SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 29, 1997
------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission File Number: 0-17932
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Micron Electronics, Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1404301
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 E. Karcher Road, Nampa, Idaho 83687
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (208) 893-3434
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of outstanding shares of the registrant's common stock as of
June 16, 1997 was 95,488,276.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Micron Electronics, Inc.
Statements of Operations
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the quarter ended For the nine months ended
May 29, May 30, May 29, May 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 511,394 $ 412,322 $ 1,442,686 $ 1,307,519
Cost of goods sold 431,812 353,751 1,191,039 1,141,226
----------- ----------- ----------- -----------
Gross margin 79,582 58,571 251,647 166,293
Selling, general and
administrative 49,288 36,084 136,631 100,108
Research and development 1,012 673 2,929 2,268
Restructuring charge - - - 29,500
----------- ----------- ----------- -----------
Operating income 29,282 21,814 112,087 34,417
Interest income, net 2,679 888 5,485 2,561
----------- ----------- ----------- -----------
Income before taxes 31,961 22,702 117,572 36,978
Income tax provision 12,305 8,627 45,265 18,844
----------- ----------- ----------- -----------
Net income $ 19,656 $ 14,075 $ 72,307 $ 18,134
=========== =========== =========== ===========
Earnings per share $ 0.20 $ 0.15 $ 0.77 $ 0.20
Number of shares used in per
share calculation 96,157 92,477 94,236 92,438
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
Micron Electronics, Inc.
Balance Sheets
(Dollars in thousands, except par value amounts)
<TABLE>
<CAPTION>
As of May 29, 1997 August 29, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 198,329 $ 115,839
Receivables 185,582 176,547
Inventories 87,653 69,863
Deferred income taxes 25,480 35,014
Other current assets 3,965 1,853
--------- ---------
Total current assets 501,009 399,116
Property, plant and equipment, net 168,604 129,192
Other assets 938 1,625
--------- ---------
Total assets $ 670,551 $ 529,933
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 243,034 $ 247,044
Accrued licenses and royalties 34,822 27,242
Current debt 7,433 3,064
--------- ---------
Total current liabilities 285,289 277,350
Long-term debt 17,129 18,233
Deferred income taxes 4,991 2,436
Other liabilities 13,232 3,454
--------- ---------
Total liabilities 320,641 301,473
Commitments and contingencies
Common stock, $.01 par value, authorized
150.0 million shares; issued and
outstanding 95.5 million shares at May
29, 1997, and 92.5 million shares at
August 29, 1996 955 925
Additional capital 118,999 69,392
Retained earnings 230,192 158,143
Cumulative foreign currency translation
adjustment (236) -
--------- ---------
Total shareholders' equity 349,910 228,460
--------- ---------
Total liabilities and shareholders' equity $ 670,551 $ 529,933
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
Micron Electronics, Inc.
Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
For the nine months ended May 29, 1997 May 30, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 72,307 $ 18,134
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation 25,020 13,927
Amortization 180 1,542
Restructuring charge - 29,500
Changes in assets and liabilities, net of
effect of restructuring charge:
Receivables (9,035) (1,111)
Inventories (17,790) (18,015)
Accounts payable and accrued expenses 11,564 (6,075)
Accrued licenses and royalties 7,581 17,746
Deferred income taxes 12,089 (8,748)
Other (2,076) 1,984
--------- ---------
Net cash provided by operating activities 99,840 48,884
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (69,345) (46,301)
Proceeds from sales of property, plant and
equipment 694 5,695
Other (591) (214)
--------- ---------
Net cash used for investing activities (69,242) (40,820)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 5,568 25,000
Repayments of debt (2,721) (21,687)
Proceeds from issuance of common stock 49,627 1,323
Purchase and retirement of stock (363) (726)
Other (219) -
--------- ---------
Net cash provided by financing activities 51,892 3,910
--------- ---------
Net increase in cash and cash equivalents 82,490 11,974
Cash and cash equivalents at beginning of
period 115,839 69,406
--------- ---------
Cash and cash equivalents at end of period $ 198,329 $ 81,380
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements
(Tabular amounts in thousands)
1. Unaudited Interim Financial Statements
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments, consisting solely of normal recurring
adjustments, necessary to present fairly the financial position of Micron
Electronics, Inc. and its subsidiaries (collectively, the "Company") and
their results of operations and cash flows. Certain reclassifications have
been made, none of which affect results of operations, to present the
financial statements on a consistent basis.
This report on Form 10-Q for the third fiscal quarter ended May 29, 1997,
should be read in conjunction with the Company's Report on Form 10-K for
the fiscal year ended August 29, 1996. Portions of the accompanying
financial statements are derived from the audited year-end financial
statements of the Company dated August 29, 1996. The Company's fiscal year
is a 52 or 53 week period ending on the Thursday closest to August 31.
During the second quarter of fiscal 1997, the Company completed the sale
of 3.0 million shares of its common stock in an underwritten offering. Net
proceeds of approximately $48.2 million were received by the Company. In
the underwritten public offering, Micron Technology, Inc., the Company's
parent, sold approximately 12.4 million shares thereby reducing its
ownership of the Company as of May 29, 1997, to 64%.
In February 1997, the Financial Accounting Standards Board ("FASB")
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 EPS Standards. This statement
is expected to be adopted by the Company effective in its second quarterly
report for fiscal 1998. The Company does not expect earnings per share as
calculated and presented under SFAS No. 128 to be materially different than
calculated and disclosed under the Company's existing methodology.
2. 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, results
of operations in the first nine months of fiscal 1996 were adversely
affected by a pretax restructuring charge of $29.5 million (approximately
$22.6 million, or $0.24 per share, net of taxes). The restructuring charge
included approximately $14.8 million related to the disposition of inventory
of discontinued product lines, the write-off of $11.4 million of goodwill
which resulted from the merger with ZEOS, $1.4 million for other asset
write-downs, $1.1 million for personnel related costs for approximately 250
employees in manufacturing, purchasing, customer service, finance and
administrative functions and $0.8 million of other exit costs.
<TABLE>
<CAPTION>
3. Receivables
May 29, 1997 August 29, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $ 182,423 $ 171,820
Receivables from affiliates, net 3,148 2,526
Income taxes recoverable from parent
corporation 4,426 5,147
Other 3,873 7,363
Allowance for doubtful accounts (5,978) (8,221)
Allowance for returns and discounts (2,310) (2,088)
--------- ---------
$ 185,582 $ 176,547
========= =========
</TABLE>
4
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands)
<TABLE>
<CAPTION>
4. Inventories
May 29, 1997 August 29, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 59,725 $ 45,949
Work in progress 12,815 13,239
Finished goods 15,113 10,675
--------- ---------
$ 87,653 $ 69,863
========= =========
</TABLE>
<TABLE>
<CAPTION>
5. Property, Plant and Equipment
May 29, 1997 August 29, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,639 $ 1,639
Buildings 42,581 17,647
Equipment 148,769 120,393
Assets in progress 35,279 35,398
--------- ---------
228,268 175,077
Less accumulated depreciation and amortization (59,664) (45,885)
--------- ---------
$ 168,604 $ 129,192
========= =========
</TABLE>
<TABLE>
<CAPTION>
6. Accounts Payable and Accrued Expenses
May 29, 1997 August 29, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $ 166,707 $ 157,350
Payable to affiliates 23,445 25,829
Salaries, wages and benefits 17,815 16,168
Income taxes payable to parent corporation 5,490 1,300
Income taxes payable 4,140 14,526
Equipment contracts payable 5,089 7,955
Accrued warranty 10,469 7,905
Other 9,879 16,011
--------- ---------
$ 243,034 $ 247,044
========= =========
</TABLE>
5
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands)
<TABLE>
<CAPTION>
7. Debt
May 29, 1997 August 29, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Notes payable in periodic installments
through September, 2001 weighted average
interest rate of 7.55% at May 29, 1997,
and 7.52% at August 29, 1996 $ 23,124 $ 21,261
Amount outstanding under revolving loan
agreement, due May 1998, variable
interest of 7.63% at May 29, 1997 1,000 -
Other 438 36
--------- ---------
24,562 21,297
Less current portion (7,433) (3,064)
--------- ---------
$ 17,129 $ 18,233
========= =========
</TABLE>
The Company has an unsecured revolving credit facility with its parent
corporation providing for borrowings of up to $80.0 million, based on the
Company's tangible net worth. As of May 29, 1997, the Company was eligible
to borrow the full amount available under the facility, but had no
borrowings outstanding. In addition, the Company has an unsecured credit
agreement, expiring June 30, 1997, with two financial institutions
providing for borrowings totaling $40.0 million, based on the amount of the
Company's eligible receivables. As of May 29, 1997, the Company was
eligible to borrow the full amount under the agreement, but had no
borrowings outstanding.
