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 February 29, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17932
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Micron Electronics, Inc.
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(Exact name of the registrant as specified in 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
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(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 the 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 March 18, 1996 was 91,601,410.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Micron Electronics, Inc.
Balance Sheets
(Dollars in thousands, except par value amount)
<TABLE>
<CAPTION>
As of February 29, 1996 August 31, 1995
- --------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Assets
Cash and equivalents $ 63,957 $ 69,406
Receivables 142,929 128,744
Inventories 93,674 92,709
Deferred income taxes 28,941 16,086
Other current assets 1,607 1,810
-------- ------
Total current assets 331,108 308,755
Property, plant and equipment, net 76,291 58,254
Goodwill, net - 12,612
Other assets 1,211 3,095
Total assets $408,610 $382,716
======== ========
Liabilities and shareholders' equity
Accounts payable and accrued expenses $176,007 $177,437
Accrued licenses and royalties 34,525 23,844
Current debt 15,016 1,022
-------- --------
Total current liabilities 225,548 202,303
Long-term debt 19 5,801
Other liabilities 1,204 949
-------- --------
Total liabilities 226,771 209,053
Commitments and contingencies
Common stock, $0.01 par value, authorized,
150.0 million shares, issued and
outstanding, 91.6 and 91.4 million shares,
respectively 916 914
Additional capital 63,234 58,613
Retained earnings 117,689 114,136
-------- --------
Total shareholders' equity 181,839 173,663
-------- --------
Total liabilities and shareholders' equity $408,610 $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 quarter ended For the six months ended
February 29, March 2, February 29, March 2,
1996 1995 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $456,619 $190,225 $895,197 $324,554
Cost of goods sold 407,609 149,732 787,475 255,037
-------- -------- -------- --------
Gross margin 49,010 40,493 107,722 69,517
Selling, general and 32,637 12,993 64,024 23,243
administrative
Research and development 934 320 1,595 505
Restructuring charge 29,500 - 29,500 -
-------- -------- -------- --------
Operating income (loss) (14,061) 27,180 12,603 45,769
Interest income, net 645 362 1,673 579
-------- -------- -------- --------
Income (loss) before taxes (13,416) 27,542 14,276 46,348
Income tax provision (860) 10,624 10,217 17,824
(benefit) -------- -------- -------- --------
Net income (loss) $(12,556) $ 16,918 $ 4,059 $ 28,524
======== ======== ======== ========
Earnings (loss) per share $ (0.14) $ 0.20 $ 0.04 $ 0.34
Number of shares used in
per share calculation 91,507 83,963 92,371 83,948
</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>
For the six months ended February 29, 1996 March 2,1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,059 $ 28,524
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 8,989 3,891
Amortization 1,424 7
Restructuring charge 29,500 -
Change in assets and liabilities, net of effect
of restructuring charge:
Increase in receivables (14,502) (3,242)
Increase in inventories (15,467) (21,231)
Increase (decrease) in accounts
payable and accrued expenses (9,363) 1,766
Increase in accrued licenses and royalties 10,680 1,844
Increase in net deferred income tax assets (10,778) (810)
Other 3,818 (1,479)
-------- --------
Net cash provided by operating activities 8,360 9,270
-------- --------
Cash flows from investing activities
Property, plant and equipment expenditures (23,287) (15,437)
Proceeds from sale of equipment 614 60
Purchase of held-to-maturity investments - (3,165)
Proceeds from maturity of investments - 3,200
Other (41) (17)
-------- --------
Net cash used for investing activities (22,714) (15,359)
-------- --------
Cash flows from financing activities
Amounts drawn on credit facility 15,000 -
Repayments of debt (6,685) (512)
Proceeds from issuance of common stock 1,216 68
Purchase and retirement of stock (626) (33)
-------- --------
Net cash provided by (used for) financing activities 8,905 (477)
-------- --------
Net decrease in cash and equivalents (5,449) (6,566)
Cash and equivalents at beginning of period 69,406 35,048
-------- --------
Cash and equivalents at end of period $ 63,957 $ 28,482
======== ========
Supplemental disclosures
Noncash investing and financing activities:
Issuance of restricted stock granted pursuant
to the 1991 Stock Incentive Plan $ 1,299 -
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements
(Tabular dollar amounts in thousands, except per share amounts)
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 ("MEI" or the "Company") and their
results of operations and cash flows.
