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 June 30, 1999 _________________________________
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 1-13828
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MEMC ELECTRONIC MATERIALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 56-1505767
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(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
501 Pearl Drive (City of O'Fallon) St. Peters, Missouri 63376
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(Address of principal executive offices) (Zip Code)
(314) 279-5500
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(Registrant's telephone number, including area code)
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(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 July
30, 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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Net sales $ 168,043 $ 202,153 $ 327,843 $ 437,396
Costs of goods sold 170,009 205,965 343,625 417,440
---------- ----------- --------- ---------
Gross margin (1,966) (3,812) (15,782) 19,956
Operating expenses:
Marketing and administration 17,293 18,940 34,172 37,370
Research and development 19,710 17,664 40,567 37,767
Restructuring costs - 131,428 - 139,454
---------- ----------- --------- ---------
Operating loss (38,969) (171,844) (90,521) (194,635)
---------- ----------- --------- ---------
Nonoperating (income) expense:
Interest expense 15,696 8,986 33,155 17,264
Interest income (291) (376) (733) (879)
Royalty income (1,458) (1,423) (2,683) (2,524)
Other, net (411) 1,609 146 3,200
---------- ----------- --------- ---------
Total nonoperating expense 13,536 8,796 29,885 17,061
---------- ----------- --------- ---------
Loss before income taxes, equity in
loss of joint ventures
and minority interests (52,505) (180,640) (120,406) (211,696)
Income taxes (16,277) (36,935) (37,326) (47,494)
---------- ----------- --------- ---------
Loss before equity in loss of joint
ventures and minority interests (36,228) (143,705) (83,080) (164,202)
Equity in loss of joint ventures (3,891) (6,860) (8,480) (18,481)
Minority interests 807 1,920 1,994 3,200
---------- ----------- --------- ---------
Net loss $ (39,312) $ (148,645) $ (89,566) $(179,483)
========== =========== ========= =========
Basic loss per share $ (.58) $ (3.67) $ (1.63) $ (4.41)
========== =========== ========= =========
Diluted loss per share $ (.58) $ (3.67) $ (1.63) $ (4.41)
========== =========== ========= =========
Weighted average shares used in computing
basic loss per share 67,266,653 40,511,164 54,800,850 40,703,636
========== =========== ========== ==========
Weighted average shares used in computing
diluted loss per share 67,266,653 40,511,164 54,800,850 40,703,636
========== =========== ========== ==========
See accompanying notes to consolidated financial statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
June 30, December 31,
1999 1998
ASSETS
Current Assets:
Cash and cash equivalents $ 31,666 $ 16,168
Accounts receivable, less allowance for doubtful accounts
$2,835 and $2,853 in 1999 and 1998, respectively 92,619 98,528
Income taxes receivable 3,691 10,161
Inventories 107,796 115,927
Deferred tax assets, net 18,314 23,129
Prepaid and other current assets 19,538 35,225
----------- -----------
Total current assets 273,624 299,138
Property, plant and equipment, net of accumulated depreciation of
$619,788 and $569,327 in 1999 and 1998, respectively 1,106,903 1,188,832
Investments in joint ventures 98,433 94,610
Excess of cost over net assets acquired, net of accumulated
amortization of $5,803 and $5,128 in 1999 and 1998, respectively 47,721 48,396
Deferred tax asset, net 153,458 104,650
Other assets 34,307 38,088
----------- -----------
Total assets $ 1,714,446 $ 1,773,714
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 27,162 $ 38,644
Accounts payable 72,653 112,581
Accrued liabilities 36,143 35,404
Customer deposits 20,736 17,639
Provision for restructuring costs 26,447 37,299
Accrued wages and salaries 21,863 17,077
----------- -----------
Total current liabilities 205,004 258,644
Long-term debt, less current portion 783,558 871,163
Pension and similar liabilities 95,797 92,466
Customer deposits 52,073 59,033
Other liabilities 42,861 45,126
----------- -----------
