1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 2, 1999
-------------
MEMC ELECTRONIC MATERIALS, INC.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-13828 56-1505767
- -------- ------- ----------
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification
incorporation) No.)
501 Pearl Drive, St. Peters, Missouri 63376
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 279-5000
--------------
(Not Applicable)
---------------------
(Former name or former address, if changed since last report)
2
Item 5. Other Events
FIVE YEAR SELECTED FINANCIAL DATA
Dollars in thousands, except share data
Year ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net sales $ 758,916 $ 986,673 $ 1,119,500 $ 886,860 $ 660,807
Gross margin (31,829) 124,759 250,185 223,279 143,210
Marketing and administration 73,515 70,715 79,680 63,893 41,298
Research and development 81,591 64,457 44,313 31,226 27,403
Restructuring costs 146,324(1) -- -- -- --
Operating profit (loss) (333,259) (10,413) 126,192 128,160 74,509
Equity in income (loss) of joint ventures (43,496) 5,480 26,716 13,199 (6,384)
Net earnings (loss) (316,332) (4,513) 103,388 86,564 34,475
Basic earnings (loss) per share (7.80) (0.11) 2.50 2.83(2) 1.60
Diluted earnings (loss) per share (7.80) (0.11) 2.49 2.81(2) 1.60(2)
Shares used in basic earnings (loss) per
share computation 40,580,869 41,345,193 41,308,806 30,612,636(2) 21,490,942(2)
Shares used in diluted earnings (loss) per
share computation 40,580,869 41,345,193 41,534,412 30,838,704(2) 21,490,942(2)
BALANCE SHEET DATA:
Working capital 40,494 38,449 42,805 199,258 69,597
Total assets 1,773,714 1,794,424 1,519,472 1,102,167 631,543
Long-term debt (including current portion) 873,680 519,995 304,589 91,451 165,230
Stockholders' equity 399,040 715,754 748,583 642,695 205,468
OTHER DATA:
Capital expenditures 194,610 372,416 590,049 215,359 78,676
Equity infusions in joint ventures 25,533 10,638 14,698 29,904 20,922
Employment 6,300 8,000 7,100 6,600 5,300
- ------------------------------------------------------------------------------------------------------------------------------------
(1)During 1998, the Company recorded restructuring costs totaling $146.3 million
to close its Spartanburg, South Carolina facility, to forego construction of an
eight-inch (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 separation program.
(2)Earnings (loss) per share and shares used in earnings (loss) per share
computation have been restated to comply with SFAS No. 128, "Earnings Per
Share."
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
---------------------------------------------------------------
RESULTS OF YEAR ENDED DECEMBER 31,1998 COMPARED WITH YEAR ENDED
OPERATIONS DECEMBER 31,1997
NET SALES. Net sales decreased by 23.1% to $758.9 million for
1998 from $986.7 million for 1997, due to significant declines
in the price for silicon wafers and a 14.3% decrease in product
volumes somewhat offset by an improved product mix. The decline
in price during 1998 is primarily attributable to significant
excess capacity in the silicon wafer industry and continuing
pricing pressure from customers who are experiencing 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 marks the first year
since 1985 that product volumes for the silicon industry have
not increased year over year. Advanced large diameter and
epitaxial products represented 47.1% of product volume for 1998
compared to 39.1% for 1997. While both 200 millimeter and
epitaxial product volumes grew during 1998, 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 declined in total by 14.3% during 1998, 200 millimeter
product volume grew by 12.3%.
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 21.7% and comprised 51.4% of 1998 sales
compared to 50.4% of 1997 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 10.1% decrease in net sales to Europe,
which constituted 23.4% of 1998 sales compared to 20.0% of 1997
sales. Net sales to Japan decreased by 22.6% and comprised
15.7% of 1998 sales compared to 15.6% of 1997 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 47.5% in net sales to Asia Pacific, which
comprised 9.5% of 1998 sales compared to 13.9% of 1997 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 4.2% for
1998 from the 12.6% 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 initiatives included short-term plant shutdowns,
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. In addition, the Company reduced its workforce by
approximately 1,700 employees, or 21.3%, compared to December
31, 1997.
MARKETING AND ADMINISTRATION. Marketing and administration
expenses increased 4.0% and represented 9.7% of net sales for
1998 compared to 7.2% for 1997. The increase is 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
26.6% and represented 10.8% of net sales for 1998 compared to
6.5% for 1997. The increase in research and development costs
is 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, MO 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 have been running their larger diameter
manufacturing lines in preference to their small diameter lines
in order to
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
gain production efficiencies; (2) a number of semiconductor
manufacturers recently have undertaken restructuring
initiatives focused on permanently eliminating small diameter
lines; and (3) management believes that small diameter wafer
capacity will exceed demand even after the semiconductor
industry begins 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 has experienced
for these wafers.
These actions resulted in a charge to operations of $121.7
million, comprised of $81.3 million non-cash asset
impairments/write-offs, $25.9 million in dismantling and
related costs and $14.5 million in personnel related costs. The
assets for which an impairment loss has been recorded or which
have been or will be written-off are 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 does not expect to relocate
elsewhere within the organization. See Note 5 of Notes to
Consolidated Financial Statements herein. The Company also
recorded a $24.7 million charge for a voluntary separation
program for approximately 600 hourly and salaried U.S.
employees. Substantially all this amount was paid to employees
as of June 30, 1998.
Ongoing operating expenses such as infrastructure, utilities,
and other costs associated with the Spartanburg facility will
continue to be recorded as period costs. Dismantling costs
relating to the relocation of equipment from the Spartanburg
facility to other sites will also be treated as period costs.
The Company estimates pre-tax savings from these restructuring
activities and the voluntary separation program to be
approximately $60 million on an annualized basis. Approximately
half of these expected savings relate to the voluntary
separation program. As employees who participated in the
voluntary separation plan were no longer employed by the
Company as of June 30, 1998, these savings began to be realized
in the third quarter of 1998.
The remaining $30 million in annualized savings principally
relates to the closure of the Company's Spartanburg
facility.Approximately half of these expected savings relate to
personnel costs and the other half relate to manufacturing
costs such as depreciation and supplies and utilities which
will not be duplicated when Spartanburg's silicon wafer
production is transferred to another Company location. As the
Company re-qualifies and transfers the production of silicon
wafers made at the Spartanburg facility to other Company
locations, it will reduce its Spartanburg workforce. With each
workforce reduction, the Company expects a portion of the
annualized cost savings associated with personnel costs to be
realized and to a much lesser extent manufacturing costs. As a
result, a portion of the remaining $30 million in annualized
cost savings began to be realized in the third quarter of 1998
and is expected to grow as workforce and production at the
Spartanburg facility are reduced. Because the manufacturing
cost savings are fixed in nature, they will largely be realized
upon the closure of the Spartanburg facility. While the Company
believes that this will occur by April 30, 1999, the ability to
re-qualify silicon wafers is highly dependent upon the
cooperation of the Company's customers.
INTEREST EXPENSE. Interest expense increased to $45.8 million
for 1998 from $14.7 million for 1997. The increase in interest
expense is 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
re-negotiation during September 1998, as described in Liquidity
and Capital Resources below. Total debt was $909.8 million and
$632.5 million at December 31, 1998 and 1997, respectively.
OTHER, NET. Other, net decreased to $1.0 million in expense for
1998 from $4.1 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 $6.0 million.
5
INCOME TAXES. The effective income tax rate was 24.0% for 1998,
as compared to (26.8%) for 1997. This fluctuation is 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 $49.0 million to a loss of
$43.5 million in 1998 from $5.5 million in income in 1997.
POSCO Huls Company, Ltd. (PHC), the Company's 40% owned,
unconsolidated joint venture in South Korea, experienced
significantly lower product volume and 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 industry and efforts by Korean DRAM manufacturers to
reduce their production, thereby reducing the worldwide
oversupply, and shrinking the size of their devices. For the
year, PHC contributed losses of $17.8 million compared to $11.1
million in income for 1997.
Net sales for Taisil Electronic Materials Corporation (Taisil),
the Company's 45% owned, unconsolidated joint venture in
Taiwan, decreased slightly due to significantly lower prices
which were partially offset by significantly higher 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 $6.0
million. For the year,Taisil contributed losses of $25.7
million in 1998 compared to $5.6 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
$316.3 million for 1998 compared to $4.5 million for 1997. Due
to overcapacity and decreasing prices in the semiconductor and
silicon wafer industries, weak economic conditions in the Asia
Pacific region and Japan, and other factors, while the Company
will continue its significant performance improvements and
cost-cutting efforts, management does not expect the Company to
be profitable in 1999.
YEAR ENDED DECEMBER 31,1997 COMPARED WITH YEAR ENDED DECEMBER
31,1996
NET SALES. Net sales decreased by 11.9% to $986.7 million for
1997 from $1.1 billion for 1996, due to a 5.1% decrease in
product volume and a decline in price somewhat offset by an
improved product mix. Overcapacity, inventory reduction and
weak pricing in the semiconductor industry, particularly for
the DRAM (memory) market, led to reduced orders for silicon
wafers that began in the second half of 1996 and gradually
recovered throughout 1997. In addition, the Company and its
competitors expanded at a faster rate than silicon consumption
growth during 1997, resulting in overcapacity in the silicon
wafer industry.The combination of these market conditions led
to significant price reductions throughout 1997. Advanced large
diameter and epitaxial products represented 39.1% of product
volume for 1997 compared to 36.7% for 1996.
