UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from_______ to_______
Commission file number 1-5442
General Semiconductor, Inc.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3575653
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Melville Park Road, Melville, New York 11747
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(516) 847-3000
(Registrant's telephone number, including area code)
----------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 29, 1998
- ------------------------ -------------------------------
Common Stock, par value $0.01 36,819,898
<PAGE>
GENERAL SEMICONDUCTOR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGES
PART I. FINANCIAL INFORMATION
---------------------
Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1998 (unaudited) and December 31, 1997 2
Consolidated Statements of Operations for the Three
and Nine Months ended September 30, 1998 and 1997 (unaudited) 3
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1998 and 1997 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
PART II. OTHER INFORMATION
-----------------
Legal Proceedings 15
Exhibits 15
SIGNATURE 16
<PAGE>
PART I
FINANCIAL INFORMATION
GENERAL SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Stock Par Value)
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997 (1)
--------- ----------
Current Assets:
<S> <C> <C>
Cash ......................................................................... $ 4,037 $ 5,192
Accounts receivable, less reserves of $795
and $825, respectively .................................................. 55,122 54,077
Inventories .................................................................. 36,070 34,309
Prepaid expenses and other current assets .................................... 12,793 9,890
Deferred income taxes ........................................................ 9,782 14,263
--------- ---------
Total current assets .................................................... 117,804 117,731
Property, plant and equipment - net .......................................... 222,358 218,752
Excess of cost over fair value of net assets acquired, less accumulated
amortization of $42,642 and $38,784, respectively ........................ 164,037 167,895
Deferred income taxes, net of valuation allowance ............................ 28,968 26,509
Intangibles and other assets, less accumulated amortization of $10,631 and
$9,228, respectively ..................................................... 20,878 19,418
--------- ---------
TOTAL ASSETS ................................................................. $ 554,045 $ 550,305
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................................. $ 20,399 $ 38,332
Accrued expenses ............................................................. 36,957 58,352
Current portion of long-term debt ............................................ -- 4,310
--------- ---------
Total current liabilities ............................................... 57,356 100,994
Long-term debt ............................................................... 293,000 263,764
Deferred income taxes ........................................................ 19,434 21,710
Other non-current liabilities ................................................ 75,174 77,476
--------- ---------
Total liabilities ....................................................... 444,964 463,944
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, $0.01 par value; 20,000 shares authorized; no shares issued . -- --
Common Stock, $0.01 par value; 400,000 shares authorized; 36,924
and 36,887 shares issued, respectively .................................. 369 369
Retained earnings ............................................................ 115,575 93,308
Other stockholders' equity ................................................... (6,863) (7,316)
--------- ---------
--------- ---------
109,081 86,361
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................... $ 554,045 $ 550,305
========= =========
</TABLE>
(1) The consolidated balance sheet as of December 31, 1997 has been derived
from the audited financial statements at that date and condensed.
See notes to consolidated financial statements.
<PAGE>
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES .......................................... $ 97,223 $ 95,568 $ 302,382 $ 276,448
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of sales .................................. 70,497 64,906 211,720 219,445
Selling, general and administrative ............ 11,519 10,291 34,769 32,868
Research and development ....................... 1,503 1,673 4,466 4,923
Amortization of excess of cost over fair value
of net assets acquired ...................... 1,286 1,286 3,858 3,857
--------- --------- --------- ---------
Total operating costs and expenses ........ 84,805 78,156 254,813 261,093
--------- --------- --------- ---------
OPERATING INCOME ................................... 12,418 17,412 47,569 15,355
Other income (expense) - net ....................... (3) 65 (84) 76
Interest expense-net ............................... (5,239) (3,976) (15,213) (9,316)
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ................................ 7,176 13,501 32,272 6,115
Provision for income taxes ......................... (1,220) (4,995) (10,005) (6,318)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS ........... 5,956 8,506 22,267 (203)
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of income tax
benefit of $1,258 and expense of $22,073 in 1997 .. -- (21,149) -- (2,939)
--------- --------- --------- ---------
NET INCOME (LOSS) .................................. $ 5,956 $ (12,643) $ 22,267 $ (3,142)
========= ========= ========= ---------
Weighted Average Shares Outstanding:
Basic ............................................ 36,820 36,374 36,808 34,957
Diluted .......................................... 36,824 37,116 36,898 34,957
Basic earnings (loss) per share:
Continuing operations ............................. $ 0.16 $ 0.23 $ 0.60 $ (0.01)
Discontinued operations ........................... -- (0.58) -- (0.08)
--------- --------- --------- ---------
Net income (loss) ................................. $ 0.16 $ (0.35) $ 0.60 $ (0.09)
========= ========= ========= =========
Diluted earnings (loss) per share:
Continuing operations ............................. $ 0.16 $ 0.23 $ 0.60 $ (0.01)
Discontinued operations ........................... -- (0.57) -- (0.08)
--------- --------- --------- ---------
Net income (loss) ................................ $ 0.16 $ (0.34) $ 0.60 $ (0.09)
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
------ -----
OPERATING ACTIVITIES:
<S> ........................................................... <C> <C>
Income (loss) from continuing operations ..................... $ 22,267 $ (203)
Adjustments to reconcile to net cash
provided by continuing operating activities:
Depreciation and amortization ............................. 18,424 18,202
Changes in assets and liabilities:
Accounts receivable .................................. (1,045) (13,294)
Inventories .......................................... (1,761) 2,273
Prepaid expenses and other current assets ............ (2,903) (4,635)
Other non-current assets ............................. (1,726) (1,488)
Deferred income taxes ................................ 528 (3,831)
Accounts payable and accrued expenses ................ (14,702) 11,730
Other non-current liabilities ........................ (2,302) 4,296
Other ..................................................... (327) (104)
--------- ---------
Net cash provided by continuing operating activities .......... 16,453 12,946
--------- ---------
Cash (used in) provided by discontinued operations ............ (25,177) 144,970
--------- ---------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment ............ (17,780) (18,347)
Proceeds from sale of short-term investments .............. -- 24,972
--------- ---------
Net cash (used in) provided by investing activities ........... (17,780) 6,625
--------- ---------
FINANCING ACTIVITIES:
Costs associated with the issuance of debt and Common Stock -- (1,049)
Net borrowing (repayments) from revolving credit facilities 71,000 (185,000)
Redemption of Convertible Junior Subordinated Notes ....... -- (245)
Principal repayment of debt ............................... (46,074) (2,155)
Exercise of stock options ................................. 423 18,305
--------- ---------
Net cash provided by (used in) financing activities ........... 25,349 (170,144)
--------- ---------
Decrease in cash and cash equivalents ......................... (1,155) (5,603)
--------- ---------
Cash and cash equivalents, beginning of period ................ 5,192 20,252
--------- ---------
Cash and cash equivalents, end of period ...................... $ 4,037 $ 14,649
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(All amounts in thousands, except per share data)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
General Semiconductor, Inc. (the "Company" or "General Semiconductor") is a
world leader in the discrete segment of the semiconductor industry. The Company
designs, manufactures and sells low-to medium-power rectifiers, small signal
transistors and transient voltage suppression ("TVS") components in axial,
bridge, surface mount and array packages. Power rectifiers, small signal devices
and TVS products are semiconductors that are essential components of most
electronic devices and systems. Rectifiers convert alternating current (AC) into
direct current (DC) which can be utilized by electronic equipment. TVS devices
provide protection from electrical surges, ranging from electrostatic discharge
to induced lightning. Small signal devices amplify or switch low level currents.
