UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
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
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General Semiconductor, Inc.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3575653
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Melville Park Road, Melville, New York 11747
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(516) 847-3000
--------------
(Registrant's telephone number, including area code)
----------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 21, 1999
- ----------------------------- -----------------------------
Common Stock, par value $0.01 36,820,778
<PAGE>
GENERAL SEMICONDUCTOR, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGES
-----
PART I. FINANCIAL INFORMATION
---------------------
Financial Statements
Condensed Consolidated Balance Sheets at
March 31, 1999 (unaudited) and December 31, 1998 2
Consolidated Statements of Operations for the Three Months
ended March 31, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1999 and 1998 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
PART II. OTHER INFORMATION
-----------------
Legal Proceedings 13
Exhibits 13
SIGNATURE 14
<PAGE>
PART I
FINANCIAL INFORMATION
GENERAL SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Stock Par Value)
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1998
--------- ----------
<S> <C> <C>
Current Assets:
Cash ................................. $2,303 $3,225
Accounts receivable, less reserves of $736
and $769, respectively ................................................ 64,945 59,643
Inventories ................................................................ 42,467 39,514
Prepaid expenses and other current assets .................................. 11,932 12,010
Deferred income taxes ...................................................... 11,357 13,738
--------- ---------
Total current assets .................................................. 133,004 128,130
Property, plant and equipment - net ........................................ 225,813 223,743
Excess of cost over fair value of net assets acquired, less accumulated
amortization of $45,215 and $43,929, respectively ...................... 161,464 162,751
Deferred income taxes, net of valuation allowance .......................... 29,737 29,376
Intangibles and other assets, less accumulated amortization of $11,443 and
$11,099, respectively .................................................. 18,331 19,447
--------- ---------
TOTAL ASSETS ............................................................... $ 568,349 $ 563,447
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................................... $ 30,021 $ 31,343
Accrued expenses ........................................................... 36,427 45,084
--------- ---------
Total current liabilities ............................................. 66,448 76,427
Long-term debt ............................................................. 297,000 286,000
Deferred income taxes ...................................................... 20,678 21,390
Other non-current liabilities .............................................. 74,624 74,283
--------- ---------
Total liabilities ..................................................... 458,750 458,100
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, $0.01 par value; 20,000 shares authorized; no shares issued -- --
Common Stock, $0.01 par value; 400,000 shares authorized; 36,925
shares issued ......................................................... 369 369
Retained earnings .......................................................... 116,094 111,842
Other stockholder's equity ................................................. (6,864) (6,864)
--------- ---------
--------- ---------
109,599 105,347
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. $ 568,349 $ 563,447
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
March 31 March 31
--------------------------
1999 1998
------------- ------------
<S> <C> <C>
NET SALES .............................................$ 96,961 $ 106,397
OPERATING COSTS AND EXPENSES:
Cost of sales ..................................... 72,477 71,108
Selling, general and administrative ............... 10,963 12,964
Research and development .......................... 1,460 1,500
Amortization of excess of cost over fair value
of net assets acquired ......................... 1,286 1,286
--------- ---------
Total operating costs and expenses ........... 86,186 86,858
--------- --------
OPERATING INCOME ...................................... 10,775 19,539
Other income (expense) - net .......................... (58) (69)
Interest expense-net .................................. (5,048) (4,907)
---------- ---------
INCOME BEFORE INCOME TAXES ........................... 5,669 14,563
Provision for income taxes ........................... (1,417) (5,097)
========== =========
NET INCOME ........................................... $ 4,252 $ 9,466
========== =========
Weighted Average Shares Outstanding:
Basic .............................................. 36,820 36,791
Diluted ............................................ 36,844 36,904
Earnings per share:
Basic .............................................. $ 0.12 $ 0.26
Diluted ............................................ $ 0.12 $ 0.26
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations $ 4,252 $ 9,466
Adjustments to reconcile to net cash
from continuing operating activities:
Depreciation and amortization 6,740 6,074
Changes in assets and liabilities:
Accounts receivable (5,302) (8,920)
Inventories (2,953) 181
Prepaid expenses and other current assets 78 (1,959)
