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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-7935
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INTERNATIONAL RECTIFIER CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 95-1528961
(State or other (IRS Employer
jurisdiction of
incorporation or Identification
organization) No.)
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233 KANSAS STREET
EL SEGUNDO, CA 90245
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (310) 726-8000
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Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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Common Stock, par value $1 New York Stock Exchange
Pacific Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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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 report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No ____
The aggregate market value of the registrant's voting Common Stock held by
non-affiliates of the registrant was approximately $733,216,584 (computed using
the closing price of a share of Common Stock on September 24, 1999 reported by
New York Stock Exchange).
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 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_
There were 51,980,480 shares of the registrant's Common Stock, par value
$1.00 per share, outstanding on September 24, 1999.
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on November 22, 1999, which Proxy
Statement will be filed no later than 120 days after the close of the
registrant's fiscal year ended June 30, 1999, are incorporated by reference in
Part III of this Annual Report on Form 10-K.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business.................................................................. 3
2. Properties................................................................ 11
3. Legal Proceedings......................................................... 12
4. Submission of Matters to a Vote of the Security Holders................... 12
Additional Item. Executive Officers of the Registrant..................... 13
PART II
5. Market for the Registrants' Common Equity and Related Stockholders'
Matters................................................................. 14
6. Selected Financial Data................................................... 15
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 16
7a. Quantitative and Qualitative Disclosures about Market Risk................ 26
8. Financial Statements and Supplementary Data............................... 26
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 54
PART III
10. Executive Officers of the Registrant...................................... 54
11. Executive Compensation.................................................... 54
12. Security Ownership of Certain Beneficial Owners and Management............ 54
13. Certain Relationships and Related Transactions............................ 54
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 54
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PART I
ITEM 1. BUSINESS
INTRODUCTION
International Rectifier Corporation ("IR" or "Company") is a technology
pioneer and a leading designer and manufacturer of power semiconductors that
refine electricity from wall outlets or batteries into a more usable form. This
process, which IR calls "power conversion," is conceptually similar to refining
oil to produce efficient, usable fuel. Power conversion reduces costs and
enhances the performance and efficiency of electrically powered products. Power
conversion can be viewed in four stages: input rectification, control,
switching, and output rectification. Input rectification conditions off-line
electricity, typically rectifying alternating current to direct current. The
control function measures incoming electricity and sends a signal to a switch.
The switch chops the energy into small elements. Output rectification re-
configures the elements into a form usable by electrically operated equipment.
The Company combines discrete components and/or integrated circuits to
produce what it believes are the industry's most advanced and complete power
conversion solutions, ranging from chipsets to modules, integrated into its
customers' products. IR products are used across a variety of markets, including
information technology, automotive, industrial, consumer electronics and
government/space. For example, the Company's products extend the battery life of
portable electronic devices (laptop computers, cellular phones); increase
automotive fuel efficiency and safety (electronic power steering, anti-lock
braking systems); and reduce design and electricity costs of industrial
automated equipment (motor controls) and major household appliances
(refrigerators, washing machines). The Company believes several factors will
drive continued demand for efficient power semiconductor components and power
conversion solutions: the proliferation of portable electronics, rapid growth in
electricity demand, and the high cost of installing electric power
infrastructure in developing economies.
IR focuses its efforts on developing more efficient power semiconductor
components and new or improved power conversion solutions. The Company's product
lines typically have an average life cycle of three to six years, with some
product lines lasting as long as 15 years. IR's proprietary technology, broad
product portfolio, and comprehensive knowledge of the power conversion process
allow it to design components and integrated solutions that improve electrical
efficiency and simplify its customers' product designs.
The Company's major customers in the automotive group include Delco, Ford,
Siemens and Bosch. IBM and Compaq are customers in the computer group. Consumer
electronics customers include Philips and Sony. Customers in the
telecommunications group include Lucent Technologies, Motorola and Nokia.
Industrial customers include Emerson, Sanken Electric and American Power
Conversion. Customers in the government/space group include Hughes and
Lockheed/Martin. The Company also sells its products to distributors, including
Arrow Electronics, Hamilton/Avnet and Future Electronics. In fiscal 1999, the
Company's product sales by region (based upon the location of the customer) were
approximately 42% from North America, 24% from Europe and 34% from Asia, which
includes Japan and Asia Pacific. IR has manufacturing facilities in North
America, Europe and Asia, and also uses subcontract assembly in Asia.
Founded in 1947 as a California corporation and reincorporated in Delaware
in 1979, IR pioneered the fundamental technology that set the industry standard
for power Metal Oxide Semiconductor Field Effect Transistors ("MOSFET"s). Since
then, the Company has advanced this technology in important ways. In fiscal
1998, IR introduced a new generation of high-voltage power MOSFETs that it
believes set a new standard for price and performance in high-volume consumer
electronics applications. The Company also manufactures high-voltage integrated
circuits ("IC"s), up to 1,200 volts, and insulated gate bipolar transistors
("IGBT"s) that allow it to provide power conversion solutions for a broader
range of applications. Based on information from the research firm Dataquest,
the Company estimates that over 75% of the world's power MOSFETs are produced by
IR or under its patents.
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INDUSTRY OVERVIEW
Based on statistics published by the Semiconductor Industry Association
("SIA"), the Company believes it is the leader in the field effect power
transistor segment of the semiconductor industry with its HEXFET-Registered
Trademark- power MOSFETs and IGBTs. Industry-wide revenues from sales of power
MOSFETs and IGBTs were $2.69 billion in calendar 1998, a decrease of 4.6% from
1997 levels. The decrease in revenue was attributable to changes in currency
exchange rates, aggressive price competition, and an inventory correction in the
PC sector. SIA data indicates that over the past five years revenues from power
MOSFET sales have grown at an average rate of 16% per year. Sales from power
MOSFET units grew 31% over the same period.
The growth of the power conversion market is driven by a number of factors:
- INCREASE IN DEMAND FOR PORTABLE ELECTRONICS. Worldwide demand for mobility
and convenience is creating significant growth opportunities in portable
electronics that depend on efficient power conversion to extend battery
life and enhance product performance. The latest-generation personal
computers rely on advances in power conversion technology to operate
efficiently at ever-lower voltages. In addition, high-efficiency power
semiconductors enable new cellular phones and laptop computers to
incorporate smaller batteries and extend battery life.
- GROWTH IN AUTOMOTIVE ELECTRONICS. The proliferation of power features in
automobiles and tougher standards for safety, fuel economy, and emissions
are driving the adoption of more complex power electronics. An engineering
group representing Mercedes-Benz, General Motors, Ford and MIT recently
forecasted that the electrical load per vehicle could triple from 800 to
2,400 watts by the year 2005, significantly reducing fuel efficiency at a
time when regulations call for improved gas mileage. Advanced power
conversion solutions can help offset this impact by replacing traditional
hydraulic and belt-driven applications with electronic ones. For example,
electronic power steering systems can increase fuel efficiency by more
than one-and-one-half miles per gallon.
- EXPANDING DEMAND FOR ELECTRICITY. Demand for electricity is driven by
global economic growth and the proliferation of electric applications.
Global per capita consumption of electricity grew 5.0% annually between
1993 and 1996, according to the 1996 United Nations Energy Statistics
Yearbook. Increased concern about environmental and health issues is
making it difficult to add capacity in developed economies, and in many
developing economies the cost of expanding the electric power
infrastructure is limiting the rate at which capacity is expanding. To
help meet demand, some utilities in industrialized economies offer
incentives to customers who buy or use appliances or other electrical
products that more efficiently consume electricity. In addition,
regulators in a number of developing economies are considering mandating
the use of energy-efficient appliances and lights.
- INCREASING ENERGY EFFICIENCY. Motors, most of which are not controlled,
consume approximately half of the world's electricity. Uncontrolled motors
operate only at full speed or not at all and therefore use electricity
very inefficiently. Variable-speed motors adjust operating speeds as
needed and increase energy efficiency and performance in a wide range of
industrial and commercial applications. For example, most refrigerator
motors can only run at full speed, but a controlled motor can run at the
lowest variable-speed needed to maintain the required refrigerator
temperature. Such variable-speed refrigerator compressor motors reduce
electricity consumption. Similarly, approximately 25% of electricity in
the United States is consumed in lighting according to the Electric Power
Research Institute. The Institute further reports that fluorescent lights
with electronic ballasts that use power semiconductors are more efficient,
last up to ten times longer, and use up to 75% less electricity than
incandescent bulbs.
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PRODUCTS
IR products condition electrical power to make it more usable and efficient
in performing work such as operating power supplies, controlling motors and
lighting lamps. Each product's ability to minimize energy lost at each point in
the power conversion process is central to that product's value.
IR's HEXFET-Registered Trademark- power MOSFET and IGBT products comprised
approximately two-thirds of fiscal 1999 sales. The Company also supplies
high-voltage ICs, high-performance diodes, high-power rectifiers and thyristors.
IR believes that its full complement of power conversion technology represents a
competitive advantage, enabling it to provide customers with integrated
solutions to their power conversion needs.
INPUT RECTIFICATION PRODUCTS
IR manufactures a broad line of rectifiers, diodes and thyristors that serve
the input rectification function of power conversion. These products, which also
condition electrical power to make it more efficient and usable, are used
principally in industrial end-products that require power-handling capability
from one amp to 5,000 amps and from 20 volts to 5,000 volts. Applications
include motor and lighting controls, welding equipment, fork lifts, machine
tools, induction heating, locomotives, motor-driven production lines, smelting
equipment and power supplies.
CONTROL PRODUCTS
A high-voltage IC is a semiconductor device that has logic and control on
the same chip and is used in conjunction with power MOSFETs or IGBTs.
HIGH-VOLTAGE INTEGRATED CIRCUITS. These devices serve the control function
of power conversion and optimize the performance of circuits that often include
power MOSFETs and IGBTs. These devices allow IR's customers to simplify circuit
design and assembly, improve reliability, and reduce overall system size and
cost. IR's high-voltage ICs draw on its power MOSFET technology. The ability of
a high-voltage IC to sense and respond to advanced conditions makes its
performance superior to discrete components. The Company has obtained certain
patent protection on these circuits and also has patent applications pending.
High-voltage ICs are used in a wide variety of power supply, motor, and
lighting control applications. These include industrial motor controls, home
appliance motor controls, solenoid drivers, welding equipment, telecom switches,
computers and peripherals, instrumentation and test equipment, and electronic
lighting ballasts.
SWITCHING PRODUCTS
Power MOSFETs and IGBTs rapidly and efficiently switch electricity on and
off in order to break electrical current into elements that can be formatted to
the specific requirements of a circuit.
POWER MOSFETS. Through its HEXFET-Registered Trademark- product line, IR
believes it is the market leader in power MOSFETs. Applications for power
MOSFETs in automobiles include anti-lock braking systems, fuel injection
systems, electronic power steering, power accessories and air bags. Computer and
peripheral applications include power supplies, disk drives and printers. Office
equipment applications include copiers and facsimile machines. Consumer
electronics applications include home entertainment, video cameras, household
appliances, and power tools. Lighting applications include electronic lighting
ballasts and compact fluorescent bulbs. Industrial applications include
automated production equipment, instrumentation and test equipment.
Communications applications include telephone networks and modems.
Government/space applications include communications satellites and
command-and-control systems.
Market acceptance and brand recognition of IR's HEXFET-Registered Trademark-
line of products have benefited from IR's emphasis on quality control and
reliability. IR makes cumulative and current data on long-term and short-term
product reliability available to customers quarterly.
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The Company fabricates the majority of its power MOSFET wafers at its HEXFET
America facility in Temecula, California. Die from these wafers are assembled
into packaged devices at IR's facilities in England and Mexico and subcontract
facilities in Asia. See "Manufacturing."
IGBTS. IGBTs typically perform the switch function in industrial
applications that require higher current and voltage than power MOSFETs can
handle efficiently. IGBTs combine the ease of voltage-driven power MOSFET
technology with the conduction efficiency of bipolar transistor technology. The
performance and ruggedness of these devices enable them to replace bipolar
transistors and thyristors in many high-voltage, high-current motor control and
power conditioning applications. Energy-efficient, variable-speed motor controls
are an emerging application, and IR believes electric and hybrid vehicles may
require large quantities of IGBTs for each vehicle.
IR's IGBT technology is closely related to its power MOSFET technology, and
the Company views them as complementary products. IR believes that its patents
on fundamental power MOSFET technology also apply to IGBTs, and the Company is
seeking further patent protection on its IGBT technology, as well as on its
power MOSFET technology.
OUTPUT RECTIFICATION PRODUCTS
IR's Schottky diodes and fast-recovery diodes serve the output rectification
function of power conversion. A diode is a discrete device that conducts current
in one direction. A Schottky diode is an ultra-fast diode used in
high-frequency, low-voltage circuits. A fast-recovery diode is a diode suited to
applications above 200 volts where high switching speed is desirable. Schottky
diodes are used with power MOSFETs in high-frequency applications such as
computers and peripherals. The Company's HEXFRED-Registered Trademark-
fast-recovery diodes are used with IGBTs in higher-current, lower-frequency
applications such as motor controls.
POWER CONVERSION SOLUTIONS
IR's power conversion solutions combine products from one or more stages of
the power conversion process. Combining these products improves power efficiency
and allows simpler application designs. The Company is currently focusing its
solution products on automotive electronics, portable electronics and motor
control applications.
APPLICATIONS
Power semiconductors are used in a broad spectrum of commercial and
industrial applications, including many products with long life cycles. Power
semiconductor demand is driven by the adoption of new technologies, the
proliferation of new end-product applications, and growth in the end-product
markets. Applications that IR believes are driving future demand for power
semiconductors include:
INFORMATION TECHNOLOGY. Portable electronics is a fast growing segment of
the information technology sector. Advances in power semiconductors help extend
battery life and reduce product size and weight in a variety of battery-operated
products such as laptop computers, personal digital organizers and cellular
telephones.
AUTOMOTIVE ELECTRONIC SYSTEMS. The use of solid-state electronics has
increased rapidly in recent model year automobiles as safety and comfort
features increase demands on their electronic systems. Applications include
anti-lock braking systems; air-bags; fuel injection systems; and electronic
power steering, windows, mirrors and seats. Widespread adoption of
battery-operated electric and hybrid vehicles could dramatically increase
consumption of field effect power transistors.
MOTOR CONTROLS. Variable-speed solid-state controls increase energy
efficiency and performance in a broad range of industrial and appliance motors.
Public mandates to meet rising demand for power while
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conserving natural resources drive demand for affordable, efficient motor
controls. Variable-speed motors are used in a variety of industrial and consumer
applications, including industrial automated equipment, washing machines,
heating and air conditioning units and refrigerators.
MANUFACTURING
Semiconductor manufacturing involves two phases of production: wafer
fabrication and assembly (or packaging). Wafer fabrication requires a sequence
of process steps that expose silicon wafers to chemicals that change their
electrical properties. The chemicals are applied in patterns that define cells
or circuits within numerous individual devices (termed "die" or "chips") on each
wafer. Packaging or assembly is the sequence of production steps that divide the
wafer into individual chips and enclose the chips in structures (termed
packages) that make them usable in a circuit. Power semiconductors generally use
process technology and equipment already proven in the manufacturing of IC's.
The Company has production facilities in California, England, Italy, Mexico,
Wales, India and China. In addition, the Company has equipment at, or
manufacturing supply agreements with, subcontractors located in the Philippines,
Japan, Taiwan, Malaysia, the Czech Republic, Wales and the United States.
IR fabricates the majority of its power MOSFET and IGBT wafers at its HEXFET
America facility in Temecula, California. The Company's most advanced wafer
fabrication facility, located in El Segundo, California, expands IR's
manufacturing resources, as well as its development capability (see also
"Research and Development"). A wafer fabrication facility for high-voltage power
integrated circuits and other advanced products, as well as assembly operations
for components used in government/space applications, are located in El Segundo,
California. The Company manufactures substantially all its high-power rectifiers
and thyristors at its Turin, Italy facility. Plants that assemble power MOSFETs
and other products are located overseas, in Company-owned and subcontract
facilities. The Company is in the process of transferring high-volume assembly
lines for power MOSFETs, IGBTs and diodes from its Oxted, England facility into
its existing facility in Mexico. The Company is currently installing a
production facility in Penllergaer, Wales, to assemble power modules for its
Electronic Motion Systems unit. The Company also has arrangements with third
parties for product assembly in the Philippines, Malaysia, Taiwan, Japan, the
Czech Republic and Mexico. In a duty-free zone in India, the Company has an
assembly facility for rectifiers and thyristors.
MARKETING, SALES AND DISTRIBUTION
The Company markets its products through sales staff, representatives and
distributors. The Company believes its ability to offer products that serve each
of the four functions of power conversion enhances its competitive position in
the overall power semiconductor market.
In fiscal 1999, the Company's product sales by region (based on the location
of the customer) were approximately 42% from North America, 24% from Europe and
34% from Asia, which includes Japan and Asia Pacific. The Company's domestic
direct sales force is organized into four regional sales zones. In Europe, the
Company's products are sold through its own sales force as well as through
independent sales agents and distributors. The Company's European sales and
representative offices are in England, Italy, Sweden, France, Germany, Finland,
Denmark, Switzerland, Russia, the Czech Republic and Hungary. In Asia, IR has
sales, representative or liaison offices in India, Japan, Singapore, China, Hong
Kong, South Korea, Taiwan, the Philippines, Australia and New Zealand.
For financial information about the results of the Company's geographic
areas for each of the last three fiscal years, see Note 5 of the Notes to the
Consolidated Financial Statements.
Because many applications require products from several product groups, the
Company has organized its marketing efforts by application, rather than product
type. These groups focus on several key
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commercial sectors and on government/space business. In addition, the Company's
staff of application engineers provides customers with technical advice and
support regarding the use of IR's products.
CUSTOMERS
International Rectifier's devices are incorporated in subsystems and
end-products manufactured by other companies. IR's customers in the automotive
group include Delco, Ford, Siemens and Bosch. IBM and Compaq are customers in
the computer group. Consumer electronics customers include Philips and Sony.
Customers in the telecommunications group include Lucent Technologies, Motorola
and Nokia. Industrial customers include Emerson, Sanken Electric and American
Power Conversion. Customers in the government/space group include Hughes and
Lockheed/Martin. Over the long term, approximately 35% of the Company's revenues
have come from sales of its products to distributors, including Arrow
Electronics, Hamilton/Avnet and Future Electronics. The Company has historically
found it more difficult to determine distributor demand than demand from its
other customers. Sales to one customer, Arrow Electronics, accounted for 10.7%
of the Company's revenues.
BACKLOG
As of June 30, 1999, the Company's backlog of orders was $146.9 million
compared to $113.0 million as of June 30, 1998. Backlog is comprised of purchase
orders and customer forecast commitments scheduled to be shipped within the
following twelve months. Increasingly, major customers are operating their
businesses with shorter lead-times and are placing their orders at shorter
intervals, which tends to reduce backlog relative to future revenue. The
increase in backlog at June 30, 1999 is largely attributable to an industry
rebound and the Company's market share gains. Given adequate notice, IR usually
allows customers to cancel purchase orders without penalty. Backlog is not
necessarily indicative of sales for any future period.
RESEARCH AND DEVELOPMENT
IR is setting performance and architecture standards for power electronics
across a broad spectrum of applications. The Company's focus on the full range
of power conversion technologies differentiates International Rectifier from its
competitors, and allows the Company to develop complementary products that add
value to the customers' products. IR conducts research and development
activities to improve the price/performance ratio of its product offerings
across a wide range of end-use applications. The Company's research and
development program focuses on the advancement and diversification of its
HEXFET-Registered Trademark-power MOSFET and IGBT product lines and the
development of high-voltage control integrated circuits and other power products
that work in combination with power MOSFETs and IGBTs. The Company also directs
its research and development on reducing the cost of existing products. IR's
program places increasing emphasis on the development of chipsets and
system-level solutions that improve overall system performance and cost, as well
as help customers to accelerate market introduction of their products.
In fiscal 1999, 1998 and 1997, the Company spent approximately $40.5
million, $39.1 million and $35.5 million, respectively, on research and
development activities.
A new Development Center in El Segundo came on-line in the first quarter of
fiscal 1998. This facility provides greater capacity and submicron capability
for development, pilot production and limited production of advanced power
MOSFETs and IGBTs. The 55,000 square foot facility incorporates a 12,000
square-foot clean-room and is designed to support greater levels of development
activity.
The advanced process capability and much shorter development cycle of this
new development center produced tangible benefits, as International Rectifier
established new standards in device density and key performance parameters to
address high-growth opportunities.
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During fiscal 1999, IR's product introductions accelerated, achieving cost
and performance enhancements across the full range of IR's transistor line. The
Company's flow of new benchmark products for target applications included:
- Multiple design wins for new trench and planar low-voltage transistors
that increase IR's penetration in advanced digital cell phones and
high-end portable PCs;
- New high-voltage power MOSFETs that combine process technologies that
achieve benchmark performance in power supplies for servers and routers
needed to carry internet traffic;
- High-performance intelligent power switches, proprietary power ICs, and
proprietary modules that won designs in electronic steering, fan controls
and diesel fuel injection applications;
- Proprietary high-voltage control ICs and IGBTs that have been designed
into high-end refrigerators and washers by major U.S., European, and Asian
brand-name OEM's;
- Proprietary IC chipsets that will go into volume production in dimmable
electronic lighting by November 1999;
- A new chipset, built around a unique 1200 volt power IC, that adds
functionality and sharply increases IR's content in industrial motor
drives.
INTELLECTUAL PROPERTY
The Company has made significant investments in developing and protecting
its intellectual property. Through successful enforcement of its patents, the
Company has entered into a number of license agreements, generated royalty
income, and received substantial payments in settlement of litigation. The
Company currently has 136 unexpired U.S. patents and 124 U.S. patents pending.
The Company's power MOSFET patents expire between 2000 and 2010, with the
broadest remaining in effect until 2007 and 2008. In addition, the Company has
179 issued foreign patents and 350 foreign patents pending in a number of
countries. The Company is also licensed to use certain patents owned by others.
The Company has several registered trademarks in the United States and abroad
including the trademark HEXFET-Registered Trademark-. The Company believes that
its proprietary technology and intellectual property contribute to its
competitive advantage.
The Company is committed to enforcing its rights under its patents,
including through litigation, if necessary. In January 1999, the Company
announced agreements that settled outstanding patent litigation with Samsung
Semiconductor, Inc. and Samsung Electronics Company and with Fuji Electric
Company and Collmer Semiconductor, Inc. In the second half of fiscal 1999, the
Company settled litigation and disputes with Shindengen Electric Company and
Rohm Co., Ltd., respectively, which resulted in two additional royalty-bearing
license agreements. The Company currently has license agreements with most of
the major power MOSFET manufacturers in the United States and abroad. In fiscal
1999, $26.5 million of net revenues were derived from license agreements. Other
income of $53.5 million primarily consisted of proceeds from license agreements
for prior periods and amounts in settlement of litigation for past patent
infringement (net of legal costs and the share of the Company's royalty proceeds
payable to Unitrode Corporation). Under the terms of an agreement with Unitrode
Corporation, the Company pays Unitrode approximately 12% of the Company's net
patent royalty income from its power MOSFET patents.
Most of the Company's broadest power MOSFET patents were subject to, and
have successfully emerged from, reexamination by the United States Patent and
Trademark Office ("PTO"). The PTO, in the fiscal year, concluded its
reexamination of the Company's U.S. patents 4,642,666 and 4,959,699 and issued
reexamination certificates confirming the patentability of claims of those
patents. The Company's 5,008,725 and 5,130,767 patents are currently undergoing
reexamination in the PTO.
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COMPETITION
The Company encounters differing degrees of competition for its various
products, depending upon the nature of the product and the particular market
served. Generally, the semiconductor industry is highly competitive and subject
to rapid price changes, and many of the Company's competitors are larger
companies with greater financial resources. The Company believes that it is
distinguished from competitors by its comprehensive line of power conversion
products and ability to combine these products into compact, cost-effective
packages and system-level solutions. IR's products compete with products
manufactured by others on the basis of breadth of product line, quality, price,
reliability, overall performance of the products, delivery time to the customer,
and service (including technical advice and support). The Company's principal
competitors include Advanced Power Technology, European Powersemiconductor and
Electronics Company GmbH (also known as Eupec, a wholly owned subsidiary of
Infineon Technologies), Fairchild Semiconductor Corporation, Fuji Electric
Company, Hitachi Ltd., Infineon Technologies AG (formerly Siemens AG), Intersil
Corporation (formerly part of Harris Corporation), IXYS Corporation, NEC
Corporation, On Semiconductor (formerly a division of Motorola, Inc.), Philips
International B.V., Powerex, Inc., ST Microelectronics (formerly called
SGS-Thomson Microelectronics), Toshiba Corporation, Vishay-Siliconix
Incorporated and Westcode Semiconductors Ltd.
ENVIRONMENTAL MATTERS
Federal, state, and local laws and regulations impose various restrictions
and controls on the storage, use and discharge of certain materials, chemicals,
and gases used in semiconductor manufacturing processes. The Company does not
believe that compliance with such laws and regulations as now in effect will
have a material adverse effect on the Company's results of operations, financial
position or cash flows.
In addition, under some of these laws and regulations, the Company could be
held financially responsible for remedial measures if properties are
contaminated, or if waste is sent to a landfill or recycling facility that
becomes contaminated. Also, the Company may be subject to common law claims if
it releases substances that damage or harm third parties. The Company cannot
make assurances that changes in environmental rules and regulations will not
require additional investments in capital equipment and the implementation of
additional compliance programs in the future which could have a material adverse
effect on the Company's results of operations, financial position or cash flows,
as could any failure by the Company to comply with environmental laws and
regulations.
The Company and Rachelle Laboratories, Inc. ("Rachelle"), a former operating
subsidiary of the Company that discontinued operations in 1986, were each named
a potentially responsible party ("PRP") in connection with the investigation by
the United States Environmental Protection Agency ("EPA") of the disposal of
allegedly hazardous substances at a major superfund site in Monterey Park,
California ("OII Site"). Certain PRPs who settled certain claims with the EPA
under consent decrees filed suit in Federal Court in May 1992 against a number
of other PRPs, including the Company, for cost recovery and contribution under
the provisions of the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"). The Company has settled all outstanding claims that
have arisen out of the OII Site.
The Company also received a letter dated July 25, 1995 from the U.S.
Department of Justice, directed to Rachelle, offering to settle claims against
Rachelle relating to the first elements of clean-up work at the OII Site for
$4,953,148 (the final remedy assessment has not yet been made). The offer stated
that the settlement would not cover the cost of any additional remedial actions
required to finish the clean-up. This settlement offer expired by its terms on
September 1, 1995. On August 7, 1995, the Company received a Supplemental
Information Request from the EPA directed to Rachelle, to which counsel for
Rachelle responded with information regarding waste shipped to the OII Site.
Counsel for Rachelle received a letter from the EPA dated September 30, 1997,
requesting that Rachelle participate in the final remedial actions at the site,
and counsel replied on October 21, 1997. The Company has taken the position that
none of the
10
<PAGE>
wastes generated by Rachelle were hazardous. The Company has received no further
communications in connection with the OII Site.
The Company cannot determine with accuracy the amount of the potential
demand to Rachelle for the cost of the final remedy. Based upon information
received to date, the Company believes that any demand, if made, while likely to
be significant, should nonetheless be substantially below, although in addition
to, the demand amount for earlier phases of the OII Site clean-up. The Company's
insurer has not accepted liability although it has made payments for defense
costs for the lawsuit against the Company.
The Company also received a letter dated September 9, 1994, from the State
of California Department of Toxic Substances Control stating that it may be a
PRP for the deposit of hazardous substances at a facility in Whittier,
California. In June 1995, the Company joined a group of other PRPs to remove
contamination from the site. The group currently estimates the total cost of the
clean-up to be between $20 million and $25 million, although the actual cost
could be much higher. The Company estimated that it sent approximately 0.1% of
the waste, by weight, sent by all PRPs contributing to the clean-up of the site,
and the Company believes the cost of the clean-up will be roughly allocated
among PRPs by the amount of waste contributed. On July 31, 1999, the group
proposed two settlement offers to the Company: one for $34,165 and the second
for $68,330. The first settlement offer covers investigation and remediation of
the site itself and a small area extending beyond the site. The second
settlement offer covers this area plus all additional downgradient
contamination. The Company accepted the $68,330 settlement offer, which requires
EPA acceptance, on September 14, 1999, and will make the required payment by
September 30, 1999. There can be no assurance, however, that the EPA will accept
the settlement offers or what the ultimate outcome of this matter will be. The
Company believes that, whatever the outcome, it will not have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
EMPLOYEES
As of June 30, 1999, the Company employed approximately 4,495 people, of
whom approximately 3,345 are employed in North America, 1,015 in Western Europe
and 135 in Asia. The Company is not a party to any collective bargaining
agreements. The Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's operations occupy a total of approximately 1,001,000 square
feet, of which approximately 635,000 square feet are located within the United
States. Of the worldwide total, approximately 257,000 square feet are leased and
the balance is owned by the Company.
IR's leases expire between 2000 and 2012. If the Company is unable to renew
these leases upon expiration, it believes that it could find other suitable
premises without any material adverse impact on its operations.
The Company's major facilities are in the following locations:
<TABLE>
<CAPTION>
TOTAL SQUARE FEET
--------------------
FACILITY OWNED LEASED EXPIRATION OF LEASE
- ------------------------------------------------------ --------- --------- ------------------------------------
<S> <C> <C> <C>
Temecula, California.................................. 331,000 --
El Segundo, California................................ 127,000 177,000 May 31, 2000--July 31, 2004
Tijuana, Mexico....................................... 129,000 --
Oxted, England........................................ 40,000 32,000 June 30, 2000--March 27, 2012
Turin, Italy.......................................... 110,000 --
</TABLE>
11
<PAGE>
The Company believes that these facilities are adequate for its current and
anticipated near-term operating needs. IR estimates that it currently utilizes
approximately 73% of its worldwide manufacturing capacity.
The Company has sales or technical support offices located throughout the
United States and in Canada, France, Denmark, Germany, Switzerland, Finland,
Scandinavia, Russia, the Czech Republic, Hungary, Hong Kong, Japan, China,
Korea, Taiwan, the Philippines, Singapore and India which operate in leased
facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company, along with 87 other companies, was sued in Phoenix, Arizona
federal court on February 26, 1999, by the Lemelson Foundation for alleged
infringement of various Lemelson "machine-vision" and "auto ID" patents. In July
1999, the Company entered into an agreement with the Lemelson Foundation that
settled all outstanding claims and grants the Company a license to use the
Lemelson patents asserted against the Company.
The Company and certain of its directors and officers have been named as
defendants in three class action lawsuits filed in Federal District Court for
the Central District of California in 1991. These suits seek unspecified but
substantial compensatory and punitive damages for alleged intentional and
negligent misrepresentations and violations of the federal securities laws in
connection with the public offering of the Company's common stock completed in
April 1991 and the redemption and conversion in June 1991 of the Company's 9%
Convertible Subordinated Debentures due 2010. They also allege that the
Company's projections for growth in fiscal 1992 were materially misleading. Two
of these suits also named the Company's underwriters, Kidder, Peabody & Co.
Incorporated and Montgomery Securities, as defendants.
On March 31, 1997, the Court, on the Company and the individual defendants'
motion for summary judgment, issued the following orders: (a) the motion for
summary judgment was granted as to claims brought under Sections 11 and 12(2) of
the Securities Act of 1933; (b) the motion was denied as to claims brought under
Section 10(b) of the Securities Exchange Act of 1934 and the Securities and
Exchange Commission Rule 10b-5; and (c) the motion was granted as to the common
law claims for fraud and negligent misrepresentation to the extent said claims
are based on representations contained in the offering prospectus and was denied
as to other such claims. The Court also granted the summary judgment motion
brought by the underwriters. The plaintiffs' motion for reconsideration or
certification of an interlocutory appeal of these orders was denied.
On January 28, 1998, the Court decertified the class pursuing common law
claims for fraud and negligent misrepresentation and granted the defendants'
motion to narrow the stockholder class period to June 19, 1991 through October
21, 1991. Plaintiffs' motion for reconsideration or certification of an
interlocutory appeal of these rulings was denied.
On June 14, 1999, the Court approved a notice of the pendency of the class
action and a proof of claim form for dissemination to class members. Such
dissemination took place in June 1999. Trial is scheduled for March 14, 2000.
Although the Company believes that the remaining claims alleged in the suits
are without merit, the ultimate outcome cannot be presently determined. A
substantial judgment or settlement, if any, could have a material adverse effect
on the Company's results of operations, financial position or cash flows. No
provision for any liability that may result upon adjudication of these matters
has been made in the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
Not applicable.
12
<PAGE>
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company serve at the discretion of the Board
of Directors. Mr. Eric Lidow's employment with the Company is subject to the
provisions of an executive employment agreement with the Company dated May 15,
1991, and subsequently amended on April 12, 1995, June 22, 1998 and August 5,
1998. For further information, see Note 14 of the Notes to the Consolidated
Financial Statements.
The executive officers of IR are:
<TABLE>
<CAPTION>
Eric Lidow......................... 86 Chairman of the Board
<S> <C> <C>
Alexander Lidow.................... 44 Chief Executive Officer
Robert J. Mueller.................. 70 Executive Vice President--External
Affairs and Business Development
Michael P. McGee................... 40 Executive Vice President and Chief
Financial Officer
L. Michael Russell................. 52 Executive Vice President, Secretary
and General Counsel
</TABLE>
Eric Lidow is a founder of the Company, has been a director of the Company
since its inception in 1947 and was Chief Executive Officer until March 6, 1995.
Mr. Lidow continues as Chairman of the Board and also serves as Chairman of the
Company's Executive Committee.
