Vishay Intertechnology
Annual Report 1999

Plain-text annual report

V I S H A Y I N T E R T E C H N O L O G Y , I N C . A n n u a l R e p o r t See the inside front cover for an explanation of this photograph www.vishay.com Vishay Intertechnology Manufacturer of the World’s Broadest Line of Discrete Electronic(cid:27)Components Vishay Intertechnology, Inc. (NYSE: VSH), a Fortune 1,000 Company with annual sales of $1.8 billion, is the largest U.S. and European manufacturer of passive electronic components (resistors, capacitors, and inductors) and a major producer of discrete semiconductors (diodes, optoelectronics, transistors), infrared data communication devices (IrDCs), and power and analog switching integrated circuits. The Company’s components are vital to electronic circuits and can be found in products manufactured in a very broad range of industries worldwide. Products that include Vishay components include telephones, computers, automobiles, video and audio equipment, household appliances, instrumentation, medical equipment, satellites, and military and aerospace equipment. With headquarters in Malvern, Pennsylvania, Vishay employs over 20,000 people in 64 plants in the U.S., Mexico, Germany, Austria, the United Kingdom, France, Portugal, the Czech Republic, Hungary, Israel, Taiwan, China, and the Philippines. Vishay can be found on the Internet at www.vishay.com. About the Cover The front cover photo illustrates Vishay’s expansion into the semiconductor market and the growing importance of cell phones, laptop computers, and other portable electronic products. The photo includes a silicon wafer, an assortment of Vishay components, and three views of a Vishay Siliconix integrated circuit: the packaged device, a magnified view of the silicon chip inside the product package, and microscopic detail of the chip’s Table of Contents 1 Financial Highlights 2 A Message from the Chairman 4 Overview: Strong Demand, High Growth 6 Vishay’s History: From Innovative Start-up to Industry Leader 8 Telecommunications: Market Trends 10 Computers: Market Trends 12 Automotive Electronics: Market Trends 14 Military and Aerospace Equipment: Market Trends 15 Instrumentation and Medical Electronics: Market Trends 16 Major Vishay Products and Brands 17 Consolidated Statements of Operations 18 Consolidated Balance Sheets 20 Consolidated Statements of Cash Flows 21 Consolidated Statements of Stockholders’ Equity 22 Notes to Consolidated Financial Statements 33 Report of Independent Auditors 34 Management’s Discussion and Analysis of Financial Condition and Results of Operations 40 Financial Summary 42 Corporate Directory Financial Highlights As Of and For the Year Ended December 31 1999 1998 1997 (In thousands, except per share amounts) Net sales .......................................................................... $ 1,760,091 $ 1,572,745 $ 1,125,219 Operating profit .............................................................. 193,744 Net earnings .................................................................... 83,237* 93,925 8,212* Depreciation and amortization ........................................ 139,676 127,947 Basic earnings per share .................................................. $ Diluted earnings per share .............................................. $ 0.99* 0.97* $ $ 0.10* 0.10* $ $ Weighted average shares outstanding – basic ................. Weighted average shares outstanding – diluted .............. 84,452 85,488 84,443 84,531 108,602 53,302* 81,874 0.63* 0.63* 84,418 84,603 Cash flows from operations ............................................. $ 239,809 $ 169,450 $ 177,158 Working capital ............................................................... 581,550 Property and equipment – net ........................................ 930,545 Long-term debt ............................................................... 656,943 639,783 997,067 814,838 Stockholders’ equity ........................................................ 1,013,592 1,002,519 455,134 709,142 347,463 959,648 1 . 0 6 7 , 1 $ 7 . 2 7 5 , 1 $ Net Sales $ In Millions 4 . 4 2 2 , 1 $ 0 . 8 9 0 , 1 $ 2 . 5 2 1 , 1 $ 8 . 7 8 9 $ 3 . 6 5 8 $ '93 '94 '95 '96 '97 '98 '99 $1800 $1600 $1400 $1200 $1000 $800 $600 $400 $200 $0 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Net Earnings $ In Millions 7 . 2 9 $ * * 0 . 9 7 $ * * 0 . 1 8 $ 9 . 8 5 $ † 1 . 4 4 $ * 6 . 2 5 $ * 3 . 3 5 $ $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 * * 8 . 7 9 $ * 2 . 3 8 $ * * 5 . 3 6 $ * 2 . 8 $ 1 Diluted Earnings per Share * * 4 1 . 1 $ * 7 9 . 0 $ * * 6 7 . 0 $ 8 1 . 1 $ * * 6 9 . 0 $ * * 3 9 . 0 $ * 2 6 . 0 $ * 3 6 . 0 $ 3 8 . 0 $ † 5 6 . 0 $ '93 '94 '95 '96 '97 * 0 1 . 0 $ '98 '99 † Includes $0.02 for cumulative effect of accounting change for income taxes. '94 '95 '99 '96 '93 † Includes $1.4 million for cumulative effect of accounting change for income taxes. '97 '98 * Includes charges for the sale of a subsidiary and a German tax rate change of $14,562,000 ($0.17 per share) for the year ended December 31, 1999, and restructuring expenses and unusual charges of $55,335,000 ($0.66 per share), $27,692,000 ($0.33 per share), and $38,030,000 ($0.31 per share) for the years ended December 31, 1998, 1997, and 1996 respectively. ** Orange color in graphs excludes charges for the sale of a subsidiary and a German tax rate change of $14,562,000 ($0.17 per share) for the year ended December 31, 1999, and restructuring expenses and unusual charges of $55,335,000 ($0.66 per share), $27,692,000 ($0.33 per share), and $38,030,000 ($0.31 per share) in 1998, 1997, and 1996 respectively. A Message from the Chairman To Our Shareholders, Employees, Customers, and Vendors: 2 We are entering the new millennium with optimism for Vishay! Increasing demand for Vishay’s products is being driven by the very large increase of the cell phone market and other wireless communication devices, as well as renewed strength in the computer and automotive markets. These end markets combined account for approximately 70% of the sales of our products, with wireless communications representing approximately 35% of our sales. Annual global shipments of cell phones have increased from 110 million units in 1997 to 283 million units in 1999. The forecast for year 2000 is 420 million units. At the same time, the number of passive components per phone increased dramatically. As a result of this strong demand, our bookings (orders) were $2.0 billion in 1999, a 30% increase over 1998 bookings. As a consequence, we increased capacity in all our major product lines to meet this continuing demand for our products. Our Siliconix operation (80.4% owned by Vishay) reported record results for 1999 with net earnings of $66 million as compared to $738 thousand in 1998. Net sales were a record $383 million in 1999, a 36% increase over $282 million in 1998. The demand for Siliconix’s products continues to be strong, especially in the wireless communications markets. This strength for Siliconix products, as well as the diodes and transistors of our Telefunken operation, resulted in 43% of our 1999 sales in semiconductor products as compared to 35% of our sales in 1998. We are quite pleased with the success of our Siliconix-Telefunken acquisition and we believe that as a result, we are now more strongly positioned as a leader in discrete semiconductor technology and the market. Our passive component business has also started to show much improved orders, first in capacitors, then followed by resistors and inductors. We have shown a significant increase in profitability, which can be attributed to production efficiencies, cost reduction programs, including movement of labor to low-cost countries, price stabilization, and, in some products, price increases. Most of the price increases are still in the backlog and will begin to be reflected in the first quarter of year 2000 and thereafter. In fact, on March 29, 2000, we announced that earnings per share for the first quarter ending March 31, 2000 should exceed analysts’ estimates of $0.54 per share by at least 25%. This was an additional increase in our results from an announcement made on March 2, 2000 when we announced that we would exceed analysts’ estimates at that time of $0.44 by at least 20% and now represents a 54% increase over these estimates. Vishay had 21,124 employees as of December 31, 1999; 15,861 of them are outside the United States, often in low labor cost countries. As a Company, we have worked hard during the past year. Successes have included the release of 150 new products, cost cutting in manufacturing and other areas, and a substantial increase in Asian sales to over $500 million in 1999. Our cash generation is also very strong. During 1999, we reduced long-term debt by $157,895,000. With the current strong demand for our products, our continuing cost reduction programs, and aggressive new product introductions, the outlook for the year 2000 looks much better. On March 27, 2000, we announced that we had agreed to sell our 65% interest in Lite-On Power Semiconductor Corporation (“LPSC”) to Lite-On JV Corporation (“Lite-On Group”), the current owner of the remaining 35% interest in LPSC, for consideration consisting of cash and the assignment or transfer of stock appreciation rights in Vishay common stock held by the Lite-On Group or the proceeds thereof. The disposition of our interest in LPSC will allow Vishay to focus its active components strategy on its Siliconix and Telefunken businesses, over which it has full control and which have been performing very well. We didn’t achieve the results we expected from LPSC and have decided to sell it back to the party we bought it from. Depending on the value of the stock appreciation rights at the time of execution of the documents, there could be a one-time gain or loss as a result of this transaction, which is expected to close before September 30, 2000. The sale of LPSC should have a positive annual impact on Vishay’s earnings going forward by approximately $0.08 to $0.10 per share. Financial Highlights For the year ended December 31, 1999, sales were $1,760,091,000 compared with $1,572,745,000 in the previous year. Net earnings, before special charges, for the year ended December 31, 1999 were $97,799,000 or $1.14 per share. After special charges of $14,562,000 or $0.17 per share, net earnings for the year ended December 31, 1999 were $83,237,000 or $0.97 per share. The 1999 special charges were primarily a result of the sale of Nicolitch, S.A., a French manufacturer of printed circuit boards, a non-core business of Vishay, which was completed on March 26, 1999. Net earnings before special charges for the year ended December 31, 1998 were $63,547,000 or $0.76 per share. After special charges of $55,335,000 or $0.66 per share, net earnings for the year ended December 31, 1998 were $8,212,000 or $0.10 per share. With the strong rebound in earnings per share in the third and fourth quarters of 1999, we are confident of a strong year 2000. Earnings per share amounts for all periods reflect a 5-for-4 stock split paid June 22, 1999. Sales of the passive components business were $1,008,266,000 for the year ended December 31, 1999 as compared to sales of $1,027,902,000 for 1998 and operating income was $104,655,000 as compared to operating income of $114,747,000 for 1998. Sales of the active components business were $751,825,000 for the year ended December 31, 1999, as compared to sales of $544,843,000 for 1998 resulting in operating income of $119,510,000 as com- pared to operating income of $51,516,000 for 1998, an increase of 132%. Gross profits for the year ended December 31, 1999 were 26.2% of sales as compared to 24.4% in the prior year. The active components business reported gross margins of 31.4% for the year ended December 31, 1999, as compared to 27.9% for the prior year. The passive components business gross profit margins were 22.4% for the year ended December 31, 1999 as compared to 22.5% for the prior year. Selling, general, and administrative expenses for the year ended December 31, 1999 were 14.5% of sales as com- pared to 14.9% in the prior year. The Company is generating substantial cash and its financial condition is strong with a current ratio of 2.7 to 1.0. For the year ended December 31, 1999, the Company’s cash flow from operations was $239,809,000. Purchases of property and equipment for the year ended December 31, 1999 were $119,638,000 as compared to $151,682,000 in the prior year. Long-term debt was reduced by $157,895,000 from $814,838,000 at December 31, 1998 to $656,943,000 at December 31, 1999. 3 Looking Ahead During the second half of 1999, Vishay began to show the results of our strength in the passive components business as well as our semiconductor business. In the year 2000 and beyond, we will continue to build on that strength and our historical position as a leader in the U.S., European, and Asian electronics markets. We are focused on being a total solution provider — a manufacturer of passive electronic components and a major producer of discrete semi- conductors and selected integrated circuits. Vishay components are vital to the operation of electronic products found in virtually all electronic applications. The Company is committed, through our state-of-the-art technology, our increasing research and development, and through an acquisition strategy targeting companies with advanced technology resources, to continually strive to introduce the most advanced components in the industry to satisfy the ever-changing customer demands in today’s dynamic marketplace. We are extremely grateful to our employees worldwide for their loyalty, skill, and energy, which have contributed significantly to our growth. We value highly the relationship we have with our customers and suppliers. To our fellow shareholders, we thank you for your continued confidence in Vishay. We look forward to the year 2000 being the best year ever. Sincerely, Dr. Felix Zandman Chairman of the Board and Chief Executive Officer April 2000 Overview: Strong Demand, High Growth Throughout the world, electronic circuits that handle data, audio, and video depend on Vishay components. Vishay is a high-growth company: Increasing demand for its products is driven by the explosive growth of cell phones and other wireless communications devices, as well as growing reliance on electronics in the computer, automotive, consumer, industrial, medical, and military markets. High Growth Vishay Percent of Sales by Region Cell phones with Internet access and other new features. Laptop computers with faster speeds and longer battery life. Cars with sophisti- cated entertainment, communication, safety, and security systems. In almost all major markets, products are becoming smaller, faster, and “smarter” — and increasingly reliant on semiconductors, resistors, capacitors, inductors, and other electronic components produced by Vishay. Increased cell phone production and an increase in the number of electronic components per cell phone — as well as rising global demand for electronic components in computers, cars, and other products — is fueling Vishay’s growth. 29% Asia 38% U.S. 33% Europe Strong Momentum and Innovative Products 4 Vishay’s entry into the fast-paced semiconductor market expanded the Company’s product line, significantly increased earnings, and provided new market opportunities. The result has been accelerated Company growth. The momentum generated by rising demand for Vishay semiconductors and other Vishay components is compounded by economic recovery in Asia and Europe. Vishay’s investment in research and development yields a steady stream of new products — 150 in 1999 alone. These pave the way for more advanced cell phones, lighter and more powerful laptop computers, more reliable and versatile automobile electronic systems, and product improvements in many other industries. Vishay’s Siliconix division, based in Silicon Valley, is known for its innovations in product performance, product packag- ing, and silicon technology. New and improved components from other Vishay divisions continue to set new standards for precision and reliability. Skilled Management Vishay’s dramatic growth — from sales of $59 million in 1986 to $1.8 billion today — has been guided by a skilled and experienced management team. An aggressive acquisition strategy and a continuing commitment to product innovation have enabled Vishay to become a global industry leader. Vishay’s semiconductor expansion has been a major success. In just two years, Vishay’s earnings have increased so that Vishay’s semiconductor business now represents approximately 50 percent of Company earnings. Vishay’s focus on cost reduction has enabled the Company to maintain a competitive edge during industry downturns, maximize the benefits of market upswings, and plan successfully for long-term growth. Total Solutions With its diverse product line, Vishay can provide a complete package of components to meet the specifications of a customer’s product. This enables Vishay to benefit from the trend towards vendor reduction. Companies that are streamlining their component vendor base and focusing on a limited number of highly efficient suppli- ers can turn to Vishay for total discrete component solutions. Customers enjoy the advantages of one-stop shopping, while Vishay increases opportunities to become involved in the early stage of customers’ product development and design. Some Major OEM and EMS* Customers Acer Alcatel Apple Bosch Celestica Cisco Systems Compaq Dell Computer Delphi Ericsson Hewlett-Packard Honeywell IBM Intel Lockheed Martin Lucent Technologies Matsushita Motorola Nokia Nortel Networks Philips Qualcomm Raytheon Rockwell Samsung SCI Seagate Siemens Solectron Sony Sun Microsystems VDO Visteon Western Digital * Original equipment manufacturers and electronics manufacturing services. All major distributors distribute Vishay components. Vishay Percent of Sales by Product Type 43% Semiconductors 32% Capacitors 25% Resistors Customer Service 5 Electronic components such as transistors and integrated circuits are made from thin silicon wafers of semiconductor material. Vishay’s wide range of products and locations enables customers to do business with a single global manufac- turer for essentially all of their discrete electronic component needs. Vishay’s commitment to superior customer service is a key part of its corporate mission. Vishay serves customers through a worldwide network of manufac- turing facilities, sales and technical support offices, independent distributorships, and manufacturers’ represen- tatives. Vishay has customer service centers and inventories strategically located where customers need them — in the Americas, Europe, and Asia. To ensure uninterrupted supplies to customers, Vishay maintains dual or triple internal sourcing for most of its products. Vishay’s History: From Innovative Start-up to Industry Leader Vishay’s Beginnings In the 1950s, as the electronics industry began its accelerated growth, Dr. Felix Zandman, a physicist, and current Chairman and CEO of Vishay, was issued patents for his PhotoStress® coatings and instruments. These devices are used to reveal and measure the distribution of stresses in structures under live load conditions. Dr. Zandman’s research in this area led him to develop Bulk Metal® foil resistors — ultra-precise, ultra-stable resistors that provide performance far beyond any other resistor available. In 1962, Dr. Zandman, with the financial help of the late Alfred P. Slaner, founded Vishay to develop and manufacture Bulk Metal foil resistors. Concurrently, J.E. Starr, a colleague of Dr. Zandman, developed foil resistance strain gages, which also became a part of Vishay. The Company was named after Dr. Zandman’s and Mr. Slaner’s ancestral village in Lithuania, in memory of family members who perished in the Holocaust. Throughout the ’60s and ’70s, Vishay established itself as a technical and market leader in PhotoStress products, strain gages, and foil resistors. Company Acquisitions Power Dramatic Growth By the early ’80s, Vishay was positioned to grow significantly. Because the markets for resistance strain gages and ultra-precise resistors were relatively small, the Company moved to expand into high-volume resistors. Such resistors are used by the billions every year, in every sector of the electronics industry. Vishay’s strategy was to enter the market through the acquisition of respected, well-positioned manufacturers. The Company set strict acquisition criteria for technological strength, brand recognition, manufacturing capabilities, markets served, and management depth. 