SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 28, 1996
------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ------------------------
Commission File Number: 0-17932
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Micron Electronics, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1404301
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 E. Karcher Road, Nampa, Idaho 83687 83687
--------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (208) 893-3434
------------------
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
--- ---
The number of outstanding shares of the registrant's common stock as of
December 16, 1996 was 92,451,018.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Micron Electronics, Inc.
Statements of Operations
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal quarter ended November 28, 1996 November 30, 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 421,018 $ 438,578
Cost of goods sold 340,568 379,866
--------- ---------
Gross margin 80,450 58,712
Selling, general and administrative 39,826 31,387
Research and development 883 661
--------- ---------
Operating income 39,741 26,664
Interest income, net 1,270 1,028
--------- ---------
Income before income taxes 41,011 27,692
Income tax provision 16,199 11,077
--------- ---------
Net income $ 24,812 $ 16,615
========= =========
Earnings per share $ 0.27 $ 0.18
Number of shares used in per share calculation 93,002 92,566
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
Micron Electronics, Inc.
Balance Sheets
(Dollars in thousands, except par value amounts)
<TABLE>
<CAPTION>
As of November 28, 1996 August 29, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 122,394 $ 115,839
Receivables 156,166 176,547
Inventories 117,289 69,863
Deferred income taxes 24,700 35,014
Other current assets 1,843 1,853
--------- ---------
Total current assets 422,392 399,116
Property, plant and equipment, net 138,940 129,192
Other assets 902 1,625
--------- ---------
Total assets $ 562,234 $ 529,933
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 245,567 $ 247,044
Accrued licenses and royalties 33,048 27,242
Current debt 3,974 3,064
--------- ---------
Total current liabilities 282,589 277,350
Long-term debt 21,085 18,233
Deferred income taxes 2,374 2,436
Other liabilities 2,918 3,454
--------- ---------
Total liabilities 308,966 301,473
--------- ---------
Commitments and contingencies
Common stock, $.01 par value, authorized 150.0
million shares; issued and outstanding 92.5
million shares at November 28, 1996 and
August 29, 1996 925 925
Additional capital 69,441 69,392
Retained earnings 182,906 158,143
Cumulative foreign currency translation
adjustment (4) -
--------- ---------
Total shareholders' equity 253,268 228,460
--------- ---------
Total liabilities and shareholders' equity $ 562,234 $ 529,933
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
Micron Electronics, Inc.
Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Fiscal quarter ended November 28, 1996 November 30, 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 24,812 $ 16,615
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 7,291 4,096
Amortization 61 1,319
Changes in assets and liabilities:
Receivables 20,381 (35,764)
Inventories (47,426) (36,563)
Accounts payable and accrued expenses 1,111 60,038
Accrued licenses and royalties 5,806 1,064
Deferred income taxes 10,252 (2,803)
Other (628) 17
--------- ---------
Net cash provided by operating activities 21,660 8,019
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (18,912) (8,076)
Proceeds from sales of property, plant and
equipment 92 396
Other - (39)
--------- ---------
Net cash used for investing activities (18,820) (7,719)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 4,568 -
Repayments of debt (806) (253)
Proceeds from issuance of common stock 23 334
Purchase and retirement of stock (70) (258)
--------- ---------
Net cash provided by (used for) financing
activities 3,715 (177)
--------- ---------
Net increase in cash and cash equivalents 6,555 123
Cash and cash equivalents at beginning of
period 115,839 69,406
--------- ---------
Cash and cash equivalents at end of period $ 122,394 $ 69,529
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements
(Tabular amounts in thousands)
1. Unaudited Interim Financial Statements
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly the financial position of Micron
Electronics, Inc. and its subsidiaries (collectively, the "Company") and
their results of operations and cash flows. Certain reclassifications have
been made, none of which affect results of operations, to present the
financial statements on a consistent basis.
This report on Form 10-Q for the first fiscal quarter ended November 28,
1996, should be read in conjunction with the Company's Report on Form 10-K
for the fiscal year ended August 29, 1996. Portions of the accompanying
financial statements are derived from the audited year-end financial
statements of the Company dated August 29, 1996. The Company's fiscal year
is a 52 or 53 week period ending on the Thursday closest to August 31.
<TABLE>
<CAPTION>
2. Receivables
November 28, 1996 August 29, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $ 151,530 $ 171,820
Receivables from affiliates, net 2,458 2,526
Income taxes recoverable from parent
corporation 4,380 5,147
Other 6,497 7,363
Allowance for doubtful accounts (6,828) (8,221)
Allowance for returns and discounts (1,871) (2,088)
--------- ---------
$ 156,166 $ 176,547
========= =========
</TABLE>
<TABLE>
<CAPTION>
3. Inventories
November 28, 1996 August 29, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 84,503 $ 45,949
Work in progress 15,681 13,239
Finished goods 17,105 10,675
--------- ---------
$ 117,289 $ 69,863
========= =========
</TABLE>
<TABLE>
<CAPTION>
4. Property, Plant and Equipment
November 28, 1996 August 29, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,639 $ 1,639
Buildings 39,373 17,647
Equipment 141,449 120,393
Construction in progress 9,308 35,398
--------- ---------
191,769 175,077
Less accumulated depreciation and amortization (52,829) (45,885)
--------- ---------
$ 138,940 $ 129,192
========= =========
</TABLE>
4
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands)
<TABLE>
<CAPTION>
5. Accounts Payable and Accrued Expenses
November 28, 1996 August 29, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $ 182,381 $ 157,350
Payable to affiliates 14,228 25,829
Salaries, wages and benefits 14,737 16,168
Income taxes payable 4,682 14,526
Income taxes payable to parent corporation 1,219 1,300
Equipment contracts payable 7,918 7,955
Accrued warranty 6,717 7,905
Other 13,685 16,011
--------- ---------
$ 245,567 $ 247,044
========= =========
</TABLE>
<TABLE>
<CAPTION>
6. Debt
November 28, 1996 August 29, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Notes payable in periodic installments
through September, 2001 weighted average
interest rate 7.57% $ 25,028 $ 21,261
Other 31 36
--------- ---------
25,059 21,297
Less current portion (3,974) (3,064)
--------- ---------
$ 21,085 $ 18,233
========= =========
</TABLE>
The Company has an unsecured revolving credit facility with its parent
corporation providing for borrowings of up to $80.0 million, based on the
Company's tangible net worth. As of November 28, 1996, the Company was
eligible to borrow approximately $54.6 million under the facility, but had
no borrowings outstanding.
The Company has an unsecured credit agreement with two financial
institutions providing for borrowings totaling $40.0 million, based on the
amount of the Company's eligible receivables. As of November 28, 1996, the
Company was eligible to borrow $40.0 million under the agreement, but had
no borrowings outstanding.
