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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-13828
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MEMC ELECTRONIC MATERIALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 56-1505767
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
501 PEARL DRIVE (CITY OF O'FALLON), ST. PETERS, MISSOURI 63376
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 279-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
$.01 PAR VALUE COMMON STOCK NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(TITLE OF CLASS)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT, BASED UPON THE CLOSING PRICE OF SUCH STOCK ON MARCH 9, 1998, AS
REPORTED BY THE NEW YORK STOCK EXCHANGE, WAS APPROXIMATELY $290.3 MILLION.
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF
MARCH 9, 1998, WAS 40,511,164 SHARES.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE
(1) PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1997 (PART I, PART II, AND PART IV OF FORM 10-K).
(2) PORTIONS OF THE REGISTRANT'S NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
AND PROXY STATEMENT DATED MARCH 23, 1998 (PART III OF FORM 10-K).
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PART I
ITEM 1. BUSINESS
GENERAL
MEMC Electronic Materials, Inc. (MEMC or the Company) is a leading
worldwide producer of silicon wafers used in the manufacture of
semiconductors that are employed in all types of microelectronic
applications, including computer systems, telecommunications equipment,
automobiles, consumer electronics products, industrial automation and control
systems, and analytical and defense systems. The Company operates
manufacturing facilities, directly or through joint ventures, in China,
Italy, Japan, Malaysia, South Korea, Taiwan and the United States and sells
its products to most of the world's largest manufacturers of semiconductors.
MEMC is the leading worldwide supplier of silicon wafers outside of Japan and
is the only non-Japanese silicon wafer manufacturer with manufacturing and
research facilities in Japan.
MEMC was incorporated in 1984 under the name Dynamit Nobel Silicon
Holdings, Inc. (DNS). Huls AG, a subsidiary of VEBA AG, subsequently
acquired ownership of DNS. In 1989, Huls AG, through DNS and other related
companies, acquired the electronic materials businesses operated by Monsanto
Company (Monsanto) in the United States, Europe, Japan and Malaysia. Huls AG
changed the name of DNS to MEMC Electronic Materials, Inc. and combined the
assets acquired from Monsanto with the assets of its U.S. and Italian silicon
wafer business to form the current MEMC. VEBA Corporation, an affiliate of
Huls AG, acquired all of the outstanding common stock of MEMC from Huls AG in
1990, which it subsequently transferred to its subsidiary, Huls Corporation,
in 1993. On July 12, 1995, the Company completed an initial public stock
offering of 19.55 million shares of common stock at an initial offering price
of $24 per share. As a result of the public stock offering, Huls
Corporation's ownership of the Company was reduced to 51.9%. As of March 9,
1998, Huls Corporation owned 53.0% of the Company's common stock.
PRODUCT
The silicon wafers manufactured by the Company vary in diameter,
surface features (polished or epitaxial), composition, electrical properties
and method of manufacture. MEMC's silicon wafers are manufactured according
to the exacting specifications required by its customers, and the Company
currently produces wafers with a variety of product features satisfying more
than 1,000 unique product specifications. Wafers of larger diameter and more
stringent technical specifications are required by semiconductor
manufacturers in order to produce increasingly complex semiconductor devices
such as the larger megabit memory chips and microprocessors.
The processes utilized by the Company's customers in manufacturing such
semiconductor devices have become more expensive, leading to their increased
focus on efficient semiconductor production processes. Because many
semiconductor devices, or chips, are made from the same wafer, and because
all chips from a particular wafer are manufactured and processed
simultaneously at each stage in the device manufacturing process,
larger-sized wafers allow for a greater yield from the same semiconductor
manufacturing process and allow semiconductor manufacturers to spread their
fixed costs of production over a larger volume of finished products. For
example, a 150 millimeter (6 inch) wafer has a surface area of approximately
27.4 square inches, whereas a 200 millimeter (8 inch) wafer has a surface
area of approximately 48.7 square inches, or approximately 78% more surface
area than the 150 millimeter wafer, and a 300 millimeter (12 inch) wafer has
a surface area of approximately 109.6 square inches or approximately 125%
more surface area than a 200 millimeter wafer. Despite the industry's focus
on 150 millimeter and larger diameter wafers, the Company continues to
manufacture and sell a significant amount of 100 millimeter (4 inch) and 125
millimeter (5 inch) wafers.
The Company's silicon wafers fall into one of three general types:
Prime Polished Wafers
The Company's principal product is its prime polished wafer, which is a
highly refined, pure silicon wafer with an ultraflat and ultraclean surface.
Prime polished wafers undergo a sophisticated chemical-mechanical polishing
process that removes defects and leaves an extremely smooth surface suitable
for the advanced technologies used by the Company's customers. MEMC's prime
polished wafers are used by the Company's customers in a broad range of
applications.
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The Company manufactures prime polished wafers in sizes ranging from
100 millimeters to 200 millimeters in diameter. The larger diameter wafers
are used in more sophisticated applications where semiconductor manufacturers
benefit from the increased efficiencies and greater number of available die
per wafer.
Epitaxial Wafers
In order to incorporate more complex functionality in the integrated
circuit, as well as to improve performance (which is affected by the distance
signals travel through the circuitry) and to control power consumption and
heat production, semiconductor manufacturers are forced to use smaller and
smaller device features. The Company manufactures epitaxial wafers to serve
the technological demands of its customers that manufacture advanced
semiconductors. Epitaxial wafers consist of a thin, single-crystal silicon
layer grown on the polished surface of the silicon wafer substrate. The
substrate, which is designed to have different composition and electrical
properties from the epitaxial layer of single-crystal silicon on the wafer
surface, among other things, helps to improve isolation between circuit
elements fabricated on the silicon film surface of the wafer. One result of
such smaller devices is the requirement that the distance between circuit
elements (referred to as line widths) becomes increasingly narrow. A critical
aspect in the construction of any integrated circuit device is the isolation
of these different elements that comprise the integrated circuit device.
Without sufficient isolation of the various elements, the elements could
communicate electrically with each other, which could render the device
inoperable. The improved isolation provided by epitaxial wafers allows for
increased reliability of the finished semiconductor device, greater
efficiencies during the semiconductor manufacturing process, and ultimately
more complex integrated circuit devices.
Test/Monitor Wafers
Test/monitor wafers (monitor wafers) are principally supplied by the
Company to its customers for their use in testing semiconductor fabrication
lines and processes. Although monitor wafers are substantially the same as
prime polished wafers with respect to cleanliness, and in some cases,
flatness, other specifications are generally less rigorous, allowing for
economies in manufacturing. In addition, monitor wafers are generally
produced from the portion of a silicon ingot that does not meet customer
specifications for the production of wafers to be used for the manufacture of
semiconductors. Therefore, sales of monitor wafers allow the Company to
experience a higher yield from each silicon ingot produced.
300 MILLIMETER WAFERS
One of the semiconductor industry's next significant technological
changes will be the transition to 300 millimeter silicon wafers. For the next
several years, the primary focus of the semiconductor equipment industry will
be to develop 300 millimeter fabrication tools while the focus of the
semiconductor manufacturing industry will be to evaluate those tools, develop
processes and build new fabrication facilities to process 300 millimeter
wafers.
MEMC is one of the industry leaders in the development of the next
generation of both polished and epitaxial silicon wafers, having first
produced 300 millimeter diameter wafers in 1991. The Company's technologists
are developing new equipment and improved processes in all of the key
manufacturing operations from crystal growing through final packaging.
The 300 millimeter market was driven during 1997 primarily by the two
industry consortia organized and funded by the leading semiconductor
manufacturers for the purpose of evaluating 300 millimeter equipment and
materials (I300I in Austin, Texas, and SELETE in Japan) and semiconductor
equipment manufacturers. While the primary use of 300 millimeter wafers in
1998 will continue to be for semiconductor device process and tool
development, the Company expects to ship samples of 300 millimeter prime
polished and epitaxial wafers during 1998.
In 1997, principal silicon wafer producers expanded the capacity of
their initial 300 millimeter pilot lines and announced plans to build
production facilities to meet future market demand. Several 300 millimeter
pilot lines are expected to be completed in 1998, equipped with early
prototypes of 300 millimeter fabrication tools. The Company's 300 millimeter
research and development line at its St. Peters' facility became operational
in the first quarter of 1997, supplying developmental wafers to semiconductor
equipment manufacturers and semiconductor customers worldwide.
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In the second quarter of 1997, the Company announced a capital investment
of approximately $250 million to expand 300 millimeter production capacity and
to accelerate process development. The investment provides the funding for
the construction of a 300 millimeter integrated development line at an
existing 200 millimeter manufacturing site in Utsunomiya, Japan, and
additional 300 millimeter crystal growing, wafer processing, and epitaxial
deposition equipment at its St. Peters' facility. The new 100,000 square foot
facility in Japan is scheduled to commence operation in mid-1998.
The demand for production volumes of 300 millimeter wafers is not
expected to develop until the year 2000 or beyond as pilot lines of
semiconductor customers use the next two years to fully develop the tool set
and processes necessary to fabricate integrated circuits on 300 millimeter
wafers.
RAW MATERIALS
Polysilicon is the predominant raw material used in the Company's
production process. The Company produces approximately one-half of its total
polysilicon requirements and purchases the remainder of its requirements from
third parties. The availability of polysilicon is primarily dependent upon
the adequacy of manufacturing capacity, as the basic materials from which
polysilicon is derived are readily available. The Company believes that an
adequate supply of polysilicon in 1998 will be obtained through internal
sourcing and purchase contracts with third parties.
The Company was the first manufacturer to successfully use granular
polysilicon. Granular polysilicon has fluid-like transport properties and
minimizes contamination risks due to reduced handling, which enhances the
crystal growth process for larger diameter wafers. In December 1997, the
Company signed a non-binding letter of intent to form a granular polysilicon
joint venture with Tokuyama Corporation, the world's second largest producer
of polysilicon and Marubeni Corporation, one of Japan's leading trading
companies. The Company would contribute its existing granular polysilicon
operation, and the other parties would contribute cash and technology. The
Company would retain a 40% interest in the new joint venture.
MANUFACTURING PROCESS
Silicon wafers for the semiconductor industry are extremely complex
materials with characteristics such as high purity levels, crystallographic
perfection and precise mechanical tolerances. Electronic grade silicon is one
of the most refined materials in the world, having an impurity level of no
more than one part per billion. Requirements for crystallographic perfection,
mechanical tolerances and cleanliness in the manufacture of silicon wafers
are at levels that stretch manufacturing processes to the limits of
measurement, and necessitate that certain processes be conducted in state of
the art "clean rooms." The silicon wafer manufacturing process is comprised
of three principal phases: the crystal growth process, the wafer slicing
process and the wafer finishing process.
Crystal Growth Process
The first step in the wafer manufacturing process is the formation of a
large, silicon single crystal or ingot. This process commences with the
melting of polysilicon, together with minute amounts of electrically active
"dopant" elements such as arsenic, boron, phosphorous or antimony in a quartz
crucible.
Once the melt has reached the desired temperature, a perfect silicon
crystal, or "seed" is lowered into the melt. The melt is slowly cooled to the
required temperature, and crystal growth begins around the seed. As the
growth continues, the seed is slowly extracted or "pulled" from the melt. The
temperature of the melt and the speed of extraction govern the diameter of
the ingot, and the dopant concentration in the melt governs the electrical
properties of the silicon wafers to be made from the ingot. This is a
complex, proprietary process requiring many control features on the
crystal-growing equipment.
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Wafer Slicing Process
After the ingots are grown, they are extracted from the crystal pulling
furnaces and allowed to cool. The ingots are then ground to the specified
diameter, following which the ingots are sliced into thin wafers. Next, a
multi-step process using precision lapping machines, edge contour machines
and chemical etchers prepares the wafers for the surface polishing steps.
Wafer Finishing Process
Final polishing and cleaning processes give the wafers the clean,
defect-free, and superflat mirror polished surfaces required for the
fabrication of semiconductor devices. For wafer polishing, the Company
currently uses its proprietary, ninth-generation polishers together with its
innovative colloidal silica chemical-mechanical polishing process. Polishing
with colloidal silica solutions was one of MEMC's early inventions that first
allowed solid state devices to move from individual circuits to the
complexities of today's integrated circuits. Some of the Company's products
are further processed by the deposition of a thin, electrically different
layer of silicon on the polished surface of the wafer to make epitaxial
wafers.
RESEARCH AND DEVELOPMENT
The Company's current research and development efforts are driven by
its business strategy and focus mainly on the development and improvement of
large diameter and advanced silicon wafer products and manufacturing
processes, enhancement of existing products and increases in efficiency. The
Company works closely with customers in developing new products and refining
existing products to attempt to meet the needs of the marketplace. A recent
product and innovation of the Company's research and development program
include the development of 300 millimeter diameter wafers. The Company
continues to develop processes to reduce microdefects in crystals and is
developing a new class of crystal called High Performance Silicon. Further
improvements are also being made in the polishing process and processes to
improve productivity of the Company's single slice epitaxial reactors.
The market for silicon wafer products is characterized by rapid
technological change and product innovation. MEMC believes that continued and
timely development of new products and enhancements to existing products is
necessary for it to maintain its competitive position. Accordingly, the
Company devotes a significant portion of its resources to research and
development programs and seeks to maintain close relationships with its
customers to remain responsive to their product needs. Expenditures for
product development activities (both in the laboratory and on the
manufacturing line that are included in research and development expenses and
in cost of goods sold, respectively) during 1997, 1996 and 1995, excluding
expenditures by the Company's joint ventures, were $88.4 million, $61.3
million, and $46.0 million, respectively, representing 9.0%, 5.5%, and 5.2%
of the Company's net sales for the respective periods.
MARKETING AND SALES
MEMC markets substantially all of its product through a direct sales
force. The Company believes an essential element of its marketing strategy
is its establishment and maintenance of close relationships with its
customers through multi-functional teams comprised of technical, marketing
and sales, and manufacturing personnel. These teams work closely with
customers in developing their new production facilities, qualifying the
Company's products for use at such new facilities and maintaining
qualification at all existing manufacturing facilities. Sales are
principally completed pursuant to indicative-only contracts of one year or
less that indicate expected volumes and specify price.
The Company's close relationships with its customers are necessitated
in part by the lengthy and expensive "qualification" process pursuant to
which silicon wafer manufacturers, and their individual facilities, are
qualified to become suppliers of a particular product to their customers.
The Company is aware of changing customer needs and
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targets its manufacturing to produce wafers uniquely tuned to each customer's
process and requirements. For 1997, over half of the Company's sales were
generated by the following ten customers: Advanced Micro Devices, Inc.;
Chartered Semiconductor Manufacturing, Ltd.; Cypress Semiconductor
Corporation; International Business Machines Corporation; Motorola, Inc.;
National Semiconductor Corporation; Philips Electronics N.V.; Samsung
Electronics Co., Ltd.; SGS-Thomson Microelectronics N.V.; and Texas
Instruments Incorporated (Texas Instruments). Texas Instruments individually
exceeded 10% of the Company's sales in 1997. The highest rate of future
growth in the semiconductor market is expected to be in the Asia Pacific
region. The Company believes it is well positioned in the Asian market with
manufacturing facilities or joint ventures in China, Japan, Malaysia, South
Korea and Taiwan.
SEASONALITY
The Company's operating results are subject to quarterly and annual
fluctuations principally due to MEMC's dependence on the performance of the
semiconductor industry, which historically has been cyclical, as well as to
the moderate seasonality of the Company's operations. MEMC attributes such
seasonality to the purchasing patterns of its customers and to the fewer
number of production days in December, January, and February.
COMPETITION
The silicon wafer manufacturing industry is highly competitive.
Significant competitive factors in the silicon wafer market include quality,
reliability and device line performance, price, flexibility, the size of each
manufacturer's qualified customer base, available capacity, customer support
and breadth of product line. The Company believes that it competes favorably
in each of these areas. The Company also believes its presence with
manufacturing facilities in all key world areas gives it a competitive edge.
In many instances, the Company must compete for customers who have
already made substantial financial and operational commitments to products
offered by the Company's competitors. To sell its products to these
customers, the Company must demonstrate that the performance, price, and
other benefits of its products justify the costs associated with the lengthy
qualification process. Additionally, three of the Company's customers produce
a portion of their own requirements for silicon wafers.
The Company believes that its wafers are highly competitive with other
products in the marketplace. However, the Company's competitors can be
expected to continue to improve the design and performance of their products
and to introduce new products with competitive performance characteristics.
STRATEGIC ALLIANCES
MEMC has entered into a number of strategic alliances as part of its
strategy to leverage its capital, to enter expanding markets, to forge closer
working relationships with its principal customers and to broaden the
geographic diversification of its operations. The Company has alliances with
prominent partners around the world, and such joint ventures operate in
China, South Korea, Taiwan, and the United States.
RISK FACTORS
This Annual Report on Form 10-K contains "forward-looking" statements
within the meaning of the Securities Litigation Reform Act of 1995, including
those concerning 300 millimeter wafers and MEMC's operations. In addition to
the business risks and uncertainties discussed elsewhere in this Annual
Report on Form 10-K, the following are important risk factors which could
cause actual results and events to differ materially from those contained in
any forward-looking statement contained herein or made elsewhere by or on
behalf of the Company.
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Impact of Downturns in the Semiconductor Industry
MEMC's business depends in large part upon market demand for
semiconductors and products utilizing semiconductors. The semiconductor
industry historically has been cyclical and has experienced periodic
downturns, which have had an adverse impact on the semiconductor industry and
suppliers to the semiconductor industry -- including manufacturers of silicon
wafers. Overcapacity, inventory reduction and weak pricing in the
semiconductor industry, particularly for the DRAM (memory) market, led to
reduced orders for silicon wafers that began in the second half of 1996 and
gradually recovered throughout 1997. In addition, the Company and its
competitors expanded at a faster rate than silicon consumption growth during
the past two years, resulting in overcapacity in the silicon wafer industry.
The combination of these market conditions led to significant price
reductions throughout 1997 that are continuing into 1998. MEMC's ability to
reduce expenses during this downturn has been limited by the Company's
significant investment in property and equipment, continued investment in
research and development, expanded capacity and marketing necessary to
maintain extensive worldwide customer service and support capabilities. A
continuation of this or any future downturns in the semiconductor industry
could have a material adverse effect on MEMC's operating results.
Capacity
MEMC is expanding certain of its manufacturing facilities around the
world. These capacity additions require significant capital investment and
result in a significant increase in fixed and operating expenses. In
addition, the Company has incurred additional indebtedness to finance such
expenditures and investments.
Growth in the worldwide supply of silicon wafers has outpaced the
growth in worldwide demand in recent periods, principally with respect to 200
millimeter wafers. This has resulted in insufficient revenue levels to offset
these additional costs, adversely impacting the Company's operating results.
Although some of MEMC's competitors have announced adjustments to the rate at
which they will implement capacity expansion programs, many have already
added significant capacity for the production of 200 millimeter silicon
wafers. The amount of capacity to be placed into production by MEMC and its
competitors could dramatically increase the worldwide supply of silicon
wafers, increase the downward pressure on prices and materially adversely
impact the Company's operating results. Further, the Company has no firm
information with which to determine the capacity and expansion plans of its
competitors.
Highly Competitive Industry
The silicon wafer industry is highly competitive. MEMC faces
substantial competition from established silicon wafer manufacturers
throughout the world, some of which have substantial financial, technical,
engineering and manufacturing resources, particularly from very large,
well-capitalized Japanese manufacturers. The Company believes that the
Japanese companies with which it competes benefit from their dominance of the
technologically advanced Japanese market, which represented approximately 39%
of the worldwide silicon wafer market in 1997. In particular, Shin-Etsu
Handotai is the largest supplier of silicon wafers in Japan and the world,
providing it with the sales and technology base to compete effectively
throughout the world. If MEMC were unable to continue to compete effectively
with Japanese silicon wafer manufacturers, the Company's operating results
could be materially adversely affected.
MEMC competes principally on the basis of product quality and
performance and price, as well as technical innovation, customer service and
product availability. The Company's competitors can be expected to continue
to improve the design and performance of their products and to introduce new
products with competitive price and performance characteristics. Over the
past two years, the Japanese yen and Deutsche mark have declined
significantly relative to the U.S. dollar which has given our competitors
certain cost advantages in the marketplace. Competitive pressures or
downturns in the semiconductor industry may necessitate price reductions
which could have a material adverse effect on MEMC's operating results.
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Although the Company believes that it has certain technological,
geographic and other strengths relative to its competitors, realizing and
maintaining such strengths will require a continued high level of investment
by MEMC in research and development, marketing and customer service and
support and increased manufacturing capacity. An inability to maintain such
investments could have a material adverse effect on the Company's operating
results. MEMC may be required to seek additional equity or debt financing to
fund these investments. There can be no assurance that such additional
financing will be available when needed, or if available, will be on
historically equivalent terms.
Changing Customer Specifications
The silicon wafer industry is subject to rapid technological change,
new and enhanced product specification requirements and manufacturing
processes as well as evolving industry standards. The Company's ability to
remain competitive will depend upon its ability to develop technologically
advanced products and processes, and to meet the increasingly demanding
requirements of its customers on a cost-effective basis. As a result, MEMC
expects to continue to make a significant investment in research and
development. Despite its past successes, there can be no assurance that the
Company will continue to be successful in the introduction, marketing and
cost-effective manufacturing of any of its new products, or that MEMC will be
able to develop new or enhanced products and processes that satisfy customer
needs or achieve market acceptance. The failure to develop, enhance and
introduce products and manufacturing processes successfully could have a
material adverse effect on the Company's competitive position and operating
results.
Limited Number of Principal Customers
Historically, MEMC has sold a significant portion of its products to a
limited number of principal customers. In 1997, ten customers generated over
one-half of its sales. Likewise, the majority of the sales of POSCO Huls Co.,
Ltd. (PHC) were to one customer. There can be no assurance that the Company
and PHC will realize equivalent sales from their top customers in the future.
The loss, or a significant curtailment, of purchases by one or more top
customers could have a material adverse effect on MEMC's operating results.
International Operations
The Company expects that international sales will continue to represent
a significant percentage of its total sales. In addition, a significant
portion of its manufacturing operations is located outside of the United
States. MEMC's risk exposure from these sales is primarily limited to the
Japanese yen, Deutsche mark and European ecu. The Company's risk exposure
from expenses at international manufacturing facilities is concentrated in
Italian lira, Japanese yen and Malaysian ringgit. Although MEMC generally
hedges receivables denominated in foreign currencies at the time of sale and
foreign currency denominated intercompany loans by entering into long dated
forward exchange contracts, there can be no assurance that exchange rate
fluctuations will not have a material adverse effect on the Company's
operations in the future.
MEMC's unconsolidated joint ventures have sales denominated in the U.S.
dollar and manufacturing expenses primarily denominated in the U.S. dollar,
Korean won and New Taiwanese dollar. PHC, the Korean joint venture, also has
significant debt denominated in the U.S. dollar and Korean won. Likewise,
Taisil, the Taiwanese joint venture, has significant debt denominated in the
U.S. dollar and New Taiwanese dollar. The Company's unconsolidated joint
ventures utilize the U.S. dollar as their functional currency and do not
hedge net Korean won and New Taiwanese exposures. Net Korean won exposure has
not been hedged, as the forward contract market is limited and the depth and
price of such contracts is not attractive. Thus far, net New Taiwanese dollar
exposure has not been hedged; however, given the broader market and depth for
forward contracts in Taiwan, forward contracts may be considered from time to
time.
International sales and operations may be adversely affected by the
imposition of governmental controls, fluctuations in local or U.S. dollar
currencies, export license requirements, restrictions on the export of
technology, political instability, trade restrictions, changes in tariffs and
difficulties in staffing and managing international operations. Although the
Company believes that the geographical distribution of its operations may
limit the effects on MEMC from regulatory, political and other factors, there
can be no assurance that such factors will not have a material adverse effect
on the Company's operations in the future or require MEMC to modify its
current business practices.
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Manufacturing Interruptions
Interruption of operations at any of the Company's primary
manufacturing facilities, including labor disputes, equipment failure,
shortages of raw materials or supplies, or other causes could result in
delays or cancellations of shipments of silicon wafers. There can be no
assurance that alternate capacity would be available on a timely basis or at
all, thereby potentially resulting in a loss of customers. The interruption
of operations for those or other reasons could materially adversely affect
MEMC's operating results.
Dependence on Certain Suppliers
The Company obtains certain of its raw materials from a limited number
of suppliers. MEMC believes that it has developed reliable sources for all of
its raw materials and that qualified alternative sources could be obtained to
supply such materials. Although the Company currently produces approximately
one-half of its polysilicon and sources a substantial portion of the
remainder under multi-year contracts with major polysilicon producers, a
prolonged inability to obtain raw materials, such as polysilicon, or
increases in the prices of raw materials resulting from tight supplies, could
have a material adverse effect on MEMC's operating results.
Fluctuations in Operating Results
The Company's operating results are subject to quarterly and annual
fluctuations principally due to MEMC's dependence on the performance of the
semiconductor industry, which historically has been cyclical, as well as to
the moderate seasonality of the Company's operations. MEMC attributes such
seasonality to the purchasing patterns of its customers and to the fewer
number of production days in December, January and February. Additional
factors that may influence the Company's operating results include the timing
of the receipt of orders from major customers, product mix, competitive
pricing pressures and the delay between the incurrence of expenses to further
develop marketing and service capabilities and expand capacity, and the
realization of benefits from such improved capabilities. Moreover, customers
may cancel or reschedule shipments, and production difficulties could delay
shipments. These factors are difficult to forecast, and these and other
factors could have a material adverse effect on MEMC's quarterly or annual
operating results.
Attraction and Retention of Qualified Personnel
The Company is dependent upon a limited number of key management and
technical personnel. In addition, MEMC's future success will depend in part
upon its ability to attract and retain highly qualified personnel. The
Company competes for such personnel with other companies, academic
institutions, government entities and other organizations. There can be no
assurance the Company will be successful in hiring or retaining qualified
personnel, or that any of MEMC's personnel will remain employed by the
Company. Any loss of key personnel or the inability to hire and retain
qualified personnel could have a material adverse effect on MEMC's operating
results.
Volatility of Stock Price
Based on the trading history of the Company's common stock, MEMC
believes that factors such as quarterly fluctuations in the Company's
financial results, announcements of technological innovations or new products
by MEMC or its competitors, the state of the semiconductor industry, pricing
in the silicon wafer industry, developments in patent or other proprietary
rights and in the Company's relationships with its customers have caused and
are likely to continue to cause the market price of MEMC's common stock to
fluctuate significantly. Technology company stocks in general have
experienced extreme price and trading volume fluctuations that often have
been unrelated to the operating performance of these companies. This market
volatility may adversely affect the market price of the Company's common
stock. In addition, an actual or anticipated shortfall in net sales, gross
margin or net earnings from security analysts' expectations could have an
immediate effect on the trading price of MEMC's common stock in any given
period.
8
<PAGE> 10
Proprietary Information and Intellectual Property
The Company believes that the success of its business depends primarily
on its proprietary technology, information and processes and know-how, rather
than on patents or trademarks. Nevertheless, MEMC attempts to protect its
intellectual property rights with respect to its products and manufacturing
processes through patents, trademarks and trade secrets when appropriate as
part of its ongoing research, development and manufacturing activities, and
has increased its efforts to obtain patent protection for its technology in
response to an increase in patent applications by the Company's competitors.
Much of MEMC's proprietary information and technology relating to the
manufacturing process is not patented and may not be patentable. Therefore,
there can be no assurance that the Company will be able to adequately protect
its technology, that competitors will not be able to develop similar
technology independently, that the claims allowed on any patents held by MEMC
will be sufficiently broad to protect the Company's technology or that
foreign property laws will adequately protect MEMC's intellectual property
rights.
Year 2000
Many computer systems experience problems handling dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company is
assessing the readiness of its computer systems to handle dates beyond the
year 1999. The Company expects to implement successfully the systems and
programming changes necessary to address year 2000 issues and does not
believe that the cost of such actions will have a material adverse effect on
the Company's results of operations or financial condition.
Year 2000 issues create risk for the Company from unforeseen problems
in its own computer systems and from customers, suppliers, financial
institutions and other organizations with which the Company conducts
financial transactions worldwide. Such failures by the Company's and/or
third parties' computer systems could have a material adverse effect on the
Company's ability to conduct business.
EMPLOYEES
At December 31, 1997, the Company had approximately 7,700 full-time
employees and 300 temporary workers worldwide. MEMC has not experienced any
material work stoppages at any of its facilities during the last several
years. The Company believes its relationships with its employees are
satisfactory.
GEOGRAPHIC INFORMATION
Information regarding MEMC's foreign and domestic operations is
contained in Note 19 on page 39 of the Company's 1997 Annual Report to
Stockholders (the 1997 Annual Report), which information is incorporated
herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers is contained in Item 10 of
Part III of this Report (General Instruction G) and is incorporated herein by
reference.
9
<PAGE> 11
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 501 Pearl
Drive (City of O'Fallon), St. Peters, Missouri 63376, and its telephone
number at that address is (314) 279-5500. The principal manufacturing and
administrative facilities of the Company and its joint ventures currently
comprise approximately 4.0 million square feet and are situated in the
following locations:
<TABLE>
<CAPTION>
Location Square Footage Ownership
-------- -------------- ---------
<S> <C> <C>
St. Peters, MO, USA 737,000 owned<F*>
Spartanburg, SC, USA 309,000 owned
Sherman, TX, USA 671,000 leased and owned
Pasadena, TX, USA 436,000 leased
Luoyang, China 70,000 leased
Merano, Italy 319,000 owned
Novara, Italy 302,000 owned
Utsunomiya, Japan 184,000 owned
Kuala Lumpur, Malaysia 53,000 leased
Chonan, South Korea 457,000 owned
(PHC joint venture)
Hsinchu, Taiwan 450,000 land leased,
(Taisil joint venture) building owned
<FN>
<F*>A portion of the St. Peters facility is currently leased with an option to
purchase pursuant to an industrial revenue bond financing.
</TABLE>
The Company believes that its existing facilities and equipment are well
maintained, in good operating condition and are adequate to meet its current
requirements. The extent of utilization of such facilities varies from plant
to plant and from time to time during the year.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The narrative or tabular information regarding the market for the
Company's common equity and related stockholder matters required by this item
is set forth under Note 18, "Unaudited Quarterly Financial Information", and
under "Stockholder Information" on pages 38 and 44, respectively, of the
Company's 1997 Annual Report, which information is incorporated herein by
reference.
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The tabular information (including the footnotes thereto) required by
this item is set forth under "Five Year Selected Financial Data" on page 12
of the Company's 1997 Annual Report, which information is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is set forth on pages 13 through
20 of the Company's 1997 Annual Report, which information is incorporated
herein by reference. In addition, the paragraphs contained in "To our
Stockholders" in the section entitled "Looking Ahead" on pages 4 and 5 of the
Company's 1997 Annual Report is incorporated herein by reference, and the
information contained in the "Safe Harbor Statement" section of the
"Stockholder Information" on page 44 of the Company's 1997 Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appearing on pages
21 through 39, and the Independent Auditors' Report thereon of KPMG Peat
Marwick LLP appearing on page 41 of the Company's 1997 Annual Report, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
11
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A definitive proxy statement will be filed with the Securities and
Exchange Commission within 120 days of year-end (the 1998 Proxy Statement).
The information required by this item with respect to directors will be set
forth in the 1998 Proxy Statement and is incorporated herein by reference.
The following is a list, as of March 1, 1998, of the names and ages of
the executive officers of MEMC and all positions and offices with the Company
presently held by the person named. There is no family relationship between
any of the named persons.
<TABLE>
<CAPTION>
Name Age All Positions and Offices Held
---- --- ------------------------------
<S> <C> <C>
Ludger H. Viefhues 55 Chief Executive Officer and Director
Klaus R. von Horde 56 President, Chief Operating Officer and
Director
James M. Stolze 54 Executive Vice President and Chief
Financial Officer
Dr. Werner Schmitz 58 Executive Vice President
Marcel Coinne 57 Corporate Vice President
Charles W. Cook, Jr. 53 Corporate Vice President
Dr. John P. DeLuca 55 Corporate Vice President
Ralph D. Hartung 54 Corporate Vice President
Helene F. Hennelly 51 Corporate Vice President, General Counsel
and Secretary
Jonathon P. Jansky 46 Corporate Vice President
Paul V. Pastorek 51 Corporate Vice President
Huston E. Sherrill 55 Corporate Vice President
Dr. Kiyoo Shimada 55 Corporate Vice President
Dr. Thomas Knothe 40 Vice President
Lori S. Nye 44 Vice President
</TABLE>
Each executive officer has held the same position or another executive
position with the Company during the past five years, except as set forth in
the 1998 Proxy Statement or as follows:
Mr. Stolze was a partner with KPMG Peat Marwick LLP from 1977 until
joining the Company in June 1995. Dr. Schmitz became an Executive Vice
President in June 1995. Dr. DeLuca served as Director, Manufacturing
Technology from May 1992 to November 1994 and has been a Corporate Vice
President since November 1994. Ms. Hennelly was a Vice President from
October 1990 until she became a Corporate Vice President in May 1996. Mr.
