FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.D.C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 26, 1998March 4, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number: 1-10658
Micron Technology, Inc.
State or other jurisdiction of incorporation or organization: Delaware
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Internal Revenue Service -- Employer Identification No. 75-1618004
8000 S. Federal Way, Boise, Idaho 83716-9632
(208) 368-4000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock as of
March 20, 1998April 5, 1999, was 212,736,975.250,395,896.
PARTPart I. FINANCIAL INFORMATION
ITEMItem 1. FINANCIAL STATEMENTSFinancial Statements
- -----------------------------
MICRON TECHNOLOGY, INC.
Consolidated Balance Sheets
(Dollars in millions, except for par value data)
February 26, August 28,
As of 1998 1997
- --------------------------------------------------------------- ------------- ----------
(Unaudited)
ASSETS
Cash and equivalents $ 561.1 $ 619.5
Liquid investments 373.8 368.2
Receivables 353.7 458.9
Inventories 448.0 454.2
Prepaid expenses 10.9 9.4
Deferred income taxes 81.5 62.2
-------- --------
Total current assets 1,829.0 1,972.4
Product and process technology, net 92.0 51.1
Property, plant and equipment, net 2,848.3 2,761.2
Other assets 69.8 66.6
-------- --------
Total assets $4,839.1 $4,851.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 578.9 $ 546.1
Short-term debt 10.6 10.6
Deferred income 4.9 14.5
Equipment purchase contracts 45.5 62.7
Current portion of long-term debt 98.0 116.0
-------- --------
Total current liabilities 737.9 749.9
Long-term debt 740.7 762.3
Deferred income taxes 284.1 239.8
Non-current product and process technology 10.0 44.1
Other liabilities 48.7 35.6
-------- --------
Total liabilities 1,821.4 1,831.7
-------- --------
Minority interests 142.9 136.5
Commitments and contingencies
Common stock, $0.10 par value, authorized 1.0 billion shares,
issued and outstanding 212.6 million and 211.3 million
shares, respectively 21.3 21.1
Additional capital 513.4 483.8
Retained earnings 2,340.1 2,378.2
-------- --------
Total shareholders' equity 2,874.8 2,883.1
-------- --------
Total liabilities and shareholders' equity $4,839.1 $4,851.3
======== ========
March 4, September 3,
As of 1999 1998
- --------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and equivalents $ 428.9 $ 558.8
Liquid investments 1,353.7 90.8
Receivables 591.9 489.5
Inventories 364.9 291.6
Prepaid expenses 20.0 8.5
Deferred income taxes 65.4 61.7
---------- ----------
Total current assets 2,824.8 1,500.9
Product and process technology, net 215.9 84.9
Property, plant and equipment, net 3,581.6 3,035.3
Other assets 148.9 82.4
---------- ----------
Total assets $ 6,771.2 $ 4,703.5
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 560.2 $ 460.7
Short-term debt -- 10.1
Deferred income 7.5 7.5
Equipment purchase contracts 71.1 168.8
Current portion of long-term debt 102.9 98.6
---------- ----------
Total current liabilities 741.7 745.7
Long-term debt 1,574.4 758.8
Deferred income taxes 263.9 284.2
Other liabilities 85.7 61.4
---------- ----------
Total liabilities 2,665.7 1,850.1
---------- ----------
Minority interests 160.4 152.1
Commitments and contingencies
Common stock, $0.10 par value, authorized
1.0 billion shares, issued and
outstanding 250.2 million and 217.1
million shares, respectively 25.0 21.7
Class A Common Stock, $0.10 par value,
authorized 32 million shares, issued
and outstanding 15.8 million shares 1.6 --
Additional capital 1,829.3 565.4
Retained earnings 2,090.5 2,114.3
Accumulated other comprehensive loss (1.3) (0.1)
---------- ----------
Total shareholders' equity 3,945.1 2,701.3
---------- ----------
Total liabilities and shareholders' equity $ 6,771.2 $ 4,703.5
========== ==========
Certain fiscal 1998 amounts have been restated as a result of a pooling-of-
interests merger. See accompanying notes to consolidated financial statements.
1
MICRON TECHNOLOGY, INC.
Consolidated Statements of Operations
(Amounts in millions, except for per share data)
(Unaudited)
February 26, February 27,
For the quarter ended 1998 1997
- --------------------- ----- ----
Net sales $ 755.4 $ 876.2
------- -------
Costs and expenses:
Cost of goods sold 733.1 657.5
Selling, general and administrative 135.7 97.4
Research and development 69.9 46.8
Other operating expense (income) 24.2 (2.2)
------- -------
Total costs and expenses 962.9 799.5
------- -------
Operating (loss) income (207.5) 76.7
Gain on sale of investments and subsidiary stock, net 157.1 176.8
Gain on issuance of subsidiary stock, net 0.5 28.6
Interest income (expense), net 1.9 (1.8)
------- -------
Income (loss) before income taxes and minority interests (48.0) 280.3
Income tax benefit (provision) 8.9 (131.2)
Minority interests in net income (9.0) (6.4)
------- -------
Net (loss) income $ (48.1) $ 142.7
======= =======
Earnings (loss) per share:
Basic $ (0.23) $ 0.68
Diluted (0.23) 0.67
Number of shares used in per share calculations:
Basic 211.8 209.7
Diluted 211.8 213.4
March 4, February 26,
For the quarter ended 1999 1998
- --------------------------------------------------------------------------------
Net sales $ 1,025.8 $ 763.2
---------- ----------
Costs and expenses:
Cost of goods sold 745.1 740.5
Selling, general and administrative 125.5 138.6
Research and development 85.5 72.0
Other operating expense, net 18.4 24.2
---------- ----------
Total costs and expenses 974.5 975.3
---------- ----------
Operating income (loss) 51.3 (212.1)
Gain on sale of investments -- 157.1
Gain on issuance of subsidiary stock, net 0.4 0.5
Interest income (expense), net (11.7) 1.8
---------- ----------
Income (loss) before income taxes and
minority interests 40.0 (52.7)
Income tax benefit (provision) (16.1) 10.8
Minority interests in net income (1.5) (9.0)
---------- ----------
Net income (loss) $ 22.4 $ (50.9)
========== ==========
Earnings (loss) per share:
Basic $ 0.08 $ (0.24)
Diluted 0.08 (0.24)
Number of shares used in per share calculations:
Basic 264.3 215.2
Diluted 272.9 215.2
Certain fiscal 1998 amounts have been restated as a result of a pooling-of-
interests merger. See accompanying notes to consolidated financial statements.
2
MICRON TECHNOLOGY, INC.
Consolidated Statements of Operations
(Amounts in millions, except for per share data)
(Unaudited)
February 26, February 27,
For the six months ended 1998 1997
- ----------------------------------------------------- ------------- -------------
Net sales $1,710.0 $1,604.3
-------- --------
Costs and expenses:
Cost of goods sold 1,477.2 1,230.3
Selling, general and administrative 260.2 173.9
Research and development 133.8 94.0
Other operating expense (income) 28.8 (2.0)
-------- --------
Total costs and expenses 1,900.0 1,496.2
-------- --------
Operating (loss) income (190.0) 108.1
Gain on sale of investments and subsidiary stock, net 157.1 187.7
Gain on issuance of subsidiary stock, net 0.6 27.7
Interest income (expense), net 0.7 (3.9)
-------- --------
Income (loss) before income taxes (31.6) 319.6
Income tax benefit (provision) 2.3 (146.8)
Minority interests in net income (9.2) (9.5)
-------- --------
Net (loss) income $ (38.5) $ 163.3
======== ========
Earnings (loss) per share:
Basic $ (0.18) $ 0.78
Diluted (0.18) 0.77
Number of shares used in per share calculations:
Basic 211.6 209.4
Diluted 211.6 212.9
March 4, February 26,
For the six months ended 1999 1998
- --------------------------------------------------------------------------------
Net sales $ 1,819.4 $ 1,720.4
---------- ----------
Costs and expenses:
Cost of goods sold 1,422.8 1,487.6
Selling, general and administrative 228.5 264.6
Research and development 153.2 139.1
Other operating expense, net 26.1 28.8
---------- ----------
Total costs and expenses 1,830.6 1,920.1
---------- ----------
Operating loss (11.2) (199.7)
Gain (loss) on sale of investments (0.1) 157.1
Gain on issuance of subsidiary stock, net 1.6 0.6
Interest income (expense), net (19.6) 0.5
---------- ----------
Loss before income taxes and minority interests (29.3) (41.5)
Income tax benefit 11.4 6.3
Minority interests in net income (5.8) (9.2)
---------- ----------
Net loss $ (23.7) $ (44.4)
========== ==========
Loss per share:
Basic $ (0.09) $ (0.21)
Diluted (0.09) (0.21)
Number of shares used in per share calculations:
Basic 255.0 214.9
Diluted 255.0 214.9
Certain fiscal 1998 amounts have been restated as a result of a pooling-of-
interests merger. See accompanying notes to consolidated financial statements.
3
MICRON TECHNOLOGY, INC.
Consolidated Statements of Cash Flows
(Dollars in millions)
(Unaudited)
February 26, February 27,
For the six months ended 1998 1997
- ------------------------------------------------------------------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (38.5) $ 163.3
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 283.5 227.9
Gain on sale and issuance of subsidiary stock and investments (157.7) (215.4)
Change in assets and liabilities, net of effects of sale of MCMS:
Decrease in receivables 62.1 43.8
Increase in inventories (16.9) (80.3)
Increase in accounts payable and accrued expenses, net of
plant and equipment purchases 31.0 121.7
Increase in deferred income taxes 10.3 59.4
Increase (decrease) in long-term product and process
rights liability (34.1) 0.3
Other (13.8) 27.5
------- -------
Net cash provided by operating activities 125.9 348.2
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (381.3) (228.3)
Proceeds from sale of subsidiary stock, net of MCMS cash 235.9 199.9
Purchase of available-for-sale and held-to-maturity securities (482.4) (2.2)
Proceeds from sales and maturities of securities 490.5 32.7
Other 6.8 1.1
------- -------
Net cash provided by (used for) investing activities (130.5) 3.2
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments on lines of credit (90.0)
Proceeds from issuance of debt 31.4 70.7
Repayments of debt (72.5) (57.6)
Payments on equipment purchase contracts (20.1) (32.3)
Proceeds from issuance of stock by subsidiary 1.4 49.0
Other 6.0 15.6
------- -------
Net cash used for financing activities (53.8) (44.6)
------- -------
Net increase (decrease) in cash and equivalents (58.4) 306.8
Cash and equivalents at beginning of period 619.5 276.1
------- -------
Cash and equivalents at end of period $ 561.1 $ 582.9
======= =======
SUPPLEMENTAL DISCLOSURES
Interest paid $ (12.3) $ (15.4)
Income taxes refunded (paid) (3.4) 25.1
Noncash investing and financing activities:
Equipment acquisitions on contracts payable and capital leases 48.7 20.5
March 4, February 26,
For the six months ended 1999 1998
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (23.7) $ (44.4)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 408.9 283.6
Change in assets and liabilities, net
of effects of acquisition
Decrease in receivables 2.0 62.1
Increase in inventories (40.9) (16.9)
Increase in accounts payable and accrued
expenses, net of plant and equipment
payables 15.5 31.0
Decrease (increase) in deferred income
taxes (1.1) 10.3
Increase (decrease) in long-term product
and process rights liability 1.3 (34.1)
Gain on sale and issuance of subsidiary
stock (1.6) (157.7)
Other 17.5 (21.2)
---------- ----------
Net cash provided by operating activities 377.9 112.7
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (306.2) (381.3)
Proceeds from sale of subsidiary stock, net of
MCMS cash -- 235.9
Purchase of available-for-sale and held-to-maturity
securities (1,945.8) (482.4)
Proceeds from sales and maturities of securities 655.5 490.5
Proceeds from sale of equipment 18.6 31.0
Other (5.4) (17.2)
---------- ----------
Net cash used for investing activities (1,583.3) (123.5)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received in conjunction with acquisition 681.1 --
Proceeds from issuance of common stock 576.7 9.9
Proceeds from issuance of debt 34.0 31.4
Repayments of debt (66.3) (72.5)
Payments on equipment purchase contracts (153.5) (20.1)
Other 3.5 3.1
---------- ----------
Net cash provided by (used for) financing activities 1,075.5 (48.2)
---------- ----------
Net decrease in cash and equivalents (129.9) (59.0)
Cash and equivalents at beginning of period 558.8 619.5
---------- ----------
Cash and equivalents at end of period $ 428.9 $ 560.5
========== ==========
SUPPLEMENTAL DISCLOSURES
Interest paid $ (30.9) $ (30.0)
Income taxes (paid) refunded, net 171.4 (3.4)
Noncash investing and financing activities:
Equipment acquisitions on contracts payable
and capital leases 55.8 48.7
Cash received in conjunction with acquisition:
Fair value of assets acquired $ 949.3 $ --
Liabilities assumed (138.0) --
Debt issued (836.0) --
Stock issued (656.4) --
---------- ----------
$ 681.1 $ --
========== ==========
Certain fiscal 1998 amounts have been restated as a result of a pooling-of-
interests merger. See accompanying notes to consolidated financial statements.statements
4
Notes to Consolidated Financial Statements
(All tabular dollar amounts are stated in millions)
1. Unaudited interim financial statements
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly the consolidated financial
position of Micron Technology, Inc., and subsidiaries (the "Company" or "MTI"),
and their consolidated results of operations and cash flows. Certain
reclassifications have been made, none of which affect the results of
operations, to present theThe Company has
restated its prior period financial statements, onas a consistent basis.