Certain of the Company's notes payable are collateralized by equipment
with a total cost of approximately $22.2 million and accumulated
depreciation of approximately $1.9 million as of November 28, 1996.
7. Income Taxes
The effective income tax rate for the three months ended November 28,
1996 was 39.5%, principally reflecting the federal statutory rate and the
net effect of state taxes.
8. Earnings Per Share
Earnings per share is computed using the weighted average number of
common and common equivalent shares outstanding. Common equivalent shares
result from the assumed exercise of outstanding stock options and affect
earnings per share when they have a dilutive effect.
5
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands)
9. Commitments
As of November 28, 1996, the Company had commitments of $11.4 million
for equipment purchases and $0.8 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.
10. 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.
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 effect on the Company's financial position or results of
operations.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains trend information and other forward-
looking statements that involve a number of risks and uncertainties. Micron
Electronics, Inc.'s actual results could differ materially from its
historical results of operations and those discussed in the forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those identified in "Certain Factors."
Overview
Micron Electronics, Inc., and its subsidiaries (collectively, the
"Company") manufacture electronic products and provide services for a wide
range of computing and digital applications. The Company develops,
markets, manufactures and supports a wide range of PC systems for consumer,
business, government and educational use. In addition, Micron Custom
Manufacturing Services, Inc., a wholly-owned subsidiary of Micron
Electronics, Inc., provides custom contract manufacturing services to
original equipment manufacturers. SpecTek, a division of Micron
Electronics, Inc., processes and markets reduced specification memory
products under the SpecTek brand name. The Company is majority owned by
Micron Technology, Inc. ("MTI").
All period references are to the Company's fiscal periods ended November
28, 1996, August 29, 1996 or November 30, 1995, unless otherwise indicated.
All tabular dollar amounts are stated in thousands.
Results of Operations
Net income for the first quarter of fiscal 1997 was $24.8 million, or
$0.27 per share, on net sales of $421.0 million, compared to net income of
$16.6 million, or $0.18 per share, on net sales of $438.6 million for the
first quarter of fiscal 1996 and net income of $26.4 million, or $0.29 per
share, on net sales of $457.4 million for the fourth quarter of fiscal
1996.
Net Sales
The following summarizes the Company's net sales by product line:
<TABLE>
<CAPTION>
First Quarter
---------------------------------------------
1997 1996
--------------------- ---------------------
Amount % of Sales Amount % of Sales
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
PC systems $ 345,907 82.2% $ 299,797 68.4%
Contract manufacturing 51,757 12.3% 100,552 22.9%
SpecTek memory products 23,354 5.5% 38,229 8.7%
--------- ---------- --------- ----------
Total net sales $ 421,018 100.0% $ 438,578 100.0%
========= ========== ========= ==========
</TABLE>
Total net sales for the first quarter of fiscal 1997 were slightly lower
compared to the corresponding period in 1996 primarily due to lower
revenues from the Company's contract manufacturing operation and, to a
lesser extent, lower sales of memory products by SpecTek, the Company's
component recovery operation. These decreases were nearly offset by a
higher level of sales of PC systems.
Personal Computer Systems. Net sales of PC systems increased in the
first quarter of fiscal 1997 compared to the corresponding period in fiscal
1996 primarily as a result of increased name recognition and market
acceptance of the Company's Micron brand PC systems and continued growth of
the direct sales channel. Total unit sales of PC systems were
approximately 22% higher in the first quarter of fiscal 1997 compared to
the first quarter of fiscal 1996. A 46% increase in unit sales of Micron
brand PC systems was made possible through manufacturing efficiencies
gained in the re-design of the Company's PC manufacturing operation in
Nampa, Idaho during fiscal 1996. This increase was partially offset by the
effect of the discontinuance of ZEOS brand PC systems during fiscal 1996.
The growth in sales of PC systems was partially attributable to a higher
level of sales to governmental entities and an increase in sales of the
Micron TransPort, the Company's modular design multimedia notebook product
introduced in the third quarter of fiscal 1996. There can be no assurance
that the Company's name recognition and market acceptance of its PC products
will not decline in the future and there can be no assurance of the
continued growth of the direct sales channel for PC systems, each of
which could have a material adverse effect on the Company's business and
results of operations. See "Certain Factors Personal Computer Systems
Reliance on the Direct Sales Approach."
7
<PAGE>
Sales to federal, state and local governmental entities were
approximately 27% of total net sales of PC systems in the first quarter of
fiscal 1997 compared to approximately 17% in the corresponding period in
1996. The Company experienced an increase in sales of PC systems under the
federal government's General Services Administration Vendor program and
through other direct government sales in the first quarter of fiscal 1997
compared to the first quarter of fiscal 1996. In addition, unit sales to
prime contractors under certain federal government procurement programs
increased by approximately 12% in the first quarter of fiscal 1997 compared
to the first quarter of fiscal 1996. The level of the Company's
governmental sales is partially dependent on the buying practices of
governmental entities and the Company's participation in government
contracts in the future, of which there can be no assurance. The level of
sales of PC systems to governmental entities may vary from quarter to
quarter and a significant decline could have a material adverse effect on
the Company's business and results of operations.
Unit sales of notebook systems were approximately 8% of total PC system
sales during the first quarter of fiscal 1997 compared to approximately 1%
in the corresponding period in 1996. Unit sales of notebook systems in the
first quarter of fiscal 1997 consisted solely of the Micron TransPort,
whereas notebook sales in the first quarter of fiscal 1996 consisted solely
of ZEOS brand product.
Average selling prices for the Company's desktop PC systems decreased in
the first quarter of fiscal 1997 compared to the corresponding period in
1996 primarily as a result of general price reductions and the effect of
the higher level of comparatively lower priced desktop systems sold to
governmental entities as a percentage of total desktop systems sold.
Average selling prices for notebook systems increased over the same period
with the Company's transition from the lower priced ZEOS Meridian notebooks
to the higher end Micron TransPort notebooks.
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 operation in Minneapolis, Minnesota. As a percentage of
total PC system sales, ZEOS brand PC system sales were approximately 19% in
the first quarter of fiscal 1996.
Net sales of PC systems in the first quarter of fiscal 1997 were slightly
lower compared to the fourth quarter of fiscal 1996 and were adversely
affected by shortages of Pentium(R) Pro microprocessors and certain high-
performance disk drives. Despite a 58% increase in unit sales of Pentium(R)
Pro microprocessor-based PC systems and a 3% overall increase in unit sales
in the first quarter of fiscal 1997 compared to the fourth quarter of fiscal
1996, the Company was unable to meet the demand for its products containing
Pentium Pro microprocessors and certain high-performance disk drives due to
these shortages. A lower level of PC shipments than expected in the first
quarter of fiscal 1997, principally as a result of these component shortages,
led to an increase of the Company's inventories of other components. In the
event that the Company is unable to obtain Pentium Pro microprocessors in
quantities sufficient to meet demand for the Company's PC systems containing
such processors, or obtain such processors at competitive prices, sales of
the Company's Pentium Pro microprocessor-based PC systems would be limited,
which, in turn, could result in further adverse effects on the Company's
business and results of operations. See "Certain Factors Personal Computer
Systems Dependence on Key Sources of Supply." To a lesser extent, sales during
the first quarter of fiscal 1997 were adversely affected by extended
quality testing performed on certain desktop PC systems which resulted in
a further increase of PC system inventories at November 28, 1996.
