UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 1-13828
MEMC ELECTRONIC MATERIALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-1505767
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
501 Pearl Drive (City of O'Fallon) St. Peters, Missouri 63376
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 279-5500
--------------
(Registrant's telephone number, including area code)
-----------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
The number of shares of the registrant's common stock outstanding at April 16,
1999 was 69,534,792.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; Dollars in thousands, except share data)
Three Months Ended
March 31,
1999 1998
---------- ----------
Net sales $ 159,800 $ 235,243
Costs of goods sold 173,616 211,475
---------- ----------
Gross margin (13,816) 23,768
Operating expenses:
Marketing and administration 16,879 18,430
Research and development 20,857 20,103
Restructuring costs - 8,026
---------- ----------
Operating loss (51,552) (22,791)
Nonoperating (income) expense:
Interest expense 17,459 8,278
Interest income (442) (503)
Royalty income (1,225) (1,101)
Other, net 557 1,591
---------- ----------
Total nonoperating expense 16,349 8,265
---------- ----------
Loss before income taxes, equity in
loss of joint ventures and minority interests (67,901) (31,056)
Income taxes (21,049) (10,559)
---------- ----------
Loss before equity in loss of joint
ventures and minority interests (46,852) (20,497)
Equity in loss of joint ventures (4,589) (11,621)
Minority interests 1,187 1,280
---------- ----------
Net loss $ (50,254) $ (30,838)
========== ==========
Basic loss per share $ (1.19) $ (0.75)
========== ==========
Diluted loss per share $ (1.19) $ (0.75)
========== ==========
Weighted average shares used in computing
basic loss per share 42,196,538 40,898,246
========== ==========
Weighted average shares used in computing
diluted loss per share 42,196,538 40,898,246
========== ==========
See accompanying notes to consolidated financial statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data) (Unaudited)
March 31, December 31,
1999 1998
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 15,985 $ 16,168
Accounts receivable, less allowance for doubtful accounts
$2,725 and $2,853 in 1999 and 1998, respectively 93,182 98,528
Income taxes receivable 7,379 10,161
Inventories 111,096 115,927
Deferred tax assets, net 20,046 23,129
Prepaid and other current assets 16,135 35,225
----------- -----------
Total current assets 263,823 299,138
Property, plant and equipment, net of accumulated depreciation of
$593,865 and $569,327 in 1999 and 1998, respectively 1,145,679 1,188,832
Investments in joint ventures 102,074 94,610
Excess of cost over net assets acquired, net of accumulated amortization of
$5,471 and $5,128 in 1999 and 1998, respectively 48,052 48,396
Deferred tax asset, net 131,236 104,650
Other assets 36,148 38,088
----------- -----------
Total assets $ 1,727,012 $ 1,773,714
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 18,523 $ 38,644
Accounts payable 83,091 112,581
Accrued liabilities 29,734 35,404
Customer deposits 19,474 17,639
Provision for restructuring costs 32,980 37,299
Accrued wages and salaries 22,823 17,077
----------- -----------
Total current liabilities 206,625 258,644
Long-term debt, less current portion 834,692 871,163
Pension and similar liabilities 93,566 92,466
Customer deposits 55,538 59,033
Other liabilities 43,520 45,126
------------ -----------
Total liabilities 1,233,941 1,326,432
------------ -----------
Minority interests 47,055 48,242
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 shares authorized,
none issued or outstanding at 1999 or 1998 - -
Common stock, $.01 par value, 200,000,000 shares authorized,
56,835,551 and 41,436,421 issued in 1999 and 1998, respectively 568 414
Additional paid-in capital 679,884 574,188
Accumulated deficit (198,090) (147,836)
Accumulated other comprehensive loss (19,201) (10,581)
Unearned restricted stock awards (125) (125)
Treasury stock, at cost: 929,205 in 1999 and 1998 (17,020) (17,020)
------------ -----------
Total stockholders' equity 446,016 399,040
------------ -----------
Total liabilities and stockholders' equity $ 1,727,012 $ 1,773,714
============ ===========
See accompanying notes to consolidated financial statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)
Three Months Ended
March 31,
1999 1998
---------- ----------
Cash flows from operating activities:
Net loss $ (50,254) $ (30,838)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 40,824 38,448
Minority interests (1,187) (1,280)
Equity in loss of joint ventures 4,589 11,621
Working capital and other (37,543) (32,634)
---------- ----------
Net cash used in operating activities (43,571) (14,683)
---------- ----------
Cash flows from investing activities:
Capital expenditures (7,361) (49,330)