During the third quarter of fiscal 1997, the Company's wholly-owned
subsidiary, Micron Custom Manufacturing Services, Inc. ("MCMS"), entered
into a revolving loan agreement with a financial institution, 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 MCMS decreases by $1.0
million per year. As of May 29, 1997, there was $1.0 million outstanding
under the agreement.
Certain of the Company's notes payable are collateralized by equipment
with a total cost of approximately $22.0 million and accumulated
depreciation of approximately $4.1 million as of May 29, 1997.
<TABLE>
<CAPTION>
8. Transactions with Affiliates
For the quarter ended For the nine months ended
May 29, May 30, May 29, May 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 5,949 $ 10,104 $ 19,446 $ 39,774
Inventory purchases 27,357 35,704 64,242 167,480
Revenue sharing expenses - 10,793 - 43,954
Component recovery agreement
expenses 17,449 - 32,910 -
Administrative services and other
expenses 706 451 2,033 1,229
Property, plant and equipment
purchases 330 43 859 733
Property, plant and equipment sales 2 - 123 -
Construction management services 287 51 911 100
</TABLE>
9. Income Taxes
The effective income tax rate for the first nine months of fiscal 1997
was 38.5%, principally reflecting the federal statutory rate and the net
effect of state taxes. The Company's effective income tax rate of 51.0%
for the corresponding period in 1996 principally reflected the federal
statutory rate, the effect of the write-off during the second quarter of
fiscal 1996 of $11.4 million of nondeductible goodwill and the net effect
of state taxes.
6
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements Continued
(Tabular amounts in thousands)
10. Earnings Per Share
Earnings per share is computed using the weighted average number of
common and common equivalent shares outstanding. Common equivalent shares
result from the assumed exercise of outstanding stock options and affect
earnings per share when they have a dilutive effect.
11. Commitments
As of May 29, 1997, the Company had commitments of approximately $23.7
million for equipment purchases and $11.3 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.
12. Contingencies
Periodically, the Company is made aware that technology used by the
Company may infringe on intellectual property rights held by others. The
Company has accrued a liability and charged operations for the estimated
costs of settlement or adjudication of asserted and unasserted claims for
alleged infringement prior to the balance sheet date. Resolution of these
claims could have a material adverse effect on future results of operations
and could require changes in the Company's products or processes.
The Company is currently a party to various legal actions arising out of
the normal course of business, none of which is expected to have a material
adverse effect on the Company's financial position or results of
operations.
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 for non-collection of sales
and use taxes prior to such agreements' effective dates. Although the
Company has not entered into agreements with all states, management
believes the ultimate settlement of this matter will not have a material
adverse effect on the Company's business and results of operations.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains trend information and other forward-
looking statements that involve a number of risks and uncertainties. Micron
Electronics, Inc.'s actual results could differ materially from its
historical results of operations and those discussed in the forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those identified in ''Certain Factors.''
Overview
Micron Electronics, Inc., and its subsidiaries (collectively, the
"Company") manufacture electronic products and provide services for a wide
range of computing and digital applications. The Company develops,
markets, manufactures and supports a wide range of PC systems for consumer,
business, government and educational use. Micron Custom Manufacturing
Services, Inc., a wholly-owned subsidiary of Micron Electronics, Inc.,
provides custom contract manufacturing services to original equipment
manufacturers. SpecTek, the Company's component recovery operation,
processes and markets various grades of dynamic random access memory
("DRAM") products under the SpecTek brand name. The Company is
majority owned by Micron Technology, Inc.
("MTI").
All period references are to the Company's fiscal periods ended May 29,
1997, February 27, 1997, August 29, 1996 or May 30, 1996, unless otherwise
indicated. All tabular dollar amounts are stated in thousands.
On June 10, 1997, the Company announced it had entered into a definitive
agreement to acquire NetFRAME Systems Incorporated, a provider of
enterprise-class multiprocessor servers, by means of a cash tender offer
with an aggregate purchase price of approximately $14 million. The
transaction, which is subject to the tendering of shares and certain
conditions and approvals, is expected to be completed in the fourth
quarter of fiscal 1997. NetFRAME reported net losses of approximately
$28.0 million and $11.1 million for its fiscal year ended December 28,
1996, and its first quarter of fiscal 1997, respectively, on net sales
of approximately $74.3 million and $13.6 million, respectively.
Results of Operations
Net income for the third quarter of fiscal 1997 was approximately
$19.7 million, or $0.20 per share, on net sales of approximately
$511.4 million, compared to net income of approximately $14.1 million,
or $0.15 per share, on net sales of approximately $412.3 million for the
third quarter of fiscal 1996. Net income for the first nine months of
fiscal 1997 was approximately $72.3 million, or $0.77 per share, on net
sales of approximately $1,442.7 million, compared to net income of
approximately $18.1 million, or $0.20 per share, on net sales of
approximately $1,307.5 million for the first nine months of fiscal 1996.
Results of operations in the first nine months of fiscal 1996 were
adversely affected by a pretax restructuring charge of $29.5 million
(approximately $22.6 million, or $0.24 per share, net of taxes)
resulting from the Company's decisions in the second quarter of fiscal
1996 to discontinue sales of ZEOS brand PC systems and to close its
related manufacturing operation in Minneapolis, Minnesota.
Net Sales
The following summarizes the Company's net sales by product line:
<TABLE>
<CAPTION>
Third Quarter Nine Months
-------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PC systems $ 382,321 74.8% $ 294,837 71.5% $1,137,806 78.8% $ 892,849 68.3%
Contract manufacturing 82,565 16.1% 86,135 20.9% 205,699 14.3% 295,225 22.6%
SpecTek memory products 46,508 9.1% 31,350 7.6% 99,181 6.9% 119,445 9.1%
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total net sales $ 511,394 100.0% $ 412,322 100.0% $1,442,686 100.0% $1,307,519 100.0%
========== ====== ========== ====== ========== ====== ========== ======
</TABLE>
Total net sales for the third quarter of fiscal 1997 were higher compared
to the corresponding period in 1996 primarily due to a higher level of
sales of PC systems and higher net sales of DRAM products. Higher PC sales
in the first nine months of fiscal 1997 compared to the first nine months
of fiscal 1996 were partially offset by lower revenues from the Company's
contract manufacturing operations and lower net sales of DRAM products,
which were both adversely affected by the general industry-wide decline in
pricing for semiconductor memory products.
