UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____ to _____
Commission file number 1-5442
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General Semiconductor, Inc.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3575653
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Melville Park Road, Melville, New York 11747
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(Address of principal executive offices)
(Zip Code)
(516) 847-3000
--------------
(Registrant's telephone number, including area code)
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Former name, former address and former fiscal year, if changed
since last report.
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 x No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 22, 1999
- ----------------------------- ----------------------------
Common Stock, par value $0.01 36,820,778
GENERAL SEMICONDUCTOR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGES
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PART I. FINANCIAL INFORMATION
---------------------
Financial Statements
Condensed Consolidated Balance Sheets at
June 30, 1999 (unaudited) and December 31, 1998 2
Consolidated Statements of Operations for the Three and
Six Months ended June 30, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Three and
Six Months ended June 30, 1999 and 1998 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
PART II. OTHER INFORMATION
-----------------
Legal Proceedings 16
Submission of Matters to a Vote of Stockholders 16
Exhibits 16
SIGNATURE 17
PART I
FINANCIAL INFORMATION
GENERAL SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Stock Par Value)
ASSETS
(Unaudited)
June 30, December 31,
1999 1998
---------- ------------
Current Assets:
Cash $ 4,708 $ 3,225
Accounts receivable, less allowance for doubtful accounts of $687
and $769, respectively 61,118 59,643
Inventories 43,383 39,514
Prepaid expenses and other current assets 12,004 12,010
Deferred income taxes 10,951 13,738
------------ ------------
Total current assets 132,164 128,130
Property, plant and equipment - net 225,109 223,743
Excess of cost over fair value of net assets acquired, less accumulated
amortization of $46,500 and $43,929, respectively 160,180 162,751
Deferred income taxes, net of valuation allowance 29,370 29,376
Intangibles and other assets, less accumulated amortization of $11,908 and
$11,099, respectively 18,869 19,447
============ ============
TOTAL ASSETS $ 565,692 $ 563,447
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 26,171 $ 31,343
Accrued expenses 35,856 45,084
----------- -----------
Total current liabilities 62,027 76,427
Long-term debt 295,000 286,000
Deferred income taxes 20,842 21,390
Other non-current liabilities 73,116 74,283
----------- -----------
Total liabilities 450,985 458,100
----------- -----------
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, $0.01 par value; 20,000 shares authorized; no shares issued - -
Common Stock, $0.01 par value; 400,000 shares authorized; 36,925
shares issued and 36,821 outstanding 369 369
Retained earnings 121,202 111,842
Other stockholder's equity (6,864) (6,864)
----------- -----------
114,707 105,347
=========== ===========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 565,692 $ 563,447
=========== ===========
See notes to consolidated financial statements.
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------
1999 1998 1999 1998
---------- --------- -------- --------
NET SALES $ 101,583 $ 98,762 $198,544 $205,159
OPERATING COSTS AND EXPENSES:
Cost of sales 75,020 70,115 147,497 141,223
Selling, general and administrative 11,583 10,286 22,546 23,250
Research and development 1,659 1,463 3,119 2,963
Amortization of excess of cost over fair value
of net assets acquired 1,285 1,286 2,571 2,572
--------- ------- -------- --------
Total operating costs and expenses 89,547 83,150 175,733 170,008
--------- ------- -------- --------
OPERATING INCOME 12,036 15,612 22,811 35,151
Other income (expense) - net 47 (12) (11) (81)
Interest expense-net (5,273) (5,067) (10,321) (9,974)
---------- --------- -------- --------
INCOME BEFORE INCOME TAXES 6,810 10,533 12,479 25,096
Provision for income taxes (1,702) (3,687) (3,119) (8,785)
========== ========= ======== ========
NET INCOME $ 5,108 $ 6,846 $ 9,360 $ 16,311
========== ========= ======== ========
Weighted Average Shares Outstanding:
Basic 36,820 36,813 36,820 36,802
Diluted 36,902 36,965 36,873 36,934
Earnings per share:
Basic $ 0.14 $ 0.19 $ 0.25 $ 0.44
Diluted $ 0.14 $ 0.19 $ 0.25 $ 0.44
See notes to consolidated financial statements.
