<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 2, 1999
Commission File Number: 0-17932
Micron Electronics, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1404301
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
900 E. Karcher Road, Nampa, Idaho 83687
(Address, including Zip Code, of principal executive offices)
(208) 898-3434
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Registered on The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of October 1, 1999 was $367 million.
The number of outstanding shares of the registrant's Common Stock on October
1, 1999 was 96,282,424.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant's 1999 Annual Meeting of
Shareholders, to be held on November 22, 1999, are incorporated by reference
into Part III of this Annual Report on Form 10-K.
================================================================================
<PAGE>
PART I
ITEM 1. BUSINESS
Statements contained in this Form 10-K 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors" and in other Company filings with the Securities
and Exchange Commission.
GENERAL
Micron Electronics, Inc. and its subsidiaries (hereinafter referred to
collectively as "Micron" or the "Company") is the third largest 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 ("PC Systems") and servers for its core
customers in consumer, commercial and government sectors. The Company's SpecTek
semiconductor memory products operation ("SpecTek Operations") recovers memory
components for specific applications. The Company is majority owned by Micron
Technology, Inc. ("MTI").
During fiscal 1999, the Company acquired two businesses, which expanded its
ability to provide Internet services to its customers. On August 2, 1999, the
Company acquired 100% of the outstanding stock of NetLimited, Inc. (d.b.a.
"HostPro"), a web and applications hosting provider. On September 2, 1999, the
Company acquired the property and equipment of Micron Internet Services ("MIS"),
formerly a division of MTI, a provider of dedicated, nationwide dial-up and
broadband Internet access, virtual private network solutions, and e-commerce
services.
The Company's technology and service oriented background, combined with a
focus on performance, is the basis for providing maximum value to its customers.
The Company is recognized by independent authorities for setting industry
standards for leading-edge technology in computers and components. The Company
also regularly receives recognition and wins awards from industry publications
for its responsive, accommodating customer service and technical support
The Company was formed through the April 7, 1995 merger of three businesses:
Micron Computer, Inc., Micron Custom Manufacturing Services, Inc., ("MCMS") and
ZEOS International, Ltd.
PERSONAL COMPUTER SYSTEMS AND SERVICES
Products and Services
- ---------------------
The Company's PC Systems segment develops, markets, manufactures, sells and
supports a wide range of high performance desktop and notebook PC systems and
network servers under the Micron and NetFRAME brand names and sells, resells,
and supports a variety of additional peripherals, software and services. The
Company's PC systems use microprocessors manufactured by Intel Corporation
("Intel") and are assembled to order with differing memory and storage
configurations as well as various operating systems and application software.
The PC Systems segment also offers under the Micron e-Additions brand name a
variety of hardware components and peripherals with its PC systems and network
servers, including monitors, modems, graphics cards, accelerators, CD-ROM and
DVD drives. In addition, the Company offers numerous hardware services and
e-Services, many through third party service providers, including technical
support available 24 hours a day, seven days a week, 365 days per year
("24/7/365"), on-site support, web and applications hosting, and Internet
access.
Desktops and Managed PCs
Millennia. Targeted for technology-savvy consumers and "driven" users in
business and government, the Millennia line of PC systems has been the Company's
best-selling product in recent periods. The Millennia Max Premium, the latest
generation Millennia, is powered by Intel's Pentium III microprocessor and
latest chipset and includes an award-winning graphics card with 16 or 32 MB
memory, a 66-bit ATA hard drive controller supporting burst mode data transfers
of 66 MBps and standard storage capacity of 20 GB up to 34 GB, and a 8x/40x DVD-
ROM drive. The Millennia Max Premium can be configured with up to 768 MB 100Mhz
SDRAM. The Company's additional Millennia products can be configured utilizing
the Company's Mid-Size Tower or MicroTower case, designed for cost savings while
maintaining power and performance. The Millennia products are also available in
configurations
1
<PAGE>
utilizing the new Intel Celeron processor with 128 Kb cache onboard for cost-
effective computing without compromising performance.
ClientPro. The ClientPro is the Company's scalable and affordable line of
managed PC's designed as a network solution for businesses demanding computing
stability and performance. The Company's ClientPro line can be configured with
Intel's latest Pentium III or Celeron microprocessors and is available in our
serviceable MicroTower convertible desktop/mini-tower or the Company's new Mid-
Size Tower cases. Utilizing advanced network manageability, self-healing and
back-up utilities, and on-line end-user training, ClientPro managed PCs are an
exceptional business desktop solution that help lower total cost of ownership.
Notebooks
TransPort Trek2. The Micron TransPort Trek2 ("Trek2") is designed for
affordable desktop-like performance for business applications. The Trek2
incorporates the Intel mobile AGP 333 Mhz, 366 Mhz or 400 Mhz Pentium II
microprocessor with 256 Kb of L2 cache. The Trek2 also can be configured with
the Intel mobile Celeron 400 processor with 12Kb of L2 cache. The Trek2 is
standard with 32MB of memory and is expandable to 256 MB of 66 Mhz SDRAM. The
Trek2 includes either a 12.1" or 14.1" SVGA display, multiple media bays, 24X
CD-ROM, two Universal Serial Bus interfaces, TV-out port, audio line-in and
line-out and microphone-in and headphone jack. The Trek2 uses a smart Lithium
Ion battery capable of providing up to three hours of operating time.
Transport NX. The Micron TransPort NX is designed for ultimate desktop-like
performance for small business and Small-Office-Home-Office ("SOHO")
applications. The Micron TransPort NX incorporates the Intel mobile AGP 333
Mhz, 366 Mhz or 400 Mhz Pentium II microprocessor with 256Kb of L2 cache. The NX
is standard with 64 MB of memory and is expandable to 384MB of 66 Mhz SDRAM.
The NX utilizes a 15.0" XGA bright display, 2 multiple media bays which can
accommodate a 24X CD-ROM, DVD, 3.5" floppy, LS120 superdisk, Iomega ZIP, 2nd
battery, or 2nd HDD. It also has two Universal Serial Bus interfaces, TV-out
port, video-in port, audio line-in and line-out and microphone in and headphone
jack. The NX utilizes the largest capacity hard drives available with 14GB per
drive available now, and 25GB per drive available in November of 1999. The NX
uses a smart Lithium Ion battery, averaging three hours of battery life.
