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FORM 10-K/A
AMENDMENT NO. 3
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 1-13828
MEMC ELECTRONIC MATERIALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1505767
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 PEARL DRIVE (CITY OF O'FALLON), ST. PETERS, MISSOURI 63376
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 279-5500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
$.01 par value Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of such stock on March 9, 1998, as
reported by the New York Stock Exchange, was approximately $290.3 million.
The number of shares outstanding of the registrant's Common Stock as of
March 9, 1998, was 40,511,164 shares.
-----------------------------
DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's Annual
Report to Stockholders for the fiscal year ended December 31, 1997 (Part
II of Form 10-K).
(2) Portions of the registrant's Notice of Annual Meeting of Stockholders
and Proxy Statement dated March 23, 1998 (Part III of Form 10-K).
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PART I
ITEM 1. BUSINESS
GENERAL
MEMC Electronic Materials, Inc. (MEMC or the Company) is a leading
worldwide producer of silicon wafers used in the manufacture of semiconductors
that are employed in all types of microelectronic applications, including
computer systems, telecommunications equipment, automobiles, consumer
electronics products, industrial automation and control systems, and analytical
and defense systems. The Company operates manufacturing facilities, directly or
through joint ventures, in China, Italy, Japan, Malaysia, South Korea, Taiwan
and the United States and sells its products to most of the world's largest
manufacturers of semiconductors. MEMC is the leading worldwide supplier of
silicon wafers outside of Japan and is the only non-Japanese silicon wafer
manufacturer with manufacturing and research facilities in Japan.
MEMC was incorporated in 1984 under the name Dynamit Nobel Silicon
Holdings, Inc. (DNS). Huls AG, a subsidiary of VEBA AG, subsequently acquired
ownership of DNS. In 1989, Huls AG, through DNS and other related companies,
acquired the electronic materials businesses operated by Monsanto Company
(Monsanto) in the United States, Europe, Japan and Malaysia. Huls AG changed the
name of DNS to MEMC Electronic Materials, Inc. and combined the assets acquired
from Monsanto with the assets of its U.S. and Italian silicon wafer business to
form the current MEMC. VEBA Corporation, an affiliate of Huls AG, acquired all
of the outstanding common stock of MEMC from Huls AG in 1990, which it
subsequently transferred to its subsidiary, Huls Corporation, in 1993. On July
12, 1995, the Company completed an initial public stock offering of 19.55
million shares of common stock at an initial offering price of $24 per share. As
a result of the public stock offering, Huls Corporation's ownership of the
Company was reduced to 51.9%. As of March 9, 1998, Huls Corporation owned 53.0%
of the Company's common stock.
PRODUCT
The silicon wafers manufactured by the Company vary in diameter, surface
features (polished or epitaxial), composition, electrical properties and method
of manufacture. MEMC's silicon wafers are manufactured according to the exacting
specifications required by its customers, and the Company currently produces
wafers with a variety of product features satisfying more than 1,000 unique
product specifications. Wafers of larger diameter and more stringent technical
specifications are required by semiconductor manufacturers in order to produce
increasingly complex semiconductor devices such as the larger megabit memory
chips and microprocessors.
The processes utilized by the Company's customers in manufacturing such
semiconductor devices have become more expensive, leading to their increased
focus on efficient semiconductor production processes. Because many
semiconductor devices, or chips, are made from the same wafer, and because all
chips from a particular wafer are manufactured and processed simultaneously at
each stage in the device manufacturing process, larger-sized wafers allow for a
greater yield from the same semiconductor manufacturing process and allow
semiconductor manufacturers to spread their fixed costs of production over a
larger volume of finished products. For example, a 150 millimeter (6 inch) wafer
has a surface area of approximately 27.4 square inches, whereas a 200 millimeter
(8 inch) wafer has a surface area of approximately 48.7 square inches, or
approximately 78% more surface area than the 150 millimeter wafer, and a 300
millimeter (12 inch) wafer has a surface area of approximately 109.6 square
inches or approximately 125% more surface area than a 200 millimeter wafer.
Despite the industry's focus on 150 millimeter and larger diameter wafers, the
Company continues to manufacture and sell a significant amount of 100 millimeter
(4 inch) and 125 millimeter (5 inch) wafers.
The Company's silicon wafers fall into one of three general types:
Prime Polished Wafers
The Company's principal product is its prime polished wafer, which is a
highly refined, pure silicon wafer with an ultraflat and ultraclean surface.
Prime polished wafers undergo a sophisticated chemical-mechanical polishing
process that removes defects and leaves an extremely smooth surface suitable for
the advanced technologies used by the Company's customers. MEMC's prime polished
wafers are used by the Company's customers in a broad range of applications.
The Company manufactures prime polished wafers in sizes ranging from 100
millimeters to 200 millimeters in diameter. The larger diameter wafers are used
in more sophisticated applications where semiconductor manufacturers benefit
from the increased efficiencies and greater number of available die per wafer.
Epitaxial Wafers
In order to incorporate more complex functionality in the integrated
circuit, as well as to improve performance (which is affected by the distance
signals travel through the circuitry) and to control power consumption and heat
production, semiconductor manufacturers are forced to use smaller and smaller
device features. The Company manufactures epitaxial wafers to serve the
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technological demands of its customers that manufacture advanced
semiconductors. Epitaxial wafers consist of a thin, single-crystal silicon
layer grown on the polished surface of the silicon wafer substrate. The
substrate, which is designed to have different composition and electrical
properties from the epitaxial layer of single-crystal silicon on the wafer
surface, among other things, helps to improve isolation between circuit
elements fabricated on the silicon film surface of the wafer. One result of
such smaller devices is the requirement that the distance between circuit
elements (referred to as line widths) becomes increasingly narrow. A
critical aspect in the construction of any integrated circuit device is the
isolation of these different elements that comprise the integrated circuit
device. Without sufficient isolation of the various elements, the elements
could communicate electrically with each other, which could render the device
inoperable. The improved isolation provided by epitaxial wafers allows for
increased reliability of the finished semiconductor device, greater
efficiencies during the semiconductor manufacturing process, and ultimately
more complex integrated circuit devices.
Test/Monitor Wafers
Test/monitor wafers (monitor wafers) are principally supplied by the
Company to its customers for their use in testing semiconductor fabrication
lines and processes. Although monitor wafers are substantially the same as prime
polished wafers with respect to cleanliness, and in some cases, flatness, other
specifications are generally less rigorous, allowing for economies in
manufacturing. In addition, monitor wafers are generally produced from the
portion of a silicon ingot that does not meet customer specifications for the
production of wafers to be used for the manufacture of semiconductors.
Therefore, sales of monitor wafers allow the Company to experience a higher
yield from each silicon ingot produced.
300 MILLIMETER WAFERS
One of the semiconductor industry's next significant technological changes
will be the transition to 300 millimeter silicon wafers. For the next several
years, the primary focus of the semiconductor equipment industry will be to
develop 300 millimeter fabrication tools while the focus of the semiconductor
manufacturing industry will be to evaluate those tools, develop processes and
build new fabrication facilities to process 300 millimeter wafers.
MEMC is one of the industry leaders in the development of the next
generation of both polished and epitaxial silicon wafers, having first produced
300 millimeter diameter wafers in 1991. The Company's technologists are
developing new equipment and improved processes in all of the key manufacturing
operations from crystal growing through final packaging.
The 300 millimeter market was driven during 1997 primarily by the two
industry consortia organized and funded by the leading semiconductor
manufacturers for the purpose of evaluating 300 millimeter equipment and
materials (I300I in Austin, Texas, and SELETE in Japan) and semiconductor
equipment manufacturers. While the primary use of 300 millimeter wafers in 1998
will continue to be for semiconductor device process and tool development, the
Company expects to ship samples of 300 millimeter prime polished and epitaxial
wafers during 1998.
In 1997, principal silicon wafer producers expanded the capacity of their
initial 300 millimeter pilot lines and announced plans to build production
facilities to meet future market demand. Several 300 millimeter pilot lines are
expected to be completed in 1998, equipped with early prototypes of 300
millimeter fabrication tools. The Company's 300 millimeter research and
development line at its St. Peters' facility became operational in the first
quarter of 1997, supplying developmental wafers to semiconductor equipment
manufacturers and semiconductor customers worldwide.
In the second quarter of 1997, the Company announced a capital investment
of approximately $250 million to expand 300 millimeter production capacity and
to accelerate process development. The investment provides the funding for the
construction of a 300 millimeter integrated development line at an existing 200
millimeter manufacturing site in Utsunomiya, Japan, and additional 300
millimeter crystal growing, wafer processing, and epitaxial deposition equipment
at its St. Peters' facility. The new 100,000 square foot facility in Japan is
scheduled to commence operation in mid-1998.
The demand for production volumes of 300 millimeter wafers is not expected
to develop until the year 2000 or beyond as pilot lines of semiconductor
customers use the next two years to fully develop the tool set and processes
necessary to fabricate integrated circuits on 300 millimeter wafers.
RAW MATERIALS
Polysilicon is the predominant raw material used in the Company's
production process. The Company produces approximately one-half of its total
polysilicon requirements and purchases the remainder of its requirements from
third parties. The availability of polysilicon is primarily dependent upon the
adequacy of manufacturing capacity, as the basic materials from which
polysilicon is derived are readily available. The Company believes that an
adequate supply of polysilicon in 1998 will be obtained through internal
sourcing and purchase contracts with third parties.
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The Company was the first manufacturer to successfully use granular
polysilicon. Granular polysilicon has fluid-like transport properties and
minimizes contamination risks due to reduced handling, which enhances the
crystal growth process for larger diameter wafers. In December 1997, the Company
signed a non-binding letter of intent to form a granular polysilicon joint
venture with Tokuyama Corporation, the world's second largest producer of
polysilicon and Marubeni Corporation, one of Japan's leading trading companies.
The Company would contribute its existing granular polysilicon operation, and
the other parties would contribute cash and technology. The Company would retain
a 40% interest in the new joint venture.
MANUFACTURING PROCESS
Silicon wafers for the semiconductor industry are extremely complex
materials with characteristics such as high purity levels, crystallographic
perfection and precise mechanical tolerances. Electronic grade silicon is one of
the most refined materials in the world, having an impurity level of no more
than one part per billion. Requirements for crystallographic perfection,
mechanical tolerances and cleanliness in the manufacture of silicon wafers are
at levels that stretch manufacturing processes to the limits of measurement, and
necessitate that certain processes be conducted in state of the art "clean
rooms". The silicon wafer manufacturing process is comprised of three principal
phases: the crystal growth process, the wafer slicing process and the wafer
finishing process.
Crystal Growth Process
The first step in the wafer manufacturing process is the formation of a
large, silicon single crystal or ingot. This process commences with the melting
of polysilicon, together with minute amounts of electrically active "dopant"
elements such as arsenic, boron, phosphorous or antimony in a quartz crucible.
Once the melt has reached the desired temperature, a perfect silicon
crystal, or "seed" is lowered into the melt. The melt is slowly cooled to the
required temperature, and crystal growth begins around the seed. As the growth
continues, the seed is slowly extracted or "pulled" from the melt. The
temperature of the melt and the speed of extraction govern the diameter of the
ingot, and the dopant concentration in the melt governs the electrical
properties of the silicon wafers to be made from the ingot. This is a complex,
proprietary process requiring many control features on the crystal-growing
equipment.
Wafer Slicing Process
After the ingots are grown, they are extracted from the crystal pulling
furnaces and allowed to cool. The ingots are then ground to the specified
diameter, following which the ingots are sliced into thin wafers. Next, a
multi-step process using precision lapping machines, edge contour machines and
chemical etchers prepares the wafers for the surface polishing steps.
Wafer Finishing Process
Final polishing and cleaning processes give the wafers the clean,
defect-free, and superflat mirror polished surfaces required for the fabrication
of semiconductor devices. For wafer polishing, the Company currently uses its
proprietary, ninth-generation polishers together with its innovative colloidal
silica chemical-mechanical polishing process. Polishing with colloidal silica
solutions was one of MEMC's early inventions that first allowed solid state
devices to move from individual circuits to the complexities of today's
integrated circuits. Some of the Company's products are further processed by the
deposition of a thin, electrically different layer of silicon on the polished
surface of the wafer to make epitaxial wafers.
RESEARCH AND DEVELOPMENT
The Company's current research and development efforts are driven by its
business strategy and focus mainly on the development and improvement of large
diameter and advanced silicon wafer products and manufacturing processes,
enhancement of existing products and increases in efficiency. The Company works
closely with customers in developing new products and refining existing products
to attempt to meet the needs of the marketplace. A recent product and innovation
of the Company's research and development program include the development of 300
millimeter diameter wafers. The Company continues to develop processes to reduce
microdefects in crystals and is developing a new class of crystal called High
Performance Silicon. Further improvements are also being made in the polishing
process and processes to improve productivity of the Company's single slice
epitaxial reactors.
The market for silicon wafer products is characterized by rapid
technological change and product innovation. MEMC believes that continued and
timely development of new products and enhancements to existing products is
necessary for it to maintain its competitive position. Accordingly, the Company
devotes a significant portion of its resources to research and development
programs and seeks to maintain close relationships with its customers to remain
responsive to their product needs. Expenditures for product development
activities (both in the laboratory and on the manufacturing line that are
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included in research and development expenses and in cost of goods sold,
respectively) during 1997, 1996 and 1995, excluding expenditures by the
Company's joint ventures, were $88.4 million, $61.3 million, and $46.0 million,
respectively, representing 9.0%, 5.5%, and 5.2% of the Company's net sales for
the respective periods.
MARKETING AND SALES
MEMC markets substantially all of its product through a direct sales force.
The Company believes an essential element of its marketing strategy is its
establishment and maintenance of close relationships with its customers through
multi-functional teams comprised of technical, marketing and sales, and
manufacturing personnel. These teams work closely with customers in developing
their new production facilities, qualifying the Company's products for use at
such new facilities and maintaining qualification at all existing manufacturing
facilities. Sales are principally completed pursuant to indicative-only
contracts of one year or less that indicate expected volumes and specify price.
The Company's close relationships with its customers are necessitated in
part by the lengthy and expensive "qualification" process pursuant to which
silicon wafer manufacturers, and their individual facilities, are qualified to
become suppliers of a particular product to their customers. The Company is
aware of changing customer needs and targets its manufacturing to produce wafers
uniquely tuned to each customer's process and requirements. For 1997, over half
of the Company's sales were generated by the following ten customers: Advanced
Micro Devices, Inc.; Chartered Semiconductor Manufacturing, Ltd.; Cypress
Semiconductor Corporation; International Business Machines Corporation;
Motorola, Inc.; National Semiconductor Corporation; Philips Electronics N.V.;
Samsung Electronics Co., Ltd.; SGS-Thomson Microelectronics N.V.; and Texas
Instruments Incorporated (Texas Instruments). Texas Instruments individually
exceeded 10% of the Company's sales in 1997. The highest rate of future growth
in the semiconductor market is expected to be in the Asia Pacific region. The
Company believes it is well positioned in the Asian market with manufacturing
facilities or joint ventures in China, Japan, Malaysia, South Korea and Taiwan.
SEASONALITY
The Company's operating results are subject to quarterly and annual
fluctuations principally due to MEMC's dependence on the performance of the
semiconductor industry, which historically has been cyclical, as well as to the
moderate seasonality of the Company's operations. MEMC attributes such
seasonality to the purchasing patterns of its customers and to the fewer number
of production days in December, January, and February.
COMPETITION
The silicon wafer manufacturing industry is highly competitive. Significant
competitive factors in the silicon wafer market include quality, reliability and
device line performance, price, flexibility, the size of each manufacturer's
qualified customer base, available capacity, customer support and breadth of
product line. The Company believes that it competes favorably in each of these
areas. The Company also believes its presence with manufacturing facilities in
all key world areas gives it a competitive edge.
In many instances, the Company must compete for customers who have already
made substantial financial and operational commitments to products offered by
the Company's competitors. To sell its products to these customers, the Company
must demonstrate that the performance, price, and other benefits of its products
justify the costs associated with the lengthy qualification process.
Additionally, three of the Company's customers produce a portion of their own
requirements for silicon wafers.
The Company believes that its wafers are highly competitive with other
products in the marketplace. However, the Company's competitors can be expected
to continue to improve the design and performance of their products and to
introduce new products with competitive performance characteristics.
STRATEGIC ALLIANCES
MEMC has entered into a number of strategic alliances as part of its
strategy to leverage its capital, to enter expanding markets, to forge closer
working relationships with its principal customers and to broaden the geographic
diversification of its operations. The Company has alliances with prominent
partners around the world, and such joint ventures operate in China, South
Korea, Taiwan, and the United States.
RISK FACTORS
This Annual Report on Form 10-K contains "forward-looking" statements
within the meaning of the Securities Litigation Reform Act of 1995, including
those concerning 300 millimeter wafers and MEMC's operations. In addition to the
business risks and uncertainties discussed elsewhere in this Annual Report on
Form 10-K, the following are important risk factors which could cause actual
results and events to differ materially from those contained in any
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forward-looking statement contained herein or made elsewhere by or on behalf of
the Company.
Impact of Downturns in the Semiconductor Industry
MEMC's business depends in large part upon market demand for semiconductors
and products utilizing semiconductors. The semiconductor industry historically
has been cyclical and has experienced periodic downturns, which have had an
adverse impact on the semiconductor industry and suppliers to the semiconductor
industry -- including manufacturers of silicon wafers. Overcapacity, inventory
reduction and weak pricing in the semiconductor industry, particularly for the
DRAM (memory) market, led to reduced orders for silicon wafers that began in the
second half of 1996 and gradually recovered throughout 1997. In addition, the
Company and its competitors expanded at a faster rate than silicon consumption
growth during the past two years, resulting in overcapacity in the silicon wafer
industry. The combination of these market conditions led to significant price
reductions throughout 1997 that are continuing into 1998. MEMC's ability to
reduce expenses during this downturn has been limited by the Company's
significant investment in property and equipment, continued investment in
research and development, expanded capacity and marketing necessary to maintain
extensive worldwide customer service and support capabilities. A continuation of
this or any future downturns in the semiconductor industry could have a material
adverse effect on MEMC's operating results.
Capacity
MEMC is expanding certain of its manufacturing facilities around the world.
These capacity additions require significant capital investment and result in a
significant increase in fixed and operating expenses. In addition, the Company
has incurred additional indebtedness to finance such expenditures and
investments.
Growth in the worldwide supply of silicon wafers has outpaced the growth in
worldwide demand in recent periods, principally with respect to 200 millimeter
wafers. This has resulted in insufficient revenue levels to offset these
additional costs, adversely impacting the Company's operating results. Although
some of MEMC's competitors have announced adjustments to the rate at which they
will implement capacity expansion programs, many have already added significant
capacity for the production of 200 millimeter silicon wafers. The amount of
capacity to be placed into production by MEMC and its competitors could
dramatically increase the worldwide supply of silicon wafers, increase the
downward pressure on prices and materially adversely impact the Company's
operating results. Further, the Company has no firm information with which to
determine the capacity and expansion plans of its competitors.
Highly Competitive Industry
The silicon wafer industry is highly competitive. MEMC faces substantial
competition from established silicon wafer manufacturers throughout the world,
some of which have substantial financial, technical, engineering and
manufacturing resources, particularly from very large, well-capitalized Japanese
manufacturers. The Company believes that the Japanese companies with which it
competes benefit from their dominance of the technologically advanced Japanese
market, which represented approximately 39% of the worldwide silicon wafer
market in 1997. In particular, Shin-Etsu Handotai is the largest supplier of
silicon wafers in Japan and the world, providing it with the sales and
technology base to compete effectively throughout the world. If MEMC were unable
to continue to compete effectively with Japanese silicon wafer manufacturers,
the Company's operating results could be materially adversely affected.
MEMC competes principally on the basis of product quality and performance
and price, as well as technical innovation, customer service and product
availability. The Company's competitors can be expected to continue to improve
the design and performance of their products and to introduce new products with
competitive price and performance characteristics. Over the past two years, the
Japanese yen and Deutsche mark have declined significantly relative to the U.S.
dollar which has given our competitors certain cost advantages in the
marketplace. Competitive pressures or downturns in the semiconductor industry
may necessitate price reductions which could have a material adverse effect on
MEMC's operating results.
Although the Company believes that it has certain technological, geographic
and other strengths relative to its competitors, realizing and maintaining such
strengths will require a continued high level of investment by MEMC in research
and development, marketing and customer service and support and increased
manufacturing capacity. An inability to maintain such investments could have a
material adverse effect on the Company's operating results. MEMC may be required
to seek additional equity or debt financing to fund these investments. There can
be no assurance that such additional financing will be available when needed, or
if available, will be on historically equivalent terms.
Changing Customer Specifications
The silicon wafer industry is subject to rapid technological change, new
and enhanced product specification requirements and manufacturing processes as
well as evolving industry standards. The Company's ability to remain competitive
will depend upon its ability to develop technologically advanced products and
processes, and to meet the increasingly demanding requirements of its customers
on a cost-effective basis. As a result, MEMC expects to continue to make a
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significant investment in research and development. Despite its past successes,
there can be no assurance that the Company will continue to be successful in the
introduction, marketing and cost-effective manufacturing of any of its new
products, or that MEMC will be able to develop new or enhanced products and
processes that satisfy customer needs or achieve market acceptance. The failure
to develop, enhance and introduce products and manufacturing processes
successfully could have a material adverse effect on the Company's competitive
position and operating results.
Limited Number of Principal Customers
Historically, MEMC has sold a significant portion of its products to a
limited number of principal customers. In 1997, ten customers generated over
one-half of its sales. Likewise, the majority of the sales of POSCO Huls Co.,
Ltd. (PHC) were to one customer. There can be no assurance that the Company and
PHC will realize equivalent sales from their top customers in the future. The
loss, or a significant curtailment, of purchases by one or more top customers
could have a material adverse effect on MEMC's operating results.
International Operations
The Company expects that international sales will continue to represent a
significant percentage of its total sales. In addition, a significant portion of
its manufacturing operations is located outside of the United States. MEMC's
risk exposure from these sales is primarily limited to the Japanese yen,
Deutsche mark and European ecu. The Company's risk exposure from expenses at
international manufacturing facilities is concentrated in Italian lira, Japanese
yen and Malaysian ringgit. Although MEMC generally hedges receivables
denominated in foreign currencies at the time of sale and foreign currency
denominated intercompany loans by entering into long dated forward exchange
contracts, there can be no assurance that exchange rate fluctuations will not
have a material adverse effect on the Company's operations in the future.
MEMC's unconsolidated joint ventures have sales denominated in the U.S.
dollar and manufacturing expenses primarily denominated in the U.S. dollar,
Korean won and New Taiwanese dollar. PHC, the Korean joint venture, also has
significant debt denominated in the U.S. dollar and Korean won. Likewise,
Taisil, the Taiwanese joint venture, has significant debt denominated in the
U.S. dollar and New Taiwanese dollar. The Company's unconsolidated joint
ventures utilize the U.S. dollar as their functional currency and do not hedge
net Korean won and New Taiwanese exposures. Net Korean won exposure has not been
hedged, as the forward contract market is limited and the depth and price of
such contracts is not attractive. Thus far, net New Taiwanese dollar exposure
has not been hedged; however, given the broader market and depth for forward
contracts in Taiwan, forward contracts may be considered from time to time.
International sales and operations may be adversely affected by the
imposition of governmental controls, fluctuations in local or U.S. dollar
currencies, export license requirements, restrictions on the export of
technology, political instability, trade restrictions, changes in tariffs and
difficulties in staffing and managing international operations. Although the
Company believes that the geographical distribution of its operations may limit
the effects on MEMC from regulatory, political and other factors, there can be
no assurance that such factors will not have a material adverse effect on the
Company's operations in the future or require MEMC to modify its current
business practices.
Manufacturing Interruptions
Interruption of operations at any of the Company's primary manufacturing
facilities, including labor disputes, equipment failure, shortages of raw
materials or supplies, or other causes could result in delays or cancellations
of shipments of silicon wafers. There can be no assurance that alternate
capacity would be available on a timely basis or at all, thereby potentially
resulting in a loss of customers. The interruption of operations for those or
other reasons could materially adversely affect MEMC's operating results.
Dependence on Certain Suppliers
The Company obtains certain of its raw materials from a limited number of
suppliers. MEMC believes that it has developed reliable sources for all of its
raw materials and that qualified alternative sources could be obtained to supply
such materials. Although the Company currently produces approximately one-half
of its polysilicon and sources a substantial portion of the remainder under
multi-year contracts with major polysilicon producers, a prolonged inability to
obtain raw materials, such as polysilicon, or increases in the prices of raw
materials resulting from tight supplies, could have a material adverse effect on
MEMC's operating results.
