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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 28, 1997
Commission File Number: 0-17932
Micron Electronics, Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1404301
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
900 E. Karcher Road, Nampa, Idaho 83687
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(Address, including Zip Code, of principal executive offices)
(208) 898-3434
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Registered on The Nasdaq Stock Market
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, and (2) has been subject to
such filing requirements for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of September 29, 1997 was $577.6 million.
The number of outstanding shares of the registrant's Common Stock on
September 29, 1997 was 95,553,127.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant's 1997 Annual
Meeting of Shareholders, to be held on November 24, 1997, are
incorporated by reference into Part III of this Annual Report on Form
10-K.
PART I
Item 1. Business
The following discussion contains trend information and other forward-
looking statements that involve a number of risks and uncertainties. The
actual results of Micron Electronics, Inc. (together with its subsidiaries,
the "Company") could differ materially from the Company's historical
results of operations and those discussed in the forward-looking
statements. Factors that could cause actual results to differ materially
are included, but are not limited to, those identified in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Certain Factors."
Micron Electronics, Inc. and its subsidiaries manufacture electronic
products and provide services for a wide range of computer and digital
applications. The Company is a leading provider of PC systems through the
direct sales channel in the United States and develops, markets,
manufactures and supports PC systems for consumer, business, government and
educational use. In addition, the Company is a supplier of multi-processor
network servers for enterprise, remote office and distributed computing
environments under the NetFRAME brand name. The Company's contract
manufacturing operation, Micron Custom Manufacturing Services, Inc.
("CMS"), specializes in the design, assembly and test of custom complex
printed circuit boards, memory modules and system level products for
original equipment manufacturers. The Company's SpecTek semiconductor
memory products operation processes and markets various grades of memory
products under the SpecTek brand name. The Company is majority owned by
Micron Technology, Inc. ("MTI").
In the fourth quarter of fiscal 1997, the Company acquired all of the
outstanding common stock of NetFRAME Systems Incorporated ("NetFRAME") for
$17.4 million in cash. NetFRAME develops and markets enterprise-class
multiprocessor servers offering continuous availability and scalability
while supporting industry standard software. The acquisition was accounted
for as a purchase, and the purchase price was allocated to the net assets
acquired, including identified intangible assets and in-process research
and development based on their fair values. The Company's results of
operations for 1997 include the results of operations of NetFRAME since the
July 18, 1997 acquisition date.
PERSONAL COMPUTER SYSTEMS
Products
The Company develops, markets, manufactures, sells and supports a wide
range of memory intensive, high performance desktop and notebook PC systems
and network servers under the Micron and NetFRAME brand names. These
systems use Pentium, Pentium Pro and Pentium II microprocessors
manufactured by Intel Corporation ("Intel") and are assembled to order in
various memory and storage configurations as well as various operating
systems and application software. The Company also offers a variety of
other system components with its PC systems and network servers, including
monitors, modems, graphics cards, accelerators and CD-ROM drives. As of
August 28, 1997, the Company's product line included the following:
Millennia. Targeted for business users and PC enthusiasts, the
Millennia line of PC systems has been the Company's best-selling products
in recent periods. The Millennia XRU is powered by the Intel Pentium II
microprocessor for enhanced multimedia and communication performance. The
Millennia MME includes Intel Pentium microprocessors with MMX technology,
USB interfaces and an Iomega Zip drive. The Millennia LXE is the Company's
lower-end Millennia computer and is designed to be a high-performance value
line of PC computing solution.
ClientPro. The ClientPro is the Company's flexible and affordable
network solution for businesses which require computing stability and
performance. The ClientPro line is designed to provide reliable, adaptable
computing without the need for frequent system upgrades. The ClientPro XLU
comes standard with a 233MHz Intel Pentium II microprocessor, 32MB EDO
memory and a 2.1GB EIDE SMART enabled hard drive. The ClientPro MTE, a
price/performance leader for multimedia business computing, includes a
166MHz Intel Pentium microprocessor with MMX technology, 16MB EDO memory
and a 2.1GB EIDE hard drive. The value line ClientPro, the managed client
system with a 133MHz Intel Pentium microprocessor, includes 16MB EDO memory
and a 1.2GB EIDE hard drive.
Powerdigm. The Powerdigm line of PC systems are designed for graphic
intensive applications and offer users a high-end 3D visual computing
workstation with professional 3D graphics and a 32-bit ultra-wide SCSI-3
host adapter. The Powerdigm XSU utilizes the exclusive Micron Samurai PCI
chipset and supports dual 300MHz Intel Pentium II microprocessors.
1
TransPort. The TransPort is the Company's notebook line of computer
systems, incorporating much of the same technology used in the Millennia
desktop line. With modular bays, the TransPort offers customers instant
custom configuration changes between hard disk drives, floppy disk drives,
CD-ROM drives and extra batteries. The TransPort XKE, designed for high-
end portable power computing, includes a 166MHz Intel Pentium
microprocessor with MMX technology, 32MB EDO memory, 3.0GB IDE hard drive,
20X CD-ROM with AutoPlay technology and a 13.3" TFT screen. The TransPort
XPE, designed to be a desktop replacement, offers a choice of 133MHz,
150MHz or 166MHz Intel Pentium microprocessors with MMX technology, 32MB
EDO memory, a 1.44GB IDE hard drive and a 12.1" active matrix screen. The
Company's value line of notebook computers, the TransPort VLX, includes a
slim, lightweight, modular design and is geared for the business traveler
or student with a 133MHz Intel Pentium microprocessor, 16MB EDO memory and
a 1.4GB hard drive.
NetFRAME Servers. The Company's NetFRAME NF9000 servers are multi-
processor, high-availability, clustered network servers for local and wide
area networks. NetFRAME servers are a PC-compatible platform that run
Microsoft Windows NT and Novell IntraNetware. Combined with the Company's
value-added software, NetFRAME servers provide a high degree of availability by
reducing downtime resulting from hardware and software failures. NetFRAME
servers are highly scaleable allowing customers to add network connections
as the number of users and applications increase.
The NetFRAME NF9000 servers incorporate the Company's Fault Isolation
Canister technology which enables users to "hot plug" PCI bus and cards
without shutting down the system. In addition, the Company's proprietary
IntraPulse technology, a self-contained distributed monitoring and
diagnostic system with its own embedded processors, software, internal
network and power system, will continue to operate and provide critical
system information to the system administrator regardless of the
operational status of the server. NetFRAME servers are based on Intel's
Pentium Pro microprocessor and utilize industry standard architecture,
employ a unique triple-tier PCI bus design and comply with the I2O
intelligent I/O standard.
The NetFRAME NF9016 server can scale in place to support a four-way SMP
(symmetric multiprocessing) complex, up to sixteen intelligent PCI I/O
cards, 2GB of memory and over a terabyte of on-line storage. In July,
1997, the Company introduced the NetFRAME NF9008 server which features a
quad-processor Pentium Pro platform and eight individually hot-pluggable
PCI card slots.
Vetix Servers. The Company's Vetix line of servers include hot-
swappable, redundant capabilities that protect data and maintain
availability for mission critical environments. The Vetix MXI is a
competitively-priced midrange corporate networking solution, custom
configured with single or dual 200MHz Intel Pentium Pro microprocessors, up
to 1GB ECC EDO memory, and up to ten 4GB Ultra-Wide SCSI-3 hard drives.
The Vetix LXI is a powerful, economical server with expandability and
manageability built in, and is custom configurable with single or dual
200MHz Intel Pentium Pro microprocessors, up to 1GB ECC EDO memory, and up
to six 4GB Ultra-Wide SCSI-3 hard drives. The Vetix EL, the Company's
value line of servers, is custom configurable with single or dual 180MHz or
200MHz Intel Pentium Pro microprocessors, up to 256MB ECC EDO memory and up
to six 4GB Ultra-Wide SCSI-3 hard drives.
Manufacturing and Materials
The Company's PC system manufacturing process is designed to provide
custom-configured PC products to its customers, and includes assembling
components, loading software and testing each system prior to shipment.
The Company's PC systems are generally assembled to order ("ATO") based on
customer specifications. Parts and components required for each customer
order are selected from inventory and are prepared for assembly into a
customized PC system. Inventories of certain components are staged for
system assembly at their point of use. While custom assembly is
advantageous to its customers, the Company is unable to achieve the level
of manufacturing efficiency normally associated with high volume production
of standardized products. A limited number of the Company's most popular
PC system configurations are assembled by a third party, under the indirect
supervision and management of Company personnel, in advance of customer
orders to facilitate shorter customer lead times.
The Company's desktop PC systems are generally assembled in its own
facilities. The Company's notebook PC systems are designed to include
feature sets defined by the Company but are assembled by third-party
suppliers and sent to the Company for final custom configuration and
testing. Following assembly, PC systems are powered up, loaded with
software and subjected to certain diagnostic tests, including evaluation of
each system's functionality and quality. Upon completion of the process,
PC systems undergo a final inspection, after which the systems are packaged
and shipped to customers.
2
The Company focuses on providing PC systems that feature components and
software incorporating the latest technological developments in the PC
industry, which components are periodically in short supply and are
available from sole or a limited number of suppliers. As a result, the
Company has experienced in the past, and expects to experience in the
future, shortages in the components used in its PC systems. The
microprocessors used in the Company's PC systems are manufactured
exclusively by Intel and, from time to time, the Company has been unable to
obtain sufficient quantities of certain Intel microprocessors. In
addition, a significant portion of the random access memory ("RAM") used in
the Company's PC systems is supplied by MTI, and the Company generally
relies on MTI to supply the latest memory densities and configurations
available. The Company relies, to a certain extent, upon its suppliers'
abilities to enhance existing products in a timely and cost-effective
manner, to develop new products to meet changing customer needs and to
respond to emerging standards and other technological developments in the
PC industry. The Company's reliance on a limited number of suppliers and
on a strategy of incorporating the latest technological developments into
its PC systems involves several risks, including the possibility of
shortages and/or increases in costs of components and software, and risk of
reduced control over delivery schedules, which could have a material
adverse effect on the Company's business and results of operations.
Marketing and Sales
The Company's direct marketing approach is aimed toward PC users who
evaluate products based on performance, price, reliability, service and
support. The Company's customer base is comprised primarily of
individuals, small to medium-sized businesses and governmental and
educational entities. The Company markets its PC systems primarily by
strategically placing advertisements in personal computer trade
publications, submitting its products for review and evaluation by these
publications and advertising its products in certain newspapers and other
publications and on its home page on the Internet. The Company also
markets its PC systems through direct-mail campaigns and sells a limited
number of PCs through its three factory outlet stores located in Idaho,
Minnesota and Utah. In addition, the Company sells its PC systems through
strategic relationships with third parties having large government
procurement contracts. Pricing and terms for such procurement contracts
are generally subject to renegotiation or termination by third parties and
governmental entities. The Company has a field sales force that focuses
primarily on soliciting and servicing large corporate customers. In
addition, the Company's Micron Advantage program allows large corporate
customers to take advantage of services including custom software
installation and configuration and access to inventories of systems pre-
built to customer specifications to ensure rapid product delivery.
Finally, the Company seeks the evaluation of its business by organizations
such as the Gartner Group in order to provide independent assurance of
product reliability, customer service and support and business continuity
for its corporate customers. In September 1997, the Company received the
Gartner Group's highest rating, consolidated Tier 1/Tier 2, as a supplier
of desktop PCs in the U.S. market.
By focusing on the direct sales channel, the Company can avoid dealer
markups typically experienced in the retail sales channel, limit inventory
carrying costs and maintain closer contact with its target markets.
Consumers seeking high performance systems at competitive prices have
historically referenced computer trade magazines, and more recently have
begun utilizing information available on the Internet, to evaluate systems
and configurations best suited to their particular needs.
Direct sales orders are received primarily via telephone, facsimile, the
Company's home page on the Internet and through its direct sales force.
The Company sales representatives assist customers in determining system
configuration, compatibility and current pricing. Customers generally
order systems configured with varying feature sets differentiated by
microprocessor speed, hard drive capacity, amount of memory, monitor size
and resolution and bundled software, as well as other features. The
Company offers its customers a variety of payment alternatives, including
commercial trade terms, lease financing, cash on delivery, its own private
label credit card and other credit cards. The Company's NetFRAME servers
are sold primarily through the Company's direct sales force and through
value-added resellers ("VARs") world wide. Typically, the Company's sales
force arranges sales with end customers for NetFRAME servers. Actual sales
are made through VARs who provide service, support and integration services
to the customer.
Product Warranties and Technical Support
The Company believes that PC product warranties and technical support
programs are key factors in achieving desired levels of customer
satisfaction. The Company believes its Micron Power warranty to be among
the most comprehensive in the industry. The key elements of the Company's
PC product warranties and technical support programs are as follows:
30-Day Money Back Guarantee. Customers may generally return PC products
purchased from the Company within 30 days after shipment for a full refund
of the purchase price.
3
Micron Power Warranty. The Company generally sells each PC and server
system with the Micron Power warranty, which consists of a five-year
limited warranty on the microprocessor and main memory and a three-year
limited warranty on the remaining hardware. The Micron Power warranty
covers repair or replacement for defects in workmanship or materials.
Technical Support. The Company offers its PC customers telephone access
to free technical support services (toll-free in the U.S.). The Company's
technical support and customer service representatives respond to a variety
of inquiries from customers, including questions concerning the Company's
product offerings, customer order status and post-installation hardware and
software issues. Many customer inquiries are resolved over the telephone
without the need to repair or replace system components. When repairs are
necessary, the Company may ship a replacement part and advise customers via
telephone regarding installation, or a customer may elect to ship a system
directly to the Company for repair. Technical support services are also
provided through the Company's home page on the Internet and through an
electronic bulletin board system. These services enable a customer to
access system-specific information and recent software updates for many of
the software programs and drivers included with the Company's systems.
Customers have an option to purchase on-site service from a third-party
service provider.
Certain of the Company's PC systems are sold with system diagnostic and
repair software that has been customized for the Company's products. The
diagnostic software is capable of remote contact with the Company's
database that allows for proper identification and resolution of certain
system problems including set-up parameters, configuration conflicts and
updated BIOS.
Backlog
Levels of unfilled orders for PC systems fluctuate depending upon
component availability, demand for certain products, the timing of large
volume customer orders and the Company's production schedules. Customers
frequently change delivery schedules and orders depending on market
conditions and other reasons. Unfilled orders can be canceled by the
customers any time prior to shipment. As of August 28, 1997, the Company
had unfilled orders for PC systems of approximately $42 million compared to
$63 million as of August 29, 1996. The Company anticipates that
substantially all of the unfilled orders as of August 28, 1997, other than
those subsequently canceled, will be shipped within 30 days. Due to a
customer's ability to cancel or reschedule orders without penalty, industry
seasonality and customer buying patterns, unfilled orders may not be
representative of actual sales for any succeeding period. The Company's
past operating results have been, and its future operating results may be,
subject to seasonality and other fluctuations, on a quarterly and an annual
basis, as a result of a wide variety of factors. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Certain Factors-General-Fluctuations in Operating Results and
Stock Price."
Competition
The PC industry is highly competitive and has been characterized by
intense pricing pressure, generally low gross margin percentages, rapid
technological advances in hardware and software, frequent introduction of
new products, and rapidly declining component costs. Competition in the PC
industry is based primarily upon brand name recognition, performance, price,
reliability and service and support. As a result of PC industry standards,
the Company and its competitors use many of the same components, typically
from the same set of suppliers, which limits the Company's ability to
technologically and functionally differentiate its products.The Company
competes with a number of PC manufacturers which sell their products
primarily through direct channels, including Dell Computer, Inc. and
Gateway 2000, Inc. The Company also competes with PC manufacturers,
such as Apple Computer, Inc., Compaq Computer Corporation,
Hewlett-Packard Company, International Business Machines Corporation and
Toshiba Corporation among others, which have traditionally sold their
products through national and regional distributors, dealers and value
added resellers, retail stores and direct sales forces. In addition,
the Company expects to face increased competition in the U.S. direct
sales market from foreign PC suppliers and from foreign and domestic
suppliers of PC products that decide to implement, or devote additional
resources to, a direct sales strategy. In order to gain an increased
share of the U.S. PC direct sales market, these competitors may effect
a pricing strategy that is more aggressive than the current pricing in
the direct sales market. Many of the Company's PC competitors offer broader
product lines, have substantially greater financial, technical, marketing
and other resources than the Company and may benefit from component
volume purchasing and product and process technology license arrangements
that are more favorable in terms of pricing and availability than the
Company's arrangements. The failure of the Company to compete effectively
in the marketplace would have an adverse effect on the Company's
business and results of operations.
4
CONTRACT MANUFACTURING
Products
The assembly of electronic products has become increasingly sophisticated
and complex and requires substantial capital investment. In response, many
original equipment manufacturers ("OEMs") are adopting manufacturing
outsourcing strategies and relying on manufacturing specialists to support
their production needs. OEMs generally use contract manufacturers to gain
access to leading manufacturing expertise, reduce time to market, enhance
their financial flexibility and improve inventory management.
