as otherwise explicitly provided herein or in the Security Documents or the Collateral Sharing Agreement, neither the Trustee nor any of its respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The Trustee shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither the Trustee nor any of its officers, directors, employees or agents shall be responsible for any act or failure to act hereunder, except for its own willful misconduct, negligence or bad faith. 73 (b) The Trustee, is authorized and directed to (i) if the Trustee shall become the Collateral Agent, enter into the Security Documents, (ii) enter into the Collateral Sharing Agreement, (iii) bind the Holders on the terms as set forth in the Security Documents and the Collateral Sharing Agreement and (iv) perform and observe its obligations under the Security Documents and the Collateral Sharing Agreement. (c) If at any time following the Discharge of Credit Agreement Obligations any Issuer or any Guarantor (i) incurs Indebtedness under any Credit Facility pursuant to Section 4.03(b)(i) and (ii) such Indebtedness constitutes Credit Agreement Obligations, the Issuers shall deliver to the Trustee an Officers' Certificate so stating and requesting the Trustee to enter into one or more amendments or supplements to, or replacements of, the Security Documents, as applicable, and the Collateral Sharing Agreement establishing and setting forth the respective rights of the holders of such Credit Agreement Obligations and the Holders in respect of their shared first priority Lien on the Collateral. Any such amendment, supplement or replacement of the Collateral Sharing Agreement shall include substantially the same terms as are set forth in the Collateral Sharing Agreement. The Trustee shall (and is hereby authorized and directed to) enter into such amendments or supplements to, or replacements of, the Collateral Sharing Agreement, bind the Holders on the terms set forth therein, and perform and observe its obligations thereunder. SECTION 10.10. Designations. For purposes of the provisions hereof and the Collateral Sharing Agreement requiring the Issuers to designate Indebtedness for the purposes of the term "Credit Agreement Obligations", "First-Lien Credit Facilities" or any other such designations hereunder or any such similar designations under the Collateral Sharing Agreement, any such designation shall be sufficient if the relevant designation is set forth in writing, signed on behalf of the Issuers by an Officer and delivered to the Trustee and the Collateral Agent. For all purposes hereof and the Collateral Sharing Agreement, the Issuers hereby designate the Credit Facilities provided pursuant to the Credit Agreement as a "First-Lien Credit Facility" and any obligations in respect of the Credit Agreement as "Credit Agreement Obligations". ARTICLE XI Note Guarantees SECTION 11.01. Note Guarantees. (a) Each Guarantor hereby jointly and severally irrevocably and unconditionally Guarantees, as a primary obligor and not merely as a surety, to each Holder and to the Trustee and its successors and assigns the full and punctual payment when due, whether at Stated Maturity, by acceleration, by redemption or otherwise, of all obligations of the Issuers under this Indenture (including obligations to the Trustee) and the Notes, whether for payment of principal of, interest on or Additional Interest, if any, in respect of the Notes and all other monetary obligations of the Issuers under this Indenture and the Notes, whether for fees, expenses, indemnification or otherwise (all the foregoing being hereinafter collectively called the "Guaranteed Obligations"). Each Guarantor further agrees that the Guaranteed Obligations may be extended or renewed, in whole or in part, without notice or further assent from each such Guarantor, and that each such Guarantor shall remain bound under this Article 11 notwithstanding any extension or renewal of any Guaranteed Obligation. 74 (b) Each Guarantor waives presentation to, demand of payment from and protest to the Issuers of any of the Guaranteed Obligations and also waives notice of protest for nonpayment. Each Guarantor waives notice of any default under the Notes or the Guaranteed Obligations. The obligations of each Guarantor hereunder shall not be affected by (i) the failure of any Holder or the Trustee to assert any claim or demand or to enforce any right or remedy against the Issuers or any other Person under this Indenture, the Notes or any other agreement or otherwise; (ii) any extension or renewal of any thereof; (iii) any rescission, waiver, amendment or modification of any of the terms or provisions of this Indenture, the Notes or any other agreement; (iv) the release of any security held by any Holder or the Trustee for the Guaranteed Obligations or any of them; (v) the failure of any Holder or Trustee to exercise any right or remedy against any other Guarantor; or (vi) any change in the ownership of such Guarantor, except as provided in Section 11.03. (c) Each Guarantor hereby waives any right to which it may be entitled to have its obligations hereunder divided among the Guarantors, such that such Guarantor's obligations would be less than the full amount claimed. Each Guarantor hereby waives any right to which it may be entitled to have the assets of the Issuers first be used and depleted as payment of the Issuers' or such Guarantor's obligations hereunder prior to any amounts being claimed from or paid by such Guarantor hereunder. Each Guarantor hereby waives any right to which it may be entitled to require that the Issuers be sued prior to an action being initiated against such Guarantor. (d) Each Guarantor further agrees that its Note Guarantee herein constitutes a guarantee of payment when due (and not a guarantee of collection) and waives any right to require that any resort be had by any Holder or the Trustee to any security held for payment of the Guaranteed Obligations. (e) Except as expressly set forth in Sections 8.01(b), 11.02, 11.03 and 11.07, the obligations of each Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (other than payment of the Guaranteed Obligations in full), including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense of setoff, counterclaim, recoupment or termination whatsoever or by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of each Guarantor herein shall not be discharged or impaired or otherwise affected by the failure of any Holder or the Trustee to assert any claim or demand or to enforce any remedy under this Indenture, the Notes or any other agreement, by any waiver or modification of any thereof, by any default, failure or delay, wilful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of any Guarantor or would otherwise operate as a discharge of any Guarantor as a matter of law or equity. (f) Each Guarantor agrees that its Note Guarantee shall remain in full force and effect until payment in full of all the Guaranteed Obligations. Each Guarantor further agrees that its Note Guarantee herein shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Guaranteed Obligation is 75 rescinded or must otherwise be restored by any Holder or the Trustee upon the bankruptcy or reorganization of the Issuers or otherwise. (g) In furtherance of the foregoing and not in limitation of any other right which any Holder or the Trustee has at law or in equity against any Guarantor by virtue hereof, upon the failure of the Issuers to pay the Guaranteed Obligation when and as the same shall become due, whether at maturity, by acceleration, by redemption or otherwise, each Guarantor hereby promises to and shall, upon receipt of written demand by the Trustee, forthwith pay, or cause to be paid, in cash, to the Holders or the Trustee an amount equal to the sum of (i) the unpaid amount of such Guaranteed Obligations and (ii) accrued and unpaid interest on such Guaranteed Obligations then due and owing (but only to the extent not prohibited by law). (h) Each Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Holders in respect of any Guaranteed Obligations guaranteed hereby until payment in full of all Guaranteed Obligations. Each Guarantor further agrees that, as between it, on the one hand, and the Holders and the Trustee, on the other hand, (i) the maturity of the Guaranteed Obligations guaranteed hereby may be accelerated as provided in Article 6 for the purposes of any Note Guarantee herein, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Guaranteed Obligations guaranteed hereby, and (ii) in the event of any declaration of acceleration of such Guaranteed Obligations as provided in Article 6, such Guaranteed Obligations (whether or not due and payable) shall forthwith become due and payable by such Guarantor for the purposes of this Section 11.01. (i) Each Guarantor also agrees to pay any and all costs and expenses (including reasonable attorneys' fees and expenses) incurred by the Trustee or any Holder in enforcing any rights under this Section 11.01. (j) Upon request of the Trustee, each Guarantor shall execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. SECTION 11.02. Limitation on Liability. Any term or provision of this Indenture to the contrary notwithstanding, the maximum aggregate amount of the Guaranteed Obligations guaranteed hereunder by any Guarantor shall not exceed the maximum amount that can be hereby guaranteed without rendering this Indenture, as it relates to such Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. SECTION 11.03. Releases of Note Guarantees. A Note Guarantee may be released without any action required on the part of the Trustee or any Holder as provided hereby. Whether prior to or after the Discharge of Credit Agreement Obligations, upon the request of the Issuers pursuant to an Officers' Certificate certifying that all conditions precedent hereunder have been met and without the consent of any Holder, a Note Guarantee may be released under any one of the following circumstances: (a) (i) if the aggregate principal amount of all Credit Agreement Obligations outstanding, after giving effect to such release and any transactions related thereto, is equal to or 76 exceeds the aggregate principal amount of the Notes then outstanding, the Collateral Agent releases the guarantee of the Credit Agreement Obligations made by such Guarantor, provided that such Guarantor does not remain a guarantor of the Senior Secured Notes due 2008 or the Senior Subordinated Notes; or (ii) if the aggregate principal amount of Credit Agreement Obligations outstanding is less than the aggregate principal amount of the Notes then outstanding, the Collateral Agent releases the guarantee of Credit Agreement Obligations made by such Guarantor; provided that (A) the release of the guarantee is not made as direct or indirect consideration for any prior, concurrent or contemplated repayment, prepayment, refinancing or reduction in commitments under the Credit Agreement Obligations and (B) such Guarantor does not remain a guarantor of the Senior Secured Notes due 2008 or the Senior Subordinated Notes; (b) (i) if all of the capital stock of, or other equity interests in, or all or substantially all of the assets of such Guarantor is sold or otherwise disposed of (including by way of merger or consolidation) to a Person other than any of the Issuers or Domestic Subsidiaries or (ii) if such Guarantor ceases to be a Restricted Subsidiary, and the Issuers otherwise comply, to the extent applicable, with Sections 4.06 and 5.01; (c) if the Issuers designate such Guarantor as an Unrestricted Subsidiary; or (d) upon the Issuers' request, if the fair market value of the assets of the applicable Guarantor (as determined in good faith by the Board of Directors of the Company), together with the fair market value of the assets of other Guarantors whose Note Guarantee was released in the same calendar year, do not exceed $2.0 million (subject to cumulative carryover for amounts not used in any prior calendar year). Upon delivery by the Issuers to the Trustee of an Officers' Certificate and an Opinion of Counsel to the effect that such release was made by the Issuers in accordance with the provisions of this Indenture, the Trustee will execute any documents reasonably required in order to evidence the release of any Guarantor from its obligations under its Note Guarantee. Any Guarantor not released from its obligations under its Note Guarantee will remain liable for the full amount of principal of and interest on the Notes and for the other obligations of any Guarantor under this Indenture as provided in this Article 11. SECTION 11.04. Successors and Assigns. This Article 11 shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the successors and assigns of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges conferred upon that party in this Indenture and in the Notes shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions of this Indenture. SECTION 11.05. No Waiver. Neither a failure nor a delay on the part of either the Trustee or the Holders in exercising any right, power or privilege under this Article 11 shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Trustee and the Holders herein expressly specified are cumulative and not exclusive of any other rights, 77 remedies or benefits which either may have under this Article 11 at law, in equity, by statute or otherwise. SECTION 11.06. Modification. No modification, amendment or waiver of any provision of this Article 11, nor the consent to any departure by any Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Trustee, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any Guarantor in any case shall entitle such Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 11.07. Execution of Supplemental Indenture for Future Guarantors. Each Subsidiary which is required to become a Guarantor pursuant to Section 4.11 shall promptly execute and deliver to the Trustee a supplemental indenture in the form of Exhibit C hereto pursuant to which such Subsidiary shall become a Guarantor under this Article 11 and shall guarantee the Guaranteed Obligations. Concurrently with the execution and delivery of such supplemental indenture, the Issuers shall deliver to the Trustee an Opinion of Counsel and an Officers' Certificate to the effect that such supplemental indenture has been duly authorized, executed and delivered by such Subsidiary and that, subject to the application of bankruptcy, insolvency, moratorium, fraudulent conveyance or transfer and other similar laws relating to creditors' rights generally and to the principles of equity, whether considered in a proceeding at law or in equity, the Note Guarantee of such Guarantor is a legal, valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms and or to such other matters as the Trustee may reasonably request. SECTION 11.08. Non-Impairment. The failure to endorse a Note Guarantee on any Note shall not affect or impair the validity thereof. ARTICLE XII Miscellaneous SECTION 12.01. Trust Indenture Act Controls. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by, or with another provision (an "incorporated provision") included in this Indenture by operation of, TIA Sections 310 to 318, inclusive, such imposed duties or incorporated provision shall control. SECTION 12.02. Notices. Any notice or communication shall be in writing and delivered in person or mailed by first-class mail addressed as follows: if to the Issuers: c/o ON Semiconductor Corporation 5005 E. McDowell Road Phoenix, AZ 85008 Attention of: President 78 with a copy to: ON Semiconductor Corporation 5005 E. McDowell Road Phoenix, AZ 85008 Attention of: General Counsel if to the Trustee: Wells Fargo Bank Minnesota, National Association Corporate Trust Services 213 Court Street, Suite 703 Middletown, CT 06457 Attention of: Corporate Trust Services The Issuers or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Holder shall be mailed, first class mail, to the Holder at the Holder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 12.03. Communication by Holders with Other Holders. Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Issuers, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 12.04. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Issuers to the Trustee to take or refrain from taking any action under this Indenture (other than a request to authenticate the Initial Notes in accordance with this Indenture), the Issuers shall furnish to the Trustee: (a) an Officers' Certificate in form reasonably satisfactory to the Trustee stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel in form reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent have been complied with. 79 SECTION 12.05. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture (other than pursuant to Section 4.09) shall include: (a) a statement that the individual making such certificate or opinion has read such covenant or condition; (b) brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such individual, such covenant or condition has been complied with. In giving such Opinion of Counsel, counsel may rely as to factual matters on an Officers' Certificate or on certificates of public officials. SECTION 12.06. When Notes Disregarded. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Issuers, any Guarantor or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuers or any Guarantor shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes which the Trustee knows are so owned shall be so disregarded. Subject to the foregoing, only Notes outstanding at the time shall be considered in any such determination. Notwithstanding the foregoing, Notes that are to be acquired by the Issuers, any Guarantor or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuers or any Guarantor pursuant to an exchange offer, tender offer or other agreement shall not be deemed to be owned by such entity until legal title to such Notes passes to such entity. SECTION 12.07. Rules by Trustee, Paying Agent and Registrar. The Trustee may make reasonable rules for action by or a meeting of Holders. The Registrar and the Paying Agent may make reasonable rules for their functions. SECTION 12.08. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or other day on which banking institutions are not required by law or regulation to be open in the State of New York. If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. If a regular record date is a Legal Holiday, the record date shall not be affected. SECTION 12.09. GOVERNING LAW. THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE 80 APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. SECTION 12.10. No Recourse Against Others. A director, officer, employee, stockholder or member, as such, of the Issuers or any of the Guarantors, shall not have any liability for any obligations of the Issuers or any of the Guarantors under the Notes or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Holder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Notes. SECTION 12.11. Successors. All agreements of each of the Issuers and each Guarantor in this Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 12.12. Multiple Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. SECTION 12.13. Table of Contents; Headings. The table of contents, crossreference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. 81 IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. ON SEMICONDUCTOR CORPORATION, SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, SCG (MALAYSIA SMP) HOLDING CORPORATION, SCG (CZECH) HOLDING CORPORATION, SCG (CHINA) HOLDING CORPORATION, SEMICONDUCTOR COMPONENTS INDUSTRIES PUERTO RICO, INC. SCG INTERNATIONAL DEVELOPMENT LLC SEMICONDUCTOR COMPONENTS INDUSTRIES OF RHODE ISLAND, INC. SEMICONDUCTOR COMPONENTS INDUSTRIES INTERNATIONAL OF RHODE ISLAND, INC. by /s/ John T. Kurtzweil ----------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee by /s/ Joseph P. O'Donnell ------------------------------ Name: Joseph P. O'Donnell Title: Corporate Trust Officer APPENDIX A PROVISIONS RELATING TO ORIGINAL NOTES, ADDITIONAL NOTES, PRIVATE EXCHANGE NOTES AND EXCHANGE NOTES 1. Definitions 1.1 Definitions For the purposes of this Appendix A the following terms shall have the meanings indicated below: "Applicable Procedures" means, with respect to any transfer or transaction involving a Regulation S Global Note or beneficial interest therein, the rules and procedures of the Depositary for such Global Note, Euroclear and Clearstream, in each case to the extent applicable to such transaction and as in effect from time to time. "Clearstream" means Clearstream Banking, S.A., or any successor securities clearing agency. "Definitive Note" means a certificated Initial Note, Private Exchange Note or Exchange Note (bearing the Restricted Notes Legend if the transfer of such Note is restricted by applicable law) that does not include the Global Notes Legend. "Depositary" means The Depository Trust Company, its nominees and their respective successors. "Euroclear" means the Euroclear Clearance System or any successor securities clearing agency. "Exchange Offer" means an offer by the Issuers, pursuant to a Registration Rights Agreement, to certain Holders of Initial Notes, to issue and deliver to such Holders, in exchange for their Initial Notes, a like aggregate principal amount of Exchange Notes registered under the Securities Act. "Global Notes Legend" means the legend set forth under that caption in Exhibit A to this Indenture. "Initial Purchasers" means Salomon Smith Barney Inc., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated. "Notes Custodian" means the custodian with respect to a Global Note (as appointed by the Depositary) or any successor person thereto, who shall initially be the Trustee. 2 "Private Exchange" means an offer by the Issuers, pursuant to a Registration Rights Agreement, to issue and deliver to certain purchasers, in exchange for the Initial Notes held by such purchasers as part of their initial distribution, a like aggregate principal amount of Private Exchange Notes. "Private Exchange Notes" means the Notes of the Issuers issued in exchange for Initial Notes pursuant to this Indenture in connection with a Private Exchange pursuant to a Registration Rights Agreement. "Purchase Agreement" means (a) the Purchase Agreement dated February 26, 2003, among the Issuers, the Guarantors and the Initial Purchasers and (b) any other similar Purchase Agreement relating to Additional Notes. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Registration Rights Agreement" means (a) the Registration Rights Agreement dated March 3, 2003, among the Issuers, the Guarantors and the Initial Purchasers and (b) any other similar Registration Rights Agreement relating to Additional Notes. "Regulation S" means Regulation S under the Securities Act. "Regulation S Notes" means all Initial Notes offered and sold outside the United States in reliance on Regulation S. "Restricted Period", with respect to any Notes, means the period of 40 consecutive days beginning on and including the later of (a) the day on which such Notes are first offered to persons other than distributors (as defined in Regulation S under the Securities Act) in reliance on Regulation S and (b) the Issue Date with respect to such Notes, which commencement date shall be notified by the Issuers to the Trustee. "Restricted Notes Legend" means the legend set forth in Section 2.3(e)(i) herein. "Rule 144A" means Rule 144A under the Securities Act. "Rule 144A Notes" means all Initial Notes offered and sold to QIBs in reliance on Rule 144A. "Securities Act" means the Securities Act of 1933. "Shelf Registration Statement" means a registration statement filed by the Issuers in connection with the offer and sale of Initial Notes pursuant to a Registration Rights Agreement. "Transfer Restricted Notes" means Definitive Notes and any other Notes that bear or are required to bear the Restricted Notes Legend. 3 1.2 Other Definitions 2. The Notes 2.1 Form and Dating (a) The Original Notes issued on the date hereof are being (i) offered and sold by the Issuers pursuant to a Purchase Agreement and (ii) resold, initially only to (1) QIBs in reliance on Rule 144A and (2) Persons other than U.S. Persons (as defined in Regulation S) in reliance on Regulation S. Such Original Notes may thereafter be transferred to, among others, QIBs and purchasers in reliance on Regulation S. Additional Notes offered after the date hereof may be offered and sold by the Company from time to time pursuant to one or more Purchase Agreements in accordance with applicable law. (b) Global Notes. Rule 144A Notes shall be issued initially in the form of one or more permanent global Notes in definitive, fully registered form (collectively, the "Rule 144A Global Note") and Regulation S Notes shall be issued initially in the form of one or more global Notes (collectively, the "Regulation S Global Note"), in each case without interest coupons and bearing the Global Notes Legend and Restricted Notes Legend, which shall be deposited on behalf of the purchasers of the Notes represented thereby with the Notes Custodian, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Issuers and authenticated by the Trustee as provided in this Indenture. Beneficial ownership interests in the Regulation S Global Note shall not be exchangeable for interests in the Rule 144A Global Note or any other Note without a Restricted Notes Legend until the expiration of the Restricted Period. The Rule 144A Global Note and the Regulation S Global Note are each referred to herein as a "Global Note" and are collectively referred to herein as "Global Notes"; provided that the term "Global Note" when used in Sections 2.1(b), 2.1(c), 2.3(g)(i), 2.3(h)(i) and 2.4 of this Appendix shall also include any Note in global form issued in connection with an Exchange Offer or Private Exchange. The aggregate principal amount of the Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee and on the schedules thereto as hereinafter provided. (c) Book-Entry Provisions. This Section 2.1(c) shall apply only to a Global Note deposited with or on behalf of the Depositary. The Issuers shall execute and the Trustee shall, in accordance with this Section 2.1(c) and Section 2.2 of this Appendix and pursuant to an order of the Issuers signed by two Officers of each Issuer, authenticate and deliver initially one or more Global Notes that (i) shall be registered in the name of the Depositary for such Global Note or Global Notes or the
Term: Defined in Section: ---- ------------------- "Agent Members".......................................... 2.1(c) "Global Note"............................................ 2.1(b) "Regulation S Global Note"............................... 2.1(b) "Rule 144A Global Note".................................. 2.1(b) 4 nominee of such Depositary and (ii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions or held by the Trustee as Notes Custodian. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary or by the Trustee as Notes Custodian or under such Global Note, and the Depositary may be treated by the Issuers, the Trustee and any agent of the Issuers or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Issuers, the Trustee or any agent of the Issuers or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices of such Depositary governing the exercise of the rights of a holder of a beneficial interest in any Global Note. (d) Definitive Notes. Except as provided in Section 2.3 or 2.4 of this Appendix, owners of beneficial interests in Global Notes will not be entitled to receive physical delivery of certificated Notes. 2.2 Authentication. The Trustee shall authenticate and make available for delivery upon a written order of the Issuers signed by two Officers of each Issuer (a) Original Notes for original issue on the date hereof in an aggregate principal amount of $200,000,000, (b) subject to the terms of this Indenture, Additional Notes in an unlimited aggregate principal amount and (c) the (i) Exchange Notes for issue only in an Exchange Offer and (ii) Private Exchange Notes for issue only in a Private Exchange, in the case of each of (i) and (ii) pursuant to a Registration Rights Agreement and for a like principal amount of Initial Notes exchanged pursuant thereto. Such order shall specify the amount of the Notes to be authenticated, the date on which the original issue of Notes is to be authenticated and whether the Notes are to be Original Notes, Additional Notes, Exchange Notes or Private Exchange Notes. The aggregate principal amount of Notes outstanding at any time is unlimited. 2.3 Transfer and Exchange. (a) Transfer and Exchange of Definitive Notes. When Definitive Notes are presented to the Registrar with a request: (i) to register the transfer of such Definitive Notes; or (ii) to exchange such Definitive Notes for an equal principal amount of Definitive Notes of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Definitive Notes surrendered for transfer or exchange: (1) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Issuers and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and 5 (2) in the case of Transfer Restricted Notes, are accompanied by the following additional information and documents, as applicable: (A) if such Definitive Notes are being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect (in the form set forth on the reverse side of the Initial Note); or (B) if such Definitive Notes are being transferred to the Issuers, a certification to that effect (in the form set forth on the reverse side of the Initial Note); or (C) if such Definitive Notes are being transferred pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or in reliance upon another exemption from the registration requirements of the Securities Act, (x) a certification to that effect (in the form set forth on the reverse side of the Initial Note) and (y) if the Issuers so request, an opinion of counsel or other evidence reasonably satisfactory to it as to the compliance with the restrictions set forth in the legend set forth in Section 2.3(e)(i) of this Appendix. (b) Restrictions on Transfer of a Definitive Note for a Beneficial Interest in a Global Note. A Definitive Note may not be exchanged for a beneficial interest in a Global Note except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Definitive Note, duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Issuers and the Registrar, together with: (i) certification (in the form set forth on the reverse side of the Initial Note) that such Definitive Note is being transferred (1) to a QIB in accordance with Rule 144A or (2) outside the United States in an offshore transaction within the meaning of Regulation S and in compliance with Rule 904 under the Securities Act; and (ii) written instructions directing the Trustee to make, or to direct the Notes Custodian to make, an adjustment on its books and records with respect to such Global Note to reflect an increase in the aggregate principal amount of the Notes represented by the Global Note, such instructions to contain information regarding the Depositary account to be credited with such increase, then the Trustee shall cancel such Definitive Note and cause, or direct the Notes Custodian to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Notes Custodian, the aggregate principal amount of Notes represented by the Global Note to be increased by the aggregate principal amount of the Definitive Note to be exchanged and shall credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Global Note equal to the principal amount of the Definitive Note so canceled. If no Global Notes are then outstanding and the Global Note has not been previously exchanged for certificated securities pursuant to Section 2.4 of this Appendix, the Issuers shall issue and the Trustee shall authenticate, upon written order of the Issuers in the form of an Officers' Certificate, a new Global Note in the appropriate principal amount. 6 (c) Transfer and Exchange of Global Notes. (i) The transfer and exchange of Global Notes or beneficial interests therein shall be effected through the Depositary, in accordance with this Indenture (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Depositary therefor. A transferor of a beneficial interest in a Global Note shall deliver a written order given in accordance with the Depositary's procedures containing information regarding the participant account of the Depositary to be credited with a beneficial interest in such Global Note or another Global Note and such account shall be credited in accordance with such order with a beneficial interest in the applicable Global Note and the account of the Person making the transfer shall be debited by an amount equal to the beneficial interest in the Global Note being transferred. Transfers by an owner of a beneficial interest in the Rule 144A Global Note to a transferee who takes delivery of such interest through the Regulation S Global Note, whether before or after the expiration of the Restricted Period, shall be made only upon receipt by the Trustee of a certification in the form provided on the reverse of the Initial Notes from the transferor to the effect that such transfer is being made in accordance with Regulation S or (if available) Rule 144 under the Securities Act and that, if such transfer is being made prior to the expiration of the Restricted Period, the interest transferred shall be held immediately thereafter through Euroclear or Clearstream. (ii) If the proposed transfer is a transfer of a beneficial interest in one Global Note to a beneficial interest in another Global Note, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the Global Note to which such interest is being transferred in an amount equal to the principal amount of the interest to be so transferred, and the Registrar shall reflect on its books and records the date and a corresponding decrease in the principal amount of Global Note from which such interest is being transferred. (iii) Notwithstanding any other provisions of this Appendix (other than the provisions set forth in Section 2.4 of this Appendix), a Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (iv) In the event that a Global Note is exchanged for Definitive Notes pursuant to Section 2.4 of this Appendix prior to the consummation of an Exchange Offer or the effectiveness of a Shelf Registration Statement with respect to such Notes, such Notes may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of this Section 2.3 (including the certification requirements set forth on the reverse of the Initial Notes intended to ensure that such transfers comply with Rule 144A, Regulation S or such other applicable exemption from registration under the Securities Act, as the case may be) and such other procedures as may from time to time be adopted by the Issuers. (d) Restrictions on Transfer of Regulation S Global Note. (i) Prior to the expiration of the Restricted Period, interests in the Regulation S Global Note may only be held through Euroclear or Clearstream. During the Restricted Period, beneficial ownership interests 7 in the Regulation S Global Note may only be sold, pledged or transferred through Euroclear or Clearstream in accordance with the Applicable Procedures and only (1) so long as such security is eligible for resale pursuant to Rule 144A, to a person whom the selling holder reasonably believes is a QIB that purchases for its own account or for the account of a QIB to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A, (2) in an offshore transaction in accordance with Regulation S, (3) pursuant to an exemption from registration under the Securities Act provided by Rule 144 (if applicable) under the Securities Act or (4) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. Prior to the expiration of the Restricted Period, transfers by an owner of a beneficial interest in the Regulation S Global Note to a transferee who takes delivery of such interest through the Rule 144A Global Note shall be made only in accordance with Applicable Procedures and upon receipt by the Trustee of a written certification from the transferor of the beneficial interest in the form provided on the reverse of the Initial Note to the effect that such transfer is being made to a QIB within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A. Such written certification shall no longer be required after the expiration of the Restricted Period. (ii) Upon the expiration of the Restricted Period, beneficial ownership interests in the Regulation S Global Note shall be transferable in accordance with applicable law and the other terms of this Indenture. (e) Legend. (i) Except as permitted by the following paragraphs (ii), (iii) or (iv), each Note certificate evidencing the Global Notes and the Definitive Notes (and all Notes issued in exchange therefor or in substitution thereof) shall bear a legend in substantially the following form (each defined term in the legend being defined as such for purposes of the legend only): "THIS NOTE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS NOTE MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS NOTE IS HEREBY NOTIFIED THAT THE SELLER OF THIS NOTE MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS NOTE AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS NOTE MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 8 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE." (ii) Upon any sale or transfer of a Transfer Restricted Note that is a Definitive Note, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Note for a Definitive Note that does not bear the legends set forth above and rescind any restriction on the transfer of such Transfer Restricted Note if the Holder certifies in writing to the Registrar that its request for such exchange was made in reliance on Rule 144 (such certification to be in the form set forth on the reverse of the Initial Note). (iii) After a transfer of any Original or Additional Notes or Private Exchange Notes during the period of the effectiveness of a Shelf Registration Statement with respect to such Original or Additional Notes or Private Exchange Notes, as the case may be, all requirements pertaining to the Restricted Notes Legend on such Original or Additional Notes or such Private Exchange Notes shall cease to apply and the requirements that any such Original or Additional Notes or such Private Exchange Notes be issued in global form shall continue to apply. (iv) Upon the consummation of an Exchange Offer with respect to the Original or Additional Notes pursuant to which Holders of such Original or Additional Notes are offered Exchange Notes in exchange for their Original or Additional Notes, all requirements pertaining to Original or Additional Notes that Original or Additional Notes be issued in global form shall continue to apply, and Exchange Notes in global form without the Restricted Notes Legend shall be available to Holders that exchange such Original or Additional Notes in such Exchange Offer. (v) Upon the consummation of a Private Exchange with respect to the Original or Additional Notes pursuant to which Holders of such Original or Additional Notes are offered Private Exchange Notes in exchange for their Original or Additional Notes, all requirements pertaining to such Original or Additional Notes that Original or Additional Notes be issued in global form shall continue to apply, and Private Exchange Notes in global form with the Restricted Notes Legend shall be available to Holders that exchange such Original or Additional Notes in such Private Exchange. (vi) Upon a sale or transfer after the expiration of the Restricted Period of any Initial Note acquired pursuant to Regulation S, all requirements that such Initial Note bear the Restricted Notes Legend shall cease to apply and the requirements requiring any such Initial Note be issued in global form shall continue to apply. 9 (vii) Any Additional Notes sold in a registered offering shall not be required to bear the Restricted Notes Legend. (f) Cancelation or Adjustment of Global Note. At such time as all beneficial interests in a Global Note have either been exchanged for Definitive Notes, transferred, redeemed, repurchased or canceled, such Global Note shall be returned by the Depositary to the Trustee for cancelation or retained and canceled by the Trustee. At any time prior to such cancelation, if any beneficial interest in a Global Note is exchanged for Definitive Notes, transferred in exchange for an interest in another Global Note, redeemed, repurchased or canceled, the principal amount of Notes represented by such Global Note shall be reduced and an adjustment shall be made on the books and records of the Trustee (if it is then the Notes Custodian for such Global Note) with respect to such Global Note, by the Trustee or the Notes Custodian, to reflect such reduction. (g) Obligations with Respect to Transfers and Exchanges of Notes. (i) To permit registrations of transfers and exchanges, the Issuers shall execute and the Trustee shall authenticate, Definitive Notes and Global Notes at the Registrar's request. (ii) No service charge shall be made for any registration of transfer or exchange, but the Issuers may require payment of a sum sufficient to cover any transfer tax, assessments, or similar governmental charge payable in connection therewith (other than any such transfer taxes, assessments or similar governmental charge payable upon exchanges pursuant to Sections 2.07, 3.06, 4.06, 4.08 and 9.05 of this Indenture). (iii) Prior to the due presentation for registration of transfer of any Note, the Issuers, the Trustee, the Paying Agent or the Registrar may deem and treat the person in whose name a Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Note and for all other purposes whatsoever, whether or not such Note is overdue, and none of the Issuers, the Trustee, the Paying Agent or the Registrar shall be affected by notice to the contrary. (iv) All Notes issued upon any transfer or exchange pursuant to the terms of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Notes surrendered upon such transfer or exchange. (h) No Obligation of the Trustee. (i) The Trustee shall have no responsibility or obligation to any beneficial owner of a Global Note, a member of, or a participant in the Depositary or any other Person with respect to the accuracy of the records of the Depositary or its nominee or of any participant or member thereof, with respect to any ownership interest in the Notes or with respect to the delivery to any participant, member, beneficial owner or other Person (other than the Depositary) of any notice (including any notice of redemption or repurchase) or the payment of any amount, under or with respect to such Notes. All 10 notices and communications to be given to the Holders and all payments to be made to Holders under the Notes shall be given or made only to the registered Holders (which shall be the Depositary or its nominee in the case of a Global Note). The rights of beneficial owners in any Global Note shall be exercised only through the Depositary subject to the applicable rules and procedures of the Depositary. The Trustee may rely and shall be fully protected in relying upon information furnished by the Depositary with respect to its members, participants and any beneficial owners. (ii) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Note (including any transfers between or among Depositary participants, members or beneficial owners in any Global Note) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. 2.4 Definitive Notes (a) A Global Note deposited with the Depositary or with the Trustee as Notes Custodian pursuant to Section 2.1 of this Appendix A or issued in connection with an Exchange Offer or Private Exchange shall be transferred to the beneficial owners thereof in the form of Definitive Notes in an aggregate principal amount equal to the principal amount of such Global Note, in exchange for such Global Note, only if such transfer complies with Section 2.3 of this Appendix A and (i) the Depositary notifies the Issuers that it is unwilling or unable to continue as a Depositary for such Global Note or if at any time the Depositary ceases to be a "clearing agency" registered under the Exchange Act, and a successor depositary is not appointed by the Issuers within 90 days of such notice or after the Issuers become aware of such cessation, or (ii) an Event of Default has occurred and is continuing or (iii) the Issuers, in their sole discretion, notify the Trustee in writing that they elect to cause the issuance of certificated Notes under this Indenture. (b) Any Global Note that is transferable to the beneficial owners thereof pursuant to this Section 2.4 shall be surrendered by the Depositary to the Trustee, to be so transferred, in whole or from time to time in part, without charge, and the Trustee shall authenticate and deliver, upon such transfer of each portion of such Global Note, an equal aggregate principal amount of Definitive Notes of authorized denominations. Any portion of a Global Note transferred pursuant to this Section shall be executed, authenticated and delivered only in denominations of $1,000 and any integral multiple thereof and registered in such names as the Depositary shall direct. Any certificated Initial Note in the form of a Definitive Note delivered in exchange for an interest in the Global Note shall, except as otherwise provided by Section 2.3(e) above, bear the Restricted Notes Legend. (c) Subject to the provisions of Section 2.4(b) above, the registered Holder of a Global Note may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. 11 (d) In the event of the occurrence of any of the events specified in Section 2.4(a)(i), (ii) or (iii), the Issuers shall promptly make available to the Trustee a reasonable supply of Definitive Notes in fully registered form without interest coupons. EXHIBIT A [FORM OF FACE OF INITIAL NOTE AND PRIVATE EXCHANGE NOTE] [Definitive Notes Legend] FOR PURPOSES OF SECTIONS 1273 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), THIS SECURITY HAS ORIGINAL ISSUE DISCOUNT. FOR PURPOSES OF SECTION 1273 OF THE CODE, THE ISSUE PRICE IS $954.67 AND THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $45.33, IN EACH CASE PER $1,000 PRINCIPAL AMOUNT AT MATURITY OF THIS SECURITY. THE ISSUE DATE OF THIS SECURITY IS MARCH 3, 2003. FOR PURPOSES OF SECTION 1272 OF THE CODE, THE YIELD TO MATURITY (COMPOUNDED SEMI-ANNUALLY) IS 13.0% PER ANNUM. [Global Notes Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE ISSUERS OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO DTC, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. [Restricted Notes Legend] THIS NOTE (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS NOTE MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER 2 OF THIS NOTE IS HEREBY NOTIFIED THAT THE SELLER OF THIS NOTE MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS NOTE AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS NOTE MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) IN THE UNITED STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES ACT, (III) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (IV) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (IV) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE. 3 No.________ $___________ 12% Senior Secured Note due 2010 CUSIP No. ______ ISIN No._____ ON Semiconductor Corporation, a Delaware corporation, and Semiconductor Components Industries, LLC, a Delaware limited liability company, promise to pay to [Cede & Co.], or registered assigns, the principal sum [of Dollars] [listed on the Schedule of Increases or Decreases in Global Note attached hereto](1) on March 15, 2010. Interest Payment Dates: March 15 and September 15. Record Dates: March 1 and September 1. - ------------------ (1) Use the Schedule of Increases and Decreases language if Note is in Global Form. 4 Additional provisions of this Note are set forth on the other side of this Note. IN WITNESS WHEREOF, the parties have caused this instrument to be duly executed. ON SEMICONDUCTOR CORPORATION, by _______________________________ Name: Title: SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, by ________________________________ Name: Title: Dated: TRUSTEE'S CERTIFICATE OF AUTHENTICATION WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee, certifies that this is one of the Notes referred to in the Indenture. by _________________________ Authorized Signatory - ------------------ */ If the Note is to be issued in global form, add the Global Notes Legend and the attachment from Exhibit A captioned "TO BE ATTACHED TO GLOBAL NOTES - SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE". 5 [FORM OF REVERSE SIDE OF INITIAL NOTE AND PRIVATE EXCHANGE NOTE] 12% Senior Secured Note due 2010 1. Interest (a) ON Semiconductor Corporation, a Delaware corporation (the "Company"), and Semiconductor Components Industries, LLC ("SCI LLC" and together with the Company, and their successors and assigns under the Indenture hereinafter referred to, being herein called the "Issuers"), promise to pay interest on the principal amount of this Note at the rate per annum shown above. The Issuers shall pay interest semiannually on March 15 and September 15 of each year, commencing on September 15, 2003. Interest on the Notes shall accrue from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from March 3, 2003 until the principal hereof is due. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. (b) Additional Interest. The Holder of this Note is entitled to the benefits of a Registration Rights Agreement, dated as of March 3, 2003, among the Issuers, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc. and Semiconductor Components Industries International of Rhode Island, Inc. (collectively, the "Guarantors") and the Initial Purchasers named therein (the "Registration Rights Agreement"). Capitalized terms used in this paragraph (b) but not defined herein have the meanings assigned to them in the Registration Rights Agreement. The Registration Rights Agreement shall provide that (i) if the Issuers or the Guarantors fail to file an Exchange Offer Registration Statement with the Commission on or prior to 120 days after the Issue Date; (ii) if the Exchange Offer Registration Statement is not declared effective by the Commission within 270 days after the Issue Date; (iii) if the Exchange Offer is not consummated within 300 days after the Issue Date; (iv) if obligated to file the Shelf Registration Statement and the Issuers and the Guarantors fail to file the same on or prior to 60 days after such filing obligation arises or the Shelf Registration Statement is not declared effective on or prior to 270 days after the Issue Date, or (v) if the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, is declared effective within 270 days after the Issue Date (or in the case of a Shelf Registration Statement to be filed in response to any change in law or applicable interpretations thereof, within 60 days after the publication of the change in law or interpretation) but shall thereafter cease to be effective (at any time that the Issuers and the Guarantors are obligated to maintain the effectiveness thereof) without being succeeded within 30 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (i) through (v), a "Registration Default"), the Issuers and the Guarantors will be obligated to pay to each Holder of Transfer Restricted Notes affected thereby additional interest ("Additional Interest") at a rate of 0.50% per annum (the "Additional Interest Rate") for the first 90-day period immediately following the occurrence of such Registration Default. The Additional Interest Rate shall increase by an additional 0.50% per annum with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum Additional Interest Rate of 2.0% per annum. Any amounts of Additional Interest due will be payable in cash on the regular interest 6 payment dates with respect to the Notes. Each obligation to pay Additional Interest rate shall be deemed to commence accruing on the date of the applicable Registration Default and to cease accruing when all Registration Defaults have been cured. The Trustee shall have no responsibility with respect to the determination of the amount of any such Additional Interest. For purposes of the foregoing, "Transfer Restricted Notes" means (i) each Initial Note until the date on which such Initial Note has been exchanged by a person other than a broker-dealer for a freely transferable Exchange Note in the Exchange Offer, (ii) each Initial Note following the exchange by a broker-dealer in an Exchange Offer until the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) each Initial Note or Private Exchange Note until the date on which such Initial Note or Private Exchange Note has been effectively registered under the Securities Act and is eligible to be disposed of in accordance with a Shelf Registration Statement or (iv) each Initial Note or Private Exchange Note until the date on which such Initial Note or Private Exchange Note is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. 2. Method of Payment The Issuers shall pay interest on the Notes (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the March 1 or September 1 next preceding the interest payment date even if Notes are canceled after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Issuers shall pay principal, premium and interest, including Additional Interest, if any, in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. Payments in respect of the Notes represented by a Global Note (including principal, premium and interest, including Additional Interest, if any) shall be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company. The Issuers will make all payments in respect of a certificated Note (including principal, premium and interest, including Additional Interest, if any) by mailing a check to the registered address of each Holder thereof; provided, however, that payments on the Notes may also be made, in the case of a Holder of at least $1,000,000 aggregate principal amount of Notes, by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States if such Holder elects payment by wire transfer by giving written notice to the Trustee or the Paying Agent to such effect designating such account no later than 30 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion). 3. Paying Agent and Registrar Initially, WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Trustee"), will act as Paying Agent and Registrar. The Issuers may appoint and change any Paying Agent, Registrar or co-registrar without notice. The Issuers or any of their domestically incorporated Wholly-Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar. 7 4. Indenture The Issuers issued the Notes under an Indenture dated as of March 3, 2003 (the "Indenture"), among the Issuers, the Guarantors and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all terms and provisions of the Indenture, and Holders are referred to the Indenture and the TIA for a statement of such terms and provisions. The Notes are senior secured obligations of the Issuers. This Note is one of the [Original] [Additional] [Private Exchange] Notes referred to in the Indenture. The Notes include the Original Notes, the Additional Notes and any Exchange Notes and Private Exchange Notes issued in exchange for Initial Notes pursuant to the Indenture. The Original Notes, the Additional Notes and any Exchange Notes and Private Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the ability of the Issuers and its Restricted Subsidiaries to, among other things, make certain Investments and other Restricted Payments, pay dividends and other distributions, incur Indebtedness, enter into consensual restrictions upon the payment of certain dividends and distributions by such Restricted Subsidiaries, issue or sell shares of capital stock of such Restricted Subsidiaries, enter into or permit certain transactions with Affiliates and make asset dispositions. The Indenture also imposes limitations on the ability of the Issuers and each Guarantor to consolidate or merge with or into any other Person or convey, transfer or lease all or substantially all of the property of the Issuers. To guarantee the due and punctual payment of the principal and interest, if any, on the Notes and all other amounts payable by the Issuers under the Indenture and the Notes when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Notes and the Indenture, the Guarantors have, jointly and severally, unconditionally guaranteed the Guaranteed Obligations on a senior secured basis pursuant to the terms of the Indenture. The Notes, the Note Guarantees and all other Obligations of the Issuers and the Guarantors are secured on a first-priority basis by the Liens created by the Security Documents pursuant to, and subject to the terms of, the Indenture and the Collateral Sharing Agreement, and such Liens are equal and ratable with any and all Liens at any time granted to secure Credit Agreement Obligations. 5. Optional Redemption Except as provided in paragraph 5 hereof, the Notes shall not be redeemable at the option of the Issuers prior to March 15, 2007. On or after such date, the Notes shall be redeemable at the option of the Issuers, in whole or in part, on one or more occasions, on not less than 30 nor more than 60 days prior notice, at the following redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest, including Additional Interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record 8 date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on March 15 of the years set forth below: In addition, on or prior to March 15, 2006, the Issuers may, on one or more occasions, redeem up to a maximum of 35% of the original aggregate principal amount of the Notes (calculated giving effect to any issuance of Additional Notes) at a redemption price equal to 112% of the principal amount thereof, plus accrued and unpaid interest, including Additional Interest, if any, to the applicable redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date) with the Net Cash Proceeds of one or more Equity Offerings by the Company; provided, however, that after giving effect to any such redemption, (a) at least 65% of the original aggregate principal amount of the Notes (calculated giving effect to any issuance of Additional Notes) remains outstanding and (b) such redemption is made within 90 days of the date of closing of the applicable Equity Offering upon not less than 30 nor more than 60 days notice mailed to each Holder of Notes being redeemed and otherwise in accordance with the procedures set forth in the Indenture. At any time on or prior to March 15, 2007, the Notes may also be redeemed as a whole at the option of the Issuers upon the occurrence of a Change of Control, upon not less than 30 nor more than 60 days' prior notice but in no event more than 90 days after the occurrence of such Change of Control, mailed by first-class mail to each Holder's registered address, at a redemption price equal to 100% of the principal amount of Notes to be redeemed plus the Applicable Premium as of, and accrued and unpaid interest, including Additional Interest, if any, to the date of the redemption (the "Change of Control Redemption Date"), except that installments of interest which are due and payable on dates falling on or prior to the applicable redemption date will be payable to the persons who were the Holders of record at the close of business on the relevant record dates. "Applicable Premium" means, with respect to the Notes at any Change of Control Redemption Date, the greater of: (a) 1.0% of the principal amount of such Notes; and (b) the excess of (i) the present value at such time of (A) the redemption price of such Notes at March 15, 2007, plus (B) all accrued and unpaid interest required to be paid on such Notes from the date of redemption through March 15, 2007, computed using a discount rate equal to the Treasury Rate plus 0.5% per annum, over
REDEMPTION YEAR PRICE - ---- -------- 2007 106.0% 2008 103.0% 2009 and thereafter 100.0% 9 (ii) the principal amount of such Notes. The Trustee shall have no responsibility with respect to the determination of the Applicable Premium. "Treasury Rate" means the yield to maturity at the time of computation of U.S. Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Release H.15 (519) which has become publicly available at least two Business Days prior to the Change of Control Redemption Date (or, if such Statistical Release is no longer published, any publicly available source or similar market data)) closest to the period from the Change of Control Redemption Date to March 15, 2007; provided, however, that if the period from the Change of Control Redemption Date to March 15, 2007 is not equal to the constant maturity of a U.S. Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of one year) from the weekly average yields of U.S. Treasury securities for which such yields are given, except that if the period from the Change of Control Redemption Date to March 15, 2007 is less than one year, the weekly average yield on actually traded U.S. Treasury securities adjusted to a constant maturity of one year shall be used. 6. Sinking Fund The Notes are not subject to any sinking fund. 7. Notice of Redemption Notice of redemption will be mailed by first-class mail at least 30 days but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at his or her registered address. Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued and unpaid interest, including Additional Interest, if any, on all Notes (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Notes (or such portions thereof) called for redemption. 8. Repurchase of Notes at the Option of Holders upon Change of Control Upon a Change of Control, any Holder of Notes will have the right, subject to certain conditions specified in the Indenture, to cause the Issuers to repurchase all or any part of the Notes of such Holder at a purchase price equal to 101% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, including Additional Interest, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date that is on or prior to the date of purchase) as provided in, and subject to the terms of, the Indenture. In accordance with Section 4.06 of the Indenture, the Issuers will be required to offer to purchase Notes upon the occurrence of certain events. 9. Denominations; Transfer; Exchange 10 The Notes are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. Upon any transfer or exchange, the Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Notes selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) or to transfer or exchange any Notes for a period of 15 days prior to a selection of Notes to be redeemed or 15 days before an interest payment date. 10. Persons Deemed Owners Except as provided in paragraph 2 hereof, the registered Holder of this Note may be treated as the owner of it for all purposes. 11. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Issuers at their written request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Issuers and not to the Trustee for payment. 12. Discharge and Defeasance Subject to certain conditions, the Issuers at any time may terminate some of or all their obligations under the Notes and the Indenture if the Issuers deposit with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Notes to redemption or maturity, as the case may be. 13. Amendment, Supplement and Waiver Subject to certain exceptions set forth in the Indenture, (a) the Indenture, the Notes, the Note Guarantees, the Collateral Sharing Agreement or the Security Documents may be amended without prior notice to any Holder but with the written consent of the Holders of at least a majority in aggregate principal amount of the outstanding Notes and (b) any default may be waived with the written consent of the Holders of at least a majority in principal amount of the outstanding Notes. Subject to certain exceptions set forth in the Indenture, without the consent of any Holder, the Issuers and the Trustee may amend or supplement the Indenture, the Notes, the Note Guarantees or the Security Documents (i) to cure any ambiguity, omission, defect or inconsistency; (ii) to comply with Article 5 of the Indenture; (iii) to provide for uncertificated Notes in addition to or in place of certificated Notes; provided, however, that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code or in a manner such that the uncertificated Notes are described in Section 163(f)(2)(B) of the Code; (iv) to add additional Note Guarantees with respect to the Notes; (v) to add to the covenants of the Issuers for the benefit of the Holders or to surrender any right or power herein conferred upon the Issuers; (vi) to make any change that does not adversely affect the rights of any Holder; (vii) to provide for the issuance of the Exchange Notes, Private Exchange Notes or Additional Notes, which shall have terms substantially identical in all material respects to the Original Notes 11 (except that the transfer restrictions contained in the Original Notes shall be modified or eliminated, as appropriate), and which shall be treated, together with any outstanding Original Notes, as a single issue of securities; (viii) to comply with any requirement of the Commission in connection with qualifying, or maintaining the qualification of, this Indenture under the TIA; (ix) if necessary, in connection with any addition or release of Collateral permitted under the terms of the Indenture or the Security Documents; or (x) prior to the Discharge of Credit Agreement Obligations, to give effect to any amendment, waiver or consent in respect of any Security Document or the Collateral Sharing Agreement that does not materially affect the rights of the Holders. 14. Defaults and Remedies If an Event of Default occurs (other than an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company or SCI LLC) and is continuing, the Trustee or the Holders of at least 25% in principal amount of the outstanding Notes may declare the principal of and accrued but unpaid interest on all the Notes to be due and payable. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company or SCI LLC occurs, the principal of and interest on all the Notes shall become immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. Under certain circumstances, the Holders of a majority in principal amount of the outstanding Notes may rescind any such acceleration with respect to the Notes and its consequences. If an Event of Default occurs and is continuing, the Trustee shall be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the Holders unless such Holders have offered to the Trustee reasonable indemnity or security against any loss, liability or expense and certain other conditions are complied with. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Holder may pursue any remedy with respect to the Indenture or the Notes unless (i) such Holder has previously given the Trustee notice that an Event of Default is continuing, (ii) Holders of at least 25% in principal amount of the outstanding Notes have requested the Trustee in writing to pursue the remedy, (iii) such Holders have offered the Trustee reasonable security or indemnity against any loss, liability or expense, (iv) the Trustee has not complied with such request within 60 days after the receipt of the request and the offer of security or indemnity and (v) the Holders of a majority in principal amount of the outstanding Notes have not given the Trustee a direction inconsistent with such request within such 60-day period. Subject to certain restrictions, the Holders of a majority in principal amount of the outstanding Notes are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other Holder or that would involve the Trustee in personal liability. Prior to taking any action under the Indenture, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. 15. Trustee Dealings with the Issuers 12 Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Issuers or their Affiliates and may otherwise deal with the Issuers or their Affiliates with the same rights it would have if it were not Trustee. 16. No Recourse Against Others A director, officer, employee, stockholder or member, as such, of the Issuers or any of the Guarantors, shall not have any liability for any obligations of the Issuers or any of the Guarantors under the Notes or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Holder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Notes. 17. Authentication This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Note. 18. Abbreviations Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 19. Governing Law THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 20. CUSIP and ISIN Numbers The Issuers may have caused CUSIP and ISIN numbers to be printed on the Notes and directed the Trustee to use such CUSIP and ISIN numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of any such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 13 21. Designated Senior Indebtedness For purposes of the indenture that governs the Senior Subordinated Notes, the Notes shall constitute Designated Senior Indebtedness (as such term is defined in such indenture). THE ISSUERS WILL FURNISH TO ANY HOLDER OF NOTES UPON WRITTEN REQUEST AND WITHOUT CHARGE TO THE HOLDER A COPY OF THE INDENTURE WHICH HAS IN IT THE TEXT OF THIS NOTE. 14 ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Note on the books of the Issuers. The agent may substitute another to act for him. _________________________________________________________________ Date: ________________ Your Signature: _____________________ ___________________________________________________________________________ Sign exactly as your name appears on the other side of this Note. Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee. 15 CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER RESTRICTED NOTES This certificate relates to $_________ principal amount of Notes held in (check applicable space) ____ book-entry or _____ definitive form by the undersigned. The undersigned (check one box below): [ ] has requested the Trustee by written order to deliver in exchange for its beneficial interest in the Global Note held by the Depositary a Note or Notes in definitive, registered form of authorized denominations and an aggregate principal amount equal to its beneficial interest in such Global Note (or the portion thereof indicated above); [ ] has requested the Trustee by written order to exchange or register the transfer of a Note or Notes. In connection with any transfer of any of the Notes evidenced by this certificate occurring prior to the expiration of the period referred to in Rule 144(k) under the Securities Act, the undersigned confirms that such Notes are being transferred in accordance with its terms: CHECK ONE BOX BELOW (1) [ ] to the Registrar for registration in the name of the Holder, without transfer; or (2) [ ] pursuant to an effective registration statement under the Securities Act of 1933; or (3) [ ] inside the United States to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act of 1933) that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that such transfer is being made in reliance on Rule 144A, in each case pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or (4) [ ] outside the United States in an offshore transaction within the meaning of Regulation S under the Securities Act in compliance with Rule 904 under the Securities Act of 1933 and such Note shall be held immediately after the transfer through Euroclear or Clearstream until the expiration of the Restricted Period (as defined in the Indenture); or (5) [ ] pursuant to another available exemption from registration provided by Rule 144 under the Securities Act of 1933. Unless one of the boxes is checked, the Trustee will refuse to register any of the Notes evidenced by this certificate in the name of any Person other than the registered Holder 16 thereof; provided, however, that if box (4) or (5) is checked, the Trustee may require, prior to registering any such transfer of the Notes, such legal opinions, certifications and other information as the Issuers have reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933. ____________________________ Your Signature Signature Guarantee: Date:_______________________ ___________________________________ Signature must be guaranteed Signature of Signature Guarantee by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Issuers as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated:_____________________ _____________________________ NOTICE: To be executed by an executive officer 17 [TO BE ATTACHED TO GLOBAL NOTES] SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The initial principal amount of this Global Note is $[ ]. The following increases or decreases in this Global Note have been made:
