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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
/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, 1998
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)
DELAWARE 95-1528961
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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 $247,657,977 (computed using
the closing price of a share of Common Stock on September 28, 1998 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 51,527,602 shares of the registrant's Common Stock, par value
$1.00 per share, outstanding on September 28, 1998.
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on November 23, 1998, which Proxy
Statement will be filed no later than 120 days after the close of the
registrant's fiscal year ended June 30, 1998, 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.......................................................................................... 4
2. Properties........................................................................................ 11
3. Legal Proceedings................................................................................. 12
4. Submission of Matters to a Vote of the Security Holders........................................... 13
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
8. Financial Statements and Supplementary Data....................................................... 23
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 48
PART III
10. Directors and Executive Officers of the Registrant................................................ 48
11. Executive Compensation............................................................................ 48
12. Security Ownership of Certain Beneficial Owners and Management.................................... 48
13. Certain Relationships and Related Transactions.................................................... 48
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 48
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EXPLANATORY NOTE
This amendment no. 1 to Company's report on Form 10-K for its fiscal year
ended June 30, 1998, is being filed to include additional disclosures for Items
1, 7 and 8. Item 1 has been amended to include additional disclosure in the
first paragraph of Environmental Matters. Item 7 has been amended to include a
section regarding Quantitative and Qualitative Disclosures of Market Risk and
additional disclosure of the Impairment of Assets and Restructuring Charges
section. Item 8 has been revised to provide these additional disclosures in the
corresponding Notes to Consolidated Financial Statements.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
International Rectifier Corporation ("IR" or "Company") is a major worldwide
supplier of power semiconductors. Power semiconductors switch or condition
electricity at relatively high voltage and current levels in products such as
office equipment, production and process equipment, computers/peripherals,
automobiles, cellular phones, routers and servers, home appliances, welders,
satellites and electronic lighting ballasts.
The Company designs, manufactures, and markets power semiconductors, which
are used for power conversion. In a manner similar to the way that oil is
refined to produce efficient, usable fuel, electrical power is converted to
produce efficient, usable power. This process of 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.
IR supplies devices that perform each of the four basic power conversion
functions, and most end products use more than one type of power conversion
device. This allows IR to develop devices that work together to optimize the
performance of end products, and enables the Company to capitalize more broadly
on market-leading devices.
IR's products are widely used. Applications for power semiconductors in
automobiles include anti-lock braking, fuel injection systems, power
accessories, air bags, and electronic power steering. Computer/ peripheral
applications include monitors, disk drives, and printers. Office equipment
applications include copiers and facsimile machines. Consumer electronics and
lighting applications include home entertainment, household appliances, and
electronic lighting ballasts. Communications applications include portable
phones, telephone networks, and modems. Power semiconductors are also used
widely in industrial applications such as motor-driven production lines, machine
tools, fork lifts, and welders.
Based on statistics published by the Semiconductor Industry Association
("SIA"), the Company believes it is the leader in the field effect power
transistor segment with its HEXFET-Registered Trademark- power MOSFETs (Metal
Oxide Semiconductor Field Effect Transistors) and IGBTs (Insulated Gate Bipolar
Transistors). SIA data indicates that over the past five years power MOSFET
sales have grown at an average rate of 22% per year. Industry-wide sales of
power MOSFETs and IGBTs were $2.8 billion in calendar 1997, an increase of 2%
over 1996 levels. The slower rate of increase in demand was attributable to the
impact of Asian economic conditions, changes in currency exchange rates,
aggressive price competition, and an inventory correction in the PC sector.
The Company's major customers in the automotive segment include Delco, Ford,
Siemens, and Bosch. IBM, NEC, and Compaq are customers in the computer segment.
Consumer electronics customers include Philips and Sony. Customers in the
telecommunications segment include Lucent Technologies, Motorola, and Nokia.
Industrial customers include Emerson, Sanken Electric, and American Power
Conversion. The Company also sells its products to distributors, including Arrow
Electronics, Hamilton/Hallmark, and Future Electronics. In fiscal year 1998, the
Company's product sales by region were approximately 47% from North America, 26%
from Europe, and 27% from Asia. IR has manufacturing facilities in North
America, Europe, and Asia, and uses subcontract assembly in Asia.
IR was founded as a California corporation in 1947 and reincorporated in
Delaware in 1979. Its executive offices are located at 233 Kansas Street, El
Segundo, California 90245 and its telephone number is (310) 726-8000.
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POWER SEMICONDUCTOR INDUSTRY
Semiconductors are silicon-based chips that conduct and block electricity.
The semiconductor industry consists of two product categories: integrated
circuits ("ICs") and discrete semiconductors. ICs operate at low power levels
and perform multiple functions to process and convey information in electronic
signal form. IC capability is largely defined by circuit density, which
increases as its features are miniaturized. The applications for ICs are
generally concentrated in the computer industry and have been subject to
frequent redesign, short product life cycles and rapid obsolescence. As a
result, the demand for ICs has been highly cyclical.
In contrast to ICs, discrete semiconductors perform a single function. Power
semiconductors are discretes that operate at high power levels, and they
condition and control electricity to operate a power supply, control a motor, or
light a lamp. Their capability is largely defined by the level of power that
they can handle and their efficiency in converting raw electric current into a
more useful form. The amount of electric current handled and the heat generated
present different design challenges than those of integrated circuits, and the
miniaturization of power semiconductors usually lags that of ICs. Demand is
typically less volatile.
MOS technology has enabled advances in power semiconductor performance and
cost-per-function. Field effect power transistors (power MOSFETs and IGBTs) have
gained an increasing share of the power transistor market at the expense of
older-technology bipolar transistors that also serve the switch function.
MOS power transistors offer significant benefits over bipolar power
transistors. They provide much greater switching speed, which allows the design
of higher frequency, more compact circuits. They are activated by voltage rather
than current, so they require less external circuitry. MOS power transistors are
more compatible with microprocessor controls. They offer more reliable long-term
performance and are more rugged, so they can better withstand adverse operating
conditions. Power MOSFETs and IGBTs compare favorably to bipolar power
transistors on a price/performance basis.
APPLICATIONS
Power semiconductors are used in a broad spectrum of commercial and
industrial applications, including many products with long life cycles. The
Company believes that because of their more gradual rate of technological change
and the diversity of applications, the demand for power semiconductors is less
cyclical than for some ICs. Power semiconductor demand is driven by conversion
to new technologies, the proliferation of new end-product applications, and
growth in the end markets. The Company believes that markets driving future
demand for power semiconductors include:
PORTABLE ELECTRONICS. Advances in power semiconductors help extend battery
life and reduce product size and weight in a variety of battery-operated
products such as lap-top and notebook computers, personal digital organizers,
cellular telephones, household appliances, and hand tools.
AUTOMOTIVE ELECTRONIC SYSTEMS. The concentration of solid state electronics
has increased rapidly in recent model year automobiles as safety and comfort
features increase demands on the electronic system. Applications include
anti-lock braking systems; air-bags; fuel injection systems; electronic power
steering, windows, mirrors, and seats. Widespread adoption of battery operated
electric and hybrid vehicles to reduce emissions could dramatically increase
consumption of field effect power transistors.
ELECTRONIC LIGHTING BALLASTS. Electronic lighting ballasts, which can
incorporate power MOSFETs and Power ICs, significantly reduce the amount of
energy consumed in lighting. Conversion to electronic ballasts has been driven
by lower end-user operating costs and incentives to increase energy efficiency.
Applications include overhead fixtures, compact fluorescent bulbs, and
high-intensity discharge (HID) lamps.
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VARIABLE SPEED MOTORS. 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 and conserve natural resources
drive demand for affordable, efficient motor controls. Clean air legislation is
also driving the conversion from traditional chlorofluorocarbons ("CFCs") to
refrigerants that are less toxic but also less efficient. Manufacturers of
refrigerators and air conditioners can compensate for these less efficient
chemicals by using more efficient variable-speed motors.
PRODUCTS
The Company's products convert electrical power to make it more usable and
efficient in performing work such as operating power supplies, controlling
motors, and lighting lamps. The products' ability to minimize energy lost at
each point in the power conversion process is central to their value. Important
growth applications include portable electronics, automotive electronics, and
variable-speed motors.
The Company's HEXFET power MOSFET products and IGBT transistors comprised
approximately 70% of fiscal 1998 sales. IR also supplies High Voltage Control
ICs, high-performance diodes, and high power rectifiers and thyristors. The
Company believes that its full complement of power conversion technology
represents a competitive advantage, enabling IR to provide customers with
integrated solutions to their power conversion needs.
SWITCHING PRODUCTS
FIELD EFFECT POWER TRANSISTORS (power MOSFETs and IGBTs) serve the switch
function in power conversion to provide an even, usable flow of power for
electronic equipment.
POWER MOSFETS. Through its HEXFET product line, the Company believes it is
the market leader in power MOSFETs. The breadth and diversity of the market for
these products help to stabilize demand.
Applications for MOSFETs in automobiles include anti-lock braking and fuel
injection systems, electronic power steering, power accessories, and air bags.
Computer/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
motor control, instrumentation, and test equipment. Communications applications
include telephone networks and modems. Government and aerospace applications
include satellites, communications equipment, command-and-control systems, and
missiles.
Market acceptance and brand recognition of the Company's HEXFET line of
products have benefited from the Company's emphasis on quality control and
reliability, and the Company believes its standards to be among the most
stringent in the industry. Cumulative and current data on long and short term
product reliability is made available to customers quarterly.
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 serve the switch function in power conversion
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 the Company believes electric and hybrid
vehicles may require large quantities of IGBTs for each vehicle.
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The Company's IGBT technology is closely related to its MOSFET technology,
and the Company views them as complementary products. The Company believes that
its patents on fundamental MOSFET technology also apply to IGBTs, and it is
seeking further patent protection on its IGBT technology, as well as on its
MOSFET technology.
CONTROL PRODUCTS
HIGH VOLTAGE CONTROL INTEGRATED CIRCUITS. These devices serve the control
function of power conversion and optimize the performance of power MOSFETs and
IGBTs. They perform the functions of multiple discrete components. This
integration allows IR's customers to simplify circuit design and assembly,
improve reliability, and reduce overall system size and cost. In sensing and
responding to adverse operating conditions the performance of high voltage
control integrated circuits is superior to that of discrete components in a
safety or diagnostic circuit. IR's high voltage control integrated circuits draw
on the Company's MOSFET technology, and the Company believes that its power
MOSFET patents also apply to a broad range of high voltage control integrated
circuits.
High voltage control integrated circuits 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 switchers, computer/peripherals, instrumentation and test equipment, and
electronic lighting ballasts.
OUTPUT RECTIFICATION PRODUCTS
The Company's Schottky diodes and Fast-Recovery diodes serve the output
rectification function of power conversion. Output rectification reconfigures
elements of electrical power into a form usable by electrically-operated
equipment. Schottky diodes are used with power MOSFETs in high-frequency
applications such as computer/peripherals. The Company's HEXFRED-Registered
Trademark- Fast-Recovery diodes are used with IGBTs in higher-current,
lower-frequency applications such as motor controls.
