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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
GENERAL SEMICONDUCTOR, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3575653
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(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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (516) 847-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $203.1 million as of February 26, 1999 (based
on the closing price of the Common Stock on the New York Stock Exchange on that
date). For purposes of this computation, shares held by affiliates and by
directors and officers of the registrant have been excluded. Such exclusion of
shares to be held by directors and officers is not intended, nor shall it be
deemed, to be an admission that such persons are affiliates of the registrant.
Number of shares of Common Stock, par value $.01 per share, outstanding as
of February 26, 1999: 36,819,898.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement to be used in conjunction with
the Annual Meeting of Stockholders to be held on May 12, 1999 are incorporated
by reference in Part III.
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PART I
ITEM I. BUSINESS
GENERAL
General Semiconductor, Inc. ("General Semiconductor" or the "Company"), a
Delaware corporation, is a market leader in the discrete segment of the
semiconductor industry with manufacturing facilities in China, France, Germany,
Ireland, Taiwan and the United States. The Company provides customers with a
broad array of power rectifiers, transient voltage suppressors and small signal
transistors and diodes. It has a diversified customer base, in terms of
geography and end-use markets. Customers include leading manufacturers of
consumer electronics, lighting, telecommunications equipment, computers,
automotive and automotive after-market products located around the globe.
1997 COMPANY REORGANIZATION
On January 7, 1997 the Board of Directors of General Instrument Corporation
("GI") approved a plan to divide GI into three separate public companies. To
effect the transaction, GI (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 and all
rights to the related GI trademarks 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. GI retained no ownership
interest in either NextLevel Systems or CommScope. Concurrent with the
Distribution, GI changed its name to General Semiconductor, Inc. and effected a
one for four reverse stock split (the "Stock Split"). On February 2, 1998
NextLevel Systems changed its name to General Instrument Corporation ("General
Instrument").
PRINCIPAL PRODUCTS
General Semiconductor designs, manufactures and sells a broad array of
discrete semiconductors. These products are used throughout industry to
condition current and voltage, to protect electrical circuits from power surges,
to amplify and switch small electrical signals and to regulate voltage levels in
circuits. Products sold include 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.
Discrete semiconductors, unlike integrated circuits (IC's), are single
function components. Power rectifiers, TVS and small signal products are
essential components of most electronic devices and systems. Unlike most IC's,
the Company's discrete semiconductor products are generally characterized by
long product life cycles. As an example, General Semiconductor has been
manufacturing the SUPERECTIFIER(R) for over 25 years. This long life cycle
allows the Company to spend less on equipment and research and development than
higher technology IC semiconductor manufacturers that produce products with
shorter life cycles.
Rectifiers. Rectifiers convert alternating current (AC) into direct
current (DC) which can be used to power electronic equipment. General
Semiconductor offers the widest selection of rectifier products in the world.
Rectifiers offered by the Company include: bridges, fast efficient rectifiers,
glass passivated rectifiers, plastic rectifiers, Schottky rectifiers and
SUPERECTIFIERS(R).
Bridge rectifiers are essential for any electronic equipment which plugs
into an electrical outlet. A bridge rectifier is comprised of four separate
rectifier components configured into a "bridge" arrangement in a single package.
Bridge assemblies convert alternating current (AC) into full wave direct current
(DC) which can be
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utilized by electronic equipment. General Semiconductor manufactures a complete
line of bridge rectifiers that meet the power and case style requirements of
most electronic equipment.
The SUPERECTIFIER(R) is a highly reliable and cost effective component that
incorporates several of the Company's unique technologies. The SUPERECTIFIER(R)
glass-plastic construction provides improved durability and handling
characteristics which makes this product effective in a broad range of end
markets.
General Semiconductor's Schottky rectifier is designed for use in
high-speed and low-power load applications such as computer and computer related
products. Its metal-silicon junctions and majority carrier conduction result in
nearly zero reverse recovery times and very low forward voltage drop. The
Company's unique sputtered metallization process and ion-implanted guard ring
technology create a highly reliable Schottky product. The Company produces
Schottky rectifiers in axial, power and surface mount packages.
Fast efficient rectifiers are a natural extension of the Company's Schottky
product portfolio. These products offer reverse times as low as 25 nanoseconds
at voltage levels as high as 1,000 volts while maintaining the efficiencies of a
lower forward voltage loss. The Company produces fast efficient rectifiers in
axial, power and surface mount packages. Fast efficient rectifiers, like
Schottky rectifiers, are principally used for computer and computer related
applications.
Transient Voltage Suppressors. TVS devices, like fuses, are designed to
provide protection against all types of transient threats, ranging from
electrostatic discharge ("ESD") to induced lightning. Based on controlled
avalanche technology, these voltage clamping devices absorb large amounts of
energy for short periods of time. The Company offers a broad range of
state-of-the-art TVS devices for use in most modern electronic equipment. In
1998, the Company introduced a line of TVS devices specifically designed for
automotive applications. These include the avalanche alternator rectifier and
the surface mount automotive high energy TVS device.
Small Signal Diodes. Small signal diodes perform various functions such as
signal blocking, routing and switching at lower current levels. Product usage
includes telecommunication equipment, personal computer motherboards, automotive
systems, power supplies and consumer electronics.
Small Signal Transistors. Small signal transistors deliver amplification
and switching functions. These products provide the critical switching and
amplification functions that are essential to any modern electronic system.
Zener Diodes. Zener product lines provide a wide variety of specialized
functions for complex electronic circuits. These devices are used as voltage
regulators, voltage reference and voltage suppressors against ESD threats. Zener
diodes are also used in most modern electronic systems and end markets.
END MARKETS AND CUSTOMERS
The Company has a diversified customer base in terms of both geography and
end-use markets. The Company's products are primarily targeted for use in the
automotive, computer, consumer electronics, telecommunications and lighting
industries. The Company's customers are located throughout the world.
The demand for discrete semiconductors has grown as product performance has
been enhanced and size and cost have decreased. In addition, system users and
designers demand systems with more functionality, higher levels of performance,
greater reliability and shorter design cycles, all in smaller packages and at
lower costs. This demand has resulted in increased semiconductor content as a
percentage of overall system content.
Automotive. General Semiconductor's discrete components are found in
critical systems and creature comfort systems throughout automotive design.
Automotive customers seek highly reliable components. The Company's components
are used in many automotive applications including: air conditioning modules,
catalytic converter heaters, climate control modules, engine cooling systems and
ignition modules.
The automotive industry represented 18% of the Company's 1998 sales. Major
automotive customers include Robert Bosch Corporation, Ford Motor Company,
General Motors Corporation and Siemens AG.
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Computer. All computers and their associated peripherals require
sophisticated, controlled electrical energy. General Semiconductor provides the
power rectifying element required in all computer electronic systems to
transform unmanaged, raw electric power into the controlled energy source modern
digital systems require. The Company's products also protect computer systems
from transient threats, such as ESD and induced lightning.
The computer market represented 24% of the Company's 1998 sales. General
Semiconductor's products are sold to computer and computer component
manufacturers in numerous applications, including: switch mode power supplies,
modem cards, P.C.A. boards, logic boards, laser printers, computer processors
and monitors. Major computer customers include Philips NV, Samsung Electronics
Co. Ltd., Acer Incorporated and LG International Corp.
Consumer electronics. General Semiconductor's products are found in a
broad range of consumer products, including: refrigerators, garage door openers,
hair dryers, washers and dryers, microwaves and more. The consumer end market
represented 13% of the Company's 1998 sales. Sony Corporation, Philips NV, LG
International Corp., and Daewoo Corporation represent a few of the Company's
customers in the consumer market.
Telecommunications. General Semiconductor's products perform various
functions for the telecommunications market. Applications using the Company's
products include cordless phones, pagers, cellular base stations, ISDN boards,
satellite dishes and more. This end-market represented 6% of General
Semiconductor's 1998 sales. Major telecommunications customers include Siemens
AG, Lucent Technologies, Nokia Electronics and Nortel Networks.
Lighting. Electronic ballast systems have been replacing older and less
efficient magnetic ballast systems and incandescent bulbs. This, in part, has
increased the demand for the Company's products which are used in electronic
ballasts. Lighting represented 4% of the Company's 1998 sales. Major customers
in this end market include Philips NV, MagneTek Inc., Siemens AG and Motorola,
Inc.
Distributors. Distributors meet the needs of customers with lower volume
requirements. Distributors serve all the Company's end-use markets described
above in all regions. Sales to distributors represented 30% of the Company's
1998 sales. Major distributors include Future Electronics, Inc., Arrow
Electronics Inc., Rutronik Elektron and Taitron Components Inc.
BUSINESS STRATEGY
As a leading manufacturer of discrete semiconductors, the Company's
strategy is to increase its market share in the $12 billion discrete
semiconductor market. This strategy is based on the following:
- Focus on Value-Added Investment and Manufacturing. General Semiconductor
intends to continue to focus on value-added investments in capital, sales
and marketing and research and development. The Company's value-added
manufacturing strategy is based on its high-volume, highly automated
operations, which is currently capable of producing approximately 45
million units per day and gives the Company the competitive advantage of
being a low cost producer. This strategy is characterized by high-quality
and very low-defect output.
- Product Breadth Expansion. General Semiconductor believes that a key
driver in its growth will be new product introduction and expansion in
the breadth of its product portfolio. The Company expects to realize this
growth by internal research and development efforts, strategic
partnerships and strategic acquisitions. The acquisition of ITT
Industries, Inc.'s discrete semiconductor business in October 1997
expanded the Company's product offerings by adding zener diodes, signal
diodes and small signal transistors to the General Semiconductor
portfolio.
- Capitalize on Global Sales and Distribution Capabilities. General
Semiconductor will continue to capitalize on its international presence.
International sales represented approximately 70% of the Company's 1998
sales. The Company currently maintains 10 sales offices worldwide and
utilizes a worldwide sales force of over 1,000 persons, including sales
agents, distributors and representatives.
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Additionally, the Company has approximately 60 direct sales and technical
personnel with over ten years average sales experience in the industry.
General Semiconductor intends to continue its strategy of utilizing
direct and indirect sales forces on a global scale.
- Maintain and Expand Strong Customer Relationships. The Company's
products occupy a segment of the semiconductor industry characterized by
long product life cycles, relatively low research and development
investments and utilization of proven wafer fabrication technology.
General Semiconductor maintains ongoing relationships with major
computer, telecommunications, automotive and consumer electronics
companies worldwide. The Company intends to continue to build upon these
strong relationships to grow with its customers and to increase its
market share.
Management of General Semiconductor believes that future demand for
discrete semiconductors will be driven over time by several factors including
(i) increased electronic content in a broad range of products, devices and
systems, including automotive, consumer products and industrial equipment; (ii)
greater demand for voice and data communications products; (iii) growth in
personal computers and peripheral products; (iv) the rapid replacement of
heavier and less efficient magnetic lighting ballasts with electronic ballasts;
and (v) increasing demand in new international markets. There can be no
assurance, however, that increased competition, excess industry capacity or
technical developments will not adversely affect the Company's revenue and
profitability by causing it to reduce prices or by reducing demand for the
Company's products.
SALES AND DISTRIBUTION
General Semiconductor products are sold primarily to the automotive,
computer, consumer electronics, telecommunications, and lighting industries via
a direct sales force, through distributors and sales representatives. In each of
the years ended December 31, 1998, 1997 and 1996, sales to customers in North
America, Europe and Southeast Asia each represented approximately 30% of the
Company's net sales. Sales to customers in Japan represented the majority of the
balance. General Semiconductor's customer base incorporates a wide array of the
world's largest manufacturers. No single customer accounted for more than 10% of
the Company's sales during the years ended December 31, 1998, 1997 and 1996.
To support its worldwide sales and distribution, General Semiconductor
utilizes more than 1,000 sales personnel worldwide, including sales
representatives, distributors and approximately 60 direct sales and technical
personnel. The Company maintains 10 sales offices located in Melville, New York;
Carlsbad, California; Arlington Heights, Illinois; Norcross, Georgia; Hong Kong;
Munich, Germany; Tokyo and Osaka, Japan; Taipei, Taiwan; and Singapore.
Additionally, the Company leverages information technology to develop and
maintain strong customer relationships. Examples such as electronic data
interchange ("EDI") are used by many of its major customers to facilitate the
order through delivery process. In addition to EDI, the Company intends to
expand upon the scope of services provided via Internet, Extranets and other
electronic means to provide broader services to the marketplace. These services
will provide, among others, improved technical support, on-line order access,
and e-commerce. The use of improved information technology, combined with strong
technical marketing and broad sales channels has helped the Company obtain new
product approvals and market share gains at major customers.
RESEARCH AND DEVELOPMENT
General Semiconductor conducts an internally funded research and
development program and employs approximately 70 full-time research and
development personnel. The Company operates research and development labs in
Ireland and Taiwan that focus primarily on the development of new packaging
technology and a third research and development lab in Westbury, New York which
focuses on applied material sciences. In addition to its in-house research and
development efforts, the Company funds dedicated research through a grant
program with the National Microelectronics Research Center at the University
College, Cork in Ireland.
Research and development expenditures totaled $6.1 million, $6.0 million
and $5.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Research and development expenditures reflect
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continued development and the advancement of new product and packaging
technologies targeted for the automotive, telecommunications and computer
end-market applications.
