-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PGbU8qLZ2KasBn2baxOvuM4gJHajY6DeMjMzkpnNTkqHsaZuvIdlmCW0ECFnGHuA e/8NC57TeUgVndIcaTel8A== 0000950123-01-002349.txt : 20010319 0000950123-01-002349.hdr.sgml : 20010319 ACCESSION NUMBER: 0000950123-01-002349 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL SEMICONDUCTOR INC CENTRAL INDEX KEY: 0000040656 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 133575653 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05442 FILM NUMBER: 1570205 BUSINESS ADDRESS: STREET 1: 10 MELVILLE PARK ROAD STREET 2: STE 1300 CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5168473000 MAIL ADDRESS: STREET 1: 10 MELVILLE PARK ROAD STREET 2: STE 1300 CITY: MELVILLE STATE: NY ZIP: 11747 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL INSTRUMENT CORP /DE/ DATE OF NAME CHANGE: 19920703 10-K405 1 y46355e10-k405.txt GENERAL SEMICONDUCTOR INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-5442 GENERAL SEMICONDUCTOR, INC. ----------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3575653 ---------- ------------ (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 10 MELVILLE PARK ROAD, MELVILLE, NEW YORK 11747 ----------------------------------------------- --------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (631) 847-3000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
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 $335.1 million as of February 28, 2001 (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 28, 2001: 37,724,558 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 9, 2001 are incorporated by reference in Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 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 and was subsequently acquired by Motorola, Inc. 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 power management semiconductor industry and other related industries which was obtained from industry publications, including reports of Worldwide Semiconductor Trade Statistics ("WSTS"), which are published by the Semiconductor Industry Association ("SIA"). 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 power semiconductor components sector of the semiconductor industry. We design, manufacture and sell a broad array of power management products, including low-to-medium power rectifiers, transient voltage suppressors (TVS), small signal transistors, diodes and MOSFETs. Power management products are semiconductor devices and circuits which facilitate and optimize the efficient use of energy in wired and wireless electronic systems or subsystems. 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 United States, and we produce an average of 42 million units per day. During our 40 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. Worldwide semiconductor market revenue was $204.4 billion in 2000, according to WSTS. The discrete segment of this market accounted for $17.6 billion, or approximately 9.0%, of the total semiconductor market and the sectors in which we compete accounted for $12 billion of this market. The following charts illustrate the principal sectors of the semiconductor market and the discrete segment by product category and highlight the areas in which we compete: 1 3 2000 SEMICONDUCTOR MARKET - $204.4 BILLION [Pie Chart] Microcomponents............................................. 30% Memory...................................................... 24% Logic IC's.................................................. 17% Analog IC's................................................. 15% Discretes................................................... 9% Optical IC's................................................ 5%
2000 DISCRETE MARKET - $17.6 BILLION [Pie Chart] Power Transistors........................................... 22% Small Signal Transistors.................................... 20% MOSFETs..................................................... 18% Diodes...................................................... 15% Rectifiers.................................................. 14% Other Discrete.............................................. 6% Thyristors.................................................. 5%
Source: WSTS (December 2000). COMPANY STRENGTHS We believe the characteristics of the power semiconductor market and our competitive strengths contribute to our stable and consistent operating income. Long-Standing Relationships with Diverse, Blue Chip Customers. During our 40-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 6% of our net sales in 2000. 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, Visteon Corporation, Delphi Automotive Systems, 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 15 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, Colmar, France, Freiburg, Germany, Taipei, Taiwan, and Tianjin, China facilities have each 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 power management sector of the semiconductor industry, all of our service and support efforts are tailored to meet our customers' needs. We employ approximately 250 sales, marketing and field applications engineers in 15 offices throughout North America, Europe and Asia. We target high growth end-use markets and focus our sales efforts on our customers' design engineers and purchasing managers in the automotive, computer, consumer, 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 2 4 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 net sales in 2000 by geographic area and by end-use market: 2000 NET SALES BY GEOGRAPHIC AREA [Pie Chart] Europe 30% Southeast Asia 22% North America 28% China 11% Japan 9%
2000 NET SALES BY END- USE MARKET(1) [Pie Chart] Distributor 30% Computer/Power Supply 25% Automotive 16% Consumer 13% Industrial/Other 7% Telecomm 5% Contract Manufacturers 4%
- --------------- (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 seven individuals who have an average of 15 years of experience with us and 20 years of experience in the semiconductor industry. Ronald A. Ostertag, our Chairman, President and Chief Executive Officer, has been with us for 22 years and has 28 years of experience in the semiconductor industry. BUSINESS STRATEGY Our objective is to provide our communications, information technology and automotive customers with semiconductor devices that work together to provide an end-to-end power management solution. The capability to offer an end-to-end power management solution is enabled by focusing the Company's resources toward two major application segments; power conditioning and circuit protection. To accomplish our objective, the principal elements of our strategy are: Target Rapid Growth Opportunities with New Product Introductions. We seek to expand our base of well-established, high quality products by introducing new MOSFET, analog, Zener and UltraFast semiconductor products that meet our customers power management needs. We define new products as those products introduced and sold for a period of three years. New product sales represented 7%, 4% and 2% of total revenues for 2000, 1999 and 1998, respectively. We employ approximately 70 full-time personnel in our Ireland, Korea, Germany, Taiwan, and United States research and development laboratories. To enhance our power conditioning offering, we introduced 29 new MOSFET products in 2000, encompassing both power and small signal types. Seventy design wins were achieved in fast growing applications such as graphics cards, lithium-ion battery packs and switch mode power supplies. MOSFETs, which were first offered by the company in 1999, are semiconductor devices that switch and/or amplify current. Our devices are used 3 5 principally by communications, information technology and automotive customers to improve system efficiency and increase battery life in portable applications. Our MOSFET manufacturing strategy employs a "fabless" model whereby the company has ported it's proprietary trench technology at established foundries in Asia. This approach enabled us to enter the power MOSFET market quickly, utilize a state of the art 0.5um equipment set at our foundry partner and minimize capital investment. We are aggressively pursuing the $3.1 billion MOSFET market through a combination of design engineering resources at our Silicon Valley design center, leveraging the assets of our foundry partners and utilizing our in-house high volume, low cost packaging expertise. We anticipate that power MOSFET sales will be an important contributor to our future growth. During 2000 the company also committed capital and personnel resources to extend its power management product portfolio into certain analog products. End-to-end power conditioning products was the impetus for us to begin design and development efforts for linear regulators, low drop out regulators, pulse width modulators and microprocessor supervisory circuits. Our analog product road maps have been defined and to date we have hired eleven design engineers. Our fabrication approach is again to use Asian foundries to provide the silicon for our designs. We expect to realize initial revenues late in 2001 from our first analog product offerings. Other new products in 2000, which have significant growth potential in power conditioning applications, include 100V Schottky rectifiers and "rugged" UltraFast rectifiers. The fast recovery time of these devices reduce energy losses in switching power supplies that serve communications and computing applications. The new UltraFast rectifiers includes a series of high voltage devices that have been optimized for power factor correction circuits, which are necessary to meet the energy conservation requirements in many countries. 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 the entire string of lights from going out when a bulb in the string burns out or is missing. Also in 1999, in the area of circuit protection, we extended the voltage range of our TRANSZORB(R) transient voltage suppressors to have the widest avalanche voltage range currently offered in the industry. These higher voltage TRANSZORB(R) products were specially designed to work in conjunction with newly developed integrated circuits that provide much greater efficiencies in computer product applications. Extend Leadership Position in Rectifier and TVS Diode Products. The research firm Dataquest ranks us as the world's leading supplier of rectifiers while IMS ranks us as the world's leading supplier of TVS products. We continue to make significant investments in surface mount package capacity as our customers continue their trend away from traditional axial packaging toward surface mount. We estimate that more than 40% of our overall revenues in 2000 were derived from surface mount products. Throughout 1999 and 2000 the Company has made significant investments to expand our Taiwan wafer fabrication facility to meet the demands of two key product lines, Schottky rectifiers and (automotive) TVS. These two product lines grew approximately 30% in revenue terms in 2000. 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 - outsourcing 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. 4 6 Pursue Selective Acquisitions. We continually evaluate candidates for strategic acquisitions and joint ventures that add complementary products or technologies to advance our goal of serving customers with an end-to-end power management solution. In addition, acquisitions broaden our product offering to meet the needs of the rapidly growing contract electronic manufacturing segment. 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 $77.3 million to our sales in 2000, representing an increase of 44% from $53.5 million in 1999. It also provided us entry into the small signal transistor, zener diode and small signal diode sectors of the discrete products market, collectively a $4.6 billion market in 2000. Acquisitions also leverage our existing sales and distribution channels, including a sales force of more than 1,000 worldwide, comprised of independent sales representatives, distributors and approximately 250 direct sales and technical personnel. PRODUCTS AND CUSTOMERS The table below identifies our end markets and the percentage of our net sales in 2000 attributable to each, and the principal products, representative applications and major customers for those end-use markets.
END-USE COMPUTER/ MARKETS POWER SUPPLY AUTOMOTIVE CONSUMER TELECOMMUNICATIONS DISTRIBUTORS % OF NET SALES (1) 25% 16% 13% 5% 30% PRINCIPAL PRODUCTS Bridge Rectifiers Superectifiers Bridge Rectifiers UltraFast All UltraFast Small Signal UltraFast Rectifiers Rectifiers Diodes Rectifiers Small Signal Schottky Small Signal Small Signal Diodes Rectifiers Transistors Diodes Small Signal Small Signal Transient Small Signal Transistors Diodes Voltage Transistors Superectifiers MOSFETs Suppressors Zener Diodes Transient Zener Diodes MOSFETs Voltage MOSFETs Suppressors MOSFETs REPRESENTATIVE CD ROM drive ABS Brake Cable Boxes Cordless Phone All APPLICATIONS Computer System CD Player Internet Line Battery Active DVD Card Charger Suspension Entertainment ISDN Board Disk Drive Airbag Module Center Mobile Phone Monitor Collision Home Modems Motherboard Warning/ Appliances/ Pager PC Scanner Avoidance White Goods Satellite Printer System Home Satellite Transmission Switch Mode Cruise Control Dish Switching Power Supply Module Microwave Systems Engine Playstation/ Management Nintendo Entertainment TV Module GPS Navigation Systems MAJOR SECTOR Acer Bosch BOSE Alcatel Arrow/Spoerle CUSTOMERS API Delphi Braun Ericsson Array Astec Ford Daewoo Hughes Avnet Delta General Motors Motorola Lucent Distrel LG Hella LG Motorola Eurodis Phihong Mitsubishi Lite-On Nokia Future Philips Motorola Matsushita Nortel Nadex Samsung AIEG Philips Networks Rutronik SCI Nadex Ryoden Sagem Ryoden Sony Nippon Denso/ Samsung Siemens Taitron Denso SONY Siemans Valeo Visteon
- --------------- (1) These products do not equal 100% of our net sales because we also sell miscellaneous products to various other end-use markets equal to approximately 11% of our net sales. 5 7 PRINCIPAL PRODUCTS We design, manufacture and sell a broad array of discrete semiconductors, including: - power conditioning devices; - protection devices; and - a maturing product portfolio. We manufacture these products in a variety of packages, including axial, bridge, power and surface mount packages. POWER CONDITIONING DEVICES Our power conditioning products are utilized to efficiently switch, amplify, regulate and convert power into a more usable form needed by today's sophisticated electronic systems. 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. 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. UltraFast rectifiers offer even lower reverse recovery times at voltage levels as high as 1,000 Volts while maintaining the efficiencies of a lower switching power losses. UltraFast rectifiers are principally used for computer and computer related applications. 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. Power MOSFETs. Power MOSFETs are manufactured using leading edge trench technology enabling the Company to offer customers significantly improved and, more energy efficient device performance versus major competitors. Typically, these components are used for computing, communication, and automotive power management applications where energy efficiency is at a premium. PROTECTION DEVICES Our protection devices protect today's state-of-the-art integrated circuits from the damaging effects of electrostatic discharge and other over-voltage conditions. 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 suppressors for use in most modern electronic equipment. We also offer 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. Zener Diodes. Zener products 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. 6 8 MATURE PRODUCT PORTFOLIO Our mature product portfolio includes devices that were originally introduced over 20 years ago. As we move forward, we plan on limiting our research and development and capital spending on these products. 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. 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. MARKETS Our customer base is diverse, both geographically and by end-use market. We target our products primarily for use in the automotive, computer, consumer electronics, telecommunications and lighting industries. Automotive. Our power management devices 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/peripherals. 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. Traditional consumer appliances that plug into a wall outlet or modem hand-held digital consumer applications require power management 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 telecommunications equipment. 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 mobile phones, pagers, cellular base stations, line cards and modems. Industrial & Lighting. New electronic ballast systems have been replacing older magnetic ballast systems and incandescent bulbs by providing greater efficiency and significantly lowering 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 7 9 competitively priced and compact. We sell to all major original equipment manufacturers (OEMs) 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. We service our customer base through a combination of direct personnel, independent sales representatives and distribution. In each of the years ended December 31, 2000, 1999 and 1998, sales by geographic region (the Americas, Europe and Asia/Pacific) each represented approximately 1/3 of our net sales. Our customer base incorporates a wide array of the world's largest manufacturers. No single customer accounted for 6% or more of our sales during the years ended December 31, 2000, 1999 or 1998. Distributors meet the needs of customers with lower volume requirements. They serve all of our markets in all of our regions, but are especially important in the Americas and Europe. In the year 2000, distribution accounted for approximately 30% of net sales. In the last several years, the electronics industry has seen an increase in the use of sub-contracted manufacturing. These worldwide companies are known as contract equipment manufacturers or CEMs. In the year 2000, CEMs accounted for approximately 4% of total sales. This trend is especially prevalent in the telecommunications sector and is expected to continue so into the foreseeable future. We have a worldwide sales force of more than 1,000, comprised of independent sales representatives, distributors and approximately 250 direct sales and technical personnel. We maintain 15 sales offices located in Melville, New York; Carlsbad, California; Arlington Heights, Illinois; Duluth, Georgia; Austin, Texas; Paris, France; Munich, Germany; Tokyo and Osaka, Japan; Gumi and 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 (EDI) is used by many of our major customers to facilitate order entry and acknowledgment. In addition to EDI, 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 Power semiconductor component 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 "die" 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. Power management semiconductors generally use process technology and equipment already proven in the manufacturing of integrated circuits. The cost of power management 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 power semiconductor wafers and, therefore, the requirement for process equipment. Additionally, because the discrete power 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 selling prices. 8 10 We own or lease six production facilities in China, Taiwan, Ireland, Germany, France and the United States. In addition, we have manufacturing supply agreements with various companies located in Asia. Our facilities are as follows:
LOCATION PRODUCTS - -------- -------- Wafer Fabrication Only: Freiburg, Germany Small signal products Westbury, New York Epitaxial wafers Wafer Fabrication and Assembly: Taipei, Taiwan Standard rectifiers Schottky rectifiers UltraFast rectifiers Transient voltage suppressors Macroom, Ireland Transient voltage suppressors Bridge rectifiers Standard rectifiers Assembly Only: Tianjin, China Rectifiers Bridge rectifiers Small signal products Colmar, France Small signal products
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, Colmar, France, Freiburg, Germany, Taipei, Taiwan and Tianjin, China facilities have each 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 employ approximately 70 full-time personnel in our research and development laboratories in Macroom, Ireland, Taipei, Taiwan, Freiburg, Germany, Fremont, California, Seoul, Korea and Westbury, New York. Our full-time staff is complemented by partnerships with universities and research institutions. The research and development laboratories in Ireland and Taiwan focus primarily on the development of new chip and packaging technologies for rectifiers and transient voltage suppressors. Research in Germany concentrates on small signal products, automation and transient voltage suppressor (TVS) arrays aimed at telecommunications protection. The development laboratory in Westbury, New York focuses on applied material sciences. In 1999, we opened a design center in Fremont, California for power MOSFET products and staffed it with experienced senior MOSFET engineers. We have also entered into related manufacturing agreements with established foundries in China and Taiwan. MOSFETs are semiconductor devices that switch and/or amplify current through changes in voltage. Our engineering group was recently expanded in order to initiate the development of analog integrated circuits, which are used for power management. In February 2001, we began leasing a facility in Pleasanton, California for this group. During 2000, we further expanded our product portfolio with the addition of analog power management IC's. Through February 2001, we have hired 11 design engineers in our California and Korea design centers to aid in this expansion. Our strategy for developing this portfolio includes utilizing both in-house developed technology and partnering with outside design houses. Product offerings will include pulse-width modulators, DC/DC converters, voltage references and standard linear and low-dropout regulators. We will use outside foundries for wafer fabrication, similar to our MOSFET product line. Our objective is to have our first in-house analog designed product introduced in the fourth quarter of 2001. 9 11 Research and development expenditures totaled $7.8 million in 2000, $6.9 million in 1999 and $6.1 million in 1998. 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. PATENTS We actively seek patents for new products and designs. At December 31, 2000, we held 54 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, 2000 we had an order backlog of approximately $156.6 million compared with $143.7 million at December 31, 1999. 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 power management sector of the 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, 2000 we employed approximately 5,700 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 our manufacturing facilities are in substantial compliance with current environmental laws and regulations, we cannot assure you that our costs to comply with 10 12 environmental requirements will not increase in the future. We cannot predict the kind of legislation or regulations that 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 presently engaged in the remediation of seven sites relating to discontinued operations in five 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, such 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 now 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 72% of our sales. Sales to the Asia/Pacific region accounted for approximately 42% of our worldwide sales in 2000. 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 2000. 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, 2000.
