<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8 - K/A
AMENDMENT NO. 2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): JULY 18, 1997
MICRON ELECTRONICS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
MINNESOTA 0-17932 41-1404301
- --------------------------------------------------------------------------------
(State or Other Jurisdiction) (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
900 E. KARCHER ROAD, NAMPA, IDAHO 83687
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(208) 898-3434
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS.
- -------------------------------------------
(a) Financial Statements of Businesses Acquired.
--------------------------------------------
The consolidated financial statements as of December 31, 1996 and 1995 and
for the two years in the period ended December 31, 1996 and the condensed
consolidated financial statements as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 of NetFRAME Systems Incorporated ("NetFRAME")
are incorporated by reference herein from the financial statements of NetFRAME
included in the definitive proxy statement of NetFRAME filed with the Securities
and Exchange Commission on August 4, 1997 with respect to the Merger of NetFRAME
with and into Payette Acquisition Corporation, a wholly-owned subsidiary of
Micron Electronics, Inc. (the "Merger"), pursuant to which NetFRAME became a
wholly-owned subsidiary of Micron Electronics, Inc. A copy of such financial
statements is filed as Exhibit 99.01 hereto, and the index to such financial
statements is set forth below.
<TABLE>
<CAPTION>
Page No. of
-------------
Exhibit 99.01
-------------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995....... F-3
Consolidated Statements of Operations for each of the three
fiscal years in the period ended December 31, 1996................ F-4
Consolidated Statements of Cash Flows for each of the three
fiscal years in the period ended December 31, 1996................ F-5
Consolidated Statement of Stockholders' Equity for each of the
three fiscal years in the period ended December 31, 1996.......... F-6
Notes to the Consolidated Financial Statements..................... F-7
Unaudited Condensed Consolidated Balance Sheet as of June 30, 1997. F-17
Unaudited Condensed Consolidated Statements of Operations
for the six month periods ended June 30, 1997 and 1996............ F-18
Unaudited Condensed Consolidated Statements of Cash Flows
for the six month periods ended June 30, 1997 and 1996............ F-19
Notes to Unaudited Condensed Consolidated Financial Statements..... F-20
</TABLE>
(b) Pro Forma Financial Information.
--------------------------------
The following is the pro forma financial information required to be filed
pursuant to Item 7(b) of Form 8-K. For purposes of this Item, reference to the
"Company" or "Micron" includes Micron Electronics, Inc. and its subsidiaries.
2
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED RESULTS OF OPERATIONS
On July 18, 1997, the Company acquired an approximate 63% interest in
NetFRAME, pursuant to a cash tender offer (the "Offer"). On August 28, 1997, the
Company completed its acquisition of NetFRAME by acquiring the remaining
outstanding shares of NetFRAME pursuant to the Merger. The purchase price for
all outstanding shares of NetFRAME was $1 per share, net to the selling NetFRAME
stockholders in cash. The purchase price aggregated $17.4 million including
acquisition costs.
The following unaudited pro forma combined condensed statement of
operations (the "Pro Forma Statement of Operations") reflects the results of
operations of the Company and NetFRAME for the year ended August 28, 1997 as if
the Merger had occurred at the beginning of the Company's fiscal 1997, after
giving effect to certain adjustments, including amortization of acquired
technology, depreciation and related income tax effects. The pro forma
adjustments exclude the effect of the nonrecurring charge of $3.9 million for
purchased in-process research and development recorded by the Company in fiscal
1997 following the consummation of the Merger.
Intercompany transactions have been eliminated in the Pro Forma Statement
of Operations. No pro forma adjustments have been included herein which reflect
the potential efficiencies which may be obtained by combining the Company's and
NetFRAME's operations or costs of restructuring, integration or consolidation of
their operations.
The pro forma adjustments and assumptions described in the accompanying
Notes to Unaudited Pro Forma Combined Condensed Statement of Operations are
based on estimates, evaluations and other data currently available. The Pro
Forma Statement of Operations is provided for illustrative purposes only and is
not necessarily indicative of the combined results of operations that would have
been reported had the closing of the Offer and the Merger occurred on August 30,
1996, nor does it represent a forecast of the combined future results of
operations for any future period. These pro forma financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's annual report on Form 10-K for fiscal 1997 filed with the
Securities and Exchange Commission on October 1, 1997 and the financial
statements of NetFRAME incorporated by reference in this filing.
A pro forma balance sheet is not required to be, and has not been, included
herewith, as the Company's balance sheet for fiscal 1997 included in the
Company's Form 10-K for fiscal 1997 filed with the Securities and Exchange
Commission on October 1, 1997 reflects the Company's acquisition of NetFRAME.
