EXHIBIT 13
FIVE YEAR SELECTED FINANCIAL HIGHLIGHTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
<Table>
<Caption>
Predecessor
------------------------------------------------------------------------------
November 14 January 1
through through Year ended December 31,
December 31, November 13, ------------------------------------------------------------
2001(1) 2001(1) 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
Net sales $ 58,846 $ 559,007 $ 871,637 $ 693,594 $ 758,916 $ 986,673
Gross margin (11,731) (39,757) 128,975 (10,335) (31,829) 124,759
Marketing and administration 7,973 61,747 69,182 63,613 73,515 70,715
Research and development 7,535 58,149 72,155 85,019 81,591 64,457
Restructuring costs 2,971(2) 29,511(2) -- (5,747) 146,324(3) --
Operating loss (30,210) (189,164) (12,362) (153,220) (333,259) (10,413)
Equity in income (loss)
of joint ventures (2,822) 441 14,664 (9,659) (43,496) 5,480
Net loss allocable to
common stockholders (33,644) (489,025) (43,390) (151,481) (316,332) (4,513)
Basic loss per share (0.48) (7.03) (0.62) (2.43) (7.80) (0.11)
Diluted loss per share (0.48) (7.03) (0.62) (2.43) (7.80) (0.11)
Shares used in basic loss
per share computation 69,612,900 69,612,900 69,596,861 62,224,869 40,580,869 41,345,193
Shares used in diluted loss
per share computation 69,612,900 69,612,900 69,596,861 62,224,869 40,580,869 41,345,193
Balance Sheet Data:
Working capital 42,331 NA 54,280 50,528 19,716 17,671
Total assets 549,334 NA 1,890,566 1,724,581 1,773,714 1,794,424
Long-term debt (including
current portion of
long-term debt) 175,856 NA 1,041,202 886,096 873,680 519,995
Stockholders' equity
(deficiency) (24,496) NA 366,419 432,791 399,040 715,754
Other Data:
Capital expenditures 6,995 42,842 57,812 49,256 194,610 372,416
Equity infusions in joint
ventures -- -- -- 12,052 25,533 10,638
Employment 4,700 NA 7,000 6,000 6,300 8,000
</Table>
(1) On November 13, 2001, an investor group led by Texas Pacific Group (TPG)
purchased from E.ON AG and its affiliates (E.ON) all of E.ON's debt and equity
holdings in MEMC. In addition, on that date, TPG and MEMC restructured MEMC's
debt acquired by TPG from E.ON. As a result of the purchase of E.ON's equity
interest by TPG and the rights possessed by TPG through its ownership of
preferred stock, we applied purchase accounting and pushed down TPG's nominal
basis in MEMC to our accounting records, reflected in our consolidated financial
statements subsequent to November 13, 2001.
(2) During 2001, we recorded restructuring costs totaling $32.5 million to close
our small diameter wafer line at MEMC Southwest Inc. in Sherman, Texas and to
reduce our workforce.
(3) During 1998, we recorded restructuring costs totaling $146.3 million to
close our Spartanburg, South Carolina facility, to forego construction of a 200
millimeter wafer facility at our joint venture in Malaysia, to withdraw from our
joint venture in a small diameter wafer operation in China and to implement a
voluntary severance program.
F-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPANY OVERVIEW
We are a leading worldwide producer of silicon wafers for the semiconductor
industry. We operate manufacturing facilities owned directly in every major
semiconductor manufacturing region throughout the world, including Europe,
Malaysia, Japan, South Korea and the United States and through a joint venture
in Taiwan. Our customers include virtually all major semiconductor device
manufacturers including the world's largest foundries as well as the major
memory, microprocessor and application specific integrated circuit (ASIC)
manufacturers.
We provide silicon wafers in sizes ranging from 100 millimeters (4 inch) to 300
millimeters (12 inch) and in three general categories: prime polished, epitaxial
and test/monitor. Our silicon wafers are sold in each of the major
semiconductor-producing regions throughout the world including Asia Pacific,
Europe, Japan and North America.
Effective September 29, 2000, we acquired an additional 40% interest in MEMC
Korea Company (MKC), formerly known as POSCO Huls Company, Ltd., increasing our
total ownership to 80%. As a result, as of September 30, 2000, MKC's balance
sheet was consolidated with MEMC. Also, as a consequence of this transaction,
MKC's operating results were consolidated with MEMC's operating results
beginning in the fourth quarter of 2000.
On November 13, 2001, an investor group led by Texas Pacific Group (TPG)
purchased from E.ON AG and its affiliates (E.ON) all of E.ON's debt and equity
holdings in MEMC for a nominal purchase price of six dollars. As part of the
purchase agreement, E.ON agreed to provide MEMC with $37 million at the closing
of the transaction. In addition, on that date TPG and MEMC restructured MEMC's
debt acquired by TPG from E.ON and TPG committed to provide MEMC with a
five-year $150 million revolving credit facility. The revolving credit facility
with TPG has been replaced with a revolving facility from Citibank, guaranteed
by TPG. TPG has exchanged previously outstanding debt of approximately $860
million for shares of our newly issued Series A Cumulative Convertible Preferred
Stock with a stated value of $260 million, $50 million in principal amount of
our newly issued senior subordinated secured notes and warrants to purchase
16,666,667 shares of our common stock. TPG also retained a 55 million Euro in
principal amount note issued by our Italian subsidiary and guaranteed by MEMC.
Stockholder approval is required in order for TPG to exercise certain of the
voting and conversion provisions of the Series A Cumulative Convertible
Preferred Stock and to exercise the warrants. Assuming stockholder approval is
obtained, as a result of the debt restructuring, TPG will own or have the right
to acquire, through conversion of the preferred stock, excluding any accrued but
unpaid dividends, and exercise of the warrants, a minimum of approximately 182
million shares of common stock, representing approximately 90% of our
outstanding common stock.
F-2
As a result of the purchase of E.ON's equity interest by TPG and the rights
possessed by TPG through its ownership of the preferred stock, we applied
purchase accounting and pushed down TPG's nominal basis in MEMC to our
accounting records, reflected in our consolidated financial statements
subsequent to November 13, 2001. Assuming full conversion of the preferred
stock, excluding any accrued but unpaid dividends, TPG would own 89.4% of MEMC's
common stock.
To revalue our assets and liabilities, we first estimated their fair market
values. To the extent the fair market value differed from the book value, 89.4%
of that difference was recorded as an adjustment to the carrying value of the
respective asset or liability. This revaluation resulted in a net decrease to
assets of approximately $800 million and a net decrease to liabilities of
approximately $900 million. The allocation of the purchase price to our assets
and liabilities is subject to further refinement.
The net decrease in assets reflects the write-down of goodwill, certain
intangible assets, investments in joint ventures, and property, plant and
equipment to reflect TPG's nominal purchase price. We expect the write-down of
property, plant and equipment, goodwill, and intangible assets to result in a
reduction in our depreciation and amortization of approximately $150 million in
2002. This, in turn, will result in a significant improvement in our gross
margin, as well as reduced marketing and administration and research and
development expenses.
The net decrease in liabilities reflects the write-off of the debt acquired by
TPG of approximately $910 million, together with related accrued interest of
approximately $20 million. The senior subordinated secured notes and the 55
million Euro Italian subsidiary note (approximately $48 million) were recorded
at their combined fair market value of two dollars. These debt instruments will
accrete interest up to their face values in six years and less than one year,
respectively.
The Series A Cumulative Convertible Preferred Stock (Preferred Stock), with an
aggregate stated value of $260 million, was recorded at its fair value of two
dollars. The Preferred Stock is redeemable at the option of the holder on or
after the eighth anniversary of the date of issuance. Accordingly, the Preferred
Stock will accrete up to its stated value over this eight year period.
The warrants were recorded at their fair market value of less than one dollar.
The following discussion compares combined information of MEMC for the year
ended December 31, 2001 with that of the predecessor for the year ended December
31, 2000. The combined information consists of the sum of the financial data
from January 1, 2001 through November 13, 2001 for the predecessor and from
November 14, 2001 through December 31, 2001 for the successor. Our consolidated
financial statements for the periods ended before November 14, 2001
(predecessor) were prepared using our historical basis of accounting. The
comparability of our operating results for these
F-3
periods and the periods following push down accounting is affected by the
purchase accounting adjustments.
RESULTS OF OPERATIONS
Net Sales
<Table>
<Caption>
(Dollars in Millions) 2001 2000 1999
-------- -------- --------
Net Sales $ 618 $ 872 $ 694
Percentage Change (29%) 26% (9%)
</Table>
Our net sales decreased by 29% to $618 million in 2001 from $872 million in
2000. This decrease was primarily caused by a 24% decrease in product volumes,
as well as a moderate decline in average selling prices, resulting from the
weakened market conditions in the semiconductor and silicon wafer industries in
2001. This decline was across all product diameters, but especially in smaller
diameters as our customers are utilizing their larger diameter fabs to realize
the lowest cost per device.
Had MKC been included in our operating results for the entire year in 2000, the
year-over-year decline in net sales in 2001 would have been approximately 38%,
caused primarily by a 34% decline in product volumes.
Approximately 38% of the decline in our 2001 net sales relates to one customer.
Had MKC been included in our operating results for the entire year in 2000,
approximately 27% of the decline in year-over-year net sales relates to this
customer.
In 2000, our net sales increased by 26% to $872 million from $694 million in
1999. This increase resulted from a 21% increase in product volumes, as well as
modest price increases and improvements in product mix. Demand for silicon
wafers increased in 2000 as the semiconductor industry expanded. Approximately
30% of our product volume increase in 2000 was a result of the consolidation of
MKC's 2000 fourth quarter results with MEMC.
Our new products represented 29% of our product volume in 2001. Large diameter
and epitaxial wafers represented 70% of our product volume for 2001, compared to
58% for 2000 and 52% for 1999. In 2000, while total product volumes increased
21%, 200 millimeter product volumes grew by 41%. The consolidation of MKC
accounted for 37% of this increased 200 millimeter product volume in 2000.
We operate in all the major semiconductor-producing regions of the world, with
over half of our 2001 net sales to customers located outside North America. Net
sales by geographic region for each of the last three years were as follows:
<Table>
<Caption>
2001 2000 1999
(Dollars in Millions) -------- -------- --------
North America $ 237 $ 411 $ 359
Asia Pacific 161 150 92
Japan 78 126 90
Europe 142 185 153
-------- -------- --------
Total $ 618 $ 872 $ 694
======== ======== ========
</Table>
<Table>
<Caption>
Percentage of Change 01/00 00/99 99/98
------- ------- -------
North America $ (42)% $ 14% $ (8)%
Asia Pacific 7 % 63% 28 %
Japan (38)% 40% (24)%
Europe (23)% 21% (14)%
-------- -------- --------
Total $ (29)% $ 26% $ (9)%
======== ======== ========
</Table>
<Table>
<Caption>
Gross Margin 2001 2000 1999
(Dollars in Millions) -------- -------- --------
Cost of Good Sold $ 669 $ 743 $ 704
Gross Margin (51) 129 (10)
Gross Margin Percent (8%) 15% (1%)
</Table>
Our gross margin declined to negative $51 million in 2001 compared to positive
$129 million in 2000, primarily as a result of the significant decline in
product volumes causing the underabsorption of manufacturing fixed costs in
2001, as well as the
F-4
moderate decline in average selling prices. In response to
the decreased product volumes and average selling prices, we took numerous
actions to decrease our manufacturing fixed costs in 2001, including:
o closing our small diameter wafer line in Sherman, Texas, as further
discussed in Restructuring Costs below;
o reducing our headcount by 2,300 employees, or 33%, from 7,000 at the
end of 2000 to 4,700 at the end of 2001;
o utilizing temporary plant shutdowns; and
o reducing discretionary spending in all areas.
In addition, our manufacturing yields continued to improve in virtually all
areas in 2001. However, because of the high fixed-cost nature of our business,
we were not able to reduce our costs at the rapid pace of the decline in product
volumes in 2001. Consequently, underabsorption of manufacturing fixed costs
resulted in the decreased gross margin in 2001. Negative gross margin in the
period November 14, 2001 to December 31, 2001 resulted from the continued
decline in product volumes and average selling prices, as well as scheduled
temporary plant shutdowns.
In 2000, our gross margin increased to $129 million compared to negative $10
million in 1999. This significant improvement resulted from increased product
volumes and continued benefits realized from our cost reduction and
manufacturing improvement programs, as well as modest increases in average
selling prices. While our product volumes increased 21% in 2000 compared to
1999, our cost of sales increased only 6% compared to 1999.
Had MKC been included in our operating results for the entire year in 2000, our
gross margin percent would have been 16%. This slight improvement in gross
margin percent is a result of MKC's lower cost structure, coupled with the
increased sales from the inclusion of MKC.
Marketing and Administration
<Table>
<Caption>
(Dollars in Millions) 2001 2000 1999
-------- -------- --------
Marketing and Administration $ 70 $ 69 $ 64
As a Percentage of Sales 11% 8% 9%
</Table>
As a result of continued controlled spending, marketing and administration
expenses remained flat in 2001, despite including expenses associated with MKC
as a result of its financial consolidation. Had MKC been included in our
operating results for the entire year in 2000, our marketing and administration
expenses would have been $7 million higher, resulting in an 8% decrease in 2001
compared to 2000.
Marketing and administration expenses remained relatively flat in 2000 compared
to 1999, despite the 26% increase in net sales and the consolidation of MKC's
fourth quarter results. As a percent of sales, marketing and administration
expenses decreased in 2000, from 9% to 8%.
F-5
Research and Development
<Table>
<Caption>
(Dollars in Millions) 2001 2000 1999
-------- -------- --------
Research and Development $ 66 $ 72 $ 85
As a Percentage of Sales 11% 8% 12%
</Table>
Our research and development expenses decreased 8% in 2001 as compared to 2000.
The decrease in reported expense was a result of continued controlled spending,
as well as increased revenue from 300 millimeter wafers, which reduced the
research and development expenses as this product was not yet in commercial
production.
Beginning in 2002, we moved our 300 millimeter operations from a pilot line to
full-scale production. Consequently, beginning in 2002, 300 millimeter revenues
and associated production costs will be presented in Net Sales and Cost of Goods
Sold, respectively.
In 2000, research and development expenses declined by 15% to 8% of net sales.
