Exhibit 13 to Form 10-K
FIVE YEAR SELECTED FINANCIAL DATA
Dollars in thousands, except share data
Year ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Net sales $ 693,594 $ 758,916 $ 986,673 $ 1,119,500 $ 886,860
Gross margin (10,335) (31,829) 124,759 250,185 223,279
Marketing and administration 63,613 73,515 70,715 79,680 63,893
Research and development 85,019 81,591 64,457 44,313 31,226
Restructuring costs (5,747) 146,324(1) -- -- --
Operating profit (loss) (153,220) (333,259) (10,413) 126,192 128,160
Equity in income (loss) of joint ventures (9,659) (43,496) 5,480 26,716 13,199
Net earnings (loss) (151,481) (316,332) (4,513) 103,388 86,564
Basic earnings (loss) per share (2.43) (7.80) (0.11) 2.50 2.83
Diluted earnings (loss) per share (2.43) (7.80) (0.11) 2.49 2.81
Shares used in basic earnings (loss) per
share computation 62,224,869 40,580,869 41,345,193 41,308,806 30,612,636
Shares used in diluted earnings (loss) per
share computation 62,224,869 40,580,869 41,345,193 41,534,412 30,838,704
Balance Sheet Data:
Working capital 86,306 40,494 38,449 42,805 199,258
Total assets 1,724,581 1,773,714 1,794,424 1,519,472 1,102,167
Long-term debt (including current portion) 886,096 873,680 519,995 304,589 91,451
Stockholders' equity 432,791 399,040 715,754 748,583 642,695
Other Data:
Capital expenditures 49,256 194,610 372,416 590,049 215,359
Equity infusions in joint ventures 12,052 25,533 10,638 14,698 29,904
Employment 6,000 6,300 8,000 7,100 6,600
- ------------------------------------------------------------------------------------------------------------------------
(1) During 1998, the Company recorded restructuring costs totaling $146.3
million to close its Spartanburg, South Carolina facility, to forego
construction of a 200 millimeter wafer facility at its joint venture in
Malaysia, to withdraw from its joint venture in a small diameter wafer
operation in China and to implement a voluntary severance program.
12 . 1999 MEMC Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
- --------------------------------------------------------------------------------
Year ended December 31, 1999 compared with year ended December 31, 1998
Net Sales. Net sales decreased by 9% to $694 million in 1999 from $759 million
in 1998, due to significant declines in the price for silicon wafers partially
offset by a 9% increase in product volumes. Industry average selling prices
continued to decline dramatically, from $1.76 per square inch equivalent in 1997
to $1.51 in 1998, and $1.31 in 1999, due to significant excess capacity in the
silicon wafer industry and continuing pricing pressure from customers. The
increase in product volume in 1999 was principally due to the on-going recovery
in the semiconductor market. Advanced large diameter and epitaxial products
represented 52% of product volume for 1999 compared to 47% for 1998. While both
200 millimeter and epitaxial product volumes grew during 1999, the increase in
this ratio is primarily indicative of customers utilizing 200 millimeter wafers
in preference to smaller diameter wafers in order to obtain the lowest cost per
device. While product volume increased in total by 9% during 1999, 200
millimeter product volume grew by 29%.
Industry average selling prices appear to have stabilized in the second half of
1999. For some products, there is evidence of price increases, especially in the
smaller diameters where supply-demand appears to have reached equilibrium. The
Company expects this trend to continue.
MEMC operates in all major semiconductor-producing regions of the world, with
almost half of the Company's 1999 net sales to customers located outside North
America. Net sales to North America decreased 8% and comprised 52% of 1999 net
sales compared to 51% of 1998 net sales, caused by a fall in prices, partially
offset by increased product volume. Lower prices offset partially by higher
volumes combined to result in a 14% decrease in net sales to Europe, which
constituted 22% of 1999 net sales compared to 23% of 1998 net sales. Net sales
to Japan decreased 25% and comprised 13% of 1999 net sales compared to 16% of
1998 net sales, due to lower volumes and prices. Increases in product volumes,
partially offset by declines in prices, resulted in an increase of 28% in net
sales to Asia Pacific, which comprised 13% of 1999 net sales compared to 10% of
1998 net sales. See Note 17 of Notes to Consolidated Financial Statements
herein.
Gross Margin. Even with the 13% decline in industry average selling prices in
1999, gross margin improved to a negative 1% in 1999 from a negative 4% in 1998.
The improved gross margin is primarily attributable to reduced cost of goods
sold, which declined 11% in 1999 compared to 1998, despite a 9% increase in
product volume. Over $100 million in costs were taken out of the business in
1999, as a result of various cost-cutting initiatives set into motion in 1998,
including the closure of the Spartanburg, South Carolina plant, implementing the
Company's "best practices" worldwide, implementing a plant focus program that
limits the number of wafer diameters manufactured at each site, and working with
our suppliers to create cost reduction opportunities and price reductions.
Marketing and Administration. Marketing and administration expenses decreased
13% and represented 9% of net sales for 1999 compared to 10% for 1998. The
decrease was a result of the Company's continuing efforts to reduce costs.
Research and Development. Research and development costs rose 4% and represented
12% of net sales for 1999 compared to 11% of net sales for 1998. The increase in
research and development costs was attributable to continuing investments in 300
millimeter wafer development and depreciation associated with capital
expenditures made for the 300 millimeter pilot line in St. Peters, Missouri and
the 300 millimeter integrated development line in Utsunomiya, Japan.
1999 MEMC Annual Report . 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Restructuring Costs. During 1999, the Company recorded an adjustment to decrease
the restructuring reserve by $6 million as a result of a change in an accounting
estimate relating primarily to the Company's withdrawal from the Chinese joint
venture, where the amount ultimately required to exit the venture was less than
originally estimated. By the fourth quarter of 1999, the Company began to fully
realize the cost savings related to the 1998 restructuring activities, and does
not anticipate additional incremental savings in future quarters.
Interest Expense. Interest expense increased to $66 million for 1999 from $46
million for 1998. The increase was primarily attributable to increased interest
rates, as the interest rates on the Company's loan agreements with its principal
lender were increased as a result of a debt renegotiation during September 1998,
as described in Liquidity and Capital Resources below, as well as the repricing
of certain debt instruments in 1999. To a lesser extent, the increase in
interest expense was also due to an increased average debt carrying level and
a reduction in capitalized interest in 1999 versus 1998. Total debt was $892
million and $910 million at December 31, 1999 and 1998, respectively.
Income Taxes. The Company realized an income tax benefit at the rate of 31% for
1999, as compared to 24% for 1998. The increase in the rate of benefit is the
result of changes in the composition of worldwide taxable income, offset by an
increase in the valuation allowance on certain deferred tax assets.
Equity in Income (Loss) of Joint Ventures. Equity in loss of joint ventures
improved $33 million to a loss of $10 million in 1999 from a $43 million loss in
1998. POSCO Huls Co., Ltd. (PHC), the Company's 40%-owned, unconsolidated joint
venture in South Korea, contributed losses of $5 million for 1999 compared to
$18 million in losses for 1998. Net sales for PHC increased significantly in
1999 due to a 60% increase in volume, which was partially offset by lower
prices. Taisil Electronic Materials Corporation (Taisil), the Company's 45%-
owned, unconsolidated joint venture in Taiwan, contributed losses of $5 million
for 1999 compared to losses of $25 million for 1998. Net sales for Taisil
increased significantly in 1999 due to an 81% increase in volume, which was
partially offset by lower prices. During 1999, Taisil also reduced its deferred
tax valuation allowance related to certain tax net operating loss carryforwards,
of which the Company's share was $2 million. The higher product volumes at both
PHC and Taisil were primarily attributable to an increase in demand in the
Korean and Taiwanese semiconductor and silicon wafer markets.
Net Loss. The improved gross margin, reduced restructuring costs, and improved
equity in loss of joint ventures, which were partially offset by increased
interest expense, resulted in a net loss of $151 million for 1999 compared to
$316 million for 1998. While the Company expects to continue its significant
performance improvements and cost-cutting efforts, due to continued weak pricing
and on-going over capacity in certain segments of the silicon wafer market,
among other factors, management does not expect the Company to be profitable in
2000.
Year ended December 31, 1998 compared with year ended December 31, 1997
Net Sales. Net sales decreased by 23% to $759 million for 1998 from $987 million
for 1997, due to significant declines in the price for silicon wafers and a 14%
decrease in product volumes somewhat offset by an improved product mix. The
decline in price during 1998 was primarily attributable to significant excess
capacity in the silicon wafer industry and continuing pricing pressure from
customers who experienced reduced profitability or losses due to significant
excess capacity and price erosion in the semiconductor industry. The decrease in
product volume in 1998 was principally due to the weak economic conditions in
the Asia Pacific markets brought on by the Asian financial crisis and the
continuing recession in Japan coupled with semiconductor customers shrinking the
size of their devices (requiring less silicon per device). A concerted effort by
customers to use fewer test/monitor wafers also caused product volumes to
decline in 1998. This marked the first
14 . 1999 MEMC Annual Report
year since 1985 that product volumes for the silicon industry did not increase
year over year. Advanced large diameter and epitaxial products represented 47%
of product volume for 1998 compared to 39% for 1997. While both 200 millimeter
and epitaxial product volumes grew during 1998, the increase in this ratio was
primarily indicative of customers utilizing 200 millimeter wafers in preference
to smaller diameter wafers in order to obtain the lowest cost per device. While
product volume declined in total by 14% during 1998, 200 millimeter product
volume grew by 12%.
MEMC operates in all major semiconductor-producing regions of the world, with
almost half of the Company's 1998 net sales to customers located outside North
America. Net sales to North America decreased 22% and comprised 51% of 1998 net
sales compared to 50% of 1997 net sales, led by a fall in prices and product
volume, partially offset by improved product mix. Lower prices offset by an
improved product mix and higher volumes combined to result in a 10% decrease in
net sales to Europe, which constituted 23% of 1998 net sales compared to 20% of
1997 net sales. Net sales to Japan decreased 23% and comprised 16% of 1998 and
1997 net sales, as lower volumes and prices more than offset an improved product
mix. Declines in product volumes, prices and product mix resulted in a decrease
of 48% in net sales to Asia Pacific, which comprised 10% of 1998 net sales
compared to 14% of 1997 net sales. See Note 17 of Notes to Consolidated
Financial Statements herein.
