1
Exhibit 99(l)
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN THOUSANDS OF US DOLLARS OR
NEW TAIWAN DOLLARS, UNLESS OTHERWISE STATED)
(AMOUNTS AND INFORMATION WITH RESPECT TO 1996 ARE UNAUDITED)
(1) Organization and business environment
Taisil Electronic Materials Corporation (the "Company"), was founded in
the Hsinchu Science-Based Industrial Park of the Republic of China ("ROC")
on September 26, 1994. Prior to June 30, 1996, the Company was a
development stage enterprise whose activities primarily involved the
construction of its manufacturing facilities, financial planning, testing
equipment, and recruiting and training employees. The Company started its
main activities of research, development, production and sale of the
latest generation silicon wafers in July 1996.
The operations of the Company have been affected, and may continue to be
affected, by the currency devaluations and general deterioration of the
economies of countries in the Asia Pacific region. The Company does not,
however, expect the currency valuation problems and potential slowdown in
Asian economies to have a significant long-term effect on its financial
position.
The accompanying financial statements reflect management's current
assessments of the possible impact of this economic situation on the
financial position of the Company. Actual results could differ from
management's current assessments. In addition, 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.
(2) Significant accounting policies
(a) Generally accepted accounting principles
The financial statements have been prepared in accordance with
accounting principles generally accepted in the Republic of China
("ROC GAAP"). ROC GAAP varies in certain significant respects from
accounting principles generally accepted in the United States of
America ("US GAAP"). Application of US GAAP would have affected
stockholders' equity as of December 31, 1998 and 1997, and the results
of operations for each of the two years then ended, to the extent
summarized in note 15.
(b) Foreign currency transactions
Foreign currency transactions in currencies other than the functional
currency are recorded at rates in effect at the transaction dates.
Monetary assets and liabilities denominated in foreign currencies at
year-end are translated at the exchange rate then prevailing. Gains or
losses resulting from settlement of such transactions or translations
are included in non-operating income.
(c) Cash equivalents
The Company considers commercial paper and bank acceptances, with a
maturity of less than three months from the date of purchase and time
deposits as cash equivalents.
(Continued)
2
2
TASIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(d) Short-term investments
Investments are carried at the lower of cost or market value. The
market value of unlisted trust funds is determined on the basis of the
trust fund's net worth on the balance sheet date. Costs of sale of
investments are determined on the weighted-average basis.
(e) Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the weighted-average method. The market value of raw
materials is determined on the basis of replacement cost. Market
values of work in process and finished goods are determined on the
basis of net realizable value.
(f) Long-term investments
Long-term investments in equity securities that are not publicly
traded in which the Company owns less than 20% of the investee's
common stock and does not exercise significant influence over the
investee's operations, are stated at the cost.
(g) Property, plant and equipment
Property, plant and equipment are stated at acquisition cost which
includes the capitalization of interest and certain expenses incurred
in connection with the construction of plant and installation of
machinery and equipment. Depreciation on plant and equipment is
provided on the straight-line method over the estimated useful lives
of the respective assets.
Property, plant and equipment is reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. For purposes of evaluating the
recoverability of property, plant and equipment, the estimated future
undiscounted net cash flows of each operational gross of assets is
compared to the carrying amount of the assets. If the carrying amount
exceeds the undiscounted cash flows, the impairment is measured based
on the fair values of the assets. At December 31, 1998, the estimated
future undiscounted net cash flows of property, plant and equipment
exceeded their carrying amount.
(h) Technology fees
The Company has entered into a technical assistance service agreement
with MEMC Electronic Materials, Inc. involving information and
processes embodying technology, equipment design, and assets and
property rights for the manufacture of silicon wafers. Payments for
such technology are capitalized and amortized over five years from the
commencement of commercial production.
(i) Organization cost and deferred charges
The costs incurred in the establishment of the Company are capitalized
and amortized over five years commencing from the start of commercial
operations. Charges for the installation of gas and power systems are
included in other assets and amortized over five years.