The decreased expenses were attributable to continued focus and spending
control, coupled with increased revenue from the sale of 300 millimeter wafers,
which reduced the related research and development expenses. Since we provide
technical assistance to MKC, MKC had no research and development expenses in
2000. Thus, research and development expenses were not impacted by the financial
consolidation of MKC beginning in the 2000 fourth quarter.
Restructuring Costs
<Table>
<Caption>
(Dollars in Millions) 2001 2000 1999
-------- -------- --------
Restructuring Costs $ 32 $ -- $ (6)
</Table>
During the fourth quarter of 2001, we reduced our workforce by approximately 800
employees. This action was taken to balance our operating costs with the
weakened product demand. We recorded total charges of $10 million related to
this action in the fourth quarter of 2001. Of these charges, $1 million was
non-cash related.
During the 2001 second quarter, we decided to close our small diameter wafer
line at MEMC Southwest Inc. in Sherman, Texas. This action was taken:
o as part of our continuing efforts to focus our manufacturing
facilities;
o to improve our cost structure; and
o to balance our production capabilities with the evolving market
conditions.
We recognized total charges of $22 million related to this action. Of these
charges, $17 million was non-cash related. See Note 6 of Notes to Consolidated
Financial Statements herein.
Nonoperating (Income) Expense and Income Taxes
<Table>
<Caption>
(Dollars in Millions) 2001 2000 1999
-------- -------- --------
Interest Expense $ 82 $ 79 $ 66
Book Value of Debt Outstanding at December 31 221 1,071 892
Interest Income (8) (5) (2)
Royalty Income (3) (10) (6)
Other, Net 6 1 1
Income Taxes 241 (21) (66)
Effective Income Tax Rate NA 27 % 31 %
</Table>
Our interest expense increased $3 million in 2001 as a result of increased
borrowings related to the acquisition and consolidation of MKC and additional
debt for operating needs. Effective November 13, 2001, TPG and MEMC restructured
MEMC's debt acquired by TPG from E.ON, resulting in a substantial decrease in
our debt outstanding. As of December 31, 2001, the book value of our debt
outstanding totaled $221 million, compared to $1,071 million at the end of 2000.
As described in Company Overview above, as a result of the restructuring of
MEMC's debt, TPG acquired a $50 million in principal amount of our newly issued
senior subordinated secured notes. TPG also retained a 55 million Euro
(approximately $48
F-6
million) in principal amount of a note issued by our Italian subsidiary. These
notes were recorded at their combined fair market value of two dollars. The
senior subordinated secured notes and the 55 million Euro Italian subsidiary
note will accrete interest up to their face values in six years and less than
one year, respectively.
In 2000, our interest expense increased to $79 million as a result of an
increase in our debt and higher interest rates on debt that repriced in 2000.
Substantially all of the increase in debt outstanding related to the acquisition
and consolidation of MKC. MKC's interest expense for the nine months ended
September 30, 2000 totaled $11 million.
Our royalty income was $3 million in 2001, as compared to $10 million in 2000.
This decrease was primarily a result of the financial consolidation of MKC
beginning in the 2000 fourth quarter, as well as reduced net sales and operating
profit of Taisil Electronic Materials Corporation (Taisil), our 45%-owned
unconsolidated joint venture in Taiwan.
During the second and third quarters of 2001, we reevaluated the conditions
surrounding our ability to use our tax loss carryforwards under Internal Revenue
Code Section 382 and determined it appropriate to discontinue recognition of
additional tax benefits from net operating loss carryforwards. As a result, we
increased our valuation allowance related to deferred tax assets in the amount
of $294 million. In making this determination, we considered the deterioration
in our liquidity at that time, the reduction in the trading price range of our
stock, the uncertainty at that time surrounding the terms and structure of the
divestiture by E.ON of its interest in MEMC and possible limitations for federal
income tax purposes on our ability to use our tax loss carryforwards under
Internal Revenue Code Section 382.
Push down accounting as described in Company Overview above created differences
in the bases of certain assets and liabilities for financial statement
accounting and for tax accounting. These differences resulted in the recognition
of a net deferred tax asset. We reviewed our total net deferred tax assets by
taxable jurisdiction and recognized a valuation allowance where it was
determined more likely than not that we would be unable to realize a benefit
from these assets.
In 2000, we realized an income tax benefit at the rate of 27%, as compared to
31% in 1999. The change in the rate of benefit recognized was a result of
changes in the composition of worldwide taxable income and in the valuation
allowance on certain deferred tax assets.
Equity in Income (Loss) of Joint Ventures
<Table>
<Caption>
(Dollars in Millions) 2001 2000 1999
- ----------------------------------------------------------------------------
Equity in Income (Loss) of Joint Ventures:
MKC NA $ 4 $(5)
Taisil $(2) 11 (5)
</Table>
As a result of the financial consolidation of MKC beginning in October 2000,
equity in income of joint ventures in 2001 relates solely to Taisil. Taisil
contributed a loss of $2 million in 2001, compared to $11 million in income in
2000. The decreased income is a result of the weakened conditions in the silicon
wafer and semiconductor markets in 2001, causing a 24% decline in Taisil's
product volumes, as well as a significant decrease in Taisil's average selling
prices. During 2001, Taisil also increased its deferred tax
F-7
valuation allowance related to certain net operating loss carryforwards, of
which our share was approximately $3 million.
In 2000, equity in income of joint ventures increased to $15 million, compared
to a loss of $10 million in 1999. As previously stated, MKC's operating results
were consolidated with MEMC beginning in the fourth quarter of 2000. For the
first three quarters of 2000, MKC contributed income of $4 million to our equity
in income of joint ventures, compared to a loss of $5 million for the twelve
months in 1999. The improved results were primarily attributable to a
significant increase in product volumes. Taisil contributed income of $11
million in 2000, compared to a loss of $5 million in 1999. Taisil's improved
results were attributable to a 20% increase in product volumes and, to a lesser
extent, a moderate increase in average selling prices. During 2000, Taisil also
reduced its deferred tax valuation allowance related to certain net operating
loss carryforwards, of which our share was approximately $3 million. MKC's and
Taisil's product volumes increased in 2000 as the semiconductor industry
expanded.
LIQUIDITY AND CAPITAL RESOURCES
<Table>
<Caption>
(Dollars in Millions) 2001 2000 1999
- -----------------------------------------------------------------------------
Net Cash Provided by (Used in):
Operating Activities $(25) $ 52 $(103)
Investing Activities (52) (44) (47)
Financing Activities 94 70 164
</Table>
The silicon wafer industry is highly capital intensive. Our capital needs depend
on numerous factors, including our profitability and our investment in capital
expenditures and research and development.
As almost all semiconductors are manufactured from silicon wafers, the strength
of the silicon wafer industry is highly correlated to the performance of the
semiconductor industry. The semiconductor device industry historically has been
a high-growth, cyclical industry. The cyclical nature of the semiconductor
industry can cause wide fluctuations in our product volumes, average selling
prices, operating results, and cash flows.
At December 31, 2001, we had $107 million of cash and cash equivalents,
including cash and cash equivalents of $73 million at MKC. Under Korean law,
there are restrictions on MKC's ability to pay dividends and make loans, thereby
limiting our access to MKC's cash.
Our principal sources and uses of cash during 2001 were as follows:
Sources:
o Borrowed $81 million under debt agreements
o Received $37 million capital contribution from E.ON AG
Uses:
o Used $25 million cash in operations
o Invested $50 million in capital expenditures
o Incurred $24 million in expenses related to the recapitalization
Our use of $25 million of cash in operating activities in 2001, a $77 million
change from the $52 million cash generated by operating activities in 2000, was
primarily due to our lower operating results.
F-8
Our accounts receivable decreased $79 million at December 31, 2001 as compared
to the end of 2000. The decrease was primarily attributable to a 53% decrease in
fourth quarter net sales between the two years. Our days' sales outstanding were
51 days at December 31, 2001, compared to 52 days at the end of 2000 based on
annualized fourth quarter sales for the respective years.
Our inventories decreased $44 million from the prior year to $70 million at
December 31, 2001. The decrease is primarily due to lower anticipated sales in
the first quarter of 2002 compared to the year-ago period and a concerted effort
to manage our inventory levels, as well as to lower capitalized depreciation of
approximately $12 million resulting from the lower property, plant and equipment
values following push down accounting, as described in Company Overview above.
Related inventory reserves for obsolescence, lower of cost or market issues, or
other impairments increased to $17 million at December 31, 2001, compared to $11
million in 2000. Charges to cost of goods sold related to these inventory
reserves totaled approximately $16 million in 2001. Our year-end inventories as
a percentage of annualized fourth quarter net sales increased to 15% at December
31, 2001 from 11% at December 31, 2000. While we made concerted efforts to
reduce our inventory levels in 2001, we were not able to reduce our inventory
levels at the rapid pace of the decline in product volumes in 2001.
During the second and third quarters of 2001, we reevaluated the conditions
surrounding our ability to use our tax loss carryforwards under Internal Revenue
Code Section 382 and determined it appropriate to discontinue recognition of
additional tax benefits from net operating loss carryforwards. As a result, we
increased our valuation allowance related to deferred tax assets in the amount
of $294 million. In making this determination, we considered the deterioration
in our liquidity at that time, the reduction in the trading price range of our
stock, the uncertainty at that time surrounding the terms and structure of the
divestiture by E.ON of its interest in MEMC and possible limitations for federal
income tax purposes on our ability to use our tax loss carryforwards under
Internal Revenue Code Section 382.
Push down accounting as described in Company Overview above created differences
in the bases of certain assets and liabilities for financial statement
accounting and for tax accounting. These differences resulted in the recognition
of a net deferred tax asset. We reviewed our total net deferred tax assets by
taxable jurisdiction and recognized a valuation allowance where it was
determined more likely than not that we would be unable to realize a benefit
from these assets.
Our net cash used in investing activities increased $8 million in 2001 compared
to 2000. In 2001, cash used in investing activities reflected slightly decreased
spending on capital projects compared to 2000. In 2000, cash used in investing
activities reflected cash from the consolidation of MKC in excess of the
purchase price by $11 million. Our capital expenditures in 2001 were primarily
related to maintenance, capabilities, and 300 millimeter development. At
December 31, 2001, we had $7 million of committed capital expenditures related
to various manufacturing and technology projects. We intend to tightly control
capital expenditures in 2002.
F-9
Our cash flows provided by financing activities increased to $94 million in 2001
compared to $70 million in 2000. In both 2001 and 2000, our financing was
primarily through the issuance of debt.
As part of the purchase and restructuring transactions, TPG committed to provide
a five-year $150 million revolving credit facility to MEMC. That revolving
credit facility has been replaced with a revolving credit facility from
Citibank, guaranteed by TPG. Loans under this facility bear interest at a rate
of LIBOR plus 1.5% or alternate base rate plus 0.5% per annum.
Loans can be made under this credit facility subject to certain conditions and
the following aggregate lending limitations:
o $50 million at any time prior to January 1, 2002
o $75 million at any time prior to April 1, 2002
o $100 million at any time prior to July 1, 2002
o $125 million at any time prior to October 1, 2002
o $150 million at any time on or after October 1, 2002
At December 31, 2001, we had drawn $30 million against this credit facility.
The Citibank revolving credit facility and the indenture for our senior
subordinated secured notes contain certain highly restrictive covenants,
including covenants to maintain minimum quarterly consolidated EBITDA; minimum
monthly consolidated backlog; minimum monthly consolidated revenues; maximum
annual capital expenditures; and other covenants customary for revolving loans
and indentures of this type and size. The minimum quarterly consolidated EBITDA
covenant is negative $13.0 million, negative $10.0 million, zero, and positive
$8.0 million in the first, second, third and fourth quarters of 2002,
respectively. Thereafter, the minimum quarterly consolidated EBITDA covenant
progressively increases to $25.0 million, $35.0 million, $44.0 million, $52.0
million and $60.0 million at the end of the last quarter of 2003, 2004, 2005,
2006 and 2007, respectively. The minimum monthly consolidated backlog covenant
is 30.0 million square inches (msi) in January 2002 and progressively increases
to 38.0 msi, 53.0 msi, 63.0 msi, 74.0 msi, 81.0 msi and 92.0 msi in the last
month of 2002, 2003, 2004, 2005, 2006 and 2007, respectively. The minimum
monthly consolidated revenues covenant is $34.0 million in January 2002 and
progressively increases to $48.0 million, $56.0 million, $67.0 million, $76.0
million, $84.0 million and $92.0 million in the last month of 2002, 2003, 2004,
2005, 2006 and 2007, respectively. Finally, the maximum annual capital
expenditures covenant is $45.0 million and $50.0 million for 2002 and 2003,
respectively, and increases to $55.0 million for each of 2004 through 2007. In
the event that we were in violation of these covenants, which in our highly
cyclical industry could occur in a sudden or sustained downturn, the loan
commitments under the revolving credit facility may terminate and the loans and
accrued interest then outstanding under the facility and the senior subordinated
secured notes and related accrued interest may be due and payable immediately.
The $150 million Citibank revolving credit facility is guaranteed by TPG. The
terms of the various guaranties are shorter than the term of the revolving
credit facility. Certain affiliates of Texas Pacific Group have guaranteed 60%
of our obligations under the revolving credit facility. The Texas Pacific Group
guaranty terminates on December 21, 2003. TCW/Crescent Mezzanine Partners III,
L.P. and certain of its affiliates have guaranteed 20% of our obligations under
the revolving credit facility. The TCW/Crescent guaranty terminates on December
20, 2002. Finally, certain affiliates of Leonard Green & Partners, L.P. have
guaranteed the remaining 20% of our obligations under the revolving credit
facility. The Leonard Green guaranty terminates on December 20, 2002. In
addition, each guarantor may terminate its guaranty for any reason. In the event
that a guarantor terminates its guaranty, or does not renew its guaranty and in
the case of a non-renewal the lenders have not received cash collateral or a
replacement guaranty executed by a replacement guarantor satisfactory to the
lenders, then the loan commitments under the revolving credit facility will
terminate and we will be required to repay all outstanding loans and accrued
interest under this facility. Likewise, if any guarantor defaults under its
guaranty, then the guarantor's default will constitute an event of default under
this revolving credit facility. In such event, the loan commitments under this
revolving credit facility may terminate and the loans and accrued interest under
the facility may be due and payable immediately.
