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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 1998
OR
[)] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10658
MICRON TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-1618004
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8000 S. FEDERAL WAY, P.O. BOX 6, BOISE, IDAHO 83707-0006
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (208) 368-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.10 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(TITLE OF CLASS)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the closing price of such stock on September 3, 1998, as
reported by the New York Stock Exchange, was approximately $4.4 billion. Shares
of common stock held by each officer and director and by each person who owns 5%
or more of the outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's common stock on October
23, 1998 was 246,514,854.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant's 1998 Annual Meeting of
Shareholders to be held on January 14, 1999, are incorporated by reference into
Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
The following discussion may contain trend information and other forward-
looking statements (including statements regarding future operating results,
future capital expenditures and facility expansion, new product introductions,
the effect of the Acquisition, technological developments 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 "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Subsequent Events and Certain Factors."
All period references are to the Company's fiscal periods ended September 3,
1998, August 28, 1997 or August 29, 1996, unless otherwise indicated.
GENERAL
Micron Technology, Inc. and its subsidiaries (hereinafter referred to
collectively as the "Company" or "MTI") principally design, develop, manufacture
and market semiconductor memory products and personal computer ("PC") systems.
The Company's PC systems business and semiconductor component recovery business
("SpecTek") are operated through Micron Electronics, Inc. ("MEI"), a 64% owned,
publicly-traded subsidiary of MTI.
The Company's semiconductor memory operations focus on the design,
development, manufacture and marketing of semiconductor memory components
primarily for use in PC systems. The Company's primary semiconductor products
are dynamic random access memory ("DRAM") components which are sold and
supported through sales offices in North America, Europe, Asia Pacific and
Japan.
The Company's PC systems operations develop, market and manufacture PC systems
sold and supported through the direct sales channel. The Company's PC systems
include a wide range of memory-intensive, high performance desktop and notebook
PC systems and multiprocessor network servers.
MTI was incorporated in Idaho in 1978 and reincorporated in Delaware in 1984.
The Company's executive offices and principal manufacturing operations are
located at 8000 South Federal Way, Boise, Idaho 83716-9632 and its telephone
number is (208) 368-4000. MEI's executive offices and principal manufacturing
operations are located at 900 East Karcher Road, Nampa, Idaho, 83687-3045 and
its telephone number is (208) 898-3434.
RECENT EVENTS
The following transactions occurred after the Company's 1998 year end and to
the extent appropriate are reflected in the following discussions.
On September 30, 1998, the Company completed its acquisition (the
"Acquisition") of substantially all of the semiconductor memory manufacturing
operations of Texas Instruments Incorporated ("TI"). The Acquisition was
consummated through the issuance of debt and equity securities. TI received
approximately 28.9 million shares of MTI common stock, $740 million principal
amount of convertible subordinated notes (the "Convertible Notes") and $210
million principal amount of subordinated notes (the "Subordinated Notes"). In
addition to TI's memory assets, the Company received $550 million in cash. The
Company and TI also entered into a ten-year, royalty-free, life-of-patents,
patent cross license that commences on January 1, 1999. The parties have also
agreed to make cash adjustments to ensure that current assets minus the sum of
current and noncurrent assumed liabilities of the acquired operations is $150
million as of September 30, 1998.
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The Company granted certain registration rights to TI for the MTI common stock
and Convertible Notes that commence on March 31, 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 approximately 12.3 million shares of MTI common stock at a conversion price
of $60 per share. The Subordinated Notes are subordinated to the Convertible
Notes, the Company's outstanding 7% Convertible Subordinated Notes due July 1,
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 to 100% of
the output of the joint ventures: TECH Semiconductor Singapore ("TECH"), 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
Semiconductor ("KTI") in Japan owned by TI and Kobe Steel, Ltd. MTI acquired
TI's approximate 30% interest in TECH and 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.
On October 19, 1998, the Company 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 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. In addition, the Company granted certain registration rights to Intel
that commence on March 31, 1999. Intel also has the right to designate a
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") products, to meet 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) if the Company achieves the
production and capital expenditure milestones, or (ii) 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 the investment). In addition, 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.
On September 11, 1998, the Company completed a stock-for-stock merger with
Rendition, Inc. ("Rendition"). Rendition designs, develops and markets high-
performance, low-cost, multi-functional graphics accelerators to the personal
computer market. The merger was accounted for as a business combination using
the pooling-of-interests method. Shareholders of Rendition received
approximately 3.7 million shares of the Company's common stock.
2
PRODUCTS
The Company's principal product categories are semiconductor memory products
(primarily DRAM) and PC systems.
SEMICONDUCTOR MEMORY PRODUCTS
The Company's semiconductor manufacturing operations focus primarily on the
design, development and manufacture of semiconductor memory products for
standard memory applications, with various packaging and configuration options,
architectures and performance characteristics. Manufacture of the Company's
semiconductor memory products utilizes proprietary advanced complementary metal-
oxide-semiconductor ("CMOS") silicon gate process technology.
DYNAMIC RANDOM ACCESS MEMORY. A DRAM is a high density, low cost per bit
random access memory component which stores digital information in the form of
bits and provides high-speed storage and retrieval of data. DRAMs are the most
widely used semiconductor memory component in most PC systems. Synchronous DRAM
("SDRAM") is a memory component which operates faster than standard DRAM, due in
part to the addition of a clock input that synchronizes all operations and
allows PC systems to transfer data at faster rates, allowing subsystems to
maintain pace with the fastest CPU's and graphics engines.
The Company's primary product during 1998 was the 16 Meg DRAM, available in
multiple configurations, speeds and package types. The Company is in the
process of ramping volume production of the 64 Meg DRAM. Bit crossover from the
16 Meg DRAM to the 64 Meg DRAM at the Boise, Idaho, operations occurred in
August 1998, and unit crossover is expected in October 1998. DRAM sales
represented approximately 43%, 48% and 57% of the Company's total net sales in
1998, 1997 and 1996, respectively. In 1998, SDRAM was the Company's primary
DRAM technology and substantially all SDRAM components were designed for PC-100
compatibility. At year end 1998, over 70% of the Company's Boise, Idaho,
production volume as measured by wafer starts was 64 Meg SDRAM.
OTHER SEMICONDUCTOR MEMORY PRODUCTS. Other semiconductor memory products
produced by the Company include Static Random Access Memory ("SRAM") devices,
Flash ("Flash") memory components and SpecTek component recovery memory
products.
SRAM is a semiconductor device which performs memory functions much the same
as DRAM, but does not require memory cells to be electronically refreshed and
operates faster than DRAM. The Company focuses on the high-performance, or
"Very Fast," sector of SRAMs which are used in applications that require a
"buffer" or "cache" of high speed memory between the CPU and main DRAM memory.
SRAM sales represented 2%, 1% and 2% of the Company's total net sales in 1998,
1997 and 1996, respectively.
Flash components are non-volatile semiconductor devices that retain memory
content when the power is turned off and are electrically erasable and
reprogrammable. Flash devices can be updated with new revisions of code,
different user parameters or settings and data collected over time. Flash
devices are used in digital cellular phones, networking applications,
workstations, servers and PCs. The Company is currently running production of
the 2 Meg, 4 Meg and 8 Meg 3.3 Volt and 5 Volt Boot Block Flash. Flash sales
represented less than 1% of the Company's semiconductor memory sales in 1998 and
1997.
The Company's SpecTek memory products operation processes and markets various
grades of nonstandard DRAM components under the SpecTek brand name in either
component or module forms. Nonstandard memory components are tested and
generally graded to their highest level of functionality. Higher grade
components meeting industry specifications are available for use in memory
modules. Certain reduced specification components may be used in nonstandard
memory modules or sold to strategic OEM customers for use in specific
applications.
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PERSONAL COMPUTER SYSTEMS
The Company develops, markets, manufactures, sells and supports a wide range
of memory intensive, high performance desktop and notebook PC systems and
network servers and sells and supports a variety of additional peripherals,
software and services. These systems use Pentium, Pentium Pro and Pentium II
microprocessors manufactured by Intel and are assembled to order with differing
memory and storage configurations as well as various operating and application
software. The Company also offers a variety of other components and peripherals
with its PC systems and network servers, including monitors, modems, graphics
cards, accelerators, and CD-ROM and DVD drives.
The Company's current product lines include the Millennia(R) line of PC
systems targeted for technology-savvy consumer, business and government users.
The ClientPro(R) is a flexible and affordable line of managed PC's designed as
a network solution for businesses demanding computing stability and
performance. The GoBook(TM) is the Company's line of thin, lightweight
notebook products featuring high speed microprocessors and large displays. The
Transport Trek(TM) notebook is designed for affordable desktop-like
performance for business applications. NetFRAME(R) series workgroup servers
provide cost-effective server solutions specifically designed for small to
medium sized businesses and for decentralized remote locations and
departments. The Company's new mPower(TM) program is a comprehensive PC
lifecycle management program to address personal computer obsolescence,
upgrading and financing tailored specifically to provide businesses and
consumers flexibility and value for their information technology expenditures.
Net sales of PC systems, exclusive of sales of MTI semiconductor memory
products incorporated in MEI PC systems, represented 48%, 42% and 31% of the
Company's total net sales for 1998, 1997 and 1996, respectively.
MANUFACTURING
SEMICONDUCTOR MEMORY PRODUCTS
The manufacturing of the Company's semiconductor products is a complex process
and involves a number of precise steps, including wafer fabrication, assembly,
burn-in and final test. Efficient production of the Company's semiconductor
memory products requires utilization of advanced semiconductor manufacturing
techniques. Manufacturing cost per unit is primarily a function of die size
(since the potential number of good die per wafer increases with reduced die
size), number of mask layers, the yield of acceptable die produced on each wafer
and labor productivity. Other contributing factors are wafer size, number of
fabrication steps, cost and sophistication of the manufacturing equipment,
equipment utilization, process complexity, package type and cleanliness. The
Company is engaged in ongoing efforts to enhance its production processes,
reduce the die size of existing products and increase capacity utilization.
Wafer fabrication occurs in a highly controlled, clean environment to minimize
dust and other yield- and quality-limiting contaminants. Despite stringent
manufacturing controls, equipment does not consistently perform flawlessly and
minute impurities, defects in the photomasks or other difficulties in the
process may cause a substantial percentage of the wafers to be scrapped or
individual circuits to be nonfunctional. The success of the Company's
manufacturing operations will be largely dependent on its ability to minimize
such impurities and to maximize its yield of acceptable, high-quality circuits.
In this regard, the Company employs rigorous quality controls throughout the
manufacturing, screening and testing processes.
After fabrication, each silicon wafer is separated into individual die.
Functional die are connected to external leads by extremely fine wire and are
assembled into plastic packages. Each completed package is then inspected,
sealed and tested. The assembly process uses high-speed automatic systems such
as wire bonders, as well as semi-automatic plastic encapsulation and solder
systems. The Company tests its products at various stages in the manufacturing
process, performs high temperature burn-in on finished products and conducts
numerous quality control inspections throughout the entire production flow. In
addition, through the utilization of its proprietary
4
AMBYX line of intelligent test and burn-in systems, the Company simultaneously
conducts circuit testing of all die during the burn-in process, capturing
quality and reliability data, and reducing testing time and cost.
The Company's semiconductor manufacturing facility in Boise, Idaho, includes
two 8 inch-wafer fabs equipped with diffusion tubes, photolithography systems,
ion implant equipment, chemical vapor deposition reactors, sputtering systems,
plasma and wet etchers, and automated mask inspection systems. The Boise,
Idaho, production facility operates in 12-hour shifts, 24 hours per day and 7
days per week to reduce down time during shift changes, and to reduce total
fabrication costs by maximizing utilization of fabrication facilities.
As of September 30, 1998, the Company acquired additional manufacturing
operations including a wafer fabrication facility in Avezzano, Italy, an
assembly/test facility in Singapore, and interests in the TECH and KTI wafer
fabrication joint ventures. The Company expects to transfer its product and
process technology into the acquired wafer fabrication facilities over the next
12 to 18 months. To the extent practicable, the Company expects to operate
these acquired manufacturing facilities using manufacturing methods similar to
those used in its Boise, Idaho, operations. There may be differences, however,
attributable to governmental constraints, labor organizations or cultural
differences that necessitate variances. There can be no assurance that the
Company will successfully integrate these operations or that the product and
process technology transfer to such facilities will be successful. The success
of these acquired operations is dependent on the Company's ability to achieve
high yields and generate high-quality circuits at a low cost. There can be no
assurance that the Company will be successful in achieving the same level of
manufacturing efficiencies in the acquired facilities as has been achieved in
its Boise, Idaho, facilities.
The acquired wafer fabrication facility in Richardson, Texas, is currently
being used by the Company as a design engineering center. Timing of the
completion of MTI's semiconductor manufacturing facility in Lehi, Utah, which
was suspended in February 1996 as a result of the decline in average selling
prices for semiconductor memory products, is dependent upon market conditions.
PERSONAL COMPUTER SYSTEMS
The Company's PC system manufacturing process is designed to provide custom-
configured PC products to its customers, and includes assembling components,
loading software and testing each system prior to shipment. The Company's PC
systems are generally assembled to order based on customer specifications.
Parts and components required for each customer order are selected from
inventory and are prepared for assembly into a customized PC system. The
Company's desktop PC systems are generally assembled in the Company's
facilities. The Company's notebook PC systems are designed to include feature
sets defined by the Company, are assembled by third party suppliers and tested
according to the Company's standards.
AVAILABILITY OF RAW MATERIALS
SEMICONDUCTOR MEMORY PRODUCTS
The raw materials utilized by the Company's semiconductor memory manufacturing
operations generally must meet exacting product specifications. The Company
generally uses multiple sources of supply, but the number of suppliers capable
of delivering certain raw materials is very limited. The availability of raw
materials, such as silicon wafers, molding compound and lead frames, may decline
due to the increase in worldwide semiconductor manufacturing. Although
shortages have occurred from time to time and lead times in the industry have
been extended on occasion, to date the Company has not experienced any
significant interruption in operations as a result of a difficulty in obtaining
raw materials for its semiconductor memory manufacturing operations.
Interruption of any one raw material source could adversely affect the Company's
operations.
5
PERSONAL COMPUTER SYSTEMS
The Company relies on third-party suppliers for its PC system components and
seeks to identify suppliers able to provide state-of-the-art technology, product
quality and prompt delivery at competitive prices. The Company purchases
substantially all of its PC components, subassemblies and software from
suppliers on a purchase order basis and generally does not have long-term supply
arrangements with its suppliers. Although the Company attempts to use standard
components, subassemblies and software available from multiple suppliers,
certain of its components, subassemblies and software are available only from
sole suppliers or a limited number of suppliers. The microprocessors used in
the Company's PC systems are manufactured exclusively by Intel. From time to
time, the Company has been unable to obtain a sufficient supply of the latest
generation Intel microprocessors. Any interruption in the supply of any of the
components, subassemblies and software currently obtained from a single source
or relatively few sources, or a decrease in the general availability of any
other components, subassemblies or software used in the Company's PC systems,
could result in production delays and adversely affect the Company's PC systems
business and results of operations.
