FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 30, 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: 1-17932
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Micron Electronics, Inc.
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(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
-----------------------------------------------------------------
(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 June 18, 1996 was 92,380,128.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Micron Electronics, Inc.
Balance Sheets
(Dollars in thousands, except par value amounts)
(Unaudited)
<TABLE>
<CAPTION>
May 30, August 31,
As of 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and equivalents $ 81,380 $ 69,406
Receivables 129,537 128,744
Inventories 96,222 92,709
Deferred income taxes 30,500 16,086
Other current assets 1,620 1,810
-------- --------
Total current assets 339,259 308,755
Property, plant and equipment, net 102,315 58,254
Goodwill, net - 12,612
Other assets 1,576 3,095
-------- --------
Total assets $443,150 $382,716
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $189,792 $177,437
Accrued licenses and royalties 41,591 23,844
Current debt 10,016 1,022
-------- --------
Total current liabilities 241,399 202,303
Long-term debt 16 5,801
Deferred income taxes 3,556 -
Other liabilities 1,376 949
-------- --------
Total liabilities 246,347 209,053
-------- --------
Commitments and contingencies
Common stock, $.01 par value, authorized 150.0
million shares; issued and outstanding 91.6
million shares at May 30, 1996 and 91.4 million
shares at August 31, 1995 916 914
Additional capital 64,187 58,613
Retained earnings 131,700 114,136
-------- --------
Total shareholders' equity 196,803 173,663
-------- --------
Total liabilities and shareholders' equity $443,150 $382,716
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
Micron Electronics, Inc.
Statements of Operations
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the For the nine
quarter ended months ended
May 30, June 1, May 30, June 1,
1996 1995 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $412,322 $271,477 $1,307,519 $596,031
Cost of goods sold 353,751 221,695 1,141,226 476,732
-------- -------- ---------- --------
Gross margin 58,571 49,782 166,293 119,299
Selling, general and
administrative 36,084 23,225 100,108 46,468
Research and development 673 585 2,268 1,090
Restructuring charge - - 29,500 -
-------- -------- ---------- --------
Operating income 21,814 25,972 34,417 71,741
Interest income, net 888 620 2,561 1,199
-------- -------- ---------- --------
Income before taxes 22,702 26,592 36,978 72,940
Income tax provision 8,627 10,987 18,844 28,811
-------- -------- ---------- --------
Net income $ 14,075 $ 15,605 $ 18,134 $ 44,129
======== ======== ========== ========
Earnings per share $ 0.15 $ 0.17 $ 0.20 $ 0.51
Number of shares used in per
share calculation 92,477 89,669 92,438 86,581
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
Micron Electronics, Inc.
Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
May 30, June 1,
For the nine months ended 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,134 $ 44,129
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 13,927 7,317
Amortization 1,542 679
Restructuring charge 29,500 -
Changes in assets and liabilities, net of effect
of restructuring charge and merger transaction:
Receivables (1,111) (24,669)
Inventories (18,015) (39,121)
Accounts payable and accrued expenses (9,196) 29,873
Accrued licenses and royalties 17,746 4,179
Deferred income taxes (8,748) (3,965)
Other 5,105 (719)
-------- --------
Net cash provided by operating activities 48,884 17,703
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment expenditures (46,301) (29,075)
Proceeds from sales of property, plant and equipment 5,695 221
Purchases of held-to-maturity investment securities - (3,165)
Proceeds from maturities of investment securities - 5,400
Cash acquired in merger transaction - 14,060
Other (214) (427)
-------- --------
Net cash used for investing activities (40,820) (12,986)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under credit facility 25,000 -
Repayments of debt (21,687) (767)
Proceeds from issuance of common stock 1,323 344
Purchase and retirement of stock (726) (882)
Other - (1,281)
-------- --------
Net cash provided by (used for) financing
activities 3,910 (2,586)
-------- --------
Net increase in cash and equivalents 11,974 2,131
Cash and equivalents at beginning of period 69,406 35,048
-------- --------
Cash and equivalents at end of period $ 81,380 $ 37,179
======== ========
SUPPLEMENTAL DISCLOSURES
Noncash investing and financing activities:
Issuance of restricted stock granted pursuant
to the ZEOS 1991 Stock Incentive Plan $ 1,299 $ -
Assets acquired, net of cash and liabilities
assumed in merger transaction - 25,998
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements
(All 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 third fiscal quarter ended May 30,
1996, should be read in conjunction with the Company's Annual Report
to Shareholders on Form 10-K for the fiscal year ended August 31,
1995. Portions of the accompanying financial statements are derived
from the audited year-end financial statements of the Company dated
August 31, 1995.