The Company's products are primarily targeted for use in the computer,
automotive, telecommunications, lighting and consumer electronics industries.
General Instrument Corporation ("GI") (i) transferred all the assets and
liabilities relating to the manufacture and sale of broadband communications
products used in the cable television, satellite, and telecommunications
industries and all rights to the related GI trademarks to its wholly-owned
subsidiary NextLevel Systems, Inc. ("NextLevel") and all the assets and
liabilities relating to the manufacture and sale of coaxial, fiber optic and
other electric cable used in the cable television, satellite and other
industries to its wholly-owned subsidiary CommScope, Inc. ("CommScope") and (ii)
distributed all of the outstanding shares of capital stock of each of NextLevel
and CommScope to its stockholders on a pro rata basis as a dividend (the
"Distribution") in a transaction that was finalized on July 28, 1997 (the
"Distribution Date"). On the Distribution Date, NextLevel and CommScope began
operating as independent entities with publicly traded common stock. GI retained
no ownership interest in either NextLevel or CommScope. Concurrent with the
Distribution, GI changed its name to General Semiconductor, Inc. and effected a
one for four reverse stock split. On February 2, 1998, NextLevel changed its
name to General Instrument Corporation ("General Instrument").
The revenues, costs and expenses, assets and liabilities and cash flows of the
businesses transferred to General Instrument and CommScope (the "Discontinued
Operations"), (See Note 2 below), have been excluded from the respective
captions in the Consolidated Statements of Operations and Consolidated
Statements of Cash Flows and have been reported as "Loss from discontinued
operations", net of applicable income taxes, for the three and nine months ended
September 30, 1997 and as "Cash (used in) provided by discontinued operations"
for the nine months ended September 30, 1998 and 1997. In this report, all share
and per share amounts have been retroactively restated to reflect the reverse
stock split. For the purpose of governing certain of the ongoing relationships
among General Semiconductor, General Instrument and CommScope after the
Distribution, these entities entered into various agreements that provided for
an orderly transition, the separation and distribution of the operating assets
and liabilities and pension plan assets and liabilities of GI, as well as tax
sharing, and other matters.
In the opinion of management, the accompanying unaudited consolidated financial
statements include all necessary adjustments (consisting of normal recurring
adjustments) and present fairly the Company's financial position as of September
30, 1998, the results of its operations for the three and nine months ended
September 30, 1998 and 1997, and its cash flows for the nine months ended
September 30, 1998 and 1997 in conformity with generally accepted accounting
principles for interim financial information applied on a consistent basis.
There were no adjustments of a non-recurring nature recorded during the nine
months ended September 30, 1998 and 1997 except for the charges discussed in
Note 2 below. The results of operations for the three and nine months ended
September 30, 1998, are not necessarily indicative of the results to be expected
for the full year. For further information, refer to the consolidated financial
statements and footnotes thereto included in General Semiconductor's Annual
Report on Form 10-K for the year ended December 31, 1997.
<PAGE>
2. DISCONTINUED OPERATIONS
Net sales from Discontinued Operations included in the statement of operations
were $143.1 million and $1.3 billion for the three and nine months ended
September 30, 1997. Discontinued operations also includes charges of $20.8
million and $52.9 million, net of applicable income taxes, for the three and
nine months ended September 30, 1997 for costs incurred primarily related to
severance and the separation of the Taiwan operations of GI between General
Semiconductor and General Instrument and for professional fees and certain other
costs incurred directly related to the Distribution.
In connection with the Distribution, the Company also recorded in income from
continuing operations pre-tax charges of $0.1 million and $32.8 million to cost
of sales and $0.1 million and $1.2 million to selling, general and
administrative expenses during the three and nine months ended September 30,
1997, respectively, incurred principally in connection with the separation of
the Taiwan operations between General Semiconductor and General Instrument.
3. INVENTORIES
Inventories consist of:
September 30, 1998 December 31, 1997
------------------ -----------------
Raw materials $ 4,759 $ 7,181
Work in process 15,374 12,052
Finished goods 15,937 15,076
------ ------
$36,070 $34,309
====== ======
4. LONG-TERM DEBT
Long-term debt consists of:
September 30, 1998 December 31, 1997
------------------ -----------------
Senior indebtedness:
Revolving credit facility $293,000 $222,000
Taiwan loan - 46,074
-------- -------
293,000 268,074
Less: current maturities - 4,310
-------- -------
$293,000 $263,764
======= =======
At December 31, 1997 the Company had a $60.0 million loan agreement with a
consortium of banks in Taiwan. On February 26, 1998 the Company consolidated its
debt and refinanced the entire Taiwan loan balance of $46.1 million with
proceeds from borrowings under its $350.0 million credit facility which matures
on December 31, 2002.
The Company entered into two interest rate swap transactions with a term of one
year beginning on January 22, 1998 pursuant to which it pays a fixed interest
rate averaging 5.96% on a notional amount of $100 million. The Company began
receiving interest on the $100 million notional amount based on a three month
LIBOR rate set quarterly beginning on January 22, 1998. During February 1998,
the Company purchased two interest rate caps each with a notional amount of $50
million. The caps became effective on April 27, 1998 and June 29, 1998 with
terms of nine months and six months, respectively. Under the terms of the caps,
the Company will receive from the counterparties the incremental amount, if any,
associated with the three month LIBOR rate in excess of 6% on the notional
amounts. The cost of the caps was immaterial.
<PAGE>
The effect of the swap agreements and the caps to the Company is to reduce its
amount of debt subject to floating interest rates.
Net interest expense included in the Consolidated Statements of Operations
through the Distribution Date represents an allocation based upon General
Semiconductor's net assets as a percentage of total assets of GI.
5. INCOME TAXES
General Semiconductor, General Instrument and CommScope entered into a tax
sharing agreement (the "Tax Sharing Agreement") that defines the parties' rights
and obligations with respect to federal, state and other income or franchise
taxes relating to the businesses of GI for tax periods prior to, including and
following the Distribution and with respect to certain other tax matters.
General Instrument is responsible for consolidated federal income taxes,
consolidated or combined state income taxes and separate state income taxes of
GI and its subsidiaries and preparation and filings of the applicable returns
through July 25, 1997. Such liability will be determined assuming a closing of
the books on July 25, 1997. Liability for foreign income taxes and other taxes
will generally be allocated to the legal entity on which such taxes are imposed
except that liability for taxes relating to the transferred businesses (as
defined in the Tax Sharing Agreement) will generally be allocated to General
Instrument.
