SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
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MEMC ELECTRONIC MATERIALS, INC.
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[MEMC LOGO]
MEMC ELECTRONIC MATERIALS, INC.
501 PEARL DRIVE (CITY OF O'FALLON)
ST. PETERS, MISSOURI 63376
NOTICE OF
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 10, 2002
MEMC Electronic Materials, Inc. will hold a special stockholders' meeting
at 345 California Street, Suite 3300, San Francisco, California 94104, on
Wednesday, July 10, 2002 at 10:00 a.m., local time, for the following purposes:
1. To consider and vote upon the issuance of 260,000 shares of Series A
Cumulative Convertible Preferred Stock, warrants to purchase 16,666,667
shares of common stock and the common stock issuable on conversion of
such preferred stock and exercise of such warrants;
2. To consider and vote upon an amendment to our restated certificate of
incorporation authorizing a one-for-two reverse split of our common
stock;
3. To consider and vote upon an amendment to our restated certificate of
incorporation authorizing an increase in our authorized capital stock
from 200,000,000 shares of common stock to 300,000,000 shares of common
stock;
4. To consider and vote upon a future merger between MEMC Electronic
Materials, Inc. and TPG Wafer Holdings LLC in connection with our debt
restructuring; and
5. To transact such other business as may properly come before the meeting
and all adjournments thereof.
The Board of Directors has fixed May 31, 2002 as the record date for the
determination of the stockholders entitled to notice of, and to vote at, the
special meeting and all adjournments thereof. A list of stockholders entitled to
vote at the special meeting will be available for examination by any stockholder
at our executive offices not less than ten days prior to the special meeting and
at the meeting.
Sincerely,
DAVID L. FLEISHER
Corporate Secretary
June 10, 2002
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, SO THAT YOUR SHARES WILL BE
REPRESENTED, PLEASE COMPLETE THE ENCLOSED PROXY CARD, AND SIGN, DATE AND RETURN
IT IN THE ENCLOSED ENVELOPE, WHICH DOES NOT REQUIRE POSTAGE IF MAILED IN THE
UNITED STATES. YOU MAY WITHDRAW YOUR PROXY AT ANY TIME BEFORE IT IS VOTED.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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PROXY STATEMENT -- VOTING PROCEDURES........................ 1
THE RESTRUCTURING........................................... 2
Summary................................................... 2
Change in Control......................................... 4
Restructuring Agreement................................... 5
Notes and Warrants........................................ 6
Registration Rights Agreement............................. 6
Credit Agreement.......................................... 7
Merger Agreement.......................................... 7
Management Advisory Agreement............................. 8
Fees and Expenses......................................... 8
Background and Reasons for the Restructuring.............. 8
Approval by the Special Committee......................... 10
Opinion of Financial Advisor to the Special Committee..... 12
Accounting Effects of the Restructuring................... 17
PROPOSAL 1: ISSUANCE OF SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK, WARRANTS AND RELATED COMMON STOCK........ 18
Description of Preferred Stock............................ 19
Description of Warrants................................... 21
PROPOSAL 2: AMENDMENT TO THE RESTATED CERTIFICATE OF
INCORPORATION: REVERSE STOCK SPLIT........................ 21
Effect of Reverse Stock Split............................. 22
Certificate of Amendment.................................. 22
Exchange of Stock Certificates............................ 22
Consequences of the Reverse Stock Split................... 22
PROPOSAL 3: AMENDMENT TO THE RESTATED CERTIFICATE OF
INCORPORATION: INCREASE IN AUTHORIZED CAPITAL STOCK....... 23
Background................................................ 23
Consequences of Approval of Additional Authorized Common
Stock.................................................. 23
Anti-Takeover Effects..................................... 24
Certificate of Amendment.................................. 24
PROPOSAL 4: MERGER BETWEEN MEMC AND TPG WAFER HOLDINGS
LLC....................................................... 25
General................................................... 25
The Merger................................................ 26
Interest of Certain Persons in the Merger................. 26
Contact Information....................................... 27
UNAUDITED PRO FORMA FINANCIAL INFORMATION................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS........................ 35
Company Overview.......................................... 35
Results of Operations..................................... 36
Liquidity and Capital Resources........................... 41
Critical Accounting Policies and Estimates................ 46
Recently Issued Accounting Pronouncements................. 47
Market Risk............................................... 48
Risk Factors.............................................. 49
CERTAIN BENEFICIAL OWNERSHIP BY DIRECTORS AND EXECUTIVE
OFFICERS.................................................. 51
OWNERSHIP OF MEMC EQUITY SECURITIES BY CERTAIN BENEFICIAL
OWNERS.................................................... 53
STOCKHOLDER PROPOSALS FOR 2002 ANNUAL MEETING............... 57
INCORPORATION BY REFERENCE.................................. 57
OTHER MATTERS............................................... 58
ANNEX A..................................................... A-1
</Table>
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PROXY STATEMENT -- VOTING PROCEDURES
YOUR VOTE IS VERY IMPORTANT
MEMC is soliciting proxies to be used at a special stockholders' meeting
called for the purposes set forth in the attached notice. This proxy statement
and the proxy card are being mailed to stockholders beginning June 10, 2002.
WHO CAN VOTE
Record holders of MEMC common stock on May 31, 2002 may vote at the special
meeting. On May 31, 2002, there were 70,324,708 shares of common stock
outstanding. The shares of common stock held in our treasury will not be voted.
Each share of common stock is entitled to one vote on each matter submitted to a
vote at the meeting.
HOW YOU CAN VOTE
- BY PROXY -- Simply mark your proxy card, date and sign it, and return it
in the envelope provided.
- IN PERSON -- You can come to the special meeting and cast your vote
there. If your shares are held in the name of your broker, bank or other
nominee and you wish to vote at the special meeting, you must obtain a
legal proxy or power of attorney from the nominee and present it at the
meeting to establish your right to vote the shares.
HOW YOU MAY REVOKE OR CHANGE YOUR VOTE
If you give a proxy, you may revoke it at any time before your shares are
voted. You may revoke your proxy in one of three ways:
- Send in another proxy with a later date;
- Notify our Corporate Secretary in writing before the special meeting that
you have revoked your proxy; or
- Vote in person at the special meeting.
SPECIAL VOTING RULES FOR PARTICIPANTS IN MEMC RETIREMENT SAVINGS PLAN
The MEMC Stock Fund holds MEMC common stock as an investment alternative
for participants in the MEMC Retirement Savings Plan. A plan participant may
direct the plan's trustee how to vote the shares held by the plan for the
participant's account, but only if the participant signs and returns a voting
direction card. If a participant does not return a voting direction card, the
trustee will vote the shares in that participant's account in the same
proportion as the shares for which signed cards are returned by other
participants.
QUORUM
A majority of the outstanding shares entitled to vote at the special
meeting represented at the meeting in person or by proxy will constitute a
quorum. Abstentions and broker non-votes are counted as present for establishing
a quorum. A broker non-vote occurs when a broker returns a proxy card but does
not vote on one or more matters because the broker does not have authority to do
so.
VOTE REQUIRED
If a quorum is present at the special meeting, an affirmative vote of a
majority of the shares present in person or represented by proxy at the special
meeting is required for approval of Proposal 1. The affirmative vote of a
majority of the shares entitled to vote in person or by proxy is required for
approval of Proposals 2, 3 and 4. Broker non-votes with respect to Proposal 1
will be treated as not represented at the meeting for purposes of counting votes
on such proposal. Broker non-votes with respect to Proposals 2, 3 and 4 will be
treated as votes against such proposals. Proxies marked "against" Proposal 1, 2,
3 or 4 will not be voted on any motion to adjourn the meeting for the purpose of
continuing to solicit proxies to approve such Proposal 1, 2, 3 or 4.
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COSTS OF SOLICITATION
We will pay for preparing, printing and mailing this proxy statement.
Proxies may be solicited personally or by telephone by our regular employees
without additional compensation. We will reimburse banks, brokers and other
custodians, nominees and fiduciaries for their costs of sending the proxy
materials to our beneficial owners.
AUDITORS
KPMG LLP was our independent accountant for the years ended December 31,
2000 and December 31, 2001. A representative of KPMG will be present at the
special stockholders' meeting, will have an opportunity to make a statement, if
desired, and will be available to respond to appropriate questions.
THE RESTRUCTURING
SUMMARY
The proposals for which proxies are being solicited by this proxy statement
relate to actions contemplated by our recently completed debt restructuring,
which accompanied a change in control transaction between our former parent
company and an investor group.
Background
On September 30, 2001, E.ON AG and its affiliates (E.ON) and an investor
group led by Texas Pacific Group and including TPG Wafer Holdings LLC and funds
managed by Leonard Green & Partners, L.P. and TCW/Crescent Mezzanine Management
III LLC (collectively, TPG) entered into a purchase agreement. Prior to the
closing contemplated by the purchase agreement, TPG Wafer Holdings formed MEMC
Holdings Corporation as a wholly owned subsidiary. Pursuant to the purchase
agreement, on November 13, 2001, TPG Wafer Holdings LLC and its assignees,
including MEMC Holdings Corporation, purchased all of E.ON's debt in MEMC of
approximately $910 million and all of E.ON's equity holdings in MEMC of
49,959,970 shares of MEMC common stock, representing approximately 72% of the
outstanding shares of MEMC common stock. MEMC Holdings Corporation acquired
approximately $411 million of the total $910 million debt.
Debt Restructuring
In connection with and as a condition to closing of the transactions
contemplated by the purchase agreement, on November 13, 2001, MEMC and TPG Wafer
Holdings entered into a restructuring agreement. Pursuant to the restructuring
agreement, the following steps were taken:
- TPG Wafer Holdings exchanged with MEMC all of the shares of the Class A
Common Stock of MEMC Holdings Corporation for 260,000 shares of our
Series A Cumulative Convertible Preferred Stock, having an aggregate
stated value of $260 million.
- TPG exchanged with MEMC approximately $449 million of the acquired debt,
all of which was then cancelled, for $50 million in principal amount of
our senior subordinated secured notes, with warrants to acquire up to
16,666,667 shares of our common stock.
- TPG retained an existing 55 million Euro (approximately $50 million) note
from our Italian subsidiary.
- TPG established a five-year revolving credit facility to make available
to us up to $150 million in senior secured loans.
- We entered into other agreements, including a registration rights
agreement and an agreement and plan of merger relating to the merger
agreement between MEMC and TPG Wafer Holdings.
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- All of the E.ON affiliated members and two independent members resigned
from the MEMC Board of Directors, and the Board appointed four nominees
designated by TPG Wafer Holdings. Shortly thereafter, the Board appointed
two additional persons to the Board. The size of the Board was
subsequently increased to ten persons and the Board appointed two
additional directors to fill the vacancies.
- TPG Wafer Holdings subsequently exchanged with MEMC the one outstanding
share of Class B Common Stock of MEMC Holdings Corporation held by TPG
Wafer Holdings for a promissory note from MEMC having a principal amount
of $250. MEMC Holdings Corporation, the holder of approximately $411
million of MEMC's old debt, is now a wholly owned subsidiary of MEMC.
As a result of these transactions, approximately $860 million of the debt
acquired from E.ON has been exchanged for our preferred stock, notes and
warrants and TPG now beneficially owns approximately 72% of the outstanding MEMC
common stock. The preferred stock is convertible at a price of $2.25 per share
and bears dividends at a rate of 10% per annum if paid in cash or 12% if paid in
kind. If Proposal 1 is approved by our stockholders, the preferred stock will
have voting rights with the holders of the common stock. Shares of preferred
stock not converted by November 13, 2009, are redeemable for cash at the
holder's option. The warrants will be exercisable only after stockholder
approval of Proposal 1 and until November 13, 2011 at an exercise price of $3.00
per share.
Capital Structure Comparison
The following chart summarizes our basic capital structure as it existed
prior to and immediately following the transactions contemplated by the purchase
agreement and restructuring agreement.
<Table>
<Caption>
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BEFORE RESTRUCTURING AFTER RESTRUCTURING
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Outstanding E.ON Debt................................ $909,699,000(1) 0
Outstanding TPG Debt................................. 0 $100,000,000(1)
Outstanding Third Party Debt......................... $229,412,000(2) $229,412,000(2)
Common Stock Outstanding
Held by E.ON....................................... 49,959,970 0
Held by TPG........................................ 0 49,959,970
Held by Public..................................... 19,652,930(3) 19,652,930(3)
Warrants to Purchase Common Stock.................... 0 16,666,667
Convertible Preferred Stock.......................... 0 260,000
Common Stock Equivalent............................ 0 115,555,556(4)
Percentage of Common Stock
Held by E.ON....................................... 72% 0%
Held by TPG (prior to any conversion of preferred
stock or exercise of warrants).................. 0% 72%
Held by Public (prior to any conversion of
preferred stock or exercise of warrants)........ 28%(5) 28%(5)
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</Table>
(1) Amounts shown at face value.
(2) Amount as of November 30, 2001. Does not include $150 million available
under the revolving credit facility with TPG after the restructuring which
had not been drawn as of November 30, 2001.
(3) Includes shares of common stock held by directors, officers and employees of
MEMC who are unaffiliated with TPG and E.ON and which in the aggregate
represents less than 1% of the outstanding common stock.
(4) Includes only those shares which may be acquired on conversion of face
amount, without taking into account accrued but unpaid dividends.
(5) Upon conversion of the initial stated value of the preferred stock and
exercise of all of the warrants issued in connection with the restructuring,
TPG will hold approximately 90% of the then outstanding common stock and the
public stockholders will hold approximately 10% of the then outstanding
common stock.
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If Proposal 1 is approved by our stockholders, TPG will own or have the
right to acquire, through ownership of the common stock acquired from E.ON,
conversion of the preferred stock (excluding accrued but unpaid dividends) and
exercise of the warrants, a minimum of approximately 182 million shares of
common stock, which would represent approximately 90% of our outstanding common
stock. TPG has agreed not to convert any of the preferred stock unless and until
Proposal 1 is approved by our stockholders. Because the preferred stock earns
cumulative dividends that may be payable in kind upon conversion, if TPG were
not to convert any preferred stock until immediately prior to the earliest
redemption date in 2009, TPG would own or have the right to acquire a maximum of
approximately 364 million shares of common stock, which would represent
approximately 95% of our outstanding common stock.
CHANGE IN CONTROL
On November 13, 2001, E.ON and TPG completed the transactions contemplated
by the purchase agreement of September 30, 2001. Pursuant to the purchase
agreement, TPG Wafer Holdings and its assignees purchased all of E.ON's debt in
MEMC of approximately $910 million for an aggregate purchase price of $4.00 and
all of E.ON's equity holdings in MEMC of 49,959,970 shares of MEMC common stock,
representing approximately 72% of the outstanding shares of MEMC common stock,
for an aggregate purchase price of $2.00. Pursuant to the purchase agreement,
the purchase price payable by TPG to E.ON may be increased by a maximum of $150
million, depending upon our financial performance in 2002.
Also at the closing, E.ON made capital contributions to MEMC as required
under the purchase agreement in the aggregate amount of $37 million, of which $5
million was contributed to enable us to make a contribution to our defined
benefit plan. In connection with these transactions, we and certain of our
subsidiaries have executed releases of E.ON from certain actions, causes of
action, suits, debts and other damages. In particular, we have released E.ON
from its obligations under the loan agreements, security agreements, guaranties
and associated documents relating to the debt acquired from E.ON by TPG. We have
also released E.ON and certain of its affiliates from damages arising out of or
in connection with any of them having been a shareholder, noteholder or director
or officer of MEMC or any of its affiliates, and in connection with agreements
in which E.ON has provided services or financing to or at the request of MEMC or
any of its affiliates, except with respect to certain specified agreements. The
specified agreements excepted from the release include various arrangements
between E.ON and MEMC's Italian subsidiary under which the Italian subsidiary
deposited excess cash with E.ON on a short-term basis, a software sub-license
agreement between E.ON and MEMC, a registration rights agreement between an
affiliate of E.ON and MEMC, and a 1995 tax disaffiliation agreement among
certain affiliates of E.ON and MEMC.
The obligations of TPG and E.ON to complete the transactions contemplated
by the purchase agreement were subject to, among other things:
- TPG reaching definitive agreement with respect to an exchange by TPG of
the loans being acquired from E.ON for newly issued debt and equity
securities of MEMC, and
- MEMC entering into a new revolving credit facility with TPG (or a
comparable lender) for up to $150 million.
The conditions to closing were satisfied and E.ON and TPG consummated their
sale and purchase on November 13, 2001. As described below, the transactions
contemplated by the debt restructuring agreement between TPG Wafer Holdings and
MEMC were also completed on November 13, 2001, except for the restructuring of
the debt of our Italian subsidiary. We are currently in discussions with a
commercial bank regarding the refinancing of all or a portion of this Italian
debt.
As a result of these transactions, TPG now beneficially owns approximately
72% of the outstanding MEMC common stock and has exchanged approximately $860
million of the debt acquired from E.ON for:
- all of the shares of our newly issued Series A Cumulative Convertible
Preferred Stock with an aggregate 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.
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TPG has also retained a senior secured term note issued by our Italian
subsidiary in the principal amount of 55 million Euro (approximately $50
million).
MEMC has been advised by TPG that the MEMC securities held by the TPG group
have been consolidated in holding vehicles principally in order to improve the
efficiency and enforceability of the governance and transfer restriction
agreements among the investors comprising the TPG group. The debt securities and
the equity securities have been allocated to different holding vehicles
principally in order to facilitate dispositions of the debt securities
separately from the equity securities efficiently and consistently with the
agreements among the investors. The retirement of a portion of the MEMC debt
previously held by E.ON was effected through the placement of the debt in MEMC
Holdings and the subsequent acquisition by MEMC of MEMC Holdings to facilitate
certain tax structuring aspects of the debt restructuring.
Effective November 13, 2001, all of the E.ON affiliated members resigned
from the MEMC Board of Directors. In addition, on that date two of the
independent members of the Board also resigned. The Board established by
resolution that the Board will consist of nine persons and, on November 13,
2001, appointed four nominees to serve on the Board as designated by TPG Wafer
Holdings in the restructuring agreement. The Board has subsequently established
by resolution that the Board will consist of ten persons and has appointed four
additional persons to the Board, two of whom are independent directors who are
now serving on the Audit Committee of the MEMC Board.
RESTRUCTURING AGREEMENT
General
In connection with and as a condition to closing of the transactions
contemplated by the purchase agreement between E.ON and TPG, on November 13,
2001, we executed a definitive restructuring agreement with TPG Wafer Holdings.
Pursuant to the restructuring agreement, TPG Wafer Holdings exchanged with MEMC
all of the shares of the Class A Common Stock of the subsidiary holding company
that had acquired approximately $411 million of the debt purchased from E.ON,
for 260,000 shares of our Series A Cumulative Convertible Preferred Stock,
having an aggregate stated value of $260 million. Each share of the Series A
Cumulative Convertible Preferred Stock is convertible into shares of MEMC common
stock at a conversion price of $2.25 per share, subject to certain limitations
and antidilution adjustments. For a summary of the material terms of the
preferred stock, see "Proposal 1 -- Description of Preferred Stock," below.
The following steps were then taken pursuant to the restructuring
agreement:
- TPG exchanged with MEMC approximately $449 million of our debt acquired
from E.ON for $50 million in principal amount of our senior subordinated
secured notes, with warrants to acquire up to 16,666,667 shares of our
common stock, subject to certain antidilution adjustments.
- TPG retained an existing 55 million Euro (approximately $50 million) note
from our Italian subsidiary.
- TPG established a five-year revolving credit facility to make available
to us up to $150 million in senior secured loans.
- We entered into various agreements contemplated by the restructuring
agreement, including a registration rights agreement and an agreement and
plan of merger relating to the merger contemplated by Proposal 4.