3
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NETFRAME
FOR THE
PERIOD
FROM
MICRON 08/25/96
YEAR ENDED PRIOR TO INTERCOMPANY PRO FORMA PRO FORMA
08/28/97 07/18/97 ELIMINATIONS ADJUSTMENTS COMBINED
---------- -------- ------------ ----------- ----------
Net sales $1,955,783 $ 52,536 $(4,040)(A) $ -- $2,004,279
Cost of goods sold 1,618,037 44,236 (4,040)(A) 292 (B) 1,657,566
(959)(D)
---------- -------- ----------- ---------- ----------
Gross margin 337,748 8,300 -- 667 346,713
Selling general and administrative 191,667 33,474 -- 225 (C) 223,209
(2,157)(D)
Research and development 9,621 15,019 -- (1,541)(D) 23,099
---------- -------- ----------- ---------- ----------
Operating income 136,458 (40,193) -- 4,140 100,405
Interest income, net 7,896 6 -- -- 7,902
---------- -------- ----------- ---------- ----------
Income before taxes 144,354 (40,187) -- 4,140 108,307
Income tax provision 57,092 -- -- (13,878)(E) 43,214
---------- -------- ----------- ---------- ----------
Net income $ 87,262 $(40,187) $ -- $ 18,018 $ 65,093
========== ======== =========== ========== ==========
Weighted average shares outstanding 94,621 94,621
========== ==========
Earnings per share $ 0.92 $0.69
========== ==========
</TABLE>
4
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
The Pro Forma Statement of Operations presents the pro forma combined
condensed results of operations of the Company and NetFRAME for the Company's
1997 fiscal year as if the closing of the Offer and the Merger had occurred at
the beginning of that period. NetFRAME's results of operations are consolidated
with the Company's results of operations after July 18, 1997.
The effect of a nonrecurring charge of $3.9 million for the write-off of
purchased in-process research and development is not reflected as a pro forma
adjustment in the Pro Forma Statement of Operations, but rather is included in
the actual results of operations for the Company in fiscal 1997 following
consummation of the Merger.
<TABLE>
<CAPTION>
The purchase price of NetFRAME follows (amounts in thousands):
<S> <C>
Purchase price of NetFRAME
shares of common stock $14,142
Acquisition costs 3,289
-------
$17,431
-------
</TABLE>
The aggregate estimated fair values of the net assets of NetFRAME resulted
in fair value in excess of the purchase price. The allocation of purchase price
as of July 18, 1997 was as follows (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
Book value of net
assets, excluding
property, plant
and equipment $ 38
Property, plant and
equipment 2,626
Identified intangible
assets:
Current technologies 823
Other 635
Deferred taxes 8,815
In-process research
and development 3,938
Tax effect of pro
forma adjustments 556
-------
$17,431
-------
</TABLE>
A. The Pro Forma Statement of Operations includes elimination of sales by
the Company to NetFRAME of approximately $4,000,000 for contract manufacturing
services and approximately $40,000 for PC systems.
B. Pro forma adjustment of amortization expense of current technologies
using the straight-line method over the estimated useful life of 30 months.
C. Pro forma adjustment of amortization expense of other identified
intagible assets using the straight-line method over the estimated useful life
of 30 months.
D. Pro forma adjustment expense based on the allocation of purchase price
to the property, plant and equipment of NetFRAME using the straight-line method
over the estimated useful life of 30 months.
E. Pro forma adjustments for the benefit of income taxes for NetFRAME's
operating losses from the beginning of the Company's 1997 fiscal year through
July 18, 1997 and the tax effect of pro forma adjustments at a rate of 38.5%.
5
<PAGE>
(c) Exhibits.
---------
The following exhibits are filed herewith:
2.01 Agreement and Plan of Merger dated as of June 10, 1997 by and among Micron
Electronics, Inc., Payette Acquisition Corporation and NetFrame
Systems Incorporated. Incorporated by reference to Exhibit c(1) to
the Registrant's Schedule 14D-1 and Schedule 13D (Commission File No.
0-17932) initially filed on June 16, 1997.
23.01 Consent of Ernst & Young LLP, independent auditors.
99.01 Consolidated Financial Statements of NetFRAME Systems Incorporated as of
December 31, 1996 and 1995 and for each of the three years in the
period ended December 31, 1996 and unaudited Condensed Consolidated
Financial Statements of NetFRAME Systems Incorporated as of June 30,
1997 and for the six month periods ended June 30, 1997 and 1996 as
included in the definitive proxy statement of NetFRAME Systems
Incorporated filed with the Securities and Exchange Commission on
August 4, 1997.
6
<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 hereunto duly authorized.
MICRON ELECTRONICS, INC.
Date: October 1, 1997 By /s/ T. Erik Oaas
----------------
T. Erik Oaas
Chief Financial Officer
7
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------- ----------------------
2.01 Agreement and Plan of Merger dated as of June 10, 1997 by and among
Micron Electronics, Inc., Payette Acquisition Corporation and NetFrame
Systems Incorporated. Incorporated by reference to Exhibit c(1) to the
Registrant's Schedule 14D-1 and Schedule 13D (Commission File No.
0-17932) initially filed on June 16, 1997 and as thereafter amended.
23.01 Consent of Ernst & Young LLP, independent accountants.
99.01 Consolidated Financial Statements of NetFRAME Systems Incorporated as
of December 31, 1996 and 1995 and for each of the three years in the
period ended December 31, 1996 and unaudited Condensed Consolidated
Financial Statements of NetFRAME Systems Incorporated as of June 30,
1997 and for the six month periods ended June 30, 1997 and 1996 as
included in the definitive proxy statement of NetFRAME Systems
Incorporated filed with the Securities and Exchange Commission on
August 4, 1997.
8
<PAGE>
EXHIBIT 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Current Report on Form
8-K Amendment No. 2 of Micron Electronics, Inc. of our report dated January 23,
1997, with respect to the consolidated financial statements of NetFRAME Systems
Incorporated included in the definitive proxy statement of NetFRAME Systems
Incorporated filed with the Securities and Exchange Commission on August 4,
1997.
We also consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 333-14035) of Micron Electronics, Inc. and in the
Registration Statement (Form S-8 No. 33-63701) pertaining to the Micron
Electronics, Inc. 1995 Employee Stock Purchase Plan and 1995 Stock Option Plan
of our report dated January 23, 1997, with respect to the consolidated financial
statements of NetFRAME Systems Incorporated incorporated herein by reference and
included in the definitive proxy statement of NetFRAME Systems Incorporated
filed with the Securities and Exchange Commission on August 4, 1997.
