ITEM 1. BUSINESS
GENERAL
MEMC Electronic Materials, Inc. (MEMC or the Company) is a leading worldwide producer of silicon wafers used in the manufacture of semiconductors that are employed in all types of microelectronic applications, including computer systems, telecommunications equipment, automobiles, consumer electronics products, industrial automation and control systems, and analytical and defense systems. The Company operates manufacturing facilities, directly or through joint ventures, in China, Italy, Japan, Malaysia, South Korea, Taiwan and the United States and sells its products to most of the world's largest manufacturers of semiconductors. MEMC is the leading worldwide supplier of silicon wafers outside of Japan and is the only non-Japanese silicon wafer manufacturer with manufacturing and research facilities in Japan.
MEMC was incorporated in 1984 under the name Dynamit Nobel Silicon Holdings, Inc. (DNS). Huls AG, a subsidiary of VEBA AG, subsequently acquired ownership of DNS. In 1989, Huls AG, through DNS and other related companies, acquired the electronic materials businesses operated by Monsanto Company (Monsanto) in the United States, Europe, Japan and Malaysia. Huls AG changed the name of DNS to MEMC Electronic Materials, Inc. and combined the assets acquired from Monsanto with the assets of its U.S. and Italian silicon wafer business to form the current MEMC. VEBA Corporation, an affiliate of Huls AG, acquired all of the outstanding common stock of MEMC from Huls AG in 1990, which it subsequently transferred to its subsidiary, Huls Corporation, in 1993. On July 12, 1995, the Company completed an initial public stock offering of 19.55 million shares of common stock at an initial offering price of $24 per share. As a result of the public stock offering, Huls Corporation's ownership of the Company was reduced to 51.9%. As of March 9, 1998, Huls Corporation owned 53.0% of the Company's common stock.
PRODUCT
The silicon wafers manufactured by the Company vary in diameter, surface features (polished or epitaxial), composition, electrical properties and method of manufacture. MEMC's silicon wafers are manufactured according to the exacting specifications required by its customers, and the Company currently produces wafers with a variety of product features satisfying more than 1,000 unique product specifications. Wafers of larger diameter and more stringent technical specifications are required by semiconductor manufacturers in order to produce increasingly complex semiconductor devices such as the larger megabit memory chips and microprocessors.
The processes utilized by the Company's customers in manufacturing such semiconductor devices have become more expensive, leading to their increased focus on efficient semiconductor production processes. Because many semiconductor devices, or chips, are made from the same wafer, and because all chips from a particular wafer are manufactured and processed simultaneously at each stage in the device manufacturing process, larger-sized wafers allow for a greater yield from the same semiconductor manufacturing process and allow semiconductor manufacturers to spread their fixed costs of production over a larger volume of finished products. For example, a 150 millimeter (6 inch) wafer has a surface area of approximately 27.4 square inches, whereas a 200 millimeter (8 inch) wafer has a surface area of approximately 48.7 square inches, or approximately 78% more surface area than the 150 millimeter wafer, and a 300 millimeter (12 inch) wafer has a surface area of approximately 109.6 square inches or approximately 125% more surface area than a 200 millimeter wafer. Despite the industry's focus on 150 millimeter and larger diameter wafers, the Company continues to manufacture and sell a significant amount of 100 millimeter (4 inch) and 125 millimeter (5 inch) wafers.
The Company's silicon wafers fall into one of three general types:
Prime Polished Wafers
The Company's principal product is its prime polished wafer, which is a highly refined, pure silicon wafer with an ultraflat and ultraclean surface. Prime polished wafers undergo a sophisticated chemical-mechanical polishing process that removes defects and leaves an extremely smooth surface suitable for the advanced technologies used by the Company's customers. MEMC's prime polished wafers are used by the Company's customers in a broad range of applications.
The Company manufactures prime polished wafers in sizes ranging from 100 millimeters to 200 millimeters in diameter. The larger diameter wafers are used in more sophisticated applications where semiconductor manufacturers benefit from the increased efficiencies and greater number of available die per wafer.
Epitaxial Wafers
In order to incorporate more complex functionality in the integrated circuit, as well as to improve performance (which is affected by the distance signals travel through the circuitry) and to control power consumption and heat production, semiconductor manufacturers are forced to use smaller and smaller device features. The Company manufactures epitaxial wafers to serve the technological demands of its customers that manufacture advanced semiconductors. Epitaxial wafers consist of a thin, single-crystal silicon layer grown on the polished surface of the silicon wafer substrate. The substrate, which is designed to have different composition and electrical properties from the epitaxial layer of single-crystal silicon on the wafer surface, among other things, helps to improve isolation between circuit elements fabricated on the silicon film surface of the wafer. One result of such smaller devices is the requirement that the distance between circuit elements (referred to as line widths) becomes increasingly narrow. A critical aspect in the construction of any integrated circuit device is the isolation of these different elements that comprise the integrated circuit device. Without sufficient isolation of the various elements, the elements could communicate electrically with each other, which could render the device inoperable. The improved isolation provided by epitaxial wafers allows for increased reliability of the finished semiconductor device, greater efficiencies during the semiconductor manufacturing process, and ultimately more complex integrated circuit devices.
Test/Monitor Wafers
Test/monitor wafers (monitor wafers) are principally supplied by the Company to its customers for their use in testing semiconductor fabrication lines and processes. Although monitor wafers are substantially the same as prime polished wafers with respect to cleanliness, and in some cases, flatness, other specifications are generally less rigorous, allowing for economies in manufacturing. In addition, monitor wafers are generally produced from the portion of a silicon ingot that does not meet customer specifications for the production of wafers to be used for the manufacture of semiconductors. Therefore, sales of monitor wafers allow the Company to experience a higher yield from each silicon ingot produced.
300 MILLIMETER WAFERS
One of the semiconductor industry's next significant technological changes will be the transition to 300 millimeter silicon wafers. For the next several years, the primary focus of the semiconductor equipment industry will be to develop 300 millimeter fabrication tools while the focus of the semiconductor manufacturing industry will be to evaluate those tools, develop processes and build new fabrication facilities to process 300 millimeter wafers.
MEMC is one of the industry leaders in the development of the next generation of both polished and epitaxial silicon wafers, having first produced 300 millimeter diameter wafers in 1991. The Company's technologists are developing new equipment and improved processes in all of the key manufacturing operations from crystal growing through final packaging.
The 300 millimeter market was driven during 1997 primarily by the two industry consortia organized and funded by the leading semiconductor manufacturers for the purpose of evaluating 300 millimeter equipment and materials (I300I in Austin, Texas, and SELETE in Japan) and semiconductor equipment manufacturers. While the primary use of 300 millimeter wafers in 1998 will continue to be for semiconductor device process and tool development, the Company expects to ship samples of 300 millimeter prime polished and epitaxial wafers during 1998.
In 1997, principal silicon wafer producers expanded the capacity of their initial 300 millimeter pilot lines and announced plans to build production facilities to meet future market demand. Several 300 millimeter pilot lines are expected to be completed in 1998, equipped with early prototypes of 300 millimeter fabrication tools. The Company's 300 millimeter research and development line at its St. Peters' facility became operational in the first quarter of 1997, supplying developmental wafers to semiconductor equipment manufacturers and semiconductor customers worldwide.
In the second quarter of 1997, the Company announced a capital investment of approximately $250 million to expand 300 millimeter production capacity and to accelerate process development. The investment provides the funding for the construction of a 300 millimeter integrated development line at an existing 200 millimeter manufacturing site in Utsunomiya, Japan, and additional 300 millimeter crystal growing, wafer processing, and epitaxial deposition equipment at its St. Peters' facility. The new 100,000 square foot facility in Japan is scheduled to commence operation in mid-1998.
The demand for production volumes of 300 millimeter wafers is not expected to develop until the year 2000 or beyond as pilot lines of semiconductor customers use the next two years to fully develop the tool set and processes necessary to fabricate integrated circuits on 300 millimeter wafers.
RAW MATERIALS
Polysilicon is the predominant raw material used in the Company's production process. The Company produces approximately one-half of its total polysilicon requirements and purchases the remainder of its requirements from third parties. The availability of polysilicon is primarily dependent upon the adequacy of manufacturing capacity, as the basic materials from which polysilicon is derived are readily available. The Company believes that an adequate supply of polysilicon in 1998 will be obtained through internal sourcing and purchase contracts with third parties.
The Company was the first manufacturer to successfully use granular polysilicon. Granular polysilicon has fluid-like transport properties and minimizes contamination risks due to reduced handling, which enhances the crystal growth process for larger diameter wafers. In December 1997, the Company signed a non-binding letter of intent to form a granular polysilicon joint venture with Tokuyama Corporation, the world's second largest producer of polysilicon and Marubeni Corporation, one of Japan's leading trading companies. The Company would contribute its existing granular polysilicon operation, and the other parties would contribute cash and technology. The Company would retain a 40% interest in the new joint venture.