In 1998 the Company introduced the surface mount high energy automotive TVS
device, the fast recovery mini-bridge and the high voltage TVS products. The new
surface mount automotive high energy TVS device is designed to protect
automotive electronic systems from high energy surges. These products use
General Semiconductor's patented PAR(TM) construction that insures superior high
temperature operation, which is critical for automotive applications. The
fast-recovery mini-bridge is a low-current surface mount bridge rectifier with
fast switching characteristics. This device saves space on printed circuit
boards when compared to standard bridges. The fast recovery time of this device
reduces energy losses for fast switching power supply applications. The Company
has extended the voltage range of its TRANSZORB(TM) TVS devices up to 550 volts,
which is the highest avalanche voltage offered in the market today. These are
offered in both axial and surface-mount packages. Applications for these higher
voltage TVS devices include lighting ballast.
PATENTS
The Company pursues an active policy of seeking patents for new products
and designs. As of December 31, 1998, the Company held 58 U.S. patents. Although
management believes that the Company's patents provide a competitive advantage,
no single patent is material to its business and General Semiconductor intends
to continue to rely on its proprietary knowledge and continuing technological
innovation to develop and maintain its competitive position.
BACKLOG
At December 31, 1998, the Company had an order backlog of approximately
$121.8 million compared with $168.1 million as of December 31, 1997. Order
backlog includes only orders for products scheduled to be shipped within six
months. Orders may be revised or canceled, either pursuant to their terms or as
a result of negotiations; consequently, it is impossible to predict accurately
the amount of backlog orders that will result in sales. While 1998 order levels
have been depressed industry wide due to the global economic conditions, order
backlog has also declined during 1998 in part due to shortened customer lead
times. The Company's backlog may not necessarily be indicative of sales for any
succeeding period.
COMPETITION
The discrete semiconductor industry is highly competitive. General
Semiconductor competes with companies worldwide, some of which have greater
financial, marketing and management resources than the Company. Management
believes, however, that the Company competes favorably on the basis of its
continued commitment to global distribution and customer service, value-added
manufacturing, technological leadership and new product innovation. There can be
no assurance, however, that the Company will have sufficient resources to
continue to make such investments or that the Company will be successful in
maintaining such advantages. The Company believes that its principal competitors
include Motorola, Inc., Philips Electronics N.V., ST Microelectronics N.V., and
a number of Taiwanese and Japanese manufacturers.
EMPLOYEES
As of December 31, 1998, General Semiconductor employed approximately 5,000
people worldwide. Management believes that the Company's relations with both its
union and non-union employees are satisfactory.
RAW MATERIALS
Silicon ingots, molding compound and lead frames typically account for
approximately two-thirds of General Semiconductor's raw material expense.
Management believes that the Company's relations with its suppliers are good and
does not anticipate any supply shortages in the near term.
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Due to the general availability of components and supplies, the Company
does not believe that the loss of any supplier would have a long-term material
adverse effect on its business although set-up costs and delays could occur if
the Company changes suppliers. In the past, delays in delivery of components
have not had a material adverse effect on shipments of the Company's products.
ENVIRONMENT
General Semiconductor is committed to operate worldwide in a manner which
respects and protects the environment. The Company uses hazardous substances and
generates solid and hazardous waste in the ordinary course of its business.
Consequently, 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. Because of the nature of its
business, the Company incurs costs relating to compliance with such
environmental laws. Although General Semiconductor's management believes that
the Company is in substantial compliance with such environmental requirements
there can be no assurance that General Semiconductor's cost to comply with such
requirements will not increase in the future. Although General Semiconductor is
unable to predict what legislation or regulations may be adopted in the future
with respect to environmental protection and waste disposal, compliance with
existing legislation and regulations has not had a material adverse effect on
the Company and is not expected to have a material adverse effect on the
Company's financial position, results of operations or cash flows.
In connection with the Distribution, General Semiconductor retained the
obligations with respect to environmental matters relating to the Company's
discontinued operations and its status as a "potentially responsible party" with
respect to the offsite disposal of wastes. 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. Based on several factors including capital expenditures and expenses for
the Company's remediation programs, and the proportionate share of the cost of
the necessary investigation and eventual remedial work that may be needed to be
performed at the sites for which the Company has been named as a "potentially
responsible party," these matters are not expected to have a material adverse
effect on the financial position, results of operations or cash flows of General
Semiconductor. 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. Reference
is made to Note 10 to the consolidated financial statements and the cautionary
statements contained in Exhibit 99 to this Form 10-K for further information
regarding environmental matters.
INTERNATIONAL OPERATIONS
A significant portion of the Company's products are manufactured or
assembled in Taiwan (Republic of China), the People's Republic of China,
Ireland, Germany and France. These foreign operations are subject to the usual
risks inherent in operating overseas, including risks with respect to
fluctuations in currency exchange rates, economic and political destabilization,
restrictive actions by foreign governments, nationalizations, the laws and
policies of the United States affecting trade, foreign investment and loans and
foreign tax laws. The Company's cost-competitive status relative to its
competitors could be adversely affected if the New Taiwan dollar appreciates
relative to the U.S. dollar or if the Company experiences other unfavorable
movements in foreign currency rates.
International sales generally represent 70% of the Company's worldwide
sales. Sales to the entire Asia/ Pacific region accounted for approximately 35%
of the Company's worldwide sales for the year ended December 31, 1998. During
1998 order trends and average selling prices weakened significantly reflecting
the current economic and currency difficulties in Southeast Asia, the economic
slowdown in Japan and the difficulties in the computer and computer peripherals
industries. However, approximately 50% of the Company's production is currently
in Taiwan, the cost of which has benefited from the weakened New Taiwan Dollar
in relation to the U.S. dollar. Extended underutilization of the Company's
manufacturing facilities,
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resulting in production inefficiency, could result in margin deterioration.
There can be no assurance as to the extent or duration of the impact of these
events on the Company.
For detailed financial information concerning foreign and domestic
operations and export sales, reference is made to Note 15 to the consolidated
financial statements included in Part II of this Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the executive
officers of the Company as of December 31, 1998.
NAME AND TITLE AGE BUSINESS EXPERIENCE
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Ronald A. Ostertag.................. 58 Ronald A. Ostertag has been Chairman, President
Chairman, President and and Chief Executive Officer of General
Chief Executive Officer Semiconductor since the Distribution.
Previously, he held the position of Vice
President of GI since February 1989 and
President of GI's Power Semiconductor Division
since September 1990.
Andrew M. Caggia.................... 50 Andrew M. Caggia has been Senior Vice President
Senior Vice President and and Chief Financial Officer of General
Chief Financial Officer Semiconductor since the Distribution.
Previously, he held the position of Senior Vice
President of Finance at GI's Power Semiconductor
Division since September 1990.
Robert J. Gange..................... 43 Robert J. Gange has been Vice President and
Vice President and Controller of General Semiconductor since the
Controller Distribution and Vice President and Controller
of GI's Power Semiconductor Division since May
1997. From 1995 to 1997, he was Director of
Finance and from 1993 to 1995, Assistant
Controller of GI's Power Semiconductor Division.
Vincent M. Guercio.................. 45 Vincent M. Guercio has been Senior Vice
Senior Vice President, e-commerce President, e-commerce of General Semiconductor
since November 1998. From the Distribution to
November 1998 he was Senior Vice President,
Worldwide Sales and Marketing. Previously, he
had been responsible for this function at GI's
Power Semiconductor Division since January 1992.
W. John Nelson...................... 44 W. John Nelson has been President, Asia/Pacific
President, Operations of General Semiconductor since
Asia/Pacific Operations November 1998. From the Distribution to November
1998 he was Senior Vice President, Asia/Pacific
Operations. Previously, he had been responsible
for this function at GI's Power Semiconductor
Division since March 1994. From 1991 to 1994, he
was President of GI Taiwan.
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NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
Stephen B. Paige.................... 51 Stephen B. Paige has been Senior Vice President,
Senior Vice President, General General Counsel and Secretary of General
Counsel and Secretary Semiconductor since the Distribution.
Previously, he was Senior Vice President and
General Counsel for GI's Power Semiconductor
Division since May 1997. From April 1995 to May
1997, he was Vice President and General Counsel
of Monsanto Business Services, Chicago Region.
From January 1992 to April 1995, he was Vice
President, General Counsel and Secretary of The
NutraSweet Company, a wholly-owned subsidiary of
Monsanto Company.
Linda S. Perry...................... 48 Linda S. Perry has been Senior Vice President,
Senior Vice President, Human Resources of General Semiconductor since
Human Resources September 1997 and its Vice President, Human
Resources since the Distribution. Previously,
she held the position of Vice President, Human
Resources at GI's Power Semiconductor Division
and has had responsibility for this function
since 1988.
John P. Phillips.................... 53 John P. Phillips has been President, Europe and
President, Europe and North America Operations of General
North America Operations Semiconductor since November 1998. From the
Distribution to November 1998 he was Senior Vice
President, European Operations. Previously, he
was Senior Vice President of Worldwide
Technology for GI's Power Semiconductor Division
and had responsibility for this function since
March 1992.
ITEM 2. PROPERTIES
The Company's administrative, production and research and development
facilities are located in Melville and Westbury, New York; Taipei, Taiwan;
Macroom, Ireland; Tianjin, China; Freiburg, Germany; and Colmar, France.
The Melville, New York facility occupies approximately 52,000 square feet
pursuant to a lease expiring in 2004 and is General Semiconductor's worldwide
headquarters. The Company has two additional five year options to renew the
lease.
The Westbury, New York facility occupies approximately 18,000 square feet
pursuant to leases expiring in 2005 with an option to extend the leases for an
additional five years. The Westbury facility is the location of the Company's
epitaxial silicon wafer manufacturing operations and its applied material
sciences research and development laboratory.
The Taipei, Taiwan land and facility is owned and occupies approximately
350,000 square feet. At the Taiwan facility, the Company manufactures standard,
Schottky and fast efficient rectifiers and TVS devices. The Company also
maintains a research and development laboratory at its Taiwan facility.
The Company owns approximately 120,000 square feet of manufacturing space
in Macroom, Ireland. The Company manufactures standard rectifiers, fast
efficient rectifiers, TVS devices and bridge assemblies and maintains a research
and development laboratory at the Ireland facility.
The Company owns an approximately 120,000 square foot manufacturing
facility in Tianjin, China. The China facility is located on land that is leased
by the Company pursuant to a ground lease expiring in 2045. The Company
manufactures rectifiers and bridges at this facility which opened in the third
quarter of 1997.
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The Freiburg, Germany facility occupies approximately 55,000 square feet
pursuant to a lease expiring in 2000 and is the location of the Company's small
signal product, die and wafer manufacturing operations. The Company has the
right to continue the lease until October 2007.
The Colmar, France facility performs the assembly function for the
Company's small signal products product line. This highly automated 63,000
square foot plant is situated on approximately six acres of land owned by the
Company.
Utilization of the Company's facilities vary with economic and other
business conditions. At the present time, the Company has excess capacity for
certain of its products. Management believes that the Company's facilities and
equipment generally are well maintained, in good operating condition and
adequate for its present and anticipated near term operating needs.
ITEM 3. 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 behalf
and as representatives of a class of purchasers of GI common stock during the
period March 21, 1995 through October 18, 1995. The complaint alleges that prior
to the Distribution, 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.
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, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the Distribution on July 28, 1997, GI's Common Stock was traded on
the New York Stock Exchange under the symbol GIC. The information set forth
below relating to the period preceding the Distribution represents market data
of GI and has not been adjusted to reflect the Distribution or the one for four
reverse stock split effected in connection with the Distribution. Since the
Distribution, the Company's Common Stock has been traded on the New York Stock
Exchange under the symbol SEM. The following table sets forth the high and low
sale prices as reported by the New York Stock Exchange for each of the years
ended December 31, 1997 and 1998.
"GIC":
----------------------
HIGH LOW
--------- ---------
YEAR ENDING DECEMBER 31, 1997
First Quarter............................................... $25 5/8 $21 1/2
Second Quarter.............................................. 28 3/8 21 1/4
Third Quarter (through July 25th)........................... 28 7/16 25 7/16
"SEM":
----------------------
HIGH LOW
--------- ---------
YEAR ENDING DECEMBER 31, 1997
July 28th through September 30th............................ $17 1/2 $12 3/8
Fourth Quarter.............................................. 13 9 7/8
HIGH LOW
--------- ---------
YEAR ENDING DECEMBER 31, 1998
First Quarter............................................... $14 3/4 $10 5/8
Second Quarter.............................................. 14 3/4 9 7/8
Third Quarter............................................... 10 1/8 6
Fourth Quarter.............................................. 10 11/16 5 15/16
As of February 26, 1999, there were 466 holders of record of the Company's
Common Stock.