In any of these events, the guarantors and their affiliates have severally
agreed to make new revolving credit loans available to us on terms and
conditions no less favorable to us than provided in the original $150 million
revolving credit facility between us and TPG. The original TPG $150 million
revolving credit facility was substantially similar to the Citibank $150
F-10
million revolving credit facility except that the interest rates were 2% higher
than the interest rates under the Citibank revolving credit facility.
Accordingly, we could be required to pay higher interest rates on any
replacement financing provided by the guarantors. In addition, the guarantors
may not have sufficient funds and assets to provide this replacement financing
and we may be required to obtain replacement financing from third parties. We
cannot be certain that we would be able to obtain the replacement financing on a
timely basis or at all.
The $150 million Citibank revolving credit facility, the indenture for the
senior subordinated secured notes and the certificate of designations for the
Preferred Stock contain change in control provisions. Under these instruments,
if (1) TPG's ownership interest in us is reduced below 15% (or, in the case of
the indenture, 30%) of our total outstanding equity interests, (2) another
person or group acquires ownership of a greater percentage of our outstanding
equity than TPG, or (3) a majority of our board of directors is neither
nominated by our board of directors nor appointed by directors so nominated,
then:
o our Preferred Stock becomes redeemable at the option of the holders at
101% of its stated value plus the amount, if any, of all accumulated
and unpaid dividends;
o an event of default shall be deemed to have occurred under the Citibank
revolving credit facility in which event the loan commitments under
this facility may terminate and the loans and accrued interest then
outstanding may become immediately due and payable; and
o the holders of the senior subordinated secured notes will have the
right to require us to repurchase the notes at a purchase price equal
to 101% of the principal amount plus accrued and unpaid interest.
In such event, we may not have sufficient funds to redeem the Preferred Stock,
repay the outstanding loans and accrued interest under the Citibank revolving
credit facility and/or repurchase the senior subordinated secured notes and we
would need to seek and obtain replacement financing. We cannot be certain that
we would be able to refinance these amounts.
Under the terms of the 55 million Euro Italian subsidiary note, we are required
to pay 50% of our annual net free cash flow, which is net of capital
expenditures, as a mandatory principal repayment of this note. We are also
required to pay 75% of any cash received from MKC through dividends, reductions
or repurchases of equity, share redemptions or loans, as a mandatory principal
repayment of this note.
We maintained the following debt agreements as of December 31, 2001, assuming
the $50 million senior subordinated secured notes and the 55 million Euro
Italian subsidiary note (approximately $48 million) are valued at face value
rather than their combined book value of two dollars:
<Table>
<Caption>
(Dollars in millions) Committed Outstanding
------------ ------------
Long-term Debt $ 346 $ 226
Short-term Borrowings 128 93
------------ ------------
Total $ 474 $ 319
============ ============
</Table>
F-11
Our weighted average cost of borrowing, excluding accretion, was 5.6% at
December 31, 2001 compared to 8.5% at December 31, 2000. Our total debt to total
capital ratio at December 31, 2001 was 88%, compared to 71% at December 31,
2000. The change in this ratio in 2001 is a result of our debt restructuring and
the purchase accounting adjustments to push down TPG's nominal basis in MEMC, as
discussed in Company Overview above.
Our contractual obligations as of December 31, 2001 were as follows, assuming
the $50 million senior subordinated secured notes, the 55 million Euro Italian
subsidiary note (approximately $48 million), and the Series A Cumulative
Convertible Preferred Stock, including accrued but unpaid dividends, are valued
at face value:
<Table>
<Caption>
(Dollars in millions) Payments Due By Period
------------------------------------------------
Less Than 2-3 4-5 After 5
Total 1 Year Years Years Years
-------- --------- -------- -------- --------
Long-term Debt $ 226 $ 31 $ 66 $ 47 $ 82
Short-term Borrowings 93 93 -- -- --
Series A Cumulative Convertible
Preferred Stock 264 -- -- -- 264
Operating Leases 13 7 5 1 --
Committed Capital Expenditures 7 7 -- -- --
-------- --------- -------- -------- --------
Total Contractual Obligations $ 603 $ 138 $ 71 $ 48 $ 346
======== ========= ======== ======== ========
</Table>
Of the $603 million contractual obligations at December 31, 2001, $264 million
relates to our Preferred Stock, which is redeemable at the option of the holder
in or after 2009. If the holders of the Preferred Stock convert these securities
to our common stock within this eight-year period, there will be no cash outlay.
TPG has agreed not to convert any shares of Preferred Stock until our
stockholders approve the issuance of the Preferred Stock, the related warrants
and the common stock issuable upon conversion of the Preferred Stock and
exercise of the warrants.
Of the short-term borrowings and the long-term debt, approximately $89 million
is owed by our Korean subsidiary, approximately $53 million of which is due
within the next year. As noted above, this subsidiary had cash on hand of $73
million at December 31, 2001.
Additionally, of the short-term borrowings, approximately $48 million relates to
the 55 million Euro Italian subsidiary note retained by TPG. As part of our debt
restructuring with TPG, we agreed to restructure this note on certain terms set
forth in the restructuring agreement. It was originally contemplated that our
Italian subsidiary would secure and deliver to TPG a senior secured note due
2031 in the principal amount of 55 million Euro, guaranteed by MEMC, bearing
interest at 6% per annum (payment in kind) and secured by assets of the Italian
subsidiary. We have been unable to restructure this note on the original terms
contemplated in the restructuring agreement. We are currently reviewing with TPG
alternatives to the originally contemplated restructuring of this note.
F-12
As described in Company Overview above, this note was recorded at its fair
market value of one dollar. It will accrete interest up to its face value in
less than one year.
Excluding the Korean subsidiary debt and the Italian subsidiary note, our
contractual obligations at December 31, 2001 with payment periods of less than
one year total approximately $37 million. As noted above, we have $120 million
available on our Citibank revolving credit facility at December 31, 2001.
Our other commercial commitments as of December 31, 2001 were as follows:
<Table>
<Caption>
(Dollars in millions) Amount Of Commitment Expiration Per Period
------------------------------------------------
Less Than 1-3 4-5 After 5
Total 1 Year Years Years Years
-------- -------- -------- -------- --------
Debt Guarantees to Taisil $ 10 $ 10 $ -- $ -- $ --
-------- -------- -------- -------- --------
Total Commercial Commitments $ 10 $ 10 $ -- $ -- $ --
======== ======== ======== ======== ========
</Table>
In January 2002, Taisil fully repaid the loans underlying these guarantees.
We believe that we have the financial resources needed to meet business
requirements for the next 12 months, including capital expenditures and working
capital requirements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements and related footnotes. In
preparing these financial statements, management has made its best estimates of
certain amounts included in the financial statements. However, application of
these accounting policies involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. MEMC's significant accounting policies are more
fully described in Note 3 of Notes to Consolidated Financial Statements herein.
Push down Accounting
As a result of the purchase of E.ON's equity interest in MEMC by TPG and the
rights possessed by TPG through its ownership of the Preferred Stock, we applied
purchase accounting and pushed down TPG's nominal basis in MEMC to our
accounting records, reflected in our consolidated financial statements
subsequent to November 13, 2001. Assuming full conversion of the Preferred
Stock, excluding any accrued but unpaid dividends, TPG would own 89.4% of MEMC's
common stock.
To revalue our assets and liabilities, we first estimated their fair market
values. To the extent the fair market value differed from the book value, 89.4%
of that difference was recorded as an adjustment to the carrying value of the
respective asset or liability. To the extent the adjusted net carrying value of
assets and liabilities exceeded the pushed down basis of TPG's investment in
MEMC, negative goodwill was generated. The negative goodwill was then allocated
to the bases of existing goodwill and other identifiable intangible assets,
investments in joint ventures, and property, plant and equipment.
This revaluation resulted in a net decrease to assets of approximately $800
million and a net decrease to liabilities of approximately $900 million. The
allocation of the purchase price to our assets and liabilities is subject to
further refinement.
The net decrease in assets reflects the write-down of goodwill, certain
intangible assets, investments in joint ventures, and property, plant and
equipment to reflect TPG's nominal purchase price. We expect the write-down of
property, plant and equipment, goodwill, and intangible assets to result in a
reduction in our depreciation and amortization of approximately $150 million in
2002.
F-13
Actual results may differ from these estimates.
The accounting for our change in majority owner and the related debt
restructuring is more fully described in Note 2 of Notes to Consolidated
Financial Statements herein.
Inventory Reserves
We adjust the value of our obsolete and unmarketable inventory to the estimated
market value based upon assumptions of future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
Impairment of Long-lived Assets and Long-lived Assets to Be Disposed of
We review long-lived assets to assess recoverability from future operations
using future net cash flows. When necessary, we record charges for impairments
at the amount by which the present value of the future cash flows is less than
the carrying value of the assets. Assets to be disposed of are valued at the
carrying amount or at fair value, less costs to sell, if lower.
Income Taxes
Deferred taxes arise because of different treatment between financial statement
accounting and tax accounting, known as temporary differences. We record the tax
effect of these temporary differences as deferred tax assets (generally items
that can be used as a tax deduction or credit in future periods) and deferred
tax liabilities (generally items that we received a tax deduction for, but have
not yet been recorded in the statement of operations). A valuation allowance is
recorded because some items recorded as deferred tax assets may not be
deductible or creditable.
We provide for U.S. income taxes on earnings of consolidated international
subsidiaries that we plan to remit to the U.S. We do not provide for U.S. income
taxes on the remaining earnings of these subsidiaries, as we expect to reinvest
these earnings overseas or we expect the taxes to be minimal based upon
available foreign tax credits.
Section 382 of the Internal Revenue Code (IRC) restricts the utilization of net
operating losses and other carryover tax attributes upon the occurrence of an
ownership change. Such an ownership change occurred during 2001 as a result of
the acquisition by TPG, as described in Company Overview above. We believe that
a significant majority of our U.S. net operating loss carryforwards will be
utilized or applied to reduce our tax attributes, under IRC Section 108(b), as
a result of the transactions with TPG. To the extent that any U.S. or foreign
net operating loss carryforwards remain, we have recognized a valuation
allowance to fully offset any associated deferred tax assets. Accordingly, as
of December 31, 2001, our net operating loss carryforwards do not carry any
value in our consolidated balance sheet.
Push down accounting as described in Company Overview above created differences
in the bases of certain assets and liabilities for financial statement
accounting and for tax accounting. These differences resulted in the
recognition of a net deferred tax asset. We reviewed our total net deferred tax
assets by taxable jurisdiction and recognized a valuation allowance where it
was determined more likely than not that we would be unable to realize a
benefit from these assets.
Revenue Recognition
We record revenue from product sales when the goods are shipped and title passes
to the customer. Our silicon wafers are made to customer specifications at plant
sites that have been pre-qualified by the customer. We conduct rigorous quality
control and testing procedures to ensure that the finished silicon wafers meet
the customer's specifications before the product is shipped.
F-14
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under the
provisions of SFAS No. 142, goodwill will no longer be amortized over its useful
life but will be subject to impairment tests at least annually or on an interim
basis whenever circumstances occur indicating the goodwill might be impaired.
Intangible assets with indefinite lives will be reclassified to goodwill and
will be subjected to the same impairment test as goodwill. This impairment test
will involve the identification of reporting units and assigning assets
(including goodwill) and liabilities to those reporting units. If a reporting
unit's carrying amount exceeds its estimated fair value, a goodwill impairment
would be recognized to the extent the reporting unit's carrying amount of
goodwill exceeds the implied fair value of the goodwill.
As described in Company Overview above, as a result of the purchase of E.ON's
equity interest in MEMC by TPG, we applied purchase accounting and pushed down
TPG's nominal basis in MEMC to our accounting records. This revaluation resulted
in a significant write-down of goodwill and certain intangible assets. We expect
this write-down to result in a significant reduction in our amortization in
2002.
We will adopt SFAS No. 142 as of January 1, 2002. We continued to amortize the
carrying value of the existing goodwill and intangible assets through 2001. Upon
adoption of SFAS No. 142, we will reassess the classification and estimated
useful lives of existing intangible assets and goodwill. We do not expect the
adoption of SFAS No. 142 to have a material impact on the financial statements
of the company.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, effective for fiscal years beginning after June 15, 2002. SFAS No.
143 addresses financial accounting requirements for retirement obligations
associated with tangible long-lived assets.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, that replaces SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The
F-15
provisions of SFAS No. 144 are effective for fiscal years beginning after
December 15, 2001 and, generally, are to be applied prospectively. SFAS No. 144
requires that long-lived assets to be disposed of by sale, including those of
discontinued operations, be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
been incurred. SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction.
We do not believe the implementation of Statements No. 142, 143 and 144 will
have a material effect on our financial condition or results of operations.
MARKET RISK
The overall objective of our financial risk management program is to reduce the
potential negative earnings effects from changes in foreign exchange and
interest rates arising in our business activities. We manage these financial
exposures through operational means and by using various financial instruments.
These practices may change as economic conditions change.
To mitigate financial market risks of foreign currency exchange rates, we
utilize currency forward contracts. We do not use derivative financial
instruments for speculative or trading purposes. All of the potential changes
noted below are based on sensitivity analyses performed on our financial
positions at December 31, 2001 and December 31, 2000. Actual results may differ
materially.
We generally hedge transactional currency risks with currency forward contracts.
Gains and losses on these foreign currency exposures are generally offset by
corresponding losses and gains on the related hedging instruments, resulting in
negligible net exposure to MEMC.
Our debt obligations are primarily of a fixed-rate nature. An adverse change
(defined as a 100 basis point change) in interest rates on our total debt
outstanding would result in a decline in income before taxes of approximately $3
million and $11 million as of the end of 2001 and 2000, respectively.
A substantial majority of our revenue and capital spending is transacted in U.S.
Dollars. However, we do enter into these transactions in other currencies,
primarily the Japanese Yen, the Italian Lira, the Euro, the Korean Won, 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, we have established transaction-based hedging programs. Our hedging
programs reduce, but do not always eliminate, the impact of foreign currency
exchange rate movements.
F-16
An adverse change (defined as 20 percent in certain Asian currencies and 10
percent in all other currencies) in exchange rates would have the following
effect on our results:
<Table>
<Caption>
(Dollars in millions) 2001 2000
-------- --------
Income Before Taxes $ -- $ (2)
Other Comprehensive Income (13) (22)
</Table>
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 competitors' products become more or less
attractive. Our 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.