Other non-current assets 776 (137)
Deferred income taxes 1,308 1,075
Accounts payable and accrued expenses (7,034) (3,234)
Restructuring (2,945) -
Other non-current liabilities 339 (2,164)
Other (394) 120
---------------- ---------------
Net cash (used in) provided by continuing operating activities (5,135) 502
---------------- ---------------
Cash used in discontinued operations - (6,553)
---------------- ---------------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (6,787) (3,797)
---------------- ---------------
Net cash used in investing activities (6,787) (3,797)
---------------- ---------------
FINANCING ACTIVITIES:
Net proceeds from revolving credit facilities 11,000 52,000
Principal repayment of debt - (46,074)
Exercise of stock options - 257
---------------- ---------------
Net cash provided by financing activities 11,000 6,183
---------------- ---------------
Decrease in cash and cash equivalents (922) (3,665)
---------------- ---------------
Cash and cash equivalents, beginning of period 3,225 5,192
---------------- ---------------
Cash and cash equivalents, end of period $ 2,303 $ 1,527
================ ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(All amounts in thousands, except per share data)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
General Semiconductor, Inc. ("General Semiconductor" or the "Company") is a
market leader in the discrete segment of the semiconductor industry. The Company
designs, manufactures and sells low-to medium-power rectifiers, transient
voltage suppressors ("TVS"), small signal diodes, and transistors and zener
diodes in axial, bridge, power and surface mount packages. Power rectifiers,
small signal devices and TVS products are semiconductors that are essential
components of most electronic devices and systems. Rectifiers convert
alternating current (AC) into direct current (DC) which can be utilized by
electronic equipment. TVS devices provide protection from electrical surges,
ranging from electrostatic discharge to induced lightning. Small signal devices
amplify or switch low level currents. The Company's products are primarily
targeted for use in the computer, automotive, telecommunications, lighting and
consumer electronics industries.
In the opinion of management, the accompanying unaudited consolidated financial
statements include all necessary adjustments (consisting of normal recurring
adjustments) and present fairly the Company's financial position as of March 31,
1999, the results of its operations for the three months ended March 31, 1999
and 1998, and its cash flows for the three months ended March 31, 1999 and 1998
in conformity with generally accepted accounting principles for interim
financial information applied on a consistent basis. There were no adjustments
of a non-recurring nature recorded during the three months ended March 31, 1999
and 1998. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the results to be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in General Semiconductor's Annual Report on Form
10-K/A for the year ended December 31, 1998.
2. INVENTORIES
Inventories consist of:
March 31, 1999 December 31, 1998
-------------- -----------------
Raw materials $ 6,239 $ 5,139
Work in process 13,928 14,181
Finished goods 22,300 20,194
------- -------
$42,467 $39,514
======= =======
3. LONG-TERM DEBT
The Company entered into two interest rate swap transactions with a term of one
year beginning on January 22, 1998 pursuant to which it paid a fixed interest
rate averaging 5.96% on a notional amount of $100 million. The Company began
receiving interest on the $100 million notional amount based on a three month
LIBOR rate set quarterly beginning on January 22, 1998. During February 1998,
the Company purchased an interest rate cap with a notional amount of $50
million. The cap became effective on April 27, 1998 with a term of nine months.
Under the terms of the cap, the Company received from the counterparty the
incremental amount, if any, associated with the three month LIBOR rate in excess
of 6% on the notional amounts. The cost of the cap was immaterial.
The effect of the swap agreements and the cap to the Company was to reduce its
amount of debt subject to floating interest rates.
<PAGE>
4. LITIGATION
A securities class action is presently pending in the United States District
Court for the Northern District of Illinois, Eastern Division, In Re General
Instrument Corporation Securities Litigation. This action, which consolidates
numerous class action complaints filed in various courts between October 10 and
October 27, 1995, is brought by plaintiffs, on their own behalf and as
representatives of a class of purchasers of GI common stock during the period
March 21, 1995 through October 18, 1995. The complaint alleges that prior to the
Distribution, GI and certain of its officers and directors, as well as Forstmann
Little & Co. and certain related entities, violated the federal securities laws,
namely, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), by allegedly making false and misleading
statements and failing to disclose material facts about GI's planned shipments
in 1995 of its CFT-2200 and DigiCipher II products. Also pending in the same
court, under the same name, is a derivative action brought on behalf of GI. The
derivative action alleges that the members of GI's Board of Directors, several
of its officers and Forstmann Little & Co. and related entities have breached
their fiduciary duties by reason of the matter complained of in the class action
and the defendants' alleged use of material non-public information to sell
shares of GI common stock for personal gain.
