UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 28, 1997
Commission File Number: 0-17932
Micron Electronics, Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1404301
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
900 E. Karcher Road, Nampa, Idaho 83687
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(Address, including Zip Code, of principal executive offices)
(208) 898-3434
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Registered on The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of September 29, 1997 was $577.6 million.
The number of outstanding shares of the registrant's Common Stock on
September 29, 1997 was 95,553,127.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant's 1997 Annual
Meeting of Shareholders, to be held on November 24, 1997, are
incorporated by reference into Part III of this Annual Report on Form
10-K.
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PART I
Item 1. Business
The following discussion contains trend information and other forward-
looking statements that involve a number of risks and uncertainties. The
actual results of Micron Electronics, Inc. (together with its subsidiaries,
the "Company") could differ materially from the Company's historical
results of operations and those discussed in the forward-looking
statements. Factors that could cause actual results to differ materially
are included, but are not limited to, those identified in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Certain Factors."
Micron Electronics, Inc. and its subsidiaries manufacture electronic
products and provide services for a wide range of computer and digital
applications. The Company is a leading provider of PC systems through the
direct sales channel in the United States and develops, markets,
manufactures and supports PC systems for consumer, business, government and
educational use. In addition, the Company is a supplier of multi-processor
network servers for enterprise, remote office and distributed computing
environments under the NetFRAME brand name. The Company's contract
manufacturing operation, Micron Custom Manufacturing Services, Inc.
("CMS"), specializes in the design, assembly and test of custom complex
printed circuit boards, memory modules and system level products for
original equipment manufacturers. The Company's SpecTek semiconductor
memory products operation processes and markets various grades of memory
products under the SpecTek brand name. The Company is majority owned by
Micron Technology, Inc. ("MTI").
In the fourth quarter of fiscal 1997, the Company acquired all of the
outstanding common stock of NetFRAME Systems Incorporated ("NetFRAME") for
$17.4 million in cash. NetFRAME develops and markets enterprise-class
multiprocessor servers offering continuous availability and scalability
while supporting industry standard software. The acquisition was accounted
for as a purchase, and the purchase price was allocated to the net assets
acquired, including identified intangible assets and in-process research
and development based on their fair values. The Company's results of
operations for 1997 include the results of operations of NetFRAME since the
July 18, 1997 acquisition date.
PERSONAL COMPUTER SYSTEMS
Products
The Company develops, markets, manufactures, sells and supports a wide
range of memory intensive, high performance desktop and notebook PC systems
and network servers under the Micron and NetFRAME brand names. These
systems use Pentium, Pentium Pro and Pentium II microprocessors
manufactured by Intel Corporation ("Intel") and are assembled to order in
various memory and storage configurations as well as various operating
systems and application software. The Company also offers a variety of
other system components with its PC systems and network servers, including
monitors, modems, graphics cards, accelerators and CD-ROM drives. As of
August 28, 1997, the Company's product line included the following:
Millennia. Targeted for business users and PC enthusiasts, the
Millennia line of PC systems has been the Company's best-selling products
in recent periods. The Millennia XRU is powered by the Intel Pentium II
microprocessor for enhanced multimedia and communication performance. The
Millennia MME includes Intel Pentium microprocessors with MMX technology,
USB interfaces and an Iomega Zip drive. The Millennia LXE is the Company's
lower-end Millennia computer and is designed to be a high-performance value
line of PC computing solution.
ClientPro. The ClientPro is the Company's flexible and affordable
network solution for businesses which require computing stability and
performance. The ClientPro line is designed to provide reliable, adaptable
computing without the need for frequent system upgrades. The ClientPro XLU
comes standard with a 233MHz Intel Pentium II microprocessor, 32MB EDO
memory and a 2.1GB EIDE SMART enabled hard drive. The ClientPro MTE, a
price/performance leader for multimedia business computing, includes a
166MHz Intel Pentium microprocessor with MMX technology, 16MB EDO memory
and a 2.1GB EIDE hard drive. The value line ClientPro, the managed client
system with a 133MHz Intel Pentium microprocessor, includes 16MB EDO memory
and a 1.2GB EIDE hard drive.
Powerdigm. The Powerdigm line of PC systems are designed for graphic
intensive applications and offer users a high-end 3D visual computing
workstation with professional 3D graphics and a 32-bit ultra-wide SCSI-3
host adapter. The Powerdigm XSU utilizes the exclusive Micron Samurai PCI
chipset and supports dual 300MHz Intel Pentium II microprocessors.
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TransPort. The TransPort is the Company's notebook line of computer
systems, incorporating much of the same technology used in the Millennia
desktop line. With modular bays, the TransPort offers customers instant
custom configuration changes between hard disk drives, floppy disk drives,
CD-ROM drives and extra batteries. The TransPort XKE, designed for high-
end portable power computing, includes a 166MHz Intel Pentium
microprocessor with MMX technology, 32MB EDO memory, 3.0GB IDE hard drive,
20X CD-ROM with AutoPlay technology and a 13.3" TFT screen. The TransPort
XPE, designed to be a desktop replacement, offers a choice of 133MHz,
150MHz or 166MHz Intel Pentium microprocessors with MMX technology, 32MB
EDO memory, a 1.44GB IDE hard drive and a 12.1" active matrix screen. The
Company's value line of notebook computers, the TransPort VLX, includes a
slim, lightweight, modular design and is geared for the business traveler
or student with a 133MHz Intel Pentium microprocessor, 16MB EDO memory and
a 1.4GB hard drive.
NetFRAME Servers. The Company's NetFRAME NF9000 servers are multi-
processor, high-availability, clustered network servers for local and wide
area networks. NetFRAME servers are a PC-compatible platform that run
Microsoft Windows NT and Novell IntraNetware. Combined with the Company's
value-added software, NetFRAME servers provide a high degree of availability by
reducing downtime resulting from hardware and software failures. NetFRAME
servers are highly scaleable allowing customers to add network connections
as the number of users and applications increase.
The NetFRAME NF9000 servers incorporate the Company's Fault Isolation
Canister technology which enables users to "hot plug" PCI bus and cards
without shutting down the system. In addition, the Company's proprietary
IntraPulse technology, a self-contained distributed monitoring and
diagnostic system with its own embedded processors, software, internal
network and power system, will continue to operate and provide critical
system information to the system administrator regardless of the
operational status of the server. NetFRAME servers are based on Intel's
Pentium Pro microprocessor and utilize industry standard architecture,
employ a unique triple-tier PCI bus design and comply with the I2O
intelligent I/O standard.
The NetFRAME NF9016 server can scale in place to support a four-way SMP
(symmetric multiprocessing) complex, up to sixteen intelligent PCI I/O
cards, 2GB of memory and over a terabyte of on-line storage. In July,
1997, the Company introduced the NetFRAME NF9008 server which features a
quad-processor Pentium Pro platform and eight individually hot-pluggable
PCI card slots.
Vetix Servers. The Company's Vetix line of servers include hot-
swappable, redundant capabilities that protect data and maintain
availability for mission critical environments. The Vetix MXI is a
competitively-priced midrange corporate networking solution, custom
configured with single or dual 200MHz Intel Pentium Pro microprocessors, up
to 1GB ECC EDO memory, and up to ten 4GB Ultra-Wide SCSI-3 hard drives.
The Vetix LXI is a powerful, economical server with expandability and
manageability built in, and is custom configurable with single or dual
200MHz Intel Pentium Pro microprocessors, up to 1GB ECC EDO memory, and up
to six 4GB Ultra-Wide SCSI-3 hard drives. The Vetix EL, the Company's
value line of servers, is custom configurable with single or dual 180MHz or
200MHz Intel Pentium Pro microprocessors, up to 256MB ECC EDO memory and up
to six 4GB Ultra-Wide SCSI-3 hard drives.
Manufacturing and Materials
The Company's PC system manufacturing process is designed to provide
custom-configured PC products to its customers, and includes assembling
components, loading software and testing each system prior to shipment.
The Company's PC systems are generally assembled to order ("ATO") based on
customer specifications. Parts and components required for each customer
order are selected from inventory and are prepared for assembly into a
customized PC system. Inventories of certain components are staged for
system assembly at their point of use. While custom assembly is
advantageous to its customers, the Company is unable to achieve the level
of manufacturing efficiency normally associated with high volume production
of standardized products. A limited number of the Company's most popular
PC system configurations are assembled by a third party, under the indirect
supervision and management of Company personnel, in advance of customer
orders to facilitate shorter customer lead times.
The Company's desktop PC systems are generally assembled in its own
facilities. The Company's notebook PC systems are designed to include
feature sets defined by the Company but are assembled by third-party
suppliers and sent to the Company for final custom configuration and
testing. Following assembly, PC systems are powered up, loaded with
software and subjected to certain diagnostic tests, including evaluation of
each system's functionality and quality. Upon completion of the process,
PC systems undergo a final inspection, after which the systems are packaged
and shipped to customers.
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The Company focuses on providing PC systems that feature components and
software incorporating the latest technological developments in the PC
industry, which components are periodically in short supply and are
available from sole or a limited number of suppliers. As a result, the
Company has experienced in the past, and expects to experience in the
future, shortages in the components used in its PC systems. The
microprocessors used in the Company's PC systems are manufactured
exclusively by Intel and, from time to time, the Company has been unable to
obtain sufficient quantities of certain Intel microprocessors. In
addition, a significant portion of the random access memory ("RAM") used in
the Company's PC systems is supplied by MTI, and the Company generally
relies on MTI to supply the latest memory densities and configurations
available. The Company relies, to a certain extent, upon its suppliers'
abilities to enhance existing products in a timely and cost-effective
manner, to develop new products to meet changing customer needs and to
respond to emerging standards and other technological developments in the
PC industry. The Company's reliance on a limited number of suppliers and
on a strategy of incorporating the latest technological developments into
its PC systems involves several risks, including the possibility of
shortages and/or increases in costs of components and software, and risk of
reduced control over delivery schedules, which could have a material
adverse effect on the Company's business and results of operations.
Marketing and Sales
The Company's direct marketing approach is aimed toward PC users who
evaluate products based on performance, price, reliability, service and
support. The Company's customer base is comprised primarily of
individuals, small to medium-sized businesses and governmental and
educational entities. The Company markets its PC systems primarily by
strategically placing advertisements in personal computer trade
publications, submitting its products for review and evaluation by these
publications and advertising its products in certain newspapers and other
publications and on its home page on the Internet. The Company also
markets its PC systems through direct-mail campaigns and sells a limited
number of PCs through its three factory outlet stores located in Idaho,
Minnesota and Utah. In addition, the Company sells its PC systems through
strategic relationships with third parties having large government
procurement contracts. Pricing and terms for such procurement contracts
are generally subject to renegotiation or termination by third parties and
governmental entities. The Company has a field sales force that focuses
primarily on soliciting and servicing large corporate customers. In
addition, the Company's Micron Advantage program allows large corporate
customers to take advantage of services including custom software
installation and configuration and access to inventories of systems pre-
built to customer specifications to ensure rapid product delivery.
Finally, the Company seeks the evaluation of its business by organizations
such as the Gartner Group in order to provide independent assurance of
product reliability, customer service and support and business continuity
for its corporate customers. In September 1997, the Company received the
Gartner Group's highest rating, consolidated Tier 1/Tier 2, as a supplier
of desktop PCs in the U.S. market.
By focusing on the direct sales channel, the Company can avoid dealer
markups typically experienced in the retail sales channel, limit inventory
carrying costs and maintain closer contact with its target markets.
Consumers seeking high performance systems at competitive prices have
historically referenced computer trade magazines, and more recently have
begun utilizing information available on the Internet, to evaluate systems
and configurations best suited to their particular needs.
Direct sales orders are received primarily via telephone, facsimile, the
Company's home page on the Internet and through its direct sales force.
The Company sales representatives assist customers in determining system
configuration, compatibility and current pricing. Customers generally
order systems configured with varying feature sets differentiated by
microprocessor speed, hard drive capacity, amount of memory, monitor size
and resolution and bundled software, as well as other features. The
Company offers its customers a variety of payment alternatives, including
commercial trade terms, lease financing, cash on delivery, its own private
label credit card and other credit cards. The Company's NetFRAME servers
are sold primarily through the Company's direct sales force and through
value-added resellers ("VARs") world wide. Typically, the Company's sales
force arranges sales with end customers for NetFRAME servers. Actual sales
are made through VARs who provide service, support and integration services
to the customer.
Product Warranties and Technical Support
The Company believes that PC product warranties and technical support
programs are key factors in achieving desired levels of customer
satisfaction. The Company believes its Micron Power warranty to be among
the most comprehensive in the industry. The key elements of the Company's
PC product warranties and technical support programs are as follows:
30-Day Money Back Guarantee. Customers may generally return PC products
purchased from the Company within 30 days after shipment for a full refund
of the purchase price.
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Micron Power Warranty. The Company generally sells each PC and server
system with the Micron Power warranty, which consists of a five-year
limited warranty on the microprocessor and main memory and a three-year
limited warranty on the remaining hardware. The Micron Power warranty
covers repair or replacement for defects in workmanship or materials.
Technical Support. The Company offers its PC customers telephone access
to free technical support services (toll-free in the U.S.). The Company's
technical support and customer service representatives respond to a variety
of inquiries from customers, including questions concerning the Company's
product offerings, customer order status and post-installation hardware and
software issues. Many customer inquiries are resolved over the telephone
without the need to repair or replace system components. When repairs are
necessary, the Company may ship a replacement part and advise customers via
telephone regarding installation, or a customer may elect to ship a system
directly to the Company for repair. Technical support services are also
provided through the Company's home page on the Internet and through an
electronic bulletin board system. These services enable a customer to
access system-specific information and recent software updates for many of
the software programs and drivers included with the Company's systems.
Customers have an option to purchase on-site service from a third-party
service provider.
Certain of the Company's PC systems are sold with system diagnostic and
repair software that has been customized for the Company's products. The
diagnostic software is capable of remote contact with the Company's
database that allows for proper identification and resolution of certain
system problems including set-up parameters, configuration conflicts and
updated BIOS.
Backlog
Levels of unfilled orders for PC systems fluctuate depending upon
component availability, demand for certain products, the timing of large
volume customer orders and the Company's production schedules. Customers
frequently change delivery schedules and orders depending on market
conditions and other reasons. Unfilled orders can be canceled by the
customers any time prior to shipment. As of August 28, 1997, the Company
had unfilled orders for PC systems of approximately $42 million compared to
$63 million as of August 29, 1996. The Company anticipates that
substantially all of the unfilled orders as of August 28, 1997, other than
those subsequently canceled, will be shipped within 30 days. Due to a
customer's ability to cancel or reschedule orders without penalty, industry
seasonality and customer buying patterns, unfilled orders may not be
representative of actual sales for any succeeding period. The Company's
past operating results have been, and its future operating results may be,
subject to seasonality and other fluctuations, on a quarterly and an annual
basis, as a result of a wide variety of factors. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Certain Factors-General-Fluctuations in Operating Results and
Stock Price."
Competition
The PC industry is highly competitive and has been characterized by
intense pricing pressure, generally low gross margin percentages, rapid
technological advances in hardware and software, frequent introduction of
new products, and rapidly declining component costs. Competition in the PC
industry is based primarily upon brand name recognition, performance, price,
reliability and service and support. As a result of PC industry standards,
the Company and its competitors use many of the same components, typically
from the same set of suppliers, which limits the Company's ability to
technologically and functionally differentiate its products.The Company
competes with a number of PC manufacturers which sell their products
primarily through direct channels, including Dell Computer, Inc. and
Gateway 2000, Inc. The Company also competes with PC manufacturers,
such as Apple Computer, Inc., Compaq Computer Corporation,
Hewlett-Packard Company, International Business Machines Corporation and
Toshiba Corporation among others, which have traditionally sold their
products through national and regional distributors, dealers and value
added resellers, retail stores and direct sales forces. In addition,
the Company expects to face increased competition in the U.S. direct
sales market from foreign PC suppliers and from foreign and domestic
suppliers of PC products that decide to implement, or devote additional
resources to, a direct sales strategy. In order to gain an increased
share of the U.S. PC direct sales market, these competitors may effect
a pricing strategy that is more aggressive than the current pricing in
the direct sales market. Many of the Company's PC competitors offer broader
product lines, have substantially greater financial, technical, marketing
and other resources than the Company and may benefit from component
volume purchasing and product and process technology license arrangements
that are more favorable in terms of pricing and availability than the
Company's arrangements. The failure of the Company to compete effectively
in the marketplace would have an adverse effect on the Company's
business and results of operations.
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CONTRACT MANUFACTURING
Products
The assembly of electronic products has become increasingly sophisticated
and complex and requires substantial capital investment. In response, many
original equipment manufacturers ("OEMs") are adopting manufacturing
outsourcing strategies and relying on manufacturing specialists to support
their production needs. OEMs generally use contract manufacturers to gain
access to leading manufacturing expertise, reduce time to market, enhance
their financial flexibility and improve inventory management.
The Company's wholly-owned subsidiary, Micron Custom Manufacturing
Services, Inc. ("CMS"), is a contract manufacturer specializing in the
design, assembly and testing of custom complex printed circuit boards,
memory modules and system level products. In addition to design, assembly
and test functions, the Company offers a broad range of manufacturing
services, including product engineering, materials procurement and
management, quality assurance and just-in-time delivery or end-order
fulfillment. CMS establishes strategic relationships with OEM customers in
technology sectors such as networking, telecommunications and PC systems to
provide manufacturing and other related services for cost-effective
solutions to OEM requirements.
Manufacturing and Materials
The Company uses numerous suppliers for the electronic components and
materials, including RAM components, used in its contract manufacturing
operation. In fiscal 1997, 1996 and 1995, the Company purchased 35%, 27%
and 41%, respectively, of the RAM components used in its contract
manufacturing operation from MTI. Such purchases are made by the Company
from MTI on a purchase order basis at negotiated prices, and no long-term
agreement exists between the Company and MTI for the supply of such
components.
The Company generally procures its materials and components based on
purchase orders received and accepted from its customers while seeking to
minimize its overall level of inventory. However, the Company's contract
manufacturing customers generally require short delivery cycles and quick
turnaround. A substantial portion of contract manufacturing orders are
scheduled for delivery within 90 days. Although the Company obtains long-
term product forecasts from certain of its OEM customers, the Company
generally does not have long-term purchase commitments from its customers
and periodically makes capital expenditures and other commitments and may
purchase materials and components based on anticipated orders. As the
Company's OEM customers react to variations in demand for their products
due to, among other things, product life cycles, competitive conditions or
general economic conditions, and adjust their manufacturing strategies
accordingly, the Company is exposed to the risk of its own non-cancelable
purchase orders with its suppliers and to market risks for raw materials,
work in process and finished goods. From time to time, anticipated orders
from the Company's OEM customers have failed to materialize, or delivery
schedules have been deferred as a result of changes in the customer's
business, adversely affecting the Company's business and results of
operations. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Certain Factors-Contract
Manufacturing-Fluctuations in OEM Orders."
Nearly all of the products manufactured by the Company's contract
manufacturing operations are assembled utilizing surface mount technology
("SMT"), whereby the leads on integrated circuits and other electronic
components are soldered to the surface of printed circuit boards. SMT
assembly requires expensive capital equipment and a high level of process
expertise. The Nampa, Idaho facility has 12 high-speed, fully-automated
SMT lines, including one dedicated quick-turn prototype line. The Durham,
North Carolina and Penang, Malaysia facilities have 5 and 2 high-speed,
fully-automated SMT lines, respectively.
The Company's contract manufacturing operation performs automated
in-circuit and functional testing, and has the capability to perform
environmental stress testing as requested by customers. As the density and
complexity of electronic circuitry increases, the Company anticipates a
need to invest in more sophisticated automated test equipment and
inspection systems that provide both three dimensional and X-ray inspection
of in-process and final products.
The Company also utilizes chip on board ("COB") technology in its
manufacturing processes. COB technology, including multi-chip module
assembly, utilizes unpackaged semiconductor die which are attached to a
printed circuit board and then sealed with epoxy. COB is well-suited for
applications involving small form factor and high lead count products. The
Company also has the capability to utilize ball grid array ("BGA")
packaging technology in its assembly process. This packaging technique
utilizes an array of "solder balls" in a matrix across the bottom of a
component package as opposed to attaching leads around the perimeter of the
die. This emerging technology in packaging is typically utilized for high
pin count integrated circuits.
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Marketing and Sales
The Company markets its contract manufacturing services on a worldwide
basis through a direct sales force that interfaces with independent sales
representatives and OEMs. The Company's contract manufacturing marketing
effort is augmented by MTI's sales force, which also markets the Company's
services to MTI's customer base. The Company's contract manufacturing
marketing efforts also include participating in industry conferences and
publishing articles in trade journals.
Product Warranties
The Company generally offers a 90-day warranty on the workmanship of its
contract manufacturing services. However, warranties are frequently
negotiated with each customer and may therefore be greater than or less
than 90 days. Generally, a considerable amount of time and effort is
invested in the start-up phase of each project. As a result, the Company
has not typically experienced significant warranty claims for its contract
manufacturing services, though there can be no assurance that the Company
will not experience significant future warranty claims with respect to its
contract manufacturing services.
Backlog
The Company's backlog for contract manufacturing services generally
consists of purchase orders believed to be firm that are expected to be
filled within the next three months. Backlog for the Company's contract
manufacturing operations as of August 28, 1997 and August 29, 1996 was
approximately $61 million and $52 million, respectively. Because of
variations in the timing of orders, delivery intervals, material
availability, customer and product mix and delivery schedules, among other
reasons, the Company's contract manufacturing backlog as of any particular
date may not be representative of actual sales for any succeeding period.
Competition
The contract manufacturing industry is highly competitive. The Company
competes against numerous domestic and offshore contract manufacturers,
including a significant number of local and regional companies. In
addition, the Company competes against in-house manufacturing capabilities
of certain of its existing customers as well as with certain large computer
manufacturers which also offer third-party contract manufacturing services.
The Company's contract manufacturing competitors include, among others,
Avex Electronics, Inc., Benchmark Electronics, Inc., Celestica Inc.,
DOVAtron International, Inc., Flextronics International, Group Technologies
Corporation, Jabil Circuits, Inc., Sanmina Corporation, SCI Systems, Inc.
and Solectron Corporation. Many of MEI's competitors have substantially
greater manufacturing, financial and marketing resources than the Company
and have manufacturing operations at multiple domestic and overseas
locations. However, despite its many competitors, in September 1997, the
Company was awarded the Cisco Systems, Inc. 1997 Supplier of the Year
Award.
The Company believes the significant competitive factors in contract
manufacturing include level of service, range of services offered, quality,
price, technology, location and the ability to offer flexible delivery
schedules and deliver finished products on an expeditious and timely basis
in accordance with customers' expectations. The Company may be at a
disadvantage as to certain competitive factors when compared to
manufacturers with greater resources than the Company, substantial offshore
facilities and/or substantially larger domestic facilities. There can be
no assurance that the Company will compete successfully in the future with
regard to these competitive factors. In order to remain competitive, it is
likely that the Company will be required to expand its contract
manufacturing capacity and may be required to establish additional
international operations. There can be no assurance that the Company will
be successful in expanding its contract manufacturing operation on a timely
and efficient basis or otherwise. The failure to do so could have a
material adverse effect on the Company's business and results of
operations. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Certain Factors-Contract
Manufacturing-Competition in the Contract Manufacturing Industry."
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SPECTEK SEMICONDUCTOR MEMORY PRODUCTS
Products
The Company's SpecTek semiconductor memory products operation generally
processes and markets various grades of memory products under the SpecTek
brand name in either component or module form. Memory components are
obtained from certain semiconductor memory manufacturers and are tested and
generally graded to their highest level of functionality. Higher grade
components meeting industry specifications are available for use in memory
modules for computer systems. Certain lower grade components may
be used in nonstandard memory modules or sold to strategic OEM customers
for use in specific applications. By working closely with its customers to
develop new applications utilizing its memory components, the Company is
able to offer reliable low cost memory solutions and increase component and
product compatibility for its OEM customers.
Historically, a substantial majority of the nonstandard DRAM components
used in the Company's SpecTek semiconductor memory products operation has
been obtained from MTI. In fiscal 1997, 1996 and 1995, the SpecTek
semiconductor memory products operation obtained 74%, 61% and 89%,
respectively, of its DRAM components from MTI, and in fiscal 1997, obtained
nearly 100% of its DRAM components from four sources, including MTI.
Pursuant to an agreement with the Company (the "Component Recovery
Agreement"), MTI is required to deliver to the Company all of the
nonstandard DRAM components produced at MTI's semiconductor memory
manufacturing operations. There can be no assurance that DRAM components
obtained from MTI or purchases of components from any alternative sources
will continue at quantities sufficient to sustain the Company's SpecTek
semiconductor memory products operation at its existing or historic levels.
The Company intends to continue to pursue additional third-party sources of
DRAM components; however, there can be no assurance that significant
additional supplies will be obtained. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations-Certain
Factors-SpecTek Semiconductor Memory Products Operation-Dependence on
Component Recovery Agreement with MTI."
Manufacturing and Materials
The Company's SpecTek semiconductor memory products operation requires a
significant investment in sophisticated testing hardware and software and
expertise in semiconductor memory products and manufacturing processes.
The semiconductor memory manufacturing process involves a highly complex
series of steps performed to create specific electronic features on silicon
wafers. Recovery of DRAM components within the semiconductor manufacturing
process is generally performed at two stages: the wafer probe stage and the
test stage. The first test of electrical functionality in the
semiconductor memory manufacturing process is performed at the wafer probe
stage, where die not meeting certain functionality or performance
characteristics are segregated while those die which potentially meet full
performance specifications continue on in the manufacturing process to
assembly and test. Although a majority of the Company's DRAM components
are identified by semiconductor memory manufacturers during the test
function, the Company maintains personnel in MTI's semiconductor memory
manufacturing facility to identify nonstandard die at the wafer probe stage
which may qualify for recovery. Once nonstandard die are identified as
recoverable at wafer probe, the die are assembled and delivered to the
Company for testing and grading.
Upon delivery to the Company, DRAM components are grouped according to
device and package type and staged for a specific sequence of electrical,
environmental and mechanical tests identified for that group. The
Company's test and product engineers develop the complex testing algorithms
and procedures necessary to recover DRAM components on a cost-effective
basis. The Company's engineers also develop and implement proprietary
software and hardware modifications to automated test and handling
equipment. Test and product engineers develop burn-in testing procedures
in order to increase assurance of reliability for devices being processed.
Throughout the testing process, DRAM components are graded in an effort to
segregate less functional components and to minimize additional testing
with respect to such components. The Company strives to maintain close
working relationships between its engineering staff and its customers, and
modifies its test procedures and test specifications to ensure generally
that DRAM components properly address customer performance requirements.
Once all electrical and environmental testing is accomplished, the devices
are subjected to automated and visual inspection to verify that the devices
meet mechanical and cosmetic specifications relating to package, mark and
device lead integrity.
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Many semiconductor memory manufacturers are reluctant to sell nonstandard
memory components because such components could compete with their full
specification components for similar applications. In addition, some
manufacturers are concerned that subsequent testing performed by a
component recovery operation could reveal proprietary data regarding
manufacturing yields and processes. As a result, there can be no assurance
that the Company will be able to obtain DRAM components from semiconductor
manufacturers in quantities sufficient to meet demand for the Company's
products. Any reduction in the availability or functionality of memory
components from the Company's suppliers could have a material adverse
effect on the Company's business and results of operations. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Certain Factors-SpecTek Semiconductor Memory Products
Operation-Dependence on Component Recovery Agreement with MTI."
Marketing and Sales
The Company's SpecTek memory products are marketed primarily to domestic
customers through the Company's direct sales force and to international
customers through manufacturing representatives, distributors and value-
added resellers. The market for semiconductor memory historically has been
volatile and has experienced significant downturns characterized by changes
in the relationship between worldwide demand and production capacity and
declines in average selling prices.
Pricing for the Company's SpecTek memory products fluctuates, to a large
degree, based on industry-wide pricing for semiconductor memory products.
During fiscal 1996 and fiscal 1997, the Company experienced significant
declines in the average selling prices of its DRAM products as industry-
wide average selling prices for full specification semiconductor memory
products experienced a sharp decline. The Company believes such decline
was due primarily to changes in the balance of supply and demand for these
commodity products, and the Company is unable to predict the impact of
semiconductor memory product market dynamics in future periods. Further
declines in industry-wide pricing for semiconductor memory products would
likely result in declines in average selling prices of the Company's
SpecTek memory products, which could have a material adverse effect on the
Company's business and results of operations. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Certain Factors-SpecTek Semiconductor Memory Products
Operation-Pricing of DRAM Products."
Product Warranties
The Company typically offers a 90-day limited warranty on its SpecTek
memory products. Longer warranties are generally offered only in special
circumstances. Although the Company's historical warranty claims with
respect to SpecTek memory products have not been material, there can be no
assurance that the Company will not experience significant future warranty
claims with respect to these products.
Backlog
The Company's SpecTek memory products customers generally do not order
with long lead times, and orders are frequently placed with a provision to
renegotiate price at or near the time of shipment. Therefore, the Company
does not believe any backlog of orders for its DRAM products is firm or a
reliable indication of actual sales for any succeeding period.
Competition
The principal competitive factors in the Company's SpecTek semiconductor
memory products operation are access to sources of DRAM components, testing
capabilities, DRAM component prices and applications engineering. The
price of nonstandard DRAM components is directly influenced by the price of
full specification DRAM components, and as higher density memory devices
become more prevalent and error correction technologies and solutions
improve, semiconductor memory manufacturers have sought ways to recover a
portion of their manufacturing costs through recovery of nonstandard DRAM
components. Certain manufacturers have established internal capabilities
and independent companies are pursuing opportunities to recover, test and
market nonstandard DRAM components. As more semiconductor memory
manufacturers recover nonstandard DRAM components, the pressure on the
remaining manufacturers may increase to develop similar programs, whether
internal or external, in order to generate revenue from their nonstandard
DRAM components. In addition to supplying nonstandard DRAM components in
the market, in-house component recovery operations eliminate a potential
source of supply to the Company. Upon termination or expiration of the
Component Recovery Agreement, MTI could develop its own component recovery
operation. The loss of a sourcing arrangement, particularly the Company's
arrangement with MTI, could have a material adverse effect on the Company's
business and results of operations. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations-Certain
Factors-SpecTek Semiconductor Memory Products Operation-Dependence on
Component Recovery Agreement with MTI."
8
<PAGE>
EXPORT SALES
The Company's export sales totaled $143 million, $181 million and $77
million in fiscal 1997, 1996 and 1995, respectively. Export sales are
denominated primarily in United States dollars.
INTELLECTUAL PROPERTY
As of August 28, 1997, the Company owned approximately 28 U.S. patents
and 10 foreign patents. In addition, the Company has 157 patent
applications pending. The Company is the holder of a number of trademarks
and registered trademarks and intends to continue to seek protections on
its significant patentable technology and trademarks. There can be no
assurance that patents will be issued for pending applications.
It is common in the electronics industry for patent, trademark and other
intellectual property rights claims to be asserted against companies,
including component suppliers and PC manufacturers. Periodically, the
Company is made aware that technology used by the Company may infringe on
intellectual property rights held by others. The Company evaluates all
such claims and, if necessary and appropriate, seeks to obtain licenses for
the continued use of such technology. The Company has accrued a liability
and charged operations for the estimated costs of settlement or
adjudication of asserted and unasserted claims for alleged infringement
prior to the balance sheet date. The Company would be placed at a
competitive disadvantage if it were unable to obtain such licenses upon
terms at least as favorable as those experienced by the Company's
competitors. The Company has entered into several intellectual property
agreements, which generally require one-time or periodic royalty payments
and are subject to expiration at various times. The Company is unable to
predict whether any of these license agreements can be obtained or renewed
on terms acceptable to the Company. If the Company or its suppliers are
unable to obtain licenses necessary to use intellectual property
in their products or processes, the Company may be forced to market
products without certain technological features or software, discontinue
sales of certain of its products and/or defend legal actions taken against
it relating to allegedly protected technology. The inability of the
Company to obtain licenses necessary to use certain technology, or an
inability to obtain such licenses on competitive terms, or any litigation
determining that the Company, in the manufacture or sale of its products,
has infringed on the intellectual property rights held by others, could
have a material adverse effect on the Company's business and results of
operations.
The Company, as a majority-owned subsidiary of MTI, is licensed under
certain license agreements between MTI and third parties. The Company
makes payments to MTI relating to certain of such agreements. The
Company's rights under such agreements may terminate in the event that the
Company is no longer a majority-owned subsidiary of MTI. In the event of
any such termination, the inability of the Company independently to obtain
such rights on similar terms could have a material adverse effect on the
Company's business and results of operations.
RESEARCH AND DEVELOPMENT
The Company maintains a research and development operation which had
approximately 95 employees as of August 28, 1997. The Company's PC
research and development group focuses its efforts on PC systems,
including: core logic chip sets, motherboards; embedded PCs, such as those
used in point of sale terminals and systems; PC BIOS development; and other
PC-related products. This group assists the Company's PC operations and
its suppliers to maximize the performance of new technologies in the PC
industry, and also performs contract design and engineering services for
third parties. In addition to the PC research and development group, the
Company has a server research and development group that focuses on the
development of proprietary enabling technologies to be incorporated into
the Company's server products. Such technologies include client/server
database and communication software and a tripple-tier PCI bus architecture
allowing hot pluggable PCI card slots. There can be no assurance that the
Company will continue to develop or have access to new technology, be
successful in incorporating such new technology in its products or deliver
commercial quantities of new products or features in a timely and cost-
effective manner.
The Company licenses certain software programs from third party
developers through a non-exclusive worldwide license. Such software is
incorporated into software programs developed by the Company for use in its
server products.
9
<PAGE>
Research and development expenses for 1997, 1996 and 1995 were
approximately $9,621,000, $3,050,000 and $1,893,000, respectively.
Research and development expense in 1997 included a one-time charge of $3.9
million for the write-off of purchased in-process research and development
associated with the Company's acquisition in the fourth quarter of fiscal
1997 of NetFRAME. See footnotes to financial statements.
EMPLOYEES
As of August 28, 1997, the Company employed approximately 3,000 people in
its PC operation, 1,300 people in its contract manufacturing operation and
320 people in its SpecTek semiconductor memory products operation, nearly
all of whom are located in the United States, and none of whom are
represented by a labor organization with respect to their employment by the
Company. The Company has never had an organized work stoppage and
considers its employee relations to be satisfactory.
ENVIRONMENTAL REGULATIONS
Some risks of costs and liabilities related to environmental matters are
inherent in the Company's business, as with many similar businesses, and
the Company's operations are subject to certain federal, state and local
environmental regulatory requirements relating to environmental and waste
management. There can be no assurance that material costs and liabilities
will not be incurred in maintaining or establishing compliance with current
or future requirements. The Company believes that its business is operated
in compliance with applicable environmental regulations, the violation of
which could have a material adverse effect on the Company. In the event of
violation, these regulations provide for civil and criminal fines,
injunctions and other sanctions and, in certain instances, allow third
parties to sue to enforce compliance. In addition, new, modified or more
stringent requirements or enforcement policies could be adopted that may
adversely affect the Company's business and results of operations. The
Company periodically generates and handles limited amounts of materials
that are considered hazardous waste under applicable law. The Company
contracts for the off-site disposal of these materials. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Certain Factors-Contract Manufacturing-Government Regulation."
10
<PAGE>
OFFICERS AND DIRECTORS OF THE REGISTRANT
The officers and directors of the Company and their ages as of September
29, 1997, are as follows:
Name Age Position
- -------------------- --- -----------------------------------------------
Joseph M. Daltoso 35 Chairman of the Board of Directors and Chief
Executive Officer
Gregory D. Stevenson 36 President and Chief Operating Officer, Director
T. Erik Oaas 44 Executive Vice President, Finance and Chief
Financial Officer, Director
Robert F. Subia 35 President, Chief Executive Officer and
Chairman of the Board of Directors of Micron
Custom Manufacturing Services, Inc. (a wholly-
owned subsidiary of the Company), Director
Michael S. Adkins 32 Vice President, SpecTek
Steven P. Arnold 42 Vice President, Legal and General Counsel
George A. Haneke 49 Senior Vice President, International Markets
Nelson L. Hanks 44 Senior Vice President, Purchasing
Dean A. Klein 40 Executive Vice President, Product Development and
Chief Technical Officer
Steven H. Laney 37 Vice President, Corporate Communications
JoAnne S. Pfeifer 38 Vice President, Administration and Corporate
Secretary
Gene P. Thomas, Jr. 36 Vice President, North America Sales
Steven R. Appleton 37 Director
Jerry M. Hess 59 Director
Robert A. Lothrop 71 Director
John R. Simplot 88 Director
Joseph M. Daltoso served as Chairman of the Board and President of former
Micron Custom Manufacturing Services, Inc., then a wholly-owned subsidiary
of MTI ("MCMS") from July 1992 until the effective time of the MEI Merger.
In August 1994, he was also named Chief Executive Officer of MCMS. At the
effective time of the MEI Merger, Mr. Daltoso was appointed Executive Vice
President, Operations and a director of the Company. He was named Chairman
of the Board, President and Chief Executive Officer of the Company on April
17, 1995. On July 28, 1997, Mr. Daltoso resigned as President of the
Company.
Gregory D. Stevenson served as Vice President, Component Recovery of MCMS
from July 1992 to August 1993. In September 1992, he was also appointed a
director of MCMS. In August 1993, Mr. Stevenson was appointed Vice
President, Operations of MCMS. In April 1995, Mr. Stevenson was
appointed Vice President, Nampa Operations and served in that
position until July 1995 when he was appointed Executive Vice
President, Operations and a director of the Company. In January 1997, Mr.
Stevenson was appointed Chief Operating Officer of the Company, and in July
1997, he was also appointed President of the Company.
T. Erik Oaas served as Vice President, Finance and Treasurer, and a
director of MCMS from July 1992 until the effective time of the MEI Merger,
at which time he was appointed Vice President, Finance and Chief Financial
Officer, and a director of the Company. In January 1997, Mr. Oaas was
appointed Executive Vice President, Finance of the Company.
Robert F. Subia served as a Regional Sales Manager for MTI from 1989
until February 1993. In February 1993, Mr. Subia joined MCMS as Director
of Sales and held this position until August 1994, when he was appointed
Vice President, Sales. On April 17, 1995, Mr. Subia was appointed
Chairman, President and Chief Executive Officer of Micron Custom
Manufacturing Services, Inc., a wholly-owned subsidiary of the Company
("CMS"). Mr. Subia was appointed a director of the Company in October
1995.
Michael S. Adkins served as Manager of the Systems Integration Group of
MTI from April 1990 to November 1993 when he was appointed President of
Systems Integration Group, Inc., then a wholly owned subsidiary of MTI. He
continued in that position until November 1994 when he was appointed
General Manager, System Integration, an operating division of MTI. Mr.
Adkins joined the Company in July 1996 as Executive Director, SpecTek
Operations and continued in that position until January 1997, when he was
appointed Vice President, SpecTek.
Steven P. Arnold served as an associate with Arnold, White and
Durkee from January 1988 to April 1995, when he joined MTI as Associate
General Counsel. He continued in that position until June 1996 when he
joined the Company as Chief Counsel, Intellectual Property. In January
1997, Mr. Arnold was appointed Vice President, Legal and General Counsel.
11
<PAGE>
George A. Haneke joined MTI in May 1988 as a financial planner. Mr.
Haneke joined Micron Computer, Inc. in September 1993 and was appointed
Vice President, Finance, Treasurer and Chief Financial Officer in December
1993. He served in that position until the effective time of the MEI
Merger. In April 1995, Mr. Haneke was appointed Vice President and Chief
Information Officer of the Company. In January 1997, Mr. Haneke was
appointed Senior Vice President, International Operations of the Company
and in September 1997, Mr. Haneke was appointed Senior Vice President,
International Markets.
Nelson L. Hanks served as Chairman, President and Chief Executive Officer
of Micron Europe Limited, a wholly-owned subsidiary of MTI, from April 1991
to August 1993. From August 1993 until the effective time of the MEI
Merger, Mr. Hanks served as Special Projects Manager for MTI. In April 1995,
Mr. Hanks was appointed Vice President, Purchasing. In January 1997, Mr.
Hanks was appointed Senior Vice President, Purchasing of the Company.
Dean A. Klein was a co-founder of and also served as President of PC
Tech, Inc., a former wholly-owned subsidiary of the Company, from its
inception in 1984. In September, 1997, PC Tech, Inc. was merged with and
into the Company. After the acquisition of PC Tech, Inc. by the Company in
February 1992, Mr. Klein served as Vice President, Research and Development
of the Company and President of PC Tech, Inc. In February 1996, Mr. Klein
was named Vice President and Chief Technical Officer of the Company. In
January 1997, Mr. Klein was appointed Senior Vice President, Chief
Technical Officer of the Company and in September 1997, he was appointed
Executive Vice President, Product Development and Chief Technical Officer.
Steven H. Laney served as Marketing Manager for MCMS from July 1992 until
May 1993 when he was appointed Director of Marketing for MCMS. He served
in this position until the effective time of the MEI Merger when he was
named Director of Investor Relations of the Company. In October 1996, Mr.
Laney was named Vice President, Corporate Communications of the Company.
JoAnne S. Pfeifer served as Accounting Manager of MTI from June 1989 to
August 1992, when she was named Administration Projects Coordinator for
MCMS. She continued in that position until January 1995 when she was named
Administrative Manager for MCMS and continued in that position for the
Company until March 1996 when she was named Director of Administration for
the Company. In July 1996 Ms. Pfeifer was appointed Corporate Secretary
and in January 1997, she was appointed Vice President, Administration for
the Company.
Gene P. Thomas, Jr. served in sales managerial roles with Polaroid
Corporation and CompuAdd Computer Corp. and was appointed Director of
Marketing for CompuAdd in 1993. Mr. Thomas joined Micron Computer, Inc. as
Director of Sales in March 1993 and was appointed Vice President, Sales and
Marketing in December 1993. In April 1995, Mr. Thomas was appointed Vice
President, Micron Sales and Marketing, and in July 1995, was named
Vice President, Direct Sales. In February 1996, he was appointed Vice
President, Marketing, and served in that capacity until January 1997,
when he was appointed Vice President, Business Development of
the Company. In September 1997, Mr. Thomas was appointed Vice President,
North America Sales.
Steven R. Appleton joined MTI in February 1983 and has served in various
capacities with MTI and its subsidiaries, including overseeing MTI's
semiconductor operations as President and Chief Executive Officer of Micron
Semiconductor, Inc. (then a wholly-owned subsidiary of MTI) from July 1992
to November 1994. Except for a nine day period in January 1996, since May
1994 Mr. Appleton has served as a member of MTI's Board of Directors and
since September 1994 Mr. Appleton has served as the Chief Executive
Officer, President and Chairman of the Board of Directors of MTI. At the
effective time of the MEI Merger, Mr. Appleton was named Chairman of the
Board of Directors, President and Chief Executive Officer of the Company.
He resigned from these positions on April 17, 1995, but continued as a
director of the Company until January 1996, when he resigned from that
position. Mr. Appleton was reappointed a director of the Company in
February 1996.
Jerry M. Hess has served as Chairman and Chief Executive Officer of J.M.
Hess Construction Company, Inc. since 1959. Mr. Hess has served on MTI's
Board of Directors since 1994. At the effective time of the MEI Merger,
Mr. Hess was appointed a director of the Company.
Robert A. Lothrop served as the Senior Vice President of the J.R. Simplot
Company, a food processing, fertilizer and agricultural chemicals
manufacturing company, from January 1986 until his retirement in January
1991. Mr. Lothrop was elected to MTI's Board of Directors in 1986. In
1992, he was elected to the Board of Directors of Micron Semiconductor,
Inc. (then a wholly-owned subsidiary of MTI) and resigned as a director of
MTI. Mr. Lothrop was re-elected to MTI's Board of Directors in 1994. At
the effective time of the MEI Merger, Mr. Lothrop was appointed a director
of the Company.
12
<PAGE>
John R. Simplot founded and served as Chairman of the Board of Directors
of the J.R. Simplot Company prior to his retirement in April 1994. Mr.
Simplot currently serves as Chairman Emeritus of the J.R. Simplot Company.
Mr. Simplot has served on MTI's Board of Directors since 1980. At the
effective time of the MEI Merger, Mr. Simplot was appointed a director of
the Company.
13
<PAGE>
Item 2. Properties
The Company's corporate headquarters, PC manufacturing operation, a
majority of its contract manufacturing operation and SpecTek semiconductor
memory products operation are based in a number of Company-owned facilities
aggregating approximately 577,000 square feet located in Nampa, Idaho.
Approximately 123,000 square feet of the Nampa facilities are dedicated to
PC manufacturing, approximately 146,000 square feet are dedicated to
contract manufacturing and approximately 40,000 square feet are dedicated
to the Company's SpecTek semiconductor memory products operation. The
balance of the Nampa facilities is dedicated to sales, technical support,
customer service, administrative functions and warehouse space.