Jansky served as Plant Manager of MEMC's St. Peters facility from 1992 until
he became a Corporate Vice President in January 1997. Mr. Pastorek was
Director, Materials Management of the Company from 1990 to 1993 and served as
Director, Business Development-Asia of the Company from 1993 until he became
a Corporate Vice President in December 1995. Mr. Sherrill was a director of
the Company from May 1993 to May 1995. Dr. Shimada was Vice President of the
Company from 1993 to May 1996 and has been a Corporate Vice President of the
Company since May 1996. Dr. Shimada is also President and Representative
Director of MEMC Japan Ltd., a wholly owned subsidiary of the Company. Dr.
Knothe served as Director, Engineering for Huls AG from 1987 to 1994; Director,
Corporate Development Plastics Business for Huls AG from 1994 to 1995; and
Director, Corporate Development Electronic Materials for Huls AG from 1995 until
joining the Company in January 1998 as a Vice President.
12
<PAGE> 14
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under (i) "BOARD MEETINGS AND COMMITTEES;
COMPENSATION OF DIRECTORS -- Directors Fees"; (ii) "SUMMARY COMPENSATION
TABLE" and related footnotes; (iii) "OPTION/SAR GRANTS IN LAST FISCAL YEAR"
and related footnotes; (iv) "AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FY-END OPTION/SAR VALUES" and related footnotes; (v) "Pension Plan";
(vi) "Pension Plan Table (1)" and "Pension Plan Table (2)"; (vii) "Employment
Agreements", and (viii) "Compensation Committee Interlocks and Insider
Participation" of the 1998 Proxy Statement are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information appearing under "Security Ownership of Management and
Certain Beneficial Owners" of the 1998 Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under "Certain Relationships and Related Party
Transactions" of the 1998 Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries, included on pages 21 through 39 of the 1997 Annual Report, and
the Independent Auditors' Report thereon of KPMG Peat Marwick LLP appearing
on page 41 of such report are incorporated herein by reference.
Consolidated Statements of Operations -- Years ended
December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets -- December 31, 1997 and 1996.
Consolidated Statements of Cash Flows -- Years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
13
<PAGE> 15
2. FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
Independent Auditors' Report on Financial Statement Schedule F-1
Valuation and Qualifying Accounts F-2
Financial Statements of POSCO HULS Co., Ltd.:
Independent Auditors' Report of KPMG San Tong Corp. F-3
Balance sheets as of December 31, 1997 and 1996 F-4
Statements of Earnings -- Years ended December 31, 1997 and 1996, and
December 31, 1995 (unaudited) F-5
Statements of Appropriation (Disposition) of Retained Earnings
(Deficit) -- Years ended December 31, 1997 and 1996, and
December 31, 1995 (unaudited) F-6
Statements of Cash Flows -- Years ended December 31, 1997 and 1996, and
December 31, 1995 (unaudited) F-7
Notes to Financial Statements F-9
Financial Statements of Taisil Electronic Materials Corporation:
Independent Auditors' Report of KPMG Peat Marwick F-25
Balance sheets as of December 31, 1997, and December 31, 1996 (unaudited) F-26
Statements of Operations -- Years ended December 31, 1997, and
December 31, 1996 and 1995 (unaudited) F-28
Statements of Changes in Stockholders' Equity -- Years ended
December 31, 1997, and December 31, 1996 and 1995 (unaudited) F-29
Statements of Cash Flows -- Years ended December 31, 1997, and
December 31, 1996 and 1995 (unaudited) F-30
Notes to Financial Statements F-31
</TABLE>
3. EXHIBITS
See the Exhibit Index beginning at page 16 of this report. For a
listing of all management contracts and compensatory plans or arrangements
required to be filed as exhibits to this report, see the Exhibits listed
under Exhibit nos. 10-n through 10-r and Exhibit nos. 10-aa, 10-oo, 10-pp,
10-xx, 10-yy, 10-ggg, 10-hhh, 10-iii, 10-nnn, 10-ooo, and 10-ppp of the
Exhibit Index. The following Exhibits listed in the Exhibit Index are filed
with this report.
<TABLE>
<C> <S>
10-nnn Consulting Agreement dated as of December 1, 1997, between
the Company and Dr. Robert M. Sandfort
10-ooo Agreement dated as of December 31, 1997, between the Company
and Tom L. Cadwell
10-ppp Agreement dated as of April 1, 1993, between the Company and
Ralph D. Hartung
13 Pages 4 through 5 (the paragraphs contained in "To Our
Stockholders" under the section entitled "Looking Ahead"),
pages 12 through 41 (excluding the "Report of Management" on
page 40), and page 44 of the Company's 1997 Annual Report
21 Subsidiaries of the Company
23-a Consent of KPMG Peat Marwick LLP
23-b Consent of KPMG San Tong Corp.
23-c Consent of KPMG Peat Marwick
24 Powers of Attorney submitted by Dr. Erhard Meyer-Galow;
Willem D. Maris; Dr. Alfred Oberholz; Paul T. O'Brien; and
Michael B. Smith
27 Financial Data Schedule (filed electronically with the SEC
only)
</TABLE>
14
<PAGE> 16
4. REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MEMC ELECTRONIC MATERIALS, INC.
By: /s/ LUDGER H. VIEFHUES
----------------------------------------
Ludger H. Viefhues
Chief Executive Officer and Director
Date: March 23, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons, on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ LUDGER H. VIEFHUES Chief Executive Officer and March 23, 1998
- ----------------------------------- Director
Ludger H. Viefhues (Principal executive officer)
/s/ KLAUS R. von HORDE President, Chief Operating March 23, 1998
- ----------------------------------- Officer and Director
Klaus R. von Horde
/s/ JAMES M. STOLZE Executive Vice President and March 23, 1998
- ------------------------------------ Chief Financial Officer
James M. Stolze (Principal financial and
accounting officer)
<F*> Chairman of the Board of March 23, 1998
- ----------------------------------- Directors
Dr. Erhard Meyer-Galow
<F*> Director March 23, 1998
- -----------------------------------
Willem D. Maris
<F*> Director March 23, 1998
- -----------------------------------
Dr. Alfred Oberholz
<F*> Director March 23, 1998
- -----------------------------------
Paul T. O'Brien
<F*> Director March 23, 1998
- -----------------------------------
Michael B. Smith
Director
- -----------------------------------
Helmut Mamsch
<FN>
<F*> James M. Stolze, by signing his name hereto, does sign this document on
behalf of the above noted individuals, pursuant to powers of attorney duly
executed by such individuals which have been filed as an Exhibit to this
Report.
/s/ JAMES M. STOLZE
-------------------------
James M. Stolze
Attorney-in-Fact
</TABLE>
15
<PAGE> 17
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit
No. Description
- --- -----------
<C> <S>
2 Omitted -- Inapplicable
3(i) Restated Certificate of Incorporation of the Company (Incorporated
by reference to Exhibit 3-a of the Company's Form 10-Q for the
Quarter ended June 30, 1995)
3(ii) Restated By-laws of the Company (Incorporated by reference to
Exhibit 3-b of the Company's Form 10- Q for the Quarter ended
September 30, 1996)
4 Omitted -- Inapplicable
5 Omitted -- Inapplicable
9 Omitted -- Inapplicable
<F*>10-a Shareholders Agreement dated May 24, 1994 among the Company and
China Steel Corporation ("China Steel"), China Development
Corporation and Chiao Tung Bank (Incorporated by reference to
Exhibit 10(a) of Amendment No. 4 to the company's Form S-1
Registration Statement No. 33-92412)
<F*>10-b Technology Cooperation Agreement dated October 26, 1994 between
the Company and Taisil Electronic Materials Corporation ("Taisil")
(Incorporated by reference to Exhibit 10-b of Amendment No. 4 to
the Company's Form S-1 Registration Statement No. 33-92412)
10-c Joint Venture Agreement dated August 28, 1990 among the Company,
Pohang Iron and Steel Company, Ltd. ("POSCO") and Samsung
Electronics Company, Ltd. ("Samsung") (Incorporated by reference
to Exhibit 10-c of Amendment No. 1 to the Company's Form S-1
Registration Statement No. 33-92412)
10-d First Amendment to Joint Venture Agreement dated December 9, 1993
among the Company, POSCO and Samsung (Incorporated by reference to
Exhibit 10-d of Amendment No. 1 to the Company's Form S-1
Registration Statement No. 33-92412)
10-e Second Amendment to Joint Venture Agreement dated
December 30, 1994 among the Company, POSCO and Samsung
(Incorporated by reference to Exhibit 10-e of Amendment No. 1 to
the Company's Form S-1 Registration Statement No. 33-92412)
<F*>10-f Technical Agreement dated December 19, 1990 between the Company
and POSCO Huls Company Limited ("PHC") (Incorporated by reference
to Exhibit 10-f of Amendment No. 1 to the Company's Form S-1
Registration Statement No. 33-92412)
<F*>10-g Amendment to Technical Agreement dated as of January 1, 1995
between the Company and PHC (Incorporated by reference to Exhibit
10-g of Amendment No. 1 to the Company's Form S-1 Registration
Statement No. 33-92412)
<F*>10-h Shareholder's Agreement dated as of May 16, 1995 between the
Company and Texas Instruments Incorporated ("TI") (Incorporated by
reference to Exhibit 10-h of Amendment No. 4 to the Company's
Form S-1 Registration Statement No. 33-92412)
<F*>10-i TI Purchase Agreement dated as of June 30, 1995 between the
Company, MEMC Southwest Inc. ("MEMC Southwest") and TI
(Incorporated by reference to Exhibit 10-i of the Company's
Form 10-Q for the Quarter ended June 30, 1995)
<F*>10-i(1) Amendment to TI Purchase Agreement (Incorporated by reference to
Exhibit 10-i of the Company's Form 10-Q for the Quarter ended
June 30, 1997)
10-j Lease Agreement Covering Silicon Wafer Operation Premises dated
June 30, 1995 between TI and MEMC Southwest (Incorporated by
reference to Exhibit 10-j of the Company's Form 10-Q for the
Quarter ended June 30, 1995)
10-j(1) Sublease Agreement covering Silicon Wafer Operation Premises dated
June 30, 1995 between TI and MEMC Southwest (Incorporated by
reference to Exhibit 10-j(1) of the Company's Form 10-Q for the
Quarter ended June 30, 1995)
16
<PAGE> 18
<F*>10-k Technology Transfer Agreement dated as of June 30, 1995 between
the Company, TI and MEMC Southwest (Incorporated by reference to
Exhibit 10-k of the Company's Form 10-Q for the Quarter ended
June 30, 1995)
10-l Registration Rights Agreement between the Company and Huls
Corporation (Incorporated by reference to Exhibit 10-l of the
Company's Form 10-K for the Year ended December 31, 1995)
10-m Master Reserve Volume Agreement (Incorporated by reference to
Exhibit 10-m of the Company's Form 10-K for the Year ended
December 31, 1995)
<F+>10-n Employment Agreement between the Company and Dr. Robert M.
Sandfort (Incorporated by reference to Exhibit 10-q of the
Company's Form 10-K for the Year ended December 31, 1995)
<F+>10-o Employment Agreement dated as of April 1, 1993 among Huls
Belgium S.A., the Company and Marcel Coinne (Incorporated by
reference to Exhibit 10-r of Amendment No. 1 to the Company's
Form S-1 Registration Statement No. 33-92412)
<F+>10-p 1997 Restatement of the MEMC Electronic Materials, Inc.
Supplemental Executive Pension Plan (Incorporated by reference to
Exhibit 10-s of the Company's Form 10-Q for the Quarter ended
March 31, 1997)
<F+>10-q MEMC Electronic Materials, Inc. 1995 Equity Incentive Plan as
Amended and Restated on March 18, 1997 (Incorporated by reference
to Exhibit 10-t of the Company's Form 10-Q for the Quarter ended
March 31, 1997)
<F+>10-q(1) Form of Stock Option and Restricted Stock Agreement (Incorporated
by reference to Exhibit 10-t(1) of the Company's Form 10-K for the
Year ended December 31, 1995)
<F+>10-q(2) Stock Option and Restricted Stock Agreement between the Company
and Dr. Robert M. Sandfort (Incorporated by reference to
Exhibit 10-t(3) of the Company's Form 10-K for the Year ended
December 31, 1995)
<F+>10-r MEMC Electronic Materials, Inc. Annual Incentive Plan
(Incorporated by reference to Exhibit 10-u of Amendment No. 1 to
the Company's Form S-1 Registration Statement No. 33-92412)
10-s Service Agreement dated January 1, 1995 between the Company and
Huls Corporation (Incorporated by reference to Exhibit 10-v of
Amendment No. 1 to the Company's Form S-1 Registration Statement
No. 33-92412)
10-t Agreement amending the Service Agreement dated June 19, 1995 among
the Company and Huls Corporation (Incorporated by reference to
Exhibit 10-w of the Company's Form 10-Q for the Quarter ended
June 30, 1995)
10-u Agency and Services Agreement dated January 1, 1995 between MEMC
Electronic Materials, SpA and Huls France S.A. (Incorporated by
reference to Exhibit 10-x of Amendment No. 1 to the Company's
Form S-1 Registration Statement No. 33-92412)
10-v Agency and Services Agreement dated April 1, 1989 between MEMC
Electronic Materials, SpA and Huls (U.K.) Ltd. and the amendment
thereto dated November 20, 1991 (Incorporated by reference to
Exhibit 10-y of Amendment No. 1 to the Company's Form S-1
Registration Statement No. 33-92412)
10-w Service Agreement effective July 1, 1995 between MEMC Electronic
Materials, SpA and Huls AG (and English translation thereof)
(Incorporated by reference to Exhibit 10-z of the Company's
Form 10-K for the Year ended December 31, 1995)
10-x Sales Representative and Offer Agency Agreement dated
November 7, 1991 between MEMC Electronic Materials, SpA and MEMC
Electronic Materials, Company (now MEMC Huls Korea Company)
(Incorporated by reference to Exhibit 10-aa of Amendment No. 1 to
the Company's Form S-1 Registration Statement No. 33-92412)
<F*>10-y Trichlorosilane Supply Agreement between MEMC Electronic Materials
SpA and Huls Silicone GmbH dated as of December 31, 1995
(Incorporated by reference to Exhibit 10-bb of the Company's
Form 10-K for the Year ended December 31, 1995)
10-z Sales Agency Agreement dated December 9, 1991 between the Company
and MEMC Huls Korea Company (Incorporated by reference to
Exhibit 10-cc of Amendment No. 1 to the Company's Form S-1
Registration Statement No. 33-92412)
17
<PAGE> 19
<F+>10-aa Employment Agreement effective as of June 16, 1995 between the
Company and James M. Stolze (Incorporated by reference to
Exhibit 10-ee of Amendment No. 1 to the Company's Form S-1
Registration Statement No. 33-92412)
10-bb Note Agreement dated as of June 30, 1995 among MEMC
Southwest Inc., Texas Instruments Incorporated and MEMC Electronic
Materials, Inc. (Incorporated by reference to Exhibit 10-gg of the
Company's Form 10-K for the Year ended December 31, 1995)
10-cc Credit Agreement dated as of July 10, 1995, between the Company
and Huls Corporation (Incorporated by reference to Exhibit 10-jj
of the Company's Form 10-Q for the Quarter ended June 30, 1995)
10-dd Credit Agreement dated as of July 10, 1995, between the Company
and Huls Corporation (Incorporated by reference to Exhibit 10-kk
of the Company's Form 10-Q for the Quarter ended June 30, 1995)
10-ee Credit Agreement dated as of July 10, 1995, between the Company
and Huls Corporation (Incorporated by reference to Exhibit 10-ll
of the Company's Form 10-Q for the Quarter ended June 30, 1995)
10-ff Credit Agreement dated as of July 10, 1995, between the Company
and Huls Corporation (Incorporated by reference to Exhibit 10-mm
of the Company's Form 10-Q for the Quarter ended June 30, 1995)
10-gg Credit Agreement dated as of July 10, 1995, between the Company
and Huls AG (Incorporated by reference to Exhibit 10-nn of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-hh Credit Agreement dated as of July 10, 1995, between the Company
and Huls AG (Incorporated by reference to Exhibit 10-oo of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-ii Revolving Credit Agreement dated as of July 10, 1995, between the
Company and Huls AG (Incorporated by reference to Exhibit 10-pp of
the Company's Form 10-Q for the Quarter ended June 30, 1995)
10-jj Reimbursement Agreement effective as of August 1, 1995 between the
Company and Huls AG (Incorporated by reference to Exhibit 10-rr of
the Company's Form 10-K for the Year ended December 31, 1995)
10-kk MEMC Technology License Agreement dated as of July 31, 1995,
between Albemarle Corporation and the Company (Incorporated by
reference to Exhibit 10-tt of the Company's Form 10-K for the Year
ended December 31, 1995)
<F*>10-ll Seller Technology License Agreement dated as of July 31, 1995,
among Albemarle Corporation, the Company, and MEMC Pasadena, Inc.
(Incorporated by reference to Exhibit 10-vv of the Company's
Form 10-K for the Year ended December 31, 1995)
<F*>10-mm Technology Purchase Agreement dated as of July 31, 1995, among
Albemarle Corporation and the Company (Incorporated by reference
to Exhibit 10-ww of the Company's Form 10-K for the Year ended
December 31, 1995)
10-nn Ground Lease Agreement dated as of July 31, 1995, between
Albemarle Corporation and MEMC Pasadena, Inc. (Incorporated by
reference to Exhibit 10-xx of the Company's Form 10-K for the Year
ended December 31, 1995)
10-nn(1) Amendment to Ground Lease Agreement dated as of May 31, 1997,
between the Company, MEMC Pasadena, Inc., and Albemarle
Corporation (Incorporated by reference to Exhibit 10-uu of the
Company's Form 10-Q for the Quarter ended September 30, 1997)
<F+>10-oo Form of Stock Option and Performance Restricted Stock Agreement
(Incorporated by reference to Exhibit 10-yy of the Company's
Form 10-K for the Year ended December 31, 1995)
<F+>10-pp Form of Stock Option Agreement (Incorporated by reference to
Exhibit 10-zz of the Company's Form 10-K for the Year ended
December 31, 1995)
10-qq Credit Agreement between the Company and Huls AG dated as of
December 22, 1995 (Incorporated by reference to Exhibit 10-aaa of
the Company's Form 10-K for the Year ended December 31, 1995)
10-rr Credit Agreement between the Company and Huls AG dated as of
December 22, 1995 (Incorporated by reference to Exhibit 10-bbb of
the Company's Form 10-K for the Year ended December 31, 1995)
18
<PAGE> 20
10-ss Credit Agreement between the Company and Huls AG dated as of
December 22, 1995 (Incorporated by reference to Exhibit 10-ccc of
the Company's Form 10-K for the Year ended December 31, 1995)
10-tt Credit Agreement between the Company and Huls AG dated as of
December 22, 1995 (Incorporated by reference to Exhibit 10-ddd of
the Company's Form 10-K for the Year ended December 31, 1995)
10-uu Commitment Fee Agreement between the Company and Huls Corporation
dated as of July 10, 1995 (Incorporated by reference to
Exhibit 10-eee of the Company's Form 10-K for the Year ended
December 31, 1995)
10-vv Commitment Fee Agreement between the Company and Huls Corporation
dated as of July 10, 1995 (Incorporated by reference to
Exhibit 10-fff of the Company's Form 10-K for the Year ended
December 31, 1995)
10-ww Commitment Fee Agreement between the Company and Huls Corporation
dated as of July 10, 1995 (Incorporated by reference to
Exhibit 10-ggg of the Company's Form 10-K for the Year ended
December 31, 1995)
<F+>10-xx Employment Agreement dated as of September 3, 1996 between the
Company and Ludger H. Viefhues (Incorporated by reference to
Exhibit 10-hhh of the Company's Form 10-Q for the Quarter ended
September 30, 1996)
<F+>10-yy Stock Option Agreement dated as of September 1, 1996 between the
Company and Ludger H. Viefhues (Incorporated by reference to
Exhibit 10-iii of the Company's Form 10-Q for the Quarter ended
September 30, 1996)
<F*>10-zz HSC/MEMC Agreement dated as of December 27, 1994 between the
Company and Hemlock Semiconductor Corporation ("Hemlock")
(Incorporated by reference to Exhibit *10-ggg of the Company's
Form 10-Q for the Quarter ended March 31, 1997)
<F*>10-zz(1) Letter Amendment dated as of June 20, 1995 to the HSC/MEMC
Agreement between the Company and Hemlock (Incorporated by
reference to Exhibit *10-ggg(1) of the Company's Form 10-Q for the
Quarter ended March 31, 1997)
<F*>10-zz(2) Letter Amendment dated as of November 8, 1996 to the HSC/MEMC
Agreement between the Company and Hemlock (Incorporated by
reference to Exhibit *10-ggg(2) of the Company's Form 10-Q for the
Quarter ended March 31, 1997)
<F*>10-aaa Joint Venture Agreement dated as of December 20, 1996 between the
Company and Khazanah Nasional Berhad
<F*>10-bbb Technology Cooperation Agreement dated as of December 20, 1996
between the Company and MEMC Kulim Electronic Materials, SDN BHD
10-ccc Credit Agreement dated as of December 1, 1996 between the Company
and Huls AG
10-ddd Credit Agreement dated as of December 1, 1996 between the Company
and Huls AG
10-eee Credit Agreement dated as of April 1, 1996 between the Company and
Huls AG
10-fff Fourth Short-Term Loan Agreement dated as of March 31, 1996
between the Company and Huls Corporation
<F+>10-ggg Form of Stock Option and Performance Restricted Stock Agreement
(Incorporated by reference to Exhibit 10-nnn of the Company's
Form 10-Q for the Quarter ended March 31, 1997)
<F+>10-hhh Form of Stock Option Agreement (Incorporated by reference to
Exhibit 10-ooo of the Company's Form 10-Q for the Quarter ended
March 31, 1997)
<F+>10-iii Form of Stock Option Agreement (Nonemployee Directors)
(Incorporated by reference to Exhibit 10- ppp of the Company's
Form 10-Q for the Quarter ended March 31, 1997)
10-jjj Five Year Credit Agreement dated as of June 26, 1997, between the
Company and Huls Corporation (Incorporated by reference to
Exhibit qqq of the Company's Form 10-Q for the Quarter ended
June 30, 1997)
10-kkk Six Year Credit Agreement dated as of June 26, 1997, between the
Company and Huls Corporation (Incorporated by reference to
Exhibit rrr of the Company's Form 10-Q for the Quarter ended
June 30, 1997)
10-lll Seven Year Credit Agreement dated as of June 26, 1997, between the
Company and Huls Corporation (Incorporated by reference to
Exhibit sss of the Company's Form 10-Q for the Quarter ended
June 30, 1997)
19
<PAGE> 21
10-mmm Eight Year Credit Agreement dated as of June 26, 1997, between the
Company and Huls Corporation (Incorporated by reference to
Exhibit ttt of the Company's Form 10-Q for the Quarter ended
June 30, 1997)
<F+>10-nnn Consulting Agreement dated as of December 1, 1997, between the
Company and Dr. Robert M. Sandfort
<F+>10-ooo Agreement dated as of December 31, 1997, between the Company and
Tom L. Cadwell
<F+>10-ppp Agreement dated as of April 1, 1993, between the Company and
Ralph D. Hartung
11 Omitted -- Inapplicable
12 Omitted -- Inapplicable
13 Pages 4 through 5 (the paragraphs contained in "To Our
Stockholders" under the section entitled "Looking Ahead"),
pages 12 through 41 (excluding the "Report of Management" on
page 40), and page 44 of the Company's 1997 Annual Report
16 Omitted -- Inapplicable
18 Omitted -- Inapplicable
21 Subsidiaries of the Company
22 Omitted -- Inapplicable
23-a Consent of KPMG Peat Marwick LLP
23-b Consent of KPMG San Tong Corp.
23-c Consent of KPMG Peat Marwick
24 Powers of Attorney submitted by Dr. Erhard Meyer-Galow;
Willem D. Maris; Dr. Alfred Oberholz; Paul T. O'Brien; and
Michael B. Smith
27 Financial Data Schedule (filed electronically with the SEC only)
99 Omitted -- Inapplicable
<FN>
- --------------------
<F*> Confidential treatment of certain portions of these documents has been
granted.
<F+> These Exhibits constitute all management contracts, compensatory plans
and arrangements required to be filed as an Exhibit to this form pursuant
to Item 14(c) of this report.
</TABLE>
20
<PAGE> 22
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
MEMC Electronic Materials, Inc.
Under date of January 26, 1998, we reported on the consolidated balance sheets
of MEMC Electronic Materials, Inc. and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997, as contained in the 1997 annual report to stockholders.
These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year 1997.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule as listed
in item 14(2) of this Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
January 26, 1998
F-1
<PAGE> 23
<TABLE>
MEMC ELECTRONIC MATERIALS, INC.
AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts- Deductions- End of
Dollars in thousands of Period Expenses Describe Describe Period
--------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1995 1,680 338 30<FB> (8)<FB> 2,040
Year ended December 31, 1996 2,040 295 0 (36)<FA><FB> 2,299
Year ended December 31, 1997 2,299 1,700 0 (526)<FA><FB> 3,473
===== ===== == ==== =====
<FN>
<FA> Currency fluctuations
<FB> Write-off of uncollectible accounts
</TABLE>
F-2
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
POSCO HULS Co., Ltd.:
We have audited the accompanying balance sheets of POSCO HULS Co., Ltd. as of
December 31, 1997 and 1996, and the related statements of earnings,
appropriation (disposition) of retained earnings (deficit) and cash flows for
the years then ended. 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 the Auditing Standards, as
approved by the Ministry of Finance and Economy of the Republic of Korea,
which are substantially equivalent to generally accepted auditing standards
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.
As discussed in note 1(b) to the financial statements, the operations of the
Company have been significantly affected and will continue to be affected for
the foreseeable future by the liquidity crisis and related adverse economic
circumstances in the Republic of Korea.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of POSCO HULS Co., Ltd. as of
December 31, 1997 and 1996, and the results of its operations, the changes in
its retained earnings (deficit), and its cash flows for the years then ended
in conformity with the Financial Accounting Standards, as approved by the
Ministry of Finance and Economy of the Republic of Korea.
The accompanying financial statements for the year ended December 31, 1995
were not audited by us and, accordingly, we express no opinion or other form
of assurance on the financial statements for the year ended December 31,
1995.
As discussed in note 1(a) to the financial statements, due to a change in
reporting currency effective from January 1, 1997, the accompanying 1996 and
1995 financial statements have been restated to the new reporting currency of
United States dollars.
The Financial Accounting Standards in the Republic of Korea, as approved by
the Ministry of Finance and Economy, vary in certain significant respects
from generally accepted accounting principles in the United States.
Application of generally accepted accounting principles in the United States
would have affected results of operations for each of the years in the
three-year period ended December 31, 1997 and stockholders' equity as of
December 31, 1997 and 1996, to the extent summarized in note 18 to the
financial statements.
/s/ KPMG San Tong Corp.
Seoul, Korea
January 10, 1998
F-3
<PAGE> 25
<TABLE>
POSCO HULS CO., LTD.
BALANCE SHEETS
December 31, 1997 and 1996
(In thousands of U.S. dollars, except share data)
<CAPTION>
Assets 1997 1996
- ------ -------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 2) $ 20,217 41,345
Marketable securities 295 3,553
Notes and account receivable, less allowance
for doubtful accounts of $147 in 1997
and $159 in 1996 (note 10) 14,561 15,703
Inventories (note 3) 29,892 48,381
Prepaid expenses and other current assets (notes 4 and 10) 3,713 5,757
-------- -------
Total current assets 68,678 114,739
Investments and other assets (note 6) 7,795 13,298
Fixed assets, less accumulated
depreciation (notes 5, 7 and 8) 113,437 246,837
Deferred foreign currency translation loss 44,046 --
-------- -------
$233,956 374,874
======== =======
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes and accounts payable (note 10) 3,141 1,790
Short-term borrowings (note 5) 8,834 2,627
Accounts payable - other (note 10) 7,083 10,275
Current portion of long-term liabilities
(notes 5, 8, 12 and 13) 39,745 48,150
Accrued expenses and other current liabilities 2,462 35,362
-------- -------
Total current liabilities 61,265 98,204
Retirement and severance benefits (note 11) 3,873 4,968
Bonds issued (note 12) -- 23,323
Long-term debt, less current portion (notes 5 and 13) 77,981 76,518
Long-term obligations under financing leases (note 8) 39,180 47,047
-------- -------
Total liabilities 182,299 250,060
-------- -------
Stockholders' equity (notes 10 and 14):
Common stock of $2.95 par value
Authorized - 20,000,000 shares
Issued and outstanding -
17,200,000 shares in 1997 and 1996 112,175 112,175
Appropriated retained earnings (note 14) 18,403 17,582
Unappropriated retained earnings 11,898 6,749
Cumulative translation adjustment (90,819) (11,692)
-------- -------
Total stockholders' equity 51,657 124,814
-------- -------
Commitments and contingencies (note 16)
$233,956 374,874
======== =======
See accompanying notes to financial statements.
</TABLE>
F-4
<PAGE> 26
<TABLE>
POSCO HULS CO., LTD.
STATEMENTS OF EARNINGS
Years ended December 31, 1997, 1996 and 1995
(In thousands of U.S. dollars, except per share data)
<CAPTION>
1997 1996 1995
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Sales (note 10) $215,938 275,096 180,461
Cost of goods sold (note 10) 169,388 176,833 133,354
-------- ------- -------
Gross profit 46,550 98,263 47,107
Selling, general and administrative expenses 10,143 10,719 6,285
-------- ------- -------
Operating income 36,407 87,544 40,822
-------- ------- -------
Other income (deductions):
Interest income 5,634 4,910 3,205
Interest expense (16,894) (18,213) (18,836)
Foreign currency translation
and exchange gain (loss), net 5,887 (9,230) 2,502
Amortization of deferred foreign
currency translation loss (15,139) -- (5,419)
Loss of inventory valuation (3,953) -- --
Other, net (4,640) (2,215) 2,776
-------- ------- -------
(29,105) (24,748) (15,772)
-------- ------- -------
Earnings before income taxes 7,302 62,796 25,050
Income taxes (note 15) 1,332 5,771 --
-------- ------- -------
Net earnings $ 5,970 57,025 25,050
======== ======= =======
Earnings per share of common
stock in U.S dollars (note 17) $ 0.35 3.32 1.49
======== ======= =======
See accompanying notes to financial statements.
</TABLE>
F-5
<PAGE> 27
<TABLE>
POSCO HULS CO., LTD.
STATEMENTS OF APPROPRIATION (DISPOSITION) OF RETAINED EARNINGS (DEFICIT)
Years ended December 31, 1997, 1996 and 1995
(In thousands of U.S. dollars)
Date of Appropriation for 1997: March 24, 1998
Date of Appropriation for 1996: February 8, 1997
Date of Disposition for 1995: March 20, 1996
<CAPTION>
1997 1996 1995
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Unappropriated (undisposed) retained earnings (deficit):
Balance at beginning of year $ 6,749 (1,288) (26,338)
Net earnings for the year 5,970 57,025 25,050
------- ------ -------
12,719 55,737 (1,288)
------- ------ -------
Appropriation (disposition) of unappopriated
retained earnings (deficit):
Legal reserve (note 14) -- 3,141 --
Reserve for business
rationalization (note 14) 821 5,523 --
Cash dividends -- 31,406 --
Reserve for technology development (note 14) -- 2,010 --
Reserve for export loss (note 14) -- 5,150 --
Reserve for overseas
market development (note 14) -- 1,758 --
------- ------ -------
821 48,988 --
------- ------ -------
Balance of unappropriated (undisposed)
retained earnings (deficit) after
(proposed) appropriation (disposition) $11,898 6,749 (1,288)
======= ====== =======
See accompanying notes to financial statements.
