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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
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Commission file number 1-5442
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
(Address of principal executive offices)
(Zip Code)
(516) 847-3000
(Registrant's telephone number, including area code)
GENERAL INSTRUMENT CORPORATION; 8770 WEST BRYN MAWR AVENUE,
CHICAGO, ILLINOIS 60631
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 close of the period covered by this report.
CLASS OUTSTANDING AT JULY 31, 1997(1)
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Common Stock, par value $0.01 36,840,759
(1) Reflects a one for four reverse stock split of the Company's common stock
effected July 25, 1997.
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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, 1997 (unaudited) and December 31, 1996............... 2
Consolidated Statements of Operations for the Three and Six Months ended June 30, 1997 and 1996
(unaudited).......................................................................................... 3
Consolidated Statement of Stockholders' Equity......................................................... 4
Consolidated Statements of Cash Flows for the Six Months ended June 30, 1997 and 1996.................. 5
Notes to Consolidated Financial Statements............................................................. 6-12
Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 13-15
PART II. OTHER INFORMATION
Legal Proceedings...................................................................................... 16
Submission of Matters to a Vote of Security Holders.................................................... 17
SIGNATURE................................................................................................ 18
Exhibits............................................................................................... 19
PART I--FINANCIAL INFORMATION
GENERAL SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT STOCK PAR VALUE)
JUNE 30, DECEMBER 31,
1997 1996(1)
------------ ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents............................................................ $ 37,350 $ 20,252
Short-term investments............................................................... -- 49,946
Accounts receivable, less allowance for doubtful accounts of $905 and $866,
respectively....................................................................... 50,491 49,629
Inventories.......................................................................... 29,492 31,551
Prepaid expenses and other current assets............................................ 8,345 5,675
Deferred income taxes................................................................ 10,274 12,354
------------ ------------
Total current assets........................................................... 135,952 169,407
Property, plant and equipment--net................................................... 204,616 202,281
Excess of cost over fair value of net assets acquired, less accumulated amortization
of $36,212 and $33,641, respectively............................................... 170,448 173,022
Deferred income taxes, net of valuation allowance.................................... 22,342 41,590
Intangibles and other assets, less accumulated amortization of $38,299 and $36,876,
respectively....................................................................... 25,216 26,128
------------ ------------
Total non-current assets....................................................... 422,622 443,021
Net assets of discontinued operations................................................ 1,501,640 1,444,734
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TOTAL ASSETS......................................................................... $ 2,060,214 $2,057,162
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................................................... $ 34,525 $ 55,365
Accrued expenses..................................................................... 46,898 40,119
Current portion of long-term debt.................................................... 4,310 4,310
------------ ------------
Total current liabilities...................................................... 85,733 99,794
Long-term debt....................................................................... 664,922 688,025
Deferred income taxes................................................................ 15,250 15,104
Other non-current liabilities........................................................ 76,985 81,086
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Total liabilities.............................................................. 842,890 884,009
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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; 34,452 and 34,286 shares
issued, respectively............................................................... 345 343
Retained earnings.................................................................... 264,053 254,552
Other stockholders' equity........................................................... 952,926 918,258
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1,217,324 1,173,153
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $ 2,060,214 $2,057,162
------------ ------------
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(1) The consolidated balance sheet as of December 31, 1996 has been derived from
the audited General Instrument Corporation financial statements at that date
and condensed.
See notes to consolidated financial statements.
2
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED--IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
NET SALES........................................................ $ 95,511 $ 100,002 $ 180,880 $ 197,904
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Cost of sales.................................................. 88,596 62,205 154,539 120,625
Selling, general and administrative............................ 11,410 7,662 22,577 21,329
Research and development....................................... 1,818 1,553 3,250 2,915
Amortization of excess of cost over fair value of net assets
acquired..................................................... 1,286 1,286 2,571 2,583
---------- ---------- ---------- ----------
Total operating costs and expenses......................... 103,110 72,706 182,937 147,452
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS).......................................... (7,599) 27,296 (2,057) 50,452
Other income (expense)-net....................................... (40) 27 11 (25)
Interest expense-net............................................. (2,277) (2,699) (5,340) (5,202)
---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES..... (9,916) 24,624 (7,386) 45,225
(Provision) Benefit from income taxes............................ 500 (10,023) (1,323) (18,407)
---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS......................... (9,416) 14,601 (8,709) 26,818
DISCONTINUED OPERATIONS
Income (Loss) from discontinued operations, net of income tax
expense of $11,443 and $23,331 in 1997 and an income tax
benefit of $38,779 and $28,082 in 1996......................... 1,234 (72,690) 18,210 (53,742)
---------- ---------- ---------- ----------
NET INCOME (LOSS)................................................ $ (8,182) $ (58,089) $ 9,501 $ (26,924)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted Average Shares Outstanding.............................. 34,433 32,102 34,394 31,849
PRIMARY EARNINGS (LOSS) PER SHARE:
Continuing operations.......................................... $ (0.27) $ 0.45 $ (0.25) $ 0.84
Discontinued operations........................................ 0.03 (2.26) 0.53 (1.69)
---------- ---------- ---------- ----------
Net income (loss).............................................. $ (0.24) $ (1.81) $ 0.28 $ (0.85)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FULLY DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations.......................................... $ 0.42 $ 0.77
---------- ----------
---------- ----------
Fully diluted earnings (loss) per share from continuing operations for 1997,
and discontinued operations and net income (loss) for 1997 and 1996 are not
reported herein as the effect of such computations are anti-dilutive.