MANUFACTURING PROCESS
Silicon wafers for the semiconductor industry are extremely complex materials with characteristics such as high purity levels, crystallographic perfection and precise mechanical tolerances. Electronic grade silicon is one of the most refined materials in the world, having an impurity level of no more than one part per billion. Requirements for crystallographic perfection, mechanical tolerances and cleanliness in the manufacture of silicon wafers are at levels that stretch manufacturing processes to the limits of measurement, and necessitate that certain processes be conducted in state of the art "clean rooms." The silicon wafer manufacturing process is comprised of three principal phases: the crystal growth process, the wafer slicing process and the wafer finishing process.
Crystal Growth Process
The first step in the wafer manufacturing process is the formation of a large, silicon single crystal or ingot. This process commences with the melting of polysilicon, together with minute amounts of electrically active "dopant" elements such as arsenic, boron, phosphorous or antimony in a quartz crucible.
Once the melt has reached the desired temperature, a perfect silicon crystal, or "seed" is lowered into the melt. The melt is slowly cooled to the required temperature, and crystal growth begins around the seed. As the growth continues, the seed is slowly extracted or "pulled" from the melt. The temperature of the melt and the speed of extraction govern the diameter of the ingot, and the dopant concentration in the melt governs the electrical properties of the silicon wafers to be made from the ingot. This is a complex, proprietary process requiring many control features on the crystal-growing equipment.
Wafer Slicing Process
After the ingots are grown, they are extracted from the crystal pulling furnaces and allowed to cool. The ingots are then ground to the specified diameter, following which the ingots are sliced into thin wafers. Next, a multi-step process using precision lapping machines, edge contour machines and chemical etchers prepares the wafers for the surface polishing steps.
Wafer Finishing Process
Final polishing and cleaning processes give the wafers the clean, defect-free, and superflat mirror polished surfaces required for the fabrication of semiconductor devices. For wafer polishing, the Company currently uses its proprietary, ninth-generation polishers together with its innovative colloidal silica chemical-mechanical polishing process. Polishing with colloidal silica solutions was one of MEMC's early inventions that first allowed solid state devices to move from individual circuits to the complexities of today's integrated circuits. Some of the Company's products are further processed by the deposition of a thin, electrically different layer of silicon on the polished surface of the wafer to make epitaxial wafers.
RESEARCH AND DEVELOPMENT
The Company's current research and development efforts are driven by its business strategy and focus mainly on the development and improvement of large diameter and advanced silicon wafer products and manufacturing processes, enhancement of existing products and increases in efficiency. The Company works closely with customers in developing new products and refining existing products to attempt to meet the needs of the marketplace. A recent product and innovation of the Company's research and development program include the development of 300 millimeter diameter wafers. The Company continues to develop processes to reduce microdefects in crystals and is developing a new class of crystal called High Performance Silicon. Further improvements are also being made in the polishing process and processes to improve productivity of the Company's single slice epitaxial reactors.
The market for silicon wafer products is characterized by rapid technological change and product innovation. MEMC believes that continued and timely development of new products and enhancements to existing products is necessary for it to maintain its competitive position. Accordingly, the Company devotes a significant portion of its resources to research and development programs and seeks to maintain close relationships with its customers to remain responsive to their product needs. Expenditures for product development activities (both in the laboratory and on the manufacturing line that are included in research and development expenses and in cost of goods sold, respectively) during 1997, 1996 and 1995, excluding expenditures by the Company's joint ventures, were $88.4 million, $61.3 million, and $46.0 million, respectively, representing 9.0%, 5.5%, and 5.2% of the Company's net sales for the respective periods.
MARKETING AND SALES
MEMC markets substantially all of its product through a direct sales force. The Company believes an essential element of its marketing strategy is its establishment and maintenance of close relationships with its customers through multi-functional teams comprised of technical, marketing and sales, and manufacturing personnel. These teams work closely with customers in developing their new production facilities, qualifying the Company's products for use at such new facilities and maintaining qualification at all existing manufacturing facilities. Sales are principally completed pursuant to indicative-only contracts of one year or less that indicate expected volumes and specify price.
The Company's close relationships with its customers are necessitated in part by the lengthy and expensive "qualification" process pursuant to which silicon wafer manufacturers, and their individual facilities, are qualified to become suppliers of a particular product to their customers. The Company is aware of changing customer needs and
targets its manufacturing to produce wafers uniquely tuned to each customer's process and requirements. For 1997, over half of the Company's sales were generated by the following ten customers: Advanced Micro Devices, Inc.; Chartered Semiconductor Manufacturing, Ltd.; Cypress Semiconductor Corporation; International Business Machines Corporation; Motorola, Inc.; National Semiconductor Corporation; Philips Electronics N.V.; Samsung Electronics Co., Ltd.; SGS-Thomson Microelectronics N.V.; and Texas Instruments Incorporated (Texas Instruments). Texas Instruments individually exceeded 10% of the Company's sales in 1997. The highest rate of future growth in the semiconductor market is expected to be in the Asia Pacific region. The Company believes it is well positioned in the Asian market with manufacturing facilities or joint ventures in China, Japan, Malaysia, South Korea and Taiwan.
SEASONALITY
The Company's operating results are subject to quarterly and annual fluctuations principally due to MEMC's dependence on the performance of the semiconductor industry, which historically has been cyclical, as well as to the moderate seasonality of the Company's operations. MEMC attributes such seasonality to the purchasing patterns of its customers and to the fewer number of production days in December, January, and February.
COMPETITION
The silicon wafer manufacturing industry is highly competitive. Significant competitive factors in the silicon wafer market include quality, reliability and device line performance, price, flexibility, the size of each manufacturer's qualified customer base, available capacity, customer support and breadth of product line. The Company believes that it competes favorably in each of these areas. The Company also believes its presence with manufacturing facilities in all key world areas gives it a competitive edge.
In many instances, the Company must compete for customers who have already made substantial financial and operational commitments to products offered by the Company's competitors. To sell its products to these customers, the Company must demonstrate that the performance, price, and other benefits of its products justify the costs associated with the lengthy qualification process. Additionally, three of the Company's customers produce a portion of their own requirements for silicon wafers.
The Company believes that its wafers are highly competitive with other products in the marketplace. However, the Company's competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive performance characteristics.
STRATEGIC ALLIANCES
MEMC has entered into a number of strategic alliances as part of its strategy to leverage its capital, to enter expanding markets, to forge closer working relationships with its principal customers and to broaden the geographic diversification of its operations. The Company has alliances with prominent partners around the world, and such joint ventures operate in China, South Korea, Taiwan, and the United States.
RISK FACTORS
This Annual Report on Form 10-K contains "forward-looking" statements within the meaning of the Securities Litigation Reform Act of 1995, including those concerning 300 millimeter wafers and MEMC's operations. In addition to the business risks and uncertainties discussed elsewhere in this Annual Report on Form 10-K, the following are important risk factors which could cause actual results and events to differ materially from those contained in any forward-looking statement contained herein or made elsewhere by or on behalf of the Company.
Impact of Downturns in the Semiconductor Industry
MEMC's business depends in large part upon market demand for semiconductors and products utilizing semiconductors. The semiconductor industry historically has been cyclical and has experienced periodic downturns, which have had an adverse impact on the semiconductor industry and suppliers to the semiconductor industry -- including manufacturers of silicon wafers. Overcapacity, inventory reduction and weak pricing in the semiconductor industry, particularly for the DRAM (memory) market, led to reduced orders for silicon wafers that began in the second half of 1996 and gradually recovered throughout 1997. In addition, the Company and its competitors expanded at a faster rate than silicon consumption growth during the past two years, resulting in overcapacity in the silicon wafer industry. The combination of these market conditions led to significant price reductions throughout 1997 that are continuing into 1998. MEMC's ability to reduce expenses during this downturn has been limited by the Company's significant investment in property and equipment, continued investment in research and development, expanded capacity and marketing necessary to maintain extensive worldwide customer service and support capabilities. A continuation of this or any future downturns in the semiconductor industry could have a material adverse effect on MEMC's operating results.
Capacity
MEMC is expanding certain of its manufacturing facilities around the world. These capacity additions require significant capital investment and result in a significant increase in fixed and operating expenses. In addition, the Company has incurred additional indebtedness to finance such expenditures and investments.