Fluctuations in Operating Results
The Company's operating results are subject to quarterly and annual
fluctuations principally due to MEMC's dependence on the performance of the
semiconductor industry, which historically has been cyclical, as well as to the
moderate seasonality of the Company's operations. MEMC attributes such
seasonality to the purchasing patterns of its customers and to the fewer number
of production days in December, January and February. Additional factors that
may influence the Company's operating results include the timing of the receipt
of orders from major customers, product mix, competitive pricing pressures and
<PAGE> 8
the delay between the incurrence of expenses to further develop marketing and
service capabilities and expand capacity, and the realization of benefits from
such improved capabilities. Moreover, customers may cancel or reschedule
shipments, and production difficulties could delay shipments. These factors are
difficult to forecast, and these and other factors could have a material adverse
effect on MEMC's quarterly or annual operating results.
Attraction and Retention of Qualified Personnel
The Company is dependent upon a limited number of key management and
technical personnel. In addition, MEMC's future success will depend in part upon
its ability to attract and retain highly qualified personnel. The Company
competes for such personnel with other companies, academic institutions,
government entities and other organizations. There can be no assurance the
Company will be successful in hiring or retaining qualified personnel, or that
any of MEMC's personnel will remain employed by the Company. Any loss of key
personnel or the inability to hire and retain qualified personnel could have a
material adverse effect on MEMC's operating results.
Volatility of Stock Price
Based on the trading history of the Company's common stock, MEMC believes
that factors such as quarterly fluctuations in the Company's financial results,
announcements of technological innovations or new products by MEMC or its
competitors, the state of the semiconductor industry, pricing in the silicon
wafer industry, developments in patent or other proprietary rights and in the
Company's relationships with its customers have caused and are likely to
continue to cause the market price of MEMC's common stock to fluctuate
significantly. Technology company stocks in general have experienced extreme
price and trading volume fluctuations that often have been unrelated to the
operating performance of these companies. This market volatility may adversely
affect the market price of the Company's common stock. In addition, an actual or
anticipated shortfall in net sales, gross margin or net earnings from security
analysts' expectations could have an immediate effect on the trading price of
MEMC's common stock in any given period.
Proprietary Information and Intellectual Property
The Company believes that the success of its business depends primarily on
its proprietary technology, information and processes and know-how, rather than
on patents or trademarks. Nevertheless, MEMC attempts to protect its
intellectual property rights with respect to its products and manufacturing
processes through patents, trademarks and trade secrets when appropriate as part
of its ongoing research, development and manufacturing activities, and has
increased its efforts to obtain patent protection for its technology in response
to an increase in patent applications by the Company's competitors. Much of
MEMC's proprietary information and technology relating to the manufacturing
process is not patented and may not be patentable. Therefore, there can be no
assurance that the Company will be able to adequately protect its technology,
that competitors will not be able to develop similar technology independently,
that the claims allowed on any patents held by MEMC will be sufficiently broad
to protect the Company's technology or that foreign property laws will
adequately protect MEMC's intellectual property rights.
Year 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is assessing
the readiness of its computer systems to handle dates beyond the year 1999. The
Company expects to implement successfully the systems and programming changes
necessary to address year 2000 issues and does not believe that the cost of such
actions will have a material adverse effect on the Company's results of
operations or financial condition.
Year 2000 issues create risk for the Company from unforeseen problems in its
own computer systems and from customers, suppliers, financial institutions and
other organizations with which the Company conducts financial transactions
worldwide. Such failures by the Company's and/or third parties' computer systems
could have a material adverse effect on the Company's ability to conduct
business.
EMPLOYEES
At December 31, 1997, the Company had approximately 7,700 full-time
employees and 300 temporary workers worldwide. MEMC has not experienced any
material work stoppages at any of its facilities during the last several years.
The Company believes its relationships with its employees are satisfactory.
GEOGRAPHIC INFORMATION
Information regarding MEMC's foreign and domestic operations is contained in
Note 19 of the Notes to the Company's Consolidated Financial Statements
contained in Item 8 of Part II of this Report and is incorporated herein by
reference.
<PAGE> 9
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers is contained in Item 10 of Part
III of the Company's Form 10-K for the year ended December 31, 1997 and is
incorporated herein by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The narrative or tabular information regarding the market for the Company's
common equity and related stockholder matters required by this item is set forth
under Note 18, "Unaudited Quarterly Financial Information", of the Notes to the
Company's Consolidated Financial Statements contained in Item 8 of Part II of
this Report and under "Stockholder Information" on page 44 of the Company's 1997
Annual Report, which information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Five Year Selected Financial Data
Dollars in thousands, except share data
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $986,673 $1,119,500 $886,860 $660,807 $552,497
Gross margin 124,759 250,185 223,279 143,210 112,665
% of net sales 12.6% 22.3% 25.2% 21.7% 20.4%
Marketing and administration 70,715 79,680 63,893 41,298 37,868
% of net sales 7.2% 7.1% 7.2% 6.2% 6.9%
Research and development 64,457 44,313 31,226 27,403 25,509
% of net sales 6.5% 4.0% 3.5% 4.1% 4.6%
Operating profit (loss) (10,413) 126,192 128,160 74,509 49,288
% of net sales (1.1%) 11.3% 14.5% 11.3% 8.9%
Equity in income (loss) of joint ventures 5,480 26,716 13,199 (6.384) (10,284)
Net earnings (loss)<F1> (4,513) 103,388 86,564 34,475 9,219
% of net sales (.5%) 9.2% 9.8% 5.2% 1.7%
Basic earnings (loss) per share (.11) 2.50 2.83 1.60 .43
Diluted earnings (loss) per share (.11) 2.49 2.81 1.60 .43
Shares used in basic earnings (loss) per
share computation 41,345,193 41,308,806 30,612,636 21,490,942 21,490,942
Shares used in diluted earnings (loss) per
share computation 41,345,193 41,534,412 30,838,704 21,490,942 21,490,492
Balance Sheet Data:
Working capital 38,449 42,805 199,258 69,597 57,509
Total assets 1,794,424 1,519,472 1,102,167 631,543 513,789
Long-term debt (including current portion) 519,995 304,589 91,451 165,230 142,697
Stockholders' equity 715,754 748,583 642,695 205,468 167,157
Other Data:
Capital expenditures 372,416 590,049 215,359 78,676 67,541
Equity infusions in joint ventures 10,638 14,698 29,904 20,922 --
Employment 8,000 7,100 6,600 5,300 5,000
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company intends to retain all net earnings to fund the development of its
business, and does not anticipate paying dividends in the foreseeable future.
In April 1995, the Company paid a $100 million dividend to Huls Corporation,
its sole stockholder prior to the initial public offering.
Net earnings in 1994 were affected by the adoption of Statement of Financial
Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment
Benefits." The effect of such change was a charge of $1.3 million. Net earnings
in 1993 were affected by the adoption of SFAS No. 109, "Accounting for Income
Taxes," and the adoption of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions." The cumulative effect of such
changes was a credit of $19.3 million and a charge of $29.3 million,
respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and
Results of Operations
<PAGE> 10
Results of Operations
Year ended December 31, 1997 compared with year ended December 31, 1996
Net Sales. Net sales decreased by 11.9% to $986.7 million for 1997 from $1.1
billion for 1996, due to a 5.1% decrease in product volume and a decline in
price somewhat offset by an improved product mix. Overcapacity, inventory
reduction and weak pricing in the semiconductor industry, particularly for the
DRAM (memory) market, led to reduced orders for silicon wafers that began in the
second half of 1996 and gradually recovered throughout 1997. In addition, the
Company and its competitors expanded at a faster rate than silicon consumption
growth during 1997, resulting in overcapacity in the silicon wafer industry. The
combination of these market conditions led to significant price reductions
throughout 1997. Advanced large diameter and epitaxial products represented
39.1% of product volume for 1997 compared to 36.7% for 1996.
MEMC operates in all major semiconductor-producing regions of the world, with
almost half of the Company's 1997 net sales to customers located outside North
America. Net sales to North America decreased 12.5% and comprised 50.4% of 1997
sales compared to 50.8% of 1996 sales led by a fall in prices and, to a lesser
extent, volume, partially offset by improved product mix. Lower prices and
volume, a less favorable product mix and the general weakening of European
currencies relative to the U.S. dollar throughout 1997 combined to result in a
22.8% decrease in net sales to Europe, which constituted 20.0% of 1997 sales
compared to 22.9% of 1996 sales. Net sales to Japan increased by 21.0% and
comprised 15.6% of 1997 sales compared to 11.4% of 1996 sales as higher volume
from expanded manufacturing capacity and improved product mix more than offset
lower pricing and the weakening of the Japanese yen relative to the U.S. dollar
throughout 1997. The Asia Pacific market experienced similar declines in
pricing, volume and product mix as did other geographic markets served by the
Company. Net sales to Asia Pacific decreased 17.9% and comprised 13.9% of 1997
sales compared to 14.9% of 1996 sales. Product volume also declined due to the
continued shift in sales from the Company to POSCO Huls Company, Ltd. (PHC), the
Company's 40% owned, unconsolidated joint venture in South Korea, and Taisil
Electronic Materials Corporation (Taisil), the Company's 45% owned,
unconsolidated joint venture in Taiwan.
Gross Margin. Gross margin as a percentage of net sales decreased to 12.6% in
1997 from 22.3% in 1996. Lower pricing and capacity utilization more than offset
the slight improvement in product mix during 1997. The Company also completed
the construction of its 200 millimeter silicon wafer facility at MEMC Southwest
(the Company's 80% owned joint venture in Sherman, Texas) and the expansion of
its 200 millimeter epitaxial wafer facility in St. Peters, Missouri which
resulted in higher levels of training and start-up costs and contributed to the
lower capacity utilization. However, these expansions, which are dedicated to
the production of 200 millimeter product, position the Company to respond to the
demand for this diameter wafer, which analysts estimate grew approximately 28%
industry wide in 1997.
Marketing and Administration. Marketing and administration expenses declined
11.3% and represented 7.2% of net sales for 1997 compared to 7.1% for 1996. The
decrease is predominately attributable to a reduction in incentive compensation.
Research and Development. Research and development costs rose 45.5% and
represented 6.5% of net sales for 1997 compared to 4.0% for 1996. The increase
in research and development costs is attributable to the addition of engineering
and scientific personnel, the start-up of the 300 millimeter pilot line in St.
Peters and increased efforts in the areas of crystal technology, epitaxial
silicon research and the development of the 300 millimeter wafer.
Interest Expense. Interest expense increased to $14.7 million for 1997 from $0.5
million for 1996 as outstanding debt rose, projects were completed and interest
costs were no longer capitalized. Total debt was $632.5 million and $331.8
million at December 31, 1997 and 1996, respectively.
Other, Net. Other, net improved to $4.1 million of income for 1997 from $7.4
million in expense for 1996, primarily due to the recognition of a $6.0 million
gain on the sale of its Santa Clara, California silicon wafer facility.
Income Taxes. Income tax expense was recorded for 1997 despite the recognition
of a pre-tax loss primarily due to the composition of the Company's worldwide
taxable income. The effective income tax rate for 1996 was 40.0%.
Equity in Income of Joint Ventures. Equity in income of joint ventures decreased
to $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.
<PAGE> 11
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.
Year ended December 31, 1996 compared with year ended December 31, 1995
Net Sales. Net sales increased by 26.2% to $1.1 billion for 1996 from $886.9
million for 1995. The first half of the year saw record sales of $614.1
million while the second half was marked by sequential sales declines as the
Company's customers continued their inventory adjustments. Overall, higher
product volume and prices and improved product mix drove the increase in net
sales. Product volume increased 8.6% in 1996 which was predominately
attributable to the inclusion of MEMC Southwest for all of 1996 compared to
one-half of 1995 and the continued expansion of 200 millimeter wafer
capacity. Additionally, the Company saw its average selling price rise by
16.3% due to higher overall prices and improved product mix. Advanced large
diameter and epitaxial products represented 36.7% of product volume for 1996
compared to 26.5% for 1995.
Net sales to North America increased 39.6% to 50.8% of 1996 sales compared to
46.0% of 1995 sales due almost equally to the inclusion of MEMC Southwest for
all of 1996 and improved pricing and product mix. Expanded manufacturing
capacity and improved pricing and product mix resulted in a 24.9% increase in
net sales for Europe to 22.9% of 1996 sales compared to 23.1% of 1995 sales.
Net sales to Japan increased by 1.9% and comprised 11.4% of 1996 sales
compared to 14.1% of 1995 sales due to improved pricing and slightly higher
volumes, offset by the weakening of the Japanese yen relative to the U.S.
dollar throughout 1996. The Asia Pacific market experienced similar
improvements in pricing and product mix to other geographic markets served by
the Company. Net sales to Asia Pacific increased 12.0% and comprised 14.9% of
1996 sales compared to 16.8% of 1995 sales. Product volume remained
relatively flat due to the continued shift in sales from the Company to PHC.
Gross Margin. Gross margin as a percentage of net sales decreased to 22.3%
for 1996 from 25.2% for 1995. Higher sales volumes and improved pricing and
product mix were more than offset by operating at a lower rate of capacity
utilization caused by the inventory correction experienced by the Company's
customers during the second half of 1996, and start-up and training costs
associated with the ramping-up of new facilities. Excluding the impact of
start-up and training costs, gross margin as a percentage of net sales would
have been 26.5% for 1996.
Marketing and Administration. Marketing and administration expenses increased
to support the Company's growth and improve information technology
capability. This growth in spending kept pace with the net sales growth, thus
no significant change in spending occurred as a percentage of sales.
Marketing and administration expenses were 7.1% of net sales for 1996 and
7.2% for 1995.
Research and Development. Research and development costs rose 41.9% and
represented 4.0% of net sales for 1996 compared to 3.5% for 1995. The rise in
spending reflects the Company's commitment to maintain its competitive
advantage and meet its customers' needs. Research and development efforts
increased in the areas of crystal technology and the development of the 300
millimeter wafer.
Interest Expense. Interest expense declined to $0.5 million for 1996 from
$11.0 million for 1995, due to the capitalization of interest related to the
Company's capacity expansions. In addition, the Company used a portion of its
$441 million in proceeds from its July 1995 initial public offering to reduce
outstanding debt.
Income Taxes. The effective income tax rate increased to 40.0% for 1996 from
36.8% for 1995. This increase is primarily due to variation in the Company's
composition of worldwide taxable income and the reduction of certain
investment incentives.
Equity in Income of Joint Ventures. Equity in income of joint ventures
increased to $26.7 million for 1996 from $13.2 million for 1995. This rise in
equity income is due to the significant improvement in PHC's contribution of
$34.1 million for 1996 resulting from improved pricing and product mix
compared to $16.4 million for 1995. This increase was offset by losses from
Taisil resulting from the start-up and qualification of its operations.
Net Earnings (Loss). The growth in net sales and improvement in equity in
income of joint ventures more than offset the reduction in gross margin and
increase in marketing and administration expenses and research and
development costs, yielding a 19.4% increase in net earnings to $103.4
million for 1996 compared to $86.6 million for 1995. Net earnings for 1996
were a record for the Company.
<PAGE> 12
Liquidity and Capital Resources
At December 31, 1997, the Company had $30.1 million of cash and cash
equivalents compared to $35.1 million at December 31, 1996.
The Company's primary sources of liquidity historically have been cash flows
from operating activities and borrowings from affiliates and third parties.
The Company's principal uses of cash have been to support its operating
activities, capital expenditures and equity infusions in joint ventures. The
Company's capital expenditures and its recent operating performance have
resulted in significant negative cash flow. The Company made substantial
capital expenditures in its process technology and manufacturing capacity
based, in part, upon the Company and industry projections regarding future
market growth.
Cash flows from operating activities decreased to $29.4 million for 1997 from
$261.9 million for 1996. This $232.5 million decline was largely attributable
to lower results of operations, an increase in inventories and accounts
receivable, partially offset by an increase in customer deposits.
Accounts receivable of $154.7 million at December 31, 1997 increased $25.4
million, or 19.6%, from $129.3 million at the end of 1996. This increase is
consistent with the 28.1% increase in fourth quarter sales between the two
years. Days' sales were 55.0 at December 31, 1997 compared to 58.9 at the end
of 1996 based upon annualized fourth quarter sales for the respective years.
This decline is attributable to geographic regions with shorter collection
times generating a larger percentage of the Company's net sales in the fourth
quarter of 1997. Bad debt expense increased $1.4 million in 1997 over 1996 to
$1.7 million, primarily as a result of the rise accounts receivable and the
relative aging of those accounts receivable at December 31, 1997 to December 31,
1996.
Inventories rose $40.9 million, or 40.7%, over the prior year to $141.4
million at December 31, 1997. This increase is primarily due to the
ramping-up of 200 millimeter and epitaxial expansions and the related
consumable supplies and spare parts needed to service those operations.
Additionally, polysilicon inventories were replenished to normal operating
levels. Accordingly, year-end inventories as a percentage of annualized
fourth quarter sales increased from 12.6% at the end of 1996 to 13.8% at
December 31, 1997.
Accounts payable decreased $10.7 million or 6.8% compared to the balance at
the end of 1996 due to a significant reduction in capital expenditures offset
by higher operating costs.
Capital expenditures decreased $217.6 million or 36.9% versus the prior year
to $372.4 million. These capital expenditures primarily consisted of the
completion of the 200 millimeter facility at MEMC Southwest and expansion of
the 200 millimeter epitaxial facility in St. Peters, construction and
equipping of the 300 millimeter research and development line in St. Peters,
construction of a 300 millimeter integrated development line in Utsunomiya,
Japan, expansion of MEMC Pasadena's granular polysilicon capacity to 2700
metric tons and expansion of 200 millimeter epitaxial capacity in Utsunomiya.
Equity infusions in joint ventures decreased $4.1 million to $10.6 million
for 1997. The majority of this investment was made in Taisil as it continues
the start-up of its operations.
The Company is in the process of performing a critical review of its capital
expenditure plans for 1998. The actual amount of capital expenditures will be
significantly impacted by market conditions. Capital expenditures during 1998
will be used primarily to expand and equip the 300 millimeter research and
development line in St. Peters; to complete construction and equip the 300
millimeter integrated development line in Utsunomiya and to complete the
expansion of the granular polysilicon operation at MEMC Pasadena to 2700
metric tons. At December 31, 1997, the Company had $148.6 million of
committed capital expenditures.
At December 31, 1997, the Company maintained $656.4 million of committed
long-term loan agreements, of which $520.0 million was outstanding. The
Company also maintained $202.0 million of short-term lines of credit, of
which $112.5 million was outstanding at year-end. The Company's weighted
average cost of borrowing was 6.0% at December 31, 1997.
Total debt outstanding increased to $632.5 million at December 31, 1997 from
$331.8 million at December 31, 1996. The total debt to total capital ratio at
December 31, 1997 was 44.9%.
The Company's liquidity is affected by many factors, some based on the normal
ongoing operations of the business and others related to the uncertainties of
the industry and global economies. Although the Company's cash requirements
will fluctuate based on the timing and extent of these factors, management
believes that cash generated from operations, together with the liquidity
provided by existing cash balances and borrowing capability, will be
sufficient to satisfy commitments for capital expenditures and other cash
requirements for the next fiscal year.
<PAGE> 13
In December 1997, the Company signed a non-binding letter of intent to form a
polysilicon joint venture with Tokuyama Corporation, the world's
second-largest producer of polysilicon, and Marubeni Corporation, one of
Japan's leading trading companies. The Company
<PAGE> 14
will contribute its existing granular polysilicon operation, and the other
parties will contribute cash and technology. The Company will retain a 40%
interest in the new joint venture.
Risk Factors
Impact of Downturns in the Semiconductor Industry. MEMC's business depends in
large part upon market demand for semiconductors and products utilizing
semiconductors. The semiconductor industry historically has been cyclical and
has experienced periodic downturns, which have had an adverse impact on the
semiconductor industry and suppliers to the semiconductor industry -- including
manufacturers of silicon wafers. Overcapacity, inventory reduction and weak
pricing in the semiconductor industry, particularly for the DRAM (memory)
market, led to reduced orders for silicon wafers that began in the second half
of 1996 and gradually recovered throughout 1997. In addition, the Company and
its competitors expanded at a faster rate than silicon consumption growth during
the past two years, resulting in overcapacity in the silicon wafer industry. The
combination of these market conditions led to significant price reductions
throughout 1997 that are continuing into 1998. MEMC's ability to reduce expenses
during this downturn has been limited by the Company's significant investment in
property and equipment, continued investment in research and development,
expanded capacity and marketing necessary to maintain extensive worldwide
customer service and support capabilities. A continuation of this or any future
downturns in the semiconductor industry could have a material adverse effect on
MEMC's operating results.
Capacity. MEMC is expanding certain of its manufacturing facilities around the
world. These capacity additions require significant capital investment and
result in a significant increase in fixed and operating expenses. In addition,
the Company has incurred additional indebtedness to finance such expenditures
and investments.
Growth in the worldwide supply of silicon wafers has outpaced the growth in
worldwide demand in recent periods, principally with respect to 200 millimeter
wafers. This has resulted in insufficient revenue levels to offset these
additional costs, adversely impacting the Company's operating results. Although
some of MEMC's competitors have announced adjustments to the rate at which they
will implement capacity expansion programs, many have already added significant
capacity for the production of 200 millimeter silicon wafers. The amount of
capacity to be placed into production by MEMC and its competitors could
dramatically increase the worldwide supply of silicon wafers, increase the
downward pressure on prices and materially adversely impact the Company's
operating results. Further, the Company has no firm information with which to
determine the capacity and expansion plans of its competitors.
Highly Competitive Industry. The silicon wafer industry is highly competitive.
MEMC faces substantial competition from established silicon wafer manufacturers
throughout the world, some of which have substantial financial, technical,
engineering and manufacturing resources, particularly from very large,
well-capitalized Japanese manufacturers. The Company believes that the Japanese
companies with which it competes benefit from their dominance of the
technologically advanced Japanese market, which represented approximately 39% of
the worldwide silicon wafer market in 1997. In particular, Shin-Etsu Handotai is
the largest supplier of silicon wafers in Japan and the world, providing it with
the sales and technology base to compete effectively throughout the world. If
MEMC were unable to continue to compete effectively with Japanese silicon wafer
manufacturers, the Company's operating results could be materially adversely
affected.
MEMC competes principally on the basis of product quality and performance and
price, as well as technical innovation, customer service and product
availability. The Company's competitors can be expected to continue to improve
the design and performance of their products and to introduce new products with
competitive price and performance characteristics. Over the past two years, the
Japanese yen and Deutsche mark have declined significantly relative to the U.S.
dollar which has given our competitors certain cost advantages in the
marketplace. Competitive pressures or downturns in the semiconductor industry
may necessitate price reductions which could have a material adverse effect on
MEMC's operating results.
Although the Company believes that it has certain technological, geographic and
other strengths over its competitors, realizing and maintaining such strengths
will require a continued high level of investment by MEMC in research and
development, marketing and customer service and support and increased
manufacturing capacity. An inability to maintain such investments could have a
material adverse effect on the Company's operating results. MEMC may be required
to seek additional equity or debt financing to fund these investments. There can
be no assurance that such additional financing will be available when needed, or
if available, will be on historically equivalent terms.
Changing Customer Specifications. The silicon wafer industry is subject to
rapid technological change, new and enhanced product specification requirements
and manufacturing processes as well as evolving industry standards. The
Company's ability to remain
<PAGE> 15
competitive will depend upon its ability to develop technologically advanced
products and processes, and to meet the increasingly demanding requirements
of its customers on a cost-effective basis. As a result, MEMC expects to
continue to make a significant investment in research and development.
Despite its past successes, there can be no assurance that the Company will
continue to be successful in the introduction, marketing and cost-effective
manufacturing of any of its new products, or that MEMC will be able to
develop new or enhanced products and processes that satisfy customer needs or
achieve market acceptance. The failure to develop, enhance and introduce
products and manufacturing processes successfully could have a material
adverse effect on the Company's competitive position and operating results.
Limited Number of Principal Customers. Historically, MEMC has sold a
significant portion of its products to a limited number of principal
customers. In 1997, ten customers generated over one-half of its sales.
Likewise, the majority of PHC's sales were to one customer. There can be no
assurance that the Company and PHC will realize equivalent sales from their
top customers in the future. The loss, or a significant curtailment, of
purchases by one or more top customers could have a material adverse effect
on MEMC's operating results.
International Operations. The Company expects that international sales will
continue to represent a significant percentage of its total sales. In
addition, a significant portion of its manufacturing operations is located
outside of the United States. MEMC's risk exposure from these sales is
primarily limited to the Japanese yen, Deutsche mark and European ecu. The
Company's risk exposure from expenses at international manufacturing
facilities is concentrated in Italian lira, Japanese yen and Malaysian
ringgit. Although MEMC generally hedges receivables denominated in foreign
currencies at the time of sale and foreign currency denominated intercompany
loans by entering into long dated forward exchange contracts, there can be no
assurance that exchange rate fluctuations will not have a material adverse
effect on the Company's operations in the future.