See notes to consolidated financial statements.
3
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED--IN THOUSANDS)
COMMON STOCK ADDITIONAL UNREALIZED COMMON
---------------------- PAID-IN RETAINED GAIN ON STOCK IN
SHARES AMOUNT CAPITAL EARNINGS INVESTMENT TREASURY
--------- ----------- ----------- --------- ----------- -----------
BALANCE, JANUARY 1, 1997..................... 34,286 $ 343 $ 926,194 $ 254,552 $ -- $ (7,271)
Net income for the six months ended June 30,
1997....................................... 9,501
Exercise of stock options and related tax
benefit.................................... 156 2 15,097
Conversion of Convertible Junior Subordinated
Notes...................................... 10 948
Amortization of unearned compensation........
Unrealized gain on investment, net of tax.... 18,487
Treasury stock transactions.................. (66)
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BALANCE, JUNE 30, 1997....................... 34,452 $ 345 $ 942,239 $ 264,053 $ 18,487 $ (7,337)
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TOTAL
UNEARNED STOCKHOLDERS'
COMPENSATION EQUITY
--------------- ------------
BALANCE, JANUARY 1, 1997..................... $ (665) $1,173,153
Net income for the six months ended June 30,
1997....................................... 9,501
Exercise of stock options and related tax
benefit.................................... 15,099
Conversion of Convertible Junior Subordinated
Notes...................................... 948
Amortization of unearned compensation........ 202 202
Unrealized gain on investment, net of tax.... 18,487
Treasury stock transactions.................. (66)
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BALANCE, JUNE 30, 1997....................... $ (463) $1,217,324
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See notes to consolidated financial statements.
4
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED--IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1996
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OPERATING ACTIVITIES:
Income (Loss) from continuing operations.............................................. $ (8,709) $ 26,818
Adjustments to reconcile to net cash provided by continuing
operating activities:
Depreciation and amortization....................................................... 12,106 11,161
Changes in assets and liabilities:
Accounts receivable............................................................... (9,749) 11,966
Inventories....................................................................... 2,059 (6,835)
Prepaid expenses and other current assets......................................... (2,670) (92)
Other non-current assets.......................................................... (681) (1,309)
Deferred income taxes............................................................. (135) 3,256
Accounts payable and accrued expenses............................................. 14,236 (12,836)
Other non-current liabilities..................................................... 5,355 (2,222)
Other............................................................................... (220) 706
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Net cash provided by continuing operating activities.................................... 11,592 30,613
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Cash used in discontinued operations.................................................... (1,256) (133,673)
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INVESTING ACTIVITIES:
Expenditures for property, plant and equipment........................................ (10,454) (33,116)
Proceeds from sale of short-term investments.......................................... 24,972 --
Proceeds from sale of assets.......................................................... -- 4,368
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Net cash provided by (used in) investing activities..................................... 14,518 (28,748)
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FINANCING ACTIVITIES:
Costs associated with the issuance of Common Stock.................................... -- (289)
Net (repayments of) proceeds from revolving credit facilities......................... (20,000) 135,000
Redemption of Convertible Junior Subordinated Notes................................... -- (6,440)
Principal repayment of debt........................................................... (2,155) (2,155)
Exercise of stock options............................................................. 14,399 2,185
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Net cash (used in) provided by financing activities..................................... (7,756) 128,301
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Increase (decrease) in cash and cash equivalents........................................ 17,098 (3,507)
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Cash and cash equivalents, beginning of period.......................................... 20,252 36,382
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Cash and cash equivalents, end of period................................................ $ 37,350 $ 32,875
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See notes to consolidated financial statements.
5
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
General Semiconductor, Inc. (the "Company" or "General Semiconductor") is a
world leader in the discrete segment of the semiconductor industry. The Company
designs, manufactures and sells low-to-medium-power rectifiers and transient
voltage suppression ("TVS") components in axial, bridge, surface mount and array
packages. Power rectifiers 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. The Company's
products are primarily targeted for use in the computer, automotive,
telecommunications and consumer electronics industries.
