Firms seeking a fresh start.

Byline: SHERRI BURI McDONALD The Register-Guard

Lane County's two largest high-technology employers won reprieves from their lenders in December and are entering 2003 with a bit more hope and a bit more cash.

Bar-code scanner manufacturer PSC Inc. and computer-chip maker Hynix Semiconductor, each with a large factory in west Eugene, have managed to stay on their feet, defying a downturn that has knocked out many Oregon technology companies.

Now, they're focusing on churning out products and running their factories more efficiently, officials at the companies say. Hynix employs 840 workers in Eugene, and Portland-based PSC has 600 workers here.

Combined, the two firms account for 38 percent of the 3,713 employees working at Lane County's high-tech manufacturing, software and computer services companies. The percentage would be even higher if temporary and contract workers at the plants were included.

But big questions remain - especially about Hynix. Will the South Korean firm at some point opt to sell the Eugene plant in order to raise cash? It's too soon to tell.

Hynix hanging on

Some observers are surprised that Hynix survived 2002. The company struggled with more than $6 billion in debt for most of last year, and even with new help from creditors it still owes $4 billion.

"I thought Hynix would be gone in 2002," said Brian Matas, vice president of market research, IC Insights Inc, based in Scottsdale, Ariz. "But it seems like no matter how much I think Hynix will not be around, they manage to find money, or backers to keep them afloat."

Hynix creditors in late December approved a $4 billion debt rollover plan to keep the company alive, and Hynix officials said they are moving ahead with plans for modest equipment upgrades this year at the Eugene plant and at several factories in Korea.

This is the third time creditors have bailed out Hynix by rolling over debt or converting it into equity shares.

Industry analysts say with the creditors' backing, Hynix appears to be a viable player in 2003. They're including Hynix in their projections, predicting that the worldwide industry for dynamic random access memory, or DRAM, chips will grow to somewhere between $17 billion to $20 billion in 2003, up 15 percent to 27 percent from last year.

"If the creditors were going to pull the plug (on Hynix), they would have done it by now," said Richard Gordon, a semiconductor analyst with Gartner Dataquest, a technology market research firm.

But there's still no clarity on whether Hynix might eventually sell some of its operations, including its Eugene plant.

Last spring, Hynix's board of directors rejected a bid by Boise-based Micron Technology Inc. to buy most of Hynix, including the Eugene plant, for $3 billion.

Nam Hyung Kim, senior DRAM analyst at iSuppli Corp., based in El Segundo, Calif., said Hynix creditors might be willing to sell the Eugene plant, although it is not high on their "sell" list. Hynix executives view the Eugene plant as critical to their operations, so company officials and creditors don't quite see eye-to-eye on the Eugene plant's future, Kim said.

However, Farhad Tabrizi, Hynix vice president of worldwide marketing, said there is no conflict between creditors and Hynix management on this issue. They all view the Eugene plant as important to the company, given that about 45 percent of Hynix's total chip output goes to customers in the United States, he said.

As for a sale of the whole company, Hynix is a large entity and few companies could afford to buy it, Tabrizi said.

"The creditors are interested in recovering their investment," he added. "The only way I believe they can recover their investment is to make Hynix a viable and profitable company with good technology and products."

"Protesting in the streets"

Creditors' support for Hynix apparently runs deep, largely for political reasons. The creditors are mostly South Korean banks that are affiliated with the government.

Formerly part of the huge Hyundai conglomerate, Hynix is a major employer in South Korea.

"No one wants to see thousands of jobs go away if Hynix doesn't make it," said Sherry Garber, a DRAM analyst at Semico Research Corp. in Phoenix.

During the recent South Korean presidential election, government officials handled Hynix's financial situation very sensitively.

"If they didn't find a way to keep Hynix going, there would have been people protesting in the streets," said Jim Cantore, a memory analyst with iSuppli. "They're a very potent bloc in Korea, and that keeps Hynix going."

While Hynix supporters applaud the creditors' rescue, the company's rivals are irked by the repeated bailouts and have complained to international trade organizations that Hynix has violated fair trade practices. Rulings on the complaints are expected later this year and could result in Hynix being slapped with tariffs.

That increases the importance of the Eugene plant - already "the Hynix jewel" because of its modern processes and equipment, according to Garber. Chips made there wouldn't be subject to U.S.-imposed tariffs.

Hynix also values the Eugene facility because of its proximity to major customers in the United States.

"Eugene is a very strategic factory for us," Tabrizi said. "We serve big accounts from the U.S. Having direct access to U.S. customers is very critical to us; that's why we're producing the latest technology in Eugene."

Hynix plans to upgrade its processing technology at several of its plants - including the Eugene plant - from 0.15-micron to 0.13-micron, Tabrizi said. That will enable Hynix to produce 50 percent more chips per wafer. He declined to reveal the cost of the upgrade.

Hynix will start upgrading the Eugene plant in April and expects to complete the job in August, Tabrizi said.

Unlike the equipment upgrade last year - a major effort during which Hynix temporarily laid off 600 workers and effectively shut down the factory for six months - the plant will remain open and its 840 workers will stay on the job, Tabrizi said.

The Eugene factory will produce mostly 256-megabit high-density chips used for memory in PCs and servers and some of the more advanced and more powerful 512-megabit chips, he said.