8
<PAGE>
PC Systems. While net sales of PC systems increased in the third
quarter and first nine months of fiscal 1997 compared to the corresponding
periods in 1996, net sales of PC systems in the third quarter of fiscal
1997 were 7% lower compared to the second quarter of fiscal 1997.
This sequential decline was primarily attributable to declines in
average selling prices and unit sales of desktop PC systems, partially
offset by increased unit sales and average selling prices for notebook and
server products. Sales in the third quarter of fiscal 1997 were adversely
affected by a reduction in selling prices of the Company's lower-end PC
systems coupled with a shift in product mix toward these lower-end systems.
Sales in the second quarter of fiscal 1997 were affected favorably by
strong demand for the Company's PC systems in the holiday season. The
higher level of net sales of PC systems in the third quarter and first nine
months of fiscal 1997 compared to the corresponding periods in 1996 was
primarily a result of increased PC units sold, partially offset by a
decline in overall average selling prices for the Company's PC systems.
Total unit sales of PC systems in the third quarter and first nine months
of fiscal 1997 were 50% and 38% higher, respectively, compared to the
corresponding periods in 1996. Unit sales of notebook systems were
11% and 10% of total unit sales of PC systems in the third quarter
and first nine months of fiscal 1997, respectively, compared to 6%
and 3%, respectively, in the corresponding periods in 1996.
Demand for the Company's PC systems was largely attributable to
increased name recognition and market acceptance of the Company's
PC systems and continued greater acceptance of the direct sales
channel for PC products. Increased production of PC systems in 1997
was made possible through manufacturing efficiencies gained in the
redesign of the Company's Nampa, Idaho operation primarily during the third
quarter of fiscal 1996. The failure of the Company's name recognition and
market acceptance to continue to improve, the failure of the direct sales
channel for PC systems to continue to grow, or the inability of the Company
to compete effectively in the direct sales channel could have a material
adverse effect on the Company's business and results of operations. See
"Certain Factors Personal Computer Systems Reliance on the Direct Sales
Approach" and "Certain Factors Personal Computer Systems Competition in
the PC Industry."
Sales to federal, state and local governmental and educational entities
were 18% and 20% of total net sales of PC systems in the third quarter
and first nine months of fiscal 1997, respectively, compared to 11% and
13% in the corresponding periods in 1996. This higher level of sales
of PC systems to governmental entities was attributable to sales under
the federal government's General Services Administration Vendor program
and to other direct sales to governmental entities. Sales under
federal government procurement programs represented 4% of total
sales of PC systems in both the third and second quarters of fiscal
1997, compared to 11% of total sales in the first quarter of fiscal
1997 and compared to 1% and 5% in the third quarter and first nine
months of fiscal 1996, respectively. The level of the Company's sales
of PC systems to governmental entities may vary from quarter to quarter
depending on, among other things, buying practices of governmental
entities and the Company's continued and future participation in
government procurement programs, of which there can be no assurance.
A significant decline in sales to governmental entities could have a
material adverse effect on the Company's business and results of
operations.
The Company's average selling price for PC systems decreased 15% in
the third quarter of fiscal 1997 compared to the third quarter of
fiscal 1996, primarily due to aggressive pricing for, and a shift in
product mix toward, the Company's lower-end PC systems. In addition,
the Company's average selling prices for PC systems in the third quarter
and first nine months of fiscal 1997 were adversely impacted during those
periods by a decline in value of RAM products incorporated in the Company's
PC systems, partially offset by an increase in average RAM content per
system to approximately 36 megabytes.
International sales of PC systems represented 6% of total PC system
sales in the third quarter of fiscal 1997, compared to 4% in the second
quarter of fiscal 1997 and 8% in the third quarter of fiscal 1996.
Sales of PC systems incorporating Intel Pentium Pro microprocessors
and Pentium microprocessors with MMX technology represented 16% and
28%, respectively, of total PC units sold in the third quarter of fiscal
1997, compared to 14% and 10%, respectively, in the second quarter of
fiscal 1997. See "Certain Factors Personal Computer Systems Dependence
on Key Sources of Supply."
In the second quarter of fiscal 1996, the Company decided to discontinue
the manufacture and sale of ZEOS brand PC systems and to close the related
manufacturing operation in Minneapolis, Minnesota. As a percentage of
total sales of PC systems, sales of ZEOS brand PC systems in the third
quarter and first nine months of fiscal 1996 were 2% and 10%, respectively.
Contract Manufacturing. Revenue from the Company's contract
manufacturing operation in the third quarter and first nine months of
fiscal 1997 was 4% and 30% lower, respectively, compared to the
corresponding periods in 1996, primarily due to the effect of the
general industry-wide decline in pricing for semiconductor memory products.
In addition, the Company experienced a shift in product mix from memory
intensive products toward relatively more complex printed circuit boards
and system level assemblies and an increase in the amount of assembly
services utilizing consigned inventory. The Company's revenue from the
assembly of memory intensive products in the third quarter and first nine
months of fiscal 1997 was 33% and 38%, respectively, of total contract
manufacturing revenue compared to 73% and 79%, respectively, in the
third quarter and first nine months of fiscal 1996.
9
<PAGE>
The Company's contract manufacturing revenue was approximately 16% higher
in the third quarter of fiscal 1997 compared to the second quarter of
fiscal 1997, primarily due to the growth in business from the Company's top
five customers and a slight increase in pricing for semiconductor memory
products. The Company achieved higher production volumes at all of its
facilities in the third quarter of fiscal 1997 compared to the second
quarter of fiscal 1997 through a shift toward more complex assembly
services and products.
The Company continues to rely on a relatively small number of customers
for a significant portion of its contract manufacturing business. Revenue
from the Company's top five contract manufacturing customers in the third
quarter of fiscal 1997 was 76% of total contract manufacturing revenue
compared to 80% in the corresponding period in 1996. Revenue from the
Company's largest contract manufacturing customer represented 36% of the
Company's total contract manufacturing revenue in the third quarter of
fiscal 1997, while a separate customer represented 40% of the Company's
total contract manufacturing revenue in the corresponding period in 1996.
Contract manufacturing revenue from MTI was 4% of total contract
manufacturing revenue in the third quarter of fiscal 1997 and was 7% in
the corresponding period in 1996. See "Certain Factors Contract
Manufacturing Customer Concentration."
SpecTek Memory Products. Net sales of DRAM products in the third
quarter of fiscal 1997 by SpecTek, the Company's component recovery
operation, were 48% higher compared to the corresponding period in
1996, primarily due to an approximately 190% increase in megabits of
memory products shipped, partially offset by a 49% decline in average
selling prices for the Company's DRAM products. Net sales of DRAM
products in the first nine months of fiscal 1997 were 17% lower
compared to the corresponding period in 1996, primarily due to a
72% decline in average selling prices for the Company's DRAM products,
partially offset by a 200% increase in megabits of memory products
shipped. Increased shipments were made possible by the acquisition
and utilization of additional test equipment, significantly reduced
component test times and a shift in product mix to generally higher
density components.
Sales of DRAM products were 59% higher in the third quarter of fiscal
1997 compared to the second quarter of fiscal 1997, primarily due to a
30% increase in megabits of memory products shipped coupled with a 22%
increase in average selling prices for the Company's DRAM products.
SpecTek's operations are influenced by a number of factors including
availability of, and pricing for, DRAM components. See "Certain
Factors SpecTek Memory Products Operation."
