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Exhibit 99(f)
POSCO HULS CO., LTD.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTING FINANCIAL STATEMENTS
The accounting records of Posco HULS Co., Ltd. (the "Company") are
expressed in Korean Won and maintained in accordance with the Financial
Accounting Standards of the Republic of Korea, which may differ in some
material respects from International Accounting Standards or the
accounting principles and standards of the country of the reader. The
accompanying financial statements have been extracted from the Company's
Korean language financial statements that were prepared using accounting
principles and reporting practices generally accepted in the Republic of
Korea. The financial statements and the auditors' report have been
translated from those issued in Korea, from the Korean language into the
English language, and have been modified to allow for formatting of the
financial statements in a manner different from the presentation under
Korean financial statements practices. Certain modifications have been
made in the accompanying financial statements to bring the formal
presentation into conformity with practices outside of Korea, and certain
information included in the Korean language statutory financial
statements, which management believes is not required for a fair
presentation of the Company's financial position or results of
operations, is not presented in the accompanying financial statements.
The accompanying financial statements are not intended to present the
financial position and results of operations and cash flows in accordance
with accounting principles and practices generally accepted in countries
and jurisdictions other than Korea.
The Company's financial position and results of operations are presented
utilizing a reporting currency of U.S. dollars. The U.S. dollar amounts
are determined by translating the Korean Won amount of assets and
liabilities into U.S. dollars at the basic exchange rate as of the
balance sheet date (-1,207.80 to US$1 and -1,695.80 to US$1 (except for
amounts denominated in foreign currencies at December 31, 1997, which
are translated at -1,415.20 to US$1 (see note 1(k))) as of
December 31, 1998 and 1997, respectively), the amount of common stock at
the basic exchange rate on the date of issuance, and income and expense
items at the average basic
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exchange rate for the year (-1,415.62 to US$1, -952.84 to US$1 and -807
to US$1 for the years ended December 31, 1998, 1997 and 1996,
respectively). The effect of changes in exchange rates are reflected as
"cumulative translation adjustment" within stockholders' equity.
(b) ECONOMIC ENVIRONMENT
In 1998, the continued adverse economic conditions in the Republic of
Korea and other countries in the Asia Pacific region, which began in
1997, continued to result in, among others, a national liquidity crisis,
higher domestic interest rates, reduced opportunities for refinancing or
refunding of maturing debts, and a general reduction in spending
throughout the region. In order to partially address this situation, the
Government of the Republic of Korea received assistance from the
International Monetary Fund and announced a comprehensive policy package
intended to address the structural weaknesses in the Korean economy and
financial sector. While the reform policies are intended to alleviate the
economic crisis in Korea and improve the economy over time, the immediate
effects have included and could continue to include, among others, slower
or negative economic growth, a reduction in the availability of credit,
an increase in interest rates, an increase in taxes, an increased rate of
inflation, devaluation of the Korean Won, an increase in the number of
bankruptcies of Korean companies, and labor unrest resulting from the
increase in unemployment. The impact of these and other factors have had
and could continue to have a material adverse effect on the financial
position and results of operations of the Company. The accompanying
financial statements reflect management's current assessment of the
possible impact of this economic situation on the financial position of
the Company.
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(b) ECONOMIC ENVIRONMENT, CONTINUED
The effect on the Company's financial position of future developments and
access to further financial information concerning the Company's
customers, suppliers, financiers and others and their ability to continue
to transact with the Company cannot presently be determined. The
financial statements therefore may not include all adjustments that might
ultimately result from these adverse economic conditions.
(c) MARKETABLE SECURITIES
Marketable securities, which are certificates of deposit, are stated at
cost plus incidental expenses, determined by the weighted average method.
(d) INVENTORIES
Inventories, excluding materials-in-transit, are stated at the lower of
cost (the weighted average method) or market value. Materials-in-transit
are valued at cost determined by the individual identification method.
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(e) FIXED ASSETS
Fixed assets are stated at cost. The Company charges maintenance,
repairs and minor renewals to expense as incurred. Major renewals and
improvements are capitalized. Interest incurred during the construction
and installation of manufacturing plant is capitalized as part of fixed
assets.
Depreciation is computed by the straight-line method at rates based on
the following estimated useful lives:
- ---------------------------------------------------------------------------------------------------------------------------
Useful lives
- ---------------------------------------------------------------------------------------------------------------------------
Buildings 30 - 60 years
Buildings - auxiliary facilities 15 - 18
Structures 15 - 40
Machinery and equipment 4 - 10
Vehicles 5
Tools and equipment 5
Furniture and fixtures 5
Industrial water usage rights 15
- ---------------------------------------------------------------------------------------------------------------------------
(f) ACCOUNTING FOR LEASES
The Company accounts for leases as operating or financing leases in
accordance with the Accounting Standards for Leases.
