Micron Technology, Inc.
MICRON TECHNOLOGY INC (Form: 10-Q, Received: 01/13/2009 15:01:19)






UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 4, 2008

OR


o
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
(IRS Employer
incorporation or organization)
Identification No.)
   
8000 S. Federal Way, Boise, Idaho
83716-9632
(Address of principal executive offices)
(Zip Code)
   
Registrant’s telephone number, including area code
(208) 368-4000


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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

The number of outstanding shares of the registrant’s common stock as of January 8, 2009 was 763,793,881.




 
 

 

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
(Unaudited)

 
Quarter ended
 
December 4,
2008
   
November 29,
2007
 
             
             
Net sales
  $ 1,402     $ 1,535  
Cost of goods sold
    1,851       1,530  
Gross margin
    (449 )     5  
                 
Selling, general and administrative
    102       112  
Research and development
    178       163  
Restructure
    (66 )     13  
Other operating (income) expense, net
    9       (23 )
Operating loss
    (672 )     (260 )
                 
Interest income
    10       30  
Interest expense
    (30 )     (21 )
Other non-operating income (expense), net
    (14 )     (1 )
Loss before taxes and noncontrolling interests
    (706 )     (252 )
                 
Income tax (provision)
    (13 )     (7 )
Noncontrolling interests in net (income) loss
    13       (3 )
Net loss
  $ (706 )   $ (262 )
                 
Loss per share:
               
Basic
  $ (0.91 )   $ (0.34 )
Diluted
    (0.91 )     (0.34 )
                 
Number of shares used in per share calculations:
               
Basic
    773.3       771.9  
Diluted
    773.3       771.9  
                 

 


See accompanying notes to consolidated financial statements.

1

MICRON TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS
(in millions except par value)
(Unaudited)

 
As of
 
December 4,
2008
   
August 28,
2008
 
             
Assets
           
Cash and equivalents
  $ 1,025     $ 1,243  
Short-term investments
    3       119  
Receivables
    1,031       1,032  
Inventories
    883       1,291  
Other current assets
    95       94  
Total current assets
    3,037       3,779  
Intangible assets, net
    354       364  
Property, plant and equipment, net
    8,460       8,811  
Equity method investments
    432       84  
Other assets
    393       392  
Total assets
  $ 12,676     $ 13,430  
                 
Liabilities and shareholders’ equity
               
Accounts payable and accrued expenses
  $ 943     $ 1,111  
Deferred income
    192       114  
Equipment purchase contracts
    157       98  
Current portion of long-term debt
    343       275  
Total current liabilities
    1,635       1,598  
Long-term debt
    2,523       2,451  
Other liabilities
    332       338  
Total liabilities
    4,490       4,387  
                 
Commitments and contingencies
               
                 
Noncontrolling interests in subsidiaries
    2,702       2,865  
                 
Common stock, $0.10 par value, authorized 3,000 shares, issued and outstanding 763.8 and 761.1 shares, respectively
     76        76  
Additional capital
    6,574       6,566  
Accumulated deficit
    (1,162 )     (456 )
Accumulated other comprehensive (loss)
    (4 )     (8 )
Total shareholders’ equity
    5,484       6,178  
Total liabilities and shareholders’ equity
  $ 12,676     $ 13,430  


 

See accompanying notes to consolidated financial statements.
 
2

MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Quarter ended
 
December 4,
2008
   
November 29,
2007
 
             
Cash flows from operating activities
           
Net loss
  $ (706 )   $ (262 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    594       504  
Provision to write down inventories to estimated market values
    369       62  
Noncash restructure charges (credits)
    (83 )     6  
(Gain) loss from disposition of equipment, net
    14       (10 )
Change in operating assets and liabilities:
               
(Increase) decrease in receivables
    138       (80 )
Decrease in inventories
    39       27  
Decrease in accounts payable and accrued expenses
    (67 )     (6 )
Increase in deferred income
    78       2  
Other
    (17 )     33  
Net cash provided by operating activities
    359       276  
                 
Cash flows from investing activities
               
Acquisition of equity method investment
    (409 )     --  
Expenditures for property, plant and equipment
    (270 )     (765 )
Purchases of available-for-sale securities
    (2 )     (123 )
Proceeds from maturities of available-for-sale securities
    123       365  
Proceeds from sales of property, plant and equipment
    6       64  
Proceeds from sales of available-for-sale securities
    --       19  
Other
    63       34  
Net cash used for investing activities
    (489 )     (406 )
                 
Cash flows from financing activities
               
Proceeds from debt
    285       --  
Cash received from noncontrolling interests
    --       150  
Repayments of debt
    (163 )     (212 )
Distributions to noncontrolling interests
    (150 )     --  
Payments on equipment purchase contracts
    (64 )     (122 )
Other
    4       2  
Net cash used for financing activities
    (88 )     (182 )
                 
Net decrease in cash and equivalents
    (218 )     (312 )
Cash and equivalents at beginning of period
    1,243       2,192  
Cash and equivalents at end of period
  $ 1,025     $ 1,880  
                 
Supplemental disclosures
               
Income taxes paid, net
  $ (8 )   $ (6 )
Interest paid, net of amounts capitalized
    (29 )     (21 )
Noncash investing and financing activities:
               
Equipment acquisitions on contracts payable and capital leases
    153       152  



 
See accompanying notes to consolidated financial statements.
 
3

MICRON TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tabular amounts in millions except per share amounts)
(Unaudited)

Business and Significant Accounting Policies

Basis of presentation:   Micron Technology, Inc. and its subsidiaries (hereinafter referred to collectively as the “Company”) manufacture and market DRAM, NAND Flash memory, CMOS image sensors and other semiconductor components.  The Company has two segments, Memory and Imaging.  The Memory segment’s primary products are DRAM and NAND Flash and the Imaging segment’s primary product is CMOS image sensors.  The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its consolidated subsidiaries.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company and its consolidated results of operations and cash flows.

The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31.  The Company’s fiscal 2009 contains 53 weeks and the Company’s first quarter of fiscal 2009, which ended on December 4, 2008, contained 14 weeks.  The Company’s fiscal 2008, which ended on August 28, 2008, contained 52 weeks and the Company’s first quarter of fiscal 2008 contained 13 weeks.  All period references are to the Company’s fiscal periods unless otherwise indicated.  These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended August 28, 2008.

Risks and uncertainties:   The Company’s liquidity is highly dependent on average selling prices for its products and the timing of capital expenditures, both of which can vary significantly from period to period.  Depending on conditions in the semiconductor memory market, the Company’s cash flows from operations and current holdings of cash and investments may not be adequate to meet the Company’s needs for capital expenditures and operations.  Historically, the Company has used external financing to fund these needs.  Due to conditions in the credit markets, many financing instruments used by the Company in the past are currently not available on terms acceptable to the Company.  The Company has significantly reduced its capital expenditures for 2009.  In addition, the Company is pursuing further financing alternatives, further reducing capital expenditures and implementing further cost-cutting initiatives.

Recently issued accounting standards:   In December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 140-1 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.”  FSP No. FAS 140-1 and FIN 46(R)-8 requires public entities to provide additional disclosures about transfers of financial assets and their involvement with variable interest entities.  The Company is required to adopt FSP No. FAS 140-1 and FIN 46(R)-8 effective in the second quarter of 2009.

In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).”  FSP No. APB 14-1 requires that issuers of convertible debt instruments that may be settled in cash upon conversion separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate as interest cost is recognized in subsequent periods.  The Company is required to adopt FSP No. APB 14-1 at the beginning of 2010.  On adoption, the Company will retrospectively account for its $1.3 billion of 1.875% convertible senior notes issued in May of 2007 under the provisions of FSP No. APB 14-1.  The Company estimates that debt recognized on issuance of the $1.3 billion convertible senior notes would be approximately $400 million lower under FSP No. APB 14-1.  The difference of approximately $400 million would be accreted to interest expense over the approximate seven-year term of the notes.  The Company is continuing to evaluate the full impact that the adoption of FSP No. APB 14-1 will have on its financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations (“SFAS No. 141(R)”), which establishes the principles and requirements for how an acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines what information to disclose.  The Company is required to adopt SFAS No. 141(R) effective at the beginning of 2010.  The impact of the adoption of SFAS No. 141(R) will depend on the nature and extent of business combinations occurring on or after the beginning of 2010.

4

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.”  SFAS No. 160 requires that (1) noncontrolling interests be reported as a separate component of equity, (2) net income attributable to the parent and to the noncontrolling interest be separately identified in the income statement, (3) changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and (4) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value.  The Company is required to adopt SFAS No. 160 effective at the beginning of 2010.  The Company is evaluating the impact that the adoption of SFAS No. 160 will have on its financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.”  Under SFAS No. 159, the Company may elect to measure many financial instruments and certain other items at fair value on an instrument by instrument basis, subject to certain restrictions.  The Company adopted SFAS No. 159 effective at the beginning of 2009.  The Company did not elect to measure any existing items at fair value upon the adoption of SFAS No. 159.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 (as amended by subsequent FSP’s) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  The Company adopted SFAS No. 157 effective at the beginning of 2009 for financial assets and financial liabilities.  The adoption did not have a significant impact on the Company’s financial statements.  The Company is required to adopt SFAS No. 157 for all other assets and liabilities at the beginning of 2010 and it is evaluating the impact that the adoption will have on its financial statements.


Supplemental Balance Sheet Information

 
Receivables
 
December 4, 2008
   
August 28, 2008
 
             
Trade receivables (net of allowance of $3 and $2, respectively)
  $ 643     $ 741  
Income and other taxes
    31       43  
Other
    357       248  
    $ 1,031     $ 1,032  

As of December 4, 2008, other receivables included amounts due from Intel Corporation (“Intel”) of $208 million in connection with the termination of a supply agreement for NAND Flash memory produced at the Company’s Boise facility and $36 million related to NAND Flash product design and process development activities.  (See “Restructure” note.)  Other receivables as of December 4, 2008 also included $77 million due from settlement of litigation.  As of August 28, 2008, other receivables included $71 million due from Intel for amounts related to NAND Flash product design and process development activities, $75 million due from settlement of litigation and $58 million due from settlements of pricing adjustments with certain suppliers.

Other noncurrent assets as of August 28, 2008 included receivables of $39 million due from settlement of litigation.

 
Inventories
 
December 4, 2008
   
August 28, 2008
 
             
Finished goods
  $ 328     $ 444  
Work in process
    395       671  
Raw materials and supplies
    160       176  
    $ 883     $ 1,291  

The Company’s results of operations for the first quarter of 2009 and fourth, second and first quarters of 2008 included charges of $369 million, $205 million, $15 million and $62 million, respectively, to write down the carrying value of work in process and finished goods inventories of memory products (both DRAM and NAND Flash) to their estimated market values.

 
5

 


Intangible Assets and Goodwill
                       
                         
Intangible Assets:
                       
   
December 4, 2008
   
August 28, 2008
 
   
Gross
Amount
   
Accumulated
Amortization
   
Gross
Amount
   
Accumulated
Amortization
 
                         
Product and process technology
  $ 580     $ (327 )   $ 577     $ (320 )
Customer relationships
    127       (39 )     127       (35 )
Other
    29       (16 )     29       (14 )
    $ 736     $ (382 )   $ 733     $ (369 )

During the first quarters of 2009 and 2008, the Company capitalized $12 million and $11 million, respectively, for product and process technology with weighted-average useful lives of 10 years.

Amortization expense for intangible assets was $22 million and $20 million for the first quarters of 2009 and 2008, respectively.  Annual amortization expense for intangible assets is estimated to be $73 million for 2009, $63 million for 2010, $57 million for 2011, $48 million for 2012 and $45 million for 2013.

Goodwill:   As of December 4, 2008 and August 28, 2008, the Company had goodwill of $58 million related to its Imaging segment.

 
Property, Plant and Equipment
 
December 4, 2008
   
August 28, 2008
 
             
Land
  $ 99     $ 99  
Buildings
    4,370       3,829  
Equipment
    12,934       13,591  
Construction in progress
    143       611  
Software
    282       283  
      17,828       18,413  
Accumulated depreciation
    (9,368 )     (9,602 )
    $ 8,460     $ 8,811  

Depreciation expense was $569 million and $484 million for the first quarters of 2009 and 2008, respectively.

Equity Method Investments

The Company has a partnering arrangement with Nanya Technology Corporation (“Nanya”) pursuant to which the Company and Nanya jointly develop process technology and designs to manufacture stack DRAM products.  Each party generally bears its own development costs and the Company’s development costs are expected to exceed Nanya’s development costs by a significant amount.  In addition, the Company has transferred and licensed certain intellectual property related to the manufacture of stack DRAM products to Nanya and licensed certain intellectual property from Nanya.  The Company is to receive an aggregate of $207 million from Nanya through 2010.  Further, the Company will receive royalties from Nanya for stack DRAM products manufactured by or for Nanya.

The Company has partnered with Nanya in investments in two Taiwan DRAM memory manufacturers:  Inotera Memories, Inc. (“Inotera”) and MeiYa Technology Corporation (“MeiYa”).  As of December 4, 2008, the Company owned 35.5% of Inotera and 50% of MeiYa and Nanya owned 35.6% of Inotera and 50% of MeiYa.  The Company’s investments in Inotera and MeiYa are accounted for under the equity method because of the Company’s ability to exercise significant influence over the operating and financial policies of these entities.  As of December 4, 2008 and August 28, 2008, the Company’s aggregate carrying value of these equity method investments in the accompanying consolidated balance sheet was $432 million and $84 million, respectively.

6

The Company has concluded that both Inotera and MeiYa are variable interest entities as defined in FIN 46(R), “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51,” and that the Company is not the primary beneficiary of either Inotera or MeiYa.  The Company’s exposure to losses on its equity investments in these entities is limited to the carrying value of such investments.  The creditors of Inotera and MeiYa have recourse only to the assets of these two entities and do not have recourse to any other assets of the Company.

Inotera and MeiYa each have fiscal years that end on December 31.  As these fiscal years differ from that of the Company’s fiscal year, the Company recognizes its share of Inotera and MeiYa quarterly earnings or losses for the calendar quarter that ends within the Company’s fiscal quarter.  This results in the recognition of the Company’s share of earnings or losses from these entities for a period that lags the Company’s fiscal periods by approximately two months.

Inotera:   In the first quarter of 2009, the Company acquired a 35.5% ownership interest (or approximately 1.2 billion shares) in Inotera, a publicly traded entity in Taiwan, from Qimonda AG (“Qimonda”) for approximately $400 million.  The interest in Inotera was acquired for cash, a portion of which was funded from loan proceeds of $200 million received by the Company from Nan Ya Plastics Corporation, an affiliate of Nanya, and $85 million received from Inotera.  The loans were recorded at their fair values, which reflect an aggregate discount of $31 million from their face amounts.  The aggregate discount was recorded as a reduction of the Company’s basis in the investment in Inotera.  The Company also capitalized $10 million of costs and other fees incurred in connection with the acquisition.  As a result of the above transactions, as of December 4, 2008 the carrying value of the Company’s equity investment in Inotera was $378 million.  Because the Company did not acquire its interest in Inotera until October and November of 2008, the Company’s results of operations for the first quarter of 2009 do not include any share of Inotera’s results of operations for the quarterly period ended September 30, 2008.  The Company is in the process of determining any difference between the carrying value of its investment in Inotera and its proportionate interest in the underlying equity of Inotera and expects to complete such analysis in the second quarter of 2009.  The closing trading price of Inotera on December 4, 2008 was equivalent to approximately $0.20 per share.  (See “Debt” note.)

The Company has rights and obligations to purchase 50% of the 120,000 per month 300mm DRAM wafer production of Inotera.  Inotera’s actual wafer production will vary from time to time based on market and other conditions.  In connection with the acquisition of the shares in Inotera, the Company and Nanya entered into a Supply Agreement with Inotera (the "Supply Agreement") pursuant to which Inotera will sell to the Company and Nanya trench and stack DRAM products manufactured by Inotera.  Inotera's current trench production capacity is expected to transition to the Company's stack process technology. Inotera will sell to the Company and Nanya all of the trench DRAM products manufactured by it other than trench DRAM products that are sold by Inotera to Qimonda pursuant to a separate supply agreement between Inotera and Qimonda (the "Qimonda Supply Agreement").  Under the Qimonda Supply Agreement, Qimonda is obligated to purchase trench DRAM products started for it by Inotera for approximately eight months following the Company’s acquisition of the shares in Inotera in accordance with a ramp down schedule specified in the Qimonda Supply Agreement.  Initially, (a) with respect to trench DRAM products, the Company will purchase the products resulting from 50% of Inotera's aggregate trench DRAM production less the trench DRAM products contemplated to be purchased by Qimonda pursuant to the Qimonda Supply Agreement and (b) with respect to stack DRAM products, the Company will purchase the products resulting from 50% of the aggregate stack DRAM production.  The pricing formula that determines the amounts to be paid by the Company for DRAM products under the Supply Agreement includes manufacturing costs and margins associated with the products purchased.

MeiYa:   In the fourth quarter of 2008, the Company and Nanya formed MeiYa to manufacture stack DRAM products and sell such products exclusively to the Company and Nanya.  As of December 4, 2008 and August 28, 2008, the carrying value of the Company’s equity investment in MeiYa was $54 million and $84 million, respectively.  In the first quarter of 2009, the Company recognized $2 million of losses for its share of MeiYa’s results of operations for the quarterly period ended September 30, 2008.  In addition, during the first quarter of 2009, the Company received $50 million from MeiYa which was accounted for as a technology transfer fee and a reduction of the Company’s investment in MeiYa.  In connection with the purchase of the ownership interest in Inotera, the Company entered into a series of agreements with Nanya which contemplated the restructuring of MeiYa and pursuant to which both parties will cease future funding of, and resource commitments to, MeiYa.

7

Accounts Payable and Accrued Expenses
 
December 4, 2008
   
August 28, 2008
 
             
Accounts payable
  $ 513     $ 597  
Salaries, wages and benefits
    199       244  
Customer advances
    100       130  
Income and other taxes
    34       27  
Other
    97       113  
    $ 943     $ 1,111  

As of December 4, 2008 and August 28, 2008, customer advances included $99 million and $129 million, respectively, for the Company’s obligation to provide certain NAND Flash memory products to Apple Computer, Inc. (“Apple”) until December 31, 2010 pursuant to a prepaid NAND Flash supply agreement.  As of December 4, 2008 and August 28, 2008, other accounts payable and accrued expenses included $18 million and $16 million, respectively, for amounts due to Intel for NAND Flash product design and process development and licensing fees pursuant to a research and development cost-sharing arrangement.

As of December 4, 2008 and August 28, 2008, other noncurrent liabilities included $83 million pursuant to the supply agreement with Apple.

Debt
 
December 4, 2008
   
August 28, 2008
 
             
Convertible senior notes payable, interest rate of 1.875%, due June 2014
  $ 1,300     $ 1,300  
Notes payable in periodic installments through July 2015, weighted-average effective interest rate of 8.3% and 4.5%, respectively, net of unamortized discount of $33 and $3, respectively
    852       699  
Capital lease obligations payable in monthly installments through February 2023, weighted-average imputed interest rate of 6.5 % and 6.6%, respectively
    644       657  
Convertible subordinated notes payable, interest rate of 5.6%, due April 2010
    70       70  
      2,866       2,726  
Less current portion
    (343 )     (275 )
    $ 2,523     $ 2,451  

In connection with the purchase of its 35.5% interest in Inotera, the Company entered into a two-year variable rate term loan with Nan Ya Plastics and a six-month variable rate term loan with Inotera.  On November 26, 2008, the Company received loan proceeds of $200 million from Nan Ya Plastics and $85 million from Inotera, which are payable at the end of each loan term.  Under the terms of the loan agreements, interest is payable quarterly at LIBOR plus 2%.  The interest rates reset quarterly and were 4.2% per annum as of December 4, 2008.  The Company recorded the debt net of aggregate discounts of $31 million, which will be recognized as interest expense over the respective lives of the loans, resulting in an effective interest rate of 12.1% for the Nan Ya Plastics loan and 11.6% for the Inotera loan.  The Nan Ya Plastics loan is collateralized by a first priority security interest in the Inotera shares owned by the Company (approximate carrying value of $378 million as of December 4, 2008).  (See “Equity Method Investments” note.)