This report on Form 10-Q for the second fiscal quarter ended February 29,
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.
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 ZEOS and (b) the other shareholders of MCI and MCMS owned an
approximate 10% interest in ZEOS. 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 1996, all 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 of 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 restructure its PC
manufacturing operations, by discontinuing sales of its ZEOS brand PC
systems and closing the related manufacturing operations in Minneapolis,
Minnesota, resulting in a restructuring charge of $29.5 million ($22.6
million or $0.25 per share, net of taxes) in the second fiscal quarter of
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 for personnel related
costs for approximately 250 employees in manufacturing, purchasing, customer
service, finance and administrative functions and (c) $0.8 million of other
exit costs. Substantially all cash expenditures related to the restructure
are expected to occur during the third and fourth quarters of fiscal 1996.
4
<TABLE>
<CAPTION>
4. Receivables
February 29, 1996 August 31, 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $136,282 $126,040
Receivable from affiliates, net 12,840 8,379
Other 2,245 1,070
Allowance for doubtful accounts (6,543) (5,458)
Allowance for returns and discounts (1,895) (1,287)
-------- --------
$142,929 $128,744
======== ========
</TABLE>
<TABLE>
<CAPTION>
5. Inventories
February 29, 1996 August 31, 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 72,922 $ 75,045
Work in progress 22,538 19,407
Finished goods 15,820 8,843
Allowance (17,606) (10,586)
-------- --------
$ 93,674 $ 92,709
======== ========
</TABLE>
<TABLE>
<CAPTION>
6. Property, Plant and Equipment
February 29, 1996 August 31, 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,391 $ 987
Buildings 24,929 15,643
Equipment 90,455 71,502
Construction in progress 6,213 7,259
-------- --------
122,988 95.391
Less accumulated depreciation
and amortization (46,697) (37,137)
-------- --------
$ 76,291 $ 58,254
======== ========
</TABLE>
<TABLE>
<CAPTION>
7. Accounts Payable and Accrued Expenses
February 29, 1996 August 31, 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $109,801 $ 99,065
Payable to affiliates 37,415 53,750
Salaries, wages and benefits 9,719 11,086
Income taxes payable to parent corporation - 4,686
Other 19,072 8,850
-------- --------
$176,007 $177,437
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
8. Debt
February 29, 1996 August 31, 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit facility with parent
corporation, variable interest rate of
6.38% $ 15,000 $ -
Notes payable to parent corporation - 6,672
Other 35 151
-------- --------
15,035 6,823
Less current portion (15,016) (1,022)
-------- --------
$ 19 $ 5,801
======== ========
</TABLE>
9. Income Taxes
The effective income tax rate for the six months ended February 29, 1996
was 71.6%, primarily as a result of the effect of the write-off during the
second quarter of $11.4 million of nondeductible goodwill (see note 3) and
the net effect of state taxes. The effective tax rate for the third and
fourth quarters of fiscal 1996 is expected to be 38.0%, principally
reflecting the federal statutory corporate income tax rate and the net
effect of state taxes. The effective income tax rate for 1995 principally
reflects the federal statutory income tax 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).
11. Commitments
As of February 29, 1996, the Company had commitments of approximately $65.8
million for equipment purchases and $1.3 million for construction of
buildings.
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 MEI has accrued a liability and charged operations for
the estimated costs of settlement or adjudication of these asserted claims
for alleged infringement and other unasserted claims arising prior to the
balance sheet date. The ultimate resolution of these claims is not
expected to have a material effect on the results of operations or
financial position of the Company.
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
Micron Electronics, Inc. and its subsidiaries ("MEI" or the
"Company") manufacture electronic products for a wide range of computing
and digital applications. The Company develops, markets, manufactures,
sells and supports PC systems for consumer and business use, provides
contract manufacturing services to original equipment manufacturers and
maintains a component recovery operation.