Notwithstanding the above, each of General Instrument, CommScope and General
Semiconductor is responsible for any such taxes to the extent that such taxes
are attributable to action taken by that entity or its affiliates after the
Distribution that is inconsistent with the tax treatment contemplated in the tax
ruling received from the Internal Revenue Service. The Company believes that the
Tax Sharing Agreement is fair to each of the parties and contains terms which
generally are comparable to those which would have been reached at arms-length
negotiations with unaffiliated parties.
The provision for income taxes is computed utilizing the Company's expected
annual effective income tax rate. The Company's effective tax rate for the nine
months ended September 30, 1998 decreased to 31% from 37% for the nine months
ended September 30, 1997, excluding the charges incurred in connection with the
separation of GI's Taiwan operations, due primarily to an increased proportion
of income of foreign subsidiaries taxed at rates lower than the U.S. rate.
The tax effects of temporary differences that give rise to the deferred tax
assets at September 30, 1998 and December 31, 1997 consist principally of
accrued employee benefits and environmental liabilities. Deferred tax
liabilities for the periods presented primarily relate to foreign tax
withholding liabilities.
6. LITIGATION
A securities class action is presently pending in the United States District
Court for the Northern District of Illinois, Eastern Division, In Re General
Instrument Corporation Securities Litigation. This action, which consolidates
numerous class action complaints filed in various courts between October 10 and
October 27, 1995, is brought by plaintiffs, on their own behalf and as
representatives of a class of purchasers of GI common stock during the period
March 21, 1995 through October 18, 1995. The complaint alleges that prior to the
Distribution, GI and certain of its officers and directors, as well as Forstmann
Little & Co. and certain related entities, violated the federal securities laws,
namely, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), by allegedly making false and misleading
statements and failing to disclose material facts about GI's planned shipments
in 1995 of its CFT-2200 and DigiCipher II products. Also pending in the same
court, under the same name, is a derivative action brought on behalf of GI. The
derivative action alleges that the members of GI's Board of Directors, several
of its officers and Forstmann Little & Co. and related entities have breached
their fiduciary duties by reason of the matter complained of in the class action
and the defendants' alleged use of material non-public information to sell
shares of GI common stock for personal gain. The court had granted the
defendants' motions to dismiss the original complaints in both of these actions,
<PAGE>
but allowed the plaintiffs in each action an opportunity to file amended
complaints. Amended complaints were filed on November 7, 1997. The defendants
have answered the amended consolidated complaint in the class actions, denying
liability, and have filed a renewed motion to dismiss the derivative action. On
September 22, 1998, defendants' motion to dismiss the derivative action was
denied.
An action entitled BKP Partners, L.P. v. General Instrument Corp. was brought in
February 1996 by certain holders of preferred stock of Next Level Communications
("NLC"), which was merged into a subsidiary of GI in September 1995. The action
was originally filed in the Northern District of California and was subsequently
transferred to the Northern District of Illinois. The plaintiffs allege that the
defendants violated federal securities laws by making misrepresentations and
omissions and breached fiduciary duties to NLC in connection with the
acquisition of NLC by GI. Plaintiffs seek, among other things, unspecified
compensatory and punitive damages and attorney's fees and costs. On September
23, 1997 the district court dismissed the complaint, without prejudice, and the
plaintiffs were given until November 7, 1997 to amend their complaint. On
November 7, 1997, plaintiffs served the defendants with amended complaints,
which contain allegations substantially similar to those in the original
complaint. The defendants have filed a motion to dismiss parts of the amended
complaint and have answered the balance of the amended compliant, denying
liability. On September 22, 1998, the district court dismissed with prejudice
the portion of the complaint alleging violations of Section 14(a) of the
Exchange Act, and denied the remainder of defendants' motion to dismiss.
In connection with the Distribution, General Instrument agreed to indemnify the
Company with respect to its obligations, if any, arising out of or relating to
In Re General Instrument Corporation Securities Litigation (including the
derivative action), and the BKP Partners, L.P. v. General Instrument Corp.
litigation. Therefore, management is of the opinion that the resolution of these
matters will have no effect on the Company's consolidated financial position,
results of operations or cash flows.
General Semiconductor is not a party to any pending legal proceedings other than
various claims and lawsuits arising in the normal course of business and those
for which they are indemnified. Management is of the opinion that such
litigation or claims will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to various federal, state, local and foreign laws and
regulations governing environmental matters, including the use, discharge and
disposal of hazardous materials. The Company's manufacturing facilities are
believed to be in substantial compliance with current laws and regulations.
Complying with current laws and regulations has not had a material adverse
effect on the Company's financial condition. In connection with the
Distribution, the Company retained the obligations with respect to environmental
matters relating to the Company's discontinued operations and its status as a
"potentially responsible party." The Company is involved in remediation
programs, principally with respect to former manufacturing sites, which are
proceeding in connection with federal and state regulatory oversight.
Accordingly, the Company is currently named as a "potentially responsible party"
with respect to the disposal of wastes at nine hazardous waste sites located in
six states.
The Company has engaged independent consultants to assist management in
evaluating potential liabilities related to environmental matters. Management
assesses the input from these independent consultants along with other
information known to the Company in its effort to continually monitor these
potential liabilities. Management assesses its environmental exposure on a
site-by-site basis, including those sites where the Company has been named as a
"potentially responsible party". Such assessments include the Company's share of
remediation costs, information known to the Company concerning the size of the
hazardous waste sites, their years of operation and the number of past users and
their financial viability. The Company has recorded a reserve for environmental
matters of $32.4 million at September 30, 1998 ($34.9 million at December 31,
1997). While the ultimate outcome of these matters cannot be determined,
management does not believe that the final disposition of these matters will
have a material adverse effect on the Company's financial position, results of
operations or cash flows beyond the amounts previously provided for in the
financial statements.
<PAGE>
Based on the factors discussed above, capital expenditures and expenses for the
Company's remediation programs, and the proportionate share of the cost of the
necessary investigation and eventual remedial work that may be needed to be
performed at the sites for which the Company has been named as a "potentially
responsible party", are not expected to have a material adverse effect on the
Company's financial position, results of operations or cash flows. The Company's
present and past facilities have been in operation for many years, and over that
time in the course of those operations, such facilities have used substances
which are or might be considered hazardous, and the Company has generated and
disposed of wastes which are or might be considered hazardous. Therefore, it is
possible that additional environmental issues may arise in the future, which the
Company cannot now predict.
8. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share" during 1997. In accordance with this pronouncement, the
Company retroactively adopted this standard and restated all historical earnings
per share data contained in this report. SFAS 128 requires presentations of
"basic" and "diluted" earnings per share.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the applicable periods. Diluted earnings per share computations are based on net
income adjusted for interest and amortization of debt issuance costs related to
convertible debt, if dilutive, and the weighted average number of common shares
outstanding adjusted for the dilutive effect of stock options and convertible
securities. The diluted earnings per share calculation assumes the exercise of
stock options using the treasury stock method.