Gross Margin. The lower volumes experienced in 1998 decreased the capacity
utilization and, coupled with the lower selling prices, caused gross margins to
decrease to a negative 4% for 1998 from the 13% achieved in 1997. Despite the
benefits from the mix improvement and cost-cutting measures that were
implemented during 1998, the volume decreases and price pressures began early in
the year and resulted in negative margins. These cost-cutting initiatives
included short-term plant shutdowns, implementing the Company's "best practices"
worldwide, implementing a plant focus program to limit the number of wafer
diameters manufactured at each site, and working with our suppliers to create
cost reduction opportunities and price reductions. In addition, the Company
reduced its workforce by approximately 1,700 employees, or 21%, compared to
December 31, 1997.
Marketing and Administration. Marketing and administration expenses increased 4%
and represented 10% of net sales for 1998 compared to 7% for 1997. The increase
was predominately attributable to expenses incurred for business systems
redesign in anticipation of implementing SAP worldwide and fees related to
several other initiatives completed during the year.
Research and Development. Research and development costs rose 27% and
represented 11% of net sales for 1998 compared to 7% for 1997. The increase in
research and development costs was attributable to continuing investments in 300
millimeter wafer development and depreciation associated with capital
expenditures made for the 300 millimeter pilot line in St. Peters, Missouri and
the 300 millimeter integrated development line in Utsunomiya, Japan.
Restructuring Costs. During the second quarter of 1998, the Company decided to
close its small diameter wafer facility in Spartanburg, South Carolina and to
withdraw from the Company's joint venture in a small diameter wafer operation in
China. These actions were taken because (1) a number of semiconductor
manufacturers had been running their larger diameter manufacturing lines in
preference to their smaller diameter lines in order to gain production
efficiencies; (2) a number of semiconductor manufacturers recently had
undertaken restructuring initiatives focused on permanently eliminating small
diameter lines; and (3) management believed that small diameter wafer capacity
would exceed demand even after the semiconductor industry began to recover. The
Company also decided to forego construction of a new 200 millimeter wafer
facility at its joint venture in Malaysia. This decision was based upon current
and anticipated excess capacity for 200 millimeter wafers and the significant
price erosion that the Company had experienced for these wafers.
1999 MEMC Annual Report . 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
These actions resulted in a charge to operations of $122 million, comprised of
$81 million non-cash asset impairments/write-offs, $26 million in dismantling
and related costs and $15 million in personnel related costs. The assets for
which an impairment loss has been recorded or which have been written-off were
primarily property, plant and equipment which cannot be sold or used at other
Company facilities. In addition, the Company wrote off architectural design and
site preparation fees as well as costs incurred to develop a computer-integrated
manufacturing system for the Malaysian joint venture.
Personnel costs represent the expected cost of involuntary terminations for
approximately 600 hourly and salaried employees whom the Company did not expect
to relocate elsewhere within the organization. The Company also recorded a $25
million charge for a voluntary severance program for approximately 600 hourly
and salaried U.S. employees. Substantially all this amount was paid to employees
as of December 31, 1998. See Note 5 of Notes to Consolidated Financial
Statements herein.
Interest Expense. Interest expense increased to $46 million for 1998 from $15
million for 1997. The increase in interest expense was primarily attributable to
increased borrowings, and to a lesser extent the completion of projects for
which interest expense could no longer be capitalized. In addition, the interest
rates on the Company's loan agreements with its principal lender were increased
as a result of a debt renegotiation during September 1998, as described in
Liquidity and Capital Resources below. Total debt was $910 million and $633
million at December 31, 1998 and 1997, respectively.
Other, Net. Other, net decreased to $1 million in expense for 1998 from $4
million of income for 1997, primarily due to the sale of the Company's Santa
Clara wafer facility in May 1997 that resulted in a pre-tax gain of $6 million.
Income Taxes. The effective income tax rate was 24% for 1998, as compared to
(27%) for 1997. This fluctuation was the result of changes in the composition of
worldwide taxable income, restructuring costs, non-deductible operating expenses
at the Company's Malaysian and Chinese joint ventures, the establishment of
valuation allowances on certain deferred tax assets in Japan and certain foreign
tax credit elections.
Equity in Income (Loss) of Joint Ventures. Equity in income (loss) of joint
ventures decreased $49 million to a loss of $43 million in 1998 from $6 million
in income in 1997. PHC experienced a 28% decrease in product volume and
significantly lower prices resulting in lower sales throughout 1998. While the
reasons for the decline in prices are similar to those of the Company, product
volume declines were primarily the result of excess capacity within the DRAM
(memory) industry and efforts by Korean DRAM manufacturers to reduce their
production, thereby reducing the worldwide oversupply, and shrink the size of
their devices. For the year, PHC contributed losses of $18 million compared to
$12 million in income for 1997.
Net sales for Taisil decreased slightly due to significantly lower prices, which
were partially offset by a 41% increase in product volumes. The higher product
volumes were primarily attributable to obtaining additional customer
qualifications during 1998. In addition, the Taiwanese semiconductor market,
particularly the foundry market, grew during 1998. During 1998, Taisil also made
adjustments to its deferred tax valuation allowance in recognition of changes in
expected realization of its operating loss carryforwards, of which the Company's
share was $6 million. For the year, Taisil contributed losses of $25 million in
1998 compared to $6 million in losses for 1997.
Net Loss. The decrease in net sales, restructuring costs, higher research and
development costs and interest expense, and the equity in loss of joint ventures
resulted in a net loss of $316 million for 1998 compared to $5 million for 1997.
16 . 1999 MEMC Annual Report
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
At December 31, 1999, the Company had $29 million of cash and cash equivalents
compared to $16 million at December 31, 1998.
Cash flows used in operating activities increased to $103 million for 1999 from
$34 million for 1998. Cash flows used by net loss, after consideration of
restructuring costs, equity in loss of joint ventures, and deferred taxes,
improved $51 million in 1999 compared to 1998. This improvement was more than
offset by an increase in working capital, primarily accounts receivable.
Accounts receivable of $112 million at December 31, 1999 increased $13 million,
or 13%, from $99 million at the end of 1998. This increase was attributable to
the 19% increase in fourth quarter net sales between the two years. Days' sales
outstanding were 56 days at December 31, 1999 compared to 58 days at the end of
1998 based upon annualized fourth quarter sales for the respective years.
Inventories declined $18 million, or 15%, from the prior year to $98 million at
December 31, 1999. This decrease was primarily due to a concerted effort by the
Company to reduce stores and supplies inventories and manage inventory levels,
as well as to fewer manufacturing facilities in 1999. Related inventory reserves
for obsolescence, lower of cost or market issues, or other impairments decreased
$3 million in 1999 to $17 million, consistent with the decreased inventory
levels. Year-end inventories as a percentage of annualized fourth quarter net
sales decreased to 13% at December 31, 1999 from 19% at the end of 1998, as a
result of the increased net sales in the fourth quarter of 1999 relative to
1998, as well as the reduced inventory levels.
The Company's net deferred tax assets increased $69 million to $197 million at
December 31, 1999. Management believes it is more likely than not that, with its
projections of future taxable income and after consideration of the valuation
allowance, the Company will generate sufficient taxable income to realize the
benefits of the net deferred tax assets existing at December 31, 1999. In order
to realize the net deferred tax assets existing at December 31, 1999, the
Company will need to generate future taxable income of approximately $549
million. The Company's net operating loss carryforwards total $647 million, of
which $7 million will expire in 2001; $13 million will expire in 2002; $29
million will expire in 2003; $9 million will expire in 2004; $14 million will
expire in 2012; $322 million will expire in 2018; and $253 million will expire
in 2019. There can be no assurance, however, that the Company will generate
sufficient taxable income to realize the full benefit of the existing net
deferred tax assets.
Accounts payable decreased $27 million or 24% compared to the balance at the end
of 1998 due to a significant reduction in capital expenditures in the fourth
quarter of 1999 compared to the year-ago period.
Cash used in investing activities decreased in the year ended December 31, 1999
to $47 million from $223 million in the year ended December 31, 1998. The
primary reduction in cash used by investing activities was a reduction in
spending on capital projects, as well as reduced equity infusions in joint
ventures.
Capital expenditures decreased $145 million or 75% versus the prior year to $49
million. The 1999 capital expenditures primarily related to the implementation
of SAP worldwide and to maintenance capital. The Company expects to continue to
tightly control capital expenditures in 2000. At December 31, 1999, the Company
had $20 million of committed capital expenditures related to the implementation
of SAP worldwide and various manufacturing and technology projects.
1999 MEMC Annual Report . 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Equity infusions in joint ventures related to Taisil and decreased $13 million
to $12 million for 1999. Although to date Taisil has an accumulated deficit, the
Company does not consider its investment in Taisil to be impaired as of December
31, 1999 based on the following factors: increasing product volumes and capacity
utilization; improving operating results; and positive operating cash flow
generated in 1999.
Cash flows provided by financing activities decreased to $164 million in the
year ended December 31, 1999 from $242 million in the year ended December 31,
1998. The 1999 financing activities consisted primarily of stock offerings by
the Company. In 1998, the financing activities consisted primarily of the
issuance of debt.
At December 31, 1999, the Company maintained $956 million of committed long-term
loan agreements, of which $886 million was outstanding. The Company also
maintained $57 million of short-term lines of credit, of which $6 million was
outstanding at year-end. The Company's weighted average cost of borrowing was
7.8% at December 31, 1999 and 1998. Total debt outstanding decreased to $892
million at December 31, 1999 from $910 million at December 31, 1998. The total
debt to total capital ratio at December 31, 1999 was 65% as compared to 67% at
December 31, 1998. In September 1998, VEBA AG and its affiliates (VEBA) agreed
to extend until 2001 all of the Company's outstanding debt with VEBA maturing
prior to January 1, 2001 (but only in the event the Company has used its best
efforts to obtain replacement financing on equivalent terms). As part of this
agreement, the Company agreed to increase the interest rates payable on the
Company's outstanding debt with VEBA to reflect interest rate spreads applicable
to an average industrial borrower at a specified credit rating. Interest rates
on the U.S. Dollar and Japanese Yen based loans outstanding with VEBA range from
3.5% to 11.0%. All outstanding debt with VEBA maturing prior to January 1, 2001
which is extended at maturity will be repriced based upon then-current interest
rates applicable to an average industrial borrower at a specified credit rating.