This report on Form 10-Qresult of the merger with
Rendition, Inc. ("Rendition") which was accounted for the quarter ended February 26, 1998,as a pooling-of-interests.
These unaudited interim financial statements should be read in conjunction
with the consolidated financial statements and accompanying notes included in
the Company's Annual Report to Shareholders and/or Form 10-K for the year ended August 28, 1997.
2. Recently issued financial statements
In June 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. The adoption of SFAS No. 130 is effective for the Company in 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operation decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements is also to be provided. SFAS No. 131 is
effective for the Company in 1999.September 3, 1998.
3.2. Supplemental balance sheet information February 26, August 28,March 4, September 3,
1999 1998
1997
- ------------------------------------------------------ ------------ -----------------------------------------------------------------------------------------------------------------------------
Receivables
Receivables
- ------------------------------------------------------ ------------ -----------------------------------------------------------------------------------------------------------------------------
Trade receivables $283.4 $447.2$ 443.4 $ 294.4
Income taxes receivable 61.1 17.975.0 191.9
Allowance for returns and discounts (12.3) (29.3)(14.7) (11.9)
Allowance for doubtful accounts (7.5) (9.0)(6.3) (6.5)
Other receivables 29.0 32.1
------94.5 21.6
---------- $353.7 $458.9
======----------
$ 591.9 $ 489.5
========== ==========
Inventories
- ------------------------------------------------------ ------------ --------------------------------------------------------------------------------------------------------------------------
Finished goods $149.1 $128.6$ 159.2 $ 93.3
Work in progress 219.5 195.7146.1 139.6
Raw materials and supplies 79.4 129.9
------59.6 58.7
---------- $448.0 $454.2
======----------
$ 364.9 $ 291.6
========== ==========
Product and process technology
- ------------------------------------------------------ ------------ --------------------------------------------------------------------------------------------------------------------------
Product and process technology, at cost $158.8 $108.1$ 307.8 $ 161.7
Less accumulated amortization (66.8) (57.0)
------(91.9) (76.8)
---------- ----------
$ 92.0 $51.1
======215.9 $ 84.9
========== ==========
5
Notes to Consolidated Financial Statements, continued
3. Supplemental balance sheet information (continued) February 26, August 28,
1998 1997
Property, plant and equipment
- -------------------------------------------------- ------------ ----------------------------------------------------------------------------------------------------------------------------
Land $ 35.242.2 $ 35.434.8
Buildings 861.7 817.91,128.6 915.5
Equipment 2,635.0 2,416.23,635.3 3,025.7
Construction in progress 681.8 681.9
--------736.7 704.6
---------- 4,213.7 3,951.4----------
Less accumulated depreciation and amortization (1,365.4) (1,190.2)
--------5,542.8 4,680.6
(1,961.2) (1,645.3)
---------- $2,848.3----------
$ 2,761.2
======== =========3,581.6 $ 3,035.3
========== ==========
As of February 26, 1998March 4, 1999, property, plant and equipment included unamortized
costs of $654.7$709.5 million for the Company's semiconductor memory manufacturing
facility in Lehi, Utah, of which $618.2$648.8 million has not been
5
Notes to Consolidated Financial Statements, continued
placed in service and is not being depreciated. Test capacity is expected to be provided byTiming of the Lehi facility in the summer of 1998. Completioncompletion of the
remainder of the Lehi production facilities is dependent upon market conditions.
Market conditions which the Company expects to evaluate include, but are not
limited to, worldwide market supply and demand of semiconductor products and the
Company's operations, cash flows and alternative uses of capital. The Company
continues to evaluate the carrying value of the facility and as of March 4,
1999, it was determined to have no impairment.
Depreciation expense was $191.1 million and $372.2 million, respectively,
for the second quarter and first six months of 1999, and $138.4 million and
$267.9 million for the second quarter and first six months of 1998.
March 4, September 3,
1999 1998
- ----------------------------------------------------------------------------------------------------------------
Accounts payable and accrued expenses
- -----------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Accounts payable $259.7 $ 277.0313.3 $ 235.6
Salaries, wages and benefits 81.9 93.7102.3 85.6
Interest payable 32.1 7.7
Taxes payable other than income 31.3 44.5
Product and process technology payable 96.4 99.9
Taxes payable other than income 41.7 37.3
Interest payable 6.1 6.927.6 46.4
Other 93.1 31.3
------ -------
$578.953.6 40.9
---------- ----------
$ 546.1
====== =======560.2 $ 460.7
========== ==========
Debt
- ----------------------------------------------------------------- ------ -----------------------------------------------------------------------------------------------------------------------
Convertible Subordinated Notes payable, due October 2005, with
an effective yield-to-maturity of 8.4%, net of unamortized
discount of $68.8 million $ 671.2 $ --
Convertible Subordinated Notes payable, due July 2004,
interest rate of 7% $500.0 $ 500.0 500.0
Subordinated Notes payable, due October 2005, with an effective
yield-to-maturity of 10.6%, net of unamortized discount of
$40.3 million 169.7 --
Notes payable in periodic installments through July 2015,
weighted average interest rate of 7.43%7.39% and 7.33%7.38%,
respectively 297.5 331.3299.0 315.2
Capitalized lease obligations payable in monthly installments
through August 2002,2004, weighted average interest rate of
7.67%7.57% and 7.68%7.61%, respectively 36.1 40.7
Other 5.1 6.3
------ -------
838.7 878.337.4 42.2
---------- ----------
1,677.3 857.4
Less current portion (98.0) (116.0)
------ -------
$740.7(102.9) (98.6)
---------- ----------
$ 762.3
====== =======1,574.4 $ 758.8
========== ==========
DuringThe convertible subordinated notes due October 2005 (the "Convertible
Notes") with an effective yield-to-maturity of 8.4% have a face value of $740
million, a stated interest rate of 6.5% and are convertible into shares of the
fourth quarter of 1997company's common stock at $60 per share. The Convertible Notes are not subject
to redemption prior to October 2000 and are redeemable from that date through
October 2002 only if the Company issued $500 million incommon stock price is at least $78.00 for a specified
trading period. The Convertible Notes have not been registered with the
Securities and Exchange Commission, however the holder has registration rights.
(See note 7 - "Acquisition").
6
Notes to Consolidated Financial Statements, continued
The 7% convertible subordinated notes due July 1, 2004 which are convertible into
shares of the Company'scompany's common stock at $67.44 per share. The notes are not
subject to redemption prior to July 1999 and are redeemable from that date
through July 2001 only if the common stock price is at least $87.67 for a
specified trading period. The notes were offered under a $1 billion shelf
registration statement pursuant to which the Company may issue from time to time
up to $500 million of additional debt or equity securities. 6
Notes to Consolidated Financial Statements, continued
- -----------------------------------------------------
3. Supplemental balance sheet information (continued)
MTIThe subordinated
notes due October 2005 with a yield-to-maturity of 10.6% have a face value of
$210 million and a stated interest rate of 6.5%.
The Company has a $500$400 million unsecured revolving credit agreement expiring inwhich expires May
2000. The interest rate on borrowed funds is based on various pricing options at
the time of borrowing. The agreement contains certain restrictive covenants
pertaining to the Company's semiconductor operations, including a minimum fixed charge coverage
ratio and a maximum operating lossdebt
to equity covenant. As of February 26, 1998,March 4, 1999, MTI was in
compliance with all covenants under the facility and had no borrowings outstanding under
the agreement.
There can be no assurance that MTI will
continue to be able to meet the terms of the covenants and conditions and be
able to borrow under the credit agreement.
Micron Electronics, Inc. ("MEI"), aan approximately 63% owned subsidiary of the
Company ("MEI"), has an
aggregate of $141.7a $100 million unsecured credit facility expiring in revolvingJune
2001. Under the credit agreements which containfacility, MEI is subject to certain financial and other
covenants pertaining to MEI's operations, including a minimum EBITDA covenant,
certain minimum financial ratios and limitations on the amount of
dividends declared or paid by MEI. For the quarter ended February 26, 1998,As of March 4, 1999, MEI was in
violation of its ratio of debt to EBITDA covenant, which excludes the effect of
the gain from the sale of MCMS. MEI obtained a waiver for the violation of the
covenant, and as a result was eligible to borrow approximately $42 millionthe full
amount under its credit agreements and had no borrowings outstanding under the
credit lines, and had aggregate borrowings of approximately $8.6 million
outstanding under the agreements as of February 26, 1998.
The Company leases certain facilities and equipment underagreement.
3. Other operating leases.
Total rental expense, on allnet
Other operating leases was $4.1 million and $1.5 millionexpense for the second quarters of 1998 and 1997, respectively. Total rental expense in
the first six months of 1998 and 1997 was $7.0 and $2.9, respectively. Minimum
future rental commitments under operating leases aggregate $35.5 million as of
February 26, 1998 and are payable as follows (in millions): 1998, $5.8; 1999,
$7.5; 2000, $7.2; 2001, $6.0 and 2002 and thereafter, $9.0.
4. Gains on investments and subsidiary stock transactions
On February 26, 1998, MEI completed the sale of 90% of its interest in MCMS,
Inc. ("MCMS"), formerly Micron Custom Manufacturing Services, Inc. and formerly
a wholly-owned subsidiary of MEI, resulting in a consolidated pre-tax gain of
$157 million (approximately $38 million or $0.18 per share after taxes and
minority interests). In exchange for the 90% interest in MCMS, MEI received
$249.2 million in cash. The sale was structured as a recapitalization of MCMS,
whereby Cornerstone Equity Investors IV, L.P. ("Cornerstone"), other investors
and certain members of MCMS management, including Robert F. Subia, then a
director of MEI, acquired the 90% interest in MCMS.
In a public offering in February 1997, MTI sold 12.4 million shares of MEI
common stock for net proceeds of $200 million and MEI sold 3 million newly
issued shares for net proceeds of $48 million, resulting in consolidated pre-tax
gains of $164 million and $25 million, respectively, from these transactions
(for a total of approximately $94 million or $0.44 per share after taxes). The
sales reduced the Company's ownership of the outstanding MEI common stock from
approximately 79% to approximately 64%. The Company also recorded pre-tax gains
totaling $22 million for 1997 relating to sales of investments. The Company has
recognized a deferred tax liability on the resultant gain from the sale of MEI
common stock in the second quarter of 1997.