TECH Semiconductor Singapore Pte. Ltd. (“TECH”), the Company’s joint venture subsidiary, has a credit facility that is collateralized by substantially all of the assets of TECH, which had an approximate carrying value of $1,744 million as of December 4, 2008.

Contingencies

The Company has accrued a liability and charged operations for the estimated costs of adjudication or settlement of various asserted and unasserted claims existing as of the balance sheet date, including those described below.  The Company is currently a party to other legal actions arising out of the normal course of business, none of which is expected to have a material adverse effect on the Company’s business, results of operations or financial condition.

8

In the normal course of business, the Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party.  It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement.  Historically, payments made by the Company under these types of agreements have not had a material effect on the Company’s business, results of operations or financial condition.

The Company is involved in the following patent, antitrust and securities matters.

Patent Matters:   As is typical in the semiconductor and other high technology industries, from time to time, others have asserted, and may in the future assert, that the Company’s products or manufacturing processes infringe their intellectual property rights.  In this regard, the Company is engaged in litigation with Rambus, Inc. (“Rambus”) relating to certain of Rambus’ patents and certain of the Company’s claims and defenses.  Lawsuits between Rambus and the Company are pending in the U.S. District Court for the District of Delaware, U.S. District Court for the Northern District of California, Germany, France, and Italy.  In the U.S. District Court for the Northern District of California, trial is scheduled to begin on January 21, 2009 on a patent phase of the case alleging that certain Company memory products infringe Rambus patents.  The Company also is engaged in patent litigation with Mosaid Technologies, Inc. (“Mosaid”) in the U.S. District Court for the Northern District of California.  Among other things, the above lawsuits pertain to certain of the Company’s SDRAM, DDR SDRAM, DDR2 SDRAM, DDR3 SDRAM, RLDRAM and image sensor products, which account for a significant portion of net sales.

The Company is unable to predict the outcome of assertions of infringement made against the Company and therefore cannot estimate the range of possible loss.  A court determination that the Company’s products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require the Company to make material changes to its products and/or manufacturing processes.  Any of the foregoing could have a material adverse effect on the Company’s business, results of operations or financial condition.

Antitrust Matters:   At least sixty-eight purported class action price-fixing lawsuits have been filed against the Company and other DRAM suppliers in various federal and state courts in the United States and in Puerto Rico on behalf of indirect purchasers alleging price-fixing in violation of federal and state antitrust laws, violations of state unfair competition law, and/or unjust enrichment relating to the sale and pricing of DRAM products during the period from April 1999 through at least June 2002.  The complaints seek treble damages sustained by purported class members in addition to restitution, costs and attorneys’ fees.  A number of these cases have been removed to federal court and transferred to the U.S. District Court for the Northern District of California for consolidated proceedings.  On January 29, 2008, the Northern District of California court granted in part and denied in part the Company’s motion to dismiss plaintiffs’ second amended consolidated complaint.  Plaintiffs subsequently filed a motion seeking certification for interlocutory appeal of the decision.  On February 27, 2008, plaintiffs filed a third amended complaint.  On June 26, 2008, the United States Court of Appeals for the Ninth Circuit accepted plaintiffs’ interlocutory appeal.

In addition, various states, through their Attorneys General, have filed suit against the Company and other DRAM manufacturers.  On July 14, 2006, and on September 8, 2006 in an amended complaint, the following Attorneys General filed suit in the U.S. District Court for the Northern District of California:  Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and the Commonwealth of the Northern Mariana Islands.  Thereafter, three states, Ohio, New Hampshire, and Texas, voluntarily dismissed their claims.  The remaining states filed a third amended complaint on October 1, 2007.  Alaska, Delaware, Kentucky, and Vermont subsequently voluntarily dismissed their claims.  The amended complaint alleges, among other things, violations of the Sherman Act, Cartwright Act, and certain other states’ consumer protection and antitrust laws and seeks damages, and injunctive and other relief.  Additionally, on July 13, 2006, the State of New York filed a similar suit in the U.S. District Court for the Southern District of New York.  That case was subsequently transferred to the U.S. District Court for the Northern District of California for pre-trial purposes.  The State of New York filed an amended complaint on October 1, 2007.  On October 3, 2008, the California Attorney General filed a similar lawsuit in California Superior Court, purportedly on behalf of local California government entities, alleging, among other things, violations of the Cartwright Act and state unfair competition law.

9

Three purported class action DRAM lawsuits also have been filed in Quebec, Ontario, and British Columbia, Canada, on behalf of direct and indirect purchasers, alleging violations of the Canadian Competition Act.  The substantive allegations in these cases are similar to those asserted in the cases filed in the United States.  In May and June 2008 respectively, plaintiffs’ motion for class certification was denied in the British Columbia and Quebec cases.  Plaintiffs subsequently filed an appeal of each of those decisions.

In February and March 2007, All American Semiconductor, Inc., Jaco Electronics, Inc., and the DRAM Claims Liquidation Trust each filed suit against the Company and other DRAM suppliers in the U.S. District Court for the Northern District of California after opting-out of a direct purchaser class action suit that was settled.  The complaints allege, among other things, violations of federal and state antitrust and competition laws in the DRAM industry, and seek damages, injunctive relief, and other remedies.

On October 11, 2006, the Company received a grand jury subpoena from the U.S. District Court for the Northern District of California seeking information regarding an investigation by the DOJ into possible antitrust violations in the “Static Random Access Memory” or “SRAM” industry.  In December 2008, the Company was informed that the DOJ closed its investigation of the SRAM industry.

Subsequent to the issuance of subpoenas to the SRAM industry, a number of purported class action lawsuits have been filed against the Company and other SRAM suppliers.  Six cases have been filed in the U.S. District Court for the Northern District of California asserting claims on behalf of a purported class of individuals and entities that purchased SRAM directly from various SRAM suppliers during the period from November 1, 1996 through December 31, 2005.  Additionally, at least seventy-four cases have been filed in various U.S. District Courts asserting claims on behalf of a purported class of individuals and entities that indirectly purchased SRAM and/or products containing SRAM from various SRAM suppliers during the time period from November 1, 1996 through December 31, 2006.  In September 2008, a class of direct purchasers was certified, and plaintiffs were granted leave to amend their complaint to cover Pseudo-Static RAM or “PSRAM” products as well.  The complaints allege price fixing in violation of federal antitrust laws and state antitrust and unfair competition laws and seek treble monetary damages, restitution, costs, interest and attorneys’ fees.

Three purported class action SRAM lawsuits also have been filed in Canada, on behalf of direct and indirect purchasers, alleging violations of the Canadian Competition Act.  The substantive allegations in these cases are similar to those asserted in the SRAM cases filed in the United States.

In addition, three purported class action lawsuits alleging price-fixing of Flash products have been filed in Canada, asserting violations of the Canadian Competition Act.  These cases assert claims on behalf of a purported class of individuals and entities that purchased Flash memory directly and indirectly from various Flash memory suppliers.

On May 5, 2004, Rambus filed a complaint in the Superior Court of the State of California (San Francisco County) against the Company and other DRAM suppliers.  The complaint alleges various causes of action under California state law including conspiracy to restrict output and fix prices on Rambus DRAM (“RDRAM”) and unfair competition.  Trial is currently scheduled to begin in March 2009.  The complaint seeks treble damages, punitive damages, attorneys’ fees, costs, and a permanent injunction enjoining the defendants from the conduct alleged in the complaint.

The Company is unable to predict the outcome of these lawsuits and investigations and therefore cannot estimate the range of possible loss.  The final resolution of these alleged violations of antitrust laws could result in significant liability and could have a material adverse effect on the Company’s business, results of operations or financial condition.

Securities Matters:   On February 24, 2006, a putative class action complaint was filed against the Company and certain of its officers in the U.S. District Court for the District of Idaho alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.  Four substantially similar complaints subsequently were filed in the same Court.  The cases purport to be brought on behalf of a class of purchasers of the Company’s stock during the period February 24, 2001 to February 13, 2003.  The five lawsuits have been consolidated and a consolidated amended class action complaint was filed on July 24, 2006.  The complaint generally alleges violations of federal securities laws based on, among other things, claimed misstatements or omissions regarding alleged illegal price-fixing conduct.  The complaint seeks unspecified damages, interest, attorneys’ fees, costs, and expenses.  On December 19, 2007, the Court issued an order certifying the class but reducing the class period to purchasers of the Company’s stock during the period from February 24, 2001 to September 18, 2002.

10

In addition, on March 23, 2006, a shareholder derivative action was filed in the Fourth District Court for the State of Idaho (Ada County), allegedly on behalf of and for the benefit of the Company, against certain of the Company’s current and former officers and directors.  The Company also was named as a nominal defendant.  An amended complaint was filed on August 23, 2006 and subsequently dismissed by the Court.  Another amended complaint was filed on September 6, 2007.  The amended complaint is based on the same allegations of fact as in the securities class actions filed in the U.S. District Court for the District of Idaho and alleges breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and insider trading.  The amended complaint seeks unspecified damages, restitution, disgorgement of profits, equitable and injunctive relief, attorneys’ fees, costs, and expenses.  The amended complaint is derivative in nature and does not seek monetary damages from the Company.  However, the Company may be required, throughout the pendency of the action, to advance payment of legal fees and costs incurred by the defendants.  On January 25, 2008, the Court granted the Company’s motion to dismiss the second amended complaint without leave to amend.  On March 10, 2008, plaintiffs filed a notice of appeal to the Idaho Court of Appeals.

The Company is unable to predict the outcome of these cases and therefore cannot estimate the range of possible loss.  A court determination in any of these actions against the Company could result in significant liability and could have a material adverse effect on the Company’s business, results of operations or financial condition.


Fair Value Measurements

SFAS No. 157 establishes three levels of inputs that may be used to measure fair value: quoted prices in active markets for identical assets or liabilities (referred to as Level 1), observable inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly (referred to as Level 2) and unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities (referred to as Level 3).

Fair value measurements on a recurring basis: Assets measured at fair value on a recurring basis as of December 4, 2008 were as follows:

   
Level 1
   
Level 2
   
Total Balance
 
                   
Money market (1)
  $ 513     $ --     $ 513  
Commercial paper (1)
    --       112       112  
U.S. government and agencies (1)
    184       --       184  
Certificates of deposit (1)
    --       133       133  
Corporate notes and bonds (2)
    3       --       3  
Marketable equity investments (3)
    6       --       6  
    $ 706     $ 245     $ 951  
                         
(1) Included in cash   and equivalents
                       
(2) Included in short-term investments
                       
(3) Included in other assets
                       

Level 2 assets are valued using observable inputs in active markets for similar assets or alternative pricing sources and models utilizing market observable inputs.  During the first quarter of 2009, the Company recognized an other-than-temporary impairment of $7 million for marketable equity instruments.

Fair value measurements on a nonrecurring basis: As of December 4, 2008, non-marketable equity investments of $13 million were valued at fair value using Level 3 inputs.  In the first quarter of 2009, the Company identified events and circumstances that indicated the fair value of a non-marketable equity investment sustained an other-than-temporary loss in value.  The Company recognized an impairment charge of $2 million to write down the carrying value of this investment to its estimated fair value.  The fair value measurement was determined using market multiples derived from industry-comparable companies which were classified as Level 3 inputs, as they were unobservable and require management’s judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments.

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During the first quarter of 2009, the Company recorded the loans with Nan Ya Plastics and Inotera at fair value because the stated interest rates were substantially lower than the prevailing rates for loans with comparable terms and collateral and for borrowers with similar credit ratings.  The fair values of these loans were determined based on discounted cash flows using inputs that are observable in the market or that could be derived from or corroborated with observable market data, as well as significant unobservable inputs (Level 3), including interest rates based on published rates for transactions involving borrowers with similar credit ratings as the Company.  (See “Debt” note.)


Equity Plans

As of December 4, 2008, the Company had an aggregate of 189.7 million shares of its common stock reserved for issuance under various equity plans, of which 121.5 million shares were subject to outstanding stock awards and 68.2 million shares were available for future grants.  Awards are subject to terms and conditions as determined by the Company’s Board of Directors.

Stock options:   The Company granted 6.8 million and 0.2 million stock options during the first quarters of 2009 and 2008, respectively, with weighted-average grant-date fair values per share of $2.31 and $4.10, respectively.

The fair values of option awards are estimated as of the date of grant using the Black-Scholes option valuation model.  The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable and requires the input of subjective assumptions, including the expected stock price volatility and estimated option life.  The expected volatilities utilized by the Company are based on implied volatilities from traded options on the Company’s stock and on historical volatility.  The expected life of options granted in 2009 was based, in part, on historical experience and on the terms and conditions of the options.  The expected life of options granted prior to 2009 was based on the simplified method provided by the Securities and Exchange Commission.  The risk-free rates utilized by the Company are based on the U.S. Treasury yield in effect at the time of the grant.  No dividends have been assumed in the Company’s estimated option values.  Assumptions used in the Black-Scholes model are presented below:
   
Quarter ended
 
   
December 4,
2008
   
November 29,
2007
 
             
Average expected life in years
    4.75       4.25  
Weighted-average expected volatility
    60 %     38 %
Weighted-average risk-free interest rate
    2.6 %     4.0 %

Restricted stock:   The Company awards restricted stock and restricted stock units (collectively, “Restricted Awards”) under its equity plans.  During the first quarter of 2009, the Company granted 1.7 million shares of service-based Restricted Awards and 1.7 million shares of performance-based Restricted Awards.  During the first quarter of 2008, the Company granted 1.3 million shares of service-based Restricted Awards and 1.3 million shares of performance-based Restricted Awards.  The weighted-average grant-date fair values per share were $4.48 and $10.76 for Restricted Awards granted during the first quarters of 2009 and 2008, respectively.

12

Stock-based compensation expense:   Total compensation costs for the Company’s equity plans were as follows:

   
Quarter ended
 
   
December 4,
2008
   
November 29,
2007
 
             
Stock-based compensation expense by caption:
           
Cost of goods sold
  $ 4     $ 3  
Selling, general and administrative
    2       6  
Research and development
    3       4  
    $ 9     $ 13  
                 
Stock-based compensation expense by type of award:
         
Stock options
  $ 7     $ 6  
Restricted stock
    2       7  
    $ 9     $ 13  

As of December 4, 2008, $96 million of total unrecognized compensation costs related to non-vested awards was expected to be recognized through the first quarter of 2013, resulting in a weighted-average period of 1.3 years.  Stock-based compensation expense in the above presentation does not reflect any significant income taxes, which is consistent with the Company’s treatment of income or loss from its U.S. operations.  (See “Income Taxes” note.)


Restructure

In the first quarter of 2009, in response to a challenging global environment for technology products, the Company announced a restructuring of its memory operations.  As part of the restructure, the Company’s IM Flash joint venture between the Company and Intel terminated its agreement with the Company to obtain NAND Flash memory supply from the Company’s Boise facility, reducing the Company’s NAND Flash production by approximately 35,000 200mm wafers per month.  In addition, the Company and Intel agreed to suspend tooling and the ramp of production at IM Flash’s Singapore wafer fabrication facility.  The Company has also undertaken additional cost savings measures to increase its competitiveness, including reductions in executive and employee salary and bonuses, a continued hiring freeze, and reduction of other discretionary costs such as outside services, travel and overtime.  As a result of these actions, the Company recorded a net $66 million credit to restructure in the first quarter of 2009, attributable to the Company’s Memory segment.  The amount includes a $144 million gain in connection with the termination of the NAND Flash supply agreement.  As of December 4, 2008, the Company expected to incur additional restructure costs of approximately $40 million through 2010.  The components of the restructure charges and credits were as follows:

Restructure charge (credit):
     
Gain from termination of NAND Flash supply agreement
  $ (144 )
Write-down of equipment
    56  
Severance and other termination benefits
    22  
Total restructure credit
  $ (66 )

As of December 4, 2008, $6 million of the restructure costs remained unpaid and were included in accounts payable and accrued expenses.

In the first quarter of 2008, the Company recorded a restructure charge of $13 million, primarily to the Memory segment, for employee severance and related costs and a write-down of certain facilities.


Other Operating (Income) Expense, Net

Other operating (income) expense for the first quarter of 2009 included losses of $14 million on disposals of semiconductor equipment.  Other operating (income) expense for the first quarter of 2008 included $38 million in receipts from the U.S. government in connection with anti-dumping tariffs, losses of $27 million from changes in currency exchange rates, and gains of $10 million on disposals of semiconductor equipment.


13

Income Taxes

Income taxes for 2009 and 2008 primarily reflect taxes on the Company’s non-U.S. operations and U.S. alternative minimum tax.  The Company has a valuation allowance for its net deferred tax asset associated with its U.S. operations.  The benefit for taxes on U.S. operations in 2009 and 2008 was substantially offset by changes in the valuation allowance.


Earnings Per Share

Basic earnings per share is computed based on the weighted-average number of common shares and stock rights outstanding.  Diluted earnings per share is computed based on the weighted-average number of common shares outstanding plus the dilutive effects of stock options, warrants and convertible notes.  Potential common shares that would increase earnings per share amounts or decrease loss per share amounts are antidilutive and are therefore excluded from earnings per share calculations.  Antidilutive potential common shares that could dilute basic earnings per share in the future were 219.1 million and 251.0 million for the first quarters of 2009 and 2008, respectively.

   
Quarter ended
 
   
December 4,
2008
   
November 29,
2007
 
             
Net loss available to common shareholders
  $ (706 )   $ (262 )
                 
Weighted-average common shares outstanding
    773.3       771.9  
                 
Loss per share:
               
Basic
  $ (0.91 )   $ (0.34 )
Diluted
    (0.91 )     (0.34 )


Comprehensive Income (Loss)

Comprehensive loss for the first quarter of 2009 was ($702) million and included $­4 million, net of tax, of unrealized gains on investments.  Comprehensive loss for the first quarter of 2008 was ($263) million and included de minimis amounts of unrealized gains and losses on investments.


Consolidated Joint Ventures

NAND Flash joint ventures with Intel (“IM Flash”):   The Company has formed two joint ventures with Intel (IM Flash Technologies, LLC and IM Flash Singapore LLP) to manufacture NAND Flash memory products for the exclusive benefit of the partners.  As of December 4, 2008, the Company owned 51% and Intel owned 49% of IM Flash.  The Company has determined that both of the IM Flash joint ventures are variable interest entities as defined in FIN 46(R), and that the Company is the primary beneficiary of both.  Accordingly, IM Flash’s financial results are included in the consolidated financial statements of the Company and all amounts pertaining to Intel’s interests in IM Flash are reported as noncontrolling interests in subsidiaries.

IM Flash manufactures NAND Flash memory products based on NAND Flash designs developed by the Company and Intel and licensed to the Company.  Product design and other research and development (“R&D”) costs for NAND Flash are generally shared equally between the Company and Intel.  As a result of reimbursements received from Intel under this NAND Flash R&D cost-sharing arrangement, the Company’s R&D expenses were reduced by $32 million and $53 million in the first quarters of 2009 and 2008, respectively.

14

IM Flash sells products to the joint venture partners generally in proportion to their ownership at long-term negotiated prices approximating cost.  IM Flash sales to Intel were $318 million and $223 million for the first quarters of 2009 and 2008, respectively.  As of December 4, 2008 and August 28, 2008, IM Flash had receivables from Intel primarily for sales of NAND Flash products of $161 million and $144 million, respectively.  In addition, as of December 4, 2008, the Company had receivables from Intel of $208 million in connection with the termination of a supply agreement for NAND Flash memory produced at the Company’s Boise facility and $36 million related to NAND Flash product design and process development activities.  As of December 4, 2008 and August 28, 2008, IM Flash had payables to Intel of $1 million and $4 million, respectively, for various services.

