<PAGE>
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 June 3, 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
----------------------------------------------------
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
July 13, 1999 was 96,176,417.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
Micron Electronics, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the quarter ended For the nine months ended
June 3, May 28, June 3, May 28,
1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------
Net sales $327,665 $340,760 $1,104,762 $1,394,410
Cost of goods sold 266,247 275,457 911,134 1,247,435
-------- -------- ---------- ----------
Gross margin 61,418 65,303 193,628 146,975
Selling, general and administrative 53,765 63,259 162,312 227,455
Research and development 419 1,419 2,998 8,760
Other expense (income), net - (4,431) 3,906 16,572
-------- -------- ---------- ----------
Operating income (loss) 7,234 5,056 24,412 (105,812)
Gain on sale of MCMS common stock - - - 156,222
Interest income, net 3,523 4,743 12,082 8,926
-------- -------- ---------- ----------
Income before taxes 10,757 9,799 36,494 59,336
Income tax provision 3,776 3,871 13,686 27,578
-------- -------- ---------- ----------
Net income $ 6,981 $ 5,928 $ 22,808 $ 31,758
======== ======== ========== ==========
Earnings per share:
Basic $ 0.07 $ 0.06 $ 0.24 $ 0.33
Diluted 0.07 0.06 0.24 0.33
Number of shares used in per share calculation:
Basic 96,176 95,672 96,089 95,616
Diluted 96,284 96,099 96,867 95,937
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
Micron Electronics, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except par value amounts)
<TABLE>
<CAPTION>
As of June 3, 1999 September 3, 1998
- --------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $265,329 $328,537
Liquid investments 97,951 29,204
Receivables, net 129,835 128,269
Inventories 21,521 30,848
Deferred income taxes 15,889 19,172
Other current assets 3,498 2,432
-------- --------
Total current assets 534,023 538,462
Property, plant and equipment, net 160,340 147,912
Other assets 4,043 6,069
-------- --------
Total assets $698,406 $692,443
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $195,354 $214,930
Accrued licenses and royalties 26,555 18,585
Current debt 7,139 16,798
-------- --------
Total current liabilities 229,048 250,313
Long-term debt 6,328 11,730
Other liabilities 19,002 13,506
-------- --------
Total liabilities 254,378 275,549
-------- --------
Commitments and contingencies
Common stock, $.01 par value, authorized 150.0 million shares;
issued and outstanding 96.2 million and 95.9 million shares
as of June 3, 1999 and September 3, 1998, respectively 962 959
Additional capital 127,165 122,837
Retained earnings 315,869 293,061
Accumulated other comprehensive income 32 37
-------- --------
Total shareholders' equity 444,028 416,894
-------- --------
Total liabilities and shareholders' equity $698,406 $692,443
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
Micron Electronics, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended June 3, 1999 May 28, 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,808 $ 31,758
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 23,197 29,904
Gain on sale of MCMS common stock - (156,222)
Provision for doubtful accounts 204 2,467
Changes in assets and liabilities, net of the effect of the sale of MCMS:
Receivables (1,106) 58,372
Inventories 9,634 57,761
Accounts payable and accrued expenses (15,809) (59,810)
Accrued licenses and royalties 7,970 1,043
Deferred income taxes 10,694 (9,671)
Other 961 10,269
--------- ---------
Net cash provided by (used for) operating activities 58,553 (34,129)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (41,234) (51,464)
Proceeds from sales of property, plant and equipment 329 5,830
Proceeds from sale of MCMS common stock, net of cash - 235,884
Purchases of held-to-maturity investment securities (119,108) (40,792)
Proceeds from maturities of investment securities 51,211 -
Other (1,301) (1,664)
--------- ---------
Net cash (used for) provided by investing activities (110,103) 147,794
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings - 173
Repayments of debt (16,068) (9,365)
Proceeds from issuance of common stock 4,049 1,124
Purchase and retirement of stock - (46)
Other - (28)
--------- ---------
Net cash used for financing activities (12,019) (8,142)
--------- ---------
Net (decrease) increase in cash and cash equivalents (63,569) 105,523
Effect of exchange rate changes on cash and cash equivalents 361 (430)
Cash and cash equivalents at beginning of period 328,537 183,935
--------- ---------
Cash and cash equivalents at end of period $ 265,329 $ 289,028
========= =========
</TABLE>
The accompanying notes are part of the financial statements.
3
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
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.
This report on Form 10-Q for the third quarter ended June 3, 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 third quarter of fiscal 1999. For the first nine months
of fiscal 1999, the Company capitalized $2.3 million of internal software
development costs.
Recently issued accounting standards include Statement of Financial
Accounting Standards ("SFAS") No. 131 "Disclosures about Segments of an
Enterprise and Related Information," issued by the FASB in June 1997 and SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities," issued
by the FASB in June 1998.
SFAS No. 131 requires public companies to report financial and other
information about key revenue-producing segments of the entity for which such
information is available and is utilized by the chief operation decision-maker.
Implementation of SFAS No. 131 is required for the Company's fiscal year end
1999.
SFAS No. 133 requires that all derivatives be recorded as either assets
or liabilities in the balance sheet and marked-to-market on an ongoing basis.
SFAS No. 133 applies to all derivatives including stand-alone instruments, such
as forward currency exchange contracts and interest rate swaps, or embedded
derivatives, such as call options contained in convertible debt investments.
Along with the derivatives, the underlying hedged items are also to be marked-
to-market on an ongoing basis. These market value adjustments are to be included
either in the statement of operations or as a component of comprehensive income,
depending on the nature of the transaction. Implementation of SFAS No. 133 is
required for the Company by the first quarter of 2000. The Company is currently
evaluating the effect SFAS 133 will have on its future results of operations and
financial position.
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 owns 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.
4
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
3. Receivables
June 3, 1999 September 3, 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $120,087 $122,294
Receivables from affiliates, net 2 105
Income taxes recoverable from parent corporation 3,656 3,068
Income taxes recoverable from governmental entities 7,062 0
Other 4,768 10,090
Allowance for doubtful accounts (3,373) (3,709)
Allowance for returns and discounts (2,367) (3,579)
-------- --------
$129,835 $128,269
======== ========
4. Inventories
June 3, 1999 September 3, 1998
- ---------------------------------------------------------------------------------------
Raw materials and supplies $ 6,911 $ 16,144
Work in progress 8,306 4,469
Finished goods 6,304 10,235
-------- --------
$ 21,521 $ 30,848
======== ========
5. Property, Plant and Equipment
June 3, 1999 September 3, 1998
- ---------------------------------------------------------------------------------------
Land $ 1,234 $ 1,234
Buildings 34,340 34,826
Equipment and software 179,195 145,310
Assets in progress 34,307 38,197
-------- --------
249,076 219,567
Less accumulated depreciation and amortization (88,736) (71,655)
-------- --------
$160,340 $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 third
quarter of fiscal 1999 depreciation and amortization by $0.8 million ($0.5
million net of tax) or $0.01 per diluted share, net of taxes. For the first nine
months of fiscal 1999, the effect of this change was to reduce depreciation and
amortization by $3.3 million ($2.1 million net of tax) or $0.02 per diluted
share, net of taxes.