Total liabilities 1,179,293 1,326,432
----------- -----------
Minority interests 46,248 48,242
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 shares authorized,
none issued or outstanding at 1999 or 1998 - -
Common stock, $.01 par value, 200,000,000 shares authorized,
70,463,997 and 41,436,421 issued in 1999 and 1998, respectively 705 414
Additional paid-in capital 770,848 574,188
Accumulated deficit (237,402) (147,836)
Accumulated other comprehensive loss (28,101) (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 488,905 399,040
----------- -----------
Total liabilities and stockholders' equity $ 1,714,446 $ 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)
Six Months Ended
June 30,
1999 1998
Cash flows from operating activities:
Net loss $ (89,566) $ (179,483)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 79,786 78,384
Restructuring costs - 114,800
Minority interests (1,994) (3,200)
Equity in loss of joint ventures 8,480 18,481
Loss on sale of property, plant and equipment 1,383 34
Working capital and other (71,094) (66,429)
----------- -----------
Net cash used in operating activities (73,005) (37,413)
----------- -----------
Cash flows from investing activities:
Capital expenditures (20,271) (107,939)
Proceeds from sale of property, plant and equipment 3 3,043
Equity infusions in joint ventures (12,052) (11,747)
Notes receivable from affiliates 9,654 -
Other - (398)
----------- -----------
Net cash used in investing activities (22,666) (117,041)
----------- -----------
Cash flows from financing activities:
Net short-term borrowings (6,039) (3,726)
Proceeds from issuance of long-term debt 8,735 170,404
Principal payments on long-term debt (86,474) (9,715)
Repurchase of common stock - (15,692)
Proceeds from issuance of common stock 196,951 -
----------- -----------
Net cash provided by financing activities 113,173 141,271
----------- -----------
Effect of exchange rates on cash and cash equivalents (2,004) (93)
----------- -----------
Net increase (decrease) in cash 15,498 (13,276)
Cash and cash equivalents at beginning of year 16,168 30,053
----------- -----------
Cash and cash equivalents at end of period $ 31,666 $ 16,777
=========== ===========
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 six-month period ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
(2) Earnings (loss) per share
The numerator for basic and diluted loss per share calculations is net loss for
all periods presented. The denominator for the basic and diluted loss per share
calculations for the three-month and six-month periods ended June 30, 1999 and
1998 is the same within each period (the weighted average shares outstanding for
each respective period). Options outstanding at June 30, 1999, 2,394,814, were
not included in the computation of diluted loss per share due to the net loss
incurred during the three-month and six-month periods ended June 30, 1999.
(3) Inventories
Inventories consist of the following:
June 30, December 31,
1999 1998
Raw materials and supplies $ 54,338 $ 59,722
Goods in process 19,195 33,612
Finished goods 34,263 22,593
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$ 107,796 $ 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:
Balance Balance
Amount June 30, December 31,
Provision Utilized 1999 1998
Asset impairment/write-off:
Spartanburg property, plant
and equipment $ 36,300 $ 36,300 $ - $ -
Malaysian joint venture assets 28,000 27,421 579 2,805
Chinese joint venture assets 13,800 9,654 4,146 4,158
Other infrastructure 3,225 3,225 - -
--------- -------- -------- --------
Total 81,325 76,600 4,725 6,963
--------- -------- -------- --------
Dismantling and related costs:
Dismantling costs 11,345 1,982 9,363 10,306
Costs incurred by
equipment suppliers 5,000 5,000 - -
Environmental costs 3,500 89 3,411 3,489
Operating leases 3,000 - 3,000 3,000
Other 3,000 134 2,866 3,000
--------- -------- -------- --------
Total 25,845 7,205 18,640 19,795
--------- -------- -------- --------
Personnel Costs 14,500 11,418 3,082 10,541
--------- -------- -------- --------
Total Restructuring Costs $ 121,670 $ 95,223 $ 26,447 $ 37,299
========= ======== ======== ========
Substantially all of the $26,447 restructuring reserve is expected to be
expended by 1999 year-end and relates primarily to costs associated with the
Spartanburg facility.
