FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, 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 December 3, 1998
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
January 5, 1999, was 247,656,782.
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
MICRON TECHNOLOGY, INC.
Consolidated Balance Sheets
(Dollars in millions, except for par value data)
December 3, September 3,
As of 1998 1998
- --------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and equivalents $ 767.7 $ 558.8
Liquid investments 1,157.1 90.8
Receivables 481.6 489.5
Inventories 360.4 291.6
Prepaid expenses 15.7 8.5
Deferred income taxes 67.2 61.7
-------- --------
Total current assets 2,849.7 1,500.9
Product and process technology, net 219.6 84.9
Property, plant and equipment, net 3,602.3 3,035.3
Other assets 116.0 82.4
-------- --------
Total assets $6,787.6 $4,703.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 627.8 $ 460.7
Short-term debt 11.1 10.1
Deferred income 6.2 7.5
Equipment purchase contracts 113.2 168.8
Current portion of long-term debt 103.4 98.6
-------- --------
Total current liabilities 861.7 745.7
Long-term debt 1,597.6 758.8
Deferred income taxes 264.5 284.2
Non-current product and process technology 12.0 11.3
Other liabilities 57.7 50.1
-------- --------
Total liabilities 2,793.5 1,850.1
-------- --------
Minority interests 157.9 152.1
Commitments and contingencies
Common stock, $0.10 par value, authorized 1.0 billion
shares, issued and outstanding 247.3 million and
217.1 million shares, respectively 24.7 21.7
Additional capital 1,743.6 565.4
Retained earnings 2,068.1 2,114.3
Accumulated other comprehensive loss (0.2) (0.1)
-------- --------
Total shareholders' equity 3,836.2 2,701.3
-------- --------
Total liabilities and shareholders' equity $6,787.6 $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)
December 3, November 27,
For the quarter ended 1998 1997
- --------------------------------------------------------------------------------
Net sales $ 793.6 $ 957.3
------- -------
Costs and expenses:
Cost of goods sold 677.7 747.1
Selling, general and administrative 103.0 126.0
Research and development 67.7 67.2
Other operating expense 7.8 4.6
------- -------
Total costs and expenses 856.2 944.9
------- -------
Operating income (loss) (62.6) 12.4
Loss on sale of investments (0.1) --
Gain on issuance of subsidiary stock, net 1.1 0.1
Interest expense, net (7.9) (1.3)
------- -------
Income (loss) before income taxes and minority
interests (69.5) 11.2
Income tax benefit (provision) 27.6 (4.5)
Minority interests in net income (4.3) (0.2)
------- -------
Net income (loss) $ (46.2) $ 6.5
======= =======
Earnings (loss) per share:
Basic $ (0.19) $ 0.03
Diluted (0.19) 0.03
Number of shares used in per share calculations:
Basic 245.7 214.7
Diluted 245.7 217.8
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 Cash Flows
(Dollars in millions)
(Unaudited)
December 3, November 27,
For the quarter ended 1998 1997
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (46.2) $ 6.5
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 189.5 136.3
Change in assets and liabilities, net of effects
of acquisition
Decrease in receivables 112.3 22.3
Increase in inventories (36.4) (27.2)
Increase in accounts payable and accrued
expenses, net of plant and equipment
purchases 65.8 59.1
Other (29.4) (14.9)
--------- ---------
Net cash provided by operating activities 255.6 182.1
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (117.5) (187.9)
Purchase of available-for-sale and held-to-maturity
securities (1,273.5) (362.0)
Proceeds from sales and maturities of securities 211.5 151.5
Other (1.5) (12.4)
--------- ---------
Net cash used for investing activities (1,181.0) (410.8)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received in conjunction with acquisition 681.1 --
Proceeds from issuance of stock rights 500.0 --
Proceeds from issuance of debt 34.0 11.4
Repayments of debt (28.3) (49.7)
Proceeds from issuance of common stock 19.1 0.1
Payments on equipment purchase contracts (73.9) (12.9)
Other 2.3 2.7
--------- ---------
Net cash provided by (used for) financing activities 1,134.3 (48.4)
--------- ---------
Net increase (decrease) in cash and equivalents 208.9 (277.1)
Cash and equivalents at beginning of period 558.8 619.5
--------- ---------
$ 767.7 $ 342.4
Cash and equivalents at end of period ========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid $ (6.9) $ (6.8)
Income taxes refunded (paid), net 183.2 (3.3)
Noncash investing and financing activities:
Equipment acquisitions on contracts payable and
capital leases 18.3 24.6
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
3
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. The Company has
restated its prior period financial statements, as a result of the merger with
Rendition, Inc. ("Rendition") which was accounted for as a pooling-of-interests.
These unaudited interim financial statements for the quarter ended December
3, 1998, should be read in conjunction with the consolidated financial
statements and accompanying notes included in the Company's Form 10-K for the
year ended September 3, 1998.