The Company's SpecTek memory products operation has historically
benefited from increased production capacity achieved, in part, through the
acquisition and utilization of additional equipment and through improved
manufacturing efficiencies. However, any future production increases may
be limited by the Company's ability to obtain adequate supplies of DRAM
components. Historically, a substantial majority of the DRAM components
used in SpecTek's operation has been obtained from MTI. In the third
quarter of fiscal 1997, the Company obtained 78% of its DRAM components
from MTI, compared to 48% in the corresponding period in 1996 and 81%
in the second quarter of fiscal 1997, with a substantial majority of
the remainder purchased from two alternative sources. Purchases from
alternative sources are generally negotiated on a purchase order basis
and there can be no assurance that the Company will be able to
negotiate future purchases from alternative sources on terms
acceptable to the Company. Unless the Company is able to obtain
significant quantities of DRAM components from alternative sources, the
Company's SpecTek memory products operation could be limited to the volume
of DRAM components supplied by MTI. Changes in MTI's semiconductor
manufacturing processes resulting in improvement of device yields and/or
changes in product mix and specifications, or other changes or events at
MTI adversely affecting its overall manufacturing output, could adversely
affect the volume of DRAM components supplied to the Company. Any
reduction in the availability or functionality of DRAM components from MTI
or other suppliers could have a material adverse effect on the Company's
business and results of operations. See "Certain Factors SpecTek Memory
Products Operation Dependence on Component Recovery Agreement with MTI."
Gross Margin
<TABLE>
<CAPTION>
Third Quarter Nine Months
-------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------ ------------------ ------------------ ------------------
% of % of % of % of
Amount Sales Amount Sales Amount Sales Amount Sales
--------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PC systems $ 55,645 14.6% $ 47,416 16.1% $ 195,747 17.2% $ 104,119 11.7%
Contract manufacturing 7,412 9.0% 6,547 7.6% 23,393 11.4% 25,487 8.6%
SpecTek memory products 16,525 35.5% 4,608 14.7% 32,507 32.8% 36,687 30.7%
--------- --------- --------- ---------
Total gross margin $ 79,582 15.6% $ 58,571 14.2% $ 251,647 17.4% $ 166,293 12.7%
========= ========= ========= =========
</TABLE>
10
<PAGE>
The Company's overall gross margin amount increased significantly in the
third quarter of fiscal 1997 compared to the corresponding period in 1996
primarily as a result of higher gross margins provided by the Company's
SpecTek memory products operation and PC operation, but was lower than the
approximately $91.6 million overall gross margin, or 18.0% of net sales,
realized in the second quarter of fiscal 1997. The sequential decrease in
gross margin in the third quarter of fiscal 1997 was due primarily to a
decrease in the gross margin provided by the Company's PC operation,
partially offset by an increase in the gross margin provided by the
SpecTek memory products operation. The significant increase in the
Company's overall gross margin in the first nine months of fiscal 1997
compared to the corresponding period in 1996 was primarily due to a higher
gross margin percentage realized from the Company's PC operation and a
higher level of PC system sales as a percent of total sales.
PC Systems. The gross margin amount provided by the Company's PC
operation in the third quarter of fiscal 1997 was higher compared to the
corresponding period in 1996 primarily due to a 30% increase
in sales of PC systems and lower costs for intellectual property rights,
partially offset by a decline in the gross margin percent. However, the
gross margin amount provided in the third quarter of fiscal 1997 was lower
compared to the second quarter of fiscal 1997 primarily due to a 7%
decrease in net sales of PC systems combined with a decrease in gross
margin percentage. Gross margin as a percent of net sales in the
third quarter of fiscal 1997 was adversely affected by a shift in
product mix which resulted in an increase in unit sales of the Company's
lower-end desktop and certain notebook systems, which generally have lower
gross margin percentages than the balance of the Company's PC products. In
addition, the gross margin percentage in the third quarter of fiscal 1997
was adversely affected by a slight increase in the cost of RAM products in
the third quarter of fiscal 1997 and the effect of a higher level of
international sales and sales to governmental entities that generally have
lower gross margin percentages.
The higher gross margin percentage for sales of the Company's PC systems
in the first nine months of fiscal 1997 compared to the corresponding
period in 1996 was primarily due to improved component costs, particularly
for RAM products, partially offset by the effect of an increase in sales to
governmental entities which generally have lower gross margins than the
balance of the Company's PC systems. During this period, costs for
components, particularly RAM components, declined at rates faster than
reductions in selling prices for the Company's PC systems. There can be no
assurance that the Company's future cost of components will decrease or
that the Company's selling prices for its PC systems will not decrease at
rates faster than the rate of decline in component costs. Average selling
prices and gross margins on the Company's notebook products in the third
quarter of fiscal 1997 were adversely affected by increased pricing
pressure for such systems. The Company continues to experience significant
pressure on its gross margins as a result of intense price competition in
the PC industry and customer expectations of more powerful PC systems at
lower prices. See "Certain Factors Personal Computer Systems Competition
in the PC Industry" and "Certain Factors Personal Computer
Systems Inventory Management."
In September 1996, the Company entered into a license agreement and,
through MTI, became licensed under another agreement, each providing for
the use of certain technology in the Company's operations. The cost of
intellectual property rights used in the manufacture of the Company's PC
systems decreased slightly as a percent of net sales of PC systems in the
third quarter of fiscal 1997 compared to the corresponding period in 1996.
Future charges for intellectual property rights may fluctuate, however, as
a result of the resolution of asserted claims of infringement and claims
that may be asserted in the future. In addition, the Company's rights
under its license agreement obtained through MTI may terminate in the event
that the Company is no longer a majority-owned subsidiary of MTI. See
"Certain Factors General Intellectual Property Matters."
Contract Manufacturing. The gross margin percentage realized from the
Company's contract manufacturing operation in the third quarter and first
nine months of fiscal 1997 was higher compared to the corresponding periods
in 1996 primarily due to a shift in product mix from memory intensive
products toward relatively more complex printed circuit board assemblies
and from a greater concentration in fiscal 1997 of assembly services based
on consignment rather than turnkey arrangements with customers. The gross
margin amount provided by the Company's contract manufacturing operation in
the first nine months of fiscal 1997 was lower than the corresponding
period of 1996 primarily due to the effect of the steep decline in selling
prices for semiconductor memory products in 1996.
11
<PAGE>
SpecTek Memory Products. The gross margin percentage realized by
SpecTek was significantly higher in the third quarter of fiscal 1997
compared to the third quarter of fiscal 1996, but was only slightly higher
comparing the first nine months of fiscal 1997 to the first nine months of
fiscal 1996. Costs of DRAM components, including those obtained under the
Component Recovery Agreement with MTI, were significantly lower in the
third quarter and first nine months of fiscal 1997 compared to the
corresponding periods in fiscal 1996. The benefit of cost declines
experienced by the Company's SpecTek operation was partially offset by
declines in average selling prices for SpecTek's DRAM products. Decreased
costs in the third quarter and first nine months of fiscal 1997 compared to
the corresponding periods in 1996 resulted from lower costs of DRAM
components, decreased test times and a transition to higher density components.
Under the Component Recovery Agreement with MTI, costs of DRAM components
in fiscal 1997 were generally determined as one-half of the net operating
income generated from sales of DRAM products obtained from MTI. Prior to
fiscal 1997, costs of DRAM components obtained from MTI were generally
equal to one-half the price realized from sales of such components. See
"Certain Factors SpecTek Memory Products Operation Dependence on Component
Recovery Agreement with MTI."
In the event that average selling prices for SpecTek's memory products
decline, the gross margin percentage for the SpecTek memory products
operation could decline and overall results of operations could be
adversely affected. See "Certain Factors SpecTek Memory Products
Operation Pricing of DRAM Products." In addition, in the event that the
Company is unable to obtain additional sources of supply of DRAM components
or to maintain its existing sources of supply, the Company's SpecTek memory
products operation gross margin and gross margin percentage could decline
and overall results of operations could be adversely affected. See
"Certain Factors SpecTek Memory Products Operation Dependence on Component
Recovery Agreement with MTI."