2. The Merger
On April 7, 1995, Micron Computer, Inc. ("MCI") and Micron Custom
Manufacturing Services, Inc. ("MCMS"), subsidiaries of Micron
Technology, Inc. ("MTI"), merged with and into ZEOS International,
Ltd. ("ZEOS"). 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
surviving corporation was changed to Micron Electronics, Inc. The
merger resulted in a change of control of approximately 89% of ZEOS
wherein, assuming exercise of all options outstanding at the time of
the merger, (a) MTI owned an approximate 79% interest in the Company
and (b) the other shareholders of MCI and MCMS owned an approximate
10% interest in the Company. The merger has been accounted for as a
purchase of ZEOS by MCI and MCMS. A new basis of accounting was
established for the assets and liabilities of ZEOS to the extent of
the change of control. The new basis reflects the allocation of the
approximate $39.1 million increased basis to the ZEOS assets and
liabilities on the basis of their fair values. Goodwill of
approximately $14.6 million was recorded to the extent the purchase
price exceeded the fair value of the identifiable net assets for which
a change of control occurred. Goodwill was being amortized on a
straight line basis over three years. In the second quarter of fiscal
1996, remaining goodwill was written off in connection with a
restructuring charge of $29.5 million recorded by the Company (see
note 3).
The Company's fiscal year is a 52 or 53 week period ending on the
Thursday closest to August 31, which was the fiscal year of MCI and
MCMS. Subsequent to the merger, the financial statements of the
Company reflect the combined results of operations, financial position
and cash flows of ZEOS, MCI and MCMS based on the new basis of
accounting for ZEOS and the historical cost basis for MCI and MCMS.
Prior to April 7, 1995, the financial statements of the Company
include only the combined results of operations, financial position
and cash flows of MCI and MCMS.
3. Restructuring Charge
On February 26, 1996, the Company adopted a plan to discontinue the
manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operations in Minneapolis, Minnesota. As a result, the
Company recorded a restructuring charge of $29.5 million ($22.6
million, net of taxes) in the second quarter of fiscal 1996. The
restructuring charge includes (a) $27.6 million of non-cash charges,
including approximately $14.8 million related to the disposition of
inventory of discontinued product lines, the write-off of $11.4
million of goodwill which resulted from the merger with ZEOS, and
other asset write-downs of approximately $1.4 million, (b) $1.1
million of personnel related costs related to approximately 250
employees engaged in manufacturing, purchasing, customer service,
finance and administrative functions and (c) $0.8 million of other
exit costs. As of May 30, 1996, the remaining balance of the
restructuring liability and asset reserves was $4.5 million. Of the
$25.0 million realized to date for restructuring costs, $12.8 million
related to disposition of inventory and other asset write downs, $11.4
million related to the write-off of goodwill, $0.5 million related to
personnel costs and $0.3 million related to other exit costs.
4
<PAGE>
<TABLE>
<CAPTION>
4. Receivables
May 30, August 31,
1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $132,520 $126,040
Receivables from affiliates, net 3,829 8,379
Income taxes recoverable from parent corporation 6,888 -
Other 8,088 1,070
Allowance for doubtful accounts (6,554) (5,458)
Allowance for returns and discounts (15,234) (1,287)
-------- --------
$129,537 $128,744
======== ========
</TABLE>
<TABLE>
<CAPTION>
5. Inventories
May 30, August 31,
1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 66,891 $ 75,045
Work in progress 25,331 19,407
Finished goods 14,022 8,843
Allowance (10,022) (10,586)
-------- --------
$ 96,222 $ 92,709
======== ========
</TABLE>
<TABLE>
<CAPTION>
6. Property, Plant and Equipment
May 30, August 31,
1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,645 $ 987
Buildings 19,540 15,643
Equipment 102,145 71,502
Construction in progress 28,274 7,259
-------- --------
151,604 95,391
Less accumulated depreciation and amortization (49,289) (37,137)
-------- --------
$102,315 $ 58,254
======== ========
</TABLE>
During the third quarter of fiscal 1996, the Company purchased
approximately 30 acres of land adjacent to its PC manufacturing
operations from a director of the Company for approximately $575,000.
<TABLE>
<CAPTION>
7. Accounts Payable and Accrued Expenses
May 30, August 31,
1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $117,769 $ 99,065
Payable to affiliates 31,234 53,750
Salaries, wages and benefits 11,545 11,086
Equipment contracts payable 19,120 1,926
Income taxes payable to parent corporation - 4,686
Other 10,124 6,924
-------- --------
$189,792 $177,437
======== ========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
8. Debt
May 30, August 31,
1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Revolving credit facility with parent corporation,
variable interest rate of 6.47% $ 10,000 $ -
Notes payable to parent corporation - 6,672
Other 32 151
-------- --------
10,032 6,823
Less current portion (10,016) (1,022)
-------- --------
$ 16 $ 5,801
======== ========
</TABLE>
The Company has a revolving credit facility with the parent
corporation providing for borrowings of up to $80 million, based on
the Company's tangible net worth. As of May 30, 1996, the Company was
eligible to borrow a total of approximately $45 million under the
facility and had borrowings of $10 million outstanding. Amounts
outstanding under the agreement are collateralized by substantially
all of the Company's assets except certain equipment subject to
permitted liens.
The Company has a credit agreement with a financial institution
providing for borrowings of up to approximately $10 million. There
were no borrowings outstanding under the agreement as of May 30, 1996.
In June, 1996, the Company drew approximately $10 million under the
credit facility and has pledged certain equipment as collateral.
