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 December 3, 1998
---------------------------------------------
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
December 30, 1998 was 96,061,036.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
Micron Electronics, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal quarter ended December 3, 1998 November 27, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 403,496 $ 558,890
Cost of goods sold 334,678 481,676
--------- ---------
Gross margin 68,818 77,214
Selling, general and administrative 52,396 72,258
Research and development 1,451 3,582
Other expense, net 40 1,807
--------- ---------
Operating income (loss) 14,931 (433)
Interest income, net 4,027 2,194
--------- ---------
Income before taxes 18,958 1,761
Income tax provision 7,299 696
--------- ---------
Net income $ 11,659 $ 1,065
========= =========
Earnings per share:
Basic $ 0.12 $ 0.01
Diluted 0.12 0.01
Number of shares used in per share calculation:
Basic 95,953 95,552
Diluted 97,316 95,923
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> <1>
Micron Electronics, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except par value amounts)
<TABLE>
<CAPTION>
As of December 3, 1998 September 3, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $313,784 $328,537
Liquid investments 55,915 29,204
Receivables, net 166,722 128,269
Inventories 29,581 30,848
Deferred income taxes 22,380 19,172
Other current assets 2,451 2,432
-------- --------
Total current assets 590,833 538,462
Property, plant and equipment, net 149,752 147,912
Other assets 3,463 6,069
------- --------
Total assets $744,048 $692,443
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $237,187 $214,930
Accrued licenses and royalties 30,685 18,585
Current debt 18,015 16,798
-------- --------
Total current liabilities 285,887 250,313
Long-term debt 9,777 11,730
Other liabilities 17,129 13,506
-------- --------
Total liabilities 312,793 275,549
-------- --------
Commitments and contingencies
Common stock, $.01 par value, authorized 150.0
million shares; issued and outstanding 96.1
million and 95.9 million shares at December 3,
1998 and September 3, 1998, respectively 961 959
Additional capital 125,888 122,837
Retained earnings 304,719 293,061
Accumulated other comprehensive income (loss) (313) 37
-------- --------
Total shareholders' equity 431,255 416,894
-------- --------
Total liabilities and shareholders' equity $744,048 $692,443
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> <2>
Micron Electronics, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousand)
<TABLE>
<CAPTION>
Fiscal quarter ended December 3, 1998 November 27, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,659 $ 1,065
Adjustments to reconcile net income to net
cash provided by (used for) operating
activities:
Depreciation and amortization 7,894 10,413
Changes in assets and liabilities:
Receivables (38,167) (33,697)
Inventories 1,520 (15,152)
Accounts payable and accrued expenses 25,220 33,448
Accrued licenses and royalties 12,100 (3,523)
Deferred income taxes 3,038 1,743
Other 399 1,419
--------- ---------
Net cash provided by (used for) operating
activities 23,663 (4,284)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (12,987) (25,931)
Proceeds from sales of property, plant and
equipment - 5,798
Purchases of held-to-maturity investment securities (42,613) -
Proceeds from maturities of investment securities 16,125 -
Other (262) (528)
--------- ---------
Net cash used for investing activities (39,737) (20,661)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings - 3
Repayments of debt (1,823) (1,877)
Proceeds from issuance of common stock 2,772 39
Purchase and retirement of stock - (21)
--------- ---------
Net cash provided by (used for) financing
activities 949 (1,856)
--------- ---------
Net decrease in cash and cash equivalents (15,125) (26,801)
Effect of exchange rate changes on cash and cash
equivalents 372 -
Cash and cash equivalents at beginning of period 328,537 183,935
--------- ---------
Cash and cash equivalents at end of period $ 313,784 $ 157,134
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> <3>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands, except per share amounts)
1. Unaudited Interim Financial Statements
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly the financial position
of Micron Electronics, Inc. and its subsidiaries (collectively, the
"Company") and their results of operations and cash flows. Certain
reclassifications have been made, none of which affect results of
operations, to present the financial statements on a consistent basis.
This report on Form 10-Q for the first fiscal quarter ended December 3,
1998 should be read in conjunction with the Company's Annual 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.
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.
The adoption did not have a material effect on the Company's results of
operations or financial position for the quarter ended December 3, 1998.
<TABLE>
<CAPTION>
2. Receivables
December 3, 1998 September 3, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $160,221 $122,294
Receivables from affiliates, net 344 105
Income taxes recoverable from MTI 3,544 3,068
Other 9,271 10,090
Allowance for doubtful accounts (3,455) (3,709)
Allowance for returns and discounts (3,203) (3,579)
-------- --------
$166,722 $128,269
======== ========
</TABLE>
3. Inventories
<TABLE>
<CAPTION>
December 3, 1998 September 3, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 15,282 $ 16,144
Work in progress 5,422 4,469
Finished goods 8,877 10,235
-------- --------
$ 29,581 $ 30,848
======== ========
</TABLE>
<PAGE> <4>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
4. Property, Plant and Equipment
<TABLE>
<CAPTION>
December 3, 1998 September 3, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,234 $ 1,234
Buildings 35,200 34,826
Equipment and software 156,136 145,310
Assets in progress 36,151 38,197
-------- --------
228,721 219,567
Less accumulated depreciation and amortization (78,969) (71,655)
-------- --------
$149,752 $147,912
======== ========
</TABLE>
Effective September 4, 1998, the Company revised its estimated useful
lives of certain information technology assets. The effect of this change
was to reduce the first fiscal quarter 1999 depreciation and amortization
charge by $1.4 million ($0.8 million net of tax), or $0.01 per diluted
share.
5. Accounts Payable and Accrued Expenses
<TABLE>
<CAPTION>
December 3, 1998 September 3, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $170,511 $146,124
Payable to affiliates 27,215 20,601
Salaries, wages and benefits 15,142 20,496
Income taxes payable 278 92
Equipment contracts payable 636 3,884
Accrued warranty 17,699 17,128
Other 5,706 6,605
-------- --------
$237,187 $214,930
======== ========
</TABLE>
6. Debt
<TABLE>
<CAPTION>
December 3, 1998 September 3, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Notes payable in periodic installments
through September 2001,weighted average
interest rate of 7.62% and 7.63%, respectively $ 14,985 $ 16,068
Capitalized lease obligations payable in monthly
installments through June 2000, interest rate
of 7.28% 3,544 4,284
Amounts outstanding under revolving loan agreement,
due June 1999, variable interest of 1.52% and
1.34%, respectively 9,263 8,176
-------- --------
27,792 28,528
Less current portion (18,015) (16,798)
-------- --------
$ 9,777 $ 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 December 3, 1998, 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.
<PAGE> <5>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements-Continued
(Tabular amounts in thousands, except per share amounts)
The Company's wholly-owned subsidiary, Micron Electronics Japan K.K., has
an unsecured revolving credit facility with a financial institution,
expiring June 1999, providing for borrowings of up to 1.5 billion Japanese
yen (US$12.6 million at December 3, 1998). As of December 3, 1998, the
Company was eligible to borrow the full amount under the agreement and
there was US$9.3 million outstanding.
Certain of the Company's notes payable are collateralized by equipment
with a total cost of approximately $20.9 million and accumulated
depreciation of approximately $10.2 million as of December 3, 1998.
7. Transactions with Affiliates
<TABLE>
<CAPTION>
For the quarter ended
December 3, 1998 November 27, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 598 $ 7,465
Inventory purchases 11,129 17,314
Component recovery agreement expenses 16,085 8,352
Administrative services and other expenses 114 268
Property, plant and equipment purchases 1,870 263
Property, plant and equipment sales - 5,148
Construction management services - 101
</TABLE>
8. Income Taxes
The effective income tax rate for the three months ended December 3, 1998
and November 27, 1997 was 38.5% and 39.5%, respectively, principally
reflecting the federal statutory rate, net of the effect of state taxes.
9.Comprehensive Income (Loss)
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
December 3, 1998 November 27, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 11,659 $ 1,065
Foreign currency translation (350) (1,246)
-------- --------
Comprehensive income (loss) $ 11,309 (181)
======== ========
</TABLE>
Accumulated other comprehensive income (loss) presented in the accompanying
consolidated balance sheets consists of the cumulative foreign currency
translation adjustment.
<PAGE> <6>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
10. 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 employee stock options.
<TABLE>
<CAPTION>
For the quarter ended
December 3, 1998 November 27, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income available to common shareholders $ 11,659 $ 1,065
======== ========
Common shares outstanding:
Weighted average shares outstanding - basic 95,953 95,552
Effect of dilutive stock options 1,363 371
-------- -------
Weighted average shares outstanding - diluted 97,316 95,923
======== ========
Earnings per share:
Basic $ 0.12 $ 0.01
Diluted 0.12 0.01
</TABLE>
11. Commitments
As of December 3, 1998, the Company had commitments of $4.2 million for
equipment purchases and $0.4 million for construction of buildings. In
addition, the Company is required to make minimum royalty payments under
certain agreements and periodically enters into purchase commitments with
certain suppliers.
12. Contingencies
Periodically, the Company is made aware that technology used by the
Company may infringe on intellectual property rights held by others. The
Company has accrued a liability and charged operations for the estimated
costs of settlement or adjudication of asserted and unasserted claims for
alleged infringement prior to the balance sheet date. Resolution of these
claims could have a material adverse effect on future results of operations
and could require changes in the Company's products or processes.
The Company is 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 pending litigation or administrative proceedings would not
materially affect its financial condition, operations or cash flows.
During fiscal 1997, the Company began to collect and remit applicable
sales or use taxes in nearly all states. In association therewith, the
Company is party to agreements with nearly all states which generally limit
the liability of the Company, if any, for non-remittance of sales and use
taxes prior to such agreements' effective dates. Management believes the
resolution of any matters relating to the non-remittance of sales or use
taxes prior to the balance sheet date will not have a material adverse
effect on the Company's business and results of operations or cash flows.