TPG Wafer Holdings subsequently exchanged with MEMC the one outstanding share of
Class B Common Stock of the subsidiary holding company for a promissory note
having a principal amount of $250. As a result, the subsidiary holding company
is now a wholly owned subsidiary of MEMC.
If Proposal 1 is approved by our stockholders, TPG will own or have the
right to acquire, through ownership of the common stock acquired from E.ON,
conversion of the preferred stock (excluding accrued but unpaid dividends) and
exercise of the warrants, a minimum of approximately 182 million shares of
common stock, which would represent approximately 90% of our outstanding common
stock. Because the
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preferred stock earns cumulative dividends that may be payable in kind upon
conversion, if TPG were not to convert any preferred stock until immediately
prior to the earliest redemption date, TPG would own or have the right to
acquire a maximum of approximately 364 million shares of common stock, which
would represent approximately 95% of our outstanding common stock. Given the
current common stock ownership by TPG, an affirmative vote by TPG in respect of
Proposal 1 will assure the necessary stockholder approval of this Proposal.
Board Representation
The restructuring agreement required the MEMC Board of Directors to appoint
a total of four nominees designated by TPG Wafer Holdings prior to the closing,
to be allocated to the different director classes as specified by TPG Wafer
Holdings. In addition, the restructuring agreement provides that commencing with
the next annual meeting of our stockholders, and at each annual meeting
thereafter, TPG Wafer Holdings shall be entitled to present to the Board of
Directors a number of nominees for election to the class of directors up for
election at such annual meeting equal to the number of TPG Wafer Holdings
nominees in such class immediately prior to such election. We have agreed to
cause each such TPG Wafer Holdings designated nominee to be included in the
slate of nominees recommended by the Board to the stockholders for election, and
to use our best efforts to cause those nominees to be elected. TPG Wafer
Holdings will have these contractual rights so long as at least $130 million in
stated value of the Series A Cumulative Convertible Preferred Stock remains
outstanding and TPG Wafer Holdings and its affiliates beneficially own greater
than 50% of the preferred stock. As a practical matter, TPG Wafer Holdings
currently possesses the power to elect all of our directors through its
beneficial ownership of a majority of our voting stock.
NOTES AND WARRANTS
The Senior Subordinated Secured Notes due 2007 are guaranteed by our
domestic subsidiaries and bear interest at a rate of 8% (payment in kind) in the
first two years following issuance, 14% (payment in kind) in the third and
fourth years following issuance and 14% (payment in kind with optional payment
in cash at the request of the note holders) in the fifth and sixth years
following issuance. As collateral under the notes, we have pledged 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, but excluding any assets currently pledged to support third party
debt. The notes and the related security interest are subordinate in priority
and in right of payment to the Citibank revolving credit agreement and the
reimbursement agreement, which are described under "-- Credit Agreement" below.
In addition, the notes and related indenture contain substantially the same loan
covenants as the Citibank revolving credit agreement, which are described under
"-- Credit Agreement" below.
The warrants issued by MEMC entitle the holders to purchase an aggregate of
16,666,667 shares of MEMC common stock at an exercise price of $3.00 per share,
subject to certain antidilution adjustments. The warrants may only be exercised
after stockholder approval of Proposal 1 described below. Assuming stockholder
approval is obtained, the warrants may be exercised, in whole or in part, at any
time and from time to time until their expiration on November 13, 2011. The
warrants are further described under "Proposal 1 -- Issuance of Series A
Cumulative Convertible Preferred Stock, Warrants and Related Common Stock,"
below.
Pursuant to the restructuring agreement, we have agreed to restructure the
55 million Euro (approximately $50 million) debt issued by our Italian
subsidiary, on 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 a rate of 6% per annum (payment in kind)
and secured by assets of the Italian subsidiary. The parties have been unable to
restructure the Italian debt on the original terms contemplated in the
restructuring agreement. We are currently in discussions with a commercial bank
regarding the refinancing of all or a portion of this Italian debt.
REGISTRATION RIGHTS AGREEMENT
We have entered into a registration rights agreement with TPG providing for
registration rights with respect to the preferred stock, the shares of common
stock issuable upon conversion of the preferred stock, the
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warrants, the shares of common stock issuable upon exercise of the warrants, the
notes and the accompanying guarantees and any shares of common stock owned or
acquired by TPG (including the shares acquired by TPG from E.ON pursuant to
their purchase agreement). We have agreed that, on or before August 10, 2002, we
will file with the Securities and Exchange Commission a shelf registration
statement on Form S-3 covering resales of these registrable securities by the
holders of the registrable securities.
CREDIT AGREEMENT
In connection with the restructuring, TPG originally established a
five-year revolving credit facility pursuant to which the TPG lender parties
committed to make available to us a line of credit in an aggregate amount of
$150 million. Pursuant to this credit agreement, loans would be made subject to
the following aggregate lending limitations:
- $50 million at any time prior to January 1, 2002,
- $75 million at any time prior to April 1, 2002,
- $100 million at any time prior to July 1, 2002,
- $125 million at any time prior to October 1, 2002, and
- $150 million at any time on and after October 1, 2002.
The TPG credit facility provided that loans would bear interest at a rate
of LIBOR plus 3.5% per annum or an alternate base rate (based upon the greater
of the Federal funds rate plus 0.5% and Citibank N.A.'s prime rate) plus 2.5%
per annum. As collateral under this credit agreement, we pledged 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, but excluding any assets then currently pledged to support third
party debt. Our domestic subsidiaries also guaranteed our payment obligations
under the credit agreement.
Subsequent to the original closing of the debt restructuring transactions,
we made arrangements to replace the TPG revolving credit facility with a
substantially similar five-year revolving credit facility with an affiliate of
Citibank, N.A. On December 21, 2001, we entered into the new Citibank credit
facility which replaced the TPG credit facility. In April 2002, Citibank
assigned 50% of its interest in this credit facility to UBS AG. The interest
rate under the Citibank facility is LIBOR plus 1.5% or an alternative base rate
(based upon the greater of the Federal funds rate plus 0.5% and Citibank's prime
rate) plus 0.5% per annum. TPG has guaranteed our obligations under the new
Citibank facility, and in return, 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 credit facility and the
reimbursement agreement are secured by substantially the same collateral that
secured the original TPG credit facility. As with the TPG facility, our domestic
subsidiaries have guaranteed MEMC's obligations under the Citibank facility and
the reimbursement agreement. The subsidiary guaranties are supported by security
interests in substantially all of the assets of the domestic subsidiaries. The
Citibank credit facility contains certain loan covenants, including covenants to
maintain minimum quarterly consolidated earnings before interest, taxes,
depreciation and amortization; minimum monthly consolidated backlog; minimum
monthly consolidated revenues; maximum annual capital expenditures; and other
covenants customary for revolving loans of this type and size. MEMC must
maintain compliance with these covenants in order to draw on the facility. In
addition, outstanding loans under the credit facility will become due and
payable if we are in breach of the loan covenants and such breach causes an
event of default under the credit facility.
MERGER AGREEMENT
Pursuant to an agreement and plan of merger, we have agreed to permit the
merger of TPG Wafer Holdings with and into us at such time as TPG Wafer Holdings
shall determine. We will continue in existence as the surviving corporation. In
connection with the merger, the members of TPG Wafer Holdings will convert their
limited liability company interests in TPG Wafer Holdings into equivalent equity
securities of us held by TPG Wafer Holdings, plus common stock having a market
value equal to the principal amount of the debt securities of MEMC held by TPG
Wafer Holdings and the accrued but unpaid interest on such debt
7
securities. TPG Wafer Holdings currently does not directly hold any debt of MEMC
and has indicated it has no current intention to acquire debt of MEMC.
The merger is subject to the approval of our stockholders and the members
of TPG Wafer Holdings. The agreement and plan of merger is being submitted to
our stockholders for approval at this special stockholders meeting and is
described under "Proposal 4 -- Merger between MEMC and TPG Wafer Holdings LLC,"
below.
MANAGEMENT ADVISORY AGREEMENT
In connection with the restructuring, we have entered into a management
advisory agreement with TPG GenPar III, L.P., an affiliate of Texas Pacific
Group. Pursuant to the agreement, TPG GenPar III 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 million per annum plus additional
compensation if TPG GenPar III acts as a financial advisor to us for future
transactions such as a merger or debt or equity financing.
FEES AND EXPENSES
We are responsible for the payment of all our expenses incurred in
connection with the restructuring agreement and the subsequent negotiation and
documentation of the Citibank replacement credit facility, including all fees
and expenses of our legal counsel and all third-party consultants engaged by us
to assist in such transactions. We have paid TPG a $10 million transaction fee
in connection with the restructuring agreement. In addition, we expect to pay
TPG and Citibank a total of $3 million in fees (of which TPG received
approximately $1.1 million) in connection with the TPG credit facility, the
Citibank 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 million) and have paid other
out-of-pocket expenses incurred by us in connection with the restructuring (of
approximately $3 million).
BACKGROUND AND REASONS FOR THE RESTRUCTURING
We have effected the debt restructuring to address our need for liquidity
and cash to continue operations past the third quarter of 2001. After
considering alternatives to the TPG restructuring, we determined that the
restructuring provided the best financial support for the company and value for
our public stockholders.
We have historically relied heavily on loans from E.ON and its affiliates
to fund our operations. In 1999, E.ON, our then principal shareholder, refocused
its strategic objectives and determined as a result to divest itself of its
investments in us. E.ON advised us that it contacted a number of potential
purchasers of our equity and debt securities, including TPG, over a several
month period ending in early 2001. At that time, as discussed below, the
conditions for the semiconductor industry and the market for semiconductor
company securities were deteriorating rapidly. As a result, the discussions
previously initiated by E.ON did not result in any transaction.
As a manufacturer of silicon wafers, we have suffered from the economic
downturn in the semiconductor industry in 2001. 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. This growth resulted in an increase in the demand for silicon
wafers. In early 2001, the semiconductor industry began to experience a slow
down and a broad-based inventory correction. This resulted in reduced demand and
a broad-based inventory correction in the silicon wafer industry.
In response to this slow down, we began taking numerous actions in early
2001 to bring our cost structure in line with demand. These actions initially
included the release of temporary employees and some employee layoffs, primarily
in the United States, as well as temporary plant shutdowns. We continued to
review our cost structure and evaluate measures to balance our operating costs
with the expected decline in demand over the following quarters.
During the second quarter of 2001, we decided to close our small diameter
wafer line in Sherman, Texas. This action was taken as part of our continuing
efforts to focus our manufacturing facilities, to improve our
8
cost structure and to balance our production capabilities with the evolving
market conditions. To address our liquidity and cash needs, we began the search
for potential financing sources.
In July 2001, E.ON and TPG resumed discussions regarding a potential
transaction with significantly lower valuations for our securities than had been
previously discussed. E.ON continued to be interested in such a transaction
since it satisfied its strategic objective of divesting itself of our
securities.
In August 2001, we announced that our existing cash and credit availability
was sufficient to fund our operations only through the third quarter of 2001.
Our liquidity and cash flow were being negatively impacted by our operating
losses caused by excess capacity and declining prices, as well as the high cost
of servicing our debt.
The discussions between E.ON and TPG continued into the third quarter of
2001, during which time conditions for the semiconductor industry in general and
us more particularly continued to deteriorate. Eventually TPG advised E.ON that
it would only be prepared to purchase our securities for a nominal purchase
price, subject further to the conditions that, among other things, E.ON fund
certain of our cash flow needs and that we agree to a restructuring of the debt
securities to be purchased by TPG.
Given E.ON's separate interest in the transaction, our Board of Directors
referred consideration of the restructuring and related matters to a special
committee comprised of Michael Smith, Willem Maris and William Stevens,
directors who were not officers, directors or employees of, or otherwise
affiliated or associated with, E.ON. The Special Committee had been previously
constituted to oversee the process pursuant to which E.ON sought to divest
itself of its debt and equity position in MEMC, and was given the full power and
authority of the Board of Directors for purposes of approving the restructuring
transactions. Representatives of E.ON and TPG periodically advised
representatives of the Special Committee of the status of the discussions
between E.ON and TPG.
E.ON and TPG advised the Special Committee that a condition to TPG's
willingness to enter into the purchase agreement with E.ON was that our Board of
Directors exempt the purchase agreement from the provisions of Section 203 of
the Delaware General Corporation Law. As described below under "Approval by the
Special Committee," Section 203 prevents a purchaser of more than 15% of the
voting securities of a Delaware corporation from engaging in certain
transactions with the corporation, subject to certain exceptions. Following a
review of the terms of the proposed purchase agreement between E.ON and TPG,
particularly the condition that the terms of the restructuring shall have been
agreed with the company, and after considering the advice of the Special
Committee's legal and financial advisors, the Special Committee resolved to
exempt the purchase agreement from the provisions of Section 203.
The purchase agreement was entered into on September 30, 2001. Pursuant to
the purchase agreement, E.ON agreed to receive nominal consideration of $6.00 in
the aggregate for all debt and equity in MEMC held by E.ON. As part of the
purchase agreement, TPG agreed to enter into a new revolving credit facility
with MEMC for up to $150 million. In addition, TPG agreed to pay E.ON additional
consideration as follows if, in MEMC's 2002 fiscal year, we meet certain
financial performance criteria based on EBITDA (defined generally as our
consolidated net income or loss, plus or minus minority interest, equity in
income or loss of joint ventures, provision or benefit for income taxes,
interest expense, interest income, depreciation, amortization of goodwill and
other intangibles and certain other items, all in accordance with generally
accepted accounting principles):
- $0, if our company's EBITDA is less than $100 million; or
- $30 million, if our company's EBITDA equals or exceeds $100 million,
but is less than $150 million; or
- $75 million, if our company's EBITDA equals or exceeds $150 million,
but is less than $300 million; or
- $150 million, if our company's EBITDA equals or exceeds $300
million.
9
As mentioned above, the purchase agreement was conditioned on TPG and MEMC
reaching agreement upon the terms of the exchange by TPG of MEMC loans acquired
from E.ON for newly issued MEMC debt and equity securities. Accordingly, shortly
after entering into the purchase agreement, TPG began negotiating with us to
restructure the loans TPG would acquire from E.ON.
The Special Committee reviewed several alternatives to the TPG
restructuring transaction, including (i) a status quo scenario in which MEMC
continued to operate in the absence of the transaction or any similar
transaction, (ii) a stand-alone restructuring/Chapter 11 bankruptcy filing,
(iii) a third party investor/acquirer, and (iv) a liquidation. For the reasons
described below under "Opinion of Financial Advisor to the Special
Committee -- Fairness Analysis," the Special Committee rejected each of these
alternatives.
TPG proposed restructuring transactions that provided for the exchange by
TPG of approximately $860 million of our outstanding loans for a combination of
(i) $150 million of cumulative convertible preferred stock with a 14% dividend
(16% until shareholder approval of the preferred stock terms) and a conversion
price of between $1.00 and $1.30 per share and (ii) $150 million of senior
subordinated notes due 2007 (comprised of $50 million in secured notes and $100
million in unsecured notes) with a 10% interest rate.
We replied that the $1.30 conversion price for the preferred stock was too
low and that the dividend rate should be 12% for dividends paid in kind and 10%
for cash dividends. We proposed that the senior subordinated notes should have,
in the case of the secured notes, a 9% interest rate for payments in kind and a
8% interest rate for cash payments and, in the case of the unsecured notes, a
10% interest rate for payments in kind and a 9% interest rate for cash payments.
We and TPG also negotiated the terms under which the new securities would be
redeemed by MEMC and the terms under which MEMC would register such securities
with the Securities and Exchange Commission for public resale. In addition, in
order to protect our minority shareholders, we sought conditions that would
apply to any short-form merger between MEMC and TPG. The results of these
negotiations are reflected in the restructuring agreement described above.
The restructuring transactions have resulted in a significant deleveraging
of our balance sheet and a potential dilution of the other stockholders of MEMC
from approximately 28% of the total outstanding shares of our common stock to
approximately 10% upon stockholder approval of Proposal 1 and approximately 5%
if TPG does not convert any preferred stock until immediately prior to the
earliest redemption date in 2009.
APPROVAL BY THE SPECIAL COMMITTEE
On September 21, 2001, the Special Committee unanimously approved the sale
by E.ON of its debt and equity interests in MEMC to TPG, solely for the purposes
of Section 203 of the Delaware General Corporation Law. Section 203 is a
statutory provision intended to discourage certain takeover attempts that are
not approved by the board of directors of the target company. Section 203
generally prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder (including a purchaser of 15% of its
voting securities) for a period of three years following the date that such
stockholder became an interested stockholder, subject to certain exceptions,
unless the transaction that results in the stockholder becoming an interested
stockholder is approved in a prescribed manner. One of the prescribed manners is
prior approval of the transaction by the board of directors of the Delaware
corporation.
The purchase by TPG of E.ON's debt and equity interests in MEMC resulted in
TPG being an interested stockholder of MEMC within the meaning of Section 203.
TPG conditioned the consummation of their purchase upon the prior approval of
the purchase by the Special Committee, solely for purposes of Section 203. If
the Special Committee had not approved the purchase, solely for purposes of
Section 203, the Special Committee believed that TPG would terminate its
agreement with E.ON and would not pursue any restructuring transactions with
MEMC. If TPG had waived its condition and completed its purchase from E.ON
without proper approval under Section 203, TPG would have been effectively
prohibited from consummating the restructuring transactions with MEMC, including
the merger that is the subject of Proposal 4.
10
The Special Committee's approval of the TPG purchase, solely for purposes
of Section 203, did not constitute approval of the restructuring transactions
between TPG and MEMC nor did it obligate MEMC to enter into the restructuring
transactions. Furthermore, the consummation of TPG's purchase was further
conditioned on TPG and MEMC reaching agreement on the terms of the restructuring
transactions, which agreement required a separate approval by the Special
Committee.
On November 5, 2001, the Special Committee unanimously approved the
restructuring transactions, including, among other things:
- the designation and issuance of the Series A Cumulative Convertible
Preferred Stock,
- the issuance of the senior subordinated secured notes and associated
warrants, and
- the merger that is the subject of Proposal 4.
The Special Committee approved the restructuring after consideration of the
restructuring transactions and their fairness to the holders of MEMC common
stock (other than E.ON and TPG). The Special Committee's consideration of the
restructuring transactions took place over the course of several weeks during
which the Special Committee met a number of times telephonically or in person.
To assist it in its work, the Special Committee retained, at MEMC's expense,
Gardner Carton & Douglas, as independent legal advisors, and Houlihan Lokey
Howard & Zukin Financial Advisors, as independent financial advisors. MEMC was
advised by its regular outside corporate counsel, Bryan Cave LLP.
In reaching its conclusion that the restructuring transactions are fair to
the holders of MEMC common stock (other than E.ON and TPG), the Special
Committee considered the following points that it viewed as favoring that
conclusion:
- E.ON had made it clear to MEMC and the members of the Board of Directors
that it was unwilling to provide additional liquidity to MEMC;
- management of MEMC informed the Special Committee that MEMC was in
imminent danger of exhausting its operating funds;
- E.ON had sought for over a year to find a buyer for its debt and equity
interests in MEMC and TPG had emerged as the only credible candidate;
- E.ON had directed that the Board of Directors consider the filing by MEMC
of a voluntary petition to initiate bankruptcy proceedings in the event
that E.ON was unable to complete a sale of its debt and equity interests
in MEMC to TPG;
- MEMC's counsel advised the Board of Directors that the holders of MEMC
common stock (other than E.ON) were unlikely to receive any proceeds from
a bankruptcy proceeding;
- the Special Committee concluded that the restructuring transactions
offered MEMC the best chance to obtain operating funds that would allow
it to continue as a going concern, thereby preserving value for the
holders of MEMC common stock;
- TPG had conditioned its acquisition of E.ON's interest in MEMC on the
approval by the Special Committee of the restructuring transactions;
- the Special Committee's legal and financial advisors, negotiating on
behalf of the Special Committee, were able to obtain TPG's agreement to
make certain changes in the documents relating to the restructuring
agreement that were favorable to the holders of MEMC common stock (other
than E.ON and TPG);
- the Special Committee's legal and financial advisors informed the Special
Committee that they did not believe that TPG would agree to any
additional favorable changes in the documents relating to the
restructuring agreement; and
11
- the Special Committee received an opinion from its financial advisors,
Houlihan Lokey Howard & Zukin Financial Advisors, that the restructuring
transactions were fair from a financial point of view to the public
stockholders of MEMC.
