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 March 4, 1999
-------------------------------------------
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.
------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1404301
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 E. Karcher Road, Nampa, Idaho 83687
-------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (208) 898-3434
-----------------------
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
April 9, 1999 was 96,176,444.
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Micron Electronics, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
March 4, February 26, March 4, February 26,
1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 373,600 $ 494,760 $ 777,097 $1,053,650
Cost of goods sold 310,208 490,302 644,887 971,978
--------- --------- --------- ----------
Gross margin 63,392 4,458 132,210 81,672
Selling, general and 56,150 91,938 108,546 164,196
administrative
Research and development 1,128 3,759 2,579 7,341
Other expense, net 3,865 19,196 3,906 21,003
--------- --------- --------- ----------
Operating income (loss) 2,249 (110,435) 17,179 (110,868)
Gain on sale of MCMS - 156,222 - 156,222
common stock
Interest income, net 4,531 1,989 8,559 4,183
--------- --------- --------- ----------
Income before taxes 6,780 47,776 25,738 49,537
Income tax provision 2,611 23,011 9,910 23,707
--------- --------- --------- ----------
Net income $ 4,169 $ 24,765 $ 15,828 $ 25,830
========= ========= ========= =========
Earnings per share:
Basic $ 0.04 $ 0.26 $ 0.16 $ 0.27
Diluted 0.04 0.26 0.16 0.27
Number of shares used in per share calculation:
Basic 96,137 95,622 96,045 95,587
Diluted 97,080 95,735 97,174 95,798
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
Micron Electronics, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except par value amounts)
<TABLE>
<CAPTION>
As of March 4, 1999 September 3, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $307,719 $328,537
Liquid investments 61,299 29,204
Receivables, net 140,043 128,269
Inventories 27,673 30,848
Deferred income taxes 18,000 19,172
Other current assets 4,573 2,432
-------- --------
Total current assets 559,307 538,462
Property, plant and equipment, net 154,137 147,912
Other assets 5,423 6,069
-------- --------
Total assets $718,867 $692,443
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $237,269 $214,930
Accrued licenses and royalties 15,552 18,585
Current debt 6,599 16,798
-------- --------
Total current liabilities 259,420 250,313
Long-term debt 8,566 11,730
Other liabilities 13,885 13,506
-------- --------
Total liabilities 281,871 275,549
-------- --------
Commitments and contingencies
Common stock, $.01 par value, authorized 150.0 million shares; issued and
outstanding 96.1 million and 95.9 million shares as of March 4, 1999 and
September 3, 1998, respectively 961 959
Additional capital 127,115 122,837
Retained earnings 308,888 293,061
Accumulated other comprehensive income 32 37
-------- --------
Total shareholders' equity 436,996 416,894
-------- --------
Total liabilities and shareholders'equity $718,867 $692,443
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Micron Electronics, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Six months ended March 4, 1999 February 26, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15,828 $ 25,830
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization 15,928 21,771
Gain on sale of MCMS common stock - (156,222)
Provision for doubtful accounts (8) 3,817
Changes in assets and liabilities,
net of the effect of the sale of MCMS:
Receivables (11,103) 25,316
Inventories 3,483 37,253
Accounts payable and accrued expenses 23,801 7,577
Accrued licenses and royalties (3,034) 513
Deferred income taxes 2,442 (7,303)
Other (617) 7,988
-------- --------
Net cash provided by (used for) operating
activities 46,720 (33,460)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and
equipment (25,287) (44,502)
Proceeds from sales of property, plant and
equipment 329 5,802
Proceeds from sale of MCMS common stock,
net of cash - 235,884
Purchases of held-to-maturity investment
securities (77,840) -
Proceeds from maturities of investment
securities 46,205 -
Other (904) (1,231)
-------- --------
Net cash (used for) provided by investing
activities (57,497) 195,953
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings - 173
Repayments of debt (14,369) (6,291)
Proceeds from issuance of common stock 3,998 935
Purchase and retirement of stock - (29)
-------- --------
Net cash used for financing activities (10,371) (5,212)
-------- --------
Net (decrease) increase in cash and cash
equivalents (21,148) 157,281
Effect of exchange rate changes on cash and
cash equivalents 330 (141)
Cash and cash equivalents at beginning of
period 328,537 183,935
-------- --------
Cash and cash equivalents at end of period $307,719 $341,075
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands, except per share amounts)
1. Unaudited Interim Financial Statements
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the financial position of Micron Electronics, Inc.
and its subsidiaries (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 second quarter ended March 4, 1999 should be
read in conjunction with the Company's Report on Form 10-K for the fiscal year
ended September 3, 1998. Portions of the accompanying financial statements are
derived from the audited year-end financial statements of the Company dated
September 3, 1998. The Company's fiscal year is a 52 or 53 week period ending on
the Thursday closest to August 31.
Revenue from product sales to customers is generally recognized upon
shipment. A provision for estimated sales returns and discounts is recorded in
the period in which the sales are recognized. Revenue from service and support
contracts for which the Company is primarily obligated is recognized over the
term of the contract. Revenue from sales of third party on-site service
contracts for which the Company is not obligated is recognized at the time of
sale.
The Company adopted Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" as of the
first quarter of fiscal 1999. SOP 98-1 requires companies to capitalize certain
costs of computer software developed or obtained for internal use, provided that
those costs are not research and development. As a result of adopting SOP 98-1,
the Company capitalized $0.6 million of internal software development costs in
the second fiscal quarter of 1999. For the first six months of fiscal 1999, the
Company capitalized $1.6 million of internal software development costs.
2. Gain on Sale of MCMS Common Stock
On February 26, 1998, the Company completed the sale of 90% of its interest
in MCMS, Inc. ("MCMS"), formerly Micron Custom Manufacturing Services, Inc. and
a wholly-owned subsidiary of the Company. The sale was structured as a
recapitalization of MCMS (the "Recapitalization"), whereby Cornerstone Equity
Investors IV, L.P. ("Cornerstone"), other investors and certain members of MCMS'
management, including Robert F. Subia, then a director of the Company, acquired
the 90% interest in MCMS. In exchange for the 90% interest in MCMS, the Company
received $249.2 million in cash. Subsequent to the Recapitalization of MCMS, the
Company owned a 10% interest in MCMS, which is accounted for by the Company on
the cost method of accounting. Accordingly, results of operations of MCMS
subsequent to February 26, 1998 are excluded from the Company's results of
operations.
<TABLE>
<CAPTION>
3. Receivables
March 4, 1999 September 3, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $124,558 $122,294
Receivables from affiliates, net - 105
Income taxes recoverable from parent
corporation 14,156 3,068
Other 7,454 10,090
Allowance for doubtful accounts (3,609) (3,709)
Allowance for returns and discounts (2,516) (3,579)
-------- --------
$140,043 $128,269
======== ========
</TABLE>
5
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements--Continued
(Tabular amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
4. Inventories
March 4, 1999 September 3, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 13,395 $ 16,144
Work in progress 6,133 4,469
Finished goods 8,145 10,235
------- -------
$ 27,673 $ 30,848
======== ========
5. Property, Plant and Equipment
March 4, 1999 September 3, 1998
- -------------------------------------------------------------------------------
Land $ 1,234 $ 1,234
Buildings 34,745 34,826
Equipment and software 166,594 145,310
Assets in progress 33,160 38,197
------- -------
235,733 219,567
Less accumulated depreciation and
amortization (81,596) (71,655)
------- -------
$154,137 $147,912
======== ========
</TABLE>
Effective September 4, 1998, the Company revised its estimated useful lives
of certain information technology assets, including enterprise software,
enterprise hardware and telecommunications systems. The original estimated
useful lives of these assets were two and three years, with the revised lives
extended to five years, on a prospective basis, which more accurately reflects
their actual useful lives. The effect of this change was to reduce the second
fiscal quarter 1999 depreciation and amortization by $1.1 million ($0.7 million
net of tax) or $0.01 per diluted share, net of taxes. For the first six months
of fiscal 1999, the effect of this change was to reduce depreciation and
amortization by $2.5 million ($1.5 million net of tax) or $0.02 per diluted
share, net of taxes.
<TABLE>
<CAPTION>
6. Accounts Payable and Accrued Expenses
March 4, 1999 September 3, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $156,435 $146,124
Payable to affiliates 41,704 20,601
Salaries, wages and benefits 16,462 20,496
Income taxes payable 537 92
Equipment contracts payable 1,895 3,884
Accrued warranty 16,623 17,128
Other 3,613 6,605
-------- --------
$237,269 $214,930
======== ========
</TABLE>
6
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements--Continued
(Tabular amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
7. Debt
March 4, 1999 September 3, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Notes payable in periodic
installments through September 2001,
weighted average interest rate of
7.85% and 7.63%, respectively $ 11,996 $ 16,068
Capitalized lease obligations payable
in monthly installments through June 2000,
interest rate of 7.28%, respectively 3,169 4,284
Amounts outstanding under revolving loan
agreement, variable interest of 1.34% - 8,176
-------- --------
15,165 28,528
Less current portion (6,599) (16,798)
-------- --------
$ 8,566 $ 11,730
======== ========
</TABLE>
The Company has an unsecured credit agreement, expiring June 2001, with a
group of financial institutions providing for borrowings totaling $100.0
million. As of March 4, 1999, the Company was eligible to borrow the full amount
under the agreement, but had no borrowings outstanding. Under the agreement, the
Company is subject to certain financial and other covenants including certain
financial ratios and limitations on the amount of dividends declared or paid by
the Company.