Net sales to North America decreased 12.5% and comprised 50.4%
of 1997 sales compared to 50.8% of 1996 sales led by a fall in
prices and, to a lesser extent, volume, partially offset by
improved product mix. Lower prices and volume, a less favorable
product mix and the general weakening of European currencies
relative to the U.S. dollar throughout 1997 combined to result
in a 22.8% decrease in net sales to Europe, which constituted
20.0% of 1997 sales compared to 22.9% of 1996 sales. Net sales
to Japan increased by 21.0% and comprised 15.6% of 1997 sales
compared to 11.4% of 1996 sales as higher volume from expanded
manufacturing capacity and improved product mix more than
offset lower pricing and the weakening of the Japanese yen
relative to the U.S. dollar throughout 1997. The Asia Pacific
market experienced similar declines in pricing, volume and
prod-
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
uct mix as did other geographic markets served by the Company.
Net sales to Asia Pacific decreased 17.9% and comprised 13.9%
of 1997 sales compared to 14.9% of 1996 sales. Product volume
also declined due to the continued shift in sales from the
Company to PHC and Taisil.
GROSS MARGIN. Gross margin as a percentage of net sales
decreased to 12.6% in 1997 from 22.3% in 1996. Lower pricing
and capacity utilization more than offset the slight
improvement in product mix during 1997. The Company also
completed the construction of its 200 millimeter silicon wafer
facility at MEMC Southwest (the Company's 80% owned joint
venture in Sherman, Texas) and the expansion of its 200
millimeter epitaxial wafer facility in St. Peters, Missouri
which resulted in higher levels of training and start-up costs
and contributed to the lower capacity utilization. However,
these expansions, which are dedicated to the production of 200
millimeter product, position the Company to respond to the
demand for this diameter wafer, which analysts estimate grew
approximately 28% industry wide in 1997.
MARKETING AND ADMINISTRATION. Marketing and administration
expenses declined 11.3% and represented 7.2% of net sales for
1997 compared to 7.1% for 1996. The decrease is predominately
attributable to a reduction in incentive compensation.
RESEARCH AND DEVELOPMENT. Research and development costs rose
45.5% and represented 6.5% of net sales for 1997 compared to
4.0% for 1996. The increase in research and development costs
is attributable to the addition of engineering and scientific
personnel, the start-up of the 300 millimeter pilot line in St.
Peters and increased efforts in the areas of crystal
technology, epitaxial silicon research and the development of
the 300 millimeter wafer.
INTEREST EXPENSE.Interest expense increased to $14.7 million
for 1997 from $0.5 million for 1996 as outstanding debt rose,
projects were completed and interest costs were no longer
capitalized. Total debt was $632.5 million and $331.8 million
at December 31, 1997 and 1996, respectively.
OTHER, NET. Other, net improved to $4.1 million of income for
1997 from $7.4 million in expense for 1996, primarily due to
the recognition of a $6.0 million gain on the sale of its Santa
Clara, California silicon wafer facility.
INCOME TAXES. Income tax expense was recorded for 1997 despite
the recognition of a pre-tax loss primarily due to the
composition of the Company's worldwide taxable income. The
effective income tax rate for 1996 was 40.0%.
EQUITY IN INCOME OF JOINT VENTURES. Equity in income of joint
ventures decreased to $5.5 million in 1997 from $26.7 million
in 1996. PHC recorded higher volumes and net sales; however,
the impact of lower prices, a less favorable product mix and a
work stoppage in the third quarter (and the subsequent ramp-up
of operations) resulted in significantly reduced gross margins.
For the year, PHC provided a contribution of $11.1 million
compared to $34.1 million for 1996. Following the start-up and
qualification of its operations, Taisil was able to generate
net sales sufficient to keep pace with the increase in expenses
as its capacity expanded. As a result, the Company's share of
Taisil's loss of $5.6 million in 1997 and $7.4 million in 1996
is fairly consistent.
NET EARNINGS (LOSS). Lower pricing and capacity utilization
coupled with higher start-up and training costs, research and
development costs and interest expense, and lower equity in
income of joint ventures resulted in a net loss of $4.5 million
for 1997 compared to net earnings of $103.4 million for 1996.
7
---------------------------------------------------------------
LIQUIDITY AND At December 31, 1998, the Company had $16.2 million of cash and
CAPITAL cash equivalents compared to $30.1 million at December 31,
RESOURCES 1997.
Cash flows from operating activities decreased to ($33.9)
million for 1998 from $29.4 million for 1997. This $63.3
million decline was largely attributable to lower results from
operations, an increase in deferred taxes, and a decrease in
accounts payable, partially offset by a decrease in accounts
receivable and inventories.
Accounts receivable of $98.5 million at December 31, 1998
decreased $56.2 million, or 36.3%, from $154.7 million at the
end of 1997. This decrease is consistent with the 40.5%
decrease in fourth quarter sales between the two years.
Days' sales outstanding were 58.4 at December 31, 1998 compared
to 55.0 at the end of 1997 based upon annualized fourth quarter
sales for the respective years. This increase is attributable
to lengthier collection periods in the Asian region in the
fourth quarter of 1998.
Inventories declined $25.5 million, or 18.0%, from the prior
year to $115.9 million at December 31, 1998. This decrease is
primarily due to lower anticipated sales in the first quarter
of 1999 compared to the year-ago period and a concerted effort
by the Company to reduce raw materials and manage inventory
levels. Related inventory reserves for obsolescence, lower of
cost or market issues, or other impairments increased $11.7
million in 1998 to $19.6 million, as a result of declining
sales and the resultant determination that certain goods in
process, finished goods and spare parts were no longer salable
or usable. Year-end inventories as a percentage of annualized
fourth quarter sales increased from 13.8% at the end of 1997 to
18.8% at December 31, 1998, as a result of the significant
sales decline in 1998 and the character of certain inventory
items such as spare parts which do not fluctuate with sales
levels.
The Company's net deferred tax assets increased $97.5 million
to $126.2 million at December 31, 1998. 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, 1998.
In order to realize the net deferred tax assets existing at
December 31, 1998, the Company will need to generate future
taxable income of approximately $353 million. The Company's net
operating loss (NOL) carryforwards total $410 million, of which
$7 million will expire in 2001; $15 million will expire in
2002; $32 million will expire in 2003; $27 million will expire
in 2012; and $329 million will expire in 2018. There can be no
assurance, however, that the Company will generate sufficient
taxable income.
Accounts payable decreased $33.6 million or 23.0% compared to
the balance at the end of 1997 due to a significant reduction
in capital expenditures and lower operating costs as a result
of lower product volumes in the fourth quarter of 1998 compared
to the year-ago period.
Capital expenditures decreased $177.8 million or 47.7% versus
the prior year to $194.6 million. The 1998 capital expenditures
primarily consisted of equipping the 300 millimeter pilot line
in St. Peters, MO, the 300 millimeter integrated development
line in Utsunomiya, Japan, the granular polysilicon expansion
at MEMC Pasadena and the installation of epitaxial reactors in
Utsunomiya, Japan. The Company anticipates that it will reduce
capital expenditures in 1999 to less than $85.0 million. At
December 31, 1998, the Company had $38.8 million of committed
capital expenditures.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Equity infusions in joint ventures increased $14.9 million to
$25.5 million for 1998 and related solely to Taisil. Although
Taisil has not yet generated positive net income, the Company
does not consider its investment in Taisil to be impaired as of
December 31, 1998 or December 31, 1997 based on the following
factors: the level of commitment by all of Taisil's
shareholders; the growing Taiwanese silicon wafer market;
increased customer qualifications and associated increased
product volumes; and future anticipated positive operating cash
flows. As discussed below, the Company intends to make an
additional equity infusion into Taisil of approximately $12.3
million in the first half of 1999.
At December 31, 1998, the Company maintained $927.2 million of
committed long-term loan agreements, of which $873.7 million
was outstanding. The Company also maintained $83.0 million of
short-term lines of credit, of which $36.1 million was
outstanding at year-end. The Company's weighted average cost of
borrowing was 7.8% at December 31, 1998.
Total debt outstanding increased to $909.8 million at December
31, 1998 from $632.5 million at December 31, 1997. The total
debt to total capital ratio at December 31, 1998 was 67.0%.
During September 1998, the Company received a three-year $100.0
million revolving credit facility from VEBA AG, the parent of
the Company's majority stockholder. This is in addition to a
$50.0 million credit facility from VEBA AG that was made
available to the Company on June 30, 1998. VEBA AG and its
affiliates agreed to extend until 2001 all of the Company's
outstanding debt 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 AG and its affiliates to reflect interest rate spreads
applicable to an average industrial borrower at a specified
credit rating. These higher rates, which are in part
attributable to extended terms, will result in an increase in
interest expense of approximately $15.0 million per year based
upon $679.6 million of debt outstanding with VEBA AG and its
affiliates as of September 30, 1998. Prior to this debt
re-negotiation, interest rates on the U.S. dollar and Japanese
yen based loans outstanding with VEBA AG and its affiliates
ranged from 2.1% to 7.6%. As a result of this debt
re-negotiation, these loans will now have interest rates
ranging from 3.4% to 10.2%. Additionally, all outstanding debt
with VEBA AG and its affiliates 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.
Subsequent to year-end, the Company received a $75 million
short-term revolving credit facility from an affiliate of VEBA
AG. The interest rate on the credit facility reflects interest
rate spreads applicable to an average industrial borrower at a
specified credit rating. Under the loan agreement, the Company
cannot pledge any of its assets to secure additional financing.
During 1998, the Company repurchased 893,000 shares of common
stock for a total of $15.7 million.
On October 22, 1998, the Company filed a registration statement
with the Securities and Exchange Commission (SEC) for the sale
of its common stock in a rights offering to existing
shareholders except VEBA AG and its affiliates (the
"Offering"). The Company expects approximately $91.1 million in
aggregate net proceeds from the Offering, after paying
estimated expenses including fees to dealer managers.