Servers
NetFRAME 2100 and 3100. The Company's entry-level NetFRAME 2100 series and
mid-level NetFRAME 3100 series workgroup servers are cost-effective server
solutions specifically designed for small to medium sized businesses and for
decentralized remote locations and departments. The 2100 and 3100 servers
feature Intel Pentium III microprocessors in a range of configurations that
include single or dual 450 Mhz to 600 Mhz processors, remote server management
functionality, ECC SDRAM, and five expansion slots. The NetFRAME 3100 can
accept up to five hot-swappable hard drives and the NetFRAME 2100 can accept up
to six 68-pin hard drives.
NetFRAME 5200 and 6200. The Company's NetFRAME 5200 and 6200 series servers
are a reliable, affordable high-end solution built on the latest Intel processor
technology. The NetFRAME 5200 is a flexible server solution for typical
business applications such as web Internet/Intranet, print/file, or groupware
applications with support for dual Pentium III Xeon processors. For the more
processor intensive applications, the NetFRAME 6200 offers maximum performance
and can support four Intel 550 Mhz Pentium III Xeon processors with a robust 2
MB level-2 cache and can be configured with 4 GB of ECC EDO DRAM and a 100 MHz
Front Side Bus. For maximum uptime, the NetFRAME 6200 server comes with six
one-inch SCA hot-swappable Ultra-2 Wide LVDS hard drives allowing 54 GB maximum
hard drive space. The NetFRAME 6200 server is fully wired to support a RAID
card that can utilize two on-board SCSI chips. The NetFRAME 6200 server ships
standard with Intel's LANDesk Server Manager, overseeing all of the server's
hardware instrumentation including voltage monitoring, fan tachometer, thermal
monitoring and chassis intrusion. In addition, LANDesk controls all event and
alerting capabilities including automatic server recovery, paging, e-mail and
system reboot.
The NetFRAME 6200 is the first full-featured server to be fully qualified and
validated with 3Com's Gigabit EtherLink server network interface card. Gigabit
Ethernet provides the scalability and performance necessary to meet the
increasing demands on today's networks. This new backbone technology allows
larger networks to exchange information at 1,000 Mbps, approximately 10 times
faster than the current standard Fast Ethernet. Businesses networked with the
NetFRAME 6200 can now take full advantage of bandwidth-intensive applications
such as full-motion video, video conferencing and video editing.
NetFRAME 9200. The Company's NetFRAME 9200 series servers are designed for
environments where maximum uptime and performance are critical. The NetFRAME
9200 takes availability and uptime to the next level through the use of hot-swap
boot hard drives, hot-swap fans and power supplies, and hot plug-ready PCI
slots. The remainder of the data storage is external to the system chassis and
is satisfied with the Micron DataFRAME 450 (DF450) hot-plug storage array. The
NetFRAME 9200 supports very high levels of network and disk traffic by employing
a triple pier PCI bus architecture, which features one fully dedicated 64-bit
PCI bus
2
<PAGE>
and slots. The NetFRAME 9200 is designed to be incorporated into a rack
configuration, which is typical in the enterprise application space. The
NetFRAME 9200's data storage is external to the system chassis and is satisfied
with the Micron DataFRAME 450 (DF450) hot-plug storage array or 3rd party
network attached storage devices. Configurations of the NetFRAME 9200 start with
a single Pentium III Xeon 550MHz processor with 512Kb of level 2 cache and range
up to an extremely powerful Quad processor Pentium III Xeon with as much as 2
Megabytes of level 2 cache for maximum application transaction performance.
Hardware Services
MServices. The Company's MServices program is a portfolio of enhanced
support and professional services enabling customers to plan, implement,
support, and manage information technology. Partnered with industry leader
Unisys and other third party providers to co-design and deliver MServices, these
services work as an extension of your business to deliver on the promise of
hassle-free computing. Through these programs, the Company's customers and
business partners can receive, from Micron, Unisys or other third parties,
various levels of standard and customized support services including extended
on-site service for one to five years, 24-hour toll-free telephone support in
the U.S., and one business day turnaround for support via e-mail. In addition,
many of the Company's server products can be purchased with on-site Unisys
support ranging from one to five years and with as fast as four-hour response
time for business critical server applications. Specialized network operating
system support and optional incident resolutions for Novell IntranetWare, or
Microsoft Windows NT Server software are available 24/7/365.
Micron's technical support and customer service representatives respond to a
variety of inquiries from customers, including questions concerning the
Company's product offerings, customer order status and post-installation
hardware and software issues. Many customer inquiries are resolved over the
telephone without the need to repair or replace system components. When repairs
are necessary, the Company may ship a replacement part or system and advise
customers via telephone regarding installation, or a customer may elect to ship
a system directly to the Company for repair. Technical support services are
also provided through the Company's home page on the Internet. These services
enable a customer to access system-specific information and recent software
updates for many of the software programs and drivers included with Micron PC
systems. In addition, many Micron PC systems are sold with system diagnostic
and repair software that has been optimized for the Company's products.
E-Services
Through MIS, the Company provides Internet access under the Net.Now! brand
name, as well other related services:
. Internet access is provided through a variety of dial-up Internet plans.
The basic Internet plan is designed for the family, hobbyist or individual
user and includes 150 hours of online service per month, 10MB of web
hosting space, and four e-mail addresses. The basic Internet plan designed
for small and medium-sized businesses provides web hosting services and a
LAN connection with MIS's 25MB Domain.Pak!, 240 hours of online service
per month, STMP mail relay services, and multiple e-mail addresses.
. Small businesses package ("SBS.Pak!") supports Microsoft's BackOffice
Small Business Server ("SBS"). SBS is designed for companies with 25 or
fewer PCs. It eliminates the need for each PC desktop to have its own
phone line, modem, and Internet account, which can amount to considerable
savings to the customer. Back Office provides automated tools for network
set-up and management as well as the online selection of MIS as the
Internet provider.