The Company's wholly-owned subsidiary, Micron Electronics Japan, had an
unsecured revolving credit facility with a financial institution. The
outstanding borrowings under this facility were fully repaid during the second
fiscal quarter of 1999 and the revolving credit facility was cancelled.
Certain of the Company's notes payable are collateralized by equipment with a
total cost of $20.9 million and accumulated depreciation of $11.2 million as of
March 4, 1999.
8. Other Expense, Net
Other expense in the second quarter of fiscal 1999 included $3.9 million
associated with the Company's closure and consolidation of its Micron
Electronics Japan operation into its Nampa operations. The charge includes those
costs associated with employee payroll and severance of $1.5 million for
approximately 45 employees, fixed asset write-downs of $0.7 million, lease
obligations of $0.6 million, pre-committed advertising of $0.2 million,
incremental future service costs of $0.2 million and $0.7 million for other
closure related costs. The Company has a remaining liability of $1.6 million for
employee severance costs, future lease obligation costs, and other related
closure costs, which have been included in accounts payable and accrued
expenses, as of March 4, 1999. The Company anticipates that all remaining
liabilities will be settled by September 2, 1999.
Other expense in the second quarter of fiscal 1998 included $13.0 million of
costs associated with the Company's actions to realign its PC operations to
concentrate on its core markets and customers. Such actions include the
consolidation of the Company's domestic and international PC operations and the
reduction of 10% of its workforce, or approximately 450 employees, from
generally all areas of the Company. Costs associated with the realignment
include employee termination benefits of $6.7 million; $1.8 million for the
write-down of equipment and leasehold improvements; $1.0 million in estimated
costs for claims related to the realignment; $0.7 million in aggregate costs
associated with vacating a leased facility in Milpitas, California, two
international sales offices and an outlet store in Minneapolis, Minnesota; $0.6
million for the write-off of current technologies and $0.3 million for the
write-off other intangible assets (consisting of customer lists, trade names,
workforce and distribution and other contracts) associated with the Company's
NetFRAME enterprise server operations. In the fourth quarter of fiscal 1998, the
actions related to this realignment were substantially complete and the
estimated costs were reduced by $1.9 million.
7
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements--Continued
(Tabular amounts in thousands, except per share amounts)
During the second quarter of fiscal 1998 and the first six months of fiscal
1998, the Company wrote-off costs totaling $2.5 million and $5.2 million,
respectively, associated with abandoned internal use enterprise software
development projects. The software included an order entry system, an order
configuration tool and part of a material requirements planning package. The
software was abandoned after the Company concluded such software lacked the
functionality desired by the Company. The Company also wrote off various fixed
assets, with a remaining book value of $1.6 million, which no longer were to be
used in the Company's operations during the second quarter of fiscal 1998.
<TABLE>
<CAPTION>
9. Transactions with Affiliates
For the quarter ended For the six months ended
March 4, February 26, March 4, February 26,
1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,154 $ 10,373 $ 1,752 $ 17,838
Inventory purchases 11,303 6,305 22,432 23,619
Component recovery agreement 19,707 6,589 35,792 14,941
Administrative services and
other expenses 115 643 229 911
Property, plant and
equipment purchases 1,665 314 3,535 577
Property, plant and
equipment sales - 159 - 5,307
Construction management
services - 9 - 110
</TABLE>
The above transactions with affiliates include those of MCMS up to February
26, 1998. The Company recognizes costs incurred under the component recovery
agreement as a component of cost of goods sold in the consolidated statement of
operations.
10. Income Taxes
The effective tax rate of 38.5% for the second quarter and first six months
of fiscal 1998 principally reflected the federal statutory rate, net of the
effect of state taxes. The provision for income taxes for the second quarter and
first six months of fiscal 1998 reflects the Company's effective tax rate of
39.5%, principally the federal statutory rate, net of the effect of state taxes,
plus $4.1 million for the write-off of a deferred tax asset relating to the
Company's consolidation of its NetFRAME enterprise server operation.
11. Comprehensive Income
The Company adopted Statements of Financial Accounting Standard ("SFAS") No.
130, "Reporting Comprehensive Income" as of the first quarter of fiscal 1999.
The adoption of this statement had no impact on the Company's current or
previously reported net income or shareholders' equity.
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
March 4, February 26, March 4, February 26,
1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 4,169 24,765 $ 15,828 $ 25,830
Reclassification adjustment
for loss included in net
income - 2,514 - 2,514
Foreign currency translation 345 (537) (5) (1,783)
-------- -------- -------- -------
Comprehensive
income $ 4,514 $ 26,742 $ 15,823 $ 26,561
======== ======== ======== ========
</TABLE>
8
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements--Continued
(Tabular amounts in thousands, except per share amounts)
Accumulated other comprehensive income presented in the accompanying
consolidated balance sheets consists of the cumulative foreign currency
translation adjustment. The reclassification adjustment for loss included in net
income is related to the sale of MCMS common stock on February 26, 1998.
12. Earnings Per Share
Basic earnings per share is computed using the weighted average number of
common shares outstanding. Diluted earnings per share is computed using the
weighted average number of common shares outstanding and common equivalent
shares outstanding. Common equivalent shares result from the assumed exercise of
outstanding stock options. Diluted earnings per share excludes the effect of
antidilutive stock options.
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
March 4, February 26, March 4, February 26,
1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income available to
common shareholders $ 4,169 $ 24,765 $ 15,828 $ 25,830
======== ======== ======== ========
Common shares outstanding:
Weighted average shares
outstanding - basic 96,137 95,622 96,045 95,587
Effect of dilutive stock
options 943 113 1,129 211
-------- -------- -------- -------
Weighted average shares
outstanding - diluted 97,080 95,735 97,174 95,798
======== ======== ======== ========
Earnings per share:
Basic $ .04 $ .26 $ .16 $ .27
Diluted .04 .26 .16 .27
</TABLE>
13. Commitments
As of March 4, 1999, the Company had commitments of $9.3 million for
equipment purchases and $2.0 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.
14. 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's results of operations in the
fourth quarter of fiscal 1998 were favorable affected by a benefit to cost of
goods sold of $11.8 million related to revisions of estimates of contingencies
for product and process technology costs for two patent infringement matters
based on new information learned by management in the fourth quarter of 1998.
The Company is involved in litigation and administrative proceedings
primarily arising in the normal course of its business. In the opinion of
management, the Company's recovery, if any, or the Company's liability, if any,
under any litigation or administrative proceedings would not materially affect
its financial condition, results of operations or cash flows.
During the third quarter of fiscal 1997, the Company began to collect and
remit applicable sales or use taxes in nearly all states. In association
therewith, the Company is party to agreements with nearly all states which
generally limit the liability of the Company, if any, for non-remittance of
sales and use taxes prior to such agreements' effective dates. The Company has
9
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements--Continued
(Tabular amounts in thousands, except per share amounts)
previously accrued a liability for the estimated settlement costs of issues
related to sales and use taxes not covered by such agreements. Management
believes the resolution of any matters relating to the non-remittance of sales
and use taxes will not materially affect the Company's business, results of
operations or cashflows.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statements contained in this Form 10-Q that are not purely historical are
forward-looking statements and are being provided in reliance upon the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. All
forward-looking statements are made as of the date hereof and are based on
current management expectations and information available to the Company as of
such date. The Company assumes no obligation to update any forward-looking
statement. It is important to note that actual results could differ materially
from historical results or those contemplated in the forward-looking statements.
Forward-looking statements involve a number of risks and uncertainties, and
include trend information. Factors that could cause actual results to differ
materially include, but are not limited to, those identified in "Certain
Factors" and in other Company filings with the Securities and Exchange
Commission. All quarterly references are to the Company's fiscal periods ended
March 4, 1999, September 3, 1998 or February 26, 1998, unless otherwise
indicated. The fiscal year ended September 3, 1998 contained fifty-three weeks
compared to fifty-two weeks in fiscal year 1999. All tabular dollar amounts are
stated in thousands. Certain reclassifications have been made in the following
discussion and analysis to present results of operations on a consistent basis.
Overview
Micron Electronics, Inc. and its subsidiaries (hereinafter referred to
collectively as "Micron" or the "Company") is a leading provider of personal
computers sold through the direct channel. The Company develops, manufactures,
markets and supports electronic products for a broad range of computing and
digital applications. The Company custom builds a wide variety of notebook and
desktop PC systems and servers for its core customers in the consumer,
commercial and public sectors. The Company's SpecTek semiconductor memory
products operation recovers memory components for specific applications. The
Company is majority owned by Micron Technology, Inc. ("MTI").
Results of Operations
Net income for the second quarter of fiscal 1999 was $4.2 million, or $0.04
per diluted share, on net sales of $373.6 million compared to net income of
$24.8 million, or $0.26 per diluted share, on net sales of $494.8 million for
the second quarter of fiscal 1998. Net income for the first six months of fiscal
1998 was $15.8 million, or $0.16 per diluted share, on net sales of $777.1
million compared to net income of $25.8 million, or $0.27 per diluted share, on
net sales of $1,053.7 million for the first six months of fiscal 1998.
