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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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)
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DELAWARE 13-3575653
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 MELVILLE PARK ROAD, MELVILLE, NEW YORK 11747
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(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code (516) 847-3000
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $377.0 million as of March 27, 1998 (based on the
closing price of the Common Stock on the New York Stock Exchange on that date).
For purposes of this computation, shares held by affiliates and by directors and
officers of the registrant have been excluded. Such exclusion of shares to be
held by directors and officers is not intended, nor shall it be deemed, to be an
admission that such persons are affiliates of the registrant.
Number of shares of Common Stock, par value $.01 per share, outstanding as
of March 27, 1998: 36,804,632.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement to be used in conjunction with the
Annual Meeting of Stockholders to be held on May 21, 1998 are incorporated by
reference in Part III.
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PART I
ITEM I. BUSINESS
GENERAL
General Semiconductor, Inc. ("General Semiconductor" or the "Company"), a
Delaware corporation, is a world leader in the design, manufacture and sale of
discrete semiconductors. These products are used throughout the electrical and
electronics industries to condition current and voltage and to protect
electrical circuits from power surges. Applications include components for
circuits in consumer electronics, computers, telecommunications, lighting
ballasts, home appliances, automotive and industrial products.
1997 COMPANY RESTRUCTURING
On January 7, 1997 the Board of Directors of General Instrument Corporation
("GI") approved a plan to divide GI into three separate public companies. To
effect the transaction, GI (i) transferred all the assets and liabilities
relating to the manufacture and sale of broadband communications products used
in the cable television, satellite, and telecommunications industries and all
rights to the related GI trademarks to its wholly-owned subsidiary NextLevel
Systems, Inc. ("NextLevel Systems"), and all the assets and liabilities relating
to the manufacture and sale of coaxial, fiber optic and other electric cable
used in the cable television, satellite and other industries to its wholly-owned
subsidiary CommScope, Inc. ("CommScope") and (ii) distributed all of the
outstanding shares of capital stock of each of NextLevel Systems and CommScope
to its stockholders on a pro rata basis as a dividend (the "Distribution") in a
transaction that was finalized on July 28, 1997 (the "Distribution Date"). On
the Distribution Date, NextLevel Systems and CommScope began operating as
independent entities with publicly traded common stock. GI retained no ownership
interest in either NextLevel Systems or CommScope. Concurrent with the
Distribution, GI changed its name to General Semiconductor, Inc. and effected a
one for four reverse stock split (the "Stock Split"). On February 2, 1998
NextLevel Systems changed its name to General Instrument Corporation ("General
Instrument").
PRINCIPAL PRODUCTS
General Semiconductor designs, manufactures and sells low-to-medium-power
rectifiers, and transient voltage suppressor ("TVS") components in axial, bridge
and surface mount packages. In addition, with the acquisition of a discrete
small signal products line from ITT Industries, Inc. ("ITT") in October 1997,
General Semiconductor now offers small signal diodes, transistors and zener
diodes. These products are available in leaded and surface mount packages. Power
rectifiers and small signal products 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. The small signal
diodes perform signal routing and rectification functions, zener diodes provide
voltage reference and low level surge protection. Small signal transistors
deliver amplification and switching functions. TVS devices are essential
semiconductors that are designed to provide protection from electrical surges,
ranging from electrostatic discharge to induced lightning. The Company's
products are primarily targeted for use in the computer, automotive,
telecommunications, lighting and consumer electronics industries.
The use of discrete semiconductors has expanded well beyond computer
systems, to applications such as communication systems, automotive systems,
consumer goods and industrial automation and control systems as product
performance has been enhanced and size and cost have decreased. In addition,
system users and designers now demand systems with more functionality, higher
levels of performance, greater reliability and shorter design cycle times, all
in smaller packages and at lower costs. These demands have resulted in increased
semiconductor content as a percentage of overall system content. Other industry
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market segments where discrete semiconductors are becoming more prevalent
include: industrial applications (manufacturing systems, industrial controls,
security and energy management and medical equipment); consumer applications
(audio, video, personal electronics, video games and appliances); and automotive
systems (engine management, anti-lock braking systems, climate control,
collision warning devices and in-car entertainment). The increasing discrete
semiconductor content in these products combined with a broadening of end
markets in all regions worldwide has created a more stable demand for discrete
semiconductor suppliers that sell globally into multiple markets.
RECTIFIERS. General Semiconductor offers standard, Schottky, and fast
efficient rectifiers and offers the widest selection of rectifier package types
in the world, including plastic encapsulated, glass passivated,
Superectifier-Registered Trademark- and surface mount packaging. Standard
rectifiers are rectifiers which offer a recovery time of greater than 100
nanoseconds. The Company offers this device in standard and fast-recovery types
in a variety of packages in axial, Superectifier-Registered Trademark- and
surface mount configurations.
General Semiconductor's Schottky rectifier is designed for use in high-speed
and low-power load applications. Its metal-silicon junctions and majority
carrier conduction result in nearly zero recovery times and very low forward
voltage drop. The Company's unique sputtered metallization process and ion-
implanted guard ring technology result in a highly reliable Schottky product.
Fast efficient rectifiers are an extension of the Company's Schottky product
portfolio. These products offer reverse recovery times as low as 25 nanoseconds
at voltage levels as high as 1,000 volts while maintaining the efficiencies of a
lower forward voltage loss. The Company produces fast efficient rectifiers in
axial, power and surface mount packages.
BRIDGE ASSEMBLIES. Bridge assemblies are essential components of most
electronic equipment which plug into an electrical outlet. A bridge assembly is
comprised of four separate rectifier components arranged in a single package.
Bridge assemblies convert alternating current (AC) into full wave direct current
(DC) which can be utilized by electronic equipment. General Semiconductor
manufactures a complete line of bridge assemblies to meet the power requirements
of almost all electronic equipment.
TRANSIENT VOLTAGE SUPPRESSORS. General Semiconductor's TVS devices are
designed to provide protection against all types of transient threats, ranging
from electrostatic discharge ("ESD") to induced lightning. The Company offers a
broad range of state-of-the-art semiconductor surge protection TVS devices for
use in modern electronic equipment. As semiconductor content as a percentage of
overall electronic content grows and as integrated circuits become smaller, the
Company's management believes that there will be a significant increase in
demand for TVS devices to protect smaller and more sensitive integrated
circuits.
SMALL SIGNAL DIODES. Utilized for signal blocking, routing, switching, and
handling a myriad of functions at lower currents, General Semiconductor's small
signal diode portfolio fits a diverse range of applications. Product usage
includes: telecommunications equipment, personal computer motherboards,
automotive systems, power supplies and consumer electronics.
ZENER DIODES. General Semiconductor's zener product lines provide a wide
variety of specialized functions for complex electronic circuits. These devices
are used as voltage regulators, voltage reference and voltage suppressors
against ESD threats.
SMALL SIGNAL TRANSISTORS. General Semiconductor's selection of small signal
transistors further diversifies its product portfolio, providing additional
electronic building blocks for its customer base. These products provide the
critical switching and amplification functions that are essential to any modern
electronic system in every end market.
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BUSINESS STRATEGY
As a leading manufacturer of discrete semiconductors, the Company's strategy
is to increase its market share in the $14 billion discrete semiconductor
market. This strategy is based on the following:
- FOCUS ON VALUE-ADDED INVESTMENT AND MANUFACTURING. General Semiconductor
intends to continue to focus on value-added investments in capital, sales
and marketing and research and development. The Company's value-added
manufacturing strategy is based on its high-volume, highly automated
operations, which is currently capable of producing approximately 40
million units per day. This strategy is characterized by high-quality and
very low-defect output which gives the Company the competitive advantage
of being a low cost producer.
- PRODUCT BREADTH EXPANSION. General Semiconductor believes that a key
driver in its growth will be new product introduction and expansion in the
breadth of its product portfolio. The Company expects to realize this
growth by internal research and development efforts, strategic
partnerships and strategic acquisitions. The recent acquisition of ITT's
discrete semiconductor business in October 1997 expanded the Company's
product offerings by adding zener diodes, signal diodes and small signal
transistors to the General Semiconductor portfolio.
- CAPITALIZE ON GLOBAL SALES AND DISTRIBUTION CAPABILITIES. General
Semiconductor intends to continue to capitalize on its international
presence. International sales represented approximately 70% of the
Company's 1997 sales. The Company maintains 11 sales offices worldwide and
utilizes a worldwide sales force of over 1,000 persons, including sales
agents, distributors and representatives. Additionally, the Company has
approximately 60 direct sales and technical personnel with over ten years
average sales experience in the industry. General Semiconductor intends to
continue its strategy of utilizing direct and indirect sales forces on a
global scale.
- MAINTAIN AND EXPAND STRONG CUSTOMER RELATIONSHIPS. The Company's products
occupy a segment of the semiconductor industry characterized by long
product life cycles, relatively low research and development investments
and utilization of proven wafer fabrication technology. General
Semiconductor maintains ongoing relationships with major computer,
telecommunications, automotive and consumer electronics companies
worldwide. The Company intends to continue to build upon these strong
relationships to grow with its customers and to increase its market share.
Management of General Semiconductor believes that future demand for discrete
semiconductors will be driven over time by several factors including (i)
increased electronic content in a broad range of products, devices and systems,
including automotive, consumer products and industrial equipment; (ii) greater
demand for voice and data communications products; (iii) growth in personal
computers and peripheral products; (iv) the rapid replacement of heavier and
less efficient magnetic lighting ballasts with electronic ballasts; and (v)
increasing demand in new international markets. There can be no assurance,
however, that increased competition or technical developments will not adversely
affect the Company's revenue and profitability by causing it to reduce prices or
by reducing demand for the Company's products.
RECENT ACQUISITION
On October 1, 1997, General Semiconductor acquired the small signal products
business of ITT pursuant to an agreement for the purchase of certain assets and
the assumption of certain liabilities for cash consideration of approximately
$8.0 million plus $1.0 million in direct transaction costs. By broadening the
Company's served market to include small signal diodes, transistors and zener
products, this acquisition has enabled the Company to participate in
approximately 50% of the $14.0 billion worldwide discrete semiconductor market
compared to the approximate 17% in which the Company participated prior to the
acquisition.
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SALES AND DISTRIBUTION
General Semiconductor products are sold primarily to the computer,
automotive, telecommunications, lighting and consumer electronics industries via
a direct sales force, through distributors and sales representatives. In each of
the years ended December 31, 1997, 1996 and 1995, international sales
represented approximately 70% of the Company's sales. General Semiconductor's
customer base incorporates a wide array of the world's largest manufacturers. No
single customer accounted for more than 10% of the Company's revenue during the
years ended December 31, 1997, 1996 and 1995.
To support its worldwide sales and distribution, General Semiconductor
utilizes more than 1,000 sales personnel worldwide, including sales agents,
representatives, distributors and approximately 60 direct sales and technical
personnel. The Company maintains 11 sales offices located in Melville, New York;
Carlsbad, California; Arlington Heights, Illinois; Norcross, Georgia; London,
England; Paris, France; Munich, Germany; Tokyo and Osaka, Japan; Taipei, Taiwan;
and Singapore.
Additionally, the Company leverages information technology to obtain and
maintain strong customer relationships by utilizing electronic data interchange
("EDI") capability with many of its major customers and plans to increase this
capability with a majority of its customers. This use of EDI, combined with
strong technical marketing, has helped the Company obtain new product approvals
and enhanced market share at major customers.
RESEARCH AND DEVELOPMENT
General Semiconductor conducts an internally funded research and development
program and employs approximately 70 full-time research and development
personnel. The Company operates research and development labs in Ireland and
Taiwan that focus primarily on the development of new packaging technology and a
third research and development lab in Westbury, New York which focuses on
applied material sciences. In addition to its in-house research and development
efforts, the Company funds dedicated research through a grant program with the
National Microelectronics Research Center at the University College Cork in
Ireland.
Research and development expenditures totaled $6.0 million, $5.8 million and
$5.1 million for the years ended December 31, 1997, 1996 and 1995, respectively.
Research and development expenditures reflect continued development and the
advancement of new product and packaging technologies targeted for the
automotive, telecommunications and computer end-market applications.
PATENTS
The Company pursues an active policy of seeking patents for new products and
designs. As of December 31, 1997, the Company held 57 U.S. patents. Although
management believes that the Company's patents provide a competitive advantage,
no single patent is material to its business and General Semiconductor intends
to continue to rely on its proprietary knowledge and continuing technological
innovation to develop and maintain its competitive position.
BACKLOG
At December 31, 1997 and 1996, the Company had an order backlog of
approximately $168.1 million, and $141.5 million, respectively. The Company
includes in backlog only orders for products scheduled to be shipped within six
months. Orders may be revised or canceled, either pursuant to their terms or as
a result of negotiations; consequently, it is impossible to predict accurately
the amount of backlog orders that will result in sales.
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COMPETITION
The discrete semiconductor industry is highly competitive. General
Semiconductor competes with companies worldwide, some of which have greater
financial, marketing and management resources than the Company. Management
believes, however, that the Company competes favorably on the basis of its
continued commitment to global distribution and customer service, value-added
manufacturing, technological leadership and new product innovation. There can be
no assurance, however, that the Company will have sufficient resources to
continue to make such investments or that the Company will be successful in
maintaining such advantages. The Company believes that its principal competitors
are Motorola, Inc., Philips Electronics N.V., SGS Thomson Microelectronics N.V.,
and a number of Taiwanese and Japanese manufacturers.
EMPLOYEES
As of December 31, 1997, General Semiconductor employed approximately 5,000
people worldwide. Management believes that the Company's relations with both its
union and non-union employees are satisfactory.
RAW MATERIALS
Silicon ingots, molding compound and lead frames typically account for
approximately two-thirds of General Semiconductor's raw material expense.
Management believes that the Company's relations with its suppliers are good and
does not anticipate any supply shortages in the near term.
Due to the general availability of components and supplies, the Company does
not believe that the loss of any supplier would have a long-term material
adverse effect on its business although set-up costs and delays could occur if
the Company changes suppliers. In the past, delays in delivery of components
have not had a material adverse effect on shipments of the Company's products.