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
13. 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 for $249.2
million in cash. Accordingly, results of operations of MCMS subsequent to
February 26, 1998 have been excluded from the Company's results of
operations.
<PAGE> <7>
14. Subsequent Event
On December 21, 1998, the Company announced it is consolidating its
Micron Electronics Japan operation currently in Japan to its Nampa, Idaho
facility. The costs associated with exiting the Japanese operation will
result in a non-recurring charge of approximately $3.2 million in the
second quarter of fiscal 1999.
<PAGE> <8>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
Statements contained in this Form 10-Q that are not purely historical
are forward-looking statements and are being provided in reliance upon the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. All forward-looking statements are made as of the date hereof and
are based on current management expectations and information available to
the Company as of such date. The Company assumes no obligation to update
any forward-looking statement. It is important to note that actual results
could differ materially from historical results or those contemplated in
the forward-looking statements. Forward-looking statements involve a
number of risks and uncertainties, and include trend information. Factors
that could cause actual results to differ materially include, but are not
limited to, those identified in "Certain Factors" and in other Company
filings with the Securities and Exchange Commission. All quarterly
references are to the Company's fiscal periods ended December 3, 1998,
September 3, 1998 or November 27, 1997, 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 Sales
The following table summarizes the Company's net sales by product line:
<TABLE>
<CAPTION>
First Quarter
---------------------------------------------
1999 1998
--------------------- ---------------------
Amount % of Sales Amount % of Sales
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
PC systems $364,159 90.3% $459,040 82.1%
Contract manufacturing - - 70,201 12.6%
SpecTek memory products 39,337 9.7% 29,649 5.3%
-------- ------ -------- ------
Total net sales $403,496 100.0% $558,890 100.0%
======== ====== ======== ======
</TABLE>
Personal Computer Systems. In the first quarter of fiscal 1999, the
Company experienced PC systems unit sales volume up 2% from the first
quarter of fiscal 1998, driven primarily by higher levels of sales to
governmental entities and sales of notebook products. The increases in
units were offset by an 18% decrease in average selling prices from the
first quarter of fiscal 1998. The decline in average selling prices was
primarily attributable to a 12% decrease in the selling prices for the
Company's desktop PC systems and a 40% decline in the selling prices for
notebook PC systems. Lower prices were largely the result of industry
price competitiveness and the Company's more aggressive pricing across
product lines, particularly on notebook products in order to stimulate
demand. In addition, during the first quarter of fiscal 1998, the Company
disposed of a large volume of excess PC component inventories, which also
contributed to the decline in net sales between periods.
Sales to governmental entities, including prime contractors under certain
federal government procurement programs, were 34% of total net sales of PC
systems in the first quarter of fiscal 1999 compared to 28% in the
corresponding period in fiscal 1998. 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 34% higher in the first quarter of fiscal 1999
compared to the first quarter of fiscal 1998 primarily due to a 174%
<PAGE> <9>
increase in megabits of memory shipped, partially offset by a 52% decline
in average selling prices. The increase in megabits of memory shipped was
primarily due to the strengthening of demand for substantially all memory
products. The Company has experienced significant volatility in prices
and anticipates significant volatility in prices for future sales of
semiconductor memory products. The Company's SpecTek semiconductor memory
products results of operations are influenced by a number of factors
including pricing for, and availability of, nonstandard semiconductor
memory components. See "Certain Factors SpecTek Semiconductor Memory
Products Operation."
The Company and MTI are parties to a Component Recovery Agreement,
expiring on September 2, 1999, under which MTI is required to deliver to
the Company all of the nonstandard memory components produced at MTI's
semiconductor manufacturing operations. Expiration, termination or
renegotiation of the Component Recovery Agreement could have a material
adverse effect on the Company's business and results of operations and
cashflows. A majority of the semiconductor components used in the
Company's SpecTek semiconductor memory products operation has been obtained
from MTI. In the first quarter of fiscal 1999, the Company obtained 99% of
its components from MTI, compared to 62% in the first quarter of fiscal
1998. Purchases from sources other than MTI are generally negotiated on a
purchase order basis. There can be no assurance the Company will be able
to negotiate future purchases from sources other than MTI on terms
acceptable to the Company. Unless the Company is able to continue
obtaining significant quantities of nonstandard semiconductor memory
components from alternative sources, the Company's SpecTek semiconductor
memory products operation could be limited by the volume of components
supplied by MTI. There can be no assurance the Company will be able to
negotiate future purchases from MTI on terms acceptable to the Company
after expiration of the Component Recovery Agreement. Any reduction in the
availability or functionality of nonstandard semiconductor memory
components from the Company's suppliers could have a material adverse
effect on the Company's business and results of operations and cashflows.
See "Certain Factors SpecTek Semiconductor Memory Products
Operation Dependence on Component Recovery Agreement with MTI."
Gross Margin
<TABLE>
<CAPTION>
First Quarter
---------------------------------------------
1999 1998
--------------------- ---------------------
Amount % of Sales Amount % of Sales
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
PC systems $ 54,505 15.0% $ 58,878 12.8%
Contract manufacturing - - 10,091 14.4%
SpecTek memory products 14,313 36.4% 8,245 27.8%
-------- --------
Total gross margin $ 68,818 17.1% $ 77,214 13.8%
======== ========
</TABLE>
Personal Computer Systems. Gross margin from the Company's PC
operations was 15.0% in the first quarter of fiscal 1999 compared to 12.8%
in the first quarter of the prior year. During the first quarter of fiscal
1999, the Company aggressively priced its products to drive unit volumes
during the government-buying season and to reinvigorate notebook sales.
Gross margin in the first quarter of fiscal 1998 were adversely affected by
significant losses recognized from disposition of excess PC component
inventories.
The Company expects to continue experiencing significant pressure on its
gross margin on sales of its PC systems as a result of intense competition
in the PC industry and consumer expectations of more powerful PC systems at
lower prices. In addition, the Company's gross margin percentage will
continue to depend in large part on its ability to effectively forecast
demand and manage its inventories of PC components. See ''Certain
Factors Personal Computer Systems Competition'' and ''Certain
Factors Personal Computer Systems Inventory Management.''
SpecTek Semiconductor Memory Products. The gross margin realized by the
Company's SpecTek semiconductor memory products operation was higher in the
first quarter of fiscal 1999 compared to the first quarter of fiscal 1998
primarily due to lower costs of components. The Company has experienced
significant volatility in selling prices and expects average selling prices
for its SpecTek semiconductor memory products to continue to exhibit
significant volatility. As a result, the gross margin for the Company's
SpecTek semiconductor memory products operation could decline and adversely
affect the Company's business and results of operations and cash flows.
See "Certain Factors SpecTek Semiconductor Memory Products
Operation Pricing of Semiconductor Memory Products."
The Company's cost of components obtained from MTI are equal to one-half
of the net operating income generated from sales of such components. See
"Certain Factors SpecTek Semiconductor Memory Products Operation Dependence
on Component Recovery Agreement with MTI."
<PAGE> <10>
Selling, General and Administrative
<TABLE>
<CAPTION>
First Quarter
---------------------------------
1999 % Change 1998
------- -------- -------
<S> <C> <C> <C>
Selling, general and administrative $52,396 (27.5%) $72,258
as a % of net sales 13.0% 12.9%
</TABLE>
Selling, general and administrative expenses decreased by
$19.9 million in the first quarter of fiscal 1999 compared to the
corresponding period in 1998 primarily due to the Company's continued focus
on operational efficiencies, cost containment efforts, and the sale of 90%
of its interest in MCMS, Inc. in fiscal 1998. Partially offsetting this
decrease was the Company's aggressive expansion of its field sales force
personnel, which included the addition of more than 100 sales people
dedicated to the mid-market.
Research and Development
<TABLE>
<CAPTION>
First Quarter
----------------------------------
1999 % Change 1998
------- -------- -------
<S> <C> <C> <C>
Research and development $ 1,451 (59.5%) $ 3,582
as a % of net sales 0.4% 0.6%
</TABLE>
Research and development expenses were lower between the quarters, as the
first quarter of fiscal 1998 had significant development activities
associated with the Company's NetFRAME enterprise server operation.
Other Expense, net
Other Expense, net, in the first quarter of fiscal 1998 included $2.7
million for the write-off of software costs from the abandoned development
of an internal use software application.
Income Tax Provision
<TABLE>
<CAPTION>
First Quarter
----------------------------------
1999 % Change 1998
------- -------- ------
<S> <C> <C> <C>
Income tax provision $ 7,299 948.7% $ 696
</TABLE>
The effective income tax rate of 38.5% and 39.5%, in the first quarters
of fiscal 1999 and 1998, respectively, principally reflected the federal
statutory rate, net of the effect of state taxes.
Liquidity and Capital Resources
As of December 3, 1998, the Company had cash, cash equivalents and liquid
investments of $369.7 million, representing an increase of $12.0 million
compared to September 3, 1998. Principal sources of liquidity in the first
quarter of fiscal 1999 were cash flows from operations of $23.7 million and
issuance of common stock of $2.8 million pursuant to the exercise of
options under the Company's 1995 Stock Option Plan. Principal uses of cash
in the first quarter of fiscal 1999 were property, plant and equipment
expenditures of $13.0 million primarily for expansion and capacity
improvements of the Company's manufacturing operations and repayment of
debt of $1.8 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 December 3, 1998, 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., has
an unsecured revolving credit facility with a financial institution,
expiring June 1999, providing for borrowings of up to 1.5 billion Japanese
yen (US$12.6 million at December 3, 1998). As of December 3, 1998, the
Company was eligible to borrow the full amount under the agreement and
there was US$9.3 million outstanding.
<PAGE> <11>
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 December 3, 1998, the Company had commitments of $4.6 million for
capital expenditures for expansion and upgrade of facilities and equipment.
The Company anticipates making capital expenditures in fiscal 1999 in
excess of $50 million.