On February 26, 1998, the Company completed the sale of 90% of its interest
in MCMS, Inc. ("MCMS"), formerly Micron Custom Manufacturing Services, Inc. and
a wholly-owned subsidiary of the Company. The sale was structured as a
recapitalization of MCMS (the "Recapitalization"), whereby Cornerstone Equity
Investors IV, L.P. ("Cornerstone"), other investors and certain members of MCMS'
management, including Robert F. Subia, then a director of the Company, acquired
the 90% interest in MCMS. In exchange for the 90% interest in MCMS, the Company
received $249.2 million in cash. Results of operations in the second quarter of
fiscal 1998 include a pre-tax gain of $156.2 million ($94.5 million or $0.98 per
diluted share, after taxes) realized from the sale. The Company's financial
statements for the second quarter and first six months of fiscal 1998 include
the results of MCMS' operation for that period. Subsequent to the
Recapitalization of MCMS, the Company owned a 10% interest in MCMS, which is
accounted for by the Company on the cost method of accounting. Accordingly,
results of operations of MCMS subsequent to February 26, 1998 have been excluded
from the Company's results of operations.
Net Sales
<TABLE>
<CAPTION>
The following table summarizes the Company's net sales by product line:
Second Quarter Six Months
----------------------------------- -----------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PC
systems $ 323,471 86.6% $ 403,044 81.4% $ 687,630 88.5% $ 862,084 81.8%
Contract
manufacturing - - 71,522 14.5% - - 141,723 13.5%
SpecTek memory
products 50,129 13.4% 20,194 4.1% 89,467 11.5 49,843 4.7%
--------- ------ --------- ------ --------- ----- ---------- -----
Total net
sales $ 373,600 100.0% $ 494,760 100.0% $ 777,097 100.0% $1,053,650 100.0%
========== ====== ========== ====== ========== ====== ========== ======
</TABLE>
11
<PAGE>
Personal Computer Systems. Net sales of PC systems were lower in the second
quarter of fiscal 1999 compared to the second quarter of fiscal 1998 primarily
as a result of a 3% decrease in unit sales of PC systems and a 9% decrease in
average selling prices for the Company's PC systems. Net sales of PC systems
were lower in the first six months of fiscal 1999 compared to the first six
months of fiscal 1998 primarily as a result of a 14% decrease in average selling
prices, with unit sales of PC systems essentially flat. Net sales of PC systems
were 11% lower in the second quarter of fiscal 1999 compared to the first
quarter of fiscal 1999 primarily as a result of a 14% decrease in unit sales of
PC systems, which was partially offset by a 4% increase in average selling
prices during the quarter. The second quarter of fiscal 1999 was unfavorably
impacted by factors including: seasonal slowdown in the Company's strategic
government segment; continued industry pricing pressure in its consumerbusiness;
and purchase deferrals from the early promotion and late-quarter timing of
Intel's Pentium III processor introduction.
Unit sales of desktop systems were 84% and 83% of total unit sales of PC
systems during the second quarter and first six months of fiscal 1999,
respectively, compared to 83% and 85% in the corresponding periods in 1998.
Average selling prices for the Company's desktop products were 11% and 13% lower
in the second quarter and first six months of fiscal 1999, respectively,
compared to the corresponding periods in fiscal 1998 primarily as a result of
price competition and product discounting in the PC industry for desktop
products.
Unit sales of notebook systems were 14% and 15% of total unit sales of PC
systems during the second quarter and first six months of fiscal 1999,
respectively, compared to 15% and 14% in the corresponding periods in 1998.
Average selling prices for the Company's notebook products were 16% and 24%
lower in the second quarter and first six months of fiscal 1999, respectively,
compared to the corresponding periods in fiscal 1998 primarily as a result of
intense price competition in the PC industry for notebook products.
Customer segment revenue mix for the quarter was 55% consumer and small
business; 19% commercial business; 22% government sector and 4% international.
This is a significantly different mix than that experienced in the first quarter
of fiscal 1999, with second quarter of fiscal 1999 consumer and small business
representing a higher relative percentage of the sales mix and government
business representing a lower percentage of the mix. The Company experienced
sequential growth of greater than 20% in the mid-market relationship PC business
compared to the first quarter of fiscal 1999.
Sales to governmental entities, including prime contractors under certain
federal government procurement programs, were 22%, 34% and 13% of total net
sales of PC systems in the second quarter and first quarter of fiscal 1999 and
second quarter of fiscal 1998, respectively. The level of the Company's
governmental sales is dependent on the buying practices of governmental entities
and the Company's participation in government contracts in the future, of which
there can be no assurance. As a result, the level of such sales may vary from
quarter to quarter and a significant decline could have a material adverse
effect on the Company's business and results of operations and cash flows.
SpecTek Semiconductor Memory Products. Net sales of semiconductor memory
products were 148% higher in the second quarter of fiscal 1999 compared to the
second quarter of fiscal 1998 primarily due to a 185% increase in megabits of
memory shipped, partially offset by a 7% decline in average selling prices. The
increase in megabits of memory shipped was primarily due to the strengthening of
demand for substantially all memory products. The Company has experienced
significant volatility in prices and anticipates significant volatility in
prices for future sales of semiconductor memory products. The Company's SpecTek
semiconductor memory products results of operations are influenced by a number
of factors including pricing for, and availability of, nonstandard semiconductor
memory components. See "Certain Factors--SpecTek Semiconductor Memory Products
Operation."
The Company has a Component Recovery Agreement (the "Component Recovery
Agreement") with MTI, which expires on September 2, 1999. Additionally, the
Component Recovery Agreement may be terminated by MTI in the event that MTI's
ownership of the Company falls below 30%. Under the Component Recovery
Agreement, MTI is required to deliver to the Company all of the nonstandard
memory components produced at MTI's semiconductor manufacturing operations. The
Company's cost of such components generally is determined as one-half of the
operating income generated from the Company's SpecTek sales of semiconductor
memory products supplied by MTI.
MTI has indicated that it does not intend to renew the Component Recovery
Agreement according to its current arrangement after September 2, 1999. The
Company is negotiating with MTI regarding possible extension of the Component
Recovey Agreement under modified terms. To date, no agreement for extension of
the Component Recovery Agreemnt has been reached and such agreement, if any, may
contain terms and conditions less favorable to the Company than the current
arrangement. A substantial majority of the semiconductor components used in the
Company's SpecTek operation is obtained from MTI. In the second quarter and
first six months of fiscal 1999, the Company obtained 99% of its components from
MTI, compared to 74% and 67% in the second quarter and first six months of
fiscal 1998, respectively. Additionally there can be no assurance that the
12
<PAGE>
Company will be able to obtain components from semiconductor manufacturers
other than MTI in quantities sufficient to meet demand for the Company's SpecTek
products. Many semiconductor memory manufacturers are reluctant to sell
nonstandard memory components because such components could compete with their
full specification memory components for similar applications and some
manufacturers are concerned that subsequent testing performed by a recovery
operation could reveal proprietary data regarding manufacturing yields and
processes. Because of such factors, the termination of the Component Recovery
Agreement, or the renewal of the Component Recovery Agreement under less
favorable terms, would have a material adverse effect of the Company's business
and results of operations and cashflows.
<TABLE>
<CAPTION>
Gross Margin
Second Quarter Six Months
------------------------------ ------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
% of % of % of % of
Amount Sales Amount Sales Amount Sales Amount Sales
-------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PC systems $ 44,479 13.8% $ (6,262)(1.6%) $ 98,984 14.4% $ 52,616 6.1%
Contract
manufacturing - - 7,507 10.5% - - 17,598 12.4%
SpecTek memory
products 18,913 37.7% 3,213 15.9% 33,226 37.1% 11,458 23.0%
-------- -------- -------- --------
Total gross
margin $ 63,392 17.0% $ 4,458 0.9% $132,210 17.0% $ 81,672 7.8%
======== ======== ======== ========
</TABLE>
Personal Computer Systems. Gross margin from the Company's PC operations was
13.8% in the second quarter of fiscal 1999 compared to 15.0% in the first
quarter of fiscal 1999 and (1.6%) in the second quarter of the fiscal 1998. PC
gross margins in the second quarter of fiscal 1999 were unfavorably impacted by
increased pricing pressure, seasonally higher returns in the consumer segment,
the business mix impact of relatively higher consumer and seasonally lower
government sales.
Gross margin in the second quarter of fiscal 1998 was negatively impacted by
a decline in average selling prices of the Company's notebook products. The
Company's purchases of notebook products from third party suppliers have
required volume and price commitments with long lead times. During the first and
second quarters of fiscal 1998, the Company entered into arrangements to
purchase notebook products at committed prices. As a result of the decline in
industry-wide pricing for notebook products, the Company's selling prices for
notebook products in the second quarter of fiscal 1998 declined to a level
significantly below the Company's cost. As a result, the Company realized
significant losses on notebook products sold during the second quarter of fiscal
1998 and wrote down the value of inventories by $25.3 million to their current
market value. Gross margin in the first six months of fiscal 1998 was adversely
affected by losses of approximately $6.4 million realized from disposition of
excess PC component inventories.