Set forth below are reconciliations of the numerators and denominators of the
basic and diluted per share computations for the three and nine months ended
September 30, 1998 and 1997. The effect of outstanding options and Convertible
Junior Subordinated Notes (the "Notes") for the nine months ended September 30,
1997 was anti-dilutive.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, 1998 Ended September 30, 1998
------------------------ ------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS
<S> <C> <C> <C> <C> <C> <C>
Income available to
common stockholders $5,956 36,820 $0.16 $22,267 36,808 $0.60
Effect of Dilutive Securities
Options 4 90
------ ------
Diluted EPS
Income available to
common stockholders
plus assumed
conversions $5,956 36,824 $0.16 $22,267 36,898 $0.60
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, 1997 Ended September 30, 1997
------------------------ ------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS
Income (loss) available
<S> <C> <C> <C> <C> <C> <C>
to common stockholders $8,506 36,374 $0.23 $(203) 34,957 $(0.01)
Effect of Dilutive Securities
Options 742 -
------- -----
Diluted EPS
Income (loss) available to
common stockholders
plus assumed
conversions $8,506 37,116 $0.23 $(203) 34,957 $(0.01)
</TABLE>
9. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130 "Reporting Comprehensive Income" in 1998. For
the nine months ended September 30, 1998 and 1997 there are no items of other
comprehensive income as defined in the pronouncement.
During 1998 the Financial Accounting Standards Board issued SFAS No.'s 132
"Employers' Disclosures about Pensions and other Postretirement Benefits" and
133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 132
standardizes the disclosure requirements for pensions and other postretirement
benefits and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and is effective for fiscal years beginning after December 15, 1997.
The Company will implement SFAS 132 as of December 31, 1998. SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires that an entity recognize all derivatives as
either assets or liabilities and measure those instruments at fair value. SFAS
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. The Company is evaluating the impact SFAS 133 will have on its
financial statements.
<PAGE>
GENERAL SEMICONDUCTOR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis pertains to the continuing
operations of General Semiconductor, Inc., unless otherwise noted, and describes
changes in the Company's financial condition since December 31, 1997.
RESULTS OF OPERATIONS:
- ---------------------
NET SALES
- ---------
Net sales for the three months ended September 30, 1998 increased $1.6 million
to $97.2 million from $95.6 million for the comparable prior year period due to
the inclusion of small signal product revenues (business acquired on October 1,
1997) primarily in Europe, partly offset by lower worldwide average selling
prices (approximating 10%) and unfavorable foreign exchange rate fluctuations in
Japan. For the nine months ended September 30, 1998 net sales increased $26.0
million to $302.4 million from $276.4 million for the comparable prior year
period due to the inclusion of small signal product revenues described above and
higher volume in the base business in North America and Europe. The increase was
partly offset by lower worldwide average selling prices described above and
unfavorable foreign exchange rate fluctuations in Europe and Japan. Orders
decreased 3% for the three months ended September 30, 1998 from the comparable
prior year period primarily due to lower selling prices.
COST OF SALES
- -------------
Cost of sales for the three and nine months ended September 30, 1998 of $70.5
million and $211.7 million compares to $64.9 million and $219.4 million for the
corresponding prior year periods. Cost of sales increased $5.6 million and $25.0
million, excluding pre-tax charges of $32.7 million for the nine months ended
September 30, 1997 for severance and costs related to the separation of the
Taiwan operations of GI, principally due to increased volume in the base
business in addition to the inclusion of small signal product sales.
Accordingly, gross margin for the three and nine months ended September 30, 1998
represents 27.5% and 30.0% of net sales, respectively, compared with 32.1% and
32.5% in the comparable prior periods, excluding the charges noted above. This
decrease relates to a change in the mix of the products sold and erosion of
average selling prices partially offset by continued cost controls and the
effect of favorable foreign exchange rate fluctuations, primarily related to the
New Taiwan Dollar.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses of $11.5 million and $34.8 million
for the three and nine months ended September 30, 1998 increased from $10.3
million and $32.9 million for the comparable prior year periods. The $1.2
million increase is due, in part, to higher operating costs incurred as a
stand-alone company for the three months ended September 30, 1998. Additionally,
the three months ended September 30, 1997 included a reduction in variable
selling expense and the settlement of an environmental matter that did not occur
during the three months ended September 30, 1998. For the nine months ended
September 30, 1998 selling, general and administrative expenses increased $3.1
million from $31.7 million, excluding a $1.1 million pre-tax charge recorded in
June, 1997 for transaction costs related to the Distribution, due primarily to
higher operating costs to support increased revenues.
<PAGE>
NET INTEREST EXPENSE
- ---------------------
Net interest expense increased to $5.2 million and $15.2 million for the three
and nine months ended September 30, 1998 from $4.0 million and $9.3 million for
the corresponding prior year periods. Net interest expense for the three and
nine months ended September 30, 1997 represents an allocation upon General
Semiconductor's net assets as a percentage of total assets of GI throughout the
Distribution date. Pro forma net interest expense, assuming a net debt level of
$275.0 million through the Distribution Date and amortization of debt issuance
costs associated with the new borrowings, would have been $4.9 million and $14.7
million, respectively, for the three and nine months ended September 30, 1997.
INCOME TAXES
- ------------
The provision for income taxes is computed utilizing the Company's expected
annual effective income tax rate. The Company's effective tax rate for the nine
months ended September 30, 1998 decreased to 31% from 37% for the nine months
ended September 30, 1997, excluding the charges incurred in connection with the
separation of GI's Taiwan operations, due primarily to an increased proportion
of income of foreign subsidiaries taxed at rates lower than the U.S. rate.
DISCONTINUED OPERATIONS
- -----------------------
The net operating results of the businesses transferred to General Instrument
and CommScope have been reported, net of applicable income taxes, as "Income
from discontinued operations". Discontinued operations also includes charges of
$20.8 million and $52.9 million, net of applicable income taxes, for the three
and nine months ended September 30, 1997, respectively, for costs incurred
primarily related to severance and the separation of the Taiwan operations of GI
and for professional fees and certain other costs incurred directly related to
the Distribution.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital at September 30, 1998 was $60.4 million compared to $16.7
million at December 31, 1997. The working capital increase of $43.7 million
resulted primarily from payments of the remaining liabilities related to the
Distribution totaling $25.2 million, the refinancing of the Taiwan loan
discussed below, payment of year-end incentives and a decrease in income taxes
payable. As a result, the current ratio increased to 2.1 to 1 at September 30,
1998 compared with 1.2 to 1 at December 31, 1997.
During the nine months ended September 30, 1998, the Company invested $17.8
million in property, plant and equipment compared with $18.3 million for the
corresponding prior year period. While the Company does not have any material
commitments for capital expenditures it does expect to invest approximately
$30.0 million in capital expenditures for the year ended December 31, 1998
principally directed to strategic initiatives and automation.
