UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999_______________________________
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 Identification No.)
incorporation or organization)
501 Pearl Drive (City of O'Fallon) St. Peters, Missouri 63376
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
636-474-5000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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
The number of shares of the registrant's common stock outstanding at
October 31, 1999 was 69,555,992.
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 182,781 $ 167,685 $ 510,624 $ 605,081
Costs of goods sold 177,859 195,780 521,484 613,220
---------- ---------- ---------- ----------
Gross margin 4,922 (28,095) (10,860) (8,139)
Operating expenses:
Marketing and administration 15,962 16,295 50,134 53,665
Research and development 20,723 20,563 61,290 58,330
Restructuring costs - - - 139,454
---------- ---------- ---------- ----------
Operating loss (31,763) (64,953) (122,284) (259,588)
---------- ---------- ---------- ----------
Nonoperating (income) expense:
Interest expense 15,899 11,931 49,054 29,195
Interest income (450) (293) (1,183) (1,172)
Royalty income (1,500) (1,188) (4,183) (3,712)
Other, net 1,337 136 1,483 3,336
---------- ---------- ---------- ----------
Total nonoperating expense 15,286 10,586 45,171 27,647
---------- ---------- ---------- ----------
Loss before income taxes, equity in
loss of joint ventures
and minority interests (47,049) (75,539) (167,455) (287,235)
Income taxes (14,585) (17,642) (51,911) (65,136)
---------- ---------- ---------- ----------
Loss before equity in loss of joint
ventures and minority interests (32,464) (57,897) (115,544) (222,099)
Equity in loss of joint ventures (2,642) (12,860) (11,122) (31,341)
Minority interests 1,389 5,807 3,383 9,007
---------- ---------- ---------- ----------
Net loss $ (33,717) $ (64,950) $ (123,283) $ (244,433)
========== ========== ========== ==========
Basic loss per share $ (.48) $ (1.60) $ (2.06) $ (6.01)
========== ========== ========== ==========
Diluted loss per share $ (.48) $ (1.60) $ (2.06) $ (6.01)
========== ========== ========== ==========
Weighted average shares used in computing
basic loss per share 69,521,389 40,507,810 59,761,618 40,637,643
========== ========== ========== ==========
Weighted average shares used in computing
diluted loss per share 69,521,389 40,507,810 59,761,618 40,637,643
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
September 30, December 31,
1999 1998
<S> <C> <C>
------------ -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 20,656 $ 16,168
Accounts receivable, less allowance for doubtful accounts
$3,048 and $2,853 in 1999 and 1998, respectively 111,477 98,528
Income taxes receivable 5,143 10,161
Inventories 107,181 115,927
Deferred tax assets, net 14,920 23,129
Prepaid and other current assets 13,926 35,225
------------ -----------
Total current assets 273,303 299,138
Property, plant and equipment, net of accumulated depreciation of
$673,318 and $569,327 in 1999 and 1998, respectively 1,123,585 1,188,832
Investments in joint ventures 95,791 94,610
Excess of cost over net assets acquired, net of accumulated
amortization of $6,134 and $5,128 in 1999 and 1998, respectively 47,390 48,396
Deferred tax asset, net 169,641 104,650
Other assets 31,302 38,088
------------ -----------
Total assets $ 1,741,012 $ 1,773,714
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 27,114 $ 38,644
Accounts payable 75,326 112,581
Accrued liabilities 38,315 35,404
Customer deposits 22,446 17,639
Provision for restructuring costs 24,271 37,299
Accrued wages and salaries 26,375 17,077
------------ -----------
Total current liabilities 213,847 258,644
Long-term debt, less current portion 833,676 871,163
Pension and similar liabilities 91,849 92,466
Customer deposits 48,930 59,033
Other liabilities 44,562 45,126
------------ -----------
Total liabilities 1,232,864 1,326,432
------------ -----------
Minority interests 44,859 48,242
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 shares authorized,
none issued or outstanding at 1999 or 1998 - -
Common stock, $.01 par value, 200,000,000 shares authorized,
70,485,197 and 41,436,421 issued in 1999 and 1998, respectively 705 414
Additional paid-in capital 771,168 574,188
Accumulated deficit (271,119) (147,836)
Accumulated other comprehensive loss (20,320) (10,581)
Unearned restricted stock awards (125) (125)
Treasury stock, at cost: 929,205 in 1999 and 1998 (17,020) (17,020)
------------ -----------
Total stockholders' equity 463,289 399,040
------------ -----------
Total liabilities and stockholders' equity $ 1,741,012 $ 1,773,714
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (123,283) $ (244,433)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 117,705 120,229
Restructuring costs - 114,800
Minority interests (3,383) (9,007)
Equity in loss of joint ventures 11,122 31,341
Loss on sale of property, plant and equipment 1,380 82
Working capital and other (95,256) (31,758)
---------- ----------
Net cash used in operating activities (91,715) (18,746)
---------- ----------
Cash flows from investing activities:
Capital expenditures (35,439) (148,354)
Proceeds from sale of property, plant and equipment 44 5,242
Equity infusions in joint ventures (12,052) (11,747)