2. Supplemental balance sheet information December 3, September 3,
1998 1998
- --------------------------------------------------------------------------------
Receivables
- --------------------------------------------------------------------------------
Trade receivables $ 404.2 $ 294.4
Income taxes receivable 46.5 191.9
Allowance for returns and discounts (15.3) (11.9)
Allowance for doubtful accounts (6.1) (6.5)
Other receivables 52.3 21.6
--------- ---------
$ 481.6 $ 489.5
========= =========
Inventories
- --------------------------------------------------------------------------------
Finished goods $ 121.9 $ 93.3
Work in progress 189.1 139.6
Raw materials and supplies 49.4 58.7
--------- ---------
$ 360.4 $ 291.6
========= =========
Product and process technology
- --------------------------------------------------------------------------------
Product and process technology, at cost $ 304.5 $ 161.7
Less accumulated amortization (84.9) (76.8)
--------- ---------
$ 219.6 $ 84.9
========= =========
Property, plant and equipment
- --------------------------------------------------------------------------------
Land $ 42.4 $ 34.8
Buildings 1,111.2 915.5
Equipment 3,529.2 3,025.7
Construction in progress 722.1 704.6
--------- ---------
5,404.9 4,680.6
Less accumulated depreciation and amortization (1,802.6) (1,645.3)
--------- ---------
$ 3,602.3 $ 3,035.3
========= =========
As of December 3, 1998, property, plant and equipment included unamortized
costs of $706.7 million for the Company's semiconductor memory manufacturing
facility in Lehi, Utah, of which $646.0 million has not been
4
Notes to Consolidated Financial Statements, continued
placed in service and is not being depreciated. Timing of the 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. The Company
continues to evaluate the carrying value of the facility and as of December 3,
1998, it was determined to have no impairment.
Depreciation expense was $181.1 million and $129.5 million for the first
quarter of 1999 and 1998, respectively.
December 3, September 3,
1998 1998
- --------------------------------------------------------------------------------
Accounts payable and accrued expenses
- --------------------------------------------------------------------------------
Accounts payable $ 312.4 $ 235.6
Salaries, wages and benefits 116.0 85.6
Product and process technology payable 68.9 46.4
Taxes payable other than income 49.2 44.5
Interest payable 24.3 7.7
Other 57.0 40.9
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$ 627.8 $ 460.7
========== ==========
Debt
- --------------------------------------------------------------------------------
Convertible Notes payable, due October 2005, with
an effective yield-to-maturity of 8.4%, net of
unamortized discount of $70.8 million $ 669.2 $ --
Convertible Subordinated Notes payable, due July
2004, interest rate of 7% 500.0 500.0
Subordinated Notes payable, due October 2005, with
an effective yield-to-maturity of 10.6%, net of
unamortized discount of $41.4 million 168.6 --
Notes payable in periodic installments through July
2015, weighted average interest rate of 7.39% and
7.38%, respectively 325.5 315.2
Capitalized lease obligations payable in monthly
installments through August 2004, weighted average
interest rate of 7.59% and 7.61%, respectively 39.7 42.2
--------- ----------
1,701.0 857.4
Less current portion (103.4) (98.6)
--------- ----------
$ 1,597.6 $ 758.8
========= ==========
The convertible notes due October 2005 (the "Convertible Notes") with a
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 Company's common stock at
$60 per share. The 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 Convertible Notes
have not been registered with the Securities and Exchange Commission, however
the holder has
5
Notes to Consolidated Financial Statements, continued
registration rights which begin April 1999. (See "Acquisition"). The
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 7% convertible subordinated notes due July 2004 are convertible into
shares of the Company'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.
The Company has a $400 million revolving credit agreement which 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 maximum debt
to equity covenant. As of December 3, 1998, MTI had no borrowings outstanding
under the agreement.
Micron Electronics, Inc., an approximately 63% owned subsidiary of the Company
("MEI"), has a $100 million unsecured credit facility expiring in June 2001 and
an additional unsecured revolving credit facility expiring in June 1999
providing for borrowings of up to 1.5 billion Japanese yen (US $12.6 million at
December 3, 1998). Under the credit facilities, MEI is subject to certain
financial and other covenants including certain financial ratios and limitations
on the amount of dividends paid by MEI. As of December 3, 1998, MEI was
eligible to borrow the full amount under its credit agreements and had aggregate
borrowings of approximately $9.3 million outstanding under its credit
agreements.
3. Income taxes
The effective tax rate approximated 40% for the first quarter of 1999 and
1998. The effective tax rate primarily reflects the statutory corporate income
tax rate and the net effect of state taxation. Taxes on earnings of domestic
subsidiaries not consolidated for tax purposes may cause the effective tax rate
to vary significantly from period to period.
4. 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.
December 3, November 27,
For the quarter ended 1998 1997
- --------------------------------------------------------------------------------
Net income (loss) available for common
shareholders, Basic and Diluted $ (46.2) $ 6.5
========= =========
Weighted average common stock outstanding -- Basic 245.7 214.7
Net effect of dilutive stock options -- 3.1
--------- ---------
Weighted average common stock and common
stock equivalents -- Diluted 245.7 217.8
========= =========
Basic earnings (loss) per share $ (0.19) $ 0.03
========= =========
Diluted earnings (loss) per share $ (0.19) $ 0.03
========= =========
6
Notes to Consolidated Financial Statements, continued
Earnings per share computations exclude stock options and potential shares
for convertible debentures to the extent that their effect would have been
antidilutive.
5. 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 new rules for the reporting and display of
comprehensive income and its components, however it has no impact on the
Company's net income or shareholders' equity.
The components of comprehensive income are as follows:
December 3, November 27,
For the quarter ended 1998 1997
- --------------------------------------------------------------------------------
Net income (loss) $ (46.2) $ 6.5
Foreign currency translation adjustments (0.2) (0.1)
-------- --------
Total comprehensive income $ (46.4) $ 6.4
======== ========
6. 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 will make 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.