INPUT RECTIFICATION PRODUCTS
The Company also manufactures a broad line of rectifiers, diodes and
thyristors that serve the input rectification function of power conversion.
These products condition power to make it more efficient and usable, principally
in industrial end products that require power-handling capability from one amp
to 5000 amps and from 20 volts to 5000 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.
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,
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, 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,
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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. Plants that assemble MOSFETs and other
products are located overseas, in Company-owned and subcontract facilities. In
the second half of fiscal 1997, the Company completed a new assembly facility in
Tijuana, Mexico, that assembles MOSFETs, Schottkys, IGBTs, and other modules.
The Company's Oxted, England facility, which qualifies as a duty-free facility,
assembles MOSFETs, IGBTs, Schottkys, and diodes. The Company manufactures
substantially all its high power rectifiers and thyristors at its Turin, Italy
facility. A Schottky wafer fabrication facility at its Turin facility went into
production in late calendar 1996. 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 year 1998, the Company's product sales by region were
approximately 47% from North America, 26% from Europe, and 27% from Asia. The
Company's domestic direct sales force is organized into four sales zones. In
Western Europe, the Company's products are sold through its own sales force as
well as through 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, and liaison offices in India, Japan, Singapore, China,
Hong Kong, South Korea, Taiwan, the Philippines, Australia, and New Zealand.
Because many applications require products from several product groups, the
Company has organized its marketing efforts by application, rather than product
type. These business management groups focus on several key commercial sectors
and on government and aerospace 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
segment include Delco, Ford, Siemens, and Bosch. IBM, NEC, and Compaq are
customers in the computer segment. Consumer electronics customers include
Philips and Sony. Customers in the telecommunications segment include Lucent
Technologies, Motorola, and Nokia. Industrial customers include Emerson, Sanken
Electric, and American Power Conversion. Over the long term, approximately 30%
of the Company's revenues have come from sales of its products to distributors,
including Arrow Electronics, Hamilton/Hallmark, and Future Electronics. The
Company has historically found it more difficult to determine distributor demand
than demand from its other customers. No single customer accounted for 10% or
more of fiscal 1998 revenues.
BACKLOG
As of June 30, 1998, the Company's backlog of orders was $113.0 million
compared to $143.8 million as of June 30, 1997. Backlog is comprised of purchase
orders and customer forecast commitments scheduled to be shipped within the
following 12 months. Increasingly, major customers are operating their
businesses with shorter lead-times and are placing orders on a periodic rather
than an annual basis, which tends to reduce backlog relative to future revenue.
The decrease in backlog at June 30, 1998 is largely attributable to shorter
customer lead times and lower order values driven by economic pressures in Asia,
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unfavorable changes in currency exchange rates, and an inventory correction in
the PC sector. 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
The Company's breadth of technology and focus on power conversion underlie
an integrated approach to developing complementary products designed to add
value and differentiate International Rectifier from its competitors. IR
conducts research and development activities to improve the price/ performance
ratio of its product offerings to customers across a wide range of end-use
applications. The Company's research and development program focuses on the
advancement and diversification of its HEXFET power MOSFET and IGBT product
lines and the development of high voltage control integrated circuits and power
products that work in combination with HEXFET power MOSFETs and IGBTs. IR's
program places increasing emphasis on the development of chipsets and
system-level solutions that optimize components to improve overall system
performance and cost. These devices will also enable customers to accelerate
market introduction of their products.
In fiscal years 1998, 1997, and 1996, the Company spent approximately $39.1
million, $35.5 million, and $27.0 million, respectively, on research and
development activities.
Fiscal 1997 product introductions included the subsystems that may reduce by
as much as half the size, cost, and development time for advanced motion control
systems. Other important product introductions included a broad family of IGBTs
with decisive speed and efficiency advantages; the industry's first 1200V IC,
which serves as the core of IR's highly-integrated motor drive solutions; a
specialized series of highly-competitive IGBTs for high-volume power supplies;
and co-packaged power MOSFETs and diodes in proprietary FETKY-TM- packages that
offer the industry's smallest footprint.
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 and pilot 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 a greater activity level as IR aggressively addresses
high-growth market opportunities in the field of power conversion. The cost for
construction and equipment totaled approximately $48 million.
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. The Company's new p-channel trench MOSFET for
cellular phones and other portable electronics products reduced on-resistance by
half, and a new chipset achieved record efficiency in portable PC's. A new
generation of power MOSFETs set benchmarks in high-voltage performance, and IR
high-voltage control IC's continued to set the industry architectural standard
for motor control and lighting applications.
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 116 unexpired U.S. patents and 76 U.S. patents pending.
Those patents fundamental to the Company's products expire between 2000 and
2010. In addition, the Company has 122 issued foreign patents and 373 foreign
patents pending in a number of countries. The Company is also licensed to use
certain patents owned by others. Under the terms of an agreement with Unitrode
Corporation, the Company pays Unitrode approximately 12% of the Company's net
patent royalty income. The Company has several registered trademarks in the
United States and abroad including the trademark HEXFET. The Company believes
that its proprietary technology and intellectual property contribute to its
competitive advantage.
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Since the Company believes that its power MOSFET patents are broadly
applicable, it is committed to enforcing its rights under those patents. The
Company presently has license agreements with most of the major power MOSFET
manufacturers in the United States and abroad. In fiscal 1998, $17.2 million of
net revenues were derived from royalty-bearing license agreements.
Certain of the Company's fundamental power MOSFET patents have been, and
continue to be, subjected to reexamination in the United States Patent and
Trademark Office ("PTO"). The Company's 5,008,725 and 5,130,767 patents are
currently undergoing reexamination in the PTO. The Board of Patent Appeals of
the PTO issued decisions in November 1997, May 1998 and August 1998 upholding
the patentability of the Company's U.S. patents 4,593,302, 4,642,666, and
4,959,699, respectively. A reexamination certificate has been issued for the
4,593,302 patent and a notice of intent to issue such a certificate, dated July
17, 1998, has been received for the 4,642,666 patent.
Although no assurance can be given as to the ultimate outcome of the
Company's patent enforcement efforts, the PTO reexamination proceedings, or the
success of the Company's patent licensing program, the Company believes that its
patent portfolio will be the source of continuing income.
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 than IR. The Company believes that it
is distinguished from competitors by its breadth of product line and ability to
combine multiple power conversion products into compact, cost-effective packages
and system-level solutions. IR's products compete with products manufactured by
others based on breadth of product line, quality, price, reliability, over-all
performance of the products, delivery time to the customer, and service
(including technical advice and support). The Company's competitors include
European Powersemiconductor and Electronics Company GmbH ("Eupec"), Harris
Corporation, Hitachi Ltd., Motorola, Inc., NEC Corporation, Philips
International B.V., Powerex, Inc., Samsung Semiconductor Inc., ST
Microelectronics (formerly called SGS-Thomson Microelectronics), Siemens AG,
Siliconix incorporated, Toshiba Corporation, and Westcode Semiconductors Ltd.
ENVIRONMENTAL MATTERS
Federal, state and local laws and regulations impose various restrictions
and controls on the discharge of certain materials, chemicals, and gases used in
semiconductor processing. The Company does not believe that compliance with such
laws and regulations will have a material adverse effect on the Company's
results of operations, financial position or cash flows.
The Company and Rachelle Laboratories, Inc. ("Rachelle"), its former
pharmaceutical subsidiary which discontinued operations in 1986, have been named
among several hundred entities as potentially responsible parties ("PRPs") under
the provisions of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), in connection with the United States
Environmental Protection Agency's ("EPA") investigation 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
CERCLA. The lawsuit against the Company, relating to the first and second
consent decrees, was settled in August 1993 for the sum of $40,000 to avoid
protracted and expensive litigation. The Company recently received an offer from
the EPA by letter dated June 16, 1998 to settle claims against the Company for
the clean up of the OII Site for a payment of $173,580, less a credit of $40,000
for the prior settlement payment, for a net payment of $133,580. The Company
recently accepted the EPA's offer and is waiting for final approval of the
settlement.
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The Company 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 three elements of clean-up work at the OII Site for the
sum of $4,953,148 (the final remedy assessment has not yet been made). 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. In its response, dated October 20, 1995, the Company stated its belief
that none of the wastes generated by Rachelle was hazardous. The Company has
received no further communications in connection with the Supplemental
Information Request.
Counsel for Rachelle received a letter from the EPA dated September 30,
1997, requesting Rachelle to participate (with numerous other companies) in the
final remedial actions for the OII Site. Counsel replied on October 21, 1997,
maintaining the position that the fermentation wastes sent to the OII Site by
Rachelle were not toxic and requesting additional information from the EPA. The
amount of Rachelle's potential liability for the final remedy has not been
provided by the EPA and is not presently determinable. The Company cannot
determine with accuracy the amount of the potential demand to Rachelle for the
cost of the final remedy. However, based upon information received to date, the
Company believes that any demand, if made, while likely to be significant,
should nonetheless be substantially below the demand amount for earlier phases
of the OII Site clean-up.
Claims have been made with the Company's insurers with respect to the OII
Site matter, which the insurers have not accepted. There can be no assurance
that the insurance coverage attaches to these claims. The Company does not
believe that either it or Rachelle is responsible for the disposal at the OII
Site of any material constituting hazardous substances under CERCLA. Although
the ultimate resolution of this matter is unknown, the Company believes that it
will not have a material adverse impact on its financial position.
The Company received a letter dated September 9, 1994, from the State of
California Department of Toxic Substances Control stating that the Company may
be a PRP for the deposit of hazardous substances at a facility in Whittier,
California. The Company, in June 1995, 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, of which between $20,000 and
$25,000 is presently expected to be allocated to the Company. However, the
ultimate cost borne by the Company will depend on the extent of the clean-up
undertaken by the group and the actual clean-up costs and the final allocation
scheme agreed upon by the group. Further, a tentative settlement offer has been
proposed by the group of PRPs to small contributors like the Company that would
allow the Company to pay a lump sum in settlement of its clean-up obligations.
If the proposal is confirmed, it is currently expected that the Company could
settle its liability by the payment of approximately $40,000 to $60,000. At this
time the Company is unable to predict when or if the settlement proposal will be
consummated.
EMPLOYEES
As of June 30, 1998, the Company employed approximately 4,395 people, of
whom approximately 3,240 are employed in North America, 1,030 in Western Europe,
and 125 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 1,101,000 square
feet, of which approximately 597,000 square feet are located within the United
States. Of the worldwide total, approximately 371,000 square feet are leased and
the balance is owned by the Company.