MARKETING AND CUSTOMERS
SEMICONDUCTOR MEMORY PRODUCTS
The semiconductor memory industry is characterized by rapid technological
change, relatively short product life cycles, frequent product introductions and
enhancements, difficult product transitions and volatile market conditions.
Historically, the semiconductor industry, and the DRAM market in particular,
have been highly cyclical.
The Company's primary semiconductor memory products are essentially
interchangeable with, and have similar functionality to, products offered by the
Company's competition. Customers for the Company's semiconductor memory
products include major domestic computer manufacturers and others in the
computer, telecommunications and office automation industries. The Company
markets its semiconductor memory products worldwide through independent sales
representatives, distributors and its own direct sales force. The Company
maintains semiconductor sales offices in the United States, United Kingdom,
Germany, Singapore, Japan and Taiwan. Sales representatives are compensated on
a commission basis and obtain orders subject to final acceptance by the Company.
The Company makes shipments against these orders directly to the customer.
Distributors carry the Company's products in inventory and typically sell a
variety of other semiconductor products, including competitors' products.
Semiconductor memory products sold through distributors approximated 11%, 7% and
8% of semiconductor net sales in 1998, 1997 and 1996, respectively.
Many of the Company's customers require a thorough review or "qualification"
of new semiconductor memory products and processes that may take several months.
As the Company diversifies its product lines and reduces the die sizes of
existing memory products, acceptance of these products and processes is subject
to this qualification procedure. There can be no assurance that new products or
processes will be qualified for purchase by existing or potential customers.
Sales to Dell Computer Corporation represented approximately 15% and 11% of
the Company's net sales of semiconductor memory products in 1998 and 1997,
respectively. Sales to Compaq Computer Corporation represented approximately
11% of the Company's net sales of semiconductor memory products in 1996. No
other customer individually accounted for 10% or more of the Company's net sales
of semiconductor memory products in 1998, 1997 or 1996.
6
PERSONAL COMPUTER SYSTEMS
The Company's direct marketing approach is aimed toward PC users who evaluate
products based on performance, price, reliability, service and support. The
Company's customers are comprised primarily of consumers and commercial and
public entities. The Company markets its PC systems primarily by strategically
placing advertisements in personal computer trade publications, submitting its
products for review and evaluation by these publications and advertising its
products in certain newspapers and other publications and on its home page on
the Internet. The Company also markets its PC systems through direct-mail
campaigns and sells a limited number of PC systems through its factory outlet
stores located in Idaho and Utah. In addition, the Company sells its PC systems
through strategic relationships with third parties having large government
procurement contracts.
By focusing on the direct sales channel, the Company can avoid dealer markups
typically experienced in the retail sales channel, limit inventory carrying
costs and maintain closer contact with its target markets. Direct sales orders
are received primarily via telephone, facsimile, the Company's home page on the
Internet and through its direct sales force. The Company's sales
representatives assist customers in determining system configuration,
compatibility and current pricing. Customers generally order systems configured
with varying feature sets differentiated by microprocessor speed, hard drive
capacity, amount of memory, monitor size and resolution and bundled software, as
well as other features. The Company offers its customers a variety of payment
alternatives, including commercial trade terms, lease financing, cash on
delivery, its own private label credit card and other credit cards. The
Company's NetFRAME enterprise servers are sold primarily through the Company's
direct sales force and through value added resellers worldwide.
EXPORT SALES
Export sales totaled approximately $613 million for 1998, including
approximately $83 million in export sales of PC systems. Export sales included
approximately $275 million in sales to Europe, $179 million in sales to Asia
Pacific, $47 million in sales to Canada and $43 million in sales to Japan.
Export sales approximated $735 million and $938 million for 1997 and 1996,
respectively. The Company believes that export sales will increase as a result
of the Acquisition.
BACKLOG
SEMICONDUCTOR MEMORY PRODUCTS
Cyclical industry conditions make it difficult for many customers to enter
into long-term, fixed-price contracts and, accordingly, new order volumes for
the Company's semiconductor memory products fluctuate significantly. Orders
are typically accepted with acknowledgment that the terms may be adjusted to
reflect market conditions at the delivery date. For the foregoing reasons, and
because of the possibility of customer changes in delivery schedules or
cancellation of orders without significant penalty, the Company does not believe
that its backlog of semiconductor memory products as of any particular date is
firm or a reliable indicator of actual sales for any succeeding period.
PERSONAL COMPUTER SYSTEMS
Levels of unfilled orders for PC systems fluctuate depending upon component
availability, demand for certain products, the timing of large volume customer
orders and the Company's production schedules. Customers frequently change
delivery schedules and orders depending on market conditions and other reasons
and the Company allows the cancellation of unfilled orders without penalty any
time prior to shipment. As of September 3, 1998, the Company had unfilled
orders for PC systems of approximately $22 million compared to $42 million as of
August 28, 1997. The Company anticipates that substantially all of the unfilled
orders as of September 3, 1998, other than those subsequently canceled, will be
shipped within 30 days. The Company believes that backlog of unfilled orders of
PC systems is not indicative of actual sales for any succeeding period.
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PRODUCT WARRANTY
SEMICONDUCTOR MEMORY PRODUCTS
Consistent with semiconductor memory industry practice, the Company generally
provides a limited warranty that its semiconductor memory products are in
compliance with specifications existing at the time of delivery. Liability for
a stated warranty period is usually limited to replacement of defective items or
return of amounts paid.
PERSONAL COMPUTER SYSTEMS
Customers may generally return PC products within 30 days after shipment for a
full refund of the purchase price. The Company generally sells desktop and
notebook PC systems and servers with the Micron Power(SM) limited warranty,
including a five-year limited warranty on the microprocessor and main memory,
and a three-year limited warranty covering repair or replacement for defects in
workmanship or materials on the remaining hardware,.
COMPETITION
SEMICONDUCTOR MEMORY PRODUCTS
The Company's semiconductor memory operations experience intense competition
from a number of substantially larger foreign and domestic companies, including
Hitachi, Ltd., Hyundai Electronics, Co., Ltd., LG Semicon, NEC Corp., Samsung
Semiconductor, Inc., Siemens AG and Toshiba Corporation. Although the Company
has captured an increasing percentage of the semiconductor memory market in
recent periods and expects to gain additional market share as a result of the
Acquisition, it may be at a disadvantage in competing against manufacturers
having significantly greater capital resources, manufacturing capacity, engineer
and employee bases and portfolios of intellectual property and more diverse
product lines. As a result of greater product diversification and resources,
the Company's larger competitors may have long-term advantages in research and
new product development, and in their ability to withstand current or future
downturns in the semiconductor memory market. The Company's competitors are
also aggressively seeking improved yields, smaller die size and fewer mask
levels in their product designs. These improvements could result in a dramatic
increase in worldwide capacity leading to further downward pressure on product
prices.
Certain of the Company's competitors have announced merger plans. Any such
merger or consolidation could put the Company at a further disadvantage with
respect to such competitors.
PERSONAL COMPUTER SYSTEMS
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. Competition in the PC industry is based
primarily upon brand name recognition, performance, price, reliability and
service and support. The Company's sales of PC systems have historically
benefited from increased name recognition and market acceptance of the Company's
PC systems, primarily resulting from the receipt by the Company of awards from
trade publications recognizing the price and performance characteristics of
Micron brand PC systems and the Company's service and support functions. The
Company competes 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
8
through national and regional distributors, dealers and value added resellers,
retail stores and direct sales forces. (See "Certain Factors--Personal Computer
Systems--Competition.")
RESEARCH AND DEVELOPMENT
Rapid technological change and intense price competition place a premium on
both new product and new process development efforts. The Company's continued
ability to compete in the semiconductor memory market will depend in part on its
ability to continue to develop technologically advanced products and processes,
of which there can be no assurance. Research and development is being performed
in strategic areas related to the Company's semiconductor expertise. Total
research and development expenditures for the Company were $272 million, $209
million and $192 million in 1998, 1997 and 1996, respectively.
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 continually devoted
to developing leading process technology, which is the primary determinant in
the Company's ability to transition to next generation products. Application of
current developments in advanced process technology is currently concentrated on
shrink versions of the Company's 64 Meg SDRAM and development of the 128 Meg
SDRAM and RDRAM, Double Data Rate (DDR) and SyncLink memory products. Other
research and development efforts are devoted to the design and development of
remote intelligent communications technology ("RIC"), flat panel displays,
graphics accelerator products and PC systems.
In 1998, the Company transitioned a substantial portion of it's Boise, Idaho,
semiconductor manufacturing capacity, as measured by wafer starts, to .25 and
.21 micron (mu) line width processing from .30 (mu) line width processing. The
Company anticipates that it will utilize .21 (mu) line width processing for
approximately 85% of its Boise, Idaho, wafer starts by the end of calendar 1998.
The Company's transition to .18 (mu) line width processing is currently
anticipated in calendar 1999. The Company's process technology is expected to
progress to tighter geometries as needed for cost effective development of
future generation semiconductor products. The operations acquired in the
Acquisition currently utilize .30 (mu) line width process technology. The
Company anticipates transitioning the acquired operations to .21 (mu) line width
processing as the Company transfers its product and process technology to such
facilities. These facilities will be transitioned to .18 (mu) line width
processing in the future.
PATENTS AND LICENSES
As of September 3, 1998, the Company owned approximately 2,100 United States
patents and 170 foreign patents relating to the use of its products and
processes. In addition, the Company has numerous United States and foreign
patent applications pending.
The Company has entered into a number of cross-license agreements with third
parties. The agreements typically require one-time and/or periodic royalty
payments and expire at various times. One-time payments are typically
capitalized and amortized over the shorter of the estimated useful life of the
technology, the patent term or the term of the agreement. Royalty and other
product and process technology expenses were $170 million, $201 million and $153
million in 1998, 1997 and 1996, respectively. As a result of the expiration of
certain license agreements and the execution of the ten-year, royalty-free,
life-of-patents, patent cross license with TI, the Company expects product and
process technology expenses in 1999 to be significantly lower than in prior
years. In the future, it may be necessary or advantageous 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
9
adverse effect on the Company's business, results of operations and financial
condition. (See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Factors.")
EMPLOYEES
As of September 3, 1998, the Company had approximately 11,400 full-time
employees, including approximately 8,800 in the semiconductor memory
manufacturing operations (including the component recovery operations) and 2,400
in the PC systems operations. Employment levels can vary depending on market
conditions and the level of the Company's production, research and product and
process development and administrative support activities. Many of the
Company's employees are highly skilled and the Company's continued success
depends in part upon its ability to attract and retain such employees.
As a result of the Acquisition, the Company's employee base grew by
approximately 3,900 employees, including 1,400 in Avezzano, Italy, 2,300 in
Singapore, and 200 in the United States. The Company's Italian employees are
represented by labor organizations that have entered into national and local
labor contracts with the Company. There can be no assurance the Company will be
able to assimilate, retain and attract key personnel in these foreign locations.
Because the Company has the right and obligation to purchase 100% of the output
of the KTI and TECH joint ventures, the Company is also dependent on the
performance of the approximate 770 employees at KTI and approximate 1,000
employees at TECH. There can be no assurance the joint ventures will be able to
retain and attract key personnel. The loss of key personnel from these
facilities could have an adverse effect on the Company's results of operations.
The Company gained approximately 100 employees located in California in its
merger with Rendition. These employees will focus on the Company's graphics
accelerator projects.
ENVIRONMENTAL COMPLIANCE
Government regulations impose various environmental controls on discharges,
emissions and solid wastes from the Company's manufacturing processes. The
Company believes that its activities conform to present environmental
regulations. In June 1998, the Idaho Association of Commerce and Industry gave
the Company's semiconductor memory operation its Environmental Excellence Award.
The award was created to formally recognize companies that have taken an extra
step in environmental protection in Idaho. In 1998, the Company continued to
conform to the requirements of ISO 14001 certification including a successful
independent surveillance audit. To continue certification, the Company met
requirements in environmental policy, planning, management, structure and
responsibility, training, communication, document control, operational control,
emergency preparedness and response, record keeping and management review.
While the Company has not experienced any materially adverse effects on its
operations from environmental or other government regulations, there can be no
assurance that changes in such regulations will not impose the need for
additional capital equipment or other compliance requirements. Additionally,
the extensive process required to obtain permits for expansion of the Company's
facilities may impact how quickly the Company can respond to increases in market
demand.
The Company is continuing to evaluate environmental compliance at the
facilities acquired in the Acquisition. The Company believes the activities at
the acquired facilities are in substantial compliance with present environmental
laws and regulations. There can be no assurance that further evaluation of the
facilities, or changes in applicable laws and regulations, will not require the
Company to incur substantial expenditures for additional equipment, improved
processes or other compliance requirements.
10
OFFICERS AND DIRECTORS OF THE REGISTRANT
Officers of the Company are appointed annually by the Board of Directors.
Directors of the Company are elected annually by the shareholders of the
Company. Any directors appointed by the Board of Directors to fill vacancies on
the Board serve until the next election by the shareholders. All officers and
directors serve until their successors are duly chosen or elected and qualified,
except in the case of earlier death, resignation or removal.
As of October 23, 1998, the following executive officers and directors of the
Company were subject to the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended:
NAME AGE POSITION
- ---- --- --------
Steven R. Appleton................ 38 Chief Executive Officer, President and Chairman of the
Board of Directors
Donald D. Baldwin................. 38 Vice President of Sales and Marketing
Kipp A. Bedard.................... 39 Vice President of Corporate Affairs
Robert M. Donnelly................ 59 Vice President of Memory Products
D. Mark Durcan.................... 37 Chief Technical Officer and Vice President of Research
& Development
Jay L. Hawkins.................... 38 Vice President of Operations
Joel J. Kocher.................... 42 Chairman, Chief Executive Officer, President and Chief Operating Officer of Micron
Electronics, Inc.
Roderic W. Lewis.................. 43 Vice President of Legal Affairs, General Counsel and
Corporate Secretary
Wilbur G. Stover, Jr.............. 45 Chief Financial Officer and Vice President of Finance
James W. Bagley................... 59 Director
Robert A. Lothrop................. 72 Director
Thomas T. Nicholson............... 62 Director
Don J. Simplot.................... 63 Director
John R. Simplot................... 89 Director
Gordon C. Smith................... 69 Director
William P. Weber.................. 58 Director
Steven R. Appleton joined MTI in February 1983 and has served in various
capacities with the Company and its subsidiaries. Mr. Appleton first became an
officer of MTI in August 1989 and has served in various officer positions,
including overseeing the Company's semiconductor operations as President, Chief
Executive Officer and Director of Micron Semiconductor, Inc. ("MSI"), then a
wholly-owned subsidiary of MTI, from July 1992 to November 1994. From April
1991 until July 1992 and since May 1994, Mr. Appleton has served on MTI's Board
of Directors. Since September 1994, Mr. Appleton has served as the Chief
Executive Officer, President and Chairman of the Board of Directors of MTI. Mr.
Appleton also serves as a Director of MEI. Mr. Appleton holds a BA in Business
Management from Boise State University.
Donald D. Baldwin joined MTI in April 1984 and has served in various
capacities with the Company and its subsidiaries. Mr. Baldwin first became an
officer of MTI in May 1991 and has served in various officer positions,
including Vice President, Sales of MSI from July 1992 to November 1994. Mr.