(Continued)
3
3
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(j) Employee retirement plan
The Company adopted a retirement plan covering substantially all
employees in December 1995. Benefits are based on the employees' years
of service. Starting in August 1996, in accordance with ROC Labor
Standards Law, the Company made monthly contributions to a pension
fund with the Central Trust of China. As approved by the authorities,
the funding rate was set at 2% of salaries and wages. Pension cost is
recognized based on the amount to be appropriated. Retirement benefits
to employees will be paid from the retirement fund first, and if the
fund is insufficient, the balance will be charged to current
operations.
Effective December 31, 1997, the Company adopted ROC Statements of
Financial Accounting Standards ("SFAS") No. 18, "Accounting for
Pensions," for its retirement plan. Based on the provisions of SFAS
No. 18, pension costs charged to earnings are actuarially computed.
The measurement date was the balance sheet date. Accrued pension
liabilities were recognized for the excess of accumulated benefit
obligation over fair value of plan assets. Net periodic pension costs
including current service cost and net obligation at transition which
are amortized over a 27 year period based on the straight-line method,
are recognized starting in 1998. The effect of this accounting change
increased the net loss by approximately $288 in 1998.
(k) Income taxes
Under the asset and liability approach of SFAS No. 22, deferred tax
liabilities are recognized for tax consequences of taxable temporary
differences by applying enacted statutory tax rates. Deferred tax
assets are recognized for tax consequences of deductible temporary
differences, tax credits and operating loss carryforwards. A valuation
allowance is provided when some portion or all of the deferred tax
assets is not expected to be realized. Deferred income tax is reported
in the financial statements as a current or noncurrent item based on
the classification of the related asset or liability which causes the
temporary differences. Deferred income taxes not relating to assets or
liabilities are classified as current or noncurrent based on the
expected period that the temporary differences will reverse.
(l) Forward exchange rate contracts
The Company enters into foreign currency forward contracts to hedge
future operating cash outflows in currencies other than the functional
currency. Foreign currency forward contracts reduce the Company's
exposure to the risk that eventual foreign currency cash outflows will
be adversely affected by changes in exchange rates. Foreign currency
gains and losses under the above arrangements are not deferred as the
cash flows being hedged do not represent firm commitments. Foreign
currency forward contracts are entered into with major commercial
European banks that have high credit ratings. From time to time, the
Company uses foreign currency forward contracts to hedge purchases of
capital equipment. Foreign currency gains and losses for such
purchases are deferred as part of the basis of the asset.
(m) Restatement of Financial Statements
The Company reports its financial position and results of operations
using the US dollar as the functional currency. Previously reported
results of operations and stockholders' equity reflected the use of
the US dollar as the functional currency only for periods after
September 30, 1997. Accordingly, net loss, net loss per share and
stockholders' equity have been restated from amounts originally
reported as follows:
NET LOSS STOCKHOLDERS'
NET LOSS PER SHARE EQUITY
-------- --------- ------------
For the year ended December 31, 1996 (unaudited):
As previously reported $(17,161) (0.08)
Effect of adjustment 230 -
As restated (16,931) (0.08)
As of and for the year ended December 31, 1997:
As previously reported $(17,851) (0.07) 71,366
Effect of adjustment 4,067 0.02 8,179
As restated (13,784) (0.05) 79,345
(Continued)
4
4
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(3) Transaction with related parties
(a) Name and relationship
OWNERSHIP
NAME OF RELATED PARTY RELATIONSHIP WITH THE COMPANY PERCENTAGE
----------------------------------------------- -------------------------------------------------- --------------
MEMC Electronic Materials Inc. USA (MEMC) Investor using equity method to account for its 45%
investment in the Company and represented on