An action entitled BKP Partners, L.P. v. General Instrument Corp. was brought in
February 1996 by certain holders of preferred stock of Next Level Communications
("NLC"), which was merged into a subsidiary of GI in September 1995. The action
was originally filed in the Northern District of California and was subsequently
transferred to the Northern District of Illinois. The plaintiffs allege that the
defendants violated federal securities laws by making misrepresentations and
omissions and breached fiduciary duties to NLC in connection with the
acquisition of NLC by GI. Plaintiffs seek, among other things, unspecified
compensatory and punitive damages and attorney's fees and costs.
In connection with the Distribution, General Instrument (formerly "NextLevel
Systems, Inc.") agreed to indemnify the Company with respect to its obligations,
if any, arising out of or relating to In Re General Instrument Corporation
Securities Litigation (including the derivative action), and the BKP Partners,
L.P. v. General Instrument Corp. litigation. Therefore, management is of the
opinion that the resolution of these matters will have no effect on the
Company's consolidated financial position, results of operations or cash flows.
General Semiconductor is not a party to any pending legal proceedings other than
various claims and lawsuits arising in the normal course of business and those
for which they are indemnified. Management is of the opinion that such
litigation or claims will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
5. COMMITMENTS AND CONTINGENCIES
The Company is subject to various federal, state, local and foreign laws and
regulations governing environmental matters, including the use, discharge and
disposal of hazardous materials. The Company's manufacturing facilities are
believed to be in substantial compliance with current laws and regulations.
Complying with current laws and regulations has not had a material adverse
effect on the Company's financial condition. In connection with the
Distribution, the Company retained the obligations with respect to environmental
matters relating to its discontinued operations and its status as a "potentially
responsible party." The Company is presently engaged in the remediation of eight
discontinued operations in six states, and is a de minimus "potentially
responsible party" at five hazardous waste sites in four states.
The Company has engaged independent consultants to assist management in
evaluating potential liabilities related to environmental matters. Management
assesses the input from these independent consultants along with other
information known to the Company in its effort to continually monitor these
potential liabilities. Management assesses its environmental exposure on a
site-by-site basis, including those sites where the Company has been named as a
"potentially responsible party". Such assessments include the Company's share of
remediation costs, information known to the Company concerning the size of the
hazardous waste sites, their years of operation and the number of past users and
their financial viability. The Company has a reserve recorded for environmental
matters of $31.6 million at March 31, 1999 ($31.9 million at December 31, 1998).
While the ultimate outcome of these matters cannot be determined, management
does not believe that the final disposition of these matters will have a
material adverse effect on the Company's financial position, results of
operations or cash flows beyond the amounts previously provided for in the
financial statements.
The Company's present and past facilities have been in operation for many years,
and over that time in the course of those operations, such facilities have used
substances which are or might be considered hazardous, and the Company has
generated and disposed of wastes which are or might be considered hazardous.
Therefore, it is possible that additional environmental issues may arise in the
future, which the Company cannot now predict.
6. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the applicable periods. Diluted earnings per share computations are based on net
income divided by the weighted average number of common shares outstanding
adjusted for the dilutive effect of stock options. The diluted earnings per
share calculation assumes the exercise of stock options using the treasury stock
method.
Set forth below are reconciliations of the numerators and denominators of the
basic and diluted per share computations for the three months ended March 31,
1999 and 1998.
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended March 31, 1999 Ended March 31, 1998
-------------------- --------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common stockholders $4,252 36,820 $0.12 $9,466 36,791 $0.26
===== =====
Effect of Dilutive Securities
Options -- 24 -- 113
------ ------- ------ ------
Diluted EPS
Income available to
common stockholders $4,252 36,844 $0.12 $9,466 36,904 $0.26
====== ====== ===== ====== ====== =====
</TABLE>
7. GEOGRAPHIC SEGMENT INFORMATION
General Semiconductor is engaged in one industry segment, specifically, the
design, manufacture and sale of discrete semiconductors. The Company manages its
business on a geographic basis. Summarized financial information for the
Company's reportable geographic segments is presented in the following table.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the Company's Annual Report on
Form 10K/A for the year ended December 31, 1998. Net sales by reportable
geographic segment reflect the originating source of the unaffiliated sale.
Intercompany transfers represent the originating geographic source of the
transfer and principally reflect product assembly which is accounted for at cost
plus a nominal profit. In determining earnings (loss) before provision for
income taxes for each geographic segment, sales and purchases between areas have
been accounted for on the basis of internal transfer prices set by the Company.