NAME AND TITLE AGE BUSINESS EXPERIENCE -------------- --- ------------------- Ronald A. Ostertag.................. 60 Ronald A. Ostertag has been our Chairman, President and Chairman, President and Chief Executive Officer since the spin-off. Previously, he Chief Executive Officer 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.
11 13
NAME AND TITLE AGE BUSINESS EXPERIENCE -------------- --- ------------------- Robert J. Gange..................... 45 Robert J. Gange has been our Senior Vice President and Chief Senior Vice President and Financial Officer since March 2000. From the spin-off to Chief Financial Officer March 2000, he was Vice President and Controller. Previously, he was Vice President and 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.................. 47 Vincent M. Guercio has been our Senior Vice President, Senior Vice President, e-commerce 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...................... 46 W. John Nelson has been our Chief Operating Officer since Chief Operating Officer March 2000. Previously, he was our President, Asia/Pacific Operations since November 1998. From the spin-off to 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.................... 53 Stephen B. Paige has been our Senior Vice President, General Senior Vice President, General Counsel and Secretary since the spin-off. Previously, he was Counsel and Secretary 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...................... 50 Linda S. Perry has been our Senior Vice President, Human Senior Vice President, Human Resources since September 1997 and its Vice President, Human Resources 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.
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NAME AND TITLE AGE BUSINESS EXPERIENCE -------------- --- ------------------- John P. Phillips.................... 55 John P. Phillips has been our Executive Vice President Executive Vice President responsible for worldwide marketing since April 2000. Previously, he was our President, Europe and North America Operations since November 1998. From the spin-off to November 1998 he was Senior Vice President, European Operations. Prior to that, 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.
ITEM 2. PROPERTIES Our principal administrative, production and research and development facilities are located in the following locations:
LOCATION LEASED OR OWNED SQUARE FEET -------- ------------------------------ ----------- 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 Pleasanton, California...................... Leased, Expires 2006 (4) 10,000
- --------------- (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. 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 13 15 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. 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, 1999 and 2000.
HIGH LOW ------ ------ YEAR ENDING DECEMBER 31, 1999 First Quarter............................................ $ 9.44 $ 5.94 Second Quarter........................................... 9.75 6.38 Third Quarter............................................ 12.63 7.88 Fourth Quarter........................................... 15.13 8.69
HIGH LOW ------ ------ YEAR ENDING DECEMBER 31, 2000 First Quarter............................................ $21.00 $12.75 Second Quarter........................................... 20.63 14.75 Third Quarter............................................ 15.88 12.19 Fourth Quarter........................................... 12.38 6.19
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. 14 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, 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.
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 2000 1999 1998 1997(a) 1996 -------- -------- -------- -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales.............................. $493,721 $417,082 $401,144 $380,038 $ 361,891 Cost of sales.......................... 339,538 302,476 283,582 289,313 230,687 Selling, general and administrative.... 57,047 46,567 46,802 44,668 42,594 Research and development............... 7,785 6,903 6,104 5,998 5,838 Restructuring.......................... -- -- 12,324 -- -- Operating income....................... 84,210 55,994 47,187 34,916 77,618 Interest expense -- net................ (18,756) (23,466) (20,026) (14,353) (10,396) Income from continuing operations...... 46,740 24,389 18,534 8,872 39,764 Net income (loss)...................... 46,740 24,389 18,534 5,933 (1,864) BASIC EARNINGS (LOSS) PER SHARE: Income from continuing operations...... $ 1.24 $ 0.66 $ 0.50 $ 0.25 $ 1.20 Net income (loss)...................... 1.24 0.66 0.50 0.17 (0.06) DILUTED EARNINGS PER SHARE: Income from continuing operations...... $ 1.08 $ 0.66 $ 0.50 $ 0.25 $ 1.15 Net income............................. 1.08 0.66 0.50 0.17 0.27 CONSOLIDATED BALANCE SHEET DATA: Accounts receivable.................... $ 66,246 $ 63,246 $ 59,643 $ 54,077 $ 49,629 Inventories............................ 53,698 43,480 39,514 34,309 31,551 Property, plant and equipment.......... 244,889 231,217 223,743 218,752 202,281 Net assets of discontinued operations........................... -- -- -- -- 1,444,734 Total assets........................... 595,289 576,315 563,447 550,305 2,057,162 Long-term debt, including current maturities(b)........................ 216,500 276,500 286,000 268,074 692,335
- --------------- (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. 15 17 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. 16 18 RESULTS OF OPERATIONS The following table sets forth certain items included in selected consolidated financial data as a percentage of sales:
YEAR ENDED DECEMBER 31, ------------------------ 2000 1999 1998 ------ ------ ------ Net sales................................................... 100.0% 100.0% 100.0% Cost of sales............................................... 68.8 72.5 70.7 ----- ----- ----- Gross profit................................................ 31.2 27.5 29.3 Selling, general and administrative......................... 11.6 11.2 11.7 Research and development.................................... 1.6 1.7 1.5 Amortization of excess of cost over fair value of net assets acquired.................................................. 1.0 1.2 1.3 Restructuring............................................... -- -- 3.1 ----- ----- ----- Operating income............................................ 17.0 13.4 11.8 Other income (expense) -- net............................... -- -- -- Interest expense -- net..................................... 3.8 5.6 5.0 ----- ----- ----- Income before income taxes.................................. 13.2 7.8 6.8 Provision for income taxes.................................. 3.7 1.9 2.1 ----- ----- ----- Net income.................................................. 9.5% 5.9% 4.6% ===== ===== =====
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.
YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 -------- ------- -------- Net Income............................................. $ 46,740 $24,389 $ 18,534 Interest............................................... 18,756 23,466 20,026 Taxes.................................................. 18,631 8,130 8,556 Depreciation and amortization(1)....................... 28,227 27,240 24,682 -------- ------- -------- EBITDA................................................. 112,354 83,225 71,798 Restructuring.......................................... -- -- 12,324 -------- ------- -------- Adjusted EBITDA........................................ $112,354 $83,225 $ 84,122 ======== ======= ========
- --------------- (1) Amortization of deferred financing fees is excluded from "Depreciation and amortization" and included in "Interest". 17 19 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. 18 20 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. 19 21 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 20 22 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. 21 23 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 22 24 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. 23 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ------------- Financial Statements of General Semiconductor, Inc. Management's Responsibility for Financial Statements...... 25 Independent Auditors' Report.............................. 26 Consolidated Financial Statements: Consolidated Balance Sheets -- as of December 31, 2000 and 1999.............................................. 27 Consolidated Statements of Income -- Years ended December 31, 2000, 1999 and 1998..................... 28 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 2000, 1999 and 1998..................... 29 Consolidated Statements of Cash Flows -- Years ended December 31, 2000, 1999 and 1998..................... 30 Notes to Consolidated Financial Statements................ 31 through 49
24 26 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. /s/ Ronald A. Ostertag /s/ Robert J. Gange Ronald A. Ostertag Robert J. Gange Chairman, President and Senior Vice President and Chief Executive Officer Chief Financial Officer
25 27 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 26 28 GENERAL SEMICONDUCTOR, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT STOCK PAR VALUE)
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents................................... $ 4,913 $ 2,586 Accounts receivable, less allowance for doubtful accounts of $1,014 and $1,091, respectively...................................... 66,246 63,246 Inventories................................................. 53,698 43,480 Prepaid expenses and other current assets................... 13,803 14,359 Deferred income taxes....................................... 11,348 10,130 -------- -------- Total current assets............................... 150,008 133,801 Property, plant and equipment -- net........................ 244,889 231,217 Excess of cost over fair value of net assets acquired, less accumulated amortization of $54,212 and $49,071, respectively......... 152,468 157,609 Deferred income taxes....................................... 26,485 29,894 Intangibles and other assets, less accumulated amortization of $16,326 and $13,083, respectively..................................... 21,439 23,794 -------- -------- TOTAL ASSETS................................................ $595,289 $576,315 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable............................................ $ 41,709 $ 34,380 Accrued expenses............................................ 57,026 34,700 Deferred income taxes....................................... 1,142 -- -------- -------- Total current liabilities.......................... 99,877 69,080 Long-term debt.............................................. 216,500 276,500 Deferred income taxes....................................... 26,508 28,608 Other non-current liabilities............................... 64,729 70,745 -------- -------- Total liabilities.................................. 407,614 444,933 -------- -------- 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; 37,829 and 37,069 shares issued, respectively........................ 378 371 Additional paid-in capital.................................. 11,697 2,151 Retained earnings........................................... 182,971 136,231 -------- -------- 195,046 138,753 Less -- Treasury stock, at cost, 104 shares................. (7,371) (7,371) -------- -------- Total stockholders' equity......................... 187,675 131,382 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $595,289 $576,315 ======== ========
See notes to consolidated financial statements. 27 29 GENERAL SEMICONDUCTOR, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- NET SALES.................................................. $493,721 $417,082 $401,144 Cost of sales............................................ 339,538 302,476 283,582 -------- -------- -------- GROSS PROFIT............................................... 154,183 114,606 117,562 -------- -------- -------- Selling, general and administrative...................... 57,047 46,567 46,802 Research and development................................. 7,785 6,903 6,104 Amortization of excess of cost over fair value of net assets acquired....................................... 5,141 5,142 5,145 Restructuring............................................ -- -- 12,324 -------- -------- -------- Total operating costs and expenses............... 69,973 58,612 70,375 -------- -------- -------- OPERATING INCOME........................................... 84,210 55,994 47,187 Other expense-net.......................................... (83) (9) (71) Interest expense-net....................................... (18,756) (23,466) (20,026) -------- -------- -------- INCOME BEFORE INCOME TAXES................................. 65,371 32,519 27,090 Provision for income taxes................................. (18,631) (8,130) (8,556) -------- -------- -------- NET INCOME................................................. $ 46,740 $ 24,389 $ 18,534 ======== ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic.................................................... 37,608 36,832 36,811 Diluted.................................................. 49,562 37,563 36,899 BASIC EARNINGS PER SHARE................................... $ 1.24 $ 0.66 $ 0.50 ======== ======== ======== DILUTED EARNINGS PER SHARE................................. $ 1.08 $ 0.66 $ 0.50 ======== ======== ========
See notes to consolidated financial statements. 28 30 GENERAL SEMICONDUCTOR, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL ---------------- PAID-IN RETAINED TREASURY STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY ------ ------ ---------- -------- -------- ------------- BALANCE, JANUARY 1, 1998....................... 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 Exercise of stock options and related tax benefit...................................... 760 7 9,546 -- -- 9,553 Comprehensive income: Net income................................... -- -- -- 46,740 -- -- Total comprehensive income..................... 46,740 ------ ---- ------- -------- ------- -------- BALANCE, DECEMBER 31, 2000..................... 37,829 $378 $11,697 $182,971 $(7,371) $187,675 ====== ==== ======= ======== ======= ========
See notes to consolidated financial statements. 29 31 GENERAL SEMICONDUCTOR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 --------- -------- --------- OPERATING ACTIVITIES: Net income................................................ $ 46,740 $ 24,389 $ 18,534 Adjustments to reconcile net income to net cash provided by continuing operating activities: Depreciation and amortization.......................... 29,961 27,806 24,982 Asset write-off in conjunction with restructuring...... -- -- 3,865 Deferred income taxes.................................. 1,233 10,308 (2,662) Changes in assets and liabilities Accounts receivable.................................. (3,000) (3,603) (5,565) Inventories.......................................... (10,218) (3,966) (5,204) Prepaid expenses and other current assets............ (1,960) 2,683 (2,694) Other non-current assets............................. (222) 800 (24) Accounts payable and accrued expenses................ 33,170 (12,215) 5,151 Other non-current liabilities........................ (6,016) (3,538) (3,193) Other.................................................. (358) (824) (689) --------- -------- --------- Net cash provided by continuing operating activities........ 89,330 41,840 32,501 --------- -------- --------- Cash used in discontinued operations........................ -- -- (25,177) --------- -------- --------- INVESTING ACTIVITIES: Expenditures for property, plant and equipment............ (34,887) (27,328) (26,898) --------- -------- --------- Net cash used in investing activities....................... (34,887) (27,328) (26,898) --------- -------- --------- FINANCING ACTIVITIES: Issuance of subordinated convertible notes................ -- 172,500 -- Net proceeds from (repayments of) revolving credit facilities............................................. (60,000) (182,000) 64,000 Deferred financing fees................................... (668) (7,131) (742) Proceeds from exercise of stock options................... 8,552 1,480 423 Principal repayment of debt............................... -- -- (46,074) --------- -------- --------- Net cash (used in) provided by financing activities......... (52,116) (15,151) 17,607 --------- -------- --------- Increase (decrease) in cash and cash equivalents............ 2,327 (639) (1,967) Cash and cash equivalents, beginning of year................ 2,586 3,225 5,192 --------- -------- --------- Cash and cash equivalents, end of year...................... $ 4,913 $ 2,586 $ 3,225 ========= ======== ========= SUPPLEMENTAL CASH FLOW INFORMATION, RELATING TO CONTINUING AND DISCONTINUED OPERATIONS: Income taxes paid......................................... $ 9,530 $ 6,023 $ 9,776 Interest paid............................................. $ 18,166 $ 24,183 $ 19,677
See notes to consolidated financial statements. 30 32 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. 31 33 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 32 34 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INVENTORIES Inventories consist of:
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ Raw materials...................................... $ 7,585 $ 5,657 Work in process.................................... 15,388 13,739 Finished goods..................................... 30,725 24,084 ------- ------- Total.............................................. $53,698 $43,480 ======= =======
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of:
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ Land and land improvements......................... $ 76,317 $ 76,317 Buildings, improvements and leasehold improvements..................................... 72,130 69,085 Machinery and equipment............................ 274,304 248,809 --------- --------- 422,751 394,211 Accumulated depreciation........................... (177,862) (162,994) --------- --------- Property, plant and equipment, net................. $ 244,889 $ 231,217 ========= =========
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:
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ Salaries and compensation liabilities.............. $25,650 $13,012 Benefit plan liabilities........................... 8,706 6,923 Income taxes payable............................... 8,220 -- Other.............................................. 14,450 14,765 ------- ------- Total.............................................. $57,026 $34,700 ======= =======
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. 33 35 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the restructuring reserve is:
YEAR ENDED DECEMBER 31, --------------------------------- 2000 1999 1998 ------- ------- ------- Restructuring reserve: Balance, beginning of period............... $ 1,375 $ 7,809 $ -- Provision (benefit)...................... (86) -- 12,324 Asset impairment write-offs.............. (280) -- (3,858) Severance and early retirement costs..... (1,009) (6,230) (605) Other costs.............................. -- (204) (52) ------- ------- ------- Balance, end of period..................... $ -- $ 1,375 $ 7,809 ======= ======= =======