Contract Manufacturing. Revenues from the Company's contract
manufacturing operation were approximately 49% lower in the first quarter
of fiscal 1997 compared to the first quarter of fiscal 1996 primarily due
to the effect of the sharp industry-wide decline in pricing for
semiconductor memory products over the Company's last four fiscal quarters
and, to a lesser extent, a shift in product mix to lower priced products.
Historically, a significant portion of contract manufacturing revenues
have been attributable to the semiconductor memory content of products
manufactured. Such effects were partially offset by a higher production
volume achieved through the acquisition and utilization of additional
manufacturing equipment and the upgrade of existing equipment at the
Company's Idaho and North Carolina facilities. Contract manufacturing
revenues were 34% lower in the first quarter of fiscal 1997 compared to the
fourth quarter of fiscal 1996 primarily due to the decline in selling
prices for semiconductor memory products, a shift in product mix to lower
priced products and a generally lower production volume from the Company's
facilities. Production volume in the first quarter of fiscal 1997 was
adversely affected by the relocation of the Boise, Idaho contract
manufacturing operation to the new site in Nampa, Idaho and the ramp-up of
the new production facility.
8
<PAGE>
The Company continues to rely on a relatively small number of customers
for a significant portion of its contract manufacturing business. As a
percent of total contract manufacturing revenue, revenues from the
Company's top five contract manufacturing customers were approximately 66%
in the first quarter of fiscal 1997, compared to approximately 75% in the
first quarter of fiscal 1996. Revenues from the Company's largest contract
manufacturing customer represented approximately 22% of total revenues from
the Company's contract manufacturing operation in the first quarter of
fiscal 1997, compared to 33% of revenue from the Company's largest contract
manufacturing customer in the first quarter of fiscal 1996. Contract
manufacturing revenues from MTI were approximately 6% and 12% of total
contract manufacturing revenues in the first quarter of fiscal 1997 and
1996, respectively. See "Certain Factors Contract Manufacturing Customer
Concentration."
SpecTek Memory Products. Net sales of reduced specification
semiconductor memory products by SpecTek, the Company's component recovery
operation, were approximately 39% lower in the first quarter of fiscal 1997
compared to the first quarter of fiscal 1996, primarily due to a sharp
industry-wide decline in pricing for semiconductor memory products over the
Company's last four fiscal quarters. These effects were partially offset
by an increase in unit sales and megabits shipped of memory products over
the same period. Increased unit sales and shipments were made possible by
the acquisition and utilization of additional test equipment, reduced
component test times and a shift in product mix to generally higher memory
density components. SpecTek's operations are influenced by a number of
factors including pricing for, and availability of, reduced specification
memory components. See "Certain Factors SpecTek Memory Products
Operation."
SpecTek sales of memory products increased by $4.0 million or 21% in the
first quarter of fiscal 1997 compared to the fourth quarter of fiscal 1996
due primarily to a 63% increase in megabits shipped, partially offset by a
continued decline in average selling prices for the Company's reduced
specification memory products. The higher volume was achieved through
utilization of additional testing equipment acquired during the fourth
quarter of fiscal 1996 and the first quarter of fiscal 1997 and through
reduced component test times.
Historically, a substantial majority of the reduced specification memory
components used in SpecTek's operation has been obtained from MTI. In the
first quarter of fiscal 1997, the Company obtained approximately 71% of its
reduced specification memory components from MTI, compared to approximately
64% in the corresponding period in 1996, with a substantial majority of the
remainder purchased from a single third-party alternative source. Purchases
from alternative sources are generally negotiated on a purchase order basis
and there can be no assurance the Company will be able to negotiate future
purchases from alternative sources on terms acceptable to the Company.
Unless the Company is able to obtain significant quantities of reduced
specification memory components from alternative sources, the Company's
SpecTek memory products operation could be limited to the volume of reduced
specification memory components supplied by MTI. In addition, changes in
MTI's semiconductor manufacturing processes resulting in improvement of
device yields and/or changes in product mix and specifications, or other
changes or events at MTI adversely affecting its overall manufacturing output,
could adversely affect the volume of reduced specification memory components
supplied by MTI. Any reduction in the availability or functionality of
reduced specification memory components from MTI or other suppliers could
have a material adverse effect on the Company's business and results of
operations. See "Certain Factors SpecTek Memory Products Operation
Dependence on Component Recovery Agreement with MTI."
Gross Margin
<TABLE>
<CAPTION>
First Quarter
---------------------------------------------
1997 1996
--------------------- ---------------------
Amount % of Sales Amount % of Sales
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
PC systems $ 68,030 19.7% $ 33,281 11.1%
Contract manufacturing 6,580 12.7% 10,017 10.0%
SpecTek memory products 5,840 25.0% 15,414 40.3%
--------- ---------
Total gross margin $ 80,450 19.1% $ 58,712 13.4%
========= =========
</TABLE>
9
<PAGE>
The Company's overall gross margin percentage increased to 19.1% in the
first quarter of fiscal 1997 from 13.4% in the first quarter of 1996,
primarily as a result of a higher gross margin percentage realized from the
Company's PC operation coupled with higher PC system sales as a percent
of total sales. This increase was partially offset by lower gross margins
realized from sales of memory products by SpecTek. The Company's overall
gross margin percentage in the first quarter of fiscal 1997 was lower than
the 20.7% realized in the fourth quarter of fiscal 1996. In the fourth
quarter of fiscal 1996, gross margin benefited by $13.0 million from
revisions of estimates for product and process technology costs. Absent
the revisions of estimates, the Company's gross margin percentage in the
fourth quarter of fiscal 1996 would have been approximately 17.9%. The
increase in the gross margin percentage for the first quarter of fiscal
1997 compared to the 17.9% was primarily due to higher gross margin
percentages realized from the Company's SpecTek and contract manufacturing
operations and a relatively stable gross margin percentage realized in the
Company's PC operation.