9. Income Taxes
The effective income tax rate for the nine months ended May 30, 1996
was 51.0%, principally reflecting the federal statutory rate, the net
effect of state taxes and the effect of the write-off during the
second quarter of $11.4 million of nondeductible goodwill (see note
3). The effective tax rate for the third quarter of fiscal 1996 was
38.0%, principally reflecting the federal statutory rate and the net
effect of state taxes.
10. Earnings Per Share
Earnings per share is computed using the weighted average number of
common and common equivalent shares outstanding. Common equivalent
shares result from the assumed exercise of outstanding stock options
and affect earnings per share when they have a dilutive effect. All
historical per share amounts have been restated to reflect the effect
of the merger transaction (see note 2).
On June 14, 1996, a former executive officer of the Company
exercised options to purchase approximately 800,000 shares of the
Company's common stock for an aggregate exercise price of
approximately $264,000.
11. Commitments
As of May 30, 1996, the Company had commitments of approximately
$10.0 million for equipment purchases and $11.5 million for
construction of a building.
12. Contingencies
Periodically, the Company is made aware that the technology used by
the Company may infringe on product or process technology rights held
by others. The Company has accrued a liability and charged operations
for the estimated costs of settlement or adjudication of asserted
claims for alleged infringement and unasserted claims arising prior to
the balance sheet date. The ultimate resolution of these claims is
not expected to have a material effect on the results of operations of
the Company.
The Company is currently a party to various legal actions, 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
Micron Electronics, (Trademark) Inc. and its subsidiaries (collectively,
the "Company") completed their third quarter of fiscal 1996 on May 30,
1996. All period references are to the Company's fiscal periods ended
May 30, 1996, February 29, 1996 and June 1, 1995, unless otherwise
indicated. All tabular dollar amounts are stated in thousands.
Results of Operations
On April 7, 1995, Micron Computer, Inc. ("MCI") and Micron Custom
Manufacturing Services, Inc. ("MCMS") merged with and into ZEOS
(Registered Trademark) International, Ltd. ("ZEOS") and the name of
the surviving corporation was changed to Micron Electronics, Inc. (the
"Merger"). The Company's financial statements set forth in "Item 1.
Financial Statements" reflect the combined operations of the Company
subsequent to April 7, 1995 and the combined results of operations of
only MCI and MCMS prior thereto. The Company believes discussion and
analysis of the Company's results of operations on a pro forma basis,
which includes the results of operations of ZEOS prior to the Merger,
provide a more meaningful comparison than discussion and analysis of
the Company's actual results of operations. The following discussion
and analysis present the Company's results of operations for the third
quarter and first nine months of 1996, compared to the Company's pro
forma results of operations for the third quarter and first nine months
of 1995, as if the Merger had occurred at the beginning of fiscal 1995,
giving effect to pro forma adjustments, including amortization of
goodwill, certain product and process technology costs and related
income tax effects.
The pro forma information is provided for illustrative purposes and
is not necessarily indicative of the results of operations that would
have occurred if MCI and MCMS merged with ZEOS at the beginning of
fiscal 1995, nor does it represent a forecast of results of operations
for any future periods.
Beginning in fiscal 1996, the Company combined its component
recovery and peripheral add-on memory module operations. To conform
to the 1996 presentation, the results of the peripheral add-on memory
module operations for 1995 have been reclassified to component
recovery operations.
The following summarizes the Company's results of operations for the
third quarter and first nine months of 1996 and pro forma results of
operations for the corresponding periods in 1995:
<TABLE>
<CAPTION>
Third Quarter Nine Months
---------------------------------- ------------------------------------
1996 Pro Forma 1995 1996 Pro Forma 1995
---------------- ---------------- ------------------ ----------------
% of % of % of % of
Amount Sales Amount Sales Amount Sales Amount Sales
---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $412,322 100.0% $307,909 100.0% $1,307,519 100.0% $785,050 100.0%
Cost of goods sold 353,751 85.8% 252,584 82.0% 1,141,226 87.3% 639,703 81.5%
Gross margin 58,571 14.2% 55,325 18.0% 166,293 12.7% 145,347 18.5%
Selling, general and
administrative 36,084 8.8% 27,598 9.0% 100,108 7.7% 70,899 9.0%
Research and development 673 0.2% 834 0.3% 2,268 0.2% 1,801 0.2%
Restructuring charge - 0.0% - 0.0% 29,500 2.3% - 0.0%
Net income 14,075 3.4% 16,690 5.4% 18,134 1.4% 45,001 5.7%
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Net Sales Third Quarter Nine Months
---------------------------------- ------------------------------------
1996 Pro Forma 1995 1996 Pro Forma 1995
---------------- ---------------- ------------------ ----------------
% of % of % of % of
Amount Sales Amount Sales Amount Sales Amount Sales
---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PC systems $294,837 71.5% $191,034 62.0% $ 892,849 68.3% $503,718 64.2%
Contract manufacturing 86,135 20.9% 50,425 16.4% 295,225 22.6% 114,843 14.6%
Component recovery 31,350 7.6% 66,450 21.6% 119,445 9.1% 166,489 21.2%
-------- ------ -------- ------ ---------- ------ -------- ------
Total net sales $412,322 100.0% $307,909 100.0% $1,307,519 100.0% $785,050 100.0%
======== ====== ======== ====== ========== ====== ======== ======
</TABLE>
Net sales for the third quarter and first nine months of 1996 were
approximately 34% and 67% higher, respectively, than for the
corresponding periods in 1995, primarily due to a significant increase
in sales of personal computer systems and higher revenues from the
Company's contract manufacturing operations, partially offset by lower
sales from the Company's component recovery operations.