Notes receivable from affiliates 9,664 -
Other - 351
---------- ----------
Net cash used in investing activities (37,783) (154,508)
---------- ----------
Cash flows from financing activities:
Net short-term borrowings (6,708) (13,753)
Proceeds from issuance of long-term debt 216,642 217,560
Principal payments on long-term debt (272,802) (11,668)
Repurchase of common stock - (15,692)
Proceeds from issuance of common stock 197,271 -
---------- ----------
Net cash provided by financing activities 134,403 176,447
---------- ----------
Effect of exchange rates on cash and cash equivalents (417) 283
---------- ----------
Net increase in cash 4,488 3,476
Cash and cash equivalents at beginning of year 16,168 30,053
---------- ----------
Cash and cash equivalents at end of period $ 20,656 $ 33,529
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of MEMC Electronic
Materials, Inc. and Subsidiaries (the Company), in the opinion of management,
include all adjustments (consisting of normal, recurring items) necessary to
present fairly the Company's financial position and results of operations and
cash flows for the periods presented. The consolidated financial statements are
presented in accordance with the requirements of Regulation S-X and consequently
do not include all disclosures required by generally accepted accounting
principles. This report on Form 10-Q, including unaudited consolidated financial
statements, should be read in conjunction with the Company's annual report to
shareholders for the fiscal year ended December 31, 1998, which contains the
Company's audited financial statements for such year and the related
management's discussion and analysis of financial condition and results of
operations. Operating results for the nine-month period ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
(2) Earnings (loss) per share
The numerator for basic and diluted loss per share calculations is net loss for
all periods presented. The denominator for the basic and diluted loss per share
calculations for the three-month and nine-month periods ended September 30, 1999
and 1998 is the same within each period (the weighted average shares outstanding
for each respective period). The Company had 2,331,768 options outstanding at
September 30, 1999 which were not included in the computation of diluted loss
per share due to the net loss incurred during the three-month and nine-month
periods ended September 30, 1999.
(3) Inventories
Inventories consist of the following:
September 30, December 31,
1999 1998
---------- ----------
Raw materials and supplies $ 56,157 $ 59,722
Goods in process 21,972 33,612
Finished goods 29,052 22,593
---------- ----------
$ 107,181 $ 115,927
========== ==========
<PAGE>
(4) Restructuring Costs
During 1998, the Company recorded a charge to operations of $121,670 related to
the decisions to close its small diameter wafer facility in Spartanburg, South
Carolina, withdraw from its 60%-owned joint venture in a small diameter wafer
operation in China and to forego construction of a new 200 millimeter wafer
facility at its 75%-owned joint venture in Malaysia. Restructuring activity
since the provision for restructuring costs was recorded is as follows:
Balance Balance
Amount September 30, December 31,
Provision Utilized 1999 1998
Asset impairment/write-off:
Spartanburg property, plant
and equipment $ 36,300 $ 36,300 $ - $ -
Malaysian joint venture assets 28,000 27,469 531 2,805
Chinese joint venture assets 13,800 9,654 4,146 4,158
Other infrastructure 3,225 3,225 - -
--------- -------- --------- ---------
Total 81,325 76,648 4,677 6,963
--------- -------- --------- ---------
Dismantling and related costs:
Dismantling costs 11,345 2,448 8,897 10,306
Costs incurred by
equipment suppliers 5,000 5,000 - -
Environmental costs 3,500 1,352 2,148 3,489
Operating leases 3,000 172 2,828 3,000
Other 3,000 134 2,866 3,000
--------- -------- --------- ---------
Total 25,845 9,106 16,739 19,795
--------- -------- --------- ---------
Personnel Costs 14,500 11,645 2,855 10,541
--------- -------- --------- ---------
Total Restructuring Costs $ 121,670 $ 97,399 $ 24,271 $ 37,299
========= ========= ========= =========
Substantially all of the dismantling and related costs, and the personnel costs
included in the $24,271 restructuring reserve are related to the Spartanburg
facility. A significant portion of the reserve is expected to be utilized by
1999 year end.
In addition to the restructuring activities discussed above, the Company
recorded a $24,654 charge for a voluntary severance program during 1998.
(5) Comprehensive Loss
Comprehensive loss for the three months ended September 30, 1999 and 1998 was
$25,936 and $44,468, respectively. Comprehensive loss for the nine months ended
September 30, 1999 and 1998, was $133,022 and $228,938, respectively. The
Company's only adjustment from net loss to comprehensive loss was foreign
currency translation adjustments in all periods presented.
(6) Private Placement
On March 22, 1999, the Company sold 15,399,130 shares of common stock in a
private placement to VEBA Zweite Verwaltungsgesellschaft mbH (VEBA Zweite), a
subsidiary of VEBA AG, for $6.89 per share. The net proceeds of approximately
$106,000 were used to repay debt of approximately $100,000 under revolving
credit agreements with the balance used for general corporate purposes.