11
<PAGE>
IR's leases expire between 1998 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............... 297,000 --
El Segundo, California............. 127,000 173,000 May 31, 1999--July 31, 2004
Tijuana, Mexico.................... 150,000 --
Oxted, England..................... 40,000 32,000 June 30, 2000--March 27, 2012
Turin, Italy....................... 110,000 --
</TABLE>
The Company believes that these facilities are adequate for its current and
anticipated near term operating needs. IR estimates that it currently utilizes
approximately 70% of its worldwide manufacturing capacity, including the
capacity added in the second half of fiscal 1997 (see
"Business--Manufacturing").
The Company has sales and technical support offices located throughout the
United States, 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
On January 16, 1998, the Company filed suit in Federal District Court in Los
Angeles, California against Samsung Semiconductor, Inc. and Samsung Electronics
Co., Ltd., alleging infringement of the Company's U.S. patents 4,959,699 and
4,705,759. The suit seeks customary relief in such matters. The complaint was
amended on August 12, 1998 to add the Company's U.S. patent 4,642,666 to the
suit.
On June 3, 1998, the Federal District Court granted the Company's motion for
a preliminary injunction prohibiting Samsung Semiconductor, Inc. and Samsung
Electronics Co., Ltd. from importing into or making, using, selling or offering
for sale in the U.S. IGBTs (Insulated Gate Bipolar Transistors) designated by
Samsung part number SGL60N90D. Samsung is appealing this order.
On August 21, 1998, the Company filed suit in Federal District Court in Los
Angeles, California against Fuji Electric Co., Ltd. and Collmer Semiconductor,
Inc., alleging infringement of the Company's U.S. patents 4,959,699, 4,705,759,
4,642,666, and 4,974,059. The suit seeks customary relief in such matters.
The Company and certain of its directors and officers have been named as
defendants in three class action lawsuits filed in Federal District Court in
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. The complaints generally allege
that the Company and the other defendants made materially false statements or
omitted to state material facts 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.
The District Court on March 31, 1997 rendered a decision on a motion for
summary judgment brought by the Company and certain of its directors and
officers. The Court 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
12
<PAGE>
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 are seeking reversal of these orders.
On January 28, 1998, the Court issued several rulings. 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. The plaintiffs are seeking reversal of
these rulings.
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 financial condition and results of operations. Trial of this
action against the Company is scheduled for February 1, 1999.
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.
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. For further information, see "Notes to Consolidated Financial
Statements--Note 13. Executive Agreement."
The executive officers of IR are:
<TABLE>
<S> <C> <C>
Eric Lidow.................. 85 Chairman of the Board
Alexander Lidow............. 43 Chief Executive Officer
Derek B. Lidow.............. 45 Chief Executive Officer
Robert J. Mueller........... 69 Executive Vice President--External Affairs
and Business Development
Michael P. McGee............ 39 Vice President--Chief Financial Officer
L. Michael Russell.......... 51 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 Semiconductor Division's Vice President--Research and Development
beginning July 1979, was promoted to Semiconductor Division Executive Vice
President--Manufacturing and Technology in March 1985, and became the President
of the Electronic Products Division in July 1989. In August 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.
13
<PAGE>
Derek B. Lidow, Ph.D., has been employed by the Company since 1976. He
served as the Semiconductor Division's Vice President--Operations beginning
March 1980, was promoted to Semiconductor Division Executive Vice
President--Marketing and Administration in March 1985, and became President of
the Power Products Division in July 1989. In August 1992, Dr. Lidow was elected
Executive Vice President and in July 1993 assumed responsibilities for worldwide
sales and marketing. He was elected a director in September 1994 and Chief
Executive Officer in March 1995. Dr. Lidow serves as member of the Leadership
Council of the School of Engineering of Princeton University and is a Trustee of
the Los Angeles Philharmonic. Dr. Lidow is a son of Eric Lidow and a brother of
Alexander Lidow.
Robert J. Mueller has been employed by the Company since November 1961. He
served as Vice President of Marketing for the U.S. Semiconductor Division from
1963 until October 1969 when he was promoted to Corporate Vice
President--Foreign Operations. Mr. Mueller became Executive Vice
President--World Marketing and Foreign Operations in April 1978, Corporate
Executive Vice President-- External Affairs and Worldwide Sales in July 1989,
and in July 1993 became Executive Vice President-- External Affairs and Business
Development. He was 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--Chief Financial Officer. 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. 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.
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 HIGH LOW HIGH LOW HIGH LOW HIGH LOW YEAR END
- -------------------- ------- ------- ------- -------- -------- -------- ------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
1997................ 20 5/8 12 1/4 16 1/4 12 1/4 16 7/8 12 18 1/4 11 1/8 1,946
</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, 1998 and 1997 and
for the fiscal years ended June 30, 1998, 1997, and 1996 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, 1996, 1995, and 1994, and for the fiscal years ended June 30, 1995 and
1994 are derived from audited consolidated financial statements of the Company
which are not included herein.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues............................................. $ 551,891 $ 486,127 $ 576,849 $ 429,026 $ 328,882
Cost of sales........................................ 375,727 323,067 351,046 278,202 219,944
---------- ---------- ---------- ---------- ----------
Gross profit......................................... 176,164 163,060 225,803 150,824 108,938
Selling and administrative expense................... 104,661 105,954 102,129 82,328 69,008
Research and development expense..................... 39,132 35,495 26,967 20,108 16,381
Impairment of assets and restructuring charge........ -- 71,000 -- -- --
---------- ---------- ---------- ---------- ----------
Operating profit (loss).............................. 32,371 (49,389) 96,707 48,388 23,549
Interest expense, net................................ (7,288) (4,015) (394) (377) (3,625)
Other income (expense), net.......................... (494) 714 (383) (544) (1,050)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.................... 24,589 (52,690) 95,930 47,467 18,874
Provision (benefit) for income taxes................. 8,114 (9,484) 29,451 8,069 3,160
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... $ 16,475 $ (43,206) $ 66,479 $ 39,398 $ 15,714
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share--Basic(1)......... $ 0.32 $ (0.84) $ 1.31 $ 0.85 $ 0.39
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income (loss) per common
share--Diluted(1).................................. $ 0.32 $ (0.84) $ 1.29 $ 0.84 $ 0.38
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Average common shares outstanding--Basic(1).......... 51,248 51,307 50,577 46,535 40,630
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Average common shares and potentially dilutive
securities outstanding--Diluted(1)................. 51,674 51,307 51,384 47,020 40,856
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS)(2)
Working capital...................................... $ 163,317 $ 203,216 $ 178,072 $ 127,751 $ 67,165
Total assets......................................... 735,827 679,753 629,079 496,184 330,574
Short-term debt...................................... 65,379 31,820 23,570 25,235 33,310
Long-term debt, less current maturities.............. 141,528 143,164 47,994 23,881 26,817
Stockholders' equity................................. 399,650 381,715 421,213 345,181 202,943
</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.
15
<PAGE>
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,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................. 100.0% 100.0% 100.0%
Cost of sales........................................................ 68.1 66.5 60.9
--------- --------- ---------
Gross profit......................................................... 31.9 33.5 39.1
Selling and administrative expense................................... 19.0 21.8 17.7
Research and development expense..................................... 7.1 7.3 4.7
Impairment of assets and restructuring charge........................ -- 14.6 --
--------- --------- ---------
Operating profit (loss).............................................. 5.8 (10.2) 16.7
Interest expense, net................................................ (1.3) (0.8) (0.1)
Other income (expense), net.......................................... (0.1) 0.1 (0.1)
--------- --------- ---------
Income (loss) before income taxes.................................... 4.4 (10.9) 16.5
Provision (benefit) for income taxes................................. 1.4 (2.0) 5.0
--------- --------- ---------
Net income (loss).................................................... 3.0% (8.9)% 11.5%
--------- --------- ---------
--------- --------- ---------
</TABLE>
1998 COMPARED WITH 1997 (53 WEEK YEAR AND 52 WEEK YEAR, RESPECTIVELY)
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, which we believe
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.
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.
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. Revenue from new products increased 14%
over the prior year level, and new products accounted for 33% of fiscal 1998 and
1997 revenue, respectively.
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, partially offset by small increases in
interest income on investments and interest capitalized on construction in
progress.
Net foreign currency gains and losses were less than $1 million in each
year.
16
<PAGE>
1997 COMPARED WITH 1996 (52 WEEK YEARS)
Revenues for fiscal 1997 decreased 15.7% to $486.1 million from $576.8
million in the prior year. This reflected an approximate 20% price reduction on
roughly 50% of the Company's products and aggressive efforts, principally by
distributors, to reduce inventory levels, partially offset by increases in
revenue attributed to new products. Changes in foreign exchange rates negatively
impacted revenues by $9.3 million. Revenues for fiscal 1997 included $20.3
million of net patent royalties compared to $16.3 million in the prior year,
reflecting higher sales by licensees.
In fiscal 1997 gross profit was $163.1 million (33.5% of revenues) versus
$225.8 million (39.1% of revenues) in fiscal 1996. Fiscal 1997 gross profit
margins reflected lower dollar volumes, an approximate 20% price reduction on
roughly 50% of the Company's products, and fixed overhead expense scaled to
anticipated higher revenue levels.
Selling and administrative expense was $106.0 million (21.8% of revenues) in
fiscal 1997 versus $102.1 million (17.7% of revenues) in fiscal 1996. The
Company's fiscal 1997 spending ratio reflected lower-than-expected revenues.
In fiscal 1997, the Company's research and development expenditures
increased $8.5 million to $35.5 million (7.3% of revenues) from $27.0 million
(4.7% of revenues) in fiscal 1996. Revenue from new products increased 33% over
the prior year level, and new products accounted for 33% of fiscal 1997 revenue
compared to 21% of fiscal 1996 revenue.
In fiscal 1997, net interest expense increased $3.6 million from the prior
year. The increase was due to increased interest expense incurred on higher
average debt balances over the prior year, partially offset by small increases
in interest capitalized on construction in progress and interest income on
investments.
Net 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, 1998, the Company maintained cash and cash equivalent balances
of $32.3 million and $13.2 million of short-term investments. Cash in excess of
operating requirements is maintained in financial institutions in the United
States.
In addition, the Company had established $73.4 million of domestic and
foreign revolving lines of credit, against which $53.2 million had been
borrowed. The Company had also established $92.5 million in domestic and foreign
term loan and collateralized equipment financing facilities, against which $25.6
million had been borrowed. Based on covenant and collateral limitations, the
Company had $33.9 million available for borrowing against these lines at June
30, 1998.
On August 28, 1998, the Company replaced an existing $2.5 million revolving
line of credit with a new $24.9 million unsecured credit facility, both with the
same foreign bank. The new agreement provides the Company with a five-year $8.3
million revolving line of credit, and a five-year $16.6 million term-loan
facility, with principal retirements beginning after 30 months. The interest
rate on both facilities is based on 1% above the applicable LIBOR rate.
Based on cash and cash equivalents on hand, short-term investments, and
available financing, at June 30, 1998, the Company's liquidity was $79.4
million. At June 30, 1998, the Company had made purchase commitments for capital
equipment of approximately $38.3 million.