Personal Computer Systems
Net sales of PC systems were significantly higher in the third
quarter and first nine months of 1996, compared to the corresponding
periods in 1995, primarily due to significantly higher unit sales of
PC systems and, to a lesser extent, higher average selling prices for
PC systems. Unit sales of PC systems in the third quarter and first
nine months of 1996 increased approximately 40% and 66%, respectively,
compared to the corresponding periods of 1995, primarily due to
significantly higher sales of Micron brand desktop PC systems. The
Company also experienced an increase in sales of its notebook products
due primarily to the introduction in the third quarter of 1996 of its
new Millennia Transport (Trademark) product offering. Unit sales of
Micron brand PC systems increased primarily as a result of increased name
recognition and market acceptance. The Company has received a number
of industry and computer trade magazine awards based on the price and
performance characteristics of its Micron brand PC systems and the
Company's service and support functions. In the event the Company is
not successful in winning such awards in the future, consumer interest
in its Micron brand PC systems could decline which could have a
material adverse effect on the Company's results of operations.
Average selling prices for the Company's PC systems increased in the
third quarter and the first nine months of 1996 compared to the
corresponding periods in 1995, primarily due to increased unit sales
of relatively higher priced Pentium (Registered Trademark) and Pentium
Pro microprocessor based systems and an increase in the number of
higher priced notebook units sold, as customers continued to prefer
more richly configured systems with components featuring the latest
developments in PC related technology. The recently introduced Micron
brand Millennia Transport notebook products have a significantly higher
average selling price than the Company's overall average selling prices
for PC systems.
In the second quarter of 1996, the Company decided to discontinue
the manufacture and sale of ZEOS brand PC systems and to close the
related manufacturing operations in Minneapolis, Minnesota. Unit
sales of ZEOS brand PC systems manufactured in Minneapolis represented
approximately 0.6% and 8% of total unit sales for the third quarter
and first nine months of 1996, respectively.
Net sales of PC systems in the third quarter of 1996 decreased
slightly compared to the second quarter of 1996, primarily due to a
decline in unit sales of ZEOS brand PC systems and a decline in unit
sales pursuant to the Company's PC-1 government contract, substantially
offset by an increase in unit sales of Micron brand notebook products.
Government sales of the Company's PC systems in the third quarter of
1996 represented approximately 11% of the Company's overall PC system
sales, compared to approximately 6% in the third quarter of 1995.
Government sales in the third quarter of 1996 consisted primarily of
sales to state and local governmental entities and sales under the
federal government's General Service Administration schedule. Sales
pursuant to the Company's PC-1 government contract declined in the third
quarter of 1996 and the Company does not anticipate further sales
under the contract.
8
<PAGE>
Contract Manufacturing
Revenues from the Company's contract manufacturing operations were
approximately 71% and 157% higher in the third quarter and first nine
months of 1996, respectively, compared to the corresponding periods in
1995, but were 21% lower comparing the third quarter of 1996 to the
second quarter of 1996. The increases in revenue in the third quarter
and first nine months of 1996 compared to the corresponding periods in
1995 were primarily due to utilization of increased manufacturing
capacity and a higher percentage of turnkey, as opposed to consignment,
memory module assembly services. Increased capacity was obtained through
the acquisition of additional manufacturing equipment and the upgrade of
existing manufacturing equipment at the Company's Boise, Idaho and
Durham, North Carolina facilities. Contract manufacturing revenues in
recent periods have been adversely impacted by an industry wide
decline in market prices for semiconductor memory products, which
typically represent a significant portion of revenues from the
Company's contract manufacturing operations.
The Company continues to rely on a relatively small number of
customers for a significant volume of its contract manufacturing
business. As a percent of total contract manufacturing revenue, sales
to the Company's top five contract manufacturing customers, including
Micron Technology, Inc. ("MTI"), for the third quarter and first nine
months of 1996 were approximately 80% and 76%, respectively, compared
to approximately 72% and 68%, in the third quarter and first nine
months of 1995, respectively. Contract manufacturing revenue from MTI
was approximately 7% and 9% of total contract manufacturing revenue in
the third quarter and first nine months of 1996, respectively,
compared to approximately 15% and 14% in the corresponding periods in
1995.
The Company intends to move its Boise, Idaho contract manufacturing
operations to a 30 acre site adjacent to its PC manufacturing
operations in Nampa, Idaho during the first quarter of fiscal 1997.
In connection therewith, the Company began construction of an
approximate 200,000 square foot facility, approximately double the
space available at the current Boise, Idaho site, allowing for
possible future expansion of the contract manufacturing operations.
There can be no assurance that such move will not disrupt the
Company's contract manufacturing operations. Any such disruption
could have a material adverse effect on the Company's results of
operations.
