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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, 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
GENERAL SEMICONDUCTOR, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (631) 847-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
</TABLE>
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 $587.5 million as of February 29, 2000 (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 February 29, 2000: 37,475,758.
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 10, 2000 are incorporated
by reference in Part III.
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PART I
ITEM I. BUSINESS
On July 28, 1997, General Instrument Corporation spun-off to its
shareholders NextLevel Systems, Inc., its broadband communication business, and
CommScope, Inc., its coaxial and other cable business, as two independent public
companies. At the time of the spin-off, General Instrument Corporation changed
its name to General Semiconductor, Inc. and effected a one-for-four reverse
stock split. After the spin-off, NextLevel Systems, Inc. changed its name to
General Instrument Corporation. Unless the context otherwise requires,
references in this Form 10-K to "General Semiconductor," the "Company," "we,"
"us," or "our" are to General Semiconductor, Inc. and its direct and indirect
subsidiaries on a consolidated basis since the spin-off and to the business
conducted by the Power Semiconductor Division of General Instrument Corporation
prior to the spin-off.
This Form 10-K includes statistical data regarding the discrete
semiconductor industry and other industries which was obtained from industry
publications, including reports of Worldwide Semiconductor Trade Statistics
("WSTS"), which are published by the Semiconductor Industry Association ("SIA"),
and reports published by International Data Corporation ("IDC"). These industry
publications generally indicate that they have obtained information from sources
believed to be reliable, but do not guarantee the accuracy and completeness of
their information. While we believe these industry publications to be reliable,
we have not independently verified their data, and we do not guarantee the
accuracy or completeness of the information, nor can we provide any assurance
that our future performance will follow industry projections.
GENERAL
We are a market leader in the discrete segment of the semiconductor
industry. We design and manufacture a broad array of discrete semiconductors,
including power rectifiers, transient voltage suppressors, small signal
transistors and small signal diodes. We are a world leader in the power
rectifier and transient voltage suppressor markets, which products represented
87% of our 1999 net sales, with an approximate 15% market share as measured by
net sales in 1999. Our products condition current and voltage, protect
electrical circuits from power surges, amplify and switch small electrical
signals and regulate voltage levels in circuits. Our products are essential
components of most electronic devices and systems and are used throughout a wide
range of industries, including the computer, automotive, telecommunications and
consumer electronics industries. We operate six production facilities located in
China, France, Germany, Ireland, Taiwan and New York, and we produce an average
of 35 million units per day.
During our 39 years of operation, we have focused on the design and
manufacture of discrete semiconductors. Our discrete semiconductor products are
different from integrated circuit semiconductor products because discrete
semiconductors are single function products and are generally characterized by:
- longer product life cycles;
- lower research and development investment requirements;
- a less complex and less costly fabrication process; and
- lower capital needs.
We believe the characteristics of the discrete semiconductor market and our
competitive strengths contribute to our stable and consistent operating income.
In 1999, 63% of our net sales were derived from the sale of four product
families, each of which we first introduced more than 20 years ago.
Worldwide semiconductor market revenue was $149.4 billion in 1999,
according to WSTS. The discrete segment of this market accounted for $13.4
billion, or approximately 9.0%, of the total semiconductor market and the
sectors in which we compete accounted for $9.0 billion of this market. The
following charts illustrate
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the principal sectors of the semiconductor market and the discrete segment by
product category and highlight the areas in which we compete:
<TABLE>
<S> <C>
1999 DISCRETE MARKET -- $13.4 BILLION
[PIE CHART]
Microcomponents............................................. 34%
Memory...................................................... 21%
Logic ICs................................................... 16%
Analog ICs.................................................. 15%
Discretes................................................... 9%
Optical ICs................................................. 4%
Bipolar ICs................................................. 1%
1999 SEMICONDUCTOR MARKET -- $149.4 BILLION
[PIE CHART]
Power Transistors........................................... 23%
Small Signal Transistors.................................... 21%
MOSFETs..................................................... 17%
Rectifiers.................................................. 16%
Diodes...................................................... 14%
Thyristors.................................................. 5%
Other Discrete.............................................. 4%
</TABLE>
Source: WSTS (December 1999).
COMPANY STRENGTHS
We believe the characteristics of the discrete semiconductor market and our
competitive strengths contribute to our stable and consistent operating income.
Long-Standing Relationships with Diverse, Blue Chip Customers. During our
39-year operating history, we have developed long-standing relationships with
many customers. We serve more than 500 customers worldwide, with no single
customer accounting for more than 5% of our 1999 net sales. Each of our ten
largest customers has been our customer for more than 25 years. Customers in our
end-use markets include leading global manufacturers such as Robert Bosch
Corporation, Ford Motor Company, General Motors Corporation, Lucent
Technologies, Matsushita Electric Industrial Co., Ltd., Motorola Inc., Nokia
Corp., Phillips NV, Siemens AG, Samsung Electronics Co. Ltd. and Sony
Corporation.
Global, Low Cost Operations. We presently operate six production
facilities and 13 sales offices located in North America, Europe and Asia. We
believe that our global operations permit us to maintain our position as a low
cost, high quality manufacturer. All of our facilities have achieved ISO 9001 or
ISO 9002 certification status as to quality and our five facilities that
manufacture products for the automotive industry have received the automotive
industry's QS 9000 certification. QS 9000 certification is a more stringent
quality system developed by Ford, Chrysler and General Motors to recognize the
outstanding overall performance of selected suppliers. Our Macroom, Ireland
facility has received ISO 14001 certification. ISO 14001 is an international
certification awarded after extensive site audits demonstrate compliance to the
Environmental Management System Standards. We are continuously engaged in cost
reduction programs, primarily through reduced pricing of our raw materials,
improved material utilization, increased use of automation and other
manufacturing efficiencies. All of our assembly sites that produce orders for
the automotive industry have also received AEC A 101, a discrete semiconductor
supplement, awarded by the Automotive Electronic Council, which requires the QS
9000 award as a step in qualification.
High Quality Customer Service. Because we are an independent company
focused on the discrete segment of the semiconductor industry, all of our
service and support efforts are tailored to meet our customers' needs. We employ
approximately 200 sales, marketing and field applications engineers in 13
offices throughout North America, Europe and Asia. We target high growth end-use
markets and focus our sales
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efforts on our customers' design engineers and purchasing managers in the
automotive, computer, consumer and telecommunications markets. Because we work
closely with our original equipment manufacturer customers in the design of
their products, our products are frequently "designed in" to the specifications
of new products. We believe these close relationships provide us with a
substantial competitive advantage and further strengthen our long-term customer
relationships. Our customers require a high quality, reliable source of supply,
often in high volumes and with short lead times. They also demand quick
responses to technical questions and seek support in designing new applications
which will use our products.
Diverse End-Use Markets. We have a diversified customer base in terms of
both geography and end use markets. The following charts illustrate our 1999 net
sales by geographic area and by end-use market:
<TABLE>
<S> <C> <C> <C>
1999 NET SALES BY GEOGRAPHIC AREA 1999 NET SALES BY END-USE MARKET(1)
[Pie Chart] [Pie Chart]
Europe 31% Distributor(1) 26%
North America 28% Computer/Power Supply 26%
Southeast Asia 23% Automotive 19%
China 10% Consumer 14%
Japan 8% Telecom 5%
Lighting/Ballast 4%
Industrial 3%
Contract Manufacturer 2%
Other 1%
</TABLE>
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(1) Distributors sell our products to diverse end-use markets, including all
those shown in the chart.
We believe that this diversity minimizes the impact of a potential loss of
sales due to an economic slowdown in any geographic area or end-use market.
Experienced, Committed Management Team. Our senior management team
consists of nine individuals who have an average of 14 years of experience with
us and 19 years of experience in the semiconductor industry. Ronald A. Ostertag,
our Chairman, President and Chief Executive Officer, has been with us for 21
years and has 27 years of experience in the semiconductor industry.
BUSINESS STRATEGY
Our objective is to maintain and strengthen our position as a leading
supplier of discrete semiconductors and achieve growth in net sales and
earnings. To accomplish our objective, the principal elements of our strategy
are:
Broaden Product Base through New Product Introductions. We seek to build
on our base of long-lived, well established products to introduce new products
that meet our customers' needs. We employ approximately 60 full-time personnel
in our research and development laboratories in Ireland, Taiwan, New York and
California.
A number of new products were introduced in 1999 to better serve the power
management and circuit protection needs of our customers. The most significant
has been the introduction of our new line of power MOSFETs, which is discussed
below. Other products introduced near the end of 1999, which we believe have
significant growth potential in power management applications include 100V
Schottky rectifiers and "rugged" UltraFast rectifiers. Both these product
families find use in high-speed switching power supplies that are
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widely used in the computer industry. A low-voltage bi-directional Zener diode,
introduced in 1999, has been very successful and shows significant revenue
growth potential in the application of Christmas tree lights. These diodes
prevent an entire string of lights from going out when a bulb in the string
burns out. In the area of circuit protection we have extended the voltage range
of our TRANSZORB(TM) transient voltage suppressors to have the widest range in
the industry.
To further broaden our product base, we recently opened a design center for
power MOSFET products with experienced MOSFET engineers. MOSFETs are
semiconductor devices that switch and/or amplify current and are used
principally by our computer, automotive and telecommunications customers. Our
strategy is to use a "fabless" approach, in which we will outsource the wafer
fabrication process, to manufacture this product. We recently entered into
manufacturing agreements with established foundries in Asia, which we believe
will enable us to enter the power MOSFET market more quickly than we otherwise
would be able to and with minimal capital requirements. We expect to address
this $2.0 billion market by combining our design expertise and customer service
orientation with this fabless manufacturing process. Although we believe that
sales from this product will be relatively small initially, we anticipate that
power MOSFET sales could be an important component of our future growth.
In 1998 we introduced a number of new products to better meet our
customers' needs, including the surface mount high energy automotive transient
voltage suppressor device, the fast recovery mini-bridge and the high voltage
transient voltage suppressor products. The new surface mount high energy
automotive transient voltage suppressor device is designed to protect automotive
electronic systems from high energy surges. These products use our patented
PAR(TM) construction that ensures superior high temperature operation, which is
critical for automotive applications. The fast recovery mini-bridge is a
low-current surface mount bridge rectifier with fast switching characteristics.
This device saves space on printed circuit boards when compared to standard
bridges. The fast recovery time of this device reduces energy losses for fast
switching power supply applications. We have extended the voltage range of our
TRANSZORB(TM) transient voltage suppressor devices up to 550 volts, which is the
highest avalanche voltage currently offered in the industry. This new product
was specially designed to work in conjunction with newly developed integrated
circuits that provide much greater efficiencies to computer products. See
"Research and Development."
Make Strategic, Synergistic Acquisitions. We continually evaluate
candidates for strategic acquisitions and joint ventures that will permit us to
broaden our product offerings and increase our presence in our existing product
lines. Acquisitions will also permit us to leverage our existing sales and
distribution channels, including a sales force of more than 1,000 worldwide,
comprised of sales representatives, distributors, and approximately 200 direct
sales and technical personnel. For example, we acquired the small signal
products business of ITT Industries, Inc. in October 1997 for $9.0 million,
including direct acquisition costs. This business contributed $53.5 million to
our sales in 1999. It also provided us entry to the small signal transistor,
zener diode and small signal diode sectors of the discrete products market,
collectively a $4.6 billion market in 1999.
Continue to Achieve Cost Savings. We are committed to being a low-cost
producer of our products. In order to achieve this, we continuously engage in
cost reduction programs. These cost reduction programs are made possible in part
by technological advancements in material sciences, wafer production processes
and packaging techniques. As a result of these advancements and through various
investments, we have been able to reduce costs in a number of ways, including,
but not limited to:
- automating production lines to reduce labor costs and increase product
quality;
- improving production processes to increase production yields;
- modifying product designs to reduce the amount of raw material required
to produce products;
- reducing raw material costs through negotiations with our vendors; and
- moving higher labor cost processes to lower labor cost locations.
Our ability to reduce our costs has allowed us to maintain our earnings and
competitive position while satisfying our customers' requirements for low-cost,
high-quality products.
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PRODUCTS AND CUSTOMERS
The table below identifies our end markets and the percentage of our 1999
net sales attributable to each, and the principal products, representative
applications and major customers for those end markets.
<TABLE>
<CAPTION>
END MARKETS COMPUTER AUTOMOTIVE CONSUMER TELECOMMUNICATIONS LIGHTING DISTRIBUTORS
% OF NET SALES(1) 26% 19% 14% 5% 4% 26%
<S> <C> <C> <C> <C> <C> <C>
PRODUCTS Bridge Rectifiers Superectifiers Bridge Rectifiers Fast Efficient Bridge Rectifiers All
Fast Efficient Small Signal Fast Efficient Rectifiers Fast Efficient
Rectifiers Diodes Rectifiers Small Signal Rectifiers
Schottky Small Signal Small Signal Diodes Superectifiers
Rectifiers Transistors Diodes Small Signal
Small Signal Transient Voltage Small Signal Transistors
Diodes Suppressors Transistors Superectifiers
Zener Diodes Zener Diodes Transient
Voltage
Suppressors
REPRESENTATIVE CD ROM drive ABS Brake Cable Boxes Cordless Phone Compact All
APPLICATIONS Computer System CD Player Internet Line Fluorescent
Battery Active DVD Card Lamp
Charger Suspension Entertainment ISDN Board Electronic
Disk Drive Airbag Module Center Mobile Phone Ballast
Monitor Collision Home Modems Energy Saving
Motherboard Warning/ Appliances/ Pager Ballast
PC Scanner Avoidance White Goods Satellite HID Ballast
Printer System Home Satellite Transmission Inverter Light
Switch Mode Cruise Control Dish Switching Ballast
Power Supply Module Microwave Systems Neon Light
Engine Playstation/ Projector
Management Nintendo Ballast
Entertainment TV
Module
GPS Navigation
Systems
MAJOR SECTOR Acer Bosch BOSE Alcatel Delta Arrow/Spoerle
CUSTOMERS API Delphi Braun Ericsson MagneTek Array
Astec Ford Daewoo Hughes Motorola Avnet
Delta Hella Motorola Lucent Philips Distrel
LG Mitsubishi LG Motorola Siemens/Osram Eurodis
Phihong Motorola AIEG Matsushita Nokia Future
Philips Nadex Philips Nortel Nadex
Samsung Nippon Denso/ Ryoden Networks Rutronik
SCI Denso Samsung Sagem Ryoden
SONY Siemens SONY Siemens Taitron
Valeo
</TABLE>
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(1) These products do not equal 100% of our net sales because we also sell
miscellaneous products to various other end markets equal to approximately
5% of our net sales.
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PRINCIPAL PRODUCTS
We design, manufacture and sell a broad array of discrete semiconductors,
including:
- low- to medium-power rectifiers;
- transient voltage suppressors;
- small signal diodes and transistors; and
- zener diodes.
We manufacture these products in a variety of packages, including axial,
bridge, power and surface mount packages.
Rectifiers. Rectifiers conduct electricity in one direction and block it
in the "reverse" direction. They are used to convert alternating current (AC)
into direct current (DC) which is used to power electronic equipment. The
current carried over power lines and into homes, offices and factories is
alternating current; however, most electronic equipment requires direct current
to operate. We offer a wide selection of rectifier products including bridge
rectifiers, fast efficient rectifiers, glass-passivated rectifiers, plastic
rectifiers, Schottky rectifiers and SUPERECTIFIER(R) rectifiers.
Bridge rectifiers are essential for the vast majority of electronic
equipment that plugs into an electrical outlet. A bridge rectifier is comprised
of four separate rectifier components configured into a single package that
converts alternating current into full wave direct current. We manufacture a
complete line of bridge rectifiers that meet the power and case style
requirements of most electronic equipment.
The SUPERECTIFIER(R) rectifier is a highly reliable and cost effective
component that incorporates several of our unique technologies. The
SUPERECTIFIER(R) rectifier glass-plastic construction combines the superior
reliability of spherical glass constructed rectifiers with plastic cases that
allow easier mass handling as well as lower costs. The automotive and computer
peripheral markets are the principal markets for this product.
Our Schottky rectifier is designed for use in high-speed applications such
as computer and computer related products. Its design results in nearly zero
reverse recovery times (the speed at which the device can go from a state of
conducting current to a blocking mode) and very low forward voltage drop which
allows for low power losses. Our manufacturing process creates a highly reliable
Schottky product.