The Company expects to continue experiencing significant pressure on its
gross margin on sales of its PC systems as a result of intense competition in
the PC industry and consumer expectations of more powerful PC systems at lower
prices. In addition, the Company's gross margin percentage will continue to
depend in large part on its ability to effectively forecast demand and manage
its inventories of PC components. See "Certain Factors--Personal Computer
Systems-- Competition" and "Certain Factors--Personal Computer
Systems--Inventory Management."
SpecTek Semiconductor Memory Products. The gross margin realized by the
Company's SpecTek semiconductor memory products operation was higher in the
second quarter and first six months of fiscal 1999 compared to the second
quarter and first six months of fiscal 1998 due to lower costs of components and
strengthening of demand. The Company has experienced significant volatility in
selling prices and expects average selling prices for its SpecTek semiconductor
memory products to continue to exhibit significant volatility. As a result, the
gross margin for the Company's SpecTek semiconductor memory products operation
could decline and adversely affect the Company's business and results of
operations and cash flows. See "Certain Factors--SpecTek Semiconductor Memory
Products Operation--Pricing of Semiconductor Memory Products."
13
<PAGE>
<TABLE>
<CAPTION>
Selling, General and Administrative
Second Quarter Six Months
------------------------ -------------------------
1999 Change 1998 1999 Change 1998
------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative $56,150 (38.9%) $91,938 $108,546 (33.9%) $164,196
as a % of net sales 15.0% 18.6% 14.0% 15.6%
</TABLE>
Selling, general and administrative expenses for the second quarter of
fiscal 1999 were $56.2 million versus $52.4 million in the first quarter of
fiscal 1999 and $91.9 million in the second quarter of fiscal 1998. The increase
in the second quarter of fiscal 1999 from the first quarter of fiscal 1999 is
primarily due to additional labor costs associated with the expanded field sales
personnel in operation for the entire quarter, seasonally higher service and
support expenses associated with the customer business and higher broadcast and
print advertising expenses due to supplemental advertising to counteract the
anticipated impact from the early promotion of the Intel Pentium III processor.
The Company expects that selling, general and administrative expenses will
remain at or slightly below current levels in the coming quarter, which will
include an estimated savings of approximately $1.5 million per quarter resulting
from the consolidation of the Company's Japan operations as discussed below.
Selling, general and administrative expenses during the first six months of
fiscal 1998 compared to the corresponding periods in 1999 were significantly
higher due to higher levels of personnel, provision for doubtful accounts,
advertising and other costs associated with the Company's PC operation in 1998.
The six months of fiscal 1998 also includes those costs related to MCMS, which
was sold on February 26, 1998.
<TABLE>
<CAPTION>
Other Expense, net
Second Quarter Six Months
---------------------- -----------------------
1999 Change 1998 1999 Change 1998
---------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Other expense, net 3,865 (79.9%) 19,196 $3,906 (81.4%) $21,003
</TABLE>
Other expense in the second quarter of fiscal 1999 included $3.9 million
associated with the Company's closure and consolidation of its Micron
Electronics Japan operation into its Nampa operations. The charge includes those
costs associated with employee payroll and severance of $1.5 million for
approximately 45 employees, fixed asset write-downs of $0.7 million, lease
obligations of $0.6 million, pre-committed advertising of $0.2 million,
incremental future service costs of $0.2 million and $0.7 million for other
closure related costs. The Company has a remaining liability of $1.6 million for
employee severance costs, future lease obligation costs, and other related
closure costs, which have been included in accounts payable and accrued
expenses, as of March 4, 1999. The Company anticipates that all remaining
liabilities will be settled by September 2, 1999.
Other expense, net in the second quarter of fiscal 1998 included $13.0
million of costs associated with the Company's actions to realign its PC
operations to concentrate on its core markets and customers. Such actions
include the consolidation of the Company's domestic and international PC
operations and the reduction of 10% of its workforce, or approximately 450
employees, from generally all areas of the Company. The realignment costs were
composed of $6.7 million associated with employee termination benefits, $1.8
million for the write-down of equipment and leasehold improvements, $1.0 million
in estimated costs for claims related to the realignment, $0.7 million in
aggregate costs associated with vacating a leased facility in Milpitas,
California, two international sales offices and an outlet store in Minneapolis,
Minnesota, $0.6 million for the write-off of current technologies and $0.3
million for the write-off other intangible assets (consisting of customer lists,
trade names, workforce and distribution and other contracts) associated with the
Company's NetFRAME enterprise servers. In the fourth quarter of fiscal 1998, the
actions related to this realignment were substantially complete and the
estimated costs were reduced by $1.9 million.
During the second quarter of fiscal 1998 and the first six months of fiscal
1998, the Company wrote-off costs totaling $2.5 million and $5.2 million,
respectively, associated with abandoned internal use enterprise software
development projects. The software included an on-line order entry system, an
on-line order configuration tool and part of a material requirements planning
package. The software was abandoned after the Company concluded such software
lacked the functionality desired by the Company. The Company also wrote off
various fixed assets, with a remaining book value of $1.6 million, which no
longer were to be used in the Company's operations during the second quarter of
fiscal 1998.
14
<PAGE>
<TABLE>
<CAPTION>
Research and Development
Second Quarter Six Months
----------------------- -----------------------
1999 Change 1998 1999 Change 1998
----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Research and development $1,128 (70.0%) $3,759 $2,579 (64.9%) $7,341
as a % of net sales 0.3% 0.8% 0.3% 0.7%
</TABLE>
Research and development expenses were higher in the second quarter and the
first six months of fiscal 1998 compared to the second quarter and first six
months of fiscal 1999 primarily as a result of the development activities
associated with the Company's NetFRAME enterprise server operation. The Company
expects that research and development expense will continue to decrease as the
Company focuses on current product development and enhancement.
<TABLE>
<CAPTION>
Income Tax Provision
Second Quarter Six Months
----------------------- -----------------------
1999 Change 1998 1999 Change 1998
----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision $2,611 (88.7%) $23,011 $9,910 (58.2%) $23,707
</TABLE>
The effective tax rate of 38.5% in the first six months of fiscal 1999
principally reflected the federal statutory rate, net effect of state taxes. The
provision for income taxes for the second quarter and first six months of fiscal
1998 reflects the Company's effective tax rate of 39.5%, principally the federal
statutory rate and the net effect of state taxes, plus $4.1 million for the
write-off of a deferred tax asset relating to the Company's consolidation of its
NetFRAME enterprise server operation.
Acquisition and Consolidation of NetFRAME
In the fourth quarter of fiscal 1997, the Company acquired all of the
outstanding common stock of NetFRAME Systems Incorporated ("NetFRAME") for $17.4
million in cash. The acquisition was accounted for as a purchase, and the
purchase price was allocated to the net assets acquired, including identified
intangible assets and in-process research and development, based on their fair
values.
The fair value of NetFRAME's technology was determined by an independent
appraiser through an analysis using a risk adjusted cash flow model. Estimated
future cash flows derived from the technology or products incorporating the
technology were discounted taking into account risks related to existing and
future markets and assessment of the life expectancy of such technology.
Technology was segregated into that which was determined to be completed (those
currently technologically feasible but that may require adjustments or
relatively minor enhancements) and in process (technologies that require
additional research and development efforts to reach technological feasibility).
The analysis resulted in the allocation of $0.8 million of purchase price to
completed technology, which was capitalized and amortized using the
straight-line method over the estimated useful life of 30 months. In-process
research and development was valued by an independent appraiser using the same
methodology as completed technology. Estimated future cash flows associated with
in-process research and development were discounted considering risks and
uncertainties related to the viability, work required to establish feasibility,
and to the completion of products ultimately to be marketed by the Company. The
analysis resulted in the allocation of $3.9 million of purchase price to
in-process research and development. In management's opinion, the acquired
in-process research and development had not yet reached a stage where
feasibility, delivery or product features were certain at July 18, 1997 and had
no alternative future use. As a result, acquired in-process research and
development was charged to expense during the fourth quarter of fiscal 1997.
Additionally, $0.6 million of purchase price was allocated to other identified
intangible assets, which were capitalized and amortized using the straight-line
method over the estimated useful lives of 30 months.
In the second quarter of 1998, the Company wrote-off the remaining book value
of capitalized current technologies and other intangible assets as a result of
the consolidation of the Company's NetFRAME enterprise server operation with its
other PC operations and the discontinuance of further development of future
enterprise server technologies.
15
<PAGE>
Liquidity and Capital Resources
As of March 4, 1999, the Company had cash, cash equivalents and liquid
investments of $369.0 million, representing an increase of $11.3 million
compared to September 3, 1998. Principal sources of liquidity in the first six
months of fiscal 1999 were cash flows from operations of $46.7 million and
issuance of common stock of $4.0 million pursuant to the exercise of options
under the Company's 1995 Stock Option Plan and Employee Stock Purchase Plan.
Principal uses of cash in the first six months of fiscal 1999 were property,
plant and equipment expenditures of $25.3 million primarily for expansion and
capacity improvements of the Company's manufacturing operations and repayment of
debt of $14.4 million.