Selling, General and Administrative
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------------- ---------------------------
1997 Change 1996 1997 Change 1996
--------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative $ 49,288 36.6% $ 36,084 $136,631 36.5% $100,108
as a % of net sales 9.6% 8.8% 9.5% 7.7%
</TABLE>
Selling, general and administrative (''SG&A'') expenses increased in
absolute dollars and as a percent of net sales in the third quarter and
first nine months of fiscal 1997 compared to the corresponding periods in
1996 primarily due to higher levels of personnel and increased advertising
associated with growth in the Company's PC operation and increased
technical, professional and legal fees. In addition, SG&A expenses in the
third quarter and first nine months of fiscal 1997 include costs associated
with the Company's start-up call center operations in Japan.
Income Tax Provision
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------------- ---------------------------
1997 Change 1996 1997 Change 1996
--------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision $ 12,305 42.6% $ 8,627 $ 45,265 140.2% $ 18,844
</TABLE>
The effective income tax rate was 38.5% for the first nine months of
fiscal 1997, principally reflecting the federal statutory rate and the net
effect of state taxes. The Company's effective income tax rate of
approximately 51.0% for the corresponding period in 1996 principally
reflected the federal statutory rate, the effect of the write-off of
non-deductible goodwill during the second quarter of fiscal 1996 of
approximately $11.4 million and the net effect of state taxes.
Liquidity and Capital Resources
As of May 29, 1997, the Company had cash and cash equivalents of
approximately $198.3 million, representing an increase of approxiimately
$82.5 million from August 29, 1996. Principal sources of liquidity in
the first nine months of fiscal 1997 were cash flows from operations of
approximately $99.8 million, approximately $49.6 million from the
issuance of common stock and borrowings of approximately $5.6 million
under equipment financing arrangements and a revolving loan agreement.
Principal uses of cash in the first nine months of fiscal 1997 were
property, plant and equipment expenditures of approximately $69.3
million for expansion and capacity improvements of the Company's
manufacturing operations and repayment of debt of approximately
$2.7 million.
12
<PAGE>
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 approximately $48.2 million were received by the
Company. In the public offering, MTI sold approximately 12.4 million
shares thereby reducing its ownership of the Company as of May 29, 1997, to
64%. 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. The registration statement also allowed 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 approximately $212.9 million has been sold.
The Company has an unsecured revolving credit facility with MTI which
provides for borrowings of up to $80.0 million, based on the Company's
tangible net worth. As of May 29, 1997, the Company was eligible to borrow
the full amount available under the facility, but had no borrowings
outstanding. In addition, the Company has an unsecured revolving credit
facility, expiring June 30, 1997, with two financial institutions providing
for borrowings of up to $40.0 million, based on the amount of the Company's
eligible receivables. As of May 29, 1997, the Company was eligible to
borrow the full amount available under this credit facility, but had no
borrowings outstanding. The Company is negotiating with a group of
financial institutions, including the two institutions who are parties to
an existing agreement, for a $130 million revolving credit facility that
would replace the facilities with MTI and the two financial institutions.
The Company has received commitments from financial institutions in excess
of the proposed $130 million facility; however, final terms and conditions
continue to be negotiated.
During the third quarter of fiscal 1997, the Company's wholly-owned
subsidiary, Micron Custom Manufacturing Services, Inc. ("MCMS"), 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 MCMS decreases by $1.0 million per year.
As of May 29, 1997, there was $1.0 million outstanding under the agreement.
As of May 29, 1997, the Company had capital expenditure commitments of
approximately $35.0 million for expansion and upgrade of facilities and
equipment. The Company estimates it will spend approximately $90 million
in fiscal year 1998. During the second quarter of fiscal 1997, the Company
began construction of an approximately 300,000 square foot facility in
Nampa, Idaho for planned expansion of its PC operation, and the Company
expects that the cost of construction will total approximately $35 million.
This facility is expected to approximately double the Company's current PC
manufacturing space and it is anticipated to be in production by June 1998.
On June 10, 1997, the Company announced it had entered into a definitive
agreement to acquire NetFRAME Systems Incorporated, a provider of
enterprise-class multiprocessor servers, by means of a cash tender offer
with an aggregate price of approximately $14 million. The transaction,
which is subject to the tendering of shares and certain conditions and
approvals, is expected to be completed in the Company's fourth quarter of
fiscal 1997.
The Company expects that its future working capital requirements will
continue to increase and believes that currently available cash and cash
equivalents, future cash flows from operations, current credit facilities
and future equipment financing will be sufficient to fund its operations
through fiscal 1998. However, maintaining an adequate level of working
capital in the future 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 financing will be
available on terms acceptable to the Company, or at all.
Certain Factors
In addition to factors discussed elsewhere in this Form 10-Q, the
following are important factors which could cause actual results or events
to differ materially from 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.
13
<PAGE>
General
Fluctuations in Operating Results
The Company's past operating results have been, and its future operating
results may be, subject to seasonality and other fluctuations, on a
quarterly and an annual basis, as a result of a wide variety of factors,
including, but not limited to, industry competition, fluctuating market
pricing for PC and semiconductor memory products, availability and pricing
of the DRAM components used by the Company's SpecTek memory products
operation, fluctuating component costs, changes in product mix, seasonal
cycles common in the PC industry, the timing of new product introductions
by the Company and its competitors, seasonal government purchasing cycles,
inventory obsolescence, failure by the Company to succeed in the
acquisition and strategies with respect to NetFRAME Systems Incorporated,
the effects of product reviews and industry awards, critical component
availability, manufacturing and production constraints, and the timing of
orders from and shipments to OEM customers. As a result, the operating
results for any particular period are not necessarily indicative of the
results that may occur in any future period.
Management
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 announced that the Company had entered into a
definitive agreement to acquire NetFRAME Systems Incorporated. There can
be no assurance that the Company's management resources, operating and
financial information systems, technical support systems and other
resources will be adequate to support the Company's existing or future
operations. Any failure to effectively monitor, implement or improve the
Company's operational, financial, management and technical support systems
could have a material adverse effect on the Company's business and results
of operations.
Control by MTI
As of May 29, 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."
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 patent and software 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 or provide licenses necessary to use technology or software in their
products or processes, the Company may be forced to market products without
certain technological features or software, discontinue sales of certain of
its products or defend legal actions taken against it relating to 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.
14
<PAGE>
The Company, as a majority-owned subsidiary of MTI, benefits from 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
Approximately 8% of the Company's net sales for the third quarter of
fiscal 1997 compared to 10% for the fiscal year ended August 29, 1996
were attributable to sales outside the United States. Although
the Company's international sales in the first nine months of 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, 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 has established a contract manufacturing
operation in Penang, Malaysia, and the Company continues to evaluate the
benefits and risks associated with overseas manufacturing for its PC and
contract manufacturing operations. The new contract manufacturing
operation in Malaysia completed its first product shipment in the second
quarter of fiscal 1997. There can be no assurance that the establishment
of the Japan and Malaysia operations or any other international expansion
will be successful, and any failure by the Company to achieve success in
international operations could have a material adverse effect on the
Company's business and results of operations. The Company's international
operations are subject to a number of other risks, including, without
limitation, fluctuations in the value of currencies, export duties, import
controls, trade barriers, restrictions on funds transfer, greater
difficulty in accounts receivable collections, political and economic
instability and compliance with foreign laws.