Amount of decrease in Amount of increase in Principal Amount of this Signature of authorized Date of Principal amount of this Principal Amount of this Global Note following such signatory of Trustee or Exchange Global Note Global Note decrease or increase Notes Custodian 18 OPTION OF HOLDER TO ELECT PURCHASE IF YOU WANT TO ELECT TO HAVE THIS NOTE PURCHASED BY THE ISSUERS PURSUANT TO SECTION 4.06 (ASSET DISPOSITION) OR 4.08 (CHANGE OF CONTROL) OF THE INDENTURE, CHECK THE BOX: ASSET DISPOSITION [ ] CHANGE OF CONTROL [ ] IF YOU WANT TO ELECT TO HAVE ONLY PART OF THIS NOTE PURCHASED BY THE ISSUERS PURSUANT TO SECTION 4.06 OR 4.08 OF THE INDENTURE, STATE THE AMOUNT ($1,000 OR AN INTEGRAL MULTIPLE THEREOF): $ DATE: __________________ YOUR SIGNATURE: ___________________________ (SIGN EXACTLY AS YOUR NAME APPEARS ON THE OTHER SIDE OF THE NOTE) SIGNATURE GUARANTEE:__________________________________________________ SIGNATURE MUST BE GUARANTEED BY A PARTICIPANT IN A RECOGNIZED SIGNATURE GUARANTY MEDALLION PROGRAM OR OTHER SIGNATURE GUARANTOR ACCEPTABLE TO THE TRUSTEE EXHIBIT B [FORM OF FACE OF EXCHANGE NOTE] [Definitive Notes Legend] FOR PURPOSES OF SECTIONS 1273 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), THIS SECURITY HAS ORIGINAL ISSUE DISCOUNT. FOR PURPOSES OF SECTION 1273 OF THE CODE, THE ISSUE PRICE IS $954.67 AND THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $45.33, IN EACH CASE PER $1,000 PRINCIPAL AMOUNT AT MATURITY OF THIS SECURITY. THE ISSUE DATE OF THIS SECURITY IS MARCH 3, 2003. FOR PURPOSES OF SECTION 1272 OF THE CODE, THE YIELD TO MATURITY (COMPOUNDED SEMI-ANNUALLY) IS 13.0% PER ANNUM. [Global Notes Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE ISSUERS OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO DTC, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. 2 No.________ $__________ 12% Senior Secured Note due 2010 CUSIP No. ______ ISIN No._____ ON Semiconductor Corporation, a Delaware corporation, and Semiconductor Components Industries, LLC, a Delaware limited liability company, promise to pay to [Cede & Co.], or registered assigns, the principal sum [of Dollars] [listed on the Schedule of Increases or Decreases in Global Note attached hereto](2) on March 15, 2010. Interest Payment Dates: March 15 and September 15. Record Dates: March 1 and September 1. - ------------------ (2) Use the Schedule of Increases and Decreases language if Note is in Global Form. 3 Additional provisions of this Note are set forth on the other side of this Note. IN WITNESS WHEREOF, the parties have caused this instrument to be duly executed. ON SEMICONDUCTOR CORPORATION, by _______________________________________ Name: Title: SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, by ______________________________________ Name: Title: Dated: TRUSTEE'S CERTIFICATE OF AUTHENTICATION WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee, certifies that this is one of the Notes referred to in the Indenture. by _____________________________ Authorized Signatory - ------------------ */ If the Note is to be issued in global form, add the Global Notes Legend and the attachment from Exhibit A captioned "TO BE ATTACHED TO GLOBAL NOTES - SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE". 4 [FORM OF REVERSE SIDE OF EXCHANGE NOTE] 12% Senior Secured Note due 2010 1. Interest ON Semiconductor Corporation, a Delaware corporation (the "Company"), and Semiconductor Components Industries, LLC ("SCI LLC" and together with the Company, and their successors and assigns under the Indenture hereinafter referred to, being herein called the "Issuers"), promise to pay interest on the principal amount of this Note at the rate per annum shown above. The Issuers shall pay interest semiannually on March 15 and September 15 of each year, commencing on September 15, 2003. Interest on the Notes shall accrue from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from March 3, 2003 until the principal hereof is due. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. Method of Payment The Issuers shall pay interest on the Notes (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the March 1 or September 1 next preceding the interest payment date even if Notes are canceled after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Issuers shall pay principal, premium and interest, in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. Payments in respect of the Notes represented by a Global Note (including principal, premium and interest) shall be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company. The Issuers will make all payments in respect of a certificated Note (including principal, premium and interest) by mailing a check to the registered address of each Holder thereof; provided, however, that payments on the Notes may also be made, in the case of a Holder of at least $1,000,000 aggregate principal amount of Notes, by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States if such Holder elects payment by wire transfer by giving written notice to the Trustee or the Paying Agent to such effect designating such account no later than 30 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion). 3. Paying Agent and Registrar Initially, WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Trustee"), will act as Paying Agent and Registrar. The Issuers may appoint and change any Paying Agent, Registrar or co-registrar without notice. The Issuers or any of their domestically incorporated Wholly-Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar. 5 4. Indenture The Issuers issued the Notes under an Indenture dated as of March 3, 2003 (the "Indenture"), among the Issuers, SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc. and Semiconductor Components Industries International of Rhode Island, Inc. (collectively, the "Guarantors") and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all terms and provisions of the Indenture, and Holders are referred to the Indenture and the TIA for a statement of such terms and provisions. The Notes are senior secured obligations of the Issuers. This Note is one of the Exchange Notes referred to in the Indenture. The Notes include the Original Notes, the Additional Notes and any Exchange Notes and Private Exchange Notes issued in exchange for Initial Notes pursuant to the Indenture. The Original Notes, the Additional Notes and any Exchange Notes and Private Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the ability of the Issuers and its Restricted Subsidiaries to, among other things, make certain Investments and other Restricted Payments, pay dividends and other distributions, incur Indebtedness, enter into consensual restrictions upon the payment of certain dividends and distributions by such Restricted Subsidiaries, issue or sell shares of capital stock of such Restricted Subsidiaries, enter into or permit certain transactions with Affiliates and make asset dispositions. The Indenture also imposes limitations on the ability of the Issuers and each Guarantor to consolidate or merge with or into any other Person or convey, transfer or lease all or substantially all of the property of the Issuers. To guarantee the due and punctual payment of the principal and interest, if any, on the Notes and all other amounts payable by the Issuers under the Indenture and the Notes when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Notes and the Indenture, the Guarantors have, jointly and severally, unconditionally guaranteed the Guaranteed Obligations on a senior secured basis pursuant to the terms of the Indenture. The Notes, the Note Guarantees and all other Obligations of the Issuers and the Guarantors are secured on a first-priority basis by the Liens created by the Security Documents pursuant to, and subject to the terms of, the Indenture and the Collateral Sharing Agreement, and such Liens are equal and ratable with any and all Liens at any time granted to secure Credit Agreement Obligations. 5. Optional Redemption Except as provided in paragraph 5 hereof, the Notes shall not be redeemable at the option of the Issuers prior to March 15, 2007. On or after such date, the Notes shall be redeemable at the option of the Issuers, in whole or in part, on one or more occasions, on not less 6 than 30 nor more than 60 days prior notice, at the following redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest, including Additional Interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on March 15 of the years set forth below: In addition, on or prior to March 15, 2006, the Issuers may, on one or more occasions, redeem up to a maximum of 35% of the original aggregate principal amount of the Notes (calculated giving effect to any issuance of Additional Notes) at a redemption price equal to 112% of the principal amount thereof, plus accrued and unpaid interest, including Additional Interest, if any, to the applicable redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date) with the Net Cash Proceeds of one or more Equity Offerings by the Company; provided, however, that after giving effect to any such redemption, (a) at least 65% of the original aggregate principal amount of the Notes (calculated giving effect to any issuance of Additional Notes) remains outstanding and (b) such redemption is made within 90 days of the date of closing of the applicable Equity Offering upon not less than 30 nor more than 60 days notice mailed to each Holder of Notes being redeemed and otherwise in accordance with the procedures set forth in the Indenture. At any time on or prior to March 15, 2007, the Notes may also be redeemed as a whole at the option of the Issuers upon the occurrence of a Change of Control, upon not less than 30 nor more than 60 days' prior notice but in no event more than 90 days after the occurrence of such Change of Control, mailed by first-class mail to each Holder's registered address, at a redemption price equal to 100% of the principal amount of Notes to be redeemed plus the Applicable Premium as of, and accrued and unpaid interest, including Additional Interest, if any, to the date of the redemption (the "Change of Control Redemption Date"), except that installments of interest which are due and payable on dates falling on or prior to the applicable redemption date will be payable to the persons who were the Holders of record at the close of business on the relevant record dates. "Applicable Premium" means, with respect to the Notes at any Change of Control Redemption Date, the greater of: (a) 1.0% of the principal amount of such Notes; and (b) the excess of (i) the present value at such time of (A) the redemption price of such Notes at March 15, 2007, plus (B) all accrued and unpaid interest required to be paid on such Notes from the date of redemption through March 15,
REDEMPTION YEAR PRICE - ---- ----- 2007 106.0% 2008 103.0% 2009 and thereafter 100.0% 7 2007, computed using a discount rate equal to the Treasury Rate plus 0.5% per annum, over (ii) the principal amount of such Notes. The Trustee shall have no responsibility with respect to the determination of the Applicable Premium. "Treasury Rate" means the yield to maturity at the time of computation of U.S. Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Release H.15 (519) which has become publicly available at least two Business Days prior to the Change of Control Redemption Date (or, if such Statistical Release is no longer published, any publicly available source or similar market data)) closest to the period from the Change of Control Redemption Date to March 15, 2007; provided, however, that if the period from the Change of Control Redemption Date to March 15, 2007 is not equal to the constant maturity of a U.S. Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of one year) from the weekly average yields of U.S. Treasury securities for which such yields are given, except that, if the period from the Change of Control Redemption Date to March 15, 2007 is less than one year, the weekly average yield on actually traded U.S. Treasury securities adjusted to a constant maturity of one year shall be used. 6. Sinking Fund The Notes are not subject to any sinking fund. 7. Notice of Redemption Notice of redemption will be mailed by first-class mail at least 30 days but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at his or her registered address. Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued and unpaid interest, including Additional Interest, if any, on all Notes (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Notes (or such portions thereof) called for redemption. 8. Repurchase of Notes at the Option of Holders upon Change of Control Upon a Change of Control, any Holder of Notes will have the right, subject to certain conditions specified in the Indenture, to cause the Issuers to repurchase all or any part of the Notes of such Holder at a purchase price equal to 101% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, including Additional Interest, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date that is on or prior to the date of purchase) as provided in, and subject to the terms of, the Indenture. 8 In accordance with Section 4.06 of the Indenture, the Issuers will be required to offer to purchase Notes upon the occurrence of certain events. 9. Denominations; Transfer; Exchange The Notes are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. Upon any transfer or exchange, the Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Notes selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) or to transfer or exchange any Notes for a period of 15 days prior to a selection of Notes to be redeemed or 15 days before an interest payment date. 10. Persons Deemed Owners Except as provided in paragraph 2 hereof, the registered Holder of this Note may be treated as the owner of it for all purposes. 11. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Issuers at their written request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Issuers and not to the Trustee for payment. 12. Discharge and Defeasance Subject to certain conditions, the Issuers at any time may terminate some of or all their obligations under the Notes and the Indenture if the Issuers deposit with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Notes to redemption or maturity, as the case may be. 13. Amendment, Supplement and Waiver Subject to certain exceptions set forth in the Indenture, (a) the Indenture, the Notes, the Note Guarantees, the Collateral Sharing Agreement or the Security Documents may be amended without prior notice to any Holder but with the written consent of the Holders of at least a majority in aggregate principal amount of the outstanding Notes and (b) any default may be waived with the written consent of the Holders of at least a majority in principal amount of the outstanding Notes. Subject to certain exceptions set forth in the Indenture, without the consent of any Holder, the Issuers and the Trustee may amend or supplement the Indenture, the Notes, the Note Guarantees or the Security Documents (i) to cure any ambiguity, omission, defect or inconsistency; (ii) to comply with Article 5; (iii) to provide for uncertificated Notes in addition to or in place of certificated Notes; provided, however, that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code or in a manner such that the uncertificated Notes are described in Section 163(f)(2)(B) of the Code; (iv) to add additional 9 Note Guarantees with respect to the Notes; (v) to add to the covenants of the Issuers for the benefit of the Holders or to surrender any right or power herein conferred upon the Issuers; (vi) to make any change that does not adversely affect the rights of any Holder; (vii) to provide for the issuance of the Exchange Notes, Private Exchange Notes or Additional Notes, which shall have terms substantially identical in all material respects to the Original Notes (except that the transfer restrictions contained in the Original Notes shall be modified or eliminated, as appropriate), and which shall be treated, together with any outstanding Original Notes, as a single issue of securities; (viii) to comply with any requirement of the Commission in connection with qualifying, or maintaining the qualification of, this Indenture under the TIA; (ix) if necessary, in connection with any addition or release of Collateral permitted under the terms of the Indenture or the Security Documents; or (x) prior to the Discharge of Credit Agreement Obligations, to give effect to any amendment, waiver or consent in respect of any Security Document or the Collateral Sharing Agreement that does not materially affect the rights of the Holders. 14. Defaults and Remedies If an Event of Default occurs (other than an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company or SCI LLC) and is continuing, the Trustee or the Holders of at least 25% in principal amount of the outstanding Notes may declare the principal of and accrued but unpaid interest on all the Notes to be due and payable. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company or SCI LLC occurs, the principal of and interest on all the Notes shall become immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. Under certain circumstances, the Holders of a majority in principal amount of the outstanding Notes may rescind any such acceleration with respect to the Notes and its consequences. If an Event of Default occurs and is continuing, the Trustee shall be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the Holders unless such Holders have offered to the Trustee reasonable indemnity or security against any loss, liability or expense and certain other conditions are complied with. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Holder may pursue any remedy with respect to the Indenture or the Notes unless (i) such Holder has previously given the Trustee notice that an Event of Default is continuing, (ii) Holders of at least 25% in principal amount of the outstanding Notes have requested the Trustee in writing to pursue the remedy, (iii) such Holders have offered the Trustee reasonable security or indemnity against any loss, liability or expense, (iv) the Trustee has not complied with such request within 60 days after the receipt of the request and the offer of security or indemnity and (v) the Holders of a majority in principal amount of the outstanding Notes have not given the Trustee a direction inconsistent with such request within such 60-day period. Subject to certain restrictions, the Holders of a majority in principal amount of the outstanding Notes are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other Holder or that would involve the Trustee in personal liability. Prior to taking any action under the Indenture, 10 the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. 15. Trustee Dealings with the Issuers Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Issuers or their Affiliates and may otherwise deal with the Issuers or their Affiliates with the same rights it would have if it were not Trustee. 16. No Recourse Against Others A director, officer, employee, stockholder or member, as such, of the Issuers or any of the Guarantors, shall not have any liability for any obligations of the Issuers or any of the Guarantors under the Notes or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Holder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Notes. 17. Authentication This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Note. 18. Abbreviations Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 19. Governing Law THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 20. CUSIP and ISIN Numbers The Issuers may have caused CUSIP and ISIN numbers to be printed on the Notes and directed the Trustee to use such CUSIP and ISIN numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of any such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 11 21. Designated Senior Indebtedness For purposes of the indenture that governs the Senior Subordinated Notes, the Notes shall constitute Designated Senior Indebtedness (as such term is defined in such indenture). THE ISSUERS WILL FURNISH TO ANY HOLDER OF NOTES UPON WRITTEN REQUEST AND WITHOUT CHARGE TO THE HOLDER A COPY OF THE INDENTURE WHICH HAS IN IT THE TEXT OF THIS NOTE. 12 ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Note on the books of the Issuers. The agent may substitute another to act for him. ________________________________________________________________ Date: ________________ Your Signature: _____________________ _______________________________________________________________ Sign exactly as your name appears on the other side of this Note. Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee. 13 [TO BE ATTACHED TO GLOBAL NOTES] SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The initial principal amount of this Global Note is $[ ]. The following increases or decreases in this Global Note have been made:
Amount of decrease in Amount of increase in Principal Amount of this Signature of authorized Date of Principal amount of this Principal Amount of this Global Note following such signatory of Trustee or Exchange Global Note Global Note decrease or increase Notes Custodian 14 OPTION OF HOLDER TO ELECT PURCHASE IF YOU WANT TO ELECT TO HAVE THIS NOTE PURCHASED BY THE ISSUERS PURSUANT TO SECTION 4.06 (ASSET DISPOSITION) OR 4.08 (CHANGE OF CONTROL) OF THE INDENTURE, CHECK THE BOX: ASSET DISPOSITION [ ] CHANGE OF CONTROL [ ] IF YOU WANT TO ELECT TO HAVE ONLY PART OF THIS NOTE PURCHASED BY THE ISSUERS PURSUANT TO SECTION 4.06 OR 4.08 OF THE INDENTURE, STATE THE AMOUNT ($1,000 OR AN INTEGRAL MULTIPLE THEREOF): $ DATE: __________________ YOUR SIGNATURE: __________________ (SIGN EXACTLY AS YOUR NAME APPEARS ON THE OTHER SIDE OF THE NOTE) SIGNATURE GUARANTEE:_______________________________________________________ SIGNATURE MUST BE GUARANTEED BY A PARTICIPANT IN A RECOGNIZED SIGNATURE GUARANTY MEDALLION PROGRAM OR OTHER SIGNATURE GUARANTOR ACCEPTABLE TO THE TRUSTEE. EXHIBIT C FORM OF SUPPLEMENTAL INDENTURE SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") dated as of , among [GUARANTOR] (the "New Guarantor"), a subsidiary of ON Semiconductor Corporation, a Delaware corporation (the "Company"), the Company, Semiconductor Components Industries, LLC ("SCI LLC" and, together with the Company and their successors and assigns, the "Issuers") (or their successors), SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc., Semiconductor Components Industries International of Rhode Island, Inc. and WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association, as trustee under the indenture referred to below (the "Trustee"). W I T N E S S E T H : WHEREAS the Issuers and SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc. and Semiconductor Components Industries International of Rhode Island, Inc. (collectively, the "Existing Guarantors") have heretofore executed and delivered to the Trustee an Indenture (the "Indenture") dated as of March 3, 2003, providing for the issuance of an unlimited aggregate principal amount of 12% Senior Secured Notes due 2010 (the "Notes"); WHEREAS Section 4.11 of the Indenture provides that under certain circumstances the Issuers are required to cause the New Guarantor to execute and deliver to the Trustee a supplemental indenture pursuant to which the New Guarantor shall unconditionally guarantee all the Issuers' obligations under the Notes pursuant to a Note Guarantee on the terms and conditions set forth herein; and WHEREAS pursuant to Section 9.01 of the Indenture, the Trustee, the Issuers and the Existing Guarantors are authorized to execute and deliver this Supplemental Indenture; NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the New Guarantor, the Issuers, the Existing Guarantors and the Trustee mutually covenant and agree for the equal and ratable benefit of the holders of the Notes as follows: 1. Agreement to Guarantee. The New Guarantor hereby agrees, jointly and severally with all the Existing Guarantors, to unconditionally guarantee the Issuers' obligations 2 under the Notes on the terms and subject to the conditions set forth in Article 11 of the Indenture and to be bound by all other applicable provisions of the Indenture and the Notes. 2. Ratification of Indenture; Supplemental Indentures Part of Indenture. Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This Supplemental Indenture shall form a part of the Indenture for all purposes, and every holder of Notes heretofore or hereafter authenticated and delivered shall be bound hereby. 3. Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 4. Trustee Makes No Representation. The Trustee makes no representation as to the validity or sufficiency of this Supplemental Indenture. 5. Counterparts. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 6. Effect of Headings. The Section headings herein are for convenience only and shall not effect the construction thereof. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed as of the date first above written. [NEW GUARANTOR], by _______________________________________ Name: Title: ON SEMICONDUCTOR CORPORATION, by _______________________________________ Name: Title: 3 SEMICONDUCTOR COMPONENTS INDUSTRIES LLC, by _______________________________________ Name: Title: SCG (MALAYSIA SMP) HOLDING CORPORATION, by _______________________________________ Name: Title: SCG (CZECH) HOLDING CORPORATION, by _______________________________________ Name: Title: SCG (CHINA) HOLDING CORPORATION, by _______________________________________ Name: Title: SEMICONDUCTOR COMPONENTS INDUSTRIES PUERTO RICO, INC., by _______________________________________ Name: Title: 4 SCG INTERNATIONAL DEVELOPMENT LLC, by _______________________________________ Name: Title: SEMICONDUCTOR COMPONENTS INDUSTRIES OF RHODE ISLAND, INC., by _______________________________________ Name: Title: SEMICONDUCTOR COMPONENTS INDUSTRIES INTERNATIONAL OF RHODE ISLAND, INC., by _______________________________________ Name: Title: WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee, by _______________________________________ Name: Title:
EXHIBIT 4.21 EXECUTION COPY $200,000,000 ON SEMICONDUCTOR CORPORATION SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC 12% SENIOR SECURED NOTES DUE 2010 REGISTRATION RIGHTS AGREEMENT March 3, 2003 Salomon Smith Barney Inc. Credit Suisse First Boston LLC J.P.Morgan Securities Inc. Morgan Stanley & Co. Incorporated c/o Salomon Smith Barney Inc. 388 Greenwich Street New York, New York 10013 Dear Sirs: ON Semiconductor Corporation, a Delaware corporation (the "HOLDING COMPANY"), and Semiconductor Components Industries, LLC, a Delaware limited liability Company ("SCI LLC" and, together with the Holding Company, the "ISSUERS") propose to issue and sell to Salomon Smith Barney Inc., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated, (collectively, the "INITIAL PURCHASERS"), upon the terms set forth in a purchase agreement dated February 26, 2003 (the "PURCHASE AGREEMENT"), $200,000,000 aggregate principal amount of their 12% Senior Secured Notes due 2010 (the "INITIAL SECURITIES") to be jointly and severally guaranteed on a senior secured basis by SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation, SCG (China) Holding Corporation, Semiconductor Components Industries Puerto Rico, Inc., SCG International Development LLC, Semiconductor Components Industries of Rhode Island, Inc. and Semiconductor Components Industries International of Rhode Island, Inc. (the "GUARANTORS" and, collectively with the Issuers, the "COMPANY"). All obligations and agreements of the Company in this Agreement shall be the joint and several obligations and agreements of each of the Issuers and the Guarantors. The Initial Securities will be issued pursuant to an Indenture, dated as of the date hereof (the "INDENTURE"), among the Issuers, the Guarantors and Wells Fargo Bank Minnesota, National Association, a national banking association, as trustee (the "TRUSTEE"). As an inducement to the Initial Purchasers to enter into the Purchase Agreement, the Company agrees with the Initial Purchasers, for the benefit of the Initial Purchasers and the holders of the Securities (as defined below) (collectively the "HOLDERS"), as follows: 1. Registered Exchange Offer. Unless not permitted by applicable law (after the Company has complied with the ultimate paragraph of this Section 1), the Company shall prepare and, not later than 120 days (such 120th day being a "FILING DEADLINE") after the date on which the Initial Purchasers purchase the Initial Securities pursuant to the Purchase Agreement (the "CLOSING DATE"), file with the Securities and Exchange Commission (the "COMMISSION") a registration statement (the "EXCHANGE OFFER REGISTRATION STATEMENT") on an appropriate form under the Securities Act of 1933, as amended (the "SECURITIES ACT"), with respect to a proposed offer (the "REGISTERED EXCHANGE OFFER") to the Holders of Transfer Restricted Securities (as defined in Section 6 hereof), who are not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer, to issue and deliver to such Holders, in exchange for the Initial Securities, a like aggregate principal amount of debt securities of the Company issued under the Indenture, identical in all material respects to the Initial Securities and registered under the Securities Act (the "EXCHANGE SECURITIES"). The Company shall use its reasonable best efforts to (i) cause such Exchange Offer Registration Statement to be declared effective under the Securities Act within 270 days after the Closing Date (such 270th day being an "EFFECTIVENESS DEADLINE") and (ii) keep the Exchange Offer Registration Statement effective for not less than 30 days (or longer, if required by applicable law) after the date notice of the Registered Exchange Offer is mailed to the Holders (such period being called the "EXCHANGE OFFER REGISTRATION PERIOD"). If the Company commences the Registered Exchange Offer, the Company (i) will be entitled to consummate the Registered Exchange Offer 30 days after such commencement (provided that the Company has accepted all the Initial Securities theretofore validly tendered in accordance with the terms of the Registered Exchange Offer) and (ii) will be required to consummate the Registered Exchange Offer no later than 300 days after the Closing Date (such 300th day being the "CONSUMMATION DEADLINE"). Following the declaration of the effectiveness of the Exchange Offer Registration Statement, the Company shall as promptly as is practicable commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder of Transfer Restricted Securities electing to exchange the Initial Securities for Exchange Securities (assuming that such Holder is not an affiliate of the Company within the meaning of the Securities Act, acquires the Exchange Securities in the ordinary course of such Holder's business and has no arrangements with any person to participate in the distribution of the Exchange Securities and is not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer) to trade such Exchange Securities from and after their receipt without any limitations or restrictions under the Securities Act and without material restrictions under the securities laws of the several states of the United States. The Company acknowledges that, pursuant to current interpretations by the Commission's staff of Section 5 of the Securities Act, in the absence of an applicable exemption therefrom, (i) each Holder that is a broker-dealer electing to exchange Initial Securities, acquired for its own account as a result of market making activities or other trading activities, for Exchange Securities (an "EXCHANGING DEALER"), is required to deliver a prospectus containing the information set forth in (a) Annex A hereto on the cover, (b) Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section, and (c) Annex C hereto in the "Plan of Distribution" section of such prospectus in connection with a sale of any such Exchange Securities received by such Exchanging Dealer pursuant to the Registered Exchange Offer and (ii) an Initial Purchaser that elects to sell Securities (as defined below) acquired in exchange for Initial Securities constituting any portion of an unsold allotment, is required to deliver a prospectus containing the information required by Items 507 or 508 of Regulation S-K under the Securities Act, as applicable, in connection with such sale. The Company shall use its reasonable best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the prospectus contained therein, in order to permit such prospectus to be lawfully delivered by all persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such persons must comply with such requirements in order to resell the Exchange Securities; provided, however, that (i) in the case where such prospectus and any amendment or supplement thereto must be delivered by an Exchanging Dealer or an Initial Purchaser, such period shall be the lesser of 180 days and the date on which all Exchanging Dealers and the Initial Purchasers have sold all Exchange Securities held by them (unless such period is extended pursuant to Section 3(j) below) and (ii) the Company shall make such prospectus and any amendment or supplement thereto available to any broker-dealer for use in connection with any resale of any Exchange Securities for a period of not less than 180-days after the consummation of the Registered Exchange Offer. If, upon consummation of the Registered Exchange Offer, any Initial Purchaser holds Initial Securities acquired by it as part of its initial distribution, the Company, simultaneously with the delivery of the Exchange Securities pursuant to the Registered Exchange Offer, shall issue and deliver to such Initial Purchaser upon the written request of such Initial Purchaser, in exchange (the "PRIVATE EXCHANGE") for the Initial Securities held by such Initial Purchaser, a like principal amount of debt securities of the Company issued under the Indenture and identical in all material respects to the Initial Securities (the "PRIVATE EXCHANGE SECURITIES"). The Initial Securities, the Exchange Securities and the Private Exchange Securities are herein collectively called the "SECURITIES". In connection with the Registered Exchange Offer, the Company shall: (a) mail to each Holder a copy of the prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Registered Exchange Offer open for not less than 30 days (or longer, if required by applicable law) after the date notice thereof is mailed to the Holders (it being understood that the Company may extend a Registered Exchange Offer or Private Exchange beyond the time at which it is scheduled to expire (either at the end of the originally scheduled offer period or at the end of a subsequently scheduled extension of such period), by issuing a press release announcing such extension and otherwise complying with applicable law); (c) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York, which may be the Trustee or an affiliate of the Trustee; (d) permit Holders to withdraw tendered Securities at any time prior to the close of business, New York time, on the last business day on which the Registered Exchange Offer shall remain open (except that, in the case where the Registered Exchange Offer or Private Exchange is extended beyond the time at which it is scheduled to expire (either at the end of the originally scheduled offer period or at the end of a subsequently scheduled extension of such period), those Securities that are validly tendered and not withdrawn pursuant to such Registered Exchange Offer or Private Exchange, as the case may be, as of such time may be accepted for exchange and may not subsequently be withdrawn by the tendering Holders); and (e) otherwise comply with all applicable laws. As soon as practicable after the close of the Registered Exchange Offer or the Private Exchange, as the case may be, the Company shall: (x) accept for exchange all the Securities validly tendered and not withdrawn pursuant to the Registered Exchange Offer and the Private Exchange; (y) deliver to the Trustee for cancellation all the Initial Securities so accepted for exchange; and (z) cause the Trustee to authenticate and deliver promptly to each Holder of the Initial Securities, Exchange Securities or Private Exchange Securities, as the case may be, equal in principal amount to the Initial Securities of such Holder so accepted for exchange. Notwithstanding the foregoing, it is understood that, in the case where the Registered Exchange Offer or Private Exchange is extended beyond the time at which it is scheduled to expire (either at the end of the originally scheduled offer period or at the end of a subsequently scheduled extension of such period), those Securities that are validly tendered and not withdrawn pursuant to such Registered Exchange Offer or Private Exchange, as the case may be, as of such time may be accepted for exchange and may not subsequently be withdrawn by the tendering Holders. The Indenture will provide that the Exchange Securities will not be subject to the transfer restrictions set forth in the Indenture and that all the Securities will vote and consent together on all matters as one class and that none of the Securities will have the right to vote or consent as a class separate from one another on any matter. Interest on each Exchange Security and Private Exchange Security issued pursuant to the Registered Exchange Offer and in the Private Exchange will accrue from the last interest payment date on which interest was paid on the Initial Securities surrendered in exchange therefor or, if no interest has been paid on the Initial Securities, from the date of original issue of the Initial Securities. Each Holder participating in the Registered Exchange Offer shall be required to represent to the Company that, at the time such Holder's tendered Securities are accepted for exchange, (i) any Exchange Securities received by such Holder will be acquired in the ordinary course of business, (ii) such Holder will have no arrangements or understanding with any person to participate in the distribution of the Securities or the Exchange Securities within the meaning of the Securities Act, (iii) such Holder is not an "affiliate," as defined in Rule 405 of the Securities Act, of the Company or if it is an affiliate, such Holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (iv) if such Holder is not a broker-dealer, that it is not engaged in, and does not intend to engage in, the distribution of the Exchange Securities and (v) if such Holder is a broker-dealer, that it will receive Exchange Securities for its own account in exchange for Initial Securities that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. Notwithstanding any other provisions hereof, the Company will ensure that (i) any Exchange Offer Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto complies in all material respects with the Securities Act and the rules and regulations thereunder, (ii) any Exchange Offer Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any prospectus forming part of any Exchange Offer Registration Statement, and any supplement to such prospectus, does not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If following the date hereof there has been announced a change in Commission policy with respect to exchange offers that in the reasonable opinion of counsel to the Company raises a substantial question as to whether the Registered Exchange Offer is permitted by applicable federal law, the Company will seek a no-action letter or other favorable decision from the Commission allowing the Company to consummate the Registered Exchange Offer. The Company will pursue the issuance of such a decision to the Commission staff level. In connection with the foregoing, the Company will take all such other commercially reasonable actions as may be requested by the Commission in connection with the issuance of such decision, including without limitation (i) participating in telephonic conferences with the Commission, (ii) delivering to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon which such counsel has concluded that the Registered Exchange Offer should be permitted and (iii) diligently pursuing a resolution (which need not be favorable) by the Commission staff. 2. Shelf Registration. If, (i) because of any change in law or in applicable interpretations thereof by the staff of the Commission, the Company is not permitted to effect a Registered Exchange Offer, as contemplated by Section 1 hereof, (ii) the Registered Exchange Offer is not consummated by the 300th day after the Closing Date, (iii) any Initial Purchaser so requests with respect to the Initial Securities (or the Private Exchange Securities) not eligible to be exchanged for Exchange Securities in the Registered Exchange Offer and held by it following consummation of the Registered Exchange Offer or (iv) any Holder (other than an Exchanging Dealer) is not eligible to participate in the Registered Exchange Offer or, in the case of any Holder (other than an Exchanging Dealer) that participates in the Registered Exchange Offer, such Holder does not receive freely tradeable Exchange Securities on the date of the exchange and any such Holder so requests, the Company shall take the following actions (the date on which any of the conditions described in the foregoing clauses (i) through (iv) occur, including in the case of clauses (iii) or (iv) the receipt of the required notice, being a "TRIGGER DATE"): (a) The Company shall promptly (but in no event more than 60 days after the Trigger Date (such 60th day being a "FILING DEADLINE")) file with the Commission and thereafter use its reasonable best efforts to cause to be declared effective no later than 270 days after the Trigger Date (such 270th day being an "EFFECTIVENESS DEADLINE") a registration statement (the "SHELF REGISTRATION STATEMENT" and, together with the Exchange Offer Registration Statement, a "REGISTRATION STATEMENT") on an appropriate form under the Securities Act relating to the offer and sale of the Transfer Restricted Securities by the Holders thereof from time to time in accordance with the methods of distribution set forth in the Shelf Registration Statement and Rule 415 under the Securities Act (hereinafter, the "SHELF REGISTRATION"); provided, however, that no Holder (other than an Initial Purchaser) shall be entitled to have the Securities held by it covered by such Shelf Registration Statement unless such Holder agrees in writing to be bound by all the provisions of this Agreement applicable to such Holder. (b) The Company shall use its reasonable best efforts to keep the Shelf Registration Statement continuously effective in order to permit the prospectus included therein to be lawfully delivered by the Holders of the relevant Securities, for a period of two years (or for such longer period if extended pursuant to Section 3(j) below) after the Closing Date or such shorter period that will terminate when all the Securities covered by the Shelf Registration Statement (i) have been sold pursuant thereto or (ii) are no longer restricted securities (as defined in Rule 144 under the Securities Act, or any successor rule thereof). (c) Notwithstanding any other provisions of this Agreement to the contrary, the Company shall cause the Shelf Registration Statement and the related prospectus and any amendment or supplement thereto, as of the effective date of the Shelf Registration Statement, amendment or supplement, (i) to comply in all material respects with the applicable requirements of the Securities Act and the rules and regulations of the Commission and (ii) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3. Registration Procedures. In connection with any Shelf Registration contemplated by Section 2 hereof and, to the extent applicable, any Registered Exchange Offer contemplated by Section 1 hereof, the following provisions shall apply: (a) The Company shall (i) furnish to each Initial Purchaser, prior to the filing thereof with the Commission, a copy of the Registration Statement and each amendment thereof and each supplement, if any, to the prospectus included therein and, in the event that an Initial Purchaser (with respect to any portion of an unsold allotment from the original offering) is participating in the Registered Exchange Offer or the Shelf Registration Statement, the Company shall use its reasonable best efforts to reflect in each such document, when so filed with the Commission, such comments as such Initial Purchaser reasonably may propose; (ii) include the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution" section of the prospectus forming a part of the Exchange Offer Registration Statement and include the information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Registered Exchange Offer; (iii) if requested by an Initial Purchaser, include the information required by Items 507 or 508 of Regulation S-K under the Securities Act, as applicable, in the prospectus forming a part of the Exchange Offer Registration Statement; (iv) include within the prospectus contained in the Exchange Offer Registration Statement a section entitled "Plan of Distribution," reasonably acceptable to the Initial Purchasers, which shall contain a summary statement of the positions taken or policies made by the staff of the Commission with respect to the potential "underwriter" status of any broker-dealer that is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of Exchange Securities received by such broker-dealer in the Registered Exchange Offer (a "Participating Broker-Dealer"), whether such positions or policies have been publicly disseminated by the staff of the Commission or such positions or policies, in the reasonable judgment of the Initial Purchasers based upon advice of counsel (which may be in-house counsel), represent the prevailing views of the staff of the Commission; and (v) in the case of a Shelf Registration Statement, include the names of the Holders who propose to sell Securities pursuant to the Shelf Registration Statement as selling securityholders. (b) The Company shall give written notice to the Initial Purchasers, the Holders of the Securities and any Participating Broker-Dealer from whom the Company has received prior written notice that it will be a Participating Broker-Dealer in the Registered Exchange Offer (which notice pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made): (i) when the Registration Statement or any post-effective amendment thereto has become effective; provided, however, that in addition to such notice, written notice shall also be given to the Initial Purchasers when the Registration Statement or any amendment thereto has been filed with the Commission; (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the prospectus included therein or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company or its legal counsel of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event that requires the Company to make changes in the Registration Statement or the prospectus in order that the Registration Statement or the prospectus do not contain an untrue statement of a material fact nor omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the prospectus, in light of the circumstances under which they were made) not misleading. (c) The Company shall make every reasonable effort to obtain the withdrawal at the earliest possible time, of any order suspending the effectiveness of the Registration Statement. (d) The Company shall furnish to each Holder of Securities included within the coverage of the Shelf Registration, without charge, at least one copy of the Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). (e) The Company shall deliver to each Exchanging Dealer and each Initial Purchaser, and to any other Holder who so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if any Initial Purchaser or any such Holder requests, all exhibits thereto (including those incorporated by reference). (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of Securities included within the coverage of the Shelf Registration, without charge, as many copies of the prospectus (including each preliminary prospectus) included in the Shelf Registration Statement and any amendment or supplement thereto as such person may reasonably request. The Company consents, subject to the provisions of this Agreement, to the use of the prospectus or any amendment or supplement thereto by each of the selling Holders of the Securities in connection with the offering and sale of the Securities covered by the prospectus, or any amendment or supplement thereto, included in the Shelf Registration Statement. (g) The Company shall deliver to each Initial Purchaser, any Exchanging Dealer, any Participating Broker-Dealer and such other persons required to deliver a prospectus following the Registered Exchange Offer, without charge, as many copies of the final prospectus included in the Exchange Offer Registration Statement and any amendment or supplement thereto as such persons may reasonably request. The Company consents, subject to the provisions of this Agreement, to the use of the prospectus or any amendment or supplement thereto by any Initial Purchaser, if necessary, any Participating Broker-Dealer and such other persons required to deliver a prospectus following the Registered Exchange Offer in connection with the offering and sale of the Exchange Securities covered by the prospectus, or any amendment or supplement thereto, included in such Exchange Offer Registration Statement. (h) Prior to any public offering of the Securities pursuant to any Registration Statement the Company shall register or qualify or cooperate with the Holders of the Securities included therein and their respective counsel in connection with the registration or qualification of the Securities for offer and sale under the securities or "blue sky" laws of such states of the United States as any Holder of the Securities reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Securities covered by such Registration Statement; provided, however, that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified or (ii) take any action which would subject it to general service of process or to taxation in any jurisdiction where it is not then so subject. (i) The Company shall cooperate with the Holders of the Securities to facilitate the timely preparation and delivery of certificates representing the Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as the Holders may request a reasonable period of time prior to sales of the Securities pursuant to such Registration Statement. (j) Upon the occurrence of any event contemplated by paragraphs (ii) through (v) of Section 3(b) above during the period for which the Company is required to maintain an effective Registration Statement, the Company shall promptly prepare and file a post-effective amendment to the Registration Statement or a supplement to the related prospectus and any other required document so that, as thereafter delivered to Holders of the Securities or purchasers of Securities, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Initial Purchasers, the Holders of the Securities and any known Participating Broker-Dealer in accordance with paragraphs (ii) through (v) of Section 3(b) above to suspend the use of the prospectus until the requisite changes to the prospectus have been made, then the Initial Purchasers, the Holders of the Securities and any such Participating Broker-Dealers shall suspend use of such prospectus, and the period of effectiveness of the Shelf Registration Statement provided for in Section 2(b) above and the Exchange Offer Registration Statement provided for in Section 1 above shall each be extended by the number of days from and including the date of the giving of such notice to and including the date when the Initial Purchasers, the Holders of the Securities and any known Participating Broker-Dealer shall have received such amended or supplemented prospectus pursuant to this Section 3(j). (k) Not later than the effective date of the applicable Registration Statement, the Company will provide a CUSIP number for the Initial Securities, the Exchange Securities or the Private Exchange Securities, as the case may be, and provide the applicable trustee with printed certificates for the Initial Securities, the Exchange Securities or the Private Exchange Securities, as the case may be, in a form eligible for deposit with The Depository Trust Company. (l) The Company will comply with all rules and regulations of the Commission to the extent and so long as they are applicable to the Registered Exchange Offer or the Shelf Registration and will make generally available to its security holders (or otherwise provide in accordance with Section 11(a) of the Securities Act) an earnings statement satisfying the provisions of Section 11(a) of the Securities Act, no later than 45 days after the end of a 12-month period (or 90 days, if such period is a fiscal year) beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the Registration Statement, which statement shall cover such 12-month period. (m) The Company shall cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended, in a timely manner and containing such changes, if any, as shall be necessary for such qualification. In the event that such qualification would require the appointment of a new trustee under the Indenture, the Company shall appoint a new trustee thereunder pursuant to the applicable provisions of the Indenture. (n) The Company may require each Holder of Securities to be sold pursuant to the Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of the Securities as the Company may from time to time reasonably require for inclusion in the Shelf Registration Statement, and the Company may exclude from such registration the Securities of any Holder that unreasonably fails to furnish such information within a reasonable time after receiving such request. (o) The Company shall enter into such customary agreements (including, if requested, an underwriting agreement in customary form) and take all such other action, if any, as any Holder of the Securities shall reasonably request in order to facilitate the disposition of the Securities pursuant to any Shelf Registration. (p) In the case of any Shelf Registration, the Company shall (i) make reasonably available for inspection by the Holders of the Securities, any underwriter participating in any disposition pursuant to the Shelf Registration Statement and any attorney, accountant or other agent retained by the Holders of the Securities or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and (ii) cause the Company's officers, directors, employees, accountants and auditors to supply all relevant information reasonably requested by the Holders of the Securities or any such underwriter, attorney, accountant or agent in connection with the Shelf Registration Statement, in each case, as shall be reasonably necessary to enable such persons, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; provided, however, that the foregoing inspection and information gathering shall be coordinated on behalf of the Initial Purchasers by you and on behalf of the other parties, by one counsel designated by and on behalf of such other parties as described in Section 4 hereof. (q) In the case of any Shelf Registration, the Company, if requested by any Holder of Securities covered thereby, shall cause (i) its counsel (who may be in-house counsel) to deliver an opinion and updates thereof relating to the Securities in customary form addressed to such Holders and the managing underwriters, if any, thereof and dated, in the case of the initial opinion, the effective date of such Shelf Registration Statement (it being agreed that the matters to be covered by such opinion shall include, without limitation, the due incorporation and good standing of the Company and its subsidiaries; the qualification of the Company and its subsidiaries to transact business as foreign corporations; the due authorization, execution and delivery of the relevant agreement of the type referred to in Section 3(o) hereof; the due authorization, execution, authentication and issuance, and the validity and enforceability, of the applicable Securities; the absence of material legal or governmental proceedings involving the Company and its subsidiaries; the absence of governmental approvals required to be obtained in connection with the Shelf Registration Statement, the offering and sale of the applicable Securities, or any agreement of the type referred to in Section 3(o) hereof; the compliance as to form of such Shelf Registration Statement and any documents incorporated by reference therein and of the Indenture with the requirements of the Securities Act and the Trust Indenture Act, respectively; and, as of the date of the opinion and as of the effective date of the Shelf Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from such Shelf Registration Statement and the prospectus included therein, as then amended or supplemented, and from any documents incorporated by reference therein of an untrue statement of a material fact or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of any such documents, in the light of the circumstances existing at the time that such documents were filed with the Commission under the Exchange Act); (ii) its officers to execute and deliver all customary documents and certificates and updates thereof requested by any underwriters of the applicable Securities and (iii) its independent public accountants and the independent public accountants with respect to the financial information relating to Semiconductor Components Group of Motorola, Inc. provided in the Shelf Registration Statement to provide to the selling Holders of the applicable Securities and any underwriter therefor a comfort letter in customary form and covering matters of the type customarily covered in comfort letters in connection with primary underwritten offerings, subject to receipt of appropriate documentation as contemplated, and only if permitted, by Statement of Auditing Standards No. 72. (r) In the case of the Registered Exchange Offer, if requested by any Initial Purchaser or any known Participating Broker-Dealer, the Company shall cause (i) its counsel (who may be in-house counsel) to deliver to such Initial Purchaser or such Participating Broker-Dealer a signed opinion in the form set forth in Section 6(c) of the Purchase Agreement with such changes as are customary in connection with the preparation of a Registration Statement and (ii) its independent public accountants and the independent public accountants with respect to the financial information relating to Semiconductor Components Group of Motorola, Inc. provided in the Registration Statement to deliver to such Initial Purchaser or such Participating Broker-Dealer a comfort letter, in customary form, meeting the requirements as to the substance thereof as set forth in Section 6(a) of the Purchase Agreement, with appropriate date changes. (s) If Securities are to be accepted for exchange pursuant to a Registered Exchange Offer or a Private Exchange, upon delivery of such Securities by Holders to the Company (or to such other Person as directed by the Company) in exchange for the Exchange Securities or the Private Exchange Securities, as the case may be, the Company shall mark, or caused to be marked, on the Initial Securities so exchanged that such Initial Securities are being canceled in exchange for the Exchange Securities or the Private Exchange Securities, as the case may be; in no event shall the Initial Securities be marked as paid or otherwise satisfied. (t) In the event that any broker-dealer registered under the Exchange Act shall underwrite any Securities or participate as a member of an underwriting syndicate or selling group or "assist in the distribution" (within the meaning of the Conduct Rules (the "RULES") of the National Association of Securities Dealers, Inc. ("NASD")) thereof, whether as a Holder of such Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company will assist such broker-dealer in complying with the requirements of such Rules, including, without limitation, by (i) if such Rules, including Rule 2720, shall so require, engaging a "qualified independent underwriter" (as defined in Rule 2720) to participate in the preparation of the Registration Statement relating to such Securities, to exercise usual standards of due diligence in respect thereto and, if any portion of the offering contemplated by such Registration Statement is an underwritten offering or is made through a placement or sales agent, to recommend the yield of such Securities, (ii) indemnifying any such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 5 hereof and (iii) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the Rules. (u) The Company shall use its reasonable best efforts to take all other steps necessary to effect the registration of the Securities covered by a Registration Statement contemplated hereby. 4. Registration Expenses. (a) All expenses incident to the Company's performance of and compliance with this Agreement will be borne by the Company, regardless of whether a Registration Statement is ever filed or becomes effective, including without limitation; (i) all registration and filing fees and expenses; (ii) all fees and expenses of compliance with federal securities and state "blue sky" or securities laws; (iii) all expenses of printing (including printing certificates for the Securities to be issued in the Registered Exchange Offer and the Private Exchange and printing of Prospectuses), messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Company; (v) all application and filing fees in connection with listing the Exchange Securities on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company (including the expenses of any special audit and comfort letters required by or incident to such performance). The Company will bear its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any person, including special experts, retained by the Company. (b) In connection with any Registration Statement required by this Agreement, the Company will reimburse the Initial Purchasers and the Holders of Transfer Restricted Securities who are tendering Initial Securities in the Registered Exchange Offer and/or selling or reselling Securities pursuant to the "Plan of Distribution" contained in the Exchange Offer Registration Statement or the Shelf Registration Statement, as applicable, for the reasonable, documented fees and disbursements of not more than one counsel chosen by the Initial Purchasers unless another firm shall be chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit such Registration Statement is being prepared. 5. Indemnification. (a) The Company agrees to indemnify and hold harmless each Holder of the Securities, any Participating Broker-Dealer and each person, if any, who controls such Holder or such Participating Broker-Dealer within the meaning of the Securities Act or the Exchange Act (each Holder, any Participating Broker-Dealer and such controlling persons are referred to collectively as the "INDEMNIFIED PARTIES") from and against any losses, claims, damages or liabilities, joint or several, or any actions in respect thereof (including, but not limited to, any losses, claims, damages, liabilities or actions relating to purchases and sales of the Securities) to which each Indemnified Party may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration, or arise out of, or are based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse, as incurred, the Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action in respect thereof; provided, however, that (i) the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Company by or on behalf of such Holder specifically for inclusion therein and (ii) with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus relating to a Shelf Registration Statement, the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any Holder or Participating Broker-Dealer from whom the person asserting any such losses, claims, damages or liabilities purchased the Securities concerned, to the extent that a prospectus relating to such Securities was required to be delivered by such Holder or Participating Broker-Dealer under the Securities Act in connection with such purchase and any such loss, claim, damage or liability of such Holder or Participating Broker-Dealer results from the fact that there was not sent or given to such person, at or prior to the written confirmation of the sale of such Securities to such person, a copy of the final prospectus if the Company had previously furnished copies thereof to such Holder or Participating Broker-Dealer; provided further, however, that this indemnity agreement will be in addition to any liability which the Company may otherwise have to such Indemnified Party. The Company shall also indemnify underwriters, their officers and directors and each person who controls such underwriters within the meaning of the Securities Act or the Exchange Act to the same extent as provided above with respect to the indemnification of the Holders of the Securities if requested by such Holders. (b) Each Holder of the Securities, severally and not jointly, will indemnify and hold harmless the Company and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act from and against any losses, claims, damages or liabilities or any actions in respect thereof, to which the Company or any such controlling person may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or prospectus or in any amendment or supplement thereto or in any preliminary prospectus relating to a Shelf Registration, or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Company by or on behalf of such Holder specifically for inclusion therein; and, subject to the limitation set forth immediately preceding this clause, shall reimburse, as incurred, the Company for any documented legal or other expenses reasonably incurred by the Company or any such controlling person in connection with investigating or defending any loss, claim, damage, liability or action in respect thereof. This indemnity agreement will be in addition to any liability which such Holder may otherwise have to the Company or any of its controlling persons. (c) Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action or proceeding (including a governmental investigation), such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 5, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof the indemnifying party will not be liable to such indemnified party under this Section 5 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof and as provided in the following sentence. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the contrary; (ii) the indemnifying party has failed within a reasonable time to retain counsel reasonably satisfactory to the indemnified party; (iii) the indemnified party shall have reasonably concluded that there may be legal defenses available to it that are different from or in addition to those available to the indemnifying party; or (iv) the named parties in any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement (i) includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action, and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 5 is unavailable or insufficient to hold harmless an indemnified party under subsections (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to in subsection (a) or (b) above in such proportion as is appropriate to reflect the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof) as well as any other relevant equitable considerations. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or such Holder or such other indemnified party, as the case may be, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding any other provision of this Section 5(d), the Holders of the Securities shall not be required to contribute any amount in excess of the amount by which the net proceeds received by such Holders from the sale of the Securities pursuant to a Registration Statement exceeds the amount of damages which such Holders have otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph (d), each person, if any, who controls such indemnified party within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as such indemnified party and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act shall have the same rights to contribution as the Company. (e) The agreements contained in this Section 5 shall survive the sale of the Securities pursuant to a Registration Statement and shall remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of any indemnified party. 6. Additional Interest Under Certain Circumstances. (a) Additional interest (the "ADDITIONAL INTEREST") with respect to the Securities shall be assessed as follows if any of the following events occur (each such event in clauses (i) through (iv) below being herein called a "REGISTRATION DEFAULT"): (i) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the applicable Filing Deadline; (ii) any Registration Statement required by this Agreement is not declared effective by the Commission on or prior to the applicable Effectiveness Deadline; (iii) the Registered Exchange Offer has not been consummated on or prior to the Consummation Deadline; or (iv) any Registration Statement is declared effective within 270 days after the Closing Date (or in the case of Shelf Registration Statement to be filed in response to any change in law or applicable interpretations thereof, within 60 days after the publication of the change in law or interpretation) but shall thereafter cease to be effective (at any time that the Company is obligated to maintain the effectiveness thereof) without being succeeded within 30 days by an additional Registration Statement filed and declared effective. Each of the foregoing will constitute a Registration Default whatever the reason for any such event and whether it is voluntary or involuntary or is beyond the control of the Company or pursuant to operation of law or as a result of any action or inaction by the Commission. Additional Interest shall accrue on the Securities over and above the interest set forth in the title of the Securities from and including the date on which any such Registration Default shall occur to but excluding the date on which all such Registration Defaults have been cured, at a rate of 0.50% per annum (the "ADDITIONAL INTEREST RATE") for the first 90-day period immediately following the occurrence of such Registration Default. The Additional Interest Rate shall increase by an additional 0.50% per annum with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum Additional Interest Rate of 2.0% per annum. (b) Any amounts of Additional Interest due pursuant to Section 6(a) will be payable in cash on the regular interest payment dates with respect to the Securities. The amount of Additional Interest will be determined by multiplying the applicable Additional Interest Rate by the principal amount of the Securities and further multiplied by a fraction, the numerator of which is the number of days such Additional Interest Rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months), and the denominator of which is 360. (c) "Transfer Restricted Securities" means each Security until (i) the date on which such Security has been exchanged by a person other than a broker-dealer for a freely transferable Exchange Security in the Registered Exchange Offer, (ii) following the exchange by a broker-dealer in the Registered Exchange Offer of an Initial Security for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Security has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the date on which such Security is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. 7. Rules 144 and 144A. The Company shall use its best efforts to file the reports required to be filed by it under the Securities Act and the Exchange Act in a timely manner and, if at any time the Company is not required to file such reports, it will, upon the request of any Holder of Securities, make publicly available other information so long as necessary to permit sales of their securities pursuant to Rules 144 and 144A. The Company covenants that it will take such further action as any Holder of Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Securities without registration under the Securities Act within the limitation of the exemptions provided by Rules 144 and 144A (including the requirements of Rule 144A(d)(4)). The Company will provide a copy of this Agreement to prospective purchasers of Initial Securities identified to the Company by the Initial Purchasers upon request. Upon the request of any Holder of Initial Securities, the Company shall deliver to such Holder a written statement as to whether it has complied with such requirements. Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to require the Company to register any of its securities pursuant to the Exchange Act. 8. Underwritten Registrations. If any of the Transfer Restricted Securities covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering ("MANAGING UNDERWRITERS") will be selected by the Holders of a majority in aggregate principal amount of such Transfer Restricted Securities to be included in such offering. No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Transfer Restricted Securities on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 9. Miscellaneous. (a) Remedies. The Company acknowledges and agrees that any failure by the Company to comply with its obligations under Sections 1 and 2 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Sections 1 and 2 hereof. The Company further agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not on or after the date of this Agreement enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any agreement in effect on the date hereof. (c) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, except by the Company and the written consent of the Holders of a majority in principal amount of the Securities affected by such amendment, modification, supplement, waiver or consents. Without the consent of the Holder of each Security, however, no modification may change the provisions relating to the payment of Additional Interest. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, first-class mail, facsimile transmission, or air courier which guarantees overnight delivery: (1) if to a Holder of the Securities, at the most current address given by such Holder to the Company. (2) if to the Initial Purchasers; Salomon Smith Barney Inc. 388 Greenwich Street New York, NY 10013 Fax No.: (212) 816-0499 Attention: Office of General Counsel (3) if to the Company, at its address as follows: ON Semiconductor Corporation 5005 East McDowell Road Phoenix, Arizona 85005 Fax No.: (602) 244-5601 Attention: General Counsel with a copy to: Cleary, Gottlieb, Steen & Hamilton One Liberty Plaza New York, New York 10006-1470 Fax No.: (212) 225-3999 Attention: Stephen H. Shalen, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; three business days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged by recipient's facsimile machine operator, if sent by facsimile transmission; and on the day delivered, if sent by overnight air courier guaranteeing next day delivery. (e) Third Party Beneficiaries. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent they may deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. (f) Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. (j) Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Securities Held by the Company. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities is required hereunder, Securities held by the Company or its affiliates (other than subsequent Holders of Securities if such subsequent Holders are deemed to be affiliates solely by reason of their holdings of such Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Holding Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the several Initial Purchasers, the Issuers and the Guarantors in accordance with its terms. Very truly yours, By: ON SEMICONDUCTOR CORPORATION, by /s/ John T. Kurtzweil ---------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, by /s/ John T. Kurtzweil ---------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SCG (MALAYSIA SMP) HOLDING CORPORATION, by /s/ John T. Kurtzweil ---------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SCG (CZECH) HOLDING CORPORATION, by /s/ John T. Kurtzweil ---------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SCG (CHINA) HOLDING CORPORATION, by /s/ John T. Kurtzweil ---------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SEMICONDUCTOR COMPONENTS INDUSTRIES PUERTO RICO, INC., by /s/ John T. Kurtzweil ---------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SCG INTERNATIONAL DEVELOPMENT, LLC, by /s/ John T. Kurtzweil ---------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SEMICONDUCTOR COMPONENTS INDUSTRIES OF RHODE ISLAND, INC., by /s/ John T. Kurtzweil ---------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer By: SEMICONDUCTOR COMPONENTS INDUSTRIES INTERNATIONAL OF RHODE ISLAND, INC., by /s/ John T. Kurtzweil ---------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer The foregoing Registration Rights Agreement is hereby confirmed and accepted as of the date first above written. SALOMON SMITH BARNEY INC. CREDIT SUISSE FIRST BOSTON LLC J.P. MORGAN SECURITIES INC. MORGAN STANLEY & CO. INCORPORATED By: SALOMON SMITH BARNEY, INC., by /s/ H. Allen Bouch ---------------------------- Name: H. Allen Bouch Title: Managing Director ANNEX A Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Initial Securities where such Initial Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date (as defined herein), it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." ANNEX B Each broker-dealer that receives Exchange Securities for its own account in exchange for Initial Securities, where such Initial Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. See "Plan of Distribution." ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Initial Securities where such Initial Securities were acquired as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until, 2003, all dealers effecting transactions in the Exchange Securities may be required to deliver a prospectus. The Company will not receive any proceeds from any sale of Exchange Securities by broker-dealers. Exchange Securities received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Securities or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such Exchange Securities. Any broker-dealer that resells Exchange Securities that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Securities may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Securities and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the Holders of the Securities) other than commissions or concessions of any brokers or dealers and will indemnify the Holders of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. ANNEX D [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO Name: Address: If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Securities. If the undersigned is a broker-dealer that will receive Exchange Securities for its own account in exchange for Initial Securities that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Securities; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act.