6 Beginning in the mid ’80s, Dale Electronics, Draloric Electronics, and Sfernice were acquired. These new operations helped produce dramatic sales growth — from $59 million in 1986 to more than $400 million in 1989. Vishay quickly achieved a position as the largest fixed resistor manufacturer in the United States and Europe. Vishay’s Major Strategic Acquisitions • 1985: Dale Electronics • 1987: Draloric Electronics • 1988: • 1992: Sfernice Sprague Electric • 1993: Roederstein • 1994: Vitramon • 1998: Telefunken; Siliconix (formerly TEMIC of Daimler-Benz) In the PhotoStress® process, special plastic coatings bonded to structures and viewed through a polariscope reveal colorful patterns that provide information on stress distribution. You are likely to find Vishay components in electronic products manufactured by all U.S. and European manufacturers, as well as many Asian manufacturers. Vishay is the only producer of such a broad line of passive and active (semiconductor) electronic components. New Passive Components and New Markets These acquisitions also brought other passive electronic components into Vishay, such as inductors, specialty capacitors, plasma displays, specialty connectors, transformers, thermistors, and oscillators — complementing Vishay’s strength in resistors. In fact, this diversification underscores the strategy that Vishay continues to pursue today — to be the manufacturer of the broadest line of discrete electronic components in the industry. In the early ’90s, Vishay applied its acquisition strategy to the high-volume capacitor market, extending its range of products and increasing penetration in passive components. Major acquisitions included Sprague Electric, the inventor and manufacturer of tantalum capacitors; Roederstein, a manufacturer of film, aluminum, and ceramic disk capacitors and thick film chip resistors; and Vitramon, a high-quality manufacturer of multi- layer ceramic chip capacitors. By 1994, annual sales had reached $988 million. Adding Active Components to the Mix In 1998, Vishay acquired the Semiconductor Business Group of TEMIC — which included Telefunken and 80.4% of Siliconix, producers of transistors, diodes, optoelectronics, transceivers, and power and analog switching integrated circuits — thus becoming a major factor in semiconductors. 7 The Company and the industry have grown, driven by the emergence of new technolo- gies, industry consolidation, a commit- ment to solve customer and applica- tion problems, and an ongoing effort to make products better, more cost-efficient, and defect-free. Semiconductor wafers are cut into small chips. Vishay’s semiconductor business represents approximately 50% of Company earnings. Telecommunications: Market Trends Exponential growth in telecommunications has been fueled by the convenience of cellular phones, pagers, and other handheld devices. Global Cell Phone Shipments 600 In Millions 550 s e n o h P r a u l l l e C f o r e b m u N 500 400 300 200 100 0 420 283 110 50 '95 '97 '99 Year '00† '02† † Estimate Source: Paumanok Publications, March 2000 8 Global Consumption of Passive Components (Capacitors, Resistors, Magnetics) in Cell Phones 200,000 In Millions 187,000 s t n e n o p m o C e v s s a P i f o r e b m u N 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 117,600 70,750 19,250 8,000 '95 '97 '99 Year '00† '02† † Estimate Source: Paumanok Publications, March 2000 Cell phones also include substantial amounts of semiconductors, many of which are produced by Vishay. Annual global shipments of cell phones are expected to grow from 283 million units in 1999 to 420 million in the year 2000.* At the same time, unflagging demand for increased functionality — devices that are both more complex and more user-friendly — will result in a dramatic rise in the number of electronic components required for each cell phone. The telecommunications industry continues to be driven by constantly improving services and falling prices, which in turn are increasing consumer demand. New product designs require passive components, discrete semiconductors, and power ICs that save space, promote efficient use of battery power, and provide new features. Key product trends include the transition to digital technol- ogy and the addition of new features, including short messaging services, smart card compatibility, voice mail alert and callback, caller identification, and voice-activated dialing. Product size reductions and new applications, such as child locators and hand-held global positioning systems (GPS) are increasing the demand for smaller, more efficient electronic components. Vishay passive electronic components (such as resistors, capacitors, and inductors) and semiconductor devices (such as diodes, power MOSFETs, ICs, and transceivers) address the needs of the telecommunications market. These include miniaturization, higher efficiency, extended run time, and wireless interconnection. Supporting the growth in cell phones, pagers, handsets, and other wireless devices is a growing investment in telecom- munications infrastructure. This increases demand for electronic components for voice and data switches, PBX equipment, power supplies, and related equipment. Vishay supplies most of these components. * Paumanok Publications, March 2000 Component Content In a Cellular Telephone The photos on this page show both sides of a printed circuit board from a cell phone, with highlights of individual components. Irdc Transceiver Highlighted on this page are types of electronic components manufactured by Vishay that are found in cell phones. Power IC Chip Resistor Multilayer Ceramic Chip Capacitor Diode Low Power MOSFET 9 Power MOSFET Coated Tantalum Chip Capacitor Molded Tantalum Chip Capacitor Chip Inductor Back Total Discrete Component Content is 477 (excluding battery charger) Source: Paumanok Publications, March 2000 Vishay Intertechnology, March 2000 Front Approximate Dollar Content per Dualband Phone Components $ Content Resistors and Inductors Capacitors Vishay Siliconix and Vishay Telefunken Products Total 3.24 4.16 5.73 $13.13 Source: Vishay Intertechnology, March 2000 Computers: Market Trends Worldwide personal computer (PC) shipments reached nearly 105 million units in 1998 and are expected to reach more than 191 million by 2002.* Computer processing speeds increase all the time, while computer and peripheral manufacturers continue to offer more features and options. This results in increased need for passive components and semiconductors. An integrated circuit (IC) located on a computer’s motherboard serves as the microprocessor that does all the calculations and coordinates all the computer’s activities. The microprocessor and other electronic circuits make up the central processing unit, or CPU. Each new generation of PCs features faster microprocessing speeds. In 1995, a speed of 200 megahertz (200 million cycles per second) was considered fast. The year 2000 saw the arrival of the 1- gigahertz (one billion cycles per second) PC. The number of passive components needed for integrated circuit support in PCs is growing more rapidly than PC manufacturing itself. Intel’s 486 microprocessor, which required 124 supporting passive components, was suc- ceeded by Intel’s Pentium® processor, which required 252 passive components, and the Pentium II, which requires 345 passive components. The even more powerful Pentium III requires 440 supporting passive components.** Vishay components can be found in nearly every computer subsystem, including the motherboard, monitor, keyboard, mouse, disk drive, PCMCIA card, and modem — as well as in printers, fax machines, and copy machines. Typical Passive Component Requirements for Integrated Circuit 440 345 252 s t n e n o p m o C e v s s a P i f o r e b m u N 450 400 350 300 250 200 150 100 50 0 124 486 Pentium Pentium II Pentium III Intel Motherboards Source: Vishay Intertechnology, January 2000 Estimates will vary depending upon end-product applications 10 Computers also include substantial amounts of semiconductors, many of which are produced by Vishay. Passive Component Usage in Computers 180,000 Millions of Units 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 '95 '96 '97 '98 '99 '00† '01† Year '02† † Estimate Source: Paumanok Publications, January 2000 Computers also include substantial amounts of semiconductors, many of which are produced by Vishay. * Paumanok Publications, April 2000 ** Vishay Intertechnology, January 2000 Vishay Produces Components Used in Computers and Peripherals The photo on this page is a portion of a personal computer (PC) motherboard. Listed below are Vishay products found in computer applications. Analog Switches Diodes IrDC Transceivers Multilayer and Wirewound Inductors Multilayer Ceramic Capacitors Optical Switches Optocouplers Power ICs Power Metal Strip® Resistors Power MOSFETs RFI Suppression Capacitors Tantalum Capacitors Thick Film Chip Resistors Thin Film Resistors 11 Automotive Electronics: Market Trends The market for automotive electronics is expected to reach $89 billion by 2002.* This growth will be fueled by enhancements to power train and safety systems such as antilock brakes (ABS), airbags, and engine control, as well as new comfort, security, and communications features. Passive Components Per Vehicle 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Average Annual Growth 16% '92 '93 '94 '95 '96 '97 Year '98 '99 '00† '01† '02† † Estimate Source: Paumanok Publications, January 2000 12 Automobiles also include substantial amounts of semiconductors, many of which are produced by Vishay. Volume of Passive Components Consumed in the Global Automotive Market 300,000 Millions of Units 250,000 200,000 150,000 100,000 50,000 0 Average Annual Growth 17% '92 '93 '94 '95 '96 '97 Year '98 '99 '00† '01† '02† † Estimate Each new generation of antilock brakes, airbags, high- intensity lighting, and traction control makes cars progres- sively safer, while electronic ignition and engine control systems promise to significantly reduce vehicle emissions and increase reliability. Automotive entertainment systems are growing as sophisticated as those found in homes, while on-board computers will become an increasingly common link to navigation and traffic information, as well as e-mail and Web access. Many of these advances originated in technologies devel- oped for the computer and communications markets, but their adaptation for cars and trucks involves a number of distinct challenges. In the automotive market, environmental ranges and climate conditions are extreme, product life cycles are relatively long, the cost of component repair is high, and component failures can be catastrophic. As a result, the reliability of components is crucial. Increasingly, mechanical parts for braking, transmission, throttle control, and other automotive operations are being replaced by sophisticated electronic circuits. Vishay ad- dresses this “drive by wire” trend by providing electronic transmission interfaces, electronic fuel-level sensors, fuel injection position sensors, and other innovative products. For drivers, fewer moving parts means greater reliability. For Vishay, global growth in automotive electronic component sales means increased market opportunities. Source: Paumanok Publications, January 2000 Automobiles also include substantial amounts of semiconductors, many of which are produced by Vishay. * Paumanok Publications, April 2000 Vishay Produces Components Used In Automobile Subsystems GPS Entertainment Center Comfort Accessories Steering Airbags Security System Lighting Engine Brakes Suspension Transmission 13 Vishay products are found in the automotive applications highlighted on this page. Military and Aerospace Equipment: Market Trends The worldwide market for military and aerospace equipment is expected to grow $11.5 billion from 1997 to 2002.* This will result in increased demand for electronics for these new systems. It is estimated that several hundred platforms will be launched into space over the next five years, with many of these providing commercial tele- phone, satellite TV, and data services. Meanwhile, substantial growth in the global commercial aviation market is being driven by the need to replace older fleets. Although the needs of the military and aerospace market are evolving, the essential criteria for the electronic components that serve it — reliability and performance — remain unchanged. Vishay is one of the largest suppliers of military components, and Vishay products for the estab- lished-reliability market reflect a long-term commitment to military and aerospace customers. Vishay components used in military and aerospace equipment are designed to function reliably when subjected to extremely hot and cold temperatures, intense vibration, and other environmental stresses. In addition, Vishay has the ability to custom-design and produce components to meet the high expecta- tions of quality and reliability demanded by military and aerospace customers. Vishay produces custom components for applications as diverse as missile systems and ground-based communication systems. Every component Vishay provides to the military and aerospace market is backed by comprehensive testing and failure analysis facilities, and by an experienced technical staff. 14 * Dataquest, January 1999 Sophisticated electronic systems in U.S. spacecraft and jet planes rely on Vishay components. Instrumentation and Medical Electronics: Market Trends The market for instrumentation and medical electronics, like the computer and telecommunications markets, is characterized by trends toward portability, miniaturization, and shortened design cycles. Vishay components are used in a wide range of instruments, manufacturing systems, and medical products, including pacemakers (righthand photo) and oscilloscopes (bottom photo). Handheld oscilloscopes and digital multimeters are giving test and measurement professionals on-site capabilities that were once confined to engineering labs. In the medical electronics area, miniaturization is being driven by the trend towards minimally invasive therapies such as laparoscopic surgery and by the growing importance of home care, where mobile equipment allows health care providers to monitor the vital functions of their patients over wireless data networks. In 1999, the worldwide semiconductor market for instruments, medical equipment, and manufactur- ing systems was approximately $10 billion. By 2002, it is expected to grow to more than $13 billion.* As product development cycles become shorter, the ability of component suppliers to work with manufacturers during the design phase, and to solve subsystem problems such as power management and cordless connectivity, is becoming ever more critical. Vishay components are found in many different types of test, measurement, instrumentation, and medical systems. They are used in pacemakers and other implantable medical devices, where reliable, long-term performance is literally a matter of life and death. Vishay is a long-time supplier of ceramic capacitors to the leading manufacturer of pacemakers. 15 * Dataquest, January 1999 Major Vishay Products and Brands Passive Components RESISTORS Bulk Metal® Foil Resistors Metal Film Resistors and Networks Thick Film Resistors and Networks Thick Film R/C Networks Thin Film Resistors and Networks Current Sensing Resistors Wirewound Resistors Power Metal Strip® Resistors Panel Controls Thermistors Varistors Fuse Resistors Trimming Potentiometers Panel Potentiometers CAPACITORS Tantalum (Solid) Capacitors Tantalum (Wet) Capacitors Ceramic Capacitors Film Capacitors Aluminum Capacitors 16 MAGNETICS Custom Magnetics Inductors Transformers Discrete Semiconductors DIODES Diodes Rectifiers TVS TRANSISTORS RF Transistors Bipolar Power Transistors Power MOSFETs JFETs OPTOELECTRONIC COMPONENTS Photo Detectors Infrared Emitters Optocouplers Optosensors Photo Modules LEDs Displays INTEGRATED CIRCUITS Power ICs Analog Switches Multiplexers IrDC Infrared Data Transceivers Passive electronic components (resistors, capacitors, and magnetics) reduce electrical currents, store electric energy, or filter frequencies. They are referred to as passive because they do not amplify DC current or voltage. In contrast, active electronic components (semiconductors) amplify electrical currents, convert currents, or switch electronic and optical signals. Vishay can provide a complete package of passive and active electronic components to meet customer needs. For Position Only Major Vishay Brands Vishay Dale Vishay Draloric Vishay Foil Resistors Vishay Measurements Group Vishay Roederstein Vishay Sfernice Vishay Siliconix Vishay Sprague Vishay Telefunken Vishay Thin Film Vishay Vitramon Consolidated Statements of Operations Vishay Intertechnology, Inc. (In thousands, except per share and share amounts) 1999 1998 1997 Year ended December 31 Net sales ................................................................................. $ 1,760,091 $ 1,572,745 $ 1,125,219 Costs of products sold ........................................................... 1,299,705 1,189,107 858,020 GROSS PROFIT ................................................................ 460,386 383,638 267,199 Selling, general, and administrative expenses .................... Amortization of goodwill ......................................................... Unusual items ......................................................................... Purchased research and development ................................. 254,282 12,360 — — 234,840 12,272 29,301 13,300 136,876 7,218 14,503 — Other income (expense): Interest expense ................................................................. Other ................................................................................... (53,296) (5,737) (49,038) (2,241) (18,819) (222) 193,744 93,925 108,602 (59,033) (51,279) (19,041) Earnings before income taxes and minority interest ........... Income taxes ........................................................................... Minority interest ...................................................................... 134,711 36,940 14,534 42,646 30,624 3,810 89,561 34,167 2,092 NET EARNINGS ................................................................ $ 83,237 $ 8,212 $ 53,302 Basic earnings per share ....................................................... $ 0.99 $ 0.10 Diluted earnings per share .................................................... $ 0.97 $ 0.10 $ 0.63 $ 0.63 17 Weighted average shares outstanding — basic .................. Weighted average shares outstanding — diluted ................ 84,452,000 85,488,000 84,443,000 84,531,000 84,418,000 84,603,000 See accompanying notes. Consolidated Balance Sheets (In thousands, except per share and share amounts) December 31 1999 1998 ASSETS CURRENT ASSETS Cash and cash equivalents ................................................................. $ 105,193 $ 113,729 Accounts receivable, less allowances of $9,495 and $9,758 ........................................................................... 320,978 276,270 Inventories: Finished goods ................................................................................ Work in process ............................................................................... Raw materials .................................................................................. Deferred income taxes ........................................................................ Prepaid expenses and other current assets ...................................... 144,645 131,951 121,704 35,119 67,159 196,551 136,393 113,194 53,389 67,045 TOTAL CURRENT ASSETS ............................................................... 926,749 956,571 PROPERTY AND EQUIPMENT — at cost Land ...................................................................................................... Buildings and improvements ............................................................... 51,453 261,528 59,146 270,095 Machinery and equipment ................................................................... 1,073,556 1,039,050 Construction in progress ..................................................................... 61,881 69,534 18 Less allowances for depreciation ....................................................... 1,448,418 (517,873) 1,437,825 (440,758) 930,545 997,067 GOODWILL ............................................................................................... 399,970 432,558 OTHER ASSETS ...................................................................................... 66,517 76,548 $ 2,323,781 $ 2,462,744 Vishay Intertechnology, Inc. December 31 1999 1998 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Notes payable to banks ....................................................................... $ 26,790 $ 20,253 Trade accounts payable ...................................................................... Payroll and related expenses .............................................................. Other accrued expenses ..................................................................... Income taxes ........................................................................................ Current portion of long-term debt ....................................................... 101,613 77,209 107,724 27,418 4,445 92,656 70,490 111,420 17,425 4,544 TOTAL CURRENT LIABILITIES ......................................................... 345,199 316,788 LONG-TERM DEBT — less current portion ........................................... 656,943 814,838 DEFERRED INCOME TAXES ................................................................. DEFERRED INCOME ............................................................................... MINORITY INTEREST ............................................................................. OTHER LIABILITIES ................................................................................ 62,712 50,462 61,637 24,715 68,933 59,264 51,858 25,174 ACCRUED PENSION COSTS ................................................................. 108,521 123,370 STOCKHOLDERS’ EQUITY Preferred Stock, par value $1.00 a share: Authorized -- 1,000,000 shares; none issued Common Stock, par value $.10 a share: Authorized -- 150,000,000 and 75,000,000 shares; 74,312,309 and 74,184,370 shares outstanding after deducting 17,116 and 21,489 shares in treasury .......................... 7,431 7,419 19 Class B convertible Common Stock, par value $.10 a share: Authorized -- 20,000,000 and 15,000,000 shares; 10,369,932 and 10,402,068 shares outstanding after deducting 186,302 and 187,096 shares in treasury ..................... Capital in excess of par value ............................................................. Retained earnings ................................................................................ Unearned compensation ..................................................................... Accumulated other comprehensive loss ............................................ 1,038 989,627 97,591 (1,086) (81,009) 1,041 988,635 14,354 (1,131) (7,799) 1,013,592 1,002,519 $ 2,323,781 $ 2,462,744 See accompanying notes. Consolidated Statements of Cash Flows (In thousands) OPERATING ACTIVITIES Vishay Intertechnology, Inc. Year ended December 31 1999 1998 1997 Net earnings .............................................................................................. $ 83,237 $ 8,212 $ 53,302 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization ........................................................ 139,676 127,947 Loss on sale of subsidiary .............................................................. Loss on disposal of property and equipment ................................ Minority interest in net earnings of consolidated subsidiaries ..... Purchased research and development .......................................... Asset impairment losses ................................................................. Loss on forward exchange contract ............................................... Changes in operating assets and liabilities, net of effects of businesses acquired or sold: 10,073 1,146 14,534 — — — Accounts receivable ................................................................. (73,678) Inventories ................................................................................. Prepaid expenses and other current assets ........................... Accounts payable ...................................................................... Other current liabilities ............................................................. 24,988 14,317 15,997 24,414 Other ................................................................................................. (14,895) — 712 3,810 13,300 23,057 (5,295) 13,827 13,304 (23,206) 1,575 (25,842) 18,049 81,874 — 1,245 2,092 — — 5,295 (23,339) 19,501 20,496 6,882 5,897 3,913 NET CASH PROVIDED BY OPERATING ACTIVITIES ......................... 239,809 169,450 177,158 20 INVESTING ACTIVITIES Purchases of property and equipment .................................................... (119,638) Purchases of businesses, net of cash acquired .................................... Proceeds from sale of subsidiary ............................................................ Proceeds from sale of property and equipment ..................................... — 9,118 7,934 (151,682) (423,031) — 11,650 (78,074) (122,468) — 959 NET CASH USED IN INVESTING ACTIVITIES ..................................... (102,586) (563,063) (199,583) FINANCING ACTIVITIES Proceeds from long-term borrowings ...................................................... Principal payments on long-term debt .................................................... 197 (4,481) Net (payments) proceeds on revolving credit lines ................................ (143,496) Net changes in short-term borrowings .................................................... 6,752 NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ....... (141,028) Effect of exchange rate changes on cash .............................................. (4,731) 5,030 (7,068) 462,214 (9,768) 450,408 1,671 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........ Cash and cash equivalents at beginning of year ................................... (8,536) 113,729 58,466 55,263 4,100 (82,076) 155,729 (17,152) 60,601 (3,858) 34,318 20,945 CASH AND CASH EQUIVALENTS AT END OF YEAR ......................... $ 105,193 $ 113,729 $ 55,263 See accompanying notes. Consolidated Statements of Stockholders’ Equity Vishay Intertechnology, Inc. (In thousands, except share amounts) Class B Convertible Common Stock Capital in Excess of Par Value Common Stock Retained Earnings Unearned Compensation Accumulated Other Comprehensive Income (Loss) Total Stock- holders’ Equity Balance at December 31, 1996 $ 6,717 $ 945 $ 824,416 $ 107,762 $ (370) $ 5,760 $ 945,230 — — — 53,302 — — — — — — (46,693) (966) 53,302 (46,693) (966) Net earnings Foreign currency translation adjustment Pension liability adjustment Comprehensive income Stock issued (35,608 shares) Stock dividends (3,359,615; 472,734 shares) Conversions from Class B to common (20,641 shares) Stock appreciation rights Tax effects relating to stock plan Amortization of unearned compensation — — — 4 336 1 — — — — — — — 47 (1) — — — 777 85,094 — 8,200 68 — Balance at December 31, 1997 7,058 991 918,555 Net earnings Foreign currency translation adjustment Pension liability adjustment Comprehensive income Stock issued (77,776 shares) Stock dividends (3,350,876; 495,338 shares) Conversions from Class B to common (13 shares) Tax effects relating to stock plan Amortization of unearned compensation — — — 8 353 — — — — — — — 50 — — — — — — 1,054 69,042 — (16) — Balance at December 31, 1998 7,419 1,041 988,635 Net earnings Foreign currency translation adjustment Pension liability adjustment Comprehensive income Stock issued (31,007 shares) Stock options exercised (58,546 shares) Conversions from Class B to common (28,137 shares) Tax effects relating to stock plan Amortization of unearned compensation — — — 3 6 3 — — — — — — — (3) — — — — — 505 485 — 2 — (644) (41,899) 959,648 — — — — 38,174 (4,074) 5,643 215 — — 8,200 68 292 — — — — — — 21 8,212 38,174 (4,074) 42,312 — — — (16) 575 — — — — — (1,131) (7,799) 1,002,519 — — — (508) — — — 553 — (76,553) 3,343 — — — — — 83,237 (76,553) 3,343 10,027 — 491 — 2 553 — (566) — (1,062) — — — — 292 — — — 575 (85,477) — — — — 75,587 8,212 — — (69,445) — — — 14,354 83,237 — — — — — — — Balance at December 31, 1999 $ 7,431 $ 1,038 $ 989,627 $ 97,591 $ (1,086) $ (81,009) $ 1,013,592 See accompanying notes. Notes to Consolidated Financial Statements — December 31, 1999 Vishay Intertechnology, Inc. Vishay Intertechnology, Inc. is an international manufacturer and supplier of passive electronic components and discrete active electronic components, particularly resistors, capacitors, power MOSFETS, power conversion and motor control integrated circuits, transistors and diodes. Electronic components manufactured by the Company are used in virtually all types of electronic products, including those in the computer, telecommunications, military/aerospace, instrument, auto- motive, medical, and consumer electronics industries. will be reduced by the estimated shortfall of discounted cash flows. Accumulated amortization amounted to $57,071,000 and $48,407,000 at December 31, 1999 and 1998, respectively. Cash Equivalents For purposes of the Statement of Cash Flows, cash equivalents include demand deposits and all highly liquid investments with maturi- ties of three months or less when purchased. 1. Summary of Significant Accounting Policies Research and Development Expenses Principles of Consolidation The consolidated financial statements include the accounts of Vishay Intertechnology, Inc. and its majority-owned subsidiaries, after elimination of all significant intercompany transactions, accounts, and profits. The Company’s investments in 20% to 50%-owned companies are accounted for on the equity method. Investments in other companies are carried at cost. Revenue Recognition The Company recognizes revenue when products are shipped to customers. The Company has agreements with distributor customers which, under specified conditions, provide protection against price reductions initiated by the Company and allow for returns of overstocked inventories. The effect of these programs is estimated based on histori- cal experience and provisions are recorded. Use of Estimates 22 The preparation of financial statements in conformity with ac- counting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. Inventories Inventories are stated at the lower of cost, determined by the first- in, first-out method, or market. Depreciation Depreciation is computed principally by the straight-line method based upon the estimated useful lives of the assets. Depreciation of capital lease assets is included in total depreciation expense. Deprecia- tion expense was $125,847,000, $114,592,000, and $73,329,000 for the years ended December31, 1999, 1998, and 1997, respectively. Construction in Progress The estimated cost to complete construction in progress at December31, 1999 was $28,208,000. Goodwill Goodwill (excess of purchase price over net assets acquired) is amortized principally over periods ranging from 30-40 years using the straight-line method. The recoverability of goodwill is evaluated at the operating unit level by an analysis of operating results and consideration of other significant events or changes in the business environment. If an operating unit has current operating losses and based upon projections there is a likelihood that such operating losses will continue, the Company will determine whether impairment exists on the basis of undiscounted expected future cash flows from operations before inter- est for the remaining amortization period. If impairment exists, goodwill The amount charged to expense for research and development (exclusive of purchased in-process research and development) aggre- gated $35,038,000, $28,857,000, and $7,023,000 for the years ended December 31, 1999, 1998, and 1997, respectively. The Company spends additional amounts for the development of machinery and equipment for new processes and for cost reduction measures. Grants Grants received by certain foreign subsidiaries from foreign governments, primarily in Israel, are recognized as income in accor- dance with the purpose of the specific contract and in the period in which the related expense is incurred. Grants from the Israeli government recognized as a reduction of costs of products sold were $14,256,000, $13,116,000, and $11,352,000 for the years ended December31, 1999, 1998, and 1997, respectively. Grants receivable of $10,056,000 and $12,828,000 are included in other current assets at December31, 1999 and 1998, respectively. Deferred grant income was $50,462,000 and $59,264,000 at December31, 1999 and 1998, respectively. The grants are subject to certain conditions, including maintaining specified levels of employment for periods up to ten years. Noncompliance with such conditions could result in repayment of grants. However, management expects that the Company will comply with all terms and conditions of the grants. Minority Interest Minority interest represents the ownership interests of third parties in the net assets and results of operations of certain consolidated subsidiaries. Share and Per Share Amounts On June 22, 1999, the Company effected a five-for-four split of the outstanding shares of Common Stock and Class B Common Stock. Accordingly, all share and per share amounts shown in the accompany- ing consolidated financial statements and notes have been retroactively adjusted to reflect the stock split. Earnings per share amounts for all periods presented also reflect 5% stock dividends paid on June 11, 1998 and June 9, 1997. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, Account- ing for Stock-Based Compensation (“SFAS 123”), encourages entities to record compensation expense for stock-based employee compensa- tion plans at fair value but provides the option of measuring compensa- tion expense using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Em- ployees (“APB 25”). The Company accounts for stock-based compensa- tion in accordance with APB25. Note 10 presents pro forma results of operations as if SFAS 123 had been used to account for stock-based compensation plans. Notes to Consolidated Financial Statements — December 31, 1999 (continued) Vishay Intertechnology, Inc. Derivative Financial Instruments The Company uses interest rate swap agreements for purposes other than trading and treats such agreements as off-balance-sheet items. Interest rate swap agreements are used by the Company to modify variable rate obligations to fixed rate obligations, thereby reduc- ing the exposure to market rate fluctuations. The interest rate swap agreements are designated as hedges, and effectiveness is determined by matching the principal balances and terms with each specific obliga- tion. Such an agreement involves the exchange of amounts based on fixed interest rates for amounts based on variable interest rates over the life of the agreement without an exchange of the notional amount upon which payments are based. The differential to be paid or received as interest rates change is accounted for on the accrual method of account- ing. The related amount payable to or receivable from counterparties is included as an adjustment to interest expense and to accrued interest in other accrued expenses. Gains and losses upon terminations of interest rate swap agreements are deferred as an adjustment to interest expense related to the obligations over the term of the original contract lives of the terminated swap agreements. In the event of early extin- guishment of an obligation, any realized or unrealized gain or loss from the swap is recognized in income at the time of extinguishment. Foreign currency forward exchange contracts are used to man- age the effect of exchange rate changes on actual cash flows from certain foreign currency denominated transactions. Foreign currency forward exchange contracts designated as effective hedges of firm commitments are treated as hedges for accounting purposes. Gains and losses are deferred and recognized in income when the hedged trans- action occurs. Accounting Pronouncements Pending Adoption In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS133”). SFAS133 establishes accounting and reporting standards for derivative instru- ments and hedging activities. It requires entities to record all derivative instruments on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in each period in current earnings or other comprehensive income, based on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges is recognized in earnings. The Company is required to adopt SFAS133, as amended, effective January 1, 2001. Based on current derivative usage and hedging activities, the Company does not expect the adoption of SFAS133 to have a material impact on its future earnings or financial position. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, Revenue Recognition (“SAB 101”), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Management believes that the Company’s revenue recognition policy is in compliance with the provisions of SAB 101 and that SAB 101 will have no material effect on the financial position or results of operations of the Company. Commitments and Contingencies for Liabilities loss contingencies, including environmental remediation costs, arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. The costs for a specific clean-up site are discounted if the aggregate amount of the obligation and the amount and timing of the cash payments for that site are fixed or reliably determinable generally based upon information derived from the remediation plan for that site. Recoveries from third parties which are probable of realization and can be reasonably estimated are sepa- rately recorded, and are not offset against the related environmental liability. Reclassifications Certain prior-year amounts have been reclassified to conform to the current financial statement presentation. 