The Company has an unsecured credit agreement, expiring June 2001, with a
group of financial institutions providing for borrowings totaling $100.0
million. As of March 4, 1999, the Company was eligible to borrow the full amount
under the agreement, but had no borrowings outstanding. Under the agreement, the
Company is subject to certain financial and other covenants including certain
financial ratios and limitations on the amount of dividends declared or paid by
the Company.
The Company's wholly owned subsidiary, Micron Electronics Japan K.K., had an
unsecured revolving credit facility with a financial institution. The
outstanding borrowings under this facility were fully repaid during the second
fiscal quarter of 1999 and the revolving credit facility was cancelled.
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.
At March 4, 1999, the Company had commitments of $11.3 million for capital
expenditures for expansion and upgrade of facilities and equipment. The Company
anticipates making capital expenditures in fiscal 1999 in excess of $50 million.
The Company expects that its future working capital requirements will
continue to increase. The Company believes that currently available cash and
cash equivalents, liquid investments, cash flows from operations, the Company's
current credit facilities and equipment financings will be sufficient to fund
its operations for the next twelve months.
16
<PAGE>
Certain Factors
In addition to factors discussed elsewhere in this Form 10-Q and in other
Company filings with the Securities and Exchange Commission, 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 contemplated in any forward-looking statements made by or on
behalf of the Company.
Personal Computer Systems
Competition
The PC industry is highly competitive and has been characterized by intense
pricing pressure, generally low gross margin percentages, rapid technological
advances in hardware and software, frequent introduction of new products, and
rapidly declining component costs. Competition in the PC industry is based
primarily upon brand name recognition, performance, price, reliability and
service and support. The Company's sales of PC systems have historically
benefited from increased name recognition and market acceptance of the Company's
PC systems, primarily resulting from the receipt by the Company of awards from
trade publications recognizing the price and performance characteristics of
Micron brand PC systems and the Company's service and support functions. As a
result of PC industry standards, the Company and its competitors use many of the
same components, typically from the same set of suppliers, which limits the
Company's ability to technologically and functionally differentiate its
products. Many of the Company's PC competitors have greater brand name
recognition and market share, offer broader product lines, have substantially
greater financial, technical, marketing and other resources than the Company. In
addition, the Company's competitors may benefit from component volume purchasing
and product and process technology license arrangements that are more favorable
in terms of pricing and availability than the Company's arrangements. In
addition, the Company may be at a relative cost disadvantage to certain of its
competitors as a result of the Company's U.S. dollar denominated purchases of PC
components during a period of relative weakening of the U.S. dollar. The failure
of the Company to compete effectively in the marketplace could have an adverse
effect on the Company's business and results of operations and cash flows.
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, NEC 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 and are now beginning to sell their products
through the direct channel. In addition, the Company expects to face increased
competition in the U.S. direct sales market from foreign PC suppliers and from
foreign and domestic suppliers of PC products that decide to implement, or
devote additional resources to, a direct sales strategy. In order to gain an
increased share of the United States PC direct sales market, these competitors
may effect a pricing strategy that is more aggressive than the current pricing
in the direct sales market or may have pricing strategies influenced by relative
fluctuations in the U.S. dollar compared to other currencies.
The Company believes that the rate of growth in worldwide sales of PC
systems, particularly in the United States, where the Company sells a
substantial majority of its PC systems, has declined and may remain below the
growth rates experienced in recent years. Any general decline in demand or
decline in the rate of increase in demand for PC systems could increase price
competition and could have a material adverse effect on the Company's business
and results of operations and cash flows.
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 accurately forecast demand
for its PC products and effectively manage its PC inventories. 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, excess PC inventories and inventory obsolescence resulting from, among
other things, the Company's inaccuracy in forecasting demand for its PC
products, the typically longer lead times associated with notebook product
supply, 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 forecast demand for its PC products and
obtain adequate, but not excessive, supplies of components to meet actual
demand. The failure of the Company to manage its inventories effectively could
result in excess PC inventories, inventory obsolescence, 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 and cash
flows.
17
<PAGE>
Dependence on Key Sources of Supply
The Company focuses on providing PC systems that feature components and
software incorporating the latest technological developments in the PC industry,
which components are periodically in short supply and are available from sole or
a limited number of suppliers. As a result, the Company has experienced in the
past, and expects to experience in the future, shortages in the components used
in its PC systems. The microprocessors used in the Company's PC systems are
manufactured exclusively by Intel and, from time to time, the Company has been
unable to obtain sufficient quantities of certain Intel microprocessors. In
addition, a significant portion of the RAM components used in the Company's PC
systems are supplied by MTI, and the Company generally relies on MTI to supply
the latest memory densities and configurations available. The Company relies, to
a certain extent, upon its suppliers' abilities to enhance existing products in
a timely and cost-effective manner, to develop new products to meet changing
customer needs and to respond to emerging standards and other technological
developments in the PC industry. The Company's reliance on a limited number of
suppliers and on a strategy of incorporating the latest technological
developments into its PC systems involves several risks, including the
possibility of shortages and/or increases in costs of components and software,
and risk of reduced control over delivery schedules, which could have a material
adverse effect on the Company's business and results of operations and cash
flows.
The Company's notebook products 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.
State Taxation
During the third quarter of fiscal 1997, the Company began to collect and
remit applicable sales or use taxes in nearly all states. In association
therewith, the Company is party to agreements with nearly all states which
generally limit the liability of the Company, if any, for non-remittance of
sales and use taxes prior to such agreements' effective dates. The Company has
previously accrued a liability for the estimated settlement costs of issues
related to sales and use taxes not covered by such agreements. Management
believes the resolution of any matters relating to the non-remittance of sales
and use taxes will not materially affect the Company's business, results of
operations or cashflows.
SpecTek Semiconductor Memory Products Operation
Expiration of Component Recovery Agreement with MTI
The Company has a Component Recovery Agreement (the "Component Recovery
Agreement") with MTI, which expires on September 2, 1999. Additionally, the
Component Recovery Agreement may be terminated by MTI in the event that MTI's
ownership of the Company falls below 30%. Under the Component Recovery
Agreement, MTI is required to deliver to the Company all of the nonstandard
memory components produced at MTI's semiconductor manufacturing operations. The
Company's cost of such components generally is determined as one-half of the
operating income generated from the Company's SpecTek sales of semiconductor
memory products supplied by MTI.
MTI has indicated that it does not intend to renew the Component Recovery
Agreement according to its current arrangement after September 2, 1999. The
Company is negotiating with MTI regarding possible extension of the Component
Recovey Agreement under modified terms. To date, no agreement for extension of
the Component Recovery Agreement has been reached and such agreement, if any,
may contain terms and conditions less favorable to the Company than the current
arrangement. A substantial majority of the semiconductor components used in the
Company's SpecTek operation is obtained from MTI. In the second quarter and
first six months of fiscal 1999, the Company obtained 99% of its components from
MTI, compared to 74% and 67% in the second quarter and first six months of
fiscal 1998, respectively. Additionally, there can be no assurance that the
Company will be able to obtain components from semiconductor manufacturers other
than MTI in quantities sufficient to meet demand for the Company's SpecTek
products. Many semiconductor memory manufacturers are reluctant to sell
nonstandard memory components because such components could compete with their
full specification memory components for similar applications and some
manufacturers are concerned that subsequent testing performed by a recovery
operation could reveal proprietary data regarding manufacturing yields and
processes. Because of such factors, the termination of the Component Recovery
Agreement, or the renewal of the Component Recovery Agreement under less
favorable terms, would have a material adverse effect of the Company's business
and results of operations and cashflows.
18
<PAGE>
Pricing of Semiconductor Memory Products
Pricing for the Company's SpecTek semiconductor memory products fluctuates,
to a large degree, based on industry-wide pricing for semiconductor memory
products. Historically, the Company has experienced significant declines in the
average selling prices of its SpecTek semiconductor memory products as
industry-wide average selling prices for full specification semiconductor memory
products experienced sharp declines. The Company believes that such declines 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
changes in relative weakness or strength of certain currencies, and the Company
is unable to predict the impact of semiconductor memory product market dynamics
in future periods. Due to increased market risk associated with holding
purchased memory components in inventory, the Company has experienced in the
past, and may experience in the future, losses from write-downs of memory
component inventories in periods of declining prices. Further declines in
pricing for semiconductor memory products would likely result in declines in
average selling prices of the Company's SpecTek semiconductor memory products,
which could have a material adverse effect on the Company's business and results
of operations and cash flows.
Memory Product Transition
The semiconductor memory industry is characterized by, among other things,
rapid technological change, frequent product introductions and enhancements,
difficulties experienced in transitioning to new products, relatively short
product life cycles and volatile market conditions. During periods of product
transition, the Company's SpecTek semiconductor memory products operation has
experienced in the past, and may experience in the future, significant increases
in component test times and corresponding decreases in throughput. Future gross
margins could be adversely affected if the Company is unable to effectively
transition to new products in a timely fashion.
Year 2000
The Year 2000 issue has arisen because many computer hardware and software
systems only use the last two digits in reference to yearly periods. Therefore,
after December 31, 1999, some hardware and software systems may erroneously
read, or attempt to read, "00" as 1900, rather than 2000. Many computer
applications could fail or return erroneous or unpredictable results if not
timely corrected.