5
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements-Continued
(Tabular Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
6. Accounts Payable and Accrued Expenses
June 3, 1999 September 3, 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $129,869 $146,124
Payable to affiliates 30,282 20,601
Salaries, wages and benefits 15,250 20,496
Income taxes payable 59 92
Equipment contracts payable - 3,884
Accrued warranty 14,524 17,128
Other 5,370 6,605
-------- --------
$195,354 $214,930
======== ========
7. Debt
June 3, 1999 September 3, 1998
- ---------------------------------------------------------------------------------------------------------
Notes payable in periodic installments through September 2001,
weighted average interest rate of 7.85% and 7.63%, respectively $ 10,871 $ 16,068
Capitalized lease obligations payable in monthly installments through
June 2000, interest rate of 7.28%, respectively 2,596 4,284
Amounts outstanding under revolving loan agreement, variable
interest of 1.34% - 8,176
-------- --------
13,467 28,528
Less current portion (7,139) (16,798)
-------- --------
$ 6,328 $ 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 June 3, 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.
Certain of the Company's notes payable are collateralized by equipment
with a total cost of $20.9 million and accumulated depreciation of $12.2 million
as of June 3, 1999.
8. Other Expense (Income), Net
Other expense in the first nine months 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 $0.6 million for
vendor claim contingencies, fixed asset write-downs, and other related closure
costs which has been included in accounts payable and accrued expenses, as of
June 3, 1999. The Company anticipates that all remaining liabilities will be
settled by September 2, 1999.
6
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
During the third quarter of fiscal 1998, the Company recognized a one-
time benefit resulting from a net rebate of $4.4 million, before taxes,
associated with a change of providers of on-site service contracts for the
Company's domestic desktop installed base.
Other expense in the first nine months 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 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.
During the first nine months of fiscal 1998, the Company wrote-off costs
totaling $5.2 million 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 subsequent to the first quarter of fiscal 1998.
9. Transactions with Affiliates
<TABLE>
<CAPTION>
For the quarter ended For the nine months ended
June 3, May 28, June 3, May 28,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 823 $ 592 $ 2,575 $ 18,430
Inventory purchases 19,005 6,080 41,437 26,699
Component recovery agreement 11,864 7,671 47,656 22,612
Administrative services and other expenses 174 115 403 1,206
Property, plant and equipment purchases 879 - 4,414 577
Property, plant and equipment sales 4 - 4 5,307
Construction management services - 103 - 213
</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 annual effective tax rate was revised in the third quarter of
fiscal 1999 resulting in an effective tax rate of 35.1% and 37.5% for the third
quarter and first nine months of fiscal 1999, respectively. The decrease is
principally due to benefits received from the Company's investments in tax-
exempt securities and sales through its wholly-owned foreign sales corporation.
The provision for income taxes for the third quarter and first nine 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 in the second quarter of fiscal 1998, of a deferred tax asset
relating to the Company's consolidation of its NetFRAME enterprise server
operation.
7
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
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 nine months ended
June 3, May 28, June 3, May 28,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $6,981 $5,928 $22,808 $31,758
Reclassification adjustment for loss
included in net income - - - 2,514
Foreign currency translation - 30 (5) (1,753)
------ ------ ------- -------
Comprehensive income $6,981 $5,958 $22,803 $32,519
====== ====== ======= =======
</TABLE>
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 nine months ended
June 3, May 28, June 3, May 28,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income available to common shareholders $ 6,981 $ 5,928 $22,808 $31,758
======= ======= ======= =======
Common shares outstanding:
Weighted average shares outstanding - basic 96,176 95,672 96,089 95,616
Effect of dilutive stock options 108 427 778 321
------- ------- ------- -------
Weighted average shares outstanding - diluted 96,284 96,099 96,867 95,937
======= ======= ======= =======
Earnings per share:
Basic $ .07 $ .06 $ .24 $ .33
Diluted .07 .06 .24 .33
</TABLE>
13. Commitments
As of June 3, 1999, the Company had commitments of $13.7 million for
equipment purchases and $0.2 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.
8
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
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 favorably 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
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.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
(Tabular amounts in thousands)
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
June 3, 1999, September 3, 1998 or May 28, 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 third quarter of fiscal 1999 was $7.0 million, or $0.07 per
diluted share, on net sales of $327.7 million compared to net income of $5.9
million, or $0.06 per diluted share, on net sales of $340.8 million for the
third quarter of fiscal 1998. Net income for the first nine months of fiscal
1999 was $22.8 million, or $0.24 per diluted share, on net sales of $1,104.8
million compared to net income of $31.8 million, or $0.33 per diluted share, on
net sales of $1,394.4 million for the first nine 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 $.99 per
diluted share, after taxes) realized from the sale. The Company's financial
statements for the 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
The following table summarizes the Company's net sales by product line:
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------------------- --------------------------------------
1999 1998 1999 1998
---------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PC systems $282,592 86.2% $317,654 93.2% $ 970,222 87.8% $1,179,738 84.6%
Contract manufacturing - - - - - - 141,723 10.2%
SpecTek memory products 45,073 13.8% 23,106 6.8% 134,540 12.2% 72,949 5.2%
-------- ----- -------- ----- ---------- ----- ---------- -----
Total net sales $327,665 100.0% $340,760 100.0% $1,104,762 100.0% $1,394,410 100.0%
======== ===== ======== ===== ========== ===== ========== =====
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis
- --------------------------------------------
of Financial Condition and Results of Operations -- Continued
- -------------------------------------------------------------
(Tabular amounts in thousands)
Personal Computer Systems Net sales of PC systems were lower in the third
quarter of fiscal 1999 compared to the third quarter of fiscal 1998 primarily as
a result of a 6% decrease in average selling prices for the Company's PC systems
and a 2% decline in unit sales. Net sales of PC systems were lower in the first
nine months of fiscal 1999 compared to the first nine months of fiscal 1998
primarily as a result of a 13% decrease in average selling prices, with unit
sales of PC systems essentially flat. Net sales of PC systems were 13% lower in
the third quarter of fiscal 1999 compared to the second quarter of fiscal 1999,
resulting primarily from a decrease in unit sales of PC systems. Average
selling prices were flat when compared to the second quarter of fiscal 1999.
The third quarter of fiscal 1999 was unfavorably impacted by lower sales in the
company's consumer business, which is experiencing continued pricing pressure
and market trends toward lower cost PC systems.
Unit sales of desktop systems were 86% and 84% of total unit sales of PC
systems during the third quarter and first nine 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 5% and 11% lower
in the third quarter and first nine months of fiscal 1999, respectively,
compared to the corresponding periods in fiscal 1998 primarily as a result of
price competition and discounting in the PC industry for desktop products.
Unit sales of notebook systems were 12% and 14% of total unit sales of PC
systems during the third quarter and first nine 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 7% and 20% lower
in the third quarter and first nine 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 third quarter of fiscal 1999 was 35%
consumer and home office; 34% commercial business; 27% government sector and 4%
international. This compares with customer segment revenue mix for the second
quarter of fiscal 1999 of 55% consumer and small business; 19% commercial
business; 22% government sector and 4% international.