General Instrument Corporation ("General Instrument") (i) transferred all
the assets and liabilities relating to the manufacture and sale of broadband
communications products used in the cable television, satellite, and
telecommunications industries to its wholly-owned subsidiary NextLevel Systems,
Inc. ("NextLevel Systems"), and all the assets and liabilities relating to the
manufacture and sale of coaxial, fiber optic and other electric cable used in
the cable television, satellite and other industries to its wholly-owned
subsidiary CommScope, Inc. ("CommScope") and (ii) distributed all of the
outstanding shares of capital stock of each of NextLevel Systems and CommScope
to its stockholders on a pro rata basis as a dividend (the "Distribution") in a
transaction that was finalized on July 28, 1997 (the "Distribution Date"). On
the Distribution Date, NextLevel Systems and CommScope began operating as
independent entities with publicly traded common stock. General Instrument
retained no ownership interest in either NextLevel Systems or CommScope.
Concurrent with the Distribution, General Instrument changed its name to General
Semiconductor, Inc. and effected a one for four reverse stock split.
In this report, all share and per share amounts have been retroactively
restated to reflect the reverse stock split. In addition, the number of common
shares issued have been adjusted to reflect the reverse stock split and an
amount equal to the par value of the reduction of the shares has been
transferred from common stock to additional paid-in capital as of June 30, 1997.
The revenues, costs and expenses, assets and liabilities and cash flows of
the businesses transferred to NextLevel Systems and CommScope (the "Discontinued
Operations"), have been excluded from the respective captions in the
Consolidated Statements of Operations, Condensed Consolidated Balance Sheets and
Consolidated Statements of Cash Flows. The net operating results of these
entities have been reported, net of applicable income taxes, as "Income (Loss)
from discontinued operations"; the net assets of these entities have been
reported as "Net assets of discontinued operations"; and the net cash flows of
these entities have been reported as "Cash used in discontinued operations". For
the purpose of governing certain of the ongoing relationships among General
Semiconductor, NextLevel Systems and CommScope after the Distribution, these
entities entered into various agreements that provide for an orderly transition,
the separation and distribution of the operating assets and liabilities and
pension plan assets and liabilities of General Instrument, as well as tax
sharing, and other matters.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all necessary adjustments (consisting
of normal recurring adjustments) and present fairly the Company's financial
position as of June 30, 1997, the results of its operations for the three and
six months ended June 30, 1997 and 1996, and its cash flows for the six months
ended June 30,1997 and 1996 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 six
months
6
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
ended June 30, 1997 and 1996 except for the charges discussed in Note 2 below.
The results of operations for the six months ended June 30, 1997, 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 the General Instrument Annual Report on Form 10-K
for the year ended December 31, 1996 and the General Instrument Proxy Statement
dated June 13, 1997.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the current year presentation.
2. DISCONTINUED OPERATIONS
Net sales for the Discontinued Operations were $609.7 million and $575.2
million for the three months ended June 30, 1997 and 1996, respectively, and
$1,165.6 million and $1,093.0 million for the six months ended June 30, 1997 and
1996, respectively.
Discontinued operations also includes $28.0 million and $32.1 million, net
of applicable income taxes, for the three and six months ended June 30, 1997,
respectively, for costs incurred primarily related to the separation of the
Taiwan operations of General Instrument between General Semiconductor and
NextLevel Systems and for certain other costs incurred directly related to the
Distribution.
In connection with the Distribution, the Company also recorded in income
(loss) from continuing operations a pre-tax charge of $25.4 million and $32.7
million to cost of sales during the three and six months ended June 30, 1997,
respectively. These costs relate to employees of General Semiconductor and were
incurred in connection with the separation of the Taiwan operations between
General Semiconductor and NextLevel Systems.
Net assets of Discontinued Operations are:
JUNE 30, 1997 DECEMBER 31, 1996
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Short-term investments.......................................................... $ 30,306 $ --
Accounts receivable............................................................. 462,609 494,801
Inventories..................................................................... 335,247 304,965
Prepaid expenses................................................................ 23,787 18,944
Deferred income taxes........................................................... 82,261 94,968
Property, plant and equipment................................................... 385,439 368,770
Intangible and other non-current assets......................................... 153,363 140,323
Deferred income taxes, non-current.............................................. 30,670 32,499
Goodwill........................................................................ 644,622 654,351
Current liabilities............................................................. (412,600) (434,926)
Flexible term notes............................................................. (10,800) (10,800)
Other non-current liabilities................................................... (223,264) (219,161)
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$ 1,501,640 $ 1,444,734
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7
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. PRO FORMA INFORMATION
Giving effect to the Distribution as of January 1, 1996, pro forma results
of operations for General Semiconductor, Inc. would have been as follows:
PRO FORMA (A) PRO FORMA(A)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30
--------------------- ---------------------
1997 1996 1997 1996
---------- --------- ---------- ---------
Income (Loss) from continuing operations............................ $ (11,068) $ 13,259 $ (11,519) $ 24,013
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Primary earnings (loss) per share................................... $ (0.30) $ 0.36 $ (0.31) $ 0.65
---------- --------- ---------- ---------
---------- --------- ---------- ---------
(A) Assumes the conversion in full of the outstanding General Instrument
Convertible Junior Subordinated Notes, a net debt level of $275.0 million
and interest expense of $4.9 million and $9.8 million for the three and six
months ended June 30, 1997 and 1996, respectively.