Growth in the worldwide supply of silicon wafers has outpaced the growth in worldwide demand in recent periods, principally with respect to 200 millimeter wafers. This has resulted in insufficient revenue levels to offset these additional costs, adversely impacting the Company's operating results. Although some of MEMC's competitors have announced adjustments to the rate at which they will implement capacity expansion programs, many have already added significant capacity for the production of 200 millimeter silicon wafers. The amount of capacity to be placed into production by MEMC and its competitors could dramatically increase the worldwide supply of silicon wafers, increase the downward pressure on prices and materially adversely impact the Company's operating results. Further, the Company has no firm information with which to determine the capacity and expansion plans of its competitors.
Highly Competitive Industry
The silicon wafer industry is highly competitive. MEMC faces substantial competition from established silicon wafer manufacturers throughout the world, some of which have substantial financial, technical, engineering and manufacturing resources, particularly from very large, well-capitalized Japanese manufacturers. The Company believes that the Japanese companies with which it competes benefit from their dominance of the technologically advanced Japanese market, which represented approximately 39% of the worldwide silicon wafer market in 1997. In particular, Shin-Etsu Handotai is the largest supplier of silicon wafers in Japan and the world, providing it with the sales and technology base to compete effectively throughout the world. If MEMC were unable to continue to compete effectively with Japanese silicon wafer manufacturers, the Company's operating results could be materially adversely affected.
MEMC competes principally on the basis of product quality and performance and price, as well as technical innovation, customer service and product availability. The Company's competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics. Over the past two years, the Japanese yen and Deutsche mark have declined significantly relative to the U.S. dollar which has given our competitors certain cost advantages in the marketplace. Competitive pressures or downturns in the semiconductor industry may necessitate price reductions which could have a material adverse effect on MEMC's operating results.
Although the Company believes that it has certain technological, geographic and other strengths relative to its competitors, realizing and maintaining such strengths will require a continued high level of investment by MEMC in research and development, marketing and customer service and support and increased manufacturing capacity. An inability to maintain such investments could have a material adverse effect on the Company's operating results. MEMC may be required to seek additional equity or debt financing to fund these investments. There can be no assurance that such additional financing will be available when needed, or if available, will be on historically equivalent terms.
Changing Customer Specifications
The silicon wafer industry is subject to rapid technological change, new and enhanced product specification requirements and manufacturing processes as well as evolving industry standards. The Company's ability to remain competitive will depend upon its ability to develop technologically advanced products and processes, and to meet the increasingly demanding requirements of its customers on a cost-effective basis. As a result, MEMC expects to continue to make a significant investment in research and development. Despite its past successes, there can be no assurance that the Company will continue to be successful in the introduction, marketing and cost-effective manufacturing of any of its new products, or that MEMC will be able to develop new or enhanced products and processes that satisfy customer needs or achieve market acceptance. The failure to develop, enhance and introduce products and manufacturing processes successfully could have a material adverse effect on the Company's competitive position and operating results.
Limited Number of Principal Customers
Historically, MEMC has sold a significant portion of its products to a limited number of principal customers. In 1997, ten customers generated over one-half of its sales. Likewise, the majority of the sales of POSCO Huls Co., Ltd. (PHC) were to one customer. There can be no assurance that the Company and PHC will realize equivalent sales from their top customers in the future. The loss, or a significant curtailment, of purchases by one or more top customers could have a material adverse effect on MEMC's operating results.
International Operations
The Company expects that international sales will continue to represent a significant percentage of its total sales. In addition, a significant portion of its manufacturing operations is located outside of the United States. MEMC's risk exposure from these sales is primarily limited to the Japanese yen, Deutsche mark and European ecu. The Company's risk exposure from expenses at international manufacturing facilities is concentrated in Italian lira, Japanese yen and Malaysian ringgit. Although MEMC generally hedges receivables denominated in foreign currencies at the time of sale and foreign currency denominated intercompany loans by entering into long dated forward exchange contracts, there can be no assurance that exchange rate fluctuations will not have a material adverse effect on the Company's operations in the future.
MEMC's unconsolidated joint ventures have sales denominated in the U.S. dollar and manufacturing expenses primarily denominated in the U.S. dollar, Korean won and New Taiwanese dollar. PHC, the Korean joint venture, also has significant debt denominated in the U.S. dollar and Korean won. Likewise, Taisil, the Taiwanese joint venture, has significant debt denominated in the U.S. dollar and New Taiwanese dollar. The Company's unconsolidated joint ventures utilize the U.S. dollar as their functional currency and do not hedge net Korean won and New Taiwanese exposures. Net Korean won exposure has not been hedged, as the forward contract market is limited and the depth and price of such contracts is not attractive. Thus far, net New Taiwanese dollar exposure has not been hedged; however, given the broader market and depth for forward contracts in Taiwan, forward contracts may be considered from time to time.
International sales and operations may be adversely affected by the imposition of governmental controls, fluctuations in local or U.S. dollar currencies, export license requirements, restrictions on the export of technology, political instability, trade restrictions, changes in tariffs and difficulties in staffing and managing international operations. Although the Company believes that the geographical distribution of its operations may limit the effects on MEMC from regulatory, political and other factors, there can be no assurance that such factors will not have a material adverse effect on the Company's operations in the future or require MEMC to modify its current business practices.
Manufacturing Interruptions
Interruption of operations at any of the Company's primary manufacturing facilities, including labor disputes, equipment failure, shortages of raw materials or supplies, or other causes could result in delays or cancellations of shipments of silicon wafers. There can be no assurance that alternate capacity would be available on a timely basis or at all, thereby potentially resulting in a loss of customers. The interruption of operations for those or other reasons could materially adversely affect MEMC's operating results.
Dependence on Certain Suppliers
The Company obtains certain of its raw materials from a limited number of suppliers. MEMC believes that it has developed reliable sources for all of its raw materials and that qualified alternative sources could be obtained to supply such materials. Although the Company currently produces approximately one-half of its polysilicon and sources a substantial portion of the remainder under multi-year contracts with major polysilicon producers, a prolonged inability to obtain raw materials, such as polysilicon, or increases in the prices of raw materials resulting from tight supplies, could have a material adverse effect on MEMC's operating results.
Fluctuations in Operating Results
The Company's operating results are subject to quarterly and annual fluctuations principally due to MEMC's dependence on the performance of the semiconductor industry, which historically has been cyclical, as well as to the moderate seasonality of the Company's operations. MEMC attributes such seasonality to the purchasing patterns of its customers and to the fewer number of production days in December, January and February. Additional factors that may influence the Company's operating results include the timing of the receipt of orders from major customers, product mix, competitive pricing pressures and the delay between the incurrence of expenses to further develop marketing and service capabilities and expand capacity, and the realization of benefits from such improved capabilities. Moreover, customers may cancel or reschedule shipments, and production difficulties could delay shipments. These factors are difficult to forecast, and these and other factors could have a material adverse effect on MEMC's quarterly or annual operating results.
Attraction and Retention of Qualified Personnel
The Company is dependent upon a limited number of key management and technical personnel. In addition, MEMC's future success will depend in part upon its ability to attract and retain highly qualified personnel. The Company competes for such personnel with other companies, academic institutions, government entities and other organizations. There can be no assurance the Company will be successful in hiring or retaining qualified personnel, or that any of MEMC's personnel will remain employed by the Company. Any loss of key personnel or the inability to hire and retain qualified personnel could have a material adverse effect on MEMC's operating results.
Volatility of Stock Price
Based on the trading history of the Company's common stock, MEMC believes that factors such as quarterly fluctuations in the Company's financial results, announcements of technological innovations or new products by MEMC or its competitors, the state of the semiconductor industry, pricing in the silicon wafer industry, developments in patent or other proprietary rights and in the Company's relationships with its customers have caused and are likely to continue to cause the market price of MEMC's common stock to fluctuate significantly. Technology company stocks in general have experienced extreme price and trading volume fluctuations that often have been unrelated to the operating performance of these companies. This market volatility may adversely affect the market price of the Company's common stock. In addition, an actual or anticipated shortfall in net sales, gross margin or net earnings from security analysts' expectations could have an immediate effect on the trading price of MEMC's common stock in any given period.
Proprietary Information and Intellectual Property
The Company believes that the success of its business depends primarily on its proprietary technology, information and processes and know-how, rather than on patents or trademarks. Nevertheless, MEMC attempts to protect its intellectual property rights with respect to its products and manufacturing processes through patents, trademarks and trade secrets when appropriate as part of its ongoing research, development and manufacturing activities, and has increased its efforts to obtain patent protection for its technology in response to an increase in patent applications by the Company's competitors. Much of MEMC's proprietary information and technology relating to the manufacturing process is not patented and may not be patentable. Therefore, there can be no assurance that the Company will be able to adequately protect its technology, that competitors will not be able to develop similar technology independently, that the claims allowed on any patents held by MEMC will be sufficiently broad to protect the Company's technology or that foreign property laws will adequately protect MEMC's intellectual property rights.