MEMC's unconsolidated joint ventures have sales denominated in the U.S.
dollar and manufacturing expenses primarily denominated in the U.S. dollar,
Korean won and New Taiwanese dollar. PHC, the Korean joint venture, also has
significant debt denominated in the U.S. dollar and Korean won. Likewise,
Taisil, the Taiwanese joint venture, has significant debt denominated in the
U.S. dollar and New Taiwanese dollar. The Company's unconsolidated joint
ventures utilize the U.S. dollar as their functional currency and do not
hedge net Korean won and New Taiwanese exposures. Net Korean won exposure has
not been hedged, as the forward contract market is limited and the depth and
price of such contracts is not attractive. Thus far, net New Taiwanese
dollar exposure has not been hedged; however, given the broader market and
depth for forward contracts in Taiwan, forward contracts may be considered
from time to time.
International sales and operations may be adversely affected by the
imposition of governmental controls, fluctuations in local or U.S. dollar
currencies, export license requirements, restrictions on the export of
technology, political instability, trade restrictions, changes in tariffs and
difficulties in staffing and managing international operations. Although the
Company believes that the geographical distribution of its operations may
limit the effects on MEMC from regulatory, political and other factors, there
can be no assurance that such factors will not have a material adverse effect
on the Company's operations in the future or require MEMC to modify its
current business practices.
Manufacturing Interruptions. Interruption of operations at any of the
Company's primary manufacturing facilities, including labor disputes,
equipment failure, shortages of raw materials or supplies, or other causes
could result in delays or cancellations of shipments of silicon wafers. There
can be no assurance that alternate capacity would be available on a timely
basis or at all, thereby potentially resulting in a loss of customers. The
interruption of operations for those or other reasons could materially
adversely affect MEMC's operating results.
Dependence on Certain Suppliers. The Company obtains certain of its raw
materials from a limited number of suppliers. MEMC believes that it has
developed reliable sources for all of its raw materials and that qualified
alternative sources could be obtained to supply such materials. Although the
Company currently produces approximately one-half of its polysilicon and
sources a substantial portion of the remainder under multi-year contracts
with major polysilicon producers, a prolonged inability to obtain raw
materials, such as polysilicon, or increases in the prices of raw materials
resulting from tight supplies, could have a material adverse effect on MEMC's
operating results.
Fluctuations in Operating Results. The Company's operating results are subject
to quarterly and annual fluctuations principally due to MEMC's dependence on
the performance of the semiconductor industry, which historically has been
cyclical, as well as to the moderate seasonality of the Company's operations.
MEMC attributes such seasonality to the purchasing patterns of its customers
and to the fewer number of production days in December, January and February.
Additional factors that may influence the Company's operating results include
the timing of the receipt of orders from major customers, product mix,
<PAGE> 16
competitive pricing pressures and the delay between the incurrence of
expenses to further develop marketing and service capabilities and expand
capacity, and the realization of benefits from
<PAGE> 17
such improved capabilities. Moreover, customers may cancel or reschedule
shipments, and production difficulties could delay shipments. These factors
are difficult to forecast, and these and other factors could have a material
adverse effect on MEMC's quarterly or annual operating results.
Attraction and Retention of Qualified Personnel. The Company is dependent upon
a limited number of key management and technical personnel. In addition,
MEMC's future success will depend in part upon its ability to attract and
retain highly qualified personnel. The Company competes for such personnel
with other companies, academic institutions, government entities and other
organizations. There can be no assurance the Company will be successful in
hiring or retaining qualified personnel, or that any of MEMC's personnel will
remain employed by the Company. Any loss of key personnel or the inability to
hire and retain qualified personnel could have a material adverse effect on
MEMC's operating results.
Volatility of Stock Price. Based on the trading history of the Company's
common stock, MEMC believes that factors such as quarterly fluctuations in
the Company's financial results, announcements of technological innovations
or new products by MEMC or the Company's competitors, the state of the
semiconductor industry, pricing in the silicon wafer industry, developments
in patent or other proprietary rights and in the Company's relationships with
its customers have caused and are likely to continue to cause the market
price of MEMC's common stock to fluctuate significantly. Technology company
stocks in general have experienced extreme price and volume fluctuations that
often have been unrelated to the operating performance of these companies.
This market volatility may adversely affect the market price of the Company's
common stock. In addition, an actual or anticipated shortfall in net sales,
gross margin or net earnings from securities analysts' expectations could
have an immediate effect on the trading price of MEMC's common stock in any
given period.
Proprietary Information and Intellectual Property. The Company believes that
the success of its business depends primarily on its proprietary technology,
information and processes and know-how, rather than on patents or trademarks.
Nevertheless, MEMC attempts to protect its intellectual property rights with
respect to its products and manufacturing processes through patents,
trademarks and trade secrets when appropriate as part of its ongoing
research, development and manufacturing activities, and has increased its
efforts to obtain patent protection for its technology in response to an
increase in patent applications by the Company's competitors. Much of MEMC's
proprietary information and technology relating to the manufacturing process
is not patented and may not be patentable. Therefore, there can be no
assurance that the Company will be able to adequately protect its technology,
that competitors will not be able to develop similar technology
independently, that the claims allowed on any patents held by MEMC will be
sufficiently broad to protect the Company's technology or that foreign
property laws will adequately protect MEMC's intellectual property rights.
Year 2000. Many computer systems experience problems handling dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company is
assessing the readiness of its computer systems to handle dates beyond the
year 1999. The Company expects to implement successfully the systems and
programming changes necessary to address year 2000 issues, and does not
believe that the cost of such actions will have a material adverse effect on
the Company's results of operations or financial condition.
Year 2000 issues create risk for the Company from unforeseen problems in its
own computer systems and from customers, suppliers, financial institutions
and other organizations with which the Company conducts financial
transactions worldwide. Such failures by the Company's and/or third parties'
computer systems could have a material adverse effect on the Company's
ability to conduct business.
Safe Harbor Statement
This Annual Report contains various forward-looking statements and includes
assumptions in the letter To Our Stockholders (pages 2-5), Business Overview
(pages 6-11) and Management's Discussion and Analysis (pages 13-17) including
those concerning MEMC's operations, future results, and trends in the silicon
wafer, semiconductor and polysilicon industries. These "forward-looking
statements," within the meaning of the Private Securities Litigation Reform
Act of 1995, are based on current expectations and are subject to risks and
uncertainties that could cause actual results to differ materially from those
set forth in or implied by the forward-looking statements and related
assumptions. Factors that may cause such differences include, but are not
limited to, those potential risks and uncertainties described in Risk Factors
(pages 17-20) and in the Company's filings with the Securities and Exchange
Commission, including its Form 10-K for the year ended December 31, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE> 18
<TABLE>
<CAPTION>
Consolidated Statements of Operations
Year ended December 31, 1997 1996 1995
Dollars in thousands, except share data
<S> <C> <C> <C>
Net sales $986,673 $1,119,500 $886,860
Cost of goods sold 861,914 869,315 663,581
- ------------------------------------------------------------------------------------------------------------------
Gross margin 124,759 250,185 223,279
Operating expenses:
Marketing and administration 70,715 79,680 63,893
Research and development 64,457 44,313 31,226
- ------------------------------------------------------------------------------------------------------------------
Operating profit (loss) (10,413) 126,192 128,160
- ------------------------------------------------------------------------------------------------------------------
Nonoperating (income) expense:
Interest expense 14,743 494 10,953
Interest income (2,570) (5,436) (7,270)
Royalty income (8,186) (6,158) (5,934)
Other, net (4,070) 7,437 11,479
- ------------------------------------------------------------------------------------------------------------------
Total nonoperating (income) expense (83) (3,663) 9,228
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes, equity in income of
joint ventures and minority interests (10,330) 129,855 118,932
Income taxes 2,769 51,942 43,786
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) before equity in income of joint ventures
and minority interests (13,099) 77,913 75,146
Equity in income of joint ventures 5,480 26,716 13,199
Minority interests 3,106 (1,241) (1,781)
- ------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (4,513) $ 103,388 $ 86,564
==================================================================================================================
Basic earnings (loss) per share $ (0.11) $ 2.50 $ 2.83
Diluted earnings (loss) per share $ (0.11) $ 2.49 $ 2.81
==================================================================================================================
Weighted average shares used in computing basic
earnings (loss) per share 41,345,193 41,308,806 30,612,636
Weighted average shares used in computing diluted
earnings (loss) per share 41,345,193 41,534,412 30,838,704
==================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, 1997 1996
Dollars in thousands, except share data
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 30,053 $ 35,096
Accounts receivable, less allowance for doubtful accounts of
$3,473 and $2,299 in 1997 and 1996, respectively 154,702 129,325
Income taxes receivable 14,382 3,882
Inventories 141,447 100,505
Prepaid and other current assets 36,391 49,329
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 376,975 318,137
Property, plant and equipment, net 1,200,827 1,015,145
Investment in joint ventures 112,573 107,718
Excess of cost over net assets acquired, net of accumulated amortization of
$3,752 and $2,376 in 1997 and 1996, respectively 49,772 51,148
Other assets 54,277 27,324
- ----------------------------------------------------------------------------------------------------------------------
Total assets $1,794,424 $1,519,472
====================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 122,476 $ 47,130
Accounts payable 146,172 156,841
Accrued liabilities 48,611 45,386
Accrued wages and salaries 21,267 25,975
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 338,526 275,332
Long-term debt, less current portion 510,038 284,701
Pension and similar liabilities 76,837 70,232
Customer deposits 67,141 48,174
Other liabilities 26,901 28,923
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,019,443 707,362
- ----------------------------------------------------------------------------------------------------------------------
Minority interests 59,227 63,527
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 shares authorized, none issued
or outstanding in 1997 or 1996 -- --
Common stock, $.01 par value, 200,000,000 shares authorized, 41,440,369
and 41,470,971 issued and outstanding in 1997 and 1996, respectively 414 415
Additional paid-in capital 574,317 573,351
Retained earnings 168,496 173,009
Cumulative translation adjustment (25,721) 4,353
Unearned restricted stock awards (424) (1,217)
Treasury stock, at cost: 36,205 shares in 1997 and 1996 (1,328) (1,328)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 715,754 748,583
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,794,424 $1,519,472
====================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Year ended December 31, 1997 1996 1995
Dollars in thousands
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (4,513) $ 103,388 $ 86,564
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 126,913 91,660 67,241
Minority interests (3,106) 1,241 1,781
Equity in income of joint ventures (5,480) (26,716) (12,221)
(Gain) loss on sale of property, plant and equipment (4,766) 610 1,494
Deferred compensation earned 596 1,001 6,601
Changes in assets and liabilities:
Accounts receivable (36,051) 32,247 (39,636)
Income taxes (8,794) (24,127) (613)
Inventories (46,445) (11,126) (3,980)
Prepaid and other current assets 9,487 (10,638) (16,591)
Deferred taxes (17,783) 11,546 10,596
Accounts payable 3,976 19,221 59,258
Accrued liabilities 5,967 2,469 6,469
Accrued wages and salaries (3,797) 1,749 7,639
Customer deposits 20,140 58,900 --
Other, net (6,915) 10,480 (6,921)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 29,429 261,905 167,681
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (372,416) (590,049) (215,359)
Proceeds from sale of property, plant and equipment 21,512 884 2,063
Equity infusions in joint ventures (10,638) (14,698) (29,904)
Dividend received from unconsolidated joint venture 11,263 -- --
Deposit with affiliate -- 55,000 (55,000)
Notes receivable from affiliates 212 2,376 28,559
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (350,067) (546,487) (269,641)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from initial public offering -- -- 441,194
Net short-term borrowings 87,420 14,898 (36,867)
Proceeds from issuance of long-term debt 248,553 222,166 209,500
Principal payments on long-term debt (18,693) (2,060) (340,000)
Dividends paid -- -- (100,000)
Other 385 7,275 --
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 317,665 242,279 173,827
- -------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (2,070) 207 213
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,043) (42,096) 72,080
Cash and cash equivalents at beginning of year 35,096 77,192 5,112
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 30,053 $ 35,096 $ 77,192
=======================================================================================================================
Supplemental disclosures of cash flow information:
Interest payments, net of amount capitalized $ 21,204 $ -- $ 13,007
Income taxes paid 18,020 57,590 34,273
=======================================================================================================================
Supplemental disclosure of noncash investing activity --
purchase of assets in exchange for notes payable $ -- $ -- $ 55,000
=======================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Common Stock
----------------- Unearned
Number Additional Cumulative Restricted
of Shares Par Paid-in Retained Translation Stock Treasury
Outstanding Value Capital Earnings Adjustment Awards Stock Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in thousands
Balance at December 31, 1994 21,490,942 $215 $158,884 $ 44,520 $ 1,849 $ -- $ -- $ 205,468
Net earnings -- -- -- 86,564 -- -- -- 86,564
Issuance of 19,550,000
common shares in
public offering 19,550,000 196 440,998 -- -- -- -- 441,194
Stock plans, net 359,056 3 8,614 -- -- (8,617) -- --
Deferred compensation earned -- -- -- -- -- 6,601 -- 6,601
Net translation adjustment -- -- -- -- 2,868 -- -- 2,868
Dividend paid to
Huls Corporation -- -- (38,537) (61,463) -- -- -- (100,000)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 41,399,998 414 569,959 69,621 4,717 (2,016) -- 642,695
Net earnings -- -- -- 103,388 -- -- -- 103,388
Stock plans, net 70,973 1 3,392 -- -- (202) -- 3,191
Deferred compensation earned -- -- -- -- -- 1,001 -- 1,001
Net translation adjustment -- -- -- -- (364) -- -- (364)
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
Net loss -- -- -- (4,513) -- -- -- (4,513)
Stock plans, net (30,602) (1) 966 -- -- 197 -- 1,162
Deferred compensation earned -- -- -- -- -- 596 -- 596
Net translation adjustment -- -- -- -- (30,074) -- -- (30,074)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 41,440,369 $414 $574,317 $168,496 $(25,721) $ (424) $(1,328) $ 715,754
=========================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 22
Notes to Consolidated Financial Statements
Dollars in thousands, except share data
(1) Organization
MEMC Electronic Materials, Inc. and subsidiaries (the Company) is a
manufacturer and leading worldwide supplier of electronic grade silicon
wafers for the semiconductor industry. The Company has production facilities
directly or through joint ventures in China, Italy, Japan, Malaysia, South
Korea, Taiwan and the United States. The Company's customers are located
throughout the world.
(2) Initial Public Stock Offering
On July 12, 1995, the Company completed an initial public stock offering of
19.55 million shares of common stock at an initial offering price of $24 per
share. Net proceeds from the offering were $441,194. Prior to the public
stock offering, the Company was a wholly owned subsidiary of Huls
Corporation. Through Huls AG and other affiliates, Huls Corporation is wholly
owned by VEBA AG, a publicly held industrial corporation in Germany. As a
result of the public stock offering, Huls Corporation's ownership of the
Company was reduced to 51.9%.
(3) Summary of Significant Accounting Policies
(a) Basis of Presentation
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Certain prior period amounts have been reclassified to conform to the current
year's presentation.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of MEMC Electronic
Materials, Inc. and its wholly and majority owned subsidiaries. Investments
of less than 50% in two joint venture companies are accounted for using the
equity method. All significant intercompany transactions have been
eliminated.
(c) Cash Equivalents
Cash equivalents consist of cash in banks, principally overnight investments
and short-term time deposits, with original maturities of three months or
less.
(d) Inventories
Inventories are stated at the lower of cost or market. Raw materials and
supplies inventories are valued using the first-in, first-out method. Goods
in process and finished goods inventory values are based upon standard costs
which approximate average costs.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
principally using the straight-line method over estimated service lives as
follows:
<TABLE>
<CAPTION>
Years
- ----------------------------------------------------------------------------
<S> <C>
Land improvements 6-15
Buildings and building improvements 10-30
Machinery and equipment 3-12
==========================================================================
</TABLE>
<PAGE> 23
The Company capitalizes interest costs as part of the cost of constructing
facilities and equipment. Interest costs of $15,968, $8,957 and $1,638 were
capitalized in 1997, 1996 and 1995, respectively.
(f) Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired is amortized on a straight-line basis
over the periods estimated to be benefited, not exceeding 40 years. Excess of
cost over net assets acquired is reviewed for impairment whenever events and
changes in business circumtances indicate the carrrying value of 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 cost over net assets at December 31, 1997 and 1996.
(g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount of fair value less costs to sell. There is no
indication of impairment of property, plant and equipment at December 31, 1997
and 1996.
(h) Impairment of Investment 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 these investments at December 31, 1997
and 1996.
(i) Revenue Recognition
Revenues are recognized when products are shipped.
(j) Derivative Financial Instruments
The Company enters into forward exchange contracts to manage foreign currency
exchange risk relating to current trade receivables with its foreign
subsidiaries and current trade receivables with its customers denominated in
foreign currencies (primarily Japanese yen and Deutsche marks). The purpose
of the Company's foreign currency hedging activities is to protect the
Company from the risk that the eventual dollar net cash flows resulting from
foreign currency transactions will be adversely affected by changes in
exchange rates. The Company does not hold or issue financial instruments for
trading purposes.
The Company's forward exchange contracts are accounted for as hedges and,
accordingly, gains and losses on those contracts are deferred and recognized
at the time of settlement of the related receivables. Deferred gains and
losses are included on a net basis in the consolidated balance sheets as
either other assets or other liabilities. Upon termination, gains and losses
are included in the consolidated statements of operations as other income or
expense. If a forward exchange contract is designated as a hedge but is no
longer effective, it is marked to market and included in other income or
expense in the consolidated statements of operations. A payment or receipt
arising from the termination of a forward exchange contract that is effective
as a hedge is included in other income or expense in the consolidated
statements of operations.
(k) Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries whose functional currency is
other than the U.S. dollar are translated to U.S. dollars using the exchange
rates in effect at the balance sheet date. Results of operations are
translated using average rates during the period. Adjustments resulting from
the translation process are included as a separate component of stockholders'
equity.
(l) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to material differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating losses and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in earnings
in the period that includes the enactment date. A valuation allowance has
been established for deferred tax assets that the Company believes may not be
realized.
No provision is made for U.S. income taxes on unremitted earnings of the
Company's non-U.S. subsidiaries, as the retention of such earnings is
considered essential for continuing operations, or the additional taxes are
considered to be minimal based upon available foreign tax credits.
<PAGE> 24
(m) Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128
requires the presentation of basic and diluted earnings per share for 1997
interim and annual periods, and restatement of all prior periods presented.
Restated earnings per share information for 1997 and 1996 interim periods is
contained in note 18, "Unaudited Quarterly Financial Information."
<PAGE> 25
(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.
(o) Contingencies
Contingent liabilities are disclosed when management believes they are material
to Company's financial position. There are no such known contingent
liabilities at December 31, 1997.
(4) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- -------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Raw materials and supplies $ 65,369 $ 47,209
Goods in process 37,996 27,411
Finished goods 38,082 25,885
- -------------------------------------------------------------------------------
$141,447 $100,505
=============================================================================
</TABLE>
(5) Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- -------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Land and land improvements $ 13,055 $ 13,782
Buildings and building improvements 435,740 141,582
Machinery and equipment 1,001,846 744,485
- -------------------------------------------------------------------------------
1,450,641 899,849
Less accumulated depreciation 465,384 372,680
- -------------------------------------------------------------------------------
985,257 527,169
Construction in progress 215,570 487,976
- -------------------------------------------------------------------------------
$1,200,827 $1,015,145
=============================================================================
</TABLE>
<PAGE> 26
On June 30, 1995, the Company and Texas Instruments, Inc.(Texas Instruments)
formed a joint venture company, MEMC Southwest, to own and operate Texas
Instruments' existing silicon wafer manufacturing facility in Sherman, Texas
and to construct and operate a new 200 millimeter silicon wafer manufacturing
facility. MEMC Southwest is 80% owned by the Company and 20% owned by Texas
Instruments. This agreement generated an excess of cost over net assets
acquired of approximately $53,000 that is being amortized over 40 years.
On July 31, 1995, the Company acquired the polysilicon production operations
of Albemarle Corporation (Albemarle), including Albemarle's production
facility in Pasadena, Texas, for approximately $58,000. Based upon an
independent valuation, the purchase price was allocated to inventory,
property, plant and equipment, and technology rights.
(6) Investment in Joint Ventures
The Company has a 40% interest in POSCO HULS Company Limited (PHC), a joint
stock company formed to manufacture and sell silicon wafers in South Korea,
and a 45% interest in Taisil Electronic Materials Corporation (Taisil), a
joint stock company formed to manufacture and sell silicon wafers in Taiwan.
During 1997, 1996 and 1995, the Company earned $8,186, $6,158 and $5,934,
respectively, from these joint ventures under royalty agreements. Sales by
PHC of intermediate and finished product to the Company totaled $32,313,
$89,723, and $20,688 in 1997, 1996 and 1995, respectively.
The Company provides PHC and Taisil with debt guarantees totaling $3,743 and
$79,805, respectively. At December 31, 1997, PHC and Taisil had $3,743 and
$79,805, respectively, in standby letters of credit and borrowings
outstanding against these guarantees.
A summary of the results of operations for 1997, 1996 and 1995, and financial
position as of December 31, 1997 and 1996 of the Company's unconsolidated
investments follows:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Total:
Net sales $277,492 $282,310 $181,009
Gross profit 54,120 107,366 57,100
Net earnings 15,274 68,847 32,296
==============================================================================
The Company's share:
Net earnings $ 5,480 $ 26,716 $ 13,199
==============================================================================
Current assets $147,644 $183,588
Noncurrent assets 565,201 526,375
- -----------------------------------------------------------------
Total assets 712,845 709,963
- -----------------------------------------------------------------
Current liabilities 155,038 186,167
Noncurrent liabilities 284,736 286,740
- -----------------------------------------------------------------
Total liabilities 439,774 472,907
- -----------------------------------------------------------------
Interests of others 160,498 129,338
- -----------------------------------------------------------------
The Company's investment $112,573 $107,718
=================================================================
</TABLE>
The Company's share of undistributed retained earnings of unconsolidated
investments was approximately $16,090 and $10,609 at December 31, 1997 and
1996, respectively. In 1997, the Company received a dividend from PHC of
$11,263.
(7) Short-Term Borrowing Agreements and Lines of Credit
The Company has unsecured, committed lines of credit available of
approximately $95,000 under short-term loan agreements with an affiliate,
renewable through 1998. The interest rate on borrowings is based on a
combination of U.S. federal funds and inter-bank offer rates. At December 31,
1997, the Company had approximately $75,000 of borrowings drawn against these
lines of credit with an interest
<PAGE> 27
rate of 6.3% per annum. Interest expense related to short-term borrowings
with an affiliate was $1,667, $181 and $485 in 1997, 1996 and 1995,
respectively.
The Company has unsecured borrowings from foreign banks of approximately
$37,000 at December 31, 1997, under approximately $62,000 of short-term loan
agreements which bear interest at various rates ranging from 1.0% to 10.4%
and are renewable annually. The Company also has two unsecured, committed
lines of credit available with two banks totaling $45,000 under short-term
borrowing agreements, of which the Company had no borrowings drawn at
December 31, 1997 or 1996. The interest rate on the borrowings is negotiated
at the time of the borrowings.
Commitment fees of 1/8 of 1% are paid on the unused portion of the lines of
credit. The Company's weighted average interest rate on short-term borrowings
was 1.9% and 4.1% for 1997 and 1996, respectively, and are favorably impacted
by interest rates in Japan.
(8) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Owed to affiliates:
Note with interest payable semiannually at 6.7%, due in 1998 $ 25,000 $ 25,000
Notes with interest payable semiannually at rates ranging from
2.1% to 7.2%, due in 1999 37,690 8,750
Notes with interest payable semiannually at rates ranging from
2.5% to 6.4%, due in 2000 17,690 18,750
Notes with interest payable semiannually at rates ranging from
2.9% to 7.2%, due in 2001 77,690 108,750
Notes with interest payable semiannually at rates ranging from
3.2% to 7.6%, due in 2002 82,690 8,750
Note with interest payable semiannually at 6.4%, due in 2003 40,000 40,000
Notes with interest payable semiannually at rates ranging from
6.9% to 7.3%, due in 2004 100,000 50,000
Note with interest payable semiannually at 7.3%, due in 2005 75,000 --
- --------------------------------------------------------------------------------------------------------------------
Total owed to affiliates 455,760 260,000
- --------------------------------------------------------------------------------------------------------------------
Owed to nonaffiliates:
Note with interest payable semiannually at 4.1%, due in 1998 7,690 17,730
Notes with interest payable semiannually at rates ranging from
1.7% to 2.2%, due in 2001 15,380 --
Note with interest payable semiannually at 1.6%, due in 2002 15,380 --
Other notes with interest payable semiannually at rates ranging
from 2.3% to 8.9%, due in 1998 through 2017 25,785 26,859
- --------------------------------------------------------------------------------------------------------------------
Total owed to nonaffiliates 64,235 44,589
- --------------------------------------------------------------------------------------------------------------------
Total long-term debt 519,995 304,589
Less current portion 9,957 19,888
- --------------------------------------------------------------------------------------------------------------------
$510,038 $284,701
==================================================================================================================
</TABLE>
The Company has long-term committed loan agreements of $656 million at
December 31, 1997, of which approximately $520 million is outstanding.