2. Acquisitions On March 2, 1998, the Company purchased 80.4% of Siliconix Incorporated (NASDAQ:SILI) and 100% of TEMIC Semiconductor GmbH (collectively, “TEMIC”) for a total of $549,889,000 in cash. TEMIC is a producer of discrete active electronic components with manufactur- ing facilities in the United States, the Far East, Germany, and Austria. On March 4, 1998, the Company sold the Integrated Circuits division of TEMIC to Atmel Incorporated for a total of $105,755,000 in cash. The purchase of TEMIC was funded from the Company’s $1.1 billion revolving credit facilities made available to Vishay on March2,1998. The TEMIC acquisition was accounted for under the purchase method of accounting. Under purchase accounting, the assets and liabilities of TEMIC were required to be adjusted from historical amounts to their estimated fair values. Management estimated that $13,300,000 of the TEMIC purchase price represented purchased in-process technology that had not reached technological feasibility and had no alternative future use. Accordingly, this amount was expensed with no tax benefit upon con- summation of the acquisition. The value assigned to purchased in- process technology was determined by identifying research projects in areas for which technological feasibility had not been established. The value was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful develop- ment of the purchased in-process technology. In connection with the TEMIC acquisition, the Company recorded restructuring liabilities of $30,471,000 in connection with an exit plan that management began to formulate prior to the acquisition date. Approximately $25,197,000 of these liabilities related to employee termination costs covering 498 technical, production, administrative and support employees located in the United States, Europe, and the Pacific Rim. The remaining $5,274,000 related to provisions for contract cancellations and other costs. As of December31, 1999, 364 employ- ees had been terminated and $20,203,000 of the termination costs were paid. Additionally, $3,302,000 of contract cancellation charges and other costs were paid. The results of operations of TEMIC have been included in the Company’s results from March 1, 1998. Excess of cost over the fair value of assets acquired ($154,866,000) is being amortized principally over periods ranging from 30-40 years using the straight-line method. In July 1997, the Company purchased 65% of the common stock of Lite-On Power Semiconductor Corporation (“LPSC”), a Taiwan com- pany, for $130,000,000 in cash and stock appreciation rights with a fair value at the time of issuance of $8,200,000. LPSC is a producer of discrete active electronic components with manufacturing facilities in 23 Notes to Consolidated Financial Statements — December 31, 1999 (continued) Vishay Intertechnology, Inc. Taiwan, China and the United States. LPSC owns 40.2% of Diodes, Inc. (AMEX:DIO). The Company utilized existing credit facilities to finance the cash portion of the purchase price. The acquisition was accounted for under the purchase method of accounting. The results of operations of LPSC have been included in the Company’s results from July1, 1997. Excess of cost over the fair value of net assets acquired ($110,978,000) is being amortized on a straight- line method over an estimated useful life of forty years. Had the TEMIC and LPSC acquisitions been made at the begin- ning of 1998 and 1997, the Company’s pro forma unaudited results would have been (in thousands, except per share amounts): Year ended December 31 1998 1997 Net sales ................................................. Net earnings ............................................ Basic and diluted earnings per share ... $ 1,655,197 6,528 0.08 $ 1,723,818 41,394 0.49 The pro forma results include adjustments for interest expense that would have been incurred to finance the acquisitions, additional depreciation based on the fair value of property, plant, and equipment acquired, writeoff of purchased in-process research and development, amortization of goodwill, and related tax effects. The unaudited pro forma results are not necessarily indicative of the results that would have been attained had the acquisitions occurred at the beginning of the periods presented. 3. Unusual Items Unusual items in 1998 consisted of the following components (in thousands): 24 Impairment losses: China .................................................. Nikkohm ............................................. Restructuring of European operations .. Closing of two U.S. sales offices ........... $ 19,556 3,501 5,944 300 $ 29,301 In May 1996, the Company signed letters of intent with the China National Non-Ferrous Metals Industry Corporation Nanchang Branch (the “CNNC”) and United Development, Inc. to enter into joint ventures to mine, process and refine tantalum at a site in China and to build a plant in China to manufacture dipped radial and chip tantalum capacitors. Management viewed this as a strategic investment as it would provide the Company with a presence in the Far East, another source of low-cost labor, and a stable, low-cost supply of tantalum. Through March31, 1998, the Company continued to negotiate the terms of the joint ventures with the CNNC and to conduct feasibility tests on the mine. As of March31, 1998, the Company had removed from existing production lines and packaged for shipment to China $18.9 million of equipment to be used in the manufacture of dipped radial and chip tantalum capaci- tors at the proposed plant. In addition, the Company had deferred $1.7 million in consulting costs incurred in evaluating the potential joint venture. During fiscal 1998, several events occurred which led to the eventual abandonment of the projects in China. First, the CNNC was disbanded by the Chinese government and replaced by a smaller organization which had much less control over the various potential Chinese partners in the joint ventures. The individual Chinese partners, no longer under the central control of the CNNC, began demanding renegotiations of the joint venture agreements in ways that were unac- ceptable to the Company. Second, the Asian economy experienced a significant downturn and demand for the Company’s tantalum capaci- tors dropped significantly. The reduction in demand for the Company’s tantalum capacitors made the building of a large factory financially impractical. Instead, the Company downsized its plans and opened a small finishing plant for tantalum capacitors in one of the Company’s existing Shanghai facilities that it had acquired in 1997. Third, suppliers of tantalum outside of China were forced to lower prices due to a significant increase in supply primarily due to competition from Chinese suppliers. Fourth, in 1997 and 1998, Vishay acquired two companies that had established facilities in China with approximately 2,000 em- ployees in five factories. These factories served to establish Vishay as a major components manufacturer in China without additional invest- ment by the Company. During the fourth quarter of fiscal 1998, manage- ment evaluated the proposed joint ventures and concluded that, due to the factors described above, the Company would discontinue negotia- tions and abandon the proposed joint ventures. Management concluded that the $18.9 million of equipment had a net realizable value of $1 million and that the $1.7 million of deferred costs were not recoverable and in accordance with the Company’s accounting policy, recorded an impairment loss of $19.6 million. In March 1995, the Company acquired a 49% interest in Nikkohm, a Japanese manufacturer and distributor of passive electronic compo- nents. The Company’s investment in Nikkohm totaled $4 million. Like the proposed Chinese joint ventures, management considered its in- vestment in Nikkohm strategic because it provided the Company with an entry into certain Far East markets. Following the acquisition of its interest, Vishay worked with the management of Nikkohm to build Nikkohm’s business and improve its profitability. Through Decem- ber31,1997, the Company recognized a cumulative loss on its invest- ment in Nikkohm of $499,800 (1995–$304,000; 1996–$141,800; 1997– $54,000). Management had been encouraged by Nikkohm’s trend in earnings and had proposed certain marketing programs intended to further improve operating results. However, Nikkohm’s results of opera- tions began to deteriorate in fiscal 1998 due to a decrease in demand for the Company’s products, particularly thin film resistors, and a downturn in the Asian economy. In addition, a significant member of Nikkohm’s management resigned due to health concerns. Also, the Company’s acquisitions in 1997 and 1998 had established Vishay as a major electronics components manufacturer in the Far East. During the fourth quarter of fiscal 1998, management evaluated these recent develop- ments and concluded that the carrying amount of the investment in Nikkohm was not recoverable and in accordance with the Company’s accounting policy, recorded an impairment loss of $3.5 million. Restructuring of European operations consists of $5,694,000 of employee termination costs covering approximately 182 technical, pro- duction, administrative and support employees located in Germany and the United Kingdom. The remaining $250,000 relates to lease buyout expense associated with the closing of a facility in the United Kingdom. At December31,1998, approximately 15 employees had been termi- nated and $471,000 of termination costs were paid. During the year ended December31, 1999, the Company terminated the remainder of the employees and paid related termination costs of $4,899,000. At December31,1999, the 1998 European operations restructuring plan was completed. The remaining $300,000 of restructuring expense consists of employee termination costs of $130,000 and lease buyout and other expenses of $170,000 relating to the closing of two U.S. sales offices. During the year ended December 31, 1999, these sales offices were closed and the restructuring costs were paid. Notes to Consolidated Financial Statements — December 31, 1999 (continued) Vishay Intertechnology, Inc. Unusual items expense of $14,503,000 in 1997 consists of restructuring expense of $12,605,000 and a settlement with the United States Government in the amount of $1,898,000 representing reim- bursements for overcharges relating to military products produced prior to 1993 at one of the Company’s U.S. subsidiaries. Restructuring expense of $12,605,000 in 1997 resulted from a downsizing of the Company’s European operations. Approximately $10,357,000 of this expense related to employee termination costs covering 324 technical, production, administrative, and support employ- ees located in Germany and France. Approximately $623,000 of the restructuring expense related to facility closure costs in France. The remaining $1,625,000 related to additional payments to certain employ- ees laid off in the last half of fiscal 1996 in connection with Vishay’s fiscal 1996 restructuring program. The payments were a result of a judgment rendered by a French court against a subsidiary of the Company. The court ruled that these employees were due additional payments under France’s mandated social plan. At December31,1998, approximately 173 employees had been terminated and $6,158,000 of termination costs were paid. During the year ended December31,1999, the Com- pany terminated an additional 143 employees and paid related termina- tion costs of $4,097,000. At December31,1999, the 1997 European operations restructuring plan was completed. 4. Income Taxes Earnings before income taxes and minority interest consists of the following components (in thousands): December 31 1999 1998 Deferred tax assets: Pension and other retiree obligations ...... Net operating loss carryforwards .............. Tax credit carryforwards ............................ Restructuring reserves .............................. Other accruals and reserves ..................... $ 26,447 $ 27,839 109,545 8,535 7,937 40,643 84,387 8,236 4,981 32,385 Total deferred tax assets ................................ 156,436 194,499 Less: Valuation allowance ......................... (47,648) (59,329) Net deferred tax assets ................................... 108,788 135,170 Deferred tax liabilities: Tax over book depreciation ....................... Other—net .................................................. 86,497 14,641 99,890 11,645 Total deferred tax liabilities ............................. 101,138 111,535 Net deferred tax assets ................................... $ 7,650 $ 23,635 A reconciliation of income tax expense at the U.S. federal statutory income tax rate to actual income tax expense is as follows (in thousands): Year ended December 31 1999 1998 1997 Year ended December 31 1999 1998 1997 Domestic .................................... Foreign ....................................... $ 26,717 $ (45,334) $ 45,832 43,729 107,994 87,980 $ 134,711 $ 42,646 $ 89,561 Significant components of income taxes are as follows (in thou- sands): Tax at statutory rate .................. State income taxes, net of U.S. federal tax benefit ........ Effect of foreign operations ...... Benefit of net operating loss carryforwards ........................ Provision for estimated tax uncertainties ......................... Year ended December 31 1999 1998 1997 Increase in valuation Current: U.S. Federal ......................... Foreign .................................. State ...................................... $ 1,685 6,810 728 $ 1,590 12,370 987 $ 20,296 6,494 2,103 Deferred: 9,223 14,947 28,893 allowance for foreign net operating loss carryforwards ........................ Purchased research and development expense .......... Other ........................................... $ 47,149 $ 14,926 $ 31,346 606 (13,717) 649 (1,561) 1,619 (11,059) 25 – – – – – (207) 10,000 10,000 – – 2,902 4,655 1,955 – 2,468 $ 36,940 $ 30,624 $ 34,167 U.S. Federal ......................... Foreign .................................. State ...................................... 21,957 5,333 427 (44) 15,708 13 1,476 3,547 251 At December 31, 1999, the Company had the following net operating loss carryforwards for tax purposes (in thousands): Expires 27,717 15,677 5,274 $ 36,940 $ 30,624 $ 34,167 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands): U.S. Federal ................. Germany ....................... France .......................... Portugal ........................ $ 36,794 131,218 6,957 6,439 2018-2019 No expiration 2004 to unlimited 2001-2004 Approximately $59,480,000 of the carryforward in Germany re- sulted from the Company’s acquisition of Roederstein, GmbH in 1993. Valuation allowances of $45,698,000 and $57,054,000 have been recorded at December31, 1999 and 1998, respectively, for deferred tax assets related to foreign net operating loss carryforwards. In 1999 and Notes to Consolidated Financial Statements — December 31, 1999 (continued) Vishay Intertechnology, Inc. 1998, respectively, tax benefits recognized through reductions of the valuation allowance had the effect of reducing goodwill of acquired companies by $454,000 and $446,000. If additional tax benefits are recognized in the future through further reduction of the valuation allowance, $21,360,000 of such benefits will reduce goodwill. At December31, 1999, no provision had been made for U.S. federal and state income taxes on approximately $423,748,000 of foreign earnings which are expected to be reinvested indefinitely. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes (subject to an adjust- ment for foreign tax credits), state income taxes, and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable be- cause of the complexities associated with its hypothetical calculation. Income taxes paid were $5,463,000, $36,488,000 and $24,879,000, for the years ended December31, 1999, 1998, and 1997, respectively. 5. Long-Term Debt Long-term debt consisted of the following (in thousands): December 31 1999 1998 Multicurrency Revolving Credit Loans ........... Other Debt and Capital Lease Obligations .... $ 635,215 $ 777,400 41,982 26,173 Less current portion ........................................ 4,445 4,544 661,388 819,382 26 $ 656,943 $ 814,838 At December 31, 1998, two facilities were available under the Company’s amended and restated loan agreements with a group of banks: an $825,000,000 five-year multicurrency revolving credit and swing line facility (interest 5.87% at December 31, 1998); and a $275,000,000 364-day multicurrency revolving credit facility. On June 1, 1999, the Company amended the two credit facilities. The $825,000,000 long-term facility matures on March2, 2003, subject to Vishay’s right to request year-to-year renewals. The short-term facility now provides for a $100,000,000 364-day facility, which is available on a revolving basis until May 30, 2000. Interest on the two facilities is payable at prime or other interest rate options. The Company is required to pay facility fees on the two facilities. As of December 31, 1999, the Company had $635,215,000 outstanding under the long-term revolving credit facility (interest 7.52%, 7.10% after giving effect to interest rate swaps). Borrowings under the loan agreements are secured by pledges of stock in certain significant subsidiaries and indirect subsidiaries of Vishay and certain guaranties by the significant subsidiaries. The credit facilities restrict the Company from paying cash dividends and require the Company to comply with other covenants, including the mainte- nance of specific financial ratios. Other debt and capital lease obligations include borrowings under short-term credit lines of $3,410,000 and $10,470,000 at Decem- ber31, 1999 and 1998, respectively, which are classified as long-term based on the Company’s intention and ability to refinance the obliga- tions on a long-term basis. Aggregate annual maturities of long-term debt, are as follows: 2000—$4,445,000; 2001—$15,627,000; 2002—$1,518,000; 2003— $635,811,000; 2004—$569,000; thereafter—$3,418,000. At December31, 1999, the Company had committed and uncom- mitted short-term credit lines with various U.S. and foreign banks aggregating $134,767,000, of which $104,567,000 was unused. The weighted average interest rate on short-term borrowings outstanding as of December31, 1999 and 1998 was 7.07% and 6.11%, respectively. Interest paid was $53,605,000, $48,105,000, and $18,699,000 for the years ended December31, 1999, 1998, and 1997, respectively. 6. Stockholders’ Equity On May 20, 1999, the Company’s shareholders approved an increase in the authorized number of shares of Common Stock, $.10 par value from 75,000,000 shares to 150,000,000 shares, and an increase in the authorized number of shares of Class B Common Stock, $.10 par value, from 15,000,000 shares to 20,000,000 shares. The Company’s Class B Common Stock carries ten votes per share while the Common Stock carries one vote per share. Class B shares are transferable only to certain permitted transferees while the Common Stock is freely transferable. Class B shares are convertible on a one-for-one basis at any time to shares of Common Stock. In connection with the acquisition of LPSC (see Notes 2 and 17), the Company issued stock appreciation rights (SARs) to the former owners of LPSC. The SARs represent the right to receive in stock the increase in value on the equivalent of 2,133,000 shares of the Company’s stock above $17.52 per share. The SARs may be exercised at any time prior to July 17, 2007 at the option of the former owners of LPSC. The Company may force redemption of the SARs if the Company’s stock trades above the “Strike Price” ($39.64 per share effective July 17, 1999). The Strike Price increases by 10% each year. The fair value of the SARs as of July 17, 1997 was determined to be $8,200,000 using the binomial option pricing model. Unearned compensation relating to Common Stock issued under employee stock plans is being amortized over periods ranging from three to five years. At December31, 1999, 203,418 shares were avail- able for issuance under stock plans. 7. Other Income (Expense) Other income (expense) consists of the following (in thousands): Year ended December 31 1999 1998 1997 Foreign exchange gains ............ Loss on forward exchange contract ................................. Investment income .................... Equity in net income of affiliates ............................ Loss on sale of fixed assets ..... Loss on sale of subsidiary ........ Other ........................................... $ 86 $ 495 $ 3,657 - 3,968 (6,269) 4,687 (5,295) 2,353 2,195 (1,179) (10,073) (734) 1,084 (712) – (1,526) 1,090 (1,245) – (782) $ (5,737) $ (2,241) $ (222) On March 26, 1999, the Company sold Nicolitch, S.A., its French manufacturer of printed circuit boards, to Leonische Drahtwerke AG. In connection with the sale, the Company received proceeds of approxi- mately $9,118,000 and recorded a noncash pretax loss of $10,073,000. Notes to Consolidated Financial Statements — December 31, 1999 (continued) Vishay Intertechnology, Inc. In connection with the Company’s acquisition of TEMIC, the Company entered into a forward exchange contract in December 1997. This contract was intended to protect against the impact of fluctuations in the exchange rate between the U.S. Dollar and the Deutsche Mark, since the purchase price was denominated in Deutsche Marks and payable in U.S. Dollars. At December 31, 1997, the Company had an unrealized loss on this contract of $5,295,000, which resulted from marking the contract to market value. On March 2, 1998, the forward exchange contract was settled and the Company recognized an additional loss of $6,269,000. 