ENVIRONMENT
General Semiconductor is committed to operate worldwide in a manner which
respects and protects the environment. The Company uses hazardous substances and
generates solid and hazardous waste in the ordinary course of its business.
Consequently, the Company is subject to various federal, state, local and
foreign laws and regulations governing environmental matters, including the use,
discharge and disposal of hazardous materials. Because of the nature of its
business, the Company incurs costs relating to compliance with such
environmental laws. Although General Semiconductor's management believes that
the Company is in substantial compliance with such environmental requirements
there can be no assurance that General Semiconductor's cost to comply with such
requirements will not increase in the future. Although General Semiconductor is
unable to predict what legislation or regulations may be adopted in the future
with respect to environmental protection and waste disposal, compliance with
existing legislation and regulations has not had a material adverse effect on
the Company and is not expected to have a material adverse effect on the
Company's financial position, results of operations or cash flows.
In connection with the Distribution, General Semiconductor retained the
obligations with respect to environmental matters relating to the Company's
discontinued operations and its status as a "potentially responsible party" with
respect to the disposal of wastes at nine hazardous waste sites located in six
states. Based on several factors including capital expenditures and expenses for
the Company's remediation programs, and the proportionate share of the cost of
the necessary investigation and eventual remedial work that may be needed to be
performed at the sites for which the Company has been named as a "potentially
responsible party," these matters are not expected to have a material adverse
effect on the financial position, results of operations or cash flows of General
Semiconductor. The Company's present and past facilities have been in operation
for many years, and over that time in the course of those operations, such
facilities have used substances which are or might be considered hazardous, and
the
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Company has generated and disposed of wastes which are or might be considered
hazardous. Therefore, it is possible that additional environmental issues may
arise in the future which the Company cannot now predict. Reference is made to
Note 11 to the consolidated financial statements included in Part II and the
cautionary statements contained in Exhibit 99 to this Form 10-K for further
information regarding environmental matters.
INTERNATIONAL OPERATIONS
A significant portion of the Company's products are manufactured or
assembled in Taiwan (Republic of China), the People's Republic of China,
Ireland, Germany and France. These foreign operations are subject to the usual
risks inherent in operating overseas, including risks with respect to
fluctuations in currency exchange rates, economic and political destabilization,
restrictive actions by foreign governments, nationalizations, the laws and
policies of the United States affecting trade, foreign investment and loans and
foreign tax laws. The Company's cost-competitive status relative to its
competitors could be adversely affected if the New Taiwan dollar appreciates
relative to the U.S. dollar or if the Company experiences other unfavorable
movements in foreign currency rates.
Sales to the Asia Pacific region accounted for approximately 40% of the
Company's worldwide sales for the year ended December 31, 1997. Approximately
50% of the Company's total production is currently in Taiwan, the cost of which
has benefited from the weakened New Taiwan dollar in relation to the U.S.
dollar. While the Company has not been materially affected by the current
economic and currency uncertainty in this region, the Company continues to
monitor this situation. Additionally, as a result of reduced liquidity levels in
this region, the Company continues to review the credit position of its
customers. There can be no assurance, however, that the economic situation in
the Asia Pacific region will not adversely impact the Company's business in the
future.
For detailed financial information concerning foreign and domestic
operations and export sales, reference is made to Note 16 to the consolidated
financial statements included in Part II of this Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the executive
officers of the Company as of December 31, 1997.
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NAME AND TITLE AGE BUSINESS EXPERIENCE
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Ronald A. Ostertag........................ 57 Ronald A. Ostertag has been Chairman, President and Chief
Chairman, President and Chief Executive Executive Officer of General Semiconductor since the
Officer Distribution. Previously, he held the position of Vice
President of GI since February 1989 and President of GI's Power
Semiconductor Division since September 1990.
Andrew M. Caggia.......................... 49 Andrew M. Caggia has been Senior Vice President and Chief
Senior Vice President and Chief Financial Officer of General Semiconductor since the
Financial Officer Distribution. Previously, he held the position of Senior Vice
President of Finance at GI's Power Semiconductor Division since
September 1990.
Robert J. Gange........................... 42 Robert J. Gange has been Vice President and Controller of
Vice President and Controller General Semiconductor since the Distribution and Vice President
and Controller of GI's Power Semiconductor Division since May
1997. From 1995 to 1997, he was Director of Finance and from
1993 to 1995, Assistant Controller of GI's Power Semiconductor
Division.
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NAME AND TITLE AGE BUSINESS EXPERIENCE
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Vincent M. Guercio........................ 44 Vincent M. Guercio has been Senior Vice President, Worldwide
Senior Vice President, Worldwide Sales Sales and Marketing of General Semiconductor since the
and Marketing Distribution. Previously, he had been responsible for this
function at GI's Power Semiconductor Division since January
1992.
W. John Nelson............................ 43 W. John Nelson has been Senior Vice President, Asia Pacific
Senior Vice President, Asia Pacific Operations of General Semiconductor since the Distribution.
Operations Previously, he had been responsible for this function at GI's
Power Semiconductor Division since March 1994. From 1991 to
1994, he was President of GI Taiwan.
Stephen B. Paige.......................... 50 Stephen B. Paige has been Senior Vice President, General
Senior Vice President, General Counsel Counsel and Secretary of General Semiconductor since the
and Secretary Distribution. Previously he was Senior Vice President and
General Counsel for GI's Power Semiconductor Division since May
1997. From April 1995 to May 1997, he was Vice President and
General Counsel of Monsanto Business Services, Chicago Region.
From January 1992 to April 1995, he was Vice President, General
Counsel and Secretary of The NutraSweet Company, a wholly-owned
subsidiary of Monsanto Company.
Linda S. Perry............................ 47 Linda S. Perry has been Senior Vice President, Human Resources
Senior Vice President, Human Resources of General Semiconductor since September 1997 and its Vice
President, Human Resources since the Distribution. Previously,
she held the position of Vice President, Human Resources at
GI's Power Semiconductor Division and has had responsibility
for this function since 1988.
John P. Phillips.......................... 52 John P. Phillips has been Senior Vice President, European
Senior Vice President, European Operations of General Semiconductor since the Distribution.
Operations Previously, he was Senior Vice President of Worldwide
Technology for GI's Power Semiconductor Division and had
responsibility for this function since March 1992.
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ITEM 2. PROPERTIES
The Company's administrative, production and research and development
facilities are located in Melville and Westbury, New York; Taipei, Taiwan;
Macroom, Ireland; Tianjin, China; Freiburg, Germany; and Colmar, France.
The Melville, New York facility occupies approximately 52,000 square feet
pursuant to a lease expiring in 2004 and is General Semiconductor's worldwide
headquarters. The Company has two additional five year options to renew the
lease.
The Westbury, New York facility occupies approximately 13,000 square feet
pursuant to leases expiring in 2000. The Westbury facility is the location of
the Company's epitaxial silicon wafer manufacturing operations and its applied
material sciences research and development laboratory.
The Taipei, Taiwan land and facility is owned and occupies approximately
350,000 square feet. At the Taiwan facility, the Company manufactures standard,
Schottky and fast efficient rectifiers and TVS devices. The Company also
maintains a research and development laboratory at its Taiwan facility.
The Company owns approximately 120,000 square feet of manufacturing space in
Macroom, Ireland. The Company manufactures standard rectifiers, TVS devices and
bridge assemblies and maintains a research and development laboratory at the
Ireland facility.
The Company owns an approximately 120,000 square foot manufacturing facility
in Tianjin, China. The China facility is located on land that is leased by the
Company pursuant to a ground lease expiring in 2045. General Semiconductor began
producing rectifiers at this facility in the third quarter of 1997.
The Freiburg, Germany facility occupies approximately 55,000 square feet
pursuant to a lease expiring in 2000 and is the location of the Company's small
signal product, die and wafer manufacturing operations. The Company has the
right to continue the lease until October 2007.
The Colmar, France facility performs the assembly function for the Company's
small signal products product line. This highly automated 63,000 square foot
plant is situated on approximately six acres of land owned by the Company.
The Company's facilities are currently operating at a capacity level of
approximately 80%. Management believes that the Company's facilities and
equipment generally are well maintained, in good operating condition and
suitable for the Company's purposes and adequate for its present operations.
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ITEM 3. LEGAL PROCEEDINGS
A securities class action is presently pending in the United States District
Court for the Northern District of Illinois, Eastern Division, IN RE GENERAL
INSTRUMENT CORPORATION SECURITIES LITIGATION. This action, which consolidates
numerous class action complaints filed in various courts between October 10 and
October 27, 1995, is brought by plaintiffs, on their own behalf and as
representatives of a class of purchasers of GI common stock during the period
March 21, 1995 through October 18, 1995. The complaint alleges that prior to the
Distribution GI and certain of its officers and directors, as well as Forstmann
Little & Co. and certain related entities, violated the federal securities laws,
namely, Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as
amended, 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. The plaintiffs have moved for class certification and
the Company has filed its opposition. 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, 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.
An action entitled BKP PARTNERS, L.P. V. GENERAL INSTRUMENT CORP. was
brought in February 1996 by shareholders of NextLevel Communications, which was
merged into 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 complaint alleges that the GI Common Stock, which was
received by the plaintiffs as a result of the merger, was overpriced because of
the matters complained of in the class action and GI's failure to disclose
information concerning a significant reduction in its gross margins. On
September 23, 1997 the district court dismissed the complaint, without
prejudice, and the plaintiffs were given until November 7, 1997 to amend their
complaints. 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.
An action entitled BROADBAND TECHNOLOGIES, INC. V. GENERAL INSTRUMENT CORP.
was brought in March 1997 in the United States District Court for the Eastern
District of North Carolina. The complaint alleges that GI infringes BroadBand
Technologies, Inc.'s ("BBT") U.S. Patent No. 5,457,560, covering an electronic
communications system which delivers television signals, and seeks monetary
damages and injunctive relief. On June 13, 1997, GI's motion to dismiss the
complaint for lack of jurisdiction was denied. In March 1998, General Instrument
filed motions with the district court for summary judgement on the issues of
patent invalidity and non-infringement of the BBT patent and BBT filed a motion
of partial summary judgement on the issue of infringement.
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), the BKP PARTNERS, L.P. V. GENERAL INSTRUMENT
CORP. litigation and the action entitled BROADBAND TECHNOLOGIES, INC. V. GENERAL
INSTRUMENT CORP. Therefore, management is of the opinion that the resolution of
these matters will have no effect on the Company's consolidated financial
position, results of operations or cash flows.
General Semiconductor is not a party to any pending legal proceedings other
than various claims and lawsuits arising in the normal course of business and
those for which they are indemnified. Management is of the opinion that such
litigation or claims will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the Distribution on July 28, 1997, GI's Common Stock was traded on
the New York Stock Exchange under the symbol GIC. The information set forth
below relating to the period preceding the Distribution represents market data
of GI and has not been adjusted to reflect the Distribution or the one for four
reverse stock split effected in connection with the Distribution. Since the
Distribution, the Company's Common Stock has been traded on the New York Stock
Exchange under the symbol SEM. The following table sets forth the high and low
sale prices as reported by the New York Stock Exchange for each of the years
ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
"GIC":
--------------------
YEAR ENDING DECEMBER 31, 1996 HIGH LOW
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter.................................................................................... $ 28 3/8 $ 21
Second Quarter................................................................................... 34 3/8 26 1/4
Third Quarter.................................................................................... 29 3/8 21 1/2
Fourth Quarter................................................................................... 27 1/8 18 1/8
YEAR ENDING DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------
First Quarter.................................................................................... $ 25 5/8 $ 21 1/2
Second Quarter................................................................................... 28 3/8 21 1/4
Third Quarter (through July 25th)................................................................ 28 7/16 25 7/16
</TABLE>
<TABLE>
<CAPTION>
"SEM":
--------------------
YEAR ENDING DECEMBER 31, 1997 HIGH LOW
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
July 28th through September 30th............................................................. $ 17 1/2 $ 12 3/8
Fourth Quarter............................................................................... 13 9 7/8
</TABLE>
As of March 27, 1998, there were 738 holders of record of the Company's
Common Stock.
The Company does not currently intend to pay dividends in the foreseeable
future, but to reinvest earnings in the Company's business. The Company's
ability to pay cash dividends on its Common Stock is limited by certain
covenants contained in a credit agreement to which the Company is a party. See
Note 10 to the consolidated financial statements included in Part II of this
Form 10-K.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data of General
Semiconductor at the dates and for each of the periods indicated. The financial
data as of December 31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997 has been derived from the audited General
Semiconductor consolidated financial statements included elsewhere herein. The
financial data as of December 31, 1995, 1994 and 1993 and for the years ended
December 31, 1994 and 1993 has been derived from the previously audited
consolidated financial statements not included herein, as adjusted to give
effect to the Distribution. The selected financial data should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Historical consolidated
financial data may not be indicative of General Semiconductor's future
performance.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997(A) 1996 1995 1994 1993
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales.................................... $ 380,038 $ 361,891 $ 414,269 $ 315,688 $ 267,773
Cost of sales................................ 289,313 230,687 254,991 208,452 183,770
Selling, general and administrative.......... 44,668 42,594 51,225 45,253 36,829
Research and development..................... 5,998 5,838 5,068 3,454 3,152
Operating income............................. 34,916 77,618 97,776 53,140 38,614
Interest expense--net........................ (14,353) (10,396) (9,461) (13,132) (19,981)
Income from continuing operations(b)......... 8,872 39,764 57,316 19,541 3,788
Net income (loss)............................ 5,933 (1,864) 123,782 246,535 90,583
BASIC EARNINGS (LOSS) PER SHARE:
Income from continuing operations.......... $ 0.25 $ 1.20 $ 1.86 $ 0.65 $ 0.13
Net income (loss).......................... 0.17 (0.06) 4.01 8.15 3.04
DILUTED EARNINGS PER SHARE:
Income from continuing operations.......... $ 0.25 $ 1.15 $ 1.68 $ 0.65 $ 0.13
Net income................................. 0.17 0.27 3.86 7.54 3.04
CONSOLIDATED BALANCE SHEET:
Accounts receivable.......................... $ 54,077 $ 49,629 $ 58,819 $ 49,837 $ 41,642
Inventories.................................. 34,309 31,551 23,524 19,510 18,081
Property, plant and equipment................ 218,752 202,281 156,714 135,120 126,068
Net assets of discontinued operations........ -- 1,444,734 1,265,345 1,107,063 890,334
Total assets................................. 550,305 2,057,162 1,799,387 1,633,122 1,397,427
Long-term debt, including current
maturities................................. 268,074 692,335 732,079 796,849 840,294
</TABLE>
All per share data has been retroactively restated to reflect the one for
four reverse stock split effected in connection with the Distribution, as well
as the adoption of Statement of Financial Accounting Standards No. 128 "Earnings
per Share".