</TABLE>
F-6
<PAGE> 28
<TABLE>
POSCO HULS CO., LTD.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
(In thousands of U.S. dollars)
<CAPTION>
1997 1996 1995
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,970 57,025 25,050
Adjustments to reconcile net earnings to cash
provided by operating activities:
Foreign translation loss (gain), net 658 11,631 (1,474)
Loss on disposition of fixed assets 486 2,392 142
Depreciation and amortization 69,574 59,723 46,128
Provision for retirement and severance benefits 3,039 3,103 1,427
Contribution to National Pension Fund (287) (223) (133)
Payment for retirement and severance benefits (352) (304) (311)
Increase in notes and accounts receivable (8,164) (7,927) (3,737)
Decrease (increase) in prepaid expenses and
other current assets (1,232) 1,202 (5,232)
Increase in inventories (9,965) (27,646) (9,184)
Increase (decrease) in trade notes and accounts payable 3,273 (639) 404
Increase (decrease) in accrued expenses and
other current liabilities (685) 1,914 145
Other, net 118 579 41
-------- ------- -------
Net cash provided by operating activities 62,433 100,830 53,266
-------- ------- -------
Cash flows from investing activities:
Additions to fixed assets (39,020) (65,032) (65,383)
Purchase of marketable securities -- (3,714) --
Proceeds from sale of fixed assets 380 30 10
Proceeds from disposition of marketable securities 2,518 232 1,297
Increase in investments, other assets and deferred charges (2,159) (7,499) (2,789)
-------- ------- -------
Net cash used in investing activities (38,281) (75,983) (66,865)
-------- ------- -------
Cash flows from financing activities:
Proceeds from bank overdraft and short-term borrowings 14,427 20,031 58,156
Repayments of bank overdraft and short-term borrowings (2,245) (18,004) (62,915)
Proceeds from issuance of bonds -- -- 37,907
Proceeds from long-term debt 26,356 36,922 35,281
Repayment of long-term debt (41,138) (48,873) (76,637)
Proceeds from issuance of common stock -- -- 38,901
Payment of dividends (28,156) -- --
Increase (decrease) in accounts payable - other 3,123 (6,679) 12,928
-------- ------- -------
Net cash provided by (used in) financing activities (27,633) (16,603) 43,621
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents (3,481) 8,244 30,022
Effect of changes in exchange rates (17,647) (3,357) (19)
Cash and cash equivalents at beginning of year 41,345 36,458 6,455
-------- ------- -------
Cash and cash equivalents at end of year $ 20,217 41,345 36,458
======== ======= =======
</TABLE>
F-7
<PAGE> 29
<TABLE>
POSCO HULS CO., LTD.
STATEMENTS OF CASH FLOWS, CONTINUED
Years ended December 31, 1997, 1996 and 1995
(In thousands of U.S. dollars)
<CAPTION>
1997 1996 1995
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $1,772 3,233 253
Interest 2,059 18,487 18,768
====== ====== ======
Supplemental schedule of non-cash investing and
financing activities:
Capital lease obligations incurred and additions to
leased equipment $ -- 15,712 18,948
====== ====== ======
See accompanying notes to financial statements.
</TABLE>
F-8
<PAGE> 30
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Presenting Financial Statements
----------------------------------------
The accounting records of Posco HULS Co., Ltd. (the "Company")
are expressed in Korean Won and maintained in accordance with the
financial accounting standards of the Republic of Korea, which
may differ in some material respects from international
accounting standards or the accounting principles and standards
of the country of the reader. For the convenience of the reader,
the statutory financial statements have been condensed,
restructured, and translated into English, with certain expanded
descriptions. Certain information included in the statutory
financial statements, not required for a fair presentation of the
Company's financial position or results of operations, is not
presented in the accompanying financial statements.
During 1997, the Company determined that its financial position
and results of operations could be presented with more relevance
if presented in U.S. dollars rather than Korean Won. Accordingly,
the accompanying 1996 and 1995 financial statements have been
restated into the new reporting currency of U.S. dollars. The
U.S. dollar amounts are determined by translating the Korean Won
amount of assets and liabilities into U.S. dollars at the basic
exchange rate as of the balance sheet date (W1,695.80 to US$1
(except for amounts denominated in foreign currencies which are
translated at W1,415.20 to US$1 (see note 1(k))) and W844.20 to
US$1 as of December 31, 1997 and 1996, respectively), the amount
of common stock at the basic exchange rate on the date of
issuance, and income and expense items at the average basic
exchange rate for the year (W988 to US$1, W807 to US$1 and W771 to
US$1 for the years ended December, 31, 1997, 1996 and 1995,
respectively). The effect of changes in exchange rates are
reflected as "cumulative translation adjustment" within
stockholders' equity.
(b) Economic Environment
--------------------
In late 1997, the Republic of Korea began to undergo a liquidity
crisis resulting in significant adverse economic circumstances and
significant depreciation in the value of Korean Won. In order to
address this situation, the Government of the Republic of Korea
sought assistance from the International Monetary Fund and
announced a comprehensive policy package intended to address the
structural weaknesses in the Korean economy and financial sector.
While the reform policies are intended to alleviate the economic
difficulties and improve the economy over time, the immediate
effects could include slower economic growth, a reduction in the
availability of credit, an increase in interest rates, an increase
in taxes, an increased rate of inflation, significant volatility
in the value of the Korean Won, an increase in the number of
bankruptcies of Korean entities, and unrest resulting from a
significant increase in unemployment. These conditions and
similar conditions in other countries in the Asia Pacific region
could have a material adverse effect on the operations of the
Company. The accompanying financial statements reflect
management's current assessment of the possible impact of this
economic situation on the financial position of the Company.
Actual results could differ from management's current assessments
and such differences could be material. In addition, the effect
on the Company's financial position of future developments and
access to further financial information concerning the Company's
customers, suppliers, financiers and others and their ability to
continue to transact with the Company cannot presently be
determined. The financial statements therefore may not include all
adjustments that might ultimately result from these adverse
economic conditions.
(Continued)
F-9
<PAGE> 31
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(c) Marketable Securities
---------------------
Marketable securities, which are certificates of deposit, are
stated at cost plus incidental expenses, determined by the
weighted average method.
(d) Inventories
-----------
Inventories, excluding materials-in-transit, are stated at the
lower of cost (the weighted average method) or market value.
Materials-in-transit are valued at cost determined by the
individual identification method.
(e) Fixed Assets
------------
Fixed assets are stated at cost. The Company charges maintenance,
repairs and minor renewals to expense as incurred. Major renewals
and improvements are capitalized. Interest incurred during the
construction and installation of manufacturing plant is
capitalized as part of fixed assets.
Depreciation is computed by the straight-line method at rates
based on the following estimated useful lives:
<TABLE>
<CAPTION>
Useful lives
------------
<S> <C>
Buildings 30 - 60 years
Buildings-auxiliary facilities 15 - 18
Structures 15 - 40
Machinery and equipment 4 - 10
Vehicles 5
Tools and equipment 5
Furniture and fixtures 5
Industrial water usage rights 15
</TABLE>
(f) Accounting for Leases
---------------------
The Company accounts for leases as operating or financing leases
in accordance with the Accounting Standards for Leases.
Under the operating lease method, lease expenses are charged to
operations as actual payments are made or due. Prepaid lease
expense relating to operating leases is amortized over the lease
term of the related lease.
Under the financing lease method, the principal amount of leased
equipment, which is the present value of total minimum lease
payments, is recorded as a leased asset and a long-term obligation
under financing leases. The leased assets are amortized over the
term of the related lease. Interest expense on long-term
obligations under financing leases is recorded when incurred.
(g) Deferred Charges
----------------
Bond issue costs and research and development costs are expensed
as incurred.
(h) Discount on Bonds Issued
------------------------
Discount on bonds issued is amortized over a period from the date
of issue to the maturity of the related bonds using the
straight-line method.
(Continued)
F-10
<PAGE> 32
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(i) Retirement and Severance Benefits
---------------------------------
Employees who have been with the Company for more than one year
are entitled to lump-sum payments based on current rates of pay
and length of service when they leave the Company. A portion of
the liability is covered by an insurance policy. The Company's
estimated liability under the plan has been accrued in the
accompanying financial statements at the amount which would be
payable if all employees left the Company at the balance sheet
date.
Under the National Pension Scheme of Korea, the Company is
required to transfer a certain portion of retirement allowances of
employees to the National Pension Fund. The amount transferred
will reduce the retirement and severance benefit amount payable to
the employees when they leave the Company and is reflected in the
accompanying financial statements.
(j) Revenue Recognition
-------------------
Local sales are recognized when goods are delivered and inspection
by the customer is completed, while export sales are recognized as
of the shipment date.
(k) Foreign Currency Translation
----------------------------
Monetary assets and liabilities denominated in foreign currencies
are translated into Korean Won at the balance sheet date. In
accordance with a change in financial accounting standards in the
Republic of Korea in 1997, net losses on long-term foreign
currency denominated monetary assets and liabilities and the
current portion of long-term debt denominated in foreign
currencies are permitted to be recorded as a deferred foreign
currency translation loss and amortized over the remaining
repayment period of the respective assets and liabilities. In
1996, such gains or losses were recorded in current results of
operations. The 1996 financial statements are not affected by
such change in financial accounting standards.
As of December 31, 1997 and 1996, monetary assets and liabilities
denominated in a foreign currency are translated into Korean Won
at W1,415.20 to US$1 and W844.2 to US$1, respectively, the rates
of exchange permitted under the financial accounting standards in
the Republic of Korea. On December 31, 1997, the basic rate of
exchange was W1,695 to US$1. Had the basic rate of exchange been
used to translate foreign currency assets and liabilities as of
December 31, 1997, the recorded amount of net foreign currency
liabilities would be increased by $21,559 and net earnings
reported by the Company would be reduced by $5,606 for the year
ended December 31, 1997.
Subsequent to December 31, 1997, the rate of exchange between the
Korean Won and the US dollar has remained extremely volatile.
Accordingly, the Korean Won amounts at which monetary assets and
liabilities denominated in a foreign currency are reflected in the
accompanying financial statements may vary significantly from the
amounts that would be reported were such items translated at a
later date. Due to the volatility in the exchange rate, it is not
practical to estimate the effect changes in the value of the
Korean Won would have on the accompanying financial statements.
(l) Income Taxes
------------
Provision is not made in the accounts to reflect the future tax
benefit (expense) on the interperiod allocation of income taxes
resulting from certain income and expense items being treated
differently for financial reporting purposes than tax computation
purposes.
(Continued)
F-11
<PAGE> 33
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(m) Earnings per Share
------------------
Earnings per common share is calculated by dividing net earnings
by the weighted average number of shares of common stock
outstanding during each period.
(n) Statement of Cash Flows
-----------------------
For purposes of the statement of cash flows, the Company considers
all highly liquid marketable securities with a maturity of three
months or less to be cash equivalents.
(o) Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expense during the period.
Actual results could differ from those estimates.
(2) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Cash on hand $ 1 3
Checking accounts 3 5
Corporate savings deposits 1 2
Foreign currency deposits 577 5
Time deposits 13,858 18,231
Installment time deposits 620 1,768
Cash management account 5,157 21,331
------- ------
$20,217 41,345
======= ======
</TABLE>
(3) Inventories
-----------
Inventories at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Finished goods $13,394 16,989
Goods-in-progress 4,753 10,066
Raw materials 1,410 864
Sub materials 3,412 9,290
Supplies 4,351 7,502
Materials-in-transit 2,572 3,670
------- ------
$29,892 48,381
======= ======
</TABLE>
(Continued)
F-12
<PAGE> 34
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(4) Prepaid Expenses and Other Current Assets
-----------------------------------------
Prepaid expenses and other current assets at December 31, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Other receivables $ 260 263
Accrued income 1,542 1,291
Prepayments 57 74
Income taxes refundable 363 --
Value added tax refundable 813 906
Prepaid expenses 635 1,329
Import guarantee deposit 43 1,894
------ -----
$3,713 5,757
====== =====
</TABLE>
(5) Pledged Assets and Guarantees Provided by Others
------------------------------------------------
(a) The following assets are pledged as collateral for short-term
borrowings and long-term debt at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Assets 1997 1996
- ------ ------- -------
<S> <C> <C>
Land $ 5,046 10,134
Buildings 23,524 43,301
Machinery and equipment 59,423 153,243
------- -------
$87,993 206,678
======= =======
Obligations the collateral is pledged to secure:
Short-term borrowings 8,641 2,627
Long-term debt, including current portion 76,192 108,962
------- -------
$84,833 111,589
======= =======
</TABLE>
(b) In addition, to secure borrowings of the Company, its shareholders
have provided guarantees as follows:
<TABLE>
<CAPTION>
Guarantors 1997 1996
---------- ------ ------
<S> <C> <C>
Pohang Iron and Steel
Company Ltd. (POSCO) $ -- 14,029
MEMC Electronic Materials,
Inc. (MEMC) 3,743 6,905
------ ------
$3,743 20,934
====== ======
</TABLE>
(Continued)
F-13
<PAGE> 35
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(6) Investments and Other Assets
----------------------------
Investments and other assets at December 31, 1997 and 1996 consist of
the following:
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Long-term deposits $ 951 4,264
Investment securities -- 62
Leasehold deposits 262 310
Rental deposit 96 117
Deposits for retirement and severance benefits 1,742 2,440
Loans to employees 4,096 5,014
Restricted cash and deposits 9 16
Telephone rights 37 73
Membership rights 475 866
Long-term prepaid expenses 127 136
------ ------
$7,795 13,298
====== ======
</TABLE>
(7) Fixed Assets
------------
Fixed assets at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997
-------------------------------
Accumulated
Cost depreciation Net
-------- ------------ -------
<S> <C> <C> <C>
Land $ 5,046 -- 5,046
Buildings 25,269 1,745 23,524
Building - auxiliary facilities 4,402 994 3,408
Structures 4,409 681 3,728
Machinery and equipment 138,998 79,575 59,423
Vehicles 385 207 178
Tools and equipment 1,564 1,022 542
Furniture and fixtures 6,864 3,589 3,275
Machinery - in - transit 4,555 -- 4,555
Construction - in - progress 9,361 -- 9,361
Industrial water usage rights 397 -- 397
-------- ------ -------
$201,250 87,813 113,437
======== ====== =======
(Continued)
F-14
<PAGE> 36
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(7) Fixed Assets, Continued
-----------------------
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------
Accumulated
Cost depreciation Net
-------- ------------ -------
<S> <C> <C> <C>
Land $ 10,134 -- 10,134
Buildings 45,681 2,380 43,301
Building - auxiliary facilities 8,843 1,538 7,305
Structures 7,740 985 6,755
Machinery and equipment 257,662 104,420 153,242
Vehicles 654 266 388
Tools and equipment 2,888 1,430 1,458
Furniture and fixtures 10,147 4,676 5,471
Machinery - in - transit 2,702 -- 2,702
Construction - in - progress 15,184 -- 15,184
Industrial water usage rights 897 -- 897
-------- ------- -------
$362,532 115,695 246,837
======== ======= =======
</TABLE>
Property, plant and equipment, and inventories were insured against
fire and other damage up to an amount of $315,734 and $774,873 at
December 31, 1997 and 1996, respectively.
(8) Financing Leases
----------------
The Company has leased silicon wafer manufacturing and other facilities
from Hanmi Leasing Co., Ltd. and Korea Development Leasing Co., Ltd.
under financing lease contracts. The following is a schedule of
minimum future payments on financing leases as of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 9,884
1999 12,849
2000 12,849
2001 9,281
2002 and after 10,465
-------
55,328
Less portion representing interest 9,465
Less current portion 6,683
-------
Long-term obligations under financing leases $39,180
=======
</TABLE>
The following is a summary of the acquisition cost of leased assets and
accumulated depreciation thereon at December 31, 1997 and 1996 which
are included in machinery and equipment:
<TABLE>
<CAPTION>
Description 1997 1996
- ----------- ------- ------
<S> <C> <C>
Leased assets at cost (including other incidental cost) $28,782 57,430
Accumulated depreciation 18,038 23,356
------- ------
$10,744 34,074
======= ======
</TABLE>
(Continued)
F-15
<PAGE> 37
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(9) Operating Leases
----------------
The Company leases certain equipment and machinery from Korea
Industrial Leasing Co., Ltd. and accounts for each of the leases
as an operating lease. The following is a summary of minimum lease
payments under operating leases:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 103
=====
</TABLE>
Operating lease expenses of $459, $1,433 and $1,561 were charged to
operations in the years ended December 31, 1997, 1996 and 1995,
respectively.
(10) Stockholders and Related Party Transactions
-------------------------------------------
The Company was established under the Foreign Capital Inducement Law in
December, 1991 as a joint venture company to manufacture and sell
silicon wafers and related products. Dividends are paid to shareholders
in Korean Won. The stockholders of the Company and their ownership
percentages at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Stockholders Number of shares Ownership percentage
- ------------ ---------------- --------------------
<S> <C> <C>
Pohang Iron and Steel Co., Ltd. (POSCO) 6,880,000 40%
MEMC Electronic Materials, Inc. (MEMC) 6,880,000 40%
Samsung Electronics Co., Ltd. (SEC) 3,440,000 20%
---------- ---
17,200,000 100%
========== ===
</TABLE>
The following are major balances and transactions with stockholders at
and for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
MEMC:
Notes and accounts receivable $ 3,257 1,757
Prepaid expenses and other current assets 217 93
Notes and accounts payable 49 324
Accounts payable - other 1,141 2,495
Sales 30,168 88,765 20,542
Purchases 6,914 8,770 17,565
Licensing and royalty payments 6,329 6,392 5,893
SEC:
Notes and accounts receivable $ 2,843 5,688
Sales 135,298 142,348 126,390
</TABLE>
(Continued)
F-16
<PAGE> 38
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(11) Retirement and Severance Benefits
---------------------------------
Details of changes in retirement and severance benefits for the years
ended December 31, 1997, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Beginning balance $ 5,433 3,033 1,778
Provision for the year 3,039 3,103 1,472
Payments (352) (304) (311)
Effect of changes in exchange rates (3,849) (399) 94
------- ----- -----
Ending balance 4,271 5,433 3,033
Contribution to National Pension Fund 398 465 304
------- ----- -----
$ 3,873 4,968 2,729
======= ===== =====
</TABLE>
(12) Bonds Issued
------------
Bonds issued at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Interest
Series Maturity per annum 1997 1996 Guarantor
- ------ -------- --------- ------- ------ ---------
<S> <C> <C> <C> <C> <C>
#6 1998 13.0% $ 5,897 11,846 Samsung Securities
#7 1998 13.0% 5,897 11,846 LG Securities
#8 1997 11.5% -- 11,846 Unsecured <F*>
#9 1998 13.0% 7,666 -- Unsecured <F*>
------- ------
19,460 35,538
Less current portion 19,427 11,846
Less unamortized discount 33 369
------- ------
$ -- 23,323
======= ======
<FN>
<F*> Private acceptance by Korea Long - term Credit Bank.
</TABLE>
(Continued)
F-17
<PAGE> 39
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(13) Long-term Debt
--------------
Long-term debt at December 31, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
Interest
per annum Final maturity 1997 1996
--------- -------------- ---- ----
<S> <C> <C> <C> <C>
Korean Won loans:
Technology facility loan Floating rate 1996-1997 $ -- 1,333
General facility loan Floating rate 1996-1997 -- 1,184
High technology facility loan Floating rate 1996-1997 -- 7,700
Information Communication
Supporting Fund 6.5% 1996-1999 317 1,002
------- ------
317 11,219
------- ------
Foreign currency loans:
Facility loan Floating rate 1997 -- 3,812
Facility loan 3LIBOR<F*>+1.2% 1998 2,000 4,000
Facility loan 6LIBOR<F*>+0.7% 2003 10,500 5,929
Facility loan 6LIBOR<F*>+1.0% 2003 3,562 294
Facility loan 3LIBOR<F*>+2% 1999 984 1,640
Facility loan 3LIBOR<F*>+1.5% 1999 759 1,265
Facility loan 6LIBOR<F*>+0.6% 2002 4,734 32,698
Facility loan 6LIBOR<F*>+1.3% 2003 6,694 7,330
Facility loan 6LIBOR<F*>+0.6% 2003 27,307 2,053
Facility loan 6LIBOR<F*>+0.6% 2003 2,459 290
Operating loan 6LIBOR<F*>+1.6% 2003 1,900 --
Operating loan 6LIBOR<F*>+0.7% 2000 12,700 12,700
Operating loan 6LIBOR<F*>+0.8% 2001 9,700 3,500
Operating loan 6LIBOR<F*>+0.7% 1997 -- 14,200
Operating loan 6LIBOR<F*>+0.7% 1999 3,040 3,040
Operating loan 6LIBOR<F*>+0.8% 2001 4,960 4,960
------- -------
91,299 97,711
------- -------
Total long-term debt 91,616 108,930
Less current portion 13,635 32,412
------- -------
$77,981 76,518
======= =======
<FN>
<F*> 3LIBOR = 3 month London inter-bank offered rate
<F*> 6LIBOR = 6 month London inter-bank offered rate
</TABLE>
The following is a schedule of payments of long-term debt as of
December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
1998 $13,635
1999 15,102
2000 24,017
2001 25,977
2002 and after 12,885
-------
$91,616
=======
</TABLE>
(Continued)
F-18
<PAGE> 40
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(14) Appropriated Retained Earnings
------------------------------
Appropriated retained earnings as of December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Legal reserve $ 3,141 3,141
Reserve for business rationalization 6,344 5,523
Reserve for technology development 2,010 2,010
Reserve for export loss 5,150 5,150
Reserve for overseas market development 1,758 1,758
------- ------
$18,403 17,582
======= ======
</TABLE>
Through December 31, 1996, appropriations of retained earnings for the year,
which are determined by the resolution of shareholders at the beginning of
the following year, are not reflected in the current years' financial
statements. However, under revised financial accounting standards, such
appropriations are to be reflected in financial statements of the year to
which it relates rather than in the year of appropriation. Retained earnings
as of December 31, 1996 have been reclassified for comparative purposes.
The Korean Commercial Code requires the Company to appropriate as legal
reserve an amount equal to at least 10% of cash dividends for each accounting
period until the reserve equals 50% of stated capital. This legal reserve may
be used to reduce a deficit or it may be transferred to common stock as a
stock dividend.
Under the Tax Exemption and Reduction Control Law, the Company is allowed to
make certain deductions from corporate income taxes. The Company is,
however, required to appropriate from retained earnings the amount of the tax
benefit obtained and transfer such amount into a reserve for business
rationalization. This legal reserve may be used to reduce a deficit or may be
transferred to common stock as a stock dividend.
Under the Tax Exemption and Reduction Control Law, the Company is allowed to
make certain deductions from taxable income and set up reserves for
technology development, reserve for export loss and reserve for overseas
market development by appropriating retained earnings. The unused portion of
the reserves is generally added back to taxable income over three to four
years after a certain grace period. These voluntary reserves may be restored
to unappropriated retained earnings by a future stockholders' resolution.
(Continued)
F-19
<PAGE> 41
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(15) Income Taxes
------------
The Company is subject to a number of taxes based upon taxable earnings
which result in the following normal tax rates:
<TABLE>
<CAPTION>
Taxable earnings Rates
---------------- -------------------
1997 1996 1995
<S> <C> <C> <C>
Up to W100,000 thousand 17.6% 17.6% 19.8%
Over W100,000 thousand up to W500,000 thousand 30.8% 30.8% 33.0%
Over W500,000 thousand 30.8% 30.8% 35.0%
</TABLE>
Under the Foreign Capital Inducement Law (FCIL), the Company is entitled to
the exemption from corporation taxes to the extent of its foreign equity
portion for the periods stipulated in the Law.
A reconciliation between net earnings before income taxes and taxable income
(tax loss carryforward) for the years ended December 31, 1997, 1996 and 1995
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Net earnings before income taxes $ 7,302 62,796 25,050
Unrealized exchange loss, net (585) (50) (150)
Accrued interest income, net (1,534) (483) (255)
Loss on inventory valuation 3,312 -- --
Entertainment expense over tax limit 205 106 190
Reserve for tax purpose -- (8,790) --
Income deduction for foreign capital increase (67) (1,078) --
Others, net 163 215 --
------- ------ -------
8,796 52,716 24,835
Utilization of tax loss carryforward -- (2,444) (24,835)
------- ------ -------
Taxable income $ 8,796 50,272 --
======= ====== =======
Income taxes payable on taxable income 2,962 15,291 --
Tax exemption tax under FCIL (804) (3,135) --
Investment tax credit (826) (6,385) --
------- ------ -------
Income taxes payable $ 1,332 5,771 --
======= ====== =======
</TABLE>
(16) Commitments and Contingencies
-----------------------------
(a) As of December 31, 1997, the Company has provided 8 blank checks
and 10 blank notes in connection with various contracts.
(b) As of December 31, 1997, the Company has entered into bank
overdraft agreements for borrowing up to $8,256 with five banks
and has also entered into borrowing arrangements with three
short-term financing companies.
(Continued)
F-20
<PAGE> 42
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(16) Commitments and Contingencies, Continued
----------------------------------------
(c) Under a technical license agreement with MEMC, the Company paid a
lump-sum royalty during 1995 and 1996 for the transfer of a
technical license to manufacture silicon wafers. The Company is
also required to pay MEMC a royalty at a specified percentage of
net sales for 5 years from the commencement of commercial
production, which took place in 1995.
(17) Earnings Per Share
------------------
Earnings per share for the years ended December 31, 1997, 1996 and 1995
are calculated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Net earnings $ 5,970 57,025 25,050
Weighted average number of
shares of common stock 17,200,000 17,200,000 16,756,164
=========== ========== ==========
Earnings per share in U.S. dollars $ 0.35 3.32 1.49
=========== ========== ==========
</TABLE>
(18) Reconciliation to United States Generally Accepted Accounting
------------------------------------------------------------
Principles
----------
The accompanying financial statements are prepared in accordance with
Financial Accounting Standards in the Republic of Korea (Korean GAAP),
which differ in certain significant respects from generally accepted
accounting principles in the United States (U.S. GAAP). The
significant differences are described below. Other differences do not
have a significant effect on either consolidated net earnings or
stockholders' equity.
The estimated effects of the significant adjustments to net earnings
and stockholders' equity which would be required if U.S. GAAP were applied
instead of Korean GAAP are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
(Unaudited)
<S> <C> <C> <C>
Net earnings - Korean GAAP $ 5,970 57,025 25,050
Adjustments:
Pre-operating costs -- -- 5,069
Start-up costs 1,991 3,121 1,624
Capital leases 18 89 26
Inventories (389) (2,369) (920)
Depreciation in relation to useful life difference 17,675 19,574 12,676
Depreciation on capitalized interest 1,423 2,627 277
Bond issue costs (15) (105) 65
Foreign currency translation loss, net (9,108) -- --
Deferred income taxes 10,915 (6,080) (300)
Others (1,565) (717) --
------- ------ ------
Total adjustments 20,945 16,140 18,517
------- ------ ------
Net earnings - U.S. GAAP $26,915 73,165 43,567
======= ====== ======
Basic earnings per share - U.S. GAAP $ 1.56 4.25 2.60
======= ====== ======
</TABLE>
(Continued)
F-21
<PAGE> 43
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(18) Reconciliation to United States Generally Accepted Accounting
-------------------------------------------------------------
Principles, Continued
---------------------
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Stockholders' equity - Korean GAAP $ 51,657 124,814
Adjustments:
Start-up costs (1,780) (3,771)
Inventories (2,999) (3,388)
Fixed assets:
Depreciation in relation to useful life difference 49,353 31,678
Depreciation on capitalized interest 2,814 1,391
Reversal of Korean GAAP cumulative
translation adjustment 90,819 --
U.S. GAAP cumulative translation adjustment (29,159) --
Foreign currency translation loss, net (9,108) --
Deferred income taxes 4,824 (6,091)
Others 1,834 (735)
-------- -------
Total adjustments 106,598 19,084
-------- -------
Stockholders' equity - U.S. GAAP $158,255 143,898
======== =======
</TABLE>
The tax effects of temporary differences that resulted in significant
portions of the deferred tax assets liabilities at December 31, 1997 and 1996
computed under U.S. GAAP, and a description of the financial statement items
that created these differences follow:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Inventories $ 766 600
Start - up costs 139 667
Capital leases 2 7
Foreign currency translation loss 10,131 --
Others -- 136
------- -------
Total deferred tax assets 11,038 1,410
------- -------
Deferred tax liabilities:
Depreciation in relation to useful life difference (4,897) (5,607)
Depreciation on capitalized interest (285) (246)
Reserves for tax purpose (850) (1,556)
Accrued income (181) (88)
Bond issue costs (1) (4)
------- -------
Total deferred tax liabilities (6,214) (7,501)
------- -------
Net deferred tax asset (liabilities) $ 4,824 (6,091)
======= =======
</TABLE>
(Continued)
F-22
<PAGE> 44
(18) Reconciliation to United States Generally Accepted Accounting
------------------------------------------------------------
Principles, Continued
---------------------
(a) Deferred Income Taxes
---------------------
Under Korean GAAP, a provision is not made in the accounts to
reflect the future tax effects resulting from certain income and
expense items being treated differently for financial reporting
purposes and tax computation purposes.
However, U.S. GAAP requires the recognition of deferred tax assets
and liabilities created by temporary differences between the
financial statement and tax bases of assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.
The tax rate used to calculate deferred tax assets and liabilities
was changed from 18.5% in 1996 to 20.3% in 1997 to reflect the
normal corporation tax rate and exemptions statutorily available
under FCIL. The effect of this increase on the effective tax rate
was to increase the net deferred tax asset and increase net
earnings by $5,401 in 1997.
(b) Pre-operating and Start-up Costs
--------------------------------
Certain preoperating and start-up costs are deferred for Korean
GAAP and amortized in equal annual amounts over 5 years from 1993.
These costs would be expensed as incurred under U.S. GAAP.
(c) Capital Leases
--------------
Under Korean GAAP, the Company has leased certain equipment and
machinery and accounts for such leases as operating leases.
However, under U.S. GAAP those leases would be classified as
capital leases. Under U.S. GAAP, equipment under capital lease is
recorded as an asset and a liability is recorded for the present
value of minimum lease payments at the inception of the lease.
This equipment is depreciated over the estimated useful life of
the asset.
(d) Bond Issue Costs
----------------
The Company charged bond issue costs to current income as
incurred. However, under U.S. GAAP, those bond issues costs are
amortized over the term of the related bonds.
(e) Useful Life of Machinery and Equipment
--------------------------------------
In 1995, the Company changed the estimated useful life of certain
machinery to 4 years from 6 years. For U.S. GAAP purposes, the
Company continues to depreciate the machinery and equipment over
its estimated useful life of 6 years.
(f) Inventories
-----------
For U.S. GAAP, inventories are adjusted for the effect of
depreciation in relation to the useful life difference of
machinery and equipment and depreciation on capitalized interest.
(Continued)
F-23
<PAGE> 45
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(18) Reconciliation to United States Generally Accepted Accounting
------------------------------------------------------------
Principles, Continued
---------------------
(g) Depreciation on Capitalized Interest
------------------------------------
In 1994, the Company recorded a prior year adjustment under Korean
GAAP for interest that should have been capitalized to
construction-in-progress in 1993 and is being depreciated over the
useful life of the related fixed assets. For U.S. GAAP purpose,
the interest amount was charged to earnings in 1993.
(h) Foreign Currency Translation
----------------------------
In accordance with a change in financial accounting standards in
the Republic of Korea in 1997, net losses on long-term foreign
currency denominated monetary assets and liabilities and the
current portion of long-term debt denominated in foreign
currencies are recorded as a deferred foreign currency translation
loss and amortized over the remaining repayment period of the
respective assets and liabilities. In 1996, such losses were
expensed as incurred. However, for U.S. GAAP purposes, all such
foreign currency translation losses are expensed as incurred in
all periods.
(i) Change of Functional Currency
-----------------------------
Effective October 1, 1997, solely for reporting under U.S. GAAP,
the Company changed its functional currency from the Korean Won to
the U.S. dollar. Significant changes in economic facts and
circumstances have necessitated such a change in functional
currency. Such facts and circumstances include: (a) an increasing
percentage of the Company's borrowings and funding requirements
being denominated in U.S. dollars; (b) an increasing percentage of
the Company's revenues and costs being denominated in U.S.
dollars; and (c) an increasing level of interdependency with MEMC.
In accordance with U.S. GAAP, the accounting bases of nonmonetary
assets and liabilities, primarily property, plant and equipment,
have been adjusted to reflect the difference between the
historical exchange rate when the transaction occurred and the
exchange rate at September 30, 1997, with a corresponding
adjustment to the "cumulative translation adjustment" included as
a separate component of stockholders' equity. This change in
functional currency also affected for U.S. GAAP purposes the
determination of results of operations (including foreign currency
exchange gain or loss), and the components of stockholders'
equity. As such change in functional currency will be effected
for U.S. GAAP purposes, this determination and its effects are
included in the U.S. GAAP reconciliation information.
F-24
<PAGE> 46
Independent Auditors' Report
----------------------------
The Board of Directors
Taisil Electronic Materials Corporation:
We have audited the accompanying balance sheet of Taisil Electronic Materials
Corporation as of December 31, 1997, and the related statements of
operations, changes in stockholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the Republic of China, which are substantially similar to
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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Taisil Electronic Materials
Corporation as of December 31, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles in the Republic of China.
As discussed in note (2)(b) to the financial statements, the Company changed
its reporting currency in 1997 to the United States dollar.
As discussed in note (2)(i) to the financial statements, as of December 31,
1997, Taisil Electronic Materials Corporation changed its method of
accounting for pensions.
Accounting principles generally accepted in the Republic of China vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles
in the United States would have affected stockholders' equity as of December
31, 1997, and the results of operations for the year then ended to the extent
summarized in note 15 to the financial statements.
