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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-13828
MEMC ELECTRONIC MATERIALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 56-1505767
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
501 PEARL DRIVE (CITY OF O'FALLON), 63376
ST. PETERS, MISSOURI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 279-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
-------------------- ------------------------------------------
<S> <C>
$.01 PAR VALUE COMMON STOCK NEW YORK STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(TITLE OF CLASS)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 23, 1999, as
reported by the New York Stock Exchange, was approximately $125.4 million.
The number of shares outstanding of the registrant's Common Stock as of
March 23, 1999, was 55,906,346 shares.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1998 (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 April 2, 1999 (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. The silicon wafer is the fundamental
building block from which almost all semiconductors are manufactured.
Semiconductors are used in virtually all electronic applications, including
computers, telecommunications equipment, automobiles, consumer electronics
products, industrial automation and control systems, and analytical and defense
systems. We operate manufacturing facilities, directly or through joint
ventures, in Italy, Japan, Malaysia, South Korea, Taiwan, and the United States.
We sell silicon wafers to most of the world's largest manufacturers of
semiconductors. We are the leading worldwide supplier of silicon wafers outside
of Japan and the only significant 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 United States and Italian silicon wafer
business to form the current MEMC. VEBA Corporation, a subsidiary of VEBA AG,
acquired all of the outstanding common stock of MEMC from Huls AG in 1990, which
it subsequently transferred to its wholly-owned subsidiary, Huls Corporation, in
1993. On July 12, 1995, the Company completed its initial public stock offering.
As a result of the public stock offering, Huls Corporation's ownership interest
in the Company was reduced to 51.9%. On September 30, 1998, Huls Corporation
merged into VEBA Corporation.
On October 22, 1998, we filed a registration statement with the Securities
and Exchange Commission (the "SEC") for the sale of our common stock in a rights
offering to existing stockholders except VEBA AG and its affiliates (the
"Offering"). We expect to sell approximately 13,628,446 shares in the Offering.
On March 22, 1999, we sold 15,399,130 shares of common stock to VEBA Zweite
Verwaltungsgesellschaft mbH ("VEBA Zweite"), a subsidiary of VEBA AG, in a
private placement. VEBA Zweite has also agreed to purchase all shares of common
stock issuable upon exercise of the rights that are not subscribed for by other
stockholders in the Offering, subject to certain conditions that are customary
in a firm commitment underwriting.
We are engaged in one reportable industry segment -- the design,
manufacture and sale of electronic grade silicon wafers for the semiconductor
industry. Financial information regarding this industry segment is contained in
our 1998 Annual Report which information is incorporated herein by reference.
INDUSTRY OVERVIEW
Almost all semiconductors are manufactured from silicon wafers, and thus
the strength of the silicon wafer industry is highly correlated to the
performance of the semiconductor industry. Although there are over two hundred
semiconductor manufacturers worldwide, we believe that the top twenty
semiconductor manufacturers accounted for over 70% of all semiconductor revenues
in 1998. We also believe that of the approximately 18 silicon wafer
manufacturers in the world today, six principal manufacturers, including MEMC,
supply a substantial majority of the wafers used by the major semiconductor
manufacturers.
Semiconductor Industry
The semiconductor industry historically has been a high growth cyclical
industry. Worldwide, the industry grew at a compound annual growth rate of 14.1%
from $24.3 billion in revenues in 1985 to $134.8 billion in revenues in 1998,
according to Dataquest estimates. Continuous improvements in semiconductor
process and design technologies, semiconductor fabrication equipment and the
composition of silicon wafers
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have allowed semiconductor manufacturers to produce more complex, higher
performance and more reliable devices at a lower cost per device. The result has
been a large proliferation of uses for semiconductors and historically rapid
growth in semiconductor revenue.
Despite the semiconductor industry's history of significant growth,
semiconductor revenues grew by only 3.6% in 1997 and declined by 8.4% in 1998,
according to Dataquest estimates. This slowdown has been attributed to excess
capacity and resultant price erosion, especially for DRAM (commonly used
computer memory chips). This downturn extended through 1998 due to continued
overcapacity and the weak economic conditions in the Asia Pacific and Japanese
markets.
Throughout this downturn, semiconductor manufacturers have been exerting
significant price pressure on their raw material suppliers, including silicon
wafer manufacturers. Semiconductor manufacturers have also accelerated the speed
at which they have reduced their device line widths, or the distance between
circuit elements, in an effort to reduce costs. The reduction in line widths
results in a requirement of less silicon per device. Additionally, the
semiconductor industry has recently experienced significant restructuring and
consolidation activities.
Semiconductor manufacturers greatly reduced their capital spending
beginning in late 1997 and throughout 1998. This reduced capital spending has
limited additions to capacity.
Silicon Wafer Industry
The silicon wafer industry historically has been a high growth cyclical
industry correlated to the growth of the semiconductor industry. Worldwide, the
industry grew at a compound annual growth rate of 9.2% from 1.2 billion square
inches in 1985 to 3.7 billion square inches in 1998, according to Dataquest
estimates. From 1993 through the first half of 1996 the industry was
characterized by excess demand and wafer shortages. Due to these shortages and
anticipated future demand, wafer manufacturers quickly added capacity,
especially for 8-inch wafers, the predominant wafer used in the industry today
and the wafer diameter anticipated to have the most significant growth in demand
over the next several years. This growth rate declined significantly in 1996.
The silicon wafer industry slowdown, which began in the summer of 1996, has
left the industry in a state of overcapacity. Price declines have resulted from
this overcapacity. Moreover, the weakness of the Japanese yen and Deutsche mark
have allowed Japanese and German competitors to offer lower dollar based
pricing. The price declines have been greatest for 8-inch wafers where the
highest overcapacity exists. According to Dataquest, silicon wafer consumption
declined by an estimated 7.6% in 1998.
Major silicon wafer manufacturers, including MEMC, invested in 12-inch
wafer manufacturing capacity in anticipation that the semiconductor industry
would migrate to this larger diameter wafer. However, in 1998, the industry
experienced a softening semiconductor market and successful implementation of
thinner device linewidths on the current diameters. This resulted in industry
recognition that the transition to 12-inch wafers would be delayed. The new
transition timing requires 12-inch wafer characteristics to be even more
advanced at the time they are introduced for production of integrated circuits.
The leading semiconductor manufacturers organized and funded two industry
consortia, International Sematech in Austin, Texas, and SELETE in Japan, for the
purpose of evaluating 12-inch equipment and materials. While the primary use of
12-inch wafers in 1999 will continue to be for semiconductor device process and
tool development, MEMC expects to also ship samples of 12-inch prime polished
and epitaxial wafers.
PRODUCTS
Our silicon wafers vary in diameter, surface features (polished or
epitaxial), composition, electrical properties and method of manufacture. Our
silicon wafers are manufactured according to the exacting specifications
required by the our customers; we currently produce wafers with a variety of
product features satisfying more than 1,000 unique product specifications.
Semiconductor manufacturers require wafers of
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larger diameter and more stringent technical specifications in order to produce
increasingly complex semiconductor devices such as the larger megabit memory
chips and microprocessors.
Our customers have increased their focus on efficient semiconductor
production processes because their manufacturing processes for semiconductor
devices have become more expensive. Our customers make many semiconductor
devices, or chips, from the same wafer, and all chips from a particular wafer
are manufactured and processed simultaneously at each stage in the device
manufacturing process. Because of this, larger-sized wafers allow for a greater
throughput 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 6-inch (150 millimeter) wafer
has a surface area of approximately 27.4 square inches, whereas an 8-inch (200
millimeter) wafer has a surface area of approximately 48.7 square inches. Thus,
the 8-inch wafer has approximately 78% more surface area than the 6-inch wafer.
A 12-inch (300 millimeter) wafer has a surface area of approximately 109.6
square inches or approximately 125% more surface area than an 8-inch wafer.
Despite the industry's focus on 6-inch and larger diameter wafers, we continue
to manufacture and sell a significant amount of 4-inch (100 millimeter) and
5-inch (125 millimeter) wafers.
We manufacture wafers in sizes ranging from 4 inches to 8 inches in
diameter as well as a limited number of 12-inch diameter wafers from our pilot
development lines. Customers use the larger diameter wafers in more
sophisticated applications where semiconductor manufacturers benefit from the
increased efficiencies and greater number of available die per wafer.
Our silicon wafers fall into one of three general types:
Prime Polished Wafers
Our principal product is the prime polished wafer, which is a highly
refined, pure silicon wafer with an ultraflat and ultraclean surface. We put
prime polished wafers through a sophisticated chemical-mechanical polishing
process that removes defects and leaves an extremely smooth surface. This makes
the wafers suitable for the advanced technologies used by our customers. Our
customers use prime polished wafers in a broad range of applications for
integrated circuit devices.
Epitaxial Wafers
Customers have forced semiconductor manufacturers to use smaller and
smaller device features in order to incorporate more complex functionality in
the integrated circuit. Smaller devices also improve performance and control
power consumption and heat production. We manufacture epitaxial wafers to serve
the technological demands of our customers that manufacture advanced
semiconductors.
Epitaxial wafers consist of a thin, single-crystal silicon layer grown on
the polished surface of the silicon wafer. The wafer is designed to have
different composition and electrical properties from the epitaxial layer on the
wafer surface. The wafer, among other things, helps to improve isolation between
circuit elements our customers fabricate on the silicon film surface of the
wafer. One result of such smaller devices is the requirement that the distance
between circuit elements becomes increasingly narrow. The industry refers to the
distance between circuit elements as line widths. 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 ruin the device. Epitaxial wafers
provide improved isolation and allow 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
We supply test/monitor wafers, or monitor wafers, to our 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. This
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allows us to produce monitor wafers from the portion of a silicon ingot that
does not meet customer specifications for wafers to be used in the manufacture
of semiconductors. Therefore, sales of monitor wafers allow us to experience a
higher yield from each silicon ingot produced.
RAW MATERIALS
The main raw material in our production process is polysilicon. We produce
over one-half of our total polysilicon requirements and purchase the remainder
of our requirements from others. The availability of polysilicon currently
significantly exceeds demand. We believe that an adequate supply of polysilicon
will be available internally or from others for the foreseeable future.
We obtain substantially all of our requirements for several raw materials,
equipment, parts and supplies from sole suppliers. Although we believe that we
could find adequate alternative sources of supply for these raw materials,
equipment, parts and supplies, we may be required to obtain new qualifications
from our customers in order to change or substitute suppliers. Because we cannot
predict whether we would be successful or how long that process would take, our
manufacturing yields could be adversely affected while we transition to a new
supplier.
We believe that adequate quantities of all our key raw materials,
equipment, parts and supplies are currently available. However, because of the
cyclical nature of our industry, we may experience shortages in the future. See
"Business -- Risk Factors -- We Depend on Certain Suppliers and Finding
Alternative Sources of Supply Could Affect Adversely Our Customer Qualifications
and Manufacturing Yields."
MANUFACTURING PROCESS
Silicon wafers for the semiconductor industry are extremely complex
materials with characteristics such as high purity levels, highly uniform
crystal structure, 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 highly uniform crystal
structure, 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 we conduct certain processes in "clean rooms."
The silicon wafer manufacturing process consists 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 begins with the melting of
polysilicon, together with minute amounts of electrically active elements such
as arsenic, boron, phosphorous or antimony in a quartz crucible.
Once the melt has reached the desired temperature, we lower a silicon seed
crystal, or "seed" 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
concentration of an electrically active element 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.
Wafer Slicing Process
After we grow the ingots, we extract them from the crystal pulling furnaces
and allow them to cool. We grind the ingots to the specified diameter, and then
we slice the ingots into thin wafers. Next, we prepare the wafers for the
surface polishing steps with a multi-step process using precision lapping
machines, edge contour machines and chemical etchers.
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Wafer Finishing Process
Final polishing and cleaning processes give the wafers the clean and
superflat mirror polished surfaces required for the fabrication of semiconductor
devices. For wafer polishing, we currently use our proprietary, ninth-generation
polishers together with an innovative chemical-mechanical polishing process.
This form of polishing was one of our early inventions that first allowed solid
state devices to move from individual circuits to the complexities of today's
integrated circuits. We further process some of our products into epitaxial
wafers.
RESEARCH AND DEVELOPMENT
A number of factors drive our current research and development efforts.
These include our business strategy and focus mainly on:
- the development and improvement of large diameter and advanced silicon
wafer products;
- manufacturing process improvements; and
- enhancement and cost reduction of existing products.
Customer focus also influences research and development. We work closely
with customers in developing new products and refining existing products to
faster meet the needs of the marketplace. To strengthen this relationship and
interaction, we assign research and development application engineers to key
customer accounts worldwide.
A recent product innovation of our research and development program
includes a new class of polished wafer with a virtually defect-free wafer
surface. We are currently delivering 6-inch and 8-inch diameters of this class
of polished wafer to customers for evaluation in increasing their yields. We
also engage in ongoing research and development to continuously improve the
surface of epitaxial wafers. Further, as a result of our commitment to develop
the next diameter of silicon wafers, we are now supplying high quality 12-inch
wafers to the industry from pilot development lines. We first produced our
12-inch diameter wafers in 1991 and believe we are one of the industry leaders
in the development of this next generation of wafers. Our new class of polished
wafer and 12-inch wafers are in the pilot stage of development, and we cannot
assure you that either will ever mature to a commercial product.
We continue to see rapid technological change and product innovation in the
market for silicon wafer products. In response to this business environment, we
recently commissioned a "Wafering Center of Excellence" to direct our wafering
process research and development. The Wafering Center of Excellence is located
at our plant in Utsunomiya, Japan and has the capacity to produce 12-inch
wafers.
We do not expect the demand for 12-inch wafers to develop until the year
2001 or beyond. In the interim, we expect semiconductor customers to continue
their support of two industry consortia to develop the tool set and processes
necessary to fabricate integrated circuits on 12-inch wafers.
Our expenditures for research and development activities during 1998, 1997
and 1996, excluding expenditures by our unconsolidated joint ventures, were
$81.6 million, $64.5 million and $44.3 million, respectively, representing
10.8%, 6.5% and 4.0% of our net sales for the respective periods.
MARKETING AND SALES
We market most of our products through a direct sales force. We believe a
key element of our marketing strategy is establishing and maintaining close
relationships with our customers. We try to accomplish this through
multi-functional teams of technical, marketing and sales, and manufacturing
personnel. These teams work closely with customers in developing their new
production facilities, qualifying our products for use at such new facilities
and maintaining qualification at all existing manufacturing facilities. We
complete sales principally through indicative-only contracts of one year or less
that indicate expected volumes and specify price.
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Our close relationships with our customers are partly the result of the
lengthy and expensive "qualification" process by which customers qualify silicon
wafer manufacturers, and their individual facilities, to supply a particular
product. We are aware of changing customer needs and target our manufacturing to
try to produce wafers adapted to each customer's process and requirements. For
1998, the following ten customers generated over half of our sales:
- 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.;
- ST Microelectronics N.V.; and
- Texas Instruments Incorporated.
Texas Instruments alone represented approximately 20%, 20% and 17% of our sales
in 1998, 1997 and 1996, respectively.
COST REDUCTION PLAN
During the first half of 1998 we accelerated our cost reduction plan in
response to the difficult industry environment.
We decided to close our small-diameter wafer facility in Spartanburg, South
Carolina and to withdraw from our joint venture participation in a
small-diameter wafer facility in China. We are negotiating the terms of our
withdrawal with our joint venture partner. We took these actions because:
- our customers have been operating their 8-inch fabrication lines in
preference to their smaller diameter fabrication lines, reducing the
demand for smaller diameter wafers;
- a number of our customers recently have undertaken restructuring
initiatives focused on permanently eliminating small diameter lines; and
- we believe that even when the semiconductor market begins to recover, we
will have excess small diameter wafer capacity.
We also decided not to construct a new 8-inch wafer facility in Malaysia
due to the substantial excess capacity for these wafers.
In addition, we implemented a voluntary separation program for our hourly
and salaried U.S. employees. As a result of the actions described above and
other initiatives, we are reducing our workforce by approximately 2,000
employees, or 25% compared to December 31, 1997.
We estimated pre-tax savings from our restructuring activities and our
voluntary separation program to be $60 million on an annualized basis. We began
to realize approximately $30 million of these estimated savings in the third
quarter of 1998 through reduced personnel costs as a result of the voluntary
separation program.
We expect the other $30 million in annualized savings to come from the
closure of our Spartanburg facility. We expect approximately half of the savings
from the Spartanburg facility's closure to relate to personnel costs, and the
other half of these savings to relate to manufacturing costs such as
depreciation and supplies and utilities. As we re-qualify and transfer the
production of silicon wafers made at the Spartanburg facility to other
locations, we expect to reduce our Spartanburg workforce. With each workforce
reduction, we
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expect a portion of our annualized cost savings associated with personnel costs
to be realized. As a result, we began to realize a portion of the remaining $30
million in annualized cost savings in the third quarter of 1998. As the
manufacturing cost savings are fixed in nature, we expect they will largely be
realized upon the closure of the Spartanburg facility.
The time frame for achieving the $30 million in annualized cost savings
from the closing of the Spartanburg facility is largely dependent upon how long
it takes us to re-qualify the silicon wafers produced at the Spartanburg
facility at our other locations. This, in turn, determines how quickly
Spartanburg's workforce will be reduced. While we believe that this will occur
during the second quarter of 1999, the ability to re-qualify silicon wafers is
highly dependent upon the cooperation of our customers.
We are also implementing a number of other cost cutting and savings
initiatives:
- We have initiated short-term plant shutdowns to better align production
with the current lower level of demand;
- We are accelerating the implementation of our "best practices" worldwide
and the development of new manufacturing technologies in order to reduce
our processing costs;
- We are implementing a plant focus program that limits the number of wafer
diameters manufactured at each site;
- We have implemented aggressive spending cuts for all of our departments;
- We are obtaining price concessions from our vendors; and
- We are performing a critical review of our capital spending and research
and development requirements and reducing these planned investments where
possible.
We anticipate that we will reduce our capital expenditures in 1999 to less
than $85 million.
The statements above regarding expected future savings and cost reduction
efforts are forward-looking statements. Actual results could differ materially
from our expectations due to, among other things, the factors set forth above
and the accuracy of assumptions regarding savings from restructuring activities.
See "Cautionary Statement Regarding Forward-Looking Statements" and "Risk
Factors."
COMPETITION
We face intense competition in the silicon wafer industry from established
manufacturers throughout the world. We believe that we possess certain
technological and other strengths relative to our competitors. However,
realizing and maintaining such strengths requires us to continue making a high
level of investment in research and development, marketing and customer service
and support. Our inability to maintain such investments could have a material
adverse effect on our operating results. For other risks related to competition,
see "Business -- Risk Factors -- We Experience Intense Competition in the
Silicon Wafer Industry and Our Customers Expect Continuing Technological
Innovation at a Low Cost" and "Business -- Risk Factors -- Currency Exchange
Rates and Increased Competition Have Reduced Wafer Prices and Have Led to Lower
Margins and Profits."
JOINT VENTURES
We have entered into a number of joint ventures as part of our strategy to
leverage our capital, to enter expanding markets, to forge closer working
relationships with our principal customers and to broaden the geographic
diversification of our operations. We have unconsolidated joint ventures with
prominent partners in South Korea and Taiwan.
POSCO HULS Co., Ltd.
In 1990, we entered into a joint venture in South Korea with Samsung
Electronic Co., Ltd. and Pohang Iron and Steel. Samsung is a South Korean
manufacturer of integrated circuits and one of our largest
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customers. Pohang is a South Korean steel manufacturer. The South Korea joint
venture is named POSCO HULS Co., Ltd. (commonly known as PHC) and manufactures
and sells silicon wafers in South Korea. PHC generated sales of $121.0 million
in 1998, $215.9 million in 1997 and $275.1 million in 1996. Over half of PHC's
sales in each of these years were to Samsung. PHC has the capacity to produce
per month an aggregate of approximately 320,000 6-inch and 8-inch wafers. We
currently own 40% of PHC. Pohang currently owns 40% and Samsung currently owns
20%.
We have agreed to provide technical assistance and information to PHC. We
have also granted licenses to PHC to use certain technology to manufacture,
promote and sell silicon wafers. In exchange for such technical assistance and
licenses, we receive royalties. Through September 30, 1998, we received
quarterly royalties based on PHC's net sales. Effective October 1, 1998, the
agreement by which we provide technical assistance and information and have
granted licenses to PHC was amended. The amendment, among other things, extends
the term of the technical agreement. Under the amendment, we receive quarterly
royalties based on net sales and an annual royalty based on net income after
taxes. The quarterly royalties and the annual royalty we receive from PHC are
separate and independent calculations. Accordingly, if PHC has a net loss for
the fiscal year, then we will not receive an annual royalty based on net income
after taxes, but we will receive and retain the full amount of the quarterly
royalties based on net sales.
Taisil Electronic Materials Corporation
In 1994, we formed Taisil Electronic Materials Corporation with China Steel
Corporation. China Steel Corporation is a Taiwanese steel manufacturer. Taisil
manufactures and sells silicon wafers in Taiwan. Taisil generated sales of $58.7
million in 1998, $61.6 million in 1997 and $7.2 million in 1996. Taisil has the
capacity to produce approximately 140,000 8-inch wafers per month. Taisil has in
place infrastructure that could support the production of approximately 240,000
8-inch wafers per month. We currently own 45% of Taisil. The remainder of Taisil
is owned by China Steel Corporation (35%), Chao Tung Bank (10%) and the China
Development Corporation (10%).
We have agreed to provide technical assistance and information to Taisil.
We have also granted licenses to Taisil to use certain technology to manufacture
and sell silicon wafers. In exchange for such technical assistance and licenses,
we receive semiannual royalties based on Taisil's net sales and operating
income.
Taisil's financial performance has been adversely affected in recent
periods due to the downturn in the semiconductor industry in Taiwan. As a result
of this downturn, Taisil has incurred losses, which have negatively impacted its
debt-to-equity ratio. The increase in the debt-to-equity ratio and the downturn
in the semiconductor industry in Taiwan have raised concerns with Taisil's
lenders. In recent months, several financial institutions have indicated that
they would no longer purchase Taisil's commercial paper. Thus, Taisil was forced
to use alternative financing. In addition, we believe that several lenders have
placed Taisil on their credit watch lists. Certain of these lenders have also
made inquiries to MEMC and VEBA AG regarding our continued financial support to
Taisil. We have also been informed by one member of a three bank syndicate of
lenders to Taisil, that another bank in the syndicate expressed a preliminary
concern that a material adverse change in the financial condition of Taisil
might have occurred and, without additional equity contributions, an event of
default should be declared. Action by such bank syndicate, however, required the
agreement of two of the three banks, and we have been informed by the two other
banks that they did not believe a material adverse change in the financial
condition of Taisil had occurred.
In order to improve Taisil's debt-to-equity ratio, certain of Taisil's
shareholders made capital contributions to Taisil of approximately $20.7 million
in November 1998 and $10.0 million in December 1998. Our share of these capital
contributions was approximately $10.3 million and $5.1 million, respectively. We
and certain of Taisil's other shareholders made an additional capital
contribution to Taisil of approximately $24 million in March 1999. Our share of
this capital contribution was approximately $12 million. Taisil also is in the
process of raising up to approximately $6 million of additional capital through
sale of stock to Taisil's employees and possibly to other investors. We believe
that these capital contributions will satisfy the concerns of Taisil's current
lenders, including the bank syndicate member that had previously expressed
concern about potential material adverse changes in the condition of Taisil.
However, if Taisil's financial performance
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continues to be adversely affected by the downturn in the semiconductor industry
in Taiwan, we and Taisil's other shareholders may have to consider additional
financing alternatives for Taisil.
Statements above as to future capital contributions to Taisil and the
response to such capital contributions by Taisil's lenders are forward looking
statements. Such future capital contributions and response from Taisil's lenders
may not occur due to a variety of factors, including inability of Taisil's
shareholders to agree on the magnitude, apportionment or other terms of such
capital contributions, changes or perceived changes in Taisil's prospects,
regulatory requirements and the willingness of Taisil employees to make an
equity investment in Taisil.
For other information regarding Taisil, see "Business -- Risk Factors -- We
May Have to Make Substantial Payments in Connection With Our Taisil Joint
Venture, and This Could Divert Funds From Other Needed Areas."
OPTION ON PASADENA FACILITY
In September 1998, we granted Tokuyama Corporation, Marubeni Corporation
and Marubeni America Corporation an option to acquire a majority interest in
MEMC Pasadena, Inc. Tokuyama is a Japanese polysilicon manufacturer and Marubeni
is a Japanese trading company. MEMC Pasadena is our granular polysilicon
subsidiary. In exchange for the option, Tokuyama and Marubeni made an option
payment to us. The term of the option is two years, subject to a one year
extension at the option of Tokuyama and Marubeni. If Tokuyama and Marubeni
exercise their option, we will then negotiate the terms and conditions
(including price) of the exercise with them based on the market value at that
time. The entire option payment will be applied toward the ultimate purchase
price. If Tokuyama and Marubeni do not exercise their option, then we will
return one-half of the option payment to them. During the term of the option,
Tokuyama and Marubeni have a right of first refusal over any transfer of MEMC
Pasadena's granular polysilicon business. In addition, for two years, we cannot
solicit offers from third parties for this business. In connection with the
option, Tokuyama will provide technical assistance to MEMC Pasadena for two
years (unless the option is earlier terminated by Tokuyama and Marubeni) to help
improve the quality of MEMC Pasadena's granular polysilicon products.
PROPRIETARY INFORMATION AND INTELLECTUAL PROPERTY
As of November 30, 1998, we owned of record or beneficially approximately
112 U.S. patents, of which approximately 14 will expire by 2003, approximately
22 will expire between 2004 and 2008 and approximately 76 will expire after
2008. As of November 30, 1998, we owned of record or beneficially approximately
174 foreign patents, of which approximately 34 will expire by 2003,
approximately 79 will expire between 2004 and 2008 and approximately 61 will
expire after 2008. These foreign patents are generally counterparts of our U.S.
patents. We cannot assure you, however, that any of these patents will not be
challenged, invalidated or circumvented in the future, or that they do or will
provide a competitive advantage. As of that date, we have also submitted
approximately 96 U.S. and 440 foreign patent applications. However, we cannot
assure you that any of these applications will be granted.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use our products or technology that
we consider proprietary, and third parties may attempt to develop similar
technology independently. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain countries. Accordingly,
there can be no assurance that our means of protecting our proprietary rights
will be adequate or that our competitors will not independently develop similar
technology.
Under certain contracts, we are required to indemnify some third parties
against claims of infringement of the intellectual property rights of others.
Any litigation in the future to enforce patents issued to us, to protect
trade secrets or know-how possessed by us or to defend us or indemnify others
against claimed infringement of the rights of others could have a material
adverse effect on our financial condition and operating results. Also,
regardless of the validity or
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successful outcome of such claims, we may need to expend significant time and
expense to protect our intellectual property rights or to defend against claims
of infringement by third parties, which could have a material adverse effect on
us. If we lose any such litigation, the Company may be required to:
- pay substantial damages;
- seek licenses from others; or
- change, or stop manufacturing or selling, some of our products.
Any of these outcomes could have a material adverse effect on our business,
results of operations or financial condition.
EMPLOYEES
At January 31, 1999, we had approximately 6,000 full-time employees and 100
temporary workers worldwide. We intend to close our Spartanburg, South Carolina
facility in the first half of 1999 and withdraw from our joint venture in
Luoyang, China during the second quarter of 1999. As of January 31, 1999,
approximately 530 full-time employees worked at our Spartanburg, South Carolina
facility and joint venture in Luoyang, China.
We have not experienced any material work stoppages at any of our
facilities during the last several years. We believe our relationships with
employees are satisfactory.
GEOGRAPHIC INFORMATION
Information regarding our foreign and domestic operations is contained in
Note 17 on page 42 of our 1998 Annual Report, which information is incorporated
herein by reference.
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 set forth under "Item 1. Business"; "Item 2. Properties"; and "Item 3.
Legal Proceedings." 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 us.
We Have Had Significant Operating and Net Losses and We Anticipate Future
Losses
We have not reported an operating profit since the third quarter of 1997.
We reported an operating loss in 1997 of $10.4 million. In 1998, we had an
operating loss of $333.3 million, which included restructuring costs of $146.3
million. Due to overcapacity and decreasing prices in the semiconductor and
silicon wafer industries, weak economic conditions in the Asia Pacific region
and Japan, and other factors, we do not expect to be profitable at least through
1999. We cannot predict how long we will continue to experience significant or
increasing operating and net losses or whether we will become profitable.
We Need Substantial Capital Investments to Fund Our Future Operations Otherwise
We May Not Keep Pace With Our Competitors
We will need substantial amounts of cash to continue to fund capital
expenditures, research and development, and marketing and customer service and
support to keep pace with our competitors. Our business is very capital
intensive. Our capital needs depend on numerous factors, including our
profitability and investment in research and development and capital
expenditures. We cannot assure you that, even with the proceeds from our pending
rights offering, our recently completed private placement to VEBA Zweite and
cash flows from operations, if any, we will have enough capital to be able to
fund our future operations. We have incurred negative cash flows from operations
in recent periods.
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We May Not Be Able to Obtain Capital from Other Parties in the Future to Meet
Our Needs and May Be Forced to Reduce Our Investment In Our Business
We cannot assure you that we will be able to obtain capital in the future
to meet our needs. If we cannot obtain additional funding, whether from current
or new lenders or investors, we may be required to reduce our investments in
research and development, marketing and customer service and support and capital
expenditures. Such reductions could materially adversely affect our ability to
compete and our business.
If we do find a source of additional capital, the terms and pricing of any
such financing may be significantly more favorable to the lender or investor
than those previously provided by us. Future capital raising could dilute or
otherwise materially adversely affect the holdings or rights of our existing
stockholders.
Historically, we have funded our operations primarily through loans from
VEBA AG and its affiliates, internally generated funds and our initial public
offering. To a lesser extent, we have raised funds by borrowing money from
commercial banks. Recently, as part of our financial restructuring, we completed
a private placement of common stock to VEBA Zweite and are in the process of a
rights offering to our existing shareholders. The Company will continue to
explore and, as appropriate, enter into discussions with other parties regarding
possible future sources of capital. However, under the loan agreements between
us and our principal lender, VEBA AG and its affiliates, we cannot pledge any of
our assets to secure additional financing. We do not believe that we currently
can obtain unsecured financing from third parties on better terms than those
with VEBA AG and its affiliates.
We Have Relied on VEBA AG and its Affiliates for Capital Funding in the Past,
But May Not be Able to Rely on Them for Such Funding in the Future Which May
Force Us to Reduce Expenditures
VEBA AG and its affiliates are not obligated to provide capital to us
except in under the standby agreement entered into in connection with the
Company's pending rights offering and under current loan agreements. We cannot
assure you that VEBA AG and its affiliates will provide additional capital to us
in the future. We may be forced to reduce expenditures if VEBA AG and its
affiliates do not provide us with capital in the future. In such an event, we
may not be able to fund certain capital expenditures, research and development,
and marketing and customer service and support.
We Have a Significant Amount of Debt That Will Adversely Affect Our Ability to
Obtain Additional Financing
The Company currently has a significant amount of debt that will adversely
affect our ability to obtain additional financing for working capital, capital
expenditures or other purposes. As of January 31, 1999, we owed $777.0 million
to VEBA AG and its affiliates, and $163.0 million to other lenders. Our debt
service could make us more vulnerable to industry downturns and competitive
pressures. In addition, the cash flow required to service our debt may reduce
our ability to fund internal growth and capital requirements.
If The Semiconductor Industry Downturn Continues We Will Face Intense Pressure
to Further Reduce Prices Which May Lead to Further Losses
If the current downturn in the semiconductor industry continues, or the
industry experiences other downturns in the future, we will face pressure to
further reduce prices. However, our ability to reduce expenses during a downturn
is limited because of the fixed costs associated with our substantial excess
capacity and continued investment in research and development and marketing
necessary to maintain our extensive worldwide customer service and support
capabilities. If we are unable to reduce our expenses sufficiently to offset the
decline in our prices, our operating results and financial condition could be
materially adversely affected.
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Our business depends in large part upon the market demand for our
customers' semiconductors and products utilizing semiconductors. The
semiconductor industry experiences:
- rapid technological change;
- product obsolescence;
- price erosion; and
- wide fluctuations in product supply and demand.
Recently, the semiconductor industry rapidly expanded its production
capacity, resulting in overcapacity, especially for DRAM (commonly used computer
memory chips). This overcapacity has caused semiconductor prices to decline,
which has depressed semiconductor revenues and profitability.
From time to time the semiconductor industry has experienced significant
downturns and is currently in the midst of such a downturn. These downturns
often occur in connection with, or in anticipation of, maturing product cycles
(of both the semiconductor companies and their "end customers") and declines in
general economic conditions. Some of these downturns have lasted for more than a
year. Also, during such periods, customers of semiconductor manufacturers
benefiting from shorter lead times may delay some purchases of semiconductors
into future periods. The current semiconductor industry downturn began in the
fourth quarter of 1995. The resulting downturn in the silicon wafer industry
began in the summer of 1996.
The economic recessions in Japan and in nations in the Asia Pacific region
have made the current downturn in the semiconductor industry worse. The
economies in these regions have contracted, and demand for semiconductors and
silicon wafers in these regions has decreased significantly.
Substantial Excess Capacity and Declining Wafer Prices Limit Our Ability to
Become Profitable
Excess capacity in the silicon wafer industry limits our ability to
maintain or raise prices and could dramatically increase the worldwide supply of
silicon wafers in the future, increase the downward pressure on prices and
materially adversely impact our operating results. The growth in the worldwide
supply of silicon wafers has outpaced the growth in worldwide demand in recent
periods, especially for 8-inch silicon wafers. As a result, the selling prices
for our products have decreased. Because of price decreases and declining
product volume, our revenues are currently insufficient to offset our costs, and
this is adversely affecting our operating results. We have no firm information
with which to determine the capacity and expansion plans of our competitors.
Although some of our competitors have announced plans to slow their capacity
expansion programs, many have already added significant capacity for the
production of 8-inch wafers. We and our competitors have the ability to increase
production of silicon wafers through unused capacity and our ability to expand
our capacity quickly.
Our Dependence on the Semiconductor Industry Causes Substantial Fluctuations in
Our Operating Results and at Times This Has Adversely Affected the Market Price
of MEMC Common Stock
Our quarterly and annual operating results can fluctuate dramatically, and
this can adversely affect the market price of MEMC common stock. The main factor
affecting these fluctuations is our dependence on the performance of the
semiconductor industry, which historically has been cyclical. Another factor is
currency exchange rate volatility, which affects the price we receive for our
wafers and may result in gains or losses on unhedged currency exposure at our
unconsolidated joint ventures.
Our operating results are also affected by:
- the timing of orders from major customers;
- product mix;
- competitive pricing pressures; and
- the delay between the incurrence of expenses to develop marketing and
service capabilities and expand capacity and the realization of benefits
from these expenditures.
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Moreover, customers may cancel or reschedule shipments, and production
difficulties could delay shipments. We cannot predict the future impact of any
of these factors. These and other factors could have a material adverse effect
on our quarterly or annual operating results.
VEBA AG's Control of MEMC Could Prevent a Favorable Acquisition of MEMC
VEBA AG's control of MEMC could prevent or discourage any unsolicited
acquisition of MEMC and consequently could prevent an acquisition favorable to
MEMC's other stockholders. After the pending rights offering, VEBA AG will
continue to have sufficient voting power to control our direction and policies.
VEBA AG will continue to be able to control any merger, consolidation or sale of
all or substantially all of our assets, to elect the members of the Board of
Directors and to prevent or cause a change in control of MEMC. Four of the eight
members of our Board of Directors are employees of VEBA AG or its affiliates,
not including MEMC.
In addition, VEBA Corporation and VEBA Zweite (collectively, the VEBA
group) have advised us that VEBA AG or one of its affiliates may purchase rights
on the New York Stock Exchange during the pending rights offering. However, the
VEBA group has agreed not to exercise the over-subscription privilege with
respect to any rights. The VEBA group has also advised us that it may decide to
purchase additional shares of MEMC common stock following the rights offering.