Commitment fees of 1/8 of 1% are paid on the unused portion of committed loan
agreements. The Company has approximately $100,000 of available long-term
loan agreements with affiliates at December 31, 1997. Although $25,000 of the
Company's long-term debt is scheduled to mature in 1998, it is the Company's
intention to refinance these borrowings with available credit facilities
maturing in 2004. Consequently, $25,000 has been reclassified to long-term
debt at December 31, 1997.
Interest expense related to long-term notes payable to affiliates was
$25,633, $7,337 and $4,888 in 1997, 1996 and 1995, respectively.
<PAGE> 28
The aggregate amounts of long-term debt maturing subsequent to December 31,
1997 are as follows:
<TABLE>
<CAPTION>
Dollars in thousands
<S> <C>
1998 $ 9,957
1999 42,102
2000 22,594
2001 95,897
2002 100,263
Thereafter 249,182
- ------------------------------------------------------------------
$519,995
==================================================================
</TABLE>
In October 1996, the Company entered into a financing arrangement with the
City of O'Fallon, Missouri related to the expansion of the Company's St.
Peters, Missouri facility. In total, approximately $252 million of industrial
revenue bonds were issued to the Company by the City of O'Fallon, of which
$210 million and $159 million of bonds were outstanding at December 31, 1997
and 1996, respectively.
The bonds were exchanged by the City of O'Fallon for the assets related to
the expansion, which were then leased by the Company for a period of 10 years
for machinery and equipment and 15 years for building and building
improvements. The Company has the option to purchase the machinery and
equipment at the end of five years and the building and building improvements
at the end of 10 years. The industrial revenue bonds bear interest at a rate
of 6% per annum and mature concurrent with the annual payments due under the
terms of the lease.
The Company has classified the leased assets as property, plant and equipment
and has established a capital lease obligation equal to the outstanding
principal balance of industrial revenue bonds. Lease payments may be made by
tendering an equivalent portion of the industrial revenue bonds. As the
capital lease payments to the City of O'Fallon may be satisfied by tendering
industrial revenue bonds (which is the Company's intention), the capital
lease obligation, industrial revenue bonds and related interest expense and
interest income, respectively, have been offset for presentation purposes in
the consolidated financial statements.
(9) Stockholders' Equity
Preferred Stock
The Company has 50,000,000 authorized shares of $.01 per share par value
preferred stock. The Board of Directors is authorized, without further action
by the stockholders, to issue any or all of the preferred stock.
Common Stock
Holders of the $.01 per share par value common stock are entitled to one vote
for each share held on all matters submitted to a vote of the stockholders.
Subject to the rights of any holders of preferred stock, holders of common
stock are entitled to receive ratably such dividends as may be declared by
the Board of Directors. In the event of liquidation, dissolution or winding
up of the Company, holders of the common stock are entitled to share ratably
in the distribution of all assets remaining after payment of liabilities,
subject to the rights of any holders of preferred stock.
Stock-Based Compensation
The Company has an Equity Incentive Plan (the Plan) that provides for the
award of incentive and non-qualified stock options, restricted stock and
performance shares. Total shares available for grant under the Plan are
3,597,045. Non-qualified stock options to employees are typically granted on
January 1 and vest at a rate of 25% annually over four years. Non-qualified
stock options to non-employee directors are also typically granted on January
1 but vest at a rate of 33 1/3% annually over three years. The exercise price
of each option equals the market price of the Company's common stock on the
date of the grant, and each option's maximum term is 10 years. Total
restricted shares awarded in 1997, 1996 and 1995 were 1,300, 38,200 and
359,056, respectively, with weighted average fair values of $22.50, $33.46
and $24, respectively. Total compensation cost recognized for these awards in
1997, 1996 and 1995 was $596, $1,001 and $6,601, respectively.
The Company applies Opinion 25 and related Interpretations in accounting for
the Plan. Accordingly, no compensation cost has been recognized for
non-qualified stock options granted under the Plan. Had compensation cost
been determined for the Company's non-qualified stock options based on the
fair value at the grant dates consistent with the alternative method set
forth under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net earnings (loss) and basic and diluted earnings (loss) per share
would have been reduced to the pro forma amounts indicated below:
<PAGE> 29
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Net earnings (loss):
As reported $(4,513) $103,388 $86,564
Pro forma (6,551) 101,820 85,019
Basic earnings (loss) per common share:
As reported (0.11) 2.50 2.83
Pro forma (0.16) 2.46 2.78
Diluted earnings (loss) per common share:
As reported (0.11) 2.49 2.81
Pro forma (0.16) 2.45 2.76
==============================================================================
</TABLE>
The fair value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: risk-free
interest rate of 6.1%, 6.5% and 6.5% expected life of six years for all
periods; expected volatility of 44.8%, 36.4% and 35.0%; expected dividends of
zero percent for all periods.
<PAGE> 30
A summary of the Company's Plan activity with respect to stock options is
presented below:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average Fair Value
Shares Option Price of Options Granted
Year ended December 31, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 965,838 $25.32
Granted 177,352 22.56 $11.94
Exercised (12,298) 27.23
Canceled (106,600) 24.36
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,024,292 $24.92
===================================================================================================================
Options exercisable at year-end 516,674 $24.77
===================================================================================================================
Year ended December 31, 1996
Outstanding at beginning of year 914,694 $24.00
Granted 141,300 32.99 $15.54
Exercised (36,333) 24.00
Canceled (53,823) 24.00
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 965,838 $25.32
===================================================================================================================
Options exercisable at year-end 146,733 $24.53
===================================================================================================================
Year ended December 31, 1995
Outstanding at beginning of year -- --
Granted 918,294 $24.00 $11.07
Exercised -- --
Canceled (3,600) 24.00
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 914,694 $24.00
===================================================================================================================
Options exercisable at year-end -- --
===================================================================================================================
</TABLE>
A summary of information about non-qualified stock options outstanding at
December 31, 1997 is presented below:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------------------------
Number Weighted Average Weighted
Range of Outstanding at Remaining Average
Exercise Prices December 31, 1997 Contractual Life Exercise Price
<S> <C> <C> <C>
$24.00 727,042 7.5 years $24.00
32.625-49.500 130,400 8.0 years 33.02
22.500-29.000 166,850 9.0 years 22.57
- --------------------------------------------------------------------------------------------------------------
$22.500-49.500 1,024,292 7.8 years $24.92
==============================================================================================================
<CAPTION>
Options Outstanding
-----------------------------------------
Range of Number Exercisable at Weighted Average
Exercise Prices December 31, 1997 Exercise Price
<S> <C> <C>
$24.00 457,849 $24.00
32.625-49.500 46,625 32.90
22.500-29.000 12,200 22.50
- --------------------------------------------------------------------------------------------------------------
$22.500-49.500 516,674 $24.77
==============================================================================================================
</TABLE>
<PAGE> 31
In the fourth quarter of 1995, restrictions lapsed on 263,056 shares of
restricted stock based upon the market price of the Company's common stock
appreciating 55% over the initial public offering price. This resulted in a
charge to compensation expense of approximately $5.8 million.
(10) Earnings Per Share
A reconciliation of the numerator and denominator of the earnings (loss) per
share calculations is provided for all periods presented. The numerator for
basic and diluted earnings (loss) per share is net earnings (loss) for all
periods presented. The denominator for basic and diluted earnings (loss) per
share for 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares used for
basic earnings (loss) per share 41,345,193 41,308,806 30,612,636
Effect of dilutive securities:
Restricted stock -- 74,579 169,199
Stock options -- 151,027 56,869
- --------------------------------------------------------------------------------------------------------------
Weighted average shares used for
diluted earnings (loss) per share 41,345,193 41,534,412 30,838,704
==============================================================================================================
</TABLE>
Options to purchase 119,300 shares of common stock at $32.63 per share were
outstanding during 1997 but were not included in the computation of diluted
earnings (loss) per share because the options' exercise price was greater
than the average market price of the common shares. The options, which expire
on January 1, 2006, were outstanding at December 31, 1997.
On January 1, 1998, the Company granted options to purchase 821,100 shares of
common stock at $15.25 per share. These options will expire on January 1,
2008. In addition, the Company repurchased 235,900 shares of common stock
during January 1998.
(11) Income Taxes
Earnings (loss) before income taxes, equity in income of joint ventures and
minority interests are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
U.S. $(59,702) $ 57,200 $ 56,598
Foreign 49,372 72,655 62,334
- --------------------------------------------------------------------------------------------------------------
$(10,330) $129,855 $118,932
==============================================================================================================
</TABLE>
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Current Deferred Total
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Year ended December 31, 1997:
U.S. federal $(5,764) $(18,712) $(24,476)
State and local (924) (398) (1,322)
Foreign 25,766 2,801 28,567
- -------------------------------------------------------------------------------------------------------------
$19,078 $(16,309) $ 2,769
=============================================================================================================
Year ended December 31, 1996:
U.S. federal $ 5,425 $ 5,420 $ 10,845
State and local 2,778 (133) 2,645
Foreign 33,756 4,696 38,452
- -------------------------------------------------------------------------------------------------------------
$41,959 $ 9,983 $ 51,942
=============================================================================================================
</TABLE>
<PAGE> 32
<TABLE>
<S> <C> <C> <C>
Year ended December 31, 1995:
U.S. federal $20,117 $ 29 $ 20,146
State and local 2,370 2 2,372
Foreign 27,960 (6,692) 21,268
- -------------------------------------------------------------------------------------------------------------
$50,447 $ (6,661) $ 43,786
=============================================================================================================
</TABLE>
<PAGE> 33
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% in 1997, 1996 and 1995 to earnings (loss)
before income taxes, equity in income of joint ventures and minority
interests as a result of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Income tax at federal statutory rate $(3,616) $45,449 $41,626
Increase (reduction) in income taxes
resulting from:
Change in the balance of the valuation
allowance for deferred tax assets
allocated to income tax expense (4,738) (3,200) (1,811)
Foreign tax differences 13,511 12,323 6,479
Amortization and depreciation
recorded for acquired assets with
different financial reporting and
historical tax bases (507) (636) (1,083)
State income taxes, net
of federal benefit (859) 1,719 1,542
Investment incentives (916) (1,809) (7,903)
Other, net (106) (1,904) 4,936
- --------------------------------------------------------------------------------------------------------------
$ 2,769 $51,942 $43,786
==============================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Deferred tax assets:
Inventory, principally due to additional costs inventoried for
tax purposes and/or financial reserves recorded to state
inventories at net realizable values $ 5,584 $ 3,660
Accruals for expenses currently not deductible for tax purposes 11,115 7,759
Pension, medical and other employee benefits, principally due
to accrual for financial reporting purposes 31,838 29,575
Net operating loss carryforwards 14,175 3,439
Investment tax credit carryforwards 1,456 1,456
Alternative minimum tax credit carryforwards 3,737 --
Foreign tax credit carryforwards 21,407 --
Other 498 371
- ------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 89,810 46,260
Less valuation allowance (11,408) (16,298)
- ------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 78,402 29,962
- ------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment, principally due to differences
in depreciation and capitalized interest (45,480) (16,532)
Other (4,244) (710)
- ------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (49,724) (17,242)
- ------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 28,678 $ 12,720
========================================================================================================================
</TABLE>
<PAGE> 34
Net deferred tax assets were classified in the consolidated balance sheets as
follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Current deferred tax assets, net $13,206 $14,861
Noncurrent deferred tax assets (liabilities), net 15,472 (2,141)
- ------------------------------------------------------------------------------------------------------------------------
$28,678 $12,720
========================================================================================================================
</TABLE>
Current deferred tax assets, net are included in prepaid and other current
assets. Noncurrent deferred tax assets (liabilities), net are included in
other assets or other liabilities.
As of December 31, 1997, the Company has regular tax net operating loss
carryforwards for federal and state income tax purposes of $28,062 and
$47,537, respectively. The Company also has foreign tax credit carryforwards
of $21,407, AMT credit carryforwards of $3,737 and net investment tax credit
carryforwards available of $1,456. Utilization of $7,053 of loss
carryforwards and all of the investment tax credit carryforwards are subject
to limitation under Internal Revenue Code Sections 382 and 383, respectively.
Pursuant to these Internal Revenue Code Sections, the amount of combined loss
and tax credit carryforwards that may be utilized is limited to approximately
$2,000 per year. Under Internal Revenue Service regulations, the investment
tax credit carryforwards are not permitted to reduce income tax expense until
the year 2000.
(12) Commitments and Contingencies
The Company leases buildings, equipment and automobiles under operating leases.
Rental expense under these leases was $23,789, $17,262 and $7,527 in 1997, 1996
and 1995, respectively. Minimum aggregate future rental obligations under leases
having remaining terms of one year or more at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Dollars in thousands
<S> <C>
1998 $26,835
1999 22,443
2000 13,567
2001 4,778
2002 1,717
Thereafter 15,300
- ----------------------------------------------------------
$84,640
==========================================================
</TABLE>
(13) Pension Plans and Other Retirement Benefits
The Company has a noncontributory defined benefit plan covering most U.S.
employees. Benefits for these plans are based on years of service and
qualifying compensation during the final years of employment. The Company
complies with federal funding requirements.
The Company also has a nonqualified plan under the Employee Retirement Income
Security Act of 1974, which provides benefits not otherwise payable under the
above plans due to Internal Revenue Code restrictions. Eligibility for
participation in this plan requires coverage under the above plan and other
specific circumstances.
<PAGE> 35
Net periodic pension cost consists of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Service cost (benefits
earned during the period) $ 8,178 $ 6,449 $ 4,336
Interest cost on projected
benefit obligation 7,937 6,121 4,677
Actual return on plan assets (11,391) (8,663) (8,870)
Net amortization and deferral 6,340 3,858 5,568
- --------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 11,064 $ 7,765 $ 5,711
==============================================================================================================
</TABLE>
The following table summarizes the actuarial present value of benefit
obligations and the funded status of the Company's plans:
<TABLE>
<CAPTION>
Accumulated Benefits Assets Exceed
Exceed Assets Accumulated Benefits
December 31, 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 6,920 $ 7,832 $ 77,991 $55,868
=======================================================================================================================
Accumulated benefit obligation $ 7,698 $ 9,061 $ 90,897 $67,191
=======================================================================================================================
Projected benefit obligation $ 8,457 $ 9,897 $122,223 $92,182
Plan assets at fair value 547 552 93,067 76,747
- -----------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in
excess of plan assets 7,910 9,345 29,156 15,435
Unrecognized net loss from
past experience (4,613) (4,095) (11,598) (7,268)
Unrecognized prior service cost (296) (374) (7,058) 52
Unrecognized net transition asset -- -- 30 35
Additional minimum liability 4,282 3,982 -- --
- -----------------------------------------------------------------------------------------------------------------------
Accrued pension expense $ 7,283 $ 8,858 $ 10,530 $ 8,254
=======================================================================================================================
</TABLE>
The assumed discount rate, rate of increase in compensation levels and the
expected long-term rate of return on assets used in the actuarial
calculations in 1997 were 7.0%, 4.5% and 8.0%, respectively, and in 1996 were
7.5%, 4.5% and 8.0%, respectively. Plan assets consist principally of
insurance contracts, marketable securities including common stocks, bonds and
interest-bearing deposits.
The Company has pension plans for its foreign subsidiaries. The aggregate
pension expense and liability are not material to the consolidated financial
statements.
(14) Other Postretirement and Postemployment Benefit Plans
The Company sponsors a health care plan that provides postretirement medical
benefits to full-time U.S. employees who meet minimum age and service
requirements. The plan is contributory, with retiree contributions adjusted
annually, and contains other cost-sharing features such as deductibles and
coinsurance. The Company's policy is to fund the cost of medical benefits in
amounts determined at the discretion of management.
Net periodic postretirement benefit cost consists of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C>
Service cost $2,441 $2,552 $1,832
</TABLE>
<PAGE> 36
<TABLE>
<S> <C> <C> <C>
Interest cost 3,468 3,435 3,055
Amortization of unrecognized prior service cost (206) -- --
Amortization of (gains) losses (76) 3 (111)
- -----------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $5,627 $5,990 $4,776
=======================================================================================================================
</TABLE>
<PAGE> 37
The following table presents the plan's accrued postretirement benefit cost:
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 6,418 $ 4,852
Fully eligible active plan participants 10,208 10,541
Other active plan participants 22,125 35,664
Unrecognized prior service cost 14,855 922
Unrecognized net gain (loss) relating to changes
in actuarial assumptions 1,233 (1,993)
- --------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $54,839 $49,986
==============================================================================================================
</TABLE>
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was assumed for
1997; the rate was assumed to decrease gradually to 5.0% by the year 2002 and
remain at that level thereafter. For 1996, an 8.5% annual rate of increase
was assumed, decreasing gradually to 5.5% by the year 2001. The health care
cost trend rate assumption may have a significant effect on the amounts
reported. For example, increasing the assumed health care cost trend rates
by 1% in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1997 and 1996 by $138 and $4,702, respectively;
and the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1997 and 1996 by $506 and $708, respectively.
The weighted average discount rates used in determining the accumulated
postretirement benefit obligation were 7.0% and 7.5% at December 31, 1997 and
1996, respectively.
(15) Retirement Savings Plan
The Company sponsors a defined contribution plan under Section 401(k) of the
Internal Revenue Code covering all U.S. salaried and hourly employees with
more than one year of service. Company contributions included in results of
operations totaled $4,138, $3,656 and $3,091 for 1997, 1996 and 1995,
respectively.
(16) Major Customers and Concentration of Credit Risk
The Company sells products to customers in the semiconductor industry which
are located in various geographic regions including the United States,
Europe, Japan and Asia Pacific. The primary customers in this industry are
well capitalized and the concentration of credit risk is considered minimal
due to the Company's customer base. Sales to the Company's largest customer
were 20.0% and 16.8% of net sales in 1997 and 1996, respectively. No other
customer constituted 10% or more of net sales in 1997, 1996 or 1995.
(17) Disclosures About the Fair Value of Financial Instruments
The carrying amount of the Company's cash, accounts receivable, income taxes
receivable, accounts payable and accrued liabilities approximates fair value
due to the short maturity of these instruments. Consequently, such
instruments are not included in the table below which provides information
regarding the estimated fair values of other financial instruments, both on
and off balance sheet, as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C> <C>
Long-term debt $519,995 $522,970 $304,589 $303,441
Unrealized gain (loss) on
foreign currency contracts (3,437) 5,332 (1,998) (1,105)
=========================================================================================================================
</TABLE>
<PAGE> 38
The fair value of each long-term debt facility is based upon the amount of
future cash flows associated with each instrument discounted at the Company's
current borrowing rate for similar debt instruments of comparable terms.
The Company has entered into forward exchange contracts with Huls AG to
manage foreign currency exchange risk relating to current trade sales with
its foreign subsidiaries and current trade sales with its customers
denominated in foreign currencies (primarily Japanese yen and Deutsche
marks), and relating to foreign currency denominated intercompany loans. The
Company believes its hedging arrangements with Huls AG allow for transactions
on a basis that is comparable to terms available from unrelated third party
financial intermediaries.
At December 31, 1997, the Company had forward contracts outstanding with a
total contract value of $82,476. The fair value of the forward contracts was
a net gain to the Company of $5,332, as measured by the amount that would
have been paid to liquidate and repurchase all open forward contracts as of
December 31, 1997. Deferred losses totaled $3,437 and $1,998 at December 31,
1997 and 1996, respectively.
(18) Unaudited Quarterly Financial Information
<TABLE>
<CAPTION>
First Second Third Fourth
1997: Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except share data
<S> <C> <C> <C> <C>
Net sales $222,284 $245,780 $260,026 $258,583
Gross margin 28,069 30,832 36,170 29,688
Earnings (loss) before equity
in income (loss) of joint ventures
and minority interests (1,337) 4,315 (111) (15,966)
Equity in income (loss) of joint
ventures (1,891) (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
1996:
- -----------------------------------------------------------------------------------------------------------------------
Net sales $289,811 $324,331 $303,525 $201,833
Gross margin 79,322 90,833 66,491 13,539
Earnings (loss) before equity in
income of joint ventures
and minority interests 32,230 36,242 19,423 (9,982)
Equity in income of joint ventures 9,015 11,379 1,763 4,559
Minority interests (1,515) (890) 270 894
Net earnings (loss) 39,730 46,731 21,456 (4,529)
Basic earnings (loss) per share 0.96 1.13 0.52 (0.11)
Diluted earnings (loss) per share 0.96 1.12 0.52 (0.11)
Market price:
High 37 1/4 55 40 5/8 28 1/2
Low 26 1/2 36 1/4 20 1/4 16 3/4
</TABLE>
The Company intends to retain all net earnings to fund the development of its
business, and does not anticipate paying dividends in the foreseeable future.
The declaration and payment of future dividends by the Company, if any, will
be at the sole discretion of the Board of Directors.
<PAGE> 39
(19) Geographic Segments
The Company is engaged in one line of business--the design, manufacture and
sale of electronic grade silicon wafers for the semiconductor industry.
Geographic financial information is as follows:
<TABLE>
<CAPTION>
United
States Europe Japan Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C> <C> <C>
Net sales to customers:
1997 $ 672,370 $210,225 $104,078 $ -- $ 986,673
1996 729,950 262,311 127,239 -- 1,119,500
1995 545,652 216,084 125,124 -- 886,860
====================================================================================================================
Transfers between geographic areas:
1997 $ 133,836 $ 64,208 $ 67,983 $ (266,027) $ --
1996 132,119 40,834 50,478 (223,431) --
1995 114,843 34,281 40,673 (189,797) --
=====================================================================================================================
Operating profit (loss):
1997 $ (63,751) $ 62,001 $ (8,663) $ -- $ (10,413)
1996 44,137 70,819 11,236 -- 126,192
1995 65,725 58,052 4,383 -- 128,160
=====================================================================================================================
Identifiable assets:
1997 $2,363,744 $227,194 $276,426 $(1,072,940) $1,794,424
1996 1,802,324 231,214 231,790 (745,856) 1,519,472
1995 1,250,996 221,939 205,366 (576,134) 1,102,167
=====================================================================================================================
</TABLE>
Net sales to customers are based upon the location of the Company's
subsidiary, not the location of the customer. Identifiable assets are the
Company's assets in the respective geographic area.
The United States segment had export sales to the Asia Pacific region
(including Japan) of $117,201, $161,918 and $139,627 for 1997, 1996 and 1995,
respectively.
The Company expects that international sales will continue to represent a
significant percentage of its total sales. In addition, a significant portion
of its manufacturing operations is located outside of the United States.
International sales and operations may be adversely affected by the
imposition of governmental controls, fluctuations in the local or U.S. dollar
currencies, export license requirements, restrictions on the export of
technology, political instability, trade restrictions, changes in tariffs and
difficulties in staffing and managing international operations.
<PAGE> 40
Independent Auditors' Report
The Board of Directors
MEMC Electronic Materials, Inc.:
We have audited the accompanying consolidated balance sheets of MEMC
Electronic Materials, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1997. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MEMC Electronic
Materials, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
St. Louis, Missouri
January 26, 1998
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries are included in Item 8 of Part II of this Report:
Consolidated Statements of Operations -- Years ended
December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets -- December 31, 1997 and 1996.
Consolidated Statements of Cash Flows -- Years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
Valuation and Qualifying Accounts F-_
Financial Statements of POSCO HULS Co., Ltd.:
Independent Auditors' Report of KPMG San Tong Corp. F-_
Balance sheets as of December 31, 1997 and 1996 F-_
Statements of Earnings -- Years ended December 31, 1997 and 1996, and
December 31, 1995 (unaudited) F-_
Statements of Appropriation (Disposition) of Retained Earnings
(Deficit) -- Years ended December 31, 1997 and 1996, and
December 31, 1995 (unaudited) F-_
</TABLE>
<PAGE> 41
<TABLE>
<S> <C>
Statements of Cash Flows -- Years ended December 31, 1997 and 1996, and
December 31, 1995 (unaudited) F-_
Notes to Financial Statements F-_
Financial Statements of Taisil Electronic Materials Corporation:
Independent Auditors' Report of KPMG Certified Public Accountants F-__
Balance sheets as of December 31, 1997, and December 31, 1996 (unaudited) F-__
Statements of Operations -- Years ended December 31, 1997, and
December 31, 1996 and 1995 (unaudited) F-__
Statements of Changes in Stockholders' Equity -- Years ended
December 31, 1997, and December 31, 1996 and 1995 (unaudited) F-__
Statements of Cash Flows -- Years ended December 31, 1997, and
December 31, 1996 and 1995 (unaudited) F-__
Notes to Financial Statements F-__
</TABLE>
3. Exhibits
See the Exhibit Index beginning at page _ of this report. For a listing of
all management contracts and compensatory plans or arrangements required to be
filed as exhibits to this report, see the Exhibits listed under Exhibit nos.