December 3, November 27,
For the quarter ended 1998 1997
- --------------------------------------------------------------------------------
Net sales $ 848.9 $1,211.2
Net loss (63.4) (18.5)
Basic loss per share (0.23) (0.08)
Diluted loss per share (0.23) (0.08)
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.
7
Notes to Consolidated Financial Statements, continued
7. 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 ended November 27, 1997 to
those presented in the accompanying consolidated financial statements.
MTI Rendition Combined
- -------------------------------------------------------------------------------
Net sales $ 954.6 $ 2.7 $ 957.3
Net income (loss) $ 9.5 $ (3.0) $ 6.5
8. Equity investment
On October 19, 1998, the Company issued to Intel Corporation ("Intel")
approximately 15.8 million stock rights exchangeable into non-voting Class A
Common Stock (upon MTI shareholder approval of such class of stock) or into
common stock of the Company for a purchase price of $500 million. The Rights at
the time of issuance represented approximately 6% of the Company's outstanding
common stock. The Rights (or 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 Company has
agreed to seek shareholder approval to amend its Certificate of Incorporation to
create the non-voting Class A Common Stock at the Company's next Annual Meeting
of Shareholders. In the event the Company's shareholders approve the amendment,
the Rights will be automatically exchanged for Class A Common Stock upon the
filing in Delaware of the amended Certificate of Incorporation. In the event
the Company's shareholders do not approve the amendment, the Rights will remain
exchangeable into the Company's common stock. In order to exchange the Rights
for the Company's common stock, Intel would be required to provide the Company
with written evidence of compliance with the Hart-Scott-Rodino Act ("HSR")
filing requirements or that no HSR filings are required. The MTI stock to be
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's registration rights
begin in April 1999. Intel also has the right to designate a nominee acceptable
to the Company to the Company's Board of Directors. Proceeds from the issuance
of these stock rights are reflected in "Additional Capital" in the Company's
balance sheet dated as of December 3, 1998.
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 exchange ratio of the Rights and conversion ratio of
the Class A Common Stock is subject to adjustment under certain formulae at the
election of Intel in the event the Company fails to meet the production or
capital expenditure milestones. No adjustment will occur to the exchange ratio
or 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 of Class A Common Stock or common stock having a value
exceeding $150 million, or (b) a number of additional shares exceeding the
number of Rights originally issued.
8
Notes to Consolidated Financial Statements, continued
9. Joint ventures
In connection with the Acquisition, the Company acquired a 30% ownership in
the TECH Singapore Semiconductor Pte. Ltd. ("TECH") and a 25% ownership in the
KTI Semiconductor Limited ("KTI") joint ventures (collectively, the "JVs"), each
of which operates 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 Company. KTI, which operates in Japan, is a joint venture between the
Company and Kobe Steel, Ltd.
The Company has rights and obligations to purchase 100% of the JVs'
production meeting the Company's specifications at pricing determined quarterly
which generally results in discounts from the Company's average worldwide
selling prices. Certain partners of the JVs have product purchase rights with
the Company. The Company charges a fee to the joint ventures for its estimated
costs to transfer product and manufacturing process technology to the joint
ventures. The Company accounts for its investments in these JVs under the equity
method.
Product purchases from the JVs aggregated $46.1 million in the first
quarter of 1999. The Company performed assembly/test services for the JVs
totaling $12.9 million for the first quarter of 1999. Receivables from and
payables to the JVs were $11.8 million and $27.6 million, respectively, as of
December 3, 1998.
10. Commitments and contingencies
As of December 3, 1998, the Company had commitments of approximately $423.9
million for equipment purchases and $18.5 million for the construction of
buildings.
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 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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 December 3, 1998, September 3, 1998, or November 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 are hereinafter referred to
collectively as the "Company" or "MTI." The Company designs, develops,
manufactures and markets semiconductor memory products, primarily DRAM, and
through its approximately 63% owned subsidiary, Micron Electronics, Inc.
("MEI"), develops, markets, manufactures and supports PC systems.
The semiconductor industry in general, and the DRAM market in particular,
experienced severe price declines in recent years. Per megabit prices declined
approximately 60% in 1998 following a 75% decline in fiscal 1997 and a 45%
decline in fiscal 1996. These extreme market conditions have had an adverse
effect on the Company's results of operations. Although the Company experienced
an 18% increase in per megabit average selling prices for the first quarter of
1999 as compared to the fourth quarter of 1998, the Company is unable to predict
whether such improved pricing is indicative of future periods.
On September 30, 1998, the Company completed the acquisition (the
"Acquisition") of substantially all of the semiconductor memory operations of
Texas Instruments, Inc. ("TI"). The Company's results of operations for the
first quarter of 1999 reflect two months for the acquired operations. On
October 19, 1998, the Company also issued to Intel Corporation ("Intel")
approximately 15.8 million stock rights (the "Rights") exchangeable into non-
voting Class A Common Stock (upon MTI shareholder approval of such class of
stock) or into common stock of the Company for an aggregate amount of $500
million. (See "Significant Transactions")
RESULTS OF OPERATIONS
- ---------------------
Net loss for the first quarter of 1999 was $46 million, or $0.19 per share,
on net sales of $794 million. For the first quarter of 1998 net income was $7
million, or $0.03 per share, on net sales of $957 million. For the fourth
quarter of 1998, net loss was $93 million, or $0.43 per share, on net sales of
$692 million.