5.1999 includes a $15
million charge to write down certain flat panel display assets, $5 million of
loss recognized on joint venture investments, and a $4 million charge for the
cost of consolidating the Company's PC operations in Japan. Other operating
income (expense)expense for the first quarter of 1999 was partially offset by $5 million from
cancellation of a compensation program.
Other operating expense for the second quarter of 1998 includes charges of
$13 million associated with the Company's PC operations resulting from employee
termination benefits and consolidation of domestic and international operations,
and a $3 million write-offfor the write off of abandoned in-development software development costs. In addition, other operating
expense includesprojects, and
$4 million related to the disposal and write-downwrite down of semiconductor memory
operations equipment.
7
Notes to Consolidated Financial Statements, continued
6.4. Income taxes
The effective tax rate for the second quarter and first six months of 1999
was 40% and 39%, respectively, primarily reflecting the U.S. corporate income
tax rate and the net effect of state taxation. In April 1999, certain of the
Company's foreign operations were granted favorable tax benefit intreatment. The Company
is currently evaluating permanent reinvestment of foreign earnings and
anticipates the effective rate will decline by several percentage points. Taxes
on earnings of domestic subsidiaries not consolidated for tax purposes may cause
the effective tax rate to vary significantly from period to period.
The effective tax rate for the second quarter and first six months of 1998
was 19%20% and 7%15%, respectively. The effectiveincome tax rate for the provision of income taxes was 47% and 46%, respectively, for the corresponding
periods of 1997. The effective tax rate primarily reflects (1) the statutory
corporate income tax rate and the net effect of state taxation, (2) the effect
of taxes on the parent of the earnings or loss by domestic subsidiaries not
consolidated with the Company for federal income tax purposes and (3) in the
second quarter and
first six months of 1998 also reflects the impact of the write-off of a $4.1$4
million deferred tax asset relating to the Company's consolidation of its
NetFRAME enterprise server operations.
Because MTI must provide for tax on the earnings of domestic
subsidiaries not consolidated for tax purposes, the effective rate may vary
significantly from period7
Notes to period.
7. Purchase of minority interests
In the second quarter of 1998 the Company purchased the 11% minority interest
in its subsidiary, Micron Quantum Devices, Inc., for $26.2 million in stock and
stock options. The cost of the acquired interest was allocated primarily to
intangible assets related to flash semiconductor technology, which is being
amortized over a three-year period.
In the first quarter of 1998 the Company purchased the 12% minority interest
in its subsidiary, Micron Display Technology, Inc., for $21 million in cash.
The cost of the acquired interest was allocated primarily to intangible assets
related to field emission flat panel display technology, which is being
amortized over a three-year period.
8.Consolidated Financial Statements, continued
5. Earnings (loss) per share
Basic earnings per share is calculated using the average number of common
shares outstanding. Diluted earnings per share is computed on the basis of the
average number of common shares outstanding plus the effect of outstanding stock
options using the "treasury stock method" and convertible debentures using the
"if-converted" method.
Quarter ended Six months ended
---------------------------------- ----------------------------------
February 26, February 27, February 26, February 27,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) available for common shareholders,
Basic and Diluted $(48.1) $142.7 $ (38.5) $163.3
======= ====== ======= ======
Weighted average common stock outstanding Basic 211.8 209.7 211.6 209.4
Net effect of dilutive stock options -- 3.7 -- 3.5
------- ------ ------- ------
Weighted average common stock and common
stock equivalents Diluted 211.8 213.4 211.6 212.9
======= ====== ======= ======
Basic earnings per share $ (0.23) $ 0.68 $ (0.18) $ 0.78
======= ====== ======= ======
Diluted earnings per share $ (0.23) $ 0.67 $ (0.18) $ 0.77
======= ====== ======= ======
Earnings per share computations exclude stock options and
potential shares for convertible debentures to the extent that their effect
would have been antidilutive.
Quarter ended Six months ended
----------------------------- -----------------------------
March 4, February 26, March 4, February 26,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) available for common shareholders,
Basic and Diluted $ 22.4 $ (50.9) $ (23.7) $ (44.4)
========== ========== ========= ==========
Weighted average common stock outstanding - Basic 264.3 215.2 255.0 214.9
Net effect of dilutive stock options 8.6 -- -- --
---------- ---------- ---------- ----------
Weighted average common stock and common
stock equivalents - Diluted 272.9 215.2 255.0 214.9
========== ========== ========== ==========
Basic earnings (loss) per share $ 0.08 $ (0.24) $ (0.09) $ (0.21)
========== ========== ========== ==========
Diluted earnings (loss) per share $ 0.08 $ (0.24) $ (0.09) $ (0.21)
========== ========== ========== ==========
Antidilutive shares excluded from computation 0.3 12.8 0.7 11.0
========== ========== ========== ==========
6. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," as of the first quarter of 1999. SFAS
No. 130 establishes rules for the reporting and display of comprehensive income
and its components.
The components of comprehensive income are as follows:
March 4, February 26,
For the quarter ended 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 22.4 $ (50.9)
Foreign currency translation adjustment 0.2 (1.2)
Unrealized loss on investments (1.3) --
---------- ----------
Total comprehensive income (loss) $ 21.3 $ (52.1)
========== ==========
March 4, February 26,
For the six months ended 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Net loss $ (23.7) $ (44.4)
Foreign currency translation adjustment -- (0.5)
Unrealized loss on investments (1.3) --
---------- ----------
Total comprehensive loss $ (25.0) $ (44.9)
========== ==========
8
Notes to Consolidated Financial Statements, continued
7. Acquisition
On September 30, 1998, the Company completed its acquisition (the
"Acquisition") of substantially all of the memory operations of Texas
Instruments, Inc. ("TI") for a net purchase price of approximately $832.8
million. The Acquisition was consummated through the issuance of debt and equity
securities. In connection with the transaction, the Company issued 28.9 million
shares of MTI common stock, $740 million principal amount of Convertible Notes
and $210 million principal amount of Subordinated Notes. In addition to TI's net
memory assets, the Company received $681.1 million in cash. The Acquisition was
accounted for as a business combination using the purchase method of accounting.
The purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values. The Company and TI also entered into a
ten-year, royalty-free, life-of-patents, patent cross license that commenced on
January 1, 1999. The Company made royalty payments to TI under a prior cross
license agreement for operations through December 31, 1998.
The following unaudited pro forma information presents the consolidated
results of operations of the Company as if the Acquisition had taken place at
the beginning of each period presented.
March 4, February 26,
For the six months ended 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Net sales $ 1,874.7 $ 2,203.1
Net loss (39.5) (132.2)
Basic loss per share (0.15) (0.54)
Diluted loss per share (0.15) (0.54)
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the Acquisition occurred on the dates
indicated, or which may result in the future.
8. Merger
On September 14, 1998, the Company completed its merger with Rendition. The
Company issued approximately 3.6 million shares of Common Stock in exchange for
all of the outstanding stock of Rendition. The merger qualified as a tax-free
exchange and was accounted for as a business combination using the "pooling-of-
interests" method. Accordingly, the Company's financial statements have been
restated to include the results of Rendition for all periods presented. The
following table presents a reconciliation of net sales and net income (loss) as
previously reported by the Company for the quarter and six months ended February
26, 1998, to those presented in the accompanying consolidated financial
statements.
For the quarter ended MTI Rendition Combined
- ------------------------------------------------------------------------------------------------------------
Net sales $ 755.4 $ 7.8 $ 763.2
Net loss $ (48.1) $ (2.8) $ (50.9)
For the six months ended MTI Rendition Combined
- ------------------------------------------------------------------------------------------------------------
Net sales $1,710.0 $ 10.4 $ 1,720.4
Net loss $ (38.5) $ (5.9) $ (44.4)
9
Notes to Consolidated Financial Statements, continued
9. Equity investment
On October 19, 1998, the Company issued to Intel approximately 15.8 million
stock rights (the "Rights") for a purchase price of $500 million. The Rights
were converted into non-voting Class A Common Stock of the Company on January
14, 1999. The Class A Common Stock represented approximately 6% of the Company's
outstanding common stock as of March 4, 1999. The Class A Common Stock will
automatically be exchanged for (or converted into) the Company's common stock
upon a transfer to a holder other than Intel or a 90% owned subsidiary of Intel.
The Class A Common Stock issued to Intel has not been registered under the
Securities Act of 1933, as amended, and is therefore subject to certain
restrictions on resale. The Company and Intel entered into a securities rights
and restrictions agreement which provides Intel with certain registration rights
and places certain restrictions on Intel's voting rights and other activities
with respect to the shares of MTI Class A Common Stock or common stock. Intel
also has the right to designate a director nominee, acceptable to the Company,
to the Company's Board of Directors.
In consideration for Intel's investment, the Company has agreed to commit
to the development of direct Rambus DRAM ("RDRAM") and to certain production and
capital expenditure milestones and to make available to Intel a certain
percentage of its semiconductor memory output over a five-year period, subject
to certain limitations. The conversion ratio of the Class A Common Stock is
subject to adjustment under certain formulae at the election of Intel in the
event MTI fails to meet the production or capital expenditure milestones. No
adjustment will occur to the conversion ratio under such formulae (i) unless the
price of the Company's common stock for a twenty day period ending two days
prior to such milestone dates is lower than $31.625 (the market price of the
Company's common stock at the time of investment), or (ii) if the Company
achieves the production and capital expenditure milestones. In addition, if an
adjustment occurs, in no event will the Company be obligated to issue more than:
(a) a number of additional shares having a value exceeding $150 million, or (b)
15,810,277 shares.
10. Joint Ventures
In connection with the Acquisition, the Company acquired a 30% ownership
interest in TECH Semiconductor Singapore Pte. Ltd. ("TECH") and a 25% ownership
interest in KMT Semiconductor Limited ("KMT"), formerly KTI Semiconductor
Limited. TECH and KMT operate wafer fabrication facilities for the manufacture
of DRAM products. TECH, which operates in Singapore, is a joint venture between
the Company, the Singapore Economic Development Board, Canon Inc., and Hewlett-
Packard Singapore (Private) Limited, a subsidiary of Hewlett-Packard Company.
KMT, which operates in Japan, is a joint venture between the Company and Kobe
Steel, Ltd. TECH and KMT are collectively referred to herein as the "JVs."
The Company has rights and obligations to purchase all of the JVs'
production meeting the Company's specifications at pricing determined quarterly.
The Company accounts for its investments in these JVs under the equity method.
The Company recognized losses on its equity investments in the JVs of $5.4
million and $7.6 million in the second quarter and first six months of 1999,
respectively.
Product purchases from the JVs aggregated $103.5 million and $149.6 million
in the second quarter and first six months of 1999, respectively. The Company
performed assembly/test services for the JVs totaling $21.5 million and $34.4
million for the second quarter and first six months of 1999, respectively.
Aggregate receivables from and payables to the JVs were $22.5 million and $34.0
million, respectively, as of March 4, 1999.
11. Commitments and contingencies
As of February 26, 1998,March 4, 1999, the Company had commitments of approximately $535.8$583.8
million for equipment purchases and $55.0$23.0 million for the construction of
buildings.
10. Contingencies
Periodically, the10
Notes to Consolidated Financial Statements, continued
The Company is made aware that technology used by the Companyhas from time to time received, and may in the manufacture of somefuture receive,
communications alleging that its products or all of its productsprocesses may infringe on
product or process technology rights held by others. The Company has accrued a
liability and charged operations for the estimated costs of settlement or
adjudication of asserted and unasserted claims for alleged infringement prior to
the balance sheet date. Determination that the Company's manufacture of products
has infringed on valid rights held by others could have a material adverse
effect on the Company's financial position, results of operations or cash flows
and could require changes in production processes and products.
The Company is currently a party to various other legal actions arising out
of the normal course of business, none of which are expected to have a material
effect on the Company's financial position or results of operations.
