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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 September 3, 1998
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 October 2, 1998 was $571.4 million.
The number of outstanding shares of the registrant's Common Stock on
October 2, 1998 was 95,883,154.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant's 1998 Annual
Meeting of Shareholders, to be held on November 23, 1998, are
incorporated by reference into Part III of this Annual Report on Form
10-K.
PART I
ITEM 1. BUSINESS
Statements contained in this Form 10-K that are not purely historical are
forward-looking statements and are being provided in reliance upon the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. All forward-looking statements are made as of the date hereof and
are based on current management expectations and information available to
the Company as of such date. The Company assumes no obligation to update
any forward-looking statement. It is important to note that actual results
could differ materially from historical results or those contemplated in
the forward-looking statements. Forward-looking statements involve a
number of risks and uncertainties, and include trend information. Factors
that could cause actual results to differ materially include, but are not
limited to, those identified in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Certain Factors"
and in other Company filings with the Securities and Exchange Commission.
GENERAL
Micron Electronics, Inc. and its subsidiaries (hereinafter referred to
collectively as "Micron" or the "Company") is the third largest provider of
personal computers sold through the direct channel. The Company develops,
manufactures, markets and supports electronic products for a broad range of
computing and digital applications. The Company custom builds a wide
variety of notebook and desktop PC systems and servers for its core
customers in consumer, commercial and public sectors. The Company's
SpecTek semiconductor memory products operation recovers memory components
for specific applications. The Company is majority owned by Micron
Technology, Inc. ("MTI").
The Company's solid technological background, combined with a focus on
performance, is the basis for providing maximum value to its customers.
The Company provides quality manufacturing by integrating innovative
product design with the latest technological features and is recognized by
independent authorities for setting industry standards with an aggressive
development and application of leading-edge technology in the computers and
components manufactured. The Company also regularly receives recognition
and wins awards from industry publications for its responsive,
accommodating customer service and technical support.
The Company was formed through the April 7, 1995, merger of three
businesses: Micron Computer, Inc., Micron Custom Manufacturing Services,
Inc., and ZEOS International, Ltd. On February 26, 1998, the Company
completed the sale of 90% of its interest in MCMS, Inc. ("MCMS"), a custom
manufacturer of complex printed circuit boards and other custom products
for original equipment manufacturers and formerly a wholly-owned subsidiary
of the Company.
PERSONAL COMPUTER SYSTEMS
Products and Services
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 and sells and
supports a variety of additional peripherals, software and services. The
Company's PC systems use Pentium, Pentium Pro and Pentium II
microprocessors manufactured by Intel Corporation ("Intel") and are
assembled to order with differing memory and storage configurations as well
as various operating systems and application software. The Company also
offers a variety of other components and peripherals with its PC systems
and network servers, including monitors, modems, graphics cards,
accelerators and CD-ROM and DVD drives. The Company's current product
lines include the following:
Desktops and Managed PCs
Millennia. Targeted for technology-savvy consumers and "driven" users
in business and government, the Millennia line of PC systems has been the
Company's best-selling product in recent periods. The Millennia Max, the
latest generation Millennia, is powered by Intel's Pentium II
microprocessor and latest chipset and includes an award-winning graphics
card with 8 MB memory, a 32-bit ATA hard drive controller supporting burst
mode data transfers of 33.3 MBps and a storage capacity of up to 14 GB, and
a slot-fed second-generation DVD-ROM drive. The Millennia Max can be
configured with up to 384 MB 100Mhz SDRAM. The Company's additional
Millennia products can be configured utilizing the Company's new MicroTower
case, designed for cost savings while maintaining power and performance.
The Millennia products are also available in configurations utilizing the
new Intel Celeron processor with 128KB cache onboard for cost-effective
computing without compromising performance.
1
ClientPro. The ClientPro is the Company's flexible and affordable line
of managed PCs designed as a network solution for businesses demanding
computing stability and performance. The ClientPro simplifies asset
management and network administration and provides reliable, adaptable
computing to support a clean migration strategy. The Company's ClientPro
line can be configured with Intel's latest Pentium II or Celeron
microprocessors and is available in a mini tower or the Company's new
MicroTower case. Utilizing SDRAM memory, AGP chipsets and built-in
advanced network manageability, ClientPro managed PCs are an exceptional
business desktop solution.
Notebooks
GoBook. The GoBook is the Company's line of thin notebook products
weighing as little as 4.4 lbs. with a 1.35" thin profile. The GoBook2
features the Intel mobile 233Mhz, 266Mhz or all-new 300Mhz Pentium II
microprocessor and 12.1" display and can be equipped with up to 96 MB of
EDO memory, a unique battery base, CD-ROM drives, additional hard drives
and network and modem cards. The Company's original GoBook product line
incorporates Intel mobile 266Mhz Pentium microprocessors with MMX
technology, a 12.1" display, and can be configured with an optional battery
base offering up to 11 hours of battery life. The Micron GoBook can also
be purchased with the Executive Desktop Package featuring a multimedia port
replicator and matching black monitor, keyboard and mouse.
TransPort Trek. The Micron TransPort Trek2 and TransPort Trek are
designed for affordable desktop-like performance for business applications.
The Micron TransPort Trek2 incorporates the Intel mobile 233Mhz, 266Mhz or
300Mhz Pentium II microprocessor and includes a 14.1" display, multiple
media bays, 24X CD-ROM, two Universal Serial Bus interfaces and a modular
Lithium Ion battery. The Micron TransPort Trek incorporates Intel's 233Mhz
Pentium microprocessor with MMX technology, a 12.1" display, 24X CD-ROM,
Universal Serial Bus interface and a modular Lithium Ion battery.
Servers
NetFRAME 2100 and 3100. The Company's entry-level NetFRAME 2100-series
and mid-entry NetFRAME 3100-series workgroup servers are cost-effective
server solutions specifically designed for small to medium sized businesses
and for decentralized remote locations and departments. The 2100 and 3100
servers feature Intel Pentium II microprocessors in configurations ranging
from 333Mhz to 450Mhz, remote server management functionality, ECC SDRAM,
five expansion slots and can be configured to run single or dual
processors. The NetFRAME 3100 can accept up to five hot-swappable hard
drives and the NetFRAME 2100 can accept up to six 68-pin hard drives.
NetFRAME 6200 and MV5000. The Company's NetFRAME 6200-series servers
are a reliable, affordable high-end solution built on the latest Intel
processor technology. The NetFRAME 6200 is a flexible server solution for
typical business applications such as Web Internet/Intranet, print/file, or
groupware applications. The NetFRAME 6200 offers maximum performance with
support for up to four Intel 400 Mhz Pentium II Xeon processors with 1 MB
level-2 cache and can be configured with up to 4 GB of ECC EDO DRAM and a
100 MHz Front Side Bus. For maximum uptime, the NetFRAME 6200 server comes
with six one-inch SCA hot-swappable Ultra-2 Wide LVDS hard drives allowing
up to 54 GB maximum hard drive space. The NetFRAME 6200 server is fully
wired to support a RAID card that can utilize two on-board SCSI chips. The
NetFRAME 6200 server ships standard with Intel's LANDesk Server Manager,
overseeing all of the server's hardware instrumentation including voltage
monitoring, fan tachometer, thermal monitoring and chassis intrusion. In
addition, LANDesk controls all event and alerting capabilities including
automatic server recovery, paging, e-mail and system reboot.
The NetFRAME 6200 is the first full-featured server to be fully qualified
and validated with 3Com's Gigabit EtherLink Server network interface card.
Gigabit Ethernet provides the scalability and performance necessary to meet
the increasing demands on today's networks. This new backbone technology
allows larger networks to exchange information at 1,000 Mbps, approximately
10 times faster than the current standard Fast Ethernet. Businesses
networked with the NetFRAME 6200 can now take full advantage of bandwidth-
intensive applications such as full-motion video, video conferencing and
video editing.
The Company's NetFRAME MV5000 and MV5001 servers utilize increased
bandwidths and a higher level of redundancy for data-intensive
applications. These rack-mountable MV5000 and MV5001 departmental servers
feature the Intel 300Mhz or 333Mhz Pentium II microprocessor with MMX
technology, ECC SDRAM memory, dual-chambered chassis to hold up to three
redundant, hot-swappable power supplies and up to ten hot-swappable hard
drives and are designed to be upgraded to run dual processors. The
NetFRAME MV5000 is the industry's first network server to integrate a high-
performance Intel i960 I/O processor on the server motherboard, enabling it
to provide superior performance without requiring costly add-in cards. I2O
architecture is an industry initiative that promotes the interoperability,
performance and ease-of-use of I/O systems.
2
Parts and Upgrades
The Company also offers an extensive array of peripherals and software to
its customers through the Micron Additions program and a dedicated sales
force. The Company offers competitively priced printers, scanners,
monitors, memory upgrades, storage devices, processor overdrives, modems
video cards and other multi-media peripherals. Customers can also purchase
current software titles and a variety of networking hardware.
MPower Program
The Company's new MPower program is a comprehensive PC lifecycle
management program to address personal computer obsolescence, upgrading and
financing tailored specifically to meet the needs of businesses and
consumers. MPower is a program for managing computer obsolescence,
financing, leasing and upgrading that gives customers flexibility and the
best value for their IT dollar and includes the following components:
MPower and PowerXchange. Businesses and consumers can immediately trade-
in existing desktop and notebook systems, including from Micron or any
other major brand of computer systems, and receive rebates based on the
wholesale value of the system toward a new Micron notebook or desktop
computer system.
MPower Obsolescence Protection. Any new Micron system purchase is
eligible for trade-in anytime from 12 to 48 months from the date of
purchase. Customers are rebated the wholesale value towards their next
Micron computer systems.
MPower TechRefresh Lease. A flexible business leasing program that
provides options for customers to upgrade their systems during the lease
term, generally from 12 to 48 months. The trade-in rebate for the computer
systems can be built-in to the lease, resulting in lower monthly payments
than with other financing options.
MPower Term Financing. Offering consumers competitive rates for
financing terms ranging from 12 to 84 months.
MPower 60 Days/Six Months Same-As-Cash. Businesses can get the benefits
of new technology immediately by taking delivery of new Micron systems and
then having up to 60 days to pay the balance without finance charges. In
addition, the Company offers qualified individuals an exclusive six months
same-as-cash program.
MPower Green Recycling. Under MPower, the Company will arrange for
disposal of obsolete PCs in a cost effective and environmentally friendly
way. As part of the program, the Company provides rebates and free
disposal to customers trading in five or more 486 or lower class PCs as
long as they deploy an equivalent number of new Micron machines.
Manufacturing and Materials
The Company's PC manufacturing process is designed to provide custom-
configured 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") in its ISO 9001-
certified manufacturing facility 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.
The Company's ATO manufacturing process promotes rapid inventory turnover
and reduced inventory levels, while allowing the Company to efficiently
manufacture customized computer systems. The Company's desktop PC systems
and servers are generally assembled in its own facilities while its
notebook PC systems, designed and including feature sets defined by the
Company, are assembled by third-party suppliers and tested according to the
Company's standards. 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.
The Company focuses on providing PC systems that feature components and
software incorporating the latest technological developments in the PC
industry. The microprocessors used in the Company's PC systems are
manufactured exclusively by Intel and a significant portion of the random
access memory ("RAM") used in Micron PC systems is supplied by MTI. The
Company generally relies on MTI to supply the latest memory densities and
configurations available. The Company also 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. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Certain Factors-Personal
Computer Systems-Dependence on Key Sources of Supply."