In addition to the restructuring activities discussed above, the Company
recorded a $24,654 million charge for a voluntary severance program during 1998.
(5) Comprehensive Loss
Comprehensive loss for the three-months ended June 30, 1999 and 1998, was
$48,212 and $151,207, respectively. Comprehensive loss for the six-months ended
June 30, 1999 and 1998, was $107,086 and $184,470, respectively. The Company's
only adjustment from net loss to comprehensive loss was foreign currency
translation adjustments in all periods presented.
(6) Private Placement
On March 22, 1999, the Company sold 15,399,130 shares of common stock in a
private placement to VEBA Zweite Verwaltungsgesellschaft mbH (VEBA Zweite), a
subsidiary of VEBA AG, for $6.89 per share. The net proceeds of approximately
$106,000 were used to repay debt of approximately $100,000 under revolving
credit agreements with the balance used for general corporate purposes.
(7) Rights Offering
On April 16, 1999, the Company sold 13,628,446 shares of common stock for $6.89
per share in connection with a rights offering. The net proceeds of
approximately $91,000 were used to repay debt of approximately $90,000 from VEBA
AG and its affiliates under revolving credit agreements and the balance was used
for general corporate purposes. VEBA AG and its affiliates now own 71.8% of the
outstanding shares of common stock following the private placement and rights
offering.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Net Sales. Net sales decreased 17% to $168 million for the second quarter of
1999 from $202 million for the second quarter of 1998. The decrease was
primarily attributable to a decrease in average selling price and a slight
decrease in product volume in the second quarter 1999 compared to the second
quarter 1998. Net sales decreased 25% to $328 million for the six-months ended
June 30, 1999 from $437 million for the six-months ended June 30, 1998. The
decrease in the 1999 six-month period was attributable to a significant decrease
in average selling price and a 10% decline in product volume. The product volume
declines for the six-month period were due to a continued weakening in demand
for smaller diameter wafers, which was partially offset by a 14% increase in
200-millimeter product volume. On a geographic basis, product volumes decreased
most significantly in Japan followed by Europe and Asia Pacific. Excess capacity
in the semiconductor industry continues to be exacerbated by weak economic
conditions in the Japanese and European markets.
Excess capacity in the semiconductor and silicon wafer industries has caused
average selling prices to decline significantly since the beginning of 1997.
Although the rate of price decline has moderated in the latest quarter, the
Company expects continued pressure on prices, at least in the near term.
However, the Company has had increases in product volume for the last two
calendar quarters and increases in net sales for the last three calendar
quarters.
Gross Margin. Gross margin improved to negative 1% in the second quarter of 1999
from a negative 2% for the second quarter of 1998. The increase in gross margin
was primarily attributable to significant cost reductions in 1999 which were
then substantially offset by declines in prices. Advanced large diameter and
epitaxial products represented 51% and 45% of product volume for the second
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.
Gross margin was a negative 5% in the six-months ended June 30, 1999 compared to
a positive 5% in the six-months ended June 30, 1998. The decline in gross margin
was primarily attributable to significant declines in volume and price for 1999,
which were only partially offset by cost reductions.
Research and Development. Research and development costs were $20 million for
the second quarter 1999, which represents a 12% increase from $18 million for
the second quarter 1998. Research and development costs were $41 million for the
first six months of 1999, which represents a 7% increase from $38 million for
the first six months of 1998. The increases were primarily 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 $16 million and $33 million for the
three and six-month periods ended June 30, 1999, respectively, compared to $9
million and $17 million for the three and six-month periods ended June 30, 1998,
respectively. The increase in interest expense was primarily attributable to
increased borrowings and, to a lesser extent, higher interest rates on loans
from VEBA AG and its affiliates as a result of the Company's debt restructuring
in September 1998.
Income Taxes. The effective income tax rates were 31% and 22% for the six months
ended June 30, 1999 and 1998, respectively. This fluctuation resulted from
changes in the composition of worldwide taxable income.