On September 27, 1999, VEBA AG, the majority shareholder and principal lender of
the Company, announced a merger with VIAG AG. The VEBA/VIAG group (the Group)
has stated that its core businesses will be energy and specialty chemicals. The
new Group's stated intent is to systematically and optimally divest certain non-
core businesses, including the Company. The Company intends to work closely with
the Group to effectuate an orderly divestiture process that preserves and
optimizes the value of the Company.
The silicon wafer industry is highly capital intensive. The Company's capital
needs depend on numerous factors, including its profitability and investment in
capital expenditures and research and development. Management believes that the
liquidity provided by existing cash balances and credit facilities, together
with cash generated from operations, will be sufficient to satisfy commitments
for capital expenditures and operating cash requirements through 2000. If,
however, the Company's future financial performance fails to meet management's
current expectations, then the Company may require additional financing in order
to satisfy planned capital expenditures and operating cash requirements for
2000. There can be no assurance that such financing will be available from VEBA
or other sources on terms acceptable to the Company.
Historically, the Company has funded its operations primarily through loans from
VEBA, internally generated funds, and issuances of common stock. To a lesser
extent, the Company has raised funds by borrowing money from commercial banks.
The Company is not required to make any principal repayments on its existing
credit facilities with VEBA until 2001. Under these credit facilities, the
Company cannot pledge any of its assets to secure additional financing without
the consent of VEBA. The Company is currently engaged in discussions with its
financial advisors and VEBA AG regarding additional sources of capital.
18 . 1999 MEMC Annual Report
Year 2000
- --------------------------------------------------------------------------------
In the fourth quarter of 1999, the Company completed its Year 2000 project.
Since the beginning of 2000, the Company has experienced no material Year 2000
issues with its computer systems, applications, or equipment. Likewise, the
Company has experienced no material problems with its strategic suppliers and
equipment vendors. The Company's total incremental Year 2000 expenditures were
approximately $4 million, as compared to previous estimates in the range of
$5 - $7 million.
Euro Conversion
- --------------------------------------------------------------------------------
On January 1, 1999, eleven of the fifteen member countries of the European union
established fixed conversion rates between their existing sovereign currencies
and the Euro. The participating countries have agreed to adopt the Euro as their
common legal currency as of that date while still utilizing their local currency
until January 1, 2002.
The Company is assessing the potential impact that may result from the Euro
conversion. In addition to tax accounting considerations, the Company is also
assessing the potential impact from the Euro conversion in a number of other
areas, including the technical challenges to adapt information technology and
other systems to accommodate Euro-denominated transactions; the competitive
impact of cross-border price transparency, which may make it more difficult for
businesses to charge different prices for the same products on a country-by-
country basis; the impact on currency exchange costs and currency exchange rate
risk; and the impact on existing contracts. While the Company will continue to
assess the impact of the introduction of the Euro, based on currently available
information, management does not believe that the introduction of the Euro will
have a material adverse effect on the Company's financial condition or results
of operations.
Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires the recognition of
all derivatives as assets or liabilities within the balance sheet, and requires
both the derivatives and the underlying exposure to be recorded at fair value.
Any gain or loss resulting from changes in fair value will be recorded as part
of the results of operations, or as a component of comprehensive income or loss,
depending upon the intended use of the derivative. In July 1999, the Financial
Accounting Standards Board changed the effective date of SFAS No. 133 to all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company does
not believe that the implementation of this Statement will have a material
adverse effect on its financial condition or results of operations.
Risk Factors
- --------------------------------------------------------------------------------
This report contains "forward-looking" statements within the meaning of the
Securities Litigation Reform Act of 1995, including those concerning: improved
financial performance in 2000 versus 1999; stabilization and improvements in
demand for and average selling prices of silicon wafers; lack of major capacity
expansions in 2000; strengthening of the Company's balance sheet through
operations; liquidity through 2000; expectation of a continuation of significant
performance improvements and cost-cutting efforts; tight control of capital
expenditures in 2000; the Company's expectations concerning its lack of
profitability in 2000; the Company's ability to generate future taxable income
as it relates to the realization of the net deferred tax asset; utilization of
the restructuring reserve; ability to meet aggressive objectives set for 2000;
impact of the introduction of the Euro; the impact of the implementation of SFAS
No. 133; impact of an adverse change in exchange rates; expectation that the
Company will not pay dividends in the foreseeable future; and the Company's
intention to work closely with the VEBA/VIAG group to effectuate an orderly
divestiture process that preserves and optimizes the value of the Company.
Such statements involve certain risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements.
Potential risks and uncertainties include such factors as: market demand for
silicon wafers; utilization of manufactur-
1999 MEMC Annual Report . 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ing capacity; ability of the Company to reduce manufacturing costs; demand for
semiconductors generally; changes in the pricing environment; general economic
conditions; actions by competitors, customers, and suppliers; the accuracy of
management's assumptions regarding the dismantling and sale of the Spartanburg
facility; technological changes; changes in product specifications and
manufacturing processes; impact of the introduction of the Euro; changes in
financial market conditions; changes in interest and exchange rates; the actions
of the VEBA/VIAG group; and other risks described in the Company's filings with
the Securities and Exchange Commission, including those risk factors described
in "Risk Factors" in the Company's Form 10-K for the year ended December 31,
1999.
Undue reliance should not be placed on these forward looking statements, which
speak only as of the date that they are made. The Company does not undertake any
obligation to release publicly any revisions to these statements to reflect
later events or circumstances or to reflect the occurrence of unanticipated
events.
Market Risk
- --------------------------------------------------------------------------------
The Company is exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. To mitigate these risks, the Company
utilizes currency forward contracts. The Company does not use derivative
financial instruments for speculative or trading purposes. All of the potential
changes noted below are based on sensitivity analyses performed on the Company's
financial positions at December 31, 1999 and 1998. Actual results may differ
materially.
The Company generally hedges transactional currency risks with currency forward
contracts. Gains and losses on these foreign currency exposures would generally
be offset by corresponding losses and gains on the related hedging instruments,
resulting in negligible net exposure to the Company.
Although the Company's debt obligations are primarily of a fixed-rate nature,
fluctuations in interest rates could significantly affect interest expense as
obligations are refinanced or extended at maturity and repriced based upon then-
current interest rates. An adverse change (defined as a 100 basis point change)
in interest rates would result in a decline in income before taxes of less than
$9 million as of the end of both 1999 and 1998.
A substantial majority of the Company's revenue and capital spending is
transacted in U.S. Dollars. However, the Company does enter into these
transactions in other currencies, primarily the Japanese Yen, the Italian Lira,
the Euro and certain other Asian and European currencies. To protect against
reductions in value and volatility of future cash flows caused by changes in
foreign exchange rates, the Company has established transaction based hedging
programs. The Company's hedging programs reduce, but do not always eliminate,
the impact of foreign currency exchange rate movements. An adverse change
(defined as 20 percent in certain Asian currencies and 10 percent in all other
currencies) in exchange rates would result in a decline in income before taxes
of less than $2 million as of the end of 1999, and a decline in other
comprehensive income of less than $20 million as of the end of 1999 ($22 million
as of the end of 1998). This calculation assumes that each exchange rate would
change in the same direction relative to the U.S. Dollar. In addition to the
direct effects of changes in exchange rates, such changes typically affect the
volume of sales or the foreign currency sales price as competitor's products
become more or less attractive. The Company's sensitivity analysis of the
effects of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency selling prices.