3
Marketing and Sales
The Company's direct marketing approach is aimed toward PC users and
companies who evaluate products based on performance, price, reliability,
service and support. The Company's customers are comprised primarily of
consumers and commercial and public entities. The Company markets its PC
systems primarily by strategically placing advertisements in personal
computer trade publications, submitting its products for review and
evaluation by these publications and advertising its products in certain
newspapers and other publications and on its home page on the Internet.
The Company also markets its PC systems through direct-mail campaigns and
sells a limited number of PCs through its factory outlet stores located in
Idaho and Utah. In addition, the Company sells its PC systems through
strategic relationships with third parties having large government
procurement contracts. Pricing and terms for such procurement contracts
are generally subject to renegotiation or termination by third parties and
governmental entities. The Company's field sales force focuses primarily
on soliciting and servicing the emerging "mid market" comprised of medium
and small sized businesses. In addition, the Company's Micron Advantage
program allows commercial 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 operation by
external organizations in order to provide independent assurance of product
reliability, customer service and support and business continuity for its
commercial customers.
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 custom MicronOpt configurator on its home page on the Internet
(www.micronpc.com) and through its direct sales force. Micron 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's NetFRAME
enterprise servers are sold primarily through the Company's direct sales
force and through value-added resellers ("VARs") worldwide. Typically, the
Company's sales force arranges sales with end customers for NetFRAME
servers. Actual sales are generally 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 key elements of the Company's PC product warranties and
service and 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.
Micron Power Limited Warranty. Desktop and notebook PC systems and
servers are generally sold with the Micron Power limited warranty,
consisting 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 limited warranty covers repair or replacement for defects in
workmanship or materials.
Technical Service & Support. Through various programs, the Company
offers its customers and business partners various levels of standard and
customized support services including extended on-site service for one to
three years, 24-hour toll-free telephone support in the U.S., one business
day turnaround for support via e-mail. In addition, many of the Company's
server products can be purchased with on-site support ranging from one to
three years and with as fast as four-hour response time for business
critical server applications; specialized network operating system support,
optional incident resolutions for Novell IntranetWare or Microsoft Windows
NT Server software available 24 hours a day, seven days a week, 365 days
per year; and server/workstation set-up to ensure proper operation and
configuration of LAN installations.
4
The Company offers telephone access to toll-free technical support
services in the United States. Micron'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 or system 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. These services
enable a customer to access system-specific information and recent software
updates for many of the software programs and drivers included with Micron
PC systems. Customers also have an option to purchase on-site service from
a third-party service provider.
Certain Micron 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 and the Company allows the cancellation of
unfilled orders without penalty any time prior to shipment. As of
September 3, 1998, the Company had unfilled orders for PC systems of
approximately $22 million compared to $42 million as of August 28, 1997.
The Company anticipates that substantially all of the unfilled orders as of
September 3, 1998, other than those subsequently canceled, will be shipped
within 30 days. The Company believes that backlog is not indicative of
actual sales of any succeeding period.
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. The Company's sales of PC
systems have historically benefited from increased name recognition and
market acceptance of the Company's PC systems, primarily resulting from the
receipt by the Company of awards from trade publications recognizing the
price and performance characteristics of Micron brand PC systems and the
Company's service and support functions. The Company competes with a
number of PC manufacturers, which sell their products primarily through
direct channels, including Dell Computer, Inc. and Gateway 2000, Inc. The
Company also competes with PC manufacturers, such as Apple Computer, Inc.,
Compaq Computer Corporation, Hewlett-Packard Company, International
Business Machines Corporation, NEC Corporation and Toshiba Corporation
among others, which have traditionally sold their products through national
and regional distributors, dealers and value added resellers, retail stores
and direct sales forces. See "Certain Factors-Personal Computer
Systems-Competition."
SPECTEK SEMICONDUCTOR MEMORY PRODUCTS
Products
The Company's SpecTek semiconductor memory products operation processes
and markets various grades of memory products under the SpecTek brand name
in either component or module form. Memory components are obtained from
semiconductor memory manufacturers and tested and 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.
5
The Company and MTI are parties to a Component Recovery Agreement, expiring
on September 2, 1999, under which MTI is required to deliver to the Company
all of the nonstandard memory components produced at MTI's semiconductor
manufacturing operations. Expiration, termination or renegotiation of the
Component Recovery Agreement could have a material adverse effect on the
Company's business and results of operations. A substantial majority of the
semiconductor components used in the Company's SpecTek semiconductor memory
products operation is obtained from MTI. In 1998, 1997 and 1996, the Company
obtained 75%, 74% and 61%, respectively, of its components from MTI, and in
1998, obtained nearly 100% of its components from three sources, including MTI.
The Company and MTI are parties to a Component Recovery Agreement, expiring on
September 2, 1999, under which MTI is required to deliver to the Company
all of the nonstandard memory components produced at MTI's semiconductor
manufacturing operations. Purchases from sources other than MTI are
generally negotiated on a purchase order basis. There can be no assurance
the Company will be able to negotiate future purchases on terms acceptable
to the Company from MTI after the expiration of the Component Recovery
Agreement or from third party sources. 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 and -Memory Product Transition."
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 memory 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 memory 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 the wafer probe stage, the die are assembled and delivered
to the Company for testing and grading.
Upon delivery to the Company, memory 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 semiconductor memory 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, semiconductor memory 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 memory 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.
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.
In recent years, the Company experienced significant declines in the
average selling prices of its memory products as industry-wide average
selling prices for full specification semiconductor memory products
experienced a sharp decline. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Certain
Factors-SpecTek Semiconductor Memory Products Operation-Pricing of
Semiconductor Memory Products."
Product Warranties
The Company typically offers a one-year 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.
6
Backlog
The Company's SpecTek memory product 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 SpecTek memory 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 semiconductor memory
components, testing capabilities, memory component prices and applications
engineering. The price of nonstandard memory components is directly
influenced by the price of full specification memory components. 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 memory components.
As more semiconductor memory manufacturers recover nonstandard memory
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 memory components. In addition to
supplying nonstandard memory 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. 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."
EXPORT SALES
The Company's consolidated export sales totaled $157 million, $143
million and $181 million in fiscal 1998, 1997 and 1996, respectively.
Export sales are denominated primarily in United States dollars.
INTELLECTUAL PROPERTY
As of September 3, 1998, the Company owned approximately 39 U.S. patents
and 5 foreign patents. In addition, the Company has 24 patent applications
allowed and awaiting issuance and has 438 patent applications pending with
the United States Patent and Trademark Office. 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. 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
entered into several intellectual property agreements, and as a majority-
owned subsidiary of MTI, is licensed under certain license agreements
between MTI and third parties. The Company's rights under license
agreements between MTI and third parties may terminate in the event that
the Company is no longer a majority-owned subsidiary of MTI. Intellectual
property agreements and license agreements generally require one-time or
periodic royalty payments and are subject to expiration at various times.
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. See
"Certain Factors-General-Intellectual Property Matters."
7
RESEARCH AND DEVELOPMENT
The Company's research and development group, which had approximately 35
employees as of September 3, 1998, focuses its efforts on PC systems,
including: computer system architecture, core logic chip sets,
motherboards; 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. This group focuses its
efforts on development of technology in the desktop, workstation and
servers product lines. Such technologies include ease of use software; the
Samurai chipset with 64-bit PCI and 66MHz PCI; and the NetFRAME triple-peer
PCI bus architecture allowing hot plug PCI card slots.
The Company licenses certain software programs from third party
developers through a non-exclusive worldwide license. Such software is
generally incorporated into software programs developed by the Company for
use in its server products.
Research and development expenses for 1998, 1997 and 1996 were
approximately $10,138,000, $9,621,000 and $3,050,000, 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 Systems Incorporated. See notes to consolidated financial
statements.
EMPLOYEES
As of September 3, 1998, the Company employed approximately 2,400 people
in its PC operation and 350 people in its SpecTek semiconductor memory
products operation. Nearly all of the Company's employees are located in
the United States, and none 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. 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. The
Company believes that its business is operated in compliance with
applicable environmental regulations.
8
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The officers and directors of the Company and their ages as of October 2,
1998, are as follows:
Name Age Position
- ----------------- --- -----------------------------------------------
Joel J. Kocher 42 Chairman of the Board of Directors and Chief
Executive Officer
T. Erik Oaas 45 Executive Vice President, Finance and Chief
Financial Officer, Director
Michael S. Adkins 33 Senior Vice President, Manufacturing
Steven P. Arnold 43 Vice President, Legal and General Counsel
Nemo C. Azamian 48 Vice President, Service and Support
Judith Bitterli 44 Vice President & General Manager, Web
Scott L. Bower 48 Vice President & General Manager, Commercial
Segment
Stephen Brown 48 Vice President & Chief Information Officer
David R. Burcham 33 Senior Vice President and General Manager, Consumer
and Small Business
Savino R. Ferrales 48 Senior Vice President, Worldwide Human
Resources
Mark E. Gonzales 37 Vice President, Worldwide Marketing
Harry B. Heisler 45 Vice President and General Manager, Public Sector
Lyle W. Jordan 54 Vice President, Materials
Dean A. Klein 41 Executive Vice President, Product Development and
Chief Technical Officer
Steven H. Laney 38 Vice President, Investor Relations
JoAnne S. Pfeifer 39 Vice President, Administration, and Corporate
Secretary
Steven R. Appleton 38 Director
Robert A. Lothrop 72 Director
John R. Simplot 89 Director
Joel J. Kocher served as President of Worldwide Marketing, Sales and
Service at Dell Computer Corporation from 1987 to September 1994. In
October 1994, Mr. Kocher joined Artistsoft, where he served as Executive
Vice President and Chief Operating Officer until he was appointed
President, Chief Operating Officer, and Director in October 1995. From
December 1996 until August 1997, Mr. Kocher served as President and Chief
Operating Officer at Power Computing Corporation. Mr. Kocher accepted the
position of President and Chief Operating Officer of the Company in January
1998 and was further named Chairman and Chief Executive Officer in June
1998.
T. Erik Oaas served as a director, Vice President of Finance, and
Treasurer of CMS from July 1992 until he was appointed director, Vice
President of Finance and Chief Financial Officer of the Company in April
1995. In January 1997, Mr. Oaas was appointed Executive Vice President,
Finance.
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 was appointed Vice President, SpecTek in February 1997,
followed by an appointment to Senior Vice President of PC Manufacturing in
October 1997.
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.
Nemo C. Azamian served as Director of Customer Service Operations at
Compaq Computer Corporation from July 1989 to May 1995. In June 1995, he
joined Allied Signal, Inc., as Director of Operations, Distribution, and
Customer Service. In December 1995, Mr. Azamian co-founded Monorail, Inc.,
where he served as Vice President of Operations until February 1998. Mr.
Azamian has served as Vice President of Service and Support for the Company
since February 1998.
Judith Bitterli served as Executive Vice President at Softbank Services
Group from May 1993 until February 1997. In February 1997, Ms. Bitterli
accepted the position of Vice President of Americas with Power Computing
Corporation. Ms. Bitterli joined the Company in October 1997 as Vice
President of Enterprise Sales, and has served as Vice President and General
Manager, Web, since June 1998.