/s/ ERNST & YOUNG LLP
San Jose, California
October 1, 1997
<PAGE>
EXHIBIT 99.01
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The NetFRAME Board and Stockholders
NetFRAME Systems Incorporated
We have audited the accompanying consolidated balance sheets of NetFRAME
Systems Incorporated as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NetFRAME Systems Incorporated at December 31, 1996 and 1995, and the
consolidated results of its operations and cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1 of Notes to Consolidated Financial Statements, the
Company's recurring net losses and negative cash flow raise substantial doubt
about its ability to continue as a going concern. Management's plans as to these
matters are also described in Note 1 of Notes to Consolidated Financial
Statements. The 1996 consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ERNST & YOUNG LLP
San Jose, California
January 23, 1997
F-2
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,011 $ 18,340
Short-term investments -- 13,304
Accounts receivable, net of
allowance for doubtful accounts
of $2,168 and $1,638 in 1996
and 1995, respectively 14,203 16,623
Inventories 9,741 10,680
Other current assets 782 1,244
-------- --------
Total current assets 38,737 60,191
Property and equipment, net 9,930 9,823
Other assets, net 1,642 1,684
-------- --------
Total assets $ 50,309 $ 71,698
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,236 $ 6,374
Accrued compensation and benefits 4,461 2,866
Accrued warranty 1,721 1,003
Deferred revenue 2,037 1,532
Other accrued liabilities 1,056 729
-------- --------
Total current liabilities 18,511 12,504
Commitments and contingencies
Stockholders' equity:
Preferred stock, 2,000,000 shares
($.001 par value) authorized,
none issued and outstanding
Common stock, 20,000,000 shares
($.001 par value) authorized,
13,835,000 and 13,602,000
issued and outstanding in
1996 and 1995, respectively 14 14
Additional paid-in capital 73,156 72,568
Accumulated deficit (41,372) (13,388)
-------- --------
Total stockholders' equity 31,798 59,194
-------- --------
Total liabilities and
stockholders' equity $ 50,309 $ 71,698
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net revenue $ 74,349 $76,434 $89,135
Cost of revenue 50,489 39,545 42,216
-------- ------- -------
Gross profit 23,860 36,889 46,919
Operating expenses:
Research and development 16,294 12,368 11,206
Selling, general and administrative 36,600 32,306 30,725
-------- ------- -------
Total operating expenses 52,894 44,674 41,931
-------- ------- -------
Operating income (loss) (29,034) (7,785) 4,988
Interest and other income 1,215 1,753 1,319
Interest and other expense (165) (2,297) (168)
-------- ------- -------
Income (loss) before income taxes (27,984) (8,329) 6,139
Provision (benefit) for income taxes -- (277) 394
-------- ------- -------
Net income (loss) $(27,984) $(8,052) $ 5,745
======== ======= =======
Net income (loss) per share $ (2.04) $ (0.60) $ 0.42
Number of shares used in computing per 13,729 13,498 13,630
share amounts
</TABLE>
See accompanying notes.
F-4
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash flows (in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM (REQUIRED FOR)
OPERATING ACTIVITIES:
Net income (loss) $(27,984) $ (8,052) $ 5,745
Items not requiring the current use of
cash:
Stock compensation expense - 66 151
Loss on disposal of capital assets 77 1,827 -
Deferred taxes - 1,367 (720)
Depreciation and amortization 8,249 5,512 4,336
Changes in items affecting operations:
Accounts receivable 2,420 8,235 (6,892)
Inventories (3,547) (3,159) (3,368)
Other current assets 462 (591) (123)
Accounts payable 2,862 1,281 707
Accrued liabilities 3,145 1,748 (1,406)
-------- --------- --------
Cash generated from (required for)
operating activities (14,316) 8,234 (1,570)
-------- --------- --------
CASH FLOWS FROM (REQUIRED FOR)
INVESTING ACTIVITIES:
Acquisitions of property and equipment (3,805) (6,109) (5,128)
Other assets (100) (1,044) (716)
Purchase of available-for-sale
securities (35,500) (149,800) (35,100)
Sale of available-for-sale securities 48,804 148,300 26,100
Purchase of held-to-maturity securities - (6,241) (24,501)
Maturity of held-to-maturity securities - 15,600 28,123
-------- --------- --------
Cash generated from (required for)
investing activities 9,399 706 (11,222)
-------- --------- --------
CASH FLOWS FROM (REQUIRED FOR)
FINANCING ACTIVITIES:
Proceeds from short-term borrowings - - 1,048
Repayment of short-term borrowings - (1,048) -
Payments on capital lease obligations - (70) (285)
Payments on stockholders' notes
receivable - (14) 1
Issuance of common stock 588 784 1,125
-------- --------- --------
Cash generated from (required for)
financing activities 588 (348) 1,889
-------- --------- --------
Net increase (decrease) in cash and
cash equivalents (4,329) 8,592 (10,903)
Cash and cash equivalents at the
beginning of the period 18,340 9,748 20,651
-------- --------- --------
Cash and cash equivalents at the end of
the period $ 14,011 $ 18,340 $ 9,748
======== ========= ========
SUPPLEMENTAL DISCLOSURES:
Other noncash charges:
Capitalization of assets through
inventory transfers 2,124 2,029 2,799
Reclassification of inventory to
other assets 2,362 - -
Cash paid during the period for:
Interest - 4 135
Income taxes 25 76 1,771
</TABLE>
See accompanying notes.