Under the operating lease method, lease expenses are charged to
operations as actual payments are made or due. Prepaid lease expense
relating to operating leases is amortized over the lease term of the
related lease.
Under the financing lease method, the principal amount of leased
equipment, which is the present value of total minimum lease payments,
is recorded as a leased asset and a long-term obligation under financing
leases. The leased assets are amortized over the term of the related
lease. Interest expense on long-term obligations under financing leases
is recorded when incurred.
(g) DEFERRED CHARGES
Deferred charges are stated at cost less accumulated amortization. Bond
issue costs are amortized over the repayment period of the related
bonds. Deferred foreign currency translation loss is amortized over the
remaining repayment period of the respective assets and liabilities.
(h) DISCOUNT ON BONDS ISSUED
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Discount on bonds issued is amortized over a period from the date
of issue to the maturity of the related bonds using the straight-line
method.
(i) RETIREMENT AND SEVERANCE BENEFITS
Employees who have been with the Company for more than one year
are entitled to lump-sum payments based on current rates of pay and
length of service when they leave the Company. The Company's estimated
liability under the plan has been accrued in the accompanying financial
statements at the amount which would be payable if all employees left
the Company at the balance sheet date.
Under the National Pension Scheme of Korea, the Company is
required to transfer a certain portion of retirement allowances of
employees to the National Pension Fund. The amount transferred will
reduce the retirement and severance benefit amount payable to the
employees when they leave the Company and is reflected as a reduction of
the retirement and severance benefits liability in the accompanying
financial statements.
The Company has covered 37% and 41% of the retirement and
severance benefits liability as of December 31, 1998 and 1997,
respectively by insurance policies, which is included in the investments
and other assets account as deposits for retirement and severance
benefits.
(j) REVENUE RECOGNITION
Local sales are recognized when goods are delivered and inspection by
the customer is completed, while export sales are recognized as of the
shipment date.
(k) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in foreign currencies
are translated into Korean Won at the balance sheet date. In accordance
with a change in financial accounting standards in the Republic of Korea
in 1997, net losses on long-term foreign currency denominated monetary
assets and liabilities and the current portion of long-term debt
denominated in foreign currencies are permitted to be recorded as a
deferred foreign currency translation loss and amortized over the
remaining repayment period of the respective assets and liabilities. In
1996, such gains or losses were recorded in current results of
operations. The 1996 financial statements are not affected by such
change in financial accounting standards.
As of December 31, 1998 and 1997, monetary assets and liabilities
denominated in a foreign currency are translated into Korean Won at
-1,207.80 to US$1 and -1,415.20 to US$1, respectively, the rates of
exchange permitted under the financial accounting standards in the
Republic of Korea. On December 31, 1997, the basic rate of exchange was
-1,695.80 to US$1. Had the basic rate of exchange been used to translate
foreign currency assets and liabilities as of December 31, 1997, the net
earnings reported by the Company would be
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reduced by $5,606 for the year ended December 31, 1997. The
difference in these exchange rates has no impact on the US GAAP
reconciliation as presented in Note 18.
(l) INCOME TAXES
Provision is not made in the accounts to reflect the future tax
benefit (expense) on the interperiod allocation of income taxes
resulting from certain income and expense items being treated
differently for financial reporting purposes than tax computation
purposes.
(m) EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share is calculated by dividing net
earnings (loss) by the weighted average number of shares of common stock
outstanding during each period.
(n) STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers
all highly liquid marketable securities with a maturity of three months
or less to be cash equivalents.
(o) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expense during the period. Actual results could differ from those
estimates.
(p) SIGNIFICANT CHANGES IN FINANCIAL ACCOUNTING STANDARDS IN
KOREA
On December 11, 1998, the Financial Supervisory Commission
announced certain changes in the Financial Accounting Standards in the
Republic of Korea ("Korean GAAP"). The revised accounting standards are
applicable for fiscal years starting on or after January 1, 1999. The
more significant changes affecting the Company are as follows:
(i) Deferred Income Tax
Currently under Korean GAAP, no provision is made to reflect the
interperiod allocation of income and expense items being treated
differently for financial reporting purpose than income tax
purposes. Under revised Korean GAAP, income tax expense shall be
computed by applying the statutory rate to income (loss) before
income tax expense. Accordingly, differences in the manner in
which certain income and expense items are treated for financial
reporting and income tax purposes will require the recognition of
deferred income tax debits and credits.
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(ii) Foreign Currency Translation
Currently under Korean GAAP, certain unrealized foreign currency
translation gains and losses on non-current monetary assets and
liabilities are permitted to be excluded from results of
operations and recognized as a deferred credit and a deferred
asset, respectively. Under revised Korean GAAP, all unrealized
foreign currency translation gains and losses on monetary assets
and liabilities are to be included in results of operations.
Amounts deferred as of December 31, 1998 will be charged or
credited to retained earnings as of January 1, 1999.