State of Readiness
In 1998, the Company established a Year 2000 project team with
representatives from generally all areas of the Company. The project team is
focusing principally on the following four areas: internal information
technology ("IT") systems; internal non-IT systems including embedded technology
associated with its manufacturing and physical facilities; third parties with
whom the Company has significant business relationships; and the Company's
products.
Generally, the Company's Year 2000 compliance program with respect to its
internal IT and non-IT systems consists of the following phases: (a) inventory -
the identification of systems which may be impacted; (b) assessment - the review
of identified systems for Year 2000 compliance; (c) remediation - the
implementation of corrective action and, if need be, the execution of
contingency plans; and (d) quality assurance testing - the verification of Year
2000 compliance. With respect to IT systems, the Company believes, as of the end
of the second quarter of fiscal 1999, that the inventory and assessment phases
are essentially complete and the remediation phase is approximately two-thirds
complete. With respect to non-IT systems, the inventory and assessment phases
are approximately 95% complete and the remediation phase is approximately 90%
complete. The Company estimates August 31, 1999 for completion of remediation of
its mission critical IT and non-IT systems, with the remainder of calendar 1999
to be used for resolution of any unforeseen difficulties and quality assurance
testing.
The Company has developed a process with respect to its assessment of Year
2000 readiness of third parties with whom the Company has significant business
relationships. The Company is focusing its efforts on the business relationships
most critical to its manufacturing operations, customer service and other core
business processes, including key suppliers, vendors, financial institutions and
utility and transportation providers. The process generally involves the
following phases: (a) initial supplier survey; (b) risk assessment; (c)
follow-up supplier review where necessary; and (d) contingency planning where
relevant. As of the end of the second quarter of fiscal 1999, the Company had
received formal responses from most of its critical third party providers. Most
of such providers indicated that they expect to address Year 2000 issues in a
timely manner. Risk assessments with respect to third party providers were
approximately 83 percent complete as of the end of the second quarter of fiscal
1999, and it is anticipated that risk assessment with respect to all mission
critical third party providers will be completed within the third quarter of
fiscal 1999. Based on the results of the risk assessments, follow-up review of
19
<PAGE>
the third party providers, including possible on-site reviews, may be performed.
Third party suppliers that fail to meet the Company's requirements with respect
to Year 2000 issues may be replaced with other suppliers.
All Micron-branded hardware products support the Year 2000 date and
calculation. All Micron-branded hardware products shipped since August 26, 1996
have BIOS clocks that will automatically roll over to "2000" after December 31,
1999. Additionally, the Company has provided software utilities to cover earlier
Micron-branded hardware products to have BIOS clock that will recognize the
century change. All NetFRAME-branded server products shipped since March, 1995
are either NSTL certified as Year 2000 compliant or self-certified as having
Real Time Clock chips and BIOS that will process date data correctly on and
after January 1, 2000. The Company has a Web-site dedicated to communicating
Year 2000 issues to its customers.
Cost to Address Year 2000 Issues
The estimated costs of the Company's Year 2000 readiness programs with
respect to internal IT and non-IT systems and third party providers are not
expected to be material to the Company's financial position or results or
operations. As of the end of the second quarter of fiscal 1999, the Company had
incurred aggregate incremental costs of $1.8 million related to such readiness
programs. The total additional cost to complete such programs is estimated at $1
million to $2 million. These estimated costs do not include costs related to the
potential failure of key suppliers to timely address Year 2000 issues, potential
costs related to any customer or other product liability claims or the cost of
internal software and hardware replaced in the ordinary course of business. The
incremental and estimated costs include allocated costs of the Company's
information technology organization incurred in connection with Year 2000
compliance projects. All estimates are based on currently known circumstances
and various assumptions regarding future events, and actual costs could differ
materially from the estimates.
The Company believes that it has no obligation for any costs incurred by its
customers to address Year 2000 issues. However, the Company recognizes the
potential for claims against it and other manufacturers arising from products
which may not support the century change, and there can be no assurance that
such claims would not have a material adverse effect on the Company's business
or results of operations, financial condition or cash flows. On October 26,
1998, the Company was sued in state court in Canyon County, Idaho, by Hannah
Films, Inc., on behalf of itself and on behalf of an as-of-yet unidentified and
uncertified class of plaintiffs alleging fraud, breach of implied warranty of
merchantability, violation of the Magnuson-Moss Consumer Protection Act, and
violation of the Idaho Consumer Protection Act arising out of the Year 2000
status of a personal computer sold by the Company to Hannah Films, Inc. in
October 1995. The Company is defending the matter. While there can be no
assurance as to the ultimate disposition of the case, the Company does not
currently believe that the resolution of this matter will have a material
adverse effect on the Company's business or results of operations, financial
condition or cash flows.
Year 2000 Contingency Plans
The Company's contingency plan generally contimplates replacement or
alternative sources of those goods and services necessary to the Company's
manufacturing and business operations. Should those necessary goods and services
become unavailable due to supplier's failure to achieve Year 2000 readiness, the
Company will review, and where appropriate, modify existing contingency plans to
address specific Year 2000 issues as they arise. During the third quarter of
fiscal 1999, the Company's Year 2000 project team is expected to advise the
Company's management of critical third-party providers which, based on
information received, do not offer full assurance of Year 2000 compliance. The
Company expects that development of contingency plans will continue through
calendar 1999.
The discussion above regarding Year 2000 projected completion dates, costs,
risks and other forward-looking statements is based on currently available
information, and is subject to change. Based on currently available information,
the Company does not believe that the most reasonably likely worst case
scenarios with respect to Year 2000 issues are likely to have a material adverse
effect on the Company's business or results of operations, financial condition
or cash flows. However, there can be no assurance that Year 2000 remediation
efforts by the Company or third parties will be completed in a timely and proper
manner, and the failure to do so could have a material adverse effect on the
Company. Additionally, an increase in customer claims with respect to the
Company's products could have a material adverse effect on the Company's
business and results of operations.
General
Fluctuations in Operating Results and Stock Price
The Company's past operating results have been, and its future operating
results may be, subject to seasonality and other fluctuations, on a quarterly
and an annual basis, as a result of a wide variety of factors, including, but
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not limited to, industry competition, the Company's ability to accurately
forecast demand and selling prices for its PC products, fluctuating market
pricing for PCs and semiconductor memory products, seasonal government
purchasing cycles, inventory obsolescence, the Company's ability to effectively
manage inventory levels, changes in product mix, manufacturing and production
constraints, fluctuating component costs, the effects of product reviews and
industry awards, availability and pricing of the memory components used by the
Company's SpecTek semiconductor memory products operation, critical component
availability, seasonal cycles common in the PC industry, the timing of new
product introductions by the Company and its competitors and global market and
economic conditions. As a result, the operating results for any particular
period are not necessarily indicative of the results that may occur in any
future period. The trading price of the common stock of the Company is subject
to significant fluctuations due to general market conditions and financial
performance of the Company, MTI and other companies in the PC industry,
announcements of technological innovations, new commercial products or new
strategies by competitors, component availability and pricing, and other
factors.
Management
The Company has experienced increased complexity of its operations, in
operating and financial information systems and in its scope of operations. This
increased complexity 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 and
other resources and systems. 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 recently completed a realignment of its operation along its key customer
classes. There can be no assurance that the Company's management resources,
operating and financial information systems and other resources, and systems
will be adequate to support the Company's existing or future operations, the
failure of which could have a material adverse effect on the Company's business
and results of operations and cash flows.
Intellectual Property Matters
It is common in the electronics industry for patent, trademark and other
intellectual property rights claims to be asserted against companies, including
component suppliers and PC manufacturers. Periodically, the Company is made
aware that technology used by the Company may infringe on intellectual property
rights held by others. The Company evaluates all such claims and, if necessary
and appropriate, seeks to obtain licenses for the continued use of such
technology. The Company has accrued a liability and charged operations for the
estimated costs of settlement or adjudication of asserted and unasserted claims
for alleged infringement prior to the balance sheet date. The Company would be
placed at a competitive disadvantage if it were unable to obtain such licenses
upon terms at least as favorable as those experienced by the Company's
competitors. The Company has entered into several intellectual property license
agreements, and as a majority-owned subsidiary of MTI, is licensed under certain
license agreements between MTI and third parties. The Company's rights under
license agreements between MTI and third parties may terminate in the event that
the Company is no longer a majority-owned subsidiary of MTI. Intellectual
property agreements and license agreements generally require one-time or
periodic royalty payments and are subject to expiration at various times. If the
Company or its suppliers are unable to obtain licenses necessary to use
intellectual property in their products or processes, the Company may be forced
to market products without certain technological features or software,
discontinue sales of certain of its products and/or defend legal actions taken
against it relating to allegedly protected technology. The inability of the
Company to obtain licenses necessary to use certain technology, or an inability
to obtain such licenses on competitive terms, or any litigation determining that
the Company, in the manufacture or sale of its products, has infringed on the
intellectual property rights of third parties, could have a material adverse
effect on the Company's business and results of operations and cash flows.
Dependence on Key Personnel
The future success of the Company will depend, in part, on its ability to
attract and retain key management, technical and sales and marketing personnel.