Under the terms of a wafer supply agreement, the Company manufactured wafers for IM Flash in its Boise, Idaho facility.  In the first quarter of 2009, the Company discontinued production of NAND flash memory for IM Flash at its Boise facility.  Also in the first quarter of 2009, IM Flash substantially completed construction of a new 300mm wafer fabrication facility structure in Singapore and the Company and Intel agreed to suspend tooling and the ramp of production at this facility.

In the first quarter of 2009, IM Flash distributed $145 million to Intel.  In the first quarter of 2008, Intel contributed $150 million to IM Flash.  The Company’s ability to access IM Flash’s cash and marketable investment securities ($249 million as of December 4, 2008) to finance the Company’s other operations is subject to agreement by the joint venture partners.  The creditors of IM Flash have recourse only to the assets of IM Flash and do not have recourse to any other assets of the Company.

TECH Semiconductor Singapore Pte. Ltd. (“TECH”):   Since 1998, the Company has participated in TECH, a semiconductor memory manufacturing joint venture in Singapore among the Company, Canon Inc. and Hewlett-Packard Company (“HP”).  As of December 4, 2008, the Company owned an approximate 73% interest in TECH.

TECH’s cash and marketable investment securities ($91 million as of December 4, 2008) are not anticipated to be available to finance the Company’s other operations.  In March, 2008, TECH entered into a credit facility, which is guaranteed, in part, by the Company.

MP Mask Technology Center, LLC (“MP Mask”):   In 2006, the Company formed a joint venture, MP Mask, with Photronics, Inc. (“Photronics”) to produce photomasks for leading-edge and advanced next generation semiconductors.  As of December 4, 2008, the Company owned 50.01% and Photronics owned 49.99% of MP Mask.

In 2008, the Company completed the construction of a facility to produce photomasks and leased the facility to Photronics under a build to suit lease agreement.  Under the terms of the lease agreement, the Company will receive quarterly lease payments through January 2013.  As of December 4, 2008, other receivables included $12 million and other noncurrent assets included $43 million for this lease.


Segment Information

The Company’s segments are Memory and Imaging.  The Memory segment’s primary products are DRAM and NAND Flash memory and the Imaging segment’s primary product is CMOS image sensors.  Segment information reported below is consistent with how it is reviewed and evaluated by the Company’s chief operating decision makers and is based on the nature of the Company’s operations and products offered to customers.  The Company does not identify or report depreciation and amortization, capital expenditures or assets by segment.

   
Quarter ended
 
   
December 4,
2008
   
November 29,
2007
 
             
Net sales:
           
Memory
  $ 1,222     $ 1,366  
Imaging
    180       169  
Total consolidated net sales
  $ 1,402     $ 1,535  
                 
Operating income (loss):
               
Memory
  $ (675 )   $ (251 )
Imaging
    3       (9 )
Total consolidated operating loss
  $ (672 )   $ (260 )



 
15

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements include, but are not limited to, statements such as those made in “Overview” regarding the costs of restructure plans, the Company’s DRAM development costs relative to Nanya, Inotera's transition to the Company's stack process technology, the supply of DRAM wafers from Inotera Memories, Inc. and manufacturing plans for CMOS image sensors; in “Net Sales” regarding production levels for the second quarter of 2009, future increases in NAND production and demand for Imaging products in the second quarter of 2009; in “Gross Margin” regarding the effects of temporary production slowdowns for the second quarter of 2009 and future charges for inventory write-downs; in “Restructure” regarding the remaining costs of restructure plans; in “Stock-based Compensation” regarding future stock-based compensation costs; in “Liquidity and Capital Resources” regarding capital spending in 2009, future distributions from IM Flash to Intel and capital contributions to TECH; and in “Recently Issued Accounting Standards” regarding the impact from the adoption of new accounting standards.  The Company’s actual results could differ materially from the Company’s historical results 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 “PART II.  OTHER INFORMATION – Item 1A.  Risk Factors.”  This discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes and with the Company’s Annual Report on Form 10-K for the year ended August 28, 2008.  All period references are to the Company’s fiscal periods unless otherwise indicated.  The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31.  The Company’s fiscal 2009, which ends on September 3, 2009, contains 53 weeks.  All production data reflects production of the Company and its consolidated joint ventures.


Overview

The Company is a global manufacturer of semiconductor devices, principally semiconductor memory products (including DRAM and NAND Flash) and CMOS image sensors.  The Company operates in two segments:  Memory and Imaging.  Its products are used in a broad range of electronic applications including personal computers, workstations, network servers, mobile phones and other consumer applications including Flash memory cards, USB storage devices, digital still cameras, MP3/4 players and in automotive applications.  The Company markets its products through its internal sales force, independent sales representatives and distributors primarily to original equipment manufacturers and retailers located around the world.  The Company’s success is largely dependent on the market acceptance of a diversified portfolio of semiconductor memory products, efficient utilization of the Company’s manufacturing infrastructure, successful ongoing development of advanced process technologies and generation of sufficient return on research and development investments.

The Company has made significant investments to develop proprietary product and process technology that is implemented in its worldwide manufacturing facilities and through its joint ventures to enable the production of semiconductor products with increasing functionality and performance at lower costs.  The Company generally reduces the manufacturing cost of each generation of product through advancements in product and process technology such as its leading-edge line-width process technology and innovative array architecture.  The Company continues to introduce new generations of products that offer improved performance characteristics, such as higher data transfer rates, reduced package size, lower power consumption and increased memory density and megapixel count.  To leverage its significant investments in research and development, the Company has formed strategic joint ventures under which the costs of developing memory product and process technologies are shared with its joint venture partners.  In addition, from time to time, the Company has also sold and/or licensed technology to other parties.  The Company is pursuing additional opportunities to recover its investment in intellectual property through partnering and other arrangements.

16

The semiconductor memory industry is experiencing a severe downturn due to a significant oversupply of products.  The downturn has been exacerbated by global economic conditions which have adversely affected demand for semiconductor memory products.  Average selling prices per gigabit for the Company’s DRAM and NAND Flash products for the first quarter of 2009 decreased 34% and 24%, respectively, compared to the fourth quarter of 2008.  Average selling prices per gigabit for the Company’s DRAM and NAND Flash products in 2008 were down 51% and 67%, respectively, compared to 2007 and down 63% and 85%, respectively, compared to 2006.  These declines significantly outpaced the long-term historical trend.  As a result of these market conditions, the Company and other semiconductor memory manufacturers have reported negative gross margins and substantial losses in recent periods.  In the first quarter of 2009, the Company reported a net loss $706 million after reporting a net loss of $1.6 billion for 2008.  In response to these market conditions, on October 9, 2008 the Company announced a plan to restructure its Memory operations.  In the first quarter of 2009, the Company discontinued production of NAND flash memory for IM Flash at its Boise facility reducing the Company’s NAND flash production by approximately 35,000 200mm wafers per month.  In addition, the Company and Intel agreed to suspend tooling and the ramp of NAND Flash production at IM Flash’s Singapore wafer fabrication plant.  The Company has also undertaken additional cost savings measures to increase its competitiveness, including reductions in executive and employee salary and bonuses, a continued hiring freeze, and reduction of other discretionary costs such as outside services, travel and overtime.  As of December 4, 2008, the Company expected to incur additional restructure costs of approximately $40 million through 2010.

The effects of the worsening global economy and the tightening credit market are also making it increasingly difficult for semiconductor memory manufacturers to obtain external sources of financing to fund their operations.  Although the Company believes that it is better positioned than some of its peers, it faces challenges in the current and near term that require it to continue to make significant improvements in its competitiveness.  Additionally, the Company is pursuing financing alternatives, delaying capital expenditures and implementing further cost-cutting initiatives.

DRAM joint ventures with Nanya Technology Corporation (“Nanya”):    The Company has a partnering arrangement with Nanya Technology Corporation (“Nanya”) pursuant to which the Company and Nanya jointly develop process technology and designs to manufacture stack DRAM products.  Each party generally bears its own development costs and the Company’s development costs are expected to exceed Nanya’s development costs by a significant amount.  In addition, the Company has transferred and licensed certain intellectual property related to the manufacture of stack DRAM products to Nanya and licensed certain intellectual property from Nanya.  The Company is to receive an aggregate of $207 million from Nanya through 2010.  Further, the Company will receive royalties from Nanya for stack DRAM products manufactured by or for Nanya.

The Company has partnered with Nanya in investments in two Taiwan DRAM memory manufacturers:  Inotera Memories, Inc. (“Inotera”) and MeiYa Technology Corporation (“MeiYa”).  As of December 4, 2008, the Company owned 35.5% of Inotera and 50% of MeiYa and Nanya owned 35.6% of Inotera and 50% of MeiYa.  The Company’s investments in Inotera and MeiYa are accounted for under the equity method because of the Company’s ability to exercise significant influence over the operating and financial policies of these entities.  As of December 4, 2008 and August 28, 2008, the Company’s aggregate carrying value of these equity method investments in the accompanying consolidated balance sheet was $432 million and $84 million, respectively.  Inotera and MeiYa each have fiscal years that end on December 31.  As these fiscal years differ from that of the Company’s fiscal year, the Company recognizes its share of Inotera and MeiYa quarterly earnings or losses for the calendar quarter that ends within the Company’s fiscal quarter.  This results in the recognition of the Company’s share of earnings or losses from these entities for a period that lags the Company’s fiscal periods by approximately two months.

Inotera:   In the first quarter of 2009, the Company acquired a 35.5% ownership interest (or approximately 1.2 billion shares) in Inotera, a publicly traded entity in Taiwan, from Qimonda AG (“Qimonda”) for approximately $400 million.  The interest in Inotera was acquired for cash, a portion of which was funded from loan proceeds of $200 million received by the Company from Nan Ya Plastics Corporation, an affiliate of Nanya, and $85 million received from Inotera.  The loans were recorded at their fair values, which reflect an aggregate discount of $31 million from their face amounts.  The aggregate discount was recorded as a reduction of the Company’s basis in the investment in Inotera.  The Company also capitalized $10 million of costs and other fees incurred in connection with the acquisition.  As a result of the above transactions, as of December 4, 2008 the carrying value of the Company’s equity investment in Inotera was $378 million.  Because the Company did not acquire its interest in Inotera until October and November of 2008, the Company’s results of operations for the first quarter of 2009 do not include any share of Inotera’s results of operations for the quarterly period ended September 30, 2008.
 

17

The Company has rights and obligations to purchase 50% of the 120,000 per month 300mm DRAM wafer production of Inotera.  Inotera’s actual wafer production will vary from time to time based on market and other conditions.  In connection with the acquisition of the shares in Inotera, the Company and Nanya entered into a Supply Agreement with Inotera (the "Supply Agreement") pursuant to which Inotera will sell to the Company and Nanya trench and stack DRAM products manufactured by Inotera.  Inotera's current trench production capacity is expected to transition to the Company's stack process technology.  Inotera will sell to the Company and Nanya all of the trench DRAM products manufactured by it other than trench DRAM products that are sold by Inotera to Qimonda pursuant to a separate supply agreement between Inotera and Qimonda (the "Qimonda Supply Agreement").  Under the Qimonda Supply Agreement, Qimonda is obligated to purchase trench DRAM products started for it by Inotera for approximately eight months following the Company’s acquisition of the shares in Inotera in accordance with a ramp down schedule specified in the Qimonda Supply Agreement.  Initially, (a) with respect to trench DRAM products, the Company will purchase the products resulting from 50% of Inotera's aggregate trench DRAM production less the trench DRAM products contemplated to be purchased by Qimonda pursuant to the Qimonda Supply Agreement and (b) with respect to stack DRAM products, the Company will purchase the products resulting from 50% of the aggregate stack DRAM production.  The pricing formula that determines the amounts to be paid by the Company for DRAM products under the Supply Agreement includes manufacturing costs and margins associated with the products purchased.

MeiYa:   In the fourth quarter of 2008, the Company and Nanya formed MeiYa to manufacture stack DRAM products and sell such products exclusively to the Company and Nanya.  In connection with the purchase of the ownership interest in Inotera, the Company entered into a series of agreements with Nanya which contemplate the restructuring of MeiYa and pursuant to which both parties will cease future funding of, and resource commitments to, MeiYa.

(See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Equity Method Investments”)

Aptina Imaging Business:   The Company is exploring partnering arrangements with outside parties regarding the sale of Aptina in which the Company could retain a minority ownership interest.  To that end, the Company began operating Aptina as a separate wholly-owned subsidiary in October 2008.  Under the arrangements being considered, the Company expects that it will continue to manufacture CMOS image sensors for some period of time.

Inventory Write-Downs:   The Company’s results of operations for the first quarter of 2009 and the first, second and fourth quarters of 2008 included charges of $369 million, $62 million, $15 million and $205 million, respectively, to write down the carrying value of work in process and finished goods inventories of Memory products (both DRAM and NAND Flash) to their estimated market values.


Results of Operations

   
First Quarter
     
Fourth Quarter
   
   
2009
   
% of net sales
     
2008
   
% of net sales
     
2008
   
% of net sales
   
Net sales:
                                         
Memory
  $ 1,222       87   %   $ 1,366       89   %   $ 1,271       88   %
Imaging
    180       13   %     169       11   %     178       12   %
    $ 1,402       100   %   $ 1,535       100   %   $ 1,449       100   %
                                                       
Gross margin:
                                                     
Memory
  $ (502 )     (41 ) %   $ (39 )     ( 3 ) %   $ (115 )     (9 ) %
Imaging
    53       29   %     44       26   %     50       28   %
    $ (449 )     (32 ) %   $ 5       0   %   $ (65 )     (4 ) %
                                                       
Selling, general and administrative
  $ 102       7   %   $ 112       7   %   $ 107       7   %
Research and development
    178       13   %     163       11   %     167       12   %
Restructure
    (66 )     (5 ) %     13       1   %     4       --    
Other operating (income) expense, net
    9       1   %     (23 )     (1 ) %     (5 )     --    
Net loss
    (706 )     (50 ) %     (262 )     (17 ) %     (344 )     (24 ) %

18

The Company’s first quarter of 2009, which ended December 4, 2008, contained 14 weeks as compared to 13 weeks for the fourth and first quarters of 2008.

Net Sales

Total net sales for the first quarter of 2009 decreased 3% as compared to the fourth quarter of 2008 primarily due to a 4% decrease in Memory sales.  Memory sales for the first quarter of 2009 reflect significant declines in per gigabit average selling prices as compared to the fourth quarter of 2008 partially offset by increases in gigabits sold.  Memory sales were 87% of total net sales for the first quarter of 2009 as compared to 88% and 89% for the fourth and first quarters of 2008.  Imaging sales for the first quarter of 2009 were stable as compared to the fourth quarter of 2008.  Total net sales for the first quarter of 2009 decreased 9% as compared to the first quarter of 2008 primarily due to an 11% decrease in Memory sales partially offset by a 7% increase in Imaging sales.

In response to market conditions, the Company implemented temporary production slowdowns at some of its manufacturing facilities during the second quarter of 2009.  The slowdowns and the shutdown of NAND production for IM Flash at the Company’s Boise fabrication facility are expected to reduce production output for Memory and Imaging products in the second quarter of 2009.

The Company has formed partnering arrangements under which it has sold and/or licensed technology to other parties.  The Company recognized royalty revenue of $36 million in the first quarter of 2009, $38 million in the fourth quarter of 2008 and $5 million in the first quarter of 2008.

Memory:   Memory sales for the first quarter of 2009 decreased 4% from the fourth quarter of 2008 as sales of DRAM products decreased by 10% partially offset by a 6% increase in sales of NAND Flash products.

Sales of DRAM products for the first quarter of 2009 decreased from the fourth quarter of 2008 primarily due to a 34% decline in average selling prices mitigated by a 35% increase in gigabit sales as a result of production increases and inventory reductions.  Gigabit production of DRAM products increased approximately 23% for the first quarter of 2009 as compared to the fourth quarter of 2008, primarily due to production efficiencies from improvements in product and process technologies as well as the additional week in the quarter.  Sales of DDR2 and DDR3 DRAM products were 25% of the Company’s total net sales in the first quarter of 2009 as compared to 28% for the fourth quarter of 2008 and 32% for the first quarter of 2008.

Sales of NAND Flash products for the first quarter of 2009 increased from the fourth quarter of 2008 primarily due to a 40% increase in gigabits sold as a result of production increases and inventory reductions partially offset by a 24% decline in average selling prices per gigabit.  Gigabit production of NAND Flash products increased 17% for the first quarter of 2009 as compared to the fourth quarter of 2008, primarily due to transitions to higher density, advanced geometry devices as well as the additional week in the quarter.  The Company expects that its gigabit production of NAND Flash products will increase at a slower rate in 2009 than in 2008 primarily due to the completion of production ramps at new 300mm manufacturing facilities in 2008 and the shutdown of 200mm wafer NAND Flash production at the Company’s Boise fabrication facility in the first quarter of 2009.  Sales of NAND Flash products represented 38% of the Company’s total net sales for the first quarter of 2009 as compared to 35% for the fourth quarter of 2008 and 33% for the first quarter of 2008.

Memory sales for the first quarter of 2009 decreased 11% from the first quarter of 2008 primarily due to a 20% decrease in sales of DRAM products partially offset by a 6% increase in sales of NAND Flash products.  The decrease in sales of DRAM products for the first quarter of 2009 from the first quarter of 2008 was primarily the result of a 47% decline in average selling prices mitigated by a 43% increase in gigabits sold.  Gigabit production of DRAM products increased 56% for the first quarter of 2009 as compared to the first quarter of 2008, primarily due to production efficiencies from improvements in product and process technologies as well as the additional week in the quarter.  Sales of NAND Flash products for the first quarter of 2009 increased 6% from the first quarter of 2008 primarily due to a 206% increase in gigabits sold partially offset by a 65% decline in average selling prices.  The significant increase in gigabit sales of NAND Flash products was primarily due to a 152% increase in production primarily as a result of the continued ramp of NAND Flash products at the Company’s 300mm fabrication facilities and transitions to higher density, advanced geometry devices.

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Imaging:   Imaging sales for the first quarter of 2009 were stable as compared to the fourth quarter of 2008 reflecting relatively stable average selling prices and unit sales.  Imaging sales for the first quarter of 2009 increased by 7% from the first quarter of 2008 primarily due to increased units sales of products with 3-megapixel or higher resolution partially offset by declines in average selling prices.  Imaging sales were approximately 13% of the Company’s total net sales for the first quarter of 2009 as compared to 12% for the fourth quarter of 2008 and 11% for the first quarter of 2008.  The Company expects that unit sales for Imaging will decrease in the second quarter of 2009 due to lower sales of cell phones and other devices incorporating the Company’s Imaging products.

Gross Margin

The Company’s overall gross margin percentage declined from negative 4% for the fourth quarter of 2008 to negative 32% for the first quarter of 2009 due to a decline in the gross margin percentages for Memory primarily as a result of significant decreases in average selling prices and inventory write-downs for Memory products.  The Company’s overall gross margin percentage declined from 0% for the first quarter of 2008 due to a decline in the gross margin percentages for Memory primarily as a result of significant decreases in average selling prices and inventory write-downs for Memory products.  Temporary production slowdowns that the Company implemented at some of its manufacturing facilities during the second quarter of 2009 are expected to adversely affect per megabit and per unit costs of Memory and Imaging products.

Memory:   The Company’s gross margin percentage for Memory products declined from negative 9% for the fourth quarter of 2008 to negative 41% for the first quarter of 2009 primarily due to declines in the gross margin for both DRAM and NAND Flash products.  Gross margins for DRAM and NAND Flash products for the first quarter of 2009 were adversely affected by declines in average selling prices and inventory write-downs, mitigated by reductions in manufacturing costs.