Baldwin served as Vice President, Sales for MTI from November 1994 through June
1997, at which time he became Vice President of Sales and Marketing. Mr.
Baldwin holds a BA in Marketing from Boise State University.
Kipp A. Bedard joined MTI in November 1983 and has served in various
capacities with the Company and its subsidiaries. Mr. Bedard first became an
officer of MTI in April 1990 and has served in various officer positions,
including Vice President, Corporate Affairs of MSI from July 1992 to January
1994. Since January 1994, Mr. Bedard has served as Vice President of Corporate
Affairs for MTI. Mr. Bedard holds a BBA in Accounting from Boise State
University.
11
Robert M. Donnelly joined MTI in September 1988 and has served in various
technical positions with the Company and its subsidiaries. Mr. Donnelly first
became an officer of MTI in August 1989 and has served in various officer
positions, including Vice President, SRAM Products Group of MSI from July 1992
to November 1994. Mr. Donnelly was named Vice President, SRAM Products Group
for MTI in November 1994. Mr. Donnelly served as Vice President, SRAM Design
and Product Engineering for MTI from October 1995 through November 1996, at
which time he became Vice President of Memory Products. Mr. Donnelly holds a BS
in Electrical Engineering from the University of Louisville.
D. Mark Durcan joined MTI in 1984 and has served in various technical
positions with the Company and its subsidiaries, including Process Integration
Manager from December 1989 until May 1995 and Manager of Process Research and
Development from May 1995 until June 1996. Mr. Durcan served as Vice President,
Process Research and Development from June 1996 through June 1997, at which time
he became Chief Technical Officer and Vice President of Research & Development.
Mr. Durcan holds a BS and MS in Chemical Engineering from Rice University.
Jay L. Hawkins joined MTI in March 1984 and has served in various
manufacturing positions for the Company and its subsidiaries, including Director
of Manufacturing for MSI from July 1992 to November 1994 and Director of
Manufacturing for MTI from November 1994 to February 1996. Mr. Hawkins served
as Vice President, Manufacturing Administration from February 1996 through June
1997, at which time he became Vice President of Operations. Mr. Hawkins holds a
BBA in Marketing from Boise State University.
Joel J. Kocher joined MEI in January 1998. Prior to joining MEI, Mr. Kocher
was employed by Dell Computer Corporation from 1987 until September 1994, most
recently serving as President of Worldwide Marketing, Sales and Service. In
October 1994, Mr. Kocher joined Artistsoft, where he initially served as
Executive Vice President and Chief Operating Officer and subsequently served
from October 1995 until December 1996 as President, Chief Operating Officer, and
Director of Artistsoft. From December 1996 until August 1997, Mr. Kocher served
as President and Chief Operating Officer at Power Computing Corporation. Since
January 1998, Mr. Kocher has served as the President and Chief Operating Officer
of MEI and since June 1998 has also served as Chairman and Chief Executive
Officer of MEI. Mr. Kocher holds a BBA in Marketing from the University of
Florida.
Roderic W. Lewis joined MTI in 1991 and has served in various capacities with
the Company and its subsidiaries, including Assistant General Counsel for MTI
from August 1993 to April 1995. From April 1995 to July 1996, Mr. Lewis served
as Vice President, General Counsel and Corporate Secretary for MEI. Mr. Lewis
served as Vice President, General Counsel and Corporate Secretary for MTI from
July 1996 until November 1996, at which time he became Vice President of Legal
Affairs, General Counsel and Corporate Secretary. Mr. Lewis holds a BA in
Economics and Asian Studies from Brigham Young University and a JD from Columbia
University School of Law.
Wilbur G. Stover, Jr. joined MTI in June 1989 and has served in various
financial positions with the Company and its subsidiaries, including Vice
President, Finance and Chief Financial Officer of MSI from August 1992 to
September 1994. Since September 1994, Mr. Stover has served as MTI's Chief
Financial Officer and Vice President of Finance. From October 1994 through
September 1996, Mr. Stover served on MTI's Board of Directors. Mr. Stover holds
a BA in Business Administration from Washington State University.
James W. Bagley became the Chairman and Chief Executive Officer of Lam
Research, Inc. ("Lam") in August 1997, upon consummation of a merger of OnTrak
Systems, Inc. ("OnTrak") into Lam. From June 1996 to August 1997, Mr. Bagley
served as the Chairman and Chief Executive Officer of OnTrak. Prior to joining
OnTrak, Mr. Bagley was employed by Applied Materials, Inc. for 15 years in
various senior management positions, including Chief Operating Officer and Vice
Chairman of the Board. Mr. Bagley currently is a director of KLA-Tencor
Corporation, Teradyne, Inc. and Kulicke & Soffe Industries, Inc. He has served
on MTI's Board of Directors since June 1997. Mr. Bagley holds a BS in
Electrical Engineering and MS in Electrical Engineering from Mississippi State
University.
12
Robert A. Lothrop served as Senior Vice President of the J.R. Simplot Company
from January 1986 until his retirement in January 1991. From August 1986 until
July 1992 and since May 1994, Mr. Lothrop has served on the Board of Directors
of MTI. From July 1992 until November 1994, he served as a Director of MSI.
Mr. Lothrop also serves as a Director of MEI. Mr. Lothrop holds a BS in
Engineering from the University of Idaho.
Thomas T. Nicholson has served as Vice President and a director of Honda of
Seattle since 1988. Mr. Nicholson has also served since 1982 as President of
Mountain View Equipment and since 1962 has been a partner of CCT Land & Cattle.
He has served on MTI's Board of Directors since May 1980. Mr. Nicholson holds a
BS in Agriculture from the University of Idaho.
Don J. Simplot served as the President of Simplot Financial Corporation, a
wholly-owned subsidiary of the J.R. Simplot Company, from February 1985 until
January 1992. Since 1955, Mr. Don J. Simplot has served in various capacities
with the J.R. Simplot Company and presently serves as a Corporate Vice
President. Since April 1994, he has also served as a member of the Office of
the Chairman of the J.R. Simplot Company. He has served on MTI's Board of
Directors since February 1982. Mr. Don Simplot is also a Director of
AirSensors, Inc.
John R. Simplot founded and served as the Chairman of the Board of Directors
of the J.R. Simplot Company prior to his retirement in April 1994, at which time
he was named Chairman Emeritus. He has served on MTI's Board of Directors since
May 1980. Mr. Simplot also serves as a Director of MEI.
Gordon C. Smith has served as President of Wesmar, Inc. since September 1996
and has served as Secretary and Treasurer of SSI Management Corp. since
September 1994. Mr. Smith served in various management positions from July 1980
until January 1992 for Simplot Financial Corporation, a wholly-owned subsidiary
of the J.R. Simplot Company. From May 1988 until his retirement in March 1994,
Mr. Smith served as the President and Chief Executive Officer of the J.R.
Simplot Company. From February 1982 until February 1984 and since September
1990, he has served on MTI's Board of Directors. Mr. Smith holds a bachelor's
degree in Accounting from Idaho State University.
William P. Weber served in various capacities with Texas Instruments
Incorporated and its subsidiaries from 1962 until April 1998. From December
1986 until December 1993 he served as the President of Texas Instrument's
worldwide semiconductor operations and from December 1993 until his retirement
in April 1998, he served as Vice Chairman of Texas Instruments Incorporated. He
is a member of the board of directors of Kmart Corporation and Unigraphics
Solutions, Inc. He has served on MTI's Board of Directors since July 1998. Mr.
Weber holds a BS in Engineering from Lamar University and a MS in Engineering
from Southern Methodist University.
There is no family relationship between any director or executive officer of
the Company, except between John R. Simplot and Don J. Simplot, who are father
and son, respectively.
13
ITEM 2. PROPERTIES
The Company's principal semiconductor manufacturing, engineering,
administrative, and support facilities are located on an approximately 830 acre
site in Boise, Idaho. All facilities have been constructed since 1981 and are
owned by the Company. The Company has approximately 1.8 million square feet of
building space at this primary site. Of the total, approximately 489,000 square
feet is production space, 628,000 square feet is facility support space, and
678,000 square feet is office and other space.
With the acquisition of substantially all of TI's memory operations on
September 30, 1998, the Company obtained a number of additional properties
including a 587,000 square foot wafer fabrication facility located on 63 acres
in Avezzano, Italy, a 519,000 square foot assembly and test facility located on
7 acres in Singapore and a 418,000 square foot wafer fabrication facility
located on 36 acres in Richardson, Texas. The Avezzano facility includes
113,000 square feet for production space, 214,000 square feet for facility
support space and 260,000 for office and other space. The Singapore assembly
and test facility includes 181,000 square feet for production space, 98,000
square feet for facility support space and 241,000 square feet for office and
other space. Approximately 50,000 square feet at the Richardson facility is
being used for design engineering.
In 1995, the Company initiated construction of an approximate 2 million square
foot semiconductor memory manufacturing facility in Lehi, Utah. Completion of
this facility was suspended in February 1996 as a result of the decline in
average selling prices for semiconductor memory products. As of September 3,
1998, the Company had incurred construction costs of approximately $700 million
to build the existing structure. Market conditions for semiconductor memory
products will dictate when the Lehi complex is completed.
MEI's corporate headquarters, PC manufacturing operation and SpecTek operation
are based in a number of MEI-owned or leased facilities aggregating
approximately 300,000 square feet located in Nampa, Idaho. Approximately
100,000 square feet of the Nampa facilities are dedicated to PC manufacturing
and approximately 40,000 square feet are dedicated to the SpecTek operation.
The balance of the Nampa facilities is dedicated to sales, technical support,
customer service, administrative functions and warehouse space. In addition,
MEI is nearing completion of a new 325,000 square foot facility expected to be
in production in the fourth calendar quarter of 1998. The new facility is
expected to have approximately 135,000 square feet dedicated to PC
manufacturing. MEI leases a 77,000 square foot facility in Minneapolis,
Minnesota, dedicated primarily to PC sales, technical support and administrative
functions and a 75,000 square foot facility in Meridian, Idaho, dedicated to a
PC call center.
Equipment with a net book value of approximately $284 million was pledged as
collateral for outstanding debt and capital leases as of September 3, 1998.
Substantially all of the Company's facilities and equipment at the Boise and
Lehi sites not otherwise collateralized for outstanding debt and capital leases
is pledged as collateral for MTI's $400 million credit agreement.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party in various legal actions arising out of the normal
course of business, none of which is expected to have a material effect on the
Company's business and results of operations. (See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Certain Factors.")
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
Micron Technology, Inc.'s common stock is listed on the New York Stock
Exchange and is traded under the symbol "MU." The following table represents
the high and low closing sales prices for the Company's common stock for each
quarter of 1998 and 1997, as reported by The Wall Street Journal.
HIGH LOW
------- -------
1998:
4th quarter........................................... $35.250 $20.125
3rd quarter........................................... 34.938 23.813
2nd quarter........................................... 38.000 22.000
1st quarter........................................... 45.312 23.125
1997:
4th quarter........................................... $60.063 $38.375
3rd quarter........................................... 45.250 33.250
2nd quarter........................................... 39.125 29.000
1st quarter........................................... 34.750 20.375
HOLDERS OF RECORD
As of October 23, 1998, there were 6,523 shareholders of record of the
Company's common stock.
DIVIDENDS
The Company did not declare or pay any dividends during 1998 or 1997. The
Company declared and paid cash dividends of $0.15 per share during 1996.
Future dividends, if any, will vary depending on the Company's profitability and
anticipated capital requirements.
ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
-------- ----------------------- -----------------------
(Amounts in millions, except for per share data)
Net sales................................... $3,011.9 $3,515.5 $3,653.8 $2,952.7 $1,628.6
Gross margin................................ 280.4 976.4 1,455.4 1,624.0 839.2
Operating income (loss)..................... (493.6) 402.4 940.5 1,307.8 625.7
Net income (loss)........................... (233.7) 332.2 593.5 844.1 400.5
Diluted earnings (loss) per share........... (1.10) 1.55 2.78 4.00 1.94
Cash dividend declared per share............ -- -- 0.15 0.15 0.06
Current assets.............................. 1,499.2 1,972.4 964.0 1,274.1 793.2
Property, plant and equipment, net.......... 3,030.8 2,761.2 2,708.1 1,385.6 663.5
Total assets................................ 4,688.3 4,851.3 3,751.5 2,774.9 1,529.7
Current liabilities......................... 740.3 749.9 664.5 604.8 274.2
Long-term debt.............................. 757.3 762.3 314.6 129.4 124.7
Shareholders' equity........................ 2,693.0 2,883.1 2,502.0 1,896.2 1,049.3
Historical per share amounts have been restated in accordance with Statement
of Financial Accounting Standards No. 128. (See "Notes to Consolidated
Financial Statements." )
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of OperationsCertain Factors."
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may contain trend information and other forward
looking statements (including statements regarding future operating results,
future capital expenditures and facility expansion, new product introductions,
the effect of the Acquisition, technological developments 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 "Subsequent Events" and "Certain Factors." All period references
are to the Company's fiscal periods ended September 3, 1998, August 28, 1997 or
August 29, 1996, unless otherwise indicated. All per share amounts are
presented on a diluted basis unless otherwise stated.
Micron Technology, Inc. and its subsidiaries (hereinafter referred to
collectively as the "Company" or "MTI") principally design, develop, manufacture
and market semiconductor memory products and personal computer ("PC") systems.
The Company's PC systems business and semiconductor component recovery business
("SpecTek") are operated through Micron Electronics, Inc. ("MEI"), a 64% owned,
publicly-traded subsidiary of MTI.
RECENT EVENTS
The semiconductor industry in general, and the DRAM market in particular, is
experiencing a severe downturn. Per megabit prices declined approximately 60%
in 1998 following a 75% decline in 1997 and a 45% decline in 1996. These
extreme market conditions, while having an adverse effect on the Company's
results of operations, have also resulted in the Company being presented with
various strategic opportunities. On September 30, 1998, the Company completed
its acquisition (the "Acquisition") of substantially all of the semiconductor
memory operations of Texas Instruments, Inc. ("TI"). The Acquisition was
effected through the issuance of MTI debt and equity securities. Upon closing,
TI received approximately 28.9 million shares of MTI common stock, $740 million
principal amount, seven-year, 6.5% notes convertible into an additional
approximate 12.3 million shares of MTI common stock (the "Convertible Notes"),
and $210 million principal amount, seven year, 6.5% subordinated notes (the
"Subordinated Notes"). In addition to TI's memory assets, the Company received
approximately $550 million in cash. The Company and TI also entered into a ten-
year, royalty-free, life-of-patents, patent cross license that commences on
January 1, 1999. In addition, the parties have agreed to make cash adjustments
to ensure that current assets minus the sum of current and noncurrent assumed
liabilities of the acquired operations is $150 million as of September 30, 1998.
In light of the current market conditions in the semiconductor industry, the
Acquisition is expected to compound the effects of the downturn on the Company
and have a near term adverse effect on the Company's results of operations and
cash flows. (See "Subsequent Events - Acquisition" and "Certain Factors.")
On October 19, 1998, the Company 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 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. Intel also has the right to designate a 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") products, to meet 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
16
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) if the Company achieves the production and capital
expenditure milestones, or (ii) 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 the
investment). In addition, 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.