The Company expects that its future working capital requirements will
continue to increase. The Company believes that currently available cash
and cash equivalents, liquid investments, cash flows from operations, the
Company's current credit facilities and equipment financings will be
sufficient to fund its operations for the next twelve months.
Subsequent Factors
On December 21, 1998, the Company announced it is consoldiating its Micron
Electronics Japan operation currently in Japan to its Nampa, Idaho facility.
The costs associated with exiting the Japanese operation will result in a
non-recurring charge of approximately $3.2 million in the second quarter
of fiscal 1999.
Subsequent Event
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.
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 reorganization of its operation along its customer
segments. 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.
<PAGE> <12>
Intellectual Property Matters
It is common in the electronics industry for patent, trademark and other
intellectual property rights claims to be asserted against companies,
including component suppliers and PC manufacturers. Periodically, the
Company is made aware that technology used by the Company may infringe on
intellectual property rights held by others. The Company evaluates all
such claims and, if necessary and appropriate, seeks to obtain licenses for
the continued use of such technology. The Company has accrued a liability
and charged operations for the estimated costs of settlement or
adjudication of asserted and unasserted claims for alleged infringement
prior to the balance sheet date. The Company would be placed at a
competitive disadvantage if it were unable to obtain such licenses upon
terms at least as favorable as those experienced by the Company's
competitors. The Company has entered into several intellectual property
license agreements, and as a majority-owned subsidiary of MTI, is licensed
under certain license agreements between MTI and third parties. The
Company's rights under license agreements between MTI and third parties may
terminate in the event that the Company is no longer a majority-owned
subsidiary of MTI. Intellectual property agreements and license agreements
generally require one-time or periodic royalty payments and are subject to
expiration at various times. If the Company or its suppliers are unable to
obtain licenses necessary to use intellectual property in their products or
processes, the Company may be forced to market products without certain
technological features or software, discontinue sales of certain of its
products and/or defend legal actions taken against it relating to allegedly
protected technology. The inability of the Company to obtain licenses
necessary to use certain technology, or an inability to obtain such
licenses on competitive terms, or any litigation determining that the
Company, in the manufacture or sale of its products, has infringed on the
intellectual property rights of third parties, could have a material
adverse effect on the Company's business and results of operations and cash
flows.
MTI Ownership of Common Stock of the Company
As of December 3, 1998, MTI owned 63% of the Company's outstanding common
stock. In addition, three of the five 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.
<PAGE> <13>
Year 2000
The Year 2000 presents issues because many computer hardware and software
systems use only the last two digits to refer to a calendar year. Thus,
when the Year 2000 arrives, some systems may erroneously believe it is 1900
or some other year. In 1998, the Company established a Year 2000 project
team with representatives from all of the Company's business units. The
Company is currently in the process of assessing the Year 2000 readiness of
the hardware associated with its internal information technology systems,
as well as embedded technology associated with its manufacturing and
physical facilities. The Company anticipates completion of this evaluation
by the end of January 1999. Additionally, the software utilized on
information technology systems within the Company has previously been
evaluated. Where necessary, appropriate remediation efforts have or will
be undertaken. The Company expects to successfully implement necessary
modifications of its internal systems to timely address Year 2000 issues.
However, if necessary modifications are not made on a timely basis, Year
2000 issues could have a material adverse effect on the Company's business
or financial condition and cashflows.
In addition to internal Year 2000 readiness efforts, the Company is in
process of contacting its key suppliers to assess their compliance. It is
anticipated that this assessment process will be substantially completed by
the end of January 1999. The Company anticipates that the assessment
process will minimize risks to the Company, which might arise from failure
of such suppliers to adequately address Year 2000 issues. Commencing in
the first calendar quarter of 1999, the Company plans to develop
contingency plans designed to address situations that might arise from the
failure of the Company or its suppliers to timely and adequately address
Year 2000 issues. However, there can be no assurance that the failure of
suppliers to address Year 2000 issues will not have a material adverse
effect on the Company's business or financial condition.
Through the end of fiscal 1998 and into the first quarter of fiscal 1999,
the Company has incurred incremental costs of approximately $1.5 million
related to Year 2000 assessment and remediation efforts. The total
estimated additional cost to complete the Company's internal readiness
program is from $1.0 million to $3.0 million. This estimate, which does
not include any costs which may be incurred by the Company if its key
suppliers fail to timely address Year 2000 issues, is based on currently
known circumstances and various assumptions regarding future events. The
actual cost of Year 2000 assessment and remediation efforts could differ
materially from the estimate.
All Micron-branded hardware products shipped since August 26, 1996 have
BIOS clocks that will automatically roll over to "2000" at the century
change. Additionally, the Company has provided software utilities to
bring earlier Micron-branded hardware products to a functional level of
Year 2000 compliance. The Company believes that it is not legally
responsible for any costs incurred by 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 financial
condition and cash flows.
On October 26, 1998, the Company was sued in state court in Canyon
County, Idaho, by Hannah Films, Inc., on behalf of itself and on behalf of
an as-of-yet unidentified and uncertified class of plaintiffs alleging
fraud, breach of the implied warranty of merchantability, violation of the
Magnuson-Moss Consumer Protection Act, and violation of the Idaho Consumer
Protection Act arising out of the Year 2000 status of a personal computer
sold by the Company to Hannah Films, Inc., in October 1995. The Company is
defending the matter. While there can be no assurance as to the ultimate
disposition of the case, the Company does not currently believe that the
resolution of this litigation will have a material adverse effect on the
Company's business or financial condition and cashflows.
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.
<PAGE> <14>
Personal Computer Systems
Competition
The PC industry is highly competitive and has been characterized by
intense pricing pressure, generally low gross margin percentages, rapid
technological advances in hardware and software, frequent introduction of
new products, and rapidly declining component costs. Competition in the PC
industry is based primarily upon brand name recognition, performance,
price, reliability and service and support. The Company's sales of PC
systems have historically benefited from increased name recognition and
market acceptance of the Company's PC systems, primarily resulting from the
receipt by the Company of awards from trade publications recognizing the
price and performance characteristics of Micron brand PC systems and the
Company's service and support functions. As a result of PC industry
standards, the Company and its competitors use many of the same components,
typically from the same set of suppliers, which limits the Company's
ability to technologically and functionally differentiate its products.
Many of the Company's PC competitors have greater brand name recognition
and market share, offer broader product lines, have substantially greater
financial, technical, marketing and other resources than the Company. In
addition, the Company's competitors may benefit from component volume
purchasing and product and process technology license arrangements that are
more favorable in terms of pricing and availability than the Company's
arrangements. In addition, the Company may be at a relative cost
disadvantage to certain of its competitors as a result of the Company's
U.S. dollar denominated purchases of PC components during a period of
relative weakening of the U.S. dollar. The failure of the Company to
compete effectively in the marketplace could have an adverse effect on the
Company's business and results of operations and cash flows.
The Company competes with a number of PC manufacturers, which sell their
products primarily through direct channels, including Dell Computer, Inc.
and Gateway 2000, Inc. The Company also competes with PC manufacturers,
such as Apple Computer, Inc., Compaq Computer Corporation, Hewlett-Packard
Company, International Business Machines Corporation, NEC Corporation and
Toshiba Corporation among others, which have traditionally sold their
products through national and regional distributors, dealers and value
added resellers, retail stores and direct sales forces and are now
beginning to sell their products through the direct channel. In addition,
the Company expects to face increased competition in the U.S. direct sales
market from foreign PC suppliers and from foreign and domestic suppliers of
PC products that decide to implement, or devote additional resources to, a
direct sales strategy. In order to gain an increased share of the United
States PC direct sales market, these competitors may effect a pricing
strategy that is more aggressive than the current pricing in the direct
sales market or may have pricing strategies influenced by relative
fluctuations in the U.S. dollar compared to other currencies.
The Company believes that the rate of growth in worldwide sales of PC
systems, particularly in the United States, where the Company sells a
substantial majority of its PC systems, has declined and may remain below
the growth rates experienced in recent years. Any general decline in
demand or decline in the rate of increase in demand for PC systems could
increase price competition and could have a material adverse effect on the
Company's business and results of operations and cash flows.
Inventory Management
The Company's ability to compete successfully in the PC market in the
future will depend in large part on its ability to accurately forecast
demand for its PC products and effectively manage its PC inventories. The
Company's PC operations focus on the direct sale of assemble-to-order PC
systems that feature components incorporating the latest technological
developments in the PC industry. The Company has experienced in the past,
and could experience in the future, excess PC inventories and inventory
obsolescence resulting from, among other things, the Company's inaccuracy
in forecasting demand for its PC products, the typically longer lead times
associated with notebook product supply, the fast pace of technological
developments in the PC industry and the short product life cycles of PC
systems and components. In addition, because high volumes of quality
components are required for the manufacture of the Company's PC systems,
the Company has experienced in the past, and expects to experience in the
future, shortages and other supply constraints of key components. Such
shortages or supply constraints have in the past adversely affected, and
could in the future adversely affect, the Company's ability to ship
products on schedule or at expected gross margins. To be successful in the
future, the Company must accurately forecast demand for its PC products and
obtain adequate, but not excessive, supplies of components to meet actual
demand. The failure of the Company to manage its inventories effectively
could result in excess PC inventories, inventory obsolescence, component
shortages and untimely shipment of products, any of which could have a
material adverse effect on the Company's business and results of operations
and cash flows.
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
<PAGE> <15>
addition, a significant portion of the RAM components used in the Company's
PC systems are supplied by MTI, and the Company generally relies on MTI to
supply the latest memory densities and configurations available. The
Company relies, to a certain extent, upon its suppliers' abilities to
enhance existing products in a timely and cost-effective manner, to develop
new products to meet changing customer needs and to respond to emerging
standards and other technological developments in the PC industry. The
Company's reliance on a limited number of suppliers and on a strategy of
incorporating the latest technological developments into its PC systems
involves several risks, including the possibility of shortages and/or
increases in costs of components and software, and risk of reduced control
over delivery schedules, which could have a material adverse effect on the
Company's business and results of operations and cash flows.
