ITEM 2. PROPERTIES
Our principal administrative, production and research and development facilities are located in the following locations:
- --------------- (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 prior to its expiration.
(4) We have an option to extend this lease until 2011.
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.
ITEM 3. LEGAL PROCEEDINGS
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.
In connection with the spin-off in 1997, NextLevel Systems, Inc. (which subsequently changed its name to General Instrument Corporation ("GI") 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 NextLevel 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.
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 spin-off, 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 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. On November 21, 2000, the Court dismissed a derivative action brought on behalf of General Instrument Corporation under the same caption.
Also included under the same caption is an action entitled BKP Partners, L.P. v. General Instrument Corp., brought in February 1996 by certain holders of preferred stock of Next Level 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 for pretrial purposes 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 Next Level in connection with the acquisition of Next Level by General Instrument Corporation. Plaintiff's complaints, seek, among other things, unspecified damages and attorneys' fees and costs.
Plaintiffs have moved to transfer the class action for trial with the Eastern District of Pennsylvania and to send the BKP Partners case back to the Northern District of California for trial. That motion is pending before the panel on Multidistrict Litigation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
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, 1999 and 2000.
As of February 28, 2001 there were 386 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.
ITEM 6.
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, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 has been derived from the audited consolidated financial statements included elsewhere herein. The financial data as of December 31, 1998, 1997, and 1996 and for the years ended December 31, 1997 and 1996 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.
- --------------- (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.
(b) In 2000 and 1999 includes $172.5 million of convertible subordinated notes which were issued in December 1999.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
We are a market leader in the design, manufacture and sale of power semiconductor components. The Company provides customers with a broad array of power management products including rectifiers, transient voltage suppressors, small signal transistors, diodes and MOSFETs. We are a world leader in the power rectifier and transient voltage suppressor markets, which products represented 84% of our 2000 net sales, with an approximate 14% market share as measured by net sales in 2000. 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 the United States, and we produce an average of 42 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, automating labor intensive portions of our manufacturing process and outsourcing.
RESTRUCTURING
We announced a restructuring plan 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.
On February 8, 2001, the Company announced a restructuring of its operations. Headcount reductions are planned through a combination of worldwide programs, including early retirement and workforce reductions. A restructuring charge of up to $14.0 million is expected to be taken in the first quarter of 2001.
RESULTS OF OPERATIONS
The following table sets forth certain items included in selected consolidated financial data as a percentage of sales:
ADJUSTED EBITDA
EBITDA represents earnings 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 accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America. 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 pre-tax charges of $12.3 million incurred in 1998 for the restructuring.
- --------------- (1) Amortization of deferred financing fees is excluded from "Depreciation and amortization" and included in "Interest".
The Company's Consolidated Financial Statements and related notes included in Part II of this Form 10-K should be read as an integral part of the following financial review.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 WITH THE YEAR ENDED DECEMBER 31, 1999
NET SALES
Net sales of $493.7 million for the year ended December 31, 2000 increased $76.6 million from $417.1 million for the comparable prior year period. The 18.4% increase is primarily due to a 25% increase in unit volume sales and new product sales, partly offset by an approximate 3% decline in average selling prices.
COST OF SALES
Cost of sales for the year ended December 31, 2000 of $339.5 million increased $37.0 million from $302.5 million for the corresponding prior year period. The 12.2% increase is principally due to an increase in unit volume sales and higher variable compensation costs.
Accordingly, gross margin for the year ended December 31, 2000 represents 31.2% of net sales compared with 27.5% for the corresponding prior year period. The increase relates to improved capacity utilization and factory absorption, continued cost controls and a change in the mix of products sold, partly offset by a decline in worldwide average selling prices, higher material and vendor costs, higher variable compensation and the strengthened New Taiwan Dollar.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses of $57.0 million for the year ended December 31, 2000 increased $10.4 million from $46.6 million for the corresponding prior year period. The 22.3% increase is due primarily to higher variable compensation and increased selling costs corresponding with higher revenues. The current year also includes the full effect of the Korea sales office which opened in April, 1999. As a percentage of sales, selling, general and administrative expenses increased to 11.6% for the year ended December 31, 2000 from 11.2% for the corresponding prior year period.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expense of $7.8 million for the year ended December 31, 2000 increased $0.9 million from $6.9 million for the comparable prior year period. The 13% increase is due to costs incurred related to the introduction of power MOSFETs and the development of power management products including analog Integrated Circuit ("I/C's"). Research and development spending reflects the modification of existing products as well as the continued development of new products. As a percentage of sales, research and development decreased to 1.6% for the year ended December 31, 2000 from 1.7% for the corresponding prior year period due to the proportionately higher increase in net sales.
