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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark
One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
[X]
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
[_]
OF THE THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-13828
MEMC ELECTRONIC MATERIALS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 56-1505767
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
501 Pearl Drive (City of O'Fallon) 63376
St. Peters, Missouri (Zip Code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code (636) 474-5000
Securities registered pursuant to Section 12(b) of the Act:
________Title of Each Class__________: _______Name of Each Exchange on Which
$.01 par value Common Stock Registered___________________________:
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of such stock on March 13, 2000, as
reported by the New York Stock Exchange, was approximately $360.0 million.
The number of shares outstanding of the registrant's Common Stock as of
March 13, 2000, was 69,557,000 shares.
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Documents Incorporated by Reference
(1) Portions of the registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1999 (Part I, Part II, and Part IV of Form 10-K).
(2) Portions of the registrant's Notice of Annual Meeting of Stockholders and
Proxy Statement dated March 27, 2000 (Part III of Form 10-K).
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PART I
Item 1. Business
General
MEMC Electronic Materials, Inc. (MEMC or the Company) is a leading worldwide
producer of silicon wafers. The silicon wafer is the fundamental building
block from which almost all semiconductors are manufactured. Semiconductors
are used in virtually all microelectronic applications, including computer
systems, telecommunications equipment, automobiles, consumer electronics
products, industrial automation and control systems, and analytical and
defense systems. We operate manufacturing facilities, directly or through
joint ventures, in Italy, Japan, Malaysia, South Korea, Taiwan, and the United
States. We sell silicon wafers to most of the world's largest manufacturers of
semiconductors. We are the only significant non-Japanese silicon wafer
manufacturer with manufacturing and research facilities in Japan.
MEMC was incorporated in 1984 under the name Dynamit Nobel Silicon Holdings,
Inc. (DNS). Huls AG, a subsidiary of VEBA AG, subsequently acquired ownership
of DNS. In 1989, Huls AG, through DNS and other related companies, acquired
the electronic materials businesses operated by Monsanto Company (Monsanto) in
the United States, Europe, Japan and Malaysia. Huls AG changed the name of DNS
to MEMC Electronic Materials, Inc. and combined the assets acquired from
Monsanto with the assets of its United States and Italian silicon wafer
business to form the current MEMC. VEBA Corporation, a subsidiary of VEBA AG,
acquired all of the outstanding common stock of MEMC from Huls AG in 1990,
which it subsequently transferred to its wholly-owned subsidiary, Huls
Corporation, in 1993. On July 12, 1995, we completed our initial public stock
offering. As a result of the public stock offering, Huls Corporation's
ownership of our outstanding common stock was reduced to 51.9%. On September
30, 1998, Huls Corporation merged into VEBA Corporation.
On March 22, 1999, we sold 15,399,130 shares of our common stock to VEBA
Zweite Verwaltungsgesellschaft mbH (VEBA Zweite), a subsidiary of VEBA AG, in
a private placement. On April 16, 1999, we sold an additional 13,069,898
shares of our common stock to VEBA Zweite in connection with a rights
offering. As a result, VEBA AG, through its subsidiaries VEBA Corporation and
VEBA Zweite, now owns 71.8% of our outstanding common stock.
We are engaged in one reportable industry segment--the design, manufacture
and sale of electronic grade silicon wafers for the semiconductor industry.
Financial information regarding this industry segment is contained in our 1999
Annual Report which information is incorporated herein by reference.
Industry Overview
Almost all semiconductors are manufactured from silicon wafers, and thus the
strength of the silicon wafer industry is highly correlated to the performance
of the semiconductor industry. Although there are approximately two hundred
semiconductor manufacturers worldwide, we believe that the top twenty
semiconductor manufacturers accounted for over 70% of all semiconductor
revenues in 1999. We also believe that of the approximately 17 silicon wafer
manufacturers in the world today, six principal manufacturers, including MEMC,
supply a substantial majority of the wafers used by the major semiconductor
manufacturers.
Semiconductor Industry
The semiconductor industry historically has been a high growth cyclical
industry. Worldwide, the industry grew at a compound annual growth rate of
14.4% from $24.3 billion in revenues in 1985 to $160.0 billion in revenues in
1999, according to Dataquest estimates. Continuous improvements in
semiconductor process and design technologies, semiconductor fabrication
equipment and the composition of silicon wafers have allowed semiconductor
manufacturers to produce more complex, higher performance and more reliable
devices at a lower cost per device. The result has been a large proliferation
of uses for semiconductors and historically rapid growth in semiconductor
revenue.
1
Despite the semiconductor industry's history of significant growth,
semiconductor revenues grew by only 3.6% in 1997 and declined by 7.5% in 1998,
according to Dataquest estimates. This slowdown was attributable to excess
capacity and resultant price erosion, especially for DRAMs (commonly used
computer memory chips). This downturn extended through 1998 due to continued
overcapacity and the weak economic conditions in the Asia Pacific and Japanese
markets. In 1999, semiconductor revenues grew by 17.6%, according to Dataquest
estimates. This turnaround is attributable to improved demand for DRAMs,
improved economic conditions in the Asia Pacific and Japanese markets, and
newer technologies related to the Internet, telecommunications and
connectivity.
Throughout the downturn, semiconductor manufacturers exerted significant
price pressure on their raw material suppliers, including silicon wafer
manufacturers. Semiconductor manufacturers also accelerated the speed at which
they reduced their device line widths, or the distance between circuit
elements, in an effort to reduce costs. The reduction in line widths results
in a requirement of less silicon per device. Additionally, during the downturn
the semiconductor industry experienced significant restructuring and
consolidation activities.
Semiconductor manufacturers greatly reduced their capital spending beginning
in late 1997 and throughout 1998. This reduced capital spending limited
additions to capacity. In 1999, capital spending increased as a result of the
improvement in the semiconductor market.
Silicon Wafer Industry
The silicon wafer industry historically has been a high growth cyclical
industry correlated to the growth of the semiconductor industry. Worldwide,
the industry grew at a compound annual growth rate of 9.9% from 1.2 billion
square inches in 1985 to 4.5 billion square inches in 1999, according to
Dataquest estimates. From 1993 through the first half of 1996 the industry was
characterized by excess demand and wafer shortages. Due to these shortages and
anticipated future demand, wafer manufacturers quickly added capacity,
especially for 8-inch wafers, the predominant wafer used in the industry today
and the wafer diameter anticipated to have the most significant growth in
demand over the next several years. This growth rate declined significantly
beginning in the second half of 1996.
The silicon wafer industry slowdown, which began in the summer of 1996 and
continued through 1998, left the industry in a state of overcapacity. This
overcapacity resulted in significant price declines. The price declines have
been greatest for 8-inch wafers where the highest overcapacity exists.
According to Dataquest, silicon wafer consumption declined by an estimated
8.7% in 1998 and increased by an estimated 22.6% in 1999. Despite the increase
in silicon wafer consumption, the silicon wafer industry still suffers from
overcapacity, predominately in the 8-inch market. As a result, pricing has
remained depressed, although by the end of 1999 the silicon wafer market
appears to have reached a period of price stabilization.
Major silicon wafer manufacturers, including MEMC, invested in 12-inch wafer
manufacturing capacity in anticipation that the semiconductor industry would
migrate to this larger diameter wafer. However, in 1998, the industry
experienced a softening semiconductor market and successful implementation of
thinner device linewidths on the current diameters. This resulted in industry
recognition that the transition to 12-inch wafers would be delayed. The new
transition timing requires 12-inch wafer characteristics to be even more
advanced at the time they are introduced for production of integrated
circuits.
The leading semiconductor manufacturers organized and funded two industry
consortia, International Sematech in Austin, Texas, and Selete in Japan, for
the purpose of evaluating 12-inch equipment and materials. During 1999, the
primary use of 12-inch wafers was for semiconductor device process and tool
development, although we also supplied some 12-inch prime wafers to
semiconductor manufacturers. We are beginning to see renewed interest in 12-
inch wafers, as numerous semiconductor manufacturers have recently announced
plans for 12-inch fabrication lines. However, we do not expect customers to
start up large-scale 12-inch fabrication lines until the year 2002 or beyond.
2
Products
Our silicon wafers vary in diameter, surface features (polished or
epitaxial), composition, electrical properties and method of manufacture. Our
silicon wafers are manufactured according to the exacting specifications
required by our customers; we currently produce wafers with a variety of
product features satisfying more than 1,000 unique product specifications.
Semiconductor manufacturers require wafers of larger diameter and more
stringent technical specifications in order to produce increasingly complex
semiconductor devices such as the larger megabit memory chips and
microprocessors.
Our customers have increased their focus on efficient semiconductor
production processes because their manufacturing processes for semiconductor
devices have become more expensive. Our customers make many semiconductor
devices, or chips, from the same wafer, and all chips from a particular wafer
are manufactured and processed simultaneously at each stage in the device
manufacturing process. Because of this, larger-sized wafers allow for a
greater throughput from the same semiconductor manufacturing process and allow
semiconductor manufacturers to spread their fixed costs of production over a
larger volume of finished products. For example, a 6-inch (150 millimeter)
wafer has a surface area of approximately 27.4 square inches, whereas an 8-
inch (200 millimeter) wafer has a surface area of approximately 48.7 square
inches. Thus, the 8-inch wafer has approximately 78% more surface area than
the 6-inch wafer. A 12-inch (300 millimeter) wafer has a surface area of
approximately 109.6 square inches or approximately 125% more surface area than
an 8-inch wafer. Despite the industry's focus on 6-inch and larger diameter
wafers, we continue to manufacture and sell a significant amount of 4-inch
(100 millimeter) and 5-inch (125 millimeter) wafers.
We manufacture wafers in sizes ranging from 4 inches to 8 inches in
diameter, as well as a limited number of 12-inch diameter wafers from our
pilot development lines.
Our silicon wafers fall into one of three general types:
Prime Polished Wafers
Our principal product is the prime polished wafer, which is a highly
refined, pure silicon wafer with an ultraflat and ultraclean surface. We put
prime polished wafers through a sophisticated chemical-mechanical polishing
process that removes defects and leaves an extremely smooth surface. This
makes the wafers suitable for the advanced technologies used by our customers.
Our customers use prime polished wafers in a broad range of applications for
integrated circuit devices.
Epitaxial Wafers
Customers have forced semiconductor manufacturers to use smaller and smaller
device features in order to incorporate more complex functionality in the
integrated circuit. Smaller devices also improve performance and control power
consumption and heat production. We manufacture epitaxial wafers to serve the
technological demands of our customers that manufacture advanced
semiconductors.
Epitaxial wafers consist of a thin, single-crystal silicon layer grown on
the polished surface of the silicon wafer. The wafer is designed to have
different composition and electrical properties from the epitaxial layer on
the wafer surface. The wafer, among other things, helps to improve isolation
between circuit elements our customers fabricate on the silicon film surface
of the wafer. One result of such smaller devices is the requirement that the
distance between circuit elements becomes increasingly narrow. The industry
refers to the distance between circuit elements as line widths. A critical
aspect in the construction of any integrated circuit device is the isolation
of these different elements that comprise the integrated circuit device.
Without sufficient isolation of the various elements, the elements could
communicate electrically with each other, which could ruin the device.
Epitaxial wafers provide improved isolation and allow for increased
reliability of the finished semiconductor device, greater efficiencies during
the semiconductor manufacturing process, and ultimately more complex
integrated circuit devices.
3
Test/Monitor Wafers
We supply test/monitor wafers, or monitor wafers, to our customers for their
use in testing semiconductor fabrication lines and processes. Although monitor
wafers are substantially the same as prime polished wafers with respect to
cleanliness, and in some cases flatness, other specifications are generally
less rigorous. This allows us to produce monitor wafers from the portion of a
silicon ingot that does not meet customer specifications for wafers to be used
in the manufacture of semiconductors. Therefore, sales of monitor wafers allow
us to experience a higher yield from each silicon ingot produced.
Raw Materials
The main raw material in our production process is polysilicon. We produce
over one-half of our total polysilicon requirements and purchase the remainder
of our requirements from others. The availability of polysilicon currently
significantly exceeds demand. We believe that an adequate supply of
polysilicon will be available internally or from others for the foreseeable
future.
We obtain substantially all of our requirements for several raw materials,
equipment, parts and supplies from sole suppliers. Although we believe that we
could find adequate alternative sources of supply for these raw materials,
equipment, parts and supplies, we may be required to obtain new qualifications
from our customers in order to change or substitute suppliers. Because we
cannot predict whether we would be successful or how long that process would
take, our manufacturing yields could be adversely affected while we transition
to a new supplier.
We believe that adequate quantities of all our key raw materials, equipment,
parts and supplies are currently available. However, because of the cyclical
nature of our industry, we may experience shortages in the future. See
"Business--Risk Factors--We Depend on Certain Suppliers and Finding
Alternative Sources of Supply Could Affect Adversely Our Customer
Qualifications and Manufacturing Yields."
Manufacturing Process
Silicon wafers for the semiconductor industry are extremely complex
materials with characteristics such as high purity levels, highly uniform
crystal structure, and precise mechanical tolerances. Electronic grade silicon
is one of the most refined materials in the world, having an impurity level of
no more than one part per billion. Requirements for highly uniform crystal
structure, mechanical tolerances and cleanliness in the manufacture of silicon
wafers are at levels that stretch manufacturing processes to the limits of
measurement, and necessitate that we conduct certain processes in "clean
rooms."
The silicon wafer manufacturing process consists of three principal phases:
the crystal growth process, the wafer slicing process and the wafer finishing
process.
Crystal Growth Process
The first step in the wafer manufacturing process is the formation of a
large, silicon single crystal or ingot. This process begins with the melting
of polysilicon, together with minute amounts of electrically active elements
such as arsenic, boron, phosphorous or antimony in a quartz crucible.
Once the melt has reached the desired temperature, we lower a silicon seed
crystal, or "seed" into the melt. The melt is slowly cooled to the required
temperature, and crystal growth begins around the seed. As the growth
continues, the seed is slowly extracted or "pulled" from the melt. The
temperature of the melt and the speed of extraction govern the diameter of the
ingot, and the concentration of an electrically active element in the melt
governs the electrical properties of the silicon wafers to be made from the
ingot. This is a complex, proprietary process requiring many control features
on the crystal-growing equipment.
4
Wafer Slicing Process
After we grow the ingots, we extract them from the crystal pulling furnaces
and allow them to cool. We grind the ingots to the specified diameter, and
then we slice the ingots into thin wafers. Next, we prepare the wafers for the
surface polishing steps with a multi-step process using precision lapping
machines, edge contour machines and chemical etchers.
Wafer Finishing Process
Final polishing and cleaning processes give the wafers the clean and
superflat mirror polished surfaces required for the fabrication of
semiconductor devices. For wafer polishing, we currently use our proprietary,
ninth-generation polishers together with an innovative chemical-mechanical
polishing process. This form of polishing was one of our early inventions that
first allowed solid state devices to move from individual circuits to the
complexities of today's integrated circuits. We further process some of our
products into epitaxial wafers.
Research and Development
A number of factors drive our current research and development efforts.
These include our business strategy and focus mainly on:
. the development and improvement of large diameter and advanced silicon
wafer products;
. manufacturing process improvements; and
. enhancement and cost reduction of existing products.
Customer focus also influences research and development. We work closely
with customers in developing new products and refining existing products to
faster meet the needs of the marketplace. To strengthen this relationship and
interaction, we assign research and development applications engineers to key
customer accounts worldwide.
Recent innovations of our research and development program include three new
products and one new product feature. We have either been granted patents or
applied for patent protection on all three new products and the new product
feature. The following is an overview of these new product offerings:
. HPS 2(TM)--A silicon wafer that has an extremely pure substrate that
eliminates even submicron defects in crystal structure. This wafer is
beneficial to manufacturers of very advanced logic and flash memory
semiconductor devices that require sophisticated integrated circuits with
a defect-free crystalline structure.
. Advanta(TM)--An advanced polished silicon wafer that fills the niche
between a standard polished wafer and our new HPS 2(TM) wafer.
Advanta(TM) wafers offer better performance than a standard polished
wafer at a competitive cost.
. EPI II(TM)--An epitaxial wafer that offers the same level of quality
performance as other advanced wafers but eliminates the need for process
changes by semiconductor manufacturers. We market EPI II(TM) wafers to
the DRAM and logic markets.
. MDZ(TM) or Magic Denuded Zone(TM)--A new product feature that can be
applied to any polished silicon wafer. MDZ(TM) offers a well-defined and
predictable level of internal gettering, which means impurities are drawn
away from the surface of the wafer. As a result, the MDZ(TM) product
feature provides greater manufacturing yield for our customers.
As a result of our commitment to develop the next diameter of silicon
wafers, we are now supplying high quality 12-inch wafers to the semiconductor
industry from our pilot development line. We first produced our 12-inch
diameter wafers in 1991 and believe we are one of the industry leaders in the
development of this next generation of wafers.
5
We are currently shipping small commercial volumes of HPS 2(TM) and
Advanta(TM) wafers, and wafers with the MDZ(TM) product feature, to certain
customers and evaluation samples of these wafers to other customers. We are
also shipping evaluation samples of EPI II(TM) wafers to selected customers.
Our new 12-inch wafers and new product offerings are all in the pilot stage
of development, and we cannot assure you that any of these products will ever
mature to a commercial product.
We continue to see rapid technological change and product innovation in the
market for silicon wafer products. In response to this business environment,
we commissioned a "Wafering Center of Excellence" in 1997 to direct our
wafering process research and development. The Wafering Center of Excellence
is located at our plant in Utsunomiya, Japan and has the capacity to produce
12-inch wafers.
Expenses incurred for research and development activities during 1999, 1998
and 1997, excluding expenses incurred by our unconsolidated joint ventures,
were $85.0 million, $81.6 million and $64.5 million, respectively,
representing 12.2%, 10.8% and 6.5% of our net sales for the respective
periods.
Marketing and Sales
We market most of our products through a direct sales force. We believe a
key element of our marketing strategy is establishing and maintaining close
relationships with our customers. We try to accomplish this through multi-
functional teams of technical, marketing and sales, and manufacturing
personnel. These teams work closely with customers in developing their new
production facilities, qualifying our products for use at such new facilities
and maintaining qualification at all existing manufacturing facilities. We
complete sales principally through indicative-only contracts of one year or
less that indicate expected volumes and specify price.
Our close relationships with our customers are partly the result of the
lengthy and expensive "qualification" process by which customers qualify
silicon wafer manufacturers, and their individual facilities, to supply a
particular product. We are aware of changing customer needs and target our
manufacturing to try to produce wafers adapted to each customer's process and
requirements. During 1999, our largest 10 customers generated over 60% of our
sales. Texas Instruments represented approximately 18% of our sales in 1999.
No other customer represented 10% or more of our 1999 sales.
Cost Reduction Plan
In 1999, we continued our cost reduction plan in response to the difficult
industry environment.