The Company's wholly-owned subsidiary, Micron Custom Manufacturing
Services, Inc. ("CMS"), is a contract manufacturer specializing in the
design, assembly and testing of custom complex printed circuit boards,
memory modules and system level products. In addition to design, assembly
and test functions, the Company offers a broad range of manufacturing
services, including product engineering, materials procurement and
management, quality assurance and just-in-time delivery or end-order
fulfillment. CMS establishes strategic relationships with OEM customers in
technology sectors such as networking, telecommunications and PC systems to
provide manufacturing and other related services for cost-effective
solutions to OEM requirements.
Manufacturing and Materials
The Company uses numerous suppliers for the electronic components and
materials, including RAM components, used in its contract manufacturing
operation. In fiscal 1997, 1996 and 1995, the Company purchased 35%, 27%
and 41%, respectively, of the RAM components used in its contract
manufacturing operation from MTI. Such purchases are made by the Company
from MTI on a purchase order basis at negotiated prices, and no long-term
agreement exists between the Company and MTI for the supply of such
components.
The Company generally procures its materials and components based on
purchase orders received and accepted from its customers while seeking to
minimize its overall level of inventory. However, the Company's contract
manufacturing customers generally require short delivery cycles and quick
turnaround. A substantial portion of contract manufacturing orders are
scheduled for delivery within 90 days. Although the Company obtains long-
term product forecasts from certain of its OEM customers, the Company
generally does not have long-term purchase commitments from its customers
and periodically makes capital expenditures and other commitments and may
purchase materials and components based on anticipated orders. As the
Company's OEM customers react to variations in demand for their products
due to, among other things, product life cycles, competitive conditions or
general economic conditions, and adjust their manufacturing strategies
accordingly, the Company is exposed to the risk of its own non-cancelable
purchase orders with its suppliers and to market risks for raw materials,
work in process and finished goods. From time to time, anticipated orders
from the Company's OEM customers have failed to materialize, or delivery
schedules have been deferred as a result of changes in the customer's
business, adversely affecting the Company's business and results of
operations. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Certain Factors-Contract
Manufacturing-Fluctuations in OEM Orders."
Nearly all of the products manufactured by the Company's contract
manufacturing operations are assembled utilizing surface mount technology
("SMT"), whereby the leads on integrated circuits and other electronic
components are soldered to the surface of printed circuit boards. SMT
assembly requires expensive capital equipment and a high level of process
expertise. The Nampa, Idaho facility has 12 high-speed, fully-automated
SMT lines, including one dedicated quick-turn prototype line. The Durham,
North Carolina and Penang, Malaysia facilities have 5 and 2 high-speed,
fully-automated SMT lines, respectively.
The Company's contract manufacturing operation performs automated
in-circuit and functional testing, and has the capability to perform
environmental stress testing as requested by customers. As the density and
complexity of electronic circuitry increases, the Company anticipates a
need to invest in more sophisticated automated test equipment and
inspection systems that provide both three dimensional and X-ray inspection
of in-process and final products.
The Company also utilizes chip on board ("COB") technology in its
manufacturing processes. COB technology, including multi-chip module
assembly, utilizes unpackaged semiconductor die which are attached to a
printed circuit board and then sealed with epoxy. COB is well-suited for
applications involving small form factor and high lead count products. The
Company also has the capability to utilize ball grid array ("BGA")
packaging technology in its assembly process. This packaging technique
utilizes an array of "solder balls" in a matrix across the bottom of a
component package as opposed to attaching leads around the perimeter of the
die. This emerging technology in packaging is typically utilized for high
pin count integrated circuits.
5
Marketing and Sales
The Company markets its contract manufacturing services on a worldwide
basis through a direct sales force that interfaces with independent sales
representatives and OEMs. The Company's contract manufacturing marketing
effort is augmented by MTI's sales force, which also markets the Company's
services to MTI's customer base. The Company's contract manufacturing
marketing efforts also include participating in industry conferences and
publishing articles in trade journals.
Product Warranties
The Company generally offers a 90-day warranty on the workmanship of its
contract manufacturing services. However, warranties are frequently
negotiated with each customer and may therefore be greater than or less
than 90 days. Generally, a considerable amount of time and effort is
invested in the start-up phase of each project. As a result, the Company
has not typically experienced significant warranty claims for its contract
manufacturing services, though there can be no assurance that the Company
will not experience significant future warranty claims with respect to its
contract manufacturing services.
Backlog
The Company's backlog for contract manufacturing services generally
consists of purchase orders believed to be firm that are expected to be
filled within the next three months. Backlog for the Company's contract
manufacturing operations as of August 28, 1997 and August 29, 1996 was
approximately $61 million and $52 million, respectively. Because of
variations in the timing of orders, delivery intervals, material
availability, customer and product mix and delivery schedules, among other
reasons, the Company's contract manufacturing backlog as of any particular
date may not be representative of actual sales for any succeeding period.
Competition
The contract manufacturing industry is highly competitive. The Company
competes against numerous domestic and offshore contract manufacturers,
including a significant number of local and regional companies. In
addition, the Company competes against in-house manufacturing capabilities
of certain of its existing customers as well as with certain large computer
manufacturers which also offer third-party contract manufacturing services.
The Company's contract manufacturing competitors include, among others,
Avex Electronics, Inc., Benchmark Electronics, Inc., Celestica Inc.,
DOVAtron International, Inc., Flextronics International, Group Technologies
Corporation, Jabil Circuits, Inc., Sanmina Corporation, SCI Systems, Inc.
and Solectron Corporation. Many of MEI's competitors have substantially
greater manufacturing, financial and marketing resources than the Company
and have manufacturing operations at multiple domestic and overseas
locations. However, despite its many competitors, in September 1997, the
Company was awarded the Cisco Systems, Inc. 1997 Supplier of the Year
Award.
The Company believes the significant competitive factors in contract
manufacturing include level of service, range of services offered, quality,
price, technology, location and the ability to offer flexible delivery
schedules and deliver finished products on an expeditious and timely basis
in accordance with customers' expectations. The Company may be at a
disadvantage as to certain competitive factors when compared to
manufacturers with greater resources than the Company, substantial offshore
facilities and/or substantially larger domestic facilities. There can be
no assurance that the Company will compete successfully in the future with
regard to these competitive factors. In order to remain competitive, it is
likely that the Company will be required to expand its contract
manufacturing capacity and may be required to establish additional
international operations. There can be no assurance that the Company will
be successful in expanding its contract manufacturing operation on a timely
and efficient basis or otherwise. The failure to do so could have a
material adverse effect on the Company's business and results of
operations. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Certain Factors-Contract
Manufacturing-Competition in the Contract Manufacturing Industry."
6
SPECTEK SEMICONDUCTOR MEMORY PRODUCTS
Products
The Company's SpecTek semiconductor memory products operation generally
processes and markets various grades of memory products under the SpecTek
brand name in either component or module form. Memory components are
obtained from certain semiconductor memory manufacturers and are tested and
generally graded to their highest level of functionality. Higher grade
components meeting industry specifications are available for use in memory
modules for computer systems. Certain lower grade components may
be used in nonstandard memory modules or sold to strategic OEM customers
for use in specific applications. By working closely with its customers to
develop new applications utilizing its memory components, the Company is
able to offer reliable low cost memory solutions and increase component and
product compatibility for its OEM customers.
Historically, a substantial majority of the nonstandard DRAM components
used in the Company's SpecTek semiconductor memory products operation has
been obtained from MTI. In fiscal 1997, 1996 and 1995, the SpecTek
semiconductor memory products operation obtained 74%, 61% and 89%,
respectively, of its DRAM components from MTI, and in fiscal 1997, obtained
nearly 100% of its DRAM components from four sources, including MTI.
Pursuant to an agreement with the Company (the "Component Recovery
Agreement"), MTI is required to deliver to the Company all of the
nonstandard DRAM components produced at MTI's semiconductor memory
manufacturing operations. There can be no assurance that DRAM components
obtained from MTI or purchases of components from any alternative sources
will continue at quantities sufficient to sustain the Company's SpecTek
semiconductor memory products operation at its existing or historic levels.
The Company intends to continue to pursue additional third-party sources of
DRAM components; however, there can be no assurance that significant
additional supplies will be obtained. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations-Certain
Factors-SpecTek Semiconductor Memory Products Operation-Dependence on
Component Recovery Agreement with MTI."
Manufacturing and Materials
The Company's SpecTek semiconductor memory products operation requires a
significant investment in sophisticated testing hardware and software and
expertise in semiconductor memory products and manufacturing processes.
The semiconductor memory manufacturing process involves a highly complex
series of steps performed to create specific electronic features on silicon
wafers. Recovery of DRAM components within the semiconductor manufacturing
process is generally performed at two stages: the wafer probe stage and the
test stage. The first test of electrical functionality in the
semiconductor memory manufacturing process is performed at the wafer probe
stage, where die not meeting certain functionality or performance
characteristics are segregated while those die which potentially meet full
performance specifications continue on in the manufacturing process to
assembly and test. Although a majority of the Company's DRAM components
are identified by semiconductor memory manufacturers during the test
function, the Company maintains personnel in MTI's semiconductor memory
manufacturing facility to identify nonstandard die at the wafer probe stage
which may qualify for recovery. Once nonstandard die are identified as
recoverable at wafer probe, the die are assembled and delivered to the
Company for testing and grading.
Upon delivery to the Company, DRAM components are grouped according to
device and package type and staged for a specific sequence of electrical,
environmental and mechanical tests identified for that group. The
Company's test and product engineers develop the complex testing algorithms
and procedures necessary to recover DRAM components on a cost-effective
basis. The Company's engineers also develop and implement proprietary
software and hardware modifications to automated test and handling
equipment. Test and product engineers develop burn-in testing procedures
in order to increase assurance of reliability for devices being processed.
Throughout the testing process, DRAM components are graded in an effort to
segregate less functional components and to minimize additional testing
with respect to such components. The Company strives to maintain close
working relationships between its engineering staff and its customers, and
modifies its test procedures and test specifications to ensure generally
that DRAM components properly address customer performance requirements.
Once all electrical and environmental testing is accomplished, the devices
are subjected to automated and visual inspection to verify that the devices
meet mechanical and cosmetic specifications relating to package, mark and
device lead integrity.
7
Many semiconductor memory manufacturers are reluctant to sell nonstandard
memory components because such components could compete with their full
specification components for similar applications. In addition, some
manufacturers are concerned that subsequent testing performed by a
component recovery operation could reveal proprietary data regarding
manufacturing yields and processes. As a result, there can be no assurance
that the Company will be able to obtain DRAM components from semiconductor
manufacturers in quantities sufficient to meet demand for the Company's
products. Any reduction in the availability or functionality of memory
components from the Company's suppliers could have a material adverse
effect on the Company's business and results of operations. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Certain Factors-SpecTek Semiconductor Memory Products
Operation-Dependence on Component Recovery Agreement with MTI."
Marketing and Sales
The Company's SpecTek memory products are marketed primarily to domestic
customers through the Company's direct sales force and to international
customers through manufacturing representatives, distributors and value-
added resellers. The market for semiconductor memory historically has been
volatile and has experienced significant downturns characterized by changes
in the relationship between worldwide demand and production capacity and
declines in average selling prices.
Pricing for the Company's SpecTek memory products fluctuates, to a large
degree, based on industry-wide pricing for semiconductor memory products.
During fiscal 1996 and fiscal 1997, the Company experienced significant
declines in the average selling prices of its DRAM products as industry-
wide average selling prices for full specification semiconductor memory
products experienced a sharp decline. The Company believes such decline
was due primarily to changes in the balance of supply and demand for these
commodity products, and the Company is unable to predict the impact of
semiconductor memory product market dynamics in future periods. Further
declines in industry-wide pricing for semiconductor memory products would
likely result in declines in average selling prices of the Company's
SpecTek memory products, which could have a material adverse effect on the
Company's business and results of operations. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Certain Factors-SpecTek Semiconductor Memory Products
Operation-Pricing of DRAM Products."
Product Warranties
The Company typically offers a 90-day limited warranty on its SpecTek
memory products. Longer warranties are generally offered only in special
circumstances. Although the Company's historical warranty claims with
respect to SpecTek memory products have not been material, there can be no
assurance that the Company will not experience significant future warranty
claims with respect to these products.
Backlog
The Company's SpecTek memory products customers generally do not order
with long lead times, and orders are frequently placed with a provision to
renegotiate price at or near the time of shipment. Therefore, the Company
does not believe any backlog of orders for its DRAM products is firm or a
reliable indication of actual sales for any succeeding period.
Competition
The principal competitive factors in the Company's SpecTek semiconductor
memory products operation are access to sources of DRAM components, testing
capabilities, DRAM component prices and applications engineering. The
price of nonstandard DRAM components is directly influenced by the price of
full specification DRAM components, and as higher density memory devices
become more prevalent and error correction technologies and solutions
improve, semiconductor memory manufacturers have sought ways to recover a
portion of their manufacturing costs through recovery of nonstandard DRAM
components. Certain manufacturers have established internal capabilities
and independent companies are pursuing opportunities to recover, test and
market nonstandard DRAM components. As more semiconductor memory
manufacturers recover nonstandard DRAM components, the pressure on the
remaining manufacturers may increase to develop similar programs, whether
internal or external, in order to generate revenue from their nonstandard
DRAM components. In addition to supplying nonstandard DRAM components in
the market, in-house component recovery operations eliminate a potential
source of supply to the Company. Upon termination or expiration of the
Component Recovery Agreement, MTI could develop its own component recovery
operation. The loss of a sourcing arrangement, particularly the Company's
arrangement with MTI, could have a material adverse effect on the Company's
business and results of operations. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations-Certain
Factors-SpecTek Semiconductor Memory Products Operation-Dependence on
Component Recovery Agreement with MTI."
8
EXPORT SALES
The Company's export sales totaled $143 million, $181 million and $77
million in fiscal 1997, 1996 and 1995, respectively. Export sales are
denominated primarily in United States dollars.
INTELLECTUAL PROPERTY
As of August 28, 1997, the Company owned approximately 28 U.S. patents
and 10 foreign patents. In addition, the Company has 157 patent
applications pending. The Company is the holder of a number of trademarks
and registered trademarks and intends to continue to seek protections on
its significant patentable technology and trademarks. There can be no
assurance that patents will be issued for pending applications.
It is common in the electronics industry for patent, trademark and other
intellectual property rights claims to be asserted against companies,
including component suppliers and PC manufacturers. Periodically, the
Company is made aware that technology used by the Company may infringe on
intellectual property rights held by others. The Company evaluates all
such claims and, if necessary and appropriate, seeks to obtain licenses for
the continued use of such technology. The Company has accrued a liability
and charged operations for the estimated costs of settlement or
adjudication of asserted and unasserted claims for alleged infringement
prior to the balance sheet date. The Company would be placed at a
competitive disadvantage if it were unable to obtain such licenses upon
terms at least as favorable as those experienced by the Company's
competitors. The Company has entered into several intellectual property
agreements, which generally require one-time or periodic royalty payments
and are subject to expiration at various times. The Company is unable to
predict whether any of these license agreements can be obtained or renewed
on terms acceptable to the Company. If the Company or its suppliers are
unable to obtain licenses necessary to use intellectual property
in their products or processes, the Company may be forced to market
products without certain technological features or software, discontinue
sales of certain of its products and/or defend legal actions taken against
it relating to allegedly protected technology. The inability of the
Company to obtain licenses necessary to use certain technology, or an
inability to obtain such licenses on competitive terms, or any litigation
determining that the Company, in the manufacture or sale of its products,
has infringed on the intellectual property rights held by others, could
have a material adverse effect on the Company's business and results of
operations.
The Company, as a majority-owned subsidiary of MTI, is licensed under
certain license agreements between MTI and third parties. The Company
makes payments to MTI relating to certain of such agreements. The
Company's rights under such agreements may terminate in the event that the
Company is no longer a majority-owned subsidiary of MTI. In the event of
any such termination, the inability of the Company independently to obtain
such rights on similar terms could have a material adverse effect on the
Company's business and results of operations.
RESEARCH AND DEVELOPMENT
The Company maintains a research and development operation which had
approximately 95 employees as of August 28, 1997. The Company's PC
research and development group focuses its efforts on PC systems,
including: core logic chip sets, motherboards; embedded PCs, such as those
used in point of sale terminals and systems; PC BIOS development; and other
PC-related products. This group assists the Company's PC operations and
its suppliers to maximize the performance of new technologies in the PC
industry, and also performs contract design and engineering services for
third parties. In addition to the PC research and development group, the
Company has a server research and development group that focuses on the
development of proprietary enabling technologies to be incorporated into
the Company's server products. Such technologies include client/server
database and communication software and a tripple-tier PCI bus architecture
allowing hot pluggable PCI card slots. There can be no assurance that the
Company will continue to develop or have access to new technology, be
successful in incorporating such new technology in its products or deliver
commercial quantities of new products or features in a timely and cost-
effective manner.