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:
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ Environmental liabilities.......................... $25,400 $27,723 Benefit plan liabilities........................... 33,835 35,682 Other.............................................. 5,494 7,340 ------- ------- Total.............................................. $64,729 $70,745 ======= =======
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. 34 36 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The domestic and foreign components of income before income taxes is:
YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- ------- ------- Domestic.............................................. $14,333 $ 7,365 $ 8,141 Foreign............................................... 51,038 25,154 18,949 ------- ------- ------- Total................................................. $65,371 $32,519 $27,090 ======= ======= =======
The components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- ------- ------- Current: Federal................................................ $ 6,156 $(4,131) $ 3,848 Foreign................................................ 10,737 2,329 6,539 State.................................................. 505 (376) 831 ------- ------- ------- 17,398 (2,178) 11,218 ------- ------- ------- Deferred: Federal................................................ 866 7,571 (11) Foreign................................................ 276 1,950 (2,478) State.................................................. 91 787 (173) ------- ------- ------- 1,233 10,308 (2,662) ------- ------- ------- Provision for income taxes............................. $18,631 $ 8,130 $ 8,556 ======= ======= =======
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:
YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- ------- ------- Federal income tax provision at 35%.................... $22,880 $11,382 $ 9,482 State income taxes, net of federal benefit............. 507 267 428 Foreign operations..................................... (7,518) (4,578) (2,166) Non-deductible expenses................................ 2,762 1,059 1,945 Other-net.............................................. -- -- (1,133) ------- ------- ------- Provision for income taxes............................. $18,631 $ 8,130 $ 8,556 ======= ======= ======= Effective income tax rate.............................. 28.5% 25.0% 31.6%
Income taxes related to foreign operations in 2000, 1999 and 1998 reflect the Company's ability to recognize the benefit of foreign tax credits. 35 37 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes recorded in the accompanying consolidated balance sheets are comprised of:
DECEMBER 31, 2000 DECEMBER 31, 1999 ------------------------------- ------------------------------- ASSET LIABILITY NET ASSET LIABILITY NET -------- --------- -------- -------- --------- -------- Current Deferred Income Taxes: Accounts receivable and inventory reserves............................ $ 3,903 $ 1,138 $ 2,765 $ 2,911 $ -- $ 2,911 Product and warranty liabilities...... 101 -- 101 156 -- 156 Employee benefits..................... 4,641 -- 4,641 2,283 -- 2,283 Other current......................... 2,703 4 2,699 4,780 -- 4,780 -------- ------- -------- -------- ------- -------- $ 11,348 $ 1,142 $ 10,206 $ 10,130 $ -- $ 10,130 ======== ======= ======== ======== ======= ======== Non-Current Deferred Income Taxes: Domestic capital loss carryforwards... $ 17,518 $ -- $ 17,518 $ 17,518 $ -- $ 17,518 Fixed and intangible assets........... (4,658) 1,378 (6,036) (6,253) -- (6,253) Environmental liabilities............. 9,652 -- 9,652 10,535 -- 10,535 Employee benefits..................... 11,353 -- 11,353 12,234 -- 12,234 Other non-current..................... 12,397 25,130 (12,733) 15,637 28,608 (12,971) Valuation allowance................... (19,777) -- (19,777) (19,777) -- (19,777) -------- ------- -------- -------- ------- -------- $ 26,485 $26,508 $ (23) $ 29,894 $28,608 $ 1,286 ======== ======= ======== ======== ======= ========
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:
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ Subordinated debt: Convertible Notes................................ $172,500 $172,500 Senior bank indebtedness: Revolving credit facility........................ 44,000 104,000 -------- -------- Total.................................... $216,500 $276,500 ======== ========
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 36 38 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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: 2001...................................................... $3,445 2002...................................................... 2,477 2003...................................................... 1,800 2004...................................................... 710 2005...................................................... 511 Thereafter................................................ 59
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." 37 39 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 38 40 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
YEAR ENDED DECEMBER 31 ----------------------------------------------------------------- 2000 1999 1998 ------------------- ------------------- ------------------- DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN -------- ------- -------- ------- -------- ------- Service cost...................... $ 549 $2,705 $ 577 $2,616 $ 482 $2,513 Interest.......................... 5,064 3,555 5,176 3,285 5,209 3,040 Expected return on plan assets.... (6,605) (1,085) (6,324) (949) (5,979) (853) Transition (asset) obligation..... -- 168 -- 165 -- 160 Amortization of prior service costs........................... (12) -- (12) -- (12) -- Recognized actuarial loss......... 10 401 50 455 198 522 ------- ------ ------- ------ ------- ------ Net periodic pension cost (income)........................ $ (994) $5,744 $ (533) $5,572 $ (102) $5,382 ======= ====== ======= ====== ======= ======
39 41 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:
DECEMBER 31, 2000 DECEMBER 31, 1999 -------------------- -------------------- DOMESTIC FOREIGN DOMESTIC FOREIGN -------- -------- -------- -------- Change in Benefit Obligation Benefit obligation at beginning of year......... $71,660 $ 53,045 $80,285 $ 50,587 Service cost................................. 549 2,705 577 2,616 Interest cost................................ 5,064 3,555 5,176 3,285 Actuarial (gain) or loss..................... (3,914) 4,194 (5,974) (825) Impact of foreign exchange................... -- (3,238) -- (121) Benefits paid................................ (4,595) (900) (9,244) (2,497) Curtailment loss............................. -- -- 840 -- ------- -------- ------- -------- Benefit obligation at end of year............... 68,764 59,361 71,660 53,045 ------- -------- ------- -------- Change in Plan Assets Fair value of plan assets at beginning of year......................................... 81,792 13,820 85,905 12,308 Actual return on plan assets, net of expenses................................... (1,923) 1,101 5,112 782 Employer contributions....................... -- 3,076 19 3,000 Impact of foreign exchange................... -- (783) -- 227 Benefits paid................................ (4,595) (900) (9,244) (2,497) ------- -------- ------- -------- Fair value of plan assets at end of year........ 75,274 16,314 81,792 13,820 ------- -------- ------- -------- Reconciliation of the Funded Status Funded status................................ 6,510 (43,047) 10,132 (39,225) Unrecognized transition (asset) or obligation................................. -- 1,088 -- 1,325 Unrecognized prior service cost.............. (42) -- (54) -- Unrecognized actuarial (gain) or loss........ (3,773) 13,552 (8,377) 10,460 ------- -------- ------- -------- Asset (liability) recognized at year-end........ $ 2,695 $(28,407) $ 1,701 $(27,440) ======= ======== ======= ======== Actuarial assumptions: Discount rate................................ 7.75% 6.50% 7.75% 6.75% Investment return............................ 9.00% 6.75% 9.00% 7.00% Compensation increases....................... 4.75% 6.00% 4.75% 6.00%
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 40 42 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
YEAR ENDED DECEMBER 31, ------------------------- 2000 1999 1998 ------ ------- ------ Service cost................................................ $ 118 $ 141 $ 91 Interest.................................................... 963 965 918 Amortization of prior service costs......................... (194) (194) (383) Recognized actuarial loss................................... 69 184 135 ----- ------ ----- Net periodic postretirement benefit cost.................... $ 956 $1,096 $ 761 ===== ====== =====
The status of the Plan and the related amounts recorded in the accompanying consolidated balance sheets are:
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ Change in Benefit Obligation Benefit obligation at beginning of year.................. $ 13,434 $ 13,927 Service cost.......................................... 118 141 Interest cost......................................... 963 965 Plan amendments....................................... -- 1,879 Actuarial (gain) or loss.............................. (306) (2,050) Retiree contributions................................. 313 269 Benefits paid......................................... (1,664) (1,697) -------- -------- Benefit obligation at end of year........................ 12,858 13,434 -------- -------- Change in Plan Assets Fair value of plan assets at beginning of year........... -- -- Employer contributions................................ 1,351 1,429 Retiree contributions................................. 313 268 Benefits paid......................................... (1,664) (1,697) -------- -------- Fair value of plan assets at end of year................. -- -- -------- -------- Reconciliation of the Funded Status Funded status......................................... (12,858) (13,434) Unrecognized prior service cost....................... (2,568) (2,762) Unrecognized actuarial (gain) or loss................. 2,345 2,719 -------- -------- Accrued benefit liability at year end.................... $(13,081) $(13,477) ======== ======== Actuarial assumptions: Discount rate......................................... 7.75% 7.75% Expected return on plan assets........................ N/A N/A
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 41 43 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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"):
NUMBER WEIGHTED- OF AVERAGE SHARES EXERCISE PRICE ------ -------------- Options outstanding at January 1, 1998................ 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 Granted............................................... 1,699 11.07 Exercised............................................. (760) 11.26 Cancelled............................................. (184) 10.47 ----- Options outstanding at December 31, 2000.............. 6,282 $10.40 =====
42 44 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about stock options outstanding and exercisable under the Company's LTIP Plans:
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 2000 TERM (YEARS) PRICE 2000 PRICE - --------------- ------------ ------------ --------- ------------ --------- $1.48 to 8.69......... 2,276 8.0 $ 7.94 1,121 $ 7.72 $8.81 to 12.06........ 2,506 8.1 $10.68 1,104 $11.71 $12.38 to 19.44....... 1,500 6.3 $13.67 1,035 $13.06 ----- ----- 6,282 7.6 $10.40 3,260 $10.77 ===== =====
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:
2000 1999 1998 ---- ---- ---- Expected life (years)....................................... 4.0 4.0 4.0 Risk-free interest rate..................................... 5.84% 6.08% 4.81% Expected volatility......................................... 68% 62% 54% Expected dividend yield..................................... 0% 0% 0%
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 43 45 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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.
YEAR ENDED DECEMBER 31, 2000 ----------------------------------------- INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- BASIC EPS Net income...................................... $46,740 37,608 $1.24 ===== EFFECT OF DILUTIVE SECURITIES Options....................................... -- 861 Convertible debt.............................. 6,769 11,093 ------- ------ DILUTED EPS Net income plus assumed conversions............. $53,509 49,562 $1.08 ======= ====== =====
44 46 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 ----------------------------------------- INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- 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 ======= ====== =====
YEAR ENDED DECEMBER 31, 1998 ----------------------------------------- INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- 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 ======= ====== =====
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 45 47 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
AVERAGE US DOLLAR (000'S) US DOLLAR (000'S) CURRENCY RATE PURCHASE/(SELL) FAIR VALUE - -------- ------- ------------------ ------------------ New Taiwan Dollar.................. 33.21 NTD/US $(10,539) $(32) Japanese Yen....................... 111.74 JPY/US 6,264 131 British Pounds..................... 1.47 US/BPS 1,029 (15)
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:
AVERAGE US DOLLAR (000'S) US DOLLAR (000'S) CURRENCY RATE PURCHASE/(SELL) FAIR VALUE - -------- ------- ------------------ ------------------ 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)
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 46 48 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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.
UNITED STATES EUROPE FAR EAST CHINA CORPORATE CONSOLIDATED -------- -------- -------- ------- --------- ------------ YEAR ENDED DECEMBER 31, 2000: Net sales(a).................. $264,221 $147,848 $ 81,652 $ -- $ -- $493,721 Intercompany transfers........ 150,858 182,860 169,189 53,413 (556,320) -- -------- -------- -------- ------- --------- -------- Net sales................... 415,079 330,708 250,841 53,413 (556,320) 493,721 ======== ======== ======== ======= ========= ======== Interest income............... -- 62 48 20 63 193 Interest expense.............. -- 208 75 -- 18,666 18,949 Depreciation and amortization expense..................... 10,910 5,651 9,895 3,505 -- 29,961 Income before provision for income taxes................ 13,682 24,543 20,544 6,602 -- 65,371 Provision for income taxes.... 6,318 6,120 5,549 644 -- 18,631 Long-lived assets............. 97,588 59,404 71,750 29,708 160,346 418,796 Capital expenditures.......... $ 2,020 $ 9,606 $ 20,349 $ 2,912 $ -- $ 34,887
47 49 GENERAL SEMICONDUCTOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNITED STATES EUROPE FAR EAST CHINA CORPORATE CONSOLIDATED -------- -------- -------- ------- --------- ------------ 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 Income before provision for income taxes............... 2,509 7,621 16,255 6,134 -- 32,519 Provision for income taxes... 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 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 Income before provision for income taxes(b)............ 6,614 3,802 11,061 5,613 -- 27,090 Provision for income taxes... 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
- --------------- (a) Included in United States net sales are export sales as follows:
2000 1999 1998 -------- -------- -------- Taiwan....................................... $ 70,846 $ 62,494 $ 93,380 China........................................ 54,009 41,607 32,904 -------- -------- -------- $124,855 $104,101 $126,284 ======== ======== ========
Net sales, by country, within the European geographic segment are:
2000 1999 1998 -------- -------- -------- France................................... $ 12,858 $ 12,428 $ 12,993 Germany.................................. 62,138 56,405 59,326 Italy.................................... 15,137 12,314 14,272 U.K...................................... 20,199 17,329 15,315 Other.................................... 37,516 31,811 33,341 -------- -------- -------- $147,848 $130,287 $135,247 ======== ======== ========
48 50 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:
QUARTER ENDED 2000 --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- Net sales......................... $114,970 $128,318 $130,521 $119,912 Gross profit...................... 34,533 39,508 41,144 38,998 Net income........................ 9,534 12,093 13,973 11,140 Earnings per share Basic:.......................... $ 0.26 $ 0.32 $ 0.37 $ 0.30 Diluted:........................ 0.23 0.28 0.32 0.26
QUARTER ENDED 1999 --------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- 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
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. 49 51 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 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. 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. 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. 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. 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 1999 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 50 52 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
EXHIBITS - -------- 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, LLC. (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)). 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)).
51 53
EXHIBITS - -------- 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+ First Amendment to the General Semiconductor, Inc. Amended and Restated 1993 Long-Term Incentive Plan, as amended February 12, 2001. 10.9+ General Semiconductor, Inc. Amended and Restated 1998 Long-Term Incentive Plan as amended on February 7, 2001. 10.10+ General Semiconductor, Inc. 2001 Annual Incentive Plan adopted February 7, 2001. 10.11+ First Amendment to General Semiconductor, Inc. Supplemental Executive Retirement Plan, dated as of October 19, 1999. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000 (File No. 1-5442)). 10.12+ 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)). 10.13+ 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)). 10.14+ 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)). 10.15 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)). 10.16 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)). 10.17 Promissory Note, dated as of September 1, 2000, between W. John Nelson and Paola Nelson ("Borrowers") and General Semiconductor, Inc. ("Lender"). (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2000 (File No. 1-5442)). 10.18+ Supplemental Executive Retirement Agreement between General Semiconductor, Inc. and John Phillips, dated March 6, 2001. 10.19+ General Semiconductor, Inc. Supplemental Executive Retirement Plan, dated as of June 30, 1997.
52 54
EXHIBITS - -------- 21. Subsidiaries of the Registrant. 23. Independent Auditors' Consent. 99. Forward-Looking Information.