We have discontinued manufacturing operations at our small-diameter wafer
facility in Spartanburg, South Carolina and have withdrawn from our joint
venture participation in a small-diameter wafer facility in China. We took
these actions because:
. our customers had been operating their 8-inch fabrication lines in
preference to their smaller diameter fabrication lines, reducing the
demand for smaller diameter wafers;
. a number of our customers undertook restructuring initiatives focused on
permanently eliminating small diameter lines; and
. we believed that even when the semiconductor market began to recover, we
would have excess small diameter wafer capacity.
As a result of these actions, we reduced our workforce by approximately 300
employees compared to December 31, 1998. This reduction follows a decrease of
1,700 employees in 1998.
We also continued a number of other cost cutting and savings initiatives:
. We had a limited number of short-term plant shutdowns to better align
production with the level of demand;
6
. We continued to implement our "best practices" worldwide and continued to
develop new manufacturing technologies in order to reduce our processing
costs;
. We continued a plant focus program that limits the number of wafer
diameters manufactured at each site;
. We continued to implement aggressive spending cuts;
. We obtained price concessions from our vendors; and
. We reduced our capital spending.
As a result of our cost cutting and savings initiatives, we believe that we
reduced costs by over $100 million in 1999 versus 1998.
We anticipate that we will continue to tightly control our capital
expenditures in 2000.
Competition
We face intense competition in the silicon wafer industry from established
manufacturers throughout the world. We believe that we possess certain
technological and other strengths relative to our competitors. However,
realizing and maintaining such strengths requires us to continue making a high
level of investment in research and development, marketing and customer
service and support. Our inability to maintain such investments could have a
material adverse effect on our operating results. For other risks related to
competition, see "Business--Risk Factors--We Experience Intense Competition in
the Silicon Wafer Industry and Our Customers Expect Continuing Technological
Innovation at a Low Cost."
Joint Ventures
We have entered into several joint ventures as part of our strategy to
leverage our capital, to enter expanding markets, to forge closer working
relationships with our principal customers and to broaden the geographic
diversification of our operations. We have unconsolidated joint ventures with
prominent partners in South Korea and Taiwan.
POSCO HULS Co., Ltd.
In 1990, we entered into a joint venture in South Korea with Samsung
Electronics Co., Ltd. and Pohang Iron and Steel. Samsung is a South Korean
manufacturer of integrated circuits and one of our largest customers. Pohang
is a South Korean steel manufacturer. The South Korea joint venture is named
POSCO HULS Co., Ltd. (commonly known as PHC) and manufactures and sells
silicon wafers primarily in South Korea. PHC generated sales of $158.0 million
in 1999, $121.0 million in 1998 and $215.9 million in 1997. Over half of PHC's
sales in each of these years were to Samsung. PHC has the capacity to produce
per month an aggregate of approximately 320,000 6-inch and 8-inch wafers. We
own 40% of PHC. Pohang owns 40%, and Samsung owns 20%. Pohang has notified us
of its desire to sell its 40% interest in PHC. We are engaged in on-going
negotiations with Pohang regarding our possible purchase of Pohang's interest
in PHC. We cannot assure you that we will be successful in purchasing Pohang's
interest in PHC.
We have agreed to provide technical assistance and information to PHC. We
have also granted licenses to PHC to use certain technology to manufacture,
promote and sell silicon wafers. In exchange for such technical assistance and
licenses, we receive quarterly royalties based on net sales and an annual
royalty based on net income after taxes. The quarterly royalties and the
annual royalty we receive from PHC are separate and independent calculations.
Accordingly, if PHC has a net loss for the fiscal year, then we will not
receive an annual royalty based on net income after taxes, but we will receive
and retain the full amount of the quarterly royalties based on net sales.
7
Taisil Electronic Materials Corporation
In 1994, we formed Taisil Electronic Materials Corporation (commonly known
as Taisil) with China Steel Corporation. China Steel Corporation is a
Taiwanese steel manufacturer. Taisil manufactures and sells silicon wafers in
Taiwan. Taisil generated sales of $94.4 million in 1999, $58.7 million in 1998
and $61.6 million in 1997. Taisil has the capacity to produce approximately
145,000 8-inch wafers per month. Taisil has in place infrastructure that could
support the production of approximately 240,000 8-inch wafers per month. We
own 45% of Taisil. The remainder of Taisil is owned by China Steel Corporation
(35%), Chiao Tung Bank (5%), the China Development Corporation (10%) and
employees and others (5%).
We have agreed to provide technical assistance and information to Taisil. We
have also granted licenses to Taisil to use certain technology to manufacture
and sell silicon wafers. In exchange for such technical assistance and
licenses, we receive semiannual royalties based on Taisil's net sales and
operating income.
For other information regarding Taisil, see "Business--Risk Factors--We May
Have to Make Substantial Payments in Connection With Our Taisil Joint Venture,
and This Could Divert Funds From Other Needed Areas."
Option on Pasadena Facility
In September 1998, we granted Tokuyama Corporation, Marubeni Corporation and
Marubeni America Corporation an option to acquire a majority interest in MEMC
Pasadena, Inc. Tokuyama is a Japanese polysilicon manufacturer and Marubeni is
a Japanese trading company. MEMC Pasadena is our granular polysilicon
subsidiary. In exchange for the option, Tokuyama and Marubeni made an option
payment to us. The term of the option is two years, subject to a one year
extension at the option of Tokuyama and Marubeni. If Tokuyama and Marubeni
exercise their option, we will then negotiate the terms and conditions
(including price) of the exercise with them based on the market value at that
time. The entire option payment will be applied toward the ultimate purchase
price. If Tokuyama and Marubeni do not exercise their option, then we will
return one-half of the option payment to them. During the term of the option,
Tokuyama and Marubeni have a right of first refusal over any transfer of MEMC
Pasadena's granular polysilicon business. In addition, for two years, we
cannot solicit offers from third parties for this business. In connection with
the option, Tokuyama has agreed to provide technical assistance to MEMC
Pasadena for two years (unless the option is earlier terminated by Tokuyama
and Marubeni) to help improve the quality of MEMC Pasadena's granular
polysilicon products.
Proprietary Information and Intellectual Property
As of December 31, 1999, we owned of record or beneficially approximately
137 U.S. patents, of which approximately 14 will expire by 2003, approximately
19 will expire between 2004 and 2008 and approximately 104 will expire after
2008. As of December 31, 1999, we owned of record or beneficially
approximately 206 foreign patents, of which approximately 29 will expire by
2003, approximately 79 will expire between 2004 and 2008 and approximately 98
will expire after 2008. These foreign patents are generally counterparts of
our U.S. patents. We cannot assure you, however, that any of these patents
will not be challenged, invalidated or circumvented in the future, or that
they do or will provide a competitive advantage. As of that date, we have also
submitted approximately 104 U.S. and 399 foreign patent applications. However,
we cannot assure you that any of these applications will be granted.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use our products or technology
that we consider proprietary, and third parties may attempt to develop similar
technology independently. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain countries.
Accordingly, there can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology.
Under certain contracts, we are required to indemnify some third parties
against claims of infringement of the intellectual property rights of others.
8
Any litigation in the future to enforce patents issued to us, to protect
trade secrets or know-how possessed by us or to defend us or indemnify others
against claimed infringement of the rights of others could have a material
adverse effect on our financial condition and operating results. Also,
regardless of the validity or successful outcome of such claims, we may need to
expend significant time and expense to protect our intellectual property rights
or to defend against claims of infringement by third parties, which could have
a material adverse effect on us. If we lose any such litigation, we may be
required to:
. pay substantial damages;
. seek licenses from others; or
. change, or stop manufacturing or selling, some of our products.
Any of these outcomes could have a material adverse effect on our business,
results of operations or financial condition.
Employees
At December 31, 1999, we had approximately 5,600 full-time employees and 350
temporary workers worldwide. We have not experienced any material work
stoppages at any of our facilities during the last several years. We believe
our relationships with employees are satisfactory.
Geographic Information
Information regarding our foreign and domestic operations is contained in
Note 17 on page 40 of our 1999 Annual Report, which information is incorporated
herein by reference.
Risk Factors
This Annual Report on Form 10-K contains "forward-looking" statements within
the meaning of the Securities Litigation Reform Act of 1995, including those
set forth under "Item 1. Business" and "Item 3. Legal Proceedings." In addition
to the business risks and uncertainties discussed elsewhere in this Annual
Report on Form 10-K, the following are important risk factors which could cause
actual results and events to differ materially from those contained in any
forward-looking statement contained herein or made elsewhere by us.
We Have Had Significant Operating and Net Losses and We Anticipate Future
Losses
We have not reported an operating profit since the third quarter of 1997. We
reported an operating loss in 1997 of $10.4 million. In 1998, we had an
operating loss of $333.3 million, which included restructuring costs of $146.3
million. In 1999, we had an operating loss of $153.2 million, which included a
$5.7 million benefit attributable to a decrease in our restructuring reserve.
Due to overcapacity and continued depressed prices in the silicon wafer
industry and other factors, we do not expect to be profitable in 2000. We
cannot predict how long we will continue to experience operating and net losses
or whether we will become profitable.
We Need Substantial Capital Investments to Fund Our Future Operations
Otherwise We May Not Keep Pace With Our Competitors
We will need substantial amounts of cash to continue to fund capital
expenditures, research and development, and marketing and customer service and
support to keep pace with our competitors. Our business is very capital
intensive. Our capital needs depend on numerous factors, including our
profitability and investment in research and development and capital
expenditures. We cannot assure you that the liquidity provided by our existing
cash balances and credit facilities, together with cash generated from
operations, if any, will be adequate to fund our future operations. We have
incurred negative cash flows from operations in recent periods.
9
VEBA AG and its Affiliates Intend to Divest Their Interests in MEMC
On September 27, 1999, VEBA AG announced a merger with VIAG AG. The
VEBA/VIAG group has stated that its core businesses will be energy and
specialty chemicals. The VEBA/VIAG group's stated intent is to systematically
and optimally divest certain non-core businesses, including the debt and
equity interests of VEBA AG and its affiliates in MEMC. VEBA AG and its
affiliates are not obligated to provide additional capital to us except under
the terms of existing loan agreements. We cannot assure you that VEBA AG and
its affiliates will provide additional capital to us in the future.
Our loans from VEBA AG and its affiliates begin to mature in 2001. We cannot
assure you that VEBA AG and its affiliates or any future purchaser of these
loans will refinance these loans upon maturity on terms acceptable to us. In
such event, we will be required to obtain capital from other parties. See
"Business--Risk Factors--We May Not Be Able to Obtain Capital from Other
Parties in the Future to Meet Our Needs and May Be Forced to Reduce Our
Investment in Our Business."
We May Not Be Able to Obtain Capital from Other Parties in the Future to Meet
Our Needs and May Be Forced to Reduce Our Investment In Our Business
We cannot assure you that we will be able to obtain capital in the future to
meet our needs. If we cannot obtain additional funding, whether from current
or new lenders or investors, we may be required to reduce our investments in
research and development, marketing and customer service and support and
capital expenditures or divest assets. Such reductions or divestitures could
materially adversely affect our business and our ability to compete.
If we do find a source of additional capital, the terms and pricing of any
such financing may be significantly more favorable to the lender or investor
than those previously provided by us. Future capital raising could dilute or
otherwise materially adversely affect the holdings or rights of our existing
stockholders.
Historically, we have funded our operations primarily through loans from
VEBA AG and its affiliates, internally generated funds and issuances of common
stock. To a lesser extent, we have raised funds by borrowing money from
commercial banks. We will continue to explore and, as appropriate, enter into
discussions with other parties regarding possible future sources of capital.
However, under the loan agreements between us and our principal lender, VEBA
AG and its affiliates, we cannot pledge any of our assets to secure additional
financing. We do not believe that we currently can obtain unsecured financing
from third parties on better terms than those with VEBA AG and its affiliates.
We Have a Significant Amount of Debt That Will Adversely Affect Our Ability
to Obtain Additional Financing
We currently have a significant amount of debt that will adversely affect
our ability to obtain additional financing for working capital, capital
expenditures or other purposes. As of December 31, 1999, we owed $729.1
million to VEBA AG and its affiliates, and $162.8 million to other lenders.
Our debt service could make us more vulnerable to industry downturns and
competitive pressures. In addition, the cash flow required to service our debt
may reduce our ability to fund internal growth and capital requirements.
If The Semiconductor Industry Experiences Future Downturns, We Will Face
Pressure to Further Reduce Prices Which May Lead to Further Losses
If the semiconductor industry experiences future downturns, we will face
pressure to further reduce prices. However, our ability to reduce expenses
during a downturn is limited because of our significant fixed costs and the
continued investment in research and development and marketing necessary to
maintain our extensive worldwide customer service and support capabilities. If
we are unable to reduce our expenses sufficiently to offset the decline in our
prices, our operating results and financial condition could be materially
adversely affected.
10
Our business depends in large part upon the market demand for our customers'
semiconductors and products utilizing semiconductors. The semiconductor
industry experiences:
. rapid technological change;
. product obsolescence;
. price erosion; and
. wide fluctuations in product supply and demand.
From time to time the semiconductor industry has experienced significant
downturns. These downturns often occur in connection with, or in anticipation
of, maturing product cycles (of both the semiconductor companies and their
"end customers") and declines in general economic conditions. Some of these
downturns have lasted for more than a year. Also, during such periods,
customers of semiconductor manufacturers benefiting from shorter lead times
may delay some purchases of semiconductors into future periods.
Excess Capacity and Depressed Wafer Prices Limit Our Ability to Become
Profitable
Excess capacity in the silicon wafer industry has limited our ability to
maintain or raise prices. Further capacity expansions could increase the
worldwide supply of silicon wafers in the future, increase the downward
pressure on prices and materially adversely impact our operating results. The
worldwide production capacity of silicon wafers has exceeded worldwide demand
in recent periods, especially for 8-inch silicon wafers. As a result, the
selling prices for our products have decreased, although by the end of 1999
the silicon wafer market appears to have reached a period of price
stabilization. Because of price decreases, our revenues are currently
insufficient to offset our costs, and this is adversely affecting our
operating results. We have no firm information with which to determine the
capacity and expansion plans of our competitors. Although some of our
competitors have slowed their capacity expansion programs, many have already
added significant capacity for the production of 8-inch wafers. We and our
competitors have the ability to increase production of silicon wafers through
utilization of unmanned capacity and our ability to expand our capacity
quickly through available infrastructure.
Our Dependence on the Semiconductor Industry Causes Substantial Fluctuations
in Our Operating Results and at Times This Has Adversely Affected the Market
Price of MEMC Common Stock
Our quarterly and annual operating results can fluctuate dramatically, and
this can adversely affect the market price of MEMC common stock. The main
factor affecting these fluctuations is our dependence on the performance of
the semiconductor industry, which historically has been cyclical. Another
factor is currency exchange rate volatility, which affects the price we
receive for our wafers and may result in gains or losses on unhedged currency
exposure at our unconsolidated joint ventures.
Our operating results are also affected by:
. the timing of orders from major customers;
. product mix;
. competitive pricing pressures; and
. the delay between the incurrence of expenses to develop marketing and
service capabilities and expand capacity and the realization of benefits
from these expenditures.
Moreover, customers may cancel or reschedule shipments, and production
difficulties could delay shipments. We cannot predict the future impact of any
of these factors. These and other factors could have a material adverse effect
on our quarterly or annual operating results.
VEBA AG's Control of MEMC Could Prevent a Favorable Acquisition of MEMC
VEBA AG's control of MEMC could prevent or discourage any unsolicited
acquisition of MEMC and consequently could prevent an acquisition favorable to
MEMC's other stockholders. VEBA AG and its affiliates have sufficient voting
power to control our direction and policies. VEBA AG and its affiliates can
also control
11
any merger, consolidation or sale of all or substantially all of our assets,
elect the members of the Board of Directors and prevent or cause a change in
control of MEMC. Four of the seven members of our Board of Directors are
employees of VEBA AG or its affiliates, not including MEMC. See "Business--
Risk Factors--VEBA AG and its Affiliates Intend to Divest Their Interests in
MEMC."
Restrictive Covenants Will, and Higher Interest Rates May, Apply to MEMC if
VEBA AG or its Affiliates Cease to Own a Majority of Our Stock
Certain of our loan agreements with VEBA AG and its affiliates provide that
if VEBA AG and its affiliates own less than a majority of the outstanding MEMC
common stock on or after January 1, 2001, then the interest rates we pay on
our loans from VEBA AG and its affiliates will be the higher of:
. the interest rate currently set forth in each such loan agreement; or
. an interest rate determined, as of the later of the change of control
date or January 1, 2001, for an average industrial borrower at an assumed
credit rating based on the remaining term of each such loan agreement.
In addition, in such an event we will become subject to certain affirmative
covenants set forth in all of our loan agreements with VEBA AG and its
affiliates. These affirmative covenants include requirements that we maintain
a minimum net worth and a minimum amount of working capital. We would also
need to meet certain financial ratios, including a minimum fixed charge
coverage ratio and minimum working capital ratio.
If we had been subject to these covenants as of December 31, 1999, we would
not have been in compliance with all of these covenants. If VEBA AG and its
affiliates own less than a majority of our outstanding common stock at any
time on or after January 1, 2001 and we are then not in compliance with all of
these affirmative covenants, then we would be in default under these loan
agreements.
If VEBA AG and its affiliates own less than a majority of the outstanding
MEMC common stock, then Taisil, our unconsolidated Taiwanese joint venture,
may become obligated to repay certain debt.
See "Business--Risk Factors--VEBA AG and its Affiliates Intend to Divest
Their Interests in MEMC" and "Business--Risk Factors--We May Have to Make
Substantial Payments in Connection With Our Taisil Joint Venture, and This
Could Divert Funds From Other Needed Areas."
We Experience Intense Competition in the Silicon Wafer Industry and Our
Customers Expect Continuing Technological Innovation at a Low Cost
We face intense competition in the silicon wafer industry from established
manufacturers throughout the world. If we cannot compete effectively with
other silicon wafer manufacturers, our operating results could be materially
adversely affected. Some of our competitors have substantial financial,
technical, engineering and manufacturing resources. We believe that our
Japanese competitors benefit from their dominance of the Japanese market,
which represented approximately 36% of the worldwide silicon wafer market in
1999. In particular, Shin-Etsu Handotai, the largest supplier of silicon
wafers in Japan and the world, is able to leverage globally its sales and
technology base.
We compete principally on the basis of product quality, consistency and
price, as well as technical innovation, customer service and product
availability. We expect that our competitors will continue to improve the
design and performance of their products and to introduce new products with
competitive price and performance characteristics. Competitive pressures may
cause additional price reductions, which could have a material adverse effect
on our operating results.
If We Fail to Make Significant Investments Necessary to Comply With Changing
Semiconductor Industry Customer Specifications, We May Lose Customers
If we fail to meet future customer requirements, we could experience a
material adverse effect on our competitive position and operating results. The
silicon wafer industry changes rapidly. Changes include
12
requirements for new and more demanding technology, product specifications and
manufacturing processes. Our ability to remain competitive will depend upon
our ability to develop technologically advanced products and processes. We
must continue to meet the increasingly demanding requirements of our customers
on a cost-effective basis. As a result, we expect to continue to make
significant investments in research and development. We cannot assure you that
we will be able to successfully introduce, market and cost-effectively
manufacture any new products, or that we will be able to develop new or
enhanced products and processes that satisfy customer needs or achieve market
acceptance.