10-n through 10-r and Exhibit nos. 10-aa, 10-oo, 10-pp, 10-xx, 10-yy, 10-ggg,
10-hhh, 10-iii, 10-nnn, 10-ooo, and 10-ppp of the Exhibit Index. The following
Exhibits listed in the Exhibit Index are filed with this report.
23-a Consent of KPMG LLP
23-b Consent of KPMG San Tong Corp.
23-c Consent of KPMG Certified Public Accountants
27 Financial Data Schedule for the Fiscal Year Ended December 31, 1997
(filed electronically with the SEC only)
27-a Restated Financial Data Schedule for the Fiscal Year ended December
31, 1996 (filed electronically with the SEC only)
27-b Restated Financial Data Schedule for the Nine Months ended September
30, 1996 (filed electronically with the SEC only)
27-c Restated Financial Data Schedule for the Six Months ended June 30,
1996 (filed electronically with the SEC only)
4. Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEMC ELECTRONIC MATERIALS, INC.
By: /s/ JAMES M. STOLZE
__________________________________
James M. Stolze
Executive Vice President and Chief
Financial Officer
Date: March 2, 1999
<PAGE> 42
<PAGE> 43
<TABLE>
MEMC ELECTRONIC MATERIALS, INC.
AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts- Deductions- End of
Dollars in thousands of Period Expenses Describe Describe Period
--------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1995 1,680 338 30(FB) (8)(FB) 2,040
Year ended December 31, 1996 2,040 295 0 (36)(FA)(FB) 2,299
Year ended December 31, 1997 2,299 1,700 0 (526)(FA)(FB) 3,473
===== ===== == ==== =====
Inventory reserves:
Year ended December 31, 1995 3,891 3,921(FD) 0 (3,380)(FC) 4,432
Year ended December 31, 1996 4,432 6,576(FD) 0 (4,063)(FC) 6,945
Year ended December 31, 1997 6,945 5,902(FD) 0 (4,984)(FC) 7,863
===== ===== == ===== =====
<FN>
(FA) Currency fluctuations
(FB) Write-off of uncollectible accounts
(FC) Write-off of inventory
(FD) Charged to cost of goods sold
</FN>
</TABLE>
F-2
<PAGE> 44
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
POSCO HULS Co., Ltd.:
We have audited the accompanying balance sheets of POSCO HULS Co., Ltd. as of
December 31, 1997 and 1996, and the related statements of earnings,
appropriation (disposition) of retained earnings (deficit) and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the Auditing Standards, as approved
by the Ministry of Finance and Economy of the Republic of Korea, which are
substantially equivalent to generally accepted auditing standards in the United
States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in note 1(b) to the financial statements, the operations of the
Company have been significantly affected and will continue to be affected for
the foreseeable future by the liquidity crisis and related adverse economic
circumstances in the Republic of Korea.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of POSCO HULS Co., Ltd. as of
December 31, 1997 and 1996, and the results of its operations, the changes in
its retained earnings (deficit), and its cash flows for the years then ended in
conformity with the Financial Accounting Standards, as approved by the Ministry
of Finance and Economy of the Republic of Korea.
The accompanying financial statements for the year ended December 31, 1995 were
not audited by us and, accordingly, we express no opinion or other form of
assurance on the financial statements for the year ended December 31, 1995.
As discussed in note 1(a) to the financial statements, due to a change in
reporting currency effected from January 1, 1997, the accompanying 1996 and 1995
financial statements have been restated to the new reporting currency of United
States dollars.
The Financial Accounting Standards in the Republic of Korea, as approved by the
Ministry of Finance and Economy, vary in certain significant respects from
generally accepted accounting principles in the United States. Application of
generally accepted accounting principles in the United States would have
affected results of operations for each of the years in the three-year period
ended December 31, 1997 and stockholders' equity as of December 31, 1997 and
1996, to the extent summarized in note 18 to the financial statements.
/s/ KPMG San Tong Corp.
Seoul, Korea
January 10, 1998, except as to note 18 which is as of February 9, 1999
F - 3
<PAGE> 45
POSCO HULS CO., LTD.
BALANCE SHEETS
December 31, 1997 and 1996
(In thousands of U.S. dollars, except share data)
<TABLE>
<CAPTION>
Assets 1997 1996
---------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 2) $ 20,217 41,345
Marketable securities 295 3,553
Notes and account receivable, less allowance
for doubtful accounts of $147 in 1997
and $159 in 1996 (note 10) 14,561 15,703
Inventories (note 3) 29,892 48,381
Prepaid expenses and other current assets (notes 4 and 10) 3,713 5,757
---------------- ---------------
Total current assets 68,678 114,739
---------------- ---------------
Investments and other assets (note 6) 7,795 13,298
Fixed assets, less accumulated
depreciation (notes 5, 7 and 8) 113,437 246,837
Deferred foreign currency translation loss 44,046 -
---------------- ---------------
$ 233,956 374,874
================ ===============
Liabilities and Stockholders' Equity
Current liabilities:
Notes and accounts payable (note 10) 3,141 1,790
Short-term borrowings (note 5) 8,834 2,627
Accounts payable - other (note 10) 7,083 10,275
Current portion of long - term liabilities
(notes 5, 8, 12 and 13) 39,745 48,150
Accrued expenses and other current liabilities 2,462 35,362
---------------- ---------------
Total current liabilities 61,265 98,204
Retirement and severance benefits (note 11) 3,873 4,968
Bonds issued (note 12) - 23,323
Long-term debt, less current portion (notes 5 and 13) 77,981 76,518
Long-term obligations under financing leases (note 8) 39,180 47,047
---------------- ---------------
Total liabilities 182,299 250,060
---------------- ---------------
Stockholders' equity (notes 10 and 14):
</TABLE>
F-4
<PAGE> 46
<TABLE>
<S> <C> <C>
Common stock of $2.95 par value
Authorized - 20,000,000 shares
Issued and outstanding -
17,200,000 shares in 1997 and 1996 112,175 112,175
Appropriated retained earnings (note 14) 18,403 17,582
Unappropriated retained earnings 11,898 6,749
Cumulative translation adjustment (90,819) (11,692)
----------------- ----------------
Total stockholders' equity 51,657 124,814
---------------- ---------------
Commitments and contingencies (note 16)
$ 233,956 374,874
================ ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 47
POSCO HULS CO., LTD.
STATEMENTS OF EARNINGS
Years ended December 31, 1997, 1996 and 1995
(In thousands of U.S. dollars, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ---------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Sales (note 10) $ 215,938 275,096 180,461
Cost of goods sold (note 10) 169,388 176,833 133,354
--------------- ---------------- ---------------
Gross profit 46,550 98,263 47,107
Selling, general and administrative expenses 10,143 10,719 6,285
--------------- ---------------- ---------------
Operating income 36,407 87,544 40,822
--------------- ---------------- ---------------
Other income (deductions):
Interest income 5,634 4,910 3,205
Interest expense (16,894) (18,213) (18,836)
Foreign currency translation
and exchange gain (loss), net 5,887 (9,230) 2,502
Amortization of deferred foreign
currency translation loss (15,139) - (5,419)
Loss of inventory valuation (3,953) -
Other, net (4,640) (2,215) 2,776
---------------- ----------------- ---------------
(29,105) (24,748) (15,772)
---------------- ----------------- ----------------
Earnings before income taxes 7,302 62,796 25,050
Income taxes (note 15) 1,332 5,771 -
--------------- ---------------- ---------------
Net earnings $ 5,970 57,025 25,050
=============== ================ ===============
Earnings per share of common
stock in U.S dollars (note 17) $ 0.35 3.32 1.49
=============== ================ ===============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 48
POSCO HULS CO., LTD.
STATEMENTS OF APPROPRIATION (DISPOSITION) OF RETAINED EARNINGS (DEFICIT)
Years ended December 31, 1997, 1996 and 1995
(In thousands of U.S. dollars)
Date of Appropriation for 1997 : March 24, 1998
Date of Appropriation for 1996 : February 8, 1997
Date of Disposition for 1995 : March 20, 1996
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Unappropriated (undisposed) retained earnings (deficit):
Balance at beginning of year $ 6,749 (1,288) (26,338)
Net earnings for the year 5,970 57,025 25,050
---------------- ---------------- ---------------
12,719 55,737 (1,288)
---------------- ---------------- ---------------
Appropriation (disposition) of unappopriated
retained earnings (deficit):
Legal reserve (note 14) - 3,141 -
Reserve for business
rationalization (note 14) 821 5,523 -
Cash dividends - 31,406 -
Reserve for technology development (note 14) - 2,010 -
Reserve for export loss (note 14) - 5,150 -
Reserve for overseas
market development (note 14) - 1,758 -
---------------- ---------------- ---------------
821 48,988 -
---------------- ---------------- ---------------
Balance of unappropriated (undisposed)
retained earnings (deficit)
after (proposed) appropriation (disposition) $ 11,898 6,749 (1,288)
================ ================ ================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 49
POSCO HULS CO., LTD.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,970 57,025 25,050
Adjustments to reconcile net earnings to cash
provided by operating activities:
Foreign translation loss (gain), net 658 11,631 (1,474)
Loss on disposition of fixed assets 486 2,392 142
Depreciation and amortization 69,574 59,723 46,128
Provision for retirement and severance benefits 3,039 3,103 1,427
Contribution to National Pension Fund (287) (223) (133)
Payment for retirement and severance benefits (352) (304) (311)
Increase in notes and accounts receivable (8,164) (7,927) (3,737)
Decrease (increase) in prepaid expenses and
other current assets (1,232) 1,202 (5,232)
Increase in inventories (9,965) (27,646) (9,184)
Increase (decrease) in trade notes and accounts payable 3,273 (639) 404
Increase (decrease) in accrued expenses and
other current liabilities (685) 1,914 145
Other, net 118 579 41
---------------- -------------- ---------------
Net cash provided by operating activities 62,433 100,830 53,266
---------------- -------------- ---------------
Cash flows from investing activities:
Additions to fixed assets (39,020) (65,032) (65,383)
Purchase of marketable securities - (3,714) -
Proceeds from sale of fixed assets 380 30 10
Proceeds from disposition of marketable securities 2,518 232 1,297
Increase in investments, other assets and deferred charges (2,159) (7,499) (2,789)
----------------- --------------- ----------------
Net cash used in investing activities (38,281) (75,983) (66,865)
----------------- --------------- ----------------
Cash flows from financing activities:
Proceeds from bank overdraft and short-term borrowings 14,427 20,031 58,156
</TABLE>
F-7
<PAGE> 50
<TABLE>
<S> <C> <C> <C>
Repayments of bank overdraft and short-term borrowings (2,245) (18,004) (62,915)
Proceeds from issuance of bonds - - 37,907
Proceeds from long-term debt 26,356 36,922 35,281
Repayment of long-term debt (41,138) (48,873) (76,637)
Proceeds from issuance of common stock - - 38,901
Payment of dividends (28,156) - -
Increase (decrease) in accounts payable - other 3,123 (6,679) 12,928
---------------- --------------- ---------------
Net cash provided by (used in) financing activities (27,633) (16,603) 43,621
----------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (3,481) 8,244 30,022
Effect of changes in exchange rates (17,647) (3,357) (19)
Cash and cash equivalents at beginning of year 41,345 36,458 6,455
---------------- -------------- ---------------
Cash and cash equivalents at end of year $ 20,217 41,345 36,458
================ ============== ===============
</TABLE>
F-8
<PAGE> 51
POSCO HULS CO., LTD.
STATEMENTS OF CASH FLOWS, CONTINUED
Years ended December 31, 1997, 1996 and 1995
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 1,772 3,233 253
Interest 2,059 18,487 18,768
================ ============== ===============
Supplemental schedule of non-cash investing and financing activities:
Capital lease obligations incurred and additions to
leased equipment $ - 15,712 18,948
================ ============== ===============
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE> 52
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies
(a) Basis of Presenting Financial Statements
The accounting records of Posco Huls Co., Ltd. (the "Company") are
expressed in Korean Won and maintained in accordance with the
financial accounting standards of the Republic of Korea, which may
differ in some material respects from international accounting
standards or the accounting principles and standards of the county of
the reader. For the convenience of the reader, the statutory
financial statements have been condensed, restructured, and
translated into English, with certain expanded descriptions. Certain
information included in the statutory financial statements, not
required for a fair presentation of the Company's financial position
or results of operations, is not presented in the accompanying
financial statements.
During 1997, the Company determined that its financial position and
results of operations could be presented with more relevance if
presented in U.S. dollars rather than Korean Won. Accordingly, the
accompanying 1996 and 1995 financial statements have been restated
into the new reporting currency of U.S. dollars. The U.S. dollar
amounts are determined by translating the Korean Won amount of assets
and liabilities into U.S. dollars at the basic exchange rate as of
the balance sheet date (W1,695.80 to US$1 (except for amounts
denominated in foreign currencies which are translated at W1,415.20
to US$1 (see note 1(k))) and W844.20 to US$1 as of December 31, 1997
and 1996, respectively), the amount of common stock at the basic
exchange rate on the date of issuance, and income and expense items
at the average basic exchange rate for the year (W988 to US$1, W807
to US$1 and W771 to US$1 for the years ended December 31, 1997, 1996
and 1995, respectively). The effect of changes in exchange rates are
reflected as "cumulative translation adjustment" within stockholders'
equity.
(b) Economic Environment
In late 1997, the Republic of Korea began to undergo a liquidity
crisis resulting in significant adverse economic circumstances and
significant depreciation in the value of Korean Won. In order to
address this situation, the Government of the Republic of Korea
sought assistance from the International Monetary Fund and announced
a comprehensive policy package intended to address the structural
weaknesses in the Korean economy and financial sector. While the
reform policies are intended to alleviate the economic difficulties
and improve the economy over time, the immediate effects could
include slower economic growth, a reduction in the availability of
credit, an increase in interest rates, an increase in taxes, an
increased rate of inflation, significant volatility in the value of
the Korean Won, an increase in the number of bankruptcies of Korean
entities, and unrest resulting from a significant increase in
unemployment. These conditions and similar conditions in other
countries in the Asia Pacific region could have a material adverse
effect on the operations of the Company. The accompanying financial
statements reflect management's current assessment of the possible
impact of this economic situation on the financial position of the
Company. Actual results could differ from management's current
assessments and such differences could be material. In addition, the
effect on the Company's financial position of future developments and
access to further financial information concerning the Company's
customers, suppliers, financiers and others and their ability to
continue to transact with the Company cannot presently be determined.
The financial statements therefore may not include all adjustments
that might ultimately result from these adverse economic conditions.
(c) Marketable Securities
Marketable securities, which are certificates of deposit, are stated
at cost plus incidental expenses, determined by the weighted average
method.
F-10
<PAGE> 53
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies, Continued
(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:
Useful lives
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
(f) Accounting for Leases
The Company accounts for leases as operating or financing leases in
accordance with the Accounting Standards for Leases.
Under the operating lease method, lease expenses are charged to
operations as actual payments are made or due. Prepaid lease expense
relating to operating leases is amortized over the lease term of the
related lease.
Under the financing lease method, the principal amount of leased
equipment, which is the present value of total minimum lease
payments, is recorded as a leased asset and a long-term obligation
under financing leases. The leased assets are amortized over the term
of the related lease. Interest expense on long-term obligations under
financing leases is recorded when incurred.
(g) Deferred Charges
Bond issue costs and research and development costs are expensed as
incurred.
(h) Discount on Bonds Issued
Discount on bonds issued is amortized over a period from the date of
issue to the maturity of the related bonds using the straight-line
method.
F-11
<PAGE> 54
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies, Continued
(i) Retirement and Severance Benefits
Employees who have been with the Company for more than one year are
entitled to lump-sum payments based on current rates of pay and
length of service when they leave the Company. A portion of the
liability is covered by an insurance policy. Expected proceeds from
this insurance are presented with other assets. The Company's
estimated liability under the plan has been accrued in the
accompanying financial statements at the amount which would be
payable if all employees left the Company at the balance sheet date.
Under the National Pension Scheme of Korea, the Company is required
to transfer a certain portion of retirement allowances of employees
to the National Pension Fund. The amount transferred will reduce the
retirement and severance benefit amount payable to the employees when
they leave the Company and is reflected in the accompanying financial
statements.
(j) Revenue Recognition
Local sales are recognized when goods are delivered and inspection by
the customer is completed, while export sales are recognized as of
the shipment date.
(k) Foreign Currency Translation
Monetary assets and liabilities denominated in foreign currencies are
translated into Korean Won at the balance sheet date. In accordance
with a change in financial accounting standards in the Republic of
Korea in 1997, net losses on long-term foreign currency denominated
monetary assets and liabilities and the current portion of long-term
debt denominated in foreign currencies are permitted to be recorded
as a deferred foreign currency translation loss and amortized over
the remaining repayment period of the respective assets and
liabilities. In 1996, such gains or losses were recorded in current
results of operations. The 1996 financial statements are not affected
by such change in financial accounting standards.
As of December 31, 1997 and 1996, monetary assets and liabilities
denominated in a foreign currency are translated into Korean Won
W1,415.20 to US$1 and W844.2 to US$1, respectively, the rates of
exchange permitted under the financial accounting standards in the
Republic of Korea. On December 31, 1997, the basic rate of exchange
was W1,695 to US$1. Had the basic rate of exchange been used to
translate foreign currency assets and liabilities as of December 31,
1997, the net earnings reported by the Company would be reduced by
$5,606 for the year ended December 31, 1997.
Subsequent to December 31, 1997, the rate of exchange between the
Korean Won and the US dollar has remained extremely volatile.
Accordingly, the Korean Won amounts at which monetary assets and
liabilities denominated in a foreign currency are reflected in the
accompanying financial statements may vary significantly from the
amounts that would be reported were such items translated at a later
date. Due to the volatility in the exchange rate, it is not practical
to estimate the effect changes in the value of the Korean Won would
have on the accompanying financial statements.
(l) Income Taxes
Provision is not made in the accounts to reflect the future tax
benefit (expense) on the interperiod allocation of income taxes
resulting from certain income and expense items being treated
differently for financial reporting purposes than tax computation
purposes.
F-12
<PAGE> 55
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies, Continued
(m) Earnings per Share
Earnings per common share is calculated by dividing net earnings by
the weighted average number of shares of common stock outstanding
during each period.
(n) Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers
all highly liquid marketable securities with a maturity of three
months or less to be cash equivalents.
(o) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expense during the period. Actual results could differ
from those estimates.
(2) Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Cash on hand $ 1 3
Checking accounts 3 5
Corporate savings deposits 1 2
Foreign currency deposits 577 5
Time deposits 13,858 18,231
Installment time deposits 620 1,768
Cash management account 5,157 21,331
--------------- --------------
$ 20,217 41,345
=============== ==============
</TABLE>
(3) Inventories
Inventories at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Finished goods $ 13,394 16,989
Goods - in - progress 4,753 10,066
Raw materials 1,410 864
Sub materials 3,412 9,290
Supplies 4,351 7,502
Materials - in - transit 2,572 3,670
--------------- --------------
$ 29,892 48,381
=============== ==============
</TABLE>
F-13
<PAGE> 56
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(4) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at December 31, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Other receivables $ 260 263
Accrued income 1,542 1,291
Prepayments 57 74
Income taxes refundable 363 -
Value added tax refundable 813 906
Prepaid expenses 635 1,329
Import guarantee deposit 43 1,894
--------------- --------------
$ 3,713 5,757
=============== ==============
</TABLE>
(5) Pledged Assets and Guarantees Provided by Others
(a) The following assets are pledged as collateral for short-term
borrowings and long-term debt at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Assets 1997 1996
--------------- --------------
<S> <C> <C>
Land $ 5,046 10,134
Buildings 23,524 43,301
Machinery and equipment 59,423 153,243
--------------- --------------
$ 87,993 206,678
=============== ==============
Obligations the collateral is pledged to secure:
Short-term borrowings 8,641 2,627
Long-term debt, including current portion 76,192 108,962
--------------- --------------
$ 84,833 111,589
=============== ==============
</TABLE>
(b) In addition, to secure borrowings of the Company, its shareholders
have provided guarantees as follows:
<TABLE>
<CAPTION>
Guarantors 1997 1996
--------------- --------------
<S> <C> <C>
Pohang Iron and Steel
Company Ltd. (POSCO) $ - 14,029
MEMC Electronic Materials,
Inc. (MEMC) 3,743 6,905
--------------- --------------
$ 3,743 20,934
=============== ==============
</TABLE>
F-14
<PAGE> 57
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(6) Investments and Other Assets
Investments and other assets at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Long-term deposits $ 951 4,264
Investment securities - 62
Leasehold deposits 262 310
Rental deposit 96 117
Deposits for retirement and severance benefits 1,742 2,440
Loans to employees 4,096 5,014
Restricted cash and deposits 9 16
Telephone rights 37 73
Membership rights 475 866
Long-term prepaid expenses 127 136
--------------- --------------
$ 7,795 13,298
=============== ==============
</TABLE>
(7) Fixed Assets
Fixed assets at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997
Accumulated
-----------------------------------------------------
Cost depreciation Net
---------------- ------------ -------------
<S> <C> <C> <C>
Land $ 5,046 - 5,046
Buildings 25,269 1,745 23,524
Building - auxiliary facilities 4,402 994 3,408
Structures 4,409 681 3,728
Machinery and equipment 138,998 79,575 59,423
Vehicles 385 207 178
Tools and equipment 1,564 1,022 542
Furniture and fixtures 6,864 3,589 3,275
Machinery - in - transit 4,555 - 4,555
Construction - in - progress 9,361 - 9,361
Industrial water usage rights 397 - 397
---------------- --------------- ---------------
$ 201,250 87,813 113,437
================ =============== ===============
</TABLE>
F-15
<PAGE> 58
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(7) Fixed Assets, Continued
<TABLE>
<CAPTION>
1996
Accumulated
-----------------------------------------------------
Cost depreciation Net
---------------- ------------ -------------
<S> <C> <C> <C>
Land $ 10,134 - 10,134
Buildings 45,681 2,380 43,301
Building - auxiliary facilities 8,843 1,538 7,305
Structures 7,740 985 6,755
Machinery and equipment 257,662 104,420 153,242
Vehicles 654 266 388
Tools and equipment 2,888 1,430 1,458
Furniture and fixtures 10,147 4,676 5,471
Machinery - in - transit 2,702 - 2,702
Construction - in - progress 15,184 - 15,184
Industrial water usage rights 897 - 897
---------------- --------------- ---------------
$ 362,532 115,695 246,837
================ =============== ===============
</TABLE>
Property, plant and equipment, and inventories were insured against fire
and other damage up to an amount of $315,734 and $774,873 at December 31,
1997 and 1996, respectively.
(8) Financing Leases
The Company has leased silicon wafer manufacturing and other facilities
from Hanmi Leasing Co., Ltd. and Korea Development Leasing Co., Ltd. under
financing lease contracts. The following is a schedule of minimum future
payments on financing leases as of December 31, 1997:
<TABLE>
<S> <C> <C>
1998 $ 9,884
1999 12,849
2000 12,849
2001 9,281
2002 and after 10,465
---------------
55,328
Less portion representing interest 9,465
Less current portion 6,683
Long - term obligations under financing leases $ 39,180
===============
</TABLE>
F-16
<PAGE> 59
The following is a summary of the acquisition cost of leased assets and
accumulated depreciation thereon at December 31, 1997 and 1996 which are
included in machinery and equipment:
<TABLE>
<CAPTION>
Description 1997 1996
----------- --------------- --------------
<S> <C> <C>
Leased assets at cost (including other incidental cost) $ 28,782 57,430
Accumulated depreciation 18,038 23,356
--------------- --------------
$ 10,744 34,074
=============== ==============
</TABLE>
F-17
<PAGE> 60
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(9) Operating Leases
The Company leases certain equipment and machinery from Korea Industrial
Leasing Co., Ltd. and accounts for each of the leases as an operating
lease. The following is a summary of minimum lease payments under
operating leases:
1998 $ 103
===============
Operating lease expenses of $459, $1,433 and $1,561 were charged to
operations in the years ended December 31, 1997, 1996 and 1995,
respectively.