20 . 1999 MEMC Annual Report
CONSOLIDATED STATEMENTS OF OPERATIONS
Dollars in thousands, except share data
Year ended December 31, 1999 199 1997
- --------------------------------------------------------------------------------------------------------------------
Net sales $ 693,594 $ 758,916 $ 986,673
Cost of goods sold 703,929 790,745 861,914
- --------------------------------------------------------------------------------------------------------------------
Gross margin (10,335) (31,829) 124,759
Operating expenses:
Marketing and administration 63,613 73,515 70,715
Research and development 85,019 81,591 64,457
Restructuring costs (5,747) 146,324 --
- --------------------------------------------------------------------------------------------------------------------
Operating loss (153,220) (333,259) (10,413)
- --------------------------------------------------------------------------------------------------------------------
Nonoperating (income) expense:
Interest expense 66,054) 45,832 14,743
Interest income (1,986) (2,291) (2,570)
Royalty income (6,112) (4,628) (8,186)
Other, net 1,472 1,043 (4,070)
- --------------------------------------------------------------------------------------------------------------------
Total nonoperating (income) expense 59,428 39,956 (83)
- --------------------------------------------------------------------------------------------------------------------
Loss before income taxes, equity in income
(loss) of joint ventures and minority interests (212,648) (373,215) (10,330)
- --------------------------------------------------------------------------------------------------------------------
Income taxes (65,921) (89,394) 2,769
- --------------------------------------------------------------------------------------------------------------------
Loss before equity in income (loss) of joint
ventures and minority interests (146,727) (283,821) (13,099)
Equity in income (loss) of joint ventures (9,659) (43,496) 5,480
Minority interests 4,905 10,985 3,106
- --------------------------------------------------------------------------------------------------------------------
Net loss $ (151,481) $ (316,332) $ (4,513)
- --------------------------------------------------------------------------------------------------------------------
Basic loss per share $ (2.43) $ (7.80) $ (0.11)
Diluted loss per share $ (2.43) $ (7.80) $ (0.11)
- --------------------------------------------------------------------------------------------------------------------
Weighted average shares used in computing basic loss per share 62,224,869 40,580,869 41,345,193
- --------------------------------------------------------------------------------------------------------------------
Weighted average shares used in computing diluted loss per share 62,224,869 40,580,869 41,345,193
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
1999 MEMC Annual Report . 21
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except share data
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 28,571 $ 16,168
Accounts receivable, less allowance for doubtful accounts of
$2,409 and $2,853 in 1999 and 1998, respectively 111,559 98,528
Income taxes receivable 9,237 10,161
Inventories 98,419 115,927
Deferred tax assets, net 12,905 23,129
Prepaid and other current assets 15,229 35,225
- --------------------------------------------------------------------------------------------------------------
Total current assets 275,920 299,138
Property, plant and equipment, net 1,090,358 1,188,832
Investments in joint ventures 97,254 94,610
Excess of cost over net assets acquired, net of accumulated amortization of
$6,466 and $5,128 in 1999 and 1998, respectively 47,058 48,396
Deferred tax asset, net 183,902 104,650
Other assets 30,089 38,088
- --------------------------------------------------------------------------------------------------------------
Total assets $1,724,581 $1,773,714
- --------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 22,163 $ 38,644
Accounts payable 85,704 112,581
Accrued liabilities 29,795 35,404
Customer deposits 16,556 17,639
Provision for restructuring costs 12,839 37,299
Accrued wages and salaries 22,557 17,077
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 189,614 258,644
Long-term debt, less current portion 869,759 871,163
Pension and similar liabilities 95,731 92,466
Customer deposits 48,456 59,033
Other liabilities 44,893 45,126
- --------------------------------------------------------------------------------------------------------------
Total liabilities 1,248,453 1,326,432
- --------------------------------------------------------------------------------------------------------------
Minority interests 43,337 48,242
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 shares authorized, none issued
or outstanding in 1999 or 1998 -- --
Common stock, $.01 par value, 200,000,000 shares authorized, 70,463,505
and 41,436,421 issued in 1999 and 1998, respectively 705 414
Additional paid-in capital 770,476 574,188
Accumulated deficit (299,317) (147,836)
Accumulated other comprehensive loss (22,053) (10,581)
Unearned restricted stock awards -- (125)
Treasury stock, at cost: 929,205 in 1999 and 1998 (17,020) (17,020)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 432,791 399,040
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,724,581 $1,773,714
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
22 . 1999 MEMC Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(151,481) $(316,332) $ (4,513)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 159,081 155,874 126,913
Minority interests (4,905) (10,985) (3,106)
Equity in (income) loss of joint ventures 9,659 43,496 (5,480)
Restructuring costs (5,747) 104,704 --
(Gain) loss on sale of property, plant and equipment 981 6,916 (4,766)
Deferred compensation earned (601) 299 596
Changes in assets and liabilities:
Accounts receivable (13,268) 61,836 (36,051)
Income taxes receivable 516 4,655 (8,794)
Inventories 12,164 28,461 (46,445)
Prepaid and other current assets 8,636 (1,203) 9,487
Deferred taxes (67,692) (98,074) (17,783)
Accounts payable (20,349) (38,833) 3,976
Accrued liabilities (16,502) (7,792) 8,301
Customer deposits (11,660) (348) 17,806
Accrued wages and salaries 4,621 (4,209) (3,797)
Other, net (6,645) 37,680 (6,915)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (103,192) (33,855) 29,429
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (49,256) (194,610) (372,416)
Proceeds from sale of property, plant and equipment 4,753 5,730 21,512
Equity infusions in joint ventures (12,052) (25,533) (10,638)
Dividend received from unconsolidated joint venture -- -- 11,263
Notes receivable from affiliates 9,664 (8,642) 212
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (46,891) (223,055) (350,067)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net short-term borrowings (26,463) (8,843) 87,420
Proceeds from issuance of long-term debt 276,692 515,313 248,553
Principal payments on long-term debt (283,620) (248,936) (18,693)
Repurchase of common stock -- (15,692) --
Proceeds from issuance of common stock 197,271 -- --
Other -- (129) 385
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 163,880 241,713 317,665
- --------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (1,394) 1,312 (2,070)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 12,403 (13,885) (5,043)
Cash and cash equivalents at beginning of year 16,168 30,053 35,096
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 28,571 $ 16,168 $ 30,053
- --------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest payments, net of amount capitalized $ 64,076 $ 48,179 $ 21,204
Income taxes paid 4,816 9,794 18,020
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
1999 MEMC Annual Report . 23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Dollars in thousands, except share data
Common Stock
------------ Retained Accumulated Unearned
Number Additional Earnings Other Restricted
of Shares Par Paid-in (Accumulated Comprehensive Stock Treasury
Issued Value Capital Deficit) Income (Loss) Awards Stock Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 41,470,971 $415 $573,351 $ 173,009 $ 4,353 $(1,217) $ (1,328) $ 748,583
---------
Comprehensive loss:
Net loss -- -- -- (4,513) -- -- -- (4,513)
Net translation adjustment -- -- -- -- (30,074) -- -- (30,074)
---------
Comprehensive loss (34,587)
---------
Stock plans, net (30,602) (1) 966 -- -- 197 -- 1,162
---------
Deferred compensation earned -- -- -- -- -- 596 -- 596
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 41,440,369 414 574,317 168,496 (25,721) (424) (1,328) 715,754
---------
Comprehensive loss:
Net loss -- -- -- (316,332) -- -- -- (316,332)
Net translation adjustment -- -- -- -- 17,682 -- -- 17,682
Minimum pension liability
(net of $1,625 tax) -- -- -- -- (2,542) -- -- (2,542)
---------
Comprehensive loss (301,192)
---------
Stock plans, net (3,948) -- (129) -- -- -- -- (129)
---------
Deferred compensation earned -- -- -- -- -- 299 -- 299
---------
Repurchase of common stock -- -- -- -- -- -- (15,692) (15,692)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 41,436,421 414 574,188 (147,836) (10,581) (125) (17,020) 399,040
---------
Comprehensive loss:
Net loss -- -- -- (151,481) -- -- -- (151,481)
Net translation adjustment -- -- -- -- (12,456) -- -- (12,456)
Minimum pension liability
(net of $629 tax) -- -- -- -- 984 -- -- 984
---------
Comprehensive loss -- -- -- -- -- -- -- (162,953)
---------
Stock plans, net (492) -- 354 -- -- -- -- 354
---------
Deferred compensation earned -- -- (726) -- -- 125 -- (601)
---------
Issuance of common stock 29,027,576 291 196,660 -- -- -- -- 196,951
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 70,463,505 $705 $770,476 $(299,317) $(22,053) $ -- $(17,020) $ 432,791
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
24 . 1999 MEMC Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except share data
1 . Nature of Operations
- --------------------------------------------------------------------------------
MEMC Electronic Materials, Inc. and subsidiaries (the Company) is a leading
global producer of electronic grade silicon wafers for the semiconductor
industry. The Company has production facilities directly or through joint
ventures in Italy, Japan, Malaysia, South Korea, Taiwan and the United States.
The Company's customers are located throughout the world.
2 . Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
(a) Basis of Presentation
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of MEMC Electronic
Materials, Inc. and its wholly and majority-owned subsidiaries. Investments of
less than 50% in two joint venture companies are accounted for using the equity
method. All significant intercompany transactions have been eliminated.
(c) Cash Equivalents
Cash equivalents consist of cash in banks, principally overnight investments and
short-term time deposits, with original maturities of three months or less. Cash
equivalents at December 31, 1999 include $3,700 of cash restricted by terms of
two annually renewable letter of credit agreements.
(d) Inventories
Inventories are stated at the lower of cost or market. Raw materials and
supplies inventories are valued using the first-in, first-out method. Goods in
process and finished goods inventory values are based upon standard costs which
approximate average costs.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
principally using the straight-line method over estimated service lives as
follows:
Years
- --------------------------------------------------------------------------------
Land improvements 6-15
Buildings and building improvements 10-30
Machinery and equipment 3-12
- --------------------------------------------------------------------------------
The Company capitalizes interest costs as part of the cost of constructing
facilities and equipment. Interest costs of $1,099, $5,521 and $15,968 were
capitalized in 1999, 1998 and 1997, respectively.
(f) Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired (goodwill) is amortized on a straight-
line basis over the periods estimated to be benefited, not exceeding 40 years.
Excess of cost over net assets acquired is reviewed for impairment whenever
events and changes in business circumstances indicate the carrying value of the
goodwill and related acquired assets that gave rise to the goodwill may not be
recoverable. Impairment losses are recognized if expected future cash flows of
the related assets are less than their carrying values. There is no indication
of impairment of excess of cost over net assets acquired at December 31, 1999 or
1998.
(g) Computer Software Developed or Obtained for Internal Use
Costs related to the development or purchase of internal-use software are
capitalized and amortized over the estimated useful life of the software. Costs
related to the preliminary project stage and the post-implementation/
operations stage of an internal-use computer software development project are
expensed as incurred.
(h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the
1999 MEMC Annual Report . 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. There is no indication of
impairment of property, plant and equipment at December 31, 1999 or 1998.
(i) Impairment of Investments in Joint Ventures
Impairment of investments in joint ventures is measured by comparing the
carrying amount of the asset to future net cash flows expected to be generated
by the asset. In addition, the level of commitment of the joint ventures'
shareholders, the silicon wafer markets serviced by the joint ventures, and the
level of customer qualifications at the joint ventures are also considered in
assessing the impairment of the Company's investments in joint ventures. There
is no indication of impairment of these investments at December 31, 1999 or
1998.
(j) Revenue Recognition
Revenues are recognized when products are shipped.
(k) Derivative Financial Instruments
The Company enters into forward exchange contracts to manage foreign currency
exchange risk relating to current trade receivables with its foreign
subsidiaries and current trade receivables with its customers denominated in
foreign currencies (primarily Japanese Yen, Italian Lira, and Euro). The purpose
of the Company's foreign currency hedging activities is to protect the Company
from the risk that the eventual dollar net cash flows resulting from foreign
currency transactions will be adversely affected by changes in exchange rates.
The Company does not hold or issue financial instruments for trading purposes.