17
<PAGE>
The Company plans fiscal 1999 capital investments of between $40 million and
$70 million, principally for fabrication and assembly capacity to meet market
demand. The Company intends to fund these 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 revolving credit
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.
Although the Company believes that the class action lawsuits brought against
the Company and its Board of Directors (see "Legal Proceedings") are without
merit, the ultimate outcome 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."
FOREIGN CURRENCY TRANSACTIONS
Due to the global nature of its operations, the Company is subject to the
effect of international currency fluctuations. In fiscal year 1998, over 50% of
the Company's revenues were derived from sales in foreign markets. Net foreign
currency gains and losses were less than $1 million in each of the years ended
June 30, 1998, 1997 and 1996, respectively.
The Company manages potential foreign currency exposure by entering into
forward contracts and currency options. These contracts are not speculative in
nature, as the resulting gains or losses will offset any losses or gains on the
underlying hedged transactions.
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.
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, 1998 (see Note 2 of the Notes to the Consolidated Financial
Statements). The Company does not use any derivatives or similar instruments to
manage its interest rate risk. A 90 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.
18
<PAGE>
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 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. The Company assumed
an adverse change of 10% in foreign exchange rates, noting that the potential
decrease in the Company's foreign currency position would have an immaterial
effect on the Company's results of operations, financial position and cash
flows.
INCOME TAXES
The Company's effective tax rate in fiscal 1998 was approximately 33.0% due
primarily to the higher statutory tax rates in certain foreign jurisdictions and
foreign jurisdiction losses without foreign tax benefit, offset by foreign tax
credits and state tax credits. The difference between the U.S. federal statutory
tax rate of 35% and the Company's effective tax rates of approximately (18.0)%
and 30.7% in fiscal years 1997 and 1996, respectively, was attributable mainly
to foreign jurisdiction losses without foreign tax benefits for 1997 and sales
corporation benefits, state credits, and other credits for 1996.
IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGE
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 include
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 are expected to reduce the cost
of the Company's business processes and lower product costs and result in
increased flow on 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 are expected to occur 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 relate 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 3 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.
19
<PAGE>
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, 1998, the Company had eliminated approximately 190 employees.
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.
As of June 30, 1998, the remaining accrued severance liability was $3.5
million and was classified as "Other accrued expenses"--$0.5 million and "Other
long-term liabilities"--$3 million in the Company's Consolidated Balance Sheet.
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 will reduce annual depreciation and
annual selling and administrative costs by approximately $10 million each. The
benefits of these cost reductions are expected to be offset by price pressure,
which impacts gross margin, and by higher unit sales, which increases total
selling and administrative expense.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 30, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income." This statement will be effective for the Company's fiscal
quarter ending September 30, 1998. SFAS 130 will affect the reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by or distributions to shareholders. The
Company believes that comprehensive income in future periods will fluctuate as a
result of changes in the cumulative translation account, which is a component of
comprehensive income. Net unrealized gains and losses on the Company's
available-for-sale securities, which have not been significant, are also a
component of comprehensive income.
Also on June 30, 1997, the 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
its operating segments in financial statements issued to shareholders 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 131 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented. Management is
currently evaluating the impact, if any, of SFAS 131.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS 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
20
<PAGE>
Other than Pensions." This Statement is effective for fiscal years beginning
after December 15, 1997. Management does not believe that this pronouncement
will have a material impact on the notes to the financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes 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 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management is currently evaluating the
impact, if any, of SFAS 133.
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. The year
1998, for example, is represented in such a two digit system as "98". Beginning
in the year 2000, these systems will need to be modified to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies may need to be adapted to meet these
requirements.
The Company has adopted the definition of Year 2000 conformity published by
the British Standards Institute (BSI) as DISC PD2000-1. The adoption of this
standard as a target for compliance does not guarantee that the Company's
products or operations will be in full Year 2000 conformity as detailed in this
definition. Currently, none of the Company's products contain date processing
logic. The Company therefore represents to purchasers that its products are Year
2000 compliant pursuant to the BSI DISC PD2000-1 definition.
The Company has established a Global Year 2000 Team as well as local site
teams. Both the Global and the local site teams consist of management as well as
operational and information technology staff members. The Global 2000 Team was
formed to address company-wide Year 2000 issues, such as overall project
integration and management, project schedules, and reporting to management.
Local site teams address research and remediation for site specific equipment,
facilities, and suppliers. Both the Global and local site teams are divided into
the following functional areas: (1) factory equipment and facilities, (2)
customers, suppliers, and business partners, (3) desktop and network hardware
and software systems, and (4) mid-range computer and manufacturing systems.
Worldwide, the Company currently employs approximately 70 employees that are
addressing the Year 2000 issue, 20 of whom are engaged in this effort on a
full-time basis. The Company currently has budgeted $5.0 million for the cost of
investigation and remediation for the period August, 1997 to March, 2000. The
budget includes staff salaries and remediation expenses.
International Rectifier prioritized efforts to prepare its 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 plans to remediate its systems
in phases, first establishing an inventory and then assessing, correcting,
testing, and certifying compliance.
The Company's Year 2000 plan is on schedule. Remediation efforts are well
underway with a milestone of May, 1999 for which corrective actions for critical
items are to be completed. There can be no assurance, however, that serious and
complicated remediation problems will not arise during the remainder of the
project.
The Company is currently engaged in surveying its suppliers and business
partners, including banks and other financial institutions with whom the Company
engages in integrated transactions, regarding whether they are Year 2000
compliant. The survey is not yet complete and, accordingly, the Company is
currently unable to evaluate the extent to which such entities may be Year 2000
compliant and the effect
21
<PAGE>
that their non-compliance might have on the Company. The Company has established
programs to ensure that current and future purchases of equipment and software
are Year 2000 compliant.
The Company is in the process of developing contingency plans in the event
the Company or its significant customers, suppliers or vendors are not Year 2000
compliant by January 1, 2000. There can be no assurance that the Company will be
able to develop a contingency plan that will adequately address every issue that
may arise in the year 2000. For this reason, it is possible that the Company may
suffer failures in embedded microprocessors that result in the malfunctioning of
the basic infrastructure of various buildings. The software that controls
manufacturing processes may malfunction, resulting in a shutdown in assembly or
packaging. The computers used in business and office operations may experience
failures 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.
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 or results of operations. However, because of the
uncertainties in this area, no assurances can be given in this regard. The
Company is subject to external forces that might generally affect industry and
commerce, such as utility or transportation infrastructure failures and
interruptions. Supply chains and delivery shipments could be disrupted for an
unknown period of time. In addition, the failure by a supplier or another third
party to ensure Year 2000 capability could have a material adverse effect on the
Company. The costs of the project and the dates on which the Company believes it
will complete Year 2000 remediation and modifications are based on management's
best estimates, which were based on assumptions of future events, including the
continued availability of certain resources, third-party modifications, plans,
and other factors. There can be no assurance that these estimates will be
achieved, and actual results could differ materially from those anticipated.
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 and that 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, capacity installed might be under-utilized,
capital spending may be slowed, and Company performance may be negatively
impacted. Other risks and uncertainties that could negatively impact Company
results include: risk of nonpayment of accounts receivable; risk of inventory
obsolescence due to shifts in market demand; an increased rate of customer
inventory adjustment; deferral of delivery dates, cancellations and returns;
development and acceptance of new products and price pressures; availability and
pricing of competitors' products; lower manufacturing yields; risks associated
with foreign operations and foreign currency fluctuations; adverse results in
litigation involving intellectual property; environmental claims; shareholder
lawsuits; the successful implementation of the Company's announced restructuring
program; the availability of cost effective sources of financing; and business
and general economic conditions in the Company's markets around the world.
22
<PAGE>
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.......................................................................... 21
Financial Statements
Consolidated Statement of Operations for the Fiscal Years Ended June 30, 1998, 1997, and 1996............ 22
Consolidated Balance Sheet as of June 30, 1998 and 1997.................................................. 23
Consolidated Statement of Stockholders' Equity for the Fiscal Years Ended June 30, 1998, 1997, and
1996................................................................................................... 24
Consolidated Statement of Cash Flows for the Fiscal Years Ended June 30, 1998, 1997, and 1996............ 25
Notes to Consolidated Financial Statements............................................................... 26
</TABLE>
Supporting Financial Statement Schedule:
<TABLE>
<CAPTION>
SCHEDULE NO. PAGE
- ------------- -----
<S> <C> <C>
II Valuation and Qualifying Accounts and Reserves for the Fiscal Years Ended June 30, 1998,
1997, and 1996............................................................................. 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.
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
International Rectifier Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of
International Rectifier Corporation and its subsidiaries at June 30, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information required to
be included therein. These financial statements and the financial statement
schedule, as listed on the index on page 20 of this Form 10-K, are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits 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.