The Company attempts to enhance its management and technical expertise by
recruiting qualified individuals who possess desired skills 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, and information technology,
engineering and technical support resources, could have a material adverse
effect on the Company's business and results of operations. 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 and cash flows.
MTI Ownership of Common Stock of the Company
As of March 4, 1999, MTI owned 63% of the Company's outstanding common stock.
In addition, three of the four 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
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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 or modification of certain of the
Company's arrangements with MTI 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 arrangements may be terminated by MTI, which could have a material
adverse effect on the Company's business and results of operations and
cashflows. See "Intellectual Property Matters" and "SpecTek Semiconductor Memory
Products Operation--Dependence on Component Recovery Agreement with MTI."
The level of MTI's ownership of the common stock of the Company may limit the
Company's ability to complete future equity financings. In addition, the sale on
the open market of substantial amounts of shares of common stock of the Company
currently held by MTI could adversely affect the prevailing market price of
common stock of the Company. MTI's ability to sell shares of common stock of the
Company, unless registered under the Securities Act of 1933, as amended (the
"Securities Act"), is subject to volume and other restrictions pursuant to Rule
145 promulgated under the Securities Act.
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 registration statement also
allows for an additional $250.0 million of outstanding common stock of the
Company to be sold by certain existing shareholders, consisting of MTI and
certain management employees, of which $212.9 million has been sold.
Government Regulation
The Company is subject to a variety of federal, state, local and foreign laws
and regulations, including, but not limited to, Federal Communications
Commission regulations, governmental procurement regulations, import and export
regulations, Federal Trade Commission regulations, securities regulations,
environmental regulations, antitrust regulations, and labor regulations. Any
failure by the Company to comply with such regulations in the past, present or
future could subject the Company to liabilities and/or the suspension of its
operations, which could have a material adverse effect on the Company's business
and results of operations and cash flows.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Substantially all of the Company's liquid investments and a majority of its
debt are at fixed interest rates, and therefore the fair value of these
instruments is affected by changes in market interest rates. However, as of
March 4, 1999, approximately 80% of the Company's liquid investments mature
within three months and the remainder within one year. As of March 4, 1999, the
Company believes the reported amounts of liquid investments and debt to be
reasonable approximations of their fair values and has the ability and intent to
hold these instruments to maturity. As result, the Company believes that the
market risk arising from its holdings of financial instruments is minimal.
The Company uses the U.S. Dollar as its functional currency, except for
its operations in Japan, which are currently being consolidated into its Nampa,
Idaho operations. The assets and liabilities of the Company's Japanese
operations are translated into U.S. Dollars at exchange rates in effect at the
balance sheet date. Income and expense items are translated at the average
exchange rates prevailing during the period. Aggregate transaction gains and
losses included in the determination of net income have not been material.
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PART II. OTHER INFORMATION
Item 5. Other Information
On April 1, 1999, Jill D. Smith became Executive Vice President, Chief
Operating Officer of the Company. On April 1, 1999, Robert Lee was elected to
the Company's Board of Directors, replacing T. Erik Oaas, who had previously
resigned.
Item 6. Exhibits and Reports on Form 8-K
(a) The following are filed as a part of this report:
Exhibit Description
------- ------------------------------------------------------------------
10.62 1995 Stock Option Plan, as amended through December 1, 1998
27 Financial Data Schedule
(b) Reports on Form 8-K:
On December 21, 1998, the Company filed a report on Form 8-K announcing the
retirement of T. Erik Oaas, Executive Vice President Finance, Chief Financial
Officer and his resignation of his position on the Board of Directors of the
Company.
NetFRAME and SpecTek are registered trademarks of the Company. All other
product names appearing herein are for identification purposes only and may
be trademarks of their respective companies.
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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: April 16, 1999
/s/ James R. Stewart
------------------------------------------------
James R. Stewart, Senior Vice President Finance
Chief Financial Officer (Principal Financial and
Accounting Officer)
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MICRON ELECTRONICS, INC.
1995 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are:
o to attract, motivate and retain experienced and qualified personnel for
positions of substantial responsibility,
o to provide additional incentive to Employees and Consultants, and
o to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory
Stock Options, as determined by the Administrator at the time of grant.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to the
administration of stock option plans under Minnesota corporate and securities
laws and the Code.
(c) "Board" means the Board of Directors of the Company.
(d) "Change in Control" means (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 twenty percent (20%) of the combined voting power of
all classes of voting securities of Micron Electronics, Inc.; or (ii) 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.
.....(e) "Code" means the Internal Revenue Code of 1986, as amended.
.....(f) "Committee" means a Committee appointed by the Board in
accordance with Section 4 of the Plan.
.....(g) "Common Stock" means the Common Stock of the Company.
.....(h) "Company" means Micron Electronics, Inc., a Minnesota
corporation.
.....(i) "Consultant" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services and who is compensated
for such services. The term "Consultant" shall not include Directors who are
paid only a director's fee by the Company or who are not compensated by the
Company for their services as Directors.
.....(j) "Continuous Status as an Employee or Consultant" means that the
employment or consulting relationship with the Company, any Parent, or
Subsidiary, is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered interrupted in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other personal leave approved by an authorized representative of
the Company. For purposes of Incentive Stock Options, no such leave may exceed
90 days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option.
.....(k) "Director" means a member of the Board.
.....(l) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
.....(m) "Employee" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. Neither
service as a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
.....(n) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
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.....(o) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
..... (i) If the Common Stock is listed on any established stock exchange
or a national market system including without limitation the Nasdaq National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, the Fair Market Value of a Share of Common Stock
shall be the average closing sales price for such stock (or the closing bid, if
no sales were reported) as quoted on such exchange or system (or the exchange
with the greatest volume of trading in the Common Stock) for the five (5)
business days preceding the day of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
..... (ii) If the Common Stock is quoted on the over-the-counter market or
is regularly quoted by a recognized securities dealer, but selling prices are
not reported, the Fair Market Value of a Share of Common Stock shall be the mean
between the high bid and low asked prices for the Common Stock on the last
market trading day prior to the day of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable;
..... (iii)In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
.....(p) "Incentive Stock Option" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
.....(q) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
.....(r) "Notice of Grant" means a written notice evidencing certain terms
and conditions of an individual Option grant. The Notice of Grant is subject to
the terms and conditions of the Option Agreement.
.....(s) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
.....(t) "Option" means a stock option granted pursuant to the Plan.
.....(u) "Option Agreement" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the Plan.
.....(v) "Option Exchange Program" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
.....(w) "Optioned Stock" means the Common Stock subject to an Option.
.....(x) "Optionee" means an Employee, Consultant or Outside Director who
holds an outstanding Option.
.....(y) "Outside Director" means a member of the Board who is not an
Employee of the Company, Micron Technology, Inc., or any Subsidiary of the
Company or Micron Technology, Inc.
(z) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
.....(aa) "Plan" means this 1995 Stock Option Plan.
.....(bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
.....(cc) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
.....(dd) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code. In the case of an
Option that is not intended to qualify as an Incentive Stock Option, the term
"Subsidiary" shall also include any other entity in which the Company, or any
Parent or Subsidiary of the Company, has a significant ownership interest.
3....Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 10,000,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated); provided,
however, that Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
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<PAGE>
4....Administration of the Plan.
.....(a) Procedure.
..... (i) Multiple Administrative Bodies. If permitted by Rule
16b-3, the Plan may be administered by different bodies with respect to (i)
Directors, (ii) Officers who are not Directors, and (iii) Employees who are
neither Directors nor Officers.
..... (ii) Administration With Respect to Employees Subject to Section
16(b). With respect to Option grants made to Employees who are also Officers or
Directors subject to Section 16(b) of the Exchange Act, the Plan shall be
administered by (A) the Board, if the Board may administer the Plan in
compliance with the rules governing a plan intended to qualify as a
discretionary plan under Rule 16b-3, or (B) a committee designated by the Board
to administer the Plan, which committee shall be constituted to comply with the
rules governing a plan intended to qualify as a discretionary plan under Rule
16b-3. Once appointed, such committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members, remove
members (with or without cause) and substitute new members, fill vacancies
(however caused), and remove all members of the Committee and thereafter
directly administer the Plan, all to the extent permitted by the rules governing
a plan intended to qualify as a discretionary plan under Rule 16b-3.
..... (iii)Administration With Respect to Other Persons. With respect to
Option grants made to Employees or Consultants who are neither Directors nor
Officers of the Company, the Plan shall be administered by (A) the Board or (B)
a committee designated by the Board, which committee shall be constituted to
satisfy Applicable Laws. Once appointed, such Board may increase the size of the
Committee and appoint additional members, remove members (with or without cause)
and substitute new members, fill vacancies (however caused), and remove all
members of the Committee and thereafter directly administer the Plan, all to the
extent permitted by Applicable Laws.