Giving effect to the Distribution, the following pro forma capitalization
reflects (i) the cash paid by NextLevel Systems and CommScope on the
Distribution Date totaling $170.1 million, (ii) the conversion of the
Convertible Junior Subordinated Notes, (iii) the distribution of 147.3 million
shares of NextLevel Systems common stock and 49.1 million shares of CommScope
common stock to the General Instrument stockholders, (iv) changes in operating
assets and liabilities from June 30, 1997 through the Distribution Date, and (v)
additional charges to be incurred related to the Distribution.
Long-term debt, including current maturities...................... $ 275,000
---------
Stockholders' equity
Common stock.................................................... 345
Other stockholders' equity...................................... 73,721
---------
Total Stockholders' equity........................................ 74,066
---------
Total Capitalization.......................................... $ 349,066
---------
---------
4. INVENTORIES
Inventories consist of:
JUNE 30, 1997 DECEMBER 31, 1996
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Raw materials............................................. $ 5,787 $ 6,616
Work in process........................................... 11,951 11,813
Finished goods............................................ 11,754 13,122
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$ 29,492 $ 31,551
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8
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. LONG-TERM DEBT
LONG-TERM DEBT CONSISTS OF:
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
Senior indebtedness:
Revolving credit facilities................................................... $ 394,000 $ 414,000
Taiwan loan................................................................... 48,229 50,384
Convertible Junior Subordinated Notes........................................... 227,003 227,951
------------- --------
669,232 692,335
Less: current maturities........................................................ 4,310 4,310
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$ 664,922 $ 688,025
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------------- --------
In June 1997, approximately $1.0 million of the Convertible Junior
Subordinated Notes were converted into General Instrument common stock resulting
in the issuance of 10,000 shares. Additionally, during July 1997 the remaining
Convertible Junior Subordinated Notes outstanding were converted into General
Instrument common stock resulting in the issuance of 2.4 million shares. In
connection with the conversion, the Company charged approximately $1.5 million
to additional paid-in capital for unamortized deferred financing costs (net of
$1.0 million of accrued interest forfeited and net of applicable income taxes).
The Company repaid the General Instrument revolving credit facility in July
1997 utilizing a combination of the bank credit facility described below and
amounts received from NextLevel Systems and CommScope described in Note 3 above.
In July 1997, the Company entered into a bank credit agreement (the "Credit
Agreement") which provides for a $350.0 million secured revolving credit
facility and matures on December 31, 2002. The Credit Agreement requires the
Company to pay a facility fee on the total commitment. The Credit Agreement
permits the Company to choose between two interest rate options: an Adjusted
Base Rate (as defined in the Credit Agreement), which is based on the highest of
(i) the rate of interest publicly announced by The Chase Manhattan Bank as its
prime rate, (ii) 1% per annum above the secondary market rate for three-month
certificates of deposit and (iii) the federal funds effective rate from time to
time plus 0.5%, or a Eurodollar rate (LIBOR) plus a margin which varies based on
the Company's ratio of indebtedness to earnings before income taxes,
depreciation and amortization 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 Agreement contains
financial and operating covenants, including limitations on guarantee
obligations, liens, sale of assets, indebtedness, investments, capital
expenditures, payment of dividends and leases, and requires the maintenance of
certain financial ratios. In addition, certain changes in control of the Company
would cause an event of default under the Credit Agreement. None of the
restrictions contained in the Credit Agreement is expected to have a significant
effect on the Company's ability to operate.
Net interest expense included in the Consolidated Statements of Operations
represents an allocation based upon General Semiconductor's net assets as a
percentage of total assets of General Instrument.
9
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. INCOME TAXES
General Semiconductor, NextLevel Systems and CommScope entered into a tax
sharing agreement (the "Tax Sharing Agreement") that defines the parties' rights
and obligations with respect to federal, state and other income or franchise
taxes relating to the businesses of General Instrument for tax periods prior to,
including and following the Distribution and with respect to certain other tax
matters. In general, NextLevel Systems will be responsible for consolidated
federal income taxes, consolidated or combined state income taxes and separate
state income taxes of General Instrument and its subsidiaries and preparation
and filings of the applicable returns through July 25, 1997. Such liability will
be determined assuming a closing of the books on July 25, 1997. Liability for
foreign income taxes and other taxes will generally be allocated to the legal
entity on which such taxes are imposed except that liability for such taxes
relating to the Broadband Networks Group (as defined in the Tax Sharing
Agreement) will generally be allocated to NextLevel Systems.