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - In Thousands)
Six Months Ended
June 30,
-------------------------
1999 1998
---------- ----------
OPERATING ACTIVITIES:
Income from continuing operations $ 9,360 $ 16,311
Adjustments to reconcile to net cash
from continuing operating activities:
Depreciation and amortization 13,632 12,116
Changes in assets and liabilities:
Accounts receivable (1,475) 579
Inventories (3,869) (3,563)
Prepaid expenses and other current assets 6 (2,413)
Other non-current assets (229) (669)
Deferred income taxes 2,245 (658)
Accounts payable and accrued expenses (10,028) (9,494)
Restructuring (4,372) -
Other non-current liabilities (1,167) (1,474)
Other 107 26
---------- ----------
Net cash provided by continuing operating activities 4,210 10,761
---------- ----------
Cash used in discontinued operations - (25,130)
---------- ----------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (11,727) (8,794)
---------- ----------
Net cash used in investing activities (11,727) (8,794)
---------- ----------
FINANCING ACTIVITIES:
Net proceeds from revolving credit facilities 9,000 70,000
Principal repayment of debt - (46,074)
Exercise of stock options - 423
---------- ----------
Net cash provided by financing activities 9,000 24,349
---------- ----------
Increase in cash and cash equivalents 1,483 1,186
---------- ----------
Cash and cash equivalents, beginning of period 3,225 5,192
---------- ----------
Cash and cash equivalents, end of period $ 4,708 $ 6,378
========== ==========
See notes to consolidated financial statements.
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(All amounts in thousands, except per share data)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
General Semiconductor, Inc. ("General Semiconductor" or the "Company") is a
market leader in the discrete segment of the semiconductor industry. The Company
designs, manufactures and sells low-to medium-power rectifiers, transient
voltage suppressors ("TVS"), small signal diodes, and transistors and zener
diodes in axial, bridge, power and surface mount packages. Power rectifiers,
small signal devices and TVS products are semiconductors that are essential
components of most electronic devices and systems. Rectifiers convert
alternating current (AC) into direct current (DC) which can be utilized by
electronic equipment. TVS devices provide protection from electrical surges,
ranging from electrostatic discharge to induced lightning. Small signal devices
amplify or switch low level currents. The Company's products are primarily
targeted for use in the computer, automotive, telecommunications, lighting and
consumer electronics industries.
In the opinion of management, the accompanying unaudited consolidated financial
statements include all necessary adjustments (consisting of normal recurring
adjustments) and present fairly the Company's financial position as of June 30,
1999, the results of its operations for the three and six months ended June 30,
1999 and 1998, and its cash flows for the three and six months ended June 30,
1999 and 1998 in conformity with generally accepted accounting principles for
interim financial information applied on a consistent basis. There were no
adjustments of a non-recurring nature recorded during the three and six months
ended June 30, 1999 and 1998. The results of operations for the three and six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the full year. For further information, refer to the consolidated
financial statements and footnotes thereto included in General Semiconductor's
Annual Report on Form 10-K/A for the year ended December 31, 1998.
2. INVENTORIES
Inventories consist of:
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials $ 6,529 $ 5,139
Work in process 12,299 14,181
Finished goods 24,555 20,194
------- -------
$43,383 $39,514
======= =======
3. LONG-TERM DEBT
The Company entered into its $350 million credit facility in July 1997 in
connection with the Distribution. In December 1998, the credit facility was
amended to modify several financial covenants to provide flexibility to execute
the 1998 restructuring. In June 1999, the credit facility was amended to modify
several financial covenants to provide greater financial flexibility. The
Company is evaluating market conditions and is planning a subordinated note
offering in the range of $200 million which may be completed in 1999. The
Company expects to use the proceeds of any such offering to repay outstanding
indebtedness under the credit facility and the credit facility will be
permanently reduced by 50% of the gross proceeds of the subordinated note
offering.
The credit facility requires the Company to pay a facility fee on the
total commitment. The credit facility permits the Company to choose between two
interest rates options: the adjusted base rate or eurodollar rate (LIBOR) plus a
margin which varies based on the Company's ratio of indebtedness to EBITDA as
defined in the credit agreement. The facility fee also varies based on that
ratio. The Company is also able to set interest rates through a competitive bid
procedure. The credit facility contains financial and operating covenants,
including limitations on guarantee obligations, liens, sale of assets,
indebtedness and investments. At June 30, 1999 the interest rate on outstanding
borrowings was 6.89% per annum.