RESULTS OF OPERATIONS
Net loss for 1998 was $234 million, or $1.10 per share, on net sales of $3,012
million. Net income for 1997 was $332 million, or $1.55 per share, on net sales
of $3,516 million. Net income for 1996 was $594 million, or $2.78 per share, on
net sales of $3,654 million.
For 1998, the Company's semiconductor memory operations incurred an operating
loss in excess of $350 million on net sales of $1,386 million, primarily due to
continued sharp declines in average sales prices for the Company's semiconductor
memory products.
Results of operation for 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"), in February
1998 for cash proceeds of $249 million. Results of operations for 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 from approximately 79% to
approximately 64%.
NET SALES
1998 1997 1996
---------------------- ---------------------- --------------------
(DOLLARS IN MILLIONS)
Semiconductor memory products.......... $1,386.2 46% $1,738.1 49% $2,210.0 60%
PC Systems............................. 1,459.8 48% 1,463.5 42% 1,128.3 31%
Other.................................. 165.9 6% 313.9 9% 315.5 9%
-------- --- -------- --- -------- ---
Total net sales $3,011.9 100% $3,515.5 100% $3,653.8 100%
======== ======== ========
Net sales reported under "Semiconductor memory products" include sales of MTI
semiconductor memory products incorporated in MEI PC systems and other products,
which amounted to $37 million, $87 million and $184 million in 1998, 1997 and
1996, respectively. "Other" net sales for 1998 include revenue of approximately
$124 million from MCMS, which was sold in February 1998. (See "Subsequent
Events Acquisition" for a discussion of the Acquisition as it relates to net
sales of the Company's semiconductor memory products.)
Total net sales in 1998 decreased by 14% compared to 1997, principally due to
an approximate 60% decline in average selling prices of semiconductor memory
products for the year, offset by increased volumes of semiconductor memory
products sold and increased unit sales of PC systems. Total megabits of
semiconductor memory shipped in 1998 increased by approximately 110% over 1997
levels. This increase was principally a result of shifts in the Company's mix
of semiconductor memory products to a higher average density, transitions to
successive reduced die size ("shrink") versions of existing products and
improved manufacturing yields on existing products.
The Company's 16 Meg DRAM comprised approximately 74% and 80%, respectively,
of net sales of semiconductor memory in 1998 and 1997. The Company's principal
semiconductor memory product in 1996 was the 4 Meg DRAM, which comprised
approximately 87% of net sales of semiconductor memory. The Company
transitioned from the 16 Meg to the 64 Meg DRAM as its primary memory product in
the fourth quarter of 1998.
17
The Company also transitioned from EDO to Synchronous DRAM ("SDRAM") in the
third quarter of 1998. Approximately 46% of the Company's DRAM revenue was
attributable to SDRAM products for 1998.
Net sales of PC systems in 1998 were flat compared to 1997 primarily due to a
11% decrease in average selling prices for the Company's PC systems offset by an
increase in unit sales and a higher level of non-system revenue. The decline in
average selling prices was primarily attributable to a 12% decrease in the
selling prices for the Company's desktop PC systems and a 24% decline in selling
prices for notebook systems. Lower prices were largely the result of industry
price competitiveness, particularly for notebook products, and to the Company's
efforts to price its products more in line with its competition. Unit sales
were 5% higher in 1998 compared to 1997 due primarily to a 49% increase in unit
sales of the Company's notebook products.
Net sales in 1997 decreased by 4% compared to 1996, principally due to an
approximate 75% decline in average selling prices of semiconductor memory
products for the year, offset by increased volumes of semiconductor memory
products sold and increased unit sales of PC systems. Total megabits shipped in
1997 increased by more than 200% over 1996 levels. This increase was
principally a result of the transition to the 16 Meg DRAM as the Company's
principal memory product, ongoing transitions to shrink versions of existing
memory products, enhanced yields on existing memory products, the conversion of
all of the Company's fabs to 8-inch wafer processing at the end of 1996 and an
increase in total wafer outs. Unit sales of PC systems increased by 37% in 1997
compared to 1996, while average selling prices for PC systems declined. Higher
unit sales were largely attributed to significantly higher government and
corporate sales.
GROSS MARGIN
1998 % Change 1997 % Change 1996
------------ -------------- --------------
(DOLLARS IN MILLIONS)
Gross margin................................. $280.4 (71.3)% $976.3 (32.9)% $1,455.4
as a % of net sales.......................... 9.3% 27.8% 39.8%
(See "Subsequent Events Acquisition" for a discussion of the Acquisition as
it relates to gross margin on the Company's semiconductor memory products.)
The Company's gross margin percentage was significantly lower for 1998
compared to 1997. This decline in gross margin percentage was principally the
result of lower gross margin percentages on sales of the Company's semiconductor
memory products resulting principally from a continued severe decline in average
sales prices.
The Company's gross margin percentage on sales of semiconductor memory
products for 1998 was 5% compared to 39% and 56% in 1997 and 1996, respectively.
The decrease in gross margin percentage on sales of semiconductor memory
products for the periods presented was primarily the result of the continuing
sharp decline in average selling prices of 60% in 1998 and 75% in 1997,
partially offset by a decline in per megabit manufacturing costs in each period.
Decreases in the Company's manufacturing costs per megabit in each period were
achieved principally through increases in production. These increases in
production resulted principally from shifts in the Company's mix of
semiconductor memory products to a higher average density, transitions to
successive shrink versions of existing products and improved manufacturing
yields on existing products.
The gross margin percentage for the Company's PC operations for 1998 was 12%,
compared to 17% and 15% in 1997 and 1996, respectively. The gross margin
percentage for sales of the Company's PC systems decreased in 1998 compared to
1997 primarily as a result of significantly lower margins realized on sales of
the Company's notebook systems as a result of intense price pressure on these
products during the year and due to losses realized from disposition of PC
component inventories. The Company's gross margin in 1998 was favorably
affected, however, by an adjustment made in the fourth quarter of $12 million
related to revisions of estimates for certain contingencies for product and
process technology costs.
18
The decrease in gross margin percentage for 1997 compared to 1996 was
principally a result of lower average selling prices for semiconductor memory
products and higher net sales of PC systems as a percentage of total net sales.
The lower gross margin percentage on sales of semiconductor memory products in
1997 was principally due to sharp declines in average selling prices for such
products as compared to more gradual decreases in per megabit manufacturing
costs. Decreases in the Company's manufacturing costs per megabit were achieved
through the transition to the 16 Meg DRAM as the Company's principal memory
product, ongoing transitions to successive shrink versions of existing memory
products, enhanced yields on existing memory products, the conversion of all of
the Company's fabs to 8-inch wafer processing at the end of 1996 and an increase
in total wafer outs. The effect on the Company's gross margin from the decrease
in semiconductor gross margin was compounded by higher net sales of PC systems
as a percentage of net sales, as sales of PC systems generally had a lower gross
margin percentage than sales of the Company's semiconductor memory products in
1997 and 1996.
Cost of goods sold includes estimated costs of settlement or adjudication of
asserted and unasserted claims for patent infringement prior to the balance
sheet date and costs of product and process technology licensing arrangements.
The 1996 gross margin was increased by a net reduction of approximately $55
million in prior year accruals for product and process rights contingencies for
both semiconductor and personal computer operations.
SELLING, GENERAL AND ADMINISTRATIVE
1998 % Change 1997 % Change 1996
-------------- -------------- --------------
(DOLLARS IN MILLIONS)
Selling, general and administrative.......... $467.9 26.2% $370.9 21.5% $305.3
as a % of net sales.......................... 15.5% 10.6% 8.4%
(See "Subsequent Events Acquisition" for a discussion of the Acquisition as
it relates to selling, general and administrative expense.)
Selling, general and administrative expenses were higher in 1998 as compared
to 1997 and in 1997 as compared to 1996 primarily due to increased expenses
associated with the Company's PC operations. The higher level of selling,
general and administrative expenses for the Company's PC operations is
principally due to higher levels of personnel, advertising and technical and
professional fees associated with information technology consulting services.
The higher selling, general and administrative expenses for 1998 were partially
offset by a lower level of performance based compensation than in 1997. During
the fourth quarter of 1996, the Company charged operations with a $9 million
accrual relating to revisions of estimates for selling costs associated with
sales of PC systems.
RESEARCH AND DEVELOPMENT
1998 % Change 1997 % Change 1996
-------------- -------------- --------------
(DOLLARS IN MILLIONS)
Research and development..................... $271.8 30.1% $208.9 8.9% $191.9
as a % of net sales.......................... 9.0% 5.9% 5.3%
(See "Subsequent Events Acquisition" for a discussion of the Acquisition as
it relates to research and development.)
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 RDRAM, Double Data Rate ("DDR"), SyncLink, Flash
and SRAM memory products. The Company transitioned from the 16 Meg to the 64 Meg
DRAM as its primary memory product in the fourth quarter of 1998 and
transitioned from EDO to SDRAM in the third quarter of 1998. Other research and
development efforts are devoted to the design and development of RIC, flat panel
displays, graphics accelerator products and PC systems.
19
The Company substantially completed its transition from .30 (mu) to .25 (mu)
in the fourth quarter of 1998 and expects to transition from .25 (mu) to .21
(mu) in calendar 1998 and transition to .18 (mu) in calendar 1999. The Company's
process technology is expected to progress to tighter geometries in the next few
years as needed for the development of future generation semiconductor products.
OTHER OPERATING EXPENSE (INCOME)
Other operating expense for 1998 includes charges associated with PC
operations of $11 million resulting from employee termination benefits and
consolidation of domestic and international operations and $5 million from the
write-off of software development costs. Other operating expense reflects a net
pre-tax loss of $14 million and $3 million, and a net pre-tax gain of $15
million from the write-down and disposal of semiconductor manufacturing
operations equipment in 1998, 1997 and 1996, respectively.
GAIN ON SALE OF INVESTMENTS AND SUBSIDIARY STOCK
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 a consolidated pre-
tax gain of $190 million. 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. Diluted earnings per share for 1997 benefited by $0.50
from these gain transactions.
RESTRUCTURING CHARGE
Results of operations for 1996 were adversely affected by a $30 million pre-
tax restructuring charge resulting from the decisions by its then approximately
79% owned subsidiary, MEI, to discontinue sales of ZEOS brand PC systems and to
close the related PC manufacturing operations in Minneapolis, Minnesota. The
restructuring charge reduced 1996 earnings per share by $0.09.
INCOME TAX PROVISION (BENEFIT)
1998 % CHANGE 1997 % Change 1996
-------------- -------------- ------------- -------------- -------------
(DOLLARS IN MILLIONS)
Income tax provision......................... $(118.8) (144.4)% $267.3 (25.1)% $357.0
The effective tax rate for 1998, 1997 and 1996 was 35%, 43% and 37%,
respectively. The effective tax rate primarily reflects (i) the statutory
corporate income tax rate and the net effect of state taxation; (ii) 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 (iii) in
1998, the impact of a $4 million valuation allowance recorded for a deferred tax
asset relating to MEI's consolidation of its NetFRAME enterprise server
operations. The relatively higher effective tax rate in 1997 was principally
due to the provision for income taxes by the Company on earnings of its domestic
subsidiaries, and the gain on the sale of MEI common stock by the Company and
the issuance of common stock by MEI in 1997. Taxes on earnings of domestic
subsidiaries not consolidated for tax purposes may cause the effective tax rate
to vary significantly from period to period.
20
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," 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. 128 was first effective for the Company for its interim period ended
February 26, 1998. Basic and diluted earnings per share pursuant to the
requirements of SFAS No. 128 are presented on the face of the income statement
and in the notes to the financial statements. Descriptions of SFAS No. 130,
SFAS No. 131, SOP 98-1, and SFAS No. 133 are included in the notes to the
financial statements. SFAS No. 130 will require the Company to provide
additional disclosures in the first quarter of 1999 and 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 September 3, 1998, the Company had cash and liquid investments totaling
$649 million, representing a decrease of $338 million during 1998. As of
September 3, 1998, approximately $358 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.
Upon closing of the Acquisition on September 30, 1998, the Company received
$550 million. In addition, the Company and TI have agreed to make cash
adjustments to ensure that current assets minus the sum of current and
noncurrent assumed liabilities of the acquired operations is $150 million. As
part of the transaction, the Company also issued notes in an aggregate principal
amount of $950 million. The Company currently estimates it will spend
approximately $850 million over the next three years, primarily for equipment,
to upgrade the acquired facilities. In addition, it is expected that in the
near-term, per unit costs associated with products manufactured at the acquired
facilities will 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 have an adverse impact upon the Company's results of operations
and cash flows in the near term. (See "Subsequent Events Acquisition" and
"Certain Factors.")
On October 19, 1998, the Company issued to 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 common stock of the
Company for a purchase price of $500 million. The proceeds from this investment
are expected to be used for the development of next generation products,
including RDRAM, and certain capital expenditures related to this effort. (See
"Subsequent Events Equity Investment.")
The Company's principal sources of liquidity during 1998 were net cash
proceeds totaling $236 million from the sale of a 90% interest in MEI's contract
manufacturing subsidiary, MCMS, net cash flow from operations of $189 million
and proceeds of $103 million from the issuance of long-term debt. The principal
uses of funds in 1998 were $707 million for property, plant and equipment and
$189 million for repayments of equipment contracts and long-term debt.
The Company believes that in order to 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. As of September 3, 1998, the Company had entered into
contracts extending into the year 2000 for approximately $335 million for
equipment purchases and approximately $12 million for the construction of
facilities. The Company estimates it will spend approximately $900 million in
the next fiscal year for purchases of equipment and construction and improvement
of buildings at the Company's facilities, including the facilities obtained in
the Acquisition.
21
Cash flows from operations for 1998 were significantly lower than cash flows
from operations for 1997. Cash flows from operations are significantly affected
by average selling prices and variable cost per unit for the Company's
semiconductor memory products. For 1998, average selling prices for
semiconductor memory products declined at a rate faster than that which the
Company was able to decrease costs per megabit, and as a result, the Company's
cash flows have been significantly and adversely affected. The Company has a $1
billion shelf registration statement under which $500 million in convertible
subordinated notes were issued in July 1997 and under which the Company may
issue from time to time up to an additional $500 million in debt or equity
securities.
The Company has an aggregate of $511 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 September 3,
1998, the Company was in compliance with all covenants under the facilities and
had borrowings totaling approximately $8 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, renegotiate satisfactory new agreements or replace the
existing agreements with satisfactory replacements.
SUBSEQUENT EVENTS
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 approximately 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
memory assets, the Company received $550 million in cash. The Company and TI
also entered into a ten-year, royalty-free, life-of-patents, patent cross
license that commences on January 1, 1999. The parties have also agreed to make
cash adjustments to ensure that current assets minus the sum of current and
noncurrent assumed liabilities of the acquired operations is $150 million as of
September 30, 1998.
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 on March 31, 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 approximately 12.3 million shares of MTI common stock at a conversion price
of approximately $60 per share. The Subordinated Notes are subordinated to the
Convertible Notes, the Company's outstanding 7% Convertible Subordinated Notes
due July 1, 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 to 100% of
the output of the joint ventures: TECH Semiconductor Singapore ("TECH"), 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
Semiconductor ("KTI") in Japan owned by TI and Kobe Steel, Ltd. MTI acquired an
approximate 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.