Component Recovery
Component recovery sales were approximately 53% and 28% lower in the
third quarter and first nine months of 1996, respectively, compared to
the corresponding periods in 1995, primarily due to a decline in sales
of peripheral add-on memory modules, a significant decline in average
selling prices for random access memory ("RAM") products and a generally
lower grade of nonstandard RAM components received from MTI, the
Company's primary supplier, partially offset by an increase in unit
sales of nonstandard RAM products. The increase in unit sales for the
third quarter of 1996 compared to the corresponding period in 1995 was
primarily due to the utilization of additional test and burn-in equipment
and reduced test times, both resulting in increased throughput for
substantially all products. The Company's component recovery results of
operations are influenced by a number of factors including pricing for,
and sources of availability of, nonstandard RAM components. See "Certain
Factors."
Historically, a substantial portion of the nonstandard RAM
components used in the Company's component recovery operations has
been obtained from MTI. In the third quarter and first nine months of
1996, the Company obtained approximately 48% and 59%, respectively, of
its nonstandard RAM components from MTI under a revenue sharing
agreement. A substantial majority of the remainder of its components
were purchased from a single third party alternative source. Purchases
from this alternative source are generally negotiated on a purchase order
basis. There can be no assurance the Company will be able to negotiate
future purchases from this alternative source on terms acceptable to the
Company. Unless the Company is able to continue obtaining significant
quantities of nonstandard RAM components from alternative sources, the
Company's component recovery operations could be limited by the volume
of nonstandard RAM components supplied by MTI. Changes in MTI's
semiconductor manufacturing processes resulting in improvement of
device yields and/or changes in the nonstandard RAM product mix and
specifications, or other changes or events at MTI adversely affecting
its overall manufacturing output, could adversely affect the volume of
nonstandard RAM components supplied by MTI. Any reduction in the
availability or functionality of nonstandard RAM components from the
Company's suppliers could have a material adverse effect on the
Company's results of operations.
9
<PAGE>
<TABLE>
<CAPTION>
Gross margin Third Quarter Nine Months
---------------------------------- ------------------------------------
1996 Pro Forma 1995 1996 Pro Forma 1995
---------------- ---------------- ------------------ ----------------
% of % of % of % of
Amount Sales Amount Sales Amount Sales Amount Sales
---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross margin $58,571 14.2% $55,325 18.0% $166,293 12.7% $145,347 18.5%
</TABLE>
Although the Company's overall gross margin amount was higher in the
third quarter and first nine months of 1996 compared to the
corresponding periods in 1995, its overall gross margin percentages
were lower. The Company realized higher gross margins from its PC
operations for the third quarter and first nine months of 1996
compared to the corresponding periods in 1995, which were partially
offset by lower gross margins from its component recovery operations.
The Company's overall gross margin percentages in the third quarter
and first nine months of 1996 compared to the corresponding periods in
1995 were negatively influenced by significantly lower gross margin
percentages realized from the component recovery operations and, to a
lesser extent, lower gross margin percentages realized from the
Company's contract manufacturing operations. The Company's overall
gross margin percentage in the third quarter of 1996 was favorably
impacted by a higher gross margin percentage realized from the Company's
PC operations combined with an increase in sales of PC systems as a
percentage of overall net sales.
The Company's overall gross margin percentage in the third quarter
of 1996 was higher than the gross margin percentage of 10.7% realized
in the second quarter of 1996, primarily due to a higher gross margin
percentage realized on sales of PC systems combined with an increase
in sales of PC systems as a percentage of overall net sales.
The gross margin percentage for sales of PC systems increased in the
third quarter and increased slightly in the first nine months of 1996
compared to the corresponding periods in 1995, primarily as a result
of improved component costs and inventory management. In addition,
increased unit sales of the Company's notebook products favorably
affected the Company's gross margin percentages for sales of PC
systems. These high-end, feature rich systems generally have higher
selling prices and gross margins compared to the balance of the
Company's PC systems. The Company continues to experience significant
pressure on its gross margins as a result of intense competition in
the PC industry and consumer expectations of more powerful PC systems
at lower prices. In addition, the Company's gross margin percentage
will continue to depend in large part on its ability to effectively
manage its inventories of PC system components. See "Certain
Factors."
The gross margin percentage realized from the Company's contract
manufacturing operations declined in the third quarter and first nine
months of 1996, compared to the corresponding periods in 1995, primarily
due to an increase in the percentage of revenues derived from the
Company's turnkey memory module assembly services, which generally have
a lower gross margin percentage than the Company's other contract
manufacturing services.
The gross margin percentage realized by the Company from its component
recovery operations declined significantly in the third quarter and
first nine months of 1996, compared to the corresponding periods in
1995, primarily due to significantly lower average selling prices
resulting from an industry wide decline in market prices for
semiconductor memory products. Due to the decline in prices, gross
margins were also negatively impacted by the effect of an increase
in the amount of nonstandard RAM components purchased from third party
suppliers relative to the amount of components obtained from MTI under
a revenue sharing agreement. Under the MTI revenue sharing agreement,
the purchase price of components is generally not determined until the
product is sold to a third party customer. In the event average
selling prices for the Company's nonstandard RAM products continue to
decline, the Company's component recovery gross margin percentage
would decline further and overall results of operations could be
materially adversely affected.