The Company leases a 60,000 square foot facility in Minneapolis,
Minnesota, dedicated primarily to PC sales, technical support and
administrative functions and a 75,000 square foot facility in Meridian,
Idaho dedicated to a PC call center. The Company leases an approximately
50,000 square foot warehouse facility in Nampa, Idaho. In addition, the
Company leases an 85,000 square foot facility in Milpitas, California,
dedicated to its enterprise server products and research and development
efforts associated therewith, with a total of approximately 29,000 square
feet dedicated to manufacturing.
The Company also occupies an approximately 61,000 square foot leased
facility in Durham, North Carolina, with approximately 43,000 square feet
dedicated to contract manufacturing. In addition, the Company's contract
manufacturing operation occupies an 18,000 square foot leased facility in
Penang, Malaysia.
Other leased facilities include three factory outlets in Boise, Idaho,
the Salt Lake City, Utah area and the Minneapolis/St. Paul, Minnesota area,
a sales and technical support call center and warehouse located in Japan
and various sales offices located primarily in the United States.
The Company has a capacity enhancement program for its PC operation
including the expansion of its PC operation in Nampa, Idaho. Construction
is underway on a new facility expected to be approximately 325,000 square
feet and to cost approximately $35 million. The facility is expected to be
in production in the second calendar quarter of 1998.
Item 3. Legal Proceedings
The Company is a party to various legal actions arising out of the normal
course of business, none of which is expected to have a material adverse
effect on the Company's financial position or results of operations. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations-Certain Factors-Intellectual Property Matters."
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
14
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Micron Electronic, Inc.'s Common Stock trades on the Nasdaq Stock Market
under the symbol "MUEI." The following table shows for the periods
indicated the high and low sales prices for the common stock of the
Company, as reported by the Nasdaq Stock Market:
High Low
------- -------
1997:
4th quarter $21.000 $14.875
3rd quarter 25.375 15.375
2nd quarter 25.000 17.500
1st quarter 23.500 12.625
1996:
4th quarter $16.500 $ 8.750
3rd quarter 17.125 9.000
2nd quarter 15.250 9.250
1st quarter 29.875 13.000
HOLDERS OF RECORD
As of August 28, 1997, there were approximately 2,253 shareholders of
record of the Company's Common Stock.
DIVIDENDS
The Company has never declared or paid any cash dividend nor has any
intent to do so in the near future. Payment of dividends is currently
limited by the terms of the Company's credit agreement, dated June 27,
1997.
15
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- -------- -------- --------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $1,955,783 $1,764,920 $999,999 $412,938 $162,180
Operating income 136,458 75,998 106,493 59,851 21,622
Net income 87,262 44,582 65,086 36,898 13,623
Earnings per share 0.92 0.48 0.74 0.45 0.17
Current assets 563,148 399,116 308,755 120,880 57,439
Working capital 203,884 121,766 106,452 45,906 24,123
Total assets 758,346 529,933 382,716 151,739 70,289
Total debt 38,641 21,297 6,823 7,845 9,327
Shareholders' equity 365,571 228,460 173,663 68,169 26,874
</TABLE>
On April 7, 1995, Micron Computer, Inc. ("MCI") and Micron Custom
Manufacturing Services, Inc. ("MCMS"), then subsidiaries of MTI, merged
with and into ZEOS International, Ltd. ("ZEOS"), and the surviving
corporation's name was changed to Micron Electronics, Inc. (the "MEI
Merger"). A new basis of accounting, based on fair values, was established
for the assets and liabilities of ZEOS. Subsequent to the MEI Merger, the
Company's financial statements reflect the consolidated results of
operations, financial position and cash flows of the Company based on the
new basis of accounting for the assets and liabilities of ZEOS and the
historical cost bases for the assets and liabilities of MCI and MCMS.
Prior to the MEI Merger, the financial statements of the Company include
only the combined results of operations, financial position and cash flows
of MCI and MCMS.
In February 1996, the Company adopted a plan to discontinue the
manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operations in Minneapolis, Minnesota. As a result, the
Company recorded restructuring charge of $29.2 million ($22.4 million, or
$0.24 per share, net of taxes) in 1996. The restructuring charge included
$14.5 million related to the disposition of inventory of discontinued
product lines, the write-off of $11.4 million of goodwill which resulted
from the MEI Merger, $1.1 million for other asset write-downs, $0.6 million
related to personnel costs and $1.6 million related to other exit costs.
In the fourth quarter of fiscal 1997, the Company acquired NetFRAME, for
$17.4 million in cash. The acquisition adversely affected the Company's
net income in fiscal 1997 by $6.4 million, or $0.07 per share, which
includes the operating losses of NetFRAME since the July 18, 1997
acquisition date and a one-time charge of $3.9 million, or $0.04 per share,
for the write-off of purchased in-process research and development.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations-Certain Factors."
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains trend information and other forward-
looking statements that involve a number of risks and uncertainties. The
Company's actual results could differ materially from the Company's
historical results of operations and those discussed in the forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those identified in "Certain Factors."
All yearly references are to the Company's fiscal years ended August 28,
1997, August 29, 1996 and August 31, 1995, unless otherwise indicated. All
tabular dollar amounts are stated in thousands. Certain reclassifications
have been made in the following discussion and analysis to present results
of operations on a consistent basis.
OVERVIEW
Micron Electronics, Inc. and its subsidiaries manufacture electronic
products and provide services for a wide range of computer and digital
applications. The Company is a leading provider of PC systems through the
direct sales channel in the United States and develops, markets,
manufactures and supports PC systems for consumer, business, government and
educational use. In addition, the Company is a supplier of multi-processor
network servers for enterprise, remote office and distributed computing
environments under the NetFRAME brand name. The Company's contract
manufacturing operation, Micron Custom Manufacturing Services, Inc.
("CMS"), specializes in the design, assembly and test of custom complex
printed circuit boards, memory modules and system level products for
original equipment manufacturers. The Company's SpecTek semiconductor memory
products operation processes and markets various grades of memory products
under the SpecTek brand name.
The Company's past operating results have been, and its future
operating results may be, subject to seasonality and other fluctuations, on
a quarterly and an annual basis, as a result of a wide variety of factors,
including, but not limited to, industry competition, fluctuating market
pricing for PCs and semiconductor memory products, fluctuating component
costs, changes in product mix, inventory obsolescence, the timing of new
product introductions by the Company and its competitors, availability and
pricing of the memory components used by the Company's SpecTek
semiconductor memory products operation, the timing of orders from and
shipments to OEM customers, seasonal government purchasing cycles,
manufacturing and production constraints, the effects of product reviews
and industry awards, seasonal cycles common in the PC industry, critical
component availability, and the failure by the Company to succeed in its
strategies with respect to NetFRAME Systems Incorporated ("NetFRAME"). As
a result, the operating results for any particular period are not necessarily
indicative of the results that may occur in any future period.
RESULTS OF OPERATIONS
Net income for 1997 was $87.3 million, or $0.92 per share, on net sales
of $1,955.8 million, compared to net income for 1996 of $44.6 million, or
$0.48 per share, on net sales of $1,764.9 million. Net sales in 1997 were
higher than 1996 primarily as a result of higher sales of PC systems,
partially offset by lower revenues from the Company's contract
manufacturing operation. The Company's overall gross margin percentage
increased from 14.8% in 1996 to 17.3% in 1997 primarily as a result of a
increased sales of PC systems combined with a higher gross margin
percentage realized on such sales.
In the fourth quarter of fiscal 1997, the Company acquired NetFRAME for
$17.4 million in cash. The acquisition adversely affected the Company's net
income in the fourth quarter of fiscal 1997 by $6.4 million, or $0.07 per
share, which includes the operating losses of NetFRAME since the July 18,
1997 acquisition date and a one-time charge of $3.9 million, or $0.04 per
share, for the write-off of purchased in-process research and development.
In February 1996, the Company adopted a plan to discontinue the
manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operations in Minneapolis, Minnesota. As a result, the
Company recorded restructuring charge of $29.2 million ($22.4 million, or
$0.24 per share, net of taxes) in 1996. The restructuring charge included
$14.5 million related to the disposition of inventory of discontinued
product lines, the write-off of $11.4 million of goodwill which resulted
from the MEI Merger, $1.1 million for other asset write-downs, $0.6 million
related to personnel costs and $1.6 million related to other exit costs.
17
<PAGE>
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." SFAS No. 128 supersedes and simplifies the standards
for computing earnings per share previously found in Accounting Principles
Board Opinion No. 15, "Earnings Per Share," and interpretations thereof,
and makes them comparable to international earnings per share standards.
This statement is expected to be adopted by the Company effective in its
second quarter of fiscal 1998. The Company does not expect earnings per
share as calculated under SFAS No. 128 to be materially different than
calculated under the Company's existing methodology.
Net Sales
The following table summarizes the Company's net sales by product line:
<TABLE>
<cpation>
1997 1996 1995
------------------ ------------------ ----------------
% of % of % of
Amount Sales Amount Sales Amount Sales
---------- ------ ---------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
PC systems $1,528,304 78.2% $1,252,492 71.0% $566,352 56.7%
Contract manufacturing 289,968 14.8% 373,622 21.2% 188,207 18.8%
SpecTek memory products 137,511 7.0% 138,806 7.8% 245,440 24.5%
---------- ------ ---------- ------ -------- ------
Total net sales $1,955,783 100.0% $1,764,920 100.0% $999,999 100.0%
========== ====== ========== ====== ======== ======
</TABLE>
Net sales for 1997 were 11% higher than in 1996, primarily due to an
increase in sales of PC systems, partially offset by lower revenues from
the Company's contract manufacturing operation. Net sales for 1996 were
76% higher than in 1995, primarily due to a significant increase in sales
of PC systems and higher revenues from the Company's contract manufacturing
operation, partially offset by lower sales from the Company's SpecTek
semiconductor memory products operation.
Personal Computer Systems. Net sales of PC systems were 22% higher in
1997 compared to 1996 primarily due to a 37% increase in unit sales
partially offset by lower average selling prices for the Company's PC
systems. The higher level of unit sales was largely attributable to
significantly higher government sales and unit sales to large corporate
entities. Although the Company's overall unit sales grew by 37%, the
growth in unit sales to consumers and to small office/home office ("SOHO")
customers more closely reflected the overall PC industry growth. In
addition, international sales were essentially flat from 1996 to 1997. The
Company's sales of PC systems also benefited from increased name
recognition and market acceptance of the Company's PC systems partially
resulting from the receipt by the Company of awards from trade publications
recognizing the price and performance characteristics of Micron brand PC
systems and the Company's service and support functions. There can be no
assurance that the Company's name recognition and market acceptance of its
PC products will not decline in the future, which could have a material
adverse effect on the Company's business and results of operations. See
"Certain Factors-Personal Computer Systems-Competition in the PC Industry."
Sales to federal, state and local governmental entities increased as a
percentage of total net sales of PC systems in 1997 to 23%, compared to 16%
in 1996 and 8% in 1995. Sales in the fourth quarter of fiscal 1997
benefited by strong demand from the Company's governmental customers as
well as sales pursuant to large government contacts. As a result,
government sales represented 29% of total PC sales in the fourth quarter of
fiscal 1997. The level of the Company's governmental sales is partially
dependent on the buying practices of governmental entities and the
Company's success in being selected to participate in government contracts
in the future, of which there can be no assurance. A significant decline
in government sales of PC systems, including those sold pursuant to
government contracts, could have a material adverse effect on the Company's
business and results of operations.
Sales to large and medium-sized business were 83% higher in 1997 compared
to 1996 and represented 13% of total PC sales in 1997. The growth in
corporate sales was largely attributable to a more focused effort on behalf
of the Company's sales force directed toward corporate customers.
International sales of PC systems represented 5% of total PC system sales
in 1997, compared to 7% in 1996 and 6% 1995. The Company's international
sales were adversely affected by a decrease in sales of its PC systems
through distributors in Japan as the Company initiated direct sales of PC
systems through its Japanese call center. Sales from the Company's
Japanese call center in 1997 represented 1% of total PC system sales.
18
<PAGE>
Unit sales of notebook systems represented 9% and 5% of total PC system
sales during 1997 and 1996, respectively, compared to 1% in 1995. Demand
for the Company's notebook systems increased in response the Company's
broadening of its notebook product offering. Sales of PC systems
incorporating Intel Pentium Pro microprocessors and Pentium microprocessors
with MMX technology represented 12% and 20%, respectively, of total PC
units sold in fiscal 1997, compared to 6% and 0%, respectively, in fiscal
1996. Sales of the Company's PC systems incorporating Intel Pentium II
microprocessors, which were introduced in the fourth quarter of fiscal
1997, represented 10% of total PC units sold in the fourth quarter of
fiscal 1997. See "Certain Factors-Personal Computer Systems-Dependence on
Key Sources of Supply."
Average selling prices for the Company's PC systems were lower in 1997
compared to 1996, primarily as a result of the introduction of a number of
lower priced desktop and notebook models during the year combined with
general price reductions for PC systems and to increased government sales
of PC systems, which generally have lower average selling prices than the
balance of the Company's PC systems. In addition, average selling prices
in 1997 were adversely affected by a decline in the value of RAM products
incorporated in the Company's PC systems, partially offset by an increase
in average RAM content per system to approximately 38 megabytes.
In the second quarter of fiscal 1996, the Company decided to discontinue
the manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operations in Minneapolis, Minnesota. As a percentage of
total PC system sales, sales of ZEOS brand PC systems represented 7% in
1996 compared to 18% in 1995.
Net sales of PC systems were significantly higher in 1996 compared to
1995 primarily due to significantly higher unit sales of PC systems and, to
a lesser extent, higher average selling prices for such PC systems. Unit
sales of PC systems in 1996 were 111% higher compared to 1995 principally
due to an increase in sales through the direct channel resulting from
increased name recognition and market acceptance of the Company's desktop
PC systems and continued growth in the direct sales channel. Increased
sales to governmental entities and increased sales of notebook systems also
contributed to higher overall unit sales. Average selling prices for the
Company's PC systems increased in 1996 compared to 1995 primarily as a
result of the completion of the transition in product mix toward relatively
higher priced Pentium and Pentium Pro microprocessor based systems and
customer preferences for more richly configured PC systems with components
featuring the latest developments in PC-related technology. In addition,
during 1996, the Company experienced higher unit sales of notebook
products, which generally have significantly higher average selling prices
compared to the Company's overall average selling price for PC systems.
Contract Manufacturing. Revenues from the Company's contract
manufacturing operation were 22% lower in 1997 than in 1996, primarily due
to the effects of a sharp industry-wide decline in pricing for
semiconductor memory products and, to a lesser extent, a shift in product
mix, which were partially offset by a higher level of demand for more
complex products.
Revenues from the Company's contract manufacturing operation were 99%
higher in 1996 than in 1995; however, quarterly revenues declined
sequentially in 1996 from the second quarter through the fourth quarter.
The increase in 1996 revenue compared to 1995 was primarily due to the
utilization of increased manufacturing capacity and a shift in mix of
contract assembly services. Increased capacity was obtained through the
acquisition and utilization of additional manufacturing equipment and the
upgrade of existing manufacturing equipment. Contract manufacturing
revenues in the last three quarters of fiscal 1996 were adversely impacted
by the industry-wide decline in pricing for semiconductor memory products.
The Company continues to rely on a relatively small number of customers
for a significant portion of its contract manufacturing business. As a
percent of total contract manufacturing revenue for 1997, revenues from the
Company's top five contract manufacturing customers, including MTI, were
74%, compared to 69% and 58% in 1996 and 1995, respectively. Revenues,
directly or indirectly, from one customer represented 33% of the revenues
of the Company's contract manufacturing operations in 1997 compared to
revenues from the Company's largest contract manufacturing customer in 1996
of 36%. Contract manufacturing revenue from MTI was 5%, 8% and 13% of
total contract manufacturing revenue in 1997, 1996 and 1995, respectively.
See "Certain Factors-Contract Manufacturing-Customer Concentration."
19
<PAGE>
SpecTek Semiconductor Memory Products. Net sales of semiconductor
memory products were slightly lower in 1997 compared to 1996, despite a 66%
decline in average selling prices. During 1997, the Company nearly tripled
megabit shipments compared to 1996. Net sales were 43% lower in 1996
compared to 1995, primarily due to a significant decline in sales of
peripheral add-on memory modules, a significant decline in average selling
prices for the Company's SpecTek semiconductor memory products and a
generally lower grade of components received from MTI, the Company's
primary supplier. These effects were partially offset by an 80% increase
in megabits of memory products shipped in 1996 compared to 1995. The
increase in megabits of memory products shipped in 1997 compared to 1996
and from 1996 compared to 1995 was primarily due to the acquisition and
utilization of additional test and burn-in equipment and reduced component
test times, both resulting in increased throughput for substantially all
memory products. The Company's SpecTek semiconductor memory products
results of operations are influenced by a number of factors including
pricing for, and availability of, nonstandard DRAM components. See
"Certain Factors-SpecTek Semiconductor Memory Products Operation."
Historically, a substantial majority of the semiconductor components used
in the SpecTek semiconductor memory products operation has been obtained
from MTI. In 1997, the Company obtained 74% of its components from MTI,
compared to 61% in 1996 and 89% in 1995. In fiscal 1997, the SpecTek
semiconductor memory products operation obtained nearly 100% of its
components from four sources. Purchases from alternative sources are
generally negotiated on a purchase order basis. There can be no assurance
the Company will be able to negotiate future purchases from alternative
sources on terms acceptable to the Company. Unless the Company is able to
continue obtaining significant quantities of nonstandard DRAM components
from alternative sources, the Company's SpecTek semiconductor memory products
operation could be limited by the volume of components supplied by MTI.
Any reduction in the availability or functionality of nonstandard
semiconductor memory components from the Company's suppliers could have
a material adverse effect on the Company's business and results of
operations. See "Certain Factors-SpecTek Semiconductor Memory Products
Operation-Dependence on Component Recovery Agreement with MTI."
Gross Margin
<TABLE>
<cpation>
1997 1996 1995
------------------ ------------------ ----------------
% of % of % of
Amount Sales Amount Sales Amount Sales
---------- ----- ---------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
PC systems $ 259,473 17.0% $ 190,142 15.2% $ 58,190 10.3%
Contract manufacturing 33,397 11.5% 33,006 8.8% 19,024 10.1%
SpecTek memory products 44,876 32.6% 38,037 27.4% 106,123 43.2%
---------- ---------- --------
Total gross margin $ 337,746 17.3% $ 261,185 14.8% $183,337 18.3%
========== ========== ========
</TABLE>
The Company's overall gross margin increased $76.6 million in 1997
compared to 1996, primarily as a result of an increased gross margin
percentage realized from the Company's PC operation coupled with a higher
level of PC sales and, to a lesser extent, an increase in gross margin
realized from the Company's SpecTek semiconductor memory products
operation. Gross margin increased in 1996 compared to 1995 primarily a
result of a significant increase in the gross margin provided by the
Company's PC operation, partially offset by lower gross margins realized
from the Company's SpecTek semiconductor memory products operation.
Personal Computer Systems. The Company's gross margin on sales of PC
systems increased $69.3 million or 36% in 1997 compared to 1996 principally
due to the higher level of net sales of PC systems and a generally higher
gross margin percentage realized on PC system sales. The gross margin
percentage for sales of the Company's PC systems increased in 1997 compared
to 1996 primarily as a result of improved component costs partially offset
by lower selling prices for the Company's PC systems. There can be no
assurance that the Company's future cost of components will decrease at
rates comparable to those in recent periods, or at all, or that the
Company's selling prices for its PC systems will not decrease at a rate
faster than the decline in its component costs. Although gross margins
increased in 1997, they were adversely affected by intense price
competition, an increase in the sales of, and a shift in product mix
toward, the Company's lower-end PC systems. The Company continues to
experience significant pressure on its gross margins as a result of intense
competition in the PC industry and consumer expectations of more powerful
PC systems at lower prices. In addition, the Company's gross margin
percentage will continue to depend in large part on its ability to
effectively manage its inventories of PC system components. See "Certain
Factors-Personal Computer Systems-Competition in the PC Industry" and
"Certain Factors-Personal Computer Systems-Inventory Management."
20
<PAGE>
The gross margin amount provided by the Company's PC operations in 1996
increased 227% compared to 1995 principally due to the higher level of net
sales of PC systems and a generally higher gross margin percentage realized
on PC system sales. Gross margin as a percent of net sales of PC systems
in the fourth quarter of fiscal 1996 benefited from an adjustment of $13.0
million relating to revisions in estimates for certain contingencies for
product and process technology costs. The gross margin percentage for
sales of the Company's PC systems increased in 1996 compared to 1995
primarily as a result of improved component costs, particularly for RAM
products, and generally improved inventory management. Increased sales of
the Company's notebook products favorably affected the Company's gross
margin percentage for sales of PC systems in 1996.
Contract Manufacturing. The gross margin percentage realized from the
Company's contract manufacturing operation was higher in 1997 compared to
1996 primarily as a result of an increase in the overall complexity of the
printed board assemblies produced by the Company and an increase in
revenues derived from services utilizing consigned inventory components.
The gross margin percentage decreased in 1996 compared to 1995, due
primarily to an increase in the percentage of total revenues derived from
the Company's turnkey memory module assembly services. Such assembly
services generally have a lower gross margin percentage than the balance of
the Company's contract manufacturing services.
SpecTek Semiconductor Memory Products. The gross margin percentage
realized by the Company's SpecTek semiconductor memory products operation
was higher in 1997 compared to 1996 primarily due to lower costs of components,
particularly those obtained from MTI. Effective at the beginning of 1997,
the Company modified its agreement for purchasing semiconductor memory
components from MTI. Under the prior agreement, the Company's cost of
components were generally equal to one-half the price realized from sales
of such components. In 1997, the Company's costs of components were
generally equal to one-half of the net operating income generated from
sales of such components. See "Certain Factors-SpecTek Semiconductor
Memory Products Operation-Dependence on Component Recovery Agreement with
MTI."
The gross margin percentage realized by the Company's SpecTek
semiconductor memory products operation declined significantly in 1996
compared to 1995, primarily due to significantly lower average selling
prices resulting from the sharp industry-wide decline in market prices for
semiconductor memory products and by the effect of increased purchases by
the Company of semiconductor memory components from third-party suppliers.
In addition, in the fourth quarter of fiscal 1995, MTI's improved
semiconductor testing processes resulted in the shipment of a reduced
amount of higher functional nonstandard semiconductor memory components to
the Company for recovery, thus reducing the Company's average selling
prices and gross margins for such products.
In the event that average selling prices for SpecTek's semiconductor
memory products continue to decline, the gross margin for the Company's
SpecTek semiconductor memory products operation would decline further and
overall results of operations could be adversely affected. See "Certain
Factors-SpecTek Semiconductor Memory Products Operation-Pricing of DRAM
Products."
Selling, General and Administrative
<TABLE>
<CAPTION>
1997 % Change 1996 % Change 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selling, general and
administrative $191,667 25.3% $152,937 104.0% $ 74,951
as a % of net sales 9.8% 8.7% 7.5%
</TABLE>
Selling, general and administrative ("SG&A") expenses increased in
absolute dollars and as a percent of net sales in 1997 compared to 1996
primarily due to higher levels of personnel costs and advertising
associated with the expanded PC operations and higher technical and
professional fees primarily associated with information technology
consulting services. During the fourth quarter of fiscal 1996, the Company
charged operations with a $9.0 million accrual relating to revisions of
estimates for selling costs associated with sales of PC systems. In
addition, SG&A expenses in 1996 included $1.2 million of goodwill
amortization, reflecting charges prior to the write off of unamortized
goodwill in connection with the Company's restructuring charge in the
second quarter of fiscal 1996. SG&A expenses increased in absolute
dollars, and as a percent of net sales, in 1996 compared to 1995 primarily
due to higher levels of personnel costs associated with the expanded PC
operations.
21
<PAGE>
Income Tax Provision
<TABLE>
<CAPTION>
1997 % Change 1996 % Change 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income tax provision $ 57,092 62.9% $ 35,055 (19.2%) $ 43,390
</TABLE>
The effective income tax rate was 39.5% in 1997, reflecting the federal
statutory rate, the net effect of state taxes and the effect of a
nondeductible $3.9 million charge to operations for the write-off of in-
process research and development resulting form the Company's acquisition
of NetFRAME in the fourth quarter of fiscal 1997. Without giving effect to
this charge, the Company's effective tax rate would have been 38.5%. The
effective tax rate of 44.0% in 1996 reflected the federal statutory rate,
the net effect of state taxes, the effect of goodwill amortization and the
write off during the second quarter of 1996 of $11.4 million of
nondeductible goodwill. Without giving effect to nondeductible goodwill
charges in 1996 totaling $12.6 million, the Company's effective income tax
rate would have been 38.0%. The Company's effective income tax rate was
40.0% for 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of August 28, 1997, the Company had cash and equivalents of $183.9
million, representing an increase of $68.1 million compared to August 29,
1996. Principal sources of liquidity in 1997 were cash flows from
operations of $130.1 million, $50.6 million from the issuance of common
stock and borrowings of $21.8 million. Principal uses of cash in 1997 were
property, plant and equipment expenditures of $105.8 million for expansion
and capacity improvements of the Company's manufacturing operations, $16.1
million for the acquisition of NetFRAME, net of cash acquired, the purchase
of held-to-maturity investment securities of $10.1 million and repayment of
debt of $4.9 million.
On October 11, 1996, the Company filed a registration statement with the
Securities and Exchange Commission allowing for the issuance from time to
time by the Company of debt and/or equity securities with a value of up to
$75.0 million, of which $51.0 million has been issued. The proceeds from
any issuance may be used for general corporate purposes. During the second
quarter of fiscal 1997, the Company completed the sale of 3.0 million
shares of its common stock in an underwritten public offering. Net
proceeds of $48.2 million were received by the Company. In the public
offering, MTI sold 12.4 million shares thereby reducing its ownership of
the Company as of August 28, 1997, to 64%. The registration statement also
allows for an additional $250.0 million of outstanding common stock of the
Company to be sold by certain existing shareholders, consisting of MTI and
certain management employees, of which $212.9 million has been sold.
During the third quarter of fiscal 1997, the Company's wholly-owned
subsidiary, CMS, entered into a revolving loan agreement, expiring May
2007, providing for borrowings of up to $15.0 million. Amounts outstanding
under the agreement are collateralized by certain real property. Under the
terms of the agreement, the amount available to CMS decreases by $1.0
million per year. As of August 28, 1997, there was $0.8 million
outstanding under the agreement. The terms of the agreement limits
dividends or other distributions from CMS.
During the fourth quarter of fiscal 1997, the Company entered into an
unsecured revolving credit facility with a group of financial institutions
which provides for borrowings of up to $130.0 million, based on the
Company's tangible net worth. The facility replaced two separate $40.0
million credit facilities. As of August 28, 1997, the Company was eligible
to borrow $130.0 million under the facility, but had no borrowings
outstanding.
During the fourth quarter of fiscal 1997, the Company's wholly-owned
subsidiary, Micron Electronics Japan K.K., entered into an unsecured
revolving credit facility with a financial institution, expiring June 1998,
providing for borrowings of up to 1.5 billion Japanese yen (US$12.7 million
at August 28, 1997). As of August 28, 1997, there was US$9.3 million
outstanding under the agreement.
At August 28,1997, the Company had commitments of $32.3 million for
capital expenditures for expansion and upgrade of facilities and equipment.
The Company anticipates making capital expenditures in fiscal 1998 in
excess of $100 million. The Company is constructing an approximately
325,000 square foot facility in Nampa, Idaho. This new facility is
expected to provide space for the expansion of the Company's Nampa, Idaho
PC operation and will provide space for possible future expansion.
22
<PAGE>
The Company expects that its future working capital requirements will
continue to increase. The Company believes that currently available cash
and equivalents, cash flows from operations, the Company's current credit
facilities and equipment financings will be sufficient to fund its
operations through fiscal 1998. However, maintaining an adequate level of
working capital through the end of fiscal 1998 and thereafter will depend
in large part on the success of the Company's products in the marketplace
and the Company's ability to control inventory levels, component costs and
other operating expenses. The Company may require additional financing for
growth opportunities, including any internal expansion that the Company may
undertake, expansion and capacity enhancements to additional sites, or
strategic acquisitions or partnerships. There can be no assurance that any
financings will be available on terms acceptable to the Company, if at all.
CERTAIN FACTORS
In addition to factors discussed elsewhere in this Form 10-K, the
following are important factors which could cause actual results or events
to differ materially from the historical results of the Company's
operations or those results or events contained in any forward-looking
statements made by or on behalf of the Company.
General
Fluctuations in Operating Results and Stock Price
The Company's past operating results have been, and its future operating
results may be, subject to seasonality and other fluctuations, on a
quarterly and an annual basis, as a result of a wide variety of factors,
including, but not limited to, industry competition, fluctuating market
pricing for PCs and semiconductor memory products, fluctuating component
costs, changes in product mix, inventory obsolescence, the timing of new
product introductions by the Company and its competitors, availability and
pricing of the memory components used by the Company's SpecTek
semiconductor memory products operation, the timing of orders from and
shipments to OEM customers, seasonal government purchasing cycles,
manufacturing and production constraints, the effects of product reviews
and industry awards, seasonal cycles common in the PC industry, critical
component availability, and the failure by the Company successfully
integrate the operations of NetFRAME. 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 trading price of the common stock
of the Company is subject to significant fluctuations due to general market
conditions and financial performance of other companies in the PC industry
and MTI, announcements of technological innovations, new commercial
products or new strategies by competitors, component availability and
pricing or other factors.
Management
Historically, the Company has experienced rapid revenue growth and an
expansion in the number of its employees, in the breadth and complexity of
its management, operating and financial information systems and in its
geographic scope of operations. This growth has resulted in new and
increased responsibilities for the Company's management and has placed, and
continues to place, significant demands upon the Company's management,
operating and financial information systems, technical support systems and
other resources. The Company continues to consider various expansion
alternatives, including expansion of facilities, acquisition or
establishment of facilities in new geographic regions and certain strategic
relationships. The Company currently is expanding its PC operation
facilities in Nampa, Idaho and has recently opened a PC sales and technical
support call center in Japan and a contract manufacturing operation in
Malaysia and recently acquired the operations of NetFRAME. There can be no
assurance that the Company's management resources, operating and financial
information systems, technical support systems and other resources will be
adequate to support the Company's existing or future operations. In
addition, the Company is in the process of identifying operating and
application software challenges related to the year 2000. While the
Company expects to resolve year 2000 compliance issues substantially
through normal replacement and upgrades of software, there can be no
assurance that there will not be interruption of operations or other
limitations of system functionality or that the Company will not incur
substantial costs to avoid such limitations. Any failure to effectively
monitor, implement or improve the Company's operational, financial,
management and technical support systems could have a material adverse
effect on the Company's business and results of operations.
23
<PAGE>
Intellectual Property Matters
It is common in the electronics industry for patent, trademark and other
intellectual property rights claims to be asserted against companies,
including component suppliers and PC manufacturers. Periodically, the
Company is made aware that technology used by the Company may infringe on
intellectual property rights held by others. The Company evaluates all
such claims and, if necessary and appropriate, seeks to obtain licenses for
the continued use of such technology. The Company has accrued a liability
and charged operations for the estimated costs of settlement or
adjudication of asserted and unasserted claims for alleged infringement
prior to the balance sheet date. The Company would be placed at a
competitive disadvantage if it were unable to obtain such licenses upon
terms at least as favorable as those experienced by the Company's
competitors. The Company has entered into several intellectual property
license agreements, which generally require one-time or periodic royalty
payments and are subject to expiration at various times. The Company is
unable to predict whether any of these license agreements can be obtained
or renewed on terms acceptable to the Company. If the Company or its
suppliers are unable to obtain licenses necessary to use intellectual
property in their products or processes, the Company may be
forced to market products without certain technological features or
software, discontinue sales of certain of its products and/or defend legal
actions taken against it relating to allegedly protected technology. The
inability of the Company to obtain licenses necessary to use certain
technology, or an inability to obtain such licenses on competitive terms,
or any litigation determining that the Company, in the manufacture or sale
of its products, has infringed on the intellectual property rights of third
parties could have a material adverse effect on the Company's business and
results of operations.
The Company, as a majority-owned subsidiary of MTI, is licensed under
certain license agreements between MTI and third parties. The Company
makes payments to MTI relating to certain of such agreements. The
Company's rights under such agreements may terminate in the event that the
Company is no longer a majority-owned subsidiary of MTI. In the event of
any such termination, the inability of the Company independently to obtain
such rights on similar terms could have a material adverse effect on the
Company's business and results of operations.
International Operations
During fiscal 1997, 7% of the Company's net sales were attributable to
sales outside the United States compared to 10% for fiscal 1996. Although
the Company's international sales in fiscal 1997 were adversely affected by
a decrease in sales of its PC systems through distributors in Japan as the
Company initiated direct sales of PC systems through its Japanese call
center established in 1997, the Company believes international sales as a
percentage of total sales will increase in the future, particularly for PC
systems and contract manufacturing services. In marketing its PC systems
in foreign countries, the Company uses either direct selling or indirect
selling through distributors, depending on consumer preferences, local
infrastructure, language and marketing methods. There can be no assurance
that the Company's primary sales and marketing methods through the direct
sales channel in the Japanese call center will result in sales at levels
that meet or exceed past levels of sales to Japan experienced by the
Company. The Company continues to evaluate the benefits and risks
associated with overseas manufacturing for its PC and contract
manufacturing operations. There can be no assurance that the establishment
of the Japan operation or any other international expansion will be
successful, and any failure by the Company to achieve success in
international operations could have a material adverse effect on the
Company's business and results of operations. The Company's international
operations are subject to a number of other risks, including, without
limitation, fluctuations in the value of currencies, export duties, import
controls, trade barriers, restrictions on funds transfer, greater
difficulty in accounts receivable collections, political and economic
instability and compliance with foreign laws.
MTI Ownership of Common Stock of the Company
As of August 28, 1997, MTI owned 64% of the Company's outstanding common
stock. In addition, four of the eight directors of the Company are also
directors of MTI, including Steven R. Appleton, Chairman and Chief
Executive Officer of MTI. So long as MTI continues to own a majority of
the outstanding common stock of the Company, MTI will have the ability to
control the outcome of matters requiring shareholder approval, including
the election of directors, and generally will have the ability to control
the management and certain financial and other affairs of the Company.
Termination of certain of the Company's arrangements by MTI or MTI
exercising its control in negotiating arrangements resulting in terms less
favorable to the Company could adversely affect the Company's business and
results of operations. In the event that MTI's ownership of the Company
were to decrease below certain levels, certain of the Company's
arrangements with MTI could terminate, which could have a material adverse
effect on the Company's business and results of operations. See
"Intellectual Property Matters" and "SpecTek Memory Products
Operation Dependence on Component Recovery Agreement."
24
<PAGE>
As a result of the level of MTI's ownership, only a limited percentage of
common stock of the Company is traded in the public market, which limits
the trading liquidity of the common stock of the Company and may limit the
Company's ability to complete future equity financings. The sale on the
open market of substantial amounts of shares of common stock of the Company
currently held by MTI could adversely affect the prevailing market price of
common stock of the Company. MTI's ability to sell shares of common stock
of the Company, unless registered under the Securities Act of 1933, as
amended (the "Securities Act"), is subject to volume and other restrictions
pursuant to Rule 145 promulgated under the Securities Act.
Dependence on Key Personnel
The future success of the Company will depend, in part, on its ability to
attract and retain key management, technical and sales and marketing
personnel. The Company attempts to enhance its management and technical
expertise by recruiting qualified individuals who possess desired skill
sets and experience in certain targeted areas. There is competition for
such personnel in the electronics industries, and the Company's inability
to retain employees and attract and retain sufficient additional employees,
particularly in the areas of information technology, engineering and
technical support resources, could have a material adverse effect on the
Company's business and results of operations. The Company does not
currently maintain "key man" life insurance with respect to any of its
employees. There can be no assurance that the Company will not lose key
personnel or that the loss of any key personnel will not have a material
adverse effect on the Company's business and results of operations.
Government Regulation
The Company is subject to a variety of federal, state, local and foreign
laws and regulations, including, but not limited to, Federal Communications
Commission regulations, governmental procurement regulations, import and
export regulations, Federal Trade Commission regulations, securities
regulations, environmental regulations, antitrust regulations, and labor
regulations. Any failure by the Company to comply with such regulations in
the past, present or future could subject the Company to liabilities and/or
the suspension of its operations, which could have a material adverse
effect on the Company's business and results of operations.
Personal Computer Systems
Competition in the PC Industry
The PC industry is highly competitive and has been characterized by
intense pricing pressure, generally low gross margin percentages, rapid
technological advances in hardware and software, frequent introduction of
new products, and rapidly declining component costs. Competition in the PC
industry is based primarily upon brand name recognition, performance,
price, reliability and service and support. The Company's sales of PC
systems has historically benefited from increased name recognition and
market acceptance of the Company's PC systems, primarily resulting from the
receipt by the Company of awards from trade publications recognizing the
price and performance characteristics of Micron brand PC systems and the
Company's service and support functions. As a result of PC industry
standards, the Company and its competitors use many of the same components,
typically from the same set of suppliers, which limits the Company's
ability to technologically and functionally differentiate its products.
The Company competes with a number of PC manufacturers which sell their
products primarily through direct channels, including Dell Computer, Inc.
and Gateway 2000, Inc. The Company also competes with PC manufacturers,
such as Apple Computer, Inc., Compaq Computer Corporation, Hewlett-Packard
Company, International Business Machines Corporation and Toshiba Corporation
among others, which have traditionally sold their products through national
and regional distributors, dealers and value added resellers, retail stores
and direct sales forces. In addition, the Company expects to face increased
competition in the U.S. direct sales market from foreign PC suppliers and
from foreign and domestic suppliers of PC products that decide to
implement, or devote additional resources to, a direct sales strategy. In
order to gain an increased share of the U.S. PC direct sales market, these
competitors may effect a pricing strategy that is more aggressive than the
current pricing in the direct sales market. Many of the Company's PC
competitors have greater brand name recognition, offer broader product
lines, have substantially greater financial, technical, marketing and other
resources than the Company and may benefit from component volume purchasing
and product and process technology license arrangements that are more
favorable in terms of pricing and availability than the Company's
arrangements. The failure of the Company to compete effectively in the
marketplace would have an adverse effect on the Company's business and
results of operations.
25
<PAGE>
The Company believes that the rate of growth in worldwide sales of PC
systems, particularly in the United States, where the Company sells a
substantial majority of its PC systems, has declined and may remain below
the growth rates experienced in recent years. Any general decline in
demand or decline in the rate of increase in demand for PC systems could
increase price competition and could have a material adverse effect on the
Company's business and results of operations.
Inventory Management
The Company's ability to compete successfully in the PC market in the
future will depend in large part on its ability to effectively manage its
inventories of PC components. The Company's PC operations focus on the
direct sale of assemble-to-order PC systems that feature components
incorporating the latest technological developments in the PC industry.
The Company has experienced in the past, and could experience in the
future, inventory obsolescence resulting from, among other things, the fast
pace of technological developments in the PC industry and the short product
life cycles of PC systems and components. In addition, because high
volumes of quality components are required for the manufacture of the
Company's PC systems, the Company has experienced in the past, and expects
to experience in the future, shortages and other supply constraints of key
components. Such shortages or supply constraints have in the past
adversely affected, and could in the future adversely affect, the Company's
ability to ship products on schedule or at expected gross margins. To be
successful in the future, the Company must accurately anticipate demand for
its products and obtain adequate supplies of components to meet such
demand. The failure of the Company to manage its inventories effectively
could result in inventory obsolescence, excess inventories, component
shortages and untimely shipment of products, any of which could have a
material adverse effect on the Company's business and results of
operations.
Dependence on Key Sources of Supply
The Company focuses on providing PC systems that feature components and
software incorporating the latest technological developments in the PC
industry, which components are periodically in short supply and are
available from sole or a limited number of suppliers. As a result, the
Company has experienced in the past, and expects to experience in the
future, shortages in the components used in its PC systems. The
microprocessors used in the Company's PC systems are manufactured
exclusively by Intel and, from time to time, the Company has been unable to
obtain sufficient quantities of certain Intel microprocessors. In
addition, a significant portion of the RAM components used in the Company's
PC systems are supplied by MTI, and the Company generally relies on MTI to
supply the latest memory densities and configurations available. The
Company relies, to a certain extent, upon its suppliers' abilities to
enhance existing products in a timely and cost-effective manner, to develop
new products to meet changing customer needs and to respond to emerging
standards and other technological developments in the PC industry. The
Company's reliance on a limited number of suppliers and on a strategy of
incorporating the latest technological developments into its PC systems
involves several risks, including the possibility of shortages and/or
increases in costs of components and software, and risk of reduced control
over delivery schedules, which could have a material adverse effect on the
Company's business and results of operations.
The Company's TransPort notebook PC systems are currently assembled by
third-party manufacturers. These outsourcing arrangements and any future
outsourcing arrangements that the Company may enter into may reduce the
direct control the Company has over certain components and the assembly of
such products. There can be no assurance that the Company's outsourcing
arrangements will not result in quality problems or affect the Company's
ability to ship such products on a timely basis or the flexibility of the
Company to respond to changing market conditions. Moreover, although
arrangements with such manufacturers may contain provisions for warranty
obligations on the part of such manufacturers, the Company remains
primarily responsible to the consumer for warranty obligations. Any
unanticipated product defect or warranty obligation, whether pursuant to
arrangements with third-party manufacturers or otherwise, could adversely
affect the Company's business and results of operations.
26
<PAGE>
NetFRAME Acquisition
In the fourth quarter of fiscal 1997, the Company acquired all of the
outstanding common stock of NetFRAME for $17.4 million in cash. NetFRAME
develops and markets enterprise-class multiprocessor servers offering
continuous availability and scalability while supporting industry standard
software. The acquisition was accounted for as a purchase, and the
purchase price was allocated to the net assets acquired, including
identified intangible assets and in-process research and development based
on their fair values. The Company is performing an ongoing evaluation
regarding the nature and scope of the operations of NetFRAME as well as
considering various short and long-term strategies as to whether and to
what extent integration, reconfiguration or other modification of the
Company's and NetFRAME's separate businesses is appropriate following the
acquisition. There can be no assurance the integration, reconfiguration or
other modification, if any, of NetFRAME will not have a material adverse
affect on the Company's business and results of operations. In addition,
there can be no assurance the Company will realize the anticipated benefits
associated with the acquisition, including, but not limited to, retention
of key personnel, acceptance of NetFRAME products in the market, increased
purchasing power, manufacturing efficiencies, technology, intellectual
property rights, increased market presence of a broader product offering
and economies of providing certain administrative support functions.
State Taxation
During the third quarter of fiscal 1997, the Company began to collect and
remit applicable sales or use taxes in nearly all states. In association
therewith, the Company is party to agreements with nearly all states which
generally limit the liability of the Company, if any, for non-remittance of
sales and use taxes prior to such agreements' effective dates. Management
believes the resolution of any matters relating to the non-remittance of
sales or use taxes prior to the balance sheet date will not have a material
adverse effect on the Company's business and results of operations.
Contract Manufacturing
Competition in the Contract Manufacturing Industry
The Company's contract manufacturing operation competes against numerous
domestic and offshore contract manufacturers, including a significant
number of local and regional companies. In addition, the Company competes
against in-house manufacturing capabilities of certain of its existing
customers as well as with certain large computer manufacturers which offer
third-party contract manufacturing services. The Company's contract
manufacturing competitors include, among others, Avex Electronics, Inc.,
Benchmark Electronics, Inc., Celestica Inc., DOVAtron International, Inc.,
Flextronics International, Group Technologies Corporation, Jabil Circuits,
Inc., Sanmina Corporation, SCI Systems, Inc. and Solectron Corporation.
Many of the Company's competitors have substantially greater manufacturing,
technical, financial, personnel, marketing and other resources than the
Company and have manufacturing operations at multiple domestic and overseas
locations.
The Company believes that the significant competitive factors in the
contract manufacturing industry include service, quality, price,
technology, location and the ability to offer flexible delivery schedules
and deliver finished products on an expeditious and timely basis in
accordance with customers' expectations. The Company may be at a
disadvantage as to certain competitive factors when compared to
manufacturers with greater resources than the Company, substantial offshore
facilities or larger domestic facilities. While the Company recently began
operation of its first foreign contract manufacturing facility, there can
be no assurance that the Company's contract manufacturing operation will
compete successfully in the future with regard to these factors. In order
to remain competitive, the Company may be required to expand its contract
manufacturing capacity and may be required to establish additional
international operations. There can be no assurance that the Company will
be successful in expanding its contract manufacturing operation on a timely
and efficient basis, or at all. The failure to do so could have a material
adverse effect on the Company's business and results of operations.
27
<PAGE>
Customer Concentration
Revenue from the Company's top five contract manufacturing customers in
1997 was 74% of total contract manufacturing revenue compared to 69% and
58% in 1996 and 1995, respectively. Revenue from the Company's largest
contract manufacturing customer represented 33% of the Company's total
contract manufacturing revenue in 1997. Revenue from the Company's largest
contract manufacturing customer in 1996 and 1995 represented 36% and 20%,
respectively, of the Company's total contract manufacturing revenue.
Contract manufacturing revenue from MTI was 5% of total contract
manufacturing revenue in 1997 compared to 8% in 1996 and 13% in 1995. The
Company expects to continue to experience a high degree of contract
manufacturing customer concentration.