(iii) Impairment of Long-lived Assets
Currently under Korean GAAP, there is no accounting standard
regarding the impairment of long-lived assets. Under revised
Korean GAAP, a valuation allowance will be required where there
has been a material decline in the value of long-lived assets.
(iv) Investments
Currently under Korean GAAP, investments in debt securities are
carried at amortized cost. Under revised Korean GAAP, investments
in debt securities are to be carried at market value, unless thy
are intended to be held to maturity in which case they may
continue to be carried at amortized cost.
(v) Deferred and Intangible Assets
Currently under Korean GAAP, pre-operating costs, stock issuance
cost, debt issuance costs, and research and development costs may
be deferred and amortized over future periods. Under revised
Korean GAAP, pre-operating costs (other than corporate
organization costs) must be expensed as incurred, stock issuance
costs must be recognized as a reduction of stockholders' equity,
debt issuance costs must be reflected as a discount in the related
debt, and research costs must be expensed as incurred (development
costs may be deferred and amortized over 5 years provided such
costs are recoverable from future earnings).
Currently under Korean GAAP, goodwill is amortized over 5 years.
Under revised Korean GAAP, goodwill may be amortized over periods
up to 20 years.
(vi) Prior Period Error Corrections
Currently under Korean GAAP, prior period error corrections are
included in results of operations. Under revised Korean GAAP,
prior period financial statements shall be restated to reflect
such corrections, if material.
(vii) Transfers of Receivables with Resources
Currently under Korean GAAP, transfers of receivables on which the
Company is continently liable are recognized as sales of
receivables. Under revised Korean GAAP, such transactions must be
treated as borrowings; only transfers of receivables without
recourse may be treated as sales.
(viii) Accounting Changes
Currently under Korean GAAP, accounting changes are applied on a
prospective basis.
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POSCO HULS CO.,LTD
Notes to Financial Statements
(in thousands of U.S. dollars)
Under revised Korean GAAP, the cumulative effect of changes in
accounting principles will be charged to retained earnings at the
beginning of the year.
(ix) Other
Under revised Korean GAAP, certain disclosures will be required
for segments, discontinued operations, and material breaches in
debt agreements. Currently under Korean GAAP, no such disclosures
are required.
The Company plans to adopt the changes on a prospective basis from
January 1, 1999. The Company has not yet determined the impact that
adoption of the revised accounting standards will have on its financial
statements.
================================================================================
(2) CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1998 and 1997 consist of the
following:
================================================================================
1998 1997
- --------------------------------------------------------------------------------
Cash on hand $ 2 1
Checking accounts 4 3
Corporate savings deposits - 1
Foreign currency deposits 48 577
Time deposits 17,315 13,858
Installment time deposits 1,152 620
Cash management account 41,527 5,157
- --------------------------------------------------------------------------------
$ 60,048 20,217
================================================================================
(3) INVENTORIES
Inventories at December 31, 1998 and 1997 consist of the following:
================================================================================
1998 1997
- --------------------------------------------------------------------------------
Finished goods $ 8,894 13,394
Goods-in-progress 6,820 4,753
Raw materials 415 1,410
Sub materials 4,308 3,412
Supplies 5,043 4,351
Materials-in-transit 3,698 2,572
- --------------------------------------------------------------------------------
(Continued)
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POSCO HULS CO.,LTD.
Notes to Financial Statements
(in thousands of U.S. dollars)
$ 29,178 29,892
================================================================================
(4) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 1998 and 1997
consist of the following:
================================================================================
1998 1997
- --------------------------------------------------------------------------------
Other receivables $ 122 260
Accrued income 1,677 1,542
Prepayments 19 57
Income taxes refundable 1,291 363
Value added tax refundable 362 813
Prepaid expenses 769 635
Import guarantee deposit 9 43
- --------------------------------------------------------------------------------
$ 4,249 3,713
================================================================================
(5) PLEDGED ASSETS AND GUARANTEES PROVIDED BY OTHERS
(a) The following assets are pledged as collateral for short-term
borrowings and long-term debt at December 31, 1998 and 1997.
=====================================================================================
Assets 1998 1997
- -------------------------------------------------------------------------------------
Land $ 14,394 5,046
Buildings 32,557 23,524
Machinery and equipment 66,436 59,423
- -------------------------------------------------------------------------------------
113,387 87,993
- -------------------------------------------------------------------------------------
Obligations the collateral is pledged to secure:
Short-term borrowings 3,850 8,641
Long-term debt, including current portion 80,534 76,192
- -------------------------------------------------------------------------------------
$ 84,384 84,833
=====================================================================================
(b) In addition, to secure borrowings of the Company, its shareholders
have provided guarantees as follows:
(Continued)
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POSCO HULS CO.,LTD.