F-5
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Additional Stockholders' Deferred Total
Stock Paid-In Accumulated Notes Stock Stockholders'
Shares Amount Capital Deficit Receivable Compensation Equity
------ ------ ---------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 13,609 $13 $70,575 $(11,081) $(15) $(133) $ 59,359
Stock compensation expense related to
vesting of options - - 84 - - - 84
Amortization of deferred stock
compensation - - - - - 67 67
Payments, interest, and forgiveness on
notes receivable from stockholders - - - - 1 - 1
Issuance of common stock under stock
plans 326 - 1,125 - - - 1,125
Net income - - - 5,745 - - 5,745
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 13,395 13 71,784 (5,336) (14) (66) 66,381
Amortization of deferred stock
compensation - - - - - 66 66
Payments, interest, and forgiveness on
notes receivable from stockholders - - - - 14 - 14
Issuance of common stock under stock
plans 207 1 784 - - - 785
Net loss - - - (8,052) - - (8,052)
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 13,602 14 72,568 (13,388) - - 59,194
Issuance of common stock under stock
plans 233 - 588 - - - 588
Net loss - - - (27,984) - - (27,984)
----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 13,835 $14 $73,156 $(41,372) $ - $ - $ 31,798
========================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of NetFRAME Systems Incorporated
(the Company) for the year ended December 28, 1996, have been prepared on a
going concern basis. The Company has approximately $14.0 million of cash and
cash equivalents at December 31, 1996, and has recently entered into an asset
based revolving credit facility (see Note 8) to provide additional capital.
However, the fiscal 1996 net loss of $28.0 million and the resulting $14.3
million of cash used in fiscal 1996 to fund operations coupled with the
continuing competitive industry conditions indicates that management must take
certain actions to continue operations with existing capital resources. These
actions include: timely introduction of products currently under development;
expanding distribution channels to increase revenue; and outsourcing certain
business operations and further streamlining the Company's infrastructure to
reduce product and operating costs. Specifically, the Company is negotiating
with third party distributors and resellers with substantially greater
resources to market, support and distribute its products. In addition, the
Company is negotiating to consolidate certain corporate facilities and has
taken measures to reduce its workforce. In the event the Company is unable to
generate sufficient cash from operations or obtain necessary financing from
other sources, management will be required to sharply curtail certain of its
existing business operations. (See Note 8).
2. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Consolidation
The Company develops, manufactures, markets and supports a broad line of
high availability, clustered network servers for local and wide area networks.
These network servers are distributed worldwide primarily through value added
resellers (VARs) and systems integrators.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, NetFRAME International
Incorporated and NetFRAME Foreign Sales Corporation. All significant
intercompany accounts and transactions have been eliminated.
Reclassification
Certain reclassifications have been made to prior year amounts to conform
with the 1996 presentation.
Fiscal Year
The Company maintains a fifty-two/fifty-three week fiscal year cycle.
Fiscal years 1996, 1995 and 1994 ended on December 28, 1996, December 30, 1995,
and December 31, 1994, respectively. For convenience, the accompanying
consolidated financial statements have been titled as ending on the last day of
the calendar period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
Cash Equivalents
The Company considers all highly liquid investments with minimum yield risks
and maturities of less than 90 days at time of purchase to be cash equivalents.
F-7
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments
The Company invests its excess cash in available-for-sale high quality
debt and equity instruments. Available-for-sale securities are stated at fair
market value, with unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization, as well as any interest on the securities, is included in
interest income.
On November 15, 1995, the FASB staff issued a special report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with provisions in that Special Report,
the Company chose to reclassify securities from held to maturity to available-
for-sale. At the date of the transfer the amortized cost of those securities
was $18,624,000 and the unrealized loss (gain) was $4,000, which is included in
shareholders' equity (income).
Inventories
Inventories are stated at the lower of standard cost (which approximates
first in, first out) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Raw materials $2,729 $ 1,954
Work in process 2,673 2,411
Finished goods 4,339 6,315
------ -------
$9,741 $10,680
====== =======
</TABLE>
Capitalization of Software Development Costs
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Cost
of Computer Software to Be Sold, Leased, or Otherwise Marketed". At December
31, 1996 and 1995, $171,000 and $828,000, respectively, of capitalized software
development costs, net of accumulated amortization, are included in other
assets. Amortization expense related to capitalized software development
costs, which was included in cost of revenue, was $808,000 and $644,000 for the
years ended December 31, 1996 and 1995, respectively.
F-8
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are computed using the straight-line method based
on the estimated useful lives of the assets (one to five years). Property and
equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------- ---------
(in thousands)
<S> <C> <C>
Equipment $ 25,176 $ 20,418
Furniture and fixtures 1,702 1,450
Leasehold improvements 3,171 2,778
-------- --------
30,049 24,646
Less accumulated depreciation and (20,119) (14,823)
amortization -------- --------
$ 9,930 $ 9,823
======== ========
</TABLE>
In the first quarter of 1995, the Company wrote-off $1.4 million of
application software and related costs in connection with a decision to
discontinue a management system upgrade.
Revenue Recognition
The Company generally recognizes revenue and accrues related estimated
royalty, warranty and sales returns provisions upon product shipment.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (FAS 109) "Accounting for Income Taxes".