The Company has no long-term agreements with any of its contract
manufacturing customers. The Company believes that its key contract
manufacturing customers may from time to time materially reduce their
purchases of the Company's contract manufacturing services in the future.
Although the Company has generally 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 business and results of
operations.
Fluctuations in OEM Orders
The Company's contract manufacturing customers generally require short
delivery cycles and quick turnaround for contract manufacturing services.
As the Company's OEM customers react to variations in demand for their
products and adjust their purchase orders to the Company, the Company may
be subject to non-cancelable purchase orders with its suppliers and may
recognize losses on write downs of inventories due primarily to the
specialized nature of certain custom components and declines in market
pricing of components. Changes in OEM orders have had an adverse effect on
the Company's contract manufacturing operation in the past and there can be
no assurance that the Company will not experience such adverse effects in
the future.
SpecTek Semiconductor Memory Products Operation
Dependence on Component Recovery Agreement with MTI
Historically, a substantial majority of the components used in the
Company's SpecTek semiconductor memory products operation has been obtained
from MTI. The Company and MTI are parties to a Component Recovery
Agreement, effective as of August 30, 1996 (the "Component Recovery
Agreement"), under which MTI is required to deliver to the Company all of
the nonstandard DRAM components produced at MTI's semiconductor
manufacturing operations. The Company's cost of such components generally
is determined as one-half of the operating income generated from the
Company's SpecTek sales of semiconductor memory products supplied by MTI.
There can be no assurance that MTI will continue to produce adequate
volumes of nonstandard DRAM components to maintain the Company's SpecTek
semiconductor memory products operation at existing or historic levels.
The Component Recovery Agreement, which expires August 31, 2000, may be
terminated earlier by MTI in the event that MTI's ownership of the Company
falls below 30%. Expiration, termination or renegotiation of the Component
Recovery Agreement could have a material adverse effect on the Company's
business and results of operations. Changes in MTI's semiconductor
manufacturing processes resulting in improvement of device yields and/or
changes in the product mix or specifications of its memory components, or
other changes or events at MTI adversely affecting its overall
manufacturing output, could adversely affect the volume of nonstandard DRAM
components supplied by MTI.
Many semiconductor memory manufacturers are reluctant to sell nonstandard
DRAM components because such components could compete with their full
specification DRAM components for similar applications. In addition, some
manufacturers are concerned that subsequent testing performed by a recovery
operation could reveal proprietary data regarding manufacturing yields and
processes. As a result, there can be no assurance that the Company will be
able to obtain nonstandard DRAM components from semiconductor manufacturers
in quantities sufficient to meet demand for the Company's SpecTek products.
Any reduction in the availability or functionality of nonstandard DRAM
components from the Company's suppliers could have a material adverse
effect on the Company's business and results of operations.
28
<PAGE>
Pricing of DRAM Products
Pricing for the Company's SpecTek semiconductor memory products
fluctuates, to a large degree, based on industry-wide pricing for
semiconductor memory products. The Company has experienced significant
declines in the average selling prices of its SpecTek semiconductor memory
products as industry-wide average selling prices for full specification
semiconductor memory products experienced a sharp decline. The Company
believes that such decline in average selling prices of semiconductor
memory products was due primarily to changes in the balance of supply and
demand for these commodity products, and the Company is unable to predict
the impact of semiconductor memory product market dynamics in future
periods. Due to increased market risk associated with holding purchased
memory components in inventory, the Company has experienced in the past,
and may experience in the future, losses from write downs of memory
component inventories in periods of declining prices. Further declines in
pricing for semiconductor memory products would likely result in declines
in average selling prices of the Company's SpecTek semiconductor memory
products, which could have a material adverse effect on the Company's
business and results of operations.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Statements:
Statements of Operations for the Fiscal Years Ended
August 28, 1997, August 29, 1996 and August 31, 1995 31
Balance Sheets as of August 28, 1997 and August 29, 1996 32
Statements of Shareholders' Equity for the Fiscal Years
Ended August 28, 1997, August 29, 1996 and August 31,
1995 33
Statements of Cash Flows for the Fiscal Years Ended August
28, 1997, August 29, 1996 and August 31, 1995 34
Notes to Financial Statements 35
Report of Independent Accountants 48
Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts for the Fiscal
Years Ended August 28, 1997, August 29, 1996 and August
31, 1995 52
30
<PAGE>
Micron Electronics, Inc.
Statements of Operations
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,955,783 $1,764,920 $ 999,999
Cost of goods sold 1,618,037 1,503,735 816,662
---------- ---------- ----------
Gross margin 337,746 261,185 183,337
Selling, general and
administrative 191,667 152,937 74,951
Research and development 9,621 3,050 1,893
Restructuring charge - 29,200 -
---------- ---------- ----------
Operating income 136,458 75,998 106,493
Interest income, net 7,896 3,639 1,983
---------- ---------- ----------
Income before taxes 144,354 79,637 108,476
Income tax provision 57,092 35,055 43,390
---------- ---------- ----------
Net income $ 87,262 $ 44,582 $ 65,086
========== ========== ==========
Earnings per share $0.92 $0.48 $0.74
Number of shares used in per
share calculation 94,621 92,495 87,422
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
Micron Electronics, Inc.
Balance Sheets
(Dollars in thousands, except par value amounts)
<TABLE>
<CAPTION>
As of August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $183,935 $115,839
Liquid investments 10,068 -
Receivables 223,476 176,547
Inventories 115,501 69,863
Deferred income taxes 26,240 35,014
Other current assets 3,928 1,853
-------- --------
Total current assets 563,148 399,116
Property, plant and equipment, net 191,536 129,192
Other assets 3,662 1,625
-------- --------
Total assets $758,346 $529,933
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $304,608 $247,044
Accrued licenses and royalties 36,034 27,242
Current debt 18,622 3,064
-------- --------
Total current liabilities 359,264 277,350
Long-term debt 20,019 18,233
Deferred income taxes 86 2,436
Other liabilities 13,406 3,454
-------- --------
Total liabilities 392,775 301,473
-------- --------
Commitments and contingencies
Common stock, $.01 par value, authorized
150.0 million shares; issued and outstanding
95.6 million and 92.5 million shares,
respectively 956 925
Additional capital 120,108 69,392
Retained earnings 245,139 158,143
Cumulative foreign currency translation adjustment (632) -
-------- --------
Total shareholders' equity 365,571 228,460
-------- --------
Total liabilities and shareholders' equity $758,346 $529,933
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
Micron Electronics, Inc.
Statements of Shareholders' Equity
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
MCI Class A:
Balance at beginning
of year 988 $ 79
Purchase and retirement
of stock (16) (1)
Merger transaction (972) (78)
------ --------
Balance at end of year - $ -
====== ========
Class B:
Balance at beginning
of year 470 $ 286
Stock sold 7 67
Purchase and retirement
of stock (90) (55)
Merger transaction (387) (298)
------ --------
Balance at end of year - $ -
====== ========
MCMS:
Balance at beginning
of year 1,849 $ 185
Merger transaction (1,849) (185)
------ --------
Balance at end of year - $ -
====== ========
MEI:
Balance at beginning
of year 92,473 $ 925 91,431 $ 914 - $ -
Stock sold 3,135 31 136 1 - -
Stock award - - 151 2 - -
Purchase and retirement
of stock (127) (1) (238) (2) (16) -
Stock options 74 1 993 10 84 1
Merger transaction - - - - 91,363 913
------ -------- ------ -------- ------ --------
Balance at end of year 95,555 $ 956 92,473 $ 925 91,431 $ 914
====== ======== ====== ======== ====== ========
ADDITIONAL CAPITAL
Balance at beginning
of year $ 69,392 $ 58,613 $ 14,662
Stock sold 49,895 1,283 -
Stock award - 1,298 -
Purchase and retirement
of stock (108) (156) (11)
Stock options 713 997 464
Tax effect of stock
purchase plans 216 7,357 710
Merger transaction - - 42,788
-------- -------- --------
Balance at end of year $120,108 $ 69,392 $ 58,613
======== ======== ========
RETAINED EARNINGS
Balance at beginning
of year $158,143 $114,136 $ 52,957
Purchase and retirement
of stock (266) (575) (824)
Merger transaction - - (3,083)
Net income 87,262 44,582 65,086
-------- -------- --------
Balance at end of year $245,139 $158,143 $114,136
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
Micron Electronics, Inc.
Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 87,262 $ 44,582 $ 65,086
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation and amortization 35,399 22,226 13,158
Write-off of purchased
in-process research and
development 3,938 - -
Restructuring charge - 29,200 -
Changes in assets and
liabilities, net of
acquisition and merger
transaction:
Receivables (41,608) (48,478) (56,049)
Inventories (37,077) 8,382 (34,052)
Deferred income taxes 15,797 (14,382) (3,634)
Accounts payable and
accrued expenses 59,111 66,592 62,377
Accrued licenses and
royalties 8,793 9,165 14,411
Other (1,501) 525 (942)
--------- --------- ---------
Net cash provided by operating
activities 130,114 117,812 60,355
CASH FLOWS FROM INVESTING
ACTIVITIES
Expenditures for property, plant
and equipment (105,752) (90,122) (39,585)
Proceeds from sales of property,
plant and equipment 3,913 6,354 528
Purchases of available-for-sale
and held-to-maturity
investment securities (10,073) - (3,165)
Proceeds from maturities of
investment securities - - 5,400
Acquisition of NetFRAME, net of
cash acquired (16,068) - -
Cash acquired in merger
transaction - - 14,060
Other (915) 21 (439)
--------- --------- ---------
Net cash used for investing
activities (128,895) (83,747) (23,201)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from debt 21,799 42,770 -
Repayments of debt (4,874) (31,969) (1,022)
Proceeds from issuance of common
stock 50,640 2,300 398
Purchase and retirement of stock (375) (733) (891)
Other (313) - (1,281)
--------- --------- ---------
Net cash provided by (used for)
financing activities 66,877 12,368 (2,796)
--------- --------- ---------
Net increase in cash and cash
equivalents 68,096 46,433 34,358
Cash and cash equivalents at
beginning of year 115,839 69,406 35,048
--------- --------- ---------
Cash and cash equivalents at end
of year $ 183,935 $ 115,839 $ 69,406
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 50,997 $ 36,076 $ 45,277
Interest paid, net of amounts
capitalized 776 253 412
Noncash investing and financing
activities:
Reclassification of current
liabilities to non-current
liabilities 9,600 3,768 -
Assets acquired, net of cash
and liabilities assumed,
in merger transaction - - 25,998
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements
(Tabular amounts in thousands)
SIGNIFICANT ACCOUNTING POLICIES
Business: Micron Electronics, Inc. and its subsidiaries manufacture
electronic products and provide services for a wide range of computer and
digital applications. The Company is a leading provider of PC systems
through the direct sales channel in the United States and develops,
markets, manufactures and supports PC systems for consumer, business,
government and educational use. In addition, the Company is a supplier of
multi-processor network servers for enterprise, remote office and
distributed computing environments under the NetFRAME brand name. The
Company's contract manufacturing operation, Micron Custom Manufacturing
Services, Inc. ("CMS"), specializes in the design, assembly and test of
custom complex printed circuit boards, memory modules and system level
products for original equipment manufacturers. The Company's SpecTek
semiconductor memory products operation processes and markets various grades
of memory products under the SpecTek brand name. The contract manufacturing
and semiconductor memory products operations sell a significant amount of
products and services to original equipment manufacturers in diverse areas
of the electronics industry.
Basis of presentation: The financial statements include the accounts of
Micron Electronics, Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The Company's
fiscal year is the 52 or 53 week period ending on the Thursday closest to
August 31. As of August 28, 1997, the Company was 64% owned by Micron
Technology, Inc. ("MTI").
Certain concentrations and use of estimates: Certain components,
subassemblies and software included in the Company's PC systems are
obtained from sole suppliers or a limited number of suppliers. The Company
relies, to a certain extent, upon its suppliers' abilities to enhance
existing products in a timely and cost-effective manner, to develop new
products to meet changing customer needs and to respond to emerging
standards and other technological developments in the PC industry. The
Company's reliance on a limited number of suppliers involves several risks,
including the possibility of shortages and/or increases in costs of
components and subassemblies, and the risk of reduced control over delivery
schedules.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Although actual results could differ from those estimates, management
believes its estimates are reasonable.
Revenue recognition: Revenue from product sales to customers is
generally recognized upon shipment. A provision for estimated sales
returns is recorded in the period in which the sales are recognized. The
Company defers recognition of sales to distributors with certain return
privileges until the distributors have sold the products.
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 "The MEI Merger").
Financial instruments: Cash equivalents include highly liquid short-
term investments with original maturities of three months or less, readily
convertible to known amounts of cash. The amounts reported as cash
equivalents, liquid investments, receivables, other assets, accounts
payable and accrued expenses and debt are considered by the Company to be
reasonable approximations of their fair values, based on information
available to management as of August 28, 1997. The use of different
assumptions could have a material effect on the estimated fair value
amounts. The reported fair values do not take into consideration potential
taxes or other expenses that would be incurred in an actual settlement.
35
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and cash
equivalents, investment securities and trade accounts receivable. The
Company invests its cash in credit instruments of highly rated financial
institutions and performs periodic evaluations of the credit standing of
these financial institutions. The Company, by policy, limits the
concentration of credit exposure by restricting investments with any single
obligor, instrument, or geographic area. A concentration of credit risk
may exist with respect to trade receivables, as many of the Company's
customers are affiliated with the computer, telecommunications and office
automation industries. The Company has a large number of customers on
which it performs ongoing credit evaluations and generally does not require
collateral from its customers. Historically, the Company has not
experienced significant losses related to receivables from individual
customers or groups of customers in any particular industry or geographic
area.
Inventories: Inventories are stated at the lower of average cost or
market.
Property, plant and equipment: Property, plant and equipment, including
software, are stated at cost. Depreciation is computed using the straight-
line method over the estimated useful lives of 5 to 30 years for buildings
and 2 to 5 years for equipment.
Product and process technology: Costs related to the conceptual
formulation and design of products and processes are expensed as research
and development. Costs incurred to establish patents and acquire product
and process technology are capitalized. Capitalized costs are amortized
using the straight-line method over the shorter of the estimated useful
life of the technology, the patent term, or the agreement, ranging up to 10
years.
Royalties: The Company has royalty-bearing license agreements that
allow it to sell certain hardware and software and to use certain patented
technology. Royalty costs are accrued and included in cost of goods sold
when the sale is recognized.
Advertising: Advertising costs are charged to operations as incurred.
Foreign currency: The Company uses the U.S. Dollar as its functional
currency, except for its operations in Japan and Malaysia. The assets and
liabilities of the Company's Japanese and Malaysian operations are
translated into U.S. Dollars at exchange rates in effect at the balance
sheet date. Income and expense items are translated at the average
exchange rates prevailing during the period. Aggregate transaction gains
and losses included in the determination of net income are not material for
any period presented.
Recently issued accounting standards: In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128
supersedes and simplifies the standards for computing earnings per share
previously found in Accounting Principles Board Opinion No. 15, "Earnings
Per Share," and interpretations thereof, and makes them comparable to
international earnings per share standards. This statement is expected to
be adopted by the Company effective in its second quarter of fiscal 1998.
The Company does not expect earnings per share as calculated under SFAS 128
to be materially different than calculated under the Company's existing
methodology.
36
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
THE MEI MERGER
On April 7, 1995, Micron Computer, Inc. ("MCI") and the former Micron
Custom Manufacturing Services, Inc. ("MCMS"), then subsidiaries of MTI,
merged with and into ZEOS International, Ltd. ("ZEOS") (the "MEI Merger").
Pursuant to the terms of the MEI Merger, ZEOS issued 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 MEI Merger resulted in a change of control of 89% of
ZEOS wherein, assuming exercise of all options outstanding at the time of
the MEI Merger, (a) MTI owned an approximate 79% interest in the Company,
and (b) the other shareholders of MCI and MCMS owned an approximate 10%
interest in the Company. The MEI Merger was 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 $39.1 million basis to the ZEOS
assets and liabilities on the basis of their fair values. Goodwill of
$14.6 million was recorded to the extent the purchase price exceeded the
fair value of the identifiable net assets for which a change of control
occurred. Goodwill was being amortized on a straight line basis over three
years. In the second quarter of fiscal 1996, the remaining goodwill was
written off in connection with a restructuring charge recorded by the
Company (see "Restructuring Charge").
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 MEI Merger, the financial statements of the Company
reflect the consolidated results of operations, financial position and cash
flows of the Company, based on the new basis of accounting for the assets
and liabilities of ZEOS and the historical cost bases for the assets and
liabilities of MCI and MCMS. Prior to the MEI Merger, the financial
statements of the Company include only the combined results of operations,
financial position and cash flows of MCI and MCMS.
ACQUISITION OF NETFRAME SYSTEMS INCORPORATED
In the fourth quarter of fiscal 1997, the Company acquired all of the
outstanding common stock of NetFRAME Systems Incorporated ("NetFRAME") for
$17.4 million in cash. NetFRAME develops and markets enterprise-class
multiprocessor servers offering continuous availability and scalability
while supporting industry standard software. The acquisition was accounted
for as a purchase, and the purchase price was allocated to the net assets
acquired, including identified intangible assets and in-process research
and development, based on their fair values. The Company's results of
operations for 1997 include the results of operations of NetFRAME since the
July 18, 1997 acquisition date.
The fair value of NetFRAME's technology was determined by an independent
appraiser through an analysis using a risk adjusted cash flow model, under
which estimated future cash flows derived from the technology or products
incorporating the technology were discounted taking into account risks
related to existing and future markets and assessment of the life
expectancy of such technology. Technology was segregated into that which
was determined to be completed (those currently technologically feasible
but that may require adjustments or relatively minor enhancements) and in
process (technologies that require additional research and development
efforts to reach technological feasibility). The analysis resulted in the
allocation of $0.8 million of purchase price to completed technology, which
was capitalized and is being amortized using the straight-line method over
the estimated useful life of 30 months. In-process research and
development was valued by an independent appraiser using the same
methodology as completed technology. Estimated future cash flows
associated with in-process research and development were discounted
considering risks and uncertainties related to the viability, work required
to establish feasibility, and to the completion of products that will
ultimately be marketed by the Company. The analysis resulted in the
allocation of $3.9 million of purchase price to in-process research and
development. In management's opinion, the acquired in-process research and
development had not yet reached a stage where feasibility, delivery or
product features were certain at July 18, 1997 and had no alternative
future use. As a result, acquired in-process research and development was
charged to expense during the fourth quarter of fiscal 1997. Additionally,
$0.6 million of purchase price was allocated to other identified intangible
assets, which were capitalized and are being amortized using the straight-
line method over the estimated useful lives of 30 months.
37
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
The following unaudited pro forma information reflects the results of the
Company's operations for the years ended August 28, 1997 and August 29,
1996 as if the acquisition of NetFRAME had occurred at the beginning of
fiscal 1997 and at the beginning of fiscal 1996, 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 consummation of the acquisition. These pro forma
results have been prepared for comparative purposes only and do not purport
to be indicative of what operating results would have been had the acquisition
actually taken place at the beginning of fiscal 1997 or at the beginning of
fiscal 1996 or operating results which may occur in the future.
<TABLE>
<CAPTION>
Fiscal year ended August 28, 1997 August 29, 1996
-----------------------------------------------------------------------------
<S> <C> <C>
Pro forma:
Net sales $2,004,279 $1,832,943
Gross margin 346,713 297,550
Net income 65,093 40,304
Earnings per share 0.69 0.44
</TABLE>
RESTRUCTURING CHARGE
In February 1996, the Company adopted a plan to discontinue the
manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operations in Minneapolis, Minnesota. As a result, the
Company recorded a restructuring charge of $29.2 million ($22.4 million, or
$0.24 per share, net of taxes) in fiscal 1996. The restructuring charge
included $14.5 million related to the disposition of inventory of
discontinued product lines, the write-off of $11.4 million of goodwill
which resulted from the MEI Merger, $1.1 million for other asset write-
downs, $0.6 million related to personnel costs and $1.6 million related to
other exit costs.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Held to maturity investment securities,
at amortized cost:
Commercial paper $ 72,685 $ 30,437
State and local government 45,235 24,650
U.S. Government agency 39,257 7,813
Bankers' acceptances 3,767 11,976
--------- ---------
160,944 74,876
Less cash equivalents (150,876) (74,876)
--------- ---------
Liquid investments $ 10,068 $ -
========= =========
</TABLE>
Securities classified as held-to-maturity have remaining maturities
within one year.
38
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
RECEIVABLES
August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $228,220 $171,820
Receivables from affiliates, net 4,227 2,526
Income taxes recoverable from MTI 1,377 5,147
Other 4,341 7,363
Allowance for doubtful accounts (7,556) (8,221)
Allowance for returns and discounts (7,133) (2,088)
-------- --------
$223,476 $176,547
======== ========
</TABLE>
<TABLE>
<CAPTION>
INVENTORIES
August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 81,505 $ 45,949
Work in progress 11,601 13,239
Finished goods 22,395 10,675
-------- --------
$115,501 $ 69,863
======== ========
</TABLE>
<TABLE>
<CAPTION>
PROPERTY, PLANT AND EQUIPMENT
August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,639 $ 1,639
Buildings 44,403 17,647
Equipment and software 167,413 120,393
Assets in progress 42,586 35,398
-------- --------
256,041 175,077
Less accumulated depreciation and amortization (64,505) (45,885)
-------- --------
$191,536 $129,192
======== ========
</TABLE>
During the third quarter of fiscal 1996, the Company purchased
approximately 30 acres of land adjacent to its PC manufacturing operations
from a director of the Company and a third party for approximately
$575,000.
<TABLE>
<CAPTION>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $237,066 $157,350
Payable to affiliates 10,971 25,829
Salaries, wages and benefits 26,006 16,168
Income taxes payable 2,193 14,526
Income taxes payable to MTI - 1,300
Equipment contracts payable 2,139 7,955
Accrued warranty 12,988 7,905
Other 13,245 16,011
-------- --------
$304,608 $247,044
======== ========
</TABLE>
39
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
DEBT
August 28, 1997 August 29, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Notes payable in periodic installments
through September 2001, weighted average
interest rate of 7.52% and 7.52%, respectively $ 22,644 $ 21,261
Capitalized lease obligations payable in
monthly installments through June 2000,
interest rate of 7.28% and 7.18%, respectively 5,881 36
Amounts outstanding under revolving loan
agreement, due June 1998, variable interest of
0.90% at August 28, 1997 9,283 -
Amounts outstanding under revolving loan
agreement, due May 1998, variable interest of
7.63% at August 28, 1997 833 -
-------- --------
38,641 21,297
Less current portion (18,622) (3,064)
-------- --------
$ 20,019 $ 18,233
======== ========
</TABLE>
The Company has an unsecured credit agreement, expiring June 2000, with a
group of financial institutions providing for borrowings totaling $130.0
million. As of August 28, 1997, the Company was eligible to borrow the
full amount under the agreement, but had no borrowings outstanding. Under
the agreement, the Company is subject to certain financial and other
covenants including certain financial ratios and limitations on the amount
of dividends declared or paid by the Company.
During the fourth quarter of fiscal 1997, the Company's wholly-owned
subsidiary, Micron Electronics Japan K.K., entered into an unsecured
revolving credit facility with a financial institution, expiring June 1998,
providing for borrowings of up to 1.5 billion Japanese yen (US$12.7 million
at August 28, 1997). As of August 28, 1997, there was US$9.3 million
outstanding under the agreement.
During the third quarter of fiscal 1997, the Company's wholly-owned
subsidiary, CMS, entered into a revolving loan agreement with a financial
institution, expiring May 2007, providing for borrowings of up to $15.0
million and subject to certain financial and other covenants. Amounts
outstanding under the agreement are collateralized by certain real
property. Under the terms of the agreement, the amount available to CMS
decreases by $1.0 million per year beginning May 1998. As of August 28,
1997, CMS was eligible to borrow the full amount under the agreement and
had $0.8 million outstanding.
Certain of the Company's notes payable are collateralized by equipment
with a total cost of $44.9 million and accumulated depreciation of $6.1
million as of August 28, 1997. Equipment under capital leases, and
accumulated amortization thereon, were $6.4 million and $0.4 million,
respectively, as of August 28, 1997. Maturities of debt are as follows:
<TABLE>
<CAPTION>
Revolving
Notes Capital Credit
Fiscal year Payable Leases Agreements
---------------------------------------------------------------
<S> <C> <C> <C>
1998 $ 6,577 $ 2,376 $ 10,116
1999 6,345 2,360 -
2000 4,824 1,770 -
2001 4,806 - -
2002 92 - -
Less interest - (625) -
-------- -------- --------
$ 22,644 $ 5,881 $ 10,116
======== ======== ========
</TABLE>
Interest income is net of approximately $1,075,000, $176,000 and $426,000
of interest expense in 1997, 1996 and 1995, respectively. Construction
period interest of approximately $981,000, $326,000 and $119,000 was
capitalized in 1997, 1996 and 1995, respectively.
40
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
STOCK PURCHASE AND INCENTIVE PLANS
The Company's 1995 Stock Option Plan provides for the granting of
incentive and nonstatutory stock options. As of August 28, 1997, there
were 5,000,000 shares of common stock reserved for issuance under the plan.
The Company's Board of Directors has approved reserving an additional 5,000,000
shares of common stock for the plan, subject to shareholder approval.
Exercise prices of the incentive and nonstatutory stock options have
generally been 100% and 85%, respectively, of the fair market value of the
Company's common stock on the date of grant. Options are granted subject
to terms and conditions determined by the Board of Directors, and generally
are exercisable in increments of 20% for each year of employment beginning
one year from date of grant and generally expire six years from date of
grant. ZEOS had a stock option plan prior to the MEI Merger for which
granting of options was suspended after the MEI Merger.
The Company's 1995 Employee Stock Purchase Plan allows eligible employees
of the Company to purchase shares of common stock through payroll
deductions. The shares can be purchased for 85% of the lower of the
beginning or ending fair market value of each six month offering period and
are restricted from resale for a period of one year from the date of
purchase. Purchases are limited to 20% of an employee's eligible
compensation. A total of 2,500,000 shares are reserved for issuance under
the plan, of which approximately 271,000 shares had been issued as of
August 28, 1997.
Option activity under the Company's option plans are summarized as
follows (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
August 28, Weighted August 29, Weighted August 31, Weighted
Fiscal year ended 1997 Average Price 1996 Average Price 1995 Average price
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,908 $13.70 1,795 $ 8.22 - $ -
Granted 1,926 19.90 1,294 12.11 747 18.06
Merger transaction - - - - 1,140 1.43
Exercised (75) 9.49 (992) 1.02 (84) 3.93
Terminated or canceled (200) 16.52 (189) 17.35 (8) 3.80
----- ----- -----
Outstanding at end of
year 3,559 16.98 1,908 13.70 1,795 8.22
===== ====== ===== ====== ===== ======
Exercisable at end
of year 473 $14.45 172 $13.84 884 $ 0.88
===== ====== ===== ====== ===== ======
Available for future
grants 1,416 3,141 4,253
===== ===== =====
</TABLE>
The following table summarizes information about the Company's stock
options outstanding as of August 28, 1997 (amounts in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
below $5.00 20 1.25 years $3.00 20 $3.00
$5.00-$10.00 11 4.58 years 9.43 4 9.39
$10.01-$15.00 1,119 4.69 years 11.85 202 11.56
$15.01-$20.00 1,658 5.04 years 18.39 243 17.73
above $20.00 751 5.38 years 22.02 4 23.83
</TABLE>
In December 1994, ZEOS awarded shares of its common stock to certain of
its employees subject to their continued employment as of January 1, 1996.
Compensation expense was recognized over the vesting period based upon the
fair market value of the stock at the date of award. To satisfy this
award, the Company issued approximately 151,000 shares of the Company's
common stock in January 1996.
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." The Company continues to
measure compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by APB No. 25,
"Accounting for Stock Issued to Employees."
41
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
The fair value of options at date of grant was estimated using the Black-
Scholes options pricing model. The weighted average assumptions and
resulting fair values at date of grant for options granted during 1997 and
1996 follow:
<TABLE>
<CAPTION>
Stock Option Employee Stock
Plan Shares Purchase Plan Shares
1997 1996 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assumptions:
Expected life 3.5 years 3.5 years 0.5 years 0.5 years
Risk-free interest rate 6.2% 5.9% 5.0% 5.1%
Expected volatility 70.0% 70.0% 70.0% 70.0%
Dividend yield 0.0% 0.0% 0.0% 0.0%
Weighted average fair values:
Exercise price equal to market
price $10.68 $6.50 - -
Exercise price less than market
price 11.41 6.61 $5.39 $3.68
</TABLE>
Stock based compensation costs would have reduced pretax income by $6.5
million and $1.3 million in 1997 and 1996, respectively ($4.0 million and
$0.8 million and $0.04 and $0.01 per share, respectively, net of taxes), if
the fair values of all options granted during 1997 and 1996 had been
recognized as compensation expense on a straight-line basis over the
vesting period of the grants. The pro forma effect on net income for 1997
and 1996 is not representative of the pro forma effect on net income in
future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1996.
RETIREMENT PLAN
The Company has a 401(k) retirement plan (the "RAM Plan") in which
substantially all employees participate. Under the RAM Plan, which is
administered by MTI, employees may contribute from 2% to 16% of eligible
pay to various savings alternatives. The RAM Plan provides for an annual
match by the Company of the first $1,500 of eligible employee contributions
and for additional contributions by the Company based on the Company's
financial performance. The Company's expense pursuant to the RAM Plan was
approximately $4,311,000, $3,051,000 and $1,062,000 in 1997, 1996 and 1995,
respectively.
42
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
TRANSACTIONS WITH AFFILIATES
<TABLE>
<CAPTION>
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 26,791 $ 46,579 $ 32,417
Inventory purchases 82,337 198,753 177,402
Component recovery agreement
expenses 44,534 - -
Revenue sharing expenses - 49,645 72,889
Administrative services and
other expenses 934 1,680 917
Property, plant and equipment
purchases 930 574 5,647
Property, plant and equipment
sales 575 9 -
Construction management services 749 940 112
</TABLE>
Revenue sharing expense is a component of cost of goods sold and reflects
expenses incurred under a revenue sharing agreement, wherein, for the
nonstandard semiconductor components supplied by MTI, the Company paid MTI
an amount equal to one-half the price realized from sales of such
components.
During the fourth quarter of fiscal 1996, the Company entered into a new
component recovery agreement with MTI, effective August 30, 1996 and
expiring August 31, 2000. The new agreement replaces the revenue sharing
agreement. Pursuant to the component recovery agreement, the Company
generally will pay to MTI an amount equal to one-half of the operating
income generated from sales of such components.
COMMITMENTS
As of August 28, 1997, the Company had commitments of $28.2 million for
equipment purchases and $4.1 million for construction of buildings. In
addition, the Company is required to make minimum royalty payments under
certain agreements and periodically enters into purchase commitments with
certain suppliers.
The Company leases various office and production facilities and certain
other property and equipment, under operating lease agreements expiring
through 2003, with renewals thereafter at the option of the Company.
Future minimum lease payments total approximately $14,296,000 and are as
follows: $3,940,000 in 1998, $3,306,000 in 1999, $3,057,000 in 2000,
$2,457,000 in 2001 and $1,536,000 in 2002.
Rental expense was approximately $3,620,000, $2,405,000 and $1,026,000 in
1997, 1996 and 1995, respectively.
43
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
INCOME TAXES
The Company was included in the consolidated U.S. federal income tax
return of MTI until June 1996, at which time the Company became a separate
taxpayer. For all periods presented, the provision for income taxes is
computed as if the Company were a separate taxpayer, and consists of the
following:
<TABLE>
<CAPTION>
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. federal $ 34,722 $ 44,128 $ 38,548
State 6,573 5,309 7,691
-------- -------- --------
41,295 49,437 46,239
-------- -------- --------
Deferred:
U.S. federal 13,625 (11,923) (570)
State 2,172 (2,459) (2,279)
-------- -------- --------
15,797 (14,382) (2,849)
-------- -------- --------
Income tax provision $ 57,092 $ 35,055 $ 43,390
======== ======== ========
</TABLE>
The tax benefit associated with nonstatutory stock options and
disqualifying dispositions by employees of shares issued under the
Company's and MTI's stock plans reduced taxes payable by approximately
$216,000, $7,357,000 and $710,000 for 1997, 1996 and 1995, respectively.
Such benefits are credited to additional capital.
A reconciliation between the income tax provision and income tax computed
using the federal statutory rate follows:
<TABLE>
<CAPTION>
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal income tax at
statutory rate $ 50,524 $ 27,873 $ 37,967
State taxes, net of federal
benefit and state tax credits 4,777 2,254 4,592
In-process research and
development 1,378 - -
Goodwill - 4,935 776
Other 413 (7) 55
-------- -------- --------
$ 57,092 $ 35,055 $ 43,390
======== ======== ========
</TABLE>
44
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes
at enacted tax rates. Deferred income tax assets totaled approximately
$38,750,000 and $38,903,000 and liabilities totaled approximately
$12,596,000 and $6,325,000 at August 28, 1997 and August 29, 1996,
respectively. The tax effects of temporary differences and carryforwards
which give rise to the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
As of August 28, 1997 August 29, 1996
-----------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax asset:
Receivables $ 3,885 $ 3,217
Inventories 4,724 4,155
Accrued compensation 1,959 4,928
Accrued licenses and royalties 8,085 9,107
Net operating loss carryforwards 640 2,619
Accrued expenses 6,768 7,472
Other 179 3,516
------- -------
26,240 35,014
------- -------
Noncurrent deferred tax asset (liability):
Property, plant and equipment (5,443) (2,093)
Net operating loss carryforwards 4,813 333
Accrued license and royalties 278 1,956
Other 266 (2,632)
------- -------
(86) (2,436)
------- -------
Total net deferred taxes $26,154 $32,578
======= =======
</TABLE>
Deferred tax assets of approximately $9,373,000 were recorded in 1997 in
connection with the acquisition of NetFRAME. The Company has federal
operating loss carryforwards of $15.1 million (including $11.8 million as a
result of the NetFRAME acquisition) that expire beginning in 2006 and state
operating loss carryforwards of $4.9 million (including $3.9 million as a
result of the NetFRAME acquisition) that expire beginning in 2000. The use
of pre-acquisition operating losses and tax credit carryforwards are
subject to limitations imposed by the Internal Revenue Code. To the extent
the amount of NetFRAME's operating loss and tax credit carryforwards
available to offset future taxable income were statutorily limited, no
deferred tax asset was established.
EXPORT SALES
Export sales were approximately $143,446,000, $181,371,000 and
$76,686,000 in 1997, 1996 and 1995, respectively.
45
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands, except per share amounts)
CONTINGENCIES
Periodically, the Company is made aware that technology used by the
Company may infringe on intellectual property rights held by others. The
Company has accrued a liability and charged operations for the estimated
costs of settlement or adjudication of asserted and unasserted claims for
alleged infringement prior to the balance sheet date. Resolution of these
claims could have a material adverse effect on future results of operations
and could require changes in the Company's products or processes.
During the third quarter of fiscal 1997, the Company began to collect and
remit applicable sales or use taxes in nearly all states. In association
therewith, the Company is party to agreements with nearly all states which
generally limit the liability of the Company, if any, for non-remittance of
sales and use taxes prior to such agreements' effective dates. Management
believes the resolution of any matters relating to the non-remittance of
sales or use taxes prior to the balance sheet date will not have a material
adverse effect on the Company's business and results of operations.
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
adverse effect on the Company's financial position or results of
operations.
46
<PAGE>
Micron Electronics, Inc.
Quarterly Financial Information
(Tabular amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net sales $513,097 $511,394 $510,274 $421,018
Gross margin 86,099 79,582 91,615 80,450
Net income 14,955 19,656 27,839 24,812
Earnings per share 0.16 0.20 0.30 0.27
1996
Net sales $457,401 $412,322 $456,619 $438,578
Gross margin 94,892 58,571 49,010 58,712
Net income (loss) 26,448 14,075 (12,556) 16,615
Earnings (loss) per share 0.29 0.15 (0.14) 0.18
</TABLE>
In the fourth quarter of fiscal 1997, the Company acquired NetFRAME
Systems Incorporated. As a result, the Company's results of operations for
the fourth quarter of fiscal 1997 were adversely affected by $6.4 million,
or $.07 per share, which includes the operating losses of NetFRAME since
the July 18, 1997 acquisition date and a one-time charge of $3.9 million,
or $0.04 per share, for the write-off of purchased in-process research and
development. See "Acquisition of NetFRAME Systems Incorporated."
In the fourth quarter of fiscal 1996, the Company recorded certain
adjustments increasing pre-tax income by $4.0 million, and net income by
$2.5 million or $.03 per share. The adjustments include a benefit to cost
of goods sold of $13.0 million related to revisions of estimates for
product and process technology costs and an accrual, included in selling,
general and administrative expense, of $9.0 million related to revisions of
estimates for selling costs associated with sales of PC systems.
In February 1996, the Company adopted a plan to discontinue the
manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operations in Minneapolis, Minnesota. As a result, the
Company recorded a restructuring charge of $29.5 million ($22.6 million,
net of taxes) in the second quarter of fiscal 1996. In the fourth quarter
of fiscal 1996, the Company reduced the restructuring charge by $0.3
million after concluding its restructuring activities had been completed or
were adequately provided for in the remaining restructuring accrual. See
"Restructuring Charge."
47
<PAGE>
Micron Electronics, Inc.
Report of Independent Accountants
The Shareholders and Board of Directors
Micron Electronics, Inc.
We have audited the financial statements and financial statement schedule
of Micron Electronics, Inc. listed in the index on page 30 of this Form
10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule 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 financial statements referred to above present
fairly, in all material respects, the financial position of Micron
Electronics, Inc., as of August 28, 1997 and August 29, 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended August 28, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Boise, Idaho
September 22, 1997
48
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Certain information concerning the Registrant's executive officers and
directors is included under the caption "Officers and Directors of the
Registrant" included in PART I, Item 1 of this report. Other information
required by Items 10, 11, 12 and 13 will be contained in the registrant's
Proxy Statement which will be filed with the Securities and Exchange
Commission within 120 days after August 28, 1997, and is incorporated
herein by reference.
49
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following are filed as a part of this report:
Financial statements and financial statement schedules see "Item 8.
Financial Statements and Supplementary Data."
Exhibit Description
2.1 Agreement of Merger, dated as of October 30, 1994, as amended
by the first amendment thereto, dated as of December 13, 1994,
by and among ZEOS, MCI and MCMS (1)
2.2 Articles of Merger, dated April 7, 1995, by and among ZEOS, MCI
and MCMS (2)
3.1 Articles of Incorporation of Registrant, as amended (3)
3.2 Bylaws of the Registrant, as amended
10.35 1995 Stock Option Plan (4)
10.36 1995 Employee Stock Purchase Plan (4)
10.37 Amended and Restated Executive Bonus Plan (6)
10.38 Form of Indemnification Agreement between the Registrant and
its officers and directors (5)
10.39 Form of Six-Month Termination Agreements for certain officers
of the Registrant (5)
10.42 Component Recovery Agreement, dated August 14, 1996, between
the Company and Micron Technology, Inc., as amended
10.43 Credit Agreement, dated June 27, 1997, between the Company
and certain financial institutions named therein
10.44 Form of Twelve-Month Termination Agreements for certain
officers of the Registrant
10.45 Form of Twenty-four-Month Termination Agreements for certain
officers of the Registrant
11 Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
__________
(1) Incorporated by reference to Registration Statement on Form S-4
(File No. 33-90212), as declared effective on March 13, 1995
(2) Incorporated by reference to Current Report on Form 8-K, dated
April 7, 1995
(3) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended April 1, 1995
(4) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended June 1, 1995
(5) Incorporated by reference to Annual Report on Form 10-K, as amended
for the fiscal year ended August 31, 1995
(6) Incorporated by reference to Quarterly Report on Form 10-Q
for the fiscal quarter ended May 29, 1997
(b) Reports on Form 8-K:
On July 18, 1997, the Company filed a report on Form 8-K announcing the
acquisition of 63% of the outstanding shares of common stock of NetFRAME
Systems Incorporated.
On July 29, 1997, the Company filed a report on Form 8-K announcing the
appointment of Gregory D. Stevenson as President of the Company.
Micron, Micron Electronics, AutoPlay, ClusterServer, ClusterSystem,
Micron Advantage, Micron Samurai, Notebooks Now!, Powerdigm, SpecTek,
TransPort and Vetix are trademarks of the Company, and ClientPro, Computers
Now!, Millennia, NetFRAME and ZEOS are registered trademarks of the
Company. Micron Power is a service mark of the Company. Pentium is a
registered trademark and MMX is a trademark of Intel Corporation. Microsoft
and Windows NT are registered trademarks of Microsoft Corporation. All other
product names appearing herein are for identification purposes only and may be
trademarks of their respective companies.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized, in the
City of Nampa, State of Idaho, on the 1st day of October, 1997.
Micron Electronics, Inc.
/s/ T. Erik Oaas
T. Erik Oaas
-------------------------------------
Executive Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Nampa, State of Idaho, on the 1st day of October, 1997.
Signature Title Date
- ------------------------- ------------------------------------- ---------------
/s/ Joseph M. Daltoso Chairman of the Board and Chief October 1, 1997
- ------------------------- Executive Officer (Principal
(Joseph M. Daltoso) Executive Officer)
/s/ Gregory D. Stevenson President and Chief Operating October 1, 1997
- ------------------------- Officer; Director
(Gregory D. Stevenson)
/s/ T. Erik Oaas Executive Vice President, Finance October 1, 1997
- ------------------------- and Chief Financial Officer
(T. Erik Oaas) (Principal Financial and Accounting
Officer); Director
/s/ Robert F. Subia Chairman of the Board, Chief October 1, 1997
- ------------------------- Executive Officer and President of
(Robert F. Subia) Micron Custom Manufacturing Services,
Inc.; Director
/s/ Steven R. Appleton Director October 1, 1997
- -------------------------
(Steven R. Appleton)
/s/ Jerry M. Hess Director October 1, 1997
- -------------------------
(Jerry M. Hess)
/s/ Robert A. Lothrop Director October 1, 1997
- -------------------------
(Robert A. Lothrop)
/s/ John R. Simplot Director October 1, 1997
- -------------------------
(John R. Simplot)
51
<PAGE>
Schedule II
Micron Electronics, Inc.
Valuation and Qualifying Accounts
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at beginning of year $ 8,221 $ 5,458 $ 1,460
Additions charged to expense 1,032 6,306 3,962
Reductions and write-offs (3,381) (3,543) (1,540)
Acquisition 1,684 - -
Merger transaction - - 1,576
------- ------- -------
Balance at end of year $ 7,556 $ 8,221 $ 5,458
======= ======= =======
</TABLE>
52
EXHIBIT 3.2
RESTATED BYLAWS
OF
ZEOS INTERNATIONAL, LTD.
(as amended through October 8, 1992)
ARTICLE I.
OFFICES, CORPORATE SEAL
Section 1.01. Registered Office. The registered
office of the corporation in Minnesota shall be that set forth in
the Articles of Incorporation or in the most recent amendment of
the Articles of Incorporation or resolution of the directors
filed with the Secretary of State of Minnesota changing the
registered office.
Section 1.02. Other Offices. The corporation may have
such other offices, within or without the State of Minnesota, as
the directors shall, from time to time, determine.
Section 1.03. Corporate Seal. The corporation shall
have no seal.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
Section 2.01. Place and Time of Meetings. Except as
provided otherwise by Minnesota Statutes Chapter 302A, meetings
of the shareholders may be held at any place, within or without
the State of Minnesota, as may from time to time be designated by
the directors and, in the absence of such designation, shall be
held at the registered office of the corporation in the State of
Minnesota. The directors shall designate the time of day for
each meeting and, in the absence of such designation, every
meeting of shareholders shall be held at ten o'clock a.m.
Section 2.02. Regular Meetings.
(a) A regular meeting of the shareholders shall be
held on such date as the Board of Directors shall by resolution
establish.
(b) At a regular meeting the shareholders, voting as
provided in the Articles of Incorporation and these Bylaws, shall
designate the number of directors to constitute the Board of
Directors (subject to the authority of the Board of Directors
thereafter to increase or decrease the number of directors as
permitted by law), shall elect qualified successors for directors
who serve for an indefinite term or whose terms have expired or
are due to expire within six months after the date of the meeting
and shall transact such other business as may properly come
before them.
Section 2.03. Special Meetings. Special meetings of
the shareholders may be held at any time and for any purpose and
may be called by the Chief Executive Officer, Chief Financial
Officer, any two or more directors, or by one or more
shareholders holding 10% or more of the shares entitled to vote
on the matters to be presented to the meeting.
Section 2.04. Quorum, Adjourned Meetings. The holders
of a majority of the shares entitled to vote shall constitute a
quorum for the transaction of business at any regular or special
meeting. In case a quorum shall not be present at a meeting,
those present may adjourn the meeting to such day as they shall,
by majority vote, agree upon, and a notice of such adjournment
and the date and time at which such meeting shall be reconvened
shall be mailed to each shareholder entitled to vote at least 5
days before such reconvened meeting. If a quorum is present, a
meeting may be adjourned from time to time without notice other
than announcement at the meeting. At adjourned meetings at which
a quorum is present, any business may be transacted which might
have been transacted at the meeting as originally noticed. If a
quorum is present, the shareholders may continue to transact
business until adjournment notwithstanding the withdrawal of
enough shareholders to leave less than a quorum.