the Company's Board of Directors
Chiao Tung Bank of Taipei, Taiwan, ROC (CTB) Investor and represented on the Company's Board of 10%
Directors
China Steel Corporation (CSC) Investor and represented on the Company's Board of 35%
Directors
China Development Corporation 10%
--------------
100%
==============
Posco Huls Co. Ltd. (PHC) MEMC group company
MEMC Japan Ltd. (MJL) MEMC group company
MEMC Electronic Materials SPA (Novara) MEMC group company
(b) Significant transactions with related parties
(i) Net sales to and corresponding amounts receivable from related
party are as follows:
SALES
---------------------------------------------------------------
1998 1997 1996 (UNAUDITED)
-------------------- -------------------- -------------------
% OF NET % OF NET % OF NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES
-------- -------- -------- --------- -------- --------
MEMC $ 8,987 15.32 17,031 27.67 921 12.63
Novara 240 0.41 - - - -
-------- --------- -------- --------- -------- --------
$ 9,227 15.73 17,031 27.67 921 12.63
======== ========= ======== ========= ======== ========
ACCOUNTS RECEIVABLE
--------------------
DECEMBER 31,
--------------------
1998 1997
--------------------
MEMC $ 2,693 6,983
Novara 247 -
--------- ---------
$ 2,940 6,983
========= =========
Purchases from and corresponding amounts payable to related party are
as follows:
PURCHASES
-----------------------------------------------------------------
1998 1997 1996 (UNAUDITED)
--------------------- --------------------- ---------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT PURCHASES AMOUNT PURCHASES AMOUNT PURCHASES
-------- --------- -------- --------- -------- ----------
MEMC $ 2,131 8.64 6,314 17.78 485 9.51
Others 186 0.75 - - - -
-------- --------- -------- --------- -------- ----------
$ 2,317 9.39 6,314 17.78 485 9.51
======== ========= ======== ========= ======== ==========
(Continued)
5
5
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
ACCOUNTS PAYABLE
------------------
DECEMBER 31,
------------------
1998 1997
-------- -------
MEMC $ 4 3,290
Others 77 -
------- -------
$ 81 3,290
======= =======
(ii) Financing
The Company's long-term loans from CTB are summarized as
follows:
MAXIMUM INTEREST ENDING INTEREST INTEREST
YEAR BALANCE RATE BALANCE EXPENSE PAYABLE COLLATERAL
---- --------- -------- --------- -------- --------- --------------
1998 $ 36,934 5.875% - 35,909 2,127 199 Machinery and
========= 6.855% ========= ======== ========= equipment $60,886
1997 $ 28,450 5.825% - 28,306 1,751 153 Machinery and
========= 6.575% ========= ======== ========= equipment $32,570
(iii) Technology, royalty and commission agreements
The Company has entered into various agreements with MEMC which
provide for payments related to, among other things,
technology, royalties and commissions. The Company paid MEMC,
net of amounts received, $713, $1,312, and $2,703 in 1998, 1997
and 1996, respectively, pursuant to the terms of such
agreements. The related amounts outstanding of $148 and $2,048
as of December 31, 1998 and 1997, respectively, are included in
accrued expenses.
(iv) Guarantees
MEMC and CSC have provided guarantees over certain of the
Company's long-term loans and bills payable up to a maximum of
$92,863 and $65,965, respectively.
(4) Cash and cash equivalents
Details of cash and cash equivalents as of December 31, 1998 and 1997 were
as follows:
DECEMBER 31,
----------------------
1998 1997
----------------------
Cash on hand, current and checking accounts $ 413 2,112
Cash equivalents 30,655 16,643
--------- ---------
$ 31,068 18,755
========= =========
(5) Short-term investments
The Company had invested $337 and $2,053 in open-ended trust funds as of
December 31, 1998 and 1997, respectively. The market value of such
investments as of December 31, 1998 and 1997 was approximately $338 and
$2,065.
(Continued)
6
6
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(6) Inventories
The components of inventories as of December 31, 1998 and 1997, are
summarized below:
DECEMBER 31,
----------------------
1998 1997
----------------------
Finished goods $ 6,153 5,381
Work in process 3,188 6,733
Raw materials and spare parts 11,905 10,068
--------- ---------
21,246 22,182
Provision for inventory devaluation (5,377) (4,061)
--------- ---------
$ 15,869 18,121
========= =========
As of December 31, 1998 and 1997, insurance coverage of inventories
amounted to approximately $21,728 and $18,383, respectively.
