SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended August 31, 1995
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-17932
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Micron Electronics, Inc.
(Exact name of registrant as specified in charter)
Minnesota 41-1404301
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(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
organization)
900 East Karcher Road, Nampa, Idaho 83687
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (208)463-3434
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 par value per share The Nasdaq Stock Market
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Securities registered pursuant to section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of 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, based upon the closing price of the Company's Common Stock
on August 31, 1995, as reported by The Nasdaq Stock Market, was approximately
$234.4 billion. Shares of Common Stock held by each officer and director
and by each person who owns 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of outstanding shares of the registrant's Common Stock on
August 31, 1995 was 91,431,392.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1995 Annual Meeting
of Shareholders to be held on November 20, 1995 are incorporated by reference
to Part III of this Annual Report on Form 10-K.
<PAGE>
PART I
Item 1. Business
Micron Electronics, Inc. ( "MEI" or the "Company") manufactures
electronic products for a wide range of computing and digital applications.
The Company develops, markets, manufactures, sells and supports personal
computer ("PC") systems for consumer, government and business use, provides
contract manufacturing services to original equipment manufacturers
("OEMs"), maintains a component recovery operation and assembles and
markets peripheral add-on memory products. The Company was originally
incorporated in May, 1981 under the name of ZEOS International, Ltd.
("ZEOS"). On April 7, 1995, Micron Computer, Inc. ("MCI") and Micron
Custom Manufacturing Services, Inc. ("MCMS"), merged with and into ZEOS
International, Ltd. MCI and MCMS were formed in late 1991 and early 1992,
respectively, as subsidiaries of Micron Technology, Inc. ("MTI"). Pursuant
to the terms of the merger, ZEOS issued approximately 82.5 million shares
of its common stock in exchange for all of the outstanding shares of MCI
and MCMS, and the name of the combined company was changed to Micron
Electronics, Inc. The merger resulted in a change of control of
approximately 89% of ZEOS whereby, assuming exercise of all outstanding
options, (a) MTI owned an approximate 79% interest in MEI, and (b) the
other shareholders of MCI and MCMS owned an approximate 10% interest in
MEI. At August 31, 1995, the Company was approximately 80% owned by MTI.
The Company's headquarters are in Nampa, Idaho.
Personal Computer Systems
MEI develops, markets, manufactures, sells and supports a broad line of
memory intensive, high performance PC systems under the Micron(Trademark)
and ZEOS(Trademark) brand names. Micron brand PC systems are manufactured,
sold and supported primarily at the Company's Nampa, Idaho facility. ZEOS
brand PC systems are manufactured, sold and supported at the Company's
Minneapolis, Minnesota facilities.
Products
MEI seeks to provide end-users with memory intensive PC systems that
include the latest hardware and software features commercially available in
the PC marketplace at competitive prices. MEI currently utilizes
Pentium(Registered Trademark) and 486 microprocessors from Intel
Corporation ("Intel") for virtually all of its PC systems. The Company's
PC systems are custom-configured with a variety of memory and storage
capacities, as well as other options, as specified by the customer and are
available with a variety of operating and applications software. MEI offers
a variety of peripheral products with its PC systems, including monitors,
modems, graphics cards, accelerators and CD-ROM units.
As of August 31, 1995, the Company's PC product lines generally
included: the Micron Millennia(Trademark), targeted for high-end business
users; the Micron PowerStation(Trademark), targeted for general business
users; the Micron Home MPC(Trademark), targeted for the home office and
general consumer; the Micron PowerServer(Trademark), a business network
server; the ZEOS Pantera(Trademark), targeted for mainstream business; and
the ZEOS Meridian(Trademark), a portable notebook computer.
The Company continues to evaluate its product strategies, including (i)
the coordination of Micron and ZEOS brand marketing strategies, (ii) the
sharing of Micron and ZEOS research and development efforts, and (iii) the
coordination and potential integration of Micron and ZEOS product lines.
Actions taken in this regard could result in a number of adverse
consequences, including, but not limited to, confusion in the marketplace
regarding the Company's product lines, a decrease in the Company's unit
sales and the recognition of unanticipated expenses, which could have a
material adverse effect on the Company's results of operations.
The Company's approach to developing new products is focused primarily
on evaluating new technological developments and changing consumer
preferences and on incorporating such developments and preferences into its
product lines. MEI works closely with its suppliers to evaluate the latest
developments in PC-related technology and specifications. The Company's
engineering and marketing staffs then determine which configurations best
respond to customer preferences. MEI has undertaken efforts specifically
to produce systems that will compete favorably in industry wide
competitions judging performance and value. These competitions typically
call for system configurations consistent with the latest trends in PC
consumer demand.
The Company does not maintain a large in-house product research
and development staff. In February 1992, ZEOS acquired PC Tech,
Inc. to design high performance motherboards and integrated circuits
for ZEOS' desktop systems and to
<PAGE>
aid in the evaluation of new technology and its incorporation into ZEOS'
product lines. Components designed by the PC Tech group are geared towards
providing performance enhancements and cost reductions in PC architecture.
Use of enhanced components designed by the PC Tech group permit broader
feature sets and increased performance without the need for add-in cards.
To maintain a competitive position in the PC industry, the Company must
introduce new products and features that address the needs and preferences
of its target markets. The PC industry is characterized by short product
life cycles resulting from rapid changes in technology and consumer
preferences and declining product prices. There can be no assurance that
the introduction of new products or features by the Company or its
competitors will not materially and adversely affect the sale of the
existing products of the Company, or that the Company will be able to adapt
to future product changes in the PC industry.
Marketing and Sales
The Company's direct marketing approach is directed toward PC users who
tend to evaluate products based on performance, price, quality, support and
service. The Company's customer base is comprised primarily of small to
medium sized businesses as well as individuals purchasing for home use. In
addition, the Company sells its products directly to certain larger volume
purchasers and through strategic sales relationships with companies
having large government procurement contracts. The Company's participation
in large government procurement contracts generally may be terminated at
any time by the companies holding the contracts. Moreover, the pricing and
terms of any such procurement contracts with government agencies are
generally subject to renegotiation or termination by such agencies. The
Company also markets its PC systems through direct mail campaigns to
existing and prospective customers and sells a limited number of its PCs
through three factory outlet and retail stores located in Minnesota and
Idaho.
Under its direct marketing approach, MEI markets its PC systems
primarily by strategically placing advertisements and attempting to win
awards in personal computer trade publications. Through direct marketing,
MEI is able to avoid dealer markups and inventory costs typically
experienced in retail marketing and can maintain close contact with its
target market. Consumers seeking high performance systems at reasonable
prices have historically referenced computer trade magazines to evaluate
the type of system and configurations best suited to their particular
needs. MEI believes that consumer interest in its PC systems has been
significantly enhanced and brand name recognition of the Company's products
has been increased by the receipt of numerous awards for overall
performance, price and reliability. In the event that the Company is
unsuccessful in receiving such awards in the future, consumer interest in
its PC systems could decline materially.
Direct sales orders are received primarily via telephone by Company
sales representatives who review system configuration compatibility and
current pricing. Most customers order custom-configured systems with
varying feature sets differentiated by microprocessor type and speed, hard
drive capacity, memory, monitor size and resolution and bundled software,
as well as other features. MEI offers its customers a variety of payment
alternatives, including lease financing and its own private label credit
cards. Commercial customers may also be offered payment terms.