Proceeds from sale of property, plant and equipment 110 2,916
Equity infusions in joint ventures (12,052) (11,747)
Notes receivable from affiliates 9,290 -
Dividend received from unconsolidated joint venture - 550
---------- ----------
Net cash used in investing activities (10,013) (57,611)
---------- ----------
Cash flows from financing activities:
Net short-term borrowings (19,408) (13,778)
Proceeds from issuance of long-term debt 8,547 89,100
Principal payments on long-term debt (41,400) (495)
Repurchase of common stock - (15,692)
Proceeds from issuance of common stock 105,850 -
---------- ----------
Net cash provided by financing activities 53,589 59,135
---------- ----------
Effect of exchange rates on cash and cash equivalents (188) 84
---------- ----------
Net decrease in cash (183) (13,075)
Cash and cash equivalents at beginning of year 16,168 30,053
---------- ----------
Cash and cash equivalents at end of year $ 15,985 $ 16,978
========== ==========
See accompanying notes to consolidated financial statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Dollars in thousands, except share data)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of MEMC Electronic
Materials, Inc. and Subsidiaries (the Company), in the opinion of management,
include all adjustments (consisting of normal, recurring items) necessary to
present fairly the Company's financial position and results of operations and
cash flows for the periods presented. The consolidated financial statements are
presented in accordance with the requirements of Regulation S-X and consequently
do not include all disclosures required by generally accepted accounting
principles. This report on Form 10-Q, including unaudited consolidated financial
statements, should be read in conjunction with the Company's annual report to
shareholders for the fiscal year ended December 31, 1998, which contains the
Company's audited financial statements for such year and the related
management's discussion and analysis of financial condition and results of
operations. Operating results for the three-month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
(2) Earnings (loss) per share
The numerator for basic and diluted loss per share calculations is net loss for
all periods presented. The denominator for the basic and diluted loss per share
calculations for the three-month periods ended March 31, 1999 and 1998 is the
same within each period (the weighted average shares outstanding for each
respective period). Options outstanding at March 31, 1999, 2,426,824, were not
included in the computation of diluted loss per share due to the net loss
incurred during the three-month period ended March 31, 1999.
(3) Inventories
Inventories consist of the following:
March 31, December 31,
1999 1998
---------- ---------
Raw materials and supplies $ 53,837 $ 59,722
Goods in process 29,933 33,612
Finished goods 27,326 22,593
--------- ---------
$ 111,096 $ 115,927
========= =========
(4) Restructuring Costs
During 1998, the Company recorded a charge to operations of $121,670 related to
the decisions to close its small diameter wafer facility in Spartanburg, South
Carolina, withdraw from its 60%-owned joint venture in a small diameter wafer
operation in China and to forego construction of a new 200 millimeter wafer
facility at its 75%-owned joint venture in Malaysia. Restructuring activity
since the provision for restructuring costs was recorded is as follows:
Provision Amount Balance Balance
Utilized March 31, December 31,
1999 1998
---------- --------- --------- ---------
Asset impairment/Write-off:
Spartanburg property, plant
and equipment $ 36,300 $ 36,300 $ - $ -
Malaysian joint venture assets 28,000 25,247 2,753 2,805
Chinese joint venture assets 13,800 9,653 4,147 4,158
Other infrastructure 3,225 3,225 - -
--------- --------- --------- ---------
Total 81,325 74,425 6,900 6,963
--------- --------- --------- ---------
Dismantling and related costs:
Dismantling costs 11,345 1,148 10,197 10,306
Costs incurred by
equipment suppliers 5,000 5,000 - -
Environmental costs 3,500 85 3,415 3,489
Operating leases 3,000 - 3,000 3,000
Other 3,000 6 2,994 3,000
--------- --------- --------- ---------
Total 25,845 6,239 19,606 19,795
--------- --------- --------- ---------
Personnel Costs 14,500 8,026 6,474 10,541
--------- --------- --------- ---------
Total Restructuring Costs $ 121,670 $ 88,690 $ 32,980 $ 37,299
========= ========= ========= =========
Substantially all of the $32,980 restructuring reserve is expected to be
expended by 1999 year-end and relates primarily to costs associated with the
Spartanburg facility. At March 31, 1999 approximately 200 employees at the
Spartanburg facility had not yet been terminated. The Company expects most of
these employees will be terminated before June 30, 1999. Ongoing operating
expenses will continue to be recorded as period costs.