10
<PAGE>
<TABLE>
<CAPTION>
Selling, General and Third Quarter Nine Months
Administrative ---------------------------------- ---------------------------------
Pro Forma Pro Forma
1996 Change 1995 1996 Change 1995
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative $ 36,084 30.7% $ 27,598 $100,108 41.2% $ 70,899
as a % of net sales 8.8% 9.0% 7.7% 9.0%
</TABLE>
Selling, general and administrative ("SG&A") expenses decreased as a
percentage of net sales for the third quarter and first nine months of
1996, compared to the corresponding periods in 1995, but increased in
absolute dollars, primarily due to higher levels of personnel costs in
response to growth in the Company's PC system operations. Although
SG&A expenses for the Company's PC system operations as a percentage
of PC system net sales is higher than that experienced by the
Company's other operations, the percentage is similar to those
experienced by the Company's primary competitors in the PC industry.
<TABLE>
<CAPTION>
Income Tax Provision Third Quarter Nine Months
---------------------------------- ---------------------------------
Pro Forma Pro Forma
1996 Change 1995 1996 Change 1995
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision $ 8,627 (21.5%) $ 10,987 $ 18,844 (35.9%) $ 29,381
</TABLE>
The effective tax rate for the third quarter of 1996 was 38.0%,
reflecting the federal statutory rate and the net effect of state
taxes. The effective tax rate for the first nine months of 1996 was
51.0%, reflecting the federal statutory rate, the net effect of state
taxes and the effect of the write-off during the second quarter of
1996 of $11.4 million of nondeductible goodwill. The effective tax
rate of 39.5% for 1995 reflects the federal statutory rate, the net
effect of state taxes and the effect of goodwill amortization.
Liquidity and Capital Resources
As of May 30, 1996, the Company had cash and equivalents of $81.4
million, compared to $69.4 million as of August 31, 1995. Principal
sources of liquidity in the first nine months of 1996 were cash flows
from operations of $48.9 million, net borrowings under the Company's
credit facility with MTI of $10.0 million and proceeds from sales of
property, plant and equipment of $5.7 million. Principal uses of
liquidity during 1996 were property, plant and equipment expenditures
of $46.3 million related to expansions and capacity improvements of
the Company's manufacturing operations and repayment of the Company's
long-term loan from MTI of $6.7 million.
The Company established a revolving credit facility with MTI in the
first quarter of 1996 providing for borrowings of up to $80 million,
based on the Company's tangible net worth. As of May 30, 1996, the
Company was eligible to borrow a total of approximately $45 million
under the facility and had borrowings of $10.0 million outstanding
under the agreement. Borrowings under the agreement are
collateralized by substantially all of the Company's assets except
certain equipment subject to permitted liens. The Company is required
to maintain a minimum level of collateral relative to borrowings made
under the agreement. Subsequent to May 30, 1996, the Company borrowed
from a financial institution approximately $10 million for which the
Company has pledged as collateral approximately $10 million of equipment.
The Company received a commitment and is negotiating with two financial
institutions regarding an additional short-term credit facility of
approximately $40 million. There can be no assurance the Company will
negotiate an agreement on acceptable terms.
At May 30, 1996, the Company had commitments of approximately $21.5
million for capital expenditures for expansion and upgrade of existing
facilities and equipment. The Company anticipates making capital
expenditures during the remainder of calendar 1996 in excess of $35
million. The Company has recently begun construction of an
approximate 200,000 square foot facility in Nampa, Idaho. The Company
anticipates spending an additional $17 million on the construction
of the facility, which is estimated to be completed in the first
quarter of fiscal 1997. This new facility is expected to provide
space for the transfer of the Company's Boise, Idaho contract
manufacturing operations and for possible future expansion of such
operations. In the third quarter of 1996, the Company sold its Boise,
Idaho contract manufacturing facility for approximately $5 million.
The Company anticipates obtaining financing through a fixed term mortgage
of the new facility. The Company intends to finance its other capital
expenditures with existing sources of liquidity and cash flows from
operations.
11
<PAGE>
The Company expects that its future working capital requirements
will continue to increase. The Company believes that currently
available cash and equivalents, funds generated from operations, its
credit facility with MTI, equipment financings and other financing
arrangements currently in negotiation (if obtained), will be
sufficient to fund its operations through the end of calendar 1996.
However, maintaining an adequate level of working capital through the
end of calendar 1996 and thereafter will depend in large part on the
success and profitability of the Company's products in the marketplace
and the Company's ability to control operating expenses. The Company
may require additional financing for growth opportunities, including
any internal expansion that the Company may undertake, expansion and
capacity enhancements to additional sites, or strategic acquisitions
or partnerships. There can be no assurance that any financings,
including those currently in negotiation, will be available on terms
acceptable to the Company, if at all.
Certain Factors
The following include important factors which could affect the
Company's future results of operations or cause actual results to
differ materially from those contained in any statements made by or on
behalf of the Company.