EXHIBIT 10.19(c) SEPARATION AGREEMENT This SEPARATION AGREEMENT (this "Agreement") made as of November 21, 2002, by and among Steven Hanson (the "Executive"), ON Semiconductor Corporation and Semiconductor Components Industries, L.L.C. (collectively, the "Company"). WHEREAS, the Company engaged the Executive to be Chief Executive Officer and President of the Company, a member of the Board of Directors of ON Semiconductor Corporation (the "Parent Board") and a member of the Board of Directors of Semiconductor Components Industries, L.L.C., (the "Board") pursuant to an Employment Agreement among the Executive and the Company dated October 27, 1999, as amended on April 25, 2002 (the "Employment Agreement"); WHEREAS, the Executive's employment with the Company has been terminated and the Executive wishes to resign his positions as a member of the Parent Board and the Board, in each case, effective as of November 19, 2002, in accordance with this Agreement; and WHEREAS, all defined terms used in this Agreement that are not otherwise defined herein shall have the meanings ascribed to such terms in the Employment Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants and promises contained herein and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Executive hereby agree as follows: 1. Termination of Employment The parties hereto hereby agree that the Executive's employment with the Company and its affiliates has terminated and the Executive hereby resigns as a member of the Parent Board and the Board, in each case, effective November 19, 2002 (the "Termination Date"). The Executive hereby resigns effective as of the Termination Date from all other positions, offices or other affiliations, that he holds in connection with the Company and its affiliates. The Executive shall execute any forms of resignation or other documents reasonably requested by the Company in order to carry out the provisions of this Agreement. 2. Termination Payments and Other Benefits (a) Pursuant to Section 5(a) of the Employment Agreement, the Company shall pay the Executive US$ 1,500,000 (the "Severance Payment") on or as soon as practicable after January 1, 2003 (but in no event later than January 10, 2003), provided that, notwithstanding the foregoing, no payment shall be made prior to the Effective Date of this Agreement. (b) The Company shall pay the Executive any Base Salary accrued but not yet paid through the Termination Date and any accrued but unused vacation and shall reimburse the Executive for any reasonable business expenses incurred on or prior to the Termination Date and properly substantiated within thirty days after the Termination Date in accordance with the Company's customary expense reimbursement procedures. (c) The Option shall become immediately exercisable as to all shares covered thereby as of the Termination Date and shall remain exercisable until the first to occur of (i) the second anniversary of the Termination Date and (ii) the tenth anniversary of the grant date of such Option. With respect to all other options to purchase stock of the Company granted by the Company to the Executive, (x) all such stock options that are by their terms exercisable as of the Termination Date shall remain exercisable until the first to occur of (A) the second anniversary of the Termination Date and (B) the tenth anniversary of the grant date of such options, at which time such options shall terminate and (y) all such stock options that are not exercisable as of the Termination Date shall terminate as of the Termination Date. (d) If the Executive elects continuation of health insurance benefits as provided under Section 4980B of the Internal Revenue Code of 1986 and Section 601 of the Employee Retirement Income Security Act of 1974, as amended (which provisions are commonly known as "COBRA"), the Company shall pay the cost of such COBRA benefits for a period not to exceed eighteen months. (e) The Company shall promptly reimburse Executive for reasonable attorney's fees and costs incurred in connection with the Executive's separation from the Company and the preparation of this Agreement not to exceed $2,000. (f) All payments and benefits provided in Sections 2(a), 2(c), 2(d) and 2(e) shall be referred to herein as the "Termination Payments". The Termination Payments shall be reduced by any required tax withholdings. The Termination Payments shall not be taken into account as compensation and no service credit shall be given after the Termination Date for purposes of determining the benefits payable under any other plan, program, agreement or arrangement of the Company. The Executive acknowledges that, except for the Termination Payments, he is not entitled to any payment in the nature of severance or termination pay from the Company. 3. General Release and Waiver (a) In consideration of payment of the Termination Payments provided herein, the Executive hereby releases, remises and acquits the Company and all of its affiliates, and their respective officers, directors, shareholders, members, family members, agents, employees, consultants, independent contractors, attorneys, advisers, successors and assigns (collectively, the "Releasees"), jointly and severally, from any and all claims, known or unknown, which the Executive or the Executive's heirs, successors or assigns have or may have against any of such parties arising on or prior to the date of this Agreement and any and all liability which any of such parties may have to the Executive, whether denominated claims, demands, causes of action, obligations, damages or liabilities arising from any and all bases, however denominated, including but not limited to the Age Discrimination in Employment Act, the Americans with Disabilities Act of 1990, the Family and Medical Leave Act of 1993, Title VII of the United States Civil Rights Act of 1964, 42 U.S.C. Section 1981, as well as any state or local laws, including without limitation the Arizona Civil Rights Act and the Arizona Employment Protection Act, or any other national, state, or local law and any workers' compensation or disability claims under any such laws. This General Release and Waiver relates to any and all claims, including without limitations claims arising from and during the Executive's relationship with the Company, any stock option, equity-based or other incentive plans, or as a result of the termination of such 2 relationship and the cancellation of any such stock options or equity awards. The Executive further agrees that the Executive will not file or permit to be filed on the Executive's behalf any such claim. Notwithstanding the preceding sentence or any other provision of this Agreement, this release is not intended to interfere with the Executive's right to file a charge with the Equal Employment Opportunity Commission or any state human rights commission in connection with any claim he believes he may have against the Company. However, by executing this Agreement, the Executive hereby waives the right to recover in any proceeding the Executive may bring before the Equal Employment Opportunity Commission or any state human rights commission or in any proceeding brought by the Equal Employment Opportunity Commission or any state human rights commission on the Executive's behalf. This release is for any relief, no matter how denominated, including, but not limited to, injunctive relief, wages, back pay, front pay, compensatory damages, or punitive damages. This General Release and Waiver shall not apply to any obligation of the Company pursuant to this Agreement. (b) The Executive expressly understands and agrees that the General Release and Waiver set forth in Section 3(a) above fully and finally releases and forever resolves the claims released and discharged therein, including those which may be unknown, unanticipated and/or unsuspected. The Executive further acknowledges that he is aware that he may hereafter discover facts in addition to or different from those which he now knows or believes to exist with respect to the subject matter of this Agreement, but that it is his intention to hereby fully, finally and forever settle and release all of the claims, known or unknown, anticipated or unanticipated, suspected or unsuspected, which now exist, may exist or heretofore have existed between or among himself and the Releasees. (c) The Executive acknowledges that the Termination Payments the Executive is receiving in connection with the foregoing release is in addition to anything of value to which the Executive already is entitled from the Company. 4. Restrictive Covenants The Non-Solicitation, Confidentiality, Non-Disclosure and Non-Disparagement provisions contained in Section 8 and 9 of the Employment Agreement shall remain in full force and effect in accordance with their terms. 5. Confidentiality of Agreement The Executive shall keep the terms of this Agreement confidential and shall not directly or indirectly disseminate any information (in any form) regarding this Agreement to any person or entity except as may be agreed to in writing by the Company. Notwithstanding the foregoing, the Executive may disclose the information described herein, to the extent the Executive is compelled to do so by lawful service of process, subpoena, court order, or as the Executive is otherwise compelled to do by law, including full and complete disclosure in response thereto, in which event the Executive agrees to provide the Company with a copy of the document(s) seeking disclosures of such information promptly upon receipt of such document(s) and prior to disclosure by the Executive of any such information, so that the Company may, upon notice to the Executive, take such action as it deems to be necessary or appropriate in relation to such subpoena or request. 3 6. Certain Forfeitures in Event of Breach The Executive acknowledges and agrees that, notwithstanding any other provision of this Agreement, in the event the Executive materially breaches any of his obligations under this Agreement or the Restrictive Covenants provided in the Employment Agreement and referenced in Section 4 of this Agreement, the Executive will forfeit his right to receive the Termination Payments provided by Section 2 of this Agreement to the extent not theretofore paid to him as of the date of such breach and, if already made as of the time of breach, the Executive agrees that he will reimburse the Company, immediately, for the amount of such payment. 7. No Admission This Agreement does not constitute an admission of liability or wrongdoing of any kind by the Company or its affiliates or by the Executive. 8. Heirs and Assigns The terms of this Agreement shall be binding on the parties hereto and their respective successors and assigns. In the event of the Executive's death prior to the date any of the payments provided hereunder become due and payable, such amounts shall be paid to the Executive's beneficiaries or estate, as applicable, to the extent they would otherwise have been payable to the Executive. 9. General Provisions (a) This Agreement and the Restrictive Covenants provided in the Employment Agreement and referenced in Section 4(a) of this Agreement constitute the entire understanding of the Company and the Executive with respect to the subject matter hereof and supersedes all prior understandings, written or oral. The terms of this Agreement may be changed, modified or discharged only by an instrument in writing signed by the parties hereto. A failure of the Company or the Executive to insist on strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision hereof. In the event that any provision of this Agreement is determined to be so broad as to be unenforceable, such provision shall be interpreted to be only so broad as is enforceable. (b) This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona, without reference to its principles of conflicts of law. All actions and proceedings relating directly or indirectly to this Agreement shall be commenced in Maricopa County, Arizona, and the parties hereby submit to the exclusive jurisdiction of such courts and waive any claim of forum non conveniens; provided that notwithstanding the foregoing, the Company may commence an action related to, or seek enforcement of, the Restrictive Covenants provided in the Employment Agreement and referenced in Section 4 of this Agreement in any jurisdiction. (c) The parties hereto acknowledge and agree that each party has reviewed the terms and provisions of this Agreement and has had the opportunity to contribute to its revision. Accordingly, the rule of construction to the effect that ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement. Rather, the terms of this Agreement shall be construed fairly as to both parties hereto and not in favor or against 4 either party. The headings in this Agreement are inserted for convenience of reference only and shall not be part of or control or affect the meaning of any provision hereof. Terms used in the singular shall include the plural and terms used in one gender shall include the other, in each case, as the context requires. (d) This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which counterpart, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement. A facsimile of a signature shall be deemed to be and have the affect of an original signature. (e) All obligations of the Company to indemnify Executive pursuant to the Company's charter, by-laws or other related documents or under any applicable law shall remain in full force and effect, except as they may be amended from time to time with respect to the Company's officers and directors generally. 10. Knowing and Voluntary Waiver The Executive acknowledges that, by the Executive's free and voluntary act of signing below, the Executive agrees to all of the terms of this Agreement and intends to be legally bound thereby. The Executive understands that he may consider whether to agree to the terms contained herein for a period of twenty-one days. The Executive acknowledges that he received this Agreement on November 21, 2002, and has had an opportunity to review and consider the terms contained in this Agreement. However, the Termination Payments provided herein shall not commence until this Agreement is executed and returned to the Company, and becomes effective on the Effective Date as provided below. The Executive acknowledges that he has been advised to consult with and has consulted with an attorney prior to executing this Agreement. This Agreement will become effective, enforceable and irrevocable on the eighth day after the date on which it is executed by the Executive, provided it is not revoked by the Executive as provided below (the "Effective Date"). The Executive may revoke his agreement to accept the terms hereof by delivering a letter within seven days after he has executed this Agreement addressed to the Company at its corporate offices to the attention of Sonny Cave, with a copy to Robert J. Raymond, Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, NY 10006, specifying his intention to revoke his agreement. If the Executive exercises his right to revoke hereunder, he shall forfeit his right to receive any of the Termination Payments and benefits provided for herein, and to the extent such payments have already been made, the Executive agrees that he will immediately reimburse the Company for the amounts of such payment and the parties' obligations under this Agreement, including without limitation, the General Release and Waiver provided in Section 3 hereof, shall become null and void ab initio and the Executive shall retain any and all claims that he may have had against the Company prior to the execution of this Agreement. 5 ON SEMICONDUCTOR CORPORATION & SEMICONDUCTOR COMPONENTS INDUSTRIES, L.L.C. /s/ SONNY CAVE ----------------------------------- Name: Sonny Cave Title: Vice President and Secretary /s/ STEVEN HANSON ----------------------------------- Steven Hanson Acknowledgment STATE OF ARIZONA ) ) ss: COUNTY OF MARICOPA ) On the 9th day of December, 2002, before me personally came Steven Hanson the Executive who, being by me duly sworn, did depose and say that he resides at 5501 E. Roadrunner, Paradise Valley, AZ 85253; and did acknowledge and represent that he has had an opportunity to consult with attorneys and other advisers of his choosing regarding the Separation Agreement attached hereto, that he has reviewed all of the terms of the Separation Agreement and that he fully understands all of its provisions, including, without limitation, the general release and waiver set forth therein. /s/ LINDA M. LEE - ---------------------- Notary Public Date: December 9, 2002 6
EXHIBIT 10.50(a) EMPLOYMENT AGREEMENT AGREEMENT, dated as of November 10, 2002 (the "Agreement"), between On Semiconductor Corporation (the "Company"), with offices at 5005 East McDowell Road, Phoenix, Arizona 85008, and Keith Jackson (the "Executive"). 1. Employment, Duties and Agreements. (a) The Company hereby agrees to employ the Executive as its President and Chief Executive Officer and the Executive hereby accepts such position and agrees to serve the Company in such capacity during the employment period fixed by Section 3 hereof (the "Employment Period"). The Executive shall report to the Board of Directors of the Company (the "Board") or its designee and shall have such duties and responsibilities as the Board may reasonably determine from time to time as are consistent with Executive's position as President. In addition, during the Employment Period, the Company shall cause the Executive to be elected as a member of the Board. During the Employment Period, the Executive shall be subject to, and shall act in accordance with, all reasonable instructions and directions of the Board and all applicable policies and rules of the Company. The Executive's principal work location shall be Phoenix, Arizona, provided that the Executive shall be required to travel as required in order to perform his duties and responsibilities hereunder. (b) During the Employment Period, excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote his full working time, energy and attention to the performance of his duties and responsibilities hereunder and shall faithfully and diligently endeavor to promote the business and best interests of the Company. (c) During the Employment Period, the Executive may not, without the prior written consent of the Company, directly or indirectly, operate, participate in the management, operations or control of, or act as an executive, officer, consultant, agent or representative of, any type of business or service (other than as an executive of the Company), provided that it shall not be a violation of the foregoing for the Executive to manage his personal, financial and legal affairs so long as such activities do not interfere with the performance of his duties and responsibilities to the Company as provided hereunder. 2. Compensation. (a) As compensation for the agreements made by the Executive herein and the performance by the Executive of his obligations hereunder, during the Employment Period, the Company shall pay the Executive, pursuant to the Company's normal and customary payroll procedures, a base salary at the rate of $500,000 per annum, (the "Base Salary"). The Board shall review the Executive's Base Salary from time to time. (b) In addition to the Base Salary, during the Employment Period, the Executive shall be eligible to participate in the executive bonus program established and approved by the Board (the "Program") and, pursuant to the Program, the Executive may earn an annual bonus (the "Annual Bonus") up to a maximum of 75% of Base Salary based on the achievement of annual performance objectives as set forth in the Program. (c) The Company shall reimburse the Executive for his reasonable relocation expenses for his relocation to the Phoenix area, including without limitation reimbursing the Executive for temporary housing expenses for the Executive for up to six (6) months following the Effective Time, in each case in accordance with the Company's existing relocation policy applicable to its senior executives. Additionally, as soon as practicable after the Effective Date (as defined in Section 3 below), the Company will pay the Executive $200,000 (the "Relocation Supplement"), provided that the Executive will be required to immediately pay back the Relocation Supplement in the event he voluntarily terminates his employment hereunder (other than for Good Reason as defined in Section 3(f) of this Agreement) or his employment is terminated by the Company for Cause prior to the second anniversary of the Effective Date, and to the extent the Executive fails to pay back any portion of the Relocation Supplement as provided herein, the Company shall have the right to offset any other payments provided hereunder or otherwise owed to the Executive in respect of such amount. (d) As soon as practicable after the Effective Date (as defined in Section 3 below), the Company shall grant the Executive an option (the "Option") to purchase 1,200,000 shares of common stock of the Company at an exercise price equal to the Fair Market Value (as defined in the On Semiconductor Corporation 2000 Stock Incentive Plan (the "Option Plan)), on the date of grant (the "Grant Date") of such Option. The Option shall be subject to and governed by the Option Plan and shall be evidenced by a stock option grant agreement as provided under the Option Plan. Twenty-five (25) percent of the Option shall vest on each anniversary of the Grant Date beginning on the first anniversary of the Grant Date until 100% of the Option is fully vested and exercisable; provided that the Executive is still employed by the Company on each such date that a portion of the Option is to become exercisable. Notwithstanding the foregoing, in the event the Executive's employment with the Company is terminated by the Company without Cause (as defined in Section 3 below) or by the Executive for Good Reason (as defined in Section 3 below) within the two-year period following a Change of Control (as defined in the Option Plan) the Option shall become immediately exercisable. The Option, or portion thereof, that has not become exercisable shall automatically expire on the Date of Termination (as defined in Section 4 below). The Option, or portion thereof, that has become exercisable as of the Date of Termination shall expire on the earlier of (i) ninety (90) days after the date the Executive's Employment is terminated for any reason other than Cause, death or Disability; (ii) two years after the date the Executive's employment is terminated by reason of death or Disability or by the Company without Cause (as defined in Section 3 below); (iii) the commencement of business on the date the Executive's employment is terminated for Cause; or (iv) the tenth anniversary of the Grant Date. (e) During the Employment Period: (i) except as specifically provided herein, the Executive shall be entitled to participate in all savings and retirement plans, practices, policies and programs of the Company which are made available generally to other executive officers of the Company, and (ii) except as specifically provided herein, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in, and shall receive all benefits under, all welfare benefit plans, practices, policies and programs (including the Company's disability plan) provided by the Company which are made available generally to other executive officers of the Company (for the avoidance of doubt, such plans, practices, policies or programs shall not include any plan, practice, policy or program which provides benefits in the nature of severance or continuation pay). (f) The Company shall provide the Executive with a car allowance not to exceed $1,200 per month. (g) The Company shall reimburse the Executive for all reasonable business expenses upon the presentation of statements of such expenses in accordance with the Company's policies and 2 procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company. 3. Employment Period. The Employment Period shall commence on January 1, 2003, or such earlier date as the parties may mutually agree (the date on which the Employment Period commences shall be referred to as the "Effective Date") and shall terminate on the third anniversary of the Effective Date, provided that on the third anniversary of the Effective Date and on each anniversary thereafter, the Employment Period shall automatically be extended for additional one-year periods unless either party provides the other party with notice of non-renewal at least sixty days before any such anniversary (the anniversary date on which the Employment Period terminates shall be referred to herein as the "Scheduled Termination Date"). Notwithstanding the foregoing, the Executive's employment hereunder may be terminated during the Employment Period prior to the Scheduled Termination Date upon the earliest to occur of the following events (at which time the Employment Period shall be terminated): (a) Death. The Executive's employment hereunder shall terminate upon his death. (b) Disability. The Company shall be entitled to terminate the Executive's employment hereunder for "Disability" if, as a result of the Executive's incapacity due to physical or mental illness or injury, the Executive shall have been unable to perform his duties hereunder for a period of ninety (90) consecutive days, and within thirty (30) days after Notice of Termination (as defined in Section 4 below) for Disability is given following such 90-day period, the Executive shall not have returned to the performance of his duties on a full-time basis. (c) Cause. The Company may terminate the Executive's employment hereunder for Cause. For purposes of this Agreement, the term "Cause" shall mean: (i) a material breach by the Executive of this Agreement; (ii) the failure by the Executive to reasonably and substantially perform his duties hereunder (other than as a result of physical or mental illness or injury); (iii) the Executive's willful misconduct or gross negligence which is materially injurious to the Company; or (iv) the commission by the Executive of a felony or other serious crime involving moral turpitude. In the case of clauses (i) and (ii) above, the Company shall provide notice to the Executive indicating in reasonable detail the events or circumstances that it believes constitute Cause hereunder and, if such breach or failure is reasonably susceptible to cure, provide the Executive with a reasonable period of time (not to exceed thirty days) to cure such breach or failure. If, subsequent to the Executive's termination of employment hereunder for other than Cause, it is determined in good faith by the Board that the Executive's employment could have been terminated for Cause, the Executive's employment shall, at the election of the Board, be deemed to have been terminated for Cause retroactively to the date the events giving rise to Cause occurred. (d) Without Cause. The Company may terminate the Executive's employment hereunder during the Employment Period without Cause. (e) Voluntarily. The Executive may voluntarily terminate his employment hereunder (other than for Good Reason), provided that the Executive provides the Company with notice of his intent to terminate his employment at least three months in advance of the Date of Termination (as defined in Section 4 below). (f) For Good Reason. The Executive may terminate his employment hereunder for Good Reason and any such termination shall be deemed a termination by the Company without Cause. 3 For purposes of this Agreement, "Good Reason" shall mean (i) a material breach of this Agreement by the Company or (ii) a material diminution of the Executive's duties and responsibilities hereunder; provided that in either case, the Executive shall notify the Company within thirty (30) days after the event or events which the Executive believes constitute Good Reason hereunder and shall describe in such notice in reasonable detail such event or events and provide the Company a reasonable time to cure such breach or diminution (not to exceed thirty (30) days). 4. Termination Procedure. (a) Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive during the Employment Period (other than a termination on account of the death of Executive) shall be communicated by written "Notice of Termination" to the other party hereto in accordance with Section 13(a). (b) Date of Termination. "Date of Termination" shall mean (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated pursuant to Section 3(b), thirty (30) days after Notice of Termination, provided that the Executive shall not have returned to the performance of his duties hereunder on a full-time basis within such thirty (30) day period, (iii) if the Executive voluntarily terminates his employment, the date specified in the notice given pursuant to Section 3(e) herein which shall not be less than three months after the Notice of Termination, (iv) if the Executive terminates his employment for Good Reason pursuant to Section 3(f) herein, thirty (30) days after Notice of Termination, and (v) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within thirty (30) days, or any alternative time period agreed upon by the parties, after the giving of such notice) set forth in such Notice of Termination. 5. Termination Payments. (a) Without Cause. In the event of the termination of the Executive's employment during the Employment Period by the Company without Cause (including a deemed termination without Cause as provided in Section 3(f) herein), in addition to the Executive's accrued but unused vacation and Base Salary through the Date of Termination (to the extent not theretofore paid) the Executive shall be entitled to continue to receive his Base Salary at the rate in effect as of the Date of Termination for a period of two (2) years following the Date of Termination, with such Base Salary to be paid in installments in accordance with the Company's normal payroll practices; provided that the payments and benefits provided herein are subject to and conditioned upon the Executive executing a valid general release and waiver (in the form reasonably acceptable to the Company), waiving all claims the Executive may have against the Company, its successors, assigns, affiliates, executives, officers and directors, and such waiver becoming effective, and the payments and benefits are subject to and conditioned upon the Executive's compliance with the Restrictive Covenants provided in Sections 9 and 10 hereof. Notwithstanding the foregoing, the Executive shall be required to mitigate any damages that the Executive may incur as a result of a termination of his employment by the Company without Cause (including a deemed termination without Cause as provided in Section 3(f) herein) during the Employment Period by seeking employment comparable in terms of compensation, position and location to the Executive's employment hereunder. Any amounts that the Executive earns pursuant to such employment shall offset and reduce the amount of severance required to be paid to the Executive pursuant to this Section 5(a) during the two-year period following the Date of Termination. For purposes of the paragraph, "employment" shall mean any activity for which the Executive is compensated as a result of the rendering of services, whether such services are rendered as a common law employee, a partner, sole 4 proprietor, independent contractor or otherwise. The Executive shall be required to provide such evidence as the Company may reasonably require regarding the amount of such earnings. Except as provided in this Section 5(a) and Sections 2(e), 7 and 10(d), to the extent applicable, the Company shall have no additional obligations under this Agreement. (b) Disability or Death. If the Executive's employment is terminated during the Employment Period as a result of the Executive's death or Disability, the Company shall pay the Executive or the Executive's estate, as the case may be, within thirty (30) days following the Date of Termination: (i) the Executive's accrued but unused vacation; (ii) his accrued but unpaid Base Salary; (iii) any Annual Bonus earned by the Executive in respect of the Company's fiscal year ending immediately prior to the Date of Termination; and (iv) an amount equal to the product of (A) the Annual Bonus earned by the Executive in the year immediately preceding the Date of Termination and (B) a fraction, the numerator of which is the number of days in the Company's fiscal year in which the Date of Termination occurs which are prior to the Date of Termination and the denominator of which is 365. Except as provided in this Section 5(b) and in Sections 2(e), 7 and 10(d), to the extent applicable, the Company shall have no additional obligations under this Agreement. (c) Cause or Voluntarily other than for Good Reason. If the Executive's employment is terminated during the Employment Period by the Company for Cause or voluntarily by the Executive for other than Good Reason, the Company shall pay the Executive within thirty (30) days following the Date of Termination: (i) the Executive's accrued but unused vacation through the Date of Termination; and (ii) his accrued but unpaid Base Salary through the Date of Termination. Except as provided in this Section 5(c) and in Sections 2(e), 7 and 10(d), to the extent applicable, the Company shall have no additional obligations under this Agreement. 6. Agreement to Purchase Stock. The Executive shall, within sixty (60) days of the date hereof, excluding any days that may form part of a blackout period during which the Executive is not permitted by Company policy or applicable law to purchase equity securities of the Company, purchase at least that number of shares of common stock of the Company that results from dividing $250,000 by the Fair Market Value (as defined in the Option Plan) on the date of purchase of a share of common stock of the Company, with any fractional number of shares that results from such division being rounded up to the nearest whole number of shares of common stock. The Executive shall, in the Company's sole discretion, purchase such shares of common stock of the Company on the open market or directly from the Company. 7. Employment Termination in Connection with a Change of Control. In the event the Company terminates the Executive's employment without Cause within two-year period following a Change of Control (as defined in the Option Plan), then, in addition to all other benefits provided to the Executive under the provisions of this Agreement, the Company shall provide the Executive with continuation of medical benefits for the greater of (A) two years after the Date of Termination or (B) the remainder of the Employment Period (assuming no automatic extensions of the Employment Period). These benefits shall be provided to the Executive at the same cost, and at the same coverage level, as in effect as of the Executive's Date of Termination. However, in the event the cost and/or level of coverage shall change for all employees of the Company, the cost and/or coverage level, likewise, shall change for the Executive in a corresponding manner. 8. Legal Fees; Directors and Officers' Liability Insurance. 5 (a) In the event of any contest or dispute between the Company and the Executive with respect to this Agreement or the Executive's employment hereunder, each of the parties shall be responsible for their respective legal fees and expenses. (b) During the Employment Period, the Executive shall be entitled to the same directors and officers' liability insurance coverage that the Company provides generally to its other directors and officers, as may be amended from time to time for such directors and officers. 9. Non-Solicitation. During the Employment Period and for two (2) years thereafter, the Executive hereby agrees not to, directly or indirectly, solicit or assist any other person or entity in soliciting any employee of the Company or any of their subsidiaries to perform services for any entity (other than the Company or their subsidiaries), or attempt to induce any such employee to leave the employ of the Company or their subsidiaries. 10. Confidentiality; Non-Compete; Non-Disclosure; Non-Disparagement. (a) The Executive hereby agrees that, during the Employment Period and thereafter, he will hold in strict confidence any proprietary or Confidential Information related to the Company and its affiliates. For purposes of this Agreement, the term "Confidential Information" shall mean all information of the Company or any of its affiliates (in whatever form) which is not generally known to the public, including without limitation any inventions, processes, methods of distribution, customer lists or customers' or trade secrets. (b) The Executive and the Company agree that the Company would likely suffer significant harm from the Executive's competing with the Company during the Employment Period and for some period of time thereafter. Accordingly, the Executive agrees that he will not, during the Employment Period and for a period of two (2) years following the termination of his employment with the Company, directly or indirectly, become employed by, engage in business with, serve as an agent or consultant to, become a partner, member, principal, stockholder or other owner (other than a holder of less than 1% of the outstanding voting shares of any publicly held company) of, or otherwise perform services for (whether or not for compensation) any Person. For purposes of this Section 10(b), the term "Person" shall mean any individual, partnership, corporation, limited liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof that is engaged in, or otherwise competes or has a reasonable potential for competing with the Business (as defined herein), anywhere in which the Company or its affiliates engage in or intend to engage in the Business or where the Company or its affiliates' customers are located. For purposes of this Agreement, the "Business" shall mean the design, marketing and sale of power semiconductors or other products offered by the Company or its affiliates for use in electronic products, appliances and automobiles, and such other businesses as the Company may engage in from time to time. (c) The Executive hereby agrees that, upon the termination of the Employment Period, he shall not take, without the prior written consent of the Company, any drawing, blueprint, specification or other document (in whatever form) of the Company or its affiliates, which is of a confidential nature relating to the Company or its affiliates, or, without limitation, relating to its or their methods of distribution, or any description of any formulas or secret processes and will return any such information (in whatever form) then in his possession. 6 (d) In the Event the Executive's employment hereunder is terminated pursuant to Section 3(d), 3(e) or 3(f) hereof, the Executive and the Company shall mutually agree on the time, method and content of any public announcement regarding the Executive's termination of employment hereunder and neither the Executive nor the Company shall make any public statements which are inconsistent with the information mutually agreed upon by the Company and the Executive and the parties hereto shall cooperate with each other in refuting any public statements made by other persons, which are inconsistent with the information mutually agreed upon between the Executive and Company as described above. (e) The Executive hereby agrees not to defame or disparage the Company, its affiliates and their officers, directors, members or executives, and the Company hereby agrees that it shall not disparage or defame the Executive through any official statement of the Company, provided that, in the event the Executive's employment is terminated for Cause, the Company shall be permitted, in its discretion, to disclose the facts and circumstances surrounding such termination. The Executive hereby agrees to cooperate with the Company in refuting any defamatory or disparaging remarks by any third party made in respect of the Company or its affiliates or their directors, members, officers or executives. 11. Injunctive Relief. It is impossible to measure in money the damages that will accrue to the Company in the event that the Executive breaches any of the restrictive covenants provided in Sections 9 and 10 hereof. In the event that the Executive breaches any such restrictive covenant, the Company shall be entitled to an injunction restraining the Executive from violating such restrictive covenant (without posting any bond). If the Company shall institute any action or proceeding to enforce any such restrictive covenant, the Executive hereby waives the claim or defense that the Company has an adequate remedy at law and agrees not to assert in any such action or proceeding the claim or defense that the Company has an adequate remedy at law. The foregoing shall not prejudice the Company's right to require the Executive to account for and pay over to the Company, and the Executive hereby agrees to account for and pay over, the compensation, profits, monies, accruals or other benefits derived or received by the Executive as a result of any transaction constituting a breach of any of the restrictive covenants provided in Sections 9 and 10 hereof. 12. Representations. (a) The parties hereto hereby represent that they each have the authority to enter into this Agreement (provided that the Company's obligations hereunder remain subject to final approval by the Board), and the Executive hereby represents to the Company that the execution of, and performance of duties under, this Agreement shall not constitute a breach of or otherwise violate any other agreement to which the Executive is a party. (b) The Executive hereby represents to the Company that he will not utilize or disclose any confidential information obtained by the Executive in connection with his former employment with respect to his duties and responsibilities hereunder. 13. Miscellaneous. (a) Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and shall be deemed to be given when delivered personally or four days after it is mailed by registered or certified mail, postage prepaid, return receipt requested or one day 7 after it is sent by a reputable overnight courier service and, in each case, addressed as follows (or if it is sent through any other method agreed upon by the parties): If to the Company: On Semiconductor Corporation 5005 East McDowell Road Phoenix, Arizona 85008 Attention: Board of Directors and Secretary with a copy to: Robert J. Raymond Cleary, Gottlieb, Steen & Hamilton One Liberty Plaza New York, NY 10006 If to the Executive: Keith Jackson On Semiconductor Corporation 5005 East McDowell Road Phoenix, Arizona 85008 or to such other address as any party hereto may designate by notice to the others. (b) This Agreement shall constitute the entire agreement among the parties hereto with respect to the Executive's employment hereunder, and supersedes and is in full substitution for any and all prior understandings or agreements with respect to the Executive's employment, including without limitation the offer letter provided on the same date hereof (it being understood that any stock options granted to the Executive shall be governed by the relevant option plan and related stock option grant agreement and any other related documents). (c) This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of any party hereto at any time to require the performance by any other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by any party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. (d) The parties hereto acknowledge and agree that each party has reviewed and negotiated the terms and provisions of this Agreement and has had the opportunity to contribute to its revision. Accordingly, the rule of construction to the effect that ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement. Rather, the terms of this Agreement shall be construed fairly as to both parties hereto and not in favor or against either party. 8 (e) (i) This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, assigns, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Executive. (ii) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in the Agreement, "the Company" shall mean both the Company as defined above and any such successor that assumes this Agreement, by operation of law or otherwise. (f) Any provision of this Agreement (or portion thereof) which is deemed invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction and subject to this Section, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions thereof in such jurisdiction or rendering that or any other provisions of this Agreement invalid, illegal, or unenforceable in any other jurisdiction. If any covenant should be deemed invalid, illegal or unenforceable because its scope is considered excessive, such covenant shall be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal and enforceable. No waiver of any provision or violation of this Agreement by Company shall be implied by Company's forbearance or failure to take action. (g) The Company may withhold from any amounts payable to the Executive hereunder all federal, state, city or other taxes that the Company may reasonably determine are required to be withheld pursuant to any applicable law or regulation, (it being understood, that the Executive shall be responsible for payment of all taxes in respect of the payments and benefits provided herein). (h) This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona without reference to its principles of conflicts of law. The parties hereto hereby agree that any dispute, claim or cause of action related to this Agreement or the Executive's employment hereunder shall be commenced in Maricopa County, Arizona, and the parties hereby submit to the exclusive jurisdiction of such courts and waive any claim of forum non conveniens. (i) This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. A facsimile of a signature shall be deemed to be and have the effect of an original signature. (j) The headings in this Agreement are inserted for convenience of reference only and shall not be a part of or control or affect the meaning of any provision hereof. 9 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ON SEMICONDUCTOR CORPORATION /S/ J. DANIEL MCCRANIE ---------------------- Name: J. Daniel McCranie Title: Chairman of the Board /S/ KEITH JACKSON ----------------- Keith Jackson 10
EXHIBIT 10.50(b) [LETTERHEAD OF ON] November 19, 2002 Keith Jackson 5005 East McDowell Road Phoenix, AZ 85008 Dear Keith: This letter agreement is intended to clarify the Effective Date of your employment agreement with ON Semiconductor Corporation (the "Company"), dated November 10, 2002 (the "Employment Agreement"). All capitalized terms not defined in this Agreement shall have the definitions provided in the Employment Agreement. Section 3 of the Employment Agreement is hereby amended to reflect the Effective Date of November 19,2002. All other terms and conditions of the Employment Agreement shall remain in full force and effect. Please acknowledge your agreement with the foregoing by executing and returning a copy of this letter to me at your earliest convenience. Very Truly Yours, /s/ George H. Cave - ------------------ George H. Cave General Counsel and Secretary I hereby accept this Agreement and agree to all of its terms and conditions. /s/ Keith Jackson - ----------------- Keith Jackson
EXHIBIT 10.51 EXECUTION COPY AMENDMENT AND RESTATEMENT AGREEMENT dated as of February 14, 2003 among ON SEMICONDUCTOR CORPORATION (formerly known as SCG HOLDING CORPORATION) ("Holdings"), SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC (the "Borrower"), the LENDERS party hereto and JPMORGAN CHASE BANK (formerly known as THE CHASE MANHATTAN BANK), as administrative agent (the "Administrative Agent"), under the Credit Agreement dated as of August 4, 1999, as amended and restated as of April 3, 2000 (as amended, supplemented and modified and in effect on the date hereof, the "Existing Credit Agreement"), among Holdings, the Borrower, the Lenders party thereto, the Administrative Agent and Credit Lyonnais New York Branch, Credit Suisse First Boston and Lehman Commercial Paper Inc., as co-documentation agents. A. Pursuant to the Existing Credit Agreement, the Lenders have extended credit to the Borrower, and have agreed to extend credit to the Borrower, in each case pursuant to the terms and subject to the conditions set forth therein. B. Holdings and the Borrower have requested that the Lenders agree to amend and restate the Existing Credit Agreement as provided herein to, among other things, provide for (i) a portion of the Revolving Loans to be converted into Tranche R Term Loans and (ii) permit the issuance of senior secured debt securities to be issued by Holdings and the Borrower, in each case pursuant to the terms and subject to the conditions set forth herein. C. The undersigned Lenders are willing so to amend and restate the Existing Credit Agreement pursuant to the terms and subject to the conditions set forth herein. D. Capitalized terms used but not defined herein have the meanings assigned to them in the Restated Credit Agreement (as defined herein). Accordingly, in consideration of the mutual agreements herein contained and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, and subject to the conditions set forth herein, the parties hereto hereby agree as follows: SECTION 1. Amendment and Restatement of the Existing Credit Agreement. The Existing Credit Agreement (excluding the annexes, schedules and exhibits thereto that are not attached as part of Exhibit A hereto) is hereby amended and restated, effective as of the Restatement Effective Date (as defined in Section 6 hereof), to read in its entirety as set forth in Exhibit A hereto (the "Restated Credit Agreement"), and the Administrative Agent is hereby directed by the Required Lenders to enter into such Loan Documents and to take such other actions as may be required to give effect to the transactions contemplated hereby. From and after the effectiveness of such amendment and restatement, the terms "Agreement", "this Agreement", "herein", "hereinafter", "hereto", "hereof" and words of similar import, as used in the Restated Credit Agreement, shall, unless the context otherwise requires, refer to the Existing 2 Credit Agreement as amended and restated in the form of the Restated Credit Agreement, and the term "Credit Agreement", as used in the other Loan Documents, shall mean the Restated Credit Agreement. All Tranche A Term Loans, Tranche B Term Loans, Tranche C Term Loans, Tranche D Term Loans, Revolving Loans, Swingline Loans and Letters of Credit outstanding under the Existing Credit Agreement on the Restatement Effective Date (to the extent not repaid) shall continue to be outstanding under the Restated Credit Agreement and the terms of the Restated Credit Agreement shall govern the rights of the Lenders and the Issuing Bank with respect thereto. SECTION 2. Conversion of Revolving Loans. On the Restatement Effective Date, upon the effectiveness of the Restated Credit Agreement pursuant to Section 1, Revolving Loans outstanding under the Existing Credit Agreement in an aggregate principal amount of $62,500,000 shall be automatically converted into an equivalent amount of Tranche R Term Loans. Such conversion shall be deemed to permanently reduce the Revolving Commitments in an amount equal to $62,500,000 and shall be made ratably among the Revolving Lenders in accordance with their respective Revolving Commitments. The Borrower shall elect, by notice to the Administrative Agent on or prior to the Restatement Effective Date, which outstanding Revolving Borrowing or Revolving Borrowings (or portion thereof) shall be so converted. Such conversion shall not affect accrual interest on any Borrowing or Borrowings so converted or terminate any Interest Period in effect at the time. SECTION 3. Waiver of Notice. The Lenders party hereto hereby waive any provision of the Restated Credit Agreement that requires the Borrower to give prior written notice of a prepayment of Term Loans or a reduction of Revolving Commitments, to the extent notice of prepayment is required in connection with application of the Net Proceeds of the issuance of the First Lien Notes in accordance with the Restated Credit Agreement or notice of reduction of Revolving Commitments is required with respect to the reduction of Revolving Commitments pursuant to Section 2. SECTION 4. Amendment of Security Documents; Collateral Sharing Agreement. Each Lender party hereto hereby (a) authorizes the Collateral Agent to execute and deliver any amendments or modifications to the Security Documents that the Collateral Agent determines to be necessary or appropriate to permit the Liens granted thereunder to secure the First Lien Notes equally and ratably with the Obligations, (b) consents to all such amendments or modifications and (c) authorizes the Collateral Agent to enter into a Collateral Sharing Agreement that will be binding on the Lenders; provided that such amendments or modifications to the Security Documents and such Collateral Sharing Agreement shall not become effective prior to the Restatement Effective Date. SECTION 5. Representations and Warranties. Each of Holdings and the Borrower represents and warrants to the Administrative Agent and to each of the Lenders that: (a) This Agreement has been duly authorized, executed and delivered by each of Holdings and the Borrower and constitutes a legal, valid and binding obligation of Holdings and the Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. 3 (b) Each of the representations and warranties of Holdings and the Borrower set forth in the Loan Documents is true and correct on and as of the date hereof, except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties are true and correct as of such earlier date. (c) No Default has occurred and is continuing. SECTION 6. Conditions to Effectiveness. The amendment and restatement of the Existing Credit Agreement as contemplated by Section 1 shall become effective on the date (the "Restatement Effective Date") that the First Lien Notes are issued, subject to satisfaction of the following conditions on or prior to such date: (a) the Administrative Agent shall have received counterparts of this Agreement that, when taken together, bear the signatures of Holdings, the Borrower and the Required Lenders; (b) all fees and expenses required to be paid or reimbursed by the Borrower under or in connection with this Agreement or the Existing Credit Agreement (and in the case of expenses to be reimbursed, including fees, charges and disbursements of the Administrative Agent's counsel or other advisors, in each case to the extent invoiced in writing to the Borrower at least two Business Days prior to the Restatement Effective Date) shall have been paid or reimbursed, as applicable; (c) the Collateral Sharing Agreement shall be reasonably satisfactory in form and substance to the Administrative Agent and shall have been executed and delivered by all parties thereto and shall be in full force and effect; (d) the terms and conditions of the First Lien Notes and the First Lien Documents (including but not limited to terms and conditions relating to payment, covenants, events of default, remedies and maturity) shall be reasonably satisfactory to the Administrative Agent; (e) the Security Documents shall have been amended and modified as contemplated by Section 4 of this Agreement and such amendment and modifications shall be reasonably satisfactory in form and substance to the Administrative Agent; and (f) the gross proceeds from the First Lien Notes shall not be less than $150,000,000; provided that the amendment and restatement of the Existing Credit Agreement contemplated hereby shall not become effective unless the First Lien Notes are issued, and all such conditions are satisfied, on or prior to March 31, 2003. The Administrative Agent shall notify the Lenders when the Restatement Effective Date occurs. SECTION 7. Amendment and Restatement Fee. In consideration of the agreements of the Lenders contained in this Agreement, the Borrower agrees to pay to the Administrative Agent, for the account of each Lender that delivers an executed counterpart of this Agreement at or prior to 12:00 noon, New York City time, on 4 February 14, 2003, a fee in an amount equal to 0.250% of the sum of such Lender's Revolving Commitment and outstanding Term Loans as of the Restatement Effective Date (determined after giving effect to all reductions of Revolving Commitments, conversions to Tranche R Term Loans and prepayments of Loans that are made on such date); provided that such fee shall not be payable unless and until the Restated Credit Agreement becomes effective as provided in Section 6. SECTION 8. No Novation. Neither this Agreement nor the effectiveness of the Restated Credit Agreement shall extinguish the obligations for the payment of money outstanding under the Existing Credit Agreement. Nothing herein contained shall be construed as a substitution or novation of the obligations outstanding under the Existing Credit Agreement, which shall remain in full force and effect, except as modified hereby or by instruments executed concurrently herewith. Nothing express or implied in this Agreement, the Restated Credit Agreement or any other document contemplated hereby or thereby shall be construed as a release or other discharge of Holdings, the Borrower or any other Loan Party under the Existing Credit Agreement or any Loan Document from any of its obligations and liabilities thereunder. Each of the Existing Credit Agreement and the other Loan Documents shall remain in full force and effect, until and except as modified hereby or in connection herewith. This Agreement shall be a Loan Document for all purposes. SECTION 9. Notices. All notices hereunder shall be given in accordance with the provisions of Section 9.01 of the Restated Credit Agreement. SECTION 10. Applicable Law; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. EACH PARTY HERETO HEREBY AGREES AS SET FORTH IN SECTION 9.10 OF THE RESTATED CREDIT AGREEMENT AS IF SUCH SECTION WERE SET FORTH IN FULL HEREIN. SECTION 11. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one agreement. Delivery of an executed signature page to this Agreement by facsimile transmission shall be effective as delivery of a manually signed counterpart of this Agreement. SECTION 12. Expenses. The Borrower agrees to reimburse the Administrative Agent for its reasonable out-of-pocket expenses in connection with this Agreement, including the fees, charges and disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent. SECTION 13. Headings. The Section headings used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first written above. ON SEMICONDUCTOR CORPORATION, by /s/ John T. Kurtzweil ------------------------- Name: John T. Kurtzweil Title: Senior Vice President, Chief Financial Officer and Treasurer SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, by /s/ John T. Kurtzweil ------------------------- Name: John T. Kurtzweil Title: Senior Vice President, Chief Financial Officer and Treasurer JPMORGAN CHASE BANK, individually and as administrative agent, by /s/ Edmond DeForest ------------------------- Name: Edmond DeForest Title: Vice President 6 SIGNATURE PAGE TO THE AMENDMENT AND RESTATEMENT AGREEMENT DATED AS OF FEBRUARY 14, 2003, RELATING TO THE CREDIT AGREEMENT AMONG ON SEMICONDUCTOR CORPORATION, SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, THE LENDERS PARTY THERETO, JPMORGAN CHASE BANK, AS ADMINISTRATIVE AGENT, COLLATERAL AGENT AND SYNDICATION AGENT, AND CREDIT LYONNAIS NEW YORK BRANCH, CREDIT SUISSE FIRST BOSTON AND LEHMAN COMMERCIAL PAPER INC., AS CO-DOCUMENTATION AGENTS. Name of Institution: Cerberus Partners, L.P. --------------------------- BY: Cerberus Associates, L.L.C. General Partner by /s/ Kevin Genda --------------------------- Name: Kevin Genda Title: Managing Director EXHIBIT A ================================================================================ AMENDED AND RESTATED CREDIT AGREEMENT dated as of August 4, 1999, as Amended and Restated as of February 14, 2003, among ON SEMICONDUCTOR CORPORATION, SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, as Borrower, The Lenders Party Hereto, JPMORGAN CHASE BANK, as Administrative Agent, CREDIT LYONNAIS NEW YORK BRANCH, as Co-Documentation Agent, CREDIT SUISSE FIRST BOSTON, as Co-Documentation Agent, and LEHMAN COMMERCIAL PAPER INC., as Co-Documentation Agent --------------------------- J.P. MORGAN SECURITIES INC., as Arranger ================================================================================ [CS&M Reference Number: 6700-787] TABLE OF CONTENTS
Page ---- ARTICLE I Definitions SECTION 1.01. Defined Terms.......................................................... 1 SECTION 1.02. Classification of Loans and Borrowings................................. 31 SECTION 1.03. Terms Generally........................................................ 31 SECTION 1.04. Accounting Terms; GAAP................................................. 31 SECTION 1.05. Interim Financial Calculations......................................... 32 ARTICLE II The Credits SECTION 2.01. Commitments............................................................ 32 SECTION 2.02. Loans and Borrowings................................................... 33 SECTION 2.03. Requests for Borrowings................................................ 33 SECTION 2.04. Swingline Loans........................................................ 34 SECTION 2.05. Letters of Credit...................................................... 35 SECTION 2.06. Funding of Borrowings.................................................. 39 SECTION 2.07. Interest Elections..................................................... 40 SECTION 2.08. Termination and Reduction of Commitments............................... 41 SECTION 2.09. Repayment of Loans; Evidence of Debt................................... 42 SECTION 2.10. Amortization of Term Loans............................................. 42 SECTION 2.11. Prepayment of Loans.................................................... 45 SECTION 2.12. Fees................................................................... 48 SECTION 2.13. Interest............................................................... 49 SECTION 2.14. Alternate Rate of Interest............................................. 50 SECTION 2.15. Increased Costs........................................................ 50 SECTION 2.16. Break Funding Payments................................................. 51 SECTION 2.17. Taxes.................................................................. 51 SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Set-offs............ 53 SECTION 2.19. Mitigation Obligations; Replacement of Lenders......................... 54 ARTICLE III Representations and Warranties SECTION 3.01. Organization; Powers................................................... 55 SECTION 3.02. Authorization; Enforceability.......................................... 55 SECTION 3.03. Governmental Approvals; No Conflicts................................... 55 SECTION 3.04. Financial Condition; No Material Adverse Change........................ 56 SECTION 3.05. Properties............................................................. 56 SECTION 3.06. Litigation and Environmental Matters................................... 57 Contents, p. 2
SECTION 3.07. Compliance with Laws and Agreements.................................... 57 SECTION 3.08. Investment and Holding Company Status.................................. 57 SECTION 3.09. Taxes.................................................................. 57 SECTION 3.10. ERISA.................................................................. 58 SECTION 3.11. Disclosure............................................................. 58 SECTION 3.12. Subsidiaries........................................................... 58 SECTION 3.13. Insurance.............................................................. 58 SECTION 3.14. Labor Matters.......................................................... 58 SECTION 3.15. Solvency............................................................... 59 SECTION 3.16. Senior Indebtedness.................................................... 59 SECTION 3.17. Year 2000.............................................................. 59 SECTION 3.18. Acquisition............................................................ 59 ARTICLE IV Conditions SECTION 4.01. [Intentionally Omitted]................................................ 59 SECTION 4.02. Each Credit Event...................................................... 60 ARTICLE V Affirmative Covenants SECTION 5.01. Financial Statements and Other Information............................. 60 SECTION 5.02. Notices of Material Events............................................. 62 SECTION 5.03. Information Regarding Collateral....................................... 62 SECTION 5.04. Existence; Conduct of Business......................................... 63 SECTION 5.05. Payment of Obligations................................................. 63 SECTION 5.06. Maintenance of Properties.............................................. 63 SECTION 5.07. Insurance.............................................................. 63 SECTION 5.08. Casualty and Condemnation.............................................. 63 SECTION 5.09. Books and Records; Inspection and Audit Rights......................... 63 SECTION 5.10. Compliance with Laws................................................... 64 SECTION 5.11. Use of Proceeds and Letters of Credit.................................. 64 SECTION 5.12. Additional Subsidiaries................................................ 64 SECTION 5.13. Further Assurances..................................................... 64 SECTION 5.14. Interest Rate Protection............................................... 64 ARTICLE VI Negative Covenants SECTION 6.01. Indebtedness; Certain Equity Securities................................ 65 SECTION 6.02. Liens.................................................................. 67 SECTION 6.03. Fundamental Changes.................................................... 68 SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions.............. 69 SECTION 6.05. Asset Sales............................................................ 71 Contents, p. 3
SECTION 6.06. Sale and Leaseback Transactions........................................ 72 SECTION 6.07. Hedging Agreements..................................................... 72 SECTION 6.08. Restricted Payments; Certain Payments of Indebtedness.................. 72 SECTION 6.09. Transactions with Affiliates........................................... 74 SECTION 6.10. Restrictive Agreements................................................. 74 SECTION 6.11. Amendment of Material Documents........................................ 75 SECTION 6.12. [Intentionally Omitted]................................................ 75 SECTION 6.13. [Intentionally Omitted]................................................ 75 SECTION 6.14. Capital Expenditures................................................... 75 SECTION 6.15. Minimum Consolidated EBITDA............................................ 76 SECTION 6.16. Minimum Cash and Cash Equivalents...................................... 76 SECTION 6.17. OnMOS Joint Venture Interest........................................... 76 ARTICLE VII Events of Default SECTION 7.01. Events of Default...................................................... 76 SECTION 7.02. Exclusion of Immaterial Subsidiaries................................... 79 ARTICLE VIII The Administrative Agent ARTICLE IX Miscellaneous SECTION 9.01. Notices................................................................ 81 SECTION 9.02. Waivers; Amendments.................................................... 81 SECTION 9.03. Expenses; Indemnity; Damage Waiver..................................... 83 SECTION 9.04. Successors and Assigns................................................. 84 SECTION 9.05. Survival............................................................... 86 SECTION 9.06. Counterparts; Integration; Effectiveness............................... 86 SECTION 9.07. Severability........................................................... 87 SECTION 9.08. Right of Setoff........................................................ 87 SECTION 9.09. GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS............. 87 SECTION 9.10. WAIVER OF JURY TRIAL................................................... 88 SECTION 9.11. Headings............................................................... 88 SECTION 9.12. Confidentiality........................................................ 88 SECTION 9.13. Interest Rate Limitation............................................... 88 SECTION 9.14. Existing Credit Agreement; Effectiveness of Amendment and Restatement.. 89 SECTION 9.15. Additional Provisions for Tranche D Lenders............................ 89 SECTION 9.16. Additional Provisions for Tranche R Lenders............................ 89 Contents, p. 4 SCHEDULES: Schedule 1.01 -- Mortgaged Properties Schedule 1.01(b) -- Restatement Mortgaged Properties Schedule 2.01 -- Commitments Schedule 3.05 -- Real Property Schedule 3.06 -- Disclosed Matters Schedule 3.12 -- Subsidiaries Schedule 3.13 -- Insurance Schedule 6.01 -- Existing Indebtedness Schedule 6.02 -- Existing Liens Schedule 6.04 -- Existing Investments Schedule 6.10 -- Existing Restrictions EXHIBITS: Exhibit A -- Form of Assignment and Acceptance Exhibit B-1 -- Form of Opinion of Borrower's Counsel Exhibit B-2 -- Form of Opinion of Local Counsel Exhibit C -- Guarantee Agreement Exhibit D -- Indemnity, Subrogation and Contribution Agreement Exhibit E -- Pledge Agreement Exhibit F -- Security Agreement Exhibit G -- Collateral Assignment Exhibit H -- Form of Reaffirmation Agreement AMENDED AND RESTATED CREDIT AGREEMENT dated as of August 4, 1999, as amended and restated as of February 14, 2003 (this "Agreement"), among ON SEMICONDUCTOR CORPORATION (formerly known as SCG Holding Corporation), SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, the LENDERS party hereto, and JPMORGAN CHASE BANK (formerly known as The Chase Manhattan Bank), as Administrative Agent, Collateral Agent and Syndication Agent hereunder, and CREDIT LYONNAIS NEW YORK BRANCH, CREDIT SUISSE FIRST BOSTON and LEHMAN COMMERCIAL PAPER INC., as co-documentation agents hereunder. WHEREAS, Holdings, the Borrower, the Lenders party thereto and JPMorgan Chase Bank, as administrative agent, are parties to a Credit Agreement dated as of August 4, 1999, as amended and restated as of April 3, 2000 (as further amended, supplemented and modified, the "Existing Credit Agreement"), as in effect immediately prior to the Restatement Effective Date (as defined in the Existing Credit Agreement), which Existing Credit Agreement amended and restated the Original Credit Agreement (as defined herein); WHEREAS, Holdings, the Borrower, the Required Lenders (as defined in the Existing Credit Agreement) and the Administrative Agent, are parties to an Amendment and Restatement Agreement dated as of February 14, 2003 (the "Amendment and Restatement Agreement"); and WHEREAS, subject to the satisfaction of the conditions set forth in the Amendment and Restatement Agreement, the Existing Credit Agreement shall be amended and restated as provided herein. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I Definitions SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "Acquisition" means the acquisition pursuant to the Acquisition Agreement by the Borrower of all the outstanding capital stock of Cherry Semiconductor for a purchase price not to exceed $250,000,000 and the other transactions contemplated by the Acquisition Agreement and the documents related thereto. "Acquisition Agreement" means the Stock Purchase Agreement dated as of March 8, 2000, between the Borrower, Holdings and the Seller. 2 "Acquisition Transactions" means the Acquisition and the Loan Transactions entered into in connection with the borrowing of the Tranche D Term Loans. "Adjusted LIBO Rate" means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "Administrative Agent" means JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), in its capacity as administrative agent for the Lenders hereunder. "Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. Notwithstanding the foregoing, no individual shall be deemed to be an Affiliate of a Person solely by reason of his or her being an officer or director of such Person. "Alternate Base Rate" means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, respectively. "Amendment and Restatement Agreement" has the meaning given to such term in the recitals hereto. "Applicable Percentage" means, with respect to any Revolving Lender, the percentage of the total Revolving Commitments represented by such Lender's Revolving Commitment. If the Revolving Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Revolving Commitments most recently in effect, giving effect to any assignments. "Applicable Rate" means, for any day (a) with respect to any Loan, (i) 3.00% per annum, in the case of an ABR Loan, or 4.00% per annum, in the case of a Eurodollar Loan, plus (ii) either (A) 2.00% per annum prior to and including September 30, 2001, or (B) 3.00% per annum from and including October 1, 2001 to and including the Supplemental Interest Termination Date, or (C) 1.00% per annum on and after the date that the aggregate principal amount of outstanding Loans plus the LC Exposure is less than $750,000,000 (notwithstanding whether clause (A) or (B) above would otherwise apply) to and including the Supplemental Interest Termination Date, and (b) with respect to the commitment fees payable hereunder, 0.50% per annum; provided that all Supplemental Interest shall cease to accrue on the Supplemental Interest Termination Date and, if the Supplemental Interest Termination Date does not occur on March 31, 2003, then any Supplemental Interest that accrues after March 31, 2003, shall 3 be reduced to a rate per annum determined by multiplying the rate otherwise applicable pursuant to clause (a)(ii) above by a fraction, the numerator of which shall be equal to the total amount of Supplemental Interest accrued prior to March 31, 2003, that remains unpaid on March 31, 2003 (giving effect to any payments made on March 31, 2003), and the denominator of which shall be equal to the total amount of Supplemental Interest accrued prior to March 31, 2003. "Approved Fund" means, with respect to any Lender that is a fund that invests in bank loans and similar commercial extensions of credit, any other fund that invests in bank loans and similar commercial extensions of credit and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "Assessment Rate" means, for any day, the annual assessment rate in effect on such day that is payable by a member of the Bank Insurance Fund classified as "well-capitalized" and within supervisory subgroup "B" (or a comparable successor risk classification) within the meaning of 12 C.F.R. Part 327 (or any successor provision) to the Federal Deposit Insurance Corporation for insurance by such Corporation of time deposits made in dollars at the offices of such member in the United States, provided that if, as a result of any change in any law, rule or regulation, it is no longer possible to determine the Assessment Rate as aforesaid, then the Assessment Rate shall be such annual rate as shall be determined by the Administrative Agent to be representative of the cost of such insurance to the Lenders. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "Base CD Rate" means the sum of (a) the Three-Month Secondary CD Rate multiplied by the Statutory Reserve Rate plus (b) the Assessment Rate. "Bermuda IP Subsidiary" means ON Semiconductor Trading Ltd., a Bermuda corporation that is a wholly-owned subsidiary of the Borrower (owned directly by the Borrower) formed in connection with the Foreign Reorganization. "Board" means the Board of Governors of the Federal Reserve System of the United States of America. "Borrower" means Semiconductor Components Industries, LLC, a Delaware limited liability company. "Borrowing" means (a) Loans of the same Class and Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect, or (b) a Swingline Loan. "Borrowing Request" means a request by the Borrower for a Borrowing in accordance with Section 2.03. "Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed, provided that, when used in connection with a Eurodollar Loan, the term 4 "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Expenditures" means, for any period, without duplication, (a) the additions to property, plant and equipment and other capital expenditures of the Borrower and its consolidated Subsidiaries that are (or would be) set forth in a consolidated statement of cash flows of the Borrower for such period prepared in accordance with GAAP and (b) Capital Lease Obligations incurred by the Borrower and its consolidated Subsidiaries during such period, provided that the term "Capital Expenditures" (i) shall be net of landlord construction allowances, (ii) shall not include expenditures made in connection with the repair or restoration of assets with insurance or condemnation proceeds and (iii) shall not include the purchase price of equipment to the extent consideration therefor consists of used or surplus equipment being traded in at such time or the proceeds of a concurrent sale of such used or surplus equipment, in each case in the ordinary course of business. "Capital Lease Obligations" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital lease obligations on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Certificate of Designation" means the certificate of designations of Holdings with respect to the Cumulative Preferred Stock. "Change in Control" means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person other than Holdings of any Equity Interest in Borrower; (b) prior to an IPO, the failure by TPG to own (and retain the right to vote), directly or indirectly, beneficially and of record, Equity Interests in Holdings representing greater than 40% of each of the aggregate ordinary voting power and aggregate equity value represented by the issued and outstanding Equity Interests in Holdings; (c) after an IPO, the failure by TPG to own (and retain the right to vote), directly or indirectly, beneficially and of record, Equity Interests in Holdings representing at least 15% of each of the aggregate ordinary voting power and the aggregate equity value represented by the issued and outstanding Equity Interests in Holdings; (d) after an IPO, the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the Effective Date), of Equity Interests representing a greater percentage of either the aggregate ordinary voting power or the aggregate equity value of Holdings than owned, directly or indirectly, beneficially and of record, by TPG; (e) occupation of a majority of the seats (other than vacant seats) on the board of directors of Holdings by Persons who were neither (i) nominated by the board of directors of Holdings nor (ii) appointed by directors so nominated; (f) the occurrence of a "Change of Control", as defined in the Subordinated Debt Documents; (g) the occurrence of a "Change of Control" as defined in the Second Lien Documents; or (h) the occurrence of a "Change of Control" as defined in the First Lien Documents. "Change in Law" means (a) the adoption of any law, rule or regulation after the Effective Date, (b) any change in any law, rule or regulation or in the 5 interpretation or application thereof by any Governmental Authority after the Effective Date or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender's or the Issuing Bank's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority first made or issued after the Effective Date. "Cherry Semiconductor" means Cherry Semiconductor Corporation, a Rhode Island corporation. "Class", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans, Tranche A Term Loans, Tranche B Term Loans, Tranche C Term Loans, Tranche D Term Loans, Tranche R Term Loans or Swingline Loans and, when used in reference to any Commitment, refers to whether such Commitment is a Revolving Commitment, Tranche A Commitment, Tranche B Commitment, Tranche C Commitment or Tranche D Commitment. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means any and all "Collateral", as defined in any applicable Security Document. "Collateral Agent" means the "Collateral Agent", as defined in any applicable Security Document. "Collateral and Guarantee Requirement" means the requirement that: (a) the Administrative Agent shall have received from each Loan Party either (i) a counterpart of each of the Guarantee Agreement, the Indemnity, Subrogation and Contribution Agreement, the Pledge Agreement, the Collateral Assignment, the Security Agreement and the Collateral Sharing Agreement duly executed and delivered on behalf of such Loan Party or (ii) in the case of any Person that becomes a Loan Party after the Effective Date, a supplement to each of the Guarantee Agreement, the Indemnity, Subrogation and Contribution Agreement, the Pledge Agreement, the Security Agreement and the Collateral Sharing Agreement, in each case in the form specified therein, duly executed and delivered on behalf of such Loan Party; (b) all outstanding Equity Interests of the Borrower and each Subsidiary owned directly by or directly on behalf of any Loan Party, shall have been pledged pursuant to the Pledge Agreement (except that the Loan Parties shall not be required to pledge more than 65% of the outstanding voting stock of any Foreign Subsidiary and shall not be required to pledge any Equity Interests in any Foreign Joint Venture Company to the extent that such a pledge is prohibited by the constitutive documents of such Foreign Joint Venture Company or applicable law) and the Collateral Agent shall have received certificates or other instruments representing all such Equity Interests, together with stock powers or other instruments of transfer with respect thereto endorsed in blank; 6 (c) all Indebtedness of Holdings, the Borrower and each Subsidiary that is owing to any Loan Party shall be evidenced by a promissory note and shall have been pledged pursuant to the Pledge Agreement and the Collateral Agent shall have received all such promissory notes, together with instruments of transfer with respect thereto endorsed in blank; provided that the requirements of this paragraph (c) shall not apply to the extent the Collateral Agent has waived compliance with Section 2(b) of the Pledge Agreement and the Required Lenders have consented to such waiver; (d) all documents and instruments, including Uniform Commercial Code financing statements, required by law or reasonably requested by the Collateral Agent to be filed, registered or recorded to create the Liens intended to be created by the Security Agreement and the Pledge Agreement (including any supplements thereto), after giving effect to the Restatement Transactions, and perfect such Liens to the extent required by, and with the priority required by, the Security Agreement and the Pledge Agreement, shall have been filed, registered or recorded or delivered to the Collateral Agent for filing, registration or recording; (e) the Administrative Agent shall have received (i) counterparts of a Mortgage with respect to each Mortgage Property and amendments to each such Mortgage providing that the Tranche R Term Loans and the First Lien Notes (in addition to the other Obligations) shall be secured by a Lien on such Mortgaged Property, signed on behalf of the record owner of such Mortgaged Property, (ii) counterparts of a Mortgage with respect to each Restatement Mortgaged Property signed on behalf of the record owner of such real property, (iii) a policy or policies of title insurance issued by a nationally recognized title insurance company, insuring the Lien of each such Mortgage as a valid first Lien on the Mortgaged Property or Restatement Mortgaged Property, as the case may be, described therein, free of any other Liens except as expressly permitted by Section 6.02, together with such endorsements, coinsurance and reinsurance as the Collateral Agent or the Required Lenders may reasonably request, and (iv) such surveys, abstracts, appraisals, legal opinions and other documents as the Collateral Agent or the Required Lenders may reasonably request with respect to any such Mortgage or Mortgaged Property or Restatement Mortgaged Property, as the case may be; and (f) each Loan Party shall have obtained all material consents and approvals required to be obtained by it in connection with the execution and delivery of all Security Documents (or supplements thereto) to which it is a party, the performance of its obligations thereunder and the granting by it of the Liens thereunder. "Collateral Assignment" means the Collateral Assignment, entered into in connection with the Original Credit Agreement, attached hereto as Exhibit G, between the Borrower and the Collateral Agent. "Collateral Sharing Agreement" means the agreement entered into among Holdings, the Borrower, the Collateral Agent and the trustee under the First Lien Note Indenture, providing for (a) the sharing of the Collateral granted pursuant to the Security Documents on a pari passu basis with the holders of the First Lien Notes, (b) the exercise of remedies under the Security Documents and (c) related intercreditor matters. 7 "Commitment" means a Revolving Commitment, Tranche A Commitment, Tranche B Commitment, Tranche C Commitment or Tranche D Commitment or any combination thereof (as the context requires). "Consolidated Cash Interest Expense" means, for any period (subject to Section 1.05), the excess of (a) the sum of (i) the interest expense (including (i) the aggregate amount of accrued letter of credit fees and (ii) imputed interest expense in respect of Capital Lease Obligations) of the Borrower and the Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, (ii) any interest accrued during such period in respect of Indebtedness of the Borrower or any Subsidiary that is required to be capitalized rather than included in consolidated interest expense for such period in accordance with GAAP, (iii) the amount of cash dividends paid on any preferred stock by Holdings during such period and (iv) any cash payments made during such period in respect of obligations referred to in clause (b)(ii) below that were amortized or accrued in a previous period, minus (b) the sum of (i) to the extent included in such consolidated interest expense for such period, non-cash amounts attributable to amortization of financing costs paid in a previous period, plus (ii) to the extent included in such consolidated interest expense for such period, non-cash amounts attributable to amortization of debt discounts or accrued interest or dividends payable in kind for such period (including with respect to the Junior Subordinated Note or the Cumulative Preferred Stock). "Consolidated EBITDA" means, for any period (subject to Section 1.05), Consolidated Net Income for such period plus (a) without duplication and to the extent deducted in determining such Consolidated Net Income, the sum of (i) consolidated interest expense for such period, (ii) consolidated income tax expense for such period, (iii) all amounts attributable to depreciation and amortization for such period, (iv) the aggregate amount of letter of credit fees accrued during such period, (v) all extraordinary charges during such period, (vi) noncash expenses during such period resulting from the grant of stock options to management and employees of Holdings, the Borrower or any of the Subsidiaries, (vii) the aggregate amount of deferred financing expenses for such period, (viii) all other noncash expenses or losses of Holdings, the Borrower or any of the Subsidiaries for such period (excluding any such charge that constitutes an accrual of or a reserve for cash charges for any future period), (ix) any non-recurring fees, expenses or charges realized by Holdings, the Borrower or any of the Subsidiaries for such period related to any offering of capital stock or incurrence of Indebtedness, (x) noncash dividends on the Cumulative Preferred Stock, (xi) cash restructuring charges (A) during the fiscal year ending on December 31, 2001 and the portion of the fiscal year ending on June 30, 2002 (or any fiscal quarter of such portion) not in excess of $131,000,000 in the aggregate (for all such periods), and (B) during any fiscal year (or any fiscal quarter of any such fiscal year) ending on or prior to December 31, 2002 (or any quarter of such fiscal year) not in excess of an additional $10,000,000 in the aggregate (for all such periods), (xii) the amount of cash fees, service and product payments, dividends and other distributions actually paid to the Borrower or a Subsidiary by the OnMOS Joint Venture during such period and (xiii) fees and expenses of Alvarez & Marsal, Inc., paid by or reimbursed by the Borrower pursuant to Section 9.03 hereof and minus (b) without duplication and to the extent included in determining such Consolidated Net Income, (i) any extraordinary gains for such period, (ii) all noncash items increasing Consolidated Net Income for such period (excluding any items that represent the reversal of any accrual of, or cash reserve for, anticipated cash charges in any prior period) and (iii) all gains during such period attributable to any sale or disposition of assets (other than in the 8 ordinary course of business), all determined on a consolidated basis in accordance with GAAP. For purposes of calculating the Leverage Ratio as of any date, if the Borrower or any consolidated Subsidiary has made any Permitted Acquisition or sale, transfer, lease or other disposition of assets outside of the ordinary course of business permitted by Section 6.05 during the period of four consecutive fiscal quarters ending on the date on which the most recent fiscal quarter ended, Consolidated EBITDA for the relevant period for testing compliance shall be calculated after giving pro forma effect thereto, as if such Permitted Acquisition or sale, transfer, lease or other disposition of assets outside of the ordinary course of business (and any related incurrence, repayment or assumption of Indebtedness with any new Indebtedness being deemed to be amortized over the applicable testing period in accordance with its terms) had occurred on the first day of the relevant period for testing compliance. "Consolidated Net Income" means, for any period, the net income or loss of Holdings, the Borrower and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, provided that there shall be excluded from such net income or loss (a) the income of any Person (other than a consolidated Subsidiary) in which any other Person (other than Holdings, the Borrower or any consolidated Subsidiary or any director holding qualifying shares in compliance with applicable law) owns an Equity Interest, except to the extent of the amount of dividends or other distributions actually paid to the Borrower or any of the consolidated Subsidiaries by such Person during such period, and (b) the income or loss of any Person accrued prior to the date on which it becomes a Subsidiary or is merged into or consolidated with the Borrower or any consolidated Subsidiary or the date on which such Person's assets are acquired by the Borrower or any consolidated Subsidiary. For purposes of calculating Consolidated EBITDA and Excess Cash Flow, Consolidated Net Income shall be calculated excluding all income, expenses, gains, losses and other items of the OnMOS Joint Venture. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. The terms "Controlling" and "Controlled" have meanings correlative thereto. "Cumulative Preferred Stock" means the 12% Cumulative Preferred Stock of Holdings with an aggregate liquidation preference on the Effective Date of $209,000,000. "Default" means any event or condition that constitutes an Event of Default or that upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Disclosed Matters" means the actions, suits and proceedings and the environmental matters disclosed in Schedule 3.06. "Documentation Agents" means Credit Lyonnais New York Branch, DLJ Capital Funding, Inc. and Lehman Commercial Paper Inc., in their capacity as co-documentation agents hereunder. "dollars" or "$" refers to lawful money of the United States of America. 9 "Effective Date" means August 4, 1999, the date on which the conditions specified in Section 4.01 of the Original Credit Agreement were satisfied. "Environmental Laws" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by or with any Governmental Authority, relating in any way to the environment, preservation or restoration of natural resources, the management, Release or threatened Release of any Hazardous Material or to health and safety matters. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, administrative oversight costs, fines, penalties or indemnities), of Holdings, the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the Release or threatened Release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "Equity Contribution" means the contribution by TPG of not less than $337,500,000 to the Investor. "Equity Interests" means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan under Section 4042 of ERISA; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a 10 determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Eurodollar", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate. "Event of Default" has the meaning assigned to such term in Article VII. "Excess Cash Flow" means, for any fiscal year, the sum (without duplication) of: (a) Consolidated Net Income for such fiscal year, adjusted to exclude any gains or losses attributable to Prepayment Events, plus (without duplication) the amount of cash dividends or other distributions actually paid to the Borrower or a Subsidiary by the OnMos Joint Venture during such period; plus (b) depreciation, amortization and other non-cash charges or losses deducted in determining such Consolidated Net Income for such fiscal year; plus (c) the sum of (i) the amount, if any, by which Net Working Capital decreased during such fiscal year plus (ii) the net amount, if any, by which the consolidated deferred revenues of Holdings, the Borrower and the consolidated Subsidiaries increased during such fiscal year; minus (d) the sum of (i) any non-cash gains included in determining such Consolidated Net Income for such fiscal year plus (ii) the amount, if any, by which Net Working Capital increased during such fiscal year plus (iii) the net amount, if any, by which the consolidated deferred revenues of Holdings, the Borrower and the consolidated Subsidiaries decreased during such fiscal year; minus (e) Capital Expenditures for such fiscal year (except (i) to the extent attributable to the incurrence of Capital Lease Obligations or otherwise financed by incurring Long-Term Indebtedness or (ii) Capital Expenditures made pursuant to the first proviso to Section 2.11(c) or the proviso to the first paragraph of Section 6.14); minus (f) the aggregate principal amount of Long-Term Indebtedness repaid or prepaid by the Borrower and the consolidated Subsidiaries during such fiscal year, excluding (i) Indebtedness in respect of Revolving Loans and Letters of Credit, (ii) Term Loans prepaid pursuant to Section 2.11(a), 2.11(c) or (d), and (iii) repayments or prepayments of Long-Term Indebtedness financed by incurring other Long-Term Indebtedness; minus (g) the aggregate amount of all prepayments of Revolving Loans made during such period to the extent accompanying reductions of the total Revolving Commitments. "Excluded Taxes" means, with respect to the Administrative Agent, any Lender, the Issuing Bank or any other recipient of any payment to be made by or on 11 account of any obligation of the Borrower hereunder, (a) doing business, income or franchise taxes imposed on (or measured by) its net income, capital or any similar alternate basis by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction described in clause (a) above and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.19(b)), any withholding tax that (i) is in effect and would apply to amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to any withholding tax pursuant to Section 2.17(a), or (ii) is attributable to such Foreign Lender's failure to comply with Section 2.17(e). "Existing Credit Agreement" has the meaning given to such term in the recitals hereto. "Facilities Transfer" means the transfer by the Borrower and/or one or more of its Subsidiaries of the packaging and testing facilities located in Carmona, Philippines, Seremban, Malaysia and Guadalajara, Mexico, which transfer may involve one or more transactions or series of transactions taking the form of (i) sales, leases or other transfers or dispositions of assets, (ii) sales or other transfers or dispositions of capital stock and/or debt securities of Subsidiaries that directly or indirectly own such facilities, (iii) other types of transfers or dispositions, (iv) facilities closures or (v) any one or combination of the foregoing. "Federal Funds Effective Rate" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Financial Officer" means the chief financial officer, principal accounting officer, treasurer or controller of Holdings. "Financial Report" means a report containing the financial information set forth on Schedule 5.01, which report shall be certified by a Financial Officer. "Financing Transactions" means the transactions undertaken by Holdings, the Borrower and the Subsidiary Loan Parties in connection with the execution and delivery of the Original Credit Agreement and the Subordinated Debt Documents, the issuance of the Subordinated Debt, the issuance by the Borrower of the Junior Subordinated Note and the borrowing of the initial Loans. "First Lien Documents" means the First Lien Note Indenture, the Collateral Sharing Agreement, and all other instruments, agreements and other 12 documents evidencing or governing the First Lien Notes or providing for any Guarantee or other right in respect thereof. "First Lien Note Indenture" means the indenture pursuant to which the First Lien Notes are issued. "First Lien Notes" means the senior secured first lien notes to be co-issued by the Borrower and Holdings on the Restatement Effective Date. "Foreign Joint Venture Companies" means (i) Leshan-Phoenix Semiconductor Co., Ltd., an entity existing under the laws of the People's Republic of China, (ii) SMP, (iii) Tesla Sezam, a.s., a corporation existing under the laws of the Czech Republic, and (iv) Terosil, a.s., a corporation existing under the laws of the Czech Republic. "Foreign Lender" means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "Foreign Reorganization" means the reorganization of the Borrower's Foreign Subsidiaries and their operations (as described by the Borrower in its communications to the Lenders prior to October 20, 2000), pursuant to which, among other things, (a) certain activities performed by Foreign Subsidiaries, and certain activities performed by the Borrower, with respect to (i) research and development, (ii) sales and distribution and (iii) manufacturing will begin to be performed by separate Foreign Subsidiaries, (b) certain new Foreign Subsidiaries (including the Bermuda IP Subsidiary) will be formed and the ownership structure of certain existing Foreign Subsidiaries will be reorganized (resulting in, among other things, certain existing Foreign Subsidiaries that are owned directly by the Borrower becoming indirectly owned by the Borrower) and (c) the Borrower will enter into the IP License with the Bermuda IP Subsidiary pursuant to which (i) the Borrower will grant to the Bermuda IP Subsidiary a license to use certain intellectual property owned by the Borrower at the time of such reorganization and certain intellectual property acquired by the Borrower in the future and (ii) the Bermuda IP Subsidiary will agree to pay royalties to the Borrower in consideration therefor. "Foreign Subsidiary" means any Subsidiary that is organized under the laws of a jurisdiction other than the United States of America or any State thereof or the District of Columbia. "Funded Indebtedness" means, as of any date, (a) the aggregate principal amount of Indebtedness of the Borrower and the Subsidiaries outstanding as of such date (other than any Indebtedness with respect to which the Borrower is not obligated to pay or accrue any cash interest expense as of such date), in the amount that would be reflected on a balance sheet prepared as of such date on a consolidated basis in accordance with GAAP, and (b) the aggregate amount of any Guarantee by Holdings, the Borrower or any Subsidiary of any such Indebtedness of any other Person. "GAAP" means generally accepted accounting principles in the United States of America. 13 "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" of or by any Person (the "guarantor") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation, provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. "Guarantee Agreement" means the Guarantee Agreement, entered into in connection with the Original Credit Agreement, attached hereto as Exhibit C, among Holdings, the Subsidiary Loan Parties and the Collateral Agent for the benefit of the Secured Parties. "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes, and all substances or wastes of any nature regulated pursuant to any Environmental Law. "Hedging Agreement" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "Holdings" means SCG Holding Corporation, a Delaware corporation. "Indebtedness" of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all 14 obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. Notwithstanding anything to the contrary in this paragraph, the term "Indebtedness" shall not include (a) obligations under Hedging Agreements or (b) agreements providing for indemnification, purchase price adjustments or similar obligations incurred or assumed in connection with the acquisition or disposition of assets or stock. "Indemnified Taxes" means Taxes other than Excluded Taxes. "Indemnity, Subrogation and Contribution Agreement" means the Indemnity, Subrogation and Contribution Agreement, entered into in connection with the Original Credit Agreement, attached hereto as Exhibit D, among the Borrower, the Subsidiary Loan Parties and the Collateral Agent. "Information Memorandum" means the Confidential Information Memorandum dated March 2000, as modified or supplemented prior to the Restatement Effective Date, relating to the Borrower and the Acquisition Transactions. "Intercreditor Agreement" means the intercreditor agreement entered into among Holdings, the Borrower, the Administrative Agent and the trustee under the Second Lien Note Indenture (or any other trustee or agent to which Liens are granted under the Second Lien Security Documents), providing for (a) the priority of the Liens granted pursuant to the Security Documents over the Liens granted pursuant to the Second Lien Security Documents and (b) restrictions on the exercise of remedies under the Second Lien Security Documents. "Interest Election Request" means a request by the Borrower to convert or continue a Revolving Borrowing or Term Borrowing in accordance with Section 2.07. "Interest Expense Coverage Ratio" means, for any period, the ratio of (i) Consolidated EBITDA (plus any Supplemental Interest deducted in calculating Consolidated EBITDA) to (ii) Consolidated Cash Interest Expense (excluding any Supplemental Interest otherwise included therein), in each case for such period. "Interest Payment Date" means (a) with respect to any ABR Loan (other than a Swingline Loan), the last day of each calendar month, (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than one month's duration, each day prior to the last day of such Interest Period that occurs at intervals of one month's duration after the first day of such Interest Period, and (c) with respect to any Swingline Loan, the day that such Loan is required to be repaid. "Interest Period" means, with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect, provided that (a) if any Interest Period would end on a day 15 other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (b) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "Investor" means TPG Semiconductor Holdings LLC, a Delaware limited liability company that is wholly owned by TPG. "IP License" means the license agreement or agreements between the Borrower and the Bermuda IP Subsidiary providing for the licensing of intellectual property to the Bermuda Subsidiary of the Borrower. "IPO" means a bona fide underwritten initial public offering of voting common stock of Holdings as a direct result of which at least 10% of the aggregate voting common stock of Holdings (calculated on a fully diluted basis after giving effect to all options to acquire voting common stock of Holdings then outstanding, regardless of whether such options are then currently exercisable) is beneficially owned by Persons other than TPG, the Investor, Holdings and their respective Affiliates (including, in the case of Holdings, all directors, officers and employees of Holdings, the Borrower and any Subsidiary). "Issuing Bank" means JPMorgan Chase Bank, in its capacity as the issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.05(i). The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term "Issuing Bank" shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate. "Joint Venture Holding Companies" means SCG (Malaysia SMP) Holding Corporation, SCG (Czech) Holding Corporation and SCG (China) Holding Corporation, each a Delaware corporation. "Junior Subordinated Note" means the 10% Junior Subordinated Note due 2011 of the Borrower. "LC Disbursement" means a payment made by the Issuing Bank pursuant to a Letter of Credit. "LC Exposure" means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Revolving Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time. "Lenders" means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other 16 than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance. Unless the context otherwise requires, the term "Lenders" includes the Swingline Lender. "Leshan JV Agreement" means the Joint Venture Contract dated as of March 1, 1995, by and between Leshan Radio Company, Ltd. and Motorola International Development Corporation. "Letter of Credit" means any letter of credit issued pursuant to this Agreement. "Leverage Ratio" means, on any date, the ratio of (a) Funded Indebtedness as of such date to (b) Consolidated EBITDA (plus, without duplication, any Supplemental Interest deducted in calculating Consolidated EBITDA) for the period of four consecutive fiscal quarters of Holdings ended on such date (or, if such date is not the last day of a fiscal quarter, ended on the last day of the fiscal quarter of Holdings most recently ended prior to such date). "LIBO Rate" means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Dow Jones Market Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the LIBO Rate with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Liquidity Amount" means, at any time, the aggregate amount of cash and Permitted Investments owned by the Borrower and its consolidated subsidiaries at such time, excluding (i) cash or Permitted Investments owned by the OnMOS Joint Venture and (ii) cash or Permitted Investments subject to any Lien in favor of any Person other than the Collateral Agent for the benefit of the Secured Parties. "Loan Documents" means this Agreement, the Guarantee Agreement, the Indemnity, Subrogation and Contribution Agreement, the Security Documents, the Intercreditor Agreement and the Collateral Sharing Agreement. 17 "Loan Parties" means Holdings, the Borrower and the Subsidiary Loan Parties. "Loan Transactions" means the execution, delivery and performance by each Loan Party of the Loan Documents to which it is to be a party, the borrowing of Loans, the use of the proceeds thereof and the issuance of Letters of Credit hereunder. "Loans" means the loans made and the loans continued by the Lenders to the Borrower pursuant to this Agreement. "Long-Term Indebtedness" means any Indebtedness that, in accordance with GAAP, constitutes (or, when incurred, constituted) a long-term liability. "Material Adverse Effect" means a material adverse effect on (a) the business, assets, operations, properties, financial condition or prospects of Holdings, the Borrower and the Subsidiaries, taken as a whole, (b) the ability of the Loan Parties to perform their obligations under the Loan Documents or (c) any material rights of or benefits available to the Lenders under the Loan Documents. "Material Indebtedness" means Indebtedness (other than the Loans and Letters of Credit), or obligations in respect of one or more Hedging Agreements, of any one or more of Holdings, the Borrower and the Subsidiaries in an aggregate principal amount exceeding $10,000,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of Holdings, the Borrower or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that Holdings, the Borrower or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. "Measurement Period" has the meaning assigned to such term in Section 6.14. "Moody's" means Moody's Investors Service, Inc. "Mortgage" means a mortgage, deed of trust, assignment of leases and rents, leasehold mortgage or other security document granting a Lien on any Mortgaged Property or Restatement Mortgaged Property to secure the Obligations. Each Mortgage shall be reasonably satisfactory in form and substance to the Collateral Agent. "Mortgaged Property" means, initially, each parcel of real property and the improvements thereto owned by a Loan Party and identified on Schedule 1.01, and includes each other parcel of real property and improvements thereto with respect to which a Mortgage is granted pursuant to Section 5.12 or 5.13. "Motorola" means Motorola, Inc., a Delaware corporation. "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Proceeds" means, with respect to any event (a) the cash proceeds received in respect of such event, including (i) any cash received in respect of any non-cash proceeds, but only as and when received, (ii) in the case of a casualty or other 18 insured damage, insurance proceeds in excess of $1,000,000, and (iii) in the case of a condemnation or similar event, condemnation awards and similar payments, net of (b) the sum of (i) all reasonable fees and out-of-pocket expenses (including underwriting discounts and commissions and collection expenses) paid or payable by Holdings, the Borrower and the Subsidiaries to third parties in connection with such event, (ii) in the case of a sale, transfer or other disposition of an asset (including pursuant to a sale and leaseback transaction or a casualty or a condemnation or similar proceeding), the amount of all payments required to be made by Holdings, the Borrower and the Subsidiaries as a result of such event to repay Indebtedness (other than Loans) secured by such asset or otherwise subject to mandatory prepayment as a result of such event, and (iii) the amount of all taxes paid (or reasonably estimated to be payable) by Holdings, the Borrower and the Subsidiaries, and the amount of any reserves established by Holdings, the Borrower and the Subsidiaries to fund contingent liabilities reasonably estimated to be payable, in each case during the year that such event occurred or the next succeeding year and that are directly attributable to such event (as determined reasonably and in good faith by the chief financial officer of the Borrower). Notwithstanding anything to the contrary set forth above, the proceeds of any sale, transfer or other disposition of Receivables or Related Property (or any interest therein) pursuant to any Permitted Receivables Financing shall not be deemed to constitute Net Proceeds except to the extent that such sale, transfer or other disposition (a) is the initial sale, transfer or other disposition of Receivables or Related Property (or any interest therein) in connection with the establishment of such Permitted Receivables Financing or (b) occurs in connection with an increase in the aggregate outstanding amount of such Permitted Receivables Financing over the aggregate outstanding amount of such Permitted Receivables Financing at the time of such initial sale, transfer or other disposition. "Net Working Capital" means, at any date, (a) the consolidated current assets and non-current deferred income tax assets of Holdings, the Borrower and the consolidated Subsidiaries as of such date (excluding cash and Permitted Investments) minus (b) the consolidated current liabilities and non-current deferred income tax liabilities of Holdings, the Borrower and the consolidated Subsidiaries as of such date (excluding current liabilities that constitute Indebtedness). Net Working Capital at any date may be a positive or negative number. Net Working Capital increases when it becomes more positive or less negative and decreases when it becomes less positive or more negative. "Obligations" has the meaning assigned to such term in the Security Agreement. "OnMOS Joint Venture" means a Person organized (or to be organized) in a jurisdiction outside the United States to which Subsidiaries of Holdings will contribute the assets and operations of their TMOS business. "Original Credit Agreement" means the Credit Agreement dated as of August 4, 1999, among Holdings, the Borrower, the Lenders party thereto, The Chase Manhattan Bank, a New York banking corporation, as Administrative Agent, Collateral Agent and syndication agent and Credit Lyonnais New York Branch, DLJ Capital Funding, Inc. and Lehman Commercial Paper, as co-documentation agents thereunder. "Other Taxes" means any and all current or future recording, stamp, documentary, excise, transfer, sales, property or similar taxes, charges or levies arising 19 from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document. "Partial Facilities Transfer" shall have the meaning assigned to such term in Section 6.15. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "Perfection Certificate" means a certificate in the form of Annex 2 to the Security Agreement or any other form approved by the Borrower and the Administrative Agent. "Permitted Acquisition" means any acquisition (whether by purchase, merger, consolidation or otherwise) by the Borrower or any consolidated Subsidiary of all or substantially all the assets of, or all the Equity Interests in, a Person or division or line of business of a Person if, at the time of and immediately after giving effect thereto, (a) no Default has occurred and is continuing or would result therefrom, (b) the principal business of such Person shall be reasonably related to a business in which the Borrower and the Subsidiaries were engaged on the Effective Date, (c) each Subsidiary formed for the purpose of or resulting from such acquisition shall be a Subsidiary Loan Party and all of the Equity Interests of such Subsidiary Loan Party shall be owned directly by the Borrower or a consolidated Subsidiary Loan Party and all actions required to be taken with respect to such acquired or newly formed Subsidiary Loan Party under Sections 5.12 and 5.13 shall have been taken and (d) Holdings has delivered to the Administrative Agent an officers' certificate to the effect set forth in clauses (a), (b) and (c) above. "Permitted Convertible Debt" means Indebtedness of Holdings in respect of subordinated convertible debt securities (i) that is unsecured and subordinated to the Obligations on terms no less favorable to the Lenders than the terms of the Subordinated Debt, (ii) that does not provide for scheduled payments of principal earlier than 91 days after the final scheduled repayment of principal of the Term Loans, (iii) that is convertible into common equity of Holdings and (iv) the other terms (excluding the aggregate principal amount and conversion rate thereof) of which are reasonably satisfactory to the Administrative Agent in all material respects. "Permitted Encumbrances" means: (a) Liens imposed by law for taxes or other governmental charges that are not yet due or are being contested in compliance with Section 5.05; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.05; (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations; 20 (d) Liens (other than Liens on Collateral) to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) judgment liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII; (f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business and minor defects or irregularities in title that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary; (g) ground leases in respect of real property on which facilities owned or leased by the Borrower or any of the Subsidiaries are located; (h) any interest or title of a lessor under any lease permitted by this Agreement; (i) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; and (j) leases or subleases granted to other Persons and not interfering in any material respect with the business of the Borrower and the Subsidiaries, taken as a whole, provided that the term "Permitted Encumbrances" shall not include any Lien securing Indebtedness. "Permitted Investments" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America); (b) investments in commercial paper maturing not more than one year after the date of acquisition thereof and having, at such date of acquisition, one of the two highest credit ratings obtainable from S&P or from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing not more than one year after the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts and overnight bank deposits issued or offered by, any commercial bank organized under the laws of the United States of America or any State thereof or any foreign country recognized by the United States of America that has a combined capital and surplus and undivided profits of not less than $250,000,000 (or the foreign-currency equivalent thereof); 21 (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above or clause (e) or (f) below and entered into with a financial institution satisfying the criteria described in clause (c) above; (e) securities issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof having maturities of not more than six months from the date of acquisition thereof and, at the time of acquisition, having one of the two highest credit ratings obtainable from S&P or from Moody's; (f) securities issued by any foreign government or any political subdivision of any foreign government or any public instrumentality thereof having maturities of not more than six months from the date of acquisition thereof and, at the time of acquisition, having one of the two highest credit ratings obtainable from S&P or from Moody's; and (g) investments in funds that invest solely in one or more types of securities described in clauses (a), (e) and (f) above. "Permitted Receivables Financing" means any financing pursuant to which (a) the Borrower or any Subsidiary sells, conveys or otherwise transfers to a Receivables Subsidiary, in "true sale" transactions, and (b) such Receivables Subsidiary sells, conveys or otherwise transfers to any other Person or grants a security interest to any other Person in, any Receivables (whether now existing or hereafter acquired) of the Borrower or any Subsidiary or any undivided interest therein, and any assets related thereto (including all collateral securing such Receivables), all contracts and all Guarantees or other obligations in respect of such Receivables, proceeds of such Receivables and other assets that are customarily transferred or in respect of which security interests are customarily granted in connection with asset securitization transactions involving Receivables, provided that the board of directors of Holdings shall have determined in good faith that such Permitted Receivables Financing is economically fair and reasonable to Holdings, the Borrower and the Subsidiaries, taken as a whole. "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is an "employer" as defined in Section 3(5) of ERISA. "Pledge Agreement" means the Pledge Agreement, entered into in connection with the Original Credit Agreement, attached hereto as Exhibit E, among the Loan Parties and the Collateral Agent for the benefit of the Secured Parties, as amended in connection with the issuance of the First Lien Notes, and as further amended from time to time. 22 "Prepayment Event" means: (a) any sale, transfer or other disposition (including pursuant to a Permitted Receivables Financing or a sale and leaseback transaction) of any property or asset of the Borrower or any Subsidiary, including any Equity Interest owned by it, other than (i) dispositions described in clauses (a) and (b) of Section 6.05 and (ii) other dispositions resulting in aggregate Net Proceeds not exceeding $1,000,000 during any fiscal year of the Borrower; or (b) any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of the Borrower or any Subsidiary, but only to the extent that the Net Proceeds therefrom have not been applied to repair, restore or replace such property or asset within 365 days after such event; or (c) the incurrence by Holdings, the Borrower or any Subsidiary of any Indebtedness, excluding any Indebtedness (other than, prior to the Transition Date, Permitted Convertible Debt) permitted by Section 6.01; or (d) prior to the Transition Date, the issuance by Holdings, the Borrower or any Subsidiary of any Equity Interests, other than (i) any such issuance by the Borrower or any Subsidiary to Holdings or the Borrower or to another Subsidiary, (ii) the issuance of Equity Interests expressly permitted by Section 6.01(d), (iii) the issuance of common stock or preferred stock of Holdings pursuant to the TPG Equity Purchase and (iv) Equity Interests issued in the form, or upon the exercise of, options to acquire common stock of Holdings issued to members of management and employees of Holdings, the Borrower or any Subsidiary and options or warrants in respect of the capital stock of Holdings issued as compensation to consultants to Holdings, the Borrower or any Subsidiary. "Prime Rate" means the rate of interest per annum publicly announced from time to time by JPMorgan Chase Bank as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "Qualified Liquidity Financing" means the issuance by Holdings of preferred stock, common stock or warrants in respect of preferred stock or common stock to TPG, or the incurrence by Holdings or the Borrower of Indebtedness for borrowed money owed to TPG, in each case for cash consideration; provided that (a) any such Indebtedness shall be unsecured, (b) the terms of any such preferred stock or Indebtedness shall not include any covenants, redemption provisions, events of default or other terms that would entitle the holder thereof to make any claim or assert any right or remedy prior to payment in full of the Obligations and termination of the Commitments and (c) prior to any such issuance of preferred stock or incurrence of Indebtedness, TPG and Holdings or the Borrower, as applicable, shall have entered into an agreement with the Administrative Agent, in form and substance reasonably satisfactory to the Administrative Agent, effectively subordinating any and all obligations in respect of such preferred stock or Indebtedness to the Obligations and providing that, prior to repayment in full of all the Obligations and termination of the Commitments, the holder or holders of such preferred stock or Indebtedness, as applicable, shall not be entitled to receive any cash payments in respect thereof or to exercise any rights or remedies (other than, in the 23 case of clauses (b) and (c) above, rights and remedies the exercise of which would not constitute or result in a Default). "Recapitalization" means (a) the recapitalization of Holdings in accordance with the Recapitalization Agreement pursuant to which the Investor will acquire approximately 91% of the common stock of Holdings and (b) the related transactions contemplated by the Recapitalization Agreement. "Recapitalization Agreement" means the Agreement and Plan of Recapitalization and Merger dated as of May 11, 1999, among Motorola, Holdings, the Borrower, the Investor and TPG Semiconductor Acquisition Corp., as amended. "Recapitalization Documents" means the Recapitalization Agreement, the Reorganization Agreement and the Transition Agreements. "Receivable" means the Indebtedness and payment obligations of any Person to the Borrower or any of the Subsidiaries or acquired by the Borrower or any of the Subsidiaries (including obligations constituting an account or general intangible or evidenced by a note, instrument, contract, security agreement, chattel paper or other evidence of indebtedness or security) arising from a sale of merchandise or the provision of services by the Borrower or any Subsidiary or the Person from which such Indebtedness and payment obligation were acquired by the Borrower or any of the Subsidiaries, including (a) any right to payment for goods sold or for services rendered and (b) the right to payment of any interest, sales taxes, finance charges, returned check or late charges and other obligations of such Person with respect thereto. "Receivables Subsidiary" means a corporation or other entity that is a newly formed, wholly owned, bankruptcy-remote, special purpose subsidiary of Holdings, the Borrower or any wholly owned Subsidiary (a) that engages in no activities other than in connection with the financing of Receivables, all proceeds thereof and all rights (contractual or other), collateral and other assets relating thereto, and any business or activities incidental or related to such business (including servicing of Receivables), (b) that is designated by the board of directors of the Borrower (as provided below) as a Receivables Subsidiary, (c) of which no portion of its Indebtedness or any other obligations (contingent or otherwise) (i) is Guaranteed by Holdings, the Borrower or any Subsidiary (other than pursuant to Standard Securitization Undertakings), (ii) is recourse to or obligates Holdings, the Borrower or any Subsidiary in any way other than pursuant to Standard Securitization Undertakings and other than any obligation to sell or transfer Receivables or (iii) subjects any property or asset of Holdings, the Borrower or any Subsidiary, directly or indirectly, contingently or otherwise, to the satisfaction thereof, (d) with which none of Holdings, the Borrower or any Subsidiary has any material contract, agreement, arrangement or understanding (except in connection with a Permitted Receivables Financing) other than on terms no less favorable to Holdings, the Borrower or such Subsidiary than those that might be obtained at the time from Persons that are not Affiliates of Holdings, other than fees payable in the ordinary course of business in connection with servicing Receivables, and (e) to which none of Holdings, the Borrower or any Subsidiary has any obligation to maintain or preserve such entity's financial condition or cause such entity to achieve certain levels of operating results. Upon any such designation, a Financial Officer of the Borrower shall deliver a certificate to the Administrative Agent certifying (a) the resolution of the board of directors of the Borrower giving effect to such designation, (b) that, to the best of such officer's 24 knowledge and belief after consulting with counsel, such designation complied with the foregoing conditions and (c) immediately after giving effect to such designation, no Default shall have occurred and be continuing. "Register" has the meaning set forth in Section 9.04(c). "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Related Property" shall mean, with respect to each Receivable: (a) all the interest of the Borrower or any Subsidiary in the goods, if any, sold and delivered to an obligor relating to the sale that gave rise to such Receivable, (b) all other security interests or Liens, and the interest of the Borrower or any Subsidiary in the property subject thereto, from time to time purporting to secure payment of such Receivable, together with all financing statements signed by an obligor describing any collateral securing such Receivable and (c) all guarantees, insurance, letters of credit and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable, in the case of clauses (b) and (c), whether pursuant to the contract related to such Receivable or otherwise or pursuant to any obligations evidenced by a note, instrument, contract, security agreement, chattel paper or other evidence of Indebtedness or security and the proceeds thereof. "Release" means any release, spill, emission, leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching or migration into the environment (including ambient air, surface water, groundwater, land surface or subsurface strata) or within any building, structure, facility or fixture. "Reorganization Agreement" means the Reorganization Agreement dated as of May 11, 1999, by and among Motorola, Holdings and the Borrower, as amended. "Required Lenders" means, at any time, Lenders having Revolving Exposures, Term Loans and unused Commitments representing more than 50% of the sum of the total Revolving Exposures, outstanding Term Loans and unused Commitments at such time. "Restatement Effective Date" has the meaning given to such term in the Amendment and Restatement Agreement. "Restatement Mortgaged Property" means each parcel of real property and the improvements thereto owned by a Loan Party as a result of the Acquisition and identified on Schedule 1.01(b). 25 "Restatement Transactions" means the execution and delivery of the Amendment and Restatement Agreement by each Person party thereto, the satisfaction of the conditions to the effectiveness thereof, and the consummation of the transactions contemplated thereby, including the conversion of Revolving Loans into Tranche R Term Loans, the issuance of the First Lien Notes and the application of the proceeds thereof. "Restricted Payment" means any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in Holdings, the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancelation or termination of any Equity Interests in Holdings, the Borrower or any Subsidiary or any option, warrant or other right to acquire any such Equity Interests in Holdings, the Borrower or any Subsidiary. "Restructuring Liquidation Sales" means sales of plant, property and equipment for cash consideration as part of restructuring activities in which Holdings, the Borrower or any Subsidiary is, as of April 17, 2002, currently engaged in or committed to engage in, which activities were disclosed to the Administrative Agent prior to April 17, 2002. "Revolving Availability Period" means the period from and including the Effective Date to but excluding the earlier of the Revolving Maturity Date and the date of termination of the Revolving Commitments. "Revolving Commitment" means, with respect to each Lender, the commitment, if any, of such Lender to make Revolving Loans and to acquire participations in Letters of Credit and Swingline Loans hereunder, expressed as an amount representing the maximum aggregate amount of such Lender's Revolving Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender's Revolving Commitment is set forth on Schedule 2.01 (as of February 14, 2003, after giving effect to the conversion of $62,500,000 aggregate amount of Revolving Loans to Tranche R Term Loans and the associated reduction of Revolving Commitments as contemplated by the Amendment and Restatement Agreement), or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Revolving Commitment, as applicable. The initial aggregate amount of the Lenders' Revolving Commitments was $150,000,000. "Revolving Exposure" means, with respect to any Lender at any time, the sum of (a) the outstanding principal amount of such Lender's Revolving Loans and (b) such Lender's LC Exposure and Swingline Exposure at such time. "Revolving Lender" means a Lender with a Revolving Commitment or, if the Revolving Commitments have terminated or expired, a Lender with Revolving Exposure. "Revolving Loan" means a Loan made pursuant to the first sentence of Section 2.01 (or, if made prior to the Restatement Effective Date, pursuant to clause (d) of Section 2.01 of the Original Credit Agreement or clause (b) of Section 2.01 of the Existing Credit Agreement). 26 "Revolving Maturity Date" means the earlier of (a) August 4, 2005, or, if such day is not a Business Day, the next preceding Business Day and (b) the date of the repayment in full of the Tranche A Term Loans. "SCG Restructuring" means the restructuring of the business of the Borrower and the Subsidiaries described in Section 3 of the Information Memorandum. "S&P" means Standard & Poor's Rating Service. "SMP" means Surface Mount Products Malaysia Sendirian Berhad, a Malaysian private limited liability company. "SMP JV Agreement" means the Joint Venture Agreement dated as of July 31, 1992, and August 17, 1992, by and between Motorola and Philips Semiconductors International B.V. "Second Lien Documents" means the Second Lien Note Indenture, the Intercreditor Agreement, the Second Lien Security Documents and all other instruments, agreements and other documents evidencing or governing the Second Lien Notes or providing for any Guarantee or other right in respect thereof. "Second Lien Note Indenture" means the indenture pursuant to which the Second Lien Notes were issued. "Second Lien Notes" means the senior secured second lien notes co-issued by the Borrower and Holdings pursuant to the Second Lien Note Indenture in an aggregate principal amount of $300,000,000. "Second Lien Security Documents" means any and all security agreements, pledge agreements, mortgages and other agreements and documents pursuant to which any Liens are granted to secure any Indebtedness or other obligations in respect of the Second Lien Notes. "Secured Parties" has the meaning assigned to such term in the Security Agreement. "Security Agreement" means the Security Agreement, entered into in connection with the Original Credit Agreement, attached hereto as Exhibit F, among the Borrower, Holdings, the Subsidiary Loan Parties and the Collateral Agent for the benefit of the Secured Parties, as amended in connection with the issuance of the First Lien Notes, and as further amended from time to time. "Seller" means The Cherry Corporation, a Delaware corporation. "Security Documents" means the Security Agreement, the Collateral Assignment, the Pledge Agreement, the Mortgages and each other security agreement or other instrument or document executed and delivered pursuant to Section 5.12 or 5.13 to secure any of the Obligations. "Senior Leverage Ratio" means, on any date, the ratio of (a) Total Senior Indebtedness as of such date to (b) Consolidated EBITDA (plus, without duplication, any 27 Supplemental Interest deducted in calculating Consolidated EBITDA) for the period of four consecutive fiscal quarters of Holdings ended on such date. "Standard Securitization Undertakings" means representations, warranties, covenants and indemnities entered into at any time by Holdings, the Borrower or any Subsidiary that are reasonably customary in an accounts receivable transaction. "Statutory Reserve Rate" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject (a) with respect to the Base CD Rate, for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months and (b) with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Subordinated Debt" means the Senior Subordinated Notes due 2009 issued by Holdings and the Borrower as co-issuers on the Effective Date in the aggregate principal amount of $400,000,000 and the Indebtedness represented thereby (including the Note Guarantees, Exchange Notes (each as defined in Subordinated Debt Documents), guarantees of Exchange Notes and any replacement Notes). "Subordinated Debt Documents" means the indenture under which the Subordinated Debt was issued and all other instruments, agreements and other documents evidencing or governing the Subordinated Debt or providing for any Guarantee or other right in respect thereof. "subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" means any subsidiary of Holdings other than the Borrower. Without limiting the generality of the definition of the term "subsidiary", it is understood and agreed that each of (a) Tesla Sezam, a.s., a corporation existing under the laws of the Czech Republic, (b) Terosil, a.s., a corporation existing under the laws of the Czech Republic, (c) ON Semiconductor Slovakia a.s. (formerly known as Slovakia Electronic 28 Industries, a.s.), a corporation existing under the laws of Slovakia, and (d) Leshan-Phoenix Semiconductor Co., Ltd., an entity existing under the laws of the People's Republic of China, is a subsidiary of Holdings as of the Effective Date. "Subsidiary Loan Party" means any Subsidiary that is not a Foreign Subsidiary or a Receivables Subsidiary. "Supplemental Interest" means the portion of any interest accrued in respect of any Loan attributable to clause (a)(ii) of the definition of the term Applicable Rate. "Supplemental Interest Termination Date" means (a) if all Supplemental Interest accrued to but excluding March 31, 2003, has been paid on or prior to March 31, 2003, then March 31, 2003, or (b) otherwise, June 30, 2003. "Swingline Exposure" means, at any time, the aggregate principal amount of all Swingline Loans outstanding at such time. The Swingline Exposure of any Revolving Lender at any time shall be its Applicable Percentage of the total Swingline Exposure at such time. "Swingline Lender" means JPMorgan Chase Bank, in its capacity as lender of Swingline Loans hereunder. "Swingline Loan" means a Loan made pursuant to Section 2.04. "Taxes" means any and all current or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Term Loans" means Tranche A Term Loans, Tranche B Term Loans, Tranche C Term Loans, Tranche D Term Loans and Tranche R Term Loans. "Three-Month Secondary CD Rate" means, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day) or, if such rate is not so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day is not a Business Day, on the next preceding Business Day) by the Administrative Agent from three negotiable certificate of deposit dealers of recognized standing selected by it. "Total Senior Indebtedness" means, as of any date, the aggregate principal amount of Indebtedness of Holdings, the Borrower and the Subsidiaries outstanding on such date, determined on a consolidated basis, excluding the Subordinated Debt, any Permitted Convertible Debt, the Junior Subordinated Note, Qualified Liquidity Financing and any other Indebtedness that is effectively subordinated to the Obligations on terms no less favorable to the Lenders than the terms of the Subordinated Debt. 29 "TPG" means TPG Partners II, L.P. and its Affiliates, provided that no such Affiliate shall be deemed a member of TPG to the extent it ceases to be Controlled by, or under common Control with, TPG Partners II, L.P. "TPG Equity Purchase" means the purchase by TPG of common stock or preferred stock of Holdings for cash consideration in an amount equal to $100,000,000 and the immediate contribution by Holdings to the Borrower of such cash as common equity; provided that, in the case of any such purchase of preferred stock, (a) the terms of such preferred stock shall not include any covenants, redemption provisions, events of default or other terms that would entitle the holder thereof to make any claim or assert any right or remedy prior to payment in full of the Obligations and termination of the Commitments and (b) prior to any such issuance of preferred stock, TPG and Holdings shall have entered into an agreement with the Administrative Agent, in form and substance reasonably satisfactory to the Administrative Agent, effectively subordinating any and all obligations in respect of such preferred stock to the Obligations and providing that, prior to the repayment in full of all the Obligations and termination of the Commitments, the holder or holders of such preferred stock shall not be entitled to receive any cash payments in respect thereof or to exercise any rights (other than in the case of clauses (a) and (b) above, rights and remedies the exercise of which would not constitute or result in a Default). "Tranche", when used in reference to any Borrowings, refers to whether such Borrowings consist of Revolving Loans, Tranche A Term Loans, Tranche B Term Loans, Tranche C Term Loans, Tranche D Term Loans or Tranche R Term Loans. "Tranche A Commitment" means, with respect to each Lender, the commitment, if any, of such Lender to make Tranche A Term Loans pursuant to clause (a) of Section 2.01 of the Original Credit Agreement. The initial aggregate amount of the Lenders' Tranche A Commitments was $200,000,000. "Tranche A Lender" means a Lender with a Tranche A Commitment or an outstanding Tranche A Term Loan. "Tranche A Maturity Date" means August 4, 2005, or, if such day is not a Business Day, the next preceding Business Day. "Tranche A Term Loan" means a Loan made on or after the Effective Date pursuant to clause (a) of Section 2.01 of the Original Credit Agreement. The aggregate principal amount of Tranche A Term Loans outstanding on February 14, 2003, is $6,606,280.37. "Tranche B Commitment" means, with respect to each Lender, the commitment, if any, of such Lender to make a Tranche B Term Loan pursuant to clause (b) of Section 2.01 of the Original Credit Agreement. The initial aggregate amount of the Lenders' Tranche B Commitments was $325,000,000. "Tranche B Lender" means a Lender with a Tranche B Commitment or an outstanding Tranche B Term Loan. "Tranche B Maturity Date" means August 4, 2006, or, if such day is not a Business Day, the next preceding Business Day. 30 "Tranche B Term Loan" means a Loan made on the Effective Date pursuant to clause (b) of Section 2.01 of the Original Credit Agreement. The aggregate principal amount of Tranche B Term Loans outstanding on February 14, 2003, is $209,869,640.05. "Tranche C Commitment" means, with respect to each Lender, the commitment, if any, of such Lender to make a Tranche C Term Loan pursuant to clause (c) of Section 2.01 of the Original Credit Agreement. The initial aggregate amount of the Lenders' Tranche C Commitments was $350,000,000. "Tranche C Lender" means a Lender with a Tranche C Commitment or an outstanding Tranche C Term Loan. "Tranche C Maturity Date" means August 4, 2007, or, if such day is not a Business Day, the next preceding Business Day. "Tranche C Term Loan" means a Loan made on the Effective Date pursuant to clause (c) of Section 2.01 of the Original Credit Agreement. The aggregate principal amount of Tranche C Term Loans outstanding on February 14, 2003, is $226,008,894.76. "Tranche D Commitment" means, with respect to each Lender, the commitment, if any, of such Lender to make a Tranche D Term Loan pursuant to clause (a) of Section 2.01 of the Existing Credit Agreement. The initial aggregate amount of the Lenders' Tranche D Commitments was $200,000,000. "Tranche D Lender" means a Lender with a Tranche D Commitment or an outstanding Tranche D Term Loan. "Tranche D Maturity Date" means August 4, 2007, or, if such day is not a Business Day, the next preceding Business Day. "Tranche D Term Loan" means a Loan made pursuant to clause (a) of Section 2.01 of the Existing Credit Agreement. The aggregate principal amount of Tranche D Term Loans outstanding on February 14, 2003, is $134,147,128.19. "Tranche R Lender" means a Lender with an outstanding Tranche R Term Loan. "Tranche R Maturity Date" means the earlier of (a) August 4, 2005, or, if such day is not a Business Day, the next preceding Business Day and (b) the date of the repayment in full of the Tranche A Term Loans. "Tranche R Term Loan" means a Loan resulting from the conversion of $62,500,000 aggregate principal amount of outstanding Revolving Loans to "Tranche R Term Loans" on the Restatement Effective Date pursuant to the Amendment and Restatement Agreement. "Transactions" means the Restatement Transactions and the Financing Transactions. 31 "Transition Agreements" means agreements to be entered into with Motorola or its Affiliates as contemplated by the Recapitalization Agreement and as in effect on the Effective Date and as amended from time to time in accordance with Section 6.11(b). "Transition Date" means the date on which the Borrower shall have delivered to the Administrative Agent financial statements demonstrating that as of the end of the immediately preceding fiscal quarter of Holdings (a) the Leverage Ratio was less than or equal to 3.75 to 1.00, (b) the Senior Leverage Ratio was less than or equal to 2.75 to 1.00 and (c) the Interest Expense Coverage Ratio for the period of four consecutive fiscal quarters ending on the last day of such quarter was greater than or equal to 2.50 to 1.00. "Type", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate. "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a "Revolving Loan") or by Type (e.g., a "Eurodollar Loan") or by Class and Type (e.g., a "Eurodollar Revolving Loan"). Borrowings also may be classified and referred to by Class (e.g., a "Revolving Borrowing") or by Type (e.g., a "Eurodollar Borrowing") or by Class and Type (e.g., a "Eurodollar Revolving Borrowing"). SECTION 1.03. Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 1.04. Accounting Terms; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time, provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to 32 any provision hereof to eliminate the effect of any change occurring after the Effective Date in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. SECTION 1.05. Interim Financial Calculations. For purposes of determining the Leverage Ratio and the Interest Expense Coverage Ratio: (a) for any period of four consecutive fiscal quarters ended on or prior to September 30, 2000, Consolidated EBITDA shall be deemed to be the Consolidated EBITDA of Holdings, the Borrower and the Subsidiaries (or their respective predecessor entities) for such period determined on a consolidated basis in accordance with GAAP (it being understood that Consolidated EBITDA for the fiscal quarter ended (i) December 31, 1998, was $86,500,000, (ii) March 31, 1999, was $76,300,000 and (iii) June 30, 1999, was $94,100,000); and (b) (i) Consolidated Cash Interest Expense for the period of four consecutive fiscal quarters ending on September 30, 1999, shall be equal to the product of (A) Consolidated Cash Interest Expense for the period of two fiscal months ending on September 30, 1999, and (B) a fraction the numerator of which is 12 and the denominator of which is two, (ii) Consolidated Cash Interest Expense for the period of four consecutive fiscal quarters ending on December 31, 1999, shall be equal to the product of (A) Consolidated Cash Interest Expense for the period of five fiscal months ending on December 31, 1999, and (B) a fraction the numerator of which is 12 and the denominator of which is five, (iii) Consolidated Cash Interest Expense for the period of four consecutive fiscal quarters ending on March 31, 2000, shall be equal to the product of (A) Consolidated Cash Interest Expense for the period of eight fiscal months ending on March 31, 2000, and (B) a fraction the numerator of which is 12 and the denominator of which is eight and (iv) Consolidated Cash Interest Expense for the period of four consecutive fiscal quarters ending on June 30, 2000, shall be equal to the product of (A) Consolidated Cash Interest Expense for the period of 11 fiscal months ending on June 30, 2000, and (B) a fraction the numerator of which is 12 and the denominator of which is 11. ARTICLE II The Credits SECTION 2.01. Commitments. Subject to the terms and conditions set forth herein, each Revolving Lender agrees to make Revolving Loans to the Borrower from time to time during the Revolving Availability Period in an aggregate principal amount that will not result in such Lender's Revolving Exposure exceeding such Lender's Revolving Commitment. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving 33 Loans. Amounts repaid or prepaid in respect of Term Loans may not be reborrowed. All Tranche A Term Loans, Tranche B Term Loans, Tranche C Term Loans, Tranche D Term Loans, Revolving Loans and Letters of Credit outstanding under the Existing Credit Agreement on the Restatement Effective Date shall remain outstanding hereunder on the terms set forth herein. SECTION 2.02. Loans and Borrowings. (a) Each Loan (other than a Swingline Loan) shall be made as part of a Borrowing consisting of Loans of the same Class and Type made by the Lenders ratably in accordance with their respective Commitments of the applicable Class. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder, provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Subject to Section 2.14, each Revolving Borrowing and Term Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith, provided that all Borrowings made on the Effective Date shall be ABR Borrowings. Each Swingline Loan shall be an ABR Loan. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan, provided that (i) any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement and (ii) the Borrower shall not be required to make any greater payment under Section 2.17 to the applicable Lender than such Lender would have been entitled to receive if such Lender had not exercised such option. (c) At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $10,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $500,000 and not less than $10,000,000, provided that an ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Revolving Commitments or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.05(e). Each Swingline Loan shall be in an amount that is an integral multiple of $100,000 and not less than $500,000. Borrowings of more than one Type and Class may be outstanding at the same time, provided that there shall not at any time be more than a total of six Eurodollar Borrowings outstanding with respect to any Tranche of Borrowings. (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Revolving Loan, Tranche A Term Loan, Tranche B Term Loan, Tranche C Term Loan, Tranche D Term Loan or Tranche R Term Loan if the Interest Period requested with respect thereto would end after the Revolving Maturity Date, Tranche A Maturity Date, Tranche B Maturity Date, Tranche C Maturity Date, Tranche D Maturity Date or Tranche R Maturity Date, respectively. SECTION 2.03. Requests for Borrowings. To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in 34 the case of an ABR Borrowing, not later than 10:00 a.m., New York City time, on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of such Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) subject to the proviso to the first sentence of Section 2.02(b), whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (vi) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.06. If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. SECTION 2.04. Swingline Loans. (a) Subject to the terms and conditions set forth herein, the Swingline Lender agrees to make Swingline Loans to the Borrower from time to time during the Revolving Availability Period, in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of outstanding Swingline Loans exceeding $25,000,000 or (ii) the sum of the total Revolving Exposures exceeding the total Revolving Commitments, provided that the Swingline Lender shall not be required to make a Swingline Loan to refinance an outstanding Swingline Loan. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Swingline Loans. (b) To request a Swingline Loan, the Borrower shall notify the Administrative Agent of such request by telephone (confirmed by telecopy), not later than 12:00 noon, New York City time, on the day of a proposed Swingline Loan. Each such notice shall be irrevocable and shall specify the requested date (which shall be a Business Day) and amount of the requested Swingline Loan. The Administrative Agent will promptly advise the Swingline Lender of any such notice received from the Borrower. The Swingline Lender shall make each Swingline Loan available to the Borrower by means of a credit to the general deposit account of the Borrower with the Swingline Lender (or, in the case of a Swingline Loan made to finance the reimbursement of an LC Disbursement as provided in Section 2.05(e), by remittance to 35 the Issuing Bank) by 3:00 p.m., New York City time, on the requested date of such Swingline Loan. (c) The Swingline Lender may by written notice given to the Administrative Agent not later than 12:00 noon, New York City time, on any Business Day require the Revolving Lenders to acquire participations on such Business Day in all or a portion of the Swingline Loans outstanding. Such notice shall specify the aggregate amount of Swingline Loans in which Revolving Lenders will participate. Promptly upon receipt of such notice, the Administrative Agent will give notice thereof to each Revolving Lender, specifying in such notice such Lender's Applicable Percentage of such Swingline Loan or Swingline Loans. Each Revolving Lender hereby absolutely and unconditionally agrees, upon receipt of notice as provided above, to pay to the Administrative Agent, for the account of the Swingline Lender, such Lender's Applicable Percentage of such Swingline Loan or Swingline Loans. Each Revolving Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans pursuant to this paragraph is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Revolving Lender shall comply with its obligation under this paragraph by wire transfer of immediately available funds, in the same manner as provided in Section 2.06 with respect to Loans made by such Lender (and Section 2.06 shall apply, mutatis mutandis, to the payment obligations of the Revolving Lenders), and the Administrative Agent shall promptly pay to the Swingline Lender the amounts so received by it from the Revolving Lenders. The Administrative Agent shall notify the Borrower of any participations in any Swingline Loan acquired pursuant to this paragraph, and thereafter payments in respect of such Swingline Loan shall be made to the Administrative Agent and not to the Swingline Lender. Any amounts received by the Swingline Lender from the Borrower (or other party on behalf of the Borrower) in respect of a Swingline Loan after receipt by the Swingline Lender of the proceeds of a sale of participations therein shall be promptly remitted to the Administrative Agent; any such amounts received by the Administrative Agent shall be promptly remitted by the Administrative Agent to the Revolving Lenders that shall have made their payments pursuant to this paragraph and to the Swingline Lender, as their interests may appear. The purchase of participations in a Swingline Loan pursuant to this paragraph shall not relieve the Borrower of any default in the payment thereof. SECTION 2.05. Letters of Credit. (a) General. Subject to the terms and conditions set forth herein, the Borrower may request the issuance of Letters of Credit for its own account, in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, at any time and from time to time during the Revolving Availability Period and prior to the date that is five Business Days prior to the Revolving Maturity Date. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been 36 approved by the Issuing Bank) to the Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Business Day), the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by the Issuing Bank, the Borrower also shall submit a letter of credit application on the Issuing Bank's standard form in connection with any request for a Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed $50,000,000 and (ii) the total Revolving Exposures shall not exceed the total Revolving Commitments. (c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Revolving Maturity Date. (d) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Revolving Lender, and each Revolving Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Revolving Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage of each LC Disbursement made by the Issuing Bank and not reimbursed by the Borrower on the date due as provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. (e) Reimbursement. If the Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than 2:00 p.m., New York City time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 10:00 a.m., New York City time, on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 2:00 p.m., New York City time, on (i) the Business Day that the Borrower receives such notice, if such notice is received prior to 10:00 a.m., New York City time, on the day of receipt, or (ii) the 37 Business Day immediately following the day that the Borrower receives such notice, if such notice is not received prior to such time on the day of receipt, provided that the Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.03 or 2.04 that such payment be financed with an ABR Revolving Borrowing or Swingline Loan in an equivalent amount and, to the extent so financed, the Borrower's obligation to make such payment shall be discharged and replaced by the resulting ABR Revolving Borrowing or Swingline Loan. If the Borrower fails to make such payment when due, the Administrative Agent shall notify each Revolving Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Lender's Applicable Percentage thereof. Promptly following receipt of such notice, each Revolving Lender shall pay to the Administrative Agent its Applicable Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.06 with respect to Loans made by such Lender (and Section 2.06 shall apply, mutatis mutandis, to the payment obligations of the Revolving Lenders), and the Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Revolving Lenders. Promptly following receipt by the Administrative Agent of any payment from the Borrower pursuant to this paragraph, the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Revolving Lenders have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to such Lenders and the Issuing Bank as their interests may appear. Any payment made by a Revolving Lender pursuant to this paragraph to reimburse the Issuing Bank for any LC Disbursement (other than the funding of ABR Revolving Loans or a Swingline Loan as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement. (f) Obligations Absolute. The Borrower's obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit, any application for the issuance of a Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower's obligations hereunder. None of the Administrative Agent, the Lenders, the Issuing Bank or any of their Related Parties shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank, provided that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by (i) the Issuing Bank's failure to exercise care 38 when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof or (ii) the Issuing Bank's failure to issue a Letter of Credit in accordance with the terms of this Agreement when requested by the Borrower pursuant to Section 2.05(b). The parties hereto expressly agree that, in the absence of gross negligence or wilful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination and each issuance (or failure to issue) a Letter of Credit. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented that appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. (g) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder, provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Revolving Lenders with respect to any such LC Disbursement. (h) Interim Interest. If the Issuing Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to ABR Revolving Loans, provided that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.13(c) shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Revolving Lender pursuant to paragraph (e) of this Section to reimburse the Issuing Bank shall be for the account of such Lender to the extent of such payment. (i) Replacement of the Issuing Bank. The Issuing Bank may be replaced at any time by written agreement among the Borrower, the Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such replacement of the Issuing Bank. At the time any such replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.12(b). From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit. 39 (j) Cash Collateralization. If any Event of Default shall occur and be continuing, on the Business Day that the Borrower receives notice from the Administrative Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Revolving Lenders with LC Exposure representing greater than 50% of the total LC Exposure) demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Lenders, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest thereon, provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (h) or (i) of Article VII. The Borrower also shall deposit cash collateral pursuant to this paragraph as and to the extent required by Section 2.11(b). Each such deposit pursuant to this paragraph or Section 2.11(b) shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Borrower's risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of Revolving Lenders with LC Exposure representing greater than 50% of the total LC Exposure), be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived. If the Borrower is required to provide an amount of cash collateral hereunder pursuant to Section 2.11(b), such amount (to the extent not applied as aforesaid) shall be returned to the Borrower as and to the extent that, after giving effect to such return, the Borrower would remain in compliance with Section 2.11(b) and no Event of Default shall have occurred and be continuing. SECTION 2.06. Funding of Borrowings. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 1:00 p.m., New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders, provided that Swingline Loans shall be made as provided in Section 2.04. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent in New York City and designated by the Borrower in the applicable Borrowing Request, provided that ABR Revolving Loans and Swingline Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.05(e) shall be remitted by the Administrative Agent to the Issuing Bank. (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make 40 available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. (c) Nothing in this Section 2.06 shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that the Borrower may have against any Lender as a result of any default by any such Lender hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to fulfill its Commitments hereunder). SECTION 2.07. Interest Elections. (a) Each Revolving Borrowing and Term Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Swingline Borrowings, which may not be converted or continued. (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); 41 (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. SECTION 2.08. Termination and Reduction of Commitments. (a) Unless previously terminated, the Revolving Commitments shall terminate on the Revolving Maturity Date. (b) The Borrower may at any time, without premium or penalty, terminate, or from time to time reduce, the Revolving Commitments, provided that (i) each reduction of the Revolving Commitments shall be in an amount that is an integral multiple of $1,000,000 and not less than $10,000,000 and (ii) the Borrower shall not terminate or reduce the Revolving Commitments if, after giving effect to any concurrent prepayment of the Revolving Loans in accordance with Section 2.11, the sum of the Revolving Exposures would exceed the total Revolving Commitments. (c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Revolving Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable, provided that a notice of termination of the Revolving Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not 42 satisfied. Any termination or reduction of the Revolving Commitments shall be permanent. Each reduction of the Revolving Commitments shall be made ratably among the Lenders in accordance with their respective Revolving Commitments. (d) The parties hereto acknowledge that the Tranche A Commitments, the Tranche B Commitments, the Tranche C Commitments and the Tranche D Commitments have terminated. SECTION 2.09. Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay (i) to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan of such Lender on the Revolving Maturity Date, (ii) to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Term Loan of such Lender as provided in Section 2.10 and (iii) to the Swingline Lender the then unpaid principal amount of each Swingline Loan on the earlier of the Revolving Maturity Date and the first date after such Swingline Loan is made that is the 15th or last day of a calendar month and is at least five Business Days after such Swingline Loan is made, provided that on each date that a Revolving Borrowing is made, the Borrower shall repay all Swingline Loans that were outstanding on the date such Borrowing was requested. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof, which accounts the Administrative Agent will make available to the Borrower upon its reasonable request. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein, provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (e) Any Lender may request that Loans of any Class made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Borrower and the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). 43 SECTION 2.10. Amortization of Term Loans. (a) Subject to adjustment pursuant to paragraph (g) of this Section, the Borrower shall repay Tranche A Term Borrowings on each date set forth below in the aggregate principal amount set forth opposite such date: The foregoing amortization schedule reflects all prepayments of Tranche A Term Borrowings made prior to February 14, 2003. (b) Subject to adjustment pursuant to paragraph (g) of this Section, the Borrower shall repay Tranche B Term Borrowings on each date set forth below in the aggregate principal amount set forth opposite such date:
Date Amount ---- ------ March 31, 2003 $ 440,418.66 June 30, 2003 $ 440,418.66 September 30, 2003 $ 550,523.37 December 31, 2003 $ 550,523.37 March 31, 2004 $ 550,523.37 June 30, 2004 $ 550,523.37 September 30, 2004 $ 880,837.39 December 31, 2004 $ 880,837.39 March 31, 2005 $ 880,837.39 August 4, 2005 $ 880,837.40 The foregoing amortization schedule reflects all prepayments of Tranche B Term Borrowings made prior to February 14, 2003.
Date Amount ---- ------ March 31, 2003 $ 532,664.06 June 30, 2003 $ 532,664.06 September 30, 2003 $ 532,664.06 December 31, 2003 $ 532,664.06 March 31, 2004 $ 532,664.06 June 30, 2004 $ 532,664.06 September 30, 2004 $ 532,664.06 December 31, 2004 $ 532,664.06 March 31, 2005 $ 532,664.06 June 30, 2005 $ 532,664.06 September 30, 2005 $ 51,135,749.86 December 31, 2005 $ 51,135,749.86 March 31, 2006 $ 51,135,749.86 August 4, 2006 $ 51,135,749.87 44 (c) Subject to adjustment pursuant to paragraph (g) of this Section, the Borrower shall repay Tranche C Term Borrowings on each date set forth below in the aggregate principal amount set forth opposite such date: The foregoing amortization schedule reflects all prepayments of Tranche C Term Borrowings made prior to February 14, 2003. (d) Subject to adjustment pursuant to paragraph (g) of this Section, the Borrower shall repay Tranche D Term Borrowings on each date set forth below in the aggregate principal amount set forth opposite such date:
Date Amount ---- ------ March 31, 2003 $ 573,626.63 June 30, 2003 $ 573,626.63 September 30, 2003 $ 573,626.63 December 31, 2003 $ 573,626.63 March 31, 2004 $ 573,626.63 June 30, 2004 $ 573,626.63 September 30, 2004 $ 573,626.63 December 31, 2004 $ 573,626.63 March 31, 2005 $ 573,626.63 June 30, 2005 $ 573,626.63 September 30, 2005 $ 573,626.63 December 31, 2005 $ 573,626.63 March 31, 2006 $ 573,626.63 June 30, 2006 $ 573,626.63 September 30, 2006 $ 54,494,530.48 December 31, 2006 $ 54,494,530.48 March 31, 2007 $ 54,494,530.48 August 4, 2007 $ 54,494,530.50
Date Amount ---- ------ March 31, 2003 $ 340,474.95 June 30, 2003 $ 340,474.95 September 30, 2003 $ 340,474.95 December 31, 2003 $ 340,474.95 March 31, 2004 $ 340,474.95 June 30, 2004 $ 340,474.95 September 30, 2004 $ 340,474.95 December 31, 2004 $ 340,474.95 March 31, 2005 $ 340,474.95 June 30, 2005 $ 340,474.95 45 The foregoing amortization schedule reflects all prepayments of Tranche D Term Borrowings made prior to February 14, 2003. (e) All Tranche R Term Loans shall be due and payable on the Tranche R Maturity Date. (f) To the extent not previously paid, (i) all Tranche A Term Loans shall be due and payable on the Tranche A Maturity Date, (ii) all Tranche B Term Loans shall be due and payable on the Tranche B Maturity Date, (iii) all Tranche C Term Loans shall be due and payable on the Tranche C Maturity Date and (iv) all Tranche D Term Loans shall be due and payable on the Tranche D Maturity Date. (g) Any prepayment of a Term Borrowing of any Class shall be applied to reduce the subsequent scheduled repayments of the Term Borrowing of such Class to be made pursuant to this Section ratably, provided that (i) any prepayment made pursuant to Sections 2.11(c)(i) and 2.11(c)(ii) shall be applied to reduce the scheduled repayments of the Term Borrowings of such Class to be made pursuant to this Section in reverse chronological order and (ii) the prepayments made pursuant to Section 2.11(c)(iv) shall be applied to reduce the scheduled repayments of Term Borrowings of such Class in chronological order. (h) Prior to any repayment of any Term Borrowings of any Class hereunder, the Borrower shall select the Borrowing or Borrowings of the applicable Class to be repaid and shall notify the Administrative Agent by telephone (confirmed by telecopy) of such selection not later than 11:00 a.m., New York City time, three Business Days before the scheduled date of such repayment. Each repayment of a Borrowing shall be applied ratably to the Loans included in the repaid Borrowing. Repayments of Term Borrowings shall be accompanied by accrued interest on the amount repaid. SECTION 2.11. Prepayment of Loans. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, without premium or penalty (but subject to Section 2.16), subject to the requirements of this Section. (b) In the event and on each occasion that the sum of the Revolving Exposures exceeds the total Revolving Commitments, the Borrower shall prepay Revolving Borrowings or Swingline Borrowings (or, if no such Borrowings are