Notwithstanding the above, each of CommScope and General Semiconductor will
be responsible for any such taxes to the extent that such taxes are attributable
to action taken by that entity or its affiliates after the Distribution that is
inconsistent with the tax treatment contemplated in the Tax Ruling received from
the Internal Revenue Service. The Company believes that the Tax Sharing
Agreement is fair to each of the parties and contains terms which generally are
comparable to those which would have been reached at arm's-length negotiations
with unaffiliated parties.
The provision for income taxes for the six months ended June 30, 1997 and
1996 was computed utilizing the Company's expected annual effective income tax
rate and the tax effects of restructuring charges recorded during 1997 at the
applicable rates.
The tax effects of temporary differences that give rise to the deferred tax
assets at June 30, 1997 and December 31, 1996 consist principally of accrued
employee benefits and environmental liabilities. Deferred tax liabilities for
the periods presented primarily relate to foreign tax withholding liabilities.
7. LITIGATION
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 behalves and as
representatives of a class of purchasers of General Instrument common stock
during the period March 21, 1995 through October 18, 1995. The complaint alleges
that General Instrument 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, by allegedly making false and misleading statements and
failing to disclose material facts about General Instrument's planned shipments
in 1995 of its CFT-2200 and DigiCipher II products. The plaintiffs have moved
for class certification. General Instrument has filed a motion to dismiss the
Consolidated Amended Class Action Complaint. Also pending in the same court,
under the same name, is a derivative action brought on behalf of General
Instrument. The derivative action alleges that the members of General
Instrument's Board of Directors, several of its officers and Forstmann Little &
Co. and related entities had 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 the Company's stock for
personal gain. General Instrument has filed a motion to dismiss the derivative
complaint.
10
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. LITIGATION (CONTINUED)
An action entitled BKP PARTNERS, L.P. V. GENERAL INSTRUMENT CORP. was
brought in February 1996 by shareholders of NextLevel Communications, which was
merged into General Instrument 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 complaint alleges that the General
Instrument common stock, which was received by the plaintiffs as a result of the
merger, was overpriced because of the matters complained of in the class action
and General Instrument's failure to disclose information concerning a
significant reduction in its gross margins. General Instrument has filed a
motion to dismiss the complaint.
An action entitled BROADBAND TECHNOLOGIES, INC. VS. GENERAL INSTRUMENT CORP.
was brought in March 1997 in the United States District Court for the Eastern
District of North Carolina. The complaint alleges that General Instrument
infringes BroadBand Technologies, Inc.'s U.S. Patent No. 5,457,560, covering an
electronic communications system which delivers television signals, and seeks
monetary damages and injunctive relief. On June 13, 1997, General Instrument's
motion to dismiss the complaint for lack of jurisdiction was denied.
NextLevel Systems has agreed to indemnify the Company in respect of its
obligations, if any, arising out of or in connection with the IN RE GENERAL
INSTRUMENT CORPORATION SECURITIES LITIGATION, the BKP PARTNERS, L.P., V. GENERAL
INSTRUMENT CORP. litigation and the action entitled BROADBAND TECHNOLOGIES, INC.
V. GENERAL INSTRUMENT CORP.
General Semiconductor is a 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. Management is of the opinion that such
litigation or claims will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
8. EMPLOYEE BENEFITS AND POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
In connection with the Distribution, the Company, NextLevel Systems and
CommScope have entered into an Employee Benefits Allocation Agreement (the
"Agreement"). The Agreement provides that the Company generally will assume or
retain, as the case may be, all liabilities under employee benefit plans
maintained by General Instrument or any of its subsidiaries with respect to
employees of General Semiconductor or any of its retained subsidiaries and
employees of previously divested operations other than the liabilities related
to employees of NextLevel Systems or CommScope subsequent to the Distribution.
The Company believes that the Agreement is fair to each of the parties and
contains terms which generally are comparable to those which would have been
reached at arm's-length negotiations with unaffiliated parties.
The General Instrument Corporation Pension Plan for Salaried and Hourly Paid
Non-Union Employees (the "GI Pension Plan") intends to effect a spin-off of the
assets and liabilities pertaining to all active employees and former employees
(as defined in the Agreement) of NextLevel Systems and its subsidiaries to the
NextLevel Systems defined benefit pension plan. The GI Pension Plan will retain
the remainder of the assets and liabilities.
Other non-current liabilities includes $36.6 million and $36.1 million at
June 30, 1997 and December 31, 1996, respectively, for employee benefits and
postretirement and postemployment benefits other than pensions.