(7) Property, plant and equipment
The construction in progress consists of various payments for plant
construction and engineering design and consulting.
Certain property, plant and equipment is pledged as security for long-term
loans. See note 13.
Insurance coverage on property, plant and equipment and the third-party
liability as of December 31, 1998 and 1997, amounted to approximately
$247,846 and $199,617, respectively.
(8) Short-term loans and short-term bills payable
DECEMBER 31,
-----------------------------------------------------------
1998 1997
----------------------------- ---------------------------
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
------ ------------- ------ -------------
Unsecured loans $ 29,023 5.988% - 7.023% - -
Secured loans 931 7.25% 3,064 6.80%
Credit loans and import loans under usance
letters of credit 5,408 0.514% - 6.50% 20,783 0.98% - 8.99%
Commercial paper payable 15,520 5.35% - 6.75% 28,494 7.30% - 8.15%
Bank acceptance payable 621 6.50 - -
Unamortized discount on short-term bills
payable (290) (749)
--------- ---------
$ 51,213 51,592
========= =========
As of December 31, 1998 and 1997, certain time deposits were pledged as
security for the issuance of short-term bills payable. See note 13.
(Continued)
7
7
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(9) LONG-TERM LOANS
BALANCE AT DECEMBER 31,
------------------------
CREDIT LINE AND
BANK PURPOSE PERIOD REPAYMENT TERM 1998 1997
----------------- --------- ------------- --------------------- ----------- ----------
Chiao Tung Bank NT$240,000 Loan February 1998 Repayable in 17 quarterly $ 6,497 -
for purchase of to February 2005 installments starting in
machinery February 2001
Chiao Tung Bank NT$400,000 Loan November 1995 Repayable in 17 quarterly 11,686 12,256
for purchase of to November 2002 installments starting in
machinery November 1998
Chiao Tung Bank NT$100,000 Loan November 1995 Repayable in 21 quarterly 2,365 2,918
for purchase of to November 2002 installments starting in
machinery November 1997
Chiao Tung Bank NT$100,000 Loan November 1995 Repayable in 29 quarterly 3,104 3,064
for purchase of to November 2005 installments starting in
machinery January 1999
Chiao Tung Bank NT$200,000 Loan December 1996 Repayable in 17 quarterly 4,136 2,213
for purchase of to November 2003 installments starting in
machinery December 1999
Chiao Tung Bank NT$200,000 Loan December 1996 Repayable in 17 quarterly 6,208 6,128
for purchase of to November 2003 installments starting in
machinery March 2000
Chiao Tung Bank NT$80,000 Loan December 1996 Repayable in 29 quarterly 1,913 1,727
for purchase of to November 2006 installments starting in
machinery January 2000
The International NT$1,000,000 December 1995 Repayable in 10 24,832 30,639
Commercial Bank Loan for plant to December 2002 semi-annual installments
of China construction starting in June 1998
The International NT$600,000 Loan - - - 2,298
Commercial Bank for plant
of China construction
Taiwan NT$600,000 - - - 18,383
Cooperative Bank Credit loan
(Continued)
8
8
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
BALANCE AT DECEMBER 31,
------------------------
CREDIT LINE AND
BANK PURPOSE PERIOD REPAYMENT TERM 1998 1997
----------------- --------- ------------- --------------------- ----------- ----------
ABN AMRO Bank (In $60,000 Loan for October Repayable in 10 48,000 60,000
charge of purchase of 1995 to semi-annual installments
syndication loan machinery August 2002 starting in February 1998
agreement for the
phase I expansion)
ABN AMRO Bank (In $20,000 Bridge - - - 3,489
charge of loan for the
syndication loan following ABN
agreement for the AMRO loan
phase II
expansion)
ABN AMRO Bank (In $45,000 Loan for January Repayable in 6 semi-annual 45,000 40,000
charge of purchase of 1997 to installments starting in
syndication loan machinery December June 1999
agreement for the 2001
phase II --------- ---------
expansion)
153,741 183,115
Less: current portion (37,395) (19,433)
--------- ---------
$ 116,346 163,682
========= =========
The following is a schedule of payments of long-term debt as of December
31, 1998:
YEAR AMOUNT
---------- -----------
1999 $ 37,395
2000 39,786
2001 41,378
2002 26,372
2003 4,651
After 2003 4,159
-----------
$ 153,741
===========
On December 23, 1996, the Company obtained a syndicate loan from the ABN
AMRO Bank and six other banks (the Banks). In accordance with the
syndication loan agreements, the Banks granted credit facilities to the
Company for purchase of machinery and equipment. During the period of
loan, restrictions on the above syndication loan are as follows:
The major stockholders MEMC and CSC, together, must own not less than 70%
of the Company's issued common shares, and VEBA AG must own not less than
50% of MEMC issued common shares.