PricewaterhouseCoopers LLP
Los Angeles, California
July 23, 1998
24
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues..................................................................... $ 551,891 $ 486,127 $ 576,849
Cost of sales................................................................ 375,727 323,067 351,046
---------- ---------- ----------
Gross profit................................................................. 176,164 163,060 225,803
Selling and administrative expense........................................... 104,661 105,954 102,129
Research and development expense............................................. 39,132 35,495 26,967
Impairment of assets and restructuring charge (Note 4)....................... -- 71,000 --
---------- ---------- ----------
Operating profit (loss).................................................... 32,371 (49,389) 96,707
Other income (expense):
Interest, net.............................................................. (7,288) (4,015) (394)
Other, net................................................................. (494) 714 (383)
---------- ---------- ----------
Income (loss) before income taxes............................................ 24,589 (52,690) 95,930
Provision (benefit) for income taxes (Note 6)................................ 8,114 (9,484) 29,451
---------- ---------- ----------
Net income (loss)............................................................ $ 16,475 $ (43,206) $ 66,479
---------- ---------- ----------
---------- ---------- ----------
Net income per common share--Basic (Note 7).................................. $ 0.32 $ (0.84) $ 1.31
---------- ---------- ----------
---------- ---------- ----------
Net income per common share--Diluted (Note 7)................................ $ 0.32 $ (0.84) $ 1.29
---------- ---------- ----------
---------- ---------- ----------
Average common shares outstanding--Basic (Note 7)............................ 51,248 51,307 50,577
---------- ---------- ----------
---------- ---------- ----------
Average common shares and potentially dilutive securities
outstanding--Diluted (Note 7).............................................. 51,674 51,307 51,384
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
25
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN 000'S EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 32,294 $ 36,564
Short-term investments.................................................................. 13,232 16,850
Trade accounts receivable, less allowance for doubtful accounts
($1,401 in 1998 and $1,043 in 1997)................................................... 129,738 125,481
Inventories............................................................................. 130,653 115,754
Deferred income taxes (Note 6).......................................................... 8,080 18,800
Prepaid expenses........................................................................ 3,253 3,032
---------- ----------
Total current assets.................................................................. 317,250 316,481
Property, plant, and equipment, at cost, less accumulated depreciation
($208,879 in 1998 and $144,852 in 1997)................................................. 390,892 333,559
Other assets.............................................................................. 27,685 29,713
---------- ----------
Total assets.......................................................................... $ 735,827 $ 679,753
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans (Note 2)..................................................................... $ 28,153 $ 12,710
Long-term debt, due within one year (Note 2)............................................ 37,226 19,110
Accounts payable........................................................................ 46,637 40,332
Accrued salaries, wages, and commissions................................................ 15,875 14,517
Other accrued expenses.................................................................. 26,042 26,596
---------- ----------
Total current liabilities............................................................. 153,933 113,265
Long-term debt, less current maturities (Note 2).......................................... 141,528 143,164
Other long-term liabilities............................................................... 29,352 28,982
Deferred income taxes (Note 6)............................................................ 11,364 12,627
Commitments and contingencies (Notes 9, 10, 11, 12, 13, and 14)
Stockholders' equity (Notes 1 and 3):
Common shares, $1 par value, authorized: 60,000,000; issued and outstanding: 51,350,923
shares in 1998 and 51,051,907 shares in 1997.......................................... 51,351 51,052
Preferred shares, $1 par value, authorized: 1,000,000; issued and outstanding: none in
1998 and 1997......................................................................... -- --
Capital contributed in excess of par value of shares.................................... 255,195 252,199
Retained earnings....................................................................... 98,646 82,171
Cumulative translation adjustments.................................................... (5,542) (3,707)
---------- ----------
Total stockholders' equity............................................................ 399,650 381,715
---------- ----------
Total liabilities and stockholders' equity............................................ $ 735,827 $ 679,753
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
26
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN 000'S EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CAPITAL
CONTRIBUTED
IN EXCESS
OF
COMMON PAR VALUE CUMULATIVE
SHARES OF SHARES RETAINED TRANSLATION
(NOTE 1) (NOTE 1) EARNINGS ADJUSTMENTS TOTAL
--------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995.............................. $ 50,360 $ 240,146 $ 58,898 $ (4,223) $ 345,181
Issuance of common shares:
339,090--exercise of stock options................ 339 3,073 -- -- 3,412
122,169--stock purchase plan...................... 122 1,339 -- -- 1,461
Tax benefits from exercise of stock options and
stock purchase plan............................... -- 1,305 -- -- 1,305
Tax benefits from exercise of warrants
(Note 3).......................................... -- 3,525 -- -- 3,525
Net income for the year ended June 30, 1996......... -- -- 66,479 -- 66,479
Cumulative translation adjustments.................. -- -- -- (150) (150)
--------- ----------- ---------- ----------- ----------
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)
Cumulative 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
Cumulative translation adjustments.................. -- -- -- (1,835) (1,835)
--------- ----------- ---------- ----------- ----------
BALANCE, JUNE 30, 1998.............................. $ 51,351 $ 255,195 $ 98,646 $ (5,542) $ 399,650
--------- ----------- ---------- ----------- ----------
--------- ----------- ---------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
27
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)............................................................ $ 16,475 $ (43,206) $ 66,479
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization............................................ 38,937 37,103 30,144
Deferred income.......................................................... (600) (718) 1,594
Deferred income taxes.................................................... 9,452 (15,500) 14,725
Deferred compensation.................................................... (1,892) 3,170 3,015
Impairment of assets and restructuring charge............................ -- 75,000 --
Change in working capital (Note 1)......................................... (16,291) (34,455) (47,373)
---------- ----------- ----------
Net cash provided by operating activities.................................... 46,081 21,394 68,584
Cash flow from investing activities:
Additions to property, plant, and equipment................................ (90,280) (99,762) (112,275)
Purchase of short-term investments......................................... (47,550) (67,000) (68,821)
Proceeds from sale of short-term investments............................... 51,168 68,150 53,821
Investment in other noncurrent assets...................................... (5,596) (9,117) (8,741)
---------- ----------- ----------
Net cash used in investing activities........................................ (92,258) (107,729) (136,016)
Cash flow from financing activities:
Proceeds from issuance of (payments on) short-term bank debt, net.......... 16,922 518 (2,904)
Proceeds from issuance of long-term debt................................... 35,792 119,329 36,495
Payments on long-term debt and obligations under capital leases............ (18,650) (15,511) (9,010)
Net proceeds from issuance of common stock................................. 3,295 2,879 4,873
Increase (decrease) in other long-term liabilities to be financed with
long-term debt........................................................... 6,336 (19,142) 20,295
Other...................................................................... (1,560) (970) 3,523
---------- ----------- ----------
Net cash provided by financing activities.................................... 42,135 87,103 53,272
---------- ----------- ----------
Effect of exchange rate changes on cash and cash equivalents................. (228) 36 (900)
---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents......................... (4,270) 804 (15,060)
Cash and cash equivalents beginning of year.................................. 36,564 35,760 50,820
---------- ----------- ----------
Cash and cash equivalents end of year........................................ $ 32,294 $ 36,564 $ 35,760
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
28
<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 automobiles,
computer/peripherals, office equipment, consumer electronics, lighting,
communications, and industrial.
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
Fiscal year 1998 consists of 53 weeks ending July 5. Fiscal years 1997 and
1996 consist of 52 weeks ending June 29 and June 30, respectively. 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.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's foreign
subsidiaries are measured using the local currency as the functional currency.
Foreign assets and liabilities in the consolidated balance sheet have been
translated at the rate of exchange on the balance sheet date. Revenues and
expenses are translated at the average exchange rate for the year. Unrealized
translation adjustments do not affect the results of operations and are reported
as a separate component of stockholders' equity. Net foreign currency gains and
losses were less than $1 million in each of the years ended June 30, 1998, 1997,
and 1996, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
ADVERTISING
The Company reports the costs of all advertising as expenses in the periods
in which those costs are incurred. The Company shares portions of certain
distributors' advertising expenses through cooperative advertising arrangements.
In fiscal 1998, 1997, and 1996, the Company spent approximately $3,579,000,
$4,078,000, and $1,667,000, respectively, on advertising.
29
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
U.S. income taxes have not been provided on approximately $31,296,000 of
undistributed earnings of foreign subsidiaries since management considers these
earnings to be invested indefinitely or substantially offset by foreign tax
credits.
STOCK SPLIT
On November 20, 1995, the Board of Directors declared a two-for-one split of
the Company's common stock. Shares were distributed on December 22, 1995 to
stockholders of record on December 1, 1995. Stockholders' equity has been
retroactively restated for all periods presented by reclassifying from Capital
Contributed in Excess of Par Value of Shares to Common Shares, the par value of
the additional shares arising from the split. In addition, all references in the
financial statements to number of shares, per share amounts, stock option data,
and market prices of the Company's common stock have been restated to reflect
the split.
NET INCOME PER COMMON SHARE
Net income per common share ("basic EPS") is computed by dividing net income
available to common shareholders (the numerator) by the weighted average number
of common shares outstanding (the denominator) during the period. The
computation of net income per common share--assuming dilution ("diluted EPS") is
similar to the computation of basic EPS 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. No
potentially dilutive securities were used in 1997 as the impact would have been
anti-dilutive.
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,
1998, 1997, and 1996 were comprised of the following (000's):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Trade accounts receivable, net............................ $ (8,381) $ (929) $ (35,760)
Inventories............................................... (16,104) (35,643) (9,890)
Prepaid expenses.......................................... (279) 764 (1,713)
Accounts payable.......................................... 7,106 (847) (6,457)
Accrued salaries, wages, and commissions.................. 1,660 791 2,288
Other accrued expenses.................................... (293) 1,409 4,159
---------- ---------- ----------
$ (16,291) $ (34,455) $ (47,373)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
30
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Supplemental disclosures of cash flow information (000's):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash paid during the year for:
Interest...................................................... $ 7,423 $ 8,633 $ 4,489
Income taxes.................................................. 2,050 3,096 15,760
Interest capitalized............................................ 2,434 1,870 1,371
</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." The Company utilizes the specific identification method
for determining the cost of the investments. At June 30, 1998 and 1997 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, 1998 and 1997 were comprised of
the following (000's):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials......................................................... $ 21,101 $ 25,002
Work-in-process....................................................... 56,224 56,749
Finished goods........................................................ 53,328 34,003
---------- ----------
$ 130,653 $ 115,754
---------- ----------
---------- ----------
</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, 1998, 1997, and 1996 was $38,937,000, $34,916,000, and
$28,958,000, respectively. Property, plant, and equipment at June 30, 1998 and
1997 were comprised of the following (000's):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Buildings and improvements.......................................... $ 122,904 $ 103,235
Equipment........................................................... 417,261 297,960
Construction in progress............................................ 49,382 68,395
Less accumulated depreciation....................................... (208,879) (144,852)
----------- -----------
380,668 324,738
Land................................................................ 10,224 8,821
----------- -----------
$ 390,892 $ 333,559
----------- -----------
----------- -----------
</TABLE>
31
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1998 and 1997 were as follows (000's):
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Equipment.............................................................. $ 14,263 $ 48,513
Less accumulated depreciation.......................................... (9,105) (33,504)
--------- ----------
$ 5,158 $ 15,009
--------- ----------
--------- ----------
</TABLE>
Repairs and maintenance costs are charged to expense. In the fiscal years
ended June 30, 1998, 1997, and 1996, repairs and maintenance costs were
$18,757,000, $16,016,000, and $16,620,000, respectively.
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 INSTRUMENTS
The Company operates internationally, giving rise to exposure to market
risks from changes in foreign exchange rates. The Company enters into forward
contracts and currency options to hedge certain foreign currency denominated
receivables and payables of its foreign subsidiaries. The related gains and
losses on these contracts are included in "Other income (expense)." The Company
does not hold or issue financial instruments for trading purposes.
Forward contracts outstanding at June 30, 1998 had maturities of less than
three months and were denominated in the British Pound Sterling, French Franc,
German Mark, Italian Lira, and Japanese Yen. Counterparties to the transactions
were large financial institutions. At June 30, 1998, the Company had $26,100,000
outstanding in forward contracts and had no outstanding currency options.
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.
32
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 30, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income." This statement will be effective for the Company's fiscal
quarter ending September 30, 1998. SFAS 130 will affect the reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by or distributions to shareholders. The
Company believes that comprehensive income in future periods will fluctuate as a
result of changes in the cumulative translation account, which is a component of
comprehensive income. Net unrealized gains and losses on the Company's
available-for-sale securities, which have not been significant, are also a
component of comprehensive income.
Also on June 30, 1997, the 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
its operating segments in financial statements issued to shareholders 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 131 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented. Management is
currently evaluating the impact, if any, of SFAS 131.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS 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. Management does not believe that this
pronouncement will have a material impact on the notes to the financial
statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes 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 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management is currently evaluating the
impact, if any, of SFAS 133.