Year 2000
Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. The Company is assessing the readiness of its computer systems to handle dates beyond the year 1999. The Company expects to implement successfully the systems and programming changes necessary to address year 2000 issues and does not believe that the cost of such actions will have a material adverse effect on the Company's results of operations or financial condition.
Year 2000 issues create risk for the Company from unforeseen problems in its own computer systems and from customers, suppliers, financial institutions and other organizations with which the Company conducts financial transactions worldwide. Such failures by the Company's and/or third parties' computer systems could have a material adverse effect on the Company's ability to conduct business.
EMPLOYEES
At December 31, 1997, the Company had approximately 7,700 full-time employees and 300 temporary workers worldwide. MEMC has not experienced any material work stoppages at any of its facilities during the last several years. The Company believes its relationships with its employees are satisfactory.
GEOGRAPHIC INFORMATION
Information regarding MEMC's foreign and domestic operations is contained in Note 19 on page 39 of the Company's 1997 Annual Report to Stockholders (the 1997 Annual Report), which information is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers is contained in Item 10 of Part III of this Report (General Instruction G) and is incorporated herein by reference.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 501 Pearl Drive (City of O'Fallon), St. Peters, Missouri 63376, and its telephone number at that address is (314) 279-5500. The principal manufacturing and administrative facilities of the Company and its joint ventures currently comprise approximately 4.0 million square feet and are situated in the following locations:
The Company believes that its existing facilities and equipment are well maintained, in good operating condition and are adequate to meet its current requirements. The extent of utilization of such facilities varies from plant to plant and from time to time during the year.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party or to which any of its property is subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The narrative or tabular information regarding the market for the Company's common equity and related stockholder matters required by this item is set forth under Note 18, "Unaudited Quarterly Financial Information", and under "Stockholder Information" on pages 38 and 44, respectively, of the Company's 1997 Annual Report, which information is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The tabular information (including the footnotes thereto) required by this item is set forth under "Five Year Selected Financial Data" on page 12 of the Company's 1997 Annual Report, which information is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is set forth on pages 13 through 20 of the Company's 1997 Annual Report, which information is incorporated herein by reference. In addition, the paragraphs contained in "To our Stockholders" in the section entitled "Looking Ahead" on pages 4 and 5 of the Company's 1997 Annual Report is incorporated herein by reference, and the information contained in the "Safe Harbor Statement" section of the "Stockholder Information" on page 44 of the Company's 1997 Annual Report is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company appearing on pages 21 through 39, and the Independent Auditors' Report thereon of KPMG Peat Marwick LLP appearing on page 41 of the Company's 1997 Annual Report, are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days of year-end (the 1998 Proxy Statement). The information required by this item with respect to directors will be set forth in the 1998 Proxy Statement and is incorporated herein by reference.
The following is a list, as of March 1, 1998, of the names and ages of the executive officers of MEMC and all positions and offices with the Company presently held by the person named. There is no family relationship between any of the named persons.
Each executive officer has held the same position or another executive position with the Company during the past five years, except as set forth in the 1998 Proxy Statement or as follows:
Mr. Stolze was a partner with KPMG Peat Marwick LLP from 1977 until joining the Company in June 1995. Dr. Schmitz became an Executive Vice President in June 1995. Dr. DeLuca served as Director, Manufacturing Technology from May 1992 to November 1994 and has been a Corporate Vice President since November 1994. Ms. Hennelly was a Vice President from October 1990 until she became a Corporate Vice President in May 1996. Mr. Jansky served as Plant Manager of MEMC's St. Peters facility from 1992 until he became a Corporate Vice President in January 1997. Mr. Pastorek was Director, Materials Management of the Company from 1990 to 1993 and served as Director, Business Development-Asia of the Company from 1993 until he became a Corporate Vice President in December 1995. Mr. Sherrill was a director of the Company from May 1993 to May 1995. Dr. Shimada was Vice President of the Company from 1993 to May 1996 and has been a Corporate Vice President of the Company since May 1996. Dr. Shimada is also President and Representative Director of MEMC Japan Ltd., a wholly owned subsidiary of the Company. Dr. Knothe served as Director, Engineering for Huls AG from 1987 to 1994; Director, Corporate Development Plastics Business for Huls AG from 1994 to 1995; and Director, Corporate Development Electronic Materials for Huls AG from 1995 until joining the Company in January 1998 as a Vice President.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under (i) "BOARD MEETINGS AND COMMITTEES; COMPENSATION OF DIRECTORS -- Directors Fees"; (ii) "SUMMARY COMPENSATION TABLE" and related footnotes; (iii) "OPTION/SAR GRANTS IN LAST FISCAL YEAR" and related footnotes; (iv) "AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES" and related footnotes; (v) "Pension Plan"; (vi) "Pension Plan Table (1)" and "Pension Plan Table (2)"; (vii) "Employment Agreements", and (viii) "Compensation Committee Interlocks and Insider Participation" of the 1998 Proxy Statement are incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under "Security Ownership of Management and Certain Beneficial Owners" of the 1998 Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under "Certain Relationships and Related Party Transactions" of the 1998 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its subsidiaries, included on pages 21 through 39 of the 1997 Annual Report, and the Independent Auditors' Report thereon of KPMG Peat Marwick LLP appearing on page 41 of such report are incorporated herein by reference.
Consolidated Statements of Operations -- Years ended December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets -- December 31, 1997 and 1996.
Consolidated Statements of Cash Flows -- Years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. FINANCIAL STATEMENT SCHEDULES
3. EXHIBITS
See the Exhibit Index beginning at page 16 of this report. For a listing of all management contracts and compensatory plans or arrangements required to be filed as exhibits to this report, see the Exhibits listed under Exhibit nos. 10-n through 10-r and Exhibit nos. 10-aa, 10-oo, 10-pp, 10-xx, 10-yy, 10-ggg, 10-hhh, 10-iii, 10-nnn, 10-ooo, and 10-ppp of the Exhibit Index. The following Exhibits listed in the Exhibit Index are filed with this report.
4. REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MEMC ELECTRONIC MATERIALS, INC.
By: /s/ LUDGER H. VIEFHUES ---------------------------------------- Ludger H. Viefhues Chief Executive Officer and Director
Date: March 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
Independent Auditors' Report ----------------------------
The Board of Directors and Stockholders MEMC Electronic Materials, Inc.
Under date of January 26, 1998, we reported on the consolidated balance sheets of MEMC Electronic Materials, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, as contained in the 1997 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1997. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in item 14(2) of this Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri January 26, 1998
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors POSCO HULS Co., Ltd.:
We have audited the accompanying balance sheets of POSCO HULS Co., Ltd. as of December 31, 1997 and 1996, and the related statements of earnings, appropriation (disposition) of retained earnings (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the Auditing Standards, as approved by the Ministry of Finance and Economy of the Republic of Korea, which are substantially equivalent to generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in note 1(b) to the financial statements, the operations of the Company have been significantly affected and will continue to be affected for the foreseeable future by the liquidity crisis and related adverse economic circumstances in the Republic of Korea.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of POSCO HULS Co., Ltd. as of December 31, 1997 and 1996, and the results of its operations, the changes in its retained earnings (deficit), and its cash flows for the years then ended in conformity with the Financial Accounting Standards, as approved by the Ministry of Finance and Economy of the Republic of Korea.
The accompanying financial statements for the year ended December 31, 1995 were not audited by us and, accordingly, we express no opinion or other form of assurance on the financial statements for the year ended December 31, 1995.
As discussed in note 1(a) to the financial statements, due to a change in reporting currency effective from January 1, 1997, the accompanying 1996 and 1995 financial statements have been restated to the new reporting currency of United States dollars.
The Financial Accounting Standards in the Republic of Korea, as approved by the Ministry of Finance and Economy, vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected results of operations for each of the years in the three-year period ended December 31, 1997 and stockholders' equity as of December 31, 1997 and 1996, to the extent summarized in note 18 to the financial statements.
/s/ KPMG San Tong Corp.
Seoul, Korea January 10, 1998
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies ------------------------------------------
(a) Basis of Presenting Financial Statements ----------------------------------------
The accounting records of Posco HULS Co., Ltd. (the "Company") are expressed in Korean Won and maintained in accordance with the financial accounting standards of the Republic of Korea, which may differ in some material respects from international accounting standards or the accounting principles and standards of the country of the reader. For the convenience of the reader, the statutory financial statements have been condensed, restructured, and translated into English, with certain expanded descriptions. Certain information included in the statutory financial statements, not required for a fair presentation of the Company's financial position or results of operations, is not presented in the accompanying financial statements.