NET SALES
First Quarter
----------------------------------
1999 1998
----------------------------------
Net sales % Net sales %
--------- ------ --------- ------
Semiconductor memory products $ 409.5 51.6 $ 440.1 46.0
PC systems 352.1 44.4 445.1 46.5
Other 32.0 4.0 72.1 7.5
--------- ------ --------- ------
Total net sales $ 793.6 100.0 $ 957.3 100.0
========= ====== ========= ======
Net sales of "Semiconductor memory products" include sales of $10.3 million
and $12.4 million in the first quarters of 1999 and 1998, respectively, of sales
of MTI semiconductor memory products incorporated in MEI PC products. "Other "
net sales for the first quarter of 1999 include revenue of $18.6 million for
test and assembly services performed by the Company. "Other" net sales for the
first quarter of 1998 include revenue of approximately $61 million from MEI's
contract manufacturing subsidiary, which was sold in February 1998.
10
Net sales of semiconductor memory products for the first quarter of 1999
decreased by 7% as compared to the first quarter of 1998, principally due to a
52% decline in average selling price per megabit of memory, partially offset by
an 89% increase in megabits shipped. This increase in megabits shipped was due
to production increases principally resulting from shifts in the Company's mix
of semiconductor memory products 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. The
Company's principal memory product in the first quarter of 1999 was the 64 Meg
DRAM, which comprised approximately 65% of the net sales of semiconductor memory
products. Approximately 87% of the 64 Meg DRAM sales were synchronous DRAM
("SDRAM") products.
Net sales of semiconductor memory products increased by 10% in the first
quarter of 1999 as compared to the fourth quarter of 1998 principally due to an
approximate 18% increase in average selling price per megabit of memory sold,
partially offset by a 10% decline in megabits shipped. During the first quarter
of 1999 prices for the Company's 16 Meg DRAM product increased significantly as
that device reached the end of its product life cycle and customers sought
lifetime-buy arrangements. The average selling price for the 64 Meg SDRAM
increased 8% in the first quarter of 1999 as compared to the fourth quarter of
1998. The decrease in megabits shipped was primarily due to backend production
constraints associated with the Company's rapid transition to the .21u shrink
version of its 64 Meg DRAM product. The effects of these constraints were
partially offset by the additional sales of semiconductor memory products
arising from the Company's newly acquired operations. These constraints are
expected to be resolved in the second quarter of 1999.
Net sales of PC systems were lower in the first quarter of 1999 compared to
the first quarter of 1998 primarily as a result of an 18% decline in average
selling prices which was partially offset by a 2% increase in unit sales. In
addition during the first quarter of 1998, the Company disposed of excess PC
component inventories, which also contributed to the comparative decline. Net
sales of PC systems for the first quarter of 1999 were 20% higher than for the
fourth quarter of 1998 primarily as a result of a 21% increase in unit sales,
which was partially offset by a 5% decrease in average selling prices.
GROSS MARGIN
First Quarter
-------------------------------------
1999 % Change 1998
-------------------------------------
Gross margin $ 115.9 (44.9)% $ 210.2
as a % of net sales 14.6% 22.0%
The Company's gross margin percentage was lower for the first quarter of
1999 compared to the first quarter of 1998 principally due to lower gross margin
percentages on sales of the Company's semiconductor memory products which
resulted primarily from a severe decline in average sales prices per megabit.
The Company's gross margin percentage on sales of semiconductor memory
products for the first quarter of 1999 was 9%, compared to 32% for the first
quarter of 1998. The decrease in gross margin percentage on sales of
semiconductor memory products for the first quarter of 1999 compared to the
first quarter of 1998 was primarily the result of the 52% decline in average
selling prices, and to a lesser extent, the inclusion of two months of results
for the acquired operations which have higher per-unit manufacturing costs.
These factors were partially offset by decreases in per megabit manufacturing
costs during the same period. Comparative decreases in per megabit
manufacturing costs 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 Company's gross margin percentage for the fourth quarter of 1998 was
6%. The gross margin percentage on sales of semiconductor memory products for
the fourth quarter of 1998 was negative 10%. The increase in gross margin
percentage for semiconductor memory products sold in the first quarter of 1999
as compared to the fourth quarter of 1998 was primarily the result of the 18%
increase in average selling prices per megabit of memory. The Company's cost per
megabit of semiconductor memory sold remained unchanged comparing the first
quarter of 1999 with the fourth quarter of 1998 as cost improvements achieved by
the Company's Boise operations were offset by higher costs per megabit incurred
at the acquired operations.
11
In connection with the Acquisition, the Company acquired the right and
obligation to purchase 100% of the production output of two joint ventures, TECH
Semiconductor Singapore Pte. Ltd. ("TECH") and KTI Semiconductor Limited
("KTI"), which meets the Company's specifications. The Company purchases
assembled and tested components from the joint ventures at prices determined
quarterly, which generally results in discounts from the Company's worldwide
average sales prices. These discounts are higher than gross margins realized by
the Company in recent periods on similar products manufactured in the Company's
wholly-owned facilities, but are lower than gross margins historically realized
in periods of relatively constrained supply. At any future reporting period,
gross margins for semiconductor memory 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 PC gross margins in the first quarter of 1999 were 15%,
compared to 13% in the first quarter of 1998 and 22% in the fourth quarter of
1998. PC gross margins in the first quarter of 1998 were adversely affected by
significant losses recognized from disposition of excess PC component
inventories. PC gross margins in the fourth quarter of 1998 were favorably
affected by revisions of estimates for certain product and process technology
costs. In addition, the Company experienced intense price pressure on its PC
products resulting in a lower gross margin provided by such products in the
first quarter of 1999 when compared to the fourth quarter of 1998. PC gross
margins in the first quarter of 1999 were also affected by a more aggressive
pricing strategy, particularly on notebook products. The Company expects to
continue experiencing significant pressure on its gross margins on sales of its
PC systems, particularly for desktop and notebook products, as a result of
intense competition in the PC industry and consumer expectations of more
powerful PC systems at lower prices.