The Company’s gross margins for Memory in 2009 and 2008 were impacted by charges to write down inventories to their estimated market values as a result of the significant decreases in average selling prices for both DRAM and NAND Flash products.  The impact of inventory write-downs on gross margins for all periods reflects the period-end inventory write-down less the estimated net effect of prior period write-downs.  The effects of inventory write-downs on gross margin for the first quarter of 2009 and fourth and first quarters of 2008 were as follows:

   
First Quarter
2009
   
First Quarter
2008
   
Fourth Quarter
2008
 
                   
Period-end inventory write-downs
  $ (369 )   $ (62 )   $ (205 )
Estimated net effect of previous write-downs
    157       14       13  
Net effect of inventory write-downs
  $ (212 )   $ (48 )   $ (192 )

As charges to write down inventories are recorded in advance of when inventories are sold, gross margins in subsequent periods are higher than they would be absent the effect of the previous write-downs.  In future periods, the Company will be required to record additional inventory write-downs if estimated average selling prices of products held in finished goods and work in process inventories at a quarter-end date are below the manufacturing cost of those products.

The Company’s gross margin for DRAM products for the first quarter of 2009 declined from the fourth quarter of 2008, primarily due to the 34% decrease in average selling prices per gigabit and inventory write-downs mitigated by a reduction in production costs per gigabit.  The Company achieved manufacturing cost reductions for DRAM products through transitions to higher-density, advanced-geometry devices.  DRAM production cost reductions for the first quarter of 2009 were offset by the inventory write-downs.  The Company reduced its DRAM manufacturing costs (which exclude inventory write-downs) per gigabit by 12% for the first quarter of 2009 as compared to the fourth quarter of 2008.

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The Company’s gross margin for NAND Flash products for the first quarter of 2009 declined from the fourth quarter of 2008 primarily due to the 24% decrease in average selling prices per gigabit and inventory write-downs.  In addition, results for the fourth quarter of 2008 reflected reduced costs from the recovery of $70 million for pricing adjustments for NAND Flash products purchased from other suppliers in prior periods.  The decline in gross margin was mitigated by a reduction in manufacturing costs per gigabit for NAND Flash products primarily achieved through increased production of higher-density, advanced-geometry devices.  Costs of NAND Flash products were also reduced as a result of lower prices for products purchased for sale under the Company’s Lexar brand.  Excluding the inventory write-downs and the effect of pricing adjustments from other suppliers in the fourth quarter of 2008, the Company reduced its NAND Flash costs per gigabit by 14%.  Sales of NAND Flash products include sales from IM Flash to Intel at long-term negotiated prices approximating cost.  IM Flash sales to Intel were $318 million for the first quarter of 2009, $293 million for the fourth quarter of 2008 and $223 million for the first quarter of 2008.

The Company’s gross margin percentage for Memory products declined to negative 41% for the first quarter of 2009 from negative 3% for the first quarter of 2008 primarily due to lower gross margins on sales of DRAM and NAND Flash products.  Declines in gross margins on sales of DRAM products for the first quarter of 2009 as compared to the first quarter of 2008 were primarily due to the 47% decline in average selling prices and inventory write-offs mitigated by per gigabit cost reductions.  The Company reduced its DRAM production costs (which exclude inventory write-downs) per gigabit by 35% for the first quarter of 2009 as compared to the first quarter of 2008.  Gross margins on NAND Flash products for the first quarter of 2009 declined from the first quarter of 2008 primarily due to the 65% decline in average selling prices and inventory write-offs mitigated by per gigabit cost reductions of 55% (excluding inventory write-offs).

In the first quarter of 2009, the Company’s TECH Semiconductor Singapore Pte. Ltd. (“TECH”) joint venture accounted for approximately 13% of the Company’s total wafer production.  TECH primarily produced DDR and DDR2 products in 2009 and 2008.  Since TECH utilizes the Company’s product designs and process technology and has a similar manufacturing cost structure, the gross margin on sales of TECH products approximates gross margins on sales of similar products manufactured by the Company’s wholly-owned operations.  (See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Consolidated Joint Ventures – TECH Semiconductor Singapore Pte. Ltd.”)

Imaging:   The Company’s gross margin percentage for Imaging for the first quarter of 2009 improved to 29% from 28% for the fourth quarter of 2008 primarily due to cost reductions.  The Company’s gross margin for Imaging products for the first quarter of 2009 improved to 29% from 26% for first quarter of 2008, primarily due to cost reductions partially offset by declines in average selling prices.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the first quarter of 2009 decreased 5% from the fourth quarter of 2008 despite increased costs associated with the additional week in the quarter, primarily due to lower legal expenses and lower payroll expenses and other costs as a result of the Company’s restructure initiatives.  SG&A expenses for the first quarter of 2009 decreased 9% from the first quarter of 2008 despite increased costs associated with the additional week in the quarter, primarily due to lower payroll expenses and other costs as a result of the Company’s restructure initiatives.  Future SG&A expense is expected to vary, potentially significantly, depending on, among other things, the number of legal matters that are resolved relatively early in their life-cycle and the number of matters that progress to trial.

For the Company’s Memory segment, SG&A expenses as a percentage of sales were 7% for the first quarter of 2009 and the fourth and first quarters of 2008.  For the Imaging segment, SG&A expenses as a percentage of sales were 8% for the first quarter of 2009, 11% for the fourth quarter of 2008 and 8% for the first quarter of 2008.

Research and Development

Research and development (“R&D”) expenses vary primarily with the number of development wafers processed, the cost of advanced equipment dedicated to new product and process development, and personnel costs.  Because of the lead times necessary to manufacture its products, the Company typically begins to process wafers before completion of performance and reliability testing.  The Company deems development of a product complete once the product has been thoroughly reviewed and tested for performance and reliability.  R&D expenses can vary significantly depending on the timing of product qualification as costs incurred in production prior to qualification are charged to R&D.

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R&D expenses for the first quarter of 2009 increased 7% from the fourth quarter of 2008 and 9% from the first quarter of 2008 primarily due to increased costs associated with the additional week in the first quarter of 2009.  As a result of reimbursements received from Intel Corporation under a NAND Flash R&D cost-sharing arrangement, R&D expenses were reduced by $32 million for both the first quarter of 2009 and for the fourth quarter of 2008 and $53 million for the first quarter of 2008.

For the Company’s Memory segment, R&D expenses as a percentage of sales were 11% for the first quarter of 2009, 10% for the fourth quarter of 2008 and 9% for the first quarter of 2008.  For the Imaging segment, R&D expenses as a percentage of sales were 22% for the first quarter of 2009, 19% for the fourth quarter of 2008, 22% for the first quarter of 2008.

The Company’s process technology R&D efforts are focused primarily on development of successively smaller line-width process technologies which are designed to facilitate the Company’s transition to next-generation memory products and CMOS image sensors.  Additional process technology R&D efforts focus on advanced computing and mobile memory architectures and new manufacturing materials.  Product design and development efforts are concentrated on the Company’s 1 Gb and 2 Gb DDR2 and DDR3 products as well as high density and mobile NAND Flash memory (including multi-level cell technology), CMOS image sensors and specialty memory products.

Restructure

In the first quarter of 2009, in response to a challenging global environment for technology products, the Company announced a restructuring of its memory operations.  As part of the restructure, the Company’s IM Flash joint venture between the Company and Intel terminated its agreement with the Company to obtain NAND Flash memory supply from the Company’s Boise facility, reducing the Company’s NAND Flash production by approximately 35,000 200mm wafers per month.  In addition, the Company and Intel agreed to suspend tooling and the ramp of production at IM Flash’s Singapore wafer fabrication facility.  The Company has also undertaken additional cost savings measures to increase its competitiveness, including reductions in executive and employee salary and bonuses, a continued hiring freeze, and reduction of other discretionary costs such as outside services, travel and overtime.  As a result of these actions, the Company recorded a net $66 million credit to restructure in the first quarter of 2009, attributable to the Company’s Memory segment.  The amount includes a $144 million gain in connection with the termination of the NAND Flash supply agreement.  As of December 4, 2008, the Company expected to incur additional restructure costs of approximately $40 million through 2010.  The components of the restructure charges and credits were as follows:

Restructure charge (credit):
     
Gain from termination of NAND Flash supply agreement
  $ (144 )
Write-down of equipment
    56  
Severance and other termination benefits
    22  
Total restructure credit
  $ (66 )

As of December 4, 2008, $6 million of the restructure costs remained unpaid and were included in accounts payable and accrued expenses.

In the first quarter of 2008, the Company recorded a restructure charge of $13 million, primarily to the Memory segment, for employee severance and related costs and a write-down of certain facilities.

Other Operating (Income) Expense, Net

Other operating (income) expense for the first quarter of 2009 included losses of $14 million on disposals of semiconductor equipment.  Other operating (income) expense for the first quarter of 2008 included $38 million in receipts from the U.S. government in connection with anti-dumping tariffs, losses of $27 million from changes in currency exchange rates, and gains of $10 million on disposals of semiconductor equipment.

Income Taxes

Income taxes for 2009 and 2008 primarily reflect taxes on the Company’s non-U.S. operations and U.S. alternative minimum tax.  The Company has a valuation allowance for its net deferred tax asset associated with its U.S. operations.  The benefit for taxes on U.S. operations in 2009 and 2008 was substantially offset by changes in the valuation allowance.

22

Noncontrolling Interests in Net (Income) Loss

Noncontrolling interests for 2009 and 2008 primarily reflects the share of income or losses of the Company’s TECH joint venture attributable to the noncontrolling interests in TECH.  (See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Consolidated Joint Ventures – TECH Semiconductor Singapore Pte. Ltd.”)

Losses and Earnings from Equity Method Investments

In connection with its DRAM partnering arrangements with Nanya, the Company has two equity method investments:  MeiYa and Inotera. Because MeiYa and Inotera each have fiscal years that end on December 31 which differs from the Company’s fiscal year, the Company recognizes its share of MeiYa and Inotera quarterly earnings or losses for the calendar quarter that ends within the Company’s fiscal quarter.  This results in the recognition of results from these entities for a period that lags the Company’s fiscal periods by approximately two months.  In the first quarter of 2009, the Company recognized $2 million of losses from MeiYa for the quarterly period ended September 30, 2008.  The Company will recognize its share of Inotera’s losses or earnings from the acquisition date through December 31, 2008 (Inotera’s year end) in the Company’s second quarter of 2009.  (See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Equity Method Investments.”)

Stock-Based Compensation

Total compensation cost for the Company’s equity plans for the first quarter of 2009, the fourth quarter of 2008 and first quarter of 2008 was $9 million, $8 million and $13 million, respectively.  Stock compensation expenses fluctuate based on assessments of whether performance conditions will be achieved for the Company’s performance-based stock grants.  As of December 4, 2008, $96 million of total unrecognized compensation cost related to non-vested awards was expected to be recognized through the first quarter of 2013.

 
Liquidity and Capital Resources

As of December 4, 2008, the Company had cash and equivalents and short-term investments totaling $1.0 billion compared to $1.4 billion as of August 28, 2008.  The balance as of December 4, 2008, included $249 million held at the Company’s IM Flash joint venture and $91 million held at the Company’s TECH joint venture.  The Company’s ability to access funds held by joint ventures to finance the Company’s other operations is subject to agreement by the joint venture partners.  Amounts held by TECH are not anticipated to be available to finance the Company’s other operations.

The Company’s liquidity is highly dependent on average selling prices for its products and the timing of capital expenditures, both of which can vary significantly from period to period.  Depending on conditions in the semiconductor memory market, the Company’s cash flows from operations and current holdings of cash and investments may not be adequate to meet the Company’s needs for capital expenditures and operations.  Historically, the Company has used external financing to fund these needs.  Due to conditions in the credit markets, many financing instruments used by the Company in the past are currently not available on terms acceptable to the Company.  The Company has significantly reduced its capital expenditures for 2009.  In addition, the Company is pursuing further financing alternatives, further reducing capital expenditures and implementing further cost-cutting initiatives.

Operating activities:   The Company generated $359 million of cash from operating activities in the first quarter of 2009, which primarily reflects the Company’s $706 million of net loss adjusted by $594 million for noncash depreciation and amortization expense, a $369 million noncash charge to write-down inventories to estimated market value and a $138 million decrease in receivables.

23

Investing activities:   Net cash used by investing activities was $489 million in the first quarter of 2009, which included cash expenditures of $409 million for the Company’s 35.5% interest in Inotera and cash expenditures of $270 million for property, plant and equipment partially offset by the net effect of maturities and purchases of marketable investment securities of $121 million.  A significant portion of the capital expenditures relate to the ramp of IM Flash facilities and 300mm conversion of manufacturing operations at TECH.  The Company believes that to develop new product and process technologies, support future growth, achieve operating efficiencies and maintain product quality, it must continue to invest in manufacturing technologies, facilities and capital equipment and research and development.  The Company expects 2009 capital spending to approximate $650 million to $750 million.  As of December 4, 2008, the Company had commitments of approximately $125 million for the acquisition of property, plant and equipment, nearly all of which are expected to be paid within one year.

In the first quarter of 2009, the Company acquired a 35.5% ownership interest in Inotera, a Taiwanese DRAM memory manufacturer, from Qimonda AG for approximately $400 million in cash and incurred $10 million of costs and other fees in connection with the acquisition.  (See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Equity Method Investments.”)

Financing activities:   Net cash used by financing activities was $88 million in the first quarter of 2009, which primarily reflects $163 million in debt payments, $150 million of distributions paid to joint venture partners and $64 million in payments on equipment purchase contracts partially offset by $285 million in proceeds from borrowings.

During the first quarter of 2009, in connection with the purchase of its 35.5% interest in Inotera, the Company entered into a two-year variable rate term loan with Nan Ya Plastics and a six-month variable rate term loan with Inotera.  On November 26, 2008, the Company received loan proceeds of $200 million from Nan Ya Plastics and $85 million from Inotera, which are payable at the end of each loan term.  Under the terms of the loan agreements, interest is payable quarterly at LIBOR plus 2%.  The interest rates reset quarterly and were 4.2% per annum as of December 4, 2008.  The Company recorded the debt net of aggregate discounts of $31 million, which will be recognized as interest expense over the respective lives of the loans, resulting in an effective interest rate of 12.1% for the Nan Ya Plastics loan and 11.6% for the Inotera loan.  The Nan Ya Plastics loan is collateralized by a first priority security interest in the Inotera shares owned by the Company (approximate carrying value of $378 million as of December 4, 2008).  (See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Debt.”)

Joint ventures:   In the first quarter of 2009, IM Flash distributed $145 million to Intel and the Company estimates that it will make additional distributions to Intel of approximately $360 million through the remainder of 2009.  Timing of these distributions and any future contributions, however, is subject to market conditions and approval of the partners.

The Company expects to make additional capital contributions to TECH in 2009.  The timing and amount of these contributions is subject to market conditions and partner participation.

Contractual obligations:   As of December 4, 2008, contractual obligations for notes payable, capital lease obligations and operating leases were as follows:

   
Total
   
Remainder of 2009
   
2010
   
2011
   
2012
   
2013
   
2014 and
thereafter
 
   
(amounts in millions)
 
Notes payable 1
  $ 2,489     $ 183     $ 335     $ 443     $ 179     $ 24     $ 1,325  
Capital lease obligations 1
    755       159       152       265       50       19       110  
Operating leases
    85       12       15       13       11       10       24  
                                                         
1 Includes interest
                                                       


Recently Issued Accounting Standards

In December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 140-1 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.”  FSP No. FAS 140-1 and FIN 46(R)-8 requires public entities to provide additional disclosures about transfers of financial assets and their involvement with variable interest entities.  The Company is required to adopt FSP No. FAS 140-1 and FIN 46(R)-8 effective in the second quarter of 2009.

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In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).”  FSP No. APB 14-1 requires that issuers of convertible debt instruments that may be settled in cash upon conversion separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate as interest cost is recognized in subsequent periods.  The Company is required to adopt FSP No. APB 14-1 at the beginning of 2010.  On adoption, the Company will retrospectively account for its $1.3 billion of 1.875% convertible senior notes issued in May of 2007 under the provisions of FSP No. APB 14-1.  The Company estimates that debt recognized on issuance of the $1.3 billion convertible senior notes would be approximately $400 million lower under FSP No. APB 14-1.  The difference of approximately $400 million would be accreted to interest expense over the approximate seven-year term of the notes.  The Company is continuing to evaluate the full impact that the adoption of FSP No. APB 14-1 will have on its financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations (“SFAS No. 141(R)”), which establishes the principles and requirements for how an acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines what information to disclose.  The Company is required to adopt SFAS No. 141(R) effective at the beginning of 2010.  The impact of the adoption of SFAS No. 141(R) will depend on the nature and extent of business combinations occurring on or after the beginning of 2010.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.”  SFAS No. 160 requires that (1) noncontrolling interests be reported as a separate component of equity, (2) net income attributable to the parent and to the noncontrolling interest be separately identified in the income statement, (3) changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and (4) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value.  The Company is required to adopt SFAS No. 160 effective at the beginning of 2010.  The Company is evaluating the impact that the adoption of SFAS No. 160 will have on its financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.”  Under SFAS No. 159, the Company may elect to measure many financial instruments and certain other items at fair value on an instrument by instrument basis, subject to certain restrictions.  The Company adopted SFAS No. 159 effective at the beginning of 2009.  The Company did not elect to measure any existing items at fair value upon the adoption of SFAS No. 159.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 (as amended by subsequent FSP’s) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  The Company adopted SFAS No. 157 effective at the beginning of 2009 for financial assets and financial liabilities.  The adoption did not have a significant impact on the Company’s financial statements.  The Company is required to adopt SFAS No. 157 for all other assets and liabilities in 2010 and it is evaluating the impact that the adoption will have on its financial statements.


Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.  Estimates and judgments are based on historical experience, forecasted future events and various other assumptions that the Company believes to be reasonable under the circumstances.  Estimates and judgments may vary under different assumptions or conditions.  The Company evaluates its estimates and judgments on an ongoing basis.  Management believes the accounting policies below are critical in the portrayal of the Company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments.

Acquisitions and consolidations:   Determination and the allocation of the purchase price of acquired operations significantly influences the period in which costs are recognized.  Accounting for acquisitions and consolidations requires the Company to estimate the fair value of the individual assets and liabilities acquired as well as various forms of consideration given, which involves a number of judgments, assumptions and estimates that could materially affect the amount and timing of costs recognized.  The Company typically obtains independent third party valuation studies to assist in determining fair values, including assistance in determining future cash flows, appropriate discount rates and comparable market values.

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Contingencies:   The Company is subject to the possibility of losses from various contingencies.  Considerable judgment is necessary to estimate the probability and amount of any loss from such contingencies.  An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated.  The Company accrues a liability and charges operations for the estimated costs of adjudication or settlement of asserted and unasserted claims existing as of the balance sheet date.

Goodwill and intangible assets:   The Company tests goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate (including declines in selling prices for products) or a decision to sell or dispose of a reporting unit.  Goodwill is tested for impairment using a two-step process.  In the first step, the fair value of each reporting unit is compared to the carrying value of the net assets assigned to the unit.  If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired.  If the carrying value of the reporting unit exceeds its fair value, then the second step of the impairment test must be performed in order to determine the implied fair value of the reporting unit’s goodwill.  Determining the implied fair value of goodwill requires valuation of all of the Company’s tangible and intangible asset and liabilities.  If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference.

Determining when to test for impairment, the Company’s reporting units, the fair value of a reporting unit and the fair value of assets and liabilities within a reporting unit, requires judgment and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables.  The Company bases fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently uncertain.  Actual future results may differ from those estimates.  In addition, judgments and assumptions are required to allocate assets and liabilities to reporting units.

The Company tests other identified intangible assets with definite useful lives and subject to amortization when events and circumstances indicate the carrying value may not be recoverable by comparing the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset.  The Company tests intangible assets with indefinite lives annually for impairment using a fair value method such as discounted cash flows.  Estimating fair values involves significant assumptions, especially regarding future sales prices, sales volumes, costs and discount rates.

Income taxes:   The Company is required to estimate its provision for income taxes and amounts ultimately payable or recoverable in numerous tax jurisdictions around the world.  Estimates involve interpretations of regulations and are inherently complex.  Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of any fiscal year.  The Company is also required to evaluate the realizability of its deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of the Company’s performance and other relevant factors when determining the need for a valuation allowance with respect to these deferred tax assets.  Realization of deferred tax assets is dependent on the Company’s ability to generate future taxable income.