The Special Committee believed that it was impractical to individually
quantify or rank the factors that it considered. The first six factors listed
above, however, are those that the Special Committee considered most important.
The Special Committee viewed the remaining four factors as being less important,
but still material to the committee's consideration.
The Special Committee also considered a number of factors that it viewed as
disfavoring the Special Committee's conclusion. The only one of these factors
that was material, in the view of the Special Committee, was the extent to which
the restructuring transactions would dilute the ownership position of MEMC's
public stockholders. In reaching its conclusion, however, the Special Committee
determined that the factors in favor of the approval of the restructuring
transactions greatly outweighed the factors against.
OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE
On August 27, 2001, the Special Committee of the MEMC Board of Directors
retained Houlihan Lokey Howard & Zukin Financial Advisors to analyze the
fairness, from a financial point of view, of the transaction between E.ON and
TPG, as ultimately contemplated by the purchase agreement dated September 30,
2001. At the November 5, 2001 meeting of the Special Committee of the Board of
Directors, Houlihan Lokey presented its analysis as described below and
delivered its written opinion to the effect that, as of such date and based on
the matters described in the opinion, the transaction was fair, from a financial
point of view, to the public stockholders of MEMC. Houlihan Lokey's opinion to
the Special Committee is dated and speaks only as of November 5, 2001. Houlihan
Lokey does not have any obligation to update, revise or reaffirm its opinion,
including at the time of the special meeting of the stockholders.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following summarizes the material valuation methodologies utilized by Houlihan
Lokey in supporting its fairness opinion. The summary does not purport to be a
complete statement of the analyses and procedures applied, the judgments made or
the conclusion reached by Houlihan Lokey or a complete description of its
presentation. Houlihan Lokey believes, and so advised the Special Committee,
that Houlihan Lokey's analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all factors and analyses, could create an incomplete view of the
process underlying its analyses and opinions.
Houlihan Lokey's opinion and financial analyses were only one of many
factors considered by the Special Committee in its evaluation of the transaction
and should not be viewed as determinative of the views of the Special Committee
or management with respect to the transaction. Houlihan Lokey did not attempt to
assign specific weights to particular analyses.
THE COMPLETE TEXT OF HOULIHAN LOKEY'S OPINION IS ATTACHED AS ANNEX A. THE
SUMMARY OF THE OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE OPINION. YOU ARE URGED TO READ THE OPINION CAREFULLY IN ITS ENTIRETY FOR
A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS CONSIDERED AND THE
ASSUMPTIONS MADE BY HOULIHAN LOKEY.
Houlihan Lokey's opinion to the Special Committee addresses only the
fairness of the transaction, from a financial point of view, to the public
stockholders of MEMC, and does not constitute a recommendation to the
stockholders as to how they should vote. Houlihan Lokey's opinion does not
address MEMC's underlying business decision to effect the transaction. Houlihan
Lokey has not been requested to, and did not, solicit third party indications of
interest in acquiring all or any part of MEMC.
12
In connection with the preparation of its opinion, Houlihan Lokey made
certain reviews, analyses and inquiries as it deemed necessary and appropriate
under the circumstances. Among other things, Houlihan Lokey:
- reviewed MEMC's annual reports to shareholders on Form 10-K for the three
fiscal years ended December 31, 2000 and quarterly reports on Form 10-Q
for the two quarters ended June 30, 2001, and draft interim financial
statements prepared by MEMC for the period ended September 30, 2001,
which MEMC's management had identified as being the most current
financial statements then available;
- reviewed copies of the following agreements:
- Purchase Agreement between E.ON, its subsidiaries and TPG dated
September 30, 2001;
- Agreement and Plan of Merger by and between TPG Wafer Holdings LLC and
MEMC Electronic Materials, Inc. (draft distributed November 2, 2001);
- Indenture for $50 million Senior Subordinated Secured Notes due 2007 of
MEMC Electronic Materials, Inc. (draft distributed November 2, 2001);
- Revolving Credit Agreement among MEMC Electronic Materials, Inc. as
borrower, the Lenders Party thereto, and Citicorp USA, Inc. as
Administrative Agent (draft dated November 2, 2001);
- Restructuring Agreement among TPG Wafer Holdings LLC and MEMC Electronic
Materials, Inc. (draft distributed November 2, 2001);
- Registration Rights Agreement among MEMC Electronic Materials, Inc. and
TPG Wafer Holdings LLC (draft distributed November 2, 2001);
- Certificate of Designations of Series A Cumulative Convertible Preferred
Stock of MEMC Electronic Materials, Inc. (draft distributed November 2,
2001);
- Warrant Certificate of MEMC Electronic Materials, Inc. (draft
distributed November 2, 2001);
- Summary of terms for E55 million Promissory Note due 2031 of MEMC
Electronic Materials SpA (draft distributed November 2, 2001); and
- Management Advisory Agreement between MEMC Electronic Materials, Inc.
and TPG GenPar III, L.P. (draft dated October 31, 2001);
- reviewed the terms of MEMC's debt outstanding to E.ON AG and its
subsidiaries (E.ON North America, Inc., E.ON International Finance, B.V.
and the Fidelia Corporation) along with debt owed to various third party
lenders;
- reviewed the joint venture agreements between MEMC and its joint venture
partners for each of MEMC's subsidiaries;
- met with certain members of the senior management of MEMC to discuss the
operations, financial condition, future prospects and projected
operations and performance of MEMC, and met with representatives of
MEMC's independent accounting firm and counsel to discuss certain
matters;
- visited MEMC's headquarters and certain facilities in St. Peters,
Missouri;
- reviewed forecasts and projections prepared by MEMC's management with
respect to MEMC for the years ended December 31, 2001 through 2002;
- reviewed the historical market prices and trading volume for MEMC's
publicly traded securities; and
- conducted such other studies, analyses and inquiries as Houlihan Lokey
deemed appropriate.
In preparing its opinion, Houlihan Lokey relied upon and assumed, without
independent verification, that the financial information provided to it had been
reasonably prepared and accurately and completely reflected the historical
financial performance and current financial condition of MEMC, and represented
the best currently available estimates of the future financial results and
condition of MEMC, and that there had been
13
no material change in the assets, financial condition, business or prospects of
MEMC since the date of the most recent financial statements made available to
Houlihan Lokey.
In assessing the financial fairness of the transaction, Houlihan Lokey:
- used widely accepted valuation methodologies to perform an independent
analysis of the enterprise value and equity value of MEMC;
- analyzed the terms of the transaction and the terms of the securities to
be issued in the transaction;
- examined the post-transaction value to public equity holders; and
- considered certain alternatives to the proposed transaction.
The following is a summary of the material financial analyses performed by
Houlihan Lokey in connection with rendering its opinion.
Analysis and Valuation of MEMC Common Stock
As part of its analysis, Houlihan Lokey performed an independent valuation
of MEMC's stock, assuming completion of the transaction, using two widely
accepted valuation methodologies. The first is the market multiple method, which
involves the multiplication of various earnings and cash flow measures by
appropriate risk-adjusted multiples determined by analyzing other public
companies in the same or similar businesses. The second method is the
transaction multiple method, in which control transactions in a similar industry
are analyzed to determine relevant earnings multiples at which control of
similar companies changes hands. Typically, a discounted cash flow valuation
analysis would also be performed, but due to the difficulty in projecting future
financial results for MEMC, Houlihan Lokey concluded that the discounted cash
flow analysis would not be a reliable valuation measure.
Market Multiple Valuation Method. MEMC is primarily engaged in the
development, manufacturing and selling of silicon wafers to the semiconductor
industry. Therefore, Houlihan Lokey chose for its analysis, public companies
whose primary business is serving the semiconductor market. The publicly traded
companies that Houlihan Lokey considered included: Asyst Technologies, Inc.;
Chippac, Inc.; Entegris, Inc.; FSI International, Inc.; Macdermid, Inc.; Mattson
Technology, Inc.; Photronics, Inc.; and Speedfam, IPEC, Inc.
Houlihan Lokey measured multiples of revenues, net income, earnings before
interest and taxes (EBIT) and earnings before interest, taxes, depreciation and
amortization (EBITDA). Because the semiconductor industry is a cyclical
industry, the revenues and earnings levels of these companies may vary
significantly from year to year. To account for this cyclicality, Houlihan Lokey
computed multiples for the latest twelve months, for the projected 2001 fiscal
year, and the average for the trailing three years.
To derive the relevant multiples, revenue, EBIT and EBITDA levels of the
public companies were compared to their enterprise value (equal to the trading
value of equity plus the book value of debt, less cash on the balance sheet),
and net income was compared to the trading value of equity.
The multiples of latest twelve-month revenue for the comparable companies
ranged from 0.55 to 2.44 times revenue, with a median of 0.90 times. Similarly,
the multiples of revenue for the comparable companies based on the last three
years' average revenue ranged from 0.51 to 3.18 times, with a median of 1.26
times. Multiples for the comparable companies of projected fiscal 2001 revenue
ranged from 0.42 to 2.50 times, with a median of 1.09 times.
The multiples of latest twelve-month EBITDA for the comparable companies
ranged from 3.9 to 14.8 times, with a median of 7.8 times. Similarly, the
multiples of EBITDA for the comparable companies based on the last three years'
average EBITDA ranged from 6.4 to 16.2 times, with a median of 7.2 times.
Multiples for the comparable companies of projected fiscal 2001 EBITDA ranged
from 2.7 to 9.2 times, with a median of 4.7 times.
The multiples of latest twelve-month EBIT for the comparable companies
ranged from 4.9 to 25.5 times, with a median of 12.2 times. Similarly, the
multiples of EBIT for the comparable companies based on the last
14
three years' average EBIT ranged from 8.1 to 23.3 times, with a median of 12.5
times. Multiples for the comparable companies based on projected fiscal 2001
ranged from 3.4 to 24.5 times, with a median of 7.6 times.
The multiples of latest twelve-month net income for the comparable
companies ranged from 8.0 to 26.8 times, with a median of 14.0 times. Similarly,
the multiples of net income for the comparable companies based on the last three
years' average net income ranged from 9.1 to 41.5 times, with a median of 23.5
times. Multiples for the comparable companies of projected fiscal 2001 net
income ranged from 3.1 to 34.0 times, with a median of 15.0 times.
Houlihan Lokey valued MEMC using multiples generally at or slightly above
the median multiples of the comparable companies and derived an enterprise value
for MEMC of between $450 million to $575 million.
As part of its analysis, Houlihan Lokey analyzed the float and trading
volume for MEMC's common stock. Houlihan Lokey calculated the public float as a
percent of total shares outstanding, as well as the ratio of average daily
trading volume (over the most recent 90 days) to float and total shares
outstanding. Houlihan Lokey then compared MEMC's ratios to the same ratios for
the selected comparable companies. This analysis showed that MEMC has a lower
percentage of public float to shares outstanding relative to the comparable
companies, and MEMC's average daily trading volume as a percentage of public
float was below the mean and median for the comparable companies.
Transaction Multiple Valuation Method. The transaction multiple methodology
also involves multiples of earnings and cash flow and other financial measures.
Multiples used in this approach are determined through an analysis of
transactions involving controlling interests in companies in a similar industry
or with operations similar to the principal business operations of MEMC.
Houlihan Lokey analyzed the following six control transactions that closed since
January 1998 involving companies that serve the semiconductor industry:
- the acquisition of Silicon Valley Group Inc. by ASM Lithography in June
2001;
- the acquisition of OnTrak Systems, Inc. by ASM Lithography in May 2001;
- the acquisition of Gasonics International Corporation by Novellus
Systems, Inc. in January 2001;
- the acquisition of Component Products Division of Motorola, Inc. by CTS
Corporation in June 2000;
- the acquisition of Align-Rite International Inc. by Photronics, Inc. in
June 2000; and
- the acquisition of LeaRonal, Inc. by Rohm and Haas Company in January
1999.
Revenue and EBITDA multiples were calculated for these transactions based
on the trailing twelve-month financial performance of the target companies. The
multiples of latest twelve-month revenue ranged from 0.46 to 3.17 times, with a
median of 1.58 times. The multiples of latest twelve-month EBITDA ranged from
5.9 to 30.3 times, with a median of 9.1 times. Based on MEMC's risk profile,
Houlihan Lokey selected multiples toward the lower end of the range of the
observed control multiples to value MEMC and derived an enterprise value for
MEMC of between $650 million to $700 million.
Equity Value. Houlihan Lokey applied an enterprise value range of $550
million to $700 million for MEMC derived from the multiple methodologies
discussed above to MEMC's current capital structure and its proposed capital
structure under the transaction. According to Houlihan Lokey's analysis under
MEMC's current capital structure with its debt obligation of approximately $1.15
billion, MEMC's stockholders would have no value left to them. Under the capital
structure with the transaction and assuming conversion of the preferred stock
issued under the transaction for an aggregate of approximately 205 million
shares of common stock outstanding, MEMC's debt would be reduced to
approximately $400 million and equity value of approximately $1.24 to $1.97 per
share would be left for MEMC's stockholders. This analysis, therefore, indicates
a higher equity value for MEMC as a result of the reduced debt from the
transaction, supporting Houlihan Lokey's fairness opinion.
15
Fairness Analysis
In assessing the fairness of the transaction to MEMC's public stockholders
from a financial point of view, Houlihan Lokey considered (i) the value
available to public equity shareholders after satisfying debt under each of the
current and proposed capital structures at various assumed levels of enterprise
value, (ii) the terms of the proposed restructuring, including the terms of the
new revolving credit facility and the securities to be issued in the
transaction, (iii) MEMC's viability under both the current and proposed capital
structures, (iv) E.ON's stated objective of selling all of its non-utility
related investments and its unwillingness to make further investments in MEMC,
(v) MEMC's prospects for obtaining additional debt or equity financing, and (vi)
the value available to satisfy debt and equity holders in a bankruptcy or
Chapter 11 reorganization.
Houlihan Lokey also compared the impact of the transaction on the value of
the common stock owned by the stockholders of MEMC to the value of the most
likely alternatives to the transaction. The alternatives considered included (i)
a status quo scenario in which MEMC continued to operate in the absence of the
transaction or any similar transaction, (ii) a stand-alone restructuring/Chapter
11 bankruptcy filing, (iii) a third party investor/acquirer, and (iv) a
liquidation.
In considering the status quo alternative, Houlihan Lokey considered that
as of July 31, 2001, MEMC had aggregate debt repayments due of $725.1 million
during the second half of the fiscal year ending December 31, 2001 and during
the full fiscal year ending December 31, 2002. On August 10, 2001, MEMC
announced that it would only have enough cash to fund operations and other cash
requirements through the third quarter 2001. MEMC had no readily available
alternative source of liquidity other than E.ON. MEMC informed Houlihan Lokey
that E.ON was unwilling to offer MEMC additional liquidity, thus limiting MEMC's
cash availability.
In considering a stand alone restructuring/Chapter 11 bankruptcy filing,
Houlihan Lokey considered that MEMC had directed its outside counsel to consider
the implications to MEMC of filing for Chapter 11 bankruptcy protection. This
would allow MEMC to complete a financial restructuring through which MEMC could
potentially lessen its interest expense burden and improve its cash flow and
balance sheet. According to Houlihan Lokey's analysis and discussions with
management, given a six-month timeframe in which MEMC could restructure its debt
in Chapter 11, MEMC would require debtor-in-possession financing of more than
the $30 million required to fund operations through fiscal year 2001. Due to
MEMC's highly leveraged balance sheet and the downturn in the semiconductor
industry which has significantly reduced the value of MEMC's assets,
debtor-in-possession financing would be very difficult to obtain.
In assessing the viability of a third party investor/acquirer, Houlihan
Lokey considered that E.ON first announced its intention to divest itself of
MEMC in late 1999. An extensive sale process was conducted by E.ON and its
advisors. No other potential acquirer has proposed an alternative that yields
MEMC's public shareholders the possibility of higher value than the current
proposed transaction. MEMC has been unsuccessful in its efforts to raise
additional capital or identify new investors. Further, the amount of capital
required to continue operations lends itself more to an acquisition rather than
an additional capital investment by a third party.
In considering the liquidation of MEMC, based on Houlihan Lokey's analysis
and discussions with management, Houlihan Lokey assumed that MEMC would be
required to incur approximately $34.3 million of expenses in order to shut down
operations. Such expenses, as estimated by management, include employee salaries
and benefits during the wind-down, negative cash flow of operating certain
facilities until they could be sold, costs associated with supporting certain
foreign operations until they could be sold, and the costs associated with
administering the liquidation. The $34.3 million in expenses would be $13.5
million more than MEMC projected receipts under the best case scenario. The
ability to conduct an orderly liquidation presumes that MEMC would be in
existence long enough to complete one. If MEMC had run out of cash by September
30, 2001 as projected, such an orderly liquidation process may not have been
possible. The majority of MEMC's assets consists of silicon wafer manufacturing
facilities and equipment of which there is already an excessive amount available
on the market. Therefore, the realizable value of these assets in the current
environment is likely to be substantially lower than their stated book value. In
any liquidation proceeding it is unlikely that the public stockholders of MEMC
would receive any value.
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In considering the transaction in comparison with the other alternatives
discussed above, Houlihan Lokey considered the following:
- The transaction provides additional capital to MEMC in the form of (i)
the five-year revolving credit facility; and (ii) up to a $50 million
capital contribution by E.ON at or before the closing of the transaction,
of which $18 million was paid prior to closing in the form of a loan and
$32 million was paid at closing.
- MEMC's debt was to be reduced by at least $750 million.
- MEMC's near term debt amortization is substantially reduced.
- The interests of public stockholders are reduced from 28.2% of equity
outstanding to 10.6% without including the effect of the warrants and
9.7% including the effect of the warrants.
- The effect of deleveraging MEMC's balance sheet allows for lower interest
expense in the future, and under the non-cash interest feature on the
restructured debt conserves MEMC's cash.
Based on the foregoing analysis, Houlihan Lokey has concluded that the
transaction is fair to the public stockholders of MEMC from a financial point of
view.
Houlihan Lokey has not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of MEMC. Houlihan Lokey has
not independently verified the accuracy and completeness of the information
supplied to it with respect to MEMC and does not assume any responsibility with
respect to such information. Houlihan Lokey was not requested to, and did not,
make an independent evaluation or appraisal of MEMC's assets or liabilities,
contingent or otherwise, and was not furnished with any evaluations or
appraisals. Houlihan Lokey's analysis is necessarily based on business,
economic, market and other conditions as they existed and can be evaluated by
Houlihan Lokey at the date of its opinion and presentation to the board of MEMC.
Houlihan Lokey is a nationally recognized investment banking firm with
expertise in, among other things, valuing businesses and securities and
rendering fairness opinions. Houlihan Lokey is continually engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, private placements of debt and equity,
corporate reorganizations, employee stock ownership plans, corporate and other
purposes. MEMC selected Houlihan Lokey because of its experience and expertise
in performing valuation and fairness analyses. Houlihan Lokey does not
beneficially own nor has it ever beneficially owned any interest in MEMC.