The Company does not currently intend to pay dividends in the foreseeable
future, but to reinvest earnings in the Company's business. The Company's
ability to pay cash dividends on its Common Stock is limited by certain
covenants contained in a credit agreement to which the Company is a party. See
Note 9 to the Consolidated Financial Statements included in Part II of this Form
10-K.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data of General
Semiconductor at the dates and for each of the periods indicated. The financial
data as of December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998 has been derived from the audited General
Semiconductor consolidated financial statements included elsewhere herein. The
financial data as of December 31, 1996, 1995 and 1994 and for the two years
ended December 31, 1995 has been derived from the previously audited
consolidated financial statements not included herein, as adjusted to give
effect to the Distribution. The selected financial data should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Historical consolidated
financial data may not be indicative of General Semiconductor's future
performance.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997(a) 1996 1995 1994
-------- -------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales........................... $401,144 $380,038 $ 361,891 $ 414,269 $ 315,688
Cost of sales....................... 283,582 289,313 230,687 254,991 208,452
Selling, general and
administrative.................... 46,802 44,668 42,594 51,225 45,253
Research and development............ 6,104 5,998 5,838 5,068 3,454
Restructuring....................... 12,324 -- -- -- --
Operating income.................... 47,187 34,916 77,618 97,776 53,140
Interest expense -- net............. (20,026) (14,353) (10,396) (9,461) (13,132)
Income from continuing
operations(b)..................... 18,534 8,872 39,764 57,316 19,541
Net income (loss)................... 18,534 5,933 (1,864) 123,782 246,535
BASIC EARNINGS (LOSS) PER SHARE:
Income from continuing operations... $ 0.50 $ 0.25 $ 1.20 $ 1.86 $ 0.65
Net income (loss)................... 0.50 0.17 (0.06) 4.01 8.15
DILUTED EARNINGS PER SHARE:
Income from continuing operations... $ 0.50 $ 0.25 $ 1.15 $ 1.68 $ 0.65
Net income.......................... 0.50 0.17 0.27 3.86 7.54
CONSOLIDATED BALANCE SHEET DATA:
Accounts receivable................. $ 59,643 $ 54,077 $ 49,629 $ 58,819 $ 49,837
Inventories......................... 39,514 34,309 31,551 23,524 19,510
Property, plant and equipment....... 223,743 218,752 202,281 156,714 135,120
Net assets of discontinued
operations........................ -- -- 1,444,734 1,265,345 1,107,063
Total assets........................ 563,447 550,305 2,057,162 1,799,387 1,633,122
Long-term debt, including current
maturities........................ 286,000 268,074 692,335 732,079 796,849
- ---------------
(a) Includes charges of $33.8 million ($25.3 million net of tax), or $0.69 per
share, primarily related to the separation of GI's Taiwan operations. These
costs include $32.7 million charged to cost of sales and $1.1 million
charged to selling, general and administrative expense.
(b) Income from continuing operations excludes the impact of the cumulative
effect of a change in accounting principle of $1.9 million for 1994, as it
was not practicable to allocate such amounts between continuing and
discontinued operations. This amount is included in net income.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1998 COMPANY RESTRUCTURING
On November 6, 1998, the Company announced a restructuring plan designed to
enhance the interface of operations and customers, to improve its cost
structure, efficiency and its competitive position and to accelerate growth. The
restructuring included reducing the workforce by decentralizing certain
purchasing, marketing, finance and research and development functions and
providing early retirement to a group of employees, closing two sales offices
and writing off assets related to an unprofitable product that will no longer be
manufactured. Restructuring charges recorded in the fourth quarter included
approximately $8.4 million in charges primarily related to severance and early
retirement costs and $3.9 million in non-cash charges for asset write-offs.
1997 COMPANY REORGANIZATION
On January 7, 1997 the Board of Directors of GI approved a plan to divide
GI into three separate public companies in a transaction that was finalized on
July 28, 1997. Concurrent with the Distribution, GI changed its name to General
Semiconductor, Inc. and effected a one for four reverse stock split. Following
the Distribution, General Semiconductor began operations as a stand-alone
publicly held company. The revenues, costs and expenses and cash flows of the
businesses transferred to the General Instrument and CommScope segments (the
"Discontinued Operations"), have been excluded from the respective captions in
the Consolidated Statements of Operations and Consolidated Statements of Cash
Flows and have been reported through the Distribution Date as: "Income (Loss)
from discontinued operations", net of applicable income taxes and as "Cash (used
in) provided by discontinued operations" for all periods presented in the
Company's consolidated financial statements included elsewhere herein. Unless
otherwise noted, the following Management's Discussion and Analysis pertains to
the continuing operations of General Semiconductor.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 WITH
THE YEAR ENDED DECEMBER 31, 1997
NET SALES
Net sales for the year ended December 31, 1998 of $401.1 million increased
$21.1 million from $380.0 million for the year ended December 31, 1997. The 5.6%
increase reflects a 7% increase in unit volume as well as the inclusion of small
signal product sales (business acquired on October 1, 1997), partially offset by
an approximate 10% decline in worldwide average selling prices. International
sales, including export sales from the U.S., represented approximately 70% of
net sales in each of the years ended December 31, 1998 and 1997.
COST OF SALES
Cost of sales for the year ended December 31, 1998 of $283.6 million
decreased 2% from $289.3 million for 1997. Excluding 1997 pre-tax charges of
$32.7 million primarily related to the separation of the Taiwan operations of
GI, cost of sales increased $27.0 million or 10.5% principally due to increased
costs related to higher operating levels and the full year effect of the small
signal products acquisition offset, in part, by improved factory performance and
cost reduction. Cost of sales, as a percentage of net sales, was 70.7% for 1998
compared to 67.5% for 1997, excluding the 1997 pre-tax charges discussed above.
This increase primarily results from the decline in average selling prices
discussed above.
Accordingly, gross margin for the year ended December 31, 1998 represents
29.3% of net sales compared with 32.5% for the comparable prior year period,
excluding the 1997 pre-tax charges discussed above. This decrease reflects the
margin percentage reduction that was expected due to the full year effect of the
small signal products acquisition and erosion of average selling prices,
partially offset by improved factory performance. Without the small signal
products acquisition, the year over year decrease in gross margin would have
been less than one percentage point.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased to $46.8 million for
the year ended December 31, 1998 compared to $44.7 million in 1997 and
represented 11.7% and 11.8% of sales, respectively. The $2.1 million increase
includes higher selling costs to support increased sales. No other expense
increase is individually significant.
RESEARCH AND DEVELOPMENT
Research and development expense for the year ended December 31, 1998 was
$6.1 million compared to $6.0 million in 1997 and represented 1.6% of sales in
each period. Research and development expenditures reflect the continued
development of new products and modifications of existing products and
manufacturing technologies to achieve cost reductions.
NET INTEREST EXPENSE
Net interest expense increased $5.6 million, to $20.0 million for the year
ended December 31, 1998 from $14.4 million in 1997. Net interest expense in 1997
represents an allocation based upon General Semiconductor's net assets as a
percentage of total assets of GI through the Distribution Date and actual
interest expense thereafter. Pro forma net interest expense, assuming a net debt
level of $275.0 million through the Distribution Date and amortization of debt
issuance costs associated with the new borrowings, would have been $19.6 million
for the year ended December 31, 1997.
INCOME TAXES
The Company's effective income tax rate was 31.6% for 1998 compared with
56.8% for 1997 (37.0% excluding the tax effects, at the applicable rates, of the
costs incurred to separate the GI Taiwan operations). The decrease from the
37.0% described above, relates primarily to increased income of foreign
subsidiaries taxed at rates lower than U.S. rates.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 WITH
THE YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales for the year ended December 31, 1997 of $380.0 million increased
$18.1 million from $361.9 million for the year ended December 31, 1996. The 5%
increase reflects increased unit volume as well as the inclusion of small signal
product sales resulting from the Company's October 1, 1997 acquisition,
partially offset by an approximate 15% decline in average selling prices.
Foreign exchange rate changes negatively affected sales by approximately 3%.
Orders increased almost 77% in 1997; 1996 orders were depressed due to industry
wide excess capacity. International sales, including export sales from the U.S.,
represented approximately 70% of net sales in each of the years ended December
31, 1997 and 1996.
COST OF SALES
Cost of sales for the year ended December 31, 1997 of $289.3 million
increased 25.4% from $230.7 million for 1996. Excluding pre-tax charges of $32.7
million primarily related to the separation of the Taiwan operations of GI, cost
of sales increased $25.9 million or 11.2% principally due to increased costs
related to higher operating levels offset, in part, by improved factory
performance. Cost of sales, as a percentage of net sales, was 76.1% for 1997
(67.5% excluding the pre-tax charges discussed above) compared to 63.7% for
1996. This increase primarily results from the decline in average selling prices
discussed above.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased to $44.7 million for
the year ended December 31, 1997 compared to $42.6 million in 1996 and
represented 11.8% of sales in each period. The increase primarily relates to
higher selling costs and compensation expense associated with increased sales.
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15
RESEARCH AND DEVELOPMENT
Research and development expense for the year ended December 31, 1997 was
$6.0 million compared to $5.8 million in 1996 and represented 1.6% of sales in
each period. Research and development expenditures reflect the continued
development of new products and modifications of existing products and
manufacturing technologies to achieve cost reductions.
NET INTEREST EXPENSE
Net interest expense increased $4.0 million, to $14.4 million for the year
ended December 31, 1997 from $10.4 million in 1996. Net interest expense
represents an allocation based upon General Semiconductor's net assets as a
percentage of total assets of GI for 1996 and through the Distribution Date for
1997. Pro forma net interest expense, assuming a net debt level of $275.0
million through the Distribution Date and amortization of debt issuance costs
associated with the new borrowings, would have been $19.6 million for the years
ended December 31, 1997 and 1996.
INCOME TAXES
The Company's effective income tax rate was 56.8% for 1997 (37.0% excluding
the tax effects, at the applicable rates, of the costs incurred to separate the
GI Taiwan operations) compared with 40.8% for 1996. The decrease in the
effective rate, excluding the tax effects of the costs described above, 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 General
Instrument and CommScope have been reported, net of applicable income taxes, as
"Income (Loss) from discontinued operations".
Discontinued operations includes $52.9 million and $2.7 million, net of
applicable income taxes, for the years ended December 31, 1997 and December 31,
1996, respectively, for costs incurred primarily related to the separation of
the Taiwan operations of GI between General Semiconductor and General
Instrument, and for professional fees and certain other administrative and
financing costs incurred directly related to the Distribution.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, working capital was $51.7 million, compared to $16.7
million at December 31, 1997. The working capital increase of $35.0 million
resulted primarily from the payment during the first half of 1998 of the $25.2
million remaining liability at December 31, 1997 related to the Distribution, an
increase in accounts receivable associated with increased days outstanding,
increased inventories, repayment of the Taiwan loan discussed below and a
reduction in income taxes payable. As of December 31, 1998 approximately $7.8
million remains accrued for costs related to the 1998 restructuring. Such
amounts are expected to be substantially paid by June 30, 1999. As a result the
current ratio increased to 1.7 to 1 at December 31, 1998 from 1.2 to 1 at
December 31, 1997.
During the year ended December 31, 1998, the Company invested $26.9 million
in property, plant and equipment principally directed to strategic initiatives
and automation compared with $29.2 million and $60.3 million in 1997 and 1996,
respectively. The higher level of capital spending incurred during 1996 was
primarily attributable to equipment for capacity expansion to meet expected
future demand and the construction of the manufacturing facility in Tianjin,
China. While the Company does not have any material commitments for capital
expenditures it does expect to invest approximately $30.0 million in 1999
principally directed at strategic initiatives and automation.
At December 31, 1998, long-term debt was $286.0 million, compared to $263.8
million at December 31, 1997. At December 31, 1997 the Company had a $60 million
loan agreement with a consortium of banks in Taiwan. On February 26, 1998, the
Company consolidated its debt and repaid the entire Taiwan loan balance
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16
of $46.1 million with proceeds from borrowings under its $350.0 million credit
facility which matures on December 31, 2002.
In July 1997, the Company entered into a bank credit agreement, which was
amended in December 1998, (as amended the "Credit Agreement") which provides for
a $350.0 million secured revolving credit facility that 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: the Adjusted Base Rate (as defined in the Credit
Agreement), or a Eurodollar rate (LIBOR) plus a margin which varies based on the
Company's ratio of indebtedness to earnings before interest, 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. The December 1998 amendment amended certain
covenant compliance calculations to provide the Company with greater flexibility
to execute the restructuring announced on November 6, 1998. At December 31,
1998, the Company was in compliance with all such amended covenants.
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 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
The following discussion and the estimated amounts generated from the
sensitivity analyses referred to below include forward-looking statements of
market risk which assume for analytical purposes that certain adverse market
conditions may occur. Actual future market conditions may differ materially from
such assumptions because the amounts noted below are the result of analyses used
for the purpose of assessing possible risks and the mitigation thereof.
Accordingly, the forward-looking statements should not be considered projections
by General Semiconductor of future events or losses.
The Company's cash flows and earnings are subject to fluctuations resulting
from changes in foreign currency exchange rates and interest rates. The Company
manages its exposure to these market risks through internally established
policies and procedures and, when deemed appropriate, through the use of
derivative financial instruments. The Company's policy does not allow
speculation in derivative instruments for profit or execution of derivative
instrument contracts for which there are no underlying exposures. The Company
does not use financial instruments for trading purposes and is not a party to
any leveraged derivatives. The Company monitors its underlying market risk
exposures on an ongoing basis and believes that it can modify or adapt its
hedging strategies as needed.
The Company measured its market risk, related to its holdings of financial
instruments based on changes in interest and foreign exchange rates, utilizing a
sensitivity analysis. The sensitivity analysis measures the potential loss in
fair values, cash flows or earnings based on a hypothetical 10% change in
interest and foreign exchange rates. The Company used current market rates on
its market risk sensitive assets and liabilities to perform the sensitivity
analysis. Certain items such as obligations for pension and post retirement
benefits were not included in the analysis.
The Company is exposed to credit risk in the event of non-performance by
the counterparties to its foreign exchange-forward contracts. The Company
believes that the various counterparties with which the Company enters into
these agreements consist of only financially sound institutions and,
accordingly, believes that the credit risk for non-performance of these
contracts is not significant.