NET INTEREST EXPENSE
Net interest expense decreased to $18.8 million for the year ended December 31, 2000 from $23.5 million for the corresponding prior year period. The $4.7 million decrease relates to a lower average debt balance outstanding, reduced borrowing rate on floating rate debt and the issuance of the Convertible Notes described in Note 8 to the Company's Consolidated Financial Statements included in Part II of this Form 10-K, partly offset by the amortization of deferred financing costs related to the Convertible Notes.
INCOME TAXES
The Company's effective tax rate for the year ended December 31, 2000 increased to 28.5% from 25.0% for the year ended December 31, 1999 due primarily to a decrease in the percentage of the Company's income from foreign subsidiaries which are taxed at rates lower than the U.S. rate.
ADJUSTED EBITDA
The $29.1 million increase in adjusted EBITDA for the year ended December 31, 2000 compared with the corresponding prior year period is due primarily to increased volume and improved factory performance partly offset by lower average selling prices.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, working capital was $50.1 million, compared to $64.7 million at December 31, 1999. The working capital decrease of $14.6 million resulted primarily from increases in accounts payable and accrued expenses partly offset by increases in accounts receivable and inventories in support of a higher revenue base. The current ratio at December 31, 2000 is 1.5 to 1 compared with a ratio of 1.9 to 1 at December 31, 1999.
During the year ended December 31, 2000, the Company invested $34.9 million in property, plant and equipment primarily for capacity expansion and automation compared with $27.3 million and $26.9 million in 1999 and 1998, respectively. While the Company does not have any material commitments for capital expenditures, it does expect to invest $45.0 to $55.0 million in 2001 for new products, automation, capacity increases (primarily for power management and conditioning products) and quality and system enhancements.
Long-term debt at December 31, 2000 was $216.5 million compared to $276.5 million at December 31, 1999. The Company's ratio of total debt to EBITDA was 1.9 to 1 at December 31, 2000 compared to 3.3 to 1 at December 31, 1999. The Company's ratio of senior debt to EBITDA improved from 1.3 to 1 at December 31, 1999 to 0.4 to 1. The improvement of this ratio is due to the repayment of $60.0 million in senior debt in 2000 and the $22.4 million increase in net income.
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 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 ($44.0 million at December 31, 2000) and to certain existing and future trade payable and other liabilities of certain of our subsidiaries (approximately $92.9 million at December 31, 2000). 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, 2000 and 1999 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, 2000 and 1999 was 6.0% and 7.0%, respectively.
At December 31, 2000 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 $89.3 million cash flow from operations and also experienced an overall increase in cash of $2.3 million for the year ended December 31, 2000. The positive cash flow provided by continuing operations was used for capital expenditures and a partial repayment of debt outstanding. For the year ended December 31, 1999 the Company generated $41.8 million cash flow from continuing operating activities but experienced an overall decrease in cash of $0.6 million. The positive cash flow provided by continuing operations was used for capital expenditures, a partial repayment of debt outstanding and financing fees associated with the issuance of the Convertible Notes.
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.
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, and the Euro. The Company's committed exposures relate primarily to trade payables, accounts receivable and employee compensation. At December 31, 2000 the Company had committed exposures of $32.9 million.
As of December 31, 2000 and 1999 the Company had outstanding forward contracts in the amounts of $7.3 million and $10.6 million, respectively, comprised of foreign currencies which were to be sold, and $10.5 million and $12.7 million, respectively, comprised of foreign currencies which were to be purchased. All outstanding forward contracts at December 31, 2000 mature within twelve months and have an aggregate fair value of $0.1 million.
At December 31, 2000 and 1999 the impact of a hypothetical 10% adverse change in exchange rates on the fair value of foreign exchange forward contracts is a reduction in fair value of $1.7 million and $2.3 million, respectively. This impact would be substantially offset by an increase in the fair value of the Company's underlying exposures.
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, 2000 and 1999 the outstanding balance under this facility was $44.0 million and $104.0 million, respectively. 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, 2000 was not significant.
A hypothetical 10% increase in interest rates would adversely affect the Company's pre-tax earnings and cash flow by $0.3 million in 2000 and $0.9 million in 1999, due to the Company's floating rate debt.