912. Subsequent Event
On March 19, 1999, the Company entered into an agreement to sell certain of
its flat panel display assets to PixTech, Inc. ("PixTech"). Pursuant to the
terms of the transaction, in exchange for the transfer of certain assets and
liabilities to PixTech, the Company will receive 7,133,562 shares of PixTech
common stock and warrants to purchase an additional 310,000 shares of PixTech
common stock at an approximate exercise price of $2.25. The Company wrote down
its flat panel display assets to be sold by $15 million during the second
quarter of 1999.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Results of Operations
-------------- ---------------------
The following discussion contains trend information and other forward
looking statements (including statements regarding future operating results,
future capital expenditures and facility expansion, new product introductions,
technological developments, acquisitions and the effect thereof and industry
trends) that involve a number of risks and uncertainties. The Company's actual
results could differ materially from the Company's historical results of
operations and those discussed in the forward looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
those identified in "Certain Factors." This discussion should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
September 3, 1998. All period references are to the Company's fiscal periods
ended March 4, 1999, September 3, 1998, or February 26, 1998, November 27, 1997, August 28, 1997, or February 27, 1997, unless otherwise
indicated. All per share amounts are presented on a diluted basis unless
otherwise stated. All 1998 financial data of the Company has been restated to
include the results of operations of Rendition, Inc., which was merged with the
Company on September 11, 1998.
Overview
Micron Technology, Inc. and its subsidiaries (collectivelyare hereinafter referred to
collectively as the "Company" or "MTI") design, develop, manufacture"MTI." The Company designs, develops,
manufactures and marketmarkets semiconductor memory products, primarily DRAM. The Company,DRAM, and
through its approximately 64%63% owned subsidiary, Micron Electronics, Inc.
("MEI"), develops, markets, manufactures and supports PC systems.
RESULTS OF OPERATIONS
Net loss forThe semiconductor industry in general, and the second quarter ofDRAM market in particular,
experienced severe price declines in recent years. Per megabit prices declined
approximately 60% in 1998 was $48 million, or $0.23 per share,following a 75% decline in fiscal 1997 and a 45%
decline in fiscal 1996. These market conditions have had an adverse effect on net sales of $755 million. Operating losses incurred in
the Company's semiconductor memory and PC operationsresults of operations. The Company experienced stable per megabit
sales prices in the second quarter of 1998 were
partially offset by a gain on the sale of a 90% interest in MEI's contract
manufacturing subsidiary. For the second quarter of 1997 net income was $143
million, or $0.67 per share, on net sales of $876 million. For the first six
months of 1998, net loss was $39 million, or $0.18 per share, on net sales of
$1,710 million compared to net income of $163 million, or $0.77 per share, on
net sales of $1,604 million1999 after an 18% increase for the first
six monthsquarter of 1997.1999, however the Company has experienced per megabit price declines
in the third quarter of 1999. The Company reported net sales of $955 million and net income of $10 million, or $0.04 per
share,is unable to predict pricing
conditions for its first quarter of 1998.
In the second quarter of fiscalfuture periods.
On September 30, 1998, the Company'sCompany completed the acquisition (the
"Acquisition") of substantially all of the semiconductor memory operations incurred an operating loss in excess(the
"Acquired Operations") of $90 million on net sales of
$283 million, primarily due to continued sharp declines in average sales prices
for the Company's semiconductor memory products.Texas Instruments, Inc. ("TI"). The Company's PC operations
incurred an operating loss in excess of $100 million in the second quarter of
fiscal 1998 resulting primarily from the effect of significant price declines
for PC products, write-downs of inventories, a 10% decline in unit sales from
the prior quarter, and actions taken to reposition PC operations to more
efficiently and cost-effectively serve core markets.
Results of operations for the second quarter of 1998 included an aggregate
pretax gain of $157 million (approximately $38 million or $0.18 per share after
taxes and minority interests) on MEI's sale of a 90% interest in its contract
manufacturing subsidiary, Micron Custom Manufacturing Services, Inc. ("MCMS"),
for cash proceeds of $249 million.
Results of operations for the second quarter of 1997 included a pretax gain of
$190 million (approximately $94 million or $0.44 per share after taxes) on the
sale of a portion of the Company's holdings in MEI common stock, which decreased
the Company's ownership in MEI to approximately 64%. Resultsresults
of operations for the first six months of 1997 also included net after-tax gains1999 reflect five months' results of
$20 million on
salesoperations for the Acquired Operations.
Results of other investments.
NET SALESOperations
Second Quarter Six Months
---------------------------------------------- ----------------------------------------------------------------------------- -------------------------------
1999 1998 19971999 1998
1997
---------------------------------------------- ----------------------------------------------------------------------------- -------------------------------
Net sales $1,025.8 $ 763.2 $1,819.4 $1,720.4
Net income (loss) 22.4 (50.9) (23.7) (44.4)
Earnings (loss) per share 0.08 (0.24) (0.09) (0.21)
Results of operations for the second quarter and first six months of 1999
were adversely affected by a $15 million write down of certain of the Company's
flat panel display assets resulting in an after tax loss of $0.03 and $0.04, per
share, respectively. (See "Subsequent Event.") For the first quarter of 1999,
net loss was $46.2 million, or $0.19 per share, on net sales of $793.6 million.
Net Sales
Second Quarter Six Months
------------------------------- -------------------------------
1999 1998 1999 1998
------------------------------- -------------------------------
Net sales % Net sales % Net sales % Net sales %
------------------- ------------------- ------------------- ---------------------------------- --------------- --------------- ---------------
Semiconductor memory products $283.4 37.5 $401.5 45.8$ 697.1 68.0 $ 283.4 37.1 $1,106.6 60.8 $ 723.5 42.3 $ 743.7 46.442.1
PC systems 309.5 30.1 396.5 52.5 395.4 45.152.0 661.6 36.4 841.6 49.2 729.2 45.448.9
Other 75.5 10.0 79.3 9.1 144.9 8.5 131.4 8.2
-------- ----- ------ ------19.2 1.9 83.3 10.9 51.2 2.8 155.3 9.0
-------- ----- -------- ----------- -------- ----- -------- -----
Total net sales $755.4$1,025.8 100.0 $876.2$ 763.2 100.0 $1,710.0$1,819.4 100.0 $1,604.3$1,720.4 100.0
============== ===== ============== ===== ======== ===== ======== =====
Net12
Semiconductor memory products' net sales of "Semiconductor memory products" include sales of MTI semiconductor memory
products incorporated in MEI products, which amounted to
$5.2PC products. Such sales totaled $14.8 million and
$12.6$5.2 million in the second quarters of 19981999 and 1997,1998, respectively, and $17.6$25.1
million and $23.9$17.6 million in the first six months of 19981999 and 1997,1998,
respectively. "Other" net sales include revenue from MEI's contract
manufacturing services subsidiary, which was sold in February
10
1998, of approximately $63.0 million and $123.6 million infor the second quarter and first six months of
1998 respectively.
Net salesinclude revenue of $63.0 million and $123.6 million, respectively from
MEI's contract manufacturing subsidiary, which was sold in the second quarter of 1998 decreased by 14% as compared to the
second quarter of 1997 principally due to a sharp decline in average selling
prices of semiconductor memory products. Net sales for the first six months of
1998 increased by 7% as compared to the first six months of 1997 principally due
to an increase in unit sales of PC systems and an increase in non-system
revenue. Net sales for the second quarter of 1998 were 21% lower compared to
the $955 million of net sales for the first quarter ofFebruary 1998.
Net sales of semiconductor memory products for the second quarter and first
six months of 1998 decreased1999 increased by 29%146% and 3%53%, respectively, as compared to the
corresponding periods of 1997,1998. The increase in net sales for these periods was
primarily due to the continued sharp decline in average selling
prices, which was partially offset by an increase in megabits of semiconductor memory sold and was
partially offset by comparatively lower average selling prices. Total megabits
shipped increased by 272% and 175% for the second quarter and first six months
of 1999, respectively, as compared to the corresponding periods of 1998. Megabit
shipments increased due to production gains principally resulting from shifts in
the Company's mix of semiconductor memory products sold.to higher average density
products, ongoing transitions to successive reduced die size ("shrink") versions
of existing memory products and additional output from the Acquired Operations.
Average selling prices per megabit of memory declined approximately 50% from33% comparing the second
quarter of 19971999 to the second quarter of 1998 and 46% fromdeclined 44% comparing the
first six months of 19971999 to the first six months of 1998. The Company's
principal memory product in the second quarter and first six months of 19981999 was
the 1664 Meg synchronous DRAM ("SDRAM"), which comprised approximately 78%73% and
84%67%, respectively, of the net sales of semiconductor memory.
Net sales of semiconductor memory products increased by 70% in the second
quarter of 1999 as compared to the first quarter of 1999 principally due to a
75% increase in megabits shipped. Megabit shipments increased primarily due to
significant increases in the amount of megabits produced by the Company in the
second quarter. In the second quarter of 1999, the Company produced
approximately 90% more megabits of memory than in the first quarter due
primarily to the transition to the .21(mu) shrink version of the 64 Meg SDRAM
and resolution of backend production constraints. Resolution of backend
constraints associated with the Company's rapid transition to .21(mu) devices in
the first quarter accounted for approximately one-third of the production
increases for the second quarter. Also contributing to the increased production
was the continued shift in the Company's mix of semiconductor memory products to
a higher average density and enhanced yields on existing memory products.
Average selling prices per megabit of memory were flat for the second quarter of
1999 as compared to the first quarter of 1999.
Net sales of PC systems were lower in the second quarter and first six
months of 1998, respectively. The 16 Meg SDRAM comprised approximately 40% and 28% of the
total net sales of semiconductor memory in the second quarter and first six
months of 1998, respectively. Total megabits shipped increased by 47% and 85%,
respectively, for the second quarter and first six months of 1998 as compared to
the same periods in 1997, and total megabits produced increased by approximately
70% and 100%, respectively. These production increases were principally the
result of the transition to the 16 Meg DRAM as the Company's principal memory
product, ongoing transitions to successive reduced die size ("shrink") versions
of existing memory products, and enhanced yields on existing memory products.
Net sales of semiconductor memory products for the second quarter of 1998
decreased by 36% as compared to the first quarter of 1998 as a result of a 26%
decline in average selling prices per megabit of memory and a 13% decrease in
megabits shipped. The decrease in megabit shipments from the first quarter to
the second quarter of 1998 was principally due to constraints on the Company's
test capacity. These test capacity constraints were resolved in the last few
weeks of the second quarter, allowing for a 10% increase in megabit production
for the second quarter.
Net sales of PC systems were flat for the second quarter of 1998 compared to
the second quarter of 1997 and increased by 15% for the first six months of 1998
compared to the first six months of 1997. Unit sales of PC systems increased by
7% and 20%, respectively, comparing the second quarter and first six months of
1998 with the corresponding periods of 1997. Average per unit revenue for the
Company's PC systems declined, while non-system revenue increased for the second
quarter and first six months of 19981999 compared to the corresponding periods of 1997. Non-system revenue is revenue received from1998 primarily as a
result of declines in overall average selling prices of 9% and 14%,
respectively. Unit sales declined by 3% comparing the salesecond quarter of PC related
products1999
with the second quarter of 1998 and services separate fromwere flat comparing the salefirst six months of
a PC system.1999 with the first six months of 1998. Net sales of PC systems for the second
quarter of 19981999 were 11% lower than for the first quarter of 19981999 primarily due toas a
10%result of a 14% decrease in unit salessales. Average selling prices for PC systems
increased 4%, comparing the second quarter of fiscal 1999 to the first quarter,
as a result of a product mix shift to more richly configured systems. Despite
the increase in overall average selling price, the Company's full line of PC
systems and a lower
level of non-system revenue.
GROSS MARGINexperienced considerable pricing pressure in the second quarter.