(7) Rights Offering
On April 16, 1999, the Company sold 13,628,446 shares of common stock for $6.89
per share in connection with a rights offering. The net proceeds of
approximately $91,000 were used to repay debt of approximately $90,000 from VEBA
AG and its affiliates under revolving credit agreements and the balance was used
for general corporate purposes. VEBA AG and its affiliates now own 71.8% of the
outstanding shares of common stock following the private placement and rights
offering.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Net Sales. Net sales increased 9% to $183 million for the third quarter of 1999
from $168 million for the third quarter of 1998. The increase was primarily
attributable to a 30% increase in product volume offset by a significant
decrease in average selling price in the third quarter 1999 compared to the
third quarter 1998. Net sales decreased 16% to $511 million for the nine months
ended September 30, 1999 from $605 million for the nine months ended September
30, 1998. The decrease in the 1999 nine-month period was attributable to a
significant decrease in average selling price. On a geographic basis, product
volumes for the nine months ended September 30, 1999 increased in the United
States and Asia Pacific, remained relatively flat in Europe, and decreased in
Japan as compared to the nine months ended September 30, 1998.
Excess capacity in the semiconductor and silicon wafer industries has caused
average selling prices to decline significantly since the beginning of 1997. In
general, average selling prices now appear to have stabilized. The Company
anticipates that some price increases will be possible in the next few quarters,
especially for small diameter products where the market is relatively sold out.
However, the 200mm market has not yet reached supply-demand equilibrium. As a
result, price increases for 200mm products are expected to be product- and
customer-specific, as opposed to broad adjustments. Overall, the Company expects
average selling prices to remain relatively flat in the near term.
Gross Margin. Gross margin improved to 3% in the third quarter of 1999 from
negative 17% for the third quarter of 1998. The increase in gross margin was
primarily attributable to volume increases and significant cost reductions in
1999, which were substantially offset by significant declines in prices as
compared to the third quarter of 1998. Advanced large diameter and epitaxial
products represented 53% and 50% of product volume for the third quarters of
1999 and 1998, respectively. The continued increase in this ratio is indicative
of the Company's customers utilizing 200-millimeter facilities in preference to
their smaller diameter facilities in order to obtain the lowest cost per device.
Gross margin was negative 2% in the nine months ended September 30, 1999
compared to negative 1% in the nine months ended September 30, 1998. This
decline in gross margin was primarily attributable to significant declines in
price for the nine months ended September 30, 1999 compared to the nine months
ended September 30, 1998, which were only partially offset by cost reductions
and volume increases.
Interest Expense. Interest expense totaled $16 million and $49 million for the
three and nine-month periods ended September 30, 1999, respectively, compared to
$12 million and $29 million for the three and nine-month periods ended September
30, 1998, respectively. The increase in interest expense was primarily
attributable to increased borrowings and, to a lesser extent, higher interest
rates on loans from VEBA AG and its affiliates as a result of the Company's debt
restructuring in September 1998.
Income Taxes. The effective income tax rates were 31% and 23% for the nine
months ended September 30, 1999 and 1998, respectively. This fluctuation
resulted from changes in the composition of worldwide taxable income.
Equity in Loss of Joint Ventures. Equity in loss of joint ventures was $3
million in the third quarter 1999, as compared to $13 million in the
third-quarter 1998. The Company's share of the loss of Posco Huls Co., Ltd.
(PHC), the Company's 40%-owned, unconsolidated joint venture in South Korea, was
$1 million in the third quarter 1999 compared to a loss of $8 million in the
third quarter 1998. PHC's reduction in loss was primarily due to a significant
increase in product volume partially offset by a decrease in average selling
price. The Company's share of the loss of Taisil Electronic Materials
Corporation (Taisil), the Company's 45%-owned, unconsolidated joint venture in
Taiwan, was $2 million in the third quarter 1999 compared to a loss of $5
million in the third quarter 1998. Taisil's reduction in loss was primarily due
to a significant increase in product volume and an increase in average selling
price in the third quarter 1999 compared to third quarter 1998. The Company
expects modest price increases at Taisil and PHC in the fourth quarter 1999.
Equity in loss of joint ventures was $11 million in the nine months ended
September 30, 1999, as compared to a loss of $31 million in the nine months
ended September 30, 1998. The Company's share of the loss of PHC was $5 million
in the nine months ended September 30, 1999 compared to a loss of $14 million in
the nine months ended September 30, 1998. PHC experienced an increase in
revenues in the nine months ended September 30, 1999 compared to the nine months
ended September 30, 1998. PHC's increase in revenues and decrease in loss were
primarily due to a significant increase in product volume, partially offset by a
decrease in average selling price. The Company's share of the loss of Taisil was
$6 million in the nine months ended September 30, 1999 compared to a loss of $17
million in the nine months ended September 30, 1998. Taisil experienced an
increase in revenues in the nine months ended September 30, 1999 compared to the
nine months ended September 30, 1998. Taisil's increase in revenue was primarily
due to a significant increase in product volume, partially offset by a decrease
in average selling price.