11
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. SUBSEQUENT EVENTS
On July 8, 1997 the Company entered into an agreement with ITT Industries,
Inc. to purchase for $8.0 million certain assets and assume certain liabilities
related to its discrete semiconductor business. The acquisition, which is
expected to be completed during the fourth quarter of 1997, will be accounted
for as a purchase transaction. By broadening the Company's served market to
include small signal transistors and zener products, this acquisition will
enable the Company to participate in approximately 45% of the $13.0 billion
worldwide discrete semiconductor market compared with 20% in which the Company
participates today.
On a pro forma basis, this transaction is not expected to have a material
impact on the Company's results of operations, financial position or cash flows
for the year ended December 31, 1997.
10. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share ("SFAS No. 128"), which will be adopted by the
Company on December 31, 1997. SFAS No. 128, which supersedes Accounting
Principles Board Opinion No. 15, Earnings per Share, ("APB No. 15") replaces
primary and fully diluted earnings per share with basic and diluted earnings per
share, respectively. The Company does not expect the result to be materially
different from that reported under APB No. 15.
12
GENERAL SEMICONDUCTOR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management discussion and analysis pertains to the continuing
operations of General Semiconductor, Inc., unless otherwise noted, and describes
material changes in the Company's financial condition since December 31, 1996.
RESULTS OF OPERATIONS:
NET SALES
Net sales for the three and six months ended June 30, 1997 of $95.5 million
and $180.9 million compares to $100.0 million and $197.9 million for the
corresponding prior year periods. The decrease of 4.5% and 8.6%, respectively,
resulted from lower average selling prices than in the prior year due to
industry wide excess capacity, partly offset by increased volume. Order levels
increased more than 65% for the three months ended June 30, 1997 over the
depressed levels of the comparable prior year period. Net sales increased 11.9%
for the three months ended June 30, 1997 compared with the three months ended
March 31, 1997 also reflecting increased unit volume.
COST OF SALES
Cost of sales of $88.6 million and $154.5 million for the three and six
months ended June 30, 1997 compares to $62.2 million and $120.6 million for the
corresponding prior year periods. Excluding pre-tax costs of $25.4 million and
$32.7 million for the three and six months ended June 30, 1997, primarily
related to the separation of the Taiwan operations of General Instrument, cost
of sales increased 1.6% and 1.0%, respectively, over the prior year periods and
represents 66.2% and 67.3% of net sales compared to 62.2% and 61.0% as a result
of the decline in average selling prices discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses of $11.4 million and $22.6
million for the three and six months ended June 30, 1997 increased from $7.7
million and $21.3 million for the comparable prior year periods. The 48.9%
increase for the three months ended June 30, 1997 relates primarily to a $2.5
million credit in June 1996 for the settlement of an environmental liability and
a $1.0 million pre-tax charge recorded in June 1997 for transaction costs
related to the Distribution. Excluding such items, selling general and
administrative expenses total $10.4 million and $10.2 million representing 10.9%
and 10.1% of net sales for the three months ended June 30, 1997 and 1996,
respectively. For the six months ended June 30, 1997 and 1996, excluding a
pre-tax charge in 1997 of $1.1 million related to the Distribution, selling,
general and administrative expenses total $21.5 million and $21.3 million,
representing 11.9% and 10.8% of net sales, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses of $1.8 million and $3.2 million for the
three and six months ended June 30, 1997 increased from $1.6 million and $2.9
million for the comparable prior year period. As a percentage of net sales,
research and development expenses approximate 1.9% for the three and six months
ended June 30, 1997 compared with 1.6% for the three and six months ended June
30, 1996 due mainly to the decrease in net sales. The increased level of
spending reflects the continued development of new products as well as the
modification of existing products.
13
NET INTEREST EXPENSE
Net interest expense decreased to $2.3 million for the three months ended
June 30, 1997 from $2.7 million for the comparable prior year period. For the
six months ended June 30, 1997 interest expense remained constant compared with
the corresponding prior year period. Net interest expense represents an
allocation based upon General Semiconductor's net assets as a percentage of
total assets of General Instrument. Pro forma net interest expense, assuming a
net debt level of $275.0 million for each period presented and amortization of
debt issuance costs associated with the new borrowings, would have been $4.9
million and $9.8 million for the three and six months ended June 30, 1997 and
1996, respectively.
INCOME TAXES
The provision for income taxes for the three and six months ended June 30,
1997 was computed utilizing the Company's expected annual effective income tax
rate of 37% and the tax effects of restructuring charges recorded during 1997 at
the applicable rates. The decrease in the effective rate from 40.7% for 1996
relates primarily to increased income of foreign subsidiaries taxed at rates
lower than U.S. rates.
DISCONTINUED OPERATIONS
The net operating results of the businesses transferred to NextLevel Systems
and CommScope have been reported, net of applicable income taxes, as "Income
(Loss) from discontinued operations".