(Continued)
9
9
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
The ranges for interest rates on these borrowings for the years ended
December 31, 1998, 1997 and 1996 were 6.50% - 7.95%, 6.00% - 7.605% and
0.85% - 7.495%, respectively. As of December 31, 1998 and 1997, total
unused lines of credit for short-term and long-term loans amounted to
approximately $102,903 and $263,435, respectively.
As December 31, 1998 and 1997, certain time deposits and property, plant
and equipment were pledged as security for long-term loans. See note 13.
(10) Pension
Effective December 31, 1997, the Company adopted SFAS No.18, "Accounting
for Pensions." The measurement dates for the actuarial study of the
Company's pension obligation were December 31, 1998 and 1997. The funded
status of the Company's pension scheme as of December 31, 1998 and 1997,
was as follows:
BALANCE AT DECEMBER 31,
-----------------------
1998 1997
--------- ----------
Benefit obligation:
Vested benefit obligation $ - -
Non-vested benefit obligation (411) (256)
--------- ---------
Accumulated benefit obligation (411) (256)
Effects of future salary progression (977) (638)
--------- ---------
Projected benefit obligation (1,388) (894)
Fair value of plan assets 476 256
--------- ---------
Benefit obligation in excess of plan assets (912) (638)
Unrecognized net obligation at transition 584 599
--------- ---------
Accrued pension liabilities (328) (39)
========= =========
The net pension cost for the year ended December 31, 1998 consisted of
following components:
Service cost $ 421
Interest expense 59
Expected returns on pension fund (24)
Amortization and deferral 23
---------
$ 479
=========
Actuarial assumptions are as follows:
1998 1997
------ ------
Discount rate 6.50% 6.50%
Rate of salary progression 6.00% 6.00%
Projected return on plan assets 6.50% 6.50%
Pension expenses were $198, and $135 for the years ended December 31, 1997
and 1996, respectively. As of December 31, 1998 and 1997, the balances of
the Company's pension fund maintained with the Central Trust of China were
$476 and $256, respectively. As of December 31, 1998 and 1997, the unpaid
balances of $15 and $63, respectively, were included in accrued expenses.
(Continued)
10
10
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(11) Stockholders' equity
(a) Capital stock
On July 17, 1996, the stockholders' meeting approved the issuance of
an additional 55,000,000 shares at NT$10 par value per share for cash
on July 17, 1996.
On July 25, 1997, the stockholders' meeting approved a proposal to
increase authorized capital stock to 480,000,000 shares at NT$10 par
value per share and to issue an additional 60,000,000 shares at NT$10
par value per share for cash on December 25, 1997. After this capital
increase, the total issued capital was $113,783.
On February 5, 1998, the board of directors decided to issue an
additional 85,000,000 shares at NT$10 per value per share for cash.
After this capital increase, the total issued capital was $139,887.
The above increases were all registered and approved by the
authorities.
On October 12, 1998, December 14, 1998 and January 11, 1999, the board
of directors decided to issue an additional 75,000,000, 35,000,000 and
90,000,000 shares at NT$10 par value per share for cash. On December
14, 1998, the special stockholders' meeting approved the deduction of
capital by 200,000,000 shares at NT$10 par value to offset the
accumulated deficit. The effective date of above increase and decrease
of capital has not been determined. Prior to December 31, 1998, the
Company received $30,744 from stockholders related to the approved
share issuances. The advance payment was recorded as "advance from
stockholders," a separate component of stockholders' equity, on the
balance sheet as of December 31, 1998.