The Company licenses certain software programs from third party
developers through a non-exclusive worldwide license. Such software is
incorporated into software programs developed by the Company for use in its
server products.
9
Research and development expenses for 1997, 1996 and 1995 were
approximately $9,621,000, $3,050,000 and $1,893,000, respectively.
Research and development expense in 1997 included a one-time charge of $3.9
million for the write-off of purchased in-process research and development
associated with the Company's acquisition in the fourth quarter of fiscal
1997 of NetFRAME. See footnotes to financial statements.
EMPLOYEES
As of August 28, 1997, the Company employed approximately 3,000 people in
its PC operation, 1,300 people in its contract manufacturing operation and
320 people in its SpecTek semiconductor memory products operation, nearly
all of whom are located in the United States, and none of whom are
represented by a labor organization with respect to their employment by the
Company. The Company has never had an organized work stoppage and
considers its employee relations to be satisfactory.
ENVIRONMENTAL REGULATIONS
Some risks of costs and liabilities related to environmental matters are
inherent in the Company's business, as with many similar businesses, and
the Company's operations are subject to certain federal, state and local
environmental regulatory requirements relating to environmental and waste
management. There can be no assurance that material costs and liabilities
will not be incurred in maintaining or establishing compliance with current
or future requirements. The Company believes that its business is operated
in compliance with applicable environmental regulations, the violation of
which could have a material adverse effect on the Company. In the event of
violation, these regulations provide for civil and criminal fines,
injunctions and other sanctions and, in certain instances, allow third
parties to sue to enforce compliance. In addition, new, modified or more
stringent requirements or enforcement policies could be adopted that may
adversely affect the Company's business and results of operations. The
Company periodically generates and handles limited amounts of materials
that are considered hazardous waste under applicable law. The Company
contracts for the off-site disposal of these materials. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Certain Factors-Contract Manufacturing-Government Regulation."
10
OFFICERS AND DIRECTORS OF THE REGISTRANT
The officers and directors of the Company and their ages as of September
29, 1997, are as follows:
Name Age Position
- -------------------- --- -----------------------------------------------
Joseph M. Daltoso 35 Chairman of the Board of Directors and Chief
Executive Officer
Gregory D. Stevenson 36 President and Chief Operating Officer, Director
T. Erik Oaas 44 Executive Vice President, Finance and Chief
Financial Officer, Director
Robert F. Subia 35 President, Chief Executive Officer and
Chairman of the Board of Directors of Micron
Custom Manufacturing Services, Inc. (a wholly-
owned subsidiary of the Company), Director
Michael S. Adkins 32 Vice President, SpecTek
Steven P. Arnold 42 Vice President, Legal and General Counsel
George A. Haneke 49 Senior Vice President, International Markets
Nelson L. Hanks 44 Senior Vice President, Purchasing
Dean A. Klein 40 Executive Vice President, Product Development and
Chief Technical Officer
Steven H. Laney 37 Vice President, Corporate Communications
JoAnne S. Pfeifer 38 Vice President, Administration and Corporate
Secretary
Gene P. Thomas, Jr. 36 Vice President, North America Sales
Steven R. Appleton 37 Director
Jerry M. Hess 59 Director
Robert A. Lothrop 71 Director
John R. Simplot 88 Director
Joseph M. Daltoso served as Chairman of the Board and President of former
Micron Custom Manufacturing Services, Inc., then a wholly-owned subsidiary
of MTI ("MCMS") from July 1992 until the effective time of the MEI Merger.
In August 1994, he was also named Chief Executive Officer of MCMS. At the
effective time of the MEI Merger, Mr. Daltoso was appointed Executive Vice
President, Operations and a director of the Company. He was named Chairman
of the Board, President and Chief Executive Officer of the Company on April
17, 1995. On July 28, 1997, Mr. Daltoso resigned as President of the
Company.
Gregory D. Stevenson served as Vice President, Component Recovery of MCMS
from July 1992 to August 1993. In September 1992, he was also appointed a
director of MCMS. In August 1993, Mr. Stevenson was appointed Vice
President, Operations of MCMS. In April 1995, Mr. Stevenson was
appointed Vice President, Nampa Operations and served in that
position until July 1995 when he was appointed Executive Vice
President, Operations and a director of the Company. In January 1997, Mr.
Stevenson was appointed Chief Operating Officer of the Company, and in July
1997, he was also appointed President of the Company.
T. Erik Oaas served as Vice President, Finance and Treasurer, and a
director of MCMS from July 1992 until the effective time of the MEI Merger,
at which time he was appointed Vice President, Finance and Chief Financial
Officer, and a director of the Company. In January 1997, Mr. Oaas was
appointed Executive Vice President, Finance of the Company.
Robert F. Subia served as a Regional Sales Manager for MTI from 1989
until February 1993. In February 1993, Mr. Subia joined MCMS as Director
of Sales and held this position until August 1994, when he was appointed
Vice President, Sales. On April 17, 1995, Mr. Subia was appointed
Chairman, President and Chief Executive Officer of Micron Custom
Manufacturing Services, Inc., a wholly-owned subsidiary of the Company
("CMS"). Mr. Subia was appointed a director of the Company in October
1995.
Michael S. Adkins served as Manager of the Systems Integration Group of
MTI from April 1990 to November 1993 when he was appointed President of
Systems Integration Group, Inc., then a wholly owned subsidiary of MTI. He
continued in that position until November 1994 when he was appointed
General Manager, System Integration, an operating division of MTI. Mr.
Adkins joined the Company in July 1996 as Executive Director, SpecTek
Operations and continued in that position until January 1997, when he was
appointed Vice President, SpecTek.
Steven P. Arnold served as an associate with Arnold, White and
Durkee from January 1988 to April 1995, when he joined MTI as Associate
General Counsel. He continued in that position until June 1996 when he
joined the Company as Chief Counsel, Intellectual Property. In January
1997, Mr. Arnold was appointed Vice President, Legal and General Counsel.
11
George A. Haneke joined MTI in May 1988 as a financial planner. Mr.
Haneke joined Micron Computer, Inc. in September 1993 and was appointed
Vice President, Finance, Treasurer and Chief Financial Officer in December
1993. He served in that position until the effective time of the MEI
Merger. In April 1995, Mr. Haneke was appointed Vice President and Chief
Information Officer of the Company. In January 1997, Mr. Haneke was
appointed Senior Vice President, International Operations of the Company
and in September 1997, Mr. Haneke was appointed Senior Vice President,
International Markets.
Nelson L. Hanks served as Chairman, President and Chief Executive Officer
of Micron Europe Limited, a wholly-owned subsidiary of MTI, from April 1991
to August 1993. From August 1993 until the effective time of the MEI
Merger, Mr. Hanks served as Special Projects Manager for MTI. In April 1995,
Mr. Hanks was appointed Vice President, Purchasing. In January 1997, Mr.
Hanks was appointed Senior Vice President, Purchasing of the Company.
Dean A. Klein was a co-founder of and also served as President of PC
Tech, Inc., a former wholly-owned subsidiary of the Company, from its
inception in 1984. In September, 1997, PC Tech, Inc. was merged with and
into the Company. After the acquisition of PC Tech, Inc. by the Company in
February 1992, Mr. Klein served as Vice President, Research and Development
of the Company and President of PC Tech, Inc. In February 1996, Mr. Klein
was named Vice President and Chief Technical Officer of the Company. In
January 1997, Mr. Klein was appointed Senior Vice President, Chief
Technical Officer of the Company and in September 1997, he was appointed
Executive Vice President, Product Development and Chief Technical Officer.
Steven H. Laney served as Marketing Manager for MCMS from July 1992 until
May 1993 when he was appointed Director of Marketing for MCMS. He served
in this position until the effective time of the MEI Merger when he was
named Director of Investor Relations of the Company. In October 1996, Mr.
Laney was named Vice President, Corporate Communications of the Company.
JoAnne S. Pfeifer served as Accounting Manager of MTI from June 1989 to
August 1992, when she was named Administration Projects Coordinator for
MCMS. She continued in that position until January 1995 when she was named
Administrative Manager for MCMS and continued in that position for the
Company until March 1996 when she was named Director of Administration for
the Company. In July 1996 Ms. Pfeifer was appointed Corporate Secretary
and in January 1997, she was appointed Vice President, Administration for
the Company.
Gene P. Thomas, Jr. served in sales managerial roles with Polaroid
Corporation and CompuAdd Computer Corp. and was appointed Director of
Marketing for CompuAdd in 1993. Mr. Thomas joined Micron Computer, Inc. as
Director of Sales in March 1993 and was appointed Vice President, Sales and
Marketing in December 1993. In April 1995, Mr. Thomas was appointed Vice
President, Micron Sales and Marketing, and in July 1995, was named
Vice President, Direct Sales. In February 1996, he was appointed Vice
President, Marketing, and served in that capacity until January 1997,
when he was appointed Vice President, Business Development of
the Company. In September 1997, Mr. Thomas was appointed Vice President,
North America Sales.
Steven R. Appleton joined MTI in February 1983 and has served in various
capacities with MTI and its subsidiaries, including overseeing MTI's
semiconductor operations as President and Chief Executive Officer of Micron
Semiconductor, Inc. (then a wholly-owned subsidiary of MTI) from July 1992
to November 1994. Except for a nine day period in January 1996, since May
1994 Mr. Appleton has served as a member of MTI's Board of Directors and
since September 1994 Mr. Appleton has served as the Chief Executive
Officer, President and Chairman of the Board of Directors of MTI. At the
effective time of the MEI Merger, Mr. Appleton was named Chairman of the
Board of Directors, President and Chief Executive Officer of the Company.
He resigned from these positions on April 17, 1995, but continued as a
director of the Company until January 1996, when he resigned from that
position. Mr. Appleton was reappointed a director of the Company in
February 1996.
Jerry M. Hess has served as Chairman and Chief Executive Officer of J.M.
Hess Construction Company, Inc. since 1959. Mr. Hess has served on MTI's
Board of Directors since 1994. At the effective time of the MEI Merger,
Mr. Hess was appointed a director of the Company.
Robert A. Lothrop served as the Senior Vice President of the J.R. Simplot
Company, a food processing, fertilizer and agricultural chemicals
manufacturing company, from January 1986 until his retirement in January
1991. Mr. Lothrop was elected to MTI's Board of Directors in 1986. In
1992, he was elected to the Board of Directors of Micron Semiconductor,
Inc. (then a wholly-owned subsidiary of MTI) and resigned as a director of
MTI. Mr. Lothrop was re-elected to MTI's Board of Directors in 1994. At
the effective time of the MEI Merger, Mr. Lothrop was appointed a director
of the Company.
12
John R. Simplot founded and served as Chairman of the Board of Directors
of the J.R. Simplot Company prior to his retirement in April 1994. Mr.
Simplot currently serves as Chairman Emeritus of the J.R. Simplot Company.
Mr. Simplot has served on MTI's Board of Directors since 1980. At the
effective time of the MEI Merger, Mr. Simplot was appointed a director of
the Company.
13
Item 2. Properties
The Company's corporate headquarters, PC manufacturing operation, a
majority of its contract manufacturing operation and SpecTek semiconductor
memory products operation are based in a number of Company-owned facilities
aggregating approximately 577,000 square feet located in Nampa, Idaho.
Approximately 123,000 square feet of the Nampa facilities are dedicated to
PC manufacturing, approximately 146,000 square feet are dedicated to
contract manufacturing and approximately 40,000 square feet are dedicated
to the Company's SpecTek semiconductor memory products operation. The
balance of the Nampa facilities is dedicated to sales, technical support,
customer service, administrative functions and warehouse space.
The Company leases a 60,000 square foot facility in Minneapolis,
Minnesota, dedicated primarily to PC sales, technical support and
administrative functions and a 75,000 square foot facility in Meridian,
Idaho dedicated to a PC call center. The Company leases an approximately
50,000 square foot warehouse facility in Nampa, Idaho. In addition, the
Company leases an 85,000 square foot facility in Milpitas, California,
dedicated to its enterprise server products and research and development
efforts associated therewith, with a total of approximately 29,000 square
feet dedicated to manufacturing.
The Company also occupies an approximately 61,000 square foot leased
facility in Durham, North Carolina, with approximately 43,000 square feet
dedicated to contract manufacturing. In addition, the Company's contract
manufacturing operation occupies an 18,000 square foot leased facility in
Penang, Malaysia.
Other leased facilities include three factory outlets in Boise, Idaho,
the Salt Lake City, Utah area and the Minneapolis/St. Paul, Minnesota area,
a sales and technical support call center and warehouse located in Japan
and various sales offices located primarily in the United States.
The Company has a capacity enhancement program for its PC operation
including the expansion of its PC operation in Nampa, Idaho. Construction
is underway on a new facility expected to be approximately 325,000 square
feet and to cost approximately $35 million. The facility is expected to be
in production in the second calendar quarter of 1998.
Item 3. Legal Proceedings
The Company is a party to various 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 financial position or results of operations. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations-Certain Factors-Intellectual Property Matters."
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Micron Electronic, Inc.'s Common Stock trades on the Nasdaq Stock Market
under the symbol "MUEI." The following table shows for the periods
indicated the high and low sales prices for the common stock of the
Company, as reported by the Nasdaq Stock Market:
High Low
------- -------
1997:
4th quarter $21.000 $14.875
3rd quarter 25.375 15.375
2nd quarter 25.000 17.500
1st quarter 23.500 12.625
1996:
4th quarter $16.500 $ 8.750
3rd quarter 17.125 9.000
2nd quarter 15.250 9.250
1st quarter 29.875 13.000
HOLDERS OF RECORD
As of August 28, 1997, there were approximately 2,253 shareholders of
record of the Company's Common Stock.
DIVIDENDS
The Company has never declared or paid any cash dividend nor has any
intent to do so in the near future. Payment of dividends is currently
limited by the terms of the Company's credit agreement, dated June 27,
1997.
15
Item 6. Selected Financial Data
1997 1996 1995 1994 1993
---------- ---------- -------- -------- --------
(Amounts in thousands, except per share amounts)
Net sales $1,955,783 $1,764,920 $999,999 $412,938 $162,180
Operating income 136,458 75,998 106,493 59,851 21,622
Net income 87,262 44,582 65,086 36,898 13,623
Earnings per share 0.92 0.48 0.74 0.45 0.17
Current assets 563,148 399,116 308,755 120,880 57,439
Working capital 203,884 121,766 106,452 45,906 24,123
Total assets 758,346 529,933 382,716 151,739 70,289
Total debt 38,641 21,297 6,823 7,845 9,327
Shareholders' equity 365,571 228,460 173,663 68,169 26,874
On April 7, 1995, Micron Computer, Inc. ("MCI") and Micron Custom
Manufacturing Services, Inc. ("MCMS"), then subsidiaries of MTI, merged
with and into ZEOS International, Ltd. ("ZEOS"), and the surviving
corporation's name was changed to Micron Electronics, Inc. (the "MEI
Merger"). A new basis of accounting, based on fair values, was established
for the assets and liabilities of ZEOS. Subsequent to the MEI Merger, the
Company's financial statements reflect the consolidated results of
operations, financial position and cash flows of the Company based on the
new basis of accounting for the assets and liabilities of ZEOS and the
historical cost bases for the assets and liabilities of MCI and MCMS.
Prior to the MEI Merger, the financial statements of the Company include
only the combined results of operations, financial position and cash flows
of MCI and MCMS.
In February 1996, the Company adopted a plan to discontinue the
manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operations in Minneapolis, Minnesota. As a result, the
Company recorded restructuring charge of $29.2 million ($22.4 million, or
$0.24 per share, net of taxes) in 1996. The restructuring charge included
$14.5 million related to the disposition of inventory of discontinued
product lines, the write-off of $11.4 million of goodwill which resulted
from the MEI Merger, $1.1 million for other asset write-downs, $0.6 million
related to personnel costs and $1.6 million related to other exit costs.
In the fourth quarter of fiscal 1997, the Company acquired NetFRAME, for
$17.4 million in cash. The acquisition adversely affected the Company's
net income in fiscal 1997 by $6.4 million, or $0.07 per share, which
includes the operating losses of NetFRAME since the July 18, 1997
acquisition date and a one-time charge of $3.9 million, or $0.04 per share,
for the write-off of purchased in-process research and development.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations-Certain Factors."
16
Item 7. 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. The
Company's actual results could differ materially from the Company's
historical results of operations and those discussed in the forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those identified in "Certain Factors."
All yearly references are to the Company's fiscal years ended August 28,
1997, August 29, 1996 and August 31, 1995, unless otherwise indicated. All
tabular dollar amounts are stated in thousands. Certain reclassifications
have been made in the following discussion and analysis to present results
of operations on a consistent basis.
OVERVIEW
Micron Electronics, Inc. and its subsidiaries manufacture electronic
products and provide services for a wide range of computer and digital
applications. The Company is a leading provider of PC systems through the
direct sales channel in the United States and develops, markets,
manufactures and supports PC systems for consumer, business, government and
educational use. In addition, the Company is a supplier of multi-processor
network servers for enterprise, remote office and distributed computing
environments under the NetFRAME brand name. The Company's contract
manufacturing operation, Micron Custom Manufacturing Services, Inc.