Discontinued operations also includes $28.0 million and $32.1 million, net
of applicable income taxes, for the three and six months ended June 30, 1997,
respectively, for costs incurred primarily related to the separation of the
Taiwan operations of General Instrument between General Semiconductor and
NextLevel Systems and for certain other costs incurred directly related to the
Distribution.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 1997 was $50.2 million, compared to $69.6
million at December 31, 1996. The working capital decrease of $19.4 million
resulted primarily from the sale of short-term investments offset, in part, by a
decrease in accounts payable and accrued expenses and the increase in cash. The
current ratio remained relatively constant at 1.6 to 1 at June 30, 1997 compared
with 1.7 to 1 at December 31, 1996.
During the six months ended June 30, 1997, the Company invested $10.5
million in property, plant and equipment related primarily to the completion of
the manufacturing facility in Tianjin, China compared with $33.1 million for the
corresponding prior year period to expand capacity to meet anticipated future
production demands. The Company does not have any material commitments for
capital expenditures.
Long-term debt, excluding current maturities, was $664.9 million at June 30,
1997, compared to $688.0 million at December 31, 1996. In June 1997
approximately $1.0 million of the Convertible Junior Subordinated Notes were
converted into General Instrument common stock resulting in the issuance of
10,000 shares. Additionally, during July 1997 the remaining Convertible Junior
Subordinated Notes outstanding were converted into General Instrument common
stock resulting in the issuance of 2.4 million shares. In connection with the
conversion, the Company charged approximately $1.5 million to additional paid-in
capital for unamortized deferred financing costs (net of $1.0 million of accrued
interest forfeited and net of applicable income taxes).
The Company repaid the General Instrument revolving credit facility in July
1997 utilizing a combination of the bank credit facility described below and
amounts received from NextLevel Systems and CommScope.
14
In July 1997, the Company entered into a bank credit agreement (the "Credit
Agreement") which provides for a $350.0 million secured revolving credit
facility and matures on December 31, 2002. The Credit Agreement requires the
Company to pay a facility fee on the total commitment. The Credit Agreement
permits the Company to choose between two interest rate options: an Adjusted
Base Rate (as defined in the Credit Agreement), which is based on the highest of
(i) the rate of interest publicly announced by The Chase Manhattan Bank as its
prime rate, (ii) 1% per annum above the secondary market rate for three-month
certificates of deposit and (iii) the federal funds effective rate from time to
time plus 0.5%, or a Eurodollar rate (LIBOR) plus a margin which varies based on
the Company's ratio of indebtedness to earnings before income taxes,
depreciation and amortization 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 Agreement contains
financial and operating covenants, including limitations on guarantee
obligations, liens, sale of assets, indebtedness, investments, capital
expenditures, payment of dividends and leases, and requires the maintenance of
certain financial ratios. In addition, certain changes in control of the Company
would cause an event of default under the Credit Agreement. None of the
restrictions contained in the Credit Agreement is expected to have a significant
effect on the Company's ability to operate.
During the second half of 1997, the Company expects to incur approximately
$15 to $20 million of additional charges, net of applicable income taxes, for
costs related to the Distribution. Cash payments after June 30, 1997 for these
charges, in addition to the unpaid portion of amounts recorded prior to June 30,
1997, will total approximately $40 to $45 million. Approximately half of such
payments will be made in 1997 and the remainder will be made in 1998.
The Company believes that it has adequate liquidity to meet its current and
anticipated needs from the results of its operations, working capital and the
existing credit facility. The Company intends to repay its remaining
indebtedness primarily with cash flow from operations. 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.
15
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 behalves and as
representatives of a class of purchasers of General Instrument Common Stock
during the period March 21, 1995 through October 18, 1995. The complaint alleges
that General Instrument 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, by allegedly making false and misleading statements and
failing to disclose material facts about General Instrument's planned shipments
in 1995 of its CFT-2200 and DigiCipher II products. The plaintiffs have moved
for class certification. General Instrument has filed a motion to dismiss the
Consolidated Amended Class Action Complaint. Also pending in the same court,
under the same name, is a derivative action brought on behalf of General
Instrument. The derivative action alleges that the members of General
Instrument's Board of Directors, several of its officers and Forstmann Little &
Co. and related entities had 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 the Company's stock for
personal gain. General Instrument has filed a motion to dismiss the derivative
complaint.
An action entitled BKP PARTNERS, L.P. V. GENERAL INSTRUMENT CORP. was
brought in February 1996 by shareholders of Next Level Communications, which was
merged into General Instrument 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 complaint alleges that the General
Instrument common stock, which was received by the plaintiffs as a result of the
merger, was overpriced because of the matters complained of in the class action
and General Instrument's failure to disclose information concerning a
significant reduction in its gross margins. General Instrument has filed a
motion to dismiss the complaint.