Restrictive Covenants Will, and Higher Interest Rates May, Apply to MEMC if
VEBA AG or its Affiliates Cease to Own a Majority of Our Stock
Certain of our loan agreements with VEBA AG and its affiliates provide that
if VEBA AG and its affiliates own less than a majority of the outstanding MEMC
common stock on or after January 1, 2001, then the interest rates we pay on our
loans from VEBA AG and its affiliates will be the higher of:
- the interest rate currently set forth in each such loan agreement; or
- an interest rate determined, as of the later of January 1, 2001 or the
change of control date, for an average industrial borrower at an assumed
credit rating based on the remaining term of each such loan agreement.
In addition, in such an event we will become subject to certain affirmative
covenants set forth in all of our loan agreements with VEBA AG and its
affiliates. These affirmative covenants include requirements that we maintain a
minimum net worth and a minimum amount of working capital. We would also need to
meet certain financial ratios, including a minimum fixed charge coverage ratio
and minimum working capital ratio.
If we had been subject to these covenants as of January 31, 1999, we would
not have been in compliance with all of these covenants. If VEBA AG and its
affiliates own less than a majority of our outstanding common stock at any time
on or after January 1, 2001 and we are then not in compliance with all of these
affirmative covenants, then we would be in default under these loan agreements.
If VEBA AG and its affiliates own less than a majority of the outstanding
MEMC common stock, then Taisil Electronic Materials Corporation, our Taiwanese
joint venture, may become obligated to repay certain debt. See "Business -- Risk
Factors -- We May Have to Make Substantial Payments in Connection With Our
Taisil Joint Venture, and This Could Divert Funds From Other Needed Areas."
We Experience Intense Competition in the Silicon Wafer Industry and Our
Customers Expect Continuing Technological Innovation at a Low Cost
We face intense competition in the silicon wafer industry from established
manufacturers throughout the world. If we cannot compete effectively with other
silicon wafer manufacturers, our operating results could be materially adversely
affected. Some of our competitors have substantial financial, technical,
engineering and manufacturing resources. We believe that our Japanese
competitors benefit from their dominance of the Japanese market, which
represented approximately 38% of the worldwide silicon wafer market in 1998. In
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particular, Shin-Etsu Handotai, the largest supplier of silicon wafers in Japan
and the world, is able to leverage globally its sales and technology base.
We compete principally on the basis of product quality, consistency and
price, as well as technical innovation, customer service and product
availability. We expect that our competitors will continue to improve the design
and performance of their products and to introduce new products with competitive
price and performance characteristics. Competitive pressures may cause
additional price reductions, which could have a material adverse effect on our
operating results.
If We Fail to Make Significant Investments Necessary to Comply With Changing
Semiconductor Industry Customer Specifications, We May Lose Customers
If we fail to meet future customer requirements, we could experience a
material adverse effect on our competitive position and operating results. The
silicon wafer industry changes rapidly. Changes include requirements for new and
more demanding technology, product specifications and manufacturing processes.
Our ability to remain competitive will depend upon our ability to develop
technologically advanced products and processes. We must continue to meet the
increasingly demanding requirements of our customers on a cost-effective basis.
As a result, we expect to continue to make significant investments in research
and development. We cannot assure you that we will be able to successfully
introduce, market and cost-effectively manufacture any new products, or that we
will be able to develop new or enhanced products and processes that satisfy
customer needs or achieve market acceptance.
We Have a Limited Number of Principal Customers, and Accordingly a Loss of One
or Several of Those Customers Would Hurt Our Business
Our operating results could materially suffer if we, or our joint ventures,
experience a significant reduction in, or loss of, purchases by one or more of
our top customers. Historically, we have sold a significant portion of our
products to a limited number of principal customers. In 1998, we made over
one-half of our sales to ten customers, with one customer accounting for
approximately 20% of our sales. Likewise, POSCO HULS Co., Ltd. (commonly known
as PHC), our unconsolidated joint venture in South Korea, sold over half its
products to Samsung, one of our partners in that joint venture. We cannot assure
you that we or PHC will realize equivalent sales from our top customers in the
future.
Currency Exchange Rates and Increased Competition Have Reduced Wafer Prices and
Have Led to Lower Margins and Profits
Decreases in wafer prices have lowered our margins and profits. In 1998, we
had a gross margin of negative 4.2%. This negative gross margin was due in part
to the decline of the Japanese yen and the Deutsche mark relative to the U.S.
dollar over the past few years. Recently, the Japanese yen has recovered
moderately relative to the U.S. dollar. The currency declines have given, and
similar currency declines in the future may give, our Japanese and German
competitors significant cost advantages in the marketplace. These currency
pressures, together with the effects of the semiconductor industry downturn and
excess capacity in the silicon wafer industry, as described above, have
increased competition and resulted in significant decreases in wafer prices.
We Expect that International Sales Will Continue to Represent a Significant
Percent of Our Total Sales, and Accordingly We are Subject to Periodic Foreign
Economic Downturns and Fluctuations in Foreign Currency Exchange and Interest
Rates
A number of factors in the past have affected adversely, and may affect
adversely in the future, our results of operations and international sales and
operations, including periodic economic downturns and fluctuations in interest
and foreign currency exchange rates.
We expect that international sales will continue to represent a significant
percentage of our total sales. In addition, a significant portion of our
manufacturing operations are located outside of the United States. Sales outside
of the United States expose us to currency exchange rate fluctuations. Our risk
exposure from these
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sales is primarily limited to the Japanese yen, Deutsche mark and European euro.
Our risk exposure from expenses at international manufacturing facilities is
concentrated in Italian lira, Japanese yen and Malaysian ringgit. We generally
hedge receivables denominated in foreign currencies at the time of sale. We
hedge some foreign currency denominated intercompany loans by entering into
long-dated forward exchange contracts. However, we cannot predict whether
exchange rate fluctuations will have a material adverse effect on our operations
and financial results in the future.
Our 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 also has significant debt denominated in the U.S.
dollar and Korean won. Likewise, Taisil Electronic Materials Corporation, our
unconsolidated Taiwanese joint venture, has significant debt denominated in the
U.S. dollar and New Taiwanese dollar. For U.S. generally accepted accounting
principles, these two unconsolidated joint ventures use the U.S. dollar as their
functional currency and do not hedge net Korean won or New Taiwanese dollar
exposures. We do not hedge our net Korean won exposure, because the forward
contract market is limited for the Korean won and we do not believe the prices
of such contracts are attractive. To date, we have not hedged net New Taiwanese
dollar exposure. However, given the increasingly broader market and depth for
forward contracts in both Korea and Taiwan, we may consider forward contracts in
the future.
The economic downturns in the Asia Pacific region and Japan and the
devaluation of the Japanese yen against the U.S. dollar have affected and in the
future could affect our operating results. Additionally, other factors may have
a material adverse effect on our operations in the future including:
- the imposition of governmental controls;
- export license requirements;
- restrictions on the export of technology;
- political instability;
- trade restrictions and changes in tariffs; and
- difficulties in staffing and managing international operations.
As a result, we may need to modify our current business practices.
We May Have to Make Substantial Payments in Connection With Our Taisil Joint
Venture, and This Could Divert Funds From Other Needed Areas
As of January 31, 1999, Taisil had approximately $202.9 million of debt
outstanding. We have guaranteed approximately $75 million of such debt (which
may increase to approximately $81 million). Generally under the guarantees, if
VEBA AG's and its affiliates' ownership of MEMC common stock falls below 50% of
MEMC's total issued and outstanding shares, we become obligated to either pay,
or provide other collateral satisfactory to the banks, which may include a
letter of credit in an amount equal to, the maximum amount we may owe under the
guarantees.
The terms of Taisil's loan agreements vary. If Taisil defaults on its
obligations to its lenders, in some circumstances Taisil may immediately be
required to repay all of its obligations to its lenders. If Taisil is required
to make an immediate repayment of its obligations to its lenders, we may be
required to make payments on our guarantees of Taisil's debt. The circumstances
in which immediate repayment may occur include, without limitation:
- a material adverse change in Taisil;
- a reduction below 70% in the combined ownership of Taisil by the two
major joint venture partners (us and China Steel Corporation);
- a material adverse change in us or China Steel Corporation;
- a reduction below 50% in VEBA AG's and its affiliates' ownership of MEMC
common stock; or
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- other customary circumstances.
We cannot assure you that Taisil's lenders will not declare a default on
Taisil's debt if they determine there has occurred a material adverse change, or
they determine a material adverse change occurs in the future, in Taisil or
MEMC. If MEMC is required to make payments on any guarantees, this would divert
capital needed to fund future operations.
For more information about Taisil please see, "Business -- Joint
Ventures -- Taisil Electronic Materials Corporation."
Because We Cannot Easily Transfer Production of Specific Products From One of
Our Manufacturing Facilities to Another, Manufacturing Delays at a Single
Facility Could Result in a Loss of Customers
It typically takes six months for one of our customers to qualify one of
our manufacturing facilities to produce a specific product, but it could take
longer in today's environment of excess capacity. Interruption of operations at
any of our primary manufacturing facilities could result in delays or
cancellations of shipments of silicon wafers and a loss of customers which could
materially and adversely affect our operating results. A number of factors could
cause interruptions, including labor disputes, equipment failures, or shortages
of raw materials or supplies. A union represents employees at PHC's facility in
South Korea. A strike at this facility could cause interruptions in
manufacturing. We cannot assure you that alternate qualified capacity would be
available on a timely basis or at all.
Much of Our Proprietary Information is Not Patented and May Not be Patentable
Much of our proprietary information and technology relating to the wafer
manufacturing process is not patented and may not be patentable. We believe that
the success of our business depends in part on our proprietary technology,
information and processes and know-how. We generally try to protect our
intellectual property rights based on trade secrets and patents as part of our
ongoing research, development and manufacturing activities. Recently, we have
increased our efforts to obtain patent protection for our technology in response
to an increase in patent applications by our competitors. However, we cannot
assure you that we have adequately protected or will be able to adequately
protect our technology, that our competitors will not be able to utilize our
existing technology or develop similar technology independently, that the claims
allowed on any patents held by us will be broad enough to protect our technology
or that foreign intellectual property laws will adequately protect our
intellectual property rights.
Some of Our Technology May Infringe on the Intellectual Property Rights of
Third Parties Which May Subject Us to Costly Patent Litigation
From time to time, we receive notices from substantial companies with
significant patent portfolios that we may be infringing certain of their patents
or other rights. We may receive more of these notices in the future. If such
companies were to assert any claims against us based on patents or other rights
described in existing notices, we believe, based on strategic and other
considerations, that we should be able to resolve them outside of litigation
without a material adverse effect to us; however, this conclusion is subject to
significant uncertainty. We expect to try to resolve these matters through
negotiation or, if necessary, by obtaining a license. However, if we are not
able to resolve these matters satisfactorily, or to obtain a license on
acceptable terms, we may face litigation. In that event, the ultimate outcome of
these matters could have a material adverse effect on our business, results of
operations or financial condition. Although third parties have not sued us based
on claims of infringement of intellectual property rights during the last
several years, we cannot assure you that third parties will not bring such suits
in the future. Competitors, suppliers and others frequently sue each other
regarding intellectual property rights in other technology industries, including
the semiconductor industry.
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Despite Our Efforts We Have Failed to Retain a Number of Experienced Upper and
Middle Management, and as a Result We Face Challenges in Attracting and
Retaining Qualified Personnel
The loss of key personnel or the inability to hire and retain qualified
personnel could have a material adverse effect on our operating results. We are
dependent upon a limited number of key management and technical personnel. We
compete for personnel with other companies, academic institutions, government
entities and other organizations. Our future success will depend in part upon
our ability to attract and retain highly qualified personnel. We cannot assure
you that we will be successful in hiring or retaining qualified personnel, or
that any of our personnel will remain employed by MEMC.
In March 1998, we adopted a special incentive bonus program designed to
retain the services of 24 of our officers and key employees, including eleven
then executive officers. Under this program, the participants received a special
bonus. Half of this bonus was paid when the participant entered into a special
incentive bonus agreement; the other half becomes payable on June 30, 1999,
subject to continued employment. If the participant's employment is terminated
under certain circumstances, that participant must repay us all or a portion of
the bonus the participant has already received. Despite this program, a number
of experienced members of upper and middle management have left MEMC.
We Depend on Certain Suppliers and Finding Alternative Sources of Supply Could
Affect Adversely Our Customer Qualifications and Manufacturing Yields
We obtain substantially all our requirements for several raw materials,
equipment, parts and supplies from sole suppliers. We believe that we could find
adequate alternative sources of supply for these raw materials, equipment, parts
and supplies. However, we may be required to obtain new qualifications from our
customers in order to change or substitute suppliers. We cannot predict whether
we would be successful or how long that process would take. In addition, our
manufacturing yields could be adversely affected while we transition to a new
supplier. A decrease in our manufacturing yields could have a material adverse
effect on our operating results.
From time-to-time we have experienced limited supplies of certain raw
materials, equipment, parts and supplies, particularly polysilicon. We believe
that adequate quantities of all our key raw materials, equipment, parts and
supplies are currently available. However, because of the cyclical nature of our
industry, we may experience shortages in the future. Increases in prices
resulting from these shortages could have a material adverse effect on our
operating results.
Because the Public is Focusing More Attention on the Environmental Impact of
Our Industry and Its Manufacturing Operations, Environmental Laws and
Regulations May Become More Stringent in the Future and Could Force MEMC to
Expend Capital to Comply with Such Laws
Because the public is focusing more attention on the environmental impact
of the semiconductor and related industries' manufacturing operations,
environmental laws and regulations related to our industry may become more
stringent in the future. Any failure to comply with environmental laws could
subject us to substantial liability or could force us to significantly change
our manufacturing operations. We are subject to a variety of foreign, federal,
state and local laws and regulations governing the protection of the
environment. These environmental regulations include those related to the use,
storage, handling, discharge and disposal of toxic, volatile or otherwise
hazardous materials used in our manufacturing processes. Under some of these
laws and regulations, we could be held financially responsible for remedial
measures if our properties are contaminated, even if we did not cause such
contamination.
In early 1998, a valve at our Italian facility malfunctioned, resulting in
a release of a hazardous gas. Governmental authorities are continuing to
investigate the incident and, in addition to private individuals, could seek to
assert claims against us. However, based on information currently available, we
do not believe any such claims should have a material adverse effect on us.
Also, we have been named as a defendant in two lawsuits with many other
defendants in which the plaintiffs allege damages related to environmental
problems.
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Our Fluctuating Financial Results, Our Position in the Silicon Wafer Industry
and Our Relationship with VEBA may Create Fluctuations in the MEMC Stock Price
Based on the trading history of MEMC common stock, we believe that certain
factors cause the market price of MEMC common stock to fluctuate significantly.
These factors include, without limitation:
- quarterly fluctuations in our financial results;
- announcements of technological innovations or new products by us or our
competitors;
- market conditions in the semiconductor industry;
- market conditions in the silicon wafer industry;
- developments in patent or other proprietary rights;
- changes in our relationships with our customers;
- any actual or perceived change in our relationship with VEBA AG and its
affiliates; and
- the size of the public float of MEMC common stock (which will depend, in
part, on the number of shares of MEMC common stock purchased or acquired
by rights holders other than by the VEBA group in our pending rights
offering).
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 MEMC common stock. In addition, if we suffer an actual or
anticipated shortfall in net sales, gross margin or net earnings from security
analysts' expectations, the trading price of MEMC common stock in any given
period could decline.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The following statements are or may constitute forward-looking statements:
- statements set forth in this Annual Report on Form 10-K or statements
incorporated by reference from documents we have filed with the
Securities and Exchange Commission, including possible or assumed future
results of our operations, including but not limited to any statements
contained herein or therein concerning:
- the manner, timing and estimated savings of restructuring activities
and the voluntary separation program;
- the transfer of Spartanburg-based small diameter production activities
to other existing locations;
- the utilization of the restructuring reserve;
- product volumes, pricing and operating results for the first quarter
of 1999;
- pricing for the near term;
- capital expenditures for 1999;
- our liquidity into 2000;
- excess capacity for future periods;
- the resolution of any intellectual property infringement claims;
- the shipment of 12-inch prime polished and epitaxial wafers in 1999
and timing of future demand for 12-inch wafers;
- the continued support of VEBA AG;
- the status, effectiveness and projected completion of our Year 2000
initiatives;
18
<PAGE> 20
- the outcome of potential litigation;
- an increase in interest expense on existing debt with VEBA AG and its
affiliates;
- the impact of the introduction of the euro;
- estimated cost reductions for the global purchasing, plant focus and
other initiatives;
- our expectations for an increase in market demand for silicon wafers
and semiconductors and an easing of pressure on pricing and margins in
the year 2000;
- our expectations concerning our lack of profitability in 1999 and our
ability to generate positive cash flows in the year 2000;
- implementations in our plants of QS 9000 and ISO 14001 certifications;
- the expectations concerning Taisil and the Taiwanese silicon wafer
market; and
- any statements preceded by, followed by or that include the words
"believes," "expects," "predicts," "anticipates," "intends," "estimates,"
"should," "may" or similar expressions.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially are set forth under "Business -- Risk Factors."
You should not place undue reliance on such statements, which speak only as
of the date that they were made. Our independent public accountants have not
examined or compiled the forward-looking statements and, accordingly, do not
provide any assurance with respect to such statements. These cautionary
statements should be considered in connection with any written or oral
forward-looking statements that we may issue in the future. We do not undertake
any obligation to release publicly any revisions to such forward-looking
statements to reflect later events or circumstances or to reflect the occurrence
of unanticipated events.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list, as of March 1, 1999, of the names and ages of our
executive officers and all positions and offices with us that are presently held
by the person named. Each executive officer's term will end upon the appointment
of his or her successor or upon his or her earlier resignation, except that Mr.
von Horde's term of office expires in 2003 pursuant to the terms of his
employment agreement. There are no family relationships between or among any of
the named persons and the directors.
<TABLE>
<CAPTION>
NAME AGE ALL POSITIONS AND OFFICES HELD
- ---- --- ------------------------------
<S> <C> <C>
Klaus R. von Horde................... 57 President, Chief Executive Officer and Director
James M. Stolze...................... 55 Executive Vice President and Chief Financial Officer
Marcel Coinne........................ 58 Corporate Vice President
Dr. John P. DeLuca................... 56 Corporate Vice President
Helene F. Hennelly................... 52 Corporate Vice President, General Counsel and
Secretary
Jonathon P. Jansky................... 47 Corporate Vice President
Dr. Thomas Knothe.................... 41 Corporate Vice President
Paul V. Pastorek..................... 52 Corporate Vice President
James W. Wick........................ 56 Corporate Vice President
</TABLE>
Each executive officer has held the same position or another executive
position with us during the past five years, except as set forth in the 1999
Proxy Statement and as indicated below.
Mr. von Horde was President and Chief Operating Officer of the Company from
December 1997 to February 1999 and has been President and Chief Executive
Officer of the Company since February 1999.
Mr. Stolze was a Partner with KPMG LLP from 1977 until joining us as
Executive Vice President and Chief Financial Officer in June 1995.
19
<PAGE> 21
Mr. Coinne was Corporate Vice President and President of the U.S. Region of
the Company from March 1993 to October 1996, Corporate Vice President and
President -- North America of the Company from October 1996 to December 1997 and
has been Corporate Vice President, Customer Operations of the Company since
December 1997.
Dr. DeLuca was Director, Manufacturing Technology of the Company from May
1992 to November 1994 and has been Corporate Vice President, Technology of the
Company since November 1994.
Ms. Hennelly was Vice President, General Counsel and Secretary of the
Company from October 1990 until May 1996 and has been Corporate Vice President,
General Counsel and Secretary of the Company since May 1996.
Mr. Jansky was Plant Manager of the Company's St. Peters facility from 1992
until January 1997, Corporate Vice President, Investment Planning of the Company
from January 1997 to May 1998 and has been Corporate Vice President, Operations
of the Company since May 1998.
Dr. Knothe was Director, Corporate Development Plastics Business for Huls
AG from 1994 to 1995 and Director, Corporate Development Electronic Materials
for Huls AG from 1995 until January 1998. Dr. Knothe was Vice President,
Strategy Development of the Company from January 1998 until August 1998 and has
been Corporate Vice President, Corporate Development of the Company since August
1998.
Mr. Pastorek was Director, Marketing and Business Development-Asia of the
Company from 1993 until December 1995, Corporate Vice President of the Company
and Executive Vice President of POSCO HULS Co. Ltd., the Company's joint venture
in South Korea, from December 1995 to May 1998 and has been Corporate Vice
President, Product Management of the Company since May 1998.
Mr. Wick was Vice President, Human Resources for Bunge Corporation from
1990 until joining us in January 1999. Bunge Corporation is an international,
privately-held, multi-billion dollar, integrated agri-business company engaged
in commodity trading, grain and edible oil exporting and food processing.
ITEM 2. PROPERTIES
Our principal executive offices are located at 501 Pearl Drive (City of
O'Fallon), St. Peters, Missouri 63376, and our telephone number at that address
is (314) 279-5500. Our principal manufacturing and administrative facilities and
the principal manufacturing and administrative facilities of our joint ventures
comprised approximately 4.2 million square feet as of December 31, 1998 and were
situated in the following locations:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE
- -------- --------------
<S> <C>
St. Peters, MO, USA......................................... 737,000
Spartanburg, SC, USA........................................ 309,000
Sherman, TX, USA............................................ 707,000
Pasadena, TX, USA........................................... 436,000
Luoyang, China.............................................. 70,000
Merano, Italy............................................... 319,000
Novara, Italy............................................... 322,000
Utsunomiya, Japan........................................... 305,000
Kuala Lumpur, Malaysia...................................... 53,000
Chonan, South Korea......................................... 460,000
(PHC joint venture)
Hsinchu, Taiwan............................................. 450,000
(Taisil joint venture)
</TABLE>
We lease a portion of our St. Peters facility pursuant to a lease agreement
between us and the City of O'Fallon, Missouri that was entered into in
connection with an industrial revenue bond financing. The term of the St. Peters
lease expires in 2011, and we have the option to purchase the leased portion of
the St. Peters
20
<PAGE> 22
facility at the end of the lease. We also lease our small diameter facility in
Sherman, Texas. The initial term of this lease expires in 2001 and is extendable
at our option for three (3) additional renewal terms of five (5) years each. We
lease our facility in Pasadena, Texas. The term of the Pasadena lease expires in
2030 and is extendable for four (4) additional renewal terms of five (5) years
each. Taisil leases the land on which its Hsinchu, Taiwan facility is located.
This lease expires in 2014. We also lease our facilities in Luoyang, China and
Kuala Lumpur, Malaysia. These leases expire in 2012 and 2000, respectively.
In 1999, we intend to close our facility in Spartanburg, South Carolina and
withdraw from our joint venture participation in the facility in Luoyang, China.
We believe that our existing facilities and equipment are well maintained,
in good operating condition and are adequate to meet our current requirements.
The extent of utilization of these facilities varies from plant to plant and
from time to time during the year.
ITEM 3. LEGAL PROCEEDINGS
Equipment Purchase Dispute
We have a dispute with a manufacturer of equipment for the production of
silicon wafers. The dispute involves our cancellation of an order for a number
of pieces of equipment. The manufacturer claims that we are obligated for
approximately $5 million for costs related to the cancelled order, including the
cost of inventory it has on hand and on order with its vendors. We are in the
process of evaluating the merits of the manufacturer's claim. The manufacturer
has advised us that if we are unable to resolve this dispute, it will file suit
against us. While we will assert all of our defenses in this dispute, we cannot
assure you that we will be able to resolve this dispute on terms favorable to
us.
Litigation Related To MEMC Pasadena
In a case entitled Damewood vs. Ethyl Corporation, et al., (Case No.
96-38521), filed on August 1, 1996, three employees of the former operator of
MEMC Pasadena's plant, Albemarle Corporation, filed suit against us and others
in the 189th Judicial District Court, Harris County, Texas. The employees
alleged that they sustained injuries during an explosion at that plant on
January 27, 1996. We have settled this matter with plaintiffs and have been
dismissed as a party. One of the other defendants, Ethyl Corporation, was the
only defendant in this case at the time of trial in October 1998. A jury awarded
a verdict against Ethyl Corporation in the amount of $6.1 million.
In July of 1996, two employees of the former operator of the MEMC Pasadena
plant were injured when flaming liquid escaped from a valve under repair. These
individuals filed suit on June 13, 1997, against us and others in a case
entitled Parden vs. Ethyl Corporation, et al. (Case No. 97-34857) in the 61st
Judicial District Court, Harris County, Texas. Plaintiffs are seeking actual and
exemplary damages in an unstated amount. We believe that we have meritorious
defenses to this cause of action. This case is currently set for trial on August
16, 1999.
A demand against us for defense and indemnity in both these cases was made
on behalf of Ethyl Corporation by Albemarle Corporation on September 29, 1998.
Albemarle Corporation has assumed the obligation to defend and indemnify Ethyl
Corporation under an agreement in which Ethyl Corporation transferred ownership
of the plant where the injury took place to Albemarle Corporation. Albemarle
Corporation's demand for defense and indemnification against us on behalf of
Ethyl Corporation is under evaluation by our counsel. In early November, we made
a demand for indemnity in these cases against Albemarle. Demands for indemnity
made by Albemarle Corporation on behalf of Ethyl Corporation and by us are both
based on contractual indemnity language contained in the contract for the sale
of the MEMC Pasadena plant from Albemarle Corporation to us.
In October 1997, a flash ignition occurred at the MEMC Pasadena plant.
Eleven employees of U.S. Contractors, Inc., a construction contractor, received
injuries from the impact. Three of these individuals have filed suit against us,
Albemarle Corporation and another party for injuries allegedly sustained in this
accident in a case entitled Larry Lambert, Andres Garcia and Rogers Patino vs.
MEMC Pasadena, Inc.,
21
<PAGE> 23
(Cause No. 97-61639). The case was filed in the 152nd Judicial District, Harris
County, Texas. Two of these individuals allege head injuries and all three
allege hearing loss. The plaintiffs are seeking actual, punitive and exemplary
damages against the defendants in an unstated amount. We believe all of the
defendants have significant defenses to the plaintiffs' claims.
Pursuant to a construction contract between us and U.S. Contractors, Inc.,
U.S. Contractors, Inc. originally agreed to defend and indemnify us in this suit
up to $25 million. Under a contract between us and Albemarle Corporation, we are
contractually obligated to defend Albemarle Corporation in this suit. We have
also made a demand upon U.S. Contractors, Inc. to defend and indemnify Albemarle
Corporation pursuant to the construction contract between us and U.S.
Contractors, Inc. U.S. Contractors, Inc.'s insurance carrier has recently
indicated to us that it disputes the obligation of U.S. Contractors, Inc. to
defend and indemnify us and Albemarle Corporation despite U.S. Contractors,
Inc.'s prior agreement to defend and indemnify us.
On March 18, 1999, the parties agreed in principal to a settlement of the
foregoing matter which will be completely covered by insurance. We anticipate
that the parties will execute agreements reflecting this settlement in the next
several weeks.
Due to uncertainty regarding the litigation process, the scope and
interpretation of contractual indemnity provisions and the status of any
insurance coverage or pending settlements, we cannot assure you that the
ultimate outcome of the foregoing matters will not have a material adverse
effect on us.
Texas Nuisance Actions
In a case entitled Crye, et al. vs. Reichhold Chemicals, Inc., et al. (Case
No. 97-24399), over 7,000 plaintiffs filed suit against MEMC Pasadena and
approximately 31 other companies operating industrial facilities along I-10 and
along the Houston Ship Channel in Harris County, Texas. The suit was filed in
the 334th Judicial District, Harris County, Texas. MEMC Pasadena was served in
this matter on December 30, 1998. In a similar case entitled Gerlich, et al. vs.
Merichem Company, et al. (Case No. 98-59745), almost 400 plaintiffs filed suit
against MEMC Pasadena and approximately 26 other companies operating industrial
facilities along I-10 and along the Houston Ship Channel in Harris County,
Texas. The suit was filed in the 80th Judicial District, Harris County, Texas.
MEMC Pasadena was served in this matter on February 2, 1999.
In both cases, plaintiffs allege that defendants have discharged various
pollutants into the air, soil, ground and surface water. Plaintiffs also allege
that these facilities generate deafening noise, sickening foul odors and glaring
and intrusive lights. Plaintiffs have sued all defendants alleging nuisance,
trespass, negligence and gross negligence. Plaintiffs are seeking an injunction
and actual and exemplary damages in an unstated amount. We are in the process of
evaluating these lawsuits. Because these suits were only recently served on us,
we have not fully evaluated our potential exposure, if any. Due to the early
stage of our investigation of these lawsuits and the uncertainty regarding the
status of any insurance coverage, we cannot assure you that the ultimate outcome
of these matters will not have a material adverse effect on us.
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 our common
equity and related stockholder matters required by this item is set forth under
Note 18, "Unaudited Quarterly Financial Information", on pages 42 and 43 of our
1998 Annual Report and under "Stockholder Information" on page 48 of our 1998
Annual Report, which information is incorporated herein by reference. We have
not paid any dividends on our common stock for the last two fiscal years.
22
<PAGE> 24
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 our
1998 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 22
of our 1998 Annual Report, which information is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth under "Market Risk" on
pages 21 and 22 of our 1998 Annual Report, which information is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements appearing on pages 23 through 43, and
the Independent Auditors' Report thereon of KPMG LLP appearing on page 45 of our
1998 Annual Report, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We will file a definitive proxy statement with the Securities and Exchange
Commission within 120 days of year-end (the 1999 Proxy Statement). The
information required by this item with respect to directors will be set forth in
the 1999 Proxy Statement under "ELECTION OF DIRECTORS" and is incorporated
herein by reference. The information required by this item with respect to
executive officers is set forth in Part I of this Annual Report on Form 10-K.
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 FISCAL
YEAR-END OPTION/SAR VALUES" and related footnotes; (v) "Pension Plan"; (vi)
"Pension Plan Table (1)," "Pension Plan Table (2)," and "Pension Plan Table (3)"
(vii) "Employment Agreements"; (viii) "Annual Incentive Plan"; (ix) "Special
Incentive Bonus Plan"; and (x) "Compensation Committee Interlocks and Insider
Participation" of the 1999 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 1999 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 1999 Proxy Statement is incorporated herein by reference.
23
<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. FINANCIAL STATEMENTS
The following consolidated financial statements of us and our subsidiaries,
included on pages 23 through 43 of the 1998 Annual Report, and the Independent
Auditors' Report thereon of KPMG LLP appearing on page 45 of such report are
incorporated herein by reference.
Consolidated Statements of Operations -- Years ended December 31, 1998,
1997 and 1996.
Consolidated Balance Sheets -- December 31, 1998 and 1997.
Consolidated Statements of Cash Flows -- Years ended December 31, 1998,
1997 and 1996.
Consolidated Statements of Stockholders' Equity -- Years ended December 31,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
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, 1998 and 1997........ F-4
Statements of Operations -- Years ended December 31,
1998, 1997 and 1996 (unaudited)....................... F-5
Statements of Appropriation (Disposition) of Retained
Earnings (Deficit) -- Years ended December 31, 1998,
1997 and 1996 (unaudited)............................. F-6
Statements of Cash Flows -- Years ended December 31,
1998, 1997 and 1996 (unaudited)....................... F-7
Notes to Financial Statements.......................... F-8
Financial Statements of Taisil Electronic Materials
Corporation:
Independent Auditors' Report of KPMG Certified Public
Accountants........................................... F-26
Balance sheets as of December 31, 1998 and 1997........ F-27
Statements of Operations -- Years ended December 31,
1998, 1997 and 1996................................... F-28
Statements of Changes in Stockholders' Equity -- Years
ended December 31, 1998, 1997 and 1996................ F-29
Statements of Cash Flows -- Years ended December 31,
1998, 1997 and 1996................................... F-30
Notes to Financial Statements.......................... F-31
</TABLE>
24
<PAGE> 26
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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 3.2 of Amendment No. 4 to the Company's Form S-3
Registration Statement No. 333-65973)
4 Form of Rights Certificate to Subscribe for Shares of Common
Stock of the Company (Incorporated by reference to Exhibit
4.1 of Amendment No. 3 to the Company's Form S-3
Registration Statement No. 333-65973)
* 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)
* 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-c(1) 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-c(2) 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)
* 10-d Technical Agreement dated December 19, 1990 between the
Company and POSCO HULS Company Ltd. ("PHC")
* 10-d(1) 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)
10-d(2) Second Amendment to Technical Agreement effective as of
September 30, 1998 between the Company and PHC (Incorporated
by reference to Exhibit 10-g(1) of the Company's Current
Report on Form 8-K dated October 22, 1998)
** 10-d(3) Third Amendment to PHC Technical Agreement effective as of
October 1, 1998 by and between the Company and PHC
* 10-e 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)
* 10-f 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)
* 10-f(1) Amendment to TI Purchase Agreement dated as of June 5, 1997,
between MEMC Southwest and TI (Incorporated by reference to
Exhibit 10-i of the Company's Form 10-Q for the Quarter
ended June 30, 1997)
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10-g 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-g(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)
* 10-h 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-i Registration Rights Agreement between the Company and VEBA
Corporation (as successor to Huls Corporation) (Incorporated
by reference to Exhibit 10-l of the Company's Form 10-K for
the Year ended December 31, 1995)
10-i(1) Form of Amendment to Registration Rights Agreement by and
between the Company and VEBA Corporation (Incorporated by
reference to Exhibit 10.3 of Amendment No. 3 to the
Company's Form S-3 Registration Statement No. 333-65973)
10-j Form of 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)
10-k 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-k(1) Letter Agreement dated June 19, 1995 amending the Service
Agreement dated January 1, 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-l 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-m 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)
* 10-n 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-ll
of the Company's Form 10-K/A Amendment No. 2 for the Year
ended December 31, 1997)
* 10-o Technology Purchase Agreement dated as of July 31, 1995,
among Albemarle Corporation and the Company (Incorporated by
reference to Exhibit 10-mm of the Company's Form 10-K/A
Amendment No. 2 for the Year ended December 31, 1997)
10-p Ground Lease Agreement dated as of July 31, 1995, between
Albemarle Corporation and MEMC Pasadena, Inc. (Incorporated
by reference to Exhibit 10-nn of the Company's Form 10-K/A
Amendment No. 2 for the Year ended December 31, 1997)
10-p(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-nn(1) of the Company's Form 10-K/A Amendment No. 2 for
the Year ended December 31, 1997)
10-q Purchase Agreement dated as of October 22, 1998 by and among
the Company and VEBA Corporation (Incorporated by reference
to Exhibit 2 of the Schedule 13D dated October 30, 1998
filed by VEBA Aktiengesellschaft and VEBA Corporation with
respect to the Company)
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10-q(1) First Amendment to Purchase Agreement dated as of December
29, 1998 by and among the Company and VEBA Corporation
(Incorporated by reference to Exhibit 10.1(a) of Amendment
No. 2 to the Company's Form S-3 Registration Statement No.
333-65973)
10-q(2) Second Amendment to Purchase Agreement dated as of February
14, 1999 by and among the Company and VEBA Zweite
Verwaltungsgesellschaft mbH (as successor to VEBA
Corporation) (Incorporated by reference to Exhibit 10.1(b)
of Amendment No. 3 to the Company's Form S-3 Registration
Statement No. 333-65973)
10-r Standby Agreement dated as of October 22, 1998 by and among
the Company and VEBA Corporation (Incorporated by reference
to Exhibit 3 of the Schedule 13D dated October 30, 1998
filed by VEBA Aktiengesellschaft and VEBA Corporation with
respect to the Company)
+ 10-aa 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)
+ 10-bb MEMC Supplemental Executive Pension Plan 1997 Restatement
(Incorporated by reference to Exhibit 10-s of the Company's
Form 10-Q for the Quarter ended March 31, 1997)
+ 10-cc 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)
+ 10-cc(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)
+ 10-cc(2) 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)
+ 10-cc(3) 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-cc(4) 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)
+ 10-cc(5) 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)
+ 10-cc(6) 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-dd Annual Incentive Plan for Selected Key Employees of MEMC
Electronic Materials, Inc. and its Subsidiaries
(Incorporated by reference to Exhibit 10-u of Amendment No.
1 to the Company's Form S-1 Registration Statement No.
33-92412)
+ 10-ee 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-ff Employment Agreement dated 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)
+ 10-ff(1) Supplemental Retirement Agreement dated as of February 17,
1999 between the Company and Ludger H. Viefhues
(Incorporated by reference to Exhibit 10-xx(1) of the
Company's Current Report on Form 8-K dated February 17,
1999)
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
+ 10-ff(2) Supplemental Retirement Agreement Clarification dated March
17, 1999 between the Company and Ludger H. Viefhues
(Incorporated by reference to Exhibit 10.6 of Amendment No.