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, (APB 25) "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for
Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Net Income (Loss) Per Share
Net income per share is based upon the weighted average number of
outstanding shares of common stock, and dilutive common stock equivalents from
the exercise of stock options and warrants (using the treasury stock method).
Common stock equivalents from stock options and warrants are excluded from the
computation if their effect is anti-dilutive.
Net loss per share is based upon the weighted average number of
outstanding shares of common stock.
F-9
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FINANCIAL INSTRUMENTS
The Company has evaluated the estimated fair value of financial
instruments. The amounts reported for cash and cash equivalents approximate
the fair value due to their short maturities. Investment securities are
reported at their estimated fair value based on quoted market prices.
At December 31, 1996, available-for-sale securities consisted of
commercial paper with a carrying value and estimated value of $10,600,000.
These securities had a contractual maturity of less than one year and were
classified as cash equivalents.
The following is a summary of available-for-sale securities at December
31, 1995:
<TABLE>
<CAPTION>
Available-for-Sale
-------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Auction preferred stock $10,500 $ - $ - $10,500
Commercial paper 18,624 - (4) 18,620
------- ---------- --------- -------
$29,124 $ - $ (4) $29,120
======= ========= ========= =======
</TABLE>
4. CONCENTRATION OF CREDIT RISK, OTHER CONCENTRATION AND RISKS AND GEOGRAPHIC
DATA
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of investments in cash
equivalents, short-term investments and trade receivables. The Company invests
in cash equivalents and short-term investments, primarily in money-market
securities, auction preferred stock, commercial paper, and corporate notes.
The Company is exposed to credit risks in the event of default by the issuer to
the extent of the amount recorded on the balance sheet. The Company performs
on-going credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses, and
such losses have been within management's expectations.
The Company derives a substantial portion of its revenue from sales to
VARs and systems integrators. Trade accounts receivable from VARs and systems
integrators was approximately $13.0 million at December 31, 1996. The
concentration of credit risk with respect to trade accounts receivable from
VARs and systems integrators is limited due to the number and geographic
dispersion of such customers. No single VAR or system integrator accounted for
more than 8% of trade accounts receivable at December 31, 1996.
The Company's products include certain components that are currently
available only from single sources or limited sources. Any availability
limitations, interruptions in supplies or price increases relative to these
components could adversely affect the Company's financial results.
The Company is currently undergoing a product transition. Management has
developed a program to liquidate inventory of the older products and believes
that it has appropriately valued the inventory. At this time, management
cannot estimate a range of amounts of loss that could occur if the program is
not successful.
The Company recently segregated the number of VARs with which it does
business between those authorized to resell and support all of the Company's
products and those limited to the resell and support of the Company's products
prior to the NF9000. Management is actively working to collect the outstanding
balances and believes no additional reserves are necessary. At this time,
management cannot estimate a range of amounts of loss that could occur if the
collections efforts are not successful.
F-10
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Export sales represent sales to the Company's customers primarily
throughout Europe and Asia Pacific. Sales by the Company to customers in
different geographic areas, expressed as a percentage of net revenue, for the
periods ended were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Europe 3.7% 7.0% 7.0%
Asia Pacific 5.1% 8.0% 5.9%
Other -% -% 2.7%
---- ---- ----
8.8% 15.0% 15.6%
==== ==== ====
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its principal facilities under non-cancelable operating
leases that expire in September 2002. In addition to its principal facilities,
the Company also leases several sales support offices worldwide.
Future minimum payments under non-cancelable operating leases with initial
terms of one year or more consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
1997 $1,619
1998 1,487
1999 1,553
2000 1,585
2001 1,661
Thereafter 1,263
------
Total minimum lease payments $9,168
======
</TABLE>
Total rent expense was approximately $1,955,000, $1,936,000, and
$1,516,000, for the years ended December 31, 1996, 1995 and 1994, respectively.
Contingencies
In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these matters
will not have a material adverse effect on its financial position, results of
operations or cash flows.
F-11
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INCOME TAXES
The provision (benefit) for income taxes for years ended December 31,
1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
Federal:
<S> <C> <C> <C>
Current $ - $(1,010) $ 766
Deferred - 733 (720)
----- ------- -----
- (277) 46
State:
Current - - 348
----- ------- -----
Total $ - $ (277) $ 394
==== ======= =====
</TABLE>
The provision (benefit) for income taxes differs from the amount computed
by applying the federal statutory income tax rate to income before taxes as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income tax computed at federal $(9,043) $(2,915) $2,087
statutory rate
State taxes, net of federal benefit - - 230
Nonuse (use) of net operating loss 9,043 2,638 (467)
Benefit of R&D credit utilized - - (406)
Adjustment to valuation allowance - - (971)
Other - - (79)
------- ------- ------
$ - $ (277) $ 394
======= ======= ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred tax assets and liabilities at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Federal net operating loss carryforward $ 13,709 $ 4,453
Capitalized research and development 1,472 695
Accruals and reserves not currently deductible 1,284 1,134
Research and AMT credit carryforwards 2,826 2,466
Accounts receivable reserve 1,100 834
Inventory valuation differences 580 1,158
Accrued commission 292 93
Depreciation 334 -
-------- -------
Total deferred tax assets 21,597 10,833
Valuation allowance (21,236) (9,967)
-------- -------
Total net deferred tax assets 361 866
Deferred tax liabilities:
Depreciation - (227)
Capitalized software (70) (348)
-------- -------
Total net deferred taxes $ 291 $ 291
======== =======
</TABLE>
The valuation allowances at December 31, 1996 and 1995 include $2,580,000
attributable to stock option deductions, the benefit of which will be credited
to paid-in capital when realized.