We Have a Limited Number of Principal Customers, and Accordingly a Loss of
One or Several of Those Customers Would Hurt Our Business
Our operating results could materially suffer if we, or our joint ventures,
experience a significant reduction in, or loss of, purchases by one or more of
our top customers. Historically, we have sold a significant portion of our
products to a limited number of principal customers. In 1999, we made over 60%
of our sales to ten customers, with one customer accounting for approximately
18% of our sales. Likewise, PHC, our unconsolidated joint venture in South
Korea, sold over half its products to Samsung, one of our partners in that
joint venture. We cannot assure you that we or PHC will realize equivalent
sales from our top customers in the future.
We Expect that International Sales Will Continue to Represent a Significant
Percent of Our Total Sales, and Accordingly We are Subject to Periodic
Foreign Economic Downturns and Fluctuations in Foreign Currency Exchange and
Interest Rates
A number of factors in the past have affected adversely, and may affect
adversely in the future, our results of operations and international sales and
operations, including periodic economic downturns and fluctuations in interest
and foreign currency exchange rates.
We expect that international sales will continue to represent a significant
percentage of our total sales. In addition, a significant portion of our
manufacturing operations are located outside of the United States. Sales
outside of the United States expose us to currency exchange rate fluctuations.
Our risk exposure from these sales is primarily limited to the Japanese yen
and European euro-based currencies. Our risk exposure from expenses at
international manufacturing facilities is concentrated in Italian lira,
Japanese yen and Malaysian ringgit. We generally hedge receivables denominated
in foreign currencies at the time of sale. We hedge some foreign currency
denominated intercompany loans by entering into long-dated forward exchange
contracts. However, we cannot predict whether exchange rate fluctuations will
have a material adverse effect on our operations and financial results in the
future.
Our unconsolidated joint ventures have sales denominated in the U.S. dollar
and manufacturing expenses primarily denominated in the U.S. dollar, Korean
won and New Taiwanese dollar. PHC, our unconsolidated Korean joint venture,
also has a portion of its debt denominated in the U.S. dollar and Korean won.
Likewise, Taisil, our unconsolidated Taiwanese joint venture, has debt
denominated in the U.S. dollar and New Taiwanese dollar. For U.S. generally
accepted accounting principles, these two unconsolidated joint ventures use
the U.S. dollar as their functional currency and do not hedge net Korean won
or New Taiwanese dollar exposures. We do not hedge our net Korean won
exposure, because the forward contract market is limited for the Korean won
and we do not believe the prices of such contracts are attractive. To date, we
have not hedged net New Taiwanese dollar exposure. However, given the
increasingly broader market and depth for forward contracts in both Korea and
Taiwan, we may consider forward contracts in the future.
Economic downturns in the Asia Pacific region and Japan and devaluations of
the Japanese yen against the U.S. dollar have affected our operating results
in the past and could affect our operating results in the future.
Additionally, other factors may have a material adverse effect on our
operations in the future including:
. the imposition of governmental controls;
13
. export license requirements;
. restrictions on the export of technology;
. political instability;
. trade restrictions and changes in tariffs; and
. difficulties in staffing and managing international operations.
As a result, we may need to modify our current business practices.
We May Have to Make Substantial Payments in Connection With Our Taisil Joint
Venture, and This Could Divert Funds From Other Needed Areas
As of December 31, 1999, Taisil had approximately $143 million of debt
outstanding. We have guaranteed approximately $49 million of such debt (which
may increase to approximately $62 million). Generally under the guarantees, if
VEBA AG's and its affiliates' ownership of MEMC common stock falls below 50%
of MEMC's total issued and outstanding shares, we become obligated to either
pay, or provide other collateral satisfactory to the banks, which may include
a letter of credit in an amount equal to the maximum amount we may owe under
the guarantees. See "Business--Risk Factors--VEBA AG and its Affiliates Intend
to Divest Their Interests in MEMC."
The terms of Taisil's loan agreements vary. If Taisil defaults on its
obligations to its lenders, in some circumstances Taisil may immediately be
required to repay all of its obligations to its lenders. If Taisil is required
to make an immediate repayment of its obligations to its lenders, we may be
required to make payments on our guarantees of Taisil's debt. The
circumstances in which immediate repayment may occur include, without
limitation:
. a material adverse change in Taisil;
. a reduction below 70% in the combined ownership of Taisil by the two
major joint venture partners (us and China Steel Corporation);
. a material adverse change in us or China Steel Corporation;
. a reduction below 50% in VEBA AG's and its affiliates' ownership of MEMC
common stock; or
. other customary circumstances.
If MEMC is required to make payments on any guarantees, this would divert
capital needed to fund future operations.
For more information about Taisil please see, "Business--Joint Ventures--
Taisil Electronic Materials Corporation."
Because We Cannot Easily Transfer Production of Specific Products From One of
Our Manufacturing Facilities to Another, Manufacturing Delays at a Single
Facility Could Result in a Loss of Customers
It typically takes three to six months for our customers to qualify a
manufacturing facility to produce a specific product, but it could take longer
depending upon the customer's requirements. Interruption of operations at any
of our primary manufacturing facilities could result in delays or
cancellations of shipments of silicon wafers and a loss of customers which
could materially and adversely affect our operating results. A number of
factors could cause interruptions, including labor disputes, equipment
failures, or shortages of raw materials or supplies. A union represents
employees at PHC's facility in South Korea. A strike at this facility could
cause interruptions in manufacturing. We cannot assure you that alternate
qualified capacity would be available on a timely basis or at all.
14
Much of Our Proprietary Information is Not Patented and May Not be Patentable
Much of our proprietary information and technology relating to the wafer
manufacturing process is not patented and may not be patentable. We believe
that the success of our business depends in part on our proprietary
technology, information and processes and know-how. We generally try to
protect our intellectual property rights based on trade secrets and patents as
part of our ongoing research, development and manufacturing activities.
Recently, we have increased our efforts to obtain patent protection for our
technology in response to an increase in patent applications by our
competitors. However, we cannot assure you that we have adequately protected
or will be able to adequately protect our technology, that our competitors
will not be able to utilize our existing technology or develop similar
technology independently, that the claims allowed on any patents held by us
will be broad enough to protect our technology or that foreign intellectual
property laws will adequately protect our intellectual property rights.
Some of Our Technology May Infringe on the Intellectual Property Rights of
Third Parties Which May Subject Us to Costly Patent Litigation
From time to time, we receive notices from substantial companies with
significant patent portfolios that we may be infringing certain of their
patents or other rights. We may receive more of these notices in the future.
If such companies were to assert any claims against us based on patents or
other rights described in existing notices, we believe, based on strategic and
other considerations, that we should be able to resolve them outside of
litigation without a material adverse effect to us; however, this conclusion
is subject to significant uncertainty. We expect to try to resolve these
matters through negotiation or, if necessary, by obtaining a license. However,
if we are not able to resolve these matters satisfactorily, or to obtain a
license on acceptable terms, we may face litigation. In that event, the
ultimate outcome of these matters could have a material adverse effect on our
business, results of operations or financial condition. Although third parties
have not sued us based on claims of infringement of intellectual property
rights during the last several years, we cannot assure you that third parties
will not bring such suits in the future. Competitors, suppliers and others
frequently sue each other regarding intellectual property rights in other
technology industries, including the semiconductor industry.
We Face Challenges in Attracting and Retaining Qualified Personnel
The loss of key personnel or the inability to hire and retain qualified
personnel could have a material adverse effect on our operating results. We
are dependent upon a limited number of key management and technical personnel.
We compete for personnel with other companies, academic institutions,
government entities and other organizations. Our future success will depend in
part upon our ability to attract and retain highly qualified personnel. We
cannot assure you that we will be successful in hiring or retaining qualified
personnel, or that any of our personnel will remain employed by MEMC.
We Depend on Certain Suppliers and Finding Alternative Sources of Supply
Could Affect Adversely Our Customer Qualifications and Manufacturing Yields
We obtain substantially all our requirements for several raw materials,
equipment, parts and supplies from sole suppliers. We believe that we could
find adequate alternative sources of supply for these raw materials,
equipment, parts and supplies. However, we may be required to obtain new
qualifications from our customers in order to change or substitute suppliers.
We cannot predict whether we would be successful or how long that process
would take. In addition, our manufacturing yields could be adversely affected
while we transition to a new supplier. A failure to obtain a new qualification
or a decrease in our manufacturing yields could have a material adverse effect
on our operating results.
From time-to-time we have experienced limited supplies of certain raw
materials, equipment, parts and supplies, particularly polysilicon. We believe
that adequate quantities of all our key raw materials, equipment, parts and
supplies are currently available. However, because of the cyclical nature of
our industry, we may experience shortages in the future. Increases in prices
resulting from these shortages could have a material adverse effect on our
operating results.
15
Because the Public is Focusing More Attention on the Environmental Impact of
Our Industry and Its Manufacturing Operations, Environmental Laws and
Regulations May Become More Stringent in the Future and Could Force MEMC to
Expend Capital to Comply with Such Laws
Because the public is focusing more attention on the environmental impact of
the semiconductor and related industries' manufacturing operations,
environmental laws and regulations related to our industry may become more
stringent in the future. Any failure to comply with environmental laws could
subject us to substantial liability or could force us to significantly change
our manufacturing operations. We are subject to a variety of foreign, federal,
state and local laws and regulations governing the protection of the
environment. These environmental regulations include those related to the use,
storage, handling, discharge and disposal of toxic, volatile or otherwise
hazardous materials used in our manufacturing processes. Under some of these
laws and regulations, we could be held financially responsible for remedial
measures if our properties are contaminated, even if we did not cause such
contamination.
Our Fluctuating Financial Results, Our Position in the Silicon Wafer Industry
and Our Relationship with VEBA may Create Fluctuations in the MEMC Stock
Price
Based on the trading history of MEMC common stock, we believe that certain
factors cause the market price of MEMC common stock to fluctuate
significantly. These factors include, without limitation:
. quarterly fluctuations in our financial results;
. announcements of technological innovations or new products by us or our
competitors;
. market conditions in the semiconductor industry;
. market conditions in the silicon wafer industry;
. developments in patent or other proprietary rights;
. changes in our relationships with our customers;
. actual or perceived changes in our relationship with VEBA AG and its
affiliates; and
. the size of the public float of MEMC common stock.
Technology company stocks in general have experienced extreme price and
trading volume fluctuations that often have been unrelated to the operating
performance of these companies. This market volatility may adversely affect
the market price of MEMC common stock. In addition, if we suffer an actual or
anticipated shortfall in net sales, gross margin or net earnings from security
analysts' expectations, the trading price of MEMC common stock in any given
period could decline.
Cautionary Statement Regarding Forward-Looking Statements
The following statements are or may constitute forward-looking statements:
. statements set forth in this Annual Report on Form 10-K or statements
incorporated by reference from documents we have filed with the
Securities and Exchange Commission, including possible or assumed future
results of our operations, including but not limited to any statements
contained herein or therein concerning:
. stabilization and improvements in average selling prices of silicon
wafers;
. stabilization and improvements in demand for silicon wafers;
. our ability to generate future taxable income as it relates to the
realization of our net deferred tax asset;
. utilization of the restructuring reserve;
. tight control of capital expenditures in 2000;
. future sources of capital;
. liquidity through 2000;
. continued investment in research and development;
16
. continued dependence on international sales;
. excess capacity;
. the resolution of any intellectual property infringement claims;
. timing of future demand for 12-inch wafers, including the start up of
large-scale 12-inch fabrication lines by our customers;
. the outcome of potential litigation;
. our ability to find adequate alternative sources of supply;
. the impact of the introduction of the euro;
. the impact of the implementation of SFAS No. 133;
. the impact of an adverse change in exchange rates;
. our expectations concerning our lack of profitability in 2000;
. our expectation that we will not pay dividends in the foreseeable
future;
. our intention to work closely with the VEBA/VIAG group to effectuate
an orderly divestiture process that preserves and optimizes our
value; and
. any statements preceded by, followed by or that include the words
"believes," "expects," "predicts," "anticipates," "intends,"
"estimates," "should," "may" or similar expressions.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause actual results to differ
materially are set forth under "Business--Risk Factors."
You should not place undue reliance on such statements, which speak only as
of the date that they were made. Our independent public accountants have not
examined or compiled the forward-looking statements and, accordingly, do not
provide any assurance with respect to such statements. These cautionary
statements should be considered in connection with any written or oral
forward-looking statements that we may issue in the future. We do not
undertake any obligation to release publicly any revisions to such forward-
looking statements to reflect later events or circumstances or to reflect the
occurrence of unanticipated events.
Executive Officers of the Registrant
The following is information concerning our executive officers as of March
1, 2000. Each executive officer's term will end upon the appointment of his or
her successor or upon his or her earlier resignation, except that Mr. von
Horde's term of office expires in 2003 pursuant to the terms of his employment
agreement. There are no family relationships between or among any of the named
persons and the directors.
Name Age All Positions and Offices Held
---- --- ------------------------------
Klaus R. von Horde 58 President, Chief Executive Officer and Director
James M. Stolze 56 Executive Vice President and Chief Financial
Officer
Marcel Coinne 59 Corporate Vice President
Dr. John P. DeLuca 57 Corporate Vice President
Julius R. Glaser 43 Corporate Vice President
Helene F. Hennelly 53 Corporate Vice President, General Counsel
and Secretary
Jonathon P. Jansky 48 Corporate Vice President
Dr. Thomas Knothe 42 Corporate Vice President
James G. Weathers 46 Corporate Vice President
James W. Wick 57 Corporate Vice President
17
Each executive officer has held the same position or another executive
position with us during the past five years except as indicated below.
Mr. von Horde was our President and Chief Operating Officer from December
1997 to February 1999 and has been our President and Chief Executive Officer
since February 1999. Mr. von Horde was Chief Executive Officer and Chairman of
the Board of Management of Carl Schenck AG from 1993 to 1997.
Mr. Stolze was a Partner with KPMG LLP from 1977 until joining us as
Executive Vice President and Chief Financial Officer in June 1995.
Mr. Coinne was Corporate Vice President and President of the U.S. Region
from March 1993 to October 1996, Corporate Vice President and President--North
America from October 1996 to December 1997, Corporate Vice President, Customer
Operations from December 1997 to October 1999 and has been our Corporate Vice
President, Marketing Operations since November 1999.
Dr. DeLuca has been our Corporate Vice President, Technology since November
1994.
Mr. Glaser was our Vice President, Sales from March 1999 to November 1999,
and has been our Corporate Vice President, Sales since November 1999. From
1992 until 1999, Mr. Glaser held various sales and marketing management
positions with GE Power Systems and GE Aircraft Systems. When he joined us in
March 1999, Mr. Glaser had been General Manager of Global Sales & Business
Development of GE Aircraft Engines since April 1998.
Ms. Hennelly has been our General Counsel and Secretary since October 1990.
She was a Vice President from October 1990 until May 1996, a Corporate Vice
President from May 1996 to June 1999, and has been our Corporate Vice
President, Corporate Projects since June 1999.
Mr. Jansky was Plant Manager of our St. Peters facility from 1992 until
January 1997, Corporate Vice President, Investment Planning from January 1997
to May 1998 and has been our Corporate Vice President, Operations since May
1998.
Dr. Knothe was Director, Corporate Development Plastics Business for Huls AG
from 1994 to 1995 and Director, Corporate Development Electronic Materials for
Huls AG from 1995 until January 1998, when he joined MEMC. Dr. Knothe was our
Vice President, Strategy Development from January 1998 until August 1998 and
has been our Corporate Vice President, Corporate Development since August
1998.
Mr. Weathers was our Director, Manufacturing Services from May 1991 to July
1997, Director, Strategic Capital Planning from August 1997 to May 1998, Vice
President, Operations Services from June 1998 to October 1999, and has been
our Corporate Vice President, Customer Services and Scheduling since November
1999.
Mr. Wick was Vice President, Human Resources for Bunge Corporation from 1990
until joining us as Corporate Vice President, Human Resources in January 1999.
Bunge Corporation is an international, privately-held, multi-billion dollar,
integrated agri-business company engaged in commodity trading, grain and
edible oil exporting and food processing.
18
Item 2. Properties
Our principal executive offices are located at 501 Pearl Drive (City of
O'Fallon), St. Peters, Missouri 63376, and our telephone number at that
address is (636) 474-5000. Our principal manufacturing and administrative
facilities and the principal manufacturing and administrative facilities of
our joint ventures comprised approximately 3.8 million square feet as of
December 31, 1999 and were situated in the following locations:
Location Square Footage
-------- --------------
St. Peters, MO, USA...................................... 737,000
Sherman, TX, USA......................................... 707,000
Pasadena, TX, USA........................................ 436,000
Merano, Italy............................................ 319,000
Novara, Italy............................................ 322,000
Utsunomiya, Japan........................................ 305,000
Kuala Lumpur, Malaysia................................... 53,000
Chonan, South Korea...................................... 460,000
(PHC joint venture)
Hsinchu, Taiwan.......................................... 450,000
(Taisil joint venture)
We lease a portion of our St. Peters facility pursuant to a lease agreement
between us and the City of O'Fallon, Missouri that was entered into in
connection with an industrial revenue bond financing. The term of the St.
Peters lease expires in 2011, and we have the option to purchase the leased
portion of the St. Peters facility at the end of the lease. We also lease our
small diameter facility in Sherman, Texas. The initial term of this lease
expires in 2001 and is extendable at our option for three (3) additional
renewal terms of five (5) years each. We lease our facility in Pasadena,
Texas. The term of the Pasadena lease expires in 2030 and is extendable for
four (4) additional renewal terms of five (5) years each. Taisil leases the
land on which its Hsinchu, Taiwan facility is located. This lease expires in
2014. We also lease our facility in Kuala Lumpur, Malaysia. This lease expires
in 2000. We are currently negotiating an extension of the lease. In 1999, we
discontinued manufacturing operations at our small diameter wafer facility in
Spartanburg, South Carolina. The Spartanburg facility is now held for sale.
We believe that our existing facilities and equipment are well maintained,
in good operating condition and are adequate to meet our current requirements.
The extent of utilization of these facilities varies from plant to plant and
from time to time during the year.
Item 3. Legal Proceedings
Damewood vs. Ethyl Corporation, et al.
In a case entitled Damewood vs. Ethyl Corporation, et al., (Case No. 96-
38521), filed on August 1, 1996, three employees of the former operator of
MEMC Pasadena's plant, Albemarle Corporation, filed suit against us and others
in the 189th Judicial District Court, Harris County, Texas. The employees
alleged that they sustained injuries during an explosion at that plant on
January 27, 1996. We have settled this matter with plaintiffs and have been
dismissed as a party. One of the other defendants, Ethyl Corporation, was the
only defendant in this case at the time of trial in October 1998. A jury
awarded a verdict in favor of the plaintiffs that resulted in a judgment
against Ethyl Corporation in the amount of $6.8 million. Ethyl Corporation
appealed this judgment. Recently, Ethyl Corporation and the plaintiffs settled
this matter for $5.2 million.