/s/ KPMG Peat Marwick
Taipei, Taiwan
January 14, 1998
F-25
<PAGE> 47
<TABLE>
TAISIL ELECTRONIC MATERIALS CORPORATION
Balance Sheets
December 31, 1997 and 1996
(expressed in thousands of US dollars)
<CAPTION>
1996
1997 (Unaudited)
-------- -----------
<S> <C> <C>
Assets
------
Current assets:
Cash (note 4) $ 18,755 11,115
Short-term investments (note 5) 2,053 -
Restricted bank deposits (note 13) 3,094 40,709
Accounts receivable (note 3) 21,335 3,813
Inventories, net (note 6) 18,239 11,905
Prepayments and other current assets (note 12) 3,359 2,070
Deferred income tax, net (note 12) 4,434 1,534
-------- -------
Total current assets 71,269 71,146
-------- -------
Property, plant and equipment (notes 7 and 13):
Buildings 48,455 42,036
Machinery and equipment 181,594 82,149
Furniture and fixtures 6,166 3,467
-------- -------
236,215 127,652
Less: accumulated depreciation (32,608) (8,711)
Construction in progress, including deposits for equipment 34,434 76,699
-------- -------
Net property, plant, and equipment 238,041 195,640
-------- -------
Other assets:
Deferred technology fees 5,076 6,738
Deferred income tax, net (note 12) 13,038 12,656
Other assets 1,342 1,325
-------- -------
Total other assets 19,456 20,719
-------- -------
$328,766 287,505
======== =======
(Continued)
F-26
<PAGE> 48
<CAPTION>
TAISIL ELECTRONIC MATERIALS CORPORATION
Balance Sheets (Continued)
December 31, 1997 and 1996
(expressed in thousands of US dollars, except per share data)
1996
1997 (Unaudited)
-------- -----------
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Short-term loans (note 8) $ 23,847 14,841
Short-term bills payable (note 8) 27,745 58,470
Current portion of long-term loans (note 9) 19,433 173
Notes and accounts payable (note 3) 11,750 2,985
Payables for construction in process 732 6,919
Accrued expenses and other current liabilities 10,191 3,747
-------- -------
Total current liabilities 93,698 87,135
Long-term loans (notes 3 and 9) 163,682 128,085
Deposits from contractors 20 37
-------- -------
Total liabilities 257,400 215,257
-------- -------
Stockholders' equity (note 11):
Common stock - par value NT$10. Authorized and issued
315,000,000 shares and 255,000,000 shares in 1997 and
1996, respectively 113,783 94,942
Accumulated deficit (38,469) (20,618)
Cumulative translation adjustment (3,948) (2,076)
-------- -------
Total stockholders' equity 71,366 72,248
-------- -------
Commitments (note 14)
$328,766 287,505
======== =======
See accompanying notes to financial statements
</TABLE>
F-27
<PAGE> 49
<TABLE>
TAISIL ELECTRONIC MATERIALS CORPORATION
Statements of Operations
For the years ended December 31, 1997 , 1996 and 1995
(expressed in thousands of US dollars, except per share data)
<CAPTION>
1996 1995
1997 (Unaudited) (Unaudited)
------------ ----------- -----------
<S> <C> <C> <C>
Net sales (note 3) $ 61,923 7,214 -
Cost of goods sold 70,350 21,560 -
----------- ----------- -----------
Gross loss (8,427) (14,346) -
----------- ----------- -----------
Selling, general and administrative expenses 7,104 8,078 6,237
Research and development expenses 6,745 3,494 1,444
----------- ----------- -----------
13,849 11,572 7,681
----------- ----------- -----------
Operating loss (22,276) (25,918) (7,681)
----------- ----------- -----------
Non-operating income (expenses):
Interest income 1,971 3,614 2,575
Interest expenses, excluding capitalized interest of $974 in
1997, $1,803 in 1996 and $217 in 1995 (note 3) (15,098) (6,972) (613)
Gain (loss) on foreign exchange, net 10,496 366 (259)
Other income, net (note 3) 1,393 79 3
----------- ----------- -----------
(1,238) (2,913) 1,706
----------- ----------- -----------
Loss before income tax (23,514) (28,831) (5,975)
Income tax benefit (note 12) 5,663 11,670 2,592
----------- ----------- -----------
Net loss $ (17,851) (17,161) (3,383)
=========== =========== ===========
Loss per share $ (0.07) (0.08) (0.03)
=========== =========== ===========
Weighted average shares outstanding 255,986,301 221,876,712 135,068,493
=========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
F-28
<PAGE> 50
<TABLE>
TAISIL ELECTRONIC MATERIALS CORPORATION
Statements of Changes in Stockholders' Equity
For the years ended December 31, 1997, 1996 and 1995
(expressed in thousands of US dollars, except per share data)
<CAPTION>
Accumulated
deficit during Cumulative
Common development Accumulated translation
stock stage deficit adjustment Total
- ---------------------------------------------------------------------------------------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1995 (unaudited) $ 18,819 (74) - 128 18,873
Capital increase through cash 34,256 - - - 34,256
Net loss - (3,383) - - (3,383)
Cumulative translation adjustment - - - (1,898) (1,898)
-------- ------ ------- ------ -------
Balance as of December 31, 1995 (unaudited) 53,075 (3,457) - (1,770) 47,848
Accumulated deficit during development stage
carried forward to accumulated deficit - 3,457 (3,457) - -
Capital increase through cash 41,867 - - - 41,867
Net loss - - (17,161) - (17,161)
Cumulative translation adjustment - - - (306) (306)
-------- ------ ------- ------ -------
Balance as of December 31, 1996 (unaudited) 94,942 - (20,618) (2,076) 72,248
Capital increase through cash 18,841 - - - 18,841
Net loss - - (17,851) - (17,851)
Cumulative translation adjustment - - - (1,872) (1,872)
-------- ------ ------- ------ -------
Balance as of December 31, 1997 $113,783 - (38,469) (3,948) 71,366
======== ====== ======= ====== =======
See accompanying notes to financial statements.
</TABLE>
F-29
<PAGE> 51
<TABLE>
TAISIL ELECTRONIC MATERIALS CORPORATION
Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
(expressed in thousands of US dollars, except per share data)
<CAPTION>
1996 1995
1997 (Unaudited) (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (17,851) (17,161) (3,383)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 26,341 9,357 120
Non-cash foreign exchange loss (gain) (11,789) (314) 260
Provision (reversal) for inventory loss (827) 5,255 -
Loss from disposal of fixed assets 9 4 -
Increase in accounts receivable (20,027) (3,826) -
Increase in inventories (6,126) (16,441) (773)
Decrease (increase) in prepayments and other current assets (4,103) 1,216 (2,467)
Increase in deferred income tax (3,852) (11,671) (2,618)
Increase in notes and accounts payable 1,550 1,662 1,223
Increase in accrued expenses and other current liabilities 10,753 1,234 2,069
--------- -------- -------
Net cash used in operating activities (25,922) (30,685) (5,569)
--------- -------- -------
Cash flows from investing activities:
Increase in short-term investments (2,060) - -
Additions to property, plant and equipment (75,965) (139,758) (58,697)
Proceeds from disposal of property and equipment 18 18 -
Payment of technology fees and other assets (247) (1,538) (2,151)
Decrease (increase) in restricted bank deposits 36,650 (10,635) (20,603)
--------- -------- -------
Net cash used in investing activities (41,604) (151,913) (81,451)
--------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 18,841 41,867 34,256
Increase (decrease) in short-term loans and bills payable 7,290 41,423 27,675
Increase in long-term loans 49,791 101,235 26,945
Increase (decrease) in deposits from contractors (16) 37 -
--------- -------- -------
Net cash provided by financing activities 75,906 184,562 88,876
--------- -------- -------
Net increase in cash 8,380 1,964 1,856
Effect of exchange rate changes on cash (740) (66) (293)
Cash at beginning of the period 11,115 9,217 7,654
--------- -------- -------
Cash at end of the period $ 18,755 11,115 9,217
========= ======== =======
Supplemental disclosure of cash flow information:
Cash paid for interest, excluding capitalized interest $ 14,190 6,566 346
========= ======== =======
Cash paid for income tax (including refundable income tax) $ 217 358 307
========= ======== =======
See accompanying notes to financial statements.
(Continued)
</TABLE>
F-30
<PAGE> 52
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
(Amounts expressed in thousands of US dollars or
New Taiwan dollars, unless otherwise stated)
(Amounts and information with respect to 1996 and 1995 are unaudited)
(1) Organization and Business Environment
-------------------------------------
Taisil Electronic Materials Corporation (the "Company"), was founded
in the Hsinchu Science-Based Industrial Park of the Republic of China
("ROC") on September 26, 1994. Prior to June 30, 1996, the Company
was a development stage enterprise whose activities primarily
involved the construction of its manufacturing facilities, financial
planning, testing equipment, and recruiting and training employees.
The Company started its main activities of research, development,
production and sale of the latest generation silicon wafers in July
1996.
During the latter half of 1997, many Asian countries experienced
problems related to currency valuations and the health of their
financial systems. As a result of the significant portion of the
Company's cash flows and monetary assets and liabilities being
denominated in US dollars, these problems did not have a significant
impact on the Company in 1997. In 1998, the Company foresees the
resulting slowdown in Asian economies as possibly having a negative
impact on the Company's sales volumes and overall operations. The
Company does not however, expect the currency valuation problems and
potential slowdown in Asian economies to have a significant adverse
effect on its financial position.
The accompanying financial statements reflect management's current
assessments of the possible impact of this economic situation on the
financial position of the Company. Actual results could differ from
management's current assessments. In addition, the effect on the
Company's financial position of future developments and access to
further financial information concerning the Company's customers,
suppliers, financiers and others and their ability to continue to
transact with the Company cannot presently be determined.
(2) Significant Accounting Policies
-------------------------------
(a) Generally Accepted Accounting Principles
----------------------------------------
The financial statements have been prepared in accordance with
accounting principles generally accepted in the Republic of
China ("ROC GAAP"). ROC GAAP vary in certain significant
respects from accounting principles generally accepted in the
United States of America ("US GAAP"). Application of US GAAP
would have affected stockholders' equity as of December 31, 1997
and 1996, and the results of operations for each of the two
years then ended, to the extent summarized in note 15.
(b) Change in functional and reporting currency
-------------------------------------------
Effective October 1, 1997, the Company changed its functional
currency from the New Taiwan dollar (NT$) to the US dollar ($).
Significant changes in economic facts and circumstances have
necessitated such a change in functional currency. Such facts
and circumstances include: (i) increasing US dollar denominated
revenues and costs, and (ii) ongoing changes in sources of
financing from obligations denominated in New Taiwan dollars to
obligations denominated in US dollars.
In conjunction with the change in the Company's functional
currency to US dollars, the Company's reporting currency was
also changed from New Taiwan dollars to US dollars to enable
financial information to be presented with more relevance.
Accordingly, the financial statements for all prior years have
been restated to the new reporting currency of US dollars.
(Continued)
F-31
<PAGE> 53
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
The change in functional currency effective October 1, 1997 was
recognized through the US dollar translated amounts of the
nonmonetary assets, primarily property, plant and equipment, at
September 30, 1997 becoming the accounting basis for these
assets at October 1, 1997 and for subsequent periods.
Additionally, through September 30, 1997, a cumulative
translation adjustment has been included as a separate component
of stockholders' equity reflecting the translation of the New
Taiwan dollar functional currency financial statements to the
newly adopted and retroactively applied US dollar reporting
currency. This cumulative translation adjustment will remain as
a separate component of stockholders' equity.
(c) Foreign currency transactions
-----------------------------
Foreign currency transactions in currencies other than the
functional currency (hereinafter referred to as "foreign
currencies", which prior to October 1, 1997, includes the US
dollar; and subsequent to September 30, 1997, includes the New
Taiwan dollar) are recorded at rates in effect at the
transaction dates. Monetary assets and liabilities denominated
in foreign currencies at year-end are translated at the exchange
rate then prevailing. Gains or losses resulting from settlement
of such transactions or translations are included in
non-operating income.
(d) Short-term investments
----------------------
Investments are carried at the lower of cost or market value.
The market value of unlisted trust funds is determined on the
basis of the trust fund's net worth on the balance sheet date.
Costs of investments sold are determined on the weighted-average
basis.
(e) Inventories
-----------
Inventories are stated at the lower of cost or market value.
Cost is determined using the weighted-average method. The
market value of raw materials is determined on the basis of
replacement cost. Market values of work in process and finished
goods are determined on the basis of net realizable value.
(f) Property, plant and equipment
-----------------------------
Property, plant and equipment are stated at acquisition cost
which includes the capitalization of interest and certain
expenses incurred in connection with the construction of plant
and installation of machinery and equipment. Depreciation on
plant and equipment is provided on the straight-line method over
the estimated useful lives of the respective assets.
(g) Technology fees
---------------
The Company has entered into a technical assistance service
agreement with MEMC Electronic Materials, Inc. involving
information and processes embodying technology, equipment
design, and assets and property rights for the manufacture of
silicon wafers. Payments for such technology are capitalized
and amortized over five years from the commencement of
commercial production.
(Continued)
F-32
<PAGE> 54
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
(h) Organization cost and deferred charges
--------------------------------------
The costs incurred in the establishment of the Company are
capitalized and amortized over five years commencing from the
start of commercial operations. Charges for the installation of
gas and power systems are included in other assets and amortized
over five years.
(i) Employee retirement plan
------------------------
The Company adopted a retirement plan covering substantially all
employees in December 1995. Benefits are based on the
employees' years of service. Starting in August 1996, in
accordance with ROC Labor Standards Law, the Company made
monthly contributions to a pension fund with the Central Trust
of China. As approved by the authorities, the funding rate was
set at 2% of salaries and wages. Pension cost is recognized
based on the amount to be appropriated. Retirement benefits to
employees will be paid from the retirement fund first, and if
the fund is insufficient, the balance will be charged to current
operations.
Effective December 31, 1997, the Company adopted ROC Statements
of Financial Accounting Standards ("SFAS") No. 18, "Accounting
for Pensions," for its retirement plan. Based on the provisions
of SFAS No. 18, pension costs charged to earnings are
actuarially computed. The measurement date was the balance
sheet date. Accrued pension liabilities were recognized for the
excess of accumulated benefit obligation over fair value of plan
assets. Net periodic pension costs will be recognized starting
in 1998. The effect of this accounting change is not material
to the 1997 financial statements.
(j) Income tax
----------
Effective January 1, 1995, the Company adopted ROC SFAS No. 22,
"Accounting for Income Tax". Under the asset and liability
approach of SFAS No. 22, deferred tax liabilities are recognized
for tax consequences of taxable temporary differences by
applying enacted statutory tax rates. Deferred tax assets are
recognized for tax consequences of deductible temporary
differences, tax credits and operating loss carryforwards. A
valuation allowance is provided when some portion or all of the
deferred tax assets is not expected to be realized. Deferred
income tax is reported in the financial statements as a current
or noncurrent item based on the classification of the related
asset or liability which causes the temporary differences.
Deferred income taxes not relating to assets or liabilities are
classified as current or noncurrent based on the expected period
that the temporary differences will reverse.
(k) Forward exchange rate contracts
-------------------------------
The Company enters into foreign currency forward contracts to
hedge future operating cash outflows in currencies other than
the functional currency. Foreign currency forward contracts
reduce the Company's exposure to the risk that eventual foreign
currency cash outflows will be adversely affected by changes in
exchange rates. Foreign currency gains and losses under the
above arrangements are not deferred. Foreign currency forward
contracts are entered into with major commercial European banks
that have high credit ratings. From time to time, the Company
uses foreign currency forward contracts to hedge purchases of
capital equipment. Foreign currency gains and losses for such
purchases are deferred as part of the basis of the asset.
(Continued)
F-33
<PAGE> 55
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
(l) Loss per share
--------------
Loss per share is computed based on the weighted average number
of common shares outstanding.
(3) Transactions with Related Parties
---------------------------------
(a) Name and relationship
---------------------
<TABLE>
<CAPTION>
Name of related party Relationship with the Company
- ------------------------------------------- -----------------------------------------------
<S> <C>
MEMC Electronic Materials Inc. USA (MEMC) Investor using equity method to account for
its investment in the Company
Chiao Tung Bank of Taipei, Taiwan, ROC (CTB) Investor and represented on the Company's Board
of Directors
China Steel Corporation (CSC) Investor and represented on the Company's Board
of Directors
</TABLE>
(b) Significant transactions with related parties
---------------------------------------------
(i) Net sales to and corresponding amounts receivable from
related party are as follows:
<TABLE>
<CAPTION>
Sales
--------------------------------------------------------------------------------------------------------
(Unaudited)
------------------------------------------------------------
% of net % of net % of net
1997 sales 1996 sales 1995 sales
-------- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
MEMC $16,870 27.64 921 12.77 - -
======= ===== ===== ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Accounts Receivable
-------------------------
December 31,
-------------------------
1996
1997 (Unaudited)
------ -----------
<S> <C> <C>
MEMC $6,983 614
===== ======
</TABLE>
Purchases from and corresponding amounts payable to related
party are as follows:
<TABLE>
<CAPTION>
Purchases
-------------------------------------------------------------------------------------------------
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------
% of total % of total % of total
1997 purchases 1996 purchases 1995 purchases
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MEMC $6,314 17.78 485 9.51 - -
===== ===== ====== ===== ====== =======
(Continued)
</TABLE>
F-34
<PAGE> 56
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
<TABLE>
<CAPTION>
Accounts Payable
-------------------------
December 31,
-------------------------
1996
1997 (Unaudited)
------ -----------
<S> <C> <C>
MEMC $3,290 436
===== ======
</TABLE>
(ii) Financing
---------
The Company's long-term loans from CTB are summarized as
follows:
<TABLE>
<CAPTION>
Maximum Interest Ending Interest Interest
Year balance rate balance expense payable Collateral
- ---- ------- -------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1997 $28,450 5.825%- 28,306 1,721 153 Machinery and
====== 6.575% ====== ===== === equipment $32,045
1996 $23,281 5.825%- 23,281 661 112 Time deposit
(Unaudited) ====== 6.45% ====== ===== === $22,727
</TABLE>
(iii) Technology, royalty and commission agreements
---------------------------------------------
The Company has entered into various agreements with
MEMC which provide for payments related to, among
other things, technology, royalties and commissions.
The Company paid MEMC, net of amounts received,
$1,312, $2,703 and $5,000 in 1997, 1996 and 1995,
respectively, pursuant to the terms of such
agreements. The related amounts outstanding of
$2,048 and $203 as of December 31, 1997 and 1996,
respectively, are included in accrued expenses.
(iv) Guarantees
----------
MEMC and CSC have provided guarantees over certain
of the Company's long-term loans and bills payable
up to a maximum of $92,863 and $65,965,
respectively.
(4) Cash
----
Details of cash as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996
1997 (Unaudited)
------- -----------
<S> <C> <C>
Cash on hand, current and checking accounts $ 2,112 115
Time deposits 16,643 11,000
------ ------
$18,755 11,115
====== ======
(Continued)
</TABLE>
F-35
<PAGE> 57
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
(5) Short-term investments
----------------------
The Company had invested $2,053 in open-ended trust funds as of
December 31, 1997. The market value of such investments as of
December 31, 1997 was approximately $2,065.
(6) Inventories
-----------
The components of inventories as of December 31, 1997 and 1996, are
summarized below:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996
1997 (Unaudited)
------- -----------
<S> <C> <C>
Finished goods $ 5,268 5,313
Work in process 6,677 4,059
Raw materials and spare parts 10,281 7,770
------ ------
22,226 17,142
Provision for inventory devaluation (3,987) (5,237)
------ ------
$18,239 11,905
====== ======
</TABLE>
As of December 31, 1997 and 1996, insurance coverage of inventories
amounted to approximately $18,383 and $11,891, respectively.
(7) Property, Plant and Equipment
-----------------------------
The construction in progress consists of various payments for plant
construction and engineering design and consulting.
Certain property, plant and equipment is pledged as security for
long-term loans. See note 13.
Insurance coverage on property, plant and equipment and the
third-party liability as of December 31, 1997 and 1996, amounted to
approximately $199,617 and $204,727, respectively.
(8) Short-term Loans and Short-term Bills Payable
---------------------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1997 1996 (Unaudited)
----------------------------- -------------------------
Amount Interest rate Amount Interest rate
------- ------------- ------ -------------
<S> <C> <C> <C> <C>
Credit loans and import loans under usance
letters of credit $23,847 0.98%-8.99% 14,841 0.77%-6.68%
Commercial paper payable 28,494 7.30%-8.15% 57,927 5.15%-5.45%
Bank acceptance payable - - 1,491 5.15%-5.45%
Unamortized discount on short-term bills
payable (749) (948)
------ ------
$51,592 73,311
====== ======
(Continued)
</TABLE>
F-36
<PAGE> 58
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
As of December 31, 1997 and 1996, certain time deposits were pledged
as security for the issuance of short-term bills payable. See note
13.
(9) Long-term Loans
---------------
<TABLE>
<CAPTION>
Balance at December 31,
-------------------------
Credit line 1996
Bank and purpose Period Repayment term 1997 (Unaudited)
- ---------------- ----------- ------------- ------------------------- -------- -----------
<S> <C> <C> <C> <C> <C>
Chiao Tung Bank NT$400,000 November 1995 Repayable in 17 quarterly $ 12,256 14,545
Loan for to November installments starting in
purchase of 2002 November 1998
machinery
Chiao Tung Bank NT$100,000 November 1995 Repayable in 21 quarterly 2,918 3,636
Loan for to November installments starting in
purchase of 2002 November 1997
machinery
Chiao Tung Bank NT$100,000 November 1995 Repayable in 29 quarterly 3,064 3,636
Loan for to November installments starting in
purchase of 2005 January 1999
machinery
Chiao Tung Bank NT$200,000 December 1996 Repayable in 17 quarterly 2,213 1,464
Loan for to November installments starting in
purchase of 2003 December 1999
machinery
Chiao Tung Bank NT$200,000 December 1996 Repayable in 17 quarterly 6,128 -
Loan for to November installments starting in
purchase of 2003 December 1999
machinery
Chiao Tung Bank NT$80,000 December 1996 Repayable in 29 quarterly 1,727 -
Loan for to November installments starting in
purchase of 2006 January 2000
machinery
The International NT$1,000,000 December 1995 Repayable in 10 semi- 30,639 36,364
Commercial Bank Loan for plant to December annual installments starting
of China construction 2002 in June 1998
The International NT$600,000 March 1997 to Recycling use repayable in 2,298 -
Commercial Bank Loan for plant March 1999 90 to 180 days
of China construction
Taiwan Cooperative NT$600,000 May 1997 to Recycling use repayable in 18,383 -
Bank Credit loan May 1999 90 to 180 days
(Continued)
F-37
<PAGE> 59
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
(9) Long-term Loans, continued
--------------------------
<CAPTION>
Balance at December 31,
-------------------------
Credit line 1996
Bank and purpose Period Repayment term 1997 (Unaudited)
- ---------------- ----------- ------------- ------------------------- -------- -----------
<S> <C> <C> <C> <C> <C>
ABN AMRO Bank $50,000 Bridge June 1995 to Transferred to the following $ - 8,613
(In charge of loan for January 1997 loan in 1997
syndication loan following ABN
agreement for the AMRO's loan
phase I expansion)
ABN AMRO Bank $60,000 Loan October 1995 to Repayable in 10 semi- 60,000 60,000
(In charge of for purchase August 2002 annual installments
syndication loan of machinery starting in February 1998
agreement for the
phase I expansion)
ABN AMRO Bank $20,000 Bridge November 1997 Can be transferred to the 3,489 -
(In charge of loan for the to June 1998 following loan when
syndication loan following ABN accumulated to $5,000 or
agreement for the AMRO loan more
phase II expansion)
ABN AMRO Bank $40,000 Loan January 1997 Repayable in 6 semi-annual 40,000 -
(In charge of for purchase to 2001 installments starting in
syndication loan of machinery June 1999
agreement for the
phase II expansion)
------- -------
183,115 128,258
<S> <C> <C>
Less: current portion of long-term loans (19,433) (173)
------- -------
$163,682 128,085
======= =======
</TABLE>
The following is a schedule of payments of long-term debt as of
December 31, 1997:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 19,433
1999 59,726
2000 41,822
2001 34,363
2002 23,798
After 2002 3,973
-------
$183,115
=======
</TABLE>
The ranges for interest rates on these borrowings for the years ended
December 31, 1997, 1996 and 1995 were 6.00% to 7.605%, 0.85% to 7.495%
and 6.075% to 7.825%, respectively. As of December 31, 1997 and 1996,
total unused lines of credit for short-term and long-term loans amounted
to approximately $263,435 and $246,327, respectively.
(Continued)
F-38
<PAGE> 60
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
As December 31, 1997 and 1996, certain time deposits and property,
plant and equipment were pledged as security for long-term loans. See
note 13.
(10) Pension
-------
Effective December 31, 1997, the Company adopted SFAS No. 18,
"Accounting for Pensions". The measurement date for the actuarial
study of the Company's pension obligation was December 31, 1997. The
funded status of the Company's pension scheme as of December 31,
1997, was as follows:
<TABLE>
<S> <C>
Benefit obligation:
Vested benefit obligation $ -
Non-vested benefit obligation (256)
------
Accumulated benefit obligation (256)
Effects of future salary progression (638)
------
Projected benefit obligation (894)
Fair value of plan assets 256
------
Benefit obligation in excess of plan assets (638)
Unrecognized net obligation at transition 599
------
Accrued pension liabilities $ (39)
======
</TABLE>
Actuarial assumptions are as follows:
<TABLE>
<S> <C>
Discount rate 6.50%
Rate of salary progression 6.00%
Projected return on plan assets 6.50%
</TABLE>
Pension expenses were $198, $135 and $0, respectively, for the years
ended December 31, 1997, 1996 and 1995, respectively. As December 31,
1997 and 1996, the balances of the Company's pension fund maintained
with the Central Trust of China were $270 and $64, respectively. As
of December 31, 1997 and 1996, the unpaid balances of $63 and $71,
respectively, were included in accrued expenses.
As of December 31, 1997 and 1996, no employee qualified for retirement.
(11) Stockholders' Equity
--------------------
(a) Capital stock
-------------
On October 13, 1995, the board of directors decided to issue an
additional 60,000,000 shares at NT$10 par value per share for
cash on January 20, 1996.
On July 17, 1996, the stockholders' meeting approved the
issuance of an additional 55,000,000 shares at NT$10 par value
per share for cash on July 17, 1996. After this capital
increase, the total issued capital was $94,942. The above
increases were all registered and approved by the authorities.
On July 25, 1997, the stockholders' meeting approved the
issuance of an additional 60,000,000 shares at NT$10 par value
per share for cash on December 25, 1997. After this capital
increase, the total issued capital was $113,783. The above
increase is still in the process of being registered.
(Continued)
F-39
<PAGE> 61
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
(b) Distribution of earnings
------------------------
In accordance with ROC Company Law, the Company's articles of
incorporation stipulate that 10% of annual earnings (net of
losses of prior years, if any) is to be retained as statutory
reserve until such retention equals the amount of issued share
capital. The distribution of remaining earnings should be
proposed by the board of directors and decided in a stockholders
meeting. At least 0.01% of the distribution should be
appropriated as employees' bonuses when the stockholders approve
an earnings distribution. Future dividends will be distributed
in NT dollars.
(c) Accumulated deficit
------------------
According to the ROC Company Law, if accumulated deficit is over
one-half of the common stock, the board of directors shall
convene a meeting of shareholders and make a report on such
loss.
(12) Income Tax
----------
The Company's earnings are subject to an income tax rate of 20%. For
the years ended December 31, 1997, 1996 and 1995, income tax expense
(benefit) was as follows:
<TABLE>
<CAPTION>
(Unaudited)
-----------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Current income tax expense $ 25 - 50
Deferred income tax (benefit) (5,688) (11,670) (2,642)
------- -------- -------
$ (5,663) (11,670) (2,592)
======= ======== =======
</TABLE>
The Company's income tax benefit for the years ended December 31,
1997, 1996 and 1995, differed from the expected income tax, computed
by applying the 20% tax rate on loss before income tax as shown on the
financial statements, as follows:
<TABLE>
<CAPTION>
(Unaudited)
----------------------
1997 1996 1995
-------- ------- ------
<C> <C> <C> <C>
Computed "expected" income tax benefit $ (4,703) (5,766) (1,195)
Deductible exchange loss (4,249) - -
Investment tax credits earned (4,736) (10,811) (1,322)
Others 39 63 (75)
Valuation allowance 7,986 4,844 -
------- ------- -------
Income tax benefit $ (5,663) (11,670) (2,592)
======= ======= =======
(Continued)
F-40
<PAGE> 62
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
As of December 31, 1997 and 1996, refundable income taxes were as
follows:
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------
1996
1997 (Unaudited)
------- -----------
<S> <C> <C>
Estimated income tax expense $ 25 -
Prepaid and withheld income tax 178 357
Other (25) -
Income tax refundable from prior years 477 233
----- ----
Income tax refundable $ 655 590
===== ====
</TABLE>
The temporary differences, tax credits, loss carryforwards and their
effects on deferred income tax assets are as follows as of December
31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1997 1996 (Unaudited)
------------------------ -----------------------
Income tax Income tax
Amount effect Amount effect
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Current assets:
Unrealized loss from inventory devaluation $ 3,738 748 5,237 1,015
Organization cost deferred for tax purposes 2,448 490 2,704 541
Employee benefit costs deferred for tax purposes 171 34 204 41
Unrealized foreign exchange loss 15,809 3,162 (312) (63)
------- -------
$ 4,434 1,534
Noncurrent assets: ======= =======
Investment tax credits earned $ 14,762 14,762 12,067 12,067
Organization costs deferred for tax purposes 3,507 702 6,464 1,293
Employee benefit costs deferred for tax purposes 171 34 407 81
Difference in technology fee 391 78 (340) (68)
Tax loss carryforward 46,851 9,370 21,108 4,222
------- -------
24,946 17,595
Less: valuation allowance (11,908) (4,939)
------- -------
$ 13,038 12,656
======= =======
</TABLE>
According to the ROC Income Tax Law, pre-operating expenses of the
Company during the development stage are amortized for tax purposes on
a straight-line basis over a period of not less than five years.
ROC tax regulations stipulate that investment tax credits used by the
Company each year shall not exceed 50% of the current income tax
payable, and any unused balance can be carried forward to the
following four years, subject to the same percentage limitation for
each year except in the year of expiration when any remainder can be
used for offset of income tax payable in that year. As of December
31, 1997, the estimated unused income tax credits, resulting
(Continued)
F-41
<PAGE> 63
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
from investment in machinery and equipment and research and
development, available to reduce future tax liabilities and the years
of expiration were as follows:
<TABLE>
<CAPTION>
Year of investment Tax credits Year of expiration
------------------ ----------- ------------------
<S> <C> <C>
1995 $ 4,246 1999
1996 10,196 2000
1997 320 2001
-------
$ 14,762
=======
</TABLE>
According to the Statute for the Establishment and Administration of
Science-Based Industrial Park, the Company may, within two years from
the date on which it begins to sell its products or to render
services, select any fiscal year in the four-year period from such
date for exemption from profit-seeking enterprise income tax for a
period of five consecutive years from the starting date of such fiscal
year. As of December 31, 1997, the Company has not chosen the
starting date.
Pursuant to the ROC Income Tax Law, the Company's tax losses may be
carried forward for up to five years to reduce future taxable income.
As of December 31, 1997, the estimated tax loss carryforwards were as
follows:
<TABLE>
<CAPTION>
Year of loss Amount Year of expiration
------------ ------ ------------------
<S> <C> <C>
1996 $ 16,272 2001
1997 30,579 2002
-------
$ 46,851
=======
</TABLE>
The tax authorities have examined and assessed the Company's income tax
returns through 1995.
(13) Pledged Assets
--------------
As of December 31, 1997 and 1996, pledged assets were as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996
Assets Related secured liabilities 1997 (Unaudited)
------------------------------ --------------------------------------- --------- -----------
<S> <C> <C> <C>
Time Deposits
Restricted bank deposits Short-term loans $ 3,063 -
Restricted bank deposits Documentary draft for export in customs 31 -
Restricted bank deposits Long-term loans - 40,709
Machinery and equipment Long-term loans 52,452 35,514
Buildings 33,779 40,090
------- --------
$ 89,325 116,313
======= ========
</TABLE>
(14) Commitments
-----------
(a) Operating lease
---------------
The Company is leasing its plant site from the Science-Based
Industrial Park Administration Bureau for a period of 20 years,
expiring December 31, 2014. In accordance with the lease agreement,
rental payments are subject
(Continued)
F-42
<PAGE> 64
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
to adjustment as and when the government reappraises the land value.
The current rent is NT$12,390 ($380) per year.