Debt increased to $293.0 million at September 30, 1998 compared to $268.1
million at December 31, 1997 including current maturities primarily to fund the
remaining payments related to the Distribution of $25.2 million made during the
six months ended June 30, 1998. On February 26, 1998, the Company consolidated
its debt and refinanced the entire Taiwan loan balance of $46.1 million with
proceeds from borrowings under its $350.0 million credit facility which matures
on December 31, 2002. At September 30, 1998 there were $11.0 million of letters
of credit outstanding that reduce the amount that can be borrowed against the
credit facility.
The Company generated cash flow from operations but experienced an overall
decrease in cash for the nine months ended September 30, 1998 due primarily to
the remaining payments related to the Distribution discussed above. As of
September 30, 1997 the Company had $14.6 million cash and cash equivalents
principally to finance the acquisition of the small signal products business on
October 1, 1997.
<PAGE>
General Semiconductor's primary cash needs on both a short and long-term basis
are for capital expenditures and other general corporate purposes. The Company
believes that it has adequate liquidity to meet its current and anticipated
needs from the results of its operations, working capital and the existing
credit facility. There can be no assurance, however, that future
industry-specific developments or general economic trends will not adversely
affect the Company's operations or its ability to meet its cash requirements.
YEAR 2000
- ---------
The Company recognizes the importance of ensuring that neither its customers nor
its business operations are disrupted as a result of Year 2000 software
failures. The Company, with the assistance of outside consulting resources, is
centrally coordinating activities directed toward achieving global Year 2000
compliance. The primary areas of potential impact include business application
systems, production equipment systems, suppliers, financial institutions,
government agencies and environmental support organizations. None of the
Company's products contain date sensitive or date processing logic.
In 1996 the Company began an upgrade of its business applications software which
includes the implementation of the full suite of JD Edwards ("JDE") financial,
distribution and manufacturing applications. The JDE software was selected to
add worldwide functionality and efficiency to the business processes of the
Company as well as address a major area of Year 2000 exposure. The financial and
distribution modules have already been installed. Implementation of the JDE
manufacturing modules is scheduled for the third quarter of 1999. In-house
developed applications will be tested for compliance by December 31, 1998.
Since the suite of JDE applications being installed is Year 2000 compliant,
incremental costs beyond the scope of this project, estimated at less than $1.0
million, do not have a material effect on the Company's results of operations
and are being expensed as incurred.
The Company has surveyed its suppliers, financial institutions, government
agencies and other vendors with which it does business to determine their Year
2000 readiness and coordinate conversion efforts. Survey results should be
received and evaluated by December 31, 1998. The Company is prepared to perform
on-site visits to validate the accuracy of the information received and will
test such systems where appropriate and possible. Additionally, the Company has
established programs to ensure that future purchases of equipment and software
are Year 2000 compliant. Costs incurred have been insignificant to date.
The Company expects to finalize Year 2000 contingency plans in the second
quarter of 1999 once risks associated with the JDE manufacturing module
installation have been assessed. Contingency costs, if required, approximate
$0.5 million.
At the present time, the Company does not expect Year 2000 issues to have a
material adverse affect on its products, services, competitive position,
financial condition or results of operations. However, the Company can give no
assurance that the systems of other companies on which the Company relies upon
will be converted on time or that a failure to convert by another company or a
conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company.
NEW EUROPEAN CURRENCY
- ---------------------
A New European currency (Euro) is planned for introduction beginning in January
1999 to replace the separate currency of several individual countries. The
Company will need to modify its payroll, benefits and pension systems, contracts
with suppliers and customers and internal financial reporting systems to be able
to process transactions in the new currency. Although a three-year transition
period is expected during which transactions can be made in the old currencies,
this may require dual currency processes until the conversion is complete. The
Company is identifying issues involved and will develop and implement solutions.
The cost of this effort is not expected to be material and will be expensed as
incurred. There is no guarantee, however, that all problems will be foreseen and
corrected, or that no material disruption of our business will occur. The
conversion to the Euro is not expected to have competitive implications on our
pricing and marketing strategies; however, any such impact is not known at this
time.
<PAGE>
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. The Company's Form 10-K for the year ended
December 31, 1997, the Company's 1997 Annual Report to Stockholders, this and
any other Form 10-Q or Form 8-K of the Company, or any oral or written
statements made by or on behalf of the Company, may include forward-looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are
identified by their use of such terms and phrases as "intends," "intend,"
"intended," "goal," "estimate," "estimates," "expects," "expect," "expected,"
"project," "projects," "projected," "projections," "plans," "anticipates,"
"anticipated," "should," "designed to," "foreseeable future," "believe,"
"believes", "scheduled" and similar expressions. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date the statement was made. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
Reference is made to the cautionary statements contained in Exhibit 99 to this
Form 10-Q for a discussion of the factors that may cause actual results to
differ from the results discussed in these forward-looking statements.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Note 6 to the Consolidated Financial Statements.
Item 6. Exhibits
(a) Exhibits
4.1 Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock
27 Financial Data Schedule
99 Forward-Looking Information
(b) Reports on Form 8-K
The Company filed a Form 8-K with the Securities and Exchange
Commission ("SEC"), dated July 1, 1998, to report under Item 5
of that Form that a press release was issued to the public on
June 29, 1998 regarding the Company's sales and earnings. A
copy of the press release was filed as an exhibit to the Form
8-K.
The Company filed a Form 8-K with the SEC, dated July 22,
1998, to report under Item 5 of that Form that a press release
was issued to the public on July 22, 1998 regarding the
Company's sales and earnings. A copy of the press release was
filed as an exhibit to the Form 8-K.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL SEMICONDUCTOR, INC.
November 10, 1998 /s/Andrew M. Caggia
- ----------------- -------------------
Date Andrew M. Caggia
Senior Vice President and Chief Financial Officer
Signing both in his capacity as Senior Vice President
on behalf of the Registrant and as Chief Financial
Officer of the Registrant
<PAGE>
Exhibit 4.1
GENERAL SEMICONDUCTOR, INC.
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES A JUNIOR PARTICIPATING
PREFERRED STOCK
(Pursuant to Section 151
of the General Corporation Law of the State of Delaware)
I, Stephen B. Paige, Senior Vice President, General Counsel and Secretary
of General Semiconductor, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), in
accordance with the provisions of Section 103 thereof, do hereby certify:
That pursuant to the authority conferred upon the Board of Directors by the
Corporation's Restated and Amended Certificate of Incorporation (the
"Certificate of Incorporation"), the Board of Directors on January 6, 1997,
adopted the following resolution creating a series of 400,000 shares of
Preferred Stock designated as Series A Junior Participating Preferred Stock:
WHEREAS, the Certificate of Incorporation provides that the Corporation is
authorized to issue 20,000,000 shares of preferred stock, none of which are
outstanding, now therefore it is.