The Company's notebook products are currently assembled by third-party
manufacturers. These outsourcing arrangements and any future outsourcing
arrangements that the Company may enter into may reduce the direct control
the Company has over certain components and the assembly of such products.
There can be no assurance that the Company's outsourcing arrangements will
not result in quality problems or affect the Company's ability to ship such
products on a timely basis or the flexibility of the Company to respond to
changing market conditions.
State Taxation
During fiscal 1997, the Company began to collect and remit applicable
sales or use taxes in nearly all states. In association therewith, the
Company is party to agreements with nearly all states which generally limit
the liability of the Company, if any, for non-remittance of sales and use
taxes prior to such agreements' effective dates. Management believes the
resolution of any matters relating to the non-remittance of sales or use
taxes prior to the balance sheet date will not have a material adverse
effect on the Company's business and results of operations and cashflows.
SpecTek Semiconductor Memory Products Operation
Dependence on Component Recovery Agreement with MTI
The Company has a Component Recovery Agreement (the "Component Recovery
Agreement") with MTI, which expires on September 2, 1999, and may be
terminated by MTI in the event that MTI's ownership of the Company falls
below 30%. Under the Component Recovery Agreement, MTI is required to
deliver to the Company all of the nonstandard memory components produced at
MTI's semiconductor manufacturing operations. The Company's cost of such
components generally is determined as one-half of the operating income
generated from the Company's SpecTek sales of semiconductor memory products
supplied by MTI. Historically, a substantial majority of the components
used in the Company's SpecTek semiconductor memory products operation has
been obtained from MTI. There can be no assurance the Company will be able
to negotiate future purchases on terms acceptable to the Company from MTI
after the expiration of the Component Recovery Agreement. Any reduction in
the availability or functionality of nonstandard semiconductor memory
components from MTI could have a material adverse effect on the Company's
business and results of operations and cash flows.
Many semiconductor memory manufacturers are reluctant to sell nonstandard
memory components because such components could compete with their full
specification memory components for similar applications. In addition,
some manufacturers are concerned that subsequent testing performed by a
recovery operation could reveal proprietary data regarding manufacturing
yields and processes. As a result, there can be no assurance that the
Company will be able to obtain nonstandard memory components from
semiconductor manufacturers in quantities sufficient to meet demand for the
Company's SpecTek products. Any reduction in the availability or
functionality of nonstandard memory components from the Company's suppliers
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 was due primarily to changes in the
balance of supply and demand for these commodity products and changes in
relative weakness or strength of certain currencies, and the Company is
unable to predict the impact of semiconductor memory product market
dynamics in future periods. Due to increased market risk associated with
holding purchased memory components in inventory, the Company has
experienced in the past, and may experience in the future, losses from
write-downs of memory component inventories in periods of declining prices.
Further declines in pricing for semiconductor memory products would likely
<PAGE> <16>
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.
<PAGE> <17>
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 December 3, 1998, approximately 80% of the Company's liquid investments
mature within three months and the remainder within one year. As of
December 3, 1998, 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. 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.
<PAGE> <18>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Shareholders
- --------------------------------------------------------
The Company's 1998 Annual Meeting of Shareholders was held on November
23, 1998 at the Nampa Civic Center, Nampa, Idaho. At the meeting, the
following items were submitted to a vote of the shareholders. At the
meeting, 95,885,574 shares were entitled to vote.
(1) The following nominees for Directors were elected. Each person
elected as Director will serve until the next meeting of shareholders
or until such person's successor is elected and qualified.
<TABLE>
<CAPTION>
Name of Nominee Votes Cast For Withhold Authority
---------------------------------------------------------------------------
<S> <C> <C>
Steven R. Appleton 89,027,813 234,870
Joel J. Kocher 88,981,428 281,255
Robert A. Lothrop 88,965,740 296,943
T. Erik Oaas 89,002,860 259,823
John R. Simplot 88,991,459 271,224
</TABLE>
(2) The ratification of the appointment of PricewaterhouseCoopers LLP
as independent public accountants of the Company for the fiscal year
ending September 2, 1999 was approved with 89,162,705 votes in favor,
54,901 votes against, 45,077 abstentions and no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) The following are filed as a part of this report:
<TABLE>
<CAPTION>
Exhibit Description
------------------------------------------------------------------------------
<S> <C>
10.58 Micron Electronics, Inc. Management and Executive Incentive Plan
10.59 Amendment No. 1 to Credit Agreement, dated November 5, 1998,
between the Company and certain financial institutions named
therein
10.60 Guaranty Agreement, dated November 5, 1998, between the Company
and certain financial institutions named therein
10.61 Amendment to the Micron Electronics, Inc. 1995 Stock Option Plan
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the quarter
ended December 3, 1998.
Micron and Micron Electronics are trademarks of the Company, and
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.
<PAGE> <19>
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: January 6, 1999
/s/ Joel J. Kocher
--------------------------------------------------
Joel J. Kocher, Chairman and
Chief Executive Officer
/s/ Brad J. Grover
--------------------------------------------------
Brad J. Grover, Controller and
Director of Finance
<PAGE> <20>
MICRON ELECTRONICS, INC.
MANAGEMENT & EXECUTIVE INCENTIVE PLAN
1. PURPOSE
The Micron Electronics, Inc. Management & Executive
Incentive Plan (the "MEIP") is designed to attract, retain, and
reward highly qualified executive, management and key employees
who are important to the Company's success and to provide
incentives relating directly to the financial performance and
long-term growth of the Company. The MEIP was originally adopted
and approved by the shareholders as the Micron Electronics, Inc.
Executive Bonus Plan (the "Bonus Plan").
2. DEFINITIONS
(a) Bonus - The cash incentive awarded to an Executive
Officer or Key Employee pursuant to the terms and conditions of
the MEIP.
(b) Board - The Board of Directors of Micron Electronics,
Inc.
(c) Change in Control - (i) The acquisition by any person
or entity of securities of Micron Electronics, Inc. such that
such person or entity, directly, indirectly or beneficially,
acting alone or in concert, (A) owns or controls more of the
combined voting power of all classes of voting securities of
Micron Electronics, Inc. than does Micron Technology, Inc. and
(B) owns or controls more than thirty-five percent (35%) of the
combined voting power of all classes of voting securities of
Micron Electronics, Inc.; or (ii) subject to Micron Technology,
Inc. owning or controlling more than thirty-five percent (35%) of
the combined voting power of all classes of voting securities of
Micron Electronics, Inc., the acquisition by any person or
entity, directly, indirectly or beneficially, acting alone or in
concert, of more than thirty-five percent (35%) of the common
stock of Micron Technology, Inc. outstanding at any time.
(d) Code - The Internal Revenue Code of 1986, as amended.
(e) Committee - The Compensation Committee of the Board, or
such other committees of the Board that is designated by the
Board to administer the MEIP, in compliance with requirements of
Section 162(m) of the Code.
(f) Company - Micron Electronics, Inc. and any other
corporation in which Micron Electronics, Inc., controls, directly
or indirectly, fifty percent (50%) or more of the combined voting
power of all classes of voting securities.
(g) Disability Total and permanent disability as defined
in Section 22(e)(3) of the Code.
<PAGE>
(h) Executive - An Executive Officer or Key Employee of the
Company.
(i) Executive Officer - Any officer of the Company subject
to the reporting requirements of Section 16 of the Securities and
Exchange Act of 1934 (the "Exchange Act").
(j) Extraordinary Items - A sale of a division or
subsidiary of the Company, a merger or consolidation of the
Company, a reorganization or dissolution of the Company or such
other Extraordinary Items as determined by the Committee in its
sole discretion.
(k) Key Employee - Any employee of the Company as may be
designated by the Committee for this MEIP.
(l) Performance Period - The fiscal month, quarter, semi-
annual or annual period of time established by the Committee for
the establishment of performance goals; provided, that any
Performance Period established for an Executive Officer who is
Chief Executive Officer, President or Chief Financial Officer
shall not be less than one year.
3. ELIGIBILITY
Only Executives, including Executive Officers and Key
Employees as defined above, are eligible for participation in the
MEIP. In order to participate in the MEIP for any Performance
Period, an Executive must be designated for participation in
accordance with the MEIP and the selection procedures established
by the Committee. All designations of Executives as participants
in the MEIP are subject to the terms of the MEIP and approval by
the Committee. If an employee becomes an Executive mid-way
through a Performance Period, then such Executive may be eligible
for participation in the MEIP on a pro-rated basis, with a Bonus
set under the MEIP equal to the Bonus that would have been set
for the entire Performance Period multiplied by the number of
weeks of the Executive s participation over the total number of
weeks in the Performance Period.
If an employee ceases to be an Executive as a result of the
Executive's death, Disability or retirement with the Company
during a Performance Period, then such Executive shall be
eligible for participation in the MEIP on a pro-rated basis. In
such event, and subject to a determination with respect to
satisfactory achievement of the Executive's performance goals and
final approval by the Committee, the Executive may earn a Bonus
under the MEIP equal to the Bonus that would have been paid for
the entire Performance Period multiplied by the number of weeks
of the Executive's participation over the total number of weeks
in the Performance Period. If an employee ceases to be an
Executive or an employee of the Company for any other reason
during a Performance Period, no Bonus shall be paid to that
employee for that Performance Period, unless governed by the
Change in Control provisions below.