<PAGE>
<TABLE>
<CAPTION>
United
States Europe Far East China Corporate Consolidated
------ ------ -------- ----- --------- ------------
Qtr.ended March 31,
1999:
<S> <C> <C> <C> <C> <C> <C>
Net sales(a)............ $49,688 $32,921 $14,352 $ - $ - $ 96,961
Intercompany transfers.. 31,606 33,360 40,012 9,139 (114,117) -
------- ------- ------- ------ ---------- --------
Net sales............. 81,294 66,281 54,364 9,139 (114,117) $ 96,961
======= ======= ======= ====== ========== ========
Interest income......... - 21 - 5 - 26
Interest expense........ - 66 10 - 4,998 5,074
Depreciation and
amortization expense.. 2,349 1,346 2,239 806 - 6,740
Earnings (loss) before
provision for
income taxes.......... (393) 631 4,067 1,364 - 5,669
Income tax expense..... $ (511) $ 460 $ 1,460 $ 8 $ - $ 1,417
Qtr. ended March 31,
1998:
Net sales(a)............ $62,665 $37,844 $ 5,888 $ - $ $106,397
Intercompany transfers.. 26,474 36,677 41,137 5,359 (109,647) -
------- ------- ------- ------ ---------- --------
Net sales............. 89,139 74,521 47,025 5,359 (109,647) 106,397
======= ======= ======= ====== ========== ========
Interest income......... - (15) - 6 79 70
Interest expense........ - 51 546 - 4,380 4,977
Depreciation and
amortization expense.. 2,167 1,180 2,142 585 - 6,074
Earnings before
provision for
income taxes.......... 10,497 1,583 1,480 1,003 - 14,563
Income tax expense..... $ 3,616 $ 650 $ 831 $ - $ - $ 5,097
</TABLE>
(a) Included in United States net sales are export sales as follows:
1999 1998
---- ----
Taiwan $13,827 $21,739
China 8,532 7,656
------- -------
$22,359 $29,395
======= =======
Net sales, by country, within the European geographic segment are:
1999 1998
---- ----
France $ 4,960 $ 5,800
Germany 23,482 25,648
U.K. 4,479 6,396
------- -------
$32,921 $37,844
======= =======
<PAGE>
8. RECENT ACCOUNTING PRONOUNCEMENTS
During 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company is evaluating the impact SFAS 133 will have on its financial statements.
<PAGE>
GENERAL SEMICONDUCTOR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis pertains to the continuing
operations of General Semiconductor, Inc., unless otherwise noted, and describes
changes in the Company's financial condition since December 31, 1998.
RESULTS OF OPERATIONS:
NET SALES
Net sales of $97.0 million for the three months ended March 31, 1999 decreased
$9.4 million from $106.4 million for the comparable prior year period. The
decrease is primarily due to lower worldwide average selling prices
(approximating 15%) partly offset by increased volume in the Asia/Pacific region
and favorable foreign exchange rate fluctuations in Europe and Japan.
COST OF SALES
Cost of sales for the three months ended March 31, 1999 of $72.5 million
compares to $71.1 million for the corresponding prior year period. Cost of sales
increased $1.4 million principally due to an approximate 2% increase in unit
volume.
Accordingly, gross margin for the three months ended March 31, 1999 represents
25.3% of net sales compared with 33.2% in the comparable prior period. This
decrease relates to an erosion of worldwide average selling prices partially
offset by a change in the mix of products sold, continued cost controls and
savings achieved from the 1998 restructuring.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses of $11.0 million for the three
months ended March 31, 1999 decreased from $13.0 million for the comparable
prior year period. The $2.0 million decrease is due primarily to reduced
variable compensation corresponding with lower revenues as well as cost savings
achieved from the 1998 restructuring.
NET INTEREST EXPENSE
Net interest expense increased to $5.0 million for the three months ended March
31, 1999 from $4.9 million for the corresponding prior year period. While the
average debt balance outstanding was higher during the three months ended March
31, 1999 compared with the corresponding prior year period, borrowing rates were
lower resulting in relatively stable net interest expense.