Personal Computer Systems. The gross margin amount provided by the
Company's PC operation in the first quarter of fiscal 1997 increased
approximately 104% compared to the first quarter of fiscal 1996 principally
due to a higher gross margin percentage realized on PC system sales coupled
with a 22% increase in unit sales of PC systems. The higher gross margin
percentage for sales of the Company's PC systems in the first quarter of
fiscal 1997 compared to the corresponding period in 1996 was primarily due
to improved component costs, particularly for random access memory ("RAM")
products, and, to a lesser extent, an increase in unit sales of notebook
systems. Due to the sharp industry-wide decline in pricing for
semiconductor memory products, the Company's cost of RAM products decreased
significantly during the Company's past four fiscal quarters. Improved
component costs resulted from declines in costs for RAM and other
components at rates faster than reductions in selling prices for the
Company's PC systems. There can be no assurance that the Company's future
cost of components will decrease at rates comparable to those in recent
periods, or at all, or that the Company's selling prices for its PC systems
will not decrease at a rate faster than the decline in its component costs.
In addition, increased sales of the Company's notebook products favorably
affected the Company's gross margin percentage for sales of PC systems.
These systems generally have experienced higher selling prices and gross
margins compared to the balance of the Company's PC systems. The increase in
government sales in the first quarter of fiscal 1997 compared to the first
quarter of fiscal 1996 had an adverse effect on the Company's overall PC
gross margin percentage, as these sales generally have lower gross margin
percentages than the balance of the Company's PC sales. The Company
continues to experience significant pressure on its gross margins as a
result of intense competition in the PC industry and consumer expectations
of more powerful PC systems at lower prices. In addition, the Company's
gross margin percentage will continue to depend in large part on its
ability to effectively manage its inventories of PC system components. See
"Certain Factors Personal Computer Systems Competition in the PC
Industry" and "Certain Factors Personal Computer Systems Inventory
Management."
In September 1996, the Company entered into a license agreement and,
through MTI, became licensed under another agreement, each providing for
the use of certain technology in its PC operation. The costs of intellectual
property rights used in the manufacture of the Company's PC systems as a
percent of net sales of PC systems were approximately 1.4% lower for the
first quarter of fiscal 1997 compared to the first quarter of fiscal 1996.
Future charges for intellectual property rights may fluctuate, however, as
a result of resolution of asserted claims of infringement and claims that
may be asserted in the future. In addition, the Company's rights under its
license agreement obtained through MTI may terminate in the event that the
Company is no longer a majority-owned subsidiary of MTI. See "Certain
Factors General Intellectual Property Matters."
Contract Manufacturing. The gross margin percentage realized from the
Company's contract manufacturing operation was higher in the first quarter
of fiscal 1997 compared to the first quarter of fiscal 1996 primarily due
to a shift in product mix to relatively higher margin products and a
significant increase in production volume resulting in a reduction in
process costs per unit.
SpecTek Memory Products. The gross margin percentage realized by
SpecTek declined in the first quarter of fiscal 1997 compared to the first
quarter of fiscal 1996, primarily due to significantly lower average
selling prices resulting from a sharp industry-wide decline in pricing for
semiconductor memory products over the Company's past four fiscal quarters.
This effect was partially offset by generally lower costs of reduced
specification memory components obtained under the Component Recovery
Agreement with MTI. Under this agreement, costs of reduced specification
memory components are generally determined as one-half of the net operating
income generated from sales of reduced specification memory products
obtained from MTI. Prior to fiscal 1997, costs of reduced specification
memory components obtained from MTI were generally equal to one-half the
price realized from sales of such components. See "Certain
Factors SpecTek Memory Products Operation Dependence on Component Recovery
Agreement with MTI."
10
<PAGE>
The gross margin percentage of 25.0% realized by the Company's SpecTek
memory products operation in the first quarter of fiscal 1997 was
significantly higher than the gross margin percentage realized in the
fourth quarter of fiscal 1996, primarily due to lower costs of components
obtained from MTI under the Component Recovery Agreement and, to a lesser
extent, generally lower production costs per unit.
In the event that average selling prices for SpecTek's memory products
continue to decline, the gross margin percentage for the Company's
component recovery operation could decline further and overall results of
operations could be adversely affected. See "Certain Factors SpecTek
Memory Products Operation Pricing of RAM Products." In the event that the
Company is unable to obtain additional sources of supply of reduced
specification memory components or to maintain its existing sources of supply,
the Company's SpecTek memory products operation gross margin percentage
could decline and overall results of operations could be adversely
affected.
Selling, General and Administrative
<TABLE>
<CAPTION>
First Quarter
--------------------------------
1997 % Change 1996
-------- -------- --------
<S> <C> <C> <C>
Selling, general and administrative $ 39,826 26.9% $ 31,387
as a % of net sales 9.5% 7.2%
</TABLE>
Selling, general and administrative ("SG&A") expenses increased in
absolute dollars and as a percent of net sales in the first quarter of fiscal
1997 compared to the corresponding period in 1996 primarily due to higher
levels of personnel costs associated with the expanded PC operation and
increased advertising for the Company's PC operation. SG&A expenses in the
first quarter of fiscal 1996 included approximately $1.2 million of
goodwill amortization, reflecting charges prior to the write-off of
unamortized goodwill in connection with the Company's restructuring charge
relating to the discontinuance of its ZEOS brand products in the second
quarter of fiscal 1996.
Income Tax Provision
<TABLE>
<CAPTION>
First Quarter
--------------------------------
1997 % Change 1996
-------- -------- --------
<S> <C> <C> <C>
Income tax provision $ 16,199 46.2% $ 11,077
</TABLE>
The effective income tax rate was 39.5% in the first quarter of fiscal
1997, principally reflecting the federal statutory rate and the net effect
of state taxes. The Company's effective income tax rate of 40.0% for the
corresponding period in 1996 principally reflected the federal statutory
rate, the net effect of state taxes and the effect of goodwill
amortization.
Liquidity and Capital Resources
As of November 28, 1996, the Company had cash and equivalents of $122.4
million, representing an increase of $6.6 million compared to August 29,
1996. Principal sources of liquidity in 1997 were cash flows from
operations of $21.7 million and borrowings under equipment financing
arrangements of $4.6 million. Principal uses of cash in 1997 were property,
plant and equipment expenditures of $18.9 million for expansion and
capacity improvements of the Company's manufacturing operations and
repayment of the Company's debt of $0.8 million.
The Company has an unsecured revolving credit facility with MTI which
provides for borrowings of up to $80.0 million, based on the Company's
tangible net worth. As of November 28, 1996, the Company was eligible to
borrow approximately $54.6 million under the facility, but had no
borrowings outstanding. In addition, the Company has an unsecured
revolving credit facility with two financial institutions providing for
borrowings of up to $40.0 million, based on the amount of the Company's
eligible receivables. As of November 28, 1996, the Company was eligible to
borrow $40.0 million under this credit facility, but had no borrowings
outstanding. 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 million. The proceeds from any such issuance may
be used for general corporate purposes. The registration statement also
allows for an additional $250 million of outstanding common stock of the
Company to be sold by certain existing shareholders, consisting of MTI and
certain management employees.