Sales to governmental entities, including prime contractors under certain
federal government procurement programs, were 27%, 22% and 22% of total net
sales of PC systems in the third quarter and second quarter of fiscal 1999 and
third 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 95% higher in the third quarter of fiscal 1999 compared to the
third quarter of fiscal 1998 primarily due to a 166% increase in megabits of
memory shipped, offset by a 26% decline in average selling prices. The increase
in megabits of memory shipped was primarily due to an increase in the amount of
product produced 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
The Company has a Component Recovery Agreement with MTI (as amended, the
"Component Recovery Agreement") which expires 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
pre-tax net income generated from the Company's SpecTek sales of semiconductor
memory products supplied by MTI.
On July 15, 1999, the Company and MTI entered into a non-binding Memorandum of
Understanding (the "MOU") with respect to a possible extension of the Component
Recovery Agreement through September 1, 2001. The MOU is subject to execution
of definitive documents by the Company and MTI. Under the MOU, the Company's
cost of components obtained from MTI would be based on a percentage of pre-tax
net income generated from the sale of SpecTek products derived from such
components. The MOU provides that the cost of components obtained from MTI
would be negotiated on a quarterly basis, but in no event would the cost be
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations -- Continued
- --------------------------
(Tabular amounts in thousands)
less than 50% of pre-tax net income. The maximum cost payable by the Company to
MTI for components during fiscal 2000 would be as follows: first quarter, 50% of
pre-tax net income; second quarter, 62.5% of pre-tax net income; third quarter,
75% of pre-tax net income; and fourth quarter, 87.5% of pre-tax net income. The
cost to the Company of components obtained from MTI during fiscal 2001 is not
subject to any maximum amount. There can be no assurance that the amounts
payable by the Company to MTI for components as contemplated under the MOU
would be more favorable than the maximum amounts stated in this paragraph. Any
increase in cost of components in excess of the Company's costs under the
current Component Recovery Agreement could have a material adverse effect on the
Company's business and results of operations and cash flows.
Under the MOU, at the commencement of the second quarter of fiscal 2000 the
Company would have an option to require MTI to purchase all of the assets of
SpecTek for a purchase price equal to net book value. At the commencement of
fiscal 2001, MTI would have an option to require the Company to sell all of the
assets of SpecTek under the same terms and conditions. Additionally, the Company
would have an option to require MTI to purchase, and MTI would have the option
to require the Company to sell, the assets of SpecTek at book value if MTI's
ownership in the Company falls below 50% or if an unrelated third party acquires
more than 30% of the Company. The sale of the assets of SpecTek to MTI could
have a material adverse effect on the Company's business and results of
operations and cash flows.
As partial consideration for the Company's entering into the MOU, and subject
to execution of subsequent definitive documents, MTI has agreed to sell to the
Company its assets associated with MTI's Micron Internet Services business at
MTI's book value.
Historically, a substantial majority of the components used in the Company's
SpecTek operation have been obtained under the Component Recovery Agreement.
Many semiconductor manufacturers other than MTI are reluctant to sell
nonstandard memory components because such components could compete with their
full specification memory components for similar applications. In addition,
some manufacturers are concerned that subsequent testing performed by a recovery
operation could reveal proprietary data regarding manufacturing yields and
processes. As a result, there can be no assurance that the Company would be
able to able to negotiate future purchases of components on terms acceptable to
the Company after expiration of the Component Recovery Agreement. The
expiration of the Component Recovery Agreement, or the failure to execute
definitive documents pursuant to the MOU, could have a material adverse effect
on the Company's business and results of operations and cash flows.
Additionally, the maximum cost to the Company to obtain components from MTI as
contemplated under the MOU increases from quarter to quarter during the extended
term and may be significantly higher than the historical costs, which could have
a material adverse effect on the Company's business and results of operations
and cash flows. See "Certain Factors--SpecTek Semiconductor Memory Products
Operation."
<PAGE>
<TABLE>
<CAPTION>
Gross Margin
Third Quarter Nine Months
------------------------------- ---------------------------------
1999 1998 1999 1998
------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% of % of % of % of
Amount Sales Amount Sales Amount Sales Amount Sales
------- ---- ------- ---- -------- ---- -------- ----
PC systems $43,922 15.5% $61,183 19.3% $142,906 14.7% $113,799 9.6%
Contract manufacturing - - - - - - 17,598 12.4%
SpecTek memory products 17,496 38.8% 4,120 17.8% 50,722 37.7% 15,578 21.4%
------- ------- -------- --------
Total gross margin $61,418 18.7% $65,303 19.2% $193,628 17.5% $146,975 10.5%
======= ======= ======== ========
</TABLE>
Personal Computer Systems Gross margin from the Company's PC operations was
15.5% in the third quarter of fiscal 1999 compared to 13.8% in the second
quarter of fiscal 1999 and 19.3% in the third quarter of the fiscal 1998. PC
gross margins in the third quarter of fiscal 1999 improved from the second
quarter of fiscal 1999 primarily due to better product line management and
reduced provisions for product returns based on declining return rates. During
the third quarter of fiscal 1999, the Company settled two outstanding claims for
alleged infringement for less than previously accrued, resulting in a $0.6
million benefit to cost of goods sold.
Gross margin in the first nine months 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 had required
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations -- Continued
- --------------------------
(Tabular amounts in thousands)
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.
Average selling prices for notebook products in the third quarter of fiscal 1998
were higher than the prices anticipated in the write-down of such products in
the second quarter of fiscal 1998. As a result, the gross margin percentage
realized on $48 million of sales of these notebook products in the third quarter
of fiscal 1998 was approximately 34%, thereby having favorable effects on the
Company's gross margin and net income for the quarter. The Company's gross
margin on PC systems other than these notebooks was approximately 17% of
applicable net sales in the third quarter of fiscal 1998. In addition, the first
nine months of fiscal 1998 was adversely affected by losses of approximately
$9.9 million realized from disposition of excess PC component inventories.
The Company expects to continue experiencing significant gross margin pressure
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
third quarter and first nine months of fiscal 1999 compared to the third quarter
and first nine months of fiscal 1998 due to lower costs of components and an
increase in the amount of product produced. 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. Additionally, under
the MOU with respect to the possible extension of the Component Recovery
Agreement, the maximum cost to the Company to obtain components from MTI
increases from quarter to quarter during the extended term and may be
significantly higher than historical costs, which could have a material adverse
effect on the Company's results of operations, including gross margin. See
"Certain Factors--SpecTek Semiconductor Memory Products Operation--Pricing of
Semiconductor Memory Products."
<TABLE>
<CAPTION>
Selling, General and Administrative
Third Quarter Nine Months
---------------------------------- -----------------------------------
1999 Change 1998 1999 Change 1998
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Selling, general and administrative $53,765 (15.0%) $63,259 $162,312 (28.6%) $227,455
as a % of net sales 16.4% 18.6% 14.7% 16.3%
</TABLE>
Selling, general and administrative expenses for the third quarter of fiscal
1999 were $53.8 million versus $56.2 million in the second quarter of fiscal
1999 and $63.3 million in the third quarter of fiscal 1998. The decrease in the
third quarter of fiscal 1999 from the second quarter of fiscal 1999 is primarily
due to reduced reliance on the consumer business and the restructuring of its
direct business model through utilization of the Internet, which has reduced
variable transaction expenses such as telephone and service and support costs.