Net Loss. Net loss for the nine-month periods ended September 30, 1999 and 1998
was approximately $123 million and $244 million, respectively. The reduction in
net loss for the nine months ended September 30, 1999 was primarily a result of
restructuring charges of $111 million, net of the tax benefit, for the nine
months ended September 30, 1998. No restructuring charges were recorded in 1999.
Liquidity and Capital Resources. At September 30, 1999, the Company had cash and
cash equivalents of $21 million. The Company's borrowings against its $1,034
million of credit facilities were $861 million at September 30, 1999, including
borrowings of $688 million from VEBA AG and its affiliates. Outstanding
borrowings decreased $49 million from December 31, 1998 to September 30, 1999.
The decrease in borrowings was primarily attributable to the application of the
net proceeds from the Company's private placement and rights offering completed
in the first six months of 1999 to repay debt under the Company's revolving
credit agreements. . This decrease was partially offset by U.S. Dollar/Japanese
Yen currency fluctuations on Yen denominated debt. Although the underlying Yen
denominated debt did not change during this period, due to the strengthening of
the Yen, the U.S. Dollar equivalent of this debt increased $18 million.
A comparison of the components of the Company's financial condition follows:
(dollars in millions):
September 30, December 31,
1999 1998
--------- ---------
Working capital $ 59 $ 40
Stockholders' equity $ 463 $ 399
Current ratio 1.3 to 1 1.2 to 1
Total debt to total capitalization 63% 67%
Weighted average borrowing rate 7.6% 7.8%
Cash used by operating activities increased to $92 million in the nine months
ended September 30, 1999 from $19 million in the nine months ended September 30,
1998. The increase is due primarily to an increase in accounts receivable in the
nine months ended September 30, 1999 as compared to a decrease in accounts
receivable in the nine months ended September 30, 1998. Accounts receivable
increased as a result of three consecutive quarters of increased sales in 1999
compared with decreased quarterly sales in 1998.
Cash used in investing activities decreased in the nine months ended September
30, 1999 to $38 million from $155 million in the nine months ended September 30,
1998. The primary reduction in cash used by investing activities was a reduction
in spending on capital projects. The Company had committed capital expenditures
of $28 million as of September 30, 1999. Capital expenditures for the nine
months ended September 30, 1999 were primarily related to the worldwide
implementation of SAP and to maintenance capital. In addition, the Company made
a $12 million equity infusion into Taisil in the nine months ended September 30,
1999. The Company currently expects total capital expenditures and equity
infusions into joint ventures will not exceed $75 million in 1999.
Cash flows provided by financing activities decreased to $134 million in the
nine months ended September 30, 1999 from $176 million in the nine months ended
September 30, 1998. The most significant change in the nine months ended
September 30, 1999, as compared to the prior year period, was that financing in
1999 consisted primarily of proceeds from issuance of common stock versus the
issuance of debt in 1998.
On September 27, 1999, VEBA AG, the majority shareholder and principal lender of
the Company, announced a merger with VIAG AG. The VEBA/VIAG group (the Group)
has stated that its core businesses will be energy and specialty chemicals. The
new Group's intent is to systematically and optimally divest certain non-core
businesses, including the Company. The Company intends to work closely with the
Group to effectuate an orderly divestiture process that preserves and optimizes
the value of the Company.
The silicon wafer industry is highly capital intensive. The Company's capital
needs depend on numerous factors, including its profitability and investment in
capital expenditures and research and development. Management believes that the
liquidity provided by existing cash balances and credit facilities, together
with cash generated from operations, will be sufficient to satisfy commitments
for capital expenditures and operating cash requirements through 2000. If,
however, the Company's future financial performance fails to meet management's
current expectations, then the Company may require additional financing in order
to satisfy planned capital expenditures and operating cash requirements for
2000. There can be no assurance that such financing will be available from VEBA
AG and its affiliates or other sources on terms acceptable to the Company.
Historically, the Company has funded its operations primarily through loans from
VEBA AG and its affiliates, internally generated funds, and issuance of common
stock. To a lesser extent, the Company has raised funds by borrowing money from
commercial banks. The Company is not required to make any principal repayments
on its existing credit facilities with VEBA AG and its affiliates until 2001.
Under these credit facilities the Company cannot pledge any of its assets to
secure additional financing without the consent of VEBA AG and its affiliates.
The Company is currently engaged in discussions with its financial advisors and
VEBA AG regarding additional sources of capital.
Year 2000. Many existing software programs, computers and other types of
equipment were not designed to accommodate the Year 2000 and beyond. If not
corrected, these computer applications and equipment could fail or create
erroneous results. For the Company, this could disrupt purchasing,
manufacturing, sales, finance and other support areas and affect the Company's
ability to timely deliver silicon wafers with the exacting specifications
required by the Company's customers, thereby causing potential lost sales and
additional expenses.