Date Amount ---- ------ September 30, 2005 $ 340,474.95 December 31, 2005 $ 340,474.95 March 31, 2006 $ 340,474.95 June 30, 2006 $ 340,474.95 September 30, 2006 $ 32,345,119.73 December 31, 2006 $ 32,345,119.72 March 31, 2007 $ 32,345,119.72 August 4, 2007 $ 32,345,119.72 46 outstanding, deposit cash collateral in an account with the Administrative Agent pursuant to Section 2.05(j)) in an aggregate amount equal to such excess. (c) (i) Prior to the Transition Date, in the event and on each occasion that any Net Proceeds are received by or on behalf of Holdings, the Borrower or any Subsidiary in respect of any Prepayment Event, the Borrower shall, within ten Business Days after such Net Proceeds are received, prepay Term Borrowings (other than Tranche R Term Borrowings) in an aggregate amount equal to (A) 100% (or 50%, in the case of Net Proceeds from the sale of Equity Interests in the OnMOS Joint Venture) of such Net Proceeds if such Net Proceeds result from an event described in clause (a) of the definition of the term "Prepayment Event", (B) 100% of such Net Proceeds if such Net Proceeds result from an event (other than the issuance of Permitted Convertible Debt) described in clause (b) or (c) of the definition of the term "Prepayment Event" and (C) 75% of such Net Proceeds if such Net Proceeds result from the issuance of Permitted Convertible Debt or an event described in clause (d) of the definition of the term "Prepayment Event". (ii) After the Transition Date, in the event and on each occasion that any Net Proceeds are received by or on behalf of Holdings, the Borrower or any Subsidiary in respect of any Prepayment Event, the Borrower shall, within ten Business Days after such Net Proceeds are received, prepay Term Borrowings (other than Tranche R Term Borrowings) in an aggregate amount equal to such Net Proceeds, provided that, in the case of any event described in clause (a) of the definition of the term "Prepayment Event" (other than the sale, transfer or other disposition of Receivables in connection with a Permitted Receivables Financing), if the Borrower shall deliver to the Administrative Agent a certificate of a Financial Officer to the effect that Holdings, the Borrower and the Subsidiaries intend to apply the Net Proceeds from such event (or a portion thereof specified in such certificate), within 180 days after receipt of such Net Proceeds, to acquire real property, equipment or other assets to be used in the business of the Borrower and the Subsidiaries, and certifying that no Default has occurred and is continuing, then no prepayment shall be required pursuant to this paragraph in respect of the Net Proceeds in respect of such event (or the portion of such Net Proceeds specified in such certificate, if applicable) except to the extent of any such Net Proceeds therefrom that have not been so applied by the end of such 180-day period, at which time a prepayment shall be required in an amount equal to such Net Proceeds that have not been so applied. (iii) In the event and on each occasion that any Net Proceeds are received by or on behalf of Holdings, the Borrower or any Subsidiary in respect of (A) the issuance of the Second Lien Notes, (B) any payment by the China JV of any Indebtedness owing to Holdings, the Borrower or any Subsidiary from the Net Proceeds to the China JV of any Indebtedness incurred by the China JV as contemplated by clause (xiv)(1) of Section 6.01(a) or (C) any Indebtedness incurred by the Borrower as contemplated by clause (xiv)(2) of Section 6.01(a), then, in each such case, the Borrower shall, on the date of receipt of such Net Proceeds (in the case of any such Net Proceeds in respect of the issuance of the Second Lien Notes or the incurrence by the Borrower of Indebtedness referred to in the foregoing clause (C)) or within 10 Business Days after such Net Proceeds are received (in the case of any such Net Proceeds in respect of Indebtedness of the China JV), prepay Term Borrowings (other than Tranche R Term Borrowings) in an aggregate amount equal to such Net Proceeds. 47 (iv) On the Restatement Effective Date, the Borrower shall prepay Term Borrowings (other than Tranche R Term Borrowings) in an aggregate amount equal to the Net Proceeds in respect of the issuance of the First Lien Notes, less $25,000,000. (d) Following the end of each fiscal year of the Borrower, commencing with the fiscal year ending December 31, 2000, the Borrower shall prepay Term Borrowings (other than Tranche R Term Borrowings) in an aggregate amount equal to 75% (or, after the Transition Date, 50%) of Excess Cash Flow for such fiscal year. Each prepayment pursuant to this paragraph shall be made on or before the date on which financial statements are delivered pursuant to Section 5.01 with respect to the fiscal year for which Excess Cash Flow is being calculated (and in any event within 90 days after the end of such fiscal year). (e) Prior to any optional or mandatory prepayment of Borrowings hereunder, the Borrower shall select the Borrowing or Borrowings to be prepaid and shall specify such selection in the notice of such prepayment pursuant to paragraph (f) of this Section. In the event of any optional or mandatory prepayment of Term Borrowings made (other than Tranche R Term Borrowings) at a time when Term Borrowings (other than Tranche R Term Borrowings) of more than one Class remain outstanding, the Borrower shall select Term Borrowings (other than Tranche R Term Borrowings) to be prepaid so that the aggregate amount of such prepayment is allocated between the Tranche A Term Borrowings, Tranche B Term Borrowings, Tranche C Term Borrowings and Tranche D Term Borrowings pro rata based on the aggregate principal amount of outstanding Borrowings of each such Class, provided that, so long as and to the extent that any Tranche A Term Borrowing remains outstanding, any Tranche B Lender, Tranche C Lender or Tranche D Lender may elect, by notice to the Administrative Agent by telephone (confirmed by telecopy) at least one Business Day prior to the prepayment date, to decline all or any portion of any prepayment of its Tranche B Term Loans, Tranche C Term Loans or Tranche D Term Loans, as applicable, pursuant to this Section (other than an optional prepayment pursuant to paragraph (a) of this Section, which may not be declined), in which case the aggregate amount of the prepayment that would have been applied to prepay Tranche B Term Loans, Tranche C Term Loans or Tranche D Term Loans, as applicable, but was so declined shall be applied to prepay Tranche A Term Borrowings. (f) The Borrower shall notify the Administrative Agent (and, in the case of prepayment of a Swingline Loan, the Swingline Lender) by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment, (ii) in the case of prepayment of an ABR Borrowing, not later than 10:00 a.m., New York City time, on the date of prepayment or (iii) in the case of prepayment of a Swingline Loan, not later than 12:00 noon, New York City time, on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date, the principal amount of each Borrowing or portion thereof to be prepaid and, in the case of a mandatory prepayment, a reasonably detailed calculation of the amount of such prepayment, provided that, if a notice of optional prepayment of any Loans is given in connection with a conditional notice of termination of the Revolving Commitments as contemplated by Section 2.08, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.08. Promptly following receipt of any such notice (other than a notice relating solely to Swingline Loans), the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of an advance of a Borrowing of the same Type as provided in Section 2.02, except as necessary to apply fully the required amount of a mandatory prepayment or to prepay such Borrowing in full. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid 48 Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13. (g) In the event of and on each occasion of any prepayment of any Tranche B Term Borrowing or Tranche C Term Borrowing pursuant to Section 2.11(a) or (c), the Borrower shall pay to the Tranche B Lenders and Tranche C Lenders whose Tranche B Term Loans or Tranche C Term Loans, as applicable, are being prepaid a prepayment premium equal to (A) if such prepayment (or the date on which such prepayment is required to be made) occurs on or prior to the date that is one year after the Effective Date, 2.0% of the principal amount of the Tranche B Term Loans or Tranche C Term Loans, as applicable, being prepaid or (B) if such prepayment (or the date on which such prepayment is required to be made) occurs more than one year after the Effective Date but on or prior to the date that is two years after the Effective Date, 1.0% of the principal amount of the Tranche B Term Loans or Tranche C Term Loans, as applicable, being prepaid. SECTION 2.12. Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee, which shall accrue at the rate set forth in the definition of the term "Applicable Rate" on the average daily unused amount of the Commitments of such Lender during the period from and including the Effective Date to but excluding the date on which such Commitment terminates (it being understood that no commitment fee shall be payable in respect of the portion of any Commitment funded on the Effective Date). Accrued commitment fees shall be payable in arrears on the last day of March, June, September and December of each year and on the dates on which the Commitments terminate, commencing on the first such date to occur after the Effective Date. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). For purposes of computing commitment fees, a Revolving Commitment of a Lender shall be deemed to be used to the extent of the outstanding Revolving Loans and LC Exposure of such Lender (and the Swingline Exposure of such Lender shall be disregarded for such purpose). (b) The Borrower agrees to pay (i) to the Administrative Agent for the account of each Revolving Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at the same Applicable Rate as interest on Eurodollar Revolving Loans on the average daily amount of such Lender's LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date on which such Lender's Revolving Commitment terminates and the date on which such Lender ceases to have any LC Exposure, and (ii) to the Issuing Bank a fronting fee, which shall accrue at the rate of 0.25% per annum on the average daily amount of the LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date of termination of the Revolving Commitments and the date on which there ceases to be any LC Exposure, as well as the Issuing Bank's standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees and fronting fees accrued through and including the last day of March, June, September and December of each year shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Effective Date, provided that all such fees shall be payable on the date on which the Revolving Commitments terminate and any such fees accruing after the date on which the Revolving Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph shall be payable within 10 days after demand. All participation fees and fronting fees shall be computed on the 49 basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent. (d) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent (or to the Issuing Bank, in the case of fees payable to it) for distribution, in the case of commitment fees and participation fees, to the Lenders entitled thereto. Fees paid shall not be refundable under any circumstances. SECTION 2.13. Interest. (a) The Loans comprising each ABR Borrowing (including each Swingline Loan) shall bear interest at the Alternate Base Rate plus the Applicable Rate. (b) The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate. (c) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, to the fullest extent permitted by applicable law, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Revolving Loans as provided in paragraph (a) of this Section. (d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Revolving Loans, upon termination of the Revolving Commitments, provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the end of the Revolving Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion. Notwithstanding the foregoing, Supplemental Interest shall not be required to be paid at the time required by the preceding sentence, except that (A) 50% of the total amount of Supplemental Interest accrued prior to March 31, 2003 shall be payable on March 31, 2003 (to the extent not previously paid) and (B) if the Supplemental Interest Termination Date does not occur on March 31, 2003, then all Supplemental Interest remaining unpaid on June 30, 2003, shall be payable in full on June 30, 2003; provided that all unpaid Supplemental Interest shall be payable upon repayment in full of the Loans. (e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base 50 Rate or Adjusted LIBO Rate shall be determined by the Administrative Agent, and such determination shall be prima facie evidence thereof. SECTION 2.14. Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing: (a) the Administrative Agent determines (which determination shall be prima facie evidence thereof) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for such Interest Period; or (b) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist (it being understood that the Administrative Agent will use commercially reasonable efforts to give such notice as soon as practicable after such circumstances no longer exist), (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing. SECTION 2.15. Increased Costs. (a) If any Change in Law (except with respect to Taxes, which shall be governed by Section 2.17) shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate or Base CD Rate) or the Issuing Bank; or (ii) impose on any Lender or the Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or the Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on a Lender's or the Issuing Bank's capital or on the capital of such Lender's or the Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by the Issuing Bank, to a level below that which such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company could have achieved but 51 for such Change in Law (taking into consideration such Lender's or the Issuing Bank's policies and the policies of such Lender's or the Issuing Bank's holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be prima facie evidence thereof. The Borrower shall pay such Lender or the Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation, provided that the Borrower shall not be required to compensate a Lender or the Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 270 days prior to the date that such Lender or the Issuing Bank, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender's or the Issuing Bank's intention to claim compensation therefor, and provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 270-day period referred to above shall be extended to include the period of retroactive effect thereof. SECTION 2.16. Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Eurodollar Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.11(f) and is revoked in accordance therewith) or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.19, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount reasonably determined by such Lender to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate that such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be prima facie evidence thereof. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.17. Taxes. (a) Any and all payments by or on account of any obligation of the Borrower hereunder or under any other Loan Document shall be made free and 52 clear of and without deduction for any Indemnified Taxes or Other Taxes, provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Administrative Agent, each Lender and the Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent, such Lender or the Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower hereunder or under any other Loan Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or the Issuing Bank, or by the Administrative Agent on its own behalf or on behalf of a Lender or the Issuing Bank, shall be prima facie evidence thereof. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate, provided that such Foreign Lender has received written notice from the Borrower advising it of the availability of such exemption or reduction and supplying all applicable documentation. (f) If the Administrative Agent or a Lender or the Issuing Bank has received a refund of any Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 2.17, which the Administrative Agent or such Lender or the Issuing Bank is able to identify as such, it shall pay such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 2.17 with respect to the Taxes giving rise to such refund), net of all reasonable out-of-pocket expenses of the Administrative Agent or such Lender or the Issuing Bank and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided, however, that the Borrower agrees to pay, upon the request of the Administrative Agent or such Lender or the Issuing Bank, the amount paid to the Borrower (plus any penalties, interest or other charges imposed by the 53 relevant Governmental Authority) to the Administrative Agent or such Lender or the Issuing Bank in the event the Administrative Agent or such Lender or the Issuing Bank is required to repay such refund to such Governmental Authority. Nothing contained in this Section 2.17(f) shall require the Administrative Agent or any Lender or the Issuing Bank to make available its tax returns (or any other information relating to its Taxes that it deems confidential) to the Borrower or any other Person. SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Set-offs. (a) The Borrower shall make each payment required to be made by it hereunder or under any other Loan Document (whether of principal, interest, fees or reimbursement of LC Disbursements, or of amounts payable under Section 2.15, 2.16 or 2.17, or otherwise) prior to the time expressly required hereunder or under such other Loan Document for such payment (or, if no such time is expressly required, prior to 2:00 p.m., New York City time), on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York, except payments to be made directly to the Issuing Bank or Swingline Lender as expressly provided herein and except that payments pursuant to Sections 2.15, 2.16, 2.17 and 9.03 shall be made directly to the Persons entitled thereto and payments pursuant to other Loan Documents shall be made to the Persons specified therein. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment under any Loan Document shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments under each Loan Document shall be made in dollars. (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans, Term Loans or participations in LC Disbursements or Swingline Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans, Term Loans and participations in LC Disbursements and Swingline Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans, Term Loans and participations in LC Disbursements and Swingline Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans, Term Loans and participations in LC Disbursements and Swingline Loans, provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this 54 paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation. (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or the Issuing Bank hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the Issuing Bank, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders or the Issuing Bank, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.04(c), 2.05(d) or (e), 2.06(b), 2.18(d) or 9.03(c), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.19. Mitigation Obligations; Replacement of Lenders. (a) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the reasonable judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.15 or 2.17, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that (i) the Borrower shall have received the prior written consent of the Administrative 55 Agent (and, if a Revolving Commitment is being assigned, the Issuing Bank and Swingline Lender), which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in LC Disbursements and Swingline Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments required to be made pursuant to Section 2.17, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply. Nothing in this Section 2.19 shall be deemed to prejudice any rights that the Borrower may have against any Lender as a result of any default by any such Lender in its obligation to fund Loans hereunder. ARTICLE III Representations and Warranties Each of Holdings and the Borrower represents and warrants to the Lenders that: SECTION 3.01. Organization; Powers. Each of Holdings, the Borrower and the Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. SECTION 3.02. Authorization; Enforceability. The Transactions entered into and to be entered into by each Loan Party are within such Loan Party's powers and have been duly authorized by all necessary action. This Agreement has been duly executed and delivered by each of Holdings and the Borrower and constitutes, and each other Loan Document to which any Loan Party is to be a party, when executed and delivered by such Loan Party, will constitute, a legal, valid and binding obligation of Holdings, the Borrower or such Loan Party (as the case may be), enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. SECTION 3.03. Governmental Approvals; No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by or before, any Governmental Authority, except such as have been obtained or made and are in full force and effect and except filings necessary to perfect Liens created under the Loan Documents and except where the failure to obtain such consent or approval or make such registration or filing, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of Holdings, the Borrower or any of the Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any material indenture, agreement or other instrument binding upon Holdings, the Borrower or any of the Subsidiaries or any of their assets, or give rise to a right thereunder to require any payment to be made by Holdings, the Borrower or any of the Subsidiaries, and (d) will not result in the 56 creation or imposition of any Lien on any asset of Holdings, the Borrower or any of the Subsidiaries, except Liens created under the Loan Documents. SECTION 3.04. Financial Condition; No Material Adverse Change. (a) Holdings has heretofore furnished to the Lenders its consolidated balance sheet as of December 31, 1999, and consolidated statement of operations and comprehensive income for the period from August 4, 1999, to December 31, 1999, reported on by PricewaterhouseCoopers LLP, independent public accountants. Such financial statements present fairly, in all material respects, the consolidated financial position and results of operations of Holdings, the Borrower and its consolidated Subsidiaries as of such date and for such period in accordance with GAAP. (b) Holdings has heretofore furnished to the Lenders a pro forma combined balance sheet and pro forma combined income statement as of and for the pro forma fiscal year ended December 31, 1999, after giving effect to the Acquisition Transactions. Such pro forma consolidated financial statements (i) have been prepared in good faith based on the same assumptions used to prepare the pro forma financial summary included in the Information Memorandum (which assumptions are believed by Holdings and the Borrower to be reasonable), (ii) are based on the best information available to Holdings and the Borrower after due inquiry, (iii) accurately reflect in all material respects all adjustments necessary to give effect to the Acquisition Transactions and (iv) present fairly, in all material respects, the pro forma consolidated financial position and results of operations and cash flows of Holdings, the Borrower and the Subsidiaries as of such date and for such period, as if the Acquisition Transactions had occurred on such date or at the beginning of such period, as applicable. (c) The Borrower has heretofore furnished to the Administrative Agent the consolidated financial statements of Cherry Semiconductor and its subsidiaries as of and for the fiscal year ended February 28, 1999, reported on by Arthur Andersen LLP, independent public accountants. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of Cherry Semiconductor and its subsidiaries as of such date and for such period in accordance with GAAP. (d) Except as disclosed in the financial statements referred to in paragraphs (a), (b) and (c) above or the notes thereto or in the Information Memorandum and except for the Disclosed Matters, after giving effect to the Acquisition Transactions, none of Holdings, the Borrower or the Subsidiaries has, as of April 3, 2000, any material contingent liabilities, unusual long-term commitments or unrealized losses. (e) Since December 31, 1999, there has been no material adverse change in the business, assets, operations, properties, financial condition or prospects of Holdings, the Borrower and its Subsidiaries, taken as a whole. (f) Since February 28, 1999, there has been no material adverse change in the business, assets, operations, properties, financial condition or prospects of Cherry Semiconductor and its subsidiaries, taken as a whole. SECTION 3.05. Properties. (a) Holdings, the Borrower and each of the Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business (including its Mortgaged Properties and Restatement Mortgaged Properties), except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes and subject to Permitted Encumbrances. 57 (b) Holdings, the Borrower and each of the Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by Holdings, the Borrower and the Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. (c) Schedule 3.05 sets forth the address of each real property that is owned or leased by the Borrower or any of the Subsidiaries as of April 3, 2000. (d) As of the Restatement Effective Date, none of Holdings, the Borrower or any of the Subsidiaries has received notice of, or has knowledge of, any material pending or contemplated condemnation proceeding affecting any Mortgaged Property or Restatement Mortgaged Property or any sale or disposition thereof in lieu of condemnation. None of the Mortgaged Property, Restatement Mortgaged Property or any interest therein is subject to any right of first refusal, option or other contractual right to purchase any such Mortgaged Property, Restatement Mortgaged Property or interest therein. SECTION 3.06. Litigation and Environmental Matters. (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of Holdings or the Borrower, threatened against or affecting Holdings, the Borrower or any of the Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve any of the Loan Documents or the Transactions. (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, none of Holdings, the Borrower or any of the Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. (c) Since the Effective Date, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. SECTION 3.07. Compliance with Laws and Agreements. Each of Holdings, the Borrower and the Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing. SECTION 3.08. Investment and Holding Company Status. None of Holdings, the Borrower or any of the Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.09. Taxes. Holdings, the Borrower and each of the Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has 58 paid or caused to be paid all Taxes required to have been paid by it, except (a) any Taxes that are being contested in good faith by appropriate proceedings and for which Holdings, the Borrower or such Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, would reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of all such underfunded Plans by an amount that, if it were required to be fully paid, would reasonably be expected to result in a Material Adverse Effect. Neither the Borrower nor any ERISA Affiliate has engaged in a transaction with respect to any employee benefit plan that would reasonably be expected to result in any material liability to the Borrower or any ERISA Affiliate pursuant to Section 4069 of ERISA. SECTION 3.11. Disclosure. Holdings and the Borrower have disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which Holdings, the Borrower or any of the Subsidiaries is subject, and all other matters known to any of them, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. The Information Memorandum and the other reports, financial statements, certificates or other information furnished by or on behalf of any Loan Party to the Administrative Agent or any Lender in connection with the negotiation of this Agreement or any other Loan Document or delivered hereunder or thereunder (as modified or supplemented by other information so furnished), taken as a whole, do not contain any material misstatement of fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, provided that (a) with respect to projected financial information, Holdings and the Borrower represent only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time and (b) with respect to information regarding the semiconductor market and other industry data, Holdings and the Borrower represent only that such information was prepared by third-party industry research firms, and although Holdings and the Borrower believe such information is reliable, Holdings and the Borrower cannot guarantee the accuracy and completeness of the information and have not independently verified such information. SECTION 3.12. Subsidiaries. Holdings does not have any subsidiaries other than the Borrower and the Subsidiaries. Schedule 3.12 sets forth the name of, and the ownership interest of Holdings in, each Subsidiary and identifies each Subsidiary that is a Subsidiary Loan Party, in each case as of February 14, 2003. SECTION 3.13. Insurance. Schedule 3.13 sets forth a description of all insurance maintained by or on behalf of Holdings, the Borrower and the Subsidiaries as of April 3, 2000. As of the Restatement Effective Date, all premiums in respect of such insurance that are required to have been paid have been paid. Holdings and the Borrower believe that the insurance maintained by or on behalf of Holdings, the Borrower and the Subsidiaries is adequate in all material respects. SECTION 3.14. Labor Matters. As of the Restatement Effective Date, there are no material strikes, lockouts or slowdowns against Holdings, the Borrower or any Subsidiary pending or, to the knowledge of Holdings or the Borrower, threatened. Except as could not 59 reasonably be expected to result in a Material Adverse Effect, (a) the hours worked by and payments made to employees of Holdings, the Borrower and the Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters and (b) the consummation of the Restatement Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which Holdings, the Borrower or any Subsidiary is bound. SECTION 3.15. Solvency. Immediately after the consummation of the Acquisition Transactions to occur on April 3, 2000, and immediately following the making of each Loan made on April 3, 2000 and after giving effect to the application of the proceeds of such Loans, (a) the fair value of the assets of each Loan Party, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of each Loan Party will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) each Loan Party will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) each Loan Party will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following April 3, 2000. SECTION 3.16. Senior Indebtedness. The Obligations constitute "Senior Indebtedness" under and as defined in the Subordinated Debt Documents. SECTION 3.17. Year 2000. Any reprogramming required to permit the proper functioning, in and following the year 2000, of (a) the computer systems of Holdings, the Borrower and the Subsidiaries and (b) equipment containing embedded microchips (including systems and equipment supplied by others, including Motorola and its Affiliates, or with which Holdings's, the Borrower's or any Subsidiary's systems interface, including the systems and equipment of Motorola and its Affiliates) and the testing of all such systems and equipment, as so reprogrammed, has been completed. The cost to Holdings, the Borrower and the Subsidiaries of such reprogramming and testing and of the reasonably foreseeable consequences of year 2000 to Holdings, the Borrower and the Subsidiaries (including reprogramming errors and the failure of others' systems or equipment) will not result in a Material Adverse Effect. SECTION 3.18. Acquisition. As of April 3, 2000, the Acquisition Agreement has been duly authorized, executed and delivered by each of the parties thereto and constitutes a legal, valid and binding obligation of each such party, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. A true, correct and complete copy of the Acquisition Agreement has been furnished to the Administrative Agent. SECTION 3.19. Senior Secured Obligations. All the Obligations constitute "Credit Agreement Obligations" under and as defined in each of the First Lien Note Indenture and the Second Lien Note Indenture. The Liens granted pursuant to the Security Documents are prior to the Liens granted pursuant to the Second Lien Security Documents. 60 ARTICLE IV Conditions SECTION 4.01. [Intentionally Omitted]. SECTION 4.02. Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing, and of the Issuing Bank to issue, amend, renew or extend any Letter of Credit, is subject to receipt of the request therefor in accordance herewith and to the satisfaction of the following conditions: (a) The representations and warranties of each Loan Party set forth in the Loan Documents shall be true and correct in all material respects on and as of the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects as to such earlier date). (b) At the time of and immediately after giving effect to such Borrowing or the issuance, amendment, renewal or extension of such Letter of Credit, as applicable, no Default shall have occurred and be continuing. Each Borrowing and each issuance, amendment, renewal or extension of a Letter of Credit shall be deemed to constitute a representation and warranty by Holdings and the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section. For purposes of the foregoing, the term "Borrowing" shall not include the continuation or conversion of Loans in which the aggregate amount of such Loans is not being increased. ARTICLE V Affirmative Covenants Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, each of Holdings and the Borrower covenants and agrees with the Lenders that: SECTION 5.01. Financial Statements and Other Information. Holdings will furnish to the Administrative Agent and each Lender: (a) within 90 days after the end of each fiscal year of Holdings, its audited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by PricewaterhouseCoopers LLP or other independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the consolidated financial condition and results of operations of Holdings, the Borrower and the Subsidiaries on a consolidated basis in accordance with GAAP consistently applied; 61 (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year of Holdings, its unaudited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by one of its Financial Officers as presenting fairly in all material respects the consolidated financial condition and results of operations of Holdings, the Borrower and the Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes; (c) concurrently with any delivery of financial statements under paragraph (a) or (b) above, a certificate of a Financial Officer of Holdings (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Section 6.15, and, prior to the Transition Date, Section 6.16 and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of Holdings' audited financial statements referred to in Section 3.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (d) concurrently with any delivery of financial statements under paragraph (a) above, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (e) prior to the commencement of each fiscal year of Holdings, a detailed consolidated budget for such fiscal year (including a projected consolidated balance sheet and related statements of projected operations and cash flow as of the end of and for such fiscal year and setting forth any material assumptions used for purposes of preparing such budget) and, promptly when available, any significant revisions of such budget; (f) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by Holdings, the Borrower or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or, in the event the Holdings becomes a publicly traded company, distributed by Holdings to its public stockholders generally, as the case may be; (g) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of Holdings, the Borrower or any Subsidiary, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request; and (h) in respect of each fiscal month ending on or prior to the earlier of (i) the Transition Date and (ii) March 31, 2003, (A) within 30 days after the end of each of the first two fiscal months of each fiscal quarter of Holdings, a Financial Report for each such month and for the then elapsed portion of the fiscal year and (B) within 45 days after the end of the last fiscal month of each fiscal quarter of Holdings, a Financial Report 62 for such fiscal month and for such fiscal quarter and for the then elapsed portion of the fiscal year. SECTION 5.02. Notices of Material Events. Holdings and the Borrower will furnish to the Administrative Agent and each Lender written notice of the following promptly upon Holdings's or the Borrower's obtaining knowledge thereof: (a) the occurrence of any Default; (b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting Holdings, the Borrower or any Affiliate thereof that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; (c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of Holdings, the Borrower and the Subsidiaries in an aggregate amount exceeding $10,000,000; and (d) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of Holdings setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. SECTION 5.03. Information Regarding Collateral. (a) Holdings will furnish to the Administrative Agent prompt written notice of any change (i) in any Loan Party's corporate name or in any trade name used to identify it in the conduct of its business or in the ownership of its properties, (ii) in the location of any Loan Party's chief executive office, its principal place of business, any office in which it maintains books or records relating to Collateral owned by it or any office or facility at which Collateral owned by it is located (including the establishment of any such new office or facility), (iii) in any Loan Party's jurisdiction of formation, identity or corporate structure or (iv) in any Loan Party's Federal Taxpayer Identification Number. Holdings agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made, or will have been made within any statutory period, under the Uniform Commercial Code or otherwise that are required in order for the Administrative Agent to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral for the benefit of the Secured Parties. Holdings also agrees promptly to notify the Administrative Agent if any material portion of the Collateral is damaged or destroyed. (b) Each year, at the time of delivery of annual financial statements with respect to the preceding fiscal year pursuant to paragraph (a) of Section 5.01, Holdings shall deliver to the Administrative Agent a certificate of a Financial Officer of Holdings (i) setting forth the information required pursuant to Section 2 of the Perfection Certificate or confirming that there has been no change in such information since the date of the Perfection Certificate delivered on the Effective Date or the date of the most recent certificate delivered pursuant to this Section and (ii) certifying that all Uniform Commercial Code financing statements (including fixture filings, as applicable) or other appropriate filings, recordings or registrations, including all refilings, 63 rerecordings and reregistrations, containing a description of the Collateral have been filed of record in each governmental, municipal or other appropriate office in each jurisdiction identified pursuant to clause (i) above to the extent necessary to protect and perfect the security interests under the Security Agreement for a period of not less than 18 months after the date of such certificate (except as noted therein with respect to any continuation statements to be filed within such period). SECTION 5.04. Existence; Conduct of Business. Each of Holdings and the Borrower will, and will cause each of the Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, contracts, licenses, permits, privileges, franchises, patents, copyrights, trademarks and trade names material to the conduct of the business of the Borrower and its Subsidiaries, taken as a whole, provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.03 or any sale of assets permitted under Section 6.05. SECTION 5.05. Payment of Obligations. Each of Holdings and the Borrower will, and will cause each of the Subsidiaries to, pay its Indebtedness and other obligations, including Tax liabilities, before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) Holdings, the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP, (c) such contest effectively suspends collection of the contested obligation and the enforcement of any Lien securing such obligation and (d) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.06. Maintenance of Properties. Each of Holdings and the Borrower will, and will cause each of the Subsidiaries to, keep and maintain all property material to the conduct of the business of Holdings, the Borrower and the Subsidiaries, taken as a whole, in good working order and condition, ordinary wear and tear excepted. SECTION 5.07. Insurance. Each of Holdings and the Borrower will, and will cause each of the Subsidiaries to, maintain, with financially sound and reputable insurance companies (a) insurance in such amounts (with no greater risk retention) and against such risks as are customarily maintained by companies of established repute engaged in the same or similar businesses operating in the same or similar locations and (b) all insurance required to be maintained pursuant to the Security Documents. Holdings will furnish to the Lenders, upon request of the Administrative Agent, information in reasonable detail as to the insurance so maintained. SECTION 5.08. Casualty and Condemnation. Holdings (a) will furnish to the Administrative Agent and the Lenders prompt written notice of any casualty or other insured damage to any material portion of any Collateral or the commencement of any action or proceeding for the taking of any Collateral or any part thereof or interest therein under power of eminent domain or by condemnation or similar proceeding and (b) will cause the Net Proceeds of any such event (whether in the form of insurance proceeds, condemnation awards or otherwise) to be applied in accordance with the applicable provisions of the Security Documents. SECTION 5.09. Books and Records; Inspection and Audit Rights. Each of Holdings and the Borrower will, and will cause each of the Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all material dealings and transactions in relation to its business and activities. Each of Holdings and the Borrower will, 64 and will cause each of the Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and at such reasonable intervals as may be reasonably requested. SECTION 5.10. Compliance with Laws. Each of Holdings and the Borrower will, and will cause each of the Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.11. Use of Proceeds and Letters of Credit. The proceeds of the Revolving Loans and Swingline Loans will be used only for general corporate purposes. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations T, U and X. Letters of Credit will be issued only to support obligations of the Borrower or any Subsidiary incurred in the ordinary course of business. SECTION 5.12. Additional Subsidiaries. If any additional Subsidiary is formed or acquired after the Effective Date, Holdings will, within ten Business Days after such Subsidiary is formed or acquired, notify the Administrative Agent and the Lenders thereof and cause the Collateral and Guarantee Requirement to be satisfied with respect to such Subsidiary (if it is a Subsidiary Loan Party) and with respect to any Equity Interest in or Indebtedness of such Subsidiary owned by or on behalf of any Loan Party. SECTION 5.13. Further Assurances. (a) Each of Holdings and the Borrower will, and will cause each Subsidiary Loan Party to, execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements, fixture filings, mortgages, deeds of trust and other documents), that may be required under any applicable law, or which the Administrative Agent or the Required Lenders may reasonably request, to cause the Collateral and Guarantee Requirement to be and remain satisfied, all at the expense of the Loan Parties. Holdings and the Borrower also agree to provide to the Administrative Agent, from time to time upon request, evidence reasonably satisfactory to the Administrative Agent as to the perfection and priority of the Liens created or intended to be created by the Security Documents. (b) If any material assets (including any real property or improvements thereto or any interest therein) are acquired by the Borrower or any Subsidiary Loan Party after the Effective Date (other than assets constituting Collateral under the Security Agreement or the Pledge Agreement that become subject to the Lien of the Security Agreement or the Pledge Agreement upon acquisition thereof), the Borrower will notify the Administrative Agent and the Lenders thereof, and, if requested by the Administrative Agent or the Required Lenders, the Borrower will cause such assets to be subjected to a Lien securing the Obligations and will take, and cause the Subsidiary Loan Parties to take, such actions as shall be necessary or reasonably requested by the Administrative Agent to grant and perfect such Liens, including actions described in paragraph (a) of this Section, all at the expense of the Loan Parties. SECTION 5.14. Interest Rate Protection. As promptly as practicable, and in any event within 90 days after the Effective Date, the Borrower will enter into, and thereafter for a period of not less than three years after the Effective Date will maintain in effect, one or more 65 interest rate protection agreements on such terms and with such parties as shall be reasonably satisfactory to the Administrative Agent, the effect of which shall be to ensure that at least 50% of the outstanding Long-Term Indebtedness of Holdings, the Borrower and the consolidated Subsidiaries is effectively subject to a fixed rate of interest. ARTICLE VI Negative Covenants Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full and all Letters of Credit have expired or terminated and all LC Disbursements shall have been reimbursed, each of Holdings and the Borrower covenants and agrees with the Lenders that: SECTION 6.01. Indebtedness; Certain Equity Securities. (a) The Borrower will not, and Holdings and the Borrower will not permit any Subsidiary to, create, incur, assume or permit to exist any Indebtedness, except: (i) Indebtedness created under the Loan Documents; (ii) the Subordinated Debt; (iii) the Junior Subordinated Note; (iv) Indebtedness existing on the Effective Date and set forth in Schedule 6.01 and extensions, renewals, refinancings and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof or result in an earlier maturity date or decreased weighted average life thereof; (v) Indebtedness of the Borrower to Holdings or any Subsidiary and of any Subsidiary to the Borrower, Holdings or any other Subsidiary; (vi) Guarantees by the Borrower and by any Subsidiary of Indebtedness of the Borrower or any other Subsidiary, provided that Guarantees by the Borrower or any Subsidiary Loan Party of Indebtedness of any Subsidiary that is not a Loan Party shall be subject to Section 6.04; (vii) Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition, construction or improvement of any fixed or capital assets, including Capital Lease Obligations (provided that such Indebtedness is incurred prior to or within 180 days after such acquisition or the completion of such construction or improvement) and any Indebtedness assumed in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, and extensions, renewals, refinancings and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof, provided that the aggregate principal amount of Indebtedness permitted by this clause (vii) shall not exceed $25,000,000 at any time outstanding; (viii) Indebtedness of the Borrower or any Subsidiary in respect of workers' compensation claims, self-insurance obligations, performance bonds, surety, appeal or 66 similar bonds and completion guarantees provided by the Borrower and the Subsidiaries in the ordinary course of their business, provided that upon the incurrence of Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims, such obligations are reimbursed within 30 days following such drawing or incurrence; (ix) Permitted Convertible Debt; (x) Indebtedness of the Borrower or any Subsidiary that was (A) Indebtedness of any other Person existing at the time such other Person was merged with or became a Subsidiary, including Indebtedness incurred in connection with, or in contemplation of, such other Person's merging with or becoming a Subsidiary, and extensions, renewals, refinancings and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof or result in an earlier maturity date or decreased weighted average life thereof, provided that the aggregate principal amount of Indebtedness permitted under this clause (x) shall not exceed $25,000,000 at any time outstanding; (xi) other unsecured Indebtedness in an aggregate principal amount not exceeding $50,000,000 at any time outstanding, provided that the aggregate principal amount of Indebtedness of the Subsidiaries that are not Subsidiary Loan Parties permitted by this clause (xi) shall not exceed $25,000,000 at any time outstanding; (xii) Indebtedness of Leshan-Phoenix Semiconductor Co., Ltd. (the "China JV") in an aggregate principal amount not exceeding $25,000,000 at any time outstanding, provided that such Indebtedness is (i) secured only by assets of the China JV and not by the assets of Holdings, the Borrower or any other Subsidiary and (ii) not Guaranteed by Holdings, the Borrower or any other Subsidiary; (xiii) the Second Lien Notes, provided that the Second Lien Notes shall not be Guaranteed by any Subsidiary that has not guaranteed the Obligations; (xiv) Indebtedness for borrowed money incurred (1) by the China JV to refinance Indebtedness owed by the China JV to Holdings, the Borrower or any Subsidiary or (2) by the Borrower, which Indebtedness is guaranteed by the China JV in consideration for the cancelation by Holdings, the Borrower or any Subsidiary, as the case may be, of Indebtedness of the China JV owing to Holdings, the Borrower or such Subsidiary, as the case may be, having an aggregate principal amount that is no greater than the aggregate principal amount of the Indebtedness so canceled; provided that (i) the aggregate principal amount of such Indebtedness shall not exceed $100,000,000, (ii) the interest rate payable by the China JV or the Borrower in respect of any such Indebtedness so incurred is less than the interest rate payable by the China JV in respect of the Indebtedness so repaid (in the case of Indebtedness incurred under clause (1) above) or canceled (in the case of Indebtedness incurred under clause (2) above), (iii) such Indebtedness (x) shall not be secured by any Lien other than Liens permitted by Section 6.02(a)(xi), (y) shall not be Guaranteed by any Person other than the China JV and (z) shall not (in the case of Indebtedness incurred pursuant to clause (2) above) mature, and no amortization or principal payment in respect thereof shall be made, prior to the date that is six months after the Tranche D Maturity Date; and 67 (xv) the First Lien Notes, provided that the First Lien Notes shall not be Guaranteed by any Subsidiary that has not guaranteed the Obligations. (b) Holdings will not create, incur, assume or permit to exist any Indebtedness except (i) Indebtedness created under the Loan Documents, (ii) the Subordinated Debt and (iii) Indebtedness permitted under clause (a)(v), (a)(xiii) and (a)(xv) of this Section 6.01. (c) Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, issue any preferred stock or other preferred Equity Interests, except that (i) Holdings may issue the Cumulative Preferred Stock, (ii) Holdings may issue preferred stock or other preferred Equity Interests of Holdings that do not require mandatory cash dividends or redemptions and do not provide for any right on the part of the holder to require redemption, repurchase or repayment thereof, in each case prior to the date that is 91 days after August 4, 2007, and (iii) Holdings, the Borrower or any Subsidiary may issue directors' qualifying shares or shares required by applicable law to be held by a Person other than Holdings, the Borrower or any Subsidiary. (d) Neither Holdings nor the Borrower will permit the Bermuda IP Subsidiary to create, incur, assume or permit to exist any Indebtedness (regardless of whether permitted under paragraph (a) of this Section) other than Indebtedness of the Bermuda IP Subsidiary owed to the Borrower or a Subsidiary Loan Party that is otherwise permitted by this Agreement. (e) Notwithstanding anything contained in Section 6.01(a), (b) or (c), (i) Holdings may issue preferred stock, or Holdings or the Borrower may incur Indebtedness, in each case pursuant to a Qualified Liquidity Financing and (ii) Holdings may issue preferred stock pursuant to the TPG Equity Purchase. (f) Notwithstanding anything contained in Section 6.01(a), the OnMOS Joint Venture may incur Indebtedness that is guaranteed by Mosel in an aggregate principal amount not exceeding $10,000,000 at any time outstanding, provided that such Indebtedness shall not be Guaranteed by, or otherwise be recourse to, any of Holdings, the Borrower or the Subsidiaries (other than the OnMOS Joint Venture or any subsidiaries of the OnMOS Joint Venture). Any such Indebtedness of the OnMOS Joint Venture shall be deemed not to be Indebtedness of Holdings, the Borrower and the Subsidiaries for the purpose of calculating Funded Indebtedness and Total Senior Indebtedness and any interest expense with respect to such Indebtedness shall be excluded from consolidated interest expense for the purpose of calculating Consolidated Cash Interest Expense. SECTION 6.02. Liens. (a) The Borrower will not, and Holdings and the Borrower will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (i) Liens created under the Loan Documents, including those Liens securing the First Lien Notes; (ii) Permitted Encumbrances; (iii) any Lien on any property or asset of the Borrower or any Subsidiary existing on the Effective Date and set forth in Schedule 6.02, provided that (i) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary and (ii) such Lien 68 shall secure only those obligations that it secures on the Effective Date and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (iv) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary or existing on any property or asset of any Person that becomes a Subsidiary after the Effective Date prior to the time such Person becomes a Subsidiary, provided that (A) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary, as the case may be, (B) such Lien shall not apply to any other property or assets of the Borrower or any Subsidiary and (C) such Lien shall secure only those obligations that it secures on the date of such acquisition or the date such Person becomes a Subsidiary, as the case may be and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (v) Liens on fixed or capital assets acquired, constructed or improved by the Borrower or any Subsidiary, provided that (A) such Liens secure Indebtedness permitted by clause (vii) of Section 6.01(a), (B) such security interests and the Indebtedness secured thereby are incurred prior to or within 180 days after such acquisition or the completion of such construction or improvement, (C) the Indebtedness secured thereby does not exceed 100% of the cost of acquiring, constructing or improving such fixed or capital assets and (D) such security interests shall not apply to any other property or assets of the Borrower or any Subsidiary; (vi) sales of Receivables and Related Property (or undivided interests therein) permitted under Section 6.05(d) and Liens on Receivables of a Receivables Subsidiary granted in connection with any Permitted Receivables Financing; (vii) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of setoff or similar rights; (viii) Liens in favor of a landlord on leasehold improvements in leased premises; (ix) Liens on the assets of the China JV securing Indebtedness incurred by the China JV permitted under clause (xii) of Section 6.01(a); (x) Liens granted under the Second Lien Security Documents; provided that (A) such Liens secure only obligations in respect of the Second Lien Notes, (B) such Liens do not apply to any asset other than Collateral that is subject to a prior Lien granted under a Security Document and (C) all such Liens and Second Lien Security Documents shall be subject to the terms of the Intercreditor Agreement; and (xi) Liens on the assets of the China JV securing Indebtedness permitted under clause (xiv) of Section 6.01(a). (b) Holdings will not create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect thereof, except Liens created under the Pledge Agreement and the Second Lien Document and Permitted Encumbrances. 69 SECTION 6.03. Fundamental Changes. (a) Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any Person may merge with Holdings or the Borrower in a transaction in which the surviving entity is a Person organized or existing under the laws of the United States of America, any State thereof or the District of Columbia and, if such surviving entity is not Holdings or the Borrower, as the case may be, such Person expressly assumes, in writing, all the obligations of Holdings or the Borrower, as the case may be, under the Loan Documents, (ii) any Person may merge with any Subsidiary in a transaction in which the surviving entity is a Subsidiary and, if any party to such merger is a Subsidiary Loan Party, is a Subsidiary Loan Party and (iii) any Subsidiary (other than a Subsidiary Loan Party) may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lenders, provided that any such merger involving a Person that is not a wholly owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Sections 6.04 and 6.08. (b) The Borrower will not, and Holdings and the Borrower will not permit any of the Subsidiaries (other than a Receivables Subsidiary) to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and the Subsidiaries on the Effective Date and businesses reasonably related thereto. (c) Holdings will not engage in any business or activity other than the ownership of all the outstanding shares of capital stock of the Borrower and the Joint Venture Holding Companies and activities incidental thereto. Holdings will not own or acquire any assets (other than shares of capital stock of the Borrower, shares of capital stock of the Joint Venture Holding Companies, cash and Permitted Investments) or incur any liabilities (other than liabilities under the Loan Documents, Guarantees by Holdings of obligations of the Borrower and the Subsidiaries under leases of real property, obligations under any stock option plans or other benefit plans for management or employees of Holdings, the Borrower and the Subsidiaries, liabilities imposed by law, including tax liabilities, and other liabilities incidental to its existence and permitted business and activities). (d) No Receivables Subsidiary will engage in any business other than the purchase and sale or other transfer of Receivables (or participation interests therein) in connection with any Permitted Receivables Financing, together with activities directly related thereto. SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions. The Borrower will not, and Holdings and the Borrower will not permit any of the Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly owned Subsidiary prior to such merger) any Equity Interests in or evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except: (a) to the extent provided for by the terms of the Recapitalization; (b) Permitted Investments; 70 (c) investments existing on the Effective Date hereof and set forth on Schedule 6.04; (d) investments by the Borrower and the Subsidiaries that are Loan Parties in Equity Interests in their respective Subsidiaries that are Loan Parties and investments by Subsidiaries that are not Loan Parties in Equity Interests in their respective Subsidiaries, provided that any such Equity Interests held by a Loan Party shall be pledged pursuant to the Pledge Agreement (subject to the limitations applicable to voting stock of a Foreign Subsidiary and Equity Interests in the Foreign Joint Venture Companies referred to in the definition of the term "Collateral and Guarantee Requirement"); (e) loans or advances made by the Borrower to Holdings or any Subsidiary and made by Holdings or any Subsidiary to the Borrower or any other Subsidiary, provided that any such loans and advances made by a Loan Party shall be evidenced by a promissory note pledged pursuant to the Pledge Agreement; (f) Guarantees constituting Indebtedness permitted by Section 6.01 (other than with respect to the Junior Subordinated Note) of Indebtedness of the Borrower or any Subsidiary Loan Party, provided that a Subsidiary shall not Guarantee the Subordinated Debt unless (i) such Subsidiary also has Guaranteed the Obligations pursuant to the Guarantee Agreement, (ii) such Guarantee of the Subordinated Debt is subordinated to such Guarantee of the Obligations on terms no less favorable to the Lenders than the subordination provisions of the Subordinated Debt and (iii) such Guarantee of the Subordinated Debt provides for the release and termination thereof, without action by any party, upon any release or termination of such Guarantee of the Obligations; (g) investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business; (h) after the Transition Date, Permitted Acquisitions, provided that the sum of all consideration paid or otherwise delivered in connection with Permitted Acquisitions (including the principal amount of any Indebtedness issued as deferred purchase price and the fair market value of any other non-cash consideration) plus the aggregate principal amount of all Indebtedness otherwise incurred or assumed in connection with, or resulting from, Permitted Acquisitions (including Indebtedness of any acquired Persons outstanding at the time of the applicable Permitted Acquisition) shall not exceed, on a cumulative basis subsequent to the Effective Date, $50,000,000; (i) any investments in or loans to any other Person received as noncash consideration for sales, transfers, leases and other dispositions permitted by Section 6.05; (j) Guarantees by the Borrower and the Subsidiaries of leases entered into by any Subsidiary as lessee; (k) extensions of credit in the nature of accounts receivable or notes receivable in the ordinary course of business; (l) investments in payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; 71 (m) loans or advances to employees made in the ordinary course of business consistent with prudent business practice and not exceeding $5,000,000 in the aggregate outstanding at any one time; (n) investments in or acquisitions of stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Borrower or any Subsidiary or in satisfaction of judgments; (o) investments in the form of Hedging Agreements permitted under Section 6.07; (p) investments by the Borrower or any Subsidiary in (i) the capital stock of a Receivables Subsidiary and (ii) other interests in a Receivables Subsidiary, in each case to the extent determined by the Borrower in its judgment to be reasonably necessary in connection with or required by the terms of the Permitted Receivables Financing; (q) investments, loans, advances, guarantees and acquisitions resulting from a foreclosure by Holdings, the Borrower or any Subsidiary with respect to any secured investment or other transfer of title with respect to any secured investment in default; (r) investments, loans, advances, guarantees and acquisitions the consideration for which consists solely of shares of common stock of Holdings; (s) the Acquisition; (t) other investments in an aggregate amount not to exceed $40,000,000 (or, after the Transition Date, $100,000,000) at any time outstanding; and (u) the creation by the Borrower of a limited liability company organized under the laws of a jurisdiction in the United States of America and the Borrower's contribution to the OnMOS Joint Venture through such limited liability company of (i) $51 in exchange for a 51% interest therein and (ii) the assets and operations of the TMOS business of the Subsidiaries and Holdings; provided that promptly following the contribution of such assets and operations to the OnMOS Joint Venture contemplated by this clause (u), the Borrower shall deliver to the Administrative Agent copies of all definitive documentation regarding such investment, certified by a Financial Officer as complete and correct. SECTION 6.05. Asset Sales. The Borrower will not, and Holdings and the Borrower will not permit any of the Subsidiaries to, sell, transfer, lease or otherwise dispose of any asset, including any Equity Interest owned by it, nor will the Borrower permit any of the Subsidiaries to issue any additional Equity Interest in such Subsidiary, except: (a) sales of inventory, used or surplus equipment and Permitted Investments in the ordinary course of business, Restructuring Liquidation Sales and the periodic clearance of aged inventory; (b) sales, transfers and dispositions to the Borrower or a Subsidiary, provided that any such sales, transfers or dispositions involving a Subsidiary that is not a Loan Party shall be made in compliance with Section 6.09; 72 (c) transfers and dispositions in connection with the SCG Restructuring, provided that the aggregate fair market value of all assets sold, transferred or otherwise disposed of in reliance on this clause (c) shall not exceed $10,000,000; (d) the Borrower may consummate the Facilities Transfer; (e) sales, transfers and other dispositions of assets (other than Equity Interests in a Subsidiary, except for sales of Equity Interests in the OnMOS Joint Venture to the extent such sales do not result in the failure of the Borrower to comply with Section 6.17) that are not permitted by any other clause of this Section, provided that the aggregate fair market value of all assets sold, transferred or otherwise disposed of in reliance upon this clause (e) shall not exceed $30,000,000 (or, after the Transition Date, $50,000,000) during any fiscal year of the Borrower; and (f) sales, transfers and other dispositions of assets listed on Schedule 6.05 hereto, provided that (i) all sales, transfers, leases and other dispositions permitted hereby shall be made for fair value (other than those permitted by clause (b) above) and for consideration of at least 80% cash or cash equivalents (other than those permitted by clause (b) and (f) above) and (ii) the fair value of all consideration (other than cash and cash equivalents) received in respect of dispositions permitted by clause (f) above does not exceed $15,000,000. SECTION 6.06. Sale and Leaseback Transactions. The Borrower will not, and Holdings and the Borrower will not permit any of the Subsidiaries to, enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property that it intends to use for substantially the same purpose or purposes as the property sold or transferred, except for any such sale of any fixed or capital assets that is made for cash consideration in an amount not less than the cost of such fixed or capital asset and is consummated within 180 days after the Borrower or such Subsidiary acquires or completes the construction of such fixed or capital asset. SECTION 6.07. Hedging Agreements. The Borrower will not, and Holdings and the Borrower will not permit any of the Subsidiaries to, enter into any Hedging Agreement, other than (a) Hedging Agreements required by Section 5.14 and (b) Hedging Agreements entered into in the ordinary course of business to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct of its business or the management of its liabilities. SECTION 6.08. Restricted Payments; Certain Payments of Indebtedness. (a) Other than as specified in the first sentence of Section 5.11, neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except that (i) Holdings may declare and pay dividends with respect to its capital stock payable solely in additional shares of its capital stock, (ii) Subsidiaries may declare and pay dividends ratably with respect to their capital stock, (iii) Holdings may make Restricted Payments, not exceeding $2,000,000 during any fiscal year, pursuant to and in accordance with stock option plans or other benefit plans for directors, management or employees of Holdings, the Borrower and the Subsidiaries, including the redemption or purchase of capital stock of Holdings held by former directors, management or employees of Holdings, the Borrower or any Subsidiary following termination of their employment, (iv) the Borrower may pay dividends to Holdings at such times and in such amounts, not exceeding $2,000,000 during any fiscal year, as shall be necessary to permit 73 Holdings to discharge its permitted liabilities and (v) the Borrower and the Joint Venture Holding Companies may make Restricted Payments to Holdings at such times and in such amounts (but not prior to the fifth anniversary of the date of issuance of the Cumulative Preferred Stock) as shall be necessary to enable Holdings, after such fifth anniversary, to pay dividends in cash on such Cumulative Preferred Stock as and when declared and payable, provided that, at the time of each Restricted Payment made in reliance upon this clause (v) and after giving pro forma effect to such payment, the Leverage Ratio shall not exceed 1.50 to 1.00, (vi) Holdings, the Borrower and the Subsidiaries may make Restricted Payments as and to the extent contemplated by the Recapitalization Agreement and (vii) Holdings may make Restricted Payments on account of the purchase, redemption or repurchase of the Cumulative Preferred Stock with the net proceeds of a substantially concurrent IPO, provided that, after giving effect to such purchase, redemption or repurchase, no Default or Event of Default shall have occurred and be continuing. (b) Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, make or agree to pay or make, directly or indirectly, any payment or other distribution (whether in cash, securities or other property) of or in respect of principal of or interest on any Indebtedness, or any payment or other distribution (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancelation or termination of any Indebtedness, except: (i) payment of Indebtedness created under the Loan Documents; (ii) payment of regularly scheduled interest and principal payments as and when due in respect of any Indebtedness, other than (A) payments in respect of the Subordinated Debt and the Junior Subordinated Note prohibited by the subordination provisions thereof, (B) principal payments in respect of the Junior Subordinated Note and (C) cash interest payments in respect of the Junior Subordinated Note unless, in the case of any such payment specified in this clause (C), at the time of such payment and after giving pro forma effect thereto the Leverage Ratio shall not exceed 1.50 to 1.00 and such payment is due and payable on or after the fifth anniversary of the date of issuance of the Junior Subordinated Note; (iii) refinancings of Indebtedness to the extent permitted by Section 6.01; (iv) payment of secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (v) payments on account of the redemption of the First Lien Notes or the Second Lien Notes or a combination thereof with not more than 25% of the aggregate net proceeds of one or more issuances of equity securities of Holdings, provided that (A) after giving effect to such redemption, no Default or Event of Default shall have occurred and be continuing, (B) not more than 35% of the original aggregate principal amount of the First Lien Notes or the Second Lien Notes is redeemed and (C) any such redemption shall be made within 90 days of such equity issuance and otherwise in compliance with the provisions of the First Lien Note Indenture or Second Lien Note Indenture, as applicable; (vi) payments in respect of any Permitted Receivables Facility; and 74 (vii) repayment of certain Indebtedness of certain Foreign Subsidiaries on the Effective Date as specified in the first sentence of Section 5.11. SECTION 6.09. Transactions with Affiliates. Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (a) transactions that are at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, (b) transactions between or among Holdings, the Borrower and the Subsidiary Loan Parties not involving any other Affiliate, (c) to pay management, consulting and advisory fees to TPG or its Affiliates pursuant to any financial advisory, financing, underwriting or placement agreement or in respect of other investment banking activities, including in connection with acquisitions or divestitures, in an aggregate amount not to exceed $2,000,000 in any fiscal year, (d) payments of fees and expenses to TPG and its Affiliates in connection with the Transactions, (e) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the board of directors of Holdings, (f) the grant of stock options or similar rights to officers, employees, consultants and directors of Holdings pursuant to plans approved by the board of directors of Holdings and the payment of amounts or the issuance of securities pursuant thereto, (g) loans or advances to employees in the ordinary course of business consistent with prudent business practice, but in any event not to exceed $5,000,000 in the aggregate outstanding at any one time, (h) the Transition Agreements, (i) any Restricted Payment permitted by Section 6.08 and (j) any ancillary agreements entered into between Holdings, the Borrower or any Subsidiary and the OnMOS Joint Venture at any time that Holdings owns directly and indirectly less than 80% of the economic interest of the OnMOS Joint Venture; provided, however, that, prior to the Transition Date, all management fees payable to TPG or its Affiliates shall accrue and not be payable in cash, it being understood that any such fees may be paid by the issuance of common stock of or warrants in respect of common stock of Holdings and any other fees may be paid in cash. SECTION 6.10. Restrictive Agreements. Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of Holdings, the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets, or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary, provided that (i) the foregoing shall not apply to restrictions and conditions imposed by law or by any Loan Document, Subordinated Debt Document, First Lien Document or Second Lien Document, (ii) the foregoing shall not apply to restrictions and conditions existing on the Effective Date identified on Schedule 6.10 (but shall apply to any extension or renewal of, or any amendment or modification if it expands the scope of, any such restriction or condition), (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (iv) clause (a) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness, (v) clause (a) of the foregoing shall not apply to customary provisions in leases 75 restricting the assignment thereof and (vi) the foregoing shall not apply to restrictions or conditions imposed on a Receivables Subsidiary in connection with a Permitted Receivables Financing. SECTION 6.11. Amendment of Material Documents. (a) Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, amend, modify or waive any of its rights under (i) any Subordinated Debt Document, (ii) its certificate of incorporation, by-laws or other organizational documents (including the SMP JV Agreement and the Leshan JV Agreement), (iii) the Junior Subordinated Note, (iv) the Certificate of Designations, (v) except for amendments to the Second Lien Security Documents permitted by the Intercreditor Agreement, any Second Lien Document, or (vi) any First Lien Document; provided that any certificate of incorporation, by-law or other organizational documents described in clause (ii) of this paragraph may be amended or modified (and any rights thereunder may be waived) in any respect that is not materially adverse to the interests of the Lenders. (b) Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, amend, modify or waive any of its rights under any Recapitalization Document or terminate any Transition Agreement, in each case to the extent that such amendment, modification, waiver or termination would be adverse to the Lenders. (c) Holdings and the Borrower will not, and will not permit any Subsidiary to, amend, modify or waive any of its rights under any Permitted Receivables Financing to the extent that such amendment, modification or waiver would be materially adverse to the Lenders. (d) The Borrower will not amend, modify or waive any of its rights under the IP License to the extent that such amendment, modification or waiver would (i) adversely affect the subordination of the rights of the Bermuda IP Subsidiary under the IP License to the Liens granted under the Security Agreement on the intellectual property covered by the IP License or (ii) otherwise be adverse to the Lenders in any material respect. SECTION 6.12. [Intentionally Omitted]. SECTION 6.13. [Intentionally Omitted]. SECTION 6.14. Capital Expenditures. (a) The Borrower and Subsidiaries shall not incur or make any Capital Expenditures during any period set forth below (a "Measurement Period") in an amount exceeding the amount set forth opposite such period:
- -------------------------------------------------------------- Maximum Capital Period Expenditures ------ ------------ - -------------------------------------------------------------- January 1, 2002 to March 31, 2003 $ 52,500,000 - -------------------------------------------------------------- April 1, 2003 to December 31, 2003 $ 87,500,000 - -------------------------------------------------------------- January 1, 2004 to December 31, 2004 $100,000,000 - -------------------------------------------------------------- January 1, 2005 to December 31, 2005 $100,000,000 - -------------------------------------------------------------- January 1, 2006 to December 31, 2006 $100,000,000 - -------------------------------------------------------------- January 1, 2007 to August 4, 2007 $100,000,000 - -------------------------------------------------------------- 76 (b) Notwithstanding the foregoing, the $100,000,000 permitted amount in respect of any fiscal year ending after December 31, 2003 shall be increased by an amount equal to 50% of the amount (if any) by which Consolidated EBITDA for the immediately preceding fiscal year exceeds $200,000,000. (c) In addition, the amount of Capital Expenditures permitted to be made by the Borrower and Subsidiaries in respect of any fiscal year after December 31, 2003 shall be increased by (i) the unused amount (if any) of Capital Expenditures that were permitted to be made during the immediately preceding Measurement Period pursuant to Section 6.14(a) minus (ii) an amount equal to the unused permitted Capital Expenditures carried forward to such immediately preceding Measurement Period pursuant to this paragraph (c); provided that the increase in any fiscal year pursuant to this clause (c) shall not exceed 50% of the permitted Capital Expenditures amount for the immediately preceding Measurement Period pursuant to paragraphs (a) and (b). For purposes of determining compliance with this Section, Capital Expenditures incurred or made by the OnMOS Joint Venture and its subsidiaries shall be disregarded. SECTION 6.15. Minimum Consolidated EBITDA. The Borrower will not permit Consolidated EBITDA for any period of four consecutive fiscal quarters ending on any date after the Restatement Effective Date to be less than $140,000,000. SECTION 6.16. Minimum Cash and Cash Equivalents. Prior to the Transition Date, the Borrower will not permit the Liquidity Amount for any period of five consecutive Business Days ending on or after the date hereof (calculated at the close of business on each Business Day), to be less than $50,000,000. SECTION 6.17. OnMOS Joint Venture Interest. At all times after consummation of its investment in the OnMOS Joint Venture the Borrower shall own (directly or indirectly) at least 51% of the voting power represented by the outstanding Equity Interests of the OnMOS Joint Venture. ARTICLE VII Events of Default SECTION 7.01. Events of Default. If any of the following events ("Events of Default") shall occur: (a) the Borrower shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement or any other Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of five days; 77 (c) any representation or warranty made or deemed made by or on behalf of Holdings, the Borrower or any Subsidiary in or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, or in any certificate or other document furnished pursuant to or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, shall prove to have been incorrect in any material respect when made or deemed made; (d) Holdings or the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02, 5.04 (with respect to the existence of Holdings or the Borrower) or 5.11 or in Article VI; (e) any Loan Party shall fail to observe or perform any covenant, condition or agreement contained in any Loan Document (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent to the Borrower (which notice will be given at the request of any Lender); (f) Holdings, the Borrower or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable after giving effect to any applicable grace period with respect thereto; (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity, provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of Holdings, the Borrower or, subject to Section 7.02, any Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holdings, the Borrower or, subject to Section 7.02, any Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) Holdings, the Borrower or, subject to Section 7.02, any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holdings, the Borrower or, subject to Section 7.02, any Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; 78 (j) Holdings, the Borrower or, subject to Section 7.02, any Subsidiary shall become unable, admit in writing its inability or fail generally to pay its debts as they become due; (k) one or more judgments for the payment of money in an aggregate amount in excess of $10,000,000 (net of amounts covered by insurance as to which the insurer has admitted liability in writing) shall be rendered against Holdings, the Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of Holdings, the Borrower or any Subsidiary to enforce any such judgment; (l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect; (m) any Lien purported to be created under any Security Document shall cease to be, or shall be asserted by any Loan Party not to be, a valid and perfected Lien on Collateral having, in the aggregate, a value in excess of $5,000,000, with the priority required by the applicable Security Document, except (i) as a result of the sale or other disposition of the applicable Collateral in a transaction permitted under the Loan Documents, (ii) any action taken by the Collateral Agent to release any such Lien in compliance with the provisions of this Agreement or any other Loan Document or (iii) as a result of the Collateral Agent's failure to maintain possession of any stock certificates, promissory notes or other instruments delivered to it under the Pledge Agreement; (n) any default or other event shall have occurred under any document governing any Permitted Receivables Financing if the effect of such default or other event is to cause the termination of such Permitted Receivables Financing; (o) a Change in Control shall occur; or (p) the TPG Equity Purchase shall not have been consummated on or prior to September 7, 2001; then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. 79 SECTION 7.02. Exclusion of Immaterial Subsidiaries. Solely for the purposes of determining whether a Default has occurred under clause (h), (i) or (j) of Section 7.01, any reference in any such clause to any "Subsidiary" shall be deemed not to include any Subsidiary affected by any event or circumstance referred to in any such clause that did not, as of the last day of the fiscal quarter of the Borrower most recently ended, have assets with a value in excess of 5.0% of the total consolidated assets of the Borrower and the Subsidiaries as of such date, provided that if it is necessary to exclude more than one Subsidiary from clause (h), (i) or (j) of Section 7.01 pursuant to this Section in order to avoid a Default thereunder, all excluded Subsidiaries shall be considered to be a single consolidated Subsidiary for purposes of determining whether the condition specified above is satisfied. ARTICLE VIII The Administrative Agent Each of the Lenders and the Issuing Bank hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto. The bank serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with Holdings, the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder. The Administrative Agent shall not have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated by the Loan Documents that the Administrative Agent is required to exercise in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02), and (c) except as expressly set forth in the Loan Documents, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to Holdings, the Borrower or any of the Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of its own gross negligence or wilful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by Holdings, the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or 80 conditions set forth in any Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent may perform any of and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of each Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time by notifying the Lenders, the Issuing Bank and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders and the Issuing Bank, appoint a successor Administrative Agent that shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Administrative Agent. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or related agreement or any document furnished hereunder or thereunder. 81 ARTICLE IX Miscellaneous SECTION 9.01. Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to Holdings or the Borrower, to it at 5005 East McDowell Road, Phoenix, Arizona 85018, Attention of President (Telecopy No. 602-244-4830); (b) if to the Administrative Agent, to JPMorgan Chase Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Gloria Javier (Telecopy No. (212) 552-5700), with a copy to JPMorgan Chase Bank, 270 Park Avenue, New York, New York 10017, Attention of Edmond DeForest (Telecopy No. (212) 270-4584); (c) if to the Issuing Bank, to JPMorgan Chase Bank, in care of JPMorgan Treasury Services, 10420 Highland Manor Drive, 4th Floor, Tampa, Florida 33610, Attention of Standby LC Department (Telecopy No. (813) 432-5161); (d) if to the Swingline Lender, to JPMorgan Chase Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Gloria Javier (Telecopy No. (212) 552-5700); and (e) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. SECTION 9.02. Waivers; Amendments. (a) No failure or delay by the Administrative Agent, the Issuing Bank or any Lender in exercising any right or power hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Issuing Bank and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of any Loan Document or consent to any departure by any Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent, any Lender or the Issuing Bank may have had notice or knowledge of such Default at the time. 82 (b) Neither this Agreement nor any other Loan Document nor any provision hereof or thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by Holdings, the Borrower and the Required Lenders or, in the case of any other Loan Document, pursuant to an agreement or agreements in writing entered into by the Administrative Agent and the Loan Party or Loan Parties that are parties thereto, in each case with the consent of the Required Lenders, provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the maturity of any Loan, or the date of any scheduled payment of the principal amount of any Term Loan under Section 2.10, or the required date of reimbursement of any LC Disbursement, or any date for the payment of any interest or fees payable hereunder, or reduce the amount of, waive or excuse any such scheduled payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.18(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, (v) change any of the provisions of this Section or the percentage set forth in the definition of the term "Required Lenders" or any other provision of any Loan Document specifying the number or percentage of Lenders (or Lenders of any Class) required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder, without the written consent of each Lender (or each Lender of such Class, as the case may be), (vi) release Holdings or any Subsidiary Loan Party from its Guarantee under the Guarantee Agreement (except as expressly provided in the Guarantee Agreement), or limit its liability in respect of such Guarantee, without the written consent of each Lender, (vii) except in strict accordance with the express provisions of the Security Documents, release all or any substantial part of the Collateral from the Liens of the Security Documents, without the written consent of each Lender, (viii) change any provisions of any Loan Document in a manner that by its terms adversely affects the rights in respect of payments due to Lenders holding Loans of any Class differently than those holding Loans of any other Class, without the written consent of Lenders holding a majority in interest of the outstanding Loans and unused Commitments of each affected Class, (ix) change the definition of "Interest Period" to include periods longer than six months or (x) change the rights of the Tranche B Lenders or the Tranche C Lenders to decline mandatory prepayments as provided in Section 2.11, without the written consent of Tranche B Lenders or the Tranche C Lenders, as applicable, holding a majority of the outstanding Tranche B Loans or Tranche C Loans, as applicable, and provided further that (A) no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, the Issuing Bank or the Swingline Lender without the prior written consent of the Administrative Agent, the Issuing Bank or the Swingline Lender, as the case may be, and (B) any waiver, amendment or modification of this Agreement that by its terms affects the rights or duties under this Agreement of the Revolving Lenders (but not the Tranche A Lenders, Tranche B Lenders and Tranche C Lenders), the Tranche A Lenders (but not the Revolving Lenders, Tranche B Lenders and Tranche C Lenders), the Tranche B Lenders (but not the Revolving Lenders, Tranche A Lenders and Tranche C Lenders) or the Tranche C Lenders (but not the Revolving Lenders, the Tranche A Lenders and the Tranche B Lenders) may be effected by an agreement or agreements in writing entered into by Holdings, the Borrower and requisite percentage in interest of the affected Class of Lenders that would be required to consent thereto under this Section if such Class of Lenders were the only Class of Lenders hereunder at the time. Notwithstanding the foregoing, any provision of this Agreement may be amended by an agreement in writing entered into by Holdings, the Borrower, the Required Lenders and the Administrative Agent (and, if their rights or obligations are affected thereby, the Issuing Bank and the Swingline Lender) if (i) by the terms of such agreement the Commitment of each Lender 83 not consenting to the amendment provided for therein shall terminate upon the effectiveness of such amendment and (ii) at the time such amendment becomes effective, each Lender not consenting thereto receives payment in full of the principal of and interest accrued on each Loan made by it and all other amounts owing to it or accrued for its account under this Agreement. SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates and the Documentation Agents and their respective Affiliates, including the reasonable fees, charges and disbursements of one counsel in each applicable jurisdiction for the Administrative Agent and the Documentation Agents, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of the Loan Documents or any amendments, modifications or waivers of the provisions thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all reasonable out-of-pocket expenses incurred by the Administrative Agent, either Documentation Agent, the Issuing Bank or any Lender, including the reasonable fees, charges and disbursements of any counsel for the Administrative Agent, either Documentation Agent, the Issuing Bank or any Lender, in connection with the enforcement or protection of its rights in connection with the Loan Documents, including its rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit. (b) The Borrower shall indemnify the Administrative Agent, the Documentation Agents, the Issuing Bank and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the reasonable fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of any Loan Document or any other agreement or instrument contemplated hereby, the performance by the parties to the Loan Documents of their respective obligations thereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan or Letter of Credit or the use of the proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence, Release or threatened Release of Hazardous Materials on or from any Mortgaged Property or Restatement Mortgaged Property or any other property currently or formerly owned or operated by Holdings, the Borrower or any of the Subsidiaries, or any Environmental Liability related in any way to Holdings, the Borrower or any of the Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses resulted from the gross negligence or wilful misconduct of such Indemnitee or any Related Person of such Indemnitee. It is acknowledged and agreed by the parties hereto that, solely in their capacities as Documentation Agents and not in their capacities as Lenders, the Documentation Agents have no duties hereunder. (c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent, either Documentation Agent, the Issuing Bank or the Swingline Lender under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the 84 Administrative Agent, such Documentation Agent, the Issuing Bank or the Swingline Lender, as the case may be, such Lender's pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent, such Documentation Agent, the Issuing Bank or the Swingline Lender in its capacity as such. For purposes hereof, a Lender's "pro rata share" shall be determined based upon its share of the sum of the total Revolving Exposures, outstanding Term Loans and unused Commitments at the time. (d) To the extent permitted by applicable law, neither Holdings nor the Borrower shall assert, and each hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable promptly after written demand therefor. (f) Neither Motorola nor any director, officer, employee, stockholder or member, as such, of any Loan Party or Motorola shall have any liability for the Obligations or for any claim based on, in respect of or by reason of the Obligations or their creation; provided that the foregoing shall not be construed to relieve any Loan Party of its Obligations under any Loan Document. SECTION 9.04. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitments and the Loans at the time owing to it), provided that (i) except in the case of an assignment to a Lender or an Affiliate or Approved Fund of a Lender, each of the Borrower and the Administrative Agent (and, in the case of an assignment of all or a portion of a Revolving Commitment or any Lender's obligations in respect of its LC Exposure or Swingline Exposure, the Issuing Bank and the Swingline Lender) must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Lender or an Affiliate or Approved Fund of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitments or Loans, the amount of the Commitments or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $1,000,000 unless each of the Borrower and the Administrative Agent otherwise 85 consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement, except that this clause (iii) shall not be construed to prohibit the assignment of a proportionate part of all the assigning Lender's rights and obligations in respect of one Class of Commitments or Loans, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire, and provided further that any consent of the Borrower otherwise required under this paragraph shall not be required if an Event of Default under clause (a), (b), (g), (h), (i), (j), (n) or (o) of Article VII has occurred and is continuing. Subject to acceptance and recording thereof pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement (provided that any liability of the Borrower to such assignee under Section 2.15, 2.16 or 2.17 shall be limited to the amount, if any, that would have been payable thereunder by the Borrower in the absence of such assignment), and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section. (c) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and Holdings, the Borrower, the Administrative Agent, the Issuing Bank and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Bank and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Lender may, without the consent of the Borrower, the Administrative Agent, the Issuing Bank or the Swingline Lender, sell participations to one or more banks or other entities (a "Participant") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it), provided that (i) such Lender's obligations under this Agreement shall remain unchanged, 86 (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) Holdings, the Borrower, the Administrative Agent, the Issuing Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce the Loan Documents and to approve any amendment, modification or waiver of any provision of the Loan Documents, provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.18(c) as though it were a Lender. (f) A Participant shall not be entitled to receive any greater payment under Section 2.15 or 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.17 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.17(e) as though it were a Lender. (g) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest, provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. SECTION 9.05. Survival. All covenants, agreements, representations and warranties made by the Loan Parties in the Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of the Loan Documents and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, the Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Sections 2.15, 2.16, 2.17 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof. SECTION 9.06. Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents and any separate letter agreements with 87 respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective as provided in the Amendment and Restatement Agreement. SECTION 9.07. Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 9.08. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower then existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement. The rights of each Lender under this Section are in addition to other rights and remedies (including any other rights of setoff) that such Lender may have. SECTION 9.09. GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS. (A) THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. (b) Each of Holdings and the Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or any other Loan Document shall affect any right that the Administrative Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against Holdings, the Borrower or its properties in the courts of any jurisdiction. (c) Each of Holdings and the Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement or any other Loan 88 Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 9.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 9.12. Confidentiality. Each of the Administrative Agent, the Issuing Bank and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, or to any direct or indirect contractual counterparties in swap agreements or such contractual counterparties' professional advisors, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent, the Issuing Bank or any Lender on a nonconfidential basis from a source other than Holdings or the Borrower. For the purposes of this Section, the term "Information" means all information received from Holdings or the Borrower relating to Holdings or the Borrower or its business, other than any such information that is available to the Administrative Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to disclosure by Holdings or the Borrower. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. SECTION 9.13. Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts that are treated as interest on such Loan under applicable law (collectively the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") that may be contracted 89 for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. SECTION 9.14. Existing Credit Agreement; Effectiveness of Amendment and Restatement. Until this Agreement becomes effective in accordance with the terms of the Amendment and Restatement Agreement, the Existing Credit Agreement shall remain in full force and effect and shall not be affected hereby. After the Restatement Effective Date, all obligations of the Borrower under the Existing Credit Agreement shall become obligations of the Borrower hereunder, secured by the Security Documents, and the provisions of the Existing Credit Agreement shall be superseded by the provisions hereof. SECTION 9.15. Additional Provisions for Tranche D Lenders. No agreement effecting an amendment or modification of this Agreement or of any other Loan Document or of any provision hereof or thereof may (i) change the rights of the Tranche D Lenders to decline mandatory prepayments as provided in Section 2.11, without the written consent of Tranche D Lenders holding a majority of the outstanding Tranche D Loans or (ii) by its terms affect the rights or duties under this Agreement of the Tranche D Lenders (but not the Revolving Lenders, the Tranche A Lenders, the Tranche B Lenders and the Tranche C Lenders), without an agreement or agreements in writing entered into by Holdings, the Borrower and the requisite percentage in interest of the Tranche D Lenders that would be required to consent thereto under Section 9.02 if the Tranche D Lenders were the only Class of Lenders hereunder at the time; provided, however, that any provision of this Agreement may be amended by an agreement in writing entered into by Holdings, the Borrower, the Required Lenders and the Administrative Agent (and, if their rights or obligations are affected thereby, the Issuing Bank and the Swingline Lender) if (i) such amendment is permitted under Section 9.02, (ii) by the terms of such agreement, the Commitment of each Tranche D Lender not consenting to the amendment provided for therein shall terminate upon the effectiveness of such amendment and (iii) at the time such amendment becomes effective, each Tranche D Lender not consenting thereto receives payment in full of the principal of and interest accrued on each Tranche D Term Loan made by it and all other amounts owing to it or accrued for its account under this Agreement. SECTION 9.16. Additional Provisions for Tranche R Lenders. No agreement effecting an amendment or modification of this Agreement or of any other Loan Document or of any provision hereof or thereof may by its terms affect the rights or duties under this Agreement of the Tranche R Lenders (but not the Revolving Lenders, the Tranche A Lenders, the Tranche B Lenders, the Tranche C Lenders and the Tranche D Lenders), without an agreement or agreements in writing entered into by Holdings, the Borrower and the requisite percentage in interest of the Tranche R Lenders that would be required to consent thereto under Section 9.02 if the Tranche R Lenders were the only Class of Lenders hereunder at the time; provided, however, that any provision of this Agreement may be amended by an agreement in writing entered into by Holdings, the Borrower, the Required Lenders and the Administrative Agent (and, if their rights or obligations are affected thereby, the Issuing Bank and the Swingline Lender) if (i) such amendment is permitted under Section 9.02, (ii) by the terms of such agreement, the Commitment of each Tranche R Lender not consenting to the amendment provided for therein 90 shall terminate upon the effectiveness of such amendment and (iii) at the time such amendment becomes effective, each Tranche R Lender not consenting thereto receives payment in full of the principal of and interest accrued on each Tranche R Term Loan made by it and all other amounts owing to it or accrued for its account under this Agreement. 91 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. ON SEMICONDUCTOR CORPORATION, by /s/ John T. Kurtzweil --------------------- Name: John T. Kurtzweil Title: Senior Vice President, Chief Financial Officer & Treasurer SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, by /s/ John T. Kurtzweil --------------------- Name: John T. Kurtzweil Title: Senior Vice President, Chief Financial Officer & Treasurer JPMORGAN CHASE BANK, individually and as Administrative Agent, by /s/ Edmond DeForest ---------------------- Name: Edmond DeForest Title: Vice President