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation by Article FOURTH of the Certificate of Incorporation, a
series of Preferred Stock of the Corporation be, and it hereby is, created out
of the authorized but unissued shares of the capital stock of the Corporation,
such series to be designated Series A Junior Participating Preferred Stock (the
"Participating Preferred Stock"), to consist of four hundred thousand (400,000)
shares, par value $.01 per share, of which the preferences and relative and
other rights, and the qualifications, limitations or restrictions thereof, shall
be as follows:
1. Future Increase or Decrease.
Subject of paragraph 4(e) of this resolution, the number of shares of said
series may at any time or from time to time be increased or decreased by the
Board of Directors notwithstanding that shares of such series may be outstanding
at such time of increase or decrease.
2. Dividend Rate.
(a) The holders of shares of Participating Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash on
the first day of each November, February, May and August in each year (each such
date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Participating Preferred Stock, in an amount
per share (rounded to the nearest cent) equal to the greater of (a) $10.00 or
(b) 1,000 times the aggregate per share amount of all cash dividends and 1,000
times the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared on the Common Stock, par value $.01 per share, of the
Corporation (the "Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of
Participating Preferred Stock.
<PAGE>
(b) On or after the first issuance of any share or fractional share of
Participating Preferred Stock, no dividend on Common Stock shall be declared
unless concurrently therewith a dividend or distribution is declared on the
Participating Preferred Stock as provided in paragraph (a) above; and the
declaration of any such dividend on the Common Stock shall be expressly
conditioned upon payment or declaration of and provision for a dividend on the
Participating Preferred Stock as above provided. In the event no dividend or
distribution shall have been declared on the Common Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $10.00 per share on the Participating
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding shares
of Participating Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Participating Preferred Stock,
unless the date of issue of such shares is prior to the record date for the
first Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the date
of issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Participating Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue and
be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. The Board of Directors may fix a record date
for the determination of holders of shares of Participating Preferred Stock
entitled to receive payment of a dividend distribution declared thereon, which
record date shall be no more than 30 days prior to the date fixed for the
payment thereof.
3. Dissolution, Liquidation and Winding Up.
In the event of any voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Corporation (hereinafter referred to as a
"Liquidation"), the holders of Participating Preferred Stock shall receive at
least $100.00 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Participating Preferred Stock shall be
entitled to receive at least an aggregate amount per share equal to 1,000 times
the aggregate amount to be distributed per share to holders of Common Stock (the
"Participating Preferred Liquidation Preference").
4. Voting Rights.
The holders of shares of Participating Preferred Stock shall have the
following voting rights:
(a) Each share of Participating Preferred Stock shall entitle the holder
thereof to one thousand (1,000) votes on all matters submitted to a vote of the
stockholders of the Corporation.
(b) Except as otherwise provided herein, or by law, the Certificate of
Incorporation or the Amended and Restated By-laws of the Corporation (the
"By-laws"), the holders of shares of Participating Preferred Stock and the
holders of shares of Common Stock shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(c) If and whenever dividends on the Participating Preferred Stock shall be
in arrears in an amount equal to six quarterly dividend payments, then and in
such event the holders of the Participating Preferred Stock, voting separately
as a class (subject to the provisions of subparagraph (d) below), shall be
entitled at the next annual meeting of the stockholders or at any special
meeting to elect two (2) directors. Each share of Participating Preferred Stock
shall be entitled to one vote, and holders of fractional shares shall have the
right to a fractional vote. Upon election, such directors shall become
additional directors of the Corporation and the authorized number of directors
of the Corporation shall thereupon be automatically increased by such number of
directors. Such right of the holders of Participating Preferred Stock to elect
directors may be exercised until all dividends in default on the Participating
Preferred Stock shall have been paid in full, and dividends for the current
dividend period declared and funds therefor set apart, and when so paid and set
apart, the right of the holders of Participating Preferred Stock to elect such
number of directors shall cease, the term of such directors shall thereupon
terminate, and the authorized number of directors of the Corporation shall
thereupon return to the number of authorized directors otherwise in effect, but
subject always to the same provisions for the vesting of such special voting
rights in the case of any such future dividend default or defaults. The fact
that dividends have been paid and set apart as required by the preceding
sentence shall be evidenced by a certificate executed by the President and the
chief financial officer of the Corporation and delivered to the Board of
Directors. The directors so elected by holders of Participating Preferred Stock
shall serve until the certificate described in the preceding sentence shall have
been delivered to the Board of Directors or until their respective successors
shall be elected or appointed and qualify.
<PAGE>
At any time when such special voting rights have been so vested in the
holders of the Participating Preferred Stock, the Secretary of the Corporation
may, and upon the written request of the holders of record of 10% or more of the
number of shares of the Participating Preferred Stock then outstanding addressed
to such Secretary at the principal office of the Corporation in the State of
Illinois, shall, call a special meeting of the holders of the Participating
Preferred Stock for the election of the directors to be elected by them as
hereinabove provided, to be held in the case of such written request within
forty (40) days after delivery of such request, and in either case to be held at
the place and upon the notice provided by law and in the By-laws of the
Corporation for the holding of meetings of stockholders; provided, however, that
the Secretary shall not be required to call such a special meeting (i) if any
such request is received less than ninety (90) days before the date fixed for
the next ensuing annual or special meeting of stockholders or (ii) if at the
time any such request is received, the holders of Participating Preferred Stock
are not entitled to elect such directors by reason of the occurrence of an event
specified in the third sentence of subparagraph (d) below.
(d) if, at any time when the holders of Participating Preferred Stock are
entitled to elect directors pursuant to the foregoing provisions of this
paragraph 4, the holders of any one or more additional series of Preferred Stock
are entitled to elect directors by reason of any default or event specified in
the Certificate of Incorporation, as in effect at the time of the certificate of
designation for such series, and if the terms for such other additional series
so permit, the voting rights of the two or more series then entitled to vote
shall be combined (with each series having a number of votes proportional to the
aggregate liquidation preference of its outstanding shares). In such case, the
holders of Participating Preferred Stock and of all such other series then
entitled so to vote, voting as a class, shall elect such directors. If the
holders of any such other series have elected such directors prior to the
happening of the default or event permitting the holders of Participating
Preferred Stock to elect directors, or prior to a written request for the
holding of a special meeting being received by the Secretary of the Corporation
from the holders of not less than 10% of the then outstanding shares of
Participating Preferred Stock, then such directors so previously elected will be
deemed to have been elected by and on behalf of the holders of Participating
Preferred Stock as well as such other series, without prejudice to the right of
the holders of Participating Preferred Stock to vote for directors if such
previously elected directors shall resign, cease to serve or fail to stand for
reelection while the holders of Participating Preferred Stock are entitled to
vote. If the holders of any such other series are entitled to elect in excess of
two (2) directors, the Participating Preferred Stock shall not participate in
the election of more than two (2) such directors, and those directors whose
terms first expire shall be deemed to be the directors elected by the holders of
Participating Preferred Stock; provided that, if at the expiration of such terms
the holders of Participating Preferred Stock are entitled to vote in the
election of directors pursuant to the provisions of this paragraph 4, then the
Secretary of the Corporation shall call a meeting (which meeting may be the
annual meeting or special meeting of stockholders referred to in
subparagraph (c)) of holders of Participating Preferred Stock for the purpose of
electing replacement directors (in accordance with the provisions of this
paragraph 4) to be held on or prior to the time of expiration of the expiring
terms referred to above.