8. Other Comprehensive Income The income tax effects allocated to and the cumulative balance of each component of other comprehensive income (loss) are as follows: (In thousands) Beginning Balance Before-Tax Amount Tax (Benefit) Expense Net-of-Tax Amount Ending Balance December 31, 1999 Pension liability adjustment ........................ Currency translation adjustment ................ December 31, 1998 Pension liability adjustment ........................ Currency translation adjustment ................ December 31, 1997 Pension liability adjustment ........................ Currency translation adjustment ................ $ (8,386) 587 $ 6,173 (76,553) $ 2,830 — $ 3,343 (76,553) $ (5,043) (75,966) $ (7,799) $ (70,380) $ 2,830 $ (73,210) $ (81,009) $ (4,312) (37,587) $ (7,338) 38,174 $ (3,264) — $ (4,074) 38,174 $ (8,386) 587 $ (41,899) $ 30,836 $ (3,264) $ 34,100 $ (7,799) $ (3,346) 9,106 $ (2,714) (46,693) $ (1,748) — $ (966) (46,693) $ (4,312) (37,587) $ 5,760 $ (49,407) $ (1,748) $ (47,659) $ (41,899) 27 Notes to Consolidated Financial Statements — December 31, 1999 (continued) Vishay Intertechnology, Inc. 9. Pensions and Other Postretirement Benefits The Company maintains several defined benefit pension and nonpension postretirement plans which cover substantially all full-time U.S. employees. The following table sets forth a reconciliation of the benefit obligation, plan assets, and accrued benefit cost related to these plans (in thousands): Pension Benefits 1999 1998 Other Benefits 1999 1998 Change in benefit obligation: Benefit obligation at beginning of year . Service cost ............................................ Interest cost ............................................ Employee contributions ......................... Actuarial losses (gains) ......................... Benefits paid ........................................... $ 110,965 3,296 6,981 1,959 (11,690) (7,064) $ 98,991 3,828 6,726 1,782 7,057 (7,419) $ 7,977 264 496 — (849) (557) $ 7,796 287 494 — (94) (506) Benefit obligation at end of year ................ $ 104,447 $ 110,965 $ 7,331 $ 7,977 Change in plan assets: Fair value of plan assets at beginning of year .......................... Actual return on plan assets ................. Company contributions .......................... Plan participants’ contributions ............. Benefits paid ........................................... $ 95,534 6,837 2,174 1,959 (7,064) $ 98,388 706 2,077 1,782 (7,419) Fair value of plan assets at end of year .... $ 99,440 $ 95,534 Funded status .............................................. Unrecognized net actuarial loss (gain) ...... Unrecognized transition obligation (asset). Unamortized prior service cost ................... $ (5,007) 4,455 (83) 75 $ (15,431) 15,184 27 173 $ (7,331) (308) 2,779 248 $ (7,977) 547 2,993 279 Net amount recognized ............................... $ (560) $ (47) $ (4,612) $ (4,158) 28 Amounts recognized in the consolidated balance sheets consist of: Prepaid benefit cost .......................... Accrued benefit liability .................... Accumulated other comprehensive income ................. $ 4,165 (4,725) $ 4,452 (7,817) $ — (4,612) $ — (4,158) — 3,318 — — Net amount recognized ............................... $ (560) $ (47) $ (4,612) $ (4,158) Weighted-average assumptions as of December 31: 6.50% Discount rate ..................................... Expected return on plan assets ....... 8.50% - 9.50% 8.50% - 9.50% 4.50% Rate of compensation increase ....... 7.50% 4.50% 7.50% 6.50% 1999 Pension Benefits 1998 1997 1999 Other Benefits 1998 1997 Components of net periodic benefit cost: Annual service cost ............................... Less employee contribution .................. $ 5,255 1,959 $ 5,610 1,782 $ 4,968 1,969 $ 264 — $ 287 — $ 252 — Net service cost ..................................... Interest cost ........................................... Expected return on plan assets ............ Amortization of prior service cost ......... Amortization of transition obligation ..... Amortization of losses ........................... 3,296 6,981 (8,259) 98 110 461 3,828 6,726 (8,463) 195 110 — 2,999 6,266 (7,511) 233 110 — 264 496 — 31 214 6 287 494 — 31 214 — 252 499 — 31 214 5 Net periodic benefit cost $ 2,687 $ 2,396 $ 2,097 $ 1,011 $ 1,026 $ 1,001 Notes to Consolidated Financial Statements — December 31, 1999 (continued) Vishay Intertechnology, Inc. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $21,494,000, $21,380,000, and $15,401,000, respectively, as of December 31, 1999 and $98,043,000, $91,596,000, and $83,739,000, respectively, as of December 31, 1998. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets were $21,494,000, $21,380,000, and $15,401,000, respectively, as of December 31, 1999 and $110,965,000, $101,414,000, and $95,535,000, respectively, as of December31, 1998. The Company’s nonpension postretirement plan is funded as costs are incurred. The plan is contributory, with employee contributions adjusted for general inflation or inflation in costs under the plan. The plan was amended in 1993 to cap employer contributions at 1993 levels. The impact of a one-percentage-point change in assumed health care cost trend rates on the net periodic benefit cost and postretirement benefit obligation is immaterial. Many of the Company’s U.S. employees are eligible to participate in 401(k) savings plans, some of which provide for Company matching under various formulas. The Company’s matching expense for the plans was $3,196,000, $2,816,000 and $2,126,000 for the years ended December 31, 1999, 1998, and 1997, respectively. The Company provides pension and similar benefits to employ- ees of certain foreign subsidiaries consistent with local practices. German subsidiaries of the Company have defined benefit pension plans. The Company acquired 100% of TEMIC Semiconductor GmbH on March 2, 1998, including its pension plan. The following table sets forth a reconciliation of the benefit obligation, plan assets, and accrued benefit cost related to the German plans (in thousands): 1999 1998 Change in benefit obligation: Benefit obligation at beginning of year ..... Service cost ................................................ Interest cost ................................................ Actuarial (gains) losses ............................. Acquisition .................................................. Benefits paid ............................................... Foreign currency translation ..................... $ 111,770 $ 64,758 510 6,025 3,383 34,536 (5,036) 7,594 554 6,501 (837) — (5,341) (14,794) Benefit obligation at end of year .................... $ 97,853 $ 111,770 Change in plan assets: Fair value of plan assets at beginning of year .................................................... Actual return on plan assets ..................... Company contributions .............................. Benefits paid ............................................... Foreign currency translation ..................... $ 15,227 $ 13,735 624 2,754 (2,872) 986 753 2,467 (2,574) (2,147) Fair value of plan assets at end of year ........ $ 13,726 $ 15,227 Funded status .................................................. Unrecognized net actuarial losses ................. Unrecognized transition obligation (asset) .... Unamortized prior service cost ....................... $ (84,127) $ (96,543) 7,002 (19) 168 5,650 (13) 103 Net amount recognized ................................... $ (78,387) $ (89,392) 1999 1998 Amounts recognized in the consolidated balance sheets consist of: Accrued benefit liability ........................ Accumulated other comprehensive $ (85,612) $ (99,476) income ................................................ 7,225 10,084 Net amount recognized ................................... $ (78,387) $ (89,392) Weighted-average assumptions as of December 31: Discount rate ......................................... Rate of compensation increase ........... 6.50% 3.00% 6.50% 3.00% 1999 1998 1997 Components of net periodic benefit cost: Service cost ..................... Interest cost .................... Expected return on plan assets ........................... Amortization of prior service cost .................. Amortization of transition asset ............ Amortization of losses .... $ 554 6,501 $ 510 6,025 $ 107 4,261 (488) (476) (1,179) 65 (6) 250 86 (2) 62 106 (4) — Net periodic benefit cost ........... $ 6,876 $ 6,205 $ 3,291 29 The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the German pension plans with accumulated benefit obligations and projected benefit obligations in excess of plan assets were $97,853,000, $96,601,000, and $13,726,000, as $111,770,000, $110,871,000, and $15,227,000, respectively, as of December 31, 1998. of December31,1999 respectively, and 10. Stock Options The Company has three stock option programs. Under the 1995 Stock Option Program, certain key executives of the Company were granted options on March3, 1995, to purchase 1,522,000 shares of the Company’s Common Stock. The options were fully vested on the date of grant and expire March1,2000, with one-third exercisable at $18.31, one-third exercisable at $23.04, and one-third exercisable at $32.91. Under the 1997 Stock Option Program, certain executive officers, key employees, and consultants of the Company were granted options on May21, 1998, to purchase 1,791,000 shares of the Company’s Common Stock. The options were fully vested on the date of grant and expire June1,2008, with one-third exercisable at $16.33, one-third at $18.79, and one-third at $20.42. Under the 1998 Stock Option Program, certain executive officers and key employees were granted options on October6, 1998 to pur- chase 1,065,000 shares of the Company’s Common Stock. The options, which are exercisable at $8.40, vest evenly over a six-year period and expire March16,2008. On October 8, 1999, an additional 852,000 options were granted. These options are exercisable at $23.00, vest evenly over a six-year period and expire October 8, 2009. Notes to Consolidated Financial Statements — December 31, 1999 (continued) Vishay Intertechnology, Inc. 10. Stock Options (continued) The following table summarizes the Company’s stock option activity (options in thousands): 1999 1998 1997 Weighted Average Exercise Price $ 17.94 23.00 8.40 — 8.40 18.99 20.74 Number of Options 4,196 852 (59) — (35) 4,954 3,244 87 Number of Options 1,522 2,856 — (182) — 4,196 3,132 904 Weighted Average Exercise Price $ 24.75 14.74 — 24.75 — 17.94 21.18 Number of Options 1,522 — — — — 1,522 1,522 — Weighted Average Exercise Price $ 24.75 — — — — 24.75 24.75 Outstanding at beginning of year ............... Granted ........................................................ Exercised ..................................................... Forfeited ....................................................... Cancelled ..................................................... Outstanding at end of year ......................... Exercisable at end of year .......................... Available for future grants ........................... The following table summarizes information concerning stock options outstanding and exercisable at December 31, 1999 (options in thousands): Options Outstanding Options Exercisable Range of Exercise Prices Options Contractual Life Weighted Average Remaining Number of $8.40 $16.33 - $20.42 $23.00 $23.04 - $32.19 Total 30 971 2,238 852 893 4,954 8.76 6.75 9.77 0.16 6.47 Weighted Average Exercise Price $ 8.40 18.47 23.00 27.98 18.99 Weighted Average Exercise Price $ 8.40 18.47 – 27.98 20.74 Number of Options 113 2,238 – 893 3,244 The following is provided to comply with the disclosure requirements of SFAS 123. If compensation cost for the Company’s stock option programs had been determined using the fair-value method prescribed by SFAS 123, the Company’s results for the year ended December31, 1999 and 1998 would have been reduced to the proforma amounts indicated below (in thousands, except per share amounts): Net earnings (loss) Basic earnings (loss) per share Diluted earnings (loss) per share 1999 $ 82,103 0.97 0.96 1998 $ (1,906) (0.02) (0.02) The weighted average fair value of the options granted was estimated using the Black-Scholes option pricing model, with the assumptions presented below. All options granted in 1999 had an exercise price equal to the market value and a weighted average fair value of $9.31. For options granted in 1998 with an exercise price equal to the market value, the weighted average fair value was $5.22 and the weighted average exercise price was $11.61. For options granted in 1998 with an average exercise price greater than the market value, the weighted average fair value was $5.78 and the weighted average exercise price was $20.70. 1999 1998 1998 Stock Option Progam 1998 Stock Option Program 1997 Stock Option Program Expected dividend yield Risk-free interest rate Expected volatility Expected life (in years) – 6.0% 51.3% 4.5 – 4.2% 48.3% 4.5 – 5.7% 48.3% 8 Notes to Consolidated Financial Statements — December 31, 1999 (continued) Vishay Intertechnology, Inc. 11. Leases 13. Current Vulnerability Due to Certain Total rental expense under operating leases was $21,390,000, $23,703,000, and $9,413,000 for the years ended December 31, 1999, 1998, and 1997, respectively. Future minimum lease payments for operating leases with initial or remaining noncancelable lease terms in excess of one year are as follows: 2000—$15,213,000; 2001—$12,237,000; 2002—$11,435,000; 2003—$10,507,000; 2004—$11,797,000; thereafter—$54,318,000. 12. Financial Instruments The Company uses financial instruments in the normal course of its business, including derivative financial instruments, for purposes other than trading. These financial instruments include debt and interest rate swap agreements. The notional or contractual amounts of these commitments and other financial instruments are discussed below. Concentration of Credit Risk Financial instruments with potential credit risk consist principally of accounts receivable. Concentrations of credit risk with respect to receivables are limited due to the Company’s large number of custom- ers and their dispersion across many countries and industries. At December31, 1999 and 1998, the Company had no significant concen- trations of credit risk. Interest Rate Swap Agreements In August 1998, the Company entered into six interest rate swap agreements with a total notional amount of $300,000,000 to manage interest rate risk related to its multicurrency revolving line of credit. These interest rate swap agreements require the Company to make payments to the counterparties at the fixed rate stated in the agree- ments, and in return to receive payments from the counterparties at variable rates. These interest rate swap agreements mature in August 2003. The variable rates are based on USD-LIBOR-BBA rates. In November 1999, the Company entered into two three-month interest rate swap agreements with a total notional amount of $300,000,000. These interest rate swap agreements require the Company to make payments to the counterparties on February 29, 2000 at the three-month USD-LIBOR-BBA rate as of November 29, 1999 less 0.16% and to receive monthly payments from the counterparties at the monthly USD- LIBOR-BBA rate. At December 31, 1999 and 1998, the Company paid a weighted average fixed rate of 5.61% and 5.77%, respectively, and received a weighted average variable rate of 6.49% and 5.25%, respec- tively. The fair value of the interest rate swap agreements, based on current market rates, approximated a net receivable of $8,714,000 and a net payable of $7,572,000 at December 31, 1999 and 1998, respec- tively. Foreign Currency Forward Exchange Contracts In September 1999, a subsidiary of the Company entered into foreign currency forward exchange contracts to manage exposure related to certain foreign currency commitments and balance sheet positions. At December 31, 1999, the notional amount of outstanding foreign currency forward exchange contracts was $6,438,000. All of the total outstanding contracts at December 31, 1999 were to hedge yen denominated commitments from customers in Japan. Cash and Cash Equivalents, Notes Payable, and Long-Term Debt The carrying amounts reported in the consolidated balance sheets approximate fair value. Concentrations Sources of Supply Although most materials incorporated in the Company’s products are available from a number of sources, certain materials (particularly tantalum and palladium) are available only from a relatively limited number of suppliers. Tantalum, a metal, is the principal material used in the manufacture of tantalum capacitor products. It is purchased in powder form primarily under annual contracts with domestic and foreign suppliers at prices that are subject to periodic adjustment. The Com- pany is a major consumer of the world’s annual tantalum production. There are currently three major suppliers that process tantalum ore into capacitor grade tantalum powder. The Company believes that there is currently a surplus of tantalum ore reserves and a sufficient number of tantalum processors relative to foreseeable demand. The tantalum required by the Company has generally been available in sufficient quantities to meet its requirements. However, the limited number of tantalum powder suppliers could lead to increases in tantalum prices that the Company may not be able to pass on to its customers. Palladium is used to produce multi-layer ceramic capacitors. Palladium is primarily purchased on the spot and forward markets, depending on market conditions. Palladium is considered a commodity and is subject to price volatility. The price of palladium fluctuated in the range of approximately $127 to $444 per troy ounce during the three years ended Decem- ber31,1999, and had increased to $670 per troy ounce as of Febru- ary28, 2000. Palladium is currently found in South Africa and Russia. Due to various factors, the Company believes there may be a short-term shortage of palladium which may affect both the cost of palladium and the Company’s plans to expand multi-layer ceramic chip capacitor production to meet increased demand. An inability on the part of the Company to pass on increases in palladium costs to its customers could have an adverse effect on the margins of those products using the metal. Geographic Concentration To address the increasing demand for its products and to lower its costs, the Company has expanded, and plans to continue to expand, its manufacturing operations in Israel in order to take advantage of that country’s lower wage rates, highly skilled labor force, government- sponsored grants, and various tax abatement programs. Israeli incen- tive programs have contributed substantially to the growth and profit- ability of the Company. The Company might be materially and adversely affected if these incentive programs were no longer available to the Company or if events were to occur in the Middle East that materially interfered with the Company’s operations in Israel. 