("CMS"), specializes in the design, assembly and test of custom complex
printed circuit boards, memory modules and system level products for
original equipment manufacturers. The Company's SpecTek semiconductor memory
products operation processes and markets various grades of memory products
under the SpecTek brand name.
The Company's past operating results have been, and its future
operating results may be, subject to seasonality and other fluctuations, on
a quarterly and an annual basis, as a result of a wide variety of factors,
including, but not limited to, industry competition, fluctuating market
pricing for PCs and semiconductor memory products, fluctuating component
costs, changes in product mix, inventory obsolescence, the timing of new
product introductions by the Company and its competitors, availability and
pricing of the memory components used by the Company's SpecTek
semiconductor memory products operation, the timing of orders from and
shipments to OEM customers, seasonal government purchasing cycles,
manufacturing and production constraints, the effects of product reviews
and industry awards, seasonal cycles common in the PC industry, critical
component availability, and the failure by the Company to succeed in its
strategies with respect to NetFRAME Systems Incorporated ("NetFRAME"). As
a result, the operating results for any particular period are not necessarily
indicative of the results that may occur in any future period.
RESULTS OF OPERATIONS
Net income for 1997 was $87.3 million, or $0.92 per share, on net sales
of $1,955.8 million, compared to net income for 1996 of $44.6 million, or
$0.48 per share, on net sales of $1,764.9 million. Net sales in 1997 were
higher than 1996 primarily as a result of higher sales of PC systems,
partially offset by lower revenues from the Company's contract
manufacturing operation. The Company's overall gross margin percentage
increased from 14.8% in 1996 to 17.3% in 1997 primarily as a result of a
increased sales of PC systems combined with a higher gross margin
percentage realized on such sales.
In the fourth quarter of fiscal 1997, the Company acquired NetFRAME for
$17.4 million in cash. The acquisition adversely affected the Company's net
income in the fourth quarter of fiscal 1997 by $6.4 million, or $0.07 per
share, which includes the operating losses of NetFRAME since the July 18,
1997 acquisition date and a one-time charge of $3.9 million, or $0.04 per
share, for the write-off of purchased in-process research and development.
In February 1996, the Company adopted a plan to discontinue the
manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operations in Minneapolis, Minnesota. As a result, the
Company recorded restructuring charge of $29.2 million ($22.4 million, or
$0.24 per share, net of taxes) in 1996. The restructuring charge included
$14.5 million related to the disposition of inventory of discontinued
product lines, the write-off of $11.4 million of goodwill which resulted
from the MEI Merger, $1.1 million for other asset write-downs, $0.6 million
related to personnel costs and $1.6 million related to other exit costs.
17
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." SFAS No. 128 supersedes and simplifies the standards
for computing earnings per share previously found in Accounting Principles
Board Opinion No. 15, "Earnings Per Share," and interpretations thereof,
and makes them comparable to international earnings per share standards.
This statement is expected to be adopted by the Company effective in its
second quarter of fiscal 1998. The Company does not expect earnings per
share as calculated under SFAS No. 128 to be materially different than
calculated under the Company's existing methodology.
Net Sales
The following table summarizes the Company's net sales by product line:
1997 1996 1995
------------------ ------------------ ----------------
% of % of % of
Amount Sales Amount Sales Amount Sales
---------- ------ ---------- ------ -------- ------
PC systems $1,528,304 78.2% $1,252,492 71.0% $566,352 56.7%
Contract manufacturing 289,968 14.8% 373,622 21.2% 188,207 18.8%
SpecTek memory products 137,511 7.0% 138,806 7.8% 245,440 24.5%
---------- ------ ---------- ------ -------- ------
Total net sales $1,955,783 100.0% $1,764,920 100.0% $999,999 100.0%
========== ====== ========== ====== ======== ======
Net sales for 1997 were 11% higher than in 1996, primarily due to an
increase in sales of PC systems, partially offset by lower revenues from
the Company's contract manufacturing operation. Net sales for 1996 were
76% higher than in 1995, primarily due to a significant increase in sales
of PC systems and higher revenues from the Company's contract manufacturing
operation, partially offset by lower sales from the Company's SpecTek
semiconductor memory products operation.
Personal Computer Systems. Net sales of PC systems were 22% higher in
1997 compared to 1996 primarily due to a 37% increase in unit sales
partially offset by lower average selling prices for the Company's PC
systems. The higher level of unit sales was largely attributable to
significantly higher government sales and unit sales to large corporate
entities. Although the Company's overall unit sales grew by 37%, the
growth in unit sales to consumers and to small office/home office ("SOHO")
customers more closely reflected the overall PC industry growth. In
addition, international sales were essentially flat from 1996 to 1997. The
Company's sales of PC systems also benefited from increased name
recognition and market acceptance of the Company's PC systems partially
resulting from the receipt by the Company of awards from trade publications
recognizing the price and performance characteristics of Micron brand PC
systems and the Company's service and support functions. There can be no
assurance that the Company's name recognition and market acceptance of its
PC products will not decline in the future, which could have a material
adverse effect on the Company's business and results of operations. See
"Certain Factors-Personal Computer Systems-Competition in the PC Industry."
Sales to federal, state and local governmental entities increased as a
percentage of total net sales of PC systems in 1997 to 23%, compared to 16%
in 1996 and 8% in 1995. Sales in the fourth quarter of fiscal 1997
benefited by strong demand from the Company's governmental customers as
well as sales pursuant to large government contacts. As a result,
government sales represented 29% of total PC sales in the fourth quarter of
fiscal 1997. The level of the Company's governmental sales is partially
dependent on the buying practices of governmental entities and the
Company's success in being selected to participate in government contracts
in the future, of which there can be no assurance. A significant decline
in government sales of PC systems, including those sold pursuant to
government contracts, could have a material adverse effect on the Company's
business and results of operations.
Sales to large and medium-sized business were 83% higher in 1997 compared
to 1996 and represented 13% of total PC sales in 1997. The growth in
corporate sales was largely attributable to a more focused effort on behalf
of the Company's sales force directed toward corporate customers.
International sales of PC systems represented 5% of total PC system sales
in 1997, compared to 7% in 1996 and 6% 1995. The Company's international
sales were adversely affected by a decrease in sales of its PC systems
through distributors in Japan as the Company initiated direct sales of PC
systems through its Japanese call center. Sales from the Company's
Japanese call center in 1997 represented 1% of total PC system sales.
18
Unit sales of notebook systems represented 9% and 5% of total PC system
sales during 1997 and 1996, respectively, compared to 1% in 1995. Demand
for the Company's notebook systems increased in response the Company's
broadening of its notebook product offering. Sales of PC systems
incorporating Intel Pentium Pro microprocessors and Pentium microprocessors
with MMX technology represented 12% and 20%, respectively, of total PC
units sold in fiscal 1997, compared to 6% and 0%, respectively, in fiscal
1996. Sales of the Company's PC systems incorporating Intel Pentium II
microprocessors, which were introduced in the fourth quarter of fiscal
1997, represented 10% of total PC units sold in the fourth quarter of
fiscal 1997. See "Certain Factors-Personal Computer Systems-Dependence on
Key Sources of Supply."
Average selling prices for the Company's PC systems were lower in 1997
compared to 1996, primarily as a result of the introduction of a number of
lower priced desktop and notebook models during the year combined with
general price reductions for PC systems and to increased government sales
of PC systems, which generally have lower average selling prices than the
balance of the Company's PC systems. In addition, average selling prices
in 1997 were adversely affected by a decline in the value of RAM products
incorporated in the Company's PC systems, partially offset by an increase
in average RAM content per system to approximately 38 megabytes.
In the second quarter of fiscal 1996, the Company decided to discontinue
the manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operations in Minneapolis, Minnesota. As a percentage of
total PC system sales, sales of ZEOS brand PC systems represented 7% in
1996 compared to 18% in 1995.
Net sales of PC systems were significantly higher in 1996 compared to
1995 primarily due to significantly higher unit sales of PC systems and, to
a lesser extent, higher average selling prices for such PC systems. Unit
sales of PC systems in 1996 were 111% higher compared to 1995 principally
due to an increase in sales through the direct channel resulting from
increased name recognition and market acceptance of the Company's desktop
PC systems and continued growth in the direct sales channel. Increased
sales to governmental entities and increased sales of notebook systems also
contributed to higher overall unit sales. Average selling prices for the
Company's PC systems increased in 1996 compared to 1995 primarily as a
result of the completion of the transition in product mix toward relatively
higher priced Pentium and Pentium Pro microprocessor based systems and
customer preferences for more richly configured PC systems with components
featuring the latest developments in PC-related technology. In addition,
during 1996, the Company experienced higher unit sales of notebook
products, which generally have significantly higher average selling prices
compared to the Company's overall average selling price for PC systems.
Contract Manufacturing. Revenues from the Company's contract
manufacturing operation were 22% lower in 1997 than in 1996, primarily due
to the effects of a sharp industry-wide decline in pricing for
semiconductor memory products and, to a lesser extent, a shift in product
mix, which were partially offset by a higher level of demand for more
complex products.
Revenues from the Company's contract manufacturing operation were 99%
higher in 1996 than in 1995; however, quarterly revenues declined
sequentially in 1996 from the second quarter through the fourth quarter.
The increase in 1996 revenue compared to 1995 was primarily due to the
utilization of increased manufacturing capacity and a shift in mix of
contract assembly services. Increased capacity was obtained through the
acquisition and utilization of additional manufacturing equipment and the
upgrade of existing manufacturing equipment. Contract manufacturing
revenues in the last three quarters of fiscal 1996 were adversely impacted
by the industry-wide decline in pricing for semiconductor memory products.
The Company continues to rely on a relatively small number of customers
for a significant portion of its contract manufacturing business. As a
percent of total contract manufacturing revenue for 1997, revenues from the
Company's top five contract manufacturing customers, including MTI, were
74%, compared to 69% and 58% in 1996 and 1995, respectively. Revenues,
directly or indirectly, from one customer represented 33% of the revenues
of the Company's contract manufacturing operations in 1997 compared to
revenues from the Company's largest contract manufacturing customer in 1996
of 36%. Contract manufacturing revenue from MTI was 5%, 8% and 13% of
total contract manufacturing revenue in 1997, 1996 and 1995, respectively.
See "Certain Factors-Contract Manufacturing-Customer Concentration."
19
SpecTek Semiconductor Memory Products. Net sales of semiconductor
memory products were slightly lower in 1997 compared to 1996, despite a 66%
decline in average selling prices. During 1997, the Company nearly tripled
megabit shipments compared to 1996. Net sales were 43% lower in 1996
compared to 1995, primarily due to a significant decline in sales of
peripheral add-on memory modules, a significant decline in average selling
prices for the Company's SpecTek semiconductor memory products and a
generally lower grade of components received from MTI, the Company's
primary supplier. These effects were partially offset by an 80% increase
in megabits of memory products shipped in 1996 compared to 1995. The
increase in megabits of memory products shipped in 1997 compared to 1996
and from 1996 compared to 1995 was primarily due to the acquisition and
utilization of additional test and burn-in equipment and reduced component
test times, both resulting in increased throughput for substantially all
memory products. The Company's SpecTek semiconductor memory products
results of operations are influenced by a number of factors including
pricing for, and availability of, nonstandard DRAM components. See
"Certain Factors-SpecTek Semiconductor Memory Products Operation."
Historically, a substantial majority of the semiconductor components used
in the SpecTek semiconductor memory products operation has been obtained
from MTI. In 1997, the Company obtained 74% of its components from MTI,
compared to 61% in 1996 and 89% in 1995. In fiscal 1997, the SpecTek
semiconductor memory products operation obtained nearly 100% of its
components from four sources. Purchases from alternative sources are
generally negotiated on a purchase order basis. There can be no assurance
the Company will be able to negotiate future purchases from alternative
sources on terms acceptable to the Company. Unless the Company is able to
continue obtaining significant quantities of nonstandard DRAM components
from alternative sources, the Company's SpecTek semiconductor memory products
operation could be limited by the volume of components supplied by MTI.
Any reduction in the availability or functionality of nonstandard
semiconductor memory components from the Company's suppliers could have
a material adverse effect on the Company's business and results of
operations. See "Certain Factors-SpecTek Semiconductor Memory Products
Operation-Dependence on Component Recovery Agreement with MTI."
Gross Margin
1997 1996 1995
------------------ ------------------ ----------------
% of % of % of
Amount Sales Amount Sales Amount Sales
---------- ----- ---------- ----- -------- -----
PC systems $ 259,473 17.0% $ 190,142 15.2% $ 58,190 10.3%
Contract manufacturing 33,397 11.5% 33,006 8.8% 19,024 10.1%
SpecTek memory products 44,876 32.6% 38,037 27.4% 106,123 43.2%
---------- ---------- --------
Total gross margin $ 337,746 17.3% $ 261,185 14.8% $183,337 18.3%
========== ========== ========
The Company's overall gross margin increased $76.6 million in 1997
compared to 1996, primarily as a result of an increased gross margin
percentage realized from the Company's PC operation coupled with a higher
level of PC sales and, to a lesser extent, an increase in gross margin
realized from the Company's SpecTek semiconductor memory products
operation. Gross margin increased in 1996 compared to 1995 primarily a
result of a significant increase in the gross margin provided by the
Company's PC operation, partially offset by lower gross margins realized
from the Company's SpecTek semiconductor memory products operation.
Personal Computer Systems. The Company's gross margin on sales of PC
systems increased $69.3 million or 36% in 1997 compared to 1996 principally
due to the higher level of net sales of PC systems and a generally higher
gross margin percentage realized on PC system sales. The gross margin
percentage for sales of the Company's PC systems increased in 1997 compared
to 1996 primarily as a result of improved component costs partially offset
by lower selling prices for the Company's PC systems. There can be no
assurance that the Company's future cost of components will decrease at
rates comparable to those in recent periods, or at all, or that the
Company's selling prices for its PC systems will not decrease at a rate
faster than the decline in its component costs. Although gross margins
increased in 1997, they were adversely affected by intense price
competition, an increase in the sales of, and a shift in product mix
toward, the Company's lower-end PC systems. The Company continues to
experience significant pressure on its gross margins as a result of intense
competition in the PC industry and consumer expectations of more powerful
PC systems at lower prices. In addition, the Company's gross margin
percentage will continue to depend in large part on its ability to
effectively manage its inventories of PC system components. See "Certain
Factors-Personal Computer Systems-Competition in the PC Industry" and
"Certain Factors-Personal Computer Systems-Inventory Management."
20
The gross margin amount provided by the Company's PC operations in 1996
increased 227% compared to 1995 principally due to the higher level of net
sales of PC systems and a generally higher gross margin percentage realized
on PC system sales. Gross margin as a percent of net sales of PC systems
in the fourth quarter of fiscal 1996 benefited from an adjustment of $13.0
million relating to revisions in estimates for certain contingencies for
product and process technology costs. The gross margin percentage for
sales of the Company's PC systems increased in 1996 compared to 1995
primarily as a result of improved component costs, particularly for RAM
products, and generally improved inventory management. Increased sales of
the Company's notebook products favorably affected the Company's gross
margin percentage for sales of PC systems in 1996.
Contract Manufacturing. The gross margin percentage realized from the
Company's contract manufacturing operation was higher in 1997 compared to
1996 primarily as a result of an increase in the overall complexity of the
printed board assemblies produced by the Company and an increase in
revenues derived from services utilizing consigned inventory components.
The gross margin percentage decreased in 1996 compared to 1995, due
primarily to an increase in the percentage of total revenues derived from
the Company's turnkey memory module assembly services. Such assembly
services generally have a lower gross margin percentage than the balance of
the Company's contract manufacturing services.
SpecTek Semiconductor Memory Products. The gross margin percentage
realized by the Company's SpecTek semiconductor memory products operation
was higher in 1997 compared to 1996 primarily due to lower costs of components,
particularly those obtained from MTI. Effective at the beginning of 1997,
the Company modified its agreement for purchasing semiconductor memory
components from MTI. Under the prior agreement, the Company's cost of
components were generally equal to one-half the price realized from sales
of such components. In 1997, the Company's costs of components were
generally equal to one-half of the net operating income generated from
sales of such components. See "Certain Factors-SpecTek Semiconductor
Memory Products Operation-Dependence on Component Recovery Agreement with
MTI."
The gross margin percentage realized by the Company's SpecTek
semiconductor memory products operation declined significantly in 1996
compared to 1995, primarily due to significantly lower average selling
prices resulting from the sharp industry-wide decline in market prices for
semiconductor memory products and by the effect of increased purchases by
the Company of semiconductor memory components from third-party suppliers.
In addition, in the fourth quarter of fiscal 1995, MTI's improved
semiconductor testing processes resulted in the shipment of a reduced
amount of higher functional nonstandard semiconductor memory components to
the Company for recovery, thus reducing the Company's average selling
prices and gross margins for such products.