Dependence on Key Personnel
The future success of the Company will depend, in part, on its ability to
attract and retain key management and technical personnel. The Company
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.
Concentration of Ownership of Common Stock of the Company
Due to MTI's ownership of 64% of the outstanding shares of the Company's
common stock as of May 29, 1997, 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 prices
of common stock of the Company. MTI's ability to sell shares of common
stock of the Company, unless registered under the Securities Act of 1933,
as amended (the "Securities Act"), is subject to volume and other
restrictions pursuant to Rule 145 promulgated under the Securities Act.
Volatility of Stock Price
The trading prices of the common stock of the Company and the stock of
other companies primarily engaged in the PC industry have had a history of
significant volatility. The trading price of the common stock of the
Company is subject to significant fluctuations due to general market
conditions and financial performance of other companies in the PC industry,
announcements of technological innovations, new commercial products or new
strategies by competitors, component availability and pricing, the
significant number of shares of common stock of the Company eligible for
future sale into the public market or other factors. The stock market
generally has experienced significant price and volume fluctuations, and
such fluctuations have impacted stock prices for many high technology
companies. These broad market fluctuations, as well as general economic
conditions and the financial performance of the Company, may adversely
affect the market price of the common stock of the Company.
15
<PAGE>
Personal Computer Systems
Competition in the PC Industry
The PC industry is highly competitive and has been characterized by
intense pricing pressure, rapid technological advances in hardware and
software, frequent introduction of new products, low gross margin
percentages and rapidly declining component costs. Competition in the PC
industry is based primarily upon performance, price, reliability, service
and support and brand name recognition. 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. Although the Company has expanded sales to corporate and
governmental entities as a percentage of total sales, a significant portion
of the Company's PC sales are to the consumer and small business segment.
Any general decline in demand, or a decline in the rate of increase of
demand, for PC systems could increase price competition and could have a
material adverse effect on the Company's business and results of
operations. To remain competitive, the Company must frequently introduce
new products and price its products and offer customers lead times
comparable to its competitors. In addition, to remain competitive, the
Company generally reduces the selling prices of its PC systems in
connection with declines in costs of components. The Company competes with
a number of PC manufacturers which sell their products primarily through
direct channels, including Dell Computer, Inc. and Gateway 2000, Inc. The
Company also competes with PC manufacturers, such as Apple Computer, Inc.,
Compaq Computer Corporation, Hewlett-Packard Company, International
Business Machines Corporation and Toshiba Corporation among others, which
have traditionally sold their products through national and regional
distributors, dealers and value added resellers, retail stores and direct
sales forces. However, 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. 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 arrangements enjoyed by the Company. In
addition, as a result of PC industry standards, the Company and its
competitors generally use many of the same components, typically from the
same set of suppliers, which limits the Company's ability to
technologically and functionally differentiate its products. In order to
gain an increased share of the U.S. PC direct sales market, these
competitors may effect a pricing strategy that is more aggressive than the
current pricing in the direct sales market. The Company's ability to
continue to produce competitively priced products and to maintain existing
gross margin percentages will depend, in large part, on the Company's
ability to sustain high levels of sales and control inventory levels,
component cost and other operating expenses. Any failure by the Company to
transition to new products effectively or to accurately forecast demand for
its products may have a material 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.
From time to time, the Company has been unable to obtain sufficient
quantities of certain critical components to permit the Company to meet
demand for its products. Sales of PC systems in the first nine months of
fiscal 1997 were adversely affected by shortages of certain Intel Pentium
Pro microprocessors and certain high-performance disk drives. There can be
no assurance that imbalances between supply and demand for microprocessors
or any other critical components will not occur in the future or that the
Company will be able to obtain these components from Intel or other parties
in quantities sufficient to meet demand within the near or longer term at
competitive prices or at all. In the event that these components are
unavailable to the Company in sufficient quantities at competitive prices
in the future, the Company may need to modify its product offerings, which,
in turn, could adversely affect the Company's business and results of
operations.
16
<PAGE>
Short PC Product Life Cycles
To maintain a competitive position in the PC industry, the Company must
introduce new products and features that address the needs and preferences
of customers in its target markets. The PC industry is characterized by
short product life cycles resulting from rapid changes in technology and
consumer preferences and declining product prices. To remain competitive,
the Company must frequently introduce new products and features. There can
be no assurance that these products or features will be successful, that
the introduction of new products or features by the Company or its
competitors will not materially and adversely affect the sale of, or gross
margins on, the existing products of the Company or that the Company will
be able to adapt to future changes in the PC industry. The Company does
not maintain a significant research and development group. Instead, the
Company strives to work closely with PC component suppliers and other
technology developers to evaluate the latest developments in PC-related
technology. There can be no assurance that the Company will continue to
have access to new technology, will be successful in incorporating new
technology in its products or will be able to deliver commercial quantities
of new products or features in a timely and cost-effective manner.
Dependence on Key Sources of Supply
The Company purchases substantially all of its PC components and
subassemblies from suppliers on a purchase order basis and generally does
not have long-term supply arrangements with its suppliers. Certain
components, subassemblies and software included in the Company's PC systems
are obtained from sole suppliers or a limited number of suppliers. The
microprocessors used in the Company's PC systems are manufactured
exclusively by Intel. A significant portion of the RAM components used in
the Company's PC systems are supplied by MTI, and the Company expects to
continue to rely on MTI as its primary source of RAM components. The
Company focuses on providing PC systems that feature components
incorporating the latest technological developments in the PC industry,
which components are periodically in short supply and are available from
sole or a limited number of suppliers. As a result, the Company has
experienced in the past, and expects to experience in the future, shortages
in the components and subassemblies used in its PC systems. From time to
time, the Company has been unable to obtain sufficient quantities of
certain Intel microprocessors. Sales of PC systems in the first nine
months of fiscal 1997 were directly affected by shortages of certain Intel
Pentium Pro microprocessors and certain high-performance disk drives. The
Company relies, to a certain extent, upon its suppliers' abilities to
enhance existing products in a timely and cost-effective manner, to develop
new products to meet changing customer needs and to respond to emerging
standards and other technological developments in the PC industry. The
Company's reliance on a limited number of suppliers and on a strategy of
incorporating the latest technological developments into its PC systems
involves several risks, including the possibility of shortages and/or
increases in costs of components, subassemblies and software, and risk of
reduced control over delivery schedules, which could have a material
adverse effect on the Company's business and results of operations.
The Company's 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.
17
<PAGE>
Reliance on the Direct Sales Approach
The Company primarily markets its PC systems directly to individuals,
small and medium-sized businesses and governmental and educational entities
through advertisements in PC trade publications, direct-mail campaigns and
on the Internet. Direct sales orders are received primarily by telephone
by the Company's sales representatives who review configuration options and
pricing with the customer. The direct sales approach may make it difficult
for the Company to penetrate specific markets and may be less appealing to
first-time PC buyers than other sales channels. In addition, the Company's
ability to increase future sales of PC systems is dependent in part on the
growth of the direct sales channel. The Company believes that to retain
customer interest in its PC systems and brand name recognition of its
products, the Company must continue to offer products, services and support
which are recognized by trade publications for overall performance, price,
reliability and quality. There can be no assurance that the name
recognition and market acceptance of the Company's PC products will not
decline in the future, which could have a material adverse effect on the
Company's business and results of operations. There can be no assurance
that direct sales of PC systems as a percentage of industry-wide PC sales
will increase or that the Company will increase its share of the direct
sales market in the future. There can be no assurance that the Company's
direct sales strategy will be successful in international markets or that
PC companies that currently distribute their PC products primarily through
distributors and resellers will not implement or devote additional
resources to a direct sales strategy. Any decline in the rate of growth of
the PC direct sales channel, or the Company's failure to compete
successfully in the direct sales channel, could have a material adverse
effect on the Company's business and result of operations.