(5) Comprehensive Earnings (Loss)
Comprehensive loss for the three-months ended March 31, 1999 and 1998, was
$58,874 and $33,263, respectively. The Company's only adjustment from net loss
to comprehensive loss was foreign currency translation adjustments of $8,620 and
$2,425 in the three-months ended March 31, 1999 and 1998, respectively.
(6) Private Placement
On March 22, 1999, the Company sold 15,399,130 shares of common stock to VEBA
Zweite Verwaltungsgesellschaft mbH (VEBA Zweite), a subsidiary of VEBA AG, for
$6.89 per share. The net proceeds of approximately $106,000 were used to repay
debt of approximately $100,000 under revolving credit agreements with the
balance used for general corporate purposes.
(7) Subsequent Event--Rights Offering
On April 16, 1999, the Company sold 13,628,446 shares of common stock for $6.89
per share. The net proceeds of approximately $91,000 were used to repay debt of
approximately $90,000 from VEBA AG and its affiliates under revolving credit
agreements and the balance for general corporate purposes. VEBA AG and its
affiliates now own 71.8% of the outstanding shares of common stock following the
private placement and rights offering.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations First Quarter 1999 compared to First Quarter 1998.
Net Sales. Net sales decreased 32% to $160 million for the first quarter of 1999
from $235 million for the first quarter of 1998. The decrease is primarily
attributable to a 17% decline in product volume and a decrease in average
selling price in the first quarter 1999 compared to the first quarter 1998. The
product volume decline was due to a continued weakening in demand for smaller
diameter wafers, which was partially offset by a 10% increase in 200-millimeter
product volume. On a geographic basis, product volumes decreased most
significantly in the United States followed by Japan, Europe and Asia Pacific.
As a percentage, Japan experienced the largest decline in volume. Excess
capacity in the semiconductor industry continues to be exacerbated by weak
economic conditions in the Asia Pacific and Japanese markets. In the first
quarter of 1999, the Company had an increase in product volume over the fourth
quarter of 1998. This is the first sequential increase in quarterly volume since
the third quarter of 1997.
Excess capacity in the semiconductor and silicon wafer industries has caused
average selling prices to decline significantly since the beginning of 1997.
Continued excess capacity in both of these industries will likely lead to
continued price pressure, at least in the near term.
Gross Margin. Gross margin declined from 10% in the first quarter of 1998 to a
negative 9% for the first quarter of 1999. The decline in gross margin is
primarily attributable to significant declines in volume and prices. Advanced
large diameter and epitaxial products represented 51% and 43% of product volume
for the first quarters of 1999 and 1998, respectively. The increase in this
ratio is indicative of the Company's customers utilizing 200-millimeter
facilities in preference to their smaller diameter facilities in order to obtain
the lowest cost per device.
Spartanburg Facility. To meet the orders of certain customers, the Company
expects to extend the operations of the Spartanburg facility until June 1999.
Ongoing operating expenses until plant closure of approximately $4 million will
be recorded as period costs as incurred.
Research and Development. Research and development costs were $21 million for
the first quarter 1999, which is consistent with $20 million for the first
quarter 1998. The increase is due to increased depreciation associated with
capital expenditures made in the Company's 300 millimeter pilot line in St.
Peters, MO and the 300 millimeter integrated development line in Utsunomiya,
Japan.
Interest Expense. Interest expense totaled $17 million for the first quarter
1999 as compared to $8 million for the first quarter 1998. The increase in
interest expense is primarily attributable to increased borrowings and to a
lesser extent, higher interest rates on loans from VEBA AG and its affiliates as
a result of the Company's debt restructuring in September 1998.