In the event that average selling prices for SpecTek's semiconductor
memory products continue to decline, the gross margin for the Company's
SpecTek semiconductor memory products operation would decline further and
overall results of operations could be adversely affected. See "Certain
Factors-SpecTek Semiconductor Memory Products Operation-Pricing of DRAM
Products."
Selling, General and Administrative
1997 % Change 1996 % Change 1995
-------- -------- -------- -------- --------
Selling, general and
administrative $191,667 25.3% $152,937 104.0% $ 74,951
as a % of net sales 9.8% 8.7% 7.5%
Selling, general and administrative ("SG&A") expenses increased in
absolute dollars and as a percent of net sales in 1997 compared to 1996
primarily due to higher levels of personnel costs and advertising
associated with the expanded PC operations and higher technical and
professional fees primarily associated with information technology
consulting services. During the fourth quarter of fiscal 1996, the Company
charged operations with a $9.0 million accrual relating to revisions of
estimates for selling costs associated with sales of PC systems. In
addition, SG&A expenses in 1996 included $1.2 million of goodwill
amortization, reflecting charges prior to the write off of unamortized
goodwill in connection with the Company's restructuring charge in the
second quarter of fiscal 1996. SG&A expenses increased in absolute
dollars, and as a percent of net sales, in 1996 compared to 1995 primarily
due to higher levels of personnel costs associated with the expanded PC
operations.
21
Income Tax Provision
1997 % Change 1996 % Change 1995
-------- -------- -------- -------- --------
Income tax provision $ 57,092 62.9% $ 35,055 (19.2%) $ 43,390
The effective income tax rate was 39.5% in 1997, reflecting the federal
statutory rate, the net effect of state taxes and the effect of a
nondeductible $3.9 million charge to operations for the write-off of in-
process research and development resulting form the Company's acquisition
of NetFRAME in the fourth quarter of fiscal 1997. Without giving effect to
this charge, the Company's effective tax rate would have been 38.5%. The
effective tax rate of 44.0% in 1996 reflected the federal statutory rate,
the net effect of state taxes, the effect of goodwill amortization and the
write off during the second quarter of 1996 of $11.4 million of
nondeductible goodwill. Without giving effect to nondeductible goodwill
charges in 1996 totaling $12.6 million, the Company's effective income tax
rate would have been 38.0%. The Company's effective income tax rate was
40.0% for 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of August 28, 1997, the Company had cash and equivalents of $183.9
million, representing an increase of $68.1 million compared to August 29,
1996. Principal sources of liquidity in 1997 were cash flows from
operations of $130.1 million, $50.6 million from the issuance of common
stock and borrowings of $21.8 million. Principal uses of cash in 1997 were
property, plant and equipment expenditures of $105.8 million for expansion
and capacity improvements of the Company's manufacturing operations, $16.1
million for the acquisition of NetFRAME, net of cash acquired, the purchase
of held-to-maturity investment securities of $10.1 million and repayment of
debt of $4.9 million.
On October 11, 1996, the Company filed a registration statement with the
Securities and Exchange Commission allowing for the issuance from time to
time by the Company of debt and/or equity securities with a value of up to
$75.0 million, of which $51.0 million has been issued. The proceeds from
any issuance may be used for general corporate purposes. During the second
quarter of fiscal 1997, the Company completed the sale of 3.0 million
shares of its common stock in an underwritten public offering. Net
proceeds of $48.2 million were received by the Company. In the public
offering, MTI sold 12.4 million shares thereby reducing its ownership of
the Company as of August 28, 1997, to 64%. The registration statement also
allows for an additional $250.0 million of outstanding common stock of the
Company to be sold by certain existing shareholders, consisting of MTI and
certain management employees, of which $212.9 million has been sold.
During the third quarter of fiscal 1997, the Company's wholly-owned
subsidiary, CMS, entered into a revolving loan agreement, expiring May
2007, providing for borrowings of up to $15.0 million. Amounts outstanding
under the agreement are collateralized by certain real property. Under the
terms of the agreement, the amount available to CMS decreases by $1.0
million per year. As of August 28, 1997, there was $0.8 million
outstanding under the agreement. The terms of the agreement limits
dividends or other distributions from CMS.
During the fourth quarter of fiscal 1997, the Company entered into an
unsecured revolving credit facility with a group of financial institutions
which provides for borrowings of up to $130.0 million, based on the
Company's tangible net worth. The facility replaced two separate $40.0
million credit facilities. As of August 28, 1997, the Company was eligible
to borrow $130.0 million under the facility, but had no borrowings
outstanding.
During the fourth quarter of fiscal 1997, the Company's wholly-owned
subsidiary, Micron Electronics Japan K.K., entered into an unsecured
revolving credit facility with a financial institution, expiring June 1998,
providing for borrowings of up to 1.5 billion Japanese yen (US$12.7 million
at August 28, 1997). As of August 28, 1997, there was US$9.3 million
outstanding under the agreement.
At August 28,1997, the Company had commitments of $32.3 million for
capital expenditures for expansion and upgrade of facilities and equipment.
The Company anticipates making capital expenditures in fiscal 1998 in
excess of $100 million. The Company is constructing an approximately
325,000 square foot facility in Nampa, Idaho. This new facility is
expected to provide space for the expansion of the Company's Nampa, Idaho
PC operation and will provide space for possible future expansion.
22
The Company expects that its future working capital requirements will
continue to increase. The Company believes that currently available cash
and equivalents, cash flows from operations, the Company's current credit
facilities and equipment financings will be sufficient to fund its
operations through fiscal 1998. However, maintaining an adequate level of
working capital through the end of fiscal 1998 and thereafter will depend
in large part on the success of the Company's products in the marketplace
and the Company's ability to control inventory levels, component costs and
other operating expenses. The Company may require additional financing for
growth opportunities, including any internal expansion that the Company may
undertake, expansion and capacity enhancements to additional sites, or
strategic acquisitions or partnerships. There can be no assurance that any
financings will be available on terms acceptable to the Company, if at all.
CERTAIN FACTORS
In addition to factors discussed elsewhere in this Form 10-K, the
following are important factors which could cause actual results or events
to differ materially from the historical results of the Company's
operations or those results or events contained in any forward-looking
statements made by or on behalf of the Company.
General
Fluctuations in Operating Results and Stock Price
The Company's past operating results have been, and its future operating
results may be, subject to seasonality and other fluctuations, on a
quarterly and an annual basis, as a result of a wide variety of factors,
including, but not limited to, industry competition, fluctuating market
pricing for PCs and semiconductor memory products, fluctuating component
costs, changes in product mix, inventory obsolescence, the timing of new
product introductions by the Company and its competitors, availability and
pricing of the memory components used by the Company's SpecTek
semiconductor memory products operation, the timing of orders from and
shipments to OEM customers, seasonal government purchasing cycles,
manufacturing and production constraints, the effects of product reviews
and industry awards, seasonal cycles common in the PC industry, critical
component availability, and the failure by the Company successfully
integrate the operations of NetFRAME. As a result, the operating results
for any particular period are not necessarily indicative of the results
that may occur in any future period. The trading price of the common stock
of the Company is subject to significant fluctuations due to general market
conditions and financial performance of other companies in the PC industry
and MTI, announcements of technological innovations, new commercial
products or new strategies by competitors, component availability and
pricing or other factors.
Management
Historically, the Company has experienced rapid revenue growth and an
expansion in the number of its employees, in the breadth and complexity of
its management, operating and financial information systems and in its
geographic scope of operations. This growth has resulted in new and
increased responsibilities for the Company's management and has placed, and
continues to place, significant demands upon the Company's management,
operating and financial information systems, technical support systems and
other resources. The Company continues to consider various expansion
alternatives, including expansion of facilities, acquisition or
establishment of facilities in new geographic regions and certain strategic
relationships. The Company currently is expanding its PC operation
facilities in Nampa, Idaho and has recently opened a PC sales and technical
support call center in Japan and a contract manufacturing operation in
Malaysia and recently acquired the operations of NetFRAME. There can be no
assurance that the Company's management resources, operating and financial
information systems, technical support systems and other resources will be
adequate to support the Company's existing or future operations. In
addition, the Company is in the process of identifying operating and
application software challenges related to the year 2000. While the
Company expects to resolve year 2000 compliance issues substantially
through normal replacement and upgrades of software, there can be no
assurance that there will not be interruption of operations or other
limitations of system functionality or that the Company will not incur
substantial costs to avoid such limitations. Any failure to effectively
monitor, implement or improve the Company's operational, financial,
management and technical support systems could have a material adverse
effect on the Company's business and results of operations.
23
Intellectual Property Matters
It is common in the electronics industry for patent, trademark and other
intellectual property rights claims to be asserted against companies,
including component suppliers and PC manufacturers. Periodically, the
Company is made aware that technology used by the Company may infringe on
intellectual property rights held by others. The Company evaluates all
such claims and, if necessary and appropriate, seeks to obtain licenses for
the continued use of such technology. The Company has accrued a liability
and charged operations for the estimated costs of settlement or
adjudication of asserted and unasserted claims for alleged infringement
prior to the balance sheet date. The Company would be placed at a
competitive disadvantage if it were unable to obtain such licenses upon
terms at least as favorable as those experienced by the Company's
competitors. The Company has entered into several intellectual property
license agreements, which generally require one-time or periodic royalty
payments and are subject to expiration at various times. The Company is
unable to predict whether any of these license agreements can be obtained
or renewed on terms acceptable to the Company. If the Company or its
suppliers are unable to obtain licenses necessary to use intellectual
property in their products or processes, the Company may be
forced to market products without certain technological features or
software, discontinue sales of certain of its products and/or defend legal
actions taken against it relating to allegedly protected technology. The
inability of the Company to obtain licenses necessary to use certain
technology, or an inability to obtain such licenses on competitive terms,
or any litigation determining that the Company, in the manufacture or sale
of its products, has infringed on the intellectual property rights of third
parties could have a material adverse effect on the Company's business and
results of operations.
The Company, as a majority-owned subsidiary of MTI, is licensed under
certain license agreements between MTI and third parties. The Company
makes payments to MTI relating to certain of such agreements. The
Company's rights under such agreements may terminate in the event that the
Company is no longer a majority-owned subsidiary of MTI. In the event of
any such termination, the inability of the Company independently to obtain
such rights on similar terms could have a material adverse effect on the
Company's business and results of operations.
International Operations
During fiscal 1997, 7% of the Company's net sales were attributable to
sales outside the United States compared to 10% for fiscal 1996. Although
the Company's international sales in fiscal 1997 were adversely affected by
a decrease in sales of its PC systems through distributors in Japan as the
Company initiated direct sales of PC systems through its Japanese call
center established in 1997, the Company believes international sales as a
percentage of total sales will increase in the future, particularly for PC
systems and contract manufacturing services. In marketing its PC systems
in foreign countries, the Company uses either direct selling or indirect
selling through distributors, depending on consumer preferences, local
infrastructure, language and marketing methods. There can be no assurance
that the Company's primary sales and marketing methods through the direct
sales channel in the Japanese call center will result in sales at levels
that meet or exceed past levels of sales to Japan experienced by the
Company. The Company continues to evaluate the benefits and risks
associated with overseas manufacturing for its PC and contract
manufacturing operations. There can be no assurance that the establishment
of the Japan operation or any other international expansion will be
successful, and any failure by the Company to achieve success in
international operations could have a material adverse effect on the
Company's business and results of operations. The Company's international
operations are subject to a number of other risks, including, without
limitation, fluctuations in the value of currencies, export duties, import
controls, trade barriers, restrictions on funds transfer, greater
difficulty in accounts receivable collections, political and economic
instability and compliance with foreign laws.
MTI Ownership of Common Stock of the Company
As of August 28, 1997, MTI owned 64% of the Company's outstanding common
stock. In addition, four of the eight directors of the Company are also
directors of MTI, including Steven R. Appleton, Chairman and Chief
Executive Officer of MTI. So long as MTI continues to own a majority of
the outstanding common stock of the Company, MTI will have the ability to
control the outcome of matters requiring shareholder approval, including
the election of directors, and generally will have the ability to control
the management and certain financial and other affairs of the Company.
Termination of certain of the Company's arrangements by MTI or MTI
exercising its control in negotiating arrangements resulting in terms less
favorable to the Company could adversely affect the Company's business and
results of operations. In the event that MTI's ownership of the Company
were to decrease below certain levels, certain of the Company's
arrangements with MTI could terminate, which could have a material adverse
effect on the Company's business and results of operations. See
"Intellectual Property Matters" and "SpecTek Memory Products
Operation Dependence on Component Recovery Agreement."
24
As a result of the level of MTI's ownership, only a limited percentage of
common stock of the Company is traded in the public market, which limits
the trading liquidity of the common stock of the Company and may limit the
Company's ability to complete future equity financings. The sale on the
open market of substantial amounts of shares of common stock of the Company
currently held by MTI could adversely affect the prevailing market price of
common stock of the Company. MTI's ability to sell shares of common stock
of the Company, unless registered under the Securities Act of 1933, as
amended (the "Securities Act"), is subject to volume and other restrictions
pursuant to Rule 145 promulgated under the Securities Act.
Dependence on Key Personnel
The future success of the Company will depend, in part, on its ability to
attract and retain key management, technical and sales and marketing
personnel. The Company attempts to enhance its management and technical
expertise by recruiting qualified individuals who possess desired skill
sets and experience in certain targeted areas. There is competition for
such personnel in the electronics industries, and the Company's inability
to retain employees and attract and retain sufficient additional employees,
particularly in the areas of information technology, engineering and
technical support resources, could have a material adverse effect on the
Company's business and results of operations. The Company does not
currently maintain "key man" life insurance with respect to any of its
employees. There can be no assurance that the Company will not lose key
personnel or that the loss of any key personnel will not have a material
adverse effect on the Company's business and results of operations.
Government Regulation
The Company is subject to a variety of federal, state, local and foreign
laws and regulations, including, but not limited to, Federal Communications
Commission regulations, governmental procurement regulations, import and
export regulations, Federal Trade Commission regulations, securities
regulations, environmental regulations, antitrust regulations, and labor
regulations. Any failure by the Company to comply with such regulations in
the past, present or future could subject the Company to liabilities and/or
the suspension of its operations, which could have a material adverse
effect on the Company's business and results of operations.
Personal Computer Systems
Competition in the PC Industry
The PC industry is highly competitive and has been characterized by
intense pricing pressure, generally low gross margin percentages, rapid
technological advances in hardware and software, frequent introduction of
new products, and rapidly declining component costs. Competition in the PC
industry is based primarily upon brand name recognition, performance,
price, reliability and service and support. The Company's sales of PC
systems has historically benefited from increased name recognition and
market acceptance of the Company's PC systems, primarily resulting from the
receipt by the Company of awards from trade publications recognizing the
price and performance characteristics of Micron brand PC systems and the
Company's service and support functions. As a result of PC industry
standards, the Company and its competitors use many of the same components,
typically from the same set of suppliers, which limits the Company's
ability to technologically and functionally differentiate its products.
The Company competes with a number of PC manufacturers which sell their
products primarily through direct channels, including Dell Computer, Inc.
and Gateway 2000, Inc. The Company also competes with PC manufacturers,
such as Apple Computer, Inc., Compaq Computer Corporation, Hewlett-Packard
Company, International Business Machines Corporation and Toshiba Corporation
among others, which have traditionally sold their products through national
and regional distributors, dealers and value added resellers, retail stores
and direct sales forces. In addition, the Company expects to face increased
competition in the U.S. direct sales market from foreign PC suppliers and
from foreign and domestic suppliers of PC products that decide to
implement, or devote additional resources to, a direct sales strategy. In
order to gain an increased share of the U.S. PC direct sales market, these
competitors may effect a pricing strategy that is more aggressive than the
current pricing in the direct sales market. Many of the Company's PC
competitors have greater brand name recognition, offer broader product
lines, have substantially greater financial, technical, marketing and other
resources than the Company and may benefit from component volume purchasing
and product and process technology license arrangements that are more
favorable in terms of pricing and availability than the Company's
arrangements. The failure of the Company to compete effectively in the
marketplace would have an adverse effect on the Company's business and
results of operations.
25
The Company believes that the rate of growth in worldwide sales of PC
systems, particularly in the United States, where the Company sells a
substantial majority of its PC systems, has declined and may remain below
the growth rates experienced in recent years. Any general decline in
demand or decline in the rate of increase in demand for PC systems could
increase price competition and could have a material adverse effect on the
Company's business and results of operations.
Inventory Management
The Company's ability to compete successfully in the PC market in the
future will depend in large part on its ability to effectively manage its
inventories of PC components. The Company's PC operations focus on the
direct sale of assemble-to-order PC systems that feature components
incorporating the latest technological developments in the PC industry.