<PAGE>
4. ADMINISTRATION
Awards of bonuses under the MEIP shall be based on one or
more of the following performance goals: (i) net income,
(ii) earnings per share, (iii) return on equity, (iv) gross
margin, (v) return on assets, (vi) net sales, (vii) new products,
(viii) expansion of facilities, (ix) customer satisfaction,
(x) asset management or (xi) debt management. Performance goals
may be set by the Committee on an individual, area of
responsibility, business segment or Company-wide basis, or any
combination thereof. Unless otherwise specifically approved by
the Committee, the methods for calculating performance goals
shall exclude Extraordinary Items.
The Committee shall administer the MEIP and shall have full
power and authority to construe, interpret, and administer the
MEIP necessary to comply with the requirements of Section 162(m)
of the Code. The Committee's decisions shall be final,
conclusive, and binding upon all persons. The Committee shall
certify in writing prior to commencement of payment of the Bonus
that the performance goal or goals under which the bonus is to be
paid has or have been achieved. The Committee in its sole
discretion has the authority to reduce the amount of a Bonus
otherwise allocated to an Executive upon attainment of the
performance goal established for any Performance Period provided
that a reduction in the amount of one Executive's Bonus does not
result in an increase in the amount of any other Executive's
Bonus.
Promptly after the beginning of a Performance Period, the
Committee shall: (i) determine the performance criteria;
(ii) determine the Executives eligible to participate in the MEIP
for the applicable Performance Period; and (iii) determine the
method for computing the amount of Bonus payable to each
Executive if the performance goal is achieved. The Committee in
its sole discretion has the authority to increase the amount of a
Bonus otherwise allocated to an Executive.
The maximum Bonus amount that can be paid to any Executive
with respect to any one fiscal year cannot exceed the greater of
$2,000,000 or two percent (2%) of the Company's consolidated
after-tax net profits. Bonus amounts shall be paid within 90
days after the close of the applicable Performance Period, unless
the Committee elects to defer the payout of the Bonus or any
portion thereof over a period of time not to exceed five (5)
years. Payout of a Bonus or any portion thereof over an extended
period may, at the discretion of the Committee, be subject to and
conditioned upon the continuation of an Executive's employment
with the Company, a determination of satisfactory job performance
with respect to the Executive, and the profitability of the
Company in the year paid. Unpaid Bonuses can be canceled at the
discretion of the Committee.
Upon a Change in Control, the Company shall pay to each
eligible Executive (i) any Bonuses allocated, if any, under the
MEIP for all Performance Periods during the current fiscal year
at the maximum level established by the Board or Committee as of
the most recent allocation, unless otherwise agreed between the
<PAGE>
Company and the Executive, and (ii) any Bonuses that have been
awarded for previous years under the MEIP (or Bonus Plan) but not
previously paid, in either case immediately before such Change in
Control. To determine the amount of the Bonus for all
Performance Periods during the current fiscal year, the bonus
pool shall be annualized if the Change in Control occurs after
the end of the second fiscal quarter. If the Change in Control
occurs prior to the end of the second fiscal quarter, the bonus
pool shall be calculated as of the fiscal month end immediately
prior to the Change in Control. The Committee may amend, modify,
suspend, or terminate the MEIP for the purpose of meeting or
addressing any changes in legal requirements or for any other
purpose permitted by law. The Committee will seek shareholder
approval of any amendment determined to require shareholder
approval or advisable under the regulations of the Internal
Revenue Service or other applicable law or regulation.
5. NONASSIGNABILITY
No Bonus or any other benefit under the MEIP shall be
assignable or transferable by the participant during the
participant's lifetime except as otherwise approved by the
Committee.
6. NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in the MEIP shall confer upon any employee any right
to continue in the employ of the Company or shall interfere with
or restrict in any way the right of the Company to discharge an
employee at any time for any reason whatsoever, with or without
good cause.
7. EFFECTIVE DATE
The original effective date of the MEIP is April 7, 1995.
The effective date of the MEIP as amended is September 4, 1998.
AMENDMENT NO. 1
TO
CREDIT AGREEMENT
This Amendment No. 1 to Credit Agreement ("Amendment"),
dated as of November 5, 1998, is entered into by and among Micron
Electronics, Inc., a Minnesota corporation (the "Borrower"), the
Co-Agents and Lenders named as such in the Credit Agreement, and
Credit Suisse First Boston, as administrative agent for Lenders
(solely in such capacity, the "Agent"). Capitalized terms used
herein but not defined herein shall have the same meaning as
given to them in the Credit Agreement (as defined below).
Recitals
Whereas, Borrower, Agent, Co-Agents and Lenders entered into
a Credit Agreement dated June 10, 1998 (the "Credit Agreement")
whereby a revolving line of credit was made available to
Borrower;
Whereas, the Borrower desires to invest and transfer cash
and other assets in and to four new Subsidiaries, each wholly-
owned by the Borrower;
Whereas, the Credit Agreement in its current state would
prohibit such investment and transfer; and
Whereas, the parties to the Credit Agreement wish to amend
the Credit Agreement to permit such investment and transfer.
Agreement
Now, Therefore, in consideration of the foregoing Recitals,
and intending to be legally bound, the parties hereto agree as
follows:
SECTION 1. Amendment to Credit Agreement.
1.1 The following definitions are added to Section 1.1,
"Definitions":
"Guarantors" means, on a joint and several basis, as co-
guarantors, each Subsidiary of the Borrower as shall execute and
deliver the Guaranty.
"Guaranty" means that certain Guaranty Agreement dated
as of November 5, 1998, by Guarantors in favor of Agent and
Lenders.
1.2 The definition of "Loan Documents" in Section 1.1
is amended by inserting the words "the Guaranty," immediately
following "the Letters of Credit" in the first line thereof.
<PAGE>
1.3 Section 7.2, "Liquidation, Merger, Sale of Assets"
is hereby amended by deleting "and (h)" in line 24 thereof, and
inserting a new subsection (h) as follows: "(h) in connection with
the creation or initial capitalization of the Guarantors, and (i)".
1.4 Section 7.3, "Indebtedness" is hereby amended by
inserting the words "of Borrower" immediately following the word
"Indebtedness" in subsection (i) thereof.
1.5 Section 7.7, "Investments", is hereby amended by
deleting subsection (h) thereof in its entirety and replacing it as
follows: "(h) Investments by Borrower to or in any Subsidiary
(or any other person which as a result of the Investment becomes
a Subsidiary) which is not a Guarantor (a "Non-Guarantor
Subsidiary") or to or in any joint venture in which Borrower or
any Subsidiary is a joint venturer, provided that after making
any such Investment the total amount of all Investments made by
Borrower after the date of this Agreement to or in all Non-
Guarantor Subsidiaries and joint ventures (net of repayments and
return of capital) shall not exceed the sum of Seventy Million
Dollars ($70,000,000) and provided, further, that the total
amount of all equity Investments (as opposed to Investments
consisting of loans or advances) made by Borrower after the date
of this Agreement in all Non-Guarantor Subsidiaries and joint
ventures (net of return of capital) shall not exceed the sum of
Thirty-five Million Dollars ($35,000,000),".
1.6 Section 7.7, "Investments", is hereby further
amended by adding a new subsection (i) and re-numbering existing
subsection (i) as new subsection (j). New subsection (i) shall
read as follows: "(i) Investments in Guarantors not otherwise
provided for herein not to exceed Fifty Million Dollars ($50,000,000)
in the aggregate,".
SECTION 2. Representations and warranties. In order to
induce Agent and Lenders to enter into this Amendment and to
amend the Credit Agreement, Borrower represents and warrants to
each Lender and Agent as follows:
2.1 Corporate Power and Authority. Borrower has all
requisite corporate power and authority to enter into this
Amendment and to carry out the transactions contemplated by, and
perform its obligations under the Credit Agreement, as amended
hereby (the "Amended Agreement").
2.2 Authorization of Agreements. The execution and
delivery of this Amendment and the performance of the Amended
Agreement have been duly authorized by all necessary corporate
action on the part of Borrower.
2.3 Binding Obligation. This Amendment has been duly
executed and delivered by Borrower and is the binding obligation of
Borrower, enforceable against it in accordance with its terms,
except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, liquidation, moratorium or other
similar laws of general application and equitable principles
relating to or affecting creditors' rights.
2.4 Absence of Default. No event has occurred and is
continuing or would result from the execution, delivery or
performance of this Amendment which constitutes a Default or
Event of Default. The representations and warranties contained in
the Loan Documents are true, accurate and complete in all material
respects.
<PAGE>
SECTION 3. Conditions Precedent. This Amendment shall be
deemed effective upon (i) its execution and delivery to the Agent
by Borrower and Majority Lenders, (ii) the receipt by Agent of a
certificate of a Responsible Person of Borrower and each
Guarantor as to the effectiveness of resolutions of the Board of
Directors of Borrower and each Guarantor authorizing Borrower to
enter into this Amendment and each Guarantor to execute, deliver
and perform the terms of the Guaranty, and (iii) receipt by Agent
of the Guaranty, duly executed and delivered by each Guarantor.
SECTION 4. Full Force and Effect; Entire Agreement. Except
to the extent expressly provided in this Amendment, the terms and
conditions of the Credit Agreement shall remain in full force and
effect. This Amendment and the Loan Documents constitute and
contain the entire agreement of the parties hereto and supersede
any and all prior agreements, negotiations, correspondence,
understandings and communications between the parties, whether
written or oral, respecting the subject matter hereof. The
parties hereto further agree that this Amendment and the Loan
Documents comprise the entire agreement of the parties thereto
and supersede any and all prior agreements, negotiations,
correspondence, understandings and other communications between
the parties thereto, whether written or oral respecting the
extension of credit by Lenders to Borrower.
SECTION 5. Release and Waiver. Borrower hereby acknowledges
and agrees that (a) it has no claim or cause of action against
Agent or any Lender or any parent, subsidiary or affiliate
thereof, or any of Agent's or any Lenders' officers, directors,
employees, attorneys or other representatives or agents in
connection with the Credit Agreement, the loans thereunder or the
transactions contemplated therein and herein; (b) it has no
offset or defense against any of its respective obligations,
indebtedness or contracts in favor of Agent or any Lender; and
(c) it recognizes that Agent and Lenders have heretofore properly
performed and satisfied in a timely manner all of its obligations
to and contracts with Borrower.