Alexander Lidow, Ph.D., has been employed by the Company since 1977. He
served as the Vice President--Research and Development of the Company's
Semiconductor Division beginning July 1979, was promoted to Semiconductor
Division Executive Vice President--Manufacturing and Technology in March 1985,
and became the President of the Company's Electronic Products Division in July
1989. In February 1992, Dr. Lidow was elected Executive Vice President of
Operations. He was elected a director in September 1994 and Chief Executive
Officer in March 1995. Dr. Lidow serves on the Board of Overseers of RAND
Corporation and on the Board of Trustees of the California Institute of
Technology. Dr. Lidow is a son of Eric Lidow and a brother of Derek B. Lidow, a
director of the Company.
Robert J. Mueller has been employed by the Company since 1961. He served as
Vice President of Marketing for the Company's Semiconductor Division from 1963
until 1967 when he was promoted to Vice President--Sales. In October 1968, he
was promoted to Corporate Vice President--Foreign Operations. Mr. Mueller became
Executive Vice President--World Marketing and Foreign Operations in April 1977,
Corporate Executive Vice President--External Affairs and Worldwide Sales in July
1989, and Executive Vice President--External Affairs and Business Development in
July 1993. He was first elected a director in 1990.
Michael P. McGee has been employed by the Company since 1990. He joined the
Company in July 1990 as Director of Corporate Accounting and was promoted to
Corporate Controller in December 1990. Mr. McGee became Vice President,
Controller and Principal Accounting Officer in 1991, and in 1993, became Vice
President and Chief Financial Officer. In November 1998, Mr. McGee was elected
Executive Vice President. From 1985 to the time he joined the Company, Mr. McGee
was a senior manager and audit manager at Ernst and Young.
L. Michael Russell has been employed by the Company since January 1997. He
joined the Company as Vice President and General Counsel and became Secretary in
February 1997. In November 1998, he was elected Executive Vice President. Mr.
Russell was General Counsel, Consumer & Industrial Segment, and Chief
International Counsel of Teledyne, Inc., where he was employed in the Corporate
Legal Department for more than five years immediately prior to joining the
Company.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS'
MATTERS
PRICE RANGE OF COMMON STOCK
(IN DOLLARS)
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER STOCKHOLDERS AT
FISCAL ---------------------- ---------------------- ---------------------- ---------------------- YEAR END
YEAR HIGH LOW HIGH LOW HIGH LOW HIGH LOW (000'S)
- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 8 9/16 4 1/4 10 13/16 4 1/4 11 7/8 6 3/8 13 1/2 7 3/16 1,839
1998 23 3/4 18 23 3/8 11 9/16 14 9/16 10 9/16 12 1/2 8 3/16 1,837
</TABLE>
The Company's Common Stock is traded on the New York Stock Exchange and the
Pacific Exchange under the symbol "IRF."
No dividends have been recently declared or paid. The Company does not
intend to pay cash dividends in the foreseeable future as all funds will be used
to expand operations. Furthermore, under certain credit agreements, the Company
is not permitted to pay any cash dividends.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of June 30, 1999 and 1998 and
for the fiscal years ended June 30, 1999, 1998 and 1997 are derived from the
audited consolidated financial statements of the Company and should be read in
conjunction with the audited consolidated financial statements and notes with
respect thereto included herein. The selected consolidated financial data as of
June 30, 1997, 1996 and 1995, and for the fiscal years ended June 30, 1996 and
1995 are derived from audited consolidated financial statements of the Company
which are not included herein.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
Revenues..................................................... $ 545,371 $ 551,891 $ 486,127 $ 576,849 $ 429,026
Cost of sales................................................ 393,379 375,727 323,067 351,046 278,202
---------- ---------- ---------- ---------- ----------
Gross profit................................................. 151,992 176,164 163,060 225,803 150,824
Selling and administrative expense........................... 98,193 104,661 105,954 102,129 82,328
Research and development expense............................. 40,512 39,132 35,495 26,967 20,108
Impairment of assets, restructuring and severance charges.... 24,520 -- 71,000 -- --
---------- ---------- ---------- ---------- ----------
Operating profit (loss)...................................... (11,233) 32,371 (49,389) 96,707 48,388
Interest expense, net........................................ (11,120) (7,288) (4,015) (394) (377)
Other income (expense), net.................................. 53,509 (494) 714 (383) (544)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and cumulative effect of
accounting change.......................................... 31,156 24,589 (52,690) 95,930 47,467
Provision (benefit) for income taxes......................... 10,780 8,114 (9,484) 29,451 8,069
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect of accounting
change..................................................... 20,376 16,475 (43,206) 66,479 39,398
Cumulative effect of change in accounting principle, net of
income tax benefit of $5,431............................... (26,154) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)............................................ $ (5,778) $ 16,475 $ (43,206) $ 66,479 $ 39,398
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share:
Basic:
Income (loss) before cumulative effect of change in
accounting principle..................................... $ 0.39 $ 0.32 $ (0.84) $ 1.31 $ 0.85
Cumulative effect of change in accounting principle........ (0.50) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share--Basic (1).............. $ (0.11) $ 0.32 $ (0.84) $ 1.31 $ 0.85
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Diluted:
Income (loss) before cumulative effect of accounting
change................................................... $ 0.39 $ 0.32 $ (0.84) $ 1.29 $ 0.84
Cumulative effect of change in accounting principle........ (0.50) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share--Diluted (1)............ $ (0.11) $ 0.32 $ (0.84) $ 1.29 $ 0.84
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Average common shares outstanding--Basic (1)................. 51,612 51,248 51,307 50,577 46,535
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Average common shares and potentially dilutive securities
outstanding--Diluted (1)................................... 51,788 51,674 51,307 51,384 47,020
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS) (2)
Working capital.............................................. $ 155,642 $ 163,317 $ 203,216 $ 178,072 $ 127,751
Total assets................................................. 709,085 735,827 679,753 629,079 496,184
Short-term debt.............................................. 23,043 65,379 31,820 23,570 25,235
Long-term debt, less current maturities...................... 158,418 141,528 143,164 47,994 23,881
Stockholders' equity......................................... 396,274 399,650 381,715 421,213 345,181
</TABLE>
- ------------------------
(1) Adjusted to reflect the two-for-one stock split declared on November 20,
1995.
(2) Certain reclassifications have been made to previously reported amounts to
conform with current-year presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain items included in selected financial
data as a percentage of revenues.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
JUNE 30,
----------------------
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Revenues.................................................................................. 100.0% 100.0% 100.0%
Cost of sales............................................................................. 72.1 68.1 66.5
------ ----- -----
Gross profit.............................................................................. 27.9 31.9 33.5
Selling and administrative expense........................................................ 18.0 19.0 21.8
Research and development expense.......................................................... 7.4 7.1 7.3
Impairment of assets, restructuring and severance charges................................. 4.5 -- 14.6
------ ----- -----
Operating profit (loss)................................................................... (2.0) 5.8 (10.2)
Interest expense, net..................................................................... (2.0) (1.3) (0.8)
Other income (expense), net............................................................... 9.8 (0.1) 0.1
------ ----- -----
Income (loss) before income taxes and cumulative effect of accounting change.............. 5.8 4.4 (10.9)
Provision (benefit) for income taxes...................................................... 2.1 1.4 (2.0)
------ ----- -----
Income (loss) before cumulative effect of accounting change............................... 3.7 3.0 (8.9)
Cumulative effect of change in accounting principle....................................... (4.8) -- --
------ ----- -----
Net income (loss)......................................................................... (1.1)% 3.0% (8.9)%
------ ----- -----
------ ----- -----
</TABLE>
1999 COMPARED WITH 1998
Fiscal 1999 was a 52-week year compared to a 53-week year in fiscal 1998.
Revenues for fiscal 1999 were $545.4 million, slightly lower than fiscal 1998
revenue of $551.9 million. Net patent royalties contributed $26.5 million to
revenue, compared to $17.2 million in the prior period. During fiscal 1999, IR's
global pricing averaged a 8% decline compared to a 14% drop in the prior period.
In fiscal 1999, product sales by region (based on the location of the
customer) were approximately 42% from North America, 24% from Europe and 34%
from Asia, which includes Japan and Asia Pacific, compared to 47%, 26% and 27%,
respectively, in fiscal 1998. Year-to-year, revenue in Japan decreased by 8.5%
but increased in Asia Pacific by 35.4%, reflecting a partial economic recovery
and the Company's penetration into new market segments in the Asian market.
Europe was down 10.1% year-to-year, with
16
<PAGE>
weakness in most market segments. Revenue in North America decreased 12.4%
year-to-year, reflecting distributors' efforts to reduce their inventories and
the shift of some U.S. based customers' assembly operations to locations in
Asia.
Unit shipments increased 28 percent year-to-year. The revenue comparison
over the same period reflects price pressure and a shift to smaller,
lower-priced products, particularly in Asian markets.
Gross profit was $152.0 million (27.9% of revenues) in fiscal 1999, versus
$176.2 million (31.9% of revenues) in fiscal 1998. The year-to-year gross profit
comparison reflected intense industry-wide price declines, unfavorable
fluctuations in product mix, and certain other expenses: a $2.5 million
inventory write-down associated with the transfer of manufacturing lines as part
of a restructuring program, and $2.7 million related to the adoption of
Statement of Position ("SOP") 98-5, ("Reporting on the Costs of Start-up
Activities"). Total cost of sales reflected the substantial increase in unit
shipments to meet rising demand.
In an effort to offset price pressure, the Company substantially reduced
unit costs and achieved approximately $53 million in manufacturing cost
reductions in fiscal 1999. Cost reduction measures included re-negotiation of
prices paid for materials and subcontract manufacturing services and process
changes that benefited manufacturing yields, as well as increased utilization of
the Company's production capacity.
Selling and administrative expense was $98.2 million (18.0% of revenues) in
fiscal 1999 versus $104.7 million (19.0% of revenues) in fiscal 1998. The
improvement in absolute dollars and as a percent of sales reflects initiatives
to increase the productivity of selling and administrative activities as well as
the benefit of restructuring programs.
In fiscal 1999, research and development expenditures increased $1.4 million
to $40.5 million (7.4% of revenues) from $39.1 million (7.1% of revenues) in the
prior period. Higher research and development expenses for fiscal 1999 reflect
accelerated development of new products, as well as higher overhead costs
associated with a new research and development facility. The Company expects
this increased development activity to yield significant new products.
In the second and third quarters of fiscal 1999, the Company took
restructuring charges totaling $18.7 million. The charges are associated with
streamlining worldwide sales and administration and with the transfer of
high-volume assembly lines from the Company's operation in England to its
facility in Mexico. This total charge consisted of an inventory write-down of
$2.5 million and a $16.2 million restructuring charge consisting of $10.1
million in estimated severance costs and $6.1 million for the write-down of
related assets. The Company expects to generate savings of $5 million in fiscal
2000 and savings of approximately $13 million annually thereafter when these
restructuring activities are fully implemented. IR expects the savings resulting
from these activities to reduce product cost and selling and administrative
expense as a percentage of sales.
During June 1999, the Company recorded an $8.3 million charge related to
employee severance associated with the elimination of approximately 39
positions. This severance consisted of costs due to the resignation of Dr. Derek
B. Lidow, who shared the responsibility of Chief Executive Officer, and a
reduction in sales and administrative management and staff levels.
Other income was $53.5 million in fiscal 1999, compared to other expense of
$0.5 million in fiscal 1998. Other income primarily consisted of proceeds from
license agreements for prior periods and amounts in settlement of litigation for
past patent infringement (net of legal costs and the share of the Company's
royalty proceeds payable to Unitrode Corporation).
In fiscal 1999, net interest expense increased $3.8 million from the prior
year. The increase was due to higher interest expense incurred on higher average
debt balances over the prior year, which were partially offset by increases in
interest income on investments.
17
<PAGE>
The Company reported a non-cash, after-tax charge of $26.2 million
associated with the early adoption of SOP 98-5, an AICPA-mandated change in
accounting practices for certain start-up and preoperating costs. Such costs had
previously been deferred and amortized by the Company.
Net realized and unrealized foreign currency gains and losses were less than
$1 million in each year.
1998 COMPARED WITH 1997
Fiscal 1998 was a 53-week year compared to a 52-week year in fiscal 1997.
Revenues for fiscal 1998 increased 14% to $551.9 million from $486.1 million in
the prior year. Unit shipments increased 38 percent, but the revenue increase
was partially offset by a $12.3 million unfavorable fluctuation in currency
exchange rates and an approximate average 14% price reduction on the Company's
products. The price decline reflected the impact of Asian economic conditions
and efforts by customers and distributors to reduce channel inventories. Net
patent royalties contributed $17.2 million to revenue, compared to $20.3 million
in the prior period. Royalties are based on licensees' sales of products covered
by IR's patents, which the Company believes declined as a result of economic and
business conditions, currency exchange rates and fluctuations in product mix.
Gross profit was $176.2 million (31.9% of revenues) in fiscal 1998 versus
$163.1 million (33.5% of revenues) in fiscal 1997. The gross profit decline
reflects pricing and market conditions described above. During the fourth
quarter of fiscal 1997, the Company recorded a $75.0 million pre-tax charge
related to a restructuring program designed to improve its competitive position
and accelerate growth and earnings by streamlining operations and
administration.
Selling and administrative expense was $104.7 million (19.0% of revenues) in
fiscal 1998 versus $106.0 million (21.8% of revenues) in fiscal 1997. Reductions
in selling and administrative expenses reflect management's continued efforts to
control spending and to administer its activities more efficiently.
In fiscal 1998, the Company's research and development expenditures
increased $3.6 million to $39.1 million (7.1% of revenues) from $35.5 million
(7.3% of revenues) in the prior period. Higher research and development expenses
reflect higher overhead costs associated with a new research and development
facility and the Company's increased development of new products.
In fiscal 1998, net interest expense increased $3.3 million from the prior
year. The increase was due to higher interest expense incurred on higher average
debt balances over the prior year, which were partially offset by small
increases in interest income on investments and interest capitalized on
construction-in-progress.
Net realized and unrealized foreign currency gains and losses were less than
$1 million in each year.
SEASONALITY
The Company has experienced moderate seasonality in its business in recent
years. On average over the past three years, the Company has reported
approximately 48% of annual revenues in the first half and 52% in the second
half of its fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company maintained cash and cash equivalent balances
and short-term investments of $31.5 million and $8.9 million, respectively.
During the twelve-month period ended June 30, 1999, operating activities
increased cash by $97.2 million, including amounts received for royalty
settlements. The Company reduced inventories by $19.7 million, excluding $2.5
million for restructuring charges, as the result of planned lower production
rates.
18
<PAGE>
Net investing activities consumed $58.4 million, primarily due to capital
expenditures of $71.6 million. At June 30, 1999, the Company had made purchase
commitments for capital expenditures of approximately $10.1 million. Assuming
existing market conditions, the Company plans fiscal 2000 capital investments of
approximately $60 million, principally for fabrication and assembly capacity to
meet market demand. The Company intends to fund capital expenditures and working
capital requirements through cash and cash equivalents on hand, anticipated cash
flow from operations, and, as needed, from funds available from a term loan and
revolving credit facility and equipment financing facilities. Although the
Company believes that funding will be sufficient, the Company may also consider
the use of funds from other external sources including, but not limited to,
public or private offerings of debt or equity.
Cash used in financing activities consumed $40.1 million. In June 1999, the
Company entered into a syndicated Credit Agreement with Banque Nationale de
Paris. The financing consists of two term loans totaling $155 million due in
2004 and 2005 and a $70 million revolver. The proceeds from the term loans were
used to pay down all of the Company's existing long-term unsecured bank loans
and substantially all domestic bank loans. As of June 30, 1999, $155 million had
been borrowed against these two term loans. The interest rate on these two term
loans is based on 3.0% and 3.5% above the applicable LIBOR rate. The loans are
collateralized by the majority of the Company's assets. The Credit Agreement
subjects the Company to a number of restrictive covenants, including the
following: (a) maximum leverage, minimum interest coverage and fixed charge
coverage ratios (b) minimum EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization) (c) maximum capital expenditures and (d) a
limitation on losses. The Credit Agreement also restricts the Company with
respect to the payment of cash dividends, the sale of assets, mergers and
acquisitions, additional financing, and investments. The Company also had $23.9
million in foreign revolving lines of credit and $5.7 million in foreign term
loans, against which $20.7 million had been borrowed. Equipment financing
facilities of $5.5 million were fully utilized. In total, the Company had credit
facilities of $260.1 million, against which $181.5 million had been borrowed.
Based on cash and cash equivalents on hand, short-term investments and
available financing, at June 30, 1999, the Company's liquidity was $119.3
million.
Three class action lawsuits have been brought against the Company and its
Board of Directors (see "Legal Proceedings"). Although the Company believes that
these class action lawsuits are without merit, the ultimate outcome and the
related effect on liquidity thereof cannot be presently determined. Accordingly,
the Company has not made any provision for any liability, if any, that may
result upon adjudication of these matters. For the possible effects of
environmental matters on liquidity, see "Business--Environmental Matters."
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various risks including changes in interest rates
affecting the repayment of debt and return on investments and foreign currency
rate fluctuations. The Company does not hold or purchase any foreign currency or
interest rate contracts for trading purposes. The Company's objective in
managing the exposure to foreign currency changes is to reduce the risk to
earnings and cash flow by entering into forward exchange contracts which are
intended to reduce risks associated with the value of its existing foreign
currency assets, liabilities, firm commitments and anticipated foreign revenues
and costs. The gains and losses on these contracts are intended to offset
changes in the related exposures. The Company does not hedge its foreign
currency exposure in a manner that would entirely eliminate the effects of
changes in foreign exchange rates on the Company's consolidated net income.
In the normal course of business, the Company also faces risks that are
either nonfinancial or nonquantifiable. Such risks principally include country
risk, credit risk and legal risk and are not discussed or quantified in the
following analyses.
19
<PAGE>
Interest Rate Risk
The financial assets of the Company are not subject to significant interest
rate risk due to their short duration. The financial liabilities of the Company
that are subject to interest rate risk are its long-term debt obligations as of
June 30, 1999 (see Note 2 of the Notes to the Consolidated Financial
Statements). As of June 30, 1999, the Company does not use any derivatives or
similar instruments to manage its interest rate risk. A 70 basis-point increase
in interest rates (approximately 10% of the Company's weighted average interest
rate on debt) affecting the Company's financial instruments would have an
immaterial effect on the Company's results of operations, financial position or
cash flows. As of June 30, 1999, the Company signed a credit agreement that will
require the use of an interest rate hedging instrument starting in fiscal 2000.
Foreign Currency Risk
The Company conducts business in various parts of the world and in various
foreign currencies. The Company manages potential foreign currency exposure by
entering into forward foreign exchange contracts or other non-speculative risk
management instruments to hedge foreign currency denominated receivables and
payables at certain of its international subsidiaries. At year-end, the Company
evaluated the effect that near-term changes in foreign exchange rates would have
had on the fair value of the Company's combined foreign currency position,
related to its outstanding foreign currency forward exchange contracts. If the
Company assumed an adverse change of 10% in foreign exchange rates, the
potential decrease in the Company's foreign currency position would have had an
immaterial effect on the Company's results of operations, financial position and
cash flows.
In fiscal 1999, over 58% of the Company's revenues were derived from sales
in foreign markets. The fair market value of foreign currency forward contracts
was $43.9 million at June 30, 1999. Net realized and unrealized foreign currency
gains and losses were less than $1 million for each of the years ended June 30,
1999, 1998 and 1997, respectively.
IMPACT OF THE INTRODUCTION OF THE EURODOLLAR
On January 1, 1999, eleven member states of the European Union established
fixed conversion rates between their existing national currency and a common
currency, the "euro." Until January 1, 2002, either the euro or the
participating country's present currency will be accepted as legal currency. On
January 1, 2002, euro-denominated bills and coins will be issued and the
participating country's present currency will no longer be accepted as legal
tender and will be withdrawn from circulation.
The Company has initiated an internal analysis to determine the effects of
the January 1, 1999 conversion. The current assessment includes the potential
impact of the technical challenges to adapt information technology and other
systems to accommodate euro-denominated transactions, the impact on currency
exchange rate risk and currency exchange costs, and the impact on existing
contracts.
Based on currently available information, management does not believe that
the euro conversion will have a material adverse impact on the Company's
business or financial condition. The Company will continue to evaluate the
impact of the euro conversion.
INCOME TAXES
The Company's effective tax rate in fiscal 1999 was approximately 34.6% due
primarily to the increase in valuation allowance, higher statutory tax rates in
certain foreign jurisdictions and foreign jurisdiction losses without foreign
tax benefit, offset by foreign tax credits, research and development credits and
state tax credits. The difference between the U.S. federal statutory tax rate of
35.0% and the Company's effective tax rate (benefit) of approximately 33.0% and
(18.0)% in fiscal 1998 and 1997, respectively, was attributable mainly to
foreign jurisdiction losses offset by foreign tax credits and state tax credits
for 1998 and foreign jurisdiction losses without foreign tax benefits and
accruals for additional tax for 1997.
20
<PAGE>
IMPAIRMENT OF ASSETS, RESTRUCTURING AND SEVERANCE CHARGES
Due to a continuous decline in selling prices for its MOSFET and IGBT
products, during the fourth quarter of fiscal 1997, the Company recorded a $75
million pretax charge related to a restructuring program designed to improve the
Company's cost structure. Specifically, the restructuring activities included
shifting production from older manufacturing facilities to newer, more efficient
facilities, changing business processes by consolidating order entry, customer
support, inventory management, information systems and finance activities at
fewer locations and accelerating the deployment of the Company's new product
development center. The restructuring activities were expected to reduce the
cost of the Company's business processes and lower product costs and result in
increased flow of new products, which are less price sensitive. The charge was
composed of $61 million for the write-down of assets, $4 million for the
write-down of inventory, primarily wafers, to net realizable value and $10
million for termination benefits to be paid in connection with the severed
employees. The restructuring activities occurred over an approximate
eighteen-month transition period through December 31, 1998.
The asset write-down of property and equipment of $61 million was determined
by comparing the expected future undiscounted cash flows to the respective asset
carrying value. If an asset was deemed to be impaired, the carrying value was
adjusted to its expected future discounted cash flows. The net book value of the
applicable property and equipment prior to the $61 million write-down was $79
million. The write-downs related to the following:
1) Wafer fabrication equipment located in El Segundo, California with a
carrying value of $21 million, was adjusted to its fair value of $2 million. One
wafer fabrication line, dedicated primarily to research and product development,
was abandoned and replaced by a new product development facility in August 1998.
The other wafer fabrication line, which manufactured product using equipment
that processed 4-inch wafers, was abandoned and replaced with a more advanced
line located in Italy, which processes 5-inch wafers, in August 1998. Using
5-inch wafers results in significant manufacturing savings. The current status
of the wafer fabrication impaired equipment falls into three categories: a) it
was scrapped as of June 1997, b) it is idle with no viable plans for usage, or
c) it is being used on a sporadic basis in research and development. There is no
viable external market for this equipment.
2) Assembly equipment in England of $26 million was adjusted to its fair
value of $4 million. Specifically, three product assembly and packaging lines in
England were operating at a gross margin loss. The Company has continued to
utilize these lines periodically for market development activities, and these
lines remain unprofitable.
3) Information systems applications with a carrying value of $32 million
were written down to $12 million as a result of lack of vendor support. The
Company's software vendor changed business strategies and informed the Company
of its intention to stop supporting and developing the software technology that
certain of the Company's information systems applications were based upon. It
was determined in June 1997, that no viable alternatives could be identified. As
a result of this decision, the Company ceased development and implementation of
certain forecasting, planning and order management programs and determined the
assets related to these specific activities were impaired (i.e. no future use
and were abandoned). These assets consisted of costs related to external
consulting fees and expenses. The remaining book value relates to modules that
have not been abandoned.
As of June 30, 1999, the Company had eliminated approximately 242 employees
related to the June 1997 restructuring. The majority of the positions eliminated
were operators and technicians at the Company's North American operations. The
Company also eliminated production and assembly positions in its manufacturing
operations in Italy due to the outsourcing of certain production and assembly
activities. In addition, administrative and sales positions in France, England,
Germany, Japan and North America, related to the regional consolidation of
certain administrative functions, were eliminated.
21
<PAGE>
As of June 30, 1999, there was no remaining accrued severance liability in
the Company's Consolidated Balance Sheet related to the June 1997 restructuring.
The Company anticipated this restructuring to result in annual savings of
approximately $20 million, which would be fully achieved on an annual basis
beginning in December 1998. The Company believes that it has achieved these
savings, but they have been more than offset by continued selling price
reductions.
During December 1998, the Company recorded a $14.5 million restructuring
charge associated with plans to relocate high-volume assembly lines from its
facility in England to its facility in Mexico to take advantage of labor rate
savings, and to centralize more of its European customer service and
administrative activities, resulting in reductions in personnel. The Company
expects to complete this operational transition over the next twelve months
ending on June 30, 2000. The charge consisted of $5.9 million for estimated
severance costs associated with the elimination of approximately 350 positions,
primarily consisting of operators and technicians, $6.1 million for the
write-off of assets to be abandoned, and $2.5 million for the write-down of
inventory related to specialty product lines. None of the assets written down,
which consist primarily of building improvements relating to the high-volume
assembly production lines, and production information systems, will remain in
use and all of them will be abandoned after the production lines are relocated.
In the third quarter of fiscal 1999, the Company recorded a final charge of $4.2
million relating to additional severance costs, after appropriate notification
was given to 43 remaining affected employees in the sales, customer service and
administrative areas. The severance per person is larger for the March 1999
restructuring versus the December 1998 restructuring as the 43 positions
included in the March 1999 restructuring are primarily highly-paid employees in
sales and administrative management. The 350 positions in the December 1998
restructuring are primarily operators and technicians who have a much lower
salary level. Therefore, the Company estimates that, ultimately, charges
associated with all of these actions will total approximately $18.7 million.
The anticipated cost savings from the second and third fiscal 1999 quarter
restructuring activities are expected to result in estimated annual savings of
approximately $5 million in fiscal 2000 and $13 million annually thereafter.
These estimated savings consist of lower direct labor costs, lower factory
overhead (including lower depreciation expense), lower materials costs and lower
selling and administrative costs.
As of June 30, 1999, the Company had eliminated 17 positions, paid $2.8
million for termination benefits related to this program and recorded the asset
impairment of $8.6 million. The remaining unutilized restructuring accrual of
$7.3 million, which is classified as current, relates to severance payments to
these previously notified employees for positions that are scheduled to be
eliminated during the next twelve months.
During June 1999, the Company recorded an $8.3 million charge related to
employee severance associated with the elimination of approximately 39
positions. This includes a reduction in sales and administrative management
staff levels and the resignation of Dr. Derek B. Lidow, who shared the
responsibility of Chief Executive Officer. As of June 30, 1999, the Company had
eliminated 4 positions and paid $3.5 million for termination benefits. The
remaining unutilized severance accrual of $4.8 million at June 30, 1999, which
is classified as current, relates to severance payments to these previously
notified employees for positions that are scheduled to be eliminated during the
next twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company elected early adoption of SOP 98-5, "Reporting on the Costs of
Start-Up Activities," during fiscal 1999. This new accounting standard, issued
in April 1998 by the American Institute of Certified Public Accountants,
requires most entities to expense all start-up and preoperating costs as they
are incurred. The Company previously deferred such costs and amortized them over
the life of the related asset following the start-up of each new process. The
early adoption of SOP 98-5 was required to be made retroactive to the beginning
of the Company's first quarter of fiscal 1999. The cumulative effect of this
change in accounting principle, net of income tax benefit of $5.4 million, was
$26.2 million or $0.50 per
22
<PAGE>
basic and diluted share and was recorded retroactively to the first quarter of
1999 as a one-time charge. Beginning July 1, 1998, all start-up and preoperating
costs are expensed as incurred.
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," and
accordingly has included a separate Statement of Comprehensive Income following
the Company's Consolidated Statement of Income. Comprehensive income generally
represents all changes in stockholders' equity during the period except those
resulting from investments by, or distributions to, stockholders. The balance of
accumulated other comprehensive income consists of accumulated foreign currency
translation adjustments.
On June 30, 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 requires publicly-held companies to report financial
and descriptive information about their operating segments in financial
statements issued to stockholders for interim and annual periods. The Statement
also requires additional disclosures with respect to products and services,
geographic areas of operation and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. The Company adopted SFAS No. 131 in the fiscal year
ended June 30, 1999. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position, but did affect the disclosure of
segment information as presented in Note 5 of the Notes to the Consolidated
Financial Statements.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 supersedes the
disclosure requirements for SFAS No. 87 "Employers' Accounting for Pensions,"
SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans," and SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other than Pensions." This Statement is effective for
fiscal years beginning after December 15, 1997. This Statement revises
employers' disclosures about pension and postretirement benefit plans. The
Company adopted SFAS No. 132 in the fiscal year ended June 30, 1999. The
Company's pension obligation is immaterial and, therefore, not disclosed
separately.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which was later amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 133 established standards
for the accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
Statement generally requires recognition of gains and losses on hedging
instruments, based on changes in fair value or the earnings effect of a
forecasted transaction. SFAS No. 133, as amended by SFAS No. 137, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
Management does not believe that SFAS No. 133 or SFAS No. 137 will have a
material impact on the Consolidated Financial Statements.
YEAR 2000 READINESS
The Year 2000 issue is the result of many existing computer programs and
embedded microprocessors using only two digits to refer to the year. Beginning
in the year 2000, these systems will need to be upgraded or replaced to
distinguish 21st century dates from 20th century dates.
The Company has adopted the definition of Year 2000 conformity published by
the British Standards Institute ("BSI") as DISC PD2000-1. Currently, none of the
Company's products contain date processing logic. The Company, therefore,
believes that its products are Year 2000 compliant pursuant to the BSI DISC
PD2000-1 definition.
The Company's Global Year 2000 Team was formed to manage and coordinate
company-wide Year 2000 initiatives, while local site teams address research and
remediation for site-specific equipment, facilities and suppliers. Worldwide,
the Company currently employs approximately 65 employees that are
23
<PAGE>
addressing the Year 2000 issue, 15 of whom are engaged in this effort on a
full-time basis. The Company is currently estimating $7.7 million for the cost
of investigation and remediation for the period August 1997 to March 2000. The
estimate includes staff salaries and remediation expenses. Through June 30,
1999, the Company has expensed $5.6 million of this estimate.
The Company prioritized efforts to prepare its information systems for Year
2000 based on the importance of each system to the Company's operations and the
potential impact of non-compliance. The Company is remediating its information
systems in phases, by first establishing an inventory of its information systems
and then assessing, correcting, testing, and certifying them for compliance. As
of May 31, 1999 and in accordance with the Company's project plan, corrective
actions have been deployed for all mission critical items. Having achieved the
May 31st milestone for mission critical items, the Company's project remains on
schedule and the Company expects to complete its remediation efforts for
non-critical items on or before November 30, 1999. Furthermore, the Company has
established programs to ensure that current and future purchases of equipment
and software are Year 2000 compliant pursuant to the BSI DISC PD2000-1
definition.
As of May 31, 1999, the Company has completed all remediation activity to
determine Year 2000 readiness status for mission critical suppliers and business
partners, including financial institutions with whom the Company has material
relationships. Furthermore, the Company has in place contingency plans for
mission critical suppliers or business partners that were not able to indicate
their Year 2000 compliance or readiness. These contingency plans include the
identification of possible alternate suppliers, possible alternate modes of
transportation, and the identification of possible sources for an increase in
raw material inventory. The remediation efforts and contingency plans for
non-critical suppliers and business partners are expected to be completed on or
before November 30, 1999.
Worldwide project auditing and Year 2000 certification is ongoing and to
date indicates that the Company is positioned to complete the project on
schedule.
Based on currently available information, management does not believe that
the Year 2000 matters discussed above will have a material adverse impact on the
Company's financial condition, liquidity, or results of operations. Currently,
infrastructure service providers (e.g. utilities and transportation) are the
areas of greatest concern. To date, interviews and research of the Company's
power, water and transportation suppliers indicate that the most reasonably
likely worst case scenarios would be a temporary disruption in utilities
service, supplier delivery and/or shipments to customers. The Company is
continuing to develop contingency plans to mitigate such scenarios in the event
the Company or its material customers, suppliers or vendors are not Year 2000
compliant by January 1, 2000 and should have these plans in place on or before
November 30, 1999.
There can be no assurance that the Company's compliance efforts and
contingency plans will adequately address every issue that may arise in the year
2000. Embedded microprocessors that regulate the basic infrastructure in various
Company facilities may fail. The software that controls manufacturing processes
may fail and shut down fabrication, assembly or packaging. The computers used in
business and office operations may fail at the desktop or network level. On a
broader scale, communication and power distribution may be disrupted, financial
institutions may experience difficulties that prevent access to or the transfer
of funds, and the transportation network, water supply and food distribution may
be affected, negatively impacting employees as well as industry and commerce
generally. The costs of the Company's Year 2000 remediation and the dates on
which the Company believes that it will be completed are based on the Company's
best estimates, which were based on assumptions of future events, including the
continued availability of certain resources, third-party compliance and other
factors. There can be no assurance that these estimates will be achieved, and
actual results could differ materially from those anticipated.
The disclosures contained herein are Year 2000 statements and constitute a
Year 2000 Readiness Disclosure under Public Law No. 105-271.
24
<PAGE>
SEC COMMENT LETTER
In response to recent communications the Company has had with the Securities
and Exchange Commission ("SEC") staff, the Company has agreed to make certain
amendments to its Form 10-K for the fiscal year ended June 30, 1998 and its Form
10-Q for the quarter ended December 31, 1998. The Company believes that these
amendments do not have a material impact on its financial results for either
fiscal 1998 or the second quarter of fiscal 1999. See the Company's amended
filings with the SEC for further information.