Inventories:   Inventories are stated at the lower of average cost or market value and the Company recorded a charge to write down the carrying value of inventories of memory products to their estimated market values of $369 million for the first quarter of 2009 and $282 million in aggregate for 2008.  Cost includes labor, material and overhead costs, including product and process technology costs.  Determining market value of inventories involves numerous judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in work in process inventories.  To project average selling prices and sales volumes, the Company reviews recent sales volumes, existing customer orders, current contract prices, industry analysis of supply and demand, seasonal factors, general economic trends and other information.  When these analyses reflect estimated market values below the Company’s manufacturing costs, the Company records a charge to cost of goods sold in advance of when the inventory is actually sold.  Differences in forecasted average selling prices used in calculating lower of cost or market adjustments can result in significant changes in the estimated net realizable value of product inventories and accordingly the amount of write-down recorded.  For example, a 5% variance in the estimated selling prices would have changed the estimated market value of the Company’s semiconductor memory inventory by approximately $50 million at December 4, 2008.  Due to the volatile nature of the semiconductor memory industry, actual selling prices and volumes often vary significantly from projected prices and volumes and, as a result, the timing of when product costs are charged to operations can vary significantly.

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U.S. GAAP provides for products to be grouped into categories in order to compare costs to market values.  The amount of any inventory write-down can vary significantly depending on the determination of inventory categories.  The Company’s inventories have been categorized as Memory products or Imaging products.  The major characteristics the Company considers in determining inventory categories are product type and markets.

Product and process technology:   Costs incurred to acquire product and process technology or to patent technology developed by the Company are capitalized and amortized on a straight-line basis over periods currently ranging up to 10 years.  The Company capitalizes a portion of costs incurred based on its analysis of historical and projected patents issued as a percent of patents filed.  Capitalized product and process technology costs are amortized over the shorter of (i) the estimated useful life of the technology, (ii) the patent term or (iii) the term of the technology agreement.

Property, plant and equipment:   The Company reviews the carrying value of property, plant and equipment for impairment when events and circumstances indicate that the carrying value of an asset or group of assets may not be recoverable from the estimated future cash flows expected to result from its use and/or disposition.  In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to the amount by which the carrying value exceeds the estimated fair value of the assets.  The estimation of future cash flows involves numerous assumptions which require judgment by the Company, including, but not limited to, future use of the assets for Company operations versus sale or disposal of the assets, future selling prices for the Company’s products and future production and sales volumes.  In addition, judgment is required by the Company in determining the groups of assets for which impairment tests are separately performed.

Research and development:   Costs related to the conceptual formulation and design of products and processes are expensed as research and development when incurred.  Determining when product development is complete requires judgment by the Company.  The Company deems development of a product complete once the product has been thoroughly reviewed and tested for performance and reliability.

Stock-based compensation:   Under the provisions of SFAS No. 123(R), stock-based compensation cost is estimated at the grant date based on the fair-value of the award and is recognized as expense ratably over the requisite service period of the award.  For stock-based compensation awards with graded vesting that were granted after 2005, the Company recognizes compensation expense using the straight-line amortization method.  For performance-based stock awards, the expense recognized is dependent on the probability of the performance measure being achieved.  The Company utilizes forecasts of future performance to assess these probabilities and this assessment requires considerable judgment.

Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates.  The Company develops its estimates based on historical data and market information which can change significantly over time.  A small change in the estimates used can result in a relatively large change in the estimated valuation.  The Company uses the Black-Scholes option valuation model to value employee stock awards.  The Company estimates stock price volatility based on an average of its historical volatility and the implied volatility derived from traded options on the Company’s stock.

 
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Item 3.   Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As of December 4, 2008, $2,002 million of the Company’s $2,866 million of debt was at fixed interest rates.  As a result, the fair value of the debt fluctuates based on changes in market interest rates.  The estimated fair value of the Company’s debt was $1,876 million as of December 4, 2008 and was $2,167 million as of August 28, 2008.  The Company estimates that as of December 4, 2008, a 1% decrease in market interest rates would change the fair value of the fixed-rate debt by approximately $29 million.  As of December 4, 2008, $864 million of the Company’s debt was at variable interest rates and an increase of 1% would increase annual interest expense by approximately $9 million.

Foreign Currency Exchange Rate Risk

The information in this section should be read in conjunction with the information related to changes in the exchange rates of foreign currency in “Item 1A. Risk Factors.”  Changes in foreign currency exchange rates could materially adversely affect the Company’s results of operations or financial condition.

The functional currency for substantially all of the Company’s operations is the U.S. dollar.  The Company held aggregate cash and other assets in foreign currencies valued at U.S. $252 million as of December 4, 2008 and U.S. $425 million as of August 28, 2008.  The Company also had aggregate foreign currency liabilities valued at U.S. $542 million as of December 4, 2008 and U.S. $580 million as of August 28, 2008.  Significant components of the Company’s assets and liabilities denominated in foreign currencies were as follows (in U.S. dollar equivalents):

   
December 4, 2008
   
August 28, 2008
 
   
Singapore Dollars
   
Yen
   
Euro
   
Singapore Dollars
   
Yen
   
Euro
 
                                     
Cash and equivalents
  $ 30     $ 16     $ 20     $ 84     $ 130     $ 25  
Net deferred tax assets
    --       100       1       --       85       2  
Accounts payable and accrued expenses
    (88 )     (198 )     (46 )     (105 )     (127 )     (61 )
Debt
    (78 )     (7 )     (4 )     (49 )     (108 )     (4 )
Other liabilities
    (8 )     (54 )     (36 )     (8 )     (45 )     (43 )

The Company estimates that, based on its assets and liabilities denominated in currencies other than the U.S. dollar as of December 4, 2008, a 1% change in the exchange rate versus the U.S. dollar would result in foreign currency gains or losses of approximately U.S. $1 million for the yen, the Singapore dollar and the euro.


Item 4.   Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based upon that evaluation, the principal executive officer and principal financial officer concluded that those disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, to allow timely decision regarding disclosure.

During the quarterly period covered by this report, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


 
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PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

Patent Matters

On August 28, 2000, the Company filed a complaint against Rambus, Inc. (“Rambus”) in the U.S. District Court for the District of Delaware seeking monetary damages and declaratory and injunctive relief.  Among other things, the Company’s complaint (as amended) alleges violation of federal antitrust laws, breach of contract, fraud, deceptive trade practices, and negligent misrepresentation.  The complaint also seeks a declaratory judgment (a) that certain Rambus patents are not infringed by the Company, are invalid, and/or are unenforceable, (b) that the Company has an implied license to those patents, and (c) that Rambus is estopped from enforcing those patents against the Company.  On February 15, 2001, Rambus filed an answer and counterclaim in Delaware denying that the Company is entitled to relief, alleging infringement of the eight Rambus patents (later amended to add four additional patents) named in the Company’s declaratory judgment claim, and seeking monetary damages and injunctive relief.  In the Delaware action, the Company subsequently added claims and defenses based on Rambus’s alleged spoliation of evidence and litigation misconduct.  The spoliation and litigation misconduct claims and defenses were heard in a bench trial before Judge Robinson in October 2007.  On January 9, 2009, Judge Robinson entered an opinion in favor of the Company holding that Rambus had engaged in spoliation and that the twelve Rambus patents in the suit were unenforceable against the Company.

A number of other suits involving Rambus are currently pending in Europe alleging that certain of the Company’s SDRAM and DDR SDRAM products infringe various of Rambus’ country counterparts to its European patent 525 068, including: on September 1, 2000, Rambus filed suit against Micron Semiconductor (Deutschland) GmbH in the District Court of Mannheim, Germany; on September 22, 2000, Rambus filed a complaint against the Company and Reptronic (a distributor of the Company’s products) in the Court of First Instance of Paris, France; on September 29, 2000, the Company filed suit against Rambus in the Civil Court of Milan, Italy, alleging invalidity and non-infringement.  In addition, on December 29, 2000, the Company filed suit against Rambus in the Civil Court of Avezzano, Italy, alleging invalidity and non-infringement of the Italian counterpart to European patent 1 004 956.  Additionally, on August 14, 2001, Rambus filed suit against Micron Semiconductor (Deutschland) GmbH in the District Court of Mannheim, Germany alleging that certain of the Company’s DDR SDRAM products infringe Rambus’ country counterparts to its European patent 1 022 642.  In the European suits against the Company, Rambus is seeking monetary damages and injunctive relief.  Subsequent to the filing of the various European suits, the European Patent Office (the “EPO”) declared Rambus’ 525 068 and 1 004 956 European patents invalid and revoked the patents.  The declaration of invalidity with respect to the '068 patent was upheld on appeal.  The original claims of the '956 patent also were declared invalid on appeal, but the EPO ultimately granted a Rambus request to amend the claims by adding a number of limitations.

On January 13, 2006, Rambus filed a lawsuit against the Company in the U.S. District Court for the Northern District of California.  The complaint alleges that certain of the Company’s DDR2, DDR3, RLDRAM, and RLDRAM II products infringe as many as fourteen Rambus patents and seeks monetary damages, treble damages, and injunctive relief.  On June 2, 2006, the Company filed an answer and counterclaim against Rambus alleging among other things, antitrust and fraud claims.  The Northern District of California Court subsequently consolidated the antitrust and fraud claims and certain equitable defenses of the Company and other parties against Rambus in a jury trial that began on January 29, 2008.  On March 26, 2008, a jury returned a verdict in favor of Rambus on the Company’s antitrust and fraud claims.  On November 24, 2008, the Court granted partial summary judgment of infringement in favor of Rambus on one of the patent claims at issue in the case.  Trial on the patent phase of that case relating to twelve claims in ten Rambus patents is currently scheduled to begin January 26, 2009.

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On July 24, 2006, the Company filed a declaratory judgment action against Mosaid Technologies, Inc. (“Mosaid”) in the U.S. District Court for the Northern District of California seeking, among other things, a court determination that fourteen Mosaid patents are invalid, not enforceable, and/or not infringed.  On July 25, 2006, Mosaid filed a lawsuit against the Company and others in the U.S. District Court for the Eastern District of Texas alleging infringement of nine Mosaid patents.  On August 31, 2006, Mosaid filed an amended complaint adding three additional Mosaid patents.  On October 23, 2006, the California Court dismissed the Company’s declaratory judgment suit based on lack of jurisdiction.  The Company appealed that decision to the U.S. Court of Appeals for the Federal Circuit.  On February 29, 2008, the U.S. Court of Appeals for the Federal Circuit issued an order reversing the dismissal of the Company’s declaratory judgment action filed in the U.S. District Court for the Northern District of California and remanding the suit to that Court.  The Texas action was subsequently transferred to the Northern District of California.  Mosaid alleges that certain of the Company’s DRAM and CMOS image sensor products infringe up to twelve Mosaid patents and seeks monetary damages, treble damages, and injunctive relief.  The accused products account for a significant portion of our net sales.  Trial is currently scheduled for June 5, 2009.

The Company is unable to predict the outcome of these suits.  A court determination that the Company’s products or manufacturing processes infringe the product or process intellectual property rights of others could result in significant liability and/or require the Company to make material changes to its products and/or manufacturing processes.  Any of the foregoing results could have a material adverse effect on the Company’s business, results of operations or financial condition.

Antitrust Matters

A number of purported class action price-fixing lawsuits have been filed against the Company and other DRAM suppliers.  Four cases have been filed in the U.S. District Court for the Northern District of California asserting claims on behalf of a purported class of individuals and entities that indirectly purchased DRAM and/or products containing DRAM from various DRAM suppliers during the time period from April 1, 1999 through at least June 30, 2002.  The complaints allege price fixing in violation of federal antitrust laws and various state antitrust and unfair competition laws and seek treble monetary damages, restitution, costs, interest and attorneys’ fees.  In addition, at least sixty-four cases have been filed in various state courts asserting claims on behalf of a purported class of indirect purchasers of DRAM.  Cases have been filed in the following states:  Arkansas, Arizona, California, Florida, Hawaii, Iowa, Kansas, Massachusetts, Maine, Michigan, Minnesota, Mississippi, Montana, North Carolina, North Dakota, Nebraska, New Hampshire, New Jersey, New Mexico, Nevada, New York, Ohio, Pennsylvania, South Dakota, Tennessee, Utah, Vermont, Virginia, Wisconsin, and West Virginia, and also in the District of Columbia and Puerto Rico.  The complaints purport to be on behalf of a class of individuals and entities that indirectly purchased DRAM and/or products containing DRAM in the respective jurisdictions during various time periods ranging from April 1999 through at least June 2002.  The complaints allege violations of the various jurisdictions’ antitrust, consumer protection and/or unfair competition laws relating to the sale and pricing of DRAM products and seek treble monetary damages, restitution, costs, interest and attorneys’ fees.  A number of these cases have been removed to federal court and transferred to the U.S. District Court for the Northern District of California (San Francisco) for consolidated proceedings.  On January 29, 2008, the Northern District of California Court granted in part and denied in part the Company’s motion to dismiss plaintiff’s second amended consolidated complaint.  Plaintiffs subsequently filed a motion seeking certification for interlocutory appeal of the decision.  On February 27, 2008, plaintiffs filed a third amended complaint.  On June 26, 2008, the United States Court of Appeals for the Ninth Circuit accepted plaintiffs’ interlocutory appeal.

Additionally, three cases have been filed in the following Canadian courts:  Superior Court, District of Montreal, Province of Quebec; Ontario Superior Court of Justice, Ontario; and Supreme Court of British Columbia, Vancouver Registry, British Columbia.  The substantive allegations in these cases are similar to those asserted in the cases filed in the United States.  In May and June 2008 respectively, plaintiffs’ motion for class certification was denied in the British Columbia and Quebec cases.  Plaintiffs have filed an appeal of each of those decisions.

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In addition, various states, through their Attorneys General, have filed suit against the Company and other DRAM manufacturers.  On July 14, 2006, and on September 8, 2006 in an amended complaint, the following Attorneys General filed suit in the U.S. District Court for the Northern District of California:  Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and the Commonwealth of the Northern Mariana Islands.  Thereafter, three states, Ohio, New Hampshire, and Texas, voluntarily dismissed their claims.  The remaining states filed a third amended complaint on October 1, 2007.  Alaska, Delaware, Kentucky, and Vermont subsequently voluntarily dismissed their claims.  The amended complaint alleges, among other things, violations of the Sherman Act, Cartwright Act, and certain other states’ consumer protection and antitrust laws and seeks damages, and injunctive and other relief.  Additionally, on July 13, 2006, the State of New York filed a similar suit in the U.S. District Court for the Southern District of New York.  That case was subsequently transferred to the U.S. District Court for the Northern District of California for pre-trial purposes.  The State of New York filed an amended complaint on October 1, 2007.  On October 3, 2008, the California Attorney General filed a similar lawsuit in California Superior Court, purportedly on behalf of local California government entities, alleging, among other things, violations of the Cartwright Act and state unfair competition law.

On February 28, 2007, February 28, 2007 and March 8, 2007, cases were filed against the Company and other manufacturers of DRAM in the U.S. District Court for the Northern District of California by All American Semiconductor, Inc., Jaco Electronics, Inc. and DRAM Claims Liquidation Trust, respectively, that opted-out of a direct purchaser class action suit that was settled.  The complaints allege, among other things, violations of federal and state antitrust and competition laws in the DRAM industry, and seek damages, injunctive relief, and other remedies.

On October 11, 2006, the Company received a grand jury subpoena from the U.S. District Court for the Northern District of California seeking information regarding an investigation by the DOJ into possible antitrust violations in the “Static Random Access Memory” or “SRAM” industry.  . In December 2008, the Company was informed that the DOJ closed its investigation of the SRAM industry.

Subsequent to the issuance of subpoenas to the SRAM industry, a number of purported class action lawsuits have been filed against the Company and other SRAM suppliers.  Six cases have been filed in the U.S. District Court for the Northern District of California asserting claims on behalf of a purported class of individuals and entities that purchased SRAM directly from various SRAM suppliers during the period from November 1, 1996 through December 31, 2005.  Additionally, at least seventy-four cases have been filed in various U.S. District Courts asserting claims on behalf of a purported class of individuals and entities that indirectly purchased SRAM and/or products containing SRAM from various SRAM suppliers during the time period from November 1, 1996 through December 31, 2006.  In September 2008, a class of direct purchasers was certified, and plaintiffs were granted leave to amend their complaint to cover Pseudo-Static RAM or “PSRAM” products as well.  The complaints allege price fixing in violation of federal antitrust laws and state antitrust and unfair competition laws and seek treble monetary damages, restitution, costs, interest and attorneys’ fees.

Three purported class action SRAM lawsuits also have been filed in Canada, on behalf of direct and indirect purchasers, alleging violations of the Canadian Competition Act.  The substantive allegations in these cases are similar to those asserted in the SRAM cases filed in the United States.

In addition, three purported class action lawsuits alleging price-fixing of Flash products have been filed in Canada, asserting violations of the Canadian Competition Act.  These cases assert claims on behalf of a purported class of individuals and entities that purchased Flash memory directly and indirectly from various Flash memory suppliers.

On May 5, 2004, Rambus filed a complaint in the Superior Court of the State of California (San Francisco County) against the Company and other DRAM suppliers.  The complaint alleges various causes of action under California state law including a conspiracy to restrict output and fix prices on Rambus DRAM (“RDRAM”) and unfair competition.  Trial is currently scheduled to begin in March 2009.  The complaint seeks treble damages, punitive damages, attorneys’ fees, costs, and a permanent injunction enjoining the defendants from the conduct alleged in the complaints.

The Company is unable to predict the outcome of these lawsuits and investigations.  The final resolution of these alleged violations of antitrust laws could result in significant liability and could have a material adverse effect on the Company’s business, results of operations or financial condition.

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Securities Matters

On February 24, 2006, a putative class action complaint was filed against the Company and certain of its officers in the U.S. District Court for the District of Idaho alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.  Four substantially similar complaints subsequently were filed in the same Court.  The cases purport to be brought on behalf of a class of purchasers of the Company’s stock during the period February 24, 2001 to February 13, 2003.  The five lawsuits have been consolidated and a consolidated amended class action complaint was filed on July 24, 2006.  The complaint generally alleges violations of federal securities laws based on, among other things, claimed misstatements or omissions regarding alleged illegal price-fixing conduct or the Company’s operations and financial results.  The complaint seeks unspecified damages, interest, attorneys’ fees, costs, and expenses.  On December 19, 2007, the Court issued an order certifying the class but reducing the class period to purchasers of the Company’s stock during the period from February 24, 2001 to September 18, 2002.

In addition, on March 23, 2006 a shareholder derivative action was filed in the Fourth District Court for the State of Idaho (Ada County), allegedly on behalf of and for the benefit of the Company, against certain of the Company’s current and former officers and directors.  The Company also was named as a nominal defendant.  An amended complaint was filed on August 23, 2006 and was subsequently dismissed by the Court.  Another amended complaint was filed on September 6, 2007.  The amended complaint is based on the same allegations of fact as in the securities class actions filed in the U.S. District Court for the District of Idaho and alleges breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and insider trading.  The amended complaint seeks unspecified damages, restitution, disgorgement of profits, equitable and injunctive relief, attorneys’ fees, costs, and expenses.  The amended complaint is derivative in nature and does not seek monetary damages from the Company.  However, the Company may be required, throughout the pendency of the action, to advance payment of legal fees and costs incurred by the defendants.  On January 25, 2008, the Court granted the Company’s motion to dismiss the second amended complaint without leave to amend.  On March 10, 2008, plaintiffs filed a notice of appeal to the Idaho Court of Appeals.

The Company is unable to predict the outcome of these cases.  A court determination in any of these actions against the Company could result in significant liability and could have a material adverse effect on the Company’s business, results of operations or financial condition.

(See “Item 1A. Risk Factors.”)


Item 1A.   Risk Factors

In addition to the factors discussed elsewhere in this Form 10-Q, the following are important factors which could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company.

We have experienced dramatic declines in average selling prices for our semiconductor memory products which have adversely affected our business.