(a) Includes charges of $33.8 million ($25.3 million net of tax), or $0.69
per share, primarily related to the separation of GI's Taiwan operations. These
costs include $32.7 million charged to cost of sales and $1.1 million charged to
selling, general and administrative expense.
(b) Income from continuing operations excludes the impact of the cumulative
effect of changes in accounting principles of $1.9 million and $0.2 million for
1994 and 1993, respectively, as it was not practicable to allocate such amounts
between continuing and discontinued operations. Such amounts are included in net
income in the respective years.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1997 COMPANY RESTRUCTURING
On January 7, 1997 the Board of Directors of GI approved a plan to divide GI
into three separate public companies in a transaction that was finalized on July
28, 1997. Concurrent with the Distribution, GI changed its name to General
Semiconductor, Inc. and effected a one for four reverse stock split. Following
the Distribution, General Semiconductor began operations as a stand-alone
publicly held company. The revenues, costs and expenses, assets and liabilities
and cash flows of the businesses transferred to the General Instrument and
CommScope segments (the "Discontinued Operations"), have been excluded from the
respective captions in the Consolidated Statements of Operations, Consolidated
Balance Sheets and Consolidated Statements of Cash Flows and have been reported
through the Distribution Date as: "Income (Loss) from discontinued operations",
net of applicable income taxes; as "Net assets of discontinued operations"; and
as "Cash flow from discontinued operations" for all periods presented in the
Company's consolidated financial statements included elsewhere herein. Unless
otherwise noted, the following Management's Discussion and Analysis pertains to
the continuing operations of General Semiconductor.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 WITH
THE YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales for the year ended December 31, 1997 of $380.0 million increased
$18.1 million from $361.9 million for the year ended December 31, 1996. The 5%
increase reflects increased unit volume as well as the inclusion of small signal
product revenues resulting from the Company's October 1, 1997 acquisition,
partially offset by an approximate 15% decline in average selling prices.
Foreign exchange rate changes negatively affected sales by approximately 3%.
Orders increased almost 77% in 1997; 1996 orders were depressed due to industry
wide excess capacity. International sales, including export sales from the U.S.,
represented approximately 70% of net sales in each of the years ended December
31, 1997 and 1996.
COST OF SALES
Cost of sales for the year ended December 31, 1997 of $289.3 million
increased 25.4% from $230.7 million for 1996. Excluding pre-tax charges of $32.7
million primarily related to the separation of the Taiwan operations of GI, cost
of sales increased $25.9 million or 11.2% principally due to increased costs
related to higher operating levels offset, in part, by improved factory
performance. Cost of sales, as a percentage of net sales, represents 76% for
1997 (68% excluding the pre-tax charges discussed above) compared to 64% for
1996. This increase primarily results from the decline in average selling prices
discussed above.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased to $44.7 million for
the year ended December 31, 1997 compared to $42.6 million in 1996 and
represented 11.8% of sales in each period. The increase primarily relates to
higher selling costs and compensation expense associated with increased
revenues.
RESEARCH AND DEVELOPMENT
Research and development expense for the year ended December 31, 1997 was
$6.0 million compared to $5.8 million in 1996 and represented 1.6% of sales in
each period. Research and development expenditures reflect the continued
development of new products and modifications of existing products and
manufacturing technologies to achieve cost reductions.
12
<PAGE>
NET INTEREST EXPENSE
Net interest expense increased $4.0 million, to $14.4 million for the year
ended December 31, 1997 from $10.4 million in 1996. Net interest expense
represents an allocation based upon General Semiconductor's net assets as a
percentage of total assets of GI for 1996 and through the Distribution Date for
1997. Pro forma net interest expense, assuming a net debt level of $275.0
million through the Distribution Date and amortization of debt issuance costs
associated with the new borrowings, would have been $19.6 million for the years
ended December 31, 1997 and 1996.
INCOME TAXES
The Company's effective income tax rate was 56.8% for 1997 (37.0% excluding
the tax effects, at the applicable rates, of the costs incurred to separate the
GI Taiwan operations) compared with 40.8% for 1996. The decrease in the
effective rate, excluding the tax effects of the costs described above, relates
primarily to increased income of foreign subsidiaries taxed at rates lower than
U.S. rates.
DISCONTINUED OPERATIONS
The net operating results of the businesses transferred to General
Instrument and CommScope have been reported, net of applicable income taxes, as
"Income (Loss) from discontinued operations".
Discontinued operations also includes $52.9 million and $2.7 million, net of
applicable income taxes, for the years ended December 31, 1997 and December 31,
1996, respectively, for costs incurred primarily related to the separation of
the Taiwan operations of GI between General Semiconductor and General
Instrument, and for professional fees and certain other administrative and
financing costs incurred directly related to the Distribution.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 WITH
THE YEAR ENDED DECEMBER 31, 1995
NET SALES
Net sales for the year ended December 31, 1996 of $361.9 million decreased
$52.4 million from $414.3 million for the year ended December 31, 1995. The
12.6% decrease in 1996 reflects the industry wide slowdown of demand for
semiconductor products from the strong levels of the prior year. The revenue
decline primarily related to the lower volume in the computer, power supply and
distributor markets. Pricing was down slightly from 1995 as most pricing for
1996 was negotiated in late 1995 and early 1996 prior to business slowdown.
Foreign exchange rate changes negatively affected sales by approximately 3% in
1996. International sales, including export sales from the U.S., represented
approximately 70% of worldwide sales in each of the years ended December 31,
1996 and 1995.
COST OF SALES
Cost of sales for the year ended December 31, 1996 of $230.7 million
decreased $24.3 million from $255.0 million. The 9.5% decrease is principally
due to the reduced sales volume discussed above and factory cost reductions
offset, in part, by a $1.8 million pre-tax charge recorded during the fourth
quarter of 1996 for the writedown of certain assets.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense decreased $8.6 million to $42.6
million in 1996 from $51.2 million in 1995 and represented 11.8% of sales in
1996 and 12.4% in 1995. The 16.8% decrease is principally attributable to lower
marketing and selling costs associated with the reduced volumes described above
and other cost controls, partially offset by a required provision for
environmental liabilities.
RESEARCH AND DEVELOPMENT
Research and development expense for the year ended December 31, 1996 was
$5.8 million compared to $5.1 million in 1995 and represented 1.6% of sales in
1996 and 1.2% in 1995. The 14% increase resulted
13
<PAGE>
from the Company's ongoing programs to develop products and modifications of
existing products and manufacturing technologies to achieve cost reductions.
NET INTEREST EXPENSE
Net interest expense for the year ended December 31, 1996 was $10.4 million
compared to $9.5 million in 1995. Net interest expense represents an allocation
based upon General Semiconductor's net assets as a percentage of total assets of
GI. Pro forma net interest expense, assuming a net debt level of $275.0 million
through the Distribution Date and amortization of debt issuance costs associated
with the new borrowings, would have been $19.6 million for the years ended
December 31, 1996 and December 31, 1995.
INCOME TAXES
The Company's effective income tax rate for the year ended December 31, 1996
was 40.8% compared to 34.9% for 1995. The increase in the effective rate relates
primarily to lower income of foreign subsidiaries taxed at rates less than U.S.
rates in 1995 as compared to 1996.
DISCONTINUED OPERATIONS
The net operating results of the businesses transferred to GI have been
reported, net of applicable income taxes, as "Income (Loss) from discontinued
operations".
Discontinued operations also includes $2.7 million, net of applicable income
taxes, for the year ended December 31, 1996 for professional fees and certain
other administrative costs incurred directly related to the Distribution.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations for the year ended December 31, 1997
was $43.8 million compared to $68.1 million and $116.0 million for 1996 and
1995, respectively. The $24.3 million decrease in cash provided by continuing
operations from 1996 to 1997 was due to lower income from continuing operations
partially offset by reductions in working capital in 1997. Cash provided by
operations decreased $47.9 million in 1996 compared to 1995 due primarily to
lower income from continuing operations and working capital increases in 1996
compared to 1995.
At December 31, 1997, working capital was $16.7 million, compared to $69.6
million at December 31, 1996. The working capital decrease of $52.9 million
resulted primarily from the liquidation of short-term investments and an
increase in amounts payable related to the Distribution totaling $21.2 million
at December 31, 1997. This was partially offset by an increase in accounts
receivable associated with increased fourth quarter revenues. The current ratio
decreased to 1.2 to 1 at December 31, 1997 from 1.7 to 1 at December 31, 1996.
Investing activities for the year ended December 31, 1997 included the
acquisition of the Company's small signal product line from ITT for a cash
payment of approximately $8.0 million, plus direct costs of approximately $1.0
million. During the year ended December 31, 1997, the Company invested $29.2
million in property, plant and equipment compared with $60.3 million and $34.9
million in 1996 and 1995, respectively. Expenditures in 1997 reflect anticipated
future production demands. The higher level of capital spending incurred during
1996 was attributable to capacity expansion to meet expected future demand
including the construction of the manufacturing facility in Tianjin, China. The
Company does not have any material commitments for capital expenditures.
At December 31, 1997, the Company had $5.2 million of cash and cash
equivalents on hand compared to $20.3 million and $36.4 million at December 31,
1996 and 1995, respectively. At December 31, 1997, long-term debt, (excluding
current maturities) of General Semiconductor was $263.8 million, compared to
$688.0 and $728.0 million at December 31, 1996 and 1995, respectively. As of
December 31, 1997, approximately $25.1 million remains accrued for costs related
to the separation of GI's Taiwan operations and costs incurred in connection
with the Distribution. Such amounts are expected to be paid during the first
half of 1998.
14
<PAGE>
During 1997, the remaining Convertible Junior Subordinated Notes outstanding
were converted into GI Common Stock at a conversion price of $23.75 per share
(unadjusted for the Distribution and Stock Split), resulting in the issuance of
2.4 million shares. In connection with the conversion of these Notes, the
Company charged approximately $1.5 million to additional paid-in capital, net of
the related tax benefit for unamortized deferred financing costs and accrued but
unpaid interest related to the converted Notes. The Company also repaid the GI
revolving credit facility in July 1997 utilizing a combination of the bank
credit facility described below and amounts received from NextLevel Systems and
CommScope at the Distribution Date totaling $170.1 million.
In July 1997, the Company entered into a bank credit agreement (the "Credit
Agreement") which provides for a $350.0 million secured revolving credit
facility that matures on December 31, 2002. The Credit Agreement requires the
Company to pay a facility fee on the total commitment. The Credit Agreement
permits the Company to choose between two interest rate options: the Adjusted
Base Rate (as defined in the Credit Agreement), or a Eurodollar rate (LIBOR)
plus a margin which varies based on the Company's ratio of indebtedness to
earnings before income taxes, depreciation and amortization as defined in the
Credit Agreement. The facility fee also varies based on that ratio. The Company
is also able to set interest rates through a competitive bid procedure. The
Credit Agreement contains financial and operating covenants, including
limitations on guarantee obligations, liens, sale of assets, indebtedness,
investments, capital expenditures, payment of dividends and leases, and requires
the maintenance of certain financial ratios. At December 31, 1997, the Company
was in compliance with all such covenants. In addition, certain changes in
control of the Company would cause an event of default under the Credit
Agreement.
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. The Company intends to repay its remaining
indebtedness primarily with cash flow from operations. There can be no
assurance, however, that future industry-specific developments or general
economic trends will not adversely affect the Company's operations or its
ability to meet its cash requirements.
DERIVATIVE INSTRUMENTS
Derivative instruments are primarily used by the Company to reduce financial
risk arising from changes in foreign exchange and interest rates. The Company
does not use derivative instruments for trading purposes, nor does it engage in
currency or interest rate speculation. Derivatives used by the Company consist
of foreign exchange, interest rate and other instruments. The Company believes
that the various counterparties with which the Company enters into these
agreements consist of only financially sound institutions and, accordingly,
believes that the credit risk for non-performance of these contracts is not
significant. The Company monitors its underlying market risk exposures on an
ongoing basis and believes that it can modify or adapt its hedging strategies as
needed.
On a selective basis, the Company from time to time enters into interest
rate cap or swap agreements to reduce the potential negative impact of increases
in interest rates on its outstanding variable-rate debt under the Credit
Agreement. In September 1997, the Company entered into two interest rate swap
transactions pursuant to which it will pay a fixed interest rate averaging 5.96%
on a notional amount of $100 million. The Company will receive interest on the
$100 million notional amount based on a three month LIBOR rate set quarterly
beginning on January 22, 1998. The agreements began on January 22, 1998 and
mature one year later. The effect of these agreements to the Company is to
reduce the amount of debt subject to floating interest rates. See Note 15 to the
consolidated financial statements included in Part II of this Form 10-K for
additional information.
15
<PAGE>
FOREIGN EXCHANGE
A significant portion of General Semiconductor's products are manufactured
in Asia and Europe and sold internationally. These foreign operations and sales
are subject to risk with respect to changes in currency exchange rates. General
Semiconductor monitors its underlying exchange rate exposures on an ongoing
basis and implements selective hedging strategies to reduce the financial risks
arising from changes in foreign exchange rates. On a selective basis, the
Company enters into contracts to hedge the currency exposure of contractual and
other firm commitments denominated in foreign currencies and the currency
exposure of anticipated, but not yet committed, transactions expected to be
denominated in foreign currencies. Gains and losses on hedges related to
contractual and other firm commitments are deferred and recognized in General
Semiconductor's results of operations in the same period as the gain or loss
from the underlying transactions. Gains and losses on forward exchange contracts
used to hedge anticipated, but not yet committed, transactions are recognized in
General Semiconductor's results of operations as changes in exchange rates for
the applicable foreign currencies occur. See Note 15 to the consolidated
financial statements included in Part II of this Form 10-K for additional
information.