INCOME TAXES
The provision for income taxes is computed utilizing the Company's expected
annual effective income tax rate. The Company's effective tax rate for the three
months ended March 31, 1999 decreased to 25% from 35% for the three months ended
March 31, 1998 due primarily to an increased proportion of income of foreign
subsidiaries taxed at rates lower than the U.S. rate.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1999 was $66.6 million compared to $51.7 million at
December 31, 1998. The working capital increase of $14.9 million resulted
primarily from increases in accounts receivable and inventory and a decrease in
accrued expenses. As a result, the current ratio increased to 2.0 to 1 at March
31, 1999 compared with 1.7 to 1 at December 31, 1998.
During the three months ended March 31, 1999 the Company invested $6.8 million
in property, plant and equipment compared with $3.8 million for the
corresponding prior year period. The Company currently plans to invest
approximately $30.0 million in capital expenditures for the year ended December
31, 1999 principally for certain capacity expansions and automation.
At March 31, 1999 there were $11.0 million of letters of credit outstanding that
reduce the amount that can be borrowed against its $350.0 million credit
facility.
General Semiconductor's primary cash needs on both a short and long-term basis
are for capital expenditures and other general corporate purposes. The Company
believes that it has adequate liquidity to meet its current and anticipated
needs from the results of its operations, working capital and the existing
credit facility. There can be no assurance, however, that future
industry-specific developments or general economic trends will not adversely
affect the Company's operations or its ability to meet its cash requirements.
YEAR 2000
The Company recognizes the importance of ensuring that neither its customers nor
its business operations are disrupted as a result of the Year 2000 phenomenon.
This phenomenon is a result of computer programs having been written using two
digits (rather than four) to define the applicable year. Any information
technology ("IT") systems that have time sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000, which could result in
miscalculations and systems failures. The problem also extends to many "non-IT"
systems such as operating and control systems that rely on embedded chip
systems. The Company, with the assistance of outside consulting resources, is
centrally coordinating activities directed toward achieving global Year 2000
compliance. The primary areas of potential impact include business application
systems, production equipment systems, suppliers, financial institutions,
government agencies and environmental support organizations. None of the
Company's products contain date sensitive or date processing logic.
In 1996 the Company began an upgrade of its business applications software which
includes the implementation of the full suite of JD Edwards ("JDE") financial,
distribution and manufacturing applications. The JDE software was selected to
add worldwide functionality and efficiency to the business processes of the
Company as well as address Year 2000 exposure. The JDE financial and
distribution modules have been installed and are Year 2000 compliant. The JDE
manufacturing module will be installed in 2000. The Company is currently
modifying its existing manufacturing applications and expects them to be Year
2000 compliant by June 30, 1999.
Since the Company's financial, distribution and manufacturing applications are
expected to be Year 2000 compliant, incremental costs associated with achieving
Year 2000 compliance beyond the scope of this project (estimated at less than
$1.0 million) should not have a material effect on the Company's financial
condition or results of operations and are being expensed as incurred.
The Company has surveyed its suppliers, financial institutions, government
agencies and others with which it does business to determine their Year 2000
readiness and coordinate conversion efforts. Approximately 65% of third party
suppliers have responded to the Company's surveys. At the current time,
respondents critical to the operations of the Company have indicated that they
are, or reasonably believe that they will be, Year 2000 compliant. If a material
risk arises, the Company is prepared to perform on-site visits to validate the
accuracy of the information received and will test such systems where
appropriate and possible. Additionally, the Company has established programs to
ensure that future purchases of equipment and software are Year 2000 compliant.
Costs incurred have been insignificant to date. At the current time, it is
difficult for the Company to specifically identify its most reasonably likely
worst case Year 2000 scenario.
The Company does not expect Year 2000 issues to have a material adverse effect
on its products, services, competitive position, financial condition or results
of operations. However, the Company can give no assurance that the systems of
other companies or government agencies on which the Company relies will be
converted on time or that a failure to convert by another company or a
conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company.
The disclosures contained herein constitute Year 2000 Readiness Statements
pursuant to the Year 2000 Information and Readiness Disclosure Act, Public Law
105-271.
NEW EUROPEAN CURRENCY
A new European currency (Euro) was introduced in January 1999 to replace the
separate currencies of eleven individual countries. The Company will need to
modify its payroll, benefits and pension systems, contracts with suppliers and
customers, and internal financial reporting systems to be able to process
transactions in the new currency. A three-year transition period is given during
which transactions may be made in the old currencies. This may require dual
currency processes until the conversion is complete. The Company is identifying
the issues involved and intends to develop and implement solutions. The cost of
this effort is not expected to be material and will be expensed as incurred.