11
<PAGE>
As of November 28,1996, the Company had capital expenditure commitments
of approximately $12.2 million for expansion and upgrade of facilities and
equipment. The Company anticipates making capital expenditures in the
remainder of fiscal 1997 of approximately $70 million. The Company recently
completed construction of an approximately 216,000 square foot facility in
Nampa, Idaho and relocated its Boise, Idaho contract manufacturing
operation to the site.
The Company expects that its future working capital requirements will
continue to increase and believes that currently available cash and
equivalents, future cash flows from operations, current credit facilities
and future equipment financing will be sufficient to fund its operations
through fiscal 1997. However, maintaining an adequate level of working
capital through the end of fiscal 1997 and thereafter will depend in large
part on the success of the Company's products in the marketplace and the
Company's ability to control inventory levels, component costs and other
operating expenses. A lower level of PC shipments than expected in the first
quarter of fiscal 1997, principally as a result of certain component
shortages, led to an overall increase of the Company's inventories. The
Company may require additional financing for growth opportunities, including
any internal expansion that the Company may undertake, expansion and capacity
enhancements to additional sites, or strategic acquisitions or partnerships.
There can be no assurance that any financing will be available on terms
acceptable to the Company, or at all.
Certain Factors
In addition to factors discussed elsewhere in this Form 10-Q, the
following are important factors which could cause actual results or events
to differ materially from those contained in any forward-looking statements
made by or on behalf of the Company.
General
Fluctuations in Operating Results
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, critical component availability,
manufacturing and production constraints, fluctuating component costs,
fluctuating market pricing for PCs and semiconductor memory products,
industry competition, the timing of new product introductions by the
Company and its competitors, availability of reduced specification memory
components, inventory obsolescence, seasonal cycles common in the PC
industry, seasonal government purchasing cycles, the effect of product
reviews and industry awards, changes in product mix and the timing of
orders from and shipments to OEM customers. As a result, the operating
results for any particular period are not necessarily indicative of the
results that may occur in any future period.
Management of Growth
In recent periods, the Company has experienced rapid revenue growth and
an expansion in the number of its employees, in the breadth and complexity
of its management, operating and financial information systems and in its
geographic scope of operations. This growth has resulted in new and
increased responsibilities for the Company's management and has placed, and
continues to place, significant demands upon the Company's management,
operating and financial information systems, technical support systems and
other resources. The Company continues to consider various expansion
alternatives, including expansion of facilities, acquisition of facilities
in alternative geographic regions and certain strategic relationships.
There can be no assurance that the Company's management resources,
operating and financial information systems, technical support systems and
other resources will be adequate to support the Company's existing or
future operations. Any failure to effectively monitor, implement or
improve the Company's operational, financial, management and technical
support systems could have a material adverse effect on the Company's
business and results of operations.
Control by MTI
As of November 28, 1996, MTI owned approximately 79% of the outstanding
common stock of the Company. In addition, four of the eight directors of
the Company are also directors of MTI, including Steven R. Appleton,
Chairman and Chief Executive Officer of MTI. So long as MTI continues to
own a majority of the outstanding common stock of the Company, MTI will
have the ability to control the outcome of matters requiring shareholder
approval, including the election of directors, and generally will have the
ability to control the management and certain financial and other affairs
of the Company. Termination of certain of the Company's arrangements by
MTI or MTI exercising its control in negotiating arrangements resulting in
terms less favorable to the Company could adversely affect the Company's
business and results of operations. In the event that MTI's ownership of
the Company were to decrease below certain levels, certain of the Company's
arrangements with MTI could terminate, which could have a material adverse
effect on the Company's business and results of operations. See
"Intellectual Property Matters" and SpecTek Memory Products Operation
Dependence on Component Recovery Agreement."
12
<PAGE>
Intellectual Property Matters
It is common in the electronics industry for patent, trademark and other
intellectual property right 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 appropriate, attempts to obtain a license to the
protected 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 licenses with royalty payments or
other terms at least as favorable as those received by the Company's
competitors. The Company has entered into several patent and software
license agreements, all of which require one-time or periodic royalty
payments. The Company is unable to predict whether any of these license
agreements can be obtained or renewed on terms acceptable to the Company.
If the Company or its suppliers are unable to obtain or provide licenses
necessary to use protected technology or software 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 or defend legal actions taken against it relating to patent or
copyright 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 its manufacturing processes or products, has infringed on the
intellectual property rights held by others could have a material adverse
effect on the Company's business and results of operations.
The Company, as a majority-owned subsidiary of MTI, enjoys the benefits
of certain license agreements between MTI and third parties. The Company
makes payments to MTI relating to certain of such agreements, and the
Company's rights under such agreements may terminate in the event that the
Company is no longer a majority-owned subsidiary of MTI. In the event of
any such termination, an inability of the Company to obtain independent
licenses necessary to use technology or an inability to obtain licenses on
competitive terms, or a finding of infringement against the Company, could
have a material adverse effect on the Company's business and results of
operations. In addition, MTI permits the Company to use certain of MTI's
trademarks and patents, including the Micron brand name, although such use
by the Company has not been documented by a formal license agreement.
There can be no assurance that the Company will continue to be able to use
such trademarks and patents in the future, particularly if the Company
ceases to be a majority-owned subsidiary of MTI. An inability to use such
trademarks and patents in the future could have a material adverse effect
on the Company's business and results of operations.
International Operations
Approximately 5% of the Company's sales for the first quarter of fiscal
1997 were attributable to sales outside the United States, and the Company
believes international sales as a percentage of total sales will increase
in the future, particularly for PC systems and contract manufacturing
services. In marketing its PC systems in foreign countries, the Company
uses either direct selling or indirect selling through distributors,
depending on consumer preferences, local infrastructure, language and
marketing methods. In the first quarter of fiscal 1997, the Company
established a PC sales and technical support call center in Japan. There
can be no assurance that the establishment of this call center will not
have an adverse effect on the Company's current relationships with its
Japanese distributors. The Company has established a contract
manufacturing operation in Malaysia, and the Company continues to evaluate
the benefits and risks associated with overseas manufacturing for its PC
and contract manufacturing operations. The new contract manufacturing
operation in Penang, Malaysia is expected to complete its first product
shipment in the second quarter of fiscal 1997. There can be no assurance
that the establishment of the Japan and Malaysia operations or any other
international expansion will be successful, and any failure by the Company
to achieve success in international operations could have a material and
adverse effect on the Company's business and results of operations. The
Company's international operations are subject to a number of other risks,
including, without limitation, fluctuations in the value of currencies,
export duties, import controls, trade barriers, restrictions on funds
transfer, greater difficulty in accounts receivable collections, political
and economic instability and compliance with foreign laws.