Future minimum lease payments as of December 31, 1997, under the
existing non-cancelable agreement are:
<TABLE>
<CAPTION>
Years Minimum lease payments
----- ----------------------
<S> <C>
1998 through 2002 $ 1,900 ($380 annually)
2003 through 2007 1,900
2008 through 2012 1,900
2013 through 2014 759
-------
$ 6,459
=======
</TABLE>
(b) Technical Service Agreement
---------------------------
In accordance with a technical assistance agreement between the
Company and MEMC, the Company is required to pay MEMC fixed payments
and the timing of such payments is based on reaching certain
milestones. As of December 31, 1997, the remaining balance of such
payments to be paid under the agreement amounted to $2,500.
In addition, the Company pays MEMC an annual royalty based on net
sales and operating income.
(c) Purchase of equipment
---------------------
As of December 31, 1997 and 1996, the Company had outstanding
letters of credit amounting to approximately $3,242 and $7,636,
respectively, and was committed to purchase equipment with a total
estimated cost of $15,369 and $70,764, respectively.
(d) Syndicated term loan agreement
------------------------------
The Company entered into certain syndication loan agreements with
ABN AMRO Bank and seven other banks (the "Banks") for the Company's
Phase I and II planned expansion. In accordance with the
syndication loan agreements, the Banks granted credit facilities to
the Company for the purchase of machinery and equipment. The
commitment fee is charged at a certain rate per annum payable
quarterly, based on the committed-to withdraw but unborrowed
balance, if any. Commitment fees paid for the years ended December
31, 1997 and 1996 amounted to $44 and $46, respectively.
(15) Reconciliation to United States Generally Accepted Accounting Principles
------------------------------------------------------------------------
The Company's financial statements have been prepared in accordance
with ROC GAAP. ROC GAAP vary in certain significant respects from US
GAAP. Differences which have a significant effect on the Company's
results of operations and stockholders' equity are as follows:
(a) Employee retirement benefits
----------------------------
Under ROC GAAP, the pension expense recorded by the Company in
connection with its defined benefit pension plan was based on
the amount of the contributions made by the Company to the
pension plan as required
(Continued)
F-43
<PAGE> 65
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
by government regulations. Under US GAAP, the accumulated
pension obligation and pension expense is determined on an
actuarial basis, assuming the Company first adopted this policy
at the beginning of 1996 since it was not feasible to apply the
actuarial basis at an earlier period. The impact of this
difference is not significant to the Company's determination of
results of operations or stockholders' equity under US GAAP for
the periods presented.
(b) Technology fee
--------------
Under ROC GAAP, the Company capitalizes and amortizes certain
costs in connection with a technical assistance agreement
entered into with a shareholder, MEMC. Under US GAAP, such
payments are expensed as incurred or treated as a deemed
dividend depending on the nature of the payment.
Net loss:
<TABLE>
<CAPTION>
December 31,
------------------------------
1996
1997 (Unaudited)
---------- ----------
<S> <C> <C>
Net loss as reported under ROC GAAP $ (17,851) (17,161)
(a) Amortization of capitalized technology fees 1,662 562
(b) Income tax effects resulting from capitalized technology fees (333) (112)
-------- --------
Net loss in accordance with US GAAP $ (16,522) (16,711)
======== ========
Basic loss per share $ (0.06) (0.08)
==== ====
Stockholders' equity:
<CAPTION>
December 31,
------------------------------
1996
1997 (Unaudited)
---------- ----------
<S> <C> <C>
Stockholders' equity as reported under ROC GAAP $ 71,366 72,248
(a) Effect of capitalization technology fees, net of amortization (5,076) (6,738)
(b) Income tax effects resulting from capitalized technology fees 1,015 1,348
Cumulative translation adjustment 339 169
-------- -------
Stockholders' equity in accordance with US GAAP $ 67,644 67,027
======== =======
</TABLE>
(16) Reclassifications
-----------------
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform with the 1997 presentation for comparison
purposes. These reclassifications do not have a significant impact on
the financial statements.
F-44
<PAGE>
Exhibit 10-nnn
CONSULTING AGREEMENT
AS ADVISOR TO
CHIEF EXECUTIVE OFFICER
This Consulting Agreement ("Agreement") is made as dated below, by and
between Dr. Robert M. Sandfort ("Dr. Sandfort") and MEMC Electronic Materials,
Inc. ("MEMC"). Dr. Sandfort and MEMC have mutually agreed to end Dr. Sandfort's
employment with MEMC, so that Dr. Sandfort may pursue other interests and become
a consulting advisor to MEMC's CEO. Dr. Sandfort has been employed as President
and Chief Operating Officer of MEMC. Dr. Sandfort also serves as a Director on
the MEMC Board of Directors. In order to resolve any and all matters arising out
of the employment relationship and its termination, and in order to insure a
smooth transition of Dr. Sandfort's job duties and to continue to take advantage
of Dr. Sandfort's skills and experience, the parties have entered into this
Agreement. The parties agree as follows:
1. Dr. Sandfort will voluntarily retire and resign his employment with MEMC
effective December 1, 1997 ("Termination Date"). Dr. Sandfort will receive all
regular compensation due for services rendered as an MEMC employee through
November 30, 1997 on the next regular pay date. In addition, Dr. Sandfort will
receive payment for all accrued but unused vacation time in the amount of
$47,525.60, payable on December 15, 1997. Dr. Sandfort (or his designated
beneficiary, if he should die before the scheduled payment date) also shall
receive compensation due him pursuant to the Employment Agreement dated May 1,
1995 between Dr. Sandfort and MEMC (the "Employment Agreement") in the aggregate
amount of $561,666.67, payable as follows: $28,083.33 payable on December 15,
1997; $337,000.00 payable on January 2, 1998; and $196,583.34 payable on January
4, 1999. The Employment Agreement, which is attached as Exhibit A and
incorporated by reference herein, shall be deemed to be amended by all
provisions of this Agreement that are inconsistent therewith. Capitalized terms
used herein but not defined herein shall have the meanings assigned in the
Employment Agreement. "Agreement" shall mean this Consulting Agreement unless
the context otherwise requires.
2. For a one-year period beginning with the day after Dr. Sandfort's
Termination Date ("Consulting Period"), Dr. Sandfort agrees to make himself
reasonably available for consultation with MEMC either by phone or in person as
reasonably requested by MEMC on such matters as MEMC may reasonably request.
During the Consulting Period Dr. Sandfort shall be considered a consulting
advisor to MEMC's CEO. Dr. Sandfort shall be free to perform services for others
when not performing under this Agreement; provided, that nothing in this
Agreement will eliminate or modify in any way the confidentiality and
non-competition restrictions placed upon Dr. Sandfort by Paragraphs 5.1 and 5.2
of the Employment Agreement, which paragraphs are incorporated by reference
herein and shall be effective as of the Termination Date, except that (a) such
paragraphs shall be interpreted solely with reference to the definition of
"Competitive Work" set forth in the Confidentiality Agreement dated as of March
31, 1989 (the "Confidentiality Agreement"), which is incorporated by reference
in the Employment Agreement; and (b) the written consent of MEMC described in
the first paragraph of the section of the Confidentiality Agreement entitled
"Competitive Activity" shall not be unreasonably withheld and shall be deemed to
have been given if Dr. Sandfort has received no response from MEMC as of the
14th day after Dr. Sandfort has furnished the written evidence required
thereunder to MEMC.
3. The parties agree that during the Consulting Period, the parties'
relationship will be that of a client and an independent contractor. During this
period Dr. Sandfort will not be considered an agent or employee of MEMC and
therefore will not necessarily be entitled to any of the benefits MEMC provides
its employees, including but not limited to health, worker's compensation and
pension or profit sharing plans; except that nothing contained herein shall
deprive Dr. Sandfort of any benefits to which he is entitled under Section 3.1.1
of the Employment Agreement, under any plan providing benefits during retirement
if and when Dr. Sandfort elects to begin receiving retirement income, and any
other benefits that may be specifically provided under this Consulting
Agreement. Nothing in this Agreement shall adversely affect Dr. Sandfort's
rights with respect to any vested profit sharing or pension monies, if any; Dr.
Sandfort's right to begin receiving retirement income, if he is eligible under
the terms of any plan, at any time before, during, or after the Consulting
Period; or Dr. Sandfort's rights under any other plan for which he may be
eligible or any law, including without limitation the Consolidated Omnibus
Reconciliation Act of 1986 ("COBRA").
4. In consideration of Dr. Sandfort's consulting services and other
promises herein, on January 2, 1998, MEMC will pay to Dr. Sandfort (or his
designated beneficiary, if he should die before January 2, 1998) a lump sum in
the amount of $539,751.00. In addition, Dr. Sandfort will be paid an hourly rate
of $250 for each hour and fraction thereof which he spends providing consulting
services, with a minimum of two hours for each telephone consultation and four
hours for each requested consultation in person. In addition, Dr. Sandfort will
be reimbursed for all reasonable expenses incurred as a result of his performing
consulting services. To the extent that Dr. Sandfort requires administrative
support to perform his consulting duties, these will be provided by MEMC;
provided that, it is expressly understood that MEMC will not be responsible for
providing Dr. Sandfort with office facilities at any MEMC location. Dr. Sandfort
expressly acknowledges that the monies paid hereunder are over and above
anything which MEMC may owe him for his services prior to the termination of his
employment and represents additional pay and benefits to which Dr. Sandfort
would not normally be entitled at the end of his employment.
If Dr. Sandfort is required to travel in order to provide consulting
services to MEMC, MEMC shall provide travel insurance in an amount not less than
that for which Dr. Sandfort was eligible during the month prior to the
Termination Date.
5. The parties also agree as follows:
(a) MEMC shall take or cause to be taken all actions necessary such that:
(1) all stock options previously awarded to Dr. Sandfort under any
plan of MEMC ("Options") that have not vested shall vest as of
the Termination Date;
(2) if at any time in the future MEMC issues Options to replace
Options granted as of the same date as any Options that then
remain outstanding, the effect of which is to lower the exercise
price under the Options being replaced, MEMC shall issue Options
to replace outstanding Options on the same terms as such other
Options, subject to Subsection 5(a)(3) and subject to the
execution of such documents as MEMC reasonably requires to assure
compliance with the securities laws.
(3) Dr. Sandfort shall have all rights under the Equity Incentive
Plan or Long Term Incentive Plan, as the case may be, to pay any
Option exercise price in shares of stock or through a cashless
exercise procedure, as well as the right to elect to pay in
shares of stock all or a part of any amount required to be
withheld to satisfy income tax liability in connection with the
exercise of any Option (unless such election would subject him to
liability under Section 16(b) of the Securities Exchange Act of
1934, as amended);
(4) Dr. Sandfort shall be allowed to exercise all Options (including
any replacement options) until the tenth anniversary of the date
on which each Option was granted; and
(5) all shares of restricted stock previously awarded to Dr. Sandfort
under any plan of MEMC ("Restricted Stock") that have not vested
shall vest as of the Termination Date, and all remaining
restrictions on such Restricted Stock shall lapse as of the
Termination Date.
(b) The six (6) month prior irrevocable election requirement of the
Supplemental Executive Pension Plan shall be waived. As payment in
full for all amounts due him from the Supplemental Executive Pension
Plan, Dr. Sandfort (or his designated beneficiary, if he should die
before the scheduled payment date) shall receive 120 monthly
installment payments as follows:
(1) $10,588.11 each month in 1998;
(2) $10,764.58 each month in 1999;
(3) $10,946.24 each month in 2000;
(4) $11,133.88 each month in 2001;
(5) $11,328.73 each month in 2002;
(6) $11,532.64 each month in 2003;
(7) $11,748.88 each month in 2004;
(8) $11,983.86 each month in 2005;
(9) $12,253.50 each month in 2006; and
(10) $12,621.10 each month in 2007.
(c) Dr. Sandfort (or his designated beneficiary, if he should die before
the scheduled payment date) also shall receive as retirement income in
addition to amounts due him from the Supplemental Executive Pension
Plan, 120 monthly installment payments as follows
(1) $11,644.68 each month in 1998;
(2) $11,838.76 each month in 1999;
(3) $12,038.54 each month in 2000;
(4) $12,244.91 each month in 2001;
(5) $12,459.20 each month in 2002;
(6) $12,683.47 each month in 2003;
(7) $12,921.28 each month in 2004;
(8) $13,179.71 each month in 2005;
(9) $13,476.25 each month in 2006; and
(10) $13,880.54 each month in 2007.
(d) MEMC shall advance to Dr. Sandfort as an interest free loan an amount
equal to 47.05% of the gross income realized by Dr. Sandfort for
federal income tax purposes resulting from the vesting of MEMC
Restricted Stock on December 1, 1997, which loan shall be advanced in
sufficient time to fund the required tax withholding on such income.
Such loan shall be repaid in full no later than January 2, 2003. In
addition, on April 15 after each year during the period December 1,
1997 through December 31, 2002, MEMC shall pay Dr. Sandfort an amount
equal to 47.05% of the amount of imputed interest reported by MEMC to
Dr. Sandfort for federal income tax purposes for the immediately
preceding year.
(e) MEMC shall deposit $2,661,282.29 in the MEMC Electronic Materials,
Inc. Supplemental Executive Pension Plan Trust in January, 1998 to
provide a source of payment of the amounts due Dr. Sandfort under
Subsections 5(b) and 5(c) above.
6. Dr. Sandfort agrees to release MEMC and its past and present
shareholders, officers, directors, agents, employees, representatives,
attorneys, successors and assigns, and affiliated or related companies (Released
Parties), from any and all claims made, to be made, or which might have been
made as a consequence of Dr. Sandfort's employment with MEMC or arising out of
the termination of said employment relationship other than the breach of any
provision of this Agreement by MEMC. This release specifically applies to, but
is not limited to, any and all claims for back pay, front pay, sick pay,
bonuses, or any other form of compensation or benefits not expressly preserved
herein, claims of wrongful or retaliatory discharge, and any and all other
claims arising under federal, state, or local law, known or unknown, which exist
as of the date of the execution of this Agreement, whether such claims arise
under either common law (whether sounding in tort or contract) or under
constitution, statute or ordinance, including by way of illustration Title VII
of the Civil Rights Act of 1954, as amended, 42 U.S.C. Section 2000(e), et seq.;
the Missouri Human Rights Act, as amended, and the Americans With Disabilities
Act, 42 U.S.C. Section 12101, et seq., the Age Discrimination in Employment Act
of 1967, 29 U.S.C. Section 621, et seq.
7. Dr. Sandfort agrees never to institute, directly or indirectly, any
action or proceeding of any kind against any Released Party, on account of any
matters over which he has waived his rights in this Agreement.
8. MEMC hereby releases Dr. Sandfort and his heirs, personal
representatives, successors, and assigns from any and all claims of every nature
and description, whether known or unknown, prior to the date hereof. This does
not release Dr. Sandfort from any claim which may be made as a consequence of
the future breach by Dr. Sandfort of any provision of this Agreement.
9. MEMC agrees never to institute, directly or indirectly, any action or
proceeding of any kind against Dr. Sandfort, on account of any matters over
which MEMC has waived its rights in this Agreement.
10. Within seven (7) days following Dr. Sandfort's Termination Date, he
shall return to MEMC any and all property of MEMC which he may have in his
possession or control, if any, including, but not limited to any financial
records or reports, memoranda, and all other documents, recordings, tapes,
disks, etc., whether written or electronic, and without retaining any copies
thereof, except that he may retain copies of those documents that may be helpful
to him in preparing an updated resume. Upon completion of the Consulting Period,
he shall also return all MEMC property with which he may be provided, without
retaining copies.
11. The provisions of this Agreement governed by state law will be governed
by Missouri law, exclusive of any rules that would apply to another state's
substantive rules of law or equity, or which would in any way impair the
enforceability of the arbitration provision described in paragraph 18 below.
12. This Agreement shall be binding upon, and shall inure to the benefit of
MEMC and Dr. Sandfort and their respective heirs, executors, administrators,
legal representatives, successors and assigns; and MEMC affirmatively will
require any successor to all or any portion of the business and/or assets of
MEMC that includes the obligations to which MEMC is bound under this Agreement,
whether succession is direct or indirect and without regard to the manner by
which it is effected, including without limitation purchase, merger, and
consolidation, expressly to assume and perform this Agreement in the same manner
and to the same extent that MEMC would be required to perform it if no such
succession had taken place. As used in this Agreement, "MEMC" shall include any
such successor.
13. Dr. Sandfort agrees not to reapply for employment with MEMC at any
time.
14. The parties agree that in the event either party breaches any of the
provisions of this Agreement, either party shall be entitled to any and all
equitable remedies provided by law. Moreover, if a party prevails in any
litigation or arbitration related to a breach of this Agreement, the prevailing
party shall be entitled to the reimbursement of reasonable attorney's fees,
expenses and court costs incurred in such litigation or arbitration.
15. The parties mutually agree that the terms of this Agreement are
strictly confidential. They will not be discussed or otherwise disclosed to
third parties. However, the parties expressly understand that nothing herein
prohibits the divulging or reporting of anything related to this Agreement as
required by law, regulation, governmental authority or similar body, or as
required in the written opinion of counsel to comply with applicable laws,
including securities laws and regulations or stock exchange requirements, it
being expressly acknowledged and agreed that this Agreement and all amendments,
attachments and exhibits thereto shall be filed with the Securities and Exchange
Commission ("the SEC") and furnished to parties requesting copies of exhibits to
filings with the SEC. The parties further acknowledge that employees of MEMC may
learn of the terms of this Agreement in the ordinary course of business and that
Dr. Sandfort's spouse, attorneys, accountants and advisors may also learn of its
terms. However, the parties will undertake to advise such persons as discussed
in the foregoing sentence that they are not to disclose or otherwise divulge the
terms of this Agreement.
16. Dr. Sandfort expressly acknowledges that he has been advised to consult
with an attorney of his choice regarding his execution of this document, that he
has been told that he has twenty-one (21) days from his date of receipt of the
final version of this Agreement to either accept or reject its terms, and that
if he executes this Agreement, he shall have the right to revoke his acceptance
by notifying MEMC, in writing, within seven (7) days of his execution, of his
revocation.
17. Dr. Sandfort shall remain a member of the Board as a non-employee
Director of MEMC, until such time as he is removed or is reappointed, provided
that he shall resign from the Board forty-five (45) days prior to the 1998
annual meeting unless requested in writing not to do so. Dr. Sandfort shall
receive fees and other compensation, if any, as a non-employee Director of MEMC
at the same level as determined for MEMC's other non-employee Directors, payable
during such time as Dr. Sandfort continues to serve as a member of the Board.
18. Any disputes between the parties to this Agreement shall be settled by
arbitration in St. Louis, Missouri, before a single arbitrator in accordance
with the Commercial Arbitration Rules under the American Arbitration
Association, provided that discovery shall be permitted in accordance with the
Federal Rules of Civil Procedure. The decision of such arbitration shall be
final and conclusive on the parties, and judgment upon such decision may be
entered in any court having jurisdiction thereof.
19. If a court of competent jurisdiction determines that any provision
contained in this Agreement, or any part thereof, cannot for any reason be
enforced, the parties agree that such determination shall not affect or
invalidate the remainder of this Agreement.
20. MEMC makes no representations and is not responsible with respect to
the income tax and securities law consequences to Dr. Sandfort resulting from
this Agreement and the compensation and benefits payable pursuant thereto. All
amounts payable pursuant to this Agreement are subject to federal and state tax
withholding as required by applicable law from time to time.
21. Dr. Sandfort may designate a beneficiary or beneficiaries
(contingently, consecutively, or successively) of a death benefit, if any,
payable under this Agreement and, from time to time, may change his designated
beneficiary. A beneficiary may be a trust. A beneficiary designation shall be
made in writing and delivered to MEMC while Dr. Sandfort is alive. If there is
no designated beneficiary surviving at the death of Dr. Sandfort, payment of any
death benefit shall be made to his surviving spouse, and if he has no surviving
spouse, to his estate.
22. Sandfort hereby agrees now and at any time in the future to refrain
from making any comments or statements to the press, the employees of MEMC or
any individual or entity with whom MEMC has a business relationship or others,
(i) which would be likely to adversely affect the conduct of the business of
MEMC or any of its affiliates, or any of their plans or prospects, or their
business reputations, or the business reputations of any of their
representatives or members of their respective boards of directors, or (ii)
which would disparage in any way or cast in a negative light MEMC or any of its
affiliates, or any of their respective directors, officers, agents or employees.
MEMC hereby agrees now and at any time in the future to refrain from making any
comments or statements to the press or any individual or entity with whom
Sandfort has a business relationship or others, (i) which would be likely to
adversely affect the business reputation of Sandfort, or (ii) which would
disparage in any way or cast in a negative light Sandfort.
23. The parties acknowledge that each has read this Agreement consisting of
9 pages, 23 sections, and the attached exhibits and fully understand same. Dr.
Sandfort also acknowledges that he agrees to all of the terms and conditions of
this Agreement and that he does so of his own free will and without coercion and
that he has had an opportunity to review this document with an attorney of his
choice. MEMC represents that it has the corporate authority to enter this
Agreement and has taken or will take all steps necessary to carry out its terms
and conditions. The parties agree that no representation or promise inconsistent
with or additional to the terms of this Agreement have been made, that this
Agreement includes all referenced Exhibits and is the full and complete
agreement of the parties, and that this Agreement may not be modified, changed,
or added to except in writing signed by all parties.
THE PARTIES ACKNOWLEDGE THAT THE INSTANT AGREEMENT CONTAINS A BINDING AND
ENFORCEABLE ARBITRATION PROVISION.
SO AGREED: MEMC ELECTRONIC MATERIALS, INC.
/s/ Robert M. Sandfort By: /s/ Ludger H. Viefhues
- ------------------------- ------------------------
Robert M. Sandfort, Ph.D. Title: CEO
Date: December 1, 1997 Date: December 1, 1997
------------------ -----------------------
<PAGE>
Exhibit 10-ooo
SEPARATION AGREEMENT, GENERAL RELEASE AND COVENANT NOT TO SUE
This Separation Agreement, General Release and Covenant Not to Sue
("Agreement") is made and entered into by and between Tommy L. Cadwell
(hereinafter "EMPLOYEE") and MEMC Electronic Materials, Inc. (hereafter "MEMC").
In consideration of the following promises, the parties agree as follows:
1. Separation from Employment. EMPLOYEE acknowledges that he was separated from
employment with MEMC effective as of December 31, 1997 (hereafter, "Separation
Date"), which was his last effective day of work. As of such Separation Date,
EMPLOYEE'S employment relationship with MEMC has ended. Following discussion
concerning this termination of employment, MEMC and EMPLOYEE have mutually
determined to settle all matters relating to EMPLOYEE's employment relationship
with MEMC and the termination.
2. Resignation of EMPLOYEE. EMPLOYEE tenders his resignation effective as of the
Separation Date, which resignation is hereby accepted by MEMC. EMPLOYEE's MEMC
personnel file will reflect a voluntary resignation.
3. Payments and Benefits. MEMC shall provide the following to EMPLOYEE in
consideration and in exchange for EMPLOYEE'S promises and obligations herein so
long as he submits this Agreement, properly executed, to MEMC on or before
December 31, 1997 and adheres to the promises and agreements set out in this
Agreement. The payments and benefits are made in lieu of any payments or
benefits that might otherwise be available to EMPLOYEE arising out of his
employment with MEMC.
a. Release Payment. The equivalent of the EMPLOYEE'S full salary for one
year paid in a lump sum on January 5, 1998. The payment of any accrued
and unused vacation will be paid in a lump sum and will be included
with EMPLOYEE'S last employment salary payment and will be subject to
all withholding and deductions currently applicable to compensation
received by an employee as an employee of MEMC. EMPLOYEE acknowledges
the receipt of his salary up to and including the Separation Date.
b. Benefits. All MEMC benefits will cease as of EMPLOYEE's Separation
Date. MEMC has notified or will notify EMPLOYEE of the right to elect
continued coverage under MEMC's medical insurance program pursuant to
the provisions of the Internal Revenue Code of 1986, as amended, and
the Employee Retirement Income Security Act of 1974, as amended,
commonly referred to as "COBRA," and has provided or will provide him
with COBRA election and cost information. MEMC will pay the associated
COBRA costs for up to eighteen months or until he has secured
employment with another firm, whichever is sooner. MEMC will pay the
net present value of the accrued benefit under the Supplemental
Executive Pension Plan ("SEPP") on January 5, 1998 in a lump sum
payment.
c. Stock Options. Any Stock Option held by the Employee may hereafter be
exercised, to to the extent it was exercisable on the date of
separation, for a period (the "Exercise Period") of one (1) year from
the date of Employee's Separation, or until the expiration of the
stated term of the Stock Option, whichever period is shorter, and to
the extent not exercisable on the date of separation such Stock Option
shall be forfeited.
d. Outplacement Counseling. In lieu of outplacement counseling and
related services EMPLOYEE agrees to accept and MEMC agrees to provide
a lump sum payment of $7,500 on January 5, 1998.
EMPLOYEE acknowledges that the items specified in this Paragraph 3 are more than
he would be entitled to receive pursuant to the agreement dated 21 March, 1989
between EMPLOYEE and MEMC (the "Employment Agreement") (a copy of which EMPLOYEE
acknowledges has been provided to him) or would otherwise be legally entitled to
receive.
4. Agreement Not to File Suit. In consideration of the mutual promises of the
parties set forth in this Agreement, the parties hereto agree, for that party
and on behalf, as applicable, that party's heirs, beneficiaries, executors,
administrators, successors, assigns, and anyone claiming through or under any of
the foregoing, that each will not file or otherwise submit any charge, claim,
complaint or action to any agency, court, organization, or judicial forum (nor
will that party permit any person, group of persons, or organization to take
such action on their behalf) against the other party and in the case of MEMC,
EMPLOYEE will not file any such charge, claim, complaint or action against any
subsidiary of MEMC, or any officer, agent, employee, successor or assign of any
of MEMC or any of said entities, arising out of any actions or non-action on the
part of the other party and in the case of MEMC on the part of any subsidiary or
any officer, agent or employee of MEMC or any subsidiary that occurred on or
prior to the date of execution of this Agreement. Said claims, complaints and
actions include, but are not limited to, (I) any breach of an actual or implied
contract of employment between EMPLOYEE and MEMC, (ii) any claim of unjust,
wrongful, or tortious discharge (including any claim of fraud, negligence,
whistle blowing, or intentional infliction of emotional distress), (iii) any
claim of defamation or other common-law action, or (iv) any claim of violations
arising under the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000e
et seq., 42 U.S.C. Section 1981, the Age Discrimination in Employment Act, 29
U.S.C. Section 621 et seq., the American with Disabilities Act, 42 U.S.C.
Section 12101 et seq., the Fair Labor Standards Act of 1938, as amended, 29
U.S.C. Section 201 et seq., the Rehabilitation Act of 1973, as amended, 29
U.S.C. Section 701 et seq., the Employee Retirement Income Security Act
("ERISA"), 29 U.S.C. Section 1001 et seq., or any other relevant federal, state,
or local statute or ordinance.
5. Release of Claims. The parties to this Agreement hereby agree for that party,
and as applicable, that party's heirs, beneficiaries, executors, administrators,
successors, assigns and anyone claiming through or under any of the foregoing,
to remise, release and forever discharge the other party hereto and in the case
of MEMC, EMPLOYEE also agrees to remise, release and forever discharge the
subsidiaries of MEMC, and all officers, agents, employees, successors and
assigns of MEMC or of said entities, from any and all matters, claims, demands,
damages, causes of action, debts, liabilities, controversies, judgments and
suits of every kind and nature whatsoever, foreseen, unforeseen, known or
unknown, including claims, complaints and actions described in Paragraph 4,
which have arisen or could arise between EMPLOYEE and MEMC from matters which
occurred on or prior to the date of execution of this Agreement, which matters
include this Agreement and EMPLOYEE'S separation of employment with MEMC.
6. Release and Waiver of Other Claims. Except as expressly provided in this
Agreement, the parties hereto agree, for that party, and, as applicable, for and
on behalf, of that party's heirs, beneficiaries, executors, administrators,
successors, assigns, and anyone claiming through or under any of the foregoing,
to further release and waive any claims related to pay, vacation pay, insurance
or welfare benefits or any other benefits of employment with MEMC arising from
events occurring on or prior to the date of execution of this Agreement.
Notwithstanding any provision of this Agreement, this Agreement does not include
any release or waiver of EMPLOYEE's non-forfeitable rights to his accrued
benefits (within the meaning of Sections 203 and 204 of ERISA), if any, under
the MEMC Electronic Materials, Inc. Pension Plan for Salaried Employees and the
MEMC Electronic Materials, Inc. Retirement Savings Plan, as such plans may
hereafter be amended, which rights are not released hereby but survive
unaffected by this Agreement.
7. Obligation Regarding Confidential Information. EMPLOYEE agrees that he has
continuing obligations to MEMC pursuant to the Employment Agreement. Any
violation of those obligations by EMPLOYEE constitutes a material breach of this
Agreement and subjects the EMPLOYEE to forfeiture of all benefits and payments
pursuant to this Agreement. MEMC expressly reserves the right to pursue all
other legal remedies available to it by virtue of any breach of the Employment
Agreement. EMPLOYEE agrees that for a period of two years from the effective
date of this Agreement that he will not, directly or indirectly, solicit the
customers of MEMC as set forth on Attachment 1 for the sale of silicon wafers.
In consideration for this promise, MEMC hereby releases the Employee from his
obligation to refrain from accepting employment with a competitor of MEMC for a
period of two years following the termination of his employment as set out in
the Employment Agreement. MEMC recognizes and consents to the solicitation of
said customers by EMPLOYEE for purposes unrelated to the sale of silicon wafers.
8. Nondisparagement. The parties hereto represents that neither will, in any way
disparage the other party hereto nor in the case of MEMC will EMPLOYEE disparage
any subsidiary of MEMC, or any officer, agent, employee, successor or assign of
any of them, or make or solicit any comments, statements or the like to the
media or to others that may be considered to be derogatory or detrimental to the
good name or business reputation of any of the aforementioned persons or
entities.
9. No Admission of Wrongdoing. The parties to this Agreement agree that nothing
in this Agreement is an admission by any party hereto of any wrongdoing, either
in violation of an applicable law or otherwise, and that nothing in this
Agreement is to be construed as such by any person.
10. Confidentiality of Agreement. The parties hereto agree to keep the terms of
this Agreement confidential except as either or in the case of MEMC its
officers, agents, employees, might be lawfully compelled to give testimony by a
court of competent jurisdiction or as either may be required by law, regulation
governmental authority or similar body to disclose. This means that except as
stated above, neither party will not, at any time, talk about, write about or
otherwise publicize this Agreement, or its negotiation, execution or
implementation, except with (1) an attorney who may be advising him in
connection with it; (2) a financial consultant or executive outplacement
counselor, and (3) his immediate family (including any children), provided that
each party shall request said persons to whom disclosure is permitted pursuant
to this sentence to keep the information that may be revealed to them
confidential and not to disclose it to others.
11. Knowing and Voluntary Agreement. Each party hereto represents, declares and
agrees that he or it voluntarily accepts the provisions of this Agreement for
the purposes of making a full and final compromise, adjustment and settlement of
all claims herein described. EMPLOYEE is advised to consult an attorney.
EMPLOYEE understands the effect of signing this Agreement.
12. Entire Agreement. This Agreement, when executed, contains the entire
agreement between the parties and there are no other understandings or
agreements, written or oral, between them on the subject except as expressly
stated herein. This Agreement fully supersedes and replaces any and all prior
agreements or understandings, if any, between EMPLOYEE and MEMC on any matter
that is addressed in this Agreement. This Agreement cannot be amended or
modified except by a written document signed by both MEMC and EMPLOYEE. Separate
copies of this document shall constitute original documents which may be signed
separately, but which together will constitute one single agreement.
13. Governing Law; Invalidity of Provisions. This Agreement shall be construed
and governed by the laws of the State of Missouri (except its laws and decisions
regarding conflicts of law which shall be disregarded in their entirety). If any
part or provision of this Agreement is determined to be invalid or unenforceable
under applicable law, the validity or enforceability of the remaining provisions
shall be unaffected. To the extent that any provision of this Agreement is
adjudicated to be invalid or unenforceable because it is over broad, that
provision shall not be void, but rather shall be limited only to the extent
required by applicable law and enforced as so limited.
14. Consequences of Violation of this Agreement. If either party hereto violates
any of the promises contained in this Agreement, then that party shall pay for
all costs incurred by any of the released parties, including reasonable
attorneys' fees, in defending against that party's claims shall be liable for
all expenses (including attorneys' fees) that are incurred in defending the
suit.
15. Consideration Period. EMPLOYEE acknowledges that he has been given at least
twenty-one (21) days within which to consider this Agreement before its
execution. This Agreement shall not become effective until seven (7) calendar
days after the date of execution by EMPLOYEE. During this seven-day period,
EMPLOYEE may revoke this Agreement by notifying MEMC in writing. Upon expiration
of the seven-day period, EMPLOYEE acknowledges that this Agreement becomes final
and binding.