State of Readiness. The Company has created a Year 2000 Project Team that is
comprised of a Program Office, including a Global Project Manager, Customer and
Vendor Management groups, and Year 2000 representatives from all sites around
the world, including the Company's unconsolidated joint ventures. This team is
responsible for planning and monitoring all Year 2000 activities and reporting
to the Company's executive management. The Company's Chief Financial Officer is
the sponsor for the Year 2000 project and reports to the Company's Board of
Directors on a periodic basis.
The Company's Year 2000 project encompasses both information and non-information
systems within the Company as well as the investigation of the readiness of the
Company's strategic suppliers/business partners.
As part of its Year 2000 project, the Company has inventoried and assessed the
Year 2000 readiness of the following:
- - In-house Applications -- Those applications that are developed and
supported in-house or purchased applications that are heavily customized
and supported in-house. This classification also includes
end-user-developed applications deemed critical to the business.
- - Business Software (Purchased) -- Applications purchased from an outside
vendor and used for automating business processes (i.e., financial systems,
order processing systems, purchasing systems).
- - Manufacturing Software (Purchased) -- Applications purchased from an
outside vendor and used for automating manufacturing processes.
- - Personal Computer Software (Purchased) -- All software packages
resident on personal computers. This includes things such as operating
systems, word processing software, communications software, project
management software, and spreadsheet software.
- - Infrastructure Software (Purchased) -- Purchased software used in the
client/server and network environments.
- - IT Hardware -- Information Technology hardware components including
midrange machines, personal computers, printers, network hardware.
- - Facilities & Utilities -- Components in the office and manufacturing
supporting systems environments. Types of components include: copy
machines, fax machines, telephone/communications systems, security systems,
fire alarm/control, electrical, waste treatment, alarms, and air handlers.
- - Manufacturing Equipment -- Shop floor equipment such as clean rooms,
crystal pullers, epitaxial reactors, inspection, lab, lappers, laser
markers, measurement tools, grinders, polishers, saws, and wet benches.
<PAGE>
In-House Applications. The Company has evaluated the extent to which
modifications of the Company's in-house applications are believed necessary to
accommodate the Year 2000 and has completed the modifications of the Company's
in-house applications necessary to enable continued processing of data into and
beyond the Year 2000.
Purchased Software. The Company has obtained, where feasible, contractual
warranties from systems vendors that their products are Year 2000 compliant. The
Company has substantially completed its Year 2000 project related to business
software, infrastructure software, manufacturing software, and personal computer
software. The Company requires Year 2000 contractual warranties from all vendors
of new software and hardware. In addition, the Company is testing
newly-purchased computer hardware and software systems in an effort to ensure
their Year 2000 compliance.
Embedded Systems. For in-house embedded systems, the Company has modified its
systems to enable the continued functioning of equipment into and beyond the
Year 2000. For third-party embedded systems, the Company has obtained, where
feasible, contractual warranties from systems vendors that their products are
Year 2000 compliant. The Company has substantially completed its Year 2000
project for hardware, facilities and utilities, and manufacturing equipment.
Suppliers/Business Partners. The Company has communicated with its strategic
suppliers and equipment vendors seeking assurances that they will be Year 2000
ready. The Company's goal is to obtain as much detailed information as possible
about its strategic suppliers/business partners' Year 2000 plans so as to
identify those companies which appear to pose a significant risk of failure to
perform their obligations to the Company as a result of the Year 2000. Detailed
information regarding all of its strategic suppliers and equipment vendors has
been compiled and Year 2000 audits have been completed for the most critical
suppliers.
Costs to address Year 2000. Spending for modifications and updates is expensed
as incurred and is not expected to have a material impact on the Company's
results of operations or cash flows. The cost of the Company's Year 2000 project
is being funded through borrowings. The Company estimates that its total
incremental Year 2000 expenditures will be in the range of $5 - $7 million.
Through September 30, 1999, the Company has expended approximately $3.7 million
of incremental costs consisting mainly of contract programmers and consulting
costs associated with the evaluation, assessment and remediation of computer
systems and manufacturing equipment. The Company anticipates that contract
programming costs will be its most significant cost as the Year 2000 project
proceeds to completion.
Risk Analysis. Like most large business enterprises, the Company is dependent
upon its own internal computer technology and relies upon the timely performance
of its suppliers/business partners. A large-scale Year 2000 failure could impair
the Company's ability to timely deliver silicon wafers with the exacting
specifications required by its customers, thereby causing potential lost sales
and additional expenses. The Company's Year 2000 project seeks to identify and
minimize this risk and includes testing of its in-house applications, purchased
software and embedded systems to ensure that all such systems will function
before and after the Year 2000. The Company has continued to refine its
understanding of the risk the Year 2000 poses to its strategic
suppliers/business partners based upon information obtained through its surveys.
This activity has continued through the 1999 third quarter.
<PAGE>
Contingency Plans. The Company's Year 2000 project includes the development of
contingency plans for business-critical systems and manufacturing equipment, as
well as for strategic suppliers/business partners to attempt to minimize
disruption to its operations in the event of a Year 2000 failure. The Company is
nearing completion of plans to address a variety of failure scenarios, including
failures of its in-house applications, as well as failures of strategic
suppliers/business partners. The Company anticipates it will substantially
complete Year 2000 contingency planning by November, 1999.