4. LITIGATION
General Semiconductor is not a party to any pending legal proceedings other than
various claims and lawsuits arising in the normal course of business and those
for which they are indemnified as described below. Management is of the opinion
that such litigation or claims will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
A securities class action is presently pending in the United States District
Court for the Northern District of Illinois, Eastern Division, In Re General
Instrument Corporation Securities Litigation. This action, which consolidates
numerous class action complaints filed in various courts between October 10 and
October 27, 1995, is brought by plaintiffs, on their own behalf and as
representatives of a class of purchasers of General Instrument Corporation (the
Company's predecessor, "GI") common stock during the period March 21, 1995
through October 18, 1995. The complaint alleges that prior to the distribution
(the "Distribution") in July 1997 of the capital stock of NextLevel Systems,
Inc. and CommScope, Inc., GI and certain of its officers and directors, as well
as Forstmann Little & Co. and certain related entities, violated the federal
securities laws, namely, Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), by allegedly making false and
misleading statements and failing to disclose material facts about GI's planned
shipments in 1995 of its CFT-2200 and DigiCipher II products. Also pending in
the same court, under the same name, is a derivative action brought on behalf of
GI. The derivative action alleges that the members of GI's Board of Directors,
several of its officers and Forstmann Little & Co. and related entities have
breached their fiduciary duties by reason of the matter complained of in the
class action and the defendants' alleged use of material non-public information
to sell shares of GI common stock for personal gain.
An action entitled BKP Partners, L.P. v. General Instrument Corp. was brought in
February 1996 by certain holders of preferred stock of Next Level Communications
("NLC"), which was merged into a subsidiary of GI in September 1995. The action
was originally filed in the Northern District of California and was subsequently
transferred to the Northern District of Illinois. The plaintiffs allege that the
defendants violated federal securities laws by making misrepresentations and
omissions and breached fiduciary duties to NLC in connection with the
acquisition of NLC by GI. Plaintiffs seek, among other things, unspecified
compensatory and punitive damages and attorney's fees and costs.
In connection with the Distribution, General Instrument (formerly "NextLevel
Systems, Inc.") agreed to indemnify the Company with respect to its obligations,
if any, arising out of or relating to In Re General Instrument Corporation
Securities Litigation (including the derivative action), and the BKP Partners,
L.P. v. General Instrument Corp. litigation. Therefore, management is of the
opinion that the resolution of these matters will have no effect on the
Company's consolidated financial position, results of operations or cash flows.
5. COMMITMENTS AND CONTINGENCIES
The Company is subject to various federal, state, local and foreign laws and
regulations governing environmental matters, including the use, discharge and
disposal of hazardous materials. The Company's manufacturing facilities are
believed to be in substantial compliance with current laws and regulations.
Complying with current laws and regulations has not had a material adverse
effect on the Company's financial condition. In connection with the
Distribution, the Company retained the obligations with respect to environmental
matters relating to its discontinued operations and its status as a "potentially
responsible party." The Company is presently engaged in the remediation of eight
discontinued operations in six states, and is a de minimus "potentially
responsible party" at five hazardous waste sites in four states.
The Company has engaged independent consultants to assist management in
evaluating potential liabilities related to environmental matters. Management
assesses the input from these independent consultants along with other
information known to the Company in its effort to continually monitor these
potential liabilities. Management assesses its environmental exposure on a
site-by-site basis, including those sites where the Company has been named as a
"potentially responsible party". Such assessments include the Company's share of
remediation costs, information known to the Company concerning the size of the
hazardous waste sites, their years of operation and the number of past users and
their financial viability. The Company has a reserve recorded for environmental
matters of $31.3 million at June 30, 1999 ($31.9 million at December 31, 1998).
While the ultimate outcome of these matters cannot be determined, management
does not believe that the final disposition of these matters will have a
material adverse effect on the Company's financial position, results of
operations or cash flows beyond the amounts previously provided for in the
financial statements.