4 to the Company's Form S-3 Registration Statement No.
333-65973)
+ 10-gg 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)
+ 10-hh Consulting Agreement dated December 1, 1997, between the
Company and Dr. Robert M. Sandfort (Incorporated by
reference to Exhibit 10-nnn of the Company's Form 10-K/A
Amendment No. 2 for the Year ended December 31, 1997)
+ 10-ii Separation Agreement, General Release and Covenant Not to
Sue dated December 31, 1997, between the Company and Tommy
L. Cadwell (Incorporated by reference to Exhibit 10-ooo of
the Company's Form 10-K for the Year ended December 31,
1997)
+ 10-jj Agreement dated as of April 1, 1993, between the Company and
Ralph D. Hartung (Incorporated by reference to Exhibit
10-ppp of the Company's Form 10-K for the Year ended
December 31, 1997)
+ 10-kk MEMC Electronic Materials, Inc. Special Incentive Plan
Summary (Incorporated by reference to Exhibit 10-qqq of the
Company's Form 10-Q for the Quarter ended June 30, 1998)
+ 10-kk(1) Special Incentive Bonus Agreement dated as of March 26, 1998
between the Company and Marcel Coinne (Incorporated by
reference to Exhibit 10-rrr of the Company's Form 10-Q for
the Quarter ended June 30, 1998)
+ 10-kk(2) Special Incentive Bonus Agreement dated as of March 24, 1998
between the Company and Ralph D. Hartung (Incorporated by
reference to Exhibit 10-sss of the Company's Form 10-Q for
the Quarter ended June 30, 1998)
+ 10-kk(3) Special Incentive Bonus Agreement dated as of March 31, 1998
between the Company and James M. Stolze (Incorporated by
reference to Exhibit 10-ttt of the Company's Form 10-Q for
the Quarter ended June 30, 1998)
+ 10-kk(4) Special Incentive Bonus Agreement dated as of March 24, 1998
between the Company and John P. DeLuca
+ 10-ll Employment Agreement effective as of April 1, 1998 between
the Company and Klaus R. von Horde (Incorporated by
reference to Exhibit 10-uuu of the Company's Form 10-Q for
the Quarter ended June 30, 1998)
+ 10-ll(1) Employment Agreement effective as of February 17, 1999
between the Company and Klaus R. von Horde (Incorporated by
reference to Exhibit 10.5 of Amendment No. 4 to the
Company's Form S-3 Registration Statement No. 333-65973)
+ 10-mm Letter Agreement dated April 17, 1998 between the Company
and Dr. Werner Schmitz (Incorporated by reference to Exhibit
10-vvv of the Company's Form 10-Q for the Quarter ended June
30, 1998)
+ 10-nn Agreement dated May 19, 1998 between the Company and Ralph
D. Hartung (Incorporated by reference to Exhibit 10-www of
the Company's Form 10-Q for the Quarter ended June 30, 1998)
+ 10-oo International Transfer Letter Agreement effective as of
October 1, 1998 between the Company and Marcel Coinne
(Incorporated by reference to Exhibit 10-yyy of the
Company's Current Report on Form 8-K dated October 21, 1998)
10-aaa Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-jj of
the Company's Form 10-Q for the Quarter ended June 30, 1995)
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10-aaa(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation) (Incorporated
by reference to Exhibit 10-cc(1) of the Company's Current
Report on Form 8-K dated October 21, 1998)
10-bbb Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-kk of
the Company's Form 10-Q for the Quarter ended June 30, 1995)
10-bbb(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA Corporation
(Incorporated by reference to Exhibit 10-dd(1) of the
Company's Current Report on Form 8-K dated October 21, 1998)
10-ccc Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-ll of
the Company's Form 10-Q for the Quarter ended June 30, 1995)
10-ccc(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation) (Incorporated
by reference to Exhibit 10-ee(1) of the Company's Current
Report on Form 8-K dated October 21, 1998)
10-ddd Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-mm of
the Company's Form 10-Q for the Quarter ended June 30, 1995)
10-ddd(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation) (Incorporated
by reference to Exhibit 10-ff(1) of the Company's Current
Report on Form 8-K dated October 21, 1998)
10-eee Credit Agreement dated as of July 10, 1995, between the
Company and VEBA AG (as successor to Huls AG) (Incorporated
by reference to Exhibit 10-nn of the Company's Form 10-Q for
the Quarter ended June 30, 1995)
10-eee(1) First Amendment to Credit Agreement effective as of July 1,
1998 between the Company and VEBA AG (as successor to Huls
AG) (Incorporated by reference to Exhibit 10-gg(1) of the
Company's Form 10-Q for the Quarter ended June 30, 1998)
10-eee(2) Second Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to Exhibit
10-gg(2) of the Company's Current Report on Form 8-K dated
October 21, 1998)
10-fff Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls AG)
(Incorporated by reference to Exhibit 10-oo of the Company's
Form 10-Q for the Quarter ended June 30, 1995)
10-ggg(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation) (Incorporated
by reference to Exhibit 10-hh(1) of the Company's Current
Report on Form 8-K dated October 21, 1998)
10-hhh Revolving Credit Agreement dated as of July 10, 1995,
between the Company and VEBA AG (as successor to Huls AG)
(Incorporated by reference to Exhibit 10-pp of the Company's
Form 10-Q for the Quarter ended June 30, 1995)
10-hhh(1) Amendment to Loan Agreement effective March 4, 1998 between
the Company and VEBA AG (as successor to Huls AG)
(Incorporated by reference to Exhibit 10-ii(1) of the
Company's Form 10-Q for the Quarter ended June 30, 1998)
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10-hhh(2) Second Amendment to Revolving Credit Agreement effective as
of September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to Exhibit
10-ii(2) of the Company's Current Report on Form 8-K dated
October 21, 1998)
10-iii 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-jjj Credit Agreement between the Company and VEBA AG (as
successor to 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-jjj(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to Exhibit
10-qq(1) of the Company's Current Report on Form 8-K dated
October 21, 1998)
10-kkk Credit Agreement between the Company and VEBA AG (as
successor to 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)
10-kkk(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to Exhibit
10-rr(1) of the Company's Current Report on Form 8-K dated
October 21, 1998)
10-lll Credit Agreement between the Company and VEBA AG (as
successor to 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-lll(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to Exhibit
10-ss(1) of the Company's Current Report on Form 8-K dated
October 21, 1998)
10-mmm Credit Agreement between the Company and VEBA AG (as
successor to 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-mmm(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to Exhibit
10-tt(1) of the Company's Current Report on Form 8-K dated
October 21, 1998)
10-nnn Credit Agreement dated as of December 1, 1996 between the
Company and VEBA AG (as successor to Huls AG) (Incorporated
by reference to Exhibit 10-jjj of the Company's Form 10-K
for the Year ended December 31, 1996)
10-nnn(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to Exhibit
10-ccc(1) of the Company's Current Report on Form 8-K dated
October 21, 1998)
10-ooo Credit Agreement dated as of December 1, 1996 between the
Company and VEBA AG (as successor to Huls AG) (Incorporated
by reference to Exhibit 10-kkk of the Company's Form 10-K
for the Year ended December 31, 1996)
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10-ooo(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to Exhibit
10-ddd(1) of the Company's Current Report on Form 8-K dated
October 21, 1998)
10-ppp Credit Agreement dated as of April 1, 1996 between the
Company and VEBA AG (as successor to Huls AG) (Incorporated
by reference to Exhibit 10-lll of the Company's Form 10-K
for the Year ended December 31, 1996)
10-ppp(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to Exhibit
10-eee(1) of the Company's Current Report on Form 8-K dated
October 21, 1998)
10-qqq Fourth Short-Term Loan Agreement dated as of March 31, 1996
between the Company and VEBA Corporation (as successor to
Huls Corporation) (Incorporated by reference to Exhibit
10-mmm of the Company's Form 10-K for the Year ended
December 31, 1996)
10-qqq(1) First Amendment to Overnight Loan Agreement effective as of
September 1, 1998 between the Company and VEBA Corporation
(as successor to Huls Corporation) (Incorporated by
reference to Exhibit 10-fff(1) of the Company's Current
Report on Form 8-K dated October 21, 1998)
10-rrr Five Year Credit Agreement dated as of June 26, 1997,
between the Company and Fidelia Corporation (as successor to
Huls Corporation) (Incorporated by reference to Exhibit
10-qqq of the Company's Form 10-Q for the Quarter ended June
30, 1997)
10-rrr(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation) (Incorporated
by reference to Exhibit 10-jjj(1) of the Company's Current
Report on Form 8-K dated October 21, 1998)
10-sss Six Year Credit Agreement dated as of June 26, 1997, between
the Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-rrr of
the Company's Form 10-Q for the Quarter ended June 30, 1997)
10-sss(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation) (Incorporated
by reference to Exhibit 10-kkk(1) of the Company's Current
Report on Form 8-K dated October 21, 1998)
10-ttt Seven Year Credit Agreement dated as of June 26, 1997,
between the Company and Fidelia Corporation (as successor to
Huls Corporation) (Incorporated by reference to Exhibit
10-sss of the Company's Form 10-Q for the Quarter ended June
30, 1997)
10-ttt(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation) (Incorporated
by reference to Exhibit 10-lll(1) of the Company's Current
Report on Form 8-K dated October 21, 1998)
10-uuu Eight Year Credit Agreement dated as of June 26, 1997,
between the Company and Fidelia Corporation (as successor to
Huls Corporation) (Incorporated by reference to Exhibit
10-ttt of the Company's Form 10-Q for the Quarter ended June
30, 1997)
10-uuu(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation) (Incorporated
by reference to Exhibit 10-mmm(1) of the Company's Current
Report on Form 8-K dated October 21, 1998)
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10-vvv Loan Agreement dated as of June 30, 1998 between the Company
and Fidelia Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-xxx of the
Company's Form 10-Q for the Quarter ended June 30, 1998)
10-vvv(1) First Amendment to Loan Agreement effective as of September
1, 1998 between the Company and and Fidelia Corporation (as
successor to Huls Corporation) (Incorporated by reference to
Exhibit 10-xxx(1) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-www Revolving Credit Agreement dated as of September 23, 1998
between the Company and VEBA AG (Incorporated by reference
to Exhibit 10-zzz of the Company's Current Report on Form
8-K dated October 21, 1998)
10-xxx Revolving Credit Agreement dated as of February 26, 1999
between the Company and Fidelia Corporation (as successor to
VEBA Corporation)(Incorporated by reference to Exhibit 10.4
of Amendment No. 3 to the Company's Form S-3 Registration
Statement No. 333-65973)
13 Pages 12 through 45 (excluding the 'Report of Management' on
page 44) and page 48 of the Company's 1998 Annual Report
21 Subsidiaries of the Company
22 Omitted -- Inapplicable
23-a Consent of KPMG LLP
23-b Consent of KPMG San Tong Corp.
23-c Consent of KPMG Certified Public Accountants
24 Powers of Attorney submitted by Dr. Hans Michael Gaul;
Helmut Mamsch; Willem D. Maris; Paul T. O'Brien; Dr. Alfred
Oberholz; Michael B. Smith; and Ludger H. Viefhues
27 Financial Data Schedule (filed electronically with the SEC
only)
99 Omitted -- Inapplicable
</TABLE>
- ---------------
* Confidential treatment of certain portions of these documents has been
granted.
** Portions of this Exhibit have been redacted pursuant to a request for
confidential treatment filed separately with the Secretary of the Securities
and Exchange Commission.
+ 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.
(B) REPORTS ON FORM 8-K
During the fourth quarter of 1998, we filed the following two (2) current
reports on Form 8-K:
1. Item 5 Form 8-K filed on October 22, 1998; and
2. Item 5 Form 8-K filed on October 27, 1998.
32
<PAGE> 34
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/ KLAUS R. VON HORDE
------------------------------------
Klaus R. von Horde
President, Chief Executive Officer
and Director
Date: March 25, 1999
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/ KLAUS R. VON HORDE President, Chief Executive March 25, 1999
- --------------------------------------------------- Officer and Director
Klaus R. von Horde (Principal executive officer)
/s/ JAMES M. STOLZE Executive Vice President and March 25, 1999
- --------------------------------------------------- Chief Financial Officer
James M. Stolze (Principal financial and
accounting officer)
* Director March 25, 1999
- ---------------------------------------------------
Dr. Hans Michael Gaul
* Chairman of the Board of March 25, 1999
- --------------------------------------------------- Directors
Helmut Mamsch
* Director March 25, 1999
- ---------------------------------------------------
Willem D. Maris
* Director March 25, 1999
- ---------------------------------------------------
Dr. Alfred Oberholz
* Director March 25, 1999
- ---------------------------------------------------
Paul T. O'Brien
* Director March 25, 1999
- ---------------------------------------------------
Michael B. Smith
* Director March 25, 1999
- ---------------------------------------------------
Ludger H. Viefhues
</TABLE>
33
<PAGE> 35
* 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
34
<PAGE> 36
EXHIBIT INDEX
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10-d Technical Agreement dated December 19, 1990 between the
Company and POSCO HULS Company, Ltd.
10-d(3) Third Amendment to PHC Technical Agreement effective as of
October 1, 1998 by and between the Company and POSCO HULS
Co., Ltd.
10-kk(4) Special Incentive Bonus Agreement dated as of March 24, 1998
between the Company and John P. DeLuca
13 Pages 12 through 45 (excluding the "Report of Management" on
page 44) and page 48 of the Company's 1998 Annual Report
21 Subsidiaries of the Company
23-a Consent of KPMG LLP
23-b Consent of KPMG San Tong Corp.
23-c Consent of KPMG Certified Public Accountants
24 Powers of Attorney submitted by Dr. Hans Michael Gaul;
Helmut Mamsch; Willem D. Maris; Paul T. O'Brien; Dr. Alfred
Oberholz; Michael B. Smith; and Ludger H. Viefhues
27 Financial Data Schedule (filed electronically with the SEC
only)
</TABLE>
35
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
MEMC Electronic Materials, Inc.
Under date of January 25, 1999, we reported on the consolidated balance
sheets of MEMC Electronic Materials, Inc. and subsidiaries as of December 31,
1998 and 1997, 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, 1998, as contained in the 1998 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 1998.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule as listed
in item 14(a)(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.
KPMG LLP
St. Louis, Missouri
January 25, 1999
F-1
<PAGE> 38
MEMC ELECTRONIC MATERIALS, INC.
AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
---------- ---------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December 31,
1996..................... $2,040 $ 295 $0 $ (36)(A)(B) $ 2,299
Year ended December 31,
1997..................... 2,299 1,700 0 (526)(A)(B) 3,473
Year ended December 31,
1998..................... 3,473 (620) 0 0(A)(B) 2,853
====== ======= == ======= =======
Inventory reserves:
Year ended December 31,
1996..................... $4,432 $ 6,576(D) $0 $(4,063)(C) $ 6,945
Year ended December 31,
1997..................... 6,945 5,902(D) 0 (4,984)(C) 7,863
Year ended December 31,
1998..................... 7,863 18,420(D) 0 (6,681)(C) 19,602
====== ======= == ======= =======
</TABLE>
- ---------------
(A) Currency fluctuations
(B) Write-off of uncollectible accounts
(C) Write-off of inventory
(D) Charged to cost of goods sold
F-2
<PAGE> 39
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, 1998 and 1997, and the related statements of operations,
appropriation (disposition) of retained earnings (deficit) and cash flows for
each of the years in the three-year period ended December 31, 1998. 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
established by the Financial Supervisory Commission of the Republic of Korea,
which are substantially similar, in all material aspects, 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, 1998 and 1997, and the results of its operations, the changes in
its retained earnings (deficit), and its cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with the Financial
Accounting Standards, as established by the Financial Supervisory Commission of
the Republic of Korea.
The Financial Accounting Standards in the Republic of Korea, as established
by the Financial Supervisory Commission of the Republic of Korea, 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, 1998 and stockholders' equity
as of December 31, 1998 and 1997, to the extent summarized in note 18 to the
financial statements.
/s/ KPMG San Tong Corp.
Seoul, Korea
January 11, 1999
F-3
<PAGE> 40
POSCO HULS CO., LTD.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 2)........................ $ 60,048 $ 20,217
Marketable securities..................................... 1,235 295
Notes and account receivable, less allowance for doubtful
accounts of $81 in 1998 and $147 in 1997 (note 10)..... 8,003 14,561
Inventories (note 3)...................................... 29,178 29,892
Prepaid expenses and other current assets (notes 4 and
10).................................................... 4,249 3,713
-------- --------
Total current assets.............................. 102,713 68,678
Investments and other assets (note 6)....................... 13,051 7,795
Fixed assets, less accumulated depreciation (notes 5, 7 and
8)........................................................ 134,377 113,437
Debt issuance costs......................................... 135 --
Deferred foreign currency translation loss.................. 23,676 44,046
-------- --------
$273,952 233,956
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes and accounts payable (note 10)...................... $ 6,932 $ 3,141
Short-term borrowings (note 5)............................ 3,850 8,834
Accounts payable -- other (note 10)....................... 4,640 7,083
Current portion of long -- term liabilities (notes 5, 8,
12 and 13)............................................. 44,256 39,745
Accrued expenses and other current liabilities............ 3,379 2,462
-------- --------
Total current liabilities......................... 63,057 61,265
Retirement and severance benefits (note 11)................. 7,071 3,873
Bonds issued (note 12)...................................... 48,175 --
Long-term debt, less current portion (notes 5 and 13)....... 65,438 77,981
Long-term obligations under financing leases (note 8)....... 28,946 39,180
-------- --------
Total liabilities................................. 212,687 182,299
-------- --------
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............ 112,175 112,175
Appropriated retained earnings (note 14).................. 16,931 18,403
Unappropriated retained earnings (deficit)................ (18,619) 11,898
Cumulative translation adjustment......................... (49,222) (90,819)
-------- --------
Total stockholders' equity........................ 61,265 51,657
Commitments and contingencies (note 16)
-------- --------
$273,952 $233,956
======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 41
POSCO HULS CO., LTD.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Sales (note 10)............................................ $120,980 $215,938 $275,096
Cost of goods sold (note 10)............................... 122,267 169,388 176,833
-------- -------- --------
Gross profit (loss)........................................ (1,287) 46,550 98,263
Selling, general and administrative expenses............... 8,713 10,143 10,719
-------- -------- --------
Operating income (loss).................................... (10,000) 36,407 87,544
-------- -------- --------
Other income (deductions):
Interest income.......................................... 5,687 5,634 4,910
Interest expense......................................... (17,362) (16,894) (18,213)
Foreign currency translation and exchange gain (loss),
net................................................... 2,845 5,887 (9,230)
Amortization of deferred foreign currency translation
loss.................................................. (6,247) (15,139) --
Loss of inventory valuation.............................. (7,299) (3,953) --
Other, net............................................... 387 (4,640) (2,215)
-------- -------- --------
(21,989) (29,105) (24,748)
-------- -------- --------
Earnings (loss) before income taxes........................ (31,989) 7,302 62,796
Income taxes (note 15)..................................... -- 1,332 5,771
-------- -------- --------
Net earnings (loss)........................................ $(31,989) $ 5,970 $ 57,025
======== ======== ========
Earnings (loss) per share of common stock in U.S. dollars
(note 17)................................................ $ (1.86) $ 0.35 $ 3.32
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 42
POSCO HULS CO., LTD.
STATEMENTS OF APPROPRIATION (DISPOSITION) OF RETAINED EARNINGS (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
DATE OF APPROPRIATION FOR 1998: MARCH 19, 1999
DATE OF APPROPRIATION FOR 1997: MARCH 24, 1998
DATE OF APPROPRIATION FOR 1996: FEBRUARY 8, 1997
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C>
Unappropriated (undisposed) retained earnings (deficit):
Balance at beginning of year.............................. $ 11,898 $ 6,749 $(1,288)
Net earnings (loss) for the year.......................... (31,989) 5,970 57,025
-------- ------- -------
(20,091) 12,719 55,737
-------- ------- -------
Transfers from voluntary reserves:
Reserve for export loss (note 14)......................... 1,472 -- --
-------- ------- -------
1,472 -- --
-------- ------- -------
Appropriation (disposition) of unappropriated 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).... $(18,619) $11,898 $ 6,749
======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 43
POSCO HULS CO., LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)...................................... $(31,989) $ 5,970 $ 57,025
Adjustments to reconcile net earnings (loss) to cash
provided by operating activities:
Foreign translation loss (gain), net.................. 45 658 11,631
Loss on disposition of fixed assets, net.............. 45 486 2,392
Depreciation and amortization......................... 39,942 69,574 59,723
Provision for retirement and severance benefits....... 1,930 3,039 3,103
Contribution to National Pension Fund................. (423) (287) (223)
Payment for retirement and severance benefits......... (197) (352) (304)
Decrease (increase) in notes and accounts
receivable.......................................... 8,302 (8,164) (7,927)
Decrease (increase) in prepaid expenses and other
current assets...................................... 614 (1,232) 1,202
Decrease (increase) in inventories.................... 10,913 (9,965) (27,646)
Increase (decrease) in trade notes and accounts
payable............................................. 2,618 3,273 (639)
Increase (decrease) in accrued expenses and other
current liabilities................................. (66) (685) 1,914
Other, net............................................ 482 118 579
-------- -------- --------
Net cash provided by operating activities.................. 32,216 62,433 100,830
-------- -------- --------
Cash flows from investing activities:
Additions to fixed assets................................ (12,720) (39,020) (65,032)
Purchase of marketable securities........................ (5,494) -- (3,714)
Proceeds from sale of fixed assets....................... 432 380 30
Proceeds from disposition of marketable securities....... 4,731 2,518 232
Increase in investments, other assets and deferred
charges............................................... (1,744) (2,159) (7,499)
-------- -------- --------
Net cash used in investing activities...................... (14,795) (38,281) (75,983)
-------- -------- --------
Cash flows from financing activities:
Proceeds from bank overdraft and short-term borrowings... 13,815 14,427 20,031
Repayments of bank overdraft and short-term borrowings... (20,863) (2,245) (18,004)
Proceeds from issuance of bonds, net of discounts........ 56,818 -- --
Proceeds from long-term debt............................. 2,300 26,356 36,922
Repayment of long-term debt.............................. (43,623) (41,138) (48,873)
Payment of dividends..................................... -- (28,156) --
Increase (decrease) in accounts payable -- other......... (4,512) 3,123 (6,679)
-------- -------- --------
Net cash provided by (used in) financing activities........ 3,935 (27,633) (16,603)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 21,356 (3,481) 8,244
Effect of changes in exchange rates........................ 18,475 (17,647) (3,357)
Cash and cash equivalents at beginning of year............. 20,217 41,345 36,458
-------- -------- --------
Cash and cash equivalents at end of year................... $ 60,048 $ 20,217 $ 41,345
======== ======== ========
Supplemental disclosure of cash flow information: Cash paid
during the year for:
Income taxes............................................. $ 795 $ 1,772 $ 3,233
Interest................................................. 16,979 2,059 18,487
======== ======== ========
Supplemental schedule of non-cash investing and financing
activities:
Capital lease obligations incurred and additions to
leased equipment...................................... $ -- $ -- $ 15,712
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 44
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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. The accompanying financial
statements have been extracted from the Company's Korean language financial
statements that were prepared using accounting principles and reporting
practices generally accepted in the Republic of Korea. The financial statements
and the auditors' report have been translated from those issued in Korea, from
the Korean language into the English language, and have been modified to allow
for formatting of the financial statements in a manner different from the
presentation under Korean financial statements practices. Certain modifications
have been made in the accompanying financial statements to bring the formal
presentation into conformity with practices outside of Korea, and certain
information included in the Korean language statutory financial statements,
which management believes is not required for a fair presentation of the
Company's financial position or results of operations, is not presented in the
accompanying financial statements. The accompanying financial statements are not
intended to present the financial position and results of operations and cash
flows in accordance with accounting principles and practices generally accepted
in countries and jurisdictions other than Korea.
The Company's financial position and results of operations are presented
utilizing a 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 (-1,207.80
to US$1 and -1,695.80 to US$1 (except for amounts denominated in foreign
currencies at December 31, 1997, which are translated at -1,415.20 to US$1 (see
note 1(k))) as of December 31, 1998 and 1997, 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 (-1,415.62 to
US$1,-952.84 to US$1 and -807 to US$1 for the years ended December 31, 1998,
1997 and 1996, respectively). The effect of changes in exchange rates are
reflected as "cumulative translation adjustment" within stockholders' equity.
(b) Economic Environment
In 1998, the continued adverse economic conditions in the Republic of Korea
and other countries in the Asia Pacific region, which began in 1997, continued
to result in, among others, a national liquidity crisis, higher domestic
interest rates, reduced opportunities for refinancing or refunding of maturing
debts, and a general reduction in spending throughout the region. In order to
partially address this situation, the Government of the Republic of Korea
received 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 crisis in Korea and improve the economy over time, the
immediate effects have included and could continue to include, among others,
slower or negative economic growth, a reduction in the availability of credit,
an increase in interest rates, an increase in taxes, an increased rate of
inflation, devaluation of the Korean Won, an increase in the number of
bankruptcies of Korean companies, and labor unrest resulting from the increase
in unemployment. The impact of these and other factors have had and could
continue to have a material adverse effect on the financial position and results
of 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.
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
F-8
<PAGE> 45
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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> <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
Deferred charges are stated at cost less accumulated amortization. Bond
issue costs are amortized over the repayment period of the related bonds.
Deferred foreign currency translation loss is amortized over the remaining
repayment period of the respective assets and liabilities.
F-9
<PAGE> 46
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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.
(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. 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 as a reduction of the retirement and severance benefits liability in
the accompanying financial statements.
The Company has covered 37% and 41% of the retirement and severance
benefits liability as of December 31, 1998 and 1997, respectively by insurance
policies, which is included in the investments and other assets account as
deposits for retirement and severance benefits.
(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, 1998 and 1997, monetary assets and liabilities
denominated in a foreign currency are translated into Korean Won at -1,207.80 to
US$1 and -1,415.20 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 -1,695.80 to US$1. Had the basic rate of
exchange been used to translate foreign currency assets and liabilities as of
December 31, 1997, the net earnings reported by the Company would be reduced by
$5,606 for the year ended December 31, 1997. The difference in these exchange
rates has no impact on the US GAAP reconciliation as presented in Note 18.
(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.
F-10
<PAGE> 47
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(m) Earnings (Loss) Per Share
Earnings (loss) per common share is calculated by dividing net earnings
(loss) 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.
(p) Significant Changes in Financial Accounting Standards in Korea
On December 11, 1998, the Financial Supervisory Commission announced
certain changes in the Financial Accounting Standards in the Republic of Korea
("Korean GAAP"). The revised accounting standards are applicable for fiscal
years starting on or after January 1, 1999. The more significant changes
affecting the Company are as follows:
(i) Deferred Income Tax Currently under Korean GAAP, no provision is
made to reflect the interperiod allocation of income and expense items
being treated differently for financial reporting purpose than income tax
purposes. Under revised Korean GAAP, income tax expense shall be computed
by applying the statutory rate to income (loss) before income tax expense.
Accordingly, differences in the manner in which certain income and expense
items are treated for financial reporting and income tax purposes will
require the recognition of deferred income tax debits and credits.
(ii) Foreign Currency Translation Currently under Korean GAAP,
certain unrealized foreign currency translation gains and losses on
non-current monetary assets and liabilities are permitted to be excluded
from results of operations and recognized as a deferred credit and a
deferred asset, respectively. Under revised Korean GAAP, all unrealized
foreign currency translation gains and losses on monetary assets and
liabilities are to be included in results of operations. Amounts deferred
as of December 31, 1998 will be charged or credited to retained earnings as
of January 1, 1999.
(iii) Impairment of Long-lived Assets Currently under Korean GAAP,
there is no accounting standard regarding the impairment of long-lived
assets. Under revised Korean GAAP, a valuation allowance will be required
where there has been a material decline in the value of long-lived assets.
(iv) Investments Currently under Korean GAAP, investments in debt
securities are carried at amortized cost. Under revised Korean GAAP,
investments in debt securities are to be carried at market value, unless
they are intended to be held to maturity in which case they may continue to
be carried at amortized cost.
(v) Deferred and Intangible Assets Currently under Korean GAAP,
pre-operating costs, stock issuance cost, debt issuance costs, and research
and development costs may be deferred and amortized over future periods.
Under revised Korean GAAP, pre-operating costs (other than corporate
organization costs) must be expensed as incurred, stock issuance costs must
be recognized as a reduction of stockholders' equity, debt issuance costs
must be reflected as a discount in the related debt, and research costs
must be expensed as incurred (development costs may be deferred and
amortized over 5 years provided such costs are recoverable from future
earnings).
F-11
<PAGE> 48
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Currently under Korean GAAP, goodwill is amortized over 5 years. Under
revised Korean GAAP, goodwill may be amortized over periods up to 20 years.
(vi) Prior Period Error Corrections Currently under Korean GAAP,
prior period error corrections are included in results of operations. Under
revised Korean GAAP, prior period financial statements shall be restated to
reflect such corrections, if material.
(vii) Transfers of Receivables with Resources Currently under Korean
GAAP, transfers of receivables on which the Company is continently liable
are recognized as sales of receivables. Under revised Korean GAAP, such
transactions must be treated as borrowings; only transfers of receivables
without recourse may be treated as sales.
(viii) Accounting Changes Currently under Korean GAAP, accounting
changes are applied on a prospective basis.
Under revised Korean GAAP, the cumulative effect of changes in
accounting principles will be charged to retained earnings at the beginning
of the year.
(ix) Other Under revised Korean GAAP, certain disclosures will be
required for segments, discontinued operations, and material breaches in
debt agreements. Currently under Korean GAAP, no such disclosures are
required.
The Company plans to adopt the changes on a prospective basis from January
1, 1999. The Company has not yet determined the impact that adoption of the
revised accounting standards will have on its financial statements.
(2) CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Cash on hand................................................ $ 2 $ 1
Checking accounts........................................... 4 3
Corporate savings deposits.................................. -- 1
Foreign currency deposits................................... 48 577
Time deposits............................................... 17,315 13,858
Installment time deposits................................... 1,152 620
Cash management account..................................... 41,527 5,157
------- -------
$60,048 $20,217
======= =======
</TABLE>
F-12
<PAGE> 49
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVENTORIES
Inventories at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Finished goods.............................................. $ 8,894 $13,394
Goods-in-progress........................................... 6,820 4,753
Raw materials............................................... 415 1,410
Sub materials............................................... 4,308 3,412
Supplies.................................................... 5,043 4,351
Materials-in-transit........................................ 3,698 2,572
------- -------
$29,178 $29,892
======= =======
</TABLE>
(4) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 1998 and 1997
consist of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Other receivables........................................... $ 122 $ 260
Accrued income.............................................. 1,677 1,542
Prepayments................................................. 19 57
Income taxes refundable..................................... 1,291 363
Value added tax refundable.................................. 362 813
Prepaid expenses............................................ 769 635
Import guarantee deposit.................................... 9 43
------ ------
$4,249 $3,713
====== ======
</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, 1998 and 1997.
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ -------- -------
<S> <C> <C>
Land........................................................ $ 14,394 $ 5,046
Buildings................................................... 32,557 23,524
Machinery and equipment..................................... 66,436 59,423
-------- -------
113,387 87,993
-------- -------
Obligations the collateral is pledged to secure:
Short-term borrowings..................................... 3,850 8,641
Long-term debt, including current portion................. 80,534 76,192
-------- -------
$ 84,384 $84,833
======== =======
</TABLE>
(b) In addition, to secure borrowings of the Company, its shareholders have
provided guarantees as follows:
<TABLE>
<CAPTION>
GUARANTORS 1998 1997
- ---------- ---- ------
<S> <C> <C>
MEMC Electronic Materials, Inc. (MEMC)...................... $581 $3,743
==== ======
</TABLE>
F-13
<PAGE> 50
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) INVESTMENTS AND OTHER ASSETS
Investments and other assets at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Long-term deposits........................................ $ 1,486 $ 951
Leasehold deposits........................................ 446 262
Rental deposit............................................ 105 96
Deposits for retirement and severance benefits............ 3,004 1,742
Loans to employees........................................ 6,983 4,096
Restricted cash and deposits.............................. 11 9
Telephone rights.......................................... 43 37
Membership rights......................................... 667 475
Long-term prepaid expenses................................ 306 127
------- ------
$13,051 $7,795
======= ======
</TABLE>
(7) FIXED ASSETS
Fixed assets at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998
------------------------------------
ACCUMULATED
COST DEPRECIATION NET
-------- ------------ --------
<S> <C> <C> <C>
Land.............................................. $ 14,394 $ -- $ 14,394
Buildings......................................... 35,811 3,254 32,557
Building -- auxiliary facilities.................. 6,181 1,716 4,465
Structures........................................ 6,278 1,226 5,052
Machinery and equipment........................... 209,809 143,373 66,436
Vehicles.......................................... 575 378 197
Tools and equipment............................... 1,871 1,464 407
Furniture and fixtures............................ 10,234 7,102 3,132
Machinery-in-transit.............................. 2,362 -- 2,362
Construction-in-progress.......................... 4,886 -- 4,886
Industrial water usage rights..................... 489 -- 489
-------- -------- --------
$292,890 $158,513 $134,377
======== ======== ========
</TABLE>
F-14
<PAGE> 51
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<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
======== ======= ========
</TABLE>
Property, plant and equipment, and inventories were insured against fire
and other damage up to an amount of $526,044 and $315,734 at December 31, 1998
and 1997, 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, 1998:
<TABLE>
<S> <C>
1999....................................................... $12,849
2000....................................................... 12,849
2001....................................................... 9,281
2002....................................................... 6,234
2003 and after............................................. 4,231
-------
45,444
Less portion representing interest......................... 6,265
Less current portion....................................... 10,233
-------
Long-term obligations under financing leases............... $28,946
=======
</TABLE>
The following is a summary of the acquisition cost of leased assets and
accumulated depreciation thereon at December 31, 1998 and 1997 which are
included in machinery and equipment:
<TABLE>
<CAPTION>
DESCRIPTION 1998 1997
- ----------- ------- -------
<S> <C> <C>
Leased assets at cost (including other incidental
cost).................................................. $41,485 $28,782
Accumulated depreciation................................. 33,857 18,038
------- -------
$ 7,628 $10,744
======= =======
</TABLE>
(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
operating leases expired in 1998.
F-15
<PAGE> 52
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Operating lease expenses of $90, $459 and $1,433 charged to operations in
the years ended December 31, 1998, 1997 and 1996, 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, 1998
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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
MEMC:
Notes and accounts receivable..................... $ 1,215 $ 3,257 $ 1,757
Prepaid expenses and other current assets......... 47 217 93
Notes and accounts payable........................ 46 49 324
Accounts payable -- other......................... 695 1,141 2,495
Sales............................................. 21,558 30,168 88,765
Purchases......................................... 3,353 6,914 48,770
Licensing and royalty payments.................... 3,186 6,329 6,392
SEC:
Notes and accounts receivable..................... 5,199 2,843 5,688
Sales............................................. 78,746 135,298 142,348
</TABLE>
(11) RETIREMENT AND SEVERANCE BENEFITS
Changes in retirement and severance benefits for the years ended December
31, 1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Beginning balance....................................... $4,271 $ 5,433 $3,033
Provision for the year.................................. 2,014 3,039 3,103
Payments................................................ (197) (352) (304)
Effect of changes in exchange rates..................... 2,039 (3,849) (399)
------ ------- ------
Ending balance.......................................... 8,127 4,271 5,433
Contribution to National Pension Fund................... 1,056 398 465
------ ------- ------
$7,071 $ 3,873 $4,968
====== ======= ======
</TABLE>
F-16
<PAGE> 53
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(12) BONDS ISSUED
Bonds issued at December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
INTEREST
SERIES MATURITY PER ANNUM 1998 1997 GUARANTOR
- ------ -------- --------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C>
#6 1998 13.0% $ -- $ 5,897 Samsung Securities
#7 1998 13.0% -- 5,897 LG Securities
#9 1998 13.0% -- 7,666 Unsecured (*)
#10 1999 17.0% 10,763 -- Boram bank
#11 1999 16.0% 8,280 -- Koram bank
#12 2000 13.3% 16,559 -- Unsecured
#13 2001 10.0% 24,838 -- Unsecured
#14 2001 8.0% 8,280 -- Unsecured
------- -------
68,720 19,460
Less current portion.......................... 18,927 19,427
Less unamortized discount..................... 1,618 33
------- -------
$48,175 $ --
======= =======
</TABLE>
- ---------------
(*) Private acceptance by Korea Long-term Credit Bank.