Immediately prior to the Offering, the Company will sell common
stock to VEBA Zweite Verwaltungsgesellschaft mbH, an affiliate
of VEBA AG ("VEBA Zweite") for aggregate net proceeds of
approximately $105.9 million. VEBA Zweite has also agreed to
purchase all shares issuable upon exercise of the rights that
are not subscribed for pursuant to the basic subscription
privilege or the over-subscription privilege by other
stockholders, subject to certain conditions that are customary
in a firm commitment underwriting. Once the Offering has been
approved by the SEC, the subscription price and number of
shares will be determined based on the average share price
during a period shortly before the effective date of the
registration statement. The Company intends to use the proceeds
from the Offering and the private placement to reduce debt
outstanding under revolving credit agree-
9
ments, for a capital contribution to Taisil of approximately
$12.3 million, and for general corporate purposes. The Company
expects the registration to be effective and the Offering to
commence by the end of the first quarter of 1999. The private
placement to VEBA Zweite will be consummated immediately prior
to commencement of the rights offering.
Management currently believes that cash generated from
operations, together with the liquidity provided by existing
cash balances and credit facilities and the anticipated proceeds
from the private placement and Offering will be sufficient to
satisfy commitments for capital expenditures and other cash
requirements into 2000.
The silicon wafer industry is highly capital intensive. Even
with the proceeds from the private placement to VEBA Zweite and
rights offering (if such transactions are consummated) and
anticipated cash from 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. The Company's capital needs
depend on numerous factors, including its profitability and
investment in capital expenditures and research and development.
Historically, the Company has funded its operations primarily
through loans from VEBA AG and its affiliates, internally
generated funds, and an initial public offering. To a lesser
extent, the Company has raised funds by borrowing money from
commercial banks. The Company will continue to explore and, as
appropriate, enter into discussions with other parties regarding
possible future sources of capital. Under the loan agreements
between the Company and its principal lender,VEBA AG and its
affiliates, the Company cannot pledge any of its assets to
secure additional financing. The Company does not believe that
it currently can obtain unsecured financing from third parties
on better terms than those with VEBA AG and its affiliates.
For financial reporting purposes, both VEBA Corporation and
VEBA AG include VEBA Corporation's share of the Company's net
earnings or losses in their consolidated financial statements.
The Company's recent losses have adversely affected
VEBA Corporation's and VEBA AG's reported earnings. While the
Company is not one of the focus areas of VEBA AG and its
affiliates' future major investments, they have recently
provided the Company with additional capital and have committed
to provide substantial additional capital, as described herein.
However,VEBA AG and its affiliates are not otherwise obligated
to provide capital to the Company. There can be no assurance
that VEBA AG and its affiliates will continue to provide capital
to the Company in the future.
----------------------------------------------------------------
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 resolved by June 1999, with Year 2000 issues
relating to the
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
most critical business systems (i.e. financial, order
processing) resolved by the first quarter of 1999. To that end,
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 are 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 75% complete and
the Company anticipates completing remediation and testing of
the Company's in-house applications by the end of the first
quarter of fiscal 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 85%, 55% and 75% 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 completed by
the end of the first 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.
11
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 are planned 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 intends to
develop 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 December 31, 1998, the Company has
expended approximately $2.2 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
complete Year 2000 contingency planning by March 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 to the
Company 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
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 In June 1998, the Financial Accounting Standards Board issued
ACCOUNTING Statement of Financial Accounting Standards (SFAS) No. 133,
PRONOUNCEMENTS "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 affect on its
financial condition or results of operations.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 requires that certain
costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful
life of the software. This Statement also requires that costs
related to the preliminary project stage and the
post-implementation/ operations stage of an internal-use
computer software development project be expensed as incurred.
SOP 98-1 is effective for financial statements issued for
fiscal years beginning after December 15, 1998. 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 Certain statements made in this report are or may constitute
"forward looking statements". These include statements
concerning the manner, timing and estimated savings and effects
of the Company's restructuring activities; estimated cost
reductions for the global purchasing, plant focus and other
initiatives; the Company's expectations for an increase in
market demand for silicon wafers and semiconductors and an
easing of pressure on pricing and margins in the year 2000; the
Company's expectations concerning its lack of profitability in
1999 and its ability to generate positive operating cash flows
in the year 2000; implementation in MEMC plants of QS 900 and
ISO 14001 certification; the transfer of Spartanburg-based
small diameter production activities to other existing
locations; utilization of the restructuring reserve; capital
expenditures in 1999; the expectations concerning Taisil and
the Taiwanese silicon wafer market; the consummation of the
pending private placement to the VEBA Group and the Offering;
the continued support of the Company by the VEBA Group; and the
status, effectiveness and projected completion of the
Company's Year 2000 initiative.
Because these matters are subject to risks and uncertainties,
actual results may differ materially from those expressed or
implied by forward looking statements. Factors that could cause
actual results to differ materially include the demand for
semiconductors worldwide; changes in the pricing environment
for the Company's products; changes in financial market
conditions; the economic conditions in the Asia Pacific region
and Japan; actions taken by the Company's competitors; the
willingness of the Company's customers to re-qualify
Spartanburg-based production to other locations; the accuracy
of assumptions made by the Company regarding savings from its
restructuring activities; and changes in interest and exchange
rates.
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
publically any revisions to these statements to reflect later
events or circumstances or to reflect the occurrence of
unanticipated events.
13
---------------------------------------------------------------
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.
The following table provides information about the Company's
financial instruments that are sensitive to changes in interest
rates. For debt obligations, the table presents principal
maturities and related weighted-average interest rates by
expected maturity dates. Weighted average variable rates are
based on implied forward rates in the yield curve at the
reporting date. The information is presented in U.S. dollar
equivalents. The instrument's actual cash flows are denominated
in U.S. dollars (USD), Japanese Yen (JPY), and Italian Lira
(ITL), as indicated in parentheses.
INTEREST RATE SENSITIVITY
Principal (Notional) Amount by Expected Maturity Average Interest Rate
Fair Value
(Amounts in thousands) 1999 2000 2001 2002 2003 Thereafter Total 12/31/98
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Variable rate debt:
Long-term debt - (USD) $131,400 $131,400 $131,400
Average interest rate 10.2% 10.2%
Fixed rate debt:
Long-term debt - (USD) $30,000(1) $10,000(1) $145,000 $100,000 $90,000 $200,000 $575,000 $542,593
Long-term debt - (JPY) 8,610(1) 20,776(1) 44,410 31,461 4,219 45,504 154,980 154,581
Long-term debt - (ITL) 2,517 2,288 2,347 1,926 1,220 2,002 12,300 12,670
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed rate debt $41,127 $33,064 $191,757 $133,387 $95,439 $247,506 $742,280 $709,844
===========================================================================================================================
Average interest rate 7.2% 4.4% 7.5% 7.5% 8.4% 8.1% 7.6%
Total Fixed and Variable 873,680 $841,244
===========================================================================================================================
(1)The Company has the ability and intent to refinance all U.S. Dollar
denominated debt in 1999 and 2000, all Japanese Yen denominated debt in 1999,
and $8,610 of the Japanese Yen denominated debt in 2000 at interest rates
reflecting new maturities to 2001 and interest rate spreads applicable to an
average industrial borrower at an assumed credit rating.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company routinely enters into forward currency exchange
contracts in the regular course of its business to manage its
exposure against foreign currencies. The Company had $30.8
million in foreign currency contracts outstanding at December
31, 1998 with an estimated fair value of $32.1 million. These
contracts are for a short duration, generally less than six
months, and their contract values approximate fair value. Thus,
they have been omitted from the table below. In addition, the
Company entered into a foreign currency swaps to hedge a
portion of its debt in Japan. For debt obligations, the table
presents debt obligations which are held by the Company in a
currency that is not its reporting currency.
FOREIGN CURRENCY EXCHANGE RATE SENSITIVITY
Principal (National) Amount by Expected Maturity
Fair Value
(Amounts in thousands) 1999 2000 2001 2002 Total 12/31/98
------------------------------------------------------------------------------------------------
LONG-TERM DEBT (US $ Functional Currency)
Long-term debt - JPY $8,610 $8,610 $8,610 $8,610 $34,440 $33,582
Average interest rates 3.4% 4.1% 4.7% 5.2% 4.4%
CURRENCY SWAP AGREEMENTS
Payment of Japanese Yen
Notional amount 12,634 12,634 10,384
Average contract rate 79.15
------------------------------------------------------------------------------------------------
15
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Dollars in thousands, except share data
Net sales $ 758,916 $ 986,673 $ 1,119,500
Cost of goods sold 790,745 861,914 869,315
- -----------------------------------------------------------------------------------------------------------
Gross margin (31,829) 124,759 250,185
Operating expenses:
Marketing and administration 73,515 70,715 79,680
Research and development 81,591 64,457 44,313
Restructuring costs 146,324 -- --
- -----------------------------------------------------------------------------------------------------------
Operating profit (loss) (333,259) (10,413) 126,192
- -----------------------------------------------------------------------------------------------------------
Nonoperating (income) expense:
Interest expense 45,832 14,743 494
Interest income (2,291) (2,570) (5,436)
Royalty income (4,628) (8,186) (6,158)
Other, net 1,043 (4,070) 7,437
- -----------------------------------------------------------------------------------------------------------
Total nonoperating (income) expense 39,956 (83) (3,663)
- -----------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes, equity in income
(loss) of joint ventures and minority interests (373,215) (10,330) 129,855
Income taxes (89,394) 2,769 51,942
- -----------------------------------------------------------------------------------------------------------
Earnings (loss) before equity in income (loss) of joint
ventures and minority interests (283,821) (13,099) 77,913
Equity in income (loss) of joint ventures (43,496) 5,480 26,716
Minority interests 10,985 3,106 (1,241)
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (316,332) $ (4,513) $ 103,388
===========================================================================================================
Basic earnings (loss) per share $ (7.80) $ (0.11) $ 2.50
Diluted earnings (loss) per share $ (7.80) $ (0.11) $ 2.49
===========================================================================================================
Weighted average shares used in computing basic
earnings (loss) per share 40,580,869 41,345,193 41,308,806
===========================================================================================================
Weighted average shares used in computing diluted
earnings (loss) per share 40,580,869 41,345,193 41,534,412
===========================================================================================================
See accompanying notes to consolidated financial statements.