F-17
CONSOLIDATED STATEMENTS OF OPERATIONS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
<Table>
<Caption>
Predecessor
--------------------------------------------
November 14 January 1
through through Year ended December 31,
December 31, November 13, ----------------------------
2001 2001 2000 1999
------------ ------------ ------------ ------------
Net sales $ 58,846 $ 559,007 $ 871,637 $ 693,594
Cost of goods sold 70,577 598,764 742,662 703,929
------------ ------------ ------------ ------------
Gross margin (11,731) (39,757) 128,975 (10,335)
Operating expenses:
Marketing and administration 7,973 61,747 69,182 63,613
Research and development 7,535 58,149 72,155 85,019
Restructuring costs 2,971 29,511 -- (5,747)
------------ ------------ ------------ ------------
Operating loss (30,210) (189,164) (12,362) (153,220)
------------ ------------ ------------ ------------
Nonoperating (income) expense:
Interest expense 3,599 78,449 78,801 66,054
Interest income (1,516) (6,773) (4,838) (1,986)
Royalty income (448) (2,978) (9,815) (6,112)
Other, net 4,173 1,804 1,317 1,472
------------ ------------ ------------ ------------
Total nonoperating expense 5,808 70,502 65,465 59,428
------------ ------------ ------------ ------------
Loss before income taxes, equity in income
(loss) of joint ventures and minority interests (36,018) (259,666) (77,827) (212,648)
Income taxes 1,576 239,352 (21,013) (65,921)
------------ ------------ ------------ ------------
Loss before equity in income (loss) of joint
ventures and minority interests (37,594) (499,018) (56,814) (146,727)
Equity in income (loss) of joint ventures (2,822) 441 14,664 (9,659)
Minority interests 11,019 9,552 (1,240) 4,905
------------ ------------ ------------ ------------
Net loss $ (29,397) $ (489,025) $ (43,390) $ (151,481)
============ ============ ============ ============
Cumulative preferred stock dividends $ 4,247 NA NA NA
============ ============ ============ ============
Net loss allocable to common stockholders $ (33,644) $ (489,025) $ (43,390) $ (151,481)
============ ============ ============ ============
Basic loss per share $ (0.48) $ (7.03) $ (0.62) $ (2.43)
Diluted loss per share $ (0.48) $ (7.03) $ (0.62) $ (2.43)
Weighted average shares used in computing
basic and diluted loss per share 69,612,900 69,612,900 69,596,861 62,224,869
============ ============ ============ ============
</Table>
See accompanying notes to consolidated financial statements.
F-18
CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
<Table>
<Caption>
December 31, 2001 2000
------------ ------------
ASSETS (Successor) (Predecessor)
Current assets:
Cash and cash equivalents $ 107,159 $ 94,759
Accounts receivable, less allowance for doubtful accounts of
$3,341 and $3,089 in 2001 and 2000, respectively 67,420 145,970
Inventories 69,947 114,357
Deferred tax assets, net -- 13,450
Prepaid and other current assets 19,504 24,369
------------ ------------
Total current assets 264,030 392,905
Property, plant and equipment, net 200,705 1,097,602
Investments in joint ventures 15,581 51,647
Goodwill, net of accumulated amortization of $736
and $7,291 in 2001 and 2000, respectively 3,761 45,733
Deferred tax assets, net 30,059 221,100
Other assets 35,198 81,579
------------ ------------
Total assets $ 549,334 $ 1,890,566
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 75,873 $ 127,782
Accounts payable 52,079 88,552
Accrued liabilities 49,958 59,372
Deferred tax liabilities, net 345 --
Customer deposits 19,370 14,307
Provision for restructuring costs 10,505 9,007
Income taxes payable 1,994 13,735
Accrued wages and salaries 11,575 25,870
------------ ------------
Total current liabilities 221,699 338,625
Long-term debt, less current portion 144,743 942,972
Pension and similar liabilities 100,804 91,786
Customer deposits 25,373 42,456
Other liabilities 25,881 33,895
------------ ------------
Total liabilities 518,500 1,449,734
------------ ------------
Minority interests 51,083 74,413
Redeemable preferred stock:
Preferred stock, $.01 par value, $1,000 stated value per share,
260,000 and 0 shares issued and outstanding in 2001 and
2000, respectively, liquidation value of $264,247
at December 31, 2001 4,247 --
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred stock, $.01 par value, 50,000,000 shares
authorized, 260,000 and 0 issued and outstanding
in 2001 and 2000, respectively, (see above) -- --
Common stock, $.01 par value, 200,000,000 shares authorized,
70,542,105 issued in 2001 and 2000 705 705
Additional paid-in capital 8,081 771,675
Accumulated deficit (29,397) (342,707)
Accumulated other comprehensive income (loss) 835 (46,234)
Treasury stock: 929,205 shares in 2001 and 2000 (4,720) (17,020)
------------ ------------
Total stockholders' equity (deficiency) (24,496) 366,419
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 549,334 $ 1,890,566
============ ============
</Table>
See accompanying notes to consolidated financial statements.
F-19
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
<Table>
<Caption>
Predecessor
------------------------------------------
November 14 January 1
through through Year ended December 31,
December 31, November 13, ---------------------------
2001 2001 2000 1999
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (29,397) $ (489,025) $ (43,390) $ (151,481)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,271 169,341 173,085 159,081
Minority interests (11,019) (9,552) 1,240 (4,905)
Equity in (income) loss of joint ventures 2,822 (441) (14,664) 9,659
Restructuring costs 1,345 16,179 -- (5,747)
(Gain) loss on sale of property, plant and equipment 233 377 (2,789) 981
Deferred compensation 2,647 -- -- (601)
Changes in assets and liabilities:
Accounts receivable 5,323 67,322 (31,460) (13,268)
Income taxes (354) (10,844) 20,410 516
Inventories 17,011 24,015 (16,417) 12,164
Prepaid and other current assets 1,812 (8,288) (10,246) 8,636
Deferred taxes 774 238,161 (38,601) (67,692)
Accounts payable 5,699 (18,659) (1,128) (20,349)
Accrued liabilities (265) 1,270 4,198 (16,502)
Customer deposits -- (7,508) (8,249) (11,660)
Accrued wages and salaries (9,658) (4,044) 3,460 4,621
Other, net 2,845 12,021 16,591 (6,645)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (4,911) (19,675) 52,040 (103,192)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (6,995) (42,842) (57,812) (49,256)
Proceeds from sale of property, plant and equipment 51 94 3,060 4,753
Equity infusions in joint ventures -- -- -- (12,052)
Dividend to minority interest -- (2,759) -- --
Purchase of business, net of cash acquired -- -- 10,660 --
Notes receivable from affiliates -- -- -- 9,664
------------ ------------ ------------ ------------
Net cash used in investing activities (6,944) (45,507) (44,092) (46,891)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net short-term borrowings (5,714) 42,605 5,916 (26,463)
Proceeds from issuance of long-term debt 32,172 93,015 100,119 276,692
Principal payments on long-term debt (19,255) (61,830) (37,437) (283,620)
Proceeds from issuance of common stock -- -- 958 197,271
Capital contributions from E.ON AG 37,000 -- -- --
Expenses related to recapitalization (24,220) -- -- --
------------ ------------ ------------ ------------
Net cash provided by financing activities 19,983 73,790 69,556 163,880
------------ ------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents (1,901) (2,435) (11,316) (1,394)
------------ ------------ ------------ ------------
Net increase in cash and cash equivalents 6,227 6,173 66,188 12,403
Cash and cash equivalents at beginning of period 100,932 94,759 28,571 16,168
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 107,159 $ 100,932 $ 94,759 $ 28,571
============ ============ ============ ============
Supplemental disclosures of cash flow information:
Interest payments, net of amount capitalized $ 1,856 $ 68,546 $ 76,026 $ 64,076
Income taxes paid $ 854 $ 5,638 $ 3,201 $ 4,816
============ ============ ============ ============
</Table>
See accompanying notes to consolidated financial statements.
F-20
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
DOLLARS IN THOUSANDS
<Table>
<Caption>
Accumulated Unearned Total Total
Additional Other Restricted Stockholders' Compre-
Common Paid-in Accumulated Comprehensive Stock Treasury Equity hensive
Stock Capital Deficit Income (Loss) Awards Stock (Deficiency) Loss
--------- ---------- ----------- ------------- ---------- --------- ------------ ---------
Balance at December 31,1998 $ 414 $ 574,188 $(147,836) $ (10,581) $ (125) $ (17,020) $ 399,040
--------- --------- --------- --------- --------- --------- ---------
Comprehensive loss:
Net loss -- -- (151,481) -- -- -- (151,481) (151,481)
Net translation adjustment -- -- -- (12,456) -- -- (12,456) (12,456)
Minimum pension liability
(net of $629 tax) -- -- -- 984 -- -- 984 984
Stock plans, net -- 354 -- -- -- -- 354 --
Deferred compensation -- (726) -- -- 125 -- (601) --
Issuance of common stock 291 196,660 -- -- -- -- 196,951 --
--------- --------- --------- --------- --------- --------- --------- ---------
Total comprehensive loss (162,953)
=========
Balance at December 31,1999 705 770,476 (299,317) (22,053) -- (17,020) 432,791
--------- --------- --------- --------- --------- --------- ---------
Comprehensive loss:
Net loss -- -- (43,390) -- -- -- (43,390) (43,390)
Net translation adjustment -- -- -- (24,640) -- -- (24,640) (24,640)
Minimum pension liability
(net of $293 tax) -- -- -- 459 -- -- 459 459
Stock plans, net -- 1,199 -- -- -- -- 1,199 --
--------- --------- --------- --------- --------- --------- --------- ---------
Total comprehensive loss (67,571)
=========
Balance at December 31, 2000 705 771,675 (342,707) (46,234) -- (17,020) 366,419
--------- --------- --------- --------- --------- --------- ---------
Comprehensive loss:
Net loss, January 1 to
November 13 -- -- (489,025) -- -- -- (489,025) (489,025)
Net translation adjustment -- -- -- (2,203) -- -- (2,203) (2,203)
--------- --------- --------- --------- --------- --------- --------- ---------
Total comprehensive loss (491,228)
=========
Balance at November 13, 2001 705 771,675 (831,732) (48,437) -- (17,020) (124,809)
--------- --------- --------- --------- --------- --------- ---------
Comprehensive loss:
Net loss, November 14 to
December 31 -- -- (29,397) -- -- -- (29,397) (29,397)
Net translation adjustment -- -- -- 6,952 -- -- 6,952 6,952
Deferred compensation -- 2,647 -- -- -- -- 2,647 --
Purchase accounting -- (761,994) 831,732 42,320 -- 12,300 124,358 --
Cumulative preferred
stock dividend -- (4,247) -- -- -- -- (4,247) --
--------- --------- --------- --------- --------- --------- --------- ---------
Total comprehensive loss $ (22,445)
=========
Balance at December 31, 2001 $ 705 $ 8,081 $ (29,397) $ 835 $ -- $ (4,720) $ (24,496)
========= ========= ========= ========= ========= ========= =========
</Table>
See accompanying notes to consolidated financial statements.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
1: NATURE OF OPERATIONS
MEMC Electronic Materials, Inc. and subsidiaries is a leading
worldwide producer of silicon wafers for the semiconductor industry. We
have production facilities owned directly in Italy, Japan, Malaysia, South
Korea, and the United States and through a joint venture in Taiwan. Our
customers include virtually all major semiconductor device manufacturers
including the world's largest foundries as well as the major memory,
microprocessor, and application specific integrated circuit (ASIC)
manufacturers.
2: CHANGE IN MAJORITY OWNER AND DEBT RESTRUCTURING
On November 13, 2001, an investor group led by Texas Pacific Group
(TPG) purchased from E.ON and its affiliates (E.ON) all of E.ON's debt and
equity holdings in MEMC for a nominal purchase price of 6 dollars. In
addition, on that date MEMC and TPG restructured MEMC's debt acquired by
TPG from E.ON and TPG committed to provide MEMC with a five-year $150,000
revolving credit facility.
As a result of these transactions, TPG now owns approximately 72% of
our outstanding common stock and has exchanged $860,000 of the total
$910,000 of debt acquired from E.ON for shares of our Series A Cumulative
Convertible Preferred Stock (Preferred Stock) with a stated value of
$260,000, $50,000 in principal of our senior subordinated secured notes and
warrants to purchase approximately 17 million shares of our common stock.
TPG also retained 55 million Euro in principal amount of a note currently
outstanding issued by our Italian subsidiary.
Stockholder approval is required in order for TPG to exercise certain
of the voting and conversion provisions of the Preferred Stock and to
exercise the warrants. TPG has agreed not to convert any shares of
Preferred Stock until our stockholders approve the issuance of the
Preferred Stock, the warrants and the common stock issuable upon conversion
of the Preferred Stock and exercise of the warrants. Assuming stockholder
approval is obtained, TPG will own or have the right to acquire, through
conversion of the Preferred Stock, excluding any accrued but unpaid
dividends, and exercise of the warrants, approximately 182 million shares
or 90% of our outstanding common stock.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, effective for fiscal years beginning after December 15, 2001.
SFAS No. 141 eliminates the pooling of interests method of accounting for
business combinations initiated after June 30, 2001. We adopted SFAS No.
141 in 2001 and accounted for these transactions in accordance with SFAS
No. 141.
As a result of the purchase of E.ON's equity interest by TPG and the
rights possessed by TPG through its ownership of the Preferred Stock, we
applied purchase accounting and pushed down TPG's nominal basis in MEMC to
our accounting records, reflected in our consolidated financial statements
subsequent to November 13, 2001. Assuming full conversion of the Preferred
Stock, excluding any accrued but unpaid dividends, TPG would own 89.4% of
MEMC's common stock.
In accordance with the terms and conditions of the purchase agreement
between E.ON and TPG, TPG agreed to a contingent performance purchase price
payment to E.ON in an aggregate amount equal to the following:
o $0 if MEMC's Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA) for fiscal year 2002 is less than $100,000; or
o $30,000, if MEMC's EBITDA for fiscal year 2002 equals or exceeds
$100,000, but is less than $150,000; or
o $75,000, if MEMC's EBITDA for fiscal year 2002 equals or exceeds
$150,000, but is less than $300,000; or
o $150,000, if MEMC's EBITDA for fiscal year 2002 equals or exceeds
$300,000.
