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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark
One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
[X]
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
[_]
OF THE 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) 63376
St. Peters, Missouri (Zip Code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code (636) 474-5000
Securities registered pursuant to Section 12(b) of the Act:
________Title of Each Class__________: _______Name of Each Exchange on Which
$.01 par value Common Stock Registered___________________________:
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of such stock on March 13, 2000, as
reported by the New York Stock Exchange, was approximately $360.0 million.
The number of shares outstanding of the registrant's Common Stock as of
March 13, 2000, was 69,557,000 shares.
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Documents Incorporated by Reference
(1) Portions of the registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1999 (Part I, Part II, and Part IV of Form 10-K).
(2) Portions of the registrant's Notice of Annual Meeting of Stockholders and
Proxy Statement dated March 27, 2000 (Part III of Form 10-K).
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PART I
Item 1. Business
General
MEMC Electronic Materials, Inc. (MEMC or the Company) is a leading worldwide
producer of silicon wafers. The silicon wafer is the fundamental building
block from which almost all semiconductors are manufactured. Semiconductors
are used in virtually all microelectronic applications, including computer
systems, telecommunications equipment, automobiles, consumer electronics
products, industrial automation and control systems, and analytical and
defense systems. We operate manufacturing facilities, directly or through
joint ventures, in Italy, Japan, Malaysia, South Korea, Taiwan, and the United
States. We sell silicon wafers to most of the world's largest manufacturers of
semiconductors. We are the only significant non-Japanese silicon wafer
manufacturer with manufacturing and research facilities in Japan.
MEMC was incorporated in 1984 under the name Dynamit Nobel Silicon Holdings,
Inc. (DNS). Huls AG, a subsidiary of VEBA AG, subsequently acquired ownership
of DNS. In 1989, Huls AG, through DNS and other related companies, acquired
the electronic materials businesses operated by Monsanto Company (Monsanto) in
the United States, Europe, Japan and Malaysia. Huls AG changed the name of DNS
to MEMC Electronic Materials, Inc. and combined the assets acquired from
Monsanto with the assets of its United States and Italian silicon wafer
business to form the current MEMC. VEBA Corporation, a subsidiary of VEBA AG,
acquired all of the outstanding common stock of MEMC from Huls AG in 1990,
which it subsequently transferred to its wholly-owned subsidiary, Huls
Corporation, in 1993. On July 12, 1995, we completed our initial public stock
offering. As a result of the public stock offering, Huls Corporation's
ownership of our outstanding common stock was reduced to 51.9%. On September
30, 1998, Huls Corporation merged into VEBA Corporation.
On March 22, 1999, we sold 15,399,130 shares of our common stock to VEBA
Zweite Verwaltungsgesellschaft mbH (VEBA Zweite), a subsidiary of VEBA AG, in
a private placement. On April 16, 1999, we sold an additional 13,069,898
shares of our common stock to VEBA Zweite in connection with a rights
offering. As a result, VEBA AG, through its subsidiaries VEBA Corporation and
VEBA Zweite, now owns 71.8% of our outstanding common stock.
We are engaged in one reportable industry segment--the design, manufacture
and sale of electronic grade silicon wafers for the semiconductor industry.
Financial information regarding this industry segment is contained in our 1999
Annual Report which information is incorporated herein by reference.
Industry Overview
Almost all semiconductors are manufactured from silicon wafers, and thus the
strength of the silicon wafer industry is highly correlated to the performance
of the semiconductor industry. Although there are approximately two hundred
semiconductor manufacturers worldwide, we believe that the top twenty
semiconductor manufacturers accounted for over 70% of all semiconductor
revenues in 1999. We also believe that of the approximately 17 silicon wafer
manufacturers in the world today, six principal manufacturers, including MEMC,
supply a substantial majority of the wafers used by the major semiconductor
manufacturers.
Semiconductor Industry
The semiconductor industry historically has been a high growth cyclical
industry. Worldwide, the industry grew at a compound annual growth rate of
14.4% from $24.3 billion in revenues in 1985 to $160.0 billion in revenues in
1999, according to Dataquest estimates. Continuous improvements in
semiconductor process and design technologies, semiconductor fabrication
equipment and the composition of silicon wafers have allowed semiconductor
manufacturers to produce more complex, higher performance and more reliable
devices at a lower cost per device. The result has been a large proliferation
of uses for semiconductors and historically rapid growth in semiconductor
revenue.
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Despite the semiconductor industry's history of significant growth,
semiconductor revenues grew by only 3.6% in 1997 and declined by 7.5% in 1998,
according to Dataquest estimates. This slowdown was attributable to excess
capacity and resultant price erosion, especially for DRAMs (commonly used
computer memory chips). This downturn extended through 1998 due to continued
overcapacity and the weak economic conditions in the Asia Pacific and Japanese
markets. In 1999, semiconductor revenues grew by 17.6%, according to Dataquest
estimates. This turnaround is attributable to improved demand for DRAMs,
improved economic conditions in the Asia Pacific and Japanese markets, and
newer technologies related to the Internet, telecommunications and
connectivity.
Throughout the downturn, semiconductor manufacturers exerted significant
price pressure on their raw material suppliers, including silicon wafer
manufacturers. Semiconductor manufacturers also accelerated the speed at which
they reduced their device line widths, or the distance between circuit
elements, in an effort to reduce costs. The reduction in line widths results
in a requirement of less silicon per device. Additionally, during the downturn
the semiconductor industry experienced significant restructuring and
consolidation activities.
Semiconductor manufacturers greatly reduced their capital spending beginning
in late 1997 and throughout 1998. This reduced capital spending limited
additions to capacity. In 1999, capital spending increased as a result of the
improvement in the semiconductor market.
Silicon Wafer Industry
The silicon wafer industry historically has been a high growth cyclical
industry correlated to the growth of the semiconductor industry. Worldwide,
the industry grew at a compound annual growth rate of 9.9% from 1.2 billion
square inches in 1985 to 4.5 billion square inches in 1999, according to
Dataquest estimates. From 1993 through the first half of 1996 the industry was
characterized by excess demand and wafer shortages. Due to these shortages and
anticipated future demand, wafer manufacturers quickly added capacity,
especially for 8-inch wafers, the predominant wafer used in the industry today
and the wafer diameter anticipated to have the most significant growth in
demand over the next several years. This growth rate declined significantly
beginning in the second half of 1996.
The silicon wafer industry slowdown, which began in the summer of 1996 and
continued through 1998, left the industry in a state of overcapacity. This
overcapacity resulted in significant price declines. The price declines have
been greatest for 8-inch wafers where the highest overcapacity exists.
According to Dataquest, silicon wafer consumption declined by an estimated
8.7% in 1998 and increased by an estimated 22.6% in 1999. Despite the increase
in silicon wafer consumption, the silicon wafer industry still suffers from
overcapacity, predominately in the 8-inch market. As a result, pricing has
remained depressed, although by the end of 1999 the silicon wafer market
appears to have reached a period of price stabilization.
Major silicon wafer manufacturers, including MEMC, invested in 12-inch wafer
manufacturing capacity in anticipation that the semiconductor industry would
migrate to this larger diameter wafer. However, in 1998, the industry
experienced a softening semiconductor market and successful implementation of
thinner device linewidths on the current diameters. This resulted in industry
recognition that the transition to 12-inch wafers would be delayed. The new
transition timing requires 12-inch wafer characteristics to be even more
advanced at the time they are introduced for production of integrated
circuits.
The leading semiconductor manufacturers organized and funded two industry
consortia, International Sematech in Austin, Texas, and Selete in Japan, for
the purpose of evaluating 12-inch equipment and materials. During 1999, the
primary use of 12-inch wafers was for semiconductor device process and tool
development, although we also supplied some 12-inch prime wafers to
semiconductor manufacturers. We are beginning to see renewed interest in 12-
inch wafers, as numerous semiconductor manufacturers have recently announced
plans for 12-inch fabrication lines. However, we do not expect customers to
start up large-scale 12-inch fabrication lines until the year 2002 or beyond.
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Products
Our silicon wafers vary in diameter, surface features (polished or
epitaxial), composition, electrical properties and method of manufacture. Our
silicon wafers are manufactured according to the exacting specifications
required by our customers; we currently produce wafers with a variety of
product features satisfying more than 1,000 unique product specifications.
Semiconductor manufacturers require wafers of larger diameter and more
stringent technical specifications in order to produce increasingly complex
semiconductor devices such as the larger megabit memory chips and
microprocessors.
Our customers have increased their focus on efficient semiconductor
production processes because their manufacturing processes for semiconductor
devices have become more expensive. Our customers make many semiconductor
devices, or chips, from the same wafer, and all chips from a particular wafer
are manufactured and processed simultaneously at each stage in the device
manufacturing process. Because of this, larger-sized wafers allow for a
greater throughput from the same semiconductor manufacturing process and allow
semiconductor manufacturers to spread their fixed costs of production over a
larger volume of finished products. For example, a 6-inch (150 millimeter)
wafer has a surface area of approximately 27.4 square inches, whereas an 8-
inch (200 millimeter) wafer has a surface area of approximately 48.7 square
inches. Thus, the 8-inch wafer has approximately 78% more surface area than
the 6-inch wafer. A 12-inch (300 millimeter) wafer has a surface area of
approximately 109.6 square inches or approximately 125% more surface area than
an 8-inch wafer. Despite the industry's focus on 6-inch and larger diameter
wafers, we continue to manufacture and sell a significant amount of 4-inch
(100 millimeter) and 5-inch (125 millimeter) wafers.
We manufacture wafers in sizes ranging from 4 inches to 8 inches in
diameter, as well as a limited number of 12-inch diameter wafers from our
pilot development lines.
Our silicon wafers fall into one of three general types:
Prime Polished Wafers
Our principal product is the prime polished wafer, which is a highly
refined, pure silicon wafer with an ultraflat and ultraclean surface. We put
prime polished wafers through a sophisticated chemical-mechanical polishing
process that removes defects and leaves an extremely smooth surface. This
makes the wafers suitable for the advanced technologies used by our customers.
Our customers use prime polished wafers in a broad range of applications for
integrated circuit devices.
Epitaxial Wafers
Customers have forced semiconductor manufacturers to use smaller and smaller
device features in order to incorporate more complex functionality in the
integrated circuit. Smaller devices also improve performance and control power
consumption and heat production. We manufacture epitaxial wafers to serve the
technological demands of our customers that manufacture advanced
semiconductors.
Epitaxial wafers consist of a thin, single-crystal silicon layer grown on
the polished surface of the silicon wafer. The wafer is designed to have
different composition and electrical properties from the epitaxial layer on
the wafer surface. The wafer, among other things, helps to improve isolation
between circuit elements our customers fabricate on the silicon film surface
of the wafer. One result of such smaller devices is the requirement that the
distance between circuit elements becomes increasingly narrow. The industry
refers to the distance between circuit elements as line widths. A critical
aspect in the construction of any integrated circuit device is the isolation
of these different elements that comprise the integrated circuit device.
Without sufficient isolation of the various elements, the elements could
communicate electrically with each other, which could ruin the device.
Epitaxial wafers provide improved isolation and allow for increased
reliability of the finished semiconductor device, greater efficiencies during
the semiconductor manufacturing process, and ultimately more complex
integrated circuit devices.
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Test/Monitor Wafers
We supply test/monitor wafers, or monitor wafers, to our customers for their
use in testing semiconductor fabrication lines and processes. Although monitor
wafers are substantially the same as prime polished wafers with respect to
cleanliness, and in some cases flatness, other specifications are generally
less rigorous. This allows us to produce monitor wafers from the portion of a
silicon ingot that does not meet customer specifications for wafers to be used
in the manufacture of semiconductors. Therefore, sales of monitor wafers allow
us to experience a higher yield from each silicon ingot produced.
Raw Materials
The main raw material in our production process is polysilicon. We produce
over one-half of our total polysilicon requirements and purchase the remainder
of our requirements from others. The availability of polysilicon currently
significantly exceeds demand. We believe that an adequate supply of
polysilicon will be available internally or from others for the foreseeable
future.
We obtain substantially all of our requirements for several raw materials,
equipment, parts and supplies from sole suppliers. Although we believe that we
could find adequate alternative sources of supply for these raw materials,
equipment, parts and supplies, we may be required to obtain new qualifications
from our customers in order to change or substitute suppliers. Because we
cannot predict whether we would be successful or how long that process would
take, our manufacturing yields could be adversely affected while we transition
to a new supplier.
We believe that adequate quantities of all our key raw materials, equipment,
parts and supplies are currently available. However, because of the cyclical
nature of our industry, we may experience shortages in the future. See
"Business--Risk Factors--We Depend on Certain Suppliers and Finding
Alternative Sources of Supply Could Affect Adversely Our Customer
Qualifications and Manufacturing Yields."
Manufacturing Process
Silicon wafers for the semiconductor industry are extremely complex
materials with characteristics such as high purity levels, highly uniform
crystal structure, and precise mechanical tolerances. Electronic grade silicon
is one of the most refined materials in the world, having an impurity level of
no more than one part per billion. Requirements for highly uniform crystal
structure, mechanical tolerances and cleanliness in the manufacture of silicon
wafers are at levels that stretch manufacturing processes to the limits of
measurement, and necessitate that we conduct certain processes in "clean
rooms."
The silicon wafer manufacturing process consists of three principal phases:
the crystal growth process, the wafer slicing process and the wafer finishing
process.
Crystal Growth Process
The first step in the wafer manufacturing process is the formation of a
large, silicon single crystal or ingot. This process begins with the melting
of polysilicon, together with minute amounts of electrically active elements
such as arsenic, boron, phosphorous or antimony in a quartz crucible.
Once the melt has reached the desired temperature, we lower a silicon seed
crystal, or "seed" into the melt. The melt is slowly cooled to the required
temperature, and crystal growth begins around the seed. As the growth
continues, the seed is slowly extracted or "pulled" from the melt. The
temperature of the melt and the speed of extraction govern the diameter of the
ingot, and the concentration of an electrically active element in the melt
governs the electrical properties of the silicon wafers to be made from the
ingot. This is a complex, proprietary process requiring many control features
on the crystal-growing equipment.
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Wafer Slicing Process
After we grow the ingots, we extract them from the crystal pulling furnaces
and allow them to cool. We grind the ingots to the specified diameter, and
then we slice the ingots into thin wafers. Next, we prepare the wafers for the
surface polishing steps with a multi-step process using precision lapping
machines, edge contour machines and chemical etchers.
Wafer Finishing Process
Final polishing and cleaning processes give the wafers the clean and
superflat mirror polished surfaces required for the fabrication of
semiconductor devices. For wafer polishing, we currently use our proprietary,
ninth-generation polishers together with an innovative chemical-mechanical
polishing process. This form of polishing was one of our early inventions that
first allowed solid state devices to move from individual circuits to the
complexities of today's integrated circuits. We further process some of our
products into epitaxial wafers.
Research and Development
A number of factors drive our current research and development efforts.
These include our business strategy and focus mainly on:
. the development and improvement of large diameter and advanced silicon
wafer products;
. manufacturing process improvements; and
. enhancement and cost reduction of existing products.
Customer focus also influences research and development. We work closely
with customers in developing new products and refining existing products to
faster meet the needs of the marketplace. To strengthen this relationship and
interaction, we assign research and development applications engineers to key
customer accounts worldwide.
Recent innovations of our research and development program include three new
products and one new product feature. We have either been granted patents or
applied for patent protection on all three new products and the new product
feature. The following is an overview of these new product offerings:
. HPS 2(TM)--A silicon wafer that has an extremely pure substrate that
eliminates even submicron defects in crystal structure. This wafer is
beneficial to manufacturers of very advanced logic and flash memory
semiconductor devices that require sophisticated integrated circuits with
a defect-free crystalline structure.
. Advanta(TM)--An advanced polished silicon wafer that fills the niche
between a standard polished wafer and our new HPS 2(TM) wafer.
Advanta(TM) wafers offer better performance than a standard polished
wafer at a competitive cost.
. EPI II(TM)--An epitaxial wafer that offers the same level of quality
performance as other advanced wafers but eliminates the need for process
changes by semiconductor manufacturers. We market EPI II(TM) wafers to
the DRAM and logic markets.
. MDZ(TM) or Magic Denuded Zone(TM)--A new product feature that can be
applied to any polished silicon wafer. MDZ(TM) offers a well-defined and
predictable level of internal gettering, which means impurities are drawn
away from the surface of the wafer. As a result, the MDZ(TM) product
feature provides greater manufacturing yield for our customers.
As a result of our commitment to develop the next diameter of silicon
wafers, we are now supplying high quality 12-inch wafers to the semiconductor
industry from our pilot development line. We first produced our 12-inch
diameter wafers in 1991 and believe we are one of the industry leaders in the
development of this next generation of wafers.
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We are currently shipping small commercial volumes of HPS 2(TM) and
Advanta(TM) wafers, and wafers with the MDZ(TM) product feature, to certain
customers and evaluation samples of these wafers to other customers. We are
also shipping evaluation samples of EPI II(TM) wafers to selected customers.
Our new 12-inch wafers and new product offerings are all in the pilot stage
of development, and we cannot assure you that any of these products will ever
mature to a commercial product.
We continue to see rapid technological change and product innovation in the
market for silicon wafer products. In response to this business environment,
we commissioned a "Wafering Center of Excellence" in 1997 to direct our
wafering process research and development. The Wafering Center of Excellence
is located at our plant in Utsunomiya, Japan and has the capacity to produce
12-inch wafers.
Expenses incurred for research and development activities during 1999, 1998
and 1997, excluding expenses incurred by our unconsolidated joint ventures,
were $85.0 million, $81.6 million and $64.5 million, respectively,
representing 12.2%, 10.8% and 6.5% of our net sales for the respective
periods.
Marketing and Sales
We market most of our products through a direct sales force. We believe a
key element of our marketing strategy is establishing and maintaining close
relationships with our customers. We try to accomplish this through multi-
functional teams of technical, marketing and sales, and manufacturing
personnel. These teams work closely with customers in developing their new
production facilities, qualifying our products for use at such new facilities
and maintaining qualification at all existing manufacturing facilities. We
complete sales principally through indicative-only contracts of one year or
less that indicate expected volumes and specify price.
Our close relationships with our customers are partly the result of the
lengthy and expensive "qualification" process by which customers qualify
silicon wafer manufacturers, and their individual facilities, to supply a
particular product. We are aware of changing customer needs and target our
manufacturing to try to produce wafers adapted to each customer's process and
requirements. During 1999, our largest 10 customers generated over 60% of our
sales. Texas Instruments represented approximately 18% of our sales in 1999.
No other customer represented 10% or more of our 1999 sales.
Cost Reduction Plan
In 1999, we continued our cost reduction plan in response to the difficult
industry environment.
We have discontinued manufacturing operations at our small-diameter wafer
facility in Spartanburg, South Carolina and have withdrawn from our joint
venture participation in a small-diameter wafer facility in China. We took
these actions because:
. our customers had been operating their 8-inch fabrication lines in
preference to their smaller diameter fabrication lines, reducing the
demand for smaller diameter wafers;
. a number of our customers undertook restructuring initiatives focused on
permanently eliminating small diameter lines; and
. we believed that even when the semiconductor market began to recover, we
would have excess small diameter wafer capacity.
As a result of these actions, we reduced our workforce by approximately 300
employees compared to December 31, 1998. This reduction follows a decrease of
1,700 employees in 1998.
We also continued a number of other cost cutting and savings initiatives:
. We had a limited number of short-term plant shutdowns to better align
production with the level of demand;
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. We continued to implement our "best practices" worldwide and continued to
develop new manufacturing technologies in order to reduce our processing
costs;
. We continued a plant focus program that limits the number of wafer
diameters manufactured at each site;
. We continued to implement aggressive spending cuts;
. We obtained price concessions from our vendors; and
. We reduced our capital spending.
As a result of our cost cutting and savings initiatives, we believe that we
reduced costs by over $100 million in 1999 versus 1998.
We anticipate that we will continue to tightly control our capital
expenditures in 2000.
Competition
We face intense competition in the silicon wafer industry from established
manufacturers throughout the world. We believe that we possess certain
technological and other strengths relative to our competitors. However,
realizing and maintaining such strengths requires us to continue making a high
level of investment in research and development, marketing and customer
service and support. Our inability to maintain such investments could have a
material adverse effect on our operating results. For other risks related to
competition, see "Business--Risk Factors--We Experience Intense Competition in
the Silicon Wafer Industry and Our Customers Expect Continuing Technological
Innovation at a Low Cost."
Joint Ventures
We have entered into several joint ventures as part of our strategy to
leverage our capital, to enter expanding markets, to forge closer working
relationships with our principal customers and to broaden the geographic
diversification of our operations. We have unconsolidated joint ventures with
prominent partners in South Korea and Taiwan.
POSCO HULS Co., Ltd.
In 1990, we entered into a joint venture in South Korea with Samsung
Electronics Co., Ltd. and Pohang Iron and Steel. Samsung is a South Korean
manufacturer of integrated circuits and one of our largest customers. Pohang
is a South Korean steel manufacturer. The South Korea joint venture is named
POSCO HULS Co., Ltd. (commonly known as PHC) and manufactures and sells
silicon wafers primarily in South Korea. PHC generated sales of $158.0 million
in 1999, $121.0 million in 1998 and $215.9 million in 1997. Over half of PHC's
sales in each of these years were to Samsung. PHC has the capacity to produce
per month an aggregate of approximately 320,000 6-inch and 8-inch wafers. We
own 40% of PHC. Pohang owns 40%, and Samsung owns 20%. Pohang has notified us
of its desire to sell its 40% interest in PHC. We are engaged in on-going
negotiations with Pohang regarding our possible purchase of Pohang's interest
in PHC. We cannot assure you that we will be successful in purchasing Pohang's
interest in PHC.
We have agreed to provide technical assistance and information to PHC. We
have also granted licenses to PHC to use certain technology to manufacture,
promote and sell silicon wafers. In exchange for such technical assistance and
licenses, we receive quarterly royalties based on net sales and an annual
royalty based on net income after taxes. The quarterly royalties and the
annual royalty we receive from PHC are separate and independent calculations.
Accordingly, if PHC has a net loss for the fiscal year, then we will not
receive an annual royalty based on net income after taxes, but we will receive
and retain the full amount of the quarterly royalties based on net sales.
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Taisil Electronic Materials Corporation
In 1994, we formed Taisil Electronic Materials Corporation (commonly known
as Taisil) with China Steel Corporation. China Steel Corporation is a
Taiwanese steel manufacturer. Taisil manufactures and sells silicon wafers in
Taiwan. Taisil generated sales of $94.4 million in 1999, $58.7 million in 1998
and $61.6 million in 1997. Taisil has the capacity to produce approximately
145,000 8-inch wafers per month. Taisil has in place infrastructure that could
support the production of approximately 240,000 8-inch wafers per month. We
own 45% of Taisil. The remainder of Taisil is owned by China Steel Corporation
(35%), Chiao Tung Bank (5%), the China Development Corporation (10%) and
employees and others (5%).
We have agreed to provide technical assistance and information to Taisil. We
have also granted licenses to Taisil to use certain technology to manufacture
and sell silicon wafers. In exchange for such technical assistance and
licenses, we receive semiannual royalties based on Taisil's net sales and
operating income.
For other information regarding Taisil, see "Business--Risk Factors--We May
Have to Make Substantial Payments in Connection With Our Taisil Joint Venture,
and This Could Divert Funds From Other Needed Areas."
Option on Pasadena Facility
In September 1998, we granted Tokuyama Corporation, Marubeni Corporation and
Marubeni America Corporation an option to acquire a majority interest in MEMC
Pasadena, Inc. Tokuyama is a Japanese polysilicon manufacturer and Marubeni is
a Japanese trading company. MEMC Pasadena is our granular polysilicon
subsidiary. In exchange for the option, Tokuyama and Marubeni made an option
payment to us. The term of the option is two years, subject to a one year
extension at the option of Tokuyama and Marubeni. If Tokuyama and Marubeni
exercise their option, we will then negotiate the terms and conditions
(including price) of the exercise with them based on the market value at that
time. The entire option payment will be applied toward the ultimate purchase
price. If Tokuyama and Marubeni do not exercise their option, then we will
return one-half of the option payment to them. During the term of the option,
Tokuyama and Marubeni have a right of first refusal over any transfer of MEMC
Pasadena's granular polysilicon business. In addition, for two years, we
cannot solicit offers from third parties for this business. In connection with
the option, Tokuyama has agreed to provide technical assistance to MEMC
Pasadena for two years (unless the option is earlier terminated by Tokuyama
and Marubeni) to help improve the quality of MEMC Pasadena's granular
polysilicon products.
Proprietary Information and Intellectual Property
As of December 31, 1999, we owned of record or beneficially approximately
137 U.S. patents, of which approximately 14 will expire by 2003, approximately
19 will expire between 2004 and 2008 and approximately 104 will expire after
2008. As of December 31, 1999, we owned of record or beneficially
approximately 206 foreign patents, of which approximately 29 will expire by
2003, approximately 79 will expire between 2004 and 2008 and approximately 98
will expire after 2008. These foreign patents are generally counterparts of
our U.S. patents. We cannot assure you, however, that any of these patents
will not be challenged, invalidated or circumvented in the future, or that
they do or will provide a competitive advantage. As of that date, we have also
submitted approximately 104 U.S. and 399 foreign patent applications. However,
we cannot assure you that any of these applications will be granted.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use our products or technology
that we consider proprietary, and third parties may attempt to develop similar
technology independently. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain countries.
Accordingly, there can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology.
Under certain contracts, we are required to indemnify some third parties
against claims of infringement of the intellectual property rights of others.
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Any litigation in the future to enforce patents issued to us, to protect
trade secrets or know-how possessed by us or to defend us or indemnify others
against claimed infringement of the rights of others could have a material
adverse effect on our financial condition and operating results. Also,
regardless of the validity or successful outcome of such claims, we may need to
expend significant time and expense to protect our intellectual property rights
or to defend against claims of infringement by third parties, which could have
a material adverse effect on us. If we lose any such litigation, we may be
required to:
. pay substantial damages;
. seek licenses from others; or
. change, or stop manufacturing or selling, some of our products.
Any of these outcomes could have a material adverse effect on our business,
results of operations or financial condition.
Employees
At December 31, 1999, we had approximately 5,600 full-time employees and 350
temporary workers worldwide. We have not experienced any material work
stoppages at any of our facilities during the last several years. We believe
our relationships with employees are satisfactory.
Geographic Information
Information regarding our foreign and domestic operations is contained in
Note 17 on page 40 of our 1999 Annual Report, which information is incorporated
herein by reference.
Risk Factors
This Annual Report on Form 10-K contains "forward-looking" statements within
the meaning of the Securities Litigation Reform Act of 1995, including those
set forth under "Item 1. Business" and "Item 3. Legal Proceedings." In addition
to the business risks and uncertainties discussed elsewhere in this Annual
Report on Form 10-K, the following are important risk factors which could cause
actual results and events to differ materially from those contained in any
forward-looking statement contained herein or made elsewhere by us.
We Have Had Significant Operating and Net Losses and We Anticipate Future
Losses
We have not reported an operating profit since the third quarter of 1997. We
reported an operating loss in 1997 of $10.4 million. In 1998, we had an
operating loss of $333.3 million, which included restructuring costs of $146.3
million. In 1999, we had an operating loss of $153.2 million, which included a
$5.7 million benefit attributable to a decrease in our restructuring reserve.
Due to overcapacity and continued depressed prices in the silicon wafer
industry and other factors, we do not expect to be profitable in 2000. We
cannot predict how long we will continue to experience operating and net losses
or whether we will become profitable.
We Need Substantial Capital Investments to Fund Our Future Operations
Otherwise We May Not Keep Pace With Our Competitors
We will need substantial amounts of cash to continue to fund capital
expenditures, research and development, and marketing and customer service and
support to keep pace with our competitors. Our business is very capital
intensive. Our capital needs depend on numerous factors, including our
profitability and investment in research and development and capital
expenditures. We cannot assure you that the liquidity provided by our existing
cash balances and credit facilities, together with cash generated from
operations, if any, will be adequate to fund our future operations. We have
incurred negative cash flows from operations in recent periods.
9
<PAGE>
VEBA AG and its Affiliates Intend to Divest Their Interests in MEMC
On September 27, 1999, VEBA AG announced a merger with VIAG AG. The
VEBA/VIAG group has stated that its core businesses will be energy and
specialty chemicals. The VEBA/VIAG group's stated intent is to systematically
and optimally divest certain non-core businesses, including the debt and
equity interests of VEBA AG and its affiliates in MEMC. VEBA AG and its
affiliates are not obligated to provide additional capital to us except under
the terms of existing loan agreements. We cannot assure you that VEBA AG and
its affiliates will provide additional capital to us in the future.
Our loans from VEBA AG and its affiliates begin to mature in 2001. We cannot
assure you that VEBA AG and its affiliates or any future purchaser of these
loans will refinance these loans upon maturity on terms acceptable to us. In
such event, we will be required to obtain capital from other parties. See
"Business--Risk Factors--We May Not Be Able to Obtain Capital from Other
Parties in the Future to Meet Our Needs and May Be Forced to Reduce Our
Investment in Our Business."
We May Not Be Able to Obtain Capital from Other Parties in the Future to Meet
Our Needs and May Be Forced to Reduce Our Investment In Our Business
We cannot assure you that we will be able to obtain capital in the future to
meet our needs. If we cannot obtain additional funding, whether from current
or new lenders or investors, we may be required to reduce our investments in
research and development, marketing and customer service and support and
capital expenditures or divest assets. Such reductions or divestitures could
materially adversely affect our business and our ability to compete.
If we do find a source of additional capital, the terms and pricing of any
such financing may be significantly more favorable to the lender or investor
than those previously provided by us. Future capital raising could dilute or
otherwise materially adversely affect the holdings or rights of our existing
stockholders.
Historically, we have funded our operations primarily through loans from
VEBA AG and its affiliates, internally generated funds and issuances of common
stock. To a lesser extent, we have raised funds by borrowing money from
commercial banks. We will continue to explore and, as appropriate, enter into
discussions with other parties regarding possible future sources of capital.
However, under the loan agreements between us and our principal lender, VEBA
AG and its affiliates, we cannot pledge any of our assets to secure additional
financing. We do not believe that we currently can obtain unsecured financing
from third parties on better terms than those with VEBA AG and its affiliates.
We Have a Significant Amount of Debt That Will Adversely Affect Our Ability
to Obtain Additional Financing
We currently have a significant amount of debt that will adversely affect
our ability to obtain additional financing for working capital, capital
expenditures or other purposes. As of December 31, 1999, we owed $729.1
million to VEBA AG and its affiliates, and $162.8 million to other lenders.
Our debt service could make us more vulnerable to industry downturns and
competitive pressures. In addition, the cash flow required to service our debt
may reduce our ability to fund internal growth and capital requirements.
If The Semiconductor Industry Experiences Future Downturns, We Will Face
Pressure to Further Reduce Prices Which May Lead to Further Losses
If the semiconductor industry experiences future downturns, we will face
pressure to further reduce prices. However, our ability to reduce expenses
during a downturn is limited because of our significant fixed costs and the
continued investment in research and development and marketing necessary to
maintain our extensive worldwide customer service and support capabilities. If
we are unable to reduce our expenses sufficiently to offset the decline in our
prices, our operating results and financial condition could be materially
adversely affected.
10
<PAGE>
Our business depends in large part upon the market demand for our customers'
semiconductors and products utilizing semiconductors. The semiconductor
industry experiences:
. rapid technological change;
. product obsolescence;
. price erosion; and
. wide fluctuations in product supply and demand.
From time to time the semiconductor industry has experienced significant
downturns. These downturns often occur in connection with, or in anticipation
of, maturing product cycles (of both the semiconductor companies and their
"end customers") and declines in general economic conditions. Some of these
downturns have lasted for more than a year. Also, during such periods,
customers of semiconductor manufacturers benefiting from shorter lead times
may delay some purchases of semiconductors into future periods.
Excess Capacity and Depressed Wafer Prices Limit Our Ability to Become
Profitable
Excess capacity in the silicon wafer industry has limited our ability to
maintain or raise prices. Further capacity expansions could increase the
worldwide supply of silicon wafers in the future, increase the downward
pressure on prices and materially adversely impact our operating results. The
worldwide production capacity of silicon wafers has exceeded worldwide demand
in recent periods, especially for 8-inch silicon wafers. As a result, the
selling prices for our products have decreased, although by the end of 1999
the silicon wafer market appears to have reached a period of price
stabilization. Because of price decreases, our revenues are currently
insufficient to offset our costs, and this is adversely affecting our
operating results. We have no firm information with which to determine the
capacity and expansion plans of our competitors. Although some of our
competitors have slowed their capacity expansion programs, many have already
added significant capacity for the production of 8-inch wafers. We and our
competitors have the ability to increase production of silicon wafers through
utilization of unmanned capacity and our ability to expand our capacity
quickly through available infrastructure.
Our Dependence on the Semiconductor Industry Causes Substantial Fluctuations
in Our Operating Results and at Times This Has Adversely Affected the Market
Price of MEMC Common Stock
Our quarterly and annual operating results can fluctuate dramatically, and
this can adversely affect the market price of MEMC common stock. The main
factor affecting these fluctuations is our dependence on the performance of
the semiconductor industry, which historically has been cyclical. Another
factor is currency exchange rate volatility, which affects the price we
receive for our wafers and may result in gains or losses on unhedged currency
exposure at our unconsolidated joint ventures.
Our operating results are also affected by:
. the timing of orders from major customers;
. product mix;
. competitive pricing pressures; and
. the delay between the incurrence of expenses to develop marketing and
service capabilities and expand capacity and the realization of benefits
from these expenditures.
Moreover, customers may cancel or reschedule shipments, and production
difficulties could delay shipments. We cannot predict the future impact of any
of these factors. These and other factors could have a material adverse effect
on our quarterly or annual operating results.
VEBA AG's Control of MEMC Could Prevent a Favorable Acquisition of MEMC
VEBA AG's control of MEMC could prevent or discourage any unsolicited
acquisition of MEMC and consequently could prevent an acquisition favorable to
MEMC's other stockholders. VEBA AG and its affiliates have sufficient voting
power to control our direction and policies. VEBA AG and its affiliates can
also control
11
<PAGE>
any merger, consolidation or sale of all or substantially all of our assets,
elect the members of the Board of Directors and prevent or cause a change in
control of MEMC. Four of the seven members of our Board of Directors are
employees of VEBA AG or its affiliates, not including MEMC. See "Business--
Risk Factors--VEBA AG and its Affiliates Intend to Divest Their Interests in
MEMC."
Restrictive Covenants Will, and Higher Interest Rates May, Apply to MEMC if
VEBA AG or its Affiliates Cease to Own a Majority of Our Stock
Certain of our loan agreements with VEBA AG and its affiliates provide that
if VEBA AG and its affiliates own less than a majority of the outstanding MEMC
common stock on or after January 1, 2001, then the interest rates we pay on
our loans from VEBA AG and its affiliates will be the higher of:
. the interest rate currently set forth in each such loan agreement; or
. an interest rate determined, as of the later of the change of control
date or January 1, 2001, for an average industrial borrower at an assumed
credit rating based on the remaining term of each such loan agreement.
In addition, in such an event we will become subject to certain affirmative
covenants set forth in all of our loan agreements with VEBA AG and its
affiliates. These affirmative covenants include requirements that we maintain
a minimum net worth and a minimum amount of working capital. We would also
need to meet certain financial ratios, including a minimum fixed charge
coverage ratio and minimum working capital ratio.
If we had been subject to these covenants as of December 31, 1999, we would
not have been in compliance with all of these covenants. If VEBA AG and its
affiliates own less than a majority of our outstanding common stock at any
time on or after January 1, 2001 and we are then not in compliance with all of
these affirmative covenants, then we would be in default under these loan
agreements.
If VEBA AG and its affiliates own less than a majority of the outstanding
MEMC common stock, then Taisil, our unconsolidated Taiwanese joint venture,
may become obligated to repay certain debt.
See "Business--Risk Factors--VEBA AG and its Affiliates Intend to Divest
Their Interests in MEMC" and "Business--Risk Factors--We May Have to Make
Substantial Payments in Connection With Our Taisil Joint Venture, and This
Could Divert Funds From Other Needed Areas."
We Experience Intense Competition in the Silicon Wafer Industry and Our
Customers Expect Continuing Technological Innovation at a Low Cost
We face intense competition in the silicon wafer industry from established
manufacturers throughout the world. If we cannot compete effectively with
other silicon wafer manufacturers, our operating results could be materially
adversely affected. Some of our competitors have substantial financial,
technical, engineering and manufacturing resources. We believe that our
Japanese competitors benefit from their dominance of the Japanese market,
which represented approximately 36% of the worldwide silicon wafer market in
1999. In particular, Shin-Etsu Handotai, the largest supplier of silicon
wafers in Japan and the world, is able to leverage globally its sales and
technology base.
We compete principally on the basis of product quality, consistency and
price, as well as technical innovation, customer service and product
availability. We expect that our competitors will continue to improve the
design and performance of their products and to introduce new products with
competitive price and performance characteristics. Competitive pressures may
cause additional price reductions, which could have a material adverse effect
on our operating results.