Although the Company believes the Acquisition further leverages its
technology, the Company anticipates that the Acquisition will have a near term
adverse impact upon the Company's results of operations and cash flows. The
22
Company expects to transfer its product and process technology into the acquired
facilities (primarily the wholly-owned fabrication facilities in Avezzano, Italy
and the joint-venture facilities, KTI and TECH) over the next 12 to 18 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 in the acquired facilities. Until the Company is able to
complete the transfer of its product and process technology into the acquired
facilities, the Company expects that the per unit costs associated with products
manufactured at the acquired facilities will 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 significant reduction in the Company's royalty expenses
beginning January 1, 1999.
Annual selling, general and administrative expense is expected to increase by
approximately $30 million in future periods as a result of the Acquisition. The
increased selling, general and administrative expense associated with the
acquired operation is primarily for information technology services and systems.
Research and development efforts will continue to be coordinated from Boise,
Idaho. Annual research and development expense is expected to increase by
approximately $50 million as a result of the Acquisition. The increase in
research and development expense will be related primarily to the Company's
efforts to broaden its range of DRAM product offerings necessitated by the
expected increase in the Company's market share. Net interest expense is
expected to increase as a result of the Convertible Notes and Subordinated Notes
issued in the Acquisition. The Company currently estimates it will spend
approximately $850 million over the next three years, primarily for equipment,
to upgrade the wholly-owned facilities acquired in the Acquisition.
Pursuant to the Acquisition, the Company acquired the right and obligation to
purchase 100% of the production output of TECH and KTI. Under the terms of the
joint venture agreements, assembled and tested components are purchased at a
discount 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.
EQUITY INVESTMENT
On October 19, 1998, the Company issued to 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 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's registration rights
begin on March 31, 1999. Intel also has the right to designate a nominee
acceptable to the Company to the Company's Board of Directors.
23
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) if the Company achieves the production and capital
expenditure milestones, or (ii) 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). In addition, 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
Rights exceeding the number of shares originally issued.
MERGER
On September 11, 1998, the Company completed a stock-for-stock merger with
Rendition, Inc. ("Rendition"). Rendition designs, develops and markets high-
performance, low-cost, multi-functional graphics accelerators to the personal
computer market. The merger was accounted for as a business combination using
the pooling-of-interests method. Shareholders of Rendition received
approximately 3.7 million shares of the Company's common stock.
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 the result of system failures and business process interruption.
The following Year 2000 discussion does not incorporate Year 2000 issues as they
relate to the Acquisition. (See "Subsequent Events - Acquisition" and "Certain
Factors.")
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 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 September 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 present, a large portion of the
Company's manufacturing equipment has yet to be subjected to Compliance Testing.
The majority of the equipment so tested has either tested Year 2000 compliant or
had minor failures, the nature of which was inconsequential to the continued
operation of the equipment. Compliance Testing on the balance of the Company's
equipment set in Boise, Idaho, will be completed by mid-1999. 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
fourth quarter of calendar 1998. 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 but is in
24
very early stages. The Company's evaluation of Year 2000 compliance as it
relates to the Company's external dependencies is expected to be complete by
mid-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 mid-1999.
CERTAIN FACTORS
In addition to the factors discussed elsewhere in this Annual Report on Form
10-K, the following are important factors which could cause actual results or
events to differ materially from those contained in any forward-looking
statement 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, is experiencing a severe downturn. Per megabit prices declined
approximately 60% in 1998 following a 75% decline in 1997 and a 45% decline in
1996. In the event that average selling prices continue to decline at a faster
rate than that 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 dramatic
increase in worldwide capacity leading to further downward pressure on prices.
Approximately 70% of the Company's sales of semiconductor memory products
during 1998 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 Japan (KTI) and
25
Singapore (TECH). The Company expects the transfer of its product and process
technology into these fabrication facilities to take approximately 12 to 18
months; 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 exceed significantly the per unit
costs of products manufactured at the Company's Boise, Idaho, facility. As a
result, it is expected that the transaction with TI will have a near term
adverse effect on the Company's results of operations and cash flows.
The Acquisition is expected to have a significant effect on the Company's
future results of operations and cash flows, including, but not limited to: a
considerable negative impact on gross margin in the near term due in part to
significantly higher per unit manufacturing costs at the acquired facilities;
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 to be issued in the transaction;
increased capital spending relating to the wholly-owned acquired facilities in
Avezzano, Italy and Singapore; and the potential for further downward pressure
on the average selling prices the Company receives on its semiconductor memory
products.
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 significant 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.
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.
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. 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 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.
For a period of approximately 18 months, the Company will rely in part on TI
computer networks and information technology services with respect to certain of
its acquired facilities. During this period and beyond, the Company will also
be utilizing software obtained or licensed from TI to conduct specific portions
of business operations. Dependency upon TI systems will span calendar years
1999 and 2000, during which period Year 2000 issues may arise. The Company is
evaluating Year 2000 preparations associated with information technology
services provided by TI and with the operations acquired in the Acquisition.
The Company is in the process of developing Year 2000 contingency plans for the
acquired operations. 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 20% of the Company's net sales in 1998, and the
Company expects international sales to increase in 1999 as a result of the
Acquisition. In addition, the Company will significantly expand 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,
26
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 an 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, particularly
arising from the Acquisition.
Pursuant to the Acquisition, the Company acquired the right and obligation to
purchase 100% of the production output of the TECH joint venture in Singapore
and the KTI joint venture in Japan. Under the terms of the joint venture
agreements, assembled and tested components are purchased at a discount 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 led to a significant increase in megabit production
over recent periods. 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 1998 at the Company's Boise, Idaho, facilities or that the
Company will not experience decreases in manufacturing yield or production as it
attempts to implement future technologies at its Boise, Idaho, facility and the
facilities acquired in the Acquisition. 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 to
ramp such products at acceptable rates to acceptable yields, of which there can
be no assurance.
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 $511 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
27
enhancement programs. Failure to obtain financing would 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 September 3, 1998, the Company
had invested approximately $700 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, if
required, 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 personnel in the facilities
acquired 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.
ITEM 7A. 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. 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.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Consolidated Financial Statements as of September 3, 1998 and August 28, 1997 and for fiscal years
ended September 3, 1998, August 28, 1997 and August 29, 1996:
Consolidated Statements of Operations................................................................ 30
Consolidated Balance Sheets.......................................................................... 31
Consolidated Statements of Shareholders' Equity...................................................... 32
Consolidated Statements of Cash Flows................................................................ 33
Notes to Consolidated Financial Statements........................................................... 34
Report of Independent Accountants.................................................................... 51
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the Fiscal Years Ended September 3, 1998, August
28, 1997 and August 26, 1996.......................................................................... 57
29
MICRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN MILLIONS, EXCEPT FOR EARNINGS PER SHARE DATA)
FISCAL YEAR ENDED
----------------------------------------------------------
SEPTEMBER 3, AUGUST 28, AUGUST 29,
1998 1997 1996
----------------- ------------------ ------------------
Net sales................................................ $3,011.9 $3,515.5 $3,653.8
Costs and expenses:
Cost of goods sold..................................... 2,731.5 2,539.2 2,198.4
Selling, general and administrative.................... 467.9 370.9 305.3
Research and development............................... 271.8 208.9 191.9
Restructuring charge................................... -- -- 29.6
Other operating expense (income), net.................. 34.3 (5.9) (11.9)
-------- -------- --------
Total costs and expenses............................ 3,505.5 3,113.1 2,713.3
-------- -------- --------
Operating income (loss).................................. (493.6) 402.4 940.5
Gain on sale of investments and subsidiary stock, net 157.0 186.7 4.7
Gain (loss) on issuance of subsidiary stock, net......... 1.3 29.1 (0.6)
Interest income, net..................................... 0.1 0.9 14.3
-------- -------- --------
Income (loss) before income taxes and minority interests. (335.2) 619.1 958.9
Income tax benefit (provision)........................... 118.8 (267.3) (357.0)
Minority interests in net income......................... (17.3) (19.6) (8.4)
-------- -------- --------
Net income (loss)........................................ $ (233.7) $ 332.2 $ 593.5
======== ======== ========
Earnings (loss) per share:
Basic.................................................. $ (1.10) $ 1.58 $ 2.86
Diluted................................................ (1.10) 1.55 2.78
Number of shares used in per share calculation:
Basic.................................................. 212.2 210.0 207.7
Diluted................................................ 212.2 214.3 213.1
The accompanying notes are an integral part of the financial statements.
30
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31
MICRON TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT FOR PAR VALUE DATA)
AS OF
----------------------------
SEPTEMBER 3, AUGUST 28,
1998 1997
------------ -----------
ASSETS
Cash and equivalents............................................................ $ 558.6 $ 619.5
Liquid investments.............................................................. 90.8 368.2
Receivables..................................................................... 489.5 458.9
Inventories..................................................................... 291.1 454.2
Prepaid expenses................................................................ 7.5 9.4
Deferred income taxes........................................................... 61.7 62.2
-------- --------
Total current assets.......................................................... 1,499.2 1,972.4
Product and process technology, net............................................. 84.9 51.1
Property, plant and equipment, net.............................................. 3,030.8 2,761.2
Other assets.................................................................... 73.4 66.6
-------- --------
Total assets............................................................... $4,688.3 $4,851.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses........................................... $ 456.6 $ 546.1
Short-term debt................................................................. 10.1 10.6
Deferred income................................................................. 7.5 14.5
Equipment purchase contracts.................................................... 168.8 62.7
Current portion of long-term debt............................................... 97.3 116.0
-------- --------
Total current liabilities..................................................... 740.3 749.9
Long-term debt.................................................................. 757.3 762.3
Deferred income taxes........................................................... 284.2 239.8
Non-current product and process technology...................................... 11.3 44.1
Other liabilities............................................................... 50.1 35.6
-------- --------
Total liabilities.......................................................... 1,843.2 1,831.7
-------- --------
Minority interests.............................................................. 152.1 136.5
Commitments and contingencies
Common stock, $0.10 par value, authorized 1.0 billion shares, issued and
outstanding 213.5 million and 211.3 million shares, respectively............... 21.4 21.1
Additional capital.............................................................. 526.8 483.8
Retained earnings............................................................... 2,144.8 2,378.2
-------- --------
Total shareholders' equity.................................................... 2,693.0 2,883.1
-------- --------
Total liabilities and shareholders' equity................................. $4,688.3 $4,851.3
======== ========
The accompanying notes are an integral part of the financial statements.
32
MICRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS AND SHARES IN MILLIONS)
FISCAL YEAR ENDED
--------------------------------------------------------------------------------
SEPTEMBER 3, 1998 AUGUST 28, 1997 AUGUST 29, 1996
------------------------- ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------ ----------- ------------
COMMON STOCK
Balance at beginning of year........... 211.3 $ 21.1 208.8 $ 20.9 206.4 $ 20.6
Stock sold............................. 0.4 0.1 0.3 -- 0.4 0.1
Stock option plan...................... 1.2 0.1 2.2 0.2 2.0 0.2
Conversion of minority interest........ 0.6 0.1 -- -- -- --
----- -------- ----------- -------- ----------- --------
Balance at end of year................. 213.5 $ 21.4 211.3 $ 21.1 208.8 $ 20.9
===== ======== =========== ======== =========== ========
ADDITIONAL CAPITAL
Balance at beginning of year........... 483.8 $ 434.7 $ 391.5
Stock sold............................. 8.1 7.7 11.1
Stock option plan...................... 12.4 26.9 11.5
Tax effect of stock purchase plans..... 5.2 14.5 20.6
Conversion of minority interest........ 17.3 -- --
-------- -------- --------
Balance at end of year................. $ 526.8 $ 483.8 $ 434.7
======== ======== ========
RETAINED EARNINGS
Balance at beginning of year........... $2,378.2 $2,046.4 $1,484.1
Net income............................. (233.7) 332.2 593.5
Cumulative translation adjustment...... 0.3 (0.4) --
Dividends paid......................... -- -- (31.2)
-------- -------- --------
Balance at end of year................. $2,144.8 $2,378.2 $2,046.4
======== ======== ========
Dividends declared per share............ $ -- $ -- $ 0.15
The accompanying notes are an integral part of the financial statements.
33
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34
MICRON TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
FISCAL YEAR ENDED
-----------------------------------------
SEPTEMBER 3, AUGUST 28, AUGUST 29,
1998 1997 1996
--------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................................... $(233.7) $ 332.2 $ 593.5
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization............................................. 606.6 476.3 383.0
Gain on sale and issuance of investments and subsidiary stock, net........ (157.0) (186.7) (4.7)
Change in assets and liabilities, net of effects of sale of MCMS
Decrease (increase) in receivables...................................... (73.8) (97.7) 107.5
Decrease (increase) in inventories...................................... 140.0 (194.2) (61.1)
Increase (decrease) in accounts payable and accrued expenses,
net of plant and equipment purchases................................... (86.1) 143.7 (57.8)
Increase (decrease) in non-current product and process liability........ (32.8) 0.6 40.0
Restructuring charge...................................................... -- -- 29.6
Gain from equipment sales................................................. (0.9) (2.9) (20.7)
Increase in deferred income taxes......................................... 30.1 93.9 48.1
Other..................................................................... (3.2) 38.4 3.1
------- ------- ---------
Net cash provided by operating activities................................... 189.2 603.6 1,060.5
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment.............................. (707.1) (516.9) (1,524.9)
Purchase of held-to-maturity securities..................................... (52.5) (10.1) --
Purchase of available-for-sale securities................................... (601.1) (436.7) (194.6)
Proceeds from sale of subsidiary stock, net of MCMS cash.................... 235.9 199.9 --
Proceeds from sales and maturities of available-for-sale securities......... 916.1 113.8 617.7
Proceeds from maturities of held-to-maturity securities..................... 34.0 -- --
Proceeds from sale of equipment............................................. 33.4 15.5 33.8
Other....................................................................... (44.7) (44.4) (11.5)
------- ------- ---------
Net cash used for investing activities...................................... (186.0) (678.9) (1,079.5)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt.............................................. 102.9 587.8 264.7
Net proceeds from (repayments of) borrowings on lines of credit............. -- (90.0) 90.0
Payments on equipment purchase contracts.................................... (63.5) (53.9) (127.0)
Repayments of debt.......................................................... (125.7) (101.1) (54.9)
Proceeds from issuance of common stock...................................... 20.6 34.8 25.1
Proceeds from issuance of stock by subsidiaries............................. 3.4 55.4 2.3
Debt issuance costs......................................................... (1.8) (14.3) (2.0)
Payment of dividends........................................................ -- -- (31.2)
------- ------- ---------
Net cash provided by (used for) financing activities........................ (64.1) 418.7 167.0
------- ------- ---------
Net increase (decrease) in cash and equivalents............................. (60.9) 343.4 148.0
Cash and equivalents at beginning of year................................... 619.5 276.1 128.1
------- ------- ---------
Cash and equivalents at end of year......................................... $ 558.6 $ 619.5 $ 276.1
======= ======= =========
Supplemental disclosures
Income taxes paid, net...................................................... $ (21.7) $(122.9) $ (403.4)
Interest paid, net of amounts capitalized................................... (59.9) (27.9) (12.3)
Noncash investing and financing activities:
Equipment acquisitions on contracts payable and capital leases........... 212.6 41.5 180.3
The accompanying notes are an integral part of the financial statements.