Fluctuations in the Company's net sales from quarter to quarter can
be expected. These fluctuations may be attributable to a number of
factors, including, without limitation, the timing of new product
introductions, seasonal cycles common in the computer industry,
seasonal government purchasing cycles, the effect of product reviews
and industry awards, changes in product mix, fluctuating market
pricing for computer and semiconductor memory products, manufacturing
and production constraints, further developments in Company structure
and alignments, the timing of orders from and shipments to OEM
customers, fluctuating component costs, critical component
availability and industry competition. As a result, the operating
results for any particular period are not necessarily indicative of
the results that may occur in any future period.
The Company's ability to compete successfully in the PC market in
the future will depend in large part on its ability to effectively
manage its inventories of PC components. The Company's PC operations
focus on the direct sale of assemble-to-order PC systems that include
the latest features available in the PC marketplace. 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, any industry shortage or other supply constraint
of any key component could 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. 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
results of operations and financial condition.
Pricing for the Company's nonstandard RAM products fluctuate to a
large degree based on industry wide pricing for semiconductor memory
products. Over the past two quarters, the Company experienced
significant declines in the selling prices of its nonstandard RAM
products as industry wide selling prices for full specification
semiconductor memory products experienced a precipitous decline. The
Company believes the decline is due primarily to changes in supply and
demand for these commodity products and is unable to predict the
impact of semiconductor memory product market dynamics in future
periods. In recent periods, the Company has increased the amount of
nonstandard RAM components purchased from alternative third party
sources relative to the amount of such components obtained from MTI
pursuant to a revenue sharing agreement. The Company's inability
to accurately predict price declines of semiconductor memory products
when negotiating these purchases may increase market risk to the
Company, and may result in losses from write-downs of nonstandard RAM
component inventories. Further declines in industry wide pricing for
semiconductor memory products could result in declines in selling
prices of the Company's nonstandard RAM products, which could
adversely impact the Company's results of operations and financial
condition.
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 its PC
systems sold to customers in those states. In the event the Company
is required to pay or collect and remit sales and use taxes in states
where the Company is not currently paying or collecting and remitting
such taxes, the Company's future operating results and financial
condition could be materially adversely affected.
12
<PAGE>
Competition in the PC industry is based primarily upon performance,
price, reliability, service and support. 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
declining product prices. The Company must frequently introduce new
products and continue to price its products and offer customers lead
times comparable to its competitors. 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. Failure by the
Company to transition to new products effectively or to accurately
forecast demand for its products may adversely affect the Company's
results of operations. Any general decline in demand for personal
computers could have a material adverse effect on the Company's
results of operations.
Due to MTI's ownership of approximately 79% of the Company's
outstanding shares of common stock, only a limited percentage of the
Company's common stock is traded in the public market. The sale of
substantial amounts of shares of the Company's stock currently held by
MTI on the open market could adversely affect the prevailing market
prices.
Certain components, subassemblies and software included in the
Company's PC systems are purchased from a single supplier or a limited
number of suppliers. The Company relies, to a certain extent, upon
its suppliers' abilities to enhance their existing products in a
timely and cost-effective manner, to develop new products to meet
customers' changing needs and to respond to emerging standards and
other technological developments in the PC industry. In addition,
reliance on a limited number of suppliers, as well as overall industry
conditions, involves several risks, including the possibility of
shortages and/or increases in costs of components and subassemblies,
and reduced control over delivery schedules, which could have a
material adverse effect on the Company's results of operations.
In recent periods, the Company has experienced rapid revenue growth
and an expansion in the number of its employees, in the scope and
complexity of its operating and financial 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 systems, and other resources. The
Company continues to consider various expansion alternatives,
including expansion to existing 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 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, and management systems could have a material
adverse effect on the Company's results of operations and financial
condition.
A substantial portion of the Company's nonstandard RAM components is
obtained from MTI pursuant to the Company's revenue sharing agreement
with MTI which expires in September 1997. Under this agreement, MTI
is required to deliver to the Company all of the nonstandard RAM
components produced at MTI's operations. There can be no assurance
that MTI will continue to produce adequate volumes of nonstandard RAM
components to maintain the Company's component recovery operation at
its existing or historic levels. The revenue sharing agreement may be
amended or modified by written consent of the Company and MTI. By
virtue of MTI's ownership and control of the Company, MTI may be able
to dictate future modifications to the terms of the agreement.
Termination or renegotiation of the key terms of the revenue sharing
agreement could have a material adverse effect on the Company's
results of operations.
In the third quarter of 1996, the Company's five largest contract
manufacturing customers accounted for approximately 80% of the
revenues from the Company's contract manufacturing operations,
compared to approximately 72% for the five largest contract
manufacturing customers in the third quarter of 1995 and 74% for the
second quarter of 1996. Revenues from MTI in the third quarter of
1996 accounted for approximately 7% of total revenues from the
Company's contract manufacturing operations, compared to 15% in the
third quarter of 1995. 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. From time to time, the Company's key contract manufacturing
customers have materially reduced their purchases of the Company's
contract manufacturing services, and the Company believes that this
will continue 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 business could have a material adverse effect
on the Company's results of operations.