If We Fail to Make Significant Investments Necessary to Comply With Changing
Semiconductor Industry Customer Specifications, We May Lose Customers
If we fail to meet future customer requirements, we could experience a
material adverse effect on our competitive position and operating results. The
silicon wafer industry changes rapidly. Changes include
12
<PAGE>
requirements for new and more demanding technology, product specifications and
manufacturing processes. Our ability to remain competitive will depend upon
our ability to develop technologically advanced products and processes. We
must continue to meet the increasingly demanding requirements of our customers
on a cost-effective basis. As a result, we expect to continue to make
significant investments in research and development. We cannot assure you that
we will be able to successfully introduce, market and cost-effectively
manufacture any new products, or that we will be able to develop new or
enhanced products and processes that satisfy customer needs or achieve market
acceptance.
We Have a Limited Number of Principal Customers, and Accordingly a Loss of
One or Several of Those Customers Would Hurt Our Business
Our operating results could materially suffer if we, or our joint ventures,
experience a significant reduction in, or loss of, purchases by one or more of
our top customers. Historically, we have sold a significant portion of our
products to a limited number of principal customers. In 1999, we made over 60%
of our sales to ten customers, with one customer accounting for approximately
18% of our sales. Likewise, PHC, our unconsolidated joint venture in South
Korea, sold over half its products to Samsung, one of our partners in that
joint venture. We cannot assure you that we or PHC will realize equivalent
sales from our top customers in the future.
We Expect that International Sales Will Continue to Represent a Significant
Percent of Our Total Sales, and Accordingly We are Subject to Periodic
Foreign Economic Downturns and Fluctuations in Foreign Currency Exchange and
Interest Rates
A number of factors in the past have affected adversely, and may affect
adversely in the future, our results of operations and international sales and
operations, including periodic economic downturns and fluctuations in interest
and foreign currency exchange rates.
We expect that international sales will continue to represent a significant
percentage of our total sales. In addition, a significant portion of our
manufacturing operations are located outside of the United States. Sales
outside of the United States expose us to currency exchange rate fluctuations.
Our risk exposure from these sales is primarily limited to the Japanese yen
and European euro-based currencies. Our risk exposure from expenses at
international manufacturing facilities is concentrated in Italian lira,
Japanese yen and Malaysian ringgit. We generally hedge receivables denominated
in foreign currencies at the time of sale. We hedge some foreign currency
denominated intercompany loans by entering into long-dated forward exchange
contracts. However, we cannot predict whether exchange rate fluctuations will
have a material adverse effect on our operations and financial results in the
future.
Our unconsolidated joint ventures have sales denominated in the U.S. dollar
and manufacturing expenses primarily denominated in the U.S. dollar, Korean
won and New Taiwanese dollar. PHC, our unconsolidated Korean joint venture,
also has a portion of its debt denominated in the U.S. dollar and Korean won.
Likewise, Taisil, our unconsolidated Taiwanese joint venture, has debt
denominated in the U.S. dollar and New Taiwanese dollar. For U.S. generally
accepted accounting principles, these two unconsolidated joint ventures use
the U.S. dollar as their functional currency and do not hedge net Korean won
or New Taiwanese dollar exposures. We do not hedge our net Korean won
exposure, because the forward contract market is limited for the Korean won
and we do not believe the prices of such contracts are attractive. To date, we
have not hedged net New Taiwanese dollar exposure. However, given the
increasingly broader market and depth for forward contracts in both Korea and
Taiwan, we may consider forward contracts in the future.
Economic downturns in the Asia Pacific region and Japan and devaluations of
the Japanese yen against the U.S. dollar have affected our operating results
in the past and could affect our operating results in the future.
Additionally, other factors may have a material adverse effect on our
operations in the future including:
. the imposition of governmental controls;
13
<PAGE>
. export license requirements;
. restrictions on the export of technology;
. political instability;
. trade restrictions and changes in tariffs; and
. difficulties in staffing and managing international operations.
As a result, we may need to modify our current business practices.
We May Have to Make Substantial Payments in Connection With Our Taisil Joint
Venture, and This Could Divert Funds From Other Needed Areas
As of December 31, 1999, Taisil had approximately $143 million of debt
outstanding. We have guaranteed approximately $49 million of such debt (which
may increase to approximately $62 million). Generally under the guarantees, if
VEBA AG's and its affiliates' ownership of MEMC common stock falls below 50%
of MEMC's total issued and outstanding shares, we become obligated to either
pay, or provide other collateral satisfactory to the banks, which may include
a letter of credit in an amount equal to the maximum amount we may owe under
the guarantees. See "Business--Risk Factors--VEBA AG and its Affiliates Intend
to Divest Their Interests in MEMC."
The terms of Taisil's loan agreements vary. If Taisil defaults on its
obligations to its lenders, in some circumstances Taisil may immediately be
required to repay all of its obligations to its lenders. If Taisil is required
to make an immediate repayment of its obligations to its lenders, we may be
required to make payments on our guarantees of Taisil's debt. The
circumstances in which immediate repayment may occur include, without
limitation:
. a material adverse change in Taisil;
. a reduction below 70% in the combined ownership of Taisil by the two
major joint venture partners (us and China Steel Corporation);
. a material adverse change in us or China Steel Corporation;
. a reduction below 50% in VEBA AG's and its affiliates' ownership of MEMC
common stock; or
. other customary circumstances.
If MEMC is required to make payments on any guarantees, this would divert
capital needed to fund future operations.
For more information about Taisil please see, "Business--Joint Ventures--
Taisil Electronic Materials Corporation."
Because We Cannot Easily Transfer Production of Specific Products From One of
Our Manufacturing Facilities to Another, Manufacturing Delays at a Single
Facility Could Result in a Loss of Customers
It typically takes three to six months for our customers to qualify a
manufacturing facility to produce a specific product, but it could take longer
depending upon the customer's requirements. Interruption of operations at any
of our primary manufacturing facilities could result in delays or
cancellations of shipments of silicon wafers and a loss of customers which
could materially and adversely affect our operating results. A number of
factors could cause interruptions, including labor disputes, equipment
failures, or shortages of raw materials or supplies. A union represents
employees at PHC's facility in South Korea. A strike at this facility could
cause interruptions in manufacturing. We cannot assure you that alternate
qualified capacity would be available on a timely basis or at all.
14
<PAGE>
Much of Our Proprietary Information is Not Patented and May Not be Patentable
Much of our proprietary information and technology relating to the wafer
manufacturing process is not patented and may not be patentable. We believe
that the success of our business depends in part on our proprietary
technology, information and processes and know-how. We generally try to
protect our intellectual property rights based on trade secrets and patents as
part of our ongoing research, development and manufacturing activities.
Recently, we have increased our efforts to obtain patent protection for our
technology in response to an increase in patent applications by our
competitors. However, we cannot assure you that we have adequately protected
or will be able to adequately protect our technology, that our competitors
will not be able to utilize our existing technology or develop similar
technology independently, that the claims allowed on any patents held by us
will be broad enough to protect our technology or that foreign intellectual
property laws will adequately protect our intellectual property rights.
Some of Our Technology May Infringe on the Intellectual Property Rights of
Third Parties Which May Subject Us to Costly Patent Litigation
From time to time, we receive notices from substantial companies with
significant patent portfolios that we may be infringing certain of their
patents or other rights. We may receive more of these notices in the future.
If such companies were to assert any claims against us based on patents or
other rights described in existing notices, we believe, based on strategic and
other considerations, that we should be able to resolve them outside of
litigation without a material adverse effect to us; however, this conclusion
is subject to significant uncertainty. We expect to try to resolve these
matters through negotiation or, if necessary, by obtaining a license. However,
if we are not able to resolve these matters satisfactorily, or to obtain a
license on acceptable terms, we may face litigation. In that event, the
ultimate outcome of these matters could have a material adverse effect on our
business, results of operations or financial condition. Although third parties
have not sued us based on claims of infringement of intellectual property
rights during the last several years, we cannot assure you that third parties
will not bring such suits in the future. Competitors, suppliers and others
frequently sue each other regarding intellectual property rights in other
technology industries, including the semiconductor industry.
We Face Challenges in Attracting and Retaining Qualified Personnel
The loss of key personnel or the inability to hire and retain qualified
personnel could have a material adverse effect on our operating results. We
are dependent upon a limited number of key management and technical personnel.
We compete for personnel with other companies, academic institutions,
government entities and other organizations. Our future success will depend in
part upon our ability to attract and retain highly qualified personnel. We
cannot assure you that we will be successful in hiring or retaining qualified
personnel, or that any of our personnel will remain employed by MEMC.
We Depend on Certain Suppliers and Finding Alternative Sources of Supply
Could Affect Adversely Our Customer Qualifications and Manufacturing Yields
We obtain substantially all our requirements for several raw materials,
equipment, parts and supplies from sole suppliers. We believe that we could
find adequate alternative sources of supply for these raw materials,
equipment, parts and supplies. However, we may be required to obtain new
qualifications from our customers in order to change or substitute suppliers.
We cannot predict whether we would be successful or how long that process
would take. In addition, our manufacturing yields could be adversely affected
while we transition to a new supplier. A failure to obtain a new qualification
or a decrease in our manufacturing yields could have a material adverse effect
on our operating results.
From time-to-time we have experienced limited supplies of certain raw
materials, equipment, parts and supplies, particularly polysilicon. We believe
that adequate quantities of all our key raw materials, equipment, parts and
supplies are currently available. However, because of the cyclical nature of
our industry, we may experience shortages in the future. Increases in prices
resulting from these shortages could have a material adverse effect on our
operating results.
15
<PAGE>
Because the Public is Focusing More Attention on the Environmental Impact of
Our Industry and Its Manufacturing Operations, Environmental Laws and
Regulations May Become More Stringent in the Future and Could Force MEMC to
Expend Capital to Comply with Such Laws
Because the public is focusing more attention on the environmental impact of
the semiconductor and related industries' manufacturing operations,
environmental laws and regulations related to our industry may become more
stringent in the future. Any failure to comply with environmental laws could
subject us to substantial liability or could force us to significantly change
our manufacturing operations. We are subject to a variety of foreign, federal,
state and local laws and regulations governing the protection of the
environment. These environmental regulations include those related to the use,
storage, handling, discharge and disposal of toxic, volatile or otherwise
hazardous materials used in our manufacturing processes. Under some of these
laws and regulations, we could be held financially responsible for remedial
measures if our properties are contaminated, even if we did not cause such
contamination.
Our Fluctuating Financial Results, Our Position in the Silicon Wafer Industry
and Our Relationship with VEBA may Create Fluctuations in the MEMC Stock
Price
Based on the trading history of MEMC common stock, we believe that certain
factors cause the market price of MEMC common stock to fluctuate
significantly. These factors include, without limitation:
. quarterly fluctuations in our financial results;
. announcements of technological innovations or new products by us or our
competitors;
. market conditions in the semiconductor industry;
. market conditions in the silicon wafer industry;
. developments in patent or other proprietary rights;
. changes in our relationships with our customers;
. actual or perceived changes in our relationship with VEBA AG and its
affiliates; and
. the size of the public float of MEMC common stock.
Technology company stocks in general have experienced extreme price and
trading volume fluctuations that often have been unrelated to the operating
performance of these companies. This market volatility may adversely affect
the market price of MEMC common stock. In addition, if we suffer an actual or
anticipated shortfall in net sales, gross margin or net earnings from security
analysts' expectations, the trading price of MEMC common stock in any given
period could decline.
Cautionary Statement Regarding Forward-Looking Statements
The following statements are or may constitute forward-looking statements:
. statements set forth in this Annual Report on Form 10-K or statements
incorporated by reference from documents we have filed with the
Securities and Exchange Commission, including possible or assumed future
results of our operations, including but not limited to any statements
contained herein or therein concerning:
. stabilization and improvements in average selling prices of silicon
wafers;
. stabilization and improvements in demand for silicon wafers;
. our ability to generate future taxable income as it relates to the
realization of our net deferred tax asset;
. utilization of the restructuring reserve;
. tight control of capital expenditures in 2000;
. future sources of capital;
. liquidity through 2000;
. continued investment in research and development;
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<PAGE>
. continued dependence on international sales;
. excess capacity;
. the resolution of any intellectual property infringement claims;
. timing of future demand for 12-inch wafers, including the start up of
large-scale 12-inch fabrication lines by our customers;
. the outcome of potential litigation;
. our ability to find adequate alternative sources of supply;
. the impact of the introduction of the euro;
. the impact of the implementation of SFAS No. 133;
. the impact of an adverse change in exchange rates;
. our expectations concerning our lack of profitability in 2000;
. our expectation that we will not pay dividends in the foreseeable
future;
. our intention to work closely with the VEBA/VIAG group to effectuate
an orderly divestiture process that preserves and optimizes our
value; and
. any statements preceded by, followed by or that include the words
"believes," "expects," "predicts," "anticipates," "intends,"
"estimates," "should," "may" or similar expressions.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause actual results to differ
materially are set forth under "Business--Risk Factors."
You should not place undue reliance on such statements, which speak only as
of the date that they were made. Our independent public accountants have not
examined or compiled the forward-looking statements and, accordingly, do not
provide any assurance with respect to such statements. These cautionary
statements should be considered in connection with any written or oral
forward-looking statements that we may issue in the future. We do not
undertake any obligation to release publicly any revisions to such forward-
looking statements to reflect later events or circumstances or to reflect the
occurrence of unanticipated events.
Executive Officers of the Registrant
The following is information concerning our executive officers as of March
1, 2000. Each executive officer's term will end upon the appointment of his or
her successor or upon his or her earlier resignation, except that Mr. von
Horde's term of office expires in 2003 pursuant to the terms of his employment
agreement. There are no family relationships between or among any of the named
persons and the directors.
<TABLE>
<CAPTION>
Name Age All Positions and Offices Held
---- --- ------------------------------
<S> <C> <C>
Klaus R. von Horde 58 President, Chief Executive Officer and Director
James M. Stolze 56 Executive Vice President and Chief Financial
Officer
Marcel Coinne 59 Corporate Vice President
Dr. John P. DeLuca 57 Corporate Vice President
Julius R. Glaser 43 Corporate Vice President
Helene F. Hennelly 53 Corporate Vice President, General Counsel
and Secretary
Jonathon P. Jansky 48 Corporate Vice President
Dr. Thomas Knothe 42 Corporate Vice President
James G. Weathers 46 Corporate Vice President
James W. Wick 57 Corporate Vice President
</TABLE>
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<PAGE>
Each executive officer has held the same position or another executive
position with us during the past five years except as indicated below.
Mr. von Horde was our President and Chief Operating Officer from December
1997 to February 1999 and has been our President and Chief Executive Officer
since February 1999. Mr. von Horde was Chief Executive Officer and Chairman of
the Board of Management of Carl Schenck AG from 1993 to 1997.
Mr. Stolze was a Partner with KPMG LLP from 1977 until joining us as
Executive Vice President and Chief Financial Officer in June 1995.
Mr. Coinne was Corporate Vice President and President of the U.S. Region
from March 1993 to October 1996, Corporate Vice President and President--North
America from October 1996 to December 1997, Corporate Vice President, Customer
Operations from December 1997 to October 1999 and has been our Corporate Vice
President, Marketing Operations since November 1999.
Dr. DeLuca has been our Corporate Vice President, Technology since November
1994.
Mr. Glaser was our Vice President, Sales from March 1999 to November 1999,
and has been our Corporate Vice President, Sales since November 1999. From
1992 until 1999, Mr. Glaser held various sales and marketing management
positions with GE Power Systems and GE Aircraft Systems. When he joined us in
March 1999, Mr. Glaser had been General Manager of Global Sales & Business
Development of GE Aircraft Engines since April 1998.
Ms. Hennelly has been our General Counsel and Secretary since October 1990.
She was a Vice President from October 1990 until May 1996, a Corporate Vice
President from May 1996 to June 1999, and has been our Corporate Vice
President, Corporate Projects since June 1999.
Mr. Jansky was Plant Manager of our St. Peters facility from 1992 until
January 1997, Corporate Vice President, Investment Planning from January 1997
to May 1998 and has been our Corporate Vice President, Operations since May
1998.
Dr. Knothe was Director, Corporate Development Plastics Business for Huls AG
from 1994 to 1995 and Director, Corporate Development Electronic Materials for
Huls AG from 1995 until January 1998, when he joined MEMC. Dr. Knothe was our
Vice President, Strategy Development from January 1998 until August 1998 and
has been our Corporate Vice President, Corporate Development since August
1998.
Mr. Weathers was our Director, Manufacturing Services from May 1991 to July
1997, Director, Strategic Capital Planning from August 1997 to May 1998, Vice
President, Operations Services from June 1998 to October 1999, and has been
our Corporate Vice President, Customer Services and Scheduling since November
1999.
Mr. Wick was Vice President, Human Resources for Bunge Corporation from 1990
until joining us as Corporate Vice President, Human Resources in January 1999.
Bunge Corporation is an international, privately-held, multi-billion dollar,
integrated agri-business company engaged in commodity trading, grain and
edible oil exporting and food processing.
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<PAGE>
Item 2. Properties
Our principal executive offices are located at 501 Pearl Drive (City of
O'Fallon), St. Peters, Missouri 63376, and our telephone number at that
address is (636) 474-5000. Our principal manufacturing and administrative
facilities and the principal manufacturing and administrative facilities of
our joint ventures comprised approximately 3.8 million square feet as of
December 31, 1999 and were situated in the following locations:
<TABLE>
<CAPTION>
Location Square Footage
-------- --------------
<S> <C>
St. Peters, MO, USA...................................... 737,000
Sherman, TX, USA......................................... 707,000
Pasadena, TX, USA........................................ 436,000
Merano, Italy............................................ 319,000
Novara, Italy............................................ 322,000
Utsunomiya, Japan........................................ 305,000
Kuala Lumpur, Malaysia................................... 53,000
Chonan, South Korea...................................... 460,000
(PHC joint venture)
Hsinchu, Taiwan.......................................... 450,000
(Taisil joint venture)
</TABLE>
We lease a portion of our St. Peters facility pursuant to a lease agreement
between us and the City of O'Fallon, Missouri that was entered into in
connection with an industrial revenue bond financing. The term of the St.
Peters lease expires in 2011, and we have the option to purchase the leased
portion of the St. Peters facility at the end of the lease. We also lease our
small diameter facility in Sherman, Texas. The initial term of this lease
expires in 2001 and is extendable at our option for three (3) additional
renewal terms of five (5) years each. We lease our facility in Pasadena,
Texas. The term of the Pasadena lease expires in 2030 and is extendable for
four (4) additional renewal terms of five (5) years each. Taisil leases the
land on which its Hsinchu, Taiwan facility is located. This lease expires in
2014. We also lease our facility in Kuala Lumpur, Malaysia. This lease expires
in 2000. We are currently negotiating an extension of the lease. In 1999, we
discontinued manufacturing operations at our small diameter wafer facility in
Spartanburg, South Carolina. The Spartanburg facility is now held for sale.
We believe that our existing facilities and equipment are well maintained,
in good operating condition and are adequate to meet our current requirements.
The extent of utilization of these facilities varies from plant to plant and
from time to time during the year.
Item 3. Legal Proceedings
Damewood vs. Ethyl Corporation, et al.
In a case entitled Damewood vs. Ethyl Corporation, et al., (Case No. 96-
38521), filed on August 1, 1996, three employees of the former operator of
MEMC Pasadena's plant, Albemarle Corporation, filed suit against us and others
in the 189th Judicial District Court, Harris County, Texas. The employees
alleged that they sustained injuries during an explosion at that plant on
January 27, 1996. We have settled this matter with plaintiffs and have been
dismissed as a party. One of the other defendants, Ethyl Corporation, was the
only defendant in this case at the time of trial in October 1998. A jury
awarded a verdict in favor of the plaintiffs that resulted in a judgment
against Ethyl Corporation in the amount of $6.8 million. Ethyl Corporation
appealed this judgment. Recently, Ethyl Corporation and the plaintiffs settled
this matter for $5.2 million.
On September 29, 1998, Albemarle Corporation made a demand against us for
defense and indemnity in this case on behalf of Ethyl Corporation. Albemarle
Corporation has assumed the obligation to defend and indemnify Ethyl
Corporation under an agreement in which Ethyl Corporation transferred
ownership of the plant where the injury took place to Albemarle Corporation.
In November 1998, we made a demand for indemnity in this case against
Albemarle. Demands for indemnity made by Albemarle Corporation on behalf of
Ethyl Corporation and by us are both based on contractual indemnity language
contained in the contract for the sale of
19
<PAGE>
the MEMC Pasadena plant from Albemarle Corporation to us. These cross-
indemnity claims have not been resolved.
Due to uncertainty regarding the litigation process, the scope and
interpretation of contractual indemnity provisions and the status of any
insurance coverage, the outcome of this matter could be unfavorable, in which
event we might be required to pay damages and other expenses, which could have
a material adverse effect on us.
Settlement of Parden vs. Ethyl Corporation, et al.
As previously reported, we were a named defendant in a lawsuit entitled
Parden vs. Ethyl Corporation, et al. (Case No. 97-34857) filed in the 61st
Judicial District Court, Harris County, Texas on June 13, 1997. This lawsuit
was filed by two employees of the former operator of the MEMC Pasadena plant
who were injured when flaming liquid escaped from a valve under repair. See
our annual report on Form 10-K for the year ended December 31, 1998. In
November 1999, we settled this matter. Under the settlement, this matter is
completely covered by insurance. In consideration of the settlement, on
January 11, 2000, the court issued a final judgment in favor of the other
defendants and us.
Lemelson Foundation Partnership
In July 1999, we received notification from attorneys representing the
Lemelson Medical, Education & Research Foundation, Limited Partnership
alleging that we infringed on certain patents owned by the Lemelson Foundation
related to bar coding and laser mark reading systems. The attorneys for the
Lemelson Foundation have not filed suit, but have requested that we enter into
a licensing agreement with the Lemelson Foundation in order to avoid
litigation. We are in the process of reviewing the patents at issue and how
they might relate to our activities. Should the Lemelson Foundation file suit,
we would vigorously defend ourselves in this matter. However, due to
uncertainty regarding the litigation process, the outcome of this action could
be unfavorable, in which event we might be required to pay damages and other
expenses, which could have a material adverse effect on us.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The narrative or tabular information regarding the market for our common
equity and related stockholder matters required by this item is set forth
under Note 18, "Unaudited Quarterly Financial Information", on page 40 of our
1999 Annual Report and under "Stockholder Information" on page 44 of our 1999
Annual Report, which information is incorporated herein by reference. We have
not paid any dividends on our common stock for the last two fiscal years.
Item 6. Selected Financial Data
The tabular information (including the footnotes thereto) required by this
item is set forth under "Five Year Selected Financial Data" on page 12 of our
1999 Annual Report, which information is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is set forth on pages 13 through 20 of
our 1999 Annual Report, which information is incorporated herein by reference.
20
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is set forth under "Market Risk" on
page 20 of our 1999 Annual Report, which information is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements appearing on pages 21 through 40, and
the Independent Auditors' Report thereon of KPMG LLP appearing on page 42 of
our 1999 Annual Report, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
We will file a definitive proxy statement with the Securities and Exchange
Commission within 120 days of year-end (the 2000 Proxy Statement). The
information required by this item with respect to compliance with Section
16(a) of the Exchange Act will be set forth in the 2000 Proxy Statement under
"Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated
herein by reference. The remaining information required by this item with
respect to directors will be set forth in the 2000 Proxy Statement under "ITEM
NO. 1. ELECTION OF DIRECTORS" and is incorporated herein by reference. The
remaining information required by this item with respect to executive officers
is set forth in Part I of this Annual Report on Form 10-K under "Executive
Officers of the Registrant."
Item 11. Executive Compensation
Information appearing under (i) "BOARD MEETINGS--COMMITTEES--Director
Compensation and Attendance"; (ii) "COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION"; (iii) "SUMMARY COMPENSATION TABLE" and related footnotes; (iv)
"OPTION GRANTS IN LAST FISCAL YEAR" and related footnotes; (v) "AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES" and
related footnotes; (vi) "Pension Plan"; (vii) "Pension Plan Table (1),"
"Pension Plan Table (2)," and "Pension Plan Table (3)"; (viii) "Employment
Agreements"; (ix) "Annual Incentive Bonus Plan"; (x) "Special Incentive Bonus
Plan"; (xi) "Severance Plan for Senior Officers"; (xii) "Compensation
Committee Interlocks and Insider Participation"; and (xiii) "STOCK PERFORMANCE
GRAPH" of the 2000 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information appearing under "COMMON STOCK OWNERSHIP BY DIRECTORS AND
EXECUTIVE OFFICERS" and related footnotes and "OWNERSHIP OF MEMC COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS" and related footnotes of the 2000 Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under "CERTAIN TRANSACTIONS" of the 2000 Proxy Statement is
incorporated herein by reference.
21
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The following consolidated financial statements of us and our
subsidiaries, included on pages 21 through 40 of the 1999 Annual
Report, and the Independent Auditors' Report thereon of KPMG LLP
appearing on page 42 of such report are incorporated herein by
reference.
Consolidated Statements of Operations--Years ended December 31,
1999, 1998 and 1997.
Consolidated Balance Sheets--December 31, 1999 and 1998.
Consolidated Statements of Cash Flows--Years ended December 31,
1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. Financial Statement Schedules
<TABLE>
<S> <C>
Independent Auditors' Report on Financial Statement Schedule......... F-1
Valuation and Qualifying Accounts.................................... F-2
Financial Statements of POSCO HULS Co., Ltd.:
Independent Auditors' Report of KPMG San Tong Corp................. F-3
Balance sheets as of December 31, 1999 (unaudited) and 1998........ F-4
Statements of Operations--Years ended December 31, 1999
(unaudited), 1998 and 1997........................................ F-5
Statements of Appropriation (Disposition) of Retained Earnings
(Accumulated Deficit)-- Years ended December 31, 1999 (unaudited),
1998 and 1997..................................................... F-6
Statements of Cash Flows--Years ended December 31, 1999
(unaudited), 1998 and 1997........................................ F-7
Notes to Financial Statements...................................... F-8
Financial Statements of Taisil Electronic Materials Corporation:
Independent Auditors' Report of KPMG Certified Public Accountants.. F-26
Balance sheets as of December 31, 1999 (unaudited) and 1998........ F-27
Statements of Operations--Years ended December 31, 1999
(unaudited), 1998 and 1997........................................ F-29
Statements of Changes in Stockholders' Equity--Years ended December
31, 1999 (unaudited), 1998 and 1997............................... F-30
Statements of Cash Flows--Years ended December 31, 1999
(unaudited), 1998 and 1997........................................ F-31
Notes to Financial Statements...................................... F-32
</TABLE>
3. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
3(i) Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3-a of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
3(ii) Restated By-laws of the Company (Incorporated by
reference to Exhibit 3(ii) of the Company's Form 10-Q
for the Quarter ended June 30, 1999)
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
*10-a Shareholders Agreement dated May 24, 1994 among the
Company and China Steel Corporation ("China Steel"),
China Development Corporation and Chiao Tung Bank
(Incorporated by reference to Exhibit 10(a) of Amendment
No. 4 to the Company's Form S-1 Registration Statement
No. 33-92412)
*10-b Technology Cooperation Agreement dated October 26, 1994
between the Company and Taisil Electronic Materials
Corporation ("Taisil") (Incorporated by reference to
Exhibit 10-b of Amendment No. 4 to the Company's Form S-
1 Registration Statement No. 33-92412)
10-c Joint Venture Agreement dated August 28, 1990 among the
Company, Pohang Iron and Steel Company, Ltd. ("POSCO")
and Samsung Electronics Company, Ltd. ("Samsung")
(Incorporated by reference to Exhibit 10-c of Amendment
No. 1 to the Company's Form S-1 Registration Statement
No. 33-92412)
10-c(1) First Amendment to Joint Venture Agreement dated
December 9, 1993 among the Company, POSCO and Samsung
(Incorporated by reference to Exhibit 10-d of Amendment
No. 1 to the Company's Form S-1 Registration Statement
No. 33-92412)
10-c(2) Second Amendment to Joint Venture Agreement dated
December 30, 1994 among the Company, POSCO and Samsung
(Incorporated by reference to Exhibit 10-e of Amendment
No. 1 to the Company's Form S-1 Registration Statement
No. 33-92412)
*10-d Technical Agreement dated December 19, 1990 between the
Company and POSCO HULS Company Ltd. ("PHC")
(Incorporated by reference to Exhibit 10-d of the
Company's Form 10-K for the Year Ended December 31,
1998)
*10-d(1) Amendment to Technical Agreement dated as of January 1,
1995 between the Company and PHC (Incorporated by
reference to Exhibit 10-g of Amendment No. 1 to the
Company's Form S-1 Registration Statement No. 33-92412)
10-d(2) Second Amendment to Technical Agreement effective as of
September 30, 1998 between the Company and PHC
(Incorporated by reference to Exhibit 10-g(1) of the
Company's Current Report on Form 8-K dated October 22,
1998)
*10-d(3) Third Amendment to PHC Technical Agreement effective as
of October 1, 1998 by and between the Company and PHC
(Incorporated by reference to Exhibit 10-d(3) of the
Company's Form 10-K for the Year Ended December 31,
1998)
*10-e Shareholder's Agreement dated as of May 16, 1995 between
the Company and Texas Instruments Incorporated ("TI")
(Incorporated by reference to Exhibit 10-h of Amendment
No. 4 to the Company's Form S-1 Registration Statement
No. 33-92412)
*10-f TI Purchase Agreement dated as of June 30, 1995 between
the Company, MEMC Southwest Inc. ("MEMC Southwest") and
TI (Incorporated by reference to Exhibit 10-i of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
*10-f(1) Amendment to TI Purchase Agreement dated as of June 5,
1997, between MEMC Southwest and TI (Incorporated by
reference to Exhibit 10-i of the Company's Form 10-Q for
the Quarter ended June 30, 1997)
10-g Lease Agreement Covering Silicon Wafer Operation
Premises dated June 30, 1995 between TI and MEMC
Southwest (Incorporated by reference to Exhibit 10-j of
the Company's Form 10-Q for the Quarter ended June 30,
1995)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
10-g(1) Sublease Agreement covering Silicon Wafer Operation
Premises dated June 30, 1995 between TI and MEMC
Southwest (Incorporated by reference to Exhibit 10-j(1)
of the Company's Form 10-Q for the Quarter ended June
30, 1995)
*10-h Technology Transfer Agreement dated as of June 30, 1995
between the Company, TI and MEMC Southwest (Incorporated
by reference to Exhibit 10-k of the Company's Form 10-Q
for the Quarter ended June 30, 1995)
10-i Registration Rights Agreement between the Company and
VEBA Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-l of the
Company's Form 10-K for the Year ended December 31,
1995)
10-i(1) Amendment to Registration Rights Agreement by and
between the Company and VEBA Corporation dated March 19,
1999
10-j Form of Master Reserve Volume Agreement (Incorporated by
reference to Exhibit 10-m of the Company's Form 10-K for
the Year ended December 31, 1995)
10-m MEMC Technology License Agreement dated as of July 31,
1995, between Albemarle Corporation and the Company
(Incorporated by reference to Exhibit 10-tt of the
Company's Form 10-K for the Year ended December 31,
1995)
*10-n Seller Technology License Agreement dated as of July 31,
1995, among Albemarle Corporation, the Company, and MEMC
Pasadena, Inc. (Incorporated by reference to Exhibit 10-
ll of the Company's Form 10-K/A Amendment No. 2 for the
Year ended December 31, 1997)
*10-o Technology Purchase Agreement dated as of July 31, 1995,
among Albemarle Corporation and the Company
(Incorporated by reference to Exhibit 10-mm of the
Company's Form 10-K/A Amendment No. 2 for the Year ended
December 31, 1997)
10-p Ground Lease Agreement dated as of July 31, 1995,
between Albemarle Corporation and MEMC Pasadena, Inc.
(Incorporated by reference to Exhibit 10-nn of the
Company's Form 10-K/A Amendment No. 2 for the Year ended
December 31, 1997)
10-p(1) Amendment to Ground Lease Agreement dated as of May 31,
1997, between the Company, MEMC Pasadena, Inc., and
Albemarle Corporation (Incorporated by reference to
Exhibit 10-nn(1) of the Company's Form 10-K/A Amendment
No. 2 for the Year ended December 31, 1997)
10-q Purchase Agreement dated as of October 22, 1998 by and
among the Company and VEBA Corporation (Incorporated by
reference to Exhibit 2 of the Schedule 13D dated October
30, 1998 filed by VEBA Aktiengesellschaft and VEBA
Corporation with respect to the Company)
10-q(1) First Amendment to Purchase Agreement dated as of
December 29, 1998 by and among the Company and VEBA
Corporation (Incorporated by reference to Exhibit
10.1(a) of Amendment No. 2 to the Company's Form S-3
Registration Statement No. 333-65973)
10-q(2) Second Amendment to Purchase Agreement dated as of
February 14, 1999 by and among the Company and VEBA
Zweite Verwaltungsgesellschaft mbH (as successor to VEBA
Corporation) (Incorporated by reference to Exhibit
10.1(b) of Amendment No. 3 to the Company's Form S-3
Registration Statement No. 333-65973)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
10-r Standby Agreement dated as of October 22, 1998 by and
among the Company and VEBA Corporation (Incorporated by
reference to Exhibit 3 of the Schedule 13D dated October
30, 1998 filed by VEBA Aktiengesellschaft and VEBA
Corporation with respect to the Company)
+10-aa Employment Agreement dated as of April 1, 1993 among
Huls Belgium S.A., the Company and Marcel Coinne
(Incorporated by reference to Exhibit 10-r of Amendment
No. 1 to the Company's Form S-1 Registration Statement
No. 33-92412)
+10-bb MEMC Supplemental Executive Pension Plan 1997
Restatement (Incorporated by reference to Exhibit 10-s
of the Company's Form 10-Q for the Quarter ended March
31, 1997)
+10-cc MEMC Electronic Materials, Inc. 1995 Equity Incentive
Plan as Amended and Restated on December 6, 1999
+10-cc(1) Form of Stock Option and Restricted Stock Agreement
(Incorporated by reference to Exhibit 10-t(1) of the
Company's Form 10-K for the Year ended December 31,
1995)
+10-cc(2) Form of Stock Option and Performance Restricted Stock
Agreement (Incorporated by reference to Exhibit 10-yy of
the Company's Form 10-K for the Year ended December 31,
1995)
+10-cc(3) Form of Stock Option Agreement (Incorporated by
reference to Exhibit 10-zz of the Company's Form 10-K
for the Year ended December 31, 1995)
+10-cc(4) Form of Stock Option and Performance Restricted Stock
Agreement (Incorporated by reference to Exhibit 10-nnn
of the Company's Form 10-Q for the Quarter ended March
31, 1997)
+10-cc(5) Form of Stock Option Agreement (Incorporated by
reference to Exhibit 10-ooo of the Company's Form 10-Q
for the Quarter ended March 31, 1997)
+10-cc(6) Form of Stock Option Agreement (Nonemployee Directors)
(Incorporated by reference to Exhibit 10-ppp of the
Company's Form 10-Q for the Quarter ended March 31,
1997)
+10-cc(7) Form of Stock Option Agreement
+10-dd Annual Incentive Plan for Selected Key Employees of MEMC
Electronic Materials, Inc. and its Subsidiaries
(Incorporated by reference to Exhibit 10-u of Amendment
No. 1 to the Company's Form S-1 Registration Statement
No. 33-92412)
+10-ee Employment Agreement effective as of June 16, 1995
between the Company and James M. Stolze (Incorporated by
reference to Exhibit 10-ee of Amendment No. 1 to the
Company's Form S-1 Registration Statement No. 33-92412)
+10-ff Supplemental Retirement Agreement dated as of February
17, 1999 between the Company and Ludger H. Viefhues
(Incorporated by reference to Exhibit 10-xx(1) of the
Company's Current Report on Form 8-K dated February 17,
1999)
+10-ff(1) Supplemental Retirement Agreement Clarification dated
March 17, 1999 between the Company and Ludger H.