On September 29, 1998, Albemarle Corporation made a demand against us for
defense and indemnity in this case on behalf of Ethyl Corporation. Albemarle
Corporation has assumed the obligation to defend and indemnify Ethyl
Corporation under an agreement in which Ethyl Corporation transferred
ownership of the plant where the injury took place to Albemarle Corporation.
In November 1998, we made a demand for indemnity in this case against
Albemarle. Demands for indemnity made by Albemarle Corporation on behalf of
Ethyl Corporation and by us are both based on contractual indemnity language
contained in the contract for the sale of
19
the MEMC Pasadena plant from Albemarle Corporation to us. These cross-
indemnity claims have not been resolved.
Due to uncertainty regarding the litigation process, the scope and
interpretation of contractual indemnity provisions and the status of any
insurance coverage, the outcome of this matter could be unfavorable, in which
event we might be required to pay damages and other expenses, which could have
a material adverse effect on us.
Settlement of Parden vs. Ethyl Corporation, et al.
As previously reported, we were a named defendant in a lawsuit entitled
Parden vs. Ethyl Corporation, et al. (Case No. 97-34857) filed in the 61st
Judicial District Court, Harris County, Texas on June 13, 1997. This lawsuit
was filed by two employees of the former operator of the MEMC Pasadena plant
who were injured when flaming liquid escaped from a valve under repair. See
our annual report on Form 10-K for the year ended December 31, 1998. In
November 1999, we settled this matter. Under the settlement, this matter is
completely covered by insurance. In consideration of the settlement, on
January 11, 2000, the court issued a final judgment in favor of the other
defendants and us.
Lemelson Foundation Partnership
In July 1999, we received notification from attorneys representing the
Lemelson Medical, Education & Research Foundation, Limited Partnership
alleging that we infringed on certain patents owned by the Lemelson Foundation
related to bar coding and laser mark reading systems. The attorneys for the
Lemelson Foundation have not filed suit, but have requested that we enter into
a licensing agreement with the Lemelson Foundation in order to avoid
litigation. We are in the process of reviewing the patents at issue and how
they might relate to our activities. Should the Lemelson Foundation file suit,
we would vigorously defend ourselves in this matter. However, due to
uncertainty regarding the litigation process, the outcome of this action could
be unfavorable, in which event we might be required to pay damages and other
expenses, which could have a material adverse effect on us.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The narrative or tabular information regarding the market for our common
equity and related stockholder matters required by this item is set forth
under Note 18, "Unaudited Quarterly Financial Information", on page 40 of our
1999 Annual Report and under "Stockholder Information" on page 44 of our 1999
Annual Report, which information is incorporated herein by reference. We have
not paid any dividends on our common stock for the last two fiscal years.
Item 6. Selected Financial Data
The tabular information (including the footnotes thereto) required by this
item is set forth under "Five Year Selected Financial Data" on page 12 of our
1999 Annual Report, which information is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is set forth on pages 13 through 20 of
our 1999 Annual Report, which information is incorporated herein by reference.
20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is set forth under "Market Risk" on
page 20 of our 1999 Annual Report, which information is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements appearing on pages 21 through 40, and
the Independent Auditors' Report thereon of KPMG LLP appearing on page 42 of
our 1999 Annual Report, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
We will file a definitive proxy statement with the Securities and Exchange
Commission within 120 days of year-end (the 2000 Proxy Statement). The
information required by this item with respect to compliance with Section
16(a) of the Exchange Act will be set forth in the 2000 Proxy Statement under
"Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated
herein by reference. The remaining information required by this item with
respect to directors will be set forth in the 2000 Proxy Statement under "ITEM
NO. 1. ELECTION OF DIRECTORS" and is incorporated herein by reference. The
remaining information required by this item with respect to executive officers
is set forth in Part I of this Annual Report on Form 10-K under "Executive
Officers of the Registrant."
Item 11. Executive Compensation
Information appearing under (i) "BOARD MEETINGS--COMMITTEES--Director
Compensation and Attendance"; (ii) "COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION"; (iii) "SUMMARY COMPENSATION TABLE" and related footnotes; (iv)
"OPTION GRANTS IN LAST FISCAL YEAR" and related footnotes; (v) "AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES" and
related footnotes; (vi) "Pension Plan"; (vii) "Pension Plan Table (1),"
"Pension Plan Table (2)," and "Pension Plan Table (3)"; (viii) "Employment
Agreements"; (ix) "Annual Incentive Bonus Plan"; (x) "Special Incentive Bonus
Plan"; (xi) "Severance Plan for Senior Officers"; (xii) "Compensation
Committee Interlocks and Insider Participation"; and (xiii) "STOCK PERFORMANCE
GRAPH" of the 2000 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information appearing under "COMMON STOCK OWNERSHIP BY DIRECTORS AND
EXECUTIVE OFFICERS" and related footnotes and "OWNERSHIP OF MEMC COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS" and related footnotes of the 2000 Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under "CERTAIN TRANSACTIONS" of the 2000 Proxy Statement is
incorporated herein by reference.
21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
The following consolidated financial statements of us and our
subsidiaries, included on pages 21 through 40 of the 1999 Annual
Report, and the Independent Auditors' Report thereon of KPMG LLP
appearing on page 42 of such report are incorporated herein by
reference.
Consolidated Statements of Operations--Years ended December 31,
1999, 1998 and 1997.
Consolidated Balance Sheets--December 31, 1999 and 1998.
Consolidated Statements of Cash Flows--Years ended December 31,
1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. Financial Statement Schedules
Independent Auditors' Report on Financial Statement Schedule......... F-1
Valuation and Qualifying Accounts.................................... F-2
Financial Statements of POSCO HULS Co., Ltd.:
Independent Auditors' Report of KPMG San Tong Corp................. F-3
Balance sheets as of December 31, 1999 (unaudited) and 1998........ F-4
Statements of Operations--Years ended December 31, 1999
(unaudited), 1998 and 1997........................................ F-5
Statements of Appropriation (Disposition) of Retained Earnings
(Accumulated Deficit)-- Years ended December 31, 1999 (unaudited),
1998 and 1997..................................................... F-6
Statements of Cash Flows--Years ended December 31, 1999
(unaudited), 1998 and 1997........................................ F-7
Notes to Financial Statements...................................... F-8
Financial Statements of Taisil Electronic Materials Corporation:
Independent Auditors' Report of KPMG Certified Public Accountants.. F-26
Balance sheets as of December 31, 1999 (unaudited) and 1998........ F-27
Statements of Operations--Years ended December 31, 1999
(unaudited), 1998 and 1997........................................ F-29
Statements of Changes in Stockholders' Equity--Years ended December
31, 1999 (unaudited), 1998 and 1997............................... F-30
Statements of Cash Flows--Years ended December 31, 1999
(unaudited), 1998 and 1997........................................ F-31
Notes to Financial Statements...................................... F-32
3. Exhibits
Exhibit No. Description
----------- -----------
3(i) Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3-a of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
3(ii) Restated By-laws of the Company (Incorporated by
reference to Exhibit 3(ii) of the Company's Form 10-Q
for the Quarter ended June 30, 1999)
22
Exhibit No. Description
----------- -----------
*10-a Shareholders Agreement dated May 24, 1994 among the
Company and China Steel Corporation ("China Steel"),
China Development Corporation and Chiao Tung Bank
(Incorporated by reference to Exhibit 10(a) of Amendment
No. 4 to the Company's Form S-1 Registration Statement
No. 33-92412)
*10-b Technology Cooperation Agreement dated October 26, 1994
between the Company and Taisil Electronic Materials
Corporation ("Taisil") (Incorporated by reference to
Exhibit 10-b of Amendment No. 4 to the Company's Form S-
1 Registration Statement No. 33-92412)
10-c Joint Venture Agreement dated August 28, 1990 among the
Company, Pohang Iron and Steel Company, Ltd. ("POSCO")
and Samsung Electronics Company, Ltd. ("Samsung")
(Incorporated by reference to Exhibit 10-c of Amendment
No. 1 to the Company's Form S-1 Registration Statement
No. 33-92412)
10-c(1) First Amendment to Joint Venture Agreement dated
December 9, 1993 among the Company, POSCO and Samsung
(Incorporated by reference to Exhibit 10-d of Amendment
No. 1 to the Company's Form S-1 Registration Statement
No. 33-92412)
10-c(2) Second Amendment to Joint Venture Agreement dated
December 30, 1994 among the Company, POSCO and Samsung
(Incorporated by reference to Exhibit 10-e of Amendment
No. 1 to the Company's Form S-1 Registration Statement
No. 33-92412)
*10-d Technical Agreement dated December 19, 1990 between the
Company and POSCO HULS Company Ltd. ("PHC")
(Incorporated by reference to Exhibit 10-d of the
Company's Form 10-K for the Year Ended December 31,
1998)
*10-d(1) Amendment to Technical Agreement dated as of January 1,
1995 between the Company and PHC (Incorporated by
reference to Exhibit 10-g of Amendment No. 1 to the
Company's Form S-1 Registration Statement No. 33-92412)
10-d(2) Second Amendment to Technical Agreement effective as of
September 30, 1998 between the Company and PHC
(Incorporated by reference to Exhibit 10-g(1) of the
Company's Current Report on Form 8-K dated October 22,
1998)
*10-d(3) Third Amendment to PHC Technical Agreement effective as
of October 1, 1998 by and between the Company and PHC
(Incorporated by reference to Exhibit 10-d(3) of the
Company's Form 10-K for the Year Ended December 31,
1998)
*10-e Shareholder's Agreement dated as of May 16, 1995 between
the Company and Texas Instruments Incorporated ("TI")
(Incorporated by reference to Exhibit 10-h of Amendment
No. 4 to the Company's Form S-1 Registration Statement
No. 33-92412)
*10-f TI Purchase Agreement dated as of June 30, 1995 between
the Company, MEMC Southwest Inc. ("MEMC Southwest") and
TI (Incorporated by reference to Exhibit 10-i of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
*10-f(1) Amendment to TI Purchase Agreement dated as of June 5,
1997, between MEMC Southwest and TI (Incorporated by
reference to Exhibit 10-i of the Company's Form 10-Q for
the Quarter ended June 30, 1997)
10-g Lease Agreement Covering Silicon Wafer Operation
Premises dated June 30, 1995 between TI and MEMC
Southwest (Incorporated by reference to Exhibit 10-j of
the Company's Form 10-Q for the Quarter ended June 30,
1995)
23
Exhibit No. Description
----------- -----------
10-g(1) Sublease Agreement covering Silicon Wafer Operation
Premises dated June 30, 1995 between TI and MEMC
Southwest (Incorporated by reference to Exhibit 10-j(1)
of the Company's Form 10-Q for the Quarter ended June
30, 1995)
*10-h Technology Transfer Agreement dated as of June 30, 1995
between the Company, TI and MEMC Southwest (Incorporated
by reference to Exhibit 10-k of the Company's Form 10-Q
for the Quarter ended June 30, 1995)
10-i Registration Rights Agreement between the Company and
VEBA Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-l of the
Company's Form 10-K for the Year ended December 31,
1995)
10-i(1) Amendment to Registration Rights Agreement by and
between the Company and VEBA Corporation dated March 19,
1999
10-j Form of Master Reserve Volume Agreement (Incorporated by
reference to Exhibit 10-m of the Company's Form 10-K for
the Year ended December 31, 1995)
10-m MEMC Technology License Agreement dated as of July 31,
1995, between Albemarle Corporation and the Company
(Incorporated by reference to Exhibit 10-tt of the
Company's Form 10-K for the Year ended December 31,
1995)
*10-n Seller Technology License Agreement dated as of July 31,
1995, among Albemarle Corporation, the Company, and MEMC
Pasadena, Inc. (Incorporated by reference to Exhibit 10-
ll of the Company's Form 10-K/A Amendment No. 2 for the
Year ended December 31, 1997)
*10-o Technology Purchase Agreement dated as of July 31, 1995,
among Albemarle Corporation and the Company
(Incorporated by reference to Exhibit 10-mm of the
Company's Form 10-K/A Amendment No. 2 for the Year ended
December 31, 1997)
10-p Ground Lease Agreement dated as of July 31, 1995,
between Albemarle Corporation and MEMC Pasadena, Inc.
(Incorporated by reference to Exhibit 10-nn of the
Company's Form 10-K/A Amendment No. 2 for the Year ended
December 31, 1997)
10-p(1) Amendment to Ground Lease Agreement dated as of May 31,
1997, between the Company, MEMC Pasadena, Inc., and
Albemarle Corporation (Incorporated by reference to
Exhibit 10-nn(1) of the Company's Form 10-K/A Amendment
No. 2 for the Year ended December 31, 1997)
10-q Purchase Agreement dated as of October 22, 1998 by and
among the Company and VEBA Corporation (Incorporated by
reference to Exhibit 2 of the Schedule 13D dated October
30, 1998 filed by VEBA Aktiengesellschaft and VEBA
Corporation with respect to the Company)
10-q(1) First Amendment to Purchase Agreement dated as of
December 29, 1998 by and among the Company and VEBA
Corporation (Incorporated by reference to Exhibit
10.1(a) of Amendment No. 2 to the Company's Form S-3
Registration Statement No. 333-65973)
10-q(2) Second Amendment to Purchase Agreement dated as of
February 14, 1999 by and among the Company and VEBA
Zweite Verwaltungsgesellschaft mbH (as successor to VEBA
Corporation) (Incorporated by reference to Exhibit
10.1(b) of Amendment No. 3 to the Company's Form S-3
Registration Statement No. 333-65973)
24
Exhibit No. Description
----------- -----------
10-r Standby Agreement dated as of October 22, 1998 by and
among the Company and VEBA Corporation (Incorporated by
reference to Exhibit 3 of the Schedule 13D dated October
30, 1998 filed by VEBA Aktiengesellschaft and VEBA
Corporation with respect to the Company)
+10-aa Employment Agreement dated as of April 1, 1993 among
Huls Belgium S.A., the Company and Marcel Coinne
(Incorporated by reference to Exhibit 10-r of Amendment
No. 1 to the Company's Form S-1 Registration Statement
No. 33-92412)
+10-bb MEMC Supplemental Executive Pension Plan 1997
Restatement (Incorporated by reference to Exhibit 10-s
of the Company's Form 10-Q for the Quarter ended March
31, 1997)
+10-cc MEMC Electronic Materials, Inc. 1995 Equity Incentive
Plan as Amended and Restated on December 6, 1999
+10-cc(1) Form of Stock Option and Restricted Stock Agreement
(Incorporated by reference to Exhibit 10-t(1) of the
Company's Form 10-K for the Year ended December 31,
1995)
+10-cc(2) Form of Stock Option and Performance Restricted Stock
Agreement (Incorporated by reference to Exhibit 10-yy of
the Company's Form 10-K for the Year ended December 31,
1995)
+10-cc(3) Form of Stock Option Agreement (Incorporated by
reference to Exhibit 10-zz of the Company's Form 10-K
for the Year ended December 31, 1995)
+10-cc(4) Form of Stock Option and Performance Restricted Stock
Agreement (Incorporated by reference to Exhibit 10-nnn
of the Company's Form 10-Q for the Quarter ended March
31, 1997)
+10-cc(5) Form of Stock Option Agreement (Incorporated by
reference to Exhibit 10-ooo of the Company's Form 10-Q
for the Quarter ended March 31, 1997)
+10-cc(6) Form of Stock Option Agreement (Nonemployee Directors)
(Incorporated by reference to Exhibit 10-ppp of the
Company's Form 10-Q for the Quarter ended March 31,
1997)
+10-cc(7) Form of Stock Option Agreement
+10-dd Annual Incentive Plan for Selected Key Employees of MEMC
Electronic Materials, Inc. and its Subsidiaries
(Incorporated by reference to Exhibit 10-u of Amendment
No. 1 to the Company's Form S-1 Registration Statement
No. 33-92412)
+10-ee Employment Agreement effective as of June 16, 1995
between the Company and James M. Stolze (Incorporated by
reference to Exhibit 10-ee of Amendment No. 1 to the
Company's Form S-1 Registration Statement No. 33-92412)
+10-ff Supplemental Retirement Agreement dated as of February
17, 1999 between the Company and Ludger H. Viefhues
(Incorporated by reference to Exhibit 10-xx(1) of the
Company's Current Report on Form 8-K dated February 17,
1999)
+10-ff(1) Supplemental Retirement Agreement Clarification dated
March 17, 1999 between the Company and Ludger H.
