Notes to Consolidated Financial Statements
     
NOTE 5 - INCOME TAXES

   In conjunction with the acquisition of the power device business, the Korean government granted a ten year tax holiday to Fairchild Korea Semiconductor Ltd. The exemption is 100% for the first seven years of the holiday and 50% for the remaining three years of the holiday. In Calendar 2000, the tax holiday was extended such that the exemption amounts were increased to 75% in the eighth year and a 25% exemption was added to the eleventh year. Taxes exempted include income taxes, dividend withholding taxes, acquisition tax, registration tax, property tax and aggregate land tax. As such, no current provision for income taxes for Korea has been provided. The tax holiday increased net income by $32.0 million, or $0.32 per diluted common share for Calendar 2000 and $18.0 million or $0.22 per diluted common share for Stub Year 1999.

   The provision (benefit) for income taxes attributable to income from continuing operations for Calendar 2000, Stub Year 1999, Fiscal 1999 and Fiscal 1998 consisted of the following:
 
Stub
 
Calendar
Year
Fiscal
Fiscal
(In millions)
2000
1999
1999
1998
Income (loss) before income taxes:
   U.S.
$ 113.8
$ (46.6)
$ (103.7)
$ 14.6
   Foreign
156.9
72.9
(15.5)
18.2
 
$ 270.7
$ 26.3
$ (119.2)
$ 32.8
Income tax provision (benefit):
   Current:
      U.S. federal
$ 8.3
$    -
$ (4.8)
$ 7.1
      U.S. state and local
0.7
-
-
1.5
      Foreign
16.9
4.0
2.1
3.3
 
25.9
4.0
(2.7)
11.9
Deferred:
   U.S. federal
(25.4)
(2.1)
(2.5)
(2.0)
   U.S. state and local
(2.4)
(0.2)
0.1
(0.4)
   Foreign
(0.5)
3.3
-
1.2
 
(28.3)
1.0
(2.4)
(1.2)
Total income tax provision (benefit):
   U.S. federal
(17.1)
(2.1)
(7.3)
5.1
   U.S. state and local
(1.7)
(0.2)
0.1
1.1
   Foreign
16.4
7.3
2.1
4.5
 
$   (2.4)
$   5.0
$   (5.1)
$10.7

 
  In addition to income tax expense (benefit) attributable to income from continuing operations, for Calendar 2000 the Company recorded income taxes of $(5.3) million in noncurrent intangible assets for the initial recognition of acquired tax benefits that were previously included in the valuation allowance. The Company also recorded income taxes of $(12.9) million and $(2.1) million for Calendar 2000 and Fiscal 1998, respectively, in stockholders' equity for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes.

   The reconciliation between the income tax rate computed by applying the U.S. federal statutory rate and the reported worldwide tax rate follows:

 
Stub
    
 
Calendar
Year
Fiscal
Fiscal
 
2000
1999
1999
1998
U.S. federal statutory rate
35.0%
35.0%
35.0%
35.0%
U.S. state and local taxes (benefit), net of federal benefit
3.2
(0.5)
1.4
3.3
Tax differential related to foreign income
(13.3)
(65.0)
(8.7)
(5.8)
Non-deductible expenses including goodwill amortization
1.1
0.2
0.1
0.1
Change in valuation allowance
(26.9)
49.3
(23.5)
-
 
(0.9)%
19.0%
4.3%
32.6%

   The tax effects of temporary differences in the recognition of income and expense for tax and financial reporting purposes that give rise to significant portions of the deferred tax assets and the deferred tax liabilities at December 31, 2000 and December 26, 1999 are presented below:

 
December 31,
December 26,
(In millions)
2000
1999
Deferred tax assets:
   Net operating loss carryforwards
$ 23.6
$ 60.1
   Reserves and accruals
24.0
21.7
   Intangibles, primarily intellectual property
7.7
9.8
   Tax credit and capital allowance carryovers
6.2
1.4
      Total gross deferred tax assets
61.5
93.0
   Valuation allowance
(1.3)
(80.3)
      Net deferred tax assets
60.2
12.7
Deferred tax liabilities:
   Plant and equipment
(6.1)
(3.3)
      Total deferred tax liabilities
(6.1)
(3.3)
Net deferred taxes
$ 54.1
$ 9.4

   The deferred tax valuation allowance decreased by $79.0 million and increased by $17.6 million for Calendar 2000 and Stub Year 1999, respectively. In assessing the realizability of deferred tax assets, the Company considered its current and future taxable earnings and the expected timing of the reversal of temporary differences. During Calendar 2000, the Company reversed all of the valuation allowance against its domestic deferred tax assets, including net operating losses and tax credits, since the Company believes that the deferred tax assets will more likely than not be realized. Deferred tax assets and liabilities are classified in the consolidated balance sheet based on the classification of the related asset or liability.

   Net operating loss, research and development credit and foreign tax credit carryforwards totaled $63.8 million, $0.2 million and $2.7 million, respectively, as of December 31, 2000. The net operating losses expire in 2018 through 2019. The research and development credits expire in varying amounts in 2012 through 2015. The foreign tax credits expire in varying amounts in 2002 through 2005. The Company also has alternative minimum tax credit carryforwards of $1.8 million, which are available to reduce future federal regular income taxes over an indefinite period. In addition, the Company has Malaysian unabsorbed capital allowance of approximately $4.7 million, which can be used to offset future year's taxable income of the Malaysian subsidiary.

   The Company's ability to utilize its net operating loss and credit carryforwards may be limited in the future if the Company experiences an ownership change as a result of future transactions. An ownership change occurs when the ownership percentage of 5% or greater stockholders changes by more than 50% over a three year period. The Company does not expect that a subsequent ownership change would place any material limitation on the utilization of the loss carryforward.

   Deferred income taxes have not been provided for the undistributed earnings of the Company's foreign subsidiaries, which aggregated approximately $2143 million at December 31, 2000. The Company plans to reinvest all such earnings for future expansion. The undistributed earnings will be subject to U.S. taxation upon repatriation as dividends to the U.S. parent. The amount of taxes attributable to these undistributed earnings is not practicably determinable.