Viefhues (Incorporated by reference to Exhibit 10.6 of
Amendment No. 4 to the Company's Form S-3 Registration
Statement No. 333-65973)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
+10-gg Stock Option Agreement dated as of September 1, 1996
between the Company and Ludger H. Viefhues (Incorporated
by reference to Exhibit 10-iii of the Company's Form 10-
Q for the Quarter ended September 30, 1996)
+10-hh Consulting Agreement dated December 1, 1997, between the
Company and Dr. Robert M. Sandfort (Incorporated by
reference to Exhibit 10-nnn of the Company's Form 10-K/A
Amendment No. 2 for the Year ended December 31, 1997)
+10-jj Agreement dated as of April 1, 1993, between the Company
and Ralph D. Hartung (Incorporated by reference to
Exhibit 10-ppp of the Company's Form 10-K for the Year
ended December 31, 1997)
+10-kk MEMC Electronic Materials, Inc. Special Incentive Plan
Summary (Incorporated by reference to Exhibit 10-qqq of
the Company's Form 10-Q for the Quarter ended June 30,
1998)
+10-kk(1) Special Incentive Bonus Agreement dated as of March 26,
1998 between the Company and Marcel Coinne (Incorporated
by reference to Exhibit 10-rrr of the Company's Form 10-
Q for the Quarter ended June 30, 1998)
+10-kk(2) Special Incentive Bonus Agreement dated as of March 24,
1998 between the Company and Ralph D. Hartung
(Incorporated by reference to Exhibit 10-sss of the
Company's Form 10-Q for the Quarter ended June 30, 1998)
+10-kk(3) Special Incentive Bonus Agreement dated as of March 31,
1998 between the Company and James M. Stolze
(Incorporated by reference to Exhibit 10-ttt of the
Company's Form 10-Q for the Quarter ended June 30, 1998)
+10-kk(4) Special Incentive Bonus Agreement dated as of March 24,
1998 between the Company and John P. DeLuca
(Incorporated by reference to Exhibit 10-kk(4) of the
Company's Form 10-K for the Year Ended December 31,
1998)
+10-ll Employment Agreement effective as of April 1, 1998
between the Company and Klaus R. von Horde (Incorporated
by reference to Exhibit 10-uuu of the Company's Form 10-
Q for the Quarter ended June 30, 1998)
+10-ll(1) Employment Agreement effective as of February 17, 1999
between the Company and Klaus R. von Horde (Incorporated
by reference to Exhibit 10.5 of Amendment No. 4 to the
Company's Form S-3 Registration Statement No. 333-65973)
+10-mm Letter Agreement dated April 17, 1998 between the
Company and Dr. Werner Schmitz (Incorporated by
reference to Exhibit 10-vvv of the Company's Form 10-Q
for the Quarter ended June 30, 1998)
+10-nn Agreement dated May 19, 1998 between the Company and
Ralph D. Hartung (Incorporated by reference to Exhibit
10-www of the Company's Form 10-Q for the Quarter ended
June 30, 1998)
+10-oo International Transfer Letter Agreement effective as of
October 1, 1998 between the Company and Marcel Coinne
(Incorporated by reference to Exhibit 10-yyy of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-aaa Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-jj
of the Company's Form 10-Q for the Quarter ended June
30, 1995)
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
10-aaa(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-cc(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-bbb Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-kk
of the Company's Form 10-Q for the Quarter ended June
30, 1995)
10-bbb(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA
Corporation (Incorporated by reference to Exhibit
10-dd(1) of the Company's Current Report on Form 8-K
dated October 21, 1998)
10-ccc Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-ll
of the Company's Form 10-Q for the Quarter ended June
30, 1995)
10-ccc(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-ee(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-ddd Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-mm
of the Company's Form 10-Q for the Quarter ended June
30, 1995)
10-ddd(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-ff(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-eee Credit Agreement dated as of July 10, 1995, between the
Company and VEBA AG (as successor to Huls AG)
(Incorporated by reference to Exhibit 10-nn of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-eee(1) First Amendment to Credit Agreement effective as of July
1, 1998 between the Company and VEBA AG (as successor to
Huls AG) (Incorporated by reference to Exhibit 10-gg(1)
of the Company's Form 10-Q for the Quarter ended June
30, 1998)
10-eee(2) Second Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-gg(2) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-fff Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
AG) (Incorporated by reference to Exhibit 10-oo of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-fff(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-hh(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
10-hhh Revolving Credit Agreement dated as of July 10, 1995,
between the Company and VEBA AG (as successor to Huls
AG) (Incorporated by reference to Exhibit 10-pp of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-hhh(1) Amendment to Loan Agreement effective March 4, 1998
between the Company and VEBA AG (as successor to Huls
AG) (Incorporated by reference to Exhibit 10-ii(1) of
the Company's Form 10-Q for the Quarter ended June 30,
1998)
10-hhh(2) Second Amendment to Revolving Credit Agreement effective
as of September 1, 1998 between the Company and VEBA AG
(as successor to Huls AG) (Incorporated by reference to
Exhibit 10-ii(2) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-jjj Credit Agreement between the Company and VEBA AG (as
successor to Huls AG) dated as of December 22, 1995
(Incorporated by reference to Exhibit 10-aaa of the
Company's Form 10-K for the Year ended December 31,
1995)
10-jjj(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-qq(1) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-kkk Credit Agreement between the Company and VEBA AG (as
successor to Huls AG) dated as of December 22, 1995
(Incorporated by reference to Exhibit 10-bbb of the
Company's Form 10-K for the Year ended December 31,
1995)
10-kkk(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-rr(1) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-lll Credit Agreement between the Company and VEBA AG (as
successor to Huls AG) dated as of December 22, 1995
(Incorporated by reference to Exhibit 10-ccc of the
Company's Form 10-K for the Year ended December 31,
1995)
10-lll(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-ss(1) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-mmm Credit Agreement between the Company and VEBA AG (as
successor to Huls AG) dated as of December 22, 1995
(Incorporated by reference to Exhibit 10-ddd of the
Company's Form 10-K for the Year ended December 31,
1995)
10-mmm(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-tt(1) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-nnn Credit Agreement dated as of December 1, 1996 between
the Company and VEBA AG (as successor to Huls AG)
(Incorporated by reference to Exhibit 10-jjj of the
Company's Form 10-K for the Year ended December 31,
1996)
10-nnn(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-ccc(1) of the Company's Current Report on
Form 8-K dated October 21, 1998)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
10-ooo Credit Agreement dated as of December 1, 1996 between
the Company and VEBA AG (as successor to Huls AG)
(Incorporated by reference to Exhibit 10-kkk of the
Company's Form 10-K for the Year ended December 31,
1996)
10-ooo(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-ddd(1) of the Company's Current Report on
Form 8-K dated October 21, 1998)
10-ppp Credit Agreement dated as of April 1, 1996 between the
Company and VEBA AG (as successor to Huls AG)
(Incorporated by reference to Exhibit 10-lll of the
Company's Form 10-K for the Year ended December 31,
1996)
10-ppp(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-eee(1) of the Company's Current Report on
Form 8-K dated October 21, 1998)
10-qqq Fourth Short-Term Loan Agreement dated as of March 31,
1996 between the Company and VEBA Corporation (as
successor to Huls Corporation) (Incorporated by
reference to Exhibit 10-mmm of the Company's Form 10-K
for the Year ended December 31, 1996)
10-qqq(1) First Amendment to Overnight Loan Agreement effective as
of September 1, 1998 between the Company and VEBA
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-fff(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-rrr Five Year Credit Agreement dated as of June 26, 1997,
between the Company and Fidelia Corporation (as
successor to Huls Corporation) (Incorporated by
reference to Exhibit 10-qqq of the Company's Form 10-Q
for the Quarter ended June 30, 1997)
10-rrr(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-jjj(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-sss Six Year Credit Agreement dated as of June 26, 1997,
between the Company and Fidelia Corporation (as
successor to Huls Corporation) (Incorporated by
reference to Exhibit 10-rrr of the Company's Form 10-Q
for the Quarter ended June 30, 1997)
10-sss(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-kkk(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-ttt Seven Year Credit Agreement dated as of June 26, 1997,
between the Company and Fidelia Corporation (as
successor to Huls Corporation) (Incorporated by
reference to Exhibit 10-sss of the Company's Form 10-Q
for the Quarter ended June 30, 1997)
10-ttt(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-lll(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
10-uuu Eight Year Credit Agreement dated as of June 26, 1997,
between the Company and Fidelia Corporation (as
successor to Huls Corporation) (Incorporated by
reference to Exhibit 10-ttt of the Company's Form 10-Q
for the Quarter ended June 30, 1997)
10-uuu(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-mmm(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-vvv Loan Agreement dated as of June 30, 1998 between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-
xxx of the Company's Form 10-Q for the Quarter ended
June 30, 1998)
10-vvv(1) First Amendment to Loan Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-xxx(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-www Revolving Credit Agreement dated as of September 23,
1998 between the Company and VEBA AG (Incorporated by
reference to Exhibit 10-zzz of the Company's Current
Report on Form 8-K dated October 21, 1998)
10-xxx Revolving Credit Agreement dated as of February 26, 1999
between the Company and Fidelia Corporation (as
successor to VEBA Corporation) (Incorporated by
reference to Exhibit 10.4 of Amendment No. 3 to the
Company's Form S-3 Registration Statement No. 333-65973)
13 Pages 12 through 42 (excluding the "Report of
Management" on page 41) and page 44 of the Company's
1999 Annual Report
21 Subsidiaries of the Company
23-a Consent of KPMG LLP
23-b Consent of KPMG San Tong Corp.
23-c Consent of KPMG Certified Public Accountants
24 Powers of Attorney submitted by Dr. Hans Michael Gaul;
Helmut Mamsch; Willem D. Maris; Paul T. O'Brien; Dr.
Alfred Oberholz; and Michael B. Smith
27 Financial Data Schedule (filed electronically with the
SEC only)
</TABLE>
- --------
* 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.
(b) Reports on Form 8-K
During the fourth quarter of 1999, we filed no current reports on Form 8-
K.
30
<PAGE>
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.
/s/ Klaus R. von Horde
By: _________________________________
Klaus R. von Horde
President, Chief Executive Officer
and Director
Date: March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Klaus R. von Horde President, Chief Executive March 24,
____________________________________ Officer and Director 2000
Klaus R. von Horde (Principal executive
officer)
/s/ James M. Stolze Executive Vice President March 28,
____________________________________ and Chief Financial 2000
James M. Stolze Officer (Principal
financial and accounting
officer)
* Director March 28,
____________________________________ 2000
Dr. Hans Michael Gaul
* Chairman of the Board of March 28,
____________________________________ Directors 2000
Helmut Mamsch
* Director March 28,
____________________________________ 2000
Willem D. Maris
* Director March 28,
____________________________________ 2000
Dr. Alfred Oberholz
* Director March 28,
____________________________________ 2000
Paul T. O'Brien
* Director March 28,
____________________________________ 2000
Michael B. Smith
</TABLE>
- --------
*James M. Stolze, by signing his name hereto, does sign this document on
behalf of the above noted individuals, pursuant to powers of attorney duly
executed by such individuals which have been filed as an Exhibit to this
Report.
/s/ James M. Stolze
_______________________________
James M. Stolze
Attorney-in-Fact
31
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
No. Description
-------- -----------
<C> <S> <C>
10-i(1) Amendment to Registration Rights Agreement by and between
the Company and VEBA Corporation dated March 19, 1999
10-cc MEMC Electronic Materials, Inc. 1995 Equity Incentive Plan
as Amended and Restated on December 6, 1999
10-cc(7) Form of Stock Option Agreement
13 Pages 12 through 42 (excluding the "Report of Management"
on page 41) and
page 44 of the Company's 1999 Annual Report
21 Subsidiaries of the Company
23-a Consent of KPMG LLP
23-b Consent of KPMG San Tong Corp.
23-c Consent of KPMG Certified Public Accountants
24 Powers of Attorney submitted by Dr. Hans Michael Gaul;
Helmut Mamsch;
Willem D. Maris; Paul T. O'Brien; Dr. Alfred Oberholz; and
Michael B. Smith
27 Financial Data Schedule (filed electronically with the SEC
only)
</TABLE>
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
MEMC Electronic Materials, Inc.
Under date of January 20, 2000, we reported on the consolidated balance
sheets of MEMC Electronic Materials, Inc. and subsidiaries as of December 31,
1999 and 1998, 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, 1999, as contained in the 1999 annual report to
stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1999. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule
as listed in item 14(a)(2) of this Form 10-K. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
St. Louis, Missouri
January 20, 2000
F-1
<PAGE>
MEMC ELECTRONIC MATERIALS, INC.
AND SUBSIDIARIES
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Charged
Balance at Charged to to Other Balance at
Beginning Costs and Accounts -- Deductions -- End of
of Period Expenses Describe Describe Period
---------- ---------- ----------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December
31, 1997............. $ 2,299 $ 1,700 $ 0 $ (526)(A)(B) $ 3,473
Year ended December
31, 1998............. 3,473 (620) 0 (0)(A)(B) 2,853
Year ended December
31, 1999............. 2,853 653 (91)(A) (1,006)(B) 2,409
======= ======= ===== ======== =======
Inventory reserves:
Year ended December
31, 1997............. $ 6,945 $ 5,902(D) $ 0 $ (4,984)(C) $ 7,863
Year ended December
31, 1998............. 7,863 18,420(D) 0 (6,681)(C) 19,602
Year ended December
31, 1999............. 19,602 8,402(D) (266)(A) (11,053)(C) 16,685
======= ======= ===== ======== =======
</TABLE>
- --------
(A) Currency fluctuations
(B) Write-off of uncollectible accounts
(C) Write-off of inventory
(D) Charged to cost of goods sold
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
POSCO HULS Co., Ltd.:
We have audited the accompanying balance sheet of POSCO HULS Co., Ltd. (the
"Company") as of December 31, 1998, and the related statements of operations,
appropriation (disposition) of retained earnings (accumulated deficit) and
cash flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the Auditing Standards, as
established by the Financial Supervisory Commission of the Republic of Korea,
which are substantially similar, in all material aspects, to generally
accepted auditing standards in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in note 1(b) to the financial statements, the operations of the
Company have been affected and may continue to be affected for the foreseeable
future by the adverse economic condition in the Republic of Korea in recent
years and those in the Asia Pacific region in general.
In our opinion, the financial statements give a true and fair view, in all
material respects, of the financial position of POSCO HULS Co., Ltd. as of
December 31, 1998, and the results of its operations, the changes in its
retained earnings (accumulated deficit), and its cash flows for the years
ended December 31, 1998 and 1997 in conformity with the Financial Accounting
Standards, as established by the Financial Supervisory Commission of the
Republic of Korea
The Financial Accounting Standards in the Republic of Korea, as established
by the Financial Supervisory Commission of the Republic of Korea, vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have affected results of operations for each of the
years in the two-year period ended December 31, 1998 and stockholders' equity
as of December 31, 1998 and 1997, to the extent summarized in note 22 to the
financial statements.
/s/ KPMG San Tong Corp.
Seoul, Korea
January 11, 1999
F-3
<PAGE>
POSCO HULS CO., LTD.
BALANCE SHEETS
December 31, 1999 and 1998
(in thousands of U.S. dollars except share data)
<TABLE>
<CAPTION>
1999 1998
----------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (notes 2 and 3).............. $ 18 $ 54
Short-term financial instruments (note 3).............. 26,412 18,467
Marketable securities (note 4)......................... 39,575 42,762
Notes and accounts receivable, less allowance for
doubtful accounts of $135 in 1999 and $81 in 1998
(note 12)............................................. 13,406 8,003
Inventories (notes 5 and 9)............................ 27,894 29,178
Other current assets (notes 6 and 12).................. 3,543 4,249
-------- --------
Total current assets..................................... 110,848 102,713
Investments and other assets (note 8).................... 15,645 13,051
Deferred tax assets, net (note 18)....................... 11,535 --
Fixed assets, less accumulated depreciation (notes 7, 9
and 10)................................................. 117,173 134,377
Debt issuance costs...................................... -- 135
Deferred foreign currency translation loss (note 19)..... -- 23,676
-------- --------
$255,201 $273,952
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes and accounts payable (note 12)................... $ 8,236 $ 6,932
Short-term borrowings (note 7)......................... 14,653 3,850
Accounts payable--other (note 12)...................... 6,203 4,640
Current portion of bonds issued (note 15).............. 17,461 18,927
Current portion of long-term debt (note 16)............ 24,390 15,096
Current portion of long-term obligations under
financial leases (note 10)............................ 10,996 10,233
Other current liabilities (note 13).................... 2,756 3,379
-------- --------
Total current liabilities................................ 84,695 63,057
Retirement and severance benefits (note 14).............. 10,090 7,071
Bonds issued (note 15)................................... 37,973 48,175
Long-term debt, less current portion (notes 7 and 16).... 41,404 65,438
Long-term obligations under financing leases (note 10)... 17,950 28,946
-------- --------
Total liabilities........................................ 192,112 212,687
-------- --------
Stockholders' equity (notes 12 and 17):
Common stock of $2.95 par value: Authorized--20,000,000
shares Issued and outstanding--17,200,000 shares...... 112,175 112,175
Appropriated retained earnings (note 17)............... 4,470 16,931
Accumulated deficit.................................... (6,986) (18,619)
Cumulative translation adjustment...................... (46,570) (49,222)
-------- --------
Total stockholders' equity............................... 63,089 61,265
Commitments and contingencies (note 20).................. -- --
-------- --------
$255,201 $273,952
======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
POSCO HULS CO., LTD.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Sales (note 12)............................... $157,979 $120,980 $215,938
Cost of goods sold (note 12).................. 128,095 122,267 169,388
-------- -------- --------
Gross profit (loss)........................... 29,884 (1,287) 46,550
Selling, general and administrative expenses.. 9,491 8,713 10,143
-------- -------- --------
Operating income (loss)....................... 20,393 (10,000) 36,407
-------- -------- --------
Other income (deductions):
Interest income............................. 5,855 5,687 5,634
Interest expense............................ (16,342) (17,362) (16,894)
Foreign currency translation and exchange
gain, net.................................. 5,359 2,845 5,887
Amortization of deferred foreign currency
translation loss........................... -- (6,247) (15,139)
Loss of inventory valuation................. (2,745) (7,299) (3,953)
Other, net.................................. (572) 387 (4,640)
-------- -------- --------
(8,445) (21,989) (29,105)
-------- -------- --------
Earnings (loss) before income taxes........... 11,948 (31,989) 7,302
Income taxes (note 18)........................ 759 -- 1,332
-------- -------- --------
Net earnings (loss)........................... $ 11,189 $(31,989) $ 5,970
======== ======== ========
Earnings (loss) per share of common stock in
U.S. dollars (note 21)....................... $ 0.65 $ (1.86) $ 0.35
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
POSCO HULS CO., LTD.
STATEMENTS OF APPROPRIATION (DISPOSITION) OF RETAINED EARNINGS (ACCUMULATED
DEFICIT)
Years Ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
Date of Disposition for 1999: March 24, 2000
Date of Disposition for 1998: March 26, 1999
Date of Appropriation for 1997: March 24, 1998
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- -------
(Unaudited)
<S> <C> <C> <C>
Unappropriated (undisposed) retained earnings
(accumulated deficit):
Balance at beginning of year................... $(18,619) $ 11,898 $ 6,749
Prior period adjustments:
Foreign currency translation adjustment (note
19)......................................... (19,138) -- --
Deferred income taxes (note 18).............. 7,121 -- --
-------- -------- -------
As restated.................................... (30,636) 11,898 6,749
Net earnings (loss) for the year............... 11,189 (31,989) 5,970
-------- -------- -------
(19,447) (20,091) 12,719
-------- -------- -------
Disposition of accumulated deficit:
Transfers from reserves:
Legal reserve (note 17)...................... 3,141 -- --
Business rationalization reserve (note 17)... 6,344 -- --
Reserve for export loss (note 17)............ 1,720 1,472 --
Reserve for technology development (note
17)......................................... 670 -- --
Reserve for overseas market development (note
17)......................................... 586 -- --
-------- -------- -------
12,461 1,472 --
-------- -------- -------
Appropriation of unappropriated retained
earnings:
Reserve for business rationalization (note
17)........................................... -- -- 821
-------- -------- -------
-- -- 821
-------- -------- -------
Balance of unappropriated (undisposed) retained
earnings (accumulated deficit) after
appropriation (disposition)..................... $ (6,986) $(18,619) $11,898
======== ======== =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
POSCO HULS CO., LTD.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).......................... $11,189 $(31,989) $ 5,970
Adjustments to reconcile net earnings (loss)
to cash provided by operating activities:
Foreign translation loss, net.............. (4,946) 45 658
Loss on disposition of fixed assets, net... 188 45 486
Depreciation and amortization.............. 30,387 39,942 69,574
Provision for retirement and severance
benefits.................................. 3,282 1,930 3,039
Contribution to National Pension Fund...... (205) (423) (287)
Payment for retirement and severance
benefits.................................. (499) (197) (352)
Decrease (increase) in marketable
securities................................ 13,262 (40,057) 361
Decrease (increase) in notes and accounts
receivable................................ (5,403) 8,302 (8,164)
Decrease (increase) in prepaid expenses and
other current assets...................... 706 614 (1,232)
Decrease (increase) in inventories......... 1,284 10,913 (9,965)
Increase in trade notes and accounts
payable................................... 1,304 2,618 3,273
Decrease in accrued expenses and other
current liabilities....................... (623) (66) (685)
Other, net................................. 1,565 420 105
------- -------- --------
Net cash provided by operating activities...... 51,491 (7,903) 62,781
------- -------- --------
Cash flows from investing activities:
Additions to fixed assets.................... (7,709) (12,720) (39,020)
Proceeds from sale of fixed assets........... 116 432 380
Decrease (increase) in short-term financial
instruments................................. (7,945) (428) 23,297
Increase in investments, other assets and
deferred charges............................ (7,731) (1,744) (2,159)
------- -------- --------
Net cash used in investing activities.......... (23,269) (14,460) (17,502)
------- -------- --------
Cash flows from financing activities:
Proceeds from bank overdraft and short-term
borrowings.................................. 14,125 13,815 14,427
Repayments of bank overdraft and short-term
borrowings.................................. (3,911) (20,863) (2,245)
Proceeds from issuance of bonds, net of
discounts................................... 3,911 56,818 --
Proceeds from long-term debt................. 267 2,300 26,356
Repayment of long-term debt.................. (45,077) (43,623) (41,138)
Payment of dividends......................... -- -- (28,156)
Increase (decrease) in accounts payable--
other....................................... 1,563 (4,512) 3,123
------- -------- --------
Net cash provided by (used in) financing
activities.................................... (29,122) 3,935 (27,633)
------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... (900) (18,428) 17,646
Effect of changes in exchange rates............ 864 18,475 (17,647)
Cash and cash equivalents at beginning of
year.......................................... 54 7 8
------- -------- --------
Cash and cash equivalents at end of year....... $ 18 $ 54 $ 7
======= ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Income taxes............................... $ 1,174 $ 795 $ 1,772
Interest................................... 16,313 16,979 2,059
======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies
(a) Basis of Presenting Financial Statements
The accounting records of POSCO HULS Co., Ltd. (the "Company") are expressed
in Korean Won and maintained in accordance with the Financial Accounting
Standards of the Republic of Korea, which may differ in some material respects
from International Accounting Standards or the accounting principles and
standards of the country of the reader. The accompanying financial statements
have been extracted from the Company's Korean language financial statements
that were prepared using accounting principles and reporting practices
generally accepted in the Republic of Korea. The financial statements and the
auditors' report have been translated from those issued in Korea, from the
Korean language into the English language, and have been modified to allow for
formatting of the financial statements in a manner different from the
presentation under Korean financial statement practices. Certain modifications
have been made in the accompanying financial statements to bring the formal
presentation into conformity with practices outside of Korea, and certain
information included in the Korean language statutory financial statements,
which management believes is not required for a fair presentation of the
Company's financial position or results of operations, is not presented in the
accompanying financial statements. The accompanying financial statements are
not intended to present the financial position and results of operations and
cash flows in accordance with accounting principles and practices generally
accepted in countries and jurisdictions other than Korea.
The Company's financial positions and results of operations are presented
utilizing a reporting currency of U.S. dollars. The U.S. dollar amounts are
determined by translating the Korean Won amounts of assets and liabilities
into U.S. dollars at the basic exchange rates as of the balance sheet date
(W1,145.40 to US$1 and W1,207.80 to US$1 as of December 31, 1999 and 1998,
respectively), the amount of common stock at the basic exchange rates on the
dates of issuance, and income and expense items at the average basic exchange
rates for each month. The effects of changes in exchange rates are reflected
as "cumulative translation adjustment" within stockholders' equity.
(b) Economic Environment
The liquidity crisis which began in late 1997 in the Republic of Korea and
other countries in the Asia Pacific region necessitated assistance from the
International Monetary Fund and a comprehensive policy package intended to
address the structural weaknesses in the Korean economy and financial sector
was developed and implemented by the government of the Republic of Korea.
While the reform policies were intended to improve the economy over time, the
immediate effects included slower economic growth, a reduction in the
availability of credit, an increase in interest rates, significant devaluation
of the Korean Won, an increase in the number of bankruptcies of Korean
entities, and labor unrest resulting from the increase in unemployment. These
conditions and similar conditions in other countries in the Asia Pacific
region have had a material adverse effect on the operations of the Company.
Recently, however, economic difficulties have largely been overcome in the
Republic of Korea, as evidenced by significant increase in foreign exchange
reserves, above-average economic growth and stabilized foreign exchange rates.
Nevertheless, it would be premature to be complacent about the economic
recovery given, among other factors, the remaining residual effects of the
economic crisis which could have a continuing impact on the economy.
The accompanying financial statements reflect management's current
assessment of the impact to date of the economic situation on the financial
position of the Company. Actual results could differ from management's current
assessments and such differences could be material.
F-8
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(c) Marketable Securities
Marketable securities are stated at market value. Any gains or losses
resulting from adjusting the securities to market value are recognized in
current operations.
(d) Allowance for Doubtful Accounts
The allowance for doubtful accounts has been provided based on an individual
analysis of the respective receivables and historical experience.
(e) Inventories
Inventories are stated at cost determined by the lower of cost (the weighted
average method) or market value, except that materials-in-transit are stated
at actual cost using the specific identification method.
(f) Fixed Assets
Fixed assets are stated at cost. The Company charges expenditures for
maintenance, repairs and minor renewals to expense as incurred. Major renewals
and improvements are capitalized. Interest incurred during the construction
and installation of manufacturing plant is capitalized as part of fixed
assets.
Depreciation is computed by the straight-line method at rates based on the
following estimated useful lives:
<TABLE>
<CAPTION>
Useful lives
------------
<S> <C>
Buildings................................................. 30-60 years
Buildings--auxiliary facilities........................... 15-18
Structures................................................ 15-40
Machinery and equipment................................... 4-10
Vehicles.................................................. 5
Tools and equipment....................................... 5
Furniture and fixtures.................................... 5
Industrial water usage rights............................. 15
</TABLE>
(g) Accounting for Leases
The Company accounts for leases as either operating leases 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 become due. Prepaid lease expenses relating to
operating leases are amortized over the lease terms of the related leases.
Under the financing lease method, the principal amount of leased equipment,
which represents 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.
(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-9
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(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. The Company's estimated liability under the plan has
been recorded 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 benefits of employees to the National
Pension Fund. The amount transferred will reduce the retirement and severance
benefit amounts payable to the employees when they leave the Company and is
reflected in the accompanying financial statements as a reduction of the
retirement and severance benefits liability.
The Company has covered 49% and 37% of the retirement and severance benefits
liability as of December 31, 1999 and 1998, respectively by insurance deposits
with certain insurance companies, which is included in the investments and
other assets account as deposits for retirement and severance benefits.
(j) Revenue Recognition
Local sales are recognized when goods are delivered and inspection by the
customer is completed, while export sales are recognized as of the shipment
date.
(k) Foreign Currency Translation
Foreign currency transactions are recorded at the appropriate rate of
exchange when incurred. As of December 31, 1999 and 1998, monetary assets and
liabilities denominated in a foreign currency are translated into Korean Won
at W1,145.40 to US$1 and W1,207.80 to US$1, respectively. Exchange gains or
losses are credited or charged to current operations.
Under the previous Financial Accounting Standards, in 1998, the Company had
deferred net foreign exchange loss on long-term foreign currency debt. In
accordance with the revised Financial Accounting Standards, the balance of
such deferred foreign exchange loss was debited to the beginning balance of
accumulated deficit.
(l) Income Taxes
Income tax expense or benefit on earnings for 1999 includes both current and
deferred taxes. Current tax is the expected tax payable on the taxable income
for the year, using tax rates enacted or substantially enacted at the balance
sheet date. Deferred tax is provided using the asset and liability method,
providing for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for taxation
purposes. 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. Through
December 31, 1998, recording of deferred taxes was not required under the old
Financial Accounting Standards. Beginning in 1999, the Company accounts for
deferred taxes using the asset and liability method as described above. The
cumulative effect, through December 31, 1998, of the adoption of revised
Financial Accounting Standards is credited to the beginning balance of
accumulated deficit in 1999.
(m) Earnings (Loss) per Share
Earnings (loss) per common share is calculated by dividing net earnings
(loss) by the weighted average number of shares of common stock outstanding
during each period.
F-10
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(n) Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid marketable securities with maturity of three months or less to
be cash equivalents.
(o) Reclassification
Certain accounts of 1998 financial statements have been reclassified to
conform with the current year's presentation.
(p) 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.
(q) Accounting Changes for 1999
On December 11, 1998, the Financial Supervisory Commission announced certain
changes in Financial Accounting Standards in the Republic of Korea ("Korean
GAAP") with the intention to enhance Korean GAAP and disclosure rules to more
closely resemble international practices. The revised accounting standards are
effective for fiscal years starting on or after January 1, 1999.
The more significant changes include, but are not limited to, accounting for
investment securities, foreign currency translation, impairment of long-lived
assets, deferred assets, goodwill, asset transfers, income taxes, accounting
changes and prior period adjustments. Additional disclosures are also required
concerning segment information, discontinued operations and significant non-
compliance with covenants. The cumulative effect, through December 31, 1998,
of the adoption of revised Financial Accounting Standards is debited or
credited to the beginning balance of accumulated deficit in 1999.
(2) Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
----------- ----
(Unaudited)
<S> <C> <C>
Cash on hand............................................. $ 6 $ 2
Checking accounts........................................ 8 4
Corporate savings deposits............................... 4 --
Foreign currency deposits................................ -- 48
--- ---
$18 $54
=== ===
</TABLE>
F-11
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(3) Short-term Financial Instruments
Short-term financial instruments at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
----------- -------
(Unaudited)
<S> <C> <C>
Time deposits........................................ $18,925 $17,315
Installment time deposits............................ 1,812 1,152
Cash management account.............................. 5,675 --
------- -------
$26,412 $18,467
======= =======
</TABLE>
Time deposits, installment time deposits and cash management accounts
classified as cash and cash equivalents as of December 31, 1998, have been
reclassified as short-term financial instruments as of December 31, 1999 in
accordance with the revised accounting standards.
(4) Marketable Securities
Marketable securities at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -------
(Unaudited)
<S> <C> <C>
Beneficiary certificates............................. $39,575 $41,941
Government bonds..................................... -- 821
------- -------
$39,575 $42,762
======= =======
</TABLE>
(5) Inventories
Inventories at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -------
(Unaudited)
<S> <C> <C>
Finished goods........................................ $ 9,097 $ 8,894
Goods-in-progress..................................... 6,954 6,820
Raw materials......................................... 1,184 415
Sub materials......................................... 5,150 4,308
Supplies.............................................. 4,913 5,043
Materials-in-transit.................................. 596 3,698
------- -------
$27,894 $29,178
======= =======
</TABLE>
F-12
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) Other Current Assets
Other current assets at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- ------
(Unaudited)
<S> <C> <C>
Accounts receivables--other........................... $ 279 $ 122
Accrued income........................................ 728 1,677
Prepayments........................................... 17 19
Income taxes refundable............................... 1,219 1,291
Value added tax refundable............................ 775 362
Prepaid expenses...................................... 525 769
Import guarantee deposit.............................. -- 9
------ ------
$3,543 $4,249
====== ======
</TABLE>
(7) 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, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
----------- --------
(Unaudited)
<S> <C> <C>
Land................................................ $ 7,572 $ 14,394
Buildings........................................... 33,505 32,557
Machinery and equipment............................. 50,375 66,436
------- --------
91,452 113,387
------- --------
Obligations the collateral is pledged to secure:
Short-term borrowings............................. -- 3,850
Long-term debt, including current portion......... 7,674 80,534
------- --------
$ 7,674 $ 84,384
======= ========
</TABLE>
(b) In addition, to secure borrowings of the Company, its shareholders have
provided guarantees as follows:
<TABLE>
<CAPTION>
Guarantors 1999 1998
---------- ----------- ----
(Unaudited)
<S> <C> <C>
MEMC Electronic Materials, Inc. (MEMC)................... $-- $581
=== ====
</TABLE>
F-13
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(8) Investments and Other Assets
Investments and other assets at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
----------- -------
(Unaudited)
<S> <C> <C>
Long-term deposits................................... $ 1,200 $ 1,486
Leasehold deposits................................... 705 446
Rental deposit....................................... 96 105
Deposits for retirement and severance benefits....... 5,550 3,004
Loans to employees................................... 7,280 6,983
Restricted cash and deposits......................... 13 11
Telephone rights..................................... 36 43
Membership rights.................................... 709 667
Long-term prepaid expenses........................... 56 306
------- -------
$15,645 $13,051
======= =======
</TABLE>
(9) Fixed Assets
Fixed assets at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 (Unaudited)
----------------------------------
Accumulated
depreciation and
Cost amortization Net
-------- ---------------- --------
<S> <C> <C> <C>
Land..................................... $ 15,210 $ -- $ 15,210
Buildings................................ 37,879 4,374 33,505
Building--auxiliary facilities........... 6,518 2,186 4,332
Structures............................... 6,767 1,597 5,170
Machinery and equipment.................. 228,488 178,113 50,375
Vehicles................................. 569 429 140
Tools and equipment...................... 2,044 1,829 215
Furniture and fixtures................... 11,989 9,149 2,840
Machinery-in-transit..................... 478 -- 478
Construction-in-progress................. 4,472 -- 4,472
Industrial water usage rights............ 800 364 436
-------- -------- --------
$315,214 $198,041 $117,173
======== ======== ========
</TABLE>
F-14
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1998
------------------------------
Accumulated
Cost depreciation Net
-------- ------------ --------
<S> <C> <C> <C>
Land...................................... $ 14,394 $ -- $ 14,394
Buildings................................. 35,811 3,254 32,557
Building--auxiliary facilities............ 6,181 1,716 4,465
Structures................................ 6,278 1,226 5,052
Machinery and equipment................... 209,809 143,373 66,436
Vehicles.................................. 575 378 197
Tools and equipment....................... 1,871 1,464 407
Furniture and fixtures.................... 10,234 7,102 3,132
Machinery-in-transit...................... 2,362 -- 2,362
Construction-in-progress.................. 4,886 -- 4,886
Industrial water usage rights............. 758 269 489
-------- -------- --------
$293,159 $158,782 $134,377
======== ======== ========
</TABLE>
Property, plant and equipment, and inventories were insured against fire and
other damage up to an amount of $614,831 (unaudited) and $526,044 at December
31, 1999 and 1998, respectively.
(10) Financing Leases
The Company has certain 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, 1999:
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
2000.......................................................... $ 12,849
2001.......................................................... 9,281
2002.......................................................... 6,234
2003 and after................................................ 4,231
--------
32,595
Less portion representing interest............................ (3,649)
Less current portion.......................................... (10,996)
--------
Long-term obligations under financing leases.................. $ 17,950
========
</TABLE>
The following is a summary of the acquisition cost of leased assets and
accumulated depreciation thereon which are included in machinery and equipment
as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Description 1999 1998
----------- ----------- --------
(Unaudited)
<S> <C> <C>
Leased assets at cost (including other incidental
cost)............................................ $ 40,370 $ 41,485
Accumulated depreciation.......................... (38,257) (33,857)
-------- --------
$ 2,113 $ 7,628
======== ========
</TABLE>
F-15
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(11) Operating Leases
The Company leased certain equipment and machinery from Korea Industrial
Leasing Co., Ltd. and accounts for each of the leases as an operating lease.
The operating leases expired in 1998.
Operating lease expenses of $90 and $459 charged to operations in the years
ended December 31, 1998 and 1997, respectively.
(12) Stockholders and Related Party Transactions
The Company was established under the Foreign Capital Inducement Law in
December 1991 as a joint venture company to manufacture and sell silicon
wafers and related products. Dividends are paid to shareholders in Korean Won.