Viefhues (Incorporated by reference to Exhibit 10.6 of
Amendment No. 4 to the Company's Form S-3 Registration
Statement No. 333-65973)
25
Exhibit No. Description
----------- -----------
+10-gg Stock Option Agreement dated as of September 1, 1996
between the Company and Ludger H. Viefhues (Incorporated
by reference to Exhibit 10-iii of the Company's Form 10-
Q for the Quarter ended September 30, 1996)
+10-hh Consulting Agreement dated December 1, 1997, between the
Company and Dr. Robert M. Sandfort (Incorporated by
reference to Exhibit 10-nnn of the Company's Form 10-K/A
Amendment No. 2 for the Year ended December 31, 1997)
+10-jj Agreement dated as of April 1, 1993, between the Company
and Ralph D. Hartung (Incorporated by reference to
Exhibit 10-ppp of the Company's Form 10-K for the Year
ended December 31, 1997)
+10-kk MEMC Electronic Materials, Inc. Special Incentive Plan
Summary (Incorporated by reference to Exhibit 10-qqq of
the Company's Form 10-Q for the Quarter ended June 30,
1998)
+10-kk(1) Special Incentive Bonus Agreement dated as of March 26,
1998 between the Company and Marcel Coinne (Incorporated
by reference to Exhibit 10-rrr of the Company's Form 10-
Q for the Quarter ended June 30, 1998)
+10-kk(2) Special Incentive Bonus Agreement dated as of March 24,
1998 between the Company and Ralph D. Hartung
(Incorporated by reference to Exhibit 10-sss of the
Company's Form 10-Q for the Quarter ended June 30, 1998)
+10-kk(3) Special Incentive Bonus Agreement dated as of March 31,
1998 between the Company and James M. Stolze
(Incorporated by reference to Exhibit 10-ttt of the
Company's Form 10-Q for the Quarter ended June 30, 1998)
+10-kk(4) Special Incentive Bonus Agreement dated as of March 24,
1998 between the Company and John P. DeLuca
(Incorporated by reference to Exhibit 10-kk(4) of the
Company's Form 10-K for the Year Ended December 31,
1998)
+10-ll Employment Agreement effective as of April 1, 1998
between the Company and Klaus R. von Horde (Incorporated
by reference to Exhibit 10-uuu of the Company's Form 10-
Q for the Quarter ended June 30, 1998)
+10-ll(1) Employment Agreement effective as of February 17, 1999
between the Company and Klaus R. von Horde (Incorporated
by reference to Exhibit 10.5 of Amendment No. 4 to the
Company's Form S-3 Registration Statement No. 333-65973)
+10-mm Letter Agreement dated April 17, 1998 between the
Company and Dr. Werner Schmitz (Incorporated by
reference to Exhibit 10-vvv of the Company's Form 10-Q
for the Quarter ended June 30, 1998)
+10-nn Agreement dated May 19, 1998 between the Company and
Ralph D. Hartung (Incorporated by reference to Exhibit
10-www of the Company's Form 10-Q for the Quarter ended
June 30, 1998)
+10-oo International Transfer Letter Agreement effective as of
October 1, 1998 between the Company and Marcel Coinne
(Incorporated by reference to Exhibit 10-yyy of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-aaa Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-jj
of the Company's Form 10-Q for the Quarter ended June
30, 1995)
26
Exhibit No. Description
----------- -----------
10-aaa(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-cc(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-bbb Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-kk
of the Company's Form 10-Q for the Quarter ended June
30, 1995)
10-bbb(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA
Corporation (Incorporated by reference to Exhibit
10-dd(1) of the Company's Current Report on Form 8-K
dated October 21, 1998)
10-ccc Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-ll
of the Company's Form 10-Q for the Quarter ended June
30, 1995)
10-ccc(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-ee(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-ddd Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-mm
of the Company's Form 10-Q for the Quarter ended June
30, 1995)
10-ddd(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-ff(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-eee Credit Agreement dated as of July 10, 1995, between the
Company and VEBA AG (as successor to Huls AG)
(Incorporated by reference to Exhibit 10-nn of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-eee(1) First Amendment to Credit Agreement effective as of July
1, 1998 between the Company and VEBA AG (as successor to
Huls AG) (Incorporated by reference to Exhibit 10-gg(1)
of the Company's Form 10-Q for the Quarter ended June
30, 1998)
10-eee(2) Second Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-gg(2) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-fff Credit Agreement dated as of July 10, 1995, between the
Company and Fidelia Corporation (as successor to Huls
AG) (Incorporated by reference to Exhibit 10-oo of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-fff(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-hh(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
27
Exhibit No. Description
----------- -----------
10-hhh Revolving Credit Agreement dated as of July 10, 1995,
between the Company and VEBA AG (as successor to Huls
AG) (Incorporated by reference to Exhibit 10-pp of the
Company's Form 10-Q for the Quarter ended June 30, 1995)
10-hhh(1) Amendment to Loan Agreement effective March 4, 1998
between the Company and VEBA AG (as successor to Huls
AG) (Incorporated by reference to Exhibit 10-ii(1) of
the Company's Form 10-Q for the Quarter ended June 30,
1998)
10-hhh(2) Second Amendment to Revolving Credit Agreement effective
as of September 1, 1998 between the Company and VEBA AG
(as successor to Huls AG) (Incorporated by reference to
Exhibit 10-ii(2) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-jjj Credit Agreement between the Company and VEBA AG (as
successor to Huls AG) dated as of December 22, 1995
(Incorporated by reference to Exhibit 10-aaa of the
Company's Form 10-K for the Year ended December 31,
1995)
10-jjj(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-qq(1) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-kkk Credit Agreement between the Company and VEBA AG (as
successor to Huls AG) dated as of December 22, 1995
(Incorporated by reference to Exhibit 10-bbb of the
Company's Form 10-K for the Year ended December 31,
1995)
10-kkk(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-rr(1) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-lll Credit Agreement between the Company and VEBA AG (as
successor to Huls AG) dated as of December 22, 1995
(Incorporated by reference to Exhibit 10-ccc of the
Company's Form 10-K for the Year ended December 31,
1995)
10-lll(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-ss(1) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-mmm Credit Agreement between the Company and VEBA AG (as
successor to Huls AG) dated as of December 22, 1995
(Incorporated by reference to Exhibit 10-ddd of the
Company's Form 10-K for the Year ended December 31,
1995)
10-mmm(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-tt(1) of the Company's Current Report on Form
8-K dated October 21, 1998)
10-nnn Credit Agreement dated as of December 1, 1996 between
the Company and VEBA AG (as successor to Huls AG)
(Incorporated by reference to Exhibit 10-jjj of the
Company's Form 10-K for the Year ended December 31,
1996)
10-nnn(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-ccc(1) of the Company's Current Report on
Form 8-K dated October 21, 1998)
28
Exhibit No. Description
----------- -----------
10-ooo Credit Agreement dated as of December 1, 1996 between
the Company and VEBA AG (as successor to Huls AG)
(Incorporated by reference to Exhibit 10-kkk of the
Company's Form 10-K for the Year ended December 31,
1996)
10-ooo(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-ddd(1) of the Company's Current Report on
Form 8-K dated October 21, 1998)
10-ppp Credit Agreement dated as of April 1, 1996 between the
Company and VEBA AG (as successor to Huls AG)
(Incorporated by reference to Exhibit 10-lll of the
Company's Form 10-K for the Year ended December 31,
1996)
10-ppp(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and VEBA AG (as
successor to Huls AG) (Incorporated by reference to
Exhibit 10-eee(1) of the Company's Current Report on
Form 8-K dated October 21, 1998)
10-qqq Fourth Short-Term Loan Agreement dated as of March 31,
1996 between the Company and VEBA Corporation (as
successor to Huls Corporation) (Incorporated by
reference to Exhibit 10-mmm of the Company's Form 10-K
for the Year ended December 31, 1996)
10-qqq(1) First Amendment to Overnight Loan Agreement effective as
of September 1, 1998 between the Company and VEBA
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-fff(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-rrr Five Year Credit Agreement dated as of June 26, 1997,
between the Company and Fidelia Corporation (as
successor to Huls Corporation) (Incorporated by
reference to Exhibit 10-qqq of the Company's Form 10-Q
for the Quarter ended June 30, 1997)
10-rrr(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-jjj(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-sss Six Year Credit Agreement dated as of June 26, 1997,
between the Company and Fidelia Corporation (as
successor to Huls Corporation) (Incorporated by
reference to Exhibit 10-rrr of the Company's Form 10-Q
for the Quarter ended June 30, 1997)
10-sss(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-kkk(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-ttt Seven Year Credit Agreement dated as of June 26, 1997,
between the Company and Fidelia Corporation (as
successor to Huls Corporation) (Incorporated by
reference to Exhibit 10-sss of the Company's Form 10-Q
for the Quarter ended June 30, 1997)
10-ttt(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-lll(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
29
Exhibit No. Description
----------- -----------
10-uuu Eight Year Credit Agreement dated as of June 26, 1997,
between the Company and Fidelia Corporation (as
successor to Huls Corporation) (Incorporated by
reference to Exhibit 10-ttt of the Company's Form 10-Q
for the Quarter ended June 30, 1997)
10-uuu(1) First Amendment to Credit Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-mmm(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-vvv Loan Agreement dated as of June 30, 1998 between the
Company and Fidelia Corporation (as successor to Huls
Corporation) (Incorporated by reference to Exhibit 10-
xxx of the Company's Form 10-Q for the Quarter ended
June 30, 1998)
10-vvv(1) First Amendment to Loan Agreement effective as of
September 1, 1998 between the Company and Fidelia
Corporation (as successor to Huls Corporation)
(Incorporated by reference to Exhibit 10-xxx(1) of the
Company's Current Report on Form 8-K dated October 21,
1998)
10-www Revolving Credit Agreement dated as of September 23,
1998 between the Company and VEBA AG (Incorporated by
reference to Exhibit 10-zzz of the Company's Current
Report on Form 8-K dated October 21, 1998)
10-xxx Revolving Credit Agreement dated as of February 26, 1999
between the Company and Fidelia Corporation (as
successor to VEBA Corporation) (Incorporated by
reference to Exhibit 10.4 of Amendment No. 3 to the
Company's Form S-3 Registration Statement No. 333-65973)
13 Pages 12 through 42 (excluding the "Report of
Management" on page 41) and page 44 of the Company's
1999 Annual Report
21 Subsidiaries of the Company
23-a Consent of KPMG LLP
23-b Consent of KPMG San Tong Corp.
23-c Consent of KPMG Certified Public Accountants
24 Powers of Attorney submitted by Dr. Hans Michael Gaul;
Helmut Mamsch; Willem D. Maris; Paul T. O'Brien; Dr.
Alfred Oberholz; and Michael B. Smith
27 Financial Data Schedule (filed electronically with the
SEC only)
- --------
* Confidential treatment of certain portions of these documents has been
granted.
+ These Exhibits constitute all management contracts, compensatory plans and
arrangements required to be filed as an Exhibit to this form pursuant to
Item 14(c) of this report.
(b) Reports on Form 8-K
During the fourth quarter of 1999, we filed no current reports on Form 8-
K.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MEMC Electronic Materials, Inc.
/s/ Klaus R. von Horde
By: _________________________________
Klaus R. von Horde
President, Chief Executive Officer
and Director
Date: March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Klaus R. von Horde President, Chief Executive March 24,
____________________________________ Officer and Director 2000
Klaus R. von Horde (Principal executive
officer)
/s/ James M. Stolze Executive Vice President March 28,
____________________________________ and Chief Financial 2000
James M. Stolze Officer (Principal
financial and accounting
officer)
* Director March 28,
____________________________________ 2000
Dr. Hans Michael Gaul
* Chairman of the Board of March 28,
____________________________________ Directors 2000
Helmut Mamsch
* Director March 28,
____________________________________ 2000
Willem D. Maris
* Director March 28,
____________________________________ 2000
Dr. Alfred Oberholz
* Director March 28,
____________________________________ 2000
Paul T. O'Brien
* Director March 28,
____________________________________ 2000
Michael B. Smith
- --------
*James M. Stolze, by signing his name hereto, does sign this document on
behalf of the above noted individuals, pursuant to powers of attorney duly
executed by such individuals which have been filed as an Exhibit to this
Report.
/s/ James M. Stolze
_______________________________
James M. Stolze
Attorney-in-Fact
31
EXHIBIT INDEX
The following exhibits are filed as part of this report:
Exhibit
No. Description
-------- -----------
10-i(1) Amendment to Registration Rights Agreement by and between
the Company and VEBA Corporation dated March 19, 1999
10-cc MEMC Electronic Materials, Inc. 1995 Equity Incentive Plan
as Amended and Restated on December 6, 1999
10-cc(7) Form of Stock Option Agreement
13 Pages 12 through 42 (excluding the "Report of Management"
on page 41) and
page 44 of the Company's 1999 Annual Report
21 Subsidiaries of the Company
23-a Consent of KPMG LLP
23-b Consent of KPMG San Tong Corp.
23-c Consent of KPMG Certified Public Accountants
24 Powers of Attorney submitted by Dr. Hans Michael Gaul;
Helmut Mamsch;
Willem D. Maris; Paul T. O'Brien; Dr. Alfred Oberholz; and
Michael B. Smith
27 Financial Data Schedule (filed electronically with the SEC
only)
32
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
MEMC Electronic Materials, Inc.
Under date of January 20, 2000, we reported on the consolidated balance
sheets of MEMC Electronic Materials, Inc. and subsidiaries as of December 31,
1999 and 1998, 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, 1999, as contained in the 1999 annual report to
stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1999. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule
as listed in item 14(a)(2) of this Form 10-K. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such 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 20, 2000
F-1
MEMC ELECTRONIC MATERIALS, INC.
AND SUBSIDIARIES
Schedule II -- Valuation and Qualifying Accounts
Charged
Balance at Charged to to Other Balance at
Beginning Costs and Accounts -- Deductions -- End of
of Period Expenses Describe Describe Period
---------- ---------- ----------- ------------- ----------
(Dollars in thousands)
Allowance for doubtful
accounts:
Year ended December
31, 1997............. $ 2,299 $ 1,700 $ 0 $ (526)(A)(B) $ 3,473
Year ended December
31, 1998............. 3,473 (620) 0 (0)(A)(B) 2,853
Year ended December
31, 1999............. 2,853 653 (91)(A) (1,006)(B) 2,409
======= ======= ===== ======== =======
Inventory reserves:
Year ended December
31, 1997............. $ 6,945 $ 5,902(D) $ 0 $ (4,984)(C) $ 7,863
Year ended December
31, 1998............. 7,863 18,420(D) 0 (6,681)(C) 19,602
Year ended December
31, 1999............. 19,602 8,402(D) (266)(A) (11,053)(C) 16,685
======= ======= ===== ======== =======
- --------
(A) Currency fluctuations
(B) Write-off of uncollectible accounts
(C) Write-off of inventory
(D) Charged to cost of goods sold
F-2
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
POSCO HULS Co., Ltd.:
We have audited the accompanying balance sheet of POSCO HULS Co., Ltd. (the
"Company") as of December 31, 1998, and the related statements of operations,
appropriation (disposition) of retained earnings (accumulated deficit) and
cash flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the Auditing Standards, as
established by the Financial Supervisory Commission of the Republic of Korea,
which are substantially similar, in all material aspects, to generally
accepted auditing standards in the United States. 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.
As discussed in note 1(b) to the financial statements, the operations of the
Company have been affected and may continue to be affected for the foreseeable
future by the adverse economic condition in the Republic of Korea in recent
years and those in the Asia Pacific region in general.
In our opinion, the financial statements give a true and fair view, in all
material respects, of the financial position of POSCO HULS Co., Ltd. as of
December 31, 1998, and the results of its operations, the changes in its
retained earnings (accumulated deficit), and its cash flows for the years
ended December 31, 1998 and 1997 in conformity with the Financial Accounting
Standards, as established by the Financial Supervisory Commission of the
Republic of Korea
The Financial Accounting Standards in the Republic of Korea, as established
by the Financial Supervisory Commission of the Republic of Korea, vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have affected results of operations for each of the
years in the two-year period ended December 31, 1998 and stockholders' equity
as of December 31, 1998 and 1997, to the extent summarized in note 22 to the
financial statements.
/s/ KPMG San Tong Corp.
Seoul, Korea
January 11, 1999
F-3
POSCO HULS CO., LTD.
BALANCE SHEETS
December 31, 1999 and 1998
(in thousands of U.S. dollars except share data)
1999 1998
----------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (notes 2 and 3).............. $ 18 $ 54
Short-term financial instruments (note 3).............. 26,412 18,467
Marketable securities (note 4)......................... 39,575 42,762
Notes and accounts receivable, less allowance for
doubtful accounts of $135 in 1999 and $81 in 1998
(note 12)............................................. 13,406 8,003
Inventories (notes 5 and 9)............................ 27,894 29,178
Other current assets (notes 6 and 12).................. 3,543 4,249
-------- --------
Total current assets..................................... 110,848 102,713
Investments and other assets (note 8).................... 15,645 13,051
Deferred tax assets, net (note 18)....................... 11,535 --
Fixed assets, less accumulated depreciation (notes 7, 9
and 10)................................................. 117,173 134,377
Debt issuance costs...................................... -- 135
Deferred foreign currency translation loss (note 19)..... -- 23,676
-------- --------
$255,201 $273,952
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes and accounts payable (note 12)................... $ 8,236 $ 6,932
Short-term borrowings (note 7)......................... 14,653 3,850
Accounts payable--other (note 12)...................... 6,203 4,640
Current portion of bonds issued (note 15).............. 17,461 18,927
Current portion of long-term debt (note 16)............ 24,390 15,096
Current portion of long-term obligations under
financial leases (note 10)............................ 10,996 10,233
Other current liabilities (note 13).................... 2,756 3,379
-------- --------
Total current liabilities................................ 84,695 63,057
Retirement and severance benefits (note 14).............. 10,090 7,071
Bonds issued (note 15)................................... 37,973 48,175
Long-term debt, less current portion (notes 7 and 16).... 41,404 65,438
Long-term obligations under financing leases (note 10)... 17,950 28,946
-------- --------
Total liabilities........................................ 192,112 212,687
-------- --------
Stockholders' equity (notes 12 and 17):
Common stock of $2.95 par value: Authorized--20,000,000
shares Issued and outstanding--17,200,000 shares...... 112,175 112,175
Appropriated retained earnings (note 17)............... 4,470 16,931
Accumulated deficit.................................... (6,986) (18,619)
Cumulative translation adjustment...................... (46,570) (49,222)
-------- --------
Total stockholders' equity............................... 63,089 61,265
Commitments and contingencies (note 20).................. -- --
-------- --------
$255,201 $273,952
======== ========
See accompanying notes to financial statements.
F-4
POSCO HULS CO., LTD.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars, except per share data)
1999 1998 1997
----------- -------- --------
(Unaudited)
Sales (note 12)............................... $157,979 $120,980 $215,938
Cost of goods sold (note 12).................. 128,095 122,267 169,388
-------- -------- --------
Gross profit (loss)........................... 29,884 (1,287) 46,550
Selling, general and administrative expenses.. 9,491 8,713 10,143
-------- -------- --------
Operating income (loss)....................... 20,393 (10,000) 36,407
-------- -------- --------
Other income (deductions):
Interest income............................. 5,855 5,687 5,634
Interest expense............................ (16,342) (17,362) (16,894)
Foreign currency translation and exchange
gain, net.................................. 5,359 2,845 5,887
Amortization of deferred foreign currency
translation loss........................... -- (6,247) (15,139)
Loss of inventory valuation................. (2,745) (7,299) (3,953)
Other, net.................................. (572) 387 (4,640)
-------- -------- --------
(8,445) (21,989) (29,105)
-------- -------- --------
Earnings (loss) before income taxes........... 11,948 (31,989) 7,302
Income taxes (note 18)........................ 759 -- 1,332
-------- -------- --------
Net earnings (loss)........................... $ 11,189 $(31,989) $ 5,970
======== ======== ========
Earnings (loss) per share of common stock in
U.S. dollars (note 21)....................... $ 0.65 $ (1.86) $ 0.35
======== ======== ========
See accompanying notes to financial statements.
F-5
POSCO HULS CO., LTD.
STATEMENTS OF APPROPRIATION (DISPOSITION) OF RETAINED EARNINGS (ACCUMULATED
DEFICIT)
Years Ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
Date of Disposition for 1999: March 24, 2000
Date of Disposition for 1998: March 26, 1999
Date of Appropriation for 1997: March 24, 1998
1999 1998 1997
----------- -------- -------
(Unaudited)
Unappropriated (undisposed) retained earnings
(accumulated deficit):
Balance at beginning of year................... $(18,619) $ 11,898 $ 6,749
Prior period adjustments:
Foreign currency translation adjustment (note
19)......................................... (19,138) -- --
Deferred income taxes (note 18).............. 7,121 -- --
-------- -------- -------
As restated.................................... (30,636) 11,898 6,749
Net earnings (loss) for the year............... 11,189 (31,989) 5,970
-------- -------- -------
(19,447) (20,091) 12,719
-------- -------- -------
Disposition of accumulated deficit:
Transfers from reserves:
Legal reserve (note 17)...................... 3,141 -- --
Business rationalization reserve (note 17)... 6,344 -- --
Reserve for export loss (note 17)............ 1,720 1,472 --
Reserve for technology development (note
17)......................................... 670 -- --
Reserve for overseas market development (note
17)......................................... 586 -- --
-------- -------- -------
12,461 1,472 --
-------- -------- -------
Appropriation of unappropriated retained
earnings:
Reserve for business rationalization (note
17)........................................... -- -- 821
-------- -------- -------
-- -- 821
-------- -------- -------
Balance of unappropriated (undisposed) retained
earnings (accumulated deficit) after
appropriation (disposition)..................... $ (6,986) $(18,619) $11,898
======== ======== =======
See accompanying notes to financial statements.