(e) Except as otherwise set forth herein or required by law, the
Certificate of Incorporation or the By-laws, holders of Participating Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for the taking of any corporate action. No consent of
the holders of outstanding shares of Participating Preferred Stock at any time
outstanding shall be required in order to permit the Board of Directors to:
(i) increase the number of authorized shares of Participating Preferred Stock or
to decrease such number to a number not below the sum of the number of shares of
Participating Preferred Stock then outstanding and the number of shares with
respect to which there are outstanding rights to purchase; or (ii) to issue
Preferred Stock which is senior to the Participating Preferred Stock, junior to
the Participating Preferred Stock or on a parity with the Participating
Preferred Stock.
5. Redemption.
The shares of Participating Preferred Stock shall not be redeemable.
6. Conversion Rights.
The Participating Preferred Stock is not convertible into Common Stock or
any other security of the Corporation.
IN WITNESS WHEREOF, the undersigned Senior Vice President, General Counsel
and Secretary of the Corporation declares under penalty or perjury the truth, to
the best of his knowledge, of this Certificate of Designation, Preferences and
Rights of Series A Junior Participating Preferred Stock.
Executed this 25th day of July, 1997 in Melville, New York
By: /s/ Stephen B. Paige
Stephen B. Paige,
Senior Vice President,
General Counsel and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000040656
<NAME> General Semiconductor, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,037
<SECURITIES> 0
<RECEIVABLES> 55,122
<ALLOWANCES> 795
<INVENTORY> 36,070
<CURRENT-ASSETS> 117,804
<PP&E> 222,358
<DEPRECIATION> 0
<TOTAL-ASSETS> 554,045
<CURRENT-LIABILITIES> 57,356
<BONDS> 0
0
0
<COMMON> 369
<OTHER-SE> 108,712
<TOTAL-LIABILITY-AND-EQUITY> 554,045
<SALES> 302,382
<TOTAL-REVENUES> 302,382
<CGS> 211,720
<TOTAL-COSTS> 254,813
<OTHER-EXPENSES> 84
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,213
<INCOME-PRETAX> 32,272
<INCOME-TAX> 10,005
<INCOME-CONTINUING> 22,267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,267
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
</TABLE>
Exhibit 99
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. The Company's Form 10-K for the year ended
December 31, 1997, the Company's 1997 Annual Report to Stockholders, any Form
10-Q or Form 8-K of the Company, or any other oral or written statements made by
or on behalf of the Company, may include forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are identified by their use of
such terms and phrases as "intends," "intend," "intended," "goal," "estimate,"
"estimates," "expects," "expect," "expected," "project," "projects,"
"projected," "projections," "plans," "anticipates," "anticipated," "should,"
"designed to," "foreseeable future," "believe," "believes" and "scheduled" and
similar expressions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statement was
made. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
The actual results of the Company may differ significantly from the results
discussed in forward-looking statements. Factors that might cause such a
difference include, but are not limited to, (a) the general political, economic
and competitive conditions in the United States, Taiwan (Republic of China), the
People's Republic of China, Ireland, Germany, France and other markets where the
Company operates; (b) changes in capital availability or costs, such as changes
in interest rates, market perceptions of the industry in which the Company
operates, or security ratings; (c) uncertainties relating to customer plans and
commitments; (d) employee workforce factors; (e) authoritative generally
accepted accounting principles or policy changes from such standard-setting
bodies as the Financial Accounting Standards Board and the Securities and
Exchange Commission and the factors set forth below.
Factors Relating to the Distribution
On January 7, 1997, the Board of Directors of General Instrument Corporation
("GI") approved a plan to divide GI into three separate public companies. To
effect the transaction, GI (i) transferred all the assets and liabilities
relating to the manufacture and sale of broadband communications products used
in the cable television, satellite, and telecommunications industries and all
rights to the related GI trademarks to its wholly-owned subsidiary NextLevel
Systems, Inc. ("NextLevel Systems") and all the assets and liabilities relating
to the manufacture and sale of coaxial, fiber optic and other electric cable
used in the cable television, satellite and other industries to its wholly-owned
subsidiary CommScope, Inc. ("CommScope") and (ii) then distributed all of the
ordinary shares of capital stock of each of NextLevel Systems and CommScope to
its stockholders on a pro rata basis as a dividend (the "Distribution"), in a
transaction that was consummated on July 28, 1997 (the "Distribution Date"). The
Company retained all the assets and liabilities relating to the manufacture and
sale of discrete power rectifiers and transient voltage suppression components
used in telecommunications, automotive and consumer electronics products. On the
Distribution Date, NextLevel Systems and CommScope began operating as
independent entities with publicly traded common stock. GI retained no ownership
interest in either NextLevel Systems or CommScope. Concurrently with the
Distribution, GI changed its name to General Semiconductor, Inc. and effected a
one for four reverse stock split. On February 2, 1998, NextLevel Systems changed
its name to General Instrument Corporation.
The Distribution Agreement dated as of June 12, 1997, among GI, General
Instrument Corporation, and CommScope (the "Distribution Agreement") and certain
other agreements executed in connection with the Distribution (collectively, the
"Ancillary Agreements") allocate among the Company, General Instrument
Corporation and CommScope, and their respective subsidiaries, responsibility for
various indebtedness, liabilities and obligations. It is possible that a court
would disregard this contractual allocation of indebtedness, liabilities and
obligations among the parties and require the Company or its subsidiaries to
assume responsibility for obligations allocated to another party, particularly
if such other party were to refuse or was unable to pay or perform any of its
allocated obligations.
Pursuant to the Distribution Agreement and certain of the Ancillary Agreements,
the Company has agreed to indemnify the other parties (and certain related
persons) from and after consummation of the Distribution with respect to certain
indebtedness, liabilities and obligations, which indemnification obligations
could be significant.
Although GI has received a favorable ruling from the Internal Revenue Service,
if the Distribution were not to qualify as a tax free spin-off (either because
of the nature of the Distribution or because of events occurring after the
Distribution) under Section 355 of the Internal Revenue Code of 1986, as
amended, then, in general, a corporate tax would be payable by the consolidated
group of which the Company was the common parent based upon the difference
between the fair market value of the stock distributed and the distributing
corporation's adjusted basis in such stock. The corporate level tax would be
payable by the Company and could substantially exceed the net worth of the
Company. However, under certain circumstances, General Instrument Corporation
and CommScope have agreed to indemnify the Company for such tax liability. In
addition, under the consolidated return rules, each member of the consolidated
group (including General Instrument Corporation and CommScope) is severally
liable for such tax liability.