The stockholders of the Company and their ownership percentages at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Stockholders Number of shares Ownership percentage
------------ ---------------- --------------------
<S> <C> <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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------- --------
(Unaudited)
<S> <C> <C> <C>
MEMC:
Notes and accounts receivable................ $ 3,796 $ 1,215 $ 3,257
Other current assets......................... 6 47 217
Notes and accounts payable................... 735 46 49
Accounts payable--other...................... 1,077 695 1,141
Sales........................................ 25,840 21,558 30,168
Purchases.................................... 10,132 3,353 6,914
Licensing and royalty payments............... 3,312 3,186 6,329
SEC:
Notes and accounts receivable................ 7,608 5,199 2,843
Sales........................................ 122,550 78,746 135,298
</TABLE>
(13) Other Current Liabilities
Other current liabilities at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
----------- ------
(Unaudited)
<S> <C> <C>
Withholding............................................ $ 274 $ 209
Accrued expenses....................................... 2,482 3,170
------ ------
$2,756 $3,379
====== ======
</TABLE>
F-16
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(14) Retirement and Severance Benefits
Changes in retirement and severance benefits for the years ended December 31,
1999, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------- -------
(Unaudited)
<S> <C> <C> <C>
Beginning balance............................ $ 7,071 $ 4,271 $ 5,433
Provision for the year....................... 3,282 2,014 3,039
Payments..................................... (499) (197) (352)
Effect of changes in exchange rates.......... 1,497 2,039 (3,849)
------- ------- -------
Ending balance............................... 11,351 8,127 4,271
Cumulative contribution to National Pension
Fund, net................................... (1,261) (1,056) (398)
------- ------- -------
$10,090 $ 7,071 $ 3,873
======= ======= =======
</TABLE>
(15) Bonds Issued
Bonds issued at December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Interests
Series Maturities per annum 1999 1998 Guarantor
------ ---------- --------- ----------- ------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
#10 1999 17.0% $ -- $10,763 Boram bank
#11 1999 16.0% -- 8,280 Koram bank*
#12 2000 13.3% 17,461 16,559 Unsecured
#13 2001 10.0% 26,192 24,838 Unsecured
#14 2001 8.0% 8,731 8,280 Unsecured
#15 2002 7.0% 4,365 -- Unsecured
------- -------
56,749 68,720
Less current portion........... 17,461 18,927
Less unamortized discount...... (1,315) (1,618)
------- -------
$37,973 $48,175
======= =======
</TABLE>
- --------
(*) Private placement
Scheduled repayments of bonds issued as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
2000.......................................................... $17,461
2001.......................................................... 34,923
2002.......................................................... 4,365
-------
$56,749
=======
</TABLE>
F-17
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(16) Long-term Debt
Long-term debt at December 31, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
Interest
per annum Final maturity 1999 1998
---------------- -------------- ----------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Korean Won loans:
General facility loan Floating rate 2005 $ 1,528 $ 1,449
Facility loan 5.5% 2007 277 191
-------- --------
1,805 1,640
-------- --------
Foreign currency loans:
Facility loan Floating rate 2005 1,187 1,186
Facility loan 6LIBOR*+0.7% 2003 6,682 8,591
Facility loan Prime Rate+1.0% 2003 2,848 3,562
Facility loan 3LIBOR*+2% 1999 -- 328
Facility loan 3LIBOR*+1.5% 1999 -- 253
Facility loan Prime Rate+1.3% 2003 4,016 5,355
Facility loan 6LIBOR*+0.6% 2003 18,950 25,480
Facility loan Prime Rate+1.2% 2003 1,565 2,012
Operating loan Prime Rate+1.6% 2003 1,381 1,727
Operating loan Prime Rate+0.67% 2000 12,700 12,700
Operating loan Prime Rate+0.8% 2001 9,700 9,700
Operating loan 6LIBOR*+0.7% 1999 -- 3,040
Operating loan Prime Rate+0.77% 2001 4,960 4,960
-------- --------
63,989 78,894
-------- --------
Total long-term debt................................. 65,794 80,534
Less current portion................................. (24,390) (15,096)
-------- --------
$ 41,404 $ 65,438
======== ========
</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,
1999:
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
2000.......................................................... $24,390
2001.......................................................... 26,485
2002.......................................................... 11,199
2003.......................................................... 2,834
2004.......................................................... 598
2005 and thereafter........................................... 288
-------
$65,794
=======
</TABLE>
F-18
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(17) Appropriated Retained Earnings
Appropriated retained earnings as of December 31, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -------
(Unaudited)
<S> <C> <C>
Legal reserve........................................... $ -- $ 3,141
Reserve for business rationalization.................... -- 6,344
Reserve for technology development...................... 1,340 2,010
Reserve for export loss................................. 1,958 3,678
Reserve for overseas market development................. 1,172 1,758
------ -------
$4,470 $16,931
====== =======
</TABLE>
The Korean Commercial Code requires the Company to appropriate as legal
reserve an amount equal to at least 10% of cash dividends for each accounting
period until the reserve equals 50% of stated capital. This legal reserve may
be used to reduce a deficit or it may be transferred to common stock as a
stock dividend. All legal reserve was used to reduce accumulated deficit in
1999.
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. All reserve for business rationalization was
used to reduce accumulated deficit in 1999.
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.
(18) Income Taxes
The Company is subject to a number of taxes based upon taxable earnings at
the following normal tax rates:
<TABLE>
<CAPTION>
Rates
-----------------------
Taxable earnings 1999 1998 1997
---------------- ----------- ----- -----
(Unaudited)
<S> <C> <C> <C>
Up to W100,000 thousand........................... 17.6% 17.6% 17.6%
Over W100,000 thousand............................ 30.8% 30.8% 30.8%
</TABLE>
Under the Foreign Capital Inducement Law (FCIL), the Company is entitled to
the exemption from corporation taxes to the extent of its foreign equity
portion (40%) until 2002, as stipulated in the Tax Exemption and Control Law.
After consideration of the FCIL exemption, the Company's effective tax rate is
23.8%.
F-19
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The "expected" income tax expense (benefit) calculated using the effective
tax rate differs from the actual income tax expense (benefit) for the year
ended December 31, 1999 for following reasons:
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
The "expected" income taxes using effective tax rates............ $ 2,836
Increase in tax credit to be carried forward..................... (886)
Other permanent differences...................................... (1,191)
-------
Income taxes per accompanying financial statements............... $ 759
=======
</TABLE>
The reconciliation between expected taxes and actual income taxes for 1998
has not been presented since there was no taxable income and deferred tax
accounting was not required prior to 1999.
The components of income tax expense for the year ended December 31, 1999
are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
Current....................................................... $--
Deferred...................................................... 759
----
$759
====
</TABLE>
The tax effects of temporary differences that resulted in significant
portion of the deferred income tax assets and liabilities at December 31, 1999
and 1998 using 23.8% as the effective tax rate after the consideration of the
FCIL exemption are presented below:
<TABLE>
<CAPTION>
1999 1998
----------- -------
(Unaudited)
<S> <C> <C>
Deferred income tax assets:
Inventories.......................................... $ 1,104 $ 1,902
Cumulative adjustment of deferred foreign exchange
translation loss.................................... 3,872 5,635
Depreciation......................................... 919 --
Tax credit........................................... 1,985 1,042
Tax loss carryforwards utilized...................... 4,751 5,772
Loss on securities valuation......................... 53 --
Others............................................... -- 15
------- -------
12,684 14,366
------- -------
Deferred income tax liabilities:
Accrued income....................................... 173 399
Gain on securities valuation......................... 190 --
Foreign exchange translation loss.................... -- 1,097
Reserve for tax purpose.............................. 739 1,167
Land................................................. 47 45
------- -------
1,149 2,708
------- -------
Net deferred income tax assets......................... $11,535 $11,658
======= =======
</TABLE>
The Company has a tax loss carryforward of $19,962 at December 31, 1999,
which may be used to offset future taxable income of the Company. If not used
to offset future taxable income, the tax loss carryforward will expire in
2003.
F-20
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Effective January 1, 1999, the Company adopted the asset and liability
method for income taxes, in accordance with the revised Financial Accounting
Standard. Out of the cumulative effect on prior years of the adoption of
deferred income taxes of $11,658 of net deferred tax asset as of January 1,
1999, $7,121 was credited to the beginning balance of accumulated deficit and
$4,537 was offset with deferred foreign currency translation loss which was
charged to the beginning balance of accumulated deficit.
(19) Deferred Foreign Currency Translation Loss
In accordance with the revised accounting standards, the cumulative effect
on prior years of the changes in the accounting standard for unrealized
foreign currency translation losses, $19,138 of deferred foreign currency
translation loss net of tax effects in the amount of $4,537 as of December 31,
1998, was charged to the beginning balance of accumulated deficit.
(20) Commitments and Contingencies
(a) As of December 31, 1999, the Company has provided 4 blank checks, 8
blank promissory notes and 1 promissory note in the amount of W8,731 to
financial institutions in connection with various contracts to guarantee
repayment in case the Company is in default for the repayment of its
borrowings or in breach of certain borrowing covenants. The Company is not
currently in default of its borrowings or lease contracts.
(b) As of December 31, 1999, the Company has entered into bank overdraft
agreements for borrowing up to $11,350 with five banks and has also entered
into borrowing arrangements with three short-term financing companies.
(21) Earnings (Loss) Per Share
Earnings (loss) per share for the years ended December 31, 1999, 1998 and
1997 are calculated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Net earnings (loss)................... $ 11,189 $ (31,989) $ 5,970
Weighted average number of shares of
common stock......................... 17,200,000 17,200,000 17,200,000
----------- ----------- -----------
Earnings (loss) per share in U.S.
dollars.............................. $ 0.65 $ (1.86) $ 0.35
=========== =========== ===========
</TABLE>
F-21
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(22) Reconciliation to United States Generally Accepted Accounting Principles
The accompanying financial statements are prepared in accordance with Korean
GAAP, which differ in certain significant respects from generally accepted
accounting principles in the United States (U.S. GAAP). The significant
differences are described below. Other differences do not have a significant
effect on either consolidated net earnings (loss) or stockholders' equity. The
estimated effects of the significant adjustments to net earnings (loss) and
stockholders' equity which would be required if U.S. GAAP were applied instead
of Korean GAAP are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Net earnings (loss)--Korean GAAP............... $ 11,189 $(31,989) $ 5,970
-------- -------- --------
Adjustments:
Start-up costs............................... 1,059 406 2,383
Inventories.................................. 1,177 1,845 1,044
Depreciation in relation to useful life and
functional currency differences............. (19,200) (13,108) 11,294
Capitalized interest and related
depreciation................................ 57 97 1,273
Amortization of deferred foreign currency
translation loss............................ -- 6,247 15,139
Foreign currency translation gain (loss)
including functional currency difference,
net......................................... (6,580) (5,493) (20,305)
Deferred income taxes, including translation
adjustment.................................. 918 (2,435) 10,915
Others....................................... (68) (12) 140
-------- -------- --------
Total adjustments.............................. (22,637) (12,453) 21,883
-------- -------- --------
Net earnings (loss)--U.S. GAAP................. $(11,448) $(44,442) $ 27,853
======== ======== ========
Basic earnings (loss) per share--U.S. GAAP..... $ (0.66) $ (2.46) $ 1.62
======== ======== ========
(1) For Korean GAAP purposes, the Company records gains and losses through its
statement of operations for changes in currency rates effecting monetary
assets and liabilities denominated in dollars. For US GAAP purposes, the
US dollar is the functional currency. Thus, for US GAAP purposes, currency
gains and losses result from changes in currency exchange rates related to
monetary assets and liabilities denominated in Korean Won. The differences
between the currency gains and losses calculated under the two different
sets of assumptions appear as adjustments in reconciling Korean GAAP net
earnings (loss) to net earnings (loss) under US GAAP.
Stockholders' equity--Korean GAAP.............. $ 63,089 $ 61,265 $ 51,657
Adjustments:
Start-up costs............................... -- (1,059) (1,465)
Inventories.................................. 554 (623) (2,468)
Fixed assets:
Depreciation in relation to useful life and
functional currency differences............. 11,262 30,462 43,570
Capitalized interest and related
depreciation................................ 2,850 2,793 2,696
Functional currency impact, principally on
fixed assets and inventories................ 71,731 80,397 141,556
Deferred foreign currency translation loss... -- (23,676) (44,046)
Deferred income taxes........................ (8,986) 2,389 4,824
Others....................................... -- -- 66
-------- -------- --------
Total adjustments.......................... 77,411 90,683 144,733
-------- -------- --------
Stockholders' equity--U.S. GAAP................ $140,500 $151,948 $196,390
======== ======== ========
</TABLE>
F-22
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) For US GAAP purposes, fixed assets are depreciated over longer lives than
for Korean GAAP purposes. Additionally, fixed assets are presented in the
Korean GAAP financial statements using a translation rate in effect at the
balance sheet date. For US GAAP purposes, US dollar is the functional
currency. Accordingly, fixed assets are translated at rates in effect at
the acquisition date of the various assets. As a result, in reconciling
from Korean GAAP to US GAAP stockholders' equity, positive adjustments
result both from the longer lives used for US GAAP as well as translating
the gross asset basis, and accompanying accumulated depreciation, at rates
different than for Korean GAAP.
The condensed balance sheets of the Company as of December 31, 1999 and 1998
under U.S. GAAP are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- --------
(Unaudited)
<S> <C> <C>
Current assets:
Inventories.......................................... $ 29,742 $ 29,655
Other current assets................................. 83,955 74,916
-------- --------
Total current assets................................. 113,697 104,571
Fixed assets........................................... 426,943 419,964
Less accumulated depreciation........................ 225,183 173,990
-------- --------
201,760 245,974
Investments and other assets........................... 26,247 14,090
-------- --------
$341,704 $364,635
======== ========
Current liabilities.................................... $ 85,059 $ 63,057
Long-term liabilities.................................. 116,145 149,630
-------- --------
Total liabilities.................................... 201,204 212,687
Stockholders' equity:
Common stock......................................... 112,175 112,175
Retained earnings.................................... 28,325 39,773
-------- --------
Total stockholders' equity........................... 140,500 151,948
-------- --------
$341,704 $364,635
======== ========
</TABLE>
F-23
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that resulted in significant
portions of the deferred tax assets and liabilities at December 31, 1999 and
1998 computed under U.S. GAAP, and a description of the financial statement
items that created these differences follow:
<TABLE>
<CAPTION>
1999 1998
----------- --------
(Unaudited)
<S> <C> <C>
Deferred tax assets:
Inventories............. $ 977 $ 2,055
Start-up costs.......... -- 165
Capital leases.......... -- 1
Depreciation............ 919 --
Foreign currency
translation loss....... 3,872 5,501
Korean tax operating
loss carryforwards..... 4,751 5,772
Tax credit.............. 1,985 --
Others.................. -- 3
------- --------
Total deferred tax
assets................... 12,504 13,497
------- --------
Deferred tax liabilities:
Depreciation in relation
to useful life
difference............. (8,305) (9,050)
Depreciation on
capitalized interest... (555) (447)
Reserves for tax
purpose................ (739) (1,167)
Accrued income.......... (173) (399)
Gain on securities
valuation.............. (137) --
Land.................... (47) (45)
------- --------
Total deferred tax
liabilities.............. (9,956) (11,108)
------- --------
Net deferred tax asset.... $ 2,548 $ 2,389
======= ========
</TABLE>
(a) Deferred Income Taxes
Until last year, under the Korean GAAP, a provision has not been 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, the revised Korean 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 tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled.
U.S. GAAP also requires the recognition of deferred tax assets and
liabilities created by temporary differences between the financial statement
and tax bases of assets and liabilities. However, because of differences
between Korean GAAP and U.S. GAAP for other items (for example, functional
currency differences) the net deferred tax amount under US GAAP is different
from that under Korean GAAP.
The tax rate used to calculate deferred tax assets and liabilities was
changed from 20.3% in 1997 to 23.8% in 1998 to reflect the normal corporation
tax rate and exemptions statutorily available under FCIL. The effect of this
increase on the effective tax rate was to decrease net loss by $291 in 1998.
F-24
<PAGE>
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(b) Start-up Costs
Certain start-up costs are deferred for Korean GAAP and amortized in equal
annual amounts over 5 years from 1993. These costs would be expensed as
incurred under U.S. GAAP.
(c) 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, 1999 and 1998.
(d) Inventories
For U.S. GAAP, inventories are adjusted for the effect of depreciation in
relation to the useful life difference of machinery and equipment and
depreciation on capitalized interest. For U.S. GAAP, inventories are adjusted
for the effect of capitalized depreciation in beginning and ending inventory
balances relating to the differences in useful lives of machinery and
equipment and to depreciation on capitalized interest.
(e) 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.
(f) Foreign Currency Translation
In accordance with a change in Korean GAAP in 1997, net deferred foreign
exchange losses on long-term foreign currency (including current portion)
denominated monetary assets and liabilities were recorded as a deferred
foreign currency translation loss and amortized over the remaining repayment
period of the respective assets and liabilities. In 1999, in accordance with a
change in Korean GAAP, the balance of such deferred foreign exchange loss was
recorded as an adjustment to the beginning balance of accumulated deficit.
However, for US GAAP purposes, all such foreign currency transaction losses
are expensed as incurred in all periods.
(g) 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.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Taisil Electronic Materials Corporation:
We have audited the accompanying balance sheets of Taisil Electronic
Materials Corporation as of December 31, 1998 and the related statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 1998 and 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the Republic of China, which are substantially similar to auditing
standards generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Taisil Electronic
Materials Corporation as of December 31, 1998, and the results of its
operations and its cash flows for the years ended December 31, 1998 and 1997
in conformity with generally accepted accounting principles in the Republic of
China.
As discussed in note (2)(j) to the financial statements, as of December 31,
1997, Taisil Electronic Materials Corporation changed its method of accounting
for pensions.
Accounting principles generally accepted in the Republic of China vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have affected stockholders' equity as of December 31,
1998, and the results of operations for the years ended December 31, 1998 and
1997 to the extent summarized in note 15 to the financial statements.
/s/ KPMG Certified Public
Accountants
Taipei, Taiwan
February 9, 1999
F-26
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
BALANCE SHEETS
December 31, 1999 and 1998
(expressed in thousands of US dollars)
<TABLE>
<CAPTION>
1999 1998
----------- --------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (note 4)...................... $ 11,041 $ 31,068
Short-term investments (note 5)......................... -- 337
Restricted bank deposits (note 13)...................... 32 962
Notes and accounts receivable (note 3).................. 20,644 14,649
Inventories, net (note 6)............................... 18,153 15,869
Prepayments and other current assets (notes 3 and 12)... 1,922 2,076
Deferred income taxes, net (note 12).................... 2,240 --
--------- --------
Total current assets.................................. 54,032 64,961
--------- --------
Long-term investments..................................... -- 23
--------- --------
Property, plant and equipment (notes 3, 7 and 13):
Buildings............................................... 51,642 51,642
Machinery and equipment................................. 216,974 213,303
Furniture and fixtures.................................. 7,072 6,691
--------- --------
275,688 271,636
Less: accumulated depreciation.......................... (106,903) (70,715)
Prepayments for equipment............................... 18,227 20,751
--------- --------
Net property, plant, and equipment.................... 187,012 221,672
--------- --------
Other assets:
Deferred technology fees (note 3)....................... 3,750 5,583
Deferred income taxes, net (note 12).................... 5,538 3,678
Other assets............................................ 619 884
--------- --------
Total other assets.................................... 9,907 10,145
--------- --------
Total assets.......................................... $ 250,951 $296,801
========= ========
</TABLE>
F-27
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
BALANCE SHEETS (Continued)
December 31, 1999 and 1998
(expressed in thousands of US dollars, except per share data)
<TABLE>
<CAPTION>
1999 1998
----------- --------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Short-term loans (note 8).............................. $ 16,609 $ 35,362
Short-term bills payable (note 8)...................... 8,477 15,851
Current portion of long-term loans (notes 3, 9 and
13)................................................... 40,120 37,395
Notes and accounts payable (note 3).................... 4,827 4,370
Accrued expenses and other current liabilities (notes 3
and 10)............................................... 7,515 9,122
-------- --------
Total current liabilities............................ 77,548 102,100
-------- --------
Commitments and contingencies (note 14)
Long-term loans (notes 3, 9 and 13)...................... 77,543 116,346
Deposits from contractors................................ 32 66
Accrued pension liabilities (note 10).................... 636 310
-------- --------
Total liabilities.................................... 155,759 218,822
-------- --------
Stockholders' equity (note 11):
Common stock--par value NT$10. Authorized 480,000,000
shares and issued 400,000,000 shares.................. 130,913 139,887
Advance from stockholders.............................. -- 30,744
Accumulated deficit.................................... (35,721) (92,652)
-------- --------
Total stockholders' equity........................... 95,192 77,979
-------- --------
Total liabilities and stockholders' equity........... $250,951 $296,801
======== ========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
(expressed in thousands of US dollars)
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Net sales (note 3)............................. $ 94,424 $ 58,663 $ 61,554
Cost of goods sold (note 3).................... 91,469 80,284 70,017
-------- -------- --------
Gross profit (loss).......................... 2,955 (21,621) (8,463)
-------- -------- --------
Selling, general and administrative expense.... 8,498 7,678 6,939
Research and development expense............. 1,651 2,117 6,908
-------- -------- --------
10,149 9,795 13,847
-------- -------- --------
Operating loss............................... (7,194) (31,416) (22,310)
-------- -------- --------
Non-operating income (expense):
Interest income.............................. 1,428 1,589 1,959
Interest expense, excluding capitalized
interest of $991 in 1997 (note 3)........... (10,979) (15,286) (15,356)
Gain (loss) on foreign exchange, net......... (1,191) (1,773) 14,800
Other income, net (note 3)................... 940 1,525 1,458
-------- -------- --------
(9,802) (13,945) 2,861
-------- -------- --------
Loss before income taxes....................... (16,996) (45,361) (19,449)
Income tax benefit (expense) (note 12)......... 3,984 (13,053) 5,665
-------- -------- --------
Net loss....................................... $(13,012) $(58,414) $(13,784)
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(expressed in thousands of US dollars)
<TABLE>
<CAPTION>
Advance
Common From Accumulated
Stock Stockholders Deficit Total
-------- ------------ ----------- -------
<S> <C> <C> <C> <C>
Balance as of January 1, 1997
(unaudited)...................... $ 94,942 $ -- $(20,454) $74,488
Capital increase through cash..... 18,841 -- -- 18,841
Net loss.......................... -- -- (13,784) (13,784)
-------- ------- -------- -------
Balance as of December 31, 1997... 113,783 -- (34,238) 79,545
Capital increase through cash..... 26,104 -- -- 26,104
Advance from stockholders......... -- 30,744 -- 30,744
Net loss.......................... -- -- (58,414) (58,414)
-------- ------- -------- -------
Balance as of December 31, 1998... 139,887 30,744 (92,652) 77,979
Capital increase through cash
(unaudited)...................... 60,969 (30,744) -- 30,225
Capital decrease to offset
accumulated deficit (unaudited).. (69,943) -- 69,943 --
Net loss (unaudited).............. -- -- (13,012) (13,012)
-------- ------- -------- -------
Balance as of December 31, 1999
(unaudited)...................... $130,913 $ -- $(35,721) $95,192
======== ======= ======== =======
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
(expressed in thousands of US dollars)
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- --------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(13,012) $(58,414) $(13,784)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Non-cash foreign exchange (gain) loss...... 3,601 1,521 (16,510)
Depreciation and amortization.............. 38,676 38,961 26,497
Provision (reversal) for inventory loss.... (3,027) 1,170 (1,207)
Loss (gain) from disposal of property,
plant and equipment....................... (1) 52 9
Decrease (increase) in notes and accounts
receivable................................ (5,469) 6,686 (20,027)
Decrease (increase) in inventories......... 743 1,082 (5,068)
Decrease (increase) in prepayments and
other current assets...................... 154 1,264 (4,103)
Decrease (increase) in deferred income
taxes..................................... (3,984) 13,794 (3,852)
Increase (decrease) in notes and accounts
payable................................... 334 (7,380) 1,550
Increase (decrease) in accrued expenses and
other current liabilities................. (1,799) (1,801) 10,573
Increase in accrued pension liabilities.... 311 310 --
-------- -------- --------
Cash provided by (used in) operating
activities.............................. 16,527 (2,755) (25,922)
-------- -------- --------
Cash flows from investing activities:
Decrease (increase) in short-term
investments................................. 337 1,716 (2,060)
Decrease (increase) in long-term
investments................................. 23 (23) --
Additions to property, plant and equipment... (2,149) (13,020) (75,965)
Proceeds from disposal of property and
equipment................................... 18 22 18
Decrease (increase) in technology fees and
other assets................................ 222 (1,379) (247)
Decrease in restricted bank deposits......... 930 2,132 36,650
-------- -------- --------
Cash used in investing activities........ (619) (10,552) (41,604)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock and
advance from stockholders................... 30,225 56,848 18,841
Increase (decrease) in loans and bills
payable..................................... (65,844) (31,132) 57,081
Increase (decrease) in deposits from
contractors................................. (35) 46 (16)
-------- -------- --------
Cash provided by (used in) financing
activities.............................. (35,654) 25,762 75,906
-------- -------- --------
Net increase in cash and cash equivalents...... (19,746) 12,455 8,380
Effect of exchange rate changes on cash........ (281) (142) (740)
Cash and cash equivalents at beginning of the
year.......................................... 31,068 18,755 11,115
-------- -------- --------
Cash and cash equivalents at end of the year... $ 11,041 $ 31,068 $ 18,755
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest, excluding capitalized
interest.................................... $ 11,961 $ 15,032 $ 14,015
======== ======== ========
Cash paid for income taxes (including
refundable income taxes).................... $ 145 $ 163 $ 191
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
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 1999 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.
(2) Significant accounting policies
(a) 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, 1999 and 1998, and
the results of operations for each of the years in the three-year period ended
December 31, 1999, to the extent summarized in note 15.
(b) Functional and reporting currency
The Company reports its financial position and results of operations using
the United States dollar as the functional currency.
(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) Cash equivalents
The Company considers commercial paper and bank acceptances with a maturity
of less than three months from the date of purchase and time deposits as cash
equivalents.
(e) Short-term investments
Investments are carried at the lower of cost or market value. The market
value of unlisted trust funds is determined on the basis of the trust fund's
net worth on the balance sheet date. Costs of sale of investments are
determined on the weighted-average basis.
(f) Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the weighted-average method. The market value of raw
materials is determined on the basis of replacement cost. Market values of
work in process and finished goods are determined on the basis of net
realizable value.
F-32
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(g) Long-term investments
Long-term investments in equity securities that are not publicly traded in
which the Company owns less than 20% of the investee's common stock and does
not exercise significant influence over the investee's operations are stated
at cost.
(h) Property, plant and equipment
Property, plant and equipment are stated at acquisition cost, which includes
the capitalization of interest and certain expenses incurred in connection
with the construction of plant and installation of machinery and equipment.
Depreciation on plant and equipment is provided on the straight-line method
over the estimated useful lives of the respective assets.
Property, plant and equipment are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of evaluating the recoverability of property,
plant and equipment, the estimated future undiscounted net cash flow of each
asset is compared to the carrying amount of the asset. If the carrying amount
exceeds the undiscounted cash flow, the impairment is measured based on the
fair values of the assets. At December 31, 1999 and 1998, the estimated future
undiscounted net cash flows of property, plant and equipment exceeded their
carrying amount.
(i) 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.
(j) Employee retirement plan
The Company adopted a retirement plan covering substantially all employees
in December 1995. Benefits are based on the employees' years of service.
Beginning in August 1996, in accordance with the 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
paid by the Company.
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
including current service cost and net obligation at transition which are
amortized over a 27 year period based on the straight-line method, begining in
1998.
(k) Income taxes
Under the asset and liability approach of SFAS No. 22, deferred tax
liabilities are recognized for tax consequences of taxable temporary
differences by applying enacted statutory tax rates. Deferred tax assets are
recognized for tax consequences of deductible temporary differences, tax
credits and operating loss carryforwards. A valuation allowance is provided
when some portion or all of the deferred tax assets is not expected to be
realized. Deferred income tax is reported in the financial statements as a
current or noncurrent
F-33
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
(3) Transaction with related parties
(a) Name and relationship
<TABLE>
<CAPTION>
Name of related party Relationship with the Company
--------------------- -----------------------------
<S> <C>
MEMC Electronic Materials Inc. Investor using equity method to account for
USA (MEMC) its investment in the Company
Chiao Tung Bank of Taipei, Investor and represented on the Company's
Taiwan, Board of Directors
ROC (CTB)
China Steel Corporation (CSC) Investor and represented on the Company's
Board of Directors
Posco Huls Co. Ltd. (PHC) MEMC group company
MEMC Japan Ltd. (MJL) MEMC group company
MEMC Electronic Materials SPA MEMC group company
(Novara)
MEMC Pasadena, Inc. (Pasadena) MEMC group company
MEMC Southwest Corp. MEMC group company
(Southwest)
</TABLE>
(b) Significant transactions with related parties
(i) Net sales to and corresponding amounts receivable from related parties
are as follows:
<TABLE>
<CAPTION>
Sales
-------------------------------------------------
1999 (Unaudited) 1998 1997
---------------- --------------- ----------------
% of net % of net % of net
Amount sales Amount sales Amount sales
------- -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
MEMC....................... $13,373 14.16 $8,987 15.32 $17,031 27.67
Novara..................... -- -- 240 0.41 -- --
MJL........................ 62 0.07 -- -- -- --
PHC........................ 132 0.14 -- -- -- --
------- ----- ------ ----- ------- -----
$13,567 14.37 $9,227 15.73 $17,031 27.67
======= ===== ====== ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
Accounts receivable
December 31,
----------------------
1999 1998
----------------------
(Unaudited)
<S> <C> <C>
MEMC.................................................. $3,113 $2,693
PHC................................................... 8 --
Novara................................................ -- 247
--------- ---------
$3,121 $2,940
========= =========
</TABLE>
F-34
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Purchases from and corresponding amounts payable to related parties are as
follows:
<TABLE>
<CAPTION>
Purchases
-----------------------------------------------------
1999 (Unaudited) 1998 1997
----------------- ----------------- -----------------
% of total % of total % of total
Amount purchases Amount purchases Amount purchases
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
MEMC.................. $1,822 4.85 $2,131 8.64 $6,314 17.78
MEMC Pasadena......... 1,291 3.44 -- -- -- --
Others................ 369 1.00 186 0.75 -- --
------ ---- ------ ---- ------ -----
$3,482 9.29 $2,317 9.39 $6,314 17.78
====== ==== ====== ==== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Accounts payable
December 31,
----------------
1999 1998
----------- ----
(Unaudited)
<S> <C> <C>
MEMC..................................................... $149 $ 4
MEMC Pasadena............................................ 505 --
Others................................................... 8 77
---- ---
$662 $81
==== ===
</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>
1999.................... $37,900 6.297%-6.602% $32,552 $2,215 $205 Machinery and
======= ======= ====== ====
(Unaudited) equipment $41,324
------------------------
1998.................... $36,934 5.875%-6.855% $35,909 $2,127 $199 Machinery and
======= ======= ====== ====
equipment $60,886
</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, $2,844
(unaudited), $713 and $1,312 in 1999, 1998 and 1997, respectively, pursuant to
the terms of such agreements. The related amounts outstanding of $2,961
(unaudited) and $148 as of December 31, 1999 and 1998, respectively, are
included in accrued expenses.
(iv) Toll fees
The Company entrusted MJL and PHC to process silicon wafers. Toll fees paid
for the years ended December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----
(Unaudited)
<S> <C> <C>
MJL...................................................... $406 $356
PHC...................................................... 106 --
---- ----
$512 $356
==== ====
</TABLE>
F-35
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999 and 1998, amounts due to related parties that
resulted from the above transaction were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----
(Unaudited)
<S> <C> <C>
MJL...................................................... $349 $184
==== ====
</TABLE>
(v) Guarantees
MEMC and CSC have provided guarantees for certain of the Company's long-term
loans and bills payable up to a maximum of $84,208 and $92,863, respectively.
(4) Cash and cash equivalents
Details of cash and cash equivalents as of December 31, 1999 and 1998 were
as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
----------- -------
(Unaudited)
<S> <C> <C>
Cash on hand and in banks............................ $ 1,348 $ 413
Cash equivalents..................................... 9,693 30,655
------- -------
$11,041 $31,068
======= =======
</TABLE>
(5) Short-term investments
The Company had invested $337 in open-ended trust funds as of December 31,
1998. The fair value of such investments as of December 31, 1998 was
approximately $338.
(6) Inventories
The components of inventories as of December 31, 1999 and 1998 are
summarized below:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
----------- -------
(Unaudited)
<S> <C> <C>
Finished goods....................................... $ 3,620 $ 6,153
Work in process...................................... 2,729 3,188
Raw materials and spare parts........................ 14,139 11,905
------- -------
20,488 21,246
Provision for inventory devaluation.................. (2,335) (5,377)
------- -------
$18,153 $15,869
======= =======
</TABLE>
As of December 31, 1999 and 1998, insurance coverage of inventories amounted
to approximately $19,111 (unaudited) and $21,728, respectively.
F-36
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(7) Property, plant and equipment
Certain property, plant and equipment are pledged as security for long-term
loans (refer to note 13.).
Insurance coverage on property, plant and equipment and third-party liability
as of December 31, 1999 and 1998 amounted to approximately $242,555 (unaudited)
and $247,846, respectively.
(8) Short-term loans and short-term bills payable
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1999 (Unaudited) 1998
---------------------- ----------------------
Amount Interest rate Amount Interest rate
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Unsecured loans.............. $11,149 5.381%-5.497% $29,023 5.988%-7.023%
Secured loans................ -- -- 931 7.25%
Credit loans and import loans
under usance letters of
credit...................... 5,460 0.679%-6.937% 5,408 0.514%-6.50%
Commercial paper payable..... 8,600 4.25%-5.76% 15,520 5.35%-6.75%
Bank acceptance payable...... -- -- 621 6.50%
Unamortized discount on
short-term bills payable.... (123) (290)
------- -------
$25,086 $51,213
======= =======
</TABLE>
F-37
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999 and 1998, certain time deposits were pledged as
security for the issuance of short-term bills payable (refer to note 13.).
(9) Long-term loans
<TABLE>
<CAPTION>
Balance at December 31,
Credit line --------------------------
Bank and purpose Period Repayment term 1999 1998
- ------------------------ ----------------- ---------------- ---------------------------- --------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Chiao Tung Bank NT$240,000 February 1998 Repayable in 17 quarterly $ 6,667 $ 6,497
Loan for purchase to February 2005 installments starting in
of machinery February 2001
Chiao Tung Bank NT$400,000 November 1995 Repayable in 17 quarterly 8,994 11,686
Loan for purchase to November 2002 installments starting in
of machinery November 1998
Chiao Tung Bank NT$100,000 November 1995 Repayable in 21 quarterly 1,821 2,365
Loan for purchase to November 2002 installments starting in
of machinery November 1997
Chiao Tung Bank NT$100,000 November 1995 Repayable in 29 quarterly 2,747 3,104
Loan for purchase to November 2005 installments starting in
of machinery January 1999
Chiao Tung Bank NT$200,000 December 1996 Repayable in 17 quarterly 3,990 4,136
Loan for purchase to November 2003 installments starting in
of machinery December 1999
Chiao Tung Bank NT$200,000 December 1996 Repayable in 17 quarterly 6,370 6,208
Loan for purchase to November 2003 installments starting in
of machinery March 2000
Chiao Tung Bank NT$80,000 December 1996 Repayable in 29 quarterly 1,963 1,913
Loan for purchase to November 2006 installments starting in
of machinery January 2000
The International NT$1,000,000 December 1995 Repayable in 10 semi- 19,111 24,832
Commercial Bank of China Loan for plant to December 2002 annual installments starting
construction in June 1998
ABN AMRO Bank (In charge $60,000 October 1995 Repayable in 10 semi- 36,000 48,000
of syndication loan Loan for purchase to August 2002 annual installments starting
agreement for the phase of machinery in February 1998
I expansion)
ABN AMRO Bank (In charge $45,000 January 1997 Repayable in 6 semi- 30,000 45,000
of syndication loan Loan for purchase to December 2001 annual installments starting
agreement for the phase of machinery in June 1999
II expansion)
----------- -----------
117,663 153,741
Less: current portion (40,120) (37,395)
----------- -----------
$ 77,543 $ 116,346
=========== ===========
</TABLE>
F-38
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following is a schedule of payments of long-term debt as of December 31,
1999:
<TABLE>
<CAPTION>
Year Amount
---- -----------
(Unaudited)
<S> <C>
2000.......................................................... $ 40,120
2001.......................................................... 41,754
2002.......................................................... 26,748
2003.......................................................... 4,773
2004.......................................................... 1,617
After 2005.................................................... 2,651
--------
$117,663
========
</TABLE>
On December 23, 1996, the Company obtained a syndication loan from ABN AMRO
Bank and other banks (the Banks). In accordance with the syndication loan
agreements, the Banks granted credit facilities to the Company for purchase of
machinery and equipment. During the period of loan, restrictions on the above
syndication loan are as follows:
The major stockholders MEMC and CSC, together, must own not less than 70%
of the Company's issued common shares, and VEBA AG must own not less than
50% of MEMC issued common shares.
The ranges for interest rates on these borrowings for the years ended
December 31, 1999, 1998 and 1997 were 5.735%-7.85% (unaudited), 6.50%-7.95%
and 6.00%-7.605%, respectively. As of December 31, 1999 and 1998, total unused
lines of credit for short-term and long-term loans amounted to approximately
$125,385 (unaudited) and $102,903, respectively.
As December 31, 1999 and 1998, certain time deposits and property, plant and
equipment were pledged as security for long-term loans (refer to note 13.).