Fast efficient rectifiers are an extension of our Schottky product
portfolio. These products offer reverse recovery times as low as 15 nanoseconds
at voltage levels as high as 1,000 Volts while maintaining the efficiencies of a
lower forward voltage loss. Fast efficient rectifiers are principally used for
computer and computer related applications.
Transient Voltage Suppressors. Transient voltage suppressors protect
electronic circuits by limiting voltage at a safe level. Under normal
circumstances they do not have to be reset or replaced. They are silicon-based
semiconductors designed to provide protection against all types of transient
threats, ranging from electrostatic discharge to induced lightning. These
voltage clamping devices absorb large amounts of energy for short periods of
time. We offer a broad range of state-of-the-art transient voltage suppressor
devices for use in most modern electronic equipment. In 1998, we introduced a
line of patented transient voltage suppressor devices specifically designed for
automotive applications which include a surface mount high-energy "load dump"
transient voltage suppressor device.
Small Signal Diodes. Small signal diodes perform various functions such as
signal blocking, routing and switching at lower current levels. These components
are used in a variety of products, including telecommunications equipment,
personal computer motherboards, automotive systems, power supplies and consumer
electronics.
Small Signal Transistors. Small signal transistors deliver amplification
and switching functions that are essential to most modern electronic systems.
These products are sold in both thru-hole and surface mount packages.
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Zener Diodes. 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 electrostatic
discharge threats. Zener diodes are also used in most modern electronic systems
and end use markets.
MARKETS AND CUSTOMERS
Our customer base is diverse, both geographically and by end use of our
products. We target our products primarily for use in the automotive, computer,
consumer electronics, telecommunications and lighting industries.
Automotive. Our discrete components are found in critical and "creature
comfort" systems throughout automotive design. Automotive customers seek highly
reliable components. Our components are used in many automotive applications
including airbag modules, global positioning satellite navigation systems,
catalytic converter heaters, climate control modules, engine cooling systems and
ignition modules.
Computer. All computers and their associated peripherals require
sophisticated, controlled electrical energy. We provide the power rectifying
element for all computer electronic systems to transform unmanaged, raw electric
power into the controlled energy source modern digital systems require. Our
products also protect computer systems from transient threats, such as
electrostatic discharge and induced lightning. Our products are sold to computer
and computer component manufacturers in numerous applications, including switch
mode power supplies, computer battery chargers, modem cards, P.C.A. boards,
logic boards, laser printers, computer processors and monitors.
Consumer electronics. Consumer appliances that plug into a wall outlet or
transmit a signal generally require discrete semiconductors. Our products are
placed in a broad range of consumer products, including refrigerators, garage
door openers, home satellite systems, washers, dryers and microwaves.
Telecommunications. Our products perform various functions for the
telecommunications market. Because of the often critical nature of
telecommunications applications and the increasing demand for portability, these
applications require a very high degree of reliability and small size. Also,
device efficiencies are very important in battery operated products to minimize
power drain on batteries and maximize run time. For this reason, customers pay a
premium for components that operate with the least amount of energy loss.
Applications using our products include cordless phones, pagers, cellular base
stations, Integrated Services Digital Network (ISDN) boards and satellite
dishes.
Lighting. New electronic ballast systems, which have been replacing older
magnetic ballast systems and incandescent bulbs, provide greater efficiency and
significantly reduce operating costs. Most light fixtures require alternating
current (AC) to be converted into direct current (DC) in order to function.
Historically, this has been achieved through an array of twisted copper wires
known as a magnetic ballast. Recently, as a result of the demand for more
efficient light fixtures, magnetic ballasts have been replaced in many
applications by electronic ballasts which use discrete semiconductors. Because
the new electronic ballast systems typically are priced at a relative premium,
these systems must be extremely reliable in order to justify the higher initial
cost. In addition to a high degree of reliability, electronic ballast
manufacturers require their components to be priced affordably and be compact.
We sell to all major applications within this end use market.
Distributors. Distributors meet the needs of customers with lower volume
requirements. Distributors serve all of our markets in all of our regions, but
our primary distributor sales are in North America and Europe.
Sales channels. Our products are sold through a direct sales force,
distributors and sales representatives. In each of the years ended December 31,
1999, 1998 and 1997, sales to customers in North America, Europe and Southeast
Asia each represented approximately 30% of our net sales. Sales to customers in
Japan represented the majority of the balance. Our customer base incorporates a
wide array of the world's largest manufacturers. No single customer accounted
for 5% or more of our sales during the years ended December 31, 1999, 1998 or
1997.
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We have a sales force of more than 1,000 worldwide, comprised of sales
representatives, distributors and approximately 200 direct sales and technical
personnel to support our worldwide sales and distribution efforts. We maintain
13 sales offices located in Melville, New York; Carlsbad, California; Arlington
Heights, Illinois; Duluth, Georgia; Paris, France; Munich, Germany; Tokyo and
Osaka, Japan; Seoul, Korea; Taipei, Taiwan; Singapore; and Shanghai and Hong
Kong, China.
Additionally, we use information technology to develop and maintain strong
customer relationships. For example, electronic data interchange is used by many
of our major customers to facilitate the order through delivery process. In
addition to electronic data interchange, we intend to expand upon the scope of
services provided through the Internet, extranets and other electronic means to
provide broader services to the marketplace. We expect that these services will
provide improved technical support, on-line order access and e-commerce
capability. The use of improved information technology, combined with strong
technical marketing and broad sales channels has helped us obtain new product
approvals and increase our market share with many of our major customers.
MANUFACTURING
Semiconductor manufacturing involves two phases of production: wafer
fabrication and assembly (or packaging). Wafer fabrication subjects silicon
wafers to various thermal, metallurgical and chemical process steps that change
their electrical and physical properties. These process steps define cells or
circuits within numerous individual devices (termed "dies" or "chips") on each
wafer. Assembly is the sequence of production steps that divide the wafer into
individual chips and enclose the chips in structures (termed "packages") that
make them usable in a circuit. Both wafer fabrication and assembly phases
incorporate wafer level and device level electrical testing to ensure that
device design integrity has been achieved.
Discrete semiconductors generally use process technology and equipment
already proven in the manufacturing of integrated circuits. The cost of discrete
semiconductor wafer fabrication facilities varies greatly, depending upon the
number and sophistication of the process steps required to produce the desired
electrical performance and functions. While Schottky and transistor products
require complex and technically sophisticated process flows, the capital
requirements of these products are significantly less than for integrated
circuits. This is due, in part, to the fewer number of process steps required to
manufacture discrete semiconductor wafers and, therefore, the requirement of
less process equipment. Additionally, because the discrete semiconductor
manufacturing process is based on well established technology, less expensive
process equipment is required.
The entire manufacturing process has evolved over time, and labor intensive
processes have given way to more reliable automated processes. The change to
automated procedures has, in part, allowed us to reduce our manufacturing costs,
significantly improve product quality and reduce the impact of declining prices.
We own or lease six production facilities in China, Taiwan, Ireland,
Germany, France and New York. In addition, we have manufacturing supply
agreements with various companies located in Asia. Our facilities are as
follows:
<TABLE>
<CAPTION>
LOCATION PRODUCTS
- -------- --------
<S> <C>
Wafer Fabrication Only:
Freiburg, Germany Small signal products
Westbury, New York Epitaxial wafers
Wafer Fabrication and Assembly:
Taipei, Taiwan Standard rectifiers
Schottky rectifiers
Fast efficient rectifiers
Transient voltage suppressors
</TABLE>
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<TABLE>
<CAPTION>
LOCATION PRODUCTS
- -------- --------
<S> <C>
Macroom, Ireland Transient voltage suppressors
Bridges
Standard rectifiers
Fast efficient rectifiers
Assembly Only:
Tianjin, China Rectifiers
Bridges
Colmar, France Small signal products
</TABLE>
All factories have received the quality certification designations ISO 9001
or ISO 9002 and all factories except the factory located in Westbury, New York,
which does not manufacture end products for the automotive industry, have
received the quality certification designation QS 9000. Our Macroom, Ireland
facility has received ISO 14001 certification. ISO 14001 is an international
certification awarded after extensive site audits demonstrate compliance to the
Environmental Management System Standards.
RESEARCH AND DEVELOPMENT
We plan to use the technology found in our long-lived, well-established
products to introduce new products that meet our customers' needs. We employ
approximately 60 full-time personnel in our research and development
laboratories in Ireland, Taiwan, Fremont, California and Westbury, New York. The
research and development laboratories in Ireland and Taiwan focus primarily on
the development of new packaging technology, and the development laboratory in
Westbury, New York focuses on applied material sciences.
We recently opened a design center in Fremont, California for power MOSFET
products with experienced senior MOSFET engineers, and have entered into related
manufacturing agreements with two established foundries in China and Taiwan.
MOSFETs are semiconductor devices that switch and/or amplify current through
changes in voltage.
Research and development expenditures totaled $6.9 million in 1999, $6.1
million in 1998 and $6.0 million in 1997. Research and development expenditures
reflect continued development and the advancement of new product and packaging
technologies targeted for the automotive, telecommunications and computer
end-use market applications.
A number of new products were introduced in 1999 to better serve the power
management and circuit protection needs of our customers. The most significant
has been the introduction of our new line of power MOSFETs. Other products
introduced near the end of 1999, which we believe have significant growth
potential in power management applications include 100V Schottky rectifiers and
"rugged" UltraFast rectifiers. Both these product families find use in
high-speed switching power supplies that are widely used in the computer
industry. A low-voltage bi-directional Zener diode, introduced in 1999, has been
very successful and shows significant revenue growth potential in the
application of Christmas tree lights. These diodes prevent an entire string of
lights from going out when a bulb in the string burns out. In the area of
circuit protection we have extended the voltage range of our TRANSZORB(TM)
transient voltage suppressors to have the widest range in the industry.
In 1998 we introduced the surface mount high energy automotive transient
voltage suppressor device, the fast recovery mini-bridge and the high voltage
transient voltage suppressor products. The new surface mount high energy
automotive transient voltage suppressor device is designed to protect automotive
electronic systems from high energy surges. These products use our patented
PAR(TM) construction that ensures superior high temperature operation, which is
critical for automotive applications. The fast recovery mini-bridge is a low
current surface mount bridge rectifier with fast switching characteristics. This
device saves space on printed circuit boards when compared to standard bridges.
The fast recovery time of this device reduces energy losses for fast switching
power supply applications. We have extended the voltage range of our
TRANSZORB(TM) transient voltage suppressor devices up to 550 volts, which is the
highest avalanche voltage currently
9
<PAGE> 11
offered in the industry. This new product was specially designed to work in
conjunction with newly developed integrated circuits that provide much greater
efficiencies to computer products.
PATENTS
We actively seek patents for new products and designs. At December 31,
1999, we held 55 U.S. patents. Although we believe our patents provide a
competitive advantage, no single patent is material to our business. We also
rely on our proprietary knowledge and continuing technological innovation to
develop and maintain our competitive position.
BACKLOG
At December 31, 1999, we had an order backlog of approximately $143.7
million compared with $121.8 million at December 31, 1998. Order backlog
includes 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. Therefore, it is impossible to predict accurately the amount of
backlog orders that will result in sales.
Our backlog at any particular date may not be representative of actual
sales for any succeeding period. The lead times for the release of purchase
orders depend upon the scheduling practices of individual customers. The
delivery times of new or non-standard products can be affected by scheduling
factors and other manufacturing considerations. The rate of booking new orders
can also vary significantly and there is the possibility of customer changes in
delivery schedules or order cancellations.
COMPETITION
The discrete semiconductor industry is highly competitive. We compete with
companies worldwide, some of which have greater financial, marketing and
management resources than we do. We believe that our principal competitors
include ON Semiconductor, Philips Electronics N.V., ST Microelectronics N.V.,
Fairchild Semiconductor Corporation, Shindengen Electric Manufacturing Co.,
Ltd., Sanken Electric Co., Ltd. and a number of Taiwanese and Japanese
manufacturers.
EMPLOYEES
At December 31, 1999, we employed approximately 5,300 people worldwide. We
believe that our relations with both our union and non-union employees are
satisfactory.
RAW MATERIALS
Silicon ingots, molding compound and lead frames typically account for
approximately two-thirds of our raw material expense. We believe that our
relations with our suppliers are good, and we do not anticipate any supply
shortages in the foreseeable future.
We believe that the loss of any supplier would not have a long-term
material negative effect on our business because components and supplies are
generally available from a variety of sources. However, we could have set-up
costs and delays if we change suppliers. In the past, delays in delivery of
components have not had a material negative effect on shipments of our products.
ENVIRONMENT
We are committed to operate worldwide in a manner which respects and
protects the environment. We use hazardous substances and generate solid and
hazardous waste in the ordinary course of our business. As a result, we are
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 our business, we incur costs to
comply with environmental laws. Although we believe we are in substantial
compliance with environmental requirements, we cannot assure you that our costs
to comply with environmental requirements will not increase in the future. We
cannot predict the kind of legislation or regulations that
10
<PAGE> 12
may be adopted in the future with respect to environmental protection and waste
disposal. To date, our compliance with existing legislation and regulations has
not had a material negative effect on us and we do not expect future compliance
to have a material negative effect on our financial position, results of
operations or cash flows.
In connection with the spin-off in 1997, we retained the obligations with
respect to environmental matters relating to our discontinued operations and
their status as a "potentially responsible party" with respect to the offsite
disposal of wastes. We are engaged in the remediation of eight sites relating to
discontinued operations in six states, and are a "potentially responsible party"
at five hazardous waste sites in four states. Based on several factors,
including capital expenditures and expenses for our 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 we have
been named as a "potentially responsible party," these matters are not expected
to have a material adverse effect on our financial position, results of
operations or cash flows.
Our present and past facilities have been in operation for many years, and
over that time in the course of those operations, these facilities have used
substances which are or might be considered hazardous. Additionally, we have
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 we cannot predict.
Reference is made to Note 9 to the Consolidated Financial Statements
included in Part II of this Form 10-K and to the cautionary statements contained
in Exhibit 99 to this Form 10-K for further information regarding environmental
matters.
INTERNATIONAL OPERATIONS
We manufacture or assemble most of our products 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. Our
cost-competitive status could be negatively affected if, relative to our
competitors, we experience unfavorable movements in foreign currency exchange
rates such as the appreciation of the New Taiwan dollar in relation to the U.S.
dollar.
International sales represent approximately 70% of our sales. Sales to the
Asia/Pacific region accounted for approximately 40% of our worldwide sales in
1999. In the first half of 1999, we benefited from improving economic conditions
in Southeast Asia, but conditions in Europe softened. Additionally,
approximately 50% of our production is located in Taiwan, the cost of which
increased from the strengthened New Taiwan Dollar in relation to the U.S. dollar
in 1999. In the second half of 1999 we saw significant improvement in the
business including improved sales, pricing and capacity utilization. We cannot
assure you as to the extent or duration of the impact of these events on our
financial position, results of operations or cash flows.
For detailed financial information concerning foreign and domestic
operations and export sales, reference is made to Note 14 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, 1999.
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
Ronald A. Ostertag.................. 59 Ronald A. Ostertag has been our Chairman, President
Chairman, President and and Chief Executive Officer since the spin-off. Previously,
Chief Executive Officer he held the position of Vice President of General Instrument
Corporation since February 1989 and President of General
Instrument Corporation's Power Semiconductor Division since
September 1990.
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
Andrew M. Caggia(1)................. 51 Andrew M. Caggia has been our Senior Vice President
Senior Vice President and and Chief Financial Officer since the spin-off. Previously,
Chief Financial Officer he held the position of Senior Vice President of Finance at
General Instrument Corporation's Power Semiconductor
Division since September 1990.
Robert J. Gange(1).................. 44 Robert J. Gange has been our Vice President and
Vice President and Controller since the spin-off and Vice President and
Controller Controller of General Instrument Corporation's Power
Semiconductor Division since May 1997. From 1995 to 1997, he
was Director of Finance and from 1993 to 1995, Assistant
Controller of General Instrument Corporation's Power
Semiconductor Division.
Vincent M. Guercio.................. 46 Vincent M. Guercio has been our Senior Vice
Senior Vice President, e-commerce President, e-commerce since November 1998. From the spin-off
to November 1998 he was Senior Vice President, Worldwide
Sales and Marketing. Previously, he had been responsible for
this function at General Instrument Corporation's Power
Semiconductor Division since January 1992.