F-17
<PAGE> 54
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(13) LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
INTEREST
PER ANNUM FINAL MATURITY 1998 1997
------------ -------------- ------- -------
<S> <C> <C> <C> <C>
Korean Won loans:
Floating
General facility loan.................. rate 2005 $ 1,449 $ --
Information Communication Supporting
Fund................................ 6.5% 1999 191 317
------- -------
1,640 317
------- -------
Foreign currency loans:
Floating
Facility loan.......................... rate 2005 1,186 --
Facility loan.......................... 3LIBOR*+1.2% 1998 -- 2,000
Facility loan.......................... 6LIBOR*+0.7% 2003 8,591 10,500
Facility loan.......................... 6LIBOR*+1.0% 2003 3,562 3,562
Facility loan.......................... 3LIBOR*+2% 1999 328 984
Facility loan.......................... 3LIBOR*+1.5% 1999 253 759
Facility loan.......................... 6LIBOR*+0.6% 1998 -- 4,734
Facility loan.......................... 6LIBOR*+1.3% 2003 5,355 6,694
Facility loan.......................... 6LIBOR*+0.6% 2003 25,480 27,307
Facility loan.......................... 6LIBOR*+1.2% 2003 2,012 2,459
Operating loan......................... 6LIBOR*+1.6% 2003 1,727 1,900
Operating loan......................... 6LIBOR*+0.7% 2000 12,700 12,700
Operating loan......................... 6LIBOR*+0.8% 2001 9,700 9,700
Operating loan......................... 6LIBOR*+0.7% 1999 3,040 3,040
Operating loan......................... 6LIBOR*+0.8% 2001 4,960 4,960
------- -------
78,894 91,299
------- -------
Total long-term debt..................................................... 80,534 91,616
Less current portion..................................................... 15,096 13,635
------- -------
$65,438 $77,981
======= =======
</TABLE>
- ---------------
* 3LIBOR = 3 month London inter-bank offered rate
* 6LIBOR = 6 month London inter-bank offered rate
The following is a schedule of payments of long-term debt as of December
31, 1998:
<TABLE>
<S> <C>
1999....................................................... $15,096
2000....................................................... 24,378
2001....................................................... 26,469
2002....................................................... 11,169
2003 and after............................................. 3,422
-------
$80,534
=======
</TABLE>
F-18
<PAGE> 55
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(14) APPROPRIATED RETAINED EARNINGS
Appropriated retained earnings as of December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Legal reserve............................................ $ 3,141 $ 3,141
Reserve for business rationalization..................... 6,344 6,344
Reserve for technology development....................... 2,010 2,010
Reserve for export loss.................................. 3,678 5,150
Reserve for overseas market development.................. 1,758 1,758
------- -------
$16,931 $18,403
======= =======
</TABLE>
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.
(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>
RATES
--------------------
TAXABLE EARNINGS 1998 1997 1996
- ---------------- ---- ---- ----
<S> <C> <C> <C>
Up to W100,000 thousand..................................... 17.6% 17.6% 17.6%
Over W100,000 thousand...................................... 30.8% 30.8% 30.8%
==== ==== ====
</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 (loss) before income taxes and
taxable income (tax loss carryforward) for the years ended December 31, 1998,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Net earnings (loss) before income taxes.............. $(31,989) $ 7,302 $62,796
Unrealized exchange loss, net........................ (108) (585) (50)
Accrued interest income, net......................... 409 (1,534) (483)
Loss on inventory valuation.......................... 4,507 3,312 --
Entertainment expense over tax limit................. 98 205 106
Reserve for tax purpose.............................. 827 -- (8,790)
</TABLE>
F-19
<PAGE> 56
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Income deduction for foreign capital increase........ $ -- $ (67) $(1,078)
Others, net.......................................... 5,564 163 215
-------- ------- -------
(20,692) 8,796 52,716
Utilization of tax loss carryforward................. -- -- (2,444)
-------- ------- -------
Taxable income (tax loss carryforward)............... (20,692) 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>
The tax loss carryforward will expire, if not utilized to offset future
taxable income, in 2003.
(16) COMMITMENTS AND CONTINGENCIES
(a) As of December 31, 1998, the Company has provided 4 blank checks and 10
blank notes to financial institutions in connection with various contracts to
guarantee repayment in case the Company is in default for the repayment of its
borrowings or in breach of certain borrowing covenants. The Company is not
currently in default of its borrowings or lease contracts.
(b) As of December 31, 1998, the Company has entered into bank overdraft
agreements for borrowing up to $9,935 with five banks and has also entered into
borrowing arrangements with three short-term financing companies.
(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 (LOSS) PER SHARE
Earnings (loss) per share for the years ended December 31, 1998, 1997 and
1996 are calculated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings (loss)............................ $ (31,989) $ 5,970 $ 57,025
Weighted average number of shares of common
stock........................................ 17,200,000 17,200,000 17,200,000
---------- ---------- ----------
Earnings (loss) per share in U.S. dollars...... $ (1.86) $ 0.35 $ 3.32
========== ========== ==========
</TABLE>
(18) RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The accompanying financial statements are prepared in accordance with
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 (loss) or stockholders' equity. The
estimated effects of the significant adjustments to
F-20
<PAGE> 57
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
net earnings (loss) and stockholders' equity which would be required if U.S.
GAAP were applied instead of Korean GAAP are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Net earnings (loss) -- Korean GAAP.................. $(31,989) $ 5,970 $57,025
-------- -------- -------
Adjustments:
Start-up costs.................................... 406 2,383 3,184
Inventories....................................... 1,845 1,044 (2,443)
Depreciation in relation to useful life and
functional currency differences................ (13,108) 11,294 19,837
Capitalized interest.............................. 97 1,273 2,684
Amortization of deferred foreign currency
translation loss............................... 6,247 15,139 --
Foreign currency translation gain (loss), net..... (5,493) (20,305) 10,733
Deferred income taxes............................. (2,435) 10,915 (6,080)
Others............................................ (12) 140 374
-------- -------- -------
Total adjustments................................... (12,453) 21,883 28,289
-------- -------- -------
Net earnings (loss) -- U.S. GAAP.................... $(44,442) $ 27,853 $85,314
======== ======== =======
Basic earnings (loss) per share -- U.S. GAAP........ $ (2.46) $ 1.62 $ 4.96
======== ======== =======
</TABLE>
For Korean GAAP presentation, the Company records gains and losses through
its statement of operations for changes in currency rates effecting monetary
assets and liabilities denominated in dollars. For US GAAP purposes, the US
dollar is the functional currency. Thus, for US GAAP purposes, currency gains
and losses result from changes in currency exchange rates related to monetary
assets and liabilities denominated in Korean won. The differences between the
currency gains and losses calculated under the two different sets of assumptions
appear as adjustments in reconciling Korean GAAP net earnings (loss) to net
earnings (loss) under US GAAP.
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Stockholders' equity -- Korean GAAP......................... $ 61,265 $ 51,657
Adjustments:
Start-up costs............................................ (1,059) (1,465)
Inventories............................................... (623) (2,468)
Fixed assets:
Depreciation in relation to useful life and functional
currency differences................................. 30,462 43,570
Capitalized interest and related depreciation.......... 2,793 2,696
Functional currency impact, principally on fixed assets
and inventories........................................ 80,397 141,556
Deferred foreign currency translation loss................ (23,676) (44,046)
Deferred income taxes..................................... 2,389 4,824
Others.................................................... -- 66
-------- --------
Total adjustments...................................... 90,683 144,733
-------- --------
Stockholders' equity -- U.S. GAAP........................... $151,948 $196,390
======== ========
</TABLE>
For US GAAP purposes fixed assets are depreciated over longer lives than
for Korean GAAP purposes. Additionally, fixed assets are presented in the Korean
GAAP financial statements using a translation rate in effect at the balance
sheet date. For US GAAP purposes, the US dollar is the functional currency.
F-21
<PAGE> 58
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accordingly, fixed assets are translated at rates in effect at the acquisition
date of the various assets. As a result, in reconciling from Korean GAAP to US
GAAP stockholders' equity, positive adjustments result both from the longer life
used for US GAAP as well as translating the gross asset basis, and accompanying
accumulated depreciation, at rates different than for Korean GAAP.
The condensed balance sheets of the Company as of December 31, 1998 and
1997 under U.S. GAAP are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Inventories............................................... $ 29,655 $ 37,518
Other current assets...................................... 74,916 39,134
-------- --------
Total current assets................................... 104,571 76,652
Fixed assets................................................ 419,964 421,551
Less accumulated depreciation............................. 173,990 132,051
-------- --------
245,974 289,500
Investments and other assets................................ 14,090 12,612
-------- --------
$364,635 $378,764
======== ========
Current liabilities......................................... $ 63,057 $ 61,340
Long-term liabilities....................................... 149,630 121,034
-------- --------
Total liabilities...................................... 212,687 182,374
Stockholders' equity:
Common stock.............................................. 112,175 112,175
Retained earnings......................................... 39,773 84,215
-------- --------
Total stockholders' equity............................. 151,948 196,390
-------- --------
$364,635 $378,764
======== ========
</TABLE>
The tax effects of temporary differences that resulted in significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 computed under U.S. GAAP, and a description of the financial statement
items that created these differences follow:
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Deferred tax assets:
Inventories............................................... $ 2,055 $ 766
Start-up costs............................................ 165 139
Capital leases............................................ 1 2
Foreign currency translation loss......................... 5,501 10,131
Korean tax operating loss carryforwards................... 5,772 --
Others.................................................... 3 --
-------- ------
Total deferred tax assets................................... 13,497 11,038
-------- ------
Deferred tax liabilities:
Depreciation in relation to useful life difference........ (9,050) (4,897)
Depreciation on capitalized interest...................... (447) (285)
</TABLE>
F-22
<PAGE> 59
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Reserves for tax purpose.................................. (1,167) (850)
Accrued income............................................ (399) (182)
Land...................................................... (45) --
-------- ------
Total deferred tax liabilities.............................. (11,108) (6,214)
-------- ------
Net deferred tax asset...................................... $ 2,389 $4,824
======== ======
</TABLE>
(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, and was further increased to 23.8%
in 1998 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, increase net earnings by $5,401 in 1997
and decrease net loss by $291 in 1998.
(b) Pre-Operating and Start-Up Costs
Certain pre-operating 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) 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.
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 or fair value less costs to
sell. There is no indication of impairment of property, plant and equipment at
December 31, 1998 and 1997.
F-23
<PAGE> 60
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(e) Inventories
For U.S. GAAP, inventories are adjusted for the effect of capitalized
depreciation in beginning and ending inventory balances relating to the
differences in useful lives of machinery and equipment and to depreciation on
capitalized interest.
(f) 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.
(g) Foreign Currency Translation
In accordance with a change in Korean GAAP in 1997, net foreign exchange
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 transaction losses are expensed as incurred in all periods.
(h) Functional Currency
Under U.S. GAAP, the Company considers the U.S. dollar as its functional
currency. Accordingly, the accounting bases of nonmonetary assets and
liabilities, primarily property, plant and equipment are reflected at the
historical exchange rate when the transaction occurred, foreign currency
exchange gains and losses under Korean GAAP are reversed, and exchange gains and
losses are recognized on Won-denominated monetary assets and liabilities. The
effects of using the U.S. dollar as the functional currency are included in the
U.S. GAAP reconciliation information.
(i) Restatement of U.S. GAAP
As discussed in note 18(h), the Company reports its financial position and
results of operations using the U.S. dollar as the functional currency under
U.S. GAAP. Originally reported net earnings and stockholders' equity under U.S.
GAAP reflected the use of the U.S. dollar as the functional currency only for
periods after September 30, 1997. Accordingly, net earnings and stockholders'
equity under U.S. GAAP have been restated as follows:
<TABLE>
<CAPTION>
NET STOCKHOLDERS'
EARNINGS EQUITY
-------- -------------
<S> <C> <C>
As of and for the year ended December 31, 1996:
As previously reported.................................... $73,165
Effect of adjustment...................................... 12,149
-------
As restated............................................... $85,314
=======
As of and for the year ended December 31, 1997:
As previously reported.................................... $26,915 $158,255
Effect of adjustment...................................... 938 38,135
------- --------
As restated............................................... $27,853 $196,390
======= ========
</TABLE>
F-24
<PAGE> 61
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The effect of such restatement on basic earnings per share as adjusted in
accordance with U.S. GAAP was an increase of $0.06 per share and $0.71 per share
for the years ended December 31, 1997 and 1996, respectively.
F-25
<PAGE> 62
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Taisil Electronic Materials Corporation:
We have audited the accompanying balance sheets of Taisil Electronic
Materials Corporation as of December 31, 1998 and 1997 and the related
statements of operations, changes in stockholders' equity 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 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
audits provide 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, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles in the Republic of China.
The accompanying financial statements for the year ended December 31, 1996
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, 1996.
As discussed in note (2)(j) 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,
1998 and 1997, and the results of operations for the years then ended to the
extent summarized in note 15 to the financial statements.
/s/ KPMG Certified Public Accountants
Taipei, Taiwan
February 9, 1999
F-26
<PAGE> 63
TAISIL ELECTRONIC MATERIALS CORPORATION
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(EXPRESSED IN THOUSANDS OF
US DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 4)........................ $ 31,068 $ 18,755
Short-term investments (note 5)........................... 337 2,053
Restricted bank deposits (note 13)........................ 962 3,094
Notes and accounts receivable (note 3).................... 14,649 21,335
Inventories, net (note 6)................................. 15,869 18,121
Prepayments and other current assets (notes 3 and 12)..... 2,076 3,200
Deferred income tax, net (note 12)........................ -- 4,434
-------- --------
Total current assets................................... 64,961 70,992
-------- --------
Long-term investments....................................... 23 --
-------- --------
Property, plant and equipment (notes 3, 7 and 13):
Buildings................................................. 51,642 51,225
Machinery and equipment................................... 213,303 189,931
Furniture and fixtures.................................... 6,691 6,509
-------- --------
271,636 247,665
Less: accumulated depreciation............................ (70,715) (33,519)
Construction in progress, including deposits for
equipment.............................................. 20,751 31,969
-------- --------
Net property, plant, and equipment..................... 221,672 246,115
-------- --------
Other assets:
Deferred technology fees (note 3)......................... 5,583 5,417
Deferred income tax, net (note 12)........................ 3,678 13,038
Other assets.............................................. 884 1,383
-------- --------
Total other assets..................................... 10,145 19,838
-------- --------
$296,801 $336,945
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term loans (note 8)................................. $ 35,362 $ 23,847
Short-term bills payable (note 8)......................... 15,851 27,745
Current portion of long-term loans (notes 3 and 9)........ 37,395 19,433
Notes and accounts payable (note 3)....................... 4,370 11,750
Payables for construction in process...................... 940 732
Accrued expenses and other current liabilities (notes 3
and 10)................................................ 8,182 10,152
-------- --------
Total current liabilities.............................. 102,100 93,659
-------- --------
Long-term loans (notes 3 and 9)............................. 116,346 163,682
Deposits from contractors................................... 66 20
Accrued pension liabilities (note 10)....................... 310 39
-------- --------
Total liabilities...................................... 218,822 257,400
-------- --------
STOCKHOLDERS' EQUITY (NOTE 11):
Common stock -- par value NT$10, Authorized 480,000,000
shares and issued 400,000,000 shares in 1998 and
authorized 480,000,000 shares and issued 315,000,000
shares in 1997......................................... 139,887 113,783
Advance from stockholders................................. 30,744 --
Accumulated deficit....................................... (92,652) (34,238)
-------- --------
Total stockholders' equity Commitments (note 14)....... 77,979 79,545
$296,801 $336,945
======== ========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 64
TAISIL ELECTRONIC MATERIALS CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ------------
(UNAUDITED)
------------
(EXPRESSED IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
Net sales (note 3)........................................ $ 58,663 $ 61,554 $ 7,214
Cost of goods sold (note 3)............................... 80,284 70,017 21,569
-------- -------- --------
Gross loss................................................ (21,621) (8,463) (14,355)
-------- -------- --------
Selling, general and administrative expense............... 7,678 6,939 8,058
Research and development expense.......................... 2,117 6,908 3,523
-------- -------- --------
9,795 13,847 11,581
-------- -------- --------
Operating loss............................................ (31,416) (22,310) (25,936)
-------- -------- --------
Non-operating income (expense):
Interest income......................................... 1,589 1,959 3,607
Interest expense, excluding capitalized interest of $0
in 1998, $991 in 1997 and $1,799 in 1996 (note 3).... (15,286) (15,356) (6,955)
Gain (loss) on foreign exchange, net.................... (1,773) 14,800 622
Other income, net (note 3).............................. 1,525 1,458 79
-------- -------- --------
(13,945) 2,861 (2,647)
-------- -------- --------
Loss before income tax.................................... (45,361) (19,449) (28,583)
Income tax benefit (expense) (note 12).................... (13,053) 5,665 11,652
-------- -------- --------
Net loss.................................................. $(58,414) $(13,784) $(16,931)
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 65
TAISIL ELECTRONIC MATERIALS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
ADVANCE DEFICIT DURING
COMMON FROM DEVELOPMENT ACCUMULATED
STOCK STOCKHOLDERS STAGE DEFICIT TOTAL
-------- ------------ -------------- ----------- --------
(EXPRESSED IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1996
(unaudited).......................... $ 53,075 $ -- $(3,523) $ -- $ 49,552
Accumulated deficit during development
stage carried forward to accumulated
deficit.............................. -- -- 3,523 (3,523) --
Capital increase through cash.......... 41,867 -- -- -- 41,867
Net loss............................... -- -- -- (16,931) (16,931)
-------- ------- ------- -------- --------
Balance as of December 31, 1996
(unaudited).......................... 94,942 -- -- (20,454) 74,488
Capital increase through cash.......... 18,841 -- -- -- 18,841
Net loss............................... -- -- -- (13,784) (13,784)
-------- ------- ------- -------- --------
Balance as of December 31, 1997........ 113,783 -- -- (34,238) 79,545
Capital increase through cash.......... 26,104 -- -- -- 26,104
Advance from stockholders.............. -- 30,744 -- -- 30,744
Net loss............................... -- -- -- (58,414) (58,414)
-------- ------- ------- -------- --------
Balance as of December 31, 1998........ $139,887 $30,744 $ -- $(92,652) $ 77,979
======== ======= ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 66
TAISIL ELECTRONIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ------------
(UNAUDITED)
(EXPRESSED IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(58,414) $(13,784) $ (16,931)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash foreign exchange (gain) loss................ 1,521 (16,510) (644)
Depreciation and amortization........................ 38,961 26,497 9,356
Provision (reversal) for inventory loss.............. 1,170 (1,207) 5,628
Loss from disposal of fixed assets................... 52 9 4
Decrease (increase) in notes and accounts
receivable......................................... 6,686 (20,027) (3,826)
Decrease (increase) in inventories................... 1,082 (5,068) (16,713)
Decrease (increase) in prepayments and other current
assets............................................. 1,264 (4,103) 1,216
Decrease (increase) in deferred income taxes......... 13,794 (3,852) (11,671)
Increase (decrease) in notes and accounts payable.... (7,380) 1,550 1,662
Increase (decrease) in accrued expenses and other
current liabilities................................ (1,801) 10,573 1,234
Increase in accrued pension liabilities.............. 310 -- --
-------- -------- ---------
Net cash used in operating activities.............. (2,755) (25,922) (30,685)
-------- -------- ---------
Cash flows from investing activities:
Decrease (increase) in short-term investments........... 1,716 (2,060) --
Increase in long-term investment........................ (23) -- --
Additions to property, plant and equipment.............. (13,020) (75,965) (139,758)
Proceeds from disposal of property and equipment........ 22 18 18
Increase in technology fees and other assets............ (1,379) (247) (1,538)
Decrease (increase) in restricted bank deposits......... 2,132 36,650 (10,635)
-------- -------- ---------
Net cash used in investing activities.............. (10,552) (41,604) (151,913)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock and advance from
stockholders......................................... 56,848 18,841 41,867
Increase (decrease) in loans and bills payable.......... (31,132) 57,081 142,658
Increase (decrease) in deposits from contractors........ 46 (16) 37
-------- -------- ---------
Net cash provided by financing activities.......... 25,762 75,906 184,562
-------- -------- ---------
Net increase in cash and cash equivalents................. 12,455 8,380 1,964
Effect of exchange rate changes on cash................... (142) (740) (66)
Cash and cash equivalents at beginning of the year........ 18,755 11,115 9,217
-------- -------- ---------
Cash and cash equivalents at end of the year.............. $ 31,068 $ 18,755 $ 11,115
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest, excluding capitalized
interest............................................. $ 15,032 $ 14,015 $ 6,549
======== ======== =========
Cash paid for income taxes (including refundable income
taxes)............................................... $ 163 $ 191 $ 358
======== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE> 67
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 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.
The operations of the Company have been affected, and may continue to be
affected, by the currency devaluations and general deterioration of the
economies of countries in the Asia Pacific region. The Company does not,
however, expect the currency valuation problems and potential slowdown in Asian
economies to have a significant long-term 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
varies 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, 1998 and 1997, and
the results of operations for each of the two years then ended, to the extent
summarized in note 15.
(b) Foreign currency transactions
Foreign currency transactions in currencies other than the functional
currency 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.
(c) Cash equivalents
The Company considers commercial paper and bank acceptances, with a
maturity of less than three months from the date of purchase and time deposits
as cash equivalents.
(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 sale of investments are determined on
the weighted-average basis.
F-31
<PAGE> 68
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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) Long-term investments
Long-term investments in equity securities that are not publicly traded in
which the Company owns less than 20% of the investee's common stock and does not
exercise significant influence over the investee's operations, are stated at the
cost.
(g) 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.
Property, plant and equipment is reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of evaluating the recoverability of property, plant
and equipment, the estimated future undiscounted net cash flows of each
operational gross of assets is compared to the carrying amount of the assets. If
the carrying amount exceeds the undiscounted cash flows, the impairment is
measured based on the fair values of the assets. At December 31, 1998, the
estimated future undiscounted net cash flows of property, plant and equipment
exceeded their carrying amount.
(h) 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.
(i) 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.
(j) 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
F-32
<PAGE> 69
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
obligation over fair value of plan assets. Net periodic pension costs including
current service cost and net obligation at transition which are amortized over a
27 year period based on the straight-line method, are recognized starting in
1998. The effect of this accounting change increased the net loss by
approximately $288 in 1998.
(k) Income taxes
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.
(l) 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 as the cash flows being hedged do not represent
firm commitments. 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.
(m) Restatement of Financial Statements
The Company reports its financial position and results of operations using
the US dollar as the functional currency. Previously reported results of
operations and stockholders' equity reflected the use of the US dollar as the
functional currency only for periods after September 30, 1997. Accordingly, net
loss, net loss per share and stockholders' equity have been restated from
amounts originally reported as follows:
<TABLE>
<CAPTION>
NET LOSS STOCKHOLDERS'
NET LOSS PER SHARE EQUITY
-------- --------- -------------
<S> <C> <C> <C>
For the year ended December 31, 1996 (unaudited):
As previously reported.......................... $(17,161) $(0.08)
Effect of adjustment............................ 230 --
-------- ------ -------
As restated..................................... $(16,931) $(0.08)
======== ====== =======
As of and for the year ended December 31, 1997:
As previously reported.......................... $(17,851) $(0.07) $71,366
Effect of adjustment............................ 4,067 0.02 8,179
-------- ------ -------
As restated..................................... $(13,784) $(0.05) $79,345
======== ====== =======
</TABLE>
F-33
<PAGE> 70
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) TRANSACTION WITH RELATED PARTIES
(a) Name and relationship
<TABLE>
<CAPTION>
OWNERSHIP
NAME OF RELATED PARTY RELATIONSHIP WITH THE COMPANY PERCENTAGE
- --------------------- ----------------------------- ----------
<S> <C> <C>
MEMC Electronic Materials Inc. USA Investor using equity method to account 45%
(MEMC) for its investment in the Company and
represented on the Company's Board of
Directors
Chiao Tung Bank of Taipei, Taiwan, Investor and represented on the 10%
ROC (CTB) Company's Board of Directors
China Steel Corporation (CSC) Investor and represented on the 35%
Company's Board of Directors
China Development Corporation 10%
---
100%
===
Posco Huls Co. Ltd. (PHC) MEMC group company
MEMC Japan Ltd. (MJL) MEMC group company
MEMC Electronic Materials SPA (Novara) MEMC group company
</TABLE>
(b) Significant transactions with related parties
(i) Net sales to and corresponding amounts receivable from related party
are as follows:
<TABLE>
<CAPTION>
SALES
--------------------------------------------------------------------
1998 1997 1996 ACCOUNTS RECEIVABLE
------------------ ------------------- ----------------------- DECEMBER 31,
% OF NET % OF NET (UNAUDITED) % OF NET --------------------
AMOUNT SALES AMOUNT SALES AMOUNT SALES 1998 1997
------ -------- ------- -------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MEMC................. $8,987 15.32 $17,031 27.67 $921 12.63 $2,693 $6,983
Novara............... 240 0.41 -- -- -- -- 247 --
------ ----- ------- ----- ---- ----- ------ ------
$9,227 15.73 $17,031 27.67 $921 12.63 $2,940 $6,983
====== ===== ======= ===== ==== ===== ====== ======
</TABLE>
Purchases from and corresponding amounts payable to related party are as
follows:
<TABLE>
<CAPTION>
PURCHASES
-------------------------------------------------------------------------
1998 1997 1996 ACCOUNTS PAYABLE
-------------------- -------------------- ------------------------- DECEMBER 31,
% OF TOTAL % OF TOTAL (UNAUDITED) % OF TOTAL -----------------
AMOUNT PURCHASES AMOUNT PURCHASES AMOUNT PURCHASES 1998 1997
------ ---------- ------ ---------- ----------- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MEMC................. $2,131 8.64 $6,314 17.78 $485 9.51 $ 4 $3,290
Others............... 186 0.75 -- -- -- -- 77 --
------ ---- ------ ----- ---- ---- --- ------
$2,317 9.39 $6,314 17.78 $485 9.51 $81 $3,290
====== ==== ====== ===== ==== ==== === ======
</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>
1998................. $36,934 5.875% - 6.855% $35,909 $2,127 $199 Machinery and
equipment $60,886
1997................. $28,450 5.825% - 6.575% $28,306 $1,751 $153 Machinery and
equipment $32,570
</TABLE>
F-34
<PAGE> 71
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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, $713,
$1,312, and $2,703 in 1998, 1997 and 1996, respectively, pursuant to the
terms of such agreements. The related amounts outstanding of $148 and
$2,048 as of December 31, 1998 and 1997, 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 AND CASH EQUIVALENTS
Details of cash and cash equivalents as of December 31, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Cash on hand, current and checking accounts.............. $ 413 $ 2,112
Cash equivalents......................................... 30,655 16,643
------- -------
$31,068 $18,755
======= =======
</TABLE>
(5) SHORT-TERM INVESTMENTS
The Company had invested $337 and $2,053 in open-ended trust funds as of
December 31, 1998 and 1997, respectively. The market value of such investments
as of December 31, 1998 and 1997 was approximately $338 and $2,065.
(6) INVENTORIES
The components of inventories as of December 31, 1998 and 1997, are
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Finished goods........................................... $ 6,153 $ 5,381
Work in process.......................................... 3,188 6,733
Raw materials and spare parts............................ 11,905 10,068
------- -------
21,246 22,182
Provision for inventory devaluation...................... (5,377) (4,061)
------- -------
$15,869 $18,121
======= =======
</TABLE>
As of December 31, 1998 and 1997, insurance coverage of inventories
amounted to approximately $21,728 and $18,383, 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.
F-35
<PAGE> 72
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Insurance coverage on property, plant and equipment and the third-party
liability as of December 31, 1998 and 1997, amounted to approximately $247,846
and $199,617, respectively.
(8) SHORT-TERM LOANS AND SHORT-TERM BILLS PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1998 1997
------------------------- ------------------------
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
------- -------------- ------- -------------
<S> <C> <C> <C> <C>
Unsecured loans.................. $29,023 5.988% - 7.023% $ -- --
Secured loans.................... 931 7.25% 3,064 6.80%
Credit loans and import loans
under usance letters of
credit......................... 5,408 0.514% - 6.50% 20,783 0.98% - 8.99%
Commercial paper payable......... 15,520 5.35% - 6.75% 28,494 7.30% - 8.15%
Bank acceptance payable.......... 621 6.50% -- --
Unamortized discount on
short-term bills payable....... (290) (749)
------- -------
$51,213 $51,592
======= =======
</TABLE>
As of December 31, 1998 and 1997, 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 AND -------------------
BANK PURPOSE PERIOD REPAYMENT TERM 1998 1997
- ---- --------------- ------ -------------- -------- --------
<S> <C> <C> <C> <C> <C>
Chiao Tung Bank NT$240,000 Loan for February 1998 to Repayable in 17 $ 6,497 $ --
purchase of February 2005 quarterly
machinery installments
starting in February
2001
Chiao Tung Bank NT$400,000 Loan for November 1995 to Repayable in 17 11,686 12,256
purchase of November 2002 quarterly
machinery installments
starting in November
1998
Chiao Tung Bank NT$100,000 Loan for November 1995 to Repayable in 21 2,365 2,918
purchase of November 2002 quarterly
machinery installments
starting in November
1997
Chiao Tung Bank NT$100,000 Loan for November 1995 to Repayable in 29 3,104 3,064
purchase of November 2005 quarterly
machinery installments
starting in January
1999
Chiao Tung Bank NT$200,000 Loan for December 1996 to Repayable in 17 4,136 2,213
purchase of November 2003 quarterly
machinery installments
starting in December
1999
Chiao Tung Bank NT$200,000 Loan for December 1996 to Repayable in 17 6,208 6,128
purchase of November 2003 quarterly
machinery installments
starting in March
2000
</TABLE>
F-36
<PAGE> 73
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
CREDIT LINE AND -------------------
BANK PURPOSE PERIOD REPAYMENT TERM 1998 1997
- ---- --------------- ------ -------------- -------- --------
<S> <C> <C> <C> <C> <C>
Chiao Tung Bank NT$80,000 Loan for December 1996 to Repayable in 29 1,913 1,727
purchase of November 2006 quarterly
machinery installments
starting in January
2000
The International NT$1,000,000 Loan December 1995 to Repayable in 10 24,832 30,639
Commercial Bank of for plant December 2002 semi- annual
China construction installments
starting in June
1998
The International NT$600,000 Loan for -- -- -- 2,298
Commercial Bank of plant construction
China
Taiwan Cooperative NT$600,000 Credit -- -- -- 18,383
Bank loan
ABN AMRO Bank (In $60,000 Loan for October 1995 to Repayable in 10 48,000 60,000
charge of syndication purchase of August 2002 semi- annual
loan agreement for machinery installments
the phase I starting in February
expansion) 1998
ABN AMRO Bank (In $20,000 Bridge loan -- -- -- 3,489
charge of syndication for the following
loan agreement for ABN AMRO loan
the phase II
expansion)
ABN AMRO Bank (In $45,000 Loan for January 1997 to Repayable in 6 semi- 45,000 40,000
charge of syndication purchase of December 2001 annual installments
loan agreement for machinery starting in June
the phase II 1999
expansion)
-------- --------
153,741 183,115
Less: current portion (37,395) (19,433)
-------- --------
$116,346 $163,682
======== ========
</TABLE>
The following is a schedule of payments of long-term debt as of December
31, 1998:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------
<S> <C>
1999.............................................. $ 37,395
2000.............................................. 39,786
2001.............................................. 41,378
2002.............................................. 26,372
2003.............................................. 4,651
After 2003........................................ 4,159
--------
$153,741
========
</TABLE>
On December 23, 1996, the Company obtained a syndicate loan from the ABN
AMRO Bank and six other banks (the Banks). In accordance with the syndication
loan agreements, the Banks granted credit facilities to the Company for purchase
of machinery and equipment. During the period of loan, restrictions on the above
syndication loan are as follows:
The major stockholders MEMC and CSC, together, must own not less than 70%
of the Company's issued common shares, and VEBA AG must own not less than 50% of
MEMC issued common shares.
F-37
<PAGE> 74
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The ranges for interest rates on these borrowings for the years ended
December 31, 1998, 1997 and 1996 were 6.50% - 7.95%, 6.00% - 7.605% and
0.85% - 7.495%, respectively. As of December 31, 1998 and 1997, total unused
lines of credit for short-term and long-term loans amounted to approximately
$102,903 and $263,435, respectively.
As December 31, 1998 and 1997, 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 dates for the actuarial study of the Company's
pension obligation were December 31, 1998 and 1997. The funded status of the
Company's pension scheme as of December 31, 1998 and 1997, was as follows:
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
----------------
1998 1997
------- -----
<S> <C> <C>
Benefit obligation:
Vested benefit obligation................................. $ -- $ --
Non-vested benefit obligation............................. (411) (256)
------- -----
Accumulated benefit obligation............................ (411) (256)
Effects of future salary progression...................... (977) (638)
------- -----
Projected benefit obligation.............................. (1,388) (894)
Fair value of plan assets................................... 476 256
------- -----
Benefit obligation in excess of plan assets................. (912) (638)
Unrecognized net obligation at transition................... 584 599
------- -----
Accrued pension liabilities................................. $ (328) $ (39)
======= =====
</TABLE>
The net pension cost for the year ended December 31, 1998 consisted of
following components:
<TABLE>
<S> <C>
Service cost................................................ $421
Interest expense............................................ 59
Expected returns on pension fund............................ (24)
Amortization and deferral................................... 23
----
$479
====
</TABLE>
Actuarial assumptions are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Discount rate............................................... 6.50% 6.50%
Rate of salary progression.................................. 6.00% 6.00%
Projected return on plan assets............................. 6.50% 6.50%
</TABLE>
Pension expenses were $198, and $135 for the years ended December 31, 1997
and 1996, respectively. As of December 31, 1998 and 1997, the balances of the
Company's pension fund maintained with the Central Trust of China were $476 and
$256, respectively. As of December 31, 1998 and 1997, the unpaid balances of $15
and $63, respectively, were included in accrued expenses.
F-38
<PAGE> 75
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11) STOCKHOLDERS' EQUITY
(a) Capital stock
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.
On July 25, 1997, the stockholders' meeting approved a proposal to increase
authorized capital stock to 480,000,000 shares at NT$10 par value per share and
to issue 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.
On February 5, 1998, the board of directors decided to issue an additional
85,000,000 shares at NT$10 per value per share for cash. After this capital
increase, the total issued capital was $139,887. The above increases were all
registered and approved by the authorities.
On October 12, 1998, December 14, 1998 and January 11, 1999, the board of
directors decided to issue an additional 75,000,000, 35,000,000 and 90,000,000
shares at NT$10 par value per share for cash. On December 14, 1998, the special
stockholders' meeting approved the deduction of capital by 200,000,000 shares at
NT$10 par value to offset the accumulated deficit. The effective date of above
increase and decrease of capital has not been determined. Prior to December 31,
1998, the Company received $30,744 from stockholders related to the approved
share issuances. The advance payment was recorded as "advance from
stockholders," a separate component of stockholders' equity, on the balance
sheet as of December 31, 1998.
(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
stockholders and make a report on such loss.