The Company's forward exchange contracts are accounted for as hedges and,
accordingly, gains and losses on those contracts are deferred and recognized at
the time of settlement of the related receivables. Deferred gains and losses are
included on a net basis in the consolidated balance sheets as either other
assets or other liabilities. Upon termination, gains and losses are included in
the consolidated statements of operations as other income or expense. If a
forward exchange contract is designated as a hedge but is no longer effective,
it is marked to market and included in other income or expense in the
consolidated statements of operations. A payment or receipt arising from the
termination of a forward exchange contract that is effective as a hedge is
included in other income or expense in the consolidated statements of
operations.
(l) Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries whose functional currency is
other than the U.S. Dollar are translated to U.S. Dollars using the exchange
rates in effect at the balance sheet date. Results of operations are translated
using average rates during the period. Adjustments resulting from the
translation process are included as a component of accumulated other
comprehensive income (loss).
(m) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to material differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating losses and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings in the period
that includes the enactment date. A valuation allowance has been established for
deferred tax assets that the Company believes may not be realized.
The Company provides for U.S. income taxes on earnings of the Company's
consolidated non-U.S. subsidiaries that are planned to be remitted. No such
provision is made for the remaining unremitted earnings, as the retention of
such earnings is considered essential for continuing operations, or the
additional taxes are considered to be minimal based upon available foreign tax
credits.
(n) Stock-Based Compensation
The Company measures its compensation cost of equity instruments issued under
employee compensation plans under the provisions of Accounting Principles Board
Opinion No. 25 (Opinion 25) and related Interpretations. Compensation expense
related to restricted stock awards is recognized over the applicable vesting
periods, and the unamortized portion of deferred compensation is reflected as a
separate component of stockholders' equity. The Company only issues equity
instruments to employees and non-employee directors.
26 . 1999 MEMC Annual Report
(o) Comprehensive Loss Reclassification Adjustment
The Company's decision to forego construction of a new 200 millimeter facility
at its joint venture in Malaysia and to withdraw from its small diameter joint
venture in China resulted in a reclassification adjustment to comprehensive loss
in 1998 of approximately $9,500.
(p) Contingencies
Contingent liabilities are disclosed when management believes they are material
to the Company's financial position. There are no such known contingent
liabilities at December 31, 1999 or 1998.
3 . Fair Value of Financial Instruments
- --------------------------------------------------------------------------------
The carrying amount of the Company's cash, accounts receivable, income taxes
receivable, short-term borrowings, accounts payable and accrued liabilities
approximates fair value due to the short maturity of these instruments.
Consequently, such instruments are not included in the table below which
provides information regarding the estimated fair values of other financial
instruments, both on and off balance sheet, as follows:
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------
Dollars in thousands Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------
Long-term debt $886,096 $866,507 $873,680 $841,244
- ----------------------------------------------------------------------------------------------
Notional Estimated Notional Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------
Off balance sheet financial instruments:
Currency forward contracts $ 24,519 $ (847) $ 43,480 $ 957
- ----------------------------------------------------------------------------------------------
The fair value of each long-term debt facility is based upon the amount of
future cash flows associated with each instrument discounted at the Company's
current borrowing rate for similar debt instruments of comparable terms.
The Company has entered into foreign currency contracts with VEBA AG and its
affiliates (VEBA) to manage foreign currency exchange risk relating to current
trade sales with its foreign subsidiaries and current trade sales with its
customers denominated in foreign currencies (primarily Japanese Yen, Italian
Lira, and Euro), and relating to foreign currency denominated intercompany
loans. The Company believes its hedging arrangements with VEBA allow for
transactions on a basis that is comparable to terms available from unrelated
third-party financial intermediaries.
The fair value of the currency forward contracts is measured by the amount that
would have been paid to liquidate and repurchase all open contracts. Deferred
losses for intercompany loans totaled $2,116 and $2,897 at December 31, 1999 and
1998, respectively.
4 . Concentration of Credit Risk
- --------------------------------------------------------------------------------
The Company sells products to customers in the semiconductor industry which are
located in various geographic regions including the United States, Europe, Japan
and Asia Pacific. The primary customers in this industry are well capitalized
and the concentration of credit risk is considered minimal due to the Company's
customer base. Sales to the Company's largest customer were 17.8%, 20.3% and
20.0% of net sales in 1999, 1998 and 1997, respectively. No other customer
constituted 10% or more of net sales in 1999, 1998 or 1997.
5 . Restructuring Costs
- --------------------------------------------------------------------------------
During the second quarter of 1998, the Company decided to close its small
diameter wafer facility in Spartanburg, South Carolina and to withdraw from its
60%-owned joint venture in a small diameter wafer operation in China. These
actions were taken because (1) a number of semiconductor manufacturers had been
running their larger diameter manufacturing lines in preference to their smaller
diameter lines in order to gain production efficiencies; (2) a number of
semiconductor manufacturers recently had undertaken restructuring initiatives
focused on permanently eliminating small diameter lines; and (3) management
believed that small diameter wafer capacity would exceed demand even after the
semiconductor industry began to recover. The Company also decided to forego
construction of a new 200 millimeter wafer facility at its 75%-owned joint
venture in Malaysia. This decision was based upon current and anticipated excess
capacity for 200 millimeter wafers and the significant price erosion that the
Company had experienced for these wafers.
In 1998, the Company recorded a charge to operations of $121,670 (of which
$81,325 was non-cash) related to the above actions. In 1999, the Company
recorded an adjustment to reduce the restructuring reserve by $5,747 as a result
of a change in an accounting estimate relating primarily to the Company's
withdrawal from the Chinese joint venture, as the amount ultimately required to
exit the venture was less than the original estimate.
1999 MEMC Annual Report . 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999, the Company made certain reclassifications to the
components of its restructuring reserve. The reclassifications were principally
attributable to anticipated costs related to the closure of the Spartanburg,
South Carolina facility. In total, the Company believes the remaining
restructuring reserve is adequate for the estimated costs remaining to exit this
facility.
Restructuring activity since the provision for restructuring was recorded is as
follows:
Balance at Balance at
December 31, Amount 1999 December 31,
1998 Adjustment Utilized Relcassification 1999
- ---------------------------------------------------------------------------------------------------------------------
Dollars in thousands
Asset impairment/write-off:
Spartanburg property,
plant and equipment $ -- $ -- $ -- $ -- $ --
Malaysian joint venture assets 2,805 -- 2,275 -- 530
Chinese joint venture assets 4,158 (5,747) (1,949) -- 360
Other infrastructure -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total 6,963 (5,747) 326 -- 890
- ---------------------------------------------------------------------------------------------------------------------
Dismantling and related costs:
Dismantling costs 10,306 -- 7,175 4,129 7,260
Costs incurred by
equipment supplier -- -- -- -- --
Environmental costs 3,489 -- 2,380 (709) 400
Operating leases 3,000 -- 416 (1,584) 1,000
Other 3,000 -- 136 -- 2,864
- ---------------------------------------------------------------------------------------------------------------------
Total 19,795 10,107 1,836 11,524
- ---------------------------------------------------------------------------------------------------------------------
Personnel costs 10,541 -- 8,280 (1,836) 425
- ---------------------------------------------------------------------------------------------------------------------
Total restructuring costs $37,299 $(5,747) $18,713 $ -- $12,839
- ---------------------------------------------------------------------------------------------------------------------
Balance at
Initial Amount December 31,
Provision Utilized 1998
- -----------------------------------------------------------------------------------------------
Dollars in thousands
Asset impairment/write-off:
Spartanburg property, plant and equipment $ 36,300 $36,300 $ --
Malaysian joint venture assets 28,000 25,195 2,805
Chinese joint venture assets 13,800 9,642 4,158
Other infrastructure 3,225 3,225 --
- -----------------------------------------------------------------------------------------------
Total 81,325 74,362 6,963
- -----------------------------------------------------------------------------------------------
Dismantling and related costs:
Dismantling costs 11,345 1,039 10,306
Costs incurred by equipment supplier 5,000 5,000 --
Environmental costs 3,500 11 3,489
Operating leases 3,000 -- 3,000
Other 3,000 -- 3,000
- -----------------------------------------------------------------------------------------------
Total 25,845 6,050 19,795
- -----------------------------------------------------------------------------------------------
Personnel costs 14,500 3,959 10,541
- -----------------------------------------------------------------------------------------------
Total restructuring costs $121,670 $84,371 $37,299
- -----------------------------------------------------------------------------------------------
28 . 1999 MEMC Annual Report
In addition to the restructuring activities discussed above, in 1998 the Company
recorded a $24,654 charge for a voluntary severance program for approximately
600 hourly and salaried U.S. employees. Substantially all of this amount was
paid to participants as of December 31, 1998.
Of the $12,839 restructuring reserve at December 31, 1999, substantially all is
expected to be expended by 2000 year-end and relates primarily to remaining
dismantling costs associated with the Spartanburg facility.
6 . Inventories
- --------------------------------------------------------------------------------
Inventories consist of the following:
December 31, 1999 1998
- --------------------------------------------------------------------------------
Dollars in thousands
Raw materials and supplies $49,537 $59,722
Goods in process 23,493 33,612
Finished goods 25,389 22,593
- --------------------------------------------------------------------------------
$98,419 $115,927
- --------------------------------------------------------------------------------
7 . Property, Plant and Equipment
- --------------------------------------------------------------------------------
Property, plant and equipment consist of the following:
December 31, 1999 1998
- --------------------------------------------------------------------------------
Dollars in thousands
Land and land improvements $ 14,529 $ 14,404
Buildings and building improvements 507,340 484,820
Machinery and equipment 1,151,196 1,110,195
- --------------------------------------------------------------------------------
1,673,065 1,609,419
Less accumulated depreciation 703,252 569,327
- --------------------------------------------------------------------------------
969,813 1,040,092
Construction in progress 120,545 148,740
- --------------------------------------------------------------------------------
$1,090,358 $1,188,832
- --------------------------------------------------------------------------------
8 . Investments in Joint Ventures
The Company has a 40% interest in POSCO Huls Co. Ltd. (PHC), a company formed to
manufacture and sell silicon wafers in South Korea, and a 45% interest in Taisil
Electronic Materials Corporation (Taisil), a company formed to manufacture and
sell silicon wafers in Taiwan.