9
Scott L. Bower served as Director of Mobile Computing Brands with
International Business Machines (IBM), PC Division, from August 1992 to
August 1995. Mr. Bower accepted the position of Vice President, Sales and
Marketing with Samsung in August 1995 until January 1997 and subsequently
served as Senior Vice President of Sales & Marketing, Americas, at AST
Computer until November 1997. Mr. Bower was appointed to the position of
Vice President and General Manager, Commercial Segment of the Company in
July 1998.
Stephen Brown served as Executive Consultant with Diversified Information
Technologies, Inc. from 1992 to 1995. Mr. Brown subsequently served as
Chief Information Officer of Imation, a spin-off of 3M Company, from July
1996 until accepting the position of Vice President and Chief Information
Officer of the Company in September 1998.
David R. Burcham served as Vice President, Operations and Sales of
Multiple Zones International from 1993 to 1996. In 1996, he joined
Creative Computers, Inc. as Executive Vice President of Sales and
Operations. Mr. Burcham has served in the position of Senior Vice
President and General Manager of Consumer and Small Business sales of the
Company since June 1998.
Savino R. Ferrales served as Vice President of Human Resources at
Dell Computer Corporation from January 1989 to June 1994. From June 1994
to June 1995, he was a principal in OMC Group, a human resources consulting
firm. From June 1995 to February 1997, Mr. Ferrales served as Vice
President, Worldwide Human Resources, for Digital Equipment Corporation.
In March 1997, Mr. Ferrales accepted the position of Vice President of
Human Resources at Power Computing Corporation, a position he held until
November 1997. From late 1997 to February 1998, he served as principal of
workSource. Mr. Ferrales accepted the position of Senior Vice President of
Worldwide Human Resources with the Company in February 1998.
Mark E. Gonzales served as Product Line Manager of the MacIntosh
Operating System for Apple Computer, Inc. from May 1987 to November 1993.
From January 1994 to April 1995, he served as Senior Product Manager,
Internet Products with Global Village Communications. In December 1995,
Mr. Gonzales became Vice President of Marketing at Be, Inc., and continued
in this position until August 1997. Mr. Gonzales accepted the position of
Vice President, Worldwide Marketing with the Company in February 1998.
Harry B. Heisler served in various positions including Vice President of
Marketing at Government Technology Services, Inc. from 1984 to 1994. In
1995, Mr. Heisler, became an independent management consultant working with
high technology firms. In June 1998, Mr. Heisler accepted the position of
Vice President and General Manager, Public Sector with the Company.
Lyle W. Jordan served as Vice President, Manufacturing and Operations of
Kubota Pacific Computer/Kubota Graphics Corporation from July 1990 to
January 1995. In early 1995, Mr. Jordan joined In Focus Systems, Inc.,
serving as Vice President of Operations until February 1997. In February
1997, Mr. Jordan accepted the position of Vice President of Manufacturing
at Power Computing Corporation, where he served until joining the Company
as Vice President, Materials in January 1998.
Dean A. Klein served as Vice President of Research and Development at
ZEOS International, Ltd. from 1992 until the merger with Micron Computer,
Inc. and MCMS in April 1995. Following the merger, Mr. Klein was named
Vice President of Research and Development for the Company, which capacity
he served in until February 1996, when he was named Vice President and
Chief Technical Officer. In January 1997, Mr. Klein was appointed Senior
Vice President, Chief Technical Officer of the Company; in September 1997,
he was appointed Executive Vice President, Product Development and Chief
Technical Officer.
Steven H. Laney served as Director of Marketing for CMS from May 1993 to
April 1995, when he became Director of Investor Relations for the Company.
In October 1996, Mr. Laney was named Vice President, Corporate
Communications of the Company. His title was changed to Vice President of
Investor Relations in June 1998.
JoAnne S. Pfeifer served as Administration Projects Coordinator for the
CMS from August 1992 until her appointment as Administration Manager of the
Company in January 1995. In March 1996, Ms. Pfeifer was named Director of
Administration and additionally appointed Corporate Secretary in July 1996.
In January 1997, she was named Vice President, Administration and continues
to serve as Corporate Secretary for the Company.
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.
10
Robert A. Lothrop has served on MTI's board of directors since May 1994
and on the Company's board of directors since April 1995. Mr. Lothrop
served in positions including Senior Vice President of the J.R. Simplot
Company, a food processing, fertilizer and agricultural chemicals
manufacturing company, since 1959. Mr. Lothrop retired from the Simplot
Company in January 1991.
John R. Simplot has served on MTI's board of directors since 1980 and on
the Company's board of directors since April 1995. Mr. Simplot founded the
J. R. Simplot Company in 1920 and served as Chairman of the Board of
Directors until his retirement in April 1994. Mr. Simplot currently serves
as Chairman Emeritus of the J.R. Simplot Company.
ITEM 2. PROPERTIES
The Company's corporate headquarters, PC manufacturing operation and
SpecTek semiconductor memory products operation are based in a number of
Company-owned or leased facilities aggregating approximately 300,000 square
feet located in Nampa, Idaho. Approximately 100,000 square feet of the
Nampa facilities are dedicated to PC manufacturing and approximately 40,000
square feet are dedicated to the 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. In addition, the Company is nearing completion of a new
325,000 square foot facility expected to be in production in the fourth
calendar quarter of 1998. The new facility is expected to have
approximately 135,000 square feet dedicated to PC manufacturing.
The Company leases a 77,000 square foot facility in Minneapolis,
Minnesota, dedicated primarily to PC sales, technical support and
administrative functions and a 75,000 square foot facility in Meridian,
Idaho dedicated to a PC call center.
Other leased facilities include two factory outlets in Boise, Idaho and
the Salt Lake City, Utah area and a sales and technical support call center
located in Japan.
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.
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 1998.
11
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
------ ------
1998:
4th quarter $17.125 $9.688
3rd quarter 16.125 10.250
2nd quarter 14.125 8.438
1st quarter 20.750 10.250
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
HOLDERS OF RECORD
As of September 3, 1998, there were approximately 2,638 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 10,
1998.
12
ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
---------- ---------- --------- -------- --------
(Amounts in thousands, except per share amounts)
Net sales $1,733,432 $1,955,783 $1,764,920 $999,999 $412,938
Operating income (loss) (83,894) 136,458 75,998 106,493 59,851
Net income 47,953 87,262 44,582 65,086 36,898
Earnings per share:
Basic 0.50 0.93 0.49 0.75 0.45
Diluted 0.50 0.92 0.48 0.74 0.45
Current assets 538,462 563,148 399,116 308,755 120,880
Working capital 288,149 203,884 121,766 106,452 45,906
Total assets 692,443 758,346 529,933 382,716 151,739
Total debt 28,528 38,641 21,297 6,823 7,845
Shareholders' equity 416,894 365,571 228,460 173,663 68,169
On April 7, 1995, Micron Computer, Inc. ("MCI") and Micron Custom
Manufacturing Services, Inc. ("CMS"), 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.
Historical per share amounts have been restated in accordance with
Statement of Financial Accounting Standards No. 128. See notes to
consolidated financial statements.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Item 8. Financial Statements and
Supplementary Data."
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements contained in this Form 10-K that are not purely historical are
forward-looking statements and are being provided in reliance upon the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. All forward-looking statements are made as of the date hereof and
are based on current management expectations and information available to
the Company as of such date. The Company assumes no obligation to update
any forward-looking statement. It is important to note that actual results
could differ materially from historical results or those contemplated in
the forward-looking statements. Forward-looking statements involve a
number of risks and uncertainties, and include trend information. Factors
that could cause actual results to differ materially include, but are not
limited to, those identified in "Certain Factors" and in other Company
filings with the Securities and Exchange Commission. All yearly references
are to the Company's fiscal years ended September 3, 1998, August 28, 1997
and August 29, 1996, unless otherwise indicated. The fiscal year ended
September 3, 1998 contained fifty-three weeks compared to fifty-two weeks
in fiscal years 1997 and 1996. 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.
RESULTS OF OPERATIONS
Net income for 1998 was $48.0 million, or $0.50 per diluted share, on net
sales of $1,733.4 million, compared to net income for 1997 of $87.3
million, or $0.92 per diluted share, on net sales of $1,955.8 million.
Excluding the effect of the sale of MCMS, net sales in 1998 were $74.1
million lower than 1997 primarily as a result of lower sales of SpecTek
semiconductor memory products and slightly lower sales of the Company's PC
systems. The Company's overall gross margin percentage declined to 12.8%
in 1998 from 17.3% in 1997 primarily as a result of a decrease in gross
margin percentage realized from the Company's PC operation and lower
margins realized from the Company's SpecTek operation.
On February 26, 1998, the Company completed the sale of 90% of its
interest in MCMS, Inc. ("MCMS"), formerly Micron Custom Manufacturing
Services, Inc., a wholly owned subsidiary of the Company. In exchange for
the 90% interest in MCMS, the Company received $249.2 million in cash.
Results of operations of the Company for 1998 include a pre-tax gain of
$156.2 million ($94.5 million or $0.98 per diluted share, after taxes).
The Company's financial statements include the results of MCMS' operation
through the date of sale. Net sales of MCMS in 1998, 1997 and 1996 were
$141.7 million, $290.0 million and $373.6 million, respectively.
Results of operations for 1998 include significant operating losses from
the Company's PC operation primarily due to significantly higher operating
expenses, including higher advertising, personnel costs and technical and
professional fees, and to a decline in gross margin as a percentage of net
sales.
As part of a plan to lower the Company's overall cost structure and to
allow the Company to price its products more competitively, in February
1998, the Company announced it had taken several actions to realign the
Company to concentrate on its core markets and customers, including the
consolidation of its domestic and international operations and the
reduction of approximately 10% of its workforce. As a result of these
actions and the continued focus by the Company on achieving operational
efficiencies, the Company has experienced improvement in the third and
fourth quarters of fiscal 1998 in the level of its operating expenses and
in the gross margin percentage realized on sales of PC systems. Selling,
general and administrative expenses in the third quarter of fiscal 1998
were 31% lower than the second quarter of fiscal 1998 and were 10% lower in
the fourth quarter of fiscal 1998 than in the third quarter.
In the fourth quarter of fiscal 1997, the Company acquired NetFRAME Systems
Incorporated ("NetFRAME") for $17.4 million in cash. The acquisition adversely
affected the Company's net income in 1997 by $6.4 million, or $0.07 per diluted
share, which included the operating losses of NetFRAME since the acquisition
date and a one-time charge of $3.9 million for the write-off of purchased
in-process research and development.