Dependence on Key Personnel
The future success of the Company will depend, in part, on its ability to
attract and retain key management and technical personnel. The Company has
enhanced its respective management and technical expertise by recruiting
qualified individuals who possess desired skill sets and experience in
certain targeted areas. There is competition for such personnel in the
electronics industries, and an inability to attract and retain sufficient
additional employees, particularly in the areas of engineering, information
technology and technical support resources, could have a material adverse
effect on the Company's business and results of operations. The Company
does not currently maintain "key man" life insurance with respect to any
of its employees. There can be no assurance that the Company will not lose
key personnel or that the loss of any key personnel will not have an
adverse effect on the Company's business and results of operations.
13
<PAGE>
Concentration of Ownership of Common Stock of the Company
Due to MTI's ownership as of November 28, 1996 of approximately 79% of
the outstanding shares of common stock of the Company, only a limited
percentage of common stock of the Company is traded in the public market,
which limits the trading liquidity of the common stock of the Company and
may limit the Company's ability to complete future equity offerings. 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 prices 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 "Act"), is subject to volume and other
restrictions pursuant to Rule 145 promulgated under the 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 million.
The proceeds from any such issuance may be used for general corporate
purposes. The registration statement also allows for an additional $250
million of outstanding common stock of the Company to be sold by certain
existing shareholders, consisting of MTI and certain management employees.
Volatility of Stock Price
The trading prices of the common stock of the Company and the stock of
other companies primarily engaged in the PC industry have had a history of
significant volatility. The trading price of the common stock of the
Company is subject to significant fluctuations due to general market
conditions in the PC industry, announcements of technological innovations
or new commercial products by competitors, component availability and
pricing, the significant number of shares of common stock of the Company
eligible for future sale into the public market or other factors. The
stock market generally has experienced significant price and volume
fluctuations, and such fluctuations have impaired stock prices for many
high technology companies. These broad market fluctuations, as well as
general economic conditions and the financial performance of the Company,
may adversely affect the market price of common stock of the Company.
Personal Computer Systems
Competition in the PC Industry
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, low gross margin
percentages and rapidly declining component costs. Competition in the PC
industry is based primarily upon performance, price, reliability, service
and support. 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 a decline in the rate of increase of demand, for PC
systems could increase price competition and could have a material adverse
effect on the Company's business and results of operations. To remain
competitive, the Company must frequently introduce new products and price its
products and offer customers lead times comparable to its competitors. In
addition, to remain competitive, the Company generally reduces the selling
prices of its PC systems in connection with declines in its costs of
components. The Company competes with a number of PC manufacturers which sell
their products primarily through direct channels, including Dell Computer, Inc.
and Gateway 2000, Inc. The Company also competes with PC manufacturers, such
as Apple Computer, Inc., Compaq Computer Corporation, Hewlett-Packard Company,
International Business Machines Corporation and Toshiba Corporation among
others, which have traditionally sold their products through national and
regional distributors, dealers and value added resellers, retail stores and
direct sales forces. Many of the Company's PC competitors offer broader
product lines, have substantially greater financial, technical, marketing and
other resources than the Company and may benefit from component volume
purchasing arrangements that are more favorable in terms of pricing and
component availability than the arrangements enjoyed by the Company. In
addition, as a result of PC industry standards, the Company and its competitors
generally 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. In the future, the Company expects to
face increased competition in the U.S. direct sales market from foreign PC
suppliers and from indirect domestic suppliers of PC products that decide to
implement, or devote additional resources to, a direct sales strategy. In
order to gain an increased share of the U.S. PC direct sales market, these
competitors may effect a pricing strategy that is more aggressive than the
current pricing in the direct sales market. The Company's ability to continue
to produce competitively priced products and to maintain existing gross margin
percentages will depend, in large part, on the Company's ability to sustain
high levels of sales, and control inventory levels, component cost and other
operating expenses. Any failure by the Company to transition to new products
effectively or to accurately forecast demand for its products may have a
material and adverse effect on the Company's business and results of
operations.
14
<PAGE>
Inventory Management
The Company's ability to compete successfully in the PC market in the
future will depend in large part on its ability to effectively manage its
inventories of PC components. The Company's PC operation focuses 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 recently experienced a significant increase in the level of
inventories. The Company has experienced in the past, and could experience
in the future, inventory obsolescence resulting from, among other things,
the fast pace of technological developments in the PC industry and the
short product life cycles of PC systems and components. In addition,
because high volumes of quality components are required for the manufacture
of the Company's PC systems, the Company has experienced in the past, and
expects to experience in the future, shortages and other supply constraints
of key components. Such shortages or supply constraints have in the past
adversely affected and could in the future adversely affect, the Company's
ability to ship products on schedule or at expected gross margins. To be
successful in the future, the Company must accurately anticipate demand
for its products and obtain adequate supplies of components to meet such
demand. The failure of the Company to manage its inventories effectively
could result in inventory obsolescence, excess inventories, component
shortages and untimely shipment of products, any of which could have a
material adverse effect on the Company's business and results of operations.
Short PC Product Life Cycles
To maintain a competitive position in the PC industry, the Company must
introduce new products and features that address the needs and preferences
of customers in 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. To remain competitive,
the Company must frequently introduce new products and features. There can
be no assurance that these products or features will be successful, 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 changes in the PC industry. The Company does not maintain a
significant research and development group. Instead, the Company strives
to work closely with PC component suppliers and other technology developers
to evaluate the latest developments in PC-related technology. There can be
no assurance that the Company will continue to have access to new
technology, will be successful in incorporating new technology in its
products or will be able to deliver commercial quantities of new products
or features in a timely and cost-effective manner.
Dependence on Key Sources of Supply
The Company purchases substantially all of its PC components and
subassemblies from suppliers on a purchase order basis and generally does
not have long-term supply arrangements with its suppliers. Certain components,
subassemblies and software included in the Company's PC systems are obtained
from sole suppliers or a limited number of suppliers. The microprocessors
used in the Company's PC systems are manufactured exclusively by Intel. In
addition, the Company currently purchases a significant majority of its
motherboards from a single source. A significant portion of the RAM
components used in the Company's PC systems are supplied by MTI, and the
Company expects to continue to rely on MTI as its primary source of RAM
components. The Company focuses on providing PC systems that feature
components 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 and subassemblies used in its PC systems. From time to time,
the Company has been unable to obtain sufficient supply of the latest Intel
microprocessors. Sales of PC systems in the first quarter of fiscal 1997 were
adversely affected by shortages of certain Intel Pentium Pro microprocessors
and certain high-performance disk drives. 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, subassemblies 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 Millennia TransPort notebook PC systems are currently
assembled by a single third-party manufacturer. This outsourcing
arrangement 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. It is uncertain what effect
such limited control will have over the quality of the products
manufactured, the Company's ability to ship such products on a timely basis
or the flexibility of the Company to respond to changing market conditions.
Moreover, although arrangements with such manufacturers may contain
provisions for warranty obligations on the part of such manufacturers, the
Company remains primarily responsible to the customer for warranty
obligations. Any unanticipated product defect or warranty obligation,
whether pursuant to arrangements with third-party manufacturers or
otherwise, could adversely affect the Company's business and results of
operations.