As of December 31, 1997 and 1996, General Semiconductor had outstanding
forward exchange contracts in the amounts of $19.9 million and $27.7 million,
respectively, comprised of foreign currencies which were to be purchased, and
$23.2 million and $9.1 million, respectively, comprised of foreign currencies
which were to be sold. All outstanding forward exchange contracts at December
31, 1997 and 1996 mature within three months, and the fair values of the
contracts as of such dates were not material.
INTERNATIONAL MARKETS
Management believes that a significant amount of General Semiconductor's
sales will continue to come from international markets.
Sales to the Asia Pacific region accounted for approximately 40% of the
Company's worldwide sales for the year ended December 31, 1997. 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.
While the Company has not been materially affected by the current economic and
currency uncertainty in this region, the Company continues to monitor this
situation. Additionally, as a result of reduced liquidity levels in this region,
the Company continues to review the credit position of its customers. There can
be no assurance, however, that the economic situation in the Asia Pacific region
will not adversely impact the Company's business in the future.
EFFECT OF INFLATION
General Semiconductor attempts to minimize the effect of inflation on
earnings by controlling its operating costs and selling prices. In the opinion
of management, the rate of inflation has not had a material impact on the
Company's results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
During June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 130 establishes standards for 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 stockholders. SFAS No. 131 requires publicly held companies to report certain
information concerning its operating segments, its products and services,
geographic areas of operation and its major customers. Both statements are
effective for fiscal years beginning after December 15, 1997 and require
restatement of earlier periods presented. Management does not believe that these
pronouncements will have a material impact on the Company's financial
statements.
16
<PAGE>
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 the identification, evaluation and implementation
activities associated with our global operating infrastructure. The primary
areas of potential business impact are being identified and conversion projects
are proceeding.
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 in the normal course of upgrading its systems to address its
business needs. Since the suite of applications being installed is Year 2000
compliant, incremental costs beyond the scope of this project are not currently
expected to have a material effect on the Company's results of operations and
are being expensed as incurred.
The Company is also communicating with suppliers, financial institutions,
government agencies and other vendors with which it does business to coordinate
Year 2000 conversion efforts. However, the Company can give no assurance that
the systems of other companies on which the Company relies will be converted on
time or that a failure to convert by another company or a conversion that is
incompatible with the Company's systems would not have a material adverse effect
on the Company. At the present time, the Company does not expect Year 2000
issues to materially affect its products, services, competitive position or
financial performance. The Company expects to achieve Year 2000 compliance by
the beginning of the third quarter of 1999.
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, any
Form 10-Q or Form 8-K of the Company, or any oral or written statements made by
or on behalf of the Company, may include forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are identified by their use of
such terms and phrases as "intends," "intend," "intended," "goal," "estimate,"
"estimates," "expects," "expect," "expected," "project," "projects,"
"projected," "projections," "plans," "anticipates," "anticipated," "should,"
"designed to," "foreseeable future," "believe," "believes" and "scheduled" and
similar expressions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statement was
made. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Reference is made to the cautionary statements contained in Exhibit 99 to
this Form 10-K for a discussion of the factors that may cause actual results to
differ from the results discussed in these forward-looking statements.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Financial Statements
<TABLE>
<CAPTION>
Financial Statements of General Semiconductor, Inc. Page
- ----------------------------------------------------------------------------- -------------
<S> <C>
Independent Auditors' Report................................................. 19
Consolidated Financial Statements:
Consolidated Balance Sheets--as of December 31, 1997 and 1996.............. 20
Consolidated Statements of Operations--Years ended December 31, 1997, 1996
and 1995................................................................. 21
Consolidated Statements of Stockholders' Equity--Years ended December 31,
1997, 1996 and 1995...................................................... 22
Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996
and 1995................................................................. 23
Notes to Consolidated Financial Statements................................... 24 through 45
</TABLE>
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
General Semiconductor, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of General
Semiconductor, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of General Semiconductor, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------------------------
DELOITTE & TOUCHE LLP
Jericho, New York
January 28, 1998
19
<PAGE>
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT STOCK PAR VALUE)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................................ $ 5,192 $ 20,252
Short-term investments............................................................... -- 49,946
Accounts receivable, less allowance for doubtful accounts of $825 and $866,
respectively....................................................................... 54,077 49,629
Inventories.......................................................................... 34,309 31,551
Prepaid expenses and other current assets............................................ 9,890 5,675
Deferred income taxes................................................................ 14,263 12,354
------------- ------------
Total current assets............................................................... 117,731 169,407
------------- ------------
Property, plant and equipment--net................................................... 218,752 202,281
Excess of cost over fair value of net assets acquired, less accumulated amortization
of $38,784 and $33,641, respectively............................................... 167,895 173,022
Deferred income taxes................................................................ 26,509 41,590
Intangibles and other assets, less accumulated amortization of $9,228 and $36,876,
respectively....................................................................... 19,418 26,128
------------- ------------
Total non-current assets........................................................... 432,574 443,021
Net assets of discontinued operations................................................ -- 1,444,734
------------- ------------
TOTAL ASSETS......................................................................... $ 550,305 $2,057,162
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................................................... $ 38,332 $ 55,365
Accrued expenses..................................................................... 58,352 40,119
Current portion of long-term debt.................................................... 4,310 4,310
------------- ------------
Total current liabilities.......................................................... 100,994 99,794
Long-term debt....................................................................... 263,764 688,025
Deferred income taxes................................................................ 21,710 15,104
Other non-current liabilities........................................................ 77,476 81,086
------------- ------------
Total liabilities.................................................................... 463,944 884,009
------------- ------------
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; 36,887 and 34,286 shares
issued, respectively............................................................... 369 343
Additional paid-in capital........................................................... 55 926,194
Retained earnings.................................................................... 93,308 254,552
------------- ------------
93,732 1,181,089
Less--Treasury stock, at cost, 104 and 58 shares, respectively....................... (7,371) (7,271)
Unearned compensation............................................................ -- (665)
------------- ------------
Total stockholders' equity......................................................... 86,361 1,173,153
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $ 550,305 $2,057,162
------------- ------------
------------- ------------
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES.................................................................... $ 380,038 $ 361,891 $ 414,269
---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Cost of sales.............................................................. 289,313 230,687 254,991
Selling, general and administrative........................................ 44,668 42,594 51,225
Research and development................................................... 5,998 5,838 5,068
Amortization of excess of cost over fair value of net assets acquired...... 5,143 5,154 5,209
---------- ---------- ----------
Total operating costs and expenses....................................... 345,122 284,273 316,493
---------- ---------- ----------
OPERATING INCOME............................................................. 34,916 77,618 97,776
Other expense-net............................................................ (42) (51) (272)
Interest expense-net......................................................... (14,353) (10,396) (9,461)
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES........................ 20,521 67,171 88,043
Provision for income taxes................................................... (11,649) (27,407) (30,727)
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS............................................ 8,872 39,764 57,316
DISCONTINUED OPERATIONS
Income (Loss) from discontinued operations, net of income tax expense of
$22,073 in 1997, income tax benefit of $20,026 in 1996 and income tax
expense of $7,839 in 1995.................................................. (2,939) (41,628) 66,466
---------- ---------- ----------
NET INCOME (LOSS)............................................................ $ 5,933 $ (1,864) $ 123,782
---------- ---------- ----------
---------- ---------- ----------
Weighted Average Shares Outstanding:
Basic...................................................................... 35,414 32,924 30,871
Diluted.................................................................... 35,576 36,852 36,348
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations...................................................... $ 0.25 $ 1.20 $ 1.86
Discontinued operations.................................................... $ (0.08) $ (1.26) $ 2.15
---------- ---------- ----------
---------- ---------- ----------
Net income (loss).......................................................... $ 0.17 $ (0.06) $ 4.01
---------- ---------- ----------
---------- ---------- ----------
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations...................................................... $ 0.25 $ 1.15 $ 1.68
Discontinued operations.................................................... $ (0.08) $ (0.88) $ 2.18
---------- ---------- ----------
---------- ---------- ----------
Net income................................................................. $ 0.17 $ 0.27 $ 3.86
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED
---------------------- PAID-IN RETAINED GAIN ON TREASURY UNEARNED
SHARES AMOUNT CAPITAL EARNINGS INVESTMENT STOCK COMPENSATION
--------- ----------- ---------- --------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 AS
PREVIOUSLY REPORTED......... 122,231 $ 1,222 $ 543,728 $ 132,634 $ -- $ (17) $ (389)
One-for-four reverse stock
split....................... (91,673) (916) 916 -- -- -- --
--------- ----------- ---------- --------- ----------- ----------- -------
BALANCE, JANUARY 1, 1995 AS
ADJUSTED.................... 30,558 306 544,644 132,634 -- (17) (389)
Exercise of stock options and
related tax benefit......... 276 3 25,905 -- -- -- --
Stock issued for business
acquisition................. 616 6 92,071 -- -- (7,229) (1,394)
Cost associated with the sale/
issuance of common stock.... -- -- (1,100) -- -- -- --
Amortization of unearned
compensation................ -- -- -- -- -- -- 506
Conversion of Convertible
Junior Subordinated
Notes--net.................. 59 1 5,614 -- -- -- --
Net income.................... -- -- -- 123,782 -- -- --
--------- ----------- ---------- --------- ----------- ----------- -------
BALANCE, DECEMBER 31, 1995.... 31,509 316 667,134 256,416 -- (7,246) (1,277)
Exercise of stock options and
related tax benefit......... 40 -- 3,475 -- -- -- --
Amortization of unearned
compensation................ -- -- -- -- -- -- 612
Conversion of Convertible
Junior Subordinated
Notes--net.................. 2,737 27 255,585 -- -- -- --
Treasury stock transactions... -- -- -- -- -- (25) --
Net loss...................... -- -- -- (1,864) -- -- --
--------- ----------- ---------- --------- ----------- ----------- -------
BALANCE, DECEMBER 31, 1996.... 34,286 343 926,194 254,552 -- (7,271) (665)
Exercise of stock options and
related tax benefit......... 200 2 19,361 -- -- -- --
Amortization of unearned
compensation................ -- -- -- -- -- -- 243
Conversion of Convertible
Junior Subordinated
Notes--net.................. 2,397 24 226,636 -- -- -- --
Unrealized gain on investment,
net of tax.................. -- -- -- -- 22,018 -- --
Treasury stock transactions... -- -- -- -- -- (100) --
Distribution of General
Instrument and Commscope.... -- -- (1,172,191) (167,177) (22,018) -- 422
Common Stock issued........... 4 -- 55 -- -- -- --
Net income.................... -- -- -- 5,933 -- -- --
--------- ----------- ---------- --------- ----------- ----------- -------
BALANCE, DECEMBER 31, 1997.... 36,887 $ 369 $ 55 $ 93,308 $ -- $ (7,371) $ --
--------- ----------- ---------- --------- ----------- ----------- -------
--------- ----------- ---------- --------- ----------- ----------- -------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
BALANCE, JANUARY 1, 1995 AS
PREVIOUSLY REPORTED......... $ 677,178
One-for-four reverse stock
split....................... --
------------
BALANCE, JANUARY 1, 1995 AS
ADJUSTED.................... 677,178
Exercise of stock options and
related tax benefit......... 25,908
Stock issued for business
acquisition................. 83,454
Cost associated with the sale/
issuance of common stock.... (1,100)
Amortization of unearned
compensation................ 506
Conversion of Convertible
Junior Subordinated
Notes--net.................. 5,615
Net income.................... 123,782
------------
BALANCE, DECEMBER 31, 1995.... 915,343
Exercise of stock options and
related tax benefit......... 3,475
Amortization of unearned
compensation................ 612
Conversion of Convertible
Junior Subordinated
Notes--net.................. 255,612
Treasury stock transactions... (25)
Net loss...................... (1,864)
------------
BALANCE, DECEMBER 31, 1996.... 1,173,153
Exercise of stock options and
related tax benefit......... 19,363
Amortization of unearned
compensation................ 243
Conversion of Convertible
Junior Subordinated
Notes--net.................. 226,660
Unrealized gain on investment,
net of tax.................. 22,018
Treasury stock transactions... (100)
Distribution of General
Instrument and Commscope.... (1,360,964)
Common Stock issued........... 55
Net income.................... 5,933
------------
BALANCE, DECEMBER 31, 1997.... $ 86,361
------------
------------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations........................................... $ 8,872 $ 39,764 $ 57,316
Adjustments to reconcile income from continuing operations to net cash
provided by continuing operating activities:
Depreciation and amortization............................................. 24,232 22,613 21,347
Changes in assets and liabilities, net of effect of business acquired:
Accounts receivable..................................................... (13,335) 9,190 (8,982)
Inventories............................................................. 2,465 (8,028) (4,013)
Prepaid expenses and other current assets............................... (3,208) 663 23,150
Other non-current assets................................................ 666 44 (992)
Deferred income taxes................................................... (1,236) 14,736 10,191
Accounts payable and accrued expenses................................... 23,973 (12,655) 33,247
Other non-current liabilities............................................. 1,685 (222) (15,867)
Other....................................................................... (331) 2,014 553
---------- ---------- ----------
Net cash provided by continuing operating activities.......................... 43,783 68,119 115,950
---------- ---------- ----------
Cash provided by (used in) discontinued operations............................ 130,753 (225,227) (7,084)
---------- ---------- ----------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment.............................. (29,208) (60,299) (34,912)
Proceeds from sale (purchases) of short-term investments.................... 24,974 (24,974) --
Proceeds from sale of assets................................................ 3,000 4,368 --
Payment for business acquired............................................... (8,982) -- --
---------- ---------- ----------
Net cash used in investing activities....................................... (10,216) (80,905) (34,912)
---------- ---------- ----------
FINANCING ACTIVITIES:
Costs associated with the issuance of debt and Common Stock................. (1,130) (1,053) (1,051)
Net (repayments of) proceeds from revolving credit facilities............... (192,000) 231,000 (57,000)
Redemption of Convertible Junior Subordinated Notes......................... (245) (6,440) --
Principal repayment of debt................................................. (4,310) (4,310) (2,155)
Proceeds from exercise of stock options..................................... 18,305 2,686 17,506
---------- ---------- ----------
Net cash (used in) provided by financing activities........................... (179,380) 221,883 (42,700)
---------- ---------- ----------
(Decrease) increase in cash and cash equivalents.............................. (15,060) (16,130) 31,254
Cash and cash equivalents, beginning of year.................................. 20,252 36,382 5,128
---------- ---------- ----------
Cash and cash equivalents, end of year........................................ $ 5,192 $ 20,252 $ 36,382
---------- ---------- ----------
---------- ---------- ----------
Supplemental cash flow information, relating to continuing and discontinued
operations:
Income taxes paid........................................................... $ 37,224 $ 55,647 $ 36,973
Interest paid............................................................... $ 32,033 $ 41,766 $ 47,801
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
General Semiconductor, Inc. ("General Semiconductor" or the "Company") is a
world leader in the discrete segment of the semiconductor industry. The Company
designs, manufactures and sells low-to-medium-power rectifiers, small signal
transistors and transient voltage suppression ("TVS") components in axial,
bridge, surface mount and array packages. Power rectifiers 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 transistors amplify or switch low level currents. The
Company's products are primarily targeted for use in the computer, automotive,
telecommunications 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 Systems"), and all the assets and
liabilities relating to the manufacture and sale of coaxial, fiber optic and
other electric cable used in the cable television, satellite and other
industries to its wholly-owned subsidiary CommScope, Inc. ("CommScope") and (ii)
distributed all of the outstanding shares of capital stock of each of NextLevel
Systems and CommScope to its stockholders on a pro rata basis as a dividend (the
"Distribution") in a transaction that was finalized on July 28, 1997 (the
"Distribution Date"). On the Distribution Date, NextLevel Systems and CommScope
began operating as independent entities with publicly traded common stock. GI
retained no ownership interest in either NextLevel Systems or CommScope.