MANAGEMENT CHANGE
On May 10, 1999, the Company announced that it would change its management
structure by designating Dr. Alexander Lidow as its sole Chief Executive
Officer. Dr. Alexander Lidow previously shared the responsibilities of Chief
Executive Officer with Dr. Derek B. Lidow. Dr. Derek B. Lidow remains on the
Company's Board of Directors and will provide consulting services to the Company
but terminated his employment with the Company on June 15, 1999 to pursue other
interests. See Note 15 in the Notes to the Consolidated Financial Statements.
The Company believes that this new structure will help achieve its long-range
objectives by, among other things, streamlining decision making, more tightly
linking the Company's activities, and allowing further operating efficiencies.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10-K Report contains some statements that are not historical facts
but are "forward-looking statements" as that term is defined in the Private
Securities Litigation Reform Act of 1995. These statements can be identified by
the use of forward-looking terminology such as "anticipate," "believe,"
"estimate," "expect," "may," "should," "view," or "will" or the negative or
other variations thereof. Such forward-looking statements are subject to risks
and uncertainties which could cause actual results to differ materially from
those projected. Financial results are to a large extent dependent on the power
MOSFET segment of the power semiconductor industry. If market demand does not
continue to grow, revenue growth may be impacted, manufacturing capacity might
be under-utilized, capital spending might be slowed, and Company performance
might be negatively impacted. Other risks and uncertainties that could
negatively impact Company results include: delays in or higher-than-anticipated
expenses associated with implementing planned cost reductions; the effectiveness
of cost controls; the impact of changes in accounting methods; the impact of
export controls; the actual results of outstanding litigation; changes in
environmental laws and regulations; delays in transferring and ramping
production lines or completing customer qualifications; the accuracy of
customers' forecasts; the ability of current manufacturing facilities to meet
future operating needs; the rate of customer inventory adjustments; push-out of
delivery dates; product returns; changes in customers' order patterns; the
Company's mix of product shipments; the actual growth of the portable
electronics industry; the continued rapid growth of demand for more efficient
semiconductor components and power conversion solutions; market and sector
conditions that affect our customers, licensees, and suppliers; pricing
pressures; acceptance of competitors' products; introduction, acceptance, and
availability of new products; inability of the Company to fund capital
expenditures from existing credit facilities or other external sources; the
ability of suppliers and subcontractors to meet their delivery commitments to
the Company; unanticipated impacts on the Company's business or financial
condition due to the euro conversion; the failure of the Company to realize the
anticipated efficiencies from its change in management structure; impact on the
Company's business from internal systems, or from the business or systems of
suppliers, customers, licensees and other third parties being adversely affected
by year 2000 problems; and general economic conditions in the Company's markets
around the world.
25
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Quantitative and Qualitative Disclosures about Market Risk" in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... 27
Financial Statements
Consolidated Statement of Operations for the Fiscal Years Ended June 30, 1999, 1998 and 1997............. 28
Consolidated Statement of Comprehensive Income for the Fiscal Years Ended June 30, 1999, 1998 and 1997... 29
Consolidated Balance Sheet as of June 30, 1999 and 1998.................................................. 30
Consolidated Statement of Stockholders' Equity for the Fiscal Years Ended June 30, 1999, 1998 and 1997... 31
Consolidated Statement of Cash Flows for the Fiscal Years Ended June 30, 1999, 1998 and 1997............. 32
Notes to Consolidated Financial Statements............................................................... 33
</TABLE>
Supporting Financial Statement Schedule:
<TABLE>
<CAPTION>
SCHEDULE NO. PAGE
- ----------------------------------------------------------------------------------------------------------- ---------
<S> <C>
II Valuation and Qualifying Accounts and Reserves for the Fiscal Years Ended June 30, 1999, 1998 and
1997.................................................................................................. F-1
</TABLE>
Schedules other than those listed above have been omitted since they are
either not required, are not applicable, or the required information is shown in
the Consolidated Financial Statements or related Notes.
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
International Rectifier Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, comprehensive income, stockholders'
equity, and cash flows present fairly, in all material respects, the financial
position of International Rectifier Corporation and its subsidiaries at June 30,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, in fiscal
1999 the Company changed its method of accounting for the cost of start-up
activities.
PricewaterhouseCoopers LLP
Los Angeles, California
July 27, 1999, except for Note 9, as to which the date is September 14, 1999
27
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues..................................................................... $ 545,371 $ 551,891 $ 486,127
Cost of sales................................................................ 393,379 375,727 323,067
---------- ---------- ----------
Gross profit............................................................. 151,992 176,164 163,060
Selling and administrative expense........................................... 98,193 104,661 105,954
Research and development expense............................................. 40,512 39,132 35,495
Impairment of assets, restructuring and severance charges (Note 4)........... 24,520 -- 71,000
---------- ---------- ----------
Operating profit (loss).................................................. (11,233) 32,371 (49,389)
Other income (expense):
Interest, net.............................................................. (11,120) (7,288) (4,015)
Other, net................................................................... 53,509 (494) 714
---------- ---------- ----------
Income (loss) before income taxes and cumulative effect of accounting
change................................................................. 31,156 24,589 (52,690)
Provision (benefit) for income taxes (Note 6)................................ 10,780 8,114 (9,484)
---------- ---------- ----------
Income (loss) before cumulative effect of accounting change.............. 20,376 16,475 (43,206)
Cumulative effect of change in accounting principle, net of income tax
benefit of $5,431.......................................................... (26,154) -- --
---------- ---------- ----------
Net income (loss)........................................................ $ (5,778) $ 16,475 $ (43,206)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per common share:
Basic and Diluted:
Income (loss) before cumulative effect of change in accounting principle... $ 0.39 $ 0.32 $ (0.84)
Cumulative effect of change in accounting principle........................ (0.50) -- --
---------- ---------- ----------
Net income (loss) per common share--Basic and Diluted (Note 7)............. $ (0.11) $ 0.32 $ (0.84)
---------- ---------- ----------
---------- ---------- ----------
Average common shares outstanding--Basic (Note 7)............................ 51,612 51,248 51,307
---------- ---------- ----------
---------- ---------- ----------
Average common shares and potentially dilutive securities
outstanding--Diluted (Note 7).............................................. 51,788 51,674 51,307
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
28
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN 000'S)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
--------------------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Net income (loss)............................................................... $ (5,778) $ 16,475 $ (43,206)
Other comprehensive income (loss), net of tax effect of $305, $903 and $(146),
respectively:
Foreign currency translation adjustments...................................... (579) (1,835) 666
--------- --------- ----------
Comprehensive income (loss)................................................. $ (6,357) $ 14,640 $ (42,540)
--------- --------- ----------
--------- --------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
29
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN 000'S EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 31,497 $ 32,294
Short-term investments.......................... 8,900 13,232
Trade accounts receivable, less allowance for
doubtful accounts ($2,168 in 1999 and $1,401
in 1998)...................................... 121,659 129,738
Inventories..................................... 108,463 130,653
Deferred income taxes (Note 6).................. 16,078 8,080
Prepaid expenses and other receivables.......... 19,677 3,253
---------- ----------
Total current assets........................ 306,274 317,250
Property, plant and equipment, at cost, less
accumulated depreciation ($252,707 in 1999 and
$208,879 in 1998)............................. 380,504 390,892
Other assets.................................... 22,307 27,685
---------- ----------
Total assets................................ $ 709,085 $ 735,827
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans (Note 2)............................. $ 14,996 $ 28,153
Long-term debt, due within one year (Note 2).... 8,047 37,226
Accounts payable................................ 64,809 46,637
Accrued salaries, wages and commissions......... 19,546 15,875
Other accrued expenses.......................... 33,234 26,042
---------- ----------
Total current liabilities................... 140,632 153,933
Long-term debt, less current maturities........... 158,418 141,528
Other long-term liabilities....................... 7,142 29,352
Deferred income taxes (Note 6).................... 6,619 11,364
Commitments and contingencies (Notes 9, 10, 11,
13, 14 and 15)
Stockholders' equity (Notes 1 and 3):
Common shares, $1 par value, authorized:
60,000,000; issued and outstanding: 51,780,700
shares in 1999 and 51,350,923 shares in
1998.......................................... 51,781 51,351
Preferred shares, $1 par value, authorized:
1,000,000; issued and outstanding: none in
1999 and 1998................................. -- --
Capital contributed in excess of par value of
shares........................................ 257,746 255,195
Retained earnings............................... 92,868 98,646
Accumulated other comprehensive loss............ (6,121) (5,542)
---------- ----------
Total stockholders' equity.................. 396,274 399,650
---------- ----------
Total liabilities and stockholders'
equity.................................... $ 709,085 $ 735,827
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
30
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN 000'S EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CAPITAL
CONTRIBUTED
IN EXCESS ACCUMULATED
OF OTHER
COMMON PAR VALUE RETAINED COMPREHENSIVE
SHARES OF SHARES EARNINGS INCOME (LOSS) TOTAL
--------- ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996........................... $ 50,821 $ 249,388 $ 125,377 $ (4,373) $ 421,213
Issuance of common shares:
48,440--exercise of stock options.............. 49 342 -- -- 391
182,190--stock purchase plan................... 182 2,306 -- -- 2,488
Tax benefits from exercise of stock options and
stock purchase plan............................ -- 163 -- -- 163
Net loss for the year ended June 30, 1997........ -- -- (43,206) -- (43,206)
Foreign currency translation adjustments......... -- -- -- 666 666
--------- ----------- ---------- ------- ----------
BALANCE, JUNE 30, 1997........................... 51,052 252,199 82,171 (3,707) 381,715
Issuance of common shares:
82,361--exercise of stock options.............. 82 528 -- -- 610
216,655--stock purchase plan................... 217 2,181 -- -- 2,398
Tax benefits from exercise of stock options and
stock purchase plan............................ -- 287 -- -- 287
Net income for the year ended
June 30, 1998.................................. -- -- 16,475 -- 16,475
Foreign currency translation adjustments......... -- -- -- (1,835) (1,835)
--------- ----------- ---------- ------- ----------
BALANCE, JUNE 30, 1998........................... 51,351 255,195 98,646 (5,542) 399,650
Issuance of common shares:
85,600--exercise of stock options.............. 86 549 -- -- 635
344,177--stock purchase plan................... 344 2,040 -- -- 2,384
Adjustment to tax benefits from exercise of stock
options and stock purchase plan................ -- (38) -- -- (38)
Net loss for the year ended June 30, 1999........ -- -- (5,778) -- (5,778)
Foreign currency translation adjustments......... -- -- -- (579) (579)
--------- ----------- ---------- ------- ----------
BALANCE, JUNE 30, 1999........................... $ 51,781 $ 257,746 $ 92,868 $ (6,121) $ 396,274
--------- ----------- ---------- ------- ----------
--------- ----------- ---------- ------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
31
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
------------------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)......................................................... $ (5,778) $ 16,475 $ (43,206)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization........................................... 46,162 38,937 37,103
Deferred income......................................................... (600) (600) (718)
Deferred income taxes................................................... (7,231) 9,452 (15,500)
Deferred compensation................................................... (6,888) (1,892) 3,170
Impairment of assets, restructuring and severance charges............... 27,020 -- 75,000
Cumulative effect of change in accounting principle..................... 26,154 -- --
Change in working capital (Note 1)...................................... 18,373 (16,291) (34,455)
----------- ---------- -----------
Net cash provided by operating activities................................... 97,212 46,081 21,394
----------- ---------- -----------
Cash flow from investing activities:
Additions to property, plant and equipment................................ (71,577) (90,280) (99,762)
Purchase of short-term investments........................................ (12,900) (47,550) (67,000)
Proceeds from sale of short-term investments.............................. 17,232 51,168 68,150
Change in other noncurrent assets......................................... 8,862 (5,596) (9,117)
----------- ---------- -----------
Net cash used in investing activities....................................... (58,383) (92,258) (107,729)
----------- ---------- -----------
Cash flow from financing activities:
Net proceeds from issuance of (repayments of) short-term bank debt........ (12,727) 16,922 518
Proceeds from issuance of long-term debt.................................. 192,669 42,128 100,187
Payments on long-term debt and obligations under capital leases........... (217,352) (18,650) (15,511)
Net proceeds from issuance of common stock................................ 2,981 3,295 2,879
Other..................................................................... (5,647) (1,560) (970)
----------- ---------- -----------
Net cash provided by (used in) financing activities......................... (40,076) 42,135 87,103
----------- ---------- -----------
Effect of exchange rate changes on cash and cash equivalents................ 450 (228) 36
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents........................ (797) (4,270) 804
Cash and cash equivalents, beginning of year................................ 32,294 36,564 35,760
----------- ---------- -----------
Cash and cash equivalents, end of year...................................... $ 31,497 $ 32,294 $ 36,564
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
32
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
International Rectifier Corporation ("IR" or "Company") designs,
manufactures, and markets power semiconductors which switch or condition
electricity at relatively high voltage and current levels. The Company's
products are used in major market sectors including industrial, automotive,
computer/peripherals, office equipment, consumer electronics, lighting and
communications.
IR was founded as a California corporation in 1947 and reincorporated in
Delaware in 1979.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all its majority-owned subsidiaries which are located in Europe, Mexico, the
Far East and South East Asia. All material intercompany transactions have been
eliminated.
FISCAL YEAR
The Company operates on a fiscal calendar under which fiscal 1999 consists
of 52 weeks ending July 4. Fiscal 1998 consisted of 53 weeks ending July 5 and
fiscal 1997 consisted of 52 weeks ending June 29. For convenience, all
references herein to fiscal years are to fiscal years ended June 30.
REVENUE RECOGNITION
The Company recognizes revenues from product sales to all customers,
including distributors, at the time of shipment.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
ADVERTISING
The Company expenses all advertising costs in the periods in which those
costs are incurred. The Company shares portions of certain distributors'
advertising expenses through cooperative advertising arrangements. In fiscal
1999, 1998 and 1997, the Company spent approximately $3,928,000, $3,579,000 and
$4,078,000, respectively, on advertising.
ENVIRONMENTAL COSTS
Costs incurred to investigate and remediate contaminated sites are expensed.
INCOME TAXES
Deferred income taxes are determined based on the difference between the
financial reporting and tax bases of assets and liabilities using enacted rates
in effect during the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable for the period and the change during the period in deferred tax assets
and liabilities.
33
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
U.S. income taxes have not been provided on approximately $24,550,000 of
undistributed earnings of foreign subsidiaries since management considers these
earnings to be invested indefinitely or substantially offset by foreign tax
credits. It is not practicable to estimate the amount of unrecognized deferred
U.S. taxes on these undistributed earnings.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share-Basic is computed by dividing net income
(loss) available to common stockholders (the numerator) by the weighted average
number of common shares outstanding (the denominator) during the period. The
computation of Net income (loss) per common share-Diluted is similar to the
computation of Net income (loss) per common share-Basic except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued.
STATEMENT OF CASH FLOWS
The Company invests excess cash from operations in investment grade money
market instruments. The Company considers all highly liquid debt instruments
with a purchased maturity of three months or less to be cash equivalents.
Components in the change in working capital for the fiscal years ended June 30,
1999, 1998 and 1997 were comprised of the following (000's):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Trade accounts receivable, net............................ $ (1,107) $ (8,381) $ (929)
Inventories............................................... 15,494 (16,104) (35,643)
Prepaid expenses and other receivables.................... (6,704) (279) 764
Accounts payable.......................................... 18,525 7,106 (847)
Accrued salaries, wages and commissions................... 3,893 1,660 791
Other accrued expenses.................................... (11,728) (293) 1,409
---------- ---------- ----------
$ 18,373 $ (16,291) $ (34,455)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Supplemental disclosures of cash flow information (000's):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash paid during the year for:
Interest........................................................ $ 6,497 $ 7,423 $ 8,633
Income taxes.................................................... 18,274 2,050 3,096
Interest capitalized............................................ 1,142 2,434 1,870
</TABLE>
SHORT-TERM INVESTMENTS
The Company's short-term investments consist of investment grade money
market instruments. All of the Company's investments have original maturities of
less than one year. In accordance with the criteria established by Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," all investments have been classified
as "available-for-sale."
34
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company utilizes the specific identification method for determining the cost
of the investments. At June 30, 1999 and 1998 the cost of the investments
approximates the market value.
INVENTORIES
Inventories are stated at the lower of cost (principally first-in,
first-out) or market. Inventories at June 30, 1999 and 1998 were comprised of
the following (000's):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Raw materials......................................................... $ 15,277 $ 21,101
Work-in-process....................................................... 52,124 56,224
Finished goods........................................................ 41,062 53,328
---------- ----------
$ 108,463 $ 130,653
---------- ----------
---------- ----------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Upon retirement or other
disposal, the asset cost and related accumulated depreciation are removed from
the accounts and any gain or loss on disposition is included in income.
Depreciation is provided on the straight-line method, based on the estimated
useful lives of the assets, or the units of production method based upon the
estimated output of the equipment. Depreciation expense for the fiscal years
ended June 30, 1999, 1998 and 1997 was $46,162,000, $38,937,000 and $34,916,000,
respectively. Property, plant and equipment at June 30, 1999 and 1998 were
comprised of the following (000's):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Buildings and improvements.......................................... $ 120,872 $ 122,904
Equipment........................................................... 425,194 417,261
Construction-in-progress............................................ 76,841 49,382
Less accumulated depreciation....................................... (252,707) (208,879)
----------- -----------
370,200 380,668
Land................................................................ 10,304 10,224
----------- -----------
$ 380,504 $ 390,892
----------- -----------
----------- -----------
</TABLE>
Depreciation of improvements to leased premises is provided on the
straight-line method over the shorter of the remaining term of the lease or
estimated useful lives of the improvements. Capital leases included in property,
plant and equipment at June 30, 1999 and 1998 were as follows (000's):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Equipment............................................................. $ 13,607 $ 14,263
Less accumulated depreciation......................................... (10,882) (9,105)
---------- ----------
$ 2,725 $ 5,158
---------- ----------
---------- ----------
</TABLE>
35
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Repairs and maintenance costs are charged to expense. In the fiscal years
ended June 30, 1999, 1998 and 1997, repairs and maintenance costs were
$16,686,000, $18,757,000 and $16,016,000, respectively.
Historically, preoperating and start-up costs incurred in connection with
construction of major new production facilities were capitalized until such
facilities become operational. These costs were then amortized over the lives of
such facilities. Effective fiscal 1999, preoperating and start-up costs are
expensed as incurred in accordance with SOP 98-5, as described more fully in the
Recent Accounting Pronouncements section of Note 1 of the Consolidated Financial
Statements.
LONG-LIVED ASSETS
The Company identifies and records impairment losses on long-lived assets
when events and circumstances indicate that such assets might be impaired. The
Company periodically evaluates the recoverability of its long-lived assets based
on expected undiscounted cash flows and recognizes impairments, if any, based on
expected discounted cash flows.
INTANGIBLE ASSETS
Patent and related costs are amortized using the straight-line method over
the life of the related patent portfolio.
CONCENTRATION OF RISK
The Company places its temporary cash investments with high credit quality
financial institutions. At times, such investments may be in excess of insured
limits.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Receivables on average are
due in 60 days. Credit losses have consistently been within management's
expectations.
FINANCIAL CURRENCY TRANSACTIONS
In general, the functional currency of a foreign operation is deemed to be
the local country's currency. Assets and liabilities of operations outside the
United States are translated into U.S. dollars using current exchange rates.
Income and expense are translated at average exchange rates prevailing during
the period. The effects of foreign currency translation adjustments are included
as a component of stockholders' equity. At June 30, 1999 and 1998, accumulated
foreign currency translation losses were $6,121,000 and $5,542,000,
respectively.
The Company hedges certain portions of its exposure to foreign currency
fluctuations of foreign currency denominated receivables and payables at certain
of its international subsidiaries through forward foreign exchange contracts. At
June 30, 1999 and 1998, the Company had approximately $44,581,000 and
$26,100,000, respectively, of forward foreign exchange contracts outstanding
with fair values of $43,922,000 and $25,916,000, respectively. The fair value of
foreign currency contracts is estimated based on the spot rate of the various
hedged currencies as of the end of the period. Net realized and unrealized gains
or losses on forward contracts for the years ending June 30, 1999 and 1998 were
$287,000 and $89,000, respectively, and were included in "Other Income
(Expense)." The Company does not hold or issue forward contracts for trading
purposes.
36
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At June 30, 1999 and 1998, maturities of the Company's forward foreign
exchange contracts were three months or less in term.
ESTIMATES
The preparation of 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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans using the
intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123, "Accounting
for Stock-Based Compensation," encourages, but does not require companies to
record stock-based employee compensation plans at fair value. The Company has
elected to continue accounting for stock-based compensation in accordance with
APB No. 25 and is providing the required disclosures under SFAS No. 123 in the
Notes to the Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company elected early adoption of SOP 98-5, "Reporting on the Costs of
Start-Up Activities," during fiscal 1999. This new accounting standard, issued
in April 1998 by the American Institute of Certified Public Accountants,
requires most entities to expense all start-up and preoperating costs as they
are incurred. The Company previously deferred such costs and amortized them over
the life of the related asset following the start-up of each new process. The
early adoption of SOP 98-5 was required to be made retroactive to the beginning
of the Company's first quarter of fiscal 1999. The cumulative effect of this
change in accounting principle, net of income tax benefit of $5.4 million, was
$26.2 million or $0.50 per basic and diluted share and was recorded
retroactively to the first quarter of 1999 as a one-time charge. Beginning July
1, 1998, all start-up and preoperating costs are expensed as incurred.
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," and
accordingly has included a separate Statement of Comprehensive Income following
the Company's Consolidated Statement of Income. Comprehensive income generally
represents all changes in stockholders' equity during the period except those
resulting from investments by, or distributions to, stockholders. The balance of
accumulated other comprehensive income consists of accumulated foreign currency
translation adjustments.
On June 30, 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 requires publicly-held companies to report financial
and descriptive information about their operating segments in financial
statements issued to stockholders for interim and annual periods. The Statement
also requires additional disclosures with respect to products and services,
geographic areas of operation, and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. The Company adopted SFAS No. 131 in the fiscal year
ended June 30, 1999. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position, but did
37
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
affect the disclosure of segment information as presented in Note 5 of the Notes
to the Consolidated Financial Statements.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 supersedes the
disclosure requirements for SFAS No. 87 "Employers' Accounting for Pensions,"
SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans," and SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other than Pensions." This Statement is effective for
fiscal years beginning after December 15, 1997. This Statement revises
employers' disclosures about pension and postretirement benefit plans. The
Company adopted SFAS No. 132 in the fiscal year ended June 30, 1999. The
Company's pension obligation is immaterial and, therefore, not disclosed
separately.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which was later amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 133 established standards
for the accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
Statement generally requires recognition of gains and losses on hedging
instruments, based on changes in fair value or the earnings effect of a
forecasted transaction. SFAS No. 133, as amended by SFAS No. 137, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
Management does not believe that SFAS No. 133 or SFAS No. 137 will have a
material impact on the Consolidated Financial Statements.
RECLASSIFICATION
Certain reclassifications have been made to previously reported amounts to
conform with the current-year presentation.
2. BANK LOANS AND LONG-TERM DEBT
At June 30, 1999, the Company entered into a syndicated Credit Agreement
with Banque Nationale de Paris as Sole Arranger, Administrative Agent and
Issuing Agent and Sanwa Bank California as the Syndication Agent. The Credit
Agreement included two term loans totaling $155 million due in 2004 and 2005,
and a $70 million revolving credit facility. The interest rate on these two term
loans is based on 3.0% and 3.5% above the applicable LIBOR rate, while the
interest rate on the $70 million revolving credit facility is based on either
3.0% above the applicable LIBOR rate or 2.0% above the prime rate, as the
Company may elect. The three-month LIBOR rate was 5.3% at June 30, 1999. The
proceeds from the term loans were used to pay down all of the Company's domestic
unsecured bank loans, and portions of foreign unsecured bank loans and domestic
bank loans collateralized by equipment. At June 30, 1999, outstanding borrowings
on the term loans were $155 million with a weighted average interest rate of
8.79%. At June 30, 1999 the revolving credit facility had $70 million available
for borrowing. The facilities are collateralized by the majority of the
Company's assets. The Company is subject to a number of restrictive covenants
under the new Credit Agreement including the following: (a) maximum leverage,
minimum interest coverage and fixed charge coverage ratios (b) minimum EBITDA
(Earnings Before Interest, Taxes, Depreciation and Amortization) (c) maximum
capital expenditures and (d) a limitation on losses. The Credit Agreement also
provides for restrictions on the payment of cash dividends, the sale of assets,
mergers and acquisitions, additional financing, and investments.
38
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BANK LOANS AND LONG-TERM DEBT (CONTINUED)
The Company had $5.5 million outstanding in equipment-collateralized
financing facilities and $5.7 million outstanding in foreign unsecured term
loans at June 30, 1999. The Company had an additional $23.9 million of unsecured
revolving credit facilities from financial institutions at foreign locations, of
which at June 30, 1999, $15.0 million was outstanding.
The following is a summary of the Company's long-term debt and other loans
at June 30, 1999 and 1998 (in 000's):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Domestic bank loans collateralized by the majority of the Company's assets, payable in
quarterly installments of principal and interest at variable rates of 8.3% and 8.8%, due
in 2004 and 2005......................................................................... $ 155,213 $ --
Domestic bank loans collateralized by equipment, payable in varying monthly installments
at rates from 6.4% to 8.7%, due in 1998 through 2002, paid down in 1999.................. -- 45,599
Domestic unsecured bank loans payable in varying monthly installments..................... -- 107,237
Capitalized lease obligations payable in varying monthly installments primarily at rates
from 6.29% to 8.21%...................................................................... 5,298 885
Foreign bank loans collateralized by property and/or equipment, payable in varying monthly
installments at 10.8%, due in 2000....................................................... 216 1,991
Foreign unsecured bank loans payable in varying monthly installments at rates from 4.3% to
8.4%, due in 2000 through 2006........................................................... 5,738 23,042
---------- ----------
Debt, including current portion of long-term debt ($8,047 in 1999 and $37,226 in 1998).... 166,465 178,754
Foreign unsecured revolving bank loans at rates from 1.5% to 8.5%......................... 14,996 28,153
---------- ----------
Total debt $ 181,461 $ 206,907
---------- ----------
---------- ----------
</TABLE>
Scheduled principal payments on long-term debt are as follows: fiscal 2000:
$8,047,000; fiscal 2001: $11,775,000; fiscal 2002: $9,810,000; fiscal 2003:
$14,708,000; fiscal 2004: $16,997,000; and $105,128,000 thereafter.
During fiscal 1999, 1998 and 1997, the Company incurred interest expense,
net of capitalized interest, of $12,703,000, $10,060,000 and $7,357,000,
respectively.
In accordance with SFAS No. 107 "Disclosures About Fair Value of Financial
Instruments," the fair values of the Company's debt has been estimated based on
current rates offered to the Company for debt of the same remaining maturities.
The carrying amounts of the loans to the Company approximate their fair values.
3. CAPITAL STOCK
EMPLOYEE STOCK PURCHASE PLAN
The Company has a compensatory employee stock purchase plan ("ESPP"). Under
this plan employees are allowed to designate between two and ten percent of
their base compensation to purchase shares of the Company's common stock at 85
percent of fair market value at a designated date. During fiscal 1999,
39
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CAPITAL STOCK (CONTINUED)
1998 and 1997, 344,177, 216,655 and 182,190 shares were purchased at weighted
average per share exercise prices of $6.93, $11.07 and $13.66, respectively.
Shares authorized under this plan that remained unissued were 1,096,709,
1,440,886 and 1,657,541 at June 30, 1999, 1998 and 1997, respectively. The
weighted average per share fair value of ESPP options granted, using the
Black-Scholes method, in 1999, 1998 and 1997 was $2.84, $4.31 and $5.54 per
share, respectively.
STOCK OPTION PLANS
The Company has three stock option plans, the Stock Option Plan of 1984 (as
amended) ("1984 Plan"), the Amended and Restated Stock Incentive Plan of 1992
("1992 Plan"), and the 1997 Employee Stock Incentive Plan ("1997 Plan"). Under
the 1984 Plan and the 1992 Plan, options to purchase shares of the Company's
common stock may be granted to the Company's employees, including executive
officers, and to members of the Company's Board of Directors. Under the 1997
Plan, options to purchase shares of the Company's common stock may be granted to
the Company's employees and consultants, but not to executive officers of the
Company or members of its Board of Directors. Options have been issued with an
exercise price at least equal to the fair value of the Company's common stock at
the date of grant ("at market") and become generally exercisable in annual
installments of 20%, beginning on the first anniversary date.
The 1984 Plan terminated in August 1994. As of June 1999, there are no
remaining options outstanding under the 1984 Plan. During fiscal 1999, 1998 and
1997, 14,000, 2,800 and 2,400 shares, respectively, expired under the 1984 Plan.
In November 1996, the stockholders of the Company approved an amendment to
the stock option plan of 1992. The amendment broadened the types of options and
other stock-based awards (e.g., restricted stock, SARs and performance shares)
that may be granted (prior to the amendment, only non-qualified options could be
granted), extended the term of the 1992 Plan for three years to December 31,
2002, retained the provision for the annual increase in shares of the Company's
common stock available for grant of 1.5% of outstanding shares, increased the
maximum number of shares that may be granted to non-employee directors from
100,000 to 120,000 (including an annual grant of 5,000 shares to each such
director), reduced the holding period for full vesting of certain non-employee
director options from one year to six months, and generally provided the
committee of the Board of Directors that administers the 1992 Plan with
substantial powers and discretion in respect to awards. During fiscal 1999 and
1998, only non-qualified options were issued, at market, under the 1992 Plan. On
January 1, 1999, 1998 and 1997, 773,019, 767,928 and 764,078 shares,
respectively, were added to the 1992 Plan.
The 1997 Plan was adopted by the Board of Directors in November 1997. The
terms of the options authorized and granted under the 1997 Plan are
substantially similar to those under the 1992 Plan. As of June 30, 1999, there
are 826,100 shares available for future grants to eligible employees; no awards
may be granted after December 31, 2002. Executive officers and directors are not
eligible for grants under the 1997 Plan. During fiscal 1999 and 1998, only
non-qualified options were issued under the 1997 Plan.
40
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CAPITAL STOCK (CONTINUED)
A summary of the status of options under the 1984, 1992 and 1997 Plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTION EXERCISE GRANT DATE FAIR
SHARES PRICE PER SHARE VALUE PER SHARE
---------- ----------------- -----------------
<S> <C> <C> <C>
Outstanding, June 30, 1996....................................... 1,839,935 $ 12.75 --
Options granted................................................ 1,018,000 17.49 $ 7.99
Options exercised.............................................. (48,440) 8.08 --
Options expired or canceled.................................... (11,310) 14.69 --
----------
Outstanding, June 30, 1997....................................... 2,798,185 14.55 --
Options granted................................................ 1,666,960 15.22 7.73
Options exercised.............................................. (82,361) 7.41 --
Options expired or canceled.................................... (88,002) 15.29 --
----------
Outstanding, June 30, 1998....................................... 4,294,782 14.93 --
Options granted................................................ 1,388,050 9.20 4.20
Options exercised.............................................. (85,600) 7.42 --
Options expired or canceled.................................... (212,485) 13.69 --
----------
Outstanding, June 30, 1999....................................... 5,384,747 $ 13.62 --
----------
----------
</TABLE>
The following table summarizes significant option groups outstanding at June
30, 1999 and related weighted average price and life information:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING --------------------------------
- -------------------------------------------------------------------------------------- NUMBER
NUMBER WEIGHTED AVERAGE EXERCISABLE
RANGE OF EXERCISE OUTSTANDING AT REMAINING LIFE WEIGHTED AVERAGE AT WEIGHTED AVERAGE
PRICE PER SHARE JUNE 30, 1999 (YEARS) EXERCISE PRICE JUNE 30, 1999 EXERCISE PRICE
- ---------------------------- -------------- --------------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$5.50 to $6.94.............. 221,200 7.9 $ 6.42 63,200 $ 6.20
7.50 to 10.69............... 1,663,850 8.1 8.50 625,550 8.24
11.19 to 16.75.............. 1,855,915 7.8 13.33 910,303 12.95
17.44 to 23.81.............. 1,643,782 7.5 20.11 789,728 20.01
-------------- -------------
$5.50 to $23.81............. 5,384,747 7.8 $ 13.62 2,388,781 $ 13.87
-------------- -------------
-------------- -------------
</TABLE>
Additional information relating to the 1984, 1992 and 1997 Plans at June 30,
1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Options exercisable........................................................ 2,388,781 1,178,881 628,285
Options available for grant................................................ 1,314,902 746,448 710,278
Total reserved common stock shares for stock option plans.................. 6,699,649 5,041,230 3,508,463
</TABLE>
41
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CAPITAL STOCK (CONTINUED)
The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected life (years)......................................... 5 5 5
Interest rate................................................. 5.40% 5.81% 6.43%
Volatility.................................................... 57.03% 49.88% 49.95%
Dividend yield................................................ 0% 0% 0%
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation programs. Had the Company recorded
compensation expense using the accounting method recommended by SFAS No. 123,
net income (loss) and net income (loss) per common share-- Basic and Diluted
would approximate the following (000's except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Net income (loss)
As reported............................................... $ (5,778) $ 16,475 $ (43,206)
Pro forma................................................. (10,091) 12,918 (45,273)
Net income (loss) per common share--Basic and Diluted
As reported............................................... $ (0.11) $ 0.32 $ (0.84)
Pro forma................................................. (0.20) 0.25 (0.88)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1996. The Company anticipates grants of additional awards in future years.