Levels of unfilled orders for PC systems fluctuate depending upon
demand for certain products or production delays. Customers frequently
change delivery schedules and orders depending on market conditions and
other reasons. Customers are not billed by the Company until their order is
shipped, and unfilled orders can be, and sometimes are, canceled by the
customer prior to shipment. As of August 31, 1995, MEI had unfilled orders
for PC systems of approximately $46.3 million as compared to combined MCI
and ZEOS unfilled orders for PC systems of $24.3 million as of September 1,
1994. MEI anticipates that substantially all of the unfilled orders as of
August 31, 1995, other than canceled orders, will be shipped within 30
days. Due to (i) customers ability to cancel or reschedule orders without
penalty, (ii) industry seasonality (especially the Christmas buying
season), and (iii) other customer buying patterns experienced by the
Company, MEI does not believe that unfilled orders are a meaningful
indicator of future sales.
The computer industry generally has been subject to seasonality and to
significant quarterly and annual fluctuations in operating results.
Fluctuations can result from a wide variety of factors affecting the
Company and its competitors. These factors include new product
developments or introductions, availability of components, changes in
product mix and pricing and product reviews and other media coverage. The
Company's business is also sensitive to the spending patterns of its
customers which are affected by economic conditions. In recent periods,
the Company's sales to the government sector have increased. Accordingly,
the Company expects that future sales may be impacted by the budgetary
spending practices of the government sector. There can be no assurance
that the Company will not experience fluctuations in operating results in
the future.
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PC Product Warranties and Technical Support
MEI believes that its PC product warranties and technical support
programs are essential to achieving customer satisfaction. The key elements
of the Company's PC product warranties and technical support programs are
as follows:
30-Day Money Back Guarantee. Customers generally may return products
purchased from the Company within 30 days after shipment for a full refund
of the purchase price.
Limited Warranty. MEI generally provides a one-year limited warranty on
hardware which covers repairs or replacements for defects in workmanship
or materials. Technicians are trained to assist customers via telephone
support in the installation of replacement parts. On-site service is
provided by third-party service suppliers. Customers have the option to
purchase an extended limited warranty from the Company and extended on-site
service from a third-party.
Technical Support. MEI offers its customers telephone access to
technical support services (toll-free in the United States). The Company's
technical and customer support representatives respond to a variety of
telephone 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 ships the replacement part and
advises the customers over the telephone how to install it. Customers may
also elect to ship computers directly to the Company for repair. The
Company also offers technical support services via the Internet through the
Company's home page on the World Wide Web and by means of an electronic
bulletin board system. These services enable a customer to access system-
specific information and recent software updates for many of the software
programs and drivers included with the Company's systems.
Manufacturing
MEI's manufacturing process is designed to provide custom-configured
products to its customers, and includes assembling components, loading
software and performing quality control tests on each system prior to
shipment. The Company's PC systems are assembled to customer
specifications. Only a limited number of the most popular PC system
configurations are manufactured in advance of customer orders. Parts and
components required for each customer order are selected from inventory and
are prepared for assembly into the customized PC system. While custom
assembly is advantageous to MEI's customers, the Company is unable to
achieve the manufacturing efficiencies normally associated with mass
production of standardized products.
The Company's desktop PC systems are assembled on the Company's
production lines while the Company's notebook PC systems are primarily
assembled and tested by a third party supplier prior to delivery to MEI for
custom configuration. During assembly, MEI's PC systems are downloaded with
software, powered up and subjected to certain diagnostic tests including
evaluation of each system's functionality and quality. When the assembly
process is completed, the PC systems undergo a final inspection after which
they are packaged and made available for shipment to customers.
MEI relies on third-party suppliers for its PC system components. The
Company seeks to identify suppliers which can provide state-of-the-art
technology, product quality and prompt delivery at a competitive price. MEI
purchases substantially all of its components and subassemblies from
suppliers on a purchase order basis and generally does not maintain long-
term supply arrangements with its suppliers. Although the Company attempts
to use standard components and subassemblies available from multiple
suppliers, certain of its components and subassemblies are available only
from sole suppliers. Microprocessors used in the Company's PC systems are
supplied exclusively by Intel. Substantially all of the RAM components
used in the Company's PC systems are supplied by MTI and the Company
expects to continue to depend on MTI as a source of random access memory
("RAM") components. In addition, the Meridian line of ZEOS notebook
computers is currently obtained from a single third party manufacturer.
Although most other components and subassemblies used by MEI are currently
available from multiple sources, the Company has from time to time
experienced shortages in the components and subassemblies used to produce
its PC systems. Any supply interruption for any of the components and
subassemblies currently obtained from a single source, including any
reduction in the availability or increase in the prices of RAM components
purchased from MTI, or the unavailability of any of the other components
and subassemblies used by MEI to produce its PC systems, could result in
production delays and adversely affect the Company's sales and
profitability.
<PAGE>
Competition
The PC industry is highly competitive and has been characterized by
intense pricing pressure, rapid technological advances in hardware and
software, frequent introduction of new products and low gross margins.
Competitive factors include price, performance, variety of products
offered, availability of peripherals and software, marketing and sales
capabilities, service and support. The Company competes with a number of
PC manufacturers which sell their products primarily through direct
marketing channels, including Dell Computer Corporation, Inc. and Gateway
2000, Inc. The Company also competes with PC manufacturers, such as
International Business Machines Corporation ("IBM"), Compaq Computer
Corporation, Packard Bell Electronics, Inc. and Apple Computer, Inc., which
have traditionally sold their products through national and regional
distributors, dealers and value-added resellers, retail stores and the PC
manufacturers' direct sales forces. In addition, MEI competes with smaller
companies which compete in local markets primarily on the basis of price.
Many of the Company's competitors have substantially greater financial,
marketing, manufacturing and technological resources, greater purchasing
power, broader product lines, larger installed customer bases and greater
brand name recognition than MEI. There can be no assurance that MEI will be
able to compete successfully in the future in the PC industry.
Contract Manufacturing
Operations
MEI's wholly owned subsidiary, Micron Custom Manufacturing Services,
Inc. ("MCMS"), is a contract manufacturing operation specializing in the
manufacture of custom, complex printed circuit board assemblies. The
manufacture of electronic products has become increasingly sophisticated
and complex and requires substantial capital investment. In response, many
original equipment manufacturers ("OEMs") are adopting manufacturing
outsourcing strategies and relying on manufacturing specialists to support
their production needs. OEMs use contract manufacturers to gain access to
leading manufacturing expertise, reduce time to market, enhance their
financial flexibility and improve inventory management. MCMS's contract
manufacturing operation consists of assembling and testing complex printed
circuit boards and memory modules and "box build" final product assembly
services. In addition to assembly and test, the Company offers a full
range of turnkey manufacturing services, including design lay-out and
product engineering, materials procurement, inventory management, quality
assurance and just-in-time delivery.
MCMS uses numerous suppliers for the electronic components and
materials, including RAM components, used in its contract manufacturing
operations. In fiscal 1995 and fiscal 1994, MCMS purchased approximately
41% and 58%, respectively, of the full specification RAM components used in
its contract manufacturing operations from MTI. Such purchases are made by
MCMS from MTI on a purchase order basis at negotiated prices, and no long
term agreement exists or is contemplated between MTI and the Company for
the supply of such components. Shortages of certain types of electronic
components, including RAM components, have occurred in the past and may
occur in the future. Component shortages or price fluctuations could have
an adverse effect on MEI's operating results. The Company generally strives
to establish long-term relationships with key suppliers similar to the
relationships it seeks with its own customers.