. High speed access ("DSL.Pak!") provides digital communications through
existing analog phone lines with an "always on" connection called a
Digital Subscriber Line (DSL). DSL is approximately nine times faster than
a 28.8 modem.
HostPro offers web hosting services ranging from e-commerce solutions to the
latest in multimedia technologies:
. Database and Platforms. HostPro supports a wide range of databases
including the low cost mySQL and the popular Access and enterprise-class
MSSQL on the flexible UNIX and NT server platforms. HostPro also supports
the latest in programming languages, such as Perl 5, Active Server Pages,
C/C++, Cold Fusion 4.0, SSI (Server Side Includes), Java (Servlets &
Applets), and Python, PHP 3.0. Mid-level hosting packages provided by
HostPro fully support streaming content via RealMedia, as well as full
shockwave and Flash support for a variety of multimedia solutions.
. e-Commerce. HostPro provides turn-key e-commerce solutions for companies
of all sizes who wish to sell products or services through the Internet.
HostPro offers e-commerce capabilities through five unique packages.
NETplus, NETbusiness, and NETpower provide solutions for networks
operating on a UNIX server platform. NETpro and NETimpact operate on NT
server platforms. HostPro utilizes SSL secure servers, which ensures that
credit card and payment information is transmitted in an encrypted format.
In addition, HostPro fully supports two different shopping cart programs
which create a "virtual shopping environment" designed for e-commerce.
These programs track products and prices, calculate order totals and
shipping costs, and integrate
3
<PAGE>
with online payment processing services. Another e-commerce solution
offered by HostPro is Payment Net Service, which is the industry's only
single-source, automated, multi-payment, secure gateway that provides
real-time on-line processing services for multiple payment media: credit
cards, purchase cards, electronic checks and others. PaymentNet's multi-
payment gateway supports critical business requirements facing Internet
merchants including recurring billing, installment payments, delayed
product shipment and immediate soft goods delivery.
. Internet Search Engines. HostPro currently offers the Excite search
engine. This engine is complimented by HostPro's Index Server search
engine, Search Engine Submissions, Analog site statistics, and the Advance
WebTrends hit statistics reporting. These features help simplify the task
of searching through the Internet's vast library of web sites.
Through Micron University ("Micron U"), the Company's customers receive
access to on-line classes, seminars and tutorials. Micron U classes are hosted
by Ziff Davis and use the ZDU web site. Micron U offers customers two ways to
learn: either with others in online, instructor-led classes, or with self-study
tutorials. While Micron U's classes are taught by professionals and industry
experts, the learning takes place in a "virtual classroom" using a powerful, yet
simple, threaded message board instead of a classroom.
Parts and Upgrades
The Company also offers an extensive array of peripherals and software to its
customers through the Micron e-Additions program. The Company offers
competitively priced printers, scanners, monitors, memory upgrades, storage
devices, processor overdrives, modems, video cards and other multi-media
peripheral manufactured by third parties. Customers can also purchase current
software titles and a variety of networking hardware.
Manufacturing and Materials
- ----------------------------
The Company's PC manufacturing process is designed to provide custom-
configured products to its customers, and includes assembling components,
loading software and testing each system prior to shipment. The Company's PC
systems are generally assembled to order ("ATO") in its ISO 9001-certified
manufacturing facility based on customer specifications. Most components are
held by the Company's suppliers in a third-party logistics providers' warehouse
and delivered as order flow demands.
The Company's ATO manufacturing process promotes rapid inventory turnover and
reduced inventory levels, while allowing the Company to efficiently manufacture
customized computer systems. Desktop PC systems and servers are generally
assembled in the Company's own manufacturing facility while notebook PC systems,
designed and including feature sets defined by the Company, are procured as a
"bare bones" sub assemblies from third-party suppliers and have several key
components added within the Company's manufacturing facility prior to software
download and testing. Following assembly, PC systems are powered up, loaded
with software and subjected to certain diagnostic tests, including evaluation of
each system's functionality and quality. Upon completion of the process, PC
systems undergo a final inspection, after which the systems are packaged and
shipped to customers.
The Company focuses on providing PC systems that feature components and
software incorporating the latest technological developments in the PC industry.
The microprocessors used in the Company's PC systems are manufactured
exclusively by Intel, and a significant portion of the random access memory
("RAM") used in Micron PC systems is supplied by MTI. The Company generally
relies on MTI to supply the latest memory densities and configurations
available. The Company also 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. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors--PC Systems--Dependence on Key Sources of Supply."
Marketing and Sales
- -------------------
The Company's direct marketing approach is aimed toward PC users and
companies who evaluate products based on performance, price, reliability, and
service and support. The Company's customers are comprised primarily of
consumers and commercial and public entities. The Company markets its PC systems
primarily by strategically placing advertisements in personal computer trade
publications, submitting its products for review and evaluation by these
publications and advertising its products in certain newspapers and other
publications and on its home page on the Internet. The Company also markets its
PC systems through direct-mail campaigns and sells a limited number of PCs
through its factory outlet store located in Idaho. The Company has conducted
limited television advertising programs in the past, and anticipates additional
television and radio advertising in selected markets. In addition, the Company
sells its PC systems through strategic relationships with third parties having
large government procurement contracts. Pricing and terms for such procurement
contracts are generally subject to re-negotiation or termination by third
parties and governmental entities. The Company's field sales force focuses
primarily on soliciting and servicing the emerging "mid market" comprised of
medium and small sized businesses, and on sales to public entities. Finally, the
Company seeks the
4
<PAGE>
evaluation of its operation by external organizations in order to provide
independent assurance of product reliability, customer service and support and
business continuity for its commercial customers.
By focusing on the direct sales channel, the Company can avoid dealer markups
typically experienced in the retail sales channel, limit inventory carrying
costs and maintain closer contact with its target markets. Consumers seeking
high performance systems at competitive prices have historically referenced
computer trade magazines, and more recently have begun utilizing information
available on the Internet, to evaluate systems and configurations best suited to
their particular needs.