Concurrent with the Distribution, GI changed its name to General Semiconductor,
Inc. and effected a one for four reverse stock split (the "Stock Split"). On
February 2, 1998, NextLevel Systems changed its name to General Instrument
Corporation ("General Instrument").
In this report, all share and per share amounts have been retroactively
restated to reflect the Stock Split. In addition, the number of common shares
issued have been adjusted to reflect the Stock Split and an amount equal to the
par value of the reduction of the shares has been transferred from common stock
to additional paid-in capital as of January 1, 1995, the earliest period
reported.
The revenues, costs and expenses, assets and liabilities and cash flows of
the businesses transferred to the General Instrument and CommScope segments (the
"Discontinued Operations"), have been excluded from the respective captions in
the Consolidated Statements of Operations, Consolidated Balance Sheets and
Consolidated Statements of Cash Flows and have been reported through the
Distribution Date as "Income (Loss) from discontinued operations", net of
applicable income taxes; as "Net assets of discontinued operations"; and as
"Cash flow from discontinued operations" for all periods presented. For the
purpose of governing certain of the ongoing relationships among General
Semiconductor, General Instrument and CommScope after the Distribution, these
entities entered into various agreements that provide for an orderly transition,
the separation and distribution of the operating assets and liabilities and
pension plan assets and liabilities of GI, as well as tax sharing, and other
matters.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of General Semiconductor and its wholly-owned
subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.
24
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES. The preparation of the accompanying consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
a maturity of three months or less at the date of purchase to be cash
equivalents.
INVENTORIES. Inventories are stated at the lower of cost, determined on a
first-in, first-out ("FIFO") basis, or market.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Provisions for depreciation are based on estimated useful lives of the
assets using the straight-line method. Average useful lives are 12 to 40 years
for buildings and improvements; estimated useful life or lease term, whichever
is shorter, for leasehold improvements and 3 to 10 years for machinery and
equipment. The cost of maintenance and repairs is charged to operations as
incurred.
INTANGIBLE ASSETS. Intangible assets consist primarily of patents which are
amortized on a straight-line basis over their useful lives not exceeding 20
years.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED. The excess of cost
over fair value of net assets acquired is being amortized on a straight-line
basis over 40 years. Management periodically evaluates the appropriateness of
both the carrying value and remaining life of the excess of cost over fair value
of net assets acquired by assessing recoverability based on forecasted operating
cash flows, on an undiscounted basis, and other factors.
LONG-LIVED ASSETS. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. SFAS No. 121
prescribes the accounting treatment for long-lived assets, identifiable
intangibles and goodwill related to those assets when there are indications that
the carrying values of those assets may not be recoverable. Whenever events
indicate that the carrying values of such assets may not be recoverable, the
Company evaluates the carrying values of such assets using future undiscounted
cash flows. The adoption of SFAS No. 121 did not have a material impact on the
Company's financial position or results of operations.
REVENUE RECOGNITION. The Company recognizes revenue when products are
shipped, with appropriate provisions for uncollectible accounts and credits for
returns.
FOREIGN CURRENCY TRANSLATION. The Company has determined the U.S. dollar to
be the functional currency of all foreign subsidiaries. Accordingly, gains and
losses recognized as a result of translating foreign subsidiaries' monetary
assets and liabilities from local foreign currencies to U.S. dollars are
reflected in the accompanying consolidated statements of operations.
RESEARCH AND DEVELOPMENT. The Company charges research and development
expenses to operations as incurred.
25
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ENVIRONMENTAL LIABILITIES. The Company accounts for environmental
expenditures in accordance with Statement of Position 96-1, "Environmental
Remediation Liabilities". Accordingly, the Company accrues for environmental
expenses resulting from existing conditions that relate to past operations when
the costs are probable and reasonably estimable.
INCOME TAXES. Deferred income taxes reflect the future tax consequences of
differences between the financial reporting and income tax bases of assets and
liabilities. Deferred income taxes are provided for the income tax liabilities
to be incurred on the repatriation of undistributed earnings of the Company's
foreign subsidiaries, except for locations where the Company has designated
earnings to be permanently reinvested.
EARNINGS (LOSS) PER SHARE. The Company adopted SFAS No. 128 "Earnings per
share" during 1997. SFAS No. 128 changed the computation, presentation and
disclosure requirements for earnings per share. In accordance with this
pronouncement, the Company retroactively adopted this standard and restated all
historical earnings per share data contained in this report. SFAS No. 128
requires presentation of "basic" and "diluted" earnings per share. The adoption
of SFAS No. 128 did not have a material impact on the Company's earnings per
share.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to the current year presentation.
3. DISCONTINUED OPERATIONS
Net sales for the Discontinued Operations included in the statement of
operations were $1.3 billion, $2.3 billion and $2.0 billion for the years ended
December 31, 1997, 1996 and 1995, respectively.
Discontinued operations also includes $52.9 million and $2.7 million, net of
applicable income taxes, for the years ended December 31, 1997 and 1996,
respectively, for costs incurred primarily related to the separation of the
Taiwan operations between General Semiconductor and General Instrument and for
professional fees and certain other administrative and financing costs incurred
directly related to the Distribution.
Net assets of Discontinued Operations as of December 31, 1996 are:
<TABLE>
<S> <C>
Accounts receivable..................................................... $ 494,801
Inventories............................................................. 304,965
Prepaid expenses........................................................ 18,944
Deferred income taxes................................................... 94,968
Property, plant and equipment........................................... 368,770
Intangible and other non-current assets................................. 140,323
Deferred income taxes, non-current...................................... 32,499
Goodwill................................................................ 654,351
Current liabilities..................................................... (434,926)
Flexible term notes..................................................... (10,800)
Other non-current liabilities........................................... (219,161)
---------
$1,444,734
---------
---------
</TABLE>
26
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
3. DISCONTINUED OPERATIONS (CONTINUED)
The distribution of the net assets of discontinued businesses reduced
stockholders' equity by $1.4 billion of which $1.2 billion was allocated to
additional paid-in capital and $0.2 billion to retained earnings.
4. ACQUISITION
On October 1, 1997 the Company purchased certain assets and assumed certain
liabilities related to the discrete semiconductor business of ITT Industries,
Inc. for $8.0 million plus $1.0 million in direct transaction costs. The
acquisition was accounted for as a purchase transaction and, accordingly, the
results of operations are included in the consolidated statement of operations
since the date of acquisition. The pro forma effects, assuming this transaction
was effective January 1, 1996, were not material to the Company's results of
operations, financial position or cash flows for the years ended December 31,
1997 and 1996.
5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Raw materials.................................................... $ 7,181 $ 6,616
Work in process.................................................. 12,052 11,813
Finished goods................................................... 15,076 13,122
------- -------
Total.......................................................... $ 34,309 $ 31,551
------- -------
------- -------
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Land and land improvements....................................... $ 76,328 $ 76,298
Buildings, improvements and leasehold improvements............... 63,485 57,822
Machinery and equipment.......................................... 208,067 183,881
-------- --------
347,880 318,001
Accumulated depreciation......................................... (129,128) (115,720)
-------- --------
Property, plant and equipment, net............................... $ 218,752 $ 202,281
-------- --------
-------- --------
</TABLE>
Depreciation expense aggregated $16.8 million, $14.4 million and $12.8
million for 1997, 1996 and 1995, respectively.
27
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
7. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Salaries and compensation liabilities............................ $ 14,849 $ 8,191
Distribution and reorganization liabilities...................... 18,734 3,853
Benefit plan liabilities......................................... 4,916 8,634
Other............................................................ 19,853 19,441
------- -------
Total.......................................................... $ 58,352 $ 40,119
------- -------
------- -------
</TABLE>
In connection with the Distribution, the Company recorded in income (loss)
from continuing operations a pre-tax charge of $32.7 million to cost of sales
and $1.1 million to selling, general and administrative expenses during the year
ended December 31, 1997. These costs relate to employees of General
Semiconductor and were incurred in connection with the separation of the Taiwan
operations between General Semiconductor and General Instrument.
8. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Environmental liabilities........................................ $ 32,415 $ 35,123
Benefit plan liabilities......................................... 36,070 30,626
Other............................................................ 8,991 15,337
------- -------
Total.......................................................... $ 77,476 $ 81,086
------- -------
------- -------
</TABLE>
9. INCOME TAXES
General Semiconductor, General Instrument and CommScope entered into a tax
sharing agreement (the "Tax Sharing Agreement") that defines the parties' rights
and obligations with respect to federal, state and other income or franchise
taxes related to the businesses of GI for tax periods prior to, including and
following the Distribution and with respect to certain other tax matters. In
general, 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.
28
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
9. INCOME TAXES (CONTINUED)
The domestic and foreign components of income from continuing operations
before income taxes is:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Domestic............................................................... $ 16,354 $ 62,084 $ 44,641
Foreign................................................................ 4,167 5,087 43,402
--------- --------- ---------
Total................................................................ $ 20,521 $ 67,171 $ 88,043
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal................................................................ $ 4,691 $ 9,477 $ 46,418
Foreign................................................................ 2,754 2,842 15,284
State.................................................................. 2,200 922 (949)
--------- --------- ---------
9,645 13,241 60,753
--------- --------- ---------
--------- --------- ---------
Deferred:
Federal................................................................ 3,066 9,472 (28,777)
Foreign................................................................ (1,325) 3,129 (2,682)
State.................................................................. 263 2,015 3,090
--------- --------- ---------
2,004 14,616 (28,369)
--------- --------- ---------
Net change in valuation allowance...................................... -- (450) (1,657)
--------- --------- ---------
Provision for income taxes............................................. $ 11,649 $ 27,407 $ 30,727
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table presents the principal reasons for the difference
between the actual income tax provision and the tax provision computed by
applying the U.S. federal statutory income tax rate to income from continuing
operations before income taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax provision at 35%.................................... $ 7,182 $ 23,510 $ 30,815
Valuation allowance benefit............................................ -- (450) (1,657)
State income taxes-net of federal benefit.............................. 1,601 1,909 1,391
Foreign operations..................................................... 1,470 1,805 (3,414)
Non-deductible expenses................................................ 914 1,844 1,872
Other-net.............................................................. 482 (1,211) 1,720
--------- --------- ---------
Provision for income taxes............................................. $ 11,649 $ 27,407 $ 30,727
--------- --------- ---------
--------- --------- ---------
Effective income tax rate.............................................. 56.8% 40.8% 34.9%
</TABLE>
29
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
9. INCOME TAXES (CONTINUED)
Income taxes related to foreign operations in 1997, 1996 and 1995 reflect
the Company's ability to recognize the benefit of foreign tax credits.
Deferred income taxes as recorded in the accompanying consolidated balance
sheets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- -------------------------------
ASSET LIABILITY NET ASSET LIABILITY NET
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Current Deferred Income Taxes:
Accounts receivable and inventory reserves..... $ 2,177 $ -- $ 2,177 $ 4,919 $ -- $ 4,919
Product and warranty liabilities............... 437 -- 437 413 -- 413
Employee benefits.............................. 5,576 -- 5,576 2,481 -- 2,481
Other current.................................. 6,073 -- 6,073 4,541 -- 4,541
--------- --------- --------- --------- --------- ---------
$ 14,263 -- $ 14,263 $ 12,354 $ -- $ 12,354
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Non-Current Deferred Income Taxes:
Domestic capital loss carryforwards............ $ 17,518 $ -- $ 17,518 $ 17,518 $ -- $ 17,518
Tax credit carryforwards....................... -- -- -- 12,318 -- 12,318
Fixed and intangible assets.................... (4,745) 1,081 (5,826) (3,523) 1,218 (4,741)
Environmental liabilities...................... 12,318 -- 12,318 14,755 -- 14,755
Litigation liabilities......................... -- -- -- 265 -- 265
Employee benefits.............................. 12,535 205 12,330 11,773 -- 11,773
Other non-current.............................. 8,660 20,424 (11,764) 8,261 13,886 (5,625)
Valuation allowance............................ (19,777) -- (19,777) (19,777) -- (19,777)
--------- --------- --------- --------- --------- ---------
$ 26,509 $ 21,710 $ 4,799 $ 41,590 $ 15,104 $ 26,486
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
In accordance with the Tax Sharing Agreement, approximately $17.8 million of
deferred tax assets related to the Company were allocated to General Instrument
in connection with the Distribution.