(b) Distribution of earnings
In accordance with ROC Company Law, the Company's articles of
incorporation stipulate that 10% of annual earnings (net of losses of
prior years, if any) is to be retained as statutory reserve until such
retention equals the amount of issued share capital. The distribution
of remaining earnings should be proposed by the board of directors and
decided in a stockholders meeting. At least 0.01% of the distribution
should be appropriated as employees' bonuses when the stockholders
approve an earnings distribution. Future dividends will be distributed
in NT dollars.
(c) Accumulated deficit
According to the ROC Company Law, if accumulated deficit is over
one-half of the common stock, the board of directors shall convene a
meeting of stockholders and make a report on such loss.
(Continued)
11
11
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(12) Income taxes
The Company's earnings are subject to an income tax rate of 20%. For the
years ended December 31, 1998, 1997 and 1996, income tax expense (benefit)
was as follows:
(UNAUDITED)
-----------
1998 1997 1996
--------- --------- ---------
Current income tax expense $ - 25 -
Deferred income tax expense (benefit) 13,053 (5,690) (11,652)
--------- --------- ---------
$ 13,053 (5,665) (11,652)
========= ========= =========
The Company's income tax expense (benefit) for the years ended December
31, 1998, 1997 and 1996, differed from the expected income tax, computed
by applying the 20% tax rate on loss before income tax as shown on the
financial statements, as follows:
(UNAUDITED)
-----------
1998 1997 1996
--------- --------- ---------
Computed "expected" income tax benefit $ (9,072) (3,890) (5,717)
Investment tax credits earned (9,406) (4,736) (10,811)
Unrealized exchange gain - (5,070) -
Other 1,712 45 32
Valuation allowance 29,819 7,986 4,844
--------- --------- ---------
Income tax expense (benefit) $ 13,053 (5,665) (11,652)
========= ========= =========
As of December 31, 1998 and 1997, refundable income taxes were as follows:
DECEMBER 31,
----------------------
1998 1997
----------------------
Estimated income tax expense $ - 25
Prepaid income tax 163 178
Other - (25)
Income tax refundable from prior years 181 477
--------- ---------
Income tax refundable $ 344 655
========= =========
(Continued)
12
12
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
The temporary differences, tax credits, loss carryforwards and their
effects on deferred income tax assets are as follows as of December 31,
1998 and 1997:
DECEMBER 31,
----------------------------------------------
1998 1997
--------------------- ---------------------
INCOME TAX INCOME TAX
AMOUNT EFFECT AMOUNT EFFECT
--------- ---------- --------- ----------
Current assets:
Unrealized loss from inventory devaluation $ 5,056 1,011 3,738 748
Organization cost deferred for tax purposes 2,408 482 2,448 490
Employee benefit costs deferred for tax purposes 174 35 171 34
Unrealized foreign exchange loss 12,145 2,429 15,809 3,162
--------- ---------
3,957 4,434
Less: valuation allowance (3,957) -
---------- ---------
$ - $ 4,434
========== =========
Noncurrent assets:
Investment tax credits earned $ 25,178 25,178 14,762 14,762
Organization costs deferred for tax purposes 1,338 268 3,507 702
Employee benefit costs deferred for tax purposes - - 171 34
Difference in technology fee 1,081 216 391 78
Tax loss carryforward 90,787 18,157 46,851 9,370
--------- ---------
43,819 24,946
Less: valuation allowance (40,141) (11,908)
---------- ---------
$ 3,678 13,038
========= =========
A valuation allowance has been established at December 31, 1998 and 1997
due to the uncertainty of realizing a portion of the deferred tax asset
balance. In management's opinion it is more likely than not that the net
deferred tax asset balance at December 31, 1998 and 1997 will be realized.