The Company completed its second fiscal quarter of 1996 on February 29,
1996. The Company's fiscal year is a 52 or 53 week period ending on the
Thursday closest to August 31. All period references are to the Company's
fiscal periods ended February 29, 1996, November 30, 1995 and March 2, 1995,
unless otherwise indicated. All tabular dollar amounts are stated in thousands.
The following discussion contains trend information and other forward
looking statements that involve a number of risks and uncertainties. The
Company's actual results could differ materially from those discussed in
the forward looking statements. Factors that could cause actual results to
differ materially include, but are not limited to, those discussed below
under "Results of Operations," "Liquidity and Capital Resources" and
"Certain Factors."
Results of Operations
On April 7, 1995, Micron Computer, Inc. ("MCI") and Micron Custom
Manufacturing Services, Inc. ("MCMS") merged with and into ZEOS
International, Ltd. ("ZEOS"), and the surviving company's name
was changed to Micron Electronics, Inc. (the "Merger"). The Company's
statements of actual operations set forth on page 2 reflect the merged
operations of the Company subsequent to April 7, 1995 and the combined
results of operations of only MCI and MCMS prior thereto. Due to the
significance of the Merger, the Company believes that discussion and
analysis of results of operations on a pro forma basis, which includes
ZEOS' results of operations prior to the Merger, provide a more meaningful
comparison than discussion and analysis of actual results of operations
which include only the combined operations of MCI and MCMS prior to the
Merger. The following discussion and analysis present the Company's
results of operations for the second quarter and six months ended February
29, 1996, as compared to the Company's pro forma results of operations for
the second quarter and six months ended March 2, 1995, as if the Merger had
occurred at the beginning of fiscal 1995,such period, after 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 ZEOS, MCI, and MCMS had been combined at the beginning of
fiscal 1995, nor does it represent a forecast of results of operations for any
future periods.
The following summarizes the Company's results of operations for the
second quarter and six months ended February 29, 1996 and pro forma results
of operations for the same periods in 1995:
<TABLE>
<CAPTION>
Second Quarter Six Months
-------------------------------------------------- ---------------------------------------------------
1996 1995 1996 1995
-------------------------------------------------- ---------------------------------------------------
Amount % of sales Amount % of sales Amount % of sales Amount % of sales
-------------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $456,619 100.0% $271,219 100.0% $895,197 100.0% $477,141 100.0%
Cost of goods sold 407,609 89.3% 219,019 80.8% 787,475 88.0% 387,119 81.1%
Gross margin 49,010 10.7% 52,200 19.2% 107,722 12.0% 90,022 18.9%
Selling, general and
administrative 32,637 7.1% 23,434 8.6% 64,024 7.2% 43,302 9.1%
Net income (loss) (12,556) (2.7%) 17,434 6.4% 4,059 0.5% 28,311 5.9%
</TABLE>
<PAGE>
7
Net Sales
The following summarizes the Company's net sales by product line:
<TABLE>
<CAPTION>
Second Quarter Six Months
-------------------------------------------------- ---------------------------------------------------
1996 1995 1996 1995
-------------------------------------------------- ---------------------------------------------------
Amount % of sales Amount % of sales Amount % of sales Amount % of sales
-------------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PC systems $298,215 65.3% $175,821 64.8% $598,012 66.8% $312,684 65.5%
Contract manufacturing 108,538 23.8% 36,598 13.5% 209,090 23.4% 64,418 13.5%
Component Recovery 49,866 10.9% 58,800 21.7% 88,095 9.8% 100,039 21.0%
-------- ------ -------- ------ -------- ------ -------- ------
Total net sales $456,619 100.0% $217,219 100.0% $895,197 100.0% $477,141 100.0%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
Beginning in fiscal 1996, the Company combined its component recovery
and peripheral add-on memory module operations. To conform to the 1996
presentation, peripheral add-on memory module sales for 1995 have been
reclassified to component recovery sales.
Net sales for the second quarter and six months ended February
29, 1996 were 68.4% and 87.6% higher, respectively, than net sales for
the corresponding periods in 1995, primarily as a result of a significant
increase in unit sales of desktop PC systems and significantly higher
revenues from the Company's contract manufacturing operations, partially
offset by lower component recovery sales.