14
Net Sales
The following table summarizes the Company's net sales by product line:
1998 1997 1996
------------------------ ----------------------- ------------------------
Amount % of Sales Amount % of Sales Amount % of Sales
------------ ---------- ----------- ---------- ------------ ----------
PC systems $ 1,496,563 86.3% $ 1,528,304 78.2% $ 1,252,492 71.0%
SpecTek memory products 95,146 5.5% 137,511 7.0% 138,806 7.8%
Contract manufacturing 141,723 8.2% 289,968 14.8% 373,622 21.2%
------------ ---------- ------------ --------- ------------ ----------
Total net sales $ 1,733,432 100.0% $ 1,955,783 100.0% $ 1,764,920 100.0%
============ ========== ============ ========= ============ ==========
Personal Computer Systems. Net sales of PC systems were 2% lower in
1998 compared to 1997 primarily due to a 11% decrease in average selling
prices for the Company's PC systems partially offset by an increase in unit
sales and a higher level of non-system revenue. The decline in average
selling prices was primarily attributable to a 12% decrease in the selling
prices for the Company's desktop PC systems and a 24% decline in selling
prices for notebook systems. Lower prices were largely the result of
industry price competitiveness, particularly for notebook products, and to
the Company's efforts to price its products more in line with its
competition. Unit sales were 5% higher in 1998 compared to 1997 due
primarily to a 49% increase in unit sales of the Company's notebook
products. Unit sales of PC systems were 9% higher in the fourth quarter of
fiscal 1998 compared to the third quarter primarily due to a 14% increase
in desktop unit sales and a 28% increase in server unit sales, partially
offset by a 20% decline in unit sales of notebooks.
Unit sales of desktop systems were 86% of total unit sales in 1998
compared to 90% in 1997 and 93% in 1996. Unit sales of notebook systems
were 13% of total unit sales in 1998 compared to 9% and 5% of total PC
system sales during 1997 and 1996, respectively. Unit sales of PC systems
incorporating Intel Pentium II microprocessors and Pentium microprocessors
with MMX technology represented 48% and 47%, respectively of total PC units
sold in 1998, compared to 20% and 3%, respectively, of total PC units sold
in 1997. Unit sales of the Company's PC systems incorporating Intel
Pentium II microprocessors were 79% of total units sold in the fourth
quarter of fiscal 1998.
Net sales of PC systems to the commercial segment were 20% higher in
1998 compared to 1997 while sales to the consumer segment were 8% lower.
Sales in the Company's other market segments were essentially flat in 1998
compared to 1997. The growth in commercial sales was largely attributable
to a more focused effort on behalf of the Company's sales force directed
toward commercial customers. International sales of PC systems represented
6% of total PC system sales in 1998 compared to 5% in 1997.
Sales to the public segment as a percentage of total net sales of PC
systems were 23% in both 1998 and 1997, compared to 16% in 1996. The level
of the Company's public 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. In
particular, the Company has been a supplier to a prime contractor to the
U.S. Air Force under the Desktop V contract. The Company's sales under
this contract represented 2% and 6% of total revenues from sales of PC
systems in 1998 and 1997, respectively. The Company expects minimal future
sales under this arrangement. In June 1998, the Company was selected as a
direct supplier to the Air Force under a blanket purchase agreement. 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.
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 commercial entities. Although the Company's
overall unit sales grew by 37%, the growth in unit sales to consumers and
to small office/home office customers more closely reflected the overall PC
industry growth. In addition, international sales were essentially flat
from 1996 to 1997. Sales to large and medium-sized business were 83%
higher in 1997 compared to 1996 and represented 13% of total PC sales in
1997. 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, general price
reductions for PC systems and to increased government sales of PC systems.
The Company's governmental sales 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. 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. ZEOS brand PC systems represented 7% of total PC
system sales in 1996.
15
SpecTek Semiconductor Memory Products. Net sales of semiconductor
memory products were 31% lower in 1998 compared to 1997, primarily due to a
significant decline in average selling prices partially offset by increases
in megabits of memory sold. Average selling prices in 1998 were 64% lower
compared to 1997, while megabits of memory sold in 1998 were 93% higher
compared to 1997. The increase in megabits of memory sold was primarily
due to reduced component test times, which resulted in increased throughput
for substantially all memory products. During the first quarter of fiscal
1998, the Company began to transition production to Synchronous DRAM
("SDRAM") products. Net sales of SDRAM memory products in 1998 represented
21% of total SpecTek sales of semiconductor memory products and were nearly
60% of total SpecTek sales in the fourth quarter of fiscal 1998. As is
typical with product transitions, the Company may experience volatility in
its test times and yields on less mature products, which would have a
corresponding effect on the level of output. Such volatility could have a
material adverse effect on the Company's business and results of
operations. 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.
The increase in megabits of memory products shipped in 1997 compared to
1996 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 expects average selling prices for its SpecTek semiconductor
memory products to continue to decline. The Company's SpecTek
semiconductor memory products results of operations are influenced by a
number of factors including pricing for, and availability of, nonstandard
semiconductor memory components. See "Certain Factors-SpecTek
Semiconductor Memory Products Operation."
The Company and MTI are parties to a Component Recovery Agreement, expiring
on September 2, 1999, under which MTI is required to deliver to the Company
all of the nonstandard memory components produced at MTI's semiconductor
manufacturing operations. Expiration, termination or renegotiation of the
Component Recovery Agreement could have material adverse effect on the
Company's business and results of operations. A substantial majority of
the semiconductor components used in the Company's SpecTek semiconductor
memory products operation is obtained from MTI. In 1998, the Company
obtained 75% of its components from MTI, compared to 74% in 1997 and 61%
in 1996. In 1998, the SpecTek semiconductor memory products operation
obtained substantially all of its components from three sources, including MTI.
Purchases from sources other than MTI are generally negotiated on a purchase
order basis and there can be no assurance the Company will be able to
negotiate future purchases on terms acceptable to the Company. Unless the
Company is able to continue obtaining significant quantities of nonstandard
semiconductor memory 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 and -Memory Product Transition."
Contract Manufacturing. The Company completed the sale of 90% of its
interest in MCMS on February 26, 1998; accordingly, results of operations
of MCMS subsequent to February 26, 1998 are excluded from the Company's
results of operations.
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.
16
Gross Margin
1998 1997 1996
---------------------- ---------------------- ----------------------
Amount % of Sales Amount % of Sales Amount % of Sales
---------- ---------- ---------- ---------- ---------- ----------
PC systems $ 183,155 12.2% $ 259,473 17.0% $ 190,142 15.2%
SpecTek memory products 21,401 22.5% 44,876 32.6% 38,037 27.4%
Contract manufacturing 17,598 12.4% 33,397 11.5% 33,006 8.8%
---------- ---------- ----------
Total gross margin $ 222,154 12.8% $ 337,746 17.3% $ 261,185 14.8%
========== ========== ==========
Personal Computer Systems. The Company's gross margin on sales of PC
systems was $76.3 million lower in 1998 compared to 1997 principally due to
generally a lower gross margin percentage realized on PC system sales. The
gross margin percentage for sales of the Company's PC systems decreased in
1998 compared to 1997 primarily as a result of losses and lower margins
realized on sales of the Company's notebook systems in the first two
quarters of fiscal 1998 and to losses realized from disposition of PC
component inventories. As a result of intense price pressure on notebook
products during the year, the Company's gross margins in 1998 were
adversely affected by significantly lower gross margins realized from sales
of the Company's notebook products. The Company's gross margin in 1998 was
favorably affected, however, by an adjustment made in the fourth quarter of
approximately $12 million related to revisions of estimates for certain
contingencies for product and process technology costs. Absent this
adjustment, the Company's gross margin as a percentage of net sales of PC
systems in 1998 and the fourth quarter of fiscal 1998 would have been
approximately 12% and 18%, respectively.
The Company continues to experience significant pressure on its gross
margins as a result of intense competition in the PC industry, consumer
expectations of more powerful PC systems at lower prices and the relatively
recent introduction and proliferation of products in the "sub-$1,000" PC
market. 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."
The Company's gross margin on sales of PC systems was $69.3 million or
36% higher 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. 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. 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.
SpecTek Semiconductor Memory Products. The gross margin percentage
realized by the Company's SpecTek semiconductor memory products operation
was lower in 1998 compared 1997 primarily due to significantly lower
average selling prices. Average selling prices in 1998 were 64% lower
compared to 1997. The Company expects average selling prices for its
SpecTek semiconductor memory products to continue to decline. As a result,
the gross margin for the Company's SpecTek semiconductor memory products
operation could decline further and adversely affect the Company's business
and results of operations. See "Certain Factors-SpecTek Semiconductor
Memory Products Operation-Pricing of 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 costs 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."
Contract Manufacturing. The Company completed the sale of 90% of its
interest in MCMS on February 26, 1998; accordingly, results of operations
of MCMS subsequent to February 26, 1998 are excluded from the Company's
results of operations.
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. Such assembly services
generally had a higher gross margin percentage than the balance of the
Company's contract manufacturing services.
17
Selling, General and Administrative
1998 % Change 1997 % Change 1996
-----------------------------------------------------------
Selling, general and administrative $284,292 43.4% $198,217 30.4% $151,959
as a % of net sales 16.4% 10.1% 8.6%
Selling, general and administrative ("SG&A") expenses were higher in 1998
compared to 1997 and in 1997 compared to 1996 primarily due to higher
levels of personnel costs and advertising associated with the Company's PC
operations and higher technical and professional fees primarily associated
with information technology consulting services. As part of a plan to
lower the Company's overall cost structure, in February 1998, the Company
announced it had taken several actions to realign the Company to
concentrate on its core markets and customers, including the consolidation
of its domestic and international operations and the reduction of
approximately 10% of its workforce. Partially as a result of these actions
and the continued focus by the Company on achieving operational
efficiencies, the Company has experienced improvement in the third and
fourth quarters of fiscal 1998 in the level of its operating expenses.
SG&A expenses in the third quarter of fiscal 1998 were 31% lower than the
second quarter of fiscal 1998 and were 10% lower in the fourth quarter of
fiscal 1998 than in the third quarter. 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.
Research and Development
1998 % Change 1997 % Change 1996
----------------------------------------------------------
Research and development $10,138 5.4% $ 9,621 215.4% $ 3,050
as a % of net sales 0.6% 0.5% 0.2%
Research and development expenses were slightly higher in 1998 compared
to 1997, but significantly higher in 1997 compared to 1996, primarily as a
result of the development activities associated with the Company's NetFRAME
enterprise server operation. In the fourth quarter of fiscal 1997, the
Company acquired NetFRAME Systems Incorporated. In connection with the
acquisition, the Company recognized a one-time charge of $3.9 million in
1997 for the write-off of purchased in-process research and development.
Other
Other expense in 1998 includes $11.1 million of costs associated with the
Company's actions taken to realign its PC operations to concentrate on its
core markets and customers. Other expense for 1998 also includes
$5.2 million for the write-off of capitalized costs associated with
abandoned in-development software projects and a one-time benefit resulting
from a net rebate of $4.4 million associated with a change of providers of
on-site service contracts for the Company's domestic desktop installed
base.
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 diluted 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.
18
Income Tax Provision
1998 % Change 1997 % Change 1996
----------------------------------------------------------
Income tax provision $38,151 (33.2%) $57,092 62.9% $35,055
The provision for income taxes in 1998 reflects the Company's effective
tax rate of 39.5% principally the federal statutory rate and the net effect
of state taxes, plus a $4.1 million valuation allowance recorded in the
second quarter of fiscal 1998 for a deferred tax asset relating to the Company's
consolidation of its NetFRAME enterprise server operation. The effective
income tax rate in 1997 was 39.5%, 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, which resulted from 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 in 1997 would have been 38.5%. The
effective tax rate in 1996 of 44.0% 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, the Company's effective income tax rate in 1996 would have
been 38.0%.