NetFRAME Acquisition
On June 10, 1997, the Company announced it entered into a definitive
agreement to acquire NetFRAME Systems Incorporated ("NetFRAME"), a provider
of enterprise-class multiprocessor servers, by means of a cash tender offer
with an aggregate price to shareholders of NetFRAME of approximately $14
million. The transaction, which is subject to the tendering of shares and
certain conditions and approvals, is expected to be completed in the
fourth quarter of fiscal 1997. 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
Company will be successful in acquiring NetFRAME or that the subsequent
integration, reconfiguration or other modification, if any, 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, 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 for non-collection of sales
and use taxes prior to such agreements' effective dates. Although the
Company has not entered into agreements with all states, management
believes the ultimate settlement of this matter will not have a material
adverse effect on the Company's business and results of operations.
However, there can be no assurance that the collection of sales or use
taxes will not have a material adverse effect on the Company's future
sales, which could have a material adverse effect on the Company's business
and results of operations.
Investment in Customer Service and Technical Support Systems
The Company's PC operation has experienced significant growth in orders
for PC systems. The Company has from time to time experienced an increase
in the volume of customer service and technical support calls, which has
placed, and is expected to continue to place, a strain on the Company's
customer service and technical support systems. To remain competitive, the
Company must invest significant resources in the maintenance and
improvement of its customer service and technical support systems. Any
failure to maintain adequate customer service and technical support systems
could cause customer dissatisfaction with the Company. Customer
dissatisfaction could result in reduced sales of PC systems, which could
have a material adverse effect on the Company's business and results of
operations.
18
<PAGE>
Government Regulation of the PC Industry
Prior to marketing its PC systems, the Company must receive certification
that such systems meet standards established by the Federal Communications
Commission and certain foreign agencies for radio frequency emissions. Any
delay or failure by the Company to obtain such certifications may delay or
prevent the Company from introducing new products on a timely basis, which
could have a material adverse effect on the Company's business and results
of operations. In addition, the U.S. Federal Trade Commission and the
Department of Commerce, along with similar foreign agencies in other
jurisdictions, have promulgated certain regulations that affect the
Company's shipping, advertising and general operations. Any failure by the
Company to comply with such regulations could result in significant
penalties, fines or marketing restrictions, which in turn could have a
material adverse effect on the Company's business and results of
operations.
Contract Manufacturing
Competition in the Contract Manufacturing Industry
The contract manufacturing industry is highly competitive and is in a
period of consolidation. The Company's contract manufacturing operation
competes against numerous domestic and offshore contract manufacturers,
including a significant number of local and regional companies. In
addition, the Company competes against in-house manufacturing capabilities
of certain of its existing customers as well as with certain large computer
manufacturers which offer third-party contract manufacturing services. The
Company's contract manufacturing competitors include, among others, Avex
Electronics, Inc., Benchmark Electronics, Inc., Celestica Inc., DOVAtron
International, Inc., Flextronics International, Group Technologies
Corporation, Jabil Circuits, Inc., Sanmina Corporation, SCI Systems, Inc.
and Solectron Corporation. Many of the Company's competitors have
substantially greater manufacturing, technical, financial, personnel,
marketing and other resources than the Company and have manufacturing
operations at multiple domestic and overseas locations.
The Company believes that the significant competitive factors in the
contract manufacturing industry include service, quality, price,
technology, location and the ability to offer flexible delivery schedules
and deliver finished products on an expeditious and timely basis in
accordance with customers' expectations. The Company may be at a
disadvantage as to certain competitive factors when compared to
manufacturers with greater resources than the Company, substantial offshore
facilities or substantially larger domestic facilities. 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.
Fluctuations in OEM Orders
The Company's contract manufacturing customers generally require short
delivery cycles and quick turnaround for contract manufacturing services.
As the Company's OEM customers react to variations in demand for their
products and adjust their purchase orders to the Company, the Company may
be subject to non-cancelable purchase orders with its suppliers and may
recognize losses on write downs of inventories due primarily to the
specialized nature of certain custom components and declines in market
pricing of components. Changes in OEM orders have had an adverse effect on
the Company's contract manufacturing operation in the past and there can be
no assurance that the Company will not experience such adverse effects in
the future.
Customer Concentration
Revenue from the Company's top five contract manufacturing customers in
the third quarter of fiscal 1997 was 76% of total contract manufacturing
revenue compared to 80% in the corresponding period in 1996 and 84% in
the second quarter of fiscal 1997. Revenue from the Company's largest
contract manufacturing customer represented 36% of the Company's total
contract manufacturing revenue in the third quarter of fiscal 1997.
Revenue from the Company's largest contract manufacturing customer in
the corresponding period in 1996 represented 40% of the Company's total
contract manufacturing revenue. Contract manufacturing revenue from MTI
was 4% of total contract manufacturing revenue in the third quarter of
fiscal 1997 compared to 7% in the corresponding period in 1996 and 4% in
the second quarter of fiscal 1997. The Company expects to continue to
experience a high degree of contract manufacturing customer concentration.
19
<PAGE>
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.
Environmental Regulation
The Company's contract manufacturing operation is subject to a variety of
environmental regulations relating to the use, storage, discharge and
disposal of hazardous chemicals and waste water used during its
manufacturing processes. Any failure by the Company to comply with present
and future environmental regulations could subject it to liabilities or the
suspension of production. In addition, such regulations could limit the
ability of the Company's contract manufacturing operation to expand its
facilities or could require the Company to acquire costly equipment or
incur other significant costs any of which could have a material adverse
effect on the Company's business and results of operations.
SpecTek Memory Products Operation
Dependence on Component Recovery Agreement with MTI
Historically, a substantial majority of the DRAM components used in the
Company's SpecTek memory products operation has been obtained from MTI.
The Company and MTI are parties to a Component Recovery Agreement,
effective as of August 30, 1996 (the "Component Recovery Agreement"), under
which MTI is required to deliver to the Company all of the nonstandard DRAM
components produced at MTI's semiconductor manufacturing operations. The
Company's cost of DRAM components under this agreement generally is
determined as one-half of the operating income generated from the Company's
sales of DRAM 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 memory products operation at existing or
historic levels. The Component Recovery Agreement, which expires September
2, 1999, may be terminated 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 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.
Pricing of DRAM Products
Pricing for the Company's DRAM 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 DRAM 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 DRAM
products, which could have a material adverse effect on the Company's
business and results of operations.
20
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following are filed as a part of this report:
Exhibit Description
10.37 Admended and Restated Executive Bonus Plan
11 Computation of Per Share Earnings
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the quarter
ended May 29, 1997.
Micron, TransPort, and SpecTek are trademarks of the Company, and ZEOS
is a registered trademark of the Company. NetFRAME is a registered
trademark of NetFRAME Systems Incorporated. Intel and Pentium are
registered trademarks and MMX is a trademark of Intel Corporation. All
other trademarks are the property of their respective holders.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICRON ELECTRONICS INC.
--------------------------------------------
(Registrant)
Dated: June 20, 1997
/s/ T. Erik Oaas
--------------------------------------------
T. Erik Oaas, Executive Vice President
Finance, and Chief Financial Officer
(Principal Financial and Accounting Officer)
22
<PAGE>
EXHIBIT 10.37
MICRON ELECTRONICS, INC.
EXECUTIVE BONUS PLAN
1. PURPOSE
The Micron Electronics, Inc. Executive Bonus Plan (the "Bonus
Plan") is designed to attract, retain, and reward highly
qualified executives who are important to the Company's success
and to provide incentives relating directly to the financial
performance and long-term growth of the Company.