16
CONSOLIDATED BALANCE SHEETS
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------
Dollars in thousands, except share data
ASSETS
Current assets:
Cash and cash equivalents $ 16,168 $ 30,053
Accounts receivable, less allowance for doubtful accounts of
$2,853 and $3,473 in 1998 and 1997, respectively 98,528 154,702
Income taxes receivable 10,161 14,382
Inventories 115,927 141,447
Deferred tax assets, net 23,129 13,206
Prepaid and other current assets 35,225 23,185
- ----------------------------------------------------------------------------------------------------------
Total current assets 299,138 376,975
Property, plant and equipment, net 1,188,832 1,200,827
Investment in joint ventures 94,610 112,573
Excess of cost over net assets acquired, net of accumulated amortization of
$5,128 and $3,752 in 1998 and 1997, respectively 48,396 49,772
Deferred tax asset, net 104,650 15,472
Other assets 38,088 38,805
- ----------------------------------------------------------------------------------------------------------
Total assets $ 1,773,714 $ 1,794,424
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 38,644 $ 122,476
Accounts payable 112,581 146,172
Accrued liabilities 35,404 40,219
Customer deposits 17,639 8,392
Provision for restructuring costs 37,299 --
Accrued wages and salaries 17,077 21,267
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 258,644 338,526
Long-term debt, less current portion 871,163 510,038
Pension and similar liabilities 92,466 76,837
Customer deposits 59,033 67,141
Other liabilities 45,126 26,901
- ----------------------------------------------------------------------------------------------------------
Total liabilities 1,326,432 1,019,443
- ----------------------------------------------------------------------------------------------------------
Minority interests 48,242 59,227
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 shares authorized, none issued
or outstanding in 1998 or 1997 -- --
Common stock, $.01 par value, 200,000,000 shares authorized, 41,436,421
and 41,440,369 issued in 1998 and 1997, respectively 414 414
Additional paid-in capital 574,188 574,317
Retained earnings (accumulated deficit) (147,836) 168,496
Accumulated other comprehensive loss (10,581) (25,721)
Unearned restricted stock awards (125) (424)
Treasury stock, at cost: 929,205 and 36,205 shares in 1998 and 1997 (17,020) (1,328)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity 399,040 715,754
- ----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,773,714 $ 1,794,424
==========================================================================================================
See accompanying notes to consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands
Cash flows from operating activities:
Net earnings (loss) $(316,332) $ (4,513) $ 103,388
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 155,874 126,913 91,660
Minority interests (10,985) (3,106) 1,241
Equity in (income) loss of joint ventures 43,496 (5,480) (26,716)
Restructuring costs 104,704 -- --
(Gain) loss on sale of property, plant and equipment 6,916 (4,766) 610
Deferred compensation earned 299 596 1,001
Changes in assets and liabilities:
Accounts receivable 61,836 (36,051) 32,247
Income taxes receivable 4,655 (8,794) (24,127)
Inventories 28,461 (46,445) (11,126)
Prepaid and other current assets (1,203) 9,487 (10,638)
Deferred taxes (98,074) (17,783) 11,546
Accounts payable (38,833) 3,976 19,221
Accrued liabilities (7,792) 8,301 (8,257)
Accrued wages and salaries (4,209) (3,797) 1,749
Customer deposits (348) 17,806 69,626
Other, net 37,680 (6,915) 10,480
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (33,855) 29,429 261,905
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (194,610) (372,416) (590,049)
Proceeds from sale of property, plant and equipment 5,730 21,512 884
Equity infusions in joint ventures (25,533) (10,638) (14,698)
Dividend received from unconsolidated joint venture -- 11,263 --
Deposit with affiliate -- -- 55,000
Notes receivable from affiliates (8,642) 212 2,376
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (223,055) (350,067) (546,487)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net short-term borrowings (8,843) 87,420 14,898
Proceeds from issuance of long-term debt 515,313 248,553 222,166
Principal payments on long-term debt (248,936) (18,693) (2,060)
Repurchase of common stock (15,692) -- (1,328)
Other (129) 385 8,603
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 241,713 317,665 242,279
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1,312 (2,070) 207
- ------------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (13,885) (5,043) (42,096)
Cash and cash equivalents at beginning of year 30,053 35,096 77,192
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 16,168 $ 30,053 $ 35,096
====================================================================================================================================
Supplemental disclosures of cash flow information:
Interest payments, net of amount capitalized $ 48,179 $ 21,204 $ --
Income taxes paid $ 9,794 18,020 57,590
====================================================================================================================================
See accompanying notes to consolidated financial statements.
18
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
---------------------------- Retained
Number Additional Earnings
of Shares Par Paid-in (Accumulated
Issued Value Capital Deficit)
- ----------------------------------------------------------------------------------------
Dollars in thousands,
except per share data
Balance at December 31, 1995 41,399,998 $ 414 $ 569,959 $ 69,621
Comprehensive income
Net earnings -- -- -- 103,388
Net translation adjustment -- -- -- --
Comprehensive income
Stock plans, net 70,973 1 3,392 --
Deferred compensation earned -- -- -- --
Repurchase of common stock -- -- -- --
- ----------------------------------------------------------------------------------------
Balance at December 31, 1996 41,470,971 415 573,351 173,009
Comprehensive loss
Net loss -- -- -- (4,513)
Net translation adjustment -- -- -- --
Comprehensive loss
Stock plans, net (30,602) (1) 966 --
Deferred compensation earned -- -- -- --
- ----------------------------------------------------------------------------------------
Balance at December 31, 1997 41,440,369 414 574,317 168,496
Comprehensive loss
Net loss -- -- -- (316,332)
Net translation adjustment -- -- -- --
Minimum pension liability -- -- -- --
Comprehensive loss (net of tax)
Stock plans, net (3,948) -- (129) --
Deferred compensation earned -- -- -- --
Repurchase of common stock -- -- -- --
- ----------------------------------------------------------------------------------------
Balance at December 31,1998 41,436,421 $ 414 $ 574,188 $ (147,836)
========================================================================================
Accumulated Unearned
Other Restricted
Comprehensive Stock Treasury
Income (loss) Awards Stock Total
- ----------------------------------------------------------------------------------------
Dollars in thousands,
except per share data
Balance at December 31, 1995 $ 4,717 $ (2,016) $ -- $ 642,695
Comprehensive income
Net earnings -- -- -- 103,388
Net translation adjustment (364) -- -- (364)
Comprehensive income 103,024
Stock plans, net -- (202) -- 3,191
Deferred compensation earned -- 1,001 -- 1,001
Repurchase of common stock -- -- (1,328) (1,328)
- ----------------------------------------------------------------------------------------
Balance at December 31, 1996 4,353 (1,217) (1,328) 748,583
Comprehensive loss
Net loss -- -- -- (4,513)
Net translation adjustment (30,074) -- -- (30,074)
Comprehensive loss (34,587)
Stock plans, net -- 197 -- 1,162
Deferred compensation earned -- 596 -- 596
- ----------------------------------------------------------------------------------------
Balance at December 31, 1997 (25,721) (424) (1,328) 715,754
Comprehensive loss
Net loss -- -- -- (316,332)
Net translation adjustment 17,682 -- -- 17,682
Minimum pension liability (2,542) -- -- (2,542)
Comprehensive loss (net of tax) (301,192)
Stock plans, net -- 129 -- --
Deferred compensation earned -- 170 -- 170
Repurchase of common stock -- -- (15,692) (15,692)
- ----------------------------------------------------------------------------------------
Balance at December 31,1998 $ (10,581) $ (125) $ (17,020) $ 399,040
========================================================================================
See accompanying notes to consolidated financial statements.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except share data
1 - NATURE OF MEMC Electronic Materials, Inc. and subsidiaries (the
OPERATIONS Company) is a manufacturer and leading worldwide supplier
of electronic grade silicon wafers for the semiconductor
industry. The Company has production facilities directly
or through joint ventures in Italy, Japan, Malaysia,
South Korea, Taiwan and the United States. The Company's
customers are located throughout the world.
---------------------------------------------------------
2 - SUMMARY (a) Basis of Presentation
OF SIGNIFICANT The preparation of the consolidated financial statements
ACCOUNTING POLICIES in conformity with generally accepted accounting
principals (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.
Certain prior period amounts have been reclassified to
conform to the current year's presentation.
(b) Principles of Consolidation
The consolidated financial statements include the
accounts of MEMC Electronic Materials, Inc. and its
wholly and majority owned subsidiaries. Investments of
less than 50% in two joint venture companies are
accounted for using the equity method. All significant
intercompany transactions have been eliminated.
(c) Cash Equivalents
Cash equivalents consist of cash in banks, principally
overnight investments and short-term time deposits, with
original maturities of three months or less.
(d) Inventories
Inventories are stated at the lower of cost or market.
Raw materials and supplies inventories are valued using
the first-in, first-out method. Goods in process and
finished goods inventory values are based upon standard
costs which approximate average costs.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost.
Depreciation is computed principally using the
straight-line method over estimated service lives as
follows:
---------------------------------------------------------
Years
Land improvements 6-15
Buildings and building improvements 10-30
Machinery and equipment 3-12
=========================================================
The Company capitalizes interest costs as part of the
cost of constructing facilities and equipment. Interest
costs of $5,521, $15,968 and $8,957 were capitalized in
1998, 1997 and 1996, 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 cost over net assets
acquired at December 31, 1998 and 1997.
(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
20
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, 1998 and 1997.