In addition, there was a reduction of operating costs from the Japanese
operation, which was closed in the second fiscal quarter of 1999 and a benefit
in the third quarter of fiscal 1999 of $0.6 million related to legal claims.
These cost reductions were partially offset by increased marketing and
advertising costs. Selling, general and administrative expenses during the
third quarter and first nine months of fiscal 1999 compared to the corresponding
periods in 1998 were significantly lower due to reduced levels of marketing and
advertising, personnel, technical and professional fees and reduced costs
associated with consolidation of the Company's Japan operations. The nine
months of fiscal 1998 also includes those costs related to MCMS, which was sold
on February 26, 1998.
<TABLE>
<CAPTION>
Research and Development
Third Quarter Nine Months
-------------------------- ----------------------------
1999 Change 1998 1999 Change 1998
-------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Research and development $ 419 (70.5%) $1,419 $2,998 (65.8%) $8,760
as a % of net sales 0.1% 0.4% 0.3% 0.6%
</TABLE>
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations -- Continued
- --------------------------
(Tabular amounts in thousands)
Research and development expenses were higher in the third quarter and the
first nine months of fiscal 1998 compared to the third quarter and first nine
months of fiscal 1999 primarily as a result of the development activities
associated with the Company's NetFRAME enterprise server operation. These
activities were discontinued after the second quarter of fiscal 1998.
Other expense (income), net
<TABLE>
<CAPTION>
Third Quarter Nine Months
---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
1999 Change 1998 1999 Change 1998
---------------------- ---------------------
Other expense (income), net - (100.0%) (4,431) $3,906 (76.4%) $16,572
</TABLE>
Other expense in the first nine months 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 $0.6 million for
vendor claim contingencies, fixed asset write-downs, and other related closure
costs which has been included in accounts payable and accrued expenses, as of
June 3, 1999. The Company anticipates that all remaining liabilities will be
settled by September 2, 1999.
During the third quarter of fiscal 1998, the Company recognized a one-time
benefit resulting from a net rebate of $4.4 million, before taxes, associated
with a change of providers of on-site service contracts for the Company's
domestic desktop installed base.
Other expense, net in the first nine months 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 first nine months of fiscal 1998, the Company wrote-off costs
totaling $5.2 million 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 first nine months
of fiscal 1998.
Income Tax Provision
<TABLE>
<CAPTION>
Third Quarter Nine Months
-------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
1999 Change 1998 1999 Change 1998
-------------------------- -----------------------
Income tax provision $3,776 2.5% $3,871 $13,686 (50.4%) $27,578
</TABLE>
The annual effective tax rate was revised in the third quarter of fiscal 1999
resulting in an effective tax rate of 35.1% and 37.5% for the third quarter and
first nine months of fiscal 1999, respectively. The decrease is principally due
to benefits received from the Company's investments in tax-exempt securities and
sales through its wholly-owned foreign sales corporation. The provision for
income taxes for the third quarter and first nine 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.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Result
- ------------------------------------------------------------------------------
of Operations -- Continued
- --------------------------
(Tabular amounts in thousands)
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.
Liquidity and Capital Resources
As of June 3, 1999, the Company had cash, cash equivalents and liquid
investments of $363.3 million, representing an increase of $5.5 million compared
to September 3, 1998. Principal sources of liquidity in the first nine months
of fiscal 1999 were cash flows from operations of $58.6 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 nine months of fiscal 1999 were property, plant and
equipment expenditures of $41.2 million primarily for expansion and capacity
improvements of the Company's manufacturing operations and repayment of debt of
$16.1 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 June 3, 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 June 3, 1999, the Company had commitments of $13.9 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.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations -- Continued
- --------------------------
(Tabular amounts in thousands)
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.
Recently Issued Accounting Pronouncements
Recently issued accounting standards include Statement of Financial Accounting
Standards ("SFAS") No. 131 "Disclosures about Segments of an Enterprise and
Related Information," issued by the FASB in June 1997 and SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," issued by the
FASB in June 1998.
SFAS No. 131 requires public companies to report financial and other
information about key revenue-producing segments of the entity for which such
information is available and is utilized by the chief operation decision-maker.
Implementation of SFAS No. 131 is required for the Company's fiscal year end
1999.
SFAS No. 133 requires that all derivatives be recorded as either assets or
liabilities in the balance sheet and marked-to-market on an ongoing basis. SFAS
No. 133 applies to all derivatives including stand-alone instruments, such as
forward currency exchange contracts and interest rate swaps, or embedded
derivatives, such as call options contained in convertible debt investments.
Along with the derivatives, the underlying hedged items are also to be marked-
to-market on an ongoing basis. These market value adjustments are to be included
either in the statement of operations or as a component of comprehensive income,
depending on the nature of the transaction. Implementation of SFAS No. 133 is
required for the Company by the first quarter of 2000. The Company is currently
evaluating the effect SFAS 133 will have on its future results of operations and
financial position.
Subsequent Event
On July 6, 1999, the Company announced it executed a non-binding letter of
intent to acquire NETLimited, Inc., d/b/a HostPro, an Internet content and
applications hosting company. If the transaction is consummated, the Company
will acquire all of the outstanding stock of HostPro. The transaction is subject
to execution of a definitive agreement and approval by the Company's board of
directors. The non-binding letter of intent contemplates that a definitive
agreement will be executed on or before July 31, 1999, when the letter of intent
expires.
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
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations -- Continued
- --------------------------
(Tabular amounts in thousands)
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, Corp. 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. Several of these manufacturers, which have
traditionally sold their products through national and regional distributors,
dealers and value added resellers and retail stores, now 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.
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
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations -- Continued
- --------------------------
(Tabular amounts in thousands)
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
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
Component Recovery Agreement with MTI
The Company has a Component Recovery Agreement with MTI (as amended, the
"Component Recovery Agreement") which expires 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
pre-tax net income generated from the Company's SpecTek sales of semiconductor
memory products supplied by MTI.
On July 15, 1999, the Company and MTI entered into a non-binding Memorandum of
Understanding (the "MOU") with respect to a possible extension of the Component
Recovery Agreement through September 1, 2001. The MOU is subject to execution
of definitive documents by the Company and MTI. Under the MOU, the Company's
cost of components obtained from MTI would be based on a percentage of pre-tax
net income generated from the sale of SpecTek products derived from such
components. The MOU provides that the cost of components obtained from MTI
would be negotiated on a quarterly basis, but in no event would the cost be less
than 50% of pre-tax net income. The maximum cost payable by the Company to MTI
for components during fiscal 2000 would be as follows: first quarter, 50% of
pre-tax net income; second quarter, 62.5% of pre-tax net income; third quarter,
75% of pre-tax net income; and fourth quarter, 87.5% of pre-tax net income. The
cost to the Company of components obtained from MTI during fiscal 2001 is not
subject to any maximum amount. There can be no assurance that the amounts
payable by the Company to MTI for components as contemplated under the MOU would
be more favorable than the maximum amounts stated in this paragraph. Any
increase in cost of components in excess of the Company's costs under the
current Component Recovery Agreement could have a material adverse effect on the
Company's business and results of operations and cash flows.