13
<PAGE>
The Company has undertaken the construction of a contract
manufacturing facility adjacent to its PC system operations in Nampa,
Idaho. The Company expects to relocate its contract manufacturing
operations from its existing site to the new site in the first quarter
of fiscal 1997. There can be no assurance that such move will not
disrupt the Company's contract manufacturing operations. Any such
disruption could have a material adverse effect on the Company's
results of operations.
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 for
raw materials, work in process and finished goods due primarily to
the specialized nature of certain custom components and declines in
market pricing of components. OEM order fluctuations and deferrals
have had an adverse effect on the Company's contract manufacturing
operations in the past and there can be no assurance that the Company
will not experience such adverse effects in the future.
It is common in the electronics industry for patent and copyright,
as well as other intellectual property rights, claims to be asserted
against companies, including component suppliers and PC manufacturers.
Periodically, the Company is made aware that the technology used by the
Company may infringe on product or process technology rights held by
others. The Company 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. The Company would be placed
at a competitive disadvantage if it is 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 with third parties,
some of which expired in the second quarter of fiscal 1996, and all of
which require one-time or periodic royalty payments. The Company is
unable to predict whether 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 in their products, the Company may be forced to
market products without certain technological features. The Company
could also incur substantial costs to 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 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's results of operations and
financial condition.
The contract manufacturing industry is highly competitive, and has
been characterized in recent periods by consolidation among contract
manufacturers. Many of the Company's contract manufacturing
competitors have substantial financial, technical, personnel and other
resources and maintain substantial international operations. In order
to remain competitive, the Company will be required to expand its
contract manufacturing capacity and may be required to establish
international operations. There can be no assurance the Company will
be successful in expanding its contract manufacturing operations on a
timely and efficient basis. The failure to do so could have a
material adverse effect on the Company's results of operations.
The Company has a number of arrangements with MTI including, but not
limited to, the supply to the Company of both full specification
and nonstandard RAM components, the MTI revenue sharing agreement, the
MTI credit facility, and service agreements to provide various
administrative functions. MTI owns 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. MTI
has the ability to control the outcome of matters requiring
shareholder approval, including the election of directors, and
generally has the ability to control the management and affairs of the
Company. Termination of certain of the Company's arrangements by MTI
or MTI's control in negotiating arrangements resulting in terms less
favorable to the Company, could adversely affect the Company's results
of operations.
14
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) The following is filed as a part of this report:
Exhibit
Number Description of Exhibit
11 Computation of per share earnings for the quarter and
nine months ended May 30, 1996 and June 1, 1995
(b) The registrant did not file any reports on Form 8-K during the
quarter ended May 30, 1996.
ZEOS is a registered trademark and Micron Electronics and Millennia
Transport are trademarks of the Company. Pentium is a registered
trademark of Intel Corporation.
15
<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: June 27, 1996 /s/ T. Erik Oaas
--------------------------------------
T. Erik Oaas, Vice President, Finance,
and Chief Financial Officer (Principal
Financial and Accounting Officer)
16
<PAGE>
EXHIBIT 11
Micron Electronics, Inc.
Computation of Per Share Earnings
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the For the nine
quarter ended months ended
May 30, June 1, May 30, June 1,
1996 1995 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average shares
outstanding 91,590 88,521 91,480 85,469
Net effect of dilutive stock
options 887 1,148 958 1,112
-------- -------- -------- --------
Number of shares used in per
share calculation 92,477 89,669 92,438 86,581
======== ======== ======== ========
Net income $ 14,075 $ 15,605 $ 18,134 $ 44,129
======== ======== ======== ========
Per share earnings $ 0.15 $ 0.17 $ 0.20 $ 0.51
======== ======== ======== ========
FULLY DILUTED
Weighted average shares
outstanding 91,590 88,521 91,480 85,469
Net effect of dilutive stock
options 1,046 1,157 973 1,120
-------- -------- -------- --------
Number of shares used in per
share calculation 92,636 89,678 92,453 86,589
======== ======== ======== ========
Net income $ 14,075 $ 15,605 $ 18,134 $ 44,129
======== ======== ======== ========
Per share earnings $ 0.15 $ 0.17 $ 0.20 $ 0.51
======== ======== ======== ========
</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> 9-MOS
<FISCAL-YEAR-END> AUG-29-1996
<PERIOD-END> MAY-30-1996
<CASH> 81,380
<SECURITIES> 0
<RECEIVABLES> 151,325
<ALLOWANCES> 21,788
<INVENTORY> 96,222
<CURRENT-ASSETS> 339,259
<PP&E> 151,604
<DEPRECIATION> 49,289
<TOTAL-ASSETS> 443,150
<CURRENT-LIABILITIES> 241,399
<BONDS> 16
0
0
<COMMON> 916
<OTHER-SE> 195,887
<TOTAL-LIABILITY-AND-EQUITY> 443,150
<SALES> 1,307,519
<TOTAL-REVENUES> 1,307,519
<CGS> 1,141,226
<TOTAL-COSTS> 1,273,102
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,561)
<INCOME-PRETAX> 36,978
<INCOME-TAX> 18,844
<INCOME-CONTINUING> 18,134
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,134
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