EXHIBIT 10.53 EXECUTION COPY COLLATERAL SHARING AGREEMENT COLLATERAL SHARING AGREEMENT dated as of March 3, 2003, among JPMORGAN CHASE BANK, as Collateral Agent, WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee, ON SEMICONDUCTOR CORPORATION and SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC. W I T N E S S E T H : WHEREAS, the Companies (such term and each other capitalized term used herein having the meanings set forth in Section 1 below), certain lenders, and JPMorgan Chase Bank, as administrative agent, collateral agent and syndication agent, are parties to the Credit Agreement dated as of August 4, 1999, as amended and restated as of April 3, 2000; WHEREAS, the Companies and the Trustee have entered into the Indenture dated as of March 3, 2003 (as amended, supplemented or otherwise modified from time to time, the "Indenture"), pursuant to which the Companies intend to issue the Notes; WHEREAS, the Companies and certain lenders under the Credit Agreement referred to above have entered into an Amendment and Restatement Agreement dated as of February 14, 2003 (the "Amendment and Restatement Agreement"), to amend and restate the Credit Agreement referred to above as of February 14, 2003 (such Credit Agreement, as further amended, supplemented or otherwise modified from time to time, the "Existing Credit Agreement") in order to, among other things, permit, subject to certain terms and conditions, (a) the issuance of the Notes by the Companies and (b) the amendment of the Security Documents to provide for securing the Noteholder Claims thereunder; and WHEREAS, it is a condition precedent to the effectiveness of the amendments contemplated by the Amendment and Restatement Agreement that the parties hereto enter into this Agreement; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and obligations herein set forth and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: SECTION 1. (a) DEFINITIONS. As used in this Agreement, the following terms have the meanings specified below: "Administrative Agent" means JPMorgan Chase Bank, in its capacity as the administrative agent under the Existing Credit Agreement. "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. Notwithstanding the foregoing, no individual shall be deemed to be an Affiliate of a Person solely by reason of his or her being an officer or director of such Person. "Amendment and Restatement Agreement" has the meaning set forth in the recitals hereto. 1 "Applicable Secured Documents" means (a) in respect of any Noteholder Claims, the Noteholder Documents and (b) in respect of any Senior Lender Claims, the relevant Senior Loan Documents or other documents governing such Senior Lender Claims. "Bank Indebtedness" means any and all amounts payable under or in respect of the Credit Agreement and any Refinancing Indebtedness (as defined in the Indenture) with respect thereto, as amended from time to time, including principal, premium (if any), interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to either Company whether or not a claim for post-filing interest is allowed in such proceedings), fees, charges, expenses, reimbursement obligations, guarantees and all other amounts payable thereunder or in respect thereof. It is understood and agreed that Refinancing Indebtedness (as defined in the Indenture) in respect of the Credit Agreement may be Incurred (as defined in the Indenture) from time to time after termination of the Credit Agreement. "Bankruptcy Law" means Title 11 of the United States Code and any similar Federal, state or foreign law for the relief of debtors. "Business Day" means any day other than a Saturday, a Sunday or a day that is a legal holiday under the laws of the State of New York or on which banking institutions in the State of New York are required or authorized by law or other governmental action to close. "Cash Management Obligations" means, with respect to any Person, all Obligations of such Person in respect of overdrafts and related liabilities owed to any other Person that arise from treasury, depositary or cash management services in connection with any automated clearing house transfers of funds or any similar transactions. "Collateral" means all assets or property of the Grantors, now owned or hereafter acquired, upon which a Lien is purported to be created by any Security Document. "Collateral Account" has the meaning set forth in Section 4.1. "Collateral Agent" means JPMorgan Chase Bank, in its capacity as collateral agent under the Security Documents and this Agreement. "Collateral Agent Fees" means all fees, costs and expenses of, and other amounts owing to, the Collateral Agent of the types referred to in Section 2.4. "Collateral Estate" has the meaning set forth in Section 2.1(b). "Commodity Hedge Obligations" means, with respect to any Person, all Obligations of such Person in respect of any commodity price protection agreement or other commodity price hedging arrangement or other similar agreement or arrangement. "Companies" means Holdings and SCI. "Credit Agreement" means the Existing Credit Agreement and all other Loan Documents (as defined therein) and any amendments, supplements, modifications, extensions, renewals, restatements or refundings thereof (except to the extent that any such amendment, supplement, modification, extension, renewal, restatement or refunding would be prohibited by the terms of the Indenture, unless otherwise agreed to by the Holders of at least a majority in aggregate principal amount of Notes at the 2 time outstanding) and any indentures or credit facilities or commercial paper facilities with banks or other institutional lenders that replace, refund or refinance any part of the loans, notes, other credit facilities or commitments thereunder, including any such replacement, refunding or refinancing facility or indenture that increases the amount borrowable thereunder or alters the maturity thereof. "Credit Facilities" means one or more debt facilities (including the Credit Agreement) or commercial paper facilities providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to lenders or to special purpose entities formed to borrow from lenders against such receivables) or letters of credit, or any debt securities or other form of debt financing (including convertible or exchangeable debt instruments), in each case, as amended, supplemented, modified, extended, renewed, restated or refunded in whole or in part from time to time. "Discharge of Senior Credit Agreement Claims" means, except to the extent otherwise provided in Section 5.2, payment in full in cash of (a) the principal of and interest and premium, if any, on all Indebtedness outstanding under the Senior Credit Agreement constituting Senior Lender Claims or, with respect to letters of credit outstanding thereunder, delivery of cash collateral or backstop letters of credit in respect thereof in compliance with the Senior Credit Agreement, in each case after or concurrently with termination of all commitments to extend credit thereunder and (b) any other Senior Lender Claims that are due and payable or otherwise accrued and owing under the Senior Credit Agreement at or prior to the time such principal, interest and premium, if any, are paid. "Discharge of Senior Lender Claims" means payment in full in cash of (a) the principal of and interest and premium, if any, on all Indebtedness outstanding under the First-Lien Credit Facilities or, with respect to Hedging Obligations, Commodity Hedge Obligations or letters of credit outstanding thereunder, delivery of cash collateral or backstop letters of credit in respect thereof in compliance with such First-Lien Credit Facilities, as applicable, in each case after or concurrently with termination of all commitments to extend credit thereunder and (b) any other Senior Lender Claims that are due and payable or otherwise accrued and owing at or prior to the time such principal, interest and premium, if any, are paid. "Distribution Date" means each date fixed by the Collateral Agent in its sole discretion for a distribution pursuant to the applicable provisions of this Agreement of any funds held in the Collateral Account. "Existing Credit Agreement" has the meaning set forth in the recitals hereto. "First-Lien Credit Facilities" means (a) the Credit Facilities provided pursuant to the Credit Agreement and (b) any other Credit Facility, that, in the case of both clauses (a) and (b), is secured by a Permitted Lien (as defined in the Indenture) described in clause (a) or (e) of the definition thereof and (except for the Credit Facilities provided pursuant to the Existing Credit Agreement) is designated by the Companies as a "First-Lien Credit Facility" for purposes of the Indenture. "Future First-Lien Credit Facility" means any First-Lien Credit Facility (other than the Existing Credit Agreement), provided that the Required Lenders under any Senior Credit Agreement then in effect have consented to the designation of such Credit Facilities as a "First-Lien Credit Facility". "Future Other First-Lien Obligations" means all Obligations of either Company or any other Grantor, to a creditor under a First-Lien Credit Facility, in respect of Cash Management Obligations or Hedging Obligations that are designated by the Companies as "Credit Agreement Obligations" for purposes of the Indenture (other than any Senior Lender Cash Management Obligations and Senior 3 Lender Hedging Obligations); provided that the Required Lenders under any Senior Credit Agreement then in effect have consented to such designation. "Grantors" means each of the Companies and the Subsidiaries that has executed and delivered a Security Document. "Hedging Obligations" means, with respect to any Person, the Obligations of such Person in respect of (a) interest rate or currency swap agreements, interest rate or currency cap agreements, interest rate or currency collar agreements, (b) other agreements or arrangements designed to protect such Person against fluctuations in interest rates and/or currency exchange rates or (c) Commodity Hedge Obligations. "Holdings" means ON Semiconductor Corporation, a Delaware corporation. "Indebtedness" means and includes all Obligations that constitute "Indebtedness" within the meaning of the Indenture or the Senior Credit Agreement. "Indenture" has the meaning set forth in the recitals hereto. "Insolvency or Liquidation Proceeding" means (a) any voluntary or involuntary case or proceeding under any Bankruptcy Law with respect to any Grantor, (b) any other voluntary or involuntary insolvency, reorganization or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding with respect to any Grantor or with respect to any of their respective assets, (c) any liquidation, dissolution, reorganization or winding up of any Grantor whether voluntary or involuntary and whether or not involving insolvency or bankruptcy or (d) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of any Grantor. "Instructing Group" means, until the Discharge of Senior Credit Agreement Claims has occurred, the Required Lenders, and thereafter, the Majority Secured Parties. "Intercreditor Agreement" means the Intercreditor Agreement dated as of May 6, 2002, among JPMorgan Chase Bank, as credit agent, Wells Fargo Bank Minnesota, National Association, as trustee, and the Companies. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Loan Parties" means the Companies and the other Grantors. "Majority Secured Parties" means, at any time, the Secured Party or Secured Parties, acting through its (or their) respective Representative, holding more than 50% of the aggregate amount of the Secured Obligations then outstanding. In calculating the aggregate amount of the Secured Obligations then outstanding represented by each Representative, (a) the amount of Indebtedness outstanding shall be that reflected on the applicable debtor's balance sheet, as determined in accordance with GAAP, (b) the amount outstanding in respect of a letter of credit shall be the face amount of such letter of credit and (c) the amount outstanding in respect of Hedging Obligations or Cash Management Obligations shall be 4 the amount which would be due and payable to a Secured Party holding such Hedging Obligations or Cash Management Obligations, as applicable, if such Hedging Obligations or Cash Management Obligations were then terminated. "Noteholder Claims" means all Obligations in respect of the Notes and the guarantees of the Notes or arising under the Noteholder Documents or any of them. "Noteholder Documents" means (a) the Indenture and the Notes and (b) any other related document or instrument executed and delivered pursuant to any Noteholder Document described in clause (a) above evidencing or governing any Obligations thereunder. Notwithstanding the foregoing, for purposes of this Agreement, "Noteholder Documents" shall be deemed to exclude the Security Documents. "Noteholders" means the Persons holding Noteholder Claims. "Notes" means (a) the 12% Senior Secured Notes due 2010 to be issued by the Companies as co-issuers, (b) the exchange notes issued in exchange therefor as contemplated by the Registration Rights Agreement dated as of March 3, 2003, among Holdings, SCI and the Initial Purchasers (as defined therein) and (c) any additional notes issued under the Indenture by the Companies as co-issuers, to the extent permitted by the Indenture and the Senior Credit Agreement. "Obligations" means any and all obligations with respect to the payment of (a) any principal of or interest (including interest accruing on or after the commencement of any Insolvency or Liquidation Proceeding, whether or not a claim for post-filing interest is allowed in such proceeding) or premium on any Indebtedness, including any reimbursement obligation in respect of any letter of credit, (b) any fees, indemnification obligations, expense reimbursement obligations or other liabilities payable under the documentation governing any Indebtedness, (c) any obligation to post cash collateral in respect of letters of credit and any other obligations or (d) any Cash Management Obligations or Hedging Obligations. "Other Secured Parties" means the Secured Parties holding Secured Obligations other than Secured Obligations under the Senior Credit Agreement. "Permitted Investments" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America); (b) investments in commercial paper maturing not more than one year after the date of acquisition thereof and having, at such date of acquisition, one of the two highest credit ratings obtainable from Standard & Poor's Rating Service or from Moody's Investor Service, Inc.; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing not more than one year after the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts and overnight bank deposits issued or offered by, any commercial bank organized under the laws of the United States of America or any state thereof or any foreign country recognized by the United States of America that has a combined capital and surplus and undivided profits of not less than $250,000,000 (or the foreign-currency equivalent thereof); 5 (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above or clause (e) or (f) below and entered into with a financial institution satisfying the criteria described in clause (c) above; (e) securities issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof having maturities of not more than six months from the date of acquisition thereof and, at the time of acquisition, having one of the two highest credit ratings obtainable from Standard & Poor's Rating Service or from Moody's Investor Service, Inc.; (f) securities issued by any foreign government or any political subdivision of any foreign government or any public instrumentality thereof having maturities of not more than six months from the date of acquisition thereof and, at the time of acquisition, having one of the two highest credit ratings obtainable from Standard & Poor's Rating Service or from Moody's Investor Service, Inc.; and (g) investments in funds that invest solely in one or more types of securities described in clauses (a), (e) and (f) above. "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, entity or other party, including any government and any political subdivision, agency or instrumentality thereof. "Pledged Collateral" means (a) the "Pledged Securities" under, and as defined in, the Pledge Agreement (as defined in the Existing Credit Agreement and the Indenture), and (b) any other Collateral in the possession of the Collateral Agent (or its agents or bailees), to the extent that possession thereof is necessary to perfect a Lien thereon under the Uniform Commercial Code. "Recovery" has the meaning set forth in Section 6.4 hereof. "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Representatives" means (a) in respect of any of the Senior Lender Claims under the Existing Credit Agreement, the Administrative Agent, (b) in respect of any other Senior Lender Claims, the agent or trustee in respect thereof (or, if there is no agent or trustee, the holder or holders thereof) and (c) in respect of any of the Noteholder Claims, the Trustee. "Required Lenders" means, with respect to any amendment, modification, termination, waiver, consent, direction or other action, those Senior Lenders the approval of which is required pursuant to the Senior Loan Documents to approve such amendment, modification, termination, waiver, consent, direction or other action. "SCI" means Semiconductor Components Industries, LLC, a Delaware limited liability company. "Second-Lien Notes" means the $300.0 million aggregate principal amount of 12.0% senior secured notes issued by the Companies on May 6, 2002 and the exchange notes issued or to be issued in exchange therefor. 6 "Secured Obligations" means, without duplication, (a) the Senior Lender Claims and (b) the Noteholder Claims. "Secured Parties" means (a) the Senior Lenders, (b) the Administrative Agent, (c) the Collateral Agent, and (d) the Trustee, for the benefit of the holders from time to time of the Noteholder Claims. "Security Documents" means the Security Documents (as defined in the Existing Credit Agreement and the Indenture) and any other agreement, document or instrument pursuant to which a Lien is granted securing any Senior Lender Claims or Noteholder Claims or under which rights or remedies with respect to such Liens are governed. "Senior Credit Agreement" means the Existing Credit Agreement; provided that if at any time a Discharge of Senior Credit Agreement Claims occurs with respect to the Existing Credit Agreement (without giving effect to Section 5.2), then, to the extent provided in Section 5.2, the term "Senior Credit Agreement" means the Future First-Lien Credit Facility designated by the Companies as the "Senior Credit Agreement" in accordance with such Section. "Senior Credit Agreement Lender" means any Senior Lender that holds any Senior Lender Claim under the Senior Credit Agreement. "Senior Lender Cash Management Obligations" means any Cash Management Obligations secured by any Collateral under the Security Documents. "Senior Lender Claims" means (a) all Bank Indebtedness and all other Indebtedness outstanding under one or more of the Senior Loan Documents, including any Future First-Lien Credit Facilities, the Indebtedness under each of which (i) constitutes Permitted Debt (as defined in the Indenture) or is otherwise permitted by the Indenture, (ii) is designated by the Companies as "Credit Agreement Obligations" for purposes of the Indenture and (iii) is secured by a Permitted Lien (as defined in the Indenture) described in clause (a) or (e) of the definition thereof, (b) all other Obligations (not constituting Indebtedness) of either Company or any Grantor under the Senior Loan Documents or any such other Future First-Lien Credit Facility, including all Senior Lender Hedging Obligations and Senior Lender Cash Management Obligations and (c) all Future Other First-Lien Obligations. Senior Lender Claims shall include all interest accrued or accruing (or which would, absent the commencement of an Insolvency or Liquidation Proceeding, accrue) after the commencement of an Insolvency or Liquidation Proceeding in accordance with and at the rate specified in the relevant Senior Loan Document whether or not the claim for such interest is allowed as a claim in such Insolvency or Liquidation Proceeding. To the extent any payment with respect to the Senior Lender Claims (whether by or on behalf of any Grantor, as proceeds of security, enforcement of any right of set-off or otherwise) is declared to be fraudulent or preferential in any respect, set aside or required to be paid to a debtor in possession, trustee, receiver or similar Person, then the obligation or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payment had not occurred. Notwithstanding anything to the contrary contained in the first sentence of this definition, any Obligation under the Senior Loan Documents or any Future First-Lien Credit Facility (including any Cash Management Obligations or Hedging Obligations) shall constitute a "Senior Lender Claim" if the Collateral Agent or the relevant Senior Lender or Senior Lenders shall have received a written representation from either Company in or in connection with the execution of such Senior Loan Documents evidencing such Obligation that such Obligation constitutes a "Credit Agreement Obligation" under and as defined in the Indenture (whether or not such Obligation is at any time determined not to have been permitted to be incurred under the Indenture). 7 "Senior Lender Hedging Obligations" means any Hedging Obligations secured by any Collateral under the Security Documents. "Senior Lenders" means the Persons holding Senior Lender Claims. "Senior Loan Documents" means the Senior Credit Agreement, and each of the other agreements, documents and instruments (including each agreement, document or instrument providing for or evidencing a Senior Lender Hedging Obligation or Senior Lender Cash Management Obligation) providing for or evidencing any other Obligation under the Credit Agreement or any Future First-Lien Credit Facility or any Future Other First-Lien Obligations, and any other related document or instrument executed or delivered pursuant to any Senior Loan Document at any time or otherwise evidencing any Senior Lender Claims. Notwithstanding the foregoing, for purposes of this Agreement, "Senior Loan Documents" shall be deemed to exclude the Security Documents. "Senior Subordinated Notes" means the $400.0 million aggregate principal amount of 12.0% senior subordinated notes issued by the Companies on August 4, 1999 and the exchange notes issued in exchange therefor. "Subsidiary" means any "Subsidiary" of either Company, as defined in the Indenture or the Senior Credit Agreement. "Trustee" means Wells Fargo Bank Minnesota, National Association, in its capacity as trustee under the Indenture. "Uniform Commercial Code" or "UCC" means the Uniform Commercial Code as from time to time in effect in the State of New York. (b) Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified, (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Sections shall be construed to refer to Sections of this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 2. THE COLLATERAL AGENT. 2.1 General Authority of the Collateral Agent over the Collateral. (a) By acceptance of the benefits of this Agreement and the Security Documents, each Secured Party shall be deemed irrevocably (i) to consent to the appointment of the Collateral Agent as its agent hereunder and under the Security Documents, (ii) to confirm that the Collateral Agent shall have the authority to act as the exclusive agent of such Secured Party for executing and delivering any amendments to the Security Documents and enforcement of any provisions of this Agreement and the Security Documents against any 8 Grantor or the exercise of remedies hereunder or thereunder, in accordance with and to the extent consistent with this Agreement and the Security Documents, (iii) to agree, except as provided in this Agreement and the Security Documents, that such Secured Party shall not take any action (other than through the Collateral Agent) to enforce any provisions of this Agreement or any Security Document against any Grantor or to exercise any remedy hereunder or thereunder and (iv) to agree to be bound by the terms of this Agreement and the Security Documents. Each Representative of the Other Secured Parties, for itself and on behalf of such Other Secured Parties, hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent of the Collateral Agent, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Representative and Other Secured Parties, as applicable, or in the Collateral Agent's own name, from time to time in the Collateral Agent's discretion, for the purpose of carrying out the terms of this Section 2.1, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Section 2.1, including any termination statements, endorsements or other instruments of transfer or release, in accordance with this Agreement and the Security Documents. (b) The Collateral Agent hereby agrees that it holds and will hold all of its right, title and interest in, to and under the Security Documents and the Collateral granted to the Collateral Agent thereunder whether now existing or hereafter arising (all such right, title and interest being hereinafter referred to as the "Collateral Estate") under and subject to the conditions set forth in this Agreement and the Security Documents; and the Collateral Agent further agrees that it will hold such Collateral Estate in trust for the ratable benefit of the relevant Secured Parties, for the enforcement of the payment of all Secured Obligations secured by the relevant Collateral (subject to the limitations and priorities set forth herein and in the Security Documents) and as security for the performance of and compliance with the covenants and conditions of this Agreement and each of the Security Documents. 2.2 Information as to Secured Parties and Representatives. The Companies shall deliver to the Collateral Agent from time to time after the date hereof upon request of the Collateral Agent a list setting forth as of a date not more than 30 days prior to the date of such delivery, (a) the aggregate unpaid principal amount of the Senior Lender Claims outstanding, (b) the aggregate unpaid principal amount of the Noteholder Claims outstanding, and (c) to the extent known to the Company, the respective names and addresses of each Secured Party. In addition, the Companies will promptly notify the Collateral Agent of each change in the identity of any Representative. Promptly following the date hereof, the Trustee shall deliver to the Collateral Agent the names of the officers of the Trustee authorized to give directions hereunder on behalf of the Trustee. Each Representative of any Other Secured Parties agrees to notify the Collateral Agent of any change of its officers authorized to give directions hereunder on behalf of such Representative prior to the date of any such change. If the Collateral Agent does not receive the names of the officers of the Representative of any Other Secured Parties authorized to give directions hereunder on behalf of such Representative, the Collateral Agent may rely on any Person purporting to be authorized to give directions hereunder on behalf of such Representative. If the Collateral Agent is not informed of changes of the officers of the applicable Representative of the Other Secured Parties authorized to give directions hereunder on behalf of such Representative, the Collateral Agent may rely on the information previously provided to the Collateral Agent. 2.3 The Collateral Agent. Each of the Secured Parties, by its acceptance of the benefits hereof, hereby irrevocably appoints the Collateral Agent as its agent and authorizes the Collateral Agent to take such actions on its behalf and to exercise such powers as are delegated to the Collateral Agent by the terms of this Agreement and the Security Documents, together with such actions and powers as are reasonably incidental thereto. 9 The bank serving as the Collateral Agent hereunder shall have the same rights and powers in its capacity as a Senior Lender as any other Senior Lender and may exercise the same as though it were not the Collateral Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Companies or any Grantor or other Affiliate thereof as if it were not the Collateral Agent hereunder. The Collateral Agent shall not have any duties or obligations except those expressly set forth in this Agreement and the Security Documents. The Collateral Agent shall make available for inspection by any Secured Party, upon request of the Representative of such Secured Party, each certificate or other paper furnished to the Collateral Agent by any Loan Party under or in respect of this Agreement, any Security Document or any portion of the Collateral Estate. The Companies hereby consent to the disclosure of such requested documents by the Collateral Agent to the Secured Parties. Without limiting the generality of the foregoing, (a) the Collateral Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a default under the Credit Agreement or the Indenture has occurred and is continuing, (b) the Collateral Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated by the Security Documents that the Collateral Agent is required to exercise in writing by the Instructing Group pursuant to this Agreement, and (c) except as expressly set forth in this Agreement and the Security Documents, the Collateral Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to either Company or any Grantor that is communicated to or obtained by the bank serving as Collateral Agent or any of its Affiliates in any capacity. The Collateral Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Instructing Group pursuant to this Agreement, or in the absence of its own gross negligence or wilful misconduct. The Collateral Agent shall be deemed not to have knowledge of any default or event of default under the Senior Loan Documents or the Noteholder Documents, unless and until written notice thereof is given to the Collateral Agent by either Company or any Representative, as applicable, and the Collateral Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Senior Loan Document or Noteholder Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Senior Loan Documents or Noteholder Documents, (iv) the validity, enforceability, effectiveness or genuineness of any Senior Loan Documents or Noteholder Documents or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV of the Existing Credit Agreement or elsewhere in any Senior Loan Document or Noteholder Document, other than to confirm receipt of items expressly required to be delivered to the Collateral Agent under the Senior Loan Documents or the Noteholder Documents. Whenever in the performance of its duties under this Agreement, the Collateral Agent shall deem it necessary or desirable that a matter be proved or established with respect to either Company, any Grantor or any other Person in connection with the taking, suffering or omitting of any action hereunder by the Collateral Agent, such matter may be conclusively deemed to be proved or established by a certificate purporting to be executed by an officer of such Person. The Collateral Agent shall be entitled to rely upon, and shall not incur any liability with respect to any action taken, suffered or omitted in reliance upon any such certificate, or any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Collateral Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Collateral Agent may consult with legal counsel (who may be counsel for the Companies), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. 10 The Collateral Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Collateral Agent. The Collateral Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Collateral Agent and any such sub-agent. Subject to the appointment and acceptance of a successor Collateral Agent as provided in this paragraph, the Collateral Agent may resign at any time by notifying the Senior Lenders, the Trustee, the Representative of any Other Secured Party and the Companies. Upon any such resignation and so long as the Discharge of Senior Credit Agreement Claims has not occurred, the Required Lenders shall have the right, in consultation with the Companies, to appoint a successor, and if no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Collateral Agent gives notice of its resignation, then the retiring Collateral Agent may, on behalf of the Secured Parties, appoint a successor Collateral Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank (unless otherwise agreed by the Companies and the Required Lenders). Upon any such resignation of the Collateral Agent after the Discharge of Senior Credit Agreement Claims has occurred, the Majority Secured Parties shall have the right, in consultation with the Companies, to appoint a successor, and if no successor shall have been so appointed and shall have accepted such appointment within 15 days after the retiring Collateral Agent gives notice of its resignation, then the Trustee shall be appointed the successor Collateral Agent. If the Trustee shall not have accepted such appointment, the Collateral Agent, the Companies or the Majority Secured Parties may apply to any court of competent jurisdiction to appoint a successor Collateral Agent to act until such time, if any, as a successor shall have been appointed and shall have accepted such appointment as above provided. Upon its appointment as Collateral Agent hereunder, a successor Collateral Agent shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Collateral Agent, and the retiring Collateral Agent shall be discharged from its duties and obligations hereunder. Any successor Collateral Agent shall execute and deliver an appropriate supplement or amendment to this Agreement and other necessary amendments or supplements to the Security Documents to effect such appointment. The fees payable by the Companies to a successor Collateral Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Companies and such successor. After the Collateral Agent's resignation hereunder, the provisions of this Section 2.3 and Section 2.4 shall continue in effect for the benefit of such retiring Collateral Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Collateral Agent. 2.4 Collateral Agent's Fees; Indemnification. (a) Each Grantor jointly and severally agrees to pay upon demand to the Collateral Agent the amount of any and all reasonable expenses, including the reasonable fees, disbursements and other charges of its counsel and of any experts or agents, which the Collateral Agent may incur in connection with this Agreement. (b) Without limitation of its indemnification obligations under the Security Documents, the Senior Loan Documents or the Noteholder Documents, each Grantor jointly and severally agrees to indemnify the Collateral Agent and its Related Parties against, and hold each of them harmless from, (i) any and all losses, claims, damages, liabilities and related expenses, including reasonable fees, disbursements and other charges of counsel, incurred by or asserted against any of them arising out of, in any way connected with, or as a result of, the execution, delivery or performance of this Agreement or any claim, litigation, investigation or proceeding relating hereto or to the Collateral, whether or not such Person is a party thereto; provided that such indemnity shall not, as to the Collateral Agent and its Related 11 Parties, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Person and (ii) any and all present or future claims or liability for any recording, stamp, documentary, excise, transfer, sales, property or similar taxes, charges or levies incurred in connection with this Agreement. (c) Any such amounts payable as provided hereunder shall be additional Secured Obligations secured by the Security Documents. The provisions of this Section 2.4 shall remain operative and in full force and effect regardless of the termination of this Agreement, any Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Noteholder Document, the consummation of the transactions contemplated hereby, the repayment of any of the Secured Obligations, the invalidity or unenforceability of any term or provision of this Agreement, any Security Document, any Senior Loan Document or any Noteholder Document, or any investigation made by or on behalf of the Collateral Agent or any other Secured Party. All amounts due under this Section 2.4 shall be payable on written demand therefor and shall bear interest at the rate specified in Section 2.13(c) of the Credit Agreement. (d) Notwithstanding anything to the contrary in this Agreement, as security for the payment of the Collateral Agent Fees, (i) the Collateral Agent is hereby granted a lien upon all Collateral and (ii) the Collateral Agent shall have the right to use and apply any of the funds held by the Collateral Agent in the Collateral Account to cover unpaid Collateral Agent Fees. SECTION 3. ENFORCEMENT; DETERMINATIONS RELATING TO COLLATERAL. 3.1 Exercise of Remedies. So long as the Discharge of Senior Lender Claims has not occurred, whether or not any Insolvency or Liquidation Proceeding has been commenced by or against either Company or any other Grantor, (i) the Other Secured Parties will not exercise or seek to exercise any rights or remedies with respect to any Collateral, institute any action or proceeding with respect to such rights or remedies (including any action of foreclosure), contest, protest or object to any foreclosure proceeding or action brought by the Collateral Agent or, if the Discharge of Senior Credit Agreement Claims has not occurred, any Senior Credit Agreement Lender, the exercise of any right under any lockbox agreement, landlord waiver or bailee's letter or similar agreement or arrangement to which any Other Secured Party is a party, or any other exercise by any such party, of any rights and remedies relating to the Collateral under the Security Documents or otherwise, or object to the forbearance by the Collateral Agent or, if the Discharge of Senior Credit Agreement Claims has not occurred, the Senior Credit Agreement Lenders, from bringing or pursuing any foreclosure proceeding or action or any other exercise of any rights or remedies relating to the Collateral, (ii) the Collateral Agent shall have the exclusive right to enforce rights, exercise remedies and make determinations regarding the release, disposition, or restrictions with respect to the Collateral in accordance with the terms of this Agreement and the Security Documents, without any consultation with or the consent of any Other Secured Party, and (iii) the Instructing Group shall have the exclusive right to direct the Collateral Agent's exercise of any and all such rights, remedies and determinations (it being understood that the foregoing shall not be construed to prevent the Collateral Agent from taking actions permitted to be taken by it in the absence of receipt of any direction from the Instructing Group); provided that (A) in any Insolvency or Liquidation Proceeding commenced by or against either Company or any Grantor, the Representative of any Other Secured Party may file a claim or statement of interest with respect to any Noteholder Claims or Senior Lender Claims with respect to which it is a Representative, and (B) the Representative of any Other Secured Party may take any action (not adverse to the rights of the Collateral Agent to exercise, or the Instructing Group to direct the exercise of, remedies in respect of the Collateral) in order to preserve or protect its Lien on the Collateral. In exercising rights and remedies with respect to the Collateral, the 12 Collateral Agent may enforce (and the Instructing Group may direct the enforcement of) the provisions of the Security Documents and exercise remedies thereunder, all in such order and in such manner as they may determine in the exercise of its (or their) sole discretion. Such exercise and enforcement shall include the rights of an agent appointed by them to sell or otherwise dispose of Collateral upon foreclosure, to incur expenses in connection with such sale or disposition, and to exercise all the rights and remedies of a secured lender under the Uniform Commercial Code of any applicable jurisdiction and of a secured creditor under Bankruptcy Laws of any applicable jurisdiction. 3.2 Determinations relating to Collateral; Releases of Collateral. (a) Subject to Sections 3.2(b), 5.2 and 5.3, so long as the Discharge of Senior Lender Claims has not occurred, in the event (i) the Collateral Agent shall receive any written request from any Loan Party under any Security Document for consent or approval with respect to any matter or thing relating to any Security Document, any Collateral or any Loan Party's obligations with respect thereto or (ii) there shall be due to or from the Collateral Agent under the provisions of any Security Document any material performance or the delivery of any material instrument or (iii) the Collateral Agent shall become aware of any nonperformance by any Loan Party of any covenant or any breach of any representation or warranty set forth in any Security Document, then, in each such event, the Collateral Agent shall advise the Administrative Agent and, after the Discharge of Senior Credit Agreement Claims has occurred, the Representatives of the Other Secured Parties, of the matter or thing as to which consent has been requested or the performance or instrument required to be delivered or the nonperformance or breach of which the Collateral Agent has become aware. So long as the Discharge of the Senior Lender Claims has not occurred, the Instructing Group shall have the exclusive authority to direct the Collateral Agent's response to any of the events or circumstances contemplated in clauses (i), (ii) and (iii) above. (b) If in connection with: (i) the exercise of the Collateral Agent's remedies in respect of the Collateral provided for in Section 3.1, including any sale, lease, exchange, transfer or other disposition of any such Collateral; (ii) any sale, lease, exchange, transfer or other disposition of any Collateral; or (iii) any other request by any Loan Party that any Collateral be released from the Liens thereon granted under any Security Document; the Collateral Agent releases any Collateral from the Liens thereon granted under any of the Security Documents, then such Liens shall be released with respect to such Collateral and such release shall be binding upon all Secured Parties, and the Collateral Agent shall not have any liability to any Secured Party on account of such reliance; provided that, in the case of any release made in connection with clause (ii) or (iii) above, such release shall be permitted or not prohibited by the terms of the Senior Credit Agreement, including by virtue of the consent of the Required Lenders, and the Indenture (including Sections 10.03 and 11.03 of the Indenture) (and the Collateral Agent shall be fully protected if it shall receive a certificate signed by an officer of either Company to such effect). It is understood that the foregoing proviso shall not apply to releases of Collateral expressly contemplated and permitted by any Security Document to be effective without the necessity of any consent, and the Collateral Agent may confirm any such release at the request of any Grantor without liability to any Secured Party. 3.3 Cooperation. Subject to the proviso to the first sentence of Section 3.1 above each Representative of any Other Secured Parties agrees (on behalf of itself and such Other Secured Parties) 13 that, unless and until the Discharge of Senior Credit Agreement Claims has occurred, it will not commence, or join with any Person (other than the Senior Credit Agreement Lenders and the Collateral Agent upon the request thereof) in commencing, any enforcement, collection, execution, levy or foreclosure action or proceeding with respect to any Lien under any of the Security Documents or otherwise. 3.4 Exercise of Powers. All of the powers, remedies and rights of the Collateral Agent as set forth in this Agreement may be exercised by the Collateral Agent in respect of any Security Document as though set forth in full therein and all of the powers, remedies and rights of the Collateral Agent as set forth in any Security Document may be exercised from time to time as herein and therein provided. SECTION 4. COLLATERAL ACCOUNT; DISTRIBUTIONS. 4.1 The Collateral Account. At such time as the Collateral Agent deems appropriate, the Collateral Agent shall establish and, at all times thereafter until this Agreement shall have terminated, there shall be maintained with the Collateral Agent an account which shall be entitled the "ON Semiconductor Collateral Account" (the "Collateral Account"). All moneys which are received by the Collateral Agent or any agent or nominee of the Collateral Agent in respect of the Collateral upon the exercise of the remedies in accordance with the terms of this Agreement or any Security Document shall be deposited in the Collateral Account and held by the Collateral Agent as part of the Collateral Estate and applied and disbursed in accordance with the terms of this Agreement. The Collateral Agent shall maintain such sub-accounts and records with respect to the Collateral Account as will permit the segregation and allocation of proceeds of Collateral in accordance with Section 4.4. 4.2 Control of Collateral Account. All right, title and interest in and to the Collateral Account, and funds on deposit in the Collateral Account, shall constitute part of the Collateral Estate. The Collateral Account shall be subject to the exclusive dominion and control of the Collateral Agent. 4.3 Investment of Funds Deposited in Collateral Account. The Collateral Agent may, at the request of the Companies, invest and reinvest moneys on deposit in the Collateral Account at any time in Permitted Investments; provided that the Collateral Agent, in its sole discretion, may (a) restrict such investments and reinvestments to Permitted Investments that have a shorter duration and higher credit quality than other Permitted Investments and (b) decline to invest or reinvest any amount that it expects to distribute from the Collateral Account within one Business Day. All such investments and the interest and income received thereon and the net proceeds realized on the sale or redemption thereof shall be held in the Collateral Account as part of the Collateral Estate. The Collateral Agent shall not be responsible for any diminution in funds resulting from such investments or any liquidation prior to maturity. 4.4 Application of Moneys. (a) The Collateral Agent shall have the right at any time to apply moneys held by it in the Collateral Account to the payment of due and unpaid Collateral Agent Fees. (b) All remaining moneys held by the Collateral Agent in the Collateral Account received by the Collateral Agent with respect to the Collateral shall, to the extent available for distribution (it being understood that the Collateral Agent may liquidate investments prior to maturity in order to make a distribution pursuant to this Section 4.4), be distributed (subject to the provisions of Sections 4.5 and 4.6) by the Collateral Agent on each Distribution Date in the following order of priority: 14 First: to the Collateral Agent for any unpaid Collateral Agent Fees and then to any Secured Party which has theretofore advanced or paid any Collateral Agent Fees constituting administrative expenses allowable under Section 503(b) of Title 11 of the United States Code, an amount equal to the amount thereof so advanced or paid by such Secured Party and for which such Secured Party has not been reimbursed prior to such Distribution Date, and, if such moneys shall be insufficient to pay such amounts in full, then ratably (without priority of any one over any other) to such Secured Parties in proportion to the amounts of such Collateral Agent Fees advanced by the respective Secured Parties and remaining unpaid on such Distribution Date; Second: to any Secured Party which has theretofore advanced or paid any Collateral Agent Fees other than such administrative expenses, an amount equal to the amount thereof so advanced or paid by such Secured Party and for which such Secured Party has not been reimbursed prior to such Distribution Date, and, if such moneys shall be insufficient to pay such amounts in full, then ratably (without priority of any one over any other) to such Secured Parties in proportion to the amounts of such Collateral Agent Fees advanced by the respective Secured Parties and remaining unpaid on such Distribution Date; Third: to the Secured Parties that hold Secured Obligations, in an amount equal to all Secured Obligations then owing to them, whether or not then due and payable, and, if such moneys shall be insufficient to pay such amounts in full, then ratably (without priority of any one over any other) to such Secured Parties in proportion to the unpaid amounts thereof on such Distribution Date; and Fourth: any surplus then remaining shall be paid (i) if any Obligations in respect of the Second-Lien Notes are then outstanding, to the trustee under the indenture governing the Second-Lien Notes in accordance with the terms of the Intercreditor Agreement and (ii) if there are no Obligations in respect of the Second-Lien Notes then outstanding, to the Grantors or their successors or assigns or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. (c) The term "unpaid" as used in Section 4.4(b) refers: (i) in the absence of an Insolvency or Liquidation Proceeding with respect to the relevant Loan Party or Loan Parties, to all amounts of the relevant Senior Lender Claims and Noteholder Claims (other than contingent indemnification and other contingent obligations as to which the applicable Grantor has not received a notice of claim) outstanding as of a Distribution Date (and for the purpose of this provision, the amount of the Senior Lender Claims then outstanding shall include the undrawn face amount of, and any unreimbursed drawings under, any letter of credit), and (ii) during the pendency of an Insolvency or Liquidation Proceeding with respect to the relevant Grantor(s), to all amounts allowed by the bankruptcy court in respect of the relevant Senior Lender Claims and Noteholder Claims as a basis for distribution (including estimated amounts, if any, allowed in respect of contingent claims), to the extent that prior distributions have not been made in respect thereof. (d) Subject to Section 4.5, the Collateral Agent shall make all payments and distributions under this Section 4.4 to the respective Representatives of the Secured Parties, as applicable. Each such 15 Representative shall be responsible for insuring that amounts distributed to it are distributed to the relevant Secured Parties in the order of priority set forth herein. 4.5 Application of Moneys Distributable to Representatives. If at any time any moneys collected or received by the Collateral Agent pursuant to this Agreement are distributable pursuant to Section 4.4 to any Secured Party, the Collateral Agent may distribute such moneys to the Representative of such Secured Party (and shall not be responsible for the distribution of such moneys by such Representative); provided that if any Representative shall notify the Collateral Agent in writing that no provision is made under the Applicable Secured Documents for the application by such Representative of such moneys (whether because the relevant Noteholder Claims or Senior Lender Claims have not become due and payable or otherwise) and that the Applicable Secured Documents do not effectively provide for the receipt and the holding by such Representative of such moneys pending the application thereof, then the Collateral Agent, after receipt of such notification, may, at the request of the Companies, invest such amounts in Permitted Investments, and shall hold all such amounts so distributable and all such investments and the net proceeds thereof solely as security for the relevant Noteholder Claims or Senior Lender Claims and for no other purpose until such time as such Representative shall request in writing the delivery thereof by the Collateral Agent for application pursuant to the Applicable Secured Documents; provided further that the Collateral Agent, in its sole discretion, may (a) restrict such investments to Permitted Investments that have a shorter duration and higher credit quality than other Permitted Investments and (b) decline to invest any amount that it expects to distribute within one Business Day. Notwithstanding the foregoing, if, at any time, all the relevant Noteholder Claims or Senior Lender Claims in respect of which any moneys and investments (and proceeds thereof) are held by the Collateral Agent pursuant to this Section 4.5 cease to be outstanding for any reason, then such moneys and any moneys that constitute proceeds of such investments will be applied by the Collateral Agent in accordance with Section 4.4(b). The Collateral Agent shall not be responsible for any diminution in funds resulting from investments made at the direction of the Companies or from holding such moneys uninvested. 4.6 Collateral Agent's Calculations. In making the determinations and allocations required by Section 4.4, the Collateral Agent may conclusively rely upon, and shall have no liability to any of the Secured Parties for actions taken in reliance upon, information supplied by any Secured Party (or its Representative) as to the amounts of unpaid principal and interest and other amounts outstanding with respect to any Senior Lender Claims or the Noteholder Claims; provided that nothing in this sentence shall prevent any Grantor from contesting any amounts claimed by any Secured Party in any information so supplied. All distributions made by the Collateral Agent pursuant to Section 4.4 shall be (subject to any decree of any court of competent jurisdiction) final (absent manifest error), and the Collateral Agent shall have no duty to inquire as to the application by any Representative of any amounts distributed to it for distribution to any Secured Parties. 4.7 Payments Over. Any Collateral or proceeds thereof received by any Secured Party (or its Representative) in connection with the exercise of any right or remedy relating to the Collateral in contravention of this Agreement shall be segregated and held in trust and forthwith paid over to the Collateral Agent in the same form as received, with any necessary endorsements or as a court of competent jurisdiction may otherwise direct. The Collateral Agent is hereby authorized to make any such endorsements as agent for any Secured Party (or its Representative). This authorization is coupled with an interest and is irrevocable. 16 SECTION 5. OTHER AGREEMENTS. 5.1 Insurance. Unless and until the Discharge of Senior Credit Agreement Claims has occurred, the Collateral Agent and the Required Lenders shall have the sole and exclusive right, subject to the rights of the Grantors under the Senior Credit Agreement and the Security Documents, to adjust settlement for any insurance policy covering the Collateral in the event of any loss thereunder and to approve any award granted in any condemnation or similar proceeding affecting the Collateral. Unless and until the Discharge of Senior Credit Agreement Claims has occurred, all proceeds of any such policy and any such award if in respect to the Collateral shall be paid to the Collateral Agent for the benefit of the Secured Parties to the extent required under the Senior Credit Agreement, the Security Documents and the Noteholder Documents and thereafter to the owner of the subject property or as a court of competent jurisdiction may otherwise direct. If any Other Secured Party (or its Representative) shall, at any time, receive any proceeds of any such insurance policy or any such award in contravention of this Agreement, it shall pay such proceeds over to the Collateral Agent in accordance with the terms of Section 4.7. 5.2 When Discharge of Senior Credit Agreement Claims Deemed to Not Have Occurred. If at any time after the Discharge of Senior Credit Agreement Claims has occurred the Companies designate any Future First-Lien Credit Facility to be the "Senior Credit Agreement" hereunder, then such Discharge of Senior Credit Agreement Claims shall automatically be deemed not to have occurred for all purposes of this Agreement (other than with respect to any actions taken prior to the date of such designation as a result of the occurrence of such prior Discharge of Senior Credit Agreement Claims), and such Future First-Lien Credit Facility shall automatically be treated as the Senior Credit Agreement for all purposes of this Agreement. Upon receipt of notice of such designation (including the identity of the new Collateral Agent), the Trustee shall promptly (i) enter into such documents and agreements (including amendments or supplements to this Agreement) as either Company or such new Collateral Agent shall request in order to provide to the new Collateral Agent the rights of the Collateral Agent contemplated hereby and (ii) deliver to the Collateral Agent the Pledged Collateral together with any necessary endorsements (or otherwise allow such Collateral Agent to obtain control of such Pledged Collateral). 5.3 Amendments to Security Documents. Unless and until the Discharge of Senior Lender Claims has occurred, the Instructing Group shall have the exclusive authority to direct the Collateral Agent to (or consent to any action by the Collateral Agent to) amend any provision of, or grant any waivers or consents in respect of, any Security Document, without any consent or approval of, or prior notice to, any other Secured Party; provided that no such amendment, waiver or consent shall, without the written consent of the Trustee, materially adversely affect the rights of the holders of the Noteholder Claims. 5.4 Right of Set-Off. Nothing in this Agreement shall prevent any Secured Party from exercising any right of set-off or counterclaim that such Secured Party may otherwise have. SECTION 6. INSOLVENCY OR LIQUIDATION PROCEEDINGS. 6.1 Financing Issues. If either Company or any other Grantor shall be subject to any Insolvency or Liquidation Proceeding, the Collateral Agent may, with the consent or at the direction of the Instructing Group, on an equal and ratable basis, permit the use of cash Collateral or permit either Company or any other Grantor to grant Liens on the Collateral to secure financing under Section 363 or Section 364 of Title 11 of the United States Code or any similar Bankruptcy Law ("DIP Financing"), and, in such event, Representatives of the Other Secured Parties (on behalf of themselves and such Other Secured Parties), agree that they will raise no objection to such use of cash Collateral or DIP Financing 17 and will not request adequate protection or any other relief in connection therewith (except to the extent contemplated by Section 6.3). 6.2 Relief from the Automatic Stay. Until the Discharge of Senior Lender Claims has occurred, the Representatives of the Other Secured Parties (on behalf of themselves and such Other Secured Parties) agree that none of them shall seek relief from the automatic stay or any other stay in any Insolvency or Liquidation Proceeding in respect of the Collateral, without the prior written consent of the Instructing Group; provided that if the Senior Credit Agreement Lenders or the Collateral Agent seek relief from the automatic stay or any other stay in any Insolvency or Liquidation Proceeding in respect of the Collateral, the request for such relief shall be made on behalf of all Secured Parties (subject to their cooperation in joining in such request to the extent necessary for such request to be made on behalf of all Secured Parties) or the Representatives of the Other Secured Parties (on behalf of themselves and the Other Secured Parties) shall be afforded an opportunity to join in or make such request. The Representative of the Senior Credit Agreement Lenders shall provide written notice to the Trustee (and to any other Representative of any Other Secured Parties that has requested, by written notice to the Representative of the Senior Credit Agreement Lenders, that it be so notified) of any such request by the Senior Credit Agreement Lenders for relief from the automatic stay or any other stay in any Insolvency or Liquidation Proceeding in respect of the Collateral. 6.3 Adequate Protection. If the Discharge of Senior Credit Agreement Claims has not occurred, the Representatives of the Other Secured Parties (on behalf of themselves and such Other Secured Parties) agree that none of them shall contest (or support any other Person contesting) (a) any request by or on behalf of the Senior Credit Agreement Lenders for adequate protection or (b) any objection by or on behalf of Senior Credit Agreement Lenders to any motion, relief, action or proceeding based on the Senior Credit Agreement Lenders claiming a lack of adequate protection; provided that in the case of any such request or objection referred to in clause (a) or (b) of this sentence, either such request or objection shall be made on behalf of all Secured Parties (subject to their cooperation in joining in such request or objection to the extent necessary for such request or objection to be made on behalf of all Secured Parties) or the Representatives of the Other Secured Parties (on behalf of themselves and the Other Secured Parties) shall be afforded an opportunity to join in or make such request or objection on an equal and ratable basis. Notwithstanding the foregoing contained in this Section 6.3, in any Insolvency or Liquidation Proceeding, if any Secured Party requests or is granted adequate protection in the form of additional collateral in connection with any DIP Financing or use of cash collateral under Section 363 or Section 364 of Title 11 of the United States Code or any similar Bankruptcy Law, then the other Secured Parties may seek or request adequate protection in the form of additional collateral on an equal and ratable basis. The Representative of the Senior Credit Agreement Lenders shall provide written notice to the Trustee (and to any other Representative of any Other Secured Parties that has requested, by written notice to the Representative of the Senior Credit Agreement Lenders, that it be so notified) of any such request by the Senior Credit Agreement Lenders for adequate protection or any such objection by the Senior Credit Agreement Lenders claiming a lack of adequate protection. 6.4 Preference Issues. If any Secured Party is required in any Insolvency or Liquidation Proceeding or otherwise to turn over or otherwise pay to the estate of either Company or any other Grantor any amount (a "Recovery"), then the Secured Obligations shall be reinstated to the extent of such Recovery. If this Agreement shall have been terminated prior to such Recovery, this Agreement shall be reinstated in full force and effect, and such prior termination shall not diminish, release, discharge, impair or otherwise affect the obligations of the parties hereto from such date of reinstatement. 18 SECTION 7. RELIANCE; WAIVERS; ETC. 7.1 Reliance. The consent by the Required Lenders to the execution and delivery of amendments to the Security Documents to provide that the Noteholder Claims are secured by the Liens or the Collateral granted thereunder, and all loans and other extensions of credit made or deemed made on and after the date hereof by the Senior Lenders to either Company or any Grantor, shall be deemed to have been given and made in reliance upon this Agreement. The Trustee, on behalf of itself and the Noteholders, acknowledges that it and the Noteholders have, independently and without reliance on the Collateral Agent or any Senior Lender, and based on documents and information deemed by them appropriate, made their own credit analysis and decision to enter into the Indenture, this Agreement and the transactions contemplated hereby and thereby and they will continue to make their own credit decision in taking or not taking any action under the Indenture or this Agreement. 7.2 No Warranties or Liability. The Trustee, on behalf of itself and the Noteholders, acknowledges and agrees that each of the Collateral Agent and the Senior Lenders has made no express or implied representation or warranty, including with respect to the execution, validity, legality, completeness, collectibility or enforceability of any of the Security Documents, the ownership of any Collateral or the perfection or priority of any Liens thereon. The Senior Lenders will be entitled to manage and supervise their respective loans and extensions of credit under the Senior Loan Documents in accordance with law and as they may otherwise, in their sole discretion, deem appropriate, and the Senior Lenders may manage their loans and extensions of credit without regard to any rights or interests that the Trustee or any of the Noteholders have in the Collateral or otherwise, except as otherwise provided in this Agreement and the Security Documents. Neither any Senior Lender nor any of their Representatives shall have any duty to the Trustee or any of the Noteholders to act or refrain from acting in a manner which allows, or results in, the occurrence or continuance of an event of default or default under any agreements with either Company or any Subsidiary thereof (including the Noteholder Documents), regardless of any knowledge thereof which they may have or be charged with. 7.3 No Waiver. (a) No right of the Senior Lenders, the Collateral Agent or any of them to enforce any provision of this Agreement, any Senior Loan Document or any Security Document shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of either Company or any other Grantor or by any act or failure to act by any Senior Lender or the Collateral Agent, or by any noncompliance by any Person with the terms, provisions and covenants of this Agreement, any Senior Loan Document, any Noteholder Document or any Security Document, regardless of any knowledge thereof which the Collateral Agent or the Senior Lenders, or any of them, may have or be otherwise charged with. (b) The Trustee, on behalf of itself and the Noteholders, agrees that the Senior Lenders and the Collateral Agent shall have no liability to the Trustee or any Noteholder, and the Trustee, on behalf of itself and the Noteholders, hereby waives any claim against any Senior Lender or the Collateral Agent, arising out of any and all actions which the Senior Lenders may take or permit or omit to take with respect to: (i) the Senior Loan Documents or (ii) the collection of the Senior Lender Claims. The Trustee, on behalf of itself and the Noteholders, agrees that the Senior Lenders and the Collateral Agent have no duty to them in respect of the maintenance or preservation of the Collateral or otherwise. 19 7.4 Obligations Unconditional. All rights, interests, agreements and obligations of the Collateral Agent and the Secured Parties hereunder shall remain in full force and effect irrespective of: (a) any lack of validity or enforceability of any Senior Loan Documents or any Noteholder Documents; (b) any change in the time, manner or place of payment of, or in any other terms of, all or any of the Senior Lender Claims or Noteholder Claims, or any amendment or waiver or other modification, including any increase in the amount thereof, whether by course of conduct or otherwise, of the terms of the Senior Credit Agreement or any other Senior Loan Document or of the terms of the Indenture or any other Noteholder Document; (c) any exchange of any security interest in any Collateral or any other collateral, or any amendment, waiver or other modification, whether in writing or by course of conduct or otherwise, of all or any of the Senior Lender Claims or Noteholder Claims or any guarantee thereof; (d) the commencement of any Insolvency or Liquidation Proceeding in respect of either Company or any other Grantor; or (e) any other circumstances which otherwise might constitute a defense available to, or a discharge of, either Company or any other Grantor in respect of the Senior Lender Claims, or of the Trustee or any Noteholder in respect of this Agreement. SECTION 8. MISCELLANEOUS. 8.1 Conflicts. In the event of any conflict between the provisions of this Agreement and the provisions of the Security Documents, the Senior Loan Documents or the Noteholder Documents, the provisions of this Agreement shall govern. 8.2 Continuing Nature of this Agreement; Severability. This Agreement shall continue to be effective until the later of (a) the date on which the Discharge of Senior Lender Claims shall have occurred and (b) the indefeasible payment in full of the Noteholder Claims. The Senior Lenders may continue, at any time and without notice to the Trustee or any Noteholder, to extend credit and other financial accommodations and lend moneys to or for the benefit of either Company or any Grantor constituting Senior Lender Claims on reliance hereof. The Trustee, on behalf of itself and the Noteholders, hereby waives any right it may have under applicable law to revoke this Agreement or any of the provisions of this Agreement. The terms of this Agreement shall survive, and shall continue in full force and effect, in any Insolvency or Liquidation Proceeding. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall not invalidate the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8.3 Amendments; Waivers. With the written consent of the Instructing Group, the Collateral Agent and the Companies may from time to time amend, supplement or waive any provision hereof; provided that no such amendment, supplement or waiver shall, without the written consent of the Trustee, materially adversely affect the rights of the Noteholders. The Companies and other Grantors shall not have any right to consent to or approve any amendment, modification or waiver of any provision of this Agreement except to the extent their rights are directly affected. The Companies hereby agree to execute and deliver any supplement or amendment to this Agreement or the Security Documents or any 20 other document or instrument necessary to evidence the appointment of a successor Collateral Agent pursuant to Section 2.3. 8.4 Information Concerning Financial Condition of the Companies and the Subsidiaries. The Senior Lenders and their Representatives, on the one hand, and the Trustee and the Noteholders, on the other hand, shall each be responsible for keeping themselves informed of (a) the financial condition of the Companies and the Subsidiaries and all endorsers and/or guarantors of the Noteholder Claims or the Senior Lender Claims and (b) all other circumstances bearing upon the risk of nonpayment of the Noteholder Claims or the Senior Lender Claims. The Collateral Agent and the Senior Lenders shall have no duty to advise the Trustee or any Noteholder of information known to it or them regarding such condition or any such circumstances or otherwise. In the event the Collateral Agent or any of the Senior Lenders, in its or their sole discretion, undertakes at any time or from time to time to provide any such information to the Trustee or any Noteholder, it or they shall be under no obligation (w) to make, and the Collateral Agent and the Senior Lenders shall not make, any express or implied representation or warranty, including with respect to the accuracy, completeness, truthfulness or validity of any such information so provided, (x) to provide any additional information or to provide any such information on any subsequent occasion, (y) to undertake any investigation or (z) to disclose any information which, pursuant to accepted or reasonable commercial finance practices, such party wishes to maintain confidential or is otherwise required to maintain confidential. 8.5 Consent to Jurisdiction; Waivers. The parties hereto consent to the jurisdiction of any state or federal court located in New York, New York, and consent that all service of process may be made by registered mail directed to such party as provided in Section 8.6 below for such party. Service so made shall be deemed to be completed three days after the same shall be posted as aforesaid. The parties hereto waive any objection to any action instituted hereunder based on forum non conveniens, and any objection to the venue of any action instituted hereunder. Each of the parties hereto waives any right it may have to trial by jury in respect of any litigation based on, or arising out of, under or in connection with this Agreement or any Security Document, or any course of conduct, course of dealing, verbal or written statement or action of any party hereto. 8.6 Notices. All notices to the Noteholders and the Senior Lenders permitted or required under this Agreement may be sent to their Representatives. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telecopied, electronically mailed or sent by courier service or U.S. mail and shall be deemed to have been given when delivered in person or by courier service, upon receipt of a telecopy or electronic mail or four Business Days after deposit in the U.S. mail (registered or certified, with postage prepaid and properly addressed). For the purposes hereof, the addresses of the parties hereto shall be as set forth below each party's name on the signature pages hereto, or, as to each party, at such other address as may be designated by such party in a written notice to all of the other parties. 8.7 Further Assurances. The Trustee, on behalf of itself and the Noteholders, agrees that each of them shall take such further action and shall execute and deliver to the Collateral Agent such additional documents and instruments (in recordable form, if requested) as the Collateral Agent may reasonably request to effectuate the terms of and the Liens contemplated by this Agreement. 8.8 GOVERNING LAW. THIS AGREEMENT HAS BEEN DELIVERED AND ACCEPTED AT AND SHALL BE DEEMED TO HAVE BEEN MADE AT NEW YORK, NEW YORK AND SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE 21 PARTIES BOUND HEREBY DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 8.9 Binding on Successors and Assigns; No Third Party Beneficiaries. This Agreement shall be binding upon the Secured Parties, the Companies and their respective permitted successors and assigns. This Agreement and the rights and benefits hereof shall inure to the benefit of the Secured Parties, the Companies and their respective successors and assigns, and nothing herein is intended or shall be construed to give any other Person any right, remedy or claim under, to or in respect of this Agreement, the Collateral or the Collateral Estate. No other Person shall have or be entitled to assert rights or benefits hereunder. 8.10 Section Titles. The section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of this Agreement. 8.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which shall together constitute one and the same document. 8.12 Authorization. By its signature, each Person executing this Agreement on behalf of a party hereto represents and warrants to the other parties hereto that it is duly authorized to execute this Agreement. 8.13 Effectiveness. This Agreement shall become effective when executed and delivered by the parties hereto. This Agreement shall be effective both before and after the commencement of any Insolvency or Liquidation Proceeding. All references to the Companies or any other Grantor shall include any Company or Grantor as debtor and debtor-in-possession and any receiver or trustee for any Company or any other Grantor (as the case may be) in any Insolvency or Liquidation Proceeding. 8.14 Trustee. It is understood and agreed that Wells Fargo Bank Minnesota, National Association is entering in this Agreement in its capacity as Trustee and the provisions of Article 7 of the Indenture applicable to the Trustee thereunder shall also apply to the Trustee hereunder. 8.15 Designations; Future Representatives of Senior Lenders. For purposes of the provisions hereof and the Indenture requiring the Companies to designate Indebtedness for the purposes of the term "Credit Agreement Obligations" under the Indenture, "First-Lien Credit Facilities" or "Senior Credit Agreement" or any other designations for any other purposes hereunder or under the Indenture, any such designation shall be sufficient if the relevant designation is set forth in writing, signed on behalf of the Companies by an officer thereof and delivered to the Trustee and the Collateral Agent. For all purposes hereof and the Indenture, the Companies hereby designate the Credit Facilities provided pursuant to the Existing Credit Agreement as the First-Lien Credit Facility and any Obligations in respect of the Existing Credit Agreement as "Credit Agreement Obligations" under the Indenture. 22 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. JPMORGAN CHASE BANK, as Collateral Agent and as Administrative Agent under the Existing Credit Agreement, By: /s/ EDMOND DEFOREST ------------------- Name: Edmond DeForest Title: Vice President Address: 270 Park Avenue New York, New York 10017 Attention: Corporate Banking Telecopy No.: (212) 270-4584 WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, as Trustee, By: /s/ JOSEPH P. O'DONNELL ----------------------- Name: Joseph P. O'Donnell Title: Corporate Trust Officer Address: 213 Court Street, Suite 703 Middletown, Connecticut 06457 Attention: Corporate Trust Services Telecopy No.: (860) 704-6219 ON SEMICONDUCTOR CORPORATION, By: /s/ JOHN T. KURTZWEIL --------------------- Name: John T. Kurtzweil Title: Chief Financial Officer Address: 5005 East McDowell Road Phoenix, Arizona 85005 Attention: General Counsel Telecopy No.: (602) 244-5601 23 SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, By: /s/ JOHN T. KURTZWEIL --------------------- Name: John T. Kurtzweil Title: Chief Financial Officer Address: 5005 East McDowell Road Phoenix, Arizona 85005 Attention: General Counsel Telecopy No.: (602) 244-5601 24