(12) INCOME TAXES
The Company's earnings are subject to an income tax rate of 20%. For the
years ended December 31, 1998, 1997 and 1996, income tax expense (benefit) was
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current income tax expense.......................... $ -- $ 25 $ --
Deferred income tax expense (benefit)............... 13,053 (5,690) (11,652)
------- ------- --------
$13,053 $(5,665) $(11,652)
======= ======= ========
</TABLE>
F-39
<PAGE> 76
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's income tax expense (benefit) for the years ended December 31,
1998, 1997 and 1996, 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>
1998 1997 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computed "expected" income tax benefit.............. $(9,072) $(3,890) $ (5,717)
Investment tax credits earned....................... (9,406) (4,736) (10,811)
Unrealized exchange gain............................ -- (5,070) --
Other............................................... 1,712 45 32
Valuation allowance................................. 29,819 7,986 4,844
------- ------- --------
Income tax expense (benefit)........................ $13,053 $(5,665) $(11,652)
======= ======= ========
</TABLE>
As of December 31, 1998 and 1997, refundable income taxes were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
Estimated income tax expense................................ $ -- $ 25
Prepaid income tax.......................................... 163 178
Other....................................................... -- (25)
Income tax refundable from prior years...................... 181 477
---- ----
Income tax refundable....................................... $344 $655
==== ====
</TABLE>
The temporary differences, tax credits, loss carryforwards and their
effects on deferred income tax assets are as follows as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1998 1997
-------------------- --------------------
INCOME TAX INCOME TAX
AMOUNT EFFECT AMOUNT EFFECT
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Current assets:
Unrealized loss from inventory
devaluation........................... $ 5,056 $ 1,011 $ 3,738 $ 748
Organization cost deferred for tax
purposes.............................. 2,408 482 2,448 490
Employee benefit costs deferred for tax
purposes.............................. 174 35 171 34
Unrealized foreign exchange loss......... 12,145 2,429 15,809 3,162
------- ------
3,957 4,434
Less: valuation allowance................ (3,957) --
------- ------
$ -- $4,434
======= ======
</TABLE>
F-40
<PAGE> 77
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1998 1997
-------------------- --------------------
INCOME TAX INCOME TAX
AMOUNT EFFECT AMOUNT EFFECT
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Noncurrent assets:
Investment tax credits earned............ $25,178 $25,178 $14,762 $14,762
Organization costs deferred for tax
purposes.............................. 1,338 268 3,507 702
Employee benefit costs deferred for tax
purposes.............................. -- -- 171 34
Difference in technology fee............. 1,081 216 391 78
Tax loss carryforward.................... 90,787 18,157 46,851 9,370
------- ------
43,819 24,946
Less: valuation allowance................ (40,141) (11,908)
------- ------
$ 3,678 $13,038
======= =======
</TABLE>
A valuation allowance has been established at December 31, 1998 and 1997
due to the uncertainty of realizing a portion of the deferred tax asset balance.
In management's opinion it is more likely than not that the net deferred tax
asset balance at December 31, 1998 and 1997 will be realized.
The significant factors considered in determining the valuation allowance
at December 31, 1998 and 1997 included the Company's eight year financial
forecast, the expected length of the Company's start-up period for its newly
constructed facilities, the expected future market conditions in Taiwan and the
semiconductor industry, the impact of the tax holiday periods, and the
expiration dates of available investment tax credits and loss carryforwards. The
Company increased its valuation allowance by approximately $30 million as of
December 31, 1998 as compared to December 31, 1997 primarily due to a change in
market conditions which resulted in a significant reduction in the Company's
near-term taxable income forecast.
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, 1998, the estimated unused income tax credits, resulting 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 $ 282 1999
1996 304 1999
1996 455 2000
1997 2,742 1999
1997 10,846 2000
1997 1,143 2001
1998 2,243 2000
1998 5,719 2001
1998 1,444 2002
-------
$25,178
=======
</TABLE>
F-41
<PAGE> 78
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company is authorized to be a "Science-based industry" and "Important
technology-based industry" as defined by the Statutes.
According to the Statute for the Establishment and Administration of
Science-Based Industrial Park, a science-based industry 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.
In accordance with Article 8 of the Statute for Promotion of Upgrading
Industries, the important technology-based industry shareholders which held
their investments for a period over two years, the shareholders may credit up to
20% of price paid for the acquisition of such investments against their income
tax payable.
The Company's initial NT$200,000 capital expenditure project (phase I
project) is entitled to enjoy both the tax holiday and shareholders investment
tax credit incentive schemes. The Company has chosen January 1, 2000 as the tax
holiday starting date.
The Company's subsequent expansion of NT$200,000 capital expenditure
project (phase II project) can only apply one of the above incentive schemes.
The stockholders' meeting on May 22, 1998 has selected to enjoy shareholders
investment tax credit.
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,
1998, the estimated tax loss carryforwards were as follows:
<TABLE>
<CAPTION>
YEAR LOSS AMOUNT YEAR OF EXPIRATION
- --------- ------- ------------------
<S> <C> <C>
1996 $16,429 2001
1997 30,862 2002
1998 43,496 2003
-------
$90,787
=======
</TABLE>
The tax authorities have examined and assessed the Company's income tax
returns through 1996.
(13) PLEDGED ASSETS
As of December 31, 1998 and 1997, pledged assets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
ASSETS RELATED SECURED LIABILITIES 1998 1997
- ------ ------------------------------ -------- -------
<S> <C> <C> <C>
Time Deposits
Restricted bank deposits Short-term loans $ 931 $ 3,063
Restricted bank deposits Documentary draft for export 31 31
in customs
Machinery and equipment Long-term loans 73,757 53,312
Buildings Long-term loans 38,113 34,333
-------- -------
$112,832 $90,739
======== =======
</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
F-42
<PAGE> 79
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are subject to adjustment as and when the government reappraises the land value.
The current rent is NT$12,390 ($383) per year.
Future minimum lease payments as of December 31, 1998, under the existing
non-cancelable agreement are:
<TABLE>
<CAPTION>
YEARS MINIMUM LEASE PAYMENTS
- ----- ------------------------
<S> <C> <C>
1999 through 2003................................... $1,915 ($383 annually)
2004 through 2008................................... 1,915
2009 through 2013................................... 1,915
2014................................................ 382
------
$6,127
======
</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, 1998 and
1997, the remaining balance of such payments to be paid under the agreement
amounted to $834 and $2,500, respectively.
In addition, the Company pays MEMC an annual royalty based on net sales and
operating income.
(c) Purchase of equipment
As of December 31, 1998 and 1997, the Company had outstanding letters of
credit amounting to approximately $4,906 and $3,242, respectively, and was
committed to purchase equipment with a total estimated cost of $981 and $15,369,
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, 1998 and 1997 amounted to
$9 and $44, 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
Prior to January 1, 1998, 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 by government
regulations under ROC GAAP. As described in note 2(j), the Company began
recording pension expense using actuarial techniques as specified by ROC SFAS
No. 18 (ROC SFAS No. 18 is similar to US SFAS No. 87). 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 1997
F-43
<PAGE> 80
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. In 1998,
the Company made a royalty payment of $1,666 which was treated as a deemed
dividend.
A reconciliation from ROC GAAP to US GAAP of net loss and stockholders'
equity are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net loss as reported under ROC GAAP............... $(58,414) $(13,784) $(16,931)
(a) Amortization of capitalized technology fees... 1,500 1,500 583
(b) Income tax effects resulting from capitalized
technology fees................................. (240) (295) (119)
-------- -------- --------
Net loss in accordance with US GAAP............... $(57,154) $(12,579) $(16,467)
======== ======== ========
</TABLE>
Stockholders' equity:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Stockholders' equity as reported under ROC GAAP............. $77,979 $79,545
(a) Effect of capitalization of technology fees, net of
amortization.............................................. (5,583) (5,417)
(b) Income tax effects resulting from capitalized technology
fees...................................................... 313 553
------- -------
Stockholders' equity in accordance with US GAAP............. $72,709 $74,681
======= =======
</TABLE>
(16) RECLASSIFICATIONS
Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform with the 1998 presentation for comparison purposes.
These reclassifications do not have a significant impact on the financial
statements.
F-44
<PAGE> 1
EXHIBIT 10-d
CONFIDENTIAL TREATMENT OF CERTAIN PORTIONS
OF THIS EXHIBIT HAVE BEEN GRANTED
TECHNICAL AGREEMENT - SILICON WAFER MANUFACTURING
THIS TECHNICAL AGREEMENT (hereinafter referred to as "Agreement") made and
entered into as of the 19th day of December, 1990, by and between:
MEMC Electronic Materials, Inc., a corporation of the State of Delaware, United
States of America, having an office at 501 Pearl Drive, O'Fallon, Missouri, U S
A (hereinafter referred to as "MEMC")
and
POSCO HULS Company Limited, a corporation organized under the laws of the
Republic of Korea, having an office at Pohang, the Republic of Korea
(hereinafter referred to as "PHC").
WITNESSETH:
WHEREAS, MEMC has developed over the years and possesses processes
involving technology, equipment design, and other intangible assets and property
rights of value, all of which are useful with respect to the manufacture of
Silicon Wafers (as hereinafter defined) and certain value added features such as
epitaxial layers; and
WHEREAS, MEMC is commercially practicing in the United States and elsewhere
the foregoing processes embodying the technology, equipment design, assets, and
property rights for the manufacture of the aforesaid Silicon Wafers; and
WHEREAS, PHC desires to have MEMC license the aforesaid intangible assets
and property rights and furnish Technical Information (as hereinafter defined)
to PHC to the extent provided in this Agreement, which will allow PHC to design,
construct, and operate manufacturing operations in Korea, and MEMC is willing to
license such intangible assets and property rights and to furnish such Technical
Information to PHC under the terms and conditions set forth in this Agreement.
NOW, THEREFORE, for and in consideration of the mutual covenants set forth
herein and other valuable consideration, it is agreed by and between the parties
as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set
forth in this Article I:
1.01 - "Silicon" means a semiconductor grade of elemental silicon of
sufficient purity and crystalline structure useful in the manufacture of
semiconductor devices.
1.02 - "Silicon Wafers" means [CONFIDENTIAL MATERIAL HAS BEEN DELETED
AND FILED SEPARATELY WITH THE SEC].
1.03 - "Prime Wafers" herein means Silicon Wafers which meet customer
specifications of prime wafer and are used by the customers as direct substrate
of semiconductor devices.
1.04 - "Test and/or Monitor Wafers" herein means Silicon Wafers which meet
customer specifications of test and/or monitor wafer and are used to test or
monitor their equipment or processes and not as a direct substrate of
semiconductor devices.
1.05 - "Field of this Agreement" means Silicon Wafers and processes,
apparatus, equipment, and materials useful in producing Silicon Wafers
consistent with the commercial requirements of PHC.
The Field of this Agreement shall not include processes, apparatus,
equipment, and materials useful in producing polycrystal Silicon.
1.06 - "Technical Information" means any and all information and know-how
commercially in use at MEMC's Plants, which from time to time may be in
existence, relating to processes, equipment, apparatus, materials, and market
technical service within the Field of this Agreement and shall include but shall
not be limited to engineering and manufacturing information, operating
procedures, design information on manufacturing plants and equipment,
specifications for raw materials, and analytical methods. "Technical
Information" shall not include data or other information relative to research,
pilot plant technology (except where the technology is required for the
construction or operation of PHC's facilities within the Field of this Agreement
or when PHC and MEMC specifically agree in writing to participate in joint
research projects), prices, profit margins, customers, customer relationships,
sales, market areas, or quantities of products produced by MEMC.
1.07 - "Date of this Agreement" means the date first set forth above.
1.08 - "Effective Date of this Agreement" means the date when any and all
of the conditions precedent set forth in ARTICLE VII of this Agreement have been
<PAGE> 2
fulfilled and the parties have so notified each other in writing.
1.09 - "Date of First Commercial Production" means the first date, as
agreed upon in writing between PHC and MEMC, on which Prime Wafers of commercial
quantity are commercially invoiced by PHC utilizing Technical Information
acquired under this Agreement.
1.10 - "SIE" means square inch equivalent which is a unit to measure the
surface area of Silicon Wafers.
1.11 - "Subsidiary" means a company or corporation, the majority of whose
stock eligible to be voted for the election of directors is owned or controlled
directly or indirectly through share ownership by another company or
corporation.
1.12 - "Parent" means the company or corporation directly or indirectly so
owning or controlling the stock of a Subsidiary.
1.13 - "Affiliates" means the Parent and all Subsidiaries of the Parent.
1.14 - "MEMC's Plants" shall mean MEMC's and its Affiliates' plants in the
US and other countries engaged in the commercial production of Silicon Wafers.
1.15 - "Net Sales Proceeds" means the total invoiced price of Silicon
Wafers sold or disposed of by PHC in a normal, bona-fide commercial transaction,
less the following items:
a. sales discounts (including sales rebate);
b. sales returns;
c. indirect taxes, insurance premiums, packing expenses, freight and
delivery expenses, sales commissions, advertising expenses and
installation expenses imposed or incurred with regard to the sale
of Silicon Wafers; and
d. CIF price of, import duties on, other duties and taxes on, and
fees on, single crystal ingots and its derivatives manufactured
by and purchased from MEMC or MEMC's Plants.
1.16 - "Joint Venture Agreement" shall mean the Joint Venture Agreement
dated as of the Aug. 29th day of 199___, by and between Pohang Iron and Steel
Company, Ltd., Samsung Electronics Company, Ltd. and MEMC.
1.17 - "Export Sales" means any sale or distribution whether direct or
indirect of Silicon Wafers manufactured by PHC, for first value added processing
outside the Republic of Korea.
ARTICLE II
TECHNICAL INFORMATION AND ASSISTANCE
2.01 - MEMC shall furnish to PHC sufficient Technical Information to enable
PHC to design, construct and operate in Korea a facility capable of producing
Silicon Wafers at a capability agreed upon by the parties, initially with a
production capacity of approximately 60 million SIE of Silicon Wafers per year
(hereinafter referred to as the "Initial Facility"). The process capability of
the Initial Facility shall be from crystal growing to polishing for 150mm and
200mm diameter wafers for use in advanced semiconductor processes. The Technical
Information shall also include, when required, information necessary to expand
the Initial Facility to include production of advanced wafers such as epitaxial
wafers. Technical Information to be provided by MEMC to PHC pursuant to this
Agreement shall contain the latest technical developments commercially in use by
MEMC at the time of providing such Technical Information.
2.02 - The Technical Information conveyed pursuant to this ARTICLE II shall
be such that the Initial Facility, if designed, constructed and operated in
accordance with good engineering practice and in accordance with information and
instructions furnished by MEMC, shall be capable of producing Silicon Wafers
with the same product quality and specifications and the same general efficiency
as is realized in the manufacture of corresponding types of Silicon Wafers in
MEMC's Plants on the Effective Date of this Agreement, but making due allowances
for the different sizes of the manufacturing facilities to be constructed by PHC
and for different local labor and manufacturing conditions including the type
and quality of raw materials used, and provided the design and installation of
the Initial Facility have been approved by MEMC and provided further that the
Initial Facility is operated in accordance with MEMC's operating instructions.
2.03 - As soon as possible and in no event later than six (6) months
following the Effective Date of this Agreement, MEMC shall make available to PHC
in O'Fallon, Missouri, the services of one or more technical representatives
familiar with all phases of manufacture of Silicon Wafers and who, at PHC's
request, will review with English-speaking representatives of PHC, the Korean
manufacturing conditions, the availability of raw materials, and proposed
manufacturing methods to be used in Korea for the purpose of establishing the
general design basis of the Initial Facility. Following such consultation, the
processing methods to be used in the Initial Facility, the raw material
specifications and the general design basis of the Initial Facility shall be
mutually agreed upon between MEMC and PHC and set forth in writing.
<PAGE> 3
2.04 - As soon as practical and in any event within six (6) months
subsequent to the date that PHC and MEMC agree in writing as to processing
methods to be used in the Initial Facility, the raw material specifications and
the general design basis as provided in Paragraph 2.03, MEMC shall furnish to
PHC two (2) copies of an engineering manual or equivalent information in a
format agreed to by the parties, in English, which shall be written in terms of
United States engineering practices and which shall contain the following
Technical Information relative to the design, construction, and operation of the
Initial Facility:
1. Process design data, including materials balance, utility
requirements, and a process flow sheet.
2. Equipment specifications and sketches, including recommended
manufacturers for such equipment, and such other information as in MEMC's
opinion will be useful to PHC in preparing procurement specifications and
detailed equipment drawings for fabricators in Korea, and in obtaining
quotations from equipment suppliers in Korea.
3. Recommended general layout drawings suitable for use as a pattern
for the placement of equipment, including preliminary plan and elevation
views.
4. Specifications for piping, control and electrical systems.
2.05 - PHC shall prepare all design and construction drawings for the
Initial Facility, but MEMC will assist and advise PHC in applying the most
modern engineering practices to the extent that MEMC has the information
available. PHC shall submit all such drawings to MEMC for review and approval,
and for purposes of such review and approval, such drawings shall be in English,
or alternatively, PHC shall make available to MEMC in the United States of
America an English-speaking Korean engineer to assist MEMC in interpreting
Korean drawings and engineering practices. MEMC's review and approval of the
construction aspects of such drawings shall include no more than a confirmation
that the construction details conform to process requirements, and shall not
include or be concerned with determining that the structures and equipment are
sound and/or conform to the requirements of applicable building or other codes.
After reviewing such drawings, MEMC shall either approve the drawings and return
them to PHC or return the drawings with necessary modifications indicated
thereon.
2.06 - Within four (4) months after all drawings for the Initial Facility
as specified in Paragraph 2.05 have been received by MEMC from PHC and have been
reviewed and approved by MEMC, there shall be supplied to PHC by MEMC two (2)
copies of a written manual of operating procedures, in English, for use in the
operation of the Initial Facility. This manual shall include a list of required
raw materials together with specifications therefor and complete information as
to the amounts required for each such raw material and, additionally, shall
contain detailed information relative to the operation of the Initial Facility,
including testing, control, start-up and normal operating procedures, and normal
and emergency shut-down instructions. The manual shall also contain information,
based on plant practices used in the manufacture of products covered by the
Field of this Agreement in MEMC's Plants relative to maintenance and repair of
manufacturing equipment, safety practices, including fire prevention, and
methods of handling raw materials, goods in process, and finished products.
2.07 - MEMC shall arrange for the technical training of approximately
twelve (12) technical personnel of PHC in one or several of MEMC's Plants. The
time and duration of such training shall be arranged by mutual consent of the
parties and is expected to total approximately seventy-two (72) man months. It
is understood and agreed that PHC will pay all traveling, living and other
expenses of its own personnel incurred during the training pursuant to this
paragraph 2.07.
2.08 - MEMC will supply, upon PHC's request, the services of one (1) or
more engineers to advise and consult with PHC during the final construction
stages and start-up period of the Initial Facility, such services to be supplied
until the Initial Facility has demonstrated its ability to produce Silicon
Wafers of a quality equivalent to those produced in MEMC's Plants. It is
expected that such consultation will be in the range of forty-eight (48) man
months.
2.09 - In addition to the services of MEMC engineers during the final
construction stages and start-up period of the Initial Facility as defined in
Section 2.08, MEMC shall make available to PHC during the term of this Agreement
the services of at least two (2) engineers and/or technical personnel (including
the Executive Vice President if the Executive Vice President is an engineer).
PHC may at its option from time to time request MEMC to provide additional
technical personnel to assist in the transfer of technology or training of PHC
personnel. Such additional personnel will be provided upon agreement of MEMC. It
is understood and agreed by the parties that the personnel described in this
Section 2.09 are supplied for the purpose of ensuring the effective initial and
on-going transfer of full and complete technical information from MEMC as
described in this agreement, the initial and on-going training of PHC employees,
and the close coordination and communication between MEMC and PHC. It is
understood and agreed that PHC will pay all salaries and other expenses of such
personnel during the entire duration of their employment on behalf of PHC. A
separate agreement between the individual or MEMC and PHC will cover the
<PAGE> 4
specific items to be included in salary and expenses of persons covered by this
Section 2.09.
ARTICLE III
TECHNICAL INFORMATION AND CONTINUING KNOW-HOW
3.01 - MEMC will, during the five (5) year period beginning with the Date
of First Commercial Production, make available to PHC all of MEMC's technical
improvements and developments within the Field of this Agreement which MEMC has
incorporated into any of MEMC's Plants for the commercial production of Silicon
Wafers to the extent PHC has requested such improvements and developments and
has a commercial requirement for the manufacture of such Silicon Wafers
commercially produced by MEMC.
3.02 - PHC will, during the five (5) year period beginning with the Date of
First Commercial Production, make available to MEMC all of PHC's technical
improvements and developments in the Field of this Agreement which PHC has
incorporated into any of its plants engaged in the commercial production of
Silicon Wafers.
3.03 - MEMC and PHC shall be obligated under this Agreement to supply only
such Technical Information as MEMC and PHC each has the legal right to supply to
the other party and only to the extent and manner set forth in this Agreement.
If at any time disclosure of any Technical Information by either party to the
other party would require any payments to third parties, excluding Affiliates,
by the party disclosing said Technical Information and the disclosing party
requests the other party to share in making such payments, such disclosure shall
be made only after the parties to this Agreement have agreed as to bearing the
cost of such payments. In the event such payments are required, PHC shall obtain
governmental approval, if required, for such payments.
3.04 - During the five (5) year period following the Date of First
Commercial Production, MEMC shall permit representatives of PHC, and PHC shall
permit representatives of MEMC to inspect, examine, and study, respectively,
MEMC's and PHC's machinery, equipment, including detailed engineering drawings
thereof, manufacturing processes, plants and related control laboratories,
wherever located, engaged in the commercial production of Silicon Wafers using
Technical Information furnished by MEMC. The number of PHC or MEMC
representatives and the time and duration of their visits to MEMC's Plants or
PHC's plants and laboratories shall be subject to MEMC's or PHC's approval,
respectively, it being understood that such inspection, examinations and studies
shall not interfere with MEMC's or PHC's operation, and such inspections shall
not be excessive. The visit of a representative of either party as provided for
in this paragraph shall not be disapproved or limited without good cause. It is
understood and agreed that the expenses of the visiting party shall be borne by
the visiting party.
3.05 - No later than four years after the Date of First Commercial
Production MEMC and PHC shall negotiate in good faith on another technical
agreement with the object of allowing PHC and MEMC to obtain continuing
technology from the other party at reasonable terms.
ARTICLE IV
RIGHTS AND LICENSES
As of the Effective Date of this Agreement the parties agree as follows:
4.01 - MEMC agrees to grant and hereby grants to PHC on a nontransferable
basis:
(1) the [CONFIDENTIAL MATERIAL HAS BEEN DELETED AND FILED
SEPARATELY WITH THE SEC] right and license to use all Technical
Information for the manufacture of Silicon Wafers in the
Republic of Korea; and
(2) a [CONFIDENTIAL MATERIAL HAS BEEN DELETED AND FILED
SEPARATELY WITH THE SEC] right and license to use Technical
Information to promote and sell Silicon Wafers in and outside
the Republic of Korea.
As an exception to the foregoing, PHC shall not use, without MEMC's written
consent, such Technical Information to manufacture for Export Sales to
territories where:
(1) MEMC is engaged in regular sales activities for Silicon Wafers
when such Export Sales are made, or
(2) MEMC is restricted from exporting Silicon Wafers by U.S. laws and
regulations.
It is agreed between the parties that PHC's Export Sales of Silicon Wafers
into the territories as defined in (1) and (2) of the preceding sentence shall
be made exclusively through MEMC under an International Distributorship
Agreement to be agreed upon by the parties hereto prior to such Export Sales.
4.02 - MEMC agrees to grant and hereby grants to PHC [CONFIDENTIAL MATERIAL
HAS BEEN DELETED AND FILED SEPARATELY WITH THE SEC], non-transferable right and
license under and for the full terms of all patents within the Field of this
<PAGE> 5
Agreement currently or in the future owned or controlled (in the sense of having
the right to grant licenses thereunder) by MEMC in the Republic of Korea during
the term of this Agreement; further, MEMC agrees to grant, as necessary, to PHC
[CONFIDENTIAL MATERIAL HAS BEEN DELETED AND FILED SEPARATELY WITH THE SEC],
non-transferable right and license under and for the full terms of other patents
within the Field of this Agreement currently or in the future owned or
controlled (in the sense of having the right to grant licenses thereunder) by
MEMC during the term of this Agreement, to the extent necessary for PHC to use
all Technical Information for Export Sales to which MEMC has consented under
Section 4.01 above.
4.03 - PHC agrees to grant and hereby grants to MEMC a non-exclusive right
and license, with the right to sublicense Affiliates, to use all Technical
Information which PHC supplies to MEMC pursuant to this Agreement. MEMC shall
pay a reasonable royalty to be agreed upon by the parties.
4.04 - PHC agrees to grant and does hereby grant to MEMC a non-exclusive
license, with the right to sublicense Affiliates, under and for the full terms
of all future patents owned or controlled by PHC, to the extent, but only to the
extent, necessary for MEMC and/or any sublicensee of MEMC to use all Technical
Information which PHC supplies to MEMC pursuant to this Agreement. MEMC shall
pay a reasonable royalty to be agreed upon by the parties.
ARTICLE V
PAYMENTS
5.01 - PHC shall pay to MEMC, as compensation for the rights and licenses,
Technical Information and continuing know-how a technology fee of seven million
and eight hundred thousand US dollars (US $7,800,000). This payment shall be the
only payment to MEMC by PHC for the rights, licenses, and Technical Information
which MEMC shall provide for the five (5) year period of this Agreement or
extended term of this Agreement in accordance with Paragraph 3.05 except for the
running royalties and other payments set forth in this Article V and any
additional royalties to be agreed upon in accordance with Paragraph 3.05.
The technology fee shall be paid as follows:
(a) one twelfth of the aforementioned fee which is six hundred and
fifty thousand US dollars (US$650,000) by the end of the calendar
quarter following the calendar quarter during which this
Agreement will become effective; and one twelfth of the
aforementioned fee, US$650,000, each for eleven times by the end
of each calendar quarter following the aforementioned first
payment.
(b) No interest will be accrued during the aforementioned payment
period.
(c) The payments shall be made in US dollars in the United States of
America and shall not be reduced by any taxes, licenses, fees or
other withholdings levied upon such payments by the Korean
government or political subdivision or agency thereof. All taxes,
licenses, fees or other levy or duty imposed upon or which arise
because of payments by PHC to MEMC shall be paid and absorbed by
PHC.
5.02 - PHC shall reimburse MEMC's out-of-pocket expenses, which MEMC will
incur to supply PHC with technical assistance for the Initial Facility as
specified in Article II. MEMC shall provide reasonable evidence to substantiate
the amounts billed to PHC under this Section 5.02.
The out-of-pocket expenses shall include:
(a) Salaries and salary overhead of the MEMC engineers and associated
personnel who, upon MEMC's recommendation and PHC's approval,
will be assigned to provide the technical assistance. MEMC shall
invoice PHC with actual cost provided however, salaries and
salary overhead shall not exceed US$600 per day per person.
(b) Travel expenses in accordance with MEMC's travel policy to and
from their place of employment, local travel expenses of such
personnel and living expenses (adequate to provide accommodation
comparable to home country standards) during the time they are
away from their regular work place.
(c) The amounts billed to MEMC for services provided for by
independent contractors retained upon MEMC's recommendation and
PHC's approval as part of MEMC's technical assistance to PHC.
5.03 - In addition to the payments specified in Sections 5.01 and 5.02 and
elsewhere in the Agreement, PHC shall pay to MEMC a running royalty of three and
ninety-four one-hundredths percent (3.94%) of Net Sales Proceeds during the five
(5) year period beginning with the Date of First Commercial Production;
provided, however that no such running royalty shall be payable for Test and/or
Monitor Wafers for the period beginning with the Date of First Commercial
Production and ending on the first anniversary thereafter.
5.04 - PHC shall not pay any running royalty for Export Sales made through
<PAGE> 6
MEMC under the International Distributorship Agreement referred to in Section
4.01 above. Silicon Wafers bartered or sold by PHC for other than cash shall be
considered to be sold.
5.05 - The payments to be made by PHC to MEMC pursuant to this Agreement
shall not be reduced by any taxes, licenses, fees, or other withholdings levied
upon such payments by the Korean government or political subdivision or agency
thereof, unless all of the following requirements are met:
(a) The amount, if any, by which the payments are reduced, is a tax
imposed on MEMC's income and is not an excise, franchise,
privilege, turnover, sales, production or property tax, or any
other tax, levy, or duty;
(b) The tax is imposed on MEMC under the laws of Korea or a political
subdivision or agency thereof, and PHC is required by law to
withhold the tax from payments to MEMC and pay the tax withheld
to the Korean government, or political subdivision or agency
thereof; and
(c) PHC furnishes MEMC a tax receipt for the taxes withheld.
All taxes, licenses, fees or other levy or duty imposed upon or which arise
because of payments by PHC to MEMC under this Agreement, other than those which
meet the requirements of (a) through (c) of this Section 5.05 shall be paid and
absorbed by PHC.
5.06 - The royalties due MEMC pursuant to Section 5.03 of this Agreement
shall be computed quarterly and shall be paid to MEMC within sixty (60) days of
the last day of March, June, September, and December of each calendar year; each
such payment shall be accompanied by a written report setting forth the
quantities and descriptions of all Silicon Wafers sold by PHC during the period
for which payment is made. The amounts payable to MEMC shall be paid in United
States dollars or such other currency or currencies as MEMC shall elect, at New
York, NY, USA. PHC will prepare the quarterly computation promptly for submittal
and approval of the remittal of the payment with the Foreign Exchange
authorities.
5.07 - PHC shall keep such detailed records as may be necessary to
determine the payments due under this Agreement. At the request of MEMC, PHC
shall permit an independent public accountant selected by MEMC (except one to
whom PHC has some reasonable objection) or a MEMC internal auditor to have
access during ordinary business hours to such records as may be necessary to
determine in respect to any calendar quarter ending not more than two (2) years
prior to the time of such request, (a) the correctness of any report and/or
payment under this Agreement or (b) information as to any sum payable for such
period in case of PHC's failure to render reports for payment pursuant to this
Agreement.
ARTICLE VI
CONFIDENTIAL INFORMATION
6.01 - During the term of this Agreement and for ten (10) years thereafter
PHC shall keep confidential and restrict access to all Technical Information and
other secret or confidential information received from MEMC pursuant to this
Agreement to those directors, officers, employees, and representatives of PHC
who have a reasonable need for such information in carrying out their respective
duties on behalf of PHC. PHC's duty of confidentiality pursuant to the Article
shall not be applicable to information which:
(a) was in the public domain at the time of disclosure or comes into
the public domain; or
(b) Technical Information which the receiving party can show by
written or other tangible evidence was in its possession at the
time of the disclosure hereunder, and which the receiving party
without breach of any obligation is free to disclose to others;
(c) Technical Information which was received by the receiving party
from a third party who did not acquire it, directly or
indirectly, from the disclosing party under an obligation of
confidentiality and which the third party without breach of any
obligation is free to disclose to others;
(d) Technical Information which is required to be disclosed by the
laws of Korea in order to carry on the business of PHC provided
that all necessary steps are taken by PHC to the extent permitted
by law to maintain the information as confidential.
6.02 - PHC, prior to permitting them to receive or have access to any
Technical Information or other secret or confidential information received from
MEMC, shall cause its directors, officers, employees, and representatives to
enter into a written agreement requiring them to keep confidential and not to
use, except in connection with their assigned duties at PHC, during the term of
this Agreement and for ten (10) years thereafter, all such information which may
be communicated to or acquired by them. No representative of an entity engaged
in manufacture and/or research of Silicon Wafers may enter PHC's premises or be
exposed to Technical Information unless prior approval has been granted jointly
<PAGE> 7
by PHC's President and Executive Vice President.
6.03 - PHC may secure and use the services of engineering contractors in
the design, engineering, and erection of a facility for manufacturing Silicon
Wafers, but such engineering contractors must be approved in advance, in writing
by MEMC and such engineering contractors and their employees shall be required
to sign security agreements approved by MEMC wherein such engineering
contractors and their employees agree to keep confidential and to use only on
behalf of PHC any confidential information within the Field of this Agreement
received, directly or indirectly, from MEMC or PHC.
ARTICLE VII
CONDITIONS PRECEDENT
7.01 - The rights and obligations set forth in this Agreement shall not
have any legal effect, and the Agreement shall not become binding upon either of
the parties hereto, unless and until all of the following conditions have been
fulfilled:
(a) both parties shall have executed the Agreement, with the further
requirement that the second party to execute the Agreement shall
have executed it within sixty (60) days after the execution by
the first party;
(b) all necessary official approvals of appropriate Korean and United
States governmental authorities shall have been obtained.
(c) the Joint Venture Agreement shall have become effective pursuant
to its Section 10 and shall not have been terminated pursuant to
its Section 11.
7.02 - The parties shall keep each other currently informed as to the
fulfillment of each of the conditions of Paragraph 7.01 of this ARTICLE VII;
upon fulfillment of all such conditions within the times specified, this
Agreement shall then become binding upon the parties and shall thereafter be
considered as made and entered into as of the Date of this Agreement.
ARTICLE VIII
MARKETING
8.01 - The parties agree that beginning with the Date of the First
Commercial Production of Silicon Wafers by PHC, PHC shall have the option to
choose among any and all commercial orders of Silicon Wafers to PHC and/or MEMC
(where permitted under such orders), from the electronics industry in the
Republic of Korea. Except for as defined in this Article 8.01, this Agreement
shall not be construed in any way as preventing, restricting, or limiting the
sales activities of PHC or MEMC in the Republic of Korea.
ARTICLE IX
ASSIGNABILITY
9.01 - Neither this Agreement nor any of the rights and obligations arising
thereunder may be assigned or transferred by either party, except that MEMC may
assign this Agreement and the rights and obligations arising thereunder to an
Affiliate or a company acquiring substantially all of the business and assets of
MEMC dealing with the Field of this Agreement.
9.02 - In case of any assignment as provided for in Section 9.01 of this
ARTICLE IX, the assignor shall guarantee compliance by the assignee with the
provisions of this Agreement.
ARTICLE X
FORCE MAJEURE
10.01 - Neither of the parties shall be liable for any default or delay
caused by any contingency beyond its control, including, without limitation,
war, restraints affecting shipping, strikes, lockouts, fires, accidents, floods,
droughts, natural calamities, short or reduced supply of fuel or of raw
materials, demand or requirements of the Korean or other government or of any
governmental subdivisions thereof, restraining orders or decrees of any court or
judge having jurisdiction in the premises; except for payments due under the
Agreement from PHC, but not made because of PHC's improfitability or lack of
cash.
ARTICLE XI
DAMAGES AND INDEMNIFICATION AND WARRANTIES
11.01 - Except as stated in Section 11.02, each party hereunder agrees that
the party disclosing Technical Information pursuant to this Agreement shall not
be liable to the other party for and that the other party shall defend,
indemnify and hold the disclosing party harmless from any loss, liability,
claim, damage or expense of whatever kind arising out of or as a consequence of,
as the case may be, the use by the receiving party of any Technical Information
or patents furnished or licensed to such receiving party pursuant to this
<PAGE> 8
Agreement or the use of any products produced with such Technical Information.
This Section 11.01 shall survive the termination or expiration of this
Agreement.
11.02 - MEMC hereby warrants that, to the best of its knowledge at the time
of execution of this Agreement, there is no claim, suit, lien or judgement made,
brought or obtained by any other predecessor or affiliated entity of MEMC or by
any third party, based on any actual or alleged infringement of any patent or
other proprietary right with respect to the Technical Information transferred
hereunder.
PHC will use best efforts to protect MEMC's confidential and proprietary
information and will defend any suits made against PHC for alleged infringement
of a patent or intellectual property rights.
Should any products manufactured by PHC strictly in accordance with the
Technical Information furnished by MEMC under this Agreement partially or
totally infringe a patent or intellectual property right belonging to a third
party who makes a claim against PHC for alleged infringement of such patent or
intellectual property right, MEMC shall give necessary assistance for the
effective defense of such suit; and the damages, penalties and all other
expenses, including attorney's fees, shall be divided between the parties in the
proportions to be agreed upon by the parties. If MEMC and PHC cannot agree upon
a proportion, the parties shall allocate fifty (50) percent of such expenses to
MEMC and fifty (50) percent to PHC. MEMC's liability under this Section 11.02
shall not be applicable with respect to allegations of or actual infringement
which:
a. relate to Technical Information not required to be transferred
pursuant to the second sentence of Section 2.01 of this
Agreement, and which
b. relate to Technical Information thereafter transferred and is
disclosed, as an existing or potential subject of infringement,
by MEMC to PHC at the time of its transfer in a good faith belief
by MEMC of potential liability.
MEMC's cumulative liability to PHC under this Section 11.02 shall not exceed
one-third of the sum of the running royalties and/or technology fees paid to
MEMC by PHC during the three year period preceding the date PHC first asserts in
writing a claim against MEMC under this Section 11.02.
MEMC's liability under this Section 11.02 shall terminate upon the termination
or expiration of this Agreement except with respect to usage of the Technical
Information by PHC prior thereto.