MCMS orders materials and components based on purchase orders received
and accepted and seeks to minimize its inventory of materials or components
that are not identified for use in filling specific orders. However, the
Company's contract manufacturing customers generally require short delivery
cycles and quick turnaround and a substantial portion of contract
manufacturing orders are scheduled for delivery within 90 days. Although
MCMS obtains long-term product forecasts from some of its OEM customers,
the Company does not have long-term purchase commitments from its customers
and makes capital expenditures and other commitments and incurs some
inventory costs based on anticipated orders. As MCMS' OEM customers react
to variations in demand for their products due to, among other things,
product life cycles, competitive conditions or general economic conditions,
and adjust their manufacturing strategies accordingly, MCMS is exposed to
the risk of noncancelable purchase orders with its suppliers and to
inventory risks for raw materials, work in process and finished goods.
Anticipated orders from the Company's OEM customers have, in certain cases,
failed to materialize, or delivery schedules have been deferred as a result
of changes in the customer's business, thereby adversely affecting MEI's
operating results.
Nearly all of the products assembled by MCMS are assembled utilizing surface
mount technology ("SMT") whereby the leads on integrated circuits and other
electronic components are soldered to the surface of printed circuit boards.
SMT assembly requires expensive capital equipment and a high level of process
expertise. MCMS currently operates six SMT lines at its Boise, Idaho
<PAGE>
facility and two SMT lines at its Durham, North Carolina facility. In the
event that customer demand continues to increase, MEI anticipates adding
additional capacity at both facilities.
MCMS performs automated in-circuit and functional testing, and has the
capability to perform environmental stress testing as requested. As the
density and complexity of electronic circuitry increases, MCMS anticipates
a need to invest in more sophisticated automated test equipment and
inspection systems that provide both three dimensional and X-ray inspection
of in-process and final products.
MCMS also utilizes chip on board ("COB") technology. COB technology,
including multi-chip module assembly, utilizes unpackaged semiconductor die
which are attached to a printed circuit board and then sealed with epoxy.
COB is well suited for applications involving small chip count and high
lead count products. MCMS also has the capability to utilize ball grid
array packaging technology in its assembly process, a packaging technique
that utilizes an array of "solder balls" in a matrix across the bottom of
a component package as opposed to having leads around the perimeter of the
die. This emerging packaging technology is typically used on high-pin
count integrated circuits.
Marketing and Sales
MCMS markets its contract manufacturing services through a direct sales
force that interfaces with independent sales representatives and OEMs.
MCMS' contract manufacturing marketing effort is augmented by MTI's sales
force, which markets MCMS' services to MTI's customer base. In addition,
certain of the Company's executives participate in developing and expanding
key customer relationships. MCMS' contract manufacturing marketing efforts
include participating in industry conferences and publishing articles in
trade journals.
MCMS' marketing and sales organization works closely with MTI to
identify potential cross-selling opportunities, and many of the Company's
contract manufacturing customers were initially obtained through MTI's
customer base. The Company believes that its relationship with MTI has been
an important factor in attracting and retaining contract manufacturing
customers. To the extent that the relationship between MCMS and MTI
diverges or is perceived to diverge, the Company could be adversely
affected.
Backlog
MCMS' backlog as of August 31, 1995 and September 1, 1994 was
approximately $95.0 million and $22.3 million, respectively. Backlog
generally consists of purchase orders believed to be firm that are expected
to be filled within the next three months. Because of variations in the
timing of orders, delivery intervals, material availability, customer and
product mix and delivery schedules, among other reasons, MCMS' backlog as
of any particular date may not be representative of actual sales for any
succeeding period.
Competition
MCMS' contract manufacturing operations compete against numerous
domestic and offshore contract manufacturers, including a significant
number of local and regional companies. In addition, MCMS competes against
the in-house manufacturing capabilities of certain of its existing
customers as well as with certain large computer manufacturers, including
IBM and its subsidiaries, which also offer third party contract
manufacturing services. The Company's contract manufacturing competitors
include Avex Electronics, Inc., Benchmark Electronics, Inc., DOVAtron
International, Inc., Flextronics International, Group Technologies
Corporation, Jabil Circuits, Inc., SCI Systems, Inc. and Solectron
Corporation, among others. Many of MEI's competitors have substantially
greater manufacturing, financial and marketing resources than MEI and have
manufacturing operations at multiple locations domestically and overseas.
Many of the Company's contract manufacturing customers also have
manufacturing relationships with one or more of MEI's competitors.
MEI believes that the significant competitive factors in contract
manufacturing are technology, quality, service, price, location and the
ability to offer flexible delivery schedules and deliver finished products
on an expeditious and timely basis in accordance with customers'
expectations. Although MEI believes it generally competes favorably with
respect to these factors, the Company may be at a disadvantage as to price
when compared to manufacturers with substantial offshore facilities or
substantially larger domestic facilities. There can be no assurance that
the Company will compete successfully in the future with regard to these
factors.
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Memory Products
MEI's memory products operation recovers, tests and markets
semiconductor memory components that do not meet full industry
specifications ("nonstandard RAM components") and designs, assembles and
markets peripheral add-on memory products utilizing full specification and
nonstandard RAM components.
Component Recovery
Historically, nonstandard RAM components have generally been discarded
by semiconductor manufacturers. Manufacturers have been reluctant to sell
their nonstandard RAM components because such components could compete with
their full specification RAM components for similar applications and the
perception that an active effort to realize value from nonstandard RAM
components could lessen their focus on the production and marketing of full
specification products. Semiconductor memory manufacturers have been
especially reluctant to sell their nonstandard RAM components to third
party recovery operations due to concern that subsequent testing would
reveal proprietary data regarding the manufacturers' yields and processes.
Despite the foregoing, as standard device densities and cost per device
have increased, semiconductor memory manufacturers have sought ways to
recover a portion of their manufacturing costs through recovery of
nonstandard RAM components. MEI's component recovery operation involves
obtaining nonstandard RAM components from such manufacturers, testing and
grading these components to their highest functional level and identifying
cost effective applications for these components. MEI markets nonstandard
RAM components for a wide variety of applications such as PC systems and
peripherals, telephone answering machines, electronic games, laser
printers, facsimile machines and cellular telephones. The Company's
contract manufacturing operation has also been able to utilize nonstandard
RAM components in the manufacture of complex circuit board assemblies for
selected OEM customers.
A substantial majority of the nonstandard RAM components used in MEI's
component recovery operation are obtained from MTI pursuant to the
Component Recovery Revenue Sharing Agreement dated July 14, 1994, between
the Company and MTI (the "Revenue Sharing Agreement"). Specifically, in
fiscal 1995 and 1994, approximately 89% and 98%, respectively, of the
nonstandard RAM components sold by MEI's component recovery operation were
obtained from MTI. The Revenue Sharing Agreement expires in September 1997
and may be amended with the consent of the parties. Pursuant to the Revenue
Sharing Agreement, MTI delivers to MEI all of the nonstandard RAM
components produced at its operations, and MEI pays to MTI an amount equal
to one-half of the net sales realized from sales of nonstandard RAM
components to third parties and one-half of the transfer price for products
identified for internal use in MCMS' contract manufacturing operation.