- --------------- + Management compensation. 53 55 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.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD A. OSTERTAG Chairman of the Board, President March 14, 2001 - --------------------------------------------------- and Chief Executive Officer and Ronald A. Ostertag Director (Principal Executive Officer) /s/ ROBERT J. GANGE Senior Vice President and Chief March 14, 2001 - --------------------------------------------------- Financial Officer Robert J. Gange (Principal Financial Officer) /s/ LINDA L. GRAMBOW Controller (Principal Accounting March 14, 2001 - --------------------------------------------------- Officer) Linda L. Grambow /s/ C. SCOTT KULICKE Director March 14, 2001 - --------------------------------------------------- C. Scott Kulicke /s/ RONALD ROSENZWEIG Director March 14, 2001 - --------------------------------------------------- Ronald Rosenzweig /s/ PETER A. SCHWARTZ Director March 14, 2001 - --------------------------------------------------- Peter A. Schwartz /s/ SAMUEL L. SIMMONS Director March 14, 2001 - --------------------------------------------------- Samuel L. Simmons /s/ PROF. GERARD T. WRIXON Director March 14, 2001 - --------------------------------------------------- Prof. Gerard T. Wrixon
54 EX-10.8.1 2 y46355ex10-8_1.txt 1ST AMENDMENT TO LONG TERM INCENTIVE PLAN 1 EXHIBIT 10.8.1 FIRST AMENDMENT TO THE GENERAL SEMICONDUCTOR, INC. AMENDED AND RESTATED 1993 LONG-TERM INCENTIVE PLAN The General Semiconductor, Inc. Amended and Restated 1993 Long-Term Incentive Plan is hereby amended as follows, effective upon execution hereof: A new Schedule A is added to read as follows: I. Schedule A EARLY RETIREMENT WINDOW BENEFIT Notwithstanding any provision of this Plan or any duly executed stock option agreement to the contrary, any Window-Eligible Participant (as defined in Item 1 below) who (i) makes a proper "Early Retirement Window Election" (as defined in Item 2 below) during the period commencing on February 9, 2001 and ending on February 28, 2001, (ii) executes and does not rescind the release and waiver described in Item 2, and (iii) has a termination of employment on his "Designated Termination Date" (as defined in Item 3 below), shall be entitled to receive benefits described in Item 4 below. 1. "Window-Eligible Participant" means a person who is a full-time employee of the Company on February 9, 2001 provided that the sum of his age and years of Vesting Service (as defined in the General Semiconductor, Inc. Pension Plan for Salaried and Hourly Paid Non-Union Employees) as of March 31, 2001 equals or exceeds 65. 2. Early Retirement Window Election. An "Early Retirement Window Election" means a written election by a Window-Eligible Participant, on a form provided by the Company, (i) to terminate employment with the Company on the Designated Termination Date, and (ii) to execute a release and waiver in the form provided by the Company. The Early Retirement Window Election must be received by the General Semiconductor, Inc. Employee Benefits Administrative Committee no later than February 28, 2001. An Early Retirement Window Election shall be irrevocable following the expiration of the applicable rescission period set forth in the Early Retirement Window Election form. 2 3. Designated Termination Date. The "Designated Termination Date" of a Window-Eligible Participant who has made an Early Retirement Window Election shall be the date, as determined by the Company in its sole discretion, on which the Window-Eligible Participant must have a termination of employment in order to receive the benefits described in Item 4 below. Notwithstanding the foregoing, a Window-Eligible Participant's Designated Termination Date shall not be earlier than the last day of the applicable rescission period set forth in the Window-Eligible Participant's Early Retirement Window Election and shall not be later than May 31, 2001. 4. Continued Plan Participation. (i) A Window-Eligible Participant to whom stock options were granted under the General Semiconductor, Inc. Amended and Restated 1993 Long-Term Incentive Plan who properly makes an Early Retirement Window Election, executes and does not rescind the required release and waiver, and has a termination of employment on his Designated Termination Date may at any time on or before the third anniversary of his Designated Termination Date, exercise his outstanding options to the extent, but only to the extent, that the stock options or portions thereof are exercisable. (ii) The stock options of a person whose period to exercise stock options is extended by the preceding sentence shall continue to become exercisable in accordance with the terms of the agreements granting the stock options as if such person continued to be employed by the Company through the third anniversary of his Designated Termination Date. II. Except as amended herein, the Plan shall remain in full force and effect. IN WITNESS WHEREOF, General Semiconductor, Inc. has cause this amendment to be executed this 12th day of February, 2001. GENERAL SEMICONDUCTOR, INC. By: /s/ Ronald A. Ostertag ------------------------------------- Ronald A. Ostertag Chief Executive Officer EX-10.9 3 y46355ex10-9.txt AMENDED AND RESTATED LONG TERM INCENTIVE PLAN 1 EXHIBIT 10.9 GENERAL SEMICONDUCTOR, INC. AMENDED AND RESTATED 1998 LONG-TERM INCENTIVE PLAN 2 GENERAL SEMICONDUCTOR, INC. AMENDED AND RESTATED 1998 LONG-TERM INCENTIVE PLAN 1. Purpose. The purpose of this Plan is based on the premise that the achievements of the Company result from the efforts of employees working toward common goals and objectives. This Plan is designed to attract, retain and motivate highly qualified employees, reinforce the alignment of employee and stockholder interests and reward its employees, officers, consultants, advisors and directors based on the Company's performance. It is intended that this purpose be achieved by extending to employees, officers, consultants, advisors and directors of the Company and its Subsidiaries an added long-term incentive through the grant of Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Dividend Equivalent Rights, Performance Awards, Share Awards, Director Shares, Phantom Stock and Restricted Stock (as each term is herein defined). 2. Definitions. 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. 2.5 "Board" means the Board of Directors of the Company. 2.6 "Cause" means unless otherwise set forth in an Agreement, (i) intentional failure to perform reasonably assigned duties, (ii) dishonesty or willful misconduct in the performance of duties, (iii) involvement in a transaction in connection with the performance of 2 3 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 (iv) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses). 2.7 "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. 2.8 "Change of Control" means the occurrence of any of the following: (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 2.8(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 February 7, 2001, 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 or, following a Merger (as defined below) which results in a Parent Corporation (as defined in paragraph (c)(i)(A) below), the board of directors of the ultimate Parent Corporation; 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 3 4 (c) The consummation of: (i) A merger, consolidation or reorganization with or into the Company or in which securities of the Company are issued (a "Merger"), unless such Merger is a "Non-Control Transaction." A "Non-Control Transaction" shall mean a Merger where: (A) the stockholders of the Company, immediately before the Merger own directly or indirectly immediately following the Merger, at least a majority of the combined voting power of the outstanding voting securities of the corporation resulting from the Merger (the "Surviving Corporation") if fifty percent (50%) or more of the combined voting power of the then outstanding Voting Securities of the Surviving Corporation is not Beneficially Owned directly or indirectly by another Person (a "Parent Corporation") or if there are one or more Parent Corporations, the ultimate Parent Corporation, and (B) the individuals, who were members of the Incumbent Board immediately prior to the execution of the agreement providing for the Merger, constitute at least a majority of the members of the board of directors of the Surviving Corporation if there is no Parent Corporation, or (y) if there are one or more Parent Corporations, the ultimate Parent 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 the Merger, was maintained by the Company or any Related Entity, or (4) any Person who, immediately prior to the Merger, 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 then outstanding voting securities or common stock of (x) the Surviving Corporation if there is no Parent Corporation, or (y) if there are one or more Parent Corporations, the ultimate Parent Corporation (a Business Combination satisfying the conditions of clauses (1), (2) and (3) of this subparagraph (A) shall be referred to as a "Non-Control Transaction"). (ii) A complete liquidation or dissolution of the Company; or (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. 4 5 2.9 "Code" means the Internal Revenue Code of 1986, as amended. 2.10 "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. 2.11 "Company" means General Semiconductor, Inc. 2.12 "Director" means a director of the Company. 2.13 "Director Option" means an Option granted pursuant to Section 6. 2.14 "Director Share" means a Share issued or transferred pursuant to Section 12.3. 2.15 "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. 2.16 "Division" means any of the operating units or divisions of the Company designated as a Division by the Committee. 2.17 "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. 2.18 "Eligible Director" means a director of the Company who is not an employee of the Company or any Subsidiary. 2.19 "Eligible Individual" means any of the following individuals who is designated by the Committee as eligible to receive Options or Awards subject to the conditions set forth herein: (a) director, officer or employee of the Company or a Subsidiary, (b) any consultant or advisor of the Company or a Subsidiary, or (c) any individual to whom the Company or a Subsidiary has extended a formal, written offer of employment. 2.20 "Employee Option" means an Option granted pursuant to Section 5. 2.21 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.22 "Fair Market Value" of any security of the Company or any other issuer means, as of any applicable date: (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 5 6 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. 2.23 "Grantee" means a person to whom an Award has been granted under the Plan. 2.24 "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. 2.25 "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. 2.26 "Nonqualified Stock Option" means an Option which is not an Incentive Stock Option. 2.27 "Option" means a Nonqualified Stock Option, an Incentive Stock Option, a Director Option, or any or all of them. 2.28 "Optionee" means a person to whom an Option has been granted under the Plan. 2.29 "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. 2.30 "Parent" means any corporation which is a parent corporation (within the meaning of Section 424(e) of the Code) with respect to the Company. 2.31 "Performance Awards" means Performance Units, Performance Shares or either or both of them. 6 7 2.32 "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. 2.33 "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. 2.34 "Performance Objectives" has the meaning set forth in Section 11. 2.35 "Performance Shares" means Shares issued or transferred to an Eligible Individual under Section 11. 2.36 "Performance Units" means Performance Units granted to an Eligible Individual under Section 11. 2.37 "Person" shall mean a person within the meaning of Sections 13(d) and 14(d) of the Exchange Act. 2.38 "Phantom Stock" means a right granted to an Eligible Individual under Section 12 representing a number of hypothetical Shares. 2.39 "Plan" means the General Semiconductor, Inc. Amended and Restated 1998 Long-Term Incentive Plan, as amended from time to time. 2.40 "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. 2.41 "Restricted Stock" means Shares issued or transferred to an Eligible Individual pursuant to Section 10. 2.42 "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. 2.43 "Share Award" means an Award of Shares granted pursuant to Section 12. 2.44 "Shares" means the common stock, par value $.01 per share, of the Company. 2.45 "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. 2.46 "Subsidiary" means (i) except as provided in subsection (ii) below, any corporation which is a subsidiary corporation within the meaning of Section 424(f) of the Code with respect to the Company, and (ii) in relation to the eligibility to receive Options or Awards other than Incentive Stock Options and continued employment for purposes of Options and Awards (unless the Committee determines otherwise), any entity, whether or not incorporated, in 7 8 which the Company directly or indirectly owns 50% or more of the outstanding equity or other ownership interests. 2.47 "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. 2.48 "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 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. 3. Administration. 3.1 Committee Administration. The Plan shall be administered by the Committee, which shall hold meetings at such times as may be necessary for the proper administration of the Plan. The Committee shall keep minutes of its meetings. A quorum shall consist of not fewer than two members of the Committee and a majority of a quorum may authorize any action. Any decision or determination reduced to writing and signed by a majority of all of the members of the Committee shall be as fully effective as if made by a majority vote at a meeting duly called and held. The Committee shall consist of at least two (2) Directors and may consist of the entire Board; provided, however, that (A) if the Committee consists of less than the entire Board then with respect to any Option or Award to an Eligible Individual who is subject to Section 16 of the Exchange Act, the Committee shall consist of at least two (2) Directors, each of whom shall be a Nonemployee Director and (B) to the extent necessary for any Option or Award intended to qualify as Performance-Based Compensation to so qualify, the Committee shall consist of at least two (2) Directors, each of whom shall be an Outside Director. For purposes of the preceding sentence, if one or more members of the Committee is not a Nonemployee Director and an Outside Director but recuses himself or herself or abstains from voting with respect to a particular action taken by the Committee, then the Committee, with respect to that action, shall be deemed to consist only of the members of the Committee who have not recused themselves or abstained from voting. Subject to applicable law, the Committee may delegate its authority under the Plan to any other person or persons. 3.2 No member of the Committee shall be liable for any action, failure to act, determination or interpretation made in good faith with respect to this Plan or any transaction hereunder, except for liability arising from his or her own willful misfeasance, gross negligence or reckless disregard of his or her duties. The Company hereby agrees to indemnify each member of the Committee for all costs and expenses and, to the extent permitted by applicable law, any liability incurred in connection with defending against, responding to, negotiating for the settlement of or otherwise dealing with any claim, cause of action or dispute of any kind arising in connection with any actions in administering this Plan or in authorizing or denying authorization to any transaction hereunder. 3.3 Board Reservation and Delegation. The Board may, in its discretion, reserve to itself or exercise any or all of the authority and responsibility of the Committee hereunder. It may also delegate to another committee of the Board any or all of the authority and responsibility of the Committee with respect to Awards to Optionees or Grantees, as the case 8 9 may be, who are not Section 16 Grantees at the time any such delegated authority or responsibility is exercised. Such other committee may consist of one or more directors who may, but need not be, officers or employees of the Company or of any of its Subsidiaries. To the extent that the Board has reserved to itself, or exercised the authority and responsibility of the Committee, or delegated the authority and responsibility of the Committee to such other committee, all references to the Committee in the Plan shall be to the Board or to such other committee. 3.4 Committee Authority. Subject to the express terms and conditions set forth herein, the Committee shall have the power from time to time to: (a) determine those Eligible Individuals to whom Employee Options shall be granted under the Plan and the number of such Employee Options to be granted and to prescribe the terms and conditions (which need not be identical) of each such Employee Option, including the exercise price per Share subject to each Employee Option, and make any amendment or modification to any Option Agreement consistent with the terms of the Plan; (b) select those Eligible Individuals to whom Awards shall be granted under the Plan and to determine the number of Shares, Stock Appreciation Rights, Performance Awards, Shares of Phantom Stock, Shares of Restricted Stock and/or Dividend Equivalent Rights to be granted pursuant to each Award, the terms and conditions (which need not be identical) of each such Award, and make any amendment or modification to any Award Agreement consistent with the terms of the Plan; (c) construe and interpret the Plan and the Options and Awards granted hereunder and to establish, amend and revoke rules and regulations for the administration of the Plan, including, but not limited to, correcting any defect or supplying any omission, or reconciling any inconsistency in the Plan or in any Agreement, in the manner and to the extent it shall deem necessary or advisable, including so that the Plan complies with Rule 16b-3 under the Exchange Act, the Code to the extent applicable and other applicable law, and otherwise to make the Plan fully effective. All decisions and determinations by the Committee in the exercise of this power shall be final, binding and conclusive upon the Company, its Subsidiaries, the Optionees and Grantees, and all other persons having any interest therein; (d) determine the duration and purposes for leaves of absence which may be granted to an Optionee or Grantee on an individual basis without constituting a termination of employment or service for purposes of the Plan; (e) exercise its discretion with respect to the powers and rights granted to it as set forth in the Plan; and (f) generally, to exercise such powers and to perform such acts as are deemed necessary or advisable to promote the best interests of the Company with respect to the Plan. 9 10 4. Stock Subject to the Plan; Grant Limitations. 4.1 The maximum number of Shares that may be made the subject of Options and Awards granted under the Plan is 4.9 million plus the number of Shares available for grant pursuant to the Company's Amended and Restated 1993 Long-Term Incentive Plan as of the date the stockholders approve this Plan; provided, however, that in the aggregate, not more than 250,000 of allotted Shares may be made the subject of Awards other than Options and Stock Appreciation Right. The maximum number of Shares that may be the subject of Options and Awards granted to an Eligible Individual in any three (3) calendar year period may not exceed 750,000 Shares. The maximum dollar amount of cash or the Fair Market Value of Shares that any Eligible Individual may receive in any calendar year in respect of Performance Units denominated in dollars may not exceed $1,000,000. Upon a Change in Capitalization, the maximum number of Shares referred to in the first two sentences of this Section 4.1 shall be adjusted in number and kind pursuant to Section 14. The Company shall reserve for the purposes of the Plan, out of its authorized but unissued Shares or out of Shares held in the Company's treasury, or partly out of each, such number of Shares as shall be determined by the Board. 4.2 Upon the granting of an Option or an Award, the number of Shares available under Section 4.1 for the granting of further Options and Awards shall be reduced as follows: (a) In connection with the granting of an Option or an Award (other than the granting of a Performance Unit denominated in dollars), the number of Shares shall be reduced by the number of Shares in respect of which the Option or Award is granted or denominated; provided, however, that if any Option, and any option granted or issued pursuant to the Company's Amended and Restated 1993 Long-Term Incentive Plan is exercised by tendering Shares, either actually or by attestation, to the Company as full or partial payment of the exercise price, the maximum number of Shares available under Section 4.1 shall be increased by the number of Shares so tendered. (b) In connection with the granting of a Performance Unit denominated in dollars, the number of Shares shall be reduced by an amount equal to the quotient of (i) the dollar amount in which the Performance Unit is denominated, divided by (ii) the Fair Market Value of a Share on the date the Performance Unit is granted. 4.3 Whenever any outstanding Option or Award or portion thereof, and any option or award or portion thereof granted or issued pursuant to the Company's Amended and Restated 1993 Long-Term Incentive Plan expires, is canceled, is settled in cash (including the settlement of tax withholding obligations using Shares) or is otherwise terminated for any reason without having been exercised or payment having been made in respect of the entire Option or Award, the Shares allocable to the expired, canceled, settled or otherwise terminated portion of the Option or Award may again be the subject of Options or Awards granted hereunder. 5. Option Grants for Eligible Individuals. 5.1 Authority of Committee. Subject to the provisions of the Plan, the Committee shall have full and final authority to select those Eligible Individuals who will receive Employee Options, and the terms and conditions of the grant to such Eligible Individuals shall be 10 11 set forth in an Agreement. Incentive Stock Options may be granted only to Eligible Individuals who are employees of the Company or any Subsidiary. 5.2 Exercise Price. The exercise price or the manner in which the exercise price is to be determined for Shares under each Employee Option shall be determined by the Committee and set forth in the Agreement; provided, however, that the exercise price per Share under each Employee Option shall not be less than 100% of the Fair Market Value of a Share on the date the Employee Option is granted (110% in the case of an Incentive Stock Option granted to a Ten-Percent Stockholder). 