PC Systems
Net sales of PC systems were significantly higher in the second
quarter and six months ended February 29, 1996, compared to the
corresponding periods in 1995, primarily as a result of significantly
higher unit sales of PC systems and, to a lesser extent, higher average
selling prices primarily resulting from higher unit sales of relatively
higher priced Pentium microprocessor based systems as a percentage of total
unit sales. Unit sales of PC systems in the second quarter and six
months ended February 29, 1996 increased approximately 58% and 81%,
respectively, compared to unit sales in the corresponding periods of 1995,
resulting primarily from significantly higher unit sales of Micron brand PC
systems. Direct unit sales of Micron brand PC systems in the second
quarter of 1996 increased approximately 27% compared to the first quarter
of 1996. However, overall unit sales of PC systems declined approximately
5% in the second quarter of 1996 as compared to the first quarter of 1996,
due primarily to a significant decline in government sales and a decline in
sales of ZEOS brand PC systems. The Company believes that direct unit
sales of Micron brand PC systems increased primarily as a result of an
increase in name recognition and market acceptance. Increased name recognition
and market acceptance resulted primarily from the receipt of a number of
industry and computer trade magazine awards relating to the price and
performance characteristics of Micron brand PC systems and to the Company's
service and support functions. In the event that the Company is not
successful in winning such awards in the future, consumer interest in its
PC systems could decline materially. In general, sales of PC systems
benefited from continued strong demand in the market for personal computers
during the first six months of fiscal 1996.
In the second quarter of 1996, the Company decided to discontinue the
manufacture and sale of its ZEOS brand PC systems and to discontinue its
related manufacturing operations in Minneapolis, Minnesota. Unit sales of
ZEOS brand PC systems manufactured in Minneapolis, Minnesota represented 6%
and 11% of total unit sales for the quarter and six months ended February
29, 1996, respectively.
Government sales of the Company's PC products in the second quarter of
1996 were approximately 6% of the Company's overall PC system net sales,
compared to 20% in the first quarter of 1996. In the second quarter of
1996, sales under the Company's PC-1 government contract declined
significantly. The Company anticipates that sales under the PC-1 contract
will decline further during the third quarter of 1996.
Contract Manufacturing
Revenues from the Company's contract manufacturing operations
were 196% and 224% higher in the second quarter and six months ended
February 29, 1996, respectively, compared to the corresponding periods of
1995, primarily due to increased
8
<PAGE>
manufacturing capacity obtained through the addition of three new surface
mount technology ("SMT") production lines and the upgrade of existing
manufacturing lines during the past 12 months. This brings the Company's
total number of SMT lines to nine. The production line expansion and
upgrades were completed in response to increased demand for the Company's
contract manufacturing services from OEM customers, including Micron
Technology, Inc. ("MTI"), the Company's parent corporation. Production
from the Company's North Carolina facility began in April 1995 and accounted
for approximately 10% of the Company's contract manufacturing sales for the
second quarter of 1996. The Company intends to move its Boise, Idaho
contract manufacturing operation to Nampa, Idaho during 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.
Component Recovery
Component recovery sales were approximately 15% and 12% lower in the
second quarter and six months ended February 29, 1996, respectively,
compared to the corresponding periods of 1995, but were 30% higher compared
to the first quarter of 1996. The decrease in component recovery sales
compared to 1995 resulted primarily from a decrease in unit sales of
peripheral add-on memory modules, changes in product mix of nonstandard
random access memory ("RAM") received from the Company's primary supplier,
MTI, and generally lower average selling prices. The decrease in unit
sales of peripheral add-on memory modules resulted from the integration of
the peripheral add-on memory module operation into the component recovery
operation in September 1995 and a corresponding change in focus of the
Company's module production and engineering resources to capacity expansion
and product development of component recovery products. Changes in
nonstandard RAM product mix resulted in increased testing times and reduced
output. Increased sales in the second quarter of 1996 compared to the
first quarter of 1996 were primarily a result of a significant increase in
overall units of memory products shipped, partially offset by a general
decline in the average selling prices for the Company's memory products.