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Additional information regarding the Company's financial instruments is
contained in Notes 9 and 14 to the Consolidated Financial Statements included in
Part II of this Form 10-K.
FOREIGN CURRENCY RISK
Almost all of General Semiconductor's products are manufactured in
Southeast Asia and Europe and a significant portion are sold internationally.
Therefore, the Company is subject to market risk related to changes in foreign
exchange rates. On a selective basis, the Company enters into forward and
purchased option contracts designed to hedge the currency exposure of
contractual and other firm commitments denominated in foreign currencies and the
currency exposure of anticipated but not yet committed transactions expected to
be denominated in foreign currencies.
The Company's principal foreign currency exposures are in the New Taiwan
Dollar, the Japanese Yen and in the major European currencies (Irish Punt,
German Mark, French Franc and the British Pound). The Company's committed
exposures relate primarily to trade payables, accounts receivable and employee
compensation. At December 31, 1998, the Company had committed exposures of $51.8
million.
As of December 31, 1998 and 1997, the Company had outstanding forward and
purchased option contracts in the amounts of $21.3 million and $19.9 million,
respectively, comprised of foreign currencies which were to be sold, and $79.6
million and $23.2 million, respectively, comprised of foreign currencies which
were to be purchased. All outstanding forward and purchased option contracts at
December 31, 1998 mature within twelve months and have an aggregate fair value
of $1.1 million.
At December 31, 1998, the impact of a hypothetical 10% adverse change in
exchange rates on the fair value of foreign exchange forward contracts and
purchased options is a reduction in fair value of $8.1 million. This impact
would be offset, in part, by an increase in the fair value of the Company's
committed exposures of $8 million.
INTEREST RATE RISK
The Company is exposed to changes in U.S. dollar LIBOR interest rates on
its floating rate revolving credit facility. At December 31, 1998, the
outstanding balance under this facility was $286 million. On a selective basis,
the Company from time to time enters into interest rate swap or cap agreements
to reduce the potential negative impact increases in interest rates could have
on its outstanding variable rate debt. The impact of interest rate instruments
on the Company's results of operations in each of the three years ended December
31, 1998 was not significant.
In 1998, the Company entered into two interest rate swap transactions with
a term of one year beginning in January, 1998. Pursuant to these agreements, the
Company paid a fixed interest rate averaging 5.96% on a notional amount of $100
million and received interest on the $100 million notional amount based on a
three month LIBOR rate set quarterly beginning in January, 1998. The fair value
of these swap transactions at December 31, 1998 was not significant.
In February 1998, the Company also purchased two interest rate caps with a
notional amount of $50 million each. The caps became effective in April and
June, 1998, with terms of nine and six months, respectively. Under the terms of
the caps, the Company was paid an amount equal to the excess, if any, of three
month LIBOR above 6%, multiplied by the notional amounts. The cost of the caps
was not material.
A hypothetical 10% increase in interest rates would adversely affect the
Company's pretax earnings and cash flow by $1.6 million annually, due to the
Company's floating rate debt. Earnings and cash flows would not be significantly
impacted by the Company's interest rate swaps or cap agreements existing at
December, 31 1998, due to a 10% adverse change in interest rates.
INTERNATIONAL MARKETS
Management believes that a significant amount of General Semiconductor's
sales in 1999 will continue to come from international markets.
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International sales generally represent 70% of the Company's worldwide
sales. Sales to the Asia/Pacific region accounted for approximately 35% of the
Company's worldwide sales for the year ended December 31, 1998. During 1998
order trends and average selling prices weakened significantly reflecting the
current economic and currency difficulties in Southeast Asia, the economic
slowdown in Japan and the difficulties in the computer and computer peripherals
industries. However, approximately 50% of the Company's production is currently
in Taiwan, the cost of which has benefited from the weakened New Taiwan Dollar
in relation to the U.S. dollar. Extended underutilization of the Company's
manufacturing facilities, resulting in production inefficiency, could result in
margin deterioration. There can be no assurance as to the extent or duration of
the impact of these events on the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998 the Financial Accounting Standards Board issued 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, 1999. The Company is evaluating the impact SFAS 133 will have on its
financial statements.
YEAR 2000
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 modules will be installed in 2000. The Company is currently
modifying its existing manufacturing applications and expects them to be Year
2000 compliant by June 30, 1999.
Since the Company's financial, distribution and manufacturing applications
are expected to be 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 65% 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. At the current time, it is
difficult for the Company to specifically identify its most reasonably likely
worst case Year 2000 scenario.
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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. However, the Company can give no assurance that the
systems of other companies or government agencies on which the Company relies
will be converted on time or that a failure to convert by another company or a
conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company.
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 our pricing and
marketing strategies; however, any such impact is not known at this time.
EFFECT OF INFLATION
General Semiconductor attempts to minimize the effect of inflation on
earnings by controlling its operating costs and selling prices. In the opinion
of management, the rate of inflation has not had a material impact on the
Company's results of operations.
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 for the year
ended December 31, 1998, the Company's 1998 Annual Report to Stockholders, any
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" and "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-K for a discussion of the factors that may cause actual results to
differ from the results discussed in these forward looking statements.
18
20
19
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Financial Statements of General Semiconductor, Inc.
Management's Responsibility for Financial Statements...... 21
Independent Auditors' Report.............................. 22
Consolidated Financial Statements:
Consolidated Balance Sheets -- as of December 31, 1998
and 1997.............................................. 23
Consolidated Statements of Operations -- Years ended
December 31, 1998, 1997 and 1996..................... 24
Consolidated Statements of Stockholders'
Equity -- Years ended
December 31, 1998, 1997 and 1996..................... 25
Consolidated Statements of Cash Flows -- Years ended
December 31, 1998, 1997 and 1996..................... 26
Notes to Consolidated Financial Statements....... 27 through 47
20
22
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and accuracy of the
consolidated financial statements and other information included in this report.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles using, where appropriate, management's
best estimates and judgments.
In meeting its responsibility for the reliability of the consolidated
financial statements, management has developed and relies on the Company's
system of internal accounting control. The system is designed to provide
reasonable assurance that assets are safeguarded and that transactions are
executed as authorized and are properly recorded. The system is augmented by
written policies and procedures and an internal audit department.
The Board of Directors reviews the consolidated financial statements and
reporting practices of the Company through its Audit Committee, which is
composed entirely of directors who are not officers or employees of the Company.
The Audit Committee meets with the independent auditors, the internal auditor
and management to discuss audit scopes and results and to consider internal
control and financial reporting matters. Both the independent and internal
auditors have direct unrestricted access to the Audit Committee. The entire
Board of Directors reviews the Company's financial performance and financial
plan.
Ronald A. Ostertag Andrew M. Caggia
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
21
23
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
General Semiconductor, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of General
Semiconductor, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of General Semiconductor, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Jericho, New York
February 3, 1999
22
24
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT STOCK PAR VALUE)
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 3,225 $ 5,192
Accounts receivable, less allowance for doubtful accounts of
$769 and $825, respectively............................... 59,643 54,077
Inventories................................................. 39,514 34,309
Prepaid expenses and other current assets................... 12,010 9,890
Deferred income taxes....................................... 13,738 14,263
-------- --------
Total current assets.............................. 128,130 117,731
Property, plant and equipment -- net........................ 223,743 218,752
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $43,929 and $38,784,
respectively.............................................. 162,751 167,895
Deferred income taxes....................................... 29,376 26,509
Intangibles and other assets, less accumulated amortization
of $11,099 and $9,228, respectively....................... 19,447 19,418
-------- --------
TOTAL ASSETS................................................ $563,447 $550,305
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 31,343 $ 38,332
Accrued expenses............................................ 45,084 58,352
Current portion of long-term debt........................... -- 4,310
-------- --------
Total current liabilities......................... 76,427 100,994
Long-term debt.............................................. 286,000 263,764
Deferred income taxes....................................... 21,390 21,710
Other non-current liabilities............................... 74,283 77,476
-------- --------
Total liabilities................................. 458,100 463,944
-------- --------
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 and 36,887 shares issued, respectively............. 369 369
Additional paid-in capital.................................. 507 55
Retained earnings........................................... 111,842 93,308
-------- --------
112,718 93,732
Less -- Treasury stock, at cost, 104 shares................. (7,371) (7,371)
-------- --------
Total stockholders' equity........................ 105,347 86,361
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $563,447 $550,305
======== ========
See notes to consolidated financial statements.
23
25
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
NET SALES.................................................. $401,144 $380,038 $361,891
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of sales............................................ 283,582 289,313 230,687
Selling, general and administrative...................... 46,802 44,668 42,594
Research and development................................. 6,104 5,998 5,838
Amortization of excess of cost over fair value of net
assets acquired....................................... 5,145 5,143 5,154
Restructuring............................................ 12,324 -- --
-------- -------- --------
Total operating costs and expenses............... 353,957 345,122 284,273
-------- -------- --------
OPERATING INCOME........................................... 47,187 34,916 77,618
Other expense-net.......................................... (71) (42) (51)
Interest expense-net....................................... (20,026) (14,353) (10,396)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES........................................ 27,090 20,521 67,171
Provision for income taxes................................. (8,556) (11,649) (27,407)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS.......................... 18,534 8,872 39,764
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of income tax
expense of $22,073 in 1997 and income tax benefit of
$20,026 in 1996.......................................... -- (2,939) (41,628)
-------- -------- --------
NET INCOME (LOSS).......................................... $ 18,534 $ 5,933 $ (1,864)
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.................................................... 36,811 35,414 32,924
Diluted.................................................. 36,899 35,576 36,852
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations.................................... $ 0.50 $ 0.25 $ 1.20
Discontinued operations.................................. -- (0.08) (1.26)
-------- -------- --------
Net income (loss)........................................ $ 0.50 $ 0.17 $ (0.06)
======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations.................................... $ 0.50 $ 0.25 $ 1.15
Discontinued operations.................................. -- (0.08) (0.88)
-------- -------- --------
Net income............................................... $ 0.50 $ 0.17 $ 0.27
======== ======== ========
See notes to consolidated financial statements.
24
26
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED OTHER
COMPREHENSIVE INCOME
-------------------- TOTAL
COMMON STOCK ADDITIONAL UNEARNED UNREALIZED STOCK-
--------------- PAID-IN RETAINED TREASURY COMPEN- GAIN ON HOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK SATION INVESTMENT EQUITY
------ ------ ----------- --------- -------- -------- -------------------- -----------
BALANCE, JANUARY 1, 1996... 31,509 $316 $ 667,134 $ 256,416 $(7,246) $(1,277) $ -- $ 915,343
Exercise of stock options
and related tax
benefit.................. 40 -- 3,475 -- -- -- -- 3,475
Comprehensive income:
Net loss................. -- -- -- (1,864) -- -- -- --
Total comprehensive
income................... -- -- -- -- -- -- -- (1,864)
Amortization of unearned
compensation............. -- -- -- -- -- 612 -- 612
Treasury stock
transactions............. -- -- -- -- (25) -- -- (25)
Conversion of Convertible
Junior Subordinated
Notes -- net............. 2,737 27 255,585 -- -- -- -- 255,612
------ ---- ----------- --------- ------- ------- -------- -----------
BALANCE, DECEMBER 31,
1996..................... 34,286 343 926,194 254,552 (7,271) (665) -- 1,173,153
Exercise of stock options
and related tax
benefit.................. 200 2 19,361 -- -- -- -- 19,363
Comprehensive income:
Net income............... -- -- -- 5,933 -- -- -- --
Unrealized gain on
investment, net of
tax.................... -- -- -- -- -- 22,018 --
Total comprehensive
income................... -- -- -- -- -- -- -- 27,951
Amortization of unearned
compensation............. -- -- -- -- -- 243 -- 243
Treasury stock
transactions............. -- -- -- -- (100) -- -- (100)
Conversion of Convertible
Junior Subordinated
Notes -- net............. 2,397 24 226,636 -- -- -- -- 226,660
Distribution of General
Instrument and
Commscope................ -- -- (1,172,191) (167,177) -- 422 (22,018) (1,360,964)
Common stock issued........ 4 -- 55 -- -- -- -- 55
------ ---- ----------- --------- ------- ------- -------- -----------
BALANCE, DECEMBER 31,
1997..................... 36,887 369 55 93,308 (7,371) 0 0 86,361
Exercise of stock options
and related tax
benefit.................. 38 -- 452 -- -- -- -- 452
Comprehensive income:
Net income............... -- -- -- 18,534 -- -- -- --
Total comprehensive
income................... 18,534
------ ---- ----------- --------- ------- ------- -------- -----------
BALANCE, DECEMBER 31,
1998..................... 36,925 $369 $ 507 $ 111,842 $(7,371) $ -- $ -- $ 105,347
====== ==== =========== ========= ======= ======= ======== ===========
See notes to consolidated financial statements.