W. John Nelson(2)................... 45 W. John Nelson has been our President, Asia/Pacific
President Operations since November 1998. From the spin-off to
Asia/Pacific Operations November 1998 he was our Senior Vice President, Asia/Pacific
Operations. Previously, he had been responsible for this
function at General Instrument Corporation's Power
Semiconductor Division since March 1994. From 1991 to 1994,
he was President of General Instrument Corporation Taiwan.
Stephen B. Paige.................... 52 Stephen B. Paige has been our Senior Vice President,
Senior Vice President, General General Counsel and Secretary since the spin-off.
Counsel and Secretary Previously, he was Senior Vice President and General Counsel
for General Instrument Corporation'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...................... 49 Linda S. Perry has been our Senior Vice President,
Senior Vice President, Human Resources since September 1997 and its Vice President,
Human Resources Human Resources since the spin-off. Previously, she held the
position of Vice President, Human Resources at General
Instrument Corporation's Power Semiconductor Division and
has had responsibility for this function since 1988.
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
-------------- --- -------------------
<S> <C> <C>
John P. Phillips.................... 54 John P. Phillips has been our President, Europe and
President, Europe and North America Operations since November 1998. From the
North America Operations spin-off to November 1998 he was Senior Vice President,
European Operations. Previously, he was Senior Vice
President of Worldwide Technology for General Instrument
Corporation's Power Semiconductor Division and had
responsibility for this function since March 1992.
</TABLE>
- ---------------
(1) Mr. Caggia resigned from his positions with General Semiconductor effective
January 19, 2000. On March 15, 2000, Mr. Gange was appointed Senior Vice
President and Chief Financial Officer.
(2) On March 15, 2000, Mr. Nelson was appointed Chief Operating Officer.
ITEM 2. PROPERTIES
Our principal administrative, production and research and development
facilities are located in the following locations:
<TABLE>
<CAPTION>
LOCATION LEASED OR OWNED SQUARE FEET
-------- ------------------------------ -----------
<S> <C> <C>
Melville, New York......................... Leased, Expires 2004 52,000
Westbury, New York......................... Leased, Expires 2005 (1) 18,000
Taipei, Taiwan............................. Owned 350,000
Macroom, Ireland........................... Owned 120,000
Tianjin, China............................. Ground Lease, Expires 2045 (2) 120,000
Freiburg, Germany.......................... Leased, Expires 2007 (3) 55,000
Colmar, France............................. Owned 63,000
</TABLE>
- ---------------
(1) We have an option to extend this lease until 2010.
(2) We own the facility; however, the land upon which it is constructed is
leased.
(3) We have the right to terminate this lease beginning in 2000.
We believe that our facilities around the world, whether owned or leased,
are well-maintained. Our manufacturing facilities contain sufficient production
capacity to meet our needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In connection with the spin-off in 1997, Next Level Systems, Inc. (which
subsequently changed its name to General Instrument Corporation and was acquired
by Motorola Inc. in January 2000) agreed to indemnify us with respect to certain
legal proceedings relating to the business transferred to Next Level Systems,
Inc., including the obligations, if any, arising out of or relating to the two
securities litigations described below. Therefore, we are of the opinion that
the resolution of these matters will not have an effect on our consolidated
financial position, results of operations or cash flows.
The action captioned In Re General Instrument Corporation Securities
Litigation pending in the U.S. District Court for the Northern District of
Illinois, Eastern Division, consolidates numerous class action complaints
(including the derivative action) filed in various courts between October 10 and
October 27, 1995, and is brought by plaintiffs, on their own behalf and as
representatives of a class of purchasers of General Instrument Corporation
common stock during the period March 21 through October 18, 1995. The complaint
alleges that prior to the spin-off, General Instrument Corporation 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, by allegedly
making false and misleading statements and failing to disclose material facts
about General Instrument Corporation'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 General Instrument Corporation. The
derivative action
13
<PAGE> 15
alleges that the members of General Instrument Corporation'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 General Instrument Corporation common stock for personal gain.
The action captioned BKP Partners, L.P. v. General Instrument Corp. was
brought in February 1996 by certain holders of preferred stock of NextLevel
Communications, which was merged into a subsidiary of General Instrument
Corporation in September 1995. The action was originally filed in the Northern
District of California and was later 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
NextLevel in connection with the acquisition of NextLevel by General Instrument
Corporation. Plaintiffs seek, among other things, unspecified compensatory and
punitive damages and attorneys' fees and costs.
We are 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
we are indemnified. We are of the opinion that these litigations or claims will
not have a material negative effect on our consolidated financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades 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 the years ended December 31, 1998 and 1999.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1998
First Quarter............................................... $14 3/4 $10 5/8
Second Quarter.............................................. 14 3/4 9 7/8
Third Quarter............................................... 10 1/8 6
Fourth Quarter.............................................. 10 11/16 5 15/16
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1999
First Quarter............................................... $ 9 7/16 $ 5 15/16
Second Quarter.............................................. 9 3/4 6 3/8
Third Quarter............................................... 12 5/8 7 7/8
Fourth Quarter.............................................. 15 1/8 8 11/16
</TABLE>
As of February 29, 2000, there were 409 holders of record of our common
stock.
We have not paid any cash dividends since the spin-off. We do not currently
intend to pay dividends in the foreseeable future, but to reinvest earnings in
our business. Our ability to pay cash dividends on our common stock is limited
by certain covenants contained in our credit agreement. See Note 8 to the
Consolidated Financial Statements included in Part II of this Form 10-K.
14
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected historical financial data at the
dates and for each of the periods indicated. The financial data as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 has been derived from the audited consolidated financial statements
included elsewhere herein. The financial data as of December 31, 1997, 1996, and
1995 and for the years ended December 31, 1996 and 1995 has been derived from
the previously audited consolidated financial statements not included herein, as
adjusted to give effect to the spin-off by General Instrument Corporation in
1997. This selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
elsewhere herein. Historical consolidated financial data may not be indicative
of our future performance.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997(A) 1996 1995
-------- -------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales............................ $417,082 $401,144 $380,038 $ 361,891 $ 414,269
Cost of sales........................ 302,476 283,582 289,313 230,687 254,991
Selling, general and
administrative..................... 46,567 46,802 44,668 42,594 51,225
Research and development............. 6,903 6,104 5,998 5,838 5,068
Restructuring........................ -- 12,324 -- -- --
Operating income..................... 55,994 47,187 34,916 77,618 97,776
Interest expense -- net.............. (23,466) (20,026) (14,353) (10,396) (9,461)
Income from continuing operations.... 24,389 18,534 8,872 39,764 57,316
Net income (loss).................... 24,389 18,534 5,933 (1,864) 123,782
BASIC EARNINGS (LOSS) PER SHARE:
Income from continuing operations.... $ 0.66 $ 0.50 $ 0.25 $ 1.20 $ 1.86
Net income (loss).................... 0.66 0.50 0.17 (0.06) 4.01
DILUTED EARNINGS PER SHARE:
Income from continuing operations.... $ 0.66 $ 0.50 $ 0.25 $ 1.15 $ 1.68
Net income........................... 0.66 0.50 0.17 0.27 3.86
CONSOLIDATED BALANCE SHEET DATA:
Accounts receivable.................. $ 63,246 $ 59,643 $ 54,077 $ 49,629 $ 58,819
Inventories.......................... 43,480 39,514 34,309 31,551 23,524
Property, plant and equipment........ 231,217 223,743 218,752 202,281 156,714
Net assets of discontinued
operations......................... -- -- -- 1,444,734 1,265,345
Total assets......................... 573,799 563,447 550,305 2,057,162 1,799,387
Long-term debt, including current
maturities......................... 276,500 286,000 268,074 692,335 732,079
</TABLE>
- ---------------
(a) Includes charges of $33.8 million ($25.3 million net of tax), or $0.69 per
share, primarily related to the separation of General Instrument
Corporation'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.
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We are a market leader in the discrete segment of the semiconductor
industry. We design and manufacture a broad array of discrete semiconductors,
including power rectifiers, transient voltage suppressors, small signal
transistors and small signal diodes. We are a world leader in the power
rectifier and transient voltage suppressor markets, which products represented
87% of our 1999 net sales, with an approximate 15% market share as measured by
net sales in 1999. Our products condition current and voltage, protect
electrical circuits from power surges, amplify and switch small electrical
signals and regulate voltage levels in circuits. Our products are essential
components of most electronic devices and systems and are used throughout a wide
range of industries, including the computer, automotive, telecommunications and
consumer electronics industries. We operate six production facilities located in
China, France, Germany, Ireland, Taiwan and New York, and we produce an average
of 35 million units per day.
COST REDUCTION PROGRAMS
We are engaged in ongoing cost reduction programs. These programs are
designed to make our global manufacturing facilities more efficient and achieve
a reduction in our future operating costs. The principal elements of our cost
reduction programs include reducing the cost of our raw materials, improving the
efficiency of our raw material utilization and automating labor intensive
portions of our manufacturing process.
RESTRUCTURING
In 1999 we completed a restructuring plan, announced on November 6, 1998,
which was designed to enhance the interface of our operations and customers and
improve our cost structure, efficiency and competitive position. The
restructuring included reducing the workforce by decentralizing certain
purchasing, marketing, finance and research and development functions and
providing early retirement to a group of employees, closing two sales offices
and writing off assets related to a discontinued product. Restructuring charges
recorded in the fourth quarter of 1998 included $8.4 million in charges
primarily related to employee separation and related costs and $3.9 million in
non-cash charges for asset write-offs. This program resulted in a reduction of
operating expenses by $6.4 million per year.
1997 SPIN-OFF
On January 7, 1997, the Board of Directors of General Instrument
Corporation approved a plan to divide General Instrument Corporation into three
separate public companies in a spin-off transaction that was completed on July
28, 1997. Simultaneously with the spin-off, General Instrument Corporation
changed its name to General Semiconductor, Inc. and effected a one-for-four
reverse stock split. Following the spin-off, we began operations as a
stand-alone publicly held company. The revenues, costs and expenses and cash
flows of the businesses transferred to the General Instrument Corporation
(formerly NextLevel Systems, Inc.) and CommScope, Inc. segments have been
excluded from the respective captions in the consolidated statements of income
and consolidated statements of cash flows and have been reported through July
28, 1997 as "Income (loss) from discontinued operations," net of applicable
income taxes, and as "Cash provided by (used in) discontinued operations" for
all periods presented in our consolidated financial statements included
elsewhere herein. Unless otherwise noted, the following discussion pertains to
our continuing operations.
16
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth certain items included in selected
consolidated financial data as a percentage of sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 72.5 70.7 76.1
----- ----- -----
Gross profit................................................ 27.5 29.3 23.9
Selling, general and administrative......................... 11.2 11.7 11.8
Research and development.................................... 1.7 1.5 1.6
Amortization of excess of cost over fair value of net assets
acquired.................................................. 1.2 1.3 1.4
Restructuring............................................... -- 3.1 --
----- ----- -----
Operating income............................................ 13.4 11.8 9.2
Other income (expense) -- net............................... -- -- --
Interest expense -- net..................................... 5.6 5.0 3.8
----- ----- -----
Income from continuing operations before income taxes....... 7.8 6.8 5.4
Provision for income taxes.................................. 1.9 2.1 3.1
----- ----- -----
Income from continuing operations........................... 5.9% 4.6% 2.3%
===== ===== =====
</TABLE>
ADJUSTED EBITDA
Adjusted EBITDA represents earnings from continuing operations before
interest, taxes, depreciation and amortization expense. EDITDA is presented
because the Company believes it is frequently used by securities analysts,
investors and other interested parties in the evaluation of companies in our
industry. However, other companies in our industry may calculate EBITDA
differently than we do. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be considered as
an alternative to cash flow from operating activities or as a measure of
liquidity or as an alternative to net income as an indicator of the Company's
operating performance or any other measures of performance derived in accordance
with generally accepted accounting principles. See the statements of cash flow
included in the Company's Consolidated Financial Statements, included in Part II
of this Form 10-K.
Adjusted EBITDA is calculated by adding to EBITDA certain items of expense
that the Company believes are neither likely to recur nor indicative of future
performance, consisting of (a) pre-tax charges of $33.8 million incurred during
1997 in connection with the separation and (b) pre-tax charges of $12.3 million
incurred in the fourth quarter of 1998 for the restructuring.
17
<PAGE> 19
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Income from continuing operations........................ $24,389 $18,534 $ 8,872
Interest................................................. 23,466 20,026 14,353
Taxes.................................................... 8,130 8,556 11,649
Depreciation and amortization(1)......................... 27,240 24,682 23,892
------- ------- -------
EBITDA................................................... 83,225 71,798 58,766
Restructuring............................................ -- 12,324 --
Spin-off................................................. -- -- 33,866
------- ------- -------
Adjusted EBITDA.......................................... $83,225 $84,122 $92,632
======= ======= =======
</TABLE>
- ---------------
(1) Amortization of deferred financing fees is excluded from "Depreciation and
amortization" and included in "Interest".
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 WITH
THE YEAR ENDED DECEMBER 31, 1998
NET SALES
Net sales of $417.1 million for the year ended December 31, 1999 increased
$16.0 million from $401.1 million for the comparable prior year period. The 4.0%
increase is primarily due to an 18% increase in unit volume sales partly offset
by a 15% decline in average selling prices resulting from the effects of
industry wide excess capacity most notably in the first half of 1999.
COST OF SALES
Cost of sales for the year ended December 31, 1999 of $302.5 million
increased $18.9 million from $283.6 million for the corresponding prior year
period. The 6.7% increase is principally due to an increase in unit volume
sales, partly offset by continued cost control and savings achieved from the
1998 restructuring.
Accordingly, gross margin for the year ended December 31, 1999 represents
27.5% of net sales compared with 29.3% for the corresponding prior year period.
The decrease relates to erosion of average selling prices partially offset by a
change in the mix of products sold, continued cost controls, savings achieved
from the 1998 restructuring and improved factory utilization.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses of $46.6 million for the year
ended December 31, 1999 remained fairly stable compared with $46.8 million in
1998. Higher selling costs to support increased sales were offset by lower
variable compensation expense and savings achieved from the 1998 restructuring.
As a percentage of sales, selling, general and administrative expenses decreased
to 11.2% for the year ended December 31, 1999 from 11.7% for the corresponding
prior year period due to the increase in sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expense of $6.9 million for the year ended
December 31, 1999 increased from $6.1 million for the comparable prior year
period due to costs incurred related to the planned introduction of power
MOSFETs partly offset by cost savings achieved from the 1998 restructuring.
Research and development spending reflects the modification of existing products
as well as the continued development of new products.
18
<PAGE> 20
NET INTEREST EXPENSE
Net interest expense increased to $23.5 million for the year ended December
31, 1999 from $20.0 million for the corresponding prior year period due to
higher borrowing rates and amortization of deferred financing fees associated
with amendments to the credit facility discussed below.
INCOME TAXES
The Company's effective tax rate for the year ended December 31, 1999
decreased to 25.0% from 31.6% for the year ended December 31, 1998 due primarily
to an increased proportion of income of foreign subsidiaries taxed at rates
lower than the U.S. rate.
ADJUSTED EBITDA
The $0.9 million decrease in adjusted EBITDA for the year ended December
31, 1999, compared with the corresponding prior year period is due primarily to
lower selling prices, partly offset by increased sales volume and operating cost
improvements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 WITH
THE YEAR ENDED DECEMBER 31, 1997
NET SALES
Net sales for the year ended December 31, 1998 of $401.1 million increased
$21.1 million from $380.0 million for the year ended December 31, 1997. The 5.6%
increase reflects a 7% increase in unit volume as well as the inclusion of small
signal product sales (business acquired on October 1, 1997), partially offset by
an approximate 10% decline in worldwide average selling prices. International
sales, including export sales from the U.S., represented approximately 70% of
net sales in each of the years ended December 31, 1998 and 1997.
COST OF SALES
Cost of sales for the year ended December 31, 1998 of $283.6 million
decreased 2% from $289.3 million for 1997. Excluding 1997 pre-tax charges of
$32.7 million primarily related to the separation of the Taiwan operations of
General Instrument Corporation in connection with the spin-off, cost of sales
increased $27.0 million or 10.5% principally due to increased costs related to
higher operating levels and the full year effect of the small signal products
acquisition offset, in part, by improved factory performance and cost reduction.
Cost of sales, as a percentage of net sales, was 70.7% for 1998 compared to
67.5% for 1997, excluding the 1997 pre-tax charges discussed above. This
increase primarily results from the decline in average selling prices discussed
above.