During 1997, the Company determined that its financial position and results of operations could be presented with more relevance if presented in U.S. dollars rather than Korean Won. Accordingly, the accompanying 1996 and 1995 financial statements have been restated into the new reporting currency of U.S. dollars. The U.S. dollar amounts are determined by translating the Korean Won amount of assets and liabilities into U.S. dollars at the basic exchange rate as of the balance sheet date (W1,695.80 to US$1 (except for amounts denominated in foreign currencies which are translated at W1,415.20 to US$1 (see note 1(k))) and W844.20 to US$1 as of December 31, 1997 and 1996, respectively), the amount of common stock at the basic exchange rate on the date of issuance, and income and expense items at the average basic exchange rate for the year (W988 to US$1, W807 to US$1 and W771 to US$1 for the years ended December, 31, 1997, 1996 and 1995, respectively). The effect of changes in exchange rates are reflected as "cumulative translation adjustment" within stockholders' equity.
(b) Economic Environment --------------------
In late 1997, the Republic of Korea began to undergo a liquidity crisis resulting in significant adverse economic circumstances and significant depreciation in the value of Korean Won. In order to address this situation, the Government of the Republic of Korea sought assistance from the International Monetary Fund and announced a comprehensive policy package intended to address the structural weaknesses in the Korean economy and financial sector. While the reform policies are intended to alleviate the economic difficulties and improve the economy over time, the immediate effects could include slower economic growth, a reduction in the availability of credit, an increase in interest rates, an increase in taxes, an increased rate of inflation, significant volatility in the value of the Korean Won, an increase in the number of bankruptcies of Korean entities, and unrest resulting from a significant increase in unemployment. These conditions and similar conditions in other countries in the Asia Pacific region could have a material adverse effect on the operations of the Company. The accompanying financial statements reflect management's current assessment of the possible impact of this economic situation on the financial position of the Company. Actual results could differ from management's current assessments and such differences could be material. In addition, the effect on the Company's financial position of future developments and access to further financial information concerning the Company's customers, suppliers, financiers and others and their ability to continue to transact with the Company cannot presently be determined. The financial statements therefore may not include all adjustments that might ultimately result from these adverse economic conditions.
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies, Continued -----------------------------------------------------
(c) Marketable Securities ---------------------
Marketable securities, which are certificates of deposit, are stated at cost plus incidental expenses, determined by the weighted average method.
(d) Inventories -----------
Inventories, excluding materials-in-transit, are stated at the lower of cost (the weighted average method) or market value. Materials-in-transit are valued at cost determined by the individual identification method.
(e) Fixed Assets ------------
Fixed assets are stated at cost. The Company charges maintenance, repairs and minor renewals to expense as incurred. Major renewals and improvements are capitalized. Interest incurred during the construction and installation of manufacturing plant is capitalized as part of fixed assets.
Depreciation is computed by the straight-line method at rates based on the following estimated useful lives:
(f) Accounting for Leases ---------------------
The Company accounts for leases as operating or financing leases in accordance with the Accounting Standards for Leases.
Under the operating lease method, lease expenses are charged to operations as actual payments are made or due. Prepaid lease expense relating to operating leases is amortized over the lease term of the related lease.
Under the financing lease method, the principal amount of leased equipment, which is the present value of total minimum lease payments, is recorded as a leased asset and a long-term obligation under financing leases. The leased assets are amortized over the term of the related lease. Interest expense on long-term obligations under financing leases is recorded when incurred.
(g) Deferred Charges ----------------
Bond issue costs and research and development costs are expensed as incurred.
(h) Discount on Bonds Issued ------------------------
Discount on bonds issued is amortized over a period from the date of issue to the maturity of the related bonds using the straight-line method.
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies, Continued -----------------------------------------------------
(i) Retirement and Severance Benefits ---------------------------------
Employees who have been with the Company for more than one year are entitled to lump-sum payments based on current rates of pay and length of service when they leave the Company. A portion of the liability is covered by an insurance policy. The Company's estimated liability under the plan has been accrued in the accompanying financial statements at the amount which would be payable if all employees left the Company at the balance sheet date.
Under the National Pension Scheme of Korea, the Company is required to transfer a certain portion of retirement allowances of employees to the National Pension Fund. The amount transferred will reduce the retirement and severance benefit amount payable to the employees when they leave the Company and is reflected in the accompanying financial statements.
(j) Revenue Recognition -------------------
Local sales are recognized when goods are delivered and inspection by the customer is completed, while export sales are recognized as of the shipment date.
(k) Foreign Currency Translation ----------------------------
Monetary assets and liabilities denominated in foreign currencies are translated into Korean Won at the balance sheet date. In accordance with a change in financial accounting standards in the Republic of Korea in 1997, net losses on long-term foreign currency denominated monetary assets and liabilities and the current portion of long-term debt denominated in foreign currencies are permitted to be recorded as a deferred foreign currency translation loss and amortized over the remaining repayment period of the respective assets and liabilities. In 1996, such gains or losses were recorded in current results of operations. The 1996 financial statements are not affected by such change in financial accounting standards.
As of December 31, 1997 and 1996, monetary assets and liabilities denominated in a foreign currency are translated into Korean Won at W1,415.20 to US$1 and W844.2 to US$1, respectively, the rates of exchange permitted under the financial accounting standards in the Republic of Korea. On December 31, 1997, the basic rate of exchange was W1,695 to US$1. Had the basic rate of exchange been used to translate foreign currency assets and liabilities as of December 31, 1997, the recorded amount of net foreign currency liabilities would be increased by $21,559 and net earnings reported by the Company would be reduced by $5,606 for the year ended December 31, 1997.
Subsequent to December 31, 1997, the rate of exchange between the Korean Won and the US dollar has remained extremely volatile. Accordingly, the Korean Won amounts at which monetary assets and liabilities denominated in a foreign currency are reflected in the accompanying financial statements may vary significantly from the amounts that would be reported were such items translated at a later date. Due to the volatility in the exchange rate, it is not practical to estimate the effect changes in the value of the Korean Won would have on the accompanying financial statements.
(l) Income Taxes ------------
Provision is not made in the accounts to reflect the future tax benefit (expense) on the interperiod allocation of income taxes resulting from certain income and expense items being treated differently for financial reporting purposes than tax computation purposes.
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(1) Summary of Significant Accounting Policies, Continued -----------------------------------------------------
(m) Earnings per Share ------------------
Earnings per common share is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding during each period.
(n) Statement of Cash Flows -----------------------
For purposes of the statement of cash flows, the Company considers all highly liquid marketable securities with a maturity of three months or less to be cash equivalents.
(o) Use of Estimates ----------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the period. Actual results could differ from those estimates.
(2) Cash and Cash Equivalents -------------------------
Cash and cash equivalents at December 31, 1997 and 1996 consist of the following:
(3) Inventories -----------
Inventories at December 31, 1997 and 1996 consist of the following:
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(4) Prepaid Expenses and Other Current Assets -----------------------------------------
Prepaid expenses and other current assets at December 31, 1997 and 1996 consist of the following:
(5) Pledged Assets and Guarantees Provided by Others ------------------------------------------------
(a) The following assets are pledged as collateral for short-term borrowings and long-term debt at December 31, 1997 and 1996.
(b) In addition, to secure borrowings of the Company, its shareholders have provided guarantees as follows:
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(6) Investments and Other Assets ----------------------------
Investments and other assets at December 31, 1997 and 1996 consist of the following:
(7) Fixed Assets ------------
Fixed assets at December 31, 1997 and 1996 consist of the following:
Property, plant and equipment, and inventories were insured against fire and other damage up to an amount of $315,734 and $774,873 at December 31, 1997 and 1996, respectively.
(8) Financing Leases ----------------
The Company has leased silicon wafer manufacturing and other facilities from Hanmi Leasing Co., Ltd. and Korea Development Leasing Co., Ltd. under financing lease contracts. The following is a schedule of minimum future payments on financing leases as of December 31, 1997:
The following is a summary of the acquisition cost of leased assets and accumulated depreciation thereon at December 31, 1997 and 1996 which are included in machinery and equipment:
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(9) Operating Leases ----------------
The Company leases certain equipment and machinery from Korea Industrial Leasing Co., Ltd. and accounts for each of the leases as an operating lease. The following is a summary of minimum lease payments under operating leases:
Operating lease expenses of $459, $1,433 and $1,561 were charged to operations in the years ended December 31, 1997, 1996 and 1995, respectively.