Income Taxes. The effective income tax rates were 31% and 34% for the three
months March 31, 1999 and 1998, respectively. This fluctuation is the result of
changes in the composition of worldwide taxable income.
Equity in Loss of Joint Ventures. Equity in loss of joint ventures was $5
million in the first quarter 1999, as compared to a loss of $12 million in the
first quarter 1998. The Company's share of the loss of Posco Huls Co., Ltd.
(PHC), the Company's 40%-owned, unconsolidated joint venture in South Korea, was
$3 million in the first quarter 1999 compared to a loss of $8 million in the
first quarter 1998. PHC's reduction in loss was primarily due to a significant
increase in product volume partially offset by a decrease in average selling
price. The Company's share of the loss of Taisil Electronic Materials
Corporation (Taisil), the Company's 45%-owned, unconsolidated joint venture in
Taiwan, was $2 million in the first quarter 1999 compared to a loss of $4
million in the first quarter 1998. Taisil's reduction in loss was primarily due
to a significant increase in product volume partially offset by a decrease in
average selling price. Both PHC and Taisil had positive operating cash flow in
the first quarter 1999.
Liquidity and Capital Resources. At March 31, 1999 and December 31, 1998, the
Company had cash and cash equivalents of $16 million. The Company's borrowings
against its $1,024 million of credit facilities were $853 million at March 31,
1999. Outstanding borrowings decreased $57 million from December 31, 1998 to
March 31, 1999. The decrease in borrowings is primarily attributable to the
application of the net proceeds from the Company's private placement in March
1999 to repay $100 million of debt outstanding under revolving credit
agreements, offset by additional borrowings in the first quarter 1999 used to
finance the Company's working capital requirements and capital expenditures. In
April 1999, the Company received net proceeds of $91 million from the sale of
common stock in connection with its rights offering.
A comparison of the components of the Company's financial condition follows
(dollars in millions):
March 31, December 31,
1999 1998
--------- ----------
Working capital $ 57 $ 40
Stockholders' equity $ 446 $ 399
Current ratio 1.3 to 1 1.2 to 1
Total debt to total capitalization 63% 67%
Weighted average borrowing rate 7.7% 7.8%
Cash used by operating activities increased to $44 million in the first quarter
1999 from $15 million in the first quarter 1998. The primary factor in the
increase in cash used by operations was the $19 million increase in the net loss
in the first quarter 1999 versus the first quarter 1998.
Cash used in investing activities decreased in the first quarter 1999 to $10
million from $57 million in first quarter 1998. The primary reduction in cash
used by investing activities was a reduction in spending on capital projects.
The Company had committed capital expenditures of $33 million as of March 31,
1999. Capital expenditures for the first quarter 1999 were primarily for
equipping the 300-millimeter integrated development line in Utsunomiya, Japan
and capital expenditures related to the implementation of SAP worldwide. In
addition, the Company made a $12 million equity infusion in Taisil in the first
quarter of 1999.
Cash flows provided by financing activities decreased to $54 million in the
first quarter 1999 from $59 million in the first quarter 1998. The most
significant change in first quarter 1999 as compared to first quarter 1998 was
that financing in 1999 consisted primarily of proceeds from issuance of common
stock versus the issuance of debt in 1998.
Management currently believes that cash generated from operations, together with
the liquidity provided by existing cash balances and credit facilities will be
sufficient to satisfy commitments for capital expenditures and other operating
cash requirements into 2000.
The silicon wafer industry is highly capital intensive. Even with the proceeds
from the recently completed private placement and the rights offering and
anticipated cash generated from future operations, the Company may need to seek
additional capital in order to fund all its future needs for capital
expenditures, research and development, and marketing and customer service and
support. There can be no assurance such capital will be available on terms
acceptable to the Company. The Company's capital needs depend on numerous
factors, including its profitability and investment in capital expenditures and
research and development.
YEAR 2000. Many existing software programs, computers and other types of
equipment were not designed to accommodate the Year 2000 and beyond. If not
corrected, these computer applications and equipment could fail or create
erroneous results. For the Company, this could disrupt purchasing,
manufacturing, sales, finance and other support areas and affect the Company's
ability to timely deliver silicon wafers with the exacting specifications
required by the Company's customers, thereby causing potential lost sales and
additional expenses.