ARTICLE XII
NOTICE
12.01 - All notices or communications given or required to be given
hereunder shall be given by personal delivery or by registered airmail, cable,
telex or facsimile at the following addresses:
If to MEMC: MEMC Electronic Materials, Inc.
501 Pearl Drive (City of O'Fallon)
Post Office Box 8
St. Peters, Missouri 63376
USA
Attention: General Counsel
If to PHC: ____________________________________
____________________________________
12.02 - Notices and communications shall be deemed received by the
addresses on the date of delivery if delivered personally, on the date fourteen
(14) days after the date of posting if sent by registered airmail or when
received if sent by cable, telex or facsimile.
12.03 - The parties may change their addresses at any time by giving notice
thereof in the manner provided in this Article.
12.04 - Any payment required under this Agreement shall be considered made
only when received.
ARTICLE XIII
INTERPRETATION AND ARBITRATION
13.01 - All disputes, controversies, or differences which may arise between
the parties out of or in relation to or in connection with this contract, or for
the breach thereof, shall be finally settled by arbitration pursuant to the U.S.
- - Korean Commercial Arbitration Agreement, dated December 1, 1974, by which each
party hereto is bound.
13.02 - The arbitration shall be held at Seoul, the Republic of Korea if
the case is brought against PHC and in St. Louis, Missouri, USA if the case is
brought against MEMC.
<PAGE> 9
13.03 - This Agreement shall be construed in accordance with and governed
by the laws of the Republic of Korea.
ARTICLE XIV
TERMINATION AND DEFAULT
14.01 - In the event that PHC is in default with respect to any payments
required pursuant to this Agreement, MEMC may give written notice to PHC,
calling attention thereto. If PHC does not correct such default within sixty
(60) days after such notice, MEMC shall at any time thereafter have the right to
terminate, by giving written notice to that effect, all of its obligations to
supply further information or services pursuant to this Agreement, and all of
the rights and licenses granted to PHC pursuant to ARTICLE IV of this Agreement.
MEMC's right to terminate pursuant to this Section 14.01 shall be at the option
of MEMC and shall not constitute a waiver of its other rights or remedies with
respect to said default, and the failure to exercise any such right in the event
of any occurrence giving rise thereto, shall not constitute a waiver of the
right in the event of any subsequent occurrence.
In the event of termination of this Agreement by MEMC under this Section
14.01, then PHC agrees to return to MEMC originals and copies of all portions of
any notes, reports, photographs, manuals, memoranda, plans, drawings, flow
sheets, records or other documents containing any Technical Information
provided, directly or indirectly, by MEMC and in PHC's possession and further
agrees to destroy all portions of any copies of any materials prepared by PHC,
its employees, or representatives which contain Technical Information. Such
return and delivery and/or destruction shall be within sixty (60) days following
the date that MEMC notifies PHC of the termination of this Agreement.
14.02 - It is understood and agreed by the parties that MEMC may, subject
to the conditions set forth below, terminate this Agreement upon thirty (30)
days written notice, in the event that MEMC's ownership or control, either
directly or indirectly, of PHC stock eligible to vote in the election of
directors falls below forty percent (40%) of the total number of shares of such
PHC stock outstanding:
a) that the five (5) year period beginning with the Date of First
Commercial Production has expired; and
b) that MEMC shall not be in default under the Joint Venture
Agreement.
Termination by MEMC pursuant to the provisions of this Section 14.02 shall not
act to terminate rights and licenses already granted pursuant to this Agreement
prior to the effective date of such termination, provided however, such rights
and licenses shall be non-exclusive.
14.03 - It is understood that, in case of failure of the negotiations under
Section 3.05 of this Agreement, this Agreement shall expire five (5) years after
the Date of First Commercial Production, and such expiration shall not act to
terminate rights and licenses already granted pursuant to this Agreement,
provided however, such rights and licenses shall be non-exclusive.
14.04 - If either party shall be in default of any obligation hereunder of
a substantial nature and if such party shall fail to remedy such default within
sixty (60) days after written notice thereof, any non-defaulting party hereto
shall have the right to terminate this Agreement by written notice of
termination to the other party given at any time within ninety (90) days after
said sixty (60) days. Such termination shall be in addition to any other rights
or remedies which may exist on account of such default.
14.05 - Termination pursuant to this ARTICLE XIV and expiration pursuant to
Section 14.03 of the rights and obligations specified therein shall not
terminate any of the obligations of PHC, including the obligation to pay in full
any and all amounts of money having come due prior to the termination by MEMC or
the expiration of this Agreement and the obligation of PHC to observe the
confidentiality provisions set forth in ARTICLE VI of this Agreement. It is
expressly agreed that the provisions of Section 4.01 second and third sentences
of this Agreement shall survive termination pursuant to Section 14.02 or
expiration pursuant to Section 14.03 for a period of five (5) years, or the
duration of the Joint Venture Agreement whichever is longer.
ARTICLE XV
EXPORT OF TECHNICAL INFORMATION
15.01 - The parties are aware that the transfer of MEMC's Technical
Information with respect to 200mm Silicon Wafers prior to April 1, 1994 requires
approval or concurrence by the U.S. Committee on Foreign Investment in the US
(CFIUS), and MEMC shall have no obligations with respect to the transfer and
license of such information prior to April 1, 1994 unless the approval or
concurrence by CFIUS is obtained; provided, however, that MEMC shall use all
reasonable efforts to obtain such approval or concurrence prior to April 1,
1994.
15.02 - Notwithstanding other provisions of the Agreement, PHC agrees to
make no disclosure of or use any Technical Information furnished or made known
<PAGE> 10
to PHC pursuant to this Agreement, except in compliance with the laws and
regulations of the United States of America, and in particular, PHC agrees not
to export, directly or indirectly, either the technical data (the term
"technical data" as used herein shall mean and include the Technical Information
furnished or made known to PHC pursuant to this Agreement) or the "direct
product" thereof to any country or countries for which a validated license is
required pursuant to the Export Regulations pertaining to the exportation of
technical data and the "direct product" thereof, promulgated by the Bureau of
Export Administration of the United States Department of Commerce. The term
"direct product" as used above is defined to mean the immediate product
(including processes and services) produced directly by the use of the technical
data.
ARTICLE XVI
TRADEMARKS AND TRADE NAMES
16.01 - No right, expressed, or implied, is granted by this Agreement to
PHC to use in any manner whatsoever the name "MEMC" or MEMC Electronic
Materials, Inc. or any other trade name or trademark of MEMC in connection with
the use or sale of any product produced by PHC. However, a separate trademark
license agreement, shall be entered into between MEMC and PHC dealing with the
use of the MEMC trademark "YIELD-GUARD".
ARTICLE XVII
MISCELLANEOUS
17.01 - The heading of the Articles have been inserted for convenience and
reference only and shall not affect the interpretation or the constructions of
the provisions of this Agreement.
17.02 - This Agreement constitutes the entire agreement and understanding
between the parties hereto, and supersedes and cancels all previous
negotiations, representations, undertakings and agreements heretofore made
between the parties hereto with respect to the subject matter hereof.
17.03 - This Agreement shall not be modified except by a written instrument
executed by duly authorized representatives of the parties hereto.
17.04 - In the event any term or provision of this Agreement shall for any
reason be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other term or
provision of the Agreement, and this Agreement shall be interpreted and
construed as if such term or provisions, to the extent it is invalid, illegal or
unenforceable, had never been contained in this Agreement, provided, however,
such invalidity, illegality or unenforceability shall not result in a material
change of this Agreement.
17.05 - Waiver of any right by a party hereto towards the other for breach
or a series of breaches thereof shall not affect the right of the waiving party
to execute any of its rights provided hereunder on account of any other breach
hereof or similar breach hereof or similar breach subsequent thereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their duly authorized representatives as of the day and
year first above written.
MEMC Electronic Materials, Inc. POSCO HULS Company Limited
By /s/ Roger D. McDaniel By /s/ In Bo Shim
--------------------------- ---------------------------
Title: President and Chief Title: President and Chief
Executive Officer Executive Officer
STATE OF MISSOURI )
) ss.
COUNTY OF ST. CHARLES )
On this 14th day of December, 1990, before me appeared Roger D. McDaniel,
to me personally known and known to be the person who executed the foregoing as
President and Chief Executive Officer of MEMC Electronic Materials, Inc., and
that he is authorized to execute said instrument on behalf of said corporation
by authority of its Board of Directors, and unto me acknowledged said instrument
to be his free act and deed and the free act and deed of said Corporation.
/s/ Patricia E. Lockett
---------------------------------
Notary Public
My Commission Expires:
April 22, 1991
- ----------------------
<PAGE> 1
EXHIBIT 10-d(3)
CONFIDENTIAL TREATMENT REQUESTED
THIRD AMENDMENT TO
PHC TECHNICAL AGREEMENT
This Third Amendment to Technical Agreement - Silicon Wafer Manufacturing
(the "Third Amendment") is made and entered into as of the date affixed by the
signatures below, and is effective as of October 1, 1998, by and between MEMC
ELECTRONIC MATERIALS, INC., a Delaware corporation ("MEMC"), and POSCO HULS
COMPANY LIMITED, a Korea corporation ("PHC"). All terms used herein, unless
otherwise defined, shall have the same meanings ascribed to them in the
Agreement (as defined below).
Recitals
A. MEMC and PHC made and entered into that certain Technical Agreement-Silicon
Wafer Manufacturing as of December 19, 1990, that certain Amendment to
Technical Agreement effective as of January 1, 1995, and that certain
Second Amendment to Technical Agreement effective as of September 30, 1998
(as so amended, the "Agreement").
B. MEMC and PHC wish to further amend the Agreement as set forth below.
NOW, THEREFORE, pursuant to Section 17.03 of the Agreement, the parties
agree as follows:
1. Limitation of Scope. The following sentence shall be added at the end of
the definition of Silicon Wafers in Section 1.02:
"As used herein, Silicon Wafers shall mean [CONFIDENTIAL MATERIAL HAS BEEN
DELETED AND FILED SEPARATELY WITH THE SEC]."
2. Research and Development Projects. Add the following paragraphs at the end
of Section 3.01 as follows:
"During the Term of the Agreement, the parties shall meet no less
frequently than annually at a mutually agreeable time and place at which
MEMC shall advise PHC of the nature of any major research or pilot plant
projects within the Field of this Agreement which MEMC is undertaking. In
addition, during the Term of the Agreement, MEMC shall periodically advise
PHC of the status and progress of projects in the Field of the Agreement
which MEMC has undertaken via its "Product and Process Pipeline" program
(the program under which MEMC currently directs its research and
development activities) or any similar successor program.
During the Term of this Agreement, if PHC requests information regarding a
technical improvement or development of MEMC (either product or
process-related) within the Field of the Agreement and PHC and MEMC agree
that PHC has a commercial requirement for such information, then MEMC will
make available to PHC the necessary technical information if MEMC has
incorporated the improvement or development into any of its Plants. If MEMC
has not incorporated the improvement or development into any of its Plants,
the parties will either agree for MEMC to transfer the information to PHC
at a later stage of development or for PHC to participate in the
development. PHC may undertake its own research or pilot plant projects
provided such projects (i) are not duplicative of any MEMC projects, (ii)
are mutually beneficial, and (iii) are agreed upon by both parties."
3. Licenses to MEMC.
(a) Sections 4.03 and 4.04 are deleted in their entirety and the following
sections are added to the Agreement:
"4.03 - PHC agrees to grant and hereby grants to MEMC a worldwide,
royalty-free, nonexclusive right and license, with the right to
sublicense, to use all Technical Information which PHC supplies to
MEMC pursuant to this Agreement.
4.04 - PHC agrees to grant and hereby grants to MEMC a royalty-free,
nonexclusive right and license, with the right to sublicense, under
and for the full terms of all PHC Korean Patents. PHC agrees to grant
and hereby grants to MEMC a royalty-free, exclusive right and license,
with the right to sublicense, under and for the full terms of all PHC
Ex-Korean Patents; provided, that the parties agree that PHC shall
retain the right to use (but not license) the PHC Ex-Korean Patents.
4.05 - Notwithstanding the foregoing, MEMC shall be permitted to
sublicense PHC Technical Information or patents to its Affiliates or
MEMC Joint Ventures only if the Affiliate or MEMC Joint Venture grants
to PHC a royalty-free license to its Technical Information and patents
in the Field of the Agreement which such Affiliate or MEMC Joint
Venture has the legal right to grant. Any license from an MEMC
Affiliate or MEMC Joint Venture shall be on the same terms as the MEMC
licenses granted in Sections 4.01 and 4.02 hereof."
(b) New Sections 1.18, 1.19 and 1.20 are added as follows:
"1.18 - "MEMC Joint Ventures" means joint venture companies in which
<PAGE> 2
MEMC participates as a shareholder, partner or member and which is
engaged in the manufacture and/or sale of silicon wafers.
1.19 - "PHC Korean Patents" shall have the meaning set forth in
Section 18.01 hereof.
1.20 - "PHC Ex-Korean Patents" shall have the meaning set forth in
Section 18.02 hereof."
4. Running Royalty
(a) Section 5.03 is deleted in its entirety and replaced with the
following:
"5.03 - In addition to the payments specified in Sections 5.01 and
5.02 and elsewhere in this Agreement, during the Term of this
Agreement, PHC shall pay MEMC a running royalty consisting of (i)
[CONFIDENTIAL MATERIAL HAS BEEN DELETED AND FILED SEPARATELY WITH THE
SEC] of Net Sales Proceeds (the "Net Sales Royalty"), and (ii)
[CONFIDENTIAL MATERIAL HAS BEEN DELETED AND FILED SEPARATELY WITH THE
SEC] of Net Income After Taxes (the "NIAT Royalty")."
(b) The first sentence of Section 5.06 is deleted in its entirety and
replaced with the following:
"5.06 - The Net Sales Royalty due MEMC pursuant to this Agreement
shall be computed quarterly and shall be paid to MEMC within sixty
(60) days of the last day of March, June, September, and December of
each calendar year; each such payment shall be accompanied by a
written report setting forth the quantities and descriptions of all
Silicon Wafers sold by PHC during the period for which payment is
made; the NIAT Royalty shall be computed annually and shall be paid to
MEMC within sixty (60) days of the last day of each calendar year;
each such payment shall be accompanied by an earnings statement of PHC
detailing the calculation of Net Income After Taxes."
(c) In the last sentence of Section 5.06, the phrase "or annual, as the
case may be" is inserted after the word "quarterly".
(d) In the second sentence of Section 5.07, the phrase "or year, as the
case may be" shall be added after the phrase "calendar quarter".
(e) A new Section 1.21 is added as follows:
"1.21 - "Net Income After Taxes" shall mean PHC's net income after
taxes but before deduction of the NIAT Royalty and shall be computed
in accordance with U.S. generally accepted accounting principles.
5. Sharing of Certain MEMC Royalties.
(a) A new Section 5.08 is added as follows:
"5.08 - In the event that MEMC sublicenses any patent jointly owned by
the parties or owned or controlled solely by PHC to a third party
other than (i) an MEMC Affiliate, or (ii) an MEMC Joint Venture, in
consideration for cash royalties, PHC shall be entitled during the
Term of this Agreement to a share of the royalties as agreed between
the parties. In determining PHC's share of the royalties, the parties
shall take into consideration each party's relative contribution to
the sublicensed technology, and MEMC's contribution to the core
technology on which the sublicensed technology is based or to which it
is related. If the parties are unable to agree on PHC's share of the
royalties, the matter shall be submitted to arbitration as set forth
in Section 13.04 below."
6. Running Royalty Upon Termination
(a) A new Section 5.09 is added as follows:
"5.09 - Following termination or expiration of this Agreement, PHC
shall pay MEMC, in accordance with the procedures set forth in this
Article V, a running royalty as follows:
a. For the [CONFIDENTIAL MATERIAL HAS BEEN DELETED AND FILED
SEPARATELY WITH THE SEC] following termination or expiration, a
percentage Net Sales Royalty and NIAT Royalty equal to [CONFIDENTIAL
MATERIAL HAS BEEN DELETED AND FILED SEPARATELY WITH THE SEC] of the
percentage Net Sales Royalty and NIAT Royalty, respectively, in effect
at the date of termination or expiration;
b. For the [CONFIDENTIAL MATERIAL HAS BEEN DELETED AND FILED
SEPARATELY WITH THE SEC] following termination or expiration, a
percentage Net Sales Royalty and NIAT Royalty shall be equal to
[CONFIDENTIAL MATERIAL HAS BEEN DELETED AND FILED SEPARATELY WITH THE
SEC] of the percentage Net Sales Royalty and NIAT Royalty,
respectively, in effect at the date of termination or expiration; and
c. For the [CONFIDENTIAL MATERIAL HAS BEEN DELETED AND FILED
SEPARATELY WITH THE SEC] following termination or expiration, a
<PAGE> 3
percentage Net Sales Royalty and a NIAT Royalty equal to [CONFIDENTIAL
MATERIAL HAS BEEN DELETED AND FILED SEPARATELY WITH THE SEC] of the
percentage Net Sales Royalty and NIAT Royalty, respectively, in effect
at the date of termination or expiration.
d. Thereafter, PHC shall have no obligation to pay any royalty
whatsoever to MEMC."
(b) The following phrase is added at the end of the first sentence of
Section 14.05:
"and the obligation of PHC to pay MEMC a running royalty upon
termination or expiration of this Agreement as set forth in Section
5.09"
7. Notice
In Sections 12.01 and 12.02, "telex or facsimile" shall be replaced with
"telex, facsimile, or electronic mail."
8. Arbitration of Certain Matters
(a) The following phrase shall be added at the beginning of the first
sentence of Section 13.01:
"Except for those matters which are to be settled by arbitration in
accordance with Section 13.04 below,"
(b) A new Section 13.04 is added as follows:
"13.04 - Arbitration to determine PHC's share of royalties received by
MEMC pursuant to Section 5.08 shall be by a single arbitrator pursuant
to the Rules of Conciliation and Arbitration of the International
Chamber of Commerce (the "Rules") then in force. The single arbitrator
shall be selected by the parties and shall be a person familiar with
the silicon wafer business. If the parties are unable to agree upon an
arbitrator within thirty (30) days after arbitration is invoked,
either party may ask the ICC to appoint an arbitrator subject to the
following stipulation: if PHC so requests, the arbitrator shall not be
a U.S. national and, if MEMC so requests, the arbitrator shall not be
a Korean national. The arbitration shall be conducted in Singapore.
Each party shall submit its position to the arbitrator and the
arbitrator shall agree upon and approve one of the positions
submitted. Unless otherwise agreed by the parties, the arbitration
proceedings shall be conducted in English and any relevant documents
in other languages shall be translated into English at the expense of
the party producing them. In rendering its decision, the arbitrator
shall apply the terms and conditions of this Agreement. The arbitrator
shall determine how the expenses of the arbitration are to be borne by
the parties in dispute."
9. Term of Agreement
(a) Section 14.03 is deleted in its entirety and replaced with the
following:
"14.03 - No later than [CONFIDENTIAL MATERIAL HAS BEEN DELETED AND
FILED SEPARATELY WITH THE SEC] after the effective date of this Third
Amendment, MEMC and PHC shall negotiate in good faith on another
technical agreement with the object of allowing PHC and MEMC to obtain
continuing technology from the other party on reasonable terms. In the
case of failure of such negotiations and unless terminated earlier as
herein provided, this Agreement shall expire [CONFIDENTIAL MATERIAL
HAS BEEN DELETED AND FILED SEPARATELY WITH THE SEC] from the effective
date of this Third Amendment. Expiration or termination of this
Agreement shall not act to terminate any of the rights or licenses
granted by the parties hereunder, provided, however, that all rights
and licenses granted by MEMC to PHC shall be non-exclusive. The period
prior to the expiration or termination of this Agreement is herein
referred to as the "Term of the Agreement.""
(b) In Section 3.02, the phrase "during the five (5) year period beginning
with the Date of First Commercial Production" shall be replaced with
"during the Term of this Agreement."
(c) In Section 3.04, the phrase "During the five (5) year period following
the Date of First Commercial Production" shall be replaced with
"During the Term of this Agreement".
10. Management of PHC and Jointly-Owned Patents. A new Article XVIII-Management
of PHC and Jointly-Owned Patents is added with the following provisions:
"18.01 - In the Republic of Korea, PHC shall be responsible for preparing,
filing, prosecuting and maintaining patents and patent applications which
claim as an invention a PHC development ("PHC Korean Patents").
18.02 - In countries other than the Republic of Korea, MEMC shall be
responsible, upon the request of and at the expense of PHC, for preparing,
<PAGE> 4
filing, prosecuting and maintaining patents and patent applications which
claim as an invention a PHC development ("PHC Ex-Korean Patents"). The
decision of when and where to file PHC Ex-Korean Patents and what other
actions to take with respect thereto shall be agreed between the parties;
provided, that if PHC elects not to pay for any filing or action proposed
by MEMC with respect to a PHC Ex-Korean Patent and MEMC makes such filing
or takes such action at its expense, PHC agrees that it will assign its
entire right and interest in and to such patent or patent application to
MEMC. MEMC shall keep PHC advised as to all developments with respect to
PHC Ex-Korean Patents and shall endeavor to supply PHC copies of all papers
received and filed in connection with the prosecution thereof and give due
consideration to PHC's comments thereon. If PHC requests MEMC to prepare,
file, prosecute or maintain a PHC Ex-Korean Patent and MEMC elects not to
assume or continue responsibility for such actions, PHC may take such
actions at its own expense. In such event, the exclusive license granted to
MEMC with respect to such patent shall become nonexclusive.
18.03 - All patents and patent applications which claim as an invention a
joint development of PHC and MEMC shall be filed in the names of and be
jointly owned by PHC and MEMC. MEMC shall be solely responsible for
preparing, filing, prosecuting and maintaining such patents and patent
applications. The expenses of such actions shall be shared equally by PHC
and MEMC. MEMC shall have the right to freely sublicense any of such
jointly-held patents; provided, that in the Republic of Korea, PHC's
consent shall be required for any such sublicense. Elsewhere, if PHC's
consent is legally required prior to MEMC's grant of a sublicense, then PHC
agrees that it shall provide such consent. PHC shall have the right to
sublicense any of such jointly-held patents with the consent of MEMC. MEMC
shall notify PHC in writing prior to granting a sublicense of any
jointly-held patent."
11. Effect
This Third Amendment shall become effective on October 1, 1998 and shall
supercede any provisions of the Agreement which are in conflict with this
Amendment. All other provisions of the Agreement shall remain effective and
binding.
IN WITNESS WHEREOF, the parties have executed this Third Amendment as
follows:
MEMC ELECTRONIC MATERIALS, INC POSCO HULS COMPANY, LIMITED
By: /s/ Klaus R. von Horde By: /s/ S. B. Hong
------------------------------ ---------------------------------
Title: President, COO Title: President, PHC
Date: December 17, 1998 Date: December 17, 1998
<PAGE> 1
EXHIBIT 10-kk(4)
MEMC ELECTRONIC MATERIALS, INC.
SPECIAL INCENTIVE BONUS AGREEMENT
THIS AGREEMENT is entered into between MEMC Electronic Materials, Inc.
("MEMC") and John P. De Luca ("Employee").
Employee is employed by MEMC.
MEMC recognizes the value of the services performed by Employee and wishes
to encourage Employee to continue employment with MEMC. Employee wishes to be
paid a certain amount of additional compensation in return for continuous
employment with MEMC for a designated period of time.
NOW, THEREFORE, in consideration of the mutual promises contained in this
Agreement, the parties agree as follows:
1. Nature of Contract. This Agreement provides for an additional bonus (the
"Special Incentive Bonus") to be paid by MEMC to Employee in consideration for
Employee's continuous employment throughout the period of April 1, 1998 through
June 30, 1999 (the "Retention Period").
Nothing contained in this Agreement shall be construed to be a contract of
employment for any term, nor as conferring upon Employee the right to continue
in the employment of MEMC in Employee's present capacity or in any other
capacity. Nothing contained in this Agreement shall be construed to preclude
either party from terminating the employment relationship at any time.
It is expressly understood by the parties that this Agreement relates
exclusively to additional compensation for Employee's services and is not
intended to be the entire employment contract. This Agreement merely supplements
Employee's employment contract with MEMC.
The Special Incentive Bonus provided by this Agreement is in addition to
the cash compensation and other fringe benefits provided to Employee pursuant to
any plan or plans maintained by MEMC for its employees generally.
2. Special Incentive Bonus. If Employee remains in the employment of MEMC
continuously throughout the Retention Period of April 1, 1998 through June 30,
1999, Employee shall be entitled to a Special Incentive Bonus in the amount of
$250,000.
3. Terms of Payment. Fifty percent of the Special Incentive Bonus will be
payable with the March 31, 1998 payroll (the "Advance Payment"); the remaining
fifty percent of the Special Incentive Bonus will be payable with the June 30,
1999 payroll (the "Final Payment").
Subject to the exceptions below, in the event Employee terminates
employment with MEMC before April 1, 1999, Employee shall reimburse MEMC the
entire amount of the Advance Payment (including any payroll tax withheld).
Subject to the exceptions below, in the event Employee terminates
employment with MEMC after March 31, 1999 and before July 1, 1999, Employee
shall reimburse MEMC that portion of the Advance Payment (including any payroll
tax withheld) that the number of days in the period beginning on the date of
Employee's termination of employment with MEMC and ending on June 30, 1999 bears
to 456. For example, if Employee terminates employment with MEMC on June 1,
1999, Employee shall reimburse MEMC 30 / 456 (or 6.58%) of the Advance Payment.
No reimbursement of the Advance Payment shall be required in the event of
the death or total and permanent disability of Employee, or in the event
Employee's employment with MEMC is involuntarily terminated by MEMC as a result
of a change in control of MEMC or a reduction in the workforce of MEMC. The
reimbursement as described above shall be required in the event of Employee's
termination of employment with MEMC for any other reason.
In no event shall Employee be entitled to the Final Payment in the event of
Employee's termination of employment with MEMC for any reason before July 1,
1999.
4. Tax Withholding
MEMC shall withhold from the Special Incentive Bonus the amount necessary
to enable MEMC to remit to the appropriate government entity or entities the
amount required to be withheld from wages with respect to such payments. All
references to the Special Incentive Bonus, the Advance Payment, and the Final
Payment shall mean the gross amount of such amount before such payroll taxes are
withheld.
5. Collection of Reimbursement
Employee agrees that any reimbursement of the Advance Payment due MEMC in
the event of termination of employment of the Employee before July 1, 1999 may
be withheld by MEMC from any amounts owed by MEMC to Employee.
6. Confidentiality
Employee agrees that the terms of this Special Incentive Bonus Agreement
<PAGE> 2
are confidential and will not be discussed with or disclosed to any present or
former employee of MEMC or its affiliates or subsidiaries.
7. Governing Law
The interpretation and enforcement of this Agreement shall be governed by
the laws of the State of Missouri.
Employee acknowledges that this Agreement has been reviewed in detail by
Employee and that Employee voluntarily entered into this Agreement.
IN WITNESS WHEREOF, the parties have executed this Special Incentive Bonus
Agreement this 24th day of March, 1998.
MEMC ELECTRONIC MATERIALS, INC.
By: /s/ Ludger H. Viefhues
--------------------------------------
Ludger H. Viefhues, Chief Executive Officer
/s/ John P. De Luca
--------------------------------------
John P. De Luca
<PAGE> 1
EXHIBIT 13
FIVE YEAR SELECTED FINANCIAL DATA
Dollars in thousands, except share data
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996 1995) 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 758,916 $ 986,673 $1,119,500 $ 886,860 $660,807
Gross margin (31,829) 124,759 250,185 223,279 143,210
Marketing and administration 73,515 70,715 79,680 63,893 41,298
Research and development 81,591 64,457 44,313 31,226 27,403
Restructuring costs 146,324(1) -- -- -- --
Operating profit (loss) (333,259) (10,413) 126,192 128,160 74,509
Equity in income (loss) of joint ventures (43,496) 5,480 (3) 26,716(3) 13,199(3) (6,384)(3)
Net earnings (loss) (316,332) (4,513)(3) 103,388(3) 86,564(3) 34,475(2)
Basic earnings (loss) per share (7.80) (0.11)(3) 2.50(3) 2.83(2)(3) 1.60(2)(3)
Diluted earnings (loss) per share (7.80) (0.11)(3) 2.49(3) 2.81(2)(3) 1.60(2)(3)
Shares used in basic earnings (loss) per
share computation 40,580,869 41,345,193 41,308,806 30,612,636(2) 21,490,942(2)
Shares used in diluted earnings (loss) per
share computation 40,580,869 41,345,193 41,534,412 30,838,704(2) 21,490,942(2)
BALANCE SHEET DATA:
Working capital 40,494 38,449 42,805 199,258 69,597
Total assets 1,773,714 1,794,424(3) 1,519,472(3) 1,102,167(3) 631,543(3)
Long-term debt (including current portion) 873,680 519,995 304,589 91,451 165,230
Stockholders' equity 399,040 715,754(3) 748,583(3) 642,695(3) 205,468(3)
OTHER DATA:
Capital expenditures 194,610 372,416 590,049 215,359 78,676
Equity infusions in joint ventures 25,533 10,638 14,698 29,904 20,922
Employment 6,300 8,000 7,100 6,600 5,300
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)During 1998, the Company recorded restructuring costs totaling $146.3 million
to close its Spartanburg, South Carolina facility, to forego construction of a
200 millimeter wafer facility at its joint venture in Malaysia, to withdraw from
its joint venture in a small diameter wafer operation in China and to implement
a voluntary severance program.
(2)Earnings (loss) per share and shares used in earnings (loss) per share
computation have been restated to comply with SFAS No. 128, "Earnings Per
Share."
(3)The Company's financial statements for all periods presented have been
restated to reflect from inception the designation of the U.S. dollar as the
functional currency for POSCO Huls Co., Ltd. and Taisil Electronic Materials
Corporation, the Company's unconsolidated joint ventures. See Note 19 of Notes
to Consolidated Financial Statements.
12
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales decreased by 23.1% to $758.9 million for 1998 from $986.7
million for 1997, due to significant declines in the price for silicon wafers
and a 14.3% decrease in product volumes somewhat offset by an improved product
mix. The decline in price during 1998 is primarily attributable to significant
excess capacity in the silicon wafer industry and continuing pricing pressure
from customers who are experiencing reduced profitability or losses due to
significant excess capacity and price erosion in the semiconductor industry. The
decrease in product volume in 1998 was principally due to the weak economic
conditions in the Asia Pacific markets brought on by the Asian financial crisis
and the continuing recession in Japan coupled with semiconductor customers
shrinking the size of their devices (requiring less silicon per device). A
concerted effort by customers to use fewer test/monitor wafers also caused
product volumes to decline in 1998. This marks the first year since 1985 that
product volumes for the silicon industry have not increased year over year.
Advanced large diameter and epitaxial products represented 47.1% of product
volume for 1998 compared to 39.1% for 1997. While both 200 millimeter and
epitaxial product volumes grew during 1998, the increase in this ratio is
primarily indicative of customers utilizing 200 millimeter wafers in preference
to smaller diameter wafers in order to obtain the lowest cost per device. While
product volume declined in total by 14.3% during 1998, 200 millimeter product
volume grew by 12.3%.
MEMC operates in all major semiconductor-producing regions of the world, with
almost half of the Company's 1998 net sales to customers located outside North
America. Net sales to North America decreased 21.7% and comprised 51.4% of 1998
sales compared to 50.4% of 1997 sales, led by a fall in prices and product
volume, partially offset by improved product mix. Lower prices offset by an
improved product mix and higher volumes combined to result in a 10.1% decrease
in net sales to Europe, which constituted 23.4% of 1998 sales compared to 20.0%
of 1997 sales. Net sales to Japan decreased 22.6% and comprised 15.7% of 1998
sales compared to 15.6% of 1997 sales, as lower volumes and prices more than
offset an improved product mix. Declines in product volumes, prices and product
mix resulted in a decrease of 47.5% in net sales to Asia Pacific, which
comprised 9.5% of 1998 sales compared to 13.9% of 1997 sales. See Note 17 of
Notes to Consolidated Financial Statements herein.
GROSS MARGIN. The lower volumes experienced in 1998 decreased the capacity
utilization and, coupled with the lower selling prices, caused gross margins to
decrease to a negative 4.2% for 1998 from the 12.6% achieved in 1997. Despite
the benefits from the mix improvement and cost cutting measures that were
implemented during 1998, the volume decreases and price pressures began early in
the year and resulted in negative margins. These cost-cutting initiatives
included short-term plant shutdowns, implementing the Company's "best practices"
worldwide, implementing a plant focus program that limits the number of wafer
diameters manufactured at each site, and working with our suppliers to create
cost reduction opportunities and price reductions. In addition, the Company
reduced its workforce by approximately 1,700 employees, or 21.3%, compared to
December 31, 1997.
MARKETING AND ADMINISTRATION. Marketing and administration expenses increased
4.0% and represented 9.7% of net sales for 1998 compared to 7.2% for 1997. The
increase is predominately attributable to expenses incurred for business systems
redesign in anticipation of implementing SAP worldwide and fees related to
several other initiatives completed during the year.
RESEARCH AND DEVELOPMENT. Research and development costs rose 26.6% and
represented 10.8% of net sales for 1998 compared to 6.5% for 1997. The increase
in research and development costs is attributable to continuing investments in
300 millimeter wafer development and depreciation associated with capital
expenditures made for the 300 millimeter pilot line in St. Peters, Missouri and
the 300 millimeter integrated development line in Utsunomiya, Japan.
RESTRUCTURING COSTS. During the second quarter of 1998, the Company decided to
close its small diameter wafer facility in Spartanburg, South Carolina and to
withdraw from the Company's joint venture in a small diameter wafer operation in
China. These actions were taken because (1) a number of semiconductor
manufacturers have been running their larger diameter manufacturing lines in
preference to their small diameter lines in order to
13
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
gain production efficiencies; (2) a number of semiconductor manufacturers
recently have undertaken restructuring initiatives focused on permanently
eliminating small diameter lines; and (3) management believes that small
diameter wafer capacity will exceed demand even after the semiconductor industry
begins to recover. The Company also decided to forego construction of a new 200
millimeter wafer facility at its joint venture in Malaysia. This decision was
based upon current and anticipated excess capacity for 200 millimeter wafers and
the significant price erosion that the Company has experienced for these wafers.
These actions resulted in a charge to operations of $121.7 million, comprised of
$81.3 million non-cash asset impairments/write-offs, $25.9 million in
dismantling and related costs and $14.5 million in personnel related costs. The
assets for which an impairment loss has been recorded or which have been or will
be written-off are primarily property, plant and equipment which cannot be sold
or used at other Company facilities. In addition, the Company wrote-off
architectural design and site preparation fees as well as costs incurred to
develop a computer-integrated manufacturing system for the Malaysian joint
venture.
Personnel costs represent the expected cost of involuntary terminations for
approximately 600 hourly and salaried employees whom the Company does not expect
to relocate elsewhere within the organization. See Note 5 of Notes to
Consolidated Financial Statements herein. The Company also recorded a $24.6
million charge for a voluntary severance program for approximately 600 hourly
and salaried U.S. employees. Substantially all this amount was paid to employees
as of December 31, 1998.
Ongoing operating expenses until plant closure associated with the Spartanburg
facility of approximately $7.9 million will continue to be recorded as period
costs. Costs of approximately $8.2 million relating to the relocation and
installation of equipment from the Spartanburg facility to other sites will be
capitalized as incurred.
The Company estimates pre-tax savings from these restructuring activities and
the voluntary severance program to be approximately $60 million on an annualized
basis. Approximately half of these expected savings relate to the voluntary
severance program. As employees who participated in the voluntary severance plan
were no longer employed by the Company as of June 30, 1998, these savings began
to be realized in the third quarter of 1998.
The remaining $30 million in annualized savings principally relates to the
closure of the Company's Spartanburg facility. Approximately half of these
expected savings relate to personnel costs and the other half relate to
manufacturing costs such as depreciation and supplies and utilities which will
not be duplicated when Spartanburg's silicon wafer production is transferred to
another Company location. As the Company re-qualifies and transfers the
production of silicon wafers made at the Spartanburg facility to other Company
locations, it will reduce its Spartanburg workforce. With each workforce
reduction, the Company expects a portion of the annualized cost savings
associated with personnel costs to be realized and to a much lesser extent
manufacturing costs. As a result, a portion of the remaining $30 million in
annualized cost savings began to be realized in the third quarter of 1998 and is
expected to grow as workforce and production at the Spartanburg facility are
reduced. On an annualized basis, the Company estimates that approximately $9.0
million in savings began to be realized by December 31, 1998 related to the
closure of the Spartanburg facility. Because the manufacturing cost savings are
fixed in nature, they will largely be realized upon the closure of the
Spartanburg facility. While the Company believes that this will occur by April
30, 1999, the ability to re-qualify silicon wafers is highly dependent upon the
cooperation of the Company's customers.