SECTION 6. Governing Law. This Amendment shall be governed
by, and shall be construed and enforced in accordance with, the
internal laws of the State of New York, without regard to
conflict of laws principles.
SECTION 7. Counterparts. This Amendment may be signed in any
number of counterparts, and by different parties hereto in
separate counterparts, with the same effect as if the signatures
to each such counterpart were upon a single instrument. All
counterparts shall be deemed an original of this Amendment.
<PAGE>
In Witness Whereof, the parties hereto have caused this
Amendment to be executed as of the date first written above.
Borrower Micron Electronics, Inc.
By:/s/ T. Erik Oaas
----------------------------------------------------
Printed Name: T. Erik Oaas
------------------------------------------
Former Title: Executive VP, Chief Financial Officer
------------------------------------------
Agent Credit Suisse First Boston
By:/s/ Chris T. Horgan
----------------------------------------------------
Printed Name: Chris T. Horgan
------------------------------------------
Title: Vice President
-------------------------------------------------
By:/s/ Jodi A. Fatto
----------------------------------------------------
Printed Name: Jodi A. Fatto
------------------------------------------
Title: Assistant Vice President
-------------------------------------------------
Co-Agents Credit Suisse First Boston
By:/s/ Chris T. Horgan
----------------------------------------------------
Printed Name: Chris T. Horgan
------------------------------------------
Title: Vice Prisident
-------------------------------------------------
By:/s/ Jodi A. Fatto
----------------------------------------------------
Printed Name: Jodi A. Fatto
------------------------------------------
Title: Assistant Vice President
-------------------------------------------------
U.S. Bank National Association
By:/s/ Ross Beaton
----------------------------------------------------
Printed Name: Ross Beaton
------------------------------------------
Title: Vice President
-------------------------------------------------
Lenders Credit Suisse First Boston
By:/s/ Chris T. Horgan
----------------------------------------------------
Printed Name: Chris T. Horgan
------------------------------------------
Title: Vice President
-------------------------------------------------
By:/s/ Kristin Lepri
----------------------------------------------------
Printed Name: Kristine Lepri
------------------------------------------
Title: Associate
-------------------------------------------------
<PAGE>
U.S. Bank National Association
By:/s/ Ross Beaton
----------------------------------------------------
Printed Name: Ross Beaton
------------------------------------------
Title: Vice President
-------------------------------------------------
Fleet National Bank
By:/s/ Frank H. Benesh
----------------------------------------------------
Printed Name: Frank H. Benesh
------------------------------------------
Title: Vice President
-------------------------------------------------
Keybank National Association
By:/s/ Richard J. Ameny, Jr.
----------------------------------------------------
Printed Name: Richard J. Ameny, Jr.
------------------------------------------
Title: Assistant Vice President
-------------------------------------------------
The Bank of Nova Scotia
By:/s/ Maarten Van Otterloo
----------------------------------------------------
Printed Name: Maarten Van Otterloo
------------------------------------------
Title: Senior Relationship Manager
-------------------------------------------------
The Sumitomo Bank, Limited
By:/s/ Bob Granfelt
----------------------------------------------------
Printed Name: Bob Granfelt
------------------------------------------
Title: Vice President and Manager
-------------------------------------------------
GUARANTY AGREEMENT
This Guaranty Agreement ("Guaranty") is entered into as of
November 5, 1998, by the Persons named on the signature pages
hereto (each, a "Guarantor"), in favor of Credit Suisse First
Boston, as Agent for the Lenders under the Credit Agreement
(defined below) (solely in its capacity as Agent, "Agent").
Recitals
A. Pursuant to that certain Credit Agreement dated as of
June 10, 1998 (as amended by that Amendment No. 1 to Credit
Agreement dated as of the date hereof, and as further amended,
modified, supplemented or restated from time to time, the "Credit
Agreement"), by and among Micron Electronics, Inc., a Minnesota
corporation, as the borrower ("Borrower"), the financial
institutions from time to time party thereto and named as Lenders
therein ("Lenders"), and Agent, Lenders have agreed to make
certain advances of money and to extend certain financial
accommodations to Borrower in the amounts and manner set forth in
the Credit Agreement (collectively, the "Loans").
B. In consideration of the agreement of Agent and Lenders
to enter into an amendment to the Credit Agreement and to
continue to make the Loans thereunder available to Borrower,
Guarantor has agreed to execute and deliver this Guaranty in
favor of Agent, on behalf of Lenders.
C. Agent and Lenders are relying upon the execution and
delivery by Guarantor of this Guaranty.
Agreement
Now, Therefore, in consideration of the foregoing recitals
and in order to induce Agent and Lenders to execute the Credit
Agreement and the other Loan Documents, and for other good and
valuable consideration, the receipt and adequacy of which are
hereby acknowledged, and intending to be legally bound, Guarantor
hereby represents, warrants, covenants and agrees as follows:
1. Definitions.
All capitalized terms used herein without definition shall
have the meanings ascribed to them in the Credit Agreement.
2. Guaranty.
2.1 Unconditional Guaranty.
Guarantor hereby unconditionally, absolutely and
irrevocably guarantees to Agent and Lenders the full, prompt and
complete payment and performance when due (whether by stated
maturity, by acceleration or otherwise) of all indebtedness of
Borrower to Agent and Lenders (whether created under the Credit
<PAGE>
Agreement and the other Loan Documents or otherwise) (all such
indebtedness being the "Liabilities"), together with, without
limitation, the prompt payment of all expenses, including,
without limitation, reasonable attorneys' fees and legal
expenses, incidental to the collection of the Liabilities and the
enforcement or protection of any security interests in and to any
collateral therefor. The term "indebtedness" is used herein in
its most comprehensive sense and includes any and all advances,
debts, obligations and Liabilities heretofore, now or hereafter
made, incurred or created, whether voluntary or involuntary and
whether due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined, and whether recovery
upon such indebtedness may be or hereafter becomes unenforceable.
(The Liabilities and all other obligations and covenants to be
performed by Guarantor under this Guaranty shall hereinafter from
time to time be collectively referred to as the "Guaranty
Obligations".)
2.2 Joint and Several Liability. If any other Person in
addition to Guarantor shall guarantee the Liabilities, all such
guarantors and their respective successors and assigns shall be
jointly and severally liable therefor, notwithstanding any
relationship or contract of co-obligation by or among such
guarantors. Agent's enforcement of the Liabilities is not
conditioned upon Agent's obtaining from any other Person a
guaranty of all or any part of the Liabilities.
2.3 Separate Obligations. The Guaranty Obligations of
Guarantor arising hereunder are independent of and separate from
any and all obligations of Guarantor to Agent arising under the
Credit Agreement or any other Loan Document as may have been
executed by Guarantor and delivered to Agent in connection therewith.
3. Payments.
All payments to be made by Guarantor to Agent pursuant to
the terms of this Guaranty shall be made in lawful money of the
United States of America, in immediately available funds, to
Agent at such address and account as Agent may hereafter specify
to Guarantor in writing, and shall be accompanied by a notice
from Guarantor stating that such payments are made under this
Guaranty.
4. Absolute Guaranty.
Guarantor agrees that the liability hereunder shall be the
immediate, direct and primary obligation of Guarantor and shall
not be contingent upon Agent's exercise or enforcement of any
remedy it may have against Borrower or any other Person. Without
limiting the generality of the foregoing, the Guaranty
Obligations shall remain in full force and effect without regard
to and shall not be impaired or affected by, nor shall Guarantor
be exonerated or discharged by, any of the following events:
(a) Insolvency, bankruptcy, reorganization, arrangement,
adjustment, composition, assignment for the benefit of creditors,
death, liquidation, winding up or dissolution of Borrower,
Guarantor or any other guarantor of the Liabilities;
(b) Any limitation, discharge or cessation of the
liability of Borrower, Guarantor or any other guarantor for the
Liabilities due to any statute, regulation or rule of law, or any
invalidity or unenforceability in whole or in part of the Loan
Documents or any other guaranty of the Liabilities;
<PAGE>
(c) Any merger, acquisition, consolidation or change in
structure of Borrower, Guarantor or any other guarantor of the
Liabilities; or any sale, lease, transfer or other disposition of
any or all of the assets or shares of Borrower, Guarantor or any
other guarantor of the Liabilities;
(d) Any assignment or other transfer, in whole or in
part, of Agent's or any Lender's interests in and rights under
the Credit Agreement and this Guaranty, including, without limitation,
Agent's right to receive payment of the Liabilities and the
Guaranty Obligations; or any assignment or other transfer, in
whole or in part, of Agent's interests in and to any collateral
security securing the Liabilities;
(e) Any claim, defense, counterclaim or setoff, other
than that of prior payment or performance, that Borrower, Guarantor
or any other guarantor of the Liabilities may have or assert,
including, but not limited to, any defense of incapacity or lack of
corporate or other authority to execute any documents relating to
the Liabilities, the Guaranty Obligations or any collateral
security for the Liabilities;
(f) Any cancellation, renunciation or surrender of any
debt instrument evidencing the Liabilities, other than due to the
complete prior and indefeasible payment or performance of such
instrument;
(g) Agent's amendment, modification, renewal or extension
of any documents or agreements relating to the Credit Agreement, the
Liabilities, the Guaranty Obligations or any other collateral
security for the Liabilities, or Agent's exchange, release or
waiver of any collateral security for the Liabilities;
(h) Agent's exercise or non-exercise of any power, right
or remedy with respect to the Liabilities, the Guaranty Obligations
or any collateral security for the Liabilities, including, but
not limited to, Agent's compromise, release, settlement or waiver
with or of Borrower, Guarantor or any other Person;
(i) Agent's vote, claim, distribution, election,
acceptance, action or inaction in any bankruptcy case related to
the Liabilities, the Guaranty Obligations or any collateral security
for the Liabilities; and
(j) Any impairment or invalidity of any collateral
security for the Liabilities or any failure to perfect any of
Agent's liens thereon or therein.