SELLING, GENERAL AND ADMINISTRATIVE
First Quarter
-------------------------------------
1999 % Change 1998
-------------------------------------
Selling, general and administrative $ 103.0 (18.3)% $ 126.0
as a % of net sales 13.0% 13.2%
Selling, general and administrative expenses were lower in the first
quarter of 1999 as compared to the first quarter of 1998 primarily as a result
of enhanced operational efficiencies and cost reductions at MEI and the sale of
90% of MEI's interest in its contract manufacturing subsidiary in fiscal 1998.
Selling, general and administrative expenses for the first quarter of 1999
include approximately $7 million in expense associated with the acquired
semiconductor operations. Selling, general and administrative expenses for the
first quarter of 1998 reflect a $6 million contribution to a university in
support of engineering education.
Selling, general and administrative expenses for the first quarter of 1999
increased by 3% as compared to the fourth quarter of 1998, primarily due to
increased costs associated with the acquired semiconductor operations. This
increase in selling, general and administrative expenses over the immediately
preceding quarter was partially offset by a decrease in expense associated with
the Company's PC operations.
RESEARCH AND DEVELOPMENT
First Quarter
-------------------------------------
1999 % Change 1998
-------------------------------------
Research and development $ 67.7 (0.7)% $ 67.2
as a % of net sales 8.5% 7.0%
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 shrink versions of the Company's 64 Meg SDRAM and development of
the Company's 128 Meg SDRAM and direct Rambus DRAM ("RDRAM"), Double Data Rate
("DDR"), SyncLink DRAM ("SLDRAM"),
12
Flash and SRAM memory products. Other research and development efforts are
currently devoted to the design and development of RIC, flat panel displays,
graphics accelerator products and PC systems.
Research and development expenses in the first quarter of 1999 include
additional 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 associated with
the Company's anticipated increased market share.
The Company completed its transition from .25u to .21u at its Boise site in
the fourth quarter of calendar 1998 and expects the transition from .21u to .18u
to occur at its Boise site in calendar 1999. The Company anticipates that
process technology will move to .15u line widths in the next few years as needed
for the development of future generation semiconductor products. Transitions to
smaller line widths at the acquired operations are expected to lag behind
transitions at the Boise site as process development will be conducted primarily
in Boise.
INCOME TAXES
The effective tax rate approximated 40% for the first quarter of 1999 and
1998. The effective tax rate primarily reflects the statutory corporate income
tax rate and the net effect of state taxation. Taxes on earnings of domestic
subsidiaries not consolidated for tax purposes may cause the effective tax rate
to vary significantly from period to period.
RECENTLY ISSUED ACCOUNTING STANDARDS
Recently issued accounting standards include Statement of Financial
Accounting Standards ("SFAS") No. 131 "Disclosures about Segments of an
Enterprise and Related Information," issued by the FASB in June 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. 133 "Accounting for Derivative Instruments and Hedging Activities,"
issued by the FASB in June 1998.
SFAS No. 131 will require the Company to provide additional disclosures for
its year end 1999. The Company is currently evaluating the impact of SOP 98-1,
required by year end 2000 and SFAS No. 133, which is required for the first
quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of December 3, 1998, the Company had cash and liquid investments
totaling $1,925 million, representing an increase of $1,275 million during the
first quarter of 1999. In the first quarter of 1999 the Company received $681
million in conjunction with the Acquisition and $500 million from the sale of
stock rights. The Company's other principal source of liquidity during the first
quarter of 1999 was net cash flow from operations of $256 million. The principal
uses of funds during the first quarter of 1999 were $118 million for property,
plant and equipment expenditures and $102 million for repayments of equipment
contracts and long-term 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 1999 for purchases of equipment and construction and improvement
of buildings. As of December 3, 1998, the Company had entered into contracts
extending into 2000 for approximately $424 million for equipment purchases and
approximately $18 million for the construction of facilities.
The Company has an aggregate of $513 million in revolving credit
agreements, including a $400 million agreement expiring in May 2000 which
contains certain restrictive covenants pertaining to the Company's semiconductor
memory operations, including a maximum total debt to equity ratio. As of
December 3, 1998, the Company was in compliance with all covenants under the
facilities and had borrowings totaling approximately $9
13
million outstanding under the agreements. There can be no assurance that the
Company will continue to be able to meet the terms of the covenants and
conditions in the agreements, borrow under the agreements or negotiate
satisfactory successor agreements.