The Company has experienced in the past, and could experience in the
future, inventory obsolescence resulting from, among other things, the fast
pace of technological developments in the PC industry and the short product
life cycles of PC systems and components. In addition, because high
volumes of quality components are required for the manufacture of the
Company's PC systems, the Company has experienced in the past, and expects
to experience in the future, shortages and other supply constraints of key
components. Such shortages or supply constraints have in the past
adversely affected, and could in the future adversely affect, the Company's
ability to ship products on schedule or at expected gross margins. To be
successful in the future, the Company must accurately anticipate demand for
its products and obtain adequate supplies of components to meet such
demand. The failure of the Company to manage its inventories effectively
could result in inventory obsolescence, excess inventories, component
shortages and untimely shipment of products, any of which could have a
material adverse effect on the Company's business and results of
operations.
Dependence on Key Sources of Supply
The Company focuses on providing PC systems that feature components and
software incorporating the latest technological developments in the PC
industry, which components are periodically in short supply and are
available from sole or a limited number of suppliers. As a result, the
Company has experienced in the past, and expects to experience in the
future, shortages in the components used in its PC systems. The
microprocessors used in the Company's PC systems are manufactured
exclusively by Intel and, from time to time, the Company has been unable to
obtain sufficient quantities of certain Intel microprocessors. In
addition, a significant portion of the RAM components used in the Company's
PC systems are supplied by MTI, and the Company generally relies on MTI to
supply the latest memory densities and configurations available. The
Company relies, to a certain extent, upon its suppliers' abilities to
enhance existing products in a timely and cost-effective manner, to develop
new products to meet changing customer needs and to respond to emerging
standards and other technological developments in the PC industry. The
Company's reliance on a limited number of suppliers and on a strategy of
incorporating the latest technological developments into its PC systems
involves several risks, including the possibility of shortages and/or
increases in costs of components and software, and risk of reduced control
over delivery schedules, which could have a material adverse effect on the
Company's business and results of operations.
The Company's TransPort notebook PC systems are currently assembled by
third-party manufacturers. These outsourcing arrangements and any future
outsourcing arrangements that the Company may enter into may reduce the
direct control the Company has over certain components and the assembly of
such products. There can be no assurance that the Company's outsourcing
arrangements will not result in quality problems or affect the Company's
ability to ship such products on a timely basis or the flexibility of the
Company to respond to changing market conditions. Moreover, although
arrangements with such manufacturers may contain provisions for warranty
obligations on the part of such manufacturers, the Company remains
primarily responsible to the consumer for warranty obligations. Any
unanticipated product defect or warranty obligation, whether pursuant to
arrangements with third-party manufacturers or otherwise, could adversely
affect the Company's business and results of operations.
26
NetFRAME Acquisition
In the fourth quarter of fiscal 1997, the Company acquired all of the
outstanding common stock of NetFRAME for $17.4 million in cash. NetFRAME
develops and markets enterprise-class multiprocessor servers offering
continuous availability and scalability while supporting industry standard
software. The acquisition was accounted for as a purchase, and the
purchase price was allocated to the net assets acquired, including
identified intangible assets and in-process research and development based
on their fair values. The Company is performing an ongoing evaluation
regarding the nature and scope of the operations of NetFRAME as well as
considering various short and long-term strategies as to whether and to
what extent integration, reconfiguration or other modification of the
Company's and NetFRAME's separate businesses is appropriate following the
acquisition. There can be no assurance the integration, reconfiguration or
other modification, if any, of NetFRAME will not have a material adverse
affect on the Company's business and results of operations. In addition,
there can be no assurance the Company will realize the anticipated benefits
associated with the acquisition, including, but not limited to, retention
of key personnel, acceptance of NetFRAME products in the market, increased
purchasing power, manufacturing efficiencies, technology, intellectual
property rights, increased market presence of a broader product offering
and economies of providing certain administrative support functions.
State Taxation
During the third quarter of fiscal 1997, the Company began to collect and
remit applicable sales or use taxes in nearly all states. In association
therewith, the Company is party to agreements with nearly all states which
generally limit the liability of the Company, if any, for non-remittance of
sales and use taxes prior to such agreements' effective dates. Management
believes the resolution of any matters relating to the non-remittance of
sales or use taxes prior to the balance sheet date will not have a material
adverse effect on the Company's business and results of operations.
Contract Manufacturing
Competition in the Contract Manufacturing Industry
The Company's contract manufacturing operation competes against numerous
domestic and offshore contract manufacturers, including a significant
number of local and regional companies. In addition, the Company competes
against in-house manufacturing capabilities of certain of its existing
customers as well as with certain large computer manufacturers which offer
third-party contract manufacturing services. The Company's contract
manufacturing competitors include, among others, Avex Electronics, Inc.,
Benchmark Electronics, Inc., Celestica Inc., DOVAtron International, Inc.,
Flextronics International, Group Technologies Corporation, Jabil Circuits,
Inc., Sanmina Corporation, SCI Systems, Inc. and Solectron Corporation.
Many of the Company's competitors have substantially greater manufacturing,
technical, financial, personnel, marketing and other resources than the
Company and have manufacturing operations at multiple domestic and overseas
locations.
The Company believes that the significant competitive factors in the
contract manufacturing industry include service, quality, price,
technology, location and the ability to offer flexible delivery schedules
and deliver finished products on an expeditious and timely basis in
accordance with customers' expectations. The Company may be at a
disadvantage as to certain competitive factors when compared to
manufacturers with greater resources than the Company, substantial offshore
facilities or larger domestic facilities. While the Company recently began
operation of its first foreign contract manufacturing facility, there can
be no assurance that the Company's contract manufacturing operation will
compete successfully in the future with regard to these factors. In order
to remain competitive, the Company may be required to expand its contract
manufacturing capacity and may be required to establish additional
international operations. There can be no assurance that the Company will
be successful in expanding its contract manufacturing operation on a timely
and efficient basis, or at all. The failure to do so could have a material
adverse effect on the Company's business and results of operations.
27
Customer Concentration
Revenue from the Company's top five contract manufacturing customers in
1997 was 74% of total contract manufacturing revenue compared to 69% and
58% in 1996 and 1995, respectively. Revenue from the Company's largest
contract manufacturing customer represented 33% of the Company's total
contract manufacturing revenue in 1997. Revenue from the Company's largest
contract manufacturing customer in 1996 and 1995 represented 36% and 20%,
respectively, of the Company's total contract manufacturing revenue.
Contract manufacturing revenue from MTI was 5% of total contract
manufacturing revenue in 1997 compared to 8% in 1996 and 13% in 1995. The
Company expects to continue to experience a high degree of contract
manufacturing customer concentration.
The Company has no long-term agreements with any of its contract
manufacturing customers. The Company believes that its key contract
manufacturing customers may from time to time materially reduce their
purchases of the Company's contract manufacturing services in the future.
Although the Company has generally in the past been able to replace such
business with increased business from new or existing customers, there can
be no assurance that the Company will obtain sufficient alternative
business on a timely basis, and the failure to obtain such business could
have a material adverse effect on the Company's business and results of
operations.
Fluctuations in OEM Orders
The Company's contract manufacturing customers generally require short
delivery cycles and quick turnaround for contract manufacturing services.
As the Company's OEM customers react to variations in demand for their
products and adjust their purchase orders to the Company, the Company may
be subject to non-cancelable purchase orders with its suppliers and may
recognize losses on write downs of inventories due primarily to the
specialized nature of certain custom components and declines in market
pricing of components. Changes in OEM orders have had an adverse effect on
the Company's contract manufacturing operation in the past and there can be
no assurance that the Company will not experience such adverse effects in
the future.
SpecTek Semiconductor Memory Products Operation
Dependence on Component Recovery Agreement with MTI
Historically, a substantial majority of the components used in the
Company's SpecTek semiconductor memory products operation has been obtained
from MTI. The Company and MTI are parties to a Component Recovery
Agreement, effective as of August 30, 1996 (the "Component Recovery
Agreement"), under which MTI is required to deliver to the Company all of
the nonstandard DRAM components produced at MTI's semiconductor
manufacturing operations. The Company's cost of such components generally
is determined as one-half of the operating income generated from the
Company's SpecTek sales of semiconductor memory products supplied by MTI.
There can be no assurance that MTI will continue to produce adequate
volumes of nonstandard DRAM components to maintain the Company's SpecTek
semiconductor memory products operation at existing or historic levels.
The Component Recovery Agreement, which expires August 31, 2000, may be
terminated earlier by MTI in the event that MTI's ownership of the Company
falls below 30%. Expiration, termination or renegotiation of the Component
Recovery Agreement could have a material adverse effect on the Company's
business and results of operations. Changes in MTI's semiconductor
manufacturing processes resulting in improvement of device yields and/or
changes in the product mix or specifications of its memory components, or
other changes or events at MTI adversely affecting its overall
manufacturing output, could adversely affect the volume of nonstandard DRAM
components supplied by MTI.
Many semiconductor memory manufacturers are reluctant to sell nonstandard
DRAM components because such components could compete with their full
specification DRAM components for similar applications. In addition, some
manufacturers are concerned that subsequent testing performed by a recovery
operation could reveal proprietary data regarding manufacturing yields and
processes. As a result, there can be no assurance that the Company will be
able to obtain nonstandard DRAM components from semiconductor manufacturers
in quantities sufficient to meet demand for the Company's SpecTek products.
Any reduction in the availability or functionality of nonstandard DRAM
components from the Company's suppliers could have a material adverse
effect on the Company's business and results of operations.
28
Pricing of DRAM Products
Pricing for the Company's SpecTek semiconductor memory products
fluctuates, to a large degree, based on industry-wide pricing for
semiconductor memory products. The Company has experienced significant
declines in the average selling prices of its SpecTek semiconductor memory
products as industry-wide average selling prices for full specification
semiconductor memory products experienced a sharp decline. The Company
believes that such decline in average selling prices of semiconductor
memory products was due primarily to changes in the balance of supply and
demand for these commodity products, and the Company is unable to predict
the impact of semiconductor memory product market dynamics in future
periods. Due to increased market risk associated with holding purchased
memory components in inventory, the Company has experienced in the past,
and may experience in the future, losses from write downs of memory
component inventories in periods of declining prices. Further declines in
pricing for semiconductor memory products would likely result in declines
in average selling prices of the Company's SpecTek semiconductor memory
products, which could have a material adverse effect on the Company's
business and results of operations.
29
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Statements:
Statements of Operations for the Fiscal Years Ended
August 28, 1997, August 29, 1996 and August 31, 1995 31
Balance Sheets as of August 28, 1997 and August 29, 1996 32
Statements of Shareholders' Equity for the Fiscal Years
Ended August 28, 1997, August 29, 1996 and August 31,
1995 33
Statements of Cash Flows for the Fiscal Years Ended August
28, 1997, August 29, 1996 and August 31, 1995 34
Notes to Financial Statements 35
Report of Independent Accountants 48
Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts for the Fiscal
Years Ended August 28, 1997, August 29, 1996 and August
31, 1995 52
30
Micron Electronics, Inc.
Statements of Operations
(Amounts in thousands, except per share amounts)
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
- -------------------------------------------------------------------------------
Net sales $1,955,783 $1,764,920 $ 999,999
Cost of goods sold 1,618,037 1,503,735 816,662
---------- ---------- ----------
Gross margin 337,746 261,185 183,337
Selling, general and
administrative 191,667 152,937 74,951
Research and development 9,621 3,050 1,893
Restructuring charge - 29,200 -
---------- ---------- ----------
Operating income 136,458 75,998 106,493
Interest income, net 7,896 3,639 1,983
---------- ---------- ----------
Income before taxes 144,354 79,637 108,476
Income tax provision 57,092 35,055 43,390
---------- ---------- ----------
Net income $ 87,262 $ 44,582 $ 65,086
========== ========== ==========
Earnings per share $0.92 $0.48 $0.74
Number of shares used in per
share calculation 94,621 92,495 87,422
The accompanying notes are an integral part of the financial statements.
31
Micron Electronics, Inc.
Balance Sheets
(Dollars in thousands, except par value amounts)
As of August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $183,935 $115,839
Liquid investments 10,068 -
Receivables 223,476 176,547
Inventories 115,501 69,863
Deferred income taxes 26,240 35,014
Other current assets 3,928 1,853
-------- --------
Total current assets 563,148 399,116
Property, plant and equipment, net 191,536 129,192
Other assets 3,662 1,625
-------- --------
Total assets $758,346 $529,933
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $304,608 $247,044
Accrued licenses and royalties 36,034 27,242
Current debt 18,622 3,064
-------- --------
Total current liabilities 359,264 277,350
Long-term debt 20,019 18,233
Deferred income taxes 86 2,436
Other liabilities 13,406 3,454
-------- --------
Total liabilities 392,775 301,473
-------- --------
Commitments and contingencies
Common stock, $.01 par value, authorized
150.0 million shares; issued and outstanding
95.6 million and 92.5 million shares,
respectively 956 925
Additional capital 120,108 69,392
Retained earnings 245,139 158,143
Cumulative foreign currency translation adjustment (632) -
-------- --------
Total shareholders' equity 365,571 228,460
-------- --------
Total liabilities and shareholders' equity $758,346 $529,933
======== ========
The accompanying notes are an integral part of the financial statements.
32
Micron Electronics, Inc.
Statements of Shareholders' Equity
(Dollars and shares in thousands)
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------
COMMON STOCK
MCI Class A:
Balance at beginning
of year 988 $ 79
Purchase and retirement
of stock (16) (1)
Merger transaction (972) (78)
------ --------
Balance at end of year - $ -
====== ========
Class B:
Balance at beginning
of year 470 $ 286
Stock sold 7 67
Purchase and retirement
of stock (90) (55)
Merger transaction (387) (298)
------ --------
Balance at end of year - $ -
====== ========
MCMS:
Balance at beginning
of year 1,849 $ 185
Merger transaction (1,849) (185)
------ --------
Balance at end of year - $ -
====== ========
MEI:
Balance at beginning
of year 92,473 $ 925 91,431 $ 914 - $ -
Stock sold 3,135 31 136 1 - -
Stock award - - 151 2 - -
Purchase and retirement
of stock (127) (1) (238) (2) (16) -
Stock options 74 1 993 10 84 1
Merger transaction - - - - 91,363 913
------ -------- ------ -------- ------ --------
Balance at end of year 95,555 $ 956 92,473 $ 925 91,431 $ 914
====== ======== ====== ======== ====== ========
ADDITIONAL CAPITAL
Balance at beginning
of year $ 69,392 $ 58,613 $ 14,662
Stock sold 49,895 1,283 -
Stock award - 1,298 -
Purchase and retirement
of stock (108) (156) (11)
Stock options 713 997 464
Tax effect of stock
purchase plans 216 7,357 710
Merger transaction - - 42,788
-------- -------- --------
Balance at end of year $120,108 $ 69,392 $ 58,613
======== ======== ========
RETAINED EARNINGS
Balance at beginning
of year $158,143 $114,136 $ 52,957
Purchase and retirement
of stock (266) (575) (824)
Merger transaction - - (3,083)
Net income 87,262 44,582 65,086
-------- -------- --------
Balance at end of year $245,139 $158,143 $114,136
======== ======== ========
The accompanying notes are an integral part of the financial statements.
33
Micron Electronics, Inc.
Statements of Cash Flows
(Amounts in thousands)
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 87,262 $ 44,582 $ 65,086
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation and amortization 35,399 22,226 13,158
Write-off of purchased
in-process research and
development 3,938 - -
Restructuring charge - 29,200 -
Changes in assets and
liabilities, net of
acquisition and merger
transaction:
Receivables (41,608) (48,478) (56,049)
Inventories (37,077) 8,382 (34,052)
Deferred income taxes 15,797 (14,382) (3,634)
Accounts payable and
accrued expenses 59,111 66,592 62,377
Accrued licenses and
royalties 8,793 9,165 14,411
Other (1,501) 525 (942)
--------- --------- ---------
Net cash provided by operating
activities 130,114 117,812 60,355
CASH FLOWS FROM INVESTING
ACTIVITIES
Expenditures for property, plant
and equipment (105,752) (90,122) (39,585)
Proceeds from sales of property,
plant and equipment 3,913 6,354 528
Purchases of available-for-sale
and held-to-maturity
investment securities (10,073) - (3,165)
Proceeds from maturities of
investment securities - - 5,400
Acquisition of NetFRAME, net of
cash acquired (16,068) - -
Cash acquired in merger
transaction - - 14,060
Other (915) 21 (439)
--------- --------- ---------
Net cash used for investing
activities (128,895) (83,747) (23,201)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from debt 21,799 42,770 -
Repayments of debt (4,874) (31,969) (1,022)
Proceeds from issuance of common
stock 50,640 2,300 398
Purchase and retirement of stock (375) (733) (891)
Other (313) - (1,281)
--------- --------- ---------
Net cash provided by (used for)
financing activities 66,877 12,368 (2,796)
--------- --------- ---------
Net increase in cash and cash
equivalents 68,096 46,433 34,358
Cash and cash equivalents at
beginning of year 115,839 69,406 35,048
--------- --------- ---------
Cash and cash equivalents at end
of year $ 183,935 $ 115,839 $ 69,406
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 50,997 $ 36,076 $ 45,277
Interest paid, net of amounts
capitalized 776 253 412
Noncash investing and financing
activities:
Reclassification of current
liabilities to non-current
liabilities 9,600 3,768 -
Assets acquired, net of cash
and liabilities assumed,
in merger transaction - - 25,998
The accompanying notes are an integral part of the financial statements.