Under the MOU, at the commencement of the second quarter of fiscal 2000 the
Company would have an option to require MTI to purchase all of the assets of
SpecTek for a purchase price equal to net book value. At the commencement of
fiscal 2001, MTI would have an option to require the Company to sell all of the
assets of SpecTek under the same terms and conditions. Additionally, the Company
would have an option to require MTI to purchase, and MTI would have the option
to require the Company to sell, the assets of SpecTek at book value if MTI's
ownership in the Company falls below 50% or if an unrelated third party acquires
more than 30% of the Company. The sale of the assets of SpecTek to MTI could
have a material adverse effect on the Company's business and results of
operations and cash flows.
As partial consideration for the Company's entering into the MOU, and subject
to execution of subsequent definitive documents, MTI has agreed to sell to the
Company its assets associated with MTI's Micron Internet Services business at
MTI's book value.
Historically, a substantial majority of the components used in the Company's
SpecTek operation have been obtained under the Component Recovery Agreement.
Many semiconductor manufacturers other than MTI are reluctant to sell
nonstandard memory components because such components could compete with their
full specification memory components for similar applications. In addition,
some manufacturers are concerned that subsequent testing performed by a recovery
operation could reveal proprietary data regarding manufacturing yields and
processes. As a result, there can be no assurance that the Company would be
able to able to negotiate future purchases of components on terms acceptable to
the Company after expiration of the Component Recovery Agreement. The
expiration of the Component Recovery Agreement, or the failure to execute
definitive documents pursuant to the MOU, could have a material adverse effect
on the Company's business and results of operations and cash flows.
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations -- Continued
- --------------------------
(Tabular amounts in thousands)
Additionally, the maximum cost to the Company to obtain components from MTI as
contemplated under the MOU increases from quarter to quarter during the extended
term and may be significantly higher than the historical costs, which could have
a material adverse effect on the Company's business and results of operations
and cash flows.
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 were 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.
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations -- Continued
- --------------------------
(Tabular amounts in thousands)
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 third quarter of fiscal 1999, that the inventory, assessment, and
remediation phases are essentially complete, and quality assurance testing is
approximately 25% complete. With respect to non-IT systems, the inventory and
assessment phases are essentially 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 third 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 95 percent complete as of the end of the third 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 fourth quarter of
fiscal 1999. Based on the results of the risk assessments, follow-up review of
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
calculations. 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 made available software utilities that
will cause earlier Micron-branded hardware products to have BIOS clocks 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 third quarter of fiscal 1999, the Company had incurred aggregate
incremental costs of $2.0 million related to such readiness programs. The total
additional cost to complete such programs is estimated at $0.5 million to $1.5
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 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. In May 1999, the case was dismissed with prejudice. The
plaintiff has filed a notice of appeal. 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.
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations -- Continued
- --------------------------
(Tabular amounts in thousands)
Year 2000 Contingency Plans
The Company's contingency plan generally contemplates 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 a 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 advised
the Company's management of critical third-party providers which, based on
information received, have not yet offered 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
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
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations -- Continued
- --------------------------
(Tabular amounts in thousands)
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.
MTI Ownership of Common Stock of the Company
As of June 3, 1999, MTI owned 63% of the Company's outstanding common stock.
In addition, two 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
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.
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.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations -- Continued
- --------------------------
(Tabular amounts in thousands)
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.
23
<PAGE>
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
June 3, 1999, approximately 50% of the Company's liquid investments mature
within three months and the remainder within one year. As of June 3, 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 have been 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.
24
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
- --------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) The following are filed as a part of this report:
Exhibit Description
------- -----------
10.63 Employment Offer, dated March 17, 1999 to Jill D. Smith (1)
10.64 Employment, Severance, and Noncompete Agreement, dated March 22,
1999, between the Company and Jill D. Smith
27 Financial Data Schedule
(1) Confidential treatment has been requested for certain portions of
this document. Such portions have been redacted and marked with a
double XX. The non-redacted version of this document has been sent to
the Securities and Exchange Commission pursuant to an application for
confidential treatment.
(b) Reports on Form 8-K:
On April 15, 1999, the Company filed a report on Form 8-K which announced the
appointment of Robert Lee as a director.
25
<PAGE>
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.
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: July 19, 1999
/s/ James R. Stewart
-------------------------------------------------
James R. Stewart, Senior Vice President Finance
Chief Financial Officer (Principal Financial and
Accounting Officer)
26
<PAGE>
EXHIBIT 10.63 CONFIDENTIAL TREATMENT REQUESTED
March 17, 1999
Jill D. Smith
29 Lawrence Street
Boston, MA 02116
Dear Ms. Smith:
Micron Electronics, Inc. ("Micron" or the "Company") is pleased to offer
you a position as its Executive Vice President, Chief Operating Officer, on the
terms and conditions set forth below, which terms and conditions are subject to
and contingent upon final approval by Micron's Board of Directors.
1. Arrangements have been made for you to join the Company on March 22,
1999. In addition to approval by the Board of Directors, this offer of
employment is conditioned upon your successful completion of all applicant
procedures, including, but not limited to the following: application materials,
drug screen test, and all new hire Company forms, including, but not limited to,
an Assignment of Inventions and Rights, a Confidential Information Agreement,
and an Acknowledgment to abide by the Company's Employment Policy Manual. You
will also have the opportunity to enter into an Employment, Severance and
Noncompete Agreement with Micron in the form of the document enclosed with this
offer letter. Your Employment, Severance and Noncompete Agreement and
appointment as an officer will be subject to final approval by Micron's Board of
Directors.
2. Your responsibility at Micron will be as an Executive Vice President,
Chief Operating Officer in the Executive Department reporting to Joel J. Kocher,
or his successor. Micron is involved in a fast-paced high technology industry.
3. Your compensation package will be as follows: your initial annual base
salary will be $400,000.00, and will be paid on a bi-weekly basis in accordance
with Micron's regular payroll schedule and practices. Your compensation will be
reviewed no less frequently than annually, which review will also include
consideration of additional option (or other equity program) grants, although
there is no guarantee of compensation increases or additional option (or other
equity program) grants. In addition, you will be eligible to participate in the
Company's Management and Executive Incentive Plan ("MEIP"), subject to approval
of the Compensation Committee of the Board of Directors.
4. Your initial participation in MEIP will be for the second half of
fiscal year 1999 (the "Performance Period"). Your target incentive for this
Performance Period is forty-five percent (45%) of the base salary actually paid
to you during this Performance Period. Because you will become an Executive
under the MEIP mid-way through the Performance Period, your participation in
MEIP during this Performance Period will be on a pro-rated basis in accordance
<PAGE>
Jill D. Smith
March 17, 1999
Page 2
with the terms of the MEIP plan document. Your participation in MEIP will
clearly delineate the Company's and your critical goals and objectives for this
Performance Period. Your participation in MEIP also provides an incentive for
you to meet and exceed performance goals, and will tie a significant portion of
your total direct compensation to your achievement of the goals. The
Compensation Committee of the Board of Directors must approve all participants
in MEIP, the goals, target incentive bonuses and the amounts awarded. Your
participation in MEIP will be governed by the terms of the MEIP plan document
(copy enclosed). As a participant in MEIP, you will not be eligible to
participate in the Company's separate Pay for Performance program during any
Performance Period in which you participate in MEIP.