EXHIBIT 10.54 EXECUTION COPY SECURITY AGREEMENT dated as of August 4, 1999, as amended and restated as of March 3, 2003, among SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, a Delaware limited liability company (the "Borrower"), ON SEMICONDUCTOR CORPORATION, a Delaware corporation ("Holdings"), each subsidiary of Holdings listed on Schedule I hereto (each such subsidiary individually a "Subsidiary" or a "Subsidiary Guarantor" and, collectively, the "Subsidiary Guarantors"; Holdings, the Subsidiary Guarantors and the Borrower are referred to collectively herein as the "Grantors") and JPMORGAN CHASE BANK, a New York banking corporation ("JPMCB"), as collateral agent (in such capacity, the "Collateral Agent") for the Secured Parties (as defined herein). W I T N E S S E T H: WHEREAS, (a) the Companies, certain lenders from time to time party thereto (the "Lenders"), and JPMCB, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), are parties to the Credit Agreement dated as of August 4, 1999, as amended and restated as of April 3, 2000, and (b) Holdings, the Subsidiary Guarantors and the Administrative Agent are parties to a Guarantee Agreement dated as of August 4, 1999 (as amended, supplemented or modified from time to time, the "Guarantee Agreement"); WHEREAS, pursuant to the terms, conditions and provisions of (a) the Indenture dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Indenture"), among the Companies, the Subsidiary Guarantors and Wells Fargo Bank Minnesota, National Association, as trustee (the "Trustee"), and (b) the Purchase Agreement dated as of February 26, 2003, among the Companies, the Subsidiary Guarantors and Salomon Smith Barney Inc., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated (the "Initial Purchasers"), the Companies are issuing $200,000,000 aggregate principal amount of 12% Senior Secured Notes due 2010 and may issue, from time to time, additional notes in accordance with the provisions of the Indenture (collectively, the "Notes") which will be guaranteed on a senior secured basis by each of the Subsidiary Guarantors; WHEREAS, the Companies and certain Lenders under the Credit Agreement referred to above have entered into an Amendment and Restatement Agreement dated as of February 14, 2003 (the "Amendment and Restatement Agreement"), to amend and restate the Credit Agreement referred to above as of February 14, 2003 (such Credit Agreement, as further amended, supplemented or otherwise modified from time to time, the "Credit Agreement") in order to, among other things, permit, subject to certain terms and conditions, (a) the issuance of the Notes by the Companies and (b) the amendment of the Security Documents to provide for securing the Note Obligations thereunder; WHEREAS, the parties hereto are parties to the Security Agreement dated as of August 4, 1999, as amended, supplemented and modified from time to time prior to the date hereof, and are entering into this Agreement to effect the securing of the Note Obligations 1 hereunder and other related amendments contemplated by the Amendment and Restatement Agreement and the Indenture; WHEREAS, the Companies, the Collateral Agent and the Trustee have entered into a Collateral Sharing Agreement dated as of the date hereof (the "Collateral Sharing Agreement"); and WHEREAS, each Grantor has duly authorized the execution, delivery and performance of this Agreement; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and obligations herein set forth and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, each Grantor and the Collateral Agent, on behalf of itself and each Secured Party (and each of their respective successors or assigns), hereby agree as follows: ARTICLE I Definitions SECTION 1.01. Definition of Terms Used Herein. Unless the context otherwise requires, all capitalized terms used but not defined herein shall have the meanings set forth in the Credit Agreement or the Indenture, as applicable. SECTION 1.02. Definition of Certain Terms Used Herein. As used herein, the following terms shall have the following meanings: "Account Debtor" shall mean any Person who is or who may become obligated to any Grantor under, with respect to or on account of an Account. "Accounts" shall mean all "accounts" (as defined in the UCC) of any Grantor and shall include any and all right, title and interest of any Grantor to payment for goods and services sold or leased, including any such right evidenced by chattel paper, whether due or to become due, whether or not it has been earned by performance, and whether now or hereafter acquired or arising in the future, including accounts receivable from Affiliates of the Grantors. "Accounts Receivable" shall mean all Accounts and all right, title and interest in any returned goods, together with all rights, titles, securities and guarantees with respect thereto, including any rights to stoppage in transit, replevin, reclamation and resales, and all related security interests, liens and pledges, whether voluntary or involuntary, in each case whether now existing or owned or hereafter arising or acquired. "Collateral" shall mean all (a) Accounts Receivable, (b) Documents, (c) Equipment, (d) General Intangibles, (e) Inventory, (f) cash and cash accounts, (g) Investment Property and (h) Proceeds; provided that the Collateral shall not include (i) more than 65% of the issued and outstanding voting stock of any Foreign Subsidiary, (ii) any Equity Interests in any Foreign Joint Venture Company to the extent that such a pledge is prohibited by the constitutive documents of such Foreign Joint Venture Company and (iii) to the extent that applicable law requires that a Subsidiary issue directors' qualifying shares, such qualifying shares. 2 "Collateral Sharing Agreement" shall have the meaning assigned to such term in the recitals to this Agreement. "Commodity Account" shall mean an account maintained by a Commodity Intermediary in which a Commodity Contract is carried out for a Commodity Customer. "Commodity Contract" shall mean a commodity futures contract, an option on a commodity futures contract, a commodity option or any other contract that, in each case, is (a) traded on or subject to the rules of a board of trade that has been designated as a contract market for such a contract pursuant to the federal commodities laws or (b) traded on a foreign commodity board of trade, exchange or market, and is carried on the books of a Commodity Intermediary for a Commodity Customer. "Commodity Customer" shall mean a Person for whom a Commodity Intermediary carries a Commodity Contract on its books. "Commodity Intermediary" shall mean (a) a Person who is registered as a futures commission merchant under the federal commodities laws or (b) a Person who in the ordinary course of its business provides clearance or settlement services for a board of trade that has been designated as a contract market pursuant to federal commodities laws. "Companies" means Holdings and the Borrower. "Copyright License" shall mean any written agreement, now or hereafter in effect, granting any right to any third party under any Copyright now or hereafter owned by any Grantor or which such Grantor otherwise has the right to license, or granting any right to such Grantor under any Copyright now or hereafter owned by any third party, and all rights of such Grantor under any such agreement. "Copyrights" shall mean all of the following: (a) all copyright rights in any work subject to the copyright laws of the United States or any other country, whether as author, assignee, transferee or otherwise, and (b) all registrations and applications for registration of any such copyright in the United States or any other country, including registrations, recordings, supplemental registrations and pending applications for registration in the United States Copyright Office, including those listed on Schedule II. "Credit Agreement" shall have the meaning assigned to such term in the recitals to this Agreement. "Documents" shall mean all instruments, files, records, ledger sheets and documents covering or relating to any of the Collateral. "Entitlement Holder" shall mean a Person identified in the records of a Securities Intermediary as the Person having a Security Entitlement against the Securities Intermediary. If a Person acquires a Security Entitlement by virtue of Section 8-501(b)(2) or (3) of the UCC, such Person is the Entitlement Holder. "Equipment" shall mean "equipment" (as defined in the UCC) of any Grantor and shall include all equipment, furniture and furnishings, and all tangible personal property similar to any of the foregoing, including tools, parts and supplies of every kind and description, 3 and all improvements, accessions or appurtenances thereto, that are now or hereafter owned by any Grantor. The term Equipment shall include Fixtures. "Equity Interests" shall mean shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person. "Event of Default" shall mean any "Event of Default" under the Credit Agreement or any "Event of Default" under the Indenture (in each case, as such term is defined in the Credit Agreement or the Indenture, as applicable). "Financial Asset" shall mean (a) a Security, (b) an obligation of a Person or a share, participation or other interest in a Person or in property or an enterprise of a Person, which is, or is of a type, dealt with in or traded on financial markets, or which is recognized in any area in which it is issued or dealt in as a medium for investment or (c) any property that is held by a Securities Intermediary for another Person in a Securities Account if the Securities Intermediary has expressly agreed with the other Person that the property is to be treated as a Financial Asset under Article 8 of the UCC. As the context requires, the term Financial Asset shall mean either the interest itself or the means by which a Person's claim to it is evidenced, including a certificated or uncertificated Security, a certificate representing a Security or a Security Entitlement. "Financial Officer" shall mean the chief financial officer, principal accounting officer, treasurer or controller of the Borrower or Holdings, as applicable. "Fixtures" shall mean all items of Equipment, whether now owned or hereafter acquired, of any Grantor that become so related to particular real estate that an interest in them arises under any real estate law applicable thereto. "General Intangibles" shall mean all "general intangibles" (as defined in the UCC) of any Grantor and shall include choses in action and causes of action and all other assignable intangible personal property of any Grantor of every kind and nature (other than Accounts Receivable) now owned or hereafter acquired by any Grantor, including corporate or other business records, indemnification claims, contract rights (including rights under leases, whether entered into as lessor or lessee, Hedging Agreements and other agreements), Intellectual Property, goodwill, registrations, franchises, tax refund claims and any letter of credit, guarantee, claim, security interest or other security held by or granted to any Grantor to secure payment by an Account Debtor of any of the Accounts Receivable. "Hedging Agreement" shall have the meaning assigned to such term in the Credit Agreement. "Indemnitees" shall mean (a) the Collateral Agent, (b) the Indemnitees specified in Section 9.03(b) of the Credit Agreement, and (c) the Trustee, the Noteholders and each Affiliate of the Trustee and the Noteholders. "Indenture Documents" shall mean (a) the Indenture and the Notes and (b) any other related document or instrument executed and delivered pursuant to any Indenture Document described in clause (a) above evidencing or governing any obligations thereunder. 4 "Intellectual Property" shall mean all intellectual and similar property of any Grantor of every kind and nature now owned or hereafter acquired by any Grantor, including inventions, designs, Patents, Copyrights, Licenses, Trademarks, trade secrets, confidential or proprietary technical and business information, know-how, show-how or other data or information, software and databases and all embodiments or fixations thereof and related documentation, registrations and franchises, and all additions, improvements and accessions to, and books and records describing or used in connection with, any of the foregoing. "Inventory" shall mean "inventory" (as defined in the UCC) of any Grantor and shall include all goods of any Grantor, whether now owned or hereafter acquired, held for sale or lease, or furnished or to be furnished by any Grantor under contracts of service, or consumed in any Grantor's business, including raw materials, intermediates, work in process, packaging materials, finished goods, semi-finished inventory, scrap inventory, manufacturing supplies and spare parts, and all such goods that have been returned to or repossessed by or on behalf of any Grantor. "Investment Property" shall mean all Securities (whether certificated or uncertificated), Security Entitlements, Securities Accounts, Commodity Contracts and Commodity Accounts of any Grantor, whether now owned or hereafter acquired by any Grantor. "Issuing Bank" shall have the meaning assigned to such term in the Credit Agreement. "Letter of Credit" shall have the meaning assigned to such term in the Credit Agreement. "Lien" shall have the meaning assigned to such term in the Credit Agreement. "License" shall mean any Patent License, Trademark License, Copyright License or other license or sublicense to which any Grantor is a party, including those listed on Schedule III (other than those license agreements in existence on the date hereof and listed on Schedule III and those license agreements entered into after the date hereof, which by their terms prohibit assignment or a grant of a security interest by such Grantor as licensee thereunder). "Loan Parties" shall mean the Companies and the other Grantors. "Loans" shall have the meaning assigned to such term in the Credit Agreement. "Noteholder" shall mean the Person in whose name a Note is registered on the books of the registrar for the Notes. "Note Obligations" shall mean all obligations of the Companies and the Subsidiary Guarantors under the Indenture Documents, including obligations to the Trustee and the Collateral Agent, whether for payment of principal of, interest on or additional interest, if any, on the Notes and all other monetary obligations of the Companies and the Subsidiary Guarantors under the Indenture Documents, whether for fees, expenses, indemnification or otherwise. "Obligations" shall mean all the obligations of the Borrower, Holdings and the Subsidiary Guarantors under the Senior Loan Documents for (a) the due and punctual payment of (i) the principal of and premium, if any, and interest (including interest accruing during the 5 pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, (ii) each payment required to be made by the Borrower under the Credit Agreement in respect of any Letter of Credit, when and as due, including payments in respect of reimbursement of disbursements made by the Issuing Bank with respect thereto, interest thereon and obligations to provide, under certain circumstances, cash collateral in connection therewith and (iii) all other monetary obligations, including fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), of the Loan Parties to the Secured Parties under the Credit Agreement and the other Senior Loan Documents, (b) the due and punctual performance of all covenants, agreements, obligations and liabilities of the Loan Parties under or pursuant to the Credit Agreement and the other Senior Loan Documents, (c) unless otherwise agreed to in writing by the applicable Lender party thereto, the due and punctual payment and performance of all obligations of the Borrower or any other Loan Party, monetary or otherwise, under each Hedging Agreement entered into with a counterparty that was a Lender (or an Affiliate of a Lender) at the time such Hedging Agreement was entered into and (d) the due and punctual payment and performance of all obligations in respect of overdrafts and related liabilities owed to the Administrative Agent or any of its Affiliates and arising from treasury, depositary and cash management services in connection with any automated clearing house transfers of funds. "Patent License" shall mean any written agreement, now or hereafter in effect, granting to any third party any right to make, use or sell any invention on which a Patent, now or hereafter owned by any Grantor or which any Grantor otherwise has the right to license, is in existence, or granting to any Grantor any right to make, use or sell any invention on which a Patent, now or hereafter owned by any third party, is in existence, and all rights of any Grantor under any such agreement. "Patents" shall mean all of the following now owned or hereafter acquired by any Grantor: (a) all letters patent of the United States or any other country, all registrations and recordings thereof, and all applications for letters patent of the United States or any other country, including registrations, recordings and pending applications in the United States Patent and Trademark Office or any similar offices in any other country, including those listed on Schedule IV, and (b) all reissues, continuations, divisions, continuations-in-part, renewals or extensions thereof, and the inventions disclosed or claimed therein, including the right to make, use and/or sell the inventions disclosed or claimed therein. "Perfection Certificate" shall mean a certificate substantially in the form of Annex 1 hereto, completed and supplemented with the schedules and attachments contemplated thereby, and duly executed by an executive officer or Financial Officer of Holdings and of the Borrower. "Person" shall mean any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, entity or other party, including any government and any political subdivision, agency or instrumentality thereof. 6 "Proceeds" shall mean "proceeds" (as defined in the UCC) of any Grantor and shall include any consideration received from the sale, exchange, license, lease or other disposition of any asset or property that constitutes Collateral, any value received as a consequence of the possession of any Collateral and any payment received from any insurer or other Person or entity as a result of the destruction, loss, theft, damage or other involuntary conversion of whatever nature of any asset or property which constitutes Collateral, and shall include (a) any claim of any Grantor against any third party for (and the right to sue and recover for and the rights to damages or profits due or accrued arising out of or in connection with) (i) past, present or future infringement of any Patent now or hereafter owned by any Grantor, or licensed under a Patent License, (ii) past, present or future infringement or dilution of any Trademark now or hereafter owned by any Grantor or licensed under a Trademark License or injury to the goodwill associated with or symbolized by any Trademark now or hereafter owned by any Grantor, (iii) past, present or future breach of any License and (iv) past, present or future infringement of any Copyright now or hereafter owned by any Grantor or licensed under a Copyright License and (b) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. "Secured Obligations" shall mean, without duplication, (a) the Obligations and (b) the Note Obligations. "Secured Parties" shall mean (a) the Lenders, (b) the Issuing Bank, (c) the Administrative Agent, (d) the Collateral Agent, (e) each counterparty to a Hedging Agreement entered into with the Borrower or any Loan Party if such counterparty was a Lender (or an Affiliate of a Lender) at the time the Hedging Agreement was entered into, (f) the beneficiaries of each indemnification obligation undertaken by any Grantor under any Senior Loan Document, (g) the Trustee for the benefit of the Noteholders and (h) the successors and assigns of each of the foregoing. "Securities" shall mean any obligations of an issuer or any shares, participations or other interests in an issuer or in property or an enterprise of an issuer which (a) are represented by a certificate representing a security in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer, (b) are one of a class or series or by its terms is divisible into a class or series of shares, participations, interests or obligations and (c)(i) are, or are of a type, dealt with or traded on securities exchanges or securities markets or (ii) are a medium for investment and by their terms expressly provide that they are a security governed by Article 8 of the UCC. "Securities Account" shall mean an account to which a Financial Asset is or may be credited in accordance with an agreement under which the Person maintaining the account undertakes to treat the Person for whom the account is maintained as entitled to exercise rights that comprise the Financial Asset. "Security Documents" means the Security Documents (as defined in the Credit Agreement and the Indenture) and any other agreement, document or instrument pursuant to which a Lien is granted securing any Secured Obligations or under which rights or remedies with respect to such Liens are governed. "Security Entitlements" shall mean the rights and property interests of an Entitlement Holder with respect to a Financial Asset. 7 "Security Interest" shall have the meaning assigned to such term in Section 2.01. "Security Intermediary" shall mean (a) a clearing corporation or (b) a Person, including a bank or broker, that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity. "Senior Loan Documents" shall mean the Credit Agreement, and each of the other agreements, documents and instruments providing for or evidencing the Obligations, and any other related document or instrument. "Trademark License" shall mean any written agreement, now or hereafter in effect, granting to any third party any right to use any Trademark now or hereafter owned by any Grantor or which any Grantor otherwise has the right to license, or granting to any Grantor any right to use any Trademark now or hereafter owned by any third party, and all rights of any Grantor under any such agreement. "Trademarks" shall mean all of the following: (a) all trademarks, service marks, trade names, corporate names, company names, business names, fictitious business names, trade styles, trade dress, logos, other source or business identifiers, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all registration and recording applications filed in connection therewith, including registrations and registration applications in the United States Patent and Trademark Office, any State of the United States or any similar offices in any other country or any political subdivision thereof, and all extensions or renewals thereof, including those listed on Schedule V, (b) all goodwill associated therewith or symbolized thereby and (c) all other assets, rights and interests that uniquely reflect or embody such goodwill. "UCC" shall mean the Uniform Commercial Code as in effect in the State of New York. SECTION 1.03. Rules of Interpretation. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. 8 ARTICLE II Security Interest SECTION 2.01. Security Interest. As security for the payment or performance, as the case may be, in full of the Secured Obligations, each Grantor hereby bargains, sells, conveys, assigns, sets over, mortgages, pledges, hypothecates and transfers to the Collateral Agent, its successors and assigns, for the ratable benefit of the Secured Parties, and hereby grants to the Collateral Agent, its successors and assigns, for the ratable benefit of the Secured Parties, a security interest in, all of such Grantor's right, title and interest in, to and under the Collateral (the "Security Interest"). Without limiting the foregoing, the Collateral Agent is hereby authorized to file one or more financing statements (including fixture filings), continuation statements, filings with the United States Patent and Trademark Office or United States Copyright Office (or any successor office or any similar office in any other country) or other documents for the purpose of perfecting, confirming, continuing, enforcing or protecting the Security Interest granted by each Grantor, without the signature of any Grantors, and naming any Grantor or the Grantors as debtors and the Collateral Agent as secured party. SECTION 2.02. No Assumption of Liability. The Security Interest is granted as security only and shall not subject the Collateral Agent or any other Secured Party to, or in any way alter or modify, any obligation or liability of any Grantor with respect to or arising out of the Collateral. ARTICLE III Representations and Warranties The Grantors jointly and severally represent and warrant to the Collateral Agent and the Secured Parties that: SECTION 3.01. Title and Authority. Each Grantor has good and valid rights in and title to the Collateral with respect to which it has purported to grant a Security Interest hereunder and has full power and authority to grant to the Collateral Agent the Security Interest in such Collateral pursuant hereto and to execute, deliver and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other Person other than any consent or approval which has been obtained. SECTION 3.02. Filings. (a) The Perfection Certificate has been duly prepared, completed and executed and the information set forth therein is correct and complete in all material respects. UCC financing statements (including fixture filings, as applicable) or other appropriate filings, recordings or registrations containing a description of the Collateral have been delivered to the Collateral Agent for filing in each governmental, municipal or other office specified in Schedule 6 to the Perfection Certificate, which are all the filings, recordings and registrations (other than filings required to be made in the United States Patent and Trademark Office and the United States Copyright Office in order to perfect the Security Interest in Collateral consisting of United States Patents, Trademarks and Copyrights) that are necessary to publish notice of and protect the validity of and to establish a legal, valid and perfected security interest in favor of the Collateral Agent (for the ratable benefit of the Secured Parties) in respect 9 of all Collateral in which the Security Interest may be perfected by filing, recording or registration in the United States (or any political subdivision thereof) and its territories and possessions, and no further or subsequent filing, refiling, recording, rerecording, registration or reregistration is necessary in any such jurisdiction, except as provided under applicable law with respect to the filing of continuation statements. (b) Each Grantor shall ensure that fully executed security agreements in the form hereof (or short-form supplements to this Agreement in form and substance satisfactory to the Collateral Agent) and containing a description of all Collateral consisting of Intellectual Property shall have been received and recorded within three months after the execution of this Agreement with respect to United States Patents and United States registered Trademarks (and Trademarks for which United States registration applications are pending) and within one month after the execution of this Agreement with respect to United States registered Copyrights have been delivered to the Collateral Agent for recording by the United States Patent and Trademark Office and the United States Copyright Office pursuant to 35 U.S.C. Section 261, 15 U.S.C. Section 1060 or 17 U.S.C. Section 205 and the regulations thereunder, as applicable, and otherwise as may be required pursuant to the laws of any other necessary jurisdiction in the United States (or any political subdivision thereof) and its territories and possessions, to protect the validity of and to establish a legal, valid and perfected security interest in favor of the Collateral Agent (for the ratable benefit of the Secured Parties) in respect of all Collateral consisting of Patents, Trademarks and Copyrights in which a security interest may be perfected by filing, recording or registration in the United States (or any political subdivision thereof) and its territories and possessions, or in any other necessary jurisdiction, and no further or subsequent filing, refiling, recording, rerecording, registration or reregistration is necessary in any such jurisdiction (other than such actions as are necessary to perfect the Security Interest with respect to any Collateral consisting of Patents, Trademarks and Copyrights (or registration or application for registration thereof) acquired or developed after the date hereof). SECTION 3.03. Validity of Security Interest. The Security Interest constitutes (a) a legal and valid security interest in all the Collateral securing the payment and performance of the Secured Obligations, (b) subject to the filings described in Section 3.02 above, a perfected security interest in all Collateral in which a security interest may be perfected by filing, recording or registering a financing statement or analogous document in the United States (or any political subdivision thereof) and its territories and possessions pursuant to the UCC or other analogous applicable law in such jurisdictions and (c) a security interest that shall be perfected in all Collateral in which a security interest may be perfected upon the receipt and recording of this Agreement with the United States Patent and Trademark Office and the United States Copyright Office, as applicable, within the three month period (commencing as of the date hereof) pursuant to 35 U.S.C. Section 261 or 15 U.S.C. Section 1060 or the one month period (commencing as of the date hereof) pursuant to 17 U.S.C. Section 205 and otherwise as may be required to pursuant to the laws of any other necessary jurisdiction in the United States (or any political subdivision thereof) and its territories and possessions. The Security Interest is and shall be prior to any other Lien on any of the Collateral, other than Liens expressly permitted pursuant to Section 6.02 of the Credit Agreement and Section 4.14 of the Indenture. SECTION 3.04. Absence of Other Liens. The Collateral is owned by the Grantors free and clear of any Lien, except for Liens expressly permitted pursuant to Section 6.02 of the Credit Agreement and Section 4.14 of the Indenture. The Grantor has not filed or consented to the filing of (a) any financing statement or analogous document under the UCC or 10 any other applicable laws covering any Collateral, (b) any assignment in which any Grantor assigns any Collateral or any security agreement or similar instrument covering any Collateral with the United States Patent and Trademark Office or the United States Copyright Office or (c) any assignment in which any Grantor assigns any Collateral or any security agreement or similar instrument covering any Collateral with any foreign governmental, municipal or other office, which financing statement or analogous document, assignment, security agreement or similar instrument is still in effect, except, in each case, for Liens expressly permitted pursuant to Section 6.02 of the Credit Agreement and Section 4.14 of the Indenture. ARTICLE IV Covenants SECTION 4.01. Records. Each Grantor agrees to maintain, at its own cost and expense, such complete and accurate records with respect to the Collateral owned by it as is consistent with its current practices, but in any event to include complete accounting records indicating all payments and proceeds received with respect to any part of the Collateral, and, at such time or times as the Collateral Agent may reasonably request, promptly to prepare and deliver to the Collateral Agent an updated Perfection Certificate, noting all material changes, if any, since the date of the most recent Perfection Certificate. SECTION 4.02. Protection of Security. Each Grantor shall, at its own cost and expense, take any and all actions necessary to defend title to the Collateral against all Persons and to defend the Security Interest of the Collateral Agent in the Collateral and the priority thereof against any Lien not expressly permitted pursuant to Section 6.02 of the Credit Agreement and Section 4.14 of the Indenture. SECTION 4.03. Further Assurances. Each Grantor agrees, at its own expense, to execute, acknowledge, deliver and cause to be duly filed all such further instruments and documents and take all such actions as the Collateral Agent may from time to time request to better assure, preserve, protect and perfect the Security Interest and the rights and remedies created hereby, including the payment of any fees and taxes required in connection with the execution and delivery of this Agreement, the granting of the Security Interest and the filing of any financing statements (including fixture filings) or other documents in connection herewith or therewith. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note or other instrument, such note or instrument shall be immediately pledged and delivered to the Collateral Agent, duly endorsed in a manner satisfactory to the Collateral Agent. SECTION 4.04. Inspection and Verification. The Collateral Agent and such Persons as the Collateral Agent may reasonably designate shall have the right to inspect the Collateral, all records related thereto (and to make extracts and copies from such records) and the premises upon which any of the Collateral is located, at reasonable times and intervals during normal business hours upon reasonable advance notice to the respective Grantor and to verify under reasonable procedures the validity, amount, quality, quantity, value, condition and status of the Collateral. The Collateral Agent shall have the absolute right to share any information it gains from such inspection or verification with any Secured Party in accordance with and subject to the provisions set forth in Section 9.12 of the Credit Agreement. 11 SECTION 4.05. Taxes; Encumbrances. At its option, the Collateral Agent may discharge past due taxes, assessments, charges, fees, Liens, security interests or other encumbrances at any time levied or placed on the Collateral and not permitted pursuant to Section 6.02 of the Credit Agreement and Section 4.14 of the Indenture, and may pay for the maintenance and preservation of the Collateral, in each case to the extent any Grantor fails to do so as required by the Credit Agreement or this Agreement, and each Grantor jointly and severally agrees to reimburse the Collateral Agent on demand for any payment made or any expense incurred by the Collateral Agent pursuant to the foregoing authorization; provided that nothing in this Section 4.05 shall be interpreted as excusing any Grantor from the performance of, or imposing any obligation on the Collateral Agent or any Secured Party to cure or perform, any covenants or other promises of any Grantor with respect to taxes, assessments, charges, fees, liens, security interests or other encumbrances and maintenance as set forth herein or in the other Security Documents, the Senior Loan Documents or the Indenture Documents. SECTION 4.06. Assignment of Security Interest. If at any time any Grantor shall take a security interest in any property of an Account Debtor or any other Person to secure payment and performance of an Account, such Grantor shall promptly assign such security interest to the Collateral Agent to the extent permitted by any contracts or arrangements to which such property is subject. Such assignment need not be filed of public record unless necessary to continue the perfected status of the security interest against creditors of and transferees from the Account Debtor or other Person granting the security interest. SECTION 4.07. Continuing Obligations of the Grantors. Each Grantor shall remain liable to observe and perform all the conditions and obligations to be observed and performed by it under each contract, agreement or instrument relating to the Collateral, all in accordance with the terms and conditions thereof, and each Grantor jointly and severally agrees to indemnify and hold harmless the Collateral Agent and the Secured Parties from and against any and all liability for such performance. SECTION 4.08. Use and Disposition of Collateral. None of the Grantors shall make or permit to be made an assignment, pledge or hypothecation of the Collateral or shall grant any other Lien in respect of the Collateral, except as expressly permitted by Section 6.02 of the Credit Agreement and Section 4.14 of the Indenture. None of the Grantors shall make or permit to be made any transfer of the Collateral and each Grantor shall remain at all times in possession of the Collateral owned by it, except that (a) Inventory may be sold in the ordinary course of business and (b) unless and until the Collateral Agent shall notify the Grantors that an Event of Default shall have occurred and be continuing and that during the continuance thereof the Grantors shall not sell, convey, lease, assign, transfer or otherwise dispose of any Collateral (which notice may be given by telephone if promptly confirmed in writing), the Grantors may use and dispose of the Collateral in any lawful manner not inconsistent with the provisions of this Agreement, any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document. Without limiting the generality of the foregoing, each Grantor agrees that it shall not permit any material Inventory to be in the possession or control of any warehouseman, bailee, agent or processor at any time unless such warehouseman, bailee, agent or processor shall have been notified of the Security Interest and shall have agreed in writing to hold the Inventory subject to the Security Interest and the instructions of the Collateral Agent and to waive and release any Lien held by it with respect to such Inventory, whether arising by operation of law or otherwise. 12 SECTION 4.09. Limitation on Modification of Accounts. None of the Grantors will, without the Collateral Agent's prior written consent, grant any extension of the time of payment of any of the Accounts Receivable, compromise, compound or settle the same for less than the full amount thereof, release, wholly or partly, any Person liable for the payment thereof or allow any credit or discount whatsoever thereon, other than extensions, credits, discounts, compromises or settlements granted or made in the ordinary course of business and consistent with its current practices. SECTION 4.10. Insurance. The Grantors, at their own expense, shall maintain or cause to be maintained insurance covering physical loss or damage to the Inventory and Equipment in accordance with Section 5.07 of the Credit Agreement. Each Grantor irrevocably makes, constitutes and appoints the Collateral Agent (and all officers, employees or agents designated by the Collateral Agent) as such Grantor's true and lawful agent (and attorney-in-fact) for the purpose, during the continuance of an Event of Default, of making, settling and adjusting claims in respect of Collateral under policies of insurance, endorsing the name of such Grantor on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and for making all determinations and decisions with respect thereto. In the event that any Grantor at any time or times shall fail to obtain or maintain any of the policies of insurance required hereby or to pay any premium in whole or part relating thereto, the Collateral Agent may, without waiving or releasing any obligation or liability of the Grantors hereunder or any Event of Default, in its sole discretion, obtain and maintain such policies of insurance and pay such premium and take any other actions with respect thereto as the Collateral Agent deems advisable. All sums disbursed by the Collateral Agent in connection with this Section 4.10, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be payable, upon demand, by the Grantors to the Collateral Agent and shall be additional Secured Obligations secured hereby. SECTION 4.11. Legend. If any Accounts Receivable of any Grantor are evidenced by chattel paper, such Grantor shall legend, in form and manner satisfactory to the Collateral Agent, such Accounts Receivable and its books, records and documents evidencing or pertaining thereto with an appropriate reference to the fact that such Accounts Receivable have been assigned to the Collateral Agent for the benefit of the Secured Parties and that the Collateral Agent has a security interest therein. SECTION 4.12. Covenants Regarding Patent, Trademark and Copyright Collateral. (a) Each Grantor agrees that it will not, nor will it permit any of its licensees to, do any act, or omit to do any act, whereby any Patent which is material to the conduct of such Grantor's business may become invalidated or dedicated to the public, and agrees that it shall continue to mark any products covered by a Patent with the relevant patent number as necessary and sufficient to establish and preserve its maximum rights under applicable patent laws pursuant to which each such Patent is issued. (b) Each Grantor (either itself or through its licensees or its sublicensees) will, for each Trademark material to the conduct of such Grantor's business, (i) maintain such Trademark in full force free from any claim of abandonment or invalidity for non-use, (ii) maintain the quality of products and services offered under such Trademark sufficient to preclude any findings of abandonment, (iii) display such Trademark with notice of Federal or foreign registration to the extent necessary and sufficient to establish and preserve its maximum rights 13 under applicable law pursuant to which each such Trademark is issued and (iv) not knowingly use or knowingly permit the use of such Trademark in violation of any third party rights. (c) Each Grantor (either itself or through licensees) will, for each work covered by a material Copyright, continue to publish, reproduce, display, adopt and distribute the work with appropriate copyright notice as necessary and sufficient to establish and preserve its maximum rights under applicable copyright laws pursuant to which each such Copyright is issued. (d) Each Grantor shall notify the Collateral Agent within 45 days after the end of each fiscal quarter of Holdings, if during the previous fiscal quarter, such Grantor has obtained knowledge or had reason to know that any Patent, Trademark or Copyright material to the conduct of its business may become abandoned, lost or dedicated to the public, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, United States Copyright Office or any court or similar office of any country) regarding such Grantor's ownership of any Patent, Trademark or Copyright material to the conduct of its business, its right to register the same, or to keep and maintain the same. (e) In no event shall any Grantor, either itself or through any agent, employee, licensee or designee, file an application for any Patent, Trademark or Copyright (or for the registration of any Trademark or Copyright) with the United States Patent and Trademark Office, United States Copyright Office or any office or agency in any political subdivision of the United States or in any other country or any political subdivision thereof, unless, within 45 days after the end of the fiscal quarter of Holdings in which such application is filed, it informs the Collateral Agent, and, upon request of the Collateral Agent, executes and delivers any and all agreements, instruments, documents and papers as the Collateral Agent may request to evidence and perfect the Collateral Agent's security interest in such Patent, Trademark or Copyright, and each Grantor hereby appoints the Collateral Agent as its attorney-in-fact to execute and file such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power, being coupled with an interest, is irrevocable. (f) Each Grantor will take all necessary steps that are consistent with the practice in any proceeding before the United States Patent and Trademark Office, United States Copyright Office or any office or agency in any political subdivision of the United States or in any other country or any political subdivision thereof, to maintain and pursue each material application relating to the Patents, Trademarks and/or Copyrights (and to obtain the relevant grant or registration) and to maintain each issued Patent and each registration of the Trademarks and Copyrights that is material to the conduct of any Grantor's business, including timely filings of applications for renewal, affidavits of use, affidavits of incontestability and payment of maintenance fees, and, if consistent with good business judgment, to initiate opposition, interference and cancelation proceedings against third parties. (g) In the event that any Grantor has reason to believe that any Collateral consisting of a Patent, Trademark or Copyright material to the conduct of any Grantor's business has been or is about to be infringed, misappropriated or diluted by a third party, such Grantor shall notify the Collateral Agent within 45 days after the end of the fiscal quarter of Holdings in which the Grantor forms such belief and shall, if consistent with good business judgment, promptly sue for infringement, misappropriation or dilution and to recover any and all damages 14 for such infringement, misappropriation or dilution, and take such other actions as are appropriate under the circumstances to protect such Collateral. (h) Upon and during the continuance of an Event of Default, each Grantor shall use its best efforts to obtain all requisite consents or approvals from the licensor of each Copyright License, Patent License or Trademark License to effect the assignment of all of such Grantor's right, title and interest thereunder to the Collateral Agent or its designee for the benefit of the Secured Parties in accordance with the Collateral Sharing Agreement. ARTICLE V Power of Attorney Each Grantor irrevocably makes, constitutes and appoints the Collateral Agent (and all officers, employees or agents designated by the Collateral Agent) as such Grantor's true and lawful agent and attorney-in-fact, and in such capacity the Collateral Agent shall have the right, with power of substitution for each Grantor and in each Grantor's name or otherwise, for the use and benefit of the Collateral Agent and the Secured Parties, upon the occurrence and during the continuance of an Event of Default (a) to receive, endorse, assign and/or deliver any and all notes, acceptances, checks, drafts, money orders or other evidences of payment relating to the Collateral or any part thereof; (b) to demand, collect, receive payment of, give receipt for and give discharges and releases of all or any of the Collateral; (c) to sign the name of any Grantor on any invoice or bill of lading relating to any of the Collateral; (d) to send verifications of Accounts Receivable to any Account Debtor; (e) to commence and prosecute any and all suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect or otherwise realize on all or any of the Collateral or to enforce any rights in respect of any Collateral; (f) to settle, compromise, compound, adjust or defend any actions, suits or proceedings relating to all or any of the Collateral; (g) to notify, or to require any Grantor to notify, Account Debtors to make payment directly to the Collateral Agent; and (h) to use, sell, assign, transfer, pledge, make any agreement with respect to or otherwise deal with all or any of the Collateral, and to do all other acts and things necessary to carry out the purposes of this Agreement, as fully and completely as though the Collateral Agent were the absolute owner of the Collateral for all purposes; provided that nothing herein contained shall be construed as requiring or obligating the Collateral Agent or any Secured Party to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Collateral Agent or any Secured Party, or to present or file any claim or notice, or to take any action with respect to the Collateral or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby, and no action taken or omitted to be taken by the Collateral Agent or any Secured Party with respect to the Collateral or any part thereof shall give rise to any defense, counterclaim or offset in favor of any Grantor or to any claim or action against the Collateral Agent or any Secured Party. It is understood and agreed that the appointment of the Collateral Agent as the agent and attorney-in-fact of the Grantors for the purposes set forth above is coupled with an interest and is irrevocable. The provisions of this Section shall in no event relieve any Grantor of any of its obligations hereunder or under any other Security Document, any Senior Loan Document, Indenture Document or the Collateral Sharing Agreement, with respect to the Collateral or any part thereof or impose any obligation on the Collateral Agent or any Secured Party to proceed in any particular manner with respect to the Collateral or any part thereof, or in any way limit the exercise by the Collateral Agent or any Secured Party of any other or further right which it may 15 have on the date of this Agreement or hereafter, whether hereunder, under any other Security Document, any Senior Loan Document, Indenture Document or the Collateral Sharing Agreement, by law or otherwise. ARTICLE VI Remedies SECTION 6.01. Remedies upon Default. Upon the occurrence and during the continuance of an Event of Default, each Grantor agrees to deliver each item of Collateral to the Collateral Agent on demand, and it is agreed that the Collateral Agent shall have the right to take any of or all the following actions at the same or different times: (a) with respect to any Collateral consisting of Intellectual Property, on demand, to cause the Security Interest to become an assignment, transfer and conveyance of any of or all such Collateral by the applicable Grantors to the Collateral Agent (except to the extent assignment, transfer or conveyance thereof would result in a loss of said Intellectual Property), or to license or sublicense, whether general, special or otherwise, and whether on an exclusive or non-exclusive basis, any such Collateral throughout the world on such terms and conditions and in such manner as the Collateral Agent shall determine (other than in violation of any then-existing licensing arrangements to the extent that waivers cannot be obtained), and (b) with or without legal process and with or without prior notice or demand for performance, to take possession of the Collateral and without liability for trespass to enter any premises where the Collateral may be located for the purpose of taking possession of or removing the Collateral and, generally, to exercise any and all rights afforded to a secured party under the UCC or other applicable law. Without limiting the generality of the foregoing, each Grantor agrees that the Collateral Agent shall have the right, subject to the mandatory requirements of applicable law, to sell or otherwise dispose of all or any part of the Collateral, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery as the Collateral Agent shall deem appropriate. The Collateral Agent shall be authorized at any such sale (if it deems it advisable to do so) to restrict the prospective bidders or purchasers to Persons who will represent and agree that they are purchasing the Collateral for their own account for investment and not with a view to the distribution or sale thereof, and upon consummation of any such sale the Collateral Agent shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Collateral so sold. Each such purchaser at any such sale shall hold the property sold absolutely, free from any claim or right on the part of any Grantor, and each Grantor hereby waives (to the extent permitted by law) all rights of redemption, stay and appraisal which such Grantor now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Collateral Agent shall give the Grantors 10 days' written notice (which each Grantor agrees is reasonable notice within the meaning of Section 9-611 of the UCC or its equivalent in other jurisdictions) of the Collateral Agent's intention to make any sale of Collateral. Such notice, in the case of a public sale, shall state the time and place for such sale and, in the case of a sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or portion thereof, will first be offered for sale at such board or exchange. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Collateral Agent may fix and state in the notice (if any) of such sale. At any such sale, the Collateral, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Collateral 16 Agent may (in its sole and absolute discretion) determine. The Collateral Agent shall not be obligated to make any sale of any Collateral if it shall determine not to do so, regardless of the fact that notice of sale of such Collateral shall have been given. The Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case any sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Collateral Agent until the sale price is paid by the purchaser or purchasers thereof, but the Collateral Agent shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may be sold again upon like notice. At any public (or, to the extent permitted by law, private) sale made pursuant to this Section, any Secured Party may bid for or purchase, free (to the extent permitted by law) from any right of redemption, stay, valuation or appraisal on the part of any Grantor (all said rights being also hereby waived and released to the extent permitted by law), the Collateral or any part thereof offered for sale and may make payment on account thereof by using any Secured Obligation then due and payable to such Secured Party from any Grantor as a credit against the purchase price, and such Secured Party may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to any Grantor therefor. For purposes hereof a written agreement to purchase the Collateral or any portion thereof shall be treated as a sale thereof; the Collateral Agent shall be free to carry out such sale pursuant to such agreement and no Grantor shall be entitled to the return of the Collateral or any portion thereof subject thereto, notwithstanding the fact that after the Collateral Agent shall have entered into such an agreement all Events of Default shall have been remedied and the Secured Obligations paid in full. As an alternative to exercising the power of sale herein conferred upon it, the Collateral Agent may proceed by a suit or suits at law or in equity to foreclose this Agreement and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction or pursuant to a proceeding by a court-appointed receiver. SECTION 6.02. Application of Proceeds. The Collateral Agent shall apply the proceeds of any collection or sale of the Collateral, as well as any Collateral consisting of cash, in accordance with the terms of the Collateral Sharing Agreement. The Collateral Agent shall have absolute discretion as to the time of application of any such proceeds, moneys or balances in accordance with this Agreement and the Collateral Sharing Agreement. Upon any sale of the Collateral by the Collateral Agent (including pursuant to a power of sale granted by statute or under a judicial proceeding), the receipt of the Collateral Agent or of the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Collateral Agent or such officer or be answerable in any way for the misapplication thereof. SECTION 6.03. Grant of License to Use Intellectual Property. For the purpose of enabling the Collateral Agent to exercise rights and remedies under this Article at such time as the Collateral Agent shall be lawfully entitled to exercise such rights and remedies, each Grantor hereby grants to the Collateral Agent an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to the Grantors) to use, license or sub-license any of the Collateral consisting of Intellectual Property now owned or hereafter acquired by such Grantor, and wherever the same may be located, and including in such license reasonable access 17 to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof. The use of such license by the Collateral Agent shall be exercised, at the option of the Collateral Agent, upon the occurrence and during the continuation of an Event of Default; provided that any license, sub-license or other transaction entered into by the Collateral Agent in accordance herewith shall be binding upon the Grantors notwithstanding any subsequent cure of an Event of Default. ARTICLE VII Miscellaneous SECTION 7.01. Notices. All communications and notices hereunder shall (except as otherwise expressly permitted herein) be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to Holdings or the Borrower, to it at 5005 East McDowell Road, Phoenix, Arizona 85008, Attention of President (Telecopy No. (602) 244-4830). (b) if to the Collateral Agent, to JPMorgan Chase Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Gloria Javier (Telecopy No. (212) 552-5700), with a copy to JPMorgan Chase Bank, 270 Park Avenue, New York, New York 10017, Attention of Edmond DeForest (Telecopy No. (212) 270-4584). (c) if to a Subsidiary Guarantor, to such Subsidiary Guarantor at its address or telecopy number set forth on Schedule I, with a copy to the Companies. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. SECTION 7.02. Security Interest Absolute. All rights of the Collateral Agent hereunder, the Security Interest and all obligations of the Grantors hereunder shall be absolute and unconditional irrespective of (a) any lack of validity or enforceability of any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document, any Indenture Document, any agreement with respect to any of the Secured Obligations or any other agreement or instrument relating to any of the foregoing, (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from any Senior Loan Document, any other Security Document, the Collateral Sharing Agreement, any Indenture Document or any other agreement or instrument relating to any of the foregoing, (c) any exchange, release or non-perfection of any Lien on other collateral, or any release or amendment or waiver of or consent under or departure from any guarantee, securing or guaranteeing all or any of the Secured Obligations, or (d) any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Grantor in respect of the Secured Obligations or this Agreement. SECTION 7.03. Survival of Agreement. All covenants, agreements, representations and warranties made by any Grantor herein and in the certificates or other 18 instruments prepared or delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the Secured Parties and shall survive the making by the Lenders of the Loans and the issuance of Letters of Credit by the Issuing Bank, the execution and delivery to the Lenders of any notes evidencing such Loans, or the purchase and resale of the Notes by the Initial Purchasers, regardless of any investigation made by the Secured Parties or on their behalf, and shall continue in full force and effect until this Agreement shall terminate. SECTION 7.04. Binding Effect; Several Agreement. This Agreement shall become effective as to any Grantor when a counterpart hereof executed on behalf of such Grantor shall have been delivered to the Collateral Agent and a counterpart hereof shall have been executed on behalf of the Collateral Agent, and thereafter shall be binding upon such Grantor and the Collateral Agent and their respective successors and assigns, and shall inure to the benefit of such Grantor, the Collateral Agent and the other Secured Parties and their respective successors and assigns, except that no Grantor shall have the right to assign or transfer its rights or obligations hereunder or any interest herein or in the Collateral (and any such assignment or transfer shall be void) except as expressly contemplated by this Agreement, the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents. This Agreement shall be construed as a separate agreement with respect to each Grantor and may be amended, modified, supplemented, waived or released with respect to any Grantor without the approval of any other Grantor and without affecting the obligations of any other Grantor hereunder. SECTION 7.05. Successors and Assigns. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of any Grantor or the Collateral Agent that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. SECTION 7.06. Collateral Agent's Fees and Expenses; Indemnification. (a) Each Grantor jointly and severally agrees to pay upon demand to the Collateral Agent the amount of any and all reasonable expenses, including the reasonable fees, disbursements and other charges of its counsel and of any experts or agents, which the Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from or other realization upon any of the Collateral, (iii) the exercise, enforcement or protection of any of the rights of the Collateral Agent hereunder or (iv) the failure of any Grantor to perform or observe any of the provisions hereof applicable to it. (b) Without limitation of its indemnification obligations under the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents, each Grantor jointly and severally agrees to indemnify the Collateral Agent and the other Indemnitees against, and hold each of them harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable fees, disbursements and other charges of counsel, incurred by or asserted against any of them arising out of, in any way connected with, or as a result of, the execution, delivery or performance of this Agreement or any claim, litigation, investigation or proceeding relating hereto or to the Collateral, whether or not any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. 19 (c) Any such amounts payable as provided hereunder shall be additional Secured Obligations secured hereby and by the other Security Documents. The provisions of this Section 7.06 shall remain operative and in full force and effect regardless of the termination of this Agreement, any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document, the consummation of the transactions contemplated hereby, the repayment of any of the Secured Obligations, the invalidity or unenforceability of any term or provision of this Agreement, any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document, or any investigation made by or on behalf of the Collateral Agent or any other Secured Party. All amounts due under this Section 7.06 shall be payable on written demand therefor and shall bear interest at the rate specified in Section 2.13(c) of the Credit Agreement. SECTION 7.07. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 7.08. Waivers; Amendment. (a) No failure or delay of the Collateral Agent in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Collateral Agent hereunder and of the Collateral Agent and the other Secured Parties under the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents and the Indenture Documents, as applicable, are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provisions of this Agreement, any Senior Loan Document or any Indenture Document or consent to any departure by any Grantor therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any Grantor in any case shall entitle such Grantor or any other Grantor to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Collateral Agent and the Grantor or Grantors with respect to which such waiver, amendment or modification is to apply, subject to the terms of the Collateral Sharing Agreement. SECTION 7.09. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, ANY OTHER SECURITY DOCUMENT, THE COLLATERAL SHARING AGREEMENT, ANY SENIOR LOAN DOCUMENT OR ANY INDENTURE DOCUMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT, ANY OTHER SECURITY DOCUMENT, THE COLLATERAL SHARING 20 AGREEMENT, ANY SENIOR LOAN DOCUMENT OR ANY INDENTURE DOCUMENT, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 7.09. SECTION 7.10. Severability. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 7.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract (subject to Section 7.04), and shall become effective as provided in Section 7.04. Delivery of an executed signature page to this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. SECTION 7.12. Headings. Article and Section headings used herein are for the purpose of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 7.13. Jurisdiction; Consent to Service of Process. (a) Each Grantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, any other Security Document, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Collateral Agent, the Administrative Agent, the Issuing Bank, any Lender, the Trustee or any Noteholder may otherwise have to bring any action or proceeding relating to this Agreement, any other Security Document, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents against any Grantor or its properties in the courts of any jurisdiction. (b) Each Grantor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement, any other Security Document, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. 21 (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 7.01. Nothing in this Agreement will affected the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 7.14. Termination. (a) This Agreement and the Security Interest shall terminate when all the Obligations (other than those described in clauses (c) and (d) of the definition thereof) and the Note Obligations have been indefeasibly paid in full and the Lenders have no further commitment to lend under the Credit Agreement, the LC Exposure (as defined in the Credit Agreement) has been reduced to zero and the Issuing Bank has no further obligation to issue Letters of Credit under the Credit Agreement. (b) A Grantor shall automatically be released from its obligations hereunder and the Security Interest in the Collateral of such Grantor shall be automatically released in the event that such Grantor ceases to be a Subsidiary of Holdings pursuant to a transaction permitted under the Senior Loan Documents and the Indenture Documents. (c) Subject to the Collateral Sharing Agreement, upon any sale or other transfer by any Grantor of any Collateral that is permitted or not prohibited under the Senior Loan Documents and the Indenture Documents to any Person that is not a Grantor, or upon the effectiveness of any written consent to the release of the Security Interest granted hereby in any Collateral pursuant to the Senior Loan Documents and the Indenture Documents, the Security Interest in such Collateral shall be automatically released. (d) In connection with any termination or release pursuant to paragraph (a), (b) or (c), the Collateral Agent shall execute and deliver to any Grantor, at such Grantor's expense, all documents that such Grantor shall reasonably request to evidence such termination or release. Any execution and delivery of documents pursuant to this Section 7.14 shall be without recourse to or warranty by the Collateral Agent. SECTION 7.15. Additional Grantors. If, pursuant to Section 5.12 of the Credit Agreement and Sections 4.11 and 11.07 of the Indenture, Holdings is required to cause any Subsidiary of Holdings that is not a Grantor to enter in to this Agreement as a Grantor, upon execution and delivery by the Collateral Agent and such Subsidiary of an instrument in the form of Annex 2 hereto, such Subsidiary shall become a Grantor hereunder with the same force and effect as if originally named as a Grantor herein. The execution and delivery of any such instrument shall not require the consent of any Grantor hereunder. The rights and obligations of each Grantor hereunder shall remain in full force and effect notwithstanding the addition of any new Grantor as a party to this Agreement. SECTION 7.16. Subject to Collateral Sharing Agreement. Notwithstanding anything herein to the contrary, the Security Interest granted to the Collateral Agent pursuant to this Agreement and the exercise of any right or remedy by the Collateral Agent hereunder are subject to the provisions of the Collateral Sharing Agreement. Each Grantor agrees to be bound by the terms of the Collateral Sharing Agreement and, without limiting the generality of the foregoing, expressly agrees that all obligations and liabilities of a "Grantor" thereunder apply to such Grantor with the same force and effect as if such Grantor were a signatory thereto. In the event of any conflict between the terms of the Collateral Sharing Agreement and this Agreement, the terms of the Collateral Sharing Agreement shall govern. 22 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, By: /s/ JOHN T. KURTZWEIL -------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer ON SEMICONDUCTOR CORPORATION, By: /s/ JOHN T. KURTZWEIL -------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer EACH OF THE SUBSIDIARY GUARANTORS LISTED ON SCHEDULE I HERETO, By: /s/ JOHN T. KURTZWEIL -------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer JPMORGAN CHASE BANK, AS COLLATERAL AGENT, By: /s/ EDMOND DEFOREST -------------------------------- Name: Edmond DeForest Title: Vice President 23 Schedule I to the Security Agreement SUBSIDIARY GUARANTORS Subsidiary Guarantors Address SCG International Development LLC 5005 East McDowell Road Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 SCG (Malaysia SMP) Holding Corporation 5005 East McDowell Road Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 SCG (Czech) Holding Corporation 5005 East McDowell Road Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 SCG (China) Holding Corporation 5005 East McDowell Road Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 Semiconductor Components Industries Puerto Rico, 5005 East McDowell Road Inc. Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 Semiconductor Components Industries of Rhode 5005 East McDowell Road Island, Inc. Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 Semiconductor Components Industries International 5005 East McDowell Road of Rhode Island, Inc. Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 24 Schedule II to the Security Agreement COPYRIGHTS 25 Schedule III to the Security Agreement LICENSES 26 Schedule IV to the Security Agreement PATENTS 27 Schedule V to the Security Agreement TRADEMARKS 28 Annex 1 to the Security Agreement [Form of] PERFECTION CERTIFICATE Reference is made to (a) the Credit Agreement, dated as of August 4, 1999, as amended and restated as of February 14, 2003 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among ON SEMICONDUCTOR CORPORATION ("Holdings"), SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC (the "Borrower"), the lenders from time to time party thereto (the "Lenders"), and JPMORGAN CHASE BANK, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), (b) the Indenture dated as of March 3, 2003 (as amended, supplemented or otherwise modified from time to time, the "Indenture"), among the Companies, the Subsidiary Guarantors and WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, as trustee, (c) the Security Agreement, dated as of August 4, 1999, as amended and restated as of March 3, 2003 (as amended, supplemented or otherwise modified from time to time, the "Security Agreement"), among the Grantors and JPMORGAN CHASE BANK, as collateral agent (in such capacity, the "Collateral Agent") and (d) the Collateral Sharing Agreement, dated as of March 3, 2003 (as amended, supplemented or otherwise modified from time to time, the "Collateral Sharing Agreement"), among Holdings, the Borrower, the Trustee and the Collateral Agent. Capitalized terms used herein but not defined herein, unless otherwise specified, having the respective meanings set forth in the Security Agreement. The undersigned, a Financial Officer of each of Holdings and the Borrower, hereby certify to the Collateral Agent and to each other Secured Party as follows: 1. Names. (a) The exact corporate name of each Grantor, as such name appears in its respective certificate of incorporation, is as follows: (b) Set forth below is each other corporate name each Grantor has had in the past five years, together with the date of the relevant change: (c) Except as set forth in Schedule 1 hereto, no Grantor has changed its identity or corporate structure in any way within the past five years. Changes in identity or corporate structure would include mergers, consolidations and acquisitions, as well as any change in the form, nature or jurisdiction of corporate organization. If any such change has occurred, include in Schedule 1 the information required by Sections 1 and 2 of this certificate as to each acquiree or constituent party to a merger or consolidation. (d) The following is a list of all other names (including trade names or similar appellations) used by each Grantor or any of its divisions or other business units in connection with the conduct of its business or the ownership of its properties at any time during the past five years: (e) Set forth below is the Federal Taxpayer Identification Number of each Grantor: 1 2. Current Locations. (a) The chief executive office of each Grantor is located at the address set forth opposite its name below: Grantor Mailing Address County State (b) Set forth below opposite the name of each Grantor are all locations where such Grantor maintains any books or records relating to any Accounts Receivable (with each location at which chattel paper, if any, is kept being indicated by an "*"): Grantor Mailing Address County State (c) Set forth below opposite the name of each Grantor are all the places of business of such Grantor not identified in paragraph (a) or (b) above: Grantor Mailing Address County State (d) Set forth below opposite the name of each Grantor are all the locations where such Grantor maintains any Collateral not identified above: Grantor Mailing Address County State (e) Set forth below opposite the name of each Grantor are the names and addresses of all Persons other than such Grantor that have possession of any of the Collateral of such Grantor: Grantor Mailing Address County State 3. Unusual Transactions. All Accounts Receivable have been originated by the Grantors and all Inventory has been acquired by the Grantors in the ordinary course of business. 4. File Search Reports. File search reports have been obtained from each UCC filing office identified with respect to such Grantor in Section 2 hereof, and such search reports reflect no Liens against any of the Collateral other than those permitted under the Credit Agreement and the Indenture. 5. UCC Filings. UCC financing statements in substantially the form of Schedule 5 hereto have been prepared for filing or filed in the UCC filing office in the jurisdiction in which 2 each Grantor is located and, to the extent any of the Collateral is comprised of fixtures in the proper local jurisdiction, as set forth with respect to such Grantor in Section 2 hereof. 6. Schedule of Filings. Attached hereto as Schedule 6 is a schedule setting forth, with respect to the filings described in Section 5 above, each filing and the filing office in which such filing is to be made. All filing fees and taxes payable in connection with the filings described in Section 5 above have been paid or provided for. 7. Equity Interests. Attached hereto as Schedule 7 is a true and correct list of all the duly authorized, issued and outstanding Equity Interests of each Subsidiary (including the Borrower) and the record and beneficial owners of such Equity Interests. Also set forth on Schedule 7 is each Equity Interest of Holdings and each Subsidiary (including the Borrower) that represents 50% or less of the equity of the entity in which such investment was made. 8. Debt Instruments. Attached hereto as Schedule 8 is a true and correct list of all instruments, including any promissory notes, and other evidence of indebtedness held by Holdings and each Subsidiary (including the Borrower) and all intercompany notes between Holdings and each Subsidiary (including the Borrower) and between each Subsidiary (including the Borrower) and each other such Subsidiary (including the Borrower). 9. Advances. Attached hereto as Schedule 9 is (a) a true and correct list of all advances made by Holdings to any Subsidiary (including the Borrower) or made by any Subsidiary (including the Borrower) to Holdings or to any other Subsidiary (including the Borrower) (other than those identified on Schedule 8), which advances will be on and after the date hereof evidenced by one or more intercompany notes pledged to the Collateral Agent under the Pledge Agreement (as defined in the Credit Agreement) and (b) a true and correct list of all unpaid intercompany transfers of goods sold and delivered by or to Holdings or any Subsidiary (including the Borrower). 10. Mortgage Filings. Attached hereto as Schedule 10 is a schedule setting forth, with respect to each Mortgaged Property and each Restatement Mortgaged Property (as such terms are defined in the Credit Agreement), (a) the exact name of the Person that owns such property as such name appears in its certificate of incorporation or other organizational document, (b) if different from the name identified pursuant to clause (a), the exact name of the current record owner of such property reflected in the records of the filing office for such property identified pursuant to the following clause and (c) the filing office in which a Mortgage (as defined in the Credit Agreement) with respect to such property must be filed or recorded in order for the Collateral Agent to obtain a perfected security interest therein. 11. Intellectual Property. Attached hereto as Schedule 11(A) is a schedule setting forth all of each Grantor's Patents and registered Trademarks and Patent and Trademark applications, including the name of the registered owner or applicant, as applicable, and the registration or application number, as applicable, of each Patent and registered Trademark or Patent or Trademark application owned by any Grantor, in proper form for filing with the United States Patent and Trademark Office, and a schedule setting forth all of each Grantor's material Patent Licenses and material Trademark Licenses. Attached hereto as Schedule 11(B) is a schedule setting forth all of each Grantor's registered Copyrights, including the name of the registered owner and the registration number of each Copyright owned by any Grantor, in proper form for 3 filing with the United States Copyright Office, and a schedule setting forth all of each Grantor's material Copyright Licenses that grant right with respect to registered Copyrights. 4 IN WITNESS WHEREOF, the undersigned have duly executed this certificate on this [ ]th day of [ ]. ON SEMICONDUCTOR CORPORATION, By__________________________________ Name: Title: [Financial Officer] SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, By__________________________________ Name: Title: [Financial Officer] 5 Annex 2 to the Security Agreement SUPPLEMENT NO. [ ] dated as of [ ], to the Security Agreement dated as of August 4, 1999, as amended and restated as of March 3, 2003 (as amended, supplemented or otherwise modified from time to time, the "Security Agreement"), among SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, a Delaware limited liability company (the "Borrower"), ON SEMICONDUCTOR CORPORATION, a Delaware corporation ("Holdings"), each subsidiary of Holdings listed on Schedule I thereto (each such subsidiary individually a "Subsidiary" or a "Subsidiary Guarantor" and, collectively, the "Subsidiary Guarantors"; Holdings, the Subsidiary Guarantors and the Borrower are referred to collectively herein as the "Grantors") and JPMORGAN CHASE BANK, a New York banking corporation ("JPMCB"), as collateral agent (in such capacity, the "Collateral Agent") for the Secured Parties. A. Reference is made to (a) the Credit Agreement dated as of August 4, 1999, as amended and restated as of February 14, 2003 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, Holdings, the lenders from time to time party thereto (the "Lenders"), and JPMCB, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), (b) the Guarantee Agreement dated as of August 4, 1999 (as amended, supplemented or otherwise modified from time to time, the "Guarantee Agreement"), among Holdings, the Subsidiary Guarantors and the Administrative Agent, (c) the Indenture dated as of March 3, 2003 (as amended, supplemented or otherwise modified from time to time, the "Indenture"), among the Companies, the Subsidiary Guarantors and Wells Fargo Bank Minnesota, National Association, as trustee (the "Trustee"), and (d) the Collateral Sharing Agreement dated as of March 3, 2003, among the Companies, the Trustee and the Collateral Agent. B. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Security Agreement. C. The Grantors have entered into the Security Agreement in order to induce the Lenders to make Loans, the Issuing Bank to issue Letters of Credit, the Trustee to enter into the Indenture and the Initial Purchasers to purchase the Notes. Pursuant to Section 5.12 of the Credit Agreement and Section 4.11 of the Indenture, Holdings is required to cause certain of its Subsidiaries that are not Grantors to enter into the Security Agreement as Grantors. Section 7.15 of the Security Agreement provides that such Subsidiaries may become Grantors under the Security Agreement by execution and delivery of an instrument in the form of this Supplement. The undersigned Subsidiary (the "New Grantor") is executing this Supplement in accordance with the requirements of the Credit Agreement and the Indenture to become a Grantor under the Security Agreement as consideration for Loans previously made, Letters of Credit previously issued and for the purchase of the Notes by the Initial Purchasers and the Noteholders. Accordingly, the Collateral Agent and the New Grantor agree as follows: SECTION 1. In accordance with Section 7.15 of the Security Agreement, the New Grantor by its signature below becomes a Grantor under the Security Agreement with the 1 same force and effect as if originally named therein as a Grantor and the New Grantor hereby (a) agrees to all the terms and provisions of the Security Agreement applicable to it as a Grantor thereunder and (b) represents and warrants that the representations and warranties made by it as a Grantor thereunder are true and correct on and as of the date hereof except to the extent a representation and warranty expressly relates solely to a specific date in which case such representation and warranty shall be true and correct on such date. In furtherance of the foregoing, the New Grantor, as security for the payment and performance in full of the Secured Obligations (as defined in the Security Agreement), does hereby create and grant to the Collateral Agent, its successors and assigns, for the benefit of the Secured Parties, their successors and assigns, a security interest in and lien on all of the New Grantor's right, title and interest in and to the Collateral of the New Grantor. Each reference to a "Grantor" in the Security Agreement shall be deemed to include the New Grantor. The Security Agreement is hereby incorporated herein by reference. SECTION 2. The New Grantor represents and warrants to the Collateral Agent and the other Secured Parties that this Supplement has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms. SECTION 3. This Supplement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Supplement shall become effective when the Collateral Agent shall have received counterparts of this Supplement that, when taken together, bear the signatures of the New Grantor and the Collateral Agent. Delivery of an executed signature page to this Supplement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Supplement. SECTION 4. The New Grantor hereby represents and warrants that (a) set forth on Schedule I attached hereto is a true and correct schedule of the location of any and all Collateral of the New Grantor and (b) set forth under its signature hereto, is the true and correct location of the chief executive office of the New Grantor. SECTION 5. Except as expressly supplemented hereby, the Security Agreement shall remain in full force and effect. SECTION 6. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 7. In case any one or more of the provisions contained in this Supplement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and in the Security Agreement shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties hereto shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 2 SECTION 8. All communications and notices hereunder shall be in writing and given as provided in Section 7.01 of the Security Agreement. All communications and notices hereunder to the New Grantor shall be given to it at the address set forth under its signature below, with a copy to the Borrower. SECTION 9. The New Grantor agrees to reimburse the Collateral Agent for its reasonable out-of-pocket expenses in connection with this Supplement, including the reasonable fees, other charges and disbursements of counsel for the Collateral Agent. 3 IN WITNESS WHEREOF, the New Grantor and the Collateral Agent have duly executed this Supplement to the Security Agreement as of the day and year first above written. [NAME OF NEW GRANTOR], By _________________________________ Name: Title: Address: JPMORGAN CHASE BANK, AS COLLATERAL AGENT, By _________________________________ Name: Title: Address: 4 Schedule I to Supplement No. [ ] to the Security Agreement LOCATION OF COLLATERAL Description Location 1