.....(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
..... (i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(o) of the Plan;
..... (ii) to select the Consultants and Employees to whom Options
may be granted hereunder;
..... (iii)to determine whether and to what extent Options are
granted hereunder;
..... (iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
..... (v) to approve forms of agreement for use under the Plan;
..... (vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder. Such terms and conditions
include, but are not limited to, the exercise price, the time or times when
Options may be exercised (which may be based on performance criteria), any
vesting acceleration or waiver of forfeiture restrictions, and any restriction
or limitation regarding any Option or the shares of Common Stock relating
thereto, based in each case on such factors as the Administrator, in its sole
discretion, shall determine;
..... (vii)to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted;
..... (viii) to construe and interpret the terms of the Plan
and awards granted pursuant to the Plan;
..... (ix) to prescribe, amend, and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
..... (x) to modify or amend each Option (subject to Section
14(c) of the Plan), including the discretionary authority to extend the
post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
..... (xi) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option previously
granted by the Administrator;
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..... (xii)to institute an Option Exchange Program; and
..... (xiii) to make all other determinations deemed necessary
or advisable for administering the Plan.
.....(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations, and interpretations shall be final and binding on all
Optionees and any other holders of Options.
5....Eligibility. Nonstatutory Stock Options may be granted to
Employees, Consultants and Outside Directors. Incentive Stock Options may
be granted only to Employees. If otherwise eligible, an Employee or
Consultant who has been granted an Option may be granted additional Options.
6....Limitations.
.....(a) Each Option shall be designated in the Notice of Grant as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of Shares subject to an Optionee's Incentive Stock Options granted by the
Company or any Parent or Subsidiary, which become exercisable for the first time
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares shall be determined as of the time of grant.
.....(b) Neither the Plan nor any Option shall confer upon an Optionee any
right with respect to continuing the Optionee's employment or consulting
relationship with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such employment or
consulting relationship at any time, with or without cause.
.....(c) The following limitations shall apply to grants of Options
to Employees:
..... (i) No Employee shall be granted, in any fiscal year of the Company,
Options to purchase more than 250,000 Shares; provided, however, that in the
fiscal year in which an employee commences employment with the Company, options
granted to such employee shall be limited to 500,000 Shares in such fiscal year.
The purchase price per Share payable by an Optionee upon exercise of each Option
intended to qualify under Section 162(m) of the Code shall be equal to the fair
market value of the Company's Common Stock on the date of grant.
(ii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 11.
..... (iii)If an Option is canceled in the same fiscal year of the Company
in which it was granted (other than in connection with a transaction described
in Section 11), the canceled Option will be counted against the limit set forth
in Section 6(c)(i). For this purpose, if the exercise price of an Option is
reduced, the transaction will be treated as a cancellation of the Option and the
grant of a new Option.
(d) The following limitations shall apply to grants of Options
to Outside Directors:
(i) Each Outside Director shall receive a formula Nonstatutory
Stock Option (a "Formula Option") as of the Effective Date with respect to
10,000 shares of Common Stock, as shall each Outside Director later appointed or
elected to the Board (with the grant made as of the date of his or her first
election or appointment). Each Outside Director serving on the Board as of the
date immediately following each annual meeting of the Company's shareholders
shall receive a Formula Option as of the date of that meeting with respect to
3,000 shares of Common Stock. The Exercise Price for Formula Options shall be
the Fair Market Value of the Common Stock on the date of grant.
(ii) Unless the Administrator specifies otherwise, each Formula
Option shall become exercisable as to 100% of the covered shares as of the date
of grant. To the extent that a Formula Option is not immediately exercisable, a
Formula Option shall become exercisable in accordance with the terms of section
9(c) of the Plan upon the Outside Director's Disability and in accordance with
the terms of section 9(d) of the Plan upon the Outside Director's death. Unless
the Administrator specifies otherwise, Options shall be granted for a term of
six years. Options shall be forfeited to the extent they are not then
exercisable if an Outside Director resigns, is removed or fails to be reelected
or reappointed as a Director. Options shall terminate within 30 days of an
Outside Director's resignation, removal, or failure to be reelected or
reappointed as a Director.
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7. Term of Option. The term of each Option shall be stated in the Notice
of Grant; provided, however, that in the case of an Incentive Stock Option, the
term shall be ten (10) years from the date of grant or such shorter term as may
be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock
Option granted to an Optionee who, at the time Incentive Stock Option is
granted, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the term of
the Incentive Stock Option shall be five (5) years from the date of grant or
such shorter term as may be provided in the Notice of Grant.
8. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time the
Incentive Stock Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. The per Share exercise
price of Nonstatutory Stock Options intended to qualify under Section 162(m) of
the Code shall be no less than 100% of the Fair Market Value per Share on the
date of grant.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised. In doing so, the Administrator may specify that an
Option may not be exercised until the completion of a service period.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii)promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii)any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement.
An Option may not be exercised for a fraction of a Share.
5
<PAGE>
An Option shall be deemed exercised when the Company receives:
(i) written notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the stock
certificate evidencing such Shares is issued (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
stock certificate, either in book entry form or in certificate form, promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the Shares are
issued, except as provided in Section 11 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Employment or Consulting Relationship. Upon
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within such period of time as is specified in the
Notice of Grant, and only to the extent that the Optionee was entitled to
exercise it as the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant). In
the absence of a specified time in the Notice of Grant, the Option shall remain
exercisable for 30 days following the Optionee's termination of Continuous
Status as an Employee or Consultant. If, at the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(c) Disability of Optionee. In the event that an Optionee's
Continuous Status as an Employee or Consultant terminates as a result of the
Optionee's Disability, the Optionee may exercise his or her Option at any time
within twelve (12) months from the date of such termination, but only to the
extent that the Optionee was entitled to exercise it at the date of such
termination (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant). If, at the date of termination, the
Optionee does not exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option with respect to
the shares covered by the exercisable portion of the Option within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If, after death, the
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Rule 16b-3. Options granted to individuals subject to Section 16
of the Exchange Act must comply with the applicable provisions of Rule 16b-3 and
shall contain such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16 of the Exchange
Act with respect to Plan transactions.
(f) Suspension. Any Optionee who is also a participant in the
Retirement at Micron or Micron Electronics Retirement at Micron Section 401(k)
Plan (each a "RAM Plan" and together the "RAM Plans") and who requests and
receives a hardship distribution from any RAM Plan, is prohibited from making,
and must suspend, for a period of twelve (12) months thereafter, his or her
elective contributions and employee contributions including, without limitation
to the foregoing, the exercise of any Option granted from the date of receipt by
that employee of the hardship distribution from any RAM Plan.
10. Non-Transferability of Options. An Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization, Dissolution, Merger, or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of issued shares of Common Stock which
have been authorized for issuance under the Plan but as to which no Options have
yet been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock or any other increase or decrease in the
number of shares of Common Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding, and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.
6
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of its sole
discretion in such instances, declare that any Option shall terminate as of a
date fixed by the Board and give each Optionee the right to exercise his or her
Option as to all or any part of the Optioned stock, including Shares as to which
the Option would not otherwise be exercisable.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, other than in either such case, a Change in Control, each
outstanding Option may be assumed or an equivalent option or right may be
substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In lieu of such assumption or substitution, or in the
event the successor corporation does not assume the Option or substitute an
equivalent option or right, the Administrator may provide for the Optionee to
have the right to exercise the Option as to all or a portion of the Optioned
Stock, including Shares as to which it would not otherwise be exercisable. If
the Administrator makes an Option exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Administrator shall
notify the Optionee that the Option shall be fully exercisable for a period of
thirty (30) days from the date of such notice, and the Option will terminate
upon the expiration of such period. For the purposes of this paragraph, the
Option shall be considered assumed if, following the merger or sale of assets,
the option or right confers the right to purchase, for each Share of Optioned
Stock subject to the Option immediately prior to the merger or sale of assets,
the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets was not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
(d) Change in Control. In the event of a Change in Control, the
unexercised portion of the Option shall become immediately exercisable, to the
extent such acceleration does not disqualify the Plan, or cause an Incentive
Stock Option to be treated as a Nonstatutory Stock Option without the consent of
the Optionee.
12. Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
13. Term of Plan. Subject to Section 18 of the Plan, the Plan shall become
effective upon the earlier to occur of its adoption by the Board or its approval
by the shareholders of the Company as described in Section 18 of the Plan. It
shall continue in effect for a term of ten (10) years from the effective date
unless terminated earlier under Section 14 of the Plan.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend, or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Rule 16b-3 or with Section 422 of the Code (or any successor rule or
statute or other applicable law, rule, or regulation, including the requirements
of any exchange or quotation system on which the Common Stock is listed or
quoted). Such shareholder approval, if required, shall be obtained in such a
manner and to such a degree as is required by the applicable law, rule, or
regulation.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension, or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
7
<PAGE>
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, Applicable Laws,
and the requirements of any stock exchange or quotation system upon which the
Shares may then be listed or quoted, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
Option, the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
16. Liability of Company.
(a) Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
(b) Grants Exceeding Allotted Shares. If the Optioned Stock covered
by an Option exceeds, as of the date of grant, the number of Shares which may be
issued under the Plan without additional shareholder approval, such Option shall
be void with respect to such excess Optioned Stock, unless shareholder approval
of an amendment sufficiently increasing the number of shares subject to the Plan
is timely obtained in accordance with Section 14(b) of the Plan.
17. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the manner and to the degree required under applicable federal and Minnesota
law.
Rev. 12/98
8
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-02-1999
<PERIOD-END> MAR-04-1999
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<PP&E> 235,733
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 718,867
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<TOTAL-COSTS> 759,918
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