5. Upon commencement of employment, you will be granted options to
purchase 400,000 shares of the Company's common stock under the Micron
Electronics, Inc. 1995 Stock Option Plan (the "Option Plan"). The options will
be granted at Fair Market Value, and will be subject to the terms and conditions
of the Company's standard notice of grant and the Option Plan. The options will
vest as follows:
a. 100,000 shares will vest at a rate of twenty percent (20%) per
year over five (5) years.
b. 100,000 shares will vest only after completion of seven (7) years
of employment with the Company, but vesting will be accelerated
in full prior to such seven (7) year period if, for a combined
two fiscal quarter period, the Company attains the following from
its core PC business: (a) (XX%) year-over-year net revenue growth
when compared to the same combined two fiscal quarter period in
the prior fiscal year, and (b) net income in the combined two
fiscal quarter period of (XX%) of net revenue.
c. 125,000 shares will vest only after completion of seven (7) years
of employment with the Company, but vesting will be accelerated
in full prior to such seven year period if, over four consecutive
fiscal quarters, the Company attains the following from its core
PC business: (a) $XX million in net revenue, and (b) $XX million
in net income.
d. 75,000 shares will vest only after completion of seven (7) years
of employment with the Company, but vesting will be accelerated
in full prior to such seven year period if, over four consecutive
fiscal quarters, the Company attains the following from its core
PC business: (a) $XX billion in net revenue, and (b) $XX million
in net income.
e. Notwithstanding the foregoing, if your employment is terminated
by the Company other than for "Cause" (as defined in your
Employment, Severance, and Noncompete Agreement): (1) under
<PAGE>
Jill D. Smith
March 17, 1999
Page 3
subparagraph 5(a), above, a proportionate share of the options
will vest in the year of termination equal to the number of
options that would vest for the entire year multiplied by the
number of months worked divided by twelve (example: if
termination occurs in July for an applicable year, then 20% or
20,000 shares x 7/12 of a year will vest, meaning that you would
vest in 11,667 shares for that year); and (2) under subparagraphs
5(b), 5(c), and 5(d), if the financial conditions established
thereunder are met as of the 60/th/ day following the
"Termination Date" (as defined in your Employment, Severance, and
Noncompete Agreement), then vesting shall be accelerated as
established in each of the applicable subparagraphs.
[xx] Confidential treatment has been requested for certain portions of this
document. Such omitted portions have been filed separately with the
Securities and Exchange Commission.
The term "core PC business" as used above includes the Company's personal
computer, server, and related peripheral equipment business, together with any
affiliated businesses, but expressly excludes the SpecTek division. The
attainment of the financial conditions for accelerated vesting of the shares as
set forth in paragraphs 5(b) through 5(d), above, will be determined by the
Board of Directors with reference to the financial statements of the Company as
filed with the Securities and Exchange Commission ("SEC") on a quarterly or
annual basis as the case may be, and such other documentation as the Company may
prepare. In determining the attainment of the financial conditions, the Company
will exclude any extraordinary gains or extraordinary losses as determined in
accordance with generally accepted accounting principles. The Board of
Directors may at any time and in its discretion lower the financial conditions
for accelerated vesting of the shares as set forth in paragraphs 5(b) through
5(d), above.
6. Micron will pay for the following expenses, including any associated
Federal, State and FICA taxes:
a. Micron will pay up to six (6) months for temporary housing at its
expense (accommodations and automobile rental only). The location
of the temporary housing may vary due to availability. You will
be required to call Micron Technology, Inc.'s relocation office
to make your reservation. If you do not use Micron's temporary
housing, Micron will pay up to $900.00 per month toward the
expense of any alternative housing.
b. Micron will pay commuting expenses (consisting primarily of
round-trip airline tickets) for you or your spouse to travel
between Boston, Massachusetts and Boise, Idaho on at least a
weekly basis for an indefinite period of time. All airline
tickets must be purchased in advance through Micron's travel
office in accordance with the Company's policies and practices
for travel. We acknowledge that, from time to time, this travel
will occur during a portion of the workweek (Monday/Friday).
<PAGE>
Jill D. Smith
March 17, 1999
Page 4
c. We acknowledge that on occasion you may be working from your
home in Boston, Massachusetts, from time to time. To facilitate
your efforts Micron will provide at its expense appropriate
telecommunications and computing equipment.
Please note that the expenses paid by Micron will be considered as compensation
on your W-2 at the end of the year. We suggest you consult your tax advisor for
further details.
7. Your election of any medical, dental, and vision insurance coverage
will become effective after completion of the month of hire plus an additional
calendar month of employment. Benefit plans are subject to change or amendment
by Micron. Please note that Micron's medical plans do not cover pre-existing
conditions under certain circumstances. Please refer to the medical plan
information provided to you for more information on how this may affect you
and/or your dependents. If you have further questions about pre-existing
conditions, please call the Insurance and Benefits Department at (208) 368-4110
or 1-800-336-8918.
If you have any questions or desire further clarification of this offer of
employment, please contact Sid Ferrales at (208) 898-1741 or Chris Gebhardt at
(208) 898-1308. If you are in agreement with the terms and conditions of this
offer, please sign where indicated and return this letter to our Human Resource
Department. Upon receipt of this signed letter, Micron will send you an
original of the Employment, Severance and Noncompete Agreement in the form
enclosed, which agreement you will be asked to execute prior to commencing your
employment with Micron.
We hope this new relationship will be productive for you and Micron.
Everyone is looking forward to your contribution to the success of the company.
Very truly yours,
/s/ Sid Ferrales
-------------------------------------------
Sid Ferrales
Senior Vice President, Human Resources
Approved and accepted this 17th day of March, 1999.
By: /s/ Jill D. Smith
---------------------------------------
Jill D. Smith
<PAGE>
EXHIBIT 10.64
EMPLOYMENT, SEVERANCE, AND NONCOMPETE AGREEMENT
THIS AGREEMENT is between Micron Electronics, Inc., a Minnesota corporation
(the "Company"), and Jill D. Smith (the "Officer").
THE PARTIES hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs the Officer as Executive Vice
President, Chief Operating Officer, of the Company, and the Officer hereby
accepts such employment upon the terms and conditions set forth in this
Agreement and in the Company's offer letter dated March 17, 1999, a copy of
which is attached hereto and incorporated by this reference.
2. TERM. The term of this Agreement shall begin on the 22nd day of March,
1999, and shall continue until terminated as provided in this Agreement. The
Officer acknowledges that this Agreement does not create any obligation on the
Officer's part to work for the Company for any fixed period of time, nor for the
Company to employ the Officer for any fixed period of time, and the Officer's
employment may be terminated at any time with or without cause.
3. DUTIES. The Officer shall serve in such capacity and perform such
duties as the Company shall from time to time require, subject to the provisions
of paragraph 7(a), below.
4. REGULAR COMPENSATION. The Company shall pay the Officer an initial base
salary as set forth in the offer letter attached hereto. In its sole discretion,
the Company may change the Officer's compensation, subject to the provisions of
paragraph 7(b), below.