Year 2000 Cautionary Statement. Year 2000 issues are widespread and complex.
While the Company believes it will address them on a timely basis, the Company
cannot guarantee that it will be successful or that these problems will not
materially adversely affect its business or results of operations. To a large
extent, the Company depends on the efforts of its customers, suppliers and other
organizations with which it conducts transactions to address their Year 2000
issues, over which the Company has no control.
Euro Conversion. On January 1, 1999, eleven of the fifteen member countries of
the European union established fixed conversion rates between their existing
sovereign currencies and the Euro. The participating countries have agreed to
adopt the Euro as their common legal currency as of that date while still
utilizing their local currency until January 1, 2002.
The Company is assessing the potential impact that may result from the Euro
conversion. In addition to tax accounting considerations, the Company is also
assessing the potential impact from the Euro conversion in a number of other
areas, including the technical challenges to adapt information technology and
other systems to accommodate Euro-denominated transactions; the competitive
impact of cross-border price transparency, which may make it more difficult for
businesses to charge different prices for the same products on a
country-by-country basis; the impact on currency exchange costs and currency
exchange rate risk; and the impact on existing contracts. While the Company will
continue to assess the impact of the introduction of the Euro, based on
currently available information, management does not believe that the
introduction of the Euro will have a material adverse effect on the Company's
financial condition or results of operation.
Recently Issued Accounting Pronouncements. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires the recognition of all derivatives as assets or
liabilities within the balance sheet, and requires both the derivatives and the
underlying exposure to be recorded at fair value. Any gain or loss resulting
from changes in fair value will be recorded as part of the results of
operations, or as a component of comprehensive income or loss, depending upon
the intended use of the derivative. In July 1999, the Financial Accountings
Standards Board changed the effective date of SFAS No. 133 to all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
believe that the implementation of this Statement will have a material adverse
effect on its financial condition or results of operations.
Cautionary Statement Regarding Forward-Looking Statements. This Form 10-Q
contains "forward-looking" statements within the meaning of the Securities
Litigation Reform Act of 1995, including those concerning: the utilization of
the restructuring reserve; liquidity through 2000; the successful implementation
and expected cost and completion dates of Year 2000 initiatives; expectation
that average selling prices will remain relatively flat in the near term;
possible price increases on smaller diameter products and some 200mm products;
price increases at Taisil and PHC; capital expenditures and equity infusions
into joint ventures in 1999; impact of the introduction of the Euro; and the
impact of the implementation of SFAS No. 133. Such statements involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Potential risks and uncertainties
include such factors as: market demand for silicon wafers; utilization of
manufacturing capacity; ability of the Company to reduce manufacturing costs;
demand for semiconductors generally; changes in the pricing environment; general
economic conditions in the Asia Pacific region, Japan and Europe; competitors'
actions; the effectiveness of the Company's Year 2000 efforts; accuracy of
management's assumptions regarding the dismantling of the Spartanburg facility;
impact of the introduction of the Euro; changes in financial market conditions;
changes in interest and exchange rates; and other risks described in the
Company's filing with the Securities and Exchange Commission, including the
Company's annual report on Form 10-K for the year ended December 31, 1998.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign exchange rates. The Company enters into
currency swaps to minimize the risk and costs associated with its financing
activities in currencies other than its functional currency. The Company does
not hold derivatives for trading purposes. There have been no significant
changes in the Company's holdings of interest rate sensitive or foreign currency
exchange rate sensitive instruments since December 31, 1998.
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to PART I, Item 3. Legal Proceedings, in the Company's annual
report on Form 10-K for the year ended December 31, 1998 and to PART II, Item 1.
Legal Proceedings in the Company's quarterly reports on Form 10-Q for the
quarters ended March 31, 1999 and June 30, 1999 for descriptions of legal
proceedings.
As previously reported, on March 18, 1999 the Company agreed in principal to
settle a case entitled Larry Lambert, Andres Garcia and Rogers Patino vs. MEMC
Pasadena, Inc. which related to a flash ignition that occurred at the MEMC
Pasadena Plant. See the Company's annual report on Form 10-K for the year ended
December 31, 1998. Effective as of September 10, 1999, the plaintiffs executed a
release that effectuates this settlement. Under the settlement, this matter is
completely covered by insurance. The Company anticipates that the court will
dismiss this case with prejudice within the next several weeks.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
- --------- --------------
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(ii) of the Company's
Form 10-Q for the Quarter ended June 30, 1999).
+ 10-pp MEMC Electronic Materials, Inc. Severance Plan for Senior Officers.
27 Financial Data Schedule
(filed electronically with the SEC only).
- -------------------------------
+ This Exhibit constitutes a management contract, compensatory plan
or arrangement.
(b) Reports on Form 8-K
During the third quarter of 1999, the Company filed no current reports on
Form 8-K.