(10) Stockholders and Related Party Transactions
The Company was established under the Foreign Capital Inducement Law in
December, 1991 as a joint venture company to manufacture and sell silicon
wafers and related products. Dividends are paid to shareholders in Korean
Won. The shareholders of the Company and their ownership percentages at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Stockholders Number of shares Ownership percentage
------------ ---------------- --------------------
<S> <C> <C>
Pohang Iron and Steel Co., Ltd. (POSCO) 6,880,000 40%
MEMC Electronic Materials, Inc. (MEMC) 6,880,000 40%
Samsung Electronics Co., Ltd. (SEC) 3,440,000 20%
-------------- -----
17,200,000 100%
============== =====
</TABLE>
The following are major balances and transactions with stockholders at and
for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
(Unaudited)
<S> <C> <C>
MEMC:
Notes and accounts receivable $ 3,257 1,757
Prepaid expenses and other current assets 217 93
Notes and accounts payable 49 324
Accounts payable - other 1,141 2,495
Sales 30,168 88,765 20,542
Purchases 6,914 8,770 17,565
Royalty payments 6,329 6,392 5,893
SEC:
Notes and accounts receivable $ 2,843 5,688
Sales 135,298 142,348 126,390
</TABLE>
F-18
<PAGE> 61
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(11) Retirement and Severance Benefits
Details of changes in retirement and severance benefits for the years
ended December 31, 1997, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Beginning balance $ 5,433 3,033 1,778
Provision for the year 3,039 3,103 1,472
Payments (352) (304) (311)
Effect of changes in exchange rates (3,849) (399) 94
----------------- ----------------- ---------------
Ending balance 4,271 5,433 3,033
Contribution to National Pension Fund 398 465 304
---------------- ---------------- ---------------
$ 3,873 4,968 2,729
================ ================ ===============
</TABLE>
(12) Bonds Issued
Bonds issued at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Interest
Series Maturity per annum 1997 1996 Guarantor
--------- -------- --------- ------------- -------------- ----------------------
<S> <C> <C> <C> <C> <C>
#6 1998 13.0% $ 5,897 11,846 Samsung Securities
#7 1998 13.0% 5,897 11,846 LG Securities
#8 1997 11.5% - 11,846 Unsecured (*)
#9 1998 13.0% 7,666 - Unsecured (*)
19,460 35,538
Less current portion 19,427 11,846
Less unamortized discount 33 369
-------------- --------------
$ - 23,323
============== ==============
</TABLE>
(*) Private acceptance by Korea Long - term Credit Bank.
F-19
<PAGE> 62
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(13) Long-term Debt
Long-term debt at December 31, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
Interest
per annum Final maturity 1997 1996
--------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Korean Won loans:
Technology facility loan Floating rate 1996-1997 $ - 1,333
General facility loan Floating rate 1996-1997 - 1,184
High technology facility loan Floating rate 1996-1997 - 7,700
Information Communication
Supporting Fund 6.5% 1996-1999 317 1,002
--------------- ---------------
317 11,219
--------------- ---------------
Foreign currency loans:
Facility loan Floating rate 1997 - 3,812
Facility loan 3LIBOR*+1.2% 1998 2,000 4,000
Facility loan 6LIBOR*+0.7% 2003 10,500 5,929
Facility loan 6LIBOR*+1.0% 2003 3,562 294
Facility loan 3LIBOR*+2% 1999 984 1,640
Facility loan 3LIBOR*+1.5% 1999 759 1,265
Facility loan 6LIBOR*+0.6% 2002 4,734 32,698
Facility loan 6LIBOR*+1.3% 2003 6,694 7,330
Facility loan 6LIBOR*+0.6% 2003 27,307 2,053
Facility loan 6LIBOR*+0.6% 2003 2,459 290
Operating loan 6LIBOR*+1.6% 2003 1,900 -
Operating loan 6LIBOR*+0.7% 2000 12,700 12,700
Operating loan 6LIBOR*+0.8% 2001 9,700 3,500
Operating loan 6LIBOR*+0.7% 1997 - 14,200
Operating loan 6LIBOR*+0.7% 1999 3,040 3,040
Operating loan 6LIBOR*+0.8% 2001 4,960 4,960
--------------- ---------------
91,299 97,711
--------------- ---------------
Total long - term debt 91,616 108,930
Less current portion 13,635 32,412
--------------- ---------------
$ 77,981 76,518
=============== ===============
</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, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 13,635
1999 15,102
2000 24,017
2001 25,977
2002 and after 12,885
---------------
$ 91,616
===============
</TABLE>
F-20
<PAGE> 63
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(14) Appropriated Retained Earnings
Appropriated retained earnings as of December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Legal reserve $ 3,141 3,141
Reserve for business rationalization 6,344 5,523
Reserve for technology development 2,010 2,010
Reserve for export loss 5,150 5,150
Reserve for overseas market development 1,758 1,758
---------------- ---------------
$ 18,403 17,582
================ ===============
</TABLE>
Through December 31, 1996, appropriations of retained earnings for the
year, which are determined by the resolution of shareholders at the
beginning of the following year, are not reflected in the current years'
financial statements. However, under revised financial accounting
standards, such appropriations are to be reflected in financial
statements of the year to which it relates rather than in the year of
appropriation. Retained earnings as of December 31, 1996 have been
reclassified for comparative purposes.
The Korean Commercial Code requires the Company to appropriate as legal
reserve an amount equal to at least 10% of cash dividends for each
accounting period until the reserve equals 50% of stated capital. This
legal reserve may be used to reduce a deficit or it may be transferred
to common stock as a stock dividend.
Under the Tax Exemption and Reduction Control Law, the Company is
allowed to make certain deductions from corporate income taxes. The
Company is, however, required to appropriate from retained earnings the
amount of the tax benefit obtained and transfer such amount into a
reserve for business rationalization. This legal reserve may be used to
reduce a deficit or may be transferred to common stock as a stock
dividend.
Under the Tax Exemption and Reduction Control Law, the Company is
allowed to make certain deductions from taxable income and set up
reserves for technology development, reserve for export loss and reserve
for overseas market development by appropriating retained earnings. The
unused portion of the reserves is generally added back to taxable income
over three to four years after a certain grace period. These voluntary
reserves may be restored to unappropriated retained earnings by a future
stockholders' resolution.
(15) Income Taxes
The Company is subject to a number of taxes based upon taxable earnings
which result in the following normal tax rates:
<TABLE>
<CAPTION>
Taxable earnings Rates
---------------- ----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Up to 100,000 thousand 17.6% 17.6% 19.8%
Over 100,000 thousand up to ?500,000 thousand 30.8% 30.8% 33.0%
Over 500,000 thousand 30.8% 30.8% 35.0%
</TABLE>
F-21
<PAGE> 64
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.
F-22
<PAGE> 65
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(15) Income Taxes, Continued
A reconciliation between net earnings before income taxes and taxable
income (tax loss carryforward) for the years ended December 31, 1997,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Net earnings before income taxes $ 7,302 62,796 25,050
Unrealized exchange loss, net (585) (50) (150)
Accrued interest income, net (1,534) (483) (255)
Loss on inventory valuation 3,312 - -
Entertainment expense over tax limit 205 106 190
Reserve for tax purpose - (8,790) -
Income deduction for foreign capital increase (67) (1,078) -
Others, net 163 215 -
---------------- ---------------- ---------------
8,796 52,716 24,835
Utilization of tax loss carryforward - (2,444) (24,835)
---------------- ----------------- ----------------
Taxable income 8,796 50,272 -
================ ================ ===============
Income taxes payable on taxable income 2,962 15,291 -
Tax exemption tax under FCIL (804) (3,135) -
Investment tax credit (826) (6,385) -
----------------- ----------------- ---------------
Income taxes payable $ 1,332 5,771 -
================ ================ ===============
</TABLE>
(16) Commitments and Contingencies
(a) As of December 31, 1997, the Company has provided 8 blank checks and
10 blank notes in connection with various contracts.
(b) As of December 31, 1997, the Company has entered into bank overdraft
agreements for borrowing up to $8,256 with five banks and has also
entered into borrowing arrangements with three short-term financing
companies.
(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.
F-23
<PAGE> 66
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(17) Earnings Per Share
Earnings per share for the years ended December 31, 1997, 1996 and 1995
are calculated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Net earnings $ 5,970 57,025 25,050
Weighted average number of
shares of common stock 17,200,000 17,200,000 16,756,164
---------------- ---------------- ---------------
Earnings per share in U.S. dollars $ 0.35 3.32 1.49
================ ================ ===============
</TABLE>
(18) Reconciliation to United States Generally Accepted Accounting Principles
The accompanying financial statements are prepared in accordance with
Financial Accounting Standards in the Republic of Korea (Korean GAAP),
which differ in certain significant respects from generally accepted
accounting principles in the United States (U.S. GAAP). The significant
differences are described below. Other differences do not have a
significant effect on either consolidated net earnings or stockholders'
equity.
The estimated effects of the significant adjustments to net earnings and
stockholders' equity which would be required if U.S. GAAP were applied
instead of Korean GAAP are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Net earnings - Korean GAAP $ 5,970 57,025 25,050
Adjustments:
Pre-operating costs - - 4,937
Start-up costs 2,383 3,184 1,582
Capital leases 39 196 (17)
Inventories 1,044 (2,443) (925)
Depreciation in relation to useful life
and functional currency differences 11,294 19,837 12,439
Depreciation on capitalized interest 1,273 2,684 270
Bond issue costs (18) (109) 66
Amortization of deferred foreign
currency translation loss 15,139 - 5,419
Foreign currency translation gain (loss), net (20,305) 10,733 (7,646)
Deferred income taxes 10,915 (6,080) (298)
Others 119 287 -
---------------- ---------------- ---------------
Total adjustments 21,883 28,289 15,827
---------------- ---------------- ---------------
</TABLE>
F-24
<PAGE> 67
<TABLE>
<S> <C> <C> <C>
Net earnings - U.S. GAAP $ 27,853 85,314 40,877
================ ================ ===============
Basic earnings per share - U.S. GAAP $ 1.62 4.96 2.44
================ ================ ===============
</TABLE>
F-25
<PAGE> 68
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(18) Reconciliation to United States Generally Accepted Accounting Principles,
Continued
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Stockholders' equity - Korean GAAP $ 51,657 124,814
Adjustments:
Start-up costs (1,465) (3,847)
Inventories (2,468) (3,512)
Fixed assets:
Depreciation in relation to useful life 43,570 32,276
Capitalized interest and related depreciation 2,696 1,423
Functional currency impact,
principally on fixed assets and inventories 141,556 24,149
Deferred foreign currency translation loss (44,046) -
Deferred income taxes 4,824 (6,091)
Others 66 (675)
-------------- ---------------
Total adjustments 144,733 43,723
-------------- --------------
Stockholders' equity - U.S. GAAP $ 196,390 168,537
============== ==============
</TABLE>
The condensed balance sheet of the Company as of December 31, 1997 and
1996 under U.S. GAAP is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Current assets
Inventories $ 37,518 45,484
Other current assets 39,134 67,017
-------------- ----------------
Total current assets 76,652 112,501
Fixed assets 421,551 389,005
Less accumulated depreciation 132,051 89,625
-------------- ----------------
289,500 299,380
Investments and other assets 12,612 14,406
-------------- ----------------
$ 378,764 426,287
============== ================
Current liabilities 61,340 99,032
Deferred tax liabilities - 6,809
Other long-term liabilities 121,034 151,909
-------------- ----------------
Total liabilities 182,374 257,750
Stockholders' equity:
Common stock 112,175 112,175
Retained earnings 84,215 56,362
-------------- ----------------
Total stockholders' equity 196,390 168,537
-------------- ----------------
$ 378,764 426,287
============== ================
</TABLE>
F-26
<PAGE> 69
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(18) Reconciliation to United States Generally Accepted Accounting Principles,
Continued
The tax effects of temporary differences that resulted in significant
portions of the deferred tax assets liabilities at December 31, 1997 and
1996 computed under U.S. GAAP, and a description of the financial
statement items that created these differences follow:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Inventories $ 766 600
Start - up costs 139 667
Capital leases 2 7
Foreign currency translation loss 10,131 -
Others - 136
---------------- ----------------
Total deferred tax assets 11,038 1,410
---------------- ----------------
Deferred tax liabilities:
Depreciation in relation to useful life difference (4,897) (5,607)
Depreciation on capitalized interest (285) (246)
Reserves for tax purpose (850) (1,556)
Accrued income (181) (88)
Bond issue costs (1) (4)
---------------- ----------------
Total deferred tax liabilities (6,214) (7,501)
---------------- ----------------
Net deferred tax asset (liabilities) $ 4,824 (6,091)
================ ================
</TABLE>
(a) Deferred Income Taxes
Under Korean GAAP, a provision is not made in the accounts to reflect
the future tax effects resulting from certain income and expense
items being treated differently for financial reporting purposes and
tax computation purposes.
However, U.S. GAAP requires the recognition of deferred tax assets
and liabilities created by temporary differences between the
financial statement and tax bases of assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The tax rate used to calculate deferred tax assets and liabilities
was changed from 18.5% in 1996 to 20.3% in 1997 to reflect the normal
corporation tax rate and exemptions statutorily available under FCIL.
The effect of this increase in the effective tax rate was to increase
the net deferred tax asset and increase net earnings by $5,401 in
1997.
(b) Pre-operating and Start-up Costs
Certain preoperating and start-up costs are deferred for Korean GAAP
and amortized in equal annual amounts over 5 years from 1993. These
costs would be expensed as incurred under U.S. GAAP.
F-27
<PAGE> 70
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(In thousands of U.S. dollars)
(18) Reconciliation to United States Generally Accepted Accounting Principles,
Continued
(c) Capital Leases
Under Korean GAAP, the Company has leased certain equipment and
machinery and accounts for such leases as operating leases. However,
under U.S. GAAP those leases would be classified as capital leases.
Under U.S. GAAP, equipment under capital lease is recorded as an
asset and a liability is recorded for the present value of minimum
lease payments at the inception of the lease. This equipment is
depreciated over the estimated useful life of the asset.
(d) Bond Issue Costs
The Company charged bond issue costs to current income as incurred.
However, under U.S. GAAP, those bond issues costs are amortized over
the term of the related bonds.
(e) Useful Life of Machinery and Equipment
In 1995, the Company changed the estimated useful life of certain
machinery to 4 years from 6 years. For U.S. GAAP purposes, the
Company continues to depreciate the machinery and equipment over its
estimated useful life of 6 years.
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, 1997 and 1996.
(f) 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
depreciation on capitalized interest.
(g) Depreciation on Capitalized Interest
In 1994, the Company recorded a prior year adjustment under Korean
GAAP for interest that should have been capitalized to construction -
in - progress in 1993 and is being depreciated over the useful life
of the related fixed assets. For U.S. GAAP purpose, the interest
amount was charged to earnings in 1993.
(h) Foreign Currency Translation
In accordance with a change in financial accounting standards in the
Republic of Korea in 1997, net losses on long-term foreign currency
denominated monetary assets and liabilities and the current portion
of long-term debt denominated in foreign currencies are recorded as a
deferred foreign currency translation loss and amortized over the
remaining repayment period of the respective assets and liabilities.
In 1996, such losses were expensed as incurred. However, for U.S.
GAAP purposes, all such foreign currency translation losses are
expensed as incurred in all periods.
F-28
<PAGE> 71
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(In thousands of U.S. dollars)
(18) Reconciliation to United States Generally Accepted Accounting Principles,
Continued
(i) 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.
(j) Restatement of U.S. GAAP
As discussed in note 18(i), the Company reports its financial
position and results of operations using the U.S. dollar as the
functional currency under U.S. GAAP. Previously 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 earnings Stockholders' equity
------------ --------------------
<S> <C> <C>
For the year ended December 31, 1995 (unaudited):
As previously reported $ 43,567
Effect of adjustment (2,690)
---------------
As restated $ 40,877
===============
As of and for the year ended December 31, 1996:
As previously reported $ 73,165 143,898
Effect of adjustment 12,149 24,639
--------------- ----------------
As restated $ 85,314 168,537
=============== ================
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>
The effect of such restatement on basic earnings per share as
adjusted in accordance with U.S. GAAP was an increase (decrease) of
$0.06 per share, $0.71 per share and $(0.16) per share for the years
ended December 31, 1997, 1996 and 1995, respectively.
F-29
<PAGE> 72
TAISIL ELECTRONIC MATERIALS
CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(WITH AUDITORS' REPORT THEREON)
<PAGE> 73
Independent Auditors' Report
The Board of Directors
Taisil Electronic Materials Corporation:
We have audited the accompanying balance sheet of Taisil Electronic Materials
Corporation as of December 31, 1997, and the related statements of operations,
changes in stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the Republic of China, which are substantially similar to auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Taisil Electronic Materials
Corporation as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles in the Republic of China.
As discussed in note (2)(b) to the financial statements, the Company changed its
reporting currency in 1997 to the United States dollar.
As discussed in note (2)(i) to the financial statements, as of December 31,
1997, Taisil Electronic Materials Corporation changed its method of accounting
for pensions.
Accounting principles generally accepted in the Republic of China vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have affected stockholders' equity as of December 31,
1997, and the results of operations for the year then ended to the extent
summarized in note 15 to the financial statements.
/s/ KPMG Certified Public Accountants
Taipei, Taiwan
January 14, 1998, except as to notes (2)(b)
and (15) which are as of February 9, 1999
<PAGE> 74
TAISIL ELECTRONIC MATERIALS CORPORATION
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
1996
1997 (UNAUDITED)
---- -----------
<S> <C> <C>
Assets
Current assets:
Cash (note 4) $ 18,755 11,115
Short-term investments (note 5) 2,053 -
Restricted bank deposits (note 13) 3,094 40,709
Accounts receivable (note 3) 21,335 3,813
Inventories, net (note 6) 18,121 11,846
Prepayments and other current assets (note 12) 3,200 2,070
Deferred income tax, net (note 12) 4,434 1,534
---------- ----------
Total current assets 70,992 71,087
---------- ----------
Property, plant and equipment (notes 7 and 13):
Buildings 51,225 42,719
Machinery and equipment 189,931 83,509
Furniture and fixtures 6,509 3,538
---------- ----------
247,665 129,766
Less: accumulated depreciation (33,519) (8,725)
Construction in progress, including deposits for equipment 31,969 76,711
---------- ----------
Net property, plant, and equipment 246,115 197,752
---------- ----------
Other assets:
Deferred technology fees (note 3) 5,417 6,917
Deferred income tax, net (note 12) 13,038 12,656
Other assets 1,383 1,333
---------- ----------
Total other assets 19,838 20,906
---------- ----------
$ 336,945 289,745
========== ==========
</TABLE>
Continued
<PAGE> 75
TAISIL ELECTRONIC MATERIALS CORPORATION
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996
1997 (UNAUDITED)
---- -----------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Short-term loans (note 8) $ 23,847 14,841
Short-term bills payable (note 8) 27,745 58,470
Current portion of long-term loans (note 9) 19,433 173
Notes and accounts payable (note 3) 11,750 2,985
Payables for construction in process 732 6,919
Accrued expenses and other current liabilities 10,191 3,747
---------- ----------
Total current liabilities 93,698 87,135
Long-term loans (notes 3 and 9) 163,682 128,085
Deposits from contractors 20 37
---------- ----------
Total liabilities 257,400 215,257
---------- ----------
Stockholders' equity (note 11):
Common stock - par value NT$10. Authorized and issued 315,000,000 shares
and 255,000,000 shares in 1997 and 1996, respectively 113,783 94,942
Accumulated deficit (34,238) (20,454)
---------- ----------
Total stockholders' equity 79,545 74,488
Commitments (note 14)
----------
$ 336,945 289,745
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 76
TAISIL ELECTRONIC MATERIALS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 , 1996 AND 1995
(EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
1997 (UNAUDITED) (UNAUDITED)
-------- ------------ ------------
<S> <C> <C> <C>
Net sales (note 3) $ 61,554 7,214 -
Cost of goods sold 70,017 21,569 -
------------ ------------ ------------
Gross loss (8,463) (14,355) -
------------ ------------- ------------
Selling, general and administrative expenses 6,939 8,058 6,254
Research and development expenses 6,908 3,523 1,450
------------ ------------ ------------
13,847 11,581 7,704
------------ ------------ ------------
Operating loss (22,310) (25,936) (7,704)
------------ ------------ ------------
Non-operating income (expenses):
Interest income 1,959 3,607 2,614
Interest expenses, excluding capitalized interest of $991 in
1997, $1,799 in 1996 and $216 in 1995 (note 3) (15,356) (6,955) (609)
Gain (loss) on foreign exchange, net 14,800 622 (427)
Other income, net (note 3) 1,458 79 3
------------ ------------ ------------
2,861 (2,647) 1,581
------------ ------------ ------------
Loss before income tax (19,449) (28,583) (6,123)
Income tax benefit (note 12) 5,665 11,652 2,560
------------ ------------ ------------
Net loss $ (13,784) (16,931) (3,563)
============ ============ ============
Loss per share $ (0.05) (0.08) (0.03)
============ ============ ===========
Weighted average shares outstanding 255,986,301 221,876,712 135,068,493
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 77
TAISIL ELECTRONIC MATERIALS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT DURING
COMMON DEVELOPMENT ACCUMULATED
STOCK STAGE DEFICIT TOTAL
----- ----- ------- -----
<S> <C> <C> <C>
Balance as of January 1, 1995 (unaudited) $ 18,819 40 - 18,859
Capital increase through cash 34,256 - - 34,256
Net loss - (3,563) - (3,563)
----------- ----------- ----------- -----------
Balance as of December 31, 1995 (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
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 78
TAISIL ELECTRONIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(EXPRESSED IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
1997 (UNAUDITED) (UNAUDITED)
---- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (13,784) (16,931) (3,563)
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash foreign exchange gain (16,510) (644) 430
Depreciation and amortization 26,497 9,356 118
Provision (reversal) for inventory loss (1,207) 5,628 -
Loss from disposal of fixed assets 9 4 -
Increase in accounts receivable (20,027) (3,826) -
Increase in inventories (5,068) (16,713) (761)
Decrease (increase) in prepayments and other current assets (4,103) 1,216 (2,467)
Increase in deferred income tax (3,852) (11,671) (2,618)
Increase in notes and accounts payable 1,550 1,662 1,223
Increase in accrued expenses and other current liabilities 10,573 1,234 2,069
--------- --------- ---------
Net cash used in operating activities (25,922) (30,685) (5,569)
---------- ---------- ---------
Cash flows from investing activities:
Increase in short-term investments (2,060) - -
Additions to property, plant and equipment (75,965) (139,758) (58,697)
Proceeds from disposal of property and equipment 18 18 -
Payment of technology fees and other assets (247) (1,538) (2,151)
Decrease (increase) in restricted bank deposits 36,650 (10,635) (20,603)
--------- ---------- ---------
Net cash used in investing activities (41,604) (151,913) (81,451)
---------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 18,841 41,867 34,256
Increase (decrease) in short-term loans and bills payable 7,290 41,423 27,675
Increase in long-term loans 49,791 101,235 26,945
Increase (decrease) in deposits from contractors (16) 37 -
---------- --------- ------
Net cash provided by financing activities 75,906 184,562 88,876
--------- --------- ---------
Net increase in cash 8,380 1,964 1,856
Effect of exchange rate changes on cash (740) (66) (293)
Cash at beginning of the period 11,115 9,217 7,654
--------- --------- ---------
Cash at end of the period $ 18,755 11,115 9,217
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest, excluding capitalized interest $ 14,015 6,549 344
========= ========= =========
Cash paid for income tax (including refundable income tax) $ 191 358 302
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 79
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS OR
NEW TAIWAN DOLLARS, UNLESS OTHERWISE STATED)
(AMOUNTS AND INFORMATION WITH RESPECT TO 1996 AND 1995 ARE UNAUDITED)
(1) Organization and Business Environment
Taisil Electronic Materials Corporation (the "Company"), was founded in
the Hsinchu Science-Based Industrial Park of the Republic of China ("ROC")
on September 26, 1994. Prior to June 30, 1996, the Company was a
development stage enterprise whose activities primarily involved the
construction of its manufacturing facilities, financial planning, testing
equipment, and recruiting and training employees. The Company started its
main activities of research, development, production and sale of the
latest generation silicon wafers in July 1996.
During the latter half of 1997, many Asian countries experienced problems
related to currency valuations and the health of their financial systems.
As a result of the significant portion of the Company's cash flows and
monetary assets and liabilities being denominated in US dollars, these
problems did not have a significant impact on the Company in 1997. In
1998, the Company foresees the resulting slowdown in Asian economies as
possibly having a negative impact on the Company's sales volumes and
overall operations. The Company does not however, expect the currency
valuation problems and potential slowdown in Asian economies to have a
significant adverse effect on its financial position.