Should any such payment be made, it would be considered as additional
TPG purchase price and would be pushed down to our financial statements. We
would then write up the value of our assets on a pro rata basis up to but
not exceeding their fair market values. Due to the uncertainty as to which
level of contingent performance purchase price might be paid, if any, we
did not consider this contingency in applying purchase accounting.
To revalue our assets and liabilities, we first estimated their fair
market values. To the extent the fair market value differed from the book
value, 89.4% of that difference was recorded as an adjustment to the
carrying value of the
F-22
respective asset or liability. To the extent the adjusted net carrying
value of assets and liabilities exceeded the pushed down basis of TPG's
investment in MEMC, negative goodwill was generated. The negative goodwill
was then allocated to the bases of existing goodwill and other identifiable
intangible assets, investments in joint ventures, and property, plant and
equipment. The fair market value of assets and liabilities was determined
as follows:
o The fair market value of all current assets and liabilities
approximated book value. In addition, the fair market value of certain
other long-term liabilities and minority interests approximated book
value.
o The fair market value of property, plant and equipment was derived by
estimating depreciated replacement cost.
o Goodwill was estimated to have no fair market value.
o Software and other intangibles in the balance sheet caption "Other
assets" were estimated to have no fair market value. The fair market
value of all other assets contained in this caption approximated book
value.
o The fair market value of pension and similar liabilities was
determined by calculating the excess of the actuarially calculated
projected benefit obligations and accumulated benefit obligations over
the fair value of plan assets.
o The fair value of long-term customer deposits was determined by
calculating the net present value of expected future payments.
Negative goodwill was allocated, on a pro rata basis, between property,
plant and equipment, investments in joint ventures, goodwill and other
intangible assets. Negative goodwill was allocated further to individual
assets within property, plant and equipment using the estimated depreciated
replacement cost.
The process of revaluing the balance sheet as described above resulted
in a significant write-down in the value of property, plant and equipment,
goodwill and other intangible assets, and investments in joint ventures.
Accordingly, depreciation and amortization subsequent to November 13, 2001
reflects the new basis of the underlying assets. The decreased depreciation
and amortization of our 80%-owned subsidiaries also affected the 20%
minority interest in their earnings subsequent to November 13, 2001.
This revaluation resulted in a net decrease to assets of approximately
$800,000 and a net decrease to liabilities of approximately $900,000. The
allocation of the purchase price to our assets and liabilities is subject
to further refinement.
The net decrease in liabilities reflects the write-off of the debt
acquired by TPG of approximately $910,000, together with related accrued
interest of approximately $19,800. The senior subordinated secured notes
and the 55 million Euro Italian subsidiary note were recorded at their
combined fair market value of 2 dollars. These debt instruments will
accrete interest up to their face values in six years and less than one
year, respectively, which will be reflected in interest expense.
The Preferred Stock, with an aggregate stated value of $260,000, was
recorded at its fair value of 2 dollars. The Preferred Stock is redeemable
at the option of the holder on or after the eighth anniversary of the date
of issuance. Accordingly, the Preferred Stock will accrete up to its stated
value over this eight year period, which will be recorded as a charge to
earnings available to common stockholders.
The warrants were recorded at their fair market value of less than 1
dollar.
We are responsible for the payment of all our expenses incurred in
connection with the restructuring agreement between MEMC and TPG, including
the revolving credit facility originally provided by TPG to MEMC under the
terms of the restructuring agreement (the TPG revolving credit facility)
and the subsequent negotiation and documentation of the Citibank revolving
credit facility which replaced the TPG revolving credit facility. These
expenses include all fees and expenses of our legal counsel and all
third-party consultants engaged by us to assist in these transactions. We
paid TPG a $10,000 transaction fee in connection with the restructuring
agreement. In addition, we expect to pay TPG and Citibank a total of $3,000
in fees (of which TPG will receive up to approximately $1,100) in
connection with the TPG revolving credit facility, the Citibank revolving
credit facility and the related guaranties. We have reimbursed TPG for all
its fees and disbursements of legal counsel, financial advisors and other
third party consultants (of approximately $14,000) and have paid other
out-of-pocket expenses incurred by us in connection with the restructuring
(of approximately $3,000).
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
In connection with the restructuring, we have entered into a
management advisory agreement with TPG. Pursuant to the agreement, TPG will
provide management and financial advisory services to us as requested by
our Board of Directors in exchange for a management advisory fee of $2,000
per year plus additional compensation if TPG acts as a financial advisor to
us for future transactions such as a merger or debt or equity financing.
Our consolidated financial statements for the periods ended before
November 14, 2001 (predecessor) were prepared using our historical basis of
accounting. The comparability of our operating results for these periods
and the periods following push down accounting is affected by the purchase
accounting adjustments.
3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
In preparing the financial statements, we use some estimates and
assumptions that may affect reported amounts and disclosures. Estimates are
used when accounting for depreciation, amortization, employee benefits and
asset valuation allowances. Our actual results could differ from those
estimates. Certain prior period amounts have been reclassified to conform
with the current period presentation.
(b) Principles of Consolidation
Our consolidated financial statements include the accounts of MEMC
Electronic Materials, Inc. and our wholly and majority-owned subsidiaries.
We account for investments of less than 50% in joint venture companies
using the equity method. All significant transactions among our
subsidiaries have been eliminated.
(c) Cash Equivalents
Cash equivalents include items almost as liquid as cash, such as
overnight investments and short-term time deposits with maturity periods of
three months or less when purchased. Our cash equivalents at December 31,
2001 include $4,375 of cash which is restricted by terms of two annually
renewable letter of credit agreements.
(d) Inventories
We value our inventories at cost or market, if lower. Cost is
determined as follows:
o Raw materials and supplies inventories at moving average costs;
o Goods in process at actual costs; and
o Finished goods at standard costs, which approximate average costs.
We adjust the value of our obsolete and unmarketable inventory to the
estimated market value based upon assumptions of future demand and market
conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.
(e) Property, Plant and Equipment
Prior to the transactions described in Note 2 above, our property,
plant and equipment was valued at cost. Effective as of November 14, 2001,
we revalued our property, plant and equipment to reflect the push-down of
TPG's nominal basis in MEMC.
We depreciate property, plant and equipment evenly over the assets'
estimated useful lives as follows:
<Table>
<Caption>
Years
-----
Land improvements 6-15
Buildings and building improvements 10-30
Machinery and equipment 3-12
</Table>
The cost of constructing facilities and equipment and developing
internal use software includes interest costs. These interest costs totaled
$565, $1,017, and $1,099 in 2001, 2000, and 1999, respectively.
(f) Goodwill
Prior to the transactions described in Note 2 above, goodwill
represented the difference between the purchase price of acquired
businesses and the fair value of their net assets when accounted for by the
purchase method. Effective November 14, 2001, we wrote down goodwill as a
result of the push-down of TPG's nominal basis in
F-24
MEMC. We amortize goodwill evenly over periods estimated to be benefited,
not exceeding 40 years. We review goodwill to assess recoverability from
future operations using expected future cash flows. When necessary, we
record charges for impairments at the amount by which the present value of
future cash flows is less than the carrying value of these assets. There is
no indication of impairment of goodwill at December 31, 2001 or 2000.
(g) Computer Software Developed or Obtained for Internal Use
Prior to the transactions described in Note 2 above, computer software
developed or purchased for internal use was valued at cost. Effective
November 14, 2001, we wrote down the book value of our computer software as
a result of the push-down of TPG's nominal basis in MEMC. We amortize the
carrying value evenly over the estimated useful life of the software. We
expense costs related to the preliminary project and the
post-implementation/operations stages of computer software development as
incurred.
(h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of
We review long-lived assets to assess recoverability from future
operations using future net cash flows. When necessary, we record charges
for impairments at the amount by which the present value of the future cash
flows is less than the carrying value of the assets. Assets to be disposed
of are valued at the carrying amount or at fair value, less costs to sell,
if lower. There is no indication of impairment at December 31, 2001 or
2000.
(i) Impairment of Investments in Joint Ventures
We assess the impairment of investments in joint ventures by comparing
the carrying amount of the asset to future net cash flows. In addition, the
level of commitment of the joint ventures' shareholders, the silicon wafer
markets serviced by the joint ventures, and the customer qualifications at
the joint ventures are also considered. There is no indication of
impairment of these investments at December 31, 2001 or 2000.
(j) Debt
Liabilities with face values greater than their carrying values are
accreted to their face values as interest expense using the effective
interest rate method.
(k) Redeemable Preferred Stock
The Preferred Stock, with an aggregate stated value of $260,000, was
recorded at its fair value of 2 dollars. The Preferred Stock is redeemable
at the option of the holder on or after the eighth anniversary of the date
of issuance. Accordingly, the Preferred Stock is being accreted up to its
stated value over this eight year period, which will be recorded as a
charge to earnings available to common stockholders. The Preferred Stock
also contains an embedded beneficial conversion feature. The intrinsic
value of the beneficial conversion feature is limited to the purchase price
allocated to the Preferred Stock, or 2 dollars. This intrinsic value is
being amortized as a return to preferred stockholders using the effective
interest rate method.
(l) Revenue Recognition
We record revenue from product sales when the goods are shipped and
title passes to the customer. Our silicon wafers are made to customer
specifications at plant sites that have been pre-qualified by the customer.
We conduct rigorous quality control and testing procedures to ensure that
the finished silicon wafers meet the customer's specifications before the
product is shipped.
(m) Derivative Financial Instruments
We use currency forward contracts to manage foreign currency exchange
risk relating to current trade receivables with our foreign subsidiaries
and current trade receivables with our customers denominated in foreign
currencies (primarily Japanese Yen, Italian Lira, and Euro). The purpose of
our foreign currency hedging activities is to protect us from the risk that
the dollar net cash flows resulting from foreign currency transactions will
be negatively affected by changes in exchange rates. We do not hold or
issue financial instruments for speculative or trading purposes.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Gains or losses on our forward exchange contracts, as well as the
offsetting losses or gains on the related hedged receivables, are included
in Nonoperating (income) expense in the statement of operations.
(n) Translation of Foreign Currencies
We determine the functional currency of each subsidiary based on a
number of factors, including the predominant currency for the subsidiary's
expenditures and the subsidiary's borrowings. When the subsidiary's local
currency is considered its functional currency, we translate its financial
statements to U.S. Dollars as follows:
o Assets and liabilities using rates in effect at the balance sheet
date; and
o Statement of operations accounts at average rates for the period.
Adjustments from the translation process are presented in accumulated
other comprehensive income (loss) in stockholders' equity (deficiency).
(o) Income Taxes
Deferred taxes arise because of different treatment between financial
statement accounting and tax accounting, known as temporary differences. We
record the tax effect of these temporary differences as deferred tax assets
(generally items that can be used as a tax deduction or credit in future
periods) and deferred tax liabilities (generally items that we received a
tax deduction for, but have not yet been recorded in the statement of
operations). A valuation allowance is recorded because some items recorded
as deferred tax assets may not be deductible or creditable.
We provide for U.S. income taxes on earnings of consolidated
international subsidiaries that we plan to remit to the U.S. We do not
provide for U.S. income taxes on the remaining earnings of these
subsidiaries, as we expect to reinvest these earnings overseas or we expect
the taxes to be minimal based upon available foreign tax credits.
(p) Stock-Based Compensation
We account for our stock-based compensation under Accounting
Principles Board Opinion No. 25 (Opinion 25), Accounting for Stock Issued
to Employees, and related interpretations. We record compensation expense
related to restricted stock awards over the vesting periods of the awards
and reflect the unearned portion of deferred compensation as a separate
component of stockholders' equity (deficiency). We only issue equity
instruments to employees and non-employee directors. We recognize
compensation cost for fixed awards with ratable vesting in the period in
which the awards are earned.
(q) Contingencies
We record contingent liabilities when the amount can be reasonably
estimated and the loss is probable.
4: FAIR VALUE OF FINANCIAL INSTRUMENTS
We used the following methods and assumptions to estimate the fair
value of derivative and other financial instruments at the balance sheet
date:
o Short-term financial instruments (cash equivalents, accounts
receivable and payable, income taxes receivable and payable,
short-term borrowings, and accrued liabilities) - cost approximates
fair value because of the short maturity period.
o Long-term debt - fair value is based on the amount of future cash
flows associated with each debt instrument discounted at our current
borrowing rate for similar debt instruments of comparable terms.
o At December 31, 2001, the 55 million Euro Italian subsidiary note
(approximately $48,000) and the $50,000 senior subordinated secured
notes are valued at their fair market values of less than $1,
due to the proximity of the debt restructuring to year-end and to
MEMC's inability to obtain similar debt instruments of comparable
terms.
o Currency forward contracts - fair value is measured by the amount that
would have been paid to liquidate and repurchase all open contracts.
F-26
Information on the estimated fair values of financial instruments,
both on and off balance sheet, is as follows:
<Table>
<Caption>
Carrying Notional Estimated
Amount Amount Fair Value
------------ ------------ ------------
DOLLARS IN THOUSANDS
Long-term debt
2001 $ 175,856 $ 225,856 $ 177,396
2000 1,041,202 1,041,202 953,796
Currency forward contracts (off-balance sheet)
2001 NA $ 28,215 $ 313
2000 NA 83,371 3,524
============ ============ ============
</Table>
5: CONCENTRATION OF CREDIT RISK
Our customers are in the semiconductor industry and are located in
various geographic regions including the United States, Europe, Japan and
Asia Pacific. Our customers are primarily well capitalized, and the
concentration of credit risk is considered minimal. Sales to Samsung
Electronics Company, Ltd. and to STMicroelectronics N.V. were 18% and 10%
of our net sales in 2001, respectively. Sales to Texas Instruments
Incorporated totaled 18% of our net sales in both 2000 and 1999. No other
customers constituted 10% or more of our net sales in 2001, 2000, or 1999.
6: RESTRUCTURING COSTS
During the fourth quarter of 2001, we reduced our workforce by
approximately 800 employees, including U.S. and Malaysian salaried and
hourly employees. This action was taken to balance our operating costs with
the weakened product demand. We recorded total charges of $10,060 related
to this action in the fourth quarter of 2001. Of these charges, $669 was
non-cash related.