Accordingly, gross margin for the year ended December 31, 1998 represents
29.3% of net sales compared with 32.5% for the comparable prior year period,
excluding the 1997 pre-tax charges discussed above. This decrease reflects the
margin percentage reduction that was expected due to the full year effect of the
small signal products acquisition and erosion of average selling prices,
partially offset by improved factory performance. Without the small signal
products acquisition, the year over year decrease in gross margin would have
been less than one percentage point.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased to $46.8 million for
the year ended December 31, 1998 compared to $44.7 million in 1997 and
represented 11.7% and 11.8% of sales, respectively. The $2.1 million increase
includes higher selling costs to support increased sales. No other expense
increase is individually significant.
19
<PAGE> 21
RESEARCH AND DEVELOPMENT
Research and development expense for the year ended December 31, 1998 was
$6.1 million compared to $6.0 million in 1997 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.
NET INTEREST EXPENSE
Net interest expense increased $5.6 million to $20.0 million for the year
ended December 31, 1998 from $14.4 million in 1997. Net interest expense in 1997
represents an allocation based upon General Semiconductor's net assets as a
percentage of total assets of General Instrument Corporation through July 28,
1997 and actual interest expense thereafter. Pro forma net interest expense,
assuming a net debt level of $275.0 million through the spin-off and
amortization of debt issuance costs associated with the new borrowings, would
have been $19.6 million for the year ended December 31, 1997.
INCOME TAXES
The Company's effective income tax rate was 31.6% for 1998 compared with
56.8% for 1997 (37.0% excluding the tax effects, at the applicable rates, of the
costs incurred to separate the General Instrument Corporation's Taiwan
operations in connection with the spin-off). The decrease from the 37.0%
described above, relates primarily to increased income of foreign subsidiaries
taxed at rates lower than U.S. rates.
ADJUSTED EBITDA
Adjusted EBITDA for the year ended December 31, 1998 of $84.1 million
decreased $8.5 million from $92.6 million for the year ended December 31, 1997.
Increased revenues in 1998 which reflect the inclusion of the small signal
products sales for a full year were offset by price erosion of approximately
15%, higher costs from increased unit production and higher operating costs
incurred as a result of increased sales.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, working capital was $64.7 million, compared to $51.7
million at December 31, 1998. The working capital increase of $13.0 million
resulted primarily from the payment of restructuring costs, an increase in
accounts receivable in support of a higher revenue base and increased days sales
outstanding, and increased inventories due to additional customer requested
consignment stock. As of December 31, 1999 approximately $1.4 million remains
accrued for costs related to the 1998 restructuring. Such amounts are expected
to be paid in 2000. As a result the current ratio increased to 2.0 to 1 at
December 31, 1999 from 1.7 to 1 at December 31, 1998.
During the year ended December 31, 1999, the Company invested $27.3 million
in property, plant and equipment principally directed to strategic initiatives
and automation compared with $26.9 million and $29.2 million in 1998 and 1997,
respectively. While the Company does not have any material commitments for
capital expenditures it does expect to invest approximately $35.0 to $40.0
million in 2000 for automation, new products, quality and system enhancements
and capacity increases.
Long-term debt at December 31, 1999 was $276.5 million, compared to $286.0
million at December 31, 1998. The Company's ratio of total debt to adjusted
EBITDA was 3.3 to 1 at December 31, 1999, compared to 3.4 to 1 at December 31,
1998. The Company's ratio of senior debt to adjusted EBITDA improved from 3.4 to
1 at December 31, 1998 to 1.3 to 1. The improvement of this ratio is due to the
issuance of $172.5 million of convertible subordinated notes in the fourth
quarter of 1999.
In December 1999, the Company issued $172.5 million principal amount of
5.75% convertible subordinated notes (the "Convertible Notes") due December 15,
2006. Interest on the Convertible Notes is payable semi-annually on June 15 and
December 15 of each year, commencing in June, 2000. The Convertible Notes are
convertible into approximately 11.1 million shares of the Company's common
stock, at the option of the holder, at a conversion price of $15.55 per share.
The Convertible Notes are redeemable at the Company's
20
<PAGE> 22
option, in whole or in part, at any time on or after December 15, 2002 at a
premium of 103.286% of par value declining annually to 100.821% at December 15,
2005 and thereafter. The Convertible Notes are subordinated to the Company's
existing and future senior indebtedness ($104.0 million at December 31, 1999)
and to certain existing and future trade payable and other liabilities of
certain of our subsidiaries (approximately $64.0 million at December 31, 1999).
The holders of the Convertible Notes may require the Company to repurchase the
notes at par value, plus interest and liquidated damages, if any, upon a change
in control of the Company. Proceeds from the Convertible Notes were used to
repay outstanding indebtedness under the Company's credit facility described
below.
In July 1997, the Company entered into a bank credit agreement, which was
amended in December 1998 and in June 1999 (as amended the "Credit Agreement")
which provides for a $350.0 million secured revolving credit facility that
matures on December 31, 2002. In December 1999 the commitment amount under the
Credit Agreement was permanently reduced by $86.3 million (50% of the gross
proceeds from issuance of the Convertible Notes) to $263.8 million. 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 interest, 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. In
addition, certain changes in control of the Company would cause an event of
default under the Credit Agreement. The December 1998 and June 1999 amendments
revised certain covenant compliance calculations to provide the Company with
greater flexibility. As required by the Credit Agreement, the Company entered
into a guarantee and collateral agreement in August 1999 under which
substantially all of the domestic assets and a portion of the capital stock of
its foreign subsidiaries were pledged as security to the lenders. At December
31, 1999 and 1998, the Company was in compliance with all such amended
covenants.
The weighted average interest rate on the Company's long-term debt as of
December 31, 1999 and 1998 was 7.0% and 5.8%, respectively.
At December 31, 1999 there were $11.0 million letters of credit outstanding
that reduce the amount that can be borrowed against the Company's $263.8 million
credit facility.
The Company generated $41.1 million cash flow from operations but
experienced an overall decrease in cash of $0.6 million for the year ended
December 31, 1999. The positive cash flow provided by operations was used for
capital expenditures, a partial repayment of debt outstanding and financing fees
associated with the issuance of the Convertible Notes. For the year ended
December 31, 1998 the Company generated $32.5 million cash flow from continuing
operating activities but experienced an overall decrease in cash of $2.0
million. The positive cash flow provided by continuing operations and borrowings
was offset by capital expenditures and the remaining payments related to the
spin-off.
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 cash flow needs from the results of its operations, working capital
and the existing Credit Agreement. The Company intends to repay its remaining
senior 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.
21
<PAGE> 23
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
The following discussion and the estimated amounts generated from the
sensitivity analyses referred to below include forward-looking statements of
market risk which assume for analytical purposes that certain adverse market
conditions may occur. Actual future market conditions may differ materially from
such assumptions because the amounts noted below are the result of analyses used
for the purpose of assessing possible risks and the mitigation thereof.
Accordingly, the forward-looking statements should not be considered projections
by General Semiconductor of future events or losses.
Among other factors, the Company's cash flows and earnings are subject to
fluctuations resulting from changes in foreign currency exchange rates and
interest rates. The Company manages its exposure to these market risks through
internally established policies and procedures and, when deemed appropriate,
through the use of derivative financial instruments. The Company's policy does
not allow speculation in derivative instruments for profit or execution of
derivative instrument contracts for which there are no underlying exposures. The
Company does not use financial instruments for trading purposes and is not a
party to any leveraged derivatives. 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.
The Company measured its market risk, related to its holdings of financial
instruments based on changes in interest and foreign exchange rates, utilizing a
sensitivity analysis. The sensitivity analysis measures the potential loss in
fair values, cash flows or earnings based on a hypothetical 10% change in
interest and foreign exchange rates. The Company used current market rates on
its market risk sensitive assets and liabilities to perform the sensitivity
analysis. Certain items such as obligations for pension and post retirement
benefits were not included in the analysis.
The Company is exposed to credit risk in the event of non-performance by
the counterparties to its foreign exchange-forward contracts. 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.
Additional information regarding the Company's financial instruments is
contained in Notes 8 and 13 to the Consolidated Financial Statements included in
Part II of this Form 10-K.
FOREIGN CURRENCY RISK
Almost all of General Semiconductor's products are manufactured in
Southeast Asia and Europe and a significant portion are sold internationally.
Therefore, the Company is subject to market risk related to changes in foreign
exchange rates. On a selective basis, the Company enters into forward and
purchased option contracts designed 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.
The Company's principal foreign currency exposures are in the New Taiwan
Dollar, Japanese Yen, Chinese Renminbi, the British Pound and the Euro. The
Company's committed exposures relate primarily to trade payables, accounts
receivable and employee compensation. At December 31, 1999, the Company had
committed exposures of $53.6 million.
As of December 31, 1999 and 1998, the Company had outstanding forward and
purchased option contracts in the amounts of $10.6 million and $21.3 million,
respectively, comprised of foreign currencies which were to be sold, and $12.7
million and $79.6 million, respectively, comprised of foreign currencies which
were to be purchased. All outstanding forward contracts at December 31, 1999
mature within twelve months and have an aggregate fair value of $0.2 million.
At December 31, 1999, the impact of a hypothetical 10% adverse change in
exchange rates on the fair value of foreign exchange forward contracts and
purchased options is a reduction in fair value of $2.3 million.
22
<PAGE> 24
This impact would be offset by an increase in the fair value of the Company's
committed exposures of $2.7 million.
INTEREST RATE RISK
The Company is exposed to changes in U.S. dollar LIBOR interest rates on
its floating rate revolving credit facility. At December 31, 1999, the
outstanding balance under this facility was $104.0 million. On a selective
basis, the Company from time to time enters into interest rate swap or cap
agreements to reduce the potential negative impact increases in interest rates
could have on its outstanding variable rate debt. The impact of interest rate
instruments on the Company's results of operations in each of the three years
ended December 31, 1999 was not significant.
A hypothetical 10% increase in interest rates would adversely affect the
Company's pretax earnings and cash flow by $0.9 million annually, due to the
Company's floating rate debt.
At December 31, 1999 the fair value of the Convertible Notes was
approximately $184.6 million.
INTERNATIONAL MARKETS
Management believes that a significant amount of General Semiconductor's
sales in 2000 will continue to come from international markets.
International sales generally represent 70% of the Company's worldwide
sales. Sales to the Asia/Pacific region accounted for approximately 40% of the
Company's worldwide sales for the year ended December 31, 1999. During 1999
order trends strengthened while average selling prices continued to deteriorate.
However, approximately 50% of the Company's production is currently in Taiwan,
the cost of which has increased from the strengthened New Taiwan Dollar in
relation to the U.S. dollar. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998 the Financial Accounting Standards Board issued 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. As
amended by SFAS 137, SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company is evaluating the impact SFAS
133 will have on its financial statements.
YEAR 2000
The Company did not experience a material adverse effect on its products,
services, competitive position, financial condition or results of operations as
a result of the Year 2000 phenomenon. However, the Company can give no assurance
that the systems of other companies or government agencies on which the Company
relies have been converted on time or that a failure to convert by another
company or a conversion that is incompatible with the Company's systems will 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
23
<PAGE> 25
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. Currently, the Company has not experienced any
material negative impact to date as a result of the introduction of the Euro.
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.
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, 1999, the Company's 1999 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.
24
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements of General Semiconductor, Inc.
Management's Responsibility for Financial Statements...... 26
Independent Auditors' Report.............................. 27
Consolidated Financial Statements:
Consolidated Balance Sheets -- as of December 31, 1999
and 1998.............................................. 28
Consolidated Statements of Income -- Years ended
December 31, 1999, 1998 and 1997...................... 29
Consolidated Statements of Stockholders'
Equity -- Years ended December 31, 1999, 1998 and
1997.................................................. 30
Consolidated Statements of Cash Flows -- Years ended
December 31, 1999, 1998 and 1997...................... 31
Notes to Consolidated Financial Statements................ 32 through 52
</TABLE>
25
<PAGE> 27
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and accuracy of the
consolidated financial statements and other information included in this report.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles using, where appropriate, management's
best estimates and judgments.
In meeting its responsibility for the reliability of the consolidated
financial statements, management has developed and relies on the Company's
system of internal accounting control. The system is designed to provide
reasonable assurance that assets are safeguarded and that transactions are
executed as authorized and are properly recorded. The system is augmented by
written policies and procedures and an internal audit department.
The Board of Directors reviews the consolidated financial statements and
reporting practices of the Company through its Audit Committee, which is
composed entirely of directors who are not officers or employees of the Company.
The Audit Committee meets with the independent auditors, the internal auditor
and management to discuss audit scopes and results and to consider internal
control and financial reporting matters. Both the independent and internal
auditors have direct unrestricted access to the Audit Committee. The entire
Board of Directors reviews the Company's financial performance and financial
plan.