Gross Margin
Second Quarter Six Months
----------------------------- ------------------------------ 1998------------------------------
1999 % Change 1997 1998 1999 % Change 1997
-----------------------------1998
------------------------------ ------------------------------
Gross margin $22.3 (89.8)% $218.7$280.7 1136.6% $ 232.8 (37.7)% $373.922.7 $396.6 70.4% $232.8
as a % of net sales 27.4% 3.0% 25.0% 13.6% 23.3%21.8% 13.5%
The Company's gross margin percentage for semiconductor memory products and PC
systems was lower in the second quarter and first six months of 1998 than in the
corresponding periods of 1997, primarily because of severe declines in average
sales prices and because of significant write-downs of the Company's notebook
inventory. The Company's gross margin percentage for the first quarter of 1998
was 22%.
The Company's gross margin percentage on sales of semiconductor memory
products for the second quarter and first six months of 19981999 was 5%32% and 22%23%,
respectively, compared to 32%5% and 28%22% for the corresponding periods of 1997.1998. The
decreaseincrease in gross margin percentage on sales of semiconductor memory products
for the second quarter and first six months of 19981999 compared to the
corresponding periods in 19971998 was primarily the result of a sharp decline in
average selling prices, partially offset by a declinedecreases in per
unitmegabit manufacturing costs. DecreasesComparative decreases in per unitmegabit manufacturing
costs for the second quarter and
first six months of 1998 compared to the same periods in 1997 were achieved primarily through shifts in the Company's mix of
semiconductor memory products to higher average density products and transitions
to shrink versions of existing products. The effect of these factors was
partially offset by
13
decreases in average selling prices, and to a lesser extent, the inclusion of
five months of results for the Acquired Operations which have higher per-unit
manufacturing costs.
The gross margin percentage on sales of semiconductor memory products shiftsfor
the first quarter of 1999 was 9%. The increase in gross margin percentage for
semiconductor memory products sold in the second quarter of 1999 as compared to
the first quarter of 1999 was primarily the result of stable pricing and
significant increases in megabit production resulting in decreases in per
megabit manufacturing costs. In the second quarter, the Company produced
approximately 90% more megabits of memory than in the first quarter due
primarily to the transition to the .21(mu) shrink version of the 64 Meg SDRAM
and resolution of backend production constraints. Resolution of backend
constraints associated with the Company's rapid transition to .21(mu) devices in
the first quarter accounted for approximately one-third of the production
increases for the second quarter. Also contributing to the increased production
was the continued shift in the Company's mix of semiconductor memory products to
a higher average density and improved manufacturing yields.enhanced yields on existing memory products.
In connection with the Acquisition, the Company acquired the right and
obligation to purchase all of the production meeting its specifications from two
joint ventures, TECH Semiconductor Singapore Pte. Ltd. ("TECH") and KMT
Semiconductor Limited ("KMT"), formerly KTI Semiconductor Limited. The gross margin percentage on
11
Company
purchases assembled and tested components from the joint ventures at prices
determined quarterly and generally representing discounts from the Company's
semiconductor memory products foraverage sales prices. These discounts were lower than gross margins realized by
the firstCompany in the second quarter of 1998 was
32%. The decline1999 on similar products manufactured in
the Company's wholly-owned facilities, but were higher than gross margin percentagemargins
historically realized in periods of excess supply. In any future reporting
period, gross margins resulting from the Company's purchase of joint venture
products may positively or negatively impact gross margins otherwise realized
for semiconductor memory products frommanufactured in the first quarter to the second quarter of 1998 was primarily the result of
the approximate 26% decline in average selling prices per megabit of memory.Company's wholly-owned
facilities.
The gross margin percentage for the Company's PC operations for the second
quarter and first six months of 19981999 was (2)% and 6%14%, respectively compared to 18%negative 2% and 19%6% for
the corresponding periods of 1997.1998. The gross margin for the Company's PC
operations was 13%15% for the first quarter of 1998.1999. Gross margins in the second
quarter of fiscal 1998 were significantly adversely affected by write-downs of notebook
product inventoriesinventories. The Company's PC gross margins in the second quarter and
first six months of 1999 were affected by increased pricing pressure on PC
products. The Company expects to continue to experience significant pressure on
its gross margins on sales of its PC systems, particularly for desktop and
notebook products, as a result of intense price competition in the PC industry.
SELLING, GENERAL AND ADMINISTRATIVEindustry and
consumer expectations of more powerful PC systems at lower prices.
Selling, General and Administrative
Second Quarter Six Months
----------------------------- -----------------------------
1998------------------------------ ------------------------------
1999 % Change 1997 1998 1999 % Change 1997
----------------------------- -----------------------------1998
------------------------------ ------------------------------
Selling, general and administrative $135.7 39.3% $97.4 $ 260.2 49.6% $173.9$125.5 (9.5)% $138.6 $228.5 (13.6)% $264.6
as a % of net sales 18.0% 11.1% 15.2% 10.8%12.2% 18.2% 12.6% 15.4%
The higher level of selling,Selling, general and administrative expenses duringwere lower in the second
quarter and first six months of 19981999 as compared to the samecorresponding periods of
1997 is1998 primarily attributable to higher levelsas a result of personnel, advertisingenhanced operational efficiencies and other costs associated withcost
reductions at MEI and the Company's PC operations.sale of 90% of MEI's interest in its contract
manufacturing subsidiary in fiscal 1998. Selling, general and administrative
expenseexpenses for the second quarter and first six months of 1998
reflect a lower level of performance based compensation than1999 include
approximately $15 million and $22 million, respectively, in corresponding
periods of 1997.expense associated
with the Acquired Operations. Selling, general and administrative expenses increased by 9%for
the first six months of 1998 reflect a $6 million contribution to a university
in support of engineering education. The Company is migrating to a comprehensive
enterprise resource planning ("ERP") system beginning in the first quarter of
2000. Total capitalized costs for this ERP system may be in excess of $20
million, and the associated depreciation will increase selling, general and
administrative expenses in subsequent periods.
Selling, general and administrative expenses for the second quarter of 1999
increased by 22% as compared to the first quarter of 1998; this increase
was mainly attributable1999, primarily due to
an increase in personnelincreased costs associated with the Company's semiconductor operations, and to a
lesser extent, increased labor costs for the Company's PC operations. The
Company's semiconductor operations experienced higher overall levels of selling,
general and administrative expenses in the second quarter of
14
1999 as compared to the first quarter primarily due to its larger and more
geographically dispersed operations, particularly in higher labor and
information technology expenses. In addition, selling, general and
administrative expenses for the second quarter of 1999 include three months of
operations for the Acquired Operations, compared to only two months included in
the first quarter of 1999.
Research and Development
Second Quarter Six Months
---------------------------- ----------------------------
1998------------------------------ ------------------------------
1999 % Change 1997 1998 1999 % Change 1997
---------------------------- ----------------------------1998
------------------------------ ------------------------------
Research and development $69.9 49.4% $46.8 $ 133.8 42.3% $94.085.5 18.8% $ 72.0 $153.2 10.1% $139.1
as a % of net sales 9.3% 5.3% 7.8% 5.9%8.3% 9.4% 8.4% 8.1%
Research and development expenses relating to the Company's semiconductor
memory operations, which constitute substantially all of the Company's research
and development expenses, vary primarily with the number of wafers processed,
personnel costs, and the cost of advanced equipment dedicated to new product and
process development. Research and development efforts are focused on advanced
process technology, which is the primary determinant in transitioning to next
generation products. Application of advanced process technology currently is
concentrated on developmentdesign of shrink versions of the Company's 64 Meg SDRAM and
design and development of the Company's 128 Meg SDRAMs,SDRAM and direct Rambus DRAM
("RDRAM"), Double Data Rate (DDR)("DDR"), SynchLinkSyncLink DRAM ("SLDRAM"), Flash and RambusSRAM
memory products.
The PC industry is in the process of transitioning from EDO to SDRAM. The
Company has transitioned to SDRAM as its primary DRAM technology, and is in the
process of increasing the ratio of 64 Meg DRAMs relative to 16 Meg DRAMs in its
product mix. Other research and development efforts are currently devoted to
the design and development of Flash, SRAM, embedded memory, RIC, flat panel displaygraphics accelerator products, PC systems and PC
systems.core logic.
Research and development expenses in the second quarter and first six
months of 1999 include costs of resources obtained in the Acquisition being
utilized to broaden the Company's range of DRAM product offerings. The expansion
of product offerings is considered necessary to support the customer base
required for the Company's increased production.
The Company anticipates completionsubstantially completed its transition from .25(mu) to .21(mu)
process technology at its Boise site early in the second quarter of 1999 and
expects the transition from .30 micron (u).21(mu) to .25 (u).18(mu) to occur at its Boise site in
fiscal 1999 andlate calendar 1999. The Company anticipates that process technology will move to
.15(mu) line widths of .21 (u), .18 (u), and .15 (u) in the next few years as needed for the development of
future generation semiconductor products. OTHER OPERATING EXPENSE (INCOME)Transitions to smaller line widths at
the Acquired Operations are expected to lag behind transitions at the Boise site
by several months as process technology development and initial manufacturing is
expected to be completed first at the Boise site.
Other Operating expense, net
Other operating expense for the second quarter of 1999 includes a $15
million charge to write down certain flat panel display assets to be sold, $5
million of loss recognized on joint venture investments, and a $4 million charge
for the cost of consolidating the Company's PC operations in Japan. Other
operating expense for the second quarter of 1999 was partially offset by a $5
million from cancellation of a compensation program.
Other operating expense for the second quarter of 1998 includes charges of
$13 million associated with the Company's PC operations resulting from employee
termination benefits and consolidation of domestic and international operations
and $3 million for the write-off of abandoned in-development software projects.
In addition, other operating expense for the second quarter of 1998 includes $4
million related to the disposal and write-down of semiconductor memory
operations equipment.
Income taxesTaxes
The effective tax rate for the second quarter and first six months of 1999
was 40% and 39%, respectively, primarily reflecting the U.S. corporate income
tax rate and the net effect of state taxation. In April 1999, certain of the
Company's foreign operations were granted favorable tax benefit intreatment. The Company
is currently evaluating permanent reinvestment of foreign earnings and
anticipates the effective rate will decline by several percentage points. Taxes
on earnings of domestic subsidiaries not consolidated for tax purposes may cause
the effective tax rate to vary significantly from period to period.
15
The effective tax rate for the second quarter and first six months of 1998
was 19%20% and 7%15%, respectively. The effectiveincome tax rate for the provision of income taxes was 47% and 46%, respectively, for the corresponding
periods of 1997. The effective tax rate primarily reflects 1) the statutory
corporate income tax rate and the net effect of state taxation, 2) the effect of
taxes on the parent of the earnings or loss by domestic subsidiaries not
consolidated with the Company for federal income tax purposes and 3) in the
second quarter and
first six months of 1998 also reflects the impact
12
of the write-off of a $4.1$4
million deferred tax asset relating to the Company's consolidation of its
NetFRAME enterprise server operations. Because MTI must
provide for tax on the earnings of domestic subsidiaries not consolidated for
tax purposes, the effective rate may vary significantly from period to period.
Recently Issued Accounting Standards
Recently issued accounting standards include Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share," issued by the Financial
Accounting Standards Board ("FASB") in February 1997, SFAS No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information," issued by the FASB in June 1997.1997, Statement
of Position ("SOP") 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," issued by the AICPA in March 1998 and
SFAS No. 128133 "Accounting for Derivative Instruments and Hedging Activities,"
issued by the FASB in June 1998.
SFAS No. 131 requires public companies to report financial and other
information about key revenue-producing segments of the entity for which such
information is available and is utilized by the chief operation decision-maker.
Implementation of SFAS No. 131 is required for the Company's year end 1999.
SOP 98-1 requires companies to capitalize certain costs of computer
software developed or obtained for internal use. The Company, which currently
capitalizes costs of purchased internal-use computer software and expenses costs
of internally developed internal-use software as incurred, expects to adopt the
standard in the first effectivequarter of 2000 for developmental costs incurred in that
quarter and thereafter. The adoption is expected to result in an initial
decrease in selling, general and administrative expense due to the
capitalization of certain ERP costs that are not being capitalized under the
Company's current practice. Subsequent period expenses are expected to reflect a
higher level of amortization expense resulting from the relatively higher
carrying value of the Company's capitalized software accounted for under SOP 98-
1.