Furthermore, Houlihan Lokey has no agreement or understanding to provide
additional services to MEMC beyond the scope of this fairness opinion.
MEMC has agreed to pay Houlihan Lokey a fee of $750,000 plus its reasonable
out-of-pocket expenses incurred in connection with the rendering of the fairness
opinion, including Houlihan Lokey's reasonable expenses of legal counsel. No
portion of the fee was contingent upon approval or completion of the
transaction. MEMC has further agreed to indemnify Houlihan Lokey against certain
liabilities and expenses related to or arising in connection with the rendering
of its services, including liabilities under the federal securities laws.
ACCOUNTING EFFECTS OF THE RESTRUCTURING
As a consequence of the change in ownership and the debt restructuring, our
accounting records were affected. Set forth below under the heading "Unaudited
Pro Forma Financial Information" is a detailed description of the accounting
effects of the restructuring. What follows is a summary of the significant
accounting effects.
There were changes in our consolidated balance sheet as follows:
- The debt and related accrued interest previously owed to E.ON were
written off of our accounting records;
- The new debt instruments and preferred stock resulting from the debt
restructuring were recorded at their fair market values;
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- As a result of TPG's ownership percentage in MEMC, we applied purchase
accounting and pushed down TPG's nominal basis in MEMC to our accounting
records. 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 to be allocated
of approximately $983 million was generated. The negative goodwill was
then allocated to the amounts that otherwise would have been recorded to
goodwill and other identifiable intangible assets, investments in joint
ventures, and property, plant and equipment. The process of allocating
negative goodwill also created new deferred tax assets. To the extent we
believed it was more likely than not that the benefit of these deferred
tax assets would not be realized, a valuation allowance was established.
To the extent a net deferred tax asset was recognized, it resulted in a
further reduction to the new carrying amount of property, plant and
equipment. As a result of this entire process, net deferred tax assets
were increased by approximately $34 million, while the carrying amounts
of property, plant and equipment and investments in joint ventures were
reduced by approximately $983 million and $34 million, respectively.
- As a result of the nominal price paid by TPG for its interest in MEMC,
goodwill, intangible assets, investments in joint ventures, and property,
plant and equipment were written down significantly.
In addition, there were changes in our consolidated statements of
operations as follows:
- Interest expense reflects the terms of our new debt instruments, as well
as the accretion from the nominal values to the face values of the
related debt instruments.
- Cost of goods sold, marketing and administration expenses, and research
and development expenses reflect lower depreciation and amortization
expense as a consequence of the lower values of the property, plant and
equipment and intangible assets resulting from purchase accounting.
- Cumulative preferred stock dividends were deducted from net income to
arrive at net income allocable to common stockholders.
PROPOSAL 1
ISSUANCE OF SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK, WARRANTS
AND RELATED COMMON STOCK
In connection with the restructuring, we have issued and delivered to TPG
Wafer Holdings 260,000 shares of our Series A Cumulative Convertible Preferred
Stock, convertible into shares of MEMC common stock, and issued and delivered to
TPG warrants to purchase 16,666,667 shares of MEMC common stock.
Under the listing rules of the New York Stock Exchange, we must obtain
stockholder approval of any issuance of common stock or securities exercisable
for or convertible into common stock that exceeds 20% of the outstanding MEMC
common stock or total voting power of our equity securities. To accommodate the
restructuring closing, we agreed to promptly seek the stockholder approval
required under the New York Stock Exchange rules. TPG Wafer Holdings has agreed
that until such approval is obtained, the preferred stock will not be converted.
The warrants may be exercised only after stockholder approval. Upon receipt of
stockholder approval, the preferred stock will be convertible into shares of
common stock at a price of $2.25 per share, and the warrants will be exercisable
for shares of common stock at a price of $3.00 per share. The closing market
price of our common stock on November 13, 2001, the date on which the preferred
stock and warrants were issued, was $3.51 per share as reported on the New York
Stock Exchange.
In connection with the special meeting, TPG will be entitled to vote on
Proposal 1 and TPG's favorable vote will ensure that Proposal 1 receives the
necessary stockholder vote for approval. If Proposal 1 is approved at the
special stockholders' meeting, TPG will own or have the right to acquire,
through ownership of the common stock acquired from E.ON, conversion of the
preferred stock and exercise of the warrants, a
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minimum of approximately 182 million shares of MEMC common stock (excluding
accrued but unpaid dividends), representing approximately 90% of our outstanding
common stock. The preferred stock is redeemable at the option of the holders on
or after November 13, 2009. Because the preferred stock earns cumulative
dividends that may be payable in kind upon conversion, if TPG were not to
convert any preferred stock until immediately prior to the earliest redemption
date, TPG would own or have the right to acquire a maximum of approximately 364
million shares of common stock, which would represent approximately 95% of our
outstanding common stock. With ownership of 90% of our outstanding common stock,
TPG would be entitled to merge with MEMC and redeem shares held by existing MEMC
shareholders for cash, securities or other property determined by TPG to be fair
consideration, in accordance with the provision of Section 253 of the Delaware
General Corporation Law, without obtaining the separate approval of our
stockholders. TPG agreed in the restructuring agreement, however, not to
consummate such a merger without the prior approval of a special committee of
the MEMC Board of Directors.
If Proposal 1 is not approved at the special stockholders' meeting, TPG
Wafer Holdings will not be able to convert the preferred stock or exercise the
warrants. TPG has agreed not to convert the preferred stock until stockholder
approval is obtained. The warrants may not be exercised by their terms until
after stockholder approval. In addition, if shareholder approval is not
obtained, holders of the preferred stock would be paid a liquidation preference
on a participating basis and, if cash dividends are paid, dividends would be
paid on a participating basis, in each case as described below. Furthermore, the
earnings per share for the MEMC common stock is likely to vary depending on
whether the preferred stock is converted.
DESCRIPTION OF PREFERRED STOCK
General
The Series A Cumulative Convertible Preferred Stock has been designated by
our Board of Directors as a new series of preferred stock. Our restated
certificate of incorporation authorizes the Board of Directors to designate one
or more series out of the authorized preferred stock and to determine the
relative rights and preferences of the shares within each series.
Liquidation Preference
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:
- if stockholder approval is obtained, $1,000 per share plus accrued and
unpaid dividends, or
- 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
shall 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.
Dividends
Cash dividends are cumulative at a rate of 10% per annum from the date the
preferred stock was originally issued or, if shareholder approval is not
obtained, and if greater, at the amount that would be payable if the shares of
preferred stock had already been converted into shares of MEMC common stock.
Dividends will be payable quarterly, when, as and if declared by our Board of
Directors. If not declared and paid
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quarterly, dividends will accumulate at a rate of 12% per annum from the date of
issuance and effectively will be paid in common stock upon conversion of the
preferred or be paid in cash upon redemption of the preferred stock in or after
2009, a change of control of MEMC or a liquidation, dissolution or winding up of
MEMC.
Ranking
The preferred stock ranks, with respect to dividend rights and the
distribution of assets upon liquidation, dissolution or winding up of MEMC,
senior to our common stock. We currently have no outstanding capital stock other
than the preferred stock and our common stock. Without the consent of the
holders of a majority of the outstanding shares of the preferred stock, voting
separately as a class, we may not issue (i) additional shares of the Series A
preferred stock, (ii) any series of capital stock ranking senior to or pari
passu with the preferred stock, or (iii) any class or series of capital stock
that is redeemable at any time prior to the redemption of the Series A preferred
stock.
Conversion
Each share of the preferred stock will be convertible, from time to time at
the option of the holder, into a number of shares of our common stock equal to
$1,000 plus accrued and unpaid dividends to the conversion date, divided by an
initial conversion price of $2.25.
As stated above, 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 upon conversion of the preferred stock.
The terms of the preferred stock include protection for the holders of the
preferred stock against dilution by providing for adjustment of the conversion
price in certain events including, among others, stock dividends, extraordinary
cash dividends, stock subdivisions or combinations and issuances of common stock
or other securities at a price, or convertible or exercisable at a price, below
the then current market price of the common stock or conversion price of the
preferred stock. In addition, in the event of a reverse stock split (such as the
one contemplated in Proposal 2 below), the conversion price will be adjusted
accordingly.
In the event of a consolidation, merger or other business combination or
recapitalization involving MEMC, and upon certain other events, which results in
the holders of our common stock receiving stock or securities of another
company, all per share amounts, the conversion rate and other economic terms
applicable to the preferred stock will be adjusted to take into account such
transaction.
Redemption
On or after November 13, 2009, the holders may require us to redeem their
shares of the preferred stock in cash at a redemption price equal to the stated
value plus accrued and unpaid dividends.
Change of Control
Upon a change of control of MEMC (as defined in the certificate of
designations), holders of the preferred stock may require us to repurchase any
or all shares of such preferred stock at a per share repurchase price equal to
101% of the stated value plus accrued and unpaid dividends to the date of actual
payment.
Voting Rights
Until stockholder approval, holders of the preferred stock will not have
voting rights except as a class as provided by Delaware law and the certificate
of designations. After stockholder approval, holders of the preferred stock will
vote together with the holders of our common stock, as a single class, on all
matters on which our common stockholders are entitled to vote. Each share of the
preferred stock will have the number of votes equal to the number of shares of
common stock then issuable upon conversion of such share of preferred stock.
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Without the consent of the holders of at least a majority of the
outstanding shares of the preferred stock, we may not amend, alter or repeal the
rights, preferences or privileges of the preferred stock.
Board Representation
So long as at least $130 million in stated value of the preferred stock
remains outstanding and TPG Wafer Holdings and its affiliates beneficially own
greater than 50% of the preferred stock, TPG Wafer Holdings has additional
rights under the terms of the preferred stock to ensure its representation on
the Board of Directors, as described above.
DESCRIPTION OF WARRANTS
The warrants will be exercisable at an exercise price of $3.00 per share of
common stock. The warrants may be exercised, in whole or in part, at any time
after stockholder approval is obtained until November 13, 2011. Once
exercisable, the warrants may be exercised using cash, exchanging the senior
subordinated secured notes equal in face value to the aggregate exercise price,
by surrendering other warrants equal in warrant market price to the aggregate
purchase price, or any combination of the foregoing. Until our stockholders
approve the issuance of the common stock issuable upon exercise of the warrants,
however, the warrants may not be exercised at all.
The terms of the warrants include protection for the holders against
dilution by providing for adjustment of the exercise price in certain events
including, among others, stock dividends, extraordinary cash dividends, stock
subdivisions or combinations and issuances of common stock or other securities
at a price, or convertible or exercisable at a price, below the then current
market price of the common stock or exercise price of the warrants. In addition,
in the event of a reverse stock split (such as the one contemplated in Proposal
2, below), the exercise price will be adjusted accordingly.
In the event of a consolidation, merger or other business combination or
recapitalization involving MEMC, and upon certain other events, which results in
the holders of our common stock receiving stock or securities of another
company, all per share amounts, the exercise price and other economic terms
applicable to the warrants will be adjusted to take into account such
transaction.
The warrants do not confer upon the holder any rights as an MEMC
stockholder, including the right to vote, receive dividends, consent or receive
notices as a stockholder with respect to any meeting of stockholders for the
election of MEMC directors or any other matter.
THE BOARD OF DIRECTORS (MESSRS. VON HORDE, MARREN, COULTER, CHAPUS,
DANHAKL, STEVENS, BOEHLKE AND MARSH) HAS UNANIMOUSLY RECOMMENDED A VOTE "FOR"
APPROVAL OF THE ISSUANCE OF THE SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK,
WARRANTS AND COMMON STOCK ISSUABLE THEREUNDER.
PROPOSAL 2
AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION:
REVERSE STOCK SPLIT
Effective January 2, 2002, the MEMC Board of Directors unanimously
approved, declared advisable and recommended that our stockholders approve, an
amendment to the company's restated certificate of incorporation authorizing a
one-for-two reverse stock split of the outstanding shares of MEMC common stock
to be effectuated, if at all, at such time as the Board deems advisable. If
Proposal 2 is approved, the Board will have the authority to effect the
one-for-two reverse stock split at any time in the future at its discretion
without seeking additional shareholder approval.
The purpose of the proposed amendment to our restated certificate of
incorporation is to make additional shares of common stock available for
issuance under benefit plans, upon conversion of the preferred stock and
exercise of the warrants, and for other corporate purposes.
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If this Proposal 2 and Proposal 3 are not approved and Proposal 1 is
approved, we will not have sufficient shares of common stock authorized under
our restated certificate of incorporation to issue upon conversion of the
preferred stock and exercise of the warrants. TPG will be entitled to vote in
respect of Proposal 2 and a vote in favor of Proposal 2 by TPG will ensure the
necessary stockholder approval of Proposal 2.
EFFECT OF REVERSE STOCK SPLIT
Pursuant to the reverse stock split, each holder of MEMC common stock
immediately prior to the effectiveness of the split will receive one share of
new common stock, par value $.01 per share, for every two shares of common stock
then held.
No fractional shares of new common stock will be issued in connection with
the reverse stock split. Instead, in calculating the number of shares to which a
holder is entitled, the company will round up to the next whole number. Thus,
holders of common stock who would otherwise be entitled to receive a fractional
share of new common stock because they hold a number of shares of common stock
not evenly divisible by two will receive a full share for such fractional share.
CERTIFICATE OF AMENDMENT
The reverse stock split would become effective only upon the filing of a
certificate of amendment to the restated certificate of incorporation with the
Delaware Secretary of State. If the reverse stock split is approved by our
stockholders, the Board of Directors intends to wait to file the certificate of
amendment until such time, if at all, that the Board determines market
conditions are favorable for the reverse split. Upon the effectiveness of the
proposed amendment, Article Fourth of our restated certificate of incorporation
would include an additional paragraph reading substantially as follows:
(8) The Corporation hereby declares that each two (2) shares of the
outstanding shares of the Corporation's Common Stock, par value $.01 per
share, as of the date of filing of this Certificate of Amendment to the
Restated Certificate of Incorporation, be converted and reconstituted
into one share of Common Stock, par value $.01 per share. No fractional
shares shall be issued upon such conversion and reconstitution. Instead
the number of shares of Common Stock to be issued shall be rounded up to
the nearest whole share.
Upon effectiveness of the certificate of amendment, the reverse stock split
will occur without any further action on the part of our stockholders. The
reverse stock split will occur without regard to the dates on which stock
certificates are physically surrendered in exchange for certificates
representing shares of new common stock that shareholders are entitled to
receive as a consequence of the reverse stock split.
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the effectiveness of the reverse stock split,
transmittal letters will be mailed to each record holder of our common stock on
the date of such effectiveness. The transmittal letters will be used in
forwarding existing stock certificates for surrender and exchange for new
certificates representing the number of shares of new common stock that
stockholders are entitled to receive as a result of the reverse stock split. The
transmittal letters will be accompanied by instructions specifying other details
of the exchange. Stockholders should not send in their certificates until they
receive a transmittal letter.
After the effectiveness of the reverse stock split, each certificate
representing shares of existing common stock will, until surrendered and
exchanged as described above, be deemed, for all corporate purposes, to evidence
ownership of the whole number of shares of new common stock into which the
shares evidenced by such certificate have been converted.
CONSEQUENCES OF THE REVERSE STOCK SPLIT
With the exception of the number of issued and outstanding shares, the
rights and preferences of our common stock prior and subsequent to the reverse
stock split will remain the same. After the effectiveness of the reverse stock
split, we do not anticipate that our financial condition, the percentage
ownership of
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management, the number of our shareholders, or any aspect of our business would
materially change as a result of the reverse stock split.
We are presently authorized to issue a maximum of 200,000,000 shares of
common stock and 50,000,000 shares of preferred stock, par value $.01 per share.
If Proposal 3 is approved, we will be authorized to issue a maximum of
300,000,000 shares of common stock. As of March 31, 2002, 70,238,660 shares of
common stock and 260,000 shares of preferred stock were issued and outstanding.
The authorized number of shares will not change in connection with the reverse
stock split. As of March 31, 2002, we have obligations to set aside
approximately 137.6 million shares of common stock for issuance upon the
conversion of the preferred stock and the exercise of outstanding warrants
(including the warrants described in Proposal 1 above), and approximately 14.1
million shares of common stock for options and other contractual commitments.
The exercise price or conversion rate of these commitments would be adjusted
proportionately upon the effectiveness of the reverse stock split. Specifically,
the conversion price of the preferred stock would be adjusted to $4.50 and the
exercise price and number of the warrants described above would be adjusted to
$6.00 and 8,333,334, respectively.
The conversion and reconstitution of our existing common stock into the new
common stock should have no material federal tax consequences to most
stockholders. Nonetheless, stockholders should consult their own tax advisors as
to the federal, state, local and foreign tax effects of the reverse stock split
in light of their individual circumstances.
THE BOARD OF DIRECTORS (MESSRS. VON HORDE, MARREN, COULTER, CHAPUS,
DANHAKL, STEVENS, BOEHLKE AND MARSH) HAS UNANIMOUSLY RECOMMENDED A VOTE "FOR"
THE AMENDMENT TO OUR RESTATED CERTIFICATE OF INCORPORATION TO EFFECTUATE THE
REVERSE STOCK SPLIT.
PROPOSAL 3
AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION:
INCREASE IN AUTHORIZED CAPITAL STOCK
BACKGROUND
Effective May 6, 2002, the MEMC Board of Directors approved, and
recommended that our stockholders approve, an amendment to the company's
restated certificate of incorporation to increase the authorized number of
shares of common stock, par value $0.01 per share, from 200,000,000 to
300,000,000.
The Board of Directors has declared advisable the proposed amendment to the
restated certificate of incorporation as the Board considers it in the best
interests of the company to have available, without effectuating the reverse
stock split described above, a sufficient number of shares of common stock to
facilitate the conversion of the outstanding convertible preferred stock and
exercise of the warrants issued in connection with the debt restructuring, and
for possible future financings, acquisitions, stock dividends, employee benefit
programs and other corporate purposes.
If Proposal 2 and Proposal 3 are not approved and Proposal 1 is approved,
we will not have sufficient shares of common stock authorized under our restated
certificate of incorporation to issue upon conversion of the preferred stock and
exercise of the warrants. If Proposal 3 is not approved but Proposal 1 and
Proposal 2 are approved, there will be sufficient shares to issue upon
conversion and exercise of the preferred stock and warrants, respectively, but
only if the Board effectuates the reverse stock split. TPG will be entitled to
vote in respect of Proposal 3 and a vote in favor of Proposal 3 by TPG will
ensure the necessary stockholder approval of Proposal 3.
CONSEQUENCES OF APPROVAL OF ADDITIONAL AUTHORIZED COMMON STOCK
If approved, the additional authorized shares of common stock will be
available for issuance at such times and for such purposes as the Board of
Directors may deem advisable without further action by the company's
stockholders, except as may be required by applicable laws or regulations,
including the rules of the New York Stock Exchange. For example, the additional
authorized shares of common stock will be available for issuance
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by the Board in connection with financings, acquisitions of other companies,
stock dividends, employee benefit programs or other corporate purposes. Except
for the shares of common stock issuable in connection with the outstanding
convertible preferred stock, warrants and options of the company, at this time
the company does not have any plans or commitments to issue common stock. The
Board does not intend to issue any stock except on terms or for reasons which
the Board deems to be in the best interests of the company and its stockholders.
Because the holders of the company's common stock do not have preemptive rights,
the issuance of additional shares of common stock (other than on a pro-rata
basis to all current stockholders such as pursuant to a stock dividend) would
have the effect of reducing the current stockholders' proportionate interests.