Notes to Financial Statements
(in thousands of U.S. dollars)
================================================================================
Guarantors 1998 1997
- --------------------------------------------------------------------------------
MEMC Electronic Materials,
Inc. (MEMC) $ 581 3,743
================================================================================
================================================================================
(6) INVESTMENTS AND OTHER ASSETS
Investments and other assets at December 31, 1998 and 1997 consist of
the following:
=========================================================================================
1998 1997
- -----------------------------------------------------------------------------------------
Long-term deposits $ 1,486 951
Leasehold deposits 446 262
Rental deposit 105 96
Deposits for retirement and severance benefits 3,004 1,742
Loans to employees 6,983 4,096
Restricted cash and deposits 11 9
Telephone rights 43 37
Membership rights 667 475
Long-term prepaid expenses 306 127
- -----------------------------------------------------------------------------------------
$ 13,051 7,795
=========================================================================================
(7) FIXED ASSETS
Fixed assets at December 31, 1998 and 1997 consist of the following:
===========================================================================================
1998
-------------------------------------------
Accumulated
Cost depreciation Net
- -------------------------------------------------------------------------------------------
Land $ 14,394 - 14,394
Buildings 35,811 3,254 32,557
Building - auxiliary facilities 6,181 1,716 4,465
Structures 6,278 1,226 5,052
Machinery and equipment 209,809 143,373 66,436
Vehicles 575 378 197
Tools and equipment 1,871 1,464 407
Furniture and fixtures 10,234 7,102 3,132
Machinery-in-transit 2,362 - 2,362
(Continued)
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POSCO HULS CO.,LTD
Notes to Financial Statements
(in thousands of U.S. dollars)
===========================================================================================
Construction-in-progress 4,886 - 4,886
Industrial water usage rights 489 - 489
- -------------------------------------------------------------------------------------------
$ 292,890 158,513 134,377
===========================================================================================
1997
-------------------------------------------
Accumulated
Cost depreciation Net
- ---------------------------------------------------------------------------------------------------------------------------
Land $ 5,046 - 5,046
Buildings 25,269 1,745 23,524
Building - auxiliary facilities 4,402 994 3,408
Structures 4,409 681 3,728
Machinery and equipment 138,998 79,575 59,423
Vehicles 385 207 178
Tools and equipment 1,564 1,022 542
Furniture and fixtures 6,864 3,589 3,275
Machinery-in-transit 4,555 - 4,555
Construction-in-progress 9,361 - 9,361
Industrial water usage rights 397 - 397
- --------------------------------------------------------------------------------------------------------------------------
$ 201,250 87,813 113,437
==========================================================================================================================
Property, plant and equipment, and inventories were insured against fire
and other damage up to an amount of $526,044 and $315,734 at December
31, 1998 and 1997, respectively.
(8) FINANCING LEASES
The Company has leased silicon wafer manufacturing and other facilities
from Hanmi Leasing Co., Ltd. and Korea Development Leasing Co., Ltd.
under financing lease contracts. The following is a schedule of minimum
future payments on financing leases as of December 31, 1998:
================================================================================
1999 $ 12,849
2000 12,849
2001 9,281
2002 6,234
2003 and after 4,231
- --------------------------------------------------------------------------------
45,444
Less portion representing interest 6,265
Less current portion 10,233
- --------------------------------------------------------------------------------
(Continued)
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POSCO HULS CO,.LTD.
Notes to Financial Statements
(in thousands of U.S. dollars)
Long-term obligations under financing leases $ 28,946
================================================================================
The following is a summary of the acquisition cost of leased assets and
accumulated depreciation thereon at December 31, 1998 and 1997 which are
included in machinery and equipment:
=================================================================================================
Description 1998 1997
- -------------------------------------------------------------------------------------------------
Leased assets at cost (including other incidental cost) $ 41,485 28,782
Accumulated depreciation 33,857 18,038
- -------------------------------------------------------------------------------------------------
$ 7,628 10,744
=================================================================================================
(9) OPERATING LEASES
The Company leases certain equipment and machinery from Korea Industrial
Leasing Co., Ltd. and accounts for each of the leases as an operating
lease. The operating leases expired in 1998.
Operating lease expenses of $90, $459 and $1,433 charged to operations
in the years ended December 31, 1998, 1997 and 1996, respectively.
(10) STOCKHOLDERS AND RELATED PARTY TRANSACTIONS
The Company was established under the Foreign Capital Inducement Law in
December, 1991 as a joint venture company to manufacture and sell
silicon wafers and related products. Dividends are paid to shareholders
in Korean Won. The stockholders of the Company and their ownership
percentages at December 31, 1998 are as follows:
===========================================================================================================================
Stockholders Number of shares Ownership percentage
- ---------------------------------------------------------------------------------------------------------------------------
Pohang Iron and Steel Co., Ltd. (POSCO) 6,880,000 40%
MEMC Electronic Materials, Inc. (MEMC) 6,880,000 40%
Samsung Electronics Co., Ltd. (SEC) 3,440,000 20%
- ---------------------------------------------------------------------------------------------------------------------------
17,200,000 100%
===========================================================================================================================
The following are major balances and transactions with stockholders at
and for the years ended December 31, 1998, 1997 and 1996:
=========================================================================================================================
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
(Continued)
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POSCO HULS CO.,LTD.