For the first quarter of 2009, average selling prices of DRAM and NAND Flash products decreased 34% and 24%, respectively, as compared to the fourth quarter of 2008.  For 2008, average selling prices of DRAM and NAND Flash products decreased 51% and 67%, respectively, as compared to 2007.  For 2007, average selling prices of DRAM and NAND Flash products decreased 23% and 56%, respectively, as compared to 2006.  Currently, and at times in the past, average selling prices for our memory products have been below our costs.  We recorded aggregate inventory write-downs of $369 million for the first quarter of 2009, $282 million in 2008 and $20 million in 2007 as a result of the significant decreases in average selling prices for our semiconductor memory products.  If the estimated market values of products held in finished goods and work in process inventories at a quarter end date are below the manufacturing cost of these products, we recognize charges to cost of goods sold to write down the carrying value of our inventories to market value.  Future charges for inventory write-downs could be larger than the amount recorded in 2009 and 2008.  If average selling prices for our memory products remain depressed or decrease faster than we can decrease per gigabit costs, as they recently have, our business, results of operations or financial condition could be materially adversely affected.

32

We may be unable to generate sufficient cash flows or obtain access to external financing necessary to fund our operations and make adequate capital investments.

Our cash flows from operations depend primarily on the volume of semiconductor memory sold, average selling prices and per unit manufacturing costs.  To develop new product and process technologies, support future growth, achieve operating efficiencies and maintain product quality, we must make significant capital investments in manufacturing technology, facilities and capital equipment, research and development, and product and process technology.  We currently estimate our capital spending to approximate between $650 million to $750 million for 2009.  Cash and investments of IM Flash and TECH are generally not available to finance our other operations.  In the past we have utilized external sources of financing when needed and access to capital markets has historically been very important to us.  As a result of the severe downturn in the semiconductor memory market, the downturn in general economic conditions, and the adverse conditions in the credit markets, financing instruments that we have used in the past are currently not available on terms acceptable to us and may not be available to us for extended periods.  We significantly reduced our capital expenditures for 2009.  In addition, we are pursuing further financing alternatives, further reducing capital expenditures and implementing further cost-cutting initiatives.  There can be no assurance that we will be able to generate sufficient cash flows or find other sources of financing to fund our operations; make adequate capital investments to remain competitive in terms of technology development and cost efficiency; or access capital markets.  Our inability to do the foregoing could have a material adverse effect on our business and results of operations.

We may be unable to reduce our per gigabit manufacturing costs at the rate average selling prices decline.

Our gross margins are dependent upon continuing decreases in per gigabit manufacturing costs achieved through improvements in our manufacturing processes, including reducing the die size of our existing products.  In future periods, we may be unable to reduce our per gigabit manufacturing costs at sufficient levels to increase gross margins due to factors including, but not limited to, strategic product diversification decisions affecting product mix, the increasing complexity of manufacturing processes, changes in process technologies or products that inherently may require relatively larger die sizes.  Per gigabit manufacturing costs may also be affected by the relatively smaller production quantities and shorter product lifecycles of certain specialty memory products.  Temporary production slowdowns that we implemented at some of our manufacturing facilities during the second quarter of 2009 are expected to adversely affect per megabit costs of Memory products.

An adverse result in our litigation matters could materially adversely affect our business, results of operations or financial condition.

On January 13, 2006, Rambus, Inc. (“Rambus”) filed a lawsuit against us in the U.S. District Court for the Northern District of California.  Rambus alleges that certain of our DDR2, DDR3, RLDRAM, and RLDRAM II products infringe as many as fourteen Rambus patents and seeks monetary damages, treble damages, and injunctive relief.  The accused products account for a significant portion of our net sales.  On June 2, 2006, we filed an answer and counterclaim against Rambus alleging, among other things, antitrust and fraud claims.  Trial on the patent phase of that case relating to twelve claims in ten Rambus patents is currently scheduled to begin January 26, 2009.

On May 5, 2004, Rambus filed a lawsuit in the Superior Court of the State of California (San Francisco County) against us and other DRAM suppliers.  The complaint alleges various causes of action under California state law including conspiracy to restrict output and fix prices on Rambus DRAM ("RDRAM"), and unfair competition.  The complaint seeks treble damages, punitive damages, attorneys’ fees, costs, and a permanent injunction enjoining the defendants from the conduct alleged in the complaint.  Trial is currently scheduled to begin in March 2009.  (See “Item 3.  Legal Proceedings” for additional details on these cases and other Rambus matters pending in Europe and Delaware.)

We are unable to predict the outcome of these lawsuits.  The adverse resolution of these lawsuits could result in significant liability and could have a material adverse effect on our business, results of operations or financial condition.

Our joint ventures and strategic partnerships involve numerous risks.


We have entered into partnering arrangements to manufacture products and develop new manufacturing process technologies and products.  These arrangements include our IM Flash NAND flash joint ventures with Intel, our DRAM joint ventures with Nanya, our TECH DRAM joint venture and our MP Mask joint venture with Photronics.  These strategic partnerships and joint ventures are subject to various risks that could adversely affect the value of our investments and our results of operations.  These risks include the following:

33

·  
our interests could diverge from our partners in the future or we may not be able to agree with partners on the amount, timing or nature of further investments in our joint venture;

·  
due to financial constraints, our partners may be unable to meet their commitments to us or our joint ventures and may pose credit risks for our transactions with them;

·  
the terms of our arrangements may turn out to be unfavorable;

·  
cash flows may be inadequate to fund increased capital requirements;

·  
we may experience difficulties in transferring technology to joint ventures;

·  
we may experience difficulties and delays in ramping production at joint ventures; and

·  
political or economic instability may occur in the countries where our joint ventures and/or partners are located.

If our joint ventures and strategic partnerships are unsuccessful, our business, results of operations or financial condition may be adversely affected.

Economic conditions may harm our business.

Economic and business conditions, including a continuing downturn in the semiconductor memory industry or the overall economy is having an adverse effect on our business.  Adverse conditions affect consumer demand for devices that incorporate our products such as personal computers, mobile phones, Flash memory cards and USB devices.  Reduced demand for our products could result in continued market oversupply and significant decreases in our selling prices.  A continuation of current conditions in credit markets would limit our ability to obtain external financing to fund our operations and capital expenditures.  In addition, we may experience losses on our holdings of cash and investments due to failures of financial institutions and other parties.  Difficult economic conditions may also result in a higher rate of losses on our accounts receivables due to credit defaults.  As a result, our business, results of operations or financial condition could be materially adversely affected.

The semiconductor memory industry is highly competitive.

We face intense competition in the semiconductor memory market from a number of companies, including Elpida Memory, Inc.; Hynix Semiconductor Inc.; Qimonda AG; Samsung Electronics Co., Ltd.; SanDisk Corporation; Toshiba Corporation and from emerging companies in Taiwan and China, who have significantly expanded the scale of their operations.  Some of our competitors are large corporations or conglomerates that may have greater resources to withstand downturns in the semiconductor markets in which we compete, invest in technology and capitalize on growth opportunities.

Our competitors seek to increase silicon capacity, improve yields, reduce die size and minimize mask levels in their product designs.  The transitions to smaller line-width process technologies and 300mm wafers in the industry have resulted in significant increases in the worldwide supply of semiconductor memory and will likely lead to future increases.  Increases in worldwide supply of semiconductor memory also result from semiconductor memory fab capacity expansions, either by way of new facilities, increased capacity utilization or reallocation of other semiconductor production to semiconductor memory production.  We and several of our competitors have significantly increased production in recent periods through construction of new facilities or expansion of existing facilities.  Increases in worldwide supply of semiconductor memory, if not accompanied with commensurate increases in demand, would lead to further declines in average selling prices for our products and would materially adversely affect our business, results of operations or financial condition.

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Our NAND Flash memory operations involve numerous risks.

As a result of severe oversupply in the NAND Flash market, our average selling prices of NAND Flash products decreased 24% as compared to the fourth quarter of 2008 after decreasing 67% for 2008 as compared to 2007 and 56% for 2007 as compared to 2006.  As a result, we experienced negative gross margins on sales of our NAND Flash products in 2009 and 2008.  In the first quarter of 2009, we discontinued production of NAND flash memory for IM Flash at our Boise facility.  The NAND Flash production shutdown reduces IM Flash’s NAND flash production by approximately 35,000 200mm wafers per month.  In addition, we and Intel agreed to suspend tooling and the ramp of production NAND Flash at IM Flash’s Singapore wafer fabrication plant.  A continuation of the challenging conditions in the NAND Flash market will materially adversely affect our business, results of operations and financial condition.

We may incur additional restructure charges or not realize the expected benefits of new initiatives to reduce costs across our operations.

In the first quarter of 2009, in response to a challenging global environment for technology products, we announced a restructuring of our memory operations.  As part of the restructure, our IM Flash joint venture between us and Intel terminated its agreement with us to obtain NAND Flash memory supply from the our Boise facility, reducing our NAND Flash production by approximately 35,000 200mm wafers per month.  In addition, we and Intel agreed to suspend tooling and the ramp of production at IM Flash’s Singapore wafer fabrication facility.  We have also undertaken additional cost savings measures to increase our competitiveness, including reductions in executive and employee salary and bonuses, a continued hiring freeze, and reduction of other discretionary costs such as outside services, travel and overtime.  As a result of these actions, we recorded a net $66 million credit to restructure in the first quarter of 2009, attributable to our Memory segment.  The amount includes a $144 million gain in connection with the termination of the NAND Flash supply agreement.   The restructure credit also includes a $56 million charge to write down equipment and costs of $22 million for severance and other employee-related items.  As of December 4, 2008, we expected to incur additional restructure costs of approximately $40 million through 2010.  We may incur additional restructure costs or not realize the expected benefits of these new initiatives.  As a result of these initiatives, we expect to lose production output, incur restructuring or other infrequent charges and we may experience disruptions in our operations, loss of key personnel and difficulties in delivering products timely.

Our acquisition of a 35.5% interest in Inotera Memories, Inc. involves numerous risks.

In the first quarter of 2009, we acquired a 35.5% ownership interest in Inotera Memories, Inc., a Taiwanese DRAM memory manufacturer, for approximately $400 million in cash.  As a result of this acquisition, we have rights and obligations to purchase 50% of the 120,000 per month 300mm DRAM wafer production of Inotera.  Our acquisition of an interest in Inotera involves numerous risks including the following:

·  
Inotera’s ability to meet its ongoing obligations;

·  
uncertainties relating to Qimonda’s purchase of certain agreed quantities of products made using Qimonda’s trench technology during the transition period.

·  
difficulties in converting Inotera production from Qimonda’s trench technology to our stack technology;

·  
difficulties in obtaining financing for capital expenditures necessary to convert Inotera production to our stack technology;

·  
increasing debt to finance the acquisition;

·  
uncertainties around the timing and amount of wafer supply received;

·  
obligations during the technology transition period to procure product based on a competitor’s technology which may be difficult to sell and provide product support for due to our limited understanding of the technology;

·  
recognition in our results of operation of our share of potential Inotera losses; and

·  
a further decline in margins associated with potentially purchasing product utilizing Qimonda’s trench technology at a relatively higher cost than other products manufactured by us and selling them potentially at a lower price than other products produced us.

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An adverse determination that our products or manufacturing processes infringe the intellectual property rights of others could materially adversely affect our business, results of operations or financial condition.

We are engaged in patent litigation with Mosaid Technologies, Inc. ("Mosaid") in the U.S. District Court for the Northern District of California.  Mosaid alleges that certain of our DRAM and CMOS image sensor products infringe up to twelve Mosaid patents and seeks monetary damages, treble damages, and injunctive relief.  The accused products account for a significant portion of our net sales.  Trial is currently scheduled for June 5, 2009.  (See “Item 3.  Legal Proceedings” for additional details.)

We are unable to predict the outcome of assertions of infringement made against us.  A court determination that our products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require us to make material changes to our products and/or manufacturing processes.  Any of the foregoing results could have a material adverse effect on our business, results of operations or financial condition.

We have a number of patent and intellectual property license agreements.  Some of these license agreements require us to make one time or periodic payments.  We may need to obtain additional patent licenses or renew existing license agreements in the future.  We are unable to predict whether these license agreements can be obtained or renewed on acceptable terms.

Allegations of anticompetitive conduct.

A number of purported class action price-fixing lawsuits have been filed against us and other DRAM suppliers.  Numerous cases have been filed in various state and federal courts asserting claims on behalf of a purported class of individuals and entities that indirectly purchased DRAM and/or products containing DRAM from various DRAM suppliers during the time period from April 1, 1999 through at least June 30, 2002.  The complaints allege violations of the various jurisdictions’ antitrust, consumer protection and/or unfair competition laws relating to the sale and pricing of DRAM products and seek treble monetary damages, restitution, costs, interest and attorneys’ fees.  A number of these cases have been removed to federal court and transferred to the U.S. District Court for the Northern District of California (San Francisco) for consolidated proceedings.  On January 29, 2008, the Northern District of California Court granted in part and denied in part our motion to dismiss the plaintiff’s second amended consolidated complaint.  The District Court subsequently certified the decision for interlocutory appeal.  On February 27, 2008, plaintiffs filed a third amended complaint.  On June 26, 2008, the United States Court of Appeals for the Ninth Circuit accepted plaintiffs’ interlocutory appeal.  (See “Item 3.  Legal Proceedings” for additional details on these cases and related matters.)

Various states, through their Attorneys General, have filed suit against us and other DRAM manufacturers alleging violations of state and federal competition laws.  The amended complaint alleges, among other things, violations of the Sherman Act, Cartwright Act, and certain other states’ consumer protection and antitrust laws and seeks damages, and injunctive and other relief.  On October 3, 2008, the California Attorney General filed a similar lawsuit in California Superior Court, purportedly on behalf of local California government entities, alleging, among other things, violations of the Cartwright Act and state unfair competition law.  (See “Item 3.  Legal Proceedings” for additional details on these cases and related matters.)

A number of purported class action lawsuits have been filed against us and other SRAM suppliers asserting claims on behalf of a purported class of individuals and entities that purchased SRAM directly or indirectly from various SRAM suppliers.  The complaints allege price fixing in violation of federal antitrust laws and state antitrust and unfair competition laws and seek treble monetary damages, restitution, costs, interest and attorneys' fees.  The first trial in these cases is currently scheduled for September 2010.  (See “Item 3.  Legal Proceedings” for additional details on these cases and related matters.)

Three purported class action lawsuits alleging price-fixing of Flash products have been filed in Canada asserting violations of the Canadian Competition Act.  These cases assert claims on behalf of a purported class of individuals and entities that purchased Flash memory directly and indirectly from various Flash memory suppliers.  (See “Item 3.  Legal Proceedings” for additional details on these cases and related matters.)

We are unable to predict the outcome of these lawsuits.  An adverse court determination in any of these lawsuits alleging violations of antitrust laws could result in significant liability and could have a material adverse effect on our business, results of operations or financial condition.

36

Covenants in our debt instruments may obligate us to repay debt, increase contributions to our TECH joint venture and limit our ability to obtain financing.

Our ability to comply with the financial and other covenants contained in our debt may be affected by economic or business conditions or other events.  As of December 4, 2008, our 73% owned TECH Semiconductor Singapore Pte. Ltd., (“TECH”) subsidiary, had $600 million outstanding under a credit facility with covenants that, among other requirements, establish certain liquidity, debt service coverage and leverage ratios for TECH and restrict TECH’s ability to incur indebtedness, create liens and acquire or dispose of assets.  If TECH does not comply with these debt covenants and restrictions, this debt may be deemed to be in default and the debt declared payable.  Additionally, if TECH is unable to repay its borrowings when due, the lenders under TECH’s credit facility could proceed against substantially all of TECH’s assets.  We have guaranteed approximately 73% of the outstanding amount of TECH’s credit facility, and our obligation increases to 100% of the outstanding amount of the facility upon the occurrence of certain conditions.  If TECH’s debt is accelerated, we may not have sufficient assets to repay amounts due.  Existing covenant restrictions may limit our ability to obtain additional debt financing and to avoid covenant defaults we may have to pay off debt obligations and make additional contributions to TECH, which could adversely affect our liquidity and financial condition.

Allegations of violations of securities laws.

On February 24, 2006, a number of purported class action complaints were filed against us and certain of our officers in the U.S. District Court for the District of Idaho alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.  The cases purport to be brought on behalf of a class of purchasers of our stock during the period February 24, 2001 to February 13, 2003.  The five lawsuits have been consolidated and a consolidated amended class action complaint was filed on July 24, 2006.  The complaint generally alleges violations of federal securities laws based on, among other things, claimed misstatements or omissions regarding alleged illegal price-fixing conduct.  The complaint seeks unspecified damages, interest, attorneys' fees, costs, and expenses.  On December 19, 2007, the Court issued an order certifying the class but reducing the class period to purchasers of our stock during the period from February 24, 2001 to September 18, 2002.  (See “Item 3.  Legal Proceedings” for additional details on these cases and related matters.)

We are unable to predict the outcome of these cases.  An adverse court determination in any of the class action lawsuits against us could result in significant liability and could have a material adverse effect on our business, results of operations or financial condition.

Products that fail to meet specifications, are defective or that are otherwise incompatible with end uses could impose significant costs on us.

Products that do not meet specifications or that contain, or are perceived by our customers to contain, defects or that are otherwise incompatible with end uses could impose significant costs on us or otherwise materially adversely affect our business, results of operations or financial condition.

Because the design and production process for semiconductor memory is highly complex, it is possible that we may produce products that do not comply with customer specifications, contain defects or are otherwise incompatible with end uses.  If, despite design review, quality control and product qualification procedures, problems with nonconforming, defective or incompatible products occur after we have shipped such products, we could be adversely affected in several ways, including the following:

·  
we may replace product or otherwise compensate customers for costs incurred or damages caused by defective or incompatible product, and

·  
we may encounter adverse publicity, which could cause a decrease in sales of our products.

Our debt level is higher than compared to historical periods.

We currently have a higher level of debt compared to historical periods.  As of December 4, 2008, we had $2.9 billion of debt. We may need to incur additional debt in the future. Our debt level could adversely impact us.  For example it could:

·  
make it more difficult for us to make payments on our debt;

37

·  
require us to dedicate a substantial portion of our cash flow from operations and other capital resources to debt service;

·  
limit our future ability to raise funds for capital expenditures, acquisitions, research and development and other general corporate requirements;

·  
increase our vulnerability to adverse economic and semiconductor memory industry conditions;

·  
expose us to fluctuations in interest rates with respect to that portion of our debt which is at variable rate of interest; and

·  
require us to make additional investments in joint ventures to maintain compliance with financial covenants.

New product development may be unsuccessful.

We are developing new products that complement our traditional memory products or leverage their underlying design or process technology.  We have made significant investments in product and process technologies and anticipate expending significant resources for new semiconductor product development over the next several years.  The process to develop NAND Flash, Imaging and certain specialty memory products requires us to demonstrate advanced functionality and performance, many times well in advance of a planned ramp of production, in order to secure design wins with our customers.  There can be no assurance that our product development efforts will be successful, that we will be able to cost-effectively manufacture these new products, that we will be able to successfully market these products or that margins generated from sales of these products will recover costs of development efforts.

The future success of our Imaging business will be dependent on continued market acceptance of our products and the development, introduction and marketing of new Imaging products.

We face competition in the image sensor market from a number of suppliers of CMOS image sensors including OmniVision Technologies, Inc.; Samsung Electronics Co., Ltd; Sony Corporation; STMicroelectronics NV; Toshiba Corporation and from a number of suppliers of CCD image sensors including Matsushita Electric Industrial Co., Ltd.; Sharp Corporation and Sony Corporation.  In recent periods, a number of new companies have entered the CMOS image sensor market.  Competitors include many large domestic and international companies that have greater presence in key markets, better access to certain customer bases, greater name recognition and more established strategic and financial relationships than the Company.