25
27
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- --------- ---------
OPERATING ACTIVITIES:
Income from continuing operations......................... $ 18,534 $ 8,872 $ 39,764
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operating
activities:
Depreciation and amortization.......................... 24,982 24,232 22,613
Asset write-off in conjunction with restructuring...... 3,865 -- --
Changes in assets and liabilities, net of effect of
business acquired:
Accounts receivable.................................. (5,565) (13,335) 9,190
Inventories.......................................... (5,204) 2,465 (8,028)
Prepaid expenses and other current assets............ (2,694) (3,208) 663
Other non-current assets............................. (766) 666 44
Deferred income taxes................................ (2,662) (1,236) 14,736
Accounts payable and accrued expenses................ 5,151 9,274 (12,655)
Other non-current liabilities........................ (3,193) 1,685 (222)
Other.................................................. (689) (331) 2,014
-------- --------- ---------
Net cash provided by continuing operating activities........ 31,759 29,084 68,119
-------- --------- ---------
Cash (used in) provided by discontinued operations.......... (25,177) 145,452 (225,227)
-------- --------- ---------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment............ (26,898) (29,208) (60,299)
Proceeds from sale (purchases) of short-term
investments............................................ -- 24,974 (24,974)
Proceeds from sale of assets.............................. -- 3,000 4,368
Payment for business acquired............................. -- (8,982) --
-------- --------- ---------
Net cash used in investing activities....................... (26,898) (10,216) (80,905)
-------- --------- ---------
FINANCING ACTIVITIES:
Costs associated with the issuance of debt and Common
Stock.................................................. -- (1,130) (1,053)
Net proceeds from (repayments of ) revolving credit
facilities............................................. 64,000 (192,000) 231,000
Redemption of Convertible Junior Subordinated Notes....... -- (245) (6,440)
Principal repayment of debt............................... (46,074) (4,310) (4,310)
Proceeds from exercise of stock options................... 423 18,305 2,686
-------- --------- ---------
Net cash provided by (used in) financing activities......... 18,349 (179,380) 221,883
-------- --------- ---------
Decrease in cash and cash equivalents....................... (1,967) (15,060) (16,130)
Cash and cash equivalents, beginning of year................ 5,192 20,252 36,382
-------- --------- ---------
Cash and cash equivalents, end of year...................... $ 3,225 $ 5,192 $ 20,252
======== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION, RELATING TO CONTINUING AND DISCONTINUED OPERATIONS:
Income taxes paid......................................... $ 9,776 $ 37,224 $ 55,647
Interest paid............................................. $ 19,677 $ 32,033 $ 41,766
See notes to consolidated financial statements.
26
28
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
General Semiconductor, Inc. ("General Semiconductor" or the "Company") is a
world leader in the discrete segment of the semiconductor industry. The Company
designs, manufactures and sells low-to-medium-power rectifiers, small signal
transistors and transient voltage suppression ("TVS") components in axial,
bridge, surface mount and array 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.
General Instrument Corporation ("GI") (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 and all rights to the related GI trademarks to its wholly-owned
subsidiary NextLevel Systems, Inc. ("NextLevel"), 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
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 and CommScope began
operating as independent entities with publicly traded common stock. GI retained
no ownership interest in either NextLevel or CommScope. Concurrent with the
Distribution, GI changed its name to General Semiconductor, Inc. and effected a
one for four reverse stock split (the "Stock Split"). On February 2, 1998
NextLevel changed its name to General Instrument Corporation ("General
Instrument").
In this report, all share and per share amounts have been retroactively
restated to reflect the Stock Split. In addition, the number of common shares
issued have been adjusted to reflect the 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 January 1, 1996, the earliest period
reported.
The revenues, costs and expenses and cash flows of the businesses
transferred to General Instrument and CommScope (the "Discontinued Operations"),
have been excluded from the respective captions in the Consolidated Statements
of Operations and Consolidated Statements of Cash Flows and have been reported
through the Distribution Date as "Income (Loss) from discontinued operations",
net of applicable income taxes and as "Cash (used in) provided by discontinued
operations" for all periods presented. For the purpose of governing certain of
the ongoing relationships among General Semiconductor, General Instrument 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 GI,
as well as tax sharing, and other matters.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of General Semiconductor and its wholly-owned
subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates. The preparation of the accompanying consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the
27
29
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of the financial statements and the reported amounts of sales and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents. The Company considers all highly liquid investments with
a maturity of three months or less at the date of purchase to be cash
equivalents.
Inventories. Inventories are stated at the lower of cost, determined on a
first-in, first-out ("FIFO") basis, or market.
Property, Plant and Equipment. Property, plant and equipment are stated at
cost. Provisions for depreciation are based on estimated useful lives of the
assets using the straight-line method. Useful lives are 12 to 40 years for
buildings and improvements; estimated useful life or lease term, whichever is
shorter, for leasehold improvements and 3 to 10 years for machinery and
equipment. The cost of maintenance and repairs is charged to operations as
incurred.
Intangible Assets. Intangible assets consist primarily of patents which
are amortized on a straight-line basis over their useful lives not exceeding 20
years.
Excess of Cost Over Fair Value of Net Assets Acquired. The excess of cost
over fair value of net assets acquired is being amortized on a straight-line
basis over 40 years. Management periodically evaluates the appropriateness of
both the carrying value and remaining life of the excess of cost over fair value
of net assets acquired by assessing recoverability based on forecasted operating
cash flows, on an undiscounted basis, and other factors.
Long-Lived Assets. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," the Company evaluates long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying values of such assets may not be recoverable. The Company evaluates
the carrying values of such assets using future undiscounted cash flows.
Revenue Recognition. The Company recognizes revenue when products are
shipped with appropriate provisions for uncollectible accounts and credits for
returns.
Foreign Currency Translation. The Company has determined the U.S. dollar
to be the functional currency of all foreign subsidiaries. Accordingly, gains
and losses recognized as a result of translating foreign subsidiaries' monetary
assets and liabilities from local foreign currencies to U.S. dollars are
reflected in the accompanying consolidated statements of operations.
Research and Development. The Company charges research and development
expenses to operations as incurred.
Environmental Liabilities. The Company accounts for environmental
expenditures in accordance with Statement of Position 96-1, "Environmental
Remediation Liabilities". Accordingly, the Company accrues for environmental
expenses resulting from existing conditions that relate to past operations when
the costs are probable and reasonably estimable.
Income Taxes. Deferred income taxes reflect the future tax consequences of
differences between the financial reporting and income tax bases of assets and
liabilities. Deferred income taxes are provided for the income tax liabilities
to be incurred on the repatriation of undistributed earnings of the Company's
foreign subsidiaries, except for locations where the Company has designated
earnings to be permanently reinvested.
Comprehensive Income. In 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement establishes rules for the reporting of
comprehensive income and its components. Comprehensive income is presented in
the Consolidated Statement of Stockholders' Equity. The adoption of
28
30
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 130 had no impact on total stockholders' equity. Prior year financial
statements have been reclassified to conform to the SFAS 130 requirements.
Reclassifications. Certain prior year amounts have been reclassified to
conform to the current year presentation.
3. ACQUISITION
On October 1, 1997 the Company purchased certain assets and assumed certain
liabilities related to the discrete semiconductor business of ITT Industries,
Inc. for $8.0 million plus $1.0 million in direct transaction costs. The
acquisition was accounted for as a purchase transaction and, accordingly, the
results of operations are included in the Consolidated Statement of Operations
since the date of acquisition. The pro forma effects, assuming this transaction
was effective January 1, 1996, were not material to the Company's results of
operations, financial position or cash flows for the years ended December 31,
1997 and 1996.
4. INVENTORIES
Inventories consist of:
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Raw materials...................................... $ 5,139 $ 7,181
Work in process.................................... 14,181 12,052
Finished goods..................................... 20,194 15,076
------- -------
Total.............................................. $39,514 $34,309
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Land and land improvements......................... $ 76,321 $ 76,328
Buildings, improvements and leasehold
improvements..................................... 64,106 63,485
Machinery and equipment............................ 232,690 208,067
--------- ---------
373,117 347,880
Accumulated depreciation........................... (149,374) (129,128)
--------- ---------
Property, plant and equipment, net................. $ 223,743 $ 218,752
========= =========
Depreciation expense aggregated $18.0 million, $16.8 million and $14.4
million for 1998, 1997 and 1996, respectively.
29
31
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consist of:
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Salaries and compensation liabilities.............. $14,355 $14,849
Distribution and reorganization liabilities........ -- 18,734
Restructuring liabilities.......................... 7,809 --
Benefit plan liabilities........................... 7,709 4,916
Other.............................................. 15,211 19,853
------- -------
Total.............................................. $45,084 $58,352
======= =======
In connection with the Distribution, the Company recorded in income (loss)
from continuing operations a pre-tax charge of $32.7 million to cost of sales
and $1.1 million to selling, general and administrative expenses during the year
ended December 31, 1997. These costs relate to employees of General
Semiconductor and were incurred in connection with the separation of the Taiwan
operations between General Semiconductor and General Instrument.
On November 6, 1998 the Company announced a restructuring plan designed to
enhance the interface of operations and customers, to improve its cost
structure, efficiency and its competitive position and to accelerate growth. The
restructuring included reducing the workforce by decentralizing certain
purchasing, marketing, finance and research and development functions and
providing early retirement to a group of employees, closing two sales offices
and writing off assets related to an unprofitable product that will no longer be
manufactured. Restructuring charges recorded in the fourth quarter included
approximately $8.4 million in charges primarily related to severance and early
retirement costs and $3.9 million in non-cash charges for asset write-offs.
7. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of:
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Environmental liabilities.......................... $29,363 $32,415
Benefit plan liabilities........................... 35,596 36,070
Other.............................................. 9,324 8,991
------- -------
Total.............................................. $74,283 $77,476
======= =======
8. INCOME TAXES
General Semiconductor, General Instrument 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 related to the businesses of GI for tax periods prior to, including and
following the Distribution and with respect to certain other tax matters.
General Instrument is responsible for consolidated federal income taxes,
consolidated or combined state income taxes and separate state income taxes of
GI and its subsidiaries and preparation and filings of the applicable returns
through July 25, 1997. Such liability was determined assuming a closing of the
books on July 25, 1997. Liability for foreign income taxes and other taxes was
generally allocated to the legal entity on which such taxes were imposed except
that liability for taxes relating to the transferred businesses (as defined in
the Tax Sharing Agreement) were generally allocated to General Instrument.
30
32
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Notwithstanding the above, each of General Instrument, CommScope and
General Semiconductor is 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
arms-length negotiations with unaffiliated parties.
The domestic and foreign components of income from continuing operations
before income taxes is:
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
Domestic.............................................. $ 8,141 $16,354 $62,084
Foreign............................................... 18,949 4,167 5,087
------- ------- -------
Total................................................. $27,090 $20,521 $67,171
======= ======= =======
The components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
Current:
Federal............................................... $ 3,848 $ 4,691 $ 9,477
Foreign............................................... 6,539 2,754 2,842
State................................................. 831 2,200 922
------- ------- -------
11,218 9,645 13,241
------- ------- -------
Deferred:
Federal............................................... (11) 3,066 9,472
Foreign............................................... (2,478) (1,325) 3,129
State................................................. (173) 263 2,015
------- ------- -------
(2,662) 2,004 14,616
------- ------- -------
Net change in valuation allowance..................... -- -- (450)
------- ------- -------
Provision for income taxes............................ $ 8,556 $11,649 $27,407
======= ======= =======
The following table presents the principal reasons for the difference
between the actual income tax provision and the tax provision computed by
applying the U.S. federal statutory income tax rate to income from continuing
operations before income taxes:
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
Federal income tax provision at 35%................... $ 9,482 $ 7,182 $23,510
Valuation allowance benefit........................... -- -- (450)
State income taxes-net of federal benefit............. 428 1,601 1,909
Foreign operations.................................... (2,166) 1,470 1,805
Non-deductible expenses............................... 1,945 914 1,844
Other-net............................................. (1,133) 482 (1,211)
------- ------- -------
Provision for income taxes............................ $ 8,556 $11,649 $27,407
======= ======= =======
Effective income tax rate............................. 31.6% 56.8% 40.8%
31
33
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes related to foreign operations in 1998, 1997 and 1996 reflect
the Company's ability to recognize the benefit of foreign tax credits.
Deferred income taxes recorded in the accompanying consolidated balance
sheets are comprised of:
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- -------------------------------
ASSET LIABILITY NET ASSET LIABILITY NET
-------- --------- -------- -------- --------- --------
Current Deferred Income Taxes:
Accounts receivable and inventory
reserves........................... $ 3,845 $ -- $ 3,845 $ 2,177 $ -- $ 2,177
Product and warranty liabilities..... 332 -- 332 437 -- 437
Employee benefits.................... 5,213 -- 5,213 5,576 -- 5,576
Other current........................ 4,348 -- 4,348 6,073 -- 6,073
-------- ------- -------- -------- ------- --------
$ 13,738 $ -- $ 13,738 $ 14,263 $ -- $ 14,263
======== ======= ======== ======== ======= ========
Non-Current Deferred Income Taxes:
Domestic capital loss
carryforwards...................... $ 17,518 $ -- $ 17,518 $ 17,518 $ -- $ 17,518
Fixed and intangible assets.......... (6,041) -- (6,041) (4,745) 1,081 (5,826)
Environmental liabilities............ 11,158 -- 11,158 12,318 -- 12,318
Employee benefits.................... 12,188 -- 12,188 12,535 205 12,330
Other non-current.................... 14,330 21,390 (7,060) 8,660 20,424 (11,764)
Valuation allowance.................. (19,777) -- (19,777) (19,777) -- (19,777)
-------- ------- -------- -------- ------- --------
$ 29,376 $21,390 $ 7,986 $ 26,509 $21,710 $ 4,799
======== ======= ======== ======== ======= ========
In accordance with the Tax Sharing Agreement, approximately $17.8 million
of deferred tax assets related to the Company were allocated to General
Instrument in connection with the Distribution.