Leverage; Certain Restrictions Under Credit Facilities
The Company is substantially more leveraged than GI was prior to the
Distribution. The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
product development, acquisitions, general corporate purposes or other purposes
may be impaired; (ii) a portion of the Company's and its subsidiaries' cash flow
from operations must be dedicated to the payment of the principal of and
interest on its indebtedness; (iii) the Credit Agreement, dated as of July 23,
1997, among the Company, certain banks, and The Chase Manhattan Bank, as
Administrative Agent, contains certain restrictive financial and operating
covenants, including, among others, requirements that the Company satisfy
certain financial ratios; (iv) a significant portion of the Company's borrowings
will be at floating rates of interest, causing the Company to be vulnerable to
increases in interest rates; (v) the Company's degree of leverage may make it
more vulnerable to a downturn in general economic conditions; and (vi) the
Company's degree of leverage may limit its flexibility in responding to changing
business and economic conditions.
In addition, in a lawsuit by an unpaid creditor or representative of creditors,
such as a trustee in bankruptcy, a court may be asked to void the Distribution
(in whole or in part) as a fraudulent conveyance and to require that the
stockholders return the special dividend (in whole or in part) to the Company or
require the Company to fund certain liabilities of General Instrument
Corporation and CommScope for the benefit of creditors.
Competition
The Company operates in the discrete segment of the semiconductor business. Its
products are commodity-like in nature and are subject to cyclical variations in
pricing and capacity utilization levels. The Company is subject to competition
from a substantial number of foreign and domestic companies, some of which have
greater financial, engineering, manufacturing and other resources, or offer a
broader product line, than the Company. The Company's competitors can be
expected to continue to improve the design and performance of their products and
to introduce new products with competitive price and performance
characteristics. Although the Company believes that it enjoys certain
technological and other advantages over its competitors, realizing and
maintaining such advantages will require continued investment by the Company in
engineering, research and development, marketing and customer service and
support. There can be no assurance that the Company will have sufficient
resources to continue to make such investments or that the Company will be
successful in maintaining such advantages.
International Operations
A significant portion of the Company's products are manufactured or assembled in
Taiwan (Republic of China), the People's Republic of China, Ireland, Germany,
and France. These foreign operations are subject to the usual risks inherent in
situating operations abroad, including risks with respect to currency exchange
rates, economic and political destabilization, restrictive actions by foreign
governments, nationalizations, the laws and policies of the United States
affecting trade, foreign investment and loans, and foreign tax laws. The
Company's cost-competitive status relative to other competitors could be
adversely affected if the Company experiences unfavorable movements in foreign
currency rates. In addition, a substantial portion of the annual sales of the
Company's business are outside of the United States.
Sales to the Asia Pacific region accounted for approximately 40% of the
Company's worldwide sales for the year ended December 31, 1997. During 1998
order trends and average selling prices have weakened significantly reflecting
the current economic and currency difficulties in Southeast Asia, the economic
slowdown in Japan and the difficulties in the computer and computer peripherals
industries. However, approximately 50% of the Company's production is currently
in Taiwan, the cost of which has benefited from the weakened New Taiwan Dollar
in relation to the U.S. dollar. Additionally, extended underutilization of the
Company's manufacturing facilities, resulting in production inefficiency, could
result in margin deterioration. There can be no assurance as to the extent or
duration of the impact of these events on the Company.
Environment
The Company is subject to various federal, state, local and foreign laws and
regulations governing environmental matters, including the use, discharge and
disposal of hazardous materials. The Company's manufacturing facilities are
believed to be in substantial compliance with current laws and regulations.
Complying with current laws and regulations has not had a material adverse
effect on the Company's financial condition. In connection with the
Distribution, the Company retained the obligations with respect to environmental
matters relating to the Company's discontinued operations and its status as a
"potentially responsible party." The Company is involved in remediation
programs, principally with respect to former manufacturing sites, which are
proceeding in connection with federal and state regulatory oversight.
Accordingly, the Company is currently named as a "potentially responsible party"
with respect to the disposal of hazardous wastes at nine hazardous waste sites
located in six states.
The Company has engaged independent consultants to assist management in
evaluating potential liabilities related to environmental matters. Management
assesses the input from these independent consultants along with other
information known to the Company in its effort to continually monitor these
potential liabilities. Management assesses its environmental exposure on a
site-by-site basis, including those sites where the Company has been named a
"potentially responsible party." Such assessments include the Company's share of
remediation costs, information known to the Company concerning the size of the
hazardous waste sites, their years of operation and the number of past users and
their financial viability. The Company has recorded a reserve for environmental
matters of $32.5 million at September 30, 1998 ($34.9 million at December 31,
1997). While the ultimate outcome of these matters cannot be determined,
management does not believe that the final disposition of these matters will
have a material adverse affect on the Company's financial position, results of
operations or cash flows beyond the amounts previously provided for in the
financial statements.
The Company's present and past facilities have been in operation for many years,
and over that time in the course of those operations, such facilities have used
substances which are or might be considered hazardous, and the Company has
generated and disposed of wastes which are or might be considered hazardous.
Therefore, it is possible that additional environmental issues may arise in the
future which the Company cannot now predict.
Year 2000
The Company recognizes the importance of ensuring that neither its customers nor
its business operations are disrupted as a result of Year 2000 software
failures. The Company, with the assistance of outside consulting resources, is
centrally coordinating activities directed toward achieving global Year 2000
compliance. The primary areas of potential impact include business application
systems, production equipment systems, suppliers, financial institutions,
government agencies and environmental support organizations. None of the
Company's products contain date sensitive or date processing logic.
In 1996 the Company began an upgrade of its business applications software which
includes the implementation of the full suite of JD Edwards ("JDE") financial,
distribution and manufacturing applications. The JDE software was selected to
add worldwide functionality and efficiency to the business processes of the
Company as well as address a major area of Year 2000 exposure. The financial and
distribution modules have already been installed. Implementation of the JDE
manufacturing modules is scheduled for the third quarter of 1999. In-house
developed applications will be tested for compliance by December 31, 1998.
Since the suite of JDE applications being installed is Year 2000 compliant,
incremental costs beyond the scope of this project, estimated at less than $1.0
million, do not have a material effect on the Company's results of operations
and are being expensed as incurred.
The Company has surveyed its suppliers, financial institutions, government
agencies and other vendors with which it does business to determine their Year
2000 readiness and coordinate conversion efforts. Survey results should be
received and evaluated by December 31, 1998. The Company is prepared to perform
on-site visits to validate the accuracy of the information received and will
test such systems where appropriate and possible. Additionally, the Company has
established programs to ensure that future purchases of equipment and software
are Year 2000 compliant. Costs incurred have been insignificant to date.
The Company's contingency plans to date have been focused on the stability of
its supply chain as described above. The Company expects to finalize material
supply and product delivery contingency plans in the second quarter of 1999 once
risks associated with the JDE manufacturing module installation have been
assessed. Contingency costs, if required, approximate $0.5 million.
At the present time, the Company does not expect Year 2000 issues to have a
material adverse affect on its products, services, competitive position,
financial condition or results of operations. However, the Company can give no
assurance that the systems of other companies on which the Company relies upon
will be converted on time or that a failure to convert by another company or a
conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company.