14. Business Segment and Geographic Area Data Vishay designs, manufactures, and markets electronic compo- nents that cover a wide range of products and technologies. The Company has two reportable segments: Passive Electronic Compo- nents (Passives) consisting principally of fixed resistors, solid tantalum surface mount chip capacitors, solid tantalum leaded capacitors, wet/ foil tantalum capacitors, multi-layer ceramic chip capacitors, film ca- pacitors and inductors, and Active Electronic Components (Actives) consisting principally of diodes, transistors, power MOSFETS, power conversion and motor control integrated circuits. The Company evaluates performance and allocates resources based on several factors, of which the primary financial measure is business segment operating income excluding amortization of intan- gibles and special charges. The accounting policies of the business segments are the same as those described in the summary of significant 31 Notes to Consolidated Financial Statements — December 31, 1999 (continued) Vishay Intertechnology, Inc. accounting policies (see Note 1). The operating results of Actives reflect the acquisition of TEMIC as of March 2, 1998 and the acquisition of LPSC as of July 1, 1997. Business segment assets are the owned or allocated assets used by each business. The corporate component of operating income represents corpo- rate selling, general, and administrative expenses. Corporate assets include corporate cash, property, plant, and equipment, and certain other assets. Business Segment Information (In thousands) 1999 1998 1997 Net Sales: Passives ....................... $ 1,008,266 751,825 Actives ......................... $ 1,027,902 $ 1,086,929 38,290 544,843 $ 1,760,091 $ 1,572,745 $ 1,125,219 Operating Income: Passives ....................... $ 104,655 119,510 Actives ......................... (18,061) Corporate ..................... — Unusual items .............. Purchased research $ 114,747 $ 138,185 2,959 (10,821) (14,503) 51,516 (17,465) (29,301) and development ... — (13,300) — Amortization of goodwill ................... (12,360) (12,272) (7,218) $ 193,744 $ 93,925 $ 108,602 Depreciation Expense: 32 Passives ....................... $ 75,798 49,826 Actives ......................... 223 Corporate ..................... $ 74,173 $ 69,716 3,409 204 40,210 209 $ 125,847 $ 114,592 $ 73,329 Total Assets: Passives ....................... $ 1,429,177 882,296 Actives ......................... 12,308 Corporate ..................... $ 1,693,554 $ 1,506,191 211,684 1,773 750,875 18,315 Geographic Area Information (In thousands) 1999 1998 1997 Net Sales: United States ............... $ 706,049 574,629 Germany ...................... 273,921 Asia Pacific .................. 88,975 France .......................... 116,517 Other ............................ $ 659,845 $ 624,377 249,298 44,647 114,704 92,193 519,114 185,784 119,992 88,010 $ 1,760,091 $ 1,572,745 $ 1,125,219 Property, Plant, and Equipment (Net): United States ............... $ 333,594 127,727 Germany ...................... 268,916 Israel ............................ 97,060 Asia Pacific .................. 25,758 France .......................... 77,490 Other ............................ $ 352,007 $ 205,784 110,827 271,180 42,522 43,071 35,758 153,423 283,691 67,051 45,461 95,434 $ 930,545 $ 997,067 $ 709,142 15. Earnings Per Share Statement of Financial Accounting Standards No.128, Earnings Per Share, requires net earnings per share to be presented under two calculations, basic earnings per share and diluted earnings per share. Basic earnings per share is computed using the weighted average number of common shares outstanding during the periods presented. Diluted earnings per share is computed using common and dilutive potential common shares outstanding during the periods presented. The Company’s potential common shares consist primarily of stock options granted under the Company’s 1995, 1997 and 1998 stock option plans (see Note 10) and stock appreciation rights issued in connection with the LPSC acquisition (see Notes 2, 6 and 17). The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): Year ended December 31 1999 1998 1997 $ 2,323,781 $ 2,462,744 $ 1,719,648 Numerator: Net Income ............................... $ 83,237 $ 8,212 $ 53,302 Capital Expenditures: Passives ....................... $ 52,903 61,409 Actives ......................... 5,326 Corporate ..................... $ 87,168 $ 69,617 8,285 172 59,969 4,545 $ 119,638 $ 151,682 $ 78,074 The amount of investment in equity method investees included in the Actives total assets above was $12,495,000, $10,090,000 and $8,854,000 for 1999, 1998 and 1997, respectively. The following geographic area data include net sales based on revenues generated by subsidiaries located within that geographic area and property, plant, and equipment based on physical location: Denominator: Denominator for basic earnings per share— weighted average shares ... Effect of dilutive securities: Employee stock options ..... Stock appreciation rights .... Other .................................... 84,452 84,443 84,418 539 378 119 – – 88 88 – – 185 185 Dilutive potential common shares .................................. 1,036 Denominator for diluted earnings per share— adjusted weighted average shares ................... 85,488 84,531 84,603 Basic earnings per share ........... $ 0.99 $ 0.10 $ 0.63 Diluted earnings per share ........ $ 0.97 $ 0.10 $ 0.63 Notes to Consolidated Financial Statements — December 31, 1999 (continued) Vishay Intertechnology, Inc. For the year ended December 31, 1999, options to purchase 477,000 shares of Common Stock at $32.91 per share were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase 3,433,000 shares of Common Stock at prices ranging from $ 16.33 to $ 32.91 per share were outstanding during 1998, and options to purchase 1,523,000 shares at prices ranging from $18.31 to $32.91 per share outstanding during 1997, were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares. 16. Summary of Quarterly Financial Information (Unaudited) Quarterly financial information for the years ended December31, 1999 and 1998 is as follows (in thousands, except per share amounts): First Quarter 1999 1998 Second Quarter 1998 1999 Third Quarter 1999 1998 Fourth Quarter 1998 1999 Total Year 1999 1998 Net sales ........................... $ 423,058 Gross profit ....................... 99,890 Net earnings (loss) ........... Basic earnings (loss) 818(1) $ 348,744 85,204 16,536(2) $ 425,323 $ 412,844 102,392 16,766 108,681 20,181 $ 443,711 119,633 25,736 $ 399,499 97,595 12,121 $ 467,999 $ 411,658 98,447 (37,211)(3) 132,182 36,502 $ 1,760,091 $ 1,572,745 383,638 8,212 460,386 83,237 per share(4) ................................. $ .01(1) $ .20(2) $ .24 $ .20 $ .30 $ .14 $ .43 $ (.44)(3) $ .99 $ .10 Diluted earnings (loss) per share(4) ................................. $ .01(1) $ .20(2) $ .24 $ .20 $ .30 $ .14 $ .42 $ (.44)(3) $ .97 $ .10 (1) The sale of Nicolitch, S.A. and a tax rate change in Germany reduced net earnings by $14,562,000 or $0.17 per share in the first quarter of 1999. (2) A forward exchange contract loss ($6,269,000) reduced net earnings by $3,924,000 or $0.05 per share in the first quarter of 1998. (3) Charges for restructuring ($6,244,000), impairment losses ($23,057,000), purchased research and development ($13,300,000), reduction of a deferred tax asset ($10,000,000), and other noncash charges ($1,815,000) reduced net earnings by $51,411,000 or $.61 per share in the fourth quarter of 1998. (4) Adjusted to give retroactive effect to a five-for-four stock split in June 1999 and a 5% stock dividend paid in June 1998. 17. Subsequent Events On January 24, 2000, the Company exercised its right to call the stock appreciation rights (“SARs”) issued in connection with its acquisition of LPSC (see Notes 2 and 6). Based on the call price of $39.64 per share and the average closing price of Vishay shares for thirty days prior to January 24, 2000, the Company would have to issue 1,529,000 shares of Vishay Common Stock to settle the SARs. 33 On March 15, 2000, the Company and Lite-On JV Corporation (“Lite-On Group”) entered into a Memorandum of Understanding for the sale of Vishay’s 65% interest in LPSC to the Lite-On Group for consideration consisting of cash and the assignment or transfer to Vishay of the Lite-On Group’s rights under the SARs. The Lite-On Group currently owns the remaining 35% interest in LPSC. Based on the March 21, 2000 closing price of Vishay stock of $59, the accounting for the disposition of Vishay’s interest in LPSC would have a minor downward effect on Vishay’s earnings. The actual effect on earnings from the disposition of LPSC will depend on the value of Vishay stock at the time the parties execute final documentation. The closing is expected to occur before September 30, 2000. During the time prior to the closing, the parties will prepare additional documentation relating to the transaction, and the Lite-On Group will arrange its financing for the cash portion of the purchase price. The Company and the Lite-On Group have agreed to defer the actual redemption of the SARs pending the execution of certain documentation relating to the sale of Vishay’s interest in LPSC to the LIte-On Group. No effects of these transactions are reflected in the Company’s financial statements for the year ended December 31, 1999. Report of Independent Auditors Board of Directors and Stockholders Vishay Intertechnology, Inc. We have audited the accompanying consolidated balance sheets of Vishay Intertechnology, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, cash flows, and stockholders’ equity for each of the three years in the period ended December31, 1999. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vishay Intertechnology, Inc. at December31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Philadelphia, Pennsylvania February 2, 2000, except for Note 17, as to which the date is March 21, 2000 Management’s Discussion and Analysis of Financial Condition and Results of Operations Vishay Intertechnology, Inc. Introduction and Background The Company’s sales and net earnings increased significantly through 1995 primarily as a result of its acquisitions. Following each acquisition, the Company implemented programs to take advantage of distribution and operating synergies among its businesses. This imple- mentation was reflected in increases in the Company’s sales and in the decline in selling, general, and administrative expenses as a percent- age of the Company’s sales. However, beginning with the last quarter of 1995 and through 1998, the Company experienced a decline in demand for its commodity- related products (fixed resistors, MLCC and tantalum capacitors) which accounted for approximately 50% of the Company’s revenues during that time. Such decline in demand resulted in a decrease in revenues, earnings and backlogs of these products. In order to address the slowdown in demand and price erosion resulting from an oversupply of tantalum and multi-layer ceramic chip capacitors, the Company implemented a restructuring program begin- ning in 1996 that included the downsizing and closing of manufacturing facilities in North America and Europe. In connection with the restruc- turing, the Company incurred $38,030,000 of pretax charges for the year ended December 31, 1996 relating to employee termination and facility closure costs. In 1997, the Company incurred $12,605,000 of restructuring expenses relating to employee termination and facility closure costs in Europe. In 1998, the Company incurred $6,244,000 of restructuring expenses. In the late 1990s, the Company began to enter into the active components business. In July 1997, the Company purchased a 65% interest in LPSC, a Taiwan-based company that is a major supplier of discrete active electronic components in Asia. In 1998, the Company acquired the Semiconductor Business Group of TEMIC, which included Telefunken and 80.4% of Siliconix, producers of transistors, diodes, optoelectronics, and power and analog switching integrated circuits. Since the third quarter of 1999, the Company has experienced increasing demand for its products, including both passive and active electronic components. The Company is expanding capacity in all of its major product lines in order to satisfy this demand. In some cases, the Company has been able to increase pricing for its products because of tight supply, reversing the price erosion experienced in prior years. The Company attributes the increased demand for its products to the continuing growth in the wireless telecommunication market, particu- larly cell phones, and to the increasing use of embedded computing devices in a wide range of consumer and commercial products. The Company’s strategy contemplates transferring some of its manufacturing operations from countries with high labor costs and tax rates, such as the United States, France and Germany, to Israel, Mexico, Portugal, the Czech Republic, Taiwan and the People’s Repub- lic of China in order to benefit from lower labor costs and, in the case of Israel, to take advantage of various government incentives, including government grants and tax incentives. Notwithstanding the current favorable market conditions, the Company intends to continue to ex- plore and implement opportunities for cost efficiencies in its manufac- turing operations. The Company realizes approximately 70.9% of its revenues from customers outside the United States. As a result, fluctuations in cur- rency exchange rates can significantly affect the Company’s reported sales and, to a lesser extent, earnings. Currency fluctuations impact the Company’s net sales and other income statement amounts, as denomi- nated in U.S. Dollars, including other income as it relates to foreign exchange gains or losses. Generally, in order to minimize the effect of currency fluctuations on profits, the Company endeavors to: 1. borrow money in the local currencies and markets where it conducts business; and 2. minimize the time for settling intercompany transactions. In connection with its day-to-day operations, the Company gen- erally does not purchase foreign currency exchange contracts or other derivative instruments to hedge foreign currency exposures. In Septem- ber 1999, a subsidiary of the Company entered into foreign currency forward exchange contracts to manage exchange rate exposure on certain foreign currency denominated transactions. As a result of the increased production by the Company’s opera- tions in Israel over the past several years, the low tax rates in Israel (as compared to the statutory rate in the United States) have had the effect of increasing the Company’s net earnings. The more favorable Israeli tax rates are applied to specific approved projects and are normally available for a period of ten years or, if the investment in the project is over $20 million, for a period of 15 years, which has been the case for most of the Company’s projects in Israel since 1994. New projects are continually being introduced. In addition, the Israeli government offers certain incentive programs in the form of grants designed to increase employment in Israel. However, the Israeli government has recently scaled back or discontinued some of its incentive programs. Accord- ingly, there can be no assurance that in the future the Israeli government will continue to offer new incentive programs applicable to the Company or that, if it does, such programs will provide the same level of benefits the Company has historically received or that the Company will continue to be eligible to take advantage of them. The Company might be materially adversely affected if these incentive programs were no longer available to the Company for new projects. However, because a majority of the Company’s projects in Israel already benefit from government incentive programs, the Company does not anticipate that any cutbacks in the incentive programs would have an adverse impact on its earnings and operations for at least several years. Israeli government grants, recorded as a reduction of costs of the year ended Decem- products sold, were $14,256,000 ber31,1999, as compared to $13,116,000 for the prior year. If the Israeli government continues its grant and incentive programs, future benefits offered to the Company by the Israeli government will likely depend on the Company’s continuing to increase capital investment and the number of Company employees in Israel. for Results of Operations Income statement captions as a percentage of sales and the effective tax rates were as follows: Year ended December 31 1999 1998 1997 Costs of products sold .............. Gross profit ................................ Selling, general, and administrative expenses ...... Operating income ...................... Earnings before income taxes and minority interest ............ Effective tax rate ........................ Net earnings ............................... 73.8% 26.2 75.6% 76.3% 23.7 24.4 14.5 11.0 7.7 27.4 4.7 14.9 6.0 2.7 71.8 0.5 12.2 9.7 8.0 38.1 4.7 34 Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Vishay Intertechnology, Inc. Year ended December 31, 1999 compared to Year ended December 31, 1998 Net Sales Net sales for the year ended December 31, 1999 increased $187,346,000 or 11.9% fromthe prior year. The increase in net sales relates primarily to the results of TEMIC, which was acquired March2,1998. Net sales of TEMIC for the year ended Decem- ber31,1999 were $673,300,000 as compared to $474,188,000 in- cluded in the Company’s reported sales for the ten months ended December 31, 1998. Exclusive of TEMIC, net sales would have de- creased by $11,776,000 or 1.0%. The strengthening of the U.S. Dollar against foreign currencies for the year ended December 31, 1999, in comparison to the prior year, resulted in decreases in reported sales of $15,882,000. The passive components business net sales were $1,008,266,000 for the year ended December 31, 1999 as compared to $1,027,902,000 for the prior year period. The active components busi- ness net sales were $751,825,000 for the year ended December 31, 1999 as compared to $544,843,000 for the prior-year period. The 1999 sales of the active business reflect increased demand for product, particularly in telecommunication and computer applications and re- duced price erosion on its products. Costs of Products Sold Costs of products sold for the year ended December 31, 1999 were 73.8% of net sales,as compared to 75.6% for the prior year. Gross profit, as a percentage of net sales, for the year ended Decem- ber31, 1999 increased from the comparable prior-year period mainly due to the results of TEMIC. TEMIC reported gross profit margins of 33.3% for the year ended December 31, 1999 as compared to 30.1% for the ten months ended December 31, 1998, mainly due to higher business volume and manufacturing efficiencies gained from the full utilization of existing manufacturing capacity. The active components business gross margins were 31.4% for the year ended December 31, 1999 as compared to 27.9% for the prior- year period. The increase is due to the Siliconix operation, where gross margins have increased substantially as a result of increased product demand, stronger capacity utilization, an improved product mix and increased fab efficiencies. The passive components business gross profit margins were 22.4% for the year ended December 31, 1999 as compared to 22.5% for the prior year period. Profitability for the passive components business was negatively affected by price erosion, which began in the second quarter of 1998. However, beginning in the third quarter of 1999, most of the Company’s product lines have seen an increase in demand and the average selling prices have stopped declining, with prices actually increasing in some instances. for Israeli government grants, recorded as a reduction of costs of products sold, were $14,256,000 the year ended Decem- ber31,1999, as compared to $13,116,000 for the prior year. Future grants and other incentive programs offered to the Company by the Israeli government will likely depend on the Company’s continuing to increase capital investment and the number of Company employees in Israel. Deferred income at December31, 1999 relating to Israeli gov- ernment grants was $50,462,000 as compared to $59,264,000 at De- cember 31, 1998. Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the year ended December 31, 1999 were 14.5% of net sales,as compared to 14.9% for the prior year. The decrease in selling, general, and administrative expenses was primarily due to the cost reduction initiatives of TEMIC, for which selling, general, and administrative expenses were 16.1% for the year ended December 31, 1999 as compared to 19.6% for the ten months ended December 31, 1998. Interest Expense Interest costs increased by $4,258,000 for the year ended De- cember 31, 1999 from the prior year. Bank borrowings related to the TEMIC acquisition were outstanding for twelve months during 1999 compared to ten months during 1998. Also during 1999, interest rates increased as compared to the prior year. Other Income Other income decreased by $3,496,000 for the year ended December 31, 1999 as compared to the prior year. Included in the results for the year ended December 31, 1999 is a noncash loss of $10,073,000 in connection with the sale of Nicolitch S.A., a subsidiary of the Company. Included in the results for the year ended Decem- ber31,1998 is a loss of $6,269,000 related to a forward exchange contract entered into to set the purchase price in connection with the TEMIC acquisition. Minority Interest Minority interest increased by $10,724,000 for the year ended December 31, 1999 as compared to the prior year primarily due to the increase in net earnings of Siliconix, of which Vishay owns 80.4%. Income Taxes The effective tax rate for the year ended December 31, 1999 was27.4% as compared to 71.8%for the prior year. The tax rate for the year ended December 31, 1999 reflects the non-tax deductibility of the loss on the sale of Nicolitch, S.A. Tax expense on the sale of Nicolitch, S.A. was $1,416,000. Also, a tax rate change in Germany resulted in a decrease in German deferred tax assets, which increased tax expense by $1,939,000. Exclusive of the effect of the sale of Nicolitch, S.A. and the tax rate change in Germany, the effective tax rate on earnings before minority interest for the year ended Decem- ber31,1999 would have been 23.2%. The higher tax rate for the year ended December 31, 1998 was primarily due to the non-tax deductibility of the in-process research and development expense in the fourth quarter 1998 and a $10,000,000 increase in a valuation allowance for a deferred tax asset for net operating loss carryforwards in Germany. Exclusive of the effect of special charges, the tax rate on earnings before minority interest for the year ended December 31, 1998 would have been 27.8%. The continuing effect of low tax rates in Israel, as compared to the statutory rate in the United States, resulted in increases innet earnings of $12,469,000 and $15,166,000 for the yearsended Decem- ber 31, 1999 and 1998, respectively. The more favorable Israeli tax rates are applied to specific approved projects and are normally avail- able for a period of ten or fifteen years. Year ended December 31, 1998 compared to Year ended December 31, 1997 Net Sales Net sales for the year ended December 31, 1998 increased $447,526,000 or 39.8% fromthe prior year. The increase in net sales related primarily to the acquisition of TEMIC, which became effective March 1, 1998. Net sales of TEMIC for the ten months ended December 31, 1998 included in the Company’s reported sales were $474,188,000. LPSC was acquired by Vishay effective July 1, 1997. LPSC’s sales for the year ended December 31,1998 were $70,655,000 compared to 35 Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Vishay Intertechnology, Inc. $38,290,000 for the six months ended December 31, 1997. Exclusive of TEMIC and LPSC, net sales would have decreased by $97,317,000 or 8.6%. The strengthening of the U.S. Dollar against foreign currencies for the year ended December 31, 1998 in comparison to the prior year resulted in decreases in reported sales of $16,131,000. Moreover, the Company’s net sales of passive components and semiconductor com- ponents were negatively affected by substantial price erosion resulting from oversupply of tantalum and multi-layer chip capacitors and the economic downturn in Asia. Costs of Products Sold Costs of products sold for the year ended December 31, 1998 were 75.6% of net sales,as compared to 76.3% for the prior year. Gross profit, as a percentage of net sales, for the year ended December 31, 1998 increased from the comparable prior-year period mainly due to the acquisition of TEMIC. TEMIC reported gross profit margins of 30.1% for the ten months ended December 31, 1998. The passive components business gross profit margins were 22.5% for the year ended December 31, 1998 as compared to 24.0% for the prior year, reflecting a weakness in the passive components business. Profitability for the passive com- ponents business was negatively affected by price erosion from an oversupply of tantalum and multi-layer chip capacitors and the de- pressed Asian market. The results for semiconductor components were also negatively affected by a decrease in demand for products in the semiconductor industry, adjustments of high inventory levels at distribu- tors, the depressed Asian market, andsubstantial price erosion. Israeli government grants, recorded as a reduction of costs of products sold, were $13,116,000 for the year ended December 31, 1998, as compared to $11,352,000 for the prior year. Deferred income at December31, 1998 relating to Israeli government grants was $59,264,000 as compared to $59,300,000 at December 31, 1997. 36 Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the year ended December 31, 1998 were 14.9% of net sales,as compared to 12.2% for the prior year. The increased selling, general, and administrative ex- penses were primarily due to the acquisition of TEMIC, for which selling, general, and administrative expenses were 19.6% for the ten months ended December 31, 1998. Unusual Items Product technology is the technology behind the development of prod- ucts. TEMIC has three primary product categories, (i)Power MOS, (ii)Power IC, and (iii)Standard Products. Introduction of the new pro- cess technologies, if successful, was expected to improve the efficiency and effectiveness of TEMIC’s MOSFET products and introduce new IC technology which would reduce die size by approximately 66%. This would lower production costs per unit and increase margins. Introduc- tion of the product technologies, if successful, was expected to optimize the performance of certain MOSFETs, diodes and power ICs and introduce new applications for certain of TEMIC’s products. These research and development projects were expected to reach completion and begin generating revenues during periods ranging from 1999 to 2003. At the acquisition date, TEMIC’s research and development projects ranged in completion from approximately 1% to 86%, with total continuing research and development commitments to complete the projects of approximately $7.4 million. The value assigned to purchased in-process research and devel- opment was determined by estimating the costs to develop TEMIC’s purchased in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discount- ing the net cash flows back to their present values. The revenue estimates used to value the in-process research and development were based on estimates of the relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors. The estimates for costs of products sold, research and development, selling, general, and administrative expenses and income taxes were calcu- lated as a percentage of revenue and were based on historical amounts and were adjusted to reflect competition and advancing technology in the industry. The rates utilized to discount the net cash flows to their present value were based on weighted average cost of capital and venture capital rates of return. Given the nature of the risks associated with the estimated growth, profitability and development projects, a discount rate of 20% was deemed appropriate for TEMIC’s in-process projects. This discount rate was intended to be commensurate with the specific risks of achieving technological feasibility and the uncertainties in the economic estimates described above. The estimates used by the Company in valuing in-process research and development were based on assumptions the Company believes to be reasonable but which are inherently uncertain and unpredictable. The Company incurred unusual items of $29,301,000 for the year ended December 31, 1998. Approximately $23,057,000 of these items related to impairment losses in connection with certain joint ventures in China and Japan. The remaining $6,244,000 of unusual items related to the Company’s restructuring of European operations ($5,944,000) and closing of two U.S. sales offices ($300,000). See Note 3 to the Consoli- dated Financial Statements for additional information on the Company’s impairment losses and restructuring programs. Interest Expense Interest costs increased by $30,219,000 for the year ended December 31, 1998 from the prior year due to the increase in bank borrowings necessary to fund the TEMIC and LPSC acquisitions. The Company had net borrowings of $444,000,000 and $130,000,000, respectively,from a group of banks to finance the acquisitions of TEMIC and LPSC. Purchased In-Process Technology Other Income In connection with the acquisition of TEMIC, the Company ex- pensed $13.3 million representing purchased in-process technology that had not yet reached technological feasibility and had no alternative future use (see Note2 to the Consolidated Financial Statements). The in-process technology acquired in the TEMIC acquisition was segmented into two categories, process technology and product technology. Process technology is the process by which multiple prod- ucts can be manufactured. Three separate process technologies were identified, (i)Bondwireless, (ii)178M Cell, and (iii)PIC.8 micron 15V. Other income decreased by $2,019,000 for the year ended December 31, 1998 as compared to the prior year primarily due to reduced foreign exchange gains. Foreign exchange gains for the year ended December 31, 1998 were $495,000 compared to $3,657,000 for the year ended December 31, 1997. The Company also incurred losses of $6,269,000 and $5,295,000 in 1998 and 1997, respectively, relating to a forward exchange contract which was entered into to set the purchase price in connection with the TEMIC acquisition, since the purchase price was denominated in German Marks and payable in U.S. Dollars. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Vishay Intertechnology, Inc. Income Taxes The effective tax rate for the year ended December 31, 1998 was71.8% as compared to 38.1%for the prior year. The higher tax rate for the year ended December 31, 1998 was primarily due to the non-tax deductibility of the in-process research and development ex- pense and a $10,000,000 increase in a valuation allowance for a deferred tax asset for net operating loss carryforwards in Germany. Exclusive of the effect of special charges, the tax rate on earnings before minority interest for the year ended December 31, 1998 would have been 27.8%. The continuing effect of low tax rates in Israel, as compared to the statutory rate in the United States, resulted in increases innet earnings of $15,166,000 and $10,685,000 for the yearsended Decem- ber 31, 1998 and 1997, respectively. The more favorable Israeli tax rates are applied to specific approved projects and are normally avail- able for a period of ten or fifteen years. Financial Condition and Liquidity Cash flows from operations were $239,809,000 for the year ended December 31, 1999 compared to $169,450,000 for the prior year. The increase in cash flows from operations is primarily attributable to an increase in net earnings for the year ended December 31, 1999 as compared to the year ended December 31, 1998. Net purchases of property and equipment for the year ended December 31, 1999 were $119,638,000 compared to $151,682,000 in the prior year. The Com- pany made $141,028,000 net payments on borrowings during 1999. Net cash provided by financing activities of $450,408,000 for the year ended December 31, 1998 reflects borrowings used to finance the acquisition of TEMIC. See Notes 2 and 3 to the Consolidated Financial Statements for discussion of restructuring costs paid during 1999. The Company’s financial condition at December 31, 1999 is strong, with a current ratio of 2.68 to 1. The Company’s ratio of long-term debt, less current portion, to stockholders’ equity was .65 to 1 at December 31, 1999 and .81 to 1 at December 31, 1998. On March 2, 1998, the Company and certain of its subsidiaries entered into a $1.1 billion multicurrency revolving credit agreement with a group of banks that included an $825 million long-term revolving credit and swing line facility and a $275 million short-term revolving credit facility. On June, 1, 1999, the Company amended the two facilities. The $825 million long-term facility matures on March 2, 2003, subject to Vishay’s right to request year-to-year renewals. The short-term facility now provides for a $100 million 364-day facility, which is available until May 30, 2000. Borrowings under the two facilities bear interest at variable rates based, at the option of Vishay, on the prime rate or a eurocurrency rate and in the case of any swing line advance, the quoted rate. The borrowings under the two facilities are secured by pledges of stock in certain significant subsidiaries and indirect subsidiaries of Vishay and guaranties by certain significant subsidiaries. The Company is required to pay facility fees on the two facilities. The credit facilities restrict the Company from paying cash dividends, and require the Company to comply with certain financial covenants. See Note 5 to the Consolidated Financial Statements for additional information. Management believes that available sources of credit, together with cash expected to be generated from operations, will be sufficient to satisfy the Company’s anticipated financing needs for working capital and capital expenditures during the next twelve months. Year 2000 Compliance In prior years, the Company discussed the nature and progress of its plans to become Year 2000 compliant. Each of the Company’s divisions implemented a Year 2000 program designed to address the Year 2000 issue, of which all programs are now complete. The Company’s total cost for these Year 2000 programs approximated $1,400,000. As a result of these efforts, the Company has experienced no significant disruptions in mission-critical information technology and non-information technology systems and believes those systems suc- cessfully responded to the Year 2000 date change. In addition, the Company has not experienced any adverse effects with any of its third- party vendors, suppliers or customers. While the Company is not aware of, and does not expect that it will experience, any material problems related to this issue, it will continue to monitor its mission-critical computer applications and those of its suppliers, vendors and custom- ers throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. Euro Conversion On January 1, 1999, 11 of the 15 member countries of the European Union adopted the euro as their common legal currency and established fixed conversion rates between their existing sovereign currencies and the euro. The Company is currently evaluating issues raised by the introduction and initial implementation of the euro on January 1, 2002. The Company does not expect costs of system modifications to be material, nor does it expect the introduction and use of theeuro to materially and adversely affect its financial condition or results of operations. The Company will continue to evaluate the impact of the euro introduction. Inflation Normally, inflation does not have a significant impact on the Company’s operations. The Company’s products are not generally sold on long-term contracts. Consequently, selling prices, to the extent permitted by competition, can be adjusted to reflect cost increases caused by inflation. 37 Market Risk Disclosure The Company’s cash flows and earnings are subject to fluctua- tions 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 instru- ments. 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. this the outstanding balance under The Company is exposed to changes in U.S. Dollar LIBOR interest rates on its floating rate revolving credit facility. At Decem- ber31, 1999, facility was $635,215,000. On a selective basis, the Company from time to time enters into interest rate swap or cap agreements to reduce the potential negative impact increases in interest rates could have on its outstanding variable rate debt. The impact of interest rate instruments on the Company’s results of operations in each of the three years ended December 31, 1999 was not significant. See Notes 5 and 12 to the Consolidated Financial Statements for components of the Company’s long-term debt and interest rate swap arrangements. In August 1998, the Company entered into six interest rate swap agreements with a total notional amount of $300,000,000 to manage interest rate risk related to its multicurrency revolving line of credit. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Vishay Intertechnology, Inc. These interest rate swap agreements require the Company to make payments to the counterparties at variable rates. These interest rate swap agreements mature in August 2003. The variable rates are based on USD-LIBOR-BBA rates. In November 1999, the Company entered into two three-month interest rate swap agreements with a total notional amount of $300,000,000. These interest rate swap agreements require the Company to make payments to the counterparties on February 29, 2000 at the three-month USD-LIBOR-BBA rate as of November 29, 1999 less 0.16% and receive monthly payments from the counterparties at the monthly USD-LIBOR-BBA rate. At December 1999 and 1998, the Company paid a weighted average fixed rate of 5.61% and 5.77%, respectively, and received a weighted average variable rate of 6.49% and 5.25%, respectively. The fair value of the interest rate swap agreements, based on current market rates, approximated a net receiv- able of $8,714,000 and a net payable of $7,572,000 at Decem- ber31,1999 and 1998, respectively. Foreign Exchange Risk The Company is exposed to foreign currency exchange rate risks. The Company’s significant foreign subsidiaries are located in Germany, France, Israel and the Far East. The Company continues to reduce its exposure to foreign currencies by borrowing funds in local currency to balance its foreign assets and liabilities. The Company, in most locations, has introduced a “netting” policy where subsidiaries pay all intercompany balances within thirty days. In September 1999, a subsidiary of the Company entered into foreign currency forward exchange contracts to manage the effect of exchange rate changes on certain foreign currency denominated trans- actions. At December 31, 1999, the notional amount of outstanding foreign currency forward exchange contracts was $6,438,000. All of the total outstanding contracts at December 31, 1999 were to hedge yen denominated commitments from customers in Japan. In the normal course of business, the financial position of the Company is routinely subjected to a variety of risks, including market risks associated with interest rate movements, currency rate move- ments on non-U.S. Dollar denominated assets and liabilities and collectibility of accounts receivable. The Company does not anticipate material losses in these areas. Safe Harbor Statement 38 From time to time, information provided by the Company, includ- ing but not limited to statements in this report, or other statements made by or on behalf of the Company, may contain “forward-looking” informa- tion within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements involve a number of risks and uncertainties. The Company’s actual results could differ materially the forward-looking statements. The cautionary statements set forth below identify important factors that could cause actual results to differ mate- rially from those in any forward-looking statements made by or on behalf of the Company. those discussed from in Changes in Product Demand, Competition, Backlog • The Company offers a broad variety of products and services to its customers. Changes in demand for, or in the mix