Deferred taxes have not been provided on undistributed earnings (losses) of
certain foreign operations of $9.9 million and $(2.4 million) in 1997 and 1996,
respectively, as those earnings (losses) are considered to be permanently
reinvested. Determining the tax liability that would arise if these amounts were
remitted is not practicable.
The valuation allowance at December 31,1997 relates principally to domestic
capital loss carryforwards, which expire in 2002. The valuation allowance will
be reduced when and if the Company generates domestic capital gains.
During 1996 and 1995, the Company settled certain tax matters which resulted
in credits to excess of cost over fair value of net assets acquired of $1.8
million and $5.5 million, respectively, since such matters related to the period
prior to August 1990, when affiliates of Forstmann Little & Co., a private
investment firm, acquired the Company.
30
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
10. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Senior bank indebtedness:
Revolving credit facility............................ $ 222,000 $ 414,000
Taiwan loan.......................................... 46,074 50,384
Convertible Junior Subordinated Notes.................. -- 227,951
-------- --------
268,074 692,335
Less current maturities................................ 4,310 4,310
-------- --------
Long-term debt......................................... $ 263,764 $ 688,025
-------- --------
-------- --------
</TABLE>
In May 1996, the Company issued a notice to redeem $250 million in principal
amount of its 5% Convertible Junior Subordinated Notes (the "Notes"). Of the
Notes called, $244 million in principal amount were converted into the Company's
Common Stock prior to the redemption date, with the remaining $6 million
redeemed for cash. Additionally, $16 million and $6 million in principal amount
of Notes that were not called for redemption were also converted into GI Common
Stock during 1996 and 1995, respectively. These conversions resulted in the
issuance of 2.8 million shares of Common Stock. In connection with the Common
Stock conversions, $4.4 million was charged to additional paid-in capital, net
of the related tax benefit, for unamortized deferred financing costs and accrued
but unpaid interest related to the converted Notes. During 1997 the remaining
Notes outstanding were converted into GI Common Stock at a conversion price of
$23.75 per share (unadjusted for the Distribution and Stock Split) resulting in
the issuance of 2.4 million shares, and $0.2 million in principal amount of
Notes were redeemed. In connection with the conversion, GI charged approximately
$1.5 million to additional paid-in capital, net of the related tax benefit, for
unamortized deferred financing costs and accrued but unpaid interest related to
the converted Notes.
The Company repaid the GI revolving credit facility in July 1997 utilizing a
combination of the bank credit facility described below and amounts received
from General Instrument and CommScope at the Distribution Date totaling $170.1
million.
In July 1997, the Company entered into a bank credit agreement (the "Credit
Agreement") which provides for a $350.0 million secured revolving credit
facility that matures on December 31, 2002. The Credit Agreement requires the
Company to pay a facility fee on the total commitment. The Credit Agreement
permits the Company to choose between two interest rate options: the Adjusted
Base Rate (as defined in the Credit Agreement) or a Eurodollar rate (LIBOR) plus
a margin which varies based on the Company's ratio of indebtedness to earnings
before income taxes, depreciation and amortization as defined in the Credit
Agreement. The facility fee also varies based on that ratio. The Company is also
able to set interest rates through a competitive bid procedure. The Credit
Agreement contains financial and operating covenants, including limitations on
guarantee obligations, liens, sale of assets, indebtedness, investments, capital
expenditures, payment of dividends and leases, and requires the maintenance of
certain financial ratios. At December 31, 1997 the Company was in compliance
with all such covenants. In addition, certain changes in control of the Company
would cause an event of default under the Credit Agreement.
31
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
10. LONG-TERM DEBT (CONTINUED)
At December 31, 1997, the Company had a $60 million loan agreement with a
consortium of banks in Taiwan (the "Taiwan Loan Agreement"). Borrowings under
the Taiwan Loan Agreement were collateralized by a mortgage on land and
buildings in Taiwan, and the interest rate under the Taiwan Loan Agreement was
equal to the Singapore Interbank Offered Rate (SIBOR) plus .75%. At December 31,
1997, the variable rate was 7.1%. The borrowings were to mature on June 30, 2000
and required nine semi-annual installments of $2.2 million payable on June 30
and December 31, which began on December 31, 1995, with the remaining balance to
be paid at maturity. On February 26, 1998, the Company repaid the entire loan
balance with proceeds from borrowings under the Credit Agreement.
The weighted average interest rate on the Company's long-term debt at
December 31, 1997 and 1996 was 6.6% and 5.7%, respectively.
Net interest expense included in the consolidated Statement of Operations
through the Distribution Date represents an allocation based upon General
Semiconductor's net assets as a percentage of total assets of GI.
11. COMMITMENTS AND CONTINGENCIES
The Company leases office space, manufacturing facilities and transportation
and other equipment under operating leases which expire at various dates through
the year 2004. Rent expense was $3.3 million, $2.9 million and $2.2 million in
1997, 1996 and 1995, respectively.
Future minimum lease payments required under operating leases as of December
31, 1997 are:
<TABLE>
<S> <C>
1998................................................................ $ 3,154
1999................................................................ 2,684
2000................................................................ 2,149
2001................................................................ 1,338
2002................................................................ 1,232
Thereafter.......................................................... 1,187
</TABLE>
The Company has approximately $10.0 million in letters of credit outstanding
at December 31, 1997.
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.
Compliance with current laws and regulations has not had, and is not expected to
have, a material adverse effect on the Company's financial condition. The
Company is also involved in remediation programs, principally with respect to
former manufacturing sites, which are proceeding in conjunction 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
32
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $34.9 million at
December 31, 1997 ($37.6 million at December 31, 1996). While the ultimate
outcome of these matters cannot be determined, management does not believe that
the final disposition of these matters beyond the amounts previously provided
for in the financial statements will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
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, the Company's 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.
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 and Exchange Act of 1934, as
amended, 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. The plaintiffs have moved for class certification and
the Company has filed its opposition to class certification. 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 General Instrument'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's common stock for personal gain. The court had
granted the defendants motions to dismiss the original complaints in both of
these actions, 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.
An action entitled BKP PARTNERS, L.P. V. GENERAL INSTRUMENT CORP. was
brought in February 1996 by shareholders of NextLevel Communications, which was
merged into 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 complaint alleges that the GI Common Stock, which was
received by the plaintiffs as a result of the merger, was overpriced because of
the matters complained of in the class action and GI's failure to disclose
information concerning a significant reduction in its gross margins. On
September 23,
33
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
1997 the district court dismissed the complaint, without prejudice, and the
plaintiffs were given until November 7, 1997 to amend their complaints. On
November 7, 1997, plaintiffs served the defendants with amended complaints,
which contain allegations substantially similar to those in the original
complaint. Defendants have filed a motion to dismiss parts of the amended
complaint and have answered the balance of the amended complaint, denying
liability.
An action entitled BROADBAND TECHNOLOGIES, INC. VS. GENERAL INSTRUMENT CORP.
was brought in March 1997 in the United States District Court for the Eastern
District of North Carolina. The complaint alleges that GI infringes BroadBand
Technologies, Inc.'s ("BBT") U.S. Patent No. 5,457,560, covering an electronic
communications system which delivers television signals, and seeks monetary
damages and injunctive relief. On June 13, 1997, GI's motion to dismiss the
complaint for lack of jurisdiction was denied. In March 1998, General Instrument
filed motions with the district court for summary judgement on the issues of
invalidity and non-infringement of the BBT patent and BBT filed a motion of
partial summary judgement on the issue of infringement.
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), the BKP PARTNERS, L.P. V. GENERAL INSTRUMENT CORP.
litigation and the action entitled BROADBAND TECHNOLOGIES, INC. V. GENERAL
INSTRUMENT CORP. 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.
12. EMPLOYEE BENEFITS
PENSION PLANS. In connection with the Distribution, the Company, General
Instrument and CommScope entered into an Employee Benefits Allocation Agreement
(the "Agreement"). The Agreement provides that the Company generally will assume
or retain, as the case may be, all liabilities under employee benefits plans
maintained by GI or any of its subsidiaries with respect to employees of General
Semiconductor or any of its retained subsidiaries and employees of previously
divested operations other than the liabilities related to employees of General
Instrument or CommScope subsequent to the Distribution. The Company believes
that the Agreement is fair to each of the parties and contains terms which
generally are comparable to those which would have been reached at arms-length
negotiations with unaffiliated parties.
34
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
12. EMPLOYEE BENEFITS (CONTINUED)
Net pension cost for continuing operations consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost............................. $ 407 $ 2,746 $ 325 $ 2,968 $ 263 $ 2,294
Interest................................. 5,117 3,301 4,616 3,503 4,445 3,415
Return on plan assets.................... (15,188) (999) (5,670) (1,663) (17,429) (1,552)
Net amortization and deferral............ 9,558 758 878 906 12,759 129
----------- --------- ----------- --------- ----------- ---------
Net pension cost (income)................ $ (106) $ 5,806 $ 149 $ 5,714 $ 38 $ 4,286
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
</TABLE>
The funded status of the Company's continuing pension plans and the related
amounts recorded in the accompanying consolidated balance sheets are:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefits............................... $ 73,629 $ 18,174 $ 64,517 $ 9,231
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Accumulated benefits.......................... $ 73,787 $ 26,669 $ 64,640 $ 28,972
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Projected benefit obligation.................... $ 75,741 $ 52,031 $ 65,431 $ 58,229
Market value of plan assets..................... 78,539 13,398 68,357 24,556
--------- ---------- --------- ----------
Funded status................................... 2,798 (38,633) 2,926 (33,673)
Unrecognized loss (gain)........................ (911) 16,082 (4,735) 18,134
--------- ---------- --------- ----------
(Accrued pension obligation)/prepaid cost....... $ 1,887 $ (22,551) $ (1,809) $ (15,539)
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Actuarial assumptions:
Discount rate................................. 7% 6% 7.75% 6.75%
Investment return............................. 9% 8% 9% 8%
Compensation increases........................ 4.75% 6% 4.75% 6%
</TABLE>
The domestic pension plans consist principally of a qualified retirement
plan which has satisfied the full funding limitation requirements under the
Employee Retirement Income Security Act of 1974 ("ERISA"). The Company made no
contributions to the plan in 1997 or 1995. Contributions to the plan in 1996
were $3.8 million. Domestic plan assets consist of fixed income and equity
securities. The Company also has an unfunded supplemental retirement plan for
certain members of management. Net pension cost and accrued pension obligations
for this plan are included in the amounts above.
The foreign pension plans consist principally of a Taiwan and a German
pension plan which are funded in accordance with statutory requirements. Foreign
pension contributions were $2.7 million in each of 1997 and 1996 and $2.4
million in 1995. Foreign plan assets principally consist of fixed income
securities.
35
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
12. EMPLOYEE BENEFITS (CONTINUED)
DEFINED CONTRIBUTION PLANS. The Company maintains defined contribution
plans covering all domestic non-union employees and employees in Ireland and
France. Company contributions were $0.7 million, $0.4 million and $0.3 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. The Company maintains an
unfunded contributory group medical plan (the "Plan") for all full-time U.S.
employees not covered by a collective bargaining agreement who meet defined age
and service requirements. The Company recognizes the cost of providing and
maintaining postretirement benefits during employees' active service periods.
The Plan is the primary provider of benefits for retirees up to age 65. After
age 65, Medicare becomes the primary provider. Net postretirement benefit cost
consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost........................................................... $ 107 $ 78 $ 53
Interest............................................................... 971 872 956
Net amortization and deferral.......................................... (312) (383) (436)
--------- --- ---
Net postretirement benefit cost........................................ $ 766 $ 567 $ 573
--------- --- ---
--------- --- ---
</TABLE>
The status of the Plan and the related amounts recorded in the accompanying
consolidated balance sheets are:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Accumulated postretirement benefit obligation ("APBO"):
Retirees............................................... $ 12,422 $ 10,751
Active participants.................................... 2,178 1,137
------- -------
Total APBO............................................. 14,600 11,888
Unrecognized prior service cost........................ 5,217 5,600
Unrecognized gain (loss)............................... (3,433) 2,036
------- -------
Accrued postretirement benefit obligation.............. $ 16,384 $ 19,524
------- -------
------- -------
Discount rate used in determining APBO................. 7.00% 7.25%
</TABLE>
The assumed rate of future increases in health care costs during 1997 and
1996 was 12.5% and 14%, respectively, for pre-age 65 retirees, and 10% and 11%,
respectively, for post-age 65 retirees, and is expected to decline to 6% by the
year 2007. Under the Plan, the actuarially determined effect of a one percentage
point increase in the assumed health care cost trend rate on annual net
postretirement benefit cost and the APBO would be $1.3 million for 1997 and
1996.
In accordance with the Employee Benefits Allocation Agreement, approximately
$8.0 million of net pension liabilities related to the Company were transferred
to General Instrument in connection with the Distribution.
36
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
12. EMPLOYEE BENEFITS (CONTINUED)
POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS. The postemployment benefits
obligation relates principally to medical costs for former employees on long
term disability. As of December 31, 1997 and 1996 $0.9 million and $0.8 million
was accrued for postemployment benefits, respectively.
13. STOCKHOLDERS' EQUITY
DISTRIBUTION. GI distributed all of its outstanding shares of capital
stock of each of General Instrument and CommScope to its stockholders on a pro
rata basis as a dividend in a transaction that was consummated on July 28, 1997.
Approximately 147.3 million shares of General Instrument Common Stock, based on
a ratio of one for one, were distributed to GI's stockholders of record on July
25, 1997. On July 28, 1997, approximately 49.1 million shares of CommScope
Common Stock, based on a ratio of one for three, were distributed to General
Instrument stockholders of record on that date. General Semiconductor (formerly
GI) retained no ownership interest in either General Instrument or CommScope.
Additionally, immediately following the Distribution, General Semiconductor
effected a one for four reverse stock split.