Direct sales orders are received primarily via telephone, facsimile, on its
home page on the Internet (www.micronpc.com) and through its direct sales force.
----------------
Micron sales representatives assist customers in determining system
configuration, compatibility and current pricing. Customers generally order
systems configured with varying feature sets differentiated by microprocessor
speed, hard drive capacity, amount of memory, monitor size and resolution and
bundled software, as well as other features.
The Company also applies the direct marketing approach for its e-Services
offerings by advertising in traditional media trade publications focused on
personal computing and the Internet, augmented with online marketing
initiatives. While continuing to strengthen its newly-acquired subsidiaries'
existing marketing programs for their targeted customer sectors, the Company is
creating an integrated marketing scheme to align its e-Services brand strategy
with that of its core PC systems business.
Product Warranties
- ------------------
The Company believes that PC product warranties and technical support
programs are key factors in achieving desired levels of customer satisfaction.
The key elements of the Company's PC product warranties and service and support
programs are as follows:
Money Back Guarantee. Customers may generally return PC products purchased
from the Company within a limited period of time after shipment. Specifically,
consumer customers may return PC products within 15 days for a full refund of
the purchase price, while commercial and government customers will receive a
full refund if they return the product within 30 days.
Micron Power Limited Warranty. Desktop and notebook PC systems and servers
are generally sold with the Micron Power Limited Warranty, consisting of a five-
year limited warranty on the microprocessor and main memory, a three-year
limited warranty on the hardware and one year on-site service provided by a
third party. The Micron Power Limited Warranty covers repair or replacement for
defects in workmanship or materials.
Backlog
- -------
Levels of unfilled orders for PC systems fluctuate depending upon component
availability, demand for certain products, the timing of large volume customer
orders and the Company's production schedules. Customers frequently change
delivery schedules and orders depending on market conditions and other reasons,
and the Company generally allows the cancellation of unfilled orders without
penalty any time prior to shipment. As of September 2, 1999, the Company had
unfilled orders for PC systems of approximately $15.6 million compared to $22.0
million as of September 3, 1998. The Company anticipates that substantially all
of the unfilled orders as of September 2, 1999, other than those subsequently
canceled, will be shipped within 30 days. The Company believes that backlog is
not indicative of actual sales of any succeeding period.
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
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 awards received from trade publications recognizing the
price and performance characteristics of Micron brand PC systems and the
Company's service and support functions. 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. Several of these manufacturers, which have traditionally sold their
products through national and regional distributors, dealers and value added
resellers, and retail stores, now sell their products through the direct
channel. In addition, the Company expects to face increased competition in the
U.S. direct sales market from foreign PC suppliers and from foreign and domestic
suppliers of PC products that decide to implement, or devote additional
resources to, a direct sales strategy. In order to gain an increased share of
the United States PC direct sales market, these competitors may effect a pricing
strategy that is more aggressive than the current pricing in
5
<PAGE>
the direct sales market or may have pricing strategies influenced by relative
fluctuations in the U.S. dollar compared to other currencies. See "Certain
Factors--PC Systems--Competition."
The competitive environment for Internet offerings is similarly intense, with
rapid technological change resulting in pricing pressure in the market for
Internet access, and to a lesser extent, web hosting services.
SPECTEK OPERATIONS
Products
- --------
SpecTek Operations processes and markets various grades of memory products
under the SpecTek brand name in either component or module form. Memory
components are obtained from semiconductor memory manufacturers, tested and
graded to their highest level of functionality. Higher-grade components meeting
industry specifications are available for use in memory modules for computer
systems. Certain lower grade components may be used in nonstandard memory
modules or sold to strategic OEM customers for use in specific applications. By
working closely with its customers to develop new applications utilizing its
memory components, the Company is able to offer reliable low cost memory
solutions and increase component and product compatibility.
Effective September 2, 1999, the Company and MTI entered into an amended and
restated Component Recovery Agreement (the "Component Recovery Agreement") which
expires August 30, 2001, unless terminated earlier based on the provisions as
described below. Under the Component Recovery Agreement, MTI is required to
offer to the Company all of the nonstandard memory components produced at MTI's
semiconductor operations. The Component Recovery Agreement provides that the
cost of components obtained from MTI will be negotiated on a quarterly basis,
but in no event will the cost be less than 50% of pre-tax net income. The
maximum cost payable by the Company to MTI for components during fiscal 2000
will be as follows: first quarter, 50% of pre-tax net income; second quarter,
62.5% of pre-tax net income; third quarter, 75% of pre-tax net income; and
fourth quarter, 87.5% of pre-tax net income. The cost to the Company for
components obtained from MTI during fiscal 2001 is not subject to any maximum
amount. There can be no assurance that the amounts payable by the Company to
MTI for components as contemplated under the Component Recovery Agreement would
be more favorable than the maximum amounts stated in this paragraph. The quarter
to quarter increase in maximum cost to the Company to obtain components from MTI
under the Component Recovery Agreement could have a material adverse effect on
the Company's business, financial position, results of operations and cash
flows.
The Component Recovery Agreement also provides that MTI will make
commercially reasonable efforts to obtain for the Company nonstandard memory
components produced by TECH Semiconductor Singapore Pte. Ltd. and KMT
Semiconductor Limited, joint venture companies in which MTI is affiliated. The
Company, MTI and the joint venture companies may agree to utilize a pricing
matrix based on effective yields and worldwide average sales prices in order to
establish prices for the components from the joint venture companies. In such
case, the price paid by the Company for components from the joint ventures will
be determined under the matrix, rather than as a percentage of pre-tax net
income.
Under the Component Recovery Agreement, at the commencement of the second
quarter of fiscal 2000, the Company has an option to require MTI to purchase the
property and equipment of SpecTek Operations for a purchase price equal to net
book value. At the commencement of fiscal 2001, MTI has an option to require the
Company to sell the property and equipment of SpecTek Operations under the same
terms and conditions. Additionally, the Company has an option to require MTI to
purchase, and MTI has the option to require the Company to sell, the assets of
SpecTek Operations at book value if MTI's ownership in the Company falls below
50% or if an unrelated third party acquires more than 30% of the Company. The
Component Recovery Agreement would terminate if MTI purchases the property and
equipment of SpecTek Operations pursuant to the exercise of the above described
options.