There can be no assurance that MTI will continue to generate sufficient
quantities of nonstandard RAM components to maintain the Company's
component recovery operation at its existing level. Termination or
renegotiation of the agreement at the end of its term resulting in terms
less favorable to MEI could have a material adverse effect on the Company's
operating results. In addition, MEI's component recovery business could be
adversely affected by reductions in the availability of nonstandard RAM
components due to operating shortfalls or other factors, variances in MTI's
defect rate, product mix, or the overall quality of nonstandard RAM
components, any of which could cause substantial variances in MEI's test
costs or reduce MEI's revenue from the resale of such components. Although
MTI supplies the substantial majority of nonstandard RAM components for the
Company's component recovery operation, MEI also purchases nonstandard RAM
components from other semiconductor manufacturers. There can be no
assurance that purchases from these sources will continue. MEI intends to
continue to pursue additional sources of nonstandard RAM components,
however, there can be no assurance that significant additional suppliers
will be secured.
Component Recovery Process. Effective component recovery requires a
significant investment in capital equipment as well as expertise in
semiconductor manufacturing processes and sophisticated testing hardware
and software. Semiconductor manufacturing involves a highly complex series
of process steps performed to create specific electronic features on
silicon wafers. After fabrication, wafers are sent through wafer probe for
their first test of electrical functionality. At wafer probe, nonstandard
die are segregated while those die which potentially meet full performance
specifications move to packaging and test. The Company maintains personnel
in MTI's semiconductor manufacturing facility to identify at the wafer
probe stage nonstandard die which may qualify for component recovery. Once
nonstandard die are identified at probe as recoverable, the die are packaged
by MTI and delivered to MEI for testing and grading. Semiconductors intended
for use in the broadest range of applications must meet rigorous functionality
specifications and are tested extensively and sorted based on performance.
RAM components which do not achieve a full range of acceptable performance
specifications at the testing step of the semiconductor manufacturing
process are also identified and delivered to MEI for testing and grading.
Upon delivery to MEI, nonstandard RAM components are grouped according to
device and package type and staged for the specific sequence of electrical,
environmental and mechanical testing identified for that group.
MEI relies on its test and product
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engineers to develop the complex testing algorithms and procedures
necessary to cost effectively recover nonstandard RAM components.
Engineering resources are also expended to develop and implement
proprietary software and hardware modifications to automated test equipment
in order to assess the highest functional level of nonstandard RAM
components. Throughout the testing process, nonstandard RAM components are
continually graded in an effort to identify less functional nonstandard RAM
components and to minimize additional testing with respect to such
components. The semiconductor manufacturers' markings are eliminated during
the testing process and the devices are remarked with the Company's SpecTek
brandname or a specific customer's device marking. Test and product
engineers develop burn-in testing procedures in order to ensure the
reliability of the devices being produced. MEI strives to maintain close
working relationships between its component recovery engineering staff and
its customers, and modifies its test procedures and test specifications to
ensure that nonstandard RAM components properly address customer
performance requirements. Once all electrical and environmental testing is
accomplished, the devices are subjected to automated and human inspection
in order to verify that the devices meet mechanical and cosmetic
specifications relating to package, mark and device lead integrity.
Marketing and Products. MEI's nonstandard RAM components are marketed
primarily to domestic customers through the Company's direct sales force,
and to international customers through manufacturing representatives. In
fiscal 1995, a majority of the Company's component recovery products were
used in the Company's peripheral add-on memory products. To date, the rate
of growth in the Company's component recovery business has been more a
function of the supply of nonstandard RAM components than the demand for
such components once they are recovered. The market for semiconductor
memory historically has been quite volatile and has in the past experienced
significant downturns, characterized by diminished product demand,
production overcapacity and a decline in average selling prices. There can
be no assurance that the currently favorable market conditions will
continue.
MEI typically offers a 90 day limited warranty on nonstandard RAM
components. Longer warranties are only offered in special circumstances.
Although MEI's historical warranty claims with respect to nonstandard RAM
components have not been material, there can be no assurance that the
Company will not experience significant future warranty claims with respect
to nonstandard RAM components.
Competition. To date, MEI has not experienced significant direct
competition with respect to its component recovery operation. The principal
competitive factors in this business are testing capabilities, nonstandard
RAM component prices and access to sources of nonstandard RAM components.
The price of nonstandard RAM components is directly influenced by the price
of full specification RAM components. As higher density memory devices
become more prevalent, error correction technologies and solutions improve
and costs per device increase, semiconductor memory manufacturers have
sought ways to recover a portion of their manufacturing costs through
recovery of nonstandard RAM components. To meet this need, certain
manufacturers have established internal capabilities and independent
companies are pursuing opportunities to recover, test and market
nonstandard RAM components. In addition, as more semiconductor memory
manufacturers recover nonstandard RAM components, the pressure on the
remaining manufacturers may increase to develop similar programs, whether
internal or external, in order to generate revenue for their nonstandard
RAM components. The risk of competition from in-house semiconductor
manufacturers is especially important because there are only a few large
semiconductor memory manufacturers, and an in-house operation would
eliminate the manufacturer as a potential source of supply to MEI. Upon
termination or expiration of the Revenue Sharing Agreement, MTI could
develop its own component recovery operation. The loss of a sourcing
arrangement, particularly the Company's arrangement with MTI, would have a
material adverse effect on MEI's operating results.
Peripheral Add-On Memory Products
MEI markets and sells peripheral add-on memory products consisting of
single in-line memory modules ("SIMMS") containing both nonstandard and
full specification RAM components. The success of the Company's peripheral
add-on memory operations is largely dependent upon its ability to obtain
nonstandard and full specification RAM components. In fiscal 1995, a
substantial portion of the Company's peripheral add-on memory product sales
were attributable to sales of peripheral add-on memory products which
contained nonstandard RAM components.
The Company's peripheral add-on memory products are primarily assembled
by third party subcontractors utilizing module printed circuit boards
designed by MEI and RAM components obtained by MEI and shipped to the
subcontractor for assembly. The nonstandard RAM components shipped to the
subcontractor are tested by MEI to determine their functionality. MEI
custom designs printed circuit boards to attempt to achieve full module
functionality using the nonstandard RAM components. After completion, the
modules are either shipped directly to the customer or delivered to the
Company for later shipment. MEI offers a one-year
<PAGE>
limited warranty on memory modules. Although the Company's historical
warranty claims with respect to peripheral add-on memory products have not
been material, there can be no assurance that MEI will not experience
significant future warranty claims with respect to such products.
To date, sales of peripheral add-on memory products have related
directly to the availability of RAM components from semiconductor
manufacturers. The majority of the Company's peripheral add-on memory
product net sales for fiscal 1995 were attributable to sales of modules
utilizing nonstandard RAM components recovered by the Company's component
recovery operations. In addition, substantially all of the full
specification RAM components used in MEI's peripheral add-on memory
products were purchased from MTI. Although MEI has experienced substantial
annual increases in sales of memory modules through fiscal 1995, such sales
have fluctuated significantly from quarter to quarter depending upon the
availability of RAM components. Rather than obtaining a steady flow of RAM
components from manufacturers pursuant to long-term agreements, MEI
typically purchases RAM components pursuant to individual purchase orders
on an "as available" basis. The Company is unable to predict with any
degree of confidence which manufacturers, including MTI, may have RAM
components available and within what time periods. There can be no
assurance that the Company will be able to continue to purchase RAM
components from MTI or other sources of supply at a rate sufficient to
support existing levels of sales or continued growth in sales, if at all.
The Company markets its peripheral add-on memory products primarily to
third party resellers and OEMs. Products sold to resellers are
subsequently sold to retail outlets, PC manufacturers and manufacturers of
various electronic products, such as laser printers, answering machines and
electronic games.
Competitors of the Company's peripheral add-on memory business include
semiconductor manufacturers, custom module manufacturers and other entities
having memory modules available for sale to resellers and OEMs.