(i) Impairment of Investment in Joint Ventures
Impairment of investments in joint ventures is measured
by comparing the carrying amount of the asset to future
net cash flows expected to be generated by the asset. In
addition, the level of commitment of the joint venture's
shareholders, the silicon wafer markets serviced by the
joint ventures, and the level of customer qualifications
at the joint ventures are also considered in assessing
the impairment of the Company's investments in joint
ventures. There is no indication of impairment of these
investments at December 31, 1998 and 1997.
(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 and
Deutsche mark). 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 separate component of stockholders' equity
(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.
No provision is made for U.S. income taxes on unremitted
earnings of the Company's consolidated non-U.S.
subsidiaries, as the retention of such earnings is
considered essential for continuing operations, or the
additional taxes are considered to be minimal based upon
available foreign tax credits.
(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 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
does not issue equity instruments to non-employees.
21
(o) Comprehensive Income
(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 income (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, 1998.
---------------------------------------------------------
3 - FAIR VALUE OF The carrying amount of the Company's cash, accounts
FINANCIAL receivable, income taxes receivable, short-term
INSTRUMENTS 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:
DECEMBER 31, 1998 1997
---------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------------------------------------------------------------------------------------
Dollars in thousands
Long-term debt $873,680 $841,244 $519,995 $522,970
Off-balance sheet financial instruments:
Foreign currency contracts 30,846 32,139 69,842 67,810
Currency swap contract 12,634 10,384 12,634 9,334
=============================================================================================
The fair value of each long-term debt facility is based
upon the amount of future cash flows associated with each
instrument discounted at the Company's current borrowing
rate for similar debt instruments of comparable terms.
The Company has entered into forward exchange contracts
with VEBAAG and its affiliates to manage foreign currency
exchange risk relating to current trade sales with its
foreign subsidiaries and current trade sales with its
customers denominated in foreign currencies (primarily
Japanese yen and Deutsche mark), and a currency swap
contract relating to foreign currency denominated
intercompany loans. The Company believes its hedging
arrangements with VEBAAG and its affiliates allow for
transactions on a basis that is comparable to terms
available from unrelated third party financial
intermediaries.
The fair values of the forward and the currency swap
contracts were a net gain to the Company of $957 and
$5,332, as measured by the amount that would have been
paid to liquidate and repurchase all open contracts as of
December 31, 1998 and 1997, respectively. Deferred losses
for intercompany loans totaled $2,897 and $3,437 at
December 31, 1998 and 1997, respectively.
---------------------------------------------------------
4 - CONCENTRATION The Company sells products to customers in the
OF CREDIT RISK semiconductor industry which are located in various
geographic regions including the United States, Europe,
Japan and Asia Pacific. The primary customers in this
industry are well capitalized and the concentration of
credit risk is considered minimal due to the Company's
customer base. Sales to the Company's largest customer
were 20.3%, 20.0% and 16.8% of net sales in 1998, 1997
and 1996, respectively. No other customer constituted 10%
or more of net sales in 1998, 1997 or 1996.
---------------------------------------------------------
5 - RESTRUCTURING During the second quarter of 1998, the Company decided to
COSTS 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 have been running their
larger diameter manufacturing lines in preference to
their small diameter lines in order to gain production
efficiencies; (2) a number of semiconductor manufacturers
recently have undertaken restructuring initiatives
focused on permanently eliminating small diameter lines;
and (3) management believes that small diameter wafer
capacity will exceed demand even after the semiconductor
industry begins 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 has experienced for these
wafers.
The Company recorded a charge to operations of $121,670
(of which $81,325 is non-cash) related to the above
actions.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring activity since the provision for
restructuring costs was recorded is as follows:
BALANCE AT
AMOUNT DECEMBER 31,
PROVISION UTILIZED 1998
------------------------------------------------------------------------------------------
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
==========================================================================================
The assets for which an impairment loss has been recorded
or which have or will be written-off are primarily
property, plant and equipment that cannot be sold or used
at other Company facilities. Accordingly, these assets
have been written down to net realizable value. The net
balance of Spartanburg property, plant and equipment
before and after the write-off was $50,965 and $14,665,
respectively. Additionally, the Company wrote-off
architectural design and site preparation fees and costs
incurred to develop a computer integrated manufacturing
system for the Malaysian joint venture that do not have
applicability elsewhere within the Company. Ongoing
operating expenses until plant closure associated with
the Spartanburg facility of approximately $7,930 will
continue to be recorded as period costs. Costs of
approximately $8,000 relating to the relocation and
installation of equipment from the Spartanburg facility
to other sites will be capitalized as incurred.
The Chinese joint venture assets represent the operating
assets of the Company's 60% owned joint venture in China.
The Company anticipates ceding its interest in the
operating assets of the joint venture to the partner in
the joint venture, with which the Company has no other
interest, and receiving deminimus proceeds in conjunction
with its withdrawal.
The provision for dismantling and related costs primarily
relates to the Spartanburg facility and includes
estimates for the dismantling of the facility, collection
and disposal of process chemicals, decontamination of
manufacturing equipment, modification of the wastewater
treatment facility, remaining operating lease payments on
equipment that will not be used elsewhere in the Company
and scrapping charges. Environmental remediation costs of
$3,500 relating to the closure of the Spartanburg
facility were accrued in accordance with Statement of
accounting Financial Standards No. 5, "Accounting for
Contingencies".
23
Personnel costs of $12,200 represent the expected
severance cost of involuntary terminations for all hourly
and salaried employees, at the Spartanburg facility, whom
the Company does not expect to relocate elsewhere within
the organization. At December 31, 1998, approximately 240
of these employees had not yet been terminated. An
additional $2,300 restructuring charge relates to
severance benefits for certain employees at other MEMC
sites.
In addition to the restructuring activities discussed
above, the Company recorded a $24,654 charge for a
voluntary separation program for approximately 600 hourly
and salaried U.S. employees. All of this amount was paid
to participants as of December 31, 1998. Of the $37,299
restructuring reserve at December 31, 1998, approximately
$7,000 is non-cash. Half of the approximately $30,000
remaining reserve is expected to be paid out in the first
half of 1999. During this time, the Company will transfer
the small diameter production activities of the
Spartanburg facility to other existing Company locations.
The remaining half is expected to be expended by 1999
year-end and relates primarily to dismantling costs
associated with the Spartanburg facility.
---------------------------------------------------------
6 - INVENTORIES Inventories consist of the following:
DECEMBER 31, 1998 1997
-------------------------------------------------------------------------------
Dollars in thousands
Raw materials and supplies $ 59,722 $ 65,369
Goods in process 33,612 37,996
Finished goods 22,593 38,082
-------------------------------------------------------------------------------
$115,927 $141,447
===============================================================================
---------------------------------------------------------
7 - PROPERTY, PLANt Property, plant and equipment consist of the following:
AND EQUIPMENT
December 31, 1998 1997
-------------------------------------------------------------------------------
Dollars in thousands
Land and land improvements $ 14,404 $ 13,055
Buildings and building improvements 484,820 435,740
Machinery and equipment 1,110,195 1,001,846
-------------------------------------------------------------------------------
1,609,419 1,450,641
Less accumulated depreciation 569,327 465,384
-------------------------------------------------------------------------------
1,040,092 985,257
Construction in progress 148,740 215,570
-------------------------------------------------------------------------------
$1,188,832 $1,200,827
===============================================================================
---------------------------------------------------------
8 - INVESTMENT IN The Company has a 40% interest in POSCO HULS Co. Ltd.
JOINT VENTURES (PHC), a joint stock company formed to manufac- ture and
sell silicon wafers in South Korea, and a 45% interest in
Taisil Electronic Materials Corporation (Taisil), a
company limited by shares formed to manufacture and sell
silicon wafers in Taiwan.
During 1998, 1997 and 1996, the Company earned $4,628,
$8,186 and $6,158, respectively, from these
unconsolidated joint ventures under royalty agreements.
Sales by PHC of intermediate and finished product to the
Company totaled $22,301, $32,313 and $89,723 in 1998,
1997 and 1996, respectively.
The Company provides PHC and Taisil with debt guarantees
totaling $581 and $74,711, respectively.At December 31,
1998, PHC and Taisil had $581 and $74,711, respectively,
in standby letters of credit and borrowings outstanding
against these guarantees.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the results of operations for 1998, 1997 and
1996, and financial position as of December 31, 1998 and
1997 of the Company's unconsolidated joint ventures
follows:
December 31, 1998 1997 1996
------------------------------------------------------------------------------------------------
Dollars in thousands
Total:
Net sales $179,643 $277,492 $282,310
Gross margin (33,668) 54,120 107,366
Net earnings (loss) (101,596) 15,274 68,847
================================================================================================
The Company's share --
Net earnings (loss) $(43,496) $ 5,480 $ 26,716
================================================================================================
Current assets $169,532 $147,644
Noncurrent assets 488,634 565,201
-------------------------------------------------------------------------
Total assets 658,166 712,845
-------------------------------------------------------------------------
Current liabilities 165,157 155,038
Noncurrent liabilities 266,352 284,736
-------------------------------------------------------------------------
Total liabilities 431,509 439,774
Interests of others 132,047 160,498
-------------------------------------------------------------------------
The Company's investment $ 94,610 $112,573
=========================================================================
The Company's share of undistributed retained earnings of
unconsolidated joint ventures was approximately ($28,156)
and $16,090 at December 31, 1998 and 1997, respectively.
In 1997, the Company received a dividend from PHC of
$11,263.
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 Interest expense related to short-term borrowings with an
BORROWING affiliate was $4,195, $1,667 and $181 in 1998, 1997 and
AGREEMENTS AND 1996, respectively.