(10) Stockholders and Related Party Transactions -------------------------------------------
The Company was established under the Foreign Capital Inducement Law in December, 1991 as a joint venture company to manufacture and sell silicon wafers and related products. Dividends are paid to shareholders in Korean Won. The stockholders of the Company and their ownership percentages at December 31, 1997 are as follows:
The following are major balances and transactions with stockholders at and for the years ended December 31, 1997, 1996 and 1995:
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(11) Retirement and Severance Benefits ---------------------------------
Details of changes in retirement and severance benefits for the years ended December 31, 1997, 1996 and 1995 are summarized as follows:
(12) Bonds Issued ------------
Bonds issued at December 31, 1997 and 1996 are summarized as follows:
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(13) Long-term Debt --------------
Long-term debt at December 31, 1997 and 1996 is summarized as follows:
The following is a schedule of payments of long-term debt as of December 31, 1997:
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(14) Appropriated Retained Earnings ------------------------------
Appropriated retained earnings as of December 31, 1997 and 1996 are summarized as follows:
Through December 31, 1996, appropriations of retained earnings for the year, which are determined by the resolution of shareholders at the beginning of the following year, are not reflected in the current years' financial statements. However, under revised financial accounting standards, such appropriations are to be reflected in financial statements of the year to which it relates rather than in the year of appropriation. Retained earnings as of December 31, 1996 have been reclassified for comparative purposes.
The Korean Commercial Code requires the Company to appropriate as legal reserve an amount equal to at least 10% of cash dividends for each accounting period until the reserve equals 50% of stated capital. This legal reserve may be used to reduce a deficit or it may be transferred to common stock as a stock dividend.
Under the Tax Exemption and Reduction Control Law, the Company is allowed to make certain deductions from corporate income taxes. The Company is, however, required to appropriate from retained earnings the amount of the tax benefit obtained and transfer such amount into a reserve for business rationalization. This legal reserve may be used to reduce a deficit or may be transferred to common stock as a stock dividend.
Under the Tax Exemption and Reduction Control Law, the Company is allowed to make certain deductions from taxable income and set up reserves for technology development, reserve for export loss and reserve for overseas market development by appropriating retained earnings. The unused portion of the reserves is generally added back to taxable income over three to four years after a certain grace period. These voluntary reserves may be restored to unappropriated retained earnings by a future stockholders' resolution.
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(15) Income Taxes ------------
The Company is subject to a number of taxes based upon taxable earnings which result in the following normal tax rates:
Under the Foreign Capital Inducement Law (FCIL), the Company is entitled to the exemption from corporation taxes to the extent of its foreign equity portion for the periods stipulated in the Law.
A reconciliation between net earnings before income taxes and taxable income (tax loss carryforward) for the years ended December 31, 1997, 1996 and 1995 is as follows:
(16) Commitments and Contingencies -----------------------------
(a) As of December 31, 1997, the Company has provided 8 blank checks and 10 blank notes in connection with various contracts.
(b) As of December 31, 1997, the Company has entered into bank overdraft agreements for borrowing up to $8,256 with five banks and has also entered into borrowing arrangements with three short-term financing companies.
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(16) Commitments and Contingencies, Continued ----------------------------------------
(c) Under a technical license agreement with MEMC, the Company paid a lump-sum royalty during 1995 and 1996 for the transfer of a technical license to manufacture silicon wafers. The Company is also required to pay MEMC a royalty at a specified percentage of net sales for 5 years from the commencement of commercial production, which took place in 1995.
(17) Earnings Per Share ------------------
Earnings per share for the years ended December 31, 1997, 1996 and 1995 are calculated as follows:
(18) Reconciliation to United States Generally Accepted Accounting ------------------------------------------------------------ Principles ----------
The accompanying financial statements are prepared in accordance with Financial Accounting Standards in the Republic of Korea (Korean GAAP), which differ in certain significant respects from generally accepted accounting principles in the United States (U.S. GAAP). The significant differences are described below. Other differences do not have a significant effect on either consolidated net earnings or stockholders' equity.
The estimated effects of the significant adjustments to net earnings and stockholders' equity which would be required if U.S. GAAP were applied instead of Korean GAAP are summarized as follows:
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(18) Reconciliation to United States Generally Accepted Accounting ------------------------------------------------------------- Principles, Continued ---------------------
The tax effects of temporary differences that resulted in significant portions of the deferred tax assets liabilities at December 31, 1997 and 1996 computed under U.S. GAAP, and a description of the financial statement items that created these differences follow:
(Continued)
(18) Reconciliation to United States Generally Accepted Accounting ------------------------------------------------------------ Principles, Continued ---------------------
(a) Deferred Income Taxes ---------------------
Under Korean GAAP, a provision is not made in the accounts to reflect the future tax effects resulting from certain income and expense items being treated differently for financial reporting purposes and tax computation purposes.
However, U.S. GAAP requires the recognition of deferred tax assets and liabilities created by temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The tax rate used to calculate deferred tax assets and liabilities was changed from 18.5% in 1996 to 20.3% in 1997 to reflect the normal corporation tax rate and exemptions statutorily available under FCIL. The effect of this increase on the effective tax rate was to increase the net deferred tax asset and increase net earnings by $5,401 in 1997.
(b) Pre-operating and Start-up Costs --------------------------------
Certain preoperating and start-up costs are deferred for Korean GAAP and amortized in equal annual amounts over 5 years from 1993. These costs would be expensed as incurred under U.S. GAAP.
(c) Capital Leases --------------
Under Korean GAAP, the Company has leased certain equipment and machinery and accounts for such leases as operating leases. However, under U.S. GAAP those leases would be classified as capital leases. Under U.S. GAAP, equipment under capital lease is recorded as an asset and a liability is recorded for the present value of minimum lease payments at the inception of the lease. This equipment is depreciated over the estimated useful life of the asset.
(d) Bond Issue Costs ----------------
The Company charged bond issue costs to current income as incurred. However, under U.S. GAAP, those bond issues costs are amortized over the term of the related bonds.
(e) Useful Life of Machinery and Equipment --------------------------------------
In 1995, the Company changed the estimated useful life of certain machinery to 4 years from 6 years. For U.S. GAAP purposes, the Company continues to depreciate the machinery and equipment over its estimated useful life of 6 years.
(f) Inventories -----------
For U.S. GAAP, inventories are adjusted for the effect of depreciation in relation to the useful life difference of machinery and equipment and depreciation on capitalized interest.
(Continued)
POSCO HULS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(18) Reconciliation to United States Generally Accepted Accounting ------------------------------------------------------------ Principles, Continued ---------------------
(g) Depreciation on Capitalized Interest ------------------------------------
In 1994, the Company recorded a prior year adjustment under Korean GAAP for interest that should have been capitalized to construction-in-progress in 1993 and is being depreciated over the useful life of the related fixed assets. For U.S. GAAP purpose, the interest amount was charged to earnings in 1993.
(h) Foreign Currency Translation ----------------------------
In accordance with a change in financial accounting standards in the Republic of Korea in 1997, net losses on long-term foreign currency denominated monetary assets and liabilities and the current portion of long-term debt denominated in foreign currencies are recorded as a deferred foreign currency translation loss and amortized over the remaining repayment period of the respective assets and liabilities. In 1996, such losses were expensed as incurred. However, for U.S. GAAP purposes, all such foreign currency translation losses are expensed as incurred in all periods.
(i) Change of Functional Currency -----------------------------
Effective October 1, 1997, solely for reporting under U.S. GAAP, the Company changed its functional currency from the Korean Won to the U.S. dollar. Significant changes in economic facts and circumstances have necessitated such a change in functional currency. Such facts and circumstances include: (a) an increasing percentage of the Company's borrowings and funding requirements being denominated in U.S. dollars; (b) an increasing percentage of the Company's revenues and costs being denominated in U.S. dollars; and (c) an increasing level of interdependency with MEMC.
In accordance with U.S. GAAP, the accounting bases of nonmonetary assets and liabilities, primarily property, plant and equipment, have been adjusted to reflect the difference between the historical exchange rate when the transaction occurred and the exchange rate at September 30, 1997, with a corresponding adjustment to the "cumulative translation adjustment" included as a separate component of stockholders' equity. This change in functional currency also affected for U.S. GAAP purposes the determination of results of operations (including foreign currency exchange gain or loss), and the components of stockholders' equity. As such change in functional currency will be effected for U.S. GAAP purposes, this determination and its effects are included in the U.S. GAAP reconciliation information.
Independent Auditors' Report ----------------------------
The Board of Directors Taisil Electronic Materials Corporation:
We have audited the accompanying balance sheet of Taisil Electronic Materials Corporation as of December 31, 1997, and the related statements of operations, changes in stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the Republic of China, which are substantially similar to auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Taisil Electronic Materials Corporation as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles in the Republic of China.