RECLASSIFICATION
Certain reclassifications have been made to previously reported amounts to
conform with the current year presentation.
33
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BANK LOANS AND LONG-TERM DEBT
At June 30, 1998, the Company had a total of $45 million in domestic
unsecured credit facilities, against which $40 million had been borrowed. The
outstanding borrowings under these facilities had a weighted average interest
rate of 6.5%. Based on the repayment terms under these facilities, $25 million
of the outstanding borrowings were classified as "Long-term bank debt" in the
balance sheet. The Company also had established $92.5 million in term loan and
equipment-collateralized financing facilities, of which $25.6 million was
outstanding at June 30, 1998. The above facilities contain similar financial
covenants and ratios that affect the availability of funds and restrict the
Company from paying cash dividends.
The Company had an additional $28.4 million of revolving credit facilities
in financial institutions at foreign locations. The interest rates on borrowings
from these facilities range from 1.6% to 8.7% at June 30, 1998. Under the terms
of the agreements, the availability of funds is affected by various financial
covenants and collateral requirements. At June 30, 1998, $13.2 million was
outstanding under these foreign facilities at a weighted average interest rate
of 5.4%.
On August 28, 1998, the Company replaced an existing $2.5 million revolving
line of credit with a new $24.9 million unsecured credit facility, both with the
same foreign bank. The new agreement provides the Company with a five-year $8.3
million revolving line of credit, and a five-year $16.6 million term-loan
facility, with principal retirements beginning after 30 months. The interest
rate on both facilities is based on 1% above the applicable LIBOR rate.
Based on covenant and collateral limitations under the above revolving
credit and term facilities, the Company had a total of $33.9 million available
for borrowing at June 30, 1998.
The following is a summary of the Company's long-term debt and other loans
at June 30, 1998 and 1997 (000's):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Capitalized lease obligations payable in varying monthly installments
primarily at rates from 6.0% to 11.2.%.............................. $ 885 $ 5,273
Domestic bank loans collateralized by equipment, payable in varying
monthly installments at rates from 6.4% to 8.7%, due in 1998 through
2002................................................................ 45,599 39,836
Domestic unsecured bank loans payable in varying monthly installments
at rates from 6.3% to 6.5%, due in 1998 through 2002................ 107,237 99,700
Foreign bank loans collateralized by property and/or equipment,
payable in varying monthly installments at rates from 8.0% to 10.8%,
due in 1998 through 2000............................................ 1,991 3,459
Foreign unsecured bank loans payable in varying monthly installments
at rates from 2.6% to 8.4%, due in 1998 through 2006................ 23,042 14,006
---------- ----------
178,754 162,274
Less current portion of long-term debt................................ (37,226) (19,110)
---------- ----------
$ 141,528 $ 143,164
---------- ----------
---------- ----------
</TABLE>
34
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BANK LOANS AND LONG-TERM DEBT (CONTINUED)
Principal payments on long-term debt are as follows: 1999 $37,226,000; 2000
$47,500,000; 2001 $67,132,000; 2002 $18,420,000; 2003 $8,342,000; and $134,000
thereafter.
During fiscal years 1998, 1997, and 1996, the Company incurred interest
expense of $12,494,000 $9,227,000, and $4,851,000, respectively.
In accordance with SFAS No. 107 "Disclosures About Fair Value of Financial
Instruments," the fair values of the Company's long-term debt has been estimated
based on current rates offered to the Company for debt of the same remaining
maturities. The carrying amounts of the Company's loans 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 1998, 1997 and
1996, 216,655, 182,190, and 122,169 shares were purchased at weighted average
exercise prices of $11.07, $13.66 and $11.96, respectively. Shares authorized
under this plan that remained unissued were 1,440,886, 1,657,541, and 1,839,731
at June 30, 1998, 1997, and 1996, respectively. The weighted average fair value
of ESPP options granted, using the Black Scholes method, in 1998, 1997, and 1996
was $4.31, $5.54, and $4.46 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
these plans, options to purchase shares of the Company's common stock are issued
to employees as well as members of the Company's 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 exercisable
in annual installments of 20%, beginning on the first anniversary date.
The 1984 plan terminated in August 1994. Exercisable options outstanding
under the 1984 Plan may still be exercised according to their terms and expire
between November 1998 and June 1999. During fiscal years 1998, 1997, and 1996,
2,800, 2,400, and 400 shares, respectively, expired under the 1984 plan.
In November 1996, the stockholders of the Company approved an amendment to
the former stock option plan of 1992 ("former 1992 Plan"). The amendment
broadened the types of options and other stock-based awards (e.g., restricted
stock, SARs, and performance shares) that may be granted (under the former 1992
Plan only non-qualified options could be granted), extended the term of the
former 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 1998, only non-qualified options were issued, at market,
under the 1992 Plan. On January 1, 1998, 1997, and 1996, 767,928, 764,078, and
757,165 shares, respectively, were added to the 1992 Plan.
35
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CAPITAL STOCK (CONTINUED)
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, 1998, there
are 107,500 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 1998, only non-qualified
options were issued under the 1997 Plan.
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, 1995....................................... 1,604,400 $ 9.82 --
Options granted................................................ 581,825 19.25 $ 9.86
Options exercised.............................................. (339,090) 10.06 --
Options expired or canceled.................................... (7,200) 13.60 --
----------
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 --
----------
----------
</TABLE>
The following table summarizes significant option groups outstanding at June
30, 1998 and related weighted average price and life information:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING -----------------------------
- ---------------------------------------------------------------------------------- WEIGHTED
NUMBER WEIGHTED AVERAGE NUMBER AVERAGE
OUTSTANDING AT REMAINING LIFE WEIGHTED AVERAGE EXERCISABLE AT EXERCISE
RANGE OF EXERCISE PRICE JUNE 30, 1998 (YEARS) EXERCISE PRICE JUNE 30, 1998 PRICE
- ------------------------------ -------------- ---------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$5.50 to $6.94................ 68,400 4.9 $ 6.16 59,400 $ 6.16
7.00 to 10.31................. 937,650 7.7 8.14 398,800 7.95
11.19 to 16.75................ 1,586,765 8.4 13.81 402,390 13.19
17.44 to 23.81................ 1,701,967 8.4 20.07 318,291 19.58
-------------- --------------
$5.50 to 23.81................ 4,294,782 8.2 $ 14.93 1,178,881 $ 12.79
-------------- --------------
-------------- --------------
</TABLE>
Additional information relating to the 1984, 1992, and 1997 plans at June
30, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Options exercisable.................................... 1,178,881 628,285 379,230
Options available for grant............................ 746,448 710,278 955,290
Total reserved common stock shares for stock option
plans................................................ 5,041,230 3,508,463 2,795,225
</TABLE>
36
<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>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Expected life (years)......................................... 5 5 5
Interest rate................................................. 5.81% 6.43% 6.19%
Volatility.................................................... 49.88% 49.95% 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 -- Diluted would
approximate the following (000's except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Net income (loss)
As reported.............................................. $ 16,475 $ (43,206) $ 66,479
Pro forma................................................ 14,720 (45,273) 65,851
Net income (loss) per common share -- Diluted
As reported.............................................. $ 0.32 $ (0.84) $ 1.29
Pro forma................................................ 0.28 (0.88) 1.28
</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.
WARRANTS
In connection with an April 24, 1991 public offering of the Company's common
stock, 700,000 warrants previously issued by the Company were exercised and sold
as part of the total shares offered. The difference between the exercise price
of the warrants and the public offering price of the stock was treated as
expense to the Company for federal and state income tax purposes. In fiscal year
1996, the income tax benefit of approximately $3,525,000 relating to the
exercise of the warrants was credited to "Capital Contributed in Excess of Par
Value."
4. IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGE
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 include
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 are 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
37
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGE (CONTINUED)
to be paid in connection with the severed employees. The restructuring
activities are expected to occur 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 relate 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 3 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, 1998, the Company had eliminated approximately 190 employees.
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.
As of June 30, 1998, the remaining accrued severance liability was $3.5
million and was classified as "Other accrued expenses"--$0.5 million and "Other
long-term liabilities"--$3 million in the Company's Consolidated Balance Sheet.
38
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. GEOGRAPHIC SEGMENTS AND FOREIGN OPERATIONS
The Company operates in one business segment. Transfers between geographic
areas are made at prices reflecting market conditions. Revenues from
unaffiliated customers are based on the location of the customer. Geographic
segment information, including sales and transfers between geographic areas, for
the fiscal years ended June 30, 1998, 1997, and 1996 is presented below (000's):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues from Unaffiliated Customers
United States............................................................ $ 250,283 $ 219,717 $ 250,252
Europe................................................................... 139,043 118,098 158,853
Asia..................................................................... 145,332 127,984 151,482
Unallocated royalties.................................................... 17,233 20,328 16,262
----------- ----------- -----------
Total.................................................................. $ 551,891 $ 486,127 $ 576,849
----------- ----------- -----------
----------- ----------- -----------
Transfers between Geographic Areas
United States............................................................ $ 90,345 $ 73,637 $ 60,694
Europe................................................................... 133,195 112,434 134,395
Asia..................................................................... 113,191 91,097 97,238
----------- ----------- -----------
Total.................................................................. $ 336,731 $ 277,168 $ 292,327
----------- ----------- -----------
----------- ----------- -----------
Total Revenues
United States............................................................ $ 340,628 $ 293,354 $ 310,946
Europe................................................................... 272,238 230,532 293,248
Asia..................................................................... 258,523 219,081 248,720
Intersegment eliminations................................................ (336,731) (277,168) (292,327)
Unallocated royalties.................................................... 17,233 20,328 16,262
----------- ----------- -----------
Total.................................................................. $ 551,891 $ 486,127 $ 576,849
----------- ----------- -----------
----------- ----------- -----------
Operating Profit (Loss)
United States............................................................ $ 18,347 $ (58,707) $ 82,276
Europe................................................................... 992 2,578 6,704
Asia..................................................................... 13,032 6,740 7,727
----------- ----------- -----------
Total.................................................................. $ 32,371 $ (49,389) $ 96,707
----------- ----------- -----------
----------- ----------- -----------
Identifiable Assets
United States (1)........................................................ $ 464,863 $ 433,684 $ 362,497
Europe................................................................... 137,897 121,311 123,994
Asia..................................................................... 69,900 66,405 43,327
----------- ----------- -----------
Total.................................................................. $ 672,660 $ 621,400 $ 529,818
----------- ----------- -----------
----------- ----------- -----------
U.S. Export Sales to Unaffiliated Customers by Destination of Sale
Europe................................................................... $ 959 $ 3,339 $ 19,863
Asia..................................................................... 16,137 14,611 24,762
Other.................................................................... 4,256 5,785 2,830
----------- ----------- -----------
Total.................................................................. $ 21,352 $ 23,735 $ 47,455
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(1) Excluding general corporate assets.