During the second quarter of 2001, we decided to close our small
diameter wafer line at MEMC Southwest Inc. in Sherman, Texas. MEMC
Southwest is a joint venture 80%-owned by MEMC and 20%-owned by Texas
Instruments. This action was taken:
o as part of our continuing efforts to focus our manufacturing
facilities;
o to improve our cost structure; and
o to balance our production capabilities with the evolving market
conditions.
We recorded total charges of $22,606 related to this action in the
second and third quarters of 2001. Of these charges, $17,085 was non-cash
related. We also wrote off approximately $3,000 of inventory related to
this action, which was included in cost of goods sold. In addition, we
recorded an adjustment to reduce the previously existing restructuring
reserve related to our former Chinese joint venture assets by $184.
During the second quarter of 1998, we decided to close our small
diameter wafer facility in Spartanburg, South Carolina and to withdraw from
our 60%-owned joint venture in a small diameter wafer operation in China.
These actions were taken because
o 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;
o a number of semiconductor manufacturers recently had undertaken
restructuring initiatives focused on permanently eliminating small
diameter lines; and
o we believed that small diameter wafer capacity would exceed demand
even after the semiconductor industry
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
began to recover.
We also decided to forego construction of a new 200 millimeter wafer
facility at our 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 we had experienced for these
wafers.
In 1998, we recorded a charge to operations of $121,670 related to
these actions. In 1999, we reduced the restructuring reserve by $5,747
because the amount required to withdraw from the Chinese joint venture was
less than we had originally estimated.
At December 31, 1999, we reclassified certain components of the
restructuring reserve based on anticipated costs to close the Spartanburg,
South Carolina facility.
Restructuring activity is as follows:
<Table>
<Caption>
Asset Dismantling
Impairment/ and Related Personnel
Write-off Costs Costs Total
------------ ------------ ------------ ------------
DOLLARS IN THOUSANDS
Balance at January 1, 1999 $ 6,963 $ 19,795 $ 10,541 $ 37,299
Amounts utilized (326) (10,107) (8,280) (18,713)
Adjustment (5,747) -- -- (5,747)
Reclassification -- 1,836 (1,836) --
------------ ------------ ------------ ------------
Balance at December 31, 1999 890 11,524 425 12,839
Amounts utilized (208) (3,432) (192) (3,832)
------------ ------------ ------------ ------------
Balance at December 31, 2000 682 8,092 233 9,007
Charges taken 14,665 2,274 15,543 32,482
Amounts utilized (14,857) (4,581) (11,546) (30,984)
------------ ------------ ------------ ------------
Balance at December 31, 2001 $ 490 $ 5,785 $ 4,230 $ 10,505
============ ============ ============ ============
</Table>
In the period November 14, 2001 to December 31, 2001, charges taken
totaled $2,971 and amounts utilized totaled $2,892.
The Spartanburg, South Carolina facility has been written down to its
estimated net realizable value of approximately $2,000. The closing of this
facility was completed in the second quarter of 1999, and final product
shipments were made from this facility in the third quarter of 1999. We
continue to actively pursue a buyer for this facility.
Of the $10,505 restructuring reserve at December 31, 2001,
approximately $4,800 is expected to be paid out in the first half of 2002.
The remaining reserve relates to the Spartanburg facility. We believe the
restructuring reserve at December 31, 2001 is adequate for the estimated
costs remaining to exit this facility. Timing for utilization of the
remainder of the reserve is primarily dependent on the timing of the sale
of this facility.
7: INVENTORIES
Inventories consist of the following:
<Table>
<Caption>
December 31, 2001 2000
------------ ------------
DOLLARS IN THOUSANDS
Raw materials and supplies $ 30,882 $ 35,141
Goods in process 22,088 35,562
Finished goods 16,977 43,654
------------ ------------
$ 69,947 $ 114,357
============ ============
</Table>
Inventories at December 31, 2001 reflect lower capitalized
depreciation of approximately $12,000 resulting from the lower property,
plant and equipment values following push down accounting, as described in
Note 2 above.
F-28
8: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<Table>
<Caption>
December 31, 2001 2000
---------- ----------
DOLLARS IN THOUSANDS
Land and land improvements $ 4,673 $ 35,057
Buildings and building improvements 106,559 577,481
Machinery and equipment 191,979 1,487,848
---------- ----------
303,211 2,100,386
Less accumulated depreciation 113,075 1,085,315
---------- ----------
190,136 1,015,071
Construction in progress 10,569 82,531
---------- ----------
$ 200,705 $1,097,602
========== ==========
</Table>
See Notes 2 and 3 regarding the reduction in cost basis of our
property, plant and equipment in 2001 as a result of the push-down of TPG's
nominal basis in MEMC.
9: INVESTMENTS IN JOINT VENTURES
We have a 45% interest in Taisil Electronic Materials Corporation
(Taisil), a company formed to manufacture and sell silicon wafers in
Taiwan.
Prior to September 29, 2000, we had a 40% interest in MEMC Korea
Company (MKC), a company formed to manufacture and sell silicon wafers in
South Korea. Effective September 29, 2000, we purchased an additional 40%
interest in MKC, which increased our ownership to 80%. Since that date,
MKC's financial results have been consolidated with MEMC. As a result of
the financial consolidation, the information below includes the operating
results of MKC only for the first nine months of 2000. MKC is not included
in the balance sheet information below for either year.
Prior to the transactions described in Note 2 above, our investments
in joint ventures were valued at our equity infusions into our joint
ventures plus our ownership percentage of their respective annual net
incomes or net losses. Effective as of November 14, 2001, we revalued our
investments in joint ventures to reflect the push-down of TPG's nominal
basis in MEMC.
Royalties earned under royalty agreements with the joint ventures and
sales of intermediate and finished product by the joint ventures to MEMC
were as follows:
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
DOLLARS IN THOUSANDS
Royalties $ 3,426 $ 9,815 $ 6,112
Sales 4,539 39,300 37,927
============ ============ ============
</Table>
We provide Taisil with debt guarantees totaling $10,212. At December
31, 2001, Taisil had $10,212 in standby letters of credit and borrowings
outstanding against these guarantees. In January 2002, Taisil fully repaid
the loans underlying these guarantees.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
A summary of the results of operations for 2001, 2000 and 1999, and financial
position as of December 31, 2001 and 2000 of our unconsolidated joint ventures
follows:
<Table>
<Caption>
December 31, 2001 2000 1999
--------- --------- ---------
DOLLARS IN THOUSANDS
Total joint ventures:
Net sales $ 83,544 $ 268,403 $ 252,402
Gross margin 16,087 69,459 20,273
Net earnings (loss) (5,289) 33,539 (22,724)
========= ========= =========
Our share--
Net earnings (loss) $ (2,381) $ 14,664 $ (9,659)
========= ========= =========
Current assets $ 44,480 $ 62,140
Noncurrent assets 151,340 169,383
--------- ---------
Total assets 195,820 231,523
--------- ---------
Current liabilities 70,359 74,851
Noncurrent liabilities 12,817 38,739
--------- ---------
Total liabilities 83,176 113,590
Interests of others 63,432 66,286
Push down accounting 33,631 --
--------- ---------
Our investment $ 15,581 $ 51,647
========= =========
</Table>
MKC 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. We designated the U.S. Dollar as their functional currency based
on the following:
o Their net sales are denominated in or based on the U.S. Dollar;
o Their manufacturing expenses are primarily denominated in the U.S.
Dollar, New Taiwanese Dollar and Korean Won; and
o Taisil has significant debt denominated in the U.S. Dollar and New
Taiwanese Dollar.
10: SHORT-TERM BORROWING AGREEMENTS AND LINES OF CREDIT
Our unsecured borrowings from banks total approximately $44,760 at
December 31, 2001, under approximately $79,747 of short-term loan
agreements bearing interest at various rates ranging from 2.5% to 11.0% and
renewable annually. Interest rates are negotiated at the time of the
borrowings. Pursuant to transactions described in Note 2 above, TPG
retained 55 million Euro (approximately $48,000) in principal amount of a
note currently outstanding issued by our Italian subsidiary. We recorded
the 55 million Euro Italian subsidiary note at its fair market value of 1
dollar. We will accrete this debt instrument up to its face value in less
than one year. At December 31, 2001, the accreted value of this note was
less than $1.
Interest expense related to short-term borrowings from affiliates was
$1,200 for the period November 14 to December 31, 2001.
Our weighted average interest rate on short-term borrowings was 5.4%
and 7.1% at December 31, 2001 and 2000, respectively.
F-30
11: LONG-TERM DEBT
Long-term debt consists of the following:
<Table>
<Caption>
December 31, 2001 2000
---------- ----------
DOLLARS IN THOUSANDS
Owed to affiliates:
Senior subordinated secured notes with interest payable at 8%
payable in kind in the first two years, 14% payable in kind
in the third and fourth years, and 14% payable in kind with
optional payment in cash at the request of the note holders
in the fifth and sixth years, $50,000 face value,
due in 2007 $ -- $ --
Notes payable to E.ON with interest payable semiannually at
rates ranging from 3.5% to 11.6%, due in 2002-2005 -- 829,246
---------- ----------
Total owed to affiliates -- 829,246
========== ==========
Owed to nonaffiliates:
Notes with interest payable semiannually at rates ranging
from 1.6% to 2.2%, due in 2001 to 2003 16,533 50,739
Notes with interest payable quarterly or semiannually at rates
ranging from 7.0% to 10.6%, due in 2001 to 2005 -- 66,458
Notes with interest payable semiannually at rates ranging
from 1.2% to 8.9%, due in 2001 through 2017 -- 94,759
Notes with interest payable quarterly at rates ranging
from 6.2% to 7%, due in 2002 through 2004 33,837 --
Notes with interest payable semiannually at rates ranging
from 2.6% to 10.3%, due in 2002 through 2005 21,408 --
Notes with interest payable semiannually at rates ranging
from 1.2% to 4.5%, due in 2002 through 2016 19,834 --
Notes with interest payable semiannually at rates ranging
from 2.1% to 2.9%, due in 2003 through 2017 54,244 --
Revolving notes with interest payable quarterly at 3.6% due in 2006 30,000 --
---------- ----------
Total owed to nonaffiliates 175,856 211,956
---------- ----------
Total long-term debt 175,856 1,041,202
Less current portion 31,113 98,230
---------- ----------
$ 144,743 $ 942,972
========== ==========
</Table>
Pursuant to the transactions described in Note 2 above, TPG exchanged
$860,000 of the total $910,000 of debt acquired from E.ON for shares of our
Preferred Stock with a stated value of $260,000, $50,000 in principal of
our senior subordinated secured notes and warrants to purchase 16,666,667
shares of our common stock. We recorded the senior subordinated secured
notes at their fair market value of 1 dollar. We will accrete this debt
instrument up to its face value in six years. At December 31, 2001, the
accreted value of this note was less than $1.
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
We have a $150,000 five-year revolving credit facility with an
affiliate of Citibank, N.A. TPG has guaranteed our obligations under this
facility, and we have entered into a reimbursement agreement with the
guarantors under which we have agreed to reimburse them for any payments
made under the guaranty. Both the Citibank revolving credit facility and
the reimbursement agreement are secured by substantially all of our
domestic assets, including all of the capital stock of most of our domestic
subsidiaries and 65% of the capital stock of certain of our foreign
subsidiaries. Our domestic subsidiaries have guaranteed our obligations
under the Citibank revolving credit facility and the reimbursement
agreement. The subsidiary guaranties are supported by security interests in
substantially all of the assets of our domestic subsidiaries. The interest
rate under the Citibank revolving credit facility is LIBOR plus 1.5% or an
alternate base rate (based upon the greater of the Federal funds rate plus
0.5% and the Citibank prime rate) plus 0.5% per annum.
Loans can be made under this credit facility subject to certain
conditions and the following aggregate lending limitations:
o $50,000 at any time prior to January 1, 2002
o $75,000 at any time prior to April 1, 2002
o $100,000 at any time prior to July 1, 2002
o $125,000 at any time prior to October 1, 2002
o $150,000 at any time on or after October 1, 2002
At December 31, 2001, we had drawn $30,000 against this credit
facility.
The Citibank revolving credit facility and the indenture for the
senior subordinated secured notes contain certain covenants, including
covenants to maintain minimum quarterly consolidated EBITDA; minimum
monthly consolidated backlog; minimum monthly consolidated revenues;
maximum annual capital expenditures; and other covenants customary for
revolving loans and indentures of this type and size. In the event that we
were in violation of these covenants, the loan commitments under the
revolving credit facility may terminate and the loans and accrued interest
then outstanding under the facility and the senior subordinated secured
notes and related accrued interest may be due and payable immediately.
We have long-term committed loan agreements of approximately $346,000
at December 31, 2001, of which approximately $226,000 is outstanding,
assuming the $50,000 senior subordinated secured notes are valued at face
value. We pay commitment fees of 1/2 of 1% on the unused portion of
committed loan agreements.
Interest expense related to long-term notes payable to affiliates was
$0 for the period November 14 to December 31, 2001, $69,523 for the period
January 1 to November 13, 2001, $72,929 in 2000, and $63,260 in 1999.
The aggregate amounts of long-term debt maturing after December 31,
2001 are as follows:
<Table>
<Caption>
December 31, Face Value Carrying Amount
--------------- ---------------
DOLLARS IN THOUSANDS
2002 $ 31,113 $ 31,113
2003 26,991 26,991
2004 39,314 39,314
2005 8,525 8,525
2006 37,817 37,817
Thereafter 82,096 32,096
--------------- ---------------
$ 225,856 $ 175,856
=============== ===============
</Table>
In October 1996, we entered into a financing arrangement with the City
of O'Fallon, Missouri related to the expansion of our St. Peters facility.
In total, the City of O'Fallon issued approximately $252,000 of industrial
revenue bonds to us. At December 31, 2001 and 2000, $141,000 and $170,000
was outstanding relating to these bonds, respectively.
F-32
The bonds were exchanged by the City of O'Fallon for the assets
related to the expansion, which we then leased for a period of 10 years for
machinery and equipment and 15 years for building and building
improvements. We have 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 an annual rate
of 6% and mature concurrent with the annual payments due under the terms of
the lease.
We have classified the leased assets as property, plant and equipment
and have established a capital lease obligation equal to the outstanding
principal balance of the 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 our 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.