The Company's present and past facilities have been in operation for many years,
and over that time in the course of those operations, such facilities have used
substances which are or might be considered hazardous, and the Company has
generated and disposed of wastes which are or might be considered hazardous.
Therefore, it is possible that additional environmental issues may arise in the
future, which the Company cannot now predict.
6. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the applicable periods. Diluted earnings per share computations are based on net
income divided by the weighted average number of common shares outstanding
adjusted for the dilutive effect of stock options. The diluted earnings per
share calculation assumes the exercise of stock options using the treasury stock
method.
Set forth below are reconciliations of the numerators and denominators of the
basic and diluted per share computations for the three and six months ended June
30, 1999 and 1998.
For the Three Months For the Three Months
Ended June 30, 1999 Ended June 30, 1998
-------------------- --------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS
Income available to
common stockholders $5,108 36,820 $0.14 $6,846 36,813 $0.19
===== =====
Effect of Dilutive Securities
Options -- 82 -- 152
------ ------ ------ ------
Diluted EPS
Income available to
common stockholders $5,108 36,902 $0.14 $6,846 36,965 $0.19
====== ====== ===== ====== ====== =====
For the Six Months For the Six Months
Ended June 30, 1999 Ended June 30, 1998
------------------- -------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS
Income available to
common stockholders $9,360 36,820 $0.25 $16,311 36,802 $0.44
===== =====
Effect of Dilutive Securities
Options -- 53 -- 132
------ ------ ------- ------
Diluted EPS
Income available to
common stockholders $9,360 36,873 $0.25 $16,311 36,934 $0.44
====== ====== ===== ======= ====== =====
7. GEOGRAPHIC SEGMENT INFORMATION
General Semiconductor is engaged in one industry segment, specifically, the
design, manufacture and sale of discrete semiconductors. The Company manages its
business on a geographic basis. Summarized financial information for the
Company's reportable geographic segments is presented in the following table.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the Company's Annual Report on
Form 10K/A for the year ended December 31, 1998. Net sales by reportable
geographic segment reflect the originating source of the unaffiliated sale.
Intercompany transfers represent the originating geographic source of the
transfer and principally reflect product assembly which is accounted for at cost
plus a nominal profit. In determining earnings before provision for income taxes
for each geographic segment, sales and purchases between areas have been
accounted for on the basis of internal transfer prices set by the Company.
United
States Europe Far East China Corporate Consolidated
------ ------ -------- ----- --------- ------------
Three months ended
June 30, 1999:
Net sales (a) ............ $54,143 $32,928 $14,512 $ - $ - $101,583
Intercompany transfers.... 31,936 34,606 42,299 9,789 (118,630) -
------- ------- ------- ------ ---------- --------
Net sales............... 86,079 67,534 56,811 9,789 (118,630) $101,583
======= ======= ======= ====== ========== ========
Interest income........... - (4) 9 3 7 15
Interest expense.......... - 68 10 - 5,210 5,288
Depreciation and
amortization expense.... 2,499 1,365 2,208 820 - 6,892
Earnings before
provision for
income taxes............ 2,523 515 2,326 1,446 - 6,810
Income tax expense........ $ 1,776 $ (336) $ 258 $ 4 $ - $ 1,702
Three months ended
June 30, 1998:
Net sales (a)............. $55,311 $36,791 $ 6,660 $ - $ - $ 98,762
Intercompany transfers.... 24,908 37,730 38,642 7,163 (108,443) -
------- ------- ------- ------ ---------- --------
Net sales............... 80,219 74,521 45,302 7,163 (108,443) 98,762
======= ======= ======= ====== ========== ========
Interest income........... - 4 11 9 78 102
Interest expense.......... - 69 7 - 5,093 5,169
Depreciation and
amortization expense.... 2,181 1,095 2,160 606 - 6,042
Earnings before
provision for
income taxes............ 822 3,608 3,983 2,120 - 10,533
Income tax expense........ $ 855 $ 1,207 $ 1,515 $ 110 $ - $ 3,687
United