F-6
POSCO HULS CO., LTD.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
1999 1998 1997
----------- -------- --------
(Unaudited)
Cash flows from operating activities:
Net earnings (loss).......................... $11,189 $(31,989) $ 5,970
Adjustments to reconcile net earnings (loss)
to cash provided by operating activities:
Foreign translation loss, net.............. (4,946) 45 658
Loss on disposition of fixed assets, net... 188 45 486
Depreciation and amortization.............. 30,387 39,942 69,574
Provision for retirement and severance
benefits.................................. 3,282 1,930 3,039
Contribution to National Pension Fund...... (205) (423) (287)
Payment for retirement and severance
benefits.................................. (499) (197) (352)
Decrease (increase) in marketable
securities................................ 13,262 (40,057) 361
Decrease (increase) in notes and accounts
receivable................................ (5,403) 8,302 (8,164)
Decrease (increase) in prepaid expenses and
other current assets...................... 706 614 (1,232)
Decrease (increase) in inventories......... 1,284 10,913 (9,965)
Increase in trade notes and accounts
payable................................... 1,304 2,618 3,273
Decrease in accrued expenses and other
current liabilities....................... (623) (66) (685)
Other, net................................. 1,565 420 105
------- -------- --------
Net cash provided by operating activities...... 51,491 (7,903) 62,781
------- -------- --------
Cash flows from investing activities:
Additions to fixed assets.................... (7,709) (12,720) (39,020)
Proceeds from sale of fixed assets........... 116 432 380
Decrease (increase) in short-term financial
instruments................................. (7,945) (428) 23,297
Increase in investments, other assets and
deferred charges............................ (7,731) (1,744) (2,159)
------- -------- --------
Net cash used in investing activities.......... (23,269) (14,460) (17,502)
------- -------- --------
Cash flows from financing activities:
Proceeds from bank overdraft and short-term
borrowings.................................. 14,125 13,815 14,427
Repayments of bank overdraft and short-term
borrowings.................................. (3,911) (20,863) (2,245)
Proceeds from issuance of bonds, net of
discounts................................... 3,911 56,818 --
Proceeds from long-term debt................. 267 2,300 26,356
Repayment of long-term debt.................. (45,077) (43,623) (41,138)
Payment of dividends......................... -- -- (28,156)
Increase (decrease) in accounts payable--
other....................................... 1,563 (4,512) 3,123
------- -------- --------
Net cash provided by (used in) financing
activities.................................... (29,122) 3,935 (27,633)
------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... (900) (18,428) 17,646
Effect of changes in exchange rates............ 864 18,475 (17,647)
Cash and cash equivalents at beginning of
year.......................................... 54 7 8
------- -------- --------
Cash and cash equivalents at end of year....... $ 18 $ 54 $ 7
======= ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Income taxes............................... $ 1,174 $ 795 $ 1,772
Interest................................... 16,313 16,979 2,059
======= ======== ========
See accompanying notes to financial statements.
F-7
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(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 statement 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 positions 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 amounts of assets and liabilities
into U.S. dollars at the basic exchange rates as of the balance sheet date
(W1,145.40 to US$1 and W1,207.80 to US$1 as of December 31, 1999 and 1998,
respectively), the amount of common stock at the basic exchange rates on the
dates of issuance, and income and expense items at the average basic exchange
rates for each month. The effects of changes in exchange rates are reflected
as "cumulative translation adjustment" within stockholders' equity.
(b) Economic Environment
The liquidity crisis which began in late 1997 in the Republic of Korea and
other countries in the Asia Pacific region necessitated assistance from the
International Monetary Fund and a comprehensive policy package intended to
address the structural weaknesses in the Korean economy and financial sector
was developed and implemented by the government of the Republic of Korea.
While the reform policies were intended to improve the economy over time, the
immediate effects included slower economic growth, a reduction in the
availability of credit, an increase in interest rates, significant devaluation
of the Korean Won, an increase in the number of bankruptcies of Korean
entities, and labor unrest resulting from the increase in unemployment. These
conditions and similar conditions in other countries in the Asia Pacific
region have had a material adverse effect on the operations of the Company.
Recently, however, economic difficulties have largely been overcome in the
Republic of Korea, as evidenced by significant increase in foreign exchange
reserves, above-average economic growth and stabilized foreign exchange rates.
Nevertheless, it would be premature to be complacent about the economic
recovery given, among other factors, the remaining residual effects of the
economic crisis which could have a continuing impact on the economy.
The accompanying financial statements reflect management's current
assessment of the impact to date of the economic situation on the financial
position of the Company. Actual results could differ from management's current
assessments and such differences could be material.
F-8
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(c) Marketable Securities
Marketable securities are stated at market value. Any gains or losses
resulting from adjusting the securities to market value are recognized in
current operations.
(d) Allowance for Doubtful Accounts
The allowance for doubtful accounts has been provided based on an individual
analysis of the respective receivables and historical experience.
(e) Inventories
Inventories are stated at cost determined by the lower of cost (the weighted
average method) or market value, except that materials-in-transit are stated
at actual cost using the specific identification method.
(f) Fixed Assets
Fixed assets are stated at cost. The Company charges expenditures for
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
(g) Accounting for Leases
The Company accounts for leases as either operating leases 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 become due. Prepaid lease expenses relating to
operating leases are amortized over the lease terms of the related leases.
Under the financing lease method, the principal amount of leased equipment,
which represents 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.
(h) Discount on Bonds Issued
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.
F-9
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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 recorded 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 benefits of employees to the National
Pension Fund. The amount transferred will reduce the retirement and severance
benefit amounts payable to the employees when they leave the Company and is
reflected in the accompanying financial statements as a reduction of the
retirement and severance benefits liability.
The Company has covered 49% and 37% of the retirement and severance benefits
liability as of December 31, 1999 and 1998, respectively by insurance deposits
with certain insurance companies, 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
Foreign currency transactions are recorded at the appropriate rate of
exchange when incurred. As of December 31, 1999 and 1998, monetary assets and
liabilities denominated in a foreign currency are translated into Korean Won
at W1,145.40 to US$1 and W1,207.80 to US$1, respectively. Exchange gains or
losses are credited or charged to current operations.
Under the previous Financial Accounting Standards, in 1998, the Company had
deferred net foreign exchange loss on long-term foreign currency debt. In
accordance with the revised Financial Accounting Standards, the balance of
such deferred foreign exchange loss was debited to the beginning balance of
accumulated deficit.
(l) Income Taxes
Income tax expense or benefit on earnings for 1999 includes both current and
deferred taxes. Current tax is the expected tax payable on the taxable income
for the year, using tax rates enacted or substantially enacted at the balance
sheet date. Deferred tax is provided using the asset and liability method,
providing for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for taxation
purposes. 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. Through
December 31, 1998, recording of deferred taxes was not required under the old
Financial Accounting Standards. Beginning in 1999, the Company accounts for
deferred taxes using the asset and liability method as described above. The
cumulative effect, through December 31, 1998, of the adoption of revised
Financial Accounting Standards is credited to the beginning balance of
accumulated deficit in 1999.
(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.
F-10
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(n) Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid marketable securities with maturity of three months or less to
be cash equivalents.
(o) Reclassification
Certain accounts of 1998 financial statements have been reclassified to
conform with the current year's presentation.
(p) 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.
(q) Accounting Changes for 1999
On December 11, 1998, the Financial Supervisory Commission announced certain
changes in Financial Accounting Standards in the Republic of Korea ("Korean
GAAP") with the intention to enhance Korean GAAP and disclosure rules to more
closely resemble international practices. The revised accounting standards are
effective for fiscal years starting on or after January 1, 1999.
The more significant changes include, but are not limited to, accounting for
investment securities, foreign currency translation, impairment of long-lived
assets, deferred assets, goodwill, asset transfers, income taxes, accounting
changes and prior period adjustments. Additional disclosures are also required
concerning segment information, discontinued operations and significant non-
compliance with covenants. The cumulative effect, through December 31, 1998,
of the adoption of revised Financial Accounting Standards is debited or
credited to the beginning balance of accumulated deficit in 1999.
(2) Cash and Cash Equivalents
Cash and cash equivalents at December 31, 1999 and 1998 consist of the
following:
1999 1998
----------- ----
(Unaudited)
Cash on hand............................................. $ 6 $ 2
Checking accounts........................................ 8 4
Corporate savings deposits............................... 4 --
Foreign currency deposits................................ -- 48
--- ---
$18 $54
=== ===
F-11
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(3) Short-term Financial Instruments
Short-term financial instruments at December 31, 1999 and 1998 consist of the
following:
1999 1998
----------- -------
(Unaudited)
Time deposits........................................ $18,925 $17,315
Installment time deposits............................ 1,812 1,152
Cash management account.............................. 5,675 --
------- -------
$26,412 $18,467
======= =======
Time deposits, installment time deposits and cash management accounts
classified as cash and cash equivalents as of December 31, 1998, have been
reclassified as short-term financial instruments as of December 31, 1999 in
accordance with the revised accounting standards.
(4) Marketable Securities
Marketable securities at December 31, 1999 and 1998 consist of the following:
1999 1998
----------- -------
(Unaudited)
Beneficiary certificates............................. $39,575 $41,941
Government bonds..................................... -- 821
------- -------
$39,575 $42,762
======= =======
(5) Inventories
Inventories at December 31, 1999 and 1998 consist of the following:
1999 1998
----------- -------
(Unaudited)
Finished goods........................................ $ 9,097 $ 8,894
Goods-in-progress..................................... 6,954 6,820
Raw materials......................................... 1,184 415
Sub materials......................................... 5,150 4,308
Supplies.............................................. 4,913 5,043
Materials-in-transit.................................. 596 3,698
------- -------
$27,894 $29,178
======= =======
F-12
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) Other Current Assets
Other current assets at December 31, 1999 and 1998 consist of the following:
1999 1998
----------- ------
(Unaudited)
Accounts receivables--other........................... $ 279 $ 122
Accrued income........................................ 728 1,677
Prepayments........................................... 17 19
Income taxes refundable............................... 1,219 1,291
Value added tax refundable............................ 775 362
Prepaid expenses...................................... 525 769
Import guarantee deposit.............................. -- 9
------ ------
$3,543 $4,249
====== ======
(7) 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, 1999 and 1998.
1999 1998
----------- --------
(Unaudited)
Land................................................ $ 7,572 $ 14,394
Buildings........................................... 33,505 32,557
Machinery and equipment............................. 50,375 66,436
------- --------
91,452 113,387
------- --------
Obligations the collateral is pledged to secure:
Short-term borrowings............................. -- 3,850
Long-term debt, including current portion......... 7,674 80,534
------- --------
$ 7,674 $ 84,384
======= ========
(b) In addition, to secure borrowings of the Company, its shareholders have
provided guarantees as follows:
Guarantors 1999 1998
---------- ----------- ----
(Unaudited)
MEMC Electronic Materials, Inc. (MEMC)................... $-- $581
=== ====
F-13
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(8) Investments and Other Assets
Investments and other assets at December 31, 1999 and 1998 consist of the
following:
1999 1998
----------- -------
(Unaudited)
Long-term deposits................................... $ 1,200 $ 1,486
Leasehold deposits................................... 705 446
Rental deposit....................................... 96 105
Deposits for retirement and severance benefits....... 5,550 3,004
Loans to employees................................... 7,280 6,983
Restricted cash and deposits......................... 13 11
Telephone rights..................................... 36 43
Membership rights.................................... 709 667
Long-term prepaid expenses........................... 56 306
------- -------
$15,645 $13,051
======= =======
(9) Fixed Assets
Fixed assets at December 31, 1999 and 1998 consist of the following:
1999 (Unaudited)
----------------------------------
Accumulated
depreciation and
Cost amortization Net
-------- ---------------- --------
Land..................................... $ 15,210 $ -- $ 15,210
Buildings................................ 37,879 4,374 33,505
Building--auxiliary facilities........... 6,518 2,186 4,332
Structures............................... 6,767 1,597 5,170
Machinery and equipment.................. 228,488 178,113 50,375
Vehicles................................. 569 429 140
Tools and equipment...................... 2,044 1,829 215
Furniture and fixtures................... 11,989 9,149 2,840
Machinery-in-transit..................... 478 -- 478
Construction-in-progress................. 4,472 -- 4,472
Industrial water usage rights............ 800 364 436
-------- -------- --------
$315,214 $198,041 $117,173
======== ======== ========
F-14
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
Construction-in-progress.................. 4,886 -- 4,886
Industrial water usage rights............. 758 269 489
-------- -------- --------
$293,159 $158,782 $134,377
======== ======== ========
Property, plant and equipment, and inventories were insured against fire and
other damage up to an amount of $614,831 (unaudited) and $526,044 at December
31, 1999 and 1998, respectively.
(10) Financing Leases
The Company has certain 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, 1999:
(Unaudited)
2000.......................................................... $ 12,849
2001.......................................................... 9,281
2002.......................................................... 6,234
2003 and after................................................ 4,231
--------
32,595
Less portion representing interest............................ (3,649)
Less current portion.......................................... (10,996)
--------
Long-term obligations under financing leases.................. $ 17,950
========
The following is a summary of the acquisition cost of leased assets and
accumulated depreciation thereon which are included in machinery and equipment
as of December 31, 1999 and 1998:
Description 1999 1998
----------- ----------- --------
(Unaudited)
Leased assets at cost (including other incidental
cost)............................................ $ 40,370 $ 41,485
Accumulated depreciation.......................... (38,257) (33,857)
-------- --------
$ 2,113 $ 7,628
======== ========
F-15
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(11) Operating Leases
The Company leased 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 and $459 charged to operations in the years
ended December 31, 1998 and 1997, respectively.
(12) 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, 1999 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, 1999, 1998 and 1997:
1999 1998 1997
----------- ------- --------
(Unaudited)
MEMC:
Notes and accounts receivable................ $ 3,796 $ 1,215 $ 3,257
Other current assets......................... 6 47 217
Notes and accounts payable................... 735 46 49
Accounts payable--other...................... 1,077 695 1,141
Sales........................................ 25,840 21,558 30,168
Purchases.................................... 10,132 3,353 6,914
Licensing and royalty payments............... 3,312 3,186 6,329
SEC:
Notes and accounts receivable................ 7,608 5,199 2,843
Sales........................................ 122,550 78,746 135,298
(13) Other Current Liabilities
Other current liabilities at December 31, 1999 and 1998 consist of the
following:
1999 1998
----------- ------
(Unaudited)
Withholding............................................ $ 274 $ 209
Accrued expenses....................................... 2,482 3,170
------ ------
$2,756 $3,379
====== ======
F-16
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(14) Retirement and Severance Benefits
Changes in retirement and severance benefits for the years ended December 31,
1999, 1998 and 1997 are summarized as follows:
1999 1998 1997
----------- ------- -------
(Unaudited)
Beginning balance............................ $ 7,071 $ 4,271 $ 5,433
Provision for the year....................... 3,282 2,014 3,039
Payments..................................... (499) (197) (352)
Effect of changes in exchange rates.......... 1,497 2,039 (3,849)
------- ------- -------
Ending balance............................... 11,351 8,127 4,271
Cumulative contribution to National Pension
Fund, net................................... (1,261) (1,056) (398)
------- ------- -------
$10,090 $ 7,071 $ 3,873
======= ======= =======
(15) Bonds Issued
Bonds issued at December 31, 1999 and 1998 are summarized as follows:
Interests
Series Maturities per annum 1999 1998 Guarantor
------ ---------- --------- ----------- ------- -----------
(Unaudited)
#10 1999 17.0% $ -- $10,763 Boram bank
#11 1999 16.0% -- 8,280 Koram bank*
#12 2000 13.3% 17,461 16,559 Unsecured
#13 2001 10.0% 26,192 24,838 Unsecured
#14 2001 8.0% 8,731 8,280 Unsecured
#15 2002 7.0% 4,365 -- Unsecured
------- -------
56,749 68,720
Less current portion........... 17,461 18,927
Less unamortized discount...... (1,315) (1,618)
------- -------
$37,973 $48,175
======= =======
- --------
(*) Private placement
Scheduled repayments of bonds issued as of December 31, 1999 are as follows:
(Unaudited)
2000.......................................................... $17,461
2001.......................................................... 34,923
2002.......................................................... 4,365
-------
$56,749
=======
F-17
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(16) Long-term Debt
Long-term debt at December 31, 1999 and 1998 is summarized as follows:
Interest
per annum Final maturity 1999 1998
---------------- -------------- ----------- --------
(Unaudited)
Korean Won loans:
General facility loan Floating rate 2005 $ 1,528 $ 1,449
Facility loan 5.5% 2007 277 191
-------- --------
1,805 1,640
-------- --------
Foreign currency loans:
Facility loan Floating rate 2005 1,187 1,186
Facility loan 6LIBOR*+0.7% 2003 6,682 8,591
Facility loan Prime Rate+1.0% 2003 2,848 3,562
Facility loan 3LIBOR*+2% 1999 -- 328
Facility loan 3LIBOR*+1.5% 1999 -- 253
Facility loan Prime Rate+1.3% 2003 4,016 5,355
Facility loan 6LIBOR*+0.6% 2003 18,950 25,480
Facility loan Prime Rate+1.2% 2003 1,565 2,012
Operating loan Prime Rate+1.6% 2003 1,381 1,727
Operating loan Prime Rate+0.67% 2000 12,700 12,700
Operating loan Prime Rate+0.8% 2001 9,700 9,700
Operating loan 6LIBOR*+0.7% 1999 -- 3,040
Operating loan Prime Rate+0.77% 2001 4,960 4,960
-------- --------
63,989 78,894
-------- --------
Total long-term debt................................. 65,794 80,534
Less current portion................................. (24,390) (15,096)
-------- --------
$ 41,404 $ 65,438
======== ========
- --------
* 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,
1999:
(Unaudited)
2000.......................................................... $24,390
2001.......................................................... 26,485
2002.......................................................... 11,199
2003.......................................................... 2,834
2004.......................................................... 598
2005 and thereafter........................................... 288
-------
$65,794
=======
F-18
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(17) Appropriated Retained Earnings
Appropriated retained earnings as of December 31, 1999 and 1998 are
summarized as follows:
1999 1998
----------- -------
(Unaudited)
Legal reserve........................................... $ -- $ 3,141
Reserve for business rationalization.................... -- 6,344
Reserve for technology development...................... 1,340 2,010
Reserve for export loss................................. 1,958 3,678
Reserve for overseas market development................. 1,172 1,758
------ -------
$4,470 $16,931
====== =======
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. All legal reserve was used to reduce accumulated deficit in
1999.