The Company's component recovery product average selling prices have
been adversely affected by a substantial industry wide decline in pricing
for semiconductor memory products which began in the second fiscal quarter of
1996. Competition for the Company's component recovery operation is
developing both from semiconductor memory manufacturers which conduct in-
house recovery operations and from independent component recovery
operations. Increased competition could result in both further price
reductions for nonstandard RAM products and a decline in the supply of
nonstandard RAM components available to the Company.
Historically, a substantial portion of the nonstandard RAM
components used in the Company's component recovery operations has been
obtained from MTI. The Company obtained 36% of its nonstandard RAM
components from alternative sources in the second quarter of 1996. 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. Suppliers of the Company's nonstandard RAM
components continuously seek improvements in device yields in their
semiconductor manufacturing processes. The improvement of such yields has
caused changes in the Company's nonstandard RAM product mix resulting in
increased testing times, reduced output, and lower average selling prices.
Any further reduction in the availability or functionality of nonstandard RAM
components from MTI could have a material adverse effect on the Company's
operating results.
Gross Margin
<TABLE>
<CAPTION>
Second Quarter Six Months
------------------------------------------------------------
1996 Change 1995 1996 Change 1995
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross margin $49,010 (6.1%) $52,200 $107,722 19.7% $90,022
as a % of net sales 10.7% 19.2% 12.0% 18.9%
</TABLE>
The Company's overall gross margin percentages declined in both
periods of 1996 compared to 1995, primarily as a result of an increase, as
a percentage of total net sales, of contract manufacturing sales, and a
decrease, as a percentage of total net sales, of component recovery sales.
Contract manufacturing sales have historically had a lower gross margin
percentage than component recovery sales. Additionally, the Company
experienced lower gross margin percentages on sales of its PC systems, its
contract manufacturing products and its component recovery products in
the second quarter and six months ended February 29, 1996 as compared to
the corresponding periods in 1995.
The gross margin percentage for sales of PC systems declined in the
second quarter of 1996, compared to both the second quarter of 1995 and the
first quarter of 1996, primarily as a result of premature price reductions
offered for certain systems in
9
<PAGE>
anticipation of lower component costs and losses on the disposition of excess
component inventory. To a lesser extent, the decline from the second quarter
of 1995 was due to an increase in sales under the Company's PC-1 government
contract as a percentage of PC systems sales. The Company continues to
experience significant pressure on its gross margin percentage as a result of
intense competition in the PC industry and consumer expectations of more
powerful PC systems at lower prices. The Company's gross margin percentage for
sales of the Company's PC systems continues to be lower than those of the
Company's primary competitors.
The gross margin percentage for the Company's contract manufacturing
operations declined in the second quarter and six months ended February 29,
1996, as compared to the corresponding periods in 1995, primarily as a
result of significant increases in sales of lower gross margin products
combined with slightly lower sales of higher gross margin products.
The component recovery gross margin percentage declined in the second
quarter and first six months of 1996, as compared to the same periods in
1995, primarily as a result of generally lower average selling prices and
changes in product mix. The gross margin percentage for the second quarter
of 1996 declined compared to the first quarter of 1996 primarily as a result
of lower average selling prices. Gross margin percentages for the Company's
component recovery operations have generally been higher than those for the
Company's other operations and a substantial portion of the Company's net
income has historically been derived from the Company's component recovery
operations. In the event that average selling prices for the Company's
component recovery products continue to decline, the Company's component
recovery gross margin percentage would decline and overall results of
operations could be materially and adversely affected.
Selling, General and Administrative
<TABLE>
<CAPTION>
Second Quarter Six Months
------------------------------------------------------------
1996 Change 1995 1996 Change 1995
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Selling, general and administrative $32,637 39.3% $23,434 $64,024 47.9% $43,302
as a % of net sales 7.1% 8.6% 7.2% 9.1%
</TABLE>
Selling, general and administrative ("SG&A") expenses
decreased as a percentage of net sales for the second quarter and six
months ended February 29, 1996, compared to the corresponding periods of
1995, but increased in absolute dollars, primarily due to higher levels of
personnel costs associated with the expanded PC system operations as well
as higher credit card processing fees associated with the increase in PC
system net sales. 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 generally in line with those
experienced by the Company's primary PC competitors.