States Europe Far East China Corporate Consolidated
------ ------ -------- ----- --------- ------------
Six months ended
June 30, 1999:
Net sales (a)............. $103,830 $ 65,849 $ 28,865 $ - $ - $198,544
Intercompany transfers.... 63,542 67,965 82,312 18,928 (232,747) -
-------- -------- -------- ------- ---------- --------
Net sales............... 167,372 133,814 111,177 18,928 (232,747) 198,544
======== ======== ======== ======= ========== ========
Interest income........... - 17 10 8 6 41
Interest expense.......... - 134 20 - 10,208 10,362
Depreciation and
amortization expense.... 4,848 2,711 4,447 1,626 - 13,632
provision for
income taxes............ 2,131 1,146 6,393 2,809 - 12,479
Income tax expense........ $ 1,265 $ 125 $ 1,717 $ 12 $ - $ 3,119
Six months ended
June 30, 1998:
Net sales (a)............. $117,976 $ 74,635 $ 12,548 $ - $ - $205,159
Intercompany transfers.... 51,381 74,408 79,779 12,522 (218,090) -
-------- -------- -------- ------- ---------- --------
Net sales............... 169,357 149,043 92,327 12,522 (218,090) 205,159
======== ======== ======== ======= ========== ========
Interest income........... - (11) 11 16 156 172
Interest expense.......... - 119 553 - 9,474 10,146
Depreciation and
amortization expense.... 4,348 2,275 4,303 1,190 - 12,116
Earnings before
provision for
income taxes............ 11,319 5,191 5,463 3,123 - 25,096
Income tax expense........ $ 4,472 $ 1,858 $ 2,345 $ 110 $ - $ 8,785
(a) Included in United States net sales are export sales as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
Taiwan $15,890 $18,725 $29,717 $40,464
China 8,913 7,554 17,445 15,210
------- ------- ------- -------
$24,803 $26,279 $47,162 $55,674
======= ======= ======= =======
Net sales, by country, within the European geographic segment are:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
France $ 3,319 $ 3,415 $ 6,529 $ 7,214
Germany 13,387 16,318 29,097 32,371
Italy 3,581 4,246 7,266 8,343
U.K. 4,744 4,041 7,933 8,557
Other 7,898 8,771 15,024 18,150
------- ------- ------- -------
$32,928 $36,791 $65,849 $74,635
======= ======= ======= =======
8. RECENT ACCOUNTING PRONOUNCEMENTS
During 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company is evaluating the impact SFAS 133 will have on its financial statements.
GENERAL SEMICONDUCTOR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis pertains to the continuing
operations of General Semiconductor, Inc., unless otherwise noted, and describes
changes in the Company's financial condition since December 31, 1998.
The following table sets forth items included in the statements of income as a
percentage of net sales:
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 73.9 71.0 74.3 68.8
----- ----- ----- -----
Gross profit 26.1 29.0 25.7 31.2
Selling, general and administrative 11.4 10.4 11.4 11.3
Research and development 1.6 1.5 1.6 1.4
Amortization of excess of cost over
fair value of net assets acquired 1.3 1.3 1.3 1.3
----- ----- ----- -----
Operating income 11.8 15.8 11.5 17.2
Other income (expense) - net - - - -
Interest expense - net 5.2 5.1 5.2 4.9
----- ----- ----- -----
Income before income tax 6.7 10.7 6.3 12.3
Provision for income tax 1.7 3.7 1.6 4.3
----- ----- ----- -----
Net income 5.0% 6.9% 4.7% 8.0%
===== ===== ===== =====
RESULTS OF OPERATIONS:
- ---------------------
NET SALES
- ---------
Net sales of $101.6 million for the three months ended June 30, 1999 increased
$2.8 million from $98.8 million for the comparable prior year period. The
increase is primarily due to an approximate 18% increase in unit volume sales
partly offset by lower worldwide average selling prices (approximating 15%). For
the six months ended June 30, 1999 net sales decreased to $198.5 million from
$205.2 million for the comparable prior year period. Increased worldwide unit
volume sales was offset by lower worldwide average selling prices (approximately
15%).
COST OF SALES
- -------------
Cost of sales for the three and six months ended June 30, 1999 of $75.0 million
and $147.5 million compares to $70.1 million and $141.2 million for the
corresponding prior year period. Cost of sales increased $4.9 million for the
three months and $6.3 million for the six months principally due to an increase
in unit volume sales, partly, offset by cost savings achieved from the 1998
restructuring.