Equity in Loss of Joint Ventures. Equity in loss of joint ventures was $4
million in the second quarter 1999, as compared to a loss of $7 million in the
second 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
$2 million in the second quarter 1999 compared to a gain of $1 million in the
second quarter 1998. Although PHC's revenues increased for the 1999 second
quarter, PHC experienced an increased loss. This increased loss was primarily
due to unfavorable currency fluctuations and a significant decrease in average
selling price, which were only partially offset by the substantial increase in
product volume. 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 second quarter 1999 compared to a loss of $8
million in the second 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.
Equity in loss of joint ventures was $8 million in the six months ended June 30,
1999, as compared to a loss of $18 million in the six months ended June 30,
1998. The Company's share of the loss of PHC was $4 million in the six months
ended June 30, 1999 compared to a loss of $6 million in the six months ended
June 30, 1998. PHC experienced an increase in revenues in the six months ended
June 30, 1999 compared to the six months ended June 30, 1998. PHC's increase in
revenues and decrease in loss were primarily due to a significant increase in
product volume, partially offset by a decrease in average selling price. The
Company's share of the loss of Taisil was $4 million in the six months ended
June 30, 1999 compared to a loss of $12 million in the six months ended June 30,
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.
Net Loss. Net loss for the three and six month periods ended June 30, 1999 was
approximately $39 million and $90 million, respectively. Net loss for the three
and six month periods ended June 30, 1998 was $149 million and $179 million,
respectively. The reduction in net loss for the 1999 periods was primarily a
result of restructuring charges of $105 million, net of the tax benefit, for the
three months ended June 30, 1998 and restructuring charges of $111 million, net
of the tax benefit, for the six months ended June 30, 1998. No restructuring
charges were recorded in 1999.
Liquidity and Capital Resources. At June 30, 1999, the Company had cash and cash
equivalents of $32 million. The Company's borrowings against its $1 billion of
credit facilities were $811 million at June 30, 1999. Outstanding borrowings
decreased $99 million from December 31, 1998 to June 30, 1999. The decrease in
borrowings was primarily attributable to the application of the net proceeds
from the Company's private placement and rights offering completed in the first
six-months of 1999 to repay debt under the Company's revolving credit
agreements.
A comparison of the components of the Company's financial condition follows:
(dollars in millions)
June 30, December 31,
1999 1998
---- ----
Working capital $ 69 $ 40
Stockholders' equity $ 489 $ 399
Current ratio 1.3 to 1 1.2 to 1
Total debt to total capitalization 60% 67%
Weighted average borrowing rate 7.6% 7.8%
Cash used by operating activities increased to $73 million in the six-months
ended June 30, 1999 from $37 million in the six-months ended June 30, 1998. The
primary factor in the increase in cash used by operations was the net loss in
the six-months ended June 30, 1999 versus the net loss in the six-months ended
June 30, 1998 less the non-cash portion of the restructuring charge taken in the
six-months ended June 30, 1998.
Cash used in investing activities decreased in the six-months ended June 30,
1999 to $23 million from $117 million in the six-months ended June 30, 1998. The
primary reduction in cash used by investing activities was a reduction in
spending on capital projects. The Company had committed capital expenditures of
$36 million as of June 30, 1999. Capital expenditures for the six-months ended
June 30, 1999 were primarily related to the worldwide implementation of SAP
worldwide and to maintenance capital. In addition, the Company made a $12
million equity infusion into Taisil in the six-months ended June 30, 1999.
Cash flows provided by financing activities decreased to $113 million in the
six-months ended June 30, 1999 from $141 million in the six-months ended June
30, 1998. The most significant change in the six-months ended June 30, 1999, as
compared to the prior year period, was that financing in 1999 consisted
primarily of proceeds from issuance of common stock versus the issuance of debt
in 1998.
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 rights offering and
anticipated cash generated from future operations, the Company may need to seek
additional capital in order to fund 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.
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 has evaluated the extent to which
modifications of the Company's in-house applications are believed necessary to
accommodate the Year 2000 and has completed the modifications of the Company's
in-house applications necessary to enable continued processing of data into and
beyond the Year 2000.