Section 2.05. Voting. At each meeting of the
shareholders every shareholder having the right to vote shall be
entitled to vote either in person or by proxy. Each shareholder,
unless the Articles of Incorporation or statute provide
otherwise, shall have one vote for each share having voting power
registered in such shareholder's name on the books of the
corporation. Jointly owned shares may be voted by any joint
owner unless the corporation receives written notice from any one
of them denying the authority of that person to vote those
shares. Upon the demand of any shareholder, the vote upon any
question before the meeting shall be by ballot. All questions
shall be decided by a majority vote of the number of shares
entitled to vote and represented at the meeting at the time of
the vote except if otherwise required by statute, the Articles of
Incorporation, or these Bylaws.
Section 2.06. Closing of Books. The Board of
Directors may fix a time, not exceeding 60 days preceding the
date of any meeting of shareholders, as a record date for the
determination of the shareholders entitled to notice of, and to
vote at, such meeting, notwithstanding any transfer of shares on
the books of the corporation after any record date so fixed. The
Board of Directors may close the books of the corporation against
the transfer of shares during the whole or any part of such
period. If the Board of Directors fails to fix a record date for
determination of the shareholders entitled to notice of, and to
vote at, any meeting of shareholders, the record date shall be
the 20th day preceding the date of such meeting.
Section 2.07. Notice of Meetings. There shall be
mailed to each shareholder, shown by the books of the corporation
to be a holder of record of voting shares, at his address as
shown by the books of the corporation, a notice setting out the
time and place of each regular meeting and each special meeting,
except where the meeting is an adjourned meeting and the date,
time and place of the meeting were announced at the time of
adjournment, which notice shall be mailed at least five days
prior thereto; except that notice of a meeting at which an
agreement of merger or exchange is to be considered shall be
mailed to all shareholders of record, whether entitled to vote or
not, at least fourteen days prior thereto. Every notice of any
special meeting called pursuant to Section 2.03 hereof shall
state the purpose or purposes for which the meeting has been
called, and the business transacted at all special meetings shall
be confined to the purpose stated in the notice.
Section 2.08. Waiver of Notice. Notice of any regular
or special meeting may be waived by any shareholder either
before, at or after such meeting orally or in writing signed by
such shareholder or a representative entitled to vote the shares
of such shareholder. A shareholder, by his attendance at any
meeting of shareholders, shall be deemed to have waived notice of
such meeting, except where the shareholder objects at the
beginning of the meeting to the transaction of business because
the item may not lawfully be considered at that meeting and does
not participate in the consideration of the item at that meeting.
Section 2.09. Written Action. Any action which might
be taken at a meeting of the shareholders may be taken without a
meeting if done in writing and signed by all of the shareholders
entitled to vote on that action.
ARTICLE III.
DIRECTORS
Section 3.01. General Powers. The business and
affairs of the corporation shall be managed by or under the
authority of the Board of Directors, except as otherwise
permitted by statute.
Section 3.02. Number, Qualification and Term of
Office. Until the first meeting of shareholders, the number of
directors shall be the number named in the Articles of
Incorporation or, if no such number is named therein, the number
elected by the incorporator. Thereafter, the number of directors
shall be established by resolution of the shareholders (subject
to the authority of the Board of Directors to increase or
decrease the number of directors as permitted by law). In the
absence of such shareholder resolution, the number of directors
shall be the number last fixed by the shareholders, the Board of
Directors, the incorporator or the Articles of Incorporation.
Directors need not be shareholders. Each of the directors shall
hold office until the regular meeting of shareholders next held
after such director's election and until such director's
successor shall have been elected and shall qualify, or until the
earlier death, resignation, removal, or disqualification of such
director; provided, however, that no director shall be elected to
a term in excess of five years.
Section 3.03. Board Meetings. Meetings of the Board
of Directors may be held from time to time at such time and place
within or without the State of Minnesota as may be designated in
the notice of such meeting.
Section 3.04. Calling Meetings; Notice. Meetings of
the Board of Directors may be called by the Chairman of the Board
by giving at least twenty-four hours' notice, or by any other
director by giving at least five days' notice, of the date, time
and place thereof to each director by mail, telephone, telegram
or in person.
Section 3.05. Waiver of Notice. Notice of any meeting
of the Board of Directors may be waived by any director either
before, at, or after such meeting orally or in a writing signed
by such director. A director, by his attendance at any meeting
of the Board of Directors, shall be deemed to have waived notice
of such meeting, except where the director objects at the
beginning of the meeting to the transaction of business because
the meeting is not lawfully called or convened and does not
participate thereafter in the meeting.
Section 3.06. Quorum. A majority of the directors
holding office immediately prior to a meeting of the Board of
Directors shall constitute a quorum for the transaction of
business at such meeting.
Section 3.07. Absent Directors. A director may give
advance written consent or opposition to a proposal to be acted
on at a meeting of the Board of Directors. If such director is
not present at the meeting, consent or opposition to a proposal
does not constitute presence for purposes of determining the
existence of a quorum, but consent or opposition shall be counted
as a vote in favor of or against the proposal and shall be
entered in the minutes or other record of action at the meeting,
if the proposal acted on at the meeting is substantially the same
or has substantially the same effect as the proposal to which the
director has consented or objected.
Section 3.08. Conference Communications. Any or all
directors may participate in any meeting of the Board of
Directors, or of any duly constituted committee thereof, by any
means of communication through which the directors may
simultaneously hear each other during such meeting. For the
purposes of establishing a quorum and taking any action at the
meeting, such directors participating pursuant to this Section
3.08 shall be deemed present in person at the meeting; and the
place of the meeting shall be the place of origination of the
conference telephone conversation or other comparable
communication technique.
Section 3.09. Vacancies; Newly Created Directorships.
Vacancies in the Board of Directors of this corporation occurring
by reason of death, or resignation, removal or disqualification
shall be filled for the unexpired term by a majority of the
remaining directors of the Board although less than a quorum;
newly created directorships resulting from an increase in the
authorized number of directors by action of the Board of
Directors as permitted by Section 3.02 may be filled by a
majority vote of the directors serving at the time of such
increase; and each director elected pursuant to this Section 3.09
shall be a director until such director's successor is elected by
the shareholders at their next regular or special meeting.
Section 3.10. Removal. Any or all of the directors
may be removed from office at any time, with or without cause, by
the affirmative vote of the shareholders holding a majority of
the shares entitled to vote at an election of directors except,
as otherwise provided by Minnesota Statutes Section 302A.223, as
amended, when the shareholders have the right to cumulate their
votes. A director named by the Board of Directors to fill a
vacancy may be removed from office at any time, with or without
cause, by the affirmative vote of the remaining directors if the
shareholders have not elected directors in the interim between
the time of the appointment to fill such vacancy and the time of
the removal. In the event that the entire Board or any one or
more directors be so removed, new directors shall be elected at
the same meeting.
Section 3.11. Committees. A resolution approved by
the affirmative vote of a majority of the Board of Directors may
establish committees having the authority of the board in the
management of the business of the corporation to the extent
provided in the resolution. A committee shall consist of one or
more persons, who need not be directors, appointed by affirmative
vote of a majority of the directors present. Committees are
subject to the direction and control of, and vacancies in the
membership thereof shall be filled by, the Board of Directors,
except as provided by Minnesota Statutes Section 302A.243.
A majority of the members of the committee present at a
meeting is a quorum for the transaction of business, unless a
larger or smaller proportion or number is provided in a
resolution approved by the affirmative vote of a majority of the
directors present.
Section 3.12. Written Action. Any action which might
be taken at a meeting of the Board of Directors, or any duly
constituted committee thereof, may be taken without a meeting if
done in writing and signed by all of the directors or committee
members, unless the Articles provide otherwise and the action
need not be approved by the shareholders.
Section 3.13. Compensation. Directors who are not
salaried officers of this corporation shall receive such fixed
sum per meeting attended or such fixed annual sum as shall be
determined, from time to time, by resolution of the Board of
Directors. The Board of Directors may, by resolution, provide
that all directors shall receive their expenses, if any, of
attendance at meetings of the Board of Directors or any committee
thereof. Nothing herein contained shall be construed to preclude
any director from serving this corporation in any other capacity
and receiving proper compensation therefor.
ARTICLE IV.
OFFICERS
Section 4.01. Number. The officers of the corporation
shall consist of a Chairman of the Board (if one is elected by
the Board), the Chief Executive Officer, the President, a Chief
Operating Officer (if one is elected by the Board), the Chief
Financial Officer, one or more Vice Presidents (if desired by the
Board), a Secretary (if one is elected by the Board) and such
other officers and agents as may, from time to time, be elected
by the Board of Directors. Any number of offices may be held by
the same person.
Section 4.02. Election, Term of Office and
Qualifications. The Board of Directors shall elect or appoint,
by resolution approved by the affirmative vote of a majority of
the directors present, from within or without their number, the
Chief Executive Officer, the President, the Chief Financial
Officer and such other officers as may be deemed advisable, each
of whom shall have the powers, rights duties, responsibilities,
and terms in office provided for in these Bylaws or a resolution
of the Board of Directors not inconsistent therewith. The Chief
Executive Officer and all other officers who may be directors
shall continue to hold office until the election and
qualification of their successors, notwithstanding an earlier
termination of their directorship.
Section 4.03. Removal and Vacancies. Any officer may
be removed from office by the Board of Directors at any time,
with or without cause. Such removal, however, shall be without
prejudice to the contract rights of the person so removed. If
there be a vacancy among the officers of the corporation by
reason of death, resignation or otherwise, such vacancy shall be
filled for the unexpired term by the Board of Directors.
Section 4.04. Chairman of the Board. The Chairman of
the Board, if one is elected, shall preside at all meetings of
the shareholders and directors and shall have such other duties
as may be prescribed, from time to time, by the Board of
Directors.
Section 4.05. Chief Executive Officer. Unless
otherwise provided by a resolution adopted by the Board of
Directors, the Chief Executive Officer (a) shall have general
active management of the business of the corporation, (b) in the
absence of the Chairman of the Board, shall preside at all
meetings of the shareholders and directors, (c) shall see that
all orders and resolutions of the Board of Directors are carried
into effect, (d) shall execute and deliver, in the name of the
corporation, any deeds, mortgages, bonds, contracts or other
instruments pertaining to the business of the corporation unless
the authority to execute and deliver is required by law to be
exercised by another person or is expressly delegated by the
Articles or Bylaws or by the Board of Directors to some other
officer or agent of the corporation, (e) shall maintain records
of and, whenever necessary, certify all proceedings of the Board
of Directors and the shareholders, and (f) shall have such other
duties as may, from time to time, be prescribed by the Board of
Directors.
Section 4.06. President. Unless otherwise determined
by the Board of Directors, the Chief Executive Officer shall also
be the President of the corporation. If an officer other than
the Chief Executive Officer is designated as the President, the
President shall perform such duties as may from time to time be
assigned to the President by the Chief Executive Officer or the
Board of Directors.
Section 4.07. Chief Operating Officer. The Chief
Operating Officer, if one is elected, shall perform such duties
as may from time to time be assigned to the Chief Operating
Officer by the Chief Executive Officer or the Board of Directors.
Section 4.08. Chief Financial Officer. Unless
otherwise provided by a resolution adopted by the Board of
Directors, the Chief Financial Officer (a) shall cause to be kept
accurate financial records for the corporation, (b) shall caused
to be deposited all moneys, drafts and checks in the name of, and
to the credit of, the corporation in such banks and depositaries
as the Board of Directors shall, from time to time, designate,
(c) shall have power to endorse, for deposit, all notes, checks
and drafts received by the corporation as ordered by the Board of
Directors, making proper vouchers therefor, (d) shall disburse
the funds of the corporation and issue checks and drafts in the
name of the corporation, as ordered by the Board of Directors,
(e) shall render to the Chief Executive Officer and the
directors, whenever requested, an account of all his transactions
as Chief Financial Officer and of the financial condition of the
corporation, and (f) shall perform such other duties as may, from
time to time, be prescribed by the Board of Directors or by the
Chief Executive Officer.
Section 4.09. Vice President. Each Vice President, if
one or more are elected, shall have such powers and shall perform
such duties as prescribed by the Board of Directors or by the
Chief Executive Officer. In the event of the absence or
disability of the President, the Vice President(s) shall succeed
to his power and duties in the order designated by the Board of
Directors.
Section 4.10. Secretary. The Secretary, if one is
elected, shall be secretary of and shall attend all meetings of
the shareholders and Board of Directors and shall record all
proceedings of such meetings in the minute books of the
corporation. He shall give proper notice of meetings of
shareholders and directors. He shall perform such other duties
as may, from time to time, be prescribed by the Board of
Directors or by the Chief Executive Officer.
Section 4.11. Compensation. The officers of this
corporation shall receive such compensation for their services as
may be determined, from time to time, by resolution of the Board
of Directors.
ARTICLE V.
SHARES AND THEIR TRANSFER
Section 5.01. Certificates for Shares. All shares of
the corporation shall be certificated shares. Every owner of
shares of the corporation shall be entitled to a certificate, to
be in such form as shall be prescribed by the Board of Directors,
certifying the number of shares of the corporation owned by such
shareholder. The certificates for such shares shall be numbered
in the order in which they shall be issued and shall be signed,
in the name of the corporation, by the Chief Executive Officer
and by the Secretary or an Assistant Secretary or by such
officers as the Board of Directors may designate. If the
certificate is signed by a transfer agent or registrar, such
signatures of the corporate officers may be by facsimile if
authorized by the Board of Directors. Every certificate
surrendered to the corporation for exchange or transfer shall be
cancelled, and no new certificate or certificates shall be issued
in exchange for any existing certificate until such existing
certificate shall have been so cancelled, except in cases
provided for in Section 5.04.
Section 5.02. Issuance of Shares. The Board of
Directors is authorized to cause to be issued shares of the
corporation up to the full amount authorized by the Articles of
Incorporation in such amounts as may be determined by the Board
of Directors and as may be permitted by law. No shares shall be
allotted except in consideration of cash or other property,
tangible or intangible, received or to be received by the
corporation under a written agreement, of services rendered or to
be rendered to the corporation under a written agreement, or of
an amount transferred from surplus to stated capital upon a share
dividend. At the time of such allotment of shares, the Board of
Directors making such allotments shall state, by resolution,
their determination of the fair value to the corporation in
monetary terms of any consideration other than cash for which
shares are allotted.
Section 5.03. Transfer of Shares. Transfer of shares
on the books of the corporation may be authorized only by the
shareholder named in the certificate, or the shareholder's legal
representative, or the shareholder's duly authorized
attorney-in-fact, and upon surrender of the certificate or the
certificates for such shares. The corporation may treat as the
absolute owner of shares of the corporation, the person or
persons in whose name shares are registered on the books of the
corporation.
Section 5.04. Loss of Certificates. Except as
otherwise provided by Minnesota Statutes Section 302A.419, any
shareholder claiming a certificate for shares to be lost, stolen,
or destroyed shall make an affidavit of that fact in such form as
the Board of Directors shall require and shall, if the Board of
Directors so requires, give the corporation a bond of indemnity
in form, in an amount, and with one or more sureties satisfactory
to the Board of Directors, to indemnify the corporation against
any claim which may be made against it on account of the reissue
of such certificate, whereupon a new certificate may be issued in
the same tenor and for the same number of shares as the one
alleged to have been lost, stolen or destroyed.
ARTICLE VI.
DIVIDENDS, RECORD DATE
Section 6.01. Dividends. Subject to the provisions of
the Articles of Incorporation, of these Bylaws, and of law, the
Board of Directors may declare dividends whenever, and in such
amounts as, in its opinion, are deemed advisable.
Section 6.02. Record Date. Subject to any provisions
of the Articles of Incorporation, the Board of Directors may fix
a date not exceeding 120 days preceding the date fixed for the
payment of any dividend as the record date for the determination
of the shareholders entitled to receive payment of the dividend
and, in such case, only shareholders of record on the date so
fixed shall be entitled to receive payment of such dividend
notwithstanding any transfer of shares on the books of the
corporation after the record date. The Board of Directors may
close the books of the corporation against the transfer of shares
during the whole or any part of such period.
ARTICLE VII.
BOOKS AND RECORDS, FISCAL YEAR
Section 7.01. Share Register. The Board of Directors
of the corporation shall cause to be kept at its principal
executive office, or at another place or places within the United
States determined by the board:
(1)a share register not more than one year old,
containing the names and addresses of the shareholders and the
number and classes of shares held by each shareholder; and
(2) a record of the dates on which
certificates or transaction statements
representing shares were issued.
Section 7.02. Other Books and Records. The Board of
Directors shall cause to be kept at its principal executive
office, or, if its principal executive office is not in
Minnesota, shall make available at its registered office within
ten days after receipt by an officer of the corporation of a
written demand for them made by a shareholder or other person
authorized by Minnesota Statutes Section 302A.461, originals or
copies of:
(1) records of all proceedings of
shareholders for the last three years;
(2) records of all proceedings of the board
for the last three years;
(3) its articles and all amendments
currently in effect;
(4) its bylaws and all amendments currently
in effect;
(5) financial statements required by
Minnesota Statutes Section 302A.463 and the
financial statements for the most recent interim
period prepared in the course of the operation of
the corporation for distribution to the
shareholders or to a governmental agency as a
matter of public record;
(6) reports made to shareholders generally
within the last three years;
(7) a statement of the names and usual
business addresses of its directors and principal
officers;
(8) any shareholder voting or control
agreements of which the corporation is aware; and
(9) such other records and books of account
as shall be necessary and appropriate to the
conduct of the corporate business.
Section 7.03. Fiscal Year. The fiscal year of the
corporation shall be determined by the Board of Directors.
ARTICLE VIII.
LOANS, GUARANTEES, SURETYSHIP
Section 8.01. The corporation may lend money to,
guarantee an obligation of, become a surety for, or otherwise
financially assist a person if the transaction, or a class of
transactions to which the transaction belongs, is approved by the
affirmative vote of a majority of the directors present, and:
(1) is in the usual and regular course of
business of the corporation;
(2) is with, or for the benefit of, a
related corporation, an organization in which the
corporation has a financial interest, an
organization with which the corporation has a
business relationship, or an organization to which
the corporation has the power to make donations;
(3) is with, or for the benefit of, an
officer or other employee of the corporation or a
subsidiary, including an officer or employee who
is a director of the corporation or a subsidiary,
and may reasonably be expected, in the judgment of
the board, to benefit the corporation; or
(4) has been approved by the affirmative
vote of the holders of two-thirds of the
outstanding shares.
The loan, guarantee, surety contract or other financial
assistance may be with or without interest, and may be unsecured,
or may be secured in the manner as a majority of the directors
approve, including, without limitation, a pledge of or other
security interest in shares of the corporation. Nothing in this
section shall be deemed to deny, limit or restrict the powers of
guaranty or warranty of the corporation at common law or under a
statute of the State of Minnesota.
ARTICLE IX.
INDEMNIFICATION OF CERTAIN PERSONS
Section 9.01. The corporation shall indemnify such
persons, for such expenses and liabilities, in such manner, under
such circumstances, and to such extent as permitted by Minnesota
Statutes Section 302A.521, as now enacted or hereafter amended.
ARTICLE X.
AMENDMENTS
Section 10.01. These Bylaws may be amended or altered
by a vote of the majority of the whole Board of Directors at any
meeting, provided that notice of such proposed amendment shall
have been given in the notice given to the directors of such
meeting. Such authority in the Board of Directors is subject to
the power of the shareholders to change or repeal such Bylaws by
a majority vote of the shareholders present or represented at any
regular or special meeting of shareholders called for such
purpose, and the Board of Directors shall not make or alter any
Bylaws fixing a quorum for meetings of shareholders, prescribing
procedures for removing directors or filling vacancies in the
Board of Directors, or fixing the number of directors or their
classifications, qualifications, or terms of office, except that
the Board of Directors may adopt or amend any Bylaw to increase
their number.
ARTICLE XI.
SECURITIES OF OTHER CORPORATIONS
Section 11.01. Voting Securities Held by the
Corporation. Unless otherwise ordered by the Board of Directors,
the Chief Executive Officer shall have full power and authority
on behalf of the corporation (a) to attend any meeting of
security holders of other corporations in which the corporation
may hold securities and to vote such securities on behalf of this
corporation; (b) to execute any proxy for such meeting on behalf
of the corporation; or (c) to execute a written action in lieu of
a meeting of such other corporation on behalf of this
corporation. At such meeting, the Chief Executive Officer shall
possess and may exercise any and all rights and powers incident
to the ownership of such securities that the corporation
possesses. The Board of Directors may, from time to time, grant
such power and authority to one or more other persons and may
remove such power and authority from the Chief Executive Officer
upon any other person or persons.
Section 11.02. Purchase and Sale of Securities.
Unless otherwise ordered by the Board of Directors, the Chief
Executive Officer shall have full power and authority on behalf
of the corporation to purchase, sell, transfer or encumber any
and all securities of any other corporation owned by the
corporation, and may execute and deliver such documents as may be
necessary to effectuate such purchase, sale, transfer or
encumbrance. The Board of Directors may, from time to time,
confer like powers upon any other person or persons.
<PAGE>
AMENDMENTS TO THE BYLAWS OF
MICRON ELECTRONICS, INC.
ON OCTOBER 30, 1995
I, Roderic W. Lewis, Corporate Secretary of Micron
Electronics, Inc. a Minnesota corporation, hereby certify that
the following resolution was adopted by the Board of Directors on
October 30, 1995:
WHEREAS: the Directors now desire to amend the bylaws of the
corporation to provide for uncertificated shares of the
company's common stock.
NOW THEREFORE BE IT RESOLVED: that Sections 5.01 and 5.03
of the Bylaws of this corporation be amended to read in their
entirety as follows:
Section 5.01. Certificates for Shares. The corporation
may have certificated or uncertificated shares, or both, as
designated by resolution of the Board of Directors. Every
owner of certificated shares of the corporation shall be
entitled to a certificate, to be in such form as shall be
prescribed by the Board of Directors, certifying the number
of shares of the corporation owned by such shareholder.
Within a reasonable time after the issuance or transfer of
uncertificated shares, the corporation shall send to the new
shareholder the information required to be stated on
certificates. Every owner of uncertificated shares shall,
upon written request to the corporation, be entitled to
certificated shares in place of uncertificated shares, in
the same form as that prescribed by the Board of Directors
for owners of certificated shares. Certificated shares
shall be numbered in the order in which they shall be issued
and shall be signed, in the name of the corporation, by the
Chief Executive Officer and by the Secretary or an Assistant
Secretary or by such officers as the Board of Directors may
designate. If the certificate is signed by a transfer agent
or registrar, such signatures of the corporate officers may
be by facsimile if authorized by the Board of Directors.
Every certificate surrendered to the corporation for
exchange or transfer shall be canceled, and no new
certificate or certificates shall be issued in exchange for
any existing certificate until such existing certificate
shall have been so canceled, except in cases provided for in
Section 5.04.
Section 5.03. Transfer of Shares. Transfer of shares
on the books of the corporation may be authorized only by the
shareholder, or the shareholder's legal representative, or
the shareholder's duly authorized attorney-in-fact, and upon
the surrender of the certificate or the certificates for
such shares or a duly executed assignment covering shares
held in uncertificated form. The corporation may treat, as
the absolute owner of shares of the corporation, the person
or persons in whose name shares are registered on the books
of the corporation.
IN WITNESS WHEREOF, I hereunto set my hand and affixed the
corporate seal of said corporation effective as of the 30th day
of October, 1995.
/s/ Roderick Lewis
---------------------
Corporate Secretary
Exhibit 10.42
COMPONENT RECOVERY AGREEMENT
This Component Recovery Agreement (the "Agreement") is
entered into effective as of August 14, 1996 (the "Effective
Date"), by and between Micron Technology, Inc., a Delaware
corporation located at 8000 South Federal Way, Boise, Idaho
83707 ("MTI"), and Micron Electronics, Inc., a Minnesota
corporation located at 900 E. Karcher Road, Nampa, Idaho
83687 ("MEI").
WHEREAS, MTI is engaged in the business of developing and
manufacturing semiconductor memory devices and MEI is
engaged in the business of recovering semiconductor memory
devices for sale to third parties; and
WHEREAS, MTI wishes to sell and MEI wishes to purchase
semiconductor memory devices manufactured by MTI which do
not meet MTI's design and electrical specifications and
utilize them in less critical applications;
NOW, THEREFORE, for good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. Definitions. As used in this Agreement, the following
terms have the following meanings:
(a) "Affiliated company" means any entity which is at
least fifty percent (50%) owned or controlled by MEI or by
MTI and any entity which is at least fifty percent (50%)
owned or controlled by any such entity.
(b) "Components" means MTI semiconductor memory
devices, in die or packaged form, limited to DRAMs, SRAMs,
VRAMs and/or derivatives which have failed MTI's design and
electrical specifications.
(c) "MEI Volume" means, at any given time and for each
separate part type, the quantity of full specification
semiconductor memory devices purchased by MEI during the
previous fiscal work week.
(d) "MTI's Average Sales Price" means, for each
separate part type, the average of the prices associated
with the lowest priced full specification semiconductor
memory devices sold by MTI during the previous fiscal work
week in the amount equal to the MEI Volume. For example, if
the MEI Volume for 1 meg x 4 devices were 100 and if, during
the same fiscal work week, MTI sold 50 1 meg x 4 devices for
$4.00 per device, 100 1 meg x 4 devices for $5.25 per device
and 50 1 meg x 4 devices for $6.00 per device, MTI's Average
Sales Price for 1 meg x 4 devices would be $4.63 [(50 x 4) +
(50 x 5.25) divided by 100].
2. Sales of Components. MTI hereby grants to MEI
the right to purchase all of MTI's Components and to resale
the Components upon the terms and conditions set forth
herein. Accordingly, MTI shall not sell Components to any
third party whether in the form of components, modules or
board level products without first offering such Components
for sale to MEI in accordance with this Agreement. Nothing
contained herein shall obligate MEI to purchase Components
made available for sale by MTI.
3. Component Recovery. MTI hereby grants to MEI the right
to enter onto MTI's premises at all reasonable hours to
recover Components from MTI. This right shall include the
right by MEI personnel directly or indirectly, with or
without MTI's assistance, (i) to retrieve Components from
MTI's Probe area; (ii) to select and assemble Components
retrieved from MTI's Probe area for submission to MTI's
Assembly area for packaging (encapsulation) by MTI or in
MTI's discretion to an assembly site of MTI's choice (MTI
is under no obligation to assemble these Components for
MEI); (iii) to retrieve Components from MTI's Assembly area
and from MTI's Test area. For the purpose of allowing MEI
personnel to select and assemble Components for packaging by
MTI in MTI's Assembly area, MTI agrees to make available to
MEI at no cost a reasonable and adequate amount of Assembly
cleanroom floor space, but in no event less than 300 square
feet of such floor space, for use by MEI personnel and
equipment; provided, however, that MTI may for reasonable
business purposes deny MEI access to MTI's manufacturing
site, recover Components and provide such Components to MEI
off-site at MTI's cost. MTI shall bear all costs associated
with MTI's fabrication, probe, assembly and testing of
Components that failed (as defined in Section 1(b) above) in
the Test area. MTI shall also bear all fabrication and
probe costs relating to Components MEI recovers from MTI's
Assembly and Probe areas. All manufacturing costs
associated with the assembly of Components recovered by MEI
from MTI's Probe and Assembly areas shall be borne by MEI.
Except as otherwise provided above, the point of delivery
shall be deemed to be the point of shipment by MTI at MTI's
manufacturing site or the point of direct retrieval by MEI
personnel of packaged Components at MTI's manufacturing
site. Components shall be shipped FOB the point of
delivery. Title and risk of loss of Components shall pass
from MTI to MEI at the FOB point.
4. Profit Sharing. In consideration for the recovery
and purchase by MEI of the Components from MTI, MEI
hereby agrees to pay to MTI an amount equal to fifty percent
(50%) of the pre-tax net income realized by MEI's Component
Recovery Division from sales of the Components to third
parties and affiliated companies and from intracompany sales
or transfers to MEI's other divisions or operations. For
the purpose of determining profits of sales from MEI's
Component Recovery Division to MEI's affiliated companies
and intracompany sales or transfers to MEI's other divisions
or operations, prices for such Components shall be based on
MTI's Average Sales Price and established in accordance with
the transfer price schedule set forth in Schedule A attached
hereto.
5. Payment of Profit Sharing Amount. Unless otherwise
provided herein, MTI's share of pre-tax net income
realized from sales to third parties and intracompany sales
or transfers of Components shall be paid by MEI to MTI net
forty-five (45) days after the end of each MEI fiscal month.
6. Inspection of Records. MEI shall keep full, clear and
accurate records with respect to third party and
intracompany sales of Components. MTI shall keep full,
clear and accurate records with respect to the Average Sales
Price used for the purpose of calculating the price of
Components and with respect to MTI's assembly costs. Each
party's records shall be kept at the party's principal place
of business and shall be open at all reasonable times during
the term of this Agreement to the inspection of a mutually
agreeable third party. Neither party hereto shall
unreasonably withhold from the other information necessary
to confirm compliance with the terms of this Agreement,
including but not limited to information pertaining to
intellectual property rights and agreements pertaining to
the Components. In the event a party requests an inspection
as provided herein, such party shall bear all costs and
expenses associated with such inspection, unless such
inspection reveals noncompliance with the terms of this
Agreement by the other party, in which case the noncomplying
party shall bear all such costs and expenses.
7. Intellectual Property Rights. Each party hereby grants
to the other party the right to use and make available as
reasonably requested the intellectual property of the other,
including but not limited to patents, patent applications,
software programs, and copyrighted materials, as necessary
to identify, recover and sell the Components. In addition
to bearing all costs of development and manufacture of
Components, MTI shall bear sole responsibility for, and
shall promptly pay when due, all royalty obligations arising
from patent license agreements entered into by MTI, and
associated with sales of the Components to and by MEI. MTI
hereby agrees to indemnify MEI for any damages incurred in
the event of nonpayment by MTI of any such royalty
obligations, provided that such indemnification shall not
extend to damages incurred as the result of nonpayment of
royalties arising from a bona fide dispute by MTI regarding
the terms or extent of such obligations. Royalty
obligations paid by MTI associated with sales of the
Components shall be treated as costs for the purpose of the
computation of pre-tax net income referred to in Section 4
above.
8. Confidentiality. Each party acknowledges that it
will have access to certain information and materials
concerning the business, plans, customers, technology, and
products of the other pertaining to the subject matter of
this Agreement that are confidential and of substantial
value to the other party. Each party agrees that it will
not at any time disclose such confidential information to
any third party.
9. No Warranty. MTI MAKES NO WARRANTIES, EXPRESSED OR
IMPLIED, REGARDING THE COMPONENTS, INCLUDING, BUT NOT
LIMITED TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, OR QUALITY, OR OTHERWISE.
MTI DOES NOT MAKE TO MEI OR ANY CUSTOMER OF MEI, AND HEREBY
EXPRESSLY DISCLAIMS, ANY OTHER REPRESENTATION OR WARRANTY OF
ANY KIND WITH RESPECT TO THE COMPONENTS. ALL COMPONENTS ARE
SOLD "AS IS" AND "WITH ALL FAULTS".
10. Limitation of Liability. Except as otherwise provided
herein, in the event of termination by either party in
accordance with any of the provisions of this Agreement,
neither party shall be liable to the other because of such
termination, for compensation, reimbursement or damages on
account of the loss of prospective profits or anticipated
sales, or on account of any expenditures or commitments in
connection with the business or goodwill of either party.
11. Patent Indemnity. MTI represents and warrants that
the delivery and sale of Components hereunder will not
infringe any patent, trademark or other intellectual
property rights of third parties. MTI shall indemnify and
hold MEI harmless of and from any and all losses, including
loss of costs, claims liabilities and expenses, including
attorneys' fees, incurred by MEI with respect to any such
infringement of any patent, trademark or other intellectual
property rights, provided that such indemnification shall
not exceed that amount equal to MTI's share of the net
profits derived from the sale by MEI of the infringing
products. MEI shall have the right to offset against
payments due to MTI hereunder the amount of any
indemnification owed by MTI to MEI under this Section.
12. Term and Termination.
12.1 Term. The term of this Agreement shall
commence on the Effective Date and shall continue thereafter
for a period of three (3) full fiscal years from the fiscal
year-end next following the Effective Date, subject to
earlier termination in accordance with the provisions of
this Section and shall continue on a year-to-year basis
thereafter unless canceled by the other party within thirty
(30) days prior to the end of the initial term or any
extension thereof.
12.2 Termination by Mutual Agreement. This Agreement
may be terminated at any time upon the mutual written
agreement of the parties.
12.3 Termination by MTI. MTI shall have the option
to terminate this Agreement upon MTI's Loss of Control of
MEI (as defined below), by providing written notice to MEI
within ninety (90) days of such Loss of Control.
For purposes of this Section 12.3, "Loss of Control"
shall mean such time as MTI shall become the beneficial
owner (as defined in Rules 13d-3 and 13d-5 under the
Securities Exchange Act of 1934, as amended) of less than
thirty percent (30%) of the total voting power of all
classes of Equity Interests of MEI then outstanding and
normally entitled to vote in the election of directors or
other governing body of MEI. For purposes of this Section
12.3, "Equity Interests" shall mean any and all shares,
interests, rights to purchase warrants, options,
participations or other equivalents of, or interests in
(however designated) corporate stock or other equity
participations, including partnership interests, whether
general or limited, including any preferred equity
interests.
12.4 Survival of Certain Terms. The provisions of
Sections 8, 9, 10, 11 and 14 of this Agreement shall remain
in full force and effect after any termination of the
Agreement. With respect to Components delivered by MTI to
MEI for which profits have not yet been realized by MEI or
paid to MTI, all the provisions of this Agreement shall
remain in full force and effect after any termination of
this Agreement.
13. Application to Subsidiaries. The obligations of either
party hereunder shall be applicable to subsidiaries of each
such party. "Subsidiary" shall mean any entity owned fifty
percent (50%) or more by a party.
14. General Provisions.
14.1 Governing Law. This Agreement shall be governed by
and construed under the laws of the State of Idaho. The
federal and state courts within the State of Idaho shall
have the sole and exclusive jurisdiction to adjudicate any
dispute arising out of this Agreement.
14.2 Entire Agreement. This Agreement sets forth the
entire agreement and understanding of the parties relating
to the subject matter herein and merges all prior
discussions between them. No modification of or amendment
to this Agreement, nor any waiver of any rights under this
Agreement, shall be effective unless in writing signed by
authorized representatives of both parties.
14.3 Notices. Any notice required or permitted by this
Agreement shall be in writing and shall be sent by prepaid
registered or certified mail, return receipt requested,
addressed to the other party at the address shown at the
beginning of this Agreement or at such other address for
which such party give notice hereunder. Such notice shall
be deemed to have been given three (3) days after deposit in
the mail.
14.4 Force Majeure. Nonperformance of either party
shall be excused to the extent that performance is rendered
impossible by strike, fire, flood, governmental acts or
orders or restrictions, or any other reason where failure to
perform is beyond the control and not caused by the
negligence of the nonperforming party.
14.5 Assignability and Binding Effect. The rights and
obligation of each party hereunder may not be assigned or
transferred directly or indirectly without the prior written
consent of the other party, which consent shall not be
unreasonably withheld. Provided, however, that MEI may
assign or transfer its rights and obligations arising out of
this Agreement to one or more of its subsidiaries or
affiliated companies. Change of ownership or control of MEI
or MTI or any assignee permitted under this Section 14.5
shall not constitute an assignment or transfer under this
Section 14.5. If MEI sells or transfers its component
recovery assets and business to a subsidiary or affiliated
company, MEI shall be permitted to assign or transfer its
rights and obligations arising out of this Agreement to such
subsidiary or affiliated company. Subject to the foregoing,
this Agreement shall be binding upon and inure to the
benefit of the parties hereto, their successors and assigns.
14.6 Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an
original and all of which together shall constitute one
instrument.
MICRON TECHNOLOGY, INC. MICRON ELECTRONICS, INC.
By Steven R. Appleton By Joseph Daltoso
----------------------- --------------------
Title President Title President
-------------------- -----------------
<PAGE>
Schedule A
Transfer Price
MTI's Transfer Price Transfer Price Transfer Price Transfer Parts
Average for Full for Systems for Printer Buffer for Audio
Sales Price Specification Parts Grade Parts Grade Parts Grade Devices
- ----------- ------------------- -------------- ------------------ --------------
X .975(X) .8288(X) .70(X) .25(X)
<PAGE>
Amendment Number 1 to Component Recovery Agreement
THIS AMENDMENT NUMBER 1 (this "Amendment") is entered
into by and between Micron Technology, Inc., a Delaware
corporation ("MTI") and Micron Electronics, Inc., a
Minnesota corporation ("MEI").
WHEREAS, MTI and MEI entered into that certain
Component Recovery Agreement with an effective date of
August 14, 1996 (the "Agreement");
WHEREAS, MTI and MEI desire to amend the Agreement to
change the effective date to August 30, 1996;
NOW THEREFORE, MTI and MEI agree that in the first
sentence of the Agreement the date "August 14, 1996" is
deleted and is replaced with the date "August 30, 1996." In
all other respects, the parties hereby ratify and reaffirm
all other provisions of the Agreement.
IN WITNESS WHEREOF, the parties have caused this
Amendment to be effective as of August 30, 1996.
MICRON TECHNOLOGY, INC. MICRON ELECTRONICS, INC.
By:/s/ Steven R. Appleton By: /s/ Gregory D. Stevenson
---------------------- -------------------------
Name: Steven R. Appleton Name: Gregory D. Stevenson
---------------------- -------------------------
President, Chairman and Executive Vice President,
Title: Chief Executive Officer Title: Operations
---------------------- -------------------------
Date: January 6, 1997 Date: January 7, 1997
---------------------- -------------------------
Exhibit 10.43
CREDIT AGREEMENT
among
MICRON ELECTRONICS, INC.
as Borrower
and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
UNITED STATES NATIONAL BANK OF OREGON
ABN AMRO BANK, N.V.
DEUTSCHE BANK AG, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH
FLEET NATIONAL BANK
KEYBANK NATIONAL ASSOCIATION
THE BANK OF NOVA SCOTIA
THE SUMITOMO BANK, LIMITED
as Lenders,
and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
UNITED STATES NATIONAL BANK OF OREGON
as Co-Agents for the Lenders
and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
as Administrative Agent for the Lenders
June 27, 1997
$130,000,000
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT ("Agreement") is made as of the 27th
day of June, 1997, by and among BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION d/b/a SEAFIRST BANK, UNITED STATES
NATIONAL BANK OF OREGON, ABN AMRO BANK, N.V., DEUTSCHE BANK AG,
NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH, FLEET NATIONAL
BANK, KEYBANK NATIONAL ASSOCIATION, THE BANK OF NOVA SCOTIA and
THE SUMITOMO BANK, LIMITED (each individually a "Lender" and
collectively the "Lenders") BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION d/b/a SEAFIRST BANK and UNITED STATES
NATIONAL BANK OF OREGON as co-agents for Lenders, BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION d/b/a SEAFIRST BANK as
administrative agent for Lenders (the "Agent"), and MICRON
ELECTRONICS, INC., a Minnesota corporation (the "Borrower").
AGREEMENT
ARTICLE 1
DEFINITIONS
Section 1.1 Certain Defined Terms. As used in this
Agreement, the following terms have the following meanings:
"Adjusted LIBOR Rate" means a per annum interest rate
equal to the sum of (i) the LIBOR Margin and (ii) the LIBOR Rate.
"Adjusted Reference Rate" means a per annum interest
rate equal to the sum of (i) the Reference Rate Margin and
(ii) the Reference Rate.
"Advances" means Loans and Letters of Credit.
"Agent" means Bank of America National Trust and
Savings Association and any successor administrative agent
selected pursuant to Section 9.6.
"Applicable Interest Period" means, with respect to any
Loan accruing interest at the Adjusted LIBOR Rate, the period
commencing on the first day Borrower elects to have such Adjusted
LIBOR Rate apply to such Loan and ending on a day one, two, three
or six months thereafter, as specified in the Interest Rate
Notice given in respect of such Loan or as otherwise determined
pursuant to Section 2.7(b) provided, however, that no Applicable
Interest Period may be selected for a Loan if it extends beyond
the Maturity Date.
"Applicable Interest Rate" means for each Loan (or
portion thereof), the Adjusted Reference Rate or the Adjusted
LIBOR Rate as designated by Borrower in an Interest Rate Notice
given with respect to such Loan (or portion thereof) or as
otherwise determined pursuant to Section 2.7(b).
"Borrower" means Micron Electronics, Inc., a Minnesota
corporation, and any permitted Successor or assign pursuant to
Section 11.6.
"Borrower Documents" means this Agreement, the Notes,
the Disclosure Letter, and that certain letter agreement
referenced in Section 2.13(c) hereof.
"Borrowing Base" means, at any time, an amount equal to
seventy percent (70%) of the accounts receivables of Borrower on
a consolidated basis determined in accordance with GAAP.
"Borrowing Base Activation Event" has the meaning given
in Section 2.2.
"Business Day" means any day other than Saturday,
Sunday or another day on which banks are authorized or obligated
to close in Seattle, Washington, or Boise, Idaho except that in
the context of the selection of a Loan accruing interest at the
Adjusted LIBOR Rate or the calculation of the LIBOR Rate for any
Applicable Interest Period, in which event "Business Day" means
any day other than Saturday or Sunday on which dealings in
foreign currencies and exchange between banks may be carried on
in London, England and Seattle, Washington.
"Capital Leases" means all leases which shall have
been, or in accordance with GAAP, should be recorded as capital
leases.
"Code" means the Internal Revenue Code of 1986, as
amended from time to time.
"Commitment" has the meaning given in Section 2.1.
"Commitment Period" has the meaning given in
Section 2.1.
"Controlled Group" means all members of a controlled
group of corporations and all trades or businesses (whether or
not incorporated) under common control which, together with
Borrower or any Subsidiary, are treated as a single employer
under Section 414(b) or 414(c) of the Code.
"Default" means any event which but for the passage of
time or the giving of notice or both would be an Event of
Default.
"Disclosure Letter" means that certain letter and the
schedules thereto dated as of the date hereof, executed by a
Responsible Officer, and delivered to Agent and Lenders.
"Dividend Payment" has the meaning given in
Section 7.1.
"Eligible Assignee" means (i) a commercial bank
organized under the laws of the United States, or any state
thereof, and having a combined capital and surplus of at least
$500,000,000; (ii) a commercial bank organized under the laws of
any other country which is a member of the Organization for
Economic Cooperation and Development (the "OECD"), or a political
subdivision of any such country, and having a combined capital
and surplus of at least $500,000,000, provided that such bank is
acting through a branch or agency located in the United States of
America; or (iii) a person that is primarily engaged in the
business of commercial banking and that is (A) a subsidiary of a
Lender, (B) a subsidiary of a person of which a Lender is a
subsidiary, or (C) a person of which a Lender is a subsidiary.
"Environmental Laws" means all federal, state and local
statutes, regulations, ordinances, and requirements, now or
hereafter in effect, pertaining to environmental protection,
contamination or cleanup, including without limitation (i) the
Federal Resource Conservation and Recovery Act of 1976 (42 U.S.C.
section 6901, et seq.), (ii) the Federal Comprehensive Environmental
Response, Compensation, and Liability Act (42 U.S.C. section 9601
et seq.), (iii) the Federal Hazardous Materials Transportation
Control Act (49 U.S.C. section 1801, et seq.), (iv) the Federal Clean
Air Act (42 U.S.C. section 7401, et seq.), (v) the Federal Water
Pollution Control Act, Federal Clean Water Act (33 U.S.C. section 1251
et seq.), (vi) the Federal Insecticide, Fungicide, and
Rodenticide Act, Federal Pesticide Act (7 U.S.C. section 136, et seq.),
(vii) the Federal Toxic Substances Control Act (15 U.S.C. section 2601
et seq.), and (viii) the Federal Safe Drinking Water Act
(42 U.S.C. section 300f et seq.), all as now or hereafter amended.
"ERISA" means the Employee Retirement Income Security
Act of 1974, as amended from time to time.
"Eurodollar Reserves" means a fraction (expressed as a
decimal), the numerator of which is the number one and the
denominator of which is the number one minus the aggregate of the
maximum reserve percentages (including, without limitation, any
special, supplemental, marginal or emergency reserves) expressed
as a decimal established by the Board of Governors of the Federal
Reserve System or any other banking authority to which Lenders
are subject for Eurocurrency Liability (as defined in
Regulation D of such Board of Governors). It is agreed that for
purposes hereof, each Loan (or portion thereof) accruing interest
at the Adjusted LIBOR Rate shall be deemed to constitute a
Eurocurrency Liability and to be subject to the reserve
requirements of Regulation D, without benefit of credit or
proration, exemptions or offsets which might otherwise be
available to Lenders from time to time under such Regulation D.
Eurodollar Reserves shall be adjusted automatically on and as of
the effective date of any change in any reserve percentage and
shall apply to Applicable Interest Periods commencing after the
effective date of change.