There can be no assurance, however, that all problems will be foreseen and
corrected, or that no material disruption of the Company's business will occur.
The conversion to the Euro may have competitive implications on our pricing and
marketing strategies; however, any such impact is not known at this time.
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. The Company's Form 10-K for the year ended
December 31, 1998, the Company's 1998 Annual Report to Stockholders, this and
any other Form 10-Q or Form 8-K of the Company, or any oral or written
statements made by or on behalf of the Company, may include forward looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are
identified by their use of such terms and phrases as "intends," "intend,"
"intended," "goal," "estimate," "estimates," "expects," "expect," "expected,"
"project," "projects," "projected," "projections," "plans," "anticipates,"
"anticipated," "should," "designed to," "foreseeable future," "believe,"
"believes", "scheduled" and similar expressions. Readers are cautioned not to
place undue reliance on these forward looking statements, which speak only as of
the date the statement was made. The Company undertakes no obligation to
publicly update or revise any forward looking statements, whether as a result of
new information, future events or otherwise.
Reference is made to the cautionary statements contained in Exhibit 99 to this
Form 10-Q for a discussion of the factors that may cause actual results to
differ from the results discussed in these forward looking statements.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Part I, Note 4 to the Consolidated Financial Statements.
Item 6. Exhibits
(a) Exhibits
27 Financial Data Schedule
99 Forward Looking Information
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
three months ended March 31, 1999.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL SEMICONDUCTOR, INC.
April 22, 1999 /s/Andrew M. Caggia
- -------------- -------------------
Date Andrew M. Caggia
Senior Vice President and Chief Financial Officer
Signing both in his capacity as Senior Vice
President on behalf of the Registrant and as Chief
Financial Officer of the Registrant
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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/A for the year ended
December 31, 1998, the Company's 1998 Annual Report to Stockholders, any Form
10-Q or Form 8-K of the Company, or any 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 forwardlooking statements are identified by their use of such
terms and phrases as "intends," "intend," "intended," "goal," "estimate,"
"estimates," "expects," "expect," "expected," "project," "projects,"
"projected," "projections," "plans," "anticipates," "anticipated," "should,"
"designed to," "foreseeable future," "believe," "believes" and "scheduled" and
similar expressions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statement was
made. The Company undertakes no obligation to publicly update or revise any
forward looking statements, whether as a result of new information, future
events or otherwise.
The actual results of the Company may differ significantly from the results
discussed in forward-looking statements. Factors that might cause such a
difference include, but are not limited to, (a) the general political, economic
and competitive conditions in the United States, Taiwan (Republic of China), the
People's Republic of China, Ireland, Germany, France and other markets where the
Company operates; (b) changes in capital availability or costs, such as changes
in interest rates, market perceptions of the industry in which the Company
operates, or security ratings; (c) uncertainties relating to customer plans and
commitments; (d) employee workforce factors; (e) authoritative generally
accepted accounting principles or policy changes from such standard-setting
bodies as the Financial Accounting Standards Board and the Securities and
Exchange Commission and the factors set forth below.
Factors Relating to the Distribution
On January 7, 1997, the Board of Directors of General Instrument Corporation
("GI") approved a plan to divide GI into three separate public companies. To
effect the transaction, GI (i) transferred all the assets and liabilities
relating to the manufacture and sale of broadband communications products used
in the cable television, satellite, and telecommunications industries and all
rights to the related GI trademarks to its wholly-owned subsidiary NextLevel
Systems, Inc. ("NextLevel Systems") and all the assets and liabilities relating
to the manufacture and sale of coaxial, fiber optic and other electric cable
used in the cable television, satellite and other industries to its wholly-owned
subsidiary CommScope, Inc. ("CommScope") and (ii) then distributed all of the
ordinary shares of capital stock of each of NextLevel Systems and CommScope to
its stockholders on a pro rata basis as a dividend (the "Distribution"), in a
transaction that was consummated on July 28, 1997 (the "Distribution Date"). The
Company retained all the assets and liabilities relating to the manufacture and
sale of discrete power rectifiers and transient voltage suppression components
used in telecommunications, automotive and consumer electronics products. On the
Distribution Date, NextLevel Systems and CommScope began operating as
independent entities with publicly traded common stock. GI retained no ownership
interest in either NextLevel Systems or CommScope. Concurrently with the
Distribution, GI changed its name to General Semiconductor, Inc. and effected a
one for four reverse stock split. On February 2, 1998, NextLevel Systems changed
its name to General Instrument Corporation.