Historically, during various reporting periods, SpecTek Operations has had a
significant positive impact on the Company's results of operations and cash
flows. The expiration of the Component Recovery Agreement, or the sale of the
property and equipment of SpecTek Operations to MTI, could have a material
adverse effect on the Company's business, financial position, results of
operations and cash flows. A substantial majority of the components used in
SpecTek Operations were obtained from MTI under the former Component Recovery
Agreement. In 1999, 1998 and 1997, SpecTek Operations obtained 82%, 75%, and
74%, respectively, of its components from MTI's semiconductor manufacturing
facilities. Additionally, in fiscal 1999, the Company obtained approximately
17.7% of its components from MTI's joint venture affiliates. Many semiconductor
manufacturers other than MTI are reluctant to sell nonstandard memory components
because such components could compete with their full specification memory
components for similar applications. In addition, some manufacturers are
concerned that subsequent testing performed by a recovery operation could reveal
proprietary data regarding manufacturing yields and processes. As a result,
there can be no assurance that the Company would be able to negotiate future
purchases of components on terms acceptable to the Company after expiration of
the Component Recovery Agreement. See "Certain Factors--SpecTek Operations--
Dependence on Component Recovery Agreement with MTI."
6
<PAGE>
Manufacturing and Materials
- ---------------------------
SpecTek Operations requires a significant investment in sophisticated testing
hardware and software and expertise in semiconductor memory products and
manufacturing processes. The semiconductor memory manufacturing process
involves a highly complex series of steps performed to create specific
electronic features on silicon wafers. Recovery of memory components within the
semiconductor manufacturing process is generally performed at two stages: the
wafer probe stage and the test stage. The first test of electrical
functionality in the semiconductor memory manufacturing process is performed at
the wafer probe stage, where die not meeting certain functionality or
performance characteristics are segregated while those die which potentially
meet full performance specifications continue on in the manufacturing process to
the assembly and test stages. Although a majority of the Company's memory
components are identified by semiconductor memory manufacturers during the test
function, the Company maintains personnel in MTI's semiconductor memory
manufacturing facility to identify nonstandard die at the wafer probe stage
which may qualify for recovery. Once identified as recoverable die in the wafer
probe stage, the die are assembled and delivered to the Company for testing and
grading.
Upon delivery to the Company, memory components are grouped according to
device and package type and staged for a specific sequence of electrical,
environmental and mechanical tests identified for that group. The Company's
test and product engineers develop the complex testing algorithms and procedures
necessary to recover semiconductor memory components on a cost-effective basis.
The Company's engineers also develop and implement proprietary software and
hardware modifications to automate test and handling equipment. Test and
product engineers develop burn-in testing procedures in order to increase
assurance of reliability for devices being processed. Throughout the testing
process, semiconductor memory components are graded in an effort to segregate
less functional components and to minimize additional testing with respect to
such components. The Company strives to maintain close working relationships
between its engineering staff and its customers and modifies its test procedures
and test specifications to ensure that memory components properly address
customer performance requirements. Once all electrical and environmental
testing is accomplished, the devices are subjected to automated and visual
inspection to verify that the devices meet mechanical and cosmetic
specifications relating to package, mark and device lead integrity.
Marketing and Sales
- -------------------
Effective September 2, 1999, the Company and Micron Semiconductor Products,
Inc., ("MSP") a subsidiary of MTI, entered into an exclusive Sales
Representative Agreement under which MSP will serve as exclusive sales
representative for SpecTek Operations' memory products.
Pricing for SpecTek Operations' memory products fluctuates, to a large
degree, based on industry-wide pricing for semiconductor memory products. In
recent years, the Company experienced significant declines in the average
selling prices of its memory products as industry-wide average selling prices
for full specification semiconductor memory products experienced a sharp
decline. In recent months, the Company has experienced a significant increase in
the average selling prices of its memory products. This is due to industry-wide
increases in average selling prices for full specification memory components.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations-Certain Factors-SpecTek Operations-Pricing of
Semiconductor Memory Products."
Product Warranties
- ------------------
The Company typically offers a one-year limited warranty on its SpecTek
Operations' memory products. Longer warranties are generally offered only in
special circumstances. Although the Company's historical warranty claims with
respect to SpecTek Operations memory products have not been material, there can
be no assurance that the Company will not experience significant future warranty
claims with respect to these products.
Backlog
- -------
The SpecTek Operations' memory product customers generally do not order with
long lead times, and orders are frequently placed with a provision to
renegotiate price at or near the time of shipment. Therefore, the Company does
not believe any backlog of orders for SpecTek Operations' memory products is
firm or a reliable indication of actual sales for any succeeding period.
Competition
- -----------
The principal competitive factors in SpecTek Operations are access to sources
of semiconductor memory components, testing capabilities, memory component
prices and applications engineering. The price of nonstandard memory components
is directly influenced by the price of full specification memory components. As
higher density memory devices become more prevalent and error correction
technologies and solutions improve, semiconductor memory manufacturers have
sought ways to recover a portion of their manufacturing costs through recovery
of nonstandard DRAM components. Certain manufacturers have established internal
capabilities and independent companies are pursuing opportunities to recover,
test and market nonstandard memory components. As
7
<PAGE>
more semiconductor memory manufacturers recover nonstandard memory components,
the pressure on the remaining manufacturers may increase to develop similar
programs, whether internal or external, in order to generate revenue from their
nonstandard memory components. In addition to supplying nonstandard memory
components to the market, in-house component recovery operations by other
manufacturers eliminate a potential source of supply to the Company. Upon
termination or expiration of the Component Recovery Agreement, MTI could
purchase SpecTek Operations' property and equipment and develop its own
component recovery operation. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations-Certain Factors-SpecTek
Operations-Dependence on Component Recovery Agreement with MTI."
EXPORT SALES
The Company's consolidated export sales totaled $173 million, $157 million
and $143 million in fiscal 1999, 1998 and 1997, respectively. Export sales are
denominated primarily in United States dollars.