Accordingly, gross margin for the three and six months ended June 30, 1999
represents 26.1% and 25.7% of net sales, respectively, compared with 29.0% and
31.2% in the corresponding prior year period. This decrease relates to an
erosion of worldwide average selling prices partially offset by a change in the
mix of products sold, continued cost controls, savings achieved from the 1998
restructuring and improved factory utilization.
RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------
Research and development expenses of $1.7 million and $3.1 million for the three
and six months ended June 30, 1999 increased from $1.5 million and $3.0 million
for the comparable prior year periods due to the hiring of the power MOSFET
product line engineers offset, in part, by cost savings achieved from the 1998
restructuring. Research and development spending reflects the modification of
existing products as well as the continued development of new products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses of $11.6 million for the three
months ended June 30, 1999 increased from $10.3 million for the comparable prior
year period. The $1.3 million increase is due to the timing of incentive costs
and the settlement of an environmental matter in 1998, offset by cost savings
achieved in 1999 from the 1998 restructuring. For the six months ended June 30,
1999 selling, general and administrative expenses of $22.5 million decreased
from $23.2 million. The $0.7 million decrease relates to lower commissions
corresponding with lower revenues, cost savings achieved from the 1998
restructuring and lower bad debt expense.
NET INTEREST EXPENSE
- --------------------
Net interest expense increased to $5.3 million and $10.3 million for the three
and six months ended June 30, 1999 from $5.1 million and $10.0 million for the
corresponding prior year period. While the average debt balance outstanding was
higher during the three and six months ended June 30, 1999 compared with the
corresponding prior year period, borrowing rates were lower resulting in
relatively stable net interest expense. Interest expense will increase for the
second half of 1999 due to amendments to the existing credit facility discussed
below.
INCOME TAXES
- ------------
The provision for income taxes is computed utilizing the Company's expected
annual effective income tax rate. The Company's effective tax rate for the six
months ended June 30, 1999 decreased to 25% from 35% for the six months ended
June 30, 1998 due primarily to an increased proportion of income of foreign
subsidiaries taxed at rates lower than the U.S. rate.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital at June 30, 1999 was $70.1 million compared to $51.7 million at
December 31, 1998. The working capital increase of $18.4 million resulted
primarily from increases in accounts receivable in support of a higher revenue
base, inventory resulting from additional consignment stock and a decrease in
accrued expenses due to the payment of restructuring costs accrued as of
December 31, 1998. As a result, the current ratio increased to 2.1 to 1 at June
30, 1999 compared with 1.7 to 1 at December 31, 1998.
During the six months ended June 30, 1999 the Company invested $11.7 million in
property, plant and equipment compared with $8.8 million for the corresponding
prior year period. The Company currently plans to invest approximately $30.0
million in capital expenditures for the year ended December 31, 1999 principally
for automation, new products, quality and system enhancements and selected
capacity increases for key lines where capacity is currently constrained.
At June 30, 1999 there were $11.0 million of letters of credit outstanding that
reduce the amount that can be borrowed against the Company's $350.0 million
credit facility.
The Company entered into its $350 million credit facility in July 1997 in
connection with the Distribution. In December 1998, the credit facility was
amended to modify several financial covenants to provide flexibility to execute
the 1998 restructuring. In June 1999, the credit facility was amended to modify
several financial covenants to provide greater financial flexibility.
The Company is evaluating market conditions and is planning a subordinated
note offering in the range of $200 million which may be completed in 1999. The
Company expects to use the proceeds of any such offering to repay outstanding
indebtedness under the credit facility and the credit facility will be
permanently reduced by 50% of the gross proceeds of the subordinated note of
offering.
The credit facility requires the Company to pay a facility fee on the total
commitment. The credit facility permits the Company to choose between two
interest rates options: the adjusted base rate or eurodollar rate (LIBOR) plus a
margin which varies based on the Company's ratio of indebtedness to EBITDA as
defined in the credit agreement. The facility fee also varies based on that
ratio. The Company is also able to set interest rates through a competitive bid
procedure. The credit facility contains financial and operating covenants,
including limitations on guarantee obligations, liens, sale of assets,
indebtedness and investments.