"Event of Default" has the meaning given in
Section 8.1.
"Federal Funds Rate" means, for any period, a
fluctuating interest rate per annum equal for each day during
such period to the weighted average of the rates on overnight
federal funds transactions with members of the Federal Reserve
System arranged by federal funds brokers, as published for such
day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day which is a
Business Day, the average of the quotations for such day on such
transactions received by Agent from three federal funds brokers
of recognized standing selected by it.
"GAAP" has the meaning given in Section 1.3.
"Government Approval" means an approval, permit,
license, authorization, certificate, or consent of any
Governmental Authority.
"Governmental Authority" means the government of the
United States or any State or any foreign country or any
political subdivision of any thereof or any branch, department,
agency, instrumentality, court, tribunal or regulatory authority
which constitutes a part or exercises any sovereign power of any
of the foregoing.
"Hazardous Substances" means any substance or material
defined or designated as hazardous or toxic waste, hazardous or
toxic material, a hazardous, toxic or radioactive substance, or
other similar terms, by any federal, state or local environmental
statute, regulation or ordinance presently in effect, including
but not limited to the Environmental Laws.
"Indebtedness" means, for any person, without
duplication, (a) all indebtedness for borrowed money; (b) all
obligations issued, undertaken or assumed as the deferred
purchase price of property or services (other than trade payables
entered into in the ordinary course of business on ordinary
terms); (c) all non-contingent reimbursement or payment
obligations with respect to letters of credit, bankers
acceptances, surety bonds and similar instruments; (d) all
obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in
connection with the acquisition of property, assets or
businesses; (e) all indebtedness created or arising under any
conditional sale or other title retention agreement (excluding
any operating lease), or incurred as financing, in either case
with respect to property acquired by the person (even though the
rights and remedies of the seller or bank under such agreement in
the event of default are limited to repossession or sale of such
property); (f) all obligations with respect to Capital Leases or
Synthetic Leases; (g) all indebtedness referred to in clauses (a)
through (f) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien upon or in property (including accounts
and contracts rights) owned by such person, even though such
person has not assumed or become liable for the payment of such
Indebtedness; and (h) all liabilities in respect of indebtedness
or obligations of others of the kinds referred to in clauses (a)
through (g) above for which such person is directly or
contingently liable as obligor, guarantor, or otherwise, or in
respect of which such person otherwise assures a creditor against
loss. For all purposes of this Agreement, the Indebtedness of
any person shall include all recourse Indebtedness of any
partnership or joint venture formed as a partnership where such
person is a general partner or is otherwise liable for the
Indebtedness of such partnership or joint venture.
"Interest Rate Notice" has the meaning given in
Section 2.7(b).
"Lenders" means Bank of America National Trust and
Savings Association, United States National Bank of Oregon, ABN
AMRO Bank, N.V., Deutsche Bank AG, New York Branch and/or Cayman
Islands Branch, Fleet National Bank, KeyBank National
Association, The Bank of Nova Scotia and The Sumitomo Bank,
Limited, and any Successors thereto or permitted assigns thereof.
"Letter of Credit" means any standby letter of credit
issued by Agent pursuant to the terms of Article 3 hereof.
"Letter of Credit Risk Participation" means a risk
participation purchased by a Lender pursuant to Article 10 hereof
with respect to a Letter of Credit (including risk participations
deemed purchased by Agent in its capacity as Lender).
"Letter of Credit Usage" means, as of any date of
determination, the sum of (i) the aggregate face amount of all
outstanding unmatured Letters of Credit plus (ii) the aggregate
amount of all payments made by Agent under Letters of Credit and
not yet reimbursed by Borrower pursuant to Section 3.4.
"Leverage Rating" means a rating determined in
accordance with the following table:
Leverage Ratio Leverage Rating
-------------- ---------------
less than 0.50 to 1.0 Level 1
equal to or greater than 0.50 to 1.0, Level 2
but less than 0.75 to 1.0
equal to or greater than 0.75 to 1.0, Level 3
but less than 1.0 to 1.0
equal to or greater than 1.0 to 1.0, Level 4
but less than 1.25 to 1.0
equal to or greater than 1.25 to 1.0, Level 5
The Leverage Rating for each fiscal quarter (the "Current
Quarter") shall be determined in accordance with the following
procedures on the basis of the Leverage Ratio as of the end of
the immediately preceding fiscal quarter (the "Prior Quarter")
and shall be effective as of the first day of the Current
Quarter. All resulting adjustments in interest rate margins and
fees shall likewise be effective as of the first day of the
Current Quarter including adjustments to the Adjusted LIBOR Rate
during any Applicable Interest Period. Until the earlier of
(i) the date on which the financial reports are due in respect of
the Prior Quarter pursuant to Sections 6.10(a) and (b) hereof; or
(ii) the date on which such financial reports are received, any
payments of fees or interest due hereunder shall be calculated
and paid, on an interim basis, as if the Leverage Rating
applicable for the Prior Quarter were the Leverage Rating
applicable to the Current Quarter. If the financial reports due
in respect of the Prior Quarter are not provided by the date
required pursuant to Sections 6.10(a) and (b) hereof, from and
after the date on which such financial statements are due, any
payments of fees or interest due hereunder shall be calculated
and paid, on an interim basis, as if the Leverage Rating
applicable for the Current Quarter was one level higher than the
Leverage Rating applicable to the Prior Quarter. Upon receipt of
the financial reports due in respect of the Prior Quarter
pursuant to Sections 6.10(a) and (b) hereof, any prior
overpayment shall be paid by Lenders to Agent for delivery to
Borrower, and any prior underpayment shall be paid by Borrower to
Agent for the account of the Lenders, in each case, without
interest and within one (1) Business Day of notice thereof.
"Leverage Ratio" means the ratio of Borrower's Total
Liabilities to Borrower's Tangible Net Worth.
"LIBOR Margin" means on any date, a per annum interest
rate determined in accordance with the following table:
Borrower's Leverage Rating Margin (expressed per annum)
-------------------------- ----------------------------
Level 1 62.5 basis points (0.625%)
Level 2 87.5 basis points (0.875%)
Level 3 100 basis points (1.00%)
Level 4 112.5 basis points (1.125%)
Level 5 137.5 basis points (1.375%)
"LIBOR Rate" means, for any Applicable Interest Period,
an interest rate per annum equal to the product of (i) the
Euro-dollar Rate in effect for such Applicable Interest Period
and (ii) the Eurodollar Reserves in effect on the first day of
such Applicable Interest Period. The "Euro-dollar Rate" will be
determined by reference to that rate (rounded upward, if
necessary, to the next one-sixteenth of one percent (.0625%))
which appears on the display designated as "Page 3750" on the
Telerate Service (or on such other page on that service or such
other service designated by the British Banker's Association for
the display of that Association's Interest Settlement Rates for
U..S. Dollar deposits) as of 11:00 a.m., London time, on the day
that is two (2) Business Days prior to the first date of the
proposed Applicable Interest Period. If there are no applicable
quotes available through Telerate Service, the Euro-dollar Rate
will be determined by reference to that rate (rounded upward, if
necessary, to the next one-sixteenth of one percent (.0625%))
appearing on the Reuters Screen LIBO Page as of 11:00 a.m.,
London time, on the day that is two (2) Business Days prior to
the first date of the proposed Applicable Interest Period. If
more than one such rate appears on the display, the rate will be
the arithmetic mean of such rates. If there is no period equal
to the Applicable Interest Period on the display, the LIBOR Rate
shall be determined by straight-line interpolation to the nearest
month (or week or day if expressed in weeks or days)
corresponding to the Applicable Interest Period between the two
nearest neighboring periods on the display. If there are no
applicable quotes available through Telerate Service or on the
Reuters Screen LIBO Page, then the Adjusted LIBOR Rate shall be
deemed unavailable as provided in Section 2.7(d).
"LIBOR Rate Loan" means a Loan or portion thereof
bearing interest at the Adjusted LIBOR Rate.
"Lien" means, for any person, any security interest,
pledge, mortgage, charge, assignment, hypothecation, encumbrance,
attachment, garnishment, execution or other voluntary or
involuntary lien upon such person's interest in real or personal
property whether now owned or hereafter acquired, except
(i) liens for Taxes which are not delinquent or which remain
payable without penalty or the validity or amount of which is
being contested in good faith by appropriate proceedings with
appropriate reserves having been established therefor in
accordance with GAAP; (ii) liens imposed by law (such as
mechanics' liens) incurred in good faith in the ordinary course
of business which are not delinquent or which remain payable
without penalty or the validity or amount of which is being
contested in good faith by appropriate proceedings with, in the
case of liens on property of Borrower, provision having been made
to the satisfaction of Agent for the payment thereof in the event
the contest is determined adversely to Borrower; (iii) deposits
or pledges under worker's compensation, unemployment insurance,
social security or other similar laws or made to secure the
performance of bids, tenders, contracts (except for repayment of
borrowed money), or leases, or to secure statutory obligations or
surety or appeal bonds or to secure indemnity, performance or
other similar bonds given in the ordinary course of business;
(iv) reservations, exceptions, encroachments, easements, rights-
of-way, covenants, conditions, restrictions and other similar
title exceptions or encumbrances affecting real property,
provided such liens do not interfere in any material respect with
the use of such property in the ordinary conduct of business of
Borrower or any Subsidiary; (v) liens on real or personal
property of a Subsidiary to secure obligations of such Subsidiary
(or of another Subsidiary) to Borrower; (vi) liens which
constitute rights of set-off of a customary nature or "bankers'
liens" with respect to amounts on deposit, whether arising by
operation of law or by contract to secure the payment of
customary bank charges assessed for the maintenance of accounts
and related facilities maintained with banks in the ordinary
course of business, but not in connection with working capital
facilities, lines of credit, term loans, or other credit
facilities and similar arrangements.
"Loan Documents" means the Borrower Documents, the
Letters of Credit and all other certificates, instruments and
other documents executed in connection with this Agreement, any
other Loan Document, or the transactions contemplated hereby or
thereby.
"Majority Lenders" means at any time Lenders having an
aggregate Percentage Interest of at least sixty-six and two
thirds percent (66 2/3%).
"Maturity Date" means June 27, 2000.
"Net Income" means for any accounting period the net
income of any person for such period, determined in accordance
with GAAP, excluding, however, (i) proceeds of any life insurance
policy, (ii) gain or loss arising from any write-up or write-down
of capital assets and (iii) special credits or charges,
including, without limitation, extraordinary gains and losses.
"Notes" has the meaning given in Section 2.10.
"Notice of Borrowing" means a written request for a
Loan executed by Borrower substantially in the form attached
hereto as Exhibit B which shall be delivered to Agent prior to
11:00 a.m. (Seattle, Washington time) on the requested date of
borrowing provided, however, if Borrower shall at the same time
elect to have interest accrue on such Loan at an Adjusted LIBOR
Rate, the Notice of Borrowing shall be given prior to 11:00 a.m.
(Seattle, Washington time), on a Business Day at least three (3)
Business Days before the requested date of borrowing. Requests
for borrowing received after the designated hour will be deemed
received on the next succeeding Business Day.
"Officer's Certificate" means a certificate signed in
the name of Borrower by its President, Chief Financial Officer,
Treasury Director or any Vice President.
"PBGC" means the Pension Benefit Guaranty Corporation
or any entity succeeding to any or all of its functions under
ERISA.
"Pension Plan" means an "employee pension benefit plan"
(as such term is defined in ERISA) from time to time maintained
by Borrower, any Subsidiary or a member of the Controlled Group.
"Percentage Interest" has the meaning given in
Section 2.1 as the same may be adjusted pursuant to Section 11.6
from time to time hereafter.
"Permitted Swap Obligations" means all obligations
(contingent or otherwise) of Borrower or any Subsidiary existing
or arising under Swap Contracts, provided that each of the
following criteria is satisfied: (a) such obligations are (or
were) entered into by such person in the ordinary course of
business for the purpose of directly mitigating risks associated
with liabilities, commitments or assets held by such person, or
changes in the value of securities issued by such person in
conjunction with a securities repurchase program not otherwise
prohibited hereunder, and not for purposes of speculation or
taking a "market view;" and (b) such Swap Contracts do not
contain any provision ("walk-away" provision) exonerating the non-
defaulting party from its obligation to make payments on
outstanding transactions to the defaulting party. As used
herein, "Swap Contract" shall mean any agreement, whether or not
in writing, relating to any transaction that is a rate swap,
basis swap, forward rate transaction, commodity swap, commodity
option, equity or equity index swap or option, bond, note or bill
option, interest rate option, forward foreign exchange
transaction, cap, collar or floor transaction, currency swap,
cross-currency rate swap, swaption, currency option or any other,
similar transaction (including any option to enter into any of
the foregoing) or any combination of the foregoing, and, unless
the context otherwise clearly requires, any master agreement
relating to or governing any or all of the foregoing.
"Plan" means, at any time, an employee pension benefit
plan which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Code and is
either (i) maintained by Borrower, any Subsidiary or any member
of a Controlled Group for employees of Borrower, any Subsidiary
or any member of such Controlled Group or (ii) maintained
pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes
contributions and to which Borrower, any Subsidiary or any member
of a Controlled Group is then making or accruing an obligation to
make contributions or has within the preceding five (5) plan
years made contributions.
"Prior Credit Agreement" means that certain Credit
Agreement dated as of July 3, 1996 by and among Borrower, Bank of
America National Trust and Savings Association d/b/a Seafirst
Bank (successor by merger to Bank of America NW, N.A.) and United
States National Bank of Oregon.
"Purchase Money Lien" means a Lien securing
Indebtedness incurred in connection with the acquisition of fixed
assets (including both equipment and real estate) where such Lien
arises after the date of this Agreement so long as (i) such Lien
shall attach only to the property to be acquired (together with
attachments, accessions, and additions thereto or proceeds
thereof), and (ii) the debt incurred shall not exceed the
purchase price of the item or items of fixed assets purchased.
"Reference Rate Margin" means, as of any day, a per
annum interest rate determined in accordance with the following
table:
Leverage Rating Margin (expressed per annum)
--------------- ----------------------------
Levels 1 and 2 0 basis points (0.0%)
Level 3 25 basis points (0.25%)
Level 4 50 basis points (0.50%)
Level 5 75 basis points (0.75%)
"Reference Rate" means on any day, the rate of interest
publicly announced from time to time by Agent in San Francisco,
California, as its "Reference Rate." The Reference Rate is set
based on various factors, including Agent's costs and desired
return, general economic conditions, and other factors, and is
used as a reference point for pricing some loans. Agent may
price loans to its customers at, above, or below the Reference
Rate. Any change in the Reference Rate shall take effect at the
opening of business on the day specified in the public
announcement of a change in the Reference Rate.
"Reference Rate Loan" means a Loan or portion thereof
bearing interest at the Adjusted Reference Rate.
"Responsible Officer" means Borrower's Chief Executive
Officer, Chief Financial Officer, President, Treasury Director,
any Executive Vice President, or any other officer having
substantially the same authority and responsibility.
"Restricted Payments" means, for any period, the sum of
(i) all Dividend Payments made by Borrower during such period
other than Dividend Payments described in Section 7.1(z) hereof;
(ii) all Dividend Payments made by any Subsidiary during such
period to any person in which Borrower has no direct or indirect
ownership interest (an "Unaffiliated Person"); (iii) the product
of (A) all Dividend Payments made by any Subsidiary to any person
which is not an Unaffiliated Person (an "Affiliated Person") and
(B) a percentage equal to the percentage of such Affiliated
Person which is owned directly or indirectly by an Unaffiliated
Person; (iv) an amount equal to the product of (A) the Tangible
Net Worth of any Subsidiary which during such period was the
surviving corporation in any merger or consolidation with any
other Subsidiary calculated as of the moment immediately
following the consummation of such merger or consolidation and
(B) a percentage equal to the percentage of such Subsidiary which
is owned directly or indirectly by an Unaffiliated Person
immediately following the consummation of such merger or
consolidation; (v) an amount equal to the fair market value of
all property distributed to an Unaffiliated Person in connection
with the liquidation or dissolution of a Subsidiary occurring
during such period; and (vi) an amount equal to the product of
(A) the fair market value of all property distributed to an
Affiliated Person in connection with the liquidation or
dissolution of a Subsidiary occurring during such period and
(B) a percentage equal to the percentage of such Affiliated
Person which is owned directly or indirectly by an Unaffiliated
Person.
"Subordinated Indebtedness" means Indebtedness of
Borrower which is expressly subordinated to all obligations of
Borrower under this Agreement and the other Loan Documents either
(i) by the terms of the instrument evidencing such Subordinated
Indebtedness, which terms are acceptable to Majority Lenders in
their sole discretion, or (ii) pursuant to one or more
subordination agreements each in form and substance acceptable to
Majority Lenders in their sole discretion.
"Subsidiary" of a person means any corporation, limited
liability company or partnership of which more than 50% of the
voting stock, membership interests or partnership interests is
owned or controlled directly or indirectly by the person, or one
or more of the Subsidiaries of the person, or a combination
thereof. Unless the context otherwise clearly requires,
references herein to a "Subsidiary" refer to a Subsidiary of the
Borrower.
"Successor" means, for any corporation or banking
association, any successor by merger or consolidation, or by
acquisition of substantially all of the assets of the
predecessor.
"Synthetic Lease" means a lease which (i) in accordance
with GAAP, including, without limitation, the requirements of
FASB-13, is accounted for as an "operating lease"; and
(ii) where, under the Code and applicable regulations and rulings
issued thereunder, the lessee thereunder is characterized as the
owner of the leased property.
"Tangible Net Worth" means for any person, the excess
of total assets over Total Liabilities, excluding, however, from
the determination of total assets (i) all assets which should be
classified as intangible assets (such as goodwill, patents,
trademarks, copyrights, franchises, and deferred charges
including unamortized debt discount and research and development
costs), (ii) cash held in a sinking or other similar fund
established for the purpose of redemption or other retirement of
capital stock, (iii) to the extent not already deducted from
total assets, reserves for depreciation, depletion, obsolescence
or amortization of properties and other reserves or
appropriations of retained earnings which have been or should be
established in connection with the business conducted by the
relevant corporation, and (iv) any revaluation or other write-up
in book value of assets subsequent to the fiscal year of such
corporation last ended at the date of this Agreement.
"Tax" means for any person any tax, assessment, duty,
levy, impost or other charge imposed by any Governmental
Authority on such person or on any property, revenue, income, or
franchise of such person and any interest or penalty with respect
to any of the foregoing.
"Total Commitment" means One Hundred Thirty Million
Dollars ($130,000,000) as the same may be reduced or terminated
pursuant to Sections 2.4.
"Total Liabilities" means for any person, all items of
indebtedness or liability of such person which would be included
in determining total liabilities as shown on the liability side
of a balance sheet in accordance with GAAP other than
Subordinated Indebtedness.
"Total Utilization" means, as of any date of
determination, the sum of (i) the aggregate outstanding principal
balance of all Loans; plus (ii) the Letter of Credit Usage.
"Unfunded Vested Liabilities" means, with respect to
any Plan, at any time, the amount (if any) by which (i) the
present value of all vested nonforfeitable benefits under such
Plan exceeds (ii) the fair market value of all Plan assets
allocable to such benefits, all determined as of the then most
recent valuation date for such Plan, but only to the extent that
such excess represents a potential liability of Borrower, any
Subsidiary or any member of the Controlled Group to the PBGC or
the Plan under Title IV of ERISA.
"Wholly-Owned Subsidiary" means any corporation,
limited liability company, or partnership in which 100% of the
voting stock, membership interests or partnership interests
(excluding directors qualifying shares and shares issued to
comply with local ownership requirements) is owned beneficially
and of record by Borrower (or by one or more Wholly-Owned
Subsidiaries or by a combination thereof).
Section 1.2 General Principles Applicable to Definitions.
Definitions given in Section 1.1 shall be equally applicable to
both singular and plural forms of the terms therein defined and
references herein to "he" or "it" shall be applicable to persons
whether masculine, feminine or neuter. References herein to any
document including, but without limitation, this Agreement shall
be deemed a reference to such document as it now exists, and as,
from time to time hereafter, the same may be amended. References
herein to a "person" or "persons" shall be deemed to be
references to an individual, corporation, partnership, trust,
unincorporated association, limited liability company, joint
venture, joint-stock company, government (including political
subdivisions), Governmental Authority or agency or any other
entity.
Section 1.3 Accounting Terms. Except as otherwise provided
herein, accounting terms not specifically defined shall be
construed, and all accounting procedures shall be performed, in
accordance with generally accepted United States accounting
principles consistently applied ("GAAP") and as in effect on the
date of application.
ARTICLE 2
THE LOANS
Section 2.1 Loans. Subject to the terms and conditions of
this Agreement, each Lender hereby severally agrees during the
period from the date hereof until the Maturity Date (the
"Commitment Period") to make loans (the "Loans") to Borrower in
amounts equal to the percentage interest set forth opposite such
Lender's name below (such Lender's "Percentage Interest") of the
aggregate amount requested by Borrower in a Notice of Borrowing
given hereunder provided that, after giving effect to any such
requested borrowing (a) the aggregate of all Loans from such
Lender will not exceed at any one time outstanding the sum set
forth opposite its name below (such Lender's "Commitment"); (b)
the Total Utilization will not exceed the Total Commitment; and,
(c) at all times after the occurrence and during the continuance
of a Borrowing Base Activation Event, the Total Utilization will
not exceed the Borrowing Base.
Percentage
Lender Interest Commitment
- ------ -------- ----------
Bank of America National 15.38462% $ 20,000,000
Trust and Savings Assoc.
United States National 15.38462% $ 20,000,000
Bank of Oregon
ABN AMRO Bank, N.V. 11.53846% $ 15,000,000
Deutsche Bank AG,
New York Branch and/or
Cayman Island Branch 11.53846% $ 15,000,000
Fleet National Bank 11.53846% $ 15,000,000
KeyBank National 11.53846% $ 15,000,000
Association
The Bank of Nova Scotia 11.53846% $ 15,000,000
The Sumitomo Bank, Limited 11.53846% $ 15,000,000
--------- ------------
Total 100.00000% $130,000,000
The line of credit extended hereunder is a revolving line of
credit and, subject to the terms and conditions hereof, Borrower
may borrow, repay and reborrow.
Section 2.2 Borrowing Base Activation. The occurrence of
any of the following events shall constitute a "Borrowing Base
Activation Event" hereunder: (a) the Leverage Ratio, on a
consolidated basis, exceeds 1.35 to 1 as of the end of any fiscal
quarter; or (b) Borrower shall incur on a consolidated basis,
pretax losses for two (2) consecutive fiscal quarters. Once a
Borrowing Base Activation Event shall have occurred it shall be
deemed to be continuing for all purposes hereunder until Borrower
shall have delivered financial statements in accordance with
Section 6.10 hereof demonstrating that as of the last day of the
applicable fiscal quarter the Leverage Ratio was equal to or less
than 1.35 to 1 and Borrower had not incurred (on a consolidated
basis) pretax losses for such fiscal quarter and the immediately
preceding fiscal quarter.
Section 2.3 Manner of Borrowing. Borrower shall give Agent
the Notice of Borrowing specifying the date of the borrowing of
any Loan and the amount thereof, which shall be an integral
multiple of One Million Dollars ($1,000,000) and not less than
Five Million Dollars ($5,000,000). Such Notice of Borrowing
shall be irrevocable and shall be deemed to constitute a
representation and warranty by Borrower that as of the date of
the notice, the statements set forth in Article 5 hereof are true
and correct and that no Default or Event of Default has occurred
and is continuing. On receipt of such notice, Agent shall
promptly notify each Lender by telephone (confirmed immediately
by telex, facsimile transmission or cable), telex, facsimile
transmission, or cable of the date of the borrowing. Each Lender
shall before 12:00 noon (Seattle, Washington time), on the date
of the borrowing, pay the lesser of (a) such Lender's Percentage
Interest of the aggregate principal amount of the requested
borrowing identified in the Notice of Borrowing or (b) the
maximum amount such Lender is committed to advance pursuant to
the terms of Section 2.1 hereof in immediately available funds to
Agent. Upon fulfillment to Agent's reasonable satisfaction of
the applicable conditions set forth in Article 4, and after
receipt by Agent of such funds, Agent will on that same day make
such funds available to Borrower by depositing them to an account
maintained by Borrower with Bank of America National Trust and
Savings Association, which account may be designated by Borrower
in a writing delivered to Agent from time to time.
Section 2.4 Reduction of Commitments. Upon not less than
five (5) Business Days' written notice to Agent, Borrower may
terminate the Total Commitment, in whole or in part, provided
that each partial reduction of the Total Commitment shall be in
an amount not less than Ten Million Dollars ($10,000,000) and,
provided, further, that in no event may the Total Commitment be
reduced to an amount less than the Total Utilization. Any
reduction in the Total Commitment shall be deemed to be a
proportionate reduction in each Lender's Commitment such that
after making such reduction, each Lender's Commitment will be in
an amount equal to its Percentage Interest of the then-reduced
Total Commitment.
Section 2.5 Repayment of Principal.
(a) Borrowing Base Payments. Borrower shall at all
times after the occurrence and during the continuance of a
Borrowing Base Activation Event, repay to Agent for the account
of Lenders, the amount, if any, by which the Total Utilization
exceeds the Borrowing Base. All amounts payable under this
Section 2.5(a) shall be due and payable three (3) Business Days
after the day in each calendar month when a new Borrowing Base is
to be established, including, without limitation, the day
Borrower is required under this Agreement to deliver to Agent a
new borrowing base certificate setting forth calculations
computing the Borrowing Base as of the end of the preceding
calendar month.
(b) At Maturity Date. Borrower shall repay to Agent
for the account of Lenders the then outstanding principal balance
of each Loan on the Maturity Date.
Section 2.6 Agent's Right to Fund. Unless Agent shall have
received notice from a Lender prior to 12:00 noon (Seattle,
Washington time) on the date of any Loan that such Lender will
not make available to Agent such Lender's Percentage Interest of
the requested borrowing, Agent may assume that such Lender has
made such funds available to Agent on the date of such Loan in
accordance with Section 2.3 hereof and Agent may, in reliance
upon such assumption, make available to Borrower on such date a
corresponding amount. If and to the extent that such Lender
shall not have made such portion available to Agent and if Agent
shall have advanced such portion to Borrower, such Lender and
Borrower severally agree to pay to Agent forthwith on demand such
corresponding amount, together with interest thereon for each day
from the date such amount is made available to Borrower until the
date such amount is repaid to Agent, at (a) in the case of
Borrower, the Applicable Interest Rate (b) in the case of such
Lender, the Federal Funds Rate. Any such repayment by Borrower
shall be without prejudice to any rights it may have against any
Lender that has failed to make its funds available for any
requested borrowing.
Section 2.7 Interest on Loans.
(a) General Provisions. Borrower agrees to pay to
Agent for the account of each Lender interest on the unpaid
principal amount of each Loan from the date of such Loan until
such Loan shall be due and payable at a per annum rate equal to
the Applicable Interest Rate, and, if default shall occur in the
payment when due of any such Loan, from the maturity of that Loan
until it is paid in full at a per annum rate equal to two
percentage points (2%) above the Adjusted Reference Rate
(changing as the Reference Rate changes). Accrued but unpaid
interest on each LIBOR Rate Loan shall be paid in arrears on the
last day of each Applicable Interest Period, on the date of any
principal payment (to the extent accrued on the principal amount
paid), on the Maturity Date, and, for each LIBOR Rate Loan having
an Applicable Interest Period longer than three months, on the
90th day of such Applicable Interest Period or at the end of the
first three months of such Applicable Interest Period, as the
case may be. Accrued but unpaid interest on each Reference Rate
Loan shall be paid on the last Business Day of each calendar
quarter commencing on June 30, 1997 and continuing on the last
Business Day of each calendar quarter thereafter and on the date
of any principal payment (to the extent accrued on the principal
amount paid) and on the Maturity Date. Unpaid interest accruing
on amounts in default shall be payable on demand.
(b) Selection of Alternative Rates. Borrower may,
subject to the requirements of this Section 2.7(b), on at least
three (3) Business Days' prior written notice elect to have
interest accrue on any Loan or any portion thereof at an Adjusted
LIBOR Rate for an Applicable Interest Period. Such notice
(herein, an "Interest Rate Notice") shall be deemed delivered on
receipt by Agent except that an Interest Rate Notice received by
Agent after 11:00 a.m. (Seattle, Washington time) on any Business
Day shall be deemed to be received on the immediately succeeding
Business Day. Such Interest Rate Notice shall identify, subject
to the conditions of this Section 2.7(b), the Loan or portions
thereof and the Applicable Interest Period which Borrower
selects. Any such Interest Rate Notice shall be irrevocable. On
receipt of such Interest Rate Notice, Agent shall promptly notify
each Lender by telephone (confirmed promptly by telex or
facsimile transmission) of the information set forth in the
Interest Rate Notice. Borrower's right to select an Adjusted
LIBOR Rate to apply to a Loan or any portion thereof shall be
subject to the following conditions: (i) the aggregate of all
Loans or portions thereof to accrue interest at a particular
Adjusted LIBOR Rate for the same Applicable Interest Period shall
be an integral multiple of One Million Dollars ($1,000,000) and
not less than Five Million Dollars ($5,000,000); (ii) Borrower
shall not have selected more than six (6) different Adjusted
LIBOR Rates or Applicable Interest Periods to be applicable to
portions of the Loans at any one time; (iii) an Adjusted LIBOR
Rate may not be selected for any Loan or portion thereof which is
already accruing interest at an Adjusted LIBOR Rate unless such
selection is only to become effective at the maturity of the
Applicable Interest Period then in effect; (iv) Agent or any
Lender shall not have given notice pursuant to Section 2.7(d)
hereof that the Adjusted LIBOR Rate selected by Borrower is not
available; (v) no Default or Event of Default shall have occurred
and be continuing and (vi) if Borrower elects to have some
portion (but less than all) of the Loans accrue interest at a
designated Adjusted LIBOR Rate, Borrower shall select a portion
of each Lender's Loans to accrue interest at such rate in
proportion to its respective Percentage Interest. In the absence
of an effective request for the application of an Adjusted LIBOR
Rate, the Loans or remaining portions thereof shall accrue
interest at the Adjusted Reference Rate. Any Interest Rate
Notice which specifies an Adjusted LIBOR Rate but fails to
identify an Applicable Interest Period shall be deemed to be a
request for an Adjusted LIBOR Rate for an Applicable Interest
Period of one (1) month. The Interest Rate Notice may be given
with and contained in any Notice of Borrowing. If Borrower
delivers an Interest Rate Notice with any Notice of Borrowing for
a Loan and Borrower thereafter declines to take such Loan or a
condition precedent to the making of such Loan is not satisfied
or waived, Borrower shall indemnify Agent and each Lender for all
losses and any costs which Agent or any Lender may sustain as a
consequence thereof including, without limitation, the costs of
redeployment of funds at rates lower than the cost to Lenders of
such funds. A certificate of Agent or any Lender setting forth
the amount due to it pursuant to this subparagraph (b) and the
basis for, and the calculation of, such amount shall be prima
facie evidence of the amount due pursuant to this
subparagraph (b). Payment of the amount owed shall be due within
fifteen (15) days after Borrower's receipt of such certificate.
(c) Applicable Days For Computation of Interest. All
computations of interest for Reference Rate Loans shall be made
on the basis of a year of three hundred sixty-five (365) or three
hundred sixty-six (366) days, as the case may be, in each case,
for the actual number of days (including the first day but
excluding the last day) occurring in the period for which such
interest is payable. All other computations of interest shall be
made on the basis of a year of three hundred sixty (360) days, in
each case, for the actual number of days (including the first day
but excluding the last day) occurring in the period for which
such interest is payable.
(d) Unavailable LIBOR Rate. If any Lender determines
that for any reason fair and adequate means do not exist for
establishing a particular LIBOR Rate or that accruing interest on
any Loan at an Adjusted LIBOR Rate by such Lender has become
unlawful, such Lender may give notice of that fact to Agent and
Borrower and such determination shall be conclusive and binding
absent manifest error. After such notice has been given and
until such Lender notifies Borrower and Agent that the
circumstances giving rise to such notice no longer exist, such
Adjusted LIBOR Rate shall no longer be available in respect of
Loans. Thereafter, any request by Borrower to have interest
accrue on a Loan at such an Adjusted LIBOR Rate shall be deemed
to be a request for interest to accrue at the Adjusted Reference
Rate. If the circumstances giving rise to the notice described
herein no longer exist, the Lender shall notify Borrower and
Agent in writing of that fact, and Borrower shall then once again
become entitled to request that such an Adjusted LIBOR Rate apply
to the Loans in accordance with Section 2.7(b) hereof.
Section 2.8 Compensation for Increased Costs. In the event
that after the date hereof any change occurs in any applicable
law, regulation, guideline, treaty or directive or interpretation
thereof by any authority charged with the administration or
interpretation thereof or in any applicable condition imposed by
any such authority, or any condition is imposed by any authority
after the date hereof which:
(a) subjects any Lender to any Tax, or changes the
basis of taxation of any payments to any Lender on account of
principal of or interest on any LIBOR Rate Loan, such Lender's
Note (to the extent such Note evidences LIBOR Rate Loans) or
other amounts payable with respect to LIBOR Rate Loans (other
than a change in the rate of Taxes based solely on the overall
net or gross income of such Lender); or
(b) imposes, modifies or determines applicable any
reserve, deposit or similar requirements against any assets held
by, deposits with or for the account of, or loans or commitments
by, any office of any Lender in connection with its LIBOR Rate
Loans to the extent the amount of which is in excess of, or was
not applicable at the time of computation of, the amounts
provided for in the definition of the related LIBOR Rate; or
(c) affects the amount of capital required to be
maintained by banks generally or by corporations controlling
banks and any Lender determines that the amount by which such
Lender or any corporation controlling such Lender is required or
expected to maintain or increase its capital is increased by, or
based upon, the existence of this Agreement or of such Lender's
Loans or Commitment hereunder;
(d) imposes upon any Lender any other condition with
respect to its LIBOR Rate Loans or its obligation to make LIBOR
Rate Loans;
which, as a result thereof, (i) increases the cost to any Lender
of making or maintaining its Loans or its Commitment hereunder,
or (ii) reduces the net amount of any payment received by any
Lender in respect of its Loans (whether of principal, interest,
commitment fees or otherwise), or (iii) requires any Lender to
make any payment on or calculated by reference to the gross
amount of any sum received by it in respect of its Loans, in each
case by an amount which such Lender in its sole judgment deems
material, then and in such case Borrower shall pay to Agent for
the account of such Lender on demand such amount or amounts as
will compensate such Lender (on an after-tax basis) for any
increased cost, deduction or payment actually incurred or made by
such Lender. The demand for payment by any Lender shall be
delivered to both Agent and Borrower and shall state the
subjection or change which occurred or the reserve or deposit
requirements or other conditions which have been imposed upon
such Lender or the request, direction or requirement with which
it has complied, together with the date thereof, the amount of
such cost, reduction or payment and the manner in which such
amount has been calculated. The statement of any Lender as to
the additional amounts payable pursuant to this Section 2.8 shall
be prima facie evidence of the amounts payable hereunder
provided, however, that the Borrower shall not be liable for any
such amount attributable to any period prior to the date one
hundred eighty (180) days prior to the date that any officer at
such Lender knew or reasonably should have known of such claim
for reimbursement or compensation.
The protection of this Section 2.8 shall be available to
each Lender regardless of any possible contention of invalidity
or inapplicability of the relevant law, regulation, guideline,
treaty, directive, condition or interpretation thereof. In the
event that Borrower pays any Lender the amount necessary to
compensate such Lender for any charge, deduction or payment
incurred or made by such Lender as provided in this Section 2.8,
and such charge, deduction or payment or any part thereof is
subsequently returned to such Lender as a result of the final
determination of the invalidity or inapplicability of the
relevant law, regulation, guideline, treaty, directive or
condition, then such Lender shall remit to Borrower the amount
paid by Borrower which has actually been returned to such Lender
(together with any interest actually paid to Lender on such
returned amount), less Borrower's pro rata share of such Lender's
costs and expenses incurred in connection with such governmental
regulation or any challenge made by such Lender with respect to
its validity or applicability.
Section 2.9 Prepayments. Upon one (1) Business Day's prior
written notice to Agent specifying the amount and date of any
proposed prepayment, Borrower shall have the right to prepay the
Loans in whole or in part, provided that each partial prepayment
of principal shall be an integral multiple of One Million Dollars
($1,000,000) but not less than Five Million Dollars ($5,000,000).
Reference Rate Loans may be repaid at any time without penalty or
premium. If a LIBOR Rate Loan is paid prior to the end of the
Applicable Interest Period, Borrower shall indemnify Agent and
each Lender for all reasonable losses and any reasonable costs
which Agent or any Lender may sustain as a consequence thereof
including, without limitation, the reasonable costs of
redeployment of funds at rates lower than the cost to Lenders of
such funds. A certificate of Agent or any Lender setting forth
the amount due to it pursuant to this Section 2.9 and the basis
for, and the calculation of, such amount shall be prima facie
evidence of the amount due pursuant to this Section 2.9. Payment
of the amount owed shall be due within fifteen (15) days after
Borrower's receipt of such certificate. Such an indemnity
payment will be required in all circumstances where such a Loan
is paid prior to the end of the Applicable Interest Period,
regardless of whether such payment is voluntary, mandatory,
required pursuant to Section 2.5(a) hereof, or the result of
Agent's or Lenders' collection efforts.
Section 2.10 Notes. The Loans shall be evidenced by
promissory notes of Borrower substantially in the form of
Exhibit A hereto, with appropriate insertions, payable to the
order of the Lenders, dated as of the date hereof, and for each
Lender in the face amount of such Lender's Commitment (the
"Notes").
Section 2.11 Manner of Payments.
(a) All payments and prepayments of principal and
interest on any Loan and all other amounts payable hereunder by
Borrower to Agent or any Lender shall be made by paying the same
in United States Dollars and in immediately available funds to
Agent at its Commercial Loan Service Center, Seattle, Washington
not later than 10:00 a.m. (Seattle, Washington time) on the date
on which such payment or prepayment shall become due. All
payments to be made by Borrower shall be made without set-off,
recoupment or counterclaim.
(b) Whenever any payment hereunder or under any other
Loan Document shall be stated to be due or whenever the last day
of any interest period would otherwise occur on a day other than
a Business Day, such payment shall be made and the last day of
such interest period shall occur on the next succeeding Business
Day and such extension of time shall in such case be included in
the computation and payment of interest or commitment fees, as
the case may be, unless such extension would cause such payment
to be made or the last day of such interest period to occur in
the next following calendar month, in which case such payment
shall be due and the last day of such interest period shall occur
on the next preceding Business Day and such reduction of time
shall in such case reduce the amount of interest and commitment
fees accruing in such period accordingly.
Section 2.12 Application of Payments. Any payments made by
Borrower in respect of amounts owing by it hereunder or under any
other Loan Document shall be applied in the manner directed by
Borrower and, in the absence of any such direction, such payments
and any prepayments of any Loan shall be applied first against
fees, expenses and indemnities due hereunder; second, against
interest due on matured obligations in respect of any Letter of
Credit, if any; third, against interest due on amounts in default
on any Loan, if any; fourth, against interest due on any Loan;
fifth, against matured obligations in respect of any Letter of
Credit, if any; sixth, against Loan principal amounts in default;
seventh, against Loan principal until the Loans are paid in full;
and thereafter as collateral security for obligations in respect
of unmatured Letters of Credit. Any payments received by Agent
or any Lender by any means and from any source after the
occurrence and during the continuation of an Event of Default
shall be applied to such portions of Borrower's obligations
hereunder or under any other Loan Document and in such order as
Majority Lenders may elect in their sole discretion or, in the
absence of such an election, in such order as Agent may elect in
its sole discretion.
Section 2.13 Fees.
(a) Unused Commitment Fees. Borrower agrees to pay to
Agent for the account of Lenders in proportion to their
Percentage Interests an unused commitment fee on the unused
portion of the Total Commitment computed daily at a per annum
rate equal to the Unused Commitment Fee Rate. Unused commitment
fees shall be payable in arrears on the last Business Day of each
calendar quarter, on the Maturity Date, and on demand after
default. Computations of unused commitment fees shall be made on
the basis of a year of three hundred sixty (360) days for the
actual number of days (including the first day but excluding the
last day) occurring in the period for which such fees are
payable. As used herein the "Unused Commitment Fee Rate" shall
be determined in accordance with the following table:
Unused Commitment Fee Rate
Leverage Rating (expressed per annum)
-------------- ---------------------
Level 1 12.5 basis points (0.125%)
Level 2 25 basis points (0.25%)
Level 3 30 basis points (0.30%)
Level 4 37.5 basis points (0.375%)
Level 5 45 basis points (0.45%)
(b) Facility Fee. Borrower agrees to pay to Agent for
the account of Lenders in proportion to their Percentage
Interests, a facility fee in an amount equal to 5 basis points
(0.05%) of the Total Commitment payable on the execution and
delivery of this Agreement.
(c) Agency Fees. Borrower agrees to pay to Agent, for
its own account the fees described in that certain letter
agreement dated as of the date hereof by and between Borrower and
Agent.
Section 2.14 Sharing of Payments, Etc. Each borrowing of
Loans from Lenders under Section 2.1 hereof will be made pro rata
in accordance with each Lender's Percentage Interest. Each
payment and prepayment of the Loans and each payment of interest
on the Loans will be made pro rata to each Lender in accordance
with its Percentage Interest. If any Lender shall obtain any
payment in respect of Borrower's obligations under this Agreement
or the Notes (whether voluntary or involuntary, through the
exercise of any right of set-off or otherwise) in excess of the
share which it would have been entitled to receive had such
payment been made to Agent for the account of the Lenders, such
Lender shall forthwith purchase from the other Lenders such
participations in the Loans made by them as shall be necessary to
cause such purchasing Lender to share the excess payment ratably
with each of them, but if any of such excess payment is afterward
recovered from such purchasing Lender, the purchase shall be
rescinded and the purchase price restored, without interest, to
the extent of such recovery. Borrower authorizes the purchase of
such participations and agrees that any Lender so purchasing a
participation from another Lender may exercise all its rights to
payment (including the right of set off) with respect to such
participation as fully as if such Lender were the direct creditor
of Borrower in the amount of such participation.
Section 2.15 Extension of Maturity Date. Borrower may
request that Lenders extend the Maturity Date for a period of one
(1) additional calendar year by notifying Lenders and Agent in
writing on a day after the first anniversary date of this
Agreement and not less than ninety (90) days prior to the
Maturity Date. Each Lender shall provide Borrower and Agent with
written notice of its consent or refusal to consent to such
extension within forty-five (45) days of the date on which
Borrower provides Agent and Lenders with a written request for
such an extension. If all Lenders provide Borrower and Agent
with such a written notice the Maturity Date shall be extended
for a period of one (1) additional calendar year. If any Lender
in its sole discretion does not provide a written notice
evidencing its consent as herein provided, the request for
extension shall be deemed denied by all Lenders.
Section 2.16 Replacement of Lender.
(a) In the event that any Lender makes a demand for
payment pursuant to Section 2.8 hereof or any Lender has
suspended its funding of LIBOR Rate Loans hereunder, Borrower
shall have the right, if no Default or Event of Default then
exists, to replace such Lender in accordance with this
Section 2.16.
(b) If Borrower determines to replace a Lender pursuant
to this Section 2.16, Borrower shall have the right to replace
such Lender with an entity that is an Eligible Assignee (a
"Replacement Lender") provided that such Replacement Lender
(i) if it is not already a Lender, shall be acceptable to Agent,
which acceptance shall not be unreasonably withheld, (ii) shall,
in its sole discretion, unconditionally agree in writing (with a
copy to Agent) to purchase on a date therein specified all of the
rights hereunder and under the other Loan Documents of the Lender
being replaced and all of the interest in the Loans owing to such
Lender without recourse at the principal amount of such Note (the
interest and fees accrued thereon to the date of such purchase
shall be paid to the Lender being replaced when the same become
due and owing) and an amount equal to losses and costs which will
be sustained by the Lender being replaced as a consequence of
such sale resulting from the selling Lenders redeployment of
funds at rates lower than the Applicable Interest Rate thereunder
shall be reimbursed by Borrower as provided herein, and
(iii) shall, if such Replacement Lender is not already a Lender,
execute and deliver to Agent an Assignment and Acceptance
substantially in the form of Exhibit D hereto pursuant to which
such Replacement Lender becomes a party hereto with a Commitment
equal to that of the Lender being replaced.
(c) Upon (i) satisfaction of the requirements set forth
in subsection 2.16(b) hereof, (ii) payment to such Lender by the
Replacement Lender of the purchase price in immediately available
funds, (iii) payment to the Lender being replaced by Borrower of
all requested increased costs or additional amounts accrued to
the date of such purchase which Borrower is obligated to pay
under Section 2.8 hereof, all amounts which would have been paid
for the account of such Lender under Section 2.9 hereof had all
of the Loans been fully prepaid on the date of replacement, and
all other amounts owed by Borrower to such Lender hereunder
(other than the principal of and interest on the Loans of such
Lender purchased by the Replacement Lender and interest and fees
accrued thereon to the date of purchase), and (iv) the
Replacement Lender shall constitute a "Lender" hereunder with a
Commitment as so specified and the Lender being so replaced shall
no longer constitute a "Lender" hereunder (and this Agreement
shall be deemed to be amended to the extent, but only to the
extent, necessary to reflect the addition of the Replacement
Lender) and the Lender being replaced shall be relieved of its
obligations hereunder. Notwithstanding anything in this
Section 2.16 to the contrary, the provisions of the Loan
Documents shall continue to inure to the benefit of the Lender
being replaced as to all matters occurring prior to the date of
replacement.