INTEREST EXPENSE. Interest expense increased to $45.8 million for 1998 from
$14.7 million for 1997. The increase in interest expense is primarily
attributable to increased borrowings, and to a lesser extent the completion of
projects for which interest expense could no longer be capitalized. In addition,
the interest rates on the Company's loan agreements with its principal lender
were increased as a result of a debt re-negotiation during September 1998, as
described in Liquidity and Capital Resources below. Total debt was $909.8
million and $632.5 million at December 31, 1998 and 1997, respectively.
OTHER, NET. Other, net decreased to $1.0 million in expense for 1998 from $4.1
million of income for 1997, primarily due to the sale of the Company's Santa
Clara wafer facility in May 1997 that resulted in a pre-tax gain of $6.0
million.
INCOME TAXES. The effective income tax rate was 24.0% for 1998, as compared to
(26.8%) for 1997. This fluctuation is the result of changes in the composition
of worldwide taxable income, restructuring costs, non-
14
<PAGE> 4
deductible operating expenses at the Company's Malaysian and Chinese joint
ventures, the establishment of valuation allowances on certain deferred tax
assets in Japan and certain foreign tax credit elections.
EQUITY IN INCOME (LOSS) OF JOINT VENTURES. Equity in income (loss) of joint
ventures decreased $49.0 million to a loss of $43.5 million in 1998 from $5.5
million in income in 1997. POSCO Huls Co., Ltd. (PHC), the Company's 40%-owned,
unconsolidated joint venture in South Korea, experienced a 28.0% decrease in
product volume and significantly lower prices resulting in lower sales
throughout 1998. While the reasons for the decline in prices are similar to
those of the Company, product volume declines were primarily the result of
excess capacity within the DRAM (memory) industry and efforts by Korean DRAM
manufacturers to reduce their production, thereby reducing the worldwide
oversupply, and shrink the size of their devices. For the year, PHC contributed
losses of $17.8 million compared to $11.1 million in income for 1997.
Net sales for Taisil Electronic Materials Corporation (Taisil), the Company's
45%-owned, unconsolidated joint venture in Taiwan, decreased slightly due to
significantly lower prices, which were partially offset by a 40.9% increase in
product volumes. The higher product volumes were primarily attributable to
obtaining additional customer qualifications during 1998. In addition, the
Taiwanese semiconductor market, particularly the foundry market, grew during
1998. During 1998, Taisil also made adjustments to its deferred tax valuation
allowance in recognition of changes in expected realization of its operating
loss carryforwards, of which the Company's share was $6.0 million. For the year,
Taisil contributed losses of $25.7 million in 1998 compared to $5.6 million in
losses for 1997.
NET LOSS. The decrease in net sales, restructuring costs, higher research and
development costs and interest expense, and the equity in loss of joint ventures
resulted in a net loss of $316.3 million for 1998 compared to $4.5 million for
1997. Management expects some reduction in losses in the first quarter of 1999,
as a result of the restructuring and cost-cutting actions, as well as
anticipated higher product volumes. Due to overcapacity and decreasing prices in
the semiconductor and silicon wafer industries, weak economic conditions in the
Asia Pacific region and Japan, and other factors, while the Company will
continue its significant performance improvements and cost-cutting efforts,
management does not expect the Company to be profitable in 1999.
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 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.
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 PHC and Taisil.
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 which resulted in
higher levels of training and start-up costs and contributed to the lower
15
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 $5.5 million in 1997 from $26.7 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 $11.1 million compared to $34.1 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 $5.6
million in 1997 and $7.4 million in 1996 is fairly consistent.
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
$4.5 million for 1997 compared to net earnings of $103.4 million for 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had $16.2 million of cash and cash equivalents
compared to $30.1 million at December 31, 1997.
Cash flows from operating activities decreased to ($33.9) million for 1998 from
$29.4 million for 1997. This $63.3 million decline was largely attributable to
lower results from operations, an increase in deferred taxes, and a decrease in
accounts payable, partially offset by a decrease in accounts receivable and
inventories.
Accounts receivable of $98.5 million at December 31, 1998 decreased $56.2
million, or 36.3%, from $154.7 million at the end of 1997. This decrease is
consistent with the 40.5% decrease in fourth quarter sales between the two
years. Days' sales outstanding were 58.4 days at December 31, 1998 compared to
55.0 days at the end of 1997 based upon annualized fourth quarter sales for the
respective years. This increase is attributable to lengthier collection periods
in the Asian region in the fourth quarter of 1998.
Inventories declined $25.5 million, or 18.0%, from the prior year to $115.9
million at December 31, 1998. This decrease is primarily due to lower
anticipated sales in the first quarter of 1999 compared to the year-ago period
and a concerted effort by the Company to reduce raw materials and manage
inventory levels. Related inventory reserves for obsolescence, lower of cost or
market issues, or other impairments increased $11.7 million in 1998 to $19.6
million, as a result of declining sales and the resultant determination that
certain goods in process, finished goods and spare parts were no longer salable
or usable. Year-end inventories as a percentage of annualized fourth quarter
sales increased from 13.8% at the end of 1997 to 18.8% at December 31, 1998, as
16
<PAGE> 6
a result of the significant sales decline in 1998 and the character of certain
inventory items such as spare parts which do not fluctuate with sales levels.
The Company's net deferred tax assets increased $99.1 million to $127.8 million
at December 31, 1998. Management believes it is more likely than not that, with
its projections of future taxable income and after consideration of the
valuation allowance, the Company will generate sufficient taxable income to
realize the benefits of the net deferred tax assets existing at December 31,
1998.
In order to realize the net deferred tax assets existing at December 31, 1998,
the Company will need to generate future taxable income of approximately $353
million. The Company's net operating loss (NOL) carryforwards total $410
million, of which $7 million will expire in 2001; $15 million will expire in
2002; $32 million will expire in 2003; $27 million will expire in 2012; and $329
million will expire in 2018. There can be no assurance, however, that the
Company will generate sufficient taxable income to realize the full benefit of
the existing net deferred tax assets.
Accounts payable decreased $33.6 million or 23.0% compared to the balance at the
end of 1997 due to a significant reduction in capital expenditures and lower
operating costs as a result of lower product volumes in the fourth quarter of
1998 compared to the year-ago period.
Capital expenditures decreased $177.8 million or 47.7% versus the prior year to
$194.6 million. The 1998 capital expenditures primarily consisted of equipping
the 300 millimeter pilot line in St. Peters, the 300 millimeter integrated
development line in Utsunomiya, the granular polysilicon expansion at MEMC
Pasadena and the installation of epitaxial reactors in Utsunomiya. The Company
anticipates that it will reduce capital expenditures in 1999 to less than $85.0
million. At December 31, 1998, the Company had $38.8 million of committed
capital expenditures related to the implementation of SAP worldwide and various
manufacturing and technology projects.
Equity infusions in joint ventures increased $14.9 million to $25.5 million for
1998 and related solely to Taisil. Although Taisil has not yet generated
positive net income, the Company does not consider its investment in Taisil to
be impaired as of December 31, 1998 based on the following factors: the level of
commitment by all of Taisil's shareholders; the growing Taiwanese silicon wafer
market; increased customer qualifications and associated increased product
volumes; and future anticipated positive operating cash flows.
At December 31, 1998, the Company maintained $927.2 million of committed
long-term loan agreements, of which $873.7 million was outstanding. The Company
also maintained $83.0 million of short-term lines of credit, of which $36.1
million was outstanding at year-end. The Company's weighted average cost of
borrowing was 7.8% at December 31, 1998.
Total debt outstanding increased to $909.8 million at December 31, 1998 from
$632.5 million at December 31, 1997. The total debt to total capital ratio at
December 31, 1998 was 67.0%.
During September 1998, the Company received a three-year $100.0 million
revolving credit facility from VEBA AG, the parent of the Company's majority
stockholder. This is in addition to a $50.0 million credit facility from VEBA AG
that was made available to the Company on June 30, 1998. VEBA AG and its
affiliates agreed to extend until 2001 all of the Company's outstanding debt
with VEBAAGand its affiliates maturing prior to January 1, 2001 (but only in the
event the Company has used its best efforts to obtain replacement financing on
equivalent terms).
As part of this agreement, the Company agreed to increase the interest rates
payable on the Company's outstanding debt with VEBA AG and its affiliates to
reflect interest rate spreads applicable to an average industrial borrower at a
specified credit rating. These higher rates, which are in part attributable to
extended terms, will result in an increase in interest expense of approximately
$15.0 million per year based upon $679.6 million of debt outstanding with VEBA
AG and its affiliates as of September 30, 1998. Prior to this debt
re-negotiation, interest rates on the U.S. dollar and Japanese yen based loans
outstanding with VEBA AG and its affiliates ranged from 2.1% to 7.6%. As a
result of this debt re-negotiation, these loans will now have interest rates
ranging from 3.4% to 10.2%. Additionally, all outstanding debt with VEBA AG and
its affiliates maturing prior to January 1, 2001 which is extended at maturity
will be repriced based upon then-current interest rates applicable to an average
industrial borrower at a specified credit rating.
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<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Subsequent to year-end, the Company received a $75.0 million short-term
revolving credit facility from an affiliate of VEBAAG. The interest rate on the
credit facility reflects interest rate spreads applicable to an average
industrial borrower at a specified credit rating. Under the loan agreement, the
Company cannot pledge any of its assets to secure additional financing.
Management believes this will satisfy the Company's short-term liquidity needs.
During 1998, the Company repurchased 893,000 shares of common stock for a total
of $15.7 million.
On October 22, 1998, the Company filed a registration statement with the
Securities and Exchange Commission (SEC) for the sale of its common stock in a
rights offering to existing stockholders except VEBA AG and its affiliates (the
Offering). The Company expects approximately $91.1 million in aggregate net
proceeds from the Offering, after paying estimated expenses, including fees to
dealer managers. Immediately prior to the Offering, the Company will sell common
stock to VEBA Zweite Verwaltungsgesellschaft mbH, an affiliate of VEBA AG (VEBA
Zweite), for aggregate net proceeds of approximately $105.9 million. VEBA Zweite
has also agreed to purchase all shares issuable upon exercise of the rights that
are not subscribed for pursuant to the basic subscription privilege or the
over-subscription privilege by other stockholders, subject to certain conditions
that are customary in a firm commitment underwriting. The subscription price and
number of shares will be determined based on the average share price during a
period shortly before the effective date of the registration statement. The
Company intends to use the proceeds from the Offering and the private placement
to reduce debt outstanding under revolving credit agreements and for general
corporate purposes. The Company expects the registration to be effective and the
Offering to commence by the end of the first quarter of 1999. The private
placement to VEBA Zweite will be consummated immediately prior to commencement
of the Offering.
Management currently believes that cash generated from operations, together with
the liquidity provided by existing cash balances and credit facilities and the
anticipated proceeds from the private placement and the Offering will be
sufficient to satisfy commitments for capital expenditures and other cash
requirements into 2000. If the Offering is not completed, the Company may need
to explore other future sources of capital.
The silicon wafer industry is highly capital intensive. Even with the proceeds
from the private placement to VEBA Zweite and the Offering (if such transactions
are consummated) and anticipated cash from operations, the Company may need to
seek additional capital in order to fund all its future needs for capital
expenditures, research and development, and marketing and customer service and
support. The Company's capital needs depend on numerous factors, including its
profitability and investment in capital expenditures and research and
development.
Historically, the Company has funded its operations primarily through loans from
VEBA AG and its affiliates, internally generated funds, and an initial public
offering. To a lesser extent, the Company has raised funds by borrowing money
from commercial banks. The Company will continue to explore and, as appropriate,
enter into discussions with other parties regarding possible future sources of
capital. Under the loan agreements between the Company and its principal lender,
VEBA AG and its affiliates, the Company cannot pledge any of its assets to
secure additional financing. The Company does not believe that it currently can
obtain unsecured financing from third parties on better terms than those with
VEBA AG and its affiliates.
For financial reporting purposes, both VEBA Corporation and VEBA AG include VEBA
Corporation's share of the Company's net earnings or losses in their
consolidated financial statements. The Company's recent losses have adversely
affected VEBA Corporation's and VEBA AG's reported earnings. While the Company
is not one of the focus areas of VEBA AG and its affiliates' future major
investments, they have recently provided the Company with additional capital and
have committed to provide substantial additional capital, as described herein.
However, VEBA AG and its affiliates are not otherwise obligated to provide
capital to the Company. There can be no assurance that VEBA AG and its
affiliates will continue to provide capital to the Company in the future.
YEAR 2000
Many existing software programs, computers and other types of equipment were not
designed to accommodate the Year 2000 and beyond. If not corrected, these
computer applications and equipment could fail or create erroneous results. For
the Company, this could disrupt purchasing, manufacturing, sales, finance and
other support areas and affect the Company's ability to timely deliver silicon
wafers with the exacting specifications required by the Company's customers,
thereby causing potential lost sales and additional expenses.
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<PAGE> 8
STATE OF READINESS. The Company has created a Year 2000 Project Team that is
comprised of a Program Office, including a Global Project Manager, Customer and
Vendor Management groups, and Year 2000 representatives from all sites around
the world, including the Company's unconsolidated joint ventures. This team is
responsible for planning and monitoring all Year 2000 activities and reporting
to the Company's executive management. The Company's Chief Financial Officer is
the sponsor for the Year 2000 project and reports to the Company's Board of
Directors on a periodic basis.
The Company's Year 2000 project encompasses both information and non-information
systems within the Company as well as the investigation of the readiness of the
Company's strategic suppliers/business partners. The Company's goal is to have
all Year 2000 issues resolved by June 1999, with Year 2000 issues relating to
the most critical business systems (i.e., financial, order processing) resolved
by the first quarter of 1999. To that end, the Company has inventoried and
assessed the Year 2000 readiness of the following:
- - In-house Applications -- Those applications that are developed and supported
in-house or purchased applications that are heavily customized and supported
in-house. This classification also includes end-user-developed applications
deemed critical to the business.
- - Business Software (Purchased) -- Applications purchased from an outside vendor
and used for automating business processes (i.e., financial systems, order
processing systems, purchasing systems).
- - Manufacturing Software (Purchased) -- Applications purchased from an outside
vendor and used for automating manufacturing processes.
- - Personal Computer Software (Purchased) -- All software packages resident on
personal computers. This includes things such as operating systems, word
processing software, communications software, project management software, and
spreadsheet software.
- - Infrastructure Software (Purchased) -- Purchased software used in the
client/server and network environments.
- - IT Hardware -- Information Technology hardware components including midrange
machines, personal computers, printers, network hardware.
- - Facilities & Utilities -- Components in the office and manufacturing
supporting systems environments. Types of components include: copy machines,
fax machines, telephone/communications systems, security systems, fire
alarm/control, electrical, waste treatment, alarms, and air handlers.
- - Manufacturing Equipment -- Shop floor equipment such as clean rooms, crystal
pullers, epitaxial reactors, inspection, lab, lappers, laser markers,
measurement tools, grinders, polishers, slicers, and wet benches.
IN-HOUSE APPLICATIONS. The Company is evaluating the extent to which
modifications of the Company's in-house applications will be necessary to
accommodate the Year 2000 and are modifying the Company's in-house applications
to enable continued processing of data into and beyond the Year 2000. This phase
of the Company's Year 2000 project is approximately 75% complete and the Company
anticipates completing remediation and testing of the Company's in-house
applications by the end of the first quarter of 1999.
PURCHASED SOFTWARE. The Company is obtaining, where feasible, contractual
warranties from systems vendors that their products are or will be Year 2000
compliant. The Company has completed approximately 85%, 55% and 75% of its Year
2000 project related to business software, manufacturing software and personal
computer software, respectively, and has completed its Year 2000 project related
to infrastructure software. The Company expects this phase of its Year 2000
project to be completed by the end of the first quarter of 1999. The Company
requires Year 2000 contractual warranties from all vendors of new software and
hardware. In addition, the Company is testing newly purchased computer hardware
and software systems in an effort to ensure their Year 2000 compliance.
EMBEDDED SYSTEMS. For in-house embedded systems, the Company is modifying its
systems to enable the continuing functioning of equipment into and beyond the
Year 2000. For third-party embedded systems, the Company is obtaining, where
feasible, contractual warranties from systems vendors that their products are or
19
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
will be Year 2000 compliant. The Company has completed this phase of its Year
2000 project for hardware and has completed approximately 65% and 55% of its
Year 2000 project related to facilities and utilities, and manufacturing
equipment, respectively. The Company anticipates that such embedded systems will
be fully tested by June 1999.
SUPPLIERS/BUSINESS PARTNERS. The Company has also communicated with its
strategic suppliers and equipment vendors seeking assurances that they will be
Year 2000 ready. The Company's goal is to obtain as much detailed information as
possible about its strategic suppliers/business partners' Year 2000 plans so as
to identify those companies which appear to pose a significant risk of failure
to perform their obligations to the Company as a result of the Year 2000.
Detailed information regarding all of its strategic suppliers and equipment
vendors has been compiled and Year 2000 audits are planned for the most critical
suppliers. This will be an ongoing process during the Company's Year 2000
project. For those strategic suppliers and equipment vendors that do not respond
as to their status or their response is not satisfactory, the Company intends to
develop contingency plans to ensure that sufficient resources are available to
continue with business operations.
COSTS TO ADDRESS THE YEAR 2000. Spending for modifications and updates is being
expensed as incurred and is not expected to have a material impact on the
Company's results of operations or cash flows. The cost of the Company's Year
2000 project is being funded through borrowings. The Company estimates that its
total incremental Year 2000 expenditures will be in the range of $5 - $7
million. Through December 31, 1998, the Company has expended approximately $2.2
million of incremental costs consisting mainly of contract programmers and
consulting costs associated with the evaluation, assessment and remediation of
computer systems and manufacturing equipment. The Company anticipates that
contract programming costs will be its most significant cost as the Year 2000
project proceeds to completion.
RISK ANALYSIS. Like most large business enterprises, the Company is dependent
upon its own internal computer technology and relies upon the timely performance
of its suppliers/business partners. A large-scale Year 2000 failure could impair
the Company's ability to timely deliver silicon wafers with the exacting
specifications required by its customers, thereby causing potential lost sales
and additional expenses. The Company's Year 2000 project seeks to identify and
minimize this risk and includes testing of its in-house applications, purchased
software and embedded systems to ensure that all such systems will function
before and after the Year 2000. The Company is continually refining its
understanding of the risk the Year 2000 poses to its strategic
suppliers/business partners based upon information obtained through its surveys.
This refinement will continue into mid-1999.
CONTINGENCY PLANS. The Company's Year 2000 project includes the development of
contingency plans for business critical systems and manufacturing equipment as
well as for strategic suppliers/business partners to attempt to minimize
disruption to its operations in the event of a Year 2000 failure. The Company
will be formulating plans to address a variety of failure scenarios, including
failures of its in-house applications, as well as failures of strategic
suppliers/business partners. The Company anticipates it will complete Year 2000
contingency planning by March 1999.
YEAR 2000 CAUTIONARY STATEMENT. Year 2000 issues are widespread and complex.
While the Company believes it will address them on a timely basis, the Company
cannot guarantee that it will be successful or that these problems will not
materially adversely affect its business or results of operations. To a large
extent, the Company depends on the efforts of its customers, suppliers and other
organizations with which it conducts transactions to address their Year 2000
issues, over which the Company has no control.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European union
established fixed conversion rates between their existing sovereign currencies
and the Euro. The participating countries have agreed to adopt the Euro as their
common legal currency as of that date while still utilizing their local currency
until January 1, 2002.
The Company has begun to assess the potential impact that may result from the
Euro conversion. In addition to tax accounting considerations, the Company is
also assessing the potential impact from the Euro conversion in a number of
other areas, including the technical challenges to adapt information technology
and other systems to accommodate Euro-denominated transactions; the competitive
impact of cross-border price transparency, which may make it more difficult for
businesses to charge different prices for the same products on a
country-by-coun-
20
<PAGE> 10
try basis; the impact on currency exchange costs and currency exchange rate
risk; and the impact on existing contracts. While the Company will continue to
assess the impact of the introduction of the Euro, based on currently available
information, management does not believe that the introduction of the Euro will
have a material adverse effect on the Company's financial condition or results
of operation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires the recognition of
all derivatives as assets or liabilities within the balance sheet, and requires
both the derivatives and the underlying exposure to be recorded at fair value.
Any gain or loss resulting from changes in fair value will be recorded as part
of the results of operations, or as a component of comprehensive income or loss,
depending upon the intended use of the derivative. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The Company
does not believe that the implementation of this Statement will have a material
adverse effect on its financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires that certain costs
related to the development or purchase of internal-use software be capitalized
and amortized over the estimated useful life of the software. This Statement
also requires that costs related to the preliminary project stage and the
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred. SOP 98-1 is effective for financial
statements issued for fiscal years beginning after December 15, 1998. The
Company does not believe that the implementation of this Statement will have a
material adverse effect on its financial condition or results of operations.
RISK FACTORS
Certain statements made in this report are or may constitute "forward looking
statements". These include statements concerning the manner, timing and
estimated savings and effects of the Company's restructuring activities;
estimated cost reductions for the global purchasing, plant focus and other
initiatives; the Company's expectations for an increase in market demand for
silicon wafers and semiconductors and an easing of pressure on pricing and
margins in the year 2000; the Company's expectations concerning its lack of
profitability in 1999 and its ability to generate positive operating cash flows
in the year 2000; implementation in MEMC plants of QS 9000 and ISO 14001
certification; the transfer of Spartanburg-based small diameter production
activities to other existing locations; utilization of the restructuring
reserve; realization of the net deferred tax asset as it relates to the
Company's ability to generate future taxable income; capital expenditures in
1999; the expectations concerning Taisil and the Taiwanese silicon wafer market;
the consummation of the pending private placement to VEBA Zweite and the
Offering; the continued support of the Company by VEBA AG and its affiliates;
and the status, effectiveness and projected completion of the Company's Year
2000 initiative.
Because these matters are subject to risks and uncertainties, actual results may
differ materially from those expressed or implied by forward looking statements.
Factors that could cause actual results to differ materially include the demand
for semiconductors worldwide; changes in the pricing environment for the
Company's products; changes in financial market conditions; the economic
conditions in the Asia Pacific region and Japan; actions taken by the Company's
competitors; the willingness of the Company's customers to re-qualify
Spartanburg-based production to other locations; the accuracy of assumptions
made by the Company regarding savings from its restructuring activities; changes
in interest and exchange rates; and those risk factors described in "Risk
Factors" and set forth in our Form 10-K for the 1998 fiscal year.
Undue reliance should not be placed on these forward looking statements, which
speak only as of the date that they are made. The Company does not undertake any
obligation to release publicly any revisions to these statements to reflect
later events or circumstances or to reflect the occurrence of unanticipated
events.
MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign exchange rates. The Company enters into
currency swaps to minimize the risk and costs associated with its financing
activities in currencies other than its functional currency. The Company does
not hold derivatives for trading purposes.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal maturities and related
weighted-average
21
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
interest rates by expected maturity dates. Weighted-average variable rates are
based on implied forward rates in the yield curve at the reporting date. The
information is presented in U.S. dollar equivalents. The instruments' actual
cash flows are denominated in U.S. dollars (USD), Japanese Yen (JPY), and
Italian Lira (ITL), as indicated in parentheses.
INTEREST RATE SENSITIVITY
Principal (Notional) Amount by Expected Maturity and Average Interest Rate
<TABLE>
<CAPTION>
Fair Value
Dollars in thousands 1999 2000 2001 2002 2003 Thereafter Total 12/31/98
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate debt:
Long-term debt - (USD) $131,400 $131,400 $131,400
Average interest rate 10.2% 10.2%
Fixed rate debt:
Long-term debt - (USD) $30,000(1) $10,000(1) $145,000 $100,000 $90,000 $200,000 $575,000 $542,593
Long-term debt - (JPY) 8,610(1) 20,776(1) 44,410 31,461 4,219 45,504 154,980 154,581
Long-term debt - (ITL) 2,517 2,288 2,347 1,926 1,220 2,002 12,300 12,670
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed rate debt $41,127 $33,064 $191,757 $133,387 $95,439 $247,506 $742,280 $709,844
Average interest rate 7.2% 4.4% 7.5% 7.5% 8.4% 8.1% 7.6%
Total Fixed and Variable $873,680 $841,244
====================================================================================================================================
</TABLE>
(1)The Company has the ability and intent to refinance all U.S. Dollar
denominated debt in 1999 and 2000, all Japanese Yen denominated debt in 1999,
and $8,610 of the Japanese Yen denominated debt in 2000 at interest rates
reflecting new maturities to 2001 and interest rate spreads applicable to an
average industrial borrower at a specified credit rating.
The Company routinely enters into forward currency exchange contracts in the
regular course of its business to manage its exposure against foreign
currencies. The Company had $30.8 million in foreign currency contracts
outstanding at December 31, 1998 with an estimated fair value of $32.1 million.
These contracts are for a short duration, generally less than six months, and
their contract values approximate fair value. Thus, they have been omitted from
the table below. In addition, the Company entered into foreign currency swaps to
hedge a portion of its debt in Japan. For debt obligations, the table presents
debt obligations which are held by the Company in a currency that is not its
reporting currency.
FOREIGN CURRENCY EXCHANGE RATE SENSITIVITY
Principal (Notional) Amount by Expected Maturity
<TABLE>
<CAPTION>
Fair Value
Dollars in thousands 1999 2000 2001 2002 Total 12/31/98)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT (US $ Functional Currency)
Long-term debt - (JPY) $8,610 $8,610 $8,610 $8,610 $34,440 $33,582
Average interest rate 3.4% 4.1% 4.7% 5.2% 4.4%
CURRENCY SWAP AGREEMENTS
Payment of Japanese Yen
Notional amount 12,634 12,634 10,384
Average contract rate 79.15
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 12
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except share data
<S> <C> <C> <C>
Net sales $ 758,916 $986,673 $1,119,500
Cost of goods sold 790,745 861,914 869,315
- ---------------------------------------------------------------------------------------------------------------------------------
Gross margin (31,829) 124,759 250,185
Operating expenses:
Marketing and administration 73,515 70,715 79,680
Research and development 81,591 64,457 44,313
Restructuring costs 146,324 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) (333,259) (10,413) 126,192
- ---------------------------------------------------------------------------------------------------------------------------------
Nonoperating (income) expense:
Interest expense 45,832 14,743 494
Interest income (2,291) (2,570) (5,436)
Royalty income (4,628) (8,186) (6,158)
Other, net 1,043 (4,070) 7,437
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonoperating (income) expense 39,956 (83) (3,663)
=================================================================================================================================
Earnings (loss) before income taxes, equity in income
(loss) of joint ventures and minority interests (373,215) (10,330) 129,855
Income taxes (89,394) 2,769 51,942
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before equity in income (loss) of joint
ventures and minority interests (283,821) (13,099) 77,913
Equity in income (loss) of joint ventures (43,496) 5,480 26,716
Minority interests 10,985 3,106 (1,241)
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $(316,332) $ (4,513) $ 103,388
=================================================================================================================================
Basic earnings (loss) per share $ (7.80) $ (0.11) $ 2.50
Diluted earnings (loss) per share $ (7.80) $ (0.11) $ 2.49
=================================================================================================================================
Weighted average shares used in computing basic
earnings (loss) per share 40,580,869 41,345,193 41,308,806
=================================================================================================================================
Weighted average shares used in computing diluted
earnings (loss) per share 40,580,869 41,345,193 41,534,412
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 13
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except share data
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,168 $ 30,053
Accounts receivable, less allowance for doubtful accounts of
$2,853 and $3,473 in 1998 and 1997, respectively 98,528 154,702
Income taxes receivable 10,161 14,382
Inventories 115,927 141,447
Deferred tax assets, net 23,129 13,206
Prepaid and other current assets 35,225 23,185
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 299,138 376,975
Property, plant and equipment, net 1,188,832 1,200,827
Investments in joint ventures 94,610 112,573
Excess of cost over net assets acquired, net of accumulated amortization of
$5,128 and $3,752 in 1998 and 1997, respectively 48,396 49,772
Deferred tax asset, net 104,650 15,472
Other assets 38,088 38,805
- ------------------------------------------------------------------------------------------------------------------------
Total assets $1,773,714 $1,794,424
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 38,644 $ 122,476
Accounts payable 112,581 146,172
Accrued liabilities 35,404 40,219
Customer deposits 17,639 8,392
Provision for restructuring costs 37,299 --
Accrued wages and salaries 17,077 21,267
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 258,644 338,526
Long-term debt, less current portion 871,163 510,038
Pension and similar liabilities 92,466 76,837
Customer deposits 59,033 67,141
Other liabilities 45,126 26,901
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,326,432 1,019,443
- ------------------------------------------------------------------------------------------------------------------------
Minority interests 48,242 59,227
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 shares authorized, none issued
or outstanding in 1998 or 1997 -- --
Common stock, $.01 par value, 200,000,000 shares authorized, 41,436,421
and 41,440,369 issued in 1998 and 1997, respectively 414 414
Additional paid-in capital 574,188 574,317
Retained earnings (accumulated deficit) (147,836) 168,496
Accumulated other comprehensive loss (10,581) (25,721)
Unearned restricted stock awards (125) (424)
Treasury stock, at cost: 929,205 and 36,205 shares in 1998 and 1997, respectively (17,020) (1,328)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 399,040 715,754
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,773,714 $1,794,424
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
Cash flows from operating activities:
Net earnings (loss) $(316,332) $ (4,513) $ 103,388
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 155,874 126,913 91,660
Minority interests (10,985) (3,106) 1,241
Equity in (income) loss of joint ventures 43,496 (5,480) (26,716)
Restructuring costs 104,704 -- --
(Gain) loss on sale of property, plant and equipment 6,916 (4,766) 610
Deferred compensation earned 299 596 1,001
Changes in assets and liabilities:
Accounts receivable 61,836 (36,051) 32,247
Income taxes receivable 4,655 (8,794) (24,127)
Inventories 28,461 (46,445) (11,126)
Prepaid and other current assets (1,203) 9,487 (10,638)
Deferred taxes (98,074) (17,783) 11,546
Accounts payable (38,833) 3,976 19,221
Accrued liabilities (7,792) 8,301 (8,257)
Customer deposits (348) 17,806 69,626
Accrued wages and salaries (4,209) (3,797) 1,749
Other, net 37,680 (6,915) 10,480
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (33,855) 29,429 261,905
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (194,610) (372,416) (590,049)
Proceeds from sale of property, plant and equipment 5,730 21,512 884
Equity infusions in joint ventures (25,533) (10,638) (14,698)
Dividend received from unconsolidated joint venture -- 11,263 --
Deposit with affiliate -- -- 55,000
Notes receivable from affiliates (8,642) 212 2,376
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (223,055) (350,067) (546,487)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net short-term borrowings (8,843) 87,420 14,898
Proceeds from issuance of long-term debt 515,313 248,553 222,166
Principal payments on long-term debt (248,936) (18,693) (2,060)
Repurchase of common stock (15,692) -- (1,328)
Other (129) 385 8,603
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 241,713 317,665 242,279
- ------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1,312 (2,070) 207
- ------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (13,885) (5,043) (42,096)
Cash and cash equivalents at beginning of year 30,053 35,096 77,192
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 16,168 $ 30,053 $ 35,096
==============================================================================================================================
Supplemental disclosures of cash flow information:
Interest payments, net of amount capitalized $ 48,179 $ 21,204 $ --
Income taxes paid $ 9,794 18,020 57,590
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------
Retained Accumulated Unearned
Number Additional Earnings Other Restricted
of Shares Par Paid-in (Accumulated Comprehensive Stock Treasury
Issued Value Capital Deficit) Income (Loss) Awards Stock Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands,
except per share data
Balance at December 31, 1995 41,399,998 $414 $569,959 $ 69,621 $ 4,717 $(2,016) $ -- $ 642,695
=========
Comprehensive income:
Net earnings -- -- -- 103,388 -- -- -- 103,388
Net translation adjustment -- -- -- -- (364) -- -- (364)
---------
Comprehensive income 103,024
=========
Stock plans, net 70,973 1 3,392 -- -- (202) -- 3,191
---------
Deferred compensation earned -- -- -- -- -- 1,001 -- 1,001
---------
Repurchase of common stock -- -- -- -- -- -- (1,328) (1,328)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 41,470,971 415 573,351 173,009 4,353 (1,217) (1,328) 748,583
=========
Comprehensive loss:
Net loss -- -- -- (4,513) -- -- -- (4,513)
Net translation adjustment -- -- -- -- (30,074) -- -- (30,074)
---------
Comprehensive loss (34,587)
---------
Stock plans, net (30,602) (1) 966 -- -- 197 -- 1,162
---------
Deferred compensation earned -- -- -- -- -- 596 -- 596
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 41,440,369 414 574,317 168,496 (25,721) (424) (1,328) 715,754
---------
Comprehensive loss:
Net loss -- -- -- (316,332) -- -- -- (316,332)
Net translation adjustment -- -- -- -- 17,682 -- -- 17,682
Minimum pension liability
(net of $1,625 tax) -- -- -- -- (2,542) -- -- (2,542)
Comprehensive loss (301,192)
Stock plans, net (3,948) -- (129) -- -- 129 -- --
Deferred compensation earned -- -- -- -- -- 170 -- 170
Repurchase of common stock -- -- -- -- -- -- (15,692) (15,692)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,1998 41,436,421 $414 $574,188 $ (147,836) $(10,581) $ (125) $(17,020) $399,040
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except share data
- --------------------------------------------------------------------------------
1 - NATURE OF OPERATIONS
MEMC Electronic Materials, Inc. and subsidiaries (the Company) is a leading
manufacturer and worldwide supplier of electronic grade silicon wafers for the
semiconductor industry. The Company has production facilities directly or
through joint ventures in Italy, Japan, Malaysia, South Korea, Taiwan and the
United States. The Company's customers are located throughout the world.
- --------------------------------------------------------------------------------
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles (GAAP) 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>
The Company capitalizes interest costs as part of the cost of constructing
facilities and equipment. Interest costs of $5,521, $15,968 and $8,957 were
capitalized in 1998, 1997 and 1996, respectively.
(f) Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired (goodwill) is amortized on a
straight-line basis over the periods estimated to be benefited, not exceeding 40
years. Excess of cost over net assets acquired is reviewed for impairment
whenever events and changes in business circumstances indicate the carrying
value of the goodwill and related acquired assets that gave rise to the goodwill
may not be recoverable. Impairment losses are recognized if expected future cash
flows of the related assets are less than their carrying values. There is no
indication of impairment of excess of cost over net assets acquired at December
31, 1998 or 1997.
(g) Computer Software Developed or Obtained for Internal Use
Costs related to the development or purchase of internal-use software are
capitalized and amortized over the estimated useful life of the software. Costs
related to the preliminary project stage and the post- implementation/operations
stage of an internal-use computer software development project are expensed as
incurred.
(h) 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
27
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. There is no indication of
impairment of property, plant and equipment at December 31, 1998 or 1997.
(i) Impairment of Investments in Joint Ventures
Impairment of investments in joint ventures is measured by comparing the
carrying amount of the asset to future net cash flows expected to be generated
by the asset. In addition, the level of commitment of the joint venture's
shareholders, the silicon wafer markets serviced by the joint ventures, and the
level of customer qualifications at the joint ventures are also considered in
assessing the impairment of the Company's investments in joint ventures. There
is no indication of impairment of these investments at December 31, 1998 or
1997.
(j) Revenue Recognition
Revenues are recognized when products are shipped.
(k) 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 mark). 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.
(l) 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 component of accumulated other
comprehensive income (loss).
(m) 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
consolidated 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.
(n) 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. The Company does not issue equity
instruments to non-employees.
28
<PAGE> 18
(o) Comprehensive Income (Loss) Reclassification Adjustment
The Company's decision to forego construction of a new 200 millimeter facility
at its joint venture in Malaysia and to withdraw from its small diameter joint
venture in China resulted in a reclassification adjustment to comprehensive
income (loss) in 1998 of approximately $9,500.