LIQUIDITY AND CAPITAL RESOURCES
As of September 3, 1998, the Company had cash, cash and equivalents and
liquid investments of $357.7 million, representing an increase of $163.7
million compared to August 28, 1997. Principal sources of liquidity in
1998 were $235.9 million of net proceeds realized from the sale of 90% of
the Company's interest in MCMS, formerly a wholly-owned subsidiary of the
Company, and $6.3 million from sales of property, plant and equipment.
Principal uses of cash in 1998 were property, plant and equipment
expenditures of $67.3 million for expansion and capacity improvements of
the Company's manufacturing operations and repayment of debt of $11.2
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. 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 second quarter of fiscal 1997, the Company
completed the sale of 3.0 million shares of its common stock in an
underwritten public offering and received net proceeds of $48.2 million.
In the same public offering, MTI sold 12.4 million shares of common stock
of the Company.
The Company has an unsecured credit agreement, expiring June 2001, with a
group of financial institutions providing for borrowings totaling $100.0
million. As of September 3, 1998, 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.
The Company's wholly-owned subsidiary, Micron Electronics Japan K.K., has
an unsecured revolving credit facility with a financial institution,
expiring June 1999, providing for borrowings of up to 1.5 billion Japanese
yen (US$11.1 million at September 3, 1998). As of September 3, 1998, the
Company was eligible to borrow the full amount under the agreement and
there was US$8.2 million outstanding.
At September 3, 1998, the Company had commitments of $10.0 million for
capital expenditures for expansion and upgrade of facilities and equipment.
The Company anticipates making capital expenditures in fiscal 1999 in
excess of $50 million.
The Company expects that its future working capital requirements will
continue to increase. The Company believes that currently available cash,
cash equivalents and liquid investments, cash flows from operations and the
Company's current credit facilities will be sufficient to fund its
operations through fiscal 1999.
19
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from nonowner sources.
The adoption of SFAS No. 130 is effective for the Company in fiscal 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 requires publicly
held companies to report financial and other information about key revenue-
producing segments of the entity for which such information is available
and is utilized by the chief operation decision-maker. Specific
information to be reported for individual segments includes profit or loss,
certain revenue and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the financial
statements is also to be provided. SFAS No. 131 is effective for the
Company in fiscal 1999 and the form of the presentation of the Company's
financial statements has not yet been determined.
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires companies to capitalize certain costs of
computer software developed or obtained for internal use, provided that
those costs are not research and development. The Company expects to adopt
the provisions of SOP 98-1 in its fiscal 1999 and adoption is not expected
to have a material effect on the Company's results of operations or
financial position.
CERTAIN FACTORS
In addition to factors discussed elsewhere in this Form 10-K and in other
Company filings with the Securities and Exchange Commission, 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 contemplated 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, the Company's ability
to accurately forecast demand and selling prices for its PC products,
fluctuating market pricing for PCs and semiconductor memory products,
seasonal government purchasing cycles, inventory obsolescence, the
Company's ability to effectively manage inventory levels, changes in
product mix, manufacturing and production constraints, fluctuating
component costs, the effects of product reviews and industry awards,
availability and pricing of the memory components used by the Company's
SpecTek semiconductor memory products operation, critical component
availability, seasonal cycles common in the PC industry, the timing of
new product introductions by the Company and its competitors and global
market and economic conditions. 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 the Company, MTI and other
companies in the PC industry, announcements of technological innovations,
new commercial products or new strategies by competitors, component
availability and pricing, and other factors.
Management
The Company has experienced increased complexity of its operations, in
operating and financial information systems and in its scope of operations.
This increased complexity 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 and other resources and systems. In
addition, during the past year, the Company underwent numerous changes in
its management structure and reduced its workforce. 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 recently
initiated a reorganization of its operation along its customer segments.
There can be no assurance that the Company's management resources,
operating and financial information systems and other resources, and
systems will be adequate to support the Company's existing or future
operations, the failure of which could have a material adverse effect on
the Company's business and results of operations.
20
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, and as a majority-owned subsidiary of MTI, is licensed
under certain license agreements between MTI and third parties. The
Company's rights under license agreements between MTI and third parties may
terminate in the event that the Company is no longer a majority-owned
subsidiary of MTI. Intellectual property agreements and license agreements
generally require one-time or periodic royalty payments and are subject to
expiration at various times. 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.
MTI Ownership of Common Stock of the Company
As of September 3, 1998, MTI owned 64% of the Company's outstanding
common stock. In addition, three of the five 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 or modification of certain of the Company's arrangements with
MTI 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
arrangements may be terminated by MTI, which could have a material adverse
effect on the Company's business and results of operations. See
"Intellectual Property Matters" and "SpecTek Semiconductor Memory Products
Operation-Dependence on Component Recovery Agreement with MTI."
The level of MTI's ownership of the common stock of the Company may limit
the Company's ability to complete future equity financings. In addition,
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.
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 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.
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 skills
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,
and information technology, engineering and technical support resources,
could have a material adverse effect on the Company's business and results
of operations. 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.
21
Year 2000
The Year 2000 presents issues because many computer hardware and software
systems use only the last two digits to refer to a calendar year. Consequently,
these systems may fail to process dates after December 31, 1999, which may
cause system failures. In 1998, the Company established a Year 2000
project team with representatives from all of the Company's business units.
The Company is currently in the process of assessing the Year 2000
readiness of the hardware associated with its internal information
technology systems, as well as embedded technology associated with its
manufacturing and physical facilities. The Company anticipates completion
of this evaluation in the fourth calendar quarter of 1998. Additionally,
the software utilized on information technology systems within the Company
has previously been evaluated. Where necessary, appropriate remediation
efforts have or will be undertaken. The Company expects to successfully
implement necessary modifications of its internal systems to address Year
2000 issues. However, if necessary modifications are not made on a timely
basis, Year 2000 issues could have a material adverse effect on the
Company's business or financial condition.
In addition to internal Year 2000 readiness efforts, the Company is in
process of contacting its key suppliers to assess their compliance. It is
anticipated that this assessment process can be substantially completed by
the end of calendar year 1998. The Company anticipates that its actions
will minimize risks to the Company which might arise from failure of such
suppliers to adequately address Year 2000 issues. However, there can be
no assurance that the failure of suppliers to address Year 2000 issues
will not have a material adverse effect on the Company's business or
financial condition. Commencing in the first calendar quarter of 1999, the
Company plans to develop a contingency plan designed to address problems
which might arise from the failure of the Company or its suppliers to
timely and adequately address Year 2000 issues.
Through the end of fiscal 1998, the Company has incurred incremental
costs of approximately $1.3 million related to Year 2000 assessment and
remediation efforts. The total estimated cost to complete the Company's
internal readiness program is from $1.0 million to $3.0 million. This
estimate, which does not include any costs which may be incurred by the
Company if its key suppliers fail to timely address Year 2000 issues, is
based on currently known circumstances and various assumptions regarding
future events. The actual cost of Year 2000 assessment and remediation
efforts could differ materially from the estimate.
The Company believes that it is not legally responsible for any costs
incurred by customers to address Year 2000 issues. However, the Company
recognizes the potential for claims against it and other manufacturers
arising from products which are not Year 2000 compliant, and there can be
no assurance that such claims would not have a material adverse effect on
the Company's business or financial condition.
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
The PC industry is highly competitive and has been characterized by
intense pricing pressure, generally low gross margin percentages, rapid
technological advances in hardware and software, frequent introduction of
new products, and rapidly declining component costs. Competition in the PC
industry is based primarily upon brand name recognition, performance,
price, reliability and service and support. The Company's sales of PC
systems have historically benefited from increased name recognition and
market acceptance of the Company's PC systems, primarily resulting from the
receipt by the Company of awards from trade publications recognizing the
price and performance characteristics of Micron brand PC systems and the
Company's service and support functions. 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.
Many of the Company's PC competitors have greater brand name recognition
and market share, offer broader product lines, have substantially greater
financial, technical, marketing and other resources than the Company. In
addition, the Company's competitors 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. In addition, the Company may be at a relative cost
disadvantage to certain of its competitors as a result of the Company's
U.S. dollar denominated purchases of PC components during a period of
relative weakening of the U.S. dollar. The failure of the Company to
compete effectively in the marketplace could have an adverse effect on the
Company's business and results of operations.
22
The Company competes with a number of PC manufacturers, which sell their
products primarily through direct channels, including Dell Computer, Inc.
and Gateway 2000, Inc. The Company also competes with PC manufacturers,
such as Apple Computer, Inc., Compaq Computer Corporation, Hewlett-Packard
Company, International Business Machines Corporation, NEC Corporation and
Toshiba Corporation among others, which have traditionally sold their
products 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 United
States PC direct sales market, these competitors may effect a pricing
strategy that is more aggressive than the current pricing in the direct
sales market or may have pricing strategies influenced by relative
fluctuations in the U.S. dollar compared to other currencies.
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 accurately forecast
demand for its PC products and effectively manage its PC inventories. 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, excess PC inventories and inventory
obsolescence resulting from, among other things, the Company's inaccuracy
in forecasting demand for its PC products, the typically longer lead times
associated with notebook product supply, 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 forecast demand for its PC products and
obtain adequate, but not excessive, supplies of components to meet actual
demand. The failure of the Company to manage its inventories effectively
could result in excess PC inventories, inventory obsolescence, 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 notebook products 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.
23
State Taxation
During 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.
SpecTek Semiconductor Memory Products Operation
Dependence on Component Recovery Agreement with MTI
The Company has a Component Recovery Agreement (the "Component Recovery
Agreement") with MTI, which expires on September 2, 1999, and may be
terminated by MTI in the event that MTI's ownership of the Company falls
below 30%. Under the Component Recovery Agreement, MTI is required to
deliver to the Company all of the nonstandard memory 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. Historically, a substantial majority of the components
used in the Company's SpecTek semiconductor memory products operation has
been obtained from MTI. There can be no assurance the Company will be able to
negotiate future purchases on terms acceptable to the Company from MTI after
the expiration of the Component Recovery Agreement. Any reduction in the
availability of functionality of nonstandard semiconductor memory components
from MTI could have a material adverse effect on the Company's business and
results of operations.
MTI is transitioning its semiconductor memory operations toward
Synchronous DRAM ("SDRAM") from EDO memory products and toward 64 Meg from
16 Meg densities. Such transition may have a significant adverse impact on
the volume or grade of nonstandard memory components supplied by MTI.
Other 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 memory components supplied by MTI. There
can be no assurance that MTI will continue to produce adequate volumes of
nonstandard memory components to maintain the Company's SpecTek
semiconductor memory products operation at existing or historic levels.
Many semiconductor memory manufacturers are reluctant to sell nonstandard
memory components because such components could compete with their full
specification memory 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 memory 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 memory components from the Company's suppliers
could have a material adverse effect on the Company's business and results
of operations.
Pricing of Semiconductor Memory 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 sharp declines. The Company
believes that such declines 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 changes in relative weakness or
strength of certain currencies, 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.
24
Memory Product Transition
The semiconductor memory industry is characterized by, among other
things, rapid technological change, frequent product introductions and
enhancements, difficulties experienced in transitioning to new products,
relatively short product life cycles and volatile market conditions.