STOCK OPTION PLAN. In May 1993, the stockholders of the Company approved
the General Instrument Corporation 1993 Long-Term Incentive Plan (the "1993
Plan") which provides for the granting of stock options, stock appreciation
rights, restricted stock, performance units, performance shares and phantom
stock to employees of the Company and its subsidiaries and the granting of stock
options to directors of the Company. Following the Distribution, the Company
continued in effect the 1993 Plan, renamed the Amended and Restated General
Semiconductor, Inc. 1993 Long-Term Incentive Plan (the "Incentive Plan") as
adjusted to reflect the Distribution and Stock Split. Stock options granted
generally vest ratably over a three year period beginning on the first
anniversary from the date granted, expire after ten years and have exercise
prices equal to the market value of the Company's common stock at the date of
grant.
The following table summarizes stock option activity relating to the
Company's Incentive Plan since the Distribution. For the period January 1, 1997
through the Distribution, 8,422 options to purchase GI common stock were
granted, 798 options were exercised and 4,032 options were canceled. The
weighted average exercise price of these options (unadjusted for the
Distribution and Stock Split) was $23.14, $22.95 and $29.50, respectively. At
the Distribution Date, all unexercised GI stock options held by General
Semiconductor employees and certain Directors of GI were converted into General
Semiconductor stock options. For the holders of unexercised General
Semiconductor stock options, the number of options was adjusted and all exercise
prices were decreased immediately following the Distribution to preserve the
economic value of the options that existed prior to the Distribution Date.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
----------- -------------
<S> <C> <C>
Outstanding at Distribution Date..................................... 2,838 $ 11.77
Granted.............................................................. 195 14.94
Canceled............................................................. (17) 12.00
-----
Options outstanding at December 31, 1997............................. 3,016 $ 11.98
-----
-----
</TABLE>
37
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
13. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable under the Company's Incentive Plan.
<TABLE>
<CAPTION>
SHARES UNDER OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- --------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT DECEMBER CONTRACTUAL EXERCISE AT DECEMBER EXERCISE
EXERCISE PRICES 31, 1997 TERM (YEARS) PRICE 31, 1997 PRICE
- ------------------ --------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$1.48 to $11.60.... 297 5.6 $ 8.70 271 $ 8.43
$11.75 to $12.06... 1,666 9.0 $ 11.75 170 $ 11.75
$12.79 to $14.94... 1,053 7.6 $ 13.26 713 $ 12.87
----- ------
3,016 8.2 $ 11.98 1,154 $ 11.66
----- ------
----- ------
</TABLE>
At December 31, 1997 and 1996, 0.7 million and 5.2 million shares,
respectively, were reserved for future awards under the Company's Incentive
Plan. The tax benefits arising from stock option exercises during the years
ended December 31, 1997, 1996 and 1995 in the amount of $1.1 million, $0.8
million and $8.4 million, respectively, were recorded in stockholders' equity as
additional paid-in capital.
In addition, under the provisions of the Incentive Plan, the Company issued
4 thousand shares of Common Stock to certain members of its Board of Directors
during the year ended December 31, 1997.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its Incentive Plan. Since the exercise price of all stock options granted under
the Incentive Plan in 1997, 1996 and 1995 was equal to the closing price of the
Common Stock on the New York Stock Exchange on the date of grant, no
compensation expense has been recognized by the Company for its stock-based
compensation plan during these years other than for restricted stock agreements.
Compensation expense, including continuing and discontinued operations, would
have been $27.1 million, $21.9 million and $7.1 million in 1997, 1996 and 1995,
respectively, had compensation cost for stock options awarded during these years
under the Company's stock option agreements been determined based upon the fair
value at the grant date consistent with the methodology prescribed under SFAS
No. 123, "Accounting for Stock-Based Compensation". The Company's pro forma net
income (loss) and diluted earnings (loss) per share would have been $(10.9)
million and $(0.31) per share for 1997, $(15.2) million and $(0.46) per share
for 1996 and $119.5 million and $3.29 per share for 1995. The estimated
weighted-average per share fair value of the options granted during 1997 was
$9.70 through the Distribution Date, $6.38 for the remainder of 1997, and $10.80
and $10.00, for 1996 and 1995 respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Expected life (years)............................................. 4.0 4.0 4.0
Risk-free interest rate........................................... 6.39% 6.18% 6.21%
Expected volatility-pre-Distribution.............................. 43.00% 43.00% 38.00%
Expected volatility-post-Distribution............................. 45.00% -- --
Expected dividend yield........................................... 0% 0% 0%
</TABLE>
38
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
13. STOCKHOLDERS' EQUITY (CONTINUED)
The pro forma effect on net income (loss) and earnings (loss) per share for
1997, 1996 and 1995 may not be representative of the pro forma effect in future
years because it includes compensation cost on a straight-line basis over the
vesting periods of the grants and does not take into consideration the pro forma
compensation costs for grants made prior to 1995.
STOCKHOLDER RIGHTS PLAN. On January 6, 1997, the Board of Directors adopted
a stockholder rights plan designed to protect stockholders from various abusive
takeover tactics, including attempts to acquire control of the Company at an
inadequate price. Under the rights plan, each stockholder, subsequent to the
distribution date of January 24, 1997, receives a dividend of one right for each
outstanding share of Common Stock. The rights are attached to, and presently
only trade with, the Common Stock and currently are not exercisable. Except as
specified below, upon becoming exercisable, all rights holders will be entitled
to purchase from the Company one one-thousandth of a share of Series A Junior
Participating Preferred Stock ("Participating Preferred Stock") at a price of
$100.
The rights become exercisable and will begin to trade separately from the
Common Stock upon the earlier of (i) the first date of public announcement that
a person or group (other than an existing 15% stockholder or pursuant to a
Permitted Offer, as defined) has acquired beneficial ownership of 15% or more of
the outstanding Common Stock, or (ii) 10 business days following a person's or
group's commencement of, or announcement of, an intention to commence a tender
or exchange offer, the consummation of which would result in beneficial
ownership of 15% or more of the Common Stock. The rights will entitle holders to
purchase Common Stock having a market value (immediately prior to such
acquisition) of twice the exercise price of the right in lieu of purchasing the
Participating Preferred Stock. If the Company is acquired through a merger or
other business combination transaction (other than a Permitted Offer, as
defined), each right will entitle the holder to purchase common stock of the
surviving company having a market value (immediately prior to such acquisition)
of twice the exercise price of the right. The Company may redeem the rights for
$0.01 each at any time prior to such acquisition. The rights will expire on
January 6, 2007, unless earlier redeemed.
In connection with the stockholder rights plan, the Board of Directors
approved the creation of, out of the authorized but unissued shares of preferred
stock of the Company, the Participating Preferred Stock, consisting of 0.4
million shares with a par value of $0.01 per share. The holders of the
Participating Preferred Stock are entitled to receive dividends, if declared by
the Board of Directors, from funds legally available. Each share of
Participating Preferred Stock is entitled to one thousand votes on all matters
submitted to stockholder vote. The shares of Participating Preferred Stock are
not redeemable by the Company nor convertible into Common Stock or any other
security of the Company.
39
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
14. EARNINGS (LOSS) PER SHARE
The Company adopted SFAS No. 128 "Earnings per Share" during 1997. In
accordance with this pronouncement, the Company retroactively adopted this
standard and restated all historical earnings per share data contained in this
report. SFAS 128 requires presentations of "basic" and "diluted" earnings per
share.
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the applicable periods. Diluted earnings (loss) per share
computations for all periods are based on net income (loss) 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 (loss) 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 each of the years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- -----------
<S> <C> <C> <C>
BASIC EPS
Income from continuing operations available to common
stockholders....................................... $ 8,872 35,414 $ 0.25
-----
-----
EFFECT OF DILUTIVE SECURITIES
Options............................................ -- 162
------ ------
DILUTED EPS
Income from continuing operations available to common
stockholders plus assumed conversions.............. $ 8,872 35,576 $ 0.25
------ ------ -----
------ ------ -----
</TABLE>
The effect of the Notes outstanding through the Distribution is excluded
from the above computation of diluted earnings per share because the impact was
anti-dilutive. Had the impact of the weighted average shares outstanding related
to the Notes of 1,305 shares been included in the diluted calculation, the
diluted weighted average shares outstanding of as December 31, 1997 would have
been 36,881 shares.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- -----------
<S> <C> <C> <C>
BASIC EPS
Income from continuing operations available to common
stockholders....................................... $ 39,764 32,924 $ 1.20
-----
-----
EFFECT OF DILUTIVE SECURITIES
Options............................................ -- 171
Convertible debt................................... 2,658 3,757
------------ ------
DILUTED EPS
Income from continuing operations available to common
stockholders plus assumed conversions.............. $ 42,422 36,852 $ 1.15
------------ ------ -----
------------ ------ -----
</TABLE>
40
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
14. EARNINGS (LOSS) PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- -----------
<S> <C> <C> <C>
BASIC EPS
Income from continuing operations available to common
stockholders....................................... $ 57,316 30,871 $ 1.86
-----
-----
EFFECT OF DILUTIVE SECURITIES
Options............................................ -- 222
Convertible debt................................... 3,768 5,255
------------ ------
DILUTED EPS
Income from continuing operations available to common
stockholders plus assumed conversions.............. $ 61,084 36,348 $ 1.68
------------ ------ -----
------------ ------ -----
</TABLE>
15. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
Derivative instruments are primarily used by the Company to reduce financial
risk arising from changes in foreign exchange and interest rates. The Company
does not use derivative instruments for trading purposes, nor does it engage in
currency or interest rate speculation. Derivatives used by the Company consist
of foreign exchange, interest rate and other instruments. The Company believes
that the various counterparties with which the Company enters into these
agreements consist of only financially sound institutions and, accordingly,
believes that the credit risk for non-performance of these contracts is not
significant. The Company monitors its underlying market risk exposures on an
ongoing basis and believes that it can modify or adapt its hedging strategies as
needed.
FOREIGN EXCHANGE INSTRUMENTS. The Company enters into forward exchange
contracts on a month-to-month basis to minimize the effect of foreign currency
fluctuations with regard to certain monetary assets and liabilities denominated
in currencies other than the U.S. dollar. Gains and losses on these contracts
generally offset, in the same period, gains and losses resulting from the
translation of monetary assets and liabilities to U.S. dollars on a monthly
basis, reducing the risk of exchange rate movements in the Company's results of
operations.
On a selective basis, the Company enters into forward exchange and purchased
option contracts to hedge the currency exposure of contractual and other firm
commitments denominated in foreign currencies. The Company may also enter into
forward exchange and purchase option contracts designed to hedge the currency
exposure of anticipated, but not yet committed, transactions expected to be
denominated in foreign currencies. The purpose of these activities is to protect
the Company from the risk that the eventual net cash flows in U.S. dollars from
foreign receivables and payables will be adversely affected by changes in
exchange rates. Gains and losses on hedges related to contractual and other firm
commitments are deferred and recognized in the Company's results of operations
in the same period as the gain or loss from the underlying transactions. Gains
and losses on forward exchange contracts used to hedge anticipated, but not yet
committed, transactions are recognized in the Company's results of operations as
changes in exchange rates for the applicable foreign currencies occur.
Historically, foreign exchange contracts with respect to contractual and other
firm commitments and anticipated, but not yet committed,
41
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
15. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS (CONTINUED)
transactions have been short-term in nature. In addition, purchased options have
had no intrinsic value at the time of purchase.
The Company settles forward exchange contracts generally at maturity and at
prevailing market rates. The Company recognizes in its results of operations
over the life of the contract the amortization of contract premium or discount
on purchased options. The amortization of these premiums or discounts during
each of the three years in the period ended December 31, 1997 was not
significant. As of December 31, 1997 and 1996, the Company had outstanding
forward exchange contracts in the amounts of $19.9 million and $27.7 million,
respectively, comprised of foreign currencies which were to be purchased and
$23.2 million and $9.1 million, respectively, comprised of foreign currencies
which were to be sold. All outstanding forward exchange contracts at December
31, 1997 and 1996 mature within three months, and the fair values of the
contracts as of such dates were immaterial. Accordingly, deferred gains or
losses on such contracts at December 31, 1997 and 1996 were not significant.
Foreign currency transaction gains (losses) included in income from continuing
operations were $3.8 million, $0.9 million and $(5.0) million in 1997, 1996 and
1995, respectively. As of December 31, 1997 and 1996, the Company had no
purchased foreign exchange option contracts outstanding.
INTEREST RATE DERIVATIVE INSTRUMENTS. On a selective basis, the Company
from time to time enters into interest rate cap or swap agreements to reduce the
potential negative impact of increases in interest rates on its outstanding
variable-rate debt under the Credit Agreement. The Company recognizes in its
results of operations over the life of the contract, as interest expense, the
amortization of contract premiums incurred from purchasing interest rate caps.
Net payments or receipts resulting from these agreements are recorded as
adjustments to interest expense. The effect of interest rate instruments on the
Company's results of operations in each of the three years in the period ended
December 31, 1997 was not significant.
In September 1997, the Company entered into two interest rate swap
transactions pursuant to which it will pay a fixed interest rate averaging 5.96%
on a notional amount of $100 million. The Company will receive interest on the
$100 million notional amount based on a three month LIBOR rate set quarterly
beginning on January 22, 1998. The agreements began on January 22, 1998 and
mature one year later. The effect of these agreements to the Company is to
reduce the amount of debt subject to floating interest rates. The fair value of
these agreements were immaterial at December 31, 1997.
OTHER DERIVATIVE INSTRUMENTS. As of December 31, 1996, the Company also had
four option contracts outstanding, providing for the purchase and sale of
certain investments. The net premiums paid totaled $50 million, of which $25
million was paid on the transaction settlement date in January, 1997. At
December 31, 1996, the $50 million net premiums have been reported as short-term
investments, and the $25 million which settled subsequent to December 31, 1996
is included in accounts payable. The option contracts expired in February 1997
and are accounted for at fair value with unrealized gains and losses recognized
in earnings. As of December 31, 1996, the net unrealized gains and losses on
these open contracts, for which the right of offset exists, were not material.
OTHER FINANCIAL INSTRUMENTS. The carrying value of cash and cash
equivalents approximates fair value because of the immediate or short-term
maturity of these financial instruments. The carrying amount of the Company's
senior bank indebtedness approximates fair value because the underlying
instruments have variable interest rates that adjust to market on a short-term
basis.