Notes to Financial Statements
(in thousands of U.S. dollars)
MEMC:
Notes and accounts receivable $ 1,215 3,257 1,757
Prepaid expenses and other current assets 47 217 93
Notes and accounts payable 46 49 324
Accounts payable - other 695 1,141 2,495
Sales 21,558 30,168 88,765
Purchases 3,353 6,914 48,770
Licensing and royalty payments 3,186 6,329 6,392
SEC:
Notes and accounts receivable 5,199 2,843 5,688
Sales 78,746 135,298 142,348
===========================================================================================================================
(11) RETIREMENT AND SEVERANCE BENEFITS
Changes in retirement and severance benefits for the years ended
December 31, 1998, 1997 and 1996 are summarized as follows:
===========================================================================================================================
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Beginning balance $ 4,271 5,433 3,033
Provision for the year 2,014 3,039 3,103
Payments (197) (352) (304)
Effect of changes in exchange rates 2,039 (3,849) (399)
- ---------------------------------------------------------------------------------------------------------------------------
Ending balance 8,127 4,271 5,433
Contribution to National Pension Fund 1,056 398 465
- ---------------------------------------------------------------------------------------------------------------------------
$ 7,071 3,873 4,968
===========================================================================================================================
(12) BONDS ISSUED
Bonds issued at December 31, 1998 and 1997 are summarized as follows:
===========================================================================================================================
Interest
Series Maturity per annum 1998 1997 Guarantor
- ---------------------------------------------------------------------------------------------------------------------------
#6 1998 13.0% $ - 5,897 Samsung Securities
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POSCO HULS CO., LTD.
Notes to Financial Statements
(in thousands of U.S. dollars)
============================================================================================================================
Series Maturity Interest 1998 1997 Guarantor
per annum
- ---------------------------------------------------------------------------------------------------------------------------
#7 1998 13.0% - 5,897 LG Securities
#9 1998 13.0% - 7,666 Unsecured (*)
#10 1999 17.0% 10,763 - Boram bank
#11 1999 16.0% 8,280 - Koram bank
#12 2000 13.3% 16,559 - Unsecured
#13 2001 10.0% 24,838 - Unsecured
#14 2001 8.0% 8,280 - Unsecured
- ---------------------------------------------------------------------------------------------------------------------------
68,720 19,460
Less current portion 18,927 19,427
Less unamortized discount 1,618 33
- ----------------------------------------------------------------------------------------------------------------------------
$ 48,175 -
============================================================================================================================
(*) Private acceptance by Korea Long - term Credit Bank.
================================================================================
(13) LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 is summarized as follows:
================================================================================
Interest
per annum Final maturity 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Korean Won loans:
General facility loan Floating rate 2005 $ 1,449 -
Information Communication
Supporting Fund 6.5% 1999 191 317
- ----------------------------------------------------------------------------------------------------------------------------
1,640 317
- ----------------------------------------------------------------------------------------------------------------------------
Foreign currency loans:
Facility loan Floating rate 2005 1,186 -
Facility loan 3LIBOR*+1.2% 1998 - 2,000
Facility loan 6LIBOR*+0.7% 2003 8,591 10,500
Facility loan 6LIBOR*+1.0% 2003 3,562 3,562
Facility loan 3LIBOR*+2% 1999 328 984
Facility loan 3LIBOR*+1.5% 1999 253 759
Facility loan 6LIBOR*+0.6% 1998 - 4,734
Facility loan 6LIBOR*+1.3% 2003 5,355 6,694
Facility loan 6LIBOR*+0.6% 2003 25,480 27,307
Facility loan 6LIBOR*+1.2% 2003 2,012 2,459
Operating loan 6LIBOR*+1.6% 2003 1,727 1,900
Operating loan 6LIBOR*+0.7% 2000 12,700 12,700
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Operating loan 6LIBOR*+0.8% 2001 9,700 9,700
Operating loan 6LIBOR*+0.7% 1999 3,040 3,040
Operating loan 6LIBOR*+0.8% 2001 4,960 4,960
- ----------------------------------------------------------------------------------------------------------------------------
78,894 91,299
- ----------------------------------------------------------------------------------------------------------------------------
Total long-term debt 80,534 91,616
Less current portion 15,096 13,635
- ----------------------------------------------------------------------------------------------------------------------------
$ 65,438 77,981
============================================================================================================================
* 3LIBOR = 3 month London inter-bank offered rate
* 6LIBOR = 6 month London inter-bank offered rate
================================================================================
The following is a schedule of payments of long-term debt as of
December 31, 1998:
================================================================================
1999 $ 15,096
2000 24,378
2001 26,469
2002 11,169
2003 and after 3,422
- ----------------------------------------------------------------------------------------------------------------------------
$ 80,534
============================================================================================================================
(14) APPROPRIATED RETAINED EARNINGS
Appropriated retained earnings as of December 31, 1998 and 1997 are
summarized as follows:
============================================================================================================================
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Legal reserve $ 3,141 3,141
Reserve for business rationalization 6,344 6,344
Reserve for technology development 2,010 2,010
Reserve for export loss 3,678 5,150
Reserve for overseas market development 1,758 1,758
- ----------------------------------------------------------------------------------------------------------------------------
$ 16,931 18,403
============================================================================================================================
The Korean Commercial Code requires the Company to appropriate as legal
reserve an amount equal to at least 10% of cash dividends for each
accounting period until the reserve equals 50% of stated capital. This
legal reserve may be used to reduce a deficit or it may be transferred
to common stock as a stock dividend.