(10) Pension
Effective December 31, 1997, the Company adopted SFAS No.18, "Accounting for
Pensions." The measurement dates for the actuarial study of the Company's
pension obligation were December 31, 1999 and 1998. The funded status of the
Company's pension scheme as of December 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
----------- ------
(Unaudited)
<S> <C> <C>
Benefit obligation:
Vested benefit obligation............................. $ -- $ --
Non-vested benefit obligation......................... (577) (411)
------ ------
Accumulated benefit obligation........................ (577) (411)
Effects of future salary progression.................. (1,371) (977)
------ ------
Projected benefit obligation.......................... (1,948) (1,388)
Fair value of plan assets............................... 717 476
------ ------
Benefit obligation in excess of plan assets............. (1,231) (912)
Unrecognized net obligation at transition............... 577 584
Unrecognized pension gain............................... (31) --
------ ------
Accrued pension liabilities............................. $ (685) $ (328)
====== ======
</TABLE>
F-39
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The net pension cost for the years ended December 31, 1999 and 1998
consisted of the following components:
<TABLE>
<CAPTION>
1999 1998
----------- ----
(Unaudited)
<S> <C> <C>
Service cost............................................ $450 $421
Interest expense........................................ 90 59
Expected returns on pension fund........................ (36) (24)
Amortization and deferral............................... 22 23
---- ----
$526 $479
==== ====
</TABLE>
Actuarial assumptions are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----
(Unaudited)
<S> <C> <C>
Discount rate........................................... 6.50% 6.50%
Rate of salary progression.............................. 6.00% 6.00%
Projected return on plan assets......................... 6.50% 6.50%
</TABLE>
Pension expenses were $537 (unaudited) and $198 for the years ended December
31, 1999 and 1998, respectively. As of December 31, 1999 and 1998, the
balances of the Company's pension fund maintained with the Central Trust of
China were $681 (unaudited) and $476, respectively. As of December 31, 1999
and 1998, the unpaid balances of $16 (unaudited) and $15, respectively, were
included in accrued expenses.
(11) Stockholders' equity
(a) Capital stock
On July 25, 1997, the stockholders approved a proposal to increase
authorized capital stock to 480,000,000 shares at NT$10 par value per share
and to issue an additional 60,000,000 shares at NT$10 par value per share for
cash on December 25, 1997. After this capital increase, the total issued
capital was $113,783.
On February 5, 1998, the board of directors decided to issue an additional
85,000,000 shares at NT$10 par value per share for cash. After this capital
increase, the total issued capital was $139,887. The above increases were all
registered and approved by the authorities.
On October 12, 1998, December 14, 1998 and January 11, 1999, the board of
directors decided to issue an additional 75,000,000, 35,000,000 and 90,000,000
shares, respectively, at NT$10 par value per share for cash. On December 14,
1998, pursuant to the resolution of a special shareholder's meeting, Taisil
decreased capital by 200,000,000 shares at $10 par value to offset its
accumulated deficit and then increased of capital by 200,000,000 shares at $10
par value. On March 8, 1999, the board of directors decided the effective
dates of the above decrease and increase of capital were April 11 and April
12, 1999, respectively. The issued common stock amounted to NT$4,000,000. The
above decrease and increases were all registered and approved by the
government authorities.
(b) Distribution of earnings
In accordance with the 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 a statutory reserve until such retention
F-40
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 the accumulated deficit is over one-
half of the common stock, the board of directors shall convene a meeting of
stockholders and make a report on such loss.
(12) Income taxes
The Company's earnings are subject to an income tax rate of 20%. For the
years ended December 31, 1999, 1998 and 1997, income tax expense (benefit) was
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------- -------
(Unaudited)
<S> <C> <C> <C>
Current income tax expense..................... $ -- $ -- $ 25
Deferred income tax expense (benefit).......... (3,984) 13,053 (5,690)
------- ------- -------
$(3,984) $13,053 $(5,665)
======= ======= =======
</TABLE>
The Company's income tax expense (benefit) for the years ended December 31,
1999, 1998 and 1997, differed from the expected income tax, computed by
applying the 20% tax rate on loss before income tax as shown on the financial
statements, as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------- -------
(Unaudited)
<S> <C> <C> <C>
Computed "expected" income tax benefit........ $(3,399) $(9,072) $(3,890)
Investment tax credits expired (earned)....... 2,105 (9,406) (4,736)
Unrealized exchange (gain) loss............... 116 -- (5,070)
Other......................................... 523 1,712 45
Valuation allowance........................... (3,329) 29,819 7,986
------- ------- -------
Income tax expense (benefit).................. $(3,984) $13,053 $(5,665)
======= ======= =======
</TABLE>
As of December 31, 1999 and 1998, refundable income tax was as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
----------- ----
(Unaudited)
<S> <C> <C>
Prepaid income tax...................................... $145 $163
Income tax refundable from prior years.................. 353 181
---- ----
Income tax refundable................................... $498 $344
==== ====
</TABLE>
F-41
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The temporary differences, tax credits, loss carryforwards and their effects
on deferred income tax assets are as follows as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 (Unaudited) 1998
----------------- ----------------
Income Income
tax tax
Amount effect Amount effect
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Current assets:
Unrealized loss from inventory
devaluation............................ $ 2,288 $ 459 $ 5,056 $ 1,011
Organization cost deferred for tax
purposes............................... 1,373 275 2,408 482
Employee benefit costs deferred for tax
purposes............................... -- -- 174 35
Unrealized foreign exchange loss........ 7,513 1,506 12,145 2,429
-------- --------
2,240 3,957
Less: valuation allowance............... -- (3,957)
-------- --------
$ 2,240 $ --
======== ========
Noncurrent assets:
Investment tax credits earned........... $ 23,073 $ 23,073 $25,178 $ 25,178
Organization costs deferred for tax
purposes............................... -- -- 1,338 268
Difference in technology fee............ 1,935 387 1,081 216
Tax loss carryforward................... 114,233 22,847 90,787 18,157
-------- --------
46,307 43,819
Less: valuation allowance............... (40,769) (40,141)
-------- --------
$ 5,538 $ 3,678
======== ========
</TABLE>
A valuation allowance has been established at December 31, 1999 and 1998 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, 1999 and 1998 will be realized.
The significant factors considered in determining the valuation allowance at
December 31, 1999 and 1998 included the Company's five 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.
F-42
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 1999, 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 (unaudited):
<TABLE>
<CAPTION>
Year of investment Tax credits Year of expiration
------------------ ----------- ------------------
<S> <C> <C>
1996....................................... $ 467 2000
1997....................................... 11,129 2000
1997....................................... 1,172 2001
1998....................................... 2,302 2000
1998....................................... 5,868 2001
1998....................................... 1,879 2002
1999....................................... 256 2003
-------
$23,073
=======
</TABLE>
The Company is authorized to be a "Science-based industry" and "Important
technology-based industry" as defined by the Statutes.
According to the Statute for the Establishment and Administration of
Science-Based Industrial Park, a science-based industry may, within two years
from the date on which it begins to sell its products or to render services,
select any fiscal year in the four-year period from such date for exemption
from profit-seeking enterprise income tax for a period of five consecutive
years from the starting date of such fiscal year.
In accordance with Article 8 of the Statute for Promotion of Upgrading
Industries, the important technology-based industry shareholders which held
their investments for a period over two years the shareholders may credit up
to 20% of the price paid for the acquisition of such investments against their
income tax payable.
The Company's initial NT$2,000,000 capital expenditure project (phase I
project) is entitled to enjoy both the tax holiday and shareholders investment
tax credit incentive schemes. The Company has chosen January 1, 2000 as the
tax holiday starting date.
The Company's subsequent NT$2,000,000 capital expenditure project (phase II
project) can only apply one of the above incentive schemes. The stockholders'
meeting on May 22, 1998 selected to enjoy the shareholders investment tax
credit.
Pursuant to the ROC Income Tax Law, the Company's tax losses may be carried
forward for up to five years to reduce future taxable income. As of December
31, 1999, the estimated tax loss carryforwards were as follows (unaudited):
<TABLE>
<CAPTION>
Year loss Amount Year of expiration
--------- -------- ------------------
<S> <C> <C>
1996.......................................... $ 16,858 2001
1997.......................................... 31,669 2002
1998.......................................... 44,114 2003
1999.......................................... 21,592 2004
--------
$114,233
========
</TABLE>
The tax authorities have examined and assessed the Company's income tax
returns through 1996.
F-43
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(13) Pledged assets
As of December 31, 1999 and 1998, pledged assets were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
Assets Related secured liabilities 1999 1998
------ --------------------------------------- ----------- --------
(Unaudited)
<S> <C> <C> <C>
Time Deposits
Restricted bank
deposits Short-term loans $ -- $ 931
Restricted bank
deposits Documentary draft for export in customs 32 31
Machinery and
equipment Long-term loans 51,378 73,757
Buildings Long-term loans 37,799 38,113
------- --------
$89,209 $112,832
======= ========
</TABLE>
(14) Commitments
(a) Operating lease
The Company leases a 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
when the government reappraises the land value. The current rent is NT$18,772
($582) per year.
Future minimum lease payments as of December 31, 1999 under the existing
non-cancelable agreement are (unaudited):
<TABLE>
<CAPTION>
Years Minimum lease payments
----- ----------------------
<S> <C>
2000 through 2004.......................... $2,911 ($582 annually)
2005 through 2009.......................... 2,911
2010 through 2014.......................... 2,911
------
$8,733
======
</TABLE>
(b) Technical service agreement
In accordance with a technical assistance agreement between the Company and
MEMC, the Company is required to pay MEMC fixed payments, and the timing of
such payments is based on reaching certain milestones. As of December 31, 1999
and 1998, the remaining balance of such payments to be paid under the
agreement amounted was $834 (unaudited).
In addition, the Company pays MEMC an annual royalty based on net sales and
operating income.
(c) Purchase of equipment
As of December 31, 1999 and 1998, the Company had outstanding letters of
credit amounting to approximately $990 (unaudited) and $981, respectively, and
was committed to purchase equipment with a total estimated cost of $4,548
(unaudited) and $4,907, respectively.
(d) Syndicated term loan agreement
The Company entered into certain syndication loan agreements with ABN AMRO
Bank and 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 year ended December 31, 1998 amounted $9. No
commitment fees were paid for the year ended December 31, 1999.
F-44
<PAGE>
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(15) Reconciliation to United States Generally Accepted Accounting Principles
The Company's financial statements have been prepared in accordance with ROC
GAAP. ROC GAAP vary in certain significant respects from US GAAP. Differences
which have a significant effect on the Company's results of operations and
stockholders' equity are as follows:
(a) Employee retirement benefits
Prior to January 1, 1998, the pension expense recorded by the Company in
connection with its defined benefit pension plan was based on the amount of
the contributions made by the Company to the pension plan as required by
government regulations under ROC GAAP. As described in note 2(j), the Company
began recording pension expense using actuarial techniques as specified by ROC
SFAS No.18 (ROC SFAS No.18 is similar to US SFAS No. 87). Under US GAAP, the
accumulated pension obligation and pension expense are determined on an
actuarial basis, assuming the Company first adopted this policy at the
beginning of 1997 since it was not feasible to apply the actuarial basis at an
earlier period. The impact of this difference is not significant to the
Company's determination of results of operations or stockholders' equity under
US GAAP for the periods presented.
(b) Technology fee
Under ROC GAAP, the Company capitalizes and amortizes certain costs in
connection with a technical assistance agreement entered into with a
shareholder, MEMC. Under US GAAP, such payments are expensed as incurred or
treated as a deemed dividend depending on the nature of the payment. In 1998,
the Company made a royalty payment of $1,666 which was treated as a deemed
dividend.
A reconciliation from ROC GAAP to US GAAP of net loss and stockholders'
equity are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Net loss as reported under ROC GAAP......... $(13,012) $(58,414) $(13,784)
(a) Amortization of capitalized technology
fees..................................... 1,833 1,500 1,500
(b) Income tax effects resulting from
capitalized technology fees.............. (205) (240) (295)
-------- -------- --------
Net loss in accordance with US GAAP......... $(11,384) $(57,154) $(12,579)
======== ======== ========
</TABLE>
Stockholders' equity:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
----------- -------
(Unaudited)
<S> <C> <C>
Stockholders' equity as reported under ROC GAAP....... $95,192 $77,979
(a) Effect of capitalization of technology fees, net
of amortization.................................... (3,750) (5,583)
(b) Income tax effects resulting from capitalized
technology fees.................................... 108 313
------- -------
Stockholders' equity in accordance with US GAAP....... $91,550 $72,709
======= =======
</TABLE>
In addition to the above reconciling items, the capital decrease to offset
the accumulated deficit of $69,943 in-fiscal year 1999 would not be allowed
under US GAAP (see the statement of changes in stockholders' equity for the
year ended December 31, 1999). This does not have an impact on total
stockholders' equity for US GAAP purposes, but it would result in a
reclassification between common stock and accumulated deficit within
stockholders' equity.
F-45
<PAGE>
EXHIBIT 10-i(1)
FIRST AMENDMENT TO
REGISTRATION RIGHTS AGREEMENT
THIS FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT is made and entered
into the 19th day of March, 1999 ("Amendment"), between MEMC Electronic
Materials, Inc., a Delaware corporation (the "Company"), and VEBA Corporation, a
Delaware corporation ("VEBA").
WHEREAS, the Company and Huls Corporation ("Huls") entered into a
Registration Rights Agreement dated as of July 12, 1995 (the "Agreement");
WHEREAS, on September 30, 1998, Huls merged with and into VEBA and thus
VEBA became the successor in interest to Huls under the Agreement;
WHEREAS, on the date hereof VEBA (as successor to Huls) is the owner of
21,490,942 shares of the Company's Common Stock, par value $.01 per share (the
"Common Stock");
WHEREAS, the Company and VEBA entered into (i) a Purchase Agreement dated
as of October 22, 1998 (as amended on December 29, 1998 and February 14, 1999,
the "Purchase Agreement") pursuant to which VEBA agreed to purchase and the
Company agreed to issue to VEBA a number of shares of Common Stock equal to
106,100,000 divided by the Purchase Price (as defined in the Purchase Agreement)
rounded up to the nearest whole number and (ii) a Standby Agreement dated as of
October 22, 1998 (the "Standby Agreement") pursuant to which VEBA agreed to
purchase and the Company agreed to issue to VEBA the shares of Common Stock
offered in a registered rights offering (the "Rights Offering") to all of the
Company's existing stockholders (other than VEBA and its affiliates) and not
otherwise subscribed for by the other stockholders of the Company prior to the
expiration time of such rights;
WHEREAS, it is a condition to the closing under each of the Purchase
Agreement and the Standby Agreement that the Agreement shall have been amended
to include all shares of Common Stock acquired or to be acquired or purchased or
to be purchased by VEBA, VEBA Aktiengesellschaft, a German stock corporation
("VEBA AG"), or any Subsidiaries of VEBA AG after October 22, 1998.
NOW, THEREFORE, in consideration of the mutual covenants, promises,
representations, warranties and conditions set forth in this Amendment, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. All references in the Agreement to "Huls Corporation" and "Huls" are
hereby amended by deleting each such reference and substituting in lieu thereof
"VEBA Corporation" or "VEBA," respectively.
2. The definitions of "Holder" and "Registrable Stock" in Section 1 of
the Agreement are hereby deleted in their entirety and the following definitions
are substituted in lieu thereof:
""Holder" shall mean (i) VEBA, VEBA AG and any Subsidiary of VEBA AG
that beneficially owns on the date hereof, or hereinafter acquires or
purchases, shares of Common Stock and (ii) any transferee or assignee to
whom the rights under this Agreement are assigned in accordance with the
provisions of Section 9 hereof;
"Purchase Agreement" shall mean that certain Purchase Agreement dated
as of October 22, 1998, as amended from time to time, by and among the
Company and VEBA;
"Registrable Stock" shall mean the Common Stock beneficially owned on
the date hereof, or hereafter acquired or purchased, by VEBA, VEBA AG or
any Subsidiary of VEBA AG, including, without limitation, any Common Stock
Page 1
<PAGE>
(i) acquired by VEBA, VEBA AG or any Subsidiary of VEBA AG as a result of
the transactions contemplated by the Purchase Agreement or the Standby
Agreement or upon exercise of any rights to purchase Common Stock, (ii)
purchased on the open market by VEBA, VEBA AG or any Subsidiary of VEBA AG
or (iii) issued to VEBA, VEBA AG or any Subsidiary of VEBA AG as a dividend
or other distribution or by way of a stock split. For purposes of this
Agreement, any Registrable Stock shall cease to be Registrable Stock when
(x) a registration statement covering such Registrable Stock has been
declared effective and such Registrable Stock has been disposed of pursuant
to such effective registration statement or (y) such Registrable Stock is
sold or distributed pursuant to Rule 144 (or any similar or successor
provision (but not Rule 144A)) under the Securities Act.
"Standby Agreement" shall mean that certain Standby Agreement dated as
of October 22, 1998, as amended from time to time, by and among the Company
and VEBA.
"Subsidiary" shall mean, with respect to any person or entity, any
other person or entity of which more than 50% of the capital stock or other
ownership interest is owned, or is controlled, either directly or
indirectly, by such person or entity.
"VEBA AG" shall mean VEBA Aktiengesellschaft, a German corporation and
the direct and indirect owner of 100% of the common stock of VEBA."
3. Section 2, paragraph (a) of the Agreement is hereby amended by
inserting at the end thereof the following:
"Within 10 days following the receipt of each notice under this
Section 2, the Company shall give all Holders (other than the Requesting
Holders) written notice of the receipt thereof, which written notice shall
include a copy of the notice by the Requesting Holders. Upon the written
request of any Holder received by the Company no later than 15 days after
the Company's notice, the Company shall use its best efforts to cause to be
included in the Demand Registration all of the Registrable Stock that each
such Holder has so requested to be included."
4. The following new Section 18 is hereby inserted after Section 17 of
the Agreement:
"Section 18. Third Party Beneficiaries." Each Holder shall be deemed
to be a third party beneficiary of this Agreement and shall have the right
to enforce directly against the Company all of the provisions contained in
this Agreement, as amended from time to time, notwithstanding that it is
not a signatory to this Agreement."
5. Unless otherwise provided herein, any term in initial capital letters
used as a defined term but not defined in this Amendment shall have the meaning
set forth in the Agreement.
6. Except as modified herein, all terms and conditions of the Agreement
shall remain in full force and effect.
7. This Amendment shall be governed by, and construed in accordance with,
the laws of the State of New York.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to
be executed as of the date first above written.
VEBA CORPORATION
By: /s/ A. Paul Brandimarte, Jr.
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-------------------------------------------
Name: A. Paul Brandimarte, Jr.
Title: Vice President
MEMC ELECTRONIC MATERIALS, INC.
By: /s/ James M. Stolze
--------------------------------------------
Name: James M. Stolze
Title: Executive Vice President
and Chief Financial Officer
Page 3
<PAGE>
Exhibit 10.cc
MEMC Electronic Materials, Inc.
1995 EQUITY INCENTIVE PLAN
as Amended and Restated on December 6, 1999
1. Purpose. The purpose of the MEMC Electronic Materials, Inc. 1995
Equity Incentive Plan as amended and restated herein (the "Plan") is to provide
an additional incentive to officers, other eligible key employees and directors
of MEMC Electronic Materials, Inc., a Delaware corporation (the "Company"), and
its Subsidiaries (as hereinafter defined) upon whom responsibilities for the
successful operation, administration and management of the Company rest and
whose present or potential contributions are important to the continued success
of the Company, and to enable the Company to attract and retain in its employ
and as directors highly qualified persons for the successful conduct of its
business. It is intended that this purpose will be effected through the granting
of incentive and nonqualified Stock Options, Restricted Stock Awards, or
Performance Share Awards, as provided herein (as each term is hereinafter
defined and collectively defined as the "Awards").
2. Definitions. For purposes of the Plan, the following terms shall be
defined as follows:
"Affiliate" and "Associate" have the respective meanings ascribed to
such terms in Rule 12b-2 promulgated under the Exchange Act.
"Award" means an award to an Eligible Employee (as hereinafter
defined) in the form of Stock Options, Restricted Stock Awards, or
Performance Share Awards.
"Award Agreement" means an agreement granting an Award and containing
such terms and conditions as the Committee deems appropriate and that are
not inconsistent with the terms of the Plan.
"Beneficial Owner" has the meaning ascribed to such term in Rule 13d-3
promulgated under the Exchange Act.
"Board" means the Board of Directors of the Company.
A "Change in Control" of the Company shall be deemed to have occurred
when (A) any Person (other than (x) the Company, any Subsidiary of the
Company, or any Parent of the Company including VEBA AG, Huls Corporation
and any of their Affiliates or (y) any employee benefit plan of the Company
or of any Subsidiary of the Company, or any Person or entity organized,
appointed or established by the Company or any Subsidiary of the Company
for or pursuant to the terms of any such plan, alone or together with its
Affiliates and Associates) shall become the Beneficial Owner of twenty
percent (20%) or more of the then outstanding shares of Common Stock or the
Combined Voting Power of the Company's then outstanding voting securities
(except pursuant to an offer for all outstanding shares of Common Stock at
a price and upon such terms and conditions as a majority of the Continuing
Directors determine to be in the best interests of the Company and its
shareholders (other than the Person on whose behalf the offer is being
made) (an "Acquiring Person")), or (B) during any period of two (2)
consecutive years, individuals who at the beginning of such period
constitute the Board, and any new director (other than a director who is a
representative or nominee of an Acquiring Person) whose election by the
Board or nomination for election by the Company's shareholders was approved
by a vote of at least a majority of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved (collectively, the
"Continuing Directors"), cease for any reason to constitute a majority of
the Board. Notwithstanding the foregoing, no Change in Control shall be
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<PAGE>
deemed to have occurred if VEBA AG and any of its Affiliates are the
Beneficial Owners of fifty percent (50%) or more of the Combined Voting
Power of the Company's then outstanding voting securities and designees of
VEBA AG and its Affiliates constitute a majority of the Board.
"Code" means the Internal Revenue Code of 1986, as amended.
"Combined Voting Power" means the combined voting power of the
Company's then outstanding voting securities.
"Committee" means the Compensation Committee appointed by the Board
pursuant to Section 3(a) hereof to administer the Plan.
"Common Stock" means the Voting Common Stock, par value $.01 per
share, of the Company.
"Disability" means, with respect to any Participant, that, as a result
of incapacity due to physical or mental illness, such Participant is, or is
reasonably likely to become, unable to perform his or her duties for more
than six (6) consecutive months or six (6) months in the aggregate during
any twelve (12) month period.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, on any given date, the closing price of the
shares of Common Stock, as reported on the New York Stock Exchange for such
date or such national securities exchange as may be designated by the Board
or, if Common Stock was not traded on such date, on the next preceding day
on which Common Stock was traded.
"Incentive Stock Option" means a Stock Option which is an "incentive
stock option" within the meaning of Section 422 of the Code and designated
by the Committee as an Incentive Stock Option in an Award Agreement.
"Nonqualified Stock Option" means a Stock Option which is not an
Incentive Stock Option.
"Parent" means any corporation which is a "parent corporation" within
the meaning of Section 424(e) of the Code with respect to the Company.
"Participant" means an Eligible Employee to whom an Award has been
granted under the Plan.
"Performance Share Award" means a conditional Award of shares of
Common Stock granted to an Eligible Employee pursuant to Section 9 hereof.
"Person" means any person, entity or "group" within the meaning of
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act.
"Restricted Stock Award" means an Award of shares of Common Stock
granted to an Eligible Employee pursuant to Section 8 hereof.
"Retirement" means retirement from active employment with the Company
and its Subsidiaries on or after the attainment of age 55, or such other
retirement date as may be approved by the Committee for purposes of the
Plan and specified in the applicable Award Agreement, but shall not include
the termination of the directorship of a nonemployee director.
"Stock Option" means an Award to purchase shares of Common Stock
granted to an Eligible Employee pursuant to Section 7 hereof.
"Subsidiary" means any corporation which is a "subsidiary corporation"
within the meaning of Section 424(f) of the Code with respect to the
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<PAGE>
Company.
"Ten Percent Shareholder" means an Eligible Employee who, at the time
an Incentive Stock Option is to be granted to him or her, owns (within the
meaning of Section 422(b)(6) of the Code,) stock possessing more than ten
percent (10%) of the total Combined Voting Power of all classes of stock of
the Company, or of a Parent or a Subsidiary.
"Window Period" means the ten (10) business day period in each fiscal
quarter of the Company commencing on the third (3rd) business day following
the release for publication of the Company's quarterly or annual sales and
earnings for the next preceding fiscal quarter or year, as the case may be,
and ending on the twelfth (12th) business day following such date of
release.
3. Administration of the Plan.
(a) The Plan shall be administered by the Committee, which shall be
comprised of no fewer than two members of the Board who shall be appointed
from time to time by the Board. Members of the Committee shall serve at the
pleasure of the Board and the Board may from time to time remove members
from, or add members to, the Committee. All determinations of the Committee
at a meeting shall be made by a majority of the members in attendance. Any
decision or determination reduced to writing and signed by all the members
shall be fully as effective as if it had been made by a majority vote at a
meeting duly called and held. No member of the Committee shall be
personally liable for any action, determination or interpretation made in
good faith with respect to the Plan, and all members of the Committee shall
be indemnified by the Company to the fullest extent permitted by the
certificate of incorporation or by-laws of the Company or applicable
Delaware law with respect to any such action, determination or
interpretation.
(b) Within the limitations described herein, the Committee shall
administer the Plan, select the Eligible Employees to whom Awards will be
granted, determine the number and type of Awards to be granted to each such
Eligible Employee, determine the terms and conditions applicable to each
Award (which need not be identical), make any amendment or modification to
any Award Agreement consistent with the terms of the Plan, and interpret,
construe and implement the provisions of the Plan. The Committee shall have
the authority to adopt rules and regulations for administering the Plan
which shall not be inconsistent with the terms of the Plan. Decisions of
the Committee shall be binding on the Company, on all Eligible Employees
and Participants and all other persons having any interest in the Plan. The
Company shall effect the granting of Awards under the Plan in accordance
with the determinations made by the Committee, which shall be evidenced by
an Award Agreement.
(c) The Committee shall have the authority to adopt such rules and
regulations and to add such terms, conditions and sub-schemes to the Plan
as it deems necessary or desirable to permit or facilitate the granting of
Awards under the Plan to, or obtain favorable tax treatment for, Eligible
Employees resident for tax purposes in jurisdictions outside the United
States; provided, however, that any such rule, regulation, term, condition
or sub-scheme shall not be inconsistent with the terms of the Plan.
(d) Any act that the Committee is authorized to perform hereunder may
instead be performed by the Board at its discretion, and to the extent that
the Board so acts, references in the Plan to the Committee shall refer to
the Board as applicable. In addition, the Committee in its discretion may
delegate its authority to grant Awards pursuant to Section 3(b) to an
officer or committee of officers, subject to specific limits and guidelines
established by the Committee at the time of such delegation.
Page 3
<PAGE>
4. Duration of Plan. The Plan shall remain in effect until terminated by
the Board of Directors and thereafter until all Awards granted under the Plan
are satisfied by the issuance of shares of Common Stock or the payment of cash
or are terminated under the terms of the Plan or under the Award Agreement
entered into in connection with the grant thereof. Notwithstanding the
foregoing, no Awards may be granted under the Plan after the tenth anniversary
of the Effective Date (as hereinafter defined).
5. Shares of Stock Subject to the Plan. Subject to adjustment as provided
in Section 13(b) hereof, the number of shares of Common Stock that may be issued
under the Plan pursuant to Awards shall not exceed, in the aggregate, 3,597,045,
less the number of shares that may be reserved for issuance under the Company's
Retirement Savings Plan or under any broad-based employee stock purchase plan.
Notwithstanding the foregoing, no more than 1,692,727 shares may be made subject
to Awards hereunder without the approval of the Board. Such shares may consist
in whole or in part, as the Board shall from time to time determine, of
authorized but unissued shares or treasury shares.
Stock underlying outstanding Stock Options, Restricted Stock Awards, or
Performance Share Awards will reduce the Plan Maximum while such Stock Options,
Restricted Stock Awards, or Performance Share Awards are outstanding. Shares
underlying expired, canceled or forfeited Stock Options, Restricted Stock
Awards, or Performance Share Awards shall be added back to the Plan Maximum.
When the exercise price of Stock Options is paid by delivery of shares of Common
Stock of the Company, or if the Committee approves the withholding of shares
from a distribution in payment of the exercise price, the Plan Maximum shall be
reduced by the net (rather than the gross) number of shares issued pursuant to
such exercise, regardless of the number of shares surrendered or withheld in
payment. If the Committee approves the payment of cash to an optionee equal to
the difference between the fair market value and the exercise price of stock
subject to a Stock Option, or if a Performance Share Award is paid in cash, the
Plan Maximum shall be increased by the number of shares with respect to which
such payment is applicable. Restricted Stock issued pursuant to the Plan will
reduce the Plan Maximum while outstanding even while subject to restrictions.
Shares of Restricted Stock shall be added back to the Plan Maximum if such
Restricted Stock is forfeited or is returned to the Company as part of a
restructuring of benefits granted pursuant to the Plan.
6. Maximum Number of Shares per Eligible Employee. To satisfy the
requirements under Section 162(m) of the Code, no Eligible Employee whose
Performance Award the Committee reasonably believes will be subject to Section
162(m) of the Code shall receive a grant of Awards with respect to more than
325,000 shares of Common Stock in any Plan year.
7. Eligible Employees. Awards may be granted by the Committee to
individuals ("Eligible Employees") who are either directors or salaried
employees of the Company or a Subsidiary with potential to contribute to the
future success of the Company or its Subsidiaries. Awards shall not be affected
by any change of duties or positions so long as the holder continues to be an
employee or director of the Company or of a Subsidiary.
8. Stock Options. Stock Options granted under the Plan may be in the form
of Incentive Stock Options or Nonqualified Stock Options. Stock Options granted
under the Plan shall be subject to the following terms and conditions and shall
contain such additional terms and conditions, not inconsistent with the terms of
the Plan, as the Committee shall deem appropriate:
(a) Award Agreement. Stock Options shall be evidenced by an Award
Agreement in such form and containing such terms and conditions as the
Committee deems appropriate and which are not inconsistent with the terms
of the Plan.
Page 4
<PAGE>
(b) Terms of Stock Options Generally. Subject to the terms of the
Plan and the applicable Award Agreement, each Stock Option shall entitle
the Participant to whom such Stock Option was granted to purchase, upon
payment of the relevant exercise price, the number of shares of Common
Stock specified in the Award Agreement.
(c) Exercise Price. The Exercise Price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee at
the time of grant and set forth in the Award Agreement.
(d) Option Term. The term of each Stock Option shall be fixed by the
Committee and set forth in the Award Agreement; provided, however, that a
Stock Option shall not be exercisable after the expiration of ten (10)
years after the date the Stock Option is granted (five (5) years in the
case of an Incentive Stock Option granted to a Ten Percent Shareholder).
(e) Exercisability. A Stock Option shall be exercisable at such time
or times and subject to such terms and conditions as shall be determined by
the Committee. The Committee may provide that Stock Options shall be
exercisable in whole or in part based upon length of service or attainment
of specified performance criteria. The Committee, in its sole discretion,
may provide for the acceleration of vesting of a Stock Option, in whole or
in part, based on such factors or criteria (including specified performance
criteria) as the Committee may determine.
(f) Method of Exercise. A Stock Option may be exercised, in whole or
in part, by giving written notice of exercise to the Company specifying the
number of shares to be purchased. Such notice shall be accompanied by
payment in full of the exercise price either by cash, certified or bank
check, note or other instrument acceptable to the Committee. Except as set
forth in Section 8(i) hereof, as determined by the Committee in its sole
discretion, payment of the exercise price may also be made in full or in
part in shares of Common Stock with a Fair Market Value (determined as of
the date of exercise of such Stock Option and, where such shares are
withheld (as described below), net of the applicable exercise price) at
least equal to such full or partial payment. Common Stock used to pay the
exercise price may be shares that are already owned by the Participant, or
the Company may withhold shares of Common Stock that would otherwise have
been received by the Participant upon exercise of the Stock Option. In its
discretion, the Committee may also permit any Participant to exercise an
Option through a "cashless exercise" procedure involving a broker or dealer
approved by the Committee, provided that the Participant has delivered an
irrevocable notice of exercise (the "Notice") to the broker or dealer and
such broker or dealer agrees: (A) to sell immediately the number of shares
of Common Stock specified in the Notice to be acquired upon exercise of the
Option in the ordinary course of its business, (B) to pay promptly to the
Company the aggregate exercise price (plus the amount necessary to satisfy
any applicable tax liability) and (C) to pay to the Participant the balance
of the proceeds of the sale of such shares over the amount determined under
clause (B) of this sentence, less applicable commissions and fees;
provided, however, that the Committee may modify the provisions of this
sentence to the extent necessary to conform the exercise of the Option to
Regulation T under the Exchange Act. The manner in which the exercise price
may be paid may be subject to certain conditions specified by the
Committee. If requested by the Committee, the Participant shall deliver the
Award Agreement evidencing an exercised Stock Option to the Secretary of
the Company, who shall endorse thereon a notation of such exercise and
return such Award Agreement to the Participant exercising the Option. No
fractional shares (or cash in lieu thereof) shall be issued upon exercise
of a Stock Option and the number of shares that may be purchased upon
exercise shall be rounded to the nearest number of whole shares.
(g) Rights as Shareholder. A Participant shall have no rights as a
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<PAGE>
shareholder with respect to any shares of Common Stock issuable upon
exercise of a Stock Option until a certificate or certificates evidencing
the shares of Common Stock shall have been issued to the Participant and,
subject to Sections 13(b) and 13(c), no adjustment shall be made for
dividends or distributions or other rights in respect of any share for
which the record date is prior to the date on which the Participant shall
become the holder of record thereof.
(h) Special Rule for Incentive Stock Options. With respect to
Incentive Stock Options granted under the Plan, if the aggregate Fair
Market Value (determined as of the date the Incentive Stock Option is
granted) of the number of shares with respect to which Incentive Stock
Options are exercisable for the first time by a Participant during any
calendar year under all plans of the Company or a Parent or Subsidiary
exceeds One Hundred Thousand Dollars ($100,000) or such other limit as may
be required by the Code, such Incentive Stock Options shall be treated, to
the extent of such excess, as Nonqualified Stock Options. No Incentive
Stock Option shall be granted to any person who is not an employee at the
time of grant.
(i) Payment Alternatives for Section 16 Persons. Persons subject to
Section 16 of the Exchange Act shall have the unfettered right (but not the
obligation) to pay the exercise price in full or in part in shares of
Common Stock with a Fair Market Value (determined as of the date of
exercise of such Stock Option and, where such shares are withheld (as
described below), net of the applicable exercise price) at least equal to
such full or partial payment. Common Stock used to pay the exercise price
may be shares that are already owned by the Participant who is subject to
Section 16 of the Exchange Act, or such Participant shall have the right
but not the obligation to direct the Company to withhold shares of Common
Stock that would otherwise have been received by such Participant upon
exercise of the Stock Option. It is the intent of this provision that the
transactions described in this subsection qualify for the exemption from
short-swing profit liability under Section 16 of the Exchange Act pursuant
to the "disposition to the issuer" exemption set forth at Rule 16b-3(e)
promulgated under Section 16 of the Exchange Act.
9. Restricted Stock Awards. Restricted Stock Awards granted under the
Plan shall be subject to the following terms and conditions and shall contain
such additional terms and conditions, not inconsistent with the Plan, as the
Committee shall deem appropriate:
(a) Award Agreement. Restricted Stock Awards shall be evidenced by an
Award Agreement in such form and containing such restrictions, terms and
conditions as the Committee deems appropriate and which are not
inconsistent with the terms of the Plan, including, without limitation,
restrictions on the sale, assignment, transfer or other disposition of such
shares and provisions requiring that a Participant forfeit such shares upon
a termination of employment or directorship for specified reasons within a
specified period of time.
(b) Terms of Restricted Stock Awards Generally. Restricted Stock
Awards may be granted under the Plan in such form as the Committee may from
time to time approve. Restricted Stock Awards may be granted for no
consideration or such consideration as the Committee deems appropriate.
Restricted Stock Awards may be granted alone or in addition to other Awards
under the Plan. Subject to the terms of the Plan, the Committee shall
determine the number of shares of Common Stock subject to each Restricted
Stock Award granted to a Participant, and the Committee may impose
different terms and conditions on any particular Restricted Stock Award
granted to any Participant. Each Participant receiving a Restricted Stock
Award shall be issued a certificate or certificates in respect of such
shares of Common Stock at the time of grant. Such certificate shall be
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<PAGE>
registered in the name of such Participant, and shall bear an appropriate
legend referring to the terms, conditions and restrictions applicable to
such Award. The Committee may require that the certificate or certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock Award, the Participant shall have delivered a stock power,
endorsed in blank, relating to the Common Stock covered by such Award.
(c) Restriction Period. Restricted Stock Awards shall provide that, in
order for a Participant to vest in such Awards, such Participant must
remain in the employment or directorship of the Company or its
Subsidiaries, subject to such exceptions as the Committee may determine in
its sole discretion for specified reasons for a period commencing on the
date of the Award and ending on such later date or dates as the Committee
may designate at the time of the Award and set forth in the Award Agreement
(the "Restriction Period"). During the Restriction Period, a Participant
may not sell, assign, transfer, pledge, encumber or otherwise dispose of
shares of Common Stock received under a Restricted Stock Award. The
Committee, in its sole discretion, may provide for the lapse of
restrictions in installments during the Restriction Period and may waive or
accelerate such restrictions in whole or in part, based on such factors or
criteria, including specified performance criteria, as the Committee may
determine. Upon expiration of the applicable Restriction Period (or lapse
of restrictions during the Restriction Period), the Participant shall be
vested in the Restricted Stock Award, or applicable portion thereof.