<TABLE>
<S> <C>
/s/ Robert J. Gange
/s/ Ronald A. Ostertag Robert J. Gange
Ronald A. Ostertag Senior Vice President and
Chairman, President and Chief Financial Officer
Chief Executive Officer
</TABLE>
26
<PAGE> 28
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, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Jericho, New York
February 2, 2000
27
<PAGE> 29
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT STOCK PAR VALUE)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 2,586 $ 3,225
Accounts receivable, less allowance for doubtful accounts of
$1,091 and $769, respectively............................. 63,246 59,643
Inventories................................................. 43,480 39,514
Prepaid expenses and other current assets................... 11,843 12,010
Deferred income taxes....................................... 10,130 13,738
-------- --------
Total current assets............................... 131,285 128,130
Property, plant and equipment -- net........................ 231,217 223,743
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $49,071 and $43,929,
respectively.............................................. 157,609 162,751
Deferred income taxes....................................... 29,894 29,376
Intangibles and other assets, less accumulated amortization
of $13,083 and $11,099, respectively...................... 23,794 19,447
-------- --------
TOTAL ASSETS................................................ $573,799 $563,447
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 31,864 $ 31,343
Accrued expenses............................................ 34,700 45,084
-------- --------
Total current liabilities.......................... 66,564 76,427
Long-term debt.............................................. 276,500 286,000
Deferred income taxes....................................... 28,608 21,390
Other non-current liabilities............................... 70,745 74,283
-------- --------
Total liabilities.................................. 442,417 458,100
-------- --------
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;
37,069 and 36,925 shares issued, respectively............. 371 369
Additional paid-in capital.................................. 2,151 507
Retained earnings........................................... 136,231 111,842
-------- --------
138,753 112,718
Less -- Treasury stock, at cost, 104 shares................. (7,371) (7,371)
-------- --------
Total stockholders' equity......................... 131,382 105,347
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $573,799 $563,447
======== ========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 30
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET SALES.................................................. $417,082 $401,144 $380,038
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of sales............................................ 302,476 283,582 289,313
Selling, general and administrative...................... 46,567 46,802 44,668
Research and development................................. 6,903 6,104 5,998
Amortization of excess of cost over fair value of net
assets acquired....................................... 5,142 5,145 5,143
Restructuring............................................ -- 12,324 --
-------- -------- --------
Total operating costs and expenses............... 361,088 353,957 345,122
-------- -------- --------
OPERATING INCOME........................................... 55,994 47,187 34,916
Other expense-net.......................................... (9) (71) (42)
Interest expense-net....................................... (23,466) (20,026) (14,353)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES........................................ 32,519 27,090 20,521
Provision for income taxes................................. (8,130) (8,556) (11,649)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS.......................... 24,389 18,534 8,872
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of income tax
expense of $22,073....................................... -- -- (2,939)
-------- -------- --------
NET INCOME................................................. $ 24,389 $ 18,534 $ 5,933
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.................................................... 36,832 36,811 35,414
Diluted.................................................. 37,563 36,899 35,576
BASIC EARNINGS PER SHARE:
Continuing operations.................................... $ 0.66 $ 0.50 $ 0.25
Discontinued operations.................................. -- -- (0.08)
-------- -------- --------
Net income............................................... $ 0.66 $ 0.50 $ 0.17
======== ======== ========
DILUTED EARNINGS PER SHARE:
Continuing operations.................................... $ 0.66 $ 0.50 $ 0.25
Discontinued operations.................................. -- -- (0.08)
-------- -------- --------
Net income............................................... $ 0.66 $ 0.50 $ 0.17
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 31
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE INCOME
-------------------- TOTAL
COMMON STOCK ADDITIONAL UNEARNED UNREALIZED STOCK-
--------------- PAID-IN RETAINED TREASURY COMPEN- GAIN ON HOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK SATION INVESTMENT EQUITY
------ ------ ----------- --------- -------- -------- -------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997... 34,286 $343 $ 926,194 $ 254,552 $(7,271) $(665) $ -- $ 1,173,153
Exercise of stock options
and related tax
benefit.................. 200 2 19,361 -- -- -- -- 19,363
Comprehensive income:
Net income............... -- -- -- 5,933 -- -- -- --
Unrealized gain on
investment, net of
tax.................... -- -- -- -- -- -- 22,018 --
Total comprehensive
income................... -- -- -- -- -- -- -- 27,951
Amortization of unearned
compensation............. -- -- -- -- -- 243 -- 243
Treasury stock
transactions............. -- -- -- -- (100) -- -- (100)
Conversion of Convertible
Junior Subordinated
Notes -- net............. 2,397 24 226,636 -- -- -- -- 226,660
Distribution of General
Instrument and
Commscope................ -- -- (1,172,191) (167,177) -- 422 (22,018) (1,360,964)
Common stock issued........ 4 -- 55 -- -- -- -- 55
------ ---- ----------- --------- ------- ----- -------- -----------
BALANCE, DECEMBER 31,
1997..................... 36,887 369 55 93,308 (7,371) -- -- 86,361
Exercise of stock options
and related tax
benefit.................. 38 -- 452 -- -- -- -- 452
Comprehensive income:
Net income............... -- -- -- 18,534 -- -- -- --
Total comprehensive
income................... 18,534
------ ---- ----------- --------- ------- ----- -------- -----------
BALANCE, DECEMBER 31,
1998..................... 36,925 369 507 111,842 (7,371) -- -- 105,347
Exercise of stock options
and related tax
benefit.................. 144 2 1,644 -- -- -- -- 1,646
Comprehensive income:
Net income............... -- -- -- 24,389 -- -- -- --
Total comprehensive
income................... 24,389
------ ---- ----------- --------- ------- ----- -------- -----------
BALANCE, DECEMBER 31,
1999..................... 37,069 $371 $ 2,151 $ 136,231 $(7,371) $ -- $ -- $ 131,382
====== ==== =========== ========= ======= ===== ======== ===========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 32
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income from continuing operations......................... $ 24,389 $ 18,534 $ 8,872
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operating
activities:
Depreciation and amortization.......................... 27,806 24,982 24,232
Asset write-off in conjunction with restructuring...... -- 3,865 --
Changes in assets and liabilities, net of effect of
business acquired:
Accounts receivable.................................. (3,603) (5,565) (13,335)
Inventories.......................................... (3,966) (5,204) 2,465
Prepaid expenses and other current assets............ 167 (2,694) (3,208)
Other non-current assets............................. 800 (24) 666
Deferred income taxes................................ 10,308 (2,662) (1,236)
Accounts payable and accrued expenses................ (3,265) 5,808 9,274
Restructuring........................................ (6,434) (657) --
Other non-current liabilities........................ (3,538) (3,193) 1,685
Other.................................................. (824) (689) (331)
--------- -------- ---------
Net cash provided by continuing operating activities........ 41,840 32,501 29,084
--------- -------- ---------
Cash (used in) provided by discontinued operations.......... -- (25,177) 145,452
--------- -------- ---------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment............ (27,328) (26,898) (29,208)
Proceeds from sale of short-term investments.............. -- -- 24,974
Proceeds from sale of assets.............................. -- -- 3,000
Payment for business acquired............................. -- -- (8,982)
--------- -------- ---------
Net cash used in investing activities....................... (27,328) (26,898) (10,216)
--------- -------- ---------
FINANCING ACTIVITIES:
Issuance of subordinated convertible notes................ 172,500 -- --
Net proceeds from (repayments of ) revolving credit
facilities............................................. (182,000) 64,000 (192,000)
Deferred financing fees................................... (7,131) (742) --
Proceeds from exercise of stock options................... 1,480 423 18,305
Redemption of Convertible Junior Subordinated Notes....... -- -- (245)
Principal repayment of debt............................... -- (46,074) (4,310)
Costs associated with the issuance of debt and Common
Stock.................................................. -- -- (1,130)
--------- -------- ---------
Net cash (used in) provided by financing activities......... (15,151) 17,607 (179,380)
--------- -------- ---------
Decrease in cash and cash equivalents....................... (639) (1,967) (15,060)
Cash and cash equivalents, beginning of year................ 3,225 5,192 20,252
--------- -------- ---------
Cash and cash equivalents, end of year...................... $ 2,586 $ 3,225 $ 5,192
========= ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION, RELATING TO CONTINUING AND DISCONTINUED OPERATIONS:
Income taxes paid......................................... $ 6,023 $ 9,776 $ 37,224
Interest paid............................................. $ 24,183 $ 19,677 $ 32,033
</TABLE>
See notes to consolidated financial statements.
31
<PAGE> 33
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, small signal devices
and TVS products are semiconductors that are essential components of most
electronic devices and systems. Rectifiers convert alternating current (AC) into
direct current (DC) which can be utilized by electronic equipment. TVS devices
provide protection from electrical surges, ranging from electrostatic discharge
to induced lightning. Small signal devices amplify or switch low level currents.
The Company's products are primarily targeted for use in the computer,
automotive, telecommunications, lighting and consumer electronics industries.
General Instrument Corporation ("GI") (i) transferred all the assets and
liabilities relating to the manufacture and sale of broadband communications
products used in the cable television, satellite, and telecommunications
industries and all rights to the related GI trademarks to its wholly-owned
subsidiary NextLevel Systems, Inc. ("NextLevel"), and all the assets and
liabilities relating to the manufacture and sale of coaxial, fiber optic and
other electric cable used in the cable television, satellite and other
industries to its wholly-owned subsidiary CommScope, Inc. ("CommScope") and (ii)
distributed all of the outstanding shares of capital stock of each of NextLevel
and CommScope to its stockholders on a pro rata basis as a dividend (the
"Distribution") in a transaction that was finalized on July 28, 1997 (the
"Distribution Date"). On the Distribution Date, NextLevel and CommScope began
operating as independent entities with publicly traded common stock. GI retained
no ownership interest in either NextLevel or CommScope. Concurrent with the
Distribution, GI changed its name to General Semiconductor, Inc. and effected a
one for four reverse stock split (the "Stock Split"). On February 2, 1998
NextLevel 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, 1997, the earliest period
reported.
The revenues, costs and expenses and cash flows of the businesses
transferred to General Instrument and CommScope (the "Discontinued Operations"),
have been excluded from the respective captions in the Consolidated Statements
of Income and Consolidated Statements of Cash Flows and have been reported
through the Distribution Date as "Loss from discontinued operations", net of
applicable income taxes and as "Cash (used in) provided by 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 provided for an orderly transition, the separation and distribution of the
operating assets and liabilities and pension plan assets and liabilities of GI,
as well as tax sharing, and other matters.
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.
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
32
<PAGE> 34
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of the financial statements and the reported amounts of sales 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. 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 periodically evaluates its long-lived
assets for impairment whenever events or changes in circumstances 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.
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 income.
Research and Development. The Company charges research and development
expenses to operations as incurred.
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.
Recent Accounting Pronouncements. In 1998 the Financial Accounting
Standards Board issued 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. As amended by SFAS 137, SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company is
evaluating the impact SFAS 133 will have on its financial statements.
33
<PAGE> 35
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications. Certain prior year amounts have been reclassified to
conform to the current year presentation.
3. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials...................................... $ 5,657 $ 5,139
Work in process.................................... 13,739 14,181
Finished goods..................................... 24,084 20,194
------- -------
Total.............................................. $43,480 $39,514
======= =======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Land and land improvements......................... $ 76,317 $ 76,321
Buildings, improvements and leasehold
improvements..................................... 69,085 64,106
Machinery and equipment............................ 248,809 232,690
--------- ---------
394,211 373,117
Accumulated depreciation........................... (162,994) (149,374)
--------- ---------
Property, plant and equipment, net................. $ 231,217 $ 223,743
========= =========
</TABLE>
Depreciation expense aggregated $20.7 million, $18.0 million, and $16.8
million for 1999, 1998 and 1997, respectively.
5. ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Salaries and compensation liabilities.............. $13,012 $14,355
Restructuring liabilities.......................... 1,375 7,809
Benefit plan liabilities........................... 6,923 7,709
Other.............................................. 13,390 15,211
------- -------
Total.............................................. $34,700 $45,084
======= =======
</TABLE>
On November 6, 1998, the Company announced a restructuring plan designed to
enhance the interface of operations and customers, to improve its cost
structure, efficiency and its competitive position and to accelerate growth. The
restructuring included reducing the workforce by decentralizing certain
purchasing, marketing, finance and research and development functions and
providing early retirement to a group of employees, closing two sales offices
and writing off assets related to an unprofitable product that will no longer
34
<PAGE> 36
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be manufactured. Restructuring charges recorded in the fourth quarter included
$8.2 million employee separation and related costs, $0.2 million other cost, and
$3.9 million in non-cash charges for asset write-offs.
A summary of the restructuring reserve is:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Restructuring reserve:
Balance, beginning of period........................... $ 7,809 $ --
Provision.............................................. -- 12,324
Asset impairment write-offs............................ -- (3,858)
Severance and early retirement costs................... (6,230) (605)
Other costs............................................ (204) (52)
------- -------
Balance, end of period................................. $ 1,375 $ 7,809
======= =======
</TABLE>
The Company estimates the remaining liability, which primarily represents
severance and early retirement costs which have been incurred but not yet paid,
will be paid during 2000.
6. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Environmental liabilities.......................... $27,723 $29,363
Benefit plan liabilities........................... 35,682 35,596
Other.............................................. 7,340 9,324
------- -------
Total.............................................. $70,745 $74,283
======= =======
</TABLE>
7. 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.
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 was determined assuming a closing of the
books on July 25, 1997. Liability for foreign income taxes and other taxes was
generally allocated to the legal entity on which such taxes were imposed except
that liability for taxes relating to the transferred businesses (as defined in
the Tax Sharing Agreement) were generally 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.
35
<PAGE> 37
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The domestic and foreign components of income from continuing operations
before income taxes is:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Domestic.............................................. $ 7,365 $ 8,141 $16,354
Foreign............................................... 25,154 18,949 4,167
------- ------- -------
Total................................................. $32,519 $27,090 $20,521
======= ======= =======
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................... $(4,131) $ 3,848 $ 4,691
Foreign............................................... 2,329 6,539 2,754
State................................................. (376) 831 2,200
------- ------- -------
(2,178) 11,218 9,645
------- ------- -------
Deferred:
Federal............................................... 7,571 (11) 3,066
Foreign............................................... 1,950 (2,478) (1,325)
State................................................. 787 (173) 263
------- ------- -------
10,308 (2,662) 2,004
------- ------- -------
Provision for income taxes............................ $ 8,130 $ 8,556 $11,649
======= ======= =======
</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,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Federal income tax provision at 35%................... $11,382 $ 9,482 $ 7,182
State income taxes-net of federal benefit............. 267 428 1,601
Foreign operations.................................... (4,578) (2,166) 1,470
Non-deductible expenses............................... 1,059 1,945 914
Other-net............................................. -- (1,133) 482
------- ------- -------
Provision for income taxes............................ $ 8,130 $ 8,556 $11,649
======= ======= =======
Effective income tax rate............................. 25.0% 31.6% 56.8%
</TABLE>
Income taxes related to foreign operations in 1999, 1998 and 1997 reflect
the Company's ability to recognize the benefit of foreign tax credits.
36
<PAGE> 38
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes recorded in the accompanying consolidated balance
sheets are comprised of :
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------- -------------------------------
ASSET LIABILITY NET ASSET LIABILITY NET
-------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Current Deferred Income Taxes:
Accounts receivable and inventory
reserves........................... $ 2,911 $ -- $ 2,911 $ 3,845 $ -- $ 3,845
Product and warranty liabilities..... 156 -- 156 332 -- 332
Employee benefits.................... 2,283 -- 2,283 5,213 -- 5,213
Other current........................ 4,780 -- 4,780 4,348 -- 4,348
-------- ------- -------- -------- ------- --------
$ 10,130 $ -- $ 10,130 $ 13,738 $ -- $ 13,738
======== ======= ======== ======== ======= ========
Non-Current Deferred Income Taxes:
Domestic capital loss
carryforwards...................... $ 17,518 $ -- $ 17,518 $ 17,518 $ -- $ 17,518
Fixed and intangible assets.......... (6,253) -- (6,253) (6,041) -- (6,041)
Environmental liabilities............ 10,535 -- 10,535 11,158 -- 11,158
Employee benefits.................... 12,234 -- 12,234 12,188 -- 12,188
Other non-current.................... 15,637 28,608 (12,971) 14,330 21,390 (7,060)
Valuation allowance.................. (19,777) -- (19,777) (19,777) -- (19,777)
-------- ------- -------- -------- ------- --------
$ 29,894 $28,608 $ 1,286 $ 29,376 $21,390 $ 7,986
======== ======= ======== ======== ======= ========
</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 of certain
foreign operations of $18.6 million and $14.3 million in 1999 and 1998,
respectively, as those earnings 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 31,1999 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.
8. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Subordinated debt:
Convertible Notes................................ $172,500 $ --
Senior bank indebtedness:
Revolving credit facility........................ 104,000 286,000
-------- --------
Total.................................... $276,500 $286,000
======== ========
</TABLE>
In December 1999, the Company issued $172.5 million principal amount of
5.75% convertible subordinated notes (the "Convertible Notes") due December 15,
2006. Interest on the Convertible Notes is payable semi-annually on June 15 and
December 15 of each year, commencing in June 2000. The Convertible Notes are
convertible into approximately 11.1 million shares of the Company's common
stock, at the option of
37
<PAGE> 39
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the holder, at a conversion price of $15.55 per share. The Convertible Notes are
redeemable at the Company's option, in whole or in part, at any time on or after
December 15, 2002 at a premium of 103.286% of par value
declining annually to 100.821% at December 15, 2005 and thereafter. The
Convertible Notes are subordinated to the Company's existing and future senior
indebtedness ($104.0 million at December 31, 1999) and to certain existing and
future trade payable and other liabilities of certain of its subsidiaries
(approximately $64.0 million at December 31, 1999). The holders of the
Convertible Notes may require the Company to repurchase the notes at par value,
plus interest and liquidated damages, if any, upon a change in control of the
Company. Proceeds from the Convertible Notes were used to repay outstanding
indebtedness under the Company's credit facility described below.
In July 1997, the Company entered into a bank credit agreement, which was
amended in December 1998, and in June 1999 (as amended, the "Credit Agreement")
which provides for a $350.0 million secured revolving credit facility that
matures on December 31, 2002. In December, 1999 the commitment amount under the
Credit Agreement was permanently reduced by $86.3 million (50% of the gross
proceeds from issuance of the Convertible Notes) to $263.8 million. 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 interest, 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. In
addition, certain changes in control of the Company would cause an event of
default under the Credit Agreement. The December 1998 and June 1999 amendments
revised certain covenant compliance calculations to provide the Company with
greater flexibility. As required by the Credit Agreement, the Company entered
into a Guarantee and Collateral Agreement in August 1999 under which
substantially all of the domestic assets and a portion of the capital stock of
its foreign subsidiaries were pledged as security to the lenders. At December
31, 1999 and 1998, the Company was in compliance with all such amended
covenants.
The weighted average interest rate on the Company's long-term debt at
December 31, 1999 and 1998 was 7.0% and 5.8%, respectively.
Net interest expense included in the 1997 Consolidated Statement of Income
through the Distribution Date represents an allocation based upon General
Semiconductor's net assets as a percentage of total assets of GI.
9. 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 2005. Rent expense was $5.5 million, $5.4 million
and $3.3 million in 1999, 1998 and 1997, respectively.
Future minimum lease payments required under operating leases as of
December 31, 1999 are:
<TABLE>
<S> <C>
2000...................................................... $3,012
2001...................................................... 2,467
2002...................................................... 1,557
2003...................................................... 1,209
2004...................................................... 248
Thereafter................................................ 52
</TABLE>
38
<PAGE> 40
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has approximately $11.0 million in letters of credit
outstanding at December 31, 1999.
Environmental Matters. 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 sites relating to discontinued operations in six
states, and is a "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 $30.2 million at December 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.
Litigation. 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 as described below.
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.
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 had
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.
39
<PAGE> 41
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. General Instrument was
acquired by Motorola Inc. in January 2000. 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.
10. 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.