Under current New York Stock Exchange rules, stockholder approval is
generally required to issue common stock, or securities convertible into or
exercisable for common stock, in one or a series of related transactions, if
such common stock represents 20% or more of the voting power or outstanding
common stock of the company. Common stock issued for cash in a public offering,
however, is excluded from this stockholder approval requirement as are shares of
common stock issued for cash in a private offering at a price at least equal to
both book value and market value of the common stock. New York Stock Exchange
rules also require stockholder approval for an issuance of shares that would
result in a change of control of the company as well as for stock issuances in
connection with certain benefit plans or related party transactions.
The Board of Directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the dividend rate, voting rights, conversion rights, conversion
rates, rights and terms of redemption and other rights, preferences and
restrictions of each series, any or all of which may be greater than the rights
of the common stock. It is not possible to state the actual effect of the
issuance of any preferred stock upon the rights of holders of the common stock
until the Board of Directors determines the specific rights of the holders of
such preferred stock. The effects might include, among other things, restricting
dividends on the common stock, diluting the voting power of the common stock,
impairing the liquidation rights of the common stock and delaying or preventing
a change in control of the company without further action by the stockholders.
Any future issuance of common stock will be subject to the rights of holders of
outstanding shares of preferred stock that the company has issued and may issue
in the future. The company at this time has no plans or commitments to issue any
additional shares of preferred stock. Subject to the requirements of the New
York Stock Exchange, preferred stock may be designated and issued from time to
time without action by the company's stockholders to such persons and for such
consideration and on such terms as the Board of Directors determines.
ANTI-TAKEOVER EFFECTS
Although the proposal to increase the authorized common stock may be
construed as having an anti-takeover effect, because authorized and unissued
common stock could be issued for the purpose of discouraging an attempt by
another person to take control of the company, neither the management of the
company nor the Board of Directors views this proposal as an anti-takeover
mechanism. In addition, this proposal is not part of any plan by the company to
recommend a series of anti-takeover amendments to the restated certificate of
incorporation and the company does not currently contemplate recommending the
adoption of other amendments to its restated certificate of incorporation that
could be construed to affect the ability of third parties to take over or change
control of the company. The company currently has a staggered or classified
board of directors. The existence of a staggered board could make it more
difficult or discourage a proxy contest for assumption of control of the company
if the voting power of the company's securities were such that a substantial
number of shares could be voted in favor of directors other than those nominated
by the company for election.
CERTIFICATE OF AMENDMENT
If the stockholders approve the proposal, the company will cause a
certificate of amendment to the company's restated certificate of incorporation
to be filed with the Delaware Secretary of State. Upon the
24
effectiveness of the proposed amendment, paragraph (1) of Article Fourth of our
restated certificate of incorporation would be revised to read substantially as
follows:
(1) The total number of shares of all classes of capital stock that the
Corporation shall have authority to issue is 350,000,000 shares, of
which (i) 300,000,000 shares shall be common stock, par value $0.01 per
share ("Common Stock"), and (ii) 50,000,000 shares shall be preferred
stock, par value $0.01 per share ("Preferred Stock").
Upon effectiveness of the certificate of amendment, the increase will be
effective without any further action on the part of our stockholders.
THE BOARD OF DIRECTORS (MESSRS. BOYCE, GAREEB, MARREN, COULTER, CHAPUS,
DANHAKL, STEVENS, BOEHLKE, MARSH AND WATKINS) HAS RECOMMENDED A VOTE "FOR" THE
AMENDMENT TO OUR RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE
AUTHORIZED SHARES OF COMMON STOCK.
PROPOSAL 4
MERGER BETWEEN MEMC AND TPG WAFER HOLDINGS LLC
Under the Delaware General Corporation Law, we must obtain stockholder
approval for a plan of merger under which the shares of common stock to be
issued and issuable upon conversion or exercise of other securities to be issued
equals or exceeds 20% of our outstanding common stock. Shareholder approval is
required in that case even where we are to be the surviving company. There is a
similar 20% rule under the listing requirements of the New York Stock Exchange
(discussed above). Because the terms of the TPG Wafer Holdings merger
contemplate issuances of MEMC equity securities that could equal or exceed 20%
of our outstanding common stock (depending on the MEMC equity and debt then held
by TPG Wafer Holdings), we are seeking stockholder approval of the merger. In
the event Proposal 1 is approved at the special stockholders meeting, however,
and TPG elects to convert all its preferred stock and warrants, TPG would own
approximately 90% of our outstanding common stock and be entitled to merge with
us without stockholder approval, in accordance with Section 253 of the Delaware
General Corporation Law. TPG has agreed, however, not to consummate such a
merger without the prior approval of a special committee of our Board of
Directors. As with Proposals 1, 2 and 3, TPG will be entitled to vote on
Proposal 4 and an approval by TPG of this proposal will ensure the necessary
stockholder approval of the proposed merger.
If Proposal 4 is not approved, and stockholder approval for the merger is
required as described above, we and TPG Wafer Holdings will not be able to
effect the merger. If the merger is not effected and TPG Wafer Holdings elects
to be treated as a corporation for tax purposes, TPG Wafer Holdings and its
members may be disadvantaged from a tax perspective on any future sale of the
MEMC securities held by it because such a sale would subject TPG Wafer Holdings
to tax on the gain from the sale and the members of TPG Wafer Holdings to tax on
distributions made by TPG Wafer Holdings to such members.
GENERAL
TPG Wafer Holdings was formed solely for the purposes of purchasing the
debt and equity of MEMC from E.ON and engaging in the debt restructuring
transactions. TPG Wafer Holdings conducts no other business. We entered into an
agreement and plan of merger with TPG Wafer Holdings in connection with our debt
restructuring. TPG requested that we enter into the merger agreement to enable
it to distribute the MEMC securities held by TPG Wafer Holdings to its members
in a tax efficient manner. The merger is not intended to have any material
economic consequence for MEMC or any of its stockholders (other than TPG Wafer
Holdings). It is expected that the merger will occur only in connection with
such a distribution.
Consummation of the merger is conditioned on approval of the merger
agreement by our stockholders. The key elements of the merger agreement are as
follows:
- At the direction of TPG Wafer Holdings, after receipt of stockholder
approval by the MEMC stockholders, TPG Wafer Holdings will merge with and
into MEMC. MEMC will continue in existence as the surviving corporation.
25
- As a result of the merger, the members of TPG Wafer Holdings generally
will convert their membership interests in TPG Wafer Holdings into their
proportionate share of the equivalent of the equity securities of MEMC
held by TPG Wafer Holdings, plus common stock having a market value equal
to the principal amount of the debt securities of MEMC held by TPG Wafer
Holdings and the accrued but unpaid interest on such debt securities. TPG
Wafer Holdings currently does not directly hold any debt of MEMC and has
indicated it has no current intention to acquire debt of MEMC.
- Effective upon completion of the merger, all of the MEMC debt and equity
securities then held by TPG Wafer Holdings will be canceled.
Certain of our executive officers have been granted membership interests in
TPG Wafer Management LLC, one of the members of TPG Wafer Holdings, and thus,
will indirectly receive equity securities of MEMC upon consummation of the
merger. See "Interest of Certain Persons in the Merger" below.
THE MERGER
The agreement and plan of merger provides that, subject to MEMC stockholder
approval, TPG Wafer Holdings will be merged with and into MEMC at such time as
TPG Wafer Holdings shall determine. MEMC will continue in existence as the
surviving corporation, and the separate existence of TPG Wafer Holdings will
cease. The restated certificate of incorporation and bylaws of MEMC at the time
of the merger will be the certificate of incorporation and bylaws of the
surviving company. In addition, the directors and officers of MEMC will be the
initial directors and officers of the surviving corporation.
The merger will become effective upon the filing of a certificate of merger
with the Secretary of State of Delaware. No other state or federal regulatory
requirements must be complied with in order to effectuate the merger. At the
effective time, each share of MEMC common stock, share of preferred stock and
warrant certificate owned by TPG Wafer Holdings will be canceled. In addition,
any debt or other obligations of MEMC or any of our subsidiaries held by TPG
Wafer Holdings will become assets of MEMC as a result of the merger. Also in the
merger, the limited liability company membership interests of TPG Wafer Holdings
will be converted into and exchanged for the following:
- shares of common stock of MEMC equal to the number of shares of MEMC
common stock then owned by TPG Wafer Holdings;
- shares of Series A Cumulative Convertible Preferred Stock of MEMC equal
to the number of shares of and having the same terms and conditions as
the Series A preferred stock then owned by TPG Wafer Holdings;
- warrants to purchase shares of common stock of MEMC equal to the number
of warrants and having the same terms and conditions as the MEMC warrants
then held by TPG Wafer Holdings; and
- shares of common stock of MEMC having a fair market value equal to the
total principal of and accrued but unpaid interest on any debt or other
obligations of MEMC or any of our subsidiaries then held by TPG Wafer
Holdings.
Neither our stockholders nor members of TPG Wafer Holdings will have
appraisal rights in connection with the merger.
INTEREST OF CERTAIN PERSONS IN THE MERGER
In connection with the restructuring transactions, certain of our executive
officers have acquired limited liability company membership interests in TPG
Wafer Management, an investment limited liability company that owns a 1.5%
membership interest in TPG Wafer Holdings. These membership interests are
economic interests with no voting rights and represent a total of approximately
57% of the interests in TPG Wafer Management and, therefore, indirectly
approximately 0.86% of the membership interests in TPG Wafer Holdings. The
executive officers owning limited liability company membership interests in TPG
Wafer
26
Management and the approximate compensation expense associated with such
interests for financial accounting purposes as of May 1, 2002 are as follows:
<Table>
<Caption>
EXECUTIVE OFFICER MEMBERSHIP INTEREST COMPENSATION EXPENSE
- ----------------- ------------------- --------------------
Nabeel Gareeb................................... 20.000% $ 630,000
James M. Stolze................................. 14.453 210,000
Jonathon P. Jansky.............................. 14.453 210,000
James G. Weathers............................... 4.800 70,000
Thomas P. Stiffler.............................. 1.920 30,000
Saeed Pirooz.................................... 1.280 20,000
------ ----------
Total......................................... 56.906% $1,170,000
====== ==========
</Table>
Additional membership interests in TPG Wafer Management may be acquired by
directors, executive officers, other employees and service providers of MEMC. In
addition to its membership interest in TPG Wafer Holdings, TPG Wafer Management
owns approximately $750,000 in principal amount of the senior secured notes and
a 1.5% interest in the 55 million Euro Italian subsidiary note issued by MEMC,
as well as 250,000 of the warrants. Upon consummation of the merger described
above, TPG Wafer Management will receive a proportionate amount of shares of
common stock, preferred stock and/or warrants of MEMC in exchange for its 1.5%
membership interest in TPG Wafer Holdings. Assuming consummation of the merger
on November 13, 2001, TPG Wafer Management would have received 749,399 shares of
MEMC common stock and 3,900 shares of Series A Preferred Stock.
The membership interests in TPG Wafer Management held by MEMC executive
officers and employees will be treated as compensation expense for financial
accounting purposes. All such interests held by MEMC executive officers and
employees were acquired in 2002. We are in the process of obtaining an outside
valuation of the membership interests in TPG Wafer Management. The amount of
compensation expense to be recognized by MEMC for financial accounting purposes
will depend on the results of this valuation and will be recognized over the
applicable vesting periods (these vesting periods range from two to four years).
We estimate that we will recognize total compensation expense of approximately
$1.2 million over the next four years related to the membership interests in TPG
Wafer Management that have been acquired by MEMC executive officers and
employees. As indicated above, the actual amount of compensation expense will
depend on the results of the outside valuation and the extent to which such
executive officers and employees actually vest in these interests. We may
recognize additional compensation expense to the extent MEMC executive officers
and employees acquire additional membership interests in TPG Wafer Management in
the future.
CONTACT INFORMATION
Contact information for MEMC and for TPG Wafer Holdings is as follows:
MEMC Electronic Materials, Inc.
501 Pearl Drive (City of O'Fallon)
St. Peters, MO 63376
636/474-5000
TPG Wafer Holdings LLC
301 Commerce Street, Suite 3300
Fort Worth, TX 76102
817/871-4000
THE BOARD OF DIRECTORS (MESSRS. VON HORDE, MARREN, COULTER, CHAPUS,
DANHAKL, STEVENS, BOEHLKE AND MARSH) HAS UNANIMOUSLY RECOMMENDED A VOTE "FOR"
THE MERGER BETWEEN MEMC AND TPG WAFER HOLDINGS.
27
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(UNAUDITED; DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
AS REPORTED
---------------------------
NOVEMBER 14 JANUARY 1
THROUGH THROUGH PRO FORMA
DECEMBER 31, NOVEMBER 13, ADJUSTMENTS PRO FORMA
2001 2001 2001 NOTE 2001
------------ ------------ ----------- ---- ----------
Net sales............................. $ 58,846 $ 559,007 $ -- $ 617,853
Cost of goods sold.................... 70,577 598,764 (113,586) 2 555,755
---------- ---------- --------- ----------
Gross margin........................ (11,731) (39,757) 113,586 62,098
Operating expenses:
Marketing and administration........ 7,973 61,747 (5,409) 1,2 64,311
Research and development............ 7,535 58,149 (17,097) 2 48,587
Restructuring Costs................. 2,971 29,511 -- 32,482
---------- ---------- --------- ----------
Operating income (loss)............. (30,210) (189,164) 136,092 (83,282)
Nonoperating (income) expense:
Interest expense.................... 3,599 78,449 (12,041) 1,2 70,007
Interest income..................... (1,516) (6,773) -- (8,289)
Royalty income...................... (448) (2,978) -- (3,426)
Other, net.......................... 4,173 1,804 -- 5,977
---------- ---------- --------- ----------
Total nonoperating (income)
expense........................ 5,808 70,502 (12,041) 64,269
---------- ---------- --------- ----------
Loss before income taxes, equity
in income (loss) of joint
ventures and minority
interests...................... (36,018) (259,666) 148,133 (147,551)
Income taxes.......................... 1,576 239,352 48,027 3 288,955
---------- ---------- --------- ----------
Loss before equity in income
(loss) of joint ventures and
minority interests............. (37,594) (499,018) 100,106 (436,506)
Equity in income (loss) of joint
ventures............................ (2,822) 441 -- (2,381)
Minority interests.................... 11,019 9,552 (7,532) 2 13,039
---------- ---------- --------- ----------
Net loss......................... $ (29,397) $ (489,025) $ 92,574 $ (425,848)
========== ========== ========= ==========
Cumulative preferred stock
dividends........................... $ 4,247 $ -- $ 28,385 1 $ 32,632
========== ========== ========= ==========
Net loss allocable to common
stockholders........................ $ (33,644) $ (489,025) $ 64,189 $ (458,480)
========== ========== ========= ==========
Basic and Diluted loss per share...... $ (0.48) $ (7.03) 4 $ (6.59)
========== ========== ==========
Weighted average shares used in
computing basic and diluted loss per
share............................... 69,612,900 69,612,900 4 69,612,900
========== ========== ==========
</Table>
See accompanying notes to consolidated pro forma financial statements.
28
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED)
On November 13, 2001, E.ON AG and its affiliates ("E.ON") and an investor
group led by Texas Pacific Group and including funds managed by Leonard Green
Partners, L.P. and TCW/Crescent Mezzanine Management III LLC (collectively,
"TPG") closed the transactions contemplated by their purchase agreement of
September 30, 2001 (the "Purchase Agreement"). Pursuant to the Purchase
Agreement, TPG Wafer Holdings LLC and its assignees purchased all of E.ON's debt
in MEMC of approximately $910,000 for a purchase price of 4 dollars and all of
E.ON's equity holdings in MEMC for a purchase price of 2 dollars.
In addition, on November 13, 2001, MEMC and TPG executed an agreement with
respect to the restructuring of the MEMC debt acquired by TPG from E.ON (the
"Restructuring Agreement").
As a result of these transactions, TPG now beneficially owns approximately
72% of MEMC's outstanding common stock, par value $.01 per share, and has
exchanged approximately $860,000 of the previously outstanding debt owed by the
company to E.ON for all of the shares of the company's newly issued Series A
Cumulative Convertible Preferred Stock with a stated value of $260,000 (the
"Preferred Stock"), $50,000 in principal amount of the company's newly issued
senior subordinated secured notes (the "Secured Notes") and warrants to purchase
16,666,667 shares of the company's common stock (the "Warrants"). As part of
these transactions, TPG also acquired a 55 million Euro term note issued by the
company's Italian subsidiary (the "Italian Note"). It was originally
contemplated that the Italian Note would be redocumented and retained by TPG.
MEMC is currently reviewing with TPG alternatives to the originally contemplated
restructuring of the Italian Note. Assuming shareholder approval is obtained for
Proposal 1 in this proxy statement, TPG and its affiliates 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 the company's outstanding common stock. Because the Preferred Stock earns
cumulative dividends that may be payable in kind upon conversion, if TPG were
not to convert any Preferred Stock until immediately prior to the mandatory
redemption date, TPG would own or have the right to acquire a maximum of
approximately 364 million shares of common stock, which would represent
approximately 95% of our outstanding common stock.
The pro forma adjustments herein represent adjustments needed to reflect
the impact of the above transactions from the period January 1, 2001 through
November 13, 2001. The statement of operations information for the period
November 14, 2001 through December 31, 2001, as reported, already reflects these
transactions.
The accompanying unaudited consolidated pro forma statement of operations
of MEMC in the opinion of management includes all material adjustments directly
attributable to the Purchase and Restructuring Agreements. The consolidated pro
forma statement of operations reflects the operating activity of the company had
the transactions occurred on January 1, 2001. This consolidated pro forma
statement of operations has been prepared for comparative purposes only and does
not purport to be indicative of the results of operations which actually would
have resulted had the transaction occurred on the date indicated and is not
necessarily indicative of the results that may be expected in the future.
29
The following table summarizes the adjustments that have been made to
derive the pro forma statement of operations for the year ended December 31,
2001. Each of these adjustments is explained in detail in the footnotes that
follow.
MEMC ELECTRONIC MATERIALS, INC.
SUMMARY OF PRO FORMA ADJUSTMENTS
FOR THE YEAR ENDED DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
TOTAL
DEBT PUSH DOWN INCOME PRO FORMA
RESTRUCTURING ACCOUNTING TAXES ADJUSTMENTS
------------- ---------- ------- -----------
Cost of goods sold:
2.(b)...................................... $(113,586) $(113,586)
=========
Marketing and administration:
1.(e)...................................... $ 2,000 $ 2,000
2.(b)...................................... $ (7,409) (7,409)
---------
$ (5,409)
=========
Research and development:
2.(b)...................................... $ (17,097) $ (17,097)
=========
Interest expense:
1.(a)...................................... $(69,523) $ (69,523)
1.(b)...................................... -- --
1.(c)...................................... 54,120 54,120
1.(d)...................................... 600 600
2.(a)...................................... $ 2,762 2,762
---------
$ (12,041)
=========
Income taxes:
3.......................................... $48,027 $ 48,027
=========
Minority interests:
2.(c)...................................... $ (7,532) $ (7,532)
=========
Cumulative preferred stock dividends:
1.(f)...................................... $ 28,385 $ 28,385
=========
</Table>
30
1. DEBT RESTRUCTURING
In accordance with the terms of the Restructuring Agreement, on November
13, 2001, the company exchanged $860,000 of debt and related accrued interest
with TPG for the Secured Notes, the Warrants and the Preferred Stock. In
addition, TPG retained the Italian Note. The combined fair market value of the
debt, equity securities, and the warrants was assumed to be 4 dollars, the
consideration paid by TPG for the debt that was exchanged for these securities.
At the same time, MEMC became obligated to reimburse TPG for certain of its
acquisition related costs, a deal fee and debt commitment fees totaling $27,000
in all (collectively the "Deal Fees").