Income Taxes
<TABLE>
<CAPTION>
Second Quarter Six Months
------------------------------------------------------------
1996 Change 1995 1996 Change 1995
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision (benefit) $(860) (107.6%) $11,382 $10,217 (44.7%) $18,484
</TABLE>
The effective income tax rate for the six months ended February 29,
1996 was 71.6%, primarily as a result of the write-off during the second
quarter of $11.4 million of nondeductible goodwill and the net effect of
state taxes. The effective tax rate for the third and fourth quarters of
fiscal 1996 is expected to be 38.0%, principally reflecting the federal
statutory corporate income tax rate and the net effect of state taxes. The
effective income tax rate for 1995 principally reflects the federal
statutory income tax rate and the net effect of state taxes.
Liquidity and Capital Resources
As of February 29, 1996, the Company had cash and equivalents
of $64.0 million, compared to $69.4 million as of August 31, 1995. The
decrease resulted primarily from property, plant and equipment expenditures
of $23.3 million related to the expansion of the Company's manufacturing
operations and PC system sales facilities, and to the purchase of related
equipment, as well as $6.7 million expended to repay the Company's long-term
loan from MTI, offset in part by cash flows from operations of $8.4 million
and borrowings of $15.0 million under the Company's credit facility with MTI.
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 February 29, 1996, the Company was eligible
to borrow
10
<PAGE>
approximately $40 million under the facility. The loan agreement is
collateralized by the Company's receivables, inventories and equipment. The
Company is also required to maintain a minimum level of collateral relative to
the borrowings made under the agreement. There was approximately $15.0
million outstanding pursuant to this agreement as of February 29, 1996. The
Company's principal sources of liquidity at February 29, 1996 consisted of
cash, supplier credit lines and the credit facility. The Company is
negotiating with external lenders in order to establish a supplemental credit
facility of approximately $50 million.
At February 29, 1996, the Company had commitments of approximately $67.1
million for capital expenditures for expansion and upgrade of existing
facilities and equipment. The Company anticipates capital expenditures for
the remainder of fiscal 1996 in excess of $90 million. A substantial
portion of these expenditures is anticipated to be for procuring additional
component recovery test and burn-in equipment, and is expected to be funded
primarily through equipment financing. The Company intends to spend
approximately $17 million on the construction of a new 218,000 square foot
facility for its contract manufacturing operations to be located on a 30 acre
site in Nampa, Idaho. This new facility is expected to provide space for the
transfer of the Company's existing contract manufacturing operation from Boise,
Idaho and potential additional future expansion. While the Company intends to
finance these expenditures with existing sources of liquidity and cash
flows from operations, the Company may seek additional financing from
external sources.
The Company expects that its working capital requirements will continue
to increase throughout fiscal 1996 and beyond. The Company believes that
currently available cash and equivalents, funds generated from operations,
its credit facility with MTI, and equipment financing will be sufficient
to fund its operations through the end of fiscal 1996. However, maintaining
an adequate level of working capital through the end of fiscal 1996 and
thereafter will depend in large part on the success of the Company's products
in the marketplace, the profitability of those products 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, strategic acquisitions or partnerships, or expansion to
additional sites. There can be no assurance that any such financing will
be available on terms acceptable to the Company, if at all.
Certain Factors
Fluctuations in the Company's net sales from quarter to quarter
can be expected and may be attributable to a number of factors including,
without limitation, the timing of new product introductions, seasonal
cycles commonly seen in the computer industry, seasonal government
purchasing cycles, the impact of product reviews and industry awards,
changes in product mix, product pricing in the computer and memory
market, 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 future will
depend in large part on its ability to manage its inventories
of PC components effectively. The Company's PC operations focus on the
sale of 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. 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 new products and obtain adequate supply of
components to meet such demand and must successfully coordinate its
inventory purchasing efforts with product pricing changes. Failure of the
Company to manage its inventories effectively could result in increased
levels of inventory obsolescence, an inability to compete successfully on
the basis of price while remaining profitable, an inability to successfully
introduce new products on a timely basis or to respond to changes in customer
demand, and an inability to obtain adequate quantities of key components, any
of which could have a material adverse effect on the Company's results of
operations and financial condition.