12: REDEEMABLE PREFERRED STOCK
The Series A Cumulative Convertible Preferred Stock (Preferred Stock)
has a stated value of $1,000 per share and is convertible into our common
stock at a price of $2.25 per share. As a result of the restructuring
transactions, 260,000 shares of the Preferred Stock were issued to TPG. We
recorded the Preferred Stock at its fair value of 2 dollars. The Preferred
Stock is redeemable at the option of the holders on or after November 13,
2009. Accordingly, the Preferred Stock will accrete up to its stated value
over this eight-year period. After shareholder approval, holders of the
Preferred Stock will be entitled to vote on all matters on which the common
stockholders are entitled to vote.
Stockholder approval is required in order for TPG to exercise certain
of the voting and conversion provisions of the Preferred Stock. TPG has
agreed not to convert any shares of Preferred Stock until our stockholders
approve the issuance of the Preferred Stock and the common stock issuable
on conversion of the Preferred Stock.
Dividends on the Preferred Stock are payable at the rate of 10% per
annum if paid in cash. If not declared and paid quarterly, dividends
accumulate at 12% per annum and are payable in common stock upon conversion
of the preferred or are payable in cash upon redemption of the Preferred
Stock, a change in control of MEMC or a liquidation, dissolution, or
winding up of MEMC. At December 31, 2001, the Preferred Stock had a
liquidation value, including accrued but unpaid dividends, of $264,247.
Upon any liquidation, dissolution or winding up of MEMC, before any
distribution or payment is made to any common stockholder or the holder of
any other equity security ranking junior to the Preferred Stock, the
holders of the Preferred Stock will be paid a liquidation preference equal
to:
o if stockholder approval is obtained, $1,000 per share plus accrued and
unpaid dividends, or
o if stockholder approval is not obtained, the greater of
-- $1,000 per share plus accrued and unpaid dividends, and
-- the amount that would be payable if the shares of Preferred Stock
had already been converted into shares of MEMC common stock.
After payment of the liquidation preference, holders of the Preferred
Stock will not be entitled to any further participation in any distribution
of assets by virtue of their ownership of the Preferred Stock.
If upon any liquidation, winding up or dissolution of MEMC, our assets
are insufficient to pay in full the amount due on the Preferred Stock, then
the assets of MEMC will be distributed ratably among the holders of the
Preferred Stock.
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
13: STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock
We have 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. The Series A
Cumulative Convertible Preferred Stock has been designated by our Board of
Directors as a new series of preferred stock. See Note 12 above for a
further description of the Series A Cumulative Convertible Preferred Stock.
Warrants
Pursuant to the transactions described in Note 2 above, TPG received
warrants to purchase 16,666,667 shares of our common stock. We recorded the
warrants at their fair market value of less than 1 dollar. Stockholder
approval is required for the exercise of the warrants. Assuming stockholder
approval is obtained, the warrants are exercisable at an exercise price of
$3.00 per share of common stock and expire on November 13, 2011.
Common Stock
Holders of our $.01 par value common stock are entitled to one vote
for each share held on all matters submitted to a vote of 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 our liquidation, dissolution or
winding up, holders of our 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.
We do not anticipate paying dividends on our common stock in the
foreseeable future. The declaration and payment of future dividends on our
common stock, if any, will be at the sole discretion of the Board of
Directors and is subject to restrictions as contained in the Citibank
revolving credit facility, the indenture for the senior subordinated
secured notes, and the restructuring agreement between MEMC and TPG.
1999 Private Placement
On March 22, 1999, we sold 15,399,130 shares of common stock in a
private placement to a subsidiary of E.ON for $6.89 per share. The $106,000
net proceeds were used to repay $100,000 of debt from E.ON under revolving
credit agreements, with the balance used for general corporate purposes.
1999 Rights Offering
On April 16, 1999, we sold 13,628,446 shares of common stock for $6.89
per share through a rights offering. The $91,000 net proceeds were used to
repay $90,000 of debt from E.ON under revolving credit agreements, and the
balance was used for general corporate purposes.
Treasury Stock
Prior to the transactions described in Note 2 above, treasury stock
was valued at cost. Effective November 14, 2001, we wrote down the carrying
value of our treasury stock as a result of the push-down of TPG's nominal
basis in MEMC.
F-34
Stock-Based Compensation
We have equity incentive plans that provide for the award of incentive
and non-qualified stock options, restricted stock and performance shares.
Total shares authorized for grant under the 1995 plan and the 2001 plan are
7,197,045 and 7,000,000, respectively. Non-qualified stock options to
employees have typically been granted on January 1 and vested at a rate of
25% annually over four years. Non-qualified stock options to non-employee
directors have also typically been granted on January 1 but vested at a
rate of 33 1/3% annually over three years. The maximum term of each option
is 10 years. In 1999, restricted shares totaling 21,692 expired. We
recognized compensation cost totaling $(601) for these awards in 1999.
The exercise price of stock options granted has historically equaled
the market price on the date of the grant. There is no recorded expense
related to grants of stock options. Once exercisable, the employee can
purchase shares of our common stock at the market price on the date we
granted the option.
We apply Opinion 25 and related interpretations in accounting for the
plans. Accordingly, no compensation cost has been recognized for
non-qualified stock options granted under the plans. Had compensation cost
been determined for our 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," we would have reported the following amounts
indicated below:
<Table>
<Caption>
Predecessor
------------------------------------------------
November 14 January 1
through through Year ended December 31,
December 31, November 13, ------------------------------
2001 2001 2000 1999
------------ ------------ ------------ ------------
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Net loss allocable to common stockholders:
As reported $ (33,644) $ (489,025) $ (43,390) $ (151,481)
Pro forma (33,930) (491,025) (44,863) (154,149)
Basic loss per share:
As reported $ (0.48) $ (7.03) $ (.62) $ (2.43)
Pro forma (0.49) (7.05) (.64) (2.48)
Diluted loss per share:
As reported $ (0.48) $ (7.03) $ (.62) $ (2.43)
Pro forma (0.49) (7.05) (.64) (2.48)
============ ============ ============ ============
</Table>
We estimate the fair value of options using the Black-Scholes
option-pricing model and the following assumptions:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Risk-free interest rate 4.9% 6.7% 4.8%
Expected stock price volatility 76.4% 77.1% 57.6%
Expected term until exercise (years) 6 6 6
Expected dividends 0.0% 0.0% 0.0%
======== ======== ========
</Table>
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
The following table summarizes the activity for the plans:
<Table>
<Caption>
Weighted- Weighted-Average
Average Fair Value of
Shares Option Price Options Granted
--------------- --------------- ----------------
Year ended December 31, 2001:
Outstanding at beginning of year 2,697,784 $ 15.25
Granted 609,600 9.44 $ 6.60
Exercised -- --
Canceled (331,204) 18.38
--------------- ---------------
Outstanding at end of year 2,976,180 $ 13.71
=============== ===============
Options exercisable at year end 1,686,655 $ 16.02
=============== ===============
Year ended December 31, 2000:
Outstanding at beginning of year 2,325,744 $ 16.61
Granted 668,000 12.46 $ 8.68
Exercised (78,600) 12.18
Canceled (217,360) 22.30
--------------- ---------------
Outstanding at end of year 2,697,784 $ 15.25
=============== ===============
Options exercisable at year end 1,596,343 $ 17.56
=============== ===============
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
=============== ===============
</Table>
The table below summarizes information concerning options outstanding at
<Table>
<Caption>
December 31, 2001:
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
------------ ------------ ------------ ------------ ------------
$24.00 310,380 3.5 years $ 24.00 310,380 $ 24.00
$32.63 - 49.50 69,900 4.1 years 33.37 69,900 33.37
$22.50 - 29.00 104,650 5.0 years 22.56 104,650 22.56
$3.13 - 15.25 663,800 6.0 years 15.02 570,200 15.04
$6.00 - 19.06 610,350 7.0 years 8.71 414,200 8.69
$7.44 - 20.12 623,600 8.1 years 12.48 217,325 12.42
$2.24 - 11.74 593,500 9.0 years 9.43 -- --
------------ ------------ ------------ ------------ ------------
2,976,180 6.9 years $ 13.71 1,686,655 $ 16.02
============ ============ ============ ============ ============
</Table>
F-36
14: LOSS PER SHARE
The numerator of the basic and diluted loss per share calculation was
net loss allocable to common stockholders. Cumulative preferred stock
dividends were not added back to the net loss, as the related conversion of
the Preferred Stock would have been antidilutive. For all periods, the
Preferred Stock, the warrants, and the options outstanding were not
considered in computing diluted loss per share, as they were antidilutive.
In January 2002 we granted options to purchase 2,983,150 shares of
common stock at $1.50 per share. The majority of these options will vest
ratably over four years. Since these options were issued below the market
price of our common stock on the date of issuance, we will recognize
compensation expense of approximately $6,000 using an accelerated method
over the four-year vesting period.
In January 2002 we also granted options to purchase 1,237,500 shares
of our common stock at $3.55 per share. These options will vest 100% on the
seven year anniversary of the grant date, but could vest earlier if MEMC
achieves certain financial targets. In general, there is no compensation
expense associated with these options as the option price approximated the
market price of our common stock on the date of issuance. For options
issued to certain employees, variable accounting is appropriate and we will
recognize compensation expense, using an accelerated method, based on the
market price of our common stock.
15: INCOME TAXES
Losses before income taxes, equity in income (loss) of joint ventures
and minority interests consists of the following:
<Table>
<Caption>
Predecessor
---------------------------------------------------------
November 14 January 1
through through Year ended December 31,
December 31, November 13, ------------------------------------
2001 2001 2000 1999
--------------- --------------- --------------- ---------------
DOLLARS IN THOUSANDS
U.S. $ (33,001) $ (262,846) $ (126,651) $ (213,138)
Foreign (3,017) 3,180 48,824 490
--------------- --------------- --------------- ---------------
$ (36,018) $ (259,666) $ (77,827) $ (212,648)
=============== =============== =============== ===============
</Table>
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Income tax (benefit) expense consists of the following:
<Table>
<Caption>
Current Deferred Total
------------ ------------ ------------
DOLLARS IN THOUSANDS
November 14 through December 31, 2001:
U.S. federal $ 335 $ -- $ 335
State and local 398 -- 398
Foreign 69 774 843
------------ ------------ ------------
$ 802 $ 774 $ 1,576
============ ============ ============
January 1 through November 13, 2001:
U.S. federal $ (6,726) $ 228,643 $ 221,917
State and local 111 10,382 10,493
Foreign 6,698 244 6,942
------------ ------------ ------------
$ 83 $ 239,269 $ 239,352
============ ============ ============
Year ended December 31, 2000:
U.S. federal $ 1,228 $ (32,447) $ (31,219)
State and local 786 (2,819) (2,033)
Foreign 16,705 (4,466) 12,239
------------ ------------ ------------
$ 18,719 $ (39,732) $ (21,013)
============ ============ ============
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)
============ ============ ============
</Table>
Income tax (benefit) expense differed from the amounts computed by
applying the U.S. federal income tax rate of 35% to loss before income
taxes, equity in income (loss) of joint ventures and minority interests as
a result of the following:
<Table>
<Caption>
Predecessor
------------------------------------------------
November 14 January 1
through through Year ended December 31,
December 31, November 13, ------------------------------
2001 2001 2000 1999
------------ ------------ ------------ ------------
DOLLARS IN THOUSANDS
Income tax at federal statutory rate $ (12,607) $ (90,883) $ (27,240) $ (74,427)
Increase (reduction) in income taxes:
Change in the valuation allowance
for deferred tax asset 11,009 321,594 (13,642) (1,622)
Foreign tax differences 78 10,681 20,787 5,976
State income taxes, net of federal benefit 258 6,821 (1,321) 1,176
Asset revaluation--foreign subsidiaries (330) (8,178) -- --
Investment incentives 1,450 (43) (714) (660)
Other, net 1,718 (640) 1,117 3,636
------------ ------------ ------------ ------------
$ 1,576 $ 239,352 $ (21,013) $ (65,921)
============ ============ ============ ============
</Table>
F-38
The tax effects of the major items recorded as deferred tax assets and
liabilities are:
<Table>
<Caption>
December 31, 2001 2000
---------- ----------
DOLLARS IN THOUSANDS
Deferred tax assets:
Inventories $ 9,510 $ 7,421
Expense accruals 29,562 41,609
Property, plant and equipment 197,809 --
Pension, medical and other employee benefits 39,542 37,332
Net operating loss carryforwards 277,903 285,768
Investment tax credit carryforwards -- 1,456
Alternative minimum tax credit carryforwards 3,760 3,760
Other 2,813 1,325
---------- ----------
Total gross deferred tax assets 560,899 378,671
Less valuation allowance (522,943) (37,104)
---------- ----------
Net deferred tax assets 37,956 341,567
---------- ----------
Deferred tax liabilities:
Property, plant and equipment -- (88,160)
Other (8,242) (18,857)
---------- ----------
Total deferred tax liabilities (8,242) (107,017)
---------- ----------
Net deferred tax assets $ 29,714 $ 234,550
========== ==========
</Table>
During the second and third quarters of 2001, we reevaluated the
conditions surrounding our ability to use our tax loss carryforwards under
Internal Revenue Code (IRC) Section 382 and determined it appropriate to
discontinue recognition of additional tax benefits from net operating loss
carryforwards. As a result, we increased our valuation allowance related to
deferred tax assets in the amount of $294,000. In making this
determination, we considered the deterioration in our liquidity at that
time, the reduction in the trading price range of our stock, the
uncertainty at that time surrounding the terms and structure of the
divestiture by E.ON of its interest in MEMC and possible limitations for
federal income tax purposes on our ability to use our tax loss
carryforwards under IRC Section 382.
Our deferred tax assets and liabilities, netted by taxing location,
are in the following captions in the balance sheet:
<Table>
<Caption>
December 31, 2001 2000
------------ ------------
DOLLARS IN THOUSANDS
Current deferred tax assets (liabilities), net $ (345) $ 13,450
Noncurrent deferred tax assets, net 30,059 221,100
------------ ------------
$ 29,714 $ 234,550
============ ============
</Table>
Our net operating loss carryforwards at December 31, 2001 were
$711,562. We also have alternative minimum tax credit carryforwards
available of $3,760.