As of December 3, 1998, approximately $370 million of the Company's
consolidated cash and liquid investments were held by MEI. Cash generated by
MEI is not readily available or anticipated to be available to finance
operations or other expenditures of MTI'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
and $210 million principal amount of Subordinated Notes. In addition to TI's net
memory assets, the Company received $681 million in cash. 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 and Convertible Notes issued in the transaction have
not been registered under the Securities Act of 1933, as amended, and are
therefore subject to certain restrictions on resale. The Company and TI entered
into a securities rights and restrictions agreement as part of the transaction
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. TI's registration rights begin in April 1999. The
Convertible Notes and the Subordinated Notes issued in the transaction bear
interest at the rate of 6.5% and have a term 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 Convertible
Notes, the Company's outstanding 7% Convertible Subordinated Notes due July,
2004, and substantially all of the 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 a wafer fabrication facility in Richardson, Texas. TI closed the
Richardson memory manufacturing operation in June 1998. Also included in the
Acquisition was TI's interest in two joint ventures and TI's rights and
obligations to purchase 100% of the joint venture production meeting the
Company's specifications. TECH in Singapore is owned by TI, 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 KTI in Japan is owned by TI
and Kobe Steel, Ltd. MTI acquired a 30% interest in TECH and a 25% interest in
KTI. 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 has begun to transfer its product and process technology
into the acquired operations (primarily the wholly-owned fabrication facilities
in Avezzano, Italy and the joint-venture facilities, KTI and TECH) and expects
the transfer to be substantially complete in the next nine to twelve months.
Output of the Company's semiconductor memory products will increase directly as
a result of 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 the 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 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 will result in a reduction in the Company's royalty
expenses beginning January, 1999.
14
EQUITY INVESTMENT
On October 19, 1998, the Company issued to Intel approximately 15.8 million
Rights exchangeable into non-voting Class A Common Stock (upon MTI shareholder
approval of such class of stock) or into common stock of the Company for a
purchase price of $500 million. The Rights at the time of issuance represented
approximately 6% of the Company's outstanding common stock. The Rights (or
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 Company has agreed to seek shareholder approval
to amend its Certificate of Incorporation to create the non-voting Class A
Common Stock at the Company's next Annual Meeting of Shareholders. In the event
the Company's shareholders approve the amendment, the Rights will be
automatically exchanged for Class A Common Stock upon the filing in Delaware of
the amended Certificate of Incorporation. In the event the Company's
shareholders do not approve the amendment, the Rights will remain exchangeable
into the Company's common stock. In order to exchange the Rights for the
Company's common stock, Intel would be required to provide the Company with
written evidence of compliance with the Hart-Scott-Rodino Act ("HSR") filing
requirements or that no HSR filings are required. The MTI tock to be 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's registration rights begin in April 1999.
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 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 exchange ratio of the Rights and 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 exchange ratio or 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
of Class A Common Stock or common stock having a value exceeding $150 million,
or (b) a number of additional shares exceeding the number of Rights originally
issued.
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.
The Company has been addressing the Year 2000 computer issue 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)
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.
15
As of December 3, 1998, the Ownership and Identification steps were
essentially complete for all three program areas: IT, manufacturing equipment
and external dependencies. The Compliance Testing and Remediation steps are
substantially complete for the IT area at the Boise site and the Company is
evaluating the status of the IT areas for the acquired operations.
Compliance Testing of manufacturing and facilitation equipment is over
fifty percent complete. Remediation efforts for equipment thus tested is in
excess of sixty percent complete. The Company is currently in the process of
assessing embedded technology associated with its PC systems manufacturing
equipment and expects the evaluation to be complete in the first calendar
quarter 1999. The Company is currently 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 relates to the Company's
external dependencies is expected to be complete by the second calendar quarter
of 1999.
The cost of addressing the Company's Year 2000 issues is expected to be
immaterial. 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 commenced work on 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 expects its contingency plans to be
complete by the second calendar quarter of 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 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 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, including in recent periods.
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, resulting in a significant
decrease in average selling prices for the Company's semiconductor memory
products. The semiconductor industry in general, and the DRAM market in
particular, has experienced a particularly severe downturn. While per megabit
prices increased in the first quarter of 1999 as compared to the fourth quarter
of 1998, per megabit prices declined approximately 60% in 1998 following a 75%
decline in 1997 and a 45% decline in 1996. The increase in per megabit pricing
for the first quarter of 1999 may not be indicative of pricing in future
periods. In the event that average selling prices decline at a faster rate than
the rate at which the Company is able to decrease per unit manufacturing costs,
the Company could be materially adversely affected in its operations, cash flows
and financial condition. Future consolidation by competitors in the
semiconductor memory industry may place the Company at a disadvantage in
competing with competitors that have greater capital resources. 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 capacity leading to further downward pressure
on prices.
16
Approximately 72% of the Company's sales of semiconductor memory products
during the first quarter of 1999 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.
On September 30, 1998, the Company acquired 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 in Singapore (TECH ) and Japan
(KTI). The Company expects the transfer of its product and process technology
into these fabrication facilities 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 the products
manufactured at the acquired fabrication facilities will continue to
significantly exceed the per unit costs of products 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 may 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.
As a result of the Acquisition, the Company has substantially increased its
share of the worldwide DRAM market and its production capacity, and as a result,
the Company's results of operations are further subject to fluctuations in
pricing for semiconductor memory products. In 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 capacity could
increase, resulting in further downward pricing pressure on the Company's
semiconductor memory products.