LINES OF CREDIT
The Company has unsecured borrowings from foreign banks
of approximately $36,000 at December 31, 1998, under
approximately $83,000 of short-term loan agreements which
bear interest at various rates ranging from 1.0% to 11.1%
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 lines of credit. The Company's weighted
average interest rate on short-term borrowings was 3.3%
and 4.9% at December 31, 1998 and 1997, respectively, and
was favorably impacted by interest rates in Japan.
25
---------------------------------------------------------
10 - LONG-TERM DEBT Long-term debt consists of the following:
December 31, 1998 1997
------------------------------------------------------------------------------------------------
Dollars in thousands
Owed to affiliates:
Note with interest payable semiannually at 6.7%, due in 1998 $ -- $ 25,000
Notes with interest payable semiannually at rates ranging from
2.1% to 7.2%, due in 1999 -- 37,690
Notes with interest payable semiannually at rates ranging from
2.5% to 6.4%, due in 2000 -- 17,690
Notes with interest payable semiannually at rates ranging from
2.9% to 10.2%, due in 2001 342,230 77,690
Notes with interest payable semiannually at rates ranging from
3.2% to 9.7%, due in 2002 108,610 82,690
Note with interest payable semiannually at rates ranging from
6.4% to 8.8%, due in 2003 90,000 40,000
Notes with interest payable semiannually at rates ranging from
6.5% to 9.7%, due in 2004 125,000 100,000
Note with interest payable semiannually at rates ranging from
7.3% to 9.6%, due in 2005 75,000 75,000
------------------------------------------------------------------------------------------------
Total owed to affiliates 740,840 455,760
------------------------------------------------------------------------------------------------
Owed to nonaffiliates:
Note with interest payable semiannually at 4.1%, due in 1998 -- 7,690
Notes with interest payable semiannually at rates ranging from
1.7% to 2.2%, due in 2001 $17,220 15,380
Note with interest payable semiannually at rates ranging from
1.6% to 1.7%, due in 2000 through 2002 43,050 15,380
Other notes with interest payable semiannually at rates ranging
from 1.5% to 8.9%, due in 1999 through 2017 72,570 25,785
------------------------------------------------------------------------------------------------
Total owed to nonaffiliates 132,840 64,235
------------------------------------------------------------------------------------------------
Total long-term debt 873,680 519,995
Less current portion 2,517 9,957
------------------------------------------------------------------------------------------------
$871,163 $510,038
================================================================================================
The Company has long-term committed loan agreements of
approximately $927,000 at December 31, 1998, of which
approximately $874,000 is outstanding. Commitment fees of
1/4 of 1% are paid on the unused portion of committed
loan agreements. The Company has approximately $54,000 of
available long-term loan agreements with affiliates at
December 31, 1998. 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 $43,567, $25,633 and $7,337 in 1998, 1997
and 1996, respectively.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate amounts of long-term debt maturing
subsequent to December 31, 1998 are as follows:
---------------------------------------------------------
Dollars in thousands
1999 $ 2,517
2000 14,454
2001 380,377
2002 133,387
2003 95,439
Thereafter 247,506
---------------------------------------------------------
$873,680
=========================================================
In October 1996, the Company entered into a financing
arrangement with the City of O'Fallon, Missouri related
to the expansion of the Company's St. Peters, Missouri
facility. In total, approximately $252 million of
industrial revenue bonds were issued to the Company by
the City of O'Fallon, of which at December 31, 1998 and
1997, $215 million and $210 million 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' Preferred Stock
EQUITY The Company has 50,000,000 authorized shares of $.01 per
share par value preferred stock. The Board of Directors
is authorized, without further action by the
stockholders, to issue any or all of the preferred stock.
Common Stock
Holders of the $.01 per share par value common stock are
entitled to one vote for each share held on all matters
submitted to a vote of the stockholders. Subject to the
rights of any holders of preferred stock, holders of
common stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors.
In the event of liquidation, dissolution or winding up of
the Company, holders of the common stock are entitled to
share ratably in the distribution of all assets remaining
after payment of liabilities, subject to the rights of
any holders of preferred stock.
Stock-Based Compensation
The Company has an Equity Incentive Plan (the Plan) that
provides for the award of incentive and non-qualified
stock options, restricted stock and performance shares.
Total shares 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 and 1996 were
1,300 and 38,200, respectively, with weighted average
fair values of $22.50 and $33.46, respectively. Total
compensation cost recognized for these awards in 1998,
1997 and 1996 was $170, $596 and $1,001, respectively.
27
The Company applies Opinion 25 and related
Interpretations in accounting for the Plan. Accordingly,
no compensation cost has been recognized for
non-qualified stock options granted under the Plan. Had
compensation cost been determined for the Company's
non-qualified stock options based on the fair value at
the grant dates consistent with the alternative method
set forth under SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net earnings
(loss) and basic and diluted earnings (loss) per share
would have been reduced (increased) to the pro forma
amounts indicated below:
Year ended December 31, 1998 1997 1996
--------------------------------------------------------------------------------
Dollars in thousands, except share data
Net earnings (loss):
As reported $(316,332) $(4,513) $103,388
Pro forma (319,627) (6,551) 101,820
Basic earnings (loss) per common share:
As reported (7.80) (0.11) 2.50
Pro forma (7.88) (0.16) 2.46
Diluted earnings (loss) per common share:
As reported (7.80) (0.11) 2.49
Pro forma (7.88) (0.16) 2.45
================================================================================
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 1998, 1997 and 1996, respectively:
risk-free interest rate of 5.7%, 6.1% and 6.5%; expected
life of six years for all periods; expected volatility of
51.4%, 44.8% and 36.4%; expected dividends of zero
percent for all periods. A summary of the Company's Plan
activity with respect to stock options is presented
below:
Weighted Weighted
Average Average Fair Value
Shares Option Price of Options Granted
------------------------------------------------------------------------------------------------
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
================================================================================================
Year ended December 31, 1996
Outstanding at beginning of year 914,694 $24.00
Granted 141,300 32.99 $15.54
Exercised (36,333) 24.00
Canceled (53,823) 24.00
------------------------------------------------------------------------------------------------
Outstanding at end of year 965,838 $25.32
================================================================================================
Options exercisable at year-end 146,733 $24.53
================================================================================================
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of information about non-qualified stock
options outstanding at December 31, 1998 is presented
below:
Options Outstanding
---------------------------------------------------------
Number Weighted Average Weighted
Range of Outstanding at Remaining Average
Exercise Prices December 31, 1998 Contractual Life Exercise Price
--------------------------------------------------------------------------------------------
$24.00 618,424 6.5 years $24.00
$32.63-49.50 126,900 7.0 years 32.81
$22.50-29.00 157,750 8.0 years 22.57
$3.13-15.25 870,100 9.0 years 15.05
--------------------------------------------------------------------------------------------
$3.13-49.50 1,773,174 7.9 years $20.11
============================================================================================
Exercisable Options Outstanding
---------------------------------------------
Range of Number Exercisable at Weighted Average
Exercise Prices December 31, 1998 Exercise Price
--------------------------------------------------------------------------------------------
$24.00 537,781 $24.00
$32.63-49.50 87,300 32.78
$22.50-29.00 85,584 22.58
$3.13-15.25 183,400 15.25
--------------------------------------------------------------------------------------------
$3.13-49.50 894,065 $22.99
============================================================================================
12 - EARNINGS (LOSS) A reconciliation of the numerator and denominator of the
PER SHARE earnings (loss) per share calculations is provided for
all periods presented. The numerator for basic and
diluted earnings (loss) per share is net earnings (loss)
for all periods presented. The denominator for basic and
diluted earnings (loss) per share for 1998, 1997 and 1996
follows:
Year ended December 31, 1998 1997 1996
-------------------------------------------------------------------------------------------
Weighted average shares used for
basic earnings (loss) per share 40,580,869 41,345,193 41,308,806
Effect of dilutive securities:
Restricted stock -- -- 74,579
Stock options -- -- 151,027
-------------------------------------------------------------------------------------------
Weighted average shares used for
diluted earnings (loss) per share 40,580,869 41,345,193 41,534,412
===========================================================================================
Options outstanding at December 31, 1998, 1,773,174
shares, were not included in the computation of diluted
loss per share during 1998, because they were
antidilutive.
In January 1999, the Company granted options to purchase
647,600 shares of common stock at $8.50 to $10.50 per
share. These options will expire in January 2008.