During the first quarter of fiscal 1998, SpecTek began to transition
production to SDRAM memory products. Net sales of SDRAM memory products in
1998 represented 21% of total SpecTek sales of semiconductor memory
products and were nearly 60% of total SpecTek sales in the fourth quarter
of fiscal 1998. In addition, the Company began the initial phase of its
transition to 64 Meg memory products during the fourth quarter of fiscal
1998, which will require significant investments in new capital equipment.
During periods of product transition, the Company's SpecTek semiconductor
memory products operation has experienced in the past, and may experience
in the future, significant increases in component test times and
corresponding decreases in throughput. Future gross margins could be
adversely affected if the Company is unable to effectively transition to
new products in a timely fashion.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of the Company's liquid investments and the majority of its
debt are at fixed interest rates, and therefore the fair value of these
instruments is affected by changes in market interest rates. However, as of
September 3, 1998, approximately 90% of the Company's liquid investments mature
within three months and the remainder within one year. As of September 3,
1998, the Company believes the reported amounts of liquid investments and debt
to be reasonable approximations of their fair values and has the ability and
intent to hold these instruments to maturity. As result, the Company
believes that the market risk arising from its holdings of financial
instruments is minimal.
The Company uses the U.S. Dollar as its functional currency, except for
its operations in Japan. The assets and liabilities of the Company's
Japanese 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
have not been material.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements:
Consolidated Statements of Operations for the Fiscal Years Ended
September 3, 1998, August 28, 1997 and August 29, 1996 27
Consolidated Balance Sheets as of September 3, 1998 and August 28, 1997 28
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended September 3, 1998, August 28, 1997 and August 29, 1996 29
Consolidated Statements of Cash Flows for the Fiscal Years Ended
September 3, 1998, August 28, 1997 and August 29, 1996 30
Notes to Consolidated Financial Statements 31
Report of Independent Accountants 43
Financial Statement Schedule:
Schedule II-Valuation and Qualifying Accounts for the Fiscal Years Ended
September 3, 1998, August 28, 1997 and August 29, 1996 48
26
Micron Electronics, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
Fiscal year ended September 3, 1998 August 28, 1997 August 29, 1996
- ----------------------------------------------------------------------------------------------------
Net sales $1,733,432 $1,955,783 $1,764,920
Cost of goods sold 1,511,278 1,618,037 1,503,735
---------- ---------- ----------
Gross margin 222,154 337,746 261,185
Selling, general and administrative 284,292 198,217 151,959
Research and development 10,138 9,621 3,050
Other expense (income), net 11,618 (6,550) 978
Restructuring charge - - 29,200
---------- ---------- ----------
Operating income (loss) (83,894) 136,458 75,998
Gain on sale of MCMS common stock 156,222 - -
Interest income, net 13,776 7,896 3,639
---------- ---------- ----------
Income before taxes 86,104 144,354 79,637
Income tax provision 38,151 57,092 35,055
---------- ---------- ----------
Net income $ 47,953 $ 87,262 $ 44,582
========== ========== ==========
Earnings per share:
Basic $ 0.50 $ 0.93 $ 0.49
Diluted 0.50 0.92 0.48
Number of shares used in per share
calculation:
Basic 95,657 94,118 91,687
Diluted 96,027 94,649 92,489
The accompanying notes are an integral part of the financial statements.
27
Micron Electronics, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except par value amounts)
As of September 3, 1998 August 28, 1997
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $328,537 $ 183,935
Liquid investments 29,204 10,068
Receivables 128,269 223,476
Inventories 30,848 115,501
Deferred income taxes 19,172 26,240
Other current assets 2,432 3,928
-------- -------
Total current assets 538,462 563,148
Property, plant and equipment, net 147,912 191,536
Deferred income taxes 2,748 -
Other assets 3,321 3,662
-------- --------
Total assets $692,443 $758,346
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $214,930 $304,608
Accrued licenses and royalties 18,585 36,034
Current debt 16,798 18,622
-------- --------
Total current liabilities 250,313 359,264
Long-term debt 11,730 20,019
Deferred income taxes - 86
Other liabilities 13,506 13,406
--------- --------
Total liabilities 275,549 392,775
--------- --------
Commitments and contingencies
Common stock, $.01 par value, authorized 150.0 million shares; issued
and outstanding 95.9 million and 95.6 million shares, respectively 959 956
Additional capital 122,837 120,108
Retained earnings 293,061 245,139
Cumulative foreign currency translation adjustment 37 (632)
-------- -------
Total shareholders' equity 416,894 365,571
-------- --------
Total liabilities and shareholders' equity $692,443 $758,346
======== ========
The accompanying notes are an integral part of the financial statements.
28
Micron Electronics, Inc.
Consolidated Statements of Shareholders' Equity
(Dollars and shares in thousands)
Fiscal year ended September 3, 1998 August 28,1997 August 29, 1996
Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of year 95,555 $ 956 92,473 $ 925 91,431 $ 914
Stock sold 254 2 3,135 31 136 1
Stock award - - - - 151 2
Purchase and retirement of stock (14) - (127) (1) (238) (2)
Stock options 68 1 74 1 993 10
------ -------- ------ ------- ------ --------
Balance at end of year 95,863 $ 959 95,555 $ 956 92,473 $ 925
====== ======== ====== ======= ====== ========
ADDITIONAL CAPITAL
Balance at beginning of year $120,108 $ 69,392 $ 58,613
Stock sold 1,912 49,895 1,283
Stock award - - 1,298
Purchase and retirement of stock (15) (108) (156)
Stock options 801 713 997
Tax effect of stock purchase plans 31 216 7,357
-------- -------- --------
Balance at end of year $122,837 $120,108 $ 69,392
======== ======== ========
RETAINED EARNINGS
Balance at beginning of year $245,139 $158,143 $114,136
Purchase and retirement of stock (31) (266) (575)
Net income 47,953 87,262 44,582
-------- -------- --------
Balance at end of year $293,061 $245,139 $158,143
======== ======== ========
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENT
Balance at beginning of year $ (632) $ - $ -
Effect of balance sheet translations (1,845) (632) -
Effect of sale of MCMS 2,514 - -
-------- -------- --------
Balance at end of year $ 37 $ (632) $ -
======== ======== ========
The accompanying notes are an integral part of the financial statements.
29
Micron Electronics, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Fiscal year ended September 3, 1998 August 28, 1997 August 29, 1996
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 47,953 $ 87,262 $ 44,582
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 39,166 35,399 22,226
Gain on sale of MCMS common stock (156,222) - -
Write-down of and losses from sales of fixed assets 8,653 347 105
Write-off of purchased in-process research and development 3,938 -
Restructuring charge - - 29,200
Changes in assets and liabilities, net of the effect of
the sale of MCMS and acquisition and merger transactions:
Receivables 51,179 (41,608) (48,478)
Inventories 61,050 (37,077) 8,382
Deferred income taxes 6,360 15,797 (14,382)
Accounts payable and accrued expenses (44,990) 59,111 66,592
Accrued licenses and royalties (17,330) 8,793 9,165
Other 1,711 (1,848) 420
---------- ---------- -----------
Net cash provided by (used for) operating activities (2,470) 130,114 117,812
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (67,290) (105,752) (90,122)
Proceeds from sales of property, plant and equipment 6,339 3,913 6,354
Purchases of held-to-maturity investment securities (52,527) (10,073) -
Proceeds from maturities of investment securities 34,000 - -
Proceeds from sale of MCMS, net of MCMS cash 235,884 - -
Acquisition of NetFRAME, net of cash acquired - (16,068) -
Other (2,091) (915) 21
---------- ---------- -----------
Net cash provided by (used for) investing activities 154,315 (128,895) (83,747)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 1,718 21,799 42,770
Repayments of debt (11,162) (4,874) (31,969)
Proceeds from issuance of common stock 2,716 50,640 2,300
Purchase and retirement of stock (46) (375) (733)
Other (94) (313) -
---------- ---------- -----------
Net cash provided by (used for) financing activities (6,868) 66,877 12,368
---------- ---------- -----------
Net increase in cash and cash equivalents 144,977 68,096 46,433
Effect of exchange rate changes on cash and cash equivalents (375) - -
Cash and cash equivalents at beginning of year 183,935 115,839 69,406
---------- ---------- ----------
Cash and cash equivalents at end of year $ 328,537 $ 183,935 $ 115,839
========== ========== ==========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 39,570 $ 50,997 $ 36,076
Interest paid, net of amounts capitalized 197 776 253
The accompanying notes are an integral part of the financial statements.
30
Micron Electronics, Inc.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands, except per share amounts)
Significant Accounting Policies
Business: Micron Electronics, Inc. and its subsidiaries (collectively,
the "Company"), a provider of personal computers sold through the direct
channel, develops, manufactures, markets and supports electronic products
for a broad range of computing and digital applications. The Company
custom builds a wide variety of notebook and desktop PC systems and servers
for its core customers-in consumer, commercial and public sectors. The
Company's SpecTek semiconductor memory products operation recovers and markets
memory components for specific applications.
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. The fiscal year ended September 3, 1998 contained 53 weeks
compared to 52 weeks in fiscal years 1997 and 1996. As of September 3,
1998, 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.
Actual results could differ from those estimates.
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.
Earnings per share: The Company adopted Statements of Financial
Accounting Standard ("SFAS") No. 128, "Earnings Per Share" in fiscal 1998.
Basic earnings per share is computed using the weighted average number of
common shares outstanding. Diluted earnings per share is computed using
the weighted average number of common shares outstanding and common
equivalent shares outstanding. Common equivalent shares result from the
assumed exercise of outstanding stock options. Historical per share
amounts have been restated in accordance with SFAS No. 128.
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 September 3, 1998. 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.
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, or are governmental entities. 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.
31
Micron Electronics, Inc.
Notes to Consolidated Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
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 and software.
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.
Warranty and services: The Company provides currently for the estimated
costs incurred under its warranty and other service programs.
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. The assets and liabilities
of the Company's Japanese 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 June 1997, the Financial
Accounting Standards Board ("FASB") issued Statements of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. The adoption of SFAS No.
130 is effective for the Company in fiscal 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 requires publicly
held companies to report financial and other information about key revenue-
producing segments of the entity for which such information is available
and is utilized by the chief operation decision-maker. Specific
information to be reported for individual segments includes profit or loss,
certain revenue and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the financial
statements is also to be provided. SFAS No. 131 is effective for the
Company in fiscal 1999 and the form of the presentation of the Company's
financial statements has not yet been determined.
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires companies to capitalize certain costs of
computer software developed or obtained for internal use, provided that
those costs are not research and development. The Company expects to adopt
the provisions of SOP 98-1 in its fiscal 1999 and adoption is not expected
to have a material effect on the Company's results of operations or
financial position.
Reclassifications: Certain reclassifications have been made, none of
which affected results of operations, to present the statements on a
consistent basis.
Gain on Sale of MCMS Common Stock
On February 26, 1998, the Company completed the sale of 90% of its
interest in MCMS, Inc. ("MCMS"), formerly Micron Custom Manufacturing
Services, Inc. and a wholly owned subsidiary of the Company. The sale was
structured as a recapitalization of MCMS (the "Recapitalization"), whereby
Cornerstone Equity Investors IV, L.P., other investors and certain members
of MCMS' management, including Robert F. Subia, then a director of the
Company, acquired the 90% interest in MCMS. In exchange for the 90%
interest in MCMS, the Company received $249.2 million in cash. Results of
operations in 1998 include a pre-tax gain of $156.2 million ($94.5 million
or $0.98 per diluted share, net of taxes) realized from the sale.