As discussed in note (2)(b) to the financial statements, the Company changed its reporting currency in 1997 to the United States dollar.
As discussed in note (2)(i) to the financial statements, as of December 31, 1997, Taisil Electronic Materials Corporation changed its method of accounting for pensions.
Accounting principles generally accepted in the Republic of China vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected stockholders' equity as of December 31, 1997, and the results of operations for the year then ended to the extent summarized in note 15 to the financial statements.
/s/ KPMG Peat Marwick
Taipei, Taiwan January 14, 1998
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
(Amounts expressed in thousands of US dollars or New Taiwan dollars, unless otherwise stated) (Amounts and information with respect to 1996 and 1995 are unaudited)
(1) Organization and Business Environment -------------------------------------
Taisil Electronic Materials Corporation (the "Company"), was founded in the Hsinchu Science-Based Industrial Park of the Republic of China ("ROC") on September 26, 1994. Prior to June 30, 1996, the Company was a development stage enterprise whose activities primarily involved the construction of its manufacturing facilities, financial planning, testing equipment, and recruiting and training employees. The Company started its main activities of research, development, production and sale of the latest generation silicon wafers in July 1996.
During the latter half of 1997, many Asian countries experienced problems related to currency valuations and the health of their financial systems. As a result of the significant portion of the Company's cash flows and monetary assets and liabilities being denominated in US dollars, these problems did not have a significant impact on the Company in 1997. In 1998, the Company foresees the resulting slowdown in Asian economies as possibly having a negative impact on the Company's sales volumes and overall operations. The Company does not however, expect the currency valuation problems and potential slowdown in Asian economies to have a significant adverse effect on its financial position.
The accompanying financial statements reflect management's current assessments of the possible impact of this economic situation on the financial position of the Company. Actual results could differ from management's current assessments. In addition, the effect on the Company's financial position of future developments and access to further financial information concerning the Company's customers, suppliers, financiers and others and their ability to continue to transact with the Company cannot presently be determined.
(2) Significant Accounting Policies -------------------------------
(a) Generally Accepted Accounting Principles ----------------------------------------
The financial statements have been prepared in accordance with accounting principles generally accepted in the Republic of China ("ROC GAAP"). ROC GAAP vary in certain significant respects from accounting principles generally accepted in the United States of America ("US GAAP"). Application of US GAAP would have affected stockholders' equity as of December 31, 1997 and 1996, and the results of operations for each of the two years then ended, to the extent summarized in note 15.
(b) Change in functional and reporting currency -------------------------------------------
Effective October 1, 1997, the Company changed its functional currency from the New Taiwan dollar (NT$) to the US dollar ($). Significant changes in economic facts and circumstances have necessitated such a change in functional currency. Such facts and circumstances include: (i) increasing US dollar denominated revenues and costs, and (ii) ongoing changes in sources of financing from obligations denominated in New Taiwan dollars to obligations denominated in US dollars.
In conjunction with the change in the Company's functional currency to US dollars, the Company's reporting currency was also changed from New Taiwan dollars to US dollars to enable financial information to be presented with more relevance. Accordingly, the financial statements for all prior years have been restated to the new reporting currency of US dollars.
(Continued)
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
The change in functional currency effective October 1, 1997 was recognized through the US dollar translated amounts of the nonmonetary assets, primarily property, plant and equipment, at September 30, 1997 becoming the accounting basis for these assets at October 1, 1997 and for subsequent periods. Additionally, through September 30, 1997, a cumulative translation adjustment has been included as a separate component of stockholders' equity reflecting the translation of the New Taiwan dollar functional currency financial statements to the newly adopted and retroactively applied US dollar reporting currency. This cumulative translation adjustment will remain as a separate component of stockholders' equity.
(c) Foreign currency transactions -----------------------------
Foreign currency transactions in currencies other than the functional currency (hereinafter referred to as "foreign currencies", which prior to October 1, 1997, includes the US dollar; and subsequent to September 30, 1997, includes the New Taiwan dollar) are recorded at rates in effect at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at year-end are translated at the exchange rate then prevailing. Gains or losses resulting from settlement of such transactions or translations are included in non-operating income.
(d) Short-term investments ----------------------
Investments are carried at the lower of cost or market value. The market value of unlisted trust funds is determined on the basis of the trust fund's net worth on the balance sheet date. Costs of investments sold are determined on the weighted-average basis.
(e) Inventories -----------
Inventories are stated at the lower of cost or market value. Cost is determined using the weighted-average method. The market value of raw materials is determined on the basis of replacement cost. Market values of work in process and finished goods are determined on the basis of net realizable value.
(f) Property, plant and equipment -----------------------------
Property, plant and equipment are stated at acquisition cost which includes the capitalization of interest and certain expenses incurred in connection with the construction of plant and installation of machinery and equipment. Depreciation on plant and equipment is provided on the straight-line method over the estimated useful lives of the respective assets.
(g) Technology fees ---------------
The Company has entered into a technical assistance service agreement with MEMC Electronic Materials, Inc. involving information and processes embodying technology, equipment design, and assets and property rights for the manufacture of silicon wafers. Payments for such technology are capitalized and amortized over five years from the commencement of commercial production.
(Continued)
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
(h) Organization cost and deferred charges --------------------------------------
The costs incurred in the establishment of the Company are capitalized and amortized over five years commencing from the start of commercial operations. Charges for the installation of gas and power systems are included in other assets and amortized over five years.
(i) Employee retirement plan ------------------------
The Company adopted a retirement plan covering substantially all employees in December 1995. Benefits are based on the employees' years of service. Starting in August 1996, in accordance with ROC Labor Standards Law, the Company made monthly contributions to a pension fund with the Central Trust of China. As approved by the authorities, the funding rate was set at 2% of salaries and wages. Pension cost is recognized based on the amount to be appropriated. Retirement benefits to employees will be paid from the retirement fund first, and if the fund is insufficient, the balance will be charged to current operations.
Effective December 31, 1997, the Company adopted ROC Statements of Financial Accounting Standards ("SFAS") No. 18, "Accounting for Pensions," for its retirement plan. Based on the provisions of SFAS No. 18, pension costs charged to earnings are actuarially computed. The measurement date was the balance sheet date. Accrued pension liabilities were recognized for the excess of accumulated benefit obligation over fair value of plan assets. Net periodic pension costs will be recognized starting in 1998. The effect of this accounting change is not material to the 1997 financial statements.
(j) Income tax ----------
Effective January 1, 1995, the Company adopted ROC SFAS No. 22, "Accounting for Income Tax". Under the asset and liability approach of SFAS No. 22, deferred tax liabilities are recognized for tax consequences of taxable temporary differences by applying enacted statutory tax rates. Deferred tax assets are recognized for tax consequences of deductible temporary differences, tax credits and operating loss carryforwards. A valuation allowance is provided when some portion or all of the deferred tax assets is not expected to be realized. Deferred income tax is reported in the financial statements as a current or noncurrent item based on the classification of the related asset or liability which causes the temporary differences. Deferred income taxes not relating to assets or liabilities are classified as current or noncurrent based on the expected period that the temporary differences will reverse.
(k) Forward exchange rate contracts -------------------------------
The Company enters into foreign currency forward contracts to hedge future operating cash outflows in currencies other than the functional currency. Foreign currency forward contracts reduce the Company's exposure to the risk that eventual foreign currency cash outflows will be adversely affected by changes in exchange rates. Foreign currency gains and losses under the above arrangements are not deferred. Foreign currency forward contracts are entered into with major commercial European banks that have high credit ratings. From time to time, the Company uses foreign currency forward contracts to hedge purchases of capital equipment. Foreign currency gains and losses for such purchases are deferred as part of the basis of the asset.
(Continued)
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
(l) Loss per share --------------
Loss per share is computed based on the weighted average number of common shares outstanding.
(3) Transactions with Related Parties ---------------------------------
(a) Name and relationship ---------------------
(b) Significant transactions with related parties ---------------------------------------------
(i) Net sales to and corresponding amounts receivable from related party are as follows:
Purchases from and corresponding amounts payable to related party are as follows:
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
(ii) Financing ---------
The Company's long-term loans from CTB are summarized as follows:
(iii) Technology, royalty and commission agreements ---------------------------------------------
The Company has entered into various agreements with MEMC which provide for payments related to, among other things, technology, royalties and commissions. The Company paid MEMC, net of amounts received, $1,312, $2,703 and $5,000 in 1997, 1996 and 1995, respectively, pursuant to the terms of such agreements. The related amounts outstanding of $2,048 and $203 as of December 31, 1997 and 1996, respectively, are included in accrued expenses.