The Distribution Agreement dated as of June 12, 1997, among GI, General
Instrument Corporation, and CommScope (the "Distribution Agreement") and certain
other agreements executed in connection with the Distribution (collectively, the
"Ancillary Agreements") allocate among the Company, General Instrument
Corporation and CommScope, and their respective subsidiaries, responsibility for
various indebtedness, liabilities and obligations. It is possible that a court
would disregard this contractual allocation of indebtedness, liabilities and
obligations among the parties and require the Company or its subsidiaries to
assume responsibility for obligations allocated to another party, particularly
if such other party were to refuse or was unable to pay or perform any of its
allocated obligations. Pursuant to the Distribution Agreement and certain of the
Ancillary Agreements, the Company has agreed to indemnify the other parties (and
certain related persons) from and after consummation of the Distribution with
respect to certain indebtedness, liabilities and obligations, which
indemnification obligations could be significant.
Although GI has received a favorable ruling from the Internal Revenue Service,
if the Distribution were not to qualify as a tax free spin-off (either because
of the nature of the Distribution or because of events occurring after the
Distribution) under Section 355 of the Internal Revenue Code of 1986, as
amended, then, in general, a corporate tax would be payable by the consolidated
group of which the Company was the common parent based upon the difference
between the fair market value of the stock distributed and the distributing
corporation's adjusted basis in such stock. The corporate level tax would be
payable by the Company and could substantially exceed the net worth of the
Company. However, under certain circumstances, General Instrument Corporation
and CommScope have agreed to indemnify the Company for such tax liability. In
addition, under the consolidated return rules, each member of the consolidated
group (including General Instrument Corporation and CommScope) is severally
liable for such tax liability.
Leverage; Certain Restrictions Under Credit Facilities
The Company is substantially more leveraged than GI was prior to the
Distribution. The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
product development, acquisitions, general corporate purposes or other purposes
may be impaired; (ii) a portion of the Company's and its subsidiaries' cash flow
from operations must be dedicated to the payment of the principal of and
interest on its indebtedness; (iii) the Credit Agreement, dated as of July 23,
1997 and amended in December 1998, 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 are at floating rates of interest, causing the Company to
be vulnerable to increases in interest rates; (v) the Company's degree of
leverage may make it more vulnerable to a downturn in general economic
conditions; and (vi) the Company's degree of leverage may limit its flexibility
in responding to changing business and economic conditions.
In addition, in a lawsuit by an unpaid creditor or representative of creditors,
such as a trustee in bankruptcy, a court may be asked to void the Distribution
(in whole or in part) as a fraudulent conveyance and to require that the
stockholders return the special dividend (in whole or in part) to the Company or
require the Company to fund certain liabilities of General Instrument
Corporation and CommScope for the benefit of creditors.
Competition
The Company operates in the discrete segment of the semiconductor business. Its
products are commodity-like in nature and are subject to cyclical variations in
pricing and capacity utilization levels. The Company is subject to competition
from a substantial number of foreign and domestic companies, some of which have
greater financial, engineering, manufacturing and other resources, or offer a
broader product line, than the Company. The Company's competitors can be
expected to continue to improve the design and performance of their products and
to introduce new products with competitive price and performance
characteristics. Although the Company believes that it enjoys certain
technological and other advantages over its competitors, realizing and
maintaining such advantages will require continued investment by the Company in
engineering, research and development, marketing and customer service and
support. There can be no assurance that the Company will have sufficient
resources to continue to make such investments or that the Company will be
successful in maintaining such advantages.
International Operations
A significant portion of the Company's products are manufactured or assembled in
Taiwan (Republic of China), the People's Republic of China, Ireland, Germany,
and France. These foreign operations are subject to the usual risks inherent in
situating operations abroad, including risks with respect to currency exchange
rates, economic and political destabilization, restrictive actions by foreign
governments, nationalizations, the laws and policies of the United States
affecting trade, foreign investment and loans, and foreign tax laws. The
Company's cost-competitive status relative to other competitors could be
adversely affected if the Company experiences unfavorable movements in foreign
currency rates. In addition, a substantial portion of the annual sales of the
Company's business are outside of the United States.
International sales generally represent 70% of the Company's worldwide sales.