Korean upgrades

In addition to upgrading plants, Hynix plans to build and open by the first half of 2004 a factory in Korea that uses 12-inch, dinner-plate size wafers, Tabrizi said. These wafers are larger than the standard 8-inch wafer, and can produce more chips per wafer. In chip production, each wafer is sliced up into numerous chips.

Such factories cost $2 billion to $3 billion to build and equip, analysts said.

IC Insights analyst Matas figures that as part of the latest debt restructuring, Hynix could be able to budget $3.5 billion in capital expenditures in the next four years.

Further expansion of Hynix would be tied to the market, Tabrizi said.

"If market conditions remain healthy, and we're profitable, I'm sure we'll need to add capacity, and Eugene could be an additional site," he said.

Becoming profitable could take quite a while for Hynix. Although the DRAM industry's overall revenues are charting healthy gains after the market bottomed out at $12 billion in 2001, profits are lagging at most DRAM manufacturers. Samsung, another Korean chip maker, is one notable exception, posting record profits last year.

Analysts say that for the DRAM market to turn around, the overall world economy has to turn up, and so do sales of personal computers and servers, which use 60 percent to 65 percent of the world's DRAM.

Some analysts expect that boost will happen in the second half of this year, when consumers typically shop for computers for school and as gifts for the winter holidays.

In the long term, analysts predict that DRAM revenues will continue to rise, peaking in 2004 or 2005. Then a down cycle will follow as manufacturers invest in new plants and equipment, once again creating a glut of chips.

PSC going private

For PSC Inc., 2003 also offers some sunshine.

By the end of March, publicly traded PSC expects to emerge from Chapter 11 bankruptcy proceedings and be reborn as a private company, company CEO Edward Borey said.

Last November, Littlejohn & Co. LLC, a Connecticut-based private investment firm, bought PSC's $124 million in debt.

It's not clear how much Littlejohn paid for the debt, but Rick Morgan, editor of Scan: The Data Capture Report, an industry newsletter, said Littlejohn paid "pennies on the dollar."

As part of the deal, Littlejohn, which specializes in revitalizing ailing midsize companies, also pledged a $20 million line of credit to PSC.

As part of the deal, approximately $73.2 million in shareholder value will be wiped out. PSC had warned of such an outcome in several financial filings last year.

"The company is in better shape than it's been in probably five years," Morgan said.

"I think they're well positioned," he said. "The main element holding them back for the past year was the debt they couldn't pay off - particularly loans dating back even to their purchase of Spectra-Physics Scanning Systems Inc. in 1996."

The bankruptcy is proceeding swiftly, and PSC is setting its goals for 2003, Borey said.

"It will be the year to simplify our business and to take a hard look at our policies and practices, and at things causing us to spend money that we shouldn't be," Borey said.

He is quick to add that he doesn't think that simplifying the business will require more layoffs. After several rounds of layoffs and moving its corporate headquarters to Portland from New York, PSC now has 850 employees. About 600 of them work at PSC's facility in west Eugene. That's down from a peak in Eugene of nearly 1,000 about two years ago.

The push to simplify includes establishing a minimum-order system, eliminating unprofitable products, focusing on large customers and redefining the services customers receive after they buy PSC products, Borey said.

He estimates that PSC could double its revenues from servicing PSC products.

"We'll be much more focused on customers," Borey said. "I've spent the last year with bankers and lawyers; I haven't spent a significant amount of time with customers."

Borey said he should be spending a quarter to a third of his time talking to customers about the company's products and how PSC can help solve customers' problems.

Simplifying operations will require new training for employees, Borey said. But he thinks workers will welcome the change because it will improve their working environment.

Rolling along in court

So far, the bankruptcy has marched along "in textbook fashion," Borey said.

PSC listed assets of $74.4 million and liabilities (excluding shareholder equity) of $172.3 million.

U.S. Bankruptcy Court in Manhattan allowed PSC to continue paying its employees and contributing to their benefits.

One wrinkle, Borey said, has been in the payment of trade creditors. PSC had wanted to pay all vendors according to usual billing cycles for trade debt, Borey said.

Symbol Technologies Inc., a rival scanner maker suing PSC in a contract dispute, complained to the Bankruptcy Court that if PSC pays off all its vendors it might not have enough money left to pay Symbol's claim of $1.69 million, should PSC lose the lawsuit with Symbol, Borey said.

During bankruptcy proceedings, the lawsuit with Symbol has been put on hold.

The Bankruptcy Court, agreeing with Symbol, has required PSC to differentiate between "critical" and "noncritical" vendors. Both types will be paid under normal terms for trade debt PSC incurred after the bankruptcy filing. But only critical vendors will be paid immediately on pre-bankruptcy debt; noncritical vendors will have to wait until the bankruptcy process is over, Borey said.

Critical vendors are those whose supplies are critical to production. Up to 85 percent of PSC's vendors are "critical," Borey said.

CAPTION(S):

Employees assemble bar-code scanners at Eugene's PSC Inc. PSC Inc. hopes continued demand for its product and the end of bankruptcy proceedings will breathe new life into the firm. Under a financial restructuring, the company will be privately held. THOMAS BOYD / The Register-Guard