35
MICRON TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL TABULAR DOLLAR AND SHARE AMOUNTS ARE STATED IN MILLIONS)
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Micron Technology, Inc. and its domestic and foreign subsidiaries
(the "Company" or "MTI"). The Company designs, develops, manufactures, and
markets semiconductor memory products, primarily DRAM, principally for use in
personal computers ("PCs"). Through its majority-owned subsidiary, Micron
Electronics, Inc. ("MEI"), the Company also designs, develops, manufactures,
markets, and supports PC systems and network servers. All significant
intercompany accounts and transactions have been eliminated. The Company's
fiscal year is the 52 or 53 week period ending on the Thursday closest to August
31. The fiscal year ended September 3, 1998 contained 53 weeks compared to 52
weeks in fiscal years 1997 and 1996.
CERTAIN CONCENTRATIONS AND ESTIMATES: Approximately 70% of the Company's
sales of semiconductor memory products are to the PC or peripheral markets.
Certain components used by the Company in manufacturing of PC systems are
purchased from a limited number of suppliers.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION: Revenue from product sales to direct customers is
recognized when title transfers to the customer, primarily upon shipment. The
Company defers recognition of sales to distributors, which allow certain rights
of return and price protection, until distributors have sold the products. Net
sales include revenues under cross-license agreements with third parties and
under government research contracts.
EARNINGS PER SHARE: The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share" in 1998. Basic earnings per
share is calculated using the average number of shares of common stock
outstanding during the year. 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. Common stock equivalents consist of
stock options. Diluted earnings per share further assumes the conversion of the
Company's convertible subordinated notes for the period they were outstanding,
unless such assumed conversion would result in anti-dilution.
FINANCIAL INSTRUMENTS: Cash equivalents include highly liquid short-term
investments with original maturities of three months or less, readily
convertible to known amounts of cash. The amounts reported as cash and
equivalents, liquid investments, receivables, other assets, accounts payable and
accrued expenses and equipment purchase contracts are considered to be
reasonable approximations of their fair values. The fair value of the Company's
long-term debt as of September 3, 1998 and August 28, 1997 approximated $787.5
million and $850.6 million, respectively. The fair value estimates presented
herein were based on market interest rates and other market information
available to management as of each balance sheet date presented. The use of
different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair value amounts. The reported fair values
do not take into consideration potential expenses that would be incurred in an
actual settlement.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash, liquid investments and trade
accounts receivable. The Company invests cash through high-credit-quality
financial institutions and performs periodic evaluations of the relative credit
standing of these financial institutions. The Company, by policy, limits the
concentration of credit exposure by restricting investments with any single
obligor. A concentration of credit risk may exist with respect to trade
receivables, as a substantial portion of the
36
MICRON TECHNOLOGY, INC.
Company's customers are affiliated with the computer, telecommunications and
office automation industries. The Company performs ongoing credit evaluations of
customers worldwide and generally does not require collateral from its
customers. Historically, the Company has not experienced significant losses on
receivables.
INVENTORIES: Inventories are stated at the lower of average cost or market.
Cost includes labor, material and overhead costs, including product and process
technology costs.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of 5 to 30 years for buildings and 2 to 20 years for
equipment. When property or equipment is retired or otherwise disposed of, the
net book value of the asset is removed from the Company's books and the net gain
or loss is included in the determination of income.
The Company capitalizes interest on borrowings during the active construction
period of major capital projects. Capitalized interest is added to the cost of
the underlying assets and is amortized over the useful lives of the assets. For
1998, 1997 and 1996, the Company capitalized $15.5 million, $6.0 million and
$7.8 million of interest, respectively, in connection with various capital
expansion projects.
The Company reviews the carrying value of property, plant and equipment for
impairment whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment loss
is recognized equal to an amount by which the carrying value exceeds the fair
value of assets.
PRODUCT AND PROCESS TECHNOLOGY: Costs related to the conceptual formulation
and design of products and processes are expensed as research and development.
Costs incurred to establish patents and acquire product and process technology
are capitalized. Capitalized costs are amortized on the straight-line method
over the shorter of the estimated useful life of the technology, the patent term
or the agreement, ranging up to 10 years. The Company has royalty-bearing
license agreements that allow it to manufacture and sell semiconductor memory
devices, PC hardware and software.
SUBSIDIARY STOCK SALES: Gains and losses on issuance of stock by a subsidiary
are recognized in income.
ADVERTISING: Advertising costs are charged to operations as incurred.
Advertising costs expensed in 1998, 1997 and 1996 were $70.8 million, $35.7
million and $25.4 million, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS: 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 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 non-
owner 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.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair
37
MICRON TECHNOLOGY, INC.
value. SFAS No. 133 is effective for the Company in 1999. The Company is
currently evaluating the effect SFAS No. 133 will have on future results of
operations and financial position as the acquired TI memory operations are
integrated into the Company. Implementation of SFAS No. 133 is required for the
Company by the first quarter of 2000.
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires companies to capitalize certain costs of
computer software developed or obtained for internal use. The Company is
currently evaluating the effect on the Company's results of operations and
financial position. Implementation of SOP 98-1 is required for the Company by
the end of 2000.
FOREIGN CURRENCY: The U.S. dollar is the Company's functional currency for
substantially all of its operations. For international operations where the
local currency is the functional currency, assets and liabilities are translated
into U.S. dollars at exchange rates in effect at the balance sheet date and
income and expense items are translated at the average exchange rates prevailing
during the period.
RESTATEMENTS AND RECLASSIFICATIONS: Certain reclassifications have been made,
none of which affected the results of operations, to present the financial
statement on a consistent basis.
SUPPLEMENTAL BALANCE SHEET INFORMATION 9/3/98 8/28/97
- --------------------------------------------------------------------------
LIQUID INVESTMENTS
- --------------------------------------------------------------------------
Available-for-sale securities:
Commercial paper........................... $ 228.4 $ 377.4
U.S. Government agency..................... 25.9 248.7
Bankers' acceptances....................... -- 96.1
State and local governments................ -- 5.8
------- -------
254.3 728.0
Held-to-maturity securities:
Commercial paper........................... 70.4 72.7
State and local governments................ 37.4 45.2
U.S. Government agency..................... 205.0 39.3
Bankers' acceptances....................... -- 3.8
------- -------
312.8 161.0
------- -------
Total investments............................. 567.1 889.0
Less cash equivalents......................... (476.3) (520.8)
------- -------
$ 90.8 $ 368.2
======= =======
Securities classified as available-for-sale are stated at amortized cost which
approximates fair value. Securities classified as held-to-maturity are stated
at amortized cost. As of September 3, 1998, the total amount of securities
classified as available-for-sale mature within 90 days and the total amount of
securities classified as held-to-maturity mature within one year.
38
MICRON TECHNOLOGY, INC.
SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED) 9/3/98 8/28/97
- ---------------------------------------------------------------------------------------------------------------------
RECEIVABLES
- ---------------------------------------------------------------------------------------------------------------------
Trade receivables.................................................................... $293.0 $ 447.2
Income taxes receivable.............................................................. 191.9 17.9
Allowance for returns and discounts.................................................. (11.4) (29.3)
Allowance for doubtful accounts...................................................... (5.4) (9.0)
Other receivables.................................................................... 21.4 32.1
------ -------
$489.5 $ 458.9
====== ========
INVENTORIES
- ---------------------------------------------------------------------------------------------------------------------
Finished goods......................................................... $ 92.8 $ 128.6
Work in progress....................................................... 139.6 195.7
Raw materials and supplies............................................. 58.7 129.9
------- --------
$ 291.1 $ 454.2
======= ========
PRODUCT AND PROCESS TECHNOLOGY
- ---------------------------------------------------------------------------------------------------------------------
Product and process technology, at cost.............................................. $ 161.7 $ 108.1
Less accumulated amortization........................................................ (76.8) (57.0)
------- --------
$ 84.9 $ 51.1
======= ========
Amortization of capitalized product and process technology costs was $23.1
million in 1998; $11.4 million in 1997; and $13.6 million in 1996.
PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------------------------------------------------------------------------------------------
Land................................................................................. $ 34.8 $ 35.4
Buildings............................................................................ 915.5 817.9
Equipment............................................................................ 3,017.4 2,416.2
Construction in progress............................................................. 704.6 681.9
--------- ---------
4,672.3 3,951.4
Less accumulated depreciation and amortization....................................... (1,641.5) (1,190.2)
--------- ---------
$3,030.8 $2,761.2
========= =========
As of September 3, 1998, property, plant and equipment included unamortized
costs of $701.2 million for the Company's semiconductor memory manufacturing
facility in Lehi, Utah, of which $640.4 million has not been 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 September 3,
1998, it was determined to have no impairment.
Depreciation expense was $567.6 million, $461.7 million and $363.7 million for
1998, 1997 and 1996, respectively.
39
MICRON TECHNOLOGY, INC.
SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED) 9/3/98 8/28/97
- ---------------------------------------------------------------------------------------------------------
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- -------------------------------------
Accounts payable.................................................. $232.8 $277.0
Salaries, wages and benefits...................................... 84.9 93.7
Product and process technology payable............................ 46.4 99.9
Taxes payable other than income................................... 44.5 37.3
Interest payable.................................................. 7.3 6.9
Other............................................................. 40.7 31.3
------ ------
$ 456.6 $546.1
====== ======
DEBT
- -------------------------------------------------------------------------------------------------------------------
Convertible Subordinated Notes payable, due July 2004, interest rate of 7%................. $500.0 $ 500.0
Notes payable in periodic installments through July 2015, weighted average
interest rate 7.38% and 7.33%, respectively............................................. 315.2 331.3
Capitalized lease obligations payable in monthly installments through August
2004, weighted average interest rate of 7.38% and 7.68%, respectively................... 39.4 40.7
Other...................................................................................... -- 6.3
------ -------
854.6 878.3
Less current portion....................................................................... (97.3) (116.0)
------ -------
$757.3 $ 762.3
====== =======
The Company has $500 million in 7% convertible subordinated notes due July 1,
2004 which are convertible into shares of the Company's common stock at $67.44
per share. 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.
During the fourth quarter of 1998 the Company renegotiated its revolving
credit agreement which expires May 2000. The total amount the Company is
eligible to borrow was reduced to $400 million. 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
September 3, 1998, MTI had no borrowings outstanding under the agreement.
MEI has an unsecured $100 million 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 $11.1 million at September
3, 1998). 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 September 3, 1998, MEI was eligible to borrow the full amount under the
agreements and had aggregate borrowings of approximately $8.2 million
outstanding under its credit agreements.
Certain notes payable are collateralized by plant and equipment with a total
cost of approximately $496.2 million and accumulated depreciation of
approximately $242.0 million as of September 3, 1998. Equipment under capital
leases, and the accumulated depreciation thereon, were approximately $45.0
million and $15.4 million, respectively, as of September 3, 1998, and $59.8
million and $21.6 million, respectively, as of August 28, 1997.
The Company leases certain facilities and equipment under operating leases.
Total rental expense on all operating leases was $16.3 million, $8.0 million and
$5.7 million for 1998, 1997 and 1996, respectively. Minimum future rental
commitments under operating leases aggregate $34.4 million as of September 3,
1998 and are payable as follows (in millions): 1999, $9.3; 2000, $7.9; 2001,
$6.6; 2002, $5.4; 2003 and thereafter, $5.2.
40
MICRON TECHNOLOGY, INC.
Maturities of long-term debt are as follows:
NOTES CAPITAL
FISCAL YEAR PAYABLE LEASES
----------- ------- -------
1999................................................................. $ 91.9 $10.9
2000................................................................. 96.1 10.5
2001................................................................. 81.1 16.5
2002................................................................. 27.5 4.6
2003................................................................. 17.2 1.3
2004 and thereafter.................................................. 502.2 2.3
Less discount and interest........................................... (0.8) (6.7)
------ -----
$815.2 $39.4
====== =====
Interest income in 1998, 1997, and 1996 is net of interest expense of $49.4
million, $31.3 million and $8.6 million, respectively.
STOCK PURCHASE PLANS
As of September 3, 1998, the Company had in place the 1994 Stock Option Plan,
the 1996 Stock Option Plan, the NSO Plan and the 1997 NSO Plan, collectively
the "Active Stock Plans." As of September 3, 1998, there was an aggregate of
42.9 million shares of the Company's common stock authorized for issuance under
the Active Stock Plans. No options were available for grant under the Company's
1985 Incentive Stock Option Plan, which expired in 1995, however, options remain
outstanding under that plan. Options are subject to terms and conditions
determined by the Board of Directors, and generally are exercisable in
increments of 20% during each year of employment beginning one year from the
date of grant. All stock options issued prior to January 19, 1998 expire six
years from the date of grant and all subsequent options granted expire 10 years
from the date of grant.
Option activity under MTI's Stock Plans is summarized as follows:
FISCAL YEAR ENDED
----------------------------------------------------------------------------
9/3/98 8/28/97 8/29/96
--------------------- --------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
------------------------------------------------------------------------------
Outstanding at beginning of year........... 21.7 $28.85 14.5 $29.38 13.7 $15.54
Assumption of subsidiary options........... 0.3 1.74
Granted.................................... 2.0 30.37 14.3 36.57 3.3 71.61
Terminated or cancelled.................... (0.6) 32.58 (4.9) 49.28 (0.5) 23.11
Exercised.................................. (1.3) 9.96 (2.2) 11.94 (2.0) 6.94
---- ---- ----
Outstanding at end of year................. 22.1 29.59 21.7 28.85 14.5 29.38
==== ==== ====
Exercisable at end of year................. 8.9 22.80 5.3 17.63 2.9 14.54
Shares available for future grants......... 26.4 -- 2.9 -- 5.1 --
Options outstanding under the Active Stock Plans as of September 3, 1998, were
at per share prices ranging from $1.50 to $45.78. Options exercised were at per
share prices ranging from $1.50 to $31.65 in 1998, $1.72 to $37.87 in 1997 and
$1.53 to $28.87 in 1996.
41
[THIS PAGE INTENTIONALLY LEFT BLANK]
42
MICRON TECHNOLOGY, INC.
The following table summarizes information about MTI options outstanding under
the Active Stock Plans as of September 3, 1998:
MTI OUTSTANDING OPTIONS MTI EXERCISABLE OPTIONS
- -----------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OF SHARES LIFE (IN PRICE of shares PRICE
YEARS)
- -----------------------------------------------------------------------------------
$1.50 - $9.60 1.8 1.7 $ 4.74 1.7 $ 4.67
$10.19 -$19.98 2.8 1.5 13.85 2.0 13.75
$20.09 -$29.94 6.8 3.3 26.69 2.3 25.84
$30.39 -$45.78 10.7 4.7 39.56 2.9 37.49
---- ---
22.1 8.9
==== ===
The Company's 1989 Employee Stock Purchase Plan ("ESPP") and MEI's 1995
Employee Stock Purchase Plan ("MEI ESPP") allow eligible employees to purchase
shares of the Company's common stock and MEI's common stock through payroll
deductions. The shares can be purchased for 85% of the lower of the beginning
or ending fair market value of each offering period and are restricted from
resale for a period of one year from the date of purchase. Purchases are
limited to 20% of an employee's eligible compensation. A total of 6.8 million
shares of Company common stock are reserved for issuance under the ESPP, of
which 6.5 million shares have been issued as of September 3, 1998. A total of
2.5 million shares of MEI common stock are reserved for issuance under the MEI
ESPP, of which approximately 508,000 shares had been issued as of September 3,
1998.