The significant factors considered in determining the valuation allowance
at December 31, 1998 and 1997 included the Company's eight year financial
forecast, the expected length of the Company's start-up period for its
newly constructed facilities, the expected future market conditions in
Taiwan and the semiconductor industry, the impact of the tax holiday
periods, and the expiration dates of available investment tax credits and
loss carryforwards. The Company increased its valuation allowance by
approximately $30 million as of December 31, 1998 as compared to December
31, 1997 primarily due to a change in market conditions which resulted in
a significant reduction in the Company's near-term taxable income
forecast.
According to the ROC Income Tax Law, pre-operating expenses of the Company
during the development stage are amortized for tax purposes on a
straight-line basis over a period of not less than five years.
ROC tax regulations stipulate that investment tax credits used by the
Company each year shall not exceed 50% of the current income tax payable,
and any unused balance can be carried forward to the following four years,
subject to the same percentage limitation for each year except in the year
of expiration when any remainder can be used for offset of income tax
payable in that year. As of December 31, 1998, the estimated unused income
tax credits, resulting from investment in machinery and equipment and
research and development, available to reduce future tax liabilities and
the years of expiration were as follows:
(Continued)
13
13
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEAR OF INVESTMENT TAX CREDITS YEAR OF EXPIRATION
------------------ ----------- ------------------
1995 $ 282 1999
1996 304 1999
1996 455 2000
1997 2,742 1999
1997 10,846 2000
1997 1,143 2001
1998 2,243 2000
1998 5,719 2001
1998 1,444 2002
---------
$ 25,178
=========
The Company is authorized to be a "Science-based industry" and "Important
technology-based industry" as defined by the Statutes.
According to the Statute for the Establishment and Administration of
Science-Based Industrial Park, a science-based industry may, within two
years from the date on which it begins to sell its products or to render
services, select any fiscal year in the four-year period from such date
for exemption from profit-seeking enterprise income tax for a period of
five consecutive years from the starting date of such fiscal year.
In accordance with Article 8 of the Statute for Promotion of Upgrading
Industries, the important technology-based industry shareholders which
held their investments for a period over two years, the shareholders may
credit up to 20% of price paid for the acquisition of such investments
against their income tax payable.
The Company's initial NT$200,000 capital expenditure project (phase I
project) is entitled to enjoy both the tax holiday and shareholders
investment tax credit incentive schemes. The Company has chosen January 1,
2000 as the tax holiday starting date.
The Company's subsequent expansion of NT$200,000 capital expenditure
project (phase II project) can only apply one of the above incentive
schemes. The stockholders' meeting on May 22, 1998 has selected to enjoy
shareholders investment tax credit.
Pursuant to the ROC Income Tax Law, the Company's tax losses may be
carried forward for up to five years to reduce future taxable income. As
of December 31, 1998, the estimated tax loss carryforwards were as
follows:
YEAR LOSS AMOUNT YEAR OF EXPIRATION
--------- ------ ------------------
1996 $ 16,429 2001
1997 30,862 2002
1998 43,496 2003
---------
$ 90,787
=========
The tax authorities have examined and assessed the Company's income tax
returns through 1996.
(Continued)
14
14
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(13) Pledged assets
As of December 31, 1998 and 1997, pledged assets were as follows:
DECEMBER 31,
----------------------
ASSETS RELATED SECURED LIABILITIES 1998 1997
---------------------- ---------------------------------------- --------- ---------
Time Deposits
Restricted bank deposits Short-term loans $ 931 3,063
Restricted bank deposits Documentary draft for export in customs 31 31
Machinery and equipment Long-term loans 73,757 53,312
Buildings Long-term loans 38,113 34,333
--------- ---------
$ 112,832 90,739
========= =========
(14) Commitments
(a) Operating lease
The Company is leasing its plant site from the Science-Based
Industrial Park Administration Bureau for a period of 20 years,
expiring December 31, 2014. In accordance with the lease agreement,
rental payments are subject to adjustment as and when the government
reappraises the land value. The current rent is NT$12,390 ($383) per
year.