Subsequent to the Recapitalization of MCMS, the Company owns a 10% interest
in MCMS, which is accounted for by the Company on the cost basis.
Accordingly, results of operations of MCMS subsequent to February 26, 1998
have been excluded from the Company's results of operations.
32
Micron Electronics, Inc.
Notes to Consolidated Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
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 developed and marketed 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. The
analysis 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 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 ultimately to 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 amortized using the straight-line method over the estimated
useful lives of 30 months. See "Other Expense (Income), Net."
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 diluted 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, $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
September 3, 1998 August 28, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Held to maturity investment securities, at amortized cost:
Commercial paper $ 70,434 $ 72,685
State and local government 37,425 45,235
U.S. Government agency 205,007 39,257
Bankers' acceptances - 3,767
---------- ----------
312,866 160,944
Less cash equivalents (283,662) (150,876)
---------- ----------
Liquid investments $ 29,204 $ 10,068
========== ==========
Securities classified as held-to-maturity have remaining maturities
within one year.
33
Micron Electronics, Inc.
Notes to Consolidated Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
Receivables
September 3, 1998 August 28, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Trade receivables $ 122,294 $ 228,220
Receivables from affiliates 105 4,227
Income taxes recoverable from MTI 3,068 1,377
Other 10,090 4,341
Allowance for doubtful accounts (3,709) (7,556)
Allowance for returns and discounts (3,579) (7,133)
---------- ----------
$ 128,269 $ 223,476
========== ==========
Inventories
September 3, 1998 August 28, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Raw materials and supplies $ 16,144 $ 81,505
Work in progress 4,469 11,601
Finished goods 10,235 22,395
--------- ----------
$ 30,848 $ 115,501
========== ==========
Property, Plant and Equipment
September 3, 1998 August 28, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Land $ 1,234 $ 1,639
Buildings 34,826 44,403
Equipment and software 145,310 167,413
Assets in progress 38,197 42,586
---------- ----------
219,567 256,041
Less accumulated depreciation and amortization (71,655) (64,505)
---------- ----------
$ 147,912 $ 191,536
========== ==========
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
September 3, 1998 August 28, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Trade accounts payable $ 146,124 $ 237,066
Payable to affiliates 20,601 10,971
Salaries, wages and benefits 20,496 26,006
Income taxes payable 92 2,193
Equipment contracts payable 3,884 2,139
Accrued warranty 17,128 12,988
Other 6,605 13,245
---------- ----------
$ 214,930 $ 304,608
========== ==========
34
Micron Electronics, Inc.
Notes to Consolidated Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
Debt
September 3, 1998 August 28, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Notes payable in periodic installments through September 2001,
weighted average interest rate of 7.63% and 7.52%, respectively $ 16,068 $ 22,644
Capitalized lease obligations payable in monthly installments through
June 2000, interest rate of 7.28% and 7.28%, respectively 4,284 5,881
Amounts outstanding under revolving loan agreement, due June 1999,
variable interest of 1.34% and 0.90%, respectively 8,176 9,283
Amounts outstanding under revolving loan agreement, due May 1998
variable interest of 7.63% at August 28, 1997 - 833
--------- --------
28,528 38,641
Less current portion (16,798) (18,622)
--------- ---------
$ 11,730 $ 20,019
========= =========
The Company has an unsecured credit agreement, expiring June 2001, with a
group of financial institutions providing for borrowings totaling $100.0
million. As of September 3, 1998, 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.
The Company's wholly-owned subsidiary, Micron Electronics Japan K.K., has
an unsecured revolving credit facility with a financial institution,
expiring June 1999, providing for borrowings of up to 1.5 billion Japanese
yen (US$11.1 million at September 3, 1998). As of September 3, 1998, the
Company was eligible to borrow the full amount under the agreement and
there was US$8.2 million outstanding.
Certain of the Company's notes payable are collateralized by equipment
with a total cost of $20.9 million and accumulated depreciation of $9.1
million as of September 3, 1998. Equipment under capital leases and
accumulated amortization thereon were $6.3 million and $2.5 million,
respectively, as of September 3, 1998. Maturities of debt and future
minimum lease payments are as follows:
Revolving
Notes Capital Credit
Fiscal year Payable Lease Agreement
----------------------------------------------------------------------
1999 $ 6,346 $ 2,514 $ 8,176
2000 4,824 2,095 -
2001 4,806 - -
2002 92 - -
Less interest - (325 -
-------- -------- --------
$ 16,068 $ 4,284 $ 8,176
======== ======== ========
Interest income is net of approximately $48,000, $1,075,000 and $176,000
of interest expense in 1998, 1997 and 1996, respectively. Construction
period interest of approximately $2,040,000, $981,000 and $326,000 was
capitalized in 1998, 1997 and 1996, respectively.
35
Micron Electronics, Inc.
Notes to Consolidated Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
Other Expense (Income), Net
Other expense in 1998 includes $11.1 million of costs associated with the
Company's actions taken in the second quarter of fiscal 1998 to realign its
PC operations to concentrate on its core markets and customers. Such
actions included the consolidation of the Company's domestic and
international PC operations and the reduction of 10% of its workforce, or
approximately 450 employees, from generally all areas of the Company.
Costs associated with the realignment included employee termination
benefits of $6.7 million, the write-down of equipment and leasehold
improvements and the write-off of current technologies and other intangible
assets as a result of the consolidation of the Company's NetFRAME
enterprise server operations. As of September 3, 1998, essentially all of
the 450 employees had been terminated and there was no remaining liability
recorded for termination benefits. Other operating expense for fiscal 1998
also includes $5.2 million for the write-off of abandoned in-development
software projects. Other income for fiscal 1998 includes a one-time
benefit recognized by the Company resulting from a net rebate of $4.4
million associated with a change of providers of on-site service contracts
for the Company's domestic desktop installed base.
Stock Purchase and Incentive Plans
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 508,000 shares had been issued as of
September 3, 1998.
In December 1994, ZEOS awarded shares of its common stock to certain of
its employees subject to their continued employment. 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's 1995 Stock Option Plan (the "Option Plan") provides for the
granting of incentive and nonstatutory stock options. As of September 3,
1998, there were 10,000,000 shares of common stock reserved for issuance
under the Option Plan. Exercise prices of the incentive and nonstatutory
stock options have generally been 100% and 85%, respectively, of the fair
market value of the Company's common stock on the date of grant. Options
are granted subject to terms and conditions determined by the Board of
Directors, and generally are exercisable in increments of 20% for each year
of employment beginning one year from date of grant and generally expire
six years from date of grant.
On March 19, 1998, the Board of Directors approved an option repricing
program pursuant to which all employees, except certain executive officers,
could exchange outstanding options under the Option Plan for new options
having an exercise price equal to the average closing price of the Company's
common stock for the five business days preceding April 3, 1998 and having
generally the same terms and conditions, including vesting and expiration
terms, as the options exchanged. Options to purchase 2,345,000 shares having
an average exercise price of $18.17 were exchanged under the program.
During fiscal 1998, Mr. Joel J. Kocher, the Company's Chief Executive
Officer and Chairman of the Board of Directors, was granted options to
purchase a total of 650,000 shares of the Company's Common Stock. Of these
650,000 options, 500,000 were granted under the Option Plan and 150,000
were granted as non-plan grants. A total of 250,000 options vest after
completion by Mr. Kocher of seven (7) years of employment with the Company,
subject to immediate early vesting if the Company achieves certain
financial criteria relating to profitability, net revenue, net margin and
cash balance increases.
36
Micron Electronics, Inc.
Notes to Consolidated Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
Option activity is summarized as follows (amounts in thousands, except
per share amounts):
Fiscal Year Ended September 3, 1998 August 28, 1997 August 29, 1996
-------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of shares price of shares price of shares price
-------------------- -------------------- --------------------
Outstanding at beginning of year 3,559 $ 16.98 1,908 $ 13.70 1,795 $ 8.22
Granted 5,842 13.20 1,926 19.90 1,294 12.11
Exercised (68) 11.37 (75) 9.49 (992) 1.02
Terminated or canceled (4,041) 17.40 (200) 16.52 (189) 17.35
--------- -------- ---------
Outstanding at end of year 5,292 12.56 3,559 16.98 1,908 13.70
========= ======== =========
Exercisable at end of year 747 13.24 473 14.45 172 13.84
Shares available for future grant under
the Option Plan 4,764 1,416 3,141
The following table summarizes information about the Company's stock
options outstanding as of September 3, 1998 (amounts in thousands, except
per share amounts):
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Number remaining exercise Number exercise
Range of exercise prices of shares life (years) price of shares price
------------------------ --------- ----------- -------- --------- --------
Less than $5.00 17 0.23 $3.00 17 $3.00
$5.00 - $10.00 742 5.43 9.14 8 9.31
$10.01 - $15.00 3,836 5.23 12.47 564 12.36
$15.01 - $20.00 600 4.26 17.17 150 17.44
Greater than $20.00 97 4.40 21.96 8 21.96
--------- ----------- ------- --------- -------
5,292 747
========= =========
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
using the intrinsic value method prescribed by APB No. 25, "Accounting for
Stock Issued to Employees."
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 1998,
1997 and 1996 follow:
Stock Option Plan Shares Employee Stock Purchase Plan Shares
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Assumptions:
Expected life 3.3 years 3.5 years 3.5 years 0.5 years 0.5 years 0.5 years
Risk-free interest rate 5.6% 6.2% 5.9% 5.1% 5.0% 5.1%
Expected volatility 70.0% 70.0% 70.0% 70.0% 70.0% 70.0%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Weighted average fair values:
Exercise price equal to market price $6.57 $10.68 $6.50 - - -
Exercise price less than market price 9.25 11.41 6.61 $3.78 $5.39 $3.68
37
Micron Electronics, Inc.
Notes to Consolidated Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
Stock based compensation costs would have reduced pretax income by $12.1
million, $6.5 million and $1.3 million in 1998, 1997 and 1996, respectively
($7.3 million, $4.0 million and $0.8 million, and $0.08, $0.04 and $0.01
per diluted share, respectively, net of taxes), if the fair values of all
options granted during 1998, 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 1998, 1997 and 1996 may
not be 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 $3,729,000, $4,311,000 and $3,051,000 in 1998, 1997 and 1996,
respectively.
Transactions With Affiliates
Fiscal year ended September 3, 1998 August 28, 1997 August 29, 1996
---------------------------------------------------------------------------------------------------------------------------
Net sales $ 18,538 $ 26,791 $ 46,579
Inventory purchases 34,393 82,337 198,753
Component recovery agreement expenses 27,350 44,534 -
Revenue sharing expenses - - 49,645
Administrative services and other expenses 1,147 934 1,680
Property, plant and equipment purchases 4,395 930 574
Property, plant and equipment sales 5,307 575 9
Construction management services - 749 940
The above transactions with affiliates include those of MCMS through
February 26, 1998.
During the fourth quarter of fiscal 1996, the Company entered into a new
component recovery agreement with MTI, effective August 30, 1996 and
expiring September 2, 1999. The new agreement replaced the revenue sharing
agreement. Pursuant to the component recovery agreement, the Company
generally pays to MTI an amount equal to one-half of the operating
income generated from sales of such components. Revenue sharing expense
reflected costs 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.