5.3 Maximum Duration. Employee Options granted hereunder shall be for such term as the Committee shall determine, provided that an Incentive Stock Option shall not be exercisable after the expiration of ten (10) years from the date it is granted (five (5) years in the case of an Incentive Stock Option granted to a Ten-Percent Stockholder) and a Nonqualified Stock Option shall not be exercisable after the expiration of ten (10) years from the date it is granted; provided, however, that upon the death of the Optionee, Options (other than an Incentive Stock Options) may be exercised for up to one (1) year following the date of the Optionee's death even if such period extends beyond ten (10) years from the date the Option is granted. The Committee may, subsequent to the granting of any Employee Option, extend the term thereof, but in no event shall the term as so extended exceed the maximum term provided for in the preceding sentence. 5.4 Vesting. Subject to Section 7.4, each Employee Option shall become exercisable in such installments (which need not be equal) and at such times as may be designated by the Committee and set forth in the Agreement. To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, at any time after becoming exercisable, but not later than the date the Employee Option expires. The Committee may accelerate the exercisability of any Employee Option or portion thereof at any time. 5.5 Deferred Delivery of Option Shares. The Committee may, in its discretion permit Optionees to elect to defer the issuance of Shares upon the exercise of one or more Nonqualified Stock Options granted pursuant to the Plan. The terms and conditions of such deferral shall be determined at the time of the grant of the Option or thereafter and shall be set forth in the Agreement evidencing the grant. 5.6 Limitations on Incentive Stock Options. To the extent that the aggregate Fair Market Value (determined as of the date of the grant) of Shares with respect to which Incentive Stock Options granted under the Plan and "incentive stock options" (within the meaning of Section 422 of the Code) granted under all other plans of the Company or its Subsidiaries (in either case determined without regard to this Section 5.6) are exercisable by an Optionee for the first time during any calendar year exceeds $100,000, such Incentive Stock Options shall be treated as Nonqualified Stock Options. For purposes of the foregoing sentence, Incentive Stock Options shall be treated as Nonqualified Stock Options according to the order in which they were granted such that the most recently granted Incentive Stock Options are first treated as Nonqualified Stock Options. 11 12 5.7 Limitations on the Granting of Options. The Committee may not re-price or cancel and subsequently re-grant any Option for the purpose of having a 6. Option Grants for Eligible Directors. Director Options with respect to 10,000 Shares shall be granted to each Eligible Director of the Company upon his or her initial election to the Board. Additionally, each year as of the date upon which the Company holds its October meeting of the Board (each an "October Board Meeting") or October 31, if the Company does not hold an October Board Meeting, Director Options with respect to 7,000 Shares shall also be granted to each Eligible Director; provided however, that any Eligible Director who received a grant of Director Options with respect to 20,000 Shares on July 21, 1999 shall not be eligible to receive a subsequent grant of Director Options until the October Board Meeting held in 2001 or October 31, 2001 if the Company does not hold an October Board meeting, and any Eligible Director who received a grant of Director Options with respect to 20,000 Shares on August 1, 2000, shall not be eligible to receive a subsequent grant of Director Options until the October Board Meeting held in 2002 or October 31, 2002 if the Company does not hold an October Board meeting. Director Options shall be granted at an exercise price per Share equal to 100% of the Fair Market Value of a Share on the date the Director Option is granted. Each Director Option granted to an Eligible Director will become exercisable with respect to 100% of the underlying Shares on the first anniversary of the date the Director Option is granted, and will have a term of ten (10) years; provided however, that a Director Option may, upon the death of the Eligible Director while still serving as a Director, be exercised at any time within one (1) year following the date of the Eligible Director's death, even if such period extends beyond ten (10) years from the date the Director Option is granted, by the person or persons to whom such rights under the Director Option shall pass by will, or by the laws of descent or distribution, after which time the Director Option shall terminate in full. If an Eligible Director ceases to serve as a Director for any reason, any Director Option granted to such Eligible Director shall be exercisable during its remaining term, to the extent that such Director Option was exercisable on the date such Eligible Director ceased to be a Director." 7. Terms and Conditions Applicable to All Options. 7.1 Non-Transferability. No Option shall be transferable by the Optionee otherwise than by will or by the laws of descent and distribution or, in the case of an Option other than an Incentive Stock Option, pursuant to a domestic relations order (within the meaning of Rule 16a-12 promulgated under the Exchange Act), and such Option shall be exercisable during the lifetime of an Optionee only by the Optionee or his or her guardian or legal representative. Notwithstanding the foregoing, the Committee may set forth in the Agreement evidencing an Option (other than an Incentive Stock Option) at the time of grant or thereafter, that the Option may be transferred to members of the Optionee's immediate family, to trusts solely for the benefit of such immediate family members and to partnerships in which such family members and/or trusts are the only partners, and for purposes of this Plan, a transferee of an Option shall be deemed to be the Optionee. For this purpose, immediate family means the Optionee's spouse, parents, children, stepchildren and grandchildren and the spouses of such parents, children, 12 13 stepchildren and grandchildren. The terms of an Option shall be final, binding and conclusive upon the beneficiaries, executors, administrators, heirs and successors of the Optionee. 7.2 Method of Exercise. The exercise of an Option shall be made only by a written notice delivered in person or by mail to the Secretary of the Company at the Company's principal executive office, specifying the number of Shares to be exercised and, to the extent applicable, accompanied by payment therefor and otherwise in accordance with the Agreement pursuant to which the Option was granted; provided, however, that Options may not be exercised by an Optionee for twelve months following a hardship distribution to the Optionee, to the extent such exercise is prohibited under Treasury Regulation ss.1.401(k)-1(d)(2)(iv)(B)(4). The exercise price for any Shares purchased pursuant to the exercise of an Option shall be paid, as determined by the Committee in its discretion, in either of the following forms (or any combination thereof): (a) cash or (b) the transfer, either actually or by attestation, to the Company of Shares that have been held by the Optionee for at least six (6) months (or such lesser period as may be permitted by the Committee), prior to the exercise of the Option, such transfer to be upon such terms and conditions as determined by the Committee. In addition, an Option may be exercised through a registered broker-dealer pursuant to such cashless exercise procedures which are, from time to time, deemed acceptable by the Committee. Any Shares transferred to the Company as payment of the exercise price under an Option shall be valued at their Fair Market Value on the day preceding the date of exercise of such Option. If requested by the Committee, the Optionee shall deliver the Agreement evidencing the Option to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Agreement to the Optionee. No fractional Shares (or cash in lieu thereof) shall be issued upon exercise of an Option and the number of Shares that may be purchased upon exercise shall be rounded to the nearest number of whole Shares. 7.3 Rights of Optionees. No Optionee shall be deemed for any purpose to be the owner of any Shares subject to any Option unless and until (a) the Option shall have been exercised pursuant to the terms thereof, (b) the Company shall have issued and delivered Shares to the Optionee, and (c) the Optionee's name shall have been entered as a stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such Shares, subject to such terms and conditions as may be set forth in the applicable Agreement. 7.4 Effect of Change in Control. In the event of a Change in Control, all Options outstanding on the date of such Change in Control shall become immediately and fully exercisable. In addition, to the extent set forth in an Agreement evidencing the grant of an Option, an Optionee will be permitted to surrender to the Company for cancellation within sixty (60) days after such Change in Control any Option or portion of an Option to the extent not yet exercised and the Optionee will be entitled to receive a cash payment in an amount equal to the excess, if any, of (a) (i) in the case of a Nonqualified Stock Option, the greater of (A) the Fair Market Value, on the date preceding the date of surrender, of the Shares subject to the Option or portion thereof surrendered or (B) the Adjusted Fair Market Value of the Shares subject to the Option or portion thereof surrendered or (ii) in the case of an Incentive Stock Option, the Fair Market Value, on the date preceding the date of surrender, of the Shares subject to the Option or portion thereof surrendered, over (b) the aggregate exercise price for such Shares under the Option or portion thereof surrendered. In the event an Optionee's employment with, or service 13 14 as a Director of, the Company and its Subsidiaries terminates following a Change in Control, each Option held by the Optionee that was exercisable as of the date of termination of the Optionee's employment or service shall, notwithstanding any shorter period set forth in the Agreement evidencing the Option, remain exercisable for a period ending not before the earlier of (x) the first anniversary of the termination of the Optionee's employment or service or (y) the expiration of the stated term of the Option. 8. Stock Appreciation Rights. The Committee may in its discretion, either alone or in connection with the grant of an Employee Option, grant to any Eligible Individual Stock Appreciation Right in accordance with the Plan, the terms and conditions of which shall be set forth in an Agreement. If granted in connection with an Option, a Stock Appreciation Right shall cover the same Shares covered by the Option (or such lesser number of Shares as the Committee may determine) and shall, except as provided in this Section 8, be subject to the same terms and conditions as the related Option. 8.1 Time of Grant. A Stock Appreciation Right may be granted (a) at any time if unrelated to an Option, or (b) if related to an Option, either at the time of grant, or at any time thereafter during the term of the Option. 8.2 Stock Appreciation Right Related to an Option. (a) Exercise. A Stock Appreciation Right granted in connection with an Option shall be exercisable at such time or times and only to the extent that the related Options are exercisable, and will not be transferable except to the extent the related Option may be transferable. A Stock Appreciation Right granted in connection with an Incentive Stock Option shall be exercisable only if the Fair Market Value of a Share on the date of exercise exceeds the exercise price specified in the related Incentive Stock Option Agreement. (b) Amount Payable. Upon the exercise of a Stock Appreciation Right related to an Option, the Grantee shall be entitled to receive an amount determined by multiplying (i) the excess of the Fair Market Value of a Share on the date preceding the date of exercise of such Stock Appreciation Right over the per Share exercise price under the related Option, by (ii) the number of Shares as to which such Stock Appreciation Right is being exercised. Notwithstanding the foregoing, the Committee may limit in any manner the amount payable with respect to any Stock Appreciation Right by including such a limit in the Agreement evidencing the Stock Appreciation Right at the time it is granted. (c) Treatment of Related Options and Stock Appreciation Rights Upon Exercise. Upon the exercise of a Stock Appreciation Right granted in connection with an Option, the Option shall be canceled to the extent of the number of Shares as to which the Stock Appreciation Right is exercised, and upon the exercise of an Option granted in connection with a Stock Appreciation Right, the Stock Appreciation Right shall be canceled to the extent of the number of Shares as to which the Option is exercised or surrendered. 8.3 Stock Appreciation Right Unrelated to an Option. The Committee may grant to Eligible Individuals Stock Appreciation Rights unrelated to Options. Stock Appreciation 14 15 Rights unrelated to Options shall contain such terms and conditions as to exercisability (subject to Section 8.7), vesting and duration as the Committee shall determine, but in no event shall they have a term of greater than ten (10) years; provided, however, that upon the death of the Grantee, Stock Appreciation Rights may be exercised for up to one (1) year following the date of the Grantee's death even if such period extends beyond ten (10) years from the date the Stock Appreciation Right is granted. Upon exercise of a Stock Appreciation Right unrelated to an Option, the Grantee shall be entitled to receive an amount determined by multiplying (a) the excess of the Fair Market Value of a Share on the date preceding the date of exercise of such Stock Appreciation Right over the Fair Market Value of a Share on the date the Stock Appreciation Right was granted, by (b) the number of Shares as to which the Stock Appreciation Right is being exercised. Notwithstanding the foregoing, the Committee may limit in any manner the amount payable with respect to any Stock Appreciation Right by including such a limit in the Agreement evidencing the Stock Appreciation Right at the time it is granted. 8.4 Non-Transferability. No Stock Appreciation Right shall be transferable by the Grantee otherwise than by will or by the laws of descent and distribution or pursuant to a domestic relations order (within the meaning of Rule 16a-12 promulgated under the Exchange Act), and such Stock Appreciation Right shall be exercisable during the lifetime of such Grantee only by the Grantee or his or her guardian or legal representative. The terms of such Stock Appreciation Right shall be final, binding and conclusive upon the beneficiaries, executors, administrators, heirs and successors of the Grantee. 8.5 Method of Exercise. Stock Appreciation Rights shall be exercised by a Grantee only by a written notice delivered in person or by mail to the Secretary of the Company at the Company's principal executive office, specifying the number of Shares with respect to which the Stock Appreciation Right is being exercised. If requested by the Committee, the Grantee shall deliver the Agreement evidencing the Stock Appreciation Right being exercised and the Agreement evidencing any related Option to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Agreement to the Grantee. 8.6 Form of Payment. Payment of the amount determined under Sections 8.2(b) or 8.3 may be made in the discretion of the Committee solely in whole Shares in a number determined at their Fair Market Value on the date preceding the date of exercise of the Stock Appreciation Right, or solely in cash, or in a combination of cash and Shares. If the Committee decides to make full payment in Shares and the amount payable results in a fractional Share, payment for the fractional Share will be made in cash. 8.7 Effect of Change in Control. In the event of a Change in Control, all Stock Appreciation Rights shall become immediately and fully exercisable. In addition, to the extent set forth in an Agreement evidencing the grant of a Stock Appreciation Right unrelated to an Option, a Grantee will be entitled to receive a payment from the Company in cash or stock, in either case, with a value equal to the excess, if any, of (a) the greater of (i) the Fair Market Value, on the date preceding the date of exercise, of the underlying Shares subject to the Stock Appreciation Right or portion thereof exercised and (ii) the Adjusted Fair Market Value, on the date preceding the date of exercise, of the Shares over (b) the aggregate Fair Market Value, on the date the Stock Appreciation Right was granted, of the Shares subject to the Stock Appreciation Right or portion thereof exercised. In the event a Grantee's employment with the 15 16 Company terminates following a Change in Control, each Stock Appreciation Right held by the Grantee that was exercisable as of the date of termination of the Grantee's employment shall, notwithstanding any shorter period set forth in the Agreement evidencing the Stock Appreciation Right, remain exercisable for a period ending not before the earlier of the first anniversary of (x) the termination of the Grantee's employment or (y) the expiration of the stated term of the Stock Appreciation Right. 9. Dividend Equivalent Rights. Dividend Equivalent Rights may be granted to Eligible Individuals in tandem with an Option or Award or as a separate Award. The terms and conditions applicable to each Dividend Equivalent Right shall be specified in the Agreement under which the Dividend Equivalent Right is granted. Amounts payable in respect of Dividend Equivalent Rights may be payable currently or deferred until the lapsing of restrictions on such Dividend Equivalent Rights or until the vesting, exercise, payment, settlement or other lapse of restrictions on the Option or Award to which the Dividend Equivalent Rights relate. In the event that the amount payable in respect of Dividend Equivalent Rights are to be deferred, the Committee shall determine whether such amounts are to be held in cash or reinvested in Shares or deemed (notionally) to be reinvested in Shares. If amounts payable in respect of Dividend Equivalent Rights are to be held in cash, there may be credited at the end of each year (or portion thereof) interest on the amount of the account at the beginning of the year at a rate per annum as the Committee, in its discretion, may determine. Dividend Equivalent Rights may be settled in cash or Shares or a combination thereof, in a single installment or multiple installments. 10. Restricted Stock. 10.1 Grant. The Committee may grant Awards to Eligible Individuals of Restricted Stock, which shall be evidenced by an Agreement between the Company and the Grantee. Each Agreement shall contain such restrictions, terms and conditions as the Committee may, in its discretion, determine and (without limiting the generality of the foregoing) such Agreements may require that an appropriate legend be placed on Share certificates. Awards of Restricted Stock shall be subject to the terms and provisions set forth below in this Section 10. 10.2 Rights of Grantee. Shares of Restricted Stock granted pursuant to an Award hereunder shall be issued in the name of the Grantee as soon as reasonably practicable after the Award is granted provided that the Grantee has executed such documents which the Committee may require as a condition to the issuance of such Shares. If a Grantee shall fail to execute the Agreement evidencing a Restricted Stock Award, or any documents which the Committee may require within the time period prescribed by the Committee at the time the Award is granted, the Award shall be null and void. At the discretion of the Committee, Shares issued in connection with a Restricted Stock Award shall be deposited together with the stock powers with an escrow agent (which may be the Company) designated by the Committee. Unless the Committee determines otherwise and as set forth in the Agreement, upon delivery of the Shares to the escrow agent, the Grantee shall have all of the rights of a stockholder with respect to such Shares, including the right to vote the Shares and to receive all dividends or other distributions paid or made with respect to the Shares. 16 17 10.3 Non-transferability. Until all restrictions upon the Shares of Restricted Stock awarded to a Grantee shall have lapsed in the manner set forth in Section 10.4, such Shares shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated. 10.4 Lapse of Restrictions. (a) Generally. Restrictions upon Shares of Restricted Stock awarded hereunder shall lapse at such time or times and on such terms and conditions as the Committee may determine; provided, however, that except in the case of Shares of Restricted Stock issued in full or partial settlement of another Award or other earned compensation, or in the event of the Grantee's termination of employment, as determined by the Committee and set forth in the Agreement evidencing the Award, such restrictions shall not fully lapse prior to the third anniversary of the date on which such Shares of Restricted Stock were granted. The Agreement evidencing the Award shall set forth any such restrictions. (b) Effect of Change in Control. Unless the Committee shall determine otherwise at the time of the grant of an Award of Restricted Stock, the restrictions upon Shares of Restricted Stock shall lapse upon a Change in Control. The Agreement evidencing the Award shall set forth any such provisions. 10.5 Treatment of Dividends. At the time an Award of Shares of Restricted Stock is granted, the Committee may, in its discretion, determine that the payment to the Grantee of dividends, or a specified portion thereof, declared or paid on such Shares by the Company shall be (a) deferred until the lapsing of the restrictions imposed upon such Shares and (b) held by the Company for the account of the Grantee until such time. In the event that dividends are to be deferred, the Committee shall determine whether such dividends are to be reinvested in Shares (which shall be held as additional Shares of Restricted Stock) or held in cash. If deferred dividends are to be held in cash, there may be credited at the end of each year (or portion thereof) interest on the amount of the account at the beginning of the year at a rate per annum as the Committee, in its discretion, may determine. Payment of deferred dividends in respect of Shares of Restricted Stock (whether held in cash or as additional Shares of Restricted Stock), together with interest accrued thereon, if any, shall be made upon the lapsing of restrictions imposed on the Shares in respect of which the deferred dividends were paid, and any dividends deferred (together with any interest accrued thereon) in respect of any Shares of Restricted Stock shall be forfeited upon the forfeiture of such Shares. 