Future minimum lease payments as of December 31, 1998, under the
existing non-cancelable agreement are:
YEARS MINIMUM LEASE PAYMENTS
------------------ -----------------------
1999 through 2003 $ 1,915 ($383 annually)
2004 through 2008 1,915
2009 through 2013 1,915
2014 382
--------
$ 6,127
========
(b) Technical service agreement
In accordance with a technical assistance agreement between the
Company and MEMC, the Company is required to pay MEMC fixed payments
and the timing of such payments is based on reaching certain
milestones. As of December 31, 1998 and 1997, the remaining balance of
such payments to be paid under the agreement amounted to $834 and
$2,500, respectively.
In addition, the Company pays MEMC an annual royalty based on net
sales and operating income.
(c) Purchase of equipment
As of December 31, 1998 and 1997, the Company had outstanding letters
of credit amounting to approximately $4,906 and $3,242, respectively,
and was committed to purchase equipment with a total estimated cost of
$981 and $15,369, respectively.
(Continued)
15
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(d) Syndicated term loan agreement
The Company entered into certain syndication loan agreements with ABN
AMRO Bank and seven other banks (the "Banks") for the Company's Phase
I and II planned expansion. In accordance with the syndication loan
agreements, the Banks granted credit facilities to the Company for the
purchase of machinery and equipment. The commitment fee is charged at
a certain rate per annum payable quarterly, based on the committed-to
withdraw but unborrowed balance, if any. Commitment fees paid for the
years ended December 31, 1998 and 1997 amounted to $9 and $44,
respectively.
(15) Reconciliation to United States Generally Accepted Accounting Principles
The Company's financial statements have been prepared in accordance with
ROC GAAP. ROC GAAP vary in certain significant respects from US GAAP.
Differences which have a significant effect on the Company's results of
operations and stockholders' equity are as follows:
(a) Employee retirement benefits
Prior to January 1, 1998, the pension expense recorded by the Company
in connection with its defined benefit pension plan was based on the
amount of the contributions made by the Company to the pension plan as
required by government regulations under ROC GAAP. As described in
note 2(j), the Company began recording pension expense using actuarial
techniques as specified by ROC SFAS No.18 (ROC SFAS No.18 is similar
to US SFAS No. 87). Under US GAAP, the accumulated pension obligation
and pension expense is determined on an actuarial basis, assuming the
Company first adopted this policy at the beginning of 1997 since it
was not feasible to apply the actuarial basis at an earlier period.
The impact of this difference is not significant to the Company's
determination of results of operations or stockholders' equity under
US GAAP for the periods presented.
(b) Technology fee
Under ROC GAAP, the Company capitalizes and amortizes certain costs in
connection with a technical assistance agreement entered into with a
shareholder, MEMC. Under US GAAP, such payments are expensed as
incurred or treated as a deemed dividend depending on the nature of
the payment. In 1998, the Company made a royalty payment of $1,666
which was treated as a deemed dividend.
A reconciliation from ROC GAAP to US GAAP of net loss and
stockholders' equity are as follows:
1996
1998 1997 (UNAUDITED)
--------- --------- -----------
Net loss as reported under ROC GAAP $ (58,414) (13,784) (16,931)
(a) Amortization of capitalized technology fees 1,500 1,500 583
(b) Income tax effects resulting from capitalized technology (240) (295) (119)
--------- --------- ---------
fees
Net loss in accordance with US GAAP $ (57,154) (12,579) (16,467)
========= ========= =========
(Continued)
15
16
16
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Stockholders' equity:
DECEMBER 31,
-----------------------
1998 1997
--------- ---------
Stockholders' equity as reported under ROC GAAP $ 77,979 79,545
(a) Effect of capitalization of technology fees, net of (5,583) (5,417)
amortization
(b) Income tax effects resulting from capitalized technology 313 553
fees --------- ---------
Stockholders' equity in accordance with US GAAP $ 72,709 74,681
========= =========
(16) Reclassifications
Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform with the 1998 presentation for comparison
purposes. These reclassifications do not have a significant impact on the
financial statements.