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Under the Tax Exemption and Reduction Control Law, the Company is
allowed to make certain deductions from corporate income taxes. The
Company is, however, required to appropriate from retained earnings the
amount of the tax benefit obtained and transfer such amount into a
reserve for business rationalization. This legal reserve may be used to
reduce a deficit or may be transferred to common stock as a stock
dividend.
Under the Tax Exemption and Reduction Control Law, the Company is
allowed to make certain deductions from taxable income and set up
reserves for technology development, reserve for export loss and reserve
for overseas market development by appropriating retained earnings. The
unused portion of the reserves is generally added back to taxable income
over three to four years after a certain grace period. These voluntary
reserves may be restored to unappropriated retained earnings by a future
stockholders' resolution.
================================================================================
(15) INCOME TAXES
The Company is subject to a number of taxes based upon taxable earnings
which result in the following normal tax rates:
================================================================================
Rates
-------------------------------------
Taxable earnings 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Up to W100,000 thousand 17.6% 17.6% 17.6%
Over W100,000 thousand 30.8% 30.8% 30.8%
============================================================================================================================
Under the Foreign Capital Inducement Law (FCIL), the Company is entitled
to the exemption from corporation taxes to the extent of its foreign
equity portion for the periods stipulated in the Law.
A reconciliation between net earnings (loss) before income taxes and
taxable income (tax loss carryforward) for the years ended December 31,
1998, 1997 and 1996 is as follows:
============================================================================================================================
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) before income taxes $ (31,989) 7,302 62,796
Unrealized exchange loss, net (108) (585) (50)
Accrued interest income, net 409 (1,534) (483)
Loss on inventory valuation 4,507 3,312 -
Entertainment expense over tax limit 98 205 106
Reserve for tax purpose 827 - (8,790)
Income deduction for foreign capital increase - (67) (1,078)
Others, net 5,564 163 215
- ----------------------------------------------------------------------------------------------------------------------------
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(20,692) 8,796 52,716
Utilization of tax loss carryforward - - (2,444)
- ----------------------------------------------------------------------------------------------------------------------------
Taxable income (tax loss carryforward) (20,692) 8,796 50,272
- ----------------------------------------------------------------------------------------------------------------------------
Income taxes payable on taxable income - 2,962 15,291
Tax exemption tax under FCIL - (804) (3,135)
Investment tax credit - (826) (6,385)
- ----------------------------------------------------------------------------------------------------------------------------
Income taxes payable $ - 1,332 5,771
============================================================================================================================
The tax loss carryforward will expire, if not utilized to offset future
taxable income, in 2003.
(16) COMMITMENTS AND CONTINGENCIES
(a) As of December 31, 1998, the Company has provided 4 blank checks
and 10 blank notes to financial institutions in connection with
various contracts to guarantee repayment in case the Company is in
default for the repayment of its borrowings or in breach of
certain borrowing covenants. The Company is not currently in
default of its borrowings or lease contracts.
(b) As of December 31, 1998, the Company has entered into bank
overdraft agreements for borrowing up to $9,935 with five banks
and has also entered into borrowing arrangements with three
short-term financing companies.
(c) Under a technical license agreement with MEMC, the Company paid a
lump-sum royalty during 1995 and 1996 for the transfer of a
technical license to manufacture silicon wafers. The Company is
also required to pay MEMC a royalty at a specified percentage of
net sales for 5 years from the commencement of commercial
production, which took place in 1995.