2. DEFINITIONS
(a) Bonus - The cash incentive awarded to an Executive Officer
or Key Employee pursuant to the terms and conditions of the Bonus
Plan.
(b) Board - The Board of Directors of Micron Electronics, Inc.
(c) Change in Control - (i) The acquisition by any person or
entity of securities of Micron Electronics, Inc. such that such
person or entity, directly, indirectly or beneficially, acting
alone or in concert, (A) owns or controls more of the combined
voting power of all classes of voting securities of Micron
Electronics, Inc. than does Micron Technology, Inc. and (B) owns
or controls more than thirty-five percent (35%) of the combined
voting power of all classes of voting securities of Micron
Electronics, Inc.; or (ii) subject to Micron Technology, Inc.
owning or controlling more than thirty-five (35%) of the combined
voting power of all classes of voting securities of Micron
Electronics, Inc., the acquisition by any person or entity,
directly, indirectly or beneficially, acting alone or in concert,
of more than thirty-five percent (35%) of the common stock of
Micron Technology, Inc. outstanding at any time.
(d) Code - The Internal Revenue Code of 1986, as amended.
(e) Committee - The Compensation Committee of the Board, or
such other committee of the Board that is designated by the Board
to administer the Bonus Plan, in compliance with requirements of
Section 162(m) of the Code.
(f) Company - Micron Electronics, Inc. and any other
corporation in which Micron Electronics, Inc., controls, directly
or indirectly, fifty percent (50%) or more of the combined voting
power of all classes of voting securities.
(g) Executive - An Executive Officer or Key Employee of the
Company.
(h) Executive Officer - Any officer of the Company subject to
the reporting requirements of Section 16 of the Securities and
Exchange Act of 1934 (the "Exchange Act").
(i) Key Employee - Any employee of the Company as may be
designated by the Committee for this Bonus Plan.
3. ELIGIBILITY
Only Executives are eligible for participation in the Bonus
Plan.
4. ADMINISTRATION
Awards of bonuses under the Bonus Plan shall be based on one
or more of the following performance goals: (i) net income, (ii)
earnings per share, (iii) return on equity, (iv) gross margin,
(v) return on assets, (vi) net sales, (vii) new products, (viii)
expansion of facilities, (ix) customer satisfaction (x) asset
management or (xi) debt management. The Committee shall
administer the Bonus Plan and shall have full power and authority
to construe, interpret, and administer the Bonus Plan necessary
to comply with the requirements of Section 162(m) of the Code.
The Committee's decisions shall be final, conclusive, and binding
upon all persons. The Committee shall certify in writing prior to
commencement of payment of the bonus that the performance goal or
goals under which the bonus is to be paid has or have been
achieved. The Committee in its sole discretion has the authority
to reduce the amount of a bonus otherwise allocated to an
Executive upon attainment of the performance goal established for
a fiscal year provided that a reduction in the amount of one
Executive s bonus does not result in an increase in the amount of
any other Executive s bonus. Promptly after the beginning of a
fiscal year, the Committee shall: (i) determine the performance
criteria; (ii) determine the Executives eligible to participate
in the Bonus Plan for the fiscal year; and (iii) determine the
method for computing the amount of bonus payable to each
Executive if the performance goal is achieved.
The maximum bonus amount that can be paid to any Executive
with respect to any one fiscal year cannot exceed the greater of
$2,000,000 or two percent (2%) of the Company's consolidated
after-tax net profits. Bonus amounts shall be paid within 90
days after the close of the Company s fiscal year unless the
Committee elects to defer the payout of the bonus amount over a
period of time not to exceed five (5) years. Payout of a bonus
over an extended period may, at the discretion of the Committee,
be subject to and conditioned upon the continuation of an
Executive s employment with the Company and the profitability of
the Company in the year paid. Unpaid bonuses can be canceled at
the discretion of the Committee.
Upon a Change in Control, the Company shall pay to each
eligible Executive (i) any bonuses allocated, if any, under the
Bonus Plan for the current fiscal year at the maximum level
established by the Board as of the most recent allocation, unless
otherwise agreed between the Company and the Executive, and (ii)
any bonuses that have been awarded for previous years under the
Bonus Plan but not previously paid, in either case immediately
before such Change in Control. To determine the amount of the
current fiscal year s bonus, the bonus pool shall be annualized
if the Change in Control occurs after the end of the second
fiscal quarter. If the Change in Control occurs prior to the end
of the second fiscal quarter, the bonus pool shall be calculated
as of the fiscal month end immediately prior to the Change in
Control. If the Executive ceases to be employed by the Company
or by any of its subsidiaries, any unpaid bonuses shall be paid
in accordance with the Executive's termination agreement.
The Committee may amend, modify, suspend, or terminate the
Bonus Plan for the purpose of meeting or addressing any changes
in legal requirements or for any other purpose permitted by law.
The Committee will seek shareholder approval of any amendment
determined to require shareholder approval or advisable under the
regulations of the Internal Revenue Service or other applicable
law or regulation.
5. NONASSIGNABILITY
No Bonus or any other benefit under the Bonus Plan shall be
assignable or transferable by the participant during the
participant's lifetime except as otherwise approved by the
Committee.
6. NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in the Bonus Plan shall confer upon any employee any
right to continue in the employ of the Company or shall interfere
with or restrict in any way the right of the Company to discharge
an employee at any time for any reason whatsoever, with or
without good cause.
7. EFFECTIVE DATE
The Bonus Plan shall be deemed effective as of April 7, 1995.
Rev 4/29/97
EXHIBIT 11
Micron Electronics, Inc.
Computation of Per Share Earnings
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the quarter ended For the nine months ended
May 29, May 30, May 29, May 30,
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average shares outstanding 95,490 91,590 93,647 91,480
Net effect of dilutive stock options 667 887 589 958
--------- --------- --------- ---------
Number of shares used in per share
earnings 96,157 92,477 94,236 92,438
========= ========= ========= =========
Net income $ 19,656 $ 14,075 $ 72,307 $ 18,134
========= ========= ========= =========
Per share earnings $ 0.20 $ 0.15 $ 0.77 $ 0.20
========= ========= ========= =========
FULLY DILUTED
Weighted average shares outstanding 95,490 91,590 93,647 91,480
Net effect of dilutive stock options 669 1,046 592 973
--------- --------- --------- ---------
Number of shares used in per share
earnings 96,159 92,636 94,239 92,453
========= ========= ========= =========
Net income $ 19,656 $ 14,075 $ 72,307 $ 18,134
========= ========= ========= =========
Per share earnings $ 0.20 $ 0.15 $ 0.77 $ 0.20
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the accompanying financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-28-1997
<PERIOD-END> MAY-29-1997
<CASH> 198,329
<SECURITIES> 0
<RECEIVABLES> 193,870
<ALLOWANCES> 8,288
<INVENTORY> 87,653
<CURRENT-ASSETS> 501,009
<PP&E> 228,268
<DEPRECIATION> 59,664
<TOTAL-ASSETS> 670,551
<CURRENT-LIABILITIES> 285,289
<BONDS> 24,562
0
0
<COMMON> 955
<OTHER-SE> 348,955
<TOTAL-LIABILITY-AND-EQUITY> 670,551
<SALES> 1,442,686
<TOTAL-REVENUES> 1,442,686
<CGS> 1,191,039
<TOTAL-COSTS> 1,330,599
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,485)
<INCOME-PRETAX> 117,572
<INCOME-TAX> 45,265
<INCOME-CONTINUING> 72,307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,307
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.77
</TABLE>