During 1999, 1998 and 1997, the Company earned $6,112, $4,628 and $8,186,
respectively, from these unconsolidated joint ventures under royalty agreements.
Sales by these unconsolidated joint ventures of intermediate and finished
product to the Company totaled $37,927, $34,479 and $32,313 in 1999, 1998 and
1997, respectively.
The Company provides Taisil with debt guarantees totaling $61,336. At December
31, 1999, Taisil had $49,100 in standby letters of credit and borrowings
outstanding against these guarantees.
1999 MEMC Annual Report . 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the results of operations for 1999, 1998 and 1997, and financial
position as of December 31, 1999 and 1998 of the Company's unconsolidated joint
ventures follows:
December 31, 1999 1998 1997
- -----------------------------------------------------------------
Dollars in thousands
Total:
Net sales $252,402 $ 179,643 $277,492
Gross margin 20,273 (33,668) 54,120
Net earnings (loss) (22,724) (101,596) 15,274
- -----------------------------------------------------------------
The Company's share--
Net earnings (loss) $ (9,659) $ (43,496) $ 5,480
- -----------------------------------------------------------------
Current assets $167,843 $ 169,532
Noncurrent assets 423,390 488,634
- -----------------------------------------------------------------
Total assets 591,233 658,166
- -----------------------------------------------------------------
Current liabilities 162,470 165,157
Noncurrent liabilities 194,356 266,352
- -----------------------------------------------------------------
Total liabilities 356,826 431,509
Interests of others 137,153 132,047
- -----------------------------------------------------------------
The Company's investments $ 97,254 $ 94,610
- -----------------------------------------------------------------
The Company's share of the accumulated deficit of unconsolidated joint ventures
was approximately $35,940 and $27,406 at December 31, 1999 and 1998,
respectively.
The Company's unconsolidated joint ventures have net sales denominated in or
based on the U.S. Dollar and manufacturing expenses primarily denominated in the
U.S. Dollar, Korean Won and New Taiwanese Dollar. PHC also has significant debt
denominated in the U.S. Dollar and Korean Won. Likewise, Taisil has significant
debt denominated in the U.S. Dollar and New Taiwanese Dollar. PHC and Taisil use
the U.S. Dollar as their functional currency for U.S. GAAP purposes and do not
hedge net Korean Won or New Taiwanese Dollar exposures.
9 . Short-Term Borrowing Agreements and Lines of Credit
- --------------------------------------------------------------------------------
Interest expense related to short-term borrowings with an affiliate was $4,195
and $1,667 in 1998 and 1997, respectively.
The Company has unsecured borrowings from banks of approximately $6,000 at
December 31, 1999, under approximately $57,000 of short-term loan agreements
which bear interest at various rates ranging from 0.3% to 1.5% and are renewable
annually. The interest rate on the borrowings is negotiated at the time of the
borrowings.
Commitment fees of 1/4 of 1% are paid on the unused portion of the committed
lines of credit. The Company's weighted average interest rate on short-term
borrowings was 0.7% and 3.3% at December 31, 1999 and 1998, respectively, and
was favorably impacted by interest rates in Japan.
30 . 1999 MEMC Annual Report
10 . Long-Term Debt
- --------------------------------------------------------------------------------
Long-term debt consists of the following:
December 31, 1999 1998
- ------------------------------------------------------------------------------------------
Dollars in thousands
Owed to affiliates:
Notes with interest payable semiannually at rates ranging from
3.5% to 11.0%, due in 2001 $329,310 $342,230
Notes with interest payable semiannually at rates ranging from
5.3% to 9.7%, due in 2002 109,770 108,610
Notes with interest payable semiannually at rates ranging from
8.7% to 8.8%, due in 2003 90,000 90,000
Notes with interest payable semiannually at rates ranging from
8.8% to 9.7%, due in 2004 125,000 125,000
Notes with interest payable semiannually at 9.6%, due in 2005 75,000 75,000
- ------------------------------------------------------------------------------------------
Total owed to affiliates 729,080 740,840
- ------------------------------------------------------------------------------------------
Owed to nonaffiliates:
Notes with interest payable semiannually at rates ranging from
1.7% to 2.2%, due in 2001 19,540 17,220
Notes with interest payable semiannually at rates ranging from
1.6% to 1.7%, due in 2002 48,850 43,050
Notes with interest payable semiannually at rates ranging
from 1.5% to 8.9%, due in 2000 through 2017 88,626 72,570
- ------------------------------------------------------------------------------------------
Total owed to nonaffiliates 157,016 132,840
- ------------------------------------------------------------------------------------------
Total long-term debt 886,096 873,680
Less current portion 16,337 2,517
- ------------------------------------------------------------------------------------------
$869,759 $871,163
- ------------------------------------------------------------------------------------------
The Company has long-term committed loan agreements of approximately $956,000 at
December 31, 1999, of which approximately $886,000 is outstanding. Commitment
fees of 1/4 of 1% are paid on the unused portion of committed loan agreements.
The Company has approximately $70,000 of available long-term loan agreements
with affiliates at December 31, 1999. Under the terms of certain of these long-
term loan agreements owed to affiliates, the Company cannot pledge any of its
assets to secure additional financing.
Interest expense related to long-term notes payable to affiliates was $63,260,
$43,567 and $25,633 in 1999, 1998 and 1997, respectively.
The aggregate amounts of long-term debt maturing subsequent to December 31, 1999
are as follows:
- --------------------------------------------------------------------------------
Dollars in thousands
2000 $ 16,337
2001 373,186
2002 138,765
2003 97,245
2004 131,998
Thereafter 128,565
- --------------------------------------------------------------------------------
$886,096
- --------------------------------------------------------------------------------
1999 MEMC Annual Report . 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 1996, the Company entered into a financing arrangement with the City
of O'Fallon, Missouri related to the expansion of the Company's St. Peters
facility. In total, approximately $252,000 of industrial revenue bonds were
issued to the Company by the City of O'Fallon, of which at December 31, 1999 and
1998, $191,000 and $215,000 was outstanding, respectively.
The bonds were exchanged by the City of O'Fallon for the assets related to the
expansion, which were then leased by the Company for a period of 10 years for
machinery and equipment and 15 years for building and building improvements. The
Company has the option to purchase the machinery and equipment at the end of
five years and the building and building improvements at the end of 10 years.
The industrial revenue bonds bear interest at a rate of 6% per annum and mature
concurrent with the annual payments due under the terms of the lease.
The Company has classified the leased assets as property, plant and equipment
and has established a capital lease obligation equal to the outstanding
principal balance of industrial revenue bonds. Lease payments may be made by
tendering an equivalent portion of the industrial revenue bonds. As the capital
lease payments to the City of O'Fallon may be satisfied by tendering industrial
revenue bonds (which is the Company's intention), the capital lease obligation,
industrial revenue bonds and related interest expense and interest income,
respectively, have been offset for presentation purposes in the consolidated
financial statements.
11 . Stockholders' Equity
- --------------------------------------------------------------------------------
Preferred Stock
The Company has 50,000,000 authorized shares of $.01 par value preferred stock.
The Board of Directors is authorized, without further action by the
stockholders, to issue any or all of the preferred stock.
Common Stock
Holders of the $.01 par value common stock are entitled to one vote for each
share held on all matters submitted to a vote of the stockholders. Subject to
the rights of any holders of preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors. In the event of liquidation, dissolution or winding up of the
Company, holders of the common stock are entitled to share ratably in the
distribution of all assets remaining after payment of liabilities, subject to
the rights of any holders of preferred stock.
The Company does not anticipate paying dividends in the foreseeable future. The
declaration and payment of future dividends by the Company, if any, will be at
the sole discretion of the Board of Directors.
Private Placement
On March 22, 1999, the Company sold 15,399,130 shares of common stock in a
private placement to VEBA Zweite Verwaltungsgesellschaft mbH (VEBA Zweite), a
subsidiary of VEBA AG, for $6.89 per share. The net proceeds of approximately
$106,000 were used to repay debt of approximately $100,000 under revolving
credit agreements with the balance used for general corporate purposes.
Rights Offering
On April 16, 1999, the Company sold 13,628,446 shares of common stock for $6.89
per share in connection with a rights offering. The net proceeds of
approximately $91,000 were used to repay debt of approximately $90,000 from VEBA
under revolving credit agreements and the balance was used for general corporate
purposes. VEBA now owns 71.8% of the outstanding shares of common stock
following the private placement and rights offering.
Stock-Based Compensation
The Company has an Equity Incentive Plan (the Plan) that provides for the award
of incentive and non-qualified stock options, restricted stock and performance
shares. Total shares authorized for grant under the Plan are 3,597,045. Non-
qualified stock options to employees are typically granted on January 1 and vest
at a rate of 25% annually over four years. Non-qualified stock options to non-
employee directors are also typically granted on January 1 but vest at a rate of
33 1/3% annually over three years. The exercise price of each option equals the
market price of the Company's common stock on the date of the grant, and each
option's maximum term is 10 years. Total restricted shares awarded in 1997 were
1,300, with a weighted average fair value of $22.50. In 1999, restricted shares
totaling 21,692 expired. Total compensation cost recognized for these awards in
1999, 1998 and 1997 was $(601), $170 and $596, respectively.
32 . 1999 MEMC Annual Report
The Company applies Opinion 25 and related Interpretations in accounting for
the Plan. Accordingly, no compensation cost has been recognized for non-
qualified stock options granted under the Plan. Had compensation cost been
determined for the Company's non-qualified stock options based on the fair value
at the grant dates consistent with the alternative method set forth under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company would have reported the following amounts indicated
below:
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
Dollars in thousands, except share data
Net loss:
As reported $(151,481) $(316,332) $(4,513)
Pro forma (154,149) (319,627) (6,551)
Basic loss per common share:
As reported (2.43) (7.80) (0.11)
Pro forma (2.48) (7.88) (0.16)
Diluted loss per common share:
As reported (2.43) (7.80) (0.11)
Pro forma (2.48) (7.88) (0.16)
- -------------------------------------------------------------------------------
The fair value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: risk-free
interest rate of 4.8%, 5.7% and 6.1%; expected life of six years for all
periods; expected volatility of 57.6%, 51.4% and 44.8%; expected dividends of
zero percent for all periods.