15
<PAGE>
State Taxation
Several states have enacted legislation which would require out of state
direct marketers to collect and remit sales and use taxes based on certain
limited contacts with the state. Taxation authorities in certain states
have, from time to time, solicited information from the Company to
determine whether the Company has sufficient contacts with such states to
require payment of sales and use taxes on PC systems sold to customers in
those states. The Company could be required to pay sales and use taxes,
and income and franchise taxes related to the Company's operations in prior
periods, which could have a material adverse effect on the Company's
business and results of operations. In addition, the Company may be
increasing its contacts and presence in various states as it pursues its
business strategies. As a result of its contacts, the Company may be
required to collect and remit sales and use taxes in the future, which
could have a material adverse effect on the Company's business and results
of operations.
Reliance on the Direct Sales Approach
The Company currently markets its PC systems directly to individuals,
small and medium-sized businesses and governmental and educational entities
through advertisements in personal computer trade publications, direct-mail
campaigns and on the Internet. Sales orders are received primarily by
telephone by the Company's sales representatives who review configuration
options and pricing with the customer. The direct sales approach may make
it difficult for the Company to penetrate specific markets and may be less
appealing to first-time PC buyers than other sales channels. In addition,
the Company's ability to increase future sales of PC systems is dependent
in part on the growth of the direct sales channel. The Company believes
that to retain customer interest in its PC systems and brand name
recognition of its products, the Company must continue to offer products,
services and support which are recognized by trade publications for overall
performance, price, reliability and quality. There can be no assurance
that the Company's name recognition and market acceptance of its PC
products will not decline in the future, which could have a material
adverse effect on the Company's business and results of operations. There
can be no assurance that direct sales of PC systems as a percentage of
industry-wide PC sales will increase or that the Company will increase its
share of the direct sales market in the future. There can also be no
assurance that PC companies that currently distribute their PC products
primarily through distributors and resellers will not implement or devote
additional resources to a direct sales strategy, or that the direct sales
strategy will be successful in international markets. Any decline in the
rate of growth of the PC direct sales channel, or the Company's failure to
compete successfully in the direct sales channel, could have a material
adverse effect on the Company's business and results of operations.
Investment in Customer Service and Technical Support Systems
In recent periods, the Company's PC operation has experienced significant
growth in orders for PC systems. The Company has from time to time
experienced an increase in the volume of customer service and technical
support calls, which has placed, and is expected to continue to place, a
strain on the Company's customer service and technical support systems. To
remain competitive, the Company must invest significant resources in the
maintenance and improvement of its customer service and technical support
systems. Any failure to maintain adequate customer service and technical
support systems could cause customer dissatisfaction with the Company.
Customer dissatisfaction could result in reduced sales of PC systems, which
could have a material adverse effect on the Company's business and results
of operations.
Government Regulation of the PC Industry
Prior to marketing its PC systems, the Company must receive certification
that such systems meet standards established by the Federal Communications
Commission and certain foreign agencies for radio frequency emissions. Any
delay or failure by the Company to obtain such certifications may delay or
prevent the Company from introducing new products on a timely basis, which
could have a material adverse effect on the Company's business and results
of operations. In addition, the U.S. Federal Trade Commission and the
Department of Commerce, along with similar foreign agencies in other
jurisdictions, have promulgated certain regulations that affect the
Company's shipping, advertising and general operations. Any failure by the
Company to comply with such regulations could result in significant
penalties, fines or marketing restrictions, which in turn could have a
material adverse effect on the Company's business and results of
operations.
16
<PAGE>
Contract Manufacturing
Competition in the Contract Manufacturing Industry
The contract manufacturing industry is highly competitive. The Company's
contract manufacturing operation competes against numerous domestic and
offshore contract manufacturers, including a significant number of local
and regional companies. In addition, the Company competes against in-house
manufacturing capabilities of certain of its existing customers as well as
with certain large computer manufacturers which offer third-party contract
manufacturing services. The Company's contract manufacturing competitors
include, among others, Avex Electronics, Inc., Benchmark Electronics, Inc.,
Celestica Inc., DOVAtron International, Inc., Flextronics International,
Group Technologies Corporation, Jabil Circuits, Inc., Sanmina Corporation,
SCI Systems, Inc. and Solectron Corporation. Many of the Company's
competitors have substantially greater manufacturing, technical, financial,
personnel, marketing and other resources than the Company and have
manufacturing operations at multiple domestic and overseas locations.
The Company believes that the significant competitive factors in the
contract manufacturing industry include service, quality, price,
technology, location and the ability to offer flexible delivery schedules
and deliver finished products on an expeditious and timely basis in
accordance with customers' expectations. The Company may be at a
disadvantage as to certain competitive factors when compared to
manufacturers with greater resources than the Company, substantial offshore
facilities or substantially larger domestic facilities. There can be no
assurance that the Company's contract manufacturing operation will compete
successfully in the future with regard to these factors. In order to
remain competitive, the Company may be required to expand its contract
manufacturing capacity and may be required to establish additional
international operations. There can be no assurance that the Company will
be successful in expanding its contract manufacturing operation on a timely
and efficient basis, or at all. The failure to do so could have a material
adverse effect on the Company's business and results of operations.
Fluctuations in OEM Orders
The Company's contract manufacturing customers generally require short
delivery cycles and quick turnaround for contract manufacturing services.
As the Company's OEM customers react to variations in demand for their
products and adjust their purchase orders to the Company, the Company may
be subject to non-cancelable purchase orders with its suppliers and may
recognize losses on write downs of inventories due primarily to the
specialized nature of certain custom components and declines in market
pricing of components. Changes in OEM orders have had an adverse effect
on the Company's contract manufacturing operation in the past and there
can be no assurance that the Company will not experience such adverse
effects in the future.
Customer Concentration
In the first quarter of fiscal 1997, the Company's five largest contract
manufacturing customers accounted for approximately 66% of the revenues
from the Company's contract manufacturing operation, compared to
approximately 75% in the first quarter of fiscal 1996. Revenues from the
Company's largest contract manufacturing customer represented approximately
22% of total revenues from the Company's contract manufacturing operation
in the first quarter of fiscal 1997, compared to 33% of revenue from the
Company's largest contract manufacturing customer in the first quarter of
fiscal 1996. Contract manufacturing revenues from MTI were approximately
6% and 12% of total contract manufacturing revenues in the first quarter of
fiscal 1997 and 1996, respectively. The Company expects to continue to
experience a high degree of contract manufacturing customer concentration.
The Company has no long-term agreements with any of its contract
manufacturing customers which require such customers to purchase contract
manufacturing services from the Company. In recent periods, direct and
indirect sales to the Company's largest contract manufacturing customer
have declined materially, and the Company believes that its key contract
manufacturing customers will from time to time materially reduce their
purchases of the Company's contract manufacturing services in the future.