(d) Rights as Shareholder. Except as otherwise provided by the
Committee in its sole discretion, a Participant shall have, with respect to
the shares of Common Stock received under a Restricted Stock Award, all of
the rights of a shareholder of the Company, including the right to vote the
shares and the right to receive any cash dividends. Stock dividends issued
with respect to shares covered by a Restricted Stock Award shall be treated
as additional shares under the Restricted Stock Award and shall be subject
to the same restrictions and other terms and conditions that apply to the
shares with respect to which such dividends are issued.
10. Performance Share Awards. Performance Share Awards granted under the
Plan shall be subject to the following terms and conditions and shall contain
such additional terms and conditions, not inconsistent with the Plan, as the
Committee shall deem appropriate:
(a) Award Agreement. Performance Share Awards shall be evidenced by an
Award Agreement in such form and containing such terms and conditions as
the Committee deems appropriate and which are not inconsistent with the
terms of the Plan. Each Award Agreement shall set forth the number of
shares of Common Stock to be received by a Participant upon satisfaction of
certain specified performance criteria and subject to such other terms and
conditions as the Committee deems appropriate.
(b) Terms of Performance Share Awards Generally. Performance Share
Awards may be granted under the Plan in such form as the Committee may from
time to time approve. Performance Share Awards may be granted for no
consideration or such consideration as the Committee deems appropriate.
Performance Share Awards may be granted alone or in addition to other
Awards under the Plan. Subject to the terms of the Plan, the Committee
shall determine the number of shares of Common Stock subject to each
Performance Share Award granted to a Participant.
(c) Performance Goals. Performance Share Awards shall provide that,
in order for a Participant to be entitled to receive shares of Common Stock
under such Award, the Company and/or the Participant must achieve certain
specified performance goals ("Performance Goals") over a designated
performance period ("Performance Period"). The Performance Goals and
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<PAGE>
Performance Period shall be established by the Committee in its sole
discretion. The Committee shall establish the Performance Goals for each
Performance Period before, or as soon as practicable after, the
commencement of the Performance Period. In setting Performance Goals, the
Committee may use such measures as net earnings, operating earnings or
income, absolute and/or relative return on equity or assets, earnings per
share, cash flow, pretax profits, earnings growth, revenue growth,
comparison to peer companies, any combination of the foregoing, or such
other measure or measures of performance, including individual measures of
performance, in such manner as it deems appropriate. Prior to the end of a
Performance Period, with respect to any Participant the deductibility of
whose Performance Award will not, in the reasonable belief of the
Committee, be subject to Section 162(m) of the Code, the Committee may, in
its discretion, adjust the performance objectives to reflect a Change in
Capitalization (as hereinafter defined) or any other event which may
materially affect the performance of the Company, a Subsidiary or a
division, including, but not limited to, market conditions or a significant
acquisition or disposition of assets or other property by the Company, a
Subsidiary or a division. With respect to any Participant, the
deductibility of whose Performance Award may, in the reasonable belief of
the Committee, be subject to Section 162(m) of the Code, the Committee
shall not be entitled to exercise the discretion conferred upon it in the
preceding sentence to the extent the existence or exercise of such
discretion would result in a loss of tax deductibility under such Section
162(m) of the Code. The extent to which a Participant is entitled to
payment of a Performance Share Award at the end of the Performance Period
shall be determined by the Committee, in its sole discretion, based on the
Committee's determination of whether the Performance Goals established by
the Committee in the granting of such Performance Share Award have been
met.
(d) Payment of Awards. Payment in settlement of a Performance Share
Award shall be made as soon as practicable following the conclusion of the
respective Performance Period, or at such other time as the Committee shall
determine, in shares of Common Stock.
(e) Rights as Shareholder. Except as otherwise provided by the
Committee in the applicable Award Agreement, a Participant shall have no
rights as a shareholder with respect to a Performance Share Award until a
certificate or certificates evidencing the shares of Common Stock shall
have been issued to the Participant following the conclusion of the
Performance Period, and, subject to Sections 13(b) and 13(c), no adjustment
shall be made for dividends or distributions or other rights in respect of
any share for which the record date is prior to the date on which the
Participant shall become the holder of record thereof.
11. Termination of Employment.
(a) Disability or Retirement. Except as may otherwise be provided by
the Committee in its sole discretion at the time of grant or subsequent
thereto, if a Participant's employment with the Company and its
Subsidiaries terminates by reason of Retirement or if a Participant's
employment (or, with respect to a nonemployee director, his directorship)
terminates by reason of Disability, (i) any Stock Option held by the
Participant may thereafter be exercised, to the extent it was exercisable
on the date of termination, for a period (the "Exercise Period") of one (1)
year from the date of such Disability or Retirement or until the expiration
of the stated term of the Stock Option, whichever period is shorter, and to
the extent not exercisable on the date of termination, such Stock Option
shall be forfeited; provided, however, that if a Participant terminates
employment by reason of Retirement and such Participant holds an Incentive
Stock Option, the Exercise Period shall not exceed the shorter of three (3)
months from the date of Retirement and the remainder of the stated term of
Page 8
<PAGE>
such Incentive Stock Option; provided further, however, that if the
Participant dies during the Exercise Period, any unexercised Stock Option
held by such Participant may thereafter be exercised to the extent it was
exercisable on the date of Disability or Retirement, by the legal
representative or beneficiary of the Participant, for a period of one (1)
year from the date of such death or until the expiration of the stated term
of such Stock Option, whichever period is shorter (or, in the case of an
Incentive Stock Option, for a period equal to the remainder of the Exercise
Period), and (ii) if such termination is prior to the end of the applicable
Restriction Period (with respect to a Restricted Stock Award) or
Performance Period (with respect to a Performance Share Award), the number
of shares of Common Stock subject to such Award which have not been earned
as of the date of Disability or Retirement shall be forfeited. In
determining whether to exercise its discretion under the first sentence of
this Section 11(a) with respect to an Incentive Stock Option the Committee
may consider the provisions of Section 422 of the Code.
(b) Death. Except as may otherwise be provided by the Committee in
its sole discretion at the time of grant or subsequent thereto, if a
Participant's employment or directorship with the Company and its
Subsidiaries terminates by reason of death, (i) any Stock Option held by
the Participant may thereafter be exercised, to the extent it was
exercisable on the date of death, by the legal representative or
beneficiary of the Participant, for a period of one (1) year from the date
of the Participant's death or until the expiration of the stated term of
such Stock Option, whichever period is shorter, and to the extent not
exercisable on the date of death, such Stock Option shall be forfeited and
(ii) if such termination is prior to the end of the applicable Restriction
Period (with respect to a Restricted Stock Award) or Performance Period
(with respect to a Performance Share Award), the number of shares of Common
Stock subject to such Award which have not been earned as of the date of
death shall be forfeited.
(c) Other Terminations. Unless the Committee determines otherwise in
its sole discretion at the time of grant or subsequent thereto, if a
Participant's employment or directorship with the Company and its
Subsidiaries terminates for any reason other than death, Disability or
Retirement, (i) any Stock Option held by the Participant may thereafter be
exercised, to the extent it was exercisable on the date of termination, for
a period of sixty (60) days from the date of such termination or until the
expiration of the stated term of such Stock Option, whichever period is
shorter, and to the extent not exercisable on the date of termination, such
Stock Option shall be forfeited, and (ii) if such termination is prior to
the end of the applicable Restriction Period (with respect to a Restricted
Stock Award) or Performance Period (with respect to a Performance Share
Award), the number of shares of Common Stock subject to such Award which
have not been earned as of the date of such termination shall be forfeited.
In determining whether to exercise its discretion under the first sentence
of this Section 10(c) with respect to an Incentive Stock Option, the
Committee may consider the provisions of Section 422 of the Code.
12. Non-transferability of Awards. No Awards under the Plan or any rights
or interests therein may be sold, transferred, assigned, pledged or otherwise
encumbered or disposed of except by will or the laws of descent and
distribution; provided, however, that with respect to any Award that is not an
Incentive Stock Option, the foregoing restrictions shall not apply to the extent
determined by the Committee in its sole discretion at the time of grant and set
forth in the applicable Award Agreement; provided further, however, that if so
determined by the Committee, a Participant may, in the manner established by the
Committee, designate a beneficiary to exercise the rights of the Participant
with respect to any Award upon the death of the Participant. During the lifetime
of a Participant, Stock Options shall be exercisable only by, and payments in
settlement of Awards shall be payable only to, the Participant.
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<PAGE>
13. Recapitalization or Reorganization.
(a) The existence of the Plan, the Award Agreements and the Awards
granted hereunder shall not affect or restrict in any way the right or
power of the Company or the shareholders of the Company to make or
authorize any adjustment, recapitalization, reorganization or other change
in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of stock or of options, warrants or
rights to purchase stock or of bonds, debentures, preferred or prior
preference stocks whose rights are superior to or affect the Common Stock
or the rights thereof or which are convertible into or exchangeable for
Common Stock, or the dissolution or liquidation of the Company, or any sale
or transfer of all or any part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or otherwise.
(b) Notwithstanding any provision of the Plan or any Award Agreement,
in the event of any change in the outstanding Common Stock by reason of a
stock dividend, recapitalization, reorganization, merger, consolidation,
stock split, combination or exchange of shares (a "Change in
Capitalization"), (i) such proportionate adjustments as may be necessary
(in the form determined by the Committee in its sole discretion) to reflect
such change shall be made to prevent dilution or enlargement of the rights
of Participants under the Plan with respect to (a) the aggregate number of
shares of Common Stock for which Awards in respect thereof may be granted
under the Plan, (b) the aggregate number of shares of Common Stock which
are subject to Awards hereunder without the approval of the Board pursuant
to Section 5 hereof, (c) the number of shares of Common Stock covered by
each outstanding Award, and (d) the exercise or Award prices in respect
thereof and (ii) the Committee may make such other adjustments, consistent
with the foregoing, as it deems appropriate in its sole discretion.
(c) Upon the occurrence of a merger of, or consolidation involving,
the Company in which the Common Stock is converted into securities of
another corporation or into cash, or any other transaction that results in
the Common Stock no longer being publicly traded, at the sole discretion of
the Committee, and on such terms and conditions as it deems appropriate,
the Committee may provide either by the terms of an Award granted under the
Plan or by a resolution adopted prior to the occurrence of such event that
upon such event, such Award shall be assumed by the successor corporation,
or a Parent or Subsidiary thereof, or shall be substituted for by a similar
Award, covering the stock of the successor corporation, or a Parent or
Subsidiary thereof, with appropriate adjustments as to the number and kind
of shares and exercise or Award prices.
14. Change in Control. In the event of a Change in Control and except as
the Committee (as constituted immediately prior to such Change in Control) may
otherwise determine in its sole discretion, (i) all Stock Options then
outstanding shall become fully exercisable as of the date of the Change in
Control, whether or not then exercisable, (ii) all restrictions and conditions
of all Restricted Stock Awards then outstanding shall lapse as of the date of
the Change in Control and (iii) all Performance Share Awards shall be deemed to
have been fully earned as of the date of the Change in Control.
15. Amendment of the Plan. The Board may at any time and from time to time
terminate, modify, or amend the Plan in any respect, except that no termination,
modification or amendment shall be effective without shareholder approval if
such approval is required to comply with any law, regulation or stock exchange
rule. No termination or amendment of the Plan shall, without the consent of a
Participant to whom any Awards shall previously have been granted, adversely
affect his or her rights under such Awards.
16. Miscellaneous.
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<PAGE>
(a) Tax Withholding. (i) The Company and its Subsidiaries shall have
the right to deduct from any cash payment made under the Plan any federal,
state or local taxes of any kind required to be withheld with respect to
such payment. It shall be a condition to the obligation of the Company to
deliver shares of Common Stock pursuant to any Award under the Plan that
the recipient of such Award pay to the Company such amount as may be
required by the Company for the purpose of satisfying any liability for any
such withholding taxes. Any Award granted under the Plan may require the
Company, or permit the recipient of such Award to elect, in accordance with
any applicable rules established by the Committee, to withhold or to pay
all or a part of the amount of such withholding taxes in shares of Common
Stock, provided, however, that regardless of whether set forth in the Award
Agreement, any person subject to Section 16 of the Exchange Act shall have
the unfettered right but not the obligation to direct and compel the
Company to withhold, or to accept from such person, such number of shares
of Common Stock valued at the Fair Market Value on the date of such payment
as is necessary to pay, in whole or in part, such person's withholding tax
obligation. Except for elections made by persons subject to Section 16 of
the Exchange Act, elections by all other Participants may be denied by the
Committee in its sole discretion, or may be made subject to certain
conditions specified by the Committee. Neither the Board of Directors nor
the Committee shall have any discretion with respect to the elections by
persons subject to Section 16 of the Exchange Act in order that such
transactions shall qualify for the exemption from short-swing profit
liability pursuant to the "disposition to the issuer" exemption set forth
at Rule 16b-3(e) promulgated under Section 16 of the Exchange Act.
(ii) The applicable Award Agreement for an Incentive Stock Option
shall provide that if a Participant makes a disposition, within the
meaning of Section 424(c) of the Code and the regulations promulgated
thereunder, of any share of Common Stock issued to such Participant
pursuant to the exercise of an Incentive Stock Option within the two
(2)-year period commencing on the day after the date of the grant or
within the one (1)-year period commencing on the day after the date of
transfer of such share of Common Stock to the Participant pursuant to
such exercise, the Participant shall, within ten (10) days of such
disposition, notify the Company thereof, by delivery of written notice
to the Company at its principal executive office.
(b) Loans. On such terms and conditions as shall be approved by the
Committee, the Company may directly or indirectly lend money to a
Participant to accomplish the purposes of the Plan, including to assist
such Participant to acquire or carry shares of Common Stock acquired upon
the exercise of Stock Options granted hereunder, and the Committee may also
separately lend money to any Participant to pay taxes with respect to any
of the transactions contemplated by the Plan.
(c) No Right to Grants or Employment. No Eligible Employee or
Participant shall have any claim or right to receive grants of Awards under
the Plan. Nothing in the Plan or in any Award or Award Agreement shall
confer upon any employee of the Company or any Subsidiary any right to
continued employment with the Company or any Subsidiary, as the case may
be, or interfere in any way with the right of the Company or a Subsidiary
to terminate the employment of any of its employees at any time, with or
without cause.
(d) Unfunded Plan. The Plan shall be unfunded and the Company shall
not be required to segregate any assets that may at any time be represented
by Awards under the Plan. Any liability of the Company to any person with
respect to any Award under the Plan shall be based solely upon any
contractual obligations that may be effected pursuant to the Plan. No such
obligation of the Company shall be deemed to be secured by any pledge of,
Page 11
<PAGE>
or other encumbrance on, any property of the Company.
(e) Other Employee Benefit Plans. Payments received by a Participant
under any Award made pursuant to the provisions of the Plan shall not be
included in, nor have any effect on, the determination of benefits under
any other employee benefit plan or similar arrangement provided by the
Company.
(f) Securities Law Restrictions. The Committee may require each
Eligible Employee purchasing or acquiring shares of Common Stock pursuant
to a Stock Option or other Award under the Plan to represent to and agree
with the Company in writing that such Eligible Employee is acquiring the
shares for investment and not with a view to the distribution thereof. All
certificates for shares of Common Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, the New York Stock
Exchange or any other stock exchange upon which the Common Stock is then
listed, and any applicable federal or state securities law, and the
Committee may cause a legend or legends to be put on any such certificates
to make appropriate reference to such restrictions. No shares of Common
Stock shall be issued hereunder unless the Company shall have determined
that such issuance is in compliance with, or pursuant to an exemption from,
all applicable federal and state securities laws.
(g) Compliance with Rule 16b-3. Notwithstanding anything contained in
the Plan or any Award Agreement to the contrary, if the consummation of any
Award under the Plan would result in the possible imposition of liability
on a Participant pursuant to Section 16(b) of the Exchange Act, the
Committee shall have the right, in its sole discretion, but shall not be
obligated, to defer such transaction to the extent necessary to avoid such
liability, but in no event for a period in excess of 180 days.
(h) Deductibility Under Code Section 162(m). Awards granted under the
Plan to Eligible Employees which the Committee reasonably believes may be
subject to Section 162(m) of the Code shall not be exercisable, and payment
under the Plan in connection with such an Award shall not be made, unless
and until the Committee has determined in its sole discretion that such
exercise or payment would no longer be subject to Section 162(m) of the
Code.
(i) Award Agreement. Each Eligible Employee receiving an Award under
the Plan shall enter into an Award Agreement in a form specified by the
Committee agreeing to the terms and conditions of the Award and such other
matters as the Committee shall, in its sole discretion, determine. In the
event of any conflict or inconsistency between the Plan and any such Award
Agreement, the Plan shall govern, and the Award Agreement shall be
interpreted to minimize or eliminate any such conflict or inconsistency.
(j) Costs of Plan. The costs and expenses of administering the Plan
shall be borne by the Company.
(k) Governing Law. Except as to matters of federal law, the Plan and
all actions taken thereunder shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to
conflicts of law principles.
(l) Effective Date. The Plan as amended and restated herein shall be
effective on December 6, 1999 (the "Effective Date").
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<PAGE>
EXHIBIT 10-CC(7)
MEMC ELECTRONIC MATERIALS, INC.
STOCK OPTION AGREEMENT
(Date)
(Name)
(Location)
This letter describes the terms of the grant by MEMC Electronic Materials,
Inc. (the "Company") to you of nonqualified stock options (the "Options") to
purchase shares of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), under the Company's 1995 Equity Incentive Plan, as amended and
restated effective December 6, 1999 (the "Plan"). The Company is granting these
Options to you in recognition of your valuable services to the Company and to
facilitate your participation in the Company's success.
Capitalized terms used in this letter without definition shall have the
meanings assigned to them in the Plan. This letter, the Options and the Common
Stock issued upon the exercise of the Options shall be controlled by the terms
of the Plan, the terms of which are incorporated by reference into this letter.
In the event of any conflict or inconsistency between the Plan and this letter,
the Plan will govern.
Before we describe how the Options work, it is important that you know that
none of the Options may be sold, transferred, assigned, pledged, or otherwise
encumbered or disposed of, except by will or the laws of descent and
distribution. Therefore, during your lifetime, an Option shall be exercisable
only by you or by your guardian or legal representative. Each permitted
transferee of an Option shall, as a condition of the transfer thereof, execute
an agreement pursuant to which it shall agree to comply with the terms of this
letter.
1. Grant of Options. You are hereby granted the number of Options shown
on Exhibit A, attached to this letter. These Options are effective as of (Date
of Grant), the "Date of Grant." Each such Option will entitle you to purchase
upon payment of the Exercise Price, one share of Common Stock. The decision to
use an Option to purchase a share of Common Stock will be referred to in this
letter as "exercising an option." The "Exercise Price" shall be the amount shown
on Exhibit A, which was the Fair Market Value, as defined in the Plan, of a
share of Common Stock on (Date of Grant).
The Options granted pursuant to this letter shall be non-qualified stock
options, which are not qualified under Section 422 of the Code.
2. Terms and Conditions of Options. The Options granted under this letter
have the following terms and conditions:
(a) Vesting. Of the total number of Options granted to you by this
letter, you will have the right to exercise 25% of them (i.e. 25% will
vest) on the first anniversary of the Date of Grant and an additional 25%
on each anniversary of the Date of Grant thereafter, such that by the
fourth anniversary of the Date of Grant, you will have the right to
exercise all (100%) of them (i.e. 100% will be vested). If a Change in
Control occurs (except as the Compensation Committee of the Board of
Directors of the Company (the "Committee"), as constituted immediately
prior to such Change in Control, may otherwise determine in its sole
discretion) any Options then outstanding (other than any Option granted
within six months of such Change in Control) will become fully exercisable
as of the date of the Change in Control.
(b) Option Period. The Options will not be exercisable after the tenth
anniversary of the Date of Grant, and may be subject to earlier termination
as described below and in the Plan.
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<PAGE>
Upon termination of your employment with the Company and its
Subsidiaries for reasons other than your death, Disability or Retirement
you (or your estate) may exercise any Option to the extent exercisable on
the date of termination within the sixty day period after such a
termination of employment (but never later than the tenth anniversary of
the Date of Grant). Any Options which have not yet vested at the time of
termination of your employment shall terminate and be cancelled (except as
the Committee may otherwise determine in its sole discretion). Also, any
Options not exercised within sixty days after such a termination of
employment shall terminate and be cancelled.
Upon termination of your employment with the Company and its
Subsidiaries on account of your death, Disability or Retirement, all
Options shall vest and you (or your Beneficiary) may exercise any or all
Options within the three year period after such a termination of employment
(but never later than the tenth anniversary of the Date of Grant);
provided, however, that in the event of Retirement or Disability, no Option
may be exercised until at least six months after its Date of Grant. From
time to time, on a form acceptable to the Committee or its delegate, you
may designate any person or persons (concurrently, contingently or
successively) to whom the Options shall be transferred in the event that
you die before you exercise the Options. A beneficiary designation form
shall be effective only when the form is signed by you and filed in writing
with the Company while you are alive, and shall cancel all beneficiary
designation forms that you previously signed and filed. If no Beneficiary
is so designated, your Beneficiary shall be the same as designated by you
under the Company's group life insurance plan. If you have not designated a
Beneficiary under the Company's group life insurance plan, your Beneficiary
shall be your estate or the distributees thereof.
For purposes of this paragraph, "Retirement" shall mean the
termination of your employment with the Company after you attain sixty-five
years of age, or after you attain fifty-five years of age and after
completing 10 years of service.
Notwithstanding anything to the contrary in this letter, in the event
of your termination of employment with the Company and its Subsidiaries for
Cause (as defined below), all Options, whether or not vested, shall be
cancelled and no longer exercisable as of the date of such termination.
Termination for "Cause" shall mean termination of your employment
because of:
(i) any act or omission that constitutes a material breach of
any of the material obligations of any employment agreement that you
may have with the Company or any of its Subsidiaries (other than by
reason of your death or Disability);
(ii) the continued failure or refusal of you to perform the
material duties required of you as an employee of the Company or any
of its Subsidiaries (other than by reason of your death or
Disability);
(iii) any willful material violation by you of any law or
regulation applicable to the business of the Company or any of its
Subsidiaries, or your conviction of a felony, or any willful
perpetration by you of a common law fraud; or
(iv) any other willful misconduct by you which is materially
injurious to the financial condition or business reputation of, or is
otherwise materially injurious to, the Company or any of its
Subsidiaries.
Page 2
<PAGE>
(c) Exercising Options. You may exercise any or all vested Options by
notifying the Company in writing that you wish to exercise your Options and
accompanying the written notice (as described in paragraph 4 below) with
the payment for the Common Stock you are purchasing with such Options.
Payment must be equal to the total number of Options that you wish to
exercise, multiplied by the Exercise Price.
Payment may be made in cash, certified or bank check, note or other
instrument acceptable to the Committee. Payment may also be made in full or
in part in shares of Common Stock with a Fair Market Value (determined as
of the date of exercise of such Option) at least equal to such full or
partial payment. Common Stock used to pay the Exercise Price may be shares
that you already own, or the Company may withhold shares of Common Stock
that you would otherwise have received upon exercise of the Option. You
also may exercise a Option through a "cashless exercise" procedure
involving a broker or dealer approved by the Committee, provided that the
conditions described in Section 8(f) of the Plan are satisfied.
If you are subject to Section 16 of the Exchange Act, you shall have
the unfettered right (but not the obligation) to pay the exercise price in
full or in part in shares of Common Stock in accordance with Section 8(i)
of the Plan.
The date of exercise will be the date that all of the requirements
above, as well as the requirements in 2(e) below, are met. No certificate
showing the Common Stock purchased under such Option will be issued to you
under 2(f) below until all of these requirements are met.
(d) Shareholder Rights. You will have no rights as a shareholder with
respect to any shares of Common Stock purchased upon the exercise of an
Option until a certificate or certificates for such shares is issued to you
making you the "holder of record" of such shares. Other than under Sections
13(b) and 13(c) of the Plan, no adjustment will be made for dividends or
distributions or other rights related to any share for which the date of
such dividend or distribution is prior to the date on which you will become
the holder of record of the shares.
(e) Limitation on Exercise. Notwithstanding the other provisions of
this letter, an Option shall not be exercisable unless and until (i) a
registration statement under the Securities Act of 1933, as amended, has
been duly filed and declared effective pertaining to the Common Stock
subject to such Option and such Common Stock will have been qualified under
applicable state "blue sky" laws, or (ii) the Committee in its sole
discretion determines that such registration, qualification and status is
not required as a result of the availability of an exemption from such
registration, qualification, and status under such laws.
(f) Issuance of Certificate. As soon as practicable following the
exercise of any Options, subject to the tax withholding provisions of
Section 3(b), a certificate showing the number of shares of Common Stock
issued in connection with such exercise will be issued in your name.
3. Miscellaneous.
(a) No Rights to Grants or Continued Employment. You will not have
any claim or right to receive future grants under the Plan. Nothing in the
Plan or in this letter will give you any right to continued employment with
the Company or any Subsidiary, as the case may be, or interfere in any way
with the right of the Company or a Subsidiary to terminate your employment
at any time, with or without cause.
(b) Tax Withholding. If the Company is required by any government
Page 3
<PAGE>
entity to withhold an amount from your wages as a result of any grant or
exercise of Options pursuant to this letter, the Company will not be
required to deliver a stock certificate to you until you pay to the Company
the amount required to be withheld from your wages with respect to such
event. Payment of such amount may be in cash, withholding from other
compensation or in shares of Common Stock with a Fair Market Value equal to
such payment. Common Stock used to pay the withholding amount may be shares
that you already own, or shares of Common Stock that you would otherwise
have received upon the exercise of the Option.
If you are subject to Section 16 of the Exchange Act, you shall have
the unfettered right but not the obligation to direct and compel the
Company to withhold, or to accept from you, such number of shares of Common
Stock as is necessary to pay in whole or in part your withholding tax
obligation, in accordance with Section 16(a)(i) of the Plan.
(c) No Restriction on Right of Company to Effect Corporate Changes.
Neither the Plan nor this letter will affect or restrict in any way the
right or power of the Company or its shareholders to make or authorize any
corporate changes described in Section 13 of the Plan.
4. Notices. All notices and other communications discussed in this letter
will be in writing and will be delivered by hand or sent by mail addressed, if
to you, to your attention at the mailing address that you will have specified to
the Company in writing and, if to the Company, to it at 501 Pearl Drive, St.
Peters, Missouri 63376, Attention: Chief Financial Officer. All such notices
will be conclusively deemed to be received and will be effective, if sent by
hand delivery, upon receipt, or if sent by registered or certified mail, on the
fifth day after the day on which such notice is mailed.
5. Entire Letter; Governing Law. This letter and the Plan represent the
entire understanding between you and the Company and supersede all prior
understandings relating to the subject matter of this letter. This letter will
be governed by, and construed in accordance with, the laws of the State of
Delaware without giving effect to conflicts of law principles.
MEMC Electronic Materials, Inc.
By:
-----------------------------------------
Title:
--------------------------------------
Exhibit A
MEMC Electronic Materials, Inc. 1995 Equity Incentive Plan as Amended
Stock Option Award Letter Agreement
(Date)
Participant Name:
Number of Options:
Exercise Price:
Page 4
<PAGE>
Exhibit 13 to Form 10-K
FIVE YEAR SELECTED FINANCIAL DATA
Dollars in thousands, except share data
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 693,594 $ 758,916 $ 986,673 $ 1,119,500 $ 886,860
Gross margin (10,335) (31,829) 124,759 250,185 223,279
Marketing and administration 63,613 73,515 70,715 79,680 63,893
Research and development 85,019 81,591 64,457 44,313 31,226
Restructuring costs (5,747) 146,324(1) -- -- --
Operating profit (loss) (153,220) (333,259) (10,413) 126,192 128,160
Equity in income (loss) of joint ventures (9,659) (43,496) 5,480 26,716 13,199
Net earnings (loss) (151,481) (316,332) (4,513) 103,388 86,564
Basic earnings (loss) per share (2.43) (7.80) (0.11) 2.50 2.83
Diluted earnings (loss) per share (2.43) (7.80) (0.11) 2.49 2.81
Shares used in basic earnings (loss) per
share computation 62,224,869 40,580,869 41,345,193 41,308,806 30,612,636
Shares used in diluted earnings (loss) per
share computation 62,224,869 40,580,869 41,345,193 41,534,412 30,838,704
Balance Sheet Data:
Working capital 86,306 40,494 38,449 42,805 199,258
Total assets 1,724,581 1,773,714 1,794,424 1,519,472 1,102,167
Long-term debt (including current portion) 886,096 873,680 519,995 304,589 91,451
Stockholders' equity 432,791 399,040 715,754 748,583 642,695
Other Data:
Capital expenditures 49,256 194,610 372,416 590,049 215,359
Equity infusions in joint ventures 12,052 25,533 10,638 14,698 29,904
Employment 6,000 6,300 8,000 7,100 6,600
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) During 1998, the Company recorded restructuring costs totaling $146.3
million to close its Spartanburg, South Carolina facility, to forego
construction of a 200 millimeter wafer facility at its joint venture in
Malaysia, to withdraw from its joint venture in a small diameter wafer
operation in China and to implement a voluntary severance program.
12 . 1999 MEMC Annual Report
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
- --------------------------------------------------------------------------------
Year ended December 31, 1999 compared with year ended December 31, 1998
Net Sales. Net sales decreased by 9% to $694 million in 1999 from $759 million
in 1998, due to significant declines in the price for silicon wafers partially
offset by a 9% increase in product volumes. Industry average selling prices
continued to decline dramatically, from $1.76 per square inch equivalent in 1997
to $1.51 in 1998, and $1.31 in 1999, due to significant excess capacity in the
silicon wafer industry and continuing pricing pressure from customers. The
increase in product volume in 1999 was principally due to the on-going recovery
in the semiconductor market. Advanced large diameter and epitaxial products
represented 52% of product volume for 1999 compared to 47% for 1998. While both
200 millimeter and epitaxial product volumes grew during 1999, the increase in
this ratio is primarily indicative of customers utilizing 200 millimeter wafers
in preference to smaller diameter wafers in order to obtain the lowest cost per
device. While product volume increased in total by 9% during 1999, 200
millimeter product volume grew by 29%.
Industry average selling prices appear to have stabilized in the second half of
1999. For some products, there is evidence of price increases, especially in the
smaller diameters where supply-demand appears to have reached equilibrium. The
Company expects this trend to continue.
MEMC operates in all major semiconductor-producing regions of the world, with
almost half of the Company's 1999 net sales to customers located outside North
America. Net sales to North America decreased 8% and comprised 52% of 1999 net
sales compared to 51% of 1998 net sales, caused by a fall in prices, partially
offset by increased product volume. Lower prices offset partially by higher
volumes combined to result in a 14% decrease in net sales to Europe, which
constituted 22% of 1999 net sales compared to 23% of 1998 net sales. Net sales
to Japan decreased 25% and comprised 13% of 1999 net sales compared to 16% of
1998 net sales, due to lower volumes and prices. Increases in product volumes,
partially offset by declines in prices, resulted in an increase of 28% in net
sales to Asia Pacific, which comprised 13% of 1999 net sales compared to 10% of
1998 net sales. See Note 17 of Notes to Consolidated Financial Statements
herein.
Gross Margin. Even with the 13% decline in industry average selling prices in
1999, gross margin improved to a negative 1% in 1999 from a negative 4% in 1998.
The improved gross margin is primarily attributable to reduced cost of goods
sold, which declined 11% in 1999 compared to 1998, despite a 9% increase in
product volume. Over $100 million in costs were taken out of the business in
1999, as a result of various cost-cutting initiatives set into motion in 1998,
including the closure of the Spartanburg, South Carolina plant, implementing the
Company's "best practices" worldwide, implementing a plant focus program that
limits the number of wafer diameters manufactured at each site, and working with
our suppliers to create cost reduction opportunities and price reductions.
Marketing and Administration. Marketing and administration expenses decreased
13% and represented 9% of net sales for 1999 compared to 10% for 1998. The
decrease was a result of the Company's continuing efforts to reduce costs.
Research and Development. Research and development costs rose 4% and represented
12% of net sales for 1999 compared to 11% of net sales for 1998. The increase in
research and development costs was attributable to continuing investments in 300
millimeter wafer development and depreciation associated with capital
expenditures made for the 300 millimeter pilot line in St. Peters, Missouri and
the 300 millimeter integrated development line in Utsunomiya, Japan.
1999 MEMC Annual Report . 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Restructuring Costs. During 1999, the Company recorded an adjustment to decrease
the restructuring reserve by $6 million as a result of a change in an accounting
estimate relating primarily to the Company's withdrawal from the Chinese joint
venture, where the amount ultimately required to exit the venture was less than
originally estimated. By the fourth quarter of 1999, the Company began to fully
realize the cost savings related to the 1998 restructuring activities, and does
not anticipate additional incremental savings in future quarters.
Interest Expense. Interest expense increased to $66 million for 1999 from $46
million for 1998. The increase was primarily attributable to increased interest
rates, as the interest rates on the Company's loan agreements with its principal
lender were increased as a result of a debt renegotiation during September 1998,
as described in Liquidity and Capital Resources below, as well as the repricing
of certain debt instruments in 1999. To a lesser extent, the increase in
interest expense was also due to an increased average debt carrying level and
a reduction in capitalized interest in 1999 versus 1998. Total debt was $892
million and $910 million at December 31, 1999 and 1998, respectively.
Income Taxes. The Company realized an income tax benefit at the rate of 31% for
1999, as compared to 24% for 1998. The increase in the rate of benefit is the
result of changes in the composition of worldwide taxable income, offset by an
increase in the valuation allowance on certain deferred tax assets.
Equity in Income (Loss) of Joint Ventures. Equity in loss of joint ventures
improved $33 million to a loss of $10 million in 1999 from a $43 million loss in
1998. POSCO Huls Co., Ltd. (PHC), the Company's 40%-owned, unconsolidated joint
venture in South Korea, contributed losses of $5 million for 1999 compared to
$18 million in losses for 1998. Net sales for PHC increased significantly in
1999 due to a 60% increase in volume, which was partially offset by lower
prices. Taisil Electronic Materials Corporation (Taisil), the Company's 45%-
owned, unconsolidated joint venture in Taiwan, contributed losses of $5 million
for 1999 compared to losses of $25 million for 1998. Net sales for Taisil
increased significantly in 1999 due to an 81% increase in volume, which was
partially offset by lower prices. During 1999, Taisil also reduced its deferred
tax valuation allowance related to certain tax net operating loss carryforwards,
of which the Company's share was $2 million. The higher product volumes at both
PHC and Taisil were primarily attributable to an increase in demand in the
Korean and Taiwanese semiconductor and silicon wafer markets.
Net Loss. The improved gross margin, reduced restructuring costs, and improved
equity in loss of joint ventures, which were partially offset by increased
interest expense, resulted in a net loss of $151 million for 1999 compared to
$316 million for 1998. While the Company expects to continue its significant
performance improvements and cost-cutting efforts, due to continued weak pricing
and on-going over capacity in certain segments of the silicon wafer market,
among other factors, management does not expect the Company to be profitable in
2000.
Year ended December 31, 1998 compared with year ended December 31, 1997
Net Sales. Net sales decreased by 23% to $759 million for 1998 from $987 million
for 1997, due to significant declines in the price for silicon wafers and a 14%
decrease in product volumes somewhat offset by an improved product mix. The
decline in price during 1998 was primarily attributable to significant excess
capacity in the silicon wafer industry and continuing pricing pressure from
customers who experienced reduced profitability or losses due to significant
excess capacity and price erosion in the semiconductor industry. The decrease in
product volume in 1998 was principally due to the weak economic conditions in
the Asia Pacific markets brought on by the Asian financial crisis and the
continuing recession in Japan coupled with semiconductor customers shrinking the
size of their devices (requiring less silicon per device). A concerted effort by
customers to use fewer test/monitor wafers also caused product volumes to
decline in 1998. This marked the first
14 . 1999 MEMC Annual Report
<PAGE>
year since 1985 that product volumes for the silicon industry did not increase
year over year. Advanced large diameter and epitaxial products represented 47%
of product volume for 1998 compared to 39% for 1997. While both 200 millimeter
and epitaxial product volumes grew during 1998, the increase in this ratio was
primarily indicative of customers utilizing 200 millimeter wafers in preference
to smaller diameter wafers in order to obtain the lowest cost per device. While
product volume declined in total by 14% during 1998, 200 millimeter product
volume grew by 12%.