(17) EARNINGS (LOSS) PER SHARE
Earnings (loss) per share for the years ended December 31, 1998, 1997
and 1996 are calculated as follows:
============================================================================================================================
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (31,989) 5,970 57,025
Weighted average number of
shares of common stock 17,200,000 17,200,000 17,200,000
- ----------------------------------------------------------------------------------------------------------------------------
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Earnings (loss) per share in U.S. dollars $ (1.86) 0.35 3.32
============================================================================================================================
================================================================================
(18) RECONCILIATION TO UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
The accompanying financial statements are prepared in accordance with
Korean GAAP, which differ in certain significant respects from generally
accepted accounting principles in the United States (U.S. GAAP). The
significant differences are described below. Other differences do not
have a significant effect on either consolidated net earnings (loss) or
stockholders' equity. The estimated effects of the significant
adjustments to net earnings (loss) and stockholders' equity which would
be required if U.S. GAAP were applied instead of Korean GAAP are
summarized as follows:
================================================================================
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) - Korean GAAP $ (31,989) 5,970 57,025
- ----------------------------------------------------------------------------------------------------------------------------
Adjustments:
Start-up costs 406 2,383 3,184
Inventories 1,845 1,044 (2,443)
Depreciation in relation to useful life
and functional currency differences (13,108) 11,294 19,837
Capitalized interest 97 1,273 2,684
Amortization of deferred foreign
currency translation loss 6,247 15,139 -
Foreign currency translation gain (loss), net (5,493) (20,305) 10,733
Deferred income taxes (2,435) 10,915 (6,080)
Others (12) 140 374
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments (12,453) 21,883 28,289
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) - U.S. GAAP $ (44,442) 27,853 85,314
===========================================================================================================================
Basic earnings (loss) per share - U.S. GAAP $ (2.46) 1.62 4.96
===========================================================================================================================
For Korean GAAP presentation, the Company records gains and
losses through its statement of operations for changes in currency
rates effecting monetary assets and liabilities denominated in dollars.
For US GAAP purposes, the US dollar is the functional currency. Thus,
for US GAAP purposes, currency gains and losses result from changes in
currency exchange rates related to monetary assets and liabilities
denominated in Korean won. The differences between the currency gains
and losses calculated under the two different sets of assumptions
appear as adjustments in reconciling Korean GAAP net earnings (loss) to
net earnings (loss) under US GAAP.
===========================================================================================================================
===========================================================================================================================
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity - Korean GAAP $ 61,265 51,657
Adjustments:
Start-up costs (1,059) (1,465)
Inventories (623) (2,468)
Fixed assets:
Depreciation in relation to useful life and functional currency differences 30,462 43,570
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Capitalized interest and related depreciation 2,793 2,696
Functional currency impact,
principally on fixed assets and inventories 80,397 141,556
Deferred foreign currency translation loss (23,676) (44,046)
Deferred income taxes 2,389 4,824
Others - 66
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments 90,683 144,733
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Stockholders' equity - U.S. GAAP $ 151,948 196,390
===========================================================================================================================
For US GAAP purposes fixed assets are depreciated over longer lives than
for Korean GAAP purposes. Additionally, fixed assets are presented in
the Korean GAAP financial statements using a translation rate in effect
at the balance sheet date. For US GAAP purposes, the US dollar is the
functional currency. Accordingly, fixed assets are translated at rates
in effect at the acquisition date of the various assets. As a result, in
reconciling from Korean GAAP to US GAAP stockholders' equity, positive
adjustments result both from the longer life used for US GAAP as well as
translating the gross asset basis, and accompanying accumulated
depreciation, at rates different than for Korean GAAP.
================================================================================
The condensed balance sheets of the Company as of December 31, 1998 and
1997 under U.S. GAAP are summarized as follows:
================================================================================
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Current assets:
Inventories $ 29,655 37,518
Other current assets 74,916 39,134
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 104,571 76,652
Fixed assets 419,964 421,551
Less accumulated depreciation 173,990 132,051
- ---------------------------------------------------------------------------------------------------------------------------
245,974 289,500
Investments and other assets 14,090 12,612
- ---------------------------------------------------------------------------------------------------------------------------
$ 364,635 378,764
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Current liabilities 63,057 61,340
Long-term liabilities 149,630 121,034
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 212,687 182,374
Stockholders' equity:
Common stock 112,175 112,175
Retained earnings 39,773 84,215
- ---------------------------------------------------------------------------------------------------------------------------
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Total stockholders' equity 151,948 196,390
- ---------------------------------------------------------------------------------------------------------------------------
$ 364,635 378,764
===========================================================================================================================
================================================================================
The tax effects of temporary differences that resulted in significant
portions of the deferred tax assets and liabilities at December 31, 1998
and 1997 computed under U.S. GAAP, and a description of the financial
statement items that created these differences follow:
===========================================================================================================================
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Inventories $ 2,055 766
Start-up costs 165 139
Capital leases 1 2
Foreign currency translation loss 5,501 10,131
Korean tax operating loss carryforwards 5,772 -
Others 3 -
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 13,497 11,038
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation in relation to useful life difference (9,050) (4,897)
Depreciation on capitalized interest (447) (285)
Reserves for tax purpose (1,167) (850)
Accrued income (399) (182)
Land (45) -
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (11,108) (6,214)
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 2,389 4,824
===========================================================================================================================
(a) DEFERRED INCOME TAXES
Under Korean GAAP, a provision is not made in the accounts to reflect
the future tax effects resulting from certain income and expense items
being treated differently for financial reporting purposes and tax
computation purposes.