The Secured Notes and the Italian Note with aggregate face values of
$50,000 and 55 million Euro, respectively, have been recorded at their combined
fair market value of approximately 2 dollars. These debt instruments will
accrete up to their face values plus accrued interest over their terms of six
years and less than one year, respectively.
The Preferred Stock, with stated value of $260,000, has been recorded at
its fair value of approximately 2 dollars and has been recorded in mezzanine
equity because the Preferred Stock is redeemable at the option of the holder and
the redemption date and amount are determinable. The Preferred Stock is
redeemable at the option of the holder on the eighth anniversary of the date of
issuance. Accordingly, the Preferred Stock will accrete up to its stated value
over this eight-year period using the effective interest rate method. The
Preferred Stock also contains an embedded beneficial conversion feature (BCF).
The intrinsic value of the BCF 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.
The warrants were recorded at their fair market value of less than 1 dollar
and have been accounted for in permanent equity.
The TPG Deal Fees have been recorded as a current liability ($27,000). The
loan commitment fee component of these costs ($3,000) has been recorded as a
deferred asset and will be amortized to expense over the 5 year term of the
related $150,000 revolving credit facility. The remaining fees ($24,000) have
been recorded as a reduction of additional paid in capital.
Pro forma adjustments to the Consolidated Statement of Operations for the
year ended December 31, 2001 have been made for the debt restructuring as
follows:
(a) Interest expense of $69,523 on the E.ON debt has been eliminated.
(b) The stated interest rate on the Secured Notes is 8% for the first two
years, and 14% thereafter. In calculating interest expense, we have
assumed all interest on the Secured Notes to be payment in kind,
cumulative compounding, bringing the total interest and principal due
at maturity to $112,300 in November 2007. The Secured Notes accrete
from approximately 1 dollar to $112,300 over six years at an effective
interest rate of 377%. Using the effective interest method, interest
expense on the $50,000 face value Secured Notes was calculated to be
less than one thousand dollars in consolidated pro forma statement of
operations.
(c) Interest expense of $54,120 related to the 55 million Euro (USD
$48,939) face value Italian Note has been recorded in the pro forma
statement of operations. The interest expense includes the accretion
from the fair market value at November 13, 2001 of approximately 1
dollar to the face value of $48,939 over its term of less than one
year, as well as the stated interest of $5,181 on the Italian Note.
(d) Amortization of $600 on the $3,000 deferred loan commitment fee has
been included in interest expense.
(e) In accordance with our management advisory agreement with TPG, fees of
$2,000 have been included in the pro forma statement of operations as
marketing and administration expense.
(f) Undeclared cumulative dividends on the Preferred Stock have been
recognized in order to derive income available to common stockholders.
The cumulative dividends were calculated on a quarterly basis by
multiplying the stated rate of interest (payment in kind at 12%) by the
stated value of the Preferred Stock ($260,000) plus any cumulative
dividends. Quarterly, the undeclared cumulative
31
dividends have been calculated as follows: $7,800, $8,034, $8,275 and
$8,523 for an annual total of $32,632. Accordingly, a pro forma
adjustment of $28,385 has been made to the cumulative preferred stock
dividend of $4,247 recognized in the period November 14, 2001 through
December 31, 2001 to derive the annual pro forma total. The Preferred
Stock accretes from approximately 1 dollar to $260,000 over eight years
at an effective interest rate of 260%. Using the effective interest
method, the accretion was calculated to be less than one thousand
dollars in 2001. Using the effective interest rate method and assuming
the Preferred Stock is not converted until its earliest mandatory
redemption date, the amount of accretion that is expected to be
recorded in MEMC's financial statements for each fiscal year is as
follows (in 000's of US dollars):
<Table>
2002...................................................... $ --
2003...................................................... --
2004...................................................... 2
2005...................................................... 23
2006...................................................... 247
--------
Subtotal.................................................. 272
Thereafter................................................ 259,728
--------
Total..................................................... $260,000
</Table>
2. PUSH DOWN ACCOUNTING
Assuming shareholder approval is obtained for Proposal 1 described in this
proxy statement, through conversion of all of the Preferred Stock into common
stock, TPG's common equity ownership interest in MEMC would be between 89% to
95% depending on the timing of TPG's conversion into MEMC common stock. For the
pro forma statement of operations, an ownership level of 89.4% has been assumed
and TPG's nominal basis in MEMC has been "pushed down" to MEMC's financial
statements. In the future, should TPG acquire a greater ownership percentage in
MEMC, additional adjustments would be necessary.
TPG's nominal basis in MEMC has been "pushed down" to the financial
statements of MEMC as follows:
- The fair market value of all assets and liabilities was estimated. To the
extent the fair market value differed from 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 the company, negative goodwill was generated. The negative
goodwill was then allocated to the bases of existing goodwill, 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:
- 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.
- The fair market value of property, plant and equipment was derived by
estimating depreciated replacement cost.
- Goodwill was estimated to have no fair market value.
- Software and other intangibles were estimated to have no fair market
value.
- 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.
- The fair market 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, and investments in joint ventures, goodwill and other
intangible assets. Negative goodwill was allocated further to
32
individual assets within property, plant and equipment using the estimated
depreciated replacement cost. The process of allocating negative goodwill also
created new deferred tax assets. To the extent we believed it was more likely
than not that the benefit of these deferred tax assets would not be realized, a
valuation allowance was established. To the extent a net deferred tax asset was
recognized, it resulted in a further reduction to the new carrying amount of
property, plant and equipment. As a result of this entire process, net deferred
tax assets were increased by approximately $34,000, while the carrying amounts
of property, plant and equipment and investments in joint ventures were reduced
by approximately $983,000 and $34,000, respectively.
Pro forma adjustments to the Consolidated Statement of Operations for the
year ended December 31, 2001 have been made for push down accounting as follows:
(a) Accretion of interest of $2,762 related to the discounting of long-term
liabilities to their respective fair market values has been included in
interest expense.
(b) The process of restating 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. Accordingly,
depreciation and amortization have been decreased to reflect the new
basis of the underlying assets as follows:
<Table>
Cost of goods sold....................................... $113,586
Marketing and administration............................. $ 7,409
Research and development................................. $ 17,097
</Table>
(c) As a result of the decreased depreciation and amortization in the pro
forma statement of operations of our 80%-owned subsidiaries, the 20%
minority interest in their earnings was adjusted by $7,532 in the pro
forma consolidation.
3. INCOME TAXES
Income tax expense of $48,027 on the pro forma adjustments has been
calculated at the statutory rate in effect during the period presented. For
those pro forma adjustments affecting the accounts of entities located in
foreign jurisdictions, the statutory foreign tax rates have been applied.
4. EARNINGS PER SHARE
Pro forma earnings per share calculation for the year ended December 31,
2001
<Table>
<Caption>
BASIC DILUTED
------------ ------------
Numerator: (IN THOUSANDS, EXCEPT SHARE DATA)
Net income.................................................. $ (425,848) $ (425,848)
Cumulative preferred stock dividends........................ 32,632(a) 32,632
---------- ----------
Numerator for basic earnings per share...................... $ (458,480) $ (458,480)
---------- ----------
Denominator:
Weighted average outstanding shares......................... 69,612,900 69,612,900
Convertible preferred stock................................. --(a) --
Employee stock options...................................... --(a) --
Warrants.................................................... --(a) --
---------- ----------
Denominator................................................. 69,612,900 69,612,900
---------- ----------
Earnings per share.......................................... $ (6.59) $ (6.59)
========== ==========
</Table>
- -------------------------
(a) The numerator of the calculation for basic and diluted loss per share was
net loss available 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. The denominator for this
calculation was the same for both basic and diluted loss per share as the
options, warrants and Preferred Stock were all antidilutive.
33
Concurrent with the change of ownership, the company had 16,666,667
warrants outstanding in addition to the 2,976,180 options outstanding at
December 31, 2001. If the stockholders vote in the affirmative, the Preferred
Stock, excluding any accrued but unpaid dividends that may be convertible into
shares of common stock, would be convertible into an additional 115,555,556
shares of common stock.
5. CONTINGENT PERFORMANCE PURCHASE PRICE
In accordance with the terms and conditions of the Purchase Agreement, TPG
agreed to a contingent performance purchase price payment to E.ON in an
aggregate amount equal to the following:
(i) $0 if MEMC's EBITDA for fiscal year 2002 is less than $100,000; or
(ii) $30,000, if MEMC's EBITDA for fiscal year 2002 equals or exceeds
$100,000, but is less than $150,000; or
(iii) $75,000, if MEMC's EBITDA for fiscal year 2002 equals or exceeds
$150,000, but is less than $300,000; or
(iv) $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 the financial statements of MEMC.
MEMC would then write up the value of its 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, no pro forma
adjustments have been made for this contingency.
6. MERGER BETWEEN MEMC AND TPG WAFER HOLDINGS LLC
Assuming proposal 4 in this proxy statement is approved, TPG Wafer Holdings
LLC at its sole discretion will be able to effectuate a merger into MEMC.
TPG Wafer Holdings LLC is a non-substantive holding company formed by TPG
to effect their acquisition of equity and debt interests in MEMC. TPG Wafer
Holdings LLC has no assets, liabilities, or operations separate from the
interest in MEMC it holds, except for $1 in capital contributions and an
approximately 40% interest in TPG Wafer Management LLC. At the date of
acquisition and at December 31, 2001, TPG Wafer Holdings LLC held 49,959,970
shares of MEMC common stock, all of MEMC's 260,000 shares of Series A Cumulative
Convertible Preferred Stock, and $1 in capital contributions.
As a result of push down accounting as described in Footnote 2 above, the
basis of TPG Wafer Holdings LLC in MEMC has been pushed down to the separate
financial statements of MEMC. Therefore, if a merger of TPG Wafer Holdings LLC
into MEMC occurs in the future, MEMC's assets and liabilities after the merger
would be the same as before the merger. Accordingly, no pro forma adjustments
have been made for this potential future merger.
34
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 of a 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.
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
35
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 periods and the periods
following push down accounting is affected by the purchase accounting
adjustments.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
<Table>
<Caption>
NET SALES 2001 2000 1999
--------- ---- ---- ----
DOLLARS IN MILLIONS
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, Texas Instruments Incorporated. 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.
36
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.
The charts below depict our revenues by geographic area.
Geographic Area Chart
<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 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.
37
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
MARKETING AND ADMINISTRATION 2001 2000 1999
---------------------------- ---- ---- ----
DOLLARS IN MILLIONS
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%.
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT 2001 2000 1999
------------------------ ---- ---- ----
DOLLARS IN MILLIONS
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 proceeds from the sale of wafers related to
research and development activities not considered commercially viable,
accordingly these proceeds were recorded as an offset to research and
development expenses. We do not expect these types of proceeds to significantly
reduce research and development expenses in future years.
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 proceeds from the sale of wafers related to
research and development activities not considered commercially viable
endeavors, which offset the 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.
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
RESTRUCTURING COSTS 2001 2000 1999
- ------------------- ---- ---- ----
DOLLARS IN MILLIONS
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:
- as part of our continuing efforts to focus our manufacturing facilities;
- to improve our cost structure; and
- 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 incorporated by reference herein.
38
<Table>
<Caption>
- ------------------------------------------------------------------------------------------
NONOPERATING (INCOME) EXPENSE AND INCOME TAXES 2001 2000 1999
---------------------------------------------- ---- ------ ----
DOLLARS IN MILLIONS
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 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.
Through the end of the 2001 first quarter, we continued to project positive
taxable income to be able to fully utilize available deferred tax assets and net
operating loss carryforwards prior to their expiration dates. At that time, E.ON
AG committed to provide us with an additional $50 million credit facility in the
event we were unable to secure additional financing from third parties. We
believed that our market position, product portfolio, and improving cost
position, together with outside industry analysts' projected long-term silicon
wafer industry growth, supported the valuation of the deferred tax assets.
In the second quarter of 2001, we understood that E.ON was engaged in
discussions with a possible purchaser of E.ON's interests in MEMC. We also
understood that the discussions between E.ON and the potential purchaser would
not culminate in an immediate transaction, but that negotiations were ongoing.
Meanwhile, our liquidity and cash flow were being negatively impacted by our
operating losses caused by excess capacity and declining prices and by
increasing interest expense. At that time, we believed that cash generated from
operations, together with the liquidity provided by existing cash balances and
credit facilities would be sufficient to satisfy commitments for capital
expenditures, repayment of current maturities of long-term debt and other cash
requirements only through the third quarter of 2001.
As a result, we reevaluated the conditions surrounding the ability to use
our tax loss carryforwards and determined it appropriate to discontinue
recognition of additional tax benefits from net operating loss carryforwards and
to increase our valuation allowance related to deferred tax assets in the amount
of $289 million. In making these determinations, 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.
39
In the 2001 third and fourth quarters, we did not recognize additional tax
benefits from net operating loss carryforwards.
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 Company Overview above. We believe that a
significant majority of our U.S. net operating loss carryforwards will be
utilized or applied to reduce tax attributes, under IRC Section 108(b), as a
result of the transaction 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. As a result, in the 2001 fourth
quarter, MEMC increased its valuation allowance related to deferred tax assets
in the amount of $172 million.
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.
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
EQUITY IN INCOME (LOSS) OF JOINT VENTURES 2001 2000 1999
- ----------------------------------------- ---- ---- ----
DOLLARS IN MILLIONS
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 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.
40
LIQUIDITY AND CAPITAL RESOURCES
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
2001 2000 1999
---- ---- -----
DOLLARS IN MILLIONS
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:
- Borrowed $81 million under debt agreements
- Received $37 million capital contribution from E.ON AG
Uses:
- Used $25 million cash in operations
- Invested $50 million in capital expenditures
- 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.
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.
41
Through the end of the 2001 first quarter, we continued to project positive
taxable income to be able to fully utilize available deferred tax assets and net
operating loss carryforwards prior to their expiration dates. At that time, E.ON
AG committed to provide us with an additional $50 million credit facility in the
event we were unable to secure additional financing from third parties. We
believed that our market position, product portfolio, and improving cost
position, together with outside industry analysts' projected long-term silicon
wafer industry growth, supported the valuation of the deferred tax assets.
In the second quarter of 2001, we understood that E.ON was engaged in
discussions with a possible purchaser of E.ON's interests in MEMC. We also
understood that the discussions between E.ON and the potential purchaser would
not culminate in an immediate transaction, but that negotiations were ongoing.
Meanwhile, our liquidity and cash flow were being negatively impacted by our
operating losses caused by excess capacity and declining prices and by
increasing interest expense. At that time, we believed that cash generated from
operations, together with the liquidity provided by existing cash balances and
credit facilities would be sufficient to satisfy commitments for capital
expenditures, repayment of current maturities of long-term debt and other cash
requirements only through the third quarter of 2001.
As a result, we reevaluated the conditions surrounding the ability to use
our tax loss carryforwards and determined it appropriate to discontinue
recognition of additional tax benefits from net operating loss carryforwards and
to increase our valuation allowance related to deferred tax assets in the amount
of $289 million. In making these determinations, 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.
In the 2001 third and fourth quarters, we did not recognize additional tax
benefits from net operating loss carryforwards.
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 Company Overview above. We believe that a
significant majority of our U.S. net operating loss carryforwards will be
utilized or applied to reduce tax attributes, under IRC Section 108(b), as a
result of the transaction 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. As a result, in the 2001 fourth
quarter, MEMC increased its valuation allowance related to deferred tax assets
in the amount of $172 million.
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.
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.
42
Loans can be made under this credit facility subject to certain conditions
and the following aggregate lending limitations:
- $50 million at any time prior to January 1, 2002
- $75 million at any time prior to April 1, 2002
- $100 million at any time prior to July 1, 2002
- $125 million at any time prior to October 1, 2002
- $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,
LP. 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 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
43
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:
- 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;
- 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
- 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>
- ---------------------------------------------------------------------------------------------
COMMITTED OUTSTANDING
--------- -----------
DOLLARS IN MILLIONS
Long-term Debt........................................... $346 $226
Short-term Borrowings.................................... 128 93
---- ----
Total.......................................... $474 $319
- ---------------------------------------------------------------------------------------------
</Table>
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
44
Series A Cumulative Convertible Preferred Stock, including accrued but unpaid
dividends, are valued at face value:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
-------------------------------------------
LESS THAN AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
----------------------- ----- --------- --------- --------- -------
DOLLARS IN MILLIONS
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 in discussions with a commercial bank regarding the refinancing of
all or a portion of this note. 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>
- ---------------------------------------------------------------------------------------------------------
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
-----------------------------------------------
LESS THAN AFTER
OTHER COMMERCIAL COMMITMENTS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
---------------------------- ----- ------------- --------- --------- -------
DOLLARS IN MILLIONS
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.
45
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.
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 incorporated by reference 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.
46
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 the
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. Proceeds from the sale of wafers related to research and development
activities not considered commercially viable are not included in Net Sales.
Instead, these types of proceeds offset research and development expenses. Such
proceeds totaled $22 million, $9 million and $2 million, respectively, in 2001,
2000 and 1999.
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.
47
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
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.
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>
- --------------------------------------------------------------------------------------
2001 2000
----- -----
DOLLARS IN MILLIONS
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.
48
RISK FACTORS
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This annual report
contains such forward-looking statements that set out anticipated results based
on management's plans and assumptions. We have tried, wherever possible, to
identify such statements by using words such as "anticipates," "estimates,"
"expects," "projects," "intends," "plans," "believes," and words and terms of
similar substance in connection with any discussion of future operating or
financial performance.
Forward-looking statements in this report include those concerning:
- the expectation that the write-down of our property, plant and equipment,
goodwill, and intangible assets will result in a reduction of our
depreciation and amortization of approximately $150 million in 2002 which
in turn will result in a significant improvement in gross margin and a
reduction in marketing and administration and research and development
expenses;
- our expectation regarding future proceeds from the sale of wafers related
to research and development activities not considered commercially
viable;
- our intent to tightly control capital expenditures in 2002;
- the impact of the implementation of SFAS Nos. 142, 143, and 144;
- the expectation that the write-down of our goodwill and certain
intangible assets will result in a significant reduction in our
amortization in 2002;
- the impact of an adverse change in interest and currency exchange rates;
- the expectation that $4.8 million of the restructuring reserve will be
paid out in the first half of 2002;
- the adequacy and timing of the utilization of the remaining portion of
our restructuring reserve;
- the expectation that we will not pay dividends on our common stock in the
foreseeable future;
- future compensation expense related to stock options granted in January
2002 and to membership interests in TPG Wafer Management granted in 2002;
- our belief that a significant majority of our U.S. net operating loss
carryforwards will be utilized or will be applied to reduce our tax
attributes under IRC section 108(b), as a result of the transactions with
TPG; and
- the expectation that expenses related to our benefit plans will be
reduced in the future as a result of amendments to the benefit plans.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks and uncertainties, and actual
results could vary materially from those anticipated, estimated or projected.
Risks and uncertainties pertaining to MEMC include, but are not limited to:
- market demand for silicon wafers;
- customer acceptance of our new products;
- utilization of manufacturing capacity;
- our ability to reduce manufacturing costs;
- inventory levels of our customers;
- demand for semiconductors generally;
- changes in the pricing environment;
- general economic conditions;
49
- actions by competitors, customers, and suppliers;
- the accuracy of our assumptions regarding the dismantling and sale of the
Spartanburg facility;
- the impact of competitive products and technologies;
- technological changes;
- changes in product specifications and manufacturing processes;
- changes in financial market conditions;
- changes in interest and currency exchange rates;
- changes in the plans and intentions of third parties, including TPG; and
- other risks described in our filings with the Securities and Exchange
Commission, including "Risk Factors" in our Form 10-K for the year ended
December 31, 2001.