F-12
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $39,000,000 and $6,000,000, respectively, and
federal and state research and development credit carryforwards of
approximately $2,700,000 expiring in 2008 through 2011. In addition, the
Company had federal alternative minimum tax credit carryforwards of
approximately $330,000 that will not expire. No restriction on the
availability to utilize tax credit carryforwards is currently anticipated.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
7. EMPLOYEE STOCK AND SAVINGS PLANS
Stock Option Plans
The Company has various stock option plans (the "Option Plans") under
which officers, employees, non-employee directors and consultants may be
granted qualified and non-qualified options to purchase shares of the Company's
authorized but unissued Common Stock. Options are generally priced at the fair
market value of the stock on the date of grant and vest ratably over two to
five years from the date of grant. Options currently expire no later than ten
years from date of grant.
On January 15, 1997, the Company offered to reprice 1992 stock options
granted to employees using a closing market value on that date of $2.625.
Options totaling 1,813,051 shares were repriced. On February 7, 1995, the
Company offered to reprice 1992 stock options granted to employees using a
closing market value on that date of $5.875. Options totaling 1,252,700 shares
were repriced.
At December 31, 1996 and 1995, 4,609,442 and 4,459,442 shares,
respectively, were reserved for issuance upon exercise of stock options. A
summary of activity under all option plans is as follows (in thousands except
weighted average exercise price amounts):
<TABLE>
<CAPTION>
Weighted Average
Shares Number of Shares Exercise Price of
Available Subject to Options
for Grant Options Outstanding Outstanding
--------- ------------------- -----------------
<S> <C> <C> <C>
Balance at December 31, 1993 199 1,462
Shares authorized 1,700 -
for issuance
Options granted (880) 880
Options canceled 195 (195)
Options exercised - (256)
Plan shares expired (13) -
------ ------
Balance at December 31, 1994 1,201 1,891
Shares authorized 100 -
for issuance
Options granted (2,172) 2,172
Options canceled 1,596 (1,596)
Options exercised - (84)
Plan shares expired (9) -
------ ------
Balance at December 31, 1995 716 2,383
Shares authorized 150 -
for issuance
Options granted (1,504) 1,504 $4.41
Options canceled 1,471 (1,471) 6.49
Options exercised - (112) 1.13
Plan shares expired (12) -
------ ------ -----
Balance at December 31, 1996 821 2,304 $5.24
====== ======
</TABLE>
F-13
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------ -------------------------------------
Weighted Average Weighted
Number Remaining Average Number Weighted
of Shares Contractual Life Exercise of Shares Average
Range of Exercise at 12/31/96 (Years) Price Exercisable Exercise Price
- ------------------- ----------- ----------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$6.00 - $10.00 446 7.5 $7.54 263 $8.53
$5.00 - $5.99 1,242 8.8 5.30 418 5.58
$2.00 - $4.99 575 9.5 3.63 57 3.88
$0.20 - $1.99 41 4.1 1.27 41 1.27
</TABLE>
At December 31, 1996, outstanding options to purchase 780,000 shares were
exercisable (of which 292 shares would be subject to repurchase if such options
were exercised).
Stock Purchase Plan
In 1992, the 1992 Employee Stock Purchase Plan ("ESPP") was approved. As
of December 31, 1996, 800,000 shares were reserved for issuance. The ESPP
provides that substantially all employees may purchase stock at 85% of its fair
market value on certain specified dates via payroll deductions. During the
years ended December 31, 1996 and 1995, 120,563 and 123,607 shares,
respectively, were issued under this plan.
Stock-Based Compensation
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by FAS 123 for awards granted by the Company after December
31, 1994 as if the Company had accounted for its stock-based awards to
employees under the fair value method of FAS 123. The fair value of the
Company's stock-based awards to employees was estimated using a Black-Scholes
option pricing model. The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, the Black-Scholes model
requires the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock-based awards to employees
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock-
based awards to employees. The fair value of the Company's stock-based awards
to employees was estimated assuming no expected dividends and the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Options ESPP
------------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expected life (years) 3.5 3.5 0.7 0.6
Expected volatility 0.75 0.73 0.70 0.65
Risk-free interest rate 5.78 - 6.48 5.20 - 7.09 5.50 - 5.60 5.60 - 6.15
(percent)
</TABLE>
F-14
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For pro forma purposes, the estimated fair value of the Company's stock-
based awards to employees is amortized over the options' vesting period (for
options) and the six to nine month purchase period (for stock purchases under
the ESPP). The Company's pro forma information follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C> <C>
Net loss As reported $(27,984) $ (8,052)
Pro forma (29,777) (10,982)
Net loss per share As reported $ (2.04) $ (0.60)
Pro forma (2.17) (0.81)
</TABLE>
Because FAS 123's pro forma disclosure requirements are applicable only to
the Company's awards granted subsequent to December 31, 1994, its pro forma
effect will not be fully reflected until approximately 1998.
The weighted-average fair value of stock options granted during fiscal
1996 and 1995 was $2.50 and $3.10 per share, respectively. The weighted-
average fair value of the employee stock purchase plans granted during fiscal
1996 and 1995 was $1.60 and $1.80 per share, respectively.