10.6 Delivery of Shares. Upon the lapse of the restrictions on Shares of Restricted Stock, the Committee shall cause a stock certificate to be delivered to the Grantee with respect to such Shares, free of all restrictions hereunder. 11. Performance Awards. 11.1 Performance Units. The Committee, in its discretion, may grant Performance Units to Eligible Individuals, the terms and conditions of which shall be set forth in an Agreement between the Company and the Grantee. Performance Units may be denominated in Shares or a specified dollar amount and, contingent upon the attainment of specified Performance Objectives within the Performance Cycle, represent the right to receive payment as 17 18 provided in Section 11.3(c) of (i) in the case of Share-denominated Performance Units, the Fair Market Value of a Share on the date the Performance Unit was granted, the date the Performance Unit became vested or any other date specified by the Committee, (ii) in the case of dollar-denominated Performance Units, the specified dollar amount or (iii) a percentage (which may be more than 100%) of the amount described in clause (i) or (ii) depending on the level of Performance Objective attainment; provided, however, that, the Committee may at the time a Performance Unit is granted specify a maximum amount payable in respect of a vested Performance Unit. Each Agreement shall specify the number of Performance Units to which it relates, the Performance Objectives which must be satisfied in order for the Performance Units to vest and the Performance Cycle within which such Performance Objectives must be satisfied. (a) Vesting. Subject to Sections 11.3(c) and 11.4, Performance Units awarded hereunder shall become vested at such time or times and on such terms as the Committee may in its discretion determine at the time the Award is granted, including, without limitation, the satisfaction of Performance Objectives for the Performance Cycle. (b) Payment of Awards. Subject to Section 11.3(c), payment to Grantees in respect of vested Performance Units shall be made as soon as practicable after the last day of the Performance Cycle to which such Award relates unless the Agreement evidencing the Award provides for the deferral of payment, in which event the terms and conditions of the deferral shall be set forth in the Agreement. Subject to Section 11.4, such payments may be made entirely in Shares valued at their Fair Market Value as of the day preceding the date of payment or such other date specified by the Committee, entirely in cash, or in such combination of Shares and cash as the Committee in its discretion shall determine at any time prior to such payment; provided, however, that if the Committee in its discretion determines to make such payment entirely or partially in Shares of Restricted Stock, the Committee must determine the extent to which such payment will be in Shares of Restricted Stock and the terms of such Restricted Stock at the time the Award is granted. 11.2 Performance Shares. The Committee, in its discretion, may grant Performance Shares to Eligible Individuals, the terms and conditions of which shall be set forth in an Agreement between the Company and the Grantee. Each Agreement may require that an appropriate legend be placed on Share certificates. Awards of Performance Shares shall be subject to the following terms and provisions: (a) Rights of Grantee. The Committee shall provide at the time an Award of Performance Shares is made the time or times at which the actual Shares represented by such Award shall be issued in the name of the Grantee; provided, however, that no Performance Shares shall be issued until the Grantee has executed an Agreement evidencing the Award, the appropriate blank stock powers and, in the discretion of the Committee, an escrow agreement and any other documents which the Committee may require as a condition to the issuance of such Performance Shares. If a Grantee shall fail to execute the Agreement evidencing an Award of Performance Shares, the appropriate blank stock powers and, in the discretion of the Committee, an escrow agreement and any other documents which the Committee may require within the time period prescribed by the Committee at the time the Award is granted, the Award shall be null and void. At the discretion of the Committee, Shares issued in connection with an Award of Performance Shares shall be deposited together with the 18 19 stock powers with an escrow agent (which may be the Company) designated by the Committee. Except as restricted by the terms of the Agreement, upon delivery of the Shares to the escrow agent, the Grantee shall have, in the discretion of the Committee, all of the rights of a stockholder with respect to such Shares, including the right to vote the Shares and to receive all dividends or other distributions paid or made with respect to the Shares. (b) Vesting. Subject to Sections 11.3(c) and 11.4, restrictions upon Performance Shares awarded hereunder shall lapse and such Performance Shares shall become vested at such time or times and on such terms as the Committee may in its discretion determine at the time the Award is granted, including, without limitation, the satisfaction of Performance Objectives for the Performance Cycle. (c) Treatment of Dividends. At the time the Award of Performance Shares is granted, the Committee may, in its discretion, determine that the payment to the Grantee of dividends, or a specified portion thereof, declared or paid on Shares represented by such Award which have been issued by the Company to the Grantee shall be (i) deferred until the lapsing of the restrictions imposed upon such Performance Shares and (ii) held by the Company for the account of the Grantee until such time. In the event that dividends are to be deferred, the Committee shall determine whether such dividends are to be reinvested in Shares (which shall be held as additional Performance Shares) or held in cash. If deferred dividends are to be held in cash, there may be credited at the end of each year (or portion thereof) interest on the amount of the account at the beginning of the year at a rate per annum as the Committee, in its discretion, may determine. Payment of deferred dividends in respect of Performance Shares (whether held in cash or in additional Performance Shares), together with interest accrued thereon, if any, shall be made upon the lapsing of restrictions imposed on the Performance Shares in respect of which the deferred dividends were paid, and any dividends deferred (together with any interest accrued thereon) in respect of any Performance Shares shall be forfeited upon the forfeiture of such Performance Shares. (d) Delivery of Shares. Upon the lapse of the restrictions on Performance Shares awarded hereunder, the Committee shall cause a stock certificate to be delivered to the Grantee with respect to such Shares, free of all restrictions hereunder. 11.3 Performance Objectives (a) Establishment. Performance Objectives for Performance Awards may be expressed in terms of (i) earnings per Share, (ii) Share price, (iii) pre-tax profits, (iv) net earnings, (v) return on equity or assets, (vi) revenues, (vii) EBITDA, (viii) market share or market penetration, (ix) any combination of the foregoing. Performance Objectives may be in respect of the performance of the Company, any of its Subsidiaries, any of its Divisions or any combination thereof. Performance Objectives may be absolute or relative (to prior performance or to the performance of one or more other entities or external indices) and may be expressed in terms of a progression within a specified range. The Performance Objectives with respect to a Performance Cycle shall be established in writing by the Committee by the earlier of (x) the date on which a quarter of the Performance Cycle has elapsed or (y) the date which is ninety (90) days after the commencement of the Performance Cycle, and in any event while the performance relating to the Performance Objectives remain substantially uncertain. 19 20 (b) Effect of Certain Events. At the time of the granting of a Performance Award, or at any time thereafter, in either case to the extent permitted under Section 162(m) of the Code and the regulations thereunder without adversely affecting the treatment of the Performance Award as Performance-Based Compensation, the Committee may provide for the manner in which performance will be measured against the Performance Objectives (or may adjust the Performance Objectives) to reflect the impact of specified corporate transactions, special charges, foreign currency effects, accounting or tax law changes and other extraordinary or nonrecurring events. (c) Determination of Performance. Prior to the vesting, payment, settlement or lapsing of any restrictions with respect to any Performance Award that is intended to constitute Performance-Based Compensation made to a Grantee who is subject to Section 162(m) of the Code, the Committee shall certify in writing that the applicable Performance Objectives have been satisfied to the extent necessary for such Award to qualify as Performance Based Compensation. 11.4 Effect of Change in Control. In the event of a Change in Control: (a) With respect to Performance Units, the Grantee shall (i) become vested in all or a portion of the Performance Units as determined by the Committee at the time of the Award of such Performance Units and as set forth in the Agreement and (ii) be entitled to receive in respect of all Performance Units which become vested as a result of a Change in Control a cash payment within ten (10) days after such Change in Control in an amount as determined by the Committee at the time of the Award of such Performance Unit and as set forth in the Agreement. (b) With respect to Performance Shares, all or a portion of any unissued Performance Shares shall be issued and restrictions shall lapse immediately on all or a portion of the Performance Shares in each case as determined by the Committee at the time of the Award of such Performance Shares and as set forth in the Agreement. (c) The Agreements evidencing Performance Shares and Performance Units shall provide for the treatment of such Awards (or portions thereof) which do not become vested as the result of a Change in Control, including, but not limited to, provisions for the adjustment of applicable Performance Objectives. 11.5 Non-transferability. Until the vesting of Performance Units or the lapsing of any restrictions on Performance Shares, as the case may be, such Performance Units or Performance Shares shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated. 12. Other Share Based Awards. 12.1 Share Awards. The Committee may grant a Share Award to any Eligible Individual on such terms and conditions as the Committee may determine in its sole discretion. Share Awards may be made as additional compensation for services rendered by the Eligible Individual or may be in lieu of cash or other compensation to which the Eligible Individual is entitled from the Company. 20 21 12.2 Phantom Stock Awards. (a) Grant. The Committee may, in its discretion, grant shares of Phantom Stock to any Eligible Individuals. Such Phantom Stock shall be subject to the terms and conditions established by the Committee and set forth in the applicable Agreement. (b) Payment of Awards. Upon the vesting of a Phantom Stock Award, the Grantee shall be entitled to receive a cash payment in respect of each share of Phantom Stock which shall be equal to the Fair Market Value of a Share as of the date the Phantom Stock Award was granted, or such other date as determined by the Committee at the time the Phantom Stock Award was granted. The Committee may, at the time a Phantom Stock Award is granted, provide a limitation on the amount payable in respect of each share of Phantom Stock. In lieu of a cash payment, the Committee may settle Phantom Stock Awards with Shares having a Fair Market Value equal to the cash payment to which the Grantee has become entitled. 12.3 Director Shares. Each Eligible Director shall be granted 1,000 Director's Shares upon his or her initial election to the Board. Director's Shares shall be fully vested and transferable upon issuance. 13. Effect of a Termination of Employment. The Agreement evidencing the grant of each Option and each Award shall set forth the terms and conditions applicable to such Option or Award upon a termination, retirement or other change in the status of the employment of the Optionee or Grantee by the Company, a Subsidiary or a Division (including a termination or change by reason of the sale of a Subsidiary or a Division), which, except for Director Options, shall be as the Committee may, in its discretion, determine at the time the Option or Award is granted or thereafter. 14. Adjustment Upon Changes in Capitalization. (a) In the event of a Change in Capitalization, the Committee shall conclusively determine the appropriate adjustments, if any, to (i) the maximum number and class of Shares or other stock or securities with respect to which Options or Awards may be granted under the Plan, (ii) the maximum number and class of Shares or other stock or securities with respect to which Options or Awards may be granted to any Eligible Individual in any three (3) calendar year period, (iii) the number and class of Shares or other stock or securities which are subject to outstanding Options or Awards granted under the Plan and the exercise price therefor, if applicable, (iv) the number and class of Shares or other securities in respect of which Director Options are to be granted under Section 6, (v) the number and class of Shares or other stock or securities with respect to which Director Shares are to be granted under Section 12.3, and (vi) the Performance Objectives. (b) Any such adjustment in the Shares or other stock or securities (i) subject to outstanding Incentive Stock Options (including any adjustments in the exercise price) shall be made in such manner as not to constitute a modification as defined by Section 424(h)(3) of the Code and only to the extent otherwise permitted by Sections 422 and 424 of the Code, or (ii) subject to outstanding Options or Awards that are intended to qualify as 21 22 Performance-Based Compensation shall be made in such a manner as not to adversely affect the treatment of the Options or Awards as Performance-Based Compensation. (c) If, by reason of a Change in Capitalization, a Grantee of an Award shall be entitled to, or an Optionee shall be entitled to exercise an Option with respect to, new, additional or different shares of stock or securities of the Company or any other corporation, such new, additional or different shares shall thereupon be subject to all of the conditions, restrictions and performance criteria which were applicable to the Shares subject to the Award or Option, as the case may be, prior to such Change in Capitalization. 15. Effect of Certain Transactions. Subject to Sections 7.4, 8.7, 10.4(b) and 11.4 or as otherwise provided in an Agreement, in the event of (a) the liquidation or dissolution of the Company or (b) a merger or consolidation of the Company (a "Transaction"), the Plan and the Options and Awards issued hereunder shall continue in effect in accordance with their respective terms, except that following a Transaction either (i) each outstanding Option or Award shall be treated as provided for in the agreement entered into in connection with the Transaction or (ii) if not so provided in such agreement, each Optionee and Grantee shall be entitled to receive in respect of each Share subject to any outstanding Options or Awards, as the case may be, upon exercise of any Option or payment or transfer in respect of any Award, the same number and kind of stock, securities, cash, property or other consideration that each holder of a Share was entitled to receive in the Transaction in respect of a Share; provided, however, that such stock, securities, cash, property, or other consideration shall remain subject to all of the conditions, restrictions and performance criteria which were applicable to the Options and Awards prior to such Transaction. The treatment of any Option or Award as provided in this Section 15 shall be conclusively presumed to be appropriate for purposes of Section 14. 16. Interpretation. (a) The Plan is intended to comply with Rule 16b-3 promulgated under the Exchange Act and the Committee shall interpret and administer the provisions of the Plan or any Agreement in a manner consistent therewith. Any provisions inconsistent with such Rule shall be inoperative and shall not affect the validity of the Plan. (b) Unless otherwise expressly stated in the relevant Agreement, each Option, Stock Appreciation Right and Performance Award granted under the Plan is intended to be Performance-Based Compensation. The Committee shall not be entitled to exercise any discretion otherwise authorized hereunder with respect to such Options or Awards if the ability to exercise such discretion or the exercise of such discretion itself would cause the compensation attributable to such Options or Awards to fail to qualify as Performance-Based Compensation. 17. Pooling Transactions. Notwithstanding anything contained in the Plan or any Agreement to the contrary, in the event of a Change in Control which is also intended to constitute a Pooling Transaction, the Committee shall make such equitable adjustments to outstanding Options and Awards, if any, as are specifically recommended by an independent accounting firm retained by 22 23 the Company to the extent reasonably necessary in order to assure that the Pooling Transaction will qualify as such, including but not limited to (a) deferring the vesting, exercise, payment, settlement or lapsing of restrictions with respect to any Option or Award, (b) providing that the payment or settlement in respect of any Option or Award be made in the form of cash, Shares or securities of a successor or acquirer of the Company, or a combination of the foregoing, and (c) providing for the extension of the term of any Option or Award to the extent necessary to accommodate the foregoing, but not beyond the maximum term permitted for any Option or Award. 18. Termination and Amendment of the Plan or Modification of Options and Awards. 18.1 Plan Amendment or Termination. The Plan shall terminate on the day preceding the tenth anniversary of the date of its adoption by the Board and no Option or Award may be granted thereafter. The Board may sooner terminate the Plan and the Board may at any time and from time to time amend, modify or suspend the Plan; provided, however, that: (a) no such amendment, modification, suspension or termination shall impair or adversely alter any Options or Awards theretofore granted under the Plan, except with the consent of the Optionee or Grantee, nor shall any amendment, modification, suspension or termination deprive any Optionee or Grantee of any Shares which he or she may have acquired through or as a result of the Plan; and (b) to the extent necessary under any applicable law, regulation or exchange requirement no amendment shall be effective unless approved by the stockholders of the Company in accordance with applicable law, regulation or exchange requirement. 18.2 Modification of Options and Awards. No modification of an Option or Award shall adversely alter or impair any rights or obligations under the Option or Award without the consent of the Optionee or Grantee, as the case may be. 19. Non-Exclusivity of the Plan. The adoption of the Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. 20. Limitation of Liability. As illustrative of the limitations of liability of the Company, but not intended to be exhaustive thereof, nothing in the Plan shall be construed to: (a) give any person any right to be granted an Option or Award other than at the sole discretion of the Committee; 23 24 (b) give any person any rights whatsoever with respect to Shares except as specifically provided in the Plan; (c) limit in any way the right of the Company or any Subsidiary to terminate the employment of any person at any time; or (d) be evidence of any agreement or understanding, expressed or implied, that the Company will employ any person at any particular rate of compensation or for any particular period of time. 21. Regulations and Other Approvals; Governing Law. 21.1 Except as to matters of federal law, the Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Delaware without giving effect to conflicts of laws principles thereof. 21.2 The obligation of the Company to sell or deliver Shares with respect to Options and Awards granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee. 21.3 The Board may make such changes as may be necessary or appropriate to comply with the rules and regulations of any government authority, or to obtain for Eligible Individuals granted Incentive Stock Options the tax benefits under the applicable provisions of the Code and regulations promulgated thereunder. 21.4 Each Option and Award is subject to the requirement that, if at any time the Committee determines, in its discretion, that the listing, registration or qualification of Shares issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option or Award or the issuance of Shares, no Options or Awards shall be granted or payment made or Shares issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions as acceptable to the Committee. 21.5 Notwithstanding anything contained in the Plan or any Agreement to the contrary, in the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended (the "Securities Act"), and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act and Rule 144 or other regulations thereunder. The Committee may require any individual receiving Shares pursuant to an Option or Award granted under the Plan, as a condition precedent to receipt of such Shares, to represent and warrant to the Company in writing that the Shares acquired by such individual are acquired without a view to any distribution thereof and will not be sold or transferred other than pursuant to an effective registration thereof under said Act or pursuant to an exemption applicable under the Securities Act or the rules and regulations promulgated thereunder. The 24 25 certificates evidencing any of such Shares shall be appropriately amended to reflect their status as restricted securities as aforesaid. 22. Withholding of Taxes. 