An action entitled BROADBAND TECHNOLOGIES, INC. VS. GENERAL INSTRUMENT CORP.
was brought in March 1997 in the United States District Court for the Eastern
District of North Carolina. The complaint alleges that General Instrument
infringes BroadBand Technologies, Inc.'s U.S. Patent No. 5,457,560, covering an
electronic communications system which delivers television signals, and seeks
monetary damages and injunctive relief. On June 13, 1997, General Instrument's
motion to dismiss the complaint for lack of jurisdiction was denied.
NextLevel Systems has agreed to indemnify the Company in respect of its
obligations, if any, arising out of or in connection with the IN RE GENERAL
INSTRUMENT CORPORATION SECURITIES LITIGATION, the BKP PARTNERS, L.P., V. GENERAL
INSTRUMENT CORP. litigation and the action entitled BROADBAND TECHNOLOGIES, INC.
V. GENERAL INSTRUMENT CORP.
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. Management is of the opinion that such
litigation or claims will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
See also Exhibit 99 to this Form 10-Q.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
General Instrument held a combined Annual and Special Meeting of
Stockholders on July 23, 1997.
1. The stockholders approved the Distribution by a vote of: 112,708,544
for, 114,241 against and 134,846 abstaining:
2. The stockholders approved an amendment to General Instrument's
Certificate of Incorporation to change the name of General Instrument
Corporation to General Semiconductor, Inc. by a vote of: 112,981,562 for,
80,750 against and 132,283 abstaining.
3. The stockholders approved an amendment to General Instrument's
Certificate of Incorporation to effect a one for four reverse stock split
of the General Semiconductor common stock by a vote of: 112,866,616 for,
168,950 against and 159,029 abstaining.
4. The stockholders approved an amendment to General Instrument's
Certificate of Incorporation to declassify the Board of Directors and
provide for the annual election of all directors by a vote of:
112,231,959 for, 506,000 against and 220,122 abstaining.
5. The stockholders approved the election of four directors. The votes cast
for each nominee were as follows:
FOR ABSTAIN
------------- ----------
Lynn Forester......................................................................... 120,329,437 1,604,949
Nicholas Forstmann.................................................................... 119,478,267 2,456,119
Richard S. Friedland.................................................................. 119,476,550 2,457,836
J. Tracy O'Rourke..................................................................... 120,324,042 1,610,344
In connection with the Distribution, the above named directors (and all
other General Instrument directors except Steven B. Klinsky) resigned on July
25, 1997 and five new directors were appointed to the Company's Board: Ronald A.
Ostertag; Ronald Rosenzweig; Peter A. Schwartz; Samuel L. Simmons; and Dr.
Gerald T. Wrixon. Steven B. Klinsky remains a member of the Board of Directors.
ITEM 6. EXHIBITS
(a) Exhibits
See attached listing
(b) Report on Form 8-K
No reports on Form 8-K were filed by the Registrant during the three months
ended June 30, 1997.
17
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.
August 14, 1997 /s/ ANDREW M. CAGGIA
- ------------- ---------------------------------------------
Date Andrew M. Caggia
Sr. Vice President and Chief Financial Officer
Signing both in his capacity as Sr. Vice
President on behalf of the Registrant and as
Chief Financial Officer of the Registrant
18
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
2.1 Agreement of Merger, dated as of July 25, 1997, between General Instrument Corporation and General
Instrument Corporation of Delaware.
3.1 Amended and Restated Certificate of Incorporation of General Instrument Corporation.
3.2 Amended and Restated By-Laws of General Semiconductor, Inc.
10.1 Employee Benefits Allocation Agreement, dated as of July 25, 1997, among NextLevel Systems Inc.,
CommScope, Inc. and General Semiconductor, Inc.
10.2 Debt and Cash Allocation Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc.,
CommScope, Inc. and General Semiconductor, Inc.
10.3 Insurance Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc. CommScope, Inc. and
General Semiconductor, Inc.
10.4 Tax Sharing Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc. CommScope, Inc. and
General Semiconductor, Inc.
10.5 Trademark License Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope,
Inc. and General Semiconductor, Inc.
10.6 Transition Services Agreement, dated as of July 25, 1997, between NextLevel Systems, Inc. and General
Semiconductor, Inc.
10.7 Credit Agreement, dated as of July 23, 1997, among General Semiconductor, Inc., Certain Banks, The
Chase Manhattan Bank, as Administrative Agent, and The Chase Manhattan Bank, Bank of America National
Trust and Savings Association, Bank of Montreal, The Bank of Nova Scotia, CIBC, Inc., Credit Lyonnais
New York Branch, Fleet National Bank and Wachovia Bank, N.A., as Co-Agents.
10.8 Amended and Restated General Semiconductor, Inc. 1993 Long-Term Incentive Plan.
10.9 Form of Indemnification Agreement between General Semiconductor, Inc. and its directors and executive
officers.
11 Computation of Earnings Per Share
27 Financial Data Schedule
99 Forward Looking Information