MEI's 1995 Stock Option Plan provides for the granting of incentive and
nonstatutory stock options. As of September 3, 1998, there were 10 million
shares of common stock reserved for issuance under the option plan. Exercise
prices of the incentive and nonstatutory stock options have generally been 100%
and 85%, respectively, of the fair market value of the Company's common stock on
the date of grant. Options are granted subject to terms and conditions
determined by the MEI Board of Directors, and generally are exercisable in
increments of 20% for each year of employment beginning one year from date of
grant and generally expire six years from date of grant.
On March 19, 1998, the MEI Board of Directors approved an option repricing
program pursuant to which essentially all MEI employees could exchange
outstanding options under the option plan for new options having an exercise
price equal to the average closing price of the Company's common stock for the
five business days preceding April 3, 1998 and having generally the same terms
and conditions, including vesting and expiration terms, as the options
exchanged. Options to purchase 2,345,000 shares were exchanged under the
program.
During 1998, Mr. Joel J. Kocher, MEI's Chief Executive Officer, President and
Chairman of the Board of Directors, was granted options to purchase a total of
650,000 shares of the Company's common stock. Of these 650,000 options, 500,000
were granted under the option plan and 150,000 were granted as non-plan grants
outside of the option plan. A total of 250,000 options vest after completion by
Mr. Kocher of seven (7) years of employment with the Company, subject to
immediate early vesting if the Company achieves certain financial criteria
relating to profitability, net revenue, net margin and cash balance increases.
43
MICRON TECHNOLOGY, INC.
Option activity under MEI's 1995 Stock Option Plan is summarized as follows
(amounts in thousands, except per share amounts):
FISCAL YEAR ENDED
-------------------------------------------------------------------------
9/3/98 8/28/97 8/29/96
----------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year........... 3,559 $16.98 1,908 $13.70 1,795 $ 8.22
Granted.................................... 5,842 13.20 1,926 19.90 1,294 12.11
Terminated or cancelled.................... (4,041) 17.40 (200) 16.52 (189) 17.35
Exercised.................................. (68) 11.37 (75) 9.49 (992) 1.02
------- ------- -------
Outstanding at end of year................. 5,292 12.56 3,559 16.98 1,908 13.70
======= ======= =======
Exercisable at end of year................. 747 13.24 473 14.45 172 13.84
Shares available for future grants......... 4,764 -- 1,416 -- 3,141 --
The following table summarizes information about MEI options outstanding under
the MEI 1995 Stock Option Plan as of September 3, 1998 (amounts in thousands,
except per share amounts):
MEI OUTSTANDING OPTIONS MEI EXERCISABLE OPTIONS
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE AVERAGE
OF REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL PRICE OF SHARES PRICE
- ---------------------------------------------------------------------------------------------------------------------
below $5.00 17 .23 $ 3.00 17 $ 3.00
$5.00 - $10.00 742 5.43 9.14 8 9.31
$10.01 - $15.00 3,836 5.23 12.47 564 12.36
$15.01 - $20.00 600 4.26 17.17 150 17.44
above $20.00 97 4.40 21.96 8 21.96
----- ---
5,292 747
===== ===
In December 1994, ZEOS International, Ltd. ("ZEOS"), subsequently merged with
MEI, awarded shares of its common stock to certain of its employees subject to
their continued employment as of January 1, 1996. Compensation expense was
recognized over the vesting period based upon the fair market value of the stock
at the date of award. To satisfy this award, MEI issued approximately 151,000
shares of its common stock in January 1996.
Pro forma Disclosure
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," issued in October 1995. Accordingly, compensation cost has been
recorded based on the intrinsic value of the option only. The Company
recognized $3.4 million and $8.4 million of compensation cost in 1998 and 1997,
respectively, for stock-based employee compensation awards. The pro forma
compensation cost for stock-based employee compensation awards was $67.6 million
and $38.9 million in 1998 and 1997, respectively. If the Company had elected to
recognize compensation cost based on the fair value of
44
MICRON TECHNOLOGY, INC.
the options granted at grant date as prescribed by SFAS No. 123, net income
(loss) and earnings (loss) per share would have been changed to the pro forma
amounts indicated in the table below:
(DOLLARS IN MILLIONS 1998 1997 1996
EXCEPT PER SHARE AMOUNTS) AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $(233.7) $(301.3) $332.2 $293.3 $593.5 $559.8
Diluted earnings (loss) per share $ (1.10) $ (1.42) $ 1.55 $ 1.35 $ 2.76 $ 2.60
The above pro forma amounts, for purposes of SFAS No. 123, reflect the portion
of the estimated fair value of awards earned in 1998 and 1997. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized over
the options' vesting period (for stock options) and over the offering period for
stock purchases under the Employee Stock Purchase Plans. The effects on pro
forma disclosures of applying SFAS 123 are not likely to be representative of
the effects on pro forma disclosures of future years. Because SFAS 123 is
applicable only to options granted subsequent to August 31, 1995, the effect
will not be fully reflected until 2000.
The Company used the Black-Scholes model to value stock options for pro forma
presentation. The assumptions used to estimate the value of the MTI options
included in the pro forma amounts and the weighted average estimated fair value
of MTI options granted are as follows:
STOCK OPTION EMPLOYEE STOCK
PLAN SHARES PURCHASE PLAN SHARES
----------------------------- --------------------------
1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Average expected life (years) 3.5 3.5 3.5 0.25 0.25 0.25
Expected volatility 60% 58% 57% 60% 58% 57%
Risk-free interest rate (zero coupon U.S. Treasury 5.6% 6.2% 5.9% 5.1% 5.0% 5.1%
note)
Weighted average fair value at grant
Exercise price equal to market price $14.70 $15.17 $34.13 -- -- --
Exercise price less than market price $27.77 $21.26 $37.14 $9.68 $6.61 $20.67
The assumptions used to estimate the value of the MEI options included in the
pro forma amounts and the weighted average estimated fair value of MEI options
granted are as follows:
STOCK OPTION EMPLOYEE STOCK
PLAN SHARES PURCHASE PLAN SHARES
----------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Average expected life (years) 3.3 3.5 3.5 0.5 0.5 0.5
Expected volatility 70% 70% 70% 70% 70% 70%
Risk-free interest rate (zero coupon U.S. Treasury 5.6% 6.2% 5.9% 5.1% 5.0% 5.1%
note)
Weighted average fair value at grant
Exercise price equal to market price $6.57 $10.68 $6.50 -- -- --
Exercise price less than market price $9.25 $11.41 $6.61 $3.78 $5.39 $3.68
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, the Black-Scholes model requires the input of
highly subjective assumptions, including the expected stock price volatility and
option life. Because the Company's stock options granted to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, existing models do not necessarily
provide a reliable measure of the fair value of its stock options granted to
employees. For purposes of this model no dividends have been assumed.
45
MICRON TECHNOLOGY, INC.
EMPLOYEE SAVINGS PLAN
The Company has 401(k) profit-sharing plans ("RAM Plans") in which
substantially all employees are participants. Employees may contribute from 2%
to 16% of their eligible pay to various savings alternatives in the RAM Plans.
The Company's contribution provides for an annual match of the first $1,500 of
eligible employee contributions, in addition to contributions based on the
Company's financial performance. The Company's RAM Plans expenses were $11.3
million in 1998, $18.9 million in 1997 and $16.9 million in 1996.
RESTRUCTURING
In 1996, MEI adopted and completed a plan to discontinue the manufacture and
sale of ZEOS brand PC systems. The Company recorded a restructuring charge of
$29.6 million in 1996, comprised principally of $14.5 million relating to the
disposition of ZEOS components and systems and $13 million to write off
unamortized goodwill.
OTHER OPERATING EXPENSE (INCOME)
Other operating expense for 1998 includes charges of $11.1 million associated
with PC operations resulting from employee termination benefits and
consolidation of domestic and international operations and $5.2 million from the
write-off of software development costs. Other operating expense (income)
reflects net pre-tax losses of $13.9 million and $2.6 million from the write-
down and disposal of semiconductor memory operations equipment in 1998 and 1997,
respectively, and a net pre-tax gain of $15.4 million in 1996. Fiscal year 1998
activity also includes a one-time benefit recognized by MEI resulting from a net
rebate of $4.4 million associated with a change of providers of on-site service
contracts.
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 a wholly-
owned subsidiary of MEI, resulting in a consolidated pre-tax gain of $157.0
million (approximately $37.8 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., 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 $200.0 million and MEI sold 3 million newly
issued shares for net proceeds of $48.2 million, resulting in consolidated pre-
tax gains of $164.6 million and $25.3 million, respectively (for a total of
approximately $93.7 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
$22.1 million for 1997 relating to sales of investments. The Company recognized
a deferred tax liability on the resultant gain from the sale of MEI common stock
in the second quarter of 1997.
46
MICRON TECHNOLOGY, INC.
INCOME TAXES
The provision for income taxes consists of the following:
9/3/98 8/28/97 8/29/96
------- -------- --------
Current:
U.S. federal...................................................... $(156.1) $ 152.1 $ 274.5
State............................................................. 0.1 21.1 25.1
Foreign........................................................... 1.7 1.5 9.3
------- -------- --------
(154.3) 174.7 308.9
------- -------- --------
Deferred:
U.S. federal...................................................... 77.6 89.5 45.5
State............................................................. (42.1) 3.1 2.6
------- -------- --------
35.5 92.6 48.1
------- -------- --------
Income tax provision (benefit)...................................... $(118.8) $ 267.3 $ 357.0
======= ======== ========
The tax benefit associated with the exercise of nonstatutory stock options and
disqualifying dispositions by employees of shares issued in the Company's stock
option and purchase plans reduced taxes payable by $5.2 million, $14.5 million
and $20.6 million for 1998, 1997 and 1996, respectively. Such benefits are
reflected as additional capital.
A reconciliation between income tax computed using the federal statutory rate
and the income tax provision (benefit) follows:
9/3/98 8/28/97 8/29/96
------- -------- --------
U.S. federal income tax at statutory rate........................... $(117.3) $ 216.7 $ 332.7
State taxes, net of federal benefit................................. (25.9) 14.1 17.5
Basis difference in domestic subsidiaries........................... 11.6 24.8 --
Other............................................................... 12.8 11.7 6.8
------- -------- --------
Income tax provision (benefit)...................................... $(118.8) $ 267.3 $ 357.0
======= ======== ========
State taxes reflect utilization of investment tax credits of $21.1 million,
$15.3 million and $31.2 million for 1998, 1997 and 1996, respectively. As of
September 3, 1998, the Company had unused state net operating loss carryforwards
of approximately $288.8 million for tax purposes which expire through 2113 and
unused state credits of approximately $44.3 million for tax and financial
reporting purposes which expire through 2005.
Deferred income taxes reflect the net tax effects of temporary differences
between the basis of assets and liabilities for financial reporting and income
tax purposes. Deferred income tax assets totaled $182.7 million and $160.4
million and liabilities totaled $405.2 million and $338.0 million as of
September 3, 1998 and August 28,
47
MICRON TECHNOLOGY, INC.
1997, respectively. The approximate tax effects of temporary differences which
give rise to the net deferred tax liability (benefit) are as follows:
9/3/98 8/28/97
------- --------
Current deferred tax asset:
Accrued product and process technology...................................... $ 10.4 $ 16.3
Inventory................................................................... 11.3 14.4
Accrued compensation........................................................ 14.8 8.3
Deferred income............................................................. 3.1 6.3
Net operating loss acquired in merger....................................... -- 0.6
Other....................................................................... 22.1 16.3
------- --------
Net deferred tax asset................................................... 61.7 62.2
------- --------
Noncurrent deferred tax asset (liability):
Excess tax over book depreciation........................................... (217.5) (191.6)
Accrued product and process technology...................................... (3.4) 21.7
Investment in subsidiary.................................................... (56.7) (44.7)
Other....................................................................... (6.6) (25.2)
------- --------
Net deferred tax liability............................................... (284.2) (239.8)
------- --------
Total net deferred tax liability.............................................. $(222.5) $ (177.6)
======= ========
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 $20.6 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.
EARNINGS (LOSS) PER SHARE
During 1998, the Company adopted SFAS No. 128, "Earnings Per Share," which
changed the standard for computing and presenting earnings per share. Earnings
per share for periods prior to 1998 have been restated as required by SFAS No.
128.
48
MICRON TECHNOLOGY, INC.
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.
9/3/98 8/28/97 8/29/96
- ------------------------------------------------------------------------------------------------------------
Net income (loss) available for common shareholders,
(233.7) $ 332.2 $ 593.5
Basic and Diluted ======= ======== ========
Weighted average common stock outstanding - Basic 212.2 210.0 207.7
Net effect of dilutive stock options --- 4.3 5.4
------- -------- --------
Weighted average common stock and common
stock equivalents Diluted 212.2 214.3 213.1
======= ======== ========
Basic earnings (loss) per share (1.10) $ 1.58 $ 2.86
======= ======== ========
Diluted earnings (loss) per share (1.10) $ 1.55 $ 2.78
======= ======== ========
Earnings per share computations exclude stock options and potential shares
for convertible debentures to the extent that their effect would have been
antidilutive.
EXPORT SALES AND MAJOR CUSTOMERS
Export sales were $612.7 million for 1998, including $275.3 million in sales
to Europe and $179.0 million in sales to Asia Pacific, $47.4 million in sales to
Canada and $42.9 million in sales to Japan. Export sales were $735.4 million
and $938.4 million in 1997 and 1996, respectively. No customer individually
accounted for 10% or more of the Company's total net sales.
COMMITMENTS AND CONTINGENCIES
As of September 3, 1998, the Company had commitments of $335.1 million for
equipment purchases and $12.3 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.
49
MICRON TECHNOLOGY, INC.
SUBSEQUENT EVENTS
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 approximately 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
memory assets, the Company received $550 million in cash. The Company and TI
also entered into a ten-year, royalty-free, life-of-patents, patent cross
license that commences on January 1, 1999. The parties have also agreed to make
cash adjustments to ensure that current assets minus the sum of current and
noncurrent assumed liabilities of the acquired operations is $150 million as of
September 30, 1998.
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 on March 31, 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 approximately 12.3 million shares of MTI common stock at a conversion price
of approximately $60 per share. The Subordinated Notes are subordinated to the
Convertible Notes, the Company's outstanding 7% Convertible Subordinated Notes
due July 1, 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 to 100% of
the output of the joint ventures, TECH and KTI. MTI acquired an approximate 30%
interest in TECH and a 25% interest in KTI. In the Acquisition, the Company
acquired the obligation to purchase and the rights to 100% of the production
output of TECH and KTI. Under the provisions of the joint venture agreements,
the Company purchases assembled and tested components from the joint ventures at
prices discounted from end customer sales price(s). Pursuant to the
Acquisition, the Company acquired the right and obligation to purchase 100% of
the production output of the TECH Semiconductor joint venture in Singapore and
the KTI Semiconductor joint venture in Japan. Under the terms of the joint
venture agreements, assembled and tested components are purchased at a discount
from worldwide average sales prices.