Defined Contribution Plan
The NetFRAME Systems Incorporated Savings and Investment Plan (the "Plan")
is a defined contribution plan that covers all U.S. employees who have at least
three months of service with the Company. Employees can contribute up to 15%
of their eligible compensation through payroll deductions. The Company
contributes to the employee's account by matching the greater of $0.25 for
every employee dollar contributed up to a maximum of 5% of the employee's
eligible compensation or a percentage of the Company's after-tax profit as
determined by the NetFRAME Board. Total contributions made by the Company to
the Plan for the years ended December 31, 1996, 1995 and 1994 were
approximately $120,000, $150,000 and $170,000 respectively.
8. SUBSEQUENT EVENTS (unaudited)
In March 1997, the Company obtained an asset based revolving credit
facility with the CIT Group/Business Credit, Inc., Los Angeles, CA (CIT) to
finance eligible accounts receivable and production inventory up to a maximum
of $15.0 million, subject to certain net worth and other financial covenants.
Borrowings under the asset based revolving credit facility with CIT, which by
its terms allowed for termination by CIT on March 26, 2000, accrue interest at
a rate equal to prime plus one-half percent (.50%). On June 23, 1997, the
credit facility was assigned to Micron Electronics, Inc. pursuant to which,
among other things, the maximum borrowings provided for thereunder were
decreased to $3.5 million and the date on which Micron may terminate the
facility, absent certain other conditions, was changed to September 30, 1997.
On July 31, 1997, the maximum borrowings provided for under the credit facility
were increased to $12.0 million. As of July 31, 1997, the Company had borrowed
$6.0 million under the credit facility.
In May 1997, the Company canceled its lease on one of its principal
administrative, product development, manufacturing and marketing facilities.
As a result, the Company reduced its commitments under this operating lease by
approximately $4.3 million and will receive a termination payment of $272,000
from the landlord. In connection with the cancellation of the operating lease,
the Company recorded a $1.3 million charge related to the write-off of
leasehold improvements.
On June 10, 1997, the Company entered into an Agreement and Plan of Merger
with Micron Electronics, Inc. (Micron) and Payette Acquisition Corporation, a
wholly owned subsidiary of Micron (Payette). In connection with that
agreement, Payette made a tender offer to purchase all of the Company's issued
and outstanding shares of common stock and all associated rights at a price per
share of $1.00 in cash. On July 18, 1997, Payette acquired approximately 62.8%
of the Company's outstanding common stock in connection with the closing of the
tender offer. Pursuant to a stockholder meeting to be held in August 1997, the
merger of Payette with and into the Company is expected to be approved and any
shares of the Company's common stock not tendered and purchased pursuant to the
tender offer will be canceled and converted into the right to receive $1.00 per
share in cash, subject to appraisal rights. The Company believes that its
F-15
<PAGE>
ability to continue to operate as a going concern is dependent on the
successful consummation of the Merger and continued financial assistance from
Micron.
F-16
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
June 30, 1997
--------------
(unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,209
Accounts receivable, net of allowance for doubtful 4,612
accounts of $1,753
Inventories 8,319
Other current assets 800
--------
Total current assets 15,940
Property and equipment, net 5,670
Other assets, net 1,060
--------
Total assets $ 22,670
========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current liabilities:
Notes payable $ 2,000
Accounts payable 5,922
Other accrued liabilities 6,741
--------
Total current liabilities 14,663
Stockholders' equity:
Preferred stock, 2,000,000 shares ($.001 par value) authorized,
none issued and outstanding --
Common stock, 20,000,000 shares ($.001 par value) authorized,
13,978,445 issued and outstanding 14
Additional paid-in capital 73,519
Accumulated deficit (65,526)
--------
Total stockholders' equity 8,007
--------
Total liabilities and stockholders' equity $ 22,670
========
</TABLE>
See accompanying notes.
F-17
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, 1997 June 30, 1996
------------- -------------
(unaudited)
<S> <C> <C>
Net revenue $ 19,984 $38,879
Cost of revenue 18,571 22,235
-------- -------
Gross profit 1,413 16,644
Operating expenses:
Research and development 8,063 7,544
Selling, general and administrative 17,737 17,370
-------- -------
Total operating expenses 25,800 24,914
-------- -------
Operating loss (24,387) (8,270)
Interest and other income, net 233 633
-------- -------
Loss before income taxes (24,154) (7,637)
Benefit for income taxes -- --
-------- -------
Net loss $(24,154) $(7,637)
-------- -------
Net loss per share $ (1.73) $ (0.56)
======== =======
Number of shares used in computing
per share amounts 13,952 13,645
======== =======
</TABLE>
See accompanying notes.
F-18
<PAGE>
NetFRAME SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash flows (in thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
June 30, 1997 June 30, 1996
-------------- --------------
(unaudited)
<S> <C> <C>
CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES:
Net loss $(24,154) $ (7,637)
Items not requiring the current use of cash:
Loss on disposal of capital assets 1,511 297
Depreciation and amortization 4,513 3,684
Changes in items affecting operations:
Accounts receivable 9,591 (269)
Inventories (967) 195
Other current assets (18) 436
Accounts payable (3,314) 874
Accrued liabilities (831) (408)
-------- --------
Cash generated from (required for) operating activities (13,669) (2,828)
-------- --------
CASH FLOWS FROM (REQUIRED FOR) INVESTING ACTIVITIES:
Acquisitions of property and equipment (493) (3,939)
Other assets (4) (2,132)
Purchase of available-for-sale securities -- (40,106)
Sale of available-for-sale securities -- 49,410
-------- --------
Cash generated from (required for) investing activities (497) 3,233
-------- --------
CASH FLOWS FROM (REQUIRED FOR) FINANCING ACTIVITIES:
Issuance of common stock 363 565
Proceeds from note payable from Micron 2,000 --
-------- --------
Cash generated from (required for) financing activities 2,363 565
Net increase (decrease) in cash and cash equivalents (11,802) 970
Cash and cash equivalents at the beginning of the period 14,011 18,340
-------- --------
Cash and cash equivalents at the end of the period $ 2,209 $ 19,310
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 210 $ --
Income taxes $ 15 $ 10
</TABLE>
See accompanying notes.