(iv) Guarantees ----------
MEMC and CSC have provided guarantees over certain of the Company's long-term loans and bills payable up to a maximum of $92,863 and $65,965, respectively.
(4) Cash ----
Details of cash as of December 31, 1997 and 1996 were as follows:
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
(5) Short-term investments ----------------------
The Company had invested $2,053 in open-ended trust funds as of December 31, 1997. The market value of such investments as of December 31, 1997 was approximately $2,065.
(6) Inventories -----------
The components of inventories as of December 31, 1997 and 1996, are summarized below:
As of December 31, 1997 and 1996, insurance coverage of inventories amounted to approximately $18,383 and $11,891, respectively.
(7) Property, Plant and Equipment -----------------------------
The construction in progress consists of various payments for plant construction and engineering design and consulting.
Certain property, plant and equipment is pledged as security for long-term loans. See note 13.
Insurance coverage on property, plant and equipment and the third-party liability as of December 31, 1997 and 1996, amounted to approximately $199,617 and $204,727, respectively.
(8) Short-term Loans and Short-term Bills Payable ---------------------------------------------
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
As of December 31, 1997 and 1996, certain time deposits were pledged as security for the issuance of short-term bills payable. See note 13.
(9) Long-term Loans ---------------
The following is a schedule of payments of long-term debt as of December 31, 1997:
The ranges for interest rates on these borrowings for the years ended December 31, 1997, 1996 and 1995 were 6.00% to 7.605%, 0.85% to 7.495% and 6.075% to 7.825%, respectively. As of December 31, 1997 and 1996, total unused lines of credit for short-term and long-term loans amounted to approximately $263,435 and $246,327, respectively.
(Continued)
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
As December 31, 1997 and 1996, certain time deposits and property, plant and equipment were pledged as security for long-term loans. See note 13.
(10) Pension -------
Effective December 31, 1997, the Company adopted SFAS No. 18, "Accounting for Pensions". The measurement date for the actuarial study of the Company's pension obligation was December 31, 1997. The funded status of the Company's pension scheme as of December 31, 1997, was as follows:
Actuarial assumptions are as follows:
Pension expenses were $198, $135 and $0, respectively, for the years ended December 31, 1997, 1996 and 1995, respectively. As December 31, 1997 and 1996, the balances of the Company's pension fund maintained with the Central Trust of China were $270 and $64, respectively. As of December 31, 1997 and 1996, the unpaid balances of $63 and $71, respectively, were included in accrued expenses.
As of December 31, 1997 and 1996, no employee qualified for retirement.
(11) Stockholders' Equity --------------------
(a) Capital stock -------------
On October 13, 1995, the board of directors decided to issue an additional 60,000,000 shares at NT$10 par value per share for cash on January 20, 1996.
On July 17, 1996, the stockholders' meeting approved the issuance of an additional 55,000,000 shares at NT$10 par value per share for cash on July 17, 1996. After this capital increase, the total issued capital was $94,942. The above increases were all registered and approved by the authorities.
On July 25, 1997, the stockholders' meeting approved the issuance of an additional 60,000,000 shares at NT$10 par value per share for cash on December 25, 1997. After this capital increase, the total issued capital was $113,783. The above increase is still in the process of being registered.
(Continued)
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
(b) Distribution of earnings ------------------------
In accordance with ROC Company Law, the Company's articles of incorporation stipulate that 10% of annual earnings (net of losses of prior years, if any) is to be retained as statutory reserve until such retention equals the amount of issued share capital. The distribution of remaining earnings should be proposed by the board of directors and decided in a stockholders meeting. At least 0.01% of the distribution should be appropriated as employees' bonuses when the stockholders approve an earnings distribution. Future dividends will be distributed in NT dollars.
(c) Accumulated deficit ------------------
According to the ROC Company Law, if accumulated deficit is over one-half of the common stock, the board of directors shall convene a meeting of shareholders and make a report on such loss.
(12) Income Tax ---------- The Company's earnings are subject to an income tax rate of 20%. For the years ended December 31, 1997, 1996 and 1995, income tax expense (benefit) was as follows:
The Company's income tax benefit for the years ended December 31, 1997, 1996 and 1995, differed from the expected income tax, computed by applying the 20% tax rate on loss before income tax as shown on the financial statements, as follows:
The temporary differences, tax credits, loss carryforwards and their effects on deferred income tax assets are as follows as of December 31, 1997 and 1996:
According to the ROC Income Tax Law, pre-operating expenses of the Company during the development stage are amortized for tax purposes on a straight-line basis over a period of not less than five years.
ROC tax regulations stipulate that investment tax credits used by the Company each year shall not exceed 50% of the current income tax payable, and any unused balance can be carried forward to the following four years, subject to the same percentage limitation for each year except in the year of expiration when any remainder can be used for offset of income tax payable in that year. As of December 31, 1997, the estimated unused income tax credits, resulting
(Continued)
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
from investment in machinery and equipment and research and development, available to reduce future tax liabilities and the years of expiration were as follows:
According to the Statute for the Establishment and Administration of Science-Based Industrial Park, the Company may, within two years from the date on which it begins to sell its products or to render services, select any fiscal year in the four-year period from such date for exemption from profit-seeking enterprise income tax for a period of five consecutive years from the starting date of such fiscal year. As of December 31, 1997, the Company has not chosen the starting date.
Pursuant to the ROC Income Tax Law, the Company's tax losses may be carried forward for up to five years to reduce future taxable income. As of December 31, 1997, the estimated tax loss carryforwards were as follows:
The tax authorities have examined and assessed the Company's income tax returns through 1995.
(13) Pledged Assets --------------
As of December 31, 1997 and 1996, pledged assets were as follows:
(14) Commitments -----------
(a) Operating lease ---------------
The Company is leasing its plant site from the Science-Based Industrial Park Administration Bureau for a period of 20 years, expiring December 31, 2014. In accordance with the lease agreement, rental payments are subject
(Continued)
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
to adjustment as and when the government reappraises the land value. The current rent is NT$12,390 ($380) per year.
Future minimum lease payments as of December 31, 1997, under the existing non-cancelable agreement are:
(b) Technical Service Agreement ---------------------------
In accordance with a technical assistance agreement between the Company and MEMC, the Company is required to pay MEMC fixed payments and the timing of such payments is based on reaching certain milestones. As of December 31, 1997, the remaining balance of such payments to be paid under the agreement amounted to $2,500.
In addition, the Company pays MEMC an annual royalty based on net sales and operating income.
(c) Purchase of equipment ---------------------
As of December 31, 1997 and 1996, the Company had outstanding letters of credit amounting to approximately $3,242 and $7,636, respectively, and was committed to purchase equipment with a total estimated cost of $15,369 and $70,764, respectively.
(d) Syndicated term loan agreement ------------------------------
The Company entered into certain syndication loan agreements with ABN AMRO Bank and seven other banks (the "Banks") for the Company's Phase I and II planned expansion. In accordance with the syndication loan agreements, the Banks granted credit facilities to the Company for the purchase of machinery and equipment. The commitment fee is charged at a certain rate per annum payable quarterly, based on the committed-to withdraw but unborrowed balance, if any. Commitment fees paid for the years ended December 31, 1997 and 1996 amounted to $44 and $46, respectively.
(15) Reconciliation to United States Generally Accepted Accounting Principles ------------------------------------------------------------------------
The Company's financial statements have been prepared in accordance with ROC GAAP. ROC GAAP vary in certain significant respects from US GAAP. Differences which have a significant effect on the Company's results of operations and stockholders' equity are as follows:
(a) Employee retirement benefits ----------------------------
Under ROC GAAP, the pension expense recorded by the Company in connection with its defined benefit pension plan was based on the amount of the contributions made by the Company to the pension plan as required
(Continued)
TAISIL ELECTRONIC MATERIALS CORPORATION
Notes to Financial Statements
by government regulations. Under US GAAP, the accumulated pension obligation and pension expense is determined on an actuarial basis, assuming the Company first adopted this policy at the beginning of 1996 since it was not feasible to apply the actuarial basis at an earlier period. The impact of this difference is not significant to the Company's determination of results of operations or stockholders' equity under US GAAP for the periods presented.
(b) Technology fee --------------
Under ROC GAAP, the Company capitalizes and amortizes certain costs in connection with a technical assistance agreement entered into with a shareholder, MEMC. Under US GAAP, such payments are expensed as incurred or treated as a deemed dividend depending on the nature of the payment.
Net loss:
(16) Reclassifications ----------------- Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform with the 1997 presentation for comparison purposes. These reclassifications do not have a significant impact on the financial statements.