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. All reserve for business rationalization was
used to reduce accumulated deficit in 1999.
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.
(18) Income Taxes
The Company is subject to a number of taxes based upon taxable earnings at
the following normal tax rates:
Rates
-----------------------
Taxable earnings 1999 1998 1997
---------------- ----------- ----- -----
(Unaudited)
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 (40%) until 2002, as stipulated in the Tax Exemption and Control Law.
After consideration of the FCIL exemption, the Company's effective tax rate is
23.8%.
F-19
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The "expected" income tax expense (benefit) calculated using the effective
tax rate differs from the actual income tax expense (benefit) for the year
ended December 31, 1999 for following reasons:
(Unaudited)
The "expected" income taxes using effective tax rates............ $ 2,836
Increase in tax credit to be carried forward..................... (886)
Other permanent differences...................................... (1,191)
-------
Income taxes per accompanying financial statements............... $ 759
=======
The reconciliation between expected taxes and actual income taxes for 1998
has not been presented since there was no taxable income and deferred tax
accounting was not required prior to 1999.
The components of income tax expense for the year ended December 31, 1999
are summarized as follows:
(Unaudited)
Current....................................................... $--
Deferred...................................................... 759
----
$759
====
The tax effects of temporary differences that resulted in significant
portion of the deferred income tax assets and liabilities at December 31, 1999
and 1998 using 23.8% as the effective tax rate after the consideration of the
FCIL exemption are presented below:
1999 1998
----------- -------
(Unaudited)
Deferred income tax assets:
Inventories.......................................... $ 1,104 $ 1,902
Cumulative adjustment of deferred foreign exchange
translation loss.................................... 3,872 5,635
Depreciation......................................... 919 --
Tax credit........................................... 1,985 1,042
Tax loss carryforwards utilized...................... 4,751 5,772
Loss on securities valuation......................... 53 --
Others............................................... -- 15
------- -------
12,684 14,366
------- -------
Deferred income tax liabilities:
Accrued income....................................... 173 399
Gain on securities valuation......................... 190 --
Foreign exchange translation loss.................... -- 1,097
Reserve for tax purpose.............................. 739 1,167
Land................................................. 47 45
------- -------
1,149 2,708
------- -------
Net deferred income tax assets......................... $11,535 $11,658
======= =======
The Company has a tax loss carryforward of $19,962 at December 31, 1999,
which may be used to offset future taxable income of the Company. If not used
to offset future taxable income, the tax loss carryforward will expire in
2003.
F-20
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Effective January 1, 1999, the Company adopted the asset and liability
method for income taxes, in accordance with the revised Financial Accounting
Standard. Out of the cumulative effect on prior years of the adoption of
deferred income taxes of $11,658 of net deferred tax asset as of January 1,
1999, $7,121 was credited to the beginning balance of accumulated deficit and
$4,537 was offset with deferred foreign currency translation loss which was
charged to the beginning balance of accumulated deficit.
(19) Deferred Foreign Currency Translation Loss
In accordance with the revised accounting standards, the cumulative effect
on prior years of the changes in the accounting standard for unrealized
foreign currency translation losses, $19,138 of deferred foreign currency
translation loss net of tax effects in the amount of $4,537 as of December 31,
1998, was charged to the beginning balance of accumulated deficit.
(20) Commitments and Contingencies
(a) As of December 31, 1999, the Company has provided 4 blank checks, 8
blank promissory notes and 1 promissory note in the amount of W8,731 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, 1999, the Company has entered into bank overdraft
agreements for borrowing up to $11,350 with five banks and has also entered
into borrowing arrangements with three short-term financing companies.
(21) Earnings (Loss) Per Share
Earnings (loss) per share for the years ended December 31, 1999, 1998 and
1997 are calculated as follows:
1999 1998 1997
----------- ----------- -----------
(Unaudited)
Net earnings (loss)................... $ 11,189 $ (31,989) $ 5,970
Weighted average number of shares of
common stock......................... 17,200,000 17,200,000 17,200,000
----------- ----------- -----------
Earnings (loss) per share in U.S.
dollars.............................. $ 0.65 $ (1.86) $ 0.35
=========== =========== ===========
F-21
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(22) 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:
1999 1998 1997
----------- -------- --------
(Unaudited)
Net earnings (loss)--Korean GAAP............... $ 11,189 $(31,989) $ 5,970
-------- -------- --------
Adjustments:
Start-up costs............................... 1,059 406 2,383
Inventories.................................. 1,177 1,845 1,044
Depreciation in relation to useful life and
functional currency differences............. (19,200) (13,108) 11,294
Capitalized interest and related
depreciation................................ 57 97 1,273
Amortization of deferred foreign currency
translation loss............................ -- 6,247 15,139
Foreign currency translation gain (loss)
including functional currency difference,
net......................................... (6,580) (5,493) (20,305)
Deferred income taxes, including translation
adjustment.................................. 918 (2,435) 10,915
Others....................................... (68) (12) 140
-------- -------- --------
Total adjustments.............................. (22,637) (12,453) 21,883
-------- -------- --------
Net earnings (loss)--U.S. GAAP................. $(11,448) $(44,442) $ 27,853
======== ======== ========
Basic earnings (loss) per share--U.S. GAAP..... $ (0.66) $ (2.46) $ 1.62
======== ======== ========
(1) For Korean GAAP purposes, 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.
Stockholders' equity--Korean GAAP.............. $ 63,089 $ 61,265 $ 51,657
Adjustments:
Start-up costs............................... -- (1,059) (1,465)
Inventories.................................. 554 (623) (2,468)
Fixed assets:
Depreciation in relation to useful life and
functional currency differences............. 11,262 30,462 43,570
Capitalized interest and related
depreciation................................ 2,850 2,793 2,696
Functional currency impact, principally on
fixed assets and inventories................ 71,731 80,397 141,556
Deferred foreign currency translation loss... -- (23,676) (44,046)
Deferred income taxes........................ (8,986) 2,389 4,824
Others....................................... -- -- 66
-------- -------- --------
Total adjustments.......................... 77,411 90,683 144,733
-------- -------- --------
Stockholders' equity--U.S. GAAP................ $140,500 $151,948 $196,390
======== ======== ========
F-22
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) 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, 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 lives 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, 1999 and 1998
under U.S. GAAP are summarized as follows:
1999 1998
----------- --------
(Unaudited)
Current assets:
Inventories.......................................... $ 29,742 $ 29,655
Other current assets................................. 83,955 74,916
-------- --------
Total current assets................................. 113,697 104,571
Fixed assets........................................... 426,943 419,964
Less accumulated depreciation........................ 225,183 173,990
-------- --------
201,760 245,974
Investments and other assets........................... 26,247 14,090
-------- --------
$341,704 $364,635
======== ========
Current liabilities.................................... $ 85,059 $ 63,057
Long-term liabilities.................................. 116,145 149,630
-------- --------
Total liabilities.................................... 201,204 212,687
Stockholders' equity:
Common stock......................................... 112,175 112,175
Retained earnings.................................... 28,325 39,773
-------- --------
Total stockholders' equity........................... 140,500 151,948
-------- --------
$341,704 $364,635
======== ========
F-23
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that resulted in significant
portions of the deferred tax assets and liabilities at December 31, 1999 and
1998 computed under U.S. GAAP, and a description of the financial statement
items that created these differences follow:
1999 1998
----------- --------
(Unaudited)
Deferred tax assets:
Inventories............. $ 977 $ 2,055
Start-up costs.......... -- 165
Capital leases.......... -- 1
Depreciation............ 919 --
Foreign currency
translation loss....... 3,872 5,501
Korean tax operating
loss carryforwards..... 4,751 5,772
Tax credit.............. 1,985 --
Others.................. -- 3
------- --------
Total deferred tax
assets................... 12,504 13,497
------- --------
Deferred tax liabilities:
Depreciation in relation
to useful life
difference............. (8,305) (9,050)
Depreciation on
capitalized interest... (555) (447)
Reserves for tax
purpose................ (739) (1,167)
Accrued income.......... (173) (399)
Gain on securities
valuation.............. (137) --
Land.................... (47) (45)
------- --------
Total deferred tax
liabilities.............. (9,956) (11,108)
------- --------
Net deferred tax asset.... $ 2,548 $ 2,389
======= ========
(a) Deferred Income Taxes
Until last year, under the Korean GAAP, a provision has not been 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, the revised Korean 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 tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled.
U.S. GAAP also requires the recognition of deferred tax assets and
liabilities created by temporary differences between the financial statement
and tax bases of assets and liabilities. However, because of differences
between Korean GAAP and U.S. GAAP for other items (for example, functional
currency differences) the net deferred tax amount under US GAAP is different
from that under Korean GAAP.
The tax rate used to calculate deferred tax assets and liabilities was
changed from 20.3% in 1997 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 decrease net loss by $291 in 1998.
F-24
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(b) Start-up Costs
Certain 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) 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, 1999 and 1998.
(d) Inventories
For U.S. GAAP, inventories are adjusted for the effect of depreciation in
relation to the useful life difference of machinery and equipment and
depreciation on capitalized interest. 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.
(e) 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.
(f) Foreign Currency Translation
In accordance with a change in Korean GAAP in 1997, net deferred foreign
exchange losses on long-term foreign currency (including current portion)
denominated monetary assets and liabilities were recorded as a deferred
foreign currency translation loss and amortized over the remaining repayment
period of the respective assets and liabilities. In 1999, in accordance with a
change in Korean GAAP, the balance of such deferred foreign exchange loss was
recorded as an adjustment to the beginning balance of accumulated deficit.
However, for US GAAP purposes, all such foreign currency transaction losses
are expensed as incurred in all periods.
(g) 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.
F-25
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Taisil Electronic Materials Corporation:
We have audited the accompanying balance sheets of Taisil Electronic
Materials Corporation as of December 31, 1998 and the related statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 1998 and 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the Republic of China, which are substantially similar to auditing
standards generally accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Taisil Electronic
Materials Corporation as of December 31, 1998, and the results of its
operations and its cash flows for the years ended December 31, 1998 and 1997
in conformity with generally accepted accounting principles in the Republic of
China.
As discussed in note (2)(j) to the financial statements, as of December 31,
1997, Taisil Electronic Materials Corporation changed its method of accounting
for pensions.
Accounting principles generally accepted in the Republic of China vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have affected stockholders' equity as of December 31,
1998, and the results of operations for the years ended December 31, 1998 and
1997 to the extent summarized in note 15 to the financial statements.
/s/ KPMG Certified Public
Accountants
Taipei, Taiwan
February 9, 1999
F-26
TAISIL ELECTRONIC MATERIALS CORPORATION
BALANCE SHEETS
December 31, 1999 and 1998
(expressed in thousands of US dollars)
1999 1998
----------- --------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents (note 4)...................... $ 11,041 $ 31,068
Short-term investments (note 5)......................... -- 337
Restricted bank deposits (note 13)...................... 32 962
Notes and accounts receivable (note 3).................. 20,644 14,649
Inventories, net (note 6)............................... 18,153 15,869
Prepayments and other current assets (notes 3 and 12)... 1,922 2,076
Deferred income taxes, net (note 12).................... 2,240 --
--------- --------
Total current assets.................................. 54,032 64,961
--------- --------
Long-term investments..................................... -- 23
--------- --------
Property, plant and equipment (notes 3, 7 and 13):
Buildings............................................... 51,642 51,642
Machinery and equipment................................. 216,974 213,303
Furniture and fixtures.................................. 7,072 6,691
--------- --------
275,688 271,636
Less: accumulated depreciation.......................... (106,903) (70,715)
Prepayments for equipment............................... 18,227 20,751
--------- --------
Net property, plant, and equipment.................... 187,012 221,672
--------- --------
Other assets:
Deferred technology fees (note 3)....................... 3,750 5,583
Deferred income taxes, net (note 12).................... 5,538 3,678
Other assets............................................ 619 884
--------- --------
Total other assets.................................... 9,907 10,145
--------- --------
Total assets.......................................... $ 250,951 $296,801
========= ========
F-27
TAISIL ELECTRONIC MATERIALS CORPORATION
BALANCE SHEETS (Continued)
December 31, 1999 and 1998
(expressed in thousands of US dollars, except per share data)
1999 1998
----------- --------
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Short-term loans (note 8).............................. $ 16,609 $ 35,362
Short-term bills payable (note 8)...................... 8,477 15,851
Current portion of long-term loans (notes 3, 9 and
13)................................................... 40,120 37,395
Notes and accounts payable (note 3).................... 4,827 4,370
Accrued expenses and other current liabilities (notes 3
and 10)............................................... 7,515 9,122
-------- --------
Total current liabilities............................ 77,548 102,100
-------- --------
Commitments and contingencies (note 14)
Long-term loans (notes 3, 9 and 13)...................... 77,543 116,346
Deposits from contractors................................ 32 66
Accrued pension liabilities (note 10).................... 636 310
-------- --------
Total liabilities.................................... 155,759 218,822
-------- --------
Stockholders' equity (note 11):
Common stock--par value NT$10. Authorized 480,000,000
shares and issued 400,000,000 shares.................. 130,913 139,887
Advance from stockholders.............................. -- 30,744
Accumulated deficit.................................... (35,721) (92,652)
-------- --------
Total stockholders' equity........................... 95,192 77,979
-------- --------
Total liabilities and stockholders' equity........... $250,951 $296,801
======== ========
See accompanying notes to financial statements.
F-28
TAISIL ELECTRONIC MATERIALS CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
(expressed in thousands of US dollars)
1999 1998 1997
----------- -------- --------
(Unaudited)
Net sales (note 3)............................. $ 94,424 $ 58,663 $ 61,554
Cost of goods sold (note 3).................... 91,469 80,284 70,017
-------- -------- --------
Gross profit (loss).......................... 2,955 (21,621) (8,463)
-------- -------- --------
Selling, general and administrative expense.... 8,498 7,678 6,939
Research and development expense............. 1,651 2,117 6,908
-------- -------- --------
10,149 9,795 13,847
-------- -------- --------
Operating loss............................... (7,194) (31,416) (22,310)
-------- -------- --------
Non-operating income (expense):
Interest income.............................. 1,428 1,589 1,959
Interest expense, excluding capitalized
interest of $991 in 1997 (note 3)........... (10,979) (15,286) (15,356)
Gain (loss) on foreign exchange, net......... (1,191) (1,773) 14,800
Other income, net (note 3)................... 940 1,525 1,458
-------- -------- --------
(9,802) (13,945) 2,861
-------- -------- --------
Loss before income taxes....................... (16,996) (45,361) (19,449)
Income tax benefit (expense) (note 12)......... 3,984 (13,053) 5,665
-------- -------- --------
Net loss....................................... $(13,012) $(58,414) $(13,784)
======== ======== ========
See accompanying notes to financial statements.
F-29
TAISIL ELECTRONIC MATERIALS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(expressed in thousands of US dollars)
Advance
Common From Accumulated
Stock Stockholders Deficit Total
-------- ------------ ----------- -------
Balance as of January 1, 1997
(unaudited)...................... $ 94,942 $ -- $(20,454) $74,488
Capital increase through cash..... 18,841 -- -- 18,841
Net loss.......................... -- -- (13,784) (13,784)
-------- ------- -------- -------
Balance as of December 31, 1997... 113,783 -- (34,238) 79,545
Capital increase through cash..... 26,104 -- -- 26,104
Advance from stockholders......... -- 30,744 -- 30,744
Net loss.......................... -- -- (58,414) (58,414)
-------- ------- -------- -------
Balance as of December 31, 1998... 139,887 30,744 (92,652) 77,979
Capital increase through cash
(unaudited)...................... 60,969 (30,744) -- 30,225
Capital decrease to offset
accumulated deficit (unaudited).. (69,943) -- 69,943 --
Net loss (unaudited).............. -- -- (13,012) (13,012)
-------- ------- -------- -------
Balance as of December 31, 1999
(unaudited)...................... $130,913 $ -- $(35,721) $95,192
======== ======= ======== =======
See accompanying notes to financial statements.
F-30
TAISIL ELECTRONIC MATERIALS CORPORATION
STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
(expressed in thousands of US dollars)
1999 1998 1997
----------- -------- --------
(unaudited)
Cash flows from operating activities:
Net loss..................................... $(13,012) $(58,414) $(13,784)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Non-cash foreign exchange (gain) loss...... 3,601 1,521 (16,510)
Depreciation and amortization.............. 38,676 38,961 26,497
Provision (reversal) for inventory loss.... (3,027) 1,170 (1,207)
Loss (gain) from disposal of property,
plant and equipment....................... (1) 52 9
Decrease (increase) in notes and accounts
receivable................................ (5,469) 6,686 (20,027)
Decrease (increase) in inventories......... 743 1,082 (5,068)
Decrease (increase) in prepayments and
other current assets...................... 154 1,264 (4,103)
Decrease (increase) in deferred income
taxes..................................... (3,984) 13,794 (3,852)
Increase (decrease) in notes and accounts
payable................................... 334 (7,380) 1,550
Increase (decrease) in accrued expenses and
other current liabilities................. (1,799) (1,801) 10,573
Increase in accrued pension liabilities.... 311 310 --
-------- -------- --------
Cash provided by (used in) operating
activities.............................. 16,527 (2,755) (25,922)
-------- -------- --------
Cash flows from investing activities:
Decrease (increase) in short-term
investments................................. 337 1,716 (2,060)
Decrease (increase) in long-term
investments................................. 23 (23) --
Additions to property, plant and equipment... (2,149) (13,020) (75,965)
Proceeds from disposal of property and
equipment................................... 18 22 18
Decrease (increase) in technology fees and
other assets................................ 222 (1,379) (247)
Decrease in restricted bank deposits......... 930 2,132 36,650
-------- -------- --------
Cash used in investing activities........ (619) (10,552) (41,604)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock and
advance from stockholders................... 30,225 56,848 18,841
Increase (decrease) in loans and bills
payable..................................... (65,844) (31,132) 57,081
Increase (decrease) in deposits from
contractors................................. (35) 46 (16)
-------- -------- --------
Cash provided by (used in) financing
activities.............................. (35,654) 25,762 75,906
-------- -------- --------
Net increase in cash and cash equivalents...... (19,746) 12,455 8,380
Effect of exchange rate changes on cash........ (281) (142) (740)
Cash and cash equivalents at beginning of the
year.......................................... 31,068 18,755 11,115
-------- -------- --------
Cash and cash equivalents at end of the year... $ 11,041 $ 31,068 $ 18,755
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest, excluding capitalized
interest.................................... $ 11,961 $ 15,032 $ 14,015
======== ======== ========
Cash paid for income taxes (including
refundable income taxes).................... $ 145 $ 163 $ 191
======== ======== ========
See accompanying notes to financial statements.
F-31
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 1999 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.
(2) Significant accounting policies
(a) 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, 1999 and 1998, and
the results of operations for each of the years in the three-year period ended
December 31, 1999, to the extent summarized in note 15.