In recent years, our Imaging net sales and gross margins decreased and we faced increased competition.  There can be no assurance that we will be able to grow or maintain our market share or gross margins for Imaging products in the future.  We expect that unit sales for Imaging will decrease in the second quarter of 2009 due to lower sales of cell phones and other devices incorporating the our Imaging products.  Temporary production slowdowns that we implemented at some of our manufacturing facilities during the second quarter of 2009 are expected to adversely affect per unit costs of Imaging products.  The success of our Imaging business will depend on a number of factors, including:

·  
development of products that maintain a technological advantage over the products of our competitors;

·  
accurate prediction of market requirements and evolving standards, including pixel resolution, output interface standards, power requirements, optical lens size, input standards and other requirements;

·  
timely completion and introduction of new Imaging products that satisfy customer requirements;

·  
timely achievement of design wins with prospective customers, as manufacturers may be reluctant to change their source of components due to the significant costs, time, effort and risk associated with qualifying a new supplier; and

·  
efficient, cost-effective manufacturing as we transition to new products and higher volumes.

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Our efforts to restructure our Aptina Imaging business may be unsuccessful.

We are exploring partnering arrangements with outside parties regarding the sale of Aptina in which we could retain a minority ownership interest.  To that end, we began operating our Imaging business as a separate, wholly-owned, subsidiary in October 2008.  To the extent we form a partnering arrangement, the resulting business model may not be successful and the Imaging operations revenues and margins could be adversely affected.  We may incur significant costs to convert Imaging operations to a new business structure and operations could be disrupted.  In addition, we may lose key personnel.  If our efforts to restructure the Imaging business are unsuccessful, our business, results of operations or financial condition could be materially adversely affected.

We expect to make future acquisitions and alliances, which involve numerous risks.

Acquisitions and the formation of alliances such as joint ventures and other partnering arrangements, involve numerous risks including the following:

·  
difficulties in integrating the operations, technologies and products of acquired or newly formed entities;

·  
increasing capital expenditures to upgrade and maintain facilities;

·  
increasing debt to finance any acquisition or formation of a new business;

·  
difficulties in protecting our intellectual property as we enter into a greater number of licensing arrangements;

·  
diverting management’s attention from normal daily operations;

·  
managing larger or more complex operations and facilities and employees in separate geographic areas; and

·  
hiring and retaining key employees.

Acquisitions of, or alliances with, high-technology companies are inherently risky, and any future transactions may not be successful and may materially adversely affect our business, results of operations or financial condition.

Changes in foreign currency exchange rates could materially adversely affect our business, results of operations or financial condition.

Our financial statements are prepared in accordance with U.S. GAAP and are reported in U.S. dollars.  Across our multi-national operations, there are transactions and balances denominated in other currencies, primarily the euro, yen and Singapore dollar.  We recorded a net loss of $25 million from changes in currency exchange rates for 2008.  We estimate that, based on its assets and liabilities denominated in currencies other than the U.S. dollar as of December 4, 2008, a 1% change in the exchange rate versus the U.S. dollar would result in foreign currency gains or losses of approximately U.S. $1 million for the yen, Singapore dollar or euro.  In the event that the U.S. dollar weakens significantly compared to the yen, Singapore dollar and euro, our results of operations or financial condition will be adversely affected.

We face risks associated with our international sales and operations that could materially adversely affect our business, results of operations or financial condition.

Sales to customers outside the United States approximated 80% of our consolidated net sales for the first quarter of 2009.  In addition, we have manufacturing operations in China, Italy, Japan, Puerto Rico and Singapore.  Our international sales and operations are subject to a variety of risks, including:

·  
currency exchange rate fluctuations;

·  
export and import duties, changes to import and export regulations, and restrictions on the transfer of funds;

·  
political and economic instability;

·  
problems with the transportation or delivery of our products;

39

·  
issues arising from cultural or language differences and labor unrest;

·  
longer payment cycles and greater difficulty in collecting accounts receivable; and

·  
compliance with trade and other laws in a variety of jurisdictions.

These factors may materially adversely affect our business, results of operations or financial condition.

Our net operating loss and tax credit carryforwards may be limited.

We have significant net operating loss and tax credit carryforwards.  We have provided significant valuation allowances against the tax benefit of such losses as well as certain tax credit carryforwards.  Utilization of these net operating losses and credit carryforwards is dependent upon us achieving sustained profitability.  As a consequence of prior business acquisitions, utilization of the tax benefits for some of the tax carryforwards is subject to limitations imposed by Section 382 of the Internal Revenue Code and some portion or all of these carryforwards may not be available to offset any future taxable income.  The determination of the limitations is complex and requires significant judgment and analysis of past transactions.

If our manufacturing process is disrupted, our business, results of operations or financial condition could be materially adversely affected.

We manufacture products using highly complex processes that require technologically advanced equipment and continuous modification to improve yields and performance.  Difficulties in the manufacturing process or the effects from a shift in product mix can reduce yields or disrupt production and may increase our per gigabit manufacturing costs.  Additionally, our control over operations at our IM Flash, TECH, Inotera, MeiYa and MP Mask joint ventures may be limited by our agreements with our partners.  From time to time, we have experienced minor disruptions in our manufacturing process as a result of power outages, improperly functioning equipment and equipment failures.  If production at a fabrication facility is disrupted for any reason, manufacturing yields may be adversely affected or we may be unable to meet our customers' requirements and they may purchase products from other suppliers.  This could result in a significant increase in manufacturing costs or loss of revenues or damage to customer relationships, which could materially adversely affect our business, results of operations or financial condition.

Disruptions in our supply of raw materials could materially adversely affect our business, results of operations or financial condition.

Our operations require raw materials that meet exacting standards.  We generally have multiple sources of supply for our raw materials.  However, only a limited number of suppliers are capable of delivering certain raw materials that meet our standards.  Various factors could reduce the availability of raw materials such as silicon wafers, photomasks, chemicals, gases, lead frames and molding compound.

Shortages may occur from time to time in the future.  In addition, disruptions in transportation lines could delay our receipt of raw materials.  Lead times for the supply of raw materials have been extended in the past.  If our supply of raw materials is disrupted or our lead times extended, our business, results of operations or financial condition could be materially adversely affected.


 
40

 

Item 2.   Issuer Purchases of Equity Securities, Unregistered Sales of Equity Securities and Use of Proceeds

During the first quarter of 2009, the Company acquired, as payment of withholding taxes in connection with the vesting of restricted stock and restricted stock unit awards, 153,205 shares of its common stock at an average price per share of $4.16.  The Company retired the 153,205 shares in the first quarter of 2009.

Period
 
(a) Total number of shares purchased
   
(b) Average price paid per share
   
(c) Total number of shares (or units) purchased as part of publicly announced plans or programs
   
(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
 
                         
August 29, 2008   –  October 2, 2008
    78,427     $ 4.34       N/A       N/A  
October 3, 2008    –  October 30, 2008
    71,885       3.95       N/A       N/A  
October 31, 2008  –  December 4, 2008
    2,893       4.38       N/A       N/A  
      153,205       4.16                  


Item 4.   Submission of Matters to a Vote of Security Holders

The Company’s 2008 Annual Meeting of Shareholders was held on December 11, 2008.  At the meeting, the following items were submitted to a vote of the shareholders:

(a)           The following nominees for Directors were elected.  Each person elected as a Director will serve until the next annual meeting of shareholders or until such person’s successor is elected and qualified.

Name of Nominee
 
Votes Cast For
   
Votes Cast Against/Withheld
 
             
Teruaki Aoki
    508,733,764       115,522,925  
Steven R. Appleton
    595,510,929       28,745,760  
James W. Bagley
    589,125,503       35,131,186  
Robert L. Bailey
    603,672,439       20,584,250  
Mercedes Johnson
    568,543,305       55,713,384  
Lawrence N. Mondry
    515,754,651       108,502,038  
Robert E. Switz
    602,203,922       22,052,767  

(b)           The proposal by the Company to approve an amendment to the Company’s 2007 Equity Incentive Plan to increase the number of shares reserved for issuance thereunder by 10,000,000 was approved with 272,872,836 votes in favor, 223,415,211 votes against, 684,556 abstentions and 127,284,086 broker non-votes.

(c)            The ratification of the appointment of PricewaterhouseCoopers LLP as the Independent Registered Public Accounting Firm of the Company for the fiscal year ending September 3, 2009, was approved with 607,039,348 votes in favor, 16,298,304 votes against, and 919,037 abstentions.
 
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Item 6.   Exhibits

 
Exhibit
   
 
Number
 
Description of Exhibit
       
 
3.1
 
Restated Certificate of Incorporation of the Registrant (1)
 
3.2
 
Bylaws of the Registrant, as amended (2)
 
10.1
 
Executive Officer Performance Incentive Plan, as Amended
 
10.3
 
1994 Stock Option Plan, as Amended
 
10.5
 
1997 Nonstatutory Stock Option Plan, as Amended
 
10.6
 
1998 Non-Employee Director Stock Incentive Plan, as Amended
 
10.7
 
1998 Nonstatutory Stock Option Plan, as Amended
 
10.8
 
2001 Stock Option Plan, as Amended
 
10.10
 
2002 Employment Inducement Plan, as Amended
 
10.11
 
2004 Equity Incentive Plan, as Amended
 
10.13
 
Nonstatutory Stock Option Plan, as Amended
 
10.15
 
Lexar Media, Inc. 2000 Equity Incentive Plan, as Amended
 
10.48
 
2007 Equity Incentive Plan, as Amended
 
10.64
 
Lexar Media, Inc. 1996 Stock Option Plan, as Amended
 
10.65*
 
Boise Supply Termination and Amendment Agreement, dated October 10, 2008, by and among Intel Corporation, Micron Technology, Inc. and IM Flash Technologies, LLC
 
10.66*
 
Loan Agreement, dated November 26, 2008, by and among Micron Semiconductor B.V., Micron Technology, Inc., and Nan Ya Plastics Corporation
 
10.67
 
Loan Agreement, dated November 26, 2008, by and between Micron Technology, Inc. and Inotera Memories, Inc.
 
10.68
 
Transition Agreement, dated October 11, 2008, by and among Nanya Technology Corporation, Qimonda AG, Inotera Memories, Inc. and Micron Technology, Inc.
 
10.69
 
Micron Guaranty Agreement, dated November 26, 2008, by Micron Technology, Inc. in favor of Nanya Technology Corporation
 
10.70
 
Share Purchase Agreement by and among Micron Technology, Inc. as the Buyer Parent, Micron Semiconductor B.V., as the Buyer, Qimonda Ag as the Seller Parent and Qimonda Holding B.V., as the Seller Sub dated as of October 11, 2008
 
10.71*
 
Master Agreement, dated November 26, 2008, among Micron Technology, Inc., Micron Semiconductor B.V., Nanya Technology Corporation, MeiYa Technology Corporation and Inotera Memories, Inc.
 
10.72*
 
Joint Venture Agreement, dated November 26, 2008, by and between Micron Semiconductor B.V. and Nanya Technology Corporation
 
10.73*
 
Facilitation Agreement, dated November 26, 2008, by and between Micron Semiconductor B.V., Nanya Technology Corporation and Inotera Memories, Inc.
 
10.74*
 
Supply Agreement, dated November 26, 2008, by and among Micron Technology, Inc., Nanya Technology Corporation and Inotera Memories, Inc.
 
10.75*
 
Amended and Restated Joint Development Program Agreement, dated November 26, 2008, by and between Nanya Technology Corporation and Micron Technology, Inc.
 
10.76*
 
Amended and Restated Technology Transfer and License Agreement, dated November 26, 2008, by and between Micron Technology, Inc. and Nanya Technology Corporation
 
10.77*
 
Technology Transfer Agreement, dated November 26, 2008, by and among Nanya Technology Corporation, Micron Technology, Inc. and Inotera Memories, Inc.
 
10.78*
 
Technology Transfer Agreement for 68-50nm Process Nodes, dated October 11, 2008, by and between Micron Technology, Inc. and Inotera Memories, Inc.
 
31.1
 
Rule 13a-14(a) Certification of Chief Executive Officer
 
31.2
 
Rule 13a-14(a) Certification of Chief Financial Officer
 
32.1
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350
 
32.2
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350
_____________________
(1)
Incorporated by reference to Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2001
(2)
Incorporated by reference to Current Report on Form 8-K dated October 1, 2008
*
Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the U.S. Securities and Exchange Commission.


 
42

 

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
Micron Technology, Inc.                                                                  
 
(Registrant)
   
   
Date:  January 13, 2009
/s/ Ronald C. Foster                                                                 
 
Ronald C. Foster
Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer)
 
 
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Exhibit 10.1
MICRON TECHNOLOGY, INC.
EXECUTIVE OFFICER
PERFORMANCE INCENTIVE PLAN
Effective as of September 3, 2004
 
1.      Purpose.
 
The purpose of the Plan is to promote the success of the Company by providing performance-based incentive compensation in the form of cash payments (“Awards”) to the chief executive officer, president and vice-presidents (“Executive Officers”) of the Company.  Such Awards are designed to attract, retain and reward the Executive Officers for outstanding business performance.  The Plan is intended, but not required, to provide qualified performance-based compensation in accordance with Section 162(m) of the Internal Revenue Code of 1986, as it may be amended from time to time, and the regulations promulgated thereunder  (“Section 162(m)”).
 
2.    Administration.
 
The Plan shall be administered by the Committee.  The Committee shall be composed solely of two or more outside directors as defined in Section 162(m) and shall qualify as an independent compensation committee under Section 162(m).  The Committee shall have full power and authority to construe, interpret and administer the Plan and shall have authority to delegate the day-to-day administration of the Plan to Company employees or to such other persons as the Committee deems reasonable under the circumstances.  The Committee shall meet at such times and places as it may determine.  A majority of the members of the Committee shall constitute a quorum and all decisions of the Committee with respect to matters related to the Plan shall be final, conclusive and binding upon all persons, including the Company, shareholders, employees, Company successors and assigns and a Participant’s spouse, if any, and his or her guardian, estate and/or heirs (“Interested Parties”).  The Committee shall have the full and exclusive right to make reductions in Awards under the Plan.  In determining whether to reduce any Award and the amount of any such reduction, the Committee shall take into consideration such factors as the Committee shall determine reasonable under the circumstances, in its sole and absolute discretion.  All expenses of the administration of the Plan shall be borne by the Company, including all Awards, if any, paid pursuant to the terms of the Plan.
 
3.    Stockholder Approval.
 
The Plan shall be effective if, and only if, the Company’s shareholders approve the Plan.  No Award shall be paid under the Plan for any period until after stockholder approval of the Plan has been obtained.  To the extent necessary for the Plan to qualify as performance-based compensation under Section 162(m), the material terms of the Plan shall be disclosed to and re-approved by the shareholders no later than the first shareholders meeting that occurs in the fifth year following the year in which shareholders previously approved the material terms of the Plan.
 
4.    Participants.
 
(a)   Selection of Participants.   For each measurement period (which may or may not be the same period with respect to each Participant and which may or may not be a twelve-month period; provided, however, in no event will a measurement period be less than ninety (90) days for any Participant), the Committee will choose, in its sole discretion, the Executive Officers who will participate in the Plan (each a “Participant”).  Nothing in this Plan shall be construed as precluding or prohibiting an Executive Officer from being eligible to participate in any other bonus or compensation arrangement of the Company, whether or not currently established.

(b)   Employment Criteria.   To be eligible to receive an Award under the terms of the Plan with respect to a measurement period, a Participant must be continuously employed by the Company or a subsidiary or affiliate as an Executive Officer for the entire measurement period, including, as well, through the date of determination and certification of the payment of any such Award (“Certification Date”).  For purposes of the Plan, with respect to any given measurement period, a Participant who (i) terminates employment (regardless of cause) or who otherwise ceases to be an Executive Officer, prior to the Certification Date and (ii) who, pursuant to a separate contractual arrangement with the Company is entitled to receive payments from the Company thereunder extending to or beyond such Certification Date as a result of such termination or cessation in Executive Officer status, shall be
deemed to have been employed by the Company as an Executive Officer through the Certification Date for purposes of Award eligibility.
 
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5.    Business Criteria on Which Performance Goals Shall be Based.
 
Awards under the Plan shall be based on the attainment of Performance Goals for the specified measurement period that are related, directly or indirectly, to one or more of the following objective business criteria, or any combination or portion thereof:

 
Gross and/or net revenue (including whether in the aggregate or attributable to specific products)
 
Cost of Goods Sold and Gross Margin
 
Costs and expenses, including Research & Development and Selling, General & Administrative
 
Income (gross, operating, net, etc.)
 
Earnings, including before interest, taxes, depreciation and amortization (whether in the aggregate or on a per share basis
 
Cash flows and share price
 
Return on investment, capital, equity
 
Manufacturing efficiency (including yield enhancement and cycle time reductions), quality improvements and customer satisfaction
 
Product life cycle management (including product and technology design, development, transfer, manufacturing introduction, and sales price optimization and management)
 
Economic profit or loss
 
Market share
 
Employee retention, compensation, training and development, including succession planning
 
Objective goals consistent with the Participant’s specific officer duties and responsibilities, designed to further the financial, operational and other business interests of the Company, including goals and objectives with respect to regulatory compliance matters.

The business criteria may be expressed or measured at the individual, function, department, region, unit, subsidiary, affiliate or Company levels or any combination of the foregoing.  Company Performance Goals with respect to the foregoing business criteria may be specified in absolute terms (including completion of pre-established projects, such as the introduction of specified products), in ratios, in percentages, or in terms of growth from period to period, growth rates over time as well as in terms of performance measured relative to an established or specially-created performance index of Company competitors, peers or other members of high tech industries.  Any member of an index that disappears during a measurement period shall be disregarded for the entire measurement period.  Performance Goals need not be based upon an increase or positive result under a business criterion and could include, for example, the maintenance of the status quo or the limitation of economic losses (measured, in each case, by reference to a specific business criterion).
 
6.    Establishment of Performance Goals.
 
(a)   Committee Action.   For each measurement period the Committee shall establish the following: (1)the length of the measurement period with respect to each Participant (measurement periods need not be the same for each Participant.  Measurement periods will coincide with the Company’s fiscal year unless a shorter measurement period is established; provided, however, in no event will a measurement period be less than a three-month period for any Participant);  (2) the Participants in the Plan for such period;  (3) the specific Company, subsidiary, affiliate, group, division, unit, department, function and/or individual business criterion or criteria, or combination thereof, that will be measured with respect to each Participant; (4) the specific results, or range of results, to be achieved with respect to the selected criterion or criteria (“Performance Goals”);  (5) any special adjustments that may need to be applied in calculating whether the Performance Goals have been met to factor out extraordinary items;  (6) the formula for calculating the awards under the Plan in relation to the Performance Goals (including instructions for extrapolating the amounts payable when performance results fall in a range between threshold, target and maximum goals), and;  (7) the targeted bonus amounts or Awards (expressed in absolute terms or as a percentage of base compensation fixed at the time the performance formula is established) for each Participant.

(b)     Timing of Committee Action.   The Committee shall make the above determinations in writing no later than ninety (90) days after the start of each measurement period, on or before twenty-five percent (25%) of the measurement period has elapsed, and while the outcome is substantially uncertain.

(c)     Maximum Award.   The maximum Award that may be paid to any one Participant with respect to the aggregate of all measurement periods in any fiscal year shall not exceed $3,000,000.
 
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(d)   Awards Intended to be “performance based compensation” under Section 409A.   With respect to Awards intended to be “performance based compensation” as defined in §1.409A-1(e) of the final regulations under Section 409A of the Internal Revenue Code of 1986, as it may be amended from time to time (“Section 409A”), (1) the measurement period shall be at least 12 consecutive months; (2) Performance Goals shall be established in writing no later than 90 days after the commencement of the period of service to which the criteria relates, provided that the outcome must be substantially uncertain at the time the criteria are established; (3) the Performance Goals may include subjective performance criteria, provided that the subjective performance criteria are bona fide and relate to the performance of the Participant, a group of service providers that includes the Participant, or a business unit for which the Participant provides services (which may include the entire organization); and (4) the Award must meet other applicable requirements of Section 409A.

(e)     Changes in the Business, Executive Officer Positions or Duties, Re-Set Events, Etc.