39
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
Income (loss) before income taxes for the fiscal years ended June 30, 1998,
1997, and 1996 is as follows (000's):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Operations:
Domestic.................................................. $ 14,389 $ (59,536) $ 86,231
Foreign................................................... 10,200 6,846 9,699
--------- ---------- ---------
$ 24,589 $ (52,690) $ 95,930
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The provision (benefit) for income taxes for the fiscal years ended June 30,
1998, 1997, and 1996 consists of (000's):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Current income taxes:
Domestic.................................................. $ (4,940) $ (2,666) $ 16,948
Foreign................................................... 3,597 8,710 2,593
--------- ---------- ---------
(1,343) 6,044 19,541
--------- ---------- ---------
Deferred income taxes:
Domestic.................................................. 9,009 (16,312) 8,695
Foreign................................................... 448 784 1,215
--------- ---------- ---------
9,457 (15,528) 9,910
--------- ---------- ---------
Total provision (benefit)................................. $ 8,114 $ (9,484) $ 29,451
--------- ---------- ---------
--------- ---------- ---------
</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,
1998, 1997, and 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory tax rate (benefit)........................................ 35.0% (35.0)% 35.0%
Change in valuation allowance....................................... 1.5 -- --
Foreign tax differential............................................ 3.7 14.4 1.4
Foreign tax credit benefit.......................................... (5.1) (1.7) (2.0)
Foreign sales corporation benefit................................... -- -- (0.8)
State taxes, net of federal tax benefit............................. (4.8) (0.6) (1.2)
Accrual without tax effect.......................................... -- 5.0 --
Other, net.......................................................... 2.7 (0.1) (1.7)
--- --------- ---
33.0% (18.0)% 30.7%
--- --------- ---
--- --------- ---
</TABLE>
40
<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, 1998 and 1997 are as follows (000's):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation........................................................ $ (51,833) $ (33,460)
Effect of state taxes............................................... (1,907) (1,917)
Other............................................................... (1,805) (1,473)
---------- ----------
Total deferred tax liabilities...................................... (55,545) (36,850)
---------- ----------
Deferred tax assets:
Reserves for books, not deducted.................................... 4,041 9,166
Credit carryovers................................................... 22,600 13,569
Impairment of assets and restructuring charge....................... 16,158 20,769
Inventory adjustment................................................ 1,044 2,991
Net operating loss carryovers....................................... 12,599 --
Other............................................................... 116 1,398
---------- ----------
Total deferred tax assets........................................... 56,558 47,893
Valuation allowance................................................... (4,297) (4,870)
---------- ----------
Net deferred tax asset (liability).................................... $ (3,284) $ 6,173
---------- ----------
---------- ----------
</TABLE>
During fiscal 1998, the Company has an estimated federal net operating loss
("NOL") of $32,965,000, which will be carried forward to offset future taxable
income. In addition, the Company has approximately $4,826,000, $1,399,000 and
$5,968,000, respectively, of foreign tax credits, investment tax credits, and
research and development tax credit carryforwards, available to reduce income
taxes otherwise payable, which expire from 1999 to 2013. In addition, the
Company has approximately $2,784,000 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 $7,622,000 state tax credit, before
valuation allowance, which expires from 2004 to 2006.
Realization of deferred tax assets are 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 $4,297,000 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.
7. NET INCOME PER COMMON SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," for the fiscal
quarter that ended December 31, 1997. This statement requires presentation of
"basic" and "diluted" earnings per share, as defined, on the face of the income
statement for all entities whose capital structure include convertible
41
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NET INCOME PER COMMON SHARE (CONTINUED)
securities and options. The following table provides a reconciliation of the
numerator and denominator of the basic and diluted per-share computations for
the years ended June 30, 1996, 1997 and 1998 (000's):
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- -----------
<S> <C> <C> <C>
Year Ended June 30, 1996
Basic EPS.......................................... $ 66,479 50,577 $ 1.31
Effect of dilutive securities:
Stock options.................................... 807
Diluted EPS.......................................... 66,479 51,384 1.29
------------ ------ -----------
Year Ended June 30, 1997
Basic EPS.......................................... (43,206) 51,307 (0.84)
Effect of dilutive securities:
Stock options.................................... --
Diluted EPS.......................................... (43,206) 51,307 (0.84)
------------ ------ -----------
Year ended June 30, 1998
Basic EPS.......................................... 16,475 51,248 0.32
Effect of dilutive securities:
Stock options.................................... 426
------------ ------ -----------
Diluted EPS.......................................... $ 16,475 51,674 $ 0.32
------------ ------ -----------
------------ ------ -----------
</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 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 years
1998, 1997 and 1996. Combined plan contributions by the Company totaled
$1,261,000, $1,365,000, and $1,021,000 for fiscal years 1998, 1997, and 1996,
respectively.
9. ENVIRONMENTAL MATTERS
Federal, state and local laws and regulations impose various restrictions
and controls on the discharge of certain materials, chemicals, and gases used in
semiconductor processing. The Company does not believe that compliance with such
laws and regulations will have a material adverse effect on the Company's
results of operations, financial position or cash flows.
The Company and Rachelle Laboratories, Inc. ("Rachelle"), its former
pharmaceutical subsidiary which discontinued operations in 1986, have been named
among several hundred entities as potentially responsible parties ("PRPs") under
the provisions of the Comprehensive Environmental Response,
42
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ENVIRONMENTAL MATTERS (CONTINUED)
Compensation and Liability Act of 1980 ("CERCLA"), in connection with the United
States Environmental Protection Agency's ("EPA") investigation 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
CERCLA. The lawsuit against the Company, relating to the first and second
consent decrees, was settled in August 1993 for the sum of $40,000 to avoid
protracted and expensive litigation. The Company recently received an offer from
the EPA by letter dated June 16, 1998 to settle claims against the Company for
the clean up of the OII Site for a payment of $173,580, less a credit of $40,000
for the prior settlement payment, for a net payment of $133,580. The Company
recently accepted the EPA's offer and is waiting for final approval of the
settlement.
The Company 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 three elements of clean-up work at the OII Site for the
sum of $4,953,148 (the final remedy assessment has not yet been made). 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. In its response, dated October 20, 1995, the Company stated its belief
that none of the wastes generated by Rachelle was hazardous. The Company has
received no further communications in connection with the Supplemental
Information Request.
Counsel for Rachelle received a letter from the EPA dated September 30,
1997, requesting Rachelle to participate (with numerous other companies) in the
final remedial actions for the OII Site. Counsel replied on October 21, 1997,
maintaining the position that the fermentation wastes sent to the OII Site by
Rachelle were not toxic and requesting additional information from the EPA. The
amount of Rachelle's potential liability for the final remedy has not been
provided by the EPA and is not presently determinable. The Company cannot
determine with accuracy the amount of the potential demand to Rachelle for the
cost of the final remedy. However, based upon information received to date, the
Company believes that any demand, if made, while likely to be significant,
should nonetheless be substantially below the demand amount for earlier phases
of the OII Site clean-up.
Claims have been made with the Company's insurers with respect to the OII
Site matter, which the insurers have not accepted. There can be no assurance
that the insurance coverage attaches to these claims. The Company does not
believe that either it or Rachelle is responsible for the disposal at the OII
Site of any material constituting hazardous substances under CERCLA. Although
the ultimate resolution of this matter is unknown, the Company believes that it
will not have a material adverse impact on its financial position.
The Company received a letter dated September 9, 1994, from the State of
California Department of Toxic Substances Control stating that the Company may
be a PRP for the deposit of hazardous substances at a facility in Whittier,
California. The Company, in June 1995, 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, of which between $20,000 and
$25,000 is presently expected to be allocated to the Company. However, the
ultimate cost borne by the Company will depend on the extent of the clean-up
undertaken by the group and the actual clean-up costs and the final allocation
scheme agreed upon by the group. Further, a tentative settlement offer has been
proposed by the group of PRPs to small contributors like the Company that would
allow the Company to pay a lump sum in settlement of its clean-up
43
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ENVIRONMENTAL MATTERS (CONTINUED)
obligations. If the proposal is confirmed, it is currently expected that the
Company could settle its liability by the payment of approximately $40,000 to
$60,000. At this time the Company is unable to predict when or if the settlement
proposal will be consummated.
10. COMMITMENTS
The future minimum lease commitments under non-cancelable capital and
operating leases of equipment and real property at June 30, 1998 are as follows
(000's):
<TABLE>
<CAPTION>
CAPITAL OPERATING TOTAL
FISCAL YEARS LEASES LEASES COMMITMENTS
- ---------------------------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
1999...................................................... $ 912 $ 3,347 $ 4,259
2000...................................................... 10 2,708 2,718
2001...................................................... -- 2,406 2,406
2002...................................................... -- 1,223 1,223
2003...................................................... -- 1,184 1,184
Later years............................................... -- 2,713 2,713
Less imputed interest..................................... (38) -- (38)
----- ----------- -------------
Total minimum lease payment............................... $ 884 $ 13,581 $ 14,465
----- ----------- -------------
----- ----------- -------------
</TABLE>
Total rental expense on all operating leases charged to income was
$7,698,000, $8,552,000, and $8,193,000 in fiscal years 1998, 1997, and 1996,
respectively.
11. INTELLECTUAL PROPERTY RIGHTS
Certain of the Company's fundamental power MOSFET patents have been, and
continue to be, subjected to reexamination in the United States Patent and
Trademark Office ("PTO"). The Company's 5,008,725 and 5,130,767 patents are
currently undergoing reexamination in the PTO. The Board of Patent Appeals of
the PTO issued decisions in November 1997, May 1998 and August 1998 upholding
the patentability of the Company's U.S. patents 4,593,302, 4,642,666, and
4,959,699, respectively. A reexamination certificate has been issued for the
4,593,302 patent, and a notice of intent to issue such a certificate, dated July
17, 1998, has been received for the 4,642,666 patent.
12. LITIGATION
On January 16, 1998, the Company filed suit in Federal District Court in Los
Angeles, California against Samsung Semiconductor, Inc. and Samsung Electronics
Co., Ltd., alleging infringement of the Company's U.S. patents 4,959,699 and
4,705,759. The suit seeks customary relief in such matters. The complaint was
amended on August 12, 1998 to add the Company's U.S. patent 4,642,666 to the
suit.
On June 3, 1998, the Federal District Court granted the Company's motion for
a preliminary injunction prohibiting Samsung Semiconductor, Inc. and Samsung
Electronics Co., Ltd. from importing into or making, using, selling or offering
for sale in the U.S. IGBTs (Insulated Gate Bipolar Transistors) designated by
Samsung part number SGL60N90D. Samsung is appealing this order.
On August 21, 1998, the Company filed suit in Federal District Court in Los
Angeles, California against Fuji Electric Co., Ltd. and Collmer Semiconductor,
Inc., alleging infringement of the Company's U.S. patents 4,959,699, 4,705,759,
4,642,666, and 4,974,059. The suit seeks customary relief in such matters.