MEMC operates in all major semiconductor-producing regions of the world, with
almost half of the Company's 1998 net sales to customers located outside North
America. Net sales to North America decreased 22% and comprised 51% of 1998 net
sales compared to 50% of 1997 net sales, led by a fall in prices and product
volume, partially offset by improved product mix. Lower prices offset by an
improved product mix and higher volumes combined to result in a 10% decrease in
net sales to Europe, which constituted 23% of 1998 net sales compared to 20% of
1997 net sales. Net sales to Japan decreased 23% and comprised 16% of 1998 and
1997 net sales, as lower volumes and prices more than offset an improved product
mix. Declines in product volumes, prices and product mix resulted in a decrease
of 48% in net sales to Asia Pacific, which comprised 10% of 1998 net sales
compared to 14% of 1997 net sales. See Note 17 of Notes to Consolidated
Financial Statements herein.
Gross Margin. The lower volumes experienced in 1998 decreased the capacity
utilization and, coupled with the lower selling prices, caused gross margins to
decrease to a negative 4% for 1998 from the 13% achieved in 1997. Despite the
benefits from the mix improvement and cost-cutting measures that were
implemented during 1998, the volume decreases and price pressures began early in
the year and resulted in negative margins. These cost-cutting initiatives
included short-term plant shutdowns, implementing the Company's "best practices"
worldwide, implementing a plant focus program to limit the number of wafer
diameters manufactured at each site, and working with our suppliers to create
cost reduction opportunities and price reductions. In addition, the Company
reduced its workforce by approximately 1,700 employees, or 21%, compared to
December 31, 1997.
Marketing and Administration. Marketing and administration expenses increased 4%
and represented 10% of net sales for 1998 compared to 7% for 1997. The increase
was predominately attributable to expenses incurred for business systems
redesign in anticipation of implementing SAP worldwide and fees related to
several other initiatives completed during the year.
Research and Development. Research and development costs rose 27% and
represented 11% of net sales for 1998 compared to 7% for 1997. The increase in
research and development costs was attributable to continuing investments in 300
millimeter wafer development and depreciation associated with capital
expenditures made for the 300 millimeter pilot line in St. Peters, Missouri and
the 300 millimeter integrated development line in Utsunomiya, Japan.
Restructuring Costs. During the second quarter of 1998, the Company decided to
close its small diameter wafer facility in Spartanburg, South Carolina and to
withdraw from the Company's joint venture in a small diameter wafer operation in
China. These actions were taken because (1) a number of semiconductor
manufacturers had been running their larger diameter manufacturing lines in
preference to their smaller diameter lines in order to gain production
efficiencies; (2) a number of semiconductor manufacturers recently had
undertaken restructuring initiatives focused on permanently eliminating small
diameter lines; and (3) management believed that small diameter wafer capacity
would exceed demand even after the semiconductor industry began to recover. The
Company also decided to forego construction of a new 200 millimeter wafer
facility at its joint venture in Malaysia. This decision was based upon current
and anticipated excess capacity for 200 millimeter wafers and the significant
price erosion that the Company had experienced for these wafers.
1999 MEMC Annual Report . 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
These actions resulted in a charge to operations of $122 million, comprised of
$81 million non-cash asset impairments/write-offs, $26 million in dismantling
and related costs and $15 million in personnel related costs. The assets for
which an impairment loss has been recorded or which have been written-off were
primarily property, plant and equipment which cannot be sold or used at other
Company facilities. In addition, the Company wrote off architectural design and
site preparation fees as well as costs incurred to develop a computer-integrated
manufacturing system for the Malaysian joint venture.
Personnel costs represent the expected cost of involuntary terminations for
approximately 600 hourly and salaried employees whom the Company did not expect
to relocate elsewhere within the organization. The Company also recorded a $25
million charge for a voluntary severance program for approximately 600 hourly
and salaried U.S. employees. Substantially all this amount was paid to employees
as of December 31, 1998. See Note 5 of Notes to Consolidated Financial
Statements herein.
Interest Expense. Interest expense increased to $46 million for 1998 from $15
million for 1997. The increase in interest expense was primarily attributable to
increased borrowings, and to a lesser extent the completion of projects for
which interest expense could no longer be capitalized. In addition, the interest
rates on the Company's loan agreements with its principal lender were increased
as a result of a debt renegotiation during September 1998, as described in
Liquidity and Capital Resources below. Total debt was $910 million and $633
million at December 31, 1998 and 1997, respectively.
Other, Net. Other, net decreased to $1 million in expense for 1998 from $4
million of income for 1997, primarily due to the sale of the Company's Santa
Clara wafer facility in May 1997 that resulted in a pre-tax gain of $6 million.
Income Taxes. The effective income tax rate was 24% for 1998, as compared to
(27%) for 1997. This fluctuation was the result of changes in the composition of
worldwide taxable income, restructuring costs, non-deductible operating expenses
at the Company's Malaysian and Chinese joint ventures, the establishment of
valuation allowances on certain deferred tax assets in Japan and certain foreign
tax credit elections.
Equity in Income (Loss) of Joint Ventures. Equity in income (loss) of joint
ventures decreased $49 million to a loss of $43 million in 1998 from $6 million
in income in 1997. PHC experienced a 28% decrease in product volume and
significantly lower prices resulting in lower sales throughout 1998. While the
reasons for the decline in prices are similar to those of the Company, product
volume declines were primarily the result of excess capacity within the DRAM
(memory) industry and efforts by Korean DRAM manufacturers to reduce their
production, thereby reducing the worldwide oversupply, and shrink the size of
their devices. For the year, PHC contributed losses of $18 million compared to
$12 million in income for 1997.
Net sales for Taisil decreased slightly due to significantly lower prices, which
were partially offset by a 41% increase in product volumes. The higher product
volumes were primarily attributable to obtaining additional customer
qualifications during 1998. In addition, the Taiwanese semiconductor market,
particularly the foundry market, grew during 1998. During 1998, Taisil also made
adjustments to its deferred tax valuation allowance in recognition of changes in
expected realization of its operating loss carryforwards, of which the Company's
share was $6 million. For the year, Taisil contributed losses of $25 million in
1998 compared to $6 million in losses for 1997.
Net Loss. The decrease in net sales, restructuring costs, higher research and
development costs and interest expense, and the equity in loss of joint ventures
resulted in a net loss of $316 million for 1998 compared to $5 million for 1997.
16 . 1999 MEMC Annual Report
<PAGE>
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
At December 31, 1999, the Company had $29 million of cash and cash equivalents
compared to $16 million at December 31, 1998.
Cash flows used in operating activities increased to $103 million for 1999 from
$34 million for 1998. Cash flows used by net loss, after consideration of
restructuring costs, equity in loss of joint ventures, and deferred taxes,
improved $51 million in 1999 compared to 1998. This improvement was more than
offset by an increase in working capital, primarily accounts receivable.
Accounts receivable of $112 million at December 31, 1999 increased $13 million,
or 13%, from $99 million at the end of 1998. This increase was attributable to
the 19% increase in fourth quarter net sales between the two years. Days' sales
outstanding were 56 days at December 31, 1999 compared to 58 days at the end of
1998 based upon annualized fourth quarter sales for the respective years.
Inventories declined $18 million, or 15%, from the prior year to $98 million at
December 31, 1999. This decrease was primarily due to a concerted effort by the
Company to reduce stores and supplies inventories and manage inventory levels,
as well as to fewer manufacturing facilities in 1999. Related inventory reserves
for obsolescence, lower of cost or market issues, or other impairments decreased
$3 million in 1999 to $17 million, consistent with the decreased inventory
levels. Year-end inventories as a percentage of annualized fourth quarter net
sales decreased to 13% at December 31, 1999 from 19% at the end of 1998, as a
result of the increased net sales in the fourth quarter of 1999 relative to
1998, as well as the reduced inventory levels.
The Company's net deferred tax assets increased $69 million to $197 million at
December 31, 1999. Management believes it is more likely than not that, with its
projections of future taxable income and after consideration of the valuation
allowance, the Company will generate sufficient taxable income to realize the
benefits of the net deferred tax assets existing at December 31, 1999. In order
to realize the net deferred tax assets existing at December 31, 1999, the
Company will need to generate future taxable income of approximately $549
million. The Company's net operating loss carryforwards total $647 million, of
which $7 million will expire in 2001; $13 million will expire in 2002; $29
million will expire in 2003; $9 million will expire in 2004; $14 million will
expire in 2012; $322 million will expire in 2018; and $253 million will expire
in 2019. There can be no assurance, however, that the Company will generate
sufficient taxable income to realize the full benefit of the existing net
deferred tax assets.
Accounts payable decreased $27 million or 24% compared to the balance at the end
of 1998 due to a significant reduction in capital expenditures in the fourth
quarter of 1999 compared to the year-ago period.
Cash used in investing activities decreased in the year ended December 31, 1999
to $47 million from $223 million in the year ended December 31, 1998. The
primary reduction in cash used by investing activities was a reduction in
spending on capital projects, as well as reduced equity infusions in joint
ventures.
Capital expenditures decreased $145 million or 75% versus the prior year to $49
million. The 1999 capital expenditures primarily related to the implementation
of SAP worldwide and to maintenance capital. The Company expects to continue to
tightly control capital expenditures in 2000. At December 31, 1999, the Company
had $20 million of committed capital expenditures related to the implementation
of SAP worldwide and various manufacturing and technology projects.
1999 MEMC Annual Report . 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Equity infusions in joint ventures related to Taisil and decreased $13 million
to $12 million for 1999. Although to date Taisil has an accumulated deficit, the
Company does not consider its investment in Taisil to be impaired as of December
31, 1999 based on the following factors: increasing product volumes and capacity
utilization; improving operating results; and positive operating cash flow
generated in 1999.
Cash flows provided by financing activities decreased to $164 million in the
year ended December 31, 1999 from $242 million in the year ended December 31,
1998. The 1999 financing activities consisted primarily of stock offerings by
the Company. In 1998, the financing activities consisted primarily of the
issuance of debt.
At December 31, 1999, the Company maintained $956 million of committed long-term
loan agreements, of which $886 million was outstanding. The Company also
maintained $57 million of short-term lines of credit, of which $6 million was
outstanding at year-end. The Company's weighted average cost of borrowing was
7.8% at December 31, 1999 and 1998. Total debt outstanding decreased to $892
million at December 31, 1999 from $910 million at December 31, 1998. The total
debt to total capital ratio at December 31, 1999 was 65% as compared to 67% at
December 31, 1998. In September 1998, VEBA AG and its affiliates (VEBA) agreed
to extend until 2001 all of the Company's outstanding debt with VEBA maturing
prior to January 1, 2001 (but only in the event the Company has used its best
efforts to obtain replacement financing on equivalent terms). As part of this
agreement, the Company agreed to increase the interest rates payable on the
Company's outstanding debt with VEBA to reflect interest rate spreads applicable
to an average industrial borrower at a specified credit rating. Interest rates
on the U.S. Dollar and Japanese Yen based loans outstanding with VEBA range from
3.5% to 11.0%. All outstanding debt with VEBA maturing prior to January 1, 2001
which is extended at maturity will be repriced based upon then-current interest
rates applicable to an average industrial borrower at a specified credit rating.
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 stated 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
or other sources on terms acceptable to the Company.
Historically, the Company has funded its operations primarily through loans from
VEBA, internally generated funds, and issuances 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 until 2001. Under these credit facilities, the
Company cannot pledge any of its assets to secure additional financing without
the consent of VEBA. The Company is currently engaged in discussions with its
financial advisors and VEBA AG regarding additional sources of capital.
18 . 1999 MEMC Annual Report
<PAGE>
Year 2000
- --------------------------------------------------------------------------------
In the fourth quarter of 1999, the Company completed its Year 2000 project.
Since the beginning of 2000, the Company has experienced no material Year 2000
issues with its computer systems, applications, or equipment. Likewise, the
Company has experienced no material problems with its strategic suppliers and
equipment vendors. The Company's total incremental Year 2000 expenditures were
approximately $4 million, as compared to previous estimates in the range of
$5 - $7 million.
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 operations.
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
Accounting 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.
Risk Factors
- --------------------------------------------------------------------------------
This report contains "forward-looking" statements within the meaning of the
Securities Litigation Reform Act of 1995, including those concerning: improved
financial performance in 2000 versus 1999; stabilization and improvements in
demand for and average selling prices of silicon wafers; lack of major capacity
expansions in 2000; strengthening of the Company's balance sheet through
operations; liquidity through 2000; expectation of a continuation of significant
performance improvements and cost-cutting efforts; tight control of capital
expenditures in 2000; the Company's expectations concerning its lack of
profitability in 2000; the Company's ability to generate future taxable income
as it relates to the realization of the net deferred tax asset; utilization of
the restructuring reserve; ability to meet aggressive objectives set for 2000;
impact of the introduction of the Euro; the impact of the implementation of SFAS
No. 133; impact of an adverse change in exchange rates; expectation that the
Company will not pay dividends in the foreseeable future; and the Company's
intention to work closely with the VEBA/VIAG group to effectuate an orderly
divestiture process that preserves and optimizes the value of the Company.
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 manufactur-
1999 MEMC Annual Report . 19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ing capacity; ability of the Company to reduce manufacturing costs; demand for
semiconductors generally; changes in the pricing environment; general economic
conditions; actions by competitors, customers, and suppliers; the accuracy of
management's assumptions regarding the dismantling and sale of the Spartanburg
facility; technological changes; changes in product specifications and
manufacturing processes; impact of the introduction of the Euro; changes in
financial market conditions; changes in interest and exchange rates; the actions
of the VEBA/VIAG group; and other risks described in the Company's filings with
the Securities and Exchange Commission, including those risk factors described
in "Risk Factors" in the Company's Form 10-K for the year ended December 31,
1999.
Undue reliance should not be placed on these forward looking statements, which
speak only as of the date that they are made. The Company does not undertake any
obligation to release publicly any revisions to these statements to reflect
later events or circumstances or to reflect the occurrence of unanticipated
events.
Market Risk
- --------------------------------------------------------------------------------
The Company is exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. To mitigate these risks, the Company
utilizes currency forward contracts. The Company does not use derivative
financial instruments for speculative or trading purposes. All of the potential
changes noted below are based on sensitivity analyses performed on the Company's
financial positions at December 31, 1999 and 1998. Actual results may differ
materially.
The Company generally hedges transactional currency risks with currency forward
contracts. Gains and losses on these foreign currency exposures would generally
be offset by corresponding losses and gains on the related hedging instruments,
resulting in negligible net exposure to the Company.
Although the Company's debt obligations are primarily of a fixed-rate nature,
fluctuations in interest rates could significantly affect interest expense as
obligations are refinanced or extended at maturity and repriced based upon then-
current interest rates. An adverse change (defined as a 100 basis point change)
in interest rates would result in a decline in income before taxes of less than
$9 million as of the end of both 1999 and 1998.
A substantial majority of the Company's revenue and capital spending is
transacted in U.S. Dollars. However, the Company does enter into these
transactions in other currencies, primarily the Japanese Yen, the Italian Lira,
the Euro and certain other Asian and European currencies. To protect against
reductions in value and volatility of future cash flows caused by changes in
foreign exchange rates, the Company has established transaction based hedging
programs. The Company's hedging programs reduce, but do not always eliminate,
the impact of foreign currency exchange rate movements. An adverse change
(defined as 20 percent in certain Asian currencies and 10 percent in all other
currencies) in exchange rates would result in a decline in income before taxes
of less than $2 million as of the end of 1999, and a decline in other
comprehensive income of less than $20 million as of the end of 1999 ($22 million
as of the end of 1998). This calculation assumes that each exchange rate would
change in the same direction relative to the U.S. Dollar. In addition to the
direct effects of changes in exchange rates, such changes typically affect the
volume of sales or the foreign currency sales price as competitor's products
become more or less attractive. The Company's sensitivity analysis of the
effects of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency selling prices.
20 . 1999 MEMC Annual Report
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Dollars in thousands, except share data
<TABLE>
<CAPTION>
Year ended December 31, 1999 199 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 693,594 $ 758,916 $ 986,673
Cost of goods sold 703,929 790,745 861,914
- --------------------------------------------------------------------------------------------------------------------
Gross margin (10,335) (31,829) 124,759
Operating expenses:
Marketing and administration 63,613 73,515 70,715
Research and development 85,019 81,591 64,457
Restructuring costs (5,747) 146,324 --
- --------------------------------------------------------------------------------------------------------------------
Operating loss (153,220) (333,259) (10,413)
- --------------------------------------------------------------------------------------------------------------------
Nonoperating (income) expense:
Interest expense 66,054) 45,832 14,743
Interest income (1,986) (2,291) (2,570)
Royalty income (6,112) (4,628) (8,186)
Other, net 1,472 1,043 (4,070)
- --------------------------------------------------------------------------------------------------------------------
Total nonoperating (income) expense 59,428 39,956 (83)
- --------------------------------------------------------------------------------------------------------------------
Loss before income taxes, equity in income
(loss) of joint ventures and minority interests (212,648) (373,215) (10,330)
- --------------------------------------------------------------------------------------------------------------------
Income taxes (65,921) (89,394) 2,769
- --------------------------------------------------------------------------------------------------------------------
Loss before equity in income (loss) of joint
ventures and minority interests (146,727) (283,821) (13,099)
Equity in income (loss) of joint ventures (9,659) (43,496) 5,480
Minority interests 4,905 10,985 3,106
- --------------------------------------------------------------------------------------------------------------------
Net loss $ (151,481) $ (316,332) $ (4,513)
- --------------------------------------------------------------------------------------------------------------------
Basic loss per share $ (2.43) $ (7.80) $ (0.11)
Diluted loss per share $ (2.43) $ (7.80) $ (0.11)
- --------------------------------------------------------------------------------------------------------------------
Weighted average shares used in computing basic loss per share 62,224,869 40,580,869 41,345,193
- --------------------------------------------------------------------------------------------------------------------
Weighted average shares used in computing diluted loss per share 62,224,869 40,580,869 41,345,193
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1999 MEMC Annual Report . 21
<PAGE>
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except share data
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 28,571 $ 16,168
Accounts receivable, less allowance for doubtful accounts of
$2,409 and $2,853 in 1999 and 1998, respectively 111,559 98,528
Income taxes receivable 9,237 10,161
Inventories 98,419 115,927
Deferred tax assets, net 12,905 23,129
Prepaid and other current assets 15,229 35,225
- --------------------------------------------------------------------------------------------------------------
Total current assets 275,920 299,138
Property, plant and equipment, net 1,090,358 1,188,832
Investments in joint ventures 97,254 94,610
Excess of cost over net assets acquired, net of accumulated amortization of
$6,466 and $5,128 in 1999 and 1998, respectively 47,058 48,396
Deferred tax asset, net 183,902 104,650
Other assets 30,089 38,088
- --------------------------------------------------------------------------------------------------------------
Total assets $1,724,581 $1,773,714
- --------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 22,163 $ 38,644
Accounts payable 85,704 112,581
Accrued liabilities 29,795 35,404
Customer deposits 16,556 17,639
Provision for restructuring costs 12,839 37,299
Accrued wages and salaries 22,557 17,077
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 189,614 258,644
Long-term debt, less current portion 869,759 871,163
Pension and similar liabilities 95,731 92,466
Customer deposits 48,456 59,033
Other liabilities 44,893 45,126
- --------------------------------------------------------------------------------------------------------------
Total liabilities 1,248,453 1,326,432
- --------------------------------------------------------------------------------------------------------------
Minority interests 43,337 48,242
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 shares authorized, none issued
or outstanding in 1999 or 1998 -- --
Common stock, $.01 par value, 200,000,000 shares authorized, 70,463,505
and 41,436,421 issued in 1999 and 1998, respectively 705 414
Additional paid-in capital 770,476 574,188
Accumulated deficit (299,317) (147,836)
Accumulated other comprehensive loss (22,053) (10,581)
Unearned restricted stock awards -- (125)
Treasury stock, at cost: 929,205 in 1999 and 1998 (17,020) (17,020)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 432,791 399,040
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,724,581 $1,773,714
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22 . 1999 MEMC Annual Report
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(151,481) $(316,332) $ (4,513)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 159,081 155,874 126,913
Minority interests (4,905) (10,985) (3,106)
Equity in (income) loss of joint ventures 9,659 43,496 (5,480)
Restructuring costs (5,747) 104,704 --
(Gain) loss on sale of property, plant and equipment 981 6,916 (4,766)
Deferred compensation earned (601) 299 596
Changes in assets and liabilities:
Accounts receivable (13,268) 61,836 (36,051)
Income taxes receivable 516 4,655 (8,794)
Inventories 12,164 28,461 (46,445)
Prepaid and other current assets 8,636 (1,203) 9,487
Deferred taxes (67,692) (98,074) (17,783)
Accounts payable (20,349) (38,833) 3,976
Accrued liabilities (16,502) (7,792) 8,301
Customer deposits (11,660) (348) 17,806
Accrued wages and salaries 4,621 (4,209) (3,797)
Other, net (6,645) 37,680 (6,915)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (103,192) (33,855) 29,429
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (49,256) (194,610) (372,416)
Proceeds from sale of property, plant and equipment 4,753 5,730 21,512
Equity infusions in joint ventures (12,052) (25,533) (10,638)
Dividend received from unconsolidated joint venture -- -- 11,263
Notes receivable from affiliates 9,664 (8,642) 212
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (46,891) (223,055) (350,067)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net short-term borrowings (26,463) (8,843) 87,420
Proceeds from issuance of long-term debt 276,692 515,313 248,553
Principal payments on long-term debt (283,620) (248,936) (18,693)
Repurchase of common stock -- (15,692) --
Proceeds from issuance of common stock 197,271 -- --
Other -- (129) 385
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 163,880 241,713 317,665
- --------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (1,394) 1,312 (2,070)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 12,403 (13,885) (5,043)
Cash and cash equivalents at beginning of year 16,168 30,053 35,096
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 28,571 $ 16,168 $ 30,053
- --------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest payments, net of amount capitalized $ 64,076 $ 48,179 $ 21,204
Income taxes paid 4,816 9,794 18,020
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1999 MEMC Annual Report . 23
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Dollars in thousands, except share data
<TABLE>
<CAPTION>
Common Stock
------------ Retained Accumulated Unearned
Number Additional Earnings Other Restricted
of Shares Par Paid-in (Accumulated Comprehensive Stock Treasury
Issued Value Capital Deficit) Income (Loss) Awards Stock Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 41,470,971 $415 $573,351 $ 173,009 $ 4,353 $(1,217) $ (1,328) $ 748,583
---------
Comprehensive loss:
Net loss -- -- -- (4,513) -- -- -- (4,513)
Net translation adjustment -- -- -- -- (30,074) -- -- (30,074)
---------
Comprehensive loss (34,587)
---------
Stock plans, net (30,602) (1) 966 -- -- 197 -- 1,162
---------
Deferred compensation earned -- -- -- -- -- 596 -- 596
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 41,440,369 414 574,317 168,496 (25,721) (424) (1,328) 715,754
---------
Comprehensive loss:
Net loss -- -- -- (316,332) -- -- -- (316,332)
Net translation adjustment -- -- -- -- 17,682 -- -- 17,682
Minimum pension liability
(net of $1,625 tax) -- -- -- -- (2,542) -- -- (2,542)
---------
Comprehensive loss (301,192)
---------
Stock plans, net (3,948) -- (129) -- -- -- -- (129)
---------
Deferred compensation earned -- -- -- -- -- 299 -- 299
---------
Repurchase of common stock -- -- -- -- -- -- (15,692) (15,692)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 41,436,421 414 574,188 (147,836) (10,581) (125) (17,020) 399,040
---------
Comprehensive loss:
Net loss -- -- -- (151,481) -- -- -- (151,481)
Net translation adjustment -- -- -- -- (12,456) -- -- (12,456)
Minimum pension liability
(net of $629 tax) -- -- -- -- 984 -- -- 984
---------
Comprehensive loss -- -- -- -- -- -- -- (162,953)
---------
Stock plans, net (492) -- 354 -- -- -- -- 354
---------
Deferred compensation earned -- -- (726) -- -- 125 -- (601)
---------
Issuance of common stock 29,027,576 291 196,660 -- -- -- -- 196,951
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 70,463,505 $705 $770,476 $(299,317) $(22,053) $ -- $(17,020) $ 432,791
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24 . 1999 MEMC Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except share data
1 . Nature of Operations
- --------------------------------------------------------------------------------
MEMC Electronic Materials, Inc. and subsidiaries (the Company) is a leading
global producer of electronic grade silicon wafers for the semiconductor
industry. The Company has production facilities directly or through joint
ventures in Italy, Japan, Malaysia, South Korea, Taiwan and the United States.
The Company's customers are located throughout the world.
2 . Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
(a) Basis of Presentation
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(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. Cash
equivalents at December 31, 1999 include $3,700 of cash restricted by terms of
two annually renewable letter of credit agreements.
(d) Inventories
Inventories are stated at the lower of cost or market. Raw materials and
supplies inventories are valued using the first-in, first-out method. Goods in
process and finished goods inventory values are based upon standard costs which
approximate average costs.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
principally using the straight-line method over estimated service lives as
follows:
<TABLE>
<CAPTION>
Years
- --------------------------------------------------------------------------------
<S> <C>
Land improvements 6-15
Buildings and building improvements 10-30
Machinery and equipment 3-12
- --------------------------------------------------------------------------------
</TABLE>
The Company capitalizes interest costs as part of the cost of constructing
facilities and equipment. Interest costs of $1,099, $5,521 and $15,968 were
capitalized in 1999, 1998 and 1997, respectively.
(f) Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired (goodwill) is amortized on a straight-
line basis over the periods estimated to be benefited, not exceeding 40 years.
Excess of cost over net assets acquired is reviewed for impairment whenever
events and changes in business circumstances indicate the carrying value of the
goodwill and related acquired assets that gave rise to the goodwill may not be
recoverable. Impairment losses are recognized if expected future cash flows of
the related assets are less than their carrying values. There is no indication
of impairment of excess of cost over net assets acquired at December 31, 1999 or
1998.
(g) Computer Software Developed or Obtained for Internal Use
Costs related to the development or purchase of internal-use software are
capitalized and amortized over the estimated useful life of the software. Costs
related to the preliminary project stage and the post-implementation/
operations stage of an internal-use computer software development project are
expensed as incurred.
(h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the
1999 MEMC Annual Report . 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. There is no indication of
impairment of property, plant and equipment at December 31, 1999 or 1998.
(i) Impairment of Investments in Joint Ventures
Impairment of investments in joint ventures is measured by comparing the
carrying amount of the asset to future net cash flows expected to be generated
by the asset. In addition, the level of commitment of the joint ventures'
shareholders, the silicon wafer markets serviced by the joint ventures, and the
level of customer qualifications at the joint ventures are also considered in
assessing the impairment of the Company's investments in joint ventures. There
is no indication of impairment of these investments at December 31, 1999 or
1998.
(j) Revenue Recognition
Revenues are recognized when products are shipped.
(k) Derivative Financial Instruments
The Company enters into forward exchange contracts to manage foreign currency
exchange risk relating to current trade receivables with its foreign
subsidiaries and current trade receivables with its customers denominated in
foreign currencies (primarily Japanese Yen, Italian Lira, and Euro). The purpose
of the Company's foreign currency hedging activities is to protect the Company
from the risk that the eventual dollar net cash flows resulting from foreign
currency transactions will be adversely affected by changes in exchange rates.
The Company does not hold or issue financial instruments for trading purposes.
The Company's forward exchange contracts are accounted for as hedges and,
accordingly, gains and losses on those contracts are deferred and recognized at
the time of settlement of the related receivables. Deferred gains and losses are
included on a net basis in the consolidated balance sheets as either other
assets or other liabilities. Upon termination, gains and losses are included in
the consolidated statements of operations as other income or expense. If a
forward exchange contract is designated as a hedge but is no longer effective,
it is marked to market and included in other income or expense in the
consolidated statements of operations. A payment or receipt arising from the
termination of a forward exchange contract that is effective as a hedge is
included in other income or expense in the consolidated statements of
operations.
(l) Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries whose functional currency is
other than the U.S. Dollar are translated to U.S. Dollars using the exchange
rates in effect at the balance sheet date. Results of operations are translated
using average rates during the period. Adjustments resulting from the
translation process are included as a component of accumulated other
comprehensive income (loss).
(m) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to material differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating losses and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings in the period
that includes the enactment date. A valuation allowance has been established for
deferred tax assets that the Company believes may not be realized.
The Company provides for U.S. income taxes on earnings of the Company's
consolidated non-U.S. subsidiaries that are planned to be remitted. No such
provision is made for the remaining unremitted earnings, as the retention of
such earnings is considered essential for continuing operations, or the
additional taxes are considered to be minimal based upon available foreign tax
credits.
(n) Stock-Based Compensation
The Company measures its compensation cost of equity instruments issued under
employee compensation plans under the provisions of Accounting Principles Board
Opinion No. 25 (Opinion 25) and related Interpretations. Compensation expense
related to restricted stock awards is recognized over the applicable vesting
periods, and the unamortized portion of deferred compensation is reflected as a
separate component of stockholders' equity. The Company only issues equity
instruments to employees and non-employee directors.
26 . 1999 MEMC Annual Report
<PAGE>
(o) Comprehensive Loss Reclassification Adjustment
The Company's decision to forego construction of a new 200 millimeter facility
at its joint venture in Malaysia and to withdraw from its small diameter joint
venture in China resulted in a reclassification adjustment to comprehensive loss
in 1998 of approximately $9,500.
(p) Contingencies
Contingent liabilities are disclosed when management believes they are material
to the Company's financial position. There are no such known contingent
liabilities at December 31, 1999 or 1998.
3 . Fair Value of Financial Instruments
- --------------------------------------------------------------------------------
The carrying amount of the Company's cash, accounts receivable, income taxes
receivable, short-term borrowings, accounts payable and accrued liabilities
approximates fair value due to the short maturity of these instruments.
Consequently, such instruments are not included in the table below which
provides information regarding the estimated fair values of other financial
instruments, both on and off balance sheet, as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------
Dollars in thousands Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt $886,096 $866,507 $873,680 $841,244
- ----------------------------------------------------------------------------------------------
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------
Off balance sheet financial instruments:
Currency forward contracts $ 24,519 $ (847) $ 43,480 $ 957
- ----------------------------------------------------------------------------------------------
</TABLE>
The fair value of each long-term debt facility is based upon the amount of
future cash flows associated with each instrument discounted at the Company's
current borrowing rate for similar debt instruments of comparable terms.
The Company has entered into foreign currency contracts with VEBA AG and its
affiliates (VEBA) 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, Italian
Lira, and Euro), and relating to foreign currency denominated intercompany
loans. The Company believes its hedging arrangements with VEBA allow for
transactions on a basis that is comparable to terms available from unrelated
third-party financial intermediaries.
The fair value of the currency forward contracts is measured by the amount that
would have been paid to liquidate and repurchase all open contracts. Deferred
losses for intercompany loans totaled $2,116 and $2,897 at December 31, 1999 and
1998, respectively.
4 . Concentration of Credit Risk
- --------------------------------------------------------------------------------
The Company sells products to customers in the semiconductor industry which are
located in various geographic regions including the United States, Europe, Japan
and Asia Pacific. The primary customers in this industry are well capitalized
and the concentration of credit risk is considered minimal due to the Company's
customer base. Sales to the Company's largest customer were 17.8%, 20.3% and
20.0% of net sales in 1999, 1998 and 1997, respectively. No other customer
constituted 10% or more of net sales in 1999, 1998 or 1997.
5 . Restructuring Costs
- --------------------------------------------------------------------------------
During the second quarter of 1998, the Company decided to close its small
diameter wafer facility in Spartanburg, South Carolina and to withdraw from its
60%-owned joint venture in a small diameter wafer operation in China. These
actions were taken because (1) a number of semiconductor manufacturers had been
running their larger diameter manufacturing lines in preference to their smaller
diameter lines in order to gain production efficiencies; (2) a number of
semiconductor manufacturers recently had undertaken restructuring initiatives
focused on permanently eliminating small diameter lines; and (3) management
believed that small diameter wafer capacity would exceed demand even after the
semiconductor industry began to recover. The Company also decided to forego
construction of a new 200 millimeter wafer facility at its 75%-owned joint
venture in Malaysia. This decision was based upon current and anticipated excess
capacity for 200 millimeter wafers and the significant price erosion that the
Company had experienced for these wafers.
In 1998, the Company recorded a charge to operations of $121,670 (of which
$81,325 was non-cash) related to the above actions. In 1999, the Company
recorded an adjustment to reduce the restructuring reserve by $5,747 as a result
of a change in an accounting estimate relating primarily to the Company's
withdrawal from the Chinese joint venture, as the amount ultimately required to
exit the venture was less than the original estimate.
1999 MEMC Annual Report . 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999, the Company made certain reclassifications to the
components of its restructuring reserve. The reclassifications were principally
attributable to anticipated costs related to the closure of the Spartanburg,
South Carolina facility. In total, the Company believes the remaining
restructuring reserve is adequate for the estimated costs remaining to exit this
facility.
Restructuring activity since the provision for restructuring was recorded is as
follows:
<TABLE>
<CAPTION>
Balance at Balance at
December 31, Amount 1999 December 31,
1998 Adjustment Utilized Relcassification 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollars in thousands
Asset impairment/write-off:
Spartanburg property,
plant and equipment $ -- $ -- $ -- $ -- $ --
Malaysian joint venture assets 2,805 -- 2,275 -- 530
Chinese joint venture assets 4,158 (5,747) (1,949) -- 360
Other infrastructure -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total 6,963 (5,747) 326 -- 890
- ---------------------------------------------------------------------------------------------------------------------
Dismantling and related costs:
Dismantling costs 10,306 -- 7,175 4,129 7,260
Costs incurred by
equipment supplier -- -- -- -- --
Environmental costs 3,489 -- 2,380 (709) 400
Operating leases 3,000 -- 416 (1,584) 1,000
Other 3,000 -- 136 -- 2,864
- ---------------------------------------------------------------------------------------------------------------------
Total 19,795 10,107 1,836 11,524
- ---------------------------------------------------------------------------------------------------------------------
Personnel costs 10,541 -- 8,280 (1,836) 425
- ---------------------------------------------------------------------------------------------------------------------
Total restructuring costs $37,299 $(5,747) $18,713 $ -- $12,839
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Balance at
Initial Amount December 31,
Provision Utilized 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
Asset impairment/write-off:
Spartanburg property, plant and equipment $ 36,300 $36,300 $ --
Malaysian joint venture assets 28,000 25,195 2,805
Chinese joint venture assets 13,800 9,642 4,158
Other infrastructure 3,225 3,225 --
- -----------------------------------------------------------------------------------------------
Total 81,325 74,362 6,963
- -----------------------------------------------------------------------------------------------
Dismantling and related costs:
Dismantling costs 11,345 1,039 10,306
Costs incurred by equipment supplier 5,000 5,000 --
Environmental costs 3,500 11 3,489
Operating leases 3,000 -- 3,000
Other 3,000 -- 3,000
- -----------------------------------------------------------------------------------------------
Total 25,845 6,050 19,795
- -----------------------------------------------------------------------------------------------
Personnel costs 14,500 3,959 10,541
- -----------------------------------------------------------------------------------------------
Total restructuring costs $121,670 $84,371 $37,299
- -----------------------------------------------------------------------------------------------
</TABLE>
28 . 1999 MEMC Annual Report
<PAGE>
In addition to the restructuring activities discussed above, in 1998 the Company
recorded a $24,654 charge for a voluntary severance program for approximately
600 hourly and salaried U.S. employees. Substantially all of this amount was
paid to participants as of December 31, 1998.
Of the $12,839 restructuring reserve at December 31, 1999, substantially all is
expected to be expended by 2000 year-end and relates primarily to remaining
dismantling costs associated with the Spartanburg facility.
6 . Inventories
- --------------------------------------------------------------------------------
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Dollars in thousands
Raw materials and supplies $49,537 $59,722
Goods in process 23,493 33,612
Finished goods 25,389 22,593
- --------------------------------------------------------------------------------
$98,419 $115,927
- --------------------------------------------------------------------------------
</TABLE>
7 . Property, Plant and Equipment
- --------------------------------------------------------------------------------
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Dollars in thousands
Land and land improvements $ 14,529 $ 14,404
Buildings and building improvements 507,340 484,820
Machinery and equipment 1,151,196 1,110,195
- --------------------------------------------------------------------------------
1,673,065 1,609,419
Less accumulated depreciation 703,252 569,327
- --------------------------------------------------------------------------------
969,813 1,040,092
Construction in progress 120,545 148,740
- --------------------------------------------------------------------------------
$1,090,358 $1,188,832
- --------------------------------------------------------------------------------
</TABLE>
8 . Investments in Joint Ventures
The Company has a 40% interest in POSCO Huls Co. Ltd. (PHC), a company formed to
manufacture and sell silicon wafers in South Korea, and a 45% interest in Taisil
Electronic Materials Corporation (Taisil), a company formed to manufacture and
sell silicon wafers in Taiwan.
During 1999, 1998 and 1997, the Company earned $6,112, $4,628 and $8,186,
respectively, from these unconsolidated joint ventures under royalty agreements.