(1)   Awards Not Intended to Satisfy Section 162(m).   With respect to Awards not intended to satisfy Section 162(m), if the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, including any acquisition, disposition or merger, or the manner in which the Company or a subsidiary or affiliate conducts its business, or other events or circumstances render Performance Goals to be unsuitable for a measurement period, the Committee may modify such Performance Goals in whole or in part, and/or such measurement period, as the Committee deems appropriate.  If a Participant is promoted, demoted or transferred to a different business unit or function during a measurement period, the Committee may determine that the Performance Goals or measurement period are no longer appropriate and may (i) adjust, change or eliminate the Performance Goals or the applicable measurement period as it deems appropriate to make such goals and period comparable to the initial Performance Goals and measurement period, or (ii) make an Award to the Participant in amount determined by the Committee to be in the best interests of the Company, in the Committee’s sole discretion.  The foregoing two sentences shall apply with respect to an Award that is not intended to satisfy Section 162(m).
 
(2)   Awards Intended to Satisfy Section 162(m).   With respect to Awards intended to satisfy Section 162(m), unless otherwise specified by the Committee in its written determinations establishing the business criteria for the particular measurement period, if prior to the end of such measurement period the Company (i) disposes of businesses or interests that, individually or in the aggregate, represent either (A) five percent (5%) or more of the Company’s consolidated gross revenues for the four fiscal quarters completed immediately preceding the consummation of the dispositions or (B) five percent (5%) of the Company’s consolidated property, plant and equipment, net, measured as of the last day of the fiscal quarter immediately preceding the disposition or (ii) consummates one or more acquisitions during the measurement period that, individually or in the aggregate, constitute a Triggering Acquisition, in each case a “Re-Set Event,” the Performance Goals shall be adjusted, effective as of the last day of the fiscal quarter immediately before the consummation of the Re-Set Event, (x) to reflect the business disposition by eliminating from the Performance Goals the projected business results relating to the disposed business for the remainder of the fiscal quarters of the measurement period, and (y) to reflect any business acquisition, by establishing supplemental performance criteria in compliance with Sections 5 and 6 (a) through (c) above, as the Committee deems appropriate, with respect to the acquired business (which business shall be tracked separately as an independent business unit for purposes of any such supplemental performance criteria).  For purposes of this Section, a Triggering Acquisition means an acquisition (or combination of acquisitions) in which either (i) the acquired entity’s gross revenues for the four quarters completed immediately prior to consummation of the acquisition is equal to five percent (5%) or more of the pro-forma gross revenues for the same four quarters for the combination of the Company and its affiliates and the acquired entity, or (ii) the acquired entity’s property, plant and equipment, net, equals or exceeds five percent (5%) of the pro-forma property, plant and equipment, net, for the combination of the Company and its affiliates and the acquired entity .  (If either the Company and its affiliates or the entity being acquired had consummated other acquisitions during the four quarters in question, the calculation described in the prior sentence shall be made using pro-forma earnings for each member of the combined entity.)  Notwithstanding the foregoing, nothing in this Section 6(d)(2) will be construed to authorize the Committee to take actions under this Section 6(d)(2) that are not permitted by Section 162(m).
 
(f)  Change in Control.

(1)   Awards.   Notwithstanding Section 6(d), in the event of a Change in Control (as defined below), each measurement period shall be deemed to have ended as of the last day of the fiscal month immediately preceding such Change in Control (the “CIC Termination Date”).  The Committee shall determine with respect to each
 
3

 
 
Participant whether his or her Performance Goal(s) were Achieved (as defined below) as of the CIC Termination Date.  In the case of any such achievement, a Participant shall receive, subject to the terms and conditions of the Plan, including the Committee’s discretion and certification as set forth in Section 7 below, an Award payable within thirty days of the Certification Date.  Subject to the Committee’s discretion set forth in Section 7(b), Awards that are Achieved as defined in subsection 6(e)(2)(i) shall not be pro-rated and Awards that are Achieved as defined in subsection 6(e)(2)(ii) shall be pro-rated.
 
(2)   Definitions.   For purposes of this Section 6, the following terms shall be defined as follows:

“Achieved” shall mean with respect to (i) a non-financial or non-numerical Performance Goal, the full achievement of such Performance Goal; and (ii) a financial or numerical Performance Goal, the achievement of results which, when extrapolated over the remainder of the full measurement period, disregarding the CIC Termination Date, would result in the Performance Goal being satisfied.

“Change in Control” means and includes the occurrence of any one of the following events:

(i)           individuals who, on the date this Plan becomes effective (“Effective Date”), constitute the Board of Directors of the Company (the “Incumbent Directors”) and who cease for any reason to constitute at least a majority of such Board, provided that any person becoming a director after the Effective Date and whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board shall be an Incumbent Director; provided , however , that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to the election or removal of directors (“Election Contest”) or other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board (“Proxy Contest”), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, shall be deemed an Incumbent Director; or
 
(ii)           any person is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the 1934 Securities Exchange Act), directly or indirectly, of either (A) 35% or more of the then-outstanding shares of common stock of the Company (“Company Common Stock”) or (B) securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of directors (the “Company Voting Securities”); provided , however , that for purposes of this subsection (ii), the following acquisitions shall not constitute a Change in Control: (w) an acquisition directly from the Company, (x) an acquisition by the Company or a subsidiary of the Company, (y) an acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, or (z) an acquisition pursuant to a Non-Qualifying Transaction (as defined in subsection (iii) below); or
 
(iii)           the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or a subsidiary (a “Reorganization”), or the sale or other disposition of all or substantially all of the Company’s assets (a “Sale”) or the acquisition of assets or stock of another corporation (an “Acquisition”), unless immediately following such Reorganization, Sale or Acquisition: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding Company Common Stock and outstanding Company Voting Securities immediately prior to such Reorganization, Sale or Acquisition beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Reorganization, Sale or Acquisition (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets or stock either directly or through one or more subsidiaries, the “Surviving Corporation”) in substantially the same proportions as their ownership, immediately prior to such Reorganization, Sale or Acquisition, of the outstanding Company Common Stock and the outstanding Company Voting Securities, as the case may be, and (B) no person (other than (x) the Company or any subsidiary of the Company, (y) the Surviving Corporation or its ultimate parent corporation, or (z) any employee benefit plan (or related trust) sponsored or maintained by any of the foregoing is the beneficial owner, directly or indirectly, of 35% or more of the total common stock or 35% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Surviving Corporation, and (C) at least a majority of the members of the board of directors of the Surviving Corporation were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Reorganization, Sale or Acquisition (any Reorganization, Sale or Acquisition which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-
 
4

 
Qualifying Transaction”); or approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
 
 
7.    Determination and Certification of Attainment of Performance Goals; Committee Discretion.
 
(a)   Determination and Certification of Awards.   As soon as practicable following the expiration of a measurement period, the Committee shall determine, pursuant to the Performance Goals and other elements established pursuant to Section 6 above, the Award to be paid to each Participant for such measurement period. The Committee’s determinations shall be final, binding and conclusive with respect to all Interested Parties and shall be certified in writing by the Committee prior to the payment of any such Award, which writing may take the form of a Committee resolution passed by a majority of the Committee at a properly convened meeting or through unanimous action by the Committee via action by written consent.  The certification requirement also may be satisfied by a separate writing executed by the Chairman of the Committee, acting in his capacity as such, following the foregoing Committee action or by the Chairman executing approved minutes of the Committee in which such determinations were made.

(b)   Committee Discretion.   The Committee, in its sole discretion, based on any factors the Committee deems appropriate, may reduce the Award to any Participant in any measurement period (including reduction to zero if the Committee so determines).  The Committee shall make a determination of whether and to what extent to reduce Awards under the Plan for each measurement period at such time or times following the close of the measurement period as the Committee shall deem appropriate. The reduction in the amount of an Award to any Participant for a measurement period shall have no effect on (i.e., shall neither increase nor decrease) the amount of the Award to any other Participant for such measurement period.
 
8.   Payment of Awards.
 
Awards shall be paid in cash, in a single lump sum, to the Participants as soon as practicable following the Certification Date, provided that any Award intended to satisfy the short-term deferral exemption specified in §1.409A-1(b)(4) of the final regulations under Section 409A, will be paid on or before later of the 15 th day of the third month following the end of the Participant’s first taxable year in which the right to the payment is no longer subject to a substantial risk of forfeiture or the 15 th day of the third month following the end of the Company’s first taxable year in which the right to the payment is no longer subject to a substantial risk of forfeiture.  Notwithstanding the foregoing, subject to applicable law, the Committee may permit or require a Participant to defer the receipt of an Award.  If any such deferral is permitted or required, the Board shall, in its sole discretion, establish rules and procedures for such Award deferrals which are compliant with Section 409A.
 
Payments of Awards to Participants, if any, who are employees of subsidiaries or affiliates of the Company shall be paid directly by such subsidiaries or affiliates.  The Company (or such subsidiary or affiliate as the case may be) shall be authorized to withhold applicable taxes from an Award and such other amounts as shall be required by law or as have been previously authorized by the Participant.
 
9.    Amendment; Termination.
 
The Committee shall be authorized to amend, modify, suspend or terminate the Plan, in whole or in part, as the Committee shall deem proper and in the best interests of the Company at any time for the purpose of meeting or addressing any changes in legal requirements or for any other purpose permitted by law. The Committee will seek shareholder approval of any amendment determined to require shareholder approval pursuant to Section 162(m) or any other applicable law, rule regulation or listing requirement.

Notwithstanding anything in the Plan or the terms of any Award or other applicable agreement to the contrary, the Committee may amend the Plan or any Award or other applicable agreement, to take effect retroactively or otherwise, as deemed necessary or advisable for the purpose of conforming the Plan, Award or other applicable agreement to any present or future law relating to plans of this or similar nature (including, but not limited to, Section 409A of the Code), and to the administrative regulations and rulings promulgated thereunder.  By participating in this Plan, a Participant agrees to any amendment made pursuant to this Section to any Award under the Plan without further consideration or action.
 
5

 
10.    Nonassignability.
 
No Award or any other right or obligation under the Plan shall be conveyed, assigned, encumbered, or transferred  by any Participant or Eligible Participant hereunder and any such attempted conveyance, assignment, encumbrance or transfer shall be void.
 
11.    No Right to Continued Employment.
 
Nothing in this Plan shall confer upon any employee who is an Executive Officer or Participant any right to continue in the employ of the Company or shall interfere with or restrict in any way the right of the Company to discharge such employee at any time for any reason whatsoever, with or without good cause.
 
12.    Effectiveness.
 
Upon stockholder approval as described in Section 3, the Plan shall be effective for measurement periods beginning on or after September 3, 2004.
 
13.        Special Provisions Related To Section 409A of the Code.
 
(a)    Notwithstanding anything in the Plan or in any Award or other applicable agreement to the contrary, to the extent that any amount or benefit that would constitute non-exempt “deferred compensation” for purposes of Section 409A of the Code would otherwise be payable or distributable under the Plan or any Award or other applicable agreement by reason of the occurrence of a change in control, or the participant’s disability or separation from service, such amount or benefit will not be payable or distributable to the Participant by reason of such circumstance unless (i) the circumstances giving rise to such change in control, disability or separation from service meet any description or definition of “change in control event”, “disability” or “separation from service”, as the case may be, in Section 409A and applicable regulations (without giving effect to any elective provisions that may be available under such definition), or (ii) the payment or distribution of such amount or benefit would be exempt from the application of Section 409A by reason of the short-term deferral exemption or otherwise.  This provision does not prohibit the vesting of any Award upon a change in control, disability or separation from service, however defined.  If this provision prevents the payment or distribution of any amount or benefit, such payment or distribution shall be made on the next earliest payment or distribution date or event specified in the Award or other applicable agreement that is permissible under Section 409A.

(b)    If any one or more Awards granted under the Plan to a Participant could qualify for any separation pay exemption described in Treas. Reg. Section 1.409A-1(b)(9), but such Awards in the aggregate exceeds the dollar limit permitted for the separation pay exemptions, the Company (acting through the Committee or the Head of Human Resources) shall determine which Awards or portions thereof will be subject to such exemptions.

(c)    Notwithstanding anything in the Plan or in any Award or other applicable agreement to the contrary, if any amount or benefit that would constitute non-exempt “deferred compensation” for purposes of Section 409A would otherwise be payable or distributable under this Plan or in any Award or other applicable agreement by reason of Participant’s separation from service during a period in which the Participant is a Specified Employee (as defined below), then, subject to any permissible acceleration of payment by the Committee under Treas. Reg. Section 1.409A-3(j)(4)(ii) (domestic relations order), (j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of employment taxes):

(i) if the payment or distribution is payable in a lump sum, the Participant’s right to receive payment or distribution of such non-exempt deferred compensation will be delayed until the earlier of the Participant’s death or the first day of the seventh month following the Participant’s separation from service; and

(ii) if the payment or distribution is payable over time, the amount of such non-exempt deferred compensation that would otherwise be payable during the six-month period immediately following the Participant’s separation from service will be accumulated and the Participant’s right to receive payment or distribution of such accumulated amount will be delayed until the earlier of the Participant’s death or the first day of the seventh month following the Participant’s separation from service, whereupon the accumulated amount will be paid or distributed
 
6

 
to the Participant and the normal payment or distribution schedule for any remaining payments or distributions will resume.

For purposes of this Plan, the term “Specified Employee” has the meaning given such term in Section 409A and the final regulations thereunder, provided, however, that, as permitted in such final regulations, the Company’s Specified Employees and its application of the six-month delay rule of Code Section 409A(a)(2)(B)(i) shall be determined in accordance with rules adopted by the Board or any committee of the Board, which shall be applied consistently with respect to all nonqualified deferred compensation arrangements of the Company, including this Plan.


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Exhibit 10.3
 MICRON TECHNOLOGY, INC.
1994 STOCK OPTION PLAN


1.            Purposes of the Plan .  The purposes of this Stock Option Plan are:
 
·   to attract and retain the best available personnel for positions of substantial responsibility,
 
·   to provide additional incentive to Employees and Consultants, and
 
·   to promote the success of the Company’s business.

Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant.

2.            Definitions .  As used herein, the following definitions shall apply:

(a)         “ Administrator ”  means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan.

(b)         “ Affiliate ”  means (i) any subsidiary or parent company of the Company, or (ii) an entity that directly or through one or more intermediaries controls, is controlled by or is under common control with, the Company, as determined by the Committee.

(c)         “ Applicable Laws ” means the legal requirements relating to the administration of stock option plans under Delaware corporate and securities laws and the Code.

(d)         “ Board ” means the Board of Directors of the Company.

(e)         " Change in Control " means the acquisition by any person or entity, directly, indirectly or beneficially, acting alone or in concert, of more than thirty-five percent (35%) of the Common Stock of the Company outstanding at any time.

(f)          “ Code ” means the Internal Revenue Code of 1986, as amended. Reference to a specific Section of the Code or regulation thereunder shall include such Section or regulation, any valid regulation promulgated under such Section, and any comparable provision of any future law, legislation or regulation amending, supplementing or superseding such Section or regulation.

(g)         “ Committee ” means a Committee appointed by the Board in accordance with Section 4 of the Plan.

(h)         “ Common Stock ” means the Common Stock of the Company.

(i)          “ Company ” means Micron Technology, Inc., a Delaware corporation.
 
 
9/22/2003 change #2 (o), (i)
 
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(j)          “ Consultant ” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services and who is compensated for such services.  The term “Consultant” shall also include Directors who are not Employees of the Company.

(k)         “ Continuous Status as and Employee or Consultant ” means that the employment or consulting relationship with the Company, any Parent, or Subsidiary, is not interrupted or terminated.  Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor.  A leave of absence approved by the Company shall include sick leave, military leave, or any other personal leave approved by an authorized representative of the Company.  For purposes of Incentive Stock Options, no such leave may exceed 90 days, unless reemployment upon expiration of such leave is guaranteed by statute or contract.  If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 91st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option.

(l)          “ Director ” means a member of the Board.

(m)        “ Disability ” means total and permanent disability as defined in Section 22(e)(3) of the Code. Notwithstanding the foregoing, for any Options that constitute a nonqualified deferred compensation plan within the meaning of Section 409A(d) of the Code, “Disability” has the meaning given such term in Section 409A of the Code.

(n)         “ Employee ” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company.  Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

(o)         “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

(p)         “ Fair Market Value ” means, as of any date, the value of Common Stock determined as follows:

(i)           If the Common Stock is listed on any established stock exchange, including without limitation the New York Stock Exchange (“NYSE”), or a national market system, the Fair Market Value of a Share of Common Stock shall be the average closing price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system (or the exchange with the greatest volume of trading in Common Stock) for the last market trading day prior to the day of determination, as reported by Bloomberg L.P.   or such other source as the Administrator deems reliable;

(ii)          If the Common Stock is quoted on the over-the-counter market or is regularly quoted by a recognized securities dealer, but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low
 
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asked prices for the Common Stock on the day of determination, as reported by Bloomberg, L. P. or such other source as the Administrator deems reliable;

(iii)          In the absence of an established market for the Common Stock, the Fair Market Value shall be determined by such other method as the Committee determines in good faith to be reasonable and in compliance with Code Section 409A.

(q)         “ Incentive Stock Option ” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(r)         “ Nonstatutory Stock Option ” means an Option not intended to qualify as an Incentive Stock Option.

(s)         “ Notice of Grant ” means a written notice evidencing certain terms and conditions of an individual Option grant.  The Notice of Grant is subject to the terms and conditions of the Option Agreement.

(t)         “ Officer ” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(u)         “ Option ” means a stock option granted pursuant to the Plan.

(v)         “ Option Agreement ” means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant.  The Option Agreement is subject to the terms and conditions of the Plan.

(w)        “ Option Exchange Program ” means a program whereby outstanding options are surrendered in exchange for options with a lower exercise price.

(x)         “ Optioned Stock ” means the Common Stock subject to an Option.

(y)         “ Optionee ” means an Employee or Consultant who holds an outstanding Option.

(z)         “ Parent ” means a “parent corporation”, whether now or hereafter existing, as defined in Section 424(e) of the Code.

(aa)       " Plan " means this 1994 Option Plan.

(bb)       “ Rule 16b-3 ” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(cc)       “ Share ” means a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan.
 
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(dd)       “ Subsidiary ” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.  In the case of an Option that is not intended to qualify as an Incentive Stock Option, the term “Subsidiary” shall also include any other entity in which the Company, or any Parent or Subsidiary of the Company has a significant ownership interest.

3.            Stock Subject to the Plan .  Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is          64,000,000  Shares.  The Shares may be authorized, but unissued, or reacquired Common Stock.

If an Option expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated);   provided , however, that Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan.

4.            Administration of the Plan .

(a)         Procedure .

(i)            Multiple Administrative Bodies .  If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to Directors, Officers who are not Directors, and Employees who are neither Directors nor Officers.

(ii)            Administration With Respect to Directors and Officers Subject to Section 16(b) .  With respect to Option grants made to Employees who are also Officers or Directors subject to Section 16(b) of the Exchange Act, the Plan shall be administered by (A) the Board, if the Board may administer the Plan in compliance with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3, or (B) a committee designated by the Board to administer the Plan, which committee shall be constituted to comply with the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3.  Once appointed, such committee shall continue to serve in its designated capacity until otherwise directed by the Board.  From time to time the Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the rules governing a plan intended to qualify as a discretionary plan under Rule 16b-3.

(iii)           Administration With Respect to Other Persons .  With respect to Option grants made to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a committee designated by the Board, which committee shall be constituted to satisfy Applicable Laws.  Once appointed, such Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and
 
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remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Applicable Laws.

(b)         Powers of the Administrator .  Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:

(i)           to determine the Fair Market Value of the Common Stock, in accordance with Section 2(o) of the Plan;


(ii)           to select the Consultants and Employees to whom Options may be
granted hereunder;

(iii)          to determine whether and to what extent Options are granted hereunder;

(iv)          to determine the number of shares of Common Stock to be covered by each Option granted hereunder;

(v)          to approve forms of agreement for use under the Plan;

(vi)          to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder.  Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

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