General
Export Sales
Export sales totaled approximately $76.7 million, $26.0 million and
$12.4 million in fiscal 1995, 1994 and 1993, respectively. Export sales
are made primarily in United States currency.
Intellectual Property
As of September 15, 1995, the Company owned 14 United States patents
relating to the use of its products and processes and had numerous United
States and foreign patent applications pending.
It is common in the PC industry for patent and copyright infringement
claims, as well as other intellectual property rights claims to be asserted
against component suppliers and PC manufacturers. Periodically, MEI is
made aware that the technology used by MEI may infringe on product or
process technology rights held by others. MEI has accrued a liability and
charged operations for the estimated costs of settlement or adjudication of
these asserted claims for alleged infringement and other unasserted claims
arising prior to the balance sheet date. MEI would be placed at a
disadvantage if its competitors were to obtain licenses with lower royalty
fee payments or other terms more favorable than those received by the
Company. The Company has entered into several patent and software license
agreements with third parties which require one-time or periodic royalty
payments, some of which expire within the next year. The Company is unable
to predict whether these license agreements can be obtained or renewed on
terms acceptable to the Company. If the Company or its suppliers were
unable to obtain licenses necessary to use protected technology in their
products, the Company may be forced to market products without certain
technological features. MEI could also incur substantial costs to defend
legal actions taken against it relating to patent or copyright protected
technology. The inability to obtain licenses necessary to use certain
technology or its inability to obtain such licenses on competitive terms,
or a finding of infringement against the Company, could have a material
adverse effect on the Company.
MEI regards its contract manufacturing processes and testing procedures
as proprietary trade secrets and confidential information. The Company
relies largely upon a combination of agreements with its OEM customers and
internal security systems, confidentiality procedures and employee
agreements to maintain the trade secrecy of its manufacturing processes.
<PAGE>
Employees
As of August 31, 1995, the Company had approximately 1,370 employees in
its PC operations, 355 employees in its contract manufacturing operations
and 230 employees in its memory products operations. None of the Company's
employees is represented by a labor organization with respect to their
employment by the Company, the Company has never had a work stoppage, and
the Company considers its employee relations satisfactory.
Environmental Regulation
MEI's operations are subject to certain federal, state and local
environmental regulatory requirements relating to environmental and waste
management, and there can be no assurance that material costs and
liabilities will not be incurred in maintaining or establishing compliance
with current or future requirements. The Company has modified its circuit
board cleaning processes at MCMS to eliminate the use of substantially all
ozone depleting chlorofluorocarbons, and aqueous (water-based) methods are
now used in its cleaning operations. The content of the resulting waste
water from this cleaning process is closely monitored and subject to
stringent regulations.
Some risks of costs and liabilities related to these matters are
inherent in the Company's business, as with many similar businesses. MEI
believes that its business is operated in compliance with applicable
environmental regulations, the violation of which could have a material
adverse effect on the Company. In the event of violation, these
regulations provide for civil and criminal fines, injunctions and other
sanctions and, in certain instances, allow third parties to sue to enforce
compliance. In addition, new, modified or more stringent requirements or
enforcement policies could be adopted that may adversely affect the
Company.
MEI periodically generates and temporarily handles limited amounts of
materials that are considered hazardous waste under applicable law. The
Company contracts for the off-site disposal of these materials.
<PAGE>
Executive Officers and Directors of the Registrant
The executive officers and directors of the Company and their ages as of
August 31, 1995, are as follows:
<TABLE>
<CAPTION>
Name Position Age
- ---- -------- ---
<S> <C> <C>
Joseph M. Daltoso Chairman of the Board, President and Chief 33
Executive Officer of the Company
T. Erik Oaas Vice President, Finance and Chief Financial 42
Officer of the Company, Director
Gregory D. Stevenson Executive Vice President, Operations of the 34
Company, Director
Robert F. Subia Chairman, President and Chief Executive Officer 32
of Micron Custom Manufacturing Services, Inc. (a
wholly-owned subsidiary of the Company),
Director
Steven R. Appleton Chairman of the Board, President and Chief 35
Executive Officer of Micron Technology, Inc.,
Director
Jerry M. Hess Chairman and Chief Executive Officer of the J.M. 57
Hess Construction Company, Inc., Director
Robert A. Lothrop Retired, former Senior Vice President of the 69
J.R. Simplot Company, Director
John R. Simplot Retired, former Chairman of the Board of the 86
J.R. Simplot Company, Director
Jess Asla Vice President, Operations of Micron Custom 33
Manufacturing Services, Inc. (a wholly-owned
subsidiary of the Company)
Kenneth C. Birch Vice President, PC Engineering 31
George A. Haneke Vice President, Chief Information Officer 47
Nelson L. Hanks Vice President, Purchasing 42
Dean A. Klein Vice President, Research and Development 38
Brian C. Klene Executive Vice President, Sales and Marketing 37
Roderic W. Lewis Vice President, General Counsel and Corporate 40
Secretary
Pete J. Scamardo Vice President, Product Marketing 32
Steve L. Schmidt Vice President, Alternate Sales 33
Gene P. Thomas, Jr. Vice President, Direct Sales 34
</TABLE>
<PAGE>
Background of Executive Officers
Joseph M. Daltoso served as Micron Technology, Inc.'s Memory
Applications Group Manager from May 1990 until April 1992, when he was
named President and a director of Micron Custom Manufacturing Services,
Inc. then a wholly-owned subsidiary of Micron Technology, Inc. In July
1992, Mr. Daltoso was named Chairman of the Board of Micron Custom
Manufacturing Services, Inc. and in August 1994 he was named Chief
Executive Officer of Micron Custom Manufacturing Services, Inc. At the
Effective Time of the Merger, Mr. Daltoso was appointed Executive Vice
President, Operations and a director of the Company. He was named Chairman
of the Board, President and Chief Executive Officer of the Company on April
17, 1995.
T. Erik Oaas served as the Administration Manager of Micron Technology,
Inc.'s Memory Applications Group from May 1990 to April 1992, when he was
named Vice President, Finance and Treasurer and a director of Micron Custom
Manufacturing Services, Inc. in July 1992. At the Effective Time of the
Merger, Mr. Oaas was appointed Vice President, Finance and Chief Financial
Officer and a director of the Company.
Gregory D. Stevenson served as Micron Technology, Inc.'s Test
Manufacturing Manager from October 1989 to April 1990. Mr. Stevenson
served as Micron Technology, Inc.'s Partials Business Unit Manager from
April 1990 until April 1992. Mr. Stevenson joined Micron Custom
Manufacturing Services, Inc. as Business Unit Manager for Component
Recovery in April 1992, was appointed Vice President, Component Recovery in
July 1992, and was appointed a director of Micron Custom Manufacturing
Services, Inc. in September 1992, and Vice President, Operations in August
1993. At the Effective Time of the Merger, Mr. Stevenson was appointed Vice
President, Nampa Operations and served in that position until July 1995
when Mr. Stevenson was appointed Executive Vice President, Operations and a
director of the Company.
Robert F. Subia was employed by Micron Technology, Inc. where he held
various sales management responsibilities, including IBM Account Manager
and Regional Sales Manager, from 1986 to 1993. Mr. Subia joined Micron
Custom Manufacturing Services, Inc. in February 1993 as Director of Sales
and held this position until August 1994, when he was appointed Vice
President, Sales of Micron Custom Manufacturing Services, Inc. On April 17,
1995, Mr. Subia was appointed Chairman, President and CEO of Micron Custom
Manufacturing Services, Inc., a wholly-owned subsidiary of the Company.