5. TERMINATION AND COMPENSATION. The Officer's employment under this
Agreement may be terminated by either party at any time and for any reason,
voluntary or involuntary, with or without cause, upon prior written notice to
the other party. The date such notice is received by the other party shall be
deemed the "Termination Date." Upon receipt by the Officer of a written notice
of termination from the Company, and upon the Company's request, the Officer
will resign immediately as an Officer. Upon termination of the Officer's
employment during the term of this Agreement, the Officer shall be entitled to
the following compensation and benefits, depending upon the applicable
circumstances:
(a) If the Officer's employment with the Company is terminated by the
Company for "Cause" (as defined in paragraph 6 herein) or by the
Officer other than for "Good Reason" (as defined in paragraph 7
herein), the Company shall pay the Officer's base salary through
the Termination Date (less applicable withholdings and authorized
deductions), and the Company shall have no further obligations to
the Officer under this Agreement.
(b) If the Officer's employment with the Company is terminated by the
Company other than for "Cause" (as defined in paragraph 6 herein)
or the death of the Officer, or if the Officer's employment with
the Company is voluntarily terminated by the Officer for "Good
Reason" (as defined in paragraph 7 herein), then the Officer shall
be entitled to the Officer's base salary through the Termination
Date, plus (i) any benefits, incentives or bonuses which pursuant
to the terms of any compensation or benefit plan have been earned
or become payable as of the Termination Date, but which have not
yet been paid to the Officer, and (ii) severance compensation in
one lump sum payment of twelve (12) months base salary (less
applicable withholdings and authorized deductions) as of the
Termination Date, plus an amount equal to a pro rata portion of
any bonus or incentive award that the Officer may have been
entitled to receive in respect of the fiscal year in which the
Officer's Termination Date occurs had the Officer continued in
employment until the end of such fiscal year (less applicable
withholdings and authorized deductions). The Officer's benefits
thereafter shall be determined in accordance with the Company's
employee benefit plans and other applicable programs and practices
in effect as of the Termination Date.
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<PAGE>
(c) In the event of the Officer's death, the Officer's employment
shall be deemed to have ended at the time of death (referred to
herein as the Termination Date), and the Company shall pay the
Officer's base salary through the Termination Date, plus (i) any
benefits, incentives or bonuses which pursuant to the terms of any
compensation or benefit plan have been earned or become payable as
of the Termination Date, but which have not yet been paid to the
Officer, and (ii) a pro rata portion of any bonus or incentive
award that the Officer would have been entitled to receive in
respect of the fiscal year in which the Officer's Termination Date
occurs had the Officer continued in employment until the end of
such fiscal year (less applicable withholdings and authorized
deductions). The Officer's benefits thereafter shall be determined
in accordance with the Company's employee benefit plans and other
applicable programs and practices in effect as of the Termination
Date.
(d) The amounts provided for in paragraphs 5(a), 5(b), and 5(c) shall
be paid within ten (10) days after the Officer's Termination Date,
except that any benefits, incentives or bonuses payable under
paragraphs 5(b) and 5(c) shall be paid in accordance with the
requirements and administration of the applicable plan or program
in effect as of the Termination Date, including, but not limited
to, the timing of such payments, determinations with respect to
the Officer's achievement of related goals and objectives, and any
adjustments to such payments as allowed by the Company under such
plan or program.
(e) Notwithstanding the foregoing provisions of paragraphs 5(a), 5(b),
5(c) and 5(d), if such payments would cause the Company to exceed
its deduction limit under Section 162(m) of the Internal Revenue
Code of 1986, the Company may in its discretion make the portion
of the payment, plus interest thereon, that otherwise would be
non-deductible to the Company by January 31st of the following
taxable year. Interest shall be accrued monthly from the date of
the initial payment to the date of the subsequent payment at a
rate equal to the monthly money market rate set by the financial
institution at which the Company has established its primary line
of credit at the time.
6. TERMINATION FOR CAUSE. The Officer's employment under this Agreement
may be terminated for "Cause." For purposes of this Agreement, "Cause" shall
include the following:
(a) The Officer's breach of a fiduciary duty to the Company;
(b) The Officer engages in dishonesty, fraud, or willful malfeasance
in the performance of the Officer's duties or during the course of
the Officer's employment;
(c) The Officer intentionally fails to perform reasonably assigned
duties, after the Officer has been given written notice by the CEO
with respect to such failure and the Officer shall have
substantially failed to remedy or cure such failure within a
reasonable period of time;
(d) The Officer violates the Company's ethics code, or willfully
violates any law, rule or regulation (other than traffic
violations or similar offenses) in the performance of the
Officer's duties that has a material adverse economic effect on
the Company; or
(e) The Officer materially breaches any of the terms of this
Agreement.
7. VOLUNTARY TERMINATION FOR GOOD REASON. The Officer may voluntarily
terminate the Officer's employment under this Agreement at any time for Good
Reason. The Officer will be deemed to have "Good Reason" for voluntary
termination of the Officer's employment, if there should occur:
2
<PAGE>
(a) A substantial reduction in the nature or scope of the Officer's
duties or responsibilities, from the duties or responsibilities
exercised previously by the Officer, without the Officer's
consent;
(b) A reduction of the Officer's base salary, without the Officer's
consent; or
(c) A relocation of the Officer's principal place of employment or
office with the Company by more than a fifty (50) mile radius,
without the Officer's consent.
8. GENERAL RELEASE. Upon receipt of all compensation and benefits under
this Agreement, the Officer and Company settle, waive, and voluntarily release
any and all claims each has or may have against the other, inclusive of any of
the Company's affiliates, officers, directors, employees or agents, both
individually and in their official capacities.
9. AGREEMENT NOT TO COMPETE OR SOLICIT. During such time as the Officer
is employed by the Company and for the twelve (12) month period after the
Termination Date (collectively, the "Period of Restriction"), and in
consideration of the terms and conditions of this Agreement, the Officer agrees
as follows:
(a) Acknowledgment. The Officer recognizes and acknowledges that it
--------------
is essential for the proper protection of the Company and its business interests
that the Officer be restrained (i) from competing against the Company during the
Officer's employment and for a reasonable period following the termination of
the Officer's employment with the Company; (ii) from soliciting or inducing any
Officer or employee of the Company to leave the employ of the Company; (iii)
from hiring or attempting to hire any Officer or employee of the Company; and
(iv) from soliciting the trade of or trading with the customers and suppliers of
the Company for any business purpose. The Officer further recognizes and
acknowledges that the Company's business interests that require and justify
protection include, without limitation, trade secrets, confidential information,
proprietary information, customer or supplier information and lists, and
accounts acquired with the Company, customer or supplier relations, and avoiding
unfair competition.
(b) Covenant Not to Compete. The Officer shall not engage in
-----------------------
competition with the Company, render advice or service to any entity In
Competition With the Company, or engage in any other employment, occupation,
consulting or other business activity directly related to the business in which
the Company is now involved or becomes involved during the Period of
Restriction. The phrase "In Competition With the Company" as used herein shall
be deemed to include competition with the Company or its respective successors
or assigns, or the businesses of any of them. A person, firm, business, or
other entity is In Competition With the Company if it is engaged in the design,
development, manufacture, marketing, sale, or service of semiconductor memory
products, personal computers, servers, printed circuit boards, memory modules,
related personal computer peripheral equipment, or any other business in which
the Company, or any wholly-owned subsidiary of the Company is currently engaged
or becomes engaged during such time as the Officer is employed by the Company,
including any business which is substantially similar to or competitive with any
such business or products.