(p) Contingencies
Contingent liabilities are disclosed when management believes they are material
to the Company's financial position. There are no such known contingent
liabilities at December 31, 1998 or 1997.
- --------------------------------------------------------------------------------
3 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash, accounts receivable, income taxes
receivable, short-term borrowings, 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, 1998 1997
- -----------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dollars in thousands
Long-term debt $873,680 $841,244 $519,995 $522,970
Off-balance sheet financial instruments:
Foreign currency contracts 30,846 32,139 69,842 67,810
Currency swap contract 12,634 10,384 12,634 9,334
===========================================================================================================
</TABLE>
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 VEBA AG and its
affiliates 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 mark),
and a currency swap contract relating to foreign currency denominated
intercompany loans. The Company believes its hedging arrangements with VEBA AG
and its affiliates allow for transactions on a basis that is comparable to terms
available from unrelated third-party financial intermediaries.
The fair values of the forward and the currency swap contracts were a net gain
to the Company of $957 and $5,332, as measured by the amount that would have
been paid to liquidate and repurchase all open contracts as of December 31, 1998
and 1997, respectively. Deferred losses for intercompany loans totaled $2,897
and $3,437 at December 31, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
4 - 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 20.3%, 20.0% and
16.8% of net sales in 1998, 1997 and 1996, respectively. No other customer
constituted 10% or more of net sales in 1998, 1997 or 1996.
- --------------------------------------------------------------------------------
5 - RESTRUCTURING COSTS
During the second quarter of 1998, the Company decided to close its small
diameter wafer facility in Spartanburg, South Carolina and to withdraw from its
60%-owned joint venture in a small diameter wafer operation in China. These
actions were taken because (1) a number of semiconductor manufacturers have been
running their larger diameter manufacturing lines in preference to their small
diameter lines in order to gain production efficiencies; (2) a number of
semiconductor manufacturers recently have undertaken restructuring initiatives
focused on permanently eliminating small diameter lines; and (3) management
believes that small diameter wafer capacity will exceed demand even after the
semiconductor industry begins to recover. The Company also decided to forego
construction of a new 200 millimeter wafer facility at its 75%-owned joint
venture in Malaysia. This decision was based upon current and anticipated excess
capacity for 200 millimeter wafers and the significant price erosion that the
Company has experienced for these wafers.
The Company recorded a charge to operations of $121,670 (of which $81,325 is
non-cash) related to the above actions.
29
<PAGE> 19
Restructuring activity since the provision for restructuring costs was recorded
is as follows:
<TABLE>
<CAPTION>
Balance at
Amount December 31,
Provision utilized 1998)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
Asset impairment/write-off:
Spartanburg property, plant and equipment $ 36,300 $36,300 $ --
Malaysian joint venture assets 28,000 25,195 2,805
Chinese joint venture assets 13,800 9,642 4,158
Other infrastructure 3,225 3,225 --
- ------------------------------------------------------------------------------------------------------------
Total 81,325 74,362 6,963
- ------------------------------------------------------------------------------------------------------------
Dismantling and related costs:
Dismantling costs 11,345 1,039 10,306
Costs incurred by equipment supplier 5,000 5,000 --
Environmental costs 3,500 11 3,489
Operating leases 3,000 -- 3,000
Other 3,000 -- 3,000
- ------------------------------------------------------------------------------------------------------------
Total 25,845 6,050 19,795
- ------------------------------------------------------------------------------------------------------------
Personnel costs 14,500 3,959 10,541
- ------------------------------------------------------------------------------------------------------------
Total restructuring costs $121,670 $84,371 $37,299
===========================================================================================================
</TABLE>
The assets for which an impairment loss has been recorded or which have or will
be written-off are primarily property, plant and equipment that cannot be sold
or used at other Company facilities. Accordingly, these assets have been written
down to net realizable value. The net balance of Spartanburg property, plant and
equipment before and after the write-off was $50,965 and $14,665, respectively.
Additionally, the Company wrote-off architectural design and site preparation
fees and costs incurred to develop a computer integrated manufacturing system
for the Malaysian joint venture that do not have applicability elsewhere within
the Company. Ongoing operating expenses until plant closure associated with the
Spartanburg facility will continue to be recorded as period costs. Costs
relating to the relocation and installation of equipment from the Spartanburg
facility to other sites will be capitalized as incurred.
The Chinese joint venture assets represent the operating assets of the Company's
60%-owned joint venture in China. The Company anticipates ceding its interest in
the operating assets of the joint venture to the partner in the joint venture,
with which the Company has no other interest, and receiving de minimus proceeds
in conjunction with its withdrawal.
The provision for dismantling and related costs primarily relates to the
Spartanburg facility and includes estimates for the dismantling of the facility,
collection and disposal of process chemicals, decontamination of manufacturing
equipment, modification of the wastewater treatment facility, remaining
operating lease payments on equipment that will not be used elsewhere in the
Company and scrapping charges. Environmental remediation costs of $3,500
relating to the closure of the Spartanburg facility were accrued in accordance
with Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies".
30
<PAGE> 20
Personnel costs of $12,200 represent the expected severance cost of involuntary
terminations for all hourly and salaried employees at the Spartanburg facility
whom the Company does not expect to relocate elsewhere within the organization.
At December 31, 1998, approximately 240 of these employees had not yet been
terminated. An additional $2,300 restructuring charge relates to severance
benefits for certain employees at other MEMC sites.
In addition to the restructuring activities discussed above, the Company
recorded a $24,654 charge for a voluntary severance program for approximately
600 hourly and salaried U.S. employees. All of this amount was paid to
participants as of December 31, 1998.
Of the $37,299 restructuring reserve at December 31, 1998, approximately $7,000
is non-cash. Half of the approximately $30,000 remaining reserve is expected to
be paid out in the first half of 1999. During this time, the Company will
transfer the small diameter production activities of the Spartanburg facility to
other existing Company locations. The remaining half is expected to be expended
by 1999 year-end and relates primarily to dismantling costs associated with the
Spartanburg facility.
- --------------------------------------------------------------------------------
6 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dollars in thousands
Raw materials and supplies $ 59,722 $ 65,369
Goods in process 33,612 37,996
Finished goods 22,593 38,082
- -----------------------------------------------------------------------------------------------------------
$115,927 $141,447
===========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
7 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Property, plant and equipment consist of the following:
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dollars in thousands
Land and land improvements $ 14,404 $ 13,055
Buildings and building improvements 484,820 435,740
Machinery and equipment 1,110,195 1,001,846
===========================================================================================================
1,609,419 1,450,641
Less accumulated depreciation 569,327 465,384
- -----------------------------------------------------------------------------------------------------------
1,040,092 985,257
Construction in progress 148,740 215,570
- -----------------------------------------------------------------------------------------------------------
$1,188,832 $1,200,827
===========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
8 - INVESTMENTS IN JOINT VENTURES
The Company has a 40% interest in POSCO Hulls Co. Ltd. (PHC), a company formed
to manufacture and sell silicon wafers in South Korea, and a 45% interest in
Taisil Electronic Materials Corporation (Taisil), a company formed to
manufacture and sell silicon wafers in Taiwan.
During 1998, 1997 and 1996, the Company earned $4,628, $8,186 and $6,158,
respectively, from these unconsolidated joint ventures under royalty agreements.
Sales by these unconsolidated joint ventures of intermediate and finished
product to the Company totaled $34,479, $32,313 and $89,723 in 1998, 1997 and
1996, respectively.
The Company provides PHC and Taisil with debt guarantees totaling $581 and
$74,711, respectively. At December 31, 1998, PHC and Taisil had $581 and
$74,711, respectively, in standby letters of credit and borrowings outstanding
against these guarantees.
31
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the results of operations for 1998, 1997 and 1996, and financial
position as of December 31, 1998 and 1997 of the Company's unconsolidated joint
ventures follows:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
Total:
Net sales $ 179,643 $ 277,492 $ 282,310
Gross margin (33,668) 54,120 107,366
Net earnings (loss) (101,596) 15,274 68,847
- -----------------------------------------------------------------------------------
The Company's share -
Net earnings (loss) $ (43,496) $ 5,480 $ 26,716
- -----------------------------------------------------------------------------------
Current assets $ 169,532 $ 147,644
Noncurrent assets 488,634 565,201
- -----------------------------------------------------------------
Total assets 658,166 712,845
- -----------------------------------------------------------------
Current liabilities 165,157 155,038
Noncurrent liabilities 266,352 284,736
- -----------------------------------------------------------------
Total liabilities 431,509 439,774
Interests of others 132,047 160,498
- -----------------------------------------------------------------
The Company's investments $ 94,610 $ 112,573
- -----------------------------------------------------------------
</TABLE>
The Company's share of undistributed retained earnings (deficit) of
unconsolidated joint ventures was approximately ($27,406) and $16,090 at
December 31, 1998 and 1997, respectively. In 1997, the Company received a
dividend from PHC of $11,263.
The Company's unconsolidated joint ventures have net sales denominated in or
based on the U.S. dollar and manufacturing expenses primarily denominated in the
U.S. dollar, Korean won and New Taiwanese dollar. PHC also has significant debt
denominated in the U.S. dollar and Korean won. Likewise, Taisil has significant
debt denominated in the U.S. dollar and New Taiwanese dollar. PHC and Taisil use
the U.S. dollar as their functional currency for U.S. GAAP purposes and do not
hedge net Korean won or New Taiwanese dollar exposures.
- --------------------------------------------------------------------------------
9 - SHORT-TERM BORROWING AGREEMENTS AND LINES OF CREDIT
Interest expense related to short-term borrowings with an affiliate was $4,195,
$1,667 and $181 in 1998, 1997 and 1996, respectively.
The Company has unsecured borrowings from banks of approximately $36,000 at
December 31, 1998, under approximately $83,000 of short-term loan agreements
which bear interest at various rates ranging from 1.0% to 11.1% and are
renewable annually. The interest rate on the borrowings is negotiated at the
time of the borrowings.
Commitment fees of 1/4 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 3.3% and 4.9% at December 31, 1998 and 1997, respectively, and was favorably
impacted by interest rates in Japan.
32
<PAGE> 22
10 - LONG-TERM DEBT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Long-term debt consists of the following:
December 31, 1998 1997
- ---------------------------------------------------------------------------------------------------
Dollars in thousands
Owed to affiliates:
<S> <C> <C>
Note with interest payable semiannually at 6.7%, due in 1998 $ -(1) $ 25,000
Notes with interest payable semiannually at rates ranging from
2.1% to 7.2%, due in 1999 -(1) 37,690
Notes with interest payable semiannually at rates ranging from
2.5% to 6.4%, due in 2000 -(1) 17,690
Notes with interest payable semiannually at rates ranging from
2.9% to 10.2%, due in 2001 342,230 77,690
Notes with interest payable semiannually at rates ranging from
3.2% to 9.7%, due in 2002 108,610 82,690
Notes with interest payable semiannually at rates ranging from
6.4% to 8.8%, due in 2003 90,000 40,000
Notes with interest payable semiannually at rates ranging from
6.5% to 9.7%, due in 2004 125,000 100,000
Notes with interest payable semiannually at rates ranging from
7.3% to 9.6%, due in 2005 75,000 75,000
- ---------------------------------------------------------------------------------------------------
Total owed to affiliates 740,840 455,760
- ---------------------------------------------------------------------------------------------------
Owed to nonaffiliates:
Note with interest payable semiannually at 4.1%, due in 1998 - 7,690
Notes with interest payable semiannually at rates ranging from
1.7% to 2.2%, due in 2001 17,220 15,380
Notes with interest payable semiannually at rates ranging from
1.6% to 1.7%, due in 2000 through 2002 43,050 15,380
Notes with interest payable semiannually at rates ranging
from 1.5% to 8.9%, due in 1999 through 2017 72,570 25,785
- ---------------------------------------------------------------------------------------------------
Total owed to nonaffiliates 132,840 64,235
- ---------------------------------------------------------------------------------------------------
Total long-term debt 873,680 519,995
Less current portion 2,517 9,957
- ---------------------------------------------------------------------------------------------------
$871,163 $510,038
===================================================================================================
</TABLE>
(1)In 1998, VEBAAG and its affiliates agreed to extend these notes until 2001.
The Company has long-term committed loan agreements of approximately $927,000 at
December 31, 1998, of which approximately $874,000 is outstanding. Commitment
fees of 1/4 of 1% are paid on the unused portion of committed loan agreements.
The Company has approximately $53,000 of available long-term loan agreements
with affiliates at December 31, 1998. Under the terms of certain of these
long-term loan agreements owed to affiliates, the Company cannot pledge any of
its assets to secure additional financing.
Interest expense related to long-term notes payable to affiliates was $43,567,
$25,633 and $7,337 in 1998, 1997 and 1996, respectively.
33
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
The aggregate amounts of long-term debt maturing subsequent to December 31, 1998 are as follows:
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Dollars in thousands
1999 $ 2,517
2000 14,454
2001 380,377
2002 133,387
2003 95,439
Thereafter 247,506
- -----------------------------------------------------------------------------------------------------------
$873,680
- -----------------------------------------------------------------------------------------------------------
</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
facility. In total, approximately $252 million of industrial revenue bonds were
issued to the Company by the City of O'Fallon, of which at December 31, 1998 and
1997, $215 million and $210 million was outstanding, 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.
- --------------------------------------------------------------------------------
11 - STOCKHOLDERS' EQUITY
Preferred Stock
The Company has 50,000,000 authorized shares of $.01 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 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.
The Company 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.
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 authorized 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 and 1996 were 1,300 and 38,200, respectively, with weighted average fair
values of $22.50 and $33.46, respectively. Total compensation cost recognized
for these awards in 1998, 1997 and 1996 was $170, $596 and $1,001, respectively.
34
<PAGE> 24
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 Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company would have reported the following amounts indicated
below:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands, except share data
Net earnings (loss):
As reported $(316,332) $(4,513) $103,388
Pro forma (319,627) (6,551) 101,820
Basic earnings (loss) per common share:
As reported (7.80) (0.11) 2.50
Pro forma (7.88) (0.16) 2.46
Diluted earnings (loss) per common share:
As reported (7.80) (0.11) 2.49
Pro forma (7.88) (0.16) 2.45
- -----------------------------------------------------------------------------------------------------------
</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 1998, 1997 and 1996, respectively: risk-free
interest rate of 5.7%, 6.1% and 6.5%; expected life of six years for all
periods; expected volatility of 51.4%, 44.8% and 36.4%; expected dividends of
zero percent for all periods.
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
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1998
Outstanding at beginning of year 1,024,292 $24.92
Granted 887,300 15.06 $8.40
Exercised - -
Canceled (138,418) 23.31
- -----------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,773,174 $20.11
- -----------------------------------------------------------------------------------------------------------
Options exercisable at year-end 894,065 $22.99
===========================================================================================================
Year ended December 31, 1997
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
===========================================================================================================
</TABLE>
35
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of information about non-qualified stock options outstanding at
December 31, 1998 is presented below:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------------------------------
Number Weighted-Average Weighted-
Range of Outstanding at Remaining Average
Exercise Prices December 31, 1998 Contractual Life Exercise Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$24.00 618,424 6.5 years $24.00
$32.63-49.50 126,900 7.0 years 32.81
$22.50-29.00 157,750 8.0 years 22.57
$3.13-15.25 870,100 9.0 years 15.05
- -----------------------------------------------------------------------------------------------------------
$3.13-49.50 1,773,174 7.9 years $20.11
===========================================================================================================
<CAPTION>
Exercisable Options Outstanding
-----------------------------------------------
Range of Number Exercisable at Weighted-Average
Exercise Prices December 31, 1998 Exercise Price
- -----------------------------------------------------------------------------------------------------------
<C> <C> <C>
$24.00 537,781 $24.00
$32.63-49.50 87,300 32.78
$22.50-29.00 85,584 22.58
$3.13-15.25 183,400 15.25
- -----------------------------------------------------------------------------------------------------------
$3.13-49.50 894,065 $22.99
===========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
12 - EARNINGS (LOSS) 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 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average shares used for
basic earnings (loss) per share 40,580,869 41,345,193 41,308,806
Effect of dilutive securities:
Restricted stock - - 74,579
Stock options - - 151,027
- -----------------------------------------------------------------------------------------------------------
Weighted-average shares used for
diluted earnings (loss) per share 40,580,869 41,345,193 41,534,412
===========================================================================================================
</TABLE>
Options outstanding at December 31, 1998, 1,773,174 shares, were not included in
the computation of diluted loss per share during 1998, because they were
antidilutive.
In January 1999, the Company granted options to purchase 647,600 shares of
common stock at $8.50 to $10.50 per share. These options will expire in January
2008.
36
<PAGE> 26
- --------------------------------------------------------------------------------
13 - INCOME TAXES
Earnings (loss) before income taxes, equity in income (loss) of joint ventures
and minority interests are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
U.S. $(349,573) $ (59,702) $ 57,200
Foreign (23,642) 49,372 72,655
- -----------------------------------------------------------------------------------------------------------------
$(373,215) $ (10,330) $ 129,855
=================================================================================================================
Income tax expense consists of the following:
Current Deferred Total
- -----------------------------------------------------------------------------------------------------------------
Dollars in thousands
Year ended December 31, 1998:
U.S. federal $ 1,524 $(103,435) $(101,911)
State and local 2,207 (4,534) (2,327)
Foreign 4,790 10,054 14,844
- -----------------------------------------------------------------------------------------------------------------
$ 8,521 $ (97,915) $ (89,394)
=================================================================================================================
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
=================================================================================================================
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% in 1998, 1997 and 1996 to earnings (loss) before
income taxes, equity in income (loss) of joint ventures and minority interests
as a result of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
Income tax at federal statutory rate $(130,625) $ (3,616) $ 45,449
Increase (reduction) in income taxes
resulting from:
Change in the balance of the valuation
allowance for deferred tax assets
allocated to income tax expense 19,386 (4,738) (3,200)
Foreign tax differences 15,310 13,511 12,323
State income taxes, net
of federal benefit (1,513) (859) 1,719
Investment incentives (600) (916) (1,809)
Malaysian joint venture charges 5,552 - -
Other, net 3,096 (613) (2,540)
- ----------------------------------------------------------------------------------------------------
$ (89,394) $ 2,769 $ 51,942
====================================================================================================
</TABLE>
37
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dollars in thousands
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 $ 7,427 $ 5,584
Accruals for expenses currently not deductible for tax purposes 40,936 11,115
Pension, medical and other employee benefits, principally due
to accrual for financial reporting purposes 37,433 31,838
Net operating loss carryforwards 160,640 14,175
Investment tax credit carryforwards 1,456 1,456
Alternative minimum tax credit carryforwards 3,427 3,737
Foreign tax credit carryforwards - 21,407
Other 1,151 498
- ------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 252,470 89,810
Less valuation allowance (42,166) (11,408)
- ------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 210,304 78,402
- ------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment, principally due to differences
in depreciation and capitalized interest (80,505) (45,480)
Other (2,020) (4,244)
- ------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (82,525) (49,724)
- ------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 127,779 $ 28,678
==================================================================================================================
Net deferred tax assets were classified in the consolidated balance sheets as
follows:
December 31, 1998 1997
---------------------------------------------------------------------------------------------------------------
Dollars in thousands
Current deferred tax assets, net $ 23,129 $ 13,206
Noncurrent deferred tax assets, net 104,650 15,472
- ------------------------------------------------------------------------------------------------------------------
$ 127,779 $ 28,678
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's net deferred tax assets increased $99.1 million to $127.8 million
at December 31, 1998. Management believes it is more likely than not that, with
its projections of future taxable income and after consideration of the
valuation allowance, the Company will generate sufficient taxable income to
realize the benefits of the net deferred tax assets existing at December 31,
1998.
38
<PAGE> 28
In order to realize the net deferred tax assets existing at December 31, 1998,
the Company will need to generate future taxable income of approximately $353
million. The Company's net operating loss (NOL) carryforwards total $410
million, of which $7 million will expire in 2001; $15 million will expire in
2002; $32 million will expire in 2003; $27 million will expire in 2012; and $329
million will expire in 2018. There can be no assurance, however, that the
Company will generate sufficient taxable income to realize the full benefit of
the existing net deferred tax assets. The Company also has AMT credit
carryforwards of $3,427 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.
- --------------------------------------------------------------------------------
14 - PENSION PLANS AND OTHER RETIREMENT BENEFITS
The Company has a noncontributory defined benefit plan covering most U.S.
employees. Benefits for this plan 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 plan due to Internal Revenue Code
restrictions. Eligibility for participation in this plan requires coverage under
the above plan and other specific circumstances.
In addition, 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.
In 1998, the Company changed the measurement date for the defined benefit plans
from December 31 to September 30 to improve administrative efficiencies and the
timeliness and accuracy of its financial reporting and planning process. The
effect on retirement plan expense was not material to the consolidated financial
statements.
Net periodic pension cost consists of the following:
<TABLE>
<CAPTION>
Pension Plans Health Care Plan
----------------------------------------------------------------------------
Year ended December 31, 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dollars in thousands
Service cost $ 8,134 $ 8,178 $ 6,449 $ 1,791 $ 2,441 $ 2,552
Interest cost 9,128 7,937 6,121 2,995 3,468 3,435
Expected return on plan assets (7,219) (6,189) (5,316) -- -- --
Amortization of service costs 501 576 68 (1,010) (206) --
Net actuarial loss/(gain) 818 562 443 47 (76) 3
Curtailment (gain) recognized 4,381 -- -- (148) -- --
Cost of special termination benefits -- 1,067 -- 1,023 -- --
- -----------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 15,743 $ 12,131 $ 7,765 $ 4,698 $ 5,627 $ 5,990
=======================================================================================================================
</TABLE>
39
<PAGE> 29
The following summarizes the change in benefit obligation, change in plan assets
and funded status of the Company's plans:
<TABLE>
<CAPTION>
Pension Plans Health Care Plan
-----------------------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollars in thousands
Change in benefit obligation:
Benefit obligation at January 1 $ 134,408 $ 104,246 $ 38,751 $ 51,057
Service cost 6,235 8,179 1,407 2,441
Interest cost 6,919 7,939 2,128 3,468
Amendments 140 8,685 -- (13,768)
Actuarial (gain)/loss 6,123 12,317 3,899 (3,673)
Benefits paid (18,494) (6,958) (773) (774)
Curtailments 2,144 -- 6,138 --
Special termination benefits - -- 1,023 --
- ----------------------------------------------------------------------------------------------------
Benefit obligation at December 31 137,475 134,408 52,573 38,751
- ----------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1 94,707 75,155 -- --
Actual return on plan assets 6,744 14,846 -- --
Employer contributions 2,155 11,664 773 774
Benefits paid (18,494) (6,958) (773) (774)
- ----------------------------------------------------------------------------------------------------
Fair value of plan assets
at December 31 85,112 94,707 -- --
- ----------------------------------------------------------------------------------------------------
Funded status (52,363) (39,701) (52,573) (38,751)
Unrecognized prior service cost 4,726 18,813 (8,495) (14,484)
Unrecognized net actuarial (gain)/loss 20,511 7,324 2,596 (1,604)
Fourth quarter contribution 801 -- -- --
- ----------------------------------------------------------------------------------------------------
Accrued benefit cost $ (26,325) $ (13,564) $ (58,472) $ (54,839)
- ----------------------------------------------------------------------------------------------------
Amounts recognized in statement
of financial position:
Accrued benefit liability $ (31,396) $ (13,860) $ (58,472) $ (54,839)
Fourth quarter contribution 801 -- -- --
Intangible asset 109 296 -- --
Accumulated other
comprehensive income 4,161 -- -- --
- ----------------------------------------------------------------------------------------------------
Accrued pension expense $ (26,325) $ (13,564) $ (58,472) $ (54,839)
====================================================================================================
</TABLE>
Pension plan assets consist principally of insurance contracts, marketable
securities including common stocks, bonds and interest-bearing deposits.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $137,475, $109,865 and $85,112, respectively, as of December
31, 1998, and $8,457, $7,698 and $547, respectively, as of December 31, 1997.
The Company recognized the curtailments and the special termination benefits
related to the closure of the Spartanburg facility and the voluntary severance
program offered to employees during 1998.
40
<PAGE> 30
The following is a table of the actuarial assumptions:
<TABLE>
<CAPTION>
Pension Plans Health Care Plan
-----------------------------------------------------------
Year ended December 31, 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted-average assumptions
as of December 31
Discount rate 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets 8.00% 8.00% N/A N/A
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
==========================================================================================================
</TABLE>
For measurement purposes, a 6% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1998. The rate was assumed to
decrease gradually to 5% by the year 2001 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A one-percentage change in assumed health care
cost trend would have the following effects:
<TABLE>
<CAPTION>
One-Percentage- One-Percentage-
Point Increase Point Decrease
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dollars in thousands
Effect on total service and
interest cost components $ 58 $ (56)
Effect on postretirement
benefit obligation $190 $(186)
===============================================================================================================
</TABLE>
The Company has pension plans for its foreign subsidiaries. The aggregate
pension expense and liability are not material to the consolidated financial
statements.
- --------------------------------------------------------------------------------
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 $4,012, $4,138 and $3,656 for 1998, 1997 and 1996,
respectively.
- --------------------------------------------------------------------------------
16 - COMMITMENTS AND CONTINGENCIES
The Company leases buildings, equipment and automobiles under operating leases.
Rental expense under these leases was $28,733, $23,789 and $17,262 in 1998, 1997
and 1996, respectively. Minimum aggregate future rental obligations under leases
having remaining terms of one year or more at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Dollars in thousands
<S> <C>
1999 $22,603
2000 14,275
2001 4,188
2002 62
2003 --
Thereafter --
- --------------------------------------------------------------------------------------
$41,128
======================================================================================
</TABLE>
41
<PAGE> 31
- --------------------------------------------------------------------------------
17 - GEOGRAPHIC SEGMENTS
The Company is engaged in one reportable segmen-the design, manufacture and
sale of electronic grade silicon wafers for the semiconductor industry.
Geographic financial information is as follows:
<TABLE>
<CAPTION>
Other
United Foreign
States Japan Italy Countries Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollars in thousands
Net sales to customers:
1998 $389,721 $119,138 $30,855 $219,202 $ 758,916
1997 497,601 153,897 25,784 309,391 986,673
1996 516,571 127,231 29,066 446,632 1,119,500
===========================================================================================================
Long-lived assets:
1998 $901,940 $221,701 $131,436 $114,849 $1,369,926
1997 976,032 136,567 135,588 153,790 1,401,977
1996 821,029 111,196 132,299 136,811 1,201,335
===========================================================================================================
</TABLE>
Net sales are attributed to countries based on location of customer. Investments
in joint ventures are presented based on the countries in which they are
located.
- --------------------------------------------------------------------------------
18 - UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dollars in thousands, except share data
Net sales $235,243 $ 202,153 $ 167,685 $ 153,835
Gross margin 23,768 (3,812) (28,095) (23,690)
Loss before equity in loss of joint
ventures and minority interests (20,497) (143,705) (57,897) (61,722)
Equity in loss of joint ventures (11,621) (6,860) (12,860) (12,155)
Minority interests 1,280 1,920 5,807 1,978
Net loss (30,838) (148,645) (64,950) (71,899)
Basic loss per share (0.75) (3.67) (1.60) (1.78)
Diluted loss per share (0.75) (3.67) (1.60) (1.78)
Market price:
High 19 16 7/16 10 13/16 12 5/8
Low 14 1/2 9 1/4 2 15/16 2 15/16
1997
- -----------------------------------------------------------------------------------------------------------
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 (1,891) (1,205) (3,737) 12,313
Minority interests 333 1,109 1,883 (219)
Net earnings (loss) (2,895) 4,219 (1,965) (3,872)
Basic earnings (loss) per share (0.07) 0.10 (0.05) (0.09)
Diluted earnings (loss) per share (0.07) 0.10 (0.05) (0.09)
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
- -----------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 32
As noted in Note 19 below, the Company restated its results for all periods
presented to reflect from inception the designation of the U.S. dollar as the
functional currency for PHC and Taisil, the Company's unconsolidated joint
ventures. Accordingly, the unaudited quarterly financial information presented
above has also been restated.
- --------------------------------------------------------------------------------
19 - RESTATEMENT OF OPERATING RESULTS
The Company's financial statements for all periods presented have been restated
to reflect from inception the designation of the U.S. dollar as the functional
currency for PHC and Taisil, the Company's unconsolidated joint ventures. The
effect of the restatement on each year is as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------
Dollars in thousands, except share data As previously As previously
reported As restated reported As restated
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consolidated Balance Sheet:
Investment in joint ventures $ 95,307 $112,573
Retained earnings 164,396 168,496
Accumulated other comprehensive loss (38,887) (25,721)
Consolidated Statement of Operations:
Equity in income of joint ventures 3,246 5,480 $ 24,884 $ 26,716
Net earnings (loss) (6,747) (4,513) 101,556 103,388
Basic earnings (loss) per share (0.16) (0.11) 2.46 2.50
Diluted earnings (loss) per share (0.16) (0.11) 2.45 2.49
=========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
20 - SUBSEQUENT EVENTS-PRIVATE PLACEMENT AND RIGHTS OFFERING
On October 22, 1998, the Company filed a registration statement with the SEC for
the sale of its common stock in a rights offering to existing stockholders
except VEBA AG and its affiliates (the Offering). The Company expects
approximately $91.1 million in aggregate net proceeds from the Offering, after
paying estimated expenses, including fees to dealer managers. Immediately prior
to the Offering, the Company will sell common stock to VEBA Zweite for aggregate
net proceeds of approximately $105.9 million. VEBA Zweite has also agreed to
purchase all shares issuable upon exercise of the rights that are not subscribed
for pursuant to the basic subscription privilege or the over-subscription
privilege by other stockholders, subject to certain conditions that are
customary in a firm commitment underwriting. The subscription price and number
of shares will be determined based on the average share price during a period
shortly before the effective date of the registration statement. The Company
intends to use the proceeds from the Offering and the private placement to
reduce debt outstanding under revolving credit agreements and for general
corporate purposes. The Company expects the registration to be effective and the
Offering to commence by the end of the first quarter of 1999. The private
placement to VEBA Zweite will be consummated immediately prior to commencement
of the Offering.
Subsequent to year-end, the Company received a $75,000 short-term revolving
credit facility from an affiliate of VEBAAG. The interest rate on the credit
facility reflects interest rate spreads applicable to an average industrial
borrower at a specified credit rating. Under the loan agreement, the Company
cannot pledge any of its assets to secure additional financing.
43
<PAGE> 33
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
St. Louis, Missouri
January 25, 1999
45
<PAGE> 34
STOCKHOLDER INFORMATION
CORPORATE OFFICE
MEMC Electronic Materials, Inc.
501 Pearl Drive (City of O'Fallon)
St. Peters, Missouri 63376
(314) 279-5000
TRANSFER AGENT AND REGISTRAR
Harris Trust & Savings Bank
311 West Monroe
P. O. Box A3504
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 Thursday, May 6, 1999, at
the Ritz-Carlton Hotel, 100 Carondelet Plaza, Clayton, Missouri 63105. Holders
of common stock of record at the close of business on March 8, 1999, 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, 1998, the last business day of the year, the Company had
830 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, 1998, 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 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.
INDEPENDENT AUDITORS
KPMG 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) 279-5443
Fax: (314) 279-5162
E-mail: [email protected]
MANUFACTURING FACILITIES
Chonan, South Korea
Hsinchu, Taiwan
Kuala Lumpur, Malaysia
Merano, Italy
Novara, Italy
Pasadena, Texas
Sherman, Texas
St. Peters, Missouri
Utsunomiya, Japan
48
<PAGE> 1
Exhibit 21
List of Subsidiaries
Subsidiary Jurisdiction of Incorporation
- ---------- -----------------------------
MEMC Japan, Ltd. Japan
MEMC Electronic Materials France SARL France
MEMC Electronic Materials GmbH Germany
MEMC Electronic Materials, S.p.A. Italy
MEMC Electronic Materials UK Ltd. United Kingdom
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
- ---------------
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 and registration statement (No. 333-65973)
on Form S-3 of MEMC Electronic Materials, Inc. of our reports dated January 25,
1999, relating to the consolidated balance sheets of MEMC Electronic Materials,
Inc. and subsidiaries as of December 31, 1998 and 1997, 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, 1998, and related
schedule, which reports appear in or are incorporated therein in the December
31, 1998 annual report on Form 10-K of MEMC Electronic Materials, Inc.
/s/ KPMG LLP
St. Louis, Missouri
March 25, 1999
<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 and registration statement (No. 333-65973)
on Form S-3 of MEMC Electronic Materials, Inc. of our report dated January 11,
1999, relating to the balance sheets of POSCO HULS Co., Ltd. as of December 31,
1998 and 1997, and the related statements of operations, appropriation
(disposition) of retained earnings (deficit) and cash flows for each of the
years in the three-year period ended December 31, 1998, which report appears in
the December 31, 1998 annual report on Form 10-K of MEMC Electronic Materials,
Inc.
/s/ KPMG San Tong Corp.
Seoul, Korea
March 25, 1999
<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 and registration statement (No. 333-65973)
on Form S-3 of MEMC Electronic Materials, Inc. of our report dated February 9,
1999, relating to the balance sheets of Taisil Electronic Materials Corporation
as of December 31, 1998 and 1997, and the related statements of operations,
changes in stockholders' equity and cash flows for the years then ended, which
report appears in the December 31, 1998 annual report on Form 10-K of MEMC
Electronic Materials, Inc.
/s/ KPMG Certified Public Accountants
Taipei, Taiwan
March 25, 1999
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Hans Michael Gaul, Director of MEMC Electronic Materials, Inc. (the
"Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze and Helene F. Hennelly, or either of them, 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, 1998, 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 17th day of February, 1999.
/s/ Hans Michael Gaul
------------------------------------
Hans Michael Gaul
<PAGE> 1
Exhibit 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Helmut Mamsch, Director of MEMC Electronic Materials, Inc. (the
"Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze and Helene F. Hennelly, or either of them, 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, 1998, 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 17th day of February, 1999.
/s/ Helmut Mamsch
------------------------------------
Helmut Mamsch
<PAGE> 1
Exhibit 24.3
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 and Helene F. Hennelly, or either of them, 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, 1998, 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 22nd day of March, 1999.
/s/ Willem D. Maris
------------------------------------
Willem D. Maris
<PAGE> 1
Exhibit 24.4
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 and Helene F. Hennelly, or either of them, 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, 1998, 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 17th day of February, 1999.
/s/ Paul T. O'Brien
------------------------------------
Paul T. O'Brien
<PAGE> 1
Exhibit 24.5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Alfred Oberholz, Director of MEMC Electronic Materials, Inc. (the
"Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze and Helene F. Hennelly, or either of them, 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, 1998, 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 17th day of February, 1999.
/s/ Alfred Oberholz
------------------------------------
Alfred Oberholz
<PAGE> 1
Exhibit 24.6
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 and Helene F. Hennelly, or either of them, 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, 1998, 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 17th day of February, 1999.
/s/ Michael B. Smith
------------------------------------
Michael B. Smith
<PAGE> 1
Exhibit 24.7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Ludger H. Viefhues, Director of MEMC Electronic Materials, Inc.
(the "Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze and Helene F. Hennelly, or either of them, 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, 1998, 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 17th day of March, 1999.
/s/ Ludger H. Viefhues
------------------------------------
Ludger H. Viefhues
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of December 31, 1998 and the consolidated
statement of operations for the year ended December 31, 1998, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,168
<SECURITIES> 0
<RECEIVABLES> 108,689
<ALLOWANCES> 2,853
<INVENTORY> 115,927
<CURRENT-ASSETS> 299,138
<PP&E> 1,758,159
<DEPRECIATION> 569,327
<TOTAL-ASSETS> 1,773,714
<CURRENT-LIABILITIES> 258,644
<BONDS> 871,163
0
0
<COMMON> 414
<OTHER-SE> 398,626
<TOTAL-LIABILITY-AND-EQUITY> 1,773,714
<SALES> 758,916
<TOTAL-REVENUES> 758,916
<CGS> 790,745
<TOTAL-COSTS> 790,745
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,832
<INCOME-PRETAX> (373,215)
<INCOME-TAX> (89,394)
<INCOME-CONTINUING> (316,332)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (316,332)
<EPS-PRIMARY> (7.80)
<EPS-DILUTED> (7.80)
</TABLE>