SFAS No. 133 requires that all derivatives be recorded as either assets or
liabilities in the balance sheet and marked-to-market on an ongoing basis. SFAS
No. 133 applies to all derivatives including stand-alone instruments, such as
forward currency exchange contracts and interest rate swaps, or embedded
derivatives, such as call options contained in convertible debt investments.
Along with the derivatives, the underlying hedged items are also to be
marked-to-market on an ongoing basis. These market value adjustments are to be
included either in the statement of operations or as a component of
comprehensive income, depending on the nature of the transaction. Implementation
of SFAS No. 133 is required for the Company forby the first quarter of 2000. The
Company is currently evaluating the effect SFAS 133 will have on its interim period ended February 26,
1998. Basicfuture
results of operations and diluted earnings per share pursuant to the requirements of SFAS
No. 128 are presented on the face of the income statementfinancial position.
Liquidity and in the notes to
the financial statements. Descriptions of SFAS No. 130 and SFAS No. 131 are
included in the notes to the financial statements.
LIQUIDITY AND CAPITAL RESOURCESCapital Resources
As of February 26, 1998,March 4, 1999, the Company had cash and liquid investments totaling
$935$1,783 million, representing a decreasean increase of $53$1,133 million during the first six
months of 1998. Approximately $3511999. In the first quarter of 1999, the Company received $681 million
in conjunction with the Acquisition and $500 million from the sale of the Company's consolidated cash and
liquid investments was held by MEI. Cash generated by MEI is not readily
available or anticipatedstock to
be available to finance operations or other
expenditures of MTI.Intel Corporation. The Company's other principal sourcessource of liquidity during the
first six months of 1998 were net cash proceeds totaling $236 million from the sale of a 90%
interest in MEI's contract manufacturing subsidiary, MCMS, and1999 was net cash flow from operations of $126$378 million. Cash flow from operations depends
significantly on average selling prices and variable cost per unit for the
Company's semiconductor memory products. The
principal uses of funds induring the first six months of 19981999 were $381$306 million
for property, plant and equipment expenditures and $93$220 million for repayments
of equipment contracts and debt.
The Company believes that in order to transition the Acquired Operations to
the Company's product and process technology, develop new product and process
technologies, support future growth, achieve operating efficiencies and maintain
product quality, it must continue to invest in manufacturing technology,
facilities and capital equipment, research and development, and product and
process technology. The Company currently estimates it will spend approximately
$1 billion in fiscal 19981999 for purchases of equipment and for construction and
improvement of buildings.buildings, of which it has spent approximately $362 million to
date. As of February 26, 1998,March 4, 1999, the Company had entered into contracts extending into
fiscal 2000 for approximately $536$584 million for equipment purchases and approximately
$55$23 million for the construction of facilities.
Should the Company elect to cancel its outstanding equipment
purchase commitments, the Company could be subject to cancellation fees in
excess of $135 million. Future capital expenditures will be used primarily to
enhance manufacturing efficiencies and product and process technology at the
Company's existing facilities. As the Company considers its product and process
technology enhancement programs and technology diversification objectives, the
Company has evaluated, and continues to evaluate, possible acquisitions and
strategic alliances.16
The Company has a $1 billion shelf registration statement
under whichan aggregate of $500 million in convertible subordinated notes were issued in July
1997 and under which may be issued from time to time up to an additional $500
million in debt or equity securities.
MTI has a $500 million unsecured revolving credit
agreements, including a $400 million agreement expiring in May 2000. The agreement2000 which
contains certain restrictive covenants pertaining to the Company's semiconductor
memory operations, including a minimum fixed charge coverage
ratio and a maximum operating loss covenant.total debt to equity ratio. As of February 26, 1998, MTIMarch
4, 1999, the Company was in compliance with all covenants under the facilityfacilities
and had no borrowings outstanding under the agreement.agreements. There can be no
assurance that MTIthe Company will continue to be able to meet the terms of the
covenants and conditions and be
able toin the agreements, borrow under the credit agreement.agreements or
negotiate satisfactory successor agreements.
As of March 4, 1999, approximately $369 million of the Company's
consolidated cash and liquid investments were held by MEI. Cash generated by MEI
has an aggregateis not readily available to finance operations or other expenditures of $142MTI's
semiconductor memory operations.
Significant Transactions - Acquisition
On September 30, 1998, the Company completed its acquisition of
substantially all of TI's memory operations. The Acquisition was consummated
through the issuance of debt and equity securities. TI received 28.9 million
shares of MTI common stock, $740 million principal amount of convertible notes
(the "Convertible Notes") and $210 million principal amount of subordinated
notes (the "Subordinated Notes"). In addition to TI's net memory assets, the
Company received $681 million in revolving credit agreements which
containcash. The Company and TI also entered into a
ten-year, royalty-free, life-of-patents, patent cross license that commenced on
January 1, 1999.
The MTI common stock, Convertible Notes and Subordinated Notes issued in
the transaction have not been registered under the Securities Act of 1933, as
amended, and are therefore subject to certain restrictive covenants pertaining to MEI's operations, includingrestrictions on resale. The
Company and TI entered into a minimum EBITDA covenant, certain minimum financial ratiossecurities rights and limitations on
the amount of dividends declared or paid by MEI. For the quarter ended February
26, 1998, MEI was in violation of its ratio of debt to EBITDA covenant, which
excludes the effectrestrictions agreement as
part of the gaintransaction which provides TI with certain registration rights and
places certain restrictions on TI's voting rights and other activities with
respect to shares of MTI common stock. The Convertible Notes and the
saleSubordinated Notes issued in the transaction bear interest at the rate of MCMS. MEI obtained6.5%
and have a waiverterm of seven years. The Convertible Notes are convertible into 12.3
million shares of MTI common stock at a conversion price of $60 per share. The
Convertible Notes are not subject to redemption prior to October 2000 and are
redeemable from that date through October 2002 only if the common stock price is
at least $78.00 for a specified trading period. The Subordinated Notes are
subordinated to the violationConvertible Notes, the Company's outstanding 7% Convertible
Subordinated Notes due July, 2004, and substantially all of the covenant,Company's other
indebtedness.
The assets acquired by the Company in the Acquisition include a wafer
fabrication operation in Avezzano, Italy, an assembly/test operation in
Singapore, and an inactive wafer fabrication facility in Richardson, Texas. Also
included in the Acquisition was TI's interest in two joint ventures, TECH and
KMT, and TI's rights and obligations to purchase 100% of the joint venture
production meeting the Company's specifications. TECH, which operates in
Singapore, is now owned by the Company, Canon, Inc., Hewlett-Packard Singapore
(Private) Limited, a subsidiary of Hewlett Packard Company, and EDB Investments
Pte. Ltd., which is controlled by the Economic Development Board of the
Singapore government; and KMT, which operates in Japan, is now owned by the
Company and Kobe Steel, Ltd. MTI acquired a 30% interest in TECH and a 25%
interest in KMT. The Company filed Form 8-K/A on October 16, 1998, which
incorporates historical and pro forma financial information with respect to the
Acquisition. Pro forma financial information is also included in the notes to
the financial statements in this Form 10-Q.
Although the Company believes the Acquisition further leverages its
technology, the Company anticipates that the Acquisition will continue to have a
near term adverse impact upon the Company's results of operations and cash
flows. The Company is in the process of transferring its .21(mu) product and
process technology into the Acquired Operations (primarily the wholly owned
fabrication facilities in Avezzano, Italy and the joint-venture facilities) and
expects the transfer to be substantially complete by 1999 calendar year end.
Output of the Company's semiconductor memory products has increased directly as
a result was eligibleof the manufacturing capacity obtained in the Acquisition and should
increase further as a result of the transfer of the Company's product and
process technology to borrow
approximately $42the Acquired Operations. Until the Company is able to
complete the transfer of its product and process technology into the Acquired
Operations, the Company expects that the per unit costs associated with products
manufactured at the Acquired Operations will continue to significantly exceed
the per unit costs of products
17
manufactured at the Company's Boise, Idaho facility, resulting in a near-term
adverse impact on the Company's gross margin percentage. The ten-year, royalty-
free, life-of-patents, patent cross license entered into with TI resulted in a
reduction in the Company's royalty expenses beginning January 1999.
Subsequent Event
On March 19, 1999, the Company announced an agreement to sell certain of
its flat panel display assets to PixTech, Inc. ("PixTech"). Pursuant to the
terms of the transaction, in exchange for the transfer of certain assets
(including manufacturing equipment and $4.35 million underin cash) and liabilities to
PixTech, the credit lines,Company will receive 7,133,562 shares of PixTech Common Stock and
warrants to purchase an additional 310,000 shares of PixTech Common Stock at an
approximate exercise price of $2.25. The Company wrote down its flat panel
display assets by $15 million during the second quarter of 1999. The agreement
is contingent upon approval of the Federal Trade Commission and approval of
PixTech's stockholders as well as customary closing conditions.
Year 2000
Like many other companies, the Year 2000 computer issue creates risks for
the Company. If internal systems do not correctly recognize and process date
information beyond the year 1999, the Company's operations could be adversely
impacted as a result of system failures and business process interruption.
Semiconductor Operations
The Company has been addressing the Year 2000 computer issue for its
semiconductor operations with a plan that began in early 1996. To manage its
Year 2000 program, the Company has divided its efforts into the primary program
areas of: (i) information technology ("IT"), which includes computer and network
hardware, operating systems, purchased development tools, third-party and
internally developed software, files and databases, end-user extracts and
electronic interfaces; (ii) embedded technology within manufacturing and
facilitation equipment; and (iii) external dependencies, which include
relationships with suppliers and customers.
The Company is following four general steps for each of these program
areas: "Ownership," wherein each department manager is responsible for assigning
ownership for the various Year 2000 issues to be tested; "Identification" of
systems and equipment and the collection of Year 2000 data in a centralized
place to track results of compliance testing and subsequent remediation;
"Compliance Testing," which includes the determination of the specific test
routine to be performed on the software or equipment and determination of year
2000 compliance for the item being tested; and "Remediation," which involves
implementation of corrective action, verification of successful implementation,
finalization of, and, if need be, execution of, contingency plans.
As of March 4, 1999, the Ownership and Identification steps were
essentially complete for all three program areas: IT, manufacturing and
facilitation equipment and external dependencies. The Compliance Testing and
Remediation steps are substantially complete for the IT area at the Boise site.
The Company is relying in part on TI computer networks, information technology
services and licensed software with respect to certain of the recently acquired
semiconductor operations, much of which is currently used by TI in its
manufacturing processes. The Company is taking various steps to remove its
dependence on the TI systems, including the migration to a comprehensive ERP
system beginning in September 1999. Nonetheless, dependency upon TI systems will
span calendar years 1999 and 2000, and Year 2000 issues may arise. The Company
is working with TI to identify and correct any Year 2000 issues, and at this
time does not anticipate any material Year 2000 issues with respect to the TI
systems. (See "Certain Factors")
Compliance Testing of semiconductor manufacturing and facilitation
equipment is over 80% complete, and Remediation efforts for equipment thus
tested is in excess of 85% complete. The Company is working with suppliers of
products and services to determine and monitor their level of compliance and
Compliance Testing. Year 2000 readiness of significant customers is also being
assessed. The Company's evaluation of Year 2000 compliance as it
18
relates to the Company's external dependencies is expected to be substantially
complete by the second calendar quarter of 1999.
As of March 4, 1999, the Company had incurred aggregate borrowingsincremental costs
of approximately $9$2 million outstanding underand estimates it will spend an additional $2 million
to address the agreements.
13
CERTAIN FACTORSYear 2000 issue with respect to its semiconductor operations. The
Company is executing its Year 2000 readiness plan solely through its employees.
Year 2000 Compliance Testing and reprogramming is being done in conjunction with
other ongoing maintenance and reprogramming efforts.