Section 382 of the IRC restricts the utilization of net operating
losses and other carryover tax attributes upon the occurrence of an
ownership change, as defined. Such an ownership change occurred during 2001
as a result of the acquisition by TPG, as described in Note 2 above. We
believe that a significant majority of our U.S. net operating loss
carryforwards will be utilized or applied to reduce our tax attributes,
under IRC Section 108(b), as a result of the transactions with TPG. To the
extent that any U.S. or foreign net operating loss carryforwards remain, we
have recognized a valuation allowance to fully offset any associated
deferred tax assets. Accordingly, as of December 31, 2001, our net
operating loss carryforwards do not carry any value in our consolidated
balance sheet.
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Push down accounting as described in Note 2 above created differences
in the bases of certain assets and liabilities for financial statement
accounting and for tax accounting. These differences resulted in the
recognition of a net deferred tax asset. We reviewed our total net deferred
tax assets by taxable jurisdiction and recognized a valuation allowance
where it was determined more likely than not that we would be unable to
realize a benefit from these assets.
16: BENEFIT PLANS
Our defined benefit plan covers most U.S. employees. Benefits for this
plan are based on years of service and qualifying compensation during the
final years of employment.
We also have a nonqualified plan under the Employee Retirement Income
Security Act of 1974. This plan provides benefits in addition to the
defined benefit plan. Eligibility for participation in this plan requires
coverage under the defined benefit plan and other specific circumstances.
Our health care plan 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.
Pursuant to the change in majority ownership as discussed in Note 2
above, effective as of November 14, 2001, we revalued our pension and
postretirement related liabilities to their fair market values to reflect
the push-down of TPG's nominal basis in MEMC. Planned changes in provisions
of the pension and postretirement plans, as well as curtailments resulting
from reductions in the workforce and plan amendments, were contemplated in
determining the fair market values of these liabilities, including the
following:
o The defined benefit plan has been amended to discontinue future
benefit accruals for certain participants. In addition, no new
participants will be added to the plan.
o The nonqualified plan has been amended to discontinue future benefit
accruals.
o The health care plan has been amended to discontinue eligibility for
certain participants. In addition, no new participants will be added
to the plan.
We expect that expenses related to our benefit plans will be reduced
in the future as a result of these plan amendments.
Net periodic pension cost consists of the following:
<Table>
<Caption>
Pension Plans Health Care Plan
------------------------------------ ------------------------------------
Year ended December 31, 2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
DOLLARS IN THOUSANDS
Service cost $ 7,067 $ 6,240 $ 7,807 $ 1,280 $ 1,383 $ 1,435
Interest cost 9,982 8,977 8,769 3,811 3,693 3,333
Expected return on plan assets (8,186) (7,436) (6,523) -- -- --
Amortization of service costs 484 579 393 (690) (707) (707)
Net actuarial loss/(gain) 360 110 770 (151) (163) 54
Curtailment loss recognized 1,890 -- 428 67 -- --
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 11,597 $ 8,470 $ 11,644 $ 4,317 $ 4,206 $ 4,115
======== ======== ======== ======== ======== ========
</Table>
F-40
The following summarizes the change in benefit obligation, change in plan
assets, and funded status of the plans:
<Table>
<Caption>
Pension Plans Health Care Plan
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
DOLLARS IN THOUSANDS
Change in benefit obligation:
Benefit obligation, beginning $ 121,783 $ 127,809 $ 50,012 $ 47,122
Service cost 7,067 6,252 1,280 1,383
Interest cost 9,983 8,977 3,811 3,693
Amendments 5,364 1,520 -- --
Actuarial (gain)/loss 20,040 (10,130) 1,546 (17)
Benefits paid (8,928) (12,645) (3,357) (2,169)
Curtailments (1,185) -- 2,640 --
--------- --------- --------- ---------
Benefit obligation as of measurement date 154,124 121,783 55,932 50,012
--------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets, beginning 104,074 94,485 -- --
Actual return on plan assets (8,607) 10,267 -- --
Employer contributions 2,961 11,967 3,357 2,169
Benefits paid (8,928) (12,645) (3,357) (2,169)
--------- --------- --------- ---------
Fair value of plan assets as of measurement date 89,500 104,074 -- --
--------- --------- --------- ---------
Funded status (64,624) (17,709) (55,932) (50,012)
Unrecognized prior service cost 3,612 5,857 -- (7,080)
Unrecognized net actuarial (gain)/loss 21,895 (13,878) -- (5,281)
Fourth quarter contribution 5,301 1,874 536 --
Purchase accounting (13,051) -- 4,522 --
--------- --------- --------- ---------
Accrued benefit cost at December 31 $ (46,867) $ (23,856) $ (50,874) $ (62,373)
========= ========= ========= =========
Amounts recognized in statement of financial position:
Accrued benefit liability $ (42,474) $ (28,021) $ (55,932) $ (62,373)
Fourth quarter contribution 5,301 1,874 536 --
Intangible asset 393 489 -- --
Accumulated other comprehensive income 2,964 1,802 -- --
Purchase accounting (13,051) -- 4,522 --
--------- --------- --------- ---------
Accrued pension expense $ (46,867) $ (23,856) $ (50,874) $ (62,373)
========= ========= ========= =========
</Table>
Pension plan assets are invested primarily in insurance contracts,
marketable securities including common stocks, bonds and interest-bearing
deposits.
Information regarding pension plans with accumulated benefit
obligations in excess of plan assets as of December 31 is as follows:
<Table>
<Caption>
2001 2000
-------- --------
DOLLARS IN THOUSANDS
Projected benefit obligation $138,347 $ 6,602
Accumulated benefit obligation 126,163 5,371
Fair value of plan assets 92,513 638
======== ========
</Table>
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
We recognized the curtailments related to the closure of the small
diameter line at MEMC Southwest, Inc. and the reductions in workforce
during 2001.
The following is a table of the actuarial assumptions:
<Table>
<Caption>
Pension Plans Health Care Plan
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Weighted-average assumptions:
Discount rate 7.25% 7.75% 7.25% 7.75%
Expected return on plan assets 8.00% 8.00% NA NA
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
======== ======== ======== ========
</Table>
An average increase of 10.25% in the cost of health care benefits was
assumed for 2001. The rate was assumed to decrease 1% per year to 5.25% in
2006 and to remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A 1% change in the medical trend
rate would have the following effects at December 31, 2001:
<Table>
<Caption>
1% Increase 1% Decrease
----------- -----------
DOLLARS IN THOUSANDS
Total service and interest cost components $ 46 $ (45)
Postretirement benefit obligation 188 (184)
========== ==========
</Table>
We also have pension plans for our foreign subsidiaries. The aggregate
pension expense and liability for these plans are not material to the
consolidated financial statements.
17: RETIREMENT SAVINGS PLAN
We sponsor a defined contribution plan under Section 401(k) of the IRC
covering all U.S. salaried and hourly employees. Our contributions included
in results of operations totaled $3,140, $3,633, and $3,618 for 2001, 2000,
and 1999, respectively.
18: COMMITMENTS AND CONTINGENCIES
We lease buildings, equipment and automobiles under operating leases.
Rental expense was $8,320, $17,607, and $24,062 in 2001, 2000, and 1999,
respectively. This table shows future minimum rental commitments under
noncancellable operating leases at December 31, 2001:
<Table>
DOLLARS IN THOUSANDS
2002 $ 6,945
2003 2,980
2004 1,849
2005 1,029
Thereafter --
-------
$12,803
=======
</Table>
F-42
19: GEOGRAPHIC SEGMENTS
We are engaged in one reportable segment--the design, manufacture and
sale of silicon wafers for the semiconductor industry.
Geographic financial information is as follows:
Net Sales to Customers:
DOLLARS IN THOUSANDS
<Table>
<Caption>
2001 2000 1999
United States United States United States
$237,049 $411,222 $359,020
Japan Japan Japan
$78,080 $125,903 $89,281
Korea Korea Korea
$125,427 $80,701 $36,153
Italy Italy Italy
$26,525 $30,828 $21,815
Other Foreign Other Foreign Other Foreign
Countries Countries Countries
$150,772 $222,983 $187,325
Total: Total: Total:
$617,853 $871,637 $693,594
</Table>
Long-lived Assets:
DOLLARS IN THOUSANDS
<Table>
<Caption>
2001 2000 1999
United States United States United States
$158,881 $744,172 $837,068
Japan Japan Japan
$37,023 $184,386 $231,187
Korea Korea Korea
$9,800 $190,157 $56,060
Italy Italy Italy
$27,929 $96,378 $107,310
Other Foreign Other Foreign Other Foreign
Countries Countries Countries
$21,612 $61,468 $53,912
Total: Total: Total:
$255,245 $1,276,561 $1,285,537
</Table>
Net sales are attributed to countries based on the location of the
customer. Investments in joint ventures are presented based on the
countries in which they are located.
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
20: UNAUDITED QUARTERLY FINANCIAL INFORMATION
<Table>
<Caption>
October 1 November 14
through through
First Second Third November 13, December 31,
2001 Quarter Quarter Quarter 2001 2001
------------ ------------ ------------ ------------ ------------
DOLLARS IN THOUSANDS,EXCEPT SHARE DATA
Net sales $ 219,834 $ 156,857 $ 120,744 $ 61,572 $ 58,846
Gross margin 27,766 (16,772) (34,728) (16,023) (11,731)
Loss before equity in income (loss) of
joint ventures and minority interests (17,817) (360,234) (71,229) (49,738) (37,594)
Equity in income (loss) of joint ventures 249 217 (9) (16) (2,822)
Minority interests 1 4,695 3,796 1,060 11,019
Net loss allocable to common stockholders (17,567) (355,322) (67,442) (48,694) (33,644)
Basic loss per share (.25) (5.10) (.97) (.71) (.48)
Diluted loss per share (.25) (5.10) (.97) (.71) (.48)
Market price:
High 11.9000 8.8500 7.6000 3.5900 4.9900
Low 5.8100 5.9400 1.0500 1.6500 3.1000
============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
DOLLARS IN THOUSANDS,EXCEPT SHARE DATA
Net sales $ 193,089 $ 200,516 $ 222,800 $ 255,232
Gross margin 14,004 25,888 37,189 51,894
Loss before equity in income (loss) of
joint ventures and minority interests (26,867) (17,373) (9,103) (3,471)
Equity in income (loss) of joint ventures (1,073) 1,789 6,747 7,201
Minority interests 601 74 75 (1,990)
Net income (loss) allocable to common stockholders (27,339) (15,510) (2,281) 1,740
Basic earnings (loss) per share (.39) (.22) (.03) .02
Diluted earnings (loss) per share (.39) (.22) (.03) .02
Market price:
High 24.1875 19.9375 19.5000 14.1250
Low 10.5000 13.0625 12.7500 6.2500
============ ============ ============ ============
</Table>
F-44
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 (MEMC) as of December 31, 2001
and 2000, and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for the periods from
January 1, 2001 through November 13, 2001 and from November 14, 2001
through December 31, 2001 and for each of the years in the two-year period
ended December 31, 2000. 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 auditing standards
generally accepted in the United States of America. 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 as of December 31, 2001 and 2000, and the results of their operations
and their cash flows for the periods from January 1, 2001 through November
13, 2001 and from November 14, 2001 through December 31, 2001 and for each
of the years in the two-year period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of
America.
As discussed in Note 2 to the Consolidated Financial Statements,
MEMC's former majority shareholder divested its interests in MEMC to an
unaffiliated investor group. The transaction has been accounted for as a
purchase, and the investor group's basis in MEMC has been pushed-down to
the MEMC accounting records creating a new basis of accounting, effective
November 13, 2001. As a result of the acquisition, the consolidated
financial information for the period after the acquisition is presented on
a different cost basis than that for the periods before the acquisition
and, therefore, is not comparable.
/s/ KPMG LLP
St. Louis, Missouri
March 1, 2002
F-45
STOCKHOLDERS' INFORMATION
<Table>
CORPORATE OFFICE FINANCIAL INFORMATION
MEMC Electronic Materials, Inc. MEMC maintains a home page on the Internet
501 Pearl Drive (City of O'Fallon) at www.memc.com where we publish informa-
St. Peters, Missouri 63376 tion, including earnings releases, other news
(636) 474-5000 releases, significant corporate disclosures and
the names of securities analysts who issue
TRANSFER AGENT AND REGISTRAR research on MEMC.
Computershare Investor Services, L.L.C.
2 North LaSalle Street INDEPENDENT AUDITORS
P. O. Box A3504 KPMG LLP
Chicago, Illinois 60690-3504 10 South Broadway, Suite 900
(312) 360-5433 St. Louis, Missouri 63102
www.computershare.com
INVESTOR RELATIONS
STOCKHOLDER INQUIRIES Stockholders, securities analysts, investment pro-
Inquiries regarding address corrections, lost cer- fessionals and prospective investors should
tificates, changes of registration, stock certificate direct their inquiries to:
holdings and other stockholder account matters MEMC Electronic Materials, Inc.
should be directed to MEMC's transfer agent, Investor Relations Department
Computershare Investor Services, L.L.C., at the 501 Pearl Drive (City of O'Fallon)
address or phone number above. St. Peters, Missouri 63376
Tel: (636) 474-5443
COMMON STOCK LISTING Fax: (636) 474-5158
MEMC's common stock is traded on the New E-mail: invest@memc.com
York Stock Exchange under the symbol "WFR".
On December 31, 2001, the last business day MANUFACTURING FACILITIES
of the year, the Company had 479 stockholders Chonan, South Korea
of record. Hsinchu, Taiwan
Kuala Lumpur, Malaysia
FORM 10-K Merano, Italy
Stockholders may obtain a copy of MEMC's Novara, Italy
Annual Report on Form 10-K and related finan- Pasadena, Texas
cial statement schedules for the year ended Sherman, Texas
December 31, 2001, filed with the Securities St. Peters, Missouri
and Exchange Commission, by writing MEMC's Utsunomiya, Japan
Investor Relations Department or by calling
(636) 474-5443.
</Table>
MEMC TECHNOLOGY IS BUILT ON US, Technology Is Built On Us, MDZ, and Magic
Denuded Zone and their related trademark designs and logotypes are registered
trademarks and OPTIA, AEGIS, and ADVANTA and their related trademark designs and
logotypes are trademarks of MEMC Electronic Materials, Inc.