16. By signing this Agreement, EMPLOYEE acknowledges:
a. He has read this Agreement completely.
b. He has had an opportunity to consider the terms of this Agreement.
c. He has been advised to consult with an attorney of his choosing prior
to executing this Agreement.
d. EMPLOYEE knows that he is giving up important legal rights by signing
this Agreement.
e. EMPLOYEE is not relying on MEMC or any representative of MEMC to
explain this Agreement or his rights to him.
f. EMPLOYEE has had an opportunity to consult an attorney and other
advisors to explain this Agreement and its consequences to him before
he signed it, and he has availed himself of this opportunity to
whatever extent he desired.
g. EMPLOYEE has signed this Agreement voluntarily and entirely of this
own free will, without any pressure from MEMC or any representative of
MEMC.
IN WITNESS WHEREOF, the undersigned parties have executed this SEPARATION
AGREEMENT, GENERAL RELEASE AND COVENANT NOT TO SUE.
MEMC ELECTRONIC MATERIALS, INC. EMPLOYEE
By: /s/ Huston E. Sherrill /s/ T. L. Cadwell
------------------------- -------------------------
Company Representative (Employee Signature)
Corporate Vice President 12/20/97
------------------------ -------------------------
Title Date
12/20/97
------------------------
Date
MEMC Witness to EMPLOYEE Signature
/s/ Helene F. Hennelly
--------------------------
(Witness Signature)
12/20/97
--------------------------
Date
Or, Notary Public (if not witnessed by MEMC employee)
Subscribed and sworn to me, a
Notary public, this ____ day of
__________, 199_.
-----------------------------
NOTARY PUBLIC
My Commission Expires:
-----------------------------
<PAGE>
Exhibit 10-ppp
LETTER OF AGREEMENT April 1, 1993
Ralph D. Hartung
PERSONAL AND CONFIDENTIAL
The MEMC International Assignment Policy ('Policy'), applies to all
international assignments. This letter of agreement will record our mutual
understanding of the current provisions of the Policy, as they apply
specifically and individually to you in your new assignment, subject to any
future modification of the Policy. This Letter of Agreement does not constitute
or create an employment contract and does not replace the basic MEMC employment
contract.
Your assignment in Novara, Italy begins on 1 May, 1993 and will be for an
indefinite period currently expected to be of 3-5 years duration.
Your initial assignment will be as Prescient, MEMC S.p.A.
While on assignment you will be included in the personnel plans of President,
MEMC, Inc. will be primarily responsible for your re-entry upon completion of
your international assignment. The terms and conditions of your primary MEMC
Employment Agreement will continue to apply and govern the terms of any
employment agreement with MEMC, S.p.A. in Italy. You will continue to be
eligible for MEMC benefit programs.
Compensation
This letter outlines the total consideration for services to be performed while
on assignment (except to the extent salary increases may be granted). You will
not be eligible for any benefits paid by your foreign employer. The base salary
is in consideration for your services in the U.S. and abroad, but the premium
and allowances are solely for services rendered in the country of assignment.
1. Base Salary
Your initial base salary will be at the rate of $13,467.00 per month.
Your base pay, less deductions, will be paid on behalf of your foreign
employer by MEMC in U.S. dollars into your personal bank account. You
acknowledge that you have completed forms authorizing these deposits.
2. Career Development Bonus
You will be provided a Career Development Bonus (CDB) consisting of
two lump sum payments. The first, paid immediately prior to your being
transferred on your international assignment, the second, immediately
after your return transfer to the U.S., or at the end of 36 months of
international assignment.
Your first lump sum award payment will be $27,000.00 and is calculated
as 15% of your current U.S. base monthly salary (capped at a maximum
salary of $10,000/month) times 18.
Your second lump sum award payment will be paid at your return
transfer to the U.S. or after 36 months of international assignment,
and will be calculated as 15% of your new U.S. base monthly salary
(capped at the then maximum salary) times the number of months at the
time of your return transfer less 18 months. Continued CDB for
international assignments extending beyond 36 months (original
assignment or subsequent back-to-back international assignments) will
be assessed at that time.
3. Cost of Living Allowance
The Policy provides for a cost of living allowance on the theory that
this allowance makes it possible for you to live in Italy at
approximately the same standard to which you have been accustomed in
the U.S. It is not designed to provide any material increases in your
living standard. Cost of living allowance, if applicable, will be paid
to you in your monthly compensation. Cost of living payments relate
directly to your services performed outside the U.S. and no cost of
living allowance is paid for services performed in the U.S.
a. The goods and services component covers differences in cost of
food, clothing, transportation, telephone, household services and
equipment, personal care and recreation. It is determined by
applying the appropriate index calculated by MEMC's present
consultant to your spendable income, which is defined as your
base salary less the average amount consumed by Federal income
taxes, assumed home country housing costs, savings, investments,
insurance, etc. Based on tables prepared by the consultant, the
goods and services component for your base salary and a family of
2 is currently determined to be $1,737.00. The index can change
by new input from the consultant. This Goods and Services
allowance component will be finalized the first month of your
assignment based on the index applicable to that month.
b. While on assignment, the Policy provides that you will be
expected to pay a share of the shelter costs. Your share will be
equal to your actual documented shelter costs based on such costs
for the immediate prior 12 months ($302.00). This amount will be
adjusted annually based on the movement of an approval CPI index
published by the U.S. Government. MEMC will pay the balance as
housing allowance provided the total shelter costs have been
approved by your Manager and the Administrator.
It is anticipated you will be able to procure housing within the
limits recommended by area management.
As defined in the Policy, shelter costs include rent, utilities (gas,
electricity, water, fuel) property taxes and insurance costs paid
separately by you as the tenant. Telephone charges or maintenance
personnel costs are not included.
Should the Goods and Services Allowance index become negative, a
reduction in your housing allowance will be determined based upon the
negative index.
Since you probably will be on an expense account basis for a short
time after your arrival in Italy, you should consult with the
Director, Human Resources as to when these cost of living allowances
will begin. It is understood that until a pattern is established on
the cost of utilities, and estimate for this component may be
necessary.
It is your obligation to notify us immediately when there is a change
in any of the factors under your control, such as material and
dependency status, actual cost of rent and utilities, etc., that would
have a bearing on cost of living allowances. We, of course, will make
the necessary adjustments when changes occur in your base salary,
local index percentage, etc. Once established, the cost of living
allowance remains the same until our consultant makes changes in the
index as the result of pricing surveys and/or inflationary
adjustments.
4. Income Tax Equalization
Your Taxes will be equalized within the terms specified in the Policy.
It is the intent of the Policy that your U.S. Income tax burden should
remain the same as if you had not gone on foreign assignment and that
no advantage or disadvantage shall accrue to you due to differences in
income tax rates between the U.S. and Italy. Special consideration
will be provided for the taxes from the investment of the proceeds
from the sale of your house.
Your U.S. income tax burden ("hypothetical tax") will be based on MEMC
income (exclusive of premiums and allowances), plus non-MEMC income.
An estimate will be made at the beginning of assignment (and each
subsequent year during the fourth quarter) which will become the
amount to be deducted from each paycheck for hypothetical tax. A final
reconciliation of actual hypothetical tax will be completed by a tax
service at tax preparation time. At that point, you will receive
reimbursement from MEMC if money is due you, or you will be
responsible for payment of any balance due MEMC at that time.
Tax Return Preparation
Prior to your assignment, you should have discussed your responsibilities with
Ernst & Young, the tax preparation firm.
You are responsible for filing tax returns and meeting tax obligations in both
the U.S. and Italy. You are responsible for providing all information necessary
to complete your tax return to Ernst & Young within (90) days of the end of the
taxable year to which the tax return relates. If you fail to provide this
information in the designated time period, and as a result, cause a late filing
of your returns, you will be liable for any penalties, fines, and interest
incurred.
As a condition of your international assignment, you agree that MEMC has the
right to inspect prior year tax returns as necessary, returns for years subject
to income tax equalization and future years until credits are exhausted.
Further, you agree to repay tax equalization due to MEMC, including "negative
gross-up" when applicable. In addition, you agree to provide to the tax
consultant copies of all returns as may be necessary to determine and reconcile
the appropriate excess tax reimbursement and will sign a release authorizing the
excess tax reimbursement calculations to be provided to MEMC.
In the event of termination of employment with MEMC, Inc. or MEMC, S.p.A., you
agree to take all necessary steps to facilitate the preparation of final tax
equalization. This includes filing tax returns in accordance with the U.S. and
Italian tax laws on a timely basis.
Travel Grants
1. Regular
You & Louise, will be entitled to receive one round trip business
class air fare allowance between Milan and St. Louis, Missouri during
each year of your assignment.
You will be eligible for your first travel grant six months from the
start of your assignment. Subsequent travel grants are provided in
each vacation year (April 1 - March 31), every twelve months
thereafter. With the exception of the first and second travel grants,
you should receive no more than one travel grant during each twelve
(12) month period.
You may use the grants any way you wish - travel to place of origin,
visits by relatives to the location of assignment or vacation travel
to a location other than the point of origin. Payment shall be limited
to the equivalent of round trip economy air fare between the two
locations. If payment is to be taken in lieu of travel to St. Louis, a
relocation expense report must be submitted.
No travel grants will be paid within six (6) months of your officially
announced reassignment to the U.S., nor will you be eligible to
receive payment in lieu of tickets during this period. In no case will
you be permitted to carry over allowances not used during the vacation
year for which they are applicable.
2. Emergency
Upon management approval, special circumstances may arise which will
require emergency travel by you and/or members of your family between
Italy and the U.S. To protect you from undue hardships because of the
expense of longer travel distances, MEMC will pay the business class
air fair cost between Milan and St. Louis for actual flights taken.
Cash-in-lieu of travel does not apply.
Vacation
Vacation during your assignment will be governed by the MEMC vacation policy,
unless laws of the country of assignment or provisions of the International
Assignment Policy dictate a more favorable policy for you. Based on your
credited service as of April 1, 1992, you are entitled to 5 weeks vacation per
vacation year.
Retirement Plan
You will continue to be covered by the MEMC Salaried Employee Pension Plan.
Medical Benefits
You will continue to be covered under the MEMC Medical Benefit Program provided
you are enrolled in the plan and making appropriate contributions. If you incur
medical or hospital expenses which are covered by the plan while in Italy, you
should pay the bills and send receipted bills, itemized as completely as
possible, with complete explanation, translation and conversion into U.S.
dollars to Janice Berg, Benefits Rep, St. Peters site. Reimbursement will either
be made directly to you or be deposited into your U.S. account. You acknowledge
you have previously received instructions and a supply of claim forms.
Other MEMC Benefits
During your assignment, you will continue to be covered by the MEMC Life
Insurance Policy, Travel Accident Insurance Policy, Disability Leave Policy,
Dental Assistance Plan, and you will also be eligible to participate in the
Retirement Savings Plan.
Transfer Expenses
Personal travel, business class air fare, for you from St. Louis to Milan will
be paid by MEMC.
You have elected to move part of your major household effects, including
furniture and major appliances, to Italy. Packing, shipping clearance, duty,
customs and insurance charges will be paid by MEMC. Shipment will usually be via
surface. However, if appropriate you can ship via air freight, items immediately
needed upon arrival at the location of assignment such as clothing, bedding,
linens, silver and china, kitchenware, necessary books and other small personal
items. In your case, this air shipment will be limited to 3,000 pounds. Where an
air shipment is provided, no excess baggage costs are expected to be incurred.
The remainder of your household effects will be packed, moved, stored and
insured at MEMC expense during your assignment, and also be moved to your new
residence following reassignment to the U.S.
Additionally, you will be permitted to purchase furniture and appliances to
supplement your requirements in Italy. An amount, approved by management at the
location of assignment, will be provided for these purchases. You will be
reimbursed upon presentation of evidence of expenditure, up to the amount
approved by management at the location of assignment. It is understood that all
items so purchased become the property of MEMC and will be disposed of at the
termination of your assignment in the manner MEMC deems appropriate. Should you
decide to purchase some of the furniture, it is agreed that you will be
permitted to ship via surface, at MEMC expense, up to 3,000 pounds over the
weight of your original air plus surface shipments. You will need to prepare a
list of all items purchased, together with costs and invoices, and forward such
to Don Otto. Reimbursement will be made only on items purchased within twelve
(12) months of your assignment date. It is assumed you will exercise judgment as
to the quality and quantity of effects purchased, keeping in mind the length of
your assignment.
MEMC will make a lump sum payment to cover miscellaneous moving expenses not
specifically covered under the Employee Relocation Policy without regard to
actual expenditures. In your case this payment will be $13,467.00.
Repatriation Moving Expenses
The moving expenses which are associated with your return to the United Sates
after completion of your assignment will be paid by MEMC as a result of your
acceptance of foreign assignment and according to your status as an employee of
MEMC.
Automobile Expenses
You will not take your automobiles to your new location. To protect you against
loss, through forced sale, you will be paid an allowance equal to the difference
between the retail and trade-in values as recorded in the NADA, Official Used
Car Guide, which is effective at the time of sale. Payment of the allowance will
be made coincident with the effective date of your assignment or sale of car, if
subsequent to this date, and deposited to your U.S. bank account.
You will be provided an automobile for business use while in Italy. In addition,
MEMC will provide 50% of the purchase price for a family automobile. You & MEMC
will share 50/50 in the proceeds from the sale of this automobile at the end of
your assignment.
Medical Examination
Prior to your departure, you are required to arrange for a medical examination
through the MEMC's medical facilities. Additionally, you should arrange through
your family physician for a medical examination, at MEMC's expense, for you (and
your family). Contact St. Peters's Medical Department which will specify the
type of examination required.
All necessary inoculations for you should be arranged through the St. Peters
Medical Department and through your family physician for your family members.
While in Italy, you should arrange for an annual medical examination, specified
by MEMC's Medical Department, for yourself, at MEMC's expense.
Language Training
Italian language instructions will be provided for you and Louise at MEMC
expense prior to your departure if such can be arranged, and following your
arrival at your international assignment location.
Country of Origin House
You have elected to sell your current house prior to going on international
assignment. In the sale of your house, you will be covered by the MEMC
Relocation Policy.
Unless required by MEMC to remain on your assignment beyond four years, you are
responsible for payment of capital gains tax, and interest, associated with the
sale of the house if you should not roll over any gains into a new residence
purchase prior to four years from the date of sale.
Employment Restrictions
It is understood that in accepting this assignment, you agree that you will not
engage in any employment or business enterprise that would in any way conflict
with your service to the interests to the Company.
Please do not hesitate to contact us if you have any questions regarding the
Policy or this letter. If you are in agreement with the provision outlined above
and those contained in the Policy, will you please date, sign and return the
original copy of this letter to Donald C. Otto retaining a copy for your files.
Best wishes to you in your new assignment.
/s/ Robert M. Sandfort 03/30/93
- --------------------------------- ---------------------------
Robert M. Sandfort Date
President & COO, MEMC, Inc.
Accepted:
/s/ Ralph D. Hartung 04/02/93
- --------------------------------- ---------------------------
Ralph D. Hartung Date
/s/ Donald C. Otto 04/05/93
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Donald C. Otto Date
Director, Employee Relations
<PAGE> 1
<TABLE>
<CAPTION>
Five Year Selected Financial Data
Dollars in thousands, except share data
Year ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $986,673 $1,119,500 $886,860 $660,807 $552,497
Gross margin 124,759 250,185 223,279 143,210 112,665
% of net sales 12.6% 22.3% 25.2% 21.7% 20.4%
Marketing and administration 70,715 79,680 63,893 41,298 37,868
% of net sales 7.2% 7.1% 7.2% 6.2% 6.9%
Research and development 64,457 44,313 31,226 27,403 25,509
% of net sales 6.5% 4.0% 3.5% 4.1% 4.6%
Operating profit (loss) (10,413) 126,192 128,160 74,509 49,288
% of net sales (1.1%) 11.3% 14.5% 11.3% 8.9%
Equity in income (loss) of joint ventures 3,246 24,884 13,908 (6,783) (10,628)
Net earnings (loss)<F1> (6,747) 101,556 87,273 34,076 8,875
% of net sales (0.7%) 9.1% 9.8% 5.2% 1.6%
Basic earnings (loss) per share (0.16) 2.46 2.80<F2> 1.43<F2> <F2>
Diluted earnings (loss) per share (0.16) 2.45 2.78<F2> 1.43<F2> <F2>
Shares used in basic earnings (loss) per
share computation 41,345,193 41,308,806 31,215,563<F2> 23,902,650<F2> <F2>
Shares used in diluted earnings (loss) per
share computation 41,345,193 41,534,412 31,441,631<F2> 23,902,650<F2> <F2>
Balance Sheet Data:
Working capital 38,449 42,805 199,258 69,597 57,509
Total assets 1,777,158 1,512,857 1,101,863 629,829 511,961
Long-term debt (including current portion) 519,995 304,589 91,451 165,230 142,697
Stockholders' equity 698,488 741,968 642,391 203,754 165,329
Other Data:
Capital expenditures 372,416 590,049 215,359 78,676 67,541
Equity infusions in joint ventures 10,638 14,698 29,904 20,922 --
Employment 8,000 7,100 6,600 5,300 5,000
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
The Company intends to retain all net earnings to fund the development of its
business, and does not anticipate paying dividends in the foreseeable future.
In April 1995, the Company paid a $100 million dividend to Huls Corporation,
its sole stockholder prior to the initial public offering.
<FN>
<F1> Net earnings in 1994 were affected by the adoption of Statement of
Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for
Postemployment Benefits." The effect of such change was a charge of $1.3
million. Net earnings in 1993 were affected by the adoption of SFAS No. 109,
"Accounting for Income Taxes," and the adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." The cumulative
effect of such changes was a credit of $19.3 million and a charge of $29.3
million, respectively.
<F2> Pro forma earnings per share for 1995 was calculated based on the
weighted average number of shares outstanding, plus for the three months
ended March 31, 1995, the number of shares that would have been required to
be sold at the initial public offering price to fund the excess of the $100
million dividend to Huls Corporation in April 1995 over the Company's net
earnings for the prior twelve-month period.
Pro forma earnings per share for 1994 was calculated based on the actual
number of shares outstanding, plus the number of shares that would have been
required to be sold at the initial public offering price to fund the excess
of the $100 million dividend to Huls Corporation over the Company's net
earnings for the prior twelve-month period.
Earnings per share information for periods prior to 1994 is not meaningful.
</TABLE>
<PAGE> 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Year ended December 31, 1997 compared with year ended December 31, 1996
Net Sales. Net sales decreased by 11.9% to $986.7 million for 1997 from $1.1
billion for 1996, due to a 5.1% decrease in product volume and a decline in
price somewhat offset by an improved product mix. Overcapacity, inventory
reduction and weak pricing in the semiconductor industry, particularly for
the DRAM (memory) market, led to reduced orders for silicon wafers that began
in the second half of 1996 and gradually recovered throughout 1997. In
addition, the Company and its competitors expanded at a faster rate than
silicon consumption growth during 1997, resulting in overcapacity in the
silicon wafer industry. The combination of these market conditions led to
significant price reductions throughout 1997. Advanced large diameter and
epitaxial products represented 39.1% of product volume for 1997 compared to
36.7% for 1996.
MEMC operates in all major semiconductor-producing regions of the world, with
almost half of the Company's 1997 net sales to customers located outside
North America. Net sales to North America decreased 12.5% and comprised 50.4%
of 1997 sales compared to 50.8% of 1996 sales led by a fall in prices and, to
a lesser extent, volume, partially offset by improved product mix. Lower
prices and volume, a less favorable product mix and the general weakening of
European currencies relative to the U.S. dollar throughout 1997 combined to
result in a 22.8% decrease in net sales to Europe, which constituted 20.0% of
1997 sales compared to 22.9% of 1996 sales. Net sales to Japan increased by
21.0% and comprised 15.6% of 1997 sales compared to 11.4% of 1996 sales as
higher volume from expanded manufacturing capacity and improved product mix
more than offset lower pricing and the weakening of the Japanese yen relative
to the U.S. dollar throughout 1997. The Asia Pacific market experienced
similar declines in pricing, volume and product mix as did other geographic
markets served by the Company. Net sales to Asia Pacific decreased 17.9% and
comprised 13.9% of 1997 sales compared to 14.9% of 1996 sales. Product volume
also declined due to the continued shift in sales from the Company to POSCO
Huls Company, Ltd. (PHC), the Company's 40% owned, unconsolidated joint
venture in South Korea, and Taisil Electronic Materials Corporation (Taisil),
the Company's 45% owned, unconsolidated joint venture in Taiwan.
Gross Margin. Gross margin as a percentage of net sales decreased to 12.6% in
1997 from 22.3% in 1996. Lower pricing and capacity utilization more than
offset the slight improvement in product mix during 1997. The Company also
completed the construction of its 200 millimeter silicon wafer facility at
MEMC Southwest (the Company's 80% owned joint venture in Sherman, Texas) and
the expansion of its 200 millimeter epitaxial wafer facility in St. Peters,
Missouri which resulted in higher levels of training and start-up costs and
contributed to the lower capacity utilization. However, these expansions,
which are dedicated to the production of 200 millimeter product, position the
Company to respond to the demand for this diameter wafer, which analysts
estimate grew approximately 28% industry wide in 1997.
Marketing and Administration. Marketing and administration expenses declined
11.3% and represented 7.2% of net sales for 1997 compared to 7.1% for 1996.
The decrease is predominately attributable to a reduction in incentive
compensation.
Research and Development. Research and development costs rose 45.5% and
represented 6.5% of net sales for 1997 compared to 4.0% for 1996. The
increase in research and development costs is attributable to the addition of
engineering and scientific personnel, the start-up of the 300 millimeter
pilot line in St. Peters and increased efforts in the areas of crystal
technology, epitaxial silicon research and the development of the 300
millimeter wafer.
Interest Expense. Interest expense increased to $14.7 million for 1997 from
$0.5 million for 1996 as outstanding debt rose, projects were completed and
interest costs were no longer capitalized. Total debt was $632.5 million and
$331.8 million at December 31, 1997 and 1996, respectively.
Other, Net. Other, net improved to $4.1 million of income for 1997 from $7.4
million in expense for 1996, primarily due to the recognition of a $6.0
million gain on the sale of its Santa Clara, California silicon wafer
facility.
Income Taxes. Income tax expense was recorded for 1997 despite the
recognition of a pre-tax loss primarily due to the composition of the
Company's worldwide taxable income. The effective income tax rate for 1996
was 40.0%.
Equity in Income of Joint Ventures. Equity in income of joint ventures
decreased to $3.2 million in 1997 from $24.9 million in 1996. PHC recorded
higher volumes and net sales; however, the impact of lower prices, a less
favorable product mix and a work stoppage in the third quarter (and the
subsequent ramp-up of operations) resulted in significantly reduced gross
margins. For the year, PHC provided a contribution of $10.7 million compared
to $31.5 million for 1996. Following the start-up and qualification of its
operations, Taisil was able to generate net sales sufficient to keep pace
with the increase in expenses as its capacity expanded. As a result, the
Company's share of Taisil's loss of $7.5 million in 1997 and $6.6 million in
1996 is fairly consistent.
<PAGE> 3
Effective October 1, 1997, the Company changed the functional currency of its
unconsolidated joint ventures from their respective local currencies to the
U.S. dollar. This change was made after careful consideration of the
composition of U.S. dollar activities in their statements of operations and
balance sheets as well as these activities going forward. Due to the dramatic
fall in these local currencies relative to the U.S. dollar during the 1997
fourth quarter, the Company recorded an unrealized currency gain of $6.1
million.
Net Earnings (Loss). Lower pricing and capacity utilization coupled with
higher start-up and training costs, research and development costs and
interest expense, and lower equity in income of joint ventures resulted in a
net loss of $6.7 million for 1997 compared to net earnings of $101.6 million
for 1996.
Year ended December 31, 1996 compared with year ended December 31, 1995
Net Sales. Net sales increased by 26.2% to $1.1 billion for 1996 from $886.9
million for 1995. The first half of the year saw record sales of $614.1
million while the second half was marked by sequential sales declines as the
Company's customers continued their inventory adjustments. Overall, higher
product volume and prices and improved product mix drove the increase in net
sales. Product volume increased 8.6% in 1996 which was predominately
attributable to the inclusion of MEMC Southwest for all of 1996 compared to
one-half of 1995 and the continued expansion of 200 millimeter wafer
capacity. Additionally, the Company saw its average selling price rise by
16.3% due to higher overall prices and improved product mix. Advanced large
diameter and epitaxial products represented 36.7% of product volume for 1996
compared to 26.5% for 1995.
Net sales to North America increased 39.6% to 50.8% of 1996 sales compared to
46.0% of 1995 sales due almost equally to the inclusion of MEMC Southwest for
all of 1996 and improved pricing and product mix. Expanded manufacturing
capacity and improved pricing and product mix resulted in a 24.9% increase in
net sales for Europe to 22.9% of 1996 sales compared to 23.1% of 1995 sales.
Net sales to Japan increased by 1.9% and comprised 11.4% of 1996 sales
compared to 14.1% of 1995 sales due to improved pricing and slightly higher
volumes, offset by the weakening of the Japanese yen relative to the U.S.
dollar throughout 1996. The Asia Pacific market experienced similar
improvements in pricing and product mix to other geographic markets served by
the Company. Net sales to Asia Pacific increased 12.0% and comprised 14.9% of
1996 sales compared to 16.8% of 1995 sales. Product volume remained
relatively flat due to the continued shift in sales from the Company to PHC.
Gross Margin. Gross margin as a percentage of net sales decreased to 22.3%
for 1996 from 25.2% for 1995. Higher sales volumes and improved pricing and
product mix were more than offset by operating at a lower rate of capacity
utilization caused by the inventory correction experienced by the Company's
customers during the second half of 1996, and start-up and training costs
associated with the ramping-up of new facilities. Excluding the impact of
start-up and training costs, gross margin as a percentage of net sales would
have been 26.5% for 1996.
Marketing and Administration. Marketing and administration expenses increased
to support the Company's growth and improve information technology
capability. This growth in spending kept pace with the net sales growth, thus
no significant change in spending occurred as a percentage of sales.
Marketing and administration expenses were 7.1% of net sales for 1996 and
7.2% for 1995.
Research and Development. Research and development costs rose 41.9% and
represented 4.0% of net sales for 1996 compared to 3.5% for 1995. The rise in
spending reflects the Company's commitment to maintain its competitive
advantage and meet its customers' needs. Research and development efforts
increased in the areas of crystal technology and the development of the 300
millimeter wafer.
Interest Expense. Interest expense declined to $0.5 million for 1996 from
$11.0 million for 1995, due to the capitalization of interest related to the
Company's capacity expansions. In addition, the Company used a portion of its
$441 million in proceeds from its July 1995 initial public offering to reduce
outstanding debt.
Income Taxes. The effective income tax rate increased to 40.0% for 1996 from
36.8% for 1995. This increase is primarily due to variation in the Company's
composition of worldwide taxable income and the reduction of certain
investment incentives.
Equity in Income of Joint Ventures. Equity in income of joint ventures
increased to $24.9 million for 1996 from $13.9 million for 1995. This rise in
equity income is due to the significant improvement in PHC's contribution of
$31.5 million for 1996 resulting from improved pricing and product mix
compared to $17.4 million for 1995. This increase was offset by losses from
Taisil resulting from the start-up and qualification of its operations.
Net Earnings (Loss). The growth in net sales and improvement in equity in
income of joint ventures more than offset the reduction in gross margin and
increase in marketing and administration expenses and research and
development costs, yielding a 16.4% increase in net earnings to $101.6
million for 1996 compared to $87.3 million for 1995. Net earnings for 1996
were a record for the Company.
<PAGE> 4
Liquidity and Capital Resources
At December 31, 1997, the Company had $30.1 million of cash and cash
equivalents compared to $35.1 million at December 31, 1996.
The Company's primary sources of liquidity historically have been cash flows
from operating activities and borrowings from affiliates and third parties.
The Company's principal uses of cash have been to support its operating
activities, capital expenditures and equity infusions in joint ventures. The
Company's capital expenditures and its recent operating performance have
resulted in significant negative cash flow. The Company made substantial
capital expenditures in its process technology and manufacturing capacity
based, in part, upon the Company and industry projections regarding future
market growth.
Cash flows from operating activities decreased to $29.4 million for 1997 from
$261.9 million for 1996. This $232.5 million decline was largely attributable
to lower results of operations, an increase in inventories and accounts
receivable, partially offset by an increase in customer deposits.
Accounts receivable of $154.7 million at December 31, 1997 increased $25.4
million, or 19.6%, from $129.3 million at the end of 1996. This increase is
consistent with the 28.1% increase in fourth quarter sales between the two
years. Days' sales were 55.0 at December 31, 1997 compared to 58.9 at the end
of 1996 based upon annualized fourth quarter sales for the respective years.
This decline is attributable to geographic regions with shorter collection
times generating a larger percentage of the Company's net sales in the fourth
quarter of 1997.
Inventories rose $40.9 million, or 40.7%, over the prior year to $141.4
million at December 31, 1997. This increase is primarily due to the
ramping-up of 200 millimeter and epitaxial expansions and the related
consumable supplies and spare parts needed to service those operations.
Additionally, polysilicon inventories were replenished to normal operating
levels. Accordingly, year-end inventories as a percentage of annualized
fourth quarter sales increased from 12.6% at the end of 1996 to 13.8% at
December 31, 1997.
Accounts payable decreased $10.7 million or 6.8% compared to the balance at
the end of 1996 due to a significant reduction in capital expenditures offset
by higher operating costs.
Capital expenditures decreased $217.6 million or 36.9% versus the prior year
to $372.4 million. These capital expenditures primarily consisted of the
completion of the 200 millimeter facility at MEMC Southwest and expansion of
the 200 millimeter epitaxial facility in St. Peters, construction and
equipping of the 300 millimeter research and development line in St. Peters,
construction of a 300 millimeter integrated development line in Utsunomiya,
Japan, expansion of MEMC Pasadena's granular polysilicon capacity to 2700
metric tons and expansion of 200 millimeter epitaxial capacity in Utsunomiya.
Equity infusions in joint ventures decreased $4.1 million to $10.6 million
for 1997. The majority of this investment was made in Taisil as it continues
the start-up of its operations.
The Company is in the process of performing a critical review of its capital
expenditure plans for 1998. The actual amount of capital expenditures will be
significantly impacted by market conditions. Capital expenditures during 1998
will be used primarily to expand and equip the 300 millimeter research and
development line in St. Peters; to complete construction and equip the 300
millimeter integrated development line in Utsunomiya and to complete the
expansion of the granular polysilicon operation at MEMC Pasadena to 2700
metric tons. At December 31, 1997, the Company had $148.6 million of
committed capital expenditures.
At December 31, 1997, the Company maintained $656.4 million of committed
long-term loan agreements, of which $520.0 million was outstanding. The
Company also maintained $202.0 million of short-term lines of credit, of
which $112.5 million was outstanding at year-end. The Company's weighted
average cost of borrowing was 6.0% at December 31, 1997.
Total debt outstanding increased to $632.5 million at December 31, 1997 from
$331.8 million at December 31, 1996. The total debt to total capital ratio at
December 31, 1997 was 45.5%.
The Company's liquidity is affected by many factors, some based on the normal
ongoing operations of the business and others related to the uncertainties of
the industry and global economies. Although the Company's cash requirements
will fluctuate based on the timing and extent of these factors, management
believes that cash generated from operations, together with the liquidity
provided by existing cash balances and borrowing capability, will be
sufficient to satisfy commitments for capital expenditures and other cash
requirements for the next fiscal year.
In December 1997, the Company signed a non-binding letter of intent to form a
polysilicon joint venture with Tokuyama Corporation, the world's
second-largest producer of polysilicon, and Marubeni Corporation, one of
Japan's leading trading companies. The Company
<PAGE> 5
will contribute its existing granular polysilicon operation, and the other
parties will contribute cash and technology. The Company will retain a 40%
interest in the new joint venture.
Risk Factors
Impact of Downturns in the Semiconductor Industry. MEMC's business depends in
large part upon market demand for semiconductors and products utilizing
semiconductors. The semiconductor industry historically has been cyclical and
has experienced periodic downturns, which have had an adverse impact on the
semiconductor industry and suppliers to the semiconductor industry --
including manufacturers of silicon wafers. Overcapacity, inventory reduction
and weak pricing in the semiconductor industry, particularly for the DRAM
(memory) market, led to reduced orders for silicon wafers that began in the
second half of 1996 and gradually recovered throughout 1997. In addition, the
Company and its competitors expanded at a faster rate than silicon
consumption growth during the past two years, resulting in overcapacity in
the silicon wafer industry. The combination of these market conditions led to
significant price reductions throughout 1997 that are continuing into 1998.
MEMC's ability to reduce expenses during this downturn has been limited by
the Company's significant investment in property and equipment, continued
investment in research and development, expanded capacity and marketing
necessary to maintain extensive worldwide customer service and support
capabilities. A continuation of this or any future downturns in the
semiconductor industry could have a material adverse effect on MEMC's
operating results.