These forward-looking statements represent our estimates and assumptions
only as of the date of this report. We undertake no obligation to publicly
update forward-looking statements, whether as a result of new information,
future events or otherwise.
50
CERTAIN BENEFICIAL OWNERSHIP BY
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the beneficial ownership of MEMC common stock,
our Series A Cumulative Convertible Preferred Stock and the membership interest
in TPG Wafer Holdings LLC, as of March 31, 2002 by each of our directors,
certain executive officers and all directors and executive officers as a group.
Except as indicated below, each person has the sole power to vote and transfer
his or her shares or interests.
<Table>
<Caption>
NUMBER OF SHARES PERCENTAGE OF NUMBER OF PERCENTAGE INTEREST
OF MEMC MEMC SHARES OF PERCENTAGE OF IN TPG WAFER
COMMON STOCK OUTSTANDING PREFERRED STOCK OUTSTANDING HOLDINGS
NAME BENEFICIALLY OWNED COMMON STOCK BENEFICIALLY OWNED PREFERRED STOCK BENEFICIALLY OWNED
---- ------------------ ------------- ------------------ --------------- -------------------
Robert J.
Boehlke**.......... -- -- -- -- --
Richard W. Boyce**... -- -- -- -- --
Jean-Marc Chapus**... 182,182,192(1)(2) 90.0%(1)(2) 260,000(1)(2) 100%(1)(2) 19.7%(2)
James G. Coulter**... 182,182,192(1)(3) 90.0%(1)(3) 260,000(1)(3) 100%(1)(3) 60.6%(3)
John G. Danhakl**.... 182,182,192(1)(4) 90.0%(1)(4) 260,000(1)(4) 100%(1)(4) 19.7%(4)
C. Douglas Marsh**... -- -- -- -- --
John Marren**........ -- -- -- -- --
William E.
Stevens**.......... -- -- -- -- --
William D.
Watkins**.......... -- -- -- -- --
Klaus R. von
Horde**............ 294,750(5) * -- -- --
James M. Stolze...... 171,208(6) * -- -- --
John P. DeLuca....... 163,208(7) * -- -- --
Julius R. Glaser..... 65,800(8) * -- -- --
Jonathan P. Jansky... 92,750(9) * -- -- --
All directors and
executive officers
as a group (17
persons)........... 183,018,949(1)-(9) 90.1%(1)-(9) 260,000(1)-(4) 100%(1)-(4) 100%(2)(3)(4)
</Table>
- -------------------------
* Represents less than 1% of MEMC's outstanding common stock of March 31,
2002.
** Director.
(1) Assumes the exercise or conversion in full of the Warrants to purchase MEMC
Common Stock and the Series A Cumulative Convertible Preferred Stock. TPG
Wafer Holdings LLC ("TPG Wafer Holdings") directly holds 49,959,970 shares
of MEMC Common Stock and 260,000 shares of Series A Preferred Stock,
convertible into 115,555,555 shares of MEMC Common Stock (excluding accrued
but unpaid dividends that may be convertible into shares of MEMC Common
Stock) assuming shareholder approval. TPG Wafer Partners LLC ("Wafer
Partners"), TPG Wafer Management LLC ("Wafer Management"), Green Equity
Investors III, L.P. ("GEI"), Green Equity Investors Side III, L.P. ("GEI
Side"), TCW/Crescent Mezzanine Partners III, L.P. ("TCW Partners"),
TCW/Crescent Mezzanine Trust III ("TCW Trust") and TCW/Crescent Mezzanine
Partners III Netherlands, L.P. ("TCW Netherlands") collectively hold
16,666,667 Warrants.
(2) TCW Partners, TCW Trust and TCW Netherlands collectively hold a 19.7%
membership interest in TPG Wafer Holdings. Jean-Marc Chapus is an officer
and director of TCW Asset Management Company and is affiliated with other
TCW entities. Mr. Chapus is also a limited partner of TCW Partners. Mr.
Chapus may be deemed to have investment powers and beneficial ownership with
respect to the equity securities held by TCW Partners, TCW Trust and TCW
Netherlands.
(3) Wafer Partners and Wafer Management collectively hold a 60.6% membership
interest in TPG Wafer Holdings. James G. Coulter is a director, officer and
stockholder of TPG Advisors III, Inc. ("TPG
51
Advisors III"), which is the general partner of TPG GenPar III, L.P., which in
turn is the sole general partner of each of TPG Partners III, L.P. ("Partners
III"), TPG Parallel III, L.P. ("Parallel III"), TPG Investors III, L.P.
("Investors III"), FOF Partners III, L.P. ("FOF"), FOF Partners III-B, L.P.
("FOF B") and the sole member of TPG GenPar Dutch, L.L.C., which is the
general partner of TPG Dutch Parallel III, C.V. ("Dutch Parallel III"). Mr.
Coulter is also a director, officer and stockholder of T(3) Advisors, Inc.
("T(3) Advisors"), which is the general partner of T(3) GenPar, L.P., which
in turn is the sole general partner of each of T(3) Partners, L.P. ("T(3)
Partners"), T(3) Parallel, L.P. ("T(3) Parallel"), T(3) Investors, L.P.
("T(3) Investors") and the sole member of T(3) GenPar Dutch, L.L.C., which
is the general partner of T(3) Dutch Parallel C.V. ("T(3) Dutch"). In
addition, Mr. Coulter is a director, officer and stockholder of T(3)
Advisors II, Inc., which is the general partner of T(3) GenPar II, L.P.,
which in turn is the sole general partner of each of T(3) Partners II, L.P.
("T(3) Partners II") and T(3) Parallel II, L.P. ("T(3) Parallel II").
Partners III, Parallel III, Investors III, FOF, FOF B, Dutch Parallel III,
T(3) Partners, T(3) Parallel, T(3) Investors, T(3) Dutch, T(3) Partners II
and T(3) Parallel II (collectively, the "TPG Funds") are members of Wafer
Partners, which in turn is a member of TPG Wafer Holdings, and also the
managing member of Wafer Management. TPG Advisors III, T(3) Advisors and
T(3) Advisors II and the TPG Funds may be deemed, pursuant to Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
to beneficially own all of the securities held by Wafer Holdings and Wafer
Partners. Mr. Coulter, by virtue of his positions with TPG Advisors III,
T(3) Advisors and T(3) Advisors II, may be deemed to have investment powers
and beneficial ownership with respect to the equity securities held by
Wafer Holdings and Wafer Partners.
(4) Green Equity Investors III, L.P. ("GEI") and Green Equity Investors Side
III, L.P. collectively hold a 19.7% membership interest in TPG Wafer
Holdings. John G. Danhakl is a member and manager of GEI Capital III, L.L.C.
("GEI Capital"), which is the general partner of GEI and GEI Side. Mr.
Danhakl is also a Vice President of LGP Management, Inc. ("LGPM"), the
general partner of Leonard Green & Partners, L.P. ("LGP"), which is an
affiliate of GEI Capital and the management company of GEI and GEI Side. GEI
Capital, GPM and LGP may be deemed pursuant to Rule 13d-3 under the Exchange
Act, to beneficially own all of the securities held by GEI and GEI Side. Mr.
Danhakl, by virtue of his positions with GEI Capital and LGPM, may be deemed
to have investment powers and beneficial ownership with respect to the
equity securities held by GEI and GEI Side.
(5) All of these shares may be acquired by the holder within 60 days of March
31, 2002.
(6) Includes 136,704 shares that may be acquired within 60 days of March 31,
2002 and 8,000 shares as to which his spouse has shared voting and
investment power.
(7) Includes 146,704 shares that may be acquired within 60 days of March 31,
2002 (including shares that may be acquired pursuant to the exercise of
options that vested on January 31, 2002, the effective date of Dr. DeLuca's
announced retirement from MEMC).
(8) Includes 65,800 shares that may be acquired within 60 days of March 31, 2002
(including shares that may be acquired by Mr. Glaser pursuant to the
exercise of options that vested on February 28, 2002, the effective date of
Mr. Glaser's termination of employment from MEMC).
(9) Includes 90,550 shares that may be acquired within 60 days of March 31, 2002
and 2,200 shares as to which his spouse has shared voting and investment
power.
52
OWNERSHIP OF MEMC EQUITY SECURITIES
BY CERTAIN BENEFICIAL OWNERS
The following table lists the persons known by us to beneficially own 5% or
more of our common stock and 5% or more of our Series A Cumulative Convertible
Preferred Stock, each as of March 31, 2002. The final column in the following
table lists the amount of shares of MEMC common stock and Series A Preferred
Stock the members of TPG Wafer Holdings would have received assuming
consummation of the proposed merger between TPG Wafer Holdings and MEMC on
November 13, 2001.
<Table>
<Caption>
EQUITY SECURITIES
AMOUNT AND TITLE PERCENT RECEIVED
NATURE OF OF OF ASSUMING MERGER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS CLASS AS OF 11/13/01
- ------------------------------------ -------------------- ----- ------- -----------------
TPG Wafer Holdings LLC........... 182,182,192(1)(2) Common 90%(1) --
301 Commerce Street 260,000(1)(2) Preferred 100%
Suite 3300
Fort Worth, TX 76102
TPG Wafer Partners LLC........... 182,182,192(1)(2)(3) Common 90%(1) 29,526,342
301 Commerce Street 260,000(1)(2)(3) Preferred 100% 153,660
Suite 3300
Fort Worth, TX 76102
TPG Wafer Management LLC......... 182,182,192(1)(2)(3) Common 90%(1) 749,399
301 Commerce Street 260,000(1)(2)(3) Preferred 100% 3,900
Suite 3300
Fort Worth, TX 76102
TPG Advisors III, Inc............ 182,182,192(1)(4) Common 90%(1) --
301 Commerce Street 260,000(1)(4) Preferred 100%
Suite 3300
Fort Worth, TX 76102
T(3) Advisors, Inc. ............. 182,182,192(1)(4) Common 90%(1) --
301 Commerce Street 260,000(1)(4) Preferred 100%
Suite 3300
Fort Worth, TX 76102
T(3) Advisors II, Inc............ 182,182,192(1)(4) Common 90%(1) --
301 Commerce Street 260,000(1)(4) Preferred 100%
Suite 3300
Fort Worth, TX 76102
Green Equity Investors III, L.P.... 182,182,192(1)(2)(3) Common 90%(1) 9,768,772
11111 Santa Monica Blvd. 260,000(1)(2)(3) Preferred 100% 50,838
Suite 2000
Los Angeles, CA 90025
Green Equity Investors Side III,
L.P............................ 182,182,192(1)(2)(3) Common 90%(1) 73,341
11111 Santa Monica Blvd. 260,000(1)(2)(3) Preferred 100% 381
Suite 2000
Los Angeles, CA 90025
GEI Capital III, L.L.C. ......... 182,182,192(1) Common 90%(1) --
11111 Santa Monica Blvd. 260,000(1) Preferred 100%
Suite 2000
Los Angeles, CA 90025
</Table>
53
<Table>
<Caption>
EQUITY SECURITIES
AMOUNT AND TITLE PERCENT RECEIVED
NATURE OF OF OF ASSUMING MERGER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS CLASS AS OF 11/13/01
- ------------------------------------ -------------------- ----- ------- -----------------
LGP Management, Inc. ............ 182,182,192(1)(5) Common 90%(1) --
11111 Santa Monica Blvd. 260,000(1)(5) Preferred 100%
Suite 2000
Los Angeles, CA 90025
Leonard Green & Partners, L.P. .. 182,182,192(1)(5) Common 90%(1) --
11111 Santa Monica Blvd. 260,000(1)(5) Preferred 100%
Suite 2000
Los Angeles, CA 90025
TCW/Crescent Mezzanine Partners III,
L.P. .......................... 182,182,192(1)(2)(3)(6) Common 90%(1) 8,224,710
11100 Santa Monica Blvd. 260,000(1)(2)(3)(6) Preferred 100% 42,802
Suite 2000
Los Angeles, CA 90025
TCW/Crescent Mezzanine Trust III... 182,182,192(1)(2)(3)(6) Common 90%(1) 1,281,373
11100 Santa Monica Blvd. 260,000(1)(2)(3)(6) Preferred 100% 6,668
Suite 2000
Los Angeles, CA 90025
TCW/Crescent Mezzanine Partners III
Netherlands, L.P. ............ 182,182,192(1)(2)(3)(6) Common 90%(1) 336,030
11100 Santa Monica Blvd. 260,000(1)(2)(3)(6) Preferred 100% 1,748
Suite 2000
Los Angeles, CA 90025
State of Wisconsin Investment
Board.......................... 6,147,000(7) Common 8.8% --
P.O. Box 7842
Madison, WI 53707
</Table>
- -------------------------
(1) Based on information contained in a Schedule 13D jointly filed with the
Securities and Exchange Commission by TPG Wafer Holdings LLC ("TPG Wafer
Holdings"), TPG Wafer Partners LLC ("TPG Wafer Partners"), TPG Advisors III,
Inc., T(3) Advisors, Inc., T(3) Advisors II, Inc., Green Equity Investors
III, L.P., Green Equity Investors Side III, L.P., GEI Capital III, L.L.C.,
LGP Management, Inc., Leonard Green & Partners, L.P., TCW/Crescent Mezzanine
Partners III, L.P., TCW/Crescent Mezzanine Trust III, The TCW Group, Inc.,
TCW Asset Management Company and TCW/Crescent Mezzanine III, LLC (the "Joint
Filers") on November 23, 2001 and Amendment No. 1 to such Schedule 13D filed
by the Joint Filers and TCW/Crescent Mezzanine Partners III Netherlands,
L.P. on January 31, 2002. Assumes the exercise or conversion in full of the
warrants and Series A preferred stock issued pursuant to the restructuring
agreement. TPG Wafer Holdings is the record owner of 49,959,970 shares of
common stock. The reporting persons have shared voting power and investment
power over all 182,182,192 shares.
(2) These entities have entered into the Amended and Restated LLC Operating
Agreement of TPG Wafer Holdings, dated as of November 13, 2001 and as
amended on January 25, 2002, which provides that TPG Wafer Partners shall be
the managing member of TPG Wafer Holdings and conduct the business and
affairs of TPG Wafer Holdings. This includes voting of the equity securities
that TPG Wafer Holdings holds except as set forth herein and in footnote (3)
to this table. These entities have also entered into a Members' Agreement,
dated as of November 13, 2001 and as amended on January 25, 2002, providing
54
for, among other things, an agreement by TPG Wafer Partners not to cause TPG
Wafer Holdings to vote its shares of common stock without the prior written
consent of the other parties to the LLC Operating Agreement on certain
matters. The Members' Agreement also provides that TCW/Crescent Mezzanine
Partners III, L.P., TCW/Crescent Mezzanine Trust III and TCW/Crescent
Mezzanine Partners III Netherlands, L.P. may nominate one individual to our
Board of Directors, Green Equity Investors III, L.P. and Green Equity
Investors Side III, L.P. may nominate one individual to our Board, and TPG
Wafer Partners agrees to cause TPG Wafer Holdings to vote its shares of
common stock in favor of the election of such individuals as our directors.
(3) These entities (each a guarantor) have entered into an Intercreditor
Agreement, dated as of December 21, 2001, providing for, among other things,
the assignment of any participation interests in the note of our Italian
subsidiary, the notes and the warrants issued pursuant to the restructuring
agreement held by any guarantor to the other non-defaulting guarantors pro
rata in the event of certain defaults of such guarantor under their
guarantees to the revolving credit agreement; TPG Wafer Partners' right of
first offer to any participation interests in the note of our Italian
subsidiary, the notes or the warrants that any guarantor wishes to transfer;
the guarantors' tag-along rights to any transfer by TPG Wafer Partners or
its affiliates of the note of our Italian subsidiary, the notes or the
warrants; and TPG Wafer Partners' rights to cause the holders of
participation interests in the notes of our Italian subsidiary, the notes or
the warrants to sell such securities if TPG Wafer Partners wishes to sell
its securities.
(4) David Bonderman, James G. Coulter and William S. Price, III are directors,
officers and the sole stockholders of TPG Advisors III, Inc. ("TPG Advisors
III"), which is the general partner of TPG GenPar III, L.P., which in turn
is the sole general partner of each of TPG Partners III, L.P. ("Partners
III"), TPG Parallel III, L.P. ("Parallel III"), TPG Investors III, L.P.
("Investors III"), FOF Partners III, L.P. ("FOF") and FOF Partners III-B,
L.P. ("FOF B") and the sole member of TPG GenPar Dutch, L.L.C., which is the
general partner of TPG Dutch Parallel III, C.V. ("Dutch Parallel III"). Mr.
Bonderman, Mr. Coulter and Mr. Price are also directors, officers and the
sole stockholders of T(3) Advisors, Inc. ("T(3) Advisors"), which is the
general partner of T(3) GenPar, L.P., which in turn is the sole general
partner of each of T(3) Partners, L.P. ("T(3) Partners"), T(3) Parallel,
L.P. ("T(3) Parallel") and T(3) Investors, L.P. ("T(3) Investors") and the
managing member of T(3) GenPar Dutch, L.L.C., which is the general partner
of T(3) Dutch Parallel C.V. ("T(3) Dutch"). In addition, Mr. Bonderman, Mr.
Coulter and Mr. Price are also directors, officers and the sole stockholders
of T(3) Advisors II, Inc. ("T(3) Advisors II"), which is the general partner
of T(3) GenPar II, L.P., which in turn is the sole general partner of each
of T(3) Partners II, L.P. ("T(3) Partners II") and T(3) Parallel II, L.P.
("T(3) Parallel II"). Partners III, Parallel III, Investors III, FOF, FOF B,
Dutch Parallel III, T(3) Partners, T(3) Parallel, T(3) Investors, T(3)
Dutch, T(3) Partners II and T(3) Parallel II (collectively, the "TPG Funds")
are members of TPG Wafer Partners, which in turn is a member of TPG Wafer
Holdings, and also the managing member of TPG Wafer Management LLC. TPG
Wafer Holdings directly holds the 49,959,970 shares of MEMC common stock and
260,000 shares of Series A Cumulative Convertible Preferred Stock and an
approximately 60% interest (as of March 31, 2002) in TPG Wafer Management.
TPG Wafer Partners directly holds 9,850,001 Warrants to purchase MEMC common
stock ("Warrants") and TPG Wafer Management directly holds 250,000 Warrants.
TPG Advisors III, T(3) Advisors and T(3) Advisors II may be deemed, pursuant
to Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), to beneficially own all of the securities held by TPG Wafer
Holdings and TPG Wafer Partners. Mr. Bonderman, Mr. Coulter and Mr. Price,
by virtue of their positions with TPG Advisors III, T(3) Advisors, and T(3)
Advisors II, may be deemed to have investment powers and beneficial
ownership with respect to the equity securities held by TPG Wafer Holdings
and Wafer Partners. Each of Mr. Bonderman, Mr. Coulter and Mr. Price
disclaims beneficial ownership of such securities.
(5) LGP Management, Inc. ("LGPM") is the general partner of Leonard Green &
Partners, L.P. ("LGP"), which is an affiliate of GEI Capital III, L.L.C.
("GEI Capital" and, together with LGPM and LGP, the "LGP Controlling
Persons"), which is the general partner of Green Equity Investors III, L.P.