5. Waivers. Guarantor hereby expressly waives (a) diligence,
presentment, demand for payment, protest, benefit of any statute
of limitations affecting Borrower's liability under the Loan
Documents or the enforcement of this Guaranty; (b) discharge due
to any disability of Borrower; (c) any defenses of Borrower to
obligations under the Loan Documents not arising under the
express terms of the Loan Documents or from a material breach
thereof by Agent which under the law has the effect of
discharging Borrower from the Liabilities as to which this
Guaranty is sought to be enforced; (d) the benefit of any act or
omission by Agent which directly or indirectly results in or aids
the discharge of Borrower from any of the Liabilities by
operation of law or otherwise; (e) all notices whatsoever,
including, without limitation, notice of acceptance of this
Guaranty and the incurring of the Liabilities; and (f) any
<PAGE>
requirement that Agent exhaust any right, power or remedy or
proceed against Borrower or any other security for, or any other
guarantor of, or any other party liable for, any of the
Liabilities or any portion thereof. Guarantor specifically
agrees that it shall not be necessary or required, and Guarantor
shall not be entitled to require, that Agent or any Lender
(i) file suit or proceed to assert or obtain a claim for personal
judgment against Borrower for the Liabilities; (ii) make any
effort at collection or enforcement of the Liabilities from
Borrower; (iii) file suit or proceed to obtain or assert a claim
for personal judgment against Guarantor or any other guarantor or
other party liable for the Liabilities; (iv) make any effort at
collection of the Liabilities from any such party; (v) exercise
or assert any other right or remedy to which Agent or any Lender
is or may be entitled in connection with the Liabilities or any
security or guaranty relating thereto; or (vi) file or assert any
claim against assets of Borrower before or as a condition of
enforcing the liability of Guarantor under this Guaranty.
6. Representations and Warranties.
Guarantor hereby represents and warrants to Agent that:
(a) Guarantor (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State set
forth below its name on the signature pages hereto; and (ii) has
all requisite power and authority to execute and deliver this
Guaranty and each Loan Document executed and delivered by
Guarantor pursuant to the Credit Agreement or this Guaranty and
to perform its obligations thereunder and hereunder.
(b) The execution, delivery and performance by Guarantor
of this Guaranty (i) do not contravene Guarantor's charter documents
or any law or any contractual restriction binding on or affecting
Guarantor or by which Guarantor's property may be affected; (ii)
do not require any authorization or approval or other action by,
or any notice to or filing with, any governmental authority or
any other Person under any indenture, mortgage, deed of trust,
lease, agreement or other instrument to which Guarantor is a
party or by which Guarantor or any of its property is bound
except such as have been obtained or made; and (iii) do not,
except as contemplated by the Credit Agreement or this Guaranty,
result in the imposition or creation of any Lien upon the
property of Guarantor.
(c) This Guaranty has been duly executed and delivered
by Guarantor and constitutes a legal, valid, and binding obligation
of Guarantor enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, or other
similar laws affecting the rights of creditors or by the
application of general equity principles;
(d) The incurrence of the Guarantor's obligations under
this Guaranty will not cause the Guarantor to (i) become insolvent;
(ii) be left with unreasonably small capital for any business or
transaction in which Guarantor is presently engaged or plans to
be engaged; or (iii) be unable to pay its debts as such debts
mature; and
(e) All representations and warranties contained in
this Guaranty shall be true, accurate and complete at the time of
Guarantor's execution of this Guaranty and shall continue to be
true until the Guaranty Obligations have been paid or otherwise
satisfied in full. Any misrepresentation or breach of any
<PAGE>
warranty whatsoever contained in this Section 6 shall be deemed
material.
7. Consents.
Guarantor hereby consents that any or all of the following
actions may be taken or things done without notice to Guarantor
and without affecting the liability of Guarantor under this
Guaranty:
(a) The time for Borrower's performance of or compliance
with any of the Liabilities may be accelerated or extended or such
performance or compliance may be waived by Agent and Lenders
(including, without limitation, the renewal, extension,
acceleration or other change in the time of payment, or other
terms of, the Liabilities, such as an increase or decrease in the
rate of interest thereon);
(b) The terms of any of the Liabilities or any term or
condition contained in any of the Loan Documents may be amended as
provided for therein by Borrower, Agent and Lenders for the purpose of
adding any provisions thereto or changing in any manner the
rights or obligations of Agent, Lenders or of Borrower
thereunder;
(c) Any collateral for all or any part of the Liabilities
may be exchanged, surrendered or otherwise dealt with, and Agent's
interests thereunder may be released and may or may not be
perfected, all as Agent in its sole discretion may determine; and
(d) Agent may apply any collateral for the Liabilities
and direct the order or manner of sale thereof, including, without
limitation, a nonjudicial sale, as Agent may in its sole
discretion determine, all without affecting the liability of
Guarantor hereunder.
8. Information Concerning Borrower.
Guarantor acknowledges that it has, independently of and
without reliance on Agent, made its own credit analysis of
Borrower and performed its own legal review of this Guaranty and
the Loan Documents and is not relying on Agent with respect to
any of the aforesaid items. Guarantor agrees to keep adequately
informed from such means of any facts, events or circumstances
which might in any way affect Guarantor's risks hereunder. Agent
makes no representation of its interest in, or the priority or
perfection of Agent's interest in and to, any collateral security
for the Liabilities.
9. Defaults and Remedies.
9.1 Events of Default. It shall be an "Event of Default"
hereunder upon the occurrence of any one or more of the following
events:
(a) The occurrence of an Event of Default under or as
defined in the Credit Agreement;
(b) If any representation, warranty or covenant of
Guarantor made under this Guaranty or any statement or
<PAGE>
certificate at any time given in writing by Guarantor pursuant
hereto or in connection herewith shall be false, misleading or
incomplete in any material respect when made;
(c) The commencement by Guarantor of a voluntary case
under the federal bankruptcy laws, as now constituted or hereafter
amended, or any other applicable federal or state bankruptcy,
insolvency or similar law; or the consent by Guarantor to the
appointment of a receiver, liquidator, assignee, trustee, custodian,
sequestrator, agent or other similar official for Guarantor for
any substantial part of its properties; or the making by
Guarantor of any assignment for the benefit of creditors; or
(d) The filing of a petition with a court having
jurisdiction over Guarantor to commence an involuntary case for
Guarantor under the federal bankruptcy laws, as now constituted or
hereafter amended, or any other applicable federal or state
bankruptcy, insolvency or similar law; or the appointment of a
receiver, liquidator, assignee, custodian, trustee, agent,
sequestrator, or other similar official for Guarantor for any
substantial part of its properties; or any substantial part of
Guarantor's property is subject to any levy, execution,
attachment, garnishment or temporary protective order and the
failure to obtain the dismissal of such petition within, or
appointment or the continuance of such decree or order is
unstayed and in effect for, a period of sixty (60) days from the
date of such filing, appointment or entry of such order or
decree.
9.2 Remedies. Upon the occurrence of an Event of Default
and so long as the same shall be continuing, all or any portion of
the Guaranty Obligations may, at the option of Agent and without
demand, notice or legal process of any kind, be declared, and
immediately shall become, due and payable.
10. Termination.
Immediately following the full, complete and indefeasible
payment, performance or other satisfaction of all the Guaranty
Obligations, except as otherwise provided herein (including
Section 11, below), all of Guarantor's obligations hereunder
shall at such time terminate.
11. Reinstatement.
This Guaranty shall remain in full force and effect and
continue to be effective if at any time payment and performance
of Borrower's Liabilities or the Guaranty Obligations, or any
part thereof, is, pursuant to applicable law, avoided, rescinded
or reduced in amount, or must otherwise be restored or returned
by any obligee of Borrower's Liabilities or the Guaranty
Obligations, whether as a "voidable preference," "fraudulent
conveyance" or otherwise, all as though such payment or
performance had not been made. In the event that any payment, or
any part thereof, is avoided, rescinded, reduced, restored or
returned, Borrower's Liabilities or the Guaranty Obligations, as
the case may be, shall be reinstated and deemed reduced only by
such amount paid and not so avoided, rescinded, reduced, restored
or returned.
12. Miscellaneous.
12.1 Entire Agreement. This Guaranty constitutes and
contains the entire agreement of the parties and supersede any
and all prior and contemporaneous agreements, negotiations,
<PAGE>
correspondence, understandings and communications between the
parties, whether written or oral, respecting the subject matter
hereof.
12.2 Assignability. This Guaranty shall be binding upon and
inure to the benefit of Guarantor and Agent and their respective
successors and assigns, except that Guarantor shall not have the
right to assign its rights hereunder or any interest herein
without the prior written consent of Agent.
12.3 Notices. Any notice or other communication hereunder to
any party shall be addressed and delivered (and shall be deemed
given) in accordance with the Credit Agreement to the addresses
set forth on the signature pages thereof and hereof.
12.4 No Waiver; Amendments. No failure on the part of Agent
or any Lender to exercise, no delay in exercising and no course of
dealing with respect to, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or
the exercise of any other right. The remedies herein provided
are cumulative and not exclusive of any remedies provided by law.
This Guaranty may not be amended or modified except by written
agreement between Guarantor and Agent, and no consent or waiver
hereunder shall be valid unless in writing and signed by Agent.
12.5 Counterparts. This Guaranty may be executed in any
number of separate counterparts, each of which, when so executed,
shall be deemed an original, and all of said counterparts taken
together shall be deemed to constitute but one and the same
instrument.