(c) Covenant of Non-Solicitation of Employees. During the Period of
-----------------------------------------
Restriction, the Officer shall not directly or indirectly, personally or through
others, employ or solicit for employment, or advise or recommend to any other
person, firm, business or entity that they employ or solicit for employment, any
employee of the Company. During the Period of Restriction, the Officer shall
not encourage, induce, attempt to induce, solicit or attempt to solicit any
employee of the Company, or any parent, subsidiary or affiliate of the Company
to leave his or her employment with the Company, or any parent, subsidiary or
affiliate of the Company.
(d) Covenant of Non-Interference or Diversion of Business. During the
------------------------------------------------------
Period of Restriction, the Officer shall not, directly or indirectly, personally
or through others, contact, solicit, advise, encourage, induce, or consult any
client, account, or customer of the Company for the purpose or with the effect
of causing such client, account or customer to purchase, license or otherwise
obtain products or services from a person, firm, business or entity In
Competition With the Company. Similarly, during the Period of Restriction, the
Officer shall not, directly or indirectly interfere with the business
relationship between the Company and its customers,
3
<PAGE>
dealers, distributors, suppliers, vendors, independent contractors, or service
providers, or encourage or induce (or attempt to induce) any such party to
terminate its relationship with the Company, or to modify the terms of such
relationship in a manner adverse to the best interests of the Company.
(e) Covenant of Non-Solicitation of Customers and Suppliers. The
-------------------------------------------------------
Officer agrees that during the Officer's time of employment with the Company the
Officer shall not, directly or indirectly, personally or through others, solicit
the trade of, or trade with, any customer or prospective customer, or supplier
or prospective supplier of the Company for any business purpose other than for
the benefit of the Company. The Officer further agrees that during the Period
of Restriction, the Officer shall not, directly or indirectly, personally or
through others, solicit the trade of, or trade with, any customers or suppliers
of the Company at the time of termination of Officer's employment.
(f) Acknowledgment of Reasonableness of Restrictions. The Officer
-------------------------------------------------
specifically acknowledges and agrees that the covenants and nature of the
limitations upon the Officer's activities as specified in this Agreement,
together with the duration and scope of such covenants and restrictions, are
reasonable limitations on the Officer's activities, and that the restrictions
are required to preserve, promote and protect the business interests and good-
will of the Company and impose no greater restraint than is reasonably necessary
to secure such protection.
(g) Interpretation of Covenants. In the event that any covenant or
----------------------------
the provisions of any covenant or restriction in this Agreement shall be held
invalid or unenforceable by a court of competent jurisdiction for any reason,
including, but not limited to, the duration or scope thereof, such invalidity or
unenforceability shall attach only to the specific covenant or provision
determined to be unenforceable and the remaining covenants or provisions of the
specific covenant shall remain in full force and effect for the greatest time
period and for the broadest scope permitted by applicable law. The Officer and
the Company intend that each of the covenants shall be deemed to be a series of
separate covenants, one for each and every county of each and every state of the
United States of America, and one for each and every political subdivision of
each and every other country where the covenants shall be effective.
10. INDEMNIFICATION. The Company shall indemnify the Officer, for such
expenses and liabilities, in such manner, under such circumstances, and to such
extent as required by the Company's bylaws and applicable law, including, if
then applicable, Minnesota Statutes Section 302A.521, as now enacted or
hereafter amended.
11. ENTITLEMENT TO EQUITABLE RELIEF. The Officer and the Company
acknowledge and agree that the breach by the Officer of any covenant,
restriction or obligation under this Agreement will cause the Company
substantial, immediate and irreparable harm, that the extent of damages will be
difficult to measure, and, consequently, there is not an adequate remedy at law
in the event of such breach. Accordingly, the Company and the Officer hereby
agree that the Company shall be entitled to injunctive relief, without prejudice
to any other right the Company may have in law or in equity under this
Agreement, by bringing an appropriate action for such remedy in any court of
competent jurisdiction which the Company, in its sole discretion, deems
appropriate.
12. RESTRICTIVE COVENANTS. The Officer presently represents that the
Officer's experience and capabilities are such that the restrictive covenants
set forth in this Agreement will not prevent the Officer from earning a
livelihood, and that the Officer will be fully able to earn and receive an
adequate livelihood for the Officer and the Officer's dependents if any of such
provisions should be specifically enforced against the Officer.
13. CONSENT TO JURISDICTION AND VENUE. The Officer hereby irrevocably
submits to the jurisdiction of the United States District Court for the District
of Idaho, or the District Court in and for the Counties of Ada or Canyon, State
of Idaho, in any action or proceeding arising out of or relating to this
Agreement, and the Officer hereby irrevocably agrees that all claims in respect
of any such action or proceeding may be heard and determined in such courts.
The Officer further irrevocably waives any objection that the Officer now or
hereafter may have to the laying of venue of any action or proceeding arising
out of or relating to this Agreement brought in such courts on the ground that
any such action or proceeding in such courts has been brought in an inconvenient
forum. Nothing in this paragraph shall affect the right of the Company to bring
any action or proceeding against the Officer or the Officer's property in the
courts of other jurisdictions. The Officer agrees that a final judgment in any
4
<PAGE>
such action or proceeding shall to the extent permitted by applicable law be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by applicable law related to the enforcement of
judgments.
14. COVENANTS OF THE ESSENCE. The covenants of the Officer set forth
herein are of the essence of this Agreement; they shall be construed as
independent of any other provision in this Agreement; and the existence of any
claim or cause of action of the Officer against the Company, whether predicated
on this Agreement or not, shall not constitute a defense to the enforcement by
the Company of these covenants.
15. TOLLING PERIOD. Officer shall not interpose as a defense to
enforcement of the covenants and obligations of the Officer contained in this
Agreement the length of time during which the Officer shall have been in breach
of any of said provisions, and if the court finds it appropriate may extend or
toll the Period of Restriction for such length of time.
16. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors in interest of any kind
whatsoever.
17. FINAL AGREEMENT. This Agreement supersedes all prior employment
agreements, and is the entire and final understanding of the parties as to the
subject matter hereof.
18. APPROVAL. This Agreement and the Officer's employment hereunder is
subject to approval by the Company's Board of Directors and, until such approval
shall be given, and evidenced by a written resolution of the Board of Directors,
or a committee thereof, shall be of no force and effect.
MICRON ELECTRONICS, INC. JILL D. SMITH
/s/ Savino R. Ferrales /s/ Jill D. Smith
- -------------------------------------- -------------------------------
Savino R. (Sid) Ferrales
Senior Vice President, Human Resources
Date: March 17, 1999 Date: March 17, 1999
-------------- --------------
5
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<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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<PERIOD-START> SEP-04-1998
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<PP&E> 249,076
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0
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<COMMON> 962
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<TOTAL-LIABILITY-AND-EQUITY> 698,406
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<CGS> 911,134
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