INTELLECTUAL PROPERTY
As of September 2, 1999, the Company owned approximately 109 issued U.S.
patents and 2 foreign patents. In addition, the Company has 80 patent
applications allowed and awaiting issuance and approximately 460 applications on
file. The Company is the holder of a number of trademarks and registered
trademarks and intends to continue to seek protections on its significant
patentable technology and trademarks. 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 entered into several
intellectual property licenses, 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 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. See "Certain Factors--
General--Intellectual Property Matters."
RESEARCH AND DEVELOPMENT
Research and development expenses for 1999, 1998 and 1997 were approximately
$4.5 million, $10.1 million, and $9.6 million, respectively. Research and
development expense in 1999 and 1997 included charges of $1.0 million and $3.9
million, respectively, for the write-off of purchased in-process research and
development associated with the Company's acquisitions in the fourth quarter of
fiscal 1999 and 1997 of HostPro and NetFRAME Systems Incorporated, respectively.
See notes to consolidated financial statements.
During the second quarter of fiscal 1999, the Company's advanced engineering
group was discontinued. Prior to the second quarter of 1999, the Company's
development efforts focused on core logic chip sets, motherboards, and PC BIOS
development as well as product development of desktops, notebooks and servers.
Currently the development efforts are primarily focused on desktop, notebook and
server development and engineering on the next generation platforms.
The Company licenses certain software programs from third party developers
through a non-exclusive worldwide license. Such software is generally
incorporated into software programs developed by the Company for use in its
server products.
EMPLOYEES
As of September 2, 1999, the Company employed approximately 2,250 people in
PC Systems and 350 people in its SpecTek Operations. Nearly all of the Company's
employees are located in the United States, and none are represented by a labor
organization with respect to their employment by the Company. The Company has
never had an organized work stoppage and considers its employee relations to be
satisfactory.
8
<PAGE>
ENVIRONMENTAL REGULATIONS
Some risks of costs and liabilities related to environmental matters are
inherent in the Company's business, as with many similar businesses, and the
Company's operations are subject to certain federal, state and local
environmental regulatory requirements relating to environmental and waste
management. The Company periodically generates and handles limited amounts of
materials that are considered hazardous waste under applicable law. The Company
contracts for the off-site disposal of these materials. The Company believes
that its business is operated in compliance with applicable environmental
regulations.
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The executive officers and directors of the Company and their ages as of
October 2, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ ----- --------------------------------------------------------------------------
<S> <C> <C>
Joel J. Kocher 43 Chairman of the Board of Directors and ChiefExecutive Officer
Jill D. Smith 41 Executive Vice President, Chief Operating Officer
James R. Stewart 43 Senior Vice President, Finance and Chief Financial Officer
Michael S. Adkins 34 Senior Vice President, Micron PC, Inc.
Savino R. "Sid" Ferrales 49 Senior Vice President, Worldwide Human Resources
Lyle W. Jordan 55 Senior Vice President, Worldwide Supply Chain Operations
Steven P. Arnold 44 Vice President, Legal and General Counsel
Scott L. Bower 48 Vice President & General Manager, Micron Computer Services, Inc.
Stephen Brown 48 Vice President & Chief Information Officer
Harry B. Heisler 46 Vice President & General Manager, Micron Government Computer Systems, Inc.
Paul A. Amlani 44 Vice President, & General Manager, Micron Commercial Computer Systems, Inc.
JoAnne S. Pfeifer 40 Vice President, Administration, and Corporate Secretary
Michael Gale 37 Vice President, Chief Web Officer
Jeffrey Moeser 36 Vice President, Desktop and Server Development
Steven R. Appleton 39 Director
John B. Balousek 54 Director
Robert Lee 52 Director
Robert A. Lothrop 73 Director
</TABLE>
Joel J. Kocher served as President of Worldwide Marketing, Sales and Service
at Dell Computer Corporation from 1987 to September 1994. In October 1994, Mr.
Kocher joined Artistsoft Inc., where he served as Executive Vice President and
Chief Operating Officer of Artistsoft, Inc. from October 1994 to October 1995.
From October 1995 until December 1996 Mr. Kocher served as President, Chief
Operating Officer, and Director of Artistsoft. From December 1996 until August
1997, Mr. Kocher served as President and Chief Operating Officer at Power
Computing Corporation. Mr. Kocher accepted the position of President and Chief
Operating Officer of the Company in January 1998 and was further named Chairman
and Chief Executive Officer in June 1998.
Jill D. Smith served as Chief Executive Officer at SRDS, L.P. from May 1994
to May 1995. In August 1995, Ms. Smith joined Treacy & Company, LLC serving as
Managing Director until March 1999. In March 1999, Ms. Smith joined the Company
as an Executive Vice President and Chief Operating Officer.
James R. Stewart served as Medical Group Controller in Europe for the 3M
Company from March 1992 to July 1995. He served as Corporate Controller for
Imation Corporation from August 1995 to September 1997. He served as General
Manager for Growth Ventures for Imation Corporation from September 1997 to
January 1999. In January 1999, he joined the Company as Senior Vice President
and Chief Financial Officer.
Michael S. Adkins served as Manager of the Systems Integration Group of MTI
from April 1990 to November 1993 when he was appointed President of Systems
Integration Group, Inc., then a wholly owned subsidiary of MTI. He continued in
that position until November 1994 when he was appointed General Manager, System
Integration, an operating division of MTI. Mr. Adkins joined the Company in
July 1996 as Executive Director, SpecTek Operations and was appointed Vice
President, SpecTek Operations in February 1997, followed by an appointment to
Senior Vice President of PC Manufacturing in October 1997. In June 1999 he
accepted the position of Senior Vice President and General Manager of Micron PC,
Inc.