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
therefore introduce many new products each quarter and continue to price its
products competitively. Failure by the Company to transition to new products
effectively, to accurately forecast demand for its products or to make timely
pricing decisions may adversely affect the Company's results of operations. 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 growth. The
11
<PAGE>
Company's PC operations have benefited in recent periods from strong,
industry-wide demand for personal computers. There can be no assurance
that such demand will continue, and any general decline in demand for
personal computers could have a material adverse effect on the Company's
business and operating results.
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 is
exposed to the risk of being subject to noncancelable purchase orders with
its suppliers and to inventory risk for raw materials, work in process and
finished goods. 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.
In the second quarter of 1996, the Company's five largest contract
manufacturing customers, including MTI, accounted for 74% of the revenues
from the Company's contract manufacturing operations, compared to 67% for
the five largest customers in the second quarter of 1995 and 75% for the
first quarter of 1996. The Company has no long term agreements with any of
its contract manufacturing customers, including MTI, 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 operating results.
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 that 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.
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. 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. In this regard, in order to accommodate potential future
growth in its PC manufacturing operations, the Company intends to redesign
its PC assembly operations at its Nampa, Idaho facility in the third and
fourth quarters of 1996. There can be no assurance that implementation of
this redesign will be accomplished on a timely and efficient basis without
disrupting the Company's PC manufacturing 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.
It is common in the electronics industry for certain companies to
assert patent and copyright infringement claims, as well as
other intellectual property rights claims, against other companies,
including component suppliers and PC manufacturers. Periodically, MEI 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 disadvantage if its competitors
were to obtain licenses with lower royalty fee payments or other terms more
favorable than those received by the Company. The Company has entered into
several patent and software license agreements with third parties, some of
which expired in the second quarter of 1996, and all of which require one-
time or periodic royalty payments. The Company is unable to predict
whether these license agreements can be obtained or renewed on terms
acceptable to the Company. If the Company or its suppliers were unable to
obtain licenses necessary to use protected technology in their products,
the Company may be forced to market products without certain technological
features. The Company could also incur substantial costs to defend
legal actions taken against it relating to patent or copyright protected
technology. The inability to obtain licenses necessary to use certain
technology or its inability to obtain such licenses on competitive terms,
or a finding of infringement against the Company, could have a material
adverse effect on the Company.
12
<PAGE>
Average selling prices for the Company's component recovery products
are highly dependent on market pricing of semiconductor memory products
generally. Pricing for semiconductor memory products is highly dependent
on actual and perceived fluctuations in the supply and demand for these
commodity products. Recent periods have been characterized by
announcements by major semiconductor memory manufacturers of significant
expansions in production capacity. Demand for semiconductor memory is
highly impacted by fluctuations in the demand generally for PC systems and
computer related products. Should demand for such products decrease, or
increase at rates below industry expectations, demand for semiconductor
memory products would likely decrease and place downward pricing pressure
on such products. This, in turn, would place downward pricing pressure on
the Company's component recovery products. The Company is unable to
predict future trends in market pricing of semiconductor memory products
and, therefore, cannot predict future pricing trends for its component
recovery products. However, the Company believes that semiconductor memory
pricing is likely to continue to decline in 1996, which will put downward
pressure on average selling prices of the Company's component recovery
products. A decline in average selling prices of component recovery
products could have a material adverse effect on the Company's operating
results.
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 solicited information from time to time from the
Company to determine whether the Company has sufficient contacts with such
states as would require payment of sales and use taxes in those states. In
the event that 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 future operating results and financial condition
of the Company could be materially adversely affected.
A substantial portion of the Company's nonstandard RAM
components is obtained from MTI pursuant to the Revenue Sharing Agreement
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 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 control position, 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 operating
results.