SHAREHOLDER RIGHTS PLAN
On August 2, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Plan") under which preferred stock purchase rights (the
"Rights") have been and will continue to be granted for each outstanding share
of the Company's common stock held at the close of business on August 14, 1996.
The Plan is intended to ensure fair and equitable treatment for all shareholders
in the event of unsolicited attempts to acquire the Company.
The Rights will become exercisable ten days after a person or group (the
"Acquiror") has acquired beneficial ownership of 20% or more of the Company's
common stock other than pursuant to a qualified offer, or announces or commences
a tender offer or exchange offer that could result in the acquisition of
beneficial ownership of 20% or more. Once exercisable, each Right entitles the
holder to purchase one one-thousandth of a share of a new series of preferred
stock at an exercise price of $135, subject to adjustment to prevent dilution.
If the Acquiror acquires 20% or more of the Company's common stock, each Right
(except those held by the Acquiror) entitles the holder to purchase either the
Company's stock or stock in the merged entity at half of market value. The
Rights have no voting power, expire on August 14, 2006, and may be redeemed at a
price of $0.01 per Right up to and including the tenth business day after a
public announcement that 20% or more of the Company's shares have been acquired
by the Acquiror.
42
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CAPITAL STOCK (CONTINUED)
The Company amended and restated its Rights Agreement, as of December 15,
1998, to remove the requirement that continuing directors vote in board
approvals of certain corporate transactions.
4. IMPAIRMENT OF ASSETS, RESTRUCTURING AND SEVERANCE CHARGES
Due to a continuous decline in selling prices for its MOSFET and IGBT
products, during the fourth quarter of fiscal 1997, the Company recorded a $75
million pretax charge related to a restructuring program designed to improve the
Company's cost structure. Specifically, the restructuring activities included
shifting production from older manufacturing facilities to newer, more efficient
facilities, changing business processes by consolidating order entry, customer
support, inventory management, information systems and finance activities at
fewer locations and accelerating the deployment of the Company's new product
development center. The restructuring activities were expected to reduce the
cost of the Company's business processes and lower product costs and result in
increased flow of new products, which are less price sensitive. The charge was
composed of $61 million for the write-down of assets, $4 million for the
write-down of inventory, primarily wafers, to net realizable value and $10
million for termination benefits to be paid in connection with the severed
employees. The restructuring activities occurred over an approximate
eighteen-month transition period through December 31, 1998.
The asset write-down of property and equipment of $61 million was determined
by comparing the expected future undiscounted cash flows to the respective asset
carrying value. If an asset was deemed to be impaired, the carrying value was
adjusted to its expected future discounted cash flows. The net book value of the
applicable property and equipment prior to the $61 million write-down was $79
million. The write-downs related to the following:
1) Wafer fabrication equipment located in El Segundo, California with a
carrying value of $21 million, was adjusted to its fair value of $2 million. One
wafer fabrication line, dedicated primarily to research and product development,
was abandoned and replaced by a new product development facility in August 1998.
The other wafer fabrication line, which manufactured product using equipment
that processed 4-inch wafers, was abandoned and replaced with a more advanced
line located in Italy, which processes 5-inch wafers, in August 1998. Using
5-inch wafers results in significant manufacturing savings. The current status
of the wafer fabrication impaired equipment falls into three categories: a) it
was scrapped as of June 1997, b) it is idle with no viable plans for usage, or
c) it is being used on a sporadic basis in research and development. There is no
viable external market for this equipment.
2) Assembly equipment in England of $26 million was adjusted to its fair
value of $4 million. Specifically, three product assembly and packaging lines in
England were operating at a gross margin loss. The Company has continued to
utilize these lines periodically for market development activities, and these
lines remain unprofitable.
3) Information systems applications with a carrying value of $32 million
were written down to $12 million as a result of lack of vendor support. The
Company's software vendor changed business strategies and informed the Company
of its intention to stop supporting and developing the software technology that
certain of the Company's information systems applications were based upon. It
was determined in June 1997, that no viable alternatives could be identified. As
a result of this decision, the Company ceased development and implementation of
certain forecasting, planning and order management programs and determined the
assets related to these specific activities were impaired (i.e. no future use
and were abandoned). These assets consisted of costs related to external
consulting fees and expenses. The remaining book value relates to modules that
have not been abandoned.
43
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. IMPAIRMENT OF ASSETS, RESTRUCTURING AND SEVERANCE CHARGES (CONTINUED)
As of June 30, 1999, the Company had eliminated approximately 242 employees
related to the June 1997 restructuring. The majority of the positions eliminated
were operators and technicians at the Company's North American operations. The
Company also eliminated production and assembly positions in its manufacturing
operations in Italy due to the outsourcing of certain assembly activities. In
addition, administrative and sales positions in France, England, Germany, Japan
and North America, related to the regional consolidation of certain
administrative functions, were eliminated.
As of June 30, 1999, there was no remaining accrued severance liability in
the Company's Consolidated Balance Sheet related to the June 1997 restructuring.
During December 1998, the Company recorded a $14.5 million restructuring
charge associated with plans to relocate high-volume assembly lines from its
facility in England to its facility in Mexico to take advantage of labor rate
savings, and to centralize more of its European customer service and
administrative activities, resulting in reductions in personnel. The Company
expects to complete this operational transition over the next twelve months
ending on June 30, 2000. The charge consisted of $5.9 million for estimated
severance costs associated with the elimination of approximately 350 positions,
primarily consisting of operators and technicians, $6.1 million for the
write-off of assets to be abandoned, and $2.5 million for the write-down of
inventory related to specialty product lines. None of the assets written down,
which consist primarily of building improvements relating to the high-volume
assembly production lines, and production information systems, will remain in
use and all of them will be abandoned after the production lines are relocated.
In the third quarter of fiscal 1999, the Company recorded a final charge of $4.2
million relating to additional severance costs, after appropriate notification
was given to 43 remaining affected employees in the sales, customer service and
administrative areas. The severance per person is larger for the March 1999
restructuring versus the December 1998 restructuring as the 43 positions
included in the March 1999 restructuring are primarily highly paid employees in
sales and administrative management. The 350 positions in the December 1998
restructuring are primarily operators and technicians who have a much lower
salary level. Therefore, the Company estimates that, ultimately, charges
associated with all of these actions will total approximately $18.7 million.
As of June 30, 1999, the Company had eliminated 17 positions, paid $2.8
million for termination benefits related to this program and recorded the asset
impairment of $8.6 million. The remaining unutilized restructuring accrual of
$7.3 million, which is classified as current, relates to severance payments to
these previously notified employees for positions that are scheduled to be
eliminated during the next twelve months.
During June 1999, the Company recorded an $8.3 million charge related to
employee severance associated with the elimination of approximately 39
positions. This includes a reduction in sales and administrative management
staff levels and the resignation of Dr. Derek B. Lidow who shared the
responsibility of Chief Executive Officer. As of June 30, 1999, the Company had
eliminated 4 positions and paid $3.5 million in termination benefits. The
remaining unutilized severance accrual of $4.8 million at June 30, 1999, which
is classified as current, relates to severance payments to these previously
notified employees for positions that are scheduled to be eliminated during the
next twelve months.
5. GEOGRAPHIC SEGMENTS AND FOREIGN OPERATIONS
As described in Note 1, the Company adopted SFAS No. 131 in fiscal 1999. The
Company operates in one business segment. Revenues from unaffiliated customers
are based on the location in which the sale
44
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. GEOGRAPHIC SEGMENTS AND FOREIGN OPERATIONS (CONTINUED)
originated. Geographic information for the fiscal years ended June 30, 1999,
1998 and 1997 is presented below (000's):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues from Unaffiliated Customers
England................................................ $ 77,457 $ 85,900 $ 70,208
Singapore.............................................. 79,489 59,840 57,656
Other Foreign.......................................... 125,173 138,635 118,218
---------- ---------- ----------
Subtotal--Foreign.................................... 282,119 284,375 246,082
United States.......................................... 236,732 250,283 219,717
Unallocated royalties.................................. 26,520 17,233 20,328
---------- ---------- ----------
Total.............................................. $ 545,371 $ 551,891 $ 486,127
---------- ---------- ----------
---------- ---------- ----------
Identifiable Assets
England................................................ $ 103,002 $ 107,220 $ 98,275
Singapore.............................................. 62,625 55,958 47,993
Other Foreign.......................................... 32,549 44,619 41,448
---------- ---------- ----------
Subtotal--Foreign.................................... 198,176 207,797 187,716
United States.......................................... 482,636 464,863 433,684
Corporate Assets and Eliminations...................... 28,273 63,167 58,353
---------- ---------- ----------
Total.............................................. $ 709,085 $ 735,827 $ 679,753
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Corporate assets consist of cash, short-term investments, royalties
receivable, inventory reserves, deferred taxes, investments in subsidiaries and
certain other assets.
One customer accounted for 10.7% of the Company's consolidated net revenues
in fiscal 1999. No single customer accounted for more than 10% of the Company's
consolidated net revenues in fiscal 1998 or 1997.
6. INCOME TAXES
Income (loss) before income taxes and cumulative effect of accounting change
for the fiscal years ended June 30, 1999, 1998 and 1997 is as follows (000's):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Operations:
Domestic.................................................. $ 29,907 $ 14,389 $ (59,536)
Foreign................................................... 1,249 10,200 6,846
--------- --------- ----------
$ 31,156 $ 24,589 $ (52,690)
--------- --------- ----------
--------- --------- ----------
</TABLE>
45
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes for the fiscal years ended June 30,
1999, 1998 and 1997 consists of (000's):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Current income taxes:
Domestic.................................................. $ 680 $ (4,940) $ (2,666)
Foreign................................................... 17,413 3,597 8,710
--------- --------- ----------
18,093 (1,343) 6,044
--------- --------- ----------
Deferred income taxes:
Domestic.................................................. (3,515) 9,009 (16,312)
Foreign................................................... (3,798) 448 784
--------- --------- ----------
(7,313) 9,457 (15,528)
--------- --------- ----------
Total provision (benefit)................................... $ 10,780 $ 8,114 $ (9,484)
--------- --------- ----------
--------- --------- ----------
</TABLE>
Deferred taxes result primarily from temporary differences relating to
depreciation, financial statement reserves and state taxes.
The Company's effective tax rate (benefit) on pretax income (loss) differs
from the U.S. Federal Statutory tax rate for the fiscal years ended June 30,
1999, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Statutory tax rate (benefit).................................... 35.0% 35.0% (35.0)%
Change in valuation allowance................................... 37.6 1.5 --
Foreign tax differential........................................ 51.2 3.7 14.4
Foreign tax credit benefit...................................... (48.4) (5.1) (1.7)
Research tax credit benefit..................................... (42.1) (1.0) (0.4)
State taxes, net of federal tax benefit......................... (7.6) (4.8) (0.6)
Accrual without tax effect (1).................................. -- -- 5.0
Deferred compensation........................................... 7.0 -- --
Other, net...................................................... 1.9 3.7 0.3
--------- --------- ---------
34.6% 33.0% (18.0)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
(1) Accrual without tax effect is the increase in tax liabilities for additional
income tax exposures resulting from worldwide tax audits.
46
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The major components of the net deferred tax asset (liability) as of June
30, 1999 and 1998 are as follows (000's):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation........................................................ $ (48,651) $ (51,833)
Effect of state taxes............................................... (3,185) (1,907)
Other............................................................... (1,370) (1,805)
---------- ----------
Total deferred tax liabilities...................................... (53,206) (55,545)
---------- ----------
Deferred tax assets:
Financial statement reserves........................................ 5,348 4,041
Credit carryovers................................................... 67,386 22,600
Impairment of assets, restructuring and severance charges........... 17,941 16,158
Inventory adjustment................................................ 571 1,044
Net operating loss carryovers....................................... 2,582 12,599
Other............................................................... 649 116
---------- ----------
Total deferred tax assets........................................... 94,477 56,558
---------- ----------
Valuation allowance................................................... (31,812) (4,297)
---------- ----------
Net deferred tax asset (liability).................................... $ 9,459 $ (3,284)
---------- ----------
---------- ----------
</TABLE>
The Company's federal net operating loss ("NOL") carryforwards of
$26,614,000 from fiscal 1998 will be fully utilized to offset taxable income in
fiscal 1999. In addition, the Company has approximately $16,188,000, $1,187,000
and $38,238,000, respectively, of foreign tax credits, investment tax credits,
and research and development tax credit carryforwards, before valuation
allowance, available to reduce income taxes otherwise payable, which expire from
2000 to 2019. In addition, the Company has approximately $3,497,000 of
alternative minimum tax credits, which can be carried over indefinitely to
offset regular tax liabilities to the extent of the alternative minimum tax, and
a $8,276,000 state tax credit, before valuation allowance, which expires from
2004 to 2007.
The Company's NOL carryforwards of $2,582,000 were generated from the
Company's United Kingdom subsidiary. The NOLs can generally be carried forward
indefinitely, with certain limitations.
Realization of deferred tax assets is dependent upon generating sufficient
taxable income. Management believes that there is a risk that certain deferred
tax assets may result in no benefit and, accordingly, has established a
valuation allowance of $31,812,000 against them. Although realization is not
assured for the remaining deferred tax assets, management believes it is more
likely than not that they will be realized through future taxable earnings or
alternative tax strategies.
The Internal Revenue Service is currently auditing the Company's income tax
returns for fiscal 1995 through 1997. Management believes that resolution of the
audit will not have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
47
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NET INCOME (LOSS) PER COMMON SHARE
The reconciliation of the numerator and denominator of the Net income (loss)
per common share-- Basic and Diluted determined in accordance with SFAS No. 128
"Earnings per Share," was as follows for the years ended June 30, 1999, 1998 and
1997 (in 000's except per share amounts):
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -----------
<S> <C> <C> <C>
Year ended June 30, 1997
Net loss per common share -- Basic................... $ (43,206) 51,307 $ (0.84)
Effect of dilutive securities:
Stock options.................................... --
------------ ------------- -----------
Net loss per common share -- Diluted................. $ (43,206) 51,307 $ (0.84)
------------ ------------- -----------
------------ ------------- -----------
Year ended June 30, 1998
Net income per common share -- Basic................. $ 16,475 51,248 $ 0.32
Effect of dilutive securities:
Stock options.................................... 426
------------ ------------- -----------
Net income per common share -- Diluted............... $ 16,475 51,674 $ 0.32
------------ ------------- -----------
------------ ------------- -----------
Year ended June 30, 1999
Net loss per common share -- Basic................... $ (5,778) 51,612 $ (0.11)
Effect of dilutive securities:
Stock options.................................... 176
------------ ------------- -----------
Net loss per common share -- Diluted................. $ (5,778) 51,788 $ (0.11)
------------ ------------- -----------
------------ ------------- -----------
</TABLE>
8. PROFIT SHARING AND RETIREMENT PLANS
The Company previously had a defined contribution plan for all eligible
employees ("The Profit Sharing and Retirement Plan"). This plan provided for
contributions by the Company in such amounts as the Board of Directors
determined annually. Effective November 1, 1996, the Company elected to
terminate its Profit Sharing and Retirement Plan in order to focus on
improvements in its voluntary Retirement Savings Plan (401K). Employees and
former employees not fully vested at the time of the plan termination became
100% vested and were given various distribution options as defined by ERISA.
Under the established Retirement Savings Plan (401K), the Company made an annual
contribution for each participating employee of up to $1,200 in fiscal 1999,
1998 and 1997. Combined plan contributions by the Company totaled $1,174,000,
$1,261,000 and $1,365,000 for fiscal 1999, 1998 and 1997, respectively.
9. ENVIRONMENTAL MATTERS
Federal, state, and local laws and regulations impose various restrictions
and controls on the storage, use and discharge of certain materials, chemicals,
and gases used in semiconductor manufacturing processes. The Company does not
believe that compliance with such laws and regulations as now in effect will
have a material adverse effect on the Company's results of operations, financial
position or cash flows.
In addition, under some of these laws and regulations, the Company could be
held financially responsible for remedial measures if properties are
contaminated, or if waste is sent to a landfill or
48
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ENVIRONMENTAL MATTERS (CONTINUED)
recycling facility that becomes contaminated. Also, the Company may be subject
to common law claims if it releases substances that damage or harm third
parties. The Company cannot make assurances that changes in environmental rules
and regulations will not require additional investments in capital equipment and
the implementation of additional compliance programs in the future which could
have a material adverse effect on the Company's results of operations, financial
position or cash flows, as could any failure by the Company to comply with
environmental laws and regulations.
The Company and Rachelle Laboratories, Inc. ("Rachelle"), a former operating
subsidiary of the Company that discontinued operations in 1986, were each named
a potentially responsible party ("PRP") in connection with the investigation by
the United States Environmental Protection Agency ("EPA") of the disposal of
allegedly hazardous substances at a major superfund site in Monterey Park,
California ("OII Site"). Certain PRPs who settled certain claims with the EPA
under consent decrees filed suit in Federal Court in May 1992 against a number
of other PRPs, including the Company, for cost recovery and contribution under
the provisions of the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"). The Company has settled all outstanding claims that
have arisen out of the OII Site.
The Company also received a letter dated July 25, 1995 from the U.S.
Department of Justice, directed to Rachelle, offering to settle claims against
Rachelle relating to the first elements of clean-up work at the OII Site for
$4,953,148 (the final remedy assessment has not yet been made). The offer stated
that the settlement would not cover the cost of any additional remedial actions
required to finish the clean-up. This settlement offer expired by its terms on
September 1, 1995. On August 7, 1995, the Company received a Supplemental
Information Request from the EPA directed to Rachelle, to which counsel for
Rachelle responded with information regarding waste shipped to the OII Site.
Counsel for Rachelle received a letter from the EPA dated September 30, 1997,
requesting that Rachelle participate in the final remedial actions at the site,
and counsel replied on October 21, 1997. The Company has taken the position that
none of the wastes generated by Rachelle were hazardous. The Company has
received no further communications in connection with the OII Site.
The Company cannot determine with accuracy the amount of the potential
demand to Rachelle for the cost of the final remedy. Based upon information
received to date, the Company believes that any demand, if made, while likely to
be significant, should nonetheless be substantially below, although in addition
to, the demand amount for earlier phases of the OII Site clean-up. The Company's
insurer has not accepted liability although it has made payments for defense
costs for the lawsuit against the Company.
The Company also received a letter dated September 9, 1994, from the State
of California Department of Toxic Substances Control stating that it may be a
PRP for the deposit of hazardous substances at a facility in Whittier,
California. In June 1995, the Company joined a group of other PRPs to remove
contamination from the site. The group currently estimates the total cost of the
clean-up to be between $20 million and $25 million, although the actual cost
could be much higher. The Company estimated that it sent approximately 0.1% of
the waste, by weight, sent by all PRPs contributing to the clean-up of the site,
and the Company believes the cost of the clean-up will be roughly allocated
among PRPs by the amount of waste contributed. On July 31, 1999, the group
proposed two settlement offers to the Company: one for $34,165 and the second
for $68,330. The first settlement offer covers investigation and remediation of
the site itself and a small area extending beyond the site. The second
settlement offer covers this area plus all additional downgradient
contamination. The Company accepted the $68,330 settlement offer, which requires
EPA acceptance, on September 14, 1999, and will make the required payment by
September 30, 1999. There
49
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ENVIRONMENTAL MATTERS (CONTINUED)
can be no assurance, however, that the EPA will accept the settlement offers or
what the ultimate outcome of this matter will be. The Company believes that,
whatever the outcome, it will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
10. COMMITMENTS
The future minimum lease commitments under non-cancelable capital and
operating leases of equipment and real property at June 30, 1999 are as follows
(000's):
<TABLE>
<CAPTION>
CAPITAL OPERATING TOTAL
FISCAL YEARS LEASES LEASES COMMITMENTS
- --------------------------------------------------------- --------- ----------- -------------
<S> <C> <C> <C>
2000..................................................... $ 1,589 $ 2,554 $ 4,143
2001..................................................... 1,488 1,966 3,454
2002..................................................... 1,334 1,120 2,454
2003..................................................... 1,136 902 2,038
2004..................................................... 788 736 1,524
Later years.............................................. -- 1,020 1,020
Less imputed interest.................................... (1,037) -- (1,037)
--------- ----------- -------------
Total minimum lease payments............................. $ 5,298 $ 8,298 $ 13,596
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
Total rental expense on all operating leases charged to income was
$6,710,000, $7,698,000 and $8,552,000 in fiscal 1999, 1998 and 1997,
respectively. The Company had outstanding purchase commitments for capital
expenditures of approximately $10.1 million at June 30, 1999.
11. INTELLECTUAL PROPERTY RIGHTS
Most of the Company's broadest power MOSFET patents were subject to, and
have successfully emerged from, reexamination by the United States Patent and
Trademark Office ("PTO"). The PTO, in the fiscal year, concluded its
reexamination of the Company's U.S. patents 4,642,666 and 4,959,699 and issued
reexamination certificates confirming the patentability of claims of those
patents. The Company's 5,008,725 and 5,130,767 patents are currently undergoing
reexamination in the PTO.
12. OTHER INCOME (EXPENSE)
Other income was $53.5 million in fiscal 1999, compared to other expense of
$0.5 million in fiscal 1998. Fiscal 1999 other income primarily consisted of
proceeds from license agreements for prior periods and amounts in settlement of
litigation for past patent infringement (net of legal costs and the share of the
Company's royalty proceeds payable to Unitrode Corporation).
In December 1998, the Company entered into licensing agreements with two
competitors, Samsung Semiconductor, Inc. and Samsung Electronics Co., Ltd.,
(together "Samsung") and Fuji Electric Co., Ltd. ("Fuji"), with respect to IR's
power MOSFET / IGBT patents. The respective agreements provide for payments of
royalties for prior periods. The agreement with Samsung also provides for a
paid-up license that expired in April 1999. The agreement with Fuji provides for
ongoing royalties on worldwide sales covered by the licensed IR patents.
50
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. OTHER INCOME (EXPENSE) (CONTINUED)
In March 1999, the Company entered into a licensing agreement with
Shindengen Electric Company. The agreement, effective as of January 1, 1999,
provided for payments of royalties for prior periods, as well as ongoing
royalties on worldwide sales covered by the licensed IR patents.
In June 1999, the Company entered into a licensing agreement with Rohm Co.,
Ltd. The agreement provides for payments of royalties for prior periods, as well
as ongoing royalties on worldwide sales covered by the licensed IR patents.
13. LITIGATION
The Company, along with 87 other companies, was sued in Phoenix, Arizona
federal court on February 26, 1999, by the Lemelson Foundation for alleged
infringement of various Lemelson "machine-vision" and "auto ID" patents. In July
1999, the Company entered into an agreement with the Lemelson Foundation that
settled all outstanding claims and grants the Company a license to use the
Lemelson patents asserted against the Company.
The Company and certain of its directors and officers have been named as
defendants in three class action lawsuits filed in Federal District Court for
the Central District of California in 1991. These suits seek unspecified but
substantial compensatory and punitive damages for alleged intentional and
negligent misrepresentations and violations of the federal securities laws in
connection with the public offering of the Company's common stock completed in
April 1991 and the redemption and conversion in June 1991 of the Company's 9%
Convertible Subordinated Debentures due 2010. They also allege that the
Company's projections for growth in fiscal 1992 were materially misleading. Two
of these suits also named the Company's underwriters, Kidder, Peabody & Co.
Incorporated and Montgomery Securities, as defendants.
On March 31, 1997, the Court, on the Company and the individual defendants'
motion for summary judgment, issued the following orders: (a) the motion for
summary judgment was granted as to claims brought under Sections 11 and 12(2) of
the Securities Act of 1933; (b) the motion was denied as to claims brought under
Section 10(b) of the Securities Exchange Act of 1934 and the Securities and
Exchange Commission Rule 10b-5; and (c) the motion was granted as to the common
law claims for fraud and negligent misrepresentation to the extent said claims
are based on representations contained in the offering prospectus and was denied
as to other such claims. The Court also granted the summary judgment motion
brought by the underwriters. The plaintiffs' motion for reconsideration or
certification of an interlocutory appeal of these orders was denied.
On January 28, 1998, the Court decertified the class pursuing common law
claims for fraud and negligent misrepresentation and granted the defendants'
motion to narrow the shareholder class period to June 19, 1991 through October
21, 1991. Plaintiffs' motion for reconsideration or certification of an
interlocutory appeal of these rulings was denied.
On June 14, 1999, the Court approved a notice of the pendency of the class
action and a proof of claim form for dissemination to class members. Such
dissemination took place in June 1999. Trial is scheduled for March 14, 2000.
Although the Company believes that the remaining claims alleged in the suits
are without merit, the ultimate outcome cannot be presently determined. A
substantial judgment or settlement, if any, could have a material adverse effect
on the Company's results of operations, financial position or cash flows. No
provision for any liability that may result upon adjudication of these matters
has been made in the Consolidated Financial Statements.
51
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EXECUTIVE AGREEMENT
The Company entered into an executive agreement with Eric Lidow dated May
15, 1991. The agreement set Mr. Lidow's annual salary at $500,000, granted the
Board discretion to increase his salary and to pay him bonuses, and established
a pension. Mr. Lidow's salary was increased in May 1992 to $550,000, in August
1994 to $632,500 and in July 1999 to $670,450. Mr. Lidow was not awarded a bonus
in fiscal 1999. The agreement may be terminated by either party upon 90 days
written notice.
Under the agreement, prior to its amendment described below, Mr. Lidow would
have been entitled to begin receiving the pension payments when his employment
with the Company ceased for any reason (except termination for cause). The
pension would have been payable in annual installments, equal to the sum of 90%
of his then current salary and the average of his prior three years' cash
bonuses, if any. If Mr. Lidow's wife survived him, she would have received, for
the remainder of her life, annual payments in an amount equal to two-thirds of
the amount of the pension payment that would have been payable to Mr. Lidow.
Before the amendments to the agreement described below, if Mr. Lidow had retired
at fiscal 1998 year-end, the pension would have been equal to $821,250 per year
for the remainder of Mr. Lidow's life and $547,500 per year for the remainder of
Mrs. Lidow's life, if she had survived him. The Company had funded a trust to
cover its liability for the pension based on actuarial assumptions established
by PricewaterhouseCoopers LLP. However, the Company's actual liability for the
pension in ensuing years could have been more or less than the funding depending
upon whether actual events mirrored the actuarial assumptions.
In fiscal 1998, the Company's Compensation Committee and Mr. Lidow
renegotiated his executive agreement. The Compensation Committee then
recommended adoption of the renegotiated agreement by the Board, which the Board
approved. In taking these actions, the Compensation Committee and the Board
considered, among other things, their and Mr. Lidow's desire to limit the sale
of his shares of IR Common Stock to meet commitments and their concerns about
the uncertainty of the Company's liability for the pension. In connection with
the former consideration, the Company also made certain loans to Mr. Lidow,
which have since been repaid. See Note 15 in the Notes to the Consolidated
Financial Statements. The amendments to Mr. Lidow's agreement canceled all of
the Company's obligations with respect to the pension. As consideration, the
corpus of the trust of $8,096,663 was distributed to Mr. Lidow in several
installments, $6,596,663 and $1,500,000 in fiscal 1999 and 1998, respectively.
Based on actuarial analysis, the consideration was less than the amount needed
to purchase the retirement benefit from a third party company. Mr. Lidow and his
wife are not entitled to receive any additional pension payments under the
agreement.
The funding of the pension had been expensed in prior years, and the lump
sum distribution did not trigger any further expense. Because Internal Revenue
Code Section 162(m) imposes certain restrictions on the deductibility of
non-performance based compensation in excess of $1,000,000, the Company was not
able to deduct any compensation in excess of $1,000,000 paid to Mr. Lidow in
fiscal 1999 and 1998.
15. RELATED PARTIES
In June 1998, after discussing with Eric Lidow his desire to limit his sale
of shares of IR Common Stock to meet commitments, the Board approved two
unsecured loans to him aggregating $1,200,000, with interest at the annual rate
of eight and one-half percent (8.5%). The first loan of $600,000 was made in
June 1998 and the second loan, also for $600,000, was made in July 1998. Both
loans were due December 31, 1998. Mr. Lidow repaid them with accrued interest of
$23,497 on September 23, 1998.
52
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTIES (CONTINUED)
Contemporaneously with the approval of the loans, the Company amended his
executive agreement. (See Note 14 in the Notes to the Consolidated Financial
Statements).
In May 1999, after considering the recommendation of the Chairman and Chief
Executive Officers, the Board determined that the Company should implement a
single CEO management structure. To effectuate this management change, the
Company entered into an agreement with Dr. Derek B. Lidow on May 10, 1999
("Agreement"), which provided for Dr. Lidow's resignation as Chief Executive
Officer and as an employee of the Company. Under the terms of the Agreement, Dr.
Lidow received a severance payment of $3,200,000 on June 15, 1999, a bonus of
$100,000 for fiscal 1999 performance on August 13, 1999 and a grant of 200,000
stock options on June 14, 1999, which were fully vested, and which expire on
June 13, 2009. The Agreement also provided for the immediate acceleration of the
vesting of all of Dr. Lidow's outstanding unvested stock options and extended
the period during which the options could be exercised. Under the Agreement, Dr.
Lidow will provide consulting services to the Company for a period of two years
for which he will be compensated $100,000 per quarter plus associated expenses.
In connection with Dr. Derek B. Lidow's exercise of an option on June 23,
1999 to purchase 64,000 shares of IR Common Stock, the Company had an
outstanding receivable from Dr. Lidow for $597,694 at June 30, 1999, which was
paid off on July 7, 1999.
During the fiscal year, the Company paid $310,160 to the Law Offices of
Janet K. Hart for legal and negotiation services rendered to the Company. Ms.
Hart is the wife of Dr. Alexander Lidow.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows (000's except per share
amounts):
<TABLE>
<CAPTION>
NET
INCOME (LOSS)
NET PER COMMON LOSS PER NET
INCOME SHARE -- COMMON INCOME
(LOSS) BASIC AND SHARE DUE (LOSS)
BEFORE DILUTED BEFORE CUMULATIVE TO PER
CUMULATIVE CUMULATIVE EFFECT OF CUMULATIVE COMMON
EFFECT OF EFFECT ACCOUNTING EFFECT OF NET SHARE --
GROSS ACCOUNTING OF ACCOUNTING CHANGE, NET ACCOUNTING INCOME BASIC AND
REVENUES PROFIT CHANGE CHANGE OF TAX CHANGE (LOSS) DILUTED
---------- --------- ------------ ---------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
1st Quarter........ $ 127,493 $ 36,210 $ 34 $ 0.00 $ (26,154) $ (0.50) $ (26,120) $ (0.50)
2nd Quarter........ 132,837 36,153 19,794 0.38 19,794 0.38
3rd Quarter........ 137,550 39,881 4,004 0.08 4,004 0.08
4th Quarter........ 147,491 39,748 (3,456) (0.07) (3,456) (0.07)
1998
1st Quarter........ $ 133,111 $ 44,951 $ 6,095 $ 0.12
2nd Quarter........ 144,622 47,850 6,699 0.13
3rd Quarter........ 140,376 44,514 3,284 0.06
4th Quarter........ 133,782 38,849 397 0.01
</TABLE>
- ------------------------
The results, as noted above, for the first quarter in fiscal 1999 differ
from those previously reported on Form 10-Q for that quarter, due to the
adoption of SOP 98-5. No changes were made to the remaining fiscal 1999 quarters
due to immateriality.
53
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
For information called for by Items 10, 11, 12 and 13, reference is made to
the Registrant's definitive proxy statement for its Annual Meeting of
Stockholders, to be held November 22, 1999, which will be filed with the
Securities and Exchange Commission within 120 days after June 30, 1999, and
which is incorporated herein by reference. Certain information concerning the
Executive Officers of the Company is included in Part I. See "Additional Item"
on page 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Financial Statements and Financial Statement Schedule being filed as
part of this report are listed in the index on page 26.
b. Exhibits filed as part of this report are listed on the Exhibit Index on
page 55.
c. The Company filed a report on Form 8-K relating to "Other Events" on
July 6, 1999 regarding a Credit Agreement dated July 1, 1999 by and among
International Rectifier Corporation, Banque Nationale de Paris, and Sanwa Bank
California as agents for a group of lenders.
54
<PAGE>
EXHIBIT INDEX
Incorporated By Reference:
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM DOCUMENT
- ----------- ------------------------------------------------- -------------------------------------------------
<S> <C> <C>
3(a) Certificate of Incorporation of the Company, as Report on Form 10-Q for the quarterly period
amended to date ended December 31, 1990, as amended by Form 8
dated March 6 and March 12, 1991 as filed with
the Securities and Exchange Commission, File No.