Mr. Subia was appointed a director of the Company on October 2, 1995.
Steven R. Appleton served as Vice President, Manufacturing of Micron
Technology, Inc. from August 1989 until April 1991, when he was appointed
President and Chief Operating Officer and a director of Micron Technology,
Inc. In July 1992, he assumed responsibilities as Chairman of the Board,
President and Chief Executive Officer of Micron Semiconductor, Inc. (then a
wholly-owned subsidiary of Micron Technology, Inc.) and resigned as a
director and an officer of Micron Technology, Inc. In May 1994, Mr.
Appleton was re-elected to Micron Technology, Inc.'s Board of Directors.
He was named Chairman of the Board, President and Chief Executive Officer
of Micron Technology, Inc. in September 1994. At the Effective Time of the
Merger, Mr. Appleton was named Chairman of the Board, President and Chief
Executive Officer of the Company. He resigned from these positions on
April 17, 1995, but remains as a director of the Company.
Jerry M. Hess has served as Chairman and Chief Executive Officer of J.M.
Hess Construction Co., Inc. since 1959. Mr. Hess has served on Micron
Technology, Inc.'s Board of Directors since 1994. At the Effective Time of
the Merger, Mr. Hess was appointed a director of the Company.
Robert A. Lothrop served as the Senior Vice President of the J.R. Simplot
Company, a privately held company involved in food processing and in
manufacturing and marketing fertilizers and agricultural chemicals, from
January 1986 until his retirement in January 1991. Mr. Lothrop was elected
to Micron Technology, Inc.'s Board of Directors in 1986. In 1992, he was
elected to the Board of Directors of Micron Semiconductor, Inc., then a
wholly-owned subsidiary of Micron Technology, Inc., and resigned as a
director of Micron Technology, Inc. Mr. Lothrop was re-elected to Micron
Technology, Inc.'s Board of Directors in 1994. At the Effective Time of
the Merger, Mr. Lothrop was appointed a director of the Company.
John R. Simplot founded the J.R. Simplot Company and served as the
Chairman of the Board of Directors until his retirement in April 1994. Mr.
Simplot continues to serve as a director of the J.R. Simplot Company. Mr.
Simplot has served on Micron Technology, Inc.'s Board of Directors since
1980. At the Effective Time of the Merger, Mr. Simplot was appointed a
director of the Company.
<PAGE>
Jess Asla served as the Process Engineer Manager for Micron Technology,
Inc.'s Memory Applications Group from 1988 until July 1994, when he was
named Director of Engineering for Micron Custom Manufacturing Services,
Inc. On April 17, 1995, Mr. Asla was appointed Vice President, Operations
of Micron Custom Manufacturing Services, Inc., a wholly-owned subsidiary of
the Company.
Kenneth C. Birch served as an Applications Engineer for Micron
Technology, Inc.'s Memory Applications Group from 1989 to 1990, when he was
named PC Product Manager. Mr. Birch served in this position until August
1991, when he joined Micron Computer, Inc. as Vice President, Operations
and Engineering. Mr. Birch was appointed a director of Micron Computer,
Inc. in April 1993, and in February 1994, Mr. Birch was appointed as Vice
President, Engineering. At the Effective Time of the Merger, Mr. Birch was
appointed Vice President, PC Engineering.
George A. Haneke joined Micron Technology, Inc. in May 1988 and became
Accounting Manager in 1992. Mr. Haneke joined Micron Computer, Inc. as its
Vice President, Finance, Treasurer and Chief Financial Officer in September
1993 and served in this position until the Effective Time of the Merger. At
the Effective Time of the Merger, Mr. Haneke was appointed Vice President,
Chief Information Officer.
Nelson L. Hanks served as a consultant for Micron Technology, Inc. from
1989 to 1991. In 1991, Mr. Hanks was named Chief Executive Officer of
Micron Europe Limited, a wholly-owned subsidiary of Micron Technology,
Inc., and served in this position until 1993. From 1993 until the
Effective Time of the Merger, Mr. Hanks served as Special Projects Manager
for Micron Technology, Inc. At the Effective Time of the Merger, Mr. Hanks
was appointed Vice President, Purchasing.
Brian C. Klene joined Micron Technology, Inc. in January 1989 as
Director, Sales and Marketing of the Memory Applications Group and served
in that position until July 1990 when he was named Regional Sales Manager
for Micron Technology, Inc. He served in that position until January 1991
when he was named National Sales Manager of Micron Technology, Inc. In
July 1995, Mr. Klene joined the Company and was named Executive Vice
President, Sales and Marketing.
Dean A. Klein served as President and co-founder of PC Tech, Inc., a
wholly-owned subsidiary of the Company, from its inception in 1984. After
the acquisition of PC Tech, Inc. by the Company in February 1992, Mr. Klein
served as Vice President, Research and Development of the Company and
President of PC Tech, Inc.
Roderic W. Lewis practiced corporate and securities law with the law
firms of LeBoeuf, Lamb, Leiby & MacRae and Rogers, Mackey, Price & Anderson
prior to joining Micron Technology, Inc. in 1991 as Associate General
Counsel. Mr. Lewis was appointed Assistant General Counsel for Micron
Technology, Inc. in 1993. At the Effective Time of the Merger, Mr. Lewis
was appointed Vice President, General Counsel and Corporate Secretary.
Pete J. Scamardo served in various sales and marketing related management
positions with CompuAdd, Inc. prior to joining Micron Computer, Inc. in
November 1991 as Director of Marketing and Strategic Relations. Mr.
Scamardo was appointed Vice President, Product Marketing of the Company on
July 31, 1995.
Steven L. Schmidt was employed by Micron Technology, Inc. as a Regional
Sales Manager from 1989 until August 1991 when he was named Vice President,
Sales and Marketing of Micron Computer, Inc. In 1992, Mr. Schmidt was
appointed Executive Vice President and a director of Micron Computer, Inc.
At the Effective Time of the Merger, Mr. Schmidt was appointed Vice
President. On July 31, 1995, Mr. Schmidt was appointed Vice President,
Alternate Sales.
Gene P. Thomas, Jr. served in sales managerial roles with Polaroid
Corporation and CompuAdd Computer and was appointed Director of Marketing
for CompuAdd in 1993. Mr. Thomas joined Micron Computer, Inc. as Director
of Sales in March 1993 and was appointed Vice President, Sales and
Marketing in December 1993. At the Effective Time of the Merger, Mr. Thomas
was appointed Vice President, Micron Computer Sales and Marketing. On July
31, 1995, Mr. Thomas was appointed Vice President, Direct Sales.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 13. Certain Relationships and Related Transactions
Certain information concerning the Registrant's executive officers is
included under the caption "Executive Officers and Directors of the
Registrant" following Part I, Item 1 of this report. Information required
by Items 10, 11, 12 and 13 will be contained in the Proxy Statement which
will be filed with the Securities and Exchange Commission within 120 days
after August 31, 1995, and is incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports On Form 8-K
(a) The following documents are filed as part of this report:
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. (4)
10.32 Voting Agreement, dated October 30, 1994, between ZEOS and
Micron Technology, Inc. (1)
10.33 Component Recovery Revenue Sharing Agreement, dated as of
July 14, 1994, between MCMS and Micron Technology, Inc. (3)
10.34 Amended and Restated Promissory Note, dated September 3,
1992, between MCMS and Micron Technology, Inc. (3)
10.35 1995 Stock Option Plan. (5)
10.36 1995 Employee Stock Purchase Plan. (5)
10.37 Executive Bonus Plan. (5)
10.38 Form of Indemnification Agreement between the Registrant and
its officers and directors.