Capacity. MEMC is expanding certain of its manufacturing facilities around the
world. These capacity additions require significant capital investment and
result in a significant increase in fixed and operating expenses. In
addition, the Company has incurred additional indebtedness to finance such
expenditures and investments.
Growth in the worldwide supply of silicon wafers has outpaced the growth in
worldwide demand in recent periods, principally with respect to 200
millimeter wafers. This has resulted in insufficient revenue levels to offset
these additional costs, adversely impacting the Company's operating results.
Although some of MEMC's competitors have announced adjustments to the rate at
which they will implement capacity expansion programs, many have already
added significant capacity for the production of 200 millimeter silicon
wafers. The amount of capacity to be placed into production by MEMC and its
competitors could dramatically increase the worldwide supply of silicon
wafers, increase the downward pressure on prices and materially adversely
impact the Company's operating results. Further, the Company has no firm
information with which to determine the capacity and expansion plans of its
competitors.
Highly Competitive Industry. The silicon wafer industry is highly competitive.
MEMC faces substantial competition from established silicon wafer
manufacturers throughout the world, some of which have substantial financial,
technical, engineering and manufacturing resources, particularly from very
large, well-capitalized Japanese manufacturers. The Company believes that the
Japanese companies with which it competes benefit from their dominance of the
technologically advanced Japanese market, which represented approximately 39%
of the worldwide silicon wafer market in 1997. In particular, Shin-Etsu
Handotai is the largest supplier of silicon wafers in Japan and the world,
providing it with the sales and technology base to compete effectively
throughout the world. If MEMC were unable to continue to compete effectively
with Japanese silicon wafer manufacturers, the Company's operating results
could be materially adversely affected.
MEMC competes principally on the basis of product quality and performance and
price, as well as technical innovation, customer service and product
availability. The Company's competitors can be expected to continue to
improve the design and performance of their products and to introduce new
products with competitive price and performance characteristics. Over the
past two years, the Japanese yen and Deutsche mark have declined
significantly relative to the U.S. dollar which has given our competitors
certain cost advantages in the marketplace. Competitive pressures or
downturns in the semiconductor industry may necessitate price reductions
which could have a material adverse effect on MEMC's operating results.
Although the Company believes that it has certain technological, geographic
and other strengths over its competitors, realizing and maintaining such
strengths will require a continued high level of investment by MEMC in
research and development, marketing and customer service and support and
increased manufacturing capacity. An inability to maintain such investments
could have a material adverse effect on the Company's operating results. MEMC
may be required to seek additional equity or debt financing to fund these
investments. There can be no assurance that such additional financing will be
available when needed, or if available, will be on historically equivalent
terms.
Changing Customer Specifications. The silicon wafer industry is subject to
rapid technological change, new and enhanced product specification
requirements and manufacturing processes as well as evolving industry
standards. The Company's ability to remain
<PAGE> 6
competitive will depend upon its ability to develop technologically advanced
products and processes, and to meet the increasingly demanding requirements
of its customers on a cost-effective basis. As a result, MEMC expects to
continue to make a significant investment in research and development.
Despite its past successes, there can be no assurance that the Company will
continue to be successful in the introduction, marketing and cost-effective
manufacturing of any of its new products, or that MEMC will be able to
develop new or enhanced products and processes that satisfy customer needs or
achieve market acceptance. The failure to develop, enhance and introduce
products and manufacturing processes successfully could have a material
adverse effect on the Company's competitive position and operating results.
Limited Number of Principal Customers. Historically, MEMC has sold a
significant portion of its products to a limited number of principal
customers. In 1997, ten customers generated over one-half of its sales.
Likewise, the majority of PHC's sales were to one customer. There can be no
assurance that the Company and PHC will realize equivalent sales from their
top customers in the future. The loss, or a significant curtailment, of
purchases by one or more top customers could have a material adverse effect
on MEMC's operating results.
International Operations. The Company expects that international sales will
continue to represent a significant percentage of its total sales. In
addition, a significant portion of its manufacturing operations is located
outside of the United States. MEMC's risk exposure from these sales is
primarily limited to the Japanese yen, Deutsche mark and European ecu. The
Company's risk exposure from expenses at international manufacturing
facilities is concentrated in Italian lira, Japanese yen and Malaysian
ringgit. Although MEMC generally hedges receivables denominated in foreign
currencies at the time of sale and foreign currency denominated intercompany
loans by entering into long dated forward exchange contracts, there can be no
assurance that exchange rate fluctuations will not have a material adverse
effect on the Company's operations in the future.
MEMC's unconsolidated joint ventures have sales denominated in the U.S.
dollar and manufacturing expenses primarily denominated in the U.S. dollar,
Korean won and New Taiwanese dollar. PHC, the Korean joint venture, also has
significant debt denominated in the U.S. dollar and Korean won. Likewise,
Taisil, the Taiwanese joint venture, has significant debt denominated in the
U.S. dollar and New Taiwanese dollar. The Company's unconsolidated joint
ventures utilize the U.S. dollar as their functional currency and do not
hedge net Korean won and New Taiwanese exposures. Net Korean won exposure has
not been hedged, as the forward contract market is limited and the depth and
price of such contracts is not attractive. Thus far, net New Taiwanese
dollar exposure has not been hedged; however, given the broader market and
depth for forward contracts in Taiwan, forward contracts may be considered
from time to time.
International sales and operations may be adversely affected by the
imposition of governmental controls, fluctuations in local or U.S. dollar
currencies, export license requirements, restrictions on the export of
technology, political instability, trade restrictions, changes in tariffs and
difficulties in staffing and managing international operations. Although the
Company believes that the geographical distribution of its operations may
limit the effects on MEMC from regulatory, political and other factors, there
can be no assurance that such factors will not have a material adverse effect
on the Company's operations in the future or require MEMC to modify its
current business practices.
Manufacturing Interruptions. Interruption of operations at any of the
Company's primary manufacturing facilities, including labor disputes,
equipment failure, shortages of raw materials or supplies, or other causes
could result in delays or cancellations of shipments of silicon wafers. There
can be no assurance that alternate capacity would be available on a timely
basis or at all, thereby potentially resulting in a loss of customers. The
interruption of operations for those or other reasons could materially
adversely affect MEMC's operating results.
Dependence on Certain Suppliers. The Company obtains certain of its raw
materials from a limited number of suppliers. MEMC believes that it has
developed reliable sources for all of its raw materials and that qualified
alternative sources could be obtained to supply such materials. Although the
Company currently produces approximately one-half of its polysilicon and
sources a substantial portion of the remainder under multi-year contracts
with major polysilicon producers, a prolonged inability to obtain raw
materials, such as polysilicon, or increases in the prices of raw materials
resulting from tight supplies, could have a material adverse effect on MEMC's
operating results.
Fluctuations in Operating Results. The Company's operating results are subject
to quarterly and annual fluctuations principally due to MEMC's dependence on
the performance of the semiconductor industry, which historically has been
cyclical, as well as to the moderate seasonality of the Company's operations.
MEMC attributes such seasonality to the purchasing patterns of its customers
and to the fewer number of production days in December, January and February.
Additional factors that may influence the Company's operating results include
the timing of the receipt of orders from major customers, product mix,
competitive pricing pressures and the delay between the incurrence of
expenses to further develop marketing and service capabilities and expand
capacity, and the realization of benefits from
<PAGE> 7
such improved capabilities. Moreover, customers may cancel or reschedule
shipments, and production difficulties could delay shipments. These factors
are difficult to forecast, and these and other factors could have a material
adverse effect on MEMC's quarterly or annual operating results.
Attraction and Retention of Qualified Personnel. The Company is dependent upon
a limited number of key management and technical personnel. In addition,
MEMC's future success will depend in part upon its ability to attract and
retain highly qualified personnel. The Company competes for such personnel
with other companies, academic institutions, government entities and other
organizations. There can be no assurance the Company will be successful in
hiring or retaining qualified personnel, or that any of MEMC's personnel will
remain employed by the Company. Any loss of key personnel or the inability to
hire and retain qualified personnel could have a material adverse effect on
MEMC's operating results.
Volatility of Stock Price. Based on the trading history of the Company's
common stock, MEMC believes that factors such as quarterly fluctuations in
the Company's financial results, announcements of technological innovations
or new products by MEMC or the Company's competitors, the state of the
semiconductor industry, pricing in the silicon wafer industry, developments
in patent or other proprietary rights and in the Company's relationships with
its customers have caused and are likely to continue to cause the market
price of MEMC's common stock to fluctuate significantly. Technology company
stocks in general have experienced extreme price and volume fluctuations that
often have been unrelated to the operating performance of these companies.
This market volatility may adversely affect the market price of the Company's
common stock. In addition, an actual or anticipated shortfall in net sales,
gross margin or net earnings from securities analysts' expectations could
have an immediate effect on the trading price of MEMC's common stock in any
given period.
Proprietary Information and Intellectual Property. The Company believes that
the success of its business depends primarily on its proprietary technology,
information and processes and know-how, rather than on patents or trademarks.
Nevertheless, MEMC attempts to protect its intellectual property rights with
respect to its products and manufacturing processes through patents,
trademarks and trade secrets when appropriate as part of its ongoing
research, development and manufacturing activities, and has increased its
efforts to obtain patent protection for its technology in response to an
increase in patent applications by the Company's competitors. Much of MEMC's
proprietary information and technology relating to the manufacturing process
is not patented and may not be patentable. Therefore, there can be no
assurance that the Company will be able to adequately protect its technology,
that competitors will not be able to develop similar technology
independently, that the claims allowed on any patents held by MEMC will be
sufficiently broad to protect the Company's technology or that foreign
property laws will adequately protect MEMC's intellectual property rights.
Year 2000. Many computer systems experience problems handling dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company is
assessing the readiness of its computer systems to handle dates beyond the
year 1999. The Company expects to implement successfully the systems and
programming changes necessary to address year 2000 issues, and does not
believe that the cost of such actions will have a material adverse effect on
the Company's results of operations or financial condition.
Year 2000 issues create risk for the Company from unforeseen problems in its
own computer systems and from customers, suppliers, financial institutions
and other organizations with which the Company conducts financial
transactions worldwide. Such failures by the Company's and/or third parties'
computer systems could have a material adverse effect on the Company's
ability to conduct business.
<PAGE> 8
<TABLE>
<CAPTION>
Consolidated Statements of Operations
Year ended December 31, 1997 1996 1995
Dollars in thousands, except share data
<S> <C> <C> <C>
Net sales $986,673 $1,119,500 $886,860
Cost of goods sold 861,914 869,315 663,581
- ------------------------------------------------------------------------------------------------------------------
Gross margin 124,759 250,185 223,279
Operating expenses:
Marketing and administration 70,715 79,680 63,893
Research and development 64,457 44,313 31,226
- ------------------------------------------------------------------------------------------------------------------
Operating profit (loss) (10,413) 126,192 128,160
- ------------------------------------------------------------------------------------------------------------------
Nonoperating (income) expense:
Interest expense 14,743 494 10,953
Interest income (2,570) (5,436) (7,270)
Royalty income (8,186) (6,158) (5,934)
Other, net (4,070) 7,437 11,479
- ------------------------------------------------------------------------------------------------------------------
Total nonoperating (income) expense (83) (3,663) 9,228
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes, equity in income of
joint ventures and minority interests (10,330) 129,855 118,932
Income taxes 2,769 51,942 43,786
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) before equity in income of joint ventures
and minority interests (13,099) 77,913 75,146
Equity in income of joint ventures 3,246 24,884 13,908
Minority interests 3,106 (1,241) (1,781)
- ------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (6,747) $ 101,556 $ 87,273
==================================================================================================================
Basic earnings (loss) per share $ (0.16) $ 2.46 $ 2.80<F*>
Diluted earnings (loss) per share $ (0.16) $ 2.45 $ 2.78<F*>
==================================================================================================================
Weighted average shares used in computing basic
earnings (loss) per share 41,345,193 41,308,806 31,215,563<F*>
Weighted average shares used in computing diluted
earnings (loss) per share 41,345,193 41,534,412 31,441,631<F*>
==================================================================================================================
<FN>
<F*> Discussion regarding the computation of pro forma earnings per share is
contained in note 3 to the consolidated financial statements.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, 1997 1996
Dollars in thousands, except share data
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 30,053 $ 35,096
Accounts receivable, less allowance for doubtful accounts of
$3,473 and $2,299 in 1997 and 1996, respectively 154,702 129,325
Income taxes receivable 14,382 3,882
Inventories 141,447 100,505
Prepaid and other current assets 36,391 49,329
- --------------------------------------------------------------------------------------------------------------------
Total current assets 376,975 318,137
Property, plant and equipment, net 1,200,827 1,015,145
Investment in joint ventures 95,307 101,103
Excess of cost over net assets acquired, net of accumulated amortization of
$3,752 and $2,376 in 1997 and 1996, respectively 49,772 51,148
Other assets 54,277 27,324
- --------------------------------------------------------------------------------------------------------------------
Total assets $1,777,158 $1,512,857
====================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 122,476 $ 47,130
Accounts payable 146,172 156,841
Accrued liabilities 48,611 45,386
Accrued wages and salaries 21,267 25,975
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 338,526 275,332
Long-term debt, less current portion 510,038 284,701
Pension and similar liabilities 76,837 70,232
Customer deposits 67,141 48,174
Other liabilities 26,901 28,923
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,019,443 707,362
- --------------------------------------------------------------------------------------------------------------------
Minority interests 59,227 63,527
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 shares authorized, none issued
or outstanding in 1997 or 1996 -- --
Common stock, $.01 par value, 200,000,000 shares authorized, 41,440,369
and 41,470,971 issued and outstanding in 1997 and 1996, respectively 414 415
Additional paid-in capital 574,317 573,351
Retained earnings 164,396 171,143
Cumulative translation adjustment (38,887) (396)
Unearned restricted stock awards (424) (1,217)
Treasury stock, at cost: 36,205 shares in 1997 and 1996 (1,328) (1,328)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 698,488 741,968
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,777,158 $1,512,857
====================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Year ended December 31, 1997 1996 1995
Dollars in thousands
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (6,747) $ 101,556 $ 87,273
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 126,913 91,660 67,241
Minority interests (3,106) 1,241 1,781
Equity in income of joint ventures (3,246) (24,884) (12,930)
(Gain) loss on sale of property, plant and equipment (4,766) 610 1,494
Deferred compensation earned 596 1,001 6,601
Changes in assets and liabilities:
Accounts receivable (36,051) 32,247 (39,636)
Income taxes (8,794) (24,127) (613)
Inventories (46,445) (11,126) (3,980)
Prepaid and other current assets 9,487 (10,638) (16,591)
Deferred taxes (17,783) 11,546 10,596
Accounts payable 3,976 19,221 59,258
Accrued liabilities 5,967 2,469 6,469
Accrued wages and salaries (3,797) 1,749 7,639
Customer deposits 20,140 58,900 --
Other, net (6,915) 10,480 (6,921)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 29,429 261,905 167,681
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (372,416) (590,049) (215,359)
Proceeds from sale of property, plant and equipment 21,512 884 2,063
Equity infusions in joint ventures (10,638) (14,698) (29,904)
Dividend received from unconsolidated joint venture 11,263 -- --
Deposit with affiliate -- 55,000 (55,000)
Notes receivable from affiliates 212 2,376 28,559
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (350,067) (546,487) (269,641)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from initial public offering -- -- 441,194
Net short-term borrowings 87,420 14,898 (36,867)
Proceeds from issuance of long-term debt 248,553 222,166 209,500
Principal payments on long-term debt (18,693) (2,060) (340,000)
Dividends paid -- -- (100,000)
Other 385 7,275 --
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 317,665 242,279 173,827
- -----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (2,070) 207 213
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,043) (42,096) 72,080
Cash and cash equivalents at beginning of year 35,096 77,192 5,112
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 30,053 $ 35,096 $ 77,192
=======================================================================================================================
Supplemental disclosures of cash flow information:
Interest payments, net of amount capitalized $ 21,204 $ -- $ 13,007
Income taxes paid 18,020 57,590 34,273
=======================================================================================================================
Supplemental disclosure of noncash investing activity --
purchase of assets in exchange for notes payable $ -- $ -- $ 55,000
=======================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Common Stock
----------------- Unearned
Number Additional Cumulative Restricted
of Shares Par Paid-in Retained Translation Stock Treasury
Outstanding Value Capital Earnings Adjustment Awards Stock Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands
Balance at December 31, 1994 21,490,942 $215 $158,884 $ 43,777 $ 878 $ -- $ -- $ 203,754
Net earnings -- -- -- 87,273 -- -- -- 87,273
Issuance of 19,550,000
common shares in
public offering 19,550,000 196 440,998 -- -- -- -- 441,194
Stock plans, net 359,056 3 8,614 -- -- (8,617) -- --
Deferred compensation earned -- -- -- -- -- 6,601 -- 6,601
Net translation adjustment -- -- -- -- 3,569 -- -- 3,569
Dividend paid to
Huls Corporation -- -- (38,537) (61,463) -- -- -- (100,000)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 41,399,998 414 569,959 69,587 4,447 (2,016) -- 642,391
Net earnings -- -- -- 101,556 -- -- -- 101,556
Stock plans, net 70,973 1 3,392 -- -- (202) -- 3,191
Deferred compensation earned -- -- -- -- -- 1,001 -- 1,001
Net translation adjustment -- -- -- -- (4,843) -- -- (4,843)
Repurchase of common stock -- -- -- -- -- -- (1,328) (1,328)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 41,470,971 415 573,351 171,143 (396) (1,217) (1,328) 741,968
Net loss -- -- -- (6,747) -- -- -- (6,747)
Stock plans, net (30,602) (1) 966 -- -- 197 -- 1,162
Deferred compensation earned -- -- -- -- -- 596 -- 596
Net translation adjustment -- -- -- -- (38,491) -- -- (38,491)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 41,440,369 $414 $574,317 $164,396 $(38,887) $ (424) $(1,328) $ 698,488
=========================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 12
Notes to Consolidated Financial Statements
Dollars in thousands, except share data
(1) Organization
MEMC Electronic Materials, Inc. and subsidiaries (the Company) is a
manufacturer and leading worldwide supplier of electronic grade silicon
wafers for the semiconductor industry. The Company has production facilities
directly or through joint ventures in China, Italy, Japan, Malaysia, South
Korea, Taiwan and the United States. The Company's customers are located
throughout the world.
(2) Initial Public Stock Offering
On July 12, 1995, the Company completed an initial public stock offering of
19.55 million shares of common stock at an initial offering price of $24 per
share. Net proceeds from the offering were $441,194. Prior to the public
stock offering, the Company was a wholly owned subsidiary of Huls
Corporation. Through Huls AG and other affiliates, Huls Corporation is wholly
owned by VEBA AG, a publicly held industrial corporation in Germany. As a
result of the public stock offering, Huls Corporation's ownership of the
Company was reduced to 51.9%.
(3) Summary of Significant Accounting Policies
(a) Basis of Presentation
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Certain prior period amounts have been reclassified to conform to the current
year's presentation.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of MEMC Electronic
Materials, Inc. and its wholly and majority owned subsidiaries. Investments
of less than 50% in two joint venture companies are accounted for using the
equity method. All significant intercompany transactions have been
eliminated.
(c) Cash Equivalents
Cash equivalents consist of cash in banks, principally overnight investments
and short-term time deposits, with original maturities of three months or
less.
(d) Inventories
Inventories are stated at the lower of cost or market. Raw materials and
supplies inventories are valued using the first-in, first-out method. Goods
in process and finished goods inventory values are based upon standard costs
which approximate average costs.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
principally using the straight-line method over estimated service lives as
follows:
<TABLE>
<CAPTION>
Years
- --------------------------------------------------------------------------
<S> <C>
Land improvements 6-15
Buildings and building improvements 10-30
Machinery and equipment 3-12
==========================================================================
</TABLE>
<PAGE> 13
The Company capitalizes interest costs as part of the cost of constructing
facilities and equipment. Interest costs of $15,968, $8,957 and $1,638 were
capitalized in 1997, 1996 and 1995, respectively.
(f) Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired is amortized on a straight-line basis
over the periods estimated to be benefited, not exceeding 40 years.
(g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount of fair value
less costs to sell. The recoverable value of property, plant and equipment
and excess of cost over net assets acquired approximates carrying value at
December 31, 1997.
(h) Revenue Recognition
Revenues are recognized when products are shipped.
(i) Derivative Financial Instruments
The Company enters into forward exchange contracts to manage foreign currency
exchange risk relating to current trade receivables with its foreign
subsidiaries and current trade receivables with its customers denominated in
foreign currencies (primarily Japanese yen and Deutsche marks). The purpose
of the Company's foreign currency hedging activities is to protect the
Company from the risk that the eventual dollar net cash flows resulting from
foreign currency transactions will be adversely affected by changes in
exchange rates. The Company does not hold or issue financial instruments for
trading purposes.
The Company's forward exchange contracts are accounted for as hedges and,
accordingly, gains and losses on those contracts are deferred and recognized
at the time of settlement of the related receivables. Deferred gains and
losses are included on a net basis in the consolidated balance sheets as
either other assets or other liabilities. Upon termination, gains and losses
are included in the consolidated statements of operations as other income or
expense. If a forward exchange contract is designated as a hedge but is no
longer effective, it is marked to market and included in other income or
expense in the consolidated statements of operations. A payment or receipt
arising from the termination of a forward exchange contract that is effective
as a hedge is included in other income or expense in the consolidated
statements of operations.
(j) Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries whose functional currency is
other than the U.S. dollar are translated to U.S. dollars using the exchange
rates in effect at the balance sheet date. Results of operations are
translated using average rates during the period. Adjustments resulting from
the translation process are included as a separate component of stockholders'
equity.
(k) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to material differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating losses and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in earnings
in the period that includes the enactment date. A valuation allowance has
been established for deferred tax assets that the Company believes may not be
realized.
No provision is made for U.S. income taxes on unremitted earnings of the
Company's non-U.S. subsidiaries, as the retention of such earnings is
considered essential for continuing operations, or the additional taxes are
considered to be minimal based upon available foreign tax credits.
(l) Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128
requires the presentation of basic and diluted earnings per share for 1997
interim and annual periods, and restatement of all prior periods presented.
Restated earnings per share information for 1997 and 1996 interim periods is
contained in note 18, "Unaudited Quarterly Financial Information."
<PAGE> 14
Pro forma basic earnings per share for 1995 was calculated based upon the
weighted average number of shares outstanding plus, for the three months
ended March 31, 1995, the number of shares that would have been required to
be sold at the initial public offering price to fund the excess of the $100
million dividend to Huls Corporation in April 1995 over the Company's net
earnings for the prior twelve-month period.
(m) Stock-Based Compensation
The Company measures its compensation cost of equity instruments issued under
employee compensation plans under the provisions of Accounting Principles
Board Opinion No. 25 (Opinion 25) and related Interpretations. Compensation
expense related to restricted stock awards is recognized over the applicable
vesting periods, and the unamortized portion of deferred compensation is
reflected as a separate component of stockholders' equity.
(4) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Raw materials and supplies $ 65,369 $ 47,209
Goods in process 37,996 27,411
Finished goods 38,082 25,885
- -----------------------------------------------------------------------------
$141,447 $100,505
=============================================================================
</TABLE>
(5) Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Land and land improvements $ 13,055 $ 13,782
Buildings and building improvements 435,740 141,582
Machinery and equipment 1,001,846 744,485
- -----------------------------------------------------------------------------
1,450,641 899,849
Less accumulated depreciation 465,384 372,680
- -----------------------------------------------------------------------------
985,257 527,169
Construction in progress 215,570 487,976
- -----------------------------------------------------------------------------
$1,200,827 $1,015,145
=============================================================================
</TABLE>
<PAGE> 15
On June 30, 1995, the Company and Texas Instruments, Inc.(Texas Instruments)
formed a joint venture company, MEMC Southwest, to own and operate Texas
Instruments' existing silicon wafer manufacturing facility in Sherman, Texas
and to construct and operate a new 200 millimeter silicon wafer manufacturing
facility. MEMC Southwest is 80% owned by the Company and 20% owned by Texas
Instruments. This agreement generated an excess of cost over net assets
acquired of approximately $53,000 that is being amortized over 40 years.
On July 31, 1995, the Company acquired the polysilicon production operations
of Albemarle Corporation (Albemarle), including Albemarle's production
facility in Pasadena, Texas, for approximately $58,000. Based upon an
independent valuation, the purchase price was allocated to inventory,
property, plant and equipment, and technology rights.
(6) Investment in Joint Ventures
The Company has a 40% interest in POSCO HULS Company Limited (PHC), a joint
stock company formed to manufacture and sell silicon wafers in South Korea,
and a 45% interest in Taisil Electronic Materials Corporation (Taisil), a
joint stock company formed to manufacture and sell silicon wafers in Taiwan.
During 1997, 1996 and 1995, the Company received $8,186, $6,158 and $5,934,
respectively, from these joint ventures under royalty agreements. Sales by
PHC of intermediate and finished product to the Company totaled $32,313,
$89,723, and $20,688 in 1997, 1996 and 1995, respectively.
The Company provides PHC and Taisil with debt guarantees totaling $3,743 and
$79,805, respectively. At December 31, 1997, PHC and Taisil had $3,743 and
$79,805, respectively, in standby letters of credit and borrowings
outstanding against these guarantees.
A summary of the results of operations for 1997, 1996 and 1995, and financial
position as of December 31, 1997 and 1996 of the Company's unconsolidated
investments follows:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Total:
Net sales $288,324 $282,764 $181,154
Gross profit 43,664 110,644 57,691
Net earnings 10,199 64,058 34,873
==============================================================================
The Company's share:
Net earnings $ 3,246 $ 24,884 $ 12,930
==============================================================================
Current assets $151,246 $183,326
Noncurrent assets 525,183 499,516
- ---------------------------------------------------------------
Total assets 676,429 682,842
- ---------------------------------------------------------------
Current liabilities 157,993 156,650
Noncurrent liabilities 291,337 288,237
- ---------------------------------------------------------------
Total liabilities 449,330 444,887
- ---------------------------------------------------------------
Interests of others 131,792 136,852
- ---------------------------------------------------------------
The Company's investment $ 95,307 $101,103
===============================================================
</TABLE>
The Company's share of undistributed retained earnings of unconsolidated
investments was approximately $11,700 and $20,700 at December 31, 1997 and
1996, respectively. In 1997, the Company received a dividend from PHC of
$11,263.
(7) Short-Term Borrowing Agreements and Lines of Credit
The Company has unsecured, committed lines of credit available of
approximately $95,000 under short-term loan agreements with an affiliate,
renewable through 1998. The interest rate on borrowings is based on a
combination of U.S. federal funds and inter-bank offer rates. At December 31,
1997, the Company had approximately $75,000 of borrowings drawn against these
lines of credit with an interest
<PAGE> 16
rate of 6.3% per annum. Interest expense related to short-term borrowings
with an affiliate was $1,667, $181 and $485 in 1997, 1996 and 1995,
respectively.
The Company has unsecured borrowings from foreign banks of approximately
$37,000 at December 31, 1997, under approximately $62,000 of short-term loan
agreements which bear interest at various rates ranging from 1.0% to 10.4%
and are renewable annually. The Company also has two unsecured, committed
lines of credit available with two banks totaling $45,000 under short-term
borrowing agreements, of which the Company had no borrowings drawn at
December 31, 1997 or 1996. The interest rate on the borrowings is negotiated
at the time of the borrowings.
Commitment fees of 1/8 of 1% are paid on the unused portion of the lines of
credit. The Company's weighted average interest rate on short-term borrowings
was 1.9% and 4.1% for 1997 and 1996, respectively, and are favorably impacted
by interest rates in Japan.
(8) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Owed to affiliates:
Note with interest payable semiannually at 6.7%, due in 1998 $ 25,000 $ 25,000
Notes with interest payable semiannually at rates ranging from
2.1% to 7.2%, due in 1999 37,690 8,750
Notes with interest payable semiannually at rates ranging from
2.5% to 6.4%, due in 2000 17,690 18,750
Notes with interest payable semiannually at rates ranging from
2.9% to 7.2%, due in 2001 77,690 108,750
Notes with interest payable semiannually at rates ranging from
3.2% to 7.6%, due in 2002 82,690 8,750
Note with interest payable semiannually at 6.4%, due in 2003 40,000 40,000
Notes with interest payable semiannually at rates ranging from
6.9% to 7.3%, due in 2004 100,000 50,000
Note with interest payable semiannually at 7.3%, due in 2005 75,000 --
- ------------------------------------------------------------------------------------------------------------------
Total owed to affiliates 455,760 260,000
- ------------------------------------------------------------------------------------------------------------------
Owed to nonaffiliates:
Note with interest payable semiannually at 4.1%, due in 1998 7,690 17,730
Notes with interest payable semiannually at rates ranging from
1.7% to 2.2%, due in 2001 15,380 --
Note with interest payable semiannually at 1.6%, due in 2002 15,380 --
Other notes with interest payable semiannually at rates ranging
from 2.3% to 8.9%, due in 1998 through 2017 25,785 26,859
- ------------------------------------------------------------------------------------------------------------------
Total owed to nonaffiliates 64,235 44,589
- ------------------------------------------------------------------------------------------------------------------
Total long-term debt 519,995 304,589
Less current portion 9,957 19,888
- ------------------------------------------------------------------------------------------------------------------
$510,038 $284,701
==================================================================================================================
</TABLE>
The Company has long-term committed loan agreements of $656 million at
December 31, 1997, of which approximately $520 million is outstanding.
Commitment fees of 1/8 of 1% are paid on the unused portion of committed loan
agreements. The Company has approximately $100,000 of available long-term
loan agreements with affiliates at December 31, 1997. Although $25,000 of the
Company's long-term debt is scheduled to mature in 1998, it is the Company's
intention to refinance these borrowings with available credit facilities
maturing in 2004. Consequently, $25,000 has been reclassified to long-term
debt at December 31, 1997.
Interest expense related to long-term notes payable to affiliates was
$25,633, $7,337 and $4,888 in 1997, 1996 and 1995, respectively.
<PAGE> 17
The aggregate amounts of long-term debt maturing subsequent to December 31,
1997 are as follows:
<TABLE>
<CAPTION>
Dollars in thousands
<S> <C>
1998 $ 9,957
1999 42,102
2000 22,594
2001 95,897
2002 100,263
Thereafter 249,182
- ------------------------------------------------------------------
$519,995
==================================================================
</TABLE>
In October 1996, the Company entered into a financing arrangement with the
City of O'Fallon, Missouri related to the expansion of the Company's St.
Peters, Missouri facility. In total, approximately $252 million of industrial
revenue bonds were issued to the Company by the City of O'Fallon, of which
$210 million and $159 million of bonds were outstanding at December 31, 1997
and 1996, respectively.
The bonds were exchanged by the City of O'Fallon for the assets related to
the expansion, which were then leased by the Company for a period of 10 years
for machinery and equipment and 15 years for building and building
improvements. The Company has the option to purchase the machinery and
equipment at the end of five years and the building and building improvements
at the end of 10 years. The industrial revenue bonds bear interest at a rate
of 6% per annum and mature concurrent with the annual payments due under the
terms of the lease.
The Company has classified the leased assets as property, plant and equipment
and has established a capital lease obligation equal to the outstanding
principal balance of industrial revenue bonds. Lease payments may be made by
tendering an equivalent portion of the industrial revenue bonds. As the
capital lease payments to the City of O'Fallon may be satisfied by tendering
industrial revenue bonds (which is the Company's intention), the capital
lease obligation, industrial revenue bonds and related interest expense and
interest income, respectively, have been offset for presentation purposes in
the consolidated financial statements.
(9) Stockholders' Equity
Preferred Stock
The Company has 50,000,000 authorized shares of $.01 per share par value
preferred stock. The Board of Directors is authorized, without further action
by the stockholders, to issue any or all of the preferred stock.
Common Stock
Holders of the $.01 per share par value common stock are entitled to one vote
for each share held on all matters submitted to a vote of the stockholders.
Subject to the rights of any holders of preferred stock, holders of common
stock are entitled to receive ratably such dividends as may be declared by
the Board of Directors. In the event of liquidation, dissolution or winding
up of the Company, holders of the common stock are entitled to share ratably
in the distribution of all assets remaining after payment of liabilities,
subject to the rights of any holders of preferred stock.
Stock-Based Compensation
The Company has an Equity Incentive Plan (the Plan) that provides for the
award of incentive and non-qualified stock options, restricted stock and
performance shares. Total shares available for grant under the Plan are
3,597,045. Non-qualified stock options to employees are typically granted on
January 1 and vest at a rate of 25% annually over four years. Non-qualified
stock options to non-employee directors are also typically granted on January
1 but vest at a rate of 33 1/3% annually over three years. The exercise price
of each option equals the market price of the Company's common stock on the
date of the grant, and each option's maximum term is 10 years. Total
restricted shares awarded in 1997, 1996 and 1995 were 1,300, 38,200 and
359,056, respectively, with weighted average fair values of $22.50, $33.46
and $24, respectively. Total compensation cost recognized for these awards in
1997, 1996 and 1995 was $596, $1,001 and $6,601, respectively.