Although the Company has in the past been able to replace such business
with increased business from new or existing customers, there can be no
assurance that the Company will obtain sufficient alternative business on a
timely basis, and the failure to obtain such volume could have a material
adverse effect on the Company's business and results of operations.
Environmental Regulation
The Company's contract manufacturing operation is subject to a variety of
environmental regulations relating to the use, storage, discharge and
disposal of hazardous chemicals and waste water used during its
manufacturing processes. Any failure by the Company to comply with present
and future environmental regulations could subject it to liabilities or the
suspension of production. In addition, such regulations could limit the
ability of the Company's contract manufacturing operation to expand its
facilities or could require the Company to acquire costly equipment or
incur other significant costs any of which could have a material adverse
effect on the Company's business and results of operations.
17
<PAGE>
SpecTek Memory Products Operation
Dependence on Component Recovery Agreement with MTI
Historically, a substantial majority of the reduced specification memory
components used in the Company's SpecTek memory products operation has been
obtained from MTI. The Company and MTI are parties to a Component Recovery
Agreement, effective as of August 30, 1996 (the "Component Recovery
Agreement"), under which MTI is required to deliver to the Company all of
the reduced specification memory components produced at MTI's semiconductor
manufacturing operations. The Company's cost of reduced specification
memory components generally will be determined as one-half of the operating
income generated from sales of reduced specification memory components
supplied by MTI. There can be no assurance that MTI will continue to
produce adequate volumes of reduced specification memory components to
maintain the Company's SpecTek memory products operation at existing or
historic levels. The Component Recovery Agreement, which expires August
14, 1999, may be terminated by MTI in the event that MTI's ownership of
the Company falls below 30%. Termination or renegotiation of the key
terms of the Component Recovery Agreement could have a material adverse
effect on the Company's business and results of operations. Changes in
MTI's semiconductor manufacturing processes resulting in improvement of
device yields and/or changes in the product mix or specifications of its
memory components, or other changes or events at MTI adversely affecting
its overall manufacturing output, could adversely affect the volume of reduced
specification memory components supplied by MTI.
Many semiconductor memory manufacturers are reluctant to sell reduced
specification memory components because such components could compete with
their full specification RAM 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 reduced specification memory
components from semiconductor manufacturers in quantities sufficient to
meet demand for the Company's products. Any reduction in the availability
or functionality of reduced specification memory components from the
Company's suppliers could have a material adverse effect on the Company's
business and results of operations.
Pricing of RAM Products
Pricing for the Company's reduced specification memory components
fluctuates, to a large degree, based on industry-wide pricing for
semiconductor memory products. During the last four fiscal quarters, the
Company has experienced significant declines in the average selling prices
of its reduced specification memory components as industry-wide average
selling prices for full specification semiconductor memory products
experienced a sharp decline. The Company believes that such decline in
average selling prices of semiconductor memory products was due primarily
to changes in the balance of supply and demand for these commodity
products, and the Company is unable to predict the impact of semiconductor
memory product market dynamics in future periods. Due to increased market
risk associated with holding purchased memory components, 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 industry-wide pricing for semiconductor memory products
would likely result in declines in average selling prices of the Company's
reduced specification memory products, which could have a material adverse
effect on the Company's business and results of operations.
18
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Shareholders
The registrant's 1996 Annual Meeting of Shareholders was held on
November 25, 1996 at the Nampa Civic Center. At the meeting, the following
items were submitted to a vote of the shareholders. At the meeting,
88,835,122 shares were entitled to vote.
(a) The following nominees for Directors were elected. Each person
elected as Director will serve until the next meeting of shareholders
or until such person's successor is elected and qualified.
<TABLE>
<CAPTION>
Name of Nominee Votes Cast For Withhold Authority
-------------------------- -------------- ------------------
<S> <C> <C>
Steven R. Appleton 88,685,168 149,954
Joseph M. Daltoso 88,686,368 148,754
Jerry M. Hess 88,677,693 157,429
Robert A. Lothrop 88,677,459 157,663
T. Erik Oaas 88,687,641 147,481
John R. Simplot 88,005,305 829,817
Gregory D. Stevenson 88,675,504 159,618
Robert F. Subia 88,687,592 147,530
</TABLE>
(b) The ratification of the appointment of Coopers & Lybrand L.L.P. as
independent public accountants of the Company for the fiscal year
ending August 28, 1997 was approved with 88,747,979 votes in favor,
60,286 votes against, 26,857 abstentions and no broker non-votes.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following are filed as a part of this report:
Exhibit Description
------- -----------------------------------------------------------
11 Computation of Per Share Earnings
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the quarter
ended November 28, 1996.
Micron Electronics, Millennia TransPort, and SpecTek are trademarks of
the Company, and ZEOS is a registered trademark of the Company. Pentium
is a registered trademark of Intel Corporation. All other trademarks are
the property of their respective holders.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICRON ELECTRONICS INC.
-----------------------------------------------
(Registrant)
Dated: December 20, 1996
/s/ T. Erik Oaas
-----------------------------------------------
T. Erik Oaas, Vice President Finance, and Chief
Financial Officer (Principal Financial and
Accounting Officer)
21
EXHIBIT 11
Micron Electronics, Inc.
Computation of Per Share Earnings
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal quarter ended November 28, 1996 November 30, 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
PRIMARY
Weighted average shares outstanding 92,464 91,341
Net effect of dilutive stock options 538 1,225
--------- ---------
Number of shares used in per share calculation 93,002 92,566
========= =========
Net income $ 24,812 $ 16,615
========= =========
Per share earnings $ 0.27 $ 0.18
========= =========
FULLY DILUTED
Weighted average shares outstanding 92,464 91,341
Net effect of dilutive stock options 595 1,224
--------- ---------
Number of shares used in per share calculation 93,059 92,565
========= =========
Net income $ 24,812 $ 16,615
========= =========
Per share earnings $ 0.27 $ 0.18
========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the accompanying financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-28-1997
<PERIOD-END> NOV-28-1996
<CASH> 122,394
<SECURITIES> 0
<RECEIVABLES> 164,865
<ALLOWANCES> 8,699
<INVENTORY> 117,289
<CURRENT-ASSETS> 422,392
<PP&E> 191,769
<DEPRECIATION> 52,829
<TOTAL-ASSETS> 562,234
<CURRENT-LIABILITIES> 282,589
<BONDS> 21,085
0
0
<COMMON> 925
<OTHER-SE> 252,343
<TOTAL-LIABILITY-AND-EQUITY> 562,234
<SALES> 421,018
<TOTAL-REVENUES> 421,018
<CGS> 340,568
<TOTAL-COSTS> 381,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,270)
<INCOME-PRETAX> 41,011
<INCOME-TAX> 16,199
<INCOME-CONTINUING> 24,812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,812
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