General Semiconductor's primary cash needs on both a short and long-term basis
are for capital expenditures and other general corporate purposes. The Company
believes that it has adequate liquidity to meet its current and anticipated cash
flow needs from the results of its operations, working capital and available
sources of financing. There can be no assurance, however, that future
industry-specific developments or general economic trends will not adversely
affect the Company's operations or its ability to meet its cash requirements.
EBITDA
- ------
EBITDA represents earnings before interest, taxes, depreciation and
amortization, EDITDA is presented because we believe it is frequently used by
securities analysts, investors and other interested parties in the evaluation of
companies in our industry. However, other companies in our industry may
calculate EBITDA differently than we do. EBITDA is not a measurement of
financial performance under generally accepted accounting principles and should
not be considered as an alternative to cash flow from operating activities or as
a measure of liquidity or as an alternative to net income as indicators of our
operating performance or any other measures of performance derived in accordance
with generally accepted accounting principles. See the statements of cash flow
included in the Company's consolidated financial statements.
Three months Six months
ended June 30, ended June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Income from continuing operations $ 5,108 $ 6,846 $ 9,360 $16,311
Interest 5,273 5,067 10,321 9,974
Taxes 1,702 3,687 3,119 8,785
Depreciation and amortization(1) 6,794 5,967 13,565 11,966
------- ------- ------- -------
EBITDA $18,877 $21,567 $36,365 $47,036
======= ======= ======= =======
(1) Amortization of deferred financing fees is excluded from "Depreciation and
amortization" and included in "Interest".
The $2.7 million and $10.7 million decrease in EBITDA for the three and six
months ended June 30, 1999, respectively, compared with the corresponding prior
year periods is due primarily to worldwide price erosion.
YEAR 2000
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The Company recognizes the importance of ensuring that neither its customers nor
its business operations are disrupted as a result of the Year 2000 phenomenon.
This phenomenon is a result of computer programs having been written using two
digits (rather than four) to define the applicable year. Any information
technology ("IT") systems that have time sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000, which could result in
miscalculations and systems failures. The problem also extends to many "non-IT"
systems such as operating and control systems that rely on embedded chip
systems. The Company, with the assistance of outside consulting resources, is
centrally coordinating activities directed toward achieving global Year 2000
compliance. The primary areas of potential impact include business application
systems, production equipment systems, suppliers, financial institutions,
government agencies and environmental support organizations. None of the
Company's products contain date sensitive or date processing logic.
In 1996 the Company began an upgrade of its business applications software which
includes the implementation of the full suite of JD Edwards ("JDE") financial,
distribution and manufacturing applications. The JDE software was selected to
add worldwide functionality and efficiency to the business processes of the
Company as well as address Year 2000 exposure. The JDE financial and
distribution modules have been installed and are Year 2000 compliant. The JDE
manufacturing module will be installed in 2000. The Company has completed the
modification of the existing manufacturing applications with each of its six
factories.
Since the Company's financial, distribution and manufacturing applications are
Year 2000 compliant, incremental costs associated with achieving Year 2000
compliance beyond the scope of this project (estimated at less than $1.0
million) should not have a material effect on the Company's financial condition
or results of operations and are being expensed as incurred.
The Company has surveyed its suppliers, financial institutions, government
agencies and others with which it does business to determine their Year 2000
readiness and coordinate conversion efforts. Approximately 90% of third party
suppliers have responded to the Company's surveys. At the current time,
respondents critical to the operations of the Company have indicated that they
are, or reasonably believe that they will be, Year 2000 compliant. If a material
risk arises, the Company is prepared to perform on-site visits to validate the
accuracy of the information received and will test such systems where
appropriate and possible. Additionally, the Company has established programs to
ensure that future purchases of equipment and software are Year 2000 compliant.
Costs incurred have been insignificant to date.