EXHIBIT 10.55 EXECUTION COPY PLEDGE AGREEMENT dated as of August 4, 1999, as amended and restated as of March 3, 2003, among SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, a Delaware limited liability company (the "Borrower"), ON SEMICONDUCTOR CORPORATION, a Delaware corporation ("Holdings" and together with the Borrower, the "Companies"), each subsidiary of Holdings listed on Schedule I hereto (each such subsidiary individually a "Subsidiary Pledgor" and collectively, the "Subsidiary Pledgors"; the Borrower, Holdings and the Subsidiary Pledgors are referred to herein individually as a "Pledgor" and collectively as the "Pledgors") and JPMORGAN CHASE BANK, a New York banking corporation ("JPMCB"), as collateral agent (in such capacity, the "Collateral Agent") for the Secured Parties. Capitalized terms used but not defined herein, unless otherwise specified, shall have the meanings assigned to such terms in the Security Agreement (as defined herein). W I T N E S S E T H: WHEREAS, (a) the Companies, certain lenders from time to time party thereto (the "Lenders"), and JPMCB, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), are parties to the Credit Agreement dated as of August 4, 1999, as amended and restated as of April 3, 2000, and (b) Holdings, the Subsidiary Pledgors and the Administrative Agent are parties to a Guarantee Agreement dated as of August 4, 1999 (as amended, supplemented or modified from time to time, the "Guarantee Agreement"); WHEREAS, pursuant to the terms, conditions and provisions of (a) the Indenture dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Indenture"), among the Companies, the Subsidiary Pledgors and Wells Fargo Bank Minnesota, National Association, as trustee (the "Trustee"), and (b) the Purchase Agreement dated as of February 26, 2003, among the Companies, the Subsidiary Pledgors and Salomon Smith Barney Inc., Credit Suisse First Boston LLC, J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated (the "Initial Purchasers"), the Companies are issuing $200,000,000 aggregate principal amount of 12% Senior Secured Notes due 2010 and may issue, from time to time, additional notes in accordance with the provisions of the Indenture (collectively, the "Notes") which will be guaranteed on a senior secured basis by each of the Subsidiary Pledgors; WHEREAS, the Companies and certain Lenders under the Credit Agreement referred to above have entered into an Amendment and Restatement Agreement dated as of February 14, 2003 (the "Amendment and Restatement Agreement"), to amend and restate the Credit Agreement referred to above as of February 14, 2003 (such Credit Agreement, as further amended, supplemented or otherwise modified from time to time, the "Credit Agreement") in order to, among other things, permit, subject to certain terms and conditions, (a) the issuance of the Notes by the Companies and (b) the amendment of the Security Documents to provide for securing the Note Obligations thereunder; WHEREAS, (a) the parties hereto are parties to the Pledge Agreement dated as of August 4, 1999, as amended, supplemented and modified from time to time prior to the date hereof, and are entering into this Agreement to effect the securing of the Note Obligations hereunder and other related amendments contemplated by the Amendment and Restatement Agreement and the Indenture and (b) the Pledgors and the Collateral Agent have entered into a 1 Security Agreement, amended and restated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Security Agreement"); WHEREAS, the Companies, the Collateral Agent and the Trustee have entered into a Collateral Sharing Agreement dated as of the date hereof (the "Collateral Sharing Agreement"); and WHEREAS, each Pledgor has duly authorized the execution, delivery and performance of this Agreement; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and obligations herein set forth and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, each Pledgor and the Collateral Agent, on behalf of itself and each Secured Party (and each of their respective successors or assigns), hereby agree as follows: SECTION 1. Pledge. As security for the payment and performance, as the case may be, in full of the Secured Obligations, each Pledgor hereby pledges and grants to the Collateral Agent, its successors and assigns, and hereby grants to the Collateral Agent, its successors and assigns, for the ratable benefit of the Secured Parties, a security interest in all of such Pledgor's right, title and interest in, to and under (a) the shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person (collectively, the "Equity Interests") owned by it which are listed on Schedule II hereto and any Equity Interests obtained in the future by such Pledgor and the certificates representing all such Equity Interests (the "Pledged Interests"); provided that (i) the Pledged Interests shall not include more than 65% of the issued and outstanding voting stock of any Foreign Subsidiary, (ii) the Pledged Interests shall not include any Equity Interests in any Foreign Joint Venture Company to the extent that such a Pledge is prohibited by the constitutive documents of such Foreign Joint Venture Company or (iii) to the extent that applicable law requires that a Subsidiary of such Pledgor issue directors' qualifying shares, such qualifying shares; (b)(i) the debt securities owned by it which are listed opposite the name of such Pledgor on Schedule II hereto, (ii) any debt securities in the future issued to such Pledgor and (iii) the promissory notes and any other instruments evidencing such debt securities (the "Pledged Debt Securities"); (c) all other property that has been or may be delivered to and held by the Collateral Agent pursuant to the terms hereof; (d) subject to Section 5, all payments of principal or interest, dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed, in respect of, in exchange for or upon the conversion of the securities referred to in clauses (a) and (b) above; (e) subject to Section 5, all rights and privileges of such Pledgor with respect to the securities and other property referred to in clauses (a), (b), (c) and (d) above; and (f) all proceeds of any of the foregoing (the items referred to in clauses (a) through (f) above being collectively referred to as the "Collateral"). Upon delivery to the Collateral Agent, (a) any Pledged Interests, any Pledged Debt Securities or any stock certificates, notes or other securities now or hereafter included in the Collateral (the "Pledged Securities") has been or shall be accompanied by stock powers duly executed in blank or other instruments of transfer satisfactory to the Collateral Agent and by such other instruments and documents as the Collateral Agent may reasonably request and (b) all other property comprising part of the Collateral have been or shall be accompanied by proper instruments of assignment duly executed by the applicable Pledgor and such other instruments or documents as the Collateral Agent may reasonably request. Each delivery of Pledged Securities shall be accompanied by a schedule 2 describing the securities theretofore and then being pledged hereunder, which schedule shall be attached hereto as Schedule II and made a part hereof. Each schedule so delivered shall supersede any prior schedules so delivered. TO HAVE AND TO HOLD the Collateral, in accordance with the terms of the Collateral Sharing Agreement, together with all right, title, interest, powers, privileges and preferences pertaining or incidental thereto, unto the Collateral Agent, its successors and assigns, for the ratable benefit of the Secured Parties, forever; subject, however, to the terms, covenants and conditions hereinafter set forth. SECTION 2. Delivery of the Collateral. (a) Each Pledgor agrees promptly to deliver or cause to be delivered to the Collateral Agent any and all Pledged Securities, and any and all certificates or other instruments or documents representing the Collateral, unless such Pledged Securities, certificates or other instruments or documents have previously been delivered to the Collateral Agent. (b) Each Pledgor will cause any Indebtedness for borrowed money owed to the Pledgor by any Person to be evidenced by a duly executed promissory note that is pledged and delivered to the Collateral Agent pursuant to the terms thereof. SECTION 3. Representations, Warranties and Covenants. Each Pledgor hereby represents, warrants and covenants, as to itself and the Collateral pledged by it hereunder, to and with the Collateral Agent that: (a) the Pledged Interests represent that percentage as set forth on Schedule II of the issued and outstanding shares of each class of the Equity Interests of the issuer with respect thereto; (b) except for the security interest granted hereunder, such Pledgor (i) is and will at all times continue to be the direct owner, beneficially and of record, of the Pledged Securities indicated on Schedule II, (ii) holds the same free and clear of all Liens other than Liens expressly permitted pursuant to Section 6.02 of the Credit Agreement and Section 4.14 of the Indenture, (iii) will make no assignment, pledge, hypothecation or transfer of, or create or permit to exist any security interest in or other Lien on, the Collateral, other than pursuant hereto and in accordance with the Collateral Sharing Agreement, and (iv) subject to the Collateral Sharing Agreement, will cause any and all Collateral, whether for value paid by such Pledgor or otherwise, to be forthwith deposited (unless such Collateral was previously deposited with the Collateral Agent) with the Collateral Agent and pledged or assigned hereunder; (c) such Pledgor (i) has the power and authority to pledge the Collateral in the manner hereby done or contemplated and (ii) will defend its title or interest thereto or therein against any and all Liens (other than the Lien created by this Agreement), however arising, of all Persons whomsoever; (d) no consent of any other Person (including stockholders or creditors of any Pledgor) and no consent or approval of any Governmental Authority or any securities exchange was or is necessary to the validity of the pledge effected hereby; 3 (e) by virtue of the execution and delivery by the Pledgors of this Agreement, upon delivery to the Collateral Agent of the Pledged Securities, certificates or other documents representing or evidencing the Collateral in accordance with this Agreement, and, in the case of the Pledged Securities not constituting certificated securities or instruments, the filing of UCC financing statements in the appropriate filing office, the Collateral Agent will have a valid and perfected first lien upon and security interest in such Pledged Securities as security for the payment and performance of the Secured Obligations; (f) the pledge effected hereby is effective to vest in the Collateral Agent, on behalf of the Secured Parties, the rights of the Collateral Agent in the Collateral as set forth herein; (g) all of the Pledged Interests have been duly authorized and validly issued and are fully paid and nonassessable; (h) all information set forth herein relating to the Pledged Interests is accurate and complete in all material respects as of the date hereof; (i) the pledge of the Pledged Interests pursuant to this Agreement does not violate Regulation T, U or X of the Federal Reserve Board or any successor thereto as of the date hereof; and (j) all Collateral consisting of Pledged Securities, certificates or other instruments or documents representing or evidencing the Collateral has been delivered to the Collateral Agent in accordance with Section 2. SECTION 4. Registration in Nominee Name; Denominations. The Collateral Agent, on behalf of the Secured Parties, shall have the right (in its sole and absolute discretion) to hold the Pledged Securities in its own name as pledgee, the name of its nominee (as pledgee or as sub-agent) or the name of the Pledgors, endorsed or assigned in blank or in favor of the Collateral Agent. Each Pledgor will promptly give to the Collateral Agent copies of any notices or other communications received by it with respect to Pledged Securities registered in the name of such Pledgor. The Collateral Agent shall at all times have the right to exchange the certificates representing Pledged Securities for certificates of smaller or larger denominations for any purpose consistent with this Agreement and the Collateral Sharing Agreement. SECTION 5. Voting Rights; Dividends and Interest, etc. (a) Unless and until an Event of Default shall have occurred and be continuing: (i) Each Pledgor shall be entitled to exercise any and all voting and/or other consensual rights and powers inuring to an owner of Pledged Securities or any part thereof for any purpose consistent with the terms of this Agreement, the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents and the Indenture Documents; provided, however, that such Pledgor will not be entitled to exercise any such right if the result thereof could materially and adversely affect the rights inuring to a holder of the Pledged Securities or the rights and remedies of any of the Secured Parties under this Agreement, any other Security Document, the Collateral 4 Sharing Agreement, any Senior Loan Document or any Indenture Document or the ability of the Secured Parties to exercise the same. (ii) The Collateral Agent shall execute and deliver to each Pledgor, or cause to be executed and delivered to each Pledgor, all such proxies, powers of attorney and other instruments as such Pledgor may reasonably request for the purpose of enabling such Pledgor to exercise the voting and/or consensual rights and powers it is entitled to exercise pursuant to subparagraph (i) above and to receive the cash dividends it is entitled to receive pursuant to subparagraph (iii) below. (iii) Each Pledgor shall be entitled to receive and retain any and all cash dividends, interest and principal paid on the Pledged Securities to the extent and only to the extent that such cash dividends, interest and principal are permitted by, and otherwise paid in accordance with, the terms and conditions of the Senior Loan Documents or the Indenture Documents and applicable laws. All noncash dividends, interest and principal, and all dividends, interest and principal paid or payable in cash or otherwise in connection with a partial or total liquidation or dissolution, return of capital, capital surplus or paid-in surplus, and all other distributions (other than distributions referred to in the preceding sentence) made on or in respect of the Pledged Securities, whether paid or payable in cash or otherwise, whether resulting from a subdivision, combination or reclassification of the outstanding capital stock of the issuer of any Pledged Securities or received in exchange for Pledged Securities or any part thereof, or in redemption thereof, or as a result of any merger, consolidation, acquisition or other exchange of assets to which such issuer may be a party or otherwise, shall be and become part of the Collateral, and, if received by any Pledgor, shall not be commingled by such Pledgor with any of its other funds or property but shall be held separate and apart therefrom, shall be held in trust for the benefit of the Collateral Agent and shall be forthwith delivered to the Collateral Agent in the same form as so received (with any necessary endorsement). (b) Upon the occurrence and during the continuance of an Event of Default, all rights of any Pledgor to dividends, interest or principal that such Pledgor is authorized to receive pursuant to paragraph (a)(iii) above shall cease, and all such rights shall thereupon become vested in the Collateral Agent, which shall subject to the provisions of this paragraph (b) have the sole and exclusive right and authority to receive and retain such dividends, interest or principal. All dividends, interest or principal received by the Pledgor contrary to the provisions of this Section 5 shall be held in trust for the benefit of the Collateral Agent, shall be segregated from other property or funds of such Pledgor and shall be forthwith delivered to the Collateral Agent upon demand in the same form as so received (with any necessary endorsement). Any and all money and other property paid over to or received by the Collateral Agent pursuant to the provisions of this paragraph (b) shall be retained by the Collateral Agent in an account to be established by the Collateral Agent upon receipt of such money or other property and shall be applied in accordance with the provisions of Section 7. After all Events of Default have been cured or waived, the Collateral Agent shall promptly repay to each Pledgor all cash dividends, interest or principal (without interest), that such Pledgor would otherwise be permitted to retain pursuant to the terms of paragraph (a)(iii) above and which remain in such account. (c) Upon the occurrence and during the continuance of an Event of Default, all rights of any Pledgor to exercise the voting and consensual rights and powers it is entitled to exercise pursuant to paragraph (a)(i) of this Section 5, and the obligations of the Collateral Agent 5 under paragraph (a)(ii) of this Section 5, shall cease, and all such rights shall thereupon become vested in the Collateral Agent, which shall have the sole and exclusive right and authority to exercise such voting and consensual rights and powers, provided that, unless otherwise directed by the Required Lenders (as defined in the Credit Agreement), or after the Obligations have been paid in full pursuant to Section 14, by holders of at least 25% in aggregate principal amount of the Notes, the Collateral Agent shall have the right from time to time following and during the continuance of an Event of Default to permit the Pledgors to exercise such rights. After all Events of Default have been cured or waived, each Pledgor will have the right to exercise the voting and consensual rights and powers that it would otherwise be entitled to exercise pursuant to the terms of paragraph (a)(i) above. SECTION 6. Remedies upon Default. Upon the occurrence and during the continuance of an Event of Default, subject to applicable regulatory and legal requirements, the Collateral Agent may sell the Collateral, or any part thereof, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery as the Collateral Agent shall deem appropriate. The Collateral Agent shall be authorized at any such sale (if it deems it advisable to do so) to restrict the prospective bidders or purchasers to Persons who will represent and agree that they are purchasing the Collateral for their own account for investment and not with a view to the distribution or sale thereof, and upon consummation of any such sale the Collateral Agent shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Collateral so sold. Each such purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Pledgor, and, to the extent permitted by applicable law, the Pledgors hereby waive all rights of redemption, stay, valuation and appraisal any Pledgor now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Collateral Agent shall give a Pledgor 10 days' prior written notice (which each Pledgor agrees is reasonable notice within the meaning of Section 9-611 of the UCC or its equivalent in other jurisdictions) of the Collateral Agent's intention to make any sale of such Pledgor's Collateral. Such notice, in the case of a public sale, shall state the time and place for such sale and, in the case of a sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or portion thereof, will first be offered for sale at such board or exchange. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Collateral Agent may fix and state in the notice of such sale. At any such sale, the Collateral, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Collateral Agent may (in its sole and absolute discretion) determine. The Collateral Agent shall not be obligated to make any sale of any Collateral if it shall determine not to do so, regardless of the fact that notice of sale of such Collateral shall have been given. The Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case any sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Collateral Agent until the sale price is paid in full by the purchaser or purchasers thereof, but the Collateral Agent shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may be sold again upon like notice. At any public (or, to the extent permitted by applicable law, private) sale made pursuant to this Section 6, any Secured Party may bid for or purchase, free from any right of redemption, stay or appraisal on the part of 6 any Pledgor (all said rights being also hereby waived and released), the Collateral or any part thereof offered for sale and may make payment on account thereof by using any Secured Obligation then due and payable to it from such Pledgor as a credit against the purchase price, and it may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to such Pledgor therefor. For purposes hereof, (a) a written agreement to purchase the Collateral or any portion thereof shall be treated as a sale thereof, (b) the Collateral Agent shall be free to carry out such sale pursuant to such agreement and (c) such Pledgor shall not be entitled to the return of the Collateral or any portion thereof subject thereto, notwithstanding the fact that after the Collateral Agent shall have entered into such an agreement all Events of Default shall have been remedied and the Secured Obligations paid in full. As an alternative to exercising the power of sale herein conferred upon it, the Collateral Agent may proceed by a suit or suits at law or in equity to foreclose upon the Collateral and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction or pursuant to a proceeding by a court-appointed receiver. SECTION 7. Application of Proceeds of Sale. The Collateral Agent shall apply the proceeds of any collection or sale of the Collateral, as well as any Collateral consisting of cash in accordance with the terms of the Collateral Sharing Agreement. The Collateral Agent shall have absolute discretion as to the time of application of any such proceeds, moneys or balances in accordance with this Agreement and the Collateral Sharing Agreement. Upon any sale of the Collateral by the Collateral Agent (including pursuant to a power of sale granted by statute or under a judicial proceeding), the receipt of the purchase money by the Collateral Agent or of the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Collateral Agent or such officer or be answerable in any way for the misapplication thereof. SECTION 8. Reimbursement of Collateral Agent. (a) Each Pledgor agrees to pay upon demand to the Collateral Agent the amount of any and all reasonable expenses, including the reasonable fees, other charges and disbursements of its counsel and of any experts or agents, that the Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Collateral Agent hereunder or (iv) the failure by such Pledgor to perform or observe any of the provisions hereof. (b) Without limitation of its indemnification obligations under the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents, each Pledgor agrees to indemnify the Collateral Agent and the Indemnitees against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, other charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of the execution, delivery or performance of this Agreement or any claim, litigation, investigation or proceeding relating hereto or to any of the Collateral, whether or not any Indemnitee is a party hereto, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee. 7 (c) Any amounts payable as provided hereunder shall be additional Secured Obligations secured hereby and by the other Security Documents. The provisions of this Section 8 shall remain operative and in full force and effect regardless of the termination of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Secured Obligations, the invalidity or unenforceability of any term or provision of this Agreement, the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents or any investigation made by or on behalf of the Collateral Agent or any other Secured Party. All amounts due under this Section 8 shall be payable on written demand therefor and shall bear interest at the rate specified in Section 2.13(c) of the Credit Agreement. SECTION 9. Collateral Agent Appointed Attorney-in-Fact. Each Pledgor hereby appoints the Collateral Agent the attorney-in-fact of such Pledgor for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instrument that the Collateral Agent may deem necessary or advisable to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, the Collateral Agent shall have the right, upon the occurrence and during the continuance of an Event of Default, with full power of substitution either in the Collateral Agent's name or in the name of such Pledgor, to ask for, demand, sue for, collect, receive and give acquittance for any and all moneys due or to become due under and by virtue of any Collateral, to endorse checks, drafts, orders and other instruments for the payment of money payable to the Pledgor representing any interest or dividend or other distribution payable in respect of the Collateral or any part thereof or on account thereof and to give full discharge for the same, to settle, compromise, prosecute or defend any action, claim or proceeding with respect thereto, and to sell, assign, endorse, pledge, transfer and to make any agreement respecting, or otherwise deal with, the same; provided that nothing herein contained shall be construed as requiring or obligating the Collateral Agent to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Collateral Agent, or to present or file any claim or notice, or to take any action with respect to the Collateral or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby. The Collateral Agent and the other Secured Parties shall be accountable only for amounts actually received as a result of the exercise of the powers granted to them herein, and neither they nor their officers, directors, employees or agents shall be responsible to any Pledgor for any act or failure to act hereunder, except for their own gross negligence or wilful misconduct. SECTION 10. Waivers; Amendment. (a) No failure or delay of the Collateral Agent in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Collateral Agent hereunder and of the Collateral Agent and the other Secured Parties under the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents, as applicable, are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provisions of this Agreement or consent to any departure by any Pledgor therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on any Pledgor in any case shall entitle such Pledgor to any other or further notice or demand in similar or other circumstances. 8 (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to a written agreement entered into between the Collateral Agent and the Pledgor or Pledgors with respect to which such waiver, amendment or modification is to apply, subject to the terms of the Collateral Sharing Agreement. SECTION 11. Securities Act, etc. In view of the position of the Pledgors in relation to the Pledged Securities, or because of other current or future circumstances, a question may arise under the Securities Act of 1933, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being called the "Federal Securities Laws") with respect to any disposition of the Pledged Securities permitted hereunder. Each Pledgor understands that compliance with the Federal Securities Laws might very strictly limit the course of conduct of the Collateral Agent if the Collateral Agent were to attempt to dispose of all or any part of the Pledged Securities, and might also limit the extent to which or the manner in which any subsequent transferee of any Pledged Securities could dispose of the same. Similarly, there may be other legal restrictions or limitations affecting the Collateral Agent in any attempt to dispose of all or part of the Pledged Securities under applicable Blue Sky or other state securities laws or similar laws analogous in purpose or effect. Each Pledgor recognizes that in light of such restrictions and limitations the Collateral Agent may, with respect to any sale of the Pledged Securities, limit the purchasers to those who will agree, among other things, to acquire such Pledged Securities for their own account, for investment, and not with a view to the distribution or resale thereof. Each Pledgor acknowledges and agrees that in light of such restrictions and limitations, the Collateral Agent, in its sole and absolute discretion, (a) may proceed to make such a sale whether or not a registration statement for the purpose of registering such Pledged Securities or part thereof shall have been filed under the Federal Securities Laws and (b) may approach and negotiate with a single potential purchaser to effect such sale, in either case in accordance with a valid exemption from registration under the Federal Securities Laws. Each Pledgor acknowledges and agrees that any such sale might result in prices and other terms less favorable to the seller than if such sale were a public sale without such restrictions. In the event of any such sale, the Collateral Agent shall incur no responsibility or liability for selling all or any part of the Pledged Securities at a price that the Collateral Agent, in its sole and absolute discretion, may in good faith deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might have been realized if the sale were deferred until after registration as aforesaid or if more than a single purchaser were approached. The provisions of this Section 11 will apply notwithstanding the existence of a public or private market upon which the quotations or sales prices may exceed substantially the price at which the Collateral Agent sells. SECTION 12. Registration, etc. Each Pledgor agrees that, upon the occurrence and during the continuance of an Event of Default, if for any reason the Collateral Agent desires to sell any of the Pledged Securities at a public sale, it will, at any time and from time to time, upon the written request of the Collateral Agent, use its reasonable best efforts to take or to cause the issuer of such Pledged Securities to take such action and prepare, distribute and/or file such documents, as are required or advisable in the reasonable opinion of counsel for the Collateral Agent to permit the public sale of such Pledged Securities. Each Pledgor further agrees to indemnify, defend and hold harmless the Collateral Agent, each other Secured Party, any underwriter and their respective officers, directors, affiliates and controlling Persons from and against all loss, liability, expenses, costs of counsel (including, without limitation, reasonable fees and expenses to the Collateral Agent of legal counsel), and claims (including the costs of investigation) that they may incur insofar as such loss, liability, expense or claim arises out of or 9 is based upon any alleged untrue statement of a material fact contained in any prospectus (or any amendment or supplement thereto) or in any notification or offering circular, or arises out of or is based upon any alleged omission to state a material fact required to be stated therein or necessary to make the statements in any thereof not misleading, except insofar as the same may have been caused by any untrue statement or omission based upon information furnished in writing to such Pledgor or the issuer of such Pledged Securities by the Collateral Agent or any other Secured Party expressly for use therein. Each Pledgor further agrees, upon such written request referred to above, to use its reasonable best efforts to qualify, file or register, or cause the issuer of such Pledged Securities to qualify, file or register, any of the Pledged Securities under the Blue Sky or other securities laws of such states as may be requested by the Collateral Agent and keep effective, or cause to be kept effective, all such qualifications, filings or registrations. Each Pledgor will bear all costs and expenses of carrying out its obligations under this Section 12. Each Pledgor acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Section 12 and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Section 12 may be specifically enforced. SECTION 13. Security Interest Absolute. All rights of the Collateral Agent hereunder, the grant of a security interest in the Collateral and all obligations of each Pledgor hereunder, shall be absolute and unconditional irrespective of (a) any lack of validity or enforceability of any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document, any agreement with respect to any of the Secured Obligations or any other agreement or instrument relating to any of the foregoing, (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document or any other agreement or instrument relating to any of the foregoing, (c) any exchange, release or nonperfection of any Lien on other collateral, or any release or amendment or waiver of or consent under or departure from any guarantee, securing or guaranteeing all or any of the Secured Obligations or (d) any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Pledgor in respect of the Secured Obligations or in respect of this Agreement. SECTION 14. Termination or Release. (a) This Agreement and the security interests granted hereby shall terminate when all the Obligations (other than those described in clauses (c) and (d) of the definition thereof) and the Note Obligations have been indefeasibly paid in full and the Lenders have no further commitment to lend under the Credit Agreement, the LC Exposure (as defined in the Credit Agreement) has been reduced to zero and the Issuing Bank has no further obligation to issue Letters of Credit under the Credit Agreement. (b) A Pledgor shall automatically be released from its obligations hereunder and the security interests in the Collateral of such Pledgor shall be automatically released in the event that such Pledgor ceases to be a Subsidiary pursuant to a transaction permitted under the Senior Loan Documents and the Indenture Documents. (c) Subject to the Collateral Sharing Agreement, upon any sale or other transfer by any Pledgor of any Collateral that is permitted or not prohibited under the Senior Loan Documents and the Indenture Documents to any Person that is not a Pledgor, or upon the effectiveness of any written consent to the release of the security interest granted hereby in any 10 Collateral pursuant to the Senior Loan Documents and the Indenture Documents, the security interest in such Collateral shall be automatically released. (d) In connection with any termination or release pursuant to paragraph (a), (b) or (c), the Collateral Agent shall execute and deliver to any Pledgor, at such Pledgor's expense, all documents that such Pledgor shall reasonably request to evidence such termination or release. Any execution and delivery of documents pursuant to this Section 14 shall be without recourse to or warranty by the Collateral Agent. SECTION 15. Notices. All communications and notices hereunder shall be in writing and given as provided in Section 7.01 of the Security Agreement. All communications and notices hereunder to any Subsidiary Pledgor shall be given to it at the address or telecopy number set forth on Schedule I, with a copy to the Companies. SECTION 16. Further Assurances. Each Pledgor agrees to do such further acts and things, and to execute and deliver such additional conveyances, assignments, agreements and instruments, as the Collateral Agent may at any time reasonably request in connection with the administration and enforcement of this Agreement or with respect to the Collateral or any part thereof or in order better to assure and confirm unto the Collateral Agent its rights and remedies hereunder. SECTION 17. Binding Effect; Several Agreement; Assignments. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of any Pledgor that are contained in this Agreement shall bind and inure to the benefit of its successors and assigns. This Agreement shall become effective as to any Pledgor when a counterpart hereof executed on behalf of such Pledgor shall have been delivered to the Collateral Agent and a counterpart hereof shall have been executed on behalf of the Collateral Agent, and thereafter shall be binding upon such Pledgor and the Collateral Agent and their respective successors and assigns, and shall inure to the benefit of such Pledgor, the Collateral Agent and the other Secured Parties, and their respective successors and assigns, except that no Pledgor shall have the right to assign its rights hereunder or any interest herein or in the Collateral (and any such attempted assignment shall be void), except as expressly contemplated by this Agreement, the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents. This Agreement shall be construed as a separate agreement with respect to each Pledgor and may be amended, modified, supplemented, waived or released with respect to any Pledgor without the approval of any other Pledgor and without affecting the obligations of any other Pledgor hereunder. SECTION 18. Survival of Agreement; Severability. (a) All covenants, agreements, representations and warranties made by each Pledgor herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the Collateral Agent and the other Secured Parties and shall survive the making by the Lenders of the Loans, the issuance of Letters of Credit by the Issuing Bank, the execution and delivery to the Lenders of any notes evidencing such Loans and the purchase and resale of the Notes by the Initial Purchasers regardless of any investigation made by the Secured Parties or on their behalf, and shall continue in full force and effect until this Agreement shall terminate. 11 (a) In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 19. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 20. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute a single contract, and shall become effective as provided in Section 17. Delivery of an executed counterpart of a signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Agreement. SECTION 21. Rules of Interpretation. The rules of interpretation specified in Section 1.03 of the Security Agreement shall be applicable to this Agreement. Section headings used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting this Agreement. SECTION 22. Jurisdiction; Consent to Service of Process. (a) Each Pledgor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that, to the extent permitted by applicable law, all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Collateral Agent or any other Secured Party may otherwise have to bring any action or proceeding relating to this Agreement, any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document against any Pledgor or its properties in the courts of any jurisdiction. (b) Each Pledgor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement, any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. 12 (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 15. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 23. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, ANY OTHER SECURITY DOCUMENT, THE COLLATERAL SHARING AGREEMENT, ANY SENIOR LOAN DOCUMENT OR ANY INDENTURE DOCUMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 24. Additional Pledgors. If, pursuant to Section 5.12 of the Credit Agreement and Sections 4.11 and 11.07 of the Indenture, Holdings is required to cause any Subsidiary of Holdings that is not a Pledgor to enter in to this Agreement as a Pledgor, upon execution and delivery by the Collateral Agent and such Subsidiary of an instrument in the form of Annex 1 hereto, such Subsidiary shall become a Pledgor hereunder with the same force and effect as if originally named as a Pledgor herein. The execution and delivery of such instrument shall not require the consent of any Pledgor hereunder. The rights and obligations of each Pledgor hereunder shall remain in full force and effect notwithstanding the addition of any new Subsidiary Pledgor as a party to this Agreement. SECTION 25. Subject to Collateral Sharing Agreement. Notwithstanding anything herein to the contrary, the security interest granted to the Collateral Agent pursuant to this Agreement and the exercise of any right or remedy by the Collateral Agent hereunder are subject to the provisions of the Collateral Sharing Agreement. Each Pledgor agrees to be bound by the terms of the Collateral Sharing Agreement and, without limiting the generality of the foregoing, expressly agrees that all obligations and liabilities of a "Grantor" thereunder apply to such Pledgor with the same force and effect as if such Pledgor were a signatory thereto. In the event of any conflict between the terms of the Collateral Sharing Agreement and this Agreement, the terms of the Collateral Sharing Agreement shall govern. 13 IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge Agreement as of the day and year first above written. SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, By: /s/ JOHN T. KURTZWEIL -------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer ON SEMICONDUCTOR CORPORATION By: /s/ JOHN T. KURTZWEIL -------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer EACH OF THE SUBSIDIARY GUARANTORS LISTED ON SCHEDULE I HERETO, By: /s/ JOHN T. KURTZWEIL -------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer JPMORGAN CHASE BANK, AS COLLATERAL AGENT, By: /s/ EDMOND DEFOREST -------------------------------- Name: Edmond DeForest Title: Vice President 14 Schedule I to the Pledge Agreement SUBSIDIARY PLEDGORS Subsidiary Pledgors Address - - SCG International Development LLC 5005 East McDowell Road Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 - - SCG (Malaysia SMP) Holding Corporation 5005 East McDowell Road Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 - - SCG (Czech) Holding Corporation 5005 East McDowell Road Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 - - SCG (China) Holding Corporation 5005 East McDowell Road Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 - - Semiconductor Components Industries 5005 East McDowell Road Puerto Rico, Inc. Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 Semiconductor Components Industries of Rhode 5005 East McDowell Road Island, Inc. Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 Semiconductor Components Industries International 5005 East McDowell Road of Rhode Island, Inc. Phoenix, AZ 85008 Attention of General Counsel Telecopy No. (602) 244-5601 15 Schedule II to the Pledge Agreement CAPITAL STOCK OR OTHER EQUITY INTERESTS DEBT SECURITIES
Number and Percentage Class of of Shares Shares or Other or Other Number of Registered Equity Equity Issuer Certificate Owner Interests Interests - ------ ----------- ----- --------- --------- 16
Principal Issuer Amount Date of Note Maturity Date - ------ ----- ------------ ------------- Annex I to the Pledge Agreement SUPPLEMENT NO. [ ] dated as of [ ], to the PLEDGE AGREEMENT dated as of August 4, 1999, as amended and restated as of March 3, 2003 (as amended, supplemented or otherwise modified from time to time, the "Pledge Agreement") among SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, a Delaware limited liability company (the "Borrower"), ON SEMICONDUCTOR CORPORATION, a Delaware corporation ("Holdings"), and each subsidiary of Holdings listed on Schedule I thereto (each such subsidiary individually a "Subsidiary Pledgor" and collectively, the "Subsidiary Pledgors"; the Borrower, Holdings and the Subsidiary Pledgors are referred to herein individually as a "Pledgor" and collectively as the "Pledgors") and JPMORGAN CHASE BANK, a New York banking corporation ("JPMCB"), as collateral agent (in such capacity, the "Collateral Agent") for the Secured Parties. A. Reference is made to (a) the Credit Agreement dated as of August 4, 1999, as amended and restated as of February 14, 2003 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, Holdings, the lenders from time to time party thereto (the "Lenders"), and JPMCB, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), (b) the Guarantee Agreement dated as of August 4, 1999 (as amended, supplemented or otherwise modified from time to time, the "Guarantee Agreement"), among Holdings, the Subsidiary Pledgors and the Administrative Agent, (c) the Indenture dated as of March 3, 2003 (as amended, supplemented or otherwise modified from time to time, the "Indenture"), among the Companies, the Subsidiary Pledgors and Wells Fargo Bank Minnesota, National Association, as trustee (the "Trustee"), and (d) the Collateral Sharing Agreement dated as of March 3, 2003, among the Companies, the Trustee and the Collateral Agent. B. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Security Agreement. C. The Pledgors have entered into the Pledge Agreement in order to induce the Lenders to make Loans, the Issuing Bank to issue Letters of Credit, the Trustee to enter into the Indenture and the Initial Purchasers to purchase the Notes. Pursuant to Section 5.12 of the Credit Agreement and Section 4.11 of the Indenture, Holdings is required to cause certain of its Subsidiaries that are not Subsidiary Pledgors to enter into the Pledge Agreement as a Subsidiary Pledgor. Section 24 of the Pledge Agreement provides that such Subsidiaries may become Subsidiary Pledgors under the Pledge Agreement by execution and delivery of an instrument in the form of this Supplement. The undersigned Subsidiary (the "New Pledgor") is executing this Supplement in accordance with the requirements of the Credit Agreement and the Indenture to become a Subsidiary Pledgor under the Pledge Agreement as consideration for Loans previously made, Letters of Credit previously issued and the purchase of the Notes by the Initial Purchasers and the Noteholders. 17 Accordingly, the Collateral Agent and the New Pledgor agree as follows: SECTION 1. In accordance with Section 24 of the Pledge Agreement, the New Pledgor by its signature below becomes a Pledgor under the Pledge Agreement with the same force and effect as if originally named therein as a Pledgor and the New Pledgor hereby agrees (a) to all the terms and provisions of the Pledge Agreement applicable to it as a Pledgor thereunder and (b) represents and warrants that the representations and warranties made by it as a Pledgor thereunder are true and correct on and as of the date hereof except to the extent a representation and warranty expressly relates solely to a specific date in which case such representation and warranty shall be true and correct on such date. In furtherance of the foregoing, the New Pledgor, as security for the payment and performance in full of the Secured Obligations, does hereby create and grant to the Collateral Agent, its successors and assigns, for the benefit of the Secured Parties, their successors and assigns, a security interest in and lien on all of the New Pledgor's right, title and interest in and to the Collateral (as defined in the Pledge Agreement) of the New Pledgor. Each reference to a "Subsidiary Pledgor" or a "Pledgor" in the Pledge Agreement shall be deemed to include the New Pledgor. The Pledge Agreement is hereby incorporated herein by reference. SECTION 2. The New Pledgor represents and warrants to the Collateral Agent and the other Secured Parties that this Supplement has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms. SECTION 3. This Supplement may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Supplement shall become effective when the Collateral Agent shall have received counterparts of this Supplement that, when taken together, bear the signatures of the New Pledgor and the Collateral Agent. Delivery of an executed signature page to this Supplement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Supplement. SECTION 4. The New Pledgor hereby represents and warrants that set forth on Schedule I attached hereto is a true and correct schedule of all its Pledged Securities. SECTION 5. Except as expressly supplemented hereby, the Pledge Agreement shall remain in full force and effect. SECTION 6. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 7. In case any one or more of the provisions contained in this Supplement should be held invalid, illegal or unenforceable in any respect, neither party hereto shall be required to comply with such provision for so long as such provision is held to be invalid, illegal or unenforceable, but the validity, legality and enforceability of the remaining provisions contained herein and in the Pledge Agreement shall not in any way be affected or impaired (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties hereto shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable 18 provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 8. All communications and notices hereunder shall be in writing and given as provided in Section 15 of the Pledge Agreement. All communications and notices hereunder to the New Pledgor shall be given to it at the address set forth under its signature hereto, below, with a copy to the Borrower. SECTION 9. The New Pledgor agrees to reimburse the Collateral Agent for its reasonable out-of-pocket expenses in connection with this Supplement, including the reasonable fees, other charges and disbursements of counsel for the Collateral Agent. IN WITNESS WHEREOF, the New Pledgor and the Collateral Agent have duly executed this Supplement to the Pledge Agreement as of the day and year first above written. [NAME OF NEW PLEDGOR], By ________________________________ Name: Title: Address: JPMORGAN CHASE BANK, as Collateral Agent, By ________________________________ Name: Title: 19 Schedule I to Supplement No. [ ] to the Pledge Agreement Pledged Securities of the New Pledgor CAPITAL STOCK OR OTHER EQUITY INTERESTS DEBT SECURITIES
Number and Percentage Class of of Shares Shares or Other or Other Number of Registered Equity Equity Issuer Certificate Owner Interests Interests - ------ ----------- ----- --------- --------- 20
Principal Issuer Amount Date of Note Maturity Date - ------ ------ ------------ -------------
EXHIBIT 10.56 EXECUTION COPY COLLATERAL ASSIGNMENT dated as of August 4, 1999, as amended and restated as of March 3, 2003, between SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, a Delaware limited liability company (the "Borrower"), and JPMORGAN CHASE BANK, a New York banking corporation ("JPMCB"), as collateral agent (in such capacity, the "Collateral Agent") for the Secured Parties. Capitalized terms used but not defined herein, unless otherwise specified, shall have the meanings assigned to such terms in the Security Agreement (as defined herein). W I T N E S S E T H: WHEREAS, the Companies, certain lenders from time to time party thereto (the "Lenders"), and JPMCB, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), are parties to the Credit Agreement dated as of August 4, 1999, as amended and restated as of April 3, 2000; WHEREAS, pursuant to the terms, conditions and provisions of (a) the Indenture dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Indenture"), among the Companies, the Subsidiary Guarantors and Wells Fargo Bank Minnesota, National Association, as trustee (the "Trustee"), and (b) the Purchase Agreement dated as of February 26, 2003, among the Companies, the Subsidiary Guarantors and Salomon Smith Barney Inc., Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated (the "Initial Purchasers"), the Companies are issuing $200,000,000 aggregate principal amount of 12% Senior Secured Notes due 2010 and may issue, from time to time, additional notes in accordance with the provisions of the Indenture (collectively, the "Notes") which will be guaranteed on a senior secured basis by each of the Subsidiary Guarantors; WHEREAS, the Companies and certain Lenders under the Credit Agreement referred to above have entered into an Amendment and Restatement Agreement dated as of February 14, 2003 (the "Amendment and Restatement Agreement"), to amend and restate the Credit Agreement referred to above as of February 14, 2003 (such Credit Agreement, as further amended, supplemented or otherwise modified from time to time, the "Credit Agreement") in order to, among other things, permit, subject to certain terms and conditions, (a) the issuance of the Notes by the Companies and (b) the amendment of the Security Documents to provide for securing the Note Obligations thereunder; WHEREAS, the parties hereto are parties to the Collateral Assignment dated as of August 4, 1999, as amended, supplemented and modified from time to time prior to the date hereof, and are entering into this Agreement to effect the securing of the Note Obligations hereunder and other related amendments contemplated by the Amendment and Restatement Agreement and the Indenture; WHEREAS, (a) the Companies, the Collateral Agent and the Trustee have entered into a Collateral Sharing Agreement dated as of the date hereof (the "Collateral Sharing Agreement") and (b) the Borrower and the Collateral Agent have entered into a Security 1 Agreement, amended and restated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Security Agreement"); and WHEREAS, the Borrower has duly authorized the execution, delivery and performance of this Agreement; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and obligations herein set forth and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the Borrower and the Collateral Agent, on behalf of itself and each Secured Party (and each of their respective successors or assigns), hereby agree as follows: SECTION 1. Collateral Assignment. As collateral security for the Secured Obligations, the Borrower hereby assigns to the Collateral Agent, its successors and assigns, for the ratable benefit of the Secured Parties, and hereby grants to the Collateral Agent, its successors and assigns, for the ratable benefit of the Secured Parties a security interest in, all of the Borrower's right, title and interest in, to and under the following contracts and instruments, as the same may be modified, amended or supplemented from time to time: (a) the Transition Agreements (as defined in the Credit Agreement); and (b) such other contracts and instruments of the Borrower as the Collateral Agent shall designate from time to time to the Borrower in writing unless such assignment is prohibited (i) by the terms thereof, and the Borrower cannot reasonably obtain a waiver or an amendment of such prohibition or (ii) by applicable law. The contracts and instruments listed in clauses (a) and (b), as amended and in effect from time to time, are referred to collectively as the "Assigned Contracts". The security interest assigned by this Section 1 shall include (a) any and all rights to receive and demand payments under any and all Assigned Contracts, (b) any and all rights to receive and compel performance under any and all Assigned Contracts, (c) the right to make all waivers, amendments, determinations and agreements of or under any and all Assigned Contracts, (d) the right to take such action, including commencement, conduct and consummation of legal, administrative or other proceedings, as shall be permitted by the Assigned Contracts or by law and (e) any and all other rights, interests and claims now existing or hereafter arising under or in connection with any and all Assigned Contracts. SECTION 2. Agreements, Representations and Warranties. The Borrower further agrees, represents and warrants to the Collateral Agent and the Secured Parties that: (a) as of the date hereof, the Assigned Contracts are in full force and effect, there being no default thereunder by the Borrower. The Borrower will not permit any waiver, supplement, amendment, change or modification to be made to the Assigned Contracts, without the written consent of the Collateral Agent, except as permitted in accordance with Section 6.11(b) of the Credit Agreement and the Indenture (to the extent consistent with the Collateral Sharing Agreement); and (b) it has the right, power and authority to grant to the Collateral Agent a security interest in its right, title and interest in and to the Assigned Contracts. It has not heretofore hypothecated, assigned, mortgaged, pledged, encumbered or otherwise transferred its right, title or interest under the Assigned Contracts in any manner to any person other than the Collateral Agent and Wells Fargo Bank Minnesota, National Association, as collateral agent for 2 the holders of the Senior Secured Notes due 2008 issued by the Borrower and Holdings, nor will it do so at any time hereafter without the Collateral Agent's prior written consent in each instance, except for assignments, mortgages, pledges or encumbrances permitted or not prohibited by the Credit Agreement and the Indenture. Any such assignment, mortgage, pledge or encumbrance without the Collateral Agent's consent shall be void and of no force or effect. SECTION 3. No Obligations for Collateral Agent. The Borrower specifically acknowledges and agrees that the Collateral Agent does not assume, and shall have no responsibility for, the performance of any obligations to be performed under or with respect to the Assigned Contracts or by it, and it hereby agrees to indemnify and hold harmless the Collateral Agent with respect to any and all claims by any person relating to such obligations. The Collateral Agent, in its discretion, may file or record this Agreement. The Collateral Agent agrees to notify the Borrower promptly after any such filing or recording. SECTION 4. Remedies upon Default. Upon the commencement and during the continuance of an Event of Default, the Collateral Agent may, at its option, without notice to or demand upon the Borrower (both of which are hereby waived for the purpose of this Section 4), in addition to all other rights and remedies provided under any other Security Document, the Collateral Sharing Agreement, the Senior Loan Documents and the Indenture Documents, in its own name or the name of the Borrower, demand, sue upon or otherwise enforce the Assigned Contracts to the same extent as if the Collateral Agent were the party named in the Assigned Contracts, and exercise all other rights of the Borrower under the Assigned Contracts in such manner as it may determine. Any moneys actually received by the Collateral Agent pursuant to the exercise of any of the rights and remedies granted in this Collateral Assignment shall be applied as provided in the Security Agreement. SECTION 5. Reimbursement of Collateral Agent. (a) The Borrower agrees to pay upon demand to the Collateral Agent the amount of any and all reasonable expenses, including the reasonable fees, disbursements and other charges of its counsel and of any experts or agents, that the Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Assigned Contracts, (iii) the exercise, enforcement or protection of any of the rights of the Collateral Agent hereunder or (iv) the failure of the Borrower to perform or observe any of the provisions hereof applicable to it. (b) Without limitation of its indemnification obligations under the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents, the Borrower agrees to indemnify the Collateral Agent and the other Indemnitees against, and hold each of them harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable fees, disbursements and other charges of counsel, incurred by or asserted against any of them arising out of, in any way connected with, or as a result of the execution, delivery or performance of this Agreement or any claim, litigation, investigation or proceeding relating hereto or to any of the Assigned Contracts, whether or not any Indemnitee is a party thereto, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee. 3 (c) Any amounts payable as provided hereunder shall be additional Secured Obligations secured hereby and by the other Security Documents. The provisions of this Section 5 shall remain operative and in full force and effect regardless of the termination of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Secured Obligations, the invalidity or unenforceability of any term or provision of this Agreement, any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document, or any investigation made by or on behalf of the Collateral Agent or any other Secured Party. All amounts due under this Section 5 shall be payable upon written demand therefor and shall bear interest at the rate specified in Section 2.13(c) of the Credit Agreement. SECTION 6. Collateral Agent Appointed Attorney-in-Fact. Upon the occurrence and during the continuation of an Event of Default, the Collateral Agent shall have the right, as the true and lawful attorney-in-fact and agent of the Borrower, with power of substitution for the Borrower and in the Borrower's name, the Collateral Agent's name or otherwise for the use and benefit of the Collateral Agent (a) to receive, endorse, assign and/or deliver any and all notes, acceptances, checks, drafts, money orders or other evidences of payment relating to the Assigned Contracts or any part thereof; (b) to demand, collect, receive payment of, give receipt for and give discharges and releases of all or any of the Assigned Contracts; (c) to sign the name of the Borrower on any invoice or bill of lading relating to any of the Assigned Contracts; (d) to commence and prosecute any and all suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect or otherwise realize on all or any of the Assigned Contracts or to enforce any rights in respect of any Assigned Contracts; (e) to settle, compromise, compound, adjust or defend any actions, suits or proceedings relating to all or any of the Assigned Contracts; and (f) to use, sell, assign, transfer, pledge, make any agreement with respect to or otherwise deal with all or any of the Assigned Contracts, and to do all other acts and things necessary to carry out the purposes of this Collateral Assignment, as fully and completely as though the Collateral Agent were the Borrower named in the Assigned Contracts; provided that nothing herein contained shall be construed as requiring or obligating the Collateral Agent or any Secured Party to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Collateral Agent or any Secured Party, or to present or file any claim or notice, or to take any action with respect to the Assigned Contracts or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby, and no action taken or omitted to be taken by the Collateral Agent or any Secured Party with respect to the Assigned Contracts or any part thereof shall give rise to any defense, counterclaim or offset in favor of the Borrower or to any claim or action against the Collateral Agent or any Secured Party. It is understood and agreed that the appointment of the Collateral Agent as the agent and attorney-in-fact of the Borrower for the purposes set forth above is coupled with an interest and is irrevocable. The provisions of this Section 6 shall in no event relieve the Borrower of any of its obligations hereunder or under the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents with respect to the Assigned Contracts or any part thereof or impose any obligation on the Collateral Agent or any Secured Party to proceed in any particular manner with respect to the Assigned Contracts or any part thereof, or in any way limit the exercise by the Collateral Agent or any Secured Party of any other or further right that it may have on the date of this Collateral Assignment or hereafter, whether hereunder, under the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents, by law or otherwise. 4 SECTION 7. Waivers; Amendment. (a) No failure or delay of the Collateral Agent in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Collateral Agent hereunder and of the Collateral Agent and the other Secured Parties under the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents, as applicable, are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provisions of this Agreement, any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Collateral Agent and the Borrower with respect to which such waiver, amendment or modification is to apply, subject to the terms of the Collateral Sharing Agreement. SECTION 8. Security Interest Absolute. All rights of the Collateral Agent hereunder and all obligations of the Borrower hereunder shall be absolute and unconditional irrespective of (a) any lack of validity or enforceability of any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document, any agreement with respect to any of the Secured Obligations or any other agreement or instrument relating to any of the foregoing, (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document or any other agreement or instrument relating to any of the foregoing, (c) any exchange, release or non-perfection of any Lien on other collateral, or any release or amendment or waiver of or consent under or departure from any guarantee, securing or guaranteeing all or any of the Secured Obligations, or (d) any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower in respect of the Secured Obligations or this Agreement. SECTION 9. Termination. This Agreement shall terminate when all the Obligations (other than those specified in clauses (c) and (d) of the definition thereof) and the Note Obligations have been indefeasibly paid in full, the Lenders have no further commitment to lend under the Credit Agreement, the LC Exposure (as defined in the Credit Agreement) has been reduced to zero and the Issuing Bank has no further commitment to issue Letters of Credit under the Credit Agreement. Upon such termination, the Collateral Agent shall take such action as the Borrower shall reasonably request at the expense of the Borrower to reassign and deliver to the Borrower, without recourse or warranty, the Assigned Contracts and related documents, if any, in which the Collateral Agent shall have any interest under this Collateral Assignment and which shall then be held by the Collateral Agent or be in its possession and the Borrower's obligations hereunder and the security interest of the Collateral Agent in the Assigned Contracts shall terminate. In connection with any termination or release, the Collateral Agent shall execute and deliver to the Borrower, at the Borrower's expense, all UCC termination statements and similar 5 documents that the Borrower shall reasonably request to evidence such termination. Any execution and delivery of termination statements or documents pursuant to this Section 9 shall be without recourse to or warranty by the Collateral Agent. SECTION 10. Notices. All communications and notices hereunder shall (except as otherwise expressly permitted herein) be in writing and given as provided in Section 7.01 of the Security Agreement. SECTION 11. Further Assurances. The Borrower covenants to execute and deliver to the Collateral Agent, promptly after demand, such additional assurances, writings or other instruments as may reasonably be required by the Collateral Agent to effectuate the purposes hereof. SECTION 12. Binding Effect: Several Agreement; Assignments. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party, and all covenants, promises and agreements by or on behalf of the Borrower that are contained in this Agreement shall bind and inure to the benefit of its successors and assigns. This Agreement shall become effective as to the Borrower when a counterpart hereof executed on behalf of the Borrower shall have been delivered to the Collateral Agent and a counterpart hereof shall have been executed on behalf of the Collateral Agent, and thereafter shall be binding upon the Borrower and the Collateral Agent and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Collateral Agent and the other Secured Parties and their respective successors and assigns, except that the Borrower shall have no right to assign or transfer its rights or obligations hereunder or any interest herein (and any such assignment or transfer shall be void) except as expressly contemplated by this Agreement, the other Security Documents, the Collateral Sharing Agreement, the Senior Loan Documents or the Indenture Documents. SECTION 13. Survival of Agreement: Severability. (a) All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the Collateral Agent and the other Secured Parties and shall survive the making by the Lenders of the Loans, the issuance of Letters of Credit by the Issuing Bank, the execution and delivery to the Lenders of any notes evidencing such Loans, and the purchase and resale of the Notes by the Initial Purchasers regardless of any investigation made by the Secured Parties or on their behalf, and shall continue in full force and effect until this Agreement shall terminate. (b) In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 14. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. 6 SECTION 15. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract (subject to Section 12), and shall become effective as provided in Section 12. Delivery of an executed signature page to this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. SECTION 16. Jurisdiction; Consent to Service of Process. (a) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Collateral Agent or any other Secured Party may otherwise have to bring any action or proceeding relating to this Agreement, any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document against the Borrower or its properties in the courts of any jurisdiction. (b) The Borrower irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement, any other Security Document, the Collateral Sharing Agreement, any Senior Loan Document or any Indenture Document in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 10. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 17. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT ANY OTHER SECURITY DOCUMENT, THE COLLATERAL SHARING AGREEMENT, ANY SENIOR LOAN DOCUMENT OR ANY INDENTURE DOCUMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 17. 7 SECTION 18. Rules of Interpretation. The rules of interpretation specified in Section 1.03 of the Security Agreement shall be applicable to this Agreement. 8 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC, By /s/ JOHN T. KURTZWEIL -------------------------------- Name: John T. Kurtzweil Title: Chief Financial Officer JPMORGAN chase BANK, as Collateral Agent, By /s/ EDMOND DEFOREST -------------------------------- Name: Edmond DeForest Title: Vice President 9
[ON LOGO] Exhibit 10.57 ON Semiconductor Corporation 5005 E. McDowell Rd. Phoenix, Arizona 85008 VIA FACSIMILE: 408.378.5167 AND FEDERAL EXPRESS DELIVERY March 14, 2003 Donald Colvin 115 Los Petios Los Gatos, CA 95032 Dear Donald: We are pleased to extend you an offer of employment to join ON Semiconductor. Employment refers to your employment by ON Semiconductor Corporation ("Company"), its primary operating company, Semiconductor Components Industries, LLC ("SCI, LLC") or any of their subsidiaries (collectively "ON Semi"). This letter ("Offer Letter") confirms our offer of employment to you and sets forth the terms and conditions of that offer. Your offer and this Offer Letter are contingent upon: (1) successful completion of a urinalysis drug test (i.e., negative test result) in accordance with SCI, LLC's policy on applicant drug testing; (2) successful background investigation and verification of salary and all other information you have submitted to us; (3) providing proof of identity and employment authorization to work in the United States; and (4) approval of the Company's Board of Directors. POSITION Initially, you will serve as the Company's Senior Financial Director. Upon the resignation of the Company's current Chief Financial Officer, which will be effective April 2, 2003, your title will be changed to and you will serve the Company as the Senior Vice President and Chief Financial Officer of ON Semi, with direct responsibility for the finance departments of these entities. Additionally, you will have such other titles as ON Semi may determine are customary for your position and responsibilities within the corporate organizational structure of ON Semi. BASE SALARY AND VARIABLE PAY BONUS You will be paid a base salary of $12,307.69 bi-weekly, which equates to $320,000 annually For 2003 and beyond, you will be eligible for a variable pay bonus based on your individual and company performance of ON Semi under a bonus plan for ON Semi as may be in effect from Donald Colvin Letter March 14, 2003 Page 2 of 6 time to time ("Bonus"). At your position, your total annual performance Bonus payout is currently "targeted" to be 60% of your actual base salary earned in the applicable calendar year ("Target Amount"). This is a target percentage only. Under the Bonus plan, your Bonus could be zero and your actual bonus amount could be lower or higher than the Target Amount depending on several factors. Further, any Bonus would be subject to additional terms and conditions as set forth in the plan document approved by the Board of Directors of the Company or its designee, which plan is subject to amendment from time to time and termination at any time. Notwithstanding the above, in the event that the amount of your Bonus earned under the Bonus plan for the calendar year 2003 is less than 50% of your Target Amount for 2003, on or about the date that final Bonus amounts are paid in 2004 with respect to the calendar year 2003, SCI, LLC will pay you a special additional bonus equal to the difference between the amount actually earned under the Bonus plan for 2003 and 50% of the Target Amount. STOCK OPTION On or after the commencement date of employment, we will request approval by the Company's Board of a stock option grant (the "Options") to you for the purchase of 600,000 shares of the Company's common stock at an exercise price equal to the "Fair Market Value" of our stock as of the grant date, as determined under our 2000 Stock Incentive Plan ("Plan"). We expect that the Options will generally vest in 25% increments over a four (4) year period beginning on the first anniversary of the grant date, subject to your continued employment by ON Semi on each such date that a portion of the Options are to become exercisable. The Options will be subject to additional terms and conditions under the Plan as well as in a separate stock option agreement. In the event that your employment with ON Semi is terminated by the Company without Cause (as defined below) or by you for Good Reason (as defined below) within the two-year period following a Change of Control (as defined in the Plan), the Options will become immediately exercisable. CERTAIN OTHER BENEFITS SCI, LLC will reimburse you for your reasonable relocation expenses for the relocation of you and your immediate family to the Phoenix metropolitan area, including reimbursing you for temporary housing expenses for you for up to three (3) months following your employment commencement date with ON Semi, in accordance with our existing relocation policy applicable to our senior executives. Further, SCI, LLC will provide you with an executive car allowance of $1,200 per month. In addition to your base salary, SCI, LLC offers a comprehensive benefits package, which includes medical, dental, vision and life insurance coverage. Once eligible, you may also participate in the ON Semi 401(k) Savings Plan, which may include an employer match pursuant to the 401(k) Savings Plan. During your employment by ON Semi, you are entitled to three (3) weeks of paid vacation time for the calendar year 2003 and four (4) weeks paid vacation time in each subsequent year. Donald Colvin Letter March 14, 2003 Page 3 of 6 Additionally, ON Semi has an executive deferred compensation plan, which allows you to defer certain compensation tax free under the terms of this plan. You will also be eligible to enroll in the ON Semi Employee Stock Purchase Plan ("ESPP"). Participation in the ESPP will provide you with an opportunity to share in increases in the Company's stock price, as well as enjoy a discount on the initial purchase price. Details of these plans will be explained when you commence employment with ON Semi. ON Semi reserves the right to amend or terminate the above-described plans and policies at any time and from time to time. AGREEMENT TO PURCHASE STOCK You will, within sixty (60) days of the date of commencement of employment, excluding any days that may form part of a blackout period during which you are not permitted by Company policy or applicable law to purchase equity securities of the Company, purchase in the aggregate that number of shares of common stock of the Company that results from dividing $100,000 by the Fair Market Value (as defined in the Plan) on each date of purchase of a share of common stock of the Company, with any fractional number of shares that results from such division being rounded up to the nearest whole number of shares of common stock. You will, in the Company's sole discretion, purchase such shares of common stock of the Company on the open market or directly from the Company. TERMINATION TERMS In the event your employment with ON Semi is terminated by the Company without Cause (as defined below) or by you for Good Reason (as defined below), you will receive the payments and benefits set forth below; provided, however that the payments and benefits provided herein are subject to and conditioned upon: (1) your executing a valid and effective general release and waiver (in the form reasonably acceptable to ON Semi), waiving all claims you may have against ON Semi, its successors, assigns, affiliates, executives, officers, employees, members, partners, shareholders and directors; (2) your execution of a severance agreement at the time of termination that includes, among other provisions, covenants by you with regard to confidentiality, nondisparagement, and nonsolicitation/interference/noncompete; and (3) your compliance with the terms and conditions of this Offer Letter. 1. SCI, LLC shall pay severance payments equal to one (1) year of your annual base salary in effect immediately prior to your date of termination. Following the effective date of your termination, the severance payments will be paid to you ratably in equal installments over the one (1) year period subsequent to your date of termination in accordance with SCI, LLC's normal payroll practices ("Severance Period"). Notwithstanding the foregoing, you will be required to mitigate any damages that you may incur as a result of a termination of your employment by the Company without Cause or by you for Good Reason by seeking employment comparable in terms of compensation, position and location Donald Colvin Letter March 14, 2003 Page 4 of 6 to your employment hereunder. Subject to paragraph 3 below, any amounts that you earn pursuant to such employment during the Severance Period shall offset and reduce the amount of severance paid to you by SCI, LLC under this Offer Letter. For purposes of these three paragraphs, "employment" shall mean any activity for which you are compensated as a result of the rendering of services, whether such services are rendered as a common law employee, a partner, sole proprietor, independent contractor or otherwise. You will be required to provide such evidence as ON Semi may reasonably require regarding the amount of such earnings. 2. During the Severance Period, SCI, LLC will pay for any continuation of medical benefits for you and your family for which you are eligible pursuant to a valid COBRA election. The foregoing notwithstanding, in the event that you become eligible for medical benefits in connection with new employment during the Severance Period, the coverage provided by SCI, LLC under this subsection shall terminate immediately. You agree that you will notify ON Semi promptly of your subsequent employment and eligibility for benefits. 3. In the event that during the Severance Period and while SCI, LLC is still obligated to pay the severance payments in paragraph 1 above, you commence employment with an employer who is located outside of the Phoenix metropolitan area and you are required to and actually do relocate to such other location, SCI, LLC will continue to make severance payments to you in an amount equal to 50% of the rate of the severance payment being paid to you immediately prior to the commencement of your new employment as provided in paragraph 1 above, provided, however, that in no event shall any severance payments be due and payable to you after the Severance Period. For purposes of this Offer Letter, the term "Cause" shall mean your: (a) breach of any material provision of this Offer Letter; (b) gross negligence in connection with the performance of your duties, obligations or responsibilities to ON Semi, or willful failure to perform your duties, obligations or responsibilities to ON Semi to the best of your ability; (c) breach of your fiduciary duty to ON Semi; (d) engaging in any misconduct, fraud or dishonesty involving the business of ON Semi, or any other activity otherwise determined to be materially detrimental or injurious to the ON Semi's reputation; or (e) commission of a felony or a crime involving moral turpitude, each as determined by the Compensation Committee of the Board and the Chief Executive Officer in their discretion. For purposes of this Offer Letter, the term "Good Reason" shall mean: (i) a material breach of this Offer Letter by On Semi or (ii) a material diminution of your duties and responsibilities as described in this Offer Letter, provided that in either case you notify On Semi within thirty (30) days after the event or events which you believe constitute Good Reason and describe in such notice in reasonable detail such event or events and provide On Semi a reasonable time to cure such breach or diminution (not to exceed thirty (30) days). Donald Colvin Letter March 14, 2003 Page 5 of 6 You understand and agree that neither the granting of any benefits set forth in this Offer Letter, nor this Offer Letter shall constitute or be evidence of any agreement or understanding, either expressed or implied, on the part of ON Semi to employ you for any definite period of time. You are an "at-will" employee, which means that you or ON Semi may terminate the employment relationship at any time and for any reason, with or without notice and with or without Good Reason or Cause. Notwithstanding your at-will status, if you fail to commence employment, voluntarily terminate your employment with ON Semi, or are terminated for Cause, you will not be entitled to start/continue the benefits set forth above, including, without limitation, each of the benefits listed under "Certain Other Benefits" of this Offer Letter. ON Semi is under no obligation to authorize, pay, or reimburse you for any expenses associated with your benefits or this Offer Letter until we receive a signed Offer Letter from you. CODE OF BUSINESS CONDUCT AND DRUG TEST Enclosed is a copy of ON Semi's Code of Business Conduct ("Code"), which explains ON Semi's principles in this important subject area and the importance of adhering to the highest standards of business conduct. We expect every ON Semi employee to follow these principles and to read and understand the contents of this booklet. When you report to work, you will be required to sign a certificate indicating that you have read and understand the Code and that you commit to follow the guidelines contained in the booklet. You will also be asked to disclose any potential issues that you may have that pertain to these guidelines. We will be discussing the subject matter in greater detail in your orientation session. ON Semi is committed to providing a drug-free workplace. Therefore, all prospective employees are required to undergo a drug test before becoming an ON Semi employee. By accepting this employment offer you agree to participate in a pre-employment drug-screening test and understand that employment is contingent upon successfully passing such a test. If you require further information, please notify me so that we can address any issues or concerns you may have. In order to allow sufficient time for processing; please complete the drug-screening test within 10 days of acceptance of this offer. OTHER By signing this Offer Letter, you acknowledge that your acceptance of this offer and future performance of services hereunder will not violate any other agreement or obligation that you may have with any of your current or former employers or other third parties. You agree that you will not use or disclose any confidential or proprietary information of any former employer in connection with the services performed hereunder for ON Semi. As used in this Offer Letter, commencement date shall mean the first day you render compensable services to ON Semi. You further agree and acknowledge that this Offer Letter contains all of the terms of our offer of employment with ON Semi, and that you have not relied Donald Colvin Letter March 14, 2003 Page 6 of 6 on any oral or written representations that are not explicitly set forth in this Offer Letter in deciding whether to accept this offer. Your commencement date will be no later than March 17, 2003. OFFER ACCEPTANCE Please indicate your acceptance of this offer by signing below and returning this letter to the undersigned. A second copy of this letter is provided for your personal files. We are confident ON Semi can offer you a challenging and rewarding job opportunity, and we look forward to you joining our team. Very truly yours, SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC By: /s/ Keith D. Jackson ------------------------------------ Its: President and Chief Executive Officer I hereby accept this Offer Letter and its conditions and terms: /s/ DONALD COLVIN Dated: March 14, 2003 - --------------------------- ------------------------- Donald Colvin
EXHIBIT 21.1 ON SEMICONDUCTOR CORPORATION List of Subsidiaries as of 12/31/02 (1) SCG (CZECH) HOLDING CORPORATION {DELAWARE} Terosil a.s. [JV] {Czech Republic} Tesla Sezam a.s. [JV] {Czech Republic} SCG (CHINA) HOLDING CORPORATION {DELAWARE} Leshan-Phoenix Semiconductor Company Limited [JV] {Leshan, China} SCG (MALAYSIA SMP) HOLDING CORPORATION {DELAWARE} SEMICONDUCTOR COMPONENTS INDUSTRIES, LLC {DELAWARE} Semiconductor Components Industries of Rhode Island, Inc. {Rhode Island} Semiconductor Components Industries International of Rhode Island, Inc. {Rhode Island} Semiconductor Components Industries Puerto Rico, Inc. {Delaware} ON Semiconductor Slovakia a.s. {Slovak Republic} SCG International Development, LLC {Delaware} SCG Malaysia Holdings Sdn. Bhd. {Malaysia} SCG Industries Malaysia Sdn. Bhd. {Malaysia} ON Semiconductor Technology Malaysia Sdn. Bhd. {Malaysia} Semiconductor Components Industries (Thailand) Limited {Thailand} SCG Mexico, S.A. de C.V. {Mexico} ON Semiconductor Technology Japan Ltd. {Japan} SCG Philippines, Incorporated {Philippines} SCG Asia Capital Pte. Ltd. {Malaysia} SCG Czech Design Center s.r.o. {Czech Republic} ON Semiconductor Hong Kong Design Limited {Hong Kong, China}[also d/b/a ON Semiconductor] ON Semiconductor Japan Ltd. {Japan} ON Semiconductor Design (Shanghai) Limited {China} ON Semiconductor Trading Ltd. {Bermuda} ON Semiconductor Denmark ApS {Denmark} ON Semiconductor Hong Kong Logistics Limited {Hong Kong, China}[also d/b/a/ ON Semiconductor] SCG Hong Kong SAR Limited {Hong Kong, China} [also d/b/a ON Semiconductor] Semiconductor Components Industries Singapore Pte Ltd {Singapore} SCG Korea Ltd. {Korea} ON Semiconductor Canada Trading Corporation {Canada} SCG do Brasil Ltda. {Brazil} SCG Holding (Netherlands) B.V. {Netherlands} ON Semiconductor Germany GmbH {Germany} SCG France SAS {France} ON Semiconductor AB {Sweden}[also d/b/a Semiconductor Components Group Sweden] ON Semiconductor Mexico Trading S. de R. L. de C. V. {Mexico} SCG Italy S.r.l. {Italy} ON Semiconductor Limited {United Kingdom} Semiconductor Components Industries UK Limited {United Kingdom} "{ }" Denotes jurisdiction (1) Listing includes only doing business names and does not include trade names.
Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-86870) and S-8 (No. 333-34130, No. 333-37638 and No. 333-71336) of ON Semiconductor Corporation of our report dated February 5, 2003 relating to the financial statement schedule of ON Semiconductor Corporation and our report dated February 5, 2003, except for Note 9 for which the date is March 3, 2003, relating to the consolidated financial statements of ON Semiconductor Corporation, which appear in this form 10-K. We also consent to the incorporation by reference of our report dated February 5, 2003, except for Note 8 for which the date is March 3, 2003, relating to the consolidated financial statements of Semiconductor Components Industries, LLC (a wholly-owned subsidiary of ON Semiconductor Corporation); our report dated February 5, 2003, except for the fourth paragraph of Note 12 for which the date is March 3, 2003, relating to the consolidated financial statements of ON Semiconductor Trading Ltd. (a wholly-owned subsidiary of ON Semiconductor Corporation); and, our report dated February 5, 2003, except for the third paragraph of Note 10 for which the date is March 3, 2003, relating to SCG Malaysia Holdings Sdn. Bhd. (a wholly-owned subsidiary of ON Semiconductor Corporation), each of which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Phoenix, AZ March 24, 2003
Exhibit 24.1 POWER OF ATTORNEY (Curtis J. Crawford) I hereby appoint John T. Kurtzweil, Keith D. Jackson and George H. Cave, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as a Director of ON Semiconductor Corporation and file with the Securities and Exchange Commission the Corporation's Form 10-K Annual Report for 2002, and any amendments. Dated: March 15, 2003 /s/ CURTIS J. CRAWFORD ----------------------- Curtis J. Crawford POWER OF ATTORNEY (David Bonderman) I hereby appoint John T. Kurtzweil, Keith D. Jackson and George H. Cave, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as a Director of ON Semiconductor Corporation and file with the Securities and Exchange Commission the Corporation's Form 10-K Annual Report for 2002, and any amendments. Dated: March 17, 2003 /s/ DAVID BONDERMAN ---------------------- David Bonderman POWER OF ATTORNEY (Richard W. Boyce) I hereby appoint John T. Kurtzweil, Keith D. Jackson and George H. Cave, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as a Director of ON Semiconductor Corporation and file with the Securities and Exchange Commission the Corporation's Form 10-K Annual Report for 2002, and any amendments. Dated: March 18, 2003 /s/ RICHARD W. BOYCE Richard W. Boyce POWER OF ATTORNEY (Justin T. Chang) I hereby appoint John T. Kurtzweil, Keith D. Jackson and George H. Cave, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as a Director of ON Semiconductor Corporation and file with the Securities and Exchange Commission the Corporation's Form 10-K Annual Report for 2002, and any amendments. Dated: March 17, 2003 /s/ JUSTIN T. CHANG --------------------- Justin T. Chang POWER OF ATTORNEY (William A. Franke) I hereby appoint John T. Kurtzweil, Keith D. Jackson and George H. Cave, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as a Director of ON Semiconductor Corporation and file with the Securities and Exchange Commission the Corporation's Form 10-K Annual Report for 2002, and any amendments. Dated: March 17, 2003 /s/ WILLIAM A. FRANKE ----------------------- William A. Franke POWER OF ATTORNEY (John W. Marren) I hereby appoint John T. Kurtzweil, Keith D. Jackson and George H. Cave, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as a Director of ON Semiconductor Corporation and file with the Securities and Exchange Commission the Corporation's Form 10-K Annual Report for 2002, and any amendments. Dated: March 17, 2003 /s/ JOHN W. MARREN --------------------- John W. Marren POWER OF ATTORNEY (Keith D. Jackson) I hereby appoint Bill George, John T. Kurtzweil and George H. Cave, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me on behalf of the registrant, ON Semiconductor Corporation, and/or as a Director and/or Chief Executive Officer of ON Semiconductor Corporation and file with the Securities and Exchange Commission the Corporation's Form 10-K Annual Report for 2002, and any amendments. Dated: March 14, 2003 /s/ KEITH D. JACKSON ---------------------- Keith D. Jackson POWER OF ATTORNEY (John T. Kurtzweil) I hereby appoint Keith D. Jackson, Bill George and George H. Cave, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me on behalf of the registrant, ON Semiconductor Corporation, and/or as a Chief Financial Officer and/or Treasurer of ON Semiconductor Corporation and file with the Securities and Exchange Commission the Corporation's Form 10-K Annual Report for 2002, and any amendments. Dated: March 14, 2003 /s/ JOHN T. KURTZWEIL ----------------------- John T. Kurtzweil POWER OF ATTORNEY (Jerome N. Gregoire) I hereby appoint John T. Kurtzweil, Keith D. Jackson and George H. Cave, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as a Director of ON Semiconductor Corporation and file with the Securities and Exchange Commission the Corporation's Form 10-K Annual Report for 2002, and any amendments. Dated: March 17, 2003 /s/ JEROME N. GREGOIRE ------------------------ Jerome N. Gregoire POWER OF ATTORNEY (Emmanuel T. Hernandez) I hereby appoint John T. Kurtzweil, Keith D. Jackson and George H. Cave, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as a Director of ON Semiconductor Corporation and file with the Securities and Exchange Commission the Corporation's Form 10-K Annual Report for 2002, and any amendments. Dated: March 17, 2003 /s/ EMMANUEL T. HERNANDEZ --------------------------- Emmanuel T. Hernandez POWER OF ATTORNEY (J. Daniel McCranie) I hereby appoint John T. Kurtzweil, Keith D. Jackson and George H. Cave, and each of them, my attorneys-in-fact, each with full power of substitution, to sign for me as as Chairman of the Board of Directors of ON Semiconductor Corporation and file with the Securities and Exchange Commission the Corporation's Form 10-K Annual Report for 2002, and any amendments. Dated: March 17, 2003 /s/ J. DANIEL MCCRANIE ------------------------ J. Daniel McCranie
Exhibit 99.2
Certification
Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of ON Semiconductor Corporation, a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (the “Form 10-K”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: March 24, 2003 |
/s/ KEITH D. JACKSON Keith D. Jackson President and Chief Executive Officer |
|
| Dated: March 24, 2003 |
/s/ JOHN T. KURTZWEIL John T. Kurtzweil Senior Vice President and Chief Financial Officer |