ARTICLE 3
LETTERS OF CREDIT
Section 3.1 Letters of Credit. Borrower may request that
Agent issue letters of credit for Borrower's account in
accordance with the terms and conditions of this Article 3.
Section 3.2 Manner of Requesting Letters of Credit.
(a) Letter of Credit Requests. From time to time
during the Commitment Period, Borrower may request that Agent
issue standby letters of credit for Borrower's account or extend
or renew existing Letters of Credit. Such a request will be made
by delivering a written request for the issuance, extension or
renewal of such a letter of credit to Agent not later than 11:00
a.m. (Seattle, Washington time) at least one (1) Business Day
prior to the date a new letter of credit is to be issued or an
existing letter of credit is scheduled to expire, provided that,
any request given orally shall be confirmed by Borrower in a
writing delivered to Agent not later than 12:00 noon (Seattle,
Washington time) on the date such oral request is made. Each
such request shall be deemed to constitute a representation and
warranty by Borrower that as of the date of such request, the
statements set forth in Article 5 hereof are true and correct and
that no Default or Event of Default has occurred and is
continuing. Each such request shall specify the face amount of
the requested Letter of Credit, the proposed date of expiration,
the name of the intended beneficiary thereof, and whether such
Letter of Credit is an extension or renewal of an existing Letter
of Credit. Each letter of credit requested hereunder (i) shall
be in a face amount such that after issuance of such letter of
credit (A) the Total Utilization will not exceed the Total
Commitment and (B) the Letter of Credit Usage would not exceed
$20,000,000; (ii) shall be in a face amount which is an integral
multiple of $100,000 and not less than $1,000,000; (iii) shall
have an expiration date not later than the earlier of (A) twelve
(12) months after the issuance or renewal date of such Letter of
Credit or (B) ninety (90) days after the Maturity Date; and
(iv) at all times after the occurrence of a Borrowing Base
Activation Event shall be in a face amount such that after
issuance of such Letter of Credit, the Total Utilization will not
exceed the Borrowing Base. Each request for the issuance,
renewal or extension of a letter of credit hereunder where such
letter of credit will have an expiration date later than the
Maturity Date shall be accompanied by a deposit of cash
collateral in the amount of such proposed letter of credit to be
held by Agent in an interest bearing account as security for all
of Borrower's obligations under this Agreement and the other Loan
Documents. Any such deposits together with any interest accrued
thereon shall be returned to Borrower upon the expiration of the
applicable Letter of Credit and the payment by Borrower of all
amounts owing hereunder in respect thereof.
(b) Letter of Credit Fees. Borrower agrees to pay to
Agent for the account of Lenders in proportion to their
Percentage Interests, a standby letter of credit fee on the face
amount of each Letter of Credit from the date such Letter of
Credit is issued until such Letter of Credit shall be terminated
or drawn at a per annum rate equal to the Letter of Credit Fee
Rate. Standby letter of credit fees shall be payable in arrears
on the last Business Day of each calendar quarter, on the
Maturity Date, and on demand after default. Computations of
standby letter of credit fees shall be made on the basis of a
year of three hundred sixty (360) days for the actual number of
days (including the first day but excluding the last day)
occurring in the period for which such fees are payable.
Borrower agrees to pay to Agent for its own account (a) an
issuance fee equal to 12.5 basis points (0.125%) of the face
amount of each Letter of Credit issued hereunder, and (b) other
standby letter of credit fees calculated and payable in
accordance with Agent's normal and customary practices. As used
herein the "Letter of Credit Fee Rate" shall be determined in
accordance with the following table:
Letter of Credit Fee Rate
Leverage Rating (expressed per annum)
--------------- ---------------------
Level 1 50 basis points (0.50%)
Level 2 62.5 basis points (0.625%)
Level 3 75 basis points (0.75%)
Level 4 87.5 basis points (0.875%)
Level 5 100 basis points (1.00%)
(c) Letter of Credit Application Forms. At the
request of Agent, Borrower shall execute a letter of credit
application in the standard form then used by Agent (which shall
not include terms inconsistent with this Agreement), in respect
of each Letter of Credit requested hereunder.
(d) Issuance of Letter of Credit. Subject to the
satisfaction of the conditions precedent set forth in Article 4
and Borrower's compliance with the terms of this Section 3.2,
Agent shall issue and deliver its letter of credit to Borrower or
to the designated beneficiary at such address as Borrower may
specify. New Letters of Credit and extensions or renewals of
existing Letters of Credit shall be in a form acceptable to
Agent.
Section 3.3 Indemnification; Increased Costs. Borrower
agrees to indemnify Agent and any Lender on demand for any and
all additional costs, expenses, or damages incurred by such Agent
or Lender, directly or indirectly, arising out of the issuance,
extension or renewal of any Letter of Credit or the purchase of
any Letter of Credit Risk Participation, including, without
limitation, any costs of maintaining reserves in respect thereof
and any premium rates imposed by the Federal Deposit Insurance
Corporation in connection therewith. A certificate as to such
additional amounts submitted to Borrower by Agent or such Lender
shall be prima facie evidence of the amounts due hereunder.
If at any time after the date hereof the introduction of or
any change in applicable law, rule, or regulation or in the
interpretation or the administration thereof by any Governmental
Authority charged with the interpretation or administration
thereof, or compliance by Agent or Lender with any requests
directed by any such Governmental Authority (whether or not
having the force of law) shall, with respect to any Letter of
Credit or Letter of Credit Risk Participation subject Agent or
such Lender to any Tax or impose, modify, or deem applicable any
reserve, special deposit, or similar requirements against assets
of, deposits with or for the account of, credit extended by Agent
or such Lender or shall impose on Agent or such Lender any other
conditions affecting the Letters of Credit or Letter of Credit
Risk Participations and the result of any of the foregoing is to
increase the cost to Agent or such Lender of issuing a Letter of
Credit or holding a Letter of Credit Risk Participation or to
reduce the amount of any sum received or receivable by Agent or
such Lender hereunder with respect to the Letters of Credit or
Letter of Credit Risk Participations, then, upon demand by Agent
or such Lender, Borrower shall pay to Agent or such Lender such
additional amount or amounts as will compensate Agent or such
Lender for such increased cost or reduction. The written
statement of any Lender as to the additional amounts payable
pursuant to this Section 3.3 shall be prima facie evidence of the
amounts due hereunder provided, however, that the Borrower shall
not be liable for any such amount attributable to any period
prior to the date one hundred eighty (180) days prior to the date
that any officer at such Lender knew or reasonably should have
known of such claim for reimbursement or compensation.
Borrower agrees to indemnify and hold Agent and each Lender
(an "Indemnitee") harmless from and against any and all (a) Taxes
and other fees payable in connection with Letters of Credit,
Letter of Credit Risk Participations or the provisions of this
Agreement relating thereto, and (b) any and all actions, claims,
damages, losses, liabilities, fines, penalties, costs, and
expenses of every nature, including reasonable attorneys' fees,
suffered or incurred by the Indemnitee otherwise arising out of
or relating to this Article 3, any Letter of Credit, or any
Letter of Credit Risk Participation; provided, however, any
indemnification under this Section 3.3 shall not apply to the
extent that any such action, claim, damage, loss, liability,
fine, penalty, cost, or expense arises out of or is based solely
upon the Indemnitee's willful misconduct or gross negligence.
Section 3.4 Payment by Borrower. Borrower agrees to fully
reimburse Agent for all amounts paid by Agent under any Letter of
Credit and to pay interest thereon at the Adjusted Reference Rate
from the date Agent makes such payment until the next Business
Day following the date of any demand for reimbursement by Agent.
Such payment shall be made in immediately available funds at
Agent's Commercial Loan Processing Center not later than 11:00
a.m. (Seattle, Washington time) on the next Business Day
following the date of any demand for reimbursement by Agent;
provided, that, if Agent so elects pursuant to the terms of
Section 8.2 hereof, following the occurrence and during the
continuance of an Event of Default, an amount equal to the face
amount of each Letter of Credit shall become immediately due and
payable. If Borrower shall default in its obligations to
reimburse Agent or to make any other payment required hereunder,
interest shall accrue on the unpaid amount thereof at a per annum
rate equal to two (2) percentage points above the Adjusted
Reference Rate (changing as the Reference Rate changes) from the
date such amount becomes due and payable until payment in full by
Borrower. Interest payable under this Section 3.4 on amounts
paid by Agent under any Letter of Credit shall be calculated on
the basis of a year of 360 days and shall be payable on demand.
ARTICLE 4
CONDITIONS TO ADVANCES
Section 4.1 Conditions to Initial Advance. In addition to
the conditions set forth in Section 4.2 hereof, the obligations
of each Lender to make its initial Loan hereunder and the
obligation of Agent to issue its initial Letter of Credit
hereunder, are subject to fulfillment of the following:
(a) Borrower Documents. Agent shall have received the
Borrower Documents, each duly executed and delivered by Borrower
and the other parties thereto.
(b) Borrower Authority. Agent shall have received in
form and substance satisfactory to it (i) a copy of a resolution
adopted by the Board of Directors of Borrower authorizing the
execution, delivery and performance of this Agreement and the
other Borrower Documents certified by the Secretary of Borrower;
(ii) evidence of the authority and specimen signatures of the
persons who have signed this Agreement and the other Borrower
Documents; (iii) Certificates of Good Standing dated as of a
recent date issued by the Secretary of State of Minnesota in
respect of Borrower; and (iv) such other evidence of corporate
authority as Agent shall reasonably require.
(c) Legal Opinion. Agent, on behalf of each Lender,
shall have received the legal opinions of Wilson Sonsini Goodrich
& Rosati, Dorsey & Whitney LLP and Steven P. Arnold, each as
counsel to Borrower, substantially in the forms attached hereto
as Exhibits C-1, C-2 and C-3 and each dated as of the date
hereof.
(d) Officer's Certificate. Agent shall have received
an Officer's Certificate of Borrower as to the accuracy of
Borrower's representations and warranties set forth in Article 5
and as to the absence of any Default or Event of Default.
(e) Evidence of Insurance. Agent shall have received
certificates of insurance evidencing insurance required to be
maintained by Borrower under this Agreement or, in the
alternative, an Officer's Certificate of Borrower setting forth a
schedule of the insurance so maintained by Borrower.
(f) Other Information. Agent shall have received such
other statements, opinions, certificates, documents, undertakings
and information with respect to the matters contemplated by this
Agreement and the other Loan Documents as Agent or any Lender may
reasonably request.
(g) Prior Credit Agreement. Agent shall have received
evidence satisfactory to it that the Prior Credit Agreement has
been terminated and that all amounts owing thereunder, including,
without limitation, accrued interest and commitment fees, have
been paid in full.
Section 4.2 Conditions to All Advances. The obligations of
each Lender to make any Advance hereunder, including the initial
Advance, and the obligation of Agent to issue any Letter of
Credit, are subject to fulfillment of the following conditions:
(a) Notice of Borrowing. If such Advance is a Loan,
Agent shall have received the Notice of Borrowing in respect of
such Loan, and, if such Advance is a Letter of Credit, Agent
shall have received from Borrower a request therefor complying
with the requirements of Section 3.2 hereof.
(b) Default, Etc. At the date of the Advance, no
Default or Event of Default shall have occurred and be continuing
or will have occurred as the result of the making of the Advance;
and the representations and warranties of Borrower in Article 5
shall be true on and as of such date with the same force and
effect as if made on and as of such date.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lenders and Agent as
follows:
Section 5.1 Corporate Existence and Power. Borrower is a
corporation duly incorporated, validly existing and in good
standing under the laws of the state of Minnesota. Borrower is
duly qualified to do business in each other jurisdiction where
the nature of its activities or the ownership of its properties
requires such qualification, except where the failure to so
qualify would not be reasonably expected to have a material
adverse effect on the business, operations or financial condition
of Borrower. Borrower has full corporate power, authority and
legal right to carry on its business as presently conducted, to
own and operate its properties and assets, and to execute,
deliver and perform the Loan Documents.
Section 5.2 Corporate Authorization. The execution,
delivery and performance by Borrower of this Agreement and the
other Loan Documents and any borrowing hereunder or thereunder,
and the request for the issuance of any Letter of Credit
hereunder or thereunder, have been duly authorized by all
necessary corporate action of Borrower, do not require any
shareholder approval or the approval or consent of any trustee or
the holders of any Indebtedness of Borrower, except such as have
been obtained (certified copies thereof having been delivered to
Agent), do not contravene any law, regulation, rule or order
binding on it or its Articles of Incorporation or Bylaws and do
not contravene the provisions of or constitute a default under
any material indenture, mortgage, contract or other agreement or
instrument to which Borrower is a party or by which Borrower or
any of its properties may be bound or affected.
Section 5.3 Government Approvals, Etc. No Government
Approval or filing or registration with any Governmental
Authority is required for the execution and delivery of the Loan
Documents, in connection with the performance by Borrower of all
its obligations required to be performed under the Loan Documents
prior to the date on which this representation is made or deemed
to have been made, or in connection with any of the transactions
contemplated thereby, except such as have been heretofore
obtained and are in full force and effect.
Section 5.4 Binding Obligations, Etc. This Agreement has
been duly executed and delivered by Borrower and constitutes, and
the other Loan Documents when duly executed and delivered will
constitute, the legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective
terms, except that the enforceability thereof may be affected by
bankruptcy, insolvency, moratorium and other similar laws
affecting the rights and remedies of creditors generally and by
the effect of general principles of equity.
Section 5.5 Litigation. Except as reflected in the
financial statements referred to in Section 5.6 hereof or
otherwise set forth on Schedule 2 to the Disclosure Letter, there
are no actions, proceedings, investigations, or claims against or
affecting Borrower or any Subsidiary now pending before any
court, arbitrator or Governmental Authority (nor to the knowledge
of Borrower has any thereof been threatened nor does any basis
exist therefor) which would be reasonably expected to have a
material adverse effect on (a) the business, operations or
consolidated financial condition of Borrower; or (b) the ability
of Borrower to perform its obligations under this Agreement and
the other Loan Documents.
Section 5.6 Financial Condition. The consolidated balance
sheet of Borrower and the Subsidiaries as at August 29, 1996, and
the related statements of income and retained earnings of
Borrower and the Subsidiaries for the fiscal year then ended, and
the consolidated balance sheet of Borrower and the Subsidiaries
as at February 27, 1997, and the related statements of income and
retained earnings of Borrower and the Subsidiaries for the fiscal
quarter then ended, copies of which have been furnished to Agent
and Lenders, fairly present in all material respects the
consolidated financial condition of Borrower and the Subsidiaries
as at such dates and the consolidated results of operations of
Borrower for the periods then ended, all in accordance with GAAP.
Since February 27, 1997 there has been no material adverse change
in the financial condition or operations of Borrower or any
Subsidiary.
Section 5.7 Title and Liens. Borrower and each Subsidiary
has good and indefeasible title to the respective real properties
reflected in the financial statements referred to in Section 5.6
hereof and good title to all of its other properties and assets
(other than patents, trademarks, service marks, trade names,
copyrights, mask works, contractual franchises and other
comparable items of intellectual property) reflected in such
financial statements (in each case, except such as have been
since sold or otherwise disposed prior to the date of this
Agreement in the ordinary course of business or after the date of
this Agreement in accordance with the terms hereof). All such
real and personal properties are subject to no Lien of any kind
except Liens permitted under this Agreement. All leases
necessary in any material respect for the conduct of the business
of Borrower and each Subsidiary are valid and subsisting and are
in full force and effect.
Section 5.8 Environmental Laws, Etc. All properties of
Borrower and each Subsidiary and Borrower's and such Subsidiary's
use thereof comply in all material respects with applicable
zoning and use restrictions and with applicable laws and
regulations relating to the environment including, without
limitation, the Environmental Laws. Except as disclosed on
Schedule 8 to the Disclosure Letter, without limiting the
foregoing, no Hazardous Substances have been generated,
manufactured, refined, transferred, stored, treated, transported,
handled, managed, discharged or disposed of, whether by Borrower
or, to the best of Borrower's knowledge, by any other person
onto, upon, over, beneath or from any real property owned by
Borrower or other premises owned, leased, operated, used or held
at any time by Borrower or any of the ground water beneath any
such premises (collectively, the "Premises") which in any fashion
could reasonably be expected to result in Borrower, Agent or any
Lender incurring or suffering at any time any material loss,
liability, damages, or obligations including liability for
cleanup and recovery costs and expenses. Except as disclosed on
Schedule 8 to the Disclosure Letter, there are no past or present
events, conditions, circumstances, activities, practices,
incidents or actions at or in connection with the Premises which
could reasonably be expected to interfere with or prevent
continued compliance with any material laws or regulations
pertaining to underground storage tanks or any other
Environmental Laws or give rise to any legal liability or
otherwise form the basis of any claim, action, suit, proceedings,
hearing or investigation against or affecting Borrower under the
Environmental Laws. There has been no disposal from the Premises
by Borrower (or to the best of Borrower's knowledge, by any other
person) directly or indirectly of any Hazardous Substances to, on
or in any site currently listed or formally proposed to be listed
on the National Priorities List under Superfund or any site
listed on any priority cleanup list compiled by any Governmental
Authority.
Section 5.9 Taxes. Borrower and each Subsidiary has filed
all tax returns and reports required of it, and to the best of
Borrower's knowledge, has paid all Taxes which are due and
payable, or has provided adequate reserves for payment of any
Taxes whose payment is being contested. The charges, accruals
and reserves on the books of Borrower and each Subsidiary in
respect of Taxes for all fiscal periods to date are accurate.
There are no material disputes between Borrower or any Subsidiary
and any Governmental Authority with respect to any Taxes except
as disclosed in the balance sheet referred to in Section 5.6
hereof or otherwise disclosed to Agent and Lenders in writing
prior to the date of this Agreement.
Section 5.10 Pari Passu Ranking. The obligations of
Borrower to pay the principal of and interest on any Loan and all
other amounts payable hereunder rank at least pari passu both as
to payment and as to security with all other Indebtedness and
other obligations of Borrower now existing or hereafter incurred
(except (i) Indebtedness given preference as a matter of law
including, without limitation, salary obligations and pension
contribution claims; and (ii) as to security, for Indebtedness
secured by Liens permitted pursuant to Section 7.6 hereof).
Section 5.11 Laws, Orders, Other Agreements. Neither
Borrower nor any Subsidiary is in violation of or subject to any
contingent liability on account of any laws, statutes, rules,
regulations and orders of any Governmental Authority, except for
violations which in the aggregate would not be reasonably
expected to have a material adverse effect on the business,
operations or financial condition of Borrower or such Subsidiary.
Neither Borrower nor any Subsidiary is in material breach of or
default under any material agreement to which it is a party or
which is binding on it or any of its assets.
Section 5.12 Federal Reserve Regulations. Neither Borrower
nor any Subsidiary is engaged principally or as one of its
important activities in the business of extending credit for the
purpose of purchasing or carrying any margin stock (within the
meaning of Federal Reserve Regulation U), and no part of the
proceeds of any Loan will be used to purchase or carry any such
margin stock or to extend credit to others for the purpose of
purchasing or carrying any such margin stock or for any other
purpose that violates the applicable provisions of any Federal
Reserve Regulation. Borrower will furnish to Agent or any Lender
on request a statement conforming with the requirements of
Regulation U.
Section 5.13 ERISA.
(a) The present value of all benefits vested under all
Pension Plans did not, as of the most recent valuation date of
such Pension Plans, exceed the value of the assets of the Pension
Plans allocable to such vested benefits by an amount which would
represent a potential material liability of Borrower or affect
materially the ability of Borrower to perform the Loan Documents.
(b) No Plan or trust created thereunder, or any
trustee or administrator thereof, has engaged in a "prohibited
transaction" (as such term is defined in Section 406 of ERISA or
Section 4975 of the Code) which is not otherwise exempt and which
could subject such Plan or any other Plan, any trust created
thereunder, or any trustee or administrator thereof, or any party
dealing with any Plan or any such trust to the tax or penalty on
prohibited transactions imposed by Section 502 of ERISA or
Section 4975 of the Code.
(c) No Pension Plan or trust has been terminated,
except in accordance with the Code, ERISA, and the regulations of
the Internal Revenue Service and the PBGC as applicable to
solvent plans in which benefits of participants are fully
protected. No "reportable event" as defined in Section 4043 of
ERISA has occurred for which notice has not been waived or for
which alternative notice procedures are permitted.
(d) No Pension Plan or trust created thereunder has
incurred any "accumulated funding deficiency" (as such term is
defined in Section 302 of ERISA) whether or not waived, since the
effective date of ERISA.
(e) The required allocations and contributions to
Pension Plans will not violate Section 415 of the Code.
(f) Neither Borrower nor any Subsidiary has any
withdrawal liability to any trust created pursuant to a
multi-employer pension or benefit plan nor would it be subject to
any such withdrawal liability in excess of One Million Dollars
($1,000,000) if it withdrew from any such plan or if its
participation therein were otherwise terminated.
Section 5.14 Subsidiaries. Schedule 1 to the Disclosure
Letter accurately sets forth the names and jurisdictions of
incorporation or organization of each Subsidiary.
Section 5.15 Patents, Licenses, Franchises, Etc. Except as
set forth in the Forms 10K for the fiscal year ended August 29,
1996 and the Forms 10Q for the fiscal quarters ended November 28,
1996 and February 27, 1997, respectively, and in each case as
filed or amended and filed with the Securities and Exchange
Commission by Borrower, (a) Borrower and the Subsidiaries own or
are licensed to use or otherwise have the right to use (or could
obtain such ownership or licenses or rights on terms and under
circumstances that could not reasonably be expected to have a
material adverse effect on Borrower's ability to perform its
obligations under this Agreement or on the business, operations
or financial condition of Borrower and the Subsidiaries, taken as
a whole) all of the patents, trademarks, service marks, trade
names, copyrights, mask works, contractual franchises and other
items of comparable intellectual property together with all other
rights that are reasonably necessary for the operation of their
respective businesses, and (b) there are no pending or, to the
best knowledge of Borrower, threatened claims that any slogan or
other advertising device, product, process, method, substance,
part or other material now employed by Borrower or any Subsidiary
infringes upon any rights held by any other person, except where
the consequences of any failure to possess any right under
clause (a) or such infringement under clause (b) could not
reasonably be expected to have a material adverse effect on
Borrower's ability to perform its obligations under this
Agreement or on the business, operations or financial condition
of Borrower and the Subsidiaries, taken as a whole.
Section 5.16 Not Investment Company, Etc. Borrower is not
(a) an "investment company" or a company "controlled" by an
investment company within the meaning of the Investment Company
Act of 1940, as amended; or (b) a "holding company" or a
"subsidiary company" of a "holding company" or an "affiliate" of
either a "holding company" or a "subsidiary company" within the
meaning of the Public Utility Holding Company Act of 1935, as
amended.
Section 5.17 Representations as a Whole. This Agreement,
the other Loan Documents and the financial statements referred to
in Section 5.6 hereof, taken as a whole and taken together with
the Form 10K most recently filed by Borrower with the Securities
and Exchange Commission and the Forms 10Q filed by Borrower since
the filing of such Form 10K, do not contain any untrue statement
of a material fact or omit to state any material fact necessary
in order to make the statements contained herein or therein not
misleading in the context made. Projections and forecasts
clearly identified as such and provided by Borrower to Agent or
any Lender are not "facts" for purposes of this Section 5.17.
Each such projection and forecast was made by Borrower in good
faith and represents Borrower's best estimate of the matters
projected or forecasted therein as of the date on which such
projection or forecast was made.
ARTICLE 6
AFFIRMATIVE COVENANTS
So long as Agent or any Lender shall have any Commitment
hereunder or there shall be any outstanding Letter of Credit
Usage and until payment in full of each Loan and the Notes and
performance of all other payment obligations of Borrower under
this Agreement and the other Loan Documents, Borrower agrees to
do all of the following unless Agent (with the consent of
Majority Lenders) shall otherwise consent in writing.
Section 6.1 Use of Proceeds. Borrower shall use the
proceeds of the Loans and the Letters of Credit for acquisitions
and general corporate purposes.
Section 6.2 Payment. Borrower shall pay the principal of
and interest on the Loans in accordance with the terms of this
Agreement and the Notes and will pay when due all other amounts
payable by Borrower hereunder and under any other Loan Document.
Section 6.3 Preservation of Corporate Existence, Etc.
Except as permitted by Section 7.2 hereof, Borrower shall, and
shall cause each Subsidiary to, preserve and maintain their
corporate existence, rights, franchises and privileges in the
jurisdictions of their incorporation and will, and will cause
each Subsidiary to, qualify and remain qualified as foreign
corporations in each jurisdiction where qualification is
necessary or advisable in view of their business and operations
or the ownership of their properties, except where the failure to
so qualify would not have a material adverse effect on the
business, operations or financial condition of Borrower (on a
consolidated basis).
Section 6.4 Visitation Rights. At any reasonable time, and
from time to time, Borrower shall permit Agent or any Lender to
examine and make copies of and abstracts from its and any
Subsidiary's records and books of account, to visit its and any
Subsidiary's properties and to discuss the affairs, finances and
accounts of Borrower and any Subsidiary with any of Borrower's
officers, directors or employees provided, however, that so long
as no Default or Event of Default shall have occurred and be
continuing, all visits to the properties of Borrower or any
Subsidiary shall be made during regular business hours upon
reasonable prior notice.
Section 6.5 Keeping of Books and Records. Borrower shall
keep and maintain and shall cause each Subsidiary to keep and
maintain financial books of record and account sufficient to
permit Borrower to prepare consolidated and consolidating
financial statements in accordance with GAAP.
Section 6.6 Maintenance of Property, Etc. Borrower shall
maintain and preserve and shall cause each Subsidiary to maintain
and preserve all of its properties in reasonably good working
order and condition, ordinary wear and tear excepted, and will
from time to time make (and cause each Subsidiary to make) all
needed repairs, renewals and replacements to the extent required
by prudent business practice.
Section 6.7 Compliance with Laws, Etc. Borrower shall
comply and shall cause each Subsidiary to comply in all material
respects with all laws, regulations, rules, and orders of
Governmental Authorities applicable to Borrower or any Subsidiary
or to their respective operations or property, except any thereof
whose validity is being contested in good faith by appropriate
proceedings where reserves or other appropriate provisions
required by GAAP shall have established therefor.
Section 6.8 Other Obligations. Borrower shall pay and
discharge and shall cause each Subsidiary to pay and discharge
before the same shall become delinquent all material
Indebtedness, Taxes and other obligations for which Borrower or
any Subsidiary is liable or to which its income or property is
subject and all claims for labor and materials or supplies which,
if unpaid, could reasonably be expected to become by law a Lien
upon assets of Borrower or any Subsidiary, except any thereof
whose validity or amount is being contested in good faith by
Borrower or such Subsidiary in appropriate proceedings where
reserves or other appropriate provisions required by GAAP shall
have established therefor.
Section 6.9 Insurance. Borrower shall keep in force and
shall cause each Subsidiary to keep in force upon all of
Borrower's or such Subsidiary's properties and operations
policies of insurance carried with responsible companies in such
amounts and covering all such risks as shall be customary in the
industry. From time to time, on request, Borrower will furnish
to Agent certificates of insurance or, at Agent's request,
certified copies of insurance policies evidencing such coverage.
Section 6.10 Financial Information. Borrower shall deliver
to Agent and each Lender:
(a) Annual Audited Financial Statements. As soon as
available and in any event within ninety (90) days after the end
of each fiscal year of Borrower, the consolidated balance sheet
of Borrower and the Subsidiaries as of the end of such fiscal
year and the related consolidated statements of income and
retained earnings and statement of cash flows of Borrower and the
Subsidiaries for such year, accompanied by the audit report
thereon by independent certified public accountants selected by
Borrower and reasonably satisfactory to Agent (which reports
shall be prepared in accordance with generally accepted auditing
standards and shall not be qualified by reason of restricted or
limited examination of any material portion of the records of
Borrower or any Subsidiary and shall contain no disclaimer of
opinion or adverse opinion except such as Agent in its sole
discretion determines to be immaterial);
(b) Quarterly Unaudited Financial Statements. As soon
as available and in any event within forty-five (45) days after
the end of each of the first three fiscal quarters of Borrower,
the unaudited consolidated and consolidating balance sheet of
Borrower as of the end of such fiscal quarter and the unaudited
consolidated and consolidating statement of income and retained
earnings of Borrower for the fiscal year to the end of such
fiscal quarter, accompanied by an Officer's Certificate of
Borrower certifying that such balance sheet and statement of
income and retained earnings have been prepared in accordance
with GAAP and present fairly the consolidated financial position
and the results of operations of Borrower as of the end of and
for such fiscal quarter and that since the fiscal year-end report
referred to in clause (a) there has been no material adverse
change in the financial condition or operations of Borrower or
any Subsidiary as shown on the balance sheet as of said date;
(c) Quarterly Compliance Certificates. As soon as
available and in any event within forty-five (45) days after the
end of each of the first three fiscal quarters of Borrower and
within ninety (90) days after the end of each of Borrower's
fourth fiscal quarter, an Officer's Certificate in form
reasonably acceptable to Agent certifying that as of the close of
such fiscal quarter no Default or Event of Default had occurred
and was continuing, and, further, setting forth calculations
demonstrating compliance as of the end of such fiscal quarter
with the financial covenants set forth in Sections 6.13 through
6.16 hereof, and, further, identifying the amount and nature of
the Restricted Payments made during such fiscal quarter and the
amount and nature of the Restricted Payments made during the
period beginning on the date of this Agreement and continuing
through the end of such fiscal quarter;
(d) Monthly Borrowing Base Certificate, Etc. If a
Borrowing Base Activation Event shall have occurred and be
continuing, as soon as available and in any event within twenty
(20) days after the end of each calendar month ending after the
occurrence of such Borrowing Base Activation Event (i) a
borrowing base certificate setting forth calculations computing
the Borrowing Base as of the end of the preceding calendar month,
and (ii) a summary of aging of accounts receivable for Borrower
in form acceptable to Agent as of the end of the preceding
calendar month;
(e) Financial Projections. As soon as available and
in any event within ninety (90) days after the beginning of each
fiscal year of Borrower, (i) a consolidated annual set of
financial projections for Borrower for such fiscal year
projecting the expected operations and expected financial
condition of Borrower on a quarter-by-quarter basis; and (ii) an
annual set of financial projections for Micron Custom
Manufacturing Services, Inc. for such fiscal year projecting the
expected operations and expected financial condition of Micron
Custom Manufacturing Services, Inc. on a quarter-by-quarter
basis;
(f) Shareholder, SEC and Government Reports. As soon
as available, all reports sent by Borrower to its shareholders
and all 8K, 10Q and 10K reports filed by Borrower with the
Securities and Exchange Commission ("SEC"), all within ten (10)
days after filing with the SEC;
(g) Schedule of Insurance. Within ninety (90) days
after the beginning of each fiscal year of Borrower, certificates
of insurance evidencing all insurance required to be maintained
by Borrower under this Agreement, or, in the alternative, an
Officer's Certificate setting forth a schedule of such insurance
coverage; and
(h) Other Information. All other statements, reports
and other information as Agent or any Lender may reasonably
request concerning the financial condition and business affairs
of Borrower or any Subsidiary.
Section 6.11 Notification. Promptly after any Responsible
Officer learns thereof, Borrower shall notify Agent of (a) the
details of any action, proceeding, investigation or claim against
or affecting Borrower or any Subsidiary, instituted before any
court, arbitrator or Governmental Authority or, to Borrower's
knowledge threatened to be instituted, which, if determined
adversely would be likely to result in a judgment or order
against Borrower or any Subsidiary for more than Five Million
Dollars ($5,000,000) or to have a material adverse effect on the
business, operations or financial condition of Borrower and the
Subsidiaries taken as a whole; (b) any substantial dispute
between Borrower or any Subsidiary and any Governmental
Authority; (c) any labor controversy which has resulted in or, to
Borrower's knowledge, threatens to result in a strike which would
materially affect the business operations of Borrower or any
Subsidiary; (d) if Borrower, any Subsidiary or any member of the
Controlled Group gives or is required to give notice to the PBGC
of any "reportable event" (as defined in subsections (b)(1), (2),
(5) or (6) of section 4043 of ERISA) with respect to any Plan (or the
Internal Revenue Service gives notice to the PBGC of any
"reportable event" as defined in subsection (c)(2) of section 4043 of
ERISA and Borrower obtains knowledge thereof) which might
constitute grounds for a termination of such Plan under Title IV
of ERISA, or knows that the plan administrator of any Plan has
given or is required to give notice of any such reportable event,
the notice of such reportable event given or required to be given
to the PBGC; and (e) the occurrence of any Default or Event of
Default.
Section 6.12 Additional Payments; Additional Acts. From
time to time and within thirty (30) days of demand by Agent,
Borrower shall (a) pay or reimburse Agent and Lenders for all
Taxes imposed on this Agreement and any other Loan Document; and
(b) pay or reimburse Agent for all reasonable expenses, including
reasonable legal fees, actually incurred by Agent in connection
with the preparation of this Agreement and the other Loan
Documents, the making of any Loan or the issuance of any Letter
of Credit. From time to time, promptly upon demand by Agent,
Borrower shall (a) pay or reimburse Agent and Lenders for all
reasonable expenses including reasonable out-of-pocket legal fees
(including allocated charges of internal legal counsel) incurred
in connection with the enforcement by judicial proceedings or
otherwise of any of the rights of Agent or Lenders under this
Agreement or any other Loan Document, (b) obtain and furnish to
Agent evidence of all such Government Approvals as may be
required to enable Borrower to comply with its obligations under
the Loan Documents; and (c) execute and deliver all such other
instruments and perform all such other acts as Agent or any
Lender may reasonably request to carry out the transactions
contemplated by this Agreement and the other Loan Documents.
Section 6.13 Minimum Tangible Net Worth. Borrower shall
maintain on a consolidated basis as of the end of each fiscal
quarter a Tangible Net Worth equal to or greater than the sum of
(a) Two Hundred Twenty-five Million Dollars ($225,000,000),
(b) seventy-five percent (75%) of Borrower's Net Income for each
fiscal quarter after the fiscal quarter ended November 28, 1996
in which Borrower has a positive Net Income and (c) seventy-five
percent (75%) of the amount, if any, by which the shareholders'
equity of Borrower has increased since the fiscal quarter ended
November 28, 1996 as a result of the issuance of common stock or
the conversion of debt securities into common stock.
Section 6.14 Minimum Current Ratio. Borrower shall
maintain on a consolidated basis as of the end of each fiscal
quarter a Current Ratio of at least 1.3 to 1 through the fiscal
quarter ended September 3, 1998, and at least 1.4 to 1 as of the
end of each fiscal quarter thereafter. As used herein, "Current
Ratio" shall mean, at any time, (i) Borrower's current assets as
determined in accordance with GAAP divided by (ii) the sum of the
then-outstanding Total Utilization and Borrower's current
liabilities as determined in accordance with GAAP.
Section 6.15 Minimum Cash Flow. Borrower shall maintain on
a consolidated basis its EBITDA for each period of four
consecutive fiscal quarters at an amount greater than or equal to
the applicable minimum EBITDA requirement set forth below:
For Fiscal Minimum EBITDA
Quarter Ending Requirement
-------------- --------------
May 29, 1997 $120,000,000
August 28, 1997 $135,000,000
On or after
November 27, 1997
and before
September 3, 1998 $160,000,000
September 3, 1998
and thereafter $200,000,000
As used herein, "EBITDA" shall mean, for any period, Borrower's
Net Income (or net loss), excluding any taxes associated
therewith, plus the sum of (a) interest expense, (b) income tax
expense, (c) depreciation expense and (d) amortization expense,
in each case determined on a consolidated basis in accordance
with GAAP for such period.
Section 6.16 Maximum Leverage Ratio. Borrower shall
maintain on a consolidated basis as of the end of each fiscal
quarter a Leverage Ratio of not more than 1.35 to 1.
ARTICLE 7
NEGATIVE COVENANTS
So long as Agent or any Lender shall have any Commitment
hereunder or there shall be any outstanding Letter of Credit
Usage and until payment in full of each Loan and the Notes and
performance of all other payment obligations of Borrower under
this Agreement and the other Loan Documents, Borrower agrees that
it will not, and will cause each Subsidiary not to, do any of the
following unless Agent (with the consent of Majority Lenders)
shall otherwise consent in writing.
Section 7.1 Dividends, Purchase of Stock, Etc. Borrower
shall not and shall cause each Subsidiary (other than a Wholly-
Owned Subsidiary) to not (a) pay any dividend (except dividends
payable in its capital stock) on any shares of any class of its
capital stock, or (b) apply any assets to the purchase,
redemption or other retirement of, or set aside any sum for the
payment of any dividends on or for the purchase, redemption or
other retirement of, or make any other distribution by reduction
of capital or otherwise in respect of, any shares of any class of
capital stock of Borrower or such Subsidiary (each of the
foregoing being a "Dividend Payment"), provided, however, that
(y) Borrower or any Subsidiary may during any fiscal quarter,
make any Dividend Payment, provided that after giving effect to
such Dividend Payment the sum of all Restricted Payments made
during such fiscal quarter, when taken together with all other
Restricted Payments made after the date of this Agreement and
prior to such fiscal quarter would not exceed twenty-five percent
(25%) of Borrower's consolidated Net Income for the period
commencing on the date of this Agreement and ending on the last
day of the immediately preceding fiscal quarter; and (z) Borrower
may make Dividend Payments to redeem any class of its corporate
stock where the amount of such Dividend Payment is not more than
the net proceeds received by Borrower from the concurrent issue
of replacement shares of its capital stock. Nothing in this
Section 7.1 is intended to limit the payments of interest or
principal on convertible Subordinated Indebtedness prior to
conversion and to the extent expressly provided for by the
Majority Lenders in connection with the approval of any
Subordinated Indebtedness, nothing in this Section 7.1 shall
limit the payment with respect to or the deliveries of
securities, cash or other property upon conversion of such
convertible Subordinated Indebtedness.
Section 7.2 Liquidation, Merger, Sale of Assets. Borrower
shall not and shall cause each Subsidiary to not merge or enter
into consolidations or liquidate, nor sell, lease or dispose of
all or any portion of its assets, except (a) sales, leases, or
other dispositions of assets in the ordinary course of business,
(b) licenses or sublicenses of software on an exclusive or
nonexclusive basis in accordance with prudent business practices
and in the ordinary course of business, and (c) mergers or
consolidations in connection with any Investment permitted under
Section 7.7 hereof, provided that in the case of any such merger
or consolidation involving Borrower, Borrower shall be the
surviving corporation; (d) mergers or consolidations entered into
for the purposes of changing the jurisdiction of incorporation of
Borrower or any Subsidiary; provided that if such merger or
consolidation involves Borrower, the successor entity shall
assume all obligations of Borrower hereunder and under the other
Borrower Loan Documents pursuant to documentation satisfactory to
the Majority Lenders; (e) any Subsidiary may merge or consolidate
with or into Borrower or another Subsidiary provided that
Borrower or a Wholly-Owned Subsidiary is the surviving person;
(f) any Subsidiary may merge or consolidate with any other
Subsidiary where the surviving person is not a Wholly-Owned
Subsidiary provided that, after giving effect to such merger or
consolidation, the aggregate of all Restricted Payments made
after the date of this Agreement would not exceed twenty-five
percent (25%) of Borrower's consolidated Net Income for the
period commencing on the date of this Agreement and ending on the
last day of the immediately preceding fiscal quarter; and (g) any
Subsidiary may dissolve or liquidate; provided that after giving
effect to such dissolution or liquidation, the aggregate of all
Restricted Payments made after the date of this Agreement would
not exceed twenty-five percent (25%) of Borrower's consolidated
Net Income for the period commencing on the date of this
Agreement and ending on the last day of the immediately preceding
fiscal quarter; and (h) other sales, leases or other dispositions
of assets made after the date of this Agreement, which on an
aggregate basis for Borrower and the Subsidiaries since the date
of this Agreement, do not exceed an amount equal to ten percent
(10%) of Borrower's consolidated tangible assets as of the last
day of the immediately preceding fiscal quarter of Borrower.
Section 7.3 Indebtedness. Borrower shall not and shall
cause each Subsidiary to not create, incur or become liable for
any Indebtedness except (a) the Loans and Indebtedness hereunder
in respect of the Letters of Credit, (b) existing Indebtedness
reflected on the balance sheets referred to in Section 5.6 hereof
or in Schedule 3 to the Disclosure Letter, (c) current accounts
payable or accrued or other current liabilities (other than
liabilities for borrowed monies) incurred by Borrower or such
Subsidiary in the ordinary course of business, (d) Subordinated
Indebtedness, (e) Indebtedness of Borrower owing to Subsidiaries,
Indebtedness of a Subsidiary owing to Borrower, and Indebtedness
of a Subsidiary owing to another Subsidiary, in each case solely
to the extent such Indebtedness constitutes a permitted
Investment under Section 7.7 hereof and (f) additional
Indebtedness secured by Purchase Money Liens or evidenced by
Capital Leases not to exceed in the aggregate for Borrower and
all Subsidiaries at any time an amount equal to fifty percent
(50%) of Borrower's consolidated net book value of all property,
plant and equipment as at the end of the immediately preceding
fiscal quarter; (g) Permitted Swap Obligations; (h) Indebtedness
permitted under Section 7.4 or Sections 7.5(a) through and
including Section 7.5(e) hereof; and (i) Indebtedness in addition
to that set forth above is in an amount which when aggregated
with the obligations described in Section 7.5(f) hereof does not
exceed fifteen percent (15%) of Borrower's consolidated Tangible
Net Worth as of the end of the immediately preceding fiscal
quarter.
Section 7.4 Foreign Subsidiary Indebtedness. Without
limiting the restrictions set forth in Section 7.3 above,
Borrower shall not permit the Indebtedness of any Foreign
Subsidiary (a) when taken together with the Indebtedness of all
Foreign Subsidiaries, to exceed at any time the sum of Forty
Million Dollars ($40,000,000), and (b) to be evidenced by
instruments or documents containing terms and conditions more
restrictive than the terms and conditions contained in this
Agreement. As used herein, "Foreign Subsidiary" shall mean any
Subsidiary organized under the laws of any jurisdiction other
than the United States or any of its constituent states.
Section 7.5 Guaranties, Etc. Borrower shall not and shall
cause each Subsidiary to not assume, guaranty, endorse or
otherwise become directly or contingently liable for, nor
obligated to purchase, pay or provide funds for payment of, any
obligation or Indebtedness of any other person, except (a) by
endorsement of negotiable instruments for deposit or collection
or by similar transaction in the ordinary course of business; or
(b) in the case of Borrower, a guaranty of any Indebtedness of
any Subsidiary permitted under Section 7.3 hereof; (c) in the
case of a Subsidiary, a guaranty of any Indebtedness of Borrower
permitted under Section 7.3 hereof other than Subordinated
Indebtedness; or (d) in the case of a Subsidiary, a guaranty of
any Indebtedness of another Subsidiary permitted under Section
7.3 hereof provided, that the percentage of Borrower's direct or
indirect ownership interest in the Subsidiary providing the
guaranty is not greater than the percentage of Borrower's direct
or indirect ownership interest in the Subsidiary whose
obligations are being guaranteed; (e) guaranty obligations
existing on the date hereof and described on Schedule 6 to the
Disclosure Letter; and (f) guaranty obligations in addition those
described above in an amount which when aggregated with the
obligations described in Section 7.3(i) hereof does not exceed
fifteen percent (15%) of Borrower's consolidated Tangible Net
Worth as of the end of the immediately preceding fiscal quarter.
Section 7.6 Liens. Borrower shall not and shall cause each
Subsidiary to not create, assume or suffer to exist any Lien on
any of its assets, except (a) existing Liens reflected in the
balance sheets referred to in Section 5.6 hereof, or otherwise
disclosed on Schedule 4 to the Disclosure Letter, (b) Purchase
Money Liens, (c) Liens on the property of any corporation at the
time such corporation becomes a Subsidiary or such corporation is
acquired by, consolidated with or merged into Borrower or a
Subsidiary, and Liens on any property at the time acquired by
Borrower a Subsidiary, provided, in each case, that such Lien was
not incurred in contemplation of such transaction; (d) any Lien
securing renewed, extended or refunded Indebtedness secured by a
Lien prior to such renewal, extension or refunding permitted
under this Section 7.6, provided that the principal amount of
such Indebtedness outstanding at the time of such renewal,
extension or refunding is not increased and such Lien is not
extended to any new property (other than pursuant to its original
terms); (e) Liens in respect of judgments or judicial attachment
liens which secure Indebtedness not exceeding Five Million
Dollars ($5,000,000) in the aggregate at any one time
outstanding; (f) leases and subleases of surplus property at fair
market rental values where Borrower or a Subsidiary is the lessor
or sublessor, provided that such leases and subleases do not in
the aggregate materially interfere with the business of Borrower
and the Subsidiaries taken as a whole; (g) licenses and
sublicenses entered into in the ordinary course of Borrower's or
any Subsidiary's business where Borrower or a Subsidiary is the
licensor or sublicensor provided that such licenses and
sublicenses do not in the aggregate materially interfere with the
business of Borrower and the Subsidiaries taken as a whole;
(h) Liens in favor of a trustee under any indenture relating to
Subordinated Indebtedness with respect to property in the
possession of the trustee securing only amounts due to the
trustee for its trustee fees and indemnities under such
indenture; and (i) additional Liens which do not at any one time
secure Indebtedness exceeding Five Million Dollars ($5,000,000)
in the aggregate for Borrower and the Subsidiaries.