Commitments
As of September 3, 1998, the Company had commitments of $9.5 million for
equipment purchases and $0.5 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 2002, with renewals thereafter at the option of the Company.
Future minimum lease payments total approximately $5,101,000 and are as
follows: $2,038,000 in 1999, $1,729,000 in 2000, $1,163,000 in 2001 and
$171,000 in 2002.
Rental expense was approximately $5,402,000, $3,620,000 and $2,405,000 in
1998, 1997 and 1996, respectively.
38
Micron Electronics, Inc.
Notes to Consolidated 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 September 3, 1998 August 28, 1997 August 29,1996
-------------------------------------------------------------------------------------------------
Current:
U.S. federal $ 29,299 $ 34,722 $ 44,128
State 2,089 6,573 5,309
---------- ---------- ----------
31,388 41,295 49,437
---------- ---------- ----------
Deferred:
U.S. federal 6,178 13,625 (11,923)
State 585 2,172 (2,459)
---------- ---------- ----------
6,763 15,797 (14,382)
---------- ---------- ----------
Income tax provision $ 38,151 $ 57,092 $ 35,055
========== ========== ==========
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
$31,000, $216,000 and $7,357,000 for 1998, 1997 and 1996, 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 September 3, 1998 August 28, 1997 August 29, 1996
--------------------------------------------------------------------------------------------------------------------------
U.S. federal income tax at statutory rate $ 30,136 $ 50,524 $ 27,873
State taxes, net of federal benefit and state tax credits 1,743 4,777 2,254
Valuation allowance 4,139 - -
In-process research and development - 1,378 -
Goodwill - - 4,935
Other 2,133 413 (7)
---------- ---------- ----------
$ 38,151 $ 57,092 $ 35,055
========== ========== ==========
39
Micron Electronics, Inc.
Notes to Consolidated 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
$30,163,000 (net of a $4,139,000 million valuation allowance) and
$38,750,000 and liabilities totaled approximately $8,243,000 and
$12,596,000 at September 3, 1998 and August 28, 1997, respectively. The
tax effects of temporary differences and carryforwards that give rise to
the deferred tax assets and liabilities are as follows:
As of September 3, 1998 August 28, 1997
--------------------------------------------------------------------------------------------------------------------------
Current deferred tax asset:
Receivables $ 1,821 $ 3,885
Inventories 2,329 4,724
Accrued expenses 10,060 6,768
Accrued licenses and royalties 2,410 8,085
Accrued compensation 1,966 1,959
Other 586 819
-------- ---------
19,172 26,240
-------- ---------
Noncurrent deferred tax asset (liability):
Property, plant and equipment (1,374) (5,443)
Investment basis difference 3,841 -
Accrued expenses 4,347 3,721
Accrued license and royalties (711) (36)
Accrued compensation 1,460 1,080
Other (4,815) 592
---------- ----------
2,748 (86)
---------- ----------
Total net deferred taxes $ 21,920 $ 26,154
========== ==========
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 $14.1 million (including $11.8 million as a
result of the NetFRAME acquisition) that expire beginning in 2006 and
apportioned state operating loss carryforwards of $37.1 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.
40
Micron Electronics, Inc.
Notes to Consolidated Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
Earnings Per Share
During fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per
Share," which changed the standard for computing and presenting earnings
per share. Earnings per share for periods prior to fiscal 1998 have been
restated as required by SFAS 128. Diluted earnings per share excludes the
effect of antidilutive employee stock options.
A reconciliation of the income available to common shareholders and
number of common shares outstanding follows:
Fiscal year ended September 3, 1998 August 28, 1997 August 29, 1996
-------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 47,953 $ 87,262 $ 44,582
========== ========== ==========
Common shares outstanding:
Weighted average shares outstanding - basic 95,657 94,118 91,687
Effect of dilutive stock options 370 531 802
---------- --------- ----------
Weighted average shares outstanding - diluted 96,027 94,649 92,489
========== ========= ==========
Earnings per share:
Basic $ 0.50 $ 0.93 $ 0.49
Diluted 0.50 0.92 0.48
Export Sales
Export sales were approximately $156,761,000, $143,446,000 and
$181,371,000 in 1998, 1997 and 1996, respectively. Export sales are
denominated primarily in United States dollars.
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.
41
Micron Electronics, Inc.
Quarterly Financial Information (Unaudited)
(Tabular amounts in thousands, except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------
1998
Net sales $339,022 $340,760 $494,760 $558,890
Gross margin 75,179 65,303 4,458 77,214
Net income 16,195 5,928 24,765 1,065
Earnings per share:
Basic 0.17 0.06 0.26 0.01
Diluted 0.17 0.06 0.26 0.01
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:
Basic 0.16 0.21 0.30 0.27
Diluted 0.16 0.20 0.30 0.27
Results of operations in the fourth quarter of fiscal 1998 were favorably
affected by $14.7 million ($8.9 million or $0.09 per diluted share, net of
taxes), including a benefit to cost of goods sold of $11.8 million related
to revisions of estimates for certain contingencies for product and process
technology costs and $2.9 million for revisions in estimates of a charge
recorded in the second quarter of fiscal 1998 related to the Company's
realignment of its PC operations (see below).
In the second quarter of fiscal 1998, the Company completed the sale of
90% of its interest in MCMS, Inc. Results of operations in the second
quarter of fiscal 1998 include a pre-tax gain of $156.2 million ($94.5
million or $0.99 per diluted share, after taxes) realized from the sale.
Results of the operations for the second quarter of fiscal 1998 also
include significant operating losses from the Company's PC operation.
Selling prices for the Company's notebook products in the second quarter of
fiscal 1998 decreased to a level below the Company's cost. In addition,
the Company wrote down the value of notebook PC inventories that the
Company purchased as a result of an overly aggressive forecast. In
February 1998, the Company announced it had taken several actions to
realign the Company to concentrate on its core markets and customers,
including the consolidation of its domestic and international operations
and the reduction of approximately 10% of its workforce. Results of
operations in the second quarter of fiscal 1998 include a pre-tax charge of
$13.0 million ($7.9 million or $0.08 per diluted share, net of taxes) for
employee severance costs and other costs to consolidate the Company's PC
operations.
In the fourth quarter of fiscal 1997, the Company acquired NetFRAME
Systems Incorporated. Net income for the fourth quarter of fiscal 1997 was
adversely affected by $6.4 million, or $0.07 per diluted share, which
includes the operating losses of NetFRAME since the July 18, 1997
acquisition date and a one-time charge of $3.9 million for the write-off of
purchased in-process research and development. See "Acquisition of
NetFRAME Systems Incorporated."
41
Micron Electronics, Inc.
Report of Independent Accountants
The Shareholders and Board of Directors
Micron Electronics, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Micron Electronics, Inc. and its subsidiaries at September 3,
1998 and August 28, 1997, and the results of their operations and their
cash flows for each of the three years in the period ended September 3,
1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers, LLP
Boise, Idaho
September 28, 1998
43
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 September 3, 1998, and is incorporated
herein by reference.
44
PART IV
ITEM 14. EXHIBITS, FINCIAL 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 (7)
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 (7)
10.44 Form of Twelve-Month Termination Agreements for certain
officers of the Registrant (7)
10.45 Form of Two-Year Termination Agreements for certain officers of
the Registrant (7)
10.47 Form of Employment and Noncompete Agreement, with 12-month
termination provision, for certain officers
of the Registrant (8)
10.48 Form of Employment and Noncompete Agreement, with 6-month
termination provision, for certain officers
of the Registrant (8)
10.49 Addendum to Severance Agreement, dated January 23, 1998, by and
between the Company and T. Erik Oaas (8)
10.50 Addendum to Severance Agreement, dated January 12, 1998, by and
between the Company and Gregory D.
Stevenson (8)
10.51 Termination Agreement, dated December 21, 1997, between the
Company and Robert F. Subia (8)
10.52 Employment Offer, dated January 10, 1998, to Joel J. Kocher (8)
10.53 Credit Agreement, dated June 10, 1998, between the Company and
certain financial institutions named therein (9)
10.54 Agent's Resignation and Appointment Agreement, dated August 28,
1998, between the Company and certain financial institutions named
therein.
10.55 Assignment and Assumption Agreement, dated September 1, 1998,
between the Company and certain financial institutions named
therein.
10.56 Form of Employment, Severance and Noncompete Agreement for
Certain Officers of the Registrant
10.57 Amendment Number 2 to Component Recovery Agreement between the
Company and Micron Technology, Inc.
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
27.1 Restated Financial Data Schedule for the Year Ended August 28,
1997
27.2 Restated Financial Data Schedule for the Year Ended August 29,
1996
__________
(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
(7) Incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended August 28, 1997
(8) Incorporated by reference to Quarterly Report on Form 10-Q
for the fiscal quarter ended February 26, 1998
45
(9) Incorporated by reference to Quarterly Report on Form 10-Q
for the fiscal quarter ended May 28, 1998
(b) Reports on Form 8-K:
On June 23, 1998, the Company filed a report on Form 8-K announcing the
election of Joel J. Kocher to the positions of chief executive officer and
chairman of the board of the Company and the retirement of Joseph M.
Daltoso from the Company.
Additions, GoBook, Micron, Micron Electronics, Millennia Max, Millennia
MicroTower, MPower, PowerXchange, Samurai, Trek and TransPort Trek are
trademarks of the Company. ClientPro, Millennia, NetFRAME, SpecTek,
TransPort, Vetix and ZEOS are registered trademarks of the Company. Micron
Advantage, MicronOpt and Micron Power are service marks of the Company.
Pentium is a registered trademark and MMX is a trademark of Intel
Corporation. Microsoft, Windows 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.
46
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 6th day of October, 1998.
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 6th day of October, 1998.
Signature Title Date
- --------------------- ------------------------------------------------- -------------------
/s/ Joel J. Kocher Chairman of the Board, President, Chief Operating October 6, 1998
- ---------------------- Officer and Chief Executive Officer (Principal
(Joel J. Kocher) Executive Officer)
/s/ T. Erik Oaas Executive Vice President, Finance and Chief October 6, 1998
- ---------------------- Financial Officer (Principal Financial and
(T. Erik Oaas) Accounting Officer); Director
/s/ Steven R. Appleton Director October 6, 1998
- -----------------------
(Steven R. Appleton)
/s/ Robert A. Lothrop Director October 6, 1998
- -----------------------
(Robert A. Lothrop)
/s/ John R. Simplot Director October 6, 1998
- -----------------------
(John R. Simplot)
47
Schedule II
Micron Electronics, Inc.
Valuation and Qualifying Accounts
(Dollars in thousands)
Fiscal year ended September 3, 1998 August 28, 1997 August 29, 1996
- ---------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at beginning of year $ 7,556 $ 8,221 $ 5,458
Additions charged to expense 4,273 1,032 6,306
Reductions and write-offs (7,662) (3,381) (3,543)
Acquisition/sale (458) 1,684 -
---------- --------- ---------
Balance at end of year $ 3,709 $ 7,556 $ 8,221
========== ========= =========
DEFERRED TAX ASSET VALUATION ALLOWANCE
Balance at beginning of year $ - $ - $ -
Additions charged to expense 4,139 - -
---------- --------- ---------
Balance at end of year $ 4,139 $ - $ -
========== ========= =========
48