A summary of the Company's Plan activity with respect to stock options is
presented below:
Weighted- Weighted-
Average Average Fair Value
Shares Option Price of Options Granted
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
Outstanding at beginning of year 1,773,174 $20.11
Granted 687,700 8.68 $5.10
Exercised (21,200) 15.12
Canceled (113,930) 23.53
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,325,744 $16.61
- -------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 1,396,428 $19.75
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
Outstanding at beginning of year 1,024,292 $24.92
Granted 887,300 15.06 $ 8.40
Exercised -- --
Canceled (138,418) 23.31
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,773,174 $20.11
- -------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 894,065 $22.99
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
Outstanding at beginning of year 965,838 $25.32
Granted 177,352 22.56 $11.94
Exercised (12,298) 27.23
Canceled (106,600) 24.36
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,024,292 $24.92
- -------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 516,674 $24.77
- -------------------------------------------------------------------------------------------------------------------
1999 MEMC Annual Report . 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of information about non-qualified stock options outstanding at
December 31, 1999 is presented below:
Options Outstanding
------------------------------------------------------------
Number Weighted-Average Weighted-
Range of Outstanding at Remaining Average
Exercise Prices December 31, 1999 Contractual Life Exercise Price
- ----------------------------------------------------------------------------------------------
$24.00 519,694 5.5 years $24.00
$32.63-49.50 117,900 6.0 years 33.07
$22.50-29.00 157,750 7.0 years 22.57
$3.13-15.25 847,100 8.0 years 15.06
$6.00-19.06 683,300 9.0 years 8.68
- ----------------------------------------------------------------------------------------------
$3.13-49.50 2,325,744 7.6 years $16.61
- ----------------------------------------------------------------------------------------------
Exercisable Options Outstanding
---------------------------------------------
Range of Number Exercisable at Weighted-Average
Exercise Prices December 31, 1999 Exercise Price
- ----------------------------------------------------------------------------------------------
$24.00 519,694 $24.00
$32.63-49.50 106,800 33.05
$22.50-29.00 129,367 22.56
$3.13-15.25 482,567 15.15
$6.00-19.06 158,000 8.50
- ----------------------------------------------------------------------------------------------
$3.13-49.50 1,396,428 $19.75
- ----------------------------------------------------------------------------------------------
12 . Loss Per Share
- --------------------------------------------------------------------------------
A reconciliation of the numerator and denominator of the loss per share
calculations is provided for all periods presented. The numerator for basic and
diluted loss per share is net loss for all periods presented. The denominator
for basic and diluted loss per share for 1999, 1998 and 1997 follows:
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Weighted-average shares used for
basic loss per share 62,224,869 40,580,869 41,345,193
Effect of dilutive securities:
Restricted stock -- -- --
Stock options -- -- --
- --------------------------------------------------------------------------------
Weighted-average shares used for
diluted loss per share 62,224,869 40,580,869 41,345,193
- --------------------------------------------------------------------------------
Options outstanding for all periods were not included in the computation of
diluted loss per share for all years, because they were antidilutive.
In January 2000, the Company granted options to purchase 580,200 shares of
common stock at $12.25 to $16.19 per share. These options will expire in January
2010.
34 . 1999 MEMC Annual Report
13 . Income Taxes
Earnings (loss) before income taxes, equity in income (loss) of joint ventures
and minority interests are as follows:
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
Dollars in thousands
U.S. $(213,138) $(349,573) $(59,702)
Foreign 490 (23,642) 49,372
- -------------------------------------------------------------------------------------------------------------
$(212,648) $(373,215) $(10,330)
- -------------------------------------------------------------------------------------------------------------
Income tax (benefit) expense consists of the following:
Current Deferred Total
- -------------------------------------------------------------------------------------------------------------
Dollars in thousands
Year ended December 31, 1999:
U.S. federal $ 570 $ (70,156) $ (69,586)
State and local 914 895 1,809
Foreign 2,152 (296) 1,856
- -------------------------------------------------------------------------------------------------------------
$ 3,636 $ (69,557) $ (65,921)
- -------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
U.S. federal $ 1,524 $(103,435) $(101,911)
State and local 2,207 (4,534) (2,327)
Foreign 4,790 10,054 14,844
- -------------------------------------------------------------------------------------------------------------
$ 8,521 $ (97,915) $ (89,394)
- -------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
U.S. federal $(5,764) $ (18,712) $ (24,476)
State and local (924) (398) (1,322)
Foreign 25,766 2,801 28,567
- -------------------------------------------------------------------------------------------------------------
$19,078 $ (16,309) $ 2,769
- -------------------------------------------------------------------------------------------------------------
Income tax (benefit) expense differed from the amounts computed by applying the
U.S. federal income tax rate of 35% in 1999, 1998 and 1997 to loss before income
taxes, equity in income (loss) of joint ventures and minority interests as a
result of the following:
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands
Income tax at federal statutory rate $(74,427) $(130,625) $(3,616)
Increase (reduction) in income taxes
resulting from:
Change in the balance of the valuation
allowance for deferred tax assets
allocated to income tax expense (1,622) 19,386 (4,738)
Foreign tax differences 5,976 15,310 13,511
State income taxes, net
of federal benefit 1,176 (1,513) (859)
Investment incentives (660) (600) (916)
Malaysian joint venture charges -- 5,552 --
Other, net 3,636 3,096 (613)
- --------------------------------------------------------------------------------------------------------------
$(65,921) $(89,394) $ 2,769
- --------------------------------------------------------------------------------------------------------------
1999 MEMC Annual Report . 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------
Dollars in thousands
Deferred tax assets:
Inventory, principally due to additional costs inventoried for
tax purposes and/or financial reserves recorded to state
inventories at net realizable values $ 6,718 $ 7,427
Accruals for expenses currently not deductible for tax purposes 38,945 40,936
Pension, medical and other employee benefits, principally due
to accrual for financial reporting purposes 36,728 37,433
Net operating loss carryforwards 252,450 160,640
Investment tax credit carryforwards 1,456 1,456
Alternative minimum tax credit carryforwards 3,760 3,427
Other 1,557 1,151
- -----------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 341,614 252,470
Less valuation allowance (49,168) (42,166)
- -----------------------------------------------------------------------------------------------------------
Net deferred tax assets 292,446 210,304
- -----------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment, principally due to differences
in depreciation and capitalized interest (89,129) (80,505)
Other (6,510) (2,020)
- -----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (95,639) (82,525)
- -----------------------------------------------------------------------------------------------------------
Net deferred tax assets $196,807 $127,779
- -----------------------------------------------------------------------------------------------------------
Net deferred tax assets were classified in the consolidated balance sheets
as follows:
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------
Dollars in thousands
Current deferred tax assets, net $ 12,905 $ 23,129
Noncurrent deferred tax assets, net 183,902 104,650
- -----------------------------------------------------------------------------------------------------------
$196,807 $127,779
- -----------------------------------------------------------------------------------------------------------
The Company's net deferred tax assets increased $69 million to $196.8 million at
December 31, 1999. Management believes it is more likely than not that with its
projections of future taxable income and after consideration of the valuation
allowance, the Company will generate sufficient taxable income to realize the
benefits of the net deferred tax assets existing at December 31, 1999. In order
to realize the net deferred tax assets existing at December 31, 1999, the
Company will need to generate future taxable income of approximately $549
million. The Company's net operating loss (NOL) carryforwards total $647
million, of which $7 million will expire in
36 . 1999 MEMC Annual Report
2001; $13 million will expire in 2002; $29 million will expire in 2003; $9
million will expire in 2004; $14 million will expire in 2012; $322 million will
expire in 2018 and $253 million will expire in 2019. There can be no assurance,
however, that the Company will generate sufficient taxable income to realize the
full benefit of the existing net deferred tax assets. The Company also has AMT
credit carryforwards available of $3,760 and net investment tax credit
carryforwards available of $1,456. Utilization of $7,220 of loss carryforwards
and all the investment tax credit carryforwards are subject to limitation under
Internal Revenue Code Sections 382 and 383, respectively. Pursuant to these
Internal Revenue Code Sections, the amount of combined loss and tax credit
carryforwards that may be utilized is limited to approximately $2,000 per year.
Under Internal Revenue Service regulations, the investment tax credit
carryforwards are not permitted to reduce income tax expense until the year
2000.
14 . Pension Plans and Other Retirement Benefits
- --------------------------------------------------------------------------------
The Company has a noncontributory defined benefit plan covering most U.S.
employees. Benefits for this plan are based on years of service and qualifying
compensation during the final years of employment. The Company complies with
federal funding requirements.
The Company also has a nonqualified plan under the Employee Retirement Income
Security Act of 1974, which provides benefits not otherwise payable under the
above plan due to Internal Revenue Code restrictions. Eligibility for
participation in this plan requires coverage under the above plan and other
specific circumstances.
In addition, the Company sponsors a health care plan that provides
postretirement medical benefits to full-time U.S. employees who meet minimum age
and service requirements. The plan is contributory, with retiree contributions
adjusted annually, and contains other cost-sharing features such as deductibles
and coinsurance. The Company's policy is to fund the cost of medical benefits in
amounts determined at the discretion of management.
In 1998, the Company changed the measurement date for the defined benefit plans
from December 31 to September 30 to improve administrative efficiencies and the
timeliness and accuracy of its financial reporting and planning process. The
effect on retirement plan expense was not material to the consolidated financial
statements.