("GEI") and Green Equity Investors Side III, L.P. ("GEI Side"). GEI and GEI
Side, in the aggregate, own 19.7% of the membership interests in TPG Wafer
Holdings. TPG Wafer Holdings directly holds
55
49,959,970 shares of MEMC common stock and 260,000 shares of Series A Cumulative
Convertible Preferred Stock. GEI directly holds 3,258,872 Warrants and GEI Side
directly holds 24,461 Warrants. LGPM, LGP and GEI Capital may be deemed,
pursuant to Rule 13d-3 under the Exchange Act to share beneficial ownership
of the securities held by TPG Wafer Holdings, and to beneficially own the
Warrants held by GEI and GEI Side. Leonard I. Green, Jonathan D. Sokoloff,
John G. Danhakl, Peter J. Nolan, Jonathan A. Seiffer and John M. Baumer,
either directly (whether through ownership interest or position) or through
one or more intermediaries, may be deemed to control the LGP Controlling
Persons. By virtue of their positions with the LGP Controlling Persons,
Messrs. Green, Sokoloff, Danhakl, Nolan, Seiffer and Baumer may be deemed
to share beneficial ownership of the securities held by TPG Wafer Holdings
and to have investment power and beneficial ownership with respect to the
Warrants held by GEI and GEI Side. However, each such individual disclaims
beneficial ownership of such securities. Messr. Danhakl is a director of
the Company.
(6) TCW/Crescent Mezzanine III, LLC ("MEZZANINE LLC"), a Delaware limited
liability company, is the General Partner of TCW/Crescent Mezzanine Partners
III, L.P. ("TCW Partners") and TCW/ Crescent Mezzanine Partners III
Netherlands, L.P. ("TCW Netherlands") and the Managing Owner of TCW/Crescent
Mezzanine Trust III ("TCW Trust" and, collectively, the "TCW Funds"). TCW/
Crescent Mezzanine Management III, LLC ("Mezz Mgmt III") is the Investment
Advisor of the TCW Funds, and has delegated all investment and voting
discretion with respect to the securities owned by the TCW Funds to TCW
Asset Management Company, a California corporation and registered investment
advisor ("TAMCO"), as Sub-Advisor. As a result, Mezz Mgmt III disclaims
beneficial ownership of these securities. TCW (Mezzanine III), L.P. ("Mezz
III LP"), a Delaware limited partnership, is a member of MEZZANINE LLC who
may be deemed to control MEZZANINE LLC. TAMCO is the Sub-Advisor to the TCW
Funds and the General Partner of Mezz III LP. TAMCO is wholly owned by The
TCW Group, Inc., a Nevada corporation ("TCWG"). TCWG, together with its
direct and indirect subsidiaries, collectively constitute The TCW Group,
Inc. business unit (the "TCW Business Unit"). The TCW Business Unit is
primarily engaged in the provision of investment management services. The
ultimate parent company of TCWG is Societe Generale, S.A., a company
incorporated under the laws of France ("SG"). The principal business of SG
is acting as a holding company for a global financial services group, which
includes certain distinct specialized business units that are independently
operated, including the TCW Business Unit. SG, for purposes of the federal
securities laws, may be deemed ultimately to control TCWG and the TCW
Business Unit. SG, its executive officers and directors, and its direct and
indirect subsidiaries (including all of its business units except the TCW
Business Unit), may beneficially own securities of the Company and such
securities are not reported in this Table. In accordance with Exchange Act
Release No. 34-39538 (January 12, 1998) and due to the separate management
and independent operation of its business units, SG disclaims beneficial
ownership of securities of the Issuer beneficially owned by the TCW Business
Unit. Each member of the TCW Business Unit disclaims beneficial ownership of
securities of the Issuer beneficially owned by SG and any of SG's other
business units. TCW Partners, TCW Trust and TCW Netherlands, in the
aggregate, own 19.7% of the membership interests in TPG Wafer Holdings and
3,065,630 warrants exercisable for MEMC common stock. TPG Wafer Holdings
directly holds 49,959,970 shares of MEMC common stock and 260,000 shares of
Series A Cumulative Convertible Preferred Stock.
(7) Based on information contained in Amendment No. 4 to Schedule 13G filed with
the Securities and Exchange Commission by The State of Wisconsin Investment
Board on February 12, 2002. The State of Wisconsin Investment Board has sole
voting and investment power over all 6,147,000 shares.
56
STOCKHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
As previously disclosed to our stockholders, stockholder proposals intended
to be presented at our 2002 Annual Stockholders' Meeting originally must have
been received by us by November 26, 2001 for inclusion in our proxy statement
and form of proxy card for that meeting. On June 4, 2002, we announced that we
have scheduled our 2002 Annual Stockholders' Meeting for July 25, 2002, which is
more than thirty days later than the anniversary of the 2001 meeting.
Stockholders who desire to submit a proposal for the 2002 meeting should submit
such proposal promptly.
In order for a stockholder to nominate a candidate for director for
election at an annual stockholders' meeting, under our restated certificate of
incorporation, we must receive timely notice of the nomination in advance of the
meeting. Such notice must be given not less than 90 nor more than 120 days prior
to the anniversary date of the immediately preceding annual stockholders'
meeting; except in the event that the annual meeting is called for a date that
is not within 30 days before or after such anniversary, and in such case, we
must receive notice not later than ten days following our announcement of the
date of the annual meeting. The stockholder filing a notice of nomination must
include information about the nominee, such as name, address, occupation and
shares held.
In order for a stockholder to bring other business before an annual
stockholders' meeting, we must receive timely notice in advance of the meeting.
Such notice must be given not less than 90 nor more than 120 days prior to the
anniversary date of the immediately preceding annual stockholders' meeting;
except in the event that the annual meeting is called for a date that is not
within 30 days before or after such anniversary, and in such case, we must
receive notice not later than ten days following our announcement of the date of
the annual meeting. The notice must include a description of the proposed
business, the reasons therefor, and other specified matters. These requirements
are separate from and in addition to the requirements a stockholder must meet to
have a proposal included in our proxy statement. Upon receipt of any such
proposal, we will determine whether or not to include such proposal in the proxy
statement, form of proxy card and/or annual stockholders' meeting agenda under
regulations governing the solicitation of proxies. The above time limits also
apply in determining whether notice is timely for purposes of rules adopted by
the Securities and Exchange Commission relating to the exercise of discretionary
voting authority.
In each case, the notice must be given to our Secretary, whose address is
501 Pearl Drive (City of O'Fallon), P.O. Box 8, St. Peters, Missouri 63376.
Any stockholder desiring a copy of our restated certificate of
incorporation or by-laws will be furnished a copy without charge upon written
request to our Secretary.
INCORPORATION BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" the information we provide in documents filed with the SEC, which
means that we can disclose important information by referring to those
documents. The information incorporated by reference is an important part of
this proxy statement. We are incorporating by reference our selected financial
data included in Item 6 on page 19 and our consolidated financial statements
included in Item 8 on page 19 of Amendment No. 3 to our annual report on Form
10-K for the fiscal year ended December 31, 2001 and pages F-1 and F-18 through
F-45 and the back cover of our 2001 annual report to shareholders included in
Exhibit 13 to Amendment No. 3 to the Form 10-K, which has been filed with the
SEC.
We are also incorporating by reference the following documents:
- Annual Report on Form 10-K, as amended on Form 10-K/A, for the fiscal
year ended December 31, 2001
- Current Report on Form 8-K filed on January 14, 2002
- Current Report on Form 8-K filed on June 4, 2002
57
We may file additional documents with the SEC pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this proxy statement
and before the date of the special meeting. Any such documents will also be
deemed to be incorporated by reference into this proxy statement.
You may get copies of any of the incorporated documents at no charge to you
by writing or calling Janine Orf, Director, Investor Relations, MEMC Electronic
Materials, Inc., 501 Pearl Drive (City of O'Fallon), St. Peters, Missouri 63376
(telephone 636/474-5443). In addition, you may read and copy these filings and
any other reports or other information that we file at the SEC's public
reference room in Washington D.C. at 450 Fifth Street, N.W. You can request
copies of these documents by writing to the SEC and paying a duplicating charge.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of its public reference rooms in other cities. The SEC makes our filings
available to the public on its Internet web site (http://www.sec.gov). In
addition, you may inspect such reports and other information at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
OTHER MATTERS
The Board of Directors knows of no other matters to be presented for
consideration at the special stockholders' meeting.
June 10, 2002
58
ANNEX A
OPINION OF
HOULIHAN LOKEY HOWARD & ZUKIN
FINANCIAL ADVISORS
A-1
November 5, 2001
To The Special Committee
of The Board of Directors
MEMC Electronic Materials, Inc.
Dear Members of the Special Committee:
We understand that E.ON AG ("E.ON" or the "Parent") and Texas Pacific Group
("TPG" or the "Buyer") have entered into an agreement (the "Purchase Agreement")
that will result in the sale (the "Sale") of E.ON's investment in MEMC
Electronic Materials, Inc. ("MEMC" or the "Company") to TPG in a two step
transaction that consists of (i) the purchase by TPG of MEMC's approximate $900
million face value of debt outstanding ("Intercompany Debt") held by the Parent;
and (ii) the purchase by TPG of E.ON's 71.8% ownership of MEMC's common stock
("Common Stock"). As a precondition to the Sale, TPG and the Company must agree
on the terms of a recapitalization (the "Recapitalization") under which all of
the Intercompany Debt purchased by TPG will be converted or exchanged into new
securities of MEMC.
The Recapitalization and other related transactions are referred to
collectively herein as the "Transaction". The Company has formed a special
committee of the board of directors (the "Special Committee") to consider
certain matters relating to the Transaction.
The Special Committee has requested our opinion (the "Opinion") as to the
matters set forth below. The Opinion does not address the Company's underlying
business decision to effect the Transaction. We have not been requested to, and
did not, solicit third party indications of interest in acquiring all or any
part of the Company.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to shareholders on Form 10-K
for the three fiscal years ended December 31, 2000 and quarterly
reports on Form 10-Q for the two quarters ended June 30, 2001, and
Company-prepared draft interim financial statements for the period
ended September 30, 2001, which the Company's management has
identified as being the most current financial statements available;
2. reviewed copies of the following agreements:
i. Purchase Agreement between E.ON, its subsidiaries and TPG dated
September 30, 2001;
ii. Agreement and Plan of Merger by and between TPG Wafer Holdings
LLC and MEMC Electronic Materials, Inc., draft distributed
November 2, 2001;
iii. Indenture for $50 million Senior Subordinated Secured Notes due
2007 of MEMC Electronic Materials, Inc., draft distributed
November 2, 2001;
iv. Revolving Credit Agreement among MEMC Electronic Materials, Inc.
as borrower, the Lenders Party Thereto, and
[ ] as Administrative Agent, draft dated
November 2, 2001;
v. Restructuring Agreement among TPG Wafer Holdings LLC and MEMC
Electronic Materials, Inc., draft distributed November 2, 2001;
vi. Registration Rights Agreement among MEMC Electronic Materials,
Inc. and TPG Wafer Holdings LLC, draft distributed November 2,
2001;
vii. Certificate of Designations of Series A Cumulative Convertible
Preferred Stock of MEMC Electronic Materials, Inc., draft
distributed November 2, 2001;
A-2
viii. Warrants Certificate of MEMC Electronic Materials, Inc., draft
distributed November 2, 2001;
ix. Summary of terms for E55 million Promissory Note due 2031 of
MEMC Electronic Materials SpA, distributed November 2, 2001;
x. Management Advisory Agreement between MEMC and TPG, draft dated
October 31, 2001.
3. reviewed the terms of the Company's debt outstanding to E.ON and its
subsidiaries VEBA AG and the Fidelia Corporation along with debt owed
to various third party lenders;
4. reviewed the joint venture agreements between MEMC and its joint
venture partners for each of MEMC's subsidiaries;
5. met with certain members of the senior management of the Company to
discuss the operations, financial condition, future prospects and
projected operations and performance of the Company, and met with
representatives of the Company's independent accounting firm and
counsel to discuss certain matters;
6. visited the Company's headquarters and certain facilities in St.
Peters, Missouri;
7. reviewed forecasts and projections prepared by the Company's
management with respect to the Company for the years ended December
31, 2001 through 2002;
8. reviewed the historical market prices and trading volume for the
Company's publicly traded securities; and
9. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition, business or prospects of the Company since
the date of the most recent financial statements made available to us. Subject
to the foregoing, we advise the recipients of this Opinion (other than the
Company and its affiliates) that nothing has come to the attention of our
personnel working on this engagement in the course thereof that has caused us to
believe that it was unreasonable for us to utilize and rely upon the financial
projections taken as a whole as part of our analysis relating to this Opinion.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the Transaction is fair to the public stockholders of the Company, from a
financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
A-3
MEMC ELECTRONIC MATERIALS, INC.
501 PEARL DRIVE (CITY OF O'FALLON)
ST. PETERS, MISSOURI 63376
June 10, 2002
TO PARTICIPANTS IN THE MEMC RETIREMENT SAVINGS PLAN:
Enclosed with this voting direction card are the Notice of Special Meeting
and Proxy Statement for the Special Meeting of Stockholders of MEMC Electronic
Materials, Inc. (the "Company") which will be held on July 10, 2002. The number
of shares of Company common stock (the "Common Stock") shown on the voting
direction card represents the number of shares which you are entitled to direct
Putnam Fiduciary Trust Company (the "Trustee") to vote. This share amount is
based on your balance in the MEMC Stock Fund account in the MEMC Retirement
Savings Plan (the "Plan") on May 31, 2002, the record date for the determination
of stockholders eligible to vote. In order for these shares to be voted by the
Trustee of the Plan in accordance with your confidential instructions, the
Trustee must receive your executed voting direction card not later than July 8,
2002. Under the provisions of the Plan, all shares for which no executed voting
direction cards are received by July 8, 2002 are to be voted by the Trustee and
its proxies in the same proportion for which directions are received. Please
note that you will not be able to vote the shares shown on the voting direction
card at the Special Meeting; only the Trustee and its proxies can vote these
shares.
MEMC ELECTRONIC MATERIALS, INC.
501 Pearl Drive (City of O'Fallon)
St. Peters, Missouri 63376
The undersigned hereby directs Putnam Fiduciary Trust Company as
trustee (the "Trustee") of the MEMC Retirement Savings Plan (the "Plan") to
vote, as designated on the reverse side, all of the shares of Common Stock of
MEMC Electronic Materials, Inc. (the "Company") which the undersigned is
entitled to direct the Trustee to vote pursuant to the terms of the Plan, on the
matters set forth on the reverse side and, in the discretion of the Trustee and
its proxies, upon any other business which may properly come before the Special
Meeting of Stockholders of the Company, to be held at 345 California Street,
Suite 3300, San Francisco, California 94104, on July 10, 2002 at 10:00 a.m.,
local time, and all adjournments thereof.
This voting direction card, when properly executed, will be voted in
the manner directed herein by the undersigned participant. If no direction is
made by a participant, voting will be controlled by the terms of the Plan.
PLEASE MARK, SIGN AND PROMPTLY RETURN THIS VOTING DIRECTION CARD
IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED
IN THE UNITED STATES.
(Continued and to be signed on reverse side.)
MEMC ELECTRONIC MATERIALS, INC.
USE A BLACK PEN. MARK WITH AN X INSIDE THE GREY AREAS AS SHOWN IN THIS
EXAMPLE. [X]
1. To approve the issuance of 260,000 shares of Series A Cumulative
Convertible Preferred Stock, warrants to purchase 16,666,667 shares of
common stock and the common stock issuable on conversion of such
preferred stock and exercise of such warrants.
FOR { } AGAINST { } ABSTAIN { }
2. To approve an amendment to the company's restated certificate of
incorporation authorizing a one-for-two reverse split of the common
stock.
FOR { } AGAINST { } ABSTAIN { }
3. To approve an amendment to the company's restated certificate of
incorporation authorizing an increase in authorized capital stock from
200,000,000 shares of common stock to 300,000,000 shares of common
stock.
FOR { } AGAINST { } ABSTAIN { }
4. To approve a future merger between MEMC Electronic Materials, Inc. and
TPG Wafer Holdings LLC in connection with the company's debt
restructuring.
FOR { } AGAINST { } ABSTAIN { }
5. In its discretion, the Trustee and its proxies are authorized to vote
upon any other business which may properly come before the meeting and
all adjournments thereof.
6. Voting directions marked "against" Proposal 1, 2, 3, or 4 will not be
voted on any motion to adjourn the meeting for the purpose of
continuing to solicit directions to approve such Proposal 1, 2, 3, or
4.
The undersigned hereby revokes all prior directions heretofore given by the
undersigned to the Trustee with respect to the subject matter hereof for said
meeting. The direction may be revoked prior to its exercise.
Note: Please sign exactly as your name or names appear hereon.
Signature 1 -- Please keep signature within the box
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Signature 2 -- Please keep signature within the box
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Date (mm/dd/yy)
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[MEMC LOGO]
MEMC ELECTRONIC MATERIALS, INC.
501 PEARL DRIVE (CITY OF O'FALLON)
ST. PETERS, MISSOURI 63376
June 10, 2002
Dear Stockholder:
A special meeting of the stockholders of MEMC Electronic Materials, Inc.
will be held at 345 California Street, Suite 3300, San Francisco, California
94104, on July 10, 2002 at 10:00 a.m., local time. It is important that your
shares are represented at this meeting. Whether or not you plan to attend the
meeting, please review the enclosed proxy materials, complete the attached proxy
form, and return the proxy form promptly in the envelope provided.
Thank you,
David L. Fleisher
Corporate Secretary
MEMC ELECTRONIC MATERIALS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
501 Pearl Drive (City of O'Fallon)
St. Peters, Missouri 63376
The undersigned hereby appoints James M. Stolze and David L.
Fleisher, and each of them, with power of substitution, as proxies of the
undersigned, to attend the Special Meeting of Stockholders of MEMC Electronic
Materials, Inc. (the "Company"), to be held at 345 California Street, Suite
3300, San Francisco, California 94104, on July 10, 2002 at 10:00 a.m., local
time, and all adjournments thereof, and to vote, as indicated on the reverse
side, the shares of Common Stock of the Company which the undersigned is
entitled to vote with all the powers the undersigned would possess if present at
the meeting.
This proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder(s).
PLEASE DATE AND SIGN ON THE REVERSE SIDE AND
MAIL PROMPTLY IN THE ENCLOSED ENVELOPE.
(Continued and to be signed on reverse side.)
MEMC ELECTRONIC MATERIALS, INC.
USE A BLACK PEN. MARK WITH AN X INSIDE THE GREY AREAS AS SHOWN IN THIS
EXAMPLE. [X]
1. To approve the issuance of 260,000 shares of Series A Cumulative
Convertible Preferred Stock, warrants to purchase 16,666,667 shares of
common stock and the common stock issuable on conversion of such
preferred stock and exercise of such warrants.
FOR { } AGAINST { } ABSTAIN { }
2. To approve an amendment to the company's restated certificate of
incorporation authorizing a one-for-two reverse split of the common
stock.
FOR { } AGAINST { } ABSTAIN { }
3. To approve an amendment to the company's restated certificate of
incorporation authorizing an increase in authorized capital stock from
200,000,000 shares of common stock to 300,000,000 shares of common
stock.
FOR { } AGAINST { } ABSTAIN { }
4. To approve a future merger between MEMC Electronic Materials, Inc. and
TPG Wafer Holdings LLC in connection with the company's debt
restructuring.
FOR { } AGAINST { } ABSTAIN { }
5. In their discretion, the proxies are authorized to vote upon any other
business which may properly come before the meeting and all
adjournments thereof.
6. Proxies marked "against" Proposal 1, 2, 3, or 4 will not be voted on
any motion to adjourn the meeting for the purpose of continuing to
solicit proxies to approve such Proposal 1, 2, 3, or 4.
THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby revokes all proxies heretofore given by the undersigned
for said meeting. The proxy may be revoked prior to its exercise.
Note: Please sign exactly as your name or names appear hereon. When shares are
held by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
Signature 1 -- Please keep signature within the box
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Signature 2 -- Please keep signature within the box
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Date (mm/dd/yy)
/ /
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