10.39 Form of Termination Agreement for officers of the Registrant.
11 Computation of per share earnings.
16 Letter from Ernst & Young LLP, dated April 11, 1995. (2)
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
- --------------------------------------------------------------------------
(1) Incorporated by reference to Registration Statement on Form S-4
(File No. 33-90212), as declared effective on March 13, 1995.
(2) Incorporated by reference to Current Report on Form 8-K, dated
April 7, 1995.
(3) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended April 1, 1995.
(4) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1992.
(5) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended June 1, 1995.
(b) Reports on Form 8-K:
On August 17, 1995, the Company filed a Report on Form 8-K which
announced (1) the resignation of Gregory E. Herrick as a director and as
Executive Vice President, Sales and Marketing, (2) the appointment of
Gregory D. Stevenson as a director and as Executive Vice President,
Operations, (3) the appointment of Brian C. Klene as Executive Vice
President, Sales and Marketing, and (4) the appointment of Pete J.
Scamardo, Jr., as Vice President, Product Marketing.
On September 15, 1995, the Company filed a report on Form 8-K which
announced the resignation of Chase S. Mart as a director and as Executive
Vice President, Business Development.
<PAGE>
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 26th day of October, 1995.
MICRON ELECTRONICS, INC.
By/s/ T. Erik Oaas
--------------------------------------
T. Erik Oaas, Vice President, Finance,
and Chief Financial Officer (Principal
Financial and Accounting Officer)
EXHIBIT 10.38
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of
this ______ day of ___________, 19___, by and between Micron
Electronics, Inc., a Minnesota corporation (the "Company"), and
_________________, ("Indemnitee").
WHEREAS, the Company desires to attract and retain the
services of highly qualified individuals, such as Indemnitee, to
serve the Company and its related entities;
WHEREAS, in order to induce Indemnitee to continue to
provide services to the Company, the Company wishes to provide
for the indemnification of, and advancement of expenses to,
Indemnitee to the maximum extent permitted by law;
WHEREAS, Indemnitee does not regard the current protection
available as adequate under the present circumstances, and the
Indemnitee and other directors, officers, employees, agents and
fiduciaries of the Company may not be willing to continue to
serve in such capacities without additional protection;
WHEREAS, the Company and Indemnitee recognize the continued
difficulty in obtaining liability insurance for the Company's
directors, officers, employees, agents and fiduciaries, the
significant increases in the cost of such insurance and the
general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the
substantial increase in corporate litigation in general,
subjecting directors, officers, employees, agents and fiduciaries
to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been
severely limited; and
WHEREAS, in view of the considerations set forth above, the
Company desires that Indemnitee shall be indemnified by the
Company as forth herein;
NOW THEREFORE, in consideration of Indemnitee's service to
the Company, the Company and Indemnitee hereby agree as follows:
1
<PAGE>
1. Indemnification
(a) Indemnification. The Company shall indemnify
Indemnitee if Indemnitee is or was a party or is threatened to be
made a party to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or
investigative (whether in a third party proceeding or in an
action by or in the right of the Company) by reason of the fact
that Indemnitee is or was a director, officer, employee or agent
of the Company, or any subsidiary of the Company, by reason of
any action or inaction on the part of Indemnitee while an
officer, director, employee or agent or by reason of the fact
that Indemnitee is or was serving at the request of the Company
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
judgements, penalties, fines (including, without limitation,
excise taxes assessed against Indemnitee with respect to an
employee benefit plan), settlements and reasonable expenses,
including attorneys' fees and disbursements, actually and
reasonably incurred by Indemnitee in connection with such action,
suit or proceeding, if Indemnitee
(1) Has not been indemnified by another organization or
employee benefit plan for the same judgements, penalties, fines
(including, without limitation, excise taxes assessed against the
person with respect to an employee benefit plan), settlements,
and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the
proceeding with respect to the same acts or omissions;
(2) acted in good faith;
(3) received no improper personal benefit and Section
302A.255 of the Minnesota Business Corporation Act (the "MBCA"),
if applicable, has been satisified;
(4) in the case of a criminal procceding, has no reasonable
cause to believe the conduct was unlawful; and
(5) in the case of acts or omissions occurring in Indemnitee's
official capacity (as defind in Section 302A.521(1)(c)(1) or (2) of
the MBCA) as an officer, director or employee of the Company, reasonably
believed that the conduct was in the best interests of the Company, or
in the case of acts or omissions occurring in the official capacity (as
defined in Section 302A.521(1)(c)(3) of the MBCA) as an officer, director
or employee of the Company, reasonably believed that the conduct was not
opposed to the best interests of the Company. If Indemnitee's acts or
omissions complained of in the proceeding relate to conduct as a
director, officer, trustee, employee, or agent of an
2
<PAGE>
employee benefit plan, the conduct is not considered
to be opposed to the best interests of the Company if Indemnitee
reasonably believed that the conduct was in the best interests of
the participants or beneficiaries of the employee benefit plan.
The termination of a proceeding by judgement, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent does not, of itself, establish that Indemnitee did not
meet the criteria set forth in this Section 1(b).
(b) Mandatory Payment of Expenses. To the extent that
Indemnitee has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in
Subsection (a) of this Section 1 or the defense of any claim,
issue or matter therein, Indemnitee shall be indemnified against
expenses (including attorneys' fees) actually and reasonably
incurred by Indemnitee in connection therewith.
2. Expenses; Indemnification Procedure
(a) Advancement of Expenses. The Company shall advance all
expenses (including attorney's fees) incurred by Indemnitee in
connection with the investigation, defense, settlement or appeal
of any civil or criminal, administrative or investigative action,
suit or proceeding referenced in Section 1(a) hereof. Indemnitee
hereby undertakes to repay such amounts advanced only if, and to
the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as
authorized hereby.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as
a condition precedent to his right to be indemnified under this
Agreement, give the Company notice in writing as soon as
practicable of any claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. In
addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within
Indemnitee's power.
(c) Procedure. Any indemnification and advances provided
for by this Agreement shall be made no later than thirty (30)
days after receipt of the written request of Indemnitee. If a
claim under this Agreement, under any statute, or under any
provision of the Company's Articles of Incorporation or Bylaws
providing for indemnification is not paid in full by the Company
within thirty (30) days after a written request for payment
thereof has first been received by the Company, Indemnitee may,
but need not, at any time thereafter bring an action against the
Company to recover the unpaid amount of the claim. It shall be a
defense to any such action (other than an action brought to enforce
a claim for expenses incurred in connection with any action, suit or
3
<PAGE>
proceeding in advance of its final disposition) that Indemnitee has
not met the standards of conduct which make it permissible under
applicable law for the Company to indemnify Indemnitee for the
amount claimed, but the burden of proving such defense shall be on
the Company and Indemnitee shall be entitled to receive interim
payments of expenses hereunder unless and until such defense may be
finally adjudicated by court order or judgment from which no further
right of appeal exists.
(d) Selection of Counsel. In the event the Company shall
be obligated to pay the expenses of any proceeding against
Indemnitee, the Company shall be entitled to assume the defense
of such proceeding, with counsel selected by the Company, upon
the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, the Company will not be
liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same
proceeding, provided that (i) Indemnitee shall have the right to
employ his counsel in any such proceeding at Indemnitee's
expense; and (ii) if (A) the employment of counsel by Indemnitee
has been authorized by the Company, (B) The Company shall have
reasonably concluded that there may be a conflict of interest
between the Company and Indemnitee in the conduct of any such
defense or (C) the Company shall not, in fact, have employed
counsel to assume the defense of such proceeding, then the fees
and expenses of Indemnitee's counsel shall be at the expense of
the Company.