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
November 1, 1999 /s/ JAMES M. STOLZE
- ---------------- ------------------------------
James M. Stolze
Executive Vice President and Chief Financial
Officer (on behalf of the registrant and as
principal financial and accounting officer)
<PAGE>
EXHIBIT INDEX
The exhibits below are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
Exhibit
Number Exhibit
- ------- --------
10-pp MEMC Electronic Materials, Inc. Severance Plan for Senior Officers.
27 Financial Data Schedule (filed electronically with SEC only).
MEMC ELECTRONIC MATERIALS, INC.
SEVERANCE PLAN FOR SENIOR OFFICERS
Objectives: (1)Assure key executives of fair and equitable treatment in cases of
involuntary termination, (2) aid in attracting and retaining key executives
during an uncertain period, while avoiding the need for individual negotiations
and the potential inequities that could arise, and (3) treat terminations
uniformly, whether or not in connection with a change in control, thereby
avoiding any concern which would arise if the plan was only for change in
control situations.
Vehicle for Providing Severance Protection: Severance Plan for Senior Officers
(not individual contracts), adopted in writing by the Board of Directors, with
individuals covered by the plan designated in writing and approved by the
Compensation Committee. Covered executives will receive written notice of their
designation and a copy of the Plan signed by the Corporate Vice President, Human
Resources.
Nature of Contract: This Plan provides for severance payments to eligible
employees in the amounts and in the circumstances described in this Plan.
Nothing contained in this Plan shall be construed to be a contract of employment
for any term, nor shall the provisions of this Plan restrict the right of MEMC
Electronic Materials, Inc. ("MEMC") to discharge an eligible employee, or
restrict the right of an eligible employee to terminate his or her employment.
This Plan relates exclusively to additional compensation for services rendered
in certain limited circumstances explicitly described in this Plan.
Eligibility: Those Corporate and Executive Vice Presidents reporting to the CEO
who are designated in writing and approved by the Compensation Committee shall
be eligible to participate in this Plan. Covered executives will receive written
notice of their designation.
Duration of Severance Protection: This Severance Plan shall remain in effect for
three years from the date of its adoption, and shall be automatically renewed
annually thereafter, unless twelve months advance notice is given to the
affected covered executive to amend or terminate the plan. Notwithstanding the
above, this Plan shall remain in effect for two years following a Change in
Control, after which time the Plan shall terminate.
An employee may be removed from coverage in this Plan by the Compensation
Committee only by twelve months advance written notice to the employee; provided
that an employee who is an eligible employee at the time of a Change in Control
shall remain covered by this Plan for at least two years following the Change in
Control.
A Change in Control ("CIC"), for purposes of this Plan, means a change in
control as defined in the MEMC Electronic Materials, Inc. Equity Incentive Plan,
as Restated March 18, 1997; except that the parenthetical exception for the
acquisition of all of the Common Stock pursuant to approval of the Continuing
Directors shall not apply.
Types of terminations Which Trigger Severance Benefits: MEMC shall provide the
severance benefits described below in the event of an Involuntary Termination of
employment (other than a Termination for Cause) of an eligible employee while
covered by this Plan, or in the event of the Constructive Termination of
employment of an eligible employee while covered by this Plan within two years
after a CIC.
An employee shall not be entitled to severance benefits under this Plan on
account of death, total and permanent disability, a Voluntary Termination of
employment, or a Termination for Cause. Furthermore, an employee shall not be
entitled to severance benefits under this Plan on account of termination of
employment with MEMC as a result of a sale or spin-off of a subsidiary or
business unit if (1) the executive is offered continued employment with the sold
or spun-off entity that does not result in: a material, adverse change in title,
responsibilities or reporting relationship; an adverse change in total
compensation opportunity unless part of a cutback applicable to a broad class of
management employees; or a forced relocation more than 25 miles from the
executive's pre-CIC MEMC office location; and (2) the purchaser enters into a
severance agreement with the executive that provides substantially similar
benefits as this Plan for a period of at least two years after such transaction.
Definitions:
A Voluntary Termination of employment means a termination of employment with
MEMC resulting solely from the initiative of the employee without undue
influence, coercion or duress on the employee caused by MEMC. A resignation by
an employee which is an alternative to immediate termination by MEMC is not a
Voluntary Termination.
An Involuntary Termination is a termination of employment that is not a
Voluntary Termination as defined above.
A Constructive Termination after a CIC means a
(1) Material, adverse change in title, responsibilities or reporting
relationship,
(2) Adverse change in total compensation opportunity unless part of a cutback
applicable to a broad class of management employees,
(3) Forced relocation more than 25 miles from the executive's pre-CIC MEMC
office location, or
(4) Failure of the new owner to honor the Plan or the aspects of a sale
agreement relating to employment matters
within two years after a CIC.
An eligible employee must file written notice of such an event with the
Corporate Vice President, Human Resources within thirty days of the event. If
MEMC does not rectify the event within thirty days after receipt of such notice,
the employee may quit and receive severance benefits.