Sales to the Asia Pacific region accounted for approximately 35% of the
Company's worldwide sales for the year ended December 31, 1998. During the first
quarter of 1999 average selling prices have weakened due to continued excess
capacity in the industry. Extended underutilization of the Company's
manufacturing facilities, resulting in production inefficiency, could result in
margin deterioration. There can be no assurance as to the extent or duration of
the impact of these events on the Company.
Environment
The Company is subject to various federal, state, local and foreign laws and
regulations governing environmental matters, including the use, discharge and
disposal of hazardous materials. The Company's manufacturing facilities are
believed to be in substantial compliance with current laws and regulations.
Complying with current laws and regulations has not had a material adverse
effect on the Company's financial condition. In connection with the
Distribution, the Company retained the obligations with respect to environmental
matters relating to the Company's discontinued operations and its status as a
"potentially responsible party." The Company is presently engaged in the
remediation of eight discontinued operations in six states, and is a de minimus
"potentially responsible party" at five hazardous waste sites in four states.
The Company has engaged independent consultants to assist management in
evaluating potential liabilities related to environmental matters. Management
assesses the input from these independent consultants along with other
information known to the Company in its effort to continually monitor these
potential liabilities. Management assesses its environmental exposure on a
site-by-site basis, including those sites where the Company has been named 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 $31.6 million at March 31, 1999 ($31.9 million at December 31, 1998).
While the ultimate outcome of these matters cannot be determined, management
does not believe that the final disposition of these matters will have a
material adverse affect on the Company's financial position, results of
operations or cash flows beyond the amounts previously provided for in the
financial statements.
The Company's present and past facilities have been in operation for many years,
and over that time in the course of those operations, such facilities have used
substances which are or might be considered hazardous, and the Company has
generated and disposed of wastes which are or might be considered hazardous.
Therefore, it is possible that additional environmental issues may arise in the
future which the Company cannot now predict.
Year 2000
The Company recognizes the importance of ensuring that neither its
customers nor its business operations are disrupted as a result of the Year 2000
phenomenon. This phenomenon is a result of computer programs having been written
using two digits (rather than four) to define the applicable year. Any
information technology ("IT") systems that have time sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations and systems failures. The problem also extends
to many "non-IT" systems such as operating and control systems that rely on
embedded chip systems. The Company, with the assistance of outside consulting
resources, is centrally coordinating activities directed toward achieving global
Year 2000 compliance. The primary areas of potential impact include business
application systems, production equipment systems, suppliers, financial
institutions, government agencies and environmental support organizations. None
of the Company's products contain date sensitive or date processing logic.
In 1996 the Company began an upgrade of its business applications
software which includes the implementation of the full suite of JD Edwards
("JDE") financial, distribution and manufacturing applications. The JDE software
was selected to add worldwide functionality and efficiency to the business
processes of the Company as well as address Year 2000 exposure. The JDE
financial and distribution modules have been installed and are Year 2000
compliant. The JDE manufacturing modules will be installed in 2000. The Company
is currently modifying its existing manufacturing applications and expects them
to be Year 2000 compliant by June 30, 1999.
Since the Company's financial, distribution and manufacturing
applications are expected to be Year 2000 compliant, incremental costs
associated with achieving Year 2000 compliance beyond the scope of this project,
estimated at less than $1.0 million, should not have a material effect on the
Company's financial condition or results of operations and are being expensed as
incurred.
The Company has surveyed its suppliers, financial institutions,
government agencies and others with which it does business to determine their
Year 2000 readiness and coordinate conversion efforts. Approximately 65% of
third party suppliers have responded to our surveys. At the current time,
respondents critical to the operations of the Company have indicated that they
are, or reasonably believe that they will be, Year 2000 compliant. If a material
risk arises, the Company is prepared to perform on-site visits to validate the
accuracy of the information received and will test such systems where
appropriate and possible. Additionally, the Company has established programs to
ensure that future purchases of equipment and software are Year 2000 compliant.
Costs incurred have been insignificant to date. At the current time, it is
difficult for the Company to specifically identify its most reasonably likely
worst case Year 2000 scenario.
The Company does not expect Year 2000 issues to have a material adverse
effect on its products, services, competitive position, financial condition or
results of operations. However, the Company can give no assurance that the
systems of other companies or government agencies on which the Company relies
will be converted on time or that a failure to convert by another company or a
conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company.
The disclosures contained herein constitute Year 2000 Readiness Statements
pursuant to the Year 2000 Information and Readiness Disclosure Act, Public Law
105-271.
<PAGE>