STATE OF READINESS. The Company has created a Year 2000 Project Team that is
comprised of a Program Office, including a Global Project Manager, Customer and
Vendor Management groups, and Year 2000 representatives from all sites around
the world, including the Company's unconsolidated joint ventures. This team is
responsible for planning and monitoring all Year 2000 activities and reporting
to the Company's executive management. The Company's Chief Financial Officer is
the sponsor for the Year 2000 project and reports to the Company's Board of
Directors on a periodic basis.
The Company's Year 2000 project encompasses both information and non-information
systems within the Company as well as the investigation of the readiness of the
Company's strategic suppliers/business partners. The Company's goal is to have
all Year 2000 issues substantially resolved by June 1999. Year 2000 issues
relating to the most critical business systems (i.e., financial, order
processing) have already been substantially resolved. As part of its Year 2000
project, the Company has inventoried and assessed the Year 2000 readiness of the
following:
- - In-house Applications -- Those applications that are developed and
supported in-house or purchased applications that are heavily customized
and supported in-house. This classification also includes
end-user-developed applications deemed critical to the business.
- - Business Software (Purchased) -- Applications purchased from an outside
vendor and used for automating business processes (i.e., financial systems,
order processing systems, purchasing systems).
- - Manufacturing Software (Purchased) -- Applications purchased from an
outside vendor and used for automating manufacturing processes.
- - Personal Computer Software (Purchased) -- All software packages
resident on personal computers. This includes things such as operating
systems, word processing software, communications software, project
management software, and spreadsheet software.
- - Infrastructure Software (Purchased) -- Purchased software used in the
client/server and network environments.
- - IT Hardware -- Information Technology hardware components including
midrange machines, personal computers, printers, network hardware.
- - Facilities & Utilities -- Components in the office and manufacturing
supporting systems environments. Types of components include: copy
machines, fax machines, telephone/communications systems, security systems,
fire alarm/control, electrical, waste treatment, alarms, and air handlers.
- - Manufacturing Equipment -- Shop floor equipment such as clean rooms,
crystal pullers, epitaxial reactors, inspection, lab, lappers, laser
markers, measurement tools, grinders, polishers, slicers, and wet benches.
IN-HOUSE APPLICATIONS. The Company is evaluating the extent to which
modifications of the Company's in-house applications will be necessary to
accommodate the Year 2000 and is modifying the Company's in-house applications
to enable continued processing of data into and beyond the Year 2000. This phase
of the Company's Year 2000 project is approximately 90% complete and the Company
anticipates substantially completing remediation and testing of the Company's
in-house applications by the end of the second quarter of 1999.
PURCHASED SOFTWARE. The Company is obtaining, where feasible, contractual
warranties from systems vendors that their products are or will be Year 2000
compliant. The Company has completed approximately 95%, 75% and 90% of its Year
2000 project related to business software, manufacturing software and personal
computer software, respectively, and has completed its Year 2000 project related
to infrastructure software. The Company expects this phase of its Year 2000
project to be substantially completed by the end of the second quarter of 1999.
The Company requires Year 2000 contractual warranties from all vendors of new
software and hardware. In addition, the Company is testing newly purchased
computer hardware and software systems in an effort to ensure their Year 2000
compliance.
EMBEDDED SYSTEMS. For in-house embedded systems, the Company is modifying its
systems to enable the continuing functioning of equipment into and beyond the
Year 2000. For third-party embedded systems, the Company is obtaining, where
feasible, contractual warranties from systems vendors that their products are or
will be Year 2000 compliant. The Company has completed this phase of its Year
2000 project for hardware and has completed approximately 65% and 55% of its
Year 2000 project related to facilities and utilities, and manufacturing
equipment, respectively. The Company anticipates that such embedded systems will
be fully tested by June 1999.