At December 31, 2000 and 1999 the fair value of the Convertible Notes was approximately $115.6 million and $184.6 million, respectively.
INTERNATIONAL MARKETS
Management believes that a significant amount of General Semiconductor's sales in 2001 will continue to be generated from international markets.
International sales generally represent 72% of the Company's worldwide sales. Sales to the Asia/Pacific region accounted for approximately 42% of the Company's worldwide sales for the year ended December 31, 2000. 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 ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" which was subsequently amended by SFAS Nos. 137 and 138 (collectively "SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and
hedging activities and requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133 effective January 1, 2001. Management does not expect the adoption of SFAS 133 to have a significant impact on the financial position, results of operations or cash flows of the Company.
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, and internal financial reporting systems to be able to process transactions in the new currency. Necessary modifications to contracts with suppliers and customers have been made to reflect the new Euro currency. A three-year transition period is given during which transactions may be made in the old currencies. This may require dual currency processes until the conversion is complete. The Company is identifying the issues involved and intends to develop and implement solutions. The cost of this effort is not expected to be material and will be expensed as incurred. There can be no assurance, however, that all problems will be foreseen and corrected, or that no material disruption of the Company's business will occur. 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, 2000, the Company's 2000 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 accounting principles generally accepted in the United States of America 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.
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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP Jericho, New York February 7, 2001
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT STOCK PAR VALUE)
See notes to consolidated financial statements.
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
See notes to consolidated financial statements.
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
See notes to consolidated financial statements.
GENERAL SEMICONDUCTOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See notes to consolidated financial statements.
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 market leader in the design, manufacture and distribution of a broad array of power management products including low-to medium-power rectifiers, transient voltage suppressors ("TVS"), small signal transistors, diodes and MOSFETs. Power rectifiers, small signal devices, TVS products and MOSFETs 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. MOSFETs are devices that switch and/or amplify current. The Company's products are primarily targeted for use in the computer, automotive, telecommunications, lighting and consumer electronics industries and are sold primarily to original equipment manufacturers, electronic distributors and contract equipment manufacturers.
General Instrument Corporation ("GI") (i) transferred all the assets and liabilities relating to the manufacture and sale of broadband communications products used in the cable television, satellite, and telecommunications industries and all rights to the related GI trademarks to its wholly-owned subsidiary NextLevel Systems, Inc. ("NextLevel"), and all the assets and liabilities relating to the manufacture and sale of coaxial, fiber optic and other electric cable used in the cable television, satellite and other industries to its wholly-owned subsidiary CommScope, Inc. ("CommScope") and (ii) distributed all of the outstanding shares of capital stock of each of NextLevel and CommScope to its stockholders on a pro rata basis as a dividend (the "Distribution") in a transaction that was finalized on July 28, 1997 (the "Distribution Date"). On the Distribution Date, NextLevel and CommScope began operating as independent entities with publicly traded common stock. GI retained no ownership interest in either NextLevel or CommScope. Concurrent with the Distribution, GI changed its name to General Semiconductor, Inc. and effected a one for four reverse stock split. On February 2, 1998 NextLevel changed its name to General Instrument Corporation ("General Instrument"). General Instrument was acquired by Motorola Inc. in January 2000.
The cash flows of the businesses transferred to General Instrument and CommScope (the "Discontinued Operations"), have been reported through the Distribution Date as "Cash used in discontinued operations". 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of 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. GENERAL SEMICONDUCTOR, INC.
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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 lives or lease terms, 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. Whenever events or changes in circumstances create concerns related to recoverability, management evaluates the appropriateness of both the carrying values and remaining useful lives of the excess of cost over fair value of net assets acquired based on forecasted operating cash flows, on an undiscounted basis, and other factors.
Long-Lived Assets. The Company 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 ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" which was subsequently amended by SFAS Nos. 137 and 138 (collectively "SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133 effective January 1, 2001. Management does not expect the adoption of SFAS 133 to have a significant impact on the financial position, results of operations or cash flows of the Company.
Reclassifications. Certain prior year amounts have been reclassified to conform to the current year presentation.
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3. INVENTORIES
Inventories consist of:
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
Depreciation expense aggregated $21.6 million, $20.7 million and $18.0 million for 2000, 1999 and 1998, respectively.
5. ACCRUED EXPENSES
Accrued expenses consist of:
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 be manufactured.
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A summary of the restructuring reserve is:
In 2000, the unused restructuring liabilities of $0.1 million were reversed against selling, general and administrative expenses.
6. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of:
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.
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The domestic and foreign components of income before income taxes is:
The components of the provision for income taxes are as follows:
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 before income taxes:
Income taxes related to foreign operations in 2000, 1999 and 1998 reflect the Company's ability to recognize the benefit of foreign tax credits.
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Deferred income taxes recorded in the accompanying consolidated balance sheets are comprised of:
Deferred taxes have not been provided on undistributed earnings of certain foreign operations of $29.8 million and $18.6 million in 2000 and 1999, 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, 2000 and 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:
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 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 ($44.0 million at December 31, 2000) and to certain existing
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and future trade payables and other liabilities of certain of its subsidiaries (approximately $92.9 million at December 31, 2000). 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 provide 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, 2000 and 1999 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, 2000 and 1999 was 6.0% and 7.0%, respectively.
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 2006. Rent expense was $4.5 million, $5.5 million and $5.4 million in 2000, 1999 and 1998, respectively.
Future minimum lease payments required under operating leases as of December 31, 2000 are:
The Company has approximately $11.0 million in letters of credit outstanding at December 31, 2000.
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."
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The Company is presently engaged in the remediation of seven sites relating to discontinued operations in five 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 $27.9 million at December 31, 2000 ($30.2 million at December 31, 1999). 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. 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.
In connection with the spin-off in 1997, NextLevel Systems, Inc. (which subsequently changed its name to General Instrument Corporation ("GI") 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 NextLevel 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.
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 spin-off, 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 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. On November 21, 2000, the Court dismissed a derivative action brought on behalf of General Instrument Corporation under the same caption.
Also included under the same caption is an action entitled BKP Partners, L.P. v. General Instrument Corp., brought in February 1996 by certain holders of preferred stock of Next Level 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 for pretrial purposes 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 Next Level in connection with the acquisition of Next Level by General Instrument Corporation. Plaintiff's complaints, seek, among other things, unspecified damages and attorneys' fees and costs.
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Plaintiffs have moved to transfer the class action for trial with the Eastern District of Pennsylvania and to send the BKP Partners case back to the Northern District of California for trial. That motion is pending before the panel on Multidistrict Litigation.
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:
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The status of the Company's continuing pension plans and the related amounts recorded in the accompanying consolidated balance sheets are:
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 2000, 1999 or 1998. 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 $0.5 million, $0.4 million and $0.7 million in 2000, 1999 and 1998, respectively.
Postretirement Benefits other than Pensions. The Company maintains an unfunded contributory group medical plan (the "Plan") for all full-time U.S. employees not covered by a collective bargaining agreement who
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meet defined age and service requirements. The Company recognizes the cost of providing and maintaining postretirement benefits during employees' active service periods. The Plan is the primary provider of benefits for retirees up to age 65. After age 65, Medicare becomes the primary provider. Net periodic postretirement benefit cost consists of:
The status of the Plan and the related amounts recorded in the accompanying consolidated balance sheets are:
The assumed rate of future increases in health care costs for 2000 and 1999 was 9.0% and 10.0%, respectively, for pre-age 65 retirees, and 7.0% and 8.0%, respectively, for post-age 65 retirees, and is expected to decline to 6.0% by the year 2005 for pre-age 65 retirees and by the year 2003 for post-age 65 retirees, respectively. Under the Plan, the actuarially determined effect of a one percentage point increase in the assumed
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health care cost trend rate on annual net periodic benefit cost and the benefit obligation would be $1.1 million for each 2000 and 1999.
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, 2000 and 1999 $0.7 million and $0.6 million, respectively, was accrued for postemployment benefits.
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"). 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. On February 7, 2001 the 1998 LTIP was amended to provide that each non-employee Director will receive a grant of non-qualified stock options in October of each year rather than on every third anniversary of his or her election to the board. 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"):
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The following table summarizes information about stock options outstanding and exercisable under the Company's LTIP Plans:
At December 31, 2000 and 1999 1.4 million shares and 2.7 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, 2000, 1999 and 1998 in the amount of $1.0 million, $0.2 million and $0.1 million, respectively, were recorded in stockholders' equity as additional paid-in capital.
In addition, under the provisions of the LTIP Plans, the Company issued one thousand shares of Common Stock to certain members of its Board of Directors during the year ended December 31, 1999.