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 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. It is expected that the
integration and operation of the acquired facilities will 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
17
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. 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 27% of the Company's net sales
in the first quarter of 1999 and 20% in 1998. The Company expects international
sales to continue to increase in 1999 as a result of the Acquisition. In
addition, the Company has significantly expanded its international operations 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 Company'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 rights and
obligations to purchase 100% of the production output of the TECH joint venture
in Singapore and the KTI joint venture in Japan. The Company purchases
assembled and tested components meeting the Company's specifications at prices
determined quarterly, which generally results in discounts from the Company's
worldwide average sales prices. These discounts are currently higher than gross
margins realized by the Company in recent periods on similar products
manufactured in the Company's wholly-owned facilities, but are lower than gross
margins historically realized in periods of relatively constrained supply. At
any future reporting period, gross margins for semiconductor memory products
resulting from the Company's right to purchase 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, the Company'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,
the Company's ability to effectively manage inventory levels, changes in product
mix, 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 the Company and its competitors and global market and 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 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. 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
18
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.
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 or anticipated to be available to finance the Company's
semiconductor operations. The Company has an aggregate of $513 million in
revolving credit agreements, including a $400 million agreement expiring in May
2000, which contains certain restrictive covenants pertaining to the Company's
semiconductor memory operations, including a maximum total debt to equity ratio.
There can be no assurance that the Company will continue to be able to meet the
terms of the covenants or be able to borrow the full amount of the 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.
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 December 3, 1998, the
Company had invested approximately $707 million in the Lehi facility. 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 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 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. The 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
19
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.
20
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 quarter 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 December 3, 1998
the Company held aggregate cash and receivables in foreign currency valued at
approximately US $13 million and aggregate foreign currency payables valued at
approximately US $61 (including long-term liabilities denominated in Italian
lira valued at approximately US $21 million). Foreign currency receivables and
payables are comprised primarily of Italian lira, Singapore dollars and Japanese
yen. The Company is currently evaluating its risk management policy regarding
foreign currency exposure.
21
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ---------------------------------------------------
TEXAS INSTRUMENTS INCORPORATED
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 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 million in cash. 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 Common Stock and Convertible Notes issued in the transaction were
issued pursuant to a Section 4(2), exemption under the Securities Act of 1933,
as amended ("the Act"), and are therefore subject to certain restrictions on
resale. The Company and TI entered into a securities rights and restrictions
agreement as part of the transaction which provides TI with certain registration
rights and places certain restrictions on TI's voting rights and other
activities with respect to shares of Common Stock. TI's registration rights
begin in April 1999. The Convertible Notes and the Subordinated Notes issued in
the transaction bear interest at the rate of 6.5% and have a term of seven
years. The Convertible Notes are convertible into 12.3 million shares of 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.
Conversion Terms
A holder of a Convertible Note has the right, at the holder's option, to
convert the Convertible Note into shares of Common Stock at any time on or prior
to the close of business on the maturity date, unless previously redeemed or
repurchased, at the Conversion Rate, subject to adjustment as described below.
The Conversion Rate is subject to adjustment in certain events, including,
without duplication: (a) dividends (and other distributions) payable in Common
Stock on shares of Common Stock, (b) the issuance to all holders of Common Stock
of rights, options or warrants entitling them to subscribe for or purchase
Common Stock at less than the then current market price of such Common Stock
(determined as provided in the Indenture for the Convertible Notes) as of the
record date for shareholders entitled to receive such rights, options or
warrants (provided that the Conversion Rate will be readjusted to the extent any
such rights, options or warrants are not exercised prior to the expiration
thereof), (c) subdivisions, combinations and reclassifications of Common Stock,
(d) distributions to all holders of Common Stock of evidences of indebtedness of
the Company, shares of capital stock, cash or assets (including securities (but
excluding those dividends, rights, options, warrants and distributions referred
to above) dividends, and distributions paid exclusively in cash), (e)
distributions consisting exclusively of cash (excluding any cash portion of
distributions referred to in (d) above) to all holders of Common Stock in an
aggregate amount that, combined together with (i) other such all-cash
distributions made within the preceding 12 months in respect of which no
adjustment has been made and (ii) any cash and the fair market value of other
considerations payable in respect of any tender offer by the Company or any of
its subsidiaries for Common Stock concluded within the preceding 12 months in
respect of which no adjustment has been made, exceeds 12.5% of the Company's
market capitalization (for this purpose being the product of the current market
price per share of the Common Stock on the record date for such distribution
times the number of shares of Common Stock outstanding) on such date, and (f)
the successful completion of a tender offer made by the Company or any of its
subsidiaries for Common Stock which involves an aggregate consideration that,
together with (i) any cash and other consideration payable in a tender offer by
the Company or any of its subsidiaries for Common Stock expiring within the 12
months preceding the expiration of such tender offer in respect of which no
adjustment has been made and (ii) the aggregate amount of any such all-cash
distributions referred to in (e) above to all holders of Common Stock within the
12 months preceding the expiration
22
of such tender offer in respect of which no adjustments have been made, exceeds
12.5% of the Company's market capitalization on the expiration of such tender
offer.
In case of any consolidation or merger of the Company with or into another
person or any merger of another person into the Company (other than a merger
which does not result in any reclassification, conversion, exchange or
cancellation of the Common Stock), or in case of any sale, transfer or lease of
all or substantially all of the assets of the Company, each Convertible Note
then outstanding will, without the consent of the holder of any Convertible
Note, become convertible only into the kind and amount of securities, cash and
other property receivable upon such consolidation, merger, sale, transfer or
lease by a holder of the number of shares of Common Stock into which such
Convertible Note was convertible immediately prior thereto (assuming such holder
of Common Stock failed to exercise any rights of election and that such
Convertible Note was then convertible).