---------------------------------------------------------
13 - INCOME TAXES Earnings (loss) before income taxes, equity in income
(loss) of joint ventures and minority interests are as
follows:
Year ended December 31, 1998 1997 1996
----------------------------------------------------------------------------------------------
Dollars in thousands
U.S. $(349,573) $(59,702) $ 57,200
Foreign (23,642) 49,372 72,655
----------------------------------------------------------------------------------------------
$(373,215) $(10,330) $129,855
==============================================================================================
29
Income tax expense consists of the following:
Current Deferred Total
--------------------------------------------------------------------------------
Dollars in thousands
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
================================================================================
Year ended December 31,1996:
U.S. federal $ 5,425 $ 5,420 $ 10,845
State and local 2,778 (133) 2,645
Foreign 33,756 4,696 38,452
--------------------------------------------------------------------------------
$ 41,959 $ 9,983 $ 51,942
================================================================================
Income tax expense differed from the amounts computed by
applying the U.S. federal income tax rate of 35% in 1998,
1997 and 1996 to earnings (loss) before income taxes,
equity in income (loss) of joint ventures and minority
interests as a result of the following:
Year ended December 31, 1998 1997 1996
--------------------------------------------------------------------------------
Dollars in thousands
Income tax at federal statutory rate $(130,625) $(3,616) $ 45,449
Increase (reduction) in income taxes
resulting from:
Change in the balance of the valuation
allowance for deferred tax assets
allocated to income tax expense 19,386 (4,738) (3,200)
Foreign tax differences 15,310 13,511 12,323
State income taxes, net
of federal benefit (1,513) (859) 1,719
Investment incentives (600) (916) (1,809)
Malaysian joint venture charges 5,552 -- --
Other, net 3,096 (613) (2,540)
--------------------------------------------------------------------------------
$ (89,394) $ 2,769 $ 51,942
================================================================================
30
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:
December 31, 1998 1997
-----------------------------------------------------------------------------------------
Dollars in thousands
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 $ 7,427 $ 5,584
Accruals for expenses currently not deductible for tax purposes 40,936 11,115
Pension, medical and other employee benefits, principally due
to accrual for financial reporting purposes 35,808 31,838
Net operating loss carryforwards 160,640 14,175
Investment tax credit carryforwards 1,456 1,456
Alternative minimum tax credit carryforwards 3,427 3,737
Foreign tax credit carryforwards -- 21,407
Other 1,151 498
-----------------------------------------------------------------------------------------
Total gross deferred tax assets 250,845 89,810
Less valuation allowance (42,166) (11,408)
-----------------------------------------------------------------------------------------
Net deferred tax assets 208,679 78,402
-----------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment, principally due to differences
in depreciation and capitalized interest (80,505) (45,480)
Other (2,020) (4,244)
-----------------------------------------------------------------------------------------
Total deferred tax liabilities (82,525) (49,724)
-----------------------------------------------------------------------------------------
Net deferred tax assets $ 126,154 $ 28,678
=========================================================================================
Net deferred tax assets were classified in the
consolidated balance sheets as follows:
December 31, 1998 1997
-----------------------------------------------------------------------------------------
Dollars in thousands
Current deferred tax assets, net $ 23,129 $ 13,206
Noncurrent deferred tax assets, net 103,025 15,472
-----------------------------------------------------------------------------------------
$ 126,154 $ 28,678
=========================================================================================
31
The Company's net deferred tax assets increased $97.5
million to $126.2 million at December 31, 1998.
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, 1998.
In order to realize the net deferred tax assets existing
at December 31, 1998, the Company will need to generate
future taxable income of approximately $353 million. The
Company's net operating loss (NOL) carryforwards total
$410 million, of which $7 million will expire in 2001;
$15 million will expire in 2002; $32 million will expire
in 2003; $27 will expire in 2012; and $329 million will
expire in 2018. There can be no assurance, however, that
the Company will generate sufficient taxable income. The
Company also has AMT credit carryforwards of $3,427 and
net investment tax credit carryforwards available of
$1,456. Utilization of $7,053 of loss carryforwards and
all of the investment tax credit carryforwards are
subject to limitation under Internal Revenue Code
Sections 382 and 383, respectively. Pursuant to these
Internal Revenue Code Sections, the amount of combined
loss and tax credit carryforwards that may be utilized is
limited to approximately $2,000 per year. Under Internal
Revenue Service regulations, the investment tax credit
carryforwards are not permitted to reduce income tax
expense until the year 2000.
14 - PENSION The Company has a noncontributory defined benefit plan
PLANS AND OTHER covering most U.S. employees. Benefits for this plan are
RETIREMENT BENEFITS based on years of service and qualifying compensation
during the final years of employment. The Company
complies with federal funding requirements.
The Company also has a nonqualified plan under the
Employee Retirement Income Security Act of 1974, which
provides benefits not otherwise payable under the above
plans due to Internal Revenue Code Restrictions.
Eligibility for participation in this plan requires
coverage under the above plan and other specific
circumstances.
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
immaterial.
Net periodic pension cost consists of the following:
Pension Plans
--------------------------------
Year ended December 31, 1998 1997 1996
-----------------------------------------------------------------------
Dollars in thousands
Service Cost $ 8,134 $ 8,178 $ 6,449
Interest Cost 9,128 7,937 6,121
Expected return on plan assets (7,219) (6,189) (5,316)
Amortization of service costs 501 576 68
Net actuarial loss/(gain) 818 562 443
Curtailment (gain) recognized 4,381 -- --
Cost of special termination benefits -- 1,067 --
-----------------------------------------------------------------------
Net periodic benefit cost $ 15,743 $ 12,131 $ 7,765
=======================================================================
Health Care Plan
--------------------------------
Year ended December 31, 1998 1997 1996
-----------------------------------------------------------------------
Dollars in thousands
Service Cost $ 1,791 $ 2,441 $ 2,552
Interest Cost 2,995 3,468 3,435
Expected return on plan assets -- -- --
Amortization of service costs (1,010) (206) --
Net actuarial loss/(gain) 47 (76) 3
Curtailment (gain) recognized (148) -- --
Cost of special termination benefits 1,023 -- --
-----------------------------------------------------------------------
Net periodic benefit cost $ 4,698 $ 5,627 $ 5,990
=======================================================================
32
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:
Pension Plans Health Care Plan
--------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------------------------------------------------
Dollars in thousands
Change in benefit obligation
Benefit obligation at January 1 $ 134,408 $ 104,246 $ 38,751 $ 51,057
Service Cost 6,235 8,179 1,407 2,441
Interest Cost 6,919 7,939 2,128 3,468
Amendments 140 8,685 -- (13,768)
Actuarial (gain)/loss 6,123 12,317 3,899 (3,673)
Benefits paid (18,494) (6,958) (773) (774)
Curtailments 2,144 -- 6,138 --
Special termination benefits -- -- 1,023 --
---------------------------------------------------------------------------------------------
Benefit obligation at December 31 $ 137,475 $ 134,408 $ 52,573 $ 38,751
---------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at January 1 $ 94,707 $ 75,155 $ -- $ --
Actual return on plan assets 6,744 14,846 -- --
Employer contributions 2,155 11,664 773 774
Benefits paid (18,494) (6,958) (773) (774)
---------------------------------------------------------------------------------------------
Fair value of plan assets
at December 31 $ 85,112 $ 94,707 $ -- $ --
---------------------------------------------------------------------------------------------
Funded status $ (52,363) $ (39,701) $ (52,573) $ (38,751)
Unrecognized prior service cost 4,726 18,813 (8,495) (14,484)
Unrecognized net actuarial (gain)/loss 20,511 7,324 2,596 (1,604)
Fourth quarter contribution 801 -- -- --
---------------------------------------------------------------------------------------------
Accrued benefit cost $ (26,325) $ (13,564) $ (58,472) $ (54,839)
=============================================================================================
Amounts recognized in statement
of financial position
Accrued benefit liability $ (31,396) $ (13,860) $ (58,472) $ (54,839)
Fourth quarter contribution 801 -- -- --
Intangible asset 109 296 -- --
Accumulated other
comprehensive income 4,161 -- -- --
---------------------------------------------------------------------------------------------
Accrued pension expense $ (26,325) $ (13,564) $ (58,472) $ (54,839)
=============================================================================================
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 $137,475, $109,865, and $85,112,
respectively, as of December 31, 1998, and $8,457,
$7,698, and $547, respectively, as of December 31, 1997.
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.
33
The following is a table of the actuarial assumptions:
Pension Plans Health Care Plan
-----------------------------------------------------
Year ended December 31, 1998 1997 1998 1997
-------------------------------------------------------------------------------------------
Weighted-average assumptions
as of December 31
Discount rate 6.75% 7.00% 6.75% 7.00%
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%
===========================================================================================
For measurement purposes, a 6% annual rate of increase
in the per capita cost of covered health care benefits
was assumed for 1998. The rate was assumed to decrease
gradually to 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 change in assumed health care cost trend
would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
---------------------------------------------------------------------------------------------
Effect on total service and
interest cost components $ 58 $ (56)
Effect on postretirement
benefit obligation $190 $(186)
=============================================================================================
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 The Company sponsors a defined contribution plan under
SAVINGS PLAN Section 401(k) of the Internal Revenue Code covering all
U.S. salaried and hourly employees with more than one
year of service. Company contributions included in
results of operations totaled $4,012, $4,138 and $3,656
for 1998, 1997 and 1996, respectively.
---------------------------------------------------------
16 - COMMITMENTS The Company leases buildings, equipment and automobiles
AND CONTINGENCIES under operating leases. Rental expense under these leases
was $28,733, $23,789 and $17,262 in 1998, 1997 and 1996,
respectively. Minimum aggregate future rental obligations
under leases having remaining terms of one year or more
at December 31, 1998, are as follows:
Dollars in thousands
1999 $22,603
2000 14,275
2001 4,188
2002 62
2003 --
Thereafter --
--------------------------------------------------------
$41,128
========================================================
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------
17 - GEOGRAPHIC The Company is engaged in one reportable segment--the
SEGMENTS design, manufacture and sale of electronic grade silicon
wafers for the semiconductor industry.
Geographic financial information is as follows:
Other
United Foreign
States Japan Italy Countries Total
------------------------------------------------------------------------------------------------
Dollars in thousands
Net sales to customers:
1998 $ 389,721 $119,138 $ 30,855 $219,202 $ 758,916
1997 497,601 153,897 25,784 309,391 986,673
1996 516,571 127,231 29,066 446,632 1,119,500
================================================================================================
Long-lived assets:
1998 $1,019,571 $214,235 $126,283 $114,487 $1,474,576
1997 990,666 138,084 136,735 151,964 1,417,449
1996 821,029 111,196 132,299 136,811 1,201,335
================================================================================================
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 First Second Third Fourth
QUARTERLY FINANCIAL 1998 Quarter Quarter Quarter Quarter
INFORMATION ----------------------------------------------------------------------------------------
Dollars in thousands,except share data
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
1997
----------------------------------------------------------------------------------------
Net sales $ 222,284 $ 245,780 $ 260,026 $ 258,583
Gross margin 28,069 30,832 36,170 29,688
Earnings (loss) before equity
in income (loss) of joint ventures
and minority interests (1,337) 4,315 (111) (15,966)
Equity in income (loss) of joint
ventures (1,891) (1,205) (3,737) 12,313
Minority interests 333 1,109 1,883 (219)
Net earnings (loss) (2,895) 4,219 (1,965) (3,872)
Basic earnings (loss) per share (0.07) 0.10 (0.05) (0.09)
Diluted earnings (loss) per share (0.07) 0.10 (0.05) (0.09)
Market price:
High 29 3/4 38 1/4 38 7/8 30
Low 22 1/4 22 7/8 25 5/8 14 7/16
----------------------------------------------------------------------------------------
35
As noted in Note 19 below, the Company restated its
results for all periods presented to reflect the
designation of the U.S. dollar as the functional currency
for PHC and Taisil, the Company's unconsolidated joint
ventures. Accordingly, the unaudited quarterly financial
information presented above has also been restated.