34
Micron Electronics, Inc.
Notes to Financial Statements
(Tabular amounts in thousands)
SIGNIFICANT ACCOUNTING POLICIES
Business: Micron Electronics, Inc. and its subsidiaries manufacture
electronic products and provide services for a wide range of computer and
digital applications. The Company is a leading provider of PC systems
through the direct sales channel in the United States and develops,
markets, manufactures and supports PC systems for consumer, business,
government and educational use. In addition, the Company is a supplier of
multi-processor network servers for enterprise, remote office and
distributed computing environments under the NetFRAME brand name. The
Company's contract manufacturing operation, Micron Custom Manufacturing
Services, Inc. ("CMS"), specializes in the design, assembly and test of
custom complex printed circuit boards, memory modules and system level
products for original equipment manufacturers. The Company's SpecTek
semiconductor memory products operation processes and markets various grades
of memory products under the SpecTek brand name. The contract manufacturing
and semiconductor memory products operations sell a significant amount of
products and services to original equipment manufacturers in diverse areas
of the electronics industry.
Basis of presentation: The financial statements include the accounts of
Micron Electronics, Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The Company's
fiscal year is the 52 or 53 week period ending on the Thursday closest to
August 31. As of August 28, 1997, the Company was 64% owned by Micron
Technology, Inc. ("MTI").
Certain concentrations and use of estimates: Certain components,
subassemblies and software included in the Company's PC systems are
obtained from sole suppliers or a limited number of suppliers. The Company
relies, to a certain extent, upon its suppliers' abilities to enhance
existing products in a timely and cost-effective manner, to develop new
products to meet changing customer needs and to respond to emerging
standards and other technological developments in the PC industry. The
Company's reliance on a limited number of suppliers involves several risks,
including the possibility of shortages and/or increases in costs of
components and subassemblies, and the risk of reduced control over delivery
schedules.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Although actual results could differ from those estimates, management
believes its estimates are reasonable.
Revenue recognition: Revenue from product sales to customers is
generally recognized upon shipment. A provision for estimated sales
returns is recorded in the period in which the sales are recognized. The
Company defers recognition of sales to distributors with certain return
privileges until the distributors have sold the products.
Earnings per share: Earnings per share is computed using the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares result from the assumed exercise of outstanding stock
options and affect earnings per share when they have a dilutive effect.
All historical per share amounts have been restated to reflect the effect
of the merger transaction (see "The MEI Merger").
Financial instruments: Cash equivalents include highly liquid short-
term investments with original maturities of three months or less, readily
convertible to known amounts of cash. The amounts reported as cash
equivalents, liquid investments, receivables, other assets, accounts
payable and accrued expenses and debt are considered by the Company to be
reasonable approximations of their fair values, based on information
available to management as of August 28, 1997. The use of different
assumptions could have a material effect on the estimated fair value
amounts. The reported fair values do not take into consideration potential
taxes or other expenses that would be incurred in an actual settlement.
35
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and cash
equivalents, investment securities and trade accounts receivable. The
Company invests its cash in credit instruments of highly rated financial
institutions and performs periodic evaluations of the credit standing of
these financial institutions. The Company, by policy, limits the
concentration of credit exposure by restricting investments with any single
obligor, instrument, or geographic area. A concentration of credit risk
may exist with respect to trade receivables, as many of the Company's
customers are affiliated with the computer, telecommunications and office
automation industries. The Company has a large number of customers on
which it performs ongoing credit evaluations and generally does not require
collateral from its customers. Historically, the Company has not
experienced significant losses related to receivables from individual
customers or groups of customers in any particular industry or geographic
area.
Inventories: Inventories are stated at the lower of average cost or
market.
Property, plant and equipment: Property, plant and equipment, including
software, are stated at cost. Depreciation is computed using the straight-
line method over the estimated useful lives of 5 to 30 years for buildings
and 2 to 5 years for equipment.
Product and process technology: Costs related to the conceptual
formulation and design of products and processes are expensed as research
and development. Costs incurred to establish patents and acquire product
and process technology are capitalized. Capitalized costs are amortized
using the straight-line method over the shorter of the estimated useful
life of the technology, the patent term, or the agreement, ranging up to 10
years.
Royalties: The Company has royalty-bearing license agreements that
allow it to sell certain hardware and software and to use certain patented
technology. Royalty costs are accrued and included in cost of goods sold
when the sale is recognized.
Advertising: Advertising costs are charged to operations as incurred.
Foreign currency: The Company uses the U.S. Dollar as its functional
currency, except for its operations in Japan and Malaysia. The assets and
liabilities of the Company's Japanese and Malaysian operations are
translated into U.S. Dollars at exchange rates in effect at the balance
sheet date. Income and expense items are translated at the average
exchange rates prevailing during the period. Aggregate transaction gains
and losses included in the determination of net income are not material for
any period presented.
Recently issued accounting standards: In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128
supersedes and simplifies the standards for computing earnings per share
previously found in Accounting Principles Board Opinion No. 15, "Earnings
Per Share," and interpretations thereof, and makes them comparable to
international earnings per share standards. This statement is expected to
be adopted by the Company effective in its second quarter of fiscal 1998.
The Company does not expect earnings per share as calculated under SFAS 128
to be materially different than calculated under the Company's existing
methodology.
36
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
THE MEI MERGER
On April 7, 1995, Micron Computer, Inc. ("MCI") and the former Micron
Custom Manufacturing Services, Inc. ("MCMS"), then subsidiaries of MTI,
merged with and into ZEOS International, Ltd. ("ZEOS") (the "MEI Merger").
Pursuant to the terms of the MEI Merger, ZEOS issued 82.5 million shares of
its common stock in exchange for all of the outstanding shares of MCI and
MCMS, and the name of the surviving corporation was changed to Micron
Electronics, Inc. The MEI Merger resulted in a change of control of 89% of
ZEOS wherein, assuming exercise of all options outstanding at the time of
the MEI Merger, (a) MTI owned an approximate 79% interest in the Company,
and (b) the other shareholders of MCI and MCMS owned an approximate 10%
interest in the Company. The MEI Merger was accounted for as a purchase of
ZEOS by MCI and MCMS. A new basis of accounting was established for the
assets and liabilities of ZEOS to the extent of the change of control. The
new basis reflects the allocation of the $39.1 million basis to the ZEOS
assets and liabilities on the basis of their fair values. Goodwill of
$14.6 million was recorded to the extent the purchase price exceeded the
fair value of the identifiable net assets for which a change of control
occurred. Goodwill was being amortized on a straight line basis over three
years. In the second quarter of fiscal 1996, the remaining goodwill was
written off in connection with a restructuring charge recorded by the
Company (see "Restructuring Charge").
The Company's fiscal year is a 52 or 53 week period ending on the
Thursday closest to August 31, which was the fiscal year of MCI and MCMS.
Subsequent to the MEI Merger, the financial statements of the Company
reflect the consolidated results of operations, financial position and cash
flows of the Company, based on the new basis of accounting for the assets
and liabilities of ZEOS and the historical cost bases for the assets and
liabilities of MCI and MCMS. Prior to the MEI Merger, the financial
statements of the Company include only the combined results of operations,
financial position and cash flows of MCI and MCMS.
ACQUISITION OF NETFRAME SYSTEMS INCORPORATED
In the fourth quarter of fiscal 1997, the Company acquired all of the
outstanding common stock of NetFRAME Systems Incorporated ("NetFRAME") for
$17.4 million in cash. NetFRAME develops and markets enterprise-class
multiprocessor servers offering continuous availability and scalability
while supporting industry standard software. The acquisition was accounted
for as a purchase, and the purchase price was allocated to the net assets
acquired, including identified intangible assets and in-process research
and development, based on their fair values. The Company's results of
operations for 1997 include the results of operations of NetFRAME since the
July 18, 1997 acquisition date.
The fair value of NetFRAME's technology was determined by an independent
appraiser through an analysis using a risk adjusted cash flow model, under
which estimated future cash flows derived from the technology or products
incorporating the technology were discounted taking into account risks
related to existing and future markets and assessment of the life
expectancy of such technology. Technology was segregated into that which
was determined to be completed (those currently technologically feasible
but that may require adjustments or relatively minor enhancements) and in
process (technologies that require additional research and development
efforts to reach technological feasibility). The analysis resulted in the
allocation of $0.8 million of purchase price to completed technology, which
was capitalized and is being amortized using the straight-line method over
the estimated useful life of 30 months. In-process research and
development was valued by an independent appraiser using the same
methodology as completed technology. Estimated future cash flows
associated with in-process research and development were discounted
considering risks and uncertainties related to the viability, work required
to establish feasibility, and to the completion of products that will
ultimately be marketed by the Company. The analysis resulted in the
allocation of $3.9 million of purchase price to in-process research and
development. In management's opinion, the acquired in-process research and
development had not yet reached a stage where feasibility, delivery or
product features were certain at July 18, 1997 and had no alternative
future use. As a result, acquired in-process research and development was
charged to expense during the fourth quarter of fiscal 1997. Additionally,
$0.6 million of purchase price was allocated to other identified intangible
assets, which were capitalized and are being amortized using the straight-
line method over the estimated useful lives of 30 months.
37
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
The following unaudited pro forma information reflects the results of the
Company's operations for the years ended August 28, 1997 and August 29,
1996 as if the acquisition of NetFRAME had occurred at the beginning of
fiscal 1997 and at the beginning of fiscal 1996, after giving effect to
certain adjustments, including amortization of acquired technology,
depreciation and related income tax effects. The pro forma adjustments
exclude the effect of the nonrecurring charge of $3.9 million for
purchased in-process research and development recorded by the Company in
fiscal 1997 following consummation of the acquisition. These pro forma
results have been prepared for comparative purposes only and do not purport
to be indicative of what operating results would have been had the acquisition
actually taken place at the beginning of fiscal 1997 or at the beginning of
fiscal 1996 or operating results which may occur in the future.
Fiscal year ended August 28, 1997 August 29, 1996
-----------------------------------------------------------------------------
Pro forma:
Net sales $2,004,279 $1,832,943
Gross margin 346,713 297,550
Net income 65,093 40,304
Earnings per share 0.69 0.44
RESTRUCTURING CHARGE
In February 1996, the Company adopted a plan to discontinue the
manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operations in Minneapolis, Minnesota. As a result, the
Company recorded a restructuring charge of $29.2 million ($22.4 million, or
$0.24 per share, net of taxes) in fiscal 1996. The restructuring charge
included $14.5 million related to the disposition of inventory of
discontinued product lines, the write-off of $11.4 million of goodwill
which resulted from the MEI Merger, $1.1 million for other asset write-
downs, $0.6 million related to personnel costs and $1.6 million related to
other exit costs.
INVESTMENT SECURITIES
August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
Held to maturity investment securities,
at amortized cost:
Commercial paper $ 72,685 $ 30,437
State and local government 45,235 24,650
U.S. Government agency 39,257 7,813
Bankers' acceptances 3,767 11,976
--------- ---------
160,944 74,876
Less cash equivalents (150,876) (74,876)
--------- ---------
Liquid investments $ 10,068 $ -
========= =========
Securities classified as held-to-maturity have remaining maturities
within one year.
38
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
RECEIVABLES
August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
Trade receivables $228,220 $171,820
Receivables from affiliates, net 4,227 2,526
Income taxes recoverable from MTI 1,377 5,147
Other 4,341 7,363
Allowance for doubtful accounts (7,556) (8,221)
Allowance for returns and discounts (7,133) (2,088)
-------- --------
$223,476 $176,547
======== ========
INVENTORIES
August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
Raw materials and supplies $ 81,505 $ 45,949
Work in progress 11,601 13,239
Finished goods 22,395 10,675
-------- --------
$115,501 $ 69,863
======== ========
PROPERTY, PLANT AND EQUIPMENT
August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
Land $ 1,639 $ 1,639
Buildings 44,403 17,647
Equipment and software 167,413 120,393
Assets in progress 42,586 35,398
-------- --------
256,041 175,077
Less accumulated depreciation and amortization (64,505) (45,885)
-------- --------
$191,536 $129,192
======== ========
During the third quarter of fiscal 1996, the Company purchased
approximately 30 acres of land adjacent to its PC manufacturing operations
from a director of the Company and a third party for approximately
$575,000.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
Trade accounts payable $237,066 $157,350
Payable to affiliates 10,971 25,829
Salaries, wages and benefits 26,006 16,168
Income taxes payable 2,193 14,526
Income taxes payable to MTI - 1,300
Equipment contracts payable 2,139 7,955
Accrued warranty 12,988 7,905
Other 13,245 16,011
-------- --------
$304,608 $247,044
======== ========
39
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
DEBT
August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
Notes payable in periodic installments
through September 2001, weighted average
interest rate of 7.52% and 7.52%, respectively $ 22,644 $ 21,261
Capitalized lease obligations payable in
monthly installments through June 2000,
interest rate of 7.28% and 7.18%, respectively 5,881 36
Amounts outstanding under revolving loan
agreement, due June 1998, variable interest of
0.90% at August 28, 1997 9,283 -
Amounts outstanding under revolving loan
agreement, due May 1998, variable interest of
7.63% at August 28, 1997 833 -
-------- --------
38,641 21,297
Less current portion (18,622) (3,064)
-------- --------
$ 20,019 $ 18,233
======== ========
The Company has an unsecured credit agreement, expiring June 2000, with a
group of financial institutions providing for borrowings totaling $130.0
million. As of August 28, 1997, the Company was eligible to borrow the
full amount under the agreement, but had no borrowings outstanding. Under
the agreement, the Company is subject to certain financial and other
covenants including certain financial ratios and limitations on the amount
of dividends declared or paid by the Company.
During the fourth quarter of fiscal 1997, the Company's wholly-owned
subsidiary, Micron Electronics Japan K.K., entered into an unsecured
revolving credit facility with a financial institution, expiring June 1998,
providing for borrowings of up to 1.5 billion Japanese yen (US$12.7 million
at August 28, 1997). As of August 28, 1997, there was US$9.3 million
outstanding under the agreement.
During the third quarter of fiscal 1997, the Company's wholly-owned
subsidiary, CMS, entered into a revolving loan agreement with a financial
institution, expiring May 2007, providing for borrowings of up to $15.0
million and subject to certain financial and other covenants. Amounts
outstanding under the agreement are collateralized by certain real
property. Under the terms of the agreement, the amount available to CMS
decreases by $1.0 million per year beginning May 1998. As of August 28,
1997, CMS was eligible to borrow the full amount under the agreement and
had $0.8 million outstanding.
Certain of the Company's notes payable are collateralized by equipment
with a total cost of $44.9 million and accumulated depreciation of $6.1
million as of August 28, 1997. Equipment under capital leases, and
accumulated amortization thereon, were $6.4 million and $0.4 million,
respectively, as of August 28, 1997. Maturities of debt are as follows:
Revolving
Notes Capital Credit
Fiscal year Payable Leases Agreements
---------------------------------------------------------------
1998 $ 6,577 $ 2,376 $ 10,116
1999 6,345 2,360 -
2000 4,824 1,770 -
2001 4,806 - -
2002 92 - -
Less interest - (625) -
-------- -------- --------
$ 22,644 $ 5,881 $ 10,116
======== ======== ========
Interest income is net of approximately $1,075,000, $176,000 and $426,000
of interest expense in 1997, 1996 and 1995, respectively. Construction
period interest of approximately $981,000, $326,000 and $119,000 was
capitalized in 1997, 1996 and 1995, respectively.
40
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
STOCK PURCHASE AND INCENTIVE PLANS
The Company's 1995 Stock Option Plan provides for the granting of
incentive and nonstatutory stock options. As of August 28, 1997, there
were 5,000,000 shares of common stock reserved for issuance under the plan.
The Company's Board of Directors has approved reserving an additional 5,000,000
shares of common stock for the plan, subject to shareholder approval.
Exercise prices of the incentive and nonstatutory stock options have
generally been 100% and 85%, respectively, of the fair market value of the
Company's common stock on the date of grant. Options are granted subject
to terms and conditions determined by the Board of Directors, and generally
are exercisable in increments of 20% for each year of employment beginning
one year from date of grant and generally expire six years from date of
grant. ZEOS had a stock option plan prior to the MEI Merger for which
granting of options was suspended after the MEI Merger.
The Company's 1995 Employee Stock Purchase Plan allows eligible employees
of the Company to purchase shares of common stock through payroll
deductions. The shares can be purchased for 85% of the lower of the
beginning or ending fair market value of each six month offering period and
are restricted from resale for a period of one year from the date of
purchase. Purchases are limited to 20% of an employee's eligible
compensation. A total of 2,500,000 shares are reserved for issuance under
the plan, of which approximately 271,000 shares had been issued as of
August 28, 1997.