However, U.S. GAAP requires the recognition of deferred tax assets and
liabilities created by temporary differences between the financial
statement and tax bases of assets and liabilities. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled.
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The tax rate used to calculate deferred tax assets and liabilities
was changed from 18.5% in 1996 to 20.3% in 1997, and was further
increased to 23.8% in 1998 to reflect the normal corporation tax rate
and exemptions statutorily available under FCIL. The effect of this
increase on the effective tax rate was to increase the net deferred tax
asset, increase net earnings by $5,401 in 1997 and decrease net loss
by $291 in 1998.
(b) PRE-OPERATING AND START-UP COSTS
Certain pre-operating and start-up costs are deferred for Korean
GAAP and amortized in equal annual amounts over 5 years from 1993. These
costs would be expensed as incurred under U.S. GAAP.
(c) CAPITAL LEASES
Under Korean GAAP, the Company has leased certain equipment and
machinery and accounts for such leases as operating leases. However,
under U.S. GAAP those leases would be classified as capital leases.
Under U.S. GAAP, equipment under capital lease is recorded as an asset
and a liability is recorded for the present value of minimum lease
payments at the inception of the lease. This equipment is depreciated
over the estimated useful life of the asset.
(d) USEFUL LIFE OF MACHINERY AND EQUIPMENT
In 1995, the Company changed the estimated useful life of certain
machinery to 4 years from 6 years. For U.S. GAAP purposes, the Company
continues to depreciate the machinery and equipment over its estimated
useful life of 6 years.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. There is no
indication of impairment of property, plant and equipment at December
31, 1998 and 1997.
(e) INVENTORIES
For U.S. GAAP, inventories are adjusted for the effect of
capitalized depreciation in beginning and ending inventory balances
relating to the differences in useful lives of machinery and equipment
and to depreciation on capitalized interest.
(f) DEPRECIATION ON CAPITALIZED INTEREST
In 1994, the Company recorded a prior year adjustment under Korean
GAAP for interest that should have been capitalized to
construction-in-progress in 1993 and is being depreciated over the
useful life of the related fixed assets. For U.S. GAAP purpose, the
interest amount was charged to earnings in 1993.
(g) FOREIGN CURRENCY TRANSLATION
In accordance with a change in Korean GAAP in 1997, net foreign
exchange losses on long-term foreign currency denominated monetary
assets and liabilities and the
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current portion of long-term debt denominated in foreign currencies are
recorded as a deferred foreign currency translation loss and amortized
over the remaining repayment period of the respective assets and
liabilities. In 1996, such losses were expensed as incurred. However,
for U.S. GAAP purposes, all such foreign currency transaction losses are
expensed as incurred in all periods.
(h) FUNCTIONAL CURRENCY
under U.S. GAAP, the Company considers the U.S. dollar as its functional
currency. Accordingly, the accounting bases of nonmonetary assets and
liabilities, primarily property, plant and equipment are reflected at
the historical exchange rate when the transaction occurred, foreign
currency exchange gains and losses under Korean GAAP are reversed, and
exchange gains and losses are recognized on Won-denominated monetary
assets and liabilities. The effects of using the U.S. dollar as the
functional currency are included in the U.S. GAAP reconciliation
information.
(i) RESTATEMENT OF U.S. GAAP
As discussed in note 18(h), the Company reports its financial position
and results of operations using the U.S. dollar as the functional
currency under U.S. GAAP. Originally reported net earnings and
stockholders' equity under U.S. GAAP reflected the use of the U.S.
dollar as the functional currency only for periods after September 30,
1997. Accordingly, net earnings and stockholders' equity under U.S. GAAP
have been restated as follows:
===========================================================================================================================
Net earnings Stockholders' equity
- ---------------------------------------------------------------------------------------------------------------------------
As of and for the year ended December 31, 1996:
As previously reported $ 73,165
Effect of adjustment 12,149
- ---------------------------------------------------------------------------------------------------------------------------
As restated $ 85,314
- ---------------------------------------------------------------------------------------------------------------------------
As of and for the year ended December 31, 1997:
As previously reported $ 26,915 158,255
Effect of adjustment 938 38,135
- ---------------------------------------------------------------------------------------------------------------------------
As restated $ 27,853 196,390
- ---------------------------------------------------------------------------------------------------------------------------
The effect of such restatement on basic earnings per share as
adjusted in accordance with U.S. GAAP was an increase of $0.06 per
share and $0.71 per share for the years ended December 31, 1997 and
1996, respectively.
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