The accompanying financial statements reflect management's current
assessments of the possible impact of this economic situation on the
financial position of the Company. Actual results could differ from
management's current assessments. In addition, the effect on the Company's
financial position of future developments and access to further financial
information concerning the Company's customers, suppliers, financiers and
others and their ability to continue to transact with the Company cannot
presently be determined.
(2) Significant Accounting Policies
(a) Generally Accepted Accounting Principles
The financial statements have been prepared in accordance with
accounting principles generally accepted in the Republic of China
("ROC GAAP"). ROC GAAP 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, 1997 and 1996, and the results
of operations for each of the two years then ended, to the extent
summarized in note 15.
(b) 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 as follows:
(Continued)
<PAGE> 80
2
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NET LOSS STOCKHOLDERS'
NET LOSS PER SHARE EQUITY
-------- ------
<S> <C> <C> <C>
For the year ended December 31, 1995 (unaudited):
As previously reported $ (3,383) (0.03)
Effect of adjustment (180) -
As restated (3,563) (0.03)
As of and for the year ended December 31, 1996 (unaudited):
As previously reported $ (17,161) (0.08) 72,248
Effect of adjustment 230 - 2,240
As restated (16,931) (0.08) 74,488
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) 79,545
</TABLE>
The Company's reporting currency was changed from New Taiwan dollars
to US dollars in 1997 to enable financial information to be presented
with more relevance. Accordingly, the financial statements for all
prior years have been restated to the new reporting currency of US
dollars.
(c) 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.
(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.
(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.
(Continued)
<PAGE> 81
3
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(f) Property, plant and equipment
Property, plant and equipment are stated at acquisition cost which
includes the capitalization of interest and certain expenses incurred
in connection with the construction of plant and installation of
machinery and equipment. Depreciation on plant and equipment is
provided on the straight-line method over the estimated useful lives
of the respective assets.
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, 1997 and 1996.
(g) Technology fees
The Company has entered into a technical assistance service agreement
with MEMC Electronic Materials, Inc. involving information and
processes embodying technology, equipment design, and assets and
property rights for the manufacture of silicon wafers. Payments for
such technology are capitalized and amortized over five years from the
commencement of commercial production.
(h) Organization cost and deferred charges
The costs incurred in the establishment of the Company are capitalized
and amortized over five years commencing from the start of commercial
operations. Charges for the installation of gas and power systems are
included in other assets and amortized over five years.
(i) Employee retirement plan
The Company adopted a retirement plan covering substantially all
employees in December 1995. Benefits are based on the employees' years
of service. Starting in August 1996, in accordance with ROC Labor
Standards Law, the Company made monthly contributions to a pension
fund with the Central Trust of China. As approved by the authorities,
the funding rate was set at 2% of salaries and wages. Pension cost is
recognized based on the amount to be appropriated. Retirement benefits
to employees will be paid from the retirement fund first, and if the
fund is insufficient, the balance will be charged to current
operations.
Effective December 31, 1997, the Company adopted ROC Statements of
Financial Accounting Standards ("SFAS") No. 18, "Accounting for
Pensions," for its retirement plan. Based on the provisions of SFAS
No. 18, pension costs charged to earnings are actuarially computed.
The measurement date was the balance sheet date. Accrued pension
liabilities were recognized for the excess of accumulated benefit
obligation over fair value of plan assets. Net periodic pension costs
will be recognized starting in 1998. The effect of this accounting
change is not material to the 1997 financial statements.
(j) Income tax
Effective January 1, 1995, the Company adopted ROC SFAS No. 22,
"Accounting for Income Tax". Under the asset and liability approach of
SFAS No. 22, deferred tax liabilities are recognized for tax
consequences of taxable temporary differences by applying enacted
statutory tax rates. Deferred tax assets are recognized for tax
consequences of deductible temporary differences, tax credits and
operating loss carryforwards. A valuation allowance is provided when
some portion or all of the deferred tax assets is not expected to be
realized. Deferred income tax is reported in the financial statements
as a current or noncurrent item based on the classification of the
related asset or liability which causes the temporary differences.
Deferred income taxes not relating to assets or liabilities are
classified as current or noncurrent based on the expected period that
the temporary differences will reverse.
(Continued)
<PAGE> 82
4
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(k) Forward exchange rate contracts
The Company enters into foreign currency forward contracts to hedge
future operating cash outflows in currencies other than the functional
currency. Foreign currency forward contracts reduce the Company's
exposure to the risk that eventual foreign currency cash outflows will
be adversely affected by changes in exchange rates. Foreign currency
gains and losses under the above arrangements are not deferred 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.
(l) Loss per share
Loss per share is computed based on the weighted average number of
common shares outstanding.
(3) Transaction with Related Parties
(a) Name and relationship
<TABLE>
<CAPTION>
OWNERSHIP
NAME OF RELATED PARTY RELATIONSHIP WITH THE COMPANY PERCENTAGE
--------------------- ----------------------------- ----------
<S> <C> <C> <C>
MEMC Electronic Materials Inc. USA (MEMC) Investor using equity method to account for its
investment in the Company and represented on the
Company's Board of Directors 45%
Chiao Tung Bank of Taipei, Taiwan, ROC (CTB) Investor and represented on the Company's Board of
Directors 10%
China Steel Corporation (CSC) Investor and represented on the Company's Board of
Directors 35%
10%
----
100%
</TABLE>
China Development Corporation
(b) Significant transactions with related parties
(i) Net sales to and corresponding amounts receivable from related
party are as follows:
<TABLE>
<CAPTION>
SALES
----------------------------------------------------------------
(UNAUDITED)
% OF NET % OF NET % OF NET
1997 SALES 1996 SALES 1995 SALES
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
MEMC $ 17,031 27.67 921 12.63 - -
======== ====== ======== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE
-------------------
DECEMBER 31,
------------
1996
1997 (UNAUDITED)
---- -----------
<S> <C> <C>
MEMC $ 6,983 614
========= =========
</TABLE>
(Continued)
<PAGE> 83
5
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Purchases from and corresponding amounts payable to related
party are as follows:
<TABLE>
<CAPTION>
PURCHASES
------------------------------------------------------------------
(UNAUDITED)
% OF TOTAL % OF TOTAL % OF TOTAL
1997 PURCHASES 1996 PURCHASES 1995 PURCHASES
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C>
MEMC $ 6,314 17.78 485 9.51 - -
======== ====== ======== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
ACCOUNTS PAYABLE
----------------
DECEMBER 31,
------------
1996
1997 (UNAUDITED)
-------
<S> <C> <C>
MEMC $ 3,290 436
======= =======
</TABLE>
(ii) Financing
The Company's long-term loans from CTB are summarized as
follows:
<TABLE>
<CAPTION>
MAXIMUM INTEREST ENDING INTEREST INTEREST
YEAR BALANCE RATE BALANCE EXPENSE PAYABLE COLLATERAL
---- ------- ---- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $ 28,450 5.825%~ 28,306 1,751 153 Machinery and
6.575% equipment $32,570
1996 $ 23,281 5.825%~ 23,281 661 112 Time deposit $22,727
====== ====== = === ===
(Unaudited) 6.45%
</TABLE>
(iii) Technology, royalty and commission agreements
The Company has entered into various agreements with MEMC which
provide for payments related to, among other things,
technology, royalties and commissions. The Company paid MEMC,
net of amounts received, $1,312, $2,703, and $5,000 in 1997,
1996 and 1995. respectively, pursuant to the terms of such
agreements. The related amounts outstanding of $2,048 and $203
as of December 31, 1997 and 1996, respectively, are included in
accrued expenses.
(iv) Guarantees
MEMC and CSC have provided guarantees over certain of the
Company's long-term loans and bills payable up to a maximum of
$92,863 and $65,965, respectively.
(Continued)
<PAGE> 84
6
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(4) Cash
Details of cash as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996
1997 (UNAUDITED)
---- -----------
<S> <C> <C>
Cash on hand, current and checking accounts $ 2,112 115
Time deposits 16,643 11,000
--------- ---------
$ 18,755 11,115
========= =========
</TABLE>
(5) Short-term investments
The Company had invested $2,053 in open-ended trust funds as of December
31, 1997. The market value of such investments as of December 31, 1997 was
approximately $2,065.
(6) Inventories
The components of inventories as of December 31, 1997 and 1996, are
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996
1997 (UNAUDITED)
---- -----------
<S> <C> <C>
Finished goods $ 5,381 5,277
Work in process 6,733 4,149
Raw materials and spare parts 10,068 7,688
--------- ---------
22,182 17,114
Provision for inventory devaluation (4,061) (5,268)
--------- ---------
$ 18,121 11,846
========= =========
</TABLE>
As of December 31, 1997 and 1996, insurance coverage of inventories
amounted to approximately $18,383 and $11,891, respectively.
(7) Property, Plant and Equipment
The construction in progress consists of various payments for plant
construction and engineering design and consulting.
Certain property, plant and equipment is pledged as security for long-term
loans. See note 13.
Insurance coverage on property, plant and equipment and the third-party
liability as of December 31, 1997 and 1996, amounted to approximately
$199,617 and $204,727, respectively.
(Continued)
<PAGE> 85
7
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(8) Short-term Loans and Short-term Bills Payable
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1997 1996(UNAUDITED)
---------------------------------------------------
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
------ ------------- ------ -------------
<S> <C> <C> <C> <C>
Credit loans and import loans under usance $ 23,847 0.98%~8.99% 14,841 0.77%~6.68%
letters of credit
Commercial paper payable 28,494 7.30%~8.15% 57,927 5.15%~5.45%
Bank acceptance payable - - 1,491 5.15%~5.45%
Unamortized discount on short-term bills
payable (749) (948)
--------- ---------
$ 51,592 73,311
========= =========
</TABLE>
As of December 31, 1997 and 1996, certain time deposits were pledged as
security for the issuance of short-term bills payable. See note 13.
(9) Long-term Loans
<TABLE>
<CAPTION>
BALANCE AT DECEMBER 31,
CREDIT LINE 1996
BANK AND PURPOSE PERIOD REPAYMENT TERM 1997 (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Chiao Tung Bank NT$400,000 Loan November 1995 Repayable in 17 quarterly $ 12,256 14,545
for purchase of to November 2002 installments starting in
machinery November 1998
Chiao Tung Bank NT$100,000 Loan November 1995 Repayable in 21 quarterly 2,918 3,636
for purchase of to November 2002 installments starting in
machinery November 1997
Chiao Tung Bank NT$100,000 Loan November 1995 Repayable in 29 quarterly 3,064 3,636
for purchase of to November 2005 installments starting in
machinery January 1999
Chiao Tung Bank NT$200,000 Loan December 1996 Repayable in 17 quarterly 2,213 1,464
for purchase of to November 2003 installments starting in
machinery December 1999
Chiao Tung Bank NT$200,000 Loan December 1996 Repayable in 17 quarterly 6,128 -
for purchase of to November 2003 installments starting in
machinery December 1999
Chiao Tung Bank NT$80,000 Loan December 1996 Repayable in 29 quarterly 1,727 -
for purchase of to November 2006 installments starting in
machinery January 2000
</TABLE>
(Continued)
<PAGE> 86
8
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BALANCE AT DECEMBER 31,
CREDIT LINE 1996
BANK AND PURPOSE PERIOD REPAYMENT TERM 1997 (UNAUDITED)
<S> <C> <C> <C> <C> <C>
The International NT$1,000,000 December 1995 Repayable in 10 30,639 36,364
Commercial Bank Loan for plant to December 2002 semi-annual installments
of China construction starting in June 1998
The International NT$600,000 Loan March 1997 to Recycling use repayable in 2,298 -
Commercial Bank for plant March 1999 90 to
of China construction 180 days
Taiwan NT$600,000 May 1997 to May Recycling use repayable in 18,383 -
Cooperative Bank Credit loan 1999 90 to
180 days
ABN AMRO Bank (In $50,000 Bridge June 1995 to Transferred to the - 8,613
charge of loan for January 1997 following loan in 1997
syndication loan following ABN
agreement for the AMRO's loan
phase I expansion)
ABN AMRO Bank (In $60,000 Loan for October Repayable in 10 60,000 60,000
charge of purchase of 1995 to August semi-annual installments
syndication loan machinery 2002 starting in February 1998
agreement for the
phase I expansion)
ABN AMRO Bank (In $20,000 Bridge November 1997 Can be transferred to the 3,489 -
charge of loan for the to following loan when
syndication loan following ABN June 1998 accumulated to $5,000 or
agreement for the AMRO loan more
phase II
expansion)
ABN AMRO Bank (In $40,000 Loan for January Repayable in 6 semi-annual 40,000 -
charge of purchase of 1997 to 2001 installments starting in
syndication loan machinery June 1999
agreement for the
phase II
---------
expansion)
183,115 128,258
Less: current portion of long-term (19,433) (173)
--------- ---------
loans
$ 163,682 128,085
========= =========
</TABLE>
(Continued)
<PAGE> 87
9
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
The following is a schedule of payments of long-term debt as of December
31, 1997:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C> <C>
1998 $ 19,433
1999 59,726
2000 41,822
2001 34,363
2002 23,798
After 2002 3,973
---------
$ 183,115
</TABLE>
The ranges for interest rates on these borrowings for the years ended
December 31, 1997, 1996 and 1995 were 6.00%~7.605%, 0.85%~7.495% and
6.075%~7.825%, respectively. As of December 31, 1997 and 1996, total
unused lines of credit for short-term and long-term loans amounted to
approximately $263,435 and $246,327, respectively.
As December 31, 1997 and 1996, certain time deposits and property, plant
and equipment were pledged as security for long-term loans. See note 13.
(10) Pension
Effective December 31, 1997, the Company adopted SFAS No.18, "Accounting
for Pensions". The measurement date for the actuarial study of the
Company's pension obligation was December 31, 1997. The funded status of
the Company's pension scheme as of December 31, 1997, was as follows:
<TABLE>
<CAPTION>
<S> <C>
Benefit obligation:
Vested benefit obligation $ -
Non-vested benefit obligation (256)
---------
Accumulated benefit obligation (256)
Effects of future salary progression (638)
---------
Projected benefit obligation (894)
Fair value of plan assets 256
---------
Benefit obligation in excess of plan assets (638)
Unrecognized net obligation at transition 599
---------
Accrued pension liabilities $ (39)
=========
Actuarial assumptions are as follows:
Discount rate 6.50%
Rate of salary progression 6.00%
Projected return on plan assets 6.50%
</TABLE>
Pension expenses were $198, $135 and $0 for the years ended December 31,
1997, 1996 and 1995, respectively. As of December 31, 1997 and 1996, the
balances of the Company's pension fund maintained with the Central Trust
of China were $270 and $64, respectively. As of December 31, 1997 and
1996, the unpaid balances of $63 and $71, respectively, were included in
accrued expenses.
(Continued)
<PAGE> 88
10
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1997 and 1996, no employee qualified for retirement.
(11) Stockholders' Equity
(a) Capital stock
On October 13, 1995, the board of directors decided to issue an
additional 60,000,000 shares at NT$10 par value per share for cash on
January 20, 1996.
On July 17, 1996, the stockholders' meeting approved the issuance of
an additional 55,000,000 shares at NT$10 par value per share for cash
on July 17, 1996. After this capital increase, the total issued
capital was $94,942. The above increases were all registered and
approved by the authorities.
On July 25, 1997, the stockholders' meeting approved the issuance of
an additional 60,000,000 shares at NT$10 par value per share for cash
on December 25, 1997. After this capital increase, the total issued
capital was $113,783. The above increase is still in the process of
being registered.
(b) Distribution of earnings
In accordance with ROC Company Law, the Company's articles of
incorporation stipulate that 10% of annual earnings (net of losses of
prior years, if any) is to be retained as statutory reserve until such
retention equals the amount of issued share capital. The distribution
of remaining earnings should be proposed by the board of directors and
decided in a stockholders meeting. At least 0.01% of the distribution
should be appropriated as employees' bonuses when the stockholders
approve an earnings distribution. Future dividends will be distributed
in NT dollars.
(c) Accumulated deficit
According to the ROC Company Law, if accumulated deficit is over
one-half of the common stock, the board of directors shall convene a
meeting of shareholders and make a report on such loss.
(12) Income Tax
The Company's earnings are subject to an income tax rate of 20%. For the
years ended December 31, 1997, 1996 and 1995, income tax expense (benefit)
was as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
1997 1996 1995
--------- --------- ------
<S> <C> <C> <C>
Current income tax expense $ 25 - 50
Deferred income tax benefit (5,690) (11,652) (2,610)
--------- --------- ---------
$ (5,665) (11,652) (2,560)
========= ========= =========
</TABLE>
The Company's income tax benefit for the years ended December 31, 1997,
1996 and 1995, differed from the expected income tax, computed by applying
the 20% tax rate on loss before income tax as shown on the financial
statements, as follows:
(Continued)
<PAGE> 89
11
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" income tax benefit $ (3,890) (5,717) (1,225)
Investment tax credits earned (4,736) (10,811) (1,322)
Unrealized exchange gain (5,070) - -
Others 45 32 (13)
Valuation allowance 7,986 4,844 -
--------- --------- ----------
Income tax benefit $ (5,665) (11,652) (2,560)
========= ========= ==========
</TABLE>
As of December 31, 1997 and 1996, refundable income taxes were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996
1997 (UNAUDITED)
---- -----------
<S> <C> <C>
Estimated income tax expense $ 25 -
Prepaid and withheld income tax 178 357
Other (25) -
Income tax refundable from prior years 477 233
--------- ---------
Income tax refundable $ 655 590
========= =========
</TABLE>
The temporary differences, tax credits, loss carryforwards and their
effects on deferred income tax assets are as follows as of December 31,
1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1997 1996 (UNAUDITED)
-------------------------------------------------
INCOME TAX INCOME TAX
AMOUNT EFFECT AMOUNT EFFECT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Current assets:
Unrealized loss from inventory devaluation $ 3,738 748 5,237 1,015
Organization cost deferred for tax purposes 2,448 490 2,704 541
Employee benefit costs deferred for tax purposes 171 34 204 41
Unrealized foreign exchange loss 15,809 3,162 (312) (63)
--------- ---------
$ 4,434 1,534
========= =========
Noncurrent assets:
Investment tax credits earned $ 14,762 14,762 12,067 12,067
Organization costs deferred for tax purposes 3,507 702 6,464 1,293
Employee benefit costs deferred for tax purposes 171 34 407 81
Difference in technology fee 391 78 (340) (68)
Tax loss carryforward 46,851 9,370 21,108 4,222
--------- ---------
24,946 17,595
Less: valuation allowance (11,908) (4,939)
--------- ---------
$ 13,038 12,656
========= =========
</TABLE>
(Continued)
<PAGE> 90
12
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
A valuation allowance has been established at December 31, 1997 and 1996
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, 1997 and 1996 will be realized.
The significant factors considered in determining the valuation allowance
at December 31, 1997 and 1996 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.
According to the ROC Income Tax Law, pre-operating expenses of the Company
during the development stage are amortized for tax purposes on a
straight-line basis over a period of not less than five years.
ROC tax regulations stipulate that investment tax credits used by the
Company each year shall not exceed 50% of the current income tax payable,
and any unused balance can be carried forward to the following four years,
subject to the same percentage limitation for each year except in the year
of expiration when any remainder can be used for offset of income tax
payable in that year. As of December 31, 1997, the estimated unused income
tax credits, resulting 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> <C>
1995 $ 4,246 1999
1996 10,196 2000
1997 320 2001
--------
$ 14,762
</TABLE>
According to the Statute for the Establishment and Administration of
Science-Based Industrial Park, the Company may, within two years from the
date on which it begins to sell its products or to render services, select
any fiscal year in the four-year period from such date for exemption from
profit-seeking enterprise income tax for a period of five consecutive
years from the starting date of such fiscal year. As of December 31, 1997,
the Company has not chosen the starting date.
Pursuant to the ROC Income Tax Law, the Company's tax losses may be
carried forward for up to five years to reduce future taxable income. As
of December 31, 1997, the estimated tax loss carryforwards were as
follows:
<TABLE>
<CAPTION>
YEAR OF LOSS AMOUNT YEAR OF EXPIRATION
<S> <C> <C> <C>
1996 $ 16,272 2001
1997 30,579 2002
--------
$ 46,851
</TABLE>
The tax authorities have examined and assessed the Company's income tax
returns through 1995.
(13) Pledged Assets
As of December 31, 1997 and 1996, pledged assets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996
ASSETS RELATED SECURED LIABILITIES 1997 (UNAUDITED)
---------------------- ---------------------------------------- ---------- -----------
<S> <C> <C> <C> <C>
Time Deposits
Restricted bank deposits Short-term loans $ 3,063 -
Restricted bank deposits Documentary draft for export in customs 31 -
Restricted bank deposits Long-term loans - 40,709
Machinery and equipment Long-term loans 53,312 34,941
Buildings 34,333 39,538
--------- ---------
$ 90,739 115,188
========= =========
</TABLE>
(Continued)
<PAGE> 91
13
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(14) Commitments
(a) Operating lease
The Company is leasing its plant site from the Science-Based
Industrial Park Administration Bureau for a period of 20 years,
expiring December 31, 2014. In accordance with the lease agreement,
rental payments are subject to adjustment as and when the government
reappraises the land value. The current rent is NT$12,390 ($380) per
year.
Future minimum lease payments as of December 31, 1997, under the
existing non-cancelable agreement are:
YEARS MINIMUM LEASE PAYMENTS
----- ----------------------
1998 through 2002 $ 1,900 ($380 annually)
2003 through 2007 1,900
2008 through 2012 1,900
2013 through 2014 759
-------
$ 6,459
(b) Technical Service Agreement
In accordance with a technical assistance agreement between the
Company and MEMC, the Company is required to pay MEMC fixed payments
and the timing of such payments is based on reaching certain
milestones. As of December 31, 1997, the remaining balance of such
payments to be paid under the agreement amounted to $2,500.
In addition, the Company pays MEMC an annual royalty based on net
sales and operating income.
(c) Purchase of equipment
As of December 31, 1997 and 1996, the Company had outstanding letters
of credit amounting to approximately $3,242 and $7,636, respectively,
and was committed to purchase equipment with a total estimated cost of
$15,369 and $70,764, respectively.
(d) Syndicated term loan agreement
The Company entered into certain syndication loan agreements with ABN
AMRO Bank and seven other banks (the "Banks") for the Company's Phase
I and II planned expansion. In accordance with the syndication loan
agreements, the Banks granted credit facilities to the Company for the
purchase of machinery and equipment. The commitment fee is charged at
a certain rate per annum payable quarterly, based on the committed-to
withdraw but unborrowed balance, if any. Commitment fees paid for the
years ended December 31, 1997 and 1996 amounted to $44 and $46,
respectively.
(15) Reconciliation to United States Generally Accepted Accounting Principles
The Company's financial statements have been prepared in accordance with
ROC GAAP. ROC GAAP vary in certain significant respects from US GAAP.
Differences which have a significant effect on the Company's results of
operations and stockholders' equity are as follows:
(Continued)
<PAGE> 92
14
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(a) Employee retirement benefits
Under ROC GAAP, the pension expense recorded by the Company in
connection with its defined benefit pension plan was based on the
amount of the contributions made by the Company to the pension plan as
required by government regulations. Under US GAAP, the accumulated
pension obligation and pension expense is determined on an actuarial
basis, assuming the Company first adopted this policy at the beginning
of 1996 since it was not feasible to apply the actuarial basis at an
earlier period. The impact of this difference is not significant to
the Company's determination of results of operations or stockholders'
equity under US GAAP for the periods presented.
(b) Technology fee
Under ROC GAAP, the Company capitalizes and amortizes certain costs in
connection with a technical assistance agreement entered into with a
shareholder, MEMC. Under US GAAP, such payments are expensed as
incurred or treated as a deemed dividend depending on the nature of
the payment.