Option activity under the Company's option plans are summarized as
follows (amounts in thousands, except per share amounts):
August 28, Weighted August 29, Weighted August 31, Weighted
Fiscal year ended 1997 Average Price 1996 Average Price 1995 Average price
----------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 1,908 $13.70 1,795 $ 8.22 - $ -
Granted 1,926 19.90 1,294 12.11 747 18.06
Merger transaction - - - - 1,140 1.43
Exercised (75) 9.49 (992) 1.02 (84) 3.93
Terminated or canceled (200) 16.52 (189) 17.35 (8) 3.80
----- ----- -----
Outstanding at end of
year 3,559 16.98 1,908 13.70 1,795 8.22
===== ====== ===== ====== ===== ======
Exercisable at end
of year 473 $14.45 172 $13.84 884 $ 0.88
===== ====== ===== ====== ===== ======
Available for future
grants 1,416 3,141 4,253
===== ===== =====
The following table summarizes information about the Company's stock
options outstanding as of August 28, 1997 (amounts in thousands, except per
share amounts):
Options Outstanding Options Exercisable
----------------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------- -------------- ----------- --------------
below $5.00 20 1.25 years $3.00 20 $3.00
$5.00-$10.00 11 4.58 years 9.43 4 9.39
$10.01-$15.00 1,119 4.69 years 11.85 202 11.56
$15.01-$20.00 1,658 5.04 years 18.39 243 17.73
above $20.00 751 5.38 years 22.02 4 23.83
In December 1994, ZEOS awarded shares of its common stock to certain of
its employees subject to their continued employment as of January 1, 1996.
Compensation expense was recognized over the vesting period based upon the
fair market value of the stock at the date of award. To satisfy this
award, the Company issued approximately 151,000 shares of the Company's
common stock in January 1996.
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." The Company continues to
measure compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by APB No. 25,
"Accounting for Stock Issued to Employees."
41
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
The fair value of options at date of grant was estimated using the Black-
Scholes options pricing model. The weighted average assumptions and
resulting fair values at date of grant for options granted during 1997 and
1996 follow:
Stock Option Employee Stock
Plan Shares Purchase Plan Shares
1997 1996 1997 1996
- -------------------------------------------------------------------------------
Assumptions:
Expected life 3.5 years 3.5 years 0.5 years 0.5 years
Risk-free interest rate 6.2% 5.9% 5.0% 5.1%
Expected volatility 70.0% 70.0% 70.0% 70.0%
Dividend yield 0.0% 0.0% 0.0% 0.0%
Weighted average fair values:
Exercise price equal to market
price $10.68 $6.50 - -
Exercise price less than market
price 11.41 6.61 $5.39 $3.68
Stock based compensation costs would have reduced pretax income by $6.5
million and $1.3 million in 1997 and 1996, respectively ($4.0 million and
$0.8 million and $0.04 and $0.01 per share, respectively, net of taxes), if
the fair values of all options granted during 1997 and 1996 had been
recognized as compensation expense on a straight-line basis over the
vesting period of the grants. The pro forma effect on net income for 1997
and 1996 is not representative of the pro forma effect on net income in
future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1996.
RETIREMENT PLAN
The Company has a 401(k) retirement plan (the "RAM Plan") in which
substantially all employees participate. Under the RAM Plan, which is
administered by MTI, employees may contribute from 2% to 16% of eligible
pay to various savings alternatives. The RAM Plan provides for an annual
match by the Company of the first $1,500 of eligible employee contributions
and for additional contributions by the Company based on the Company's
financial performance. The Company's expense pursuant to the RAM Plan was
approximately $4,311,000, $3,051,000 and $1,062,000 in 1997, 1996 and 1995,
respectively.
42
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
TRANSACTIONS WITH AFFILIATES
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
-----------------------------------------------------------------------------
Net sales $ 26,791 $ 46,579 $ 32,417
Inventory purchases 82,337 198,753 177,402
Component recovery agreement
expenses 44,534 - -
Revenue sharing expenses - 49,645 72,889
Administrative services and
other expenses 934 1,680 917
Property, plant and equipment
purchases 930 574 5,647
Property, plant and equipment
sales 575 9 -
Construction management services 749 940 112
Revenue sharing expense is a component of cost of goods sold and reflects
expenses incurred under a revenue sharing agreement, wherein, for the
nonstandard semiconductor components supplied by MTI, the Company paid MTI
an amount equal to one-half the price realized from sales of such
components.
During the fourth quarter of fiscal 1996, the Company entered into a new
component recovery agreement with MTI, effective August 30, 1996 and
expiring August 31, 2000. The new agreement replaces the revenue sharing
agreement. Pursuant to the component recovery agreement, the Company
generally will pay to MTI an amount equal to one-half of the operating
income generated from sales of such components.
COMMITMENTS
As of August 28, 1997, the Company had commitments of $28.2 million for
equipment purchases and $4.1 million for construction of buildings. In
addition, the Company is required to make minimum royalty payments under
certain agreements and periodically enters into purchase commitments with
certain suppliers.
The Company leases various office and production facilities and certain
other property and equipment, under operating lease agreements expiring
through 2003, with renewals thereafter at the option of the Company.
Future minimum lease payments total approximately $14,296,000 and are as
follows: $3,940,000 in 1998, $3,306,000 in 1999, $3,057,000 in 2000,
$2,457,000 in 2001 and $1,536,000 in 2002.
Rental expense was approximately $3,620,000, $2,405,000 and $1,026,000 in
1997, 1996 and 1995, respectively.
43
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
INCOME TAXES
The Company was included in the consolidated U.S. federal income tax
return of MTI until June 1996, at which time the Company became a separate
taxpayer. For all periods presented, the provision for income taxes is
computed as if the Company were a separate taxpayer, and consists of the
following:
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
-----------------------------------------------------------------------------
Current:
U.S. federal $ 34,722 $ 44,128 $ 38,548
State 6,573 5,309 7,691
-------- -------- --------
41,295 49,437 46,239
-------- -------- --------
Deferred:
U.S. federal 13,625 (11,923) (570)
State 2,172 (2,459) (2,279)
-------- -------- --------
15,797 (14,382) (2,849)
-------- -------- --------
Income tax provision $ 57,092 $ 35,055 $ 43,390
======== ======== ========
The tax benefit associated with nonstatutory stock options and
disqualifying dispositions by employees of shares issued under the
Company's and MTI's stock plans reduced taxes payable by approximately
$216,000, $7,357,000 and $710,000 for 1997, 1996 and 1995, respectively.
Such benefits are credited to additional capital.
A reconciliation between the income tax provision and income tax computed
using the federal statutory rate follows:
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
-----------------------------------------------------------------------------
U.S. federal income tax at
statutory rate $ 50,524 $ 27,873 $ 37,967
State taxes, net of federal
benefit and state tax credits 4,777 2,254 4,592
In-process research and
development 1,378 - -
Goodwill - 4,935 776
Other 413 (7) 55
-------- -------- --------
$ 57,092 $ 35,055 $ 43,390
======== ======== ========
44
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes
at enacted tax rates. Deferred income tax assets totaled approximately
$38,750,000 and $38,903,000 and liabilities totaled approximately
$12,596,000 and $6,325,000 at August 28, 1997 and August 29, 1996,
respectively. The tax effects of temporary differences and carryforwards
which give rise to the net deferred tax assets are as follows:
As of August 28, 1997 August 29, 1996
-----------------------------------------------------------------------------
Current deferred tax asset:
Receivables $ 3,885 $ 3,217
Inventories 4,724 4,155
Accrued compensation 1,959 4,928
Accrued licenses and royalties 8,085 9,107
Net operating loss carryforwards 640 2,619
Accrued expenses 6,768 7,472
Other 179 3,516
------- -------
26,240 35,014
------- -------
Noncurrent deferred tax asset (liability):
Property, plant and equipment (5,443) (2,093)
Net operating loss carryforwards 4,813 333
Accrued license and royalties 278 1,956
Other 266 (2,632)
------- -------
(86) (2,436)
------- -------
Total net deferred taxes $26,154 $32,578
======= =======
Deferred tax assets of approximately $9,373,000 were recorded in 1997 in
connection with the acquisition of NetFRAME. The Company has federal
operating loss carryforwards of $15.1 million (including $11.8 million as a
result of the NetFRAME acquisition) that expire beginning in 2006 and state
operating loss carryforwards of $4.9 million (including $3.9 million as a
result of the NetFRAME acquisition) that expire beginning in 2000. The use
of pre-acquisition operating losses and tax credit carryforwards are
subject to limitations imposed by the Internal Revenue Code. To the extent
the amount of NetFRAME's operating loss and tax credit carryforwards
available to offset future taxable income were statutorily limited, no
deferred tax asset was established.
EXPORT SALES
Export sales were approximately $143,446,000, $181,371,000 and
$76,686,000 in 1997, 1996 and 1995, respectively.
45
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
CONTINGENCIES
Periodically, the Company is made aware that technology used by the
Company may infringe on intellectual property rights held by others. The
Company has accrued a liability and charged operations for the estimated
costs of settlement or adjudication of asserted and unasserted claims for
alleged infringement prior to the balance sheet date. Resolution of these
claims could have a material adverse effect on future results of operations
and could require changes in the Company's products or processes.
During the third quarter of fiscal 1997, the Company began to collect and
remit applicable sales or use taxes in nearly all states. In association
therewith, the Company is party to agreements with nearly all states which
generally limit the liability of the Company, if any, for non-remittance of
sales and use taxes prior to such agreements' effective dates. Management
believes the resolution of any matters relating to the non-remittance of
sales or use taxes prior to the balance sheet date will not have a material
adverse effect on the Company's business and results of operations.
The Company is currently a party to various 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 financial position or results of
operations.
46
Micron Electronics, Inc.
Quarterly Financial Information
(Tabular amounts in thousands, except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------
1997
Net sales $513,097 $511,394 $510,274 $421,018
Gross margin 86,099 79,582 91,615 80,450
Net income 14,955 19,656 27,839 24,812
Earnings per share 0.16 0.20 0.30 0.27
1996
Net sales $457,401 $412,322 $456,619 $438,578
Gross margin 94,892 58,571 49,010 58,712
Net income (loss) 26,448 14,075 (12,556) 16,615
Earnings (loss) per share 0.29 0.15 (0.14) 0.18
In the fourth quarter of fiscal 1997, the Company acquired NetFRAME
Systems Incorporated. As a result, the Company's results of operations for
the fourth quarter of fiscal 1997 were adversely affected by $6.4 million,
or $.07 per share, which includes the operating losses of NetFRAME since
the July 18, 1997 acquisition date and a one-time charge of $3.9 million,
or $0.04 per share, for the write-off of purchased in-process research and
development. See "Acquisition of NetFRAME Systems Incorporated."
In the fourth quarter of fiscal 1996, the Company recorded certain
adjustments increasing pre-tax income by $4.0 million, and net income by
$2.5 million or $.03 per share. The adjustments include a benefit to cost
of goods sold of $13.0 million related to revisions of estimates for
product and process technology costs and an accrual, included in selling,
general and administrative expense, of $9.0 million related to revisions of
estimates for selling costs associated with sales of PC systems.
In February 1996, the Company adopted a plan to discontinue the
manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operations in Minneapolis, Minnesota. As a result, the
Company recorded a restructuring charge of $29.5 million ($22.6 million,
net of taxes) in the second quarter of fiscal 1996. In the fourth quarter
of fiscal 1996, the Company reduced the restructuring charge by $0.3
million after concluding its restructuring activities had been completed or
were adequately provided for in the remaining restructuring accrual. See
"Restructuring Charge."
47
Micron Electronics, Inc.
Report of Independent Accountants
The Shareholders and Board of Directors
Micron Electronics, Inc.
We have audited the financial statements and financial statement schedule
of Micron Electronics, Inc. listed in the index on page 30 of this Form
10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Micron
Electronics, Inc., as of August 28, 1997 and August 29, 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended August 28, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Boise, Idaho
September 22, 1997
48
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Certain information concerning the Registrant's executive officers and
directors is included under the caption "Officers and Directors of the
Registrant" included in PART I, Item 1 of this report. Other information
required by Items 10, 11, 12 and 13 will be contained in the registrant's
Proxy Statement which will be filed with the Securities and Exchange
Commission within 120 days after August 28, 1997, and is incorporated
herein by reference.
49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following are filed as a part of this report:
Financial statements and financial statement schedules see "Item 8.
Financial Statements and Supplementary Data."
Exhibit Description
2.1 Agreement of Merger, dated as of October 30, 1994, as amended
by the first amendment thereto, dated as of December 13, 1994,
by and among ZEOS, MCI and MCMS (1)
2.2 Articles of Merger, dated April 7, 1995, by and among ZEOS, MCI
and MCMS (2)
3.1 Articles of Incorporation of Registrant, as amended (3)
3.2 Bylaws of the Registrant, as amended
10.35 1995 Stock Option Plan (4)
10.36 1995 Employee Stock Purchase Plan (4)
10.37 Amended and Restated Executive Bonus Plan (6)
10.38 Form of Indemnification Agreement between the Registrant and
its officers and directors (5)
10.39 Form of Six-Month Termination Agreements for certain officers
of the Registrant (5)
10.42 Component Recovery Agreement, dated August 14, 1996, between
the Company and Micron Technology, Inc., as amended
10.43 Credit Agreement, dated June 27, 1997, between the Company
and certain financial institutions named therein
10.44 Form of Twelve-Month Termination Agreements for certain
officers of the Registrant
10.45 Form of Twenty-four-Month Termination Agreements for certain
officers of the Registrant
11 Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
__________
(1) Incorporated by reference to Registration Statement on Form S-4
(File No. 33-90212), as declared effective on March 13, 1995
(2) Incorporated by reference to Current Report on Form 8-K, dated
April 7, 1995
(3) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended April 1, 1995
(4) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended June 1, 1995
(5) Incorporated by reference to Annual Report on Form 10-K, as amended
for the fiscal year ended August 31, 1995
(6) Incorporated by reference to Quarterly Report on Form 10-Q
for the fiscal quarter ended May 29, 1997
(b) Reports on Form 8-K:
On July 18, 1997, the Company filed a report on Form 8-K announcing the
acquisition of 63% of the outstanding shares of common stock of NetFRAME
Systems Incorporated.
On July 29, 1997, the Company filed a report on Form 8-K announcing the
appointment of Gregory D. Stevenson as President of the Company.
Micron, Micron Electronics, AutoPlay, ClusterServer, ClusterSystem,
Micron Advantage, Micron Samurai, Notebooks Now!, Powerdigm, SpecTek,
TransPort and Vetix are trademarks of the Company, and ClientPro, Computers
Now!, Millennia, NetFRAME and ZEOS are registered trademarks of the
Company. Micron Power is a service mark of the Company. Pentium is a
registered trademark and MMX is a trademark of Intel Corporation. Microsoft
and Windows NT are registered trademarks of Microsoft Corporation. All other
product names appearing herein are for identification purposes only and may be
trademarks of their respective companies.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized, in the
City of Nampa, State of Idaho, on the 1st day of October, 1997.
Micron Electronics, Inc.
/s/ T. Erik Oaas
T. Erik Oaas
-------------------------------------
Executive Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Nampa, State of Idaho, on the 1st day of October, 1997.
Signature Title Date
- ------------------------- ------------------------------------- ---------------
/s/ Joseph M. Daltoso Chairman of the Board and Chief October 1, 1997
- ------------------------- Executive Officer (Principal
(Joseph M. Daltoso) Executive Officer)
/s/ Gregory D. Stevenson President and Chief Operating October 1, 1997
- ------------------------- Officer; Director
(Gregory D. Stevenson)
/s/ T. Erik Oaas Executive Vice President, Finance October 1, 1997
- ------------------------- and Chief Financial Officer
(T. Erik Oaas) (Principal Financial and Accounting
Officer); Director
/s/ Robert F. Subia Chairman of the Board, Chief October 1, 1997
- ------------------------- Executive Officer and President of
(Robert F. Subia) Micron Custom Manufacturing Services,
Inc.; Director
/s/ Steven R. Appleton Director October 1, 1997
- -------------------------
(Steven R. Appleton)
/s/ Jerry M. Hess Director October 1, 1997
- -------------------------
(Jerry M. Hess)
/s/ Robert A. Lothrop Director October 1, 1997
- -------------------------
(Robert A. Lothrop)
/s/ John R. Simplot Director October 1, 1997
- -------------------------
(John R. Simplot)
51
Schedule II
Micron Electronics, Inc.
Valuation and Qualifying Accounts
(Dollars in thousands)
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
- -------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at beginning of year $ 8,221 $ 5,458 $ 1,460
Additions charged to expense 1,032 6,306 3,962
Reductions and write-offs (3,381) (3,543) (1,540)
Acquisition 1,684 - -
Merger transaction - - 1,576
------- ------- -------
Balance at end of year $ 7,556 $ 8,221 $ 5,458
======= ======= =======
52