The Company applies Opinion 25 and related Interpretations in accounting for
the Plan. Accordingly, no compensation cost has been recognized for
non-qualified stock options granted under the Plan. Had compensation cost
been determined for the Company's non-qualified stock options based on the
fair value at the grant dates consistent with the alternative method set
forth under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net earnings (loss) and basic and diluted earnings (loss) per share
would have been reduced to the pro forma amounts indicated below:
<PAGE> 18
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Net earnings (loss):
As reported $(6,747) $101,556 $87,273
Pro forma (8,785) 99,988 85,728
Basic earnings (loss) per common share:
As reported (0.16) 2.46 2.80
Pro forma (0.21) 2.42 2.75
Diluted earnings (loss) per common share:
As reported (0.16) 2.45 2.78
Pro forma (0.21) 2.42 2.73
==============================================================================
</TABLE>
The fair value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: risk-free
interest rate of 6.1%, 6.5% and 6.5% expected life of six years for all
periods; expected volatility of 44.8%, 36.4% and 35.0%; expected dividends of
zero percent for all periods.
<PAGE> 19
A summary of the Company's Plan activity with respect to stock options is
presented below:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average Fair Value
Shares Option Price of Options Granted
Year ended December 31, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 965,838 $25.32
Granted 177,352 22.56 $11.94
Exercised (12,298) 27.23
Canceled (106,600) 24.36
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,024,292 $24.92
===================================================================================================================
Options exercisable at year-end 516,674 $24.77
===================================================================================================================
Year ended December 31, 1996
Outstanding at beginning of year 914,694 $24.00
Granted 141,300 32.99 $15.54
Exercised (36,333) 24.00
Canceled (53,823) 24.00
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 965,838 $25.32
===================================================================================================================
Options exercisable at year-end 146,733 $24.53
===================================================================================================================
Year ended December 31, 1995
Outstanding at beginning of year -- --
Granted 918,294 $24.00 $11.07
Exercised -- --
Canceled (3,600) 24.00
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 914,694 $24.00
===================================================================================================================
Options exercisable at year-end -- --
===================================================================================================================
</TABLE>
A summary of information about non-qualified stock options outstanding at
December 31, 1997 is presented below:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------------------------
Number Weighted Average Weighted
Range of Outstanding at Remaining Average
Exercise Prices December 31, 1997 Contractual Life Exercise Price
<S> <C> <C> <C>
$24.00 727,042 7.5 years $24.00
32.625-49.500 130,400 8.0 years 33.02
22.500-29.000 166,850 9.0 years 22.57
- --------------------------------------------------------------------------------------------------------------
$22.500-49.500 1,024,292 7.8 years $24.92
==============================================================================================================
<CAPTION>
Options Outstanding
-----------------------------------------
Range of Number Exercisable at Weighted Average
Exercise Prices December 31, 1997 Exercise Price
<S> <C> <C>
$24.00 457,849 $24.00
32.625-49.500 46,625 32.90
22.500-29.000 12,200 22.50
- --------------------------------------------------------------------------------------------------------------
$22.500-49.500 516,674 $24.77
==============================================================================================================
</TABLE>
<PAGE> 20
In the fourth quarter of 1995, restrictions lapsed on 263,056 shares of
restricted stock based upon the market price of the Company's common stock
appreciating 55% over the initial public offering price. This resulted in a
charge to compensation expense of approximately $5.8 million.
(10) Earnings Per Share
A reconciliation of the numerator and denominator of the earnings (loss) per
share calculations is provided for all periods presented. The numerator for
basic and diluted earnings (loss) per share is net earnings (loss) for all
periods presented. The denominator for basic and diluted earnings (loss) per
share for 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares used for
basic earnings (loss) per share 41,345,193 41,308,806 31,215,563
Effect of dilutive securities:
Restricted stock -- 74,579 169,199
Stock options -- 151,027 56,869
- --------------------------------------------------------------------------------------------------------------
Weighted average shares used for
diluted earnings (loss) per share 41,345,193 41,534,412 31,441,631
==============================================================================================================
</TABLE>
Options to purchase 119,300 shares of common stock at $32.63 per share were
outstanding during 1997 but were not included in the computation of diluted
earnings (loss) per share because the options' exercise price was greater
than the average market price of the common shares. The options, which expire
on January 1, 2006, were outstanding at December 31, 1997.
On January 1, 1998, the Company granted options to purchase 821,100 shares of
common stock at $15.25 per share. These options will expire on January 1,
2008. In addition, the Company repurchased 235,900 shares of common stock
during January 1998.
(11) Income Taxes
Earnings (loss) before income taxes, equity in income of joint ventures and
minority interests are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
U.S. $(59,702) $ 57,200 $ 56,598
Foreign 49,372 72,655 62,334
- --------------------------------------------------------------------------------------------------------------
$(10,330) $129,855 $118,932
==============================================================================================================
</TABLE>
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Current Deferred Total
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Year ended December 31, 1997:
U.S. federal $(5,764) $(18,712) $(24,476)
State and local (924) (398) (1,322)
Foreign 25,766 2,801 28,567
- -------------------------------------------------------------------------------------------------------------
$19,078 $(16,309) $ 2,769
=============================================================================================================
Year ended December 31, 1996:
U.S. federal $ 5,425 $ 5,420 $ 10,845
State and local 2,778 (133) 2,645
Foreign 33,756 4,696 38,452
- -------------------------------------------------------------------------------------------------------------
$41,959 $ 9,983 $ 51,942
=============================================================================================================
Year ended December 31, 1995:
U.S. federal $20,117 $ 29 $ 20,146
State and local 2,370 2 2,372
Foreign 27,960 (6,692) 21,268
- -------------------------------------------------------------------------------------------------------------
$50,447 $ (6,661) $ 43,786
=============================================================================================================
</TABLE>
<PAGE> 21
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% in 1997, 1996 and 1995 to earnings (loss)
before income taxes, equity in income of joint ventures and minority
interests as a result of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Income tax at federal statutory rate $(3,616) $45,449 $41,626
Increase (reduction) in income taxes
resulting from:
Change in the balance of the valuation
allowance for deferred tax assets
allocated to income tax expense (4,738) (3,200) (1,811)
Foreign tax differences 13,511 12,323 6,479
Amortization and depreciation
recorded for acquired assets with
different financial reporting and
historical tax bases (507) (636) (1,083)
State income taxes, net
of federal benefit (859) 1,719 1,542
Investment incentives (916) (1,809) (7,903)
Other, net (106) (1,904) 4,936
- --------------------------------------------------------------------------------------------------------------
$ 2,769 $51,942 $43,786
==============================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Deferred tax assets:
Inventory, principally due to additional costs inventoried for
tax purposes and/or financial reserves recorded to state
inventories at net realizable values $ 5,584 $ 3,660
Accruals for expenses currently not deductible for tax purposes 11,115 7,759
Pension, medical and other employee benefits, principally due
to accrual for financial reporting purposes 31,838 29,575
Net operating loss carryforwards 14,175 3,439
Investment tax credit carryforwards 1,456 1,456
Alternative minimum tax credit carryforwards 3,737 --
Foreign tax credit carryforwards 21,407 --
Other 498 371
- ------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 89,810 46,260
Less valuation allowance (11,408) (16,298)
- ------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 78,402 29,962
- ------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment, principally due to differences
in depreciation and capitalized interest (45,480) (16,532)
Other (4,244) (710)
- ------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (49,724) (17,242)
- ------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 28,678 $ 12,720
========================================================================================================================
</TABLE>
<PAGE> 22
Net deferred tax assets were classified in the consolidated balance sheets as
follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Current deferred tax assets, net $13,206 $14,861
Noncurrent deferred tax assets (liabilities), net 15,472 (2,141)
- ------------------------------------------------------------------------------------------------------------------------
$28,678 $12,720
========================================================================================================================
</TABLE>
Current deferred tax assets, net are included in prepaid and other current
assets. Noncurrent deferred tax assets (liabilities), net are included in
other assets or other liabilities.
As of December 31, 1997, the Company has regular tax net operating loss
carryforwards for federal and state income tax purposes of $28,062 and
$47,537, respectively. The Company also has foreign tax credit carryforwards
of $21,407, AMT credit carryforwards of $3,737 and net investment tax credit
carryforwards available of $1,456. Utilization of $7,053 of loss
carryforwards and all of the investment tax credit carryforwards are subject
to limitation under Internal Revenue Code Sections 382 and 383, respectively.
Pursuant to these Internal Revenue Code Sections, the amount of combined loss
and tax credit carryforwards that may be utilized is limited to approximately
$2,000 per year. Under Internal Revenue Service regulations, the investment
tax credit carryforwards are not permitted to reduce income tax expense until
the year 2000.
(12) Commitments and Contingencies
The Company leases buildings, equipment and automobiles under operating
leases. Rental expense under these leases was $23,789, $17,262 and $7,527 in
1997, 1996 and 1995, respectively. Minimum aggregate future rental
obligations under leases having remaining terms of one year or more at
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Dollars in thousands
<S> <C>
1998 $26,835
1999 22,443
2000 13,567
2001 4,778
2002 1,717
Thereafter 15,300
- ----------------------------------------------------------
$84,640
==========================================================
</TABLE>
(13) Pension Plans and Other Retirement Benefits
The Company has a noncontributory defined benefit plan covering most U.S.
employees. Benefits for these plans are based on years of service and
qualifying compensation during the final years of employment. The Company
complies with federal funding requirements.
The Company also has a nonqualified plan under the Employee Retirement Income
Security Act of 1974, which provides benefits not otherwise payable under the
above plans due to Internal Revenue Code restrictions. Eligibility for
participation in this plan requires coverage under the above plan and other
specific circumstances.
<PAGE> 23
Net periodic pension cost consists of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Service cost (benefits
earned during the period) $ 8,178 $ 6,449 $ 4,336
Interest cost on projected
benefit obligation 7,937 6,121 4,677
Actual return on plan assets (11,391) (8,663) (8,870)
Net amortization and deferral 6,340 3,858 5,568
- --------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 11,064 $ 7,765 $ 5,711
==============================================================================================================
</TABLE>
The following table summarizes the actuarial present value of benefit
obligations and the funded status of the Company's plans:
<TABLE>
<CAPTION>
Accumulated Benefits Assets Exceed
Exceed Assets Accumulated Benefits
December 31, 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 6,920 $ 7,832 $ 77,991 $55,868
=======================================================================================================================
Accumulated benefit obligation $ 7,698 $ 9,061 $ 90,897 $67,191
=======================================================================================================================
Projected benefit obligation $ 8,457 $ 9,897 $122,223 $92,182
Plan assets at fair value 547 552 93,067 76,747
- -----------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in
excess of plan assets 7,910 9,345 29,156 15,435
Unrecognized net loss from
past experience (4,613) (4,095) (11,598) (7,268)
Unrecognized prior service cost (296) (374) (7,058) 52
Unrecognized net transition asset -- -- 30 35
Additional minimum liability 4,282 3,982 -- --
- -----------------------------------------------------------------------------------------------------------------------
Accrued pension expense $ 7,283 $ 8,858 $ 10,530 $ 8,254
=======================================================================================================================
</TABLE>
The assumed discount rate, rate of increase in compensation levels and the
expected long-term rate of return on assets used in the actuarial
calculations in 1997 were 7.0%, 4.5% and 8.0%, respectively, and in 1996 were
7.5%, 4.5% and 8.0%, respectively. Plan assets consist principally of
insurance contracts, marketable securities including common stocks, bonds and
interest-bearing deposits.
The Company has pension plans for its foreign subsidiaries. The aggregate
pension expense and liability are not material to the consolidated financial
statements.
(14) Other Postretirement and Postemployment Benefit Plans
The Company sponsors a health care plan that provides postretirement medical
benefits to full-time U.S. employees who meet minimum age and service
requirements. The plan is contributory, with retiree contributions adjusted
annually, and contains other cost-sharing features such as deductibles and
coinsurance. The Company's policy is to fund the cost of medical benefits in
amounts determined at the discretion of management.
Net periodic postretirement benefit cost consists of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Service cost $2,441 $2,552 $1,832
Interest cost 3,468 3,435 3,055
Amortization of unrecognized prior service cost (206) -- --
Amortization of (gains) losses (76) 3 (111)
- -----------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $5,627 $5,990 $4,776
=======================================================================================================================
</TABLE>
<PAGE> 24
The following table presents the plan's accrued postretirement benefit cost:
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 6,418 $ 4,852
Fully eligible active plan participants 10,208 10,541
Other active plan participants 22,125 35,664
Unrecognized prior service cost 14,855 922
Unrecognized net gain (loss) relating to changes
in actuarial assumptions 1,233 (1,993)
- --------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $54,839 $49,986
==============================================================================================================
</TABLE>
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was assumed for
1997; the rate was assumed to decrease gradually to 5.0% by the year 2002 and
remain at that level thereafter. For 1996, an 8.5% annual rate of increase
was assumed, decreasing gradually to 5.5% by the year 2001. The health care
cost trend rate assumption may have a significant effect on the amounts
reported. For example, increasing the assumed health care cost trend rates
by 1% in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1997 and 1996 by $138 and $4,702, respectively;
and the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1997 and 1996 by $506 and $708, respectively.
The weighted average discount rates used in determining the accumulated
postretirement benefit obligation were 7.0% and 7.5% at December 31, 1997 and
1996, respectively.
(15) Retirement Savings Plan
The Company sponsors a defined contribution plan under Section 401(k) of the
Internal Revenue Code covering all U.S. salaried and hourly employees with
more than one year of service. Company contributions included in results of
operations totaled $4,138, $3,656 and $3,091 for 1997, 1996 and 1995,
respectively.
(16) Major Customers and Concentration of Credit Risk
The Company sells products to customers in the semiconductor industry which
are located in various geographic regions including the United States,
Europe, Japan and Asia Pacific. The primary customers in this industry are
well capitalized and the concentration of credit risk is considered minimal
due to the Company's customer base. Sales to the Company's largest customer
were 20.0% and 16.8% of net sales in 1997 and 1996, respectively. No other
customer constituted 10% or more of net sales in 1997, 1996 or 1995.
(17) Disclosures About the Fair Value of Financial Instruments
The carrying amount of the Company's cash, accounts receivable, income taxes
receivable, accounts payable and accrued liabilities approximates fair value
due to the short maturity of these instruments. Consequently, such
instruments are not included in the table below which provides information
regarding the estimated fair values of other financial instruments, both on
and off balance sheet, as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C> <C>
Long-term debt $519,995 $522,970 $304,589 $303,441
Unrealized gain (loss) on
foreign currency contracts (3,437) 5,332 (1,998) (1,105)
=========================================================================================================================
</TABLE>
<PAGE> 25
The fair value of each long-term debt facility is based upon the amount of
future cash flows associated with each instrument discounted at the Company's
current borrowing rate for similar debt instruments of comparable terms.
The Company has entered into forward exchange contracts with Huls AG to
manage foreign currency exchange risk relating to current trade sales with
its foreign subsidiaries and current trade sales with its customers
denominated in foreign currencies (primarily Japanese yen and Deutsche
marks), and relating to foreign currency denominated intercompany loans. The
Company believes its hedging arrangements with Huls AG allow for transactions
on a basis that is comparable to terms available from unrelated third party
financial intermediaries.
At December 31, 1997, the Company had forward contracts outstanding with a
total contract value of $82,476. The fair value of the forward contracts was
a net gain to the Company of $5,332, as measured by the amount that would
have been paid to liquidate and repurchase all open forward contracts as of
December 31, 1997. Deferred losses totaled $3,437 and $1,998 at December 31,
1997 and 1996, respectively.
(18) Unaudited Quarterly Financial Information
<TABLE>
<CAPTION>
First Second Third Fourth
1997: Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except share data
<S> <C> <C> <C> <C>
Net sales $222,284 $245,780 $260,026 $258,583
Gross margin 28,069 30,832 36,170 29,688
Earnings (loss) before equity
in income (loss) of joint ventures
and minority interests (1,337) 4,315 (111) (15,966)
Equity in income (loss) of joint
ventures (1,773) (1,671) (6,033) 12,723
Minority interests 333 1,109 1,883 (219)
Net earnings (loss) (2,777) 3,753 (4,261) (3,462)
Basic earnings (loss) per share (0.07) 0.09 (0.10) (0.08)
Diluted earnings (loss) per share (0.07) 0.09 (0.10) (0.08)
Market price:
High 29 3/4 38 1/4 38 7/8 30
Low 22 1/4 22 7/8 25 5/8 14 7/16
1996:
- -----------------------------------------------------------------------------------------------------------------------
Net sales $289,811 $324,331 $303,525 $201,833
Gross margin 79,322 90,833 66,491 13,539
Earnings (loss) before equity in
income of joint ventures
and minority interests 32,230 36,242 19,423 (9,982)
Equity in income of joint ventures 8,911 11,134 1,460 3,379
Minority interests (1,515) (890) 270 894
Net earnings (loss) 39,626 46,486 21,153 (5,709)
Basic earnings (loss) per share 0.96 1.13 0.51 (0.14)
Diluted earnings (loss) per share 0.95 1.12 0.51 (0.14)
Market price:
High 37 1/4 55 40 5/8 28 1/2
Low 26 1/2 36 1/4 20 1/4 16 3/4
</TABLE>
The Company intends to retain all net earnings to fund the development of its
business, and does not anticipate paying dividends in the foreseeable future.
The declaration and payment of future dividends by the Company, if any, will
be at the sole discretion of the Board of Directors.
<PAGE> 26
(19) Geographic Segments
The Company is engaged in one line of business--the design, manufacture and
sale of electronic grade silicon wafers for the semiconductor industry.
Geographic financial information is as follows:
<TABLE>
<CAPTION>
United
States Europe Japan Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C> <C> <C>
Net sales to customers:
1997 $ 672,370 $210,225 $104,078 $ -- $ 986,673
1996 729,950 262,311 127,239 -- 1,119,500
1995 545,652 216,084 125,124 -- 886,860
====================================================================================================================
Transfers between geographic areas:
1997 $ 133,836 $ 64,208 $ 67,983 $ (266,027) $ --
1996 132,119 40,834 50,478 (223,431) --
1995 114,843 34,281 40,673 (189,797) --
=====================================================================================================================
Operating profit (loss):
1997 $ (63,751) $ 62,001 $ (8,663) $ -- $ (10,413)
1996 44,137 70,819 11,236 -- 126,192
1995 65,725 58,052 4,383 -- 128,160
=====================================================================================================================
Identifiable assets:
1997 $2,346,478 $227,194 $276,426 $(1,072,940) $1,177,158
1996 1,795,709 231,214 231,790 (745,856) 1,512,857
1995 1,250,692 221,939 205,366 (576,134) 1,101,863
=====================================================================================================================
</TABLE>
Net sales to customers are based upon the location of the Company's
subsidiary, not the location of the customer. Identifiable assets are the
Company's assets in the respective geographic area.
The United States segment had export sales to the Asia Pacific region
(including Japan) of $117,201, $161,918 and $139,627 for 1997, 1996 and 1995,
respectively.
The Company expects that international sales will continue to represent a
significant percentage of its total sales. In addition, a significant portion
of its manufacturing operations is located outside of the United States.
International sales and operations may be adversely affected by the
imposition of governmental controls, fluctuations in the local or U.S. dollar
currencies, export license requirements, restrictions on the export of
technology, political instability, trade restrictions, changes in tariffs and
difficulties in staffing and managing international operations.
<PAGE> 27
Independent Auditors' Report
The Board of Directors
MEMC Electronic Materials, Inc.:
We have audited the accompanying consolidated balance sheets of MEMC
Electronic Materials, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1997. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MEMC
Electronic Materials, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
St. Louis, Missouri
January 26, 1998
<PAGE> 28
To Our Stockholders:
Looking Ahead
As we look to 1998 and beyond, the Asian financial crisis has created
uncertainty about market conditions. Before the Asian situation emerged, the
consensus of semiconductor market analysts was that double-digit growth would
return to the industry in 1998. That kind of growth would have gone a long
way to offset continuing overcapacity and pricing pressures in the silicon
wafer industry. But given the uncertainty in Asia, analysts have tempered
their optimism.
In short, 1998 remains problematic for both the semiconductor and silicon
wafer industries. However, the broad consensus is that a strong cyclical
upturn will be delayed, not eliminated.
In the meantime, overcapacity and pricing pressure in the silicon wafer
industry have continued into 1998. We have responded by setting in motion
intensive cost reduction measures in manufacturing and overhead to protect
our margins to the extent possible. We are also scrutinizing capital
expenditures and research and development costs to make certain they are the
right investments, made at the right time. Put simply, we will not mortgage
our future for short-term results. But we also can and will take decisive
action to combat near-term pressures.
We look forward to reporting examples of operational improvements and cost
reductions that result from our transformation efforts in next year's annual
report.
In summary, the 1997 financial performance for MEMC was disappointing.
However, we have taken actions that will allow MEMC to emerge from these
problems stronger than before.
We have the advanced technology. We have the production capacity. We have a
strong global presence. We have a streamlined organization. And we have a
clear focus on customers.
We are ready to move MEMC to a new level of performance.
<PAGE> 29
STOCKHOLDER INFORMATION
Corporate Office
MEMC Electronic Materials, Inc.
501 Pearl Drive (City of O'Fallon)
St. Peters, Missouri 63376
(314) 279-5500
Transfer Agent and Registrar
Harris Trust & Savings Bank
111 West Monroe
P. O. Box 755
Chicago, Illinois 60690
(312) 461-6001
Annual Meeting
All stockholders are invited to attend the annual meeting of
MEMC Electronic Materials, Inc. at 10:00 a.m. central standard time on
Tuesday, May 5, 1998, at the Ritz-Carlton Hotel, 100 Carondelet Plaza,
Clayton, Missouri 63105. Holders of common stock of record at the close of
business on March 9, 1998, are entitled to vote at the meeting. A notice of
the meeting, proxy statement and proxy were sent to stockholders with this
Annual Report.
Stockholder Inquiries
Inquiries regarding address corrections, lost certificates, changes of
registration, stock certificate holdings and other stockholder account
matters should be directed to MEMC's transfer agent, Harris Trust & Savings
Bank, at the address or phone number above.
Common Stock Listing
MEMC's common stock is traded on the New York Stock Exchange under the symbol
"WFR". On December 31, 1997, the last business day of the year, the Company
had 781 stockholders of record.
Form 10-K
Stockholders may obtain a copy of MEMC's Annual Report on Form 10-K and
related financial statement schedule for the year ended December 31, 1997,
filed with the Securities and Exchange Commission, by writing MEMC's Investor
Relations Department or by calling (314) 279-5505.
Financial Information
MEMC maintains a home page on the Internet at http://www.memc.com where the
Company publishes information, including earnings releases, other news releases,
significant corporate disclosures and the names of securities analysts who
issue research on the Company.
<PAGE> 30
Independent Auditors
KPMG Peat Marwick LLP
10 South Broadway, Suite 900
St. Louis, Missouri 63102
Investor Relations
Stockholders, securities analysts, investment professionals and prospective
investors should direct their inquiries to:
MEMC Electronic Materials, Inc.
Investor Relations Department
501 Pearl Drive (City of O'Fallon)
St. Peters, Missouri 63376
Tel: (314) 279-5920
Fax: (314) 279-5158
E-mail: [email protected]
Manufacturing Facilities
Chonan, South Korea
Hsinchu, Taiwan
Kuala Lumpur, Malaysia
Luoyang, China
Merano, Italy
Novara, Italy
Pasadena, Texas
Sherman, Texas
Spartanburg, South Carolina
St. Peters, Missouri
Utsunomiya, Japan
Safe Harbor Statement
This Annual Report contains various forward-looking statements and includes
assumptions in the letter To Our Stockholders (pages 2-5), Business Overview
(pages 6-11) and Management's Discussion and Analysis (pages 13-17) including
those concerning MEMC's operations, future results, and trends in the silicon
wafer, semiconductor and polysilicon industries. These "forward-looking
statements," within the meaning of the Private Securities Litigation Reform
Act of 1995, are based on current expectations and are subject to risks and
uncertainties that could cause actual results to differ materially from those
set forth in or implied by the forward-looking statements and related
assumptions. Factors that may cause such differences include, but are not
limited to, those potential risks and uncertainties described in Risk Factors
(pages 17-20) and in the Company's filings with the Securities and Exchange
Commission, including its Form 10-K for the year ended December 31, 1997.
<PAGE> 1
Exhibit 21
List of Subsidiaries
Subsidiary Jurisdiction of Incorporation
- ---------- -----------------------------
MEMC Japan, Ltd. Japan
MEMC Electronic Materials, S.p.A. Italy
MEMC Electronic Materials, SDN BHD Malaysia
MEMC Electronic Materials Sales, SDN BHD Malaysia
MEMC Kulim Electronic Materials, SDN BHD Malaysia
MEMC Huls Korea Company South Korea
<F*>POSCO HULS Co., Ltd. South Korea
<F*>Taisil Electronic Materials Corporation Taiwan
SiBond, L.L.C. Delaware
MEMC-CSMC Electronic Materials, Ltd. China (PRC)
MEMC Southwest Inc. Delaware
MEMC Pasadena, Inc. Delaware
MEMC Foreign Sales Corp., Inc. Barbados
MEMC International, Inc. Delaware
PlasmaSil, L.L.C. Delaware
[FN]
- ---------------
<F*>The inclusion of these entities on this Exhibit 21 does not constitute an
admission by the Company that the Company "controls" these entities for purposes
of the Federal Securities laws.
<PAGE> 1
Exhibit 23-a
Independent Auditors' Consent
The Board of Directors
MEMC Electronic Materials, Inc.:
We consent to incorporation by reference in the registration statement (Nos.
33-96420 and 333-19159) on Form S-8 of MEMC Electronic Materials, Inc. of our
reports dated January 26, 1998, relating to the consolidated balance sheets of
MEMC Electronic Materials, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997, and related schedule, which reports appear in or are
incorporated therein in the December 31, 1997, annual report on Form 10-K of
MEMC Electronic Materials, Inc.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
March 23, 1998
<PAGE> 1
Exhibit 23-b
Independent Auditors' Consent
To the Stockholders and Board of Directors
POSCO HULS Co., Ltd.
We consent to incorporation by reference in the registration statement (Nos.
33-96420 and 333-19159) on Form S-8 of MEMC Electronic Materials, Inc. of our
report dated January 10, 1998, relating to the balance sheets of POSCO HULS Co.,
Ltd. as of December 31, 1997 and 1996, and the statements of earnings,
appropriation (disposition) of retained earnings (deficit) and cash flows for
the years ended December 31, 1997 and 1996, which report appears in the December
31, 1997 annual report on Form 10-K of MEMC Electronic Materials, Inc.
/s/ KPMG San Tong Corp.
Seoul, Korea
March 23, 1998
<PAGE> 1
Exhibit 23-c
Independent Auditors' Consent
The Board of Directors
Taisil Electronic Materials Corporation
We consent to incorporation by reference in the registration statement (Nos.
33-96420 and 333-19159) on Form S-8 of MEMC Electronic Materials, Inc. of our
report dated January 14, 1998, relating to the balance sheet of Taisil
Electronic Materials Corporation as of December 31, 1997, and the statements of
operations, changes in stockholders' equity and cash flows for the year ended
December 31, 1997, which report appears in the December 31, 1997 annual report
on Form 10-K of MEMC Electronic Materials, Inc.
/s/ KPMG Peat Marwick
Taipei, Taiwan
March 23, 1998
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Dr. Erhard Meyer-Galow, Director of MEMC Electronic Materials,
Inc. (the "Company"), a Delaware corporation, hereby constitute and appoint
James M. Stolze, Helene F. Hennelly, and Ludger H. Viefhues, or any of them,
severally, my true and lawful attorney or attorneys and agent or agents with
full power of substitution and resubstitution to sign in my name, place and
stead the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, and documents and exhibits in connection therewith, and to
file the same with the Securities and Exchange Commission, each of said
attorneys to have power to act with or without the other, and to have full power
and authority to do and perform, in my name and on my behalf and on the name and
behalf of the Company every act whatsoever which said attorneys, or any of them,
may deem necessary, appropriate or desirable to be done in connection therewith
as fully and to all intents and purposes as I might or could do in person or the
Company might or could do by a properly authorized agent.
Witness my hand this 20th day of March, 1998.
/s/ Erhard Meyer-Galow
------------------------------------
Dr. Erhard Meyer-Galow
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Willem D. Maris, Director of MEMC Electronic Materials, Inc.
(the "Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze, Helene F. Hennelly, and Ludger H. Viefhues, or any of them, severally,
my true and lawful attorney or attorneys and agent or agents with full power of
substitution and resubstitution to sign in my name, place and stead the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, and documents and exhibits in connection therewith, and to file the same
with the Securities and Exchange Commission, each of said attorneys to have
power to act with or without the other, and to have full power and authority to
do and perform, in my name and on my behalf and on the name and behalf of the
Company every act whatsoever which said attorneys, or any of them, may deem
necessary, appropriate or desirable to be done in connection therewith as fully
and to all intents and purposes as I might or could do in person or the Company
might or could do by a properly authorized agent.
Witness my hand this 20th day of March, 1998.
/s/ Willem D. Maris
------------------------------------
Willem D. Maris
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Dr. Alfred Oberholz, Director of MEMC Electronic Materials,
Inc. (the "Company"), a Delaware corporation, hereby constitute and appoint
James M. Stolze, Helene F. Hennelly, and Ludger H. Viefhues, or any of them,
severally, my true and lawful attorney or attorneys and agent or agents with
full power of substitution and resubstitution to sign in my name, place and
stead the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, and documents and exhibits in connection therewith, and to
file the same with the Securities and Exchange Commission, each of said
attorneys to have power to act with or without the other, and to have full power
and authority to do and perform, in my name and on my behalf and on the name and
behalf of the Company every act whatsoever which said attorneys, or any of them,
may deem necessary, appropriate or desirable to be done in connection therewith
as fully and to all intents and purposes as I might or could do in person or the
Company might or could do by a properly authorized agent.
Witness my hand this 20th day of March, 1998.
/s/ Alfred Oberholz
------------------------------------
Dr. Alfred Oberholz
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Paul T. O'Brien, Director of MEMC Electronic Materials, Inc.
(the "Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze, Helene F. Hennelly, and Ludger H. Viefhues, or any of them, severally,
my true and lawful attorney or attorneys and agent or agents with full power of
substitution and resubstitution to sign in my name, place and stead the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, and documents and exhibits in connection therewith, and to file the same
with the Securities and Exchange Commission, each of said attorneys to have
power to act with or without the other, and to have full power and authority to
do and perform, in my name and on my behalf and on the name and behalf of the
Company every act whatsoever which said attorneys, or any of them, may deem
necessary, appropriate or desirable to be done in connection therewith as fully
and to all intents and purposes as I might or could do in person or the Company
might or could do by a properly authorized agent.
Witness my hand this 20th day of March, 1998.
/s/ Paul T. O'Brien
------------------------------------
Paul T. O'Brien
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Michael B. Smith, Director of MEMC Electronic Materials, Inc.
(the "Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze, Helene F. Hennelly, and Ludger H. Viefhues, or any of them, severally,
my true and lawful attorney or attorneys and agent or agents with full power of
substitution and resubstitution to sign in my name, place and stead the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, and documents and exhibits in connection therewith, and to file the same
with the Securities and Exchange Commission, each of said attorneys to have
power to act with or without the other, and to have full power and authority to
do and perform, in my name and on my behalf and on the name and behalf of the
Company every act whatsoever which said attorneys, or any of them, may deem
necessary, appropriate or desirable to be done in connection therewith as fully
and to all intents and purposes as I might or could do in person or the Company
might or could do by a properly authorized agent.
Witness my hand this 20th day of March, 1998.
/s/ Michael B. Smith
------------------------------------
Michael B. Smith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of December 31, 1997 and the consolidated
statement of operations for the year ended December 31, 1997, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 30,053
<SECURITIES> 0
<RECEIVABLES> 158,175
<ALLOWANCES> 3,473
<INVENTORY> 141,447
<CURRENT-ASSETS> 376,975
<PP&E> 1,666,211
<DEPRECIATION> 465,384
<TOTAL-ASSETS> 1,777,158
<CURRENT-LIABILITIES> 338,526
<BONDS> 510,038
0
0
<COMMON> 414
<OTHER-SE> 698,074
<TOTAL-LIABILITY-AND-EQUITY> 1,777,158
<SALES> 986,673
<TOTAL-REVENUES> 986,673
<CGS> 861,914
<TOTAL-COSTS> 861,914
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,700
<INTEREST-EXPENSE> 14,743
<INCOME-PRETAX> (10,330)
<INCOME-TAX> 2,769
<INCOME-CONTINUING> (6,747)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,747)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