Net periodic pension cost consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Service cost..................... $ 577 $2,616 $ 482 $2,513 $ 407 $ 2,746
Interest......................... 5,176 3,285 5,209 3,040 5,117 3,301
Expected return on plan assets... (6,324) (949) (5,979) (853) (5,620) (1,185)
Transition (asset) obligation.... -- 165 -- 160 -- 188
Amortization of prior service
costs.......................... (12) -- (12) -- (12) --
Recognized actuarial loss........ 50 455 198 522 2 756
------- ------ ------- ------ ------- -------
Net periodic pension cost
(income)....................... $ (533) $5,572 $ (102) $5,382 $ (106) $ 5,806
======= ====== ======= ====== ======= =======
</TABLE>
40
<PAGE> 42
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The status of the Company's continuing pension plans and the related
amounts recorded in the accompanying consolidated balance sheets are:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- --------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year......... $80,285 $ 50,587 $75,741 $ 46,863
Service cost................................. 577 2,616 482 2,513
Interest cost................................ 5,176 3,285 5,209 3,040
Actuarial (gain) or loss..................... (5,974) (825) 4,499 (174)
Impact of foreign exchange................... -- (121) -- 885
Benefits paid................................ (9,244) (2,497) (5,646) (2,540)
Curtailment loss............................. 840 -- -- --
------- -------- ------- --------
Benefit obligation at end of year............... 71,660 53,045 80,285 50,587
------- -------- ------- --------
Change in Plan Assets
Fair value of plan assets at beginning of
year......................................... 85,905 12,308 78,539 11,018
Actual return on plan assets (net of
expenses).................................. 5,112 782 13,012 1,132
Employer contributions....................... 19 3,000 -- 2,543
Impact of foreign exchange................... -- 227 -- 155
Benefits paid................................ (9,244) (2,497) (5,646) (2,540)
------- -------- ------- --------
Fair value of plan assets at end of year........ 81,792 13,820 85,905 12,308
------- -------- ------- --------
Reconciliation of the Funded Status
Funded status................................ 10,132 (39,225) 5,620 (38,279)
Unrecognized transition (asset) or
obligation................................. -- 1,325 -- 1,523
Unrecognized prior service cost.............. (54) -- (65) --
Unrecognized actuarial (gain) or loss........ (8,377) 10,460 (3,567) 11,496
------- -------- ------- --------
Asset (liability) recognized at year-end........ $ 1,701 $(27,440) $ 1,988 $(25,260)
======= ======== ======= ========
Actuarial assumptions:
Discount rate................................ 7.75% 6.75% 6.75% 6.75%
Investment return............................ 9.00% 7.00% 9.00% 7.00%
Compensation increases....................... 4.75% 6.00% 4.75% 6.00%
</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 1999, 1998 or 1997. 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
plan assets principally consist of fixed income securities.
Defined Contribution Plans. The Company maintains defined contribution
plans covering all domestic non-union employees and employees in Ireland and
France. Company contributions were $0.4 million in 1999 and $0.7 million in 1998
and 1997.
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
41
<PAGE> 43
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of benefits for retirees up to age 65. After age 65, Medicare becomes the
primary provider. Net periodic postretirement benefit cost consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Service cost................................................ $ 141 $ 91 $ 87
Interest.................................................... 965 918 891
Amortization of prior service cost.......................... (194) (383) (383)
Recognized actuarial loss................................... 184 135 12
------ ----- -----
Net periodic postretirement benefit cost.................... $1,096 $ 761 $ 607
====== ===== =====
</TABLE>
The status of the Plan and the related amounts recorded in the accompanying
consolidated balance sheets are:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year.................. $ 13,927 $ 13,286
Service cost.......................................... 141 91
Interest cost......................................... 965 918
Plan amendments....................................... 1,879 --
Actuarial (gain) or loss.............................. (2,050) 2,056
Retiree contributions................................. 269 --
Benefits paid......................................... (1,697) (2,424)
-------- --------
Benefit obligation at end of year........................ 13,434 13,927
-------- --------
Change in Plan Assets
Fair value of plan assets at beginning of year........... -- --
Actual return on plan assets.......................... -- --
Employer contributions................................ 1,429 2,424
Retiree contributions................................. 268 --
Benefits paid......................................... (1,697) (2,424)
-------- --------
Fair value of plan assets at end of year................. -- --
-------- --------
Reconciliation of the Funded Status
Funded status......................................... (13,434) (13,927)
Unrecognized transition (asset) or obligation......... -- --
Unrecognized prior service cost....................... (2,762) (4,834)
Unrecognized actuarial (gain) or loss................. 2,719 4,955
-------- --------
Accrued benefit liability at year end.................... $(13,477) $(13,806)
======== ========
Actuarial assumptions:
Discount rate......................................... 7.75% 6.75%
Expected return on plan assets........................ N/A N/A
</TABLE>
The assumed rate of future increases in health care costs for 1999 and 1998
was 10.0% and 11.25%, respectively, for pre-age 65 retirees, and 8% and 9%,
respectively, for post-age 65 retirees, and is expected to decline to 6% by the
year 2003 for pre-age 65 retirees and by the year 2005 for post-age 65 retirees,
respectively. Under the Plan, the actuarially determined effect of a one
percentage point increase in the
42
<PAGE> 44
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumed health care cost trend rate on annual net postretirement benefit cost
and the APBO would be $1.1 million and $1.4 million, respectively, for 1999 and
1998.
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, 1999 and 1998 $0.6 million and $1.0
million was accrued for postemployment benefits, respectively.
11. STOCKHOLDERS' EQUITY
Stock Option Plan. Following the Distribution, the Company continued in
effect the 1993 Long-Term Incentive Plan, renamed the Amended and Restated
General Semiconductor, Inc. 1993 Long-Term Incentive Plan (the "1993 LTIP") 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.
In May 1998, the stockholders of the Company approved the adoption of the
General Semiconductor, Inc. 1998 Long-Term Incentive Plan (the "1998 LTIP")
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. The 1998 LTIP replaces the Company's 1993 LTIP. No
further awards or options were granted pursuant to the 1993 LTIP. All shares
available for future grant under the 1993 LTIP and those shares in respect of
options or awards granted or issued pursuant to the 1993 LTIP which are
subsequently forfeited, expired or otherwise terminate without having been
exercised will be added to the number of shares available for grant under the
1998 LTIP.
The following table summarizes stock option activity relating to the
Company's 1993 LTIP and 1998 LTIP (collectively, the "LTIP Plans") since the
Distribution.
<TABLE>
<CAPTION>
NUMBER WEIGHTED-
OF AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Options outstanding at Distribution Date.............. 2,838 $11.77
Granted............................................... 195 14.94
Cancelled............................................. (17) 12.00
-----
Options outstanding at December 31, 1997.............. 3,016 $11.98
Granted............................................... 1,715 8.96
Exercised............................................. (38) 11.28
Cancelled............................................. (69) 12.03
-----
Options outstanding at December 31, 1998.............. 4,624 $10.86
Granted............................................... 1,347 8.65
Exercised............................................. (144) 10.24
Cancelled............................................. (300) 11.10
-----
Options outstanding at December 31, 1999.............. 5,527 $10.32
=====
</TABLE>
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
43
<PAGE> 45
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The following table summarizes information about stock options outstanding
and exercisable under the Company's LTIP Plans.
<TABLE>
<CAPTION>
SHARES UNDER OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1999 TERM (YEARS) PRICE 1999 PRICE
- --------------- ------------ ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$1.48 to $8.44....... 1,318 7.9 $ 7.23 519 $ 7.39
$8.68 to $12.06...... 2,702 8.0 $10.35 1,158 $11.73
$12.75 to $14.38..... 1,507 6.2 $12.97 1,083 $13.04
----- -----
5,527 7.5 $10.32 2,760 $11.43
===== =====
</TABLE>
At December 31, 1999 and 1998, 2.7 million shares and 3.8 million shares,
respectively, were reserved for future awards under the Company's LTIP Plans.
The tax benefits arising from stock options exercised during the years ended
December 31, 1999, 1998 and 1997 in the amount of $0.2 million, $0.1 million,
and $1.1 million, respectively, were recorded in stockholders' equity as
additional paid-in capital.
In addition, under the provisions of the Incentive Plan, the Company issued
1 thousand and 4 thousand shares of Common Stock to certain members of its Board
of Directors during the years ended December 31, 1999 and 1997, respectively.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its LTIP Plans. Since the exercise price of all stock options granted under the
LTIP Plans in 1999, 1998 and 1997 was equal to the closing price of the Common
Stock on the date of grant, no compensation expense has been recognized.
Compensation expense would have been $4.4 million, $5.4 million and $27.1
million in 1999, 1998 and 1997, 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 $21.7 million and $0.59 per share,
respectively, for 1999, $15.2 million and $0.41 per share, respectively, for
1998 and $(10.9) million and $(0.31) per share, respectively for 1997. The
estimated weighted-average per share fair value of the options granted during
1999 was $4.45, $4.18 during 1998, $9.70 for the period from January 1, 1997
through the Distribution Date, and $6.38 for the remainder of 1997, on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected life (years)....................................... 4.0 4.0 4.0
Risk-free interest rate..................................... 6.08% 4.81% 6.39%
Expected volatility-pre-Distribution........................ N/A N/A 43%
Expected volatility-post-Distribution....................... 62% 54% 45%
Expected dividend yield..................................... 0% 0% 0%
</TABLE>
The pro forma effect on net income (loss) and earnings (loss) per share for
1999, 1998 and 1997 may not be representative of the pro forma effect in future
years because it includes compensation cost on a straight-
44
<PAGE> 46
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, which was amended in March 1999, each
stockholder, subsequent to the distribution date of January 24, 1997, receives a
dividend of one right for each outstanding share of the Company's 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 Company's 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 Company's 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.
12. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the applicable
periods. In 1999 and 1997, the diluted earnings per share computation is based
on net income adjusted for interest and amortization of debt issuance costs
related to convertible debt, if dilutive, divided by the weighted-average number
of common shares outstanding adjusted for the dilutive effect of stock options
and convertible securities. In 1998, the diluted earnings per share computation
is 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.
45
<PAGE> 47
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net income..................................... $24,389 36,832 $0.66
=====
EFFECT OF DILUTIVE SECURITIES
Options...................................... -- 218
Convertible debt............................. 323 513
------- ------
DILUTED EPS
Net income plus assumed conversions............ $24,712 37,563 $0.66
======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net income..................................... $18,534 36,811 $0.50
=====
EFFECT OF DILUTIVE SECURITIES
Options...................................... -- 88
------- ------
DILUTED EPS
Net income..................................... $18,534 36,899 $0.50
======= ====== =====
</TABLE>
<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.............. $8,872 35,414 $0.25
=====
EFFECT OF DILUTIVE SECURITIES
Options...................................... -- 162
------ ------
DILUTED EPS
Income from continuing operations.............. $8,872 35,576 $0.25
====== ====== =====
</TABLE>
In 1997 the effect of GI's 5% convertible junior subordinated notes (the
"Junior Notes") which were 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 Junior 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.
13. 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
46
<PAGE> 48
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 contracts and
purchased option contracts designed 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. 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 all purchased options and those
forward contracts which hedge 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 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
contracts with respect to contractual and other firm commitments and
anticipated, but not yet committed, transactions have been short-term in nature.
In addition, purchased options have had no intrinsic value at the time of
purchase.
The Company settles foreign exchange contracts generally at maturity and at
prevailing market rates. The Company amortizes premiums on purchased options
over the life of the contract. The amortization of these premiums during each of
the three years in the period ended December 31, 1999 was not significant. As of
December 31, 1999 and 1998, the Company had outstanding forward and purchased
option contracts in the amounts of $10.6 million and $21.3 million,
respectively, comprised of foreign currencies which were to be sold and $12.7
million and $79.6 million, respectively, comprised of foreign currencies which
were to be purchased. All outstanding forward option contracts as of December
31, 1999 mature within twelve months.
As of December 31, 1999 the Company had no purchased option contracts
outstanding. As of December 31, 1999 the following forward contracts were
outstanding:
FORWARD CONTRACTS:
<TABLE>
<CAPTION>
AVERAGE US DOLLAR (000'S) US DOLLAR (000'S)
CURRENCY RATE PURCHASE/(SELL) FAIR VALUE
- -------- ------- ----------------- -----------------
<S> <C> <C> <C> <C>
New Taiwan Dollar................. 31.57 NTD/US $(12,670) $116
Japanese Yen...................... 102.66 JPY/US 9,741 138
British Pounds.................... 1.61 US/BPS 899 (20)
</TABLE>
As of December 31, 1998 the following forward and purchased option
contracts were outstanding:
47
<PAGE> 49
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FORWARD CONTRACTS:
<TABLE>
<CAPTION>
AVERAGE US DOLLAR (000'S) US DOLLAR (000'S)
CURRENCY RATE PURCHASE/(SELL) FAIR VALUE
- -------- ------- ----------------- -----------------
<S> <C> <C> <C> <C>
New Taiwan Dollar................. 32.57 NTD/US $(54,283) $545
German Marks...................... 1.67 DM/US 11,392 60
Japanese Yen...................... 115.62 JPY/US 8,779 (155)
Irish Punt........................ 1.49 US/IEP (3,125) (5)
British Pounds.................... 1.68 US/BPS 1,093 5
</TABLE>
PURCHASED OPTIONS:
<TABLE>
<CAPTION>
AVERAGE US DOLLAR (000'S) US DOLLAR (000'S)
CURRENCY RATE PURCHASE/(SELL) FAIR VALUE
- -------- ------- ----------------- -----------------
<S> <C> <C> <C> <C>
New Taiwan Dollar................. 33.03 NTD/US $(22,161) $ 600
</TABLE>
Fair values shown above are based on quoted market prices. Deferred gains
or losses on the above contracts at December 31, 1999 and 1998 were not
significant. Foreign currency transaction gains included in income from
continuing operations were $0.8 million, $1.6 million and $3.8 million in 1999,
1998, 1997, respectively.
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 term 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, 1999 was not significant.
The Company entered into two interest rate swap transactions with a term of
one year beginning on January 22, 1998. Pursuant to these agreements it paid a
fixed interest rate averaging 5.96% on a combined notional amount of $100
million and received interest on the combined $100 million notional amount based
on a three month LIBOR rate set quarterly beginning on January 22, 1998. During
February 1998, the Company purchased two interest rate caps each with a notional
amount of $50 million. The caps became effective on April 27, 1998 and June 29,
1998 with terms of nine months and six months, respectively. Under the terms of
the caps, the Company was paid an amount equal to the excess, if any, of three
month LIBOR above 6% multiplied by the notional amounts. The premium paid for
the caps was not significant.
At December 31, 1998 the Company held the following interest rate
derivative instruments:
<TABLE>
<CAPTION>
INSTRUMENT NOTIONAL AMOUNT FIXED/STRIKE RATE FLOATING RATE FAIR VALUE
- ---------- --------------- ----------------- ------------- ----------
<S> <C> <C> <C> <C>
Interest Rate Cap...... $50,000 6.000% 3-month LIBOR $ --
Floating to Fixed
Swap................. 50,000 5.953% 3-month LIBOR (100)
Floating to Fixed
Swap................. 50,000 5.966% 3-month LIBOR (100)
</TABLE>
Fair values are based on the net present value of the future cash flows
under the swap and cap agreements.
Other Financial Instruments. As of December 31, 1999 and 1998 the carrying
value of cash and cash equivalents, trade accounts receivable and trade accounts
payable 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
48
<PAGE> 50
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rates that adjust to market on a short-term basis. At December 31, 1999 the fair
value of the Convertible Notes was approximately $184.6 million.
Concentration of credit risk. The Company's accounts receivable are
generated from sales to customers in a variety of end-use markets that are
geographically and economically dispersed and payment is generally due within 30
days. Accordingly, the Company does not believe it is subject to any significant
concentration of credit risk.
14. 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. Net sales by reportable geographic
segment reflects 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.
Corporate assets consist of patents, the excess of cost over fair value of net
assets acquired and deferred financing costs. Long-lived assets in the European
and Far East geographic segments are related primarily to Ireland and Taiwan,
respectively.