A reconciliation from ROC GAAP to US GAAP of net loss and stockholders'
equity follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996
1997 (UNAUDITED)
-----------
<S> <C> <C>
Net loss as reported under ROC GAAP $ (13,784) (16,931)
(a) Amortization of capitalized technology fees 1,500 583
(b) Income tax effects resulting from capitalized technology (295) (119)
---------- ----------
fees
Net loss in accordance with US GAAP $ (12,579) (16,467)
========= =========
Basic loss per share (0.05) (0.08)
========= =========
</TABLE>
Stockholders' equity:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996
1997 (UNAUDITED)
-----------
<S> <C> <C>
Stockholders' equity as reported under ROC GAAP $ 79,545 74,488
(a) Effect of capitalization of technology fees, net of (5,417) (6,917)
amortization
(b) Income tax effects resulting from capitalized technology 553 848
--------- ---------
fees
Stockholders' equity in accordance with US GAAP $ 74,681 68,419
========= =========
</TABLE>
As discussed in note 2(b), the Company previously reported results of
operations and stockholders' equity using the U.S. dollar as the
functional currency only for periods after September 30, 1997 under both
ROC GAAP and US GAAP. The restated net loss, basic loss per share and
stockholders' equity using the U.S. dollar as the functional currency is
as follows:
(Continued)
<PAGE> 93
15
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NET LOSS STOCKHOLDERS'
NET LOSS PER SHARE EQUITY
-------- --------- ------
<S> <C> <C> <C>
As of and for the year ended December 31, 1996 (unaudited):
As previously reported $ (16,711) (0.08) 67,027
Effect of adjustments 244 - 1,392
As restated (16,467) (0.08) 68,419
As of and for the year ended December 31, 1997:
As previously reported $ (16,522) (0.06) 67,644
Effect of adjustments 3,943 0.01 7,037
As restated (12,579) (0.05) 74,681
</TABLE>
(16) Reclassifications
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform with the 1997 presentation for comparison
purposes. These reclassifications do not have a significant impact on the
financial statements.
<PAGE> 94
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K.
Exhibit
No. Description
_______ _____________________________________________________________________
2 Omitted -- Inapplicable
3(i) Restated Certificate of Incorporation of the Company (Incorporated by
reference to Exhibit 3-a of the Company's Form 10-Q for the Quarter
ended June 30, 1995)
3(ii) Restated By-laws of the Company (Incorporated by reference to Exhibit
3-b of the Company's Form 10-Q for the Quarter ended September 30,
1996)
4 Omitted-- Inapplicable
5 Omitted-- Inapplicable
9 Omitted-- Inapplicable
*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-d First Amendment to Joint Venture Agreement dated December 9, 1993
among the Company, POSCO and Samsung (Incorporated by reference to
Exhibit 10-d of Amendment No. 1 to the Company's Form S-1 Registration
Statement No. 33-92412)
10-e Second Amendment to Joint Venture Agreement dated December 30, 1994
among the Company, POSCO and Samsung (Incorporated by reference to
Exhibit 10-e of Amendment No. 1 to the Company's Form S-1 Registration
Statement No. 33-92412)
*10-f Technical Agreement dated December 19, 1990 between the Company and
POSCO Huls Company Limited ("PHC") (Incorporated by reference to
Exhibit 10-f of Amendment No. 1 to the Company's Form S-1 Registration
Statement No. 33-92412)
*10-g Amendment to Technical Agreement dated as of January 1, 1995 between
the Company and PHC (Incorporated by reference to Exhibit 10-g of
Amendment No. 1 to the Company's Form S-1 Registration Statement No.
33-92412)
*10-h Shareholder's Agreement dated as of May 16, 1995 between the Company
and Texas Instruments Incorporated ("TI") (Incorporated by reference
to Exhibit 10-h of Amendment No. 4 to the Company's Form S-1
Registration Statement No. 33-92412)
*10-i TI Purchase Agreement dated as of June 30, 1995 between the Company,
MEMC Southwest Inc. ("MEMC Southwest") and TI (Incorporated by
reference to Exhibit 10-i of the Company's Form 10-Q for the Quarter
ended June 30, 1995)
*10-i(1)Amendment to TI Purchase Agreement dated as of June 5, 1997,
between MEMC Southwest Inc. and TI (Incorporated by reference to
Exhibit 10-i of the Company's Form 10-Q for the Quarter ended June 30,
1997)
10-j Lease Agreement Covering Silicon Wafer Operation Premises dated June
30, 1995 between TI and MEMC Southwest (Incorporated by reference to
Exhibit 10-j of the Company's Form 10-Q for the Quarter ended June 30,
1995)
10-j(1) Sublease Agreement covering Silicon Wafer Operation Premises dated
June 30, 1995 between TI and MEMC Southwest (Incorporated by reference
to Exhibit 10-j(1) of the Company's Form 10-Q for the Quarter ended
June 30, 1995)
*10-k Technology Transfer Agreement dated as of June 30, 1995 between the
Company, TI and MEMC Southwest (Incorporated by reference to Exhibit
10-k of the Company's Form 10-Q for the Quarter ended June 30, 1995)
10-l Registration Rights Agreement between the Company and Huls Corporation
(Incorporated by reference to Exhibit 10-l of the Company's Form 10-K
for the Year ended December 31, 1995)
10-m 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-n Employment Agreement between the Company and Dr. Robert M. Sandfort
(Incorporated by reference to Exhibit 10-q of the Company's Form 10-K
for the Year ended December 31, 1995)
+10-o Employment Agreement dated as of April 1, 1993 among Huls Belgium
S.A., the Company and Marcel Coinne (Incorporated by reference to
Exhibit 10-r of Amendment No. 1 to the Company's Form S-1 Registration
Statement No. 33-92412)
+10-p 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)
<PAGE> 95
+10-q MEMC Electronic Materials, Inc. 1995 Equity Incentive Plan as Amended
and Restated on March 18, 1997 (Incorporated by reference to Exhibit
10-t of the Company's Form 10-Q for the Quarter ended March 31, 1997)
+10-q(1) Form of Stock Option and Restricted Stock Agreement (Incorporated
by reference to Exhibit 10-t(1) of the Company's Form 10-K for the
Year ended December 31, 1995)
+10-q(2) Stock Option and Restricted Stock Agreement between the Company
and Dr. Robert M. Sandfort (Incorporated by reference to Exhibit
10-t(3) of the Company's Form 10-K for the Year ended December 31,
1995)
+10-r 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-s Service Agreement dated January 1, 1995 between the Company and Huls
Corporation (Incorporated by reference to Exhibit 10-v of Amendment
No. 1 to the Company's Form S-1 Registration Statement No. 33-92412)
10-t 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-u Agency and Services Agreement dated January 1, 1995 between MEMC
Electronic Materials, SpA and Huls France S.A. (Incorporated by
reference to Exhibit 10-x of Amendment No. 1 to the Company's Form S-1
Registration Statement No. 33-92412)
10-v Agency and Services Agreement dated April 1, 1989 between MEMC
Electronic Materials, SpA and Huls (U.K.) Ltd. and the amendment
thereto dated November 20, 1991 (Incorporated by reference to Exhibit
10-y of Amendment No. 1 to the Company's Form S-1 Registration
Statement No. 33- 92412)
10-w Service Agreement effective July 1, 1995 between MEMC Electronic
Materials, SpA and Huls AG (and English translation thereof)
(Incorporated by reference to Exhibit 10-z of the Company's Form 10-K
for the Year ended December 31, 1995)
10-x Sales Representative and Offer Agency Agreement dated November 7, 1991
between MEMC Electronic Materials, SpA and MEMC Electronic Materials,
Company (now MEMC Huls Korea Company) (Incorporated by reference to
Exhibit 10-aa of Amendment No. 1 to the Company's Form S-1
Registration Statement No. 33-92412)
*10-y Trichlorosilane Supply Agreement between MEMC Electronic Materials
SpA and Huls Silicone GmbH dated as of December 31, 1995 (Incorporated
by reference to Exhibit 10-bb of the Company's Form 10-K for the Year
ended December 31, 1995)
10-z Sales Representative and Offer Agency Agreement dated December 9, 1991
between the Company and MEMC Electronic Materials, Company (now MEMC
Huls Korea Company) (Incorporated by reference to Exhibit 10-cc of
Amendment No. 1 to the Company's Form S-1 Registration Statement No.
33-92412)
+10-aa Employment Agreement effective as of June 16, 1995 between the
Company and James M. Stolze (Incorporated by reference to Exhibit
10-ee of Amendment No. 1 to the Company's Form S-1 Registration
Statement No. 33-92412)
10-bb Note Agreement dated as of June 30, 1995 among MEMC Southwest Inc.,
Texas Instruments Incorporated and MEMC Electronic Materials, Inc.
(Incorporated by reference to Exhibit 10-gg of the Company's Form 10-K
for the Year ended December 31, 1995)
10-cc Credit Agreement dated as of July 10, 1995, between the Company and
Huls Corporation (Incorporated by reference to Exhibit 10-jj of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-dd Credit Agreement dated as of July 10, 1995, between the Company and
Huls Corporation (Incorporated by reference to Exhibit 10-kk of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-ee Credit Agreement dated as of July 10, 1995, between the Company and
Huls Corporation (Incorporated by reference to Exhibit 10-ll of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-ff Credit Agreement dated as of July 10, 1995, between the Company and
Huls Corporation (Incorporated by reference to Exhibit 10-mm of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-gg Credit Agreement dated as of July 10, 1995, between the Company and
Huls AG (Incorporated by reference to Exhibit 10-nn of the Company's
Form 10-Q for the Quarter ended June 30, 1995)
10-hh Credit Agreement dated as of July 10, 1995, between the Company and
Huls AG (Incorporated by reference to Exhibit 10-oo of the Company's
Form 10-Q for the Quarter ended June 30, 1995)
10-ii Revolving Credit Agreement dated as of July 10, 1995, between the
Company and Huls AG (Incorporated by reference to Exhibit 10-pp of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-jj Reimbursement Agreement effective as of August 1, 1995 between the
Company and Huls AG (Incorporated by reference to Exhibit 10-rr of the
Company's Form 10-K for the Year ended December 31, 1995)
10-kk MEMC Technology License Agreement dated as of July 31, 1995, between
Albemarle Corporation and the Company (Incorporated by reference to
Exhibit 10-tt of the Company's Form 10-K for the Year ended December
31, 1995)
*10-ll Seller Technology License Agreement dated as of July 31, 1995, among
Albemarle Corporation, the Company, and MEMC Pasadena, Inc.
(Incorporated by reference to Exhibit 10-ll of the Company's Form
10-K/A Amendment No. 2 for the Year Ended December 31, 1997)
*10-mm Technology Purchase Agreement dated as of July 31, 1995, among
<PAGE> 96
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-nn 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-nn(1) Amendment to Ground Lease Agreement dated as of May 31, 1997, between
the Company, MEMC Pasadena, Inc., and Albemarl 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-oo Form of Stock Option and Performance Restricted Stock Agreement
(Incorporated by reference to Exhibit 10-yy of the Company's Form 10-K
for the Year ended December 31, 1995)
+10-pp Form of Stock Option Agreement (Incorporated by reference to Exhibit
10-zz of the Company's Form 10-K for the Year ended December 31, 1995)
10-qq Credit Agreement between the Company and Huls AG dated as of December
22, 1995 (Incorporated by reference to Exhibit 10-aaa of the Company's
Form 10-K for the Year ended December 31, 1995)
10-rr Credit Agreement between the Company and Huls AG dated as of December
22, 1995 (Incorporated by reference to Exhibit 10-bbb of the Company's
Form 10-K for the Year ended December 31, 1995)
10-ss Credit Agreement between the Company and Huls AG dated as of December
22, 1995 (Incorporated by reference to Exhibit 10-ccc of the Company's
Form 10-K for the Year ended December 31, 1995)
10-tt Credit Agreement between the Company and Huls AG dated as of December
22, 1995 (Incorporated by reference to Exhibit 10-ddd of the Company's
Form 10-K for the Year ended December 31, 1995)
10-uu Commitment Fee Agreement between the Company and Huls Corporation
dated as of July 10, 1995 (Incorporated by reference to Exhibit 10-eee
of the Company's Form 10-K for the Year ended December 31, 1995)
10-vv Commitment Fee Agreement between the Company and Huls Corporation
dated as of July 10, 1995 (Incorporated by reference to Exhibit 10-fff
of the Company's Form 10-K for the Year ended December 31, 1995)
10-ww Commitment Fee Agreement between the Company and Huls Corporation
dated as of July 10, 1995 (Incorporated by reference to Exhibit 10-ggg
of the Company's Form 10-K for the Year ended December 31, 1995)
+10-xx 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-yy Stock Option Agreement dated as of September 1, 1996 between the
Company and Ludger H. Viefhues (Incorporated by reference to Exhibit
10-iii of the Company's Form 10-Q for the Quarter ended September 30,
1996)
*10-zz HSC/MEMC Agreement dated as of December 27, 1994 between the Company
and Hemlock Semiconductor Corporation ("Hemlock") (Incorporated by
reference to Exhibit *10-ggg of the Company's Form 10-Q for the
Quarter ended March 31, 1997)
*10-zz(1)Letter Amendment dated as of June 20, 1995 to the HSC/MEMC Agreement
between the Company and Hemlock (Incorporated by reference to Exhibit
*10-ggg(1) of the Company's Form 10-Q for the Quarter ended March 31,
1997)
*10-zz(2)Letter Amendment dated as of November 8, 1996 to the HSC/MEMC
Agreement between the Company and Hemlock (Incorporated by reference
to Exhibit *10-ggg(2) of the Company's Form 10-Q for the Quarter ended
March 31, 1997)
*10-aaa Joint Venture Agreement dated as of December 20, 1996 between the
Company and Khazanah Nasional Berhad (Incorporated by reference to
Exhibit 10-hhh of the Company's Form 10-K for the Year ended December
31, 1996)
*10-bbb Technology Cooperation Agreement dated as of December 20, 1996 between
the Company and MEMC Kulim Electronic Materials, SDN BHD (Incorporated
by reference to Exhibit 10-iii of the Company's Form 10-K for the Year
ended December 31, 1996)
10-ccc Credit Agreement dated as of December 1, 1996 between the Company and
Huls AG (Incorporated by reference to Exhibit 10-jjj of the Company's
Form 10-K for the Year ended December 31, 1996)
10-ddd Credit Agreement dated as of December 1, 1996 between the Company and
Huls AG (Incorporated by reference to Exhibit 10-kkk of the Company's
Form 10-K for the Year ended December 31, 1996)
10-eee Credit Agreement dated as of April 1, 1996 between the Company and
Huls AG (Incorporated by reference to Exhibit 10-lll of the Company's
Form 10-K for the Year ended December 31, 1996)
10-fff Fourth Short-Term Loan Agreement dated as of March 31, 1996 between
the Company and Huls Corporation (Incorporated by reference to Exhibit
10-mmm of the Company's Form 10-K for the Year ended December 31,
1996)
+10-gg 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-hhh Form of Stock Option Agreement (Incorporated by reference to Exhibit
10-ooo of the Company's Form 10-Q for the Quarter ended March 31,
1997)
+10-iii Form of Stock Option Agreement (Nonemployee Directors) (Incorporated
by reference to Exhibit 10-ppp of the Company's Form 10-Q for the
Quarter ended March 31, 1997)
10-jjj Five Year Credit Agreement dated as of June 26, 1997, between the
Company and Huls Corporation (Incorporated by reference to Exhibit
10-qqq of the Company's Form 10-Q for the Quarter ended June 30, 1997)
<PAGE> 97
10-kkk Six Year Credit Agreement dated as of June 26, 1997, between the
Company and Huls Corporation (Incorporated by reference to Exhibit
10-rrr of the Company's Form 10-Q for the Quarter ended June 30, 1997)
10-lll Seven Year Credit Agreement dated as of June 26, 1997, between the
Company and Huls Corporation (Incorporated by reference to Exhibit
10-sss of the Company's Form 10-Q for the Quarter ended June 30, 1997)
10-mmm Eight Year Credit Agreement dated as of June 26, 1997, between the
Company and Huls Corporation (Incorporated by reference to Exhibit
10-ttt of the Company's Form 10-Q for the Quarter ended June 30, 1997)
+10-nnn 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-ooo 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-ppp Letter 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)
11 Omitted-- Inapplicable
12 Omitted-- Inapplicable
13 Page 44 of the Company's 1997 Annual Report (Incorporated by reference
to Exhibit 13 of the Company's Form 10-K for the Year ended December
31, 1997)
16 Omitted -- Inapplicable
18 Omitted -- Inapplicable
21 Subsidiaries of the Company (Incorporated by reference to Exhibit 21
of the Company's Form 10-K for the Year ended December 31, 1997)
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. Erhard Meyer-Galow; Willem D.
Maris; Dr. Alfred Oberholz; Paul T. O'Brien; and Michael B. Smith
(Incorporated by reference to Exhibit 24 of the Company's Form 10-K
for the Year ended December 31, 1997)
27 Financial Data Schedule for the Fiscal Year Ended December 31, 1997
(filed electronically with the SEC only)
27-a Restated Financial Data Schedule for the Nine Months ended September
30, 1997(filed electronically with the SEC only)
27-b Restated Financial Data Schedule for the Six Months ended June 30,
1997 (filed electronically with the SEC only)
27-c Restated Financial Data Schedule for the Three Months ended
June 30, 1997 (filed electronically with the SEC only)
27-d Restated Financial Data Schedule for the Fiscal Year ended December
31, 1996 (filed electronically with the SEC only)
27-e Restated Financial Data Schedule for the Nine Months ended September
30, 1996 (filed electronically with the SEC only)
27-f Restated Financial Data Schedule for the Six Months ended June 30,
1996 (filed electronically with the SEC only)
99 Omitted -- Inapplicable
- -----------------
* Confidential treatment of certain portions of these documents has been
granted.
+ 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.
<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 statements (Nos.
33-96420 and 333-19159) on Form S-8 of MEMC Electronic Materials, Inc. of our
report dated January 26, 1998, relating to the consolidated balance sheets of
MEMC Electronic Materials, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997, and related schedule, which report is included in the Form
10-K/A Amendment No. 3 of MEMC Electronic Materials, Inc.
/s/ KPMG LLP
St. Louis, Missouri
March 2, 1999
<PAGE> 1
Exhibit 23(b)
INDEPENDENT AUDITORS' CONSENT
The Stockholders and Board of Directors
POSCO HULS Co., Ltd.:
We consent to incorporation by reference in the registration statements (Nos.
33-96420 and 333-19159) on Form S-8 of MEMC Electronic Materials, Inc. of our
report dated January 10, 1998, except as to note 18 which is as of February 9,
1999, relating to the balance sheets of POSCO HULS Co., Ltd. as of December 31,
1997 and 1996, and the related statements of operations, appropriation
(disposition) of retained earnings (deficit) and cash flows for the years ended
December 31, 1997 and 1996, which report is included in the Form 10-K/A
Amendment No. 3 of MEMC Electronic Materials, Inc.
/s/ KPMG San Tong Corp.
Seoul, Korea
March 2, 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 statements (Nos.
33-96420 and 333-19159) on Form S-8 of MEMC Electronic Materials, Inc. of our
report dated January 14, 1998, except as to notes (2)(b) and (15) which are as
of February 9, 1999, relating to the balance sheet of Taisil Electronic
Materials Corporation as of December 31, 1997, and the related statements of
operations, changes in stockholders' equity, and cash flows for the year then
ended, which report is included in the Form 10-K/A Amendment No. 3 of MEMC
Electronic Materials, Inc.
Taipei, Taiwan /s/ KPMG Certified Public Accountants
March 2, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of December 31, 1997 and the consolidated
statement of operations for the year ended December 31, 1997, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 30053
<SECURITIES> 0
<RECEIVABLES> 158175
<ALLOWANCES> 3473
<INVENTORY> 141447
<CURRENT-ASSETS> 376975
<PP&E> 1666211
<DEPRECIATION> 465384
<TOTAL-ASSETS> 1794424
<CURRENT-LIABILITIES> 338526
<BONDS> 510038
0
0
<COMMON> 414
<OTHER-SE> 715340
<TOTAL-LIABILITY-AND-EQUITY> 1794424
<SALES> 986673
<TOTAL-REVENUES> 986673
<CGS> 861914
<TOTAL-COSTS> 861914
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1700
<INTEREST-EXPENSE> 14743
<INCOME-PRETAX> (10330)
<INCOME-TAX> 2769
<INCOME-CONTINUING> (4513)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4513)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of September 30, 1997 and the consolidated
statement of operations for the nine months ended September 30, 1997, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 16074
<SECURITIES> 0
<RECEIVABLES> 168304
<ALLOWANCES> 2346
<INVENTORY> 126692
<CURRENT-ASSETS> 362424
<PP&E> 1601855
<DEPRECIATION> 436214
<TOTAL-ASSETS> 1710219
<CURRENT-LIABILITIES> 287125
<BONDS> 459043
0
0
<COMMON> 414
<OTHER-SE> 736656
<TOTAL-LIABILITY-AND-EQUITY> 1710219
<SALES> 728090
<TOTAL-REVENUES> 728090
<CGS> 633019
<TOTAL-COSTS> 633019
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6521
<INCOME-PRETAX> 5030
<INCOME-TAX> 2163
<INCOME-CONTINUING> (641)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (641)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of December 31, 1997 and the consolidated
statement of operations for the year ended December 31, 1997, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 23869
<SECURITIES> 0
<RECEIVABLES> 156445
<ALLOWANCES> 2368
<INVENTORY> 116618
<CURRENT-ASSETS> 340910
<PP&E> 1525440
<DEPRECIATION> 408118
<TOTAL-ASSETS> 1636563
<CURRENT-LIABILITIES> 283136
<BONDS> 376865
0
0
<COMMON> 415
<OTHER-SE> 743330
<TOTAL-LIABILITY-AND-EQUITY> 1636563
<SALES> 468064
<TOTAL-REVENUES> 468064
<CGS> 409163
<TOTAL-COSTS> 409163
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1256
<INCOME-PRETAX> 5226
<INCOME-TAX> 2248
<INCOME-CONTINUING> 1324
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1324
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of December 31, 1997 and the consolidated
statement of operations for the year ended December 31, 1997, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 23127
<SECURITIES> 0
<RECEIVABLES> 152033
<ALLOWANCES> 2234
<INVENTORY> 108179
<CURRENT-ASSETS> 318090
<PP&E> 1447808
<DEPRECIATION> 380484
<TOTAL-ASSETS> 1562790
<CURRENT-LIABILITIES> 239255
<BONDS> 367861
0
0
<COMMON> 415
<OTHER-SE> 732659
<TOTAL-LIABILITY-AND-EQUITY> 1562790
<SALES> 222284
<TOTAL-REVENUES> 222284
<CGS> 194215
<TOTAL-COSTS> 194215
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2346)
<INCOME-TAX> (1009)
<INCOME-CONTINUING> (2895)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2895)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of December 31, 1996 and the consolidated
statement of operations for the year ended December 31, 1996, 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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 35096
<SECURITIES> 0
<RECEIVABLES> 131624
<ALLOWANCES> 2299
<INVENTORY> 100505
<CURRENT-ASSETS> 318137
<PP&E> 1387825
<DEPRECIATION> 372680
<TOTAL-ASSETS> 1519472
<CURRENT-LIABILITIES> 275332
<BONDS> 284701
0
0
<COMMON> 415
<OTHER-SE> 748168
<TOTAL-LIABILITY-AND-EQUITY> 1519472
<SALES> 1119500
<TOTAL-REVENUES> 1119500
<CGS> 869315
<TOTAL-COSTS> 869315
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 295
<INTEREST-EXPENSE> 494
<INCOME-PRETAX> 129855
<INCOME-TAX> 51942
<INCOME-CONTINUING> 103388
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,388
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.49
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of September 30, 1996 and the consolidated
statement of operations for the year ended September 30, 1996, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 31205
<SECURITIES> 0
<RECEIVABLES> 179257
<ALLOWANCES> 2306
<INVENTORY> 98594
<CURRENT-ASSETS> 347236
<PP&E> 1227708
<DEPRECIATION> 355408
<TOTAL-ASSETS> 1430969
<CURRENT-LIABILITIES> 281093
<BONDS> 175533
0
0
<COMMON> 415
<OTHER-SE> 757497
<TOTAL-LIABILITY-AND-EQUITY> 1430969
<SALES> 917667
<TOTAL-REVENUES> 917667
<CGS> 681021
<TOTAL-COSTS> 681021
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 494
<INCOME-PRETAX> 146492
<INCOME-TAX> 58597
<INCOME-CONTINUING> 107917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107917
<EPS-PRIMARY> 2.61
<EPS-DILUTED> 2.60
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of June 30, 1996 and the consolidated statement of
operations for the six months ended December 31, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 30917
<SECURITIES> 0
<RECEIVABLES> 195744
<ALLOWANCES> 1800
<INVENTORY> 100833
<CURRENT-ASSETS> 406145
<PP&E> 1035456
<DEPRECIATION> 333671
<TOTAL-ASSETS> 1282560
<CURRENT-LIABILITIES> 227734
<BONDS> 135299
0
0
<COMMON> 414
<OTHER-SE> 732614
<TOTAL-LIABILITY-AND-EQUITY> 1282560
<SALES> 614142
<TOTAL-REVENUES> 614142
<CGS> 443987
<TOTAL-COSTS> 443987
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 494
<INCOME-PRETAX> 114121
<INCOME-TAX> 45649
<INCOME-CONTINUING> 86461
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,461
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.08
</TABLE>