Sales by these unconsolidated joint ventures of intermediate and finished
product to the Company totaled $37,927, $34,479 and $32,313 in 1999, 1998 and
1997, respectively.
The Company provides Taisil with debt guarantees totaling $61,336. At December
31, 1999, Taisil had $49,100 in standby letters of credit and borrowings
outstanding against these guarantees.
1999 MEMC Annual Report . 29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the results of operations for 1999, 1998 and 1997, and financial
position as of December 31, 1999 and 1998 of the Company's unconsolidated joint
ventures follows:
<TABLE>
<CAPTION>
December 31, 1999 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
Total:
Net sales $252,402 $ 179,643 $277,492
Gross margin 20,273 (33,668) 54,120
Net earnings (loss) (22,724) (101,596) 15,274
- -----------------------------------------------------------------
The Company's share--
Net earnings (loss) $ (9,659) $ (43,496) $ 5,480
- -----------------------------------------------------------------
Current assets $167,843 $ 169,532
Noncurrent assets 423,390 488,634
- -----------------------------------------------------------------
Total assets 591,233 658,166
- -----------------------------------------------------------------
Current liabilities 162,470 165,157
Noncurrent liabilities 194,356 266,352
- -----------------------------------------------------------------
Total liabilities 356,826 431,509
Interests of others 137,153 132,047
- -----------------------------------------------------------------
The Company's investments $ 97,254 $ 94,610
- -----------------------------------------------------------------
</TABLE>
The Company's share of the accumulated deficit of unconsolidated joint ventures
was approximately $35,940 and $27,406 at December 31, 1999 and 1998,
respectively.
The Company's unconsolidated joint ventures have net sales denominated in or
based on the U.S. Dollar and manufacturing expenses primarily denominated in the
U.S. Dollar, Korean Won and New Taiwanese Dollar. PHC also has significant debt
denominated in the U.S. Dollar and Korean Won. Likewise, Taisil has significant
debt denominated in the U.S. Dollar and New Taiwanese Dollar. PHC and Taisil use
the U.S. Dollar as their functional currency for U.S. GAAP purposes and do not
hedge net Korean Won or New Taiwanese Dollar exposures.
9 . Short-Term Borrowing Agreements and Lines of Credit
- --------------------------------------------------------------------------------
Interest expense related to short-term borrowings with an affiliate was $4,195
and $1,667 in 1998 and 1997, respectively.
The Company has unsecured borrowings from banks of approximately $6,000 at
December 31, 1999, under approximately $57,000 of short-term loan agreements
which bear interest at various rates ranging from 0.3% to 1.5% and are renewable
annually. The interest rate on the borrowings is negotiated at the time of the
borrowings.
Commitment fees of 1/4 of 1% are paid on the unused portion of the committed
lines of credit. The Company's weighted average interest rate on short-term
borrowings was 0.7% and 3.3% at December 31, 1999 and 1998, respectively, and
was favorably impacted by interest rates in Japan.
30 . 1999 MEMC Annual Report
<PAGE>
10 . Long-Term Debt
- --------------------------------------------------------------------------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Dollars in thousands
Owed to affiliates:
Notes with interest payable semiannually at rates ranging from
3.5% to 11.0%, due in 2001 $329,310 $342,230
Notes with interest payable semiannually at rates ranging from
5.3% to 9.7%, due in 2002 109,770 108,610
Notes with interest payable semiannually at rates ranging from
8.7% to 8.8%, due in 2003 90,000 90,000
Notes with interest payable semiannually at rates ranging from
8.8% to 9.7%, due in 2004 125,000 125,000
Notes with interest payable semiannually at 9.6%, due in 2005 75,000 75,000
- ------------------------------------------------------------------------------------------
Total owed to affiliates 729,080 740,840
- ------------------------------------------------------------------------------------------
Owed to nonaffiliates:
Notes with interest payable semiannually at rates ranging from
1.7% to 2.2%, due in 2001 19,540 17,220
Notes with interest payable semiannually at rates ranging from
1.6% to 1.7%, due in 2002 48,850 43,050
Notes with interest payable semiannually at rates ranging
from 1.5% to 8.9%, due in 2000 through 2017 88,626 72,570
- ------------------------------------------------------------------------------------------
Total owed to nonaffiliates 157,016 132,840
- ------------------------------------------------------------------------------------------
Total long-term debt 886,096 873,680
Less current portion 16,337 2,517
- ------------------------------------------------------------------------------------------
$869,759 $871,163
- ------------------------------------------------------------------------------------------
</TABLE>
The Company has long-term committed loan agreements of approximately $956,000 at
December 31, 1999, of which approximately $886,000 is outstanding. Commitment
fees of 1/4 of 1% are paid on the unused portion of committed loan agreements.
The Company has approximately $70,000 of available long-term loan agreements
with affiliates at December 31, 1999. Under the terms of certain of these long-
term loan agreements owed to affiliates, the Company cannot pledge any of its
assets to secure additional financing.
Interest expense related to long-term notes payable to affiliates was $63,260,
$43,567 and $25,633 in 1999, 1998 and 1997, respectively.
The aggregate amounts of long-term debt maturing subsequent to December 31, 1999
are as follows:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Dollars in thousands
2000 $ 16,337
2001 373,186
2002 138,765
2003 97,245
2004 131,998
Thereafter 128,565
- --------------------------------------------------------------------------------
$886,096
- --------------------------------------------------------------------------------
</TABLE>
1999 MEMC Annual Report . 31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 1996, the Company entered into a financing arrangement with the City
of O'Fallon, Missouri related to the expansion of the Company's St. Peters
facility. In total, approximately $252,000 of industrial revenue bonds were
issued to the Company by the City of O'Fallon, of which at December 31, 1999 and
1998, $191,000 and $215,000 was outstanding, respectively.
The bonds were exchanged by the City of O'Fallon for the assets related to the
expansion, which were then leased by the Company for a period of 10 years for
machinery and equipment and 15 years for building and building improvements. The
Company has the option to purchase the machinery and equipment at the end of
five years and the building and building improvements at the end of 10 years.
The industrial revenue bonds bear interest at a rate of 6% per annum and mature
concurrent with the annual payments due under the terms of the lease.
The Company has classified the leased assets as property, plant and equipment
and has established a capital lease obligation equal to the outstanding
principal balance of industrial revenue bonds. Lease payments may be made by
tendering an equivalent portion of the industrial revenue bonds. As the capital
lease payments to the City of O'Fallon may be satisfied by tendering industrial
revenue bonds (which is the Company's intention), the capital lease obligation,
industrial revenue bonds and related interest expense and interest income,
respectively, have been offset for presentation purposes in the consolidated
financial statements.
11 . Stockholders' Equity
- --------------------------------------------------------------------------------
Preferred Stock
The Company has 50,000,000 authorized shares of $.01 par value preferred stock.
The Board of Directors is authorized, without further action by the
stockholders, to issue any or all of the preferred stock.
Common Stock
Holders of the $.01 par value common stock are entitled to one vote for each
share held on all matters submitted to a vote of the stockholders. Subject to
the rights of any holders of preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors. In the event of liquidation, dissolution or winding up of the
Company, holders of the common stock are entitled to share ratably in the
distribution of all assets remaining after payment of liabilities, subject to
the rights of any holders of preferred stock.
The Company does not anticipate paying dividends in the foreseeable future. The
declaration and payment of future dividends by the Company, if any, will be at
the sole discretion of the Board of Directors.
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.
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
under revolving credit agreements and the balance was used for general corporate
purposes. VEBA now owns 71.8% of the outstanding shares of common stock
following the private placement and rights offering.
Stock-Based Compensation
The Company has an Equity Incentive Plan (the Plan) that provides for the award
of incentive and non-qualified stock options, restricted stock and performance
shares. Total shares authorized for grant under the Plan are 3,597,045. Non-
qualified stock options to employees are typically granted on January 1 and vest
at a rate of 25% annually over four years. Non-qualified stock options to non-
employee directors are also typically granted on January 1 but vest at a rate of
33 1/3% annually over three years. The exercise price of each option equals the
market price of the Company's common stock on the date of the grant, and each
option's maximum term is 10 years. Total restricted shares awarded in 1997 were
1,300, with a weighted average fair value of $22.50. In 1999, restricted shares
totaling 21,692 expired. Total compensation cost recognized for these awards in
1999, 1998 and 1997 was $(601), $170 and $596, respectively.
32 . 1999 MEMC Annual Report
<PAGE>
The Company applies Opinion 25 and related Interpretations in accounting for
the Plan. Accordingly, no compensation cost has been recognized for non-
qualified stock options granted under the Plan. Had compensation cost been
determined for the Company's non-qualified stock options based on the fair value
at the grant dates consistent with the alternative method set forth under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company would have reported the following amounts indicated
below:
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands, except share data
Net loss:
As reported $(151,481) $(316,332) $(4,513)
Pro forma (154,149) (319,627) (6,551)
Basic loss per common share:
As reported (2.43) (7.80) (0.11)
Pro forma (2.48) (7.88) (0.16)
Diluted loss per common share:
As reported (2.43) (7.80) (0.11)
Pro forma (2.48) (7.88) (0.16)
- -------------------------------------------------------------------------------
</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 1999, 1998 and 1997, respectively: risk-free
interest rate of 4.8%, 5.7% and 6.1%; expected life of six years for all
periods; expected volatility of 57.6%, 51.4% and 44.8%; expected dividends of
zero percent for all periods.
A summary of the Company's Plan activity with respect to stock options is
presented below:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average Fair Value
Shares Option Price of Options Granted
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1999
Outstanding at beginning of year 1,773,174 $20.11
Granted 687,700 8.68 $5.10
Exercised (21,200) 15.12
Canceled (113,930) 23.53
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,325,744 $16.61
- -------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 1,396,428 $19.75
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
Outstanding at beginning of year 1,024,292 $24.92
Granted 887,300 15.06 $ 8.40
Exercised -- --
Canceled (138,418) 23.31
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,773,174 $20.11
- -------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 894,065 $22.99
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
Outstanding at beginning of year 965,838 $25.32
Granted 177,352 22.56 $11.94
Exercised (12,298) 27.23
Canceled (106,600) 24.36
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,024,292 $24.92
- -------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 516,674 $24.77
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
1999 MEMC Annual Report . 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of information about non-qualified stock options outstanding at
December 31, 1999 is presented below:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------------------
Number Weighted-Average Weighted-
Range of Outstanding at Remaining Average
Exercise Prices December 31, 1999 Contractual Life Exercise Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$24.00 519,694 5.5 years $24.00
$32.63-49.50 117,900 6.0 years 33.07
$22.50-29.00 157,750 7.0 years 22.57
$3.13-15.25 847,100 8.0 years 15.06
$6.00-19.06 683,300 9.0 years 8.68
- ----------------------------------------------------------------------------------------------
$3.13-49.50 2,325,744 7.6 years $16.61
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Exercisable Options Outstanding
---------------------------------------------
Range of Number Exercisable at Weighted-Average
Exercise Prices December 31, 1999 Exercise Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
$24.00 519,694 $24.00
$32.63-49.50 106,800 33.05
$22.50-29.00 129,367 22.56
$3.13-15.25 482,567 15.15
$6.00-19.06 158,000 8.50
- ----------------------------------------------------------------------------------------------
$3.13-49.50 1,396,428 $19.75
- ----------------------------------------------------------------------------------------------
</TABLE>
12 . Loss Per Share
- --------------------------------------------------------------------------------
A reconciliation of the numerator and denominator of the loss per share
calculations is provided for all periods presented. The numerator for basic and
diluted loss per share is net loss for all periods presented. The denominator
for basic and diluted loss per share for 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average shares used for
basic loss per share 62,224,869 40,580,869 41,345,193
Effect of dilutive securities:
Restricted stock -- -- --
Stock options -- -- --
- --------------------------------------------------------------------------------
Weighted-average shares used for
diluted loss per share 62,224,869 40,580,869 41,345,193
- --------------------------------------------------------------------------------
</TABLE>
Options outstanding for all periods were not included in the computation of
diluted loss per share for all years, because they were antidilutive.
In January 2000, the Company granted options to purchase 580,200 shares of
common stock at $12.25 to $16.19 per share. These options will expire in January
2010.
34 . 1999 MEMC Annual Report
<PAGE>
13 . Income Taxes
Earnings (loss) before income taxes, equity in income (loss) of joint ventures
and minority interests are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
U.S. $(213,138) $(349,573) $(59,702)
Foreign 490 (23,642) 49,372
- -------------------------------------------------------------------------------------------------------------
$(212,648) $(373,215) $(10,330)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Income tax (benefit) expense consists of the following:
<TABLE>
<CAPTION>
Current Deferred Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
Year ended December 31, 1999:
U.S. federal $ 570 $ (70,156) $ (69,586)
State and local 914 895 1,809
Foreign 2,152 (296) 1,856
- -------------------------------------------------------------------------------------------------------------
$ 3,636 $ (69,557) $ (65,921)
- -------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
U.S. federal $ 1,524 $(103,435) $(101,911)
State and local 2,207 (4,534) (2,327)
Foreign 4,790 10,054 14,844
- -------------------------------------------------------------------------------------------------------------
$ 8,521 $ (97,915) $ (89,394)
- -------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
U.S. federal $(5,764) $ (18,712) $ (24,476)
State and local (924) (398) (1,322)
Foreign 25,766 2,801 28,567
- -------------------------------------------------------------------------------------------------------------
$19,078 $ (16,309) $ 2,769
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Income tax (benefit) expense differed from the amounts computed by applying the
U.S. federal income tax rate of 35% in 1999, 1998 and 1997 to loss before income
taxes, equity in income (loss) of joint ventures and minority interests as a
result of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollars in thousands
Income tax at federal statutory rate $(74,427) $(130,625) $(3,616)
Increase (reduction) in income taxes
resulting from:
Change in the balance of the valuation
allowance for deferred tax assets
allocated to income tax expense (1,622) 19,386 (4,738)
Foreign tax differences 5,976 15,310 13,511
State income taxes, net
of federal benefit 1,176 (1,513) (859)
Investment incentives (660) (600) (916)
Malaysian joint venture charges -- 5,552 --
Other, net 3,636 3,096 (613)
- --------------------------------------------------------------------------------------------------------------
$(65,921) $(89,394) $ 2,769
- --------------------------------------------------------------------------------------------------------------
</TABLE>
1999 MEMC Annual Report . 35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------
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 $ 6,718 $ 7,427
Accruals for expenses currently not deductible for tax purposes 38,945 40,936
Pension, medical and other employee benefits, principally due
to accrual for financial reporting purposes 36,728 37,433
Net operating loss carryforwards 252,450 160,640
Investment tax credit carryforwards 1,456 1,456
Alternative minimum tax credit carryforwards 3,760 3,427
Other 1,557 1,151
- -----------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 341,614 252,470
Less valuation allowance (49,168) (42,166)
- -----------------------------------------------------------------------------------------------------------
Net deferred tax assets 292,446 210,304
- -----------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment, principally due to differences
in depreciation and capitalized interest (89,129) (80,505)
Other (6,510) (2,020)
- -----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (95,639) (82,525)
- -----------------------------------------------------------------------------------------------------------
Net deferred tax assets $196,807 $127,779
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Net deferred tax assets were classified in the consolidated balance sheets
as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C>
Current deferred tax assets, net $ 12,905 $ 23,129
Noncurrent deferred tax assets, net 183,902 104,650
- -----------------------------------------------------------------------------------------------------------
$196,807 $127,779
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Company's net deferred tax assets increased $69 million to $196.8 million at
December 31, 1999. Management believes it is more likely than not that with its
projections of future taxable income and after consideration of the valuation
allowance, the Company will generate sufficient taxable income to realize the
benefits of the net deferred tax assets existing at December 31, 1999. In order
to realize the net deferred tax assets existing at December 31, 1999, the
Company will need to generate future taxable income of approximately $549
million. The Company's net operating loss (NOL) carryforwards total $647
million, of which $7 million will expire in
36 . 1999 MEMC Annual Report
<PAGE>
2001; $13 million will expire in 2002; $29 million will expire in 2003; $9
million will expire in 2004; $14 million will expire in 2012; $322 million will
expire in 2018 and $253 million will expire in 2019. There can be no assurance,
however, that the Company will generate sufficient taxable income to realize the
full benefit of the existing net deferred tax assets. The Company also has AMT
credit carryforwards available of $3,760 and net investment tax credit
carryforwards available of $1,456. Utilization of $7,220 of loss carryforwards
and all the investment tax credit carryforwards are subject to limitation under
Internal Revenue Code Sections 382 and 383, respectively. Pursuant to these
Internal Revenue Code Sections, the amount of combined loss and tax credit
carryforwards that may be utilized is limited to approximately $2,000 per year.
Under Internal Revenue Service regulations, the investment tax credit
carryforwards are not permitted to reduce income tax expense until the year
2000.
14 . Pension Plans and Other Retirement Benefits
- --------------------------------------------------------------------------------
The Company has a noncontributory defined benefit plan covering most U.S.
employees. Benefits for this plan are based on years of service and qualifying
compensation during the final years of employment. The Company complies with
federal funding requirements.
The Company also has a nonqualified plan under the Employee Retirement Income
Security Act of 1974, which provides benefits not otherwise payable under the
above plan due to Internal Revenue Code restrictions. Eligibility for
participation in this plan requires coverage under the above plan and other
specific circumstances.
In addition, the Company sponsors a health care plan that provides
postretirement medical benefits to full-time U.S. employees who meet minimum age
and service requirements. The plan is contributory, with retiree contributions
adjusted annually, and contains other cost-sharing features such as deductibles
and coinsurance. The Company's policy is to fund the cost of medical benefits in
amounts determined at the discretion of management.
In 1998, the Company changed the measurement date for the defined benefit plans
from December 31 to September 30 to improve administrative efficiencies and the
timeliness and accuracy of its financial reporting and planning process. The
effect on retirement plan expense was not material to the consolidated financial
statements.
Net periodic pension cost consists of the following:
<TABLE>
<CAPTION>
Pension Plans Health Care Plan
----------------------------------------------------------------------
Year ended December 31, 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dollars in thousands
Service cost $ 7,807 $ 8,134 $ 8,178 $1,435 $ 1,791 $2,441
Interest cost 8,769 9,128 7,937 3,333 2,995 3,468
Expected return on plan assets (6,523) (7,219) (6,189) -- -- --
Amortization of service costs 393 501 576 (707) (1,010) (206)
Net actuarial loss/(gain) 770 818 562 54 47 (76)
Curtailment (gain) recognized 428 4,381 -- -- (148) --
Cost of special termination benefits -- -- 1,067 -- 1,023 --
- --------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $11,644 $15,743 $12,131 $4,115 $ 4,698 $5,627
- --------------------------------------------------------------------------------------------------------------
</TABLE>
1999 MEMC Annual Report . 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the change in benefit obligation, change in plan assets
and funded status of the Company's plans:
<TABLE>
<CAPTION>
Pension Plans Health Care Plan
--------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dollars in thousands
Change in benefit obligation:
Benefit obligation at January 1 $137,475 $134,408 $ 52,573 $ 38,751
Service cost 7,820 6,235 1,435 1,407
Interest cost 8,769 6,919 3,333 2,128
Amendments 559 140 -- --
Actuarial (gain)/loss (15,451) 6,123 (8,182) 3,899
Benefits paid (11,791) (18,494) (2,037) (773)
Curtailments 428 2,144 -- 6,138
Special termination benefits -- -- -- 1,023
- -------------------------------------------------------------------------------------------------------
Benefit obligation at December 31 127,809 137,475 47,122 52,573
- -------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1 85,112 94,707 -- --
Actual return on plan assets 11,682 6,744 -- --
Employer contributions 9,482 2,155 2,037 773
Benefits paid (11,791) (18,494) (2,037) (773)
- -------------------------------------------------------------------------------------------------------
Fair value of plan assets
at December 31 94,485 85,112 -- --
- -------------------------------------------------------------------------------------------------------
Funded status (33,324) (52,363) (47,122) (52,573)
Unrecognized prior service cost 4,891 4,726 (7,787) (8,495)
Unrecognized net actuarial (gain)/loss (783) 20,511 (5,386) 2,596
Fourth quarter contribution 110 801 -- --
- -------------------------------------------------------------------------------------------------------
Accrued benefit cost $(29,106) $(26,325) $(60,295) $(58,472)
- -------------------------------------------------------------------------------------------------------
Amounts recognized in statement
of financial position:
Accrued benefit liability $(32,354) $(31,396) $(60,295) $(58,472)
Fourth quarter contribution 110 801 -- --
Intangible asset 584 109 -- --
Accumulated other
comprehensive income 2,554 4,161 -- --
- -------------------------------------------------------------------------------------------------------
Accrued pension expense $(29,106) $(26,325) $(60,295) $(58,472)
- -------------------------------------------------------------------------------------------------------
</TABLE>
Pension plan assets consist principally of insurance contracts, marketable
securities including common stocks, bonds and interest-bearing deposits.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $8,184, $6,478 and $601, respectively, as of December 31,
1999, and $137,475, $109,865 and $85,112, respectively, as of December 31, 1998.
The Company recognized the curtailments and the special termination benefits
related to the closure of the Spartanburg facility and the voluntary severance
program offered to employees during 1998.
38 . 1999 MEMC Annual Report
<PAGE>
The following is a table of the actuarial assumptions:
<TABLE>
<CAPTION>
Pension Plans Health Care Plan
----------------------------------------
Year ended December 31, 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted-average assumptions
as of December 31:
Discount rate 7.75% 6.75% 7.75% 6.75%
Expected return on plan assets 8.00% 8.00% N/A N/A
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
- ----------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 6% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually to 5.5% by the year 2001 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A one-percentage-point change in assumed health
care cost trend would have the following effects:
<TABLE>
<CAPTION>
One-Percentage- One-Percentage-
Point Increase Point Decrease
- -------------------------------------------------------------------------------
<S> <C> <C>
Dollars in thousands
Effect on total service and
interest cost components $ 49 $ (48)
Effect on postretirement
benefit obligation $170 $(167)
- -------------------------------------------------------------------------------
</TABLE>
The Company has pension plans for its foreign subsidiaries. The aggregate
pension expense and liability are not material to the consolidated financial
statements.
15 . Retirement Savings Plan
- --------------------------------------------------------------------------------
The Company sponsors a defined contribution plan under Section 401(k) of the
Internal Revenue Code covering all U.S. salaried and hourly employees with more
than one year of service. Company contributions included in results of
operations totaled $3,618, $4,012 and $4,138 for 1999, 1998 and 1997,
respectively.
16 . Commitments and Contingencies
- --------------------------------------------------------------------------------
The Company leases buildings, equipment and automobiles under operating leases.
Rental expense under these leases was $24,062, $28,733 and $23,789 in 1999, 1998
and 1997, respectively. Minimum aggregate future rental obligations under leases
having remaining terms of one year or more at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------
Dollars in thousands
<S> <C>
2000 $17,726
2001 7,859
2002 2,214
2003 95
2004 16
Thereafter --
- ------------------------------------------------
$27,910
- ------------------------------------------------
</TABLE>
1999 MEMC Annual Report . 39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17 . Geographic Segments
- --------------------------------------------------------------------------------
The Company is engaged in one reportable segmentNthe design, manufacture and
sale of electronic grade silicon wafers for the semiconductor industry.
Geographic financial information is as follows:
<TABLE>
<CAPTION>
Other
United Foreign
States Japan Italy Countries Total
- ------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C> <C> <C>
Net sales to customers:
1999 $359,020 $ 89,281 $ 21,815 $223,478 $ 693,594
1998 389,721 119,138 30,855 219,202 758,916
1997 497,601 153,897 25,784 309,391 986,673
- ------------------------------------------------------------------------------
Long-lived assets:
1999 $824,977 $229,349 $101,739 $108,694 $1,264,759
1998 901,940 221,701 131,436 114,849 1,369,926
1997 976,032 136,567 135,588 153,790 1,401,977
- ------------------------------------------------------------------------------
</TABLE>
Net sales are attributed to countries based on location of customer. Investments
in joint ventures are presented based on the countries in which they are
located.
18 . Unaudited Quarterly Financial Information
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Dollars in thousands, except share data
Net sales $ 159,800 $ 168,043 $ 182,781 $ 182,970
Gross margin (13,816) (1,966) 4,922 525
Loss before equity in income (loss) of
joint ventures and minority interests (46,852) (36,228) (32,464) (31,183)
Equity in income (loss) of joint ventures (4,589) (3,891) (2,642) 1,463
Minority interests 1,187 807 1,389 1,522
Net loss (50,254) (39,312) (33,717) (28,198)
Basic loss per share (1.19) (.58) (.48) (.41)
Diluted loss per share (1.19) (.58) (.48) (.41)
Market price:
High 11 1/8 12 3/4 21 1/2 15 3/8
Low 5 1/2 5 3/4 10 3/4 10 1/8
</TABLE>
<TABLE>
<CAPTION>
1998
- --------------------------------------------------------------------------------------------------
Dollars in thousands, except share data
<S> <C> <C> <C> <C>
Net sales $ 235,243 $ 202,153 $ 167,685 $ 153,835
Gross margin 23,768 (3,812) (28,095) (23,690)
Loss before equity in loss of joint
ventures and minority interests (20,497) (143,705) (57,897) (61,722)
Equity in loss of joint ventures (11,621) (6,860) (12,860) (12,155)
Minority interests 1,280 1,920 5,807 1,978
Net loss (30,838) (148,645) (64,950) (71,899)
Basic loss per share (0.75) (3.67) (1.60) (1.78)
Diluted loss per share (0.75) (3.67) (1.60) (1.78)
Market price:
High 19 16 7/16 10 13/16 12 5/8
Low 14 1/2 9 1/4 2 15/16 2 15/16
- --------------------------------------------------------------------------------------------------
</TABLE>
40 . 1999 MEMC Annual Report
<PAGE>
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, 1999 and 1998, 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, 1999.
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
January 20, 2000
42 . 1999 MEMC Annual Report
<PAGE>
STOCKHOLDER INFORMATION
Corporate Office
MEMC Electronic Materials, Inc.
501 Pearl Drive (City of O'Fallon)
St. Peters, Missouri 63376
(636) 474-5000
Transfer Agent and Registrar
Harris Trust & Savings Bank
311 West Monroe, 11th Floor
P. O. Box 755
Chicago, Illinois 60690
(312) 360-5433
Annual Meeting
All stockholders are invited to attend the annual meeting of MEMC Electronic
Materials, Inc. at 10:00 a.m. central standard time on May 9, 2000, at the
Frontenac Hilton, 1335 S. Lindbergh Blvd., St. Louis, MO 63131. Holders of
common stock of record at the close of business on March 13, 2000, are entitled
to vote at the meeting. A notice of the meeting, proxy statement and proxy were
sent to stockholders with this Annual Report.
Stockholder Inquiries
Inquiries regarding address corrections, lost certificates, changes of
registration, stock certificate holdings and other stockholder account matters
should be directed to MEMC's transfer agent, Harris Trust & Savings Bank, at the
address or phone number above.
Common Stock Listing
MEMC's common stock is traded on the New York Stock Exchange under the symbol
OWFRO. On December 31, 1999, the last business day of the year, the Company had
660 stockholders of record.
Form 10-K
Stockholders may obtain a copy of MEMC's Annual Report on Form 10-K and related
financial statement schedules for the year ended December 31, 1999, filed with
the Securities and Exchange Commission, by writing MEMC's Investor Relations
Department or by calling (636) 474-5505.
Financial Information
MEMC maintains a home page on the Internet at www.memc.com where the Company
publishes information, including earnings releases, other news releases,
significant corporate disclosures and the names of securities analysts who issue
research on the Company.
Independent Auditors
KPMG LLP
10 South Broadway, Suite 900
St. Louis, Missouri 63102
Investor Relations
Stockholders, securities analysts, investment professionals and prospective
investors should direct their inquiries to:
MEMC Electronic Materials, Inc.
Investor Relations Department
501 Pearl Drive (City of O'Fallon)
St. Peters, Missouri 63376
Tel: (636) 474-5443
Fax: (636) 474-5158
E-mail: [email protected]
Manufacturing Facilities
Chonan, South Korea
Hsinchu, Taiwan
Kuala Lumpur, Malaysia
Merano, Italy
Novara, Italy
Pasadena, Texas
Sherman, Texas
St. Peters, Missouri
Utsunomiya, Japan
44 . 1999 MEMC Annual Report
<PAGE>
Exhibit 21
List of Subsidiaries
Subsidiary Jurisdiction of Incorporation
- ---------- -----------------------------
MEMC Japan, Ltd. Japan
MEMC Electronic Materials France SARL France
MEMC Electronic Materials GmbH Germany
MEMC Electronic Materials, S.p.A. Italy
MEMC Electronic Materials UK Ltd. United Kingdom
MEMC Electronic Materials, SDN BHD Malaysia
MEMC Electronic Materials Sales, SDN BHD Malaysia
MEMC Kulim Electronic Materials, SDN BHD Malaysia
F*: POSCO HULS Co., Ltd. South Korea
F*: Taisil Electronic Materials Corporation Taiwan
SiBond, L.L.C. Delaware
MEMC Southwest Inc. Delaware
MEMC Pasadena, Inc. Delaware
MEMC Foreign Sales Corp., Inc. Barbados
MEMC International, Inc. Delaware
PlasmaSil, L.L.C. Delaware
[FN]
- ---------------
F*: The inclusion of these entities on this Exhibit 21 does not constitute an
admission by the Company that the Company "controls" these entities for purposes
of the Federal Securities laws.
</FN>
Page 1
<PAGE>
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
reports dated January 20, 2000, relating to the consolidated balance sheets of
MEMC Electronic Materials, Inc. and subsidiaries as of December 31, 1999 and
1998, 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, 1999, and the related schedule, which reports appear in or are
incorporated therein in the December 31, 1999 annual report on Form 10-K of MEMC
Electronic Materials, Inc.
/s/ KPMG LLP
St. Louis, Missouri
March 28, 2000
Page 1
<PAGE>
EXHIBIT 23-B
Independent Auditors' Consent
To the Stockholders and Board of Directors
POSCO HULS Co., Ltd:
We consent to incorporation by reference in the registration statements (Nos.
33-96420 and 333-19159) on Form S-8 of MEMC Electronic Materials, Inc. of our
report dated January 11, 1999, relating to the balance sheet of POSCO HULS Co.,
Ltd. as of December 31, 1998, and the related statements of operations,
appropriation (disposition) of retained earnings (accumulated deficit) and cash
flows for the years ended December 31, 1998 and 1997, which report appears in
the December 31, 1999 annual report on Form 10-K of MEMC Electronic Materials,
Inc.
/s/ KPMG San Tong Corp.
Seoul, Korea
March 28, 2000
Page 1
<PAGE>
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 February 9, 1999, relating to the balance sheet of Taisil
Electronic Materials Corporation as of December 31, 1998, and the related
statements of operations, changes in stockholders' equity, and cash flows for
the years ended December 31, 1998 and 1997, which report appears in the December
31, 1999 annual report on Form 10-K of MEMC Electronic Materials, Inc.
/s/ KPMG Certified Public Accountants
Taipei, Taiwan
March 28, 2000
Page 1
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Hans Michael Gaul, Director of MEMC Electronic Materials, Inc. (the
"Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze and Helene F. Hennelly, or either of them, my true and lawful attorney or
attorneys and agent or agents with full power of substitution and resubstitution
to sign in my name, place and stead the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, and documents and exhibits in
connection therewith, and to file the same with the Securities and Exchange
Commission, each of said attorneys to have power to act with or without the
other, and to have full power and authority to do and perform, in my name and on
my behalf and on the name and behalf of the Company every act whatsoever which
said attorneys, or any of them, may deem necessary, appropriate or desirable to
be done in connection therewith as fully and to all intents and purposes as I
might or could do in person or the Company might or could do by a properly
authorized agent.
Witness my hand this 28th day of March, 2000.
/s/ Hans Michael Gaul
------------------------------------
Hans Michael Gaul
Page 1
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Helmut Mamsch, Director of MEMC Electronic Materials, Inc. (the
"Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze and Helene F. Hennelly, or either of them, my true and lawful attorney or
attorneys and agent or agents with full power of substitution and resubstitution
to sign in my name, place and stead the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, and documents and exhibits in
connection therewith, and to file the same with the Securities and Exchange
Commission, each of said attorneys to have power to act with or without the
other, and to have full power and authority to do and perform, in my name and on
my behalf and on the name and behalf of the Company every act whatsoever which
said attorneys, or any of them, may deem necessary, appropriate or desirable to
be done in connection therewith as fully and to all intents and purposes as I
might or could do in person or the Company might or could do by a properly
authorized agent.
Witness my hand this 28th day of March, 2000.
/s/ Helmut Mamsch
------------------------------------
Helmut Mamsch
Page 1
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Willem D. Maris, Director of MEMC Electronic Materials, Inc. (the
"Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze and Helene F. Hennelly, or either of them, my true and lawful attorney or
attorneys and agent or agents with full power of substitution and resubstitution
to sign in my name, place and stead the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, and documents and exhibits in
connection therewith, and to file the same with the Securities and Exchange
Commission, each of said attorneys to have power to act with or without the
other, and to have full power and authority to do and perform, in my name and on
my behalf and on the name and behalf of the Company every act whatsoever which
said attorneys, or any of them, may deem necessary, appropriate or desirable to
be done in connection therewith as fully and to all intents and purposes as I
might or could do in person or the Company might or could do by a properly
authorized agent.
Witness my hand this 23rd day of March, 2000.
/s/ Willem D. Maris
------------------------------------
Willem D. Maris
Page 1
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Alfred Oberholz, Director of MEMC Electronic Materials, Inc. (the
"Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze and Helene F. Hennelly, or either of them, my true and lawful attorney or
attorneys and agent or agents with full power of substitution and resubstitution
to sign in my name, place and stead the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, and documents and exhibits in
connection therewith, and to file the same with the Securities and Exchange
Commission, each of said attorneys to have power to act with or without the
other, and to have full power and authority to do and perform, in my name and on
my behalf and on the name and behalf of the Company every act whatsoever which
said attorneys, or any of them, may deem necessary, appropriate or desirable to
be done in connection therewith as fully and to all intents and purposes as I
might or could do in person or the Company might or could do by a properly
authorized agent.
Witness my hand this 24th day of March, 2000.
/s/ Alfred Oberholz
------------------------------------
Alfred Oberholz
Page 1
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Paul T. O'Brien, Director of MEMC Electronic Materials, Inc. (the
"Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze and Helene F. Hennelly, or either of them, my true and lawful attorney or
attorneys and agent or agents with full power of substitution and resubstitution
to sign in my name, place and stead the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, and documents and exhibits in
connection therewith, and to file the same with the Securities and Exchange
Commission, each of said attorneys to have power to act with or without the
other, and to have full power and authority to do and perform, in my name and on
my behalf and on the name and behalf of the Company every act whatsoever which
said attorneys, or any of them, may deem necessary, appropriate or desirable to
be done in connection therewith as fully and to all intents and purposes as I
might or could do in person or the Company might or could do by a properly
authorized agent.
Witness my hand this 22nd day of March, 2000.
/s/ Paul T. O'Brien
------------------------------------
Paul T. O'Brien
Page 1
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, Michael B. Smith, Director of MEMC Electronic Materials, Inc. (the
"Company"), a Delaware corporation, hereby constitute and appoint James M.
Stolze and Helene F. Hennelly, or either of them, my true and lawful attorney or
attorneys and agent or agents with full power of substitution and resubstitution
to sign in my name, place and stead the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, and documents and exhibits in
connection therewith, and to file the same with the Securities and Exchange
Commission, each of said attorneys to have power to act with or without the
other, and to have full power and authority to do and perform, in my name and on
my behalf and on the name and behalf of the Company every act whatsoever which
said attorneys, or any of them, may deem necessary, appropriate or desirable to
be done in connection therewith as fully and to all intents and purposes as I
might or could do in person or the Company might or could do by a properly
authorized agent.
Witness my hand this 22nd day of March, 2000.
/s/ Michael B. Smith
------------------------------------
Michael B. Smith
Page 1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>This schedule contains summary financial information extracted from the
consolidated balance sheet as of December 31, 1999 and the consolidated
statement of operations for the year ended December 31, 1999, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 28,571
<SECURITIES> 0
<RECEIVABLES> 113,968
<ALLOWANCES> 2,409
<INVENTORY> 98,419
<CURRENT-ASSETS> 275,920
<PP&E> 1,793,610
<DEPRECIATION> 703,252
<TOTAL-ASSETS> 1,724,581
<CURRENT-LIABILITIES> 189,614
<BONDS> 869,759
0
0
<COMMON> 705
<OTHER-SE> 432,086
<TOTAL-LIABILITY-AND-EQUITY> 1,724,581
<SALES> 693,594
<TOTAL-REVENUES> 693,594
<CGS> 703,929
<TOTAL-COSTS> 703,929
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,054
<INCOME-PRETAX> (212,648)
<INCOME-TAX> (65,921)
<INCOME-CONTINUING> (151,481)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (151,481)
<EPS-BASIC> (2.43)
<EPS-DILUTED> (2.43)
</TABLE>