Section 7.7 Investments. Borrower shall not and shall
cause each Subsidiary to not purchase or otherwise acquire the
capital stock, assets or obligations of, or any interest in, any
person or make any loan or advance to any person ("Investments"),
except (a) Investments permitted under Borrower's investment
policy as disclosed on Schedule 7 to the Disclosure Letter, as
such investment policy may be amended from time to time to permit
other substantially comparable Investments or other Investments
acceptable to Agent, (b) extensions of credit in the nature of
accounts receivable or notes receivable arising from the sale or
lease of goods or services in the ordinary course of business,
(c) loans or advances by any Subsidiary to Borrower,
(d) Investments received in connection with the bankruptcy or
reorganization of customers and suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or
suppliers, arising in the ordinary course of business and in the
exercise of the reasonable business judgment of Borrower or a
Subsidiary; (e) loans or advances to employees in the ordinary
course of business or as part of their overall compensation
package; (f) Investments in Permitted Swap Obligations;
(g) Investments existing as of the date hereof disclosed on
Schedule 5 to the Disclosure Letter, (h) Investments by Borrower
to or in any Subsidiary (or any other person which as a result of
the Investment becomes a Subsidiary) or to or in any joint
venture in which Borrower or any Subsidiary is a joint venturer,
provided that after making any such Investment the total amount
of all Investments made by Borrower after the date of this
Agreement to or in all Subsidiaries and joint ventures (net of
repayments and return of capital) shall not exceed the sum of
Seventy Million Dollars ($70,000,000) and provided, further, that
the total amount of all equity Investments (as opposed to
Investments consisting of loans or advances) made by Borrower
after the date of this Agreement in all Subsidiaries and joint
ventures (net of return of capital) shall not exceed the sum of
Thirty-five Million Dollars ($35,000,000), and (i) any other
Investments in any person by Borrower provided that after making
such additional Investment that the total amount of all such
additional Investments made by Borrower after the date of this
Agreement does not exceed five percent (5%) of Borrower's
Tangible Net Worth as of the end of the immediately preceding
fiscal quarter.
Section 7.8 Transactions With Affiliates. Borrower shall
not, and shall not suffer or permit any Subsidiary to, enter into
any material transaction with any Affiliate of Borrower, except
(a) with respect to any Affiliate which is not a Subsidiary upon
fair and reasonable terms not materially less favorable to
Borrower or such Subsidiary than it would obtain in a comparable
arms-length transaction with a person not an Affiliate of
Borrower or such Subsidiary; and (b) with respect to any
Affiliate which is a Subsidiary, upon fair and reasonable terms.
As used herein, "Affiliate" means, as to any person, any other
person which, directly or indirectly, is in control of, is
controlled by, or is under common control with, such person. A
person shall be deemed to control another person if the
controlling person possesses, directly or indirectly, the power
to direct or cause the direction of the management and policies
of the other person, whether through the ownership of voting
securities, membership interests, by contract, or otherwise.
Section 7.9 Accounting Change. Borrower shall maintain a
fiscal year ending on the Thursday closest to August 31 and shall
not make any significant change in accounting policies or
reporting practices other than changes permitted or required by
GAAP or otherwise required by law.
Section 7.10 ERISA Compliance. Neither Borrower, any
Subsidiary nor any member of the Controlled Group nor any Plan
will: (a) engage in any "prohibited transaction" (as such term
is defined in Section 406 or Section 2003(a) of ERISA) which is
not otherwise exempt and which could result in a material
liability to Borrower or any Subsidiary; (b) incur any
"accumulated funding deficiency" (as such term is defined in
Section 302 of ERISA) whether or not waived which could result in
a material liability to Borrower or any Subsidiary; (c) terminate
any Pension Plan in a manner which could result in a material
liability to Borrower or any Subsidiary or could result in the
imposition of a material Lien on any property of Borrower, any
Subsidiary or any member of the Controlled Group pursuant to
Section 4068 of ERISA; or (d) violate state or federal securities
laws applicable to any Plan in any material respect.
ARTICLE 8
EVENTS OF DEFAULT
Section 8.1 Events of Default. The occurrence of any of
the following events shall constitute an "Event of Default"
hereunder.
(a) Loan Payment Default. Borrower shall fail to pay
when due (i) any amount of principal on any Loan; (ii) any amount
of interest or unused commitment fees and such failure shall
remain unremedied for five (5) Business Days; or (iii) any
amounts due in respect of Letters of Credit and such failure
shall remain unremedied for five (5) Business Days; or
(b) Other Payment Default. Borrower shall fail to pay
any other amount payable by it hereunder or under any Loan
Document and such failure shall remain unremedied for ten (10)
Business Days; or
(c) Breach of Warranty. Any representation or
warranty made or deemed made by Borrower under or in connection
with this Agreement or the other Loan Documents shall prove to
have been incorrect in any material respect when made or deemed
made; or
(d) Breach of Certain Covenants. Borrower shall have
failed to perform or observe any covenant set forth in
Sections 6.3 (in respect of the corporate existence of Borrower
or any Subsidiary), 6.11(e), 6.13 through 6.16 and 7.1 through
7.3 hereof; or
(e) Breach of Other Covenants. Borrower shall fail to
perform or observe any other covenant, obligation or term of this
Agreement or any other Loan Document and such failure shall
remain unremedied for thirty (30) days after the earlier of
(i) the date on which written notice thereof shall have been
given to Borrower by Agent, or (ii) the date upon which a
Responsible Officer knows of such failure; or
(f) Cross-default. Borrower or any Subsidiary shall
fail (i) to pay when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise) any Indebtedness
in excess of Ten Million Dollars ($10,000,000) or any interest or
premium thereon and such failure shall continue after the
applicable grace period, if any, specified in the agreement or
instrument relating to such Indebtedness, or (ii) to perform any
term or covenant on its part to be performed under any agreement
or instrument relating to any such Indebtedness and required to
be performed and such failure shall continue after the applicable
grace period, if any, specified in such agreement or instrument,
if the effect of such failure to perform is to accelerate or to
legally and in accordance with the applicable documents permit
the acceleration of the maturity of such Indebtedness; or
(g) Voluntary Bankruptcy, Etc. Borrower or any
Subsidiary shall: (i) file a petition seeking relief for itself
under Title 11 of the United States Code, as now constituted or
hereafter amended, or file an answer consenting to, admitting the
material allegations of or otherwise not controverting, or fail
timely to controvert a petition filed against it seeking relief
under Title 11 of the United States Code, as now constituted or
hereafter amended; or (ii) file such petition or answer with
respect to relief under the provisions of any other now existing
or future applicable bankruptcy, insolvency, or other similar law
of the United States of America or any state thereof or of any
other country or jurisdiction providing for the reorganization,
winding-up or liquidation of corporations or an arrangement,
composition, extension or adjustment with creditors; or
(h) Involuntary Bankruptcy, Etc. An order for relief
shall be entered against Borrower or any Subsidiary under
Title 11 of the United States Code, as now constituted or
hereafter amended, which order is not stayed; or upon the entry
of an order, judgment or decree by operation of law or by a court
having jurisdiction in the premises which is not stayed adjudging
Borrower or any Subsidiary a bankrupt or insolvent under, or
ordering relief against it under, or approving as properly filed
a petition seeking relief against it under the provisions of any
other now existing or future applicable bankruptcy, insolvency or
other similar law of the United States of America or any state
thereof or of any other country or jurisdiction providing for the
reorganization, winding-up or liquidation of corporations or any
arrangement, composition, extension or adjustment with creditors,
or appointing a receiver, liquidator, assignee, sequestrator,
trustee or custodian of Borrower, or any Subsidiary or of any
substantial part of its or their property, or ordering the
reorganization, winding-up or liquidation of its affairs, or upon
the expiration of sixty (60) days after the filing of any
involuntary petition against Borrower or such Subsidiary seeking
any of the relief specified in Section 8.1(g) hereof or this
Section 8.1(h) without the petition being dismissed prior to that
time; or
(i) Insolvency, Etc. Borrower or any Subsidiary shall
(i) make a general assignment for the benefit of its creditors or
(ii) consent to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, or custodian of all or a
substantial part of the property of Borrower or any Subsidiary,
as the case may be, or (iii) admit in writing its insolvency or
inability to pay its debts generally as they become due, or
(iv) fail generally to pay its debts as they become due, or
(v) take any action (or suffer any action to be taken by its
directors or shareholders) looking to the dissolution or
liquidation of Borrower or any Subsidiary, as the case may be; or
(j) ERISA. Borrower, any Subsidiary or any member of
the Controlled Group shall fail to pay when due an amount or
amounts aggregating in excess of One Million Dollars ($1,000,000)
which it shall have become liable to pay to the PBGC or to a Plan
under Section 515 of ERISA or Title IV of ERISA; or notice of
intent to terminate a Plan or Plans (other than a multi-employer
plan, as defined in Section 4001(3) of ERISA), having aggregate
Unfunded Vested Liabilities in excess of One Million Dollars
($1,000,000) shall be filed under Title IV of ERISA by Borrower,
any Subsidiary, any member of the Controlled Group, any plan
administrator or any combination of the foregoing; or the PBGC
shall institute proceedings under Title IV of ERISA to terminate
any such Plan or Plans; or
(k) Judgment. One or more final judgments (which are
not subject to appeal by any party) or orders for the payment of
money in excess of Five Million Dollars ($5,000,000) in the
aggregate or its equivalent in another currency shall be rendered
against Borrower or any Subsidiary and such judgments or orders
shall continue unsatisfied and in effect for a period of thirty
(30) consecutive days; or
(l) Government Approvals, Etc. Any Government
Approval or registration or filing with any Governmental
Authority now or hereafter required in connection with the
performance by Borrower of its obligations set forth the Loan
Documents is revoked, withdrawn or withheld or shall fail to
remain in full force and effect, or any act of any Governmental
Authority is taken which, in the reasonable opinion of Agent,
deprives Borrower of any right, privilege or franchise or
substantially restricts the exercise thereof, where such
deprivation or restriction would be likely to have a material
adverse effect on the business, operations or financial condition
of Borrower and the Subsidiaries taken as a whole, and such act
shall not be revoked or rescinded within thirty (30) days after
it shall have become effective; or
(m) Change of Control. If (i) any person or two or
more persons acting in concert, other than Micron Technology,
Inc., shall either acquire beneficial ownership, directly or
indirectly, of, or acquire by contract or otherwise, or enter
into a contract or arrangement which upon consummation will
result in its or their acquisition of, or control over,
securities of Borrower (or other securities convertible into such
securities) representing forty percent (40%) or more of the
combined voting power of all securities of Borrower entitled to
vote in the election of directors; or (ii) during any period of
twelve (12) consecutive months, commencing after the date of this
Agreement, individuals who at the beginning of such twelve- (12-)
month period were directors of Borrower shall cease for any
reason to constitute a majority of the Board of Directors of
Borrower unless the persons replacing such individuals were
nominated by the Board of Directors of Borrower.
Section 8.2 Consequences of Default. If an Event of
Default described in Section 8.1(g) or 8.1(h) hereof shall occur
and be continuing, then in any such case, the Total Commitment
and Lender's respective Commitments shall be immediately
terminated and, if any Loans or Letters of Credit shall have been
made or issued, the principal of and interest on the Loans, the
face amounts of all issued and outstanding Letters of Credit, and
all other sums payable by Borrower hereunder and under the other
Loan Documents shall become immediately due and payable all
without protest, presentment, notice or demand, all of which
Borrower expressly waives. If any other Event of Default shall
occur and be continuing, then in any such case and at any time
thereafter so long as any such Event of Default shall be
continuing, Agent may, or shall at the request of the Majority
Lenders, immediately terminate the Total Commitment and Lenders'
respective Commitments and, if any Loans or Letters of Credit
shall have been made, Agent may, or shall at the request of the
Majority Lenders, declare the principal of and the interest on
the Loans and the Notes, the face amounts of all issued and
outstanding Letters of Credit, and all other sums payable by
Borrower hereunder and under the other Loan Documents to be
immediately due and payable, whereupon the same shall become
immediately due and payable all without protest, presentment,
notice, or demand, all of which Borrower expressly waives. Agent
agrees to provide Borrower with prompt notice of any election to
declare the principal of and the interest on the Loans to be
immediately due and payable pursuant to the preceding sentence,
it being agreed that such notice may be provided after any such
acceleration is effective and after Agent and Lenders have
exercised any rights of set-off or recoupment to which they are
entitled hereunder or under applicable law and it being further
agreed that the failure to give such notice shall not affect the
validity of such acceleration, set-off or recoupment. Amounts
paid or received hereunder in respect of issued and outstanding
Letters of Credit which exceed amounts paid by Agent under such
Letters of Credit shall be held (and applied) as cash collateral
to secure the performance of all obligations of Borrower owing to
Agent and Lenders hereunder and under the other Loan Documents.
ARTICLE 9
THE AGENT
Section 9.1 Authorization and Action. Each Lender hereby
appoints and authorizes Agent to take such action as agent on its
behalf and to exercise such powers under this Agreement as are
delegated to Agent by the terms hereof, together with such powers
as are reasonably incidental thereto. Agent shall have no duties
or responsibilities except those expressly set forth in this
Agreement. The duties of Agent shall be mechanical and
administrative in nature; Agent shall not have by reason of this
Agreement a fiduciary relationship in respect of any Lender; and
nothing in this Agreement or the other Loan Documents, expressed
or implied, is intended to or shall be so construed as to impose
upon Agent any obligations in respect of this Agreement or the
other Loan Documents except as expressly set forth herein. As to
any matters not expressly provided for by this Agreement,
including enforcement or collection of the Loans and Indebtedness
owed in respect of the Letters of Credit, Agent shall not be
required to exercise any discretion or take any action, but shall
be required to act or to refrain from acting (and shall be fully
protected in so acting or refraining) upon the instructions of
the Majority Lenders, and such instructions shall be binding upon
all Lenders and any holders of any Note provided that Agent shall
not be required to take any action which exposes Agent to
personal liability or which is contrary to the Loan Documents or
applicable law and provided, further, that without the consent of
Majority Lenders, Agent shall not amend this Agreement or waive
Borrower's compliance with any provision of this Agreement and
provided, further, that without the consent of all Lenders, Agent
shall not release any cash collateral received under
Section 3.2(a) except in accordance with the terms of such
Section and shall not change or modify the Total Commitment
(other than reductions made pursuant to Section 2.4 hereof), any
Lender's Commitment (other than reductions made pursuant to
Section 2.4 hereof), the definition of "Majority Lenders", the
timing or rates of interest payments, the timing or amount of
fees, the timing, amounts or forgiveness of principal payments
due in respect of Loans, the terms of Section 3.2(a)(iii), or the
definition of "Borrowing Base," and provided, further, that the
terms of Section 2.6, Section 2.13(c) hereof, this Article 9 and
Article 10 shall not be amended without the prior written consent
of Agent (acting for its own account). In the absence of
instructions from the Majority Lenders, Agent shall have
authority (but no obligation), in its sole discretion, to take or
not to take any action, unless this Agreement specifically
requires the consent of Lenders or the consent of the Majority
Lenders and any such action or failure to act shall be binding on
all Lenders and on all holders of the Notes. Each Lender and
each holder of any Note shall execute and deliver such additional
instruments as may be necessary or desirable to enable Agent to
exercise its powers hereunder.
Section 9.2 Duties and Obligations.
(a) Neither Agent nor any of its directors, officers,
agents or employees shall be liable for any action taken or
omitted to be taken by it or any of them under or in connection
with this Agreement except for its or their own gross negligence
or willful misconduct. Without limiting the generality of the
foregoing, Agent (i) may treat each Lender which is a party
hereto as the party entitled to receive payments hereunder until
Agent receives written notice of the assignment of such Lender's
interest herein signed by such Lender and made in accordance with
the terms hereof and a written agreement of the assignee that it
is bound hereby as it would have been had it been an original
party hereto, in each case in form satisfactory to Agent;
(ii) may consult with legal counsel (including counsel for
Borrower), independent public accountants and other experts
selected by it and shall not be liable for any action taken or
omitted to be taken in good faith by it in accordance with the
advice of such experts; (iii) makes no warranty or representation
to any Lender and shall not be responsible to any Lender for any
statements, warranties or representations made in or in
connection with this Agreement, the other Loan Documents or in
any instrument or document furnished pursuant hereto or thereto;
(iv) shall not have any duty to ascertain or to inquire as to the
performance of any of the terms, covenants, or conditions of the
Loan Documents on the part of Borrower or as to the use of the
proceeds of any Loan, or the proceeds received in respect of any
Letter of Credit or as to the existence or possible existence of
any Default or Event of Default; (v) shall not be responsible to
any Lender for the due execution, legality, validity,
enforceability, genuineness, effectiveness, or value of this
Agreement or of any instrument or document furnished pursuant
hereto; and (vi) shall incur no liability under or in respect to
this Agreement by acting upon any oral or written notice,
consent, certificate or other instrument or writing (which may be
by telegram, facsimile transmission, cable or telex) believed by
it to be genuine and signed or sent by the proper party or
parties or by acting upon any representation or warranty of
Borrower made or deemed to be made hereunder. Agent may execute
any of its duties under this Agreement or any other Loan Document
by or through agents, employees or attorneys-in-fact and shall be
entitled to advice of counsel concerning all matters pertaining
to such duties. Agent shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it
selects without gross negligence.
(b) Agent will account to each Lender for its
Percentage Interest of payments of principal of, interest on and
fees in respect of the Loans (other than fees payable to Agent
for its own account) which are received by Agent from Borrower
and will promptly remit to Lenders entitled thereto all such
payments. Agent will transmit to each Lender copies of all
documents received from Borrower pursuant to the requirements of
this Agreement other than documents which by the terms of this
Agreement Borrower is obligated to deliver directly to Lenders.
(c) Each Lender or its assignee organized outside of
the United States shall furnish to Agent in a timely fashion such
documentation (including, but not by way of limitation, IRS
Forms Nos. 1001 and 4224) as may be required by applicable law or
regulation to establish such Lender's status for tax withholding
purposes.
Section 9.3 Dealings Between Agent and Borrower. With
respect to its Commitment and the Loans made by it, Agent shall
have the same rights and powers under this Agreement and the
other Loan Documents as any other Lender and may exercise the
same as though it were not the Agent, and the term "Lender" shall
unless otherwise expressly indicated include Agent in its
individual capacity. Agent may accept deposits from, lend money
to, act and generally engage in any kind of business with
Borrower or any Subsidiary and any person which may do business
with Borrower or any Subsidiary, all as if Agent were not Agent
hereunder and without any duty to account therefor to Lenders.
Section 9.4 Lender Credit Decision. Each Lender
acknowledges that it has, independently and without reliance upon
Agent or any other Lender and based upon such documents and
information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender
also acknowledges that it will, independently and without
reliance upon Agent or any other Lender and based upon such
documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not
taking action under this Agreement.
Section 9.5 Indemnification. Lenders agree to indemnify
Agent (to the extent not reimbursed by Borrower) ratably
according to their respective Percentage Interests from and
against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever which may be
imposed on, incurred by or asserted against Agent in any way
relating to or arising out of this Agreement or any other Loan
Document or any action taken or omitted by Agent under this
Agreement or any other Loan Document, except any such as result
from Agent's gross negligence or willful misconduct. Without
limiting the foregoing, each Lender agrees to reimburse Agent
promptly on demand in proportion to its Percentage Interest for
any out-of-pocket expenses, including legal fees, incurred by
Agent in connection with the administration or enforcement of or
the preservation of any rights under this Agreement or any other
Loan Document (to the extent that Agent is not reimbursed for
such expenses by Borrower) including without limitation, expenses
incurred in connection with any Letter of Credit.
Section 9.6 Successor Agent. Agent may give written notice
of resignation at any time to Lenders and Borrower and may be
removed at any time with cause by the Majority Lenders. Upon any
such resignation or removal, the Majority Lenders shall have the
right to appoint a successor Agent. If no successor Agent shall
have been so appointed by the Majority Lenders and shall have
accepted such appointment within thirty (30) days after Agent's
giving of notice of resignation or the Majority Lenders' removal
of Agent, then Agent may on behalf of Lenders, appoint a
successor Agent, which shall be (a) a Lender or (b) another bank
organized under the laws of the United States or of any state
thereof, or any affiliate of such bank, and having a combined
capital and surplus of at least Five Hundred Million Dollars
($500,000,000). Upon the acceptance of any appointment as Agent
hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights,
powers, privileges and duties of the retiring Agent, and the
retiring Agent shall be discharged from its duties and
obligations under this Agreement. Until the acceptance by such a
successor Agent, the retiring Agent shall continue as "Agent"
hereunder. Notwithstanding any retiring Agent's resignation or
removal hereunder as Agent, the provisions of this Article 9
shall inure to its benefit as to any actions taken or omitted to
be taken by it while it was Agent under this Agreement. Any
company into which Agent may be merged or converted or with which
it may be consolidated or any company resulting from any merger,
conversion or consolidation to which it shall be a party or any
company to which Agent may sell or transfer all or substantially
all of its agency relationships shall be the successor to Agent
without the execution or filing of any paper or further act,
anything herein to the contrary notwithstanding.
ARTICLE 10
RISK PARTICIPATIONS
Section 10.1 Sale of Risk Participations. Agent shall be
deemed to have sold to each Lender (including itself), and each
Lender severally shall be deemed to have unconditionally and
irrevocably purchased from Agent, an undivided risk participation
in each Letter of Credit as of the date such Letter of Credit is
issued. Each risk participation sold hereunder shall be sold to
Lenders in fractional amounts in proportion to their Percentage
Interest.
Section 10.2 Notice of Participations. Via telex,
facsimile transmission, telegram or cable, Agent will advise each
Lender of its respective Percentage Interest of each Letter of
Credit on the same day Agent issues such Letter of Credit as
requested by Borrower pursuant to Article 3 hereof. Said notice
shall contain the following information: (i) the face amount of
the Letter of Credit issued, (ii) the number of such Letter of
Credit, (iii) the date of issuance, and (iv) the maturity or
expiration date of such Letter of Credit. Agent shall not have
any duty to ascertain or to inquire as to the accuracy of any
information furnished by Borrower to Agent in respect of any
Letter of Credit.
Section 10.3 Payment Obligations.
(a) Reimbursements to Agent. In the event Borrower
fails to fully reimburse Agent for amounts disbursed under a
Letter of Credit ("Letter of Credit Payment") by 12:00 noon
(Seattle, Washington time) on the date reimbursement is demanded,
each Lender shall, upon receipt of notice from Agent of such
failure, pay to Agent the amount of such Lender's Percentage
Interest of the face amount of such Letter of Credit Payment, as
the case may be, provided, however, if Borrower pays a portion
but less than all of the face amount of any such Letter of Credit
Payment, Lenders shall pay Agent only their respective Percentage
Interests of the difference between the face amount of the Letter
of Credit Payment and the amount paid by Borrower on account of
such Letter of Credit Payment. Each and every payment to be made
by Lenders to Agent under this Section 10.3(a) shall be made by
federal wire transfer in immediately available funds. If any
Lender receives notice from Agent by 1:00 p.m. (Seattle,
Washington time) on any Business Day of its obligation to make
payments under this subsection, then such Lender shall make such
payment no later than 2:00 p.m. (Seattle, Washington time) on the
day such notice is received. If any Lender receives such notice
after 1:00 p.m. (Seattle, Washington time) on any Business Day,
then such Lender shall make such payment by no later than
1:00 p.m. (Seattle, Washington time) on the next succeeding
Business Day. If any Lender fails to make such payment by the
date and time required, its obligation shall bear interest from
and including the date when such payment was due until paid at
the per annum rate equal to the Federal Funds Rate.
(b) Payments to Lenders. Agent shall promptly remit
to each Lender such Lender's Percentage Interest of any letter of
credit fees or other amounts received from or for the account of
Borrower in respect of any Letter of Credit. In the event Agent
is required to refund any amount which is paid to it or received
by it from or for the account of Borrower, then Lenders, to the
extent they shall have previously received their Percentage
Interest of such amount, agree to repay to Agent their respective
Percentage Interest of such amount.
(c) Reimbursements to Lenders. Borrower agrees to
reimburse any Lender for amounts paid by such Lender to Agent
pursuant to Section 10.3(a) hereof.
ARTICLE 11
MISCELLANEOUS
Section 11.1 No Waiver; Remedies Cumulative. No failure by
Agent or any Lender to exercise, and no delay in exercising, any
right, power or remedy under this Agreement or any other Loan
Document in and of itself shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or
remedy under this Agreement or any other Loan Document preclude
any other or further exercise thereof or the exercise of any
other right, power, or remedy. The exercise of any right, power,
or remedy shall in no event constitute a cure or waiver of any
Event of Default under this Agreement or any other Loan Document
nor prejudice the rights of Agent or any Lender in the exercise
of any right hereunder or thereunder. The rights and remedies
provided herein and therein are cumulative and not exclusive of
any right or remedy provided by law.
Section 11.2 Governing Law. This Agreement and the other
Loan Documents shall be governed by and construed in accordance
with the laws of the State of Washington, U.S.A.
Section 11.3 Consent to Jurisdiction. Borrower hereby
irrevocably submits to the nonexclusive jurisdiction of any state
or federal court sitting in Seattle, King County, Washington, in
any action or proceeding brought to enforce or otherwise arising
out of or relating to this Agreement or any other Loan Document
and irrevocably waives to the fullest extent permitted by law any
objection which it may now or hereafter have to the laying of
venue in any such action or proceeding in any such forum, and
hereby further irrevocably waives any claim that any such forum
is an inconvenient forum. Borrower agrees that a final judgment
in any such action or proceeding shall be conclusive and may be
enforced in any other jurisdiction by suit on the judgment or in
any other manner provided by law. Nothing in this Section 11.3
shall impair the right of Agent or any other Lender or the holder
of any Note to bring any action or proceeding against Borrower or
its property in the courts of any other jurisdiction, and
Borrower irrevocably submits to the nonexclusive jurisdiction of
the appropriate courts of the jurisdiction in which Borrower is
incorporated or sitting in any place where property or an office
of Borrower is located.
Section 11.4 Waiver of Jury Trial. THE PARTIES HERETO
WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO
ENFORCE OR DEFEND ANY RIGHTS UNDER OR RELATING TO THIS AGREEMENT
OR ANY OTHER LOAN DOCUMENT, OR ANY AMENDMENT, INSTRUMENT,
DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE
DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY
RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT, AND AGREE THAT (A) ANY SUCH ACTION OR
PROCEEDING SHALL NOT BE TRIED BEFORE A JURY AND (B) ANY PARTY
HERETO MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS AGREEMENT
WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RESPECTIVE RIGHTS TO A TRIAL BY
JURY.
Section 11.5 Notices. All notices and other communications
provided for in this Agreement (unless otherwise specified) shall
be in writing (including, without limitation, telex, facsimile
transmission, telegram or cable) and shall be mailed (return
receipt requested, except with respect to notices provided by
Agent to Lenders which may be mailed merely with first class
postage prepaid), or sent or delivered to each party at the
address set forth under its name on the signature pages hereof,
or at such other address as shall be designated by such party in
a written notice to each other party. Except as otherwise
specified all notices sent by a nationally recognized overnight
courier service, if duly given, shall be effective one (1)
Business Day after delivery to such courier service and all other
notices and communications if duly given or made shall be
effective upon receipt.
Section 11.6 Assignment and Participations. This Agreement
shall be binding upon and inure to the benefit of the parties and
their respective Successors and assigns, provided that Borrower
may not assign or otherwise transfer all or any part of its
rights or obligations hereunder or under any other Loan Document
without the prior written consent of Agent and all Lenders, and
any such assignment or transfer purported to be made without such
consent shall be ineffective. Any Lender may at any time sell to
any Eligible Assignee participation interests in its Loans and
Commitment. Such sales may be made without the consent of Agent,
any other Lender or Borrower provided, however, (a) that the
selling Lender shall have provided Borrower with prior written
notice of the sale of any participation interest in any Loan or
in such Lender's Commitment; and (b) that the selling Lender
retains the right to vote as a Lender hereunder in respect of the
interest sold without being bound to obtain the consent of its
participant or to exercise its rights in accordance with
instructions received from its participant (except that the
participant's consent can be required for proposed changes to the
timing or amount of principal payments or changes to the timing,
rate or amount of payments of interest or fees). Any Lender may
pledge or assign all or any part of its interest under the Loan
Documents for security purposes to any Federal Reserve Bank. Any
Lender may assign or otherwise transfer to any Eligible Assignee
all or any part of its interest under the Loan Documents pursuant
to an Assignment and Assumption Agreement, substantially in the
form of Exhibit D hereto (y) without the consent of Agent, any
other Lender, or Borrower to any of the assigning Lender's
affiliates or to any other Lender; or (z) with the prior written
consent of Agent and, if no Event of Default shall have occurred
and be continuing, Borrower, (such consents not to be
unreasonably withheld or delayed) but without the consent of the
other Lenders, to any other Eligible Assignee provided, however,
that in either case no such assignment (as distinguished from the
sale of a participation) other than an assignment of a Lender's
entire interest under the Loan Documents (i) shall be made in an
amount less than Ten Million Dollars ($10,000,000) nor (ii) shall
be made if after giving effect to such assignment the aggregate
amount of the Loans and unused Commitment of the assigning Lender
would be less than Ten Million Dollars ($10,000,000) and
provided, further, that in connection with any assignment (as
distinguished from the sale of a participation) the assigning
Lender shall pay to Agent a fee of Two Thousand Five Hundred
Dollars ($2,500) for each proposed assignee that is not then a
Lender or an affiliate thereof. The assignee of any permitted
sale or assignment (including assignments for security and sales
of participations) shall have the same rights and benefits
against Borrower under the Loan Documents (excepting however, in
the case of sales of participations, the right to grant or
withhold consents or otherwise vote in respect thereof) including
the right of setoff, and in the case of any outright assignment
(as distinguished from an assignment for security or the sale of
a participation) the same obligations in respect thereof, as if
such assignee were an original Lender. Except to the extent
otherwise required by the context of this Agreement, the word
"Lender" where used in this Agreement shall mean and include any
holder of a Note originally issued to a Lender hereunder, and
each such holder shall be bound by and have the benefits of this
Agreement the same as if such holder had been a signatory hereto.
Any outright assignment of a Lender's interest hereunder to
another Lender made in conformance with the terms of this
Section 11.6 shall result in a corresponding adjustment to the
selling and purchasing Lenders' Commitments and Percentage
Interests.
Section 11.7 Borrower's Indemnity. Whether or not the
transactions contemplated hereby shall be consummated, Borrower
shall pay, indemnify and hold each Lender, Agent and each of
their respective officers, directors, employees, counsel, agents
and attorneys-in-fact (each, an "Indemnified Person") harmless
from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, charges,
expenses or disbursements (including reasonable attorney's fees,
which may include the allocated charges of internal legal
counsel) of any kind or nature whatsoever (collectively,
"Losses") which may at any time (including at any time following
repayment of the Loans and the termination, resignation or
replacement of the Agent or replacement of any Lender) be imposed
on, incurred by or asserted against any such person in favor of
any third-party in any way relating to or arising out of this
Agreement or any document contemplated by or referred to herein,
or the transactions contemplated hereby, or any action taken or
omitted by any such person under or in connection with any of the
foregoing, including any Losses resulting from the inaccuracy of
any representation or warranty by Borrower when made or deemed
made by Borrower hereunder and including Losses incurred with
respect to any investigation, litigation or proceeding (including
any insolvency proceeding or appellate proceeding) related to
this Agreement or any other Loan Document or any actual or
proposed use of proceeds of the Loans hereunder, whether or not
any Indemnified Person is a party thereto (all of the foregoing,
collectively the "Indemnified Liabilities"); provided, that
Borrower shall have no obligation hereunder to any Indemnified
Person with respect to Indemnified Liabilities arising from the
gross negligence or willful misconduct of such Indemnified
Person. All amounts owing under this Section 11.8 shall be paid
promptly upon demand. At the election of any Indemnified Person,
Borrower shall defend such Indemnified Person in respect of any
Indemnified Liabilities using legal counsel reasonably
satisfactory to such Indemnified Person at the sole cost and
expense of Borrower.
Section 11.8 Set-off. In addition to any rights and
remedies of the Lenders provided by law, if an Event of Default
exists or the Loans have been accelerated, each Lender is
authorized at any time and from time to time, without prior
notice to Borrower, any such notice being waived by Borrower to
the fullest extent permitted by law, to set-off and apply any and
all deposits (general or special, time or demand, provisional or
final) at any time held by, and other indebtedness at any time
owing by, such Lender to or for the credit or the account of
Borrower against any and all obligations owing to such Lender,
now or hereafter existing, irrespective of whether or not Agent
or such Lender shall have made demand under this Agreement or any
Loan Document and although such obligations may be contingent or
unmatured. Each Lender agrees promptly to notify Borrower and
Agent after any such set-off and application made by such Lender;
provided, however, that the failure to give such notice shall not
affect the validity of such set-off and application.
Section 11.9 Severability. Any provision of this Agreement
or any other Loan Document which is prohibited or unenforceable
in any jurisdiction shall as to such jurisdiction be ineffective
to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the
validity or enforceability of such provision in any other
jurisdiction. To the extent permitted by applicable law, the
parties waive any provision of law which renders any provision
hereof prohibited or unenforceable in any respect.
Section 11.10 Survival. The indemnities of Borrower in
favor of Agent and Lenders shall survive indefinitely and,
without limiting the foregoing, shall survive the execution and
delivery of this Agreement and the other Loan Documents, the
making of any Loans, the issuance of any Letters of Credit the
expiration of the Total Commitment and the repayment of all Loans
and other amounts due hereunder.
Section 11.11 Conditions Not Fulfilled. If the Commitments
are not borrowed owing to nonfulfillment of any condition
precedent specified in Article 4, no party hereto shall be
responsible to any other party for any damage or loss by reason
thereof, except that Borrower shall in any event be liable to pay
the fees, Taxes, and expenses for which it is obligated
hereunder. If the conditions precedent specified in Article 4
shall have been satisfied and any Lender (the "Defaulting
Lender") fails to make its Commitment available in accordance
with the terms hereof, neither Agent nor any Lender other than
the Defaulting Lender shall be responsible to Borrower for any
damage or loss by reason thereof, nor shall Borrower or any
Lender other than the Defaulting Lender be excused from its
performance hereunder.
Section 11.12 Entire Agreement; Amendment. This Agreement,
together with the Exhibits and Schedule hereto, the Disclosure
Letter and the letter agreement described in Section 2.13(c)
hereof, comprise the entire agreement of the parties and may not
be amended or modified except by written agreement of Borrower
and Agent executed in conformance with the terms of Section 9.1
hereof. No provision of this Agreement may be waived except in
writing and then only in the specific instance and for the
specific purpose for which given.
Section 11.13 Confidentiality. Each Lender agrees to take
and to cause its affiliates to take normal and reasonable
precautions and exercise due care to maintain the confidentiality
of all confidential information provided to it by Borrower or any
Subsidiary, or by Agent on Borrower's or such Subsidiary's
behalf, under this Agreement or any other Loan Document, and
neither it nor any of its affiliates shall use any such
information other than in connection with or in enforcement of
this Agreement and the other Loan Documents or in connection with
other business now or hereafter existing or contemplated with
Borrower or any Subsidiary; except to the extent such information
(i) was or becomes generally available to the public other than
as a result of disclosure by any Lender, or (ii) was or becomes
available on a non-confidential basis from a source other than
Borrower, provided that such source is not bound by a
confidentiality agreement with Borrower known to Lender;
provided, however, that any Lender may disclose such information
(A) at the request or pursuant to any requirement of any
Governmental Authority to which such Lender is subject or in
connection with an examination of such Lender by any such
authority; (B) pursuant to subpoena or other court process,
provided that such Lender shall use its reasonable, good faith
efforts to provide prior written notice (unless prohibited from
doing so by any applicable laws) to Borrower to allow Borrower to
seek a protective order; (C) when required to do so in accordance
with the provisions of any applicable requirement of law; (D) to
the extent reasonably required in connection with any litigation
or proceeding to which Agent, any Lender or their respective
affiliates may be party provided that except as set forth in
clause (E), provided that such Lender shall use its reasonable,
good faith efforts to provide prior written notice (unless
prohibited from doing so by any applicable laws) to Borrower to
allow Borrower to seek a protective order; (E) to the extent
reasonably required in connection with the exercise of any remedy
hereunder or under any other Loan Document; (F) to such Lender's
independent auditors and other professional advisors provided
such advisors have a need to know such information; (G) to any
participant or assignee, actual or potential, provided that such
person agrees in writing to keep such information confidential to
the same extent required of Lenders hereunder; (H) as to any
Lender or its affiliate, as expressly permitted under the terms
of any other document or agreement regarding confidentiality to
which Borrower or any Subsidiary is party or is deemed party with
such Lender or such affiliate; and (I) to its affiliates. Upon
the execution and delivery of this Agreement by all the parties,
the confidentiality undertaking set forth in this Section 11.13
shall replace and supersede the terms of any confidentiality
agreement between Borrower and any of Agent or Lenders previously
executed prior to the date of this Agreement and shall survive
the termination of this Agreement for a period of twelve (12)
months.
Section 11.14 Headings. The headings of the various
provisions of this Agreement are for convenience of reference
only, do not constitute a part hereof, and shall not affect the
meaning or construction of any provision hereof.
Section 11.15 Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be
deemed to be an original, and all of which taken together shall
constitute one and the same Agreement.
Section 11.16 Oral Agreements Not Enforceable.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT,
OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers or agents
thereunto duly authorized as of the date first above written.
BORROWER: MICRON ELECTRONICS, INC.
By /s/T. Erik Oaas
-------------------------------------
T. Erik Oaas
Its Executive Vice President, Finance
& CFO
Address: 900 East Karcher Road
Nampa, ID 83687
Attn: Chief Financial Officer
Telefax: (208) 898-7411
with a copy to
Address: 900 East Karcher Road
Nampa, ID 83687
Attn: General Counsel
<PAGE>
LENDERS: BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By /s/Thomas P. Rook
-----------------------------------
Its Vice President
---------------------------------
Address: Western Wholesale Banking
10500 N.E. Eighth Street
Suite 500
Bellevue, WA 98009
Attn: Thomas P. Rook
Telefax: (206) 585-6393
UNITED STATES NATIONAL BANK OF OREGON
By /s/Daniel J. Hempy
------------------------------------
Its Senior Vice President
---------------------------------
Address: Corporate Banking Division
111 S.W. Fifth Avenue
Suite 400
Portland, OR 97204
Attn: Ross A. Beaton
Telefax: (503) 275-5795
ABN AMRO BANK, N.V.
By /s/Lee-Lee Miao
------------------------------------
Its Vice President
---------------------------------
By /s/Leif Olsson
------------------------------------
Its Senior Vice President
---------------------------------
Address: 600 University Street
Suite 2323
Seattle, WA 98101
Attn: Lee-Lee Miao
Telefax: (206) 682-5641
<PAGE>
DEUTSCHE BANK AG, NEW YORK BRANCH AND/OR
CAYMAN ISLANDS BRANCH
By /s/Stephan A. Wiedemann
------------------------------------
Its Director
---------------------------------
By /s/John Augsburger
------------------------------------
Its Vice President
---------------------------------
Address: 50 California Street
Suite 1500
San Francisco, CA 94111
Attn: Ross Howard
Telefax: (415) 439-5215
FLEET NATIONAL BANK
By /s/Frank H. Benesh, III
------------------------------------
Its Vice President
---------------------------------
Address: 75 State Street
MA BOF 04 M
Boston, MA 02109
Attn: Frank Benesh
Telefax: (617) 346-0568
KEYBANK NATIONAL ASSOCIATION
By /s/ J. T. Taylor
------------------------------------
Its Assistant Vice President
---------------------------------
Address: 700 Fifth Avenue
48th Floor
Seattle, WA 98104
Attn: J.T. Taylor
Telefax: (206) 684-6035
<PAGE>
THE BANK OF NOVA SCOTIA
By /s/ Maarten Van Otterloo
------------------------------------
Its Senior Relationship Manager
---------------------------------
Address: 580 California Street
Suite 2100
San Francisco, CA 94104
Attn: Maarten Van Otterloo
Telefax: (415) 397-0791
THE SUMITOMO BANK, LIMITED
By /s/Gordo Hirai
------------------------------------
Its Joint General Manager
---------------------------------
Address: 777 S. Figueroa St.
Suite 2600
Los Angeles, CA 90017
Attn: Gordo Hirai
Telefax: (213) 623-6832
and:
Address: 1201 Third Avenue
Suite 5320
Seattle, WA 98101
Attn: Bob Granfelt
Telefax: (206) 623-8551
AGENT: BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By /s/Ken Puro
------------------------------------
Its Vice President
---------------------------------
Address: Seafirst Agency Services
701 Fifth Avenue
Floor 16
Seattle, WA 98104
Attn: Ken Puro
Telefax: (206) 358-0971
<PAGE>
CO-AGENTS: BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By /s/ Thomas P. Rook
------------------------------------
Its Vice President
---------------------------------
Address: Western Wholesale Banking
10500 N.E. Eighth Street
Suite 500
Bellevue, WA 98009
Attn: Thomas P. Rook
Telefax: (425) 585-6393
UNITED STATES NATIONAL BANK OF OREGON
By /s/ Dan Hempy
------------------------------------
Its Senior Vice President
---------------------------------
Address: Corporate Banking Division
111 S.W. Fifth Avenue
Suite 400
Portland, OR 97204
Attn: Ross A. Beaton
Telefax: (503) 275-5795
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$______________ June 27, 1997
Seattle, Washington
FOR VALUE RECEIVED, the undersigned, MICRON ELECTRONICS,
INC., a Minnesota corporation (the "Borrower"), hereby promises
to pay to the order of ________________________, a _____________
_____________ (the "Lender") on the Maturity Date the unpaid
principal balance of all Loans made by Lender under this Note, in
a maximum amount not to exceed ___________ Million Dollars
($__________), together with interest thereon from the date
hereof until maturity at a per annum rate equal to the Interest
Rate as defined below (changing as the Interest Rate changes),
and, if default shall occur in the payment when due (whether by
acceleration or otherwise) of any principal amount hereunder,
from the maturity of that amount until it is paid in full at a
per annum rate equal to the Adjusted Reference Rate (changing as
the Reference Rate changes), plus two percent (2%).
Notwithstanding anything herein to the contrary, interest shall
not accrue at a rate in excess of the maximum rate permitted by
applicable law.
Borrower further agrees as follows:
1. All payments of principal and interest on this Note
shall be made in immediately available funds to Bank of America
National Trust and Savings Association, as the agent for Lender
(the "Agent"), in accordance with wire transfer instructions as
may be provided to Borrower from time to time, at Agent's
Commercial Loan Service Center, Fifth Avenue Plaza Building, 13th
Floor, 800 Fifth Avenue, Seattle, Washington 98104, or at such
other address as Agent shall from time to time designate.
2. As used herein "Interest Rate" shall mean the Adjusted
Reference Rate unless Borrower shall elect to have some or all of
the loans made hereunder accrue interest at an Adjusted LIBOR
Rate as provided in Section 2.7(b) of the Credit Agreement (as
defined below). Accrued but unpaid interest on each Loan
accruing interest at an Adjusted LIBOR Rate shall be paid on the
last day of each Applicable Interest Period, on the date of any
principal payment (to the extent accrued on the principal amount
paid) and at the Maturity Date, and, for each LIBOR Rate Loan
having an Applicable Interest Period longer than three months, on
the 90th day of such Applicable Interest Period or at the end of
the first three months of such Applicable Interest Period, as the
case may be. Accrued but unpaid interest on each Reference Rate
Loan shall be paid on the last Business Day of each calendar
quarter commencing on June 30, 1997 and continuing on the last
Business Day of each calendar quarter thereafter and on the date
of any principal payment (to the extent accrued on the principal
amount paid) and at the Maturity Date. Unpaid interest accruing
on amounts in default shall be payable on demand.
3. This Note is issued under and is subject to the terms
of a Credit Agreement dated as of the date hereof, among Bank of
America National Trust and Savings Association and United States
National Bank of Oregon as co-agents, Bank of America National
Trust and Savings Association, as administrative agent, Lender
and certain other banks as "Lenders" and the undersigned as
"Borrower" (as amended from time to time, the "Credit
Agreement"). Capitalized terms not defined herein have the
meanings set forth in the Credit Agreement.