22.1 At such times as the Company becomes obligated to pay withholding taxes in connection with the granting, vesting, settlement, or exercise of an Award or Option hereunder (a "Withholding Event"), the Optionee or Grantee shall pay to the Company an amount equal to the federal, state and local income taxes and other amounts as may be required by law to be withheld by the Company in connection with the Withholding Event (the "Withholding Taxes") prior to the issuance, or release from escrow, of such Shares or the payment of such cash. In satisfaction of the obligation to pay Withholding Taxes, the Company shall have the right to (i) deduct from any payment of cash to an Optionee or Grantee an amount equal to the Withholding Taxes, or (ii) withhold from any Shares issuable to an Optionee or Grantee the number of Shares having a Fair Market Value equal to the Withholding Taxes. The Committee may provide in the Agreement at the time of grant, or at any time thereafter, that the Optionee or Grantee, in satisfaction of the obligation to pay Withholding Taxes to the Company, may elect to have withheld a portion of the Shares then issuable to him or her having an aggregate Fair Market Value equal to the Withholding Taxes. The Committee may also include in an Agreement that the Optionee or Grantee is required to satisfy the obligation to pay Withholding Taxes by having the Company withhold a portion of the Shares then issuable to him or her having an aggregate Fair Market Value equal to the Withholding Taxes. 22.2 If an Optionee makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any Share or Shares issued to such Optionee pursuant to the exercise of an Incentive Stock Option within the two-year period commencing on the day after the date of the grant or within the one-year period commencing on the day after the date of transfer of such Share or Shares to the Optionee pursuant to such exercise, the Optionee shall, within ten (10) days of such disposition, notify the Company thereof, by delivery of written notice to the Company at its principal executive office. 25 26 Schedule A EARLY RETIREMENT WINDOW BENEFIT Notwithstanding any provision of this Plan or any duly executed stock option agreement to the contrary, any Window-Eligible Participant (as defined in Item 1 below) who (i) makes a proper "Early Retirement Window Election" (as defined in Item 2 below) during the period commencing on February 9, 2001 and ending on February 28, 2001, (ii) executes and does not rescind the release and waiver described in Item 2, and (iii) has a termination of employment on his "Designated Termination Date" (as defined in Item 3 below), shall be entitled to receive benefits described in Item 4 below. 1. "Window-Eligible Participant" means a person who is a full-time employee of the Company on February 9, 2001 provided that the sum of his age and years of Vesting Service (as defined in the General Semiconductor, Inc. Pension Plan for Salaried and Hourly Paid Non-Union Employees) as of March 31, 2001 equals or exceeds 65. 2. Early Retirement Window Election. An "Early Retirement Window Election" means a written election by a Window-Eligible Participant, on a form provided by the Company, (i) to terminate employment with the Company on the Designated Termination Date, and (ii) to execute a release and waiver in the form provided by the Company. The Early Retirement Window Election must be received by the General Semiconductor, Inc. Employee Benefits Administrative Committee no later than February 28, 2001. An Early Retirement Window Election shall be irrevocable following the expiration of the applicable rescission period set forth in the Early Retirement Window Election form. 3. Designated Termination Date. The "Designated Termination Date" of a Window-Eligible Participant who has made an Early Retirement Window Election shall be the date, as determined by the Company in its sole discretion, on which the Window-Eligible Participant must have a termination of employment in order to receive the benefits described in Item 4 below. Notwithstanding the foregoing, a Window-Eligible Participant's Designated Termination Date shall not be earlier than the last day of the applicable rescission period set forth in the Window-Eligible Participant's Early Retirement Window Election and shall not be later than May 31, 2001. 4. Continued Plan Participation. (i) A Window-Eligible Participant to whom stock options were granted under the 1998 General Semiconductor, Inc. Long-Term Incentive Plan, as amended through February 7, 2001, who properly makes an Early Retirement Window Election, executes and does not rescind the required release and waiver, and has a termination of employment on his Designated Termination Date may at any time on or before the third anniversary of his Designated Termination Date exercise his outstanding options to the extent, but only to the extent, that the stock options or portions thereof are exercisable. (ii) The stock options of a person whose period to exercise stock options is extended by the preceding sentence shall continue to become exercisable in accordance with the terms of the agreements granting the stock options as if such person continued to be employed by the Company through the third anniversary of his Designated Termination Date. 26 EX-10.10 4 y46355ex10-10.txt GENERAL SEMICONDUCTOR 2001 ANNUAL INCENTIVE PLAN 1 EXHIBIT 10.10 GENERAL SEMICONDUCTOR, INC. MANAGEMENT INCENTIVE PLAN 1. Purpose The purpose of the Management Incentive Plan is to enhance the ability of General Semiconductor, Inc. to attract, motivate, reward and retain key employees, to strengthen their commitment to the success of the Company and to align their interests with those of the Company's stockholders by providing additional compensation to designated key employees of the Company based on the achievement of performance objectives. To this end, the Management Incentive Plan provides a means of rewarding participants primarily based on the performance of the Company and its Business Units and secondarily based on the achievement of personal performance objectives. 2. Eligibility Participation in the Plan for a Performance Period shall be limited to those Employees who, because of their significant impact on the current and future success of the Company, the CEO selects, in accordance with Section 4, to participate in the Plan for that Performance Period. Notwithstanding the foregoing, Officers shall participate in the Plan in every Performance Period. To be eligible to participate in the Plan in any Performance Period an Employee shall have had at least 30 days active tenure during such Performance Period and be actively employed by the Company on the Award payment date (except as provided in Sections 6 and 7). Employees shall participate in only one short-term cash or sales incentive plan for any specific period in time. For example, an individual may not participate in both the Plan and the Company's sales incentive plan at the same time. An individual may participate in this Plan and another Plan sequentially during any Performance Period because of promotion or reassignment, provided that participation in each such plan is pro-rated to reflect (to the nearest weekly increment) the period during which he or she participated in each plan. 3. Administration The administration of the Plan shall be consistent with the purpose and the terms of the Plan. The Plan shall be administered by the Committee with respect to Officers and by the CEO with respect to all other Participants. The Committee and the CEO, as the case may be, shall have full authority to establish the rules and regulations relating to the Plan, to interpret the Plan and those rules and regulations, to select Participants in the Plan, to determine each Participant's Target Award Percentage, to approve all Awards, to decide the facts in any case arising under the Plan and to make all other determinations and to take all other actions necessary or appropriate for the proper administration of the Plan, including the delegation of such 2 authority or power, where appropriate; provided, however, that only the Committee shall have authority to amend or terminate the Plan. The Committee's and the CEO's administration of the Plan, including all such rules and regulations, interpretations, selections, determinations, approvals, decisions, delegations, amendments, terminations and other actions, shall be final and binding on the Company, their respective stockholders and all employees of the Company, including the Participants and their respective beneficiaries. 4. Determination of Awards Prior to, or as soon as practicable following, the commencement of each Performance Period, the CEO with respect to all Employees other than Officers shall determine the Employees who shall be Participants during that Performance Period and determine each Participant's Target Award Percentage and the Committee shall determine each Officer's Target Award Percentage. The Company shall prepare schedules, which will be treated as part of the Plan for that Performance Period, setting forth (a) the Participants during that Performance Period, (b) each Participant's Target Award Percentage for that Performance Period, and (c) the Operational Targets (and the allocation among the Operational Targets) for that Performance Period (which shall be established before the later of the date on which 25 percent of the term of such Performance Period has elapsed or the 30th day after the commencement of the such Performance Period). The Company shall notify each Participant of his or her Target Award Percentage and the applicable Operational Targets for the Performance Period. The Committee shall establish the Target Award Percentage and the Operational Targets for Officers before the later of the date on which 25 percent of the term of the relevant Performance Period has elapsed or the 30th day after the commencement of the such Performance Period. A Participant earns an Award for a Performance Period based on (i) the Company's and his or her Business Unit's achievement of the Operational Targets, and (ii) in the case of Participants other than the CEO, his or her achievement of personal performance goals. The portion of Awards based on Company or Business Unit Performance will only be earned if the Company or Business Unit, as applicable, achieves at least the minimum percentage specified by the Committee or the CEO, as applicable, of the Operational Target set for the Performance Period. The Awards for any Performance Period may also be increased above the Target Award Percentage for achievement in excess of the Operational Targets for that Performance Period, as specified by the Committee or CEO, as applicable, for that Performance Period. The Awards of each Participant may be adjusted upward or downward by twenty percent (20%) by the Committee or the CEO, as applicable, based upon the CEO's or the Committee's determination of a Participant's Personal Performance Percentage for that Performance Period. 5. Changes to the Target The Committee, with respect to Officers, and the CEO, with respect to all other Participants, may at any time prior to the final determination of Awards change the Target Award Percentage of any Participant or assign a different Target Award Percentage to a Participant to reflect any change in the Participant's responsibility level or position during the course of the Performance Period. 2 3 The Committee, with respect to Officers, and the CEO, with respect to all other Participants, may at any time prior to the final determination of Awards change the Operational Targets to reflect a change in corporate capitalization, such as a stock split or stock dividend, or a corporate transaction, such as a merger, consolidation, separation, reorganization or partial or complete liquidation; or to equitably reflect changed business circumstances during the Performance Period; the occurrence of any extraordinary event; any change in applicable accounting rules or principles; any change in the Company's method of accounting; any change in applicable law; any change due to any merger, consolidation, acquisition, reorganization, stock split, stock dividend combination of shares or other changes in the Company's corporate structure or shares; or any other change of a similar nature. 6. Payment of Awards The Committee shall certify and announce the Awards that will be paid by the Company to each Officer as soon as practicable following the final determination of the Company's financial results for the relevant Performance Period. Subject to the provisions of Section 7, payment of the Awards certified by the Committee shall normally be made, in a single lump sum cash payment as soon as practicable following the close of such Performance Period but in any event within 60 days after the close of the Performance Period. In the case of all other Participants, as soon as practicable after the close of a Performance Period, the CEO shall review the Business Units' financial performance against the Operational Targets for that Performance Period and, subject to the provisions of Section 7, each Award to the extent earned shall be paid in a single lump sum cash payment as soon as practicable after the close of the Performance Period, but no later than 60 days following the close of the Performance Period. If a Change in Control occurs, the Company shall, within 60 days thereafter, pay to each Participant in the Plan immediately prior to the Change in Control (regardless of whether the Participant remains employed after the Change in Control) an Award which is calculated assuming that all performance percentages are 100 percent, and such Award shall be prorated to the date of the Change in Control based on the Participant's Base Salary earned to the date of the Change in Control. 7. Limitations on Rights to Payment of Awards No Participant shall have any right to receive payment of an Award under the Plan for a Performance Period unless the Participant remains in the employ of the Company through the Award payment date, except as provided in the last paragraph of Section 6. However, if the Participant has active service with the Company for at least 30 days during any Performance Period and the Participant's employment with the Company terminates due to the death, Disability or Retirement (or, in the event of the Participant's death, the Participant's estate, beneficiary or beneficiaries as determined under Section 8), the Participant shall remain eligible to receive a prorated portion of any earned Award, based on the number of weeks that the Participant was actively employed and performed services during such Performance Period. 8. Designation of Beneficiary 3 4 A Participant may designate a beneficiary or beneficiaries who, in the event of the Participant's death prior to full payment of any Award hereunder, shall receive payment of any Award due under the Plan. Such designation shall be made by the Participant on a form prescribed by the Committee. The Participant may, at any time, change or revoke such designation. A beneficiary designation, or revocation of a prior beneficiary designation, will be effective only if it is made in writing on a form provided by the Company, signed by the Participant and received by the Company's Human Resources Department. If the Participant does not designate a beneficiary or the beneficiary dies prior to receiving any payment of an Award, Awards payable under the Plan shall be paid to the Participant's estate. 9. Amendment and Termination (a) The Committee may at any time, or from time to time, amend, in whole or in part, the Plan. However, no amendment or termination of the Plan shall adversely affect any Participant's right to or interest in an Award earned prior to the date of such amendment, unless the Participant agrees in writing thereto. (b) The Committee may terminate the Plan, in whole or in part; however, each Participant shall receive an amount equal to the amount of the Award that would have been paid for the Performance Period, prorated for the number of weeks in the Performance Period prior to the date of termination of the Plan. 10. Miscellaneous Provisions (a) This Plan is not a contract between the Company and the Employees or the Participants. Neither the establishment of this Plan, nor any action taken hereunder, shall be construed as giving any Employee or any Participant any right to be retained in the employ of the Company. The Company is under no obligation to continue the Plan. (b) A Participant's right and interest under the Plan may not be assigned or transferred, except as provided in Section 8, and any attempted assignment or transfer shall be null and void and shall extinguish, in the Company's sole discretion, the Company's obligation under the Plan to pay Awards with respect to the Participant. (c) The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund, or to make any other segregation of assets, to assure payment of Awards. (d) The Company shall have the right to deduct from Awards paid, any taxes or other amounts required by law to be withheld. (e) Nothing contained in the Plan shall limit or affect in any manner or degree the normal and usual powers of management, exercised by the Officers and the Board of Directors or committees thereof, to change the duties or the character of employment of any 4 5 employee of the Company or to remove the individual from the employment of the Company at any time, all of which rights and powers are expressly reserved. (f) The Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of New York, without giving effect to conflict of law principles thereof. 11. Definitions (a) "Award" shall mean the incentive award earned by a Participant under the Plan for any Performance Period. (b) "Base Salary" shall mean the Participant's base salary, paid in the performance period. Base salary does not include Awards under the Plan, long-term incentive awards, imputed income from such programs as executive life insurance or nonrecurring earnings such as moving expenses and is based on salary before reductions for such items as contributions under Sections 401(k) or 125 of the Internal Revenue Code of 1986, as amended, and Company-sponsored deferred compensation arrangements. (c) "Board" shall mean the Board of Directors of the Company. (d) "Business Unit" shall mean either the Company, a strategic function, regional group or other unit of classification, as specified by the Committee or CEO, as applicable. (e) "CEO" shall mean the Chief Executive Officer of the Company. (f) "Change in Control" shall mean a Change in Control as defined in the General Semiconductor, Inc. Amended and Restated 1998 Long-Term Incentive Plan, as amended. (g) "Committee" shall mean the Compensation Committee of the Board. (h) "Company" shall mean General Semiconductor, Inc., and its Subsidiaries. (i) "Disability" shall mean permanent disability, as defined in the Company's long-term disability plan. (j) "Effective Date" shall mean January 1, 2001. (k) "Employee" shall mean any person (including an officer) employed by the Company or any of its Subsidiaries on a full-time salaried basis. 5 6 (l) "Officer" shall mean the CEO and an officer of the Company elected by the Board. (m) "Operational Targets," for any Performance Period, shall mean the financial performance of the Company, as specified by the Committee or the CEO, as applicable, as the stock price, earnings per share, net earnings, operating income, return on assets, net capital employed, shareholder return, return on equity, growth in assets, unit volume, sales, market share, or strategic business criteria consisting of one or more Company objectives based on meeting specified revenue goals, market penetration goals, geographic business expansion goals, cost targets, customer satisfaction goals, product development goals, or goals relating to acquisitions or divestitures. In setting Operational Targets pursuant to Section 4, the Committee or the CEO shall use objectively determinable Operational Targets based on the foregoing criteria. To the extent applicable, any such Operational Target shall be determined in accordance with generally accepted accounting principles and reported upon by the Company's independent accountants. The Operational Targets established by the Committee or the CEO may be (but need not be) different each Performance Period and different Operational Targets may be applicable to different Participants. (n) "Participant," for any Performance Period, shall mean an Officer or Employee selected to participate in the Plan for such Performance Period in accordance with Section 2. (o) "Performance Period" shall mean the fiscal year of the Company or any other period designated by the Committee with respect to which an Award is earned. (p) "Personal Performance Percentage," with respect to Participants other than the CEO for any Performance Period, shall mean the percentage between 80% and 120%, based on the achievement of the Participant's personal performance goals, as determined in accordance with Section 4. (q) "Plan" shall mean this General Semiconductor, Inc. Management Incentive Plan, as from time to time amended and in effect. (r) "Retirement" shall mean retirement at or after age 65 or early retirement with the prior written approval of the Company. (s) "Subsidiary" shall mean a corporation as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, with the Company being treated as the employer corporation for purposes of this definition. (t) "Target Award Percentage" for any Participant with respect to any Performance Period, shall mean the percentage of the Participant's Base Salary that the Participant would earn as an Award for that Performance Period if each of the Operational Target Awards Earned and the Personal Performance Percentage (if applicable) for that Performance Period is 100%, and shall be determined by the Committee with respect to Officers and by the CEO with respect to all other Participants, based on the Participant's responsibility level or the 6 7 position or positions held during the Performance Period; provided, however, that if any Participant other than an Officer held more than one position during the Performance Period, then the CEO may designate a different Target Award Percentage with respect to each position and the Award will be pro-rated to reflect (to the nearest semi-monthly increment) the period during which such Participant had each Target Award Percentage. General Semiconductor, Inc. Date: February 12, 2001 By: /s/ Ronald A. Ostertag ----------------- ---------------------- 7 8 Schedule A EARLY RETIREMENT WINDOW BENEFIT Notwithstanding any provision of this Plan to the contrary, any Window-Eligible Participant (as defined in Item 1 below) who (i) makes a proper "Early Retirement Window Election" (as defined in Item 2 below) during the period commencing on February 9, 2001 and ending on February 28, 2001, (ii) executes and does not rescind the release and waiver described in Item 2, and (iii) has a termination of employment on his "Designated Termination Date" (as defined in Item 3 below), shall be entitled to receive benefits described in Item 4 below. 