SUPPLIERS/BUSINESS PARTNERS. The Company has also communicated with its
strategic suppliers and equipment vendors seeking assurances that they will be
Year 2000 ready. The Company's goal is to obtain as much detailed information as
possible about its strategic suppliers/business partners' Year 2000 plans so as
to identify those companies which appear to pose a significant risk of failure
to perform their obligations to the Company as a result of the Year 2000.
Detailed information regarding all of its strategic suppliers and equipment
vendors has been compiled and Year 2000 audits have been completed for the most
critical suppliers. This will be an ongoing process during the Company's Year
2000 project. For those strategic suppliers and equipment vendors that do not
respond as to their status or their response is not satisfactory, the Company is
developing contingency plans to ensure that sufficient resources are available
to continue with business operations.
COSTS TO ADDRESS THE YEAR 2000. Spending for modifications and updates is being
expensed as incurred and is not expected to have a material impact on the
Company's results of operations or cash flows. The cost of the Company's Year
2000 project is being funded through borrowings. The Company estimates that its
total incremental Year 2000 expenditures will be in the range of $5 - $7
million. Through March 31, 1999, the Company has expended approximately $2.8
million of incremental costs consisting mainly of contract programmers and
consulting costs associated with the evaluation, assessment and remediation of
computer systems and manufacturing equipment. The Company anticipates that
contract programming costs will be its most significant cost as the Year 2000
project proceeds to completion.
RISK ANALYSIS. Like most large business enterprises, the Company is dependent
upon its own internal computer technology and relies upon the timely performance
of its suppliers/business partners. A large-scale Year 2000 failure could impair
the Company's ability to timely deliver silicon wafers with the exacting
specifications required by its customers, thereby causing potential lost sales
and additional expenses. The Company's Year 2000 project seeks to identify and
minimize this risk and includes testing of its in-house applications, purchased
software and embedded systems to ensure that all such systems will function
before and after the Year 2000. The Company is continually refining its
understanding of the risk the Year 2000 poses to its strategic
suppliers/business partners based upon information obtained through its surveys.
This refinement will continue into mid-1999.
CONTINGENCY PLANS. The Company's Year 2000 project includes the development of
contingency plans for business critical systems and manufacturing equipment as
well as for strategic suppliers/business partners to attempt to minimize
disruption to its operations in the event of a Year 2000 failure. The Company
will be formulating plans to address a variety of failure scenarios, including
failures of its in-house applications, as well as failures of strategic
suppliers/business partners. The Company anticipates it will substantially
complete Year 2000 contingency planning by June 1999.
YEAR 2000 CAUTIONARY STATEMENT. Year 2000 issues are widespread and complex.
While the Company believes it will address them on a timely basis, the Company
cannot guarantee that it will be successful or that these problems will not
materially adversely affect its business or results of operations. To a large
extent, the Company depends on the efforts of its customers, suppliers and other
organizations with which it conducts transactions to address their Year
2000 issues, over which the Company has no control.
EURO CONVERSION. On January 1, 1999, eleven of the fifteen member countries of
the European union established fixed conversion rates between their existing
sovereign currencies and the Euro. The participating countries have agreed to
adopt the Euro as their common legal currency as of that date while still
utilizing their local currency until January 1, 2002.
The Company has begun to assess the potential impact that may result from the
Euro conversion. In addition to tax accounting considerations, the Company is
also assessing the potential impact from the Euro conversion in a number of
other areas, including the technical challenges to adapt information technology
and other systems to accommodate Euro-denominated transactions; the competitive
impact of cross-border price transparency, which may make it more difficult for
businesses to charge different prices for the same products on a
country-by-country basis; the impact on currency exchange costs and currency
exchange rate risk; and the impact on existing contracts. While the Company will
continue to assess the impact of the introduction of the Euro, based on
currently available information, management does not believe that the
introduction of the Euro will have a material adverse effect on the Company's
financial condition or results of operation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires the recognition of all derivatives as assets or
liabilities within the balance sheet, and requires both the derivatives and the
underlying exposure to be recorded at fair value. Any gain or loss resulting
from changes in fair value will be recorded as part of the results of
operations, or as a component of comprehensive income or loss, depending upon
the intended use of the derivative. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does not
believe that the implementation of this Statement will have a material adverse
effect on its financial condition or results of operations.