1-7935 (Exhibit 3(a))
3(b) Amended and restated By-Laws of the Company Form 10-Q--for the quarterly period ended March
31, 1995 as filed with the Securities and
Exchange Commission, File No. 1-7935
3(c) Certificate of Amendment of Certificate of Form 10-K--Annual Report Pursuant to Section 13
Incorporation dated as of November 29, 1995 or 15(d) of the Securities Exchange Act of 1934
for Fiscal Year Ended June 30, 1997, Commission
File No. 1-7935
10(a) Technical Assistance Agreement dated March 30, Registration Statement on Form S-2 as filed with
1983 between the Company and Unitrode the Securities and Exchange Commission,
Corporation Registration No. 2-89410 (Exhibit 10.8)
10(b) Amended and Restated Settlement Agreement between Form 10-K--Annual Report Pursuant to Section 13
International Rectifier Corporation and or 15(d) of the Securities Exchange Act of 1934
Siliconix incorporated dated July 27, 1990 for Fiscal Year Ended June 30, 1990, Commission
File No. 1-7935
10(c) Amendment to Technical Assistance Agreement, Report on Form 10-Q for the quarterly period
effective as of August 27, 1987, by and between ended December 31, 1990 as amended by Form 8
the Company and Unitrode Corporation dated April 15, 1991, Commission File No. 1-7935
(Exhibit 10(l))
10(d) International Rectifier Corporation Stock Option Registration Statement on Form S-8 as filed with
Plan of 1984 (Second Amendment) the Securities and Exchange Commission,
Registration No. 33-40208
10(e) Amendment to International Rectifier Corporation Registration Statement on Form S-8 as filed with
1984 Stock Participation Plan the Securities and Exchange Commission,
Registration No. 33-53589 (Exhibit 4.1)
10(f) International Rectifier Corporation Stock Option Registration Statement on Form S-8 as filed with
Plan of 1992 the Securities and Exchange Commission,
Registration No. 33-63958 (Exhibit 8)
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM DOCUMENT
- ----------- ------------------------------------------------- -------------------------------------------------
<S> <C> <C>
10(g) Executive Employment Agreement dated May 15, 1991 Form 10-K--Annual Report Pursuant to Section 13
between International Rectifier Corporation and or 15(d) of the Securities Exchange Act of 1934
Eric Lidow and amended as of April 12, 1995 for Fiscal Years Ended June 30, 1991 and 1995,
Commission File No. 1-7935
10(h) International Rectifier Corporation Grantor Trust Form 10-K--Annual Report Pursuant to Section 13
for Retirement Benefits for Eric Lidow dated or 15(d) of the Securities Exchange Act of 1934
October 24, 1995 and amended as of February 22, for Fiscal Year Ended June 30, 1996, Commission
1996 File No. 1-7935
10(i) Line of Credit Agreement between International Form 10-K--Annual Report Pursuant to Section 13
Rectifier Corporation and Sanwa Bank California or 15(d) of the Securities Exchange Act of 1934
dated as of June 30, 1993 and amended as of for Fiscal Years Ended June 30, 1993, 1994,
August 24, 1993, November 22, 1993, July 1, 1995, and 1996, and Form 10-Q for the quarterly
1994, December 30, 1994, February 28, 1995, period ended March 31, 1996, Commission File No.
February 29, 1996, and June 28, 1996 1-7935
10(j) Security Agreement between International Form 10-K--Annual Report Pursuant to Section 13
Rectifier Corporation and Nationsbanc Leasing or 15(d) of the Securities Exchange Act of 1934
Corporation of North Carolina dated as of July for Fiscal Years Ended June 30, 1994, 1995, and
1, 1994 and amended as of August 15, 1994, 1996, and Form 10-Q for the quarterly period
November 3, 1994, March 8, 1995, December 29, ended December 31, 1996, Commission File No.
1995, July 30, 1996, and December 19, 1996 1-7935
10(k) Revolving Credit Agreement between International Form 10-K--Annual Report Pursuant to Section 13
Rectifier Corporation and Wells Fargo Bank, N.A. or 15(d) of the Securities Exchange Act of 1934
dated as of July 1, 1994 and amended as of for Fiscal Years Ended June 30, 1994, 1995, and
December 30, 1994, March 31, 1995, and May 15, 1996, Commission File No. 1-7935
1996
10(l) Loan and Security Agreement between Sanwa General Form 10-K--Annual Report Pursuant to Section 13
Equipment Leasing, a Division of Sanwa Business or 15(d) of the Securities Exchange Act of 1934
Credit Corporation and International Rectifier for Fiscal Year Ended June 30, 1994, Commission
Corporation dated as of July 1, 1994 File No. 1-7935
10(m) Term Loan Agreement between International Form 10-K--Annual Report Pursuant to Section 13
Rectifier Corporation and Sanwa Bank California or 15(d) of the Securities Exchange Act of 1934
dated February 28, 1995 and amended as of for Fiscal Year Ended June 30, 1996, Commission
December 29, 1995, February 29, 1995, and June File No. 1-7935
28, 1996
10(n) Revolving Credit Agreement between International Form 10-K--Annual Report Pursuant to Section 13
Rectifier Corporation and Nationsbank of Texas, or 15(d) of the Securities Exchange Act of 1934
N.A. dated as of June 15, 1995 and amended as of for Fiscal Years Ended June 30, 1995 and 1996,
June 6, 1996 Commission File No. 1-7935
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM DOCUMENT
- ----------- ------------------------------------------------- -------------------------------------------------
<S> <C> <C>
10(o) Term Loan Agreement between International Form 10-Q for the quarterly period ended March
Rectifier Corporation and Sanwa Bank California 31, 1996, Commission File No. 1-7935
(Sanwa Term Facility #2) dated March 26, 1996
10(p) Term Loan Agreement between International Form 10-K--Annual Report Pursuant to Section 13
Rectifier Corporation and Sumitomo Trust & or 15(d) of the Securities Exchange Act of 1934
Banking Co., LTD., Los Angeles Agency dated June for Fiscal Year Ended June 30, 1996, Commission
12, 1996 File No. 1-7935
10(q) Term Loan Agreement between International Form 10-K--Annual Report Pursuant to Section 13
Rectifier Corporation and Banque Nationale de or 15(d) of the Securities Exchange Act of 1934
Paris, Los Angeles Branch dated June 25, 1996 for Fiscal Year Ended June 30, 1996, Commission
File No. 1-7935
10(r) Amendment to Term Loan Agreement between Form 10-K--Annual Report Pursuant to Section 13
International Rectifier Corporation and Banque or 15(d) of the Securities Exchange Act of 1934
Nationale de Paris, Los Angeles Branch dated as for Fiscal Year Ended June 30, 1997, Commission
of May 9, 1997 File No. 1-7935
10(s) Amendments to Revolving Credit Agreement between Form 10-K--Annual Report Pursuant to Section 13
International Rectifier Corporation and or 15(d) of the Securities Exchange Act of 1934
Nationsbank of Texas, N.A. dated as of May 9, for Fiscal Year Ended June 30, 1997, Commission
1997 and June 5, 1997 File No. 1-7935
10(t) Amendment to Term Loan Agreement between Form 10-K--Annual Report Pursuant to Section 13
International Rectifier Corporation and Sumitomo or 15(d) of the Securities Exchange Act of 1934
Trust & Banking Co., LTD., Los Angeles Agency for Fiscal Year Ended June 30, 1997, Commission
dated as of May 9, 1997 File No. 1-7935
10(u) Amendment to Revolving Credit Agreement between Form 10-K--Annual Report Pursuant to Section 13
International Rectifier Corporation and Wells or 15(d) of the Securities Exchange Act of 1934
Fargo Bank, N.A. dated as of May 9, 1997 for Fiscal Year Ended June 30, 1997, Commission
File No. 1-7935
10(v) Amendment to Line of Credit Agreement between Form 10-K--Annual Report Pursuant to Section 13
International Rectifier Corporation and Sanwa or 15(d) of the Securities Exchange Act of 1934
Bank California dated as of May 22, 1997 for Fiscal Year Ended June 30, 1997, Commission
File No. 1-7935
10(w) Amendment to Term Loan Agreement between Form 10-K--Annual Report Pursuant to Section 13
International Rectifier Corporation and Sanwa or 15(d) of the Securities Exchange Act of 1934
Bank California dated as of May 22, 1997 for Fiscal Year Ended June 30, 1997, Commission
File No. 1-7935
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM DOCUMENT
- ----------- ------------------------------------------------- -------------------------------------------------
<S> <C> <C>
10(x) Amendment to Term Loan Agreement between Form 10-K--Annual Report Pursuant to Section 13
International Rectifier Corporation and Sanwa or 15(d) of the Securities Exchange Act of 1934
Bank California (Sanwa Term Facility #2) dated for Fiscal Year Ended June 30, 1997, Commission
as of May 22, 1997 File No. 1-7935
10(y) International Rectifier Corporation 1997 Employee Registration Statement on Form S-8 as filed with
Stock Incentive Plan the Securities and Exchange Commission,
Registration No. 33-46901
10(z) International Rectifier Corporation Amended and Registration Statement on Form S-8 as filed with
Restated Stock Incentive Plan of 1992 the Securities and Exchange Commission,
Registration No. 33-41363
10(aa) International Rectifier Corporation Retirement Registration Statement on Form S-8 as filed with
Savings Plan the Securities and Exchange Commission,
Registration No. 33-57575
10(ab) Amendment to Executive Employment Agreement dated Form 10-K--Annual Report Pursuant to Section 13
May 15, 1991 between International Rectifier or 15(d) of the Securities Exchange Act of 1934
Corporation and Eric Lidow amended as of June for Fiscal Year Ended June 30, 1998, Commission
22, 1998 File No. 1-7935
10(ac) Amendment to International Rectifier Corporation Form 10-K--Annual Report Pursuant to Section 13
Grantor Trust for Retirement Benefits for Eric or 15(d) of the Securities Exchange Act of 1934
Lidow, dated October 25, 1995 and amended as of for Fiscal Year Ended June 30, 1998, Commission
February 22, 1996 and June 22, 1998 File No. 1-7935
10(ad) Amendment to International Rectifier Corporation Form 10-K--Annual Report Pursuant to Section 13
Grantor Trust for Retirement Benefits for Eric or 15(d) of the Securities Exchange Act of 1934
Lidow, dated October 25, 1995 and amended as of for Fiscal Year Ended June 30, 1998, Commission
February 22, 1996, June 22, 1998, and August 5, File No. 1-7935
1998
10(ae) Amendment to Executive Employment Agreement dated Form 10-K--Annual Report Pursuant to Section 13
May 15, 1991 between International Rectifier or 15(d) of the Securities Exchange Act of 1934
Corporation and Eric Lidow amended as of June for Fiscal Year Ended June 30, 1998, Commission
22, 1998 and August 5, 1998 File No. 1-7935
</TABLE>
58
<PAGE>
SUBMITTED HEREWITH:
See page 26 for an index of Financial Statements and Financial Statement
Schedule being filed as part of this report.
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM DOCUMENT
- ----------- ------------------------------------------------- -------------------------------------------------
<S> <C> <C>
3(d) First Amendment to Amended and restated By-Laws
of the Company, dated August 25, 1997
4(a) Amended and Restated Rights Agreement between
International Rectifier Corporation and
ChaseMellon Shareholder Services, L.L.C., dated
as of December 15, 1998
10(af) Consulting, Nondisclosure, Severance and
Resignation Agreement between Derek Lidow and
International Rectifier Corporation, dated as of
May 10, 1999
10(ag) First Amendment dated September 29, 1999, to
Consulting, Nondisclosure, Severance and
Resignation Agreement between Derek Lidow and
International Rectifier Corporation, dated as of
May 10, 1999
21 List of Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
INTERNATIONAL RECTIFIER CORPORATION
(Registrant)
By: /s/ MICHAEL P. MCGEE
-----------------------------------------
Michael P. McGee
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Date: September 30, 1999
Each person whose signature appears below hereby authorizes Michael P.
McGee, as attorney-in-fact and agent, with full powers of substitution, to sign
on his behalf, individually and in the capacities stated below, and to file any
and all amendments to this Form 10-K, and other documents in connection
therewith, with the Securities and Exchange Commission, granting to said
attorney-in-fact and agent full power and authority to perform any other act on
behalf of the undersigned required to be done in the premises.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ ERIC LIDOW
- ------------------------------ Chairman of the Board September 30, 1999
Eric Lidow
/s/ ALEXANDER LIDOW
- ------------------------------ Director, Chief Executive September 30, 1999
Alexander Lidow Officer
/s/ ROBERT J. MUELLER
- ------------------------------ Director, Executive Vice September 30, 1999
Robert J. Mueller President
/s/ DEREK B. LIDOW
- ------------------------------ Director September 30, 1999
Derek B. Lidow
/s/ GEORGE KRSEK
- ------------------------------ Director September 30, 1999
George Krsek
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ JACK O. VANCE
- ------------------------------ Director September 30, 1999
Jack O. Vance
/s/ ROCHUS E. VOGT
- ------------------------------ Director September 30, 1999
Rochus E. Vogt
/s/ DONALD S. BURNS
- ------------------------------ Director September 30, 1999
Donald S. Burns
/s/ JAMES D. PLUMMER
- ------------------------------ Director September 30, 1999
James D. Plummer
/s/ MINORU MATSUDA
- ------------------------------ Director September 30, 1999
Minoru Matsuda
</TABLE>
61
<PAGE>
SCHEDULE II
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(IN 000'S)
<TABLE>
<CAPTION>
ADDITIONS
------------------------------------------------------
BALANCE AT CHARGED TO
BEGINNING OF COST AND CHARGED TO DEDUCTIONS BALANCE AT END
DESCRIPTION PERIOD EXPENSES OTHER (2) (1) OF PERIOD
- ------------------------------------------- ------------- ----------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1999
Allowance for doubtful accounts............ $ 1,401 $ 1,280 $ 117 $ (630) $ 2,168
Deferred tax valuation allowance........... 4,297 20,669 6,846 -- 31,812
Inventory valuation reserve................ 2,551 6,528 -- (5,793) 3,286
1998
Allowance for doubtful accounts............ 1,043 851 (88) (405) 1,401
Deferred tax valuation allowance........... 4,870 377 -- (950) 4,297
Inventory valuation reserve................ 3,580 3,572 -- (4,601) 2,551
1997
Allowance for doubtful accounts............ 1,014 428 -- (399) 1,043
Deferred tax valuation allowance........... -- 4,870 -- -- 4,870
Inventory valuation reserve................ 6,084 596 -- (3,100) 3,580
</TABLE>
- ------------------------
(1) Deductions include the write-off of uncollectible amounts with respect to
trade accounts receivable, obsolete and scrap inventory, revaluation or
write-off of state valuation allowance, and the effects of Statement of
Financial Accounting Standards No. 52.
(2) 1999 charge relates to the cumulative effect of change in accounting
principle.
F-1
<PAGE>
First Amendment dated August 25, 1997
First Amendment to
Amended and Restated Bylaws of
International Rectifier Corporation (a Delaware
corporation),
dated March 6, 1995
The following sections of Article III of the Amended and Restated Bylaws of
International Rectifier Corporation are amended and restated as follows:
Section 2(a): The number of directors which shall constitute the
Board shall be ten (10) until changed by an amendment hereof duly
adopted by the Board amending this Section 2.
Section 3: Classification; Term of Office. The directors shall
be divided into three classes, as nearly equal in numbers as the
then total number of directors permits. The term of office of all
directors shall be for three years.
At each annual meeting held, directors shall be elected for a full
three-year term.
Each director shall serve for a term continuing until the annual
meeting of the stockholders at which the term of the class to which
he was elected expires or, if chosen to fill a vacancy in another
class, the expiration of that class, and until his successor shall
have been duly elected and qualified or until his earlier
resignation or removal.
Section 4. Vacancies. Any director may resign effective upon
giving written notice to the Chairman of the Board, the Chief
Executive Officer, the President, the Corporate Secretary or the
Board, unless the notice specifies a later time for the
effectiveness of such resignation. Vacancies and directorships
resulting from an increase in the number of directors may be filled
by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director. A director serving in one
class may be chosen to fill a vacancy or a new directorship in
another class. Any director so chosen, including a sitting director
who is chosen to fill a vacancy or newly created directorship in
another class, shall hold office until the next election of that
class and until his or her successor shall be duly elected and
qualified.
If at any time by reason of death or resignation or other cause,
the Corporation shall have no directors in office, then any officer
or any stockholder, or an executor, administrator, trustee or
guardian of the stockholder or other fiduciary entrusted with like
responsibility for the person or estate or a stockholder may call a
special meeting of stockholders in accordance with the provisions
of the Bylaws, or may apply to the Court of Chancery for a decree
<PAGE>
summarily ordering an election as provided in Section 211 of the
Delaware General Corporation Law.
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION
and
ChaseMellon Shareholder Services, L.L.C.
Rights Agent
----------------------
AMENDED AND RESTATED RIGHTS AGREEMENT
Dated as of December 15, 1998
<PAGE>
<TABLE>
<S> <C>
Section 1. Certain Definitions 1
Section 2. Appointment of Rights Agent 4
Section 3. Issuance of Right Certificates 4
Section 4. Form of Right Certificates 5
Section 5. Countersignature and Registration 6
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen Right Certificates 7
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights 7
Section 8. Cancellation and Destruction of Right Certificates 9
Section 9. Reservation and Availability of Shares; Registration 10
Section 10. Record Date 10
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights 11
Section 12. Certification of Adjusted Purchase Price or Number of Shares 17
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power 17
Section 14. Fractional Rights and Fractional Shares 20
Section 15. Rights of Action 20
Section 16. Agreement of Right Holders 21
Section 17. Right Certificate Holder Not Deemed a Stockholder 21
Section 18. Concerning the Rights Agent 21
Section 19. Merger or Consolidation or Change of Name of Rights Agent 22
Section 20. Duties of Rights Agent 22
Section 21. Change of Rights Agent 24
Section 22. Issuance of New Right Certificates 25
Section 23. Redemption 25
Section 24. Notice of Proposed Actions 25
Section 25. Notices 26
Section 26. Supplements and Amendments 26
Section 27. Exchange 27
Section 28. Successors 28
Section 29. DeterminationS and Actions Taken by the Board of Directors 28
Section 30. Benefits of this Agreement 28
Section 31. Governing Law 28
Section 32. Counterparts 28
Section 33. Section Headings 28
Section 34. Severability 29
</TABLE>
<PAGE>
RIGHTS AGREEMENT
AMENDED AND RESTATED RIGHTS AGREEMENT, dated as of December 15, 1998, between
International Rectifier Corporation, a Delaware corporation (the "Company"), and
ChaseMellon Shareholder Services, L.L.C. as Rights Agent.
W I T N E S S E T H
WHEREAS, the Board of Directors of the Company has authorized and
declared the distribution of one right for (i) each share of Common Stock of
the Company ("Common Stock") outstanding at the Close of Business (as
hereinafter defined) on August 14, 1996 (the "Rights Record Date"), each
right representing the right to purchase one Unit consisting, initially, of
one one-thousandth of a share of Junior Participating Preferred Stock, and
(ii) each additional share of Common Stock which shall become outstanding
between the Rights Record Date and the earliest of the Distribution Date, the
Expiration Date (as such terms are hereinafter defined) and the date, if any,
on which such rights may be redeemed, all upon the terms and subject to the
conditions hereinafter set forth (each such right being hereinafter referred
to as a "Right");
WHEREAS, the Board of Directors of the Company authorized the Company to
enter into an Amended and Restated Rights Agreement to eliminate the concept
of, and all references to, "Continuing Director";
NOW, THEREFORE, the parties agree as follows:
Section 1. Certain Definitions.
(a) For purposes of this Agreement, the following terms have the
meanings indicated: "Acquiring Person" shall mean any Person who or which,
alone or together with all Affiliates and Associates of such Person, shall be
the Beneficial Owner (within the meaning of Section 1(b)) of a Substantial
Block of Voting Stock, but shall not include (i) an Exempt Person or (ii) any
Person who or which acquires a Substantial Block of Voting Stock in
connection with a transaction or series of transactions approved prior to
such transaction or transactions by the Board of Directors of the Company;
provided that no person shall become an Acquiring Person solely as a result
of a reduction in the number of shares of Voting Stock outstanding, unless
and until such Person shall thereafter become the Beneficial Owner of
additional shares constituting 1% or more of the general voting power of the
Company.
"Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act, as in effect as of the date hereof.
"Business Day" shall mean any day other than a Saturday, Sunday or day
on which banking institutions in the State of California are authorized or
obligated by law or executive order to close.
2
<PAGE>
"Close of Business" on any given date shall mean 5:00 p.m., Los Angeles
time, on such date; provided, however, that if such date is not a Business
Day it shall mean 5:00 p.m., Los Angeles time, on the next succeeding
Business Day.
"Common Stock" shall have the meaning assigned to it in the preamble;
and common stock when used with reference to Persons other than the Company
shall mean: (i) in the case of Persons organized in corporate form, the
capital stock or equity security with the greatest voting power of such
Person or, if such Person is a Subsidiary of another Person, of the Person or
Persons which ultimately control such first-mentioned Person; and (ii) in the
case of Persons not organized in corporate form, the units of beneficial
interest which (A) represent the right to participate generally in the
profits and losses of such Person (including without limitation any
flow-through tax benefits resulting from an ownership interest in such
Person) and (B) are entitled to exercise the greatest voting power of such
Person or, in the case of a limited partnership, shall have the power to
remove the general partner or partners.
"Distribution Date" shall have the meaning assigned to it in Section 3(a).
"Equivalent Stock" shall have the meaning assigned to it in Section 7(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Exempt Person" shall mean the Company, any Subsidiary of the Company and
any employee benefit plan or employee stock plan of the Company or of any
Subsidiary of the Company, or any trust or other entity organized,
established or holding shares of Common Stock by, for or pursuant to, the
terms of any such plan.
"Expiration Date" shall have the meaning assigned to it in Section 7(a).
"Offer Date" shall have the meaning assigned to it in Section 3(a).
"Person" shall mean any individual, firm, corporation, partnership,
trust or other entity and shall include any successor by merger (or
otherwise) of any of the foregoing.
"Principal Party" shall have the meaning assigned to it in Section 13(b).
"Purchase Price" shall mean the price payable for one Unit upon exercise
of a Right.
"Qualified Offer" shall mean a tender or exchange offer for all
outstanding Common Stock at a price and on terms determined to be adequate
and otherwise in the best interests of the Company and its shareholders
(other than the Person or an Affiliate or Associate thereof on whose behalf
the offer is made) by at least a majority of the Directors who are not
representatives of or affiliated with the Person making such offer or any
Affiliate or Associate of such Person.
"Redemption Price" shall have the meaning assigned to it in Section 23(a).
3
<PAGE>
"Right" shall have the meaning assigned to it in the preamble.
"Rights Record Date" shall have the meaning assigned to it in the preamble.
"Subject Shares" shall mean the class or series of shares then issuable on
exercise of the Rights.
"Stock Acquisition Date" shall mean the date of the first public
announcement by the Company or an Acquiring Person (which, for purposes of
this definition, shall include, without limitation, a report filed pursuant
to Section 13(d) under the Exchange Act) that an Acquiring Person has become
such.
"Subsidiary" shall mean, with respect to any Person, a corporation or
other entity the securities or other ownership interests of which having
ordinary voting power sufficient to elect a majority of the board of
directors or other persons performing similar functions are at the time
directly or indirectly owned by such Person and any Affiliate of such Person.
"Substantial Block" shall mean a number of shares of Voting Stock having
in the aggregate 20 percent or more of the general voting power.
"Trading Day" shall have the meaning assigned to it in Section 11(d).
"Unit" shall mean the shares or other securities issuable upon exercise of
one Right, initially one one-thousandth of a share of Junior Participating
Preferred Stock of the Company having the rights and preferences set forth in
Exhibit C, before any adjustment pursuant to Section 11(a)(ii) or Section 13.
"Voting Stock" shall mean shares of the Company's capital stock the
holders of which have general voting power.
(b) For purposes of this Agreement, a Person shall be deemed the
"Beneficial Owner" of any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding, (whether or not in writing) or upon the
exercise of any conversion, exchange or purchase rights (other than the
Rights), warrants or options, or otherwise; provided, however, that a Person
shall not be deemed the Beneficial Owner of securities tendered pursuant to a
tender or exchange offer made by or on behalf of such Person or any of such
Person's Affiliates or Associates until such tendered securities are accepted
for payment or exchange; or (B) the right to vote or to direct the voting of,
pursuant to any agreement, arrangement or understanding (whether or not in
writing); or (C) the right to dispose or to direct the disposition of,
pursuant to any agreement, arrangement or understanding (whether or not in
writing); or
4
<PAGE>
(iii) which are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any securities of the Company;
provided, however, that a Person shall not be deemed the Beneficial Owner of,
or to Beneficially Own, any security if the agreement, arrangement or
understanding to vote such security (1) arises solely from the grant of a
revocable proxy or consent given to such Person in connection with a public
proxy or consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations under the Exchange Act, and (2) is not also
then reportable on Schedule 13D (or any comparable or successor report) under
the Exchange Act; provided, further, that a Person engaged in business as an
underwriter of securities shall not be deemed the Beneficial Owner of
securities acquired through such person's participation in good faith in a
firm commitment underwriting until the expiration of the 40-day period
immediately following the date of such acquisition.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agent or Agents as it
may deem necessary or desirable and determine the respective duties of the
Rights Agent and the Co-Rights Agents.
Section 3. Issuance of Right Certificates.
(a) Until the Close of Business on the earlier of (i) the tenth
Business Day after a Stock Acquisition Date or (ii) the tenth Business Day
(or such later date as the Company's Board of Directors shall determine)
after the date of the commencement by any Person (other than an Exempt
Person) of, or the date of the first public announcement (such commencement
date or announcement date being herein referred to as the "Offer Date") of
the intent of any Person (other than an Exempt Person) to commence, a tender
or exchange offer upon the successful consummation of which such Person,
together with its Affiliates and Associates, would be the Beneficial Owner of
20 percent or more of the then outstanding Voting Stock (irrespective of
whether any shares are actually purchased pursuant to such offer) (the tenth
Business Day after the first to occur of a Stock Acquisition Date or an Offer
Date being herein referred to as the "Distribution Date"),
(i) the Rights will automatically attach to, and be evidenced
by, the certificates for Common Stock registered in the names of the holders
of Common Stock (which certificates for Common Stock shall be deemed also to
be Right Certificates) and not by separate Right Certificates, and
(ii) each Right will be transferable
5
<PAGE>
only in connection with the transfer of the underlying shares of Common
Stock. As soon as practicable after the Distribution Date, the Rights Agent
will mail, by first-class, insured, postage prepaid mail, to each record
holder of Common Stock as of the Close of Business on the Distribution Date,
as shown by the records of the Company at the Close of Business on the
Distribution Date, at the address of such holder shown on such records, a
Right Certificate, in substantially the form of Exhibit A hereto, evidencing
one Right for each share of Common Stock so held.
(b) As soon as practicable after the Rights Record Date, the Company
will send a copy of a Summary of Rights, in substantially the form attached
hereto as Exhibit B, by first-class mail, postage prepaid, to each record
holder of Common Stock as of the Close of Business on the Rights Record Date,
at the address of such holder shown on the records of the Company.
(c) The Company will cause certificates for Common Stock issued
after the Rights Record Date (including replacement certificates for shares
of Common Stock outstanding on or prior to the Rights Record Date), but prior
to the earliest of (i) the Distribution Date, (ii) the Expiration Date and
(iii) the date, if any, on which the Rights may be redeemed, to have
impressed on, printed on, written on or otherwise affixed to them the
following legend:
"This certificate also entitles the holder hereof to certain Rights as set
forth in the Amended and Restated Rights Agreement between the Company and
ChaseMellon Shareholder Services, L.L.C. as Rights Agent as the same shall be
amended from time to time (the Rights Agreement ), the terms of which are
hereby incorporated herein by reference and a copy of which is on file at the
principal executive offices of the Company. Under certain circumstances, as
set forth in the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. The Company
will mail to the holder of this certificate a copy of the Rights Agreement
without charge after receipt of a written request thereof. Under certain
circumstances set forth in the Rights Agreement, Rights issued to, or held
by, any Person who is, was or becomes an Acquiring Person or any Affiliate or
Associate thereof (as such terms are defined in the Rights Agreement) or
certain transferees of any thereof, whether currently held by or on behalf of
such Person or by any subsequent holder, may be limited as provided in
Section 7(f) of the Rights Agreement."
With respect to such certificates containing the foregoing legend, until
the Distribution Date, the Rights associated with Common Stock represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificates shall also constitute the
transfer of the Rights associated with the Common Stock represented by such
certificate.
(d) Until the Distribution Date, the surrender for transfer of any
of the certificates for Common Stock outstanding on or after the Rights
Record Date, with or without a copy of the Summary of Rights attached thereto
and with or without the legend set forth in subsection (c) above, shall also
constitute the transfer of the Rights associated with such Common Stock.
After the Distribution Date, the Rights will be evidenced solely by the Right
Certificates.
6
<PAGE>
Section 4. Form of Right Certificates.
(a) The Right Certificates (and the forms of assignment and
certification and of election to purchase shares to be printed on the reverse
thereof) shall be in substantially the form of Exhibit A hereto and may have
such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required
to comply with any law or with any rule or regulation made pursuant thereto
or with any rule or regulation of any stock exchange on which the Rights may
from time to time be listed, or to conform to usage.
(b) Any Right Certificate issued pursuant to Section 3(a) or Section
22 that represents Rights Beneficially Owned by: (i) an Acquiring Person or
any Associate or Affiliate of any Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (iii) a transferee of
an Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such
and receives such Rights pursuant to either (A) a transfer (whether or not
for consideration) from the Acquiring Person to holders of equity interests
in such Acquiring Person or to any Person with whom such Acquiring Person has
any continuing agreement, arrangement or understanding regarding the
transferred Rights, or (B) a transfer which the Board of Directors of the
Company has determined is part of a plan, arrangement or understanding which
has as a primary purpose or effect avoidance of Section 7(f), and any Right
Certificate issued pursuant to Section 6 or Section 11 upon transfer,
exchange, replacement or adjustment of any other Right Certificate referred
to in this sentence, shall contain (to the extent feasible and reasonably
identifiable as such) the following legend:
"The Rights represented by this Right Certificate are or were beneficially
owned by a Person who was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person (as such terms are defined in the Rights
Agreement) or certain transferees thereof. Accordingly, under certain
circumstances as provided in the Rights Agreement, this Right Certificate and
the Rights represented hereby may be limited as provided in Section 7(f) of
such Agreement."
Section 5. Countersignature and Registration.
(a) The Right Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President or any of its Vice
Presidents, either manually or by facsimile signature, and have affixed
thereto the Company's seal or a facsimile thereof which shall be attested by
the Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature. The Right Certificates shall be manually countersigned
by the Rights Agent and shall not be valid for any purpose unless so
countersigned. In case any officer of the Company who shall have signed any
of the Right Certificates shall cease to be such officer of the Company
before countersignature by the Rights Agent and issuance and delivery by the
Company, such Right
7
<PAGE>
Certificates, nevertheless, may be countersigned by the Rights Agent, issued
and delivered with the same force and effect as though the person who signed
such Right Certificates had not ceased to be such officer of the Company; and
any Right Certificate may be signed on behalf of the Company by any person
who, at the actual date of the execution of such Right Certificate, shall be
a proper officer (as specified above) of the Company to sign such Right
Certificate, although at the date of the execution of this Rights Agreement
any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept books for registration and transfer of the Right
Certificates issued hereunder. Such books shall show the names and addresses
of the respective holders of the Right Certificates, the number of Rights
evidenced on its face by each Right Certificate, the date of each Right
Certificate and the number of each Right Certificate.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(f) and
Section 14, at any time after the Close of Business on the Distribution Date,
and prior to the Close of Business on the Expiration Date or the day prior to
the day, if any, on which the Rights are to be redeemed pursuant to Section
23, any Right Certificate or Certificates may be transferred, split up,
combined or exchanged for another Right Certificate or Right Certificates,
entitling the registered holder to purchase such number of Units as the Right
Certificate or Right Certificates surrendered then entitled such holder to
purchase. Any registered holder desiring to transfer, split up, combine or
exchange any Right Certificate shall make such request in writing delivered
to the Rights Agent, and shall surrender the Right Certificate(s) to be
transferred, split up, combined or exchanged, with the form of assignment on
the reverse side(s) thereof duly completed and executed, at the stock
transfer office of the Rights Agent. Thereupon the Rights Agent shall
countersign and deliver to the persons entitled thereto the Right
Certificate(s) requested.
The Company may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer,
split up, combination or exchange of Right Certificates. Notwithstanding the
foregoing, neither the Rights Agent nor the Company shall be obligated to
take any action whatsoever with respect to the transfer of any such
surrendered Right Certificate unless and until the registered holder shall
have completed and signed the certificate contained in the form of assignment
on the reverse side of such Right Certificate and shall have provided such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation
of a Right Certificate, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and reimbursement to
the Company and the Rights Agent of all reasonable expenses incidental
thereto, and upon surrender to the Rights Agent and cancellation of the Right
Certificate, if mutilated, the Company will execute and deliver a new Right
Certificate of like tenor to the Rights Agent for delivery to the registered
owner in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.
8
<PAGE>
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) Subject to Section 7(f), and unless earlier redeemed as provided
in Section 23, the registered holder of any Right Certificate may exercise
the Rights evidenced thereby in whole or in part at any time after the
Distribution Date upon surrender of the Right Certificate, with the form of
election to purchase on the reverse side thereof duly completed and executed,
to the Rights Agent at the stock transfer office of the Rights Agent,
together with payment of the Purchase Price for each Unit as to which the
Rights are exercised, at or prior to the Close of Business on the tenth
anniversary of the Rights Record Date or such other date to which the Rights
may be extended as provided in this Agreement (the latest of such dates being
herein referred to as the "Expiration Date"). If at any time after the
Distribution Date but prior to the Expiration Date the Company is unable,
under its Certificate of Incorporation, to issue the number and class of
shares required to be issued upon the exercise of all of the outstanding
Rights, the Company may issue upon exercise of any of the Rights shares of
capital stock or other securities of the Company of equivalent value to the
shares so required to be issued ("Equivalent Stock"), as determined by the
Board of Directors.
(b) The Purchase Price for each Unit pursuant to the exercise of a
Right shall initially be $135, shall be subject to adjustment from time to
time as provided in Sections 11 and 13 and shall be payable in lawful money
of the United States of America.