F-19
<PAGE>
NetFRAME SYSTEMS INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission but do not include all of the information and footnotes
required by generally accepted accounting principles for complete consolidated
financial statements and should, therefore, be read in conjunction with the
Company's audited consolidated financial statements and notes thereto for the
fiscal year ended December 31, 1996 included in the Annual Report on Form 10-K.
The accompanying statements include all normal recurring adjustments which the
Company believes necessary for a fair presentation of the statements. The
interim operating results are not necessarily indicative of the results for the
full year.
The Company maintains a fifty-two/fifty-three week fiscal year cycle. The
second quarters of fiscal 1997 and 1996 ended on June 28, 1997 and June 29,
1996, respectively. For convenience, the accompanying condensed consolidated
financial statements have been titled as ending on the last day of the calendar
quarter.
2. BASIS OF PRESENTATION
The consolidated financial statements of NetFRAME Systems Incorporated
(the Company) for the six months ended June 30, 1997, have been prepared on a
going concern basis. The Company had approximately $2.2 million of cash and
cash equivalents at June 30, 1997, of which $2.0 million represented amounts
borrowed from Micron under the Company's revolving credit facility (see Note
7). As of July 31, 1997, the Company had borrowed $6.0 million under the credit
facility. The Company's net losses for the six months ended June 30, 1997
totaled approximately $24.2 million. The Company believes that its ability to
continue to operate as a going concern is dependent on the successful
consummation of the Merger and continued financial assistance from Micron.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Raw materials $2,633 $2,729
Work in process 791 2,673
Finished goods 4,895 4,339
------ ------
$8,319 $9,741
====== ======
</TABLE>
4. CONTINGENCIES
In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these matters
will not have a material adverse effect on its financial position, results of
operations or cash flows.
5. PROVISION (BENEFIT) FOR INCOME TAXES
The Company provides for income tax expense (or benefit) during interim
reporting periods based upon an estimate of the annual effective tax rate. The
rate of tax (benefit) is less than the federal statutory rate of 35% due to
the limitations controlling the timing for realization of net operating losses
and tax credits (which may carryforward to partially offset future income
taxes) established by the Statement of Financial Accounting Standards No. 109
(FAS 109), "Accounting for Income Taxes".
F-20
<PAGE>
6. NET LOSS PER SHARE
Net loss per share is based upon the weighted average number of
outstanding shares of common stock.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (FAS 128), "Earnings Per Share", which is required to be
adopted by the Company on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The Company's common stock equivalent shares for the six months
ended June 30, 1997 and 1996 were antidilutive and accordingly, FAS 128
should have no impact on primary earnings per share. The Company does not
believe FAS 128 will have a material impact on the calculation of fully
diluted earnings per share.
7. CREDIT FACILITY
In March 1997, the Company obtained an asset based revolving credit
facility with the CIT Group/Business Credit, Inc., Los Angeles, CA, to finance
eligible accounts receivable and production inventory up to a maximum of $15.0
million, subject to certain net worth and other financial covenants. Borrowings
under the asset based revolving credit facility with CIT, which by its terms
allowed for termination by CIT on March 26, 2000, accrue interest in an amount
equal to prime plus one-half percent (0.50%). On June 23, 1997, this credit
facility was assigned to Micron Electronics, Inc. (see Note 9) pursuant to
which, among other things, the maximum borrowings provided for thereunder were
decreased to $3.5 million and the date on which Micron may terminate the
facility, absent certain other conditions, was changed to September 30, 1997.
On July 31, 1997, the maximum borrowings provided for under the credit facility
were increased to $12.0 million. As of July 31, 1997, the Company had borrowed
$6.0 million under the credit facility.
8. CANCELLATION OF LEASE
In May 1997, the Company canceled its lease on one of its principal
administrative, product development, manufacturing and marketing facilities.
As a result, the Company reduced its commitments under this operating lease by
approximately $4.3 million and will receive a termination payment of $272,000
from the landlord. In connection with the cancellation of the operating lease,
the Company recorded a $1.3 million charge related to the write-off of
leasehold improvements.
9. PLAN OF MERGER AGREEMENT
On June 10, 1997, the Company entered into an Agreement and Plan of Merger
with Micron Electronics Inc. (Micron) and Payette Acquisition Corporation, a
wholly owned subsidiary of Micron (Payette). In connection with that
agreement, Payette made a tender offer to purchase all of the Company's issued
and outstanding shares of common stock and all associated rights at a price per
share of $1.00 in cash. On July 18, 1997, Payette acquired approximately 62.8%
of the Company's outstanding common stock in connection with the closing of the
tender offer. Pursuant to a stockholder meeting to be held in August 1997, the
merger of Payette with and into the Company is expected to be approved and any
shares of the Company's common stock not tendered and purchased pursuant to the
tender offer will be canceled and converted into the right to receive $1.00 per
share in cash, subject to appraisal rights. The Company believes that its
ability to continue to operate as a going concern is dependent on the
successful consummation of the Merger and continued financial assistance from
Micron.
F-21