With respect to Remediation, the Company has prepared various types of
contingency plans to address potential problem areas with internal systems and
with suppliers and other third parties. Internally, each software and hardware
system has been assigned to on-call personnel who are responsible for bringing
the system back on line in the event of a failure. Externally, the Company's
Year 2000 plan includes identification of alternate sources for providers of
goods and services. The Company has completed its internal contingency plans and
expects its external contingency plans to be substantially complete by the
second calendar quarter of 1999.
PC operations
The Company's PC operations have been addressing the Year 2000 issue
independently of the Company's semiconductor operations. PC operations are
addressing the plan in a manner similar to the semiconductor operations.
With respect to IT systems for the Company's PC operations, MEI believes,
as of March 4, 1999, that the inventory and assessment phases are essentially
complete and the remediation phase is approximately two-thirds complete. With
respect to non-IT systems, the inventory and assessment phases are approximately
95% complete and the remediation phase is approximately 90% complete. MEI
estimates August 1999 for completion of remediation of its mission critical IT
and non-IT systems, with the remainder of calendar 1999 to be used for
resolution of any unforeseen difficulties and quality assurance testing. It is
anticipated that risk assessment with respect to mission critical external
dependencies will be completed within the third quarter of fiscal 1999. As of
March 4, 1999, MEI had incurred aggregate incremental costs of approximately $2
million and estimates it will spend an additional $1 to $2 million to address
the Year 2000 issue with respect to its PC operations.
MEI is in the process of preparing various types of contingency plans to
address potential Year 2000 issues. It is currently anticipated that these
contingency plans will focus on the possible interruption of supply of key
components or services from third-party providers. MEI expects that development
of contingency plans for its PC operations will continue through calendar 1999.
Certain Factors
In addition to the factors discussed elsewhere in this Form 10-Q and in the
Company's Form 10-K for the fiscal year ended August 28, 1997,September 3, 1998, the following
are important factors which could cause actual results or events to differ
materially from those contained in any forward looking statements made by or on
behalf of the Company.
The semiconductor memory industry is characterized by rapid technological
change, frequent product introductions and enhancements, difficult product
transitions, relatively short product life cycles, and volatile market
conditions. These characteristics historically have made the semiconductor
industry highly cyclical, particularly in the market for DRAMs, which are the
Company's primary semiconductor memory products. The semiconductor industry has a history of
declining average sales prices as products mature. Long-term average decreases
in sales prices for semiconductor memory products approximate 30% on an
annualized basis; however, significant fluctuations from this rate have occurred
from time to time, as evidenced by the 75% declineincluding in average
selling prices for the Company's semiconductor memory products for 1997 and the
subsequent 25% and 26% declines in average selling prices for the first and
second quarters of 1998 as compared to the preceding quarters.recent years.
The selling prices for the Company's semiconductor memory products
fluctuate significantly with real and perceived changes in the balance of supply
and demand for these commodity products. Growth in worldwide supply has outpaced
growth in worldwide demand in recent periods,years, resulting in a significant decrease
in average selling
19
prices for the Company's semiconductor memory products. For most of fiscal 1997The semiconductor
industry in general, and the rate at which the Company was able to
decrease per unit manufacturing costs exceeded the rate ofDRAM market in particular, has experienced a severe
downturn. Per megabit prices declined approximately 60% in 1998 following a 75%
decline in average
selling1997 and a 45% decline in 1996. Per megabit prices due mainlywere stable in the
second quarter of 1999 following an increase in the first quarter of 1999 as
compared to a transition to a higher density product.
However, in the fourth quarter of 1997 and1998. The improved per megabit pricing for the
first six months of 19981999 may not be indicative of pricing in future periods, and
in fact the Company was unable to decrease per unit manufacturing costs at a rate
commensurate withhas experienced price declines in the decline in average selling prices.third quarter of 1999.
In the event that average selling prices continue to decline at a faster rate than thatthe rate
at which the Company is able to decrease per unit manufacturing costs, the
Company could
be materially adversely affected in itsCompany's operations, cash flows and financial condition. Althoughcondition could be materially
adversely affected. Competitors are also aggressively seeking improved yields,
smaller die size and fewer mask levels in their product designs. These
improvements could result in a significant increase in worldwide excess capacity
exists, certain Asian competitors
continueleading to add capacity for the production of semiconductor memory products.
The amount of capacity to be placed into production and future yield
improvements by the Company's competitors could dramatically increase worldwide
supply of semiconductor memory and increase downward pressure on pricing.
Further, the Company has no firm information with which to determine inventory
levels of its competitors, or to determine the likelihood that substantial
inventory liquidation may occur and cause further downward pressure on pricing.
Worldwideprices.
In 1998, many of the Company's Korean and Japanese semiconductor pricing is influencedmemory
competitors were impacted by currency fluctuations. In
calendar 1997 thedeteriorating economic conditions in Southeast
Asia, resulting in decreased capital investment by Korean Won, the New Taiwan Dollar and the Japanese Yen were
devalued significantly, dropping approximately 100%, 20%DRAM
manufacturers. Improved economic conditions could increase sources of capital
available to finance technology advancements and 10%, respectively,
compared to the U.S. dollar. The devaluation of these currencies was
particularly severeexpansion projects, and likely
would result in the fourth quarter of calendar 1997 and contributed to
the current South Korean credit crisis. South Korean semiconductor competitors
are likely to be particularly affected by the currency devaluations as a result
of substantial debt structures denominated in U.S. dollars. The currency
devaluations and the credit crisis could have a significant adverse impact on
DRAM pricing if the Company's Asian, and particularly Korean, competitors offer
products at significantly lower pricesincrease in an effort to maximize cash flows to
service near-term dollar denominated obligations. While the Company cannot
predict the overall impact of the Asian currency devaluations and the Korean
credit crisis, its products may be subjectworldwide supply leading to further
downward pricing pressure. If average selling prices forIn addition, if the Company is successful in the
transfer of its product and process technology into the acquired facilities, the
amount of worldwide semiconductor memory products continue to decline,
the Company's results of operations will continue to be adversely affected.
Ifcapacity could increase, resulting in
further downward pricing forpressure on the Company's semiconductor products remains at current levels
for an extended period of time or declines further, the Company may be required
to make changes in its operations, including but not limited to, reduction of
the amount or changes in timing of its capital expenditures, renegotiation of
existing debt agreements, reduction of production and workforce levels,
reduction of research and development, or changes in the products produced.memory
products.
Approximately 70%80% of the Company's sales of semiconductor memory products
during the second quarter of 19981999 were directly into the PC or peripheral
markets. DRAMs are the most widely used semiconductor memory component in most
PC systems. Should the rate of growth of sales of PC systems or the rate of
growth in the amount of memory per PC system decrease, the growth rate for sales
of semiconductor memory could also decrease, placing further downward pressure
on selling prices for the Company's semiconductor memory products. The Company
is unable to predict changes in industry supply, major customer inventory
management strategies, or end user demand, which are significant factors
influencing pricing for the Company's semiconductor memory products.
14
In recent periods the PC industry has seen a shift in demand towards sub-$1000
PCs. WhileOn September 30, 1998, the Company cannot predictacquired substantially all of TI's
memory operations. The integration and successful operation of the Acquired
Operations is dependent upon a number of factors, including, but not limited to,
the Company's ability to transfer its product and process technology in a timely
and cost-effective manner into the wholly-owned acquired fabrication facilities
in Avezzano, Italy and joint venture facilities. The Company is in the process
of transferring its .21(mu) product and process technology into these
fabrication facilities and expects the transfer to be substantially complete by
the end of calendar 1999. However, there can be no assurance that the Company
will be able to meet this timeline. Until such time as the Company is able to
complete the transfer of its product and process technology into the acquired
fabrication facilities, it is expected that the per unit costs associated with
any degreethe products manufactured at the acquired fabrication facilities will continue
to significantly exceed the per unit costs of accuracyproducts manufactured at the
Company's Boise, Idaho, facility. As a result, it is expected that the
Acquisition will continue to have a near term adverse effect on the Company's
results of operations and cash flows.
As the semiconductor industry transitions to higher bandwidth products
including RDRAM, DDR and SLDRAM, the Company may encounter difficulties in
achieving the semiconductor manufacturing efficiencies that it has historically
achieved. The Company's productivity levels, die per wafer yields, and in
particular, backend equipment requirements are expected to be affected by a
transition to higher bandwidth products. There can be no assurance that the
Company will successfully transition to these products or that it will be able
to achieve its historical rate of cost per megabit reductions.
The Company is engaged in ongoing efforts to enhance its production
processes to reduce per unit costs by reducing the die size of existing
products. The result of such efforts has generally led to significant increases
in megabit production. There can be no assurance that the Company will be able
to maintain or approximate increases in megabit production at a level
approaching that experienced in recent years or that the Company will not
experience decreases in manufacturing yield or production as it attempts to
implement future technologies. Further, from time to time, the Company
experiences volatility in its manufacturing yields, as it is not unusual to
encounter difficulties in ramping latest shrink versions of existing devices or
new generation devices to commercial volumes.
20
The semiconductor memory industry is characterized by frequent product
introductions and enhancements. The Company's ability to reduce per unit
manufacturing costs of its semiconductor memory products is largely dependent on
its ability to design and develop new generation products and shrink versions of
existing products and its ability to ramp such products at acceptable rates to
acceptable yields, of which there can be no assurance. In addition, there can be
no assurance that the Company will be able to continue to reduce its per unit
manufacturing costs at the rate historically achieved by the Company.
The Acquisition is expected to continue to have a significant effect on the
Company's future results of operations and cash flows, including, but not
limited to: a negative impact on gross margin in the near term due in part to
significantly higher per unit manufacturing costs at the Acquired Operations;
costs related to the assimilation of the Acquired Operations; increased selling,
general and administrative expenses in support of the larger and more
geographically dispersed operations; increased research and development expense
associated with the Company's efforts to broaden its range of DRAM product
offerings; increased interest expense associated with the Convertible Notes and
Subordinated Notes issued in the transaction and increased capital spending
relating to the wholly-owned Acquired Operations in Avezzano, Italy and
Singapore.
The Company has limited experience in integrating or operating
geographically dispersed manufacturing facilities. The integration and operation
of the acquired facilities has placed, and continues to place, strains on the
Company's management and information systems resources. Failure by the Company
to effectively manage the integration of the acquired facilities could have a
material adverse effect on the Company's results of operations.
In connection with the Acquisition, the Company and TI entered into a
transition services agreement requiring TI to provide certain services and
support to the Company for specified periods following the Acquisition. Among
other items, TI is to provide information technology, finance and accounting,
human resources, equipment maintenance, facilities and purchasing services under
the services agreement. The successful integration and operation of the acquired
facilities is partially dependent upon the continued successful provision of
services by TI under the services agreement. There can be no assurance that the
services and support called for under the services agreement will be provided in
a manner sufficient to meet anticipated requirements. The failure to obtain
sufficient services and support could impair the Company's ability to
successfully integrate the acquired facilities and could have a material adverse
affect on the Company's results of operations.
In accordance with the transition services agreement, the Company will rely
in part on TI computer networks and information technology services with respect
to certain of the Acquired Operations. During this period and beyond, the
Company will also be utilizing software obtained or licensed from TI to conduct
specific portions of the business. Dependency upon TI systems will span calendar
years 1999 and 2000, during which period Year 2000 issues may arise. The Company
is planning for the migration to a comprehensive ERP system beginning in
September 1999, which is expected to eliminate some of the Company's dependence
on TI systems. Failure to successfully implement the first stages of this ERP
system would complicate the Company's dependence upon TI systems. If unforeseen
difficulties are encountered in ending the Company's reliance upon TI's
software, hardware or services or in segregating the companies' information
technology operations or with Year 2000 issues, the Company's results of
operations could be materially adversely affected.