Deferred taxes have not been provided on undistributed earnings of certain
foreign operations of $14.3 million and $9.9 million in 1998 and 1997,
respectively, as those earnings are considered to be permanently reinvested.
Determining the tax liability that would arise if these amounts were remitted is
not practicable.
The valuation allowance at December 31,1998 relates principally to domestic
capital loss carryforwards, which expire in 2002. The valuation allowance will
be reduced when and if the Company generates domestic capital gains.
During 1996 the Company settled certain tax matters which resulted in
credits to excess of cost over fair value of net assets acquired of $1.8 million
since such matters related to the period prior to August 1990, when affiliates
of Forstmann Little & Co., a private investment firm, acquired the Company.
9. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
Senior bank indebtedness:
Revolving credit facility................ $286,000 $222,000
Taiwan loan.............................. -- 46,074
-------- --------
286,000 268,074
Less current maturities.................... -- 4,310
-------- --------
Long-term debt............................. $286,000 $263,764
======== ========
32
34
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1997, the Company entered into a bank credit agreement, which was
amended in December 1998, (as amended, the "Credit Agreement") which provides
for a $350.0 million secured revolving credit facility that 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: the Adjusted Base Rate (as defined in the Credit
Agreement), or a Eurodollar rate (LIBOR) plus a margin which varies based on the
Company's ratio of indebtedness to earnings before interest, 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. The December 1998 amendment amended certain
covenant compliance calculations to provide the Company with greater flexibility
to execute the restructuring announced on November 6, 1998. At December 31, 1998
the Company was in compliance with all such amended covenants.
At December 31, 1997 the Company had a $60 million loan agreement with a
consortium of banks in Taiwan. On February 26, 1998 the Company consolidated its
debt and repaid the entire Taiwan loan balance of $46.1 million with proceeds
from borrowings under the Credit Agreement.
In May 1996, the Company issued a notice to redeem $250 million in
principal amount of its 5% Convertible Junior Subordinated Notes (the "Notes").
Of the Notes called, $244 million in principal amount were converted into the
Company's Common Stock prior to the redemption date, with the remaining $6
million redeemed for cash. Additionally, $16 million and $6 million in principal
amount of Notes that were not called for redemption were also converted into GI
Common Stock during 1996 and 1995, respectively. These conversions resulted in
the issuance of 2.8 million shares of Common Stock. In connection with the
Common Stock conversions, $4.4 million was charged to additional paid-in
capital, net of the related tax benefit, for unamortized deferred financing
costs and accrued but unpaid interest related to the converted Notes. During
1997 the remaining Notes outstanding were converted into GI Common Stock at a
conversion price of $23.75 per share (unadjusted for the Distribution and Stock
Split) resulting in the issuance of 2.4 million shares, and $0.2 million in
principal amount of Notes were redeemed. In connection with the conversion, GI
charged approximately $1.5 million to additional paid-in capital, net of the
related tax benefit, for unamortized deferred financing costs and accrued but
unpaid interest related to the converted Notes.
The Company repaid the GI revolving credit facility in July 1997 utilizing
a combination of the bank credit facility described above and amounts received
from General Instrument and CommScope at the Distribution Date totaling $170.1
million.
The Company entered into two interest rate swap transactions with a term of
one year beginning on January 22, 1998. Pursuant to these agreements it paid a
fixed interest rate averaging 5.96% on a notional amount of $100 million and
received interest on the $100 million notional amount based on a three month
LIBOR rate set quarterly beginning on January 22, 1998. The fair value of the
swaps as of December 31, 1998 was $(0.2) million. During February 1998, the
Company purchased two interest rate caps each with a notional amount of $50
million. The caps became effective on April 27, 1998 and June 29, 1998 with
terms of nine months and six months, respectively. Under the terms of the caps,
the Company was paid an amount equal to the excess, if any, of three month LIBOR
above 6% multiplied by the notional amounts. The cost of the caps was
immaterial. The purpose of the swap agreement and the caps is to reduce its
amount of debt subject to floating interest rates.
The weighted average interest rate on the Company's long-term debt at
December 31, 1998 and 1997 was 5.8% and 6.6%, respectively.
33
35
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net interest expense included in the 1996 and 1997 Consolidated Statement
of Operations through the Distribution Date represents an allocation based upon
General Semiconductor's net assets as a percentage of total assets of GI.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space, manufacturing facilities and
transportation and other equipment under operating leases which expire at
various dates through the year 2004. Rent expense was $5.4 million, $3.3 million
and $2.9 million in 1998, 1997 and 1996, respectively.
Future minimum lease payments required under operating leases as of
December 31, 1998 are:
1999...................................................... $4,454
2000...................................................... 3,028
2001...................................................... 1,853
2002...................................................... 1,255
2003...................................................... 1,119
Thereafter................................................ 295
The Company has approximately $11.0 million in letters of credit
outstanding at December 31, 1998.
Environmental Matters. 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 $31.9 million at December 31, 1998 ($34.9 million at December 31,
1997). 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.
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 behalf
and as representatives of a class of
34
36
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchasers of GI common stock during the period March 21, 1995 through October
18, 1995. The complaint alleges that prior to the Distribution, 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.
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, results of operations or cash flows.
11. EMPLOYEE BENEFITS
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132 "Employer' Disclosures about Pensions and Other Post-Retirement
Benefits -- an amendment of FASB Statement No. 87, 88 and 106." SFAS 132 revises
employers' disclosures about pension and other post-retirement benefit plans. It
does not change the measurement of recognition of those plans. The Company has
adopted the provisions of SFAS 132 in their disclosures below.
Pension Plans. In connection with the Distribution, the Company, General
Instrument and CommScope 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 benefits plans
maintained by GI 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 General
Instrument or CommScope subsequent to the Distribution.
35
37
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension cost consists of:
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- ------- -------- ------- -------- -------
Service cost.................... $ 482 $2,513 $ 407 $ 2,746 $ 325 $ 2,968
Interest........................ 5,209 3,040 5,117 3,301 4,616 3,503
Expected return on plan
assets........................ (5,979) (853) (5,620) (1,185) (5,670) (1,663)
Transition (asset) obligation... -- 160 -- 188 -- --
Amortization of prior service
costs......................... (12) -- (12) -- 878 906
Recognized actuarial (gain) or
loss.......................... 198 522 2 756 -- --
------- ------ ------- ------- ------- -------
Net periodic pension cost
(income)...................... $ (102) $5,382 $ (106) $ 5,806 $ 149 $ 5,714
======= ====== ======= ======= ======= =======
The status of the Company's continuing pension plans and the related
amounts recorded in the accompanying consolidated balance sheets are:
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- --------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- -------- -------- --------
Change in Benefit Obligation
Benefit obligation at beginning of year......... $75,741 $ 46,863 $65,431 $ 60,586
Service cost................................. 482 2,513 407 2,746
Interest cost................................ 5,209 3,040 5,117 3,301
Actuarial (gain) or loss..................... 4,499 (174) 9,034 2,086
Impact of foreign exchange................... -- 885 -- (8,119)
Benefits paid................................ (5,646) (2,540) (4,248) (151)
Curtailment loss............................. -- -- -- 3,272
Settlement payment........................... -- -- -- (16,858)
------- -------- ------- --------
Benefit obligation at end of year............... 80,285 50,587 75,741 46,863
------- -------- ------- --------
Change in Plan Assets
Fair value of plan assets at beginning of
year......................................... 78,539 11,018 67,599 23,944
Actual return on plan assets (net of
expenses).................................. 13,012 1,132 15,188 999
Employer contributions....................... -- 2,543 -- 6,568
Impact of foreign exchange................... -- 155 -- (3,484)
Benefits paid................................ (5,646) (2,540) (4,248) (17,009)
------- -------- ------- --------
Fair value of plan assets at end of year........ 85,905 12,308 78,539 11,018
------- -------- ------- --------
Reconciliation of the Funded Status
Funded status................................... 5,620 (38,279) 2,798 (35,845)
Unrecognized transition (asset) or obligation... -- 1,523 -- 1,670
Unrecognized prior service cost................. (65) -- (77) --
Unrecognized actuarial (gain) or loss........... (3,567) 11,496 (834) 12,451
------- -------- ------- --------
Asset (liability) recognized at year-end........ $ 1,988 $(25,260) $ 1,887 $(21,724)
======= ======== ======= ========
Actuarial assumptions:
Discount rate................................... 6.75% 6.75% 7.00% 6.75%
Investment return............................... 9.00% 7.00% 9.00% 7.00%
Compensation increases.......................... 4.75% 6.00% 4.75% 6.00%
36
38
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The domestic pension plans consist principally of a qualified retirement
plan which has satisfied the full funding limitation requirements under the
Employee Retirement Income Security Act of 1974 ("ERISA"). The Company made no
contributions to the plan in 1998 or 1997. Contributions to the plan in 1996
were $3.8 million. Domestic plan assets consist of fixed income and equity
securities. The Company also has an unfunded supplemental retirement plan for
certain members of management. Net pension cost and accrued pension obligations
for this plan are included in the amounts above.
The foreign pension plans consist principally of a Taiwan and a German
pension plan which are funded in accordance with statutory requirements. Foreign
pension contributions were $2.7 million in 1996. Foreign plan assets principally
consist of fixed income securities.
Defined Contribution Plans. The Company maintains defined contribution
plans covering all domestic non-union employees and employees in Ireland and
France. Company contributions were $0.7 million in 1998 and 1997 and $0.4
million in 1996.
Postretirement Benefits other than Pensions. The Company maintains an
unfunded contributory group medical plan (the "Plan") for all full-time U.S.
employees not covered by a collective bargaining agreement who meet defined age
and service requirements. The Company recognizes the cost of providing and
maintaining postretirement benefits during employees' active service periods.
The Plan is the primary provider of benefits for retirees up to age 65. After
age 65, Medicare becomes the primary provider. Net periodic postretirement
benefit cost consists of:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
Service cost............................................... $ 91 $ 87 $ 78
Interest................................................... 918 891 872
Amortization of prior service cost......................... (383) (383) (383)
Recognized actuarial (gain) or loss........................ 135 12 --
----- ----- -----
Net periodic postretirement benefit cost................... $ 761 $ 607 $ 567
===== ===== =====
The status of the Plan and the related amounts recorded in the accompanying
consolidated balance sheets are:
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Change in Benefit Obligation
Benefit obligation at beginning of year.................. $ 13,286 $ 11,888
Service cost.......................................... 91 87
Interest cost......................................... 918 891
Actuarial (gain) or loss.............................. 2,056 1,932
Benefits paid......................................... (2,424) (1,512)
-------- --------
Benefit obligation at end of year........................ 13,927 13,286
-------- --------
Change in Plan Assets
Fair value of plan assets at beginning of year........... -- --
Actual return on plan assets.......................... -- --
Employer contributions................................ 2,424 1,512
Benefits paid......................................... (2,424) (1,512)
-------- --------
Fair value of plan assets at end of year................. -- --
-------- --------
37
39
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Reconciliation of the Funded Status
Funded status............................................ (13,927) (13,286)
Unrecognized transition (asset) or obligation............ -- --
Unrecognized prior service cost.......................... (4,834) (5,217)
Unrecognized actuarial (gain) or loss.................... 4,955 3,033
-------- --------
Accrued benefit liability at year end.................... $(13,806) $(15,470)
======== ========
Actuarial assumptions:
Discount rate............................................ 6.75% 7.00%
Expected return on plan assets........................... N/A N/A
The assumed rate of future increases in health care costs for 1998 and 1997
was 11.25% and 12.5%, respectively, for pre-age 65 retirees, and 9% and 10%,
respectively, for post-age 65 retirees, and is expected to decline to 6% by the
year 2003 for pre-age 65 retirees and by the year 2005 for post-age 65 retirees,
respectively. Under the Plan, the actuarially determined effect of a one
percentage point increase in the assumed health care cost trend rate on annual
net postretirement benefit cost and the APBO would be $1.4 million and $1.3
million, respectively, for 1998 and 1997.
In accordance with the Employee Benefits Allocation Agreement,
approximately $8.0 million of net pension liabilities related to the Company
were transferred to General Instrument in connection with the Distribution for
the year ended December 31, 1997.
Postemployment Benefits other than Pensions. The postemployment benefits
obligation relates principally to medical costs for former employees on
long-term disability. As of December 31, 1998 and 1997 $1.0 million and $0.9
million was accrued for postemployment benefits, respectively.
12. STOCKHOLDERS' EQUITY
Distribution. GI distributed all of its outstanding shares of capital
stock of each of General Instrument and CommScope to its stockholders on a pro
rata basis as a dividend in a transaction that was consummated on July 28, 1997.
Approximately 147.3 million shares of General Instrument Common Stock, based on
a ratio of one for one, were distributed to GI's stockholders of record on July
25, 1997. On July 28, 1997 approximately 49.1 million shares of CommScope Common
Stock, based on a ratio of one for three, were distributed to General Instrument
stockholders of record on that date. General Semiconductor (formerly GI)
retained no ownership interest in either General Instrument or CommScope.
Additionally, immediately following the Distribution, General Semiconductor
effected a one for four reverse stock split.
Stock Option Plan. Following the Distribution, the Company continued in
effect the 1993 Long-Term Incentive Plan, renamed the Amended and Restated
General Semiconductor, Inc. 1993 Long-Term Incentive Plan (the "1993 LTIP") as
adjusted to reflect the Distribution and Stock Split. Stock options granted
generally vest ratably over a three year period beginning on the first
anniversary from the date granted, expire after ten years and have exercise
prices equal to the market value of the Company's common stock at the date of
grant.