(c) Upon receipt of a Right Certificate, with the form of election
to purchase duly executed, accompanied by payment of the Purchase Price for
the Units to be purchased and an amount equal to any applicable transfer tax
in cash, or by certified check, bank draft or money order payable to the
order of the Company, the Rights Agent shall thereupon promptly (i)
requisition from the Company or any transfer agent of the Company a
certificate for the number of shares to be purchased and the Company will
comply, and hereby irrevocably authorizes its transfer agent to comply, with
all such requests, (ii) requisition from the Company the amount of cash to be
paid in lieu of issuance of a fractional share, when appropriate, in
accordance with Section 14, and (iii) promptly after receipt of such
certificate from any such transfer agent, cause the same to be delivered to
or upon the order of the registered holder of such Right Certificate,
registered in such name or names as may be designated by such holder, and,
when appropriate, after receipt promptly deliver such cash in lieu of a
fractional share to or upon the order of the registered holder of such Right
Certificate; provided, however, that in the case of the purchase, in
connection with the exercise of a Right, of securities other than shares of
stock, the Rights Agent shall promptly take the appropriate actions with
respect thereto as shall as nearly as practicable correspond to the actions
described in the foregoing clauses (i) through (iii).
(d) The Company shall not be required to pay any transfer tax which
may be payable in respect of any transfer involved in the transfer or
delivery of Right Certificates, or the issuance or delivery of certificates
in a name other than that of the registered holder of the Right Certificate
evidencing Rights surrendered for exercise, or to issue or deliver any
certificates upon the exercise of any Rights, until any such tax shall have
been paid (any such tax being payable by the holder of such Right Certificate
at the time of surrender) or until it has been established to the Company s
satisfaction that no such tax is due.
9
<PAGE>
(e) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be
issued by the Rights Agent to the registered holder of such Right Certificate
or to his duly authorized assigns, subject to the provisions of Section 14.
(f) Notwithstanding any provision of this Agreement to the contrary,
upon the occurrence of any of the events described in any of clauses (A),
(B), (C) or (D) of Section 11(a)(ii), the adjustment provided for under
Section 11(a)(ii) shall not apply with respect to any Rights that are at the
time of the occurrence of such event Beneficially Owned by (i)an Acquiring
Person or by any Associate or Affiliate of such Acquiring Person (which
Acquiring Person or Affiliate or Associate engages in, or realizes the
benefit of, one or more of the transactions described in clause (A) or clause
(B) of Section 11(a)(ii), realizes the benefits set forth in clause (C) of
Section 11(a)(ii) or, alone or together, become the Beneficial Owner(s) of a
number of shares of Voting Stock which equals or exceeds the percentage of
the general voting power as provided in clause (D) of Section 11(a)(ii), as
the case may be), or (ii) a transferee of an Acquiring Person or of any
Associate or Affiliate of such Acquiring Person (which Acquiring Person or
Associate or Affiliate engages in, or realizes the benefit of, one or more of
the transactions described in clause (A) or clause (B) of Section 11(a)(ii),
realizes the benefits set forth in clause (C) of Section 11(a)(ii) or, alone
or together with such Acquiring Person or any such Associate or Affiliate,
become the Beneficial Owner(s) of a number of shares of Voting Stock which
equals or exceeds the percentage of the general voting power as provided in
clause (D) of Section 11(a)(ii), as the case may be) (A)who becomes a
transferee after the Acquiring Person becomes such, or (B)who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such
and receives such Rights pursuant to either (1)a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in
such Acquiring Person or to any Person with whom such Acquiring Person has
any continuing agreement, arrangement or understanding regarding the
transferred Rights or (2)a transfer which the Board of Directors of the
Company has determined is part of a plan, arrangement or understanding which
has as a primary purpose or effect the avoidance of this Section 7(f). Upon
the exercise of such Rights, the holders thereof shall be entitled to
receive, upon payment of the Purchase Price, the number of Units issuable
upon exercise of such Rights without giving effect to the adjustment provided
for under Section 11(a)(ii). The Company shall use all reasonable efforts to
insure that the provisions of this Section 7(f) and Section 4(b) are complied
with, but shall have no liability to any holder of Right Certificates or
other Person as a result of its making or failing to make any determinations
with respect to an Acquiring Person or its Affiliates, Associates or
transferees hereunder.
(g) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any
purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) completed and signed the certificate contained in the
form of election to purchase set forth on the reverse side of the Right
Certificate surrendered for such exercise, and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner)
or Affiliates or Associates thereof as the Company shall reasonably request.
10
<PAGE>
Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split
up, combination or exchange shall, if surrendered to the Company or to any of
its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and
no Right Certificates shall be issued in lieu thereof except as expressly
permitted by this Agreement. The Company shall deliver to the Rights Agent
for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Right Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
cancelled Right Certificates to the Company, or shall, at the written request
of the Company, destroy such cancelled Right Certificates, and in such case
shall deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Shares; Registration.
(a) The Company covenants and agrees that it shall (i) on or prior
to the Rights Record Date, take all such action as shall be necessary to
cause to be reserved and kept available out of its authorized and unissued
capital stock, the number, class and series of shares that will be sufficient
to permit the exercise in full of all Rights to be outstanding as of the
Rights Record Date, (ii) no later than promptly following the Distribution
Date, take all such action as shall be necessary to cause to be reserved and
kept available out of its authorized and unissued capital stock, or its
authorized and issued shares held in its treasury, the number of additional
shares that will, from time to time, be sufficient to permit the exercise in
full of all Rights from time to time outstanding, (iii) take all such action
as may be necessary to insure that all shares delivered upon exercise of
Rights shall, at the time of delivery of the certificates for such shares
(subject to payment of the Purchase Price), be duly and validly authorized
and issued and fully paid and nonassessable, and (iv) pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or
of any shares upon the exercise of Rights (except as otherwise provided in
Section 7(d)).
(b) The Company agrees to take all such action, from and after the
Distribution Date, as may be necessary or appropriate to permit the issuance
of shares in connection with the exercise of the Rights, including any
required registration under (i) the Securities Act of 1933, as amended from
time to time (the Securities Act ), and (ii) the securities or blue sky laws
of the various states. The Company may temporarily suspend, for a period of
time not to exceed 90 days, the exercisability of the Rights in order to
prepare and file a registration statement or statements for the purpose of
effecting any such registration and permit such statement(s) to become
effective. At the commencement and termination of any such suspension, the
Company shall issue a public announcement and shall provide written notice to
the Rights Agent, stating that the exercisability of the Rights has been
temporarily suspended, or that such suspension has terminated, as the case
may be.
(c) If and so long as the stock issuable upon the exercise of Rights
is listed on any national securities exchange, the Company shall use its
reasonable efforts to cause all shares
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reserved for issuance upon exercise of Rights to be listed on such exchange
upon official notice of issuance upon such exercise.
Section 10. Record Date. Each Person in whose name any stock
certificate is issued upon the exercise of Rights shall for all purposes be
deemed to have become the holder of record of the shares represented thereby
on, and such certificate shall be dated, the date upon which the Right
Certificate evidencing such Rights was duly surrendered and payment of the
Purchase Price (and any applicable transfer taxes) was made. Prior to the
exercise of the Rights evidenced thereby, the holder of a Right Certificate
shall not be entitled to any rights of a stockholder of the Company with
respect to shares for which the Rights shall be exercisable, including
without limitation the right to vote or to receive dividends or other
distributions, and such holder shall not be entitled to receive any notice of
any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights.
The Purchase Price, the number and kind of shares or other securities
covered by each Right and the number of Rights outstanding are subject to
adjustment from time to time as provided in this Section 11.
(a)(i) If the Company shall at any time after the date of this
Agreement (A) declare and pay a dividend on the shares which are subject to
the Rights ("Subject Shares") payable in shares of stock of the Company, (B)
subdivide or split the Subject Shares, (C) combine or consolidate the Subject
Shares into a smaller number of shares or effect a reverse stock split of the
Subject Shares or (D) issue any shares of its capital stock in a
reclassification of the Subject Shares (including any such reclassification
in connection with a consolidation or merger in which the Company is the
continuing or surviving corporation), then, and in each such event, except as
otherwise provided in this Section 11(a), the Purchase Price in effect at the
time of the record date for such dividend or of the effective date of such
subdivision, split, reverse split, combination, consolidation or
reclassification, and the number and kind of shares of capital stock issuable
on such date, shall be proportionately adjusted so that the holder of any
Right exercised after such time shall be entitled to receive the aggregate
number and kind of shares of capital stock which, if such Right had been
exercised immediately prior to such date and at a time when the transfer
books of the Company were open, he would have received upon such exercise and
been entitled to receive by virtue of such dividend, subdivision, split,
reverse split, combination, consolidation or reclassification. If an event
occurs which would require an adjustment under both this Section 11(a)(i) and
Section 11(a)(ii), the adjustment provided for in this Section 11(a)(i) shall
be in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii).
(ii) If at any time after the date of this Agreement
(A) any Acquiring Person, or any Associate or Affiliate of any
Acquiring Person, directly or indirectly (1) shall merge into the Company or
any of its Subsidiaries or otherwise combine with the Company or any of its
Subsidiaries and the Company or such Subsidiary shall be the continuing or
surviving corporation of such merger or
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combination and the Common Stock shall remain outstanding and the outstanding
shares thereof shall not be changed into or exchanged for stock or other
securities of the Company or of any other Person or cash or any other
property, or (2) shall sell or otherwise transfer in one or more transactions,
assets to the Company or any of its Subsidiaries in exchange for 20 percent
or more of the shares of any class of capital stock of the Company or any of
its Subsidiaries, and the Common Stock shall remain outstanding and
unchanged, or
(B) directly or indirectly, any Acquiring Person, or any Associate or
Affiliate of any Acquiring Person, shall (1) in one or more transactions,
transfer any assets to the Company or any of its Subsidiaries in exchange (in
whole or in part) for shares of any class of capital stock of the Company or
any of its Subsidiaries or for securities exercisable for or convertible into
shares of any class of capital stock of the Company or any of its
Subsidiaries or otherwise obtain from the Company or any of its Subsidiaries,
with or without consideration, any additional shares of any class of capital
stock of the Company or any of its Subsidiaries or other securities
exercisable for or convertible into shares of any class of capital stock of
the Company or any of its Subsidiaries (other than as part of a pro rata
distribution by the Company or such Subsidiary to all holders of Common
Stock), (2) sell, purchase, lease, exchange, mortgage, pledge, transfer or
otherwise dispose (in one or more transactions), to, from or with, as the
case may be, the Company or any of its Subsidiaries, assets on terms and
conditions less favorable to the Company or such Subsidiary than the Company
or such Subsidiary would be able to obtain in arm's-length negotiation with
an unaffiliated third party, (3) receive any compensation from the Company or
any of the Company s Subsidiaries other than compensation for full-time
employment as a regular employee, or fees for serving as director, at rates
in accordance with the Company's (or its Subsidiaries') past practices, or
(4) receive the benefit, directly or indirectly (except proportionately as a
stockholder), of any loans, advances, guarantees, pledges or other financial
assistance provided by the Company or any of its Subsidiaries, on terms and
conditions less favorable to the Company or such Subsidiary than the Company
or such Subsidiary would be able to obtain in arm's-length negotiation with
an unaffiliated third party, or
(C) during any such time as there is an Acquiring Person, there
shall be any reclassification of securities (including any reverse stock
split), or recapitalization of the Company, or any merger or consolidation of
the Company with any of its Subsidiaries or any other similar transaction or
series of transactions involving the Company or any of its Subsidiaries
(whether or not with or into or otherwise involving an Acquiring Person or
any Affiliate or Associate of such Acquiring Person) which has the effect,
directly or indirectly, of increasing by more than one percent the
proportionate share of the outstanding shares of any class of equity
securities, or of securities exercisable for or convertible into equity
securities, of the Company or any of its Subsidiaries which is directly or
indirectly owned by any Acquiring Person or any Associate or Affiliate of any
Acquiring Person, or
(D) any Person shall become an Acquiring Person otherwise than
pursuant to a Qualified Offer, then, and in each such case, but subject to
the provisions of Section 27, proper provision shall be made so that each
holder of a Right, except as provided below and in Section 7(f), shall, on
and after the later of (I) the date of the occurrence of an event
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described in clause (A), (B), (C) or (D) of this Section 11(a)(ii), or (II)
the date of the expiration of the period within which the Rights may be
redeemed pursuant to Section 23 (as the same may have been amended as
provided in Section 26), have the right to receive, upon exercise thereof at
the then current Purchase Price, such number of shares of Common Stock as
shall equal the result obtained by (x) multiplying the then current Purchase
Price by the then number of Units for which a Right is then exercisable and
dividing that product by (y) 50 percent of the current market price per share
of Common Stock (determined in accordance with Section 11(d)) on the date of
the occurrence of the relevant event listed above in clause (A), (B), (C) or
(D) of this subparagraph (ii); provided, however, that if the transaction
that would otherwise give rise to the foregoing adjustment is also subject to
the provisions of Section 13, then only the provisions of Section 13 shall
apply and no adjustment shall be made pursuant to this Section 11(a)(ii). The
Company shall not consummate any such merger, combination, transfer or
transaction referred to in any of such clauses (A), (B) and (C) unless prior
thereto there shall be sufficient authorized but unissued Common Stock to
permit the exercise in full of the Rights in accordance with the foregoing
sentence, unless the Board of Directors has determined to issue Equivalent
Stock in accordance with Section 7(a); provided, however, that in no case may
the Company consummate any such merger, combination, transfer or transaction
if at the time of or immediately after such transaction there are any rights,
warrants or other instruments or securities outstanding or agreements in
effect which would substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights.
If the Company issues Equivalent Stock upon the exercise of any Rights
pursuant to the immediately preceding paragraph, then, upon any such
exercise, proper provision shall be made so that the holder of a Right
(except as provided in Section 7(f)) shall have the right to receive, upon
such exercise at the then current Purchase Price, such number of shares or
other units of Equivalent Stock of the Company as shall equal the result
obtained by (x)multiplying the then current Purchase Price by the number of
Units for which a Right is then exercisable and dividing that product by
(y)50 percent of the current market price per share or other unit of the
Equivalent Stock of the Company (determined on substantially the same basis
as is prescribed by Section 11(d) with respect to the valuation of Common
Stock) on the date of occurrence of the relevant event listed above in clause
(A), (B), (C) or (D) of this subparagraph (ii). If at any time the Company
should be prohibited by law, by any provision of its Certificate of
Incorporation, or by any instrument or agreement to which the Company is a
party or by which it is bound, from issuing, or should be unable under its
Certificate of Incorporation to issue, sufficient Equivalent Stock to permit
the exercise of all outstanding Rights in accordance with the foregoing
sentence, then, in lieu of issuing such Equivalent Stock upon such exercise,
the Company shall pay to each holder of a Right (except as provided in
Section 7(f)) upon surrender of the Right as provided herein but without
payment of the Purchase Price, an amount in cash for each Right equal to the
Purchase Price.
(b) In case the Company shall at any time after the Rights Record
Date fix a record date for the issuance of rights or warrants to all holders
of Common Stock or Subject Shares entitling them (for a period expiring
within 45 calendar days after such record date) to subscribe for or purchase
Common Stock or Subject Shares or securities convertible into Common Stock or
Subject Shares at a price per share (or having a conversion price per share,
if a
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<PAGE>
security convertible into Common Stock) less than the current market price
per share (determined in accordance with Section 11(d)) on such record date,
the Purchase Price to be in effect after such record date shall be determined
by multiplying the Purchase Price in effect immediately prior to such record
date by a fraction, of which the numerator shall be the total number of
shares of Common Stock and Subject Shares outstanding on such record date
plus the number of shares of Common Stock which the aggregate offering price
of the total number of shares so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would
purchase at such current market price and of which the denominator shall be
the total number of shares of Common Stock and Subject Shares outstanding on
such record date plus the number of additional shares to be offered for
subscription or purchase (or into which the convertible securities to be
offered are initially convertible). In case such subscription or purchase
price may be paid, in whole or in part, in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent. Shares owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of any
such computation. Such adjustment shall be made successively whenever such a
record date is fixed, and if such rights or warrants are not so issued, the
Purchase Price shall be adjusted to be the Purchase Price which would then be
in effect if such record date had not been fixed.
(c) In case the Company shall at any time after the Rights Record
Date fix a record date for the making of a distribution on the shares of
Common Stock or the Subject Shares, whether by way of a dividend,
distribution, reclassification of stock, recapitalization, reorganization or
partial liquidation of the Company or otherwise (and including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing corporation), of subscription rights or warrants
(excluding those referred to in Section 11(b)), evidences of indebtedness or
other assets (other than (i) regular periodic cash dividends, (ii) a dividend
payable in Common Stock or (iii) a distribution which is part of or is made
in connection with a transaction to which Section 11(a)(ii) or Section 13
applies), the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, of which the numerator shall be the current
market price per share of Common Stock (determined in accordance with Section
11(d)) on such record date, less the fair market value applicable to one
share of Common Stock (as determined in good faith by the Board of Directors
of the Company, whose determination shall be described in a statement filed
with the Rights Agent) of such assets or evidences of indebtedness or of such
subscription rights or warrants so to be distributed, and of which the
denominator shall be such current market price per share of Common Stock.
Such adjustments shall be made successively whenever such a record date is
fixed; and if such distribution is not so made, the Purchase Price shall
again be adjusted to be the Purchase Price which would then be in effect if
such record date had not been fixed.
(d) For the purpose of any computation hereunder, the "current market
price" per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices per share of such Common Stock for the 30
consecutive Trading Days immediately prior to such date; provided, however,
that if the current market price per share of Common Stock is
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<PAGE>
determined during a period following the announcement by the issuer of such
Common Stock of a dividend or distribution on such Common Stock payable in
shares of such Common Stock or securities convertible into shares of Common
Stock (other than the Rights), and prior to the expiration of 30 Trading Days
after the ex-dividend date for such dividend or distribution, then, and in
each such case, the current market price shall be appropriately adjusted to
reflect the current market price per share of Common Stock in connection with
ex-dividend trading. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the shares of Common Stock are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed
on the principal national securities exchange on which the shares of Common
Stock are listed or admitted to trading or, if the shares of Common Stock are
not listed or admitted to trading on any national securities exchange, the
average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc.,
Automated Quotation System ("NASDAQ"). If on any such date the shares of
Common Stock are not quoted by any such organization, the fair market value
of such shares on such date as determined in good faith by the Board of
Directors of the issuer of such Common Stock shall be used. Any such
determination of current market price shall be described in a statement filed
with the Rights Agent.
For the purpose of any computation hereunder, the "current market price"
of a Unit shall be deemed to be equal to the current market price per share
of Common Stock, and the "current market price" of a Subject Share shall be
deemed to be equal to the current market price per share of Common Stock
divided by the number of Subject Shares which comprise a Unit.
For purposes of this Agreement, the term "Trading Day" shall mean a day on
which the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading is open for the transaction of
business or, if the shares of Common Stock are not listed or admitted to
trading on any national securities exchange, a Business Day.
(e) No adjustment in the Purchase Price shall be required unless
such adjustment would require an increase or decrease of at least one percent
in such Price; provided, however, that any adjustments which by reason of
this Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest one-thousandth
of a share, as the case may be. Notwithstanding the proviso to the first
sentence of this Section 11(e), any adjustment required by this Section 11
shall be made no later than the earlier of (i) three years from the date of
the transaction which gives rise to such adjustment or (ii) the date of the
expiration of the right to exercise any Rights.
(f) If at any time, as a result of an adjustment made pursuant to
Section 11(a), the holder of any Right thereafter exercised shall become
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<PAGE>
entitled to receive any shares of capital stock of the Company other than
shares of Common Stock, thereafter the number of such other shares so
receivable upon exercise of any Right shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to
the provisions, with respect to such shares, contained in Sections 11(a)
through (c), inclusive, and the provisions of Sections 7, 9, 10, 13 and 14
with respect to the shares of Common Stock shall apply on like terms to any
such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall represent the right to
purchase, at the adjusted Purchase Price, the number of shares purchasable
from time to time hereunder upon exercise of the Rights, all subject to
further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided
in Section 11(i), upon each adjustment of the Purchase Price as a result of
the calculations made in Sections 11(b) and (c), each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence
the right to purchase, at the adjusted Purchase Price, that number of shares
(calculated to the nearest one-thousandth) obtained by (i) multiplying (x)
the number of shares covered by a Right immediately prior to such adjustment
by (y) the Purchase Price in effect immediately prior to such adjustment of
the Purchase Price and (ii) dividing the product so obtained by the Purchase
Price in effect immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of shares purchasable upon the exercise of each
Right. Each of the Rights outstanding after such adjustment of the number of
Rights shall be exercisable for the number of Units for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest one-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase
Price by the Purchase Price in effect immediately after adjustment of the
Purchase Price. The Company shall make a public announcement of its election
to adjust the number of Rights, indicating the record date for the
adjustment, and, if known at the time, the amount of the adjustment to be
made. This record date may be the date on which the Purchase Price is
adjusted or any day thereafter, but, if the Right Certificates have been
issued, shall be at least 10 days later than the date of the public
announcement. If Right Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this Section 11(i) the Company shall, as
promptly as practicable, cause to be distributed to holders of record of
Right Certificates on such record date Right Certificates evidencing, subject
to Section 14, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Company, shall cause
to be distributed to such holders of record in substitution and replacement
for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be
entitled after such adjustment. Right Certificates so to be distributed shall
be issued, executed and countersigned in the manner provided for herein (and
may bear, at the option of the Company, the adjusted Purchase Price) and
shall be registered in the names of the holders of record of Right
Certificates on the record date specified in the public announcement.
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(j) Irrespective of any adjustment or change in the Purchase Price
or the number of shares issuable upon the exercise of the Rights, the Right
Certificates theretofore and thereafter issued may continue to express the
Purchase Price per share and the number of shares which were expressed in the
initial Right Certificates issued hereunder.
(k) In any case in which this Section 11 requires that an adjustment
in the Purchase Price be made effective as of the record date for a specified
event, the Company may elect to defer until the occurrence of such event the
issuance to the holder of any Right exercised after such record date the
additional shares or securities of the Company, if any, issuable as a
consequence of such adjustment; provided, however, that the Company shall
deliver to such holder a due bill or other appropriate instrument evidencing
such holder's right to receive such additional shares or securities upon the
occurrence of such event.
(l) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such adjustments in the number of shares
which may be acquired upon exercise of the Rights, and such adjustments in
the Purchase Price, in addition to those adjustments expressly required by
the other subsections of this Section 11, as and to the extent that the
Company, in its sole discretion, shall determine to be advisable, in order
that, if (i) any reclassification, consolidation or subdivision of the Common
Stock, (ii) any reorganization or partial liquidation of the Company or
similar transaction, (iii) any issuance wholly for cash of any Common Stock
at less than the current market price, (iv) any issuance wholly for cash of
Common Stock or securities which by their terms are convertible into or
exchangeable for Common Stock, (v) any stock dividends or (vi) any issuance of
rights, options or warrants, hereafter made by the Company to holders of its
Common Stock as provided herein-above in this Section 11, (x) the holders of
the Rights in any such event shall be treated equitably and in accordance
with the purpose and intent of this Agreement, and (y) to the extent
reasonably possible, such event shall not, in the opinion of counsel for the
Company, result in the stockholders of the Company being subject to any
United States federal income tax liability by reason thereof.
Section 12. Certification of Adjusted Purchase Price or Number of
Shares. Whenever an adjustment is made as provided in Section 11 or 13, the
Company shall (i) promptly prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such
adjustment, (ii) promptly file with the Rights Agent and with each transfer
agent for the Common Stock a copy of such certificate, and (iii) mail a brief
summary thereof to each holder of a Right Certificate in accordance with
Section 25. Notwithstanding the foregoing sentence, the failure of the
Company to give such notice shall not affect the validity of, or the force or
effect of, the requirement for such adjustment.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) If, at any time after an Acquiring Person has become such,
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(i) the Company shall consolidate with, or merge with and into,
any other Person and the Company shall not be the continuing or surviving
corporation of such consolidation or merger,
(ii) any other Person(s) shall consolidate or merge with and
into the Company, the Company shall be the continuing or surviving
corporation of such merger and, in connection with such consolidation or
merger, all or part of the Common Stock shall be changed into or exchanged
for stock or other securities of the Company or of any other Person or cash
or any other property, or
(iii) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating more than 50 percent of the
assets or earning power of the Company and its Subsidiaries (taken as a
whole) to any other Person, (other than a pro rata distribution by the
Company of assets (including securities) of the Company or any of its
Subsidiaries to all holders of the Company s Common Stock), then, on and
after the later of (I) the date of the occurrence of an event described in
clause (i), (ii) or (iii) of this Section 13(a), or (II) the date of the
expiration of the period within which the Rights may be redeemed pursuant to
Section 23 (as the same may have been amended as provided in Section 26):
(A) proper provision shall be made so that each holder of a Right
shall thereafter have the right to receive, upon the exercise thereof at the
then current Purchase Price, such number of shares of common stock of the
Principal Party as shall be equal to the result obtained by (x) multiplying
the then current Purchase Price by the number of Units for which a Right is
then exercisable and dividing that product by (y) 50 percent of the current
market price per share of the common stock of the Principal Party (determined
in the same manner as the current market price of Common Stock is determined
under Section 11(d)) on the date of consummation of such consolidation,
merger, sale or transfer;
(B) the Principal Party shall thereafter be liable for, and shall
assume, by virtue of such consolidation, merger, sale or transfer, all the
obligations and duties of the Company pursuant to this Agreement, and proper
provision shall be made for the foregoing, provided that the Principal Party
shall, prior to the first occurrence of an event described in clause (i),
(ii) or (iii) of this Section 13(a), have caused to be reserved out of its
authorized and unissued shares of common stock (or its authorized and issued
shares of common stock held in its treasury), for issuance pursuant to this
Agreement, the number of shares of common stock that will be sufficient to
permit the exercise in full of the Rights after the occurrence of such event;
(C) the term "Company" wherever used in this Agreement shall
thereafter be deemed to refer to such Principal Party; and
(D) the Principal Party shall, in addition to the reservation of
shares of its common stock as provided in the proviso to clause (B) above,
take such steps (including without limitation compliance with the Company's
other obligations as set forth in Section 9) in connection with such
consummation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to the
shares of its Common Stock thereafter deliverable upon the exercise of the
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<PAGE>
Rights; provided, however, that, upon the subsequent occurrence of any
merger, consolidation, sale of all or substantially all assets,
recapitalization, reclassification of shares, reorganization or other
extraordinary transaction in respect of such Principal Party, each holder of
a Right shall thereupon be entitled to receive, upon exercise of a Right and
payment of the Purchase Price, such cash, shares, rights, warrants and other
property which such holder would have been entitled to receive had such
holder, at the time of such transaction, owned the shares of common stock of
the Principal Party purchasable upon the exercise of a Right, and such
Principal Party shall take such steps (including, but not limited to,
reservation of shares of stock) as may be necessary to permit the subsequent
exercise of the Rights in accordance with the terms hereof for such cash,
shares, rights, warrants and other property.
(b) For purposes of this Agreement, "Principal Party" shall mean
(i) in the case of any transaction described in clause (i) or
(ii) of Section 13(a), (A) the Person that is the issuer of the securities
into which shares of Common Stock are converted in such merger or
consolidation, or, if there is more than one such issuer, the issuer the
common stock of which has the greatest market value, or (B) if no securities
are so issued, (x) the Person that is the other party to the merger or
consolidation and that survives said merger or consolidation, or, if there is
more than one such Person, the Person the common stock of which has the
greatest market value or (y) if the Person that is the other party to the
merger or consolidation does not survive the merger or consolidation, the
Person that does so survive (including the Company if it survives); and
(ii) in the case of any transaction described in clause (iii)
of Section 13(a), the Person that is the party receiving the greatest portion
of the assets or earning power transferred pursuant to such transaction or
transactions, or, if each Person that is a party to such transaction or
transactions receives the same portion of the assets or earning power so
transferred or if the Person receiving the greatest portion of the assets or
earning power cannot be determined, whichever of such Persons is the issuer
of common stock having the greatest market value of shares outstanding;
provided, however, that in any such case, (1) if the common stock of such
Person is not at such time and has not been continuously over the preceding
12-month period registered under Section 12 of the Exchange Act, and such
Person is a direct or indirect Subsidiary of another corporation the common
stock of which is and has been so registered, Principal Party shall refer to
such other corporation; (2) if the common stock of such Person is not and has
not been so registered and such Person is not a direct or indirect Subsidiary
of another corporation the common stock of which is and has been so
registered, "Principal Party" shall refer to the corporation which ultimately
controls such Person; (3) in case such Person is a Subsidiary, directly or
indirectly, of more than one corporation, the common stocks of all of which
are and have been so registered, "Principal Party" shall refer to whichever
of such corporations is the issuer of common stock having the greatest market
value of shares held by the public; and (4) if the common stock of such
Person is not and has not been so registered and such Person is owned,
directly or indirectly, by a joint venture formed by two or more Persons that
are not owned, directly or indirectly, by the same Person, the rules set
forth in clauses (1), (2) and (3) above shall apply to each of the chains of
ownership having an interest in such joint venture as
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if such Person were a "Subsidiary" of both or all of such joint venturers and
the Principal Party in each such chain shall bear the obligations set forth
in this Section 13 in the same ratio as its direct or indirect interests in
such Person bear to the total of such interests.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless prior thereto the Company and the Principal Party
shall have executed and delivered to the Rights Agent a supplemental
agreement making valid provision for the results described in clause (A) of
Section 13(a) and confirming that the Principal Party will perform its
obligations under this Section 13(a); provided, however, that in no case may
the Company consummate any such consolidation, merger, sale or transfer if
(i) at the time of or immediately after such transaction there are any
rights, warrants or other instruments or securities outstanding or agreements
in effect which would substantially diminish or otherwise eliminate the
benefits intended to be afforded by the Rights or (ii) prior to,
simultaneously with or immediately after such transaction, the shareholders
of the Person which constitutes, or would constitute, the Principal Party for
purposes of this Section 13 shall have received a distribution of Rights
previously owned by such Person or any of its Affiliates and Associates.
(d) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. This
Section 13 shall not be applicable to a transaction described in
Subparagraphs (i), (ii) or (iii) of Subsection (a) of this Section if (i)
such transaction is consummated with a Person or Persons who acquired Common
Stock pursuant to a Qualified Offer (or a wholly owned subsidiary of any such
Person or Persons), (ii) the price per share of Common Stock offered in such
transaction or distributable to shareholders upon conclusion of such
transaction is not less than the price per share of Common Stock paid to all
holders of Common Stock whose shares were purchased pursuant to such
Qualified Offer and (iii) the form of consideration being offered to the
remaining holders of Common Stock pursuant to such transaction or
distributable to shareholders upon conclusion of such transaction is the same
as the form of consideration paid pursuant to such Qualified Offer. Upon
conclusion of any transaction described in the foregoing sentence, all Rights
shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights
or to distribute Right Certificates which evidence fractional Rights. If the
Company shall elect not to issue such fractional Rights, in lieu of such
fractional Rights, there shall be paid to the registered holders of the Right
Certificates with regard to which such Fractional Rights would otherwise be
issuable an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for
the Trading Day immediately prior to the date on which such fractional Rights
would have been otherwise issuable. The closing price for any day shall be
the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New
York Stock Exchange or, if the Rights are not listed or admitted to trading
on the New York Stock Exchange, as reported in the principal consolidated
transaction reporting system with
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respect to securities listed on the principal national securities exchange on
which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the
average of the high bid and low asked prices in the over-the-counter market,
as reported by NASDAQ. If on any such date the Rights are not quoted by any
such organization, the fair value of the Rights on such date as determined in
good faith by the Board of Directors of the Company shall be used. Any such
determination of current market value shall be described in a statement filed
with the Rights Agent.
(b) The Company shall not be required to issue fractions of shares
upon exercise of a Right or to distribute certificates which evidence
fractional shares. In lieu of fractional shares, the Company shall pay to the
registered holders of Right Certificates at the time such Right Certificates
are exercised as herein provided an amount in cash equal to the same fraction
of the current market value of a share of Common Stock. For purposes of this
Section 14, the current market value of a share of Common Stock shall be the
closing price of a share of Common Stock (as determined pursuant to the
second sentence of Section 11(d)) for the Trading Day immediately prior to
the date of such exercise.
(c) The holder of a Right by the acceptance thereof expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right.
Section 15. Rights of Action. All rights of action in respect of this
Agreement are vested in the respective registered holders of the Right
Certificates (and prior to the Distribution Date, the registered holders of
the Common Stock), and any registered holder of any Right Certificate (or,
prior to the Distribution Date, any registered holder of the Common Stock),
without the consent of the Rights Agent or of the holder of any other Right
Certificate (or, prior to the Distribution Date, any other registered holder
of the Common Stock), may, on his own behalf and for his own benefit,
enforce, and may institute and maintain, any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner
provided in such Right Certificate and in this Agreement. Without limiting
the foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an
adequate remedy at law for any breach of this Agreement and will be entitled
to specific performance of the obligations under, and injunctive relief
against actual or threatened violations of the obligations of any Person
subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of Common Stock;
(b) on and after the Distribution Date, the Right Certificates will
be transferable only on the registry books
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<PAGE>
of the Rights Agent and then if surrendered at the stock transfer office of
the Rights Agent, duly endorsed or accompanied by a proper instrument of
transfer; and
(c) the Company and the Rights Agent may deem and treat the person
in whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Stock certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Stock
certificate made by anyone other than the Company or the Rights Agent) for
all purposes whatsoever, and neither the Company nor the Rights Agent shall
be affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of Common Stock or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained
herein or in any Right Certificate be construed to confer upon the holder of
any Right Certificate, as such, any of the rights of a stockholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting stockholders (except as provided in Section 24), or to
receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by such Right Certificate shall have been exercised in
accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to
time, on demand of the Rights Agent, its reasonable expenses and counsel fees
and other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The
Company also agrees to indemnify the Rights Agent for, and to hold it
harmless against, any loss, liability, or expense incurred, without
negligence, bad faith or willful misconduct on the part of the Rights Agent,
for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability in the premises.