<TABLE>
<CAPTION>
UNITED
STATES EUROPE FAR EAST CHINA CORPORATE CONSOLIDATED
-------- -------- -------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1999:
Net sales(a)................ $220,602 $130,287 $ 66,193 $ -- $ -- $417,082
Intercompany transfers...... 133,183 143,058 171,609 45,025 (492,875) --
-------- -------- -------- ------- --------- --------
Net sales................. 353,785 273,345 237,802 45,025 (492,875) 417,082
======== ======== ======== ======= ========= ========
Interest income............. -- 35 22 12 34 103
Interest expense............ -- 239 46 -- 23,284 23,569
Depreciation and
amortization expense...... 9,580 5,939 8,953 3,334 -- 27,806
Earnings before provision
for income taxes.......... 2,509 7,621 16,255 6,134 -- 32,519
Income tax expense.......... 2,507 1,200 4,750 (327) -- 8,130
Long-lived assets........... 99,866 55,559 60,090 30,383 166,722 412,620
Capital expenditures........ $ 3,244 $ 7,560 $ 12,862 $ 3,662 $ -- $ 27,328
</TABLE>
49
<PAGE> 51
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
UNITED
STATES EUROPE FAR EAST CHINA CORPORATE CONSOLIDATED
-------- -------- -------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1998:
Net sales (a)............... $225,711 $135,247 $ 40,186 $ -- $ -- $401,144
Intercompany transfers...... 114,833 136,993 170,568 28,956 (451,350) --
-------- -------- -------- ------- --------- --------
Net sales................. 340,544 272,240 210,754 28,956 (451,350) $401,144
======== ======== ======== ======= ========= ========
Interest income............. -- 48 26 29 273 376
Interest expense............ -- 297 588 -- 19,517 20,402
Depreciation and
amortization expense...... 8,770 4,654 8,913 2,645 -- 24,982
Earnings before provision
for income taxes(b)....... 6,614 3,802 11,061 5,613 -- 27,090
Income tax expense.......... 3,073 3,364 1,989 130 -- 8,556
Long-lived assets........... 93,691 52,931 57,264 29,049 173,006 405,941
Capital expenditures........ $ 2,731 $ 14,042 $ 7,532 $ 2,593 $ -- $ 26,898
YEAR ENDED DECEMBER 31,
1997:
Net sales (a)............... $245,772 $102,881 $ 31,385 $ -- $ -- $380,038
Intercompany transfers...... 102,966 84,301 137,293 4,752 (329,312) --
-------- -------- -------- ------- --------- --------
Net sales................. 348,738 187,182 168,678 4,752 (329,312) $380,038
======== ======== ======== ======= ========= ========
Interest income............. -- 224 58 26 -- 308
Interest expense............ -- 223 3,561 -- 10,877 14,661
Depreciation and
amortization expense...... 9,711 4,323 9,514 684 -- 24,232
Earnings (loss) before
provision for income
taxes(c).................. 14,535 630 8,328 (2,972) -- 20,521
Income tax expense.......... 5,452 1,042 5,155 -- -- 11,649
Long-lived assets........... 94,670 47,360 59,827 27,094 177,114 406,065
Capital expenditures........ $ 7,106 $ 1,039 $ 8,100 $12,963 $ -- $ 29,208
</TABLE>
- ---------------
(a) Included in United States net sales are export sales as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Taiwan....................................... $ 62,494 $ 93,380 $ 99,134
China........................................ 41,607 32,904 28,602
-------- -------- --------
$104,101 $126,284 $127,736
======== ======== ========
</TABLE>
50
<PAGE> 52
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net sales, by country, within the European geographic segment are:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
France....................................... $ 12,428 $ 12,993 $ 9,988
Germany...................................... 56,405 59,326 41,265
Italy........................................ 12,314 14,272 12,662
U.K. ........................................ 17,329 15,315 13,457
Other........................................ 31,811 33,341 25,509
-------- -------- --------
$130,287 $135,247 $102,881
======== ======== ========
</TABLE>
(b) Earnings before provision for income taxes in 1998 includes restructuring
charges of $12.3 million ($8.5 million net of tax).
(c) Earnings(loss) before provision for income taxes in 1997 includes charges of
$33.8 million, ($25.3 million net of tax), primarily related to the
separation of GI's Taiwan operations.
No single customer accounted for more than 10% of the Company's sales during the
years ended December 31, 1999, 1998 and 1997.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data for 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED 1999
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Net sales............................. $ 96,961 $101,583 $105,756 $112,782
Gross profit.......................... 24,484 26,563 28,835 34,724
Net income............................ 4,252 5,108 6,208 8,821
Earnings per share
Basic:.............................. $ 0.12 $ 0.14 $ 0.17 $ 0.24
Diluted:............................ 0.12 0.14 0.17 0.23
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED 1998
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31(A)
----------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Net sales............................. $106,397 $ 98,762 $ 97,223 $ 98,762
Gross profit.......................... 35,289 28,647 26,726 26,900
Net income(loss)...................... 9,466 6,846 5,956 (3,734)
Earnings(loss) per share
Basic:.............................. $ 0.26 $ 0.19 $ 0.16 $ (0.10)
Diluted:............................ 0.26 0.19 0.16 (0.10)
</TABLE>
- ---------------
(a) Includes restructuring charges of $12.3 million ($8.5 million or $0.23 per
share net of tax).
16. 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 $9.0 million including 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 Income since the date
of acquisition. The pro forma effects, assuming this transaction was effective
January 1, 1997, were not material to the Company's results of operations,
financial position or cash flows for the year ended December 31, 1997.
51
<PAGE> 53
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. DISCONTINUED OPERATIONS
Net sales for the Discontinued Operations included in the Consolidated
Statement of Income were $1.3 billion for the year ended December 31, 1997.
Discontinued operations includes $52.9 million, net of applicable income taxes,
for the year ended December 31, 1997 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. 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.
52
<PAGE> 54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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
2000 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 2000 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
Agreements", in the Company's 2000 Proxy Statement and is incorporated by
reference herein. The sections captioned "Report of the Compensation Committee"
and "Performance Graph" in the Company's 2000 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 sections captioned
"Security Ownership of Certain Beneficial Owners and Management of the Company"
and "Compensation of Executive Officers-Stock Options" in the Company's 2000
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 2000 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, 1999 and
1998
Consolidated Statements of Income -- Years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows -- Years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
53
<PAGE> 55
See item 8 of this Form 10-K for 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
The Company filed a Form 8-K with the SEC, dated December 1, 1999,
to report under Item 5 of that Form that a press release was issued
on December 1, 1999 announcing the Company's planned convertible
subordinated note offering. A copy of the press release was filed
as an exhibit to the Form 8-K.
The Company filed a Form 8-K with the SEC, dated December 14, 1999,
to report under Item 5 of that Form that a press release was issued
on December 14, 1999 announcing completion of the Company's
convertible subordinated note offering. A copy of the press release
was filed as an exhibit to the Form 8-K.
(c) Item 601 Exhibits
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
2.1 Agreement of Merger, dated as of July 25, 1997, between
General Instrument Corporation and General Instrument
Corporation of Delaware. (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))
3.1 Restated Certificate of Incorporation of General
Semiconductor, Inc. (including Certificate of Designation,
Preferences and Rights of Series A Junior Participating
Preferred Stock). (Incorporated herein by reference from the
Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1998 (File No. 1-5442))
3.2 Amended and Restated By-Laws of General Semiconductor, Inc.
(Incorporated herein by reference from the Company's Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1998 (File No. 1-5442))
4.1 Rights Agreement, dated January 6, 1997, between General
Semiconductor, Inc. and ChaseMellon Shareholder Services,
LLC. (Incorporated herein by reference from the Registration
Statement on Form 8-A filed January 10, 1997 (File No.
1-5442))
4.2 Amendment No. 1 to the Rights Agreement, dated as of March
10, 1999 between General Semiconductor, Inc. and ChaseMellon
Shareholder Services, LL (Incorporated herein by reference
from the Amendment to the Registration Statement on Form
8-A/A filed March 16, 1999 (File No. 1-5442))
10.1 Employee Benefits Allocation Agreement, dated as of July 25,
1997, among NextLevel Systems, Inc., CommScope, Inc. and
General Semiconductor, Inc. (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))
10.2 Debt and Cash Allocation Agreement, dated as of July 25,
1997, among NextLevel Systems, Inc., CommScope, Inc. and
General Semiconductor, Inc. (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))
10.3 Insurance Agreement, dated as of July 25, 1997, among
NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. (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))
10.4 Tax Sharing Agreement, dated as of July 25, 1997, among
NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. (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))
</TABLE>
54
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
10.5 Trademark License Agreement, dated as of July 25, 1997,
among NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. (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))
10.6 Transition Services Agreement, dated as of July 25, 1997,
among NextLevel Systems, Inc., CommScope, Inc. and General
Semiconductor, Inc. (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))
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.
(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))
10.7.1 First Amendment to the Credit Agreement, dated as of
December 31, 1998 among General Semiconductor, Inc., The
Chase Manhattan Bank as Administrative Agent, the Banks from
time to time parties thereto, and the financial institutions
named therein as co-agents for the Banks. (Incorporated
herein by reference from the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1998 (File No.
1-5442))
10.7.2 Second Amendment to the Credit Agreement, dated as of June
22, 1999 among General Semiconductor, Inc., The Chase
Manhattan Bank as Administrative Agent, the Banks from time
to time parties thereto, and the financial institutions
named therein as co-agents for the Banks. (Incorporated
herein by reference from the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1999 (File No.
1-5442))
10.7.3 Guarantee and Collateral Agreement, dated as of August 15,
1999 between General Semiconductor, Inc. and certain of its
subsidiaries in favor of the Chase Manhattan Bank, as
Administrative Agent. (Incorporated herein by reference from
the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1999 (file No. 1-5442))
10.8+ Amended and Restated General Semiconductor, Inc. 1993
Long-Term Incentive Plan. (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))
10.8.1+ General Semiconductor, Inc. 1998 Long-Term Incentive Plan.
(Incorporated herein by reference from the Company's
Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on July 20, 1998 (Reg. No.
333-22861))
10.8.2+ First Amendment to the General Semiconductor, Inc. 1998
Long-Term Incentive Plan effective as of October 19, 1999
10.8.3+ General Semiconductor, Inc. Annual Incentive Plan adopted
October 19, 1999. (Incorporated herein by reference from the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1999 (File No. 1-5442))
10.9+ Form of Indemnification Agreement between General
Semiconductor, Inc. and certain executive officers.
(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))
10.10+ Amended and Restated Severance Protection Agreement, dated
October 29, 1998, between General Semiconductor, Inc. and
Ronald A. Ostertag. (Incorporated herein by reference from
the Company's Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1998 (File No. 1-5442))
10.11+ Form of Amended and Restated Severance Protection Agreement
between General Semiconductor, Inc. and certain of its
executive officers (other than the Chief Executive Officer).
(Incorporated herein by reference from the Company's Annual
Report on Form 10-K/ A for the fiscal year ended December
31, 1998 (File No. 1-5442))
10.12 Indenture dated as of December 14, 1999 between General
Semiconductor, Inc. and The Bank of New York, as Trustee
(Incorporated herein by reference from the Company's
Registration Statement on Form S-3 dated January 12, 2000
(File No. 333-94513))
10.13 Registration Rights Agreement dated as of December 14, 1999
between General Semiconductor, Inc. and the Initial
Purchasers named therein (Incorporated herein by reference
from the Company's Registration Statement on Form S-3 dated
January 12, 2000 (File No. 333-94513)).
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBITS
- --------
<C> <S>
21. Subsidiaries of the Registrant.
23. Independent Auditors' Consent.
27. Financial Data Schedule.
99. Forward-Looking Information.
</TABLE>
- ---------------
+ Management compensation.
56
<PAGE> 58
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.
/s/ RONALD A. OSTERTAG
--------------------------------------
Ronald A. Ostertag
Chairman of the Board, President
and Chief Executive Officer
Dated: March 15, 2000
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RONALD A. OSTERTAG Chairman of the Board, President March 15, 2000
- --------------------------------------------------- and Chief Executive Officer and
Ronald A. Ostertag Director (Principal Executive
Officer)
/s/ ROBERT J. GANGE Senior Vice President and Chief March 15, 2000
- --------------------------------------------------- Financial Officer
Robert J. Gange (Principal Financial Officer)
/s/ ROBERT J. GANGE Controller (Principal Accounting March 15, 2000
- --------------------------------------------------- Officer)
Robert J. Gange
/s/ C. SCOTT KULICKE Director March 15, 2000
- ---------------------------------------------------
C. Scott Kulicke
/s/ RONALD ROSENZWEIG Director March 15, 2000
- ---------------------------------------------------
Ronald Rosenzweig
/s/ PETER A. SCHWARTZ Director March 15, 2000
- ---------------------------------------------------
Peter A. Schwartz
/s/ SAMUEL L. SIMMONS Director March 15, 2000
- ---------------------------------------------------
Samuel L. Simmons
/s/ PROF. GERARD T. WRIXON Director March 15, 2000
- ---------------------------------------------------
Prof. Gerard T. Wrixon
</TABLE>
57
<PAGE> 1
Exhibit 10.8.2
FIRST AMENDMENT
TO THE GENERAL SEMICONDUCTOR, INC.
1998 LONG-TERM INCENTIVE PLAN
WHEREAS, General Semiconductor, Inc, maintains the General
Semiconductor, Inc. 1998 Long-Term Incentive Plan (the "Plan"); and
WHEREAS, on October 19, 1999 the Compensation Committee
directed the Company to amend the definition of "Change in Control" in the Plan;
NOW, THEREFORE, the Plan is hereby amended as follows,
effective October 19, 1999:
Section 2, Definitions, is amended to read:
For purposes of the Plan:
2.1 "Adjusted Fair Market Value" means, in the event of a
Change of Control, the greater of (a) the highest price per Share paid to
holders of the Shares in any transaction (or series of transactions)
constituting or resulting in a Change of Control or (b) the highest Fair Market
Value of a Share during the ninety (90) day period ending on the date of a
Change of Control.
2.2 "Affiliate" means any entity, directly or indirectly,
controlled by, controlling or under common control with the Company or any
corporation or other entity acquiring, directly or indirectly, all or
substantially all the assets and business of the Company, whether by operation
of law or otherwise.
2.3 "Agreement" means the written agreement between the
Company and an Optionee or Grantee evidencing the grant of an Option or Award
and setting forth the terms and conditions thereof.
2.4 "Award" means a grant of Restricted Stock, Phantom Stock,
a Stock Appreciation Right, a Performance Award, a Dividend Equivalent Right, a
Share Award, Director Shares or any or all of them.
2.6 "Board" means the Board of Directors of the Company.
2.7 "Cause" means: unless otherwise set forth in an Agreement,
(a) intentional failure to perform reasonably assigned duties, (b) dishonesty or
willful misconduct in the performance of duties, (c) involvement in a
transaction in connection with the performance of duties to the Company or any
of its Subsidiaries which transaction is adverse to the interests of the Company
or any of its Subsidiaries and which is engaged in for personal profit or (d)
willful violation of any law, rule or regulation in connection with the
performance of duties (other than traffic violations or similar offenses).
2.8 "Change in Capitalization" means any increase or reduction
in the number of Shares, or any change (including, but not limited to, in the
case of a spin-off, dividend or other distribution in respect of Shares, a
change in value) in the Shares or exchange of Shares for a different number or
kind of shares or other securities of the Company or another corporation, by
reason of a reclassification, recapitalization, merger, consolidation,
reorganization, spin-off, split-up, issuance of warrants or rights or
debentures, stock dividend, stock split or reverse stock split, cash dividend,
property dividend, combination or exchange of shares, repurchase of shares,
change in corporate structure or otherwise.