1. "Window-Eligible Participant" means a person who is a full-time employee of the Company on February 9, 2001 provided that the sum of his age and years of Vesting Service (as defined in the General Semiconductor, Inc. Pension Plan for Salaried and Hourly Paid Non-Union Employees) as of March 31, 2001 equals or exceeds 65. 2. Early Retirement Window Election. An "Early Retirement Window Election" means a written election by a Window-Eligible Participant, on a form provided by the Company, (i) to terminate employment with the Company on the Designated Termination Date, and (ii) to execute a release and waiver in the form provided by the Company. The Early Retirement Window Election must be received by the General Semiconductor, Inc. Employee Benefits Administrative Committee no later than February 28, 2001. An Early Retirement Window Election shall be irrevocable following the expiration of the applicable rescission period set forth in the Early Retirement Window Election form. 3. Designated Termination Date. The "Designated Termination Date" of a Window-Eligible Participant who has made an Early Retirement Window Election shall be the date, as determined by the Company in its sole discretion, on which the Window-Eligible Participant must have a termination of employment in order to receive the benefits described in Item 4 below. Notwithstanding the foregoing, a Window-Eligible Participant's Designated Termination Date shall not be earlier than the last day of the applicable rescission period set forth in the Window-Eligible Participant's Early Retirement Window Election and shall not be later than May 31, 2001. 4. Continued Plan Participation. A Window-Eligible Participant who is a participant in the General Semiconductor, Inc. Management Incentive Plan ("MIP") on February 9, 2001 who properly makes an Early Retirement Window Election, executes and does not rescind the required release and waiver, and has a termination of employment on his Designated Termination Date shall continue to participate in the MIP as if he continued to be employed by the Company for the period for which he is eligible to receive enhanced severance benefits pursuant to the First Amendment to the General Semiconductor, Inc. Severance Plan ("Severance Plan"). The requirement that a participant in the MIP must be employed by the Company on the day awards under the MIP are paid is waived with respect to participants continuing to participate in the MIP under this Item 4. A participant who is continuing to participate in the MIP under this Item 4 and is eligible for 78 weeks salary pursuant to the First Amendment to the Severance Plan shall receive an award under the MIP for 2002 (payable in 2003) equal to 50% of 8 9 the award that would be payable if the participant was employed by the Company for the full year. 9 EX-10.18 5 y46355ex10-18.txt SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT 1 EXHIBIT 10.18 SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT This Supplemental Executive Retirement Agreement ("Agreement") is made this 6th day of March, 2001 by and between General Semiconductor, Inc. (the "Company") and John Phillips (the "Executive"). WHEREAS, the Executive has rendered and continues to render valuable services to the Company; and WHEREAS, the Company wishes to reward the Executive for such services by entering into this Agreement to provide nonqualified deferred compensation to the Executive; WHEREAS, the Executive and the Company have mutually agreed to terminate the Amended and Restated Severance Protection Agreement entered into October 29, 1998 and amended October 19, 1999; THEREFORE, in consideration of the promises, covenants and terms set forth herein, the parties agree as follows: 1. Retirement Benefits. 1.1. The Executive shall be entitled to receive a monthly benefit payable for the joint life of the Executive and his spouse ("Supplemental Benefit") commencing on April 1, 2001 in an amount equal to the difference between (a) $4,000 and (b) the benefit payable from the General Semiconductor, Inc. Pension Plan for Salaried and Hourly Paid Non-Union Employees (the "Pension Plan") and the General Semiconductor, Inc. Supplemental Executive Retirement Plan (the "SERP") in the form of a 100% Spouse Joint and Survivor Annuity, as defined in the Pension Plan, as of April 1, 2001. 1.2. In the event of the Executive's death prior to April 1, 2001, the Executive's surviving spouse shall be entitled to receive a monthly benefit for her life ("Death Benefit") commencing on April 1, 2001 in an amount equal to the difference between (a) $2,700 and (b) the benefit payable from the Pension Plan and the SERP in the form of a Qualified Survivor Annuity, as defined in the Pension Plan, as of the first day of the month following the Executive's death. 2. Vesting. The Executive shall be fully vested in the benefits set forth in Section 1. 3. Payment of Supplemental Benefit. The Supplemental Benefit and the Death Benefit shall be paid to the Executive or his surviving spouse, at the same time as the benefit payable under the Pension Plan. Notwithstanding the foregoing, the lump sum actuarial equivalent of the benefit Supplemental Benefit or Pre-retirement Death Benefit on the date of a Change in Control, as defined in the General Semiconductor, Inc. Long-Term Incentive Plan, (including Supplemental Benefits then in pay status) shall be paid immediately to the Executive or his surviving spouse in a lump sum in cash. Actuarial equivalence shall be determined in accordance with Appendix I of the Pension Plan and shall be determined as if the Executive's benefit payable under the Pension Plan was paid in a lump sum at the same time as the lump sum payable under this Agreement. 4. Nature of Payment and Obligations. This Agreement is an unfunded arrangement to provide retirement benefits. Any payment due the Executive or his surviving spouse shall be made from the general assets of the Company. This agreement shall not give any person an interest in any specific asset of the Company. To the extent any person is entitled to payment from the Company under this Agreement, such right shall be that of an unsecured general creditor of the Company. 5. Administration. This Agreement shall be administered by the General Semiconductor, Inc. Employee Benefits Administrative Committee (the "Committee"), which shall have, to the extent 2 appropriate, the same powers, rights, duties, and obligations with respect to this Agreement as it has with respect to the Pension Plan, including but not limited to claims administration and discretionary power to construe and interpret this Agreement. 6. Employment Rights. This Agreement shall not be construed to give the Executive the right to be retained in the service of the Company or to any benefits not specifically provided by this Agreement, nor shall this Agreement in any manner modify the Company's right to modify, amend or terminate the Pension Plan or SERP. 7. Interests Not Transferable. Benefits payable under this Agreement shall not be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, or other legal process, or encumbrance of any kind. Any attempt to alienate, sell transfer, assign, pledge, or otherwise encumber any such benefits, whether currently or thereafter payable, shall be void. No benefit shall be liable, in any manner, for or subject to the debts or liabilities of any person entitled to such benefits. If any person shall attempt to, or shall alienate, sell, transfer, assign, pledge, or otherwise encumber his or her benefits under this Agreement, or if by reason of his or her bankruptcy or other event happening at any time, such benefits would devolve upon any other person or would not be enjoyed by the person entitled thereto under this Agreement, then the Committee, in its discretion, may terminate the interest in any such benefits of the person entitle thereto under this Agreement and hold or apply them for the benefit of such person entitled thereto under the Agreement or his or her dependents in such manner as the Committee may deem proper. 8. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the Corporation and its respective successors and assigns. The Corporation shall require its respective successors and assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession or assignment had taken place. 9. Controlling Law, Jurisdiction and Venue. The validity, interpretation, construction and performance of this Agreement shall in all respects be governed by the laws of the State of New York, without giving effect to the conflict of law principles thereof. The Executive consents to submit to the jurisdiction and venue of any federal or state court in the State of New York for any dispute arising under or related to this Agreement and agrees not to commence any litigation relating to this Agreement except in such courts. 10. Action by Company. Any action required or permitted by the Company under this Agreement shall be by resolution of the Board of Directors of the Company or any person authorized by resolution of such Board of Directors. 11. Amendment and Termination. The Company intends this Agreement to be permanent, but reserves the right at any time to modify, amend, or terminate this Agreement; provided, however, benefits provided under Section 1 hereof shall constitute an irrevocable obligation of the Company to the same extent as such benefit would have been irrevocable had it been an obligation of the Pension Plan. GENERAL SEMICONDUCTOR, INC. By: /s/ Ronald A. Ostertag ------------------------------------- Ronald A. Ostertag /s/ John Phillips ------------------------------------- John Phillips EX-10.19 6 y46355ex10-19.txt SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 1 Exhibit 10.19 GENERAL SEMICONDUCTOR, INC. --------------------------- SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN -------------------------------------- As amended and restated effective June 30, 1997 2 GENERAL SEMICONDUCTOR, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Section 1 Introduction 1.1 The Plan and Its Effective Date. The General Instrument Corporation Supplemental Executive Retirement Plan (the "Plan") was established by General Instrument Corporation of Delaware, effective January 1, 1994. Effective on or prior to the date of the distribution by General Instrument Corporation of all of its shares of stock of NextLevel Systems, Inc. (the "Spinoff"), General Instrument Corporation of Delaware, Inc. is expected to merge into General Instrument Corporation, which is expected to change its name to General Semiconductor, Inc. Effective prior to such merger and name change, references to the "Company" shall refer to General Instrument Corporation of Delaware, Inc. of General Instrument Corporation. Thereafter, references to the "Company" shall refer to General Semiconductor, Inc. Effective as of June 30, 1997, and subject to the transfer of liabilities described in the next sentence, participants whose employment after the Spinoff continues with NextLevel Systems, Inc. or its subsidiaries ("Transferred Employees") shall cease to accrue benefits under the plan. Effective as of the Spinoff, the liabilities of the Plan with respect to Transferred Employees shall be transferred to and assumed by the NextLevel Systems, Inc. Supplemental Executive Retirement Plan, and Transferred Employees shall cease to be participants in the Plan. 1.2 Purpose. The Company maintains the General Instrument Corporation Pension Plan for Salaried and Hourly Paid Non-Union Employees (the "Pension Plan"), which is intended to meet the requirements of a "qualified plan" under the Internal Revenue Code of 1986. Internal Revenue Code Section 401(a)(17) places limitations on the maximum amount of compensation which may be taken into account in determining the amount of benefit to which a participant is entitled under a qualified plan. Prior to 1994, the limit was $200,000, as adjusted for cost of living increases ("Old Compensation Limit"). Effective beginning in 1994, the limit is $150,000, as adjusted for cost of living increases ("New Compensation Limit"). Certain participants in the Pension Plan are also eligible to participate in the General Instrument Corporation Voluntary Deferred Compensation Plan or the GI Deferred Compensation Plan ("Deferred Compensation Plan") under which they may elect to defer payment of a portion of their compensation. Amounts deferred under the Deferred Compensation Plan are not considered to be compensation on which benefits under the Pension Plan are based ("Pension Earnings"). The purpose of the Plan is to provide benefits which would be payable under the Pension Plan if subject to the Old Compensation Limit in 1994 and later years, but which may not be provided thereunder because of (a) the New Compensation Limit and (b) the exclusion of certain deferrals under the Deferred 3 Compensation Plan from Pension Earnings. The Plan shall be an unfunded plan maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. Section 2 Participation and Benefits -------------------------------- 2.1 Eligibility for Participation. Any Related Company (as defined in the Pension Plan) that has become an Employer under the Pension Plan may, with the consent of the Company, adopt this Plan for its employees who are participants in the Pension Plan. The Company and each Related Company that adopts this Plan is referred to herein as an "Employer." 2.2 Eligibility for Benefits. Subject to the conditions and limitations of the Plan, if a participant in the Pension Plan becomes entitled to benefits under the Pension Plan, and such benefits have been limited as a result of the New Compensation Limit or the exclusion of deferrals under the Deferred Compensation Plan from Pension Earnings, or both, such employee shall then become a participant in the Plan. 2.3 Amount of Benefits. The participant (or his beneficiary) shall be entitled to receive under the Plan an amount ("Supplemental Benefit") equal to the amount by which the benefit which would have been payable to the participant (or his beneficiary) under the Pension Plan (under the Old Compensation Limit) is reduced on account of the New Compensation Limit or the exclusion, in the year of deferral, of deferrals under the Deferred Compensation Plan from Pension Earnings, or both, subject to (a) and (b) below: (a) The amount which would have been payable under the Old Compensation Limit shall be determined by adjusting the Old Compensation Limit for cost of living increases as though the New Compensation Limit had not taken effect. For this purpose, a participant's Frozen Benefit as of December 31, 1993 (as defined in the Pension Plan) shall not be considered to be affected by the New Compensation Limit. (b) Supplemental Benefits shall be based on amounts deferred under the Deferred Compensation Plan in the year of deferral, but only to the extent such amounts would have been considered to be Pension Compensation (subject to the Old Compensation Limit) if they had not been so deferred. A participant shall be vested in and subject to forfeitures of his Supplemental Benefit to the same extent as he would be if it were a benefit under the Pension Plan. -2- 4 2.4 Payment of Benefits. A participant's Supplemental Benefit shall be paid to him, or his beneficiary, at the same time and in the same manner as the benefit payable to such person under the Pension Plan, subject to the following: (i) if the present value lump sum actuarial equivalent of the Supplemental Benefit at the earlier of the date of a participant's termination of employment or the date pension benefits commence to him under the Pension Plan is $10,000 or less, the Supplemental Benefit shall be paid as soon as administratively practicable after such earlier date in a lump sum in cash; and (ii) in the event of a Change of Control (as defined in the 1997 Long-Term Incentive Plan) the present value lump sum actuarial equivalent of each participant's Supplemental Benefit on the date of the Change of Control (including Supplemental Benefits then in pay status) shall be paid immediately in a lump sum in cash. Any Supplemental Benefits payable under the Plan after a lump sum payment has been made shall be reduced by the actuarial equivalent of such lump sum payment to the extent necessary to avoid double payment of benefits. 2.5 Determination of Actuarial Equivalents. The actuarial equivalent for a lump sum under this Plan shall be determined in accordance with the provisions of the Pension Plan regarding actuarial equivalents as in effect for the participant's pension benefits. 2.6 No Funding. Benefits payable under the Plan to any person shall be paid directly by the Employer that last employed the participant; provided that benefits not paid by an Employer shall be paid by the Company. No Employer shall be required to fund, or otherwise segregate assets to be used for payment of, benefits under the Plan. Section 3 General Provisions ------------------ 3.1 Plan Administration. The Plan shall be administered by a Committee ("Committee"), which shall have, to the extent appropriate, the same powers, rights, duties and obligations with respect to the Plan as it has with respect to the Pension Plan, including but not limited to claims administration and the discretionary power to construe and interpret the Plan. If the General Semiconductor Employee Benefits Administrative Committee does not accept appointment as the Committee, the Company shall appoint a Committee of at least two members, and if no such appointment is made, the Company shall serve as the Committee. 3.2 Employment Rights. Establishment of the Plan shall not be construed to give any employee the right to be retained in the service of any Employer or to any benefits not -3- 5 specifically provided by the Plan, nor shall the establishment of the Plan in any manner modify the Company's right to modify, amend or terminate the Pension Plan. 3.3 Interests Not Transferable. Except as to withholding of any tax under the laws of the United States or any state or locality, no benefit payable at any time under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, or other legal process, or encumbrance of any kind. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any such benefits, whether currently or thereafter payable, shall be void. No benefit shall, in any manner, be liable for or subject to the debts or liabilities of any person entitled to such benefits. If any person shall attempt to, or shall alienate, sell, transfer, assign, pledge or otherwise encumber his benefits under the Plan, or if by reason of his bankruptcy or other event happening at any time, such benefits would devolve upon any other person or would not be enjoyed by the person entitled thereto under the Plan, then the Committee, in its discretion, may terminate the interest in any such benefits of the person entitled thereto under the Plan and hold or apply them to or for the benefit of such person entitled thereto under the Plan or his spouse, children or other dependents, or any of them, in such manner as the Committee may deem proper. 3.4 Controlling Law. The law of Illinois, except its law with respect to choice of law, shall be controlling in all matters relating to the Plan, except to the extent preempted by federal law. 3.5 Action by the Company. Any action required of or permitted by the Company under the Plan shall be by resolution of the Board of Directors of the Company or any person(s) authorized by resolution of such Board of Directors. Section 4 Amendment and Termination The Company intends the Plan to be permanent, but reserves the right at any time, by action of its board of directors, to modify, amend or terminate the Plan, including with respect to benefits then being paid; provided, however, that if a person covered by the Plan becomes entitled to a benefit under the Pension Plan, benefits provided under Section 2.1 -4- 6 hereof shall constitute an irrevocable obligation of the Company to the same extent as such benefit would have been irrevocable had it been an obligation of the Pension Plan. Date: June 30, 1997 GENERAL INSTRUMENT CORPORATION OF DELAWARE By: /s/ Thomas Dumit ATTEST: /s/ Keith Zar - ----------------------------- Secretary EX-21 7 y46355ex21.txt SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 Subsidiaries of the Registrant The following is a list of the Company's subsidiaries as of December 31, 2000, 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 General Semiconductor Korea Co., Ltd. EX-23 8 y46355ex23.txt INDEPENDENT AUDITORS CONSENT 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 7, 2001, appearing in this Annual Report on Form 10-K of General Semiconductor, Inc. for the year ended December 31, 2000. /s/ Deloitte & Touche LLP Jericho, New York March 12, 2001 EX-99 9 y46355ex99.txt FORWARD LOOKING INFORMATION 1 EXHIBIT 99 GENERAL SEMICONDUCTOR, INC. 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, 2000, our 2000 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, including the cyclical nature of our business; (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: o impair our ability to obtain additional financing in the future; o reduce funds available to us for other purposes, including working capital, capital expenditures, research and development, strategic acquisitions and other general corporate purposes; o restrict our ability to introduce new products or exploit business opportunities; o increase our vulnerability to economic downturns and competitive pressures in the industry in which we operate; o 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; o limit our ability to dispose of assets; o make it more difficult for us to satisfy our obligations with respect to the notes; and o 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. 1 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 you 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 in the past experienced unusually large price declines and may experience such declines in the future. During 1998 and 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. While pricing has somewhat stabilized in 2000, we cannot assure you 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 POWER MANAGEMENT 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 you 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 3 acquisition prices. The magnitude, timing and nature of future acquisitions will depend upon various factors, including: o the availability of suitable acquisition candidates; o competition with others for suitable acquisitions; o the negotiation of acceptable terms; o our access to capital; o the availability of skilled employees to manage and operate the acquired companies; and o 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. 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 seven discontinued operations in five 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 $27.9 million at December 31, 2000. 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. 3 -----END PRIVACY-ENHANCED MESSAGE-----