44
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LITIGATION (CONTINUED)
The Company and certain of its directors and officers have been named as
defendants in three class action lawsuits filed in Federal District Court in
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. The complaints generally allege
that the Company and the other defendants made materially false statements or
omitted to state material facts 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.
The District Court on March 31, 1997 rendered a decision on a motion for
summary judgment brought by the Company and certain of its directors and
officers. The Court 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 are seeking reversal of these
orders.
On January 28, 1998, the Court issued several rulings. 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. The plaintiffs are seeking reversal of
these rulings.
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 financial condition and results of operations. Trial of this
action against the Company is scheduled for February 1, 1999.
No provision for any liability that may result upon adjudication of these
matters has been made in the consolidated financial statements.
13. 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 and in
August 1994 to $632,500. Mr. Lidow was not awarded a bonus in fiscal year 1998.
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
45
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EXECUTIVE AGREEMENT (CONTINUED)
year end, the pension would have been equal to $821,250 per year for the
remainder of Mr. Lidow's life and $574,500 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
Coopers & Lybrand L.L.P. 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 1998, the Company's Compensation Committee and Mr. Lidow renegotiated his
executive agreement by eliminating the pension provisions referred to above. The
Compensation Committee then recommended adoption of the renegotiated agreement
by the Board. In making its recommendation to the Board, the Compensation
Committee considered, among other things, its and Mr. Lidow's desire to limit
the sale of his shares of IR Common Stock to meet commitments and its 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 "Related Party Transactions." Amendments were
thereafter made to the agreement that cancelled 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, $1,500,000 of
which was distributed to Mr. Lidow in fiscal 1998. 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 no longer
entitled to receive any payments under the agreement after Mr. Lidow's
employment with the Company ceases.
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 will not
be able to deduct any compensation in excess of $1,000,000 paid to Mr. Lidow in
fiscal 1998 and may not be able to deduct any such amount in fiscal 1999.
14. 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. The year
1998, for example is represented in such a two digit system as "98". Beginning
in the year 2000, these systems will need to be modified to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies may need to be adapted to meet these
requirements.
The Company has adopted the definition of Year 2000 conformity published by
the British Standards Institute (BSI) as DISC PD2000-1. The adoption of this
standard as a target for compliance does not guarantee that the Company's
products or operations will be in full Year 2000 conformity as detailed in this
definition. Currently, none of the Company's products contain date processing
logic. The Company therefore represents to purchasers that its products are Year
2000 compliant pursuant to the BSI DISC PD2000-1 definition.
The Company has established a Global Year 2000 Team as well as local site
teams. Both the Global and the local site teams consist of management as well as
operational and information technology staff members. The Global 2000 Team was
formed to address company-wide Year 2000 issues, such as overall project
integration and management, project schedules, and reporting to management.
Local site teams address research and remediation for site specific equipment,
facilities, and suppliers. Both the Global and local site teams are divided into
the following functional areas: (1) factory equipment and facilities,
46
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. YEAR 2000 READINESS (CONTINUED)
(2) customers, suppliers, and business partners, (3) desktop and network
hardware and software systems, and (4) mid-range computer and manufacturing
systems. Worldwide, the Company currently employs approximately 70 employees
that are addressing the Year 2000 issue, 20 of whom are engaged in this effort
on a full-time basis. The Company currently has budgeted $5.0 million for the
cost of investigation and remediation for the period August, 1997 to March,
2000. The budget includes staff salaries and remediation expenses.
International Rectifier prioritized efforts to prepare its 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 plans to remediate its systems
in phases, first establishing an inventory and then assessing, correcting,
testing, and certifying compliance.
The Company's Year 2000 plan is on schedule. Remediation efforts are well
underway with a milestone of May, 1999 for which corrective actions for critical
items are to be completed. There can be no assurance, however, that serious and
complicated remediation problems will not arise during the remainder of the
project.
The Company is currently engaged in surveying its suppliers and business
partners, including banks and other financial institutions with whom the Company
engages in integrated transactions, regarding whether they are Year 2000
compliant. The survey is not yet complete and, accordingly, the Company is
currently unable to evaluate the extent to which such entities may be Year 2000
compliant and the effect that their non-compliance might have on the Company.
The Company has established programs to ensure that current and future purchases
of equipment and software are Year 2000 compliant.
The Company is in the process of developing contingency plans in the event
the Company or its significant customers, suppliers or vendors are not Year 2000
compliant by January 1, 2000. There can be no assurance that the Company will be
able to develop a contingency plan that will adequately address every issue that
may arise in the year 2000. For this reason, it is possible that the Company may
suffer failures in embedded microprocessors that result in the malfunctioning of
the basic infrastructure of various buildings. The software that controls
manufacturing processes may malfunction, resulting in a shutdown in assembly or
packaging. The computers used in business and office operations may experience
failures 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.
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 or results of operations. However, because of the
uncertainties in this area, no assurances can be given in this regard. The
Company is subject to external forces that might generally affect industry and
commerce, such as utility or transportation infrastructure failures and
interruptions. Supply chains and delivery shipments could be disrupted for an
unknown period of time. In addition, the failure by a supplier or another third
party to ensure Year 2000 capability could have a material adverse effect on the
Company. The costs of the project and the dates on which the Company believes it
will complete Year 2000 remediation and modifications are based on management's
best estimates, which were based on assumptions of future events, including the
continued availability of certain resources, third-party modifications, plans,
and other factors. There can be no assurance that these estimates will be
achieved, and actual results could differ materially from those anticipated.
47
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS
In June 1998, after discussing with Eric Lidow his desire to limit the 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 loans were disbursed in two
installments of $600,000, in June and July 1998. Both loans were due December
31, 1998 and on September 23, 1998, Mr. Lidow repaid them with accrued interest
of $23,497. Contemporaneously, the Company amended his executive agreement. See
"Executive Agreement".
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows (000's except per share
data):
<TABLE>
<CAPTION>
NET INCOME
GROSS NET INCOME (LOSS) PER COMMON
REVENUES PROFIT (LOSS) SHARE--DILUTED
---------- --------- ---------- -------------------
<S> <C> <C> <C> <C>
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
1997
1st Quarter........................... $ 115,193 $ 38,812 $ 3,057 $ 0.06
2nd Quarter........................... 118,007 40,335 3,404 0.07
3rd Quarter........................... 122,750 42,322 3,874 0.08
4th Quarter........................... 130,177 41,591 (53,541) (1.04)
</TABLE>
- ------------------------
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 23, 1998, which will be filed with the
Securities and Exchange Commission within 120 days after June 30, 1998, and
which is incorporated herein by reference. Certain information concerning the
Executive Officers of the Company is included in Part I. See "Additional Item"
page 10.
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 20.
b. Exhibits filed as part of this report are listed on the Exhibit Index on
page 45.
c. No reports on Form 8-K were filed during the quarter ended June 30,
1998.
The accompanying notes are an integral part of this statement.
48
<PAGE>
EXHIBIT INDEX
Incorporated By Reference:
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM DOCUMENT
- ----------- ------------------------------------------------- -------------------------------------------------
<C> <S> <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>
49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM DOCUMENT
- ----------- ------------------------------------------------- -------------------------------------------------
<C> <S> <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
February 29, 1996, and June 28, 1996 No. 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, or 15(d) of the Securities Exchange Act of 1934
N.A. 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
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM DOCUMENT
- ----------- ------------------------------------------------- -------------------------------------------------
<C> <S> <C>
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 for Fiscal Years Ended June 30, 1995 and 1996,
of June 6, 1996 Commission File No. 1-7935
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 for Fiscal Year Ended June 30, 1996, Commission
June 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 or 15(d) of the Securities Exchange Act of 1934
Sumitomo Trust & Banking Co., LTD., Los Angeles for Fiscal Year Ended June 30, 1997, Commission
Agency 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
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM DOCUMENT
- ----------- ------------------------------------------------- -------------------------------------------------
<C> <S> <C>
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
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
</TABLE>
52
<PAGE>
SUBMITTED HEREWITH:
See page 20 for an index of Financial Statements and Financial Statement
Schedule being filed as part of this report.
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM DOCUMENT
- ----------- ------------------------------------------------- -------------------------------------------------
<C> <S> <C>
*10(ab) Amendment to Executive Employment Agreement dated
May 15, 1991 between International Rectifier
Corporation and Eric Lidow amended as of June
22, 1998
*10(ac) Amendment to International Rectifier Corporation
Grantor Trust for Retirement Benefits for Eric
Lidow, dated October 24, 1995, and amended as
of February 22, 1996 and June 22, 1998.
*10(ad) Amendment to International Rectifier Corporation
Grantor Trust for Retirement Benefits for Eric
Lidow, dated October 24, 1995, and amended as
of February 22, 1996, June 22, 1998 and August
5, 1998.
*10(ae) Amendment to Executive Employment Agreement dated
May 15, 1991 between International Rectifier
Corporation and Eric Lidow amended as of June
22, 1998 and August 5, 1998.
*21 List of Subsidiaries
*23 Consent of Independent Accountants
*27 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed with the Commission.
53
<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)
Date: September 20, 1999 By: /s/ MICHAEL P. MCGEE
-----------------------------------------
Michael P. McGee
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
</TABLE>
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 20, 1999
Eric Lidow
/s/ ALEXANDER LIDOW
- ------------------------------ Director, Chief Executive September 20, 1999
Alexander Lidow Officer
/s/ DEREK B. LIDOW
- ------------------------------ Director, Chief Executive September 20, 1999
Derek B. Lidow Officer
/s/ ROBERT J. MUELLER
- ------------------------------ Director, Executive Vice September 20, 1999
Robert J. Mueller President
/s/ GEORGE KRSEK
- ------------------------------ Director September 20, 1999
George Krsek
/s/ JACK O. VANCE
- ------------------------------ Director September 20, 1999
Jack O. Vance
/s/ ROCHUS E. VOGT
- ------------------------------ Director September 20, 1999
Rochus E. Vogt
/s/ DONALD S. BURNS
- ------------------------------ Director September 20, 1999
Donald S. Burns
/s/ JAMES D. PLUMMER
- ------------------------------ Director September 20, 1999
James D. Plummer
/s/ MINORU MATSUDA
- ------------------------------ Director September 20, 1999
Minoru Matsuda
</TABLE>
54
<PAGE>
SCHEDULE II
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN 000'S)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED TO
BEGINNING OF COST AND CHARGED TO BALANCE AT END
DESCRIPTION PERIOD EXPENSES OTHER DEDUCTIONS(1) OF PERIOD
- ------------------------------------------- ------------- ----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
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 $ (2,327) $ -- $ (177) $ 3,580
1996
Allowance for doubtful accounts............ $ 901 $ 421 $ -- $ (308) $ 1,014
Deferred tax valuation allowance........... $ -- $ -- $ -- $ -- $ --
Inventory valuation reserve................ $ 5,029 $ 6,503 $ -- $ (5,448) $ 6,084
</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.
F-1