4. It is expressly provided that if any of the Events of
Default defined in Sections 8.1(g) or (h) of the Credit Agreement
shall occur, the entire unpaid balance of the principal and
interest hereunder shall be immediately due and payable in
accordance with the terms of the Credit Agreement. It is also
expressly provided that upon the occurrence of any other Event of
Default, the entire remaining unpaid balance of the principal and
interest may be declared by Agent to be immediately due and
payable in accordance with the terms of the Credit Agreement.
5. Borrower may repay Reference Rate Loans at any time
without penalty or premium. Prepayment of any LIBOR Rate Loan,
whether voluntary, mandatory, required by Section 2.5(a) of the
Credit Agreement or as the result of Agent's or Lender's
collection efforts, shall be subject to the payment of fees as
described in Section 2.9 of the Credit Agreement.
6. The unpaid principal balance of the Loans made
hereunder shall be the total amount advanced hereunder, less the
amount of the principal payments made hereon. This Note is given
to avoid the execution of an individual note for each Loan by
Lender to Borrower. This Note evidences a revolving credit and,
within the limits and on the conditions set forth in the Credit
Agreement, prior to the Maturity Date Borrower may borrow, repay
and reborrow hereunder. Lender is hereby authorized to record
the date and amount of each Loan it makes hereunder and the date
and amount of each payment of principal and interest thereon on a
schedule annexed hereto and constituting a part of this Note or
maintained in connection herewith. Any such recordation by
Lender shall constitute prima facie evidence of the accuracy of
the information so recorded; provided, however, that the failure
to make any such recordation or any error in any such recordation
shall not affect the obligations of Borrower hereunder.
7. Each maker, surety, guarantor and endorser of this Note
expressly waives all notices, demands for payment, presentations
for payment, notices of intention to accelerate the maturity,
protest and notice of protest.
8. In the event this Note is placed in the hands of an
attorney for collection, or suit is brought on the same, or the
same is collected through bankruptcy or other judicial
proceedings, Borrower agrees and promises to pay reasonable
attorneys' fees and collection costs, including all out-of-pocket
expenses and the allocated costs and disbursements of internal
counsel, incurred by Lender or Agent.
9. This Note has been executed and delivered in and shall
be governed by and construed in accordance with the internal laws
of the State of Washington. Borrower hereby irrevocably submits
to the jurisdiction of any state or federal court sitting in
Seattle, King County, Washington, U.S.A., in any action or
proceeding brought to enforce or otherwise arising out of or
relating to this Note and hereby waives any objection to venue in
any such court and any claim that such forum is an inconvenient
forum.
MICRON ELECTRONICS, INC.
By
------------------------------------
Its
---------------------------------
<PAGE>
Schedule 1
to Micron Electronics, Inc. Promissory Note
- ----------------------------------------------------------------------
Applicable Amount of Unpaid
Amount of Interest Interest Principal Principal Notation
Date Loan Option Period Paid Balance By
- ----------------------------------------------------------------------
<PAGE>
EXHIBIT B
NOTICE OF BORROWING
Reference is hereby made to that certain Credit Agreement by and
among Micron Electronics, Inc., as Borrower, certain banks as Lenders,
Bank of America National Trust and Savings Association d/b/a Seafirst
Bank and United States National Bank of Oregon as co-agents for
Lenders and Bank of America National Trust and Savings Association
d/b/a Seafirst Bank as administrative agent (the "Agent") for the
Lenders dated as of June 27, 1997 (as the same may be amended from
time to time, the "Credit Agreement"). This notice is being given
pursuant to Section 2.3 of the Credit Agreement. The undersigned
hereby advises Agent that it intends to borrow a Loan in the amount of
[AMOUNT OF BORROWING]1 on [PROPOSED DATE OF BORROWING].2
Optional. The undersigned elects to have interest accrue on the
above-referenced Loan from the date made for a period of [SPECIFY
APPLICABLE INTEREST PERIOD]3 at the Adjusted LIBOR Rate.
This notice is irrevocable, constitutes a representation and
warranty by the undersigned that as of the date hereof, the statements
set forth in Article 5 of the Credit Agreement are true and correct
and that no Default or Event of Default (as such words are defined in
the Credit Agreement) has occurred and is continuing.
MICRON ELECTRONICS, INC.
By
-----------------------------------------
Its 4
--------------------------------------
_______________________________
1 The amount specified shall be an integral multiple of One
Million Dollars ($1,000,000) and not less than Five Million
Dollars ($5,000,000).
2 The date of the proposed borrowing may be the same date as
the date of this notice provided this notice is delivered to the
Agent prior to 11:00 o'clock a.m. and provided further that if an
Adjusted LIBOR Rate is selected to accrue as of the proposed date
of borrowing the notice must be delivered prior to 11:00 o'clock
a.m. three Business Days before the requested date of borrowing.
3 The undersigned may select applicable interest periods of
one, two, three or six months provided that no such interest
period may be selected if it extends beyond the Maturity Date as
such term is defined in the Credit Agreement.
4 This notice is to be executed by the Borrower's_______________,
____ ___________, _______________, _________________, or such other
person as may be designated in a writing delivered to the Agent by
the Borrower's _________ ______ or_________________.
<PAGE>
EXHIBIT C-1
June 27, 1997
Bank of America National Trust
and Savings Association, as
Administrative Agent
for the Lenders Named
in the Credit Agreement
Bank of America National Trust
and Savings Association and United
States National Bank of Oregon, as
Co-Agents for the Lenders Named
in the Credit Agreement
and
The Lenders Named in
the Credit Agreement
Re: Credit Agreement, dated as of June 27,
1997, among Micron Electronics, Inc., the
Lenders Named therein, Bank of America
National Trust and Savings Association and
United States National Bank of Oregon, as
Co-Agents for such Lenders and Bank of
America National Trust and Savings
Association, as Administrative Agent for
such Lenders
Ladies and Gentlemen:
We have acted as special counsel to Micron
Electronics, Inc., a Minnesota corporation ("Borrower"), in
connection with the negotiation, execution and delivery of
the Credit Agreement dated, as of June 27, 1997 (including
the exhibits and schedules thereto, the "Credit
Agreement"), among Borrower, the Lenders named in the
Credit Agreement (the "Lenders"), Bank of America National
Trust and Savings Association and United States National
Bank of Oregon, as Co-Agents for the Lenders (the "Co-
Agents") and Bank of America National Trust and Savings
Association, as Administrative Agent for the Lenders
("Administrative Agent"). This opinion is rendered to you
pursuant to Section 4.1(c) of the Credit Agreement. All
capitalized terms used but not defined herein shall have
the respective meanings assigned to such terms in the
Credit Agreement.
In rendering the opinions expressed below, we have
examined originals or copies of the following documents:
(a) the Credit Agreement;
(b) the Notes;
(c) the legal opinion of Dorsey & Whitney
LLP, special Minnesota counsel to
Borrower, dated the date hereof; and
(d) a certificate of certain officers of
Borrower as to certain factual matters.
We have also relied upon and obtained from public
officials and officers of Borrower such other certificates
and assurances as we consider necessary for the rendering of
thisopinion. The Credit Agreement and the Notes are
sometimes referred to herein collectively as the "Transaction
Documents."
With your permission and without any verification by
us, we have assumed the following for purposes of rendering
the opinions set forth herein:
(i) The genuineness of all signatures, the legal
capacity of all natural persons to execute
and deliver documents, the authenticity and
completeness of documents submitted to us as
originals and the completeness and conformity
with authentic original documents of all
documents submitted to us as copies, and that
all documents, books and records made
available to us by Borrower are accurate and
complete.
(ii) That there are no agreements or
understandings between or among Borrower,
Administrative Agent, the Co-Agents, the
Lenders of third parties which would expand,
modify or otherwise affect the terms of the
Transaction Documents or the respective
rights or obligations of the parties
thereunder and that the Transaction Documents
correctly and completely set forth the intent
of all parties thereto.
(iii) That all parties to the Transaction
Documents have filed all required franchise
tax returns, if any, and paid all required
taxes, if any, under the California Revenue &
Taxation Code.
(iv) That the Transaction Documents have been duly
authorized, executed and delivered by
Administrative Agent, the Co-Agents and the
Lenders to the extent Administrative Agent,
the Co-Agents or the Lenders are contemplated
to be a party thereto and that each party
thereto has full power, authority and legal
right to enter into and perform the terms and
conditions of the Transaction Documents to be
performed by such party and that the
Transaction Documents constitute legal, valid
and binding obligations of Administrative
Agent, such Co-Agent or such Lender, as
applicable, enforceable against it in
accordance with its terms.
(v) That each Lender is either (i) a "Bank" as
defined in and operating under that certain
act known as the "Bank Act" approved March 1,
1909, as amended, (ii) a bank created and
operating under and pursuant to the laws of
the State of California or of the United
States or (iii) a foreign bank complying with
the criteria set forth in Section 1716 of the
California Financial Code, as amended, and
that the Lenders are therefore exempt from
the restrictions of Section 1 of Article XV
of the California Constitution and related
statutes relating to usury.
(vi) With respect to certain matters of fact, that
the representations and warranties of
Borrower set forth in the Credit Agreement,
the certificates of certain officers of
Borrower delivered to you in connection with
the transactions contemplated by the Credit
Agreement and the certificates of certain
officers of Borrower referred to in paragraph
(d) above are true and correct.
As used in this opinion, the expression "to our
knowledge" or "known to us" with reference to matters of
fact means that during the course of our representation of
Borrower in connection with the Transaction Documents, no
information has come to the attention of the attorneys of
our firm involved in this engagement which would give them
actual knowledge of the existence or absence of such facts;
however, we have made no independent investigation to
determine the existence or absence of such facts, and any
limited inquiry undertaken by us during the preparation of
this opinion should not be regarded as such an
investigation. No inference as to our knowledge of the
existence or absence of any facts underlying any opinion
given "to our knowledge" should be drawn from the fact of
our representation of Borrower.
On the basis of the foregoing and in reliance thereon,
and based upon examination of such questions of law as we
have deemed appropriate, and subject to the assumptions,
exceptions, qualifications, and limitations set forth
herein, we advise you that in our opinion:
1. The Transaction Documents constitute valid
and binding obligations of Borrower,
enforceable against Borrower in accordance
with their terms.
2. The execution and delivery of the Transaction
Documents, the undertaking of the covenants
set forth in Credit Agreement and the
borrowing of Advances in accordance with the
Credit Agreement and repayment of any
Advances by Borrower do not violate or
contravene any United States federal or
California state law, statute, rule or
regulation applicable to Borrower.
3. No consents, approvals, authorizations,
registrations, declarations or filings are
required to be made or obtained by or in
respect of the Borrower (or on its behalf)
with or from any governmental or regulatory
authority or agency of the United States or
the State of California for the due
authorization, execution and delivery by the
Borrower of the Transaction Documents, the
undertaking of the covenants set forth in the
Transaction Documents, the borrowing of
Advances in accordance with the Agreement or
the repayment of any such Advances by the
Borrower.
4. Borrower is not an "investment company," or,
to our knowledge, an "affiliated person" of,
or a "promoter" or "principal underwriter"
for, an "investment company," as such terms
are defined in the Investment Company Act of
1940, as amended.
5. The extension of credit under the Transaction
Documents does not violate the provisions of
Regulations G, T, U or X of the Board of
Governors of the Federal Reserve System.
The opinions set forth above are subject to the
following exceptions, qualifications, limitations, comments
and additional assumptions:
A. We express no opinion as to any matter
relating to laws of any jurisdiction other
than the laws of the State of California
and the federal laws of the United States,
as such are in effect on the date hereof,
and we have made no inquiry into, and we
express no opinion as to, the statutes,
regulations, treaties, common laws or
other laws of any other nation, state or
jurisdiction. In that regard, we note
that the Transaction Documents purport to
be governed by the laws of the State of
Washington. The opinions expressed herein
concerning the validity, binding effect
and enforceability of the Transaction
Documents are intended to express our
views on those matters as if the
substantive law of the State of California
were applicable. In addition, in
rendering our opinion set forth in
paragraph 1 above, we have relied solely
on the opinion of Dorsey & Whitney LLP, as
to matters of due authorization, execution
and delivery of the Transaction Documents.
B. We express no opinion as to (i) the effect
of any bankruptcy, insolvency,
reorganization, arrangement, fraudulent
conveyance, moratorium or other similar
laws relating to or affecting the rights
of creditors generally, or (ii) the effect
of general principles of equity, including
without limitation, concepts of
materiality, reasonableness, good faith
and fair dealing, and the possible
unavailability of specific performance,
injunctive relief or other equitable
relief, whether considered in a proceeding
in equity or at law.
C. We express no opinion regarding any of (i)
the rights or remedies available to any
party for violations or breaches of any
provisions which are immaterial or the
enforcement of which would be unreasonable
under the then existing circumstances,
(ii) the rights or remedies available to
any party which takes discretionary action
which is arbitrary, unreasonable or
capricioius, or is not taken in good faith
orin a commercially reasonable manner,
whether or not the Transaction Documents
permit such action, or (iii) the
enforceability of any provision deemed to
be "unconscionable" within the meaning of
Section 1670.5 of the California Civil
Code.
D. We express no opinion as to the legality,
validity, binding nature or enforceability
of (i) any provisions in the Transaction
Documents providing for the payment or
reimbursement of costs or expenses or
indemnifying a party, to the extent such
provisions may be held unenforceable as
contrary to public policy, (ii) any
provision of any Transaction Document
insofar as it provides for the payment or
reimbursement of costs and expenses or
indemnification for claims, losses or
liabilities in excess of a reasonable
amount determined by any court or other
tribunal, (iii) any provisions regarding
any party's ability to collect attorneys'
fees and costs in an action involving the
Transaction Documents, if the party is not
the prevailing party in such action (we
call your attention to the effect of
Section 1717 of the California Civil Code,
which provides that, where a contract
permits one party thereto to recover
attorneys' fees, the prevailing party in
any action to enforce any provisions of
the contract shall be entitled to recover
its reasonable attorneys' fees), (iv) any
provisions of the Transaction Documents
imposing penalties or forfeitures, late
payment charges or any increase in
interest rate, upon delinquency in payment
or the occurrence of a default to the
extent they bear no reasonable relation to
the damage suffered by the damaged party,
constitute a penalty or forfeiture or are
otherwise contrary to public policy, or
(v) any provision of the Transaction
Documents to the effect that a statement,
certificate, determination or record shall
be deemed conclusive absent manifest
error.
E. We express no opinion with respect to the
legality, validity, binding nature or
enforceability of (i) any vaguely or
broadly stated waiver, including, without
limitation, the waivers of diligence,
presentment, demand, protest or notice,
(ii) any waivers or consents (whether or
not characterized as a waiver or consent
in the Transaction Documents) relating to
the rights of Borrower or duties owing to
it existing as a matter of law, including,
without limitation, waivers of the
benefits of statutory or constitutional
provisions, to the extent such waivers or
consents are found by courts ot be against
public policy or which are ineffective
pursuant to California statutes and
judicial decisions, or (iii) any waivers
of any statute of limitations to the
extent such waivers are in excess of four
years beyond the statutory period.
F. We express no opinion with respect to the
legality, validity, binding nature or
enforceability of any provision of the
Transaction Documents to the effect that
rights or remedies are not exclusive, that
every right or remedy is cumulative and
may be exercised in addition to any other
right or remedy, that the election of some
particular remedy or remedies does not
preclude recourse to one or more other
remedies or that failure ot exercise or
dealy in exercising rights or remedies
will not operate as a waiver of any such
right or remedy.
G. We express no opinion as to any provision
of the Transaction Documents requiring
written amendments or waivers of such
documents insofar as it suggests that oral
or other modifications, amendments or
waivers could not be effectively agreed
upon by the parties or that the doctrine
of promissory estoppel might not apply.
H. Except to the extent specifically set
forth in paragraph 5 above, we express no
opinion as to the applicability or effect
of compliance or non-compliance by any
Lender (or its agent) with any state,
federal or other laws applicable to such
Lender (or its agent) or to the
transactions contemplated by the
Transaction Documents because of the
nature of its business, including its
legal or regulatory status.
I. We express no opinion regarding compliance
or non-compliance (or the effect thereof)
with applicable anti-fraud provisions of
federal or state securities laws, or with
respect to the "Blue Sky" laws of any
state, although in the course of our
representation of the Borrower in
connection with matters to which this
opinion is addressed (without further
investigation), nothing has come to our
attention that would lead us to believe
that, with respect to such matters, any
such provisions of federal or state
securities laws or "Blue Sky" laws would
be applicable.
J. We express no opinion as to the
enforceability or legal effect of any
provision of any Transaction Document
purporting to reinstate, as against any
obligor or guarantor, obligations or
liabilities of such obligor which have
been avoided or which have arisen from
transactions which have been rescinded or
the payment of which has been required to
be returned by any court of competent
jurisdiction.
K. Our opinions in paragraph 2 above are
intended to express our opinion that the
execution, delivery and performance by
Borrower of the Credit Agreement are
neither prohibited by, nor do they subject
Borrower to a fine, penalty or similar
sanction that would be materially adverse
to Borrower, under or any law, rule,
regulation of the State of California or
United States federal law or any order,
writ, judgment, decree, determination or
award of any United States federal or
California state governmental authority
that a lawyer practicing in the State of
California exercising customary
professional diligence would reasonably
recognize to be applicable to Borrower and
the transactions contemplated by the
Transaction Documents; accordingly, our
opinions set forth above are limited by
the foregoing.
L. The opinion speaks only at and as of its
date and is based solely on the facts and
circumstances known to us at and as of
such date. We express no opinion as to
the effect on Administrative Agent's, the
Co-Agents' or any Lender's rights under
the Transaction Documents of any statute,
rule, regulation or other law which is
enacted or becomes effective after, or of
any court decision which changes the law
relevant to such rights which is rendered
after, the date of this opinion or the
conduct of the parties following the
closing of the contemplated transaction.
In addition, in rendering this opinion, we
assume no obligation to revise or
supplement this opinion should the present
laws of the jurisdictions mentioned herein
be changed by legislative action, judicial
decision or otherwise.
This opinion is made with the knowledge and
understanding that you (but no other person) may relay
thereon in entering into the Transaction Documents and is
solely for your benefit, and this opinion may not be
disclosed to or relied upon by any person other than you,
except that (i) this opinion may not be disclosed to
(A) bank regulatory and other governmental authorities
having jurisdiction over you requesting (or requiring) such
disclosure, and (B) prospective assignees and participants
in connection with the potential transfer of all or part of
the Advances or Commitments of any Lender, and (ii) this
opinion may be relied upon by assignees of or participants
in the Advances or Commitments if the assignments or
participations relating thereto are permitted under and
made in accordance with the Transaction Documents; provided
that in no event does this opinion extend to any issue or
matter related to any such assignment or participation or
arising from or out of any such assignment or participation
(as distinct from the subject of the transaction).
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT C-2
(Legal Opinion of Dorsey & Whitney)
Bank of America National Trust and Savings Association,
doing business as Seafirst Bank, and its successors and
assigns, as Agent
701 Fifth Avenue, 16th Floor
Seattle, WA 98104
Re: Micron Electronics, Inc. Credit Agreement (the
"Agreement") dated as of June 27, 1997, by and among
Micron Electronics, Inc., Bank of America National
Trust and Savings Association and United States
National Bank of Oregon, as Co-Agents for the Lenders,
and Bank of America National Trust and Savings
Association, doing business as Seafirst Bank, as
Administrative Agent for the Lenders, and the Lenders
(as defined in the Agreement)
Ladies and Gentlemen:
We have acted as local counsel to Micron Electronics, Inc.
(the "Company") in connection with the Agreement. This opinion
is being delivered to you pursuant to Section 4.1(c) of the
Agreement. All capitalized terms used herein and not defined
herein have the meanings assigned to them in the Agreement.
We have examined such documents and have reviewed such
questions of law as we have considered necessary and appropriate
for the purposes of our opinions set forth below.
In rendering our opinions set forth below, we have assumed
the authenticity of all documents submitted to us as originals,
the genuineness of all signatures and the conformity to authentic
originals of all documents submitted to us as copies. We have
also assumed the legal capacity for all purposes relevant hereto
of all natural persons and, with respect to all parties to
agreements or instruments relevant hereto other than the Company,
that such parties had the requisite power and authority
(corporate or otherwise) to execute, deliver and perform such
agreements or instruments, that such agreements or instruments
have been duly authorized by all requisite action (corporate or
otherwise), executed and delivered by such parties and that such
agreements or instruments are the valid, binding and enforceable
obligations of such parties. As to questions of fact material to
our opinions, we have relied upon certificates of officers of the
Company and of public officials.
Based on the foregoing, we are of the opinion that:
1. The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Minnesota, with corporate power and authority to own and operate
its property or lease the property it operates and to conduct any
lawful business activity, including its business as described in
the Company's Annual Report on Form 10-K for the fiscal year
ended August 29, 1996.
2. The Company is duly qualified to do business as a
foreign corporation and is in good standing in each U.S.
jurisdiction in which the character of the business conducted by
it or the location of the properties owned or leased by it makes
such qualification necessary, except where the failure to be so
qualified would not have a material adverse effect on the
financial position of the Company.
3. The Company has corporate power to execute, deliver and
perform the Agreement and the Notes. The execution, delivery and
performance of the Agreement and the Notes have been duly
authorized by all requisite corporate action on the part of the
Company, and the Agreement and the Notes have been duly executed
and delivered by the Company.
Our opinions expressed above are limited to the law of the
State of Minnesota.
The foregoing opinions are being furnished to you solely for
your benefit and may not be relied upon by, nor may copies be
delivered to, any other person, other than the Lenders, without
our prior written consent.
Dated: June 27, 1997
Very truly yours,
Dorsey & Whitney, LLP
<PAGE>
EXHIBIT C-3
(Legal Opinion of Steven P. Arnold)
June 27, 1997
Bank of America National Trust
and Savings Association, as
Administrative Agent
for the Lenders Named
in the Credit Agreement
Bank of America National Trust
and Savings Association and United
States National Bank of Oregon, as
Co-agents for the Lenders Named
in the Credit Agreement
and
The Lenders Named in
the Credit Agreement
Re: Credit Agreement, dated as of June 27, 1997, among
Micron Electronics, Inc., the Lenders Named therein, Bank of
America National Trust and Savings Association and United States
National Bank of Oregon, as Co-Agents for such Lenders and Bank
of America National Trust and Savings Association, as
Administrative Agent for such Lenders
Ladies and Gentlemen:
I am General Counsel of Micron Electronics, Inc., a
Minnesota corporation ("Borrower"), in connection with the
negotiation, execution and delivery of the Credit Agreement dated
as of June 27, 1997 (including the exhibits and schedules
thereto, the "Credit Agreement") among Borrower, the Lenders
named in the Credit Agreement (the "Lenders"), Bank of America
National Trust and Savings Association and United States National
Bank of Oregon, as Co-Agents for the Lenders (the "Co-Agents")
and Bank of America National Trust and Savings Association as
Administrative Agent for the Lenders ("Administrative Agent").
This opinion is rendered to you pursuant to Section 4.1(c) of the
Credit Agreement. All capitalized terms used but not defined
herein shall have the respective meanings assigned to such terms
in the Credit Agreement.
In rendering the opinion expressed herein, I have reviewed
original or copies, certified or otherwise identified to my
satisfaction, of the Credit Agreement and the Notes (the "Credit
Documents"), such documents, corporate records and other
instruments and have made such other investigations and
considered such questions of law as I have deemed necessary or
advisable for the purpose of rendering this opinion. The law
covered by the opinions expressed herein is limited to the
federal law of the United States and the laws of the State of
Idaho.
As used in this opinion, the expression "to my knowledge" or
"known to me" with reference to matters of fact means that during
the course of my representation of Borrower in connection with
the Credit Documents, no information has come to my attention
which would give me actual knowledge of the existence or absence
of such facts; however, I have made no independent investigation
to determine the existence or absence of such facts and any
limited inquiry undertaken by me during the preparation of this
opinion should not be regarded as such an investigation. No
inference as to my knowledge of the existence or absence of any
facts underlying any opinion given "to my knowledge" should be
drawn from the fact of my representation of Borrower.
Specifically in rendering the opinion set forth in paragraph 4
below, I have not made any independent investigation of court
records to determine whether any actions have been filed.
On the basis of the foregoing and in reliance thereon, and
subject to the assumptions, exceptions, qualifications, and
limitations set forth herein, I advise you that in my opinion:
1. The execution, delivery and performance by
Borrower of the Credit Documents and any borrowing
thereunder, and the request for the issuance of any
Letter of Credit thereunder, have been duly authorized
by all necessary corporate action of Borrower, do not
require any shareholder approval or the approval or
consent of any trustee or the holders of any
Indebtedness of Borrower, and, to the best of my
knowledge, do not contravene any law, regulation, rule
or order binding on it or its Articles of Incorporation
or Bylaws and do not contravene the provisions of or
constitute a default under any material indenture,
mortgage, contract or other agreement or instrument to
which Borrower is a party or by which Borrower or any
of its properties may be bound or affected.
2. No consents, approvals, authorizations,
registrations, declarations or filings are required to
be made or obtained by or in respect of the Borrower
(or on its behalf) with or from any governmental or
regulatory authority or agency of the State of Idaho
for the due authorization, execution and delivery by
the Borrower of the Credit Documents, the undertaking
of the covenants set forth in the Credit Documents, the
borrowing of Advances in accordance with the Agreement
or the repayment of any such Advances by the Borrower.
3. The courts of the State of Idaho will give effect
to the parties' choice of law of the State of
Washington to govern the Credit Documents except
insofar as application of the law of the chosen
jurisdiction would be contrary to a fundamental public
policy of Idaho. In my opinion, no provision of the
Credit Documents so violates a fundamental public
policy of the State of Idaho as to render any of the
Credit Documents invalid as a whole or make the
remedies provided in the Credit Documents inadequate
for the practical realization of the principal benefits
intended to be provided thereby.
4. To the best of my knowledge, except as reflected
in the financial statements referred to in Section 4.6
of the Credit Agreement or otherwise set forth on
Schedule 3 to the Disclosure Letter, there are no
actions, proceedings, investigations, or claims against
or affecting Borrower or any Subsidiary now pending
before any court, arbitrator or Governmental Authority
(nor to my knowledge has any thereof been threatened
nor does any basis exist therefor) which if determined
adversely to Borrower or such Subsidiary would be
likely to result in a judgment or order against
Borrower or any Subsidiary for more than Five Million
Dollars ($5,000,000) or to have a material adverse
effect on (a) the business, operations or consolidated
financial condition of Borrower; or (b) the ability of
Borrower to perform its obligations under this
Agreement and the other Loan Documents.
With respect to the opinions expressed in Paragraphs 1 and 2
above, I express no opinion as to any state or federal banking
laws or regulations or other laws or regulations regulating banks
or financial institutions. I express no opinion regarding
compliance or non-compliance (or the effect thereof) with
applicable anti-fraud provisions of federal or state securities
laws or with respect to the "Blue Sky" laws of any state.
This opinion speaks only at and as of its date and is based
solely on the facts and circumstances known to me at and as of
such date. I express no opinion as to the effect on Agent's or
any Bank's rights under the Credit Documents of any statute,
rule, regulation or other law which is enacted or becomes
effective after, or of any court decision which changes the law
relevant to such rights which is rendered after the date of this
opinion or the conduct of the parties following the closing of
the contemplated transaction. In addition, in rendering this
opinion, I assume no obligation to revise or supplement this
opinion should the present laws of the jurisdictions mentioned
herein be changed by legislative action, judicial decision or
otherwise.
This opinion is rendered solely in connection with the
Credit Agreement and shall not be relied upon by the addressees
for any other purpose. No party, other than Agent, Banks or a
potential or actual Participant or Assignee, shall be entitled to
rely on this opinion for any purpose not expressly stated herein,
nor may it be quoted to or relied upon by any other person, other
than Agent, Banks or a potential or actual Participant or
Assignee, or filed with any Governmental Authority, without my
prior written consent.
Very truly yours,
Steven P. Arnold
Vice President, Legal
and General Counsel
<PAGE>
EXHIBIT D
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT ("Agreement") is
made as of this ____ day of __________, 199__, by and between
___________________ (the "Assignor") and ______________________
_________ (the "Assignee").
RECITALS
A. Micron Electronics, Inc., a Minnesota corporation (the
"Borrower"), Assignor, Assignee, _______________________________,
_______________________________, _______________________________,
_______________________________, _______________________________
and _______________________________, (collectively, the
"Lenders") Bank of America National Trust and Savings Association
d/b/a Seafirst Bank and United States National Bank of Oregon as
co-agents for Lenders and Bank of America National Trust and
Savings Association d/b/a Seafirst Bank as administrative agent
for Lenders (the "Agent") are parties to that certain Credit
Agreement dated as of June 27, 1997 (as the same may be amended,
modified or extended from time to time the "Credit Agreement").
Capitalized terms not otherwise defined herein shall have the
meanings given in the Credit Agreement.
B. Pursuant to the terms of the Credit Agreement, Assignor
has a Commitment to make Loans to Borrower under the Credit
Agreement in an aggregate principal amount at any time
outstanding not to exceed ____________________ Dollars
($_____________).
C. Assignor proposes to assign to Assignee [all] [a
portion] of Assignor's rights under the Credit Agreement, and
Assignee proposes to accept assignment of such rights and assume
the corresponding obligations from Assignor on such terms;
NOW, THEREFORE, in consideration of the foregoing and the
mutual agreements contained herein, the parties hereto agree as
follows:
AGREEMENT
1. Definitions. Capitalized terms used herein and not
otherwise defined shall have the meanings given in the Credit
Agreement.
2. Assignment and Assumption. Assignor hereby assigns and
sells to Assignee a _______________ percent (____%) undivided
interest in all of its Loans and in all of its rights under the
Credit Agreement and the other Loan Documents, and Assignee
hereby accepts such assignment from Assignor and assumes a
corresponding _______________ percent (____%) undivided interest
of the obligations of Assignor under the Credit Agreement and the
other Loan Documents. The percentage interest assigned to and
assumed by Assignee from Assignor as set forth in the preceding
sentence is sometimes hereafter referred to as Assignee's
"Assigned Interest." Assignee hereby agrees, for the benefit of
Agent, to be responsible for its Assigned Interest of each
Assignor's obligations to Agent, whether now existing or
hereafter arising, including, but not limited to, the
indemnification obligations arising under Section 9.5 of the
Credit Agreement. Upon the execution and delivery hereof by
Assignor, Assignee, Agent and Borrower and the payment of the
amounts specified in Section 3 hereof required to be paid on the
date hereof (a) Assignee shall enjoy the rights and be obligated
to perform the obligations of a "Lender" under the Credit
Agreement and the other Loan Documents with respect to the
Assigned Interest to the same extent as if Assignee had been the
original Lender with respect thereto and (b) the Commitment of
Assignor and Assignee under the Credit Agreement shall be
$___________ and $___________ respectively. The assignment
provided for herein shall be without recourse to Assignor.
3. Payments. As consideration for the assignment and sale
contemplated in Section 2 hereof, Assignee shall pay to Assignor
on the date hereof in immediately available funds the amount of
$___________, such amount being the product of (a) the Assigned
Interest and (b) principal of and accrued interest on Assignor's
Loans outstanding as of the date hereof. It is understood that
the facility fee paid by Borrower upon the execution of the
Credit Agreement and the unused commitment fees accrued to the
date hereof in respect of the Assigned Interest are for the
account of Assignor and that the unused commitment fees accruing
from and including the date hereof are for the account of
Assignor and Assignee in accordance with their respective
Percentage Interests after giving effect to the assignment and
sale contemplated in Section 2 hereof. Assignor and Assignee
each hereby agree that if it receives any amount under the Credit
Agreement which is for the account of the other party hereto, it
shall receive the same for the account of such other party to the
extent of such other party's interest therein and shall promptly
pay the same to such other party.
4. Non-Reliance on Assignor. Assignor makes no
representation or warranty and assumes no responsibility with
respect to the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement, the Assigned
Interest, the Loans, the Credit Agreement, any other Loan
Document, any other instrument or document furnished pursuant
thereto or in connection therewith or the transactions
contemplated herein or therein except that Assignor represents
and warrants that it is legally authorized to enter into this
Agreement, that it has good title to the interest being assigned
by it and that the interest being assigned by it is not subject
to any liens or claims of others arising by, through or under
Assignor. Assignor makes no representation or warranty and
assumes no responsibility with respect to the financial condition
of Borrower. Assignor assumes no responsibility for the
performance or observance by Borrower of any of its obligations
under the Credit Agreement or any other Loan Document or any
other certificate, instrument or document furnished pursuant
thereto. Assignee confirms and agrees that it has received a
copy of the Credit Agreement, any amendments or waivers thereto
and any other documents furnished pursuant thereto, together with
copies of any financial statements requested by it, and that it
has independently and without reliance on Assignor or Agent, and
based on such documents and information as it has deemed
appropriate, made its own credit analysis and decision to enter
into this Agreement and will continue to be responsible for
making its own independent appraisal of the business, affairs and
financial condition of Borrower.
5. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Washington.
6. Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be
deemed an original, and all of which when taken together shall
constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers or agents
thereunto duly authorized as of the date first above written.
ASSIGNOR: ____________________________________
By____________________________________
Its_________________________________
ASSIGNEE: ____________________________________
By____________________________________
Its_________________________________
BORROWER'S CONSENT AND AGREEMENT
Borrower hereby consents to the terms of the foregoing
Agreement. Borrower hereby agrees, as of the date hereof, to
recognize Assignee as a "Lender" under the Credit Agreement and
the other Loan Documents.
BORROWER: MICRON ELECTRONICS, INC.
By____________________________________
Its_________________________________
AGENT'S CONSENT AND AGREEMENT
Agent hereby consents to the terms of the foregoing
Agreement. Agent hereby agrees, as of the date hereof, to
recognize Assignee as a "Lender" under the Credit Agreement and
the other Loan Documents.
AGENT: BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By____________________________________
Its_________________________________
Exhibit 10.44
EMPLOYMENT AGREEMENT
This Agreement is by and between Micron Electronics, Inc., a
Minnesota corporation (the "Company"), and _______________________,
an individual and officer of the Company (the "Officer"), and is
effective as of the last date signed below.
WHEREAS, the parties recognize that it is in the best
interest of the Company to provide for a smooth transition when
there is a change in management, and wish to recognize the valued
contributions of the Officer; and
WHEREAS, the Company desires to provide the Officer with
benefits in consideration for his execution of this Employment
Agreement (the "Agreement");
NOW THEREFORE, the parties agree as follows:
1. Termination of the Officer. Either the Company or the
Officer may at any time terminate the Officer's active employment
with the Company for any reason, voluntary or involuntary, with
or without cause, by providing notice to that effect in writing.
The date such notice is received by the other party shall be
deemed the "Termination Date." Upon receipt by the Officer of a
notice of termination from the Company, and upon the Company's
request, the Officer will resign immediately as an Officer and/or
Director.
2. Effect of Termination. Effective on the Termination
Date, and for a period defined in Paragraph 2(a) (the "Transition
Period"), the Officer shall continue as an employee only for
purposes of receiving the benefits specified in Paragraph 3, and
while employed in that capacity shall not perform any service or
work that conflicts with interests of the Company. During the
Transition Period, the Officer may continue in a consulting role
with the Company, or continue as a non-officer employee with the
Company, if both parties agree.
(a) Transition Period. For purposes of this
agreement, the "Transition Period" shall be twelve months plus
the amount of any TOP time and leave time, if any, which the
Officer has accrued as of the Termination Date.
(b) Change of Officer Status. In the event that
the Officer or the Company terminates the Officer's status as an
Officer of the Company but not as an employee, both parties agree
that such change in status will be treated as a termination for
purposes of this Agreement, and that the date of such change in
status will be deemed the Termination Date. Following the
Transition Period, the Officer shall be entitled only to such
compensation and benefits for his services as an employee that
may be mutually agreed upon between the Company and the Officer.
In no circumstance shall benefits under Paragraph 3 be paid to an
Officer for a period longer than the first Transition Period
created by a change of status or termination.
3. Benefits During Transition Period. Provided the
Officer complies with the terms of this Agreement, the Officer
will receive during the Transition Period all benefits
customarily provided to officers of the Company, including, but
not limited to salary, bonuses, executive bonuses, and the
continued vesting of any granted stock options, as if the
Officer's employment as an officer had continued during that
period. "Customarily provided" refers to Company practices and
plans with respect to officer benefits and compensation in effect
as of the Termination Date. For purposes of this provision,
however, it will be understood that the Officer, during the
Transition Period, will not be entitled to any new grants of
interest in future executive bonus pools, nor to any new grants
of stock options. It will be further understood that the Officer
will not be entitled to payment of any compensation that is
deferred past the Transition Period due to payment criteria of an
incentive program, as those criteria existed as of the
Termination Date. No action by the Company or the Company's
Board of Directors may affect the Officer's receipt of the
benefits set forth above, other than as provided herein.
4. Confidentiality. The parties agree that throughout the
Transition Period no statements regarding the Officer's
termination will be made other than to indicate that the reasons
for, and circumstances of, the termination are CONFIDENTIAL and
that both the Company, the Board of Directors, and the Officer
are obligated to make "no comment" regarding the termination.
For purposes of this paragraph, "statements" include, but are not
limited to, statements to the press, analysts, and journalists.
Nothing in this paragraph is meant to prevent the Company from
disclosing any facts required to be disclosed pursuant to statute
or regulation.
5. Termination. This Agreement terminates when the
Officer turns 60 years of age, and any termination or change of
status of the Officer after that date will not entitle the
Officer to any of the benefits of this Agreement.
6. Release. Upon receipt of all benefits under this
Agreement, the Officer and Company settle, waive, and voluntarily
release any and all claims each has or may have against the
other, inclusive of any of the Company's affiliates, officers,
directors, employees or agents, both individually and in their
official capacities, which claims accrued prior to the end of the
Transition Period.
7. Final Agreement. This Agreement supersedes all prior
agreements, and is the entire and final understanding of the
parties as to the subject matter hereof.
MICRON ELECTRONICS, INC. OFFICER
- ------------------------------- ---------------------------
Joseph M. Daltoso
Chairman & CEO
Date:______________ Date:_______________
Exhibit 10.45
EMPLOYMENT AGREEMENT
This Agreement is by and between Micron Electronics, Inc., a
Minnesota corporation (the "Company"), and _______________________,
an individual and officer of the Company (the "Officer"), and is
effective as of the last date signed below.
WHEREAS, the parties recognize that it is in the best
interest of the Company to provide for a smooth transition when
there is a change in management, and wish to recognize the valued
contributions of the Officer; and
WHEREAS, the Company desires to provide the Officer with
benefits in consideration for his execution of this Employment
Agreement (the "Agreement");
NOW THEREFORE, the parties agree as follows:
1. Termination of the Officer. Either the Company or the
Officer may at any time terminate the Officer's active employment
with the Company for any reason, voluntary or involuntary, with
or without cause, by providing notice to that effect in writing.
The date such notice is received by the other party shall be
deemed the "Termination Date." Upon receipt by the Officer of a
notice of termination from the Company, and upon the Company's
request, the Officer will resign immediately as an Officer and/or
Director.
2. Effect of Termination. Effective on the Termination
Date, and for a period defined in Paragraph 2(a) (the "Transition
Period"), the Officer shall continue as an employee only for
purposes of receiving the benefits specified in Paragraph 3, and
while employed in that capacity shall not perform any service or
work that conflicts with interests of the Company. During the
Transition Period, the Officer may continue in a consulting role
with the Company, or continue as a non-officer employee with the
Company, if both parties agree.
(a) Transition Period. For purposes of this
agreement, the "Transition Period" shall be twenty-four months plus
the amount of any TOP time and leave time, if any, which the
Officer has accrued as of the Termination Date.
(b) Change of Officer Status. In the event that
the Officer or the Company terminates the Officer's status as an
Officer of the Company but not as an employee, both parties agree
that such change in status will be treated as a termination for
purposes of this Agreement, and that the date of such change in
status will be deemed the Termination Date. Following the
Transition Period, the Officer shall be entitled only to such
compensation and benefits for his services as an employee that
may be mutually agreed upon between the Company and the Officer.
In no circumstance shall benefits under Paragraph 3 be paid to an
Officer for a period longer than the first Transition Period
created by a change of status or termination.
3. Benefits During Transition Period. Provided the
Officer complies with the terms of this Agreement, the Officer
will receive during the Transition Period all benefits
customarily provided to officers of the Company, including, but
not limited to salary, bonuses, executive bonuses, and the
continued vesting of any granted stock options, as if the
Officer's employment as an officer had continued during that
period. "Customarily provided" refers to Company practices and
plans with respect to officer benefits and compensation in effect
as of the Termination Date. For purposes of this provision,
however, it will be understood that the Officer, during the
Transition Period, will not be entitled to any new grants of
interest in future executive bonus pools, nor to any new grants
of stock options. It will be further understood that the Officer
will not be entitled to payment of any compensation that is
deferred past the Transition Period due to payment criteria of an
incentive program, as those criteria existed as of the
Termination Date. No action by the Company or the Company's
Board of Directors may affect the Officer's receipt of the
benefits set forth above, other than as provided herein.
4. Confidentiality. The parties agree that throughout the
Transition Period no statements regarding the Officer's
termination will be made other than to indicate that the reasons
for, and circumstances of, the termination are CONFIDENTIAL and
that both the Company, the Board of Directors, and the Officer
are obligated to make "no comment" regarding the termination.
For purposes of this paragraph, "statements" include, but are not
limited to, statements to the press, analysts, and journalists.
Nothing in this paragraph is meant to prevent the Company from
disclosing any facts required to be disclosed pursuant to statute
or regulation.
5. Termination. This Agreement terminates when the
Officer turns 60 years of age, and any termination or change of
status of the Officer after that date will not entitle the
Officer to any of the benefits of this Agreement.
6. Release. Upon receipt of all benefits under this
Agreement, the Officer and Company settle, waive, and voluntarily
release any and all claims each has or may have against the
other, inclusive of any of the Company's affiliates, officers,
directors, employees or agents, both individually and in their
official capacities, which claims accrued prior to the end of the
Transition Period.
7. Final Agreement. This Agreement supersedes all prior
agreements, and is the entire and final understanding of the
parties as to the subject matter hereof.
MICRON ELECTRONICS, INC. OFFICER
- ------------------------------ --------------------------
Joseph M. Daltoso
Chairman & CEO
Date:______________ Date:_______________
Exhibit 11
Micron Electronics, Inc.
Computation of Per Share Earnings
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal year ended August 28, 1997 August 29, 1996 August 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY
Weighted average shares
outstanding 94,118 91,687 86,959
Net effect of dilutive stock
options 503 808 463
-------- -------- --------
Number of shares used in per
share calculation 94,621 92,495 87,422
======== ======== ========
Net income $ 87,262 $ 44,582 $ 65,086
======== ======== ========
Per share earnings $ 0.92 $ 0.48 $ 0.74
======== ======== ========
FULLY DILUTED
Weighted average shares
outstanding 94,118 91,687 86,959
Net effect of dilutive stock
options 505 834 469
-------- -------- --------
Number of shares used in per
share calculation 94,623 92,521 87,428
======== ======== ========
Net income $ 87,262 $ 44,582 $ 65,086
======== ======== ========
Per share earnings $ 0.92 $ 0.48 $ 0.74
======== ======== ========
</TABLE>
Exhibit 21
Micron Electronics, Inc.
Subsidiaries of the Registrant
State (or jurisdiction) Percentage
in which Ownership
Name Incorporated by Registrant
- ------------------------------------ ----------------------- -------------
Micron Custom Manufacturing
Services, Inc. Idaho 100%
M.C.M.S. SDN. BHD. Malaysia 100%
Micron Electronics (H.K.) Limited Hong Kong 100%
Micron Electronics Japan K.K. Japan 100%
Micron Overseas Trading, Inc. Barbados 100%
NetFRAME Systems Incorporated Delaware 100%
Exhibit 23
Micron Electronics, Inc.
Consent of Independent Accountants
We consent to the incorporation by reference in the registration
statement of Micron Electronics, Inc. on Form S-3 (File No. 333-14035) and
on Form S-8 (File No. 33-63701) of our report, dated September 22, 1997, on
our audits of the financial statements and financial statement schedule of
Micron Electronics, Inc., as of August 28, 1997 and August 29, 1996 and for
each of the three years in the period ended August 28, 1997, which report
is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Boise, Idaho
September 22, 1997
<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> YEAR
<FISCAL-YEAR-END> AUG-28-1997
<PERIOD-END> AUG-28-1997
<CASH> 183,935
<SECURITIES> 10,068
<RECEIVABLES> 238,165
<ALLOWANCES> 14,689
<INVENTORY> 115,501
<CURRENT-ASSETS> 563,148
<PP&E> 256,041
<DEPRECIATION> 64,505
<TOTAL-ASSETS> 758,346
<CURRENT-LIABILITIES> 359,264
<BONDS> 0
0
0
<COMMON> 956
<OTHER-SE> 364,615
<TOTAL-LIABILITY-AND-EQUITY> 758,346
<SALES> 1,955,783
<TOTAL-REVENUES> 1,955,783
<CGS> 1,618,037
<TOTAL-COSTS> 1,819,325
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7,896)
<INCOME-PRETAX> 144,354
<INCOME-TAX> 57,092
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,262
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.92
</TABLE>