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.
19 - RESTATEMENT OF The Company's financial statements for all periods
OPERATING RESULTS presented have been restated to reflect the designation
of the U.S. dollar as the functional currency for PHC and
Taisil, the Company's unconsolidated joint ventures.
The effect of the restatement on each year is as follows:
December 31, 1997
-----------------------------------------------------------------------
Dollars in thousands As previously
reported As restated
-----------------------------------------------------------------------
Balance Sheet:
Investment in joint ventures 95,307 112,573
Retained earnings 164,396 168,496
Accumulated other comprehensive loss (38,887) (25,721)
Statement of operations:
Equity in income (loss) of joint ventures 3,246 5,480
Net earnings (loss) (6,747) (4,513)
Basic earnings (loss) per share (0.16) (0.11)
Diluted earnings (loss) per share (0.16) (0.11)
=======================================================================
December 31, 1996
---------------------------------------------------------------------
Dollars in thousands As previously
reported As restated
---------------------------------------------------------------------
Balance Sheet:
Investment in joint ventures
Retained earnings
Accumulated other comprehensive loss
Statement of operations:
Equity in income (loss) of joint ventures 24,884 26,716
Net earnings (loss) 101,556 103,388
Basic earnings (loss) per share 2.46 2.50
Diluted earnings (loss) per share 2.45 2.49
=====================================================================
---------------------------------------------------------
20 - SUBSEQUENT On October 22, 1998, the Company filed a registration
EVENTS--PRIVATE statement with the SEC for the sale of its common stock
PLACEMENT AND in a rights offering to existing shareholders except
RIGHTS OFFERING VEBA AG and its affiliates (the "Offering"). The Company
expects approximately $91.1 million in aggregate net
proceeds from the Offering, after paying estimated
expenses,including fees to dealer managers. Immediately
prior to the Offering, the Company will sell common stock
to VEBA Zweite for aggregate net proceeds of
approximately $105.9 million. VEBA Zweite has also agreed
to purchase all shares issuable upon exercise of the
rights that are not subscribed for pursuant to the basic
subscription privilege or the over-subscription privilege
by other stockholders, subject to certain conditions that
are customary in a firm commitment underwriting. Once the
Offering has been approved by the SEC, the subscription
price and number of shares will be determined based on
the average share price during a period shortly before
the effective date of the registration statement. The
Company intends to use the proceeds from the Offering and
the private placement to reduce debt outstanding under
revolving credit agreements, for a capital contribution
to Taisil of approximately $12.3 million, and for general
corporate purposes. The Company expects the registration
to be effective and the Offering to commence by the end
of the first quarter of 1999. The private placement to
VEBA Zweite will be consummated immediately prior to
commencement of the rights offering.
Subsequent to year-end, the Company received a $75.0
million short-term revolving credit facility from an
affiliate of VEBA AG. The interest rate on the credit
facility reflects interest rate spreads applicable to an
average industrial borrower at a specified credit rating.
Under the loan agreement, the Company cannot pledge any
of its assets to secure additional financing.
36
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
St. Louis, Missouri
January 25, 1999
2
37
MEMC ELECTRONIC MATERIALS, INC.
AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts- Deductions- End of
Dollars in thousands of Period Expenses Describe Describe Period
--------- -------- -------- -------- ------
Allowance for doubtful accounts:
Year ended December 31, 1995 1,680 338 30(FB) (8)(FB) 2,040
Year ended December 31, 1996 2,040 295 0 (36)(FA)(FB) 2,299
Year ended December 31, 1997 2,299 1,700 0 (526)(FA)(FB) 3,473
Year ended December 31, 1998 3,473 (620) 0 0(FA)(FB) 2,853
===== ===== == ==== =====
Inventory reserves:
Year ended December 31, 1995 3,891 3,921(FD) 0 (3,380)(FC) 4,432
Year ended December 31, 1996 4,432 6,576(FD) 0 (4,063)(FC) 6,945
Year ended December 31, 1997 6,945 5,902(FD) 0 (4,984)(FC) 7,863
Year ended December 31, 1998 7,863 18,420(FD) 0 (6,681)(FC) 19,602
===== ====== == ===== ======
<FN>
(FA) Currency fluctuations
(FB) Write-off of uncollectible accounts
(FC) Write-off of inventory
(FD) Charged to cost of goods sold
</FN>
38
Filed herewith and incorporated by reference herein are the following
documents for MEMC Electronic Materials, Inc. and subsidiaries, which are
attached hereto as Exhibit 23(a) and Exhibit 27:
1) Consent of KPMG LLP; and
2) Financial Data Schedule.
Filed herewith and incorporated by reference herein are the following
documents for POSCO Huls Co., Ltd., which are attached hereto as Exhibits 99(a)
through 99(f) and Exhibit 23(b):
1) Independent Auditors' Report of KPMG San Tong Corp.;
2) Balance Sheets as of December 31, 1998 and 1997;
3) Statements of Operations - Years ended December 31, 1998, 1997
and 1996;
4) Statements of Appropriation (Disposition) of Retained Earnings
(Deficit) - Years ended December 31, 1998, 1997 and 1996;
5) Statements of Cash Flows - Years ended December 31, 1998, 1997
and 1996;
6) Notes to Financial Statements; and
7) Consent of KPMG San Tong Corp.
Filed herewith and incorporated by reference herein are the following
documents for Taisil Electronic Materials Corporation, which are attached hereto
as Exhibits 99(g) through 99(l) and Exhibit 23(c):
1) Independent Auditors' Report of KPMG Certified Public Accountants;
2) Balance Sheets as of December 31, 1998 and 1997;
3) Statements of Operations - Years ended December 31, 1998, 1997 and
1996;
4) Statements of Changes in Stockholders' Equity - Years ended
December 31, 1998, 1997 and 1996;
5) Statements of Cash Flows - Years ended December 31, 1998, 1997
and 1996;
6) Notes to Financial Statements; and
7) Consent of KPMG Certified Public Accountants.
Item 7. Financial Statements and Exhibits
C. Exhibits
Exhibit No. Description
----------- -------------------------------------------------------
23(a) Consent of KPMG LLP
23(b) Consent of KPMG San Tong Corp.
23(c) Consent of KPMG Certified Public Accountants
27 Financial Data Schedule (filed electronically with the
SEC only)
99(a) Independent Auditors' Report of KPMG San Tong Corp.
99(b) Balance Sheets as of December 31, 1998 and 1997 for
POSCO Huls Co., Ltd. ("PHC")
99(c) Statements of Operations - Years ended December 31,
1998, 1997 and 1996 for PHC
99(d) Statements of Appropriation (Disposition) of Retained
Earnings (Deficit) - Years ended December 31, 1998,
1997 and 1996 for PHC
99(e) Statements of Cash Flows - Years ended December 31,
1998, 1997 and 1996 for PHC
99(f) Notes to Financial Statements of PHC
99(g) Independent Auditors' Report of KPMG Certified Public
Accountants
99(h) Balance Sheets as of December 31, 1998 and 1997 for
Taisil Electronic Materials Corporation ("Taisil")
99(i) Statements of Operations - Years ended December 31,
1998, 1997 and 1996 for Taisil
99(j) Statements of Changes in Stockholders' Equity - Years
ended December 31, 1998, 1997 and 1996 for Taisil
99(k) Statements of Cash Flows - Years ended December 31,
1998, 1997 and 1996 for Taisil
99(l) Notes to Financial Statements of Taisil
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 hereunto duly authorized.
MEMC Electronic Materials, Inc.
Date: March 2, 1999 /s/ James M. Stolze
------------- -------------------------------
James M. Stolze
Executive Vice President and
Chief Financial Officer
39
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K:
Exhibit No. Description
----------- -----------
23(a) Consent of KPMG LLP
23(b) Consent of KPMG San Tong Corp.
23(c) Consent of KPMG Certified Public Accountants
27 Financial Data Schedule (filed electronically with the
SEC only)
99(a) Independent Auditors' Report of KPMG San Tong Corp.
99(b) Balance Sheets as of December 31, 1998 and 1997 for
POSCO Huls Co., Ltd. ("PHC")
99(c) Statements of Operations - Years ended December 31,
1998, 1997 and 1996 for PHC
99(d) Statements of Appropriation (Disposition) of Retained
Earnings (Deficit) - Years ended December 31, 1998,
1997 and 1996 for PHC
99(e) Statements of Cash Flows - Years ended December 31,
1998, 1997 and 1996 for PHC
99(f) Notes to Financial Statements of PHC
99(g) Independent Auditors' Report of KPMG Certified Public
Accountants
99(h) Balance Sheets as of December 31, 1998 and 1997 for
Taisil Electronic Materials Corporation ("Taisil")
99(i) Statements of Operations - Years ended December 31,
1998, 1997 and 1996 for Taisil
99(j) Statements of Changes in Stockholders' Equity - Years
ended December 31, 1998, 1997 and 1996 for Taisil
99(k) Statements of Cash Flows - Years ended December 31,
1998, 1997 and 1996 for Taisil
99(l) Notes to Financial Statements of Taisil