EQUITY INVESTMENT
On October 19, 1998, the Company issued to 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 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
50
MICRON TECHNOLOGY, INC.
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 on March 31, 1999. Intel also
has the right to designate a 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 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
(Intel's purchase price per Right at the time of the investment). In addition,
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 shares originally issued.
MERGER
On September 11, 1998, the Company completed a stock-for-stock merger with
Rendition. Rendition designs, develops and markets high-performance, low-cost,
multi-functional graphics accelerators to the personal computer market. The
merger was accounted for as a business combination using the pooling-of-
interests method. Shareholders of Rendition received approximately 3.7 million
shares of the Company's common stock.
51
QUARTERLY FINANCIAL AND MARKET INFORMATION (UNAUDITED)
(Dollars in millions, except for per share data)
1998 QUARTER 1ST 2nd 3rd 4th
-------------- -------------- -------------- --------------
Net sales............................................... $ 954.6 $ 755.4 $ 609.9 $ 692.0
Costs and expenses:
Cost of goods sold.................................... 744.1 733.1 603.6 650.7
Selling, general and administrative................... 124.5 135.7 109.0 98.7
Research and development.............................. 63.9 69.9 66.2 71.8
Other operating expense (income)...................... 4.6 24.2 3.4 2.1
------- ------- ------- -------
Total costs and expenses........................... 937.1 962.9 782.2 823.3
------- ------- ------- -------
Operating income (loss)................................. 17.5 (207.5) (172.3) (131.3)
Gain (loss) on sale of investments and subsidiary
stock, net............................................. -- 157.1 -- (0.1)
Gain on issuance of subsidiary stock, net............... 0.1 0.5 0.2 0.5
Interest income (expense), net.......................... (1.3) 1.9 0.8 (1.3)
------- ------- ------- -------
Income (loss) before income taxes....................... 16.3 (48.0) (171.3) (132.2)
Income tax benefit (provision).......................... (6.5) 8.9 67.3 49.1
Minority interests...................................... (0.2) (9.0) (2.1) (6.0)
------- ------- ------- -------
Net income (loss)....................................... $ 9.6 $ (48.1) $(106.1) $ (89.1)
======= ======= ======= =======
Diluted earnings (loss) per share....................... $ 0.04 $ (0.23) $ (0.50) $ (0.42)
Quarterly stock price:
High.................................................. $45.312 $38.000 $34.938 $35.250
Low................................................... 23.125 22.000 23.813 20.125
1997 QUARTER 1ST 2nd 3rd 4th
-------------- -------------- -------------- --------------
Net sales............................................... $ 728.1 $ 876.2 $ 965.0 $ 946.2
Costs and expenses:
Cost of goods sold.................................... 572.9 657.5 650.0 658.8
Selling, general and administrative................... 76.4 97.4 92.3 104.8
Research and development.............................. 47.2 46.8 52.6 62.3
Other operating expense (income) (0.6) (2.5) 1.1 (3.9)
------- ------- ------- -------
Total costs and expenses........................... 695.9 799.2 796.0 822.0
------- ------- ------- -------
Operating income........................................ 32.2 77.0 169.0 124.2
Gain on sale of investments and subsidiary stock, net... 10.1 176.5 0.1 --
Gain (loss) on issuance of subsidiary stock, net........ (0.9) 28.6 (0.1) 1.5
Interest (expense) income, net.......................... (2.1) (1.8) 1.5 3.3
------- ------- ------- -------
Income before income taxes.............................. 39.3 280.3 170.5 129.0
Income tax provision.................................... (15.6) (131.2) (67.8) (52.7)
Minority interests...................................... (3.1) (6.4) (5.9) (4.2)
------- ------- ------- -------
Net income.............................................. $ 20.6 $ 142.7 $ 96.8 $ 72.1
======= ======= ======= =======
Diluted earnings per share.............................. $ 0.10 $ 0.67 $ 0.45 $ 0.33
Quarterly stock price:
High.................................................. $34.750 $39.125 $45.250 $60.063
Low................................................... 20.375 29.000 33.250 38.375
As of October 23, 1998, the Company had 6,523 shareholders of record. The
Company did not declare or pay any dividends during 1998 or 1997.
Net gains on sale of investments and subsidiary stock for the third quarter of
1998 includes a pretax gain of $157.0 million on the sale of 90% of the
Company's contract manufacturing subsidiary. Net gain on sales of
52
investments and subsidiary stock in the second quarter of 1997 includes a pretax
gain of $189.9 million for the sale of 15.4 million shares of common stock of
MEI.
Other operating expense for the second quarter of 1998 includes charges of
$13.0 million associated with the Company's PC operations resulting from a
reduction in workforce and consolidation of domestic and international
operations.
53
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and
Shareholders of Micron Technology, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Micron
Technology, Inc., and its subsidiaries at September 3, 1998 and August 28, 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended September 3, 1998, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial schedule based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Boise, Idaho
September 28, 1998, except the
Subsequent Event Note, which
is as of October 19, 1998
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information concerning the registrant's executive officers is included
under the caption "Officers and Directors of the Registrant" following Part I,
Item 1 of this report. Other information required by Items 10, 11, 12 and 13
will be contained in the registrant's Proxy Statement which will be filed with
the Securities and Exchange Commission within 120 days after September 3, 1998,
and is incorporated herein by reference.
55
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Consolidated financial statements and financial statement schedules--(see
"Item 8. Financial Statements and Supplementary Data--Notes to Consolidated
Financial Statements--Contingencies.")
EXHIBIT Description
- ----------- ---------------------------------------------------------------------------------------------
2.1 Acquisition Agreement between the Registrant and Texas Instruments Incorporated dated June
18, 1998 (1)
2.2 Second Amendment to Acquisition Agreement dated as of September 30, 1998 between the
Registrant and Texas Instruments Incorporated (2)
2.3 Agreement and Plan of Reorganization dated as of June 22, 1998 between the Registrant and
Rendition, Inc. (3)
3.1 Certificate of Incorporation of the Registrant, as amended (4)
3.7 Bylaws of the Registrant, as amended (5)
4.1 Indenture dated as of June 15, 1997 between the Registrant and Norwest Bank Minnesota,
National Association (the "Trustee"), relating to the issuance of 7% Convertible
Subordinated Notes due July 1, 2004 (the "Notes") (6)
4.2 Supplemental Trust Indenture dated as of June 15, 1997 between the Registrant and the
Trustee, relating to the Notes (including the form of Note) (6)
4.3 Rendition Affiliate Agreement dated as of June 22, 1998 among the Registrant, Rendition,
Inc. and each of the affiliates of Rendition (3)
10.6 Form of Micron Affiliate Agreement among the Registrant, Rendition, Inc. and each of the
affiliates of the Registrant (3)
10.82 Form of Indemnification Agreement between the Registrant and its officers and directors (7)
10.91 Board Resolution regarding stock and bonus plan vesting schedules in the event of change
in control of the Registrant (8)
10.92 Additional provisions related to Management Bonus Arrangements for Certain Executive
Officers (8)
10.100 Amended and Restated 1985 Incentive Stock Option Plan (9)
10.109 Form of Management bonus arrangements for Executive Officers of Micron Technology,
Inc., and Micron Semiconductor, Inc., for 1994 (10)
10.110 1994 Stock Option Plan (11)
10.111 Executive Bonus Plan (4)
10.112 Forms of Severance Agreement (12)
10.116 Registration Rights Agreement dated as of June 28, 1996 between the Registrant and
Canadian Imperial Bank of Commerce (13)
10.117 Registration Rights Agreement dated as of July 29, 1996 between the Registrant and
Canadian Imperial Bank of Commerce (13)
10.118(a) Irrevocable Proxy dated June 28, 1996 by Canadian Imperial Bank of Commerce in favor of the
Registrant (13)
10.118(b) Irrevocable Proxy dated July 24, 1998 by the Registrant in favor of the Canadian Imperial
Bank of Commerce
56
EXHIBIT DESCRIPTION
------- -----------
10.119(a) Reformed Irrevocable Proxy dated July 23, 1998 by J.R. Simplot Company in favor of the
Registrant
10.119(b) Irrevocable Proxy dated July 24, 1998 by the Registrant in favor of the Canadian Imperial
Bank of Commerce
10.120 Form of Agreement and Amendment to Severance Agreement between the Company and its executive
officers (14)
10.125 Second Supplemental Trust Indenture dated as of September 30, 1998 between the Registrant
and the Trustee, relating to the issuance of 6 1/2% Convertible Subordinated Notes due
October 2, 2003 (the "TI Notes") (including the form of TI Note) (2)
10.126 Subordinated Promissory Note dated September 30, 1998, issued by the Registrant in the name
of Texas Instruments Incorporated in the amount of $210,000,000 (2)
10.127 Registration Rights Agreement dated as of July 20, 1998, between the Registrant, Canadian
Imperial Bank of Commerce and J.R. Simplot Company (5)
10.128 Nonstatutory Stock Option Plan (15)
10.129 1997 Nonstatutory Stock Option Plan (16)
10.130 Micron Quantum Devices, Inc. 1996 Stock Option Plan (16)
10.131 Sample Stock Option Assumption Letter for Micron Quantum Devices, Inc. 1996 Stock Option
Plan (16)
10.132 1998 Nonstatutory Stock Option Plan (17)
10.133 Rendition, Inc. 1994 Equity Incentive Plan (17)
10.134 Sample Stock Option Assumption Letter for Rendition, Inc. 1994 Equity Incentive Plan (17)
10.135 Second Amended and Restated Revolving Credit Agreement dated as of September 1, 1998 among
the Registrant and several financial institutions
10.136 Securities Purchase Agreement dated as of October 15, 1998 between the Registrant and Intel
Corporation (Confidential Treatment has been requested for a portion of this document)
10.137 Securities Rights and Restrictions Agreement dated as of October 19, 1998 between the
Registrant and Intel Corporation
10.138 Stock Rights Agreement dated as of October 19, 1998 between the Registrant and Intel
Corporation (Confidential Treatment has been requested for a portion of this document)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
- ---------
(1) Incorporated by Reference to Quarterly Report on Form 10-Q for the
fiscal quarter ended May 28, 1998
(2) Incorporated by Reference to Current Report on Form 8-K filed on
October 14, 1998, as amended on October 16, 1998
(3) Incorporated by Reference to Registration Statement on Form S-4 as
amended (Reg. No. 333-60129)
(4) Incorporated by Reference to Annual Report on Form 10-K as amended for
the fiscal year ended August 31, 1995
(5) Incorporated by Reference to Registration Statement on Form S-3 as
amended (Reg. No. 333-57973)
(6) Incorporated by Reference to Current Report on Form 8-K filed on July
3, 1997
(7) Incorporated by Reference to Proxy Statement for the 1986 Annual
Meeting of Shareholders
57
(8) Incorporated by Reference to Annual Report on Form 10-K for the fiscal
year ended August 31, 1989
(9) Incorporated by Reference to Registration Statements on Forms S-8
(Reg. Nos. 33-38665, 33-38926, and 33-52653)
(10) Incorporated by Reference to Annual Report on Form 10-K for the fiscal
year ended September 2, 1993
(11) Incorporated by Reference to Registration Statement on Form S-8 (Reg.
Nos. 33-57887, 333-07283 and 333-50353)
(12) Incorporated by Reference to Quarterly Report on Form 10-Q for the
fiscal quarter ended February 29, 1996
(13) Incorporated by Reference to Annual Report on Form 10-K for the fiscal
year ended August 29, 1996
(14) Incorporated by Reference to Quarterly Report on Form 10-Q for the
fiscal quarter ended February 27, 1997
(15) Incorporated by Reference to Registration Statement on Form S-8 (Reg.
Nos. 333-17073 and 333-50353)
(16) Incorporated by Reference to Registration Statement on Form S-8 (Reg.
No. 333-50353)
(17) Incorporated by Reference to Registration Statement on Form S-8 (Reg.
No. 333-65449)
(b) Reports on Form 8-K:
The Registrant did not file any Reports on Form 8-K during the quarter ended
September 3, 1998.
Micron is a trademark of the Company. GoBook, mPower and Transport Trek are
trademarks of MEI. ClientPro, Millennia and NetFRAME are registered trademarks
of MEI. Micron Power is a service mark of MEI. All other product names
appearing herein are for identification purposes only and may be trademarks of
their respective companies.
58
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BOISE,
STATE OF IDAHO, ON THE 2ND DAY OF NOVEMBER, 1998.
MICRON TECHNOLOGY, INC.
By: /S/ WILBUR G. STOVER, JR.
--------------------------------
WILBUR G. STOVER, JR.,
VICE PRESIDENT OF FINANCE, CHIEF
FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature TITLE DATE
--------- ----- ----
/S/ STEVEN R. APPLETON Chairman of the Board, November 2, 1998
- ----------------------
(STEVEN R. APPLETON) Chief Executive Officer
and President
/S/ JAMES W. BAGLEY Director November 2, 1998
- -------------------
(JAMES W. BAGLEY)
/S/ ROBERT A. LOTHROP Director November 2, 1998
- ---------------------
(ROBERT A. LOTHROP)
/S/ THOMAS T. NICHOLSON Director November 2, 1998
- -----------------------
(THOMAS T. NICHOLSON)
/S/ DON J. SIMPLOT Director November 2, 1998
- -----------------------
(DON J. SIMPLOT)
/S/ JOHN R. SIMPLOT Director November 2, 1998
- -----------------------
(JOHN R. SIMPLOT)
/S/ GORDON C. SMITH Director November 2, 1998
- -----------------------
(GORDON C. SMITH)
/S/ WILLIAM P. WEBER Director November 2, 1998
- -----------------------
(WILLIAM P. WEBER)
59
Schedule II
MICRON TECHNOLOGY, INC.
Valuation and Qualification Accounts
(dollars in millions)
Balance at Charged Deduction/ Balance at End
Beginning of (Credited) to Write-Off of Period
Period Costs and Expenses
------------------------------------------------------------------------------
Allowance for Doubtful Accounts
- --------------------------------------
Year ended September 3, 1998 $ 9.0 $(3.3) $ (0.3) $ 5.4
Year ended August 28, 1997 9.0 0.2 (0.2) 9.0
Year ended August 29, 1996 7.4 1.9 (0.3) 9.0
Allowance for Obsolete Inventory
- --------------------------------------
Year ended September 3, 1998 $23.7 $12.4 $(16.3) $19.8
Year ended August 28, 1997 14.5 15.9 (6.7) 23.7
Year ended August 29, 1996 11.1 8.1 (4.7) 14.5
Deferred Tax Asset Valuation Allowance
- --------------------------------------
Year ended September 3, 1998 $ - $ 4.1 $ - $ 4.1
Year ended August 28, 1997 - - - -
Year ended August 29, 1996 - - - -
60