The success of the Company will depend to a large extent on its
continuing relationship with MTI, including the continuation of various
favorable business arrangements between MTI and the Company. Such favorable
arrangements include, but are not limited to, the availability to the
Company of both full specification and nonstandard RAM components, the
Revenue Sharing Agreement, the availability of the credit facility, and
various administrative functions. MTI owns approximately 80% of the
outstanding common stock of the Company. In addition, four of the eight
directors of the Company are directors of MTI, including Steven R.
Appleton, Chairman and Chief Executive Officer of MTI. MTI has the power
to control the outcome of substantially all matters requiring shareholder
approval, including the election of directors, and has the ability to
control the management and affairs of the Company. Because of MTI's
significant share ownership, only a limited percentage of the Company's
outstanding common stock can be traded in the public market unless MTI
sells shares into the public market or otherwise exchanges or transfers a
portion of its ownership. As a result of the relatively limited number of
shares that are publicly traded, sales of substantial amounts of the
Company's common stock in the public market could adversely affect
prevailing market prices. In addition, in the event that MTI is unwilling
to allow the reduction of its percentage of ownership, the Company may be
unable to complete an equity financing and could be forced to forego
certain other corporate opportunities. MTI could, in the future, determine
to dispose of all or a portion of its shares of the Company's common stock.
Further, in such event, MTI could determine to terminate one or more of the
favorable business relationships between MTI and the Company. The
termination of one or more of such business relationships could have a
material adverse effect on the Company's business and operating results.
13
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company is party to various legal actions, none of which is
expected to have a material effect on the Company's financial position.
Item 6. Exhibits and Report on Form 8-K
(a) The following are filed as a part of this report:
Exhibit
Number Description of Exhibit
11 Computation of per share earnings (loss) for the
second quarter and six months ended February 29,
1996 and March 2, 1995
(b) The registrant filed a Report on Form 8-K, dated February 29, 1996,
announcing the discontinuance of its Minneapolis, Minnesota
manufacturing operations effective April 30, 1996, and the
discontinuation of sales of its ZEOS line of personal computers,
resulting in recording a restructuring charge of approximately $30
million in the second fiscal quarter of 1996.
14
<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: March 27, 1996 /s/ T. Erik Oaas
--------------------------------------------
T. Erik Oaas, Vice President, Finance, and
Chief Financial Officer (Principal Financial
and Accounting Officer)
15
Exhibit 11
Micron Electronics, Inc.
Computation of Per Share Earnings (Loss)
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
February 29, March 2, February 29, March 2,
1996 1995 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary
Weighted average shares outstanding 91,507 83,962 91,424 83,943
Net effect of dilutive stock options - 1 947 5
-------- ------- ------- -------
Total 91,507 83,963 92,371 83,948
======== ======= ======== =======
Net income (loss) $(12,556) $16,918 $4,059 $28,524
======== ======= ======== =======
Per share amount $(0.14) $0.20 $0.04 $0.34
Fully Diluted
Weighted average shares outstanding 91,507 83,962 91,424 83,943
Net effect of dilutive stock options - 1 940 5
-------- ------- ------- -------
Total 91,507 83,963 92,364 83,948
======== ======= ======== =======
Net income (loss) $(12,556) $16,918 $4,059 $28,524
======== ======= ======== =======
Per share amount $(0.14) $0.20 $0.04 $0.34
</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> 6-MOS
<FISCAL-YEAR-END> AUG-29-1996
<PERIOD-END> FEB-29-1996
<CASH> 63,957
<SECURITIES> 0
<RECEIVABLES> 151,367
<ALLOWANCES> 8,438
<INVENTORY> 93,674
<CURRENT-ASSETS> 331,108
<PP&E> 122,988
<DEPRECIATION> 46,697
<TOTAL-ASSETS> 408,610
<CURRENT-LIABILITIES> 225,548
<BONDS> 19
0
0
<COMMON> 916
<OTHER-SE> 180,923
<TOTAL-LIABILITY-AND-EQUITY> 408,610
<SALES> 895,197
<TOTAL-REVENUES> 895,197
<CGS> 787,475
<TOTAL-COSTS> 882,594
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,673)
<INCOME-PRETAX> 14,276
<INCOME-TAX> 10,217
<INCOME-CONTINUING> 4,059
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,059
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