12.6 Severability. If any provision of this Guaranty is held
to be unenforceable under applicable law for any reason, it shall be
adjusted, if possible, rather than voided in order to achieve the
intent of the parties to the extent possible. In any event, all
other provisions of this Guaranty shall be deemed valid and
enforceable to the fullest extent possible under applicable law.
12.7 Governing Law. This Guaranty shall be governed by, and
construed in accordance with, the laws of the State of New York
as applied to contracts made and performed entirely within the
State of New York by residents of such State without giving
effect to any conflict of laws principle or rule that might
require the application of the laws of another jurisdiction.
12.8 Consent to Jurisdiction. GUARANTOR AND AGENT HEREBY AGREE
THAT ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY
OR ANY OF THE AGREEMENTS, DOCUMENTS OR INSTRUMENTS DELIVERED IN
CONNECTION HEREWITH MAY BE BROUGHT IN THE COURTS OF THE STATE OF
NEW YORK OR THE UNITED STATES OF AMERICA LOCATED IN NEW YORK, NEW
YORK AS AGENT MAY ELECT, AND, BY EXECUTION AND DELIVERY HEREOF,
GUARANTOR AND AGENT EACH ACCEPTS AND CONSENTS TO, FOR ITSELF AND
IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE
JURISDICTION OF THE AFORESAID COURTS. GUARANTOR WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO STAY OR TO DISMISS
<PAGE>
ANY ACTION OR PROCEEDING BROUGHT BEFORE SAID COURTS ON THE BASIS
OF FORUM NON CONVENIENS.
12.9 Waiver of Jury Trial. GUARANTOR AND AGENT EACH WAIVE
ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE,
WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, BETWEEN
GUARANTOR AND AGENT ARISING OUT OF, CONNECTED WITH, RELATED TO OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS GUARANTY OR ANY OTHER INSTRUMENT, DOCUMENT
OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE
TRANSACTIONS RELATED HERETO OR THERETO.
12.10 Waiver of Rights. UNTIL PAYMENT IN FULL OF THE
LIABILITIES, GUARANTOR HEREBY IRREVOCABLY WAIVES AND RELEASES:
(a) ANY AND ALL RIGHTS IT MAY HAVE AT ANY TIME
(WHETHER ARISING DIRECTLY OR INDIRECTLY, BY OPERATION OF LAW,
CONTRACT OR OTHERWISE) (i) TO ASSERT ANY CLAIM AGAINST BORROWER
OR ANY OTHER PERSON, OR AGAINST ANY DIRECT OR INDIRECT SECURITY,
ON ACCOUNT OF PAYMENTS MADE OR OBLIGATIONS PERFORMED BY GUARANTOR
PURSUANT TO THIS GUARANTY, INCLUDING WITHOUT LIMITATION ANY AND
ALL RIGHTS OF SUBROGATION, REIMBURSEMENT, EXONERATION, CONTRIBUTION
OR INDEMNITY, OR (ii) TO REQUIRE THE MARSHALING OF ANY ASSETS OF
BORROWER, WHICH RIGHT OF MARSHALING MIGHT OTHERWISE ARISE FROM
ANY SUCH PAYMENTS MADE OR OBLIGATIONS PERFORMED; AND
(b) ANY AND ALL RIGHTS THAT WOULD RESULT IN GUARANTOR
BEING DEEMED, UNDER THE UNITED STATES BANKRUPTCY CODE, A "CREDITOR"
OF THE BORROWER OR ANY OTHER PERSON, ON ACCOUNT OF PAYMENTS MADE OR
OBLIGATIONS PERFORMED BY GUARANTOR.
<PAGE>
In Witness Whereof, Guarantor has caused this Guaranty to be
duly executed as of the date first written above.
Guarantor Micron PC, Inc.,
a Delaware corporation
--------
By: /s/ David R. Burcham
-----------------------------------------
Name: David R. Burcham
----------------------------------------
Its: President
-----------------------------------------
Notices to be sent to:
Micron PC, Inc.
625 Stratford, Suite 1000
Meridian, ID 83642
Attention: President
---------------------------
Facsimile: (208) 893-7479
---------------------------
Telephone: (208) 438-3343
---------------------------
Guarantor Micron Commercial Systems, Inc.,
a Delaware corporation
--------
By:/s/ Scott L. Bower
------------------------------------------
Name: Scott L. Bower
----------------------------------------
Its: President
-----------------------------------------
Notices to be sent to:
Micron Commercial Systems, Inc.
625 Stratford, Suite 2500
Meridian, ID 83642
Attention: President
----------------------
Facsimile: West Div. (208) 893-8720/East Div. (800) 362-1205
----------------------
Telephone: (800) 858-3472
----------------------
<PAGE>
Guarantor Micron Government Systems, Inc.,
a Delaware corporation
--------
By:/s/ Harry B. Heisler
------------------------------------------
Name: Harry B. Heisler
----------------------------------------
Its: President
-----------------------------------------
Notices to be sent to:
Micron Government Systems, Inc.
625 Stratford, Suite 2000
Meridian, ID 83642
Attention: President
-----------------------
Facsimile: (208) 893-7479
-----------------------
Telephone: (800) 245-2449
-----------------------
Guarantor Micron Services, Inc.,
a Delaware corporation
--------
By:/s/ Nemo C. Azamian
------------------------------------------
Name: Nemo C. Azamian
----------------------------------------
Its: President
-----------------------------------------
Notices to be sent to:
Micron Services, Inc.
900 E. Karcher Road, Phase III
Nampa, ID 83687
Attention: President
-----------------------
Facsimile: (800) 270-1232
-----------------------
Telephone: (888) 349-6972
-----------------------
<PAGE>
Approved And Accepted:
Credit Suisse First Boston, as Agent
By:/s/ Chris T. Horgan
---------------------------------
Printed Name: Chris T. Horgan
-----------------------
Title: Vice President
------------------------------
By:/s/ Jodi A. Fatto
---------------------------------
Printed Name: Jodi A. Fatto
-----------------------
Title: Assistant Vice President
------------------------------
Notices to be sent to:
Credit Suisse First Boston
11 Madison Avenue
New York, NY 10010
Attn: Jodi A. Fatto
Facsimile: (212) 325-8304
Telephone: (212) 325-9941
AMENDMENT TO
THE MICRON ELECTRONICS, INC.
1995 STOCK OPTION PLAN
1. Plan Sponsor. Micron Electronics, Inc. ("MEI")
2. Recitals. In accordance with Section 14 of the
Micron Electronics, Inc. 1995 Stock Option Plan (the
"Plan"), the Board of Directors of MEI wishes to amend the
Plan to permit formula grants to outside directors of MEI.
3. Amendment of Plan. The following amendments to
the Plan are adopted effective as provided in Paragraph 4
below:
a. Section 2(x) shall be amended as follows:
Optionee means an Employee, Consultant or Outside
Director who holds an outstanding Option.
b. A new Section 2(y) shall be inserted as
follows, and the remaining subsections of Section 2 shall be
renumbered accordingly.
Outside Director means a member of the Board who is not
an Employee of the Company, Micron Technology, Inc., or
any Subsidiary of the Company or Micron Technology,
Inc.
c. A new Section 6(d) shall be added to the Plan
as follows:
The following limitations shall apply to grants of
Options to Outside Directors:
(i) Each Outside Director shall receive a formula
Nonstatutory Stock Option (a "Formula Option") as of
the Effective Date with respect to 10,000 shares of
Common Stock, as shall each Outside Director later
appointed or elected to the Board (with the grant made
as of the date of his or her first election or
appointment). Each Outside Director serving on the
Board as of the date immediately following each annual
meeting of the Company's shareholders shall receive a
Formula Option as of the date of that meeting with
respect to 3,000 shares of Common Stock. The Exercise
Price for Formula Options shall be the Fair Market
Value of the Common Stock on the date of grant.
(ii) Unless the Administrator specifies otherwise,
each Formula Option shall become exercisable as to 100%
of the covered shares as of the date of grant. To the
extent that a Formula Option is not immediately
exercisable, a Formula Option shall become exercisable
<PAGE>
in accordance with the terms of section 9(c) of the
Plan upon the Outside Director's Disability and in
accordance with the terms of section 9(d) of the Plan
upon the Outside Director's death. Unless the
Administrator specifies otherwise, Options shall be
granted for a term of six years. Options shall be
forfeited to the extent they are not then exercisable
if an Outside Director resigns, is removed or fails to
be reelected or reappointed as a Director. Options
shall terminate within 30 days of an Outside Director's
resignation, removal, or failure to be reelected or
reappointed as a Director.
4. Effective Date. The effective date of this
Amendment shall be December 1, 1998.
5. Terms and Conditions of Plan. Except for the
Amendment in paragraph 3, all terms and conditions of the
Plan are unamended and shall remain in full force and
effect.
6. Execution. MEI has executed this Amendment as of
the date set forth below.
MICRON ELECTRONICS, INC.
Plan Sponsor
By:/s/ JoAnne S. Pfeifer
----------------------------------------------------
Title: Vice President, Administration,
Corporate Secretary
-------------------------------------------------
Date: January 7, 1999
--------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-02-1999
<PERIOD-END> DEC-03-1998
<CASH> 313,784
<SECURITIES> 55,915
<RECEIVABLES> 173,380
<ALLOWANCES> 6,658
<INVENTORY> 29,581
<CURRENT-ASSETS> 590,833
<PP&E> 228,721
<DEPRECIATION> 78,969
<TOTAL-ASSETS> 744,048
<CURRENT-LIABILITIES> 285,887
<BONDS> 0
0
0
<COMMON> 961
<OTHER-SE> 430,294
<TOTAL-LIABILITY-AND-EQUITY> 744,048
<SALES> 403,496
<TOTAL-REVENUES> 403,496
<CGS> 334,678
<TOTAL-COSTS> 388,565
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,027)
<INCOME-PRETAX> 18,958
<INCOME-TAX> 7,259
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,659
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