Cautionary Statement Regarding Forward-Looking Statements. This Form 10-Q
contains "forward-looking" statements within the meaning of the Securities
Litigation Reform Act of 1995, including those concerning: the utilization of
the restructuring reserve; liquidity into 2000; the successful implementation of
Year 2000 initiatives; continued pricing pressure on silicon wafers; the timing
of the closure of the Spartanburg facility and the ongoing operating expenses to
be incurred until such closure; the timing of the termination of the remaining
employees at the Spartanburg facility; and the impact of the introduction of the
Euro. 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: the
demand for the Company's wafers; utilization of manufacturing capacity; demand
for semiconductors generally; changes in the pricing environment; general
economic conditions in the Asia Pacific region and Japan; competitors' actions;
willingness of customers to re-qualify Spartanburg-based customer orders at
other Company facilities; the status and effectiveness of the Company's Year
2000 efforts; and other risks described in the Company's filings with the
Securities and Exchange Commission, including the Company's annual report on
Form 10-K for the year ended December 31, 1998.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign exchange rates. The Company enters into
currency swaps to minimize the risk and costs associated with its financing
activities in currencies other than its functional currency. The Company does
not hold derivatives for trading purposes. There have been no significant
changes in Company's holdings of interest rate sensitive or foreign currency
exchange rate sensitive instruments during the first quarter of 1999.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to PART I, Item 3. Legal Proceedings, in the Company's annual
report on Form 10-K for the year ended December 31, 1998 for descriptions of
legal proceedings.
As previously reported, the Company was a named defendant in two class action
lawsuits filed against companies operating industrial facilities along I-10 and
along the Houston Ship Channel in Harris County, Texas. The lawsuits alleged
that the defendants had discharged various pollutants into the air, soil, ground
and surface waters. See the Company's annual report on Form 10-K for the 1998
fiscal year. The Company has agreed to a settlement of these lawsuits and has
been dismissed without prejudice as a defendant in such lawsuits. The settlement
is conditioned upon the Company receiving signed releases from substantially all
of the plaintiffs in these lawsuits.
Item 2. Changes in Securities and Use of Proceeds.
On March 22, 1999, pursuant to Regulation D promulgated under the Securities Act
of 1933, as amended, the Company sold 15,399,130 shares of common stock to VEBA
Zweite for $6.89 per share. The net proceeds of $106 million were used to repay
debt of $100 million under revolving credit agreements and the balance for
general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
3(i) Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3-a of the Company's
10-Q for the Quarter ended June 30, 1995).
3(ii) Restated By-laws of the Company (Incorporated by reference
to Exhibit 3.2 of Amendment No. 4 to the Company's Form S-3
Registration Statement No. 333-65973).
4 Form of Rights Certificate to Subscribe for Shares of Common
Stock of the Company (Incorporated by reference to Exhibit
4.1 of Amendment No. 3 to the Company's Form S-3
Registration Statement No. 333-65973).
10-cc MEMC Electronic Materials, Inc. 1995 Equity Incentive Plan
as Amended and Restated on February 17, 1999.
27 Financial Data Schedule (filed electronically with the
SEC only).
(b) Reports on Form 8-K
During the first quarter of 1999, we filed the following six current reports on
Form 8-K:
1. Item 5 Form 8-K filed on January 28, 1999;
2. Item 5 Form 8-K filed on March 1, 1999;
3. Item 5 Form 8-K filed on March 2, 1999;
4. Item 5 Form 8-K filed on March 5, 1999;
5. Form 8-K/A filed on March 16, 1999 amending Form 8-K
filed March 2, 1999;
6. Item 5 Form 8-K filed on March 26, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEMC Electronic Materials, Inc.
May 13, 1999 /s/ JAMES M. STOLZE
- ------------------- ----------------------------------------
James M. Stolze
Executive Vice President and Chief Financial
Officer (on behalf of the registrant and as
principal financial and accounting officer)
EXHIBIT INDEX
The exhibits below are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
Exhibit
Number Exhibit
- ------ ------
10-cc MEMC Electronic Materials, Inc. 1995 Equity Incentive Plan
as Amended and Restated on February 17, 1999.
27 Financial Data Schedule (filed electronically with SEC only).