Net periodic pension cost consists of the following:
Pension Plans Health Care Plan
----------------------------------------------------------------------
Year ended December 31, 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Dollars in thousands
Service cost $ 7,807 $ 8,134 $ 8,178 $1,435 $ 1,791 $2,441
Interest cost 8,769 9,128 7,937 3,333 2,995 3,468
Expected return on plan assets (6,523) (7,219) (6,189) -- -- --
Amortization of service costs 393 501 576 (707) (1,010) (206)
Net actuarial loss/(gain) 770 818 562 54 47 (76)
Curtailment (gain) recognized 428 4,381 -- -- (148) --
Cost of special termination benefits -- -- 1,067 -- 1,023 --
- --------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $11,644 $15,743 $12,131 $4,115 $ 4,698 $5,627
- --------------------------------------------------------------------------------------------------------------
1999 MEMC Annual Report . 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the change in benefit obligation, change in plan assets
and funded status of the Company's plans:
Pension Plans Health Care Plan
--------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------
Dollars in thousands
Change in benefit obligation:
Benefit obligation at January 1 $137,475 $134,408 $ 52,573 $ 38,751
Service cost 7,820 6,235 1,435 1,407
Interest cost 8,769 6,919 3,333 2,128
Amendments 559 140 -- --
Actuarial (gain)/loss (15,451) 6,123 (8,182) 3,899
Benefits paid (11,791) (18,494) (2,037) (773)
Curtailments 428 2,144 -- 6,138
Special termination benefits -- -- -- 1,023
- -------------------------------------------------------------------------------------------------------
Benefit obligation at December 31 127,809 137,475 47,122 52,573
- -------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1 85,112 94,707 -- --
Actual return on plan assets 11,682 6,744 -- --
Employer contributions 9,482 2,155 2,037 773
Benefits paid (11,791) (18,494) (2,037) (773)
- -------------------------------------------------------------------------------------------------------
Fair value of plan assets
at December 31 94,485 85,112 -- --
- -------------------------------------------------------------------------------------------------------
Funded status (33,324) (52,363) (47,122) (52,573)
Unrecognized prior service cost 4,891 4,726 (7,787) (8,495)
Unrecognized net actuarial (gain)/loss (783) 20,511 (5,386) 2,596
Fourth quarter contribution 110 801 -- --
- -------------------------------------------------------------------------------------------------------
Accrued benefit cost $(29,106) $(26,325) $(60,295) $(58,472)
- -------------------------------------------------------------------------------------------------------
Amounts recognized in statement
of financial position:
Accrued benefit liability $(32,354) $(31,396) $(60,295) $(58,472)
Fourth quarter contribution 110 801 -- --
Intangible asset 584 109 -- --
Accumulated other
comprehensive income 2,554 4,161 -- --
- -------------------------------------------------------------------------------------------------------
Accrued pension expense $(29,106) $(26,325) $(60,295) $(58,472)
- -------------------------------------------------------------------------------------------------------
Pension plan assets consist principally of insurance contracts, marketable
securities including common stocks, bonds and interest-bearing deposits.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $8,184, $6,478 and $601, respectively, as of December 31,
1999, and $137,475, $109,865 and $85,112, respectively, as of December 31, 1998.
The Company recognized the curtailments and the special termination benefits
related to the closure of the Spartanburg facility and the voluntary severance
program offered to employees during 1998.
38 . 1999 MEMC Annual Report
The following is a table of the actuarial assumptions:
Pension Plans Health Care Plan
----------------------------------------
Year ended December 31, 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------
Weighted-average assumptions
as of December 31:
Discount rate 7.75% 6.75% 7.75% 6.75%
Expected return on plan assets 8.00% 8.00% N/A N/A
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
- ----------------------------------------------------------------------------------------
For measurement purposes, a 6% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually to 5.5% by the year 2001 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A one-percentage-point change in assumed health
care cost trend would have the following effects:
One-Percentage- One-Percentage-
Point Increase Point Decrease
- -------------------------------------------------------------------------------
Dollars in thousands
Effect on total service and
interest cost components $ 49 $ (48)
Effect on postretirement
benefit obligation $170 $(167)
- -------------------------------------------------------------------------------
The Company has pension plans for its foreign subsidiaries. The aggregate
pension expense and liability are not material to the consolidated financial
statements.
15 . Retirement Savings Plan
- --------------------------------------------------------------------------------
The Company sponsors a defined contribution plan under Section 401(k) of the
Internal Revenue Code covering all U.S. salaried and hourly employees with more
than one year of service. Company contributions included in results of
operations totaled $3,618, $4,012 and $4,138 for 1999, 1998 and 1997,
respectively.
16 . Commitments and Contingencies
- --------------------------------------------------------------------------------
The Company leases buildings, equipment and automobiles under operating leases.
Rental expense under these leases was $24,062, $28,733 and $23,789 in 1999, 1998
and 1997, respectively. Minimum aggregate future rental obligations under leases
having remaining terms of one year or more at December 31, 1999 are as follows:
- ------------------------------------------------
Dollars in thousands
2000 $17,726
2001 7,859
2002 2,214
2003 95
2004 16
Thereafter --
- ------------------------------------------------
$27,910
- ------------------------------------------------
1999 MEMC Annual Report . 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17 . Geographic Segments
- --------------------------------------------------------------------------------
The Company is engaged in one reportable segmentNthe design, manufacture and
sale of electronic grade silicon wafers for the semiconductor industry.
Geographic financial information is as follows:
Other
United Foreign
States Japan Italy Countries Total
- ------------------------------------------------------------------------------
Dollars in thousands
Net sales to customers:
1999 $359,020 $ 89,281 $ 21,815 $223,478 $ 693,594
1998 389,721 119,138 30,855 219,202 758,916
1997 497,601 153,897 25,784 309,391 986,673
- ------------------------------------------------------------------------------
Long-lived assets:
1999 $824,977 $229,349 $101,739 $108,694 $1,264,759
1998 901,940 221,701 131,436 114,849 1,369,926
1997 976,032 136,567 135,588 153,790 1,401,977
- ------------------------------------------------------------------------------
Net sales are attributed to countries based on location of customer. Investments
in joint ventures are presented based on the countries in which they are
located.
18 . Unaudited Quarterly Financial Information
- ---------------------------------------------------------------------------------------------------
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
Dollars in thousands, except share data
Net sales $ 159,800 $ 168,043 $ 182,781 $ 182,970
Gross margin (13,816) (1,966) 4,922 525
Loss before equity in income (loss) of
joint ventures and minority interests (46,852) (36,228) (32,464) (31,183)
Equity in income (loss) of joint ventures (4,589) (3,891) (2,642) 1,463
Minority interests 1,187 807 1,389 1,522
Net loss (50,254) (39,312) (33,717) (28,198)
Basic loss per share (1.19) (.58) (.48) (.41)
Diluted loss per share (1.19) (.58) (.48) (.41)
Market price:
High 11 1/8 12 3/4 21 1/2 15 3/8
Low 5 1/2 5 3/4 10 3/4 10 1/8
1998
- --------------------------------------------------------------------------------------------------
Dollars in thousands, except share data
Net sales $ 235,243 $ 202,153 $ 167,685 $ 153,835
Gross margin 23,768 (3,812) (28,095) (23,690)
Loss before equity in loss of joint
ventures and minority interests (20,497) (143,705) (57,897) (61,722)
Equity in loss of joint ventures (11,621) (6,860) (12,860) (12,155)
Minority interests 1,280 1,920 5,807 1,978
Net loss (30,838) (148,645) (64,950) (71,899)
Basic loss per share (0.75) (3.67) (1.60) (1.78)
Diluted loss per share (0.75) (3.67) (1.60) (1.78)
Market price:
High 19 16 7/16 10 13/16 12 5/8
Low 14 1/2 9 1/4 2 15/16 2 15/16
- --------------------------------------------------------------------------------------------------
40 . 1999 MEMC Annual Report
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MEMC Electronic Materials, Inc.:
We have audited the accompanying consolidated balance sheets of MEMC Electronic
Materials, Inc. and subsidiaries as of December 31, 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.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MEMC Electronic
Materials, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
January 20, 2000
42 . 1999 MEMC Annual Report
STOCKHOLDER INFORMATION
Corporate Office
MEMC Electronic Materials, Inc.
501 Pearl Drive (City of O'Fallon)
St. Peters, Missouri 63376
(636) 474-5000
Transfer Agent and Registrar
Harris Trust & Savings Bank
311 West Monroe, 11th Floor
P. O. Box 755
Chicago, Illinois 60690
(312) 360-5433
Annual Meeting
All stockholders are invited to attend the annual meeting of MEMC Electronic
Materials, Inc. at 10:00 a.m. central standard time on May 9, 2000, at the
Frontenac Hilton, 1335 S. Lindbergh Blvd., St. Louis, MO 63131. Holders of
common stock of record at the close of business on March 13, 2000, are entitled
to vote at the meeting. A notice of the meeting, proxy statement and proxy were
sent to stockholders with this Annual Report.
Stockholder Inquiries
Inquiries regarding address corrections, lost certificates, changes of
registration, stock certificate holdings and other stockholder account matters
should be directed to MEMC's transfer agent, Harris Trust & Savings Bank, at the
address or phone number above.
Common Stock Listing
MEMC's common stock is traded on the New York Stock Exchange under the symbol
OWFRO. On December 31, 1999, the last business day of the year, the Company had
660 stockholders of record.
Form 10-K
Stockholders may obtain a copy of MEMC's Annual Report on Form 10-K and related
financial statement schedules for the year ended December 31, 1999, filed with
the Securities and Exchange Commission, by writing MEMC's Investor Relations
Department or by calling (636) 474-5505.
Financial Information
MEMC maintains a home page on the Internet at www.memc.com where the Company
publishes information, including earnings releases, other news releases,
significant corporate disclosures and the names of securities analysts who issue
research on the Company.
Independent Auditors
KPMG LLP
10 South Broadway, Suite 900
St. Louis, Missouri 63102
Investor Relations
Stockholders, securities analysts, investment professionals and prospective
investors should direct their inquiries to:
MEMC Electronic Materials, Inc.
Investor Relations Department
501 Pearl Drive (City of O'Fallon)
St. Peters, Missouri 63376
Tel: (636) 474-5443
Fax: (636) 474-5158
E-mail: invest@memc.com
Manufacturing Facilities
Chonan, South Korea
Hsinchu, Taiwan
Kuala Lumpur, Malaysia
Merano, Italy
Novara, Italy
Pasadena, Texas
Sherman, Texas
St. Peters, Missouri
Utsunomiya, Japan
44 . 1999 MEMC Annual Report