Purchased Software. The Company is obtaining, where feasible, contractual
warranties from systems vendors that their products are or will be Year 2000
compliant. The Company has completed approximately 100%, 85% and 95% 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 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 80% and 85% 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 September 1999.
Suppliers/Business Partners. The Company has communicated with its strategic
suppliers and equipment vendors seeking assurances that they will be Year 2000
ready. The Company's goal is to obtain as much detailed information as possible
about its strategic suppliers/business partners' Year 2000 plans so as to
identify those companies which appear to pose a significant risk of failure to
perform their obligations to the Company as a result of the Year 2000. Detailed
information regarding all of its strategic suppliers and equipment vendors has
been compiled and Year 2000 audits have been completed for the most critical
suppliers. 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 whose 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 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 June 30, 1999, the Company has expended approximately $3.5
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 1999 third quarter.
Contingency Plans. The Company's Year 2000 project includes the development of
contingency plans for business critical systems and manufacturing equipment as
well as for strategic suppliers/business partners to attempt to minimize
disruption to its operations in the event of a Year 2000 failure. The Company is
in the process of 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 September 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. In July 1999, the Financial Accountings
Standards Board changed the effective date of SFAS No. 133 to all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
believe that the implementation of this Statement will have a material adverse
effect on its financial condition or results of operations.
Cautionary Statement Regarding Forward-Looking Statements. This Form 10-Q
contains "forward-looking" statements within the meaning of the Securities
Litigation Reform Act of 1995, including those concerning: the utilization of
the restructuring reserve; liquidity into 2000; the successful implementation
and expected completion dates of Year 2000 initiatives; continued pricing
pressure on silicon wafers; the timing of the dismantling of the Spartanburg
facility; 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, Japan and Europe; competitors' actions;
the effectiveness of the Company's Year 2000 efforts; the accuracy of
management's assumptions regarding the dismantling of the Spartanburg facility
and the impact of the introduction of the Euro, 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 since December 31, 1998.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to PART I, Item 3. Legal Proceedings, in the Company's annual
report on Form 10-K for the year ended December 31, 1998 and to PART II, Item 1.
Legal Proceedings in the Company's quarterly report on Form 10-Q for the quarter
ended March 31, 1999 for descriptions of legal proceedings.
As previously reported, the Company was involved in a dispute with a
manufacturer of equipment for the production of silicon wafers. The dispute
related to the Company's cancellation of an order for a number of pieces of
equipment. See the Company's annual report on Form 10-K for the year ended
December 31, 1998. In June 1999, the Company settled this matter. As part of the
settlement, the equipment manufacturer granted the Company a full release from
any further claims relating to this dispute.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of the Company was held on May 6, 1999. The
directors listed in the Notice of Annual Meeting of Stockholders dated April 2,
1999 were elected to terms expiring in 2002, with the voting as follows:
Director For Withheld Non-Votes
- ---------- ------------- ------------ -------------
Willem D. Maris 38,779,549 346,447 0
Paul T. O'Brien 38,780,549 345,447 0
Klaus R. von Horde 38,759,045 366,951 0
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
- ------- -----------
3(i) Restated Certificate of Incorporation of the Company (Incorporated
by reference to Exhibit 3-a of the Company's Form 10-Q for the
Quarter ended June 30, 1995).
3(ii) Restated By-laws of the Company.
27 Financial Data Schedule (filed electronically with the SEC only).
(b) Reports on Form 8-K
During the second quarter of 1999, we filed the following three current reports
on Form 8-K:
1. Item 5 Form 8-K filed on April 13, 1999;
2. Item 5 Form 8-K filed on April 13, 1999;
3. Item 5 Form 8-K filed on April 23, 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.
August 10, 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
601of Regulation S-K.
Exhibit
Number Exhibit
- ------- -------
3(ii) Restated By-laws of the Company.
27 Financial Data Schedule (filed electronically with SEC only).