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 2000, 1999 and 1998 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 $4.9 million, $4.4 million and $5.4 million in 2000, 1999 and 1998, 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 and diluted earnings per share would have been $43.7 million and $1.02 per share, respectively, for 2000, $21.7 million and $0.59 per share, respectively, for 1999 and $15.2 million and $0.41 per share, respectively for 1998. The estimated weighted-average per share fair value of the options granted was $6.19 during 2000, $4.45 during 1999 and $4.18 during 1998, on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
The pro forma effect on net income and earnings per share for 2000, 1999 and 1998 may not be representative of the pro forma effect in future years because it includes compensation cost on a straight-line basis over the vesting periods of the grants and does not take into consideration the pro forma compensation costs for grants made prior to 1995.
Stockholder Rights Plan. On January 6, 1997 the Board of Directors adopted a stockholder rights plan designed to protect stockholders from various abusive takeover tactics, including attempts to acquire control of the Company at an inadequate price. Under the rights plan, 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
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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 2000 and 1999, 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.
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, 2000, 1999 and 1998.
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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 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
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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, 2000 was not significant. As of December 31, 2000 and 1999, the Company had outstanding forward contracts in the amounts of $7.3 million and $10.6 million, respectively, comprised of foreign currencies which were to be sold and $10.5 million and $12.7 million, respectively, comprised of foreign currencies which were to be purchased. All outstanding forward contracts as of December 31, 2000 mature within twelve months.
As of December 31, 2000 the Company had no purchased option contracts outstanding. As of December 31, 2000 the following forward contracts were outstanding:
FORWARD CONTRACTS:
As of December 31, 1999 the Company had no purchase option contracts outstanding. As of December 31, 1999 the following forward contracts were outstanding:
FORWARD CONTRACTS:
Fair values shown above are based on quoted market prices. Deferred gains or losses on the above contracts at December 31, 2000 and 1999 were not significant. Foreign currency transaction gains (losses) included in net income were $(1.2) million, $0.8 million and $1.6 million in 2000, 1999 and 1998, 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, 2000 was not significant. As of December 31, 2000 and 1999, the Company had no interest rate derivative instruments outstanding.
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
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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.
Other Financial Instruments. As of December 31, 2000 and 1999 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 rates that adjust to market on a short-term basis. At December 31, 2000 and 1999 the fair value of the Convertible Notes was approximately $115.6 million and $184.6 million, respectively.
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 power management 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 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.
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- --------------- (a) Included in United States net sales are export sales as follows:
Net sales, by country, within the European geographic segment are:
GENERAL SEMICONDUCTOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Earnings before provision for income taxes in 1998 includes restructuring charges of $12.3 million ($8.5 million net of tax).
No single customer accounted for more than 10% of the Company's sales during the years ended December 31, 2000, 1999 and 1998.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly data for 2000 and 1999 is as follows:
16. RELATED PARTY TRANSACTION
Included within intangibles and other assets at December 31, 2000 is a $0.5 million secured, promissory note due from an officer of the Company. This note, which was issued in connection with the relocation of the officer, bears interest at an annual rate of 6.23% and is subject to voluntary and mandatory prepayment. The outstanding principal and all unpaid interest on the note are due upon maturity of the note on September 1, 2007.
17. SUBSEQUENT EVENT -- BUSINESS RESTRUCTURING (UNAUDITED)
On February 8, 2001 the Company announced a restructuring of its operations. Worldwide headcount reductions are planned through a combination of early retirement programs and workforce reductions. A restructuring charge of up to $14.0 million is expected to be taken in the first quarter of 2001.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
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 2001 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 2001 Proxy Statement is hereby incorporated by reference.
ITEM 11.
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 2001 Proxy Statement and is incorporated by reference herein. The sections captioned "Report of the Compensation Committee", "Report of the Audit Committee" and "Performance Graph" in the Company's 2001 Proxy Statement are not incorporated by reference herein.
ITEM 12.
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 2001 Proxy Statement and is incorporated by reference herein.
ITEM 13.
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 2001 Proxy Statement and is incorporated by reference herein.
PART IV
ITEM 14.
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, 2000 and
Consolidated Statements of Income -- Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity -- Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows -- Years ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
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 October 26, 2000 to report under Item 5 of that Form that a press release was issued on October 26, 2000 announcing earnings for the three and nine months ended September 30, 2000. 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 13, 2000 to report under Item 9 of that Form that a press release was issued on December 13, 2000 announcing updated earnings estimates for the year ended December 31, 2000. A copy of the press release was filed as an exhibit to the Form 8-K.
(c) Item 601 Exhibits
- --------------- + Management compensation.
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 14, 2001
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.