(b) Functional and reporting currency
The Company reports its financial position and results of operations using
the United States dollar as the functional currency.
(c) 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.
(d) 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.
(e) 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.
(f) 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-32
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(g) 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 cost.
(h) 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 are 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 flow of each
asset is compared to the carrying amount of the asset. If the carrying amount
exceeds the undiscounted cash flow, the impairment is measured based on the
fair values of the assets. At December 31, 1999 and 1998, the estimated future
undiscounted net cash flows of property, plant and equipment exceeded their
carrying amount.
(i) 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.
(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.
Beginning in August 1996, in accordance with the 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
paid by the Company.
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, begining 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
F-33
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
(3) Transaction with related parties
(a) Name and relationship
Name of related party Relationship with the Company
--------------------- -----------------------------
MEMC Electronic Materials Inc. Investor using equity method to account for
USA (MEMC) its investment in the Company
Chiao Tung Bank of Taipei, Investor and represented on the Company's
Taiwan, Board of Directors
ROC (CTB)
China Steel Corporation (CSC) Investor and represented on the Company's
Board of Directors
Posco Huls Co. Ltd. (PHC) MEMC group company
MEMC Japan Ltd. (MJL) MEMC group company
MEMC Electronic Materials SPA MEMC group company
(Novara)
MEMC Pasadena, Inc. (Pasadena) MEMC group company
MEMC Southwest Corp. MEMC group company
(Southwest)
(b) Significant transactions with related parties
(i) Net sales to and corresponding amounts receivable from related parties
are as follows:
Sales
-------------------------------------------------
1999 (Unaudited) 1998 1997
---------------- --------------- ----------------
% of net % of net % of net
Amount sales Amount sales Amount sales
------- -------- ------ -------- ------- --------
MEMC....................... $13,373 14.16 $8,987 15.32 $17,031 27.67
Novara..................... -- -- 240 0.41 -- --
MJL........................ 62 0.07 -- -- -- --
PHC........................ 132 0.14 -- -- -- --
------- ----- ------ ----- ------- -----
$13,567 14.37 $9,227 15.73 $17,031 27.67
======= ===== ====== ===== ======= =====
Accounts receivable
December 31,
----------------------
1999 1998
----------------------
(Unaudited)
MEMC.................................................. $3,113 $2,693
PHC................................................... 8 --
Novara................................................ -- 247
--------- ---------
$3,121 $2,940
========= =========
F-34
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Purchases from and corresponding amounts payable to related parties are as
follows:
Purchases
-----------------------------------------------------
1999 (Unaudited) 1998 1997
----------------- ----------------- -----------------
% of total % of total % of total
Amount purchases Amount purchases Amount purchases
------ ---------- ------ ---------- ------ ----------
MEMC.................. $1,822 4.85 $2,131 8.64 $6,314 17.78
MEMC Pasadena......... 1,291 3.44 -- -- -- --
Others................ 369 1.00 186 0.75 -- --
------ ---- ------ ---- ------ -----
$3,482 9.29 $2,317 9.39 $6,314 17.78
====== ==== ====== ==== ====== =====
Accounts payable
December 31,
----------------
1999 1998
----------- ----
(Unaudited)
MEMC..................................................... $149 $ 4
MEMC Pasadena............................................ 505 --
Others................................................... 8 77
---- ---
$662 $81
==== ===
(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
------------------------ ------- ------------- ------- -------- -------- -----------------
1999.................... $37,900 6.297%-6.602% $32,552 $2,215 $205 Machinery and
======= ======= ====== ====
(Unaudited) equipment $41,324
------------------------
1998.................... $36,934 5.875%-6.855% $35,909 $2,127 $199 Machinery and
======= ======= ====== ====
equipment $60,886
(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, $2,844
(unaudited), $713 and $1,312 in 1999, 1998 and 1997, respectively, pursuant to
the terms of such agreements. The related amounts outstanding of $2,961
(unaudited) and $148 as of December 31, 1999 and 1998, respectively, are
included in accrued expenses.
(iv) Toll fees
The Company entrusted MJL and PHC to process silicon wafers. Toll fees paid
for the years ended December 31, 1999 and 1998 were as follows:
1999 1998
----------- ----
(Unaudited)
MJL...................................................... $406 $356
PHC...................................................... 106 --
---- ----
$512 $356
==== ====
F-35
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999 and 1998, amounts due to related parties that
resulted from the above transaction were as follows:
1999 1998
----------- ----
(Unaudited)
MJL...................................................... $349 $184
==== ====
(v) Guarantees
MEMC and CSC have provided guarantees for certain of the Company's long-term
loans and bills payable up to a maximum of $84,208 and $92,863, respectively.
(4) Cash and cash equivalents
Details of cash and cash equivalents as of December 31, 1999 and 1998 were
as follows:
December 31,
-------------------
1999 1998
----------- -------
(Unaudited)
Cash on hand and in banks............................ $ 1,348 $ 413
Cash equivalents..................................... 9,693 30,655
------- -------
$11,041 $31,068
======= =======
(5) Short-term investments
The Company had invested $337 in open-ended trust funds as of December 31,
1998. The fair value of such investments as of December 31, 1998 was
approximately $338.
(6) Inventories
The components of inventories as of December 31, 1999 and 1998 are
summarized below:
December 31,
-------------------
1999 1998
----------- -------
(Unaudited)
Finished goods....................................... $ 3,620 $ 6,153
Work in process...................................... 2,729 3,188
Raw materials and spare parts........................ 14,139 11,905
------- -------
20,488 21,246
Provision for inventory devaluation.................. (2,335) (5,377)
------- -------
$18,153 $15,869
======= =======
As of December 31, 1999 and 1998, insurance coverage of inventories amounted
to approximately $19,111 (unaudited) and $21,728, respectively.
F-36
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(7) Property, plant and equipment
Certain property, plant and equipment are pledged as security for long-term
loans (refer to note 13.).
Insurance coverage on property, plant and equipment and third-party liability
as of December 31, 1999 and 1998 amounted to approximately $242,555 (unaudited)
and $247,846, respectively.
(8) Short-term loans and short-term bills payable
December 31,
---------------------------------------------
1999 (Unaudited) 1998
---------------------- ----------------------
Amount Interest rate Amount Interest rate
------- ------------- ------- -------------
Unsecured loans.............. $11,149 5.381%-5.497% $29,023 5.988%-7.023%
Secured loans................ -- -- 931 7.25%
Credit loans and import loans
under usance letters of
credit...................... 5,460 0.679%-6.937% 5,408 0.514%-6.50%
Commercial paper payable..... 8,600 4.25%-5.76% 15,520 5.35%-6.75%
Bank acceptance payable...... -- -- 621 6.50%
Unamortized discount on
short-term bills payable.... (123) (290)
------- -------
$25,086 $51,213
======= =======
F-37
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999 and 1998, certain time deposits were pledged as
security for the issuance of short-term bills payable (refer to note 13.).
(9) Long-term loans
Balance at December 31,
Credit line --------------------------
Bank and purpose Period Repayment term 1999 1998
- ------------------------ ----------------- ---------------- ---------------------------- --------------------------
(Unaudited)
Chiao Tung Bank NT$240,000 February 1998 Repayable in 17 quarterly $ 6,667 $ 6,497
Loan for purchase to February 2005 installments starting in
of machinery February 2001
Chiao Tung Bank NT$400,000 November 1995 Repayable in 17 quarterly 8,994 11,686
Loan for purchase to November 2002 installments starting in
of machinery November 1998
Chiao Tung Bank NT$100,000 November 1995 Repayable in 21 quarterly 1,821 2,365
Loan for purchase to November 2002 installments starting in
of machinery November 1997
Chiao Tung Bank NT$100,000 November 1995 Repayable in 29 quarterly 2,747 3,104
Loan for purchase to November 2005 installments starting in
of machinery January 1999
Chiao Tung Bank NT$200,000 December 1996 Repayable in 17 quarterly 3,990 4,136
Loan for purchase to November 2003 installments starting in
of machinery December 1999
Chiao Tung Bank NT$200,000 December 1996 Repayable in 17 quarterly 6,370 6,208
Loan for purchase to November 2003 installments starting in
of machinery March 2000
Chiao Tung Bank NT$80,000 December 1996 Repayable in 29 quarterly 1,963 1,913
Loan for purchase to November 2006 installments starting in
of machinery January 2000
The International NT$1,000,000 December 1995 Repayable in 10 semi- 19,111 24,832
Commercial Bank of China Loan for plant to December 2002 annual installments starting
construction in June 1998
ABN AMRO Bank (In charge $60,000 October 1995 Repayable in 10 semi- 36,000 48,000
of syndication loan Loan for purchase to August 2002 annual installments starting
agreement for the phase of machinery in February 1998
I expansion)
ABN AMRO Bank (In charge $45,000 January 1997 Repayable in 6 semi- 30,000 45,000
of syndication loan Loan for purchase to December 2001 annual installments starting
agreement for the phase of machinery in June 1999
II expansion)
----------- -----------
117,663 153,741
Less: current portion (40,120) (37,395)
----------- -----------
$ 77,543 $ 116,346
=========== ===========
F-38
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following is a schedule of payments of long-term debt as of December 31,
1999:
Year Amount
---- -----------
(Unaudited)
2000.......................................................... $ 40,120
2001.......................................................... 41,754
2002.......................................................... 26,748
2003.......................................................... 4,773
2004.......................................................... 1,617
After 2005.................................................... 2,651
--------
$117,663
========
On December 23, 1996, the Company obtained a syndication loan from ABN AMRO
Bank and 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.
The ranges for interest rates on these borrowings for the years ended
December 31, 1999, 1998 and 1997 were 5.735%-7.85% (unaudited), 6.50%-7.95%
and 6.00%-7.605%, respectively. As of December 31, 1999 and 1998, total unused
lines of credit for short-term and long-term loans amounted to approximately
$125,385 (unaudited) and $102,903, respectively.
As December 31, 1999 and 1998, certain time deposits and property, plant and
equipment were pledged as security for long-term loans (refer to 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, 1999 and 1998. The funded status of the
Company's pension scheme as of December 31, 1999 and 1998 was as follows:
December 31,
------------------
1999 1998
----------- ------
(Unaudited)
Benefit obligation:
Vested benefit obligation............................. $ -- $ --
Non-vested benefit obligation......................... (577) (411)
------ ------
Accumulated benefit obligation........................ (577) (411)
Effects of future salary progression.................. (1,371) (977)
------ ------
Projected benefit obligation.......................... (1,948) (1,388)
Fair value of plan assets............................... 717 476
------ ------
Benefit obligation in excess of plan assets............. (1,231) (912)
Unrecognized net obligation at transition............... 577 584
Unrecognized pension gain............................... (31) --
------ ------
Accrued pension liabilities............................. $ (685) $ (328)
====== ======
F-39
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The net pension cost for the years ended December 31, 1999 and 1998
consisted of the following components:
1999 1998
----------- ----
(Unaudited)
Service cost............................................ $450 $421
Interest expense........................................ 90 59
Expected returns on pension fund........................ (36) (24)
Amortization and deferral............................... 22 23
---- ----
$526 $479
==== ====
Actuarial assumptions are as follows:
1999 1998
----------- ----
(Unaudited)
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 $537 (unaudited) and $198 for the years ended December
31, 1999 and 1998, respectively. As of December 31, 1999 and 1998, the
balances of the Company's pension fund maintained with the Central Trust of
China were $681 (unaudited) and $476, respectively. As of December 31, 1999
and 1998, the unpaid balances of $16 (unaudited) and $15, respectively, were
included in accrued expenses.
(11) Stockholders' equity
(a) Capital stock
On July 25, 1997, the stockholders 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 par 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, respectively, at NT$10 par value per share for cash. On December 14,
1998, pursuant to the resolution of a special shareholder's meeting, Taisil
decreased capital by 200,000,000 shares at $10 par value to offset its
accumulated deficit and then increased of capital by 200,000,000 shares at $10
par value. On March 8, 1999, the board of directors decided the effective
dates of the above decrease and increase of capital were April 11 and April
12, 1999, respectively. The issued common stock amounted to NT$4,000,000. The
above decrease and increases were all registered and approved by the
government authorities.
(b) Distribution of earnings
In accordance with the 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 a statutory reserve until such retention
F-40
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 the 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.
(12) Income taxes
The Company's earnings are subject to an income tax rate of 20%. For the
years ended December 31, 1999, 1998 and 1997, income tax expense (benefit) was
as follows:
1999 1998 1997
----------- ------- -------
(Unaudited)
Current income tax expense..................... $ -- $ -- $ 25
Deferred income tax expense (benefit).......... (3,984) 13,053 (5,690)
------- ------- -------
$(3,984) $13,053 $(5,665)
======= ======= =======
The Company's income tax expense (benefit) for the years ended December 31,
1999, 1998 and 1997, 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:
1999 1998 1997
----------- ------- -------
(Unaudited)
Computed "expected" income tax benefit........ $(3,399) $(9,072) $(3,890)
Investment tax credits expired (earned)....... 2,105 (9,406) (4,736)
Unrealized exchange (gain) loss............... 116 -- (5,070)
Other......................................... 523 1,712 45
Valuation allowance........................... (3,329) 29,819 7,986
------- ------- -------
Income tax expense (benefit).................. $(3,984) $13,053 $(5,665)
======= ======= =======
As of December 31, 1999 and 1998, refundable income tax was as follows:
December 31,
----------------
1999 1998
----------- ----
(Unaudited)
Prepaid income tax...................................... $145 $163
Income tax refundable from prior years.................. 353 181
---- ----
Income tax refundable................................... $498 $344
==== ====
F-41
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The temporary differences, tax credits, loss carryforwards and their effects
on deferred income tax assets are as follows as of December 31, 1999 and 1998:
December 31,
-----------------------------------
1999 (Unaudited) 1998
----------------- ----------------
Income Income
tax tax
Amount effect Amount effect
-------- -------- ------- --------
Current assets:
Unrealized loss from inventory
devaluation............................ $ 2,288 $ 459 $ 5,056 $ 1,011
Organization cost deferred for tax
purposes............................... 1,373 275 2,408 482
Employee benefit costs deferred for tax
purposes............................... -- -- 174 35
Unrealized foreign exchange loss........ 7,513 1,506 12,145 2,429
-------- --------
2,240 3,957
Less: valuation allowance............... -- (3,957)
-------- --------
$ 2,240 $ --
======== ========
Noncurrent assets:
Investment tax credits earned........... $ 23,073 $ 23,073 $25,178 $ 25,178
Organization costs deferred for tax
purposes............................... -- -- 1,338 268
Difference in technology fee............ 1,935 387 1,081 216
Tax loss carryforward................... 114,233 22,847 90,787 18,157
-------- --------
46,307 43,819
Less: valuation allowance............... (40,769) (40,141)
-------- --------
$ 5,538 $ 3,678
======== ========
A valuation allowance has been established at December 31, 1999 and 1998 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, 1999 and 1998 will be realized.
The significant factors considered in determining the valuation allowance at
December 31, 1999 and 1998 included the Company's five 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.
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.
F-42
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 1999, 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 (unaudited):
Year of investment Tax credits Year of expiration
------------------ ----------- ------------------
1996....................................... $ 467 2000
1997....................................... 11,129 2000
1997....................................... 1,172 2001
1998....................................... 2,302 2000
1998....................................... 5,868 2001
1998....................................... 1,879 2002
1999....................................... 256 2003
-------
$23,073
=======
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 the price paid for the acquisition of such investments against their
income tax payable.
The Company's initial NT$2,000,000 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 NT$2,000,000 capital expenditure project (phase II
project) can only apply one of the above incentive schemes. The stockholders'
meeting on May 22, 1998 selected to enjoy the 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, 1999, the estimated tax loss carryforwards were as follows (unaudited):
Year loss Amount Year of expiration
--------- -------- ------------------
1996.......................................... $ 16,858 2001
1997.......................................... 31,669 2002
1998.......................................... 44,114 2003
1999.......................................... 21,592 2004
--------
$114,233
========
The tax authorities have examined and assessed the Company's income tax
returns through 1996.
F-43
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(13) Pledged assets
As of December 31, 1999 and 1998, pledged assets were as follows:
December 31,
--------------------
Assets Related secured liabilities 1999 1998
------ --------------------------------------- ----------- --------
(Unaudited)
Time Deposits
Restricted bank
deposits Short-term loans $ -- $ 931
Restricted bank
deposits Documentary draft for export in customs 32 31
Machinery and
equipment Long-term loans 51,378 73,757
Buildings Long-term loans 37,799 38,113
------- --------
$89,209 $112,832
======= ========
(14) Commitments
(a) Operating lease
The Company leases a 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
when the government reappraises the land value. The current rent is NT$18,772
($582) per year.
Future minimum lease payments as of December 31, 1999 under the existing
non-cancelable agreement are (unaudited):
Years Minimum lease payments
----- ----------------------
2000 through 2004.......................... $2,911 ($582 annually)
2005 through 2009.......................... 2,911
2010 through 2014.......................... 2,911
------
$8,733
======
(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, 1999
and 1998, the remaining balance of such payments to be paid under the
agreement amounted was $834 (unaudited).
In addition, the Company pays MEMC an annual royalty based on net sales and
operating income.
(c) Purchase of equipment
As of December 31, 1999 and 1998, the Company had outstanding letters of
credit amounting to approximately $990 (unaudited) and $981, respectively, and
was committed to purchase equipment with a total estimated cost of $4,548
(unaudited) and $4,907, respectively.
(d) Syndicated term loan agreement
The Company entered into certain syndication loan agreements with ABN AMRO
Bank and 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 year ended December 31, 1998 amounted $9. No
commitment fees were paid for the year ended December 31, 1999.
F-44
TAISIL ELECTRONIC MATERIALS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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 are 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:
1999 1998 1997
----------- -------- --------
(Unaudited)
Net loss as reported under ROC GAAP......... $(13,012) $(58,414) $(13,784)
(a) Amortization of capitalized technology
fees..................................... 1,833 1,500 1,500
(b) Income tax effects resulting from
capitalized technology fees.............. (205) (240) (295)
-------- -------- --------
Net loss in accordance with US GAAP......... $(11,384) $(57,154) $(12,579)
======== ======== ========
Stockholders' equity:
December 31,
-------------------
1999 1998
----------- -------
(Unaudited)
Stockholders' equity as reported under ROC GAAP....... $95,192 $77,979
(a) Effect of capitalization of technology fees, net
of amortization.................................... (3,750) (5,583)
(b) Income tax effects resulting from capitalized
technology fees.................................... 108 313
------- -------
Stockholders' equity in accordance with US GAAP....... $91,550 $72,709
======= =======
In addition to the above reconciling items, the capital decrease to offset
the accumulated deficit of $69,943 in-fiscal year 1999 would not be allowed
under US GAAP (see the statement of changes in stockholders' equity for the
year ended December 31, 1999). This does not have an impact on total
stockholders' equity for US GAAP purposes, but it would result in a
reclassification between common stock and accumulated deficit within
stockholders' equity.
F-45