In May 1998, the stockholders of the Company approved the adoption of the
General Semiconductor, Inc. 1998 Long-Term Incentive Plan (the "1998 LTIP")
which provides for the granting of stock options, stock appreciation rights,
restricted stock, performance units, performance shares and phantom stock to
employees of the Company and its subsidiaries and the granting of stock options
to directors of the Company. The 1998 LTIP replaces the Company's 1993 LTIP. No
further awards or options were granted pursuant to the 1993 LTIP. All shares
available for future grant under the 1993 LTIP and those shares in respect of
38
40
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options or awards granted or issued pursuant to the 1993 LTIP which are
subsequently forfeited, expired or otherwise terminate without having been
exercised will be added to the number of shares available for grant under the
1998 LTIP.
The following table summarizes stock option activity relating to the
Company's 1993 LTIP and 1998 LTIP (collectively, the "LTIP Plans") since the
Distribution.
NUMBER WEIGHTED-
OF AVERAGE
SHARES EXERCISE PRICE
------ --------------
Outstanding at Distribution Date...................... 2,838 $11.77
Granted............................................... 195 14.94
Cancelled............................................. (17) 12.00
-----
Options outstanding at December 31, 1997.............. 3,016 $11.98
Granted............................................... 1,715 8.96
Exercised............................................. (38) 11.28
Cancelled............................................. (69) 12.03
-----
Options outstanding at December 31, 1998.............. 4,624 $10.86
=====
For the period January 1, 1997 through the Distribution, 8,422 options to
purchase GI common stock were granted, 798 options were exercised and 4,032
options were canceled. The weighted-average exercise price of these options
(unadjusted for the Distribution and Stock Split) was $23.14, $22.95 and $29.50,
respectively. At the Distribution Date, all unexercised GI stock options held by
General Semiconductor employees and certain Directors of GI were converted into
General Semiconductor stock options. For the holders of unexercised General
Semiconductor stock options, the number of options was adjusted and all exercise
prices were decreased immediately following the Distribution to preserve the
economic value of the options that existed prior to the Distribution Date.
The following table summarizes information about stock options outstanding
and exercisable under the Company's LTIP Plans.
SHARES UNDER OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 TERM (YEARS) PRICE 1998 PRICE
- --------------- ------------ ------------ --------- ------------ ---------
$1.48 to $11.60...... 1,382 8.7 $ 7.37 258 $ 8.35
$11.75 to $12.06..... 1,613 8.0 $11.75 705 $11.75
$12.36 to $14.94..... 1,629 7.4 $12.94 907 $13.02
----- -----
4,624 8.0 $10.86 1,870 $11.90
===== =====
At December 31, 1998 and 1997, 3.8 million shares and 0.7 million shares,
respectively, were reserved for future awards under the Company's LTIP Plans.
The tax benefits arising from stock options exercised during the years ended
December 31, 1998, 1997 and 1996 in the amount of $0.1 million, $1.1 million,
and $0.8 million, respectively, were recorded in stockholders' equity as
additional paid-in capital.
In addition, under the provisions of the Incentive Plan, the Company issued
4 thousand shares of Common Stock to certain members of its Board of Directors
during the year ended December 31, 1997.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its LTIP Plans. Since the exercise price of all stock
39
41
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options granted under the LTIP Plans in 1998, 1997 and 1996 was equal to the
closing price of the Common Stock on the New York Stock Exchange on the date of
grant, no compensation expense has been recognized by the Company for its
stock-based compensation plan during these years other than for restricted stock
agreements. Compensation expense, relating to both continuing and discontinued
operations, would have been $5.4 million, $27.1 million and $21.9 million in
1998, 1997 and 1996, respectively, had compensation cost for stock options
awarded during these years under the Company's stock option agreements been
determined based upon the fair value at the grant date consistent with the
methodology prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation". The Company's pro forma net income (loss) and diluted earnings
(loss) per share would have been $15.2 million and $0.41 per share for 1998,
$(10.9) million and $(0.31) per share for 1997 and $(15.2) million and $(0.46)
per share for 1996. The estimated weighted-average per share fair value of the
options granted during 1998 was $4.18, was $9.70 January 1, 1997 through the
Distribution Date, $6.38 for the remainder of 1997 and $10.80 for 1996, on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1998 1997 1996
---- ---- ----
Expected life (years)....................................... 4.0 4.0 4.0
Risk-free interest rate..................................... 4.81% 6.39% 6.18%
Expected volatility-pre-Distribution........................ N/A 43% 43%
Expected volatility-post-Distribution....................... 54% 45% N/A
Expected dividend yield..................................... 0% 0% 0%
The pro forma effect on net income (loss) and earnings (loss) per share for
1998, 1997 and 1996 may not be representative of the pro forma effect in future
years because it includes compensation cost on a straight-line basis over the
vesting periods of the grants and does not take into consideration the pro forma
compensation costs for grants made prior to 1995.
Stockholder Rights Plan. On January 6, 1997 the Board of Directors adopted
a stockholder rights plan designed to protect stockholders from various abusive
takeover tactics, including attempts to acquire control of the Company at an
inadequate price. Under the rights plan, which was amended in March 1999, each
stockholder, subsequent to the distribution date of January 24, 1997, receives a
dividend of one right for each outstanding share of Common Stock. The rights are
attached to, and presently only trade with, the Common Stock and currently are
not exercisable. Except as specified below, upon becoming exercisable, all
rights holders will be entitled to purchase from the Company one one-thousandth
of a share of Series A Junior Participating Preferred Stock ("Participating
Preferred Stock") at a price of $100.
The rights become exercisable and will begin to trade separately from the
Common Stock upon the earlier of (i) the first date of public announcement that
a person or group (other than an existing 15% stockholder or pursuant to a
Permitted Offer, as defined) has acquired beneficial ownership of 15% or more of
the outstanding Common Stock, or (ii) 10 business days following a person's or
group's commencement of, or announcement of, an intention to commence a tender
or exchange offer, the consummation of which would result in beneficial
ownership of 15% or more of the Common Stock. The rights will entitle holders to
purchase Common Stock having a market value (immediately prior to such
acquisition) of twice the exercise price of the right in lieu of purchasing the
Participating Preferred Stock. If the Company is acquired through a merger or
other business combination transaction (other than a Permitted Offer, as
defined), each right will entitle the holder to purchase common stock of the
surviving company having a market value (immediately prior to such acquisition)
of twice the exercise price of the right. The Company may redeem the rights for
$0.01 each at any time prior to such acquisition. The rights will expire on
January 6, 2007, unless earlier redeemed.
In connection with the stockholder rights plan, the Board of Directors
approved the creation of, out of the authorized but unissued shares of preferred
stock of the Company, the Participating Preferred Stock, consisting of 0.4
million shares with a par value of $0.01 per share. The holders of the
Participating Preferred
40
42
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock are entitled to receive dividends, if declared by the Board of Directors,
from funds legally available. Each share of Participating Preferred Stock is
entitled to one thousand votes on all matters submitted to stockholder vote. The
shares of Participating Preferred Stock are not redeemable by the Company nor
convertible into Common Stock or any other security of the Company.
13. EARNINGS (LOSS) PER SHARE
The Company adopted SFAS No. 128 "Earnings per Share" during 1997. In
accordance with this pronouncement, the Company retroactively adopted this
standard and restated all historical earnings per share data contained in this
report. SFAS 128 requires presentations of "basic" and "diluted" earnings per
share.
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted-average number of common shares
outstanding during the applicable periods. In 1998, the diluted earnings per
share computation is based on net income divided by the weighted-average number
of common shares outstanding adjusted for the dilutive effect of stock options.
In 1997 and 1996, the diluted earnings (loss) per share computations are based
on net income (loss) adjusted for interest and amortization of debt issuance
costs related to convertible debt, if dilutive, divided by the weighted-average
number of common shares outstanding adjusted for the dilutive effect of stock
options and convertible securities. The diluted earnings (loss) per share
calculations assume 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 each of the years ended
December 31, 1998, 1997 and 1996.
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EPS
Income available to common stockholders........ $18,534 36,811 $0.50
=====
EFFECT OF DILUTIVE SECURITIES
Options...................................... -- 88
------- ------
DILUTED EPS
Income available to common stockholders plus
assumed conversions.......................... $18,534 36,899 $0.50
======= ====== =====
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EPS
Income from continuing operations available to
common stockholders.......................... $8,872 35,414 $0.25
=====
EFFECT OF DILUTIVE SECURITIES
Options...................................... -- 162
------ ------
DILUTED EPS
Income from continuing operations available to
common stockholders plus assumed
conversions.................................. $8,872 35,576 $0.25
====== ====== =====
41
43
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of the Notes outstanding through the Distribution is excluded
from the above computation of diluted earnings per share because the impact was
anti-dilutive. Had the impact of the weighted-average shares outstanding related
to the Notes of 1,305 shares been included in the diluted calculation, the
diluted weighted-average shares outstanding of as December 31, 1997 would have
been 36,881 shares.
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EPS
Income from continuing operations available to
common stockholders.......................... $39,764 32,924 $1.20
=====
EFFECT OF DILUTIVE SECURITIES
Options...................................... -- 171
Convertible debt............................. 2,658 3,757
------- ------
DILUTED EPS
Income from continuing operations available to
common stockholders plus assumed
conversions.................................. $42,422 36,852 $1.15
======= ====== =====
14. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
Derivative instruments are primarily used by the Company to reduce
financial risk arising from changes in foreign exchange and interest rates. The
Company does not use derivative instruments for trading purposes, nor does it
engage in currency or interest rate speculation. Derivatives used by the Company
consist of foreign exchange, interest rate and other instruments. The Company
believes that the various counterparties with which the Company enters into
these agreements consist of only financially sound institutions and,
accordingly, believes that the credit risk for non-performance of these
contracts is not significant. The Company monitors its underlying market risk
exposures on an ongoing basis and believes that it can modify or adapt its
hedging strategies as needed.
Foreign Exchange Instruments. The Company enters into forward contracts on
a month-to-month basis to minimize the effect of foreign currency fluctuations
with regard to certain monetary assets and liabilities denominated in currencies
other than the U.S. dollar. Gains and losses on these contracts generally
offset, in the same period, gains and losses resulting from the translation of
monetary assets and liabilities to U.S. dollars on a monthly basis, reducing the
risk of exchange rate movements in the Company's results of operations.
On a selective basis, the Company enters into forward contracts and
purchased option contracts designed to hedge the currency exposure of
contractual and other firm commitments denominated in foreign currencies and the
currency exposure of anticipated, but not yet committed, transactions expected
to be denominated in foreign currencies. The purpose of these activities is to
protect the Company from the risk that the eventual net cash flows in U.S.
dollars from foreign receivables and payables will be adversely affected by
changes in exchange rates. Gains and losses on all purchased options and those
forward contracts which hedge contractual and other firm commitments are
deferred and recognized in the Company's results of operations in the same
period as the gain or loss from the underlying transactions. Gains and losses on
forward contracts used to hedge anticipated, but not yet committed, transactions
are recognized in the Company's results of operations as changes in exchange
rates for the applicable foreign currencies occur. Historically, foreign
contracts with respect to contractual and other firm commitments and
anticipated, but not yet committed, transactions have been short-term in nature.
In addition, purchased options have had no intrinsic value at the time of
purchase.
42
44
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company settles foreign exchange contracts generally at maturity and at
prevailing market rates. The Company recognizes in its results of operations
over the life of the contract the amortization of contract premium on purchased
options. The amortization of these premiums during each of the three years in
the period ended December 31, 1998 was not significant. As of December 31, 1998
and 1997, the Company had outstanding forward and purchased option contracts in
the amounts of $21.3 million and $19.9 million, respectively, comprised of
foreign currencies which were to be sold and $79.6 million and $23.2 million,
respectively, comprised of foreign currencies which were to be purchased. All
outstanding forward and purchased option contracts as of December 31, 1998
mature within twelve months.
As of December 31, 1998 the Company owned the following forward and option
contracts:
FORWARD CONTRACTS:
US DOLLAR (000'S)
AVERAGE US DOLLAR (000'S) FAIR
CURRENCY RATE PURCHASE/(SELL) VALUE
- -------- ------- ----------------- -----------------
New Taiwan Dollar................. 32.57 NTD/US $(54,283) $ 545
German Marks...................... 1.67 DM/US 11,392 60
Japanese Yen...................... 115.62 JPY/US 8,779 (155)
Irish Punt........................ 1.49 US/IEP (3,125) (5)
British Pounds.................... 1.68 US/BPS 1,093 5
PURCHASED OPTIONS:
US DOLLAR (000'S)
AVERAGE US DOLLAR (000'S) FAIR
CURRENCY RATE PURCHASE/(SELL) VALUE
- -------- ------- ----------------- -----------------
New Taiwan Dollar................. 33.03 NTD/US (22,161) $ 600
Deferred gains or losses on the above contracts at December 31, 1998 and
1997 were not significant. Foreign currency transaction gains included in income
from continuing operations were $1.6 million, $3.8 million and $0.9 million in
1998, 1997 and 1996, respectively. As of December 31, 1997 the Company had no
purchased option contracts outstanding. All outstanding forward contracts at
December 31, 1997 matured within three months, and the fair values of the
contracts were not material. Fair values are based on quoted market prices.