42
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
16. GEOGRAPHIC INFORMATION
The Company is engaged in one industry, specifically, the design,
manufacture and sale of discrete semiconductors. Operations in this business
segment are summarized below by geographic area. Operating income (loss)
represents net sales less operating costs and expenses, which excludes interest
and income taxes.
<TABLE>
<CAPTION>
UNITED
STATES EUROPE FAR EAST ELIMINATIONS CONSOLIDATED
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Net sales (a)................................. $ 245,772 $ 102,881 $ 31,385 $ $ 380,038
Intercompany transfers (b).................... 102,966 84,301 142,046 (329,313) --
------------ ---------- ---------- ------------ ------------
Net sales................................. 348,738 187,182 173,431 (329,313) $ 380,038
------------
------------
Operating income(loss)........................ 42,489(d) 1,792 (9,365) -- $ 34,916
------------
------------
Identifiable assets (c)....................... 88,738 90,650 193,805 -- $ 373,193
Corporate assets (c).......................... 177,112
------------
Total assets.............................. $ 550,305
------------
------------
YEAR ENDED DECEMBER 31, 1996:
Net sales (a)................................. $ 232,902 $ 98,921 $ 30,068 $ -- $ 361,891
Intercompany transfers (b).................... 90,855 41,369 133,981 (266,205) --
------------ ---------- ---------- ------------ ------------
Net sales................................. 323,757 140,290 164,049 (266,205) $ 361,891
------------
------------
Operating income(loss)........................ 78,677 3,450 (4,509) -- $ 77,618
------------
------------
Identifiable assets (c)....................... 125,438 75,939 177,197 -- $ 378,574
Corporate assets (c).......................... 233,854
------------
Total assets--continuing operations....... $ 612,428
------------
------------
YEAR ENDED DECEMBER 31, 1995:
Net sales (a)................................. $ 267,306 $ 108,458 $ 38,505 $ -- $ 414,269
Intercompany transfers (b).................... 83,646 47,801 156,704 (288,151) --
------------ ---------- ---------- ------------ ------------
Net sales................................. 350,952 156,259 195,209 (288,151) $ 414,269
------------
------------
Operating income.............................. 61,764 34,446 1,566 -- $ 97,776
------------
------------
Identifiable assets (c)....................... 136,823 62,816 170,998 -- $ 370,637
Corporate assets (c).......................... 191,996
------------
Total assets--continuing operations....... $ 562,633
------------
------------
</TABLE>
- ------------------------
(a) Net sales by geographic segment reflect the originating source of the
unaffiliated sale. Included in the U.S. net sales amount are export sales
principally to the Far East of $127.7 million, $117.5 million and $137.1
million in 1997, 1996 and 1995, respectively.
(b) Intercompany transfers represent the originating geographic source of the
transfer and principally reflect product assembly which is accounted for at
cost plus a nominal profit.
43
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
16. GEOGRAPHIC INFORMATION (CONTINUED)
(c) Identifiable assets are those tangible and intangible assets used in
operations in each geographic area. Corporate assets consist principally of
patents and the excess of cost over fair value of net assets acquired and,
in 1996, temporary investments.
(d) Operating income includes charges of $33.8 million, ($25.3 million net of
tax), primarily related to the separation of GI's Taiwan operations.
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data for 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED 1997
-----------------------------------------------------
MARCH 31(A) JUNE 30(B) SEPTEMBER 30 DECEMBER 31
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales.................................................. $ 85,369 $ 95,511 $ 95,568 $ 103,590
Gross profit............................................... 19,426 6,915 30,662 33,722
Income(loss) from continuing operations.................... 707 (9,416) 8,506 9,075
Net income(loss)........................................... 17,683 (8,182) (12,643) 9,075
Earnings(loss) per share(c)
Basic:
Continuing operations.................................. $ 0.02 $ (0.27) $ 0.23 $ 0.25
Net income(loss)....................................... 0.52 (0.24) (0.35) 0.25
Diluted:
Continuing operations.................................. $ 0.02 $ (0.27) $ 0.23 $ 0.25
Net income(loss)....................................... 0.51 (0.24) (0.33) 0.25
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED 1996
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales.................................................... $ 97,902 $ 100,002 $ 84,650 $ 79,337
Gross profit................................................. 39,482 37,797 30,613 23,312
Income from continuing operations............................ 12,217 14,601 10,691 2,255
Net income(loss)............................................. 31,166 (58,089) 42,122 (17,063)
Earnings(loss) per share(c)
Basic:
Continuing operations.................................... $ 0.39 $ 0.46 $ 0.31 $ 0.07
Net income(loss)......................................... 0.99 (1.83) 1.23 (0.50)
Diluted:
Continuing operations.................................... $ 0.36 $ 0.42 $ 0.30 $ $0.07
Net income(loss)......................................... 0.96 (1.46) 1.19 (0.50)
</TABLE>
- ------------------------
(a) Includes charges of $7.4 million ($5.5 million net of tax) primarily related
to the separation of GI's Taiwan operations. These costs include $7.3
million charged to cost of sales and $0.1 million charged to selling,
general and administrative expense.
44
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
(b) Includes charges of $26.4 million ($19.8 million net of tax) primarily
related to the separation of GI's Taiwan operations. These costs include
$25.4 million charged to cost of sales and $1.0 million charged to selling,
general and administrative expense.
(c) Earnings (loss) per share data has been adjusted to reflect the one for four
reverse stock split and restated in conformance with SFAS No. 128.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
45
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors:
The sections captioned "Election of Directors" and "The Board of Directors
and Committees of the Board" contained in the Company's 1998 Proxy Statement are
hereby incorporated by reference.
(b) Identification of Executive Officers:
See Part I of this Form 10-K
(c) Compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended:
The section captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" contained in the Company's 1998 Proxy Statement is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is contained in the sections captioned
"Compensation of Executive Officers", and "Severance Protection and Other
Arrangements", in the Company's 1998 Proxy Statement and is incorporated by
reference herein. The sections captioned "Report of the Compensation Committee"
and "Performance Graphs" in the Company's 1998 Proxy Statement are not
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is contained in the section captioned
"Security Ownership of Certain Beneficial Owners and Management of the Company"
and "Compensation of Executive Officers--Stock Options" in the Company's 1998
Proxy Statement and is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained in the section captioned
"Certain Related Party Transactions" in the Company's 1998 Proxy Statement and
is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1. Financial Statements
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets--as of December 31, 1997 and 1996
Consolidated Statements of Operations--Years ended December 31,
1997, 1996 and
1995
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows--Years ended December 31,
1997, 1996 and
1995
Notes to Consolidated Financial Statements
46
<PAGE>
See item 8 of this Form 10-K for the Consolidated Financial
Statements
2. Financial Statement Schedules. Schedules are omitted because they
are not applicable or the required information is shown in the financial
statements or notes thereto.
3. Exhibits. The exhibits required by Item 601 of Regulation S-K filed
as part of, or incorporated by reference in, this report are listed in (c)
below.
(b) Reports on Form 8-K
None
(c) Item 601 Exhibits
<TABLE>
<CAPTION>
EXHIBITS
<C> <S>
2.1* Agreement of Merger, dated as of July 25, 1997, between General Instrument Corporation and General
Instrument Corporation of Delaware.
3.1* Amended and Restated Certificate of Incorporation of General Semiconductor, Inc.
3.2* Amended and Restated By-Laws of General Semiconductor, Inc.
4.1** Rights Agreement, dated January 6, 1997, between General Semiconductor, Inc. and ChaseMellon
Shareholder Services, LLC
10.1* Employee Benefits Allocation Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc.,
CommScope, Inc. and General Semiconductor, Inc.
10.2* Debt and Cash Allocation Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc.,
CommScope, Inc. and General Semiconductor, Inc.
10.3* Insurance Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope, Inc. and
General Semiconductor, Inc.
10.4* Tax Sharing Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope, Inc. and
General Semiconductor, Inc.
10.5* Trademark License Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope,
Inc. and General Semiconductor, Inc.
10.6* Transition Services Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope,
Inc. and General Semiconductor, Inc.
10.7* Credit Agreement, dated as of July 23, 1997, among NextLevel Systems, Inc., and General
Semiconductor, Inc., Certain Banks, The Chase Manhattan Bank as Administrative Agent and The Chase
Manhattan Bank, Bank of America National Trust and Savings Association, Bank of Montreal, The Bank
of Nova Scotia, CIBC, Inc. Credit Lyonnais New York Branch, Fleet National Bank and Wachovia Bank,
N.A. as Co-Agents.
10.8*+ Amended and Restated General Semiconductor, Inc. 1993 Long-Term Incentive Plan.
10.9*+ Form of Indemnification Agreement between General Semiconductor, Inc. and certain executive
officers.
10.10***+ Form of Stay Incentive and Severance Protection Agreement between General Semiconductor, Inc. and
certain of its executive officers.
10.11***+ Form of Severance Protection Agreement between General Semiconductor, Inc. and certain of its
executive officers.
21. Subsidiaries of the Registrant.
</TABLE>
47
<PAGE>
<TABLE>
<C> <S>
23. Independent Auditors' Consent
27. Financial Data Schedule (Filing only for the Electronic Data Gathering, Analysis and Retrieval
system of the U.S. Securities and Exchange Commission.)
99. Forward-Looking Information.
</TABLE>
- ------------------------
* Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997 (File No. 1-5442).
** Incorporated herein by reference from the Registration Statement on Form 8-A
filed January 10, 1997 (File No. 1-5442).
*** Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1997 (File No. 1-5442).
+ Management compensation.
48
<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.
GENERAL SEMICONDUCTOR, INC.
Dated: March 31, 1998 By: /s/ RONALD A. OSTERTAG
-----------------------------------------
Ronald A. Ostertag
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
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 date indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board,
/s/ RONALD A. OSTERTAG President and Chief
- ------------------------------ Executive Officer and March 31, 1998
Ronald A. Ostertag Director (Principal
Executive Officer)
Senior Vice President and
/s/ ANDREW M. CAGGIA Chief Financial Officer
- ------------------------------ (Principal Financial March 31, 1998
Andrew M. Caggia Officer)
/s/ ROBERT J. GANGE Vice President and
- ------------------------------ Controller (Principal March 31, 1998
Robert J. Gange Accounting Officer)
/s/ STEVEN B. KLINSKY Director
- ------------------------------ March 31, 1998
Steven B. Klinsky
/s/ RONALD ROSENZWEIG Director
- ------------------------------ March 31, 1998
Ronald Rosenzweig
/s/ PETER A. SCHWARTZ Director
- ------------------------------ March 31, 1998
Peter A. Schwartz
/s/ SAMUEL L. SIMMONS Director
- ------------------------------ March 31, 1998
Samuel L. Simmons
/s/ DR. GERARD T. WRIXON Director
- ------------------------------ March 31, 1998
Dr. Gerard T. Wrixon
49
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of the Company's subsidiaries as of December 31,
1997, except for unnamed subsidiaries which, considered in the aggregate as a
single subsidiary, would not constitute a significant subsidiary.
General Semiconductor (China) Co., Ltd. (Peoples Republic of China)
General Semiconductor (Deutschland) GmbH (Germany)
General Semiconductor France (France)
General Semiconductor of Taiwan, Ltd. (Taiwan)
General Semiconductor Ireland (Ireland)
General Semiconductor Japan, Ltd. (Japan)
General Semiconductor (UK) Limited (United Kingdom)
General Semiconductor (Singapore) Pte. Ltd. (Singapore)
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-60498, 33-61820, 33-50911, 33-52189, 33-55595, 33-57737 and 333-22861 of
General Semiconductor, Inc. (formerly General Instrument Corporation) each on
Form S-8 of our report dated January 28, 1998, appearing in this Annual Report
on Form 10-K of General Semiconductor, Inc. for the year ended December 31,
1997.
/s/ DELOITTE & TOUCHE LLP
- -------------------------------------------
DELOITTE & TOUCHE LLP
Jericho, New York
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,192
<SECURITIES> 0
<RECEIVABLES> 54,077
<ALLOWANCES> 825
<INVENTORY> 34,309
<CURRENT-ASSETS> 117,731
<PP&E> 218,752
<DEPRECIATION> 0
<TOTAL-ASSETS> 550,305
<CURRENT-LIABILITIES> 100,994
<BONDS> 0
0
0
<COMMON> 369
<OTHER-SE> 85,992
<TOTAL-LIABILITY-AND-EQUITY> 550,305
<SALES> 380,038
<TOTAL-REVENUES> 380,038
<CGS> 289,313
<TOTAL-COSTS> 345,122
<OTHER-EXPENSES> 42
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,353
<INCOME-PRETAX> 20,521
<INCOME-TAX> 11,649
<INCOME-CONTINUING> 8,872
<DISCONTINUED> (2,939)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,933
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.00
</TABLE>
<PAGE>
EXHIBIT 99
GENERAL SEMICONDUCTOR, INC. (THE "COMPANY")
EXHIBIT 99--FORWARD-LOOKING INFORMATION
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. 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 Systems changed
it name to General Instrument Corporation.
The Company is a smaller and less diversified company than GI was prior to
the Distribution. The ability of the Company to satisfy its obligations and
maintain profitability is solely dependent upon its own future performance, and
the Company is no longer able to rely on the capital resources and cash flows of
the businesses transferred to NextLevel Systems or CommScope. The future
performance and cash flows of the Company will be subject to prevailing economic
conditions and to financial, business and other factors affecting the business
operations of the Company, including factors beyond its control.
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
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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 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 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
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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 New Taiwan dollar appreciates relative to the U.S.
dollar or if the Company experiences other 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. 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.
While the Company has not been materially affected by the current economic and
currency uncertainty in this region, the Company continues to monitor the affect
the situation will have on its business. Additionally, as a result of reduced
liquidity levels in this region, the Company continues to review the credit
position of its customers. There can be no assurance, however, that this
situation will not adversely impact the Company's business in the future.
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. 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 $34.9 million at December 31, 1997 ($37.6 million at December 31,
1996). While the ultimate outcome of these matters cannot be determined,
management does not believe that the final disposition of these matters beyond
the amounts previously provided for in the financial statements will have a
material adverse affect on the Company's financial position, results of
operations or cash flows.
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." 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 financial
position of the Company. 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.
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