of, products and services comprising revenues could cause actual operating results to vary from those expected. • A slowdown in demand for passive electronic components or recessionary trends in the global economy in general or in specific countries or regions where the Company sells the bulk of its products, such as the United States, Germany, France or the Pacific Rim, could adversely impact the Company’s results of operations. • The Company operates in a highly competitive environment, which includes significant competitive pricing pressures and intense competition for entry into new markets. • Many of the orders in the Company’s backlog may be canceled by its customers without penalty. Customers may on occasion double and triple order components from multiple sources to ensure timely delivery when backlog is particularly long. The Company’s results of operations may be adversely impacted if customers were to cancel a material portion of such orders. Product Development, Business Expansion • The Company’s future operating results are dependent, in part, on its ability to develop, produce and market new and innova- tive products, to convert existing products to surface mount devices and to customize certain products to meet customer requirements. There are numerous risks inherent in this com- plex process, including the need for the Company to timely bring to market new products and applications to meet custom- ers’ changing needs. • The Company’s historic growth in revenues and net earnings has resulted in large part from its strategy to expand through acquisi- tions. However, there is no assurance that the Company will find or consummate transactions with suitable acquisition candidates in the future. From time to time, when the Company is in the process of pursuing a strategic acquisition, the Company or the acquisition target may feel compelled for securities and other legal reasons to announce the potential acquisition or the Company’s desire to enter into a certain market prior to entering into formal agreements. As a result, there can be no assurance that the Company will consummate any such acquisition. • The Company may have difficulty expanding its product lines to satisfy the current unusually strong demand for its products. Factors, which could limit such expansion, include delays in procurement of manufacturing equipment, shortages of skilled personnel and capacity constraints at the Company’s facilities. • The Company is currently benefiting from an acute atypical shortage of the Company’s products. This shortage has en- abled the Company to increase prices for certain products and thus increase gross margins. Any drop in demand or increase in supply due to competitors’ expansion could cause a dramatic drop in average sales prices causing a drop in gross margins. Foreign Operations and Sales • Approximately 71% of the Company’s revenues are derived from sales to customers outside the United States. As a result, currency exchange rate fluctuations, inflation, changes in mon- etary policy and tariffs, potential changes in laws and regula- tions affecting the Company’s business in foreign jurisdictions, trade restrictions or prohibitions, intergovernmental disputes, increased labor costs and reduction or cancellation of govern- ment grants, tax benefits or other incentives could impact the Company’s results of operations. • Specifically, as a result of the increased production by the Company’s operations in Israel over the past several years, the low tax rates in Israel, as compared to the statutory rates in the United States, have had the effect of increasing the Company’s net earnings. In addition, the Company takes advantage of certain incentive programs in Israel in the form of grants Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Vishay Intertechnology, Inc. 4. 5. increases in the Company’s debt levels or its cost of borrowings; changes in generally accepted accounting policies and practices; 6. disruptions to the Company’s manufacturing operations that may result from casualty losses, military hostilities particularly in the Middle East, or acts of God; and 7. changes in executive personnel. Common Stock Market Prices Calendar 1999 Low High Calendar 1998 Low High First Quarter ...................... Second Quarter ................ Third Quarter .................... Fourth Quarter .................. $ 12.40 $ 21.06 $ 26.25 $ 32.00 $ 8.90 $ 11.70 $ 18.06 $ 21.25 $ 18.34 $ 18.76 $ 14.70 $ 13.75 $ 15.00 $ 13.81 $ 8.00 $ 7.35 The Company’s Common Stock is listed on the New York Stock Exchange under the symbol VSH. The following table sets forth the high and low sales prices for the Company’s Common Stock as reported on the New York Stock Exchange Composite Tape for the quarterly periods within the 1999 and 1998 calendar years indicated. Stock prices have been restated to reflect stock dividends and stock splits. The Company does not currently pay cash dividends on its capital stock. Its policy is to retain earnings to support the growth of the Company’s business and the Company does not intend to change this policy at the present time. In addition, the Company is restricted from paying cash dividends under the terms of the Company’s revolving credit agreements. See Note 5 to the Consolidated Financial Statements. Holders of record of the Company’s Common Stock totaled approximately 1,867 at March28,2000. At March 28, 2000, the Company had outstanding 10,369,932 shares of Class B Common Stock, par value $.10 per share (the “Class B Stock”), each of which entitles the holder to ten votes. The Class B Stock generally is not transferable and there is no market for those shares. The Class B Stock is convertible, at the option of the holder, into Common Stock on a share-for-share basis. Substantially all of such Class B Stock is owned by Dr. Felix Zandman, Mrs. Luella B. Slaner and trusts for the benefit of Mrs. Slaner’s grandchildren, either directly or beneficially. Dr. Felix Zandman is an executive officer and director of the Company. Mrs. Luella B. Slaner is a director of the Company. 39 designed to increase employment in Israel. Any significant increase in the Israeli tax rates or reduction or elimination of any of the Israeli grant programs could have an adverse impact on the Company’s results of operations. Restructuring and Cost Reduction Activities • The Company may experience underutilization of certain plants and factories in high labor cost regions and capacity constraints in plants and factories located in low labor cost regions, resulting initially in production inefficiencies and higher costs. Such costs include those associated with work force reductions and plant closings in the higher labor cost regions, as described in “Introduction and Background,” and start-up expenses, manufacturing and construction delays, and increased depreciation costs in connection with the start of production in new plants and expansions in lower labor cost regions. Moreover, capacity constraints may the Company’s ability to continue to meet demand for any of the Company’s products. For example, during 1998, restructuring costs were particularly high as a result of the Company’s accelerated effort to streamline operations in response to the continued weakness in the international electronic compo- nents market at the time. limit • When the Company restructures its operations in response to changing economic conditions, particularly in Europe, labor unrest or strikes may occur, which could have an adverse effect on the Company. • The Company’s strategy also focuses on the reduction of selling, general, and administrative expenses through the inte- gration or elimination of redundant sales offices and adminis- trative functions at acquired companies and achievement of significant production cost savings through the transfer and expansion of manufacturing operations to lower cost regions such as Israel, Mexico, Portugal, the Czech Republic, Taiwanand the People’s Republic of China. The Company’s inability to achieve any of these goals could have an adverse effect on the Company’s results of operations. Raw Material Costs • The Company’s results of operations may be adversely impacted by: 1. difficulties in obtaining raw materials, supplies, power, natural resources and any other items needed for the production of the Company’s products; 2. 3. the effects of quality deviations in raw materials, particu- larly tantalum powder, palladium and ceramic dielectric materials; and the effects of significant price increases for tantalum or palladium, or an inability to obtain adequate supplies of tantalum or palladium from the limited number of suppliers. Miscellaneous Factors • The Company’s results may also be affected by a variety of other factors, including: 1. possible environmental liability and redemption costs; 2. legal proceedings and investigations; 3. possible challenges to the Company’s intellectual property rights; Financial Summary Summary of Operations (in thousands, except per share amounts) 1999 1998 1997 1996 As of and for the Year ended December 31 Net sales ................................................................................................... Costs of products sold ............................................................................. $ 1,760,091 1,299,705 $ 1,572,745 1,189,107 Gross profit ........................................................................................... Selling, general, and administrative expenses ...................................... Amortization of goodwill ........................................................................... Unusual items ........................................................................................... Operating income ..................................................................................... Other income (expense): Interest expense ................................................................................... Other ..................................................................................................... Total other income (expense) .................................................... Earnings before income taxes, minority interest, and cumulative effect of accounting change ................................................................ Income taxes ............................................................................................. Minority interest ........................................................................................ Earnings before cumulative effect of accounting change ..................... Cumulative effect of accounting change ................................................. 460,386 254,282 12,360 — 193,744 (53,296) (5,737) (59,033) 134,711 36,940 14,534 83,237 — 383,638 234,840 12,272 42,601 93,925 (49,038) (2,241) (51,279) 42,646 30,624 3,810 8,212 — $ 1,125,219 $ 1,097,979 858,020 267,199 136,876 7,218 14,503 108,602 (18,819) (222) (19,041) 89,561 34,167 2,092 53,302 — 825,866 272,113 141,765 6,494 38,030 85,824 (17,408) 2,430 (14,978) 70,846 17,741 489 52,616 — Net earnings ......................................................................................... $ 83,237 $ 8,212 $ 53,302 $ 52,616 Earnings per share: Basic ..................................................................................................... Diluted ................................................................................................... $ 0.99 $ 0.97 $ 0.10 $ 0.10 $ 0.63 $ 0.63 $ 0.62 $ 0.62 Shares used in computing earnings per share: 40 Basic ..................................................................................................... Diluted ................................................................................................... 84,452 85,488 84,443 84,531 84,418 84,603 84,421 84,478 Financial Data (in thousands, except ratios) Cash and cash equivalents ...................................................................... $ 105,193 $ 113,729 $ 55,263 $ 20,945 Working capital ......................................................................................... Current ratio .............................................................................................. Property and equipment — net ............................................................... Capital expenditures ................................................................................ Depreciation and amortization ................................................................. Total assets ............................................................................................... Long-term debt ......................................................................................... Stockholders’ equity ................................................................................. 581,550 2.68 930,545 119,638 139,676 2,323,781 656,943 1,013,592 639,783 3.02 997,067 151,682 127,947 2,462,744 814,838 1,002,519 455,134 3.38 709,142 78,074 81,874 1,719,648 347,463 959,648 434,199 3.27 710,662 136,276 77,247 1,558,515 229,885 945,230 Note: This table should be read in conjunction with the related consolidated financial statements and accompanying notes and management’s discussion and analysis of financial condition and results of operations. Includes the results of TEMIC from March 1, 1998, the results of Lite-On Power Semiconductor Corporation from July 1, 1997, the results of Vitramon from July 1, 1994, the results of Roederstein from January 1, 1993 and the results of the businesses acquired from Sprague Technologies, Inc. from January 1, 1992. Earnings per share amounts and weighted average shares outstanding have been retroactively restated for stock dividends and stock splits. Basic and diluted earnings per share for 1993 includes $0.02 for the cumulative effect of an accounting change for income taxes. Vishay Intertechnology, Inc. 1995 1994 1993 1992 1991 1990 1989 As of and for the Year ended December 31 $ 1,224,416 $ 987,837 $ 856,272 $ 664,226 $ 442,283 $ 445,596 $ 415,619 902,518 321,898 158,821 6,461 4,200 152,416 (29,433) 272 (29,161) 123,255 30,307 281 92,667 — 748,135 239,702 137,124 4,609 — 97,969 (24,769) 916 (23,853) 74,116 15,169 — 58,947 — 663,239 193,033 118,906 3,294 (562) 71,395 (20,624) 123 (20,501) 50,894 8,246 — 42,648 1,427 508,018 156,208 101,327 2,380 — 52,501 (19,110) 4,533 (14,577) 37,924 7,511 — 30,413 — 318,166 124,117 75,973 1,695 3,700 42,749 (15,207) (289) (15,496) 27,253 6,363 — 20,890 — 312,925 132,671 77,740 1,552 2,441 50,938 (19,426) 2,344 (17,082) 33,856 10,655 — 23,201 — 290,801 124,818 75,423 1,502 1,846 46,047 (21,068) 1,439 (19,629) 26,418 8,651 — 17,767 — $ 92,667 $ 58,947 $ 44,075 $ 30,413 $ 20,890 $ 23,201 $ 17,767 $ 1.18 $ 1.18 $ 0.83 $ 0.83 $ 0.65 $ 0.65 $ 0.55 $ 0.54 $ 0.39 $ 0.39 $ 0.47 $ 0.46 $ 0.38 $ 0.38 78,571 78,615 71,048 71,048 67,729 67,729 55,101 61,791 53,124 53,124 48,815 57,308 45,800 45,800 41 $ 19,584 $ 26,876 411,286 2.80 669,228 165,699 69,547 1,543,331 228,610 907,853 328,322 2.41 543,402 91,571 57,742 1,345,070 402,337 565,088 $ 10,949 205,806 2.09 422,668 79,377 48,578 950,670 266,999 376,503 $ 15,994 145,327 2.02 271,619 49,801 36,062 661,643 139,540 346,625 $ 14,438 128,733 2.65 171,951 26,660 27,056 448,771 127,632 201,366 $ 16,306 120,384 2.42 166,346 28,999 26,157 440,656 140,212 177,839 $ 27,779 115,945 2.35 150,912 21,605 22,288 419,958 186,182 117,984 Corporate Directory Board of Directors Corporate Officers Shareholders’ Information Independent Auditors Ernst & Young LLP Philadelphia, PA Transfer Agent and Registrar American Stock Transfer & Trust Company 40 Wall St., 46th Floor New York, NY 10055 Phone: 800-937-5449 Stock Exchange Listings New York Stock Exchange Symbol: VSH Midwest Stock Exchange Chicago Board of Options Exchange Investor Relations Contact Robert A. Freece Senior Vice President Vishay Intertechnology, Inc. Phone: 610-644-1300 SEC Form 10-K A copy of the Company’s Form 10-K Annual Report for the year ended December 31, 1999, filed with the Securities and Exchange Commission, may be obtained by shareholders without charge by writing to the Investor Relations Department, Vishay Intertechnology, Inc., 63 Lincoln Highway, Malvern, PA 19355-2120 or through Vishay’s website at www.vishay.com. Dr. Felix Zandman Chairman of the Board Chief Executive Officer Vishay Intertechnology, Inc. Avi D. Eden Vice Chairman of the Board Executive Vice President, General Counsel Vishay Intertechnology, Inc. Robert A. Freece Senior Vice President Vishay Intertechnology, Inc. Richard N. Grubb Executive Vice President, Treasurer, Chief Financial Officer Vishay Intertechnology, Inc. Eliyahu Hurvitz President and Chief Executive Officer Teva Pharmaceutical Industries, Ltd. 42 Dr. Gerald Paul President Chief Operating Officer Vishay Intertechnology, Inc. Luella B. Slaner Investor Dr. Felix Zandman Chairman of the Board Chief Executive Officer Avi D. Eden Vice Chairman of the Board Executive Vice President, General Counsel Dr. Gerald Paul President Chief Operating Officer Richard N. Grubb Executive Vice President, Treasurer, Chief Financial Officer Robert A. Freece Senior Vice President William J. Spires Vice President, Secretary Annual Meeting May 18, 2000 at 10:30 a.m. Four Seasons Hotel South Ballroom Lobby Level One Logan Square Philadelphia, PA 19103 Dr. Edward B. Shils George W. Taylor Professor Emeritus of Entrepreneurial Studies The Wharton School University of Pennsylvania Mark I. Solomon Founder and Chairman CMS Companies Jean-Claude Tiné Investor and Former Chairman of the Board Sfernice, S.A. Honorary Chairman of the Board Alfred P. Slaner (Deceased March 14, 1996) Quarterly Report Mailings Shareholders owning Vishay stock indirectly (through a bank, broker, or nominee who is a registered holder) can receive our reports directly and promptly from the Company at the same time we mail to shareholders of record. To be placed on Vishay’s mailing list, call 610-644-1300, extension 7483. Shareholders with access to the Internet can find quarterly reports, press releases, SEC filings, and all other financial documents at www.vishay.com. Vishay Intertechnology, Inc. World Headquarters 63 Lincoln Highway, Malvern, PA 19355-2120 USA Phone: 610-644-1300 • Fax: 610-296-0657 www.vishay.com Major Vishay Units Vishay Electronic GmbH Geheimrat-Rosenthal-Straße 100 95100 Selb Germany Phone: 49-9287-71-2244 Fax: 49-9287-8188 Vishay Dale 1122 23rd Street Columbus, NE 68601-3647 USA Phone 402-564-3131 Fax 402-563-6418 Vishay Draloric Geheimrat-Rosenthal-Straße 100 95100 Selb Germany Phone: 49-9287-71-2244 Fax: 49-9287-8188 Vishay Foil Resistors 63 Lincoln Highway Malvern, PA 19355-2120 USA Phone 610-644-1300 Fax 610-296-0657 Vishay Intertechnology Asia Pte Ltd. 25 Tampines Street 92 Keppel Building #02-00 Singapore 528877 Phone: 65-788-6668 Fax: 65-788-3383 Vishay Israel, Ltd. 2 Ha’Ofan Street Holon 58814 Israel Phone 972-3-557-0888 Fax 972-3-556-8116 Vishay Measurements Group 951 Wendell Boulevard Wendell, NC 27591 USA Phone 919-365-3800 Fax 919-365-3945 Vishay Roederstein 2100 W. Front Street Statesville, NC 28677 USA Phone: 704-872-8101 Fax: 704-872-8023 Vishay S.A., Division Sfernice 199, Blvd. de la Madeleine B.P. 159 F06003 Nice Cedex 1 France Phone 33-493-37-27-27 Fax 33-493-37-27-26 Vishay Siliconix 2201 Laurelwood Road Santa Clara, CA 95056 USA Phone 408-988-8000 Fax 408-567-8950 Vishay Sprague 678 Main Street Sanford, ME 04073 USA Phone 207-324-4140 Fax 207-324-7223 Vishay Telefunken Theresienstrasse 2, D-74072 Heilbronn Germany Phone 49-713-1670 Fax 49-713-167-3040 Vishay Thin Film 63 Lincoln Highway Malvern, PA 19355-2120 USA Phone 610-644-1300 Fax 610-296-0657 Vishay Vitramon 10 Main Street Monroe, CT 06468 USA Phone 203-268-6261 Fax 203-261-4446 V I S H A Y I N T E R T E C H N O L O G Y , I N C . World Headquarters 63 Lincoln Highway, Malvern, PA 19355-2120, USA Phone: (610) 644-1300 • Fax: (610) 296-0657 W W W . V I S H A Y . C O M © Copyright 2000 Vishay Intertechnology, Inc. ® Registered trademarks of Vishay Intertechnology, Inc. 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