Savino R. "Sid" Ferrales served as Vice President of Human Resources at Dell
Computer Corporation from January 1989 to June 1994. From June 1994 to June
1995, he was a principal in OMC Group, a human resources consulting firm. From
June 1995 to February 1997, Mr. Ferrales served as Vice President, Worldwide
Human Resources, for Digital Equipment Corporation. In March 1997, Mr. Ferrales
accepted the position of Vice President of Human Resources at Power Computing
Corporation, a position he held
9
<PAGE>
until November 1997. From late 1997 to February 1998, he served as principal of
WorkSource. Mr. Ferrales accepted the position of Senior Vice President of
Worldwide Human Resources with the Company in February 1998.
Lyle W. Jordan served as Vice President, Manufacturing and Operations of
Kubota Pacific Computer/Kubota Graphics Corporation from July 1990 to January
1995. In January 1995, Mr. Jordan joined InFocus Systems, Inc., serving as Vice
President of Operations until February 1997. In February 1997, Mr. Jordan
accepted the position of Vice President of Manufacturing at Power Computing
Corporation, where he served until joining the Company as Vice President,
Materials in January 1998. Mr. Jordan was appointed Senior Vice President,
Supply Chain, Materials in April 1999 and Sr. Vice President, Worldwide Supply
Chain Operations in June 1999.
Steven P. Arnold served as an associate with Arnold, White and Durkee from
January 1988 to April 1995, when he joined MTI as Associate General Counsel. He
continued in that position until June 1996 when he joined the Company as Chief
Counsel, Intellectual Property. In January 1997, Mr. Arnold was appointed Vice
President, Legal and General Counsel.
Scott L. Bower served as Director of Mobile Computing Brands with
International Business Machines (IBM), PC Division, from August 1992 to August
1995. Mr. Bower served as Vice President, Sales and Marketing with Samsung in
August 1995 until December 1996 and subsequently served as Senior Vice President
of Sales and Marketing, Americas, at AST Computer until from January 1997 to
November 1997. Mr. Bower was appointed to the position of Vice President and
General Manager, Commercial Segment of the Company in July 1998. He was
appointed Vice President and General Manager for Micron Computer Services, Inc.
in July 1999.
Stephen Brown served as Executive Consultant with Diversified Information
Technologies, Inc. from April 1992 to September 1995. Mr. Brown subsequently
served as Chief Information Officer of Imation Corporation, a spin-off of 3M
Company, from September 1996 until accepting the position of Vice President and
Chief Information Officer of the Company in September 1998.
Harry B. Heisler served in various positions including Vice President of
Marketing at Government Technology Services, Inc. from August 1984 to June 1994.
In January1995, Mr. Heisler, became an independent management consultant working
with high technology firms. In June 1998, Mr. Heisler accepted the position of
Vice President and General Manager, public sector, with the Company where he
served until his appointment as Vice President and General Manger for Micron
Government Computer Systems, Inc.
Paul A. Amlani served as Director, Sales; General Manager at AST Canada, Inc.
from July 1994 to November 1996. He served as Vice President, Sales for
Compugen Corp. from December 1996 to June 1998. In October 1998 he joined the
Company as Director, Micron Computer Canada, Inc. Mr. Amlani was appointed to
Vice President and General Manager for Micron Commercial Computer Systems, Inc.
in July 1999.
JoAnne S. Pfeifer served as Administration Projects Coordinator for MCMS from
August 1992 until her appointment as Administration Manager of the Company in
January 1995. In March 1996, Ms. Pfeifer was named Director of Administration
and additionally appointed Corporate Secretary in July 1996. In January 1997,
she was named Vice President, Administration and continues to serve as Corporate
Secretary for the Company.
Michael Gale served as Managing Director, International Research for
IntelliQuest from January 1993 to October 1997. In October 1997 he became Vice
President, Brand and Market Analysis for IntelliQuest. In November 1998 he
joined the Company to serve as Vice President, Business Development. In February
1999 he was appointed Vice President and General Manager for Micron PC, Inc. In
June 1999 he was appointed Vice President and Chief Web Officer.
Jeffrey K. Moeser served as Product Marketing Manager, CPU's for CompuAdd
August 1988 until May 1994. In May 1994 he joined the Company as Product
Manager. He subsequently served as Product Development Manager and Desktop
Product Marketing Director. In September 1997, he was appointed Vice President
Desktop Products for the Company. In August 1999, he was appointed Vice
President Desktop and Server Development.
Steven R. Appleton joined MTI in February 1983 and has served in various
capacities with MTI and its subsidiaries, including overseeing MTI's
semiconductor operations as President and Chief Executive Officer of Micron
Semiconductor, Inc. (then a wholly-owned subsidiary of MTI) from July 1992 to
November 1994. Except for a nine-day period in January 1996, since May 1994 Mr.
Appleton has served as a member of MTI's Board of Directors and since September
1994, Mr. Appleton has served as the Chief Executive Officer, President and
Chairman of the Board of Directors of MTI. Mr. Appleton has served as a member
of the Board of Directors of the Company from April 1995 until January 1996 and
from February 1996 to the present.
John B. Balousek was appointed to the Board of Directors of the Company, on
August 17, 1999. Mr. Balousek served as President, Chief Operating Officer, and
Director of Foote Cone & Belding Communications, Inc., a global advertising and
communications company, from May 1991 to February 1996 and he served as Chairman
and CEO of True North Technologies, a
10
<PAGE>
digital and interactive services company of True North Communications, parent
company of Foote Cone & Belding Communications, from March to July 1996. Mr.
Balousek continued to serve as director of True North Communications until
January 1997. Mr. Balousek is currently a director on the boards of Geoworks
Corporation and Freeshop.com, Inc., both publicly held companies and also serves
as director for several privately held companies.