INTEL CORPORATION
On October 19, 1998, the Company issued to Intel Corporation ("Intel")
15,810,277 stock rights ("Rights") exchangeable into non-voting Class A Common
Stock (upon shareholder approval of such class of stock), or if shareholder
approval is not obtained, into Common Stock of the Company, for a purchase price
of $500 million. The Rights at the time of issuance represented approximately
6% of the Company's outstanding Common Stock. The Company agreed with Intel to
seek shareholder approval of an amendment to its Certificate of Incorporation to
provide for the authorization of Class A Common Stock. The Class A Common Stock
(or Rights, if shareholder approval is not obtained) will automatically be
converted into (or exchanged for) the Company's Common Stock upon a transfer by
Intel to a holder other than one of its 90% or more owned subsidiaries. In
consideration for Intel's investment, in addition to proceeds received, the
Company has agreed to certain goals for the development and production of direct
Rambus DRAM ("RDRAM") products and to certain related capital expenditures and
to make available to Intel a portion of its semiconductor memory output over a
five-year period, subject to certain limitations. 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 Class A Common Stock
(or Common Stock). Intel's registration rights begin in April 1999. Intel also
has the right to designate a nominee to the Company's Board of Directors,
provided such nominee is acceptable to the Company. The Rights were issued
pursuant to a Section 4(2) exemption under the Act.
Conversion Terms of the Rights and Class A Common Stock
The Class A Common Stock, if approved by the Company's shareholders, will
be, and the Rights are convertible into shares of Common Stock at a conversion
ratio of one-to-one, subject to adjustment upon the occurrence of certain events
or circumstances as summarized. An amount equal to the fair market value of one
share of Common Stock, as determined in good faith by the Board of Directors,
will be paid in lieu of any fractional shares. In the event the Class A Common
Stock or the Rights are transferred to a person other than Intel or a 90% owned
subsidiary of Intel, each share of Class A Common Stock or each Right will
automatically convert into shares of Common Stock at the applicable conversion
ratio.
The conversion ratio is subject to adjustment in the event of any
subdivision (by stock split, stock dividend or otherwise) of the Common Stock or
any combination of the Rights or Class A Common Stock (by reverse stock split or
otherwise) or any combination of the Common Stock (by reverse stock split or
otherwise) or any subdivision of the Rights or Class A Common Stock (by stock
split, stock dividend or otherwise). In addition, the conversion ratio is
subject to special adjustments, in accordance with certain specified formulas,
in the event the Company fails to meet certain agreed upon capital expenditure
goals or RDRAM production goals and the average price of the Company's Common
Stock at the time of adjustment is lower than Intel's original price. These
goals are subject to adjustment under certain circumstances. The Company may
elect to pay cash in an amount equal to the value of the additional shares
issuable as a result of a special adjustment in lieu of such special adjustment.
The special conversion rate adjustments will be limited to the extent
required to ensure (1) that the value of additional shares of Common Stock and
other securities or property and any related payments (including any cash
payments in lieu of special adjustments), together with any shares of Common
Stock and other securities or property and any related payments as a result of
the special conversion rate adjustments with respect to the Rights, does not
exceed a maximum aggregate adjustment amount of $150 million (with the value of
such additional shares, securities
23
and property measured as set forth in the Amendment); and (2) that the aggregate
number of shares of Common Stock issued or issuable upon conversion of Class A
Common Stock (or exercise of the Rights) does not exceed the lesser of (i) 19.9%
of the shares of Common Stock outstanding on the closing date of the issuance of
the Rights and (ii) 31,620,554 shares of Common Stock. No special conversion
rate adjustments will occur if (i) the Company achieves the production and
capital expenditure goals or (ii) the average price of the Company's Common
Stock is higher than $31.625 (the market price of the Company's Common Stock at
the time of the investment) for the twenty day period ending two days prior to
the goal achievement date.
The conversion rights are also subject to adjustment in the event of any
reorganization, reclassification or change of shares of the Common Stock (other
than a change in par value or from par value to no par value as a result of a
subdivision or combination), or any consolidation of the Company with one or
more corporations or a merger of the Company with another corporation (other
than a consolidation or merger in which the Company is the resulting or
surviving corporation and which does not result in any reclassification or
change of outstanding shares of Common Stock).
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
------ ----------------------
3.7 Bylaws, as amended
10.139 Purchase Agreement dated September 30, 1998 between the Company and
KTI Semiconductor Limited
10.140 Purchase Agreement dated September 30, 1998 between the Company and
TECH Semiconductor Singapore Pte. Ltd.
27 Financial Data Schedule
(b) The registrant filed the following reports on Form 8-K or Form 8-K/A during
the fiscal quarter ended December 3, 1998:
Form Date Item
---- ---- ----
8-K October 7, 1998 Item 5, Other Events
8-K October 14, 1998 Item 2, Acquisition or Disposition of Assets
Item 7, Financial Statements
8-K/A October 16, 1998 Item 7(a), Financial Statements of Business
Acquired MMP Business of Texas
Instruments Incorporated
Item 7(b), Pro Forma Financial Information
Unaudited Pro Forma Combined
Financial Statements, Micron/MMP
Combined Company
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: January 13, 1999 /s/ Wilbur G. Stover, Jr.
-------------------------
Wilbur G. Stover, Jr., Vice President of
Finance and Chief Financial Officer
(Principal Financial and Accounting
Officer)
26