International sales comprised approximately 30% and 29%, respectively, of
the Company's net sales in the second quarter and first six months of 1999, as
compared to 20% in 1998. The Company expects international sales to continue to
increase in 1999 as a result of the Acquisition. International sales and
operations are subject to a variety of risks, including those arising from
currency fluctuations, export duties, changes to import and export regulations,
possible restrictions on the transfer of funds, employee turnover, labor unrest,
longer payment cycles, greater difficulty in collecting accounts receivable, the
burdens and costs of compliance with a variety of foreign laws and, in certain
parts of the world, political instability. While to date these factors have not
had a significant adverse impact on the PCCompany's results of operations, there
can be no assurance that there will not be such an impact in the future.
In connection with the Acquisition, the Company acquired the right and
semiconductor industryobligation to purchase all of this shift, possible effects
include,the production meeting its specifications from two
joint ventures, TECH and KMT. The Company purchases assembled and tested
components from the joint ventures at prices determined quarterly, which
generally results in discounts
21
from the Company's worldwide average sales prices. These discounts were lower
than gross margins realized by the Company in the second quarter of 1999 on
similar products manufactured in the Company's wholly-owned facilities, but are
not limited to, further downward pricing pressure on PC systems
and further downward pricing pressure onhigher than gross margins historically realized in periods of relatively
abundant supply. At any future reporting period, gross margins for semiconductor
memory products.products resulting from the Company's purchase of joint venture products
may positively or negatively impact gross margins depending on the then existing
relationship of average selling prices to the Company's cost per unit sold for
product manufactured in its wholly-owned facilities.
The Company's operating results are significantly impacted by the operating
results of its consolidated subsidiaries, particularly MEI. MEI's past operating
results have been, and its future operating results may be, subject to
seasonality and other fluctuations, on a quarterly and an annual basis, as a
result of a wide variety of factors, including, but not limited to, industry
competition, MEI's ability to accurately forecast demand and selling prices for
its PC products, fluctuating market pricing for PCs and semiconductor memory
products, seasonal government purchasing cycles, inventory obsolescence, MEI's
ability to effectively manage inventory levels, the lead time and inventory
exposure from shipments of products from OEM suppliers, fluctuating component
costs, changes in product mix,
inventory obsolescence,manufacturing and production constraints, fluctuating component costs, the
effects of product reviews and industry awards, critical component availability,
seasonal cycles common in the PC industry, the timing of new product
introductions by MEI and its competitors seasonal government purchasing cycles,
manufacturing and production constraints, the effects of product reviewsglobal market and industry awards, seasonal cycles common in the PC industry and critical
component availability.economic
conditions. Changing circumstances, including but not limited to, changes in the
Company's core operations, uses of capital, strategic objectives and market
conditions, could result in the Company changing its ownership interest in its
subsidiaries.
The PC industry is highly competitive and has been characterized by intense
pricing pressure, generally low gross margin percentages, rapid technological
advances in hardware and software, frequent introduction of new products, and
rapidly declining component costs. The Company's PC operations compete with a
number of PC manufacturers, which sell their products primarily through direct
channels, including Dell Computer, Inc. and Gateway 2000, Inc. The Company also
competes with PC manufacturers, such as Apple Computer, Inc., Compaq Computer
Corporation, Hewlett-Packard Company, International Business Machines
Corporation, NEC Corporation and Toshiba Corporation among others, which have
traditionally sold their products through national and regional distributors,
dealers and value added resellers, retail stores and direct sales forces and are
now beginning to sell their products through the direct channel. In addition,
the Company expects to face increased competition in the U.S. direct sales
market from foreign PC suppliers and from foreign and domestic suppliers of PC
products that decide to implement, or devote additional resources to, a direct
sales strategy. In order to gain an increased share of the United States PC
direct sales market, these competitors may effect a pricing strategy that is
engagedmore aggressive than the current pricing in ongoing effortsthe direct sales market or may have
pricing strategies influenced by relative fluctuations in the U.S. dollar
compared to enhanceother currencies. The Company continues to experience significant
pressure on its semiconductor
production processes to reduce per unit costs by reducing the die size of
existing products. ThePC operating results as a result of such efforts has led to a significant increaseintense competition in megabit production. There can be no assurance that the
Company will be able
to maintain or approximate increasesPC industry, consumer expectations of more powerful PC systems at lower prices
and the relatively recent introduction and proliferation of products in megabit production at a level
approaching that experienced in recent periods or that the
Company will not
experience decreases in production volume as it attempts to implement future
technologies. Further, from time to time, the Company experiences volatility in
its manufacturing yields, as it is not unusual to encounter difficulties in
ramping latest shrink versions of existing devices or new generation devices to
commercial volumes. The Company's ability to reduce per unit manufacturing
costs of its semiconductor memory products is largely dependent on its ability
to design and develop new generation products and shrink versions of existing
products and its ability to ramp such products at acceptable rates to acceptable
yields, of which there can be no assurance.
The semiconductor memory industry is characterized by frequent product
introductions and enhancements. The Company's transition to SDRAM products
reached approximately 59% of DRAM wafer starts at the end of the second quarter
of 1998. The Company's transition from the 16 Meg to the 64 Meg SDRAM as its
primary memory product is expected to occur in late summer of 1998. It is not
unusual to encounter difficulties in manufacturing while transitioning to shrink
versions of existing products or new generation products. Future gross margins
will be adversely impacted if the Company is unable to efficiently transition to
shrink versions of the 64 Meg SDRAM."sub-$1,000" PC market.
Historically, the Company has reinvested substantially all cash flow from
semiconductor memory operations in capacity expansion and enhancement programs.
The Company's cash flow from operations depends primarily on average selling
prices and per unit manufacturing costs of the Company's semiconductor memory
products. If for any extended period of time average selling prices decline
faster than the rate at which the Company is able to decrease per unit
manufacturing costs, the Company may not be able to generate sufficient cash
flows from operations to sustain operations. Cash generated by MEI is not
readily available to finance operations or other expenditures of MTI's
semiconductor memory operations. The Company has aan aggregate of $500 million unsecuredin
revolving credit agreements, including a $400 million agreement expiring in May
2000, which is available to finance its
semiconductor operations. However, the agreement contains certain restrictive covenants pertaining to the Company's
semiconductor memory operations, including a minimum fixed charge coverage ratio and a maximum operating losses covenant, which the Company may not be abletotal debt to meet if
semiconductor market conditions continue to deteriorate. In the event that the
Company does not comply with the covenants, thereequity ratio.
There can be no assurance that the Company wouldwill continue to be able to successfully renegotiatemeet the
agreement or obtain a
waiver toterms of the covenants or be able to borrow the full amount of the existing agreement. In either event,credit
facilities. There can be no assurance that, if needed, external sources of
liquidity will be available to fund the Company's operations or its capacity and
product and process technology enhancement programs. Failure to obtain financing
could hinder the Company's ability to make continued investments in such
programs, which could materially adversely affect the Company's business,
results of operations and financial condition.
As of March 4, 1999, TI and Intel held an aggregate of 44,743,369 shares of
common stock, representing 17% of the Company's total outstanding common stock.
These shares have not been registered with the Securities and
22
Exchange Commission ("SEC"), however TI and Intel each have registration rights.
Until such time as TI and Intel substantially reduce their holdings of Company
common stock, the Company may not be ablehindered in obtaining new equity capital. As of
March 4, 1999, the Company had convertible subordinated notes with a face value
of $500 million outstanding which are registered with the SEC and are
convertible into 7,413,997 shares of common stock. TI holds notes with a face
value of $740 million which are convertible into 12,333,333 shares of common
stock. TI's resale of these notes could limit the Company's ability to draw onraise
capital through the credit facility. Cash generated by, and credit
lines available to, MEI are not anticipated to be available to finance other MTI
operations.issuance of additional convertible debt instruments.
Completion of the Company's semiconductor manufacturing facility in Lehi,
Utah was suspended in February 1996, as a result of the decline in average
selling prices for semiconductor memory products. As of February 26, 1998March 4, 1999, the
Company had invested approximately $655$710 million in the Lehi facility. The cost to
complete the Lehi facility is estimated to approximate $1.6 billion. Although
additional test capacity for Boise production is anticipated to be provided in
Lehi in 1998,Timing of
completion of the remainder of the Lehi production facilities is dependent upon
market conditions. Market conditions which the Company expects to evaluate
include, but are not limited to, worldwide market supply and demand of
semiconductor products and the Company's operations, cash flows and alternative
uses of capital. There can be no assurance that the Company will be able to fund
the completion of the Lehi manufacturing facility. The failure by the Company to
complete the facility would likely result in the Company
15
being required to write
off all or a portion of the facility's cost, which could have a material adverse
effect on the Company's business and results of operations. In addition, in the
event that market conditions improve, there can be no assurance that the Company
can commence manufacturing at the Lehi facility in a timely, cost effective
manner that enables it to take advantage of the improved market conditions.
The semiconductor and PC industries have experienced a substantial amount
of litigation regarding patent and other intellectual property rights. In the
future, litigation may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company, or to defend the Company
against claimed infringement of the rights of others. The Company has from time
to time received, and may in the future receive, communications alleging that
its products or its processes may infringe on product or process technology rights
held by others. The Company has entered into a number of patent and intellectual
property license agreements with third parties, some of which require one-time
or periodic royalty payments. It may be necessary or advantageous in the future
for the Company to obtain additional patent licenses or to renew existing
license agreements. The Company is unable to predict whether these license
agreements can be obtained or renewed on terms acceptable to the Company.
Adverse determinations that the Company's manufacturing processes or products
have infringed on the product or process rights held by others could subject the
Company to significant liabilities to third parties or require material changes
in production processes or products, any of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company is dependent upon a limited number of key management and
technical personnel. In addition, the Company's future success will depend in
part upon its ability to attract and retain highly qualified personnel,
particularly as the Company engages in worldwide operations and adds different
product types to its product line, which will require parallel design efforts
and significantly increase the need for highly skilled technical personnel. The
Company competes for such personnel with other companies, academic institutions,
government entities and other organizations. In recent periods, theThe Company has experienced, and
expects to continue to experience, increased recruitment of its existing
personnel by other employers. The Company's ability to retain key acquired
personnel will be a critical factor in the Company's ability to successfully
integrate the Acquired Operations. There can be no assurance that the Company
will be successful in hiring or retaining qualified personnel. Any loss of key
personnel or the inability to hire or retain qualified personnel could have a
material adverse effect on the Company's business and results of operations.
1623
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
Substantially all of the Company's liquid investments and long-term debt
are at fixed interest rates, and therefore the fair value of these instruments
is affected by changes in market interest rates. However, substantially all of
the Company's liquid investments mature within one year. As a result, the
Company believes that the market risk arising from its holdings of financial
instruments is minimal. The Company's results of operations and financial
position for the first six months of 1999 reflect a higher volume of foreign
currency transactions and account balances than in previous periods related to
the foreign operations obtained through the Acquisition. As of March 4, 1999,
the Company held aggregate cash and receivables in foreign currency valued at
approximately US $32 million and aggregate foreign currency payables valued at
approximately US $64 (including long-term liabilities denominated in Italian
Lira valued at approximately US $18 million). Foreign currency receivables and
payables are comprised primarily of Italian Lira, Singapore Dollars, British
Pounds and Japanese Yen. The Company is currently evaluating its long-term risk
management policy regarding foreign currency exposure.
24
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) The following are filed as a part of this report:
Exhibit
Number Description of Exhibit
------ ------------------------------------
10.122 Second------- ----------------------------------------------------------
3.2 Certificate of Sixth Amendment to First Amended & Restated Revolving Credit
Agreement dated February 26, 1998, among the Company and several
financial institutionsCertificate of
Incorporation
27 Financial Data Schedule
(b) The registrant did not file any reports on Form 8-K or Form 8-K/A during
the fiscal quarter ended February 26, 1998.
17March 4, 1999:
25
SIGNATURES
Pursuant to the requirements 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.
Micron Technology, Inc.
------------------------------------------------------
(Registrant)
Dated: April 1, 19987, 1999 /s/ Wilbur G. Stover, Jr.
--------------------------------------------------------
Wilbur G. Stover, Jr., Vice
President of Finance and Chief
Financial Officer (Principal
Financial and Accounting
Officer)
26