Anything to the contrary notwithstanding, in no event shall the Rights Agent
be liable for special, punitive, indirect, consequential or incidental loss
or damage of any kind whatsoever (including but not limited to lost profits),
even if the Rights Agent has been advised of the likelihood of such loss or
damage.
(b) The Rights Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any
Right Certificate or Certificate for Common Stock or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it, acting with reasonable
care, to be genuine and to be signed, executed and, where necessary, verified
or acknowledged, by the proper person or persons.
If and for so long as the Rights are listed on the New York Stock
Exchange or the American Stock Exchange, the Rights Agent, if its principal
offices are located outside New
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York City, shall maintain in the New York City area facilities for the
servicing of the Rights in the area of Manhattan located south of Chambers
Street. Such facilities may consist of either an office or agency where
transactions in the Rights are serviced directly or a "drop" where Common
Stock certificates, Right Certificates, and other instruments relating to
transactions in Rights may be received for redelivery to an office or agency
outside New York City, all in accordance with the applicable rules of the
stock exchange on which the Rights are listed.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the stock transfer business of the Rights Agent or any
successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on
the part of any of the parties hereto, provided that such corporation would
be eligible for appointment as a successor Rights Agent under the provisions
of Section 21. In case at the time such successor Rights Agent shall succeed
to the agency created by this Agreement any of the Right Certificates shall
have been countersigned but not delivered, any such successor Rights Agent
may adopt the countersignature of the predecessor Rights Agent and deliver
such Right Certificates so countersigned, and in case at that time any of the
Right Certificates shall not have been countersigned, any successor Rights
Agent may countersign such Right Certificates either in the name of the
predecessor Rights Agent or in the name of the successor Rights Agent and in
all such cases such Right Certificates shall have the full force provided in
the Right Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Right Certificates so
countersigned, and in case at that time any of the Right Certificates shall
not have been countersigned, the Rights Agent may countersign such Right
Certificates either in its prior name or in its changed name, and in all such
cases such Right Certificates shall have the full force provided in the Right
Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right
Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any
action taken or omitted by it in good faith and in accordance with such
opinion.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless
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other evidence in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established by a certificate signed by
the Chairman of the Board, the President, any Vice President, or the
Secretary of the Company and delivered to the Rights Agent, and such
certificate shall be full authorization to the Rights Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement
in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed
to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery
hereof (except the due execution hereof by the Rights Agent) or in respect of
the validity or execution of any Right Certificate (except its
countersignature thereof), nor shall it be responsible for any breach by the
Company of any covenant or condition contained in this Agreement or in any
Right Certificate, nor shall it be responsible for any adjustment required
under the provisions of Section 11 or 13 or responsible for the manner,
method or amount of any such adjustment or the ascertaining of the existence
of facts that would require any such adjustment (except with respect to the
exercise of Rights evidenced by Right Certificates after actual notice of any
such adjustment), nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
shares of stock to be issued pursuant to this Agreement or any Right
Certificate or as to whether any shares of stock will, when issued, be
validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered
all such further and other acts, instruments and assurances as may reasonably
be required by the Rights Agent for the carrying out or performance by the
Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, any Vice President or the Secretary of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and it shall not be liable for any action taken
or suffered to be taken by it in good faith in accordance with instructions
of any such officer.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were
not Rights Agent under this Agreement. Nothing herein shall preclude the
Rights Agent from acting in any other capacity for the Company or for any
other legal entity.
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(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any
such act, default, neglect or misconduct, provided reasonable care was
exercised in the selection and continued employment thereof.
(j) If, with respect to any Right Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to
such requested exercise or transfer without first obtaining the Company s
approval.
Section 21. Change of Rights Agent. Unless the Company and the Rights
Agent agree to a shorter time period, the Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this
Agreement upon 15 days notice in writing mailed to the Company and to each
transfer agent of Common Stock by registered or certified mail, and to the
holders of the Right Certificates by first-class mail. Unless the Company and
the Rights Agent agree to a shorter time period, the Company may remove the
Rights Agent or any successor Rights Agent upon 15 days notice in writing,
mailed to the Rights Agent or successor Rights Agent, as the case may be, and
to each transfer agent of Common Stock by registered or certified mail, and
to the holders of the Right Certificates by first-class mail. If the Rights
Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Rights Agent. If the
Company shall fail to make such appointment within a period of 15 days after
such removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of
a Right Certificate (who shall, with such notice, submit his Right
Certificate for inspection by the Company), then the registered holder of any
Right Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether
appointed by the Company or by such a court, shall be a corporation organized
and doing business under the laws of the United States or of the State of
California (or of any other state of the United States so long as such
corporation is authorized to do business as a banking institution in the
State of California) in good standing, having a stock transfer office in the
State of California, which is authorized under such laws to exercise stock
transfer powers and is subject to supervision or examination by federal or
state authority and which has at the time of its appointment as Rights Agent
a combined capital and surplus of at least $50,000,000. After appointment,
the successor Rights Agent shall be vested with the same powers, rights,
duties and responsibilities as if it had been originally named as Rights
Agent without further act or deed, but the predecessor Rights Agent shall
deliver and transfer to the successor Rights Agent any property at the time
held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the
effective date of any such appointment, the Company shall file notice thereof
in writing with the predecessor Rights Agent and each transfer agent of
Common Stock and mail a notice thereof in writing to the registered holders
of the Right Certificates. Failure to give any notice provided for in this
Section 21, however, or any defect therein, shall
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<PAGE>
not affect the legality or validity of the resignation or removal of the
Rights Agent or the appointment of the successor Rights Agent, as the case
may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Right Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any
adjustment or change in the Expiration Date, the Purchase Price per share or
the number or kind or class of shares of stock or other securities or
property purchasable under the Right Certificates made in accordance with the
provisions of this Agreement.
Section 23. Redemption.
(a) The Board of Directors of the Company may, at its option and as
provided herein, and notwithstanding the provisions of Sections 11 and 13 of
this Agreement, elect to redeem all but not less than all of the then
outstanding Rights at a redemption price of $.01 per Right, appropriately
adjusted to reflect any stock split, stock dividend, reclassification or
similar transaction occurring after the date hereof (such redemption price
being herein referred to as the "Redemption Price") at any time up to the
Close of Business on a Stock Acquisition Date.
(b) Immediately upon the action of the Board of Directors of the
Company electing to redeem the Rights, the Company shall make a public
announcement thereof, and from and after the date of such announcement,
without any further action and without any further notice, the right to
exercise the Rights will terminate and the only right thereafter of the
holders of Rights shall be to receive the Redemption Price. As soon as
practicable after the election of the Board of Directors to redeem the
Rights, the Company shall give notice of such redemption to the holders of
the then outstanding Rights by mailing such notice to all such holders at
their last addresses as they appear upon the registry books of the Rights
Agent. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice
of redemption will state the method by which the payment of the Redemption
Price will be made.
Section 24. Notice of Proposed Actions. In case the Company, after the
Rights become exercisable, shall propose (i) to pay any dividend payable in
stock of any class to the holders of its Common Stock or the Subject Shares
or to make any other distribution to the holders of its Common Stock or
Subject Shares (other than a regular periodic cash dividend), or (ii) to
offer to the holders of its Common Stock or Subject Shares rights or warrants
to subscribe for or to purchase any additional shares of Common Stock or
shares of stock of any class or any other securities, rights or options, or
(iii) to effect any reclassification of its Common Stock or Subject Shares
(other than a reclassification involving only the subdivision of outstanding
shares of Common Stock) or any recapitalization or reorganization of the
Company, or (iv) to effect any consolidation or merger into or with, or to
effect any sale or other transfer (or to permit one or more of its
Subsidiaries to effect any sale or other transfer), in one or more
transactions, of more than 50 percent of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to, any other Person, or (v)
to effect the liquidation, dissolution or winding up of the Company, then, in
each such case, the Company shall give to each holder of a Right, in
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<PAGE>
accordance with Section 25, a notice of such proposed action, which shall
specify the record date for the purposes of such dividend, distribution of
rights or warrants, or the date on which such reclassification,
recapitalization, reorganization, consolidation, merger, sale, transfer,
liquidation, dissolution or winding up is to take place and the date of
participation therein by the holders of Common Stock and/or Subject Shares,
if any such date is to be fixed, and such notice shall be so given in the
case of any action covered by clause (i) or (ii) above at least twenty days
prior to the record date for determining holders of the Common Stock and/or
Subject Shares for purposes of such action, and in the case of any such other
action, at least twenty days prior to the date of the taking of such proposed
action or the date of participation therein by the holders of Common Stock
and/or Subject Shares, whichever shall be the earlier. The failure to give
notice required by this Section 24 or any defect thereon shall not affect the
legality or validity of the action taken by the Company or the vote upon any
such action.
Section 25. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent
by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Rights Agent) as follows:
International Rectifier Corporation
233 Kansas Street
El Segundo, California 90245
Attention: Eric Lidow, Chairman of the Board
Subject to the provisions of Section 21, any notice or
demand authorized by this Agreement to be given or made by the Company or by the
holder of any Right Certificate to or on the Rights Agent shall be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed (until
another address is filed in writing with the Company) as follows:
ChaseMellon Shareholder Services, L.L.C.
400 South Hope Street, 4th Floor
Los Angeles, California 90071
Attention: James Kirkland
Notices or demands authorized by this Agreement to be given or made by
the Company or the Rights Agent to or on the holder of any Right Certificate
shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed to such holder at the address of such holder as shown on the
registry books of the Company.
Section 26. Supplements and Amendments. Prior to the Distribution Date
and subject to the penultimate sentence of this Section 26, the Company and
the Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of
certificates representing shares of Common Stock. From and after the
Distribution Date and subject to the penultimate sentence of this Section 26,
the Company and the Rights Agent shall, if the Company so directs, supplement
or amend this Agreement without the approval of any holders of Right
Certificates in order (i) to cure any ambiguity, (ii) to
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<PAGE>
correct or supplement any provision contained herein which may be defective
or inconsistent with any other provisions herein, (iii) to shorten or
lengthen any time period, or (iv) to change or supplement the provisions
hereof in any manner which the Company may deem necessary or desirable and
which shall not adversely affect the interests of the holders of Right
Certificates; provided, however, this Agreement may not be supplemented or
amended to lengthen, pursuant to clause (iii) of this sentence, (A) a time
period relating to when the Rights may be redeemed at such time as the Rights
are not then redeemable, or (B) any other time period, unless such
lengthening is for the purpose of protecting, enhancing or clarifying the
rights of, and/or the benefits to, the holders of Rights. Upon the delivery
of a certificate from an appropriate officer of the Company which states that
the proposed supplement or amendment is in compliance with the terms of this
Section 26, the Rights Agent shall execute such supplement or amendment.
Notwithstanding anything contained in this Agreement to the contrary: (1) no
supplement or amendment shall be made which changes the Redemption Price, the
Purchase Price or the number of shares or Units for which a Right is
exercisable; and (2) the duration of the Rights may not be shortened without
the written consent of the registered holders thereof (other than by a
redemption of the Rights pursuant to Section 23). Prior to the Distribution
Date, the interests of the holders of Rights shall be deemed coincident with
the interests of the holders of Common Stock.
Section 27. Exchange.
(a) The Board of Directors of the Company may, at its option, at any
time after any Person becomes an Acquiring Person, exchange all or part of
the then outstanding and exercisable Rights (which shall not include Rights
that have become subject to the provisions of Section 7(f) hereof) for Common
Stock at an exchange ratio of one share of Common Stock per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio").
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of shares of Common
Stock equal to the number of such Rights held by such holder multiplied by
the Exchange Ratio. The Company shall promptly give public notice of any such
exchange; provided, however, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Company promptly
shall mail a notice of any such exchange to all of the holders of such Rights
at their last addresses as they appear upon the registry books of the Rights
Agent. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not
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<PAGE>
the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Stock for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the
number of Rights (other than Rights which have become subject to the
provisions of Section 7(f) hereof) held by each holder of Rights.
(c) If there shall not be sufficient authorized Common Stock to
permit an exchange of Rights as contemplated in accordance with this Section,
the Company shall take all such action as may be necessary to authorize
additional Common Stock or Equivalent Stock for issuance upon exchange of the
Rights.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns
hereunder.
Section 29. Determination and Actions Taken by the Board of Directors.
For all purposes of this Agreement, any calculation of the number of shares
of Common Stock (or other applicable securities hereunder) outstanding at any
particular time, including for purposes of determining the particular
percentage of such outstanding shares of Common Stock (or other securities)
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) (as in effect on the date of this
Agreement) of the General Rules and Regulations under the Exchange Act. The
Board of Directors of the Company shall have the exclusive power and
authority to administer this Agreement and to exercise all rights and powers
specifically granted to such Board or to the Company, or as may be necessary
or advisable in the administration of this Agreement, including without
limitation the right and power to (i) interpret the provisions of this
Agreement, and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including a determination to redeem or
not redeem the Rights or to amend the Agreement). All such actions,
calculations, interpretations and determinations (including, for purposes of
clause (B) below, all omissions with respect to the foregoing) which are done
or made by the Board in good faith, shall (A) be final, conclusive and
binding on the Company, the Rights Agent, the holders of the Rights and all
other parties, and (B) not subject the Board to any liability to the holders
of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent
and the registered holders of the Right Certificates (and, prior to the
Distribution Date, the holders of Common Stock) any legal or equitable right,
remedy or claim under this Agreement. This Agreement shall be for the sole
and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Right Certificates (and, prior to the Distribution Date, the
holders of Common Stock).
Section 31. Governing Law. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State. The rights and obligations of the
Rights Agent under this Agreement shall be governed by and construed in
accordance with the laws in effect in the State of Delaware.
Section 32. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
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Section 33. Section Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions
hereof.
Section 34. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, illegal, or unenforceable, (i) such invalid,
illegal or unenforceable term, provision, covenant or restriction shall
nevertheless be valid, legal and enforceable to the extent, if any, provided
by such court or authority, and (ii) the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
INTERNATIONAL RECTIFIER CORPORATION:
By: /s/ L. Michael Russell
Title: Secretary
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.:
By: /s/ James Kirkland
Title: Assistant Vice President
31
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Exhibit A
[Form of Right Certificate]
Certificate No. R- _____ Rights
NOT EXERCISABLE AFTER PUBLIC ANNOUNCEMENT OF REDEMPTION IS MADE. THE RIGHTS
ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01 PER RIGHT ON
THE TERMS SET FORTH IN THE AGREEMENT. IF THE RIGHTS REPRESENTED BY THIS
CERTIFICATE ARE ISSUED TO A PERSON WHO IS AN ACQUIRING PERSON OR AN ASSOCIATE
OR AFFILIATE THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) OR
CERTAIN TRANSFEREES THEREOF, THIS RIGHT CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BE SUBJECT TO CERTAIN LIMITATIONS IN THE CIRCUMSTANCES
SPECIFIED IN SECTION 7 OF THE RIGHTS AGREEMENT.
RIGHT CERTIFICATE
This certifies that _______________, or registered assigns, is the registered
owner of the number of Rights set forth above, each of which entitles the
owner thereof, subject to the terms, provisions and conditions of the Amended
and Restated Rights Agreement, dated as of December __ , 1998 (the "Rights
Agreement"), between International Rectifier Corporation, (the "Company"),
and ChaseMellon Shareholder Services, L.L.C. (the "Rights Agent"), to
purchase from the Company, unless the Rights have been previously redeemed,
at any time after the Distribution Date (as such term is defined in the
Rights Agreement) and prior to the Expiration Date (as such term is defined
in the Rights Agreement), or the date, if any, on which the Rights evidenced
by this Certificate may be redeemed, at the stock transfer office of the
Rights Agent, or its successors as Rights Agent, one one-thousandth of a
fully paid and nonassessable share of Junior Participating Preferred Stock
("Preferred Shares"), at a purchase price of $135 (the "Purchase Price"),
upon presentation and surrender of this Right Certificate with the Form of
Election to Purchase duly completed and executed. The number of Rights
evidenced by this Right Certificate as set forth above (and the number of
shares which may be purchased upon exercise thereof), and the Purchase Price
set forth above, are the number and Purchase Price as of the date of the
Rights Agreement based on the shares of Common Stock of the Company as
constituted at such date.
Upon the occurrence of an event described in clause (A), (B), (C) or
(D) of Section 11(a)(ii) of the Rights Agreement, the holder of any Rights that
are, or were, beneficially owned by an Acquiring Person or an Associate or
Affiliate thereof (as such terms are defined in the Rights Agreement) or certain
transferees thereof which engaged in, or realized the benefit of, an event or
transaction or transactions described in clause (A), (B), (C) or (D) of such
Section 11(a)(ii), shall not be entitled to the benefit of the adjustment
described in such Section 11(a)(ii). As provided in the Rights Agreement, the
Purchase Price and the number and class of shares which may be purchased upon
the exercise of the Rights evidenced by this Right
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Certificate are subject to modification and adjustment upon the happening of
certain events. This Right Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions
and conditions are hereby incorporated herein by reference and made a part
hereof and to which Rights Agreement reference is hereby made for a full
description of the rights, limitations of rights, obligations, duties and
immunities hereunder of the Rights Agent, the Company and the holders of the
Right Certificates, which limitations of rights include the temporary
suspension of the exercisability of such Rights under specific circumstances
set forth in the Rights Agreement. Copies of the Rights Agreement are on file
at the above-mentioned office of the Rights Agent and at the principal office
of the Company.
This Right Certificate, with or without other Right Certificates, upon
surrender at the stock transfer office of the Rights Agent set forth above,
may be exchanged for another Right Certificate or Right Certificates of like
tenor and date evidencing Rights entitling the holder to purchase such number
of shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed by the Company at its option at a redemption
price of $.01 per Right.
No fractional shares will be issued upon the exercise of any Rights
evidenced hereby, but in lieu thereof a cash payment may be made, as provided in
the Rights Agreement. No holder of this Right Certificate shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of shares or
of any other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained in the Rights Agreement or herein
be construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting stockholders (except as provided in the Rights
Agreement), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by this Right Certificate shall have been
exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose until
it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signatures of the proper officers of the Company.
Dated as of ____________, ____.
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Attest:
By:
Title: Secretary
Countersigned:
By:
Authorized Signature
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[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED hereby
sells, assigns and transfers unto
(Please print name and address of
transferee) this Right Certificate, together with all right,
title and interest therein, and does hereby irrevocably
constitute and appoint Attorney to
transfer the within Right Certificate on the books of the within-
named Corporation, with full power of substitution.
Dated: ____________,
____Signature
Signature Guaranteed:
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CERTIFICATE
The undersigned hereby certifies (after due inquiry and to the best knowledge
of the undersigned) by checking the appropriate boxes that:
(1) this Right Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are defined
in the Rights Agreement);
(2) the undersigned [ ] did [ ] did not acquire the
Rights evidenced by this Right Certificate from any Person
who is, was or subsequently became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person.
Dated: ____________,
____Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Assignment and Certificate must correspond to the
name as written upon the face of this Right Certificate in every particular,
without alteration or enlargement or any change whatsoever.
1
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FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Right
Certificate.)
To the Company and the Rights Agent: The undersigned hereby irrevocably elects
to exercise _________________ Rights represented by this Right Certificate and
to purchase the shares issuable upon the exercise of such Rights and requests
that certificates for such shares be issued in the name of: Please insert social
security or other identifying number: ________ _____________________
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to: Please insert social
security or other identifying number: _____________ ________________
(Please print name and address)
Dated: ______________, ____
Signature:
(Signature must conform in all respects to
name of holder as specified on the face of this
Right Certificate) Signature Guaranteed:
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CERTIFICATE
The undersigned hereby certifies (after due inquiry and to the best
knowledge of the undersigned) by checking the appropriate boxes that:
(1)the Rights evidenced by this Right Certificate [ ] are [ ] are not being
exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are defined
in the Rights Agreement);
(2)the undersigned [ ] did [ ] did not acquire the
Rights evidenced by this Right Certificate from any person
who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated: ____________,
____Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Right Certificate
in every particular, without alteration or enlargement or any change
whatsoever.
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CONSULTING, NONDISCLOSURE, SEVERANCE AND RESIGNATION
AGREEMENT
This Consulting, Nondisclosure, Severance and Resignation Agreement (this
"Agreement") is entered into by and between Derek Lidow (the "Executive") and
International Rectifier Corporation (the "Company"), as of May 10, 1999,
based on the following:
The Executive is employed by the Company as one of its two its Chief
Executive Officers. The Board of Directors of the Company (the "Board")
recognizes that the Executive's contribution to the growth and success of the
Company has been substantial. The Company and the Executive desire to enter
into a contractual arrangement whereby the Executive will resign from his
position as Chief Executive Officer and provide independent consulting
services to the Company.
In consideration of the promises and mutual covenants contained in this
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties agree:
I.RESIGNATION. The Executive shall resign his employment as Chief
Executive Officer of the Company effective as of June 15, 1999 (the
"Resignation Date"), at which time the Executive's employment with the
Company shall be severed. At the same time, the Executive shall resign
as an officer or director of any subsidiary or other affiliate of the
Company. The Executive's resignation does not affect the Executive's
tenure as a member of the Company's Board of Directors.
II.TRANSITION SERVICES. Between the date of this Agreement and
the Resignation Date, the Executive shall use his full time efforts to
assist in the transition of his management responsibilities to the
other Chief Executive Officer of the Company in such manner, and at
such times and places, as the other Chief Executive Officer reasonably
requests.
III.CONSULTING ENGAGEMENT.
A.Engagement. Subject to the Executive's resignation under
Section I of this Agreement, and effective from the Resignation
Date to the end of the Term as defined in Section V of this
Agreement, the Company shall engage the Executive as a
consultant, and the Executive agrees to serve as a consultant to
the Company.
B.Assignment of Duties. The Executive shall be available to the
Company to provide such services and complete such projects as
may reasonably be required of or assigned to him by the Chairman
of the Board or the Chief Executive Officer of the Company. The
Executive's obligation to provide consulting services shall not
exceed 20 hours during any month occurring during the Term.
C.Outside Employment. The Executive's engagement under this
Agreement is nonexclusive and limited in time, so as to permit
the Executive to perform duties for another person or
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company, subject to the limitations set forth in Sections III
and IV of this Agreement. Thus, except as otherwise provided in
this Agreement, the Executive is free, during the Term of this
Agreement, to seek employment with or consult with any other
person. If an availability conflict arises between the
Executive's performance of his duties or commitments under this
Agreement and any obligation that he may owe to an employer, both
the Executive and the Company shall make reasonable scheduling
accommodations to allow the Executive to perform both his duties
under this Agreement and his obligation to his then-employer.
D.Independent Contractor Status.
1.Status. The Executive shall perform all of his services
under this Section III solely as an independent contractor
and not as an agent or employee of the Company. The
Executive does not have any right or authority to assume or
create any obligation, responsibility or liability on
behalf of or in the name of the Company or to bind the
Company, except as may be authorized in writing
by an officer of the Company, and he shall not make any
contrary representation to any third party. This Agreement
does not constitute the Company and the Executive as
partners, joint venturers or employer and employee.
2.Independent Judgment. The Company is engaging
Executive to exercise his own independent and professional
judgment in performing his services under this Section III.
The Executive will determine, in his sole discretion, the
manner, means, details, and methods used in performing his
services. The Company retains no control over the manner,
means, details, or methods that the Executive uses in
performing his services.
3.Treatment of Relationship, Taxes. The Executive and
the Company shall treat the engagement solely as that of
independent contractor and not that of agent or employee for
all purposes, including (a) Federal, state, and local
income, employment and other taxes, (b) benefits, and (c)
insurance. Specifically, the Executive and the Company agree
that the Executive shall not be eligible for benefits
generally available to employees of the Company;
compensation to be paid to the Executive for his consulting
services under this Agreement will not be subject to
withholding or deductions provided by local, state or
Federal law; and the Executive shall report and pay all
taxes imposed on the Executive for any compensation to be
paid to the Executive for his consulting services under this
Agreement. The Executive shall indemnify and hold harmless
the Company against any liabilities to any taxing authority
arising out of the Executive's failure to report or pay
taxes on any such compensation, but does not indemnify the
Company for any related payments, penalties, or other
liabilities to any taxing authority arising from any cause
other than the Executive's failure to report or pay taxes on
such compensation.
4.Facilities. The Executive shall maintain at his own
expense any facilities, equipment, and instrumentalities
required to perform his services under this Section III.
IV.RESTRICTIONS ON EXECUTIVE
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For purposes of this Section IV, "the Company" means the Company
and its subsidiaries.
A.Confidentiality and Work Product.
1.During his employment with the Company, Executive
has had and during the Term will continue to have access
to proprietary information, trade secrets, and
confidential material, in whatever form, of the Company
and its successors and assigns, including information
concerning the Company's operations, policies and
procedures, present and future business plans, financial
information, budgets and projections, methods of doing
business, and marketing, research and development
activities and strategies ("Confidential Information").
Executive shall maintain the confidentiality of the
Confidential Information and refrain from divulging,
disclosing, or otherwise using the Confidential
Information to the detriment of the Company or its
successors or assigns, or for any other purpose.
Executive's obligation under this Section continues
without limitation in time, or until the Confidential
Information becomes public other than by Executive's
unauthorized disclosure.
2.Except as may be authorized in writing by the
Chairman of the Board or the other Chief Executive Officer
of the Company, at the time of leaving the employ of the
Company, the Executive shall deliver to the Company (and
will not keep in his possession, recreate or deliver to
anyone else) any Confidential Information, and any and all
devices, records, data, notes, reports, proposals, lists,
correspondence, specifications, drawings, blueprints,
sketches, materials, equipment, other documents or property,
or reproductions of any of the aforementioned items in any
form developed by the Executive pursuant to his employment
with the Company or otherwise belonging to the Company, and
its affiliates and successors or assigns.
3.Assignment of Work Product. The Executive hereby
assigns the Company the entire right, title and interest for
the entire world in and to all (a) work performed,
writing(s), software, formula(s), design(s), model(s),
drawing(s), photograph(s), design invention(s) and other
invention(s) (collectively "Developments") made, conceived
or reduced to practice or authorized by the Executive,
either solely or jointly with others, during Executive's
employment with the Company and during the performance of
this Agreement, and (b) materials or facilities of the
Company received or used by the Executive during Executive's
employment with the Company and during the Term. The
Executive shall promptly disclose to the Company all
work(s), writing(s), formula(s), design(s), other
invention(s) made, conceived, or reduced to practice or
authored by the Executive in the course of the performance
of this Agreement.
The Executive shall sign, execute and acknowledge or cause
to be signed, executed and acknowledged without cost to the
Executive, but at the expense of the Company, any and
all documents and perform such acts as may be necessary,
useful or convenient for the purpose of securing to the
Company or its nominees, patent, trademark, or copyright
protection
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throughout the world upon all such Developments, title to
which the Company may acquire in accordance with the
provisions of this clause.
4.Work Product Owned by Company. All Developments made
during Executive's employment with the Company and under
this Agreement of whatever type relating to the work
performed during Executive's employment or under this
Agreement shall be the exclusive property of the Company.
The Executive hereby confirms and agrees that such
Developments were conceived, created and developed during
the course of his employment by the Company and are the sole
and exclusive property of the company and were also "works
for hire" under the federal copyright statute and other
applicable intellectual property laws, domestic or foreign.
All machines, instruments and products purchased,
manufactured or assembled by the Executive during his
employment or pursuant to this agreement and paid for by the
Company shall be the exclusive property of the Company. Upon
termination of this Agreement, the Executive shall dispose
of such items as directed by the Company.
B.Involvement with Company's Competitors.
1.During the Term, the Executive shall not
directly or indirectly (a) engage in a business that
competes with the Company; (b) work for, as an employee,
officer, independent contractor, or consultant, or take
an interest in, in any capacity, including as a partner,
stockholder, director, principal, agent, or trustee, any
person, business or entity that competes with the
Company, except that the Executive may own, directly or
indirectly, solely as a passive investment, securities of
any entity traded on any national securities exchange if
Executive is not a controlling person of, or a member of
a group which controls, such person, business or entity
and does not, directly or indirectly, own 5% or more of
any class of securities of such entity. For the purposes
of this paragraph, a person, business or entity
"competes" with the Company if the entity designs,
licenses, manufactures, markets, or sells a product that
performs the same or similar function as any product that
is listed in the Company's catalog or is being researched
or developed on the Resignation Date or is scheduled for
release during the Term. The Company's Board of
Directors, acting through only its nonemployee members,
shall determine, in their reasonable discretion, whether
a person, business, or entity "competes" within the
meaning of this paragraph. The Executive may request such
a determination at any time during the Term, and the
Company's Board of Directors will respond as promptly as
the Board deems reasonable under the circumstances.
2.During the Term, the Executive (whether acting alone
or in concert with others) shall not (a) solicit, induce or
encourage or attempt to solicit, induce or encourage any
customer, consultant, vendor, supplier or other business
relation of the Company to cease doing business or provide
service with the Company or in any way interfere with the
relationship between any such customer, consultant, vendor,
supplier or business relation and the Company or (b)
solicit, induce or encourage any customer, consultant,
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vendor or supplier to do business with or provide any
service to any person, business or entity that competes with
the Company within the meaning of Paragraph IV.B.1.
C.Non-Acquisition. During the Term, the Executive may
not directly or indirectly engage in any activity, on his own
behalf, or on behalf of any other entity (as an employee,
consultant, independent contractor, broker, agent, or otherwise),
the purpose of which is the acquisition of the Company, a
material portion of its assets, or its common stock, except in
connection with the exercise of options to purchase common stock
that the Company grants or has granted to the Executive, unless
the Company in its sole discretion waives this restriction in
writing or offers in writing to sell any of the foregoing to the
Executive.
D.Solicitation of Employees. For a period of two years
immediately following the termination of the Executive's
employment by the Company, the Executive shall not (whether
acting alone or in concert with others) either directly or
indirectly solicit, recruit, induce or encourage, or attempt to
solicit, recruit, induce or encourage any of the Company's
employees to leave their employment or to join any other person
or entity, subject to the following exceptions:
1.This paragraph does not prohibit the Executive from
soliciting or employing his current executive assistant at
any time.
2.This paragraph does not prohibit any business or
entity by whom the Executive is employed or for whom the
Executive renders services from employing any of the
Company's employees or any former Company employee or from
soliciting, recruiting, inducing, or encouraging, or
attempting to solicit, recruit, induce or encourage any of
the Company's employees to leave their employment or to join
such business or entity, as long as the employment,
solicitation, recruiting, inducing, encouragement, or
attempt does not result from a breach of the other
provisions of this paragraph.
3.This paragraph does not prohibit the Executive from
responding to any employment or similar inquiry from any
Company employee that is initiated by the employee and not
directly or indirectly by the Executive, but the Executive
may not employ any employee of the Company before December
15, 1999.
E.Enforceability of Provisions/Remedies. With the
objective of obtaining the successful implementation of the
provisions of this Section IV, the Company and the Executive
agree (1) the obligations contained in each provision shall be
enforced to the maximum extent that the provision and the
obligation may be enforced and still be held to be reasonable and
(2) the arbitrator or court interpreting or enforcing a provision
of Section IV of this Agreement that the arbitrator or court
determines is not reasonable or enforceable may excise or modify
the provision to the extent that the provision appears
unreasonable to the court and enforce the provision as so
modified.
V.TERM OF THE AGREEMENT. Unless earlier terminated in
accordance with Section VII of this Agreement, the term of this
Agreement is two years, commencing on the Resignation
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Date (the "Term").
VI.PAYMENTS AND BENEFITS.
A.Severance Payment. As compensation for the Company's
termination of the Executive's employment with the Company and
in partial consideration for the restrictions imposed on the
Executive under this Agreement and the other terms and
conditions of this Agreement, the Company shall pay the
Executive $3,200,000 by check or wire transfer on the
Resignation Date.
B.Compensation as Chief Executive Officer.
1.Salary. The Executive's salary shall remain the
same for the remainder of fiscal 1999 through the Resignation
Date.
2.Bonus. The Company shall award and pay the Executive
the same bonus (including option grants), if any, for fiscal
1999 performance (to be awarded and paid during fiscal year
2000) as it awards and pays to the other Chief Executive
Officer for fiscal year 1999 performance (the "1999 Bonus").
3.Other. On the Resignation Date, the Company shall pay
the Executive any other amounts owing to the Executive for
his services as an employee of the Company, such as accrued
vacation pay, other accrued benefits, and reimbursable
expenses.
C.Consulting Fee. In addition to the payment required
under Sections VI.A and B of this Agreement and as partial
additional consideration for this Agreement, including
particularly the agreements in Section III of this Agreement, the
Company shall pay the Executive a fee of $100,000 per quarter
during the Term, payable on the forty- fifth day of each
consulting quarter during the Term.
D.No Offset. Any other compensation owing to the Executive
as of the Resignation Date for services performed for the Company
on or before the Resignation Date shall be in addition to and
shall not be applied to or operate to reduce the payments and
benefits due and payable under Section VI of this Agreement on or
after the Resignation Date.
E.Expense Reimbursement. The Company shall promptly
reimburse the Executive for all reasonable out of pocket expenses
related to travel, entertainment and miscellaneous expense
incurred in carrying out his duties under this Agreement. Any
expenses not previously approved that aggregate over $5,000 and
any expense that is over $5,000 must be pre-approved by the
Chairman or the other Chief Executive Officer of the Company.
Reimbursement shall be made only against an itemized list of such
expenditures signed by the Executive in such form as required by
the Company and consistent with the Company's expense
reimbursement policy.
F.Stock Options.