2.9 "Change of Control" means the occurrence of any of the
following:
<PAGE> 2
(a) An acquisition (other than directly from the Company) of
any voting securities of the Company (the "Voting Securities") by any Person,
immediately after which such Person has "Beneficial Ownership" (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty-three
percent (33%) or more of the then outstanding Shares or the combined voting
power of the Company's then outstanding Voting Securities; provided, however, in
determining whether a Change in Control has occurred pursuant to this Section
2.9 (a), Shares or Voting Securities which are acquired in a "Non-Control
Acquisition" (as hereinafter defined) shall not constitute an acquisition which
would cause a Change in Control. A "Non-Control Acquisition" shall mean an
acquisition by (i) an employee benefit plan (or a trust forming a part thereof)
maintained by (A) the Company or (B) any corporation or other Person of which a
majority of its voting power or its voting equity securities or equity interest
is owned, directly or indirectly, by the Company (for purposes of this
definition, a "Related Entity"), (ii) the Company or any Related Entity, or
(iii) any Person in connection with a "Non-Control Transaction" (as hereinafter
defined);
(b) The individuals who, as of October 19, 1999, are members
of the Board (the "Incumbent Board"), cease, for any reason, to constitute at
least two-thirds (2/3) of the members of the Board; provided, however, that if
the election, or nomination for election by the Company's common stockholders,
of any new director was approved by a vote of at least two-thirds (2/3) of the
Incumbent Board, such new director shall, for purposes of this Plan, be
considered as a member of the Incumbent Board; provided further, however, that
no individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11 promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board (a "Proxy Contest") including
by reason of any agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(c) The consummation of:
(i) A merger, consolidation or reorganization with or
into the Company or in which securities of the Company are issued, unless such
merger, consolidation or reorganization is a "Non-Control Transaction." A
"Non-Control Transaction" shall mean a merger, consolidation or reorganization
with or into the Company or in which securities of the Company are issued where:
(A) the stockholders of the Company, immediately
before such merger, consolidation or reorganization, own directly or indirectly
immediately following such merger, consolidation or reorganization, at least a
majority of the combined voting power of the outstanding voting securities of
the corporation resulting from such merger or consolidation or reorganization
(the "Surviving Corporation"), in substantially the same proportion as their
ownership of the Voting Securities immediately before such merger, consolidation
or reorganization,
(B) the individuals, who were members of the
Incumbent Board immediately prior to the extension of the agreement providing
for such merger, consolidation or reorganization, constitute at least a majority
of the members of the board of directors of the Surviving Corporation, or a
corporation beneficially directly or indirectly owning a majority of the Voting
Securities of the Surviving Corporation, and
(C) no Person other than (1) the Company, (2) any
Related Entity, (3) any employee benefit plan (or any trust forming a part
thereof) that, immediately prior to such merger, consolidation or
reorganization, was maintained by the Company or any Related Entity, or (4) any
Person who, immediately prior to such merger, consolidation or reorganization
had Beneficial Ownership of thirty-three percent (33%) or more of the then
outstanding Voting Securities or Shares, has Beneficial Ownership of
thirty-three percent (33%) or more of the combined voting power of the Surviving
Corporation's then outstanding voting securities or its common stock.
(ii) A complete liquidation or dissolution of the
Company; or
2
<PAGE> 3
(iii) The sale or other disposition of all or
substantially all of the assets of the Company to any Person (other than a
transfer to a Related Entity or the distribution to the Company's stockholders
of the stock of a Related Entity or any other assets).
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
solely because any Person (the "Subject Person") acquired Beneficial Ownership
of more than the permitted amount of the then outstanding Shares or Voting
Securities as a result of the acquisition of Shares or Voting Securities by the
Company which, by reducing the number of Shares or Voting Securities then
outstanding, increases the proportional number of shares Beneficially Owned by
the Subject Persons, provided that if a Change in Control would occur (but for
the operation of this sentence) as a result of the acquisition of Shares or
Voting Securities by the Company, and after such share acquisition by the
Company, the Subject Person becomes the Beneficial Owner of any additional
Shares or Voting Securities Beneficially Owned by the Subject Person, then a
Change in Control shall occur.
2.10 "Code" means the Internal Revenue Code of 1986, as
amended.
2.11 "Committee" means a committee, as described in Section
3.1, appointed by the Board from time to time to administer the Plan and to
perform the functions set forth herein.
2.12 "Company" means General Semiconductor, Inc.
2.13 "Director" means a director of the Company.
2.14 "Director Option" means an Option granted pursuant to
Section 6.
2.15 "Director Share" means a Share issued or transferred
pursuant to Section 12.3.
2.16 "Disability" means a mental or physical condition which,
in the opinion of the Committee, renders a Grantee unable or incompetent to
carry out the job responsibilities which such Grantee held or the duties to
which such Grantee was assigned at the time the disability was incurred, and
which is expected to be permanent or for an indefinite duration.
2.17 "Division" means any of the operating units or divisions
of the Company designated as a Division by the Committee.
2.18 "Dividend Equivalent Right" means a right to receive all
or some portion of the cash dividends that are or would be payable with respect
to Shares.
2.19 "Eligible Director" means a director of the Company who
is not an employee of the Company or any Subsidiary, or a general partner of any
of the Forstmann Little Companies.
2.20 "Eligible Individual" means any director, officer or
employee of the Company or a Subsidiary, or any consultant or advisor of the
Company or a Subsidiary, designated by the Committee as eligible to receive
Options or Awards subject to the conditions set forth herein.
2.21 "Employee Option" means an Option granted pursuant to
Section 5.
2.22 "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
2.23 "Fair Market Value" of any security of the Company or any
other issuer means, as of any applicable date:
3
<PAGE> 4
(a) if the security is listed for trading on the New York
Stock Exchange, the closing price, regular way, of the security as reported on
the New York Stock Exchange Composite Tape, or if no such reported sale of the
security shall have occurred on such date, on the next preceding date on which
there was such a reported sale, or
(b) if the security is not so listed, but is listed on another
national securities exchange or authorized for quotation on the National
Association of Securities Dealers, Inc.'s NASDAQ National Market System
("NASDAQ/NMS"), the closing price, regular way, of the security on such exchange
or NASDAQ/NMS, as the case may be, or if no such reported sale of the security
shall have occurred on such date, on the next preceding date on which there was
such a reported sale, or
(c) if the security is not listed for trading on a national
securities exchange or authorized for quotation on NASDAQ/NMS, the average of
the closing bid and asked prices as reported by the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or, if no such prices
shall have been so reported for such date, on the next preceding date for which
such prices were so reported, or
(d) if the security is not listed for trading on a national
securities exchange or is not authorized for quotation on NASDAQ/NMS or NASDAQ,
the fair market value of the security as determined in good faith by the
Committee and, in the case of an Incentive Stock Option, in accordance with
Section 422 of the Code.
2.24 "Grantee" means a person to whom an Award has been
granted under the Plan.
2.25 "Incentive Stock Option" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.
2.26 "Nonemployee Director" means a director of the Company
who is a "nonemployee director" within the meaning of Rule 16b-3 promulgated
under the Exchange Act.
2.27 "Nonqualified Stock Option" means an Option which is not
an Incentive Stock Option.
2.28 "Option" means a Nonqualified Stock Option, an Incentive
Stock Option, a Director Option, or any or all of them.
2.29 "Optionee" means a person to whom an Option has been
granted under the Plan.
2.30 "Outside Director" means a director of the Company who is
an "outside director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
2.31 "Parent" means any corporation which is a parent
corporation (within the meaning of Section 424(e) of the Code) with respect to
the Company.
2.32 "Performance Awards" means Performance Units, Performance
Shares or either or both of them.
2.33 "Performance-Based Compensation" means any Option or
Award that is intended to constitute "performance based compensation" within the
meaning of Section 162(m)(4)(C) of the Code and the regulations promulgated
thereunder.
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<PAGE> 5
2.34 "Performance Cycle" means the time period specified by
the Committee at the time Performance Awards are granted during which the
performance of the Company, a Subsidiary or a Division will be measured.
2.35 "Performance Objectives" has the meaning set forth in
Section 11.
2.36 "Performance Shares" means Shares issued or transferred
to an Eligible Individual under Section 11. 2.37 "Performance Units" means
Performance Units granted to an Eligible Individual under Section 11.
2.38 "Person" shall mean a person within the meaning of
Sections 13(d) and 14(d) of the Exchange Act.
2.39 "Phantom Stock" means a right granted to an Eligible
Individual under Section 12 representing a number of hypothetical Shares.
2.40 "Plan" means the General Semiconductor, Inc. 1998
Long-Term Incentive Plan, as amended and restated from time to time.
2.41 "Pooling Transaction" means an acquisition of the Company
in a transaction which is intended to be treated as a "pooling of interests"
under generally accepted accounting principles.
2.42 "Restricted Stock" means Shares issued or transferred to
an Eligible Individual pursuant to Section 10.
2.43 "Section 16 Grantee" means a person subject to potential
liability with respect to equity securities of the Company under Section 16(b)
of the Exchange Act.
2.44 "Share Award" means an Award of Shares granted pursuant
to Section 12.
2.45 "Shares" means the common stock, par value $.01 per
share, of the Company.
2.46 "Stock Appreciation Right" means a right to receive all
or some portion of the increase in the value of the Shares as provided in
Section 8 hereof.
2.47 "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the Code) with respect to
the Company.
2.48 "Successor Corporation" means a corporation, or a parent
or subsidiary thereof within the meaning of Section 424(a) of the Code, which
issues or assumes a stock option in a transaction to which Section 424(a) of the
Code applies.
2.49 "Ten-Percent Stockholder" means an Eligible Individual,
who, at the time an Incentive Stock Option is to be granted to him or her, owns
(within the meaning of Section
5
<PAGE> 6
422(b)(6) of the Code) stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company,
or of a Parent or a Subsidiary.
General Semiconductor, Inc.
Date: November 17, 1999 By: /s/ Ronald A. Ostertag
6
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
The following is a list of the Company's subsidiaries as of December 31, 1998,
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)
General Semiconductor (Europe) Limited
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-60498, 33-61820, 33-50911, 33-52189, 33-55595, 33-57737, 333-22861, and
333-09180 of General Semiconductor, Inc. each on Form S-8 and Registration
Statement No. 333-94513 of General Semiconductor Inc. on Form S-3 of our report
dated February 2, 2000, appearing in this Annual Report on Form 10-K of General
Semiconductor, Inc. for the year ended December 31, 1999.
/s/DELOITTE & TOUCHE LLP
Jericho, New York
March 15, 2000
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<PAGE> 1
EXHIBIT 99
GENERAL SEMICONDUCTOR, INC.
EXHIBIT 99 - FORWARD LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. Our Form 10-K for the year ended December 31,
1999, our 1999 Annual Report to Stockholders, any Form 10-Q or Form 8-K of ours,
or any other oral or written statements made by or on behalf of General
Semiconductor, may include forward looking statements which reflect our 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. We undertake no
obligation to publicly update or revise any forward looking statements, whether
as a result of new information, future events or otherwise.
Our actual results 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 we operate;
(b) changes in capital availability or costs, such as changes in interest rates,
market perceptions of the industry in which we operate, 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.
OUR SUBSTANTIAL INDEBTEDNESS COULD RESTRICT OUR OPERATIONS AND MAKE US MORE
VULNERABLE TO ADVERSE ECONOMIC CONDITIONS.
We have had and will continue to have a substantial amount of outstanding
indebtedness with significant debt service requirements. In the future, we may
incur additional indebtedness.
Our substantial current and future indebtedness could have important
consequences. For example, it could:
- - impair our ability to obtain additional financing in the future;
- - reduce funds available to us for other purposes, including working
capital, capital expenditures, research and development, strategic
acquisitions and other general corporate purposes;
- - restrict our ability to introduce new products or exploit business
opportunities;
- - increase our vulnerability to economic downturns and competitive
pressures in the industry in which we operate;
- - increase our vulnerability to interest rate increases to the extent
debt under our credit facility is not hedged because the interest
rates under our credit facility are variable;
- - limit our ability to dispose of assets;
- - make it more difficult for us to satisfy our obligations with respect
to the notes; and
- - place us at a competitive disadvantage.
WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR DEBT. OUR ABILITY TO
GENERATE CASH DEPENDS UPON MANY FACTORS BEYOND OUR CONTROL.
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<PAGE> 2
We will require a significant amount of cash to service our indebtedness and to
fund our operations. Based on our current level of operations, we believe that
our cash flow from operations and our available financing will be adequate to
meet our anticipated requirements for operating our business and servicing our
debt. Our ability to generate cash depends upon, among other things, our future
operating performance. To a large extent, this depends upon economic, financial,
competitive and other factors beyond our control. If we cannot generate enough
cash from operations to make payments on our indebtedness, we will need to
refinance our indebtedness, obtain additional financing or sell assets. We
cannot assure that we would be able to do so or do so without additional
expense.
WE OPERATE IN AN INDUSTRY THAT HAS RECENTLY EXPERIENCED UNUSUALLY LARGE PRICE
DECLINES AND FUTURE PRICING DECLINES MAY ADVERSELY AFFECT OUR BUSINESS, RESULTS
OF OPERATIONS AND LIQUIDITY.
The discrete segment of the semiconductor industry has recently experienced
unusually large price declines and may experience such declines in the future.
During 1998 and the first quarter of 1999, average selling prices of our
products weakened at rates beyond those historically experienced due to
continued excess capacity in the industry. The excess capacity resulted from a
combination of factors, including industry capacity expansion in 1996, economic
difficulties in Southeast Asia, the economic slowdown in Japan and difficulties
in the computer and computer peripherals industry. During this period, our
production facilities were underutilized. The underutilization of our facilities
for an extended period in the future could result in production inefficiencies
and cause a reduction in our operating margins. We cannot assure that our
industry will not experience future price declines which could have a material
adverse effect on our business, results of operations and liquidity.
WE FACE SIGNIFICANT COMPETITION IN THE DISCRETE SEGMENT OF THE SEMICONDUCTOR
INDUSTRY, WHICH MAY ADVERSELY AFFECT US.
We are 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 we do. Our 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 we believe that we enjoy certain technological and
other advantages over our competitors, realizing and maintaining such advantages
will require continued investment by us in engineering, research and
development, marketing and customer service and support. We cannot assure that
we will have sufficient resources to continue to make such investments or that
we will be successful in maintaining our advantages.
OUR BUSINESS IS SUBJECT TO THE ECONOMIC AND POLITICAL RISKS OF OPERATING OUR
FACILITIES AND SELLING OUR PRODUCTS IN FOREIGN COUNTRIES.
Almost all of our 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 risks inherent in situating operations
abroad, including risks with respect to currency exchange rates, economic and
political destabilization, restrictive actions by foreign governments,
nationalizations, natural events such as severe weather, floods and earthquakes,
the laws and policies of the United States affecting trade, foreign investment
and loans, and foreign tax laws. Our cost-competitive status could be adversely
affected if, relative to our competitors, we experience unfavorable movements in
foreign currency exchange rates.
In addition, international sales of our products generally represent
approximately 70% of our annual sales. Our financial performance in the future
may be adversely affected by international economic conditions.
WE MAY NOT BE ABLE TO SUCCESSFULLY MAKE ACQUISITIONS.
As part of our business strategy, we intend to make acquisitions. We may not be
able to complete any acquisition in the future or identify those candidates that
would result in a successful transaction. In addition, we may not be able to
complete future acquisitions at acceptable prices and terms, and increased
competition for acquisition candidates could result in fewer acquisition
opportunities and higher
2
<PAGE> 3
acquisition prices. The magnitude, timing and nature of future acquisitions will
depend upon various factors, including:
- - the availability of suitable acquisition candidates;
- - competition with others for suitable acquisitions;
- - the negotiation of acceptable terms;
- - our access to capital;
- - the availability of skilled employees to manage and operate the
acquired companies; and
- - general economic and business conditions.
We expect to finance acquisitions with cash on hand, through issuance of debt or
equity securities and through borrowings under credit arrangements, including
pursuant to our credit facility, subject to the restrictions set forth in the
credit facility. The ability to obtain debt or equity financing is subject to
market conditions and to limitations imposed on us by our credit facility.
Therefore, we may not be able to obtain additional financing in order to finance
future acquisitions. Our operating and financial flexibility could be
substantially limited if we use cash to complete acquisitions.
POTENTIAL ENVIRONMENTAL LIABILITIES, INCLUDING THOSE RELATING TO FORMER
OPERATIONS, MAY ADVERSELY IMPACT OUR FINANCIAL POSITION.
We are subject to various federal, state, local and foreign laws and regulations
governing environmental matters, including the use, discharge and disposal of
hazardous materials. We are presently engaged in the remediation of sites
associated with eight discontinued operations in six states, and we are a
"potentially responsible party" at five hazardous waste sites in four states. We
have recorded a reserve for environmental matters of $30.2 million at December
31, 1999. While the ultimate outcome of these matters cannot be determined, we
do not believe that the final disposition of these matters will have a material
adverse effect on our financial position, results of operations or cash flows
beyond the amounts previously provided for in our financial statements.
Our present and past facilities have been in operation for many years, and, over
that time, these facilities have used substances which are or might be
considered hazardous, and we have generated and disposed of wastes which are or
might be considered hazardous. In addition, new environmental legislation or
regulations may be enacted in the future. Therefore, it is possible that
additional environmental issues may arise in the future which we cannot now
predict.
YEAR 2000
The Company did not experience a material adverse effect on its products,
services, competitive position, financial condition or results of operations as
a result of the Year 2000 phenomenon. However, the Company can give no assurance
that the systems of other companies or government agencies on which the Company
relies have been converted on time or that a failure to convert by another
company or a conversion that is incompatible with the Company's systems will 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.
3