Interest Rate Derivative Instruments. On a selective basis, the Company
from time to time enters into interest rate cap or swap agreements to reduce the
potential negative impact of increases in interest rates on its outstanding
variable-rate debt under the Credit Agreement. The Company recognizes in its
results of operations over the term of the contract, as interest expense, the
amortization of contract premiums incurred from purchasing interest rate caps.
Net payments or receipts resulting from these agreements are recorded as
adjustments to interest expense. The effect of interest rate instruments on the
Company's results of operations in each of the three years in the period ended
December 31, 1998 was not significant.
The Company entered into two interest rate swap transactions with a term of
one year beginning on January 22, 1998. Pursuant to these agreements it paid a
fixed interest rate averaging 5.96% on a notional amount of $100 million and
received interest on the $100 million notional amount based on a three month
LIBOR rate set quarterly beginning on January 22, 1998. During February 1998,
the Company purchased two interest rate caps each with a notional amount of $50
million. The caps became effective on April 27, 1998 and June 29, 1998 with
terms of nine months and six months, respectively. Under the terms of the caps,
the Company was paid an amount equal to the excess, if any, of three month LIBOR
above 6% multiplied by the notional amounts. The cost of the caps was
immaterial.
43
45
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998 the Company held the following interest rate
derivative instruments:
INSTRUMENT NOTIONAL AMOUNT FIXED RATE FLOATING RATE FAIR VALUE
- ---------- --------------- ---------- ------------- ----------
Interest Rate Cap........... $50,000 6.000% 3-month LIBOR --
Floating to Fixed Swap...... 50,000 5.953% 3-month LIBOR (100)
Floating to Fixed Swap...... 50,000 5.966% 3-month LIBOR (100)
Fair values are based on quoted market prices.
Other Financial Instruments. As of December 31, 1998 and 1997 the carrying
value of cash and cash equivalents, trade accounts receivable and trade accounts
payable approximates fair value because of the immediate or short-term maturity
of these financial instruments. The carrying amount of the Company's senior bank
indebtedness approximates fair value because the underlying instruments have
variable interest rates that adjust to market on a short-term basis.
Concentration of credit risk. The Company's accounts receivable are
generated from sales to customers in a variety of end-use markets that are
geographically and economically dispersed and payment is generally due within 30
days. Accordingly, the Company does not believe it is subject to any significant
concentration of credit risk.
15. 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. Net sales by reportable geographic
segment reflects 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 (loss) 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.
Corporate assets consist of patents, the excess of cost over fair value of net
assets acquired and deferred financing costs. Long-lived assets in the European
and Far East geographic segments are related primarily to Ireland and Taiwan,
respectively.
UNITED
STATES EUROPE FAR EAST CHINA CORPORATE CONSOLIDATED
-------- -------- -------- ------- --------- ------------
YEAR ENDED DECEMBER 31,
1998:
Net sales(a)................ $225,711 $135,247 $ 40,186 $ -- $ -- $401,144
Intercompany transfers...... 114,833 136,993 170,568 28,956 (451,350) --
-------- -------- -------- ------- --------- --------
Net sales................. 340,544 272,240 210,754 28,956 (451,350) $401,144
======== ======== ======== ======= ========= ========
Interest income............. -- 48 26 29 273 376
Interest expense............ -- 297 588 -- 19,517 20,402
Depreciation and
amortization expense...... 8,770 4,654 8,913 2,645 -- 24,982
Earnings before provision
for income taxes(b)....... 6,614 3,802 11,061 5,613 -- 27,090
Income tax expense.......... 3,073 3,364 1,989 130 -- 8,556
Long-lived assets........... 93,691 52,931 57,264 29,049 173,007 405,942
Capital expenditures........ $ 2,731 $ 14,042 $ 7,532 $ 2,593 $ -- $ 26,898
44
46
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNITED
STATES EUROPE FAR EAST CHINA CORPORATE CONSOLIDATED
-------- -------- -------- ------- --------- ------------
YEAR ENDED DECEMBER 31,
1997:
Net sales(a)................ $245,772 $102,881 $ 31,385 $ -- $ -- $380,038
Intercompany transfers...... 102,966 84,301 137,293 4,752 (329,312) --
-------- -------- -------- ------- --------- --------
Net sales................. 348,738 187,182 168,678 4,752 (329,312) $380,038
======== ======== ======== ======= ========= ========
Interest income............. -- 224 58 26 -- 308
Interest expense............ -- 223 3,561 -- 10,877 14,661
Depreciation and
amortization expense...... 9,711 4,323 9,514 684 -- 24,232
Earnings (loss) before
provision for income
taxes(c).................. 14,535 630 8,328 (2,972) -- 20,521
Income tax expense.......... 5,452 1,042 5,155 -- -- 11,649
Long-lived assets........... 94,670 47,360 59,827 27,094 177,112 406,063
Capital expenditures........ $ 7,106 $ 1,039 $ 8,100 $12,963 $ -- $ 29,208
YEAR ENDED DECEMBER 31,
1996:
Net sales(a)................ $232,902 $ 98,921 $ 30,068 $ -- $ -- $361,891
Intercompany transfers...... 90,855 41,369 133,981 -- (266,205) --
-------- -------- -------- ------- --------- --------
Net sales................. 323,757 140,290 164,049 -- (266,205) $361,891
======== ======== ======== ======= ========= ========
Interest income............. -- 419 127 43 -- 589
Interest expense............ -- 286 3,780 -- 6,919 10,985
Depreciation and
amortization expense...... 10,136 3,831 8,435 211 -- 22,613
Earnings(loss) before
provision for income
taxes..................... 60,364 2,464 8,009 (3,666) -- 67,171
Income tax expense.......... 21,840 4,508 1,059 -- -- 27,407
Long-lived assets........... 90,836 47,220 60,904 12,258 190,219 401,437
Capital expenditures........ $ 9,049 $ 20,504 $ 21,225 $ 9,521 $ -- $ 60,299
- ---------------
(a) Included in United States net sales are export sales as follows:
1998 1997 1996
-------- -------- --------
Taiwan....................................... $ 69,156 $ 99,134 $ 93,718
China........................................ 32,904 28,602 23,792
-------- -------- --------
$102,060 $127,736 $117,510
======== ======== ========
Net sales, by country, within the European geographic segment are:
1998 1997 1996
-------- -------- -------
France........................................ $ 20,742 $ 16,485 $15,057
Germany....................................... 92,058 66,811 62,890
U.K. ......................................... 22,447 19,585 20,974
-------- -------- -------
$135,247 $102,881 $98,921
======== ======== =======
(b) Earnings before provision for income taxes in 1998 includes restructuring
charges of $12.3 million ($8.5 million net of tax).
45
47
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Earnings before provision for income taxes in 1997 includes charges of $33.8
million, ($25.3 million net of tax), primarily related to the separation of
GI's Taiwan operations.
No single customer accounted for more than 10% of the Company's sales during the
years ended December 31, 1998, 1997 and 1996.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data for 1998 and 1997 is as follows:
QUARTER ENDED 1998
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 December 31(a)
----------- ---------- ------------ --------------
Net sales............................. $106,397 $98,762 $ 97,223 $ 98,762
Gross profit.......................... 35,289 28,647 26,726 26,900
Net income(loss)...................... 9,466 6,846 5,956 (3,734)
Earnings(loss) per share
Basic:.............................. $ 0.26 $ 0.19 $ 0.16 $ (0.10)
Diluted:............................ 0.26 0.19 0.16 (0.10)
QUARTER ENDED 1997
--------------------------------------------------------
MARCH 31(B) JUNE 30(C) SEPTEMBER 30 DECEMBER 31
----------- ---------- ------------ --------------
Net sales............................. $ 85,369 $95,511 $ 95,568 $103,590
Gross profit.......................... 19,426 6,915 30,662 33,722
Income(loss) from continuing
operations.......................... 707 (9,416) 8,506 9,075
Net income(loss)...................... 17,683 (8,182) (12,643) 9,075
Earnings(loss) per share(d)...........
Basic:
Continuing operations............ $ 0.02 $ (0.27) $ 0.23 $ 0.25
Net income(loss)................. 0.52 (0.24) (0.35) 0.25
Diluted:
Continuing operations............ $ 0.02 $ (0.27) $ 0.23 $ 0.25
Net income(loss)................. 0.51 (0.24) (0.33) 0.25
- ---------------
(a) Includes restructuring charges of $12.3 million ($8.5 million or $0.23 per
share net of tax).
(b) Includes charges of $7.4 million ($5.5 million or $0.15 per share net of
tax) primarily related to the separation of GI's Taiwan operations. These
costs include $7.3 million charged to cost of sales and $0.1 million charged
to selling, general and administrative expense.
(c) Includes charges of $26.4 million ($19.8 million or $0.54 per share net of
tax) primarily related to the separation of GI's Taiwan operations. These
costs include $25.4 million charged to cost of sales and $1.0 million
charged to selling, general and administrative expense.
(d) Earnings (loss) per share data has been adjusted to reflect the one for four
reverse stock split and restated in conformance with SFAS No. 128.
46
48
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. DISCONTINUED OPERATIONS
Net sales for the Discontinued Operations included in the Consolidated
Statement of Operations were $1.3 billion and $2.3 billion for the years ended
December 31, 1997 and 1996, respectively.
Discontinued operations includes $52.9 million and $2.7 million, net of
applicable income taxes, for the years ended December 31, 1997 and 1996,
respectively, for costs incurred primarily related to the separation of the
Taiwan operations between General Semiconductor and General Instrument and for
professional fees and certain other administrative and financing costs incurred
directly related to the Distribution.
The distribution of the net assets of discontinued businesses reduced
stockholders' equity by $1.4 billion of which $1.2 billion was allocated to
additional paid-in capital and $0.2 billion to retained earnings.
47
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors:
The sections captioned "Election of Directors" and "The Board of
Directors and Committees of the Board" contained in the Company's
1999 Proxy Statement are hereby incorporated by reference.
(b) Identification of Executive Officers:
See Part I of this Form 10-K
(c) Compliance with Section 16(a) of the Securities Exchange Act of 1934,
as amended:
The section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" contained in the Company's 1999 Proxy
Statement is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is contained in the sections captioned
"Compensation of Executive Officers", and "Severance Protection and Other
Agreements", in the Company's 1999 Proxy Statement and is incorporated by
reference herein. The sections captioned "Report of the Compensation Committee"
and "Performance Graph" in the Company's 1999 Proxy Statement are not
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is contained in the sections captioned
"Security Ownership of Certain Beneficial Owners and Management of the Company"
and "Compensation of Executive Officers-Stock Options" in the Company's 1999
Proxy Statement and is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained in the section captioned
"Certain Related Party Transactions" in the Company's 1999 Proxy Statement and
is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1. Financial Statements
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets -- as of December 31, 1998 and 1997
Consolidated Statements of Operations -- Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -- Years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
48
50
See item 8 of this Form 10-K for Consolidated Financial Statements
2. Financial Statement Schedules. Schedules are omitted because they
are not applicable or the required information is shown in the
financial statements or notes thereto.
3. Exhibits. The exhibits required by Item 601 of Regulation S-K filed
as part of, or incorporated by reference in, this report are listed
in (c) below.
(b) Reports on Form 8-K
The Company filed a Form 8-K with the SEC, dated November 6, 1998, to
report under Item 5 of that Form that a press release was issued on
November 6, 1998 regarding a restructuring plan the Company adopted. A
copy of the press release was filed as an exhibit to the Form 8-K.
(c) Item 601 Exhibits
EXHIBITS
- --------
2.1* Agreement of Merger, dated as of July 25, 1997, between
General Instrument Corporation and General Instrument
Corporation of Delaware
3.1 Restated Certificate of Incorporation of General
Semiconductor, Inc. (including Certificate of Designation,
Preferences and Rights of Series A Junior Participating
Preferred Stock)
3.2 Amended and Restated By-Laws of General Semiconductor, Inc.
4.1** Rights Agreement, dated January 6, 1997, between General
Semiconductor, Inc. and ChaseMellon Shareholder Services,
LLC
4.2*** Amendment No. 1 to the Rights Agreement, dated as of March
10, 1999 between General Semiconductor, Inc. and ChaseMellon
Shareholder Services, LLC
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,
among NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc.
10.7* Credit Agreement, dated as of July 23, 1997, among NextLevel
Systems, Inc., and 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
10.7.1 First Amendment to the Credit Agreement, dated as of
December 31, 1998 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*+ Amended and Restated General Semiconductor, Inc. 1993
Long-Term Incentive Plan
10.8.1****+ General Semiconductor, Inc. 1998 Long-Term Incentive Plan
10.9*+ Form of Indemnification Agreement between General
Semiconductor, Inc. and certain executive officers
10.10+ Amended and Restated Severance Protection Agreement, dated
October 29, 1998, between General Semiconductor, Inc. and
Ronald A. Ostertag
10.11+ Form of Amended and Restated Severance Protection Agreement
between General Semiconductor, Inc. and certain of its
executive officers (other than the Chief Executive Officer)
21. Subsidiaries of the Registrant
49
51
EXHIBITS
- --------
23. Independent Auditors' Consent
27. Financial Data Schedule
99. Forward-Looking Information
- ---------------
* Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1997 (File No. 1-5442).
** Incorporated herein by reference from the Registration Statement on Form
8-A filed January 10, 1997 (File No. 1-5442).
*** Incorporated herein by reference from the Amendment to the Registration
Statement on Form 8-A/A filed March 16, 1999 (File No. 1-5442).
**** Incorporated herein by reference from the Company's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on July 20,
1998 (Reg. No. 333-22861).
+ Management compensation.
50