The Company does not expect Year 2000 issues to have a material adverse effect
on its products, services, competitive position, financial condition or results
of operations. If, however, any of the Company systems are not Year 2000
compliant or if government agencies, the Company's customers, or suppliers fail
to achieve Year 2000 compliance, the Company may experience adverse consequences
including the following: (i) customers may be unable to place orders due either
to the Company's or customers system failures; (ii) the Company may be unable to
maintain adequate production scheduling, inventory cost accounting and other
elements of its business that are dependent upon computer systems; and (iii) the
Company may be unable to deliver its products on a timely basis.
The disclosures contained herein constitute Year 2000 Readiness Statements
pursuant to the Year 2000 Information and Readiness Disclosure Act, Public Law
105-271.
NEW EUROPEAN CURRENCY
- ---------------------
A new European currency (Euro) was introduced in January 1999 to replace the
separate currencies of eleven individual countries. The Company will need to
modify its payroll, benefits and pension systems, contracts with suppliers and
customers, and internal financial reporting systems to be able to process
transactions in the new currency. A three-year transition period is given during
which transactions may be made in the old currencies. This may require dual
currency processes until the conversion is complete. The Company is identifying
the issues involved and intends to develop and implement solutions. The cost of
this effort is not expected to be material and will be expensed as incurred.
There can be no assurance, however, that all problems will be foreseen and
corrected, or that no material disruption of the Company's business will occur.
The conversion to the Euro may have competitive implications on the Company's
pricing and marketing strategies; however, any such impact is not known at this
time.
FORWARD LOOKING STATEMENTS
- --------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. The Company's Form 10-K/A for the year ended
December 31, 1998, the Company's 1998 Annual Report to Stockholders, this and
any other Form 10-Q or Form 8-K of the Company, or any oral or written
statements made by or on behalf of the Company, may include forward looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward looking statements are
identified by their use of such terms and phrases as "intends," "intend,"
"intended," "goal," "estimate," "estimates," "expects," "expect," "expected,"
"project," "projects," "projected," "projections," "plans," "anticipates,"
"anticipated," "should," "designed to," "foreseeable future," "believe,"
"believes", "scheduled" and similar expressions. Readers are cautioned not to
place undue reliance on these forward looking statements, which speak only as of
the date the statement was made. The Company undertakes no obligation to
publicly update or revise any forward looking statements, whether as a result of
new information, future events or otherwise.
Reference is made to the cautionary statements contained in Exhibit 99 to this
Form 10-Q for a discussion of the factors that may cause actual results to
differ from the results discussed in these forward looking statements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Part I, Note 4 to the Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Stockholders
-----------------------------------------------
General Semiconductor held an Annual Meeting of Stockholders on May
12, 1999.
1. The stockholders approved the election of five directors. The votes
cast for each nominee were as follows:
FOR WITHHELD
--- --------
Ronald A. Ostertag 33,655,958 44,093
Ronald Rosenzweig 33,668,356 31,695
Peter A. Schwartz 33,668,241 31,810
Samuel L. Simmons 33,663,606 36,445
Dr. Gerard T. Wrixon 33,665,781 34,270
2. The stockholders ratified the appointment of Deloitte & Touche
LLP as independent auditor for the Company for the 1999 fiscal
year by a vote of 33,679,133 shares in favor of the
appointment; 12,368 shares against the appointment and 8,550
shares abstaining.
Item 6. Exhibits
--------
(a) Exhibits
--------
10.7.2 Second Amendment to the Credit Agreement, dated as of June
22, 1999 among General Semiconductor, Inc., The Chase
Manhattan Bank as Administrative Agent, the Banks from
time to time parties thereto, and the financial
institutions named therein as co-agents for the Banks.
10.8.2 Restated General Semiconductor, Inc. Annual Incentive Plan
adopted July 21, 1999.
27 Financial Data Schedule
99 Forward Looking Information
99.1 Press release dated July 21, 1999 regarding the Company's
sales and earnings.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Registrant during
the three months ended June 30, 1999.
SIGNATURE
---------
Pursuant to the requirements 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.
GENERAL SEMICONDUCTOR, INC.
July 23, 1999 /s/Andrew M. Caggia
- ------------- -------------------
Date Andrew M. Caggia
Senior Vice President and Chief Financial Officer
Signing both in his capacity as Senior Vice
President on behalf of the Registrant and as Chief
Financial Officer of the Registrant