3. Additional Indemnification Rights; Nonexclusivity
(a) Scope. Notwithstanding any other provision of this
Agreement, the Company hereby agrees to indemnify Indemnitee to
the fullest extent permitted by law, notwithstanding that such
indemnification is not specifically authorized by the other
provisions of this Agreement, the Company's Articles of
Incorporation, the Company's Bylaws or by statute. In the event
of any change, after the date of this Agreement, in any
applicable law, statute, or rule which expands the right of a
Minnesota corporation to indemnify a member of its board of
directors or an officer, such changes shall be, ipso facto,
within the purview of Indemnitee's rights and Company's
obligations, under this Agreement. In the event of any change in
any applicable law, statute or rule which narrows the right of a
Minnesota corporation to indemnify a member of its board of
directors or an officer, such changes, to the extent not
otherwise required by such law, statute or rule to be applied to
this Agreement shall have no effect on this Agreement or the
parties' rights and obligations hereunder.
4
<PAGE>
(b) Nonexclusivity. The indemnification and advancement of
expenses provided by or granted pursuant to this Agreement shall
not be deemed exclusive of any rights to which an Indemnitee may
be entitled under the Company's Articles of Incorporation, its
Bylaws, any agreement, any vote of stockholders or disinterested
directors, the MBCA, or otherwise, both as to action in
Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided
under this Agreement shall continue as to Indemnitee for any
action taken or not taken while serving in an indemnified
capacity even though he may have ceased to serve in such capacity
at the time of any action, suit or other covered proceeding.
4. Partial Indemnification. If Indemnitee is entitled
under any provision of this Agreement to indemnification by the
Company for some or a portion of the expenses, judgments, fines
or penalties actually or reasonably incurred by him in the
investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceeding, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such expenses, judgments, fines or
penalties to which Indemnitee is entitled.
5. Mutual Acknowledgment. Both the Company and Indemnitee
acknowledge that in certain instances, Federal law or public
policy may override applicable state law and prohibit the Company
from indemnifying its directors and officers under this Agreement
or otherwise. For example, the Company and Indemnitee
acknowledge that the Securities and Exchange Commission (the
"SEC") has taken the position that indemnification is not
permissible for liabilities arising under certain federal
securities laws, and federal legislation prohibits
indemnification for certain ERISA violations.
6. Severability. Nothing in this Agreement is intended to
require or shall be construed as requiring the Company to do or
fail to do any act in violation of applicable law. The Company's
inability, pursuant to court order, to perform its obligations
under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable.
If this Agreement or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify Indemnitee to the full
extent permitted by any applicable portion of this Agreement that
shall not have been invalidated, and the balance of this
Agreement not so invalidated shall be enforceable in accordance
with its terms.
5
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7. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to
the terms of this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or
advance expenses to Indemnitee with respect to proceedings or
claims initiated or brought voluntarily by Indemnitee and not by
way of defense.
(b) Insured Claims. To indemnify Indemnitee for expenses
or liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes or penalties, and
amounts paid in settlement) which have been paid directly to
Indemnitee by an insurance carrier under a policy of officers'
and directors' liability insurance maintained by the Company.
(c) Claims Under Section 16(b). To indemnify Indemnitee
for expenses or the payment of profits arising from the purchase
and sale by Indemnitee of securities in violation of Section
16(b) of the Securities Exchange Act of 1934, as amended, or any
similar successor statute.
8. Construction of Certain Phrases
(a) For purposes of this Agreement, references to the
"Company" shall include, in addition to the resulting
corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have
had power and authority to indemnify its directors, officers, and
employees or agents, so that if Indemnitee is or was a director,
officer, employee or agent of such constituent corporation, or is
or was serving at the request of such constituent corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee
shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation
as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on Indemnitee
with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director,
officer, employee or agent of the Company which imposes duties on,
or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or
beneficiaries; and if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of any employee benefit plan,
Indemnitee shall be deemed to have acted in a manner "not
6
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opposed to the best interests of the Company" as referred to in this
Agreement.
9. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall constitute an original.
10. Successors and Assigns. This Agreement shall be
binding upon the Company and its successors and assigns, and
shall inure to the benefit of Indemnitee and Indemnitee's estate,
heirs, legal representatives and assigns.
11. Attorneys' Fees. In the event that any action is
instituted by Indemnitee under this Agreement to enforce or
interpret any of the terms hereof, Indemnitee shall be entitled
to be paid all court costs and expenses, including reasonable
attorneys' fees, incurred by Indemnitee with respect to such
action, unless as a part of such action, the court of competent
jurisdiction determines that each of the material assertions made
by Indemnitee as a basis for such action were not made in good
faith or were frivolous. In the event of an action instituted by
or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall
be entitled to be paid all court costs and expenses, including
attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-
claims made in such action), unless as a part of such action the
court determines that each of Indemnitee's material defenses to
such action were made in bad faith or were frivolous.
12. Notice. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall
be deemed duly given (i) if delivered by hand and receipted for
by the party addressee, on the date of such receipt, or (ii) if
mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked.
Addresses for notice to either party are as shown on the
signature page of this Agreement, or as subsequently modified by
written notice.
13. Choice of Law. This Agreement shall be governed by and
its provisions construed in accordance with the laws of the State
of Minnesota, without reference to the provisions thereof
regarding conflicts of laws.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
Micron Electronics, Inc.
By:
____________________________
Its:
____________________________
900 East Karcher Road
Boise, Idaho 83687
AGREED TO AND ACCEPTED:
INDEMNITEE:
___________________________
Address:
___________________________
___________________________
8
EXHIBIT 10.39
TERMINATION AGREEMENT
This Agreement is made effective the _____ day of __________,
1995, between Micron Electronics, Inc. (hereinafter called "company")
and _______________________________ (hereinafter called "employee").
WHEREAS, the parties decided to have advance notice of any
termination of employment and deem it in the best interest of
both parties to have as harmonious and smooth a transition as
possible;
NOW THEREFORE the parties agree as follows:
1. ADVANCE NOTICE. Each party shall give the other
party six months advance written notice of a termination
date, regardless of the reason or justification for the
termination.
2. TRANSITION. The company or employee may at any
time during said six month period discontinue active
employment of the employee at the company (at which time,
upon the company's request, said person will resign
immediately as an officer and/or director); but said
employee shall continue as an employee of the company for
salary, bonuses, benefits and stock vesting purposes, as
well as determining conflicts of interest, through the date
six months from the date of notice (plus any days for unused
vacation, holidays or sick days). To the extent active
employment does continue for a portion of the six-month
period, said employee will carry out only those assignments
directed by the President. The employee will answer
questions and provide information to assist the transition
during said six month period. Any mention of reasons for
the termination will be limited to the following statement
by all parties involved: the employee resigned for personal
reasons and there will be no further comment unless approved
by both parties or required by either party's legal counsel
to avoid securities law violation or other bona fide reason.
3. WAIVER. Upon receipt of said salary, bonuses,
benefits and stock, the employee waives any and all other
claims against the company, its directors, officers and
employees.
IN WITNESS WHEREOF, the parties have executed their
approval.
Micron Electronics, Inc.
By: _____________________________
By: _____________________________