1.Outstanding Stock Options. All outstanding options
to purchase common stock of the Company that the Company
previously granted to the Executive, other than the vested
options that are "in-the-money" as of the close of business on
date of this Agreement, shall fully vest, and the
post-termination exercise period of each option will be extended
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to the end of the remaining term of such option. The terms
of the outstanding vested options that are "in-the-money" as
of the close of business on date of this Agreement will not
change.
2.New Options. Before the Resignation Date, the Company
shall grant the Executive new nonqualified options to
purchase shares of common stock of the Company at the market
price on the date of grant determined in accordance with the
Company's stock option plan. The new options will
immediately vest and will terminate on the tenth anniversary
of the date of grant. The amount of the new options to be
granted under this paragraph shall be equal to the number of
options, if any, that the Company grants to the other Chief
Executive Officer of the Company relating to performance in
fiscal year 1999, as provided in Section VI.B, plus 51,200.
3.Early Termination. If this Agreement is terminated
under Section VII.C, any unexercised options will expire 30
days after such termination.
VII.TERMINATION.
A.Termination Upon Death or Disability. If the Executive dies or
becomes totally disabled during the Term, this Agreement shall
terminate on the date of such death or disability; but the
termination does not relieve the Company of its obligations to
provide the benefits described in Section VI.F (in accordance
with the Company's Stock Option Plan of 1992 , as amended, and
the Executive's option agreement) of this Agreement and to make
the payments or provide the entitlement to benefits described in
Sections VI.C and E of this Agreement accrued through the date of
termination, all of which are subject to Section VI.D of this
Agreement. For purposes of this Section, the Executive is
"disabled" if the Executive is unable to perform his duties under
this Agreement for a period of 90 consecutive days or for shorter
periods aggregating six months in any 12 month period because of
disability or incapacitation.
B.Termination by the Company. If the Company terminates the
Executive as consultant before the end of the Term without cause
(as "cause" is defined in paragraph C of this Section) or
otherwise materially breaches any provision of this Agreement,
the Company shall pay the Executive a lump sum amount by check or
wire transfer equal to the total compensation and benefits due or
to become due under Section VI.C of this Agreement through to the
end of the Term as if fully completed, within thirty days of the
termination or breach. Any options to purchase common stock of
the Company that the Executive holds as of the date of such
termination or breach shall be governed by Section VI.F.3.
C.Termination for Cause. The Company may terminate this
Agreement and all of Executive's rights to receive any unpaid
compensation or benefits under this Agreement (1) if Executive
fails, refuses, or willfully neglects to perform his required
consulting services contemplated by this Agreement ten or more
days after the Company has given him written notice of such
failure to perform; (2) upon a determination by the Company
acting in good faith that the Executive (a) is engaging or has
engaged in willful misconduct that adversely affects the Company,
(b) is
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breaching or has breached a fiduciary duty to the Company,
(c) has violated any law, rule or regulation that adversely
affects the Company, or (3) if the Executive materially breaches
any of the provisions of this Agreement. The Executive agrees to
resign from the Board of Directors of the Company if this
Agreement is terminated under this paragraph. Any erroneous
termination for cause shall be treated solely as a termination
under Section VII.B.
D.Other Relief. In addition to and notwithstanding the
exercise of the foregoing termination rights, the Company
reserves all other available rights and remedies including
injunctive and other equitable relief. The Executive agrees that
damages would not be an adequate remedy for his breach of any of
the provisions of Section IV of this Agreement.
E.Survival of Provisions. The provisions of Sections IV,
VIII, IX, X, and XI of this Agreement survive any termination of
this Agreement.
VIII.RELEASE. Except for those obligations created by or arising
out of this Agreement or the Executive's vested accounts (such as
a 401(k) plan), the Executive (a) acknowledges full and complete
satisfaction of all obligations of the Company toward him whether
past, present or future, and on behalf of himself, his spouse, his
descendants, dependents, heirs, administrators, assignees and
successors, and each of them, (b) discharges, releases and covenants
not to sue the Company, its divisions, subsidiaries, or affiliated
corporations, past and present, and each of them, as well as their
respective directors, officers, shareholders, representatives,
assignees, successors, agents and employees, past and present, and
each of them (individually and collectively, "Releasees") from and
with respect to any and all claims, agreements, obligations, demands
and causes of action of any nature whatsoever, known or unknown,
suspected or unsuspected (individually and collectively, the
"Claims")
1.as to the Company, its divisions, subsidiaries, or affiliated
corporation, past and present, as well as their respective
assignees and successors, past and present, including but
not limited to Claims arising out of or in any way connected
with the employment relationship with or termination from
the Company, and any Claims for wages, severance pay, bonus
or similar benefit, stock options, sick leave, pension,
retirement, vacation pay, life insurance, health or medical
or disability, or any other Claims resulting from any act or
omission by or on the part of Releasees committed or omitted
prior to the date of this Agreement, whether based on
contract, tort, common law, statute or any other legal
source including, without limiting the generality of the
foregoing, any Claims under Title VII of the Civil Rights
Act of 1964, the Age Discrimination in Employment Act, the
Americans with Disabilities Act, the Family and Medical
Leave Act, the California Fair Employment and Housing Act,
the California Family Rights Act, or any other federal,
state or local law, regulation or ordinance; and
2.as to their respective directors, officers,
shareholders, representatives, agents and employees, past
<PAGE>
and present, limited to Claims arising out of or in any
way connected with the Executive's service as an officer
or director of or the employment relationship with or
termination from the Company, including any Claims for
wages, severance pay, bonus or similar benefit, stock
options, sick leave, pension, retirement, vacation pay,
life insurance, health or medical or disability,
resulting from any act or omission by or on the part of
Releasees committed or omitted prior to the date of this
Agreement, whether based on contract, tort, common law,
statute or any other legal source including, without
limiting the generality of the foregoing, any Claims
under Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act, the Americans with
Disabilities Act, the Family and Medical Leave Act, the
California Fair Employment and Housing Act, the
California Family Rights Act, or any other federal, state
or local law, regulation or ordinance; This Agreement is
intended to be effective as a bar to all Claims as stated
above, including unknown or unsuspected claims.
Accordingly, the Executive expressly waives any rights
and benefits conferred by Section 1542 of the California
Civil Code, which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE
TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
The Executive expressly acknowledges and agrees that, by entering
into this Agreement, he is waiving any and all rights or claims
arising under the Age Discrimination in Employment Act of 1967, as
amended, which have arisen on or before the date of execution of this
Agreement. In furtherance of that intention, the Executive expressly
acknowledges and agrees that:
A.In return for this Agreement, the Executive will receive
compensation beyond that which he was already entitled to receive
before entering into this Agreement;
B.The Executive has been advised to consult with an attorney before
signing this Agreement, and has done so;
C.The Executive has been advised, and is hereby advised in writing by
this Agreement, that he has 21 days within which to consider the
Agreement before executing it (although he may choose to execute
it at any time before the 21 days has elapsed); and
D.The Executive has seven days following the date of execution of this
Agreement in which to revoke this Agreement. This Agreement will
not be effective or enforceable until the revocation period has
expired.
IX.INDEMNIFICATION. The Company shall (a) indemnify, hold harmless,
and defend the Executive against all claims, damages, losses and
expenses (including attorney's fees and costs) arising out of or
resulting from the Executive's
<PAGE>
performance of consulting services covered by this Agreement, to the
full extent that the Company indemnifies its senior officers and
directors, (b) continue to indemnify, hold harmless, and defend the
Executive against all claims, damages, losses and expenses (including
attorney's fees and costs) arising out of or resulting from the
Executive's acts, conduct, or decisions during his employment by the
Company to the same extent as the Company is required to indemnify,
hold harmless, and defend the Executive during his employment by the
Company, (c) pay all reasonable expenses and attorney's fees and
costs that the Executive incurs in connection with or relating to any
of the matters for which the Executive is indemnified under this
Section, to the full extent of the indemnity, unless the adjudicating
body determines Executive is ineligible for indemnification, in which
case the Executive must reimburse the Company for all such fees,
expenses and costs, and (d) continue to include the Executive as a
covered individual under the Company's directors' and officers'
liability insurance policies for a period of five years after the
Resignation Date.
X.OTHER PROVISIONS.
A.Announcements B Publicity. Any written announcements or other public
statement by the Company or the Executive, including press
releases, other external communications, and internal Company
communications, of the Executive's resignation from the Company,
of this Agreement or its terms, or of any other matter relating
to the resignation, this Agreement or the events or circumstances
leading thereto, shall be consistent with the message and tone of
the statements which the Company and the Executive have agreed
upon under separate cover; but the Company retains the reasonable
discretion to make only such additional announcements as are
deemed reasonably necessary by the Company's counsel to meet
disclosure obligations. Public oral communications shall be
consistent with written statements. The Company and the Executive
will maintain and uphold the name and professional reputation of
the other.
B.Notices. All notices and other communications under this Agreement
shall be in writing and shall be given by fax or first-class
mail, certified or registered with return receipt requested, and
shall be deemed to have been given three days after mailing or 24
hours after transmission of a fax (with answer-back) to the
respective persons named below:
If to the Company:International Rectifier Corporation
Attention: General Counsel
233 Kansas Street
El Segundo, Calif. 90245
Phone: (310) 726-8000
Fax: (310) 726-8484
If to the Executive:
Derek Lidow
665 E. Channel Road
<PAGE>
Santa Monica, Calif. 90402
Phone: (310) 454-2293
Fax: (310) 454-1937
With a copy to:Richard Levin, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
300 N. Grand Avenue,
Suite 3400
Los Angeles, California 90071
Phone: (213) 687-5000
Fax: (213) 687-5600
Either party may change the party's notice information in
this paragraph by notice given under this paragraph.
C.Entire Agreement. This Agreement contains the entire agreement
between the parties and supersedes all prior agreements, written
or oral, with respect to the subject matter of this Agreement.
D.Waivers and Amendments. This Agreement may be amended, superseded,
cancelled, renewed or extended, and the terms of this Agreement
may be waived, only in writing, signed by both parties or, in the
case of a waiver, by the party waiving compliance. No delay on
the part of any party in exercising any right, power or privilege
under this Agreement shall operate as a waiver thereof, nor shall
any waiver on the part of any party of any right, power or
privilege, nor any single or partial exercise of any such right,
power or privilege, preclude any other or further exercise
thereof or the exercise of any other such right, power or
privilege.
E.Severability. Each of the Sections in this Agreement shall be
enforceable, independently of every other section in this
Agreement, and the invalidity or enforceability of any Section
shall not invalidate or render unenforceable any other Section in
this Agreement.
F.Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to
agreements made and to be performed entirely within California.
G.Assignment of Change in Control. The services to be rendered by the
Executive under this Agreement are personal in nature and, thus,
the Executive may not assign any of his obligations under this
Agreement to any other person, but the Executive may assign his
right to receive any payments due under this Agreement. The
Company may not assign this Agreement or any of its rights or
obligations under this Agreement without the express written
consent of the Executive, which Executive must not unreasonably
withhold. A Change of Control, as defined in the Company's Stock
Option Plan of 1992, as amended, during the Term shall be treated
for purposes of this Agreement the same as an assignment of this
Agreement by the Company, except that if the Executive reasonably
withholds his consent to the Change
<PAGE>
in Control, then the Change of Control shall be treated as a
termination of this Agreement without cause under Section VII.B.
H.Counterparts. This Agreement may be executed by the parties in
separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts
together shall constitute one and the same instrument. Each
counterpart may consist of two copies hereof each signed by one
of the parties hereto.
I.Headings. The headings in this Agreement are for reference only and
shall not affect the interpretation of this Agreement.
J.Authority. The Company represents and warrants that
it has all corporate power and authority and has obtained
all required approvals to enter into this Agreement.
K.Attorney's Fees. In the event of a dispute under this Agreement, the
prevailing party shall, unless the applicable statute requires
different treatment of the issue, be awarded all costs, including
reasonable attorneys' fees, based on the determination by the
authority that resolves the dispute, of the extent to which each
party has prevailed as to the material issues involved in the
dispute.
XI.ARBITRATION OF DISPUTES.
A.In exchange for the benefits of the speedy, economical, confidential
and impartial dispute resolution procedure of arbitration, the
Company and Executive are foregoing their right to resolution of
their disputes in a court of law by a judge or jury, in favor of
binding arbitration pursuant to the Federal Arbitration Act
and/or California Civil Procedure Code " 1281 et seq.
B.Any controversy or claim arising out of or in any way related to
this Agreement, or to Executive's employment with the Company or
its termination, and otherwise cognizable in a court of law,
shall be submitted to final and binding arbitration. This
obligation includes, but is not limited to any contractual,
common law, tort or statutory claims (such as discrimination
claims under either Federal or State laws), and claims against
individual officers, directors, managers, supervisors, employees
and agents of the Company, in their capacity as such, as well as
claims against the Company. However, either party may, without
waiving arbitration rights and duties under this Agreement, seek
preliminary injunctive relief (including temporary restraining
orders) or other provisional relief pursuant to California Code
of Civil Procedure "1281.8 from a court upon the same basis and
showing as would other litigants, together with a showing that
any potential arbitration award would be rendered ineffectual
without such provisional relief. Nothing herein shall limit in
any way the scope and preclusive effort of the Release herein
(Section VIII).
<PAGE>
C.Statutes of limitations, scope of remedies, prior
exhaustion of administrative agency relief, and substantive law
shall be the same as would be applicable were the action to be
brought in court, except that claimed breaches of this Agreement
must be filed with the responding party within one year of the
event giving rise to the claim. Any claim or demand for
arbitration must be served upon the responding party in a timely
manner, and fairly put the opposing parties on notice as to the
factual and legal basis for the claim(s).
D.The arbitration shall be held in Los Angeles County and administered
by the American Arbitration Association ("AAA") under its
Commercial Arbitration Rules, except as otherwise provided in
this Section XI. If for any reason AAA is unwilling or unable to
handle the dispute, then the dispute shall be processed pursuant
to California Civil Procedure Code " 1282 - 1284.2.
E.The arbitrator shall be selected by mutual agreement of the parties,
or pursuant to the appointment procedures of AAA.
F.The arbitrator shall have exclusive authority to resolve any dispute
relating to the arbitrability of any claim or matter, including
any dispute regarding the applicability, formation or enforcement
of this Agreement, to hear and rule upon pre-hearing disputes,
and shall entertain and rule upon motions for summary
adjudication or judgment and motions in limine, and in doing so
shall apply the Federal Rules of Civil Procedure applicable to
such motions.
G.Each party shall have the right to engage in reasonable, limited
pre-hearing discovery, subject to the supervision of the
Arbitrator.
H.Any party may, but is not required to, be represented by counsel of
its choice. The hearing and all filings and other proceedings
shall be treated in a private and confidential manner by the
arbitrator and all parties and representatives, and shall not be
disclosed except as necessary for any related judicial
proceedings.
The parties have executed this Agreement as of the date first above
written.
INTERNATIONAL RECTIFIER CORPORATION
By:__________________________________________
L. Michael Russell, Its Executive Vice President
---------------------------------------------
Derek Lidow
<PAGE>
FIRST AMENDMENT TO THE
CONSULTING, NONDISCLOSURE, SEVERANCE AND RESIGNATION AGREEMENT ENTERED INTO BY
AND BETWEEN DEREK LIDOW AND INTERNATIONAL RECTIFIER CORPORATION, AS OF
MAY 10, 1999
Derek Lidow and International Rectifier Corporation hereby agree to amend
that certain Consulting, Nondisclosure, Severance and Resignation Agreement
entered into by and between the parties, as of May 10, 1999, as follows:
- - Section VI.F.2 shall be amended to read in its entirety as follows:
NEW OPTIONS. Before the Resignation Date, the Company shall grant the
Executive new nonqualified options to purchase shares of common stock of
the Company at the market price on the date of grant determined in
accordance with the Company's stock option plan. The new options will
immediately vest and will terminate ten years after the date of grant.
The amount of the new options to be granted under this paragraph shall
be equal to the number of options, if any, that the Company grants to
the other Chief Executive Officer of the Company relating to performance
in fiscal year 1999, as provided in Section VI.B, plus 51,200, but shall
not exceed an aggregate amount of 200,000 shares. The form of stock
option agreement to be used for New Options is attached hereto as
Exhibit A and made a part hereof.
- - The last sentence of Section VII.B shall be amended to read in its entirety
as follows:
Any options to purchase common stock of the Company that the Executive
holds as of the date of such termination or breach shall be governed by
Section VI.F.2.
In Witness Whereof, the parties have executed this amendment
as of the 29th day of September, 1999.
Derek Lidow International Rectifier Corporation
/s/ Derek Lidow By: /s/ L. Michael Russell
- -------------------- --------------------------------
L. Michael Russell
Its: Executive Vice President
<PAGE>
Exhibit A
INTERNATIONAL RECTIFIER CORPORATION
EMPLOYEE NONQUALIFIED STOCK OPTION AGREEMENT
--------------------------------------------
THIS OPTION AGREEMENT is between INTERNATIONAL RECTIFIER
CORPORATION (the "Company") and Derek Lidow (the "Optionee"). Pursuant to
the International Rectifier Corporation Amended and Restated Stock Incentive
Plan of 1992 (the "Plan") and Optionee's Consulting, Nondisclosure, Severance
and Resignation Agreement with the Company dated as of May 10, 1999, as
amended by letter agreement dated September 29, 1999 (the "Consulting
Agreement"), the Company hereby evidences the grant of a nonqualified stock
option to purchase authorized but unissued or treasury shares of Common
Stock, $1.00 par value, of the Company on the terms and conditions included
herein and in the Plan:
GRANT DATE: JUNE 14, 1999
NUMBER OF SHARES: 200,000(1)
EXERCISE PRICE PER SHARE: $11.375(1)
EXPIRATION DATE: JUNE 13, 2009(2)
- --------------------------------------
(1) Subject to adjustment under Section 8 of the Plan and Section 4
of the Terms and Conditions.
(2) Subject to early termination if the Optionee's Consulting
Agreement is terminated under certain circumstances or in certain other
circumstances. See the Terms and Conditions (attached hereto and
incorporated herein by this reference) and the Plan and the Consulting
Agreement for exceptions and additional details regarding early termination
of the Option.
INTERNATIONAL RECTIFIER CORPORATION OPTIONEE
(a Delaware Corporation)
By:
L. Michael Russell, Executive Vice President Derek Lidow
and
(Address)
By:
Lesley C. Kleveter, Assistant Secretary
(City, State, Zip Code)
<PAGE>
TERMS AND CONDITIONS
--------------------
1. EXERCISABILITY OF OPTION. The Option shall vest and become
exercisable immediately and may be exercised at any time (or from time to
time in one or more installments) prior to the expiration date, subject to
earlier termination of the Option as provided in this Agreement, the
Consulting Agreement, or the Plan. Notwithstanding the foregoing, no fewer
than 100 shares may be purchased at any one time, unless the number purchased
is the total number at the time exercisable under the Option.
2. METHOD OF EXERCISE OF OPTION. So long as the Option remains
exercisable, the Option may be exercised by the delivery to the Company of a
written notice stating the number of shares to be purchased pursuant to the
Option and accompanied by payment made in cash or by check payable to the
order of the Company in the full amount of the purchase price of the shares,
plus any amount required to satisfy any applicable withholding taxes. Other
payment methods may be permitted only if expressly authorized by the
Committee with respect to this Option or all options under the Plan.
3. EFFECT OF TERMINATION EVENT. If one of the termination events
listed below occurs, and the Option was exercisable at the date of the
termination event, the Option and all other rights and benefits under this
Agreement shall terminate upon the earlier of the expiration of the
post-termination exercise period opposite the particular termination event
specified below or the Expiration Date:
TERMINATION EVENT POST-TERMINATION EVENT EXERCISE PERIOD
- - Death or Disability (as defined below) one year
of Optionee
- - Early Termination of the Consulting one year
Agreement by mutual consent
<PAGE>
- - Termination of the Consulting Agreement 30 days after notice to Optionee
and/or rights and benefits by the Company
for Cause (or after the service period,
the occurrence of any of the acts, omissions
or events constituting Cause), as "Cause" is
defined in the Consulting Agreement
- - Termination of the Consulting Agreement by 30 days
Optionee without the Company's consent
- - Optionee engages in conduct that 30 days after notice to Optionee
constitutes Cause (as defined below)
- - Termination of services under the remainder of term
Consulting Agreement by the Company WITHOUT
Cause (as defined in the Consulting Agreement)
- - Material breach of the Consulting remainder of term
Agreement by the Company
4. ADJUSTMENT AND/OR TERMINATION OF OPTION UNDER CERTAIN CIRCUMSTANCES.
In addition to adjustments contemplated by Section 8 of the Plan, upon the
occurrence or in contemplation of an Event (as defined in Section 10 below),
the Company may provide for the assumption, substitution, conversion,
exchange, or other settlement and/or adjustment of the Option, whether
exercisable or not, or may terminate the Option. If the Company terminates
an Option, the Company shall make provision for a cash payment for the Option
or shall provide for the assumption, conversion or substitution of other
options or rights, in either case based on the distribution or consideration
payable to holders of the Common Stock of the Company or the difference
between the exercise price and the fair market value of the shares on the
applicable measurement date in respect of the Event. In addition, if the
Option is not exercised prior to an Event involving a Change of Control (as
these terms are defined in Section 10) approved by the Board, the Committee
acting prior to the Event, may provide that the Option terminates, subject to
any provision by the Committee, in its sole discretion through a plan of
reorganization approved by the Board or otherwise, for the survival,
substitution, assumption, exchange or other reasonable settlement of the
Option.
5. NOTICES. Any notice to be given under the terms of this Agreement
shall be in writing and addressed to the Company at its principal office, to
the attention of the Corporate Secretary and to the Optionee at the address
given beneath the Optionee's signature, or at such other address as either
party may hereafter designate in writing to the other.
6. OPTIONEE NOT A STOCKHOLDER. Neither the Optionee nor any other
person entitled to exercise the Option shall have any of the rights or
privileges of a stockholder of the Company as to any shares of Common Stock
not actually issued and delivered to Optionee prior to delivery of
<PAGE>
the exercise price and satisfaction of all other conditions precedent
to the due exercise of the Option and delivery of shares.
7. NO SERVICE COMMITMENT BY COMPANY. Nothing contained in this
Agreement or the Plan constitutes a commitment by the Company to engage the
services of Optionee during the term of the Option, confers upon Optionee any
right to remain in the service of the Company, interferes in any way with any
right of the Company to terminate any services, or affects the rights and
obligations of the parties under the Consulting Agreement.
8. EFFECT OF AWARD AGREEMENT. This Agreement shall be binding upon and
inure to the benefit of any successor or successors of the Company except to
the extent the Committee determines otherwise.
9. CHOICE OF LAW. The constructive interpretation, performance and
enforcement of the Option and this Agreement shall be governed by the laws of
the State of California.
10. DEFINED TERMS. Capitalized terms used herein and not otherwise
defined herein shall have the meaning assigned to such terms in the Plan.
"CAUSE" means, at any time after Consulting Agreement has terminated
in all respects:
- any unlawful or improper act by Optionee that has resulted in
the Optionee's personal gain at the expense of the Company or any
of its subsidiaries;
- Optionee's breach of fiduciary duty to the Company or willful
misconduct, or conviction of a crime (other than minor traffic
violations or similar offenses), affecting the Company;
- Optionee's violation of any policy or rule of the Company
applicable to him; or
- Other unlawful or improper conduct of Optionee that results in
a substantial detriment to the business or reputation of the Company
or any of its subsidiaries.
The existence of Cause shall be determined in good faith by the Committee,
subject to ratification by the Board, whether before or after the date of
termination of services, and any disputes with respect to any determination
during the term of the Consulting Agreement shall be resolved under Section
XI of the Consulting Agreement.
"CHANGE IN CONTROL" means any of the following:
- - Approval by the stockholders of the Company of the dissolution or
liquidation of the Company;
- - Approval by the stockholders of the Company of an agreement to merge or
consolidate, or
<PAGE>
otherwise reorganize, with or into one or more entities that are not
majority-owned subsidiaries of the Company, as a result of which 50% or
less of the outstanding voting securities of the surviving or resulting
entity are, or are to be, owned by former stockholders of the Company.
- - Approval by the stockholders of the Company of the sale or transfer of
substantially all of the Company's business and/or assets to a person or
entity that is not a subsidiary of the Company; or
- - The occurrence of any of the following:
- any "person," alone or together with all "affiliates" and
"associates" of such person, without the prior approval of the
Board of Directors, becomes the "beneficial owner" of more than
50% of the outstanding voting securities of the Company (the
terms "person", "affiliates", "associates" and "beneficial owner"
are used as such terms are used in the Securities Exchange Act of
1934 and the General Rules and Regulations thereunder); PROVIDED,
HOWEVER, that a "Change in Control" shall not be deemed to have
occurred if such "person" is the Company, any subsidiary of the
Company or any employee benefit plan or employee stock plan of
the Company or of any subsidiary of the Company, or any trust or
other entity organized, established or holding shares of such
voting securities by, for, or pursuant to the terms of any such
plan, or any member of or entity or group affiliated with the
Lidow family; or
- individuals who at the beginning of any period of two
consecutive calendar years constitute a majority of the Board
cease for any reason, during such period, to constitute at least
a majority thereof, unless the election, or the nomination for
election by the Company's shareholders, of each new Board member
was approved by a vote of at least two-thirds of the Board
members then still in office who were Board members at the
beginning of such period.
"DISABILITY" means if the Executive is unable to perform his duties
under the Consulting Agreement for a period of 90 consecutive days or for
shorter periods aggregating six months in any 12 month period because of
disability or incapacitation, or, after June 14, 2001, incurs a total and
permanent disability.
"EVENT" means a liquidation, dissolution, Change in Control, merger,
consolidation, or other combination or reorganization, or a recapitalization,
reclassification, extraordinary dividend or other distribution (including a
split up or a spin off of the Company or any significant subsidiary), or a
sale or other distribution of substantially all the assets of the Company as
an entirety.
11. PLAN. The Option and all rights of Optionee thereunder are subject
to, and the Optionee agrees to be bound by, all of the terms and conditions
of the provisions of the Plan, including, but
<PAGE>
not limited to Section 8 (Adjustments and Settlement of Awards) and
Section 12 (Legal Issues). The Optionee acknowledges receipt of a
copy of the Plan, which is made a part hereof by this reference,
and agrees to be bound by the terms thereof. Unless otherwise
expressly provided in other Sections of this Agreement, provisions
of the Plan that confer discretionary authority on the Committee
do not (and shall not be deemed to) create any additional rights
in the Optionee not expressly set forth above. The Option is not
intended as an incentive stock option.
\<PAGE>
World Headquarters
International Rectifier
233 Kansas Street
El Segundo, CA 90245
Phone: (310) 726-8000
FAX: (310) 322-3332
Internet: www.irf.com
North American Operations
International Rectifier
233 Kansas Street
El Segundo, CA 90245
Phone: (310)726-8000
FAX: (310) 322-3332
Internet: www.irf.com
HEXFET America
41915 Business Park Drive
Temecula, CA 92590
Phone: (909) 676-7500
FAX: (909) 676-9154
Rectificadores Internacionales, S.A.
Prolongacion Ave. Los Cabos
No. 9234
Parque Industrial Pacifico II
C.P. 22709
Tijuana, Baja California, Mexico
Phone: (++) 52 66 26 08 04
FAX: (++) 52 66 26 01 02
European Operations
International Rectifier Company
(Great Britain) Ltd.
Holland Road, Hurst Green
Oxted, Surrey, RH8 9BB
Phone: (++) 44 1883 732020
FAX: (++) 44 1883 733410
Branch Office -- Denmark
P.O. Box 88, Telefonvej
8DK-2860, Soeborg
Phone: (++) 45 39 57 71
50FAX: (++) 45 39 57 71 52
Branch Office -- Finland
Billskogsvagen 19
02580 Sjundea St.
Phone: (++) 358 9 262 8144
FAX: (++) 358 9 262 8150
Branch Office -- France
32, rue des Processions,
BP61 91241 St. Michel sur Orge Cedex
<PAGE>
Phone: (++) 33 1 64 49 59 59
FAX: (++) 33 1 64 49 59 69
Branch Office -- Sweden
Box 8159 , S-163 08, Spanga
Phone: (++) 46 8 795 9840
FAX: (++) 46 8 795 9895
International Rectifier
Electronic Motion Systems, Ltd.
Llys-Y-Ddraig,
Penllergaer Business Park
Penllergaer
Swansea, SA4 1HL Wales
Phone: (++) 44 1792 54 3000
FAX: (++) 44 1792 54 3001
International Rectifier Corporation Italiana, S.p.A.
Via Liguria 49, 10071 Borgaro,
Torino (To), Italy
Phone: (++) 39 011 451 0111
FAX: (++) 39 011 451 0220
International Rectifier GmbH
Saalburgstrasse 157
D-61350 Bad Homburg, Germany
Phone: (++) 49 6172 96590
FAX: (++) 49 6172 965933
Branch Office -- Switzerland
Riedmatt 9
CH-8153 Rumlang
Phone: (++) 41 1 817 6295
FAX: (++) 41 1 817 6299
IR International Holdings, Inc.
Branch Office -- Moscow, Russia
3 Floor, Room 301
24/2 Ul. Ussievich Str.
125315 Moscow
Phone/FAX: (++) 7 502 224 58 46
E-mail: [email protected]
Asian Operations
International Rectifier Japan Company, Ltd.
K&H Bldg., 3-30-4 Nishi-Ikebukuro
Toshima-ku, Tokyo, 171-0021 Japan
Phone: (++) 81 33 983 0641
FAX: (++) 81 33 983 0642
Western Sales Office -- Osaka, Japan
KAZU IT Bldg.
2-10-27 Minami-Semba
Chuo-ku 542-0081
Phone: (++) 81 66 258 7560
<PAGE>
FAX: (++) 81 66 258 7561
Shanghai International Rectifier Trading Ltd.
231 Fu Te Road (N)
Waigaoqiao Free Trade Zone
Pudong, Shanghai, 200131, P.R. China
Phone: (++) 86 21 5866 6060
FAX: (++) 86 21 5866 1654
IR International Holdings, Inc.
Representative Office
Canway Building, Suite 71066
Nan Li Shi Road, Xi Cheng District
Beijing, 100045, P.R. China
Phone: (++) 86 10 6803 8195 & 6803 8196
FAX: (++) 86 10 6803 8194
Representative Office
16th Floor, Suite B, 319, Sec. 2
Tun Hwa South Road
Taipei 10673, Taiwan, R.O.C.
Phone: (++) 886 2 2739 4230
FAX: (++) 886 2 2377 9936
Representative Office
Suite 2111, Herrera Tower
98 Herrera Corner Valero St., Salcedo Village
Makati City, Philippines
Phone/FAX: (++) 632 845 1653
IR International Holdings China, Inc.
Xian International Rectifier Weiguang Co.
202 Zhu Que Street
Xian, Shaanxi province, 710061, P.R. China
Phone: (++) 86 29 524 7490/ 92
FAX: (++) 86 29 524 7423
IR-PERI Power Electronics Co. Ltd.
202 Zhu Que Street
Xian, Shaanxi province, 710061, P.R. China
Phone: (++) 86 29 521 5895
FAX: (++) 86 29 521 5896
Liaison Office -- Seoul, Korea
#402, Noksan Building, 106-8
Kuro-5Dong, Kuro-Gu
Seoul, 152-055 Korea
Phone: (++) 822 858 8773
FAX: (++) 822 858 8775
International Rectifier
Southeast Asia Pte. Ltd.
50 Kallang Avenue #08-01/03
Noel Corporate Building
Singapore 339505
Phone: (++) 65 295 9555
FAX: (++) 65 392 3558
<PAGE>
International Rectifier
Hong Kong, Ltd.
Unit 308, New East Ocean Centre
No. 9 Science Museum Road
Tsimshatsui East, Kowloon
Hong Kong
Phone: (++) 852 2803 7380
FAX: (++) 852 2540 5835
Semiconductor Electronics Ltd.
S.D.F.I Unit No. 23, SEEPZ
Andheri (East)
Bombay 400 096, India
Phone: (++) 91 22 829 1055
FAX: (++) 91 22 829 0473
IR Infotech Pvt. Ltd.
Marwah House
Krishanlal Marwah Marg
Off Saki Vihar Road, Sakinaka
Andheri (East)
Bombay 400 072, India
Phone: (++) 91 22 857 2111
FAX: (++) 91 22 857 3130
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (File No. 33-40208, File No. 33-63958, File No.
33-53589, File No. 33-57575, File No. 33-46901 and File No. 33-41363) of
International Rectifier Corporation of our report dated July 27, 1999, except
for Note 9, as to which the date is September 14, 1999, relating to the
financial statements and financial statement schedule which appears in this
Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
--------------------------------------
PricewaterhouseCoopers LLP
Los Angeles, California
September 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-04-1999
<PERIOD-START> JUL-06-1998
<PERIOD-END> JUL-04-1999
<CASH> 31,497
<SECURITIES> 8,900
<RECEIVABLES> 123,827
<ALLOWANCES> 2,168
<INVENTORY> 108,463
<CURRENT-ASSETS> 306,274
<PP&E> 633,211
<DEPRECIATION> 252,707
<TOTAL-ASSETS> 709,085
<CURRENT-LIABILITIES> 140,632
<BONDS> 0
0
0
<COMMON> 51,781
<OTHER-SE> 344,493
<TOTAL-LIABILITY-AND-EQUITY> 709,085
<SALES> 545,371
<TOTAL-REVENUES> 545,371
<CGS> 393,379
<TOTAL-COSTS> 393,379
<OTHER-EXPENSES> 163,225
<LOSS-PROVISION> 338
<INTEREST-EXPENSE> 11,120
<INCOME-PRETAX> 31,156
<INCOME-TAX> 10,780
<INCOME-CONTINUING> 20,376
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (26,154)
<NET-INCOME> (5,778)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