Termination for Cause means the Involuntary Termination of employment of an
employee because of:
(1) Dishonesty that results in a material detriment to MEMC;
(2) The intentional subversion of MEMC's best interests; or
(3) Insubordination with respect to a specific directive or resolution of the
CEO or the Board of Directors.
Severance Benefits:
The severance benefits under this Plan shall consist of the following four
components:
Cash Compensation: The greater of (1) one year's base salary in effect at the
time of termination of employment (with no payment for accrued or unused
vacation), or (2) two week's of such salary for each Year of Service (as defined
in the Supplemental Executive Pension Plan ("SEPP") for purposes of vesting),
plus one week, plus accrued and unused vacation. In addition, the executive will
receive a pro rata bonus payment for the year of termination based on the number
of days in such year before the date of termination of employment. The base
bonus for purposes of such proration shall be determined based on the actual
level of achievement of the relevant goals. However, if the termination of
employment occurs within two years after a CIC, such pro rata bonus shall be
based on the full targeted level (without regard to the achievement of goals);
and, in addition to such pro rata bonus, the executive will receive a payment
equal to the bonus to which the executive would be entitled for the year of
termination at the full targeted level.
The salary-based portion of such severance payment shall be paid in a single
lump sum, net of applicable taxes, within thirty days of termination. The bonus
portion of such severance payment generally shall be paid at the same time as
bonuses are paid generally to executives with respect to that year. However, the
bonus portion of such severance payment due on account of a termination of
employment within two years after a CIC shall be paid within thirty days of
termination.
Stock Options: Outstanding stock options will be treated according to the terms
of their award letter; provided that, if a termination of employment occurs
subsequent to and within two years of a CIC which triggers severance benefits,
the executive will be deemed to have retired for purposes of the stock option
awards.
Retirement Benefits: Notwithstanding anything to the contrary in the SEPP for
purposes of determining benefits under the SEPP, the period of severance with
respect to which severance pay was determined shall be treated as Benefit
Service. Payments from the SEPP shall not commence until such severance period
has lapsed. However, Average Total Earnings shall be determined as of the actual
termination of employment of the employee.
Medical Benefits: If an employee eligible for such severance payments is not
eligible for MEMC retiree medical benefits at termination of his or her
employment, MEMC will pay the executive the grossed up cost of eighteen months
COBRA premiums for medical and dental coverage for the same level of coverage
that the executive is enrolled immediately prior to termination.
If an employee eligible for such severance payments is eligible for MEMC retiree
medical benefits at termination of his or her employment, MEMC will pay the
executive the grossed up cost of eighteen months COBRA premiums only for dental
coverage for the same level of coverage that the executive is enrolled
immediately prior to termination.
All other coverage will be terminated as of the termination date in accordance
with the terms of the applicable plan.
Severance benefits under this Plan shall be in lieu of any severance benefits
under any other severance plan or policy of MEMC.
Amendment and Termination:
Subject to the initial three year duration period described above, the Board of
Directors may amend or terminate this Plan at any time; except that, for any
amendment or termination that adversely affects a covered executive, a one-year
notice shall be given to such employee. In the event a CIC occurs during that
notice period, the intended change shall be suspended. Notwithstanding the
above, this Plan shall remain in effect for two years following a Change in
Control, after which time it shall terminate.
Release: If the benefits under this Plan are invoked as a result of an action
that is not following a CIC, the executive will be obligated to sign a release
acceptable to MEMC in order to receive payment. In the event of benefits invoked
as a result of a CIC, no release will be required for benefits to be paid.
Arbitration: Any disputes between the parties to this Agreement shall be settled
by arbitration in St. Louis, Missouri, before a single arbitrator in accordance
with the Commercial Arbitration Rules under the American Arbitration
Association, provided that discovery shall be permitted in accordance with the
Federal Rules of Civil Procedure. The decision of such arbitration shall be
final and conclusive on the parties, and judgment upon such decision may be
entered in any court having jurisdiction thereof. The employer will pay the full
cost of the arbitration.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form10-Q
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 20,656
<SECURITIES> 0
<RECEIVABLES> 114,525
<ALLOWANCES> 3,048
<INVENTORY> 107,181
<CURRENT-ASSETS> 273,303
<PP&E> 1,796,903
<DEPRECIATION> 673,318
<TOTAL-ASSETS> 1,741,012
<CURRENT-LIABILITIES> 213,847
<BONDS> 833,676
0
0
<COMMON> 705
<OTHER-SE> 462,584
<TOTAL-LIABILITY-AND-EQUITY> 1,741,012
<SALES> 510,624
<TOTAL-REVENUES> 510,624
<CGS> 521,484
<TOTAL-COSTS> 521,484
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,054
<INCOME-PRETAX> (167,455)
<INCOME-TAX> (51,911)
<INCOME-CONTINUING> (123,283)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (123,283)
<EPS-BASIC> (2.06)
<EPS-DILUTED> (2.06)
</TABLE>