Robert Lee was appointed to the Board of Directors of the Company on April 1,
1999. Mr. Lee served as President of Business Communication Services of Pacific
Bell from April 1995 to May 1998. Prior to his appointment as President of
Business Communication Services, Mr. Lee had served as Executive Vice President,
California Market Group, for Pacific Bell since April 1993. Mr. Lee currently
serves as director of several privately held companies, including AUnet,
Amplify.net, Advanced Mobile Solutions, and Telmax, Inc
Robert A. Lothrop has served on MTI's Board of Directors since May 1994 and
on the Company's Board of Directors since April 1995. Mr. Lothrop served in
positions including Senior Vice President of the J.R. Simplot Company, a food
processing, fertilizer and agricultural chemicals manufacturing company, since
1959. Mr. Lothrop retired from the Simplot Company in January 1991.
ITEM 2. PROPERTIES
The Company's corporate headquarters, PC Systems and SpecTek Operations are
based in a number of Company-owned or leased facilities aggregating
approximately 490,000 square feet located in Nampa, Idaho. Approximately
100,000 square feet of the Nampa facilities are dedicated to PC manufacturing
and approximately 40,000 square feet are dedicated to SpecTek Operations. The
balance of the Nampa facilities is dedicated to sales, technical support,
customer service, and administrative functions and warehouse space. In
addition, the Company is nearing completion of approximately 135,000 square feet
of PC manufacturing space expected to be in production in the first quarter of
2000.
The Company leases an 81,000 square foot facility in Minneapolis, Minnesota,
dedicated primarily to PC sales, technical support, field sales, and
administrative functions and a 74,000 square foot facility in Meridian, Idaho,
dedicated to a PC call center.
Other leased facilities include a factory outlet in Boise, Idaho, a leased
facility in Los Angeles, California, dedicated to the operations of the
Company's web hosting services, and a leased facility in Boise, Idaho, used by
the Company's Internet service provider.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal actions arising out of the normal
course of business, none of which is expected to have a material adverse effect
on the Company's business, financial position, results of operations and cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Micron Electronic, Inc.'s Common Stock trades on the Nasdaq Stock Market
under the symbol "MUEI". The following table shows for the periods indicated the
high and low sales prices for the common stock of the Company, as reported by
the Nasdaq Stock Market:
High Low
------- -------
1999: 4th quarter $12.031 $ 9.000
3rd quarter 13.125 9.375
2nd quarter 22.625 11.250
1st quarter 24.750 13.375
1998: 4th quarter $17.125 $ 9.688
3rd quarter 16.125 10.250
2nd quarter 14.125 8.438
1st quarter 20.750 10.250
11
<PAGE>
HOLDERS OF RECORD
As of September 2, 1999, there were approximately 2,548 shareholders of
record of the Company's Common Stock.
DIVIDENDS
The Company has never declared or paid any cash dividend nor has any intent
to do so in the near future. Payment of dividends is currently limited by the
terms of the Company's Credit Agreement, dated June 10, 1998.
ITEM 6. SELECTED FINANCIAL DATA (Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $1,437,829 $1,733,432 $1,955,783 $1,764,920 $999,999
Operating income (loss) 43,221 (83,894) 136,458 75,998 106,493
Net income 36,524 47,953 87,262 44,582 65,086
Earnings per share:
Basic .38 0.50 0.93 0.49 0.75
Diluted .38 0.50 0.92 0.48 0.74
Current assets 544,066 538,462 563,148 399,116 308,755
Working capital 296,741 288,149 203,884 121,766 106,452
Total assets 733,531 692,443 758,346 529,933 382,716
Total debt 12,001 28,528 38,641 21,297 6,823
Shareholders' equity 458,498 416,894 365,571 228,460 173,663
</TABLE>
On April 7, 1995, Micron Computer, Inc. ("MCI") and Micron Custom
Manufacturing Services, Inc. ("CMS"), then subsidiaries of MTI, merged with and
into ZEOS International, Ltd. ("ZEOS"), and the surviving corporation's name was
changed to Micron Electronics, Inc. (the "MEI Merger"). A new basis of
accounting, based on fair values, was established for the assets and liabilities
of ZEOS. Subsequent to the MEI Merger, the Company's financial statements
reflect the consolidated results of operations, financial position and cash
flows of the Company based on the new basis of accounting for the assets and
liabilities of ZEOS and the historical cost bases for the assets and liabilities
of MCI and MCMS. Prior to the MEI Merger, the financial statements of the
Company include only the combined results of operations, financial position and
cash flows of MCI and MCMS.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Item 8. Financial Statements and Supplementary
Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements contained in this Form 10-K 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 yearly references are to the Company's fiscal years ended
September 2, 1999, September 3, 1998 and August 28, 1997, unless otherwise
indicated. The fiscal year ended September 2, 1999 contained fifty-two weeks
compared to fifty-three weeks in fiscal year 1998 and fifty-two weeks in fiscal
1997. 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.
RESULTS OF OPERATIONS
Net income for 1999 was $36.5 million, or $0.38 per diluted share, on net
sales of $1,437.8 million, compared with a net loss for 1998 of $46.5 million,
or $0.48 per diluted share, on net sales of $1,591.7 million, adjusted to
exclude net sales of MCMS of $141.7 million and the gain of $94.5 million net of
tax, or $.98 per diluted share, from the sale of 90% of the Company's wholly
owned
12
<PAGE>
subsidiary, MCMS. Without adjusting for the sale of MCMS, net income for 1998
was $48 million, or $0.50 per diluted share on net sales of $1,733.4 million.
The Company's consolidated gross margin percent increased to 18.8% in 1999 from
12.8% in 1998.
The Company's PC Systems segment had net sales of $1,240.0 million and an
operating loss of $32.5 million in 1999 compared with net sales of $1,496.6
million and an operating loss of $108.8 million in 1998. The reduction in the
operating loss of the PC Systems segment is primarily due to improved gross
margins and lower operating expenses, that were partially offset by
significantly lower average selling prices. Gross margins for PC Systems were
15.3% in 1999 compared with 12.2% in 1998 primarily due to better inventory
management, and an improved sales mix.
Selling, general and administrative expenses ("SG&A") for 1999 were 23.0%
lower than for 1998, primarily due to actions taken by the Company to lower the
overall cost structure in February 1998 to concentrate on its core markets and
customers, including the consolidation of its domestic and international
operations and the reduction of approximately 10% of its workforce.
The Company's SpecTek Operations had net sales of $198.0 million and
operating income of $75.7 million in 1999 compared to 1998 net sales of $95.1
million and operating income of $14.3 million, primarily due to a 175.6%
increase in megabits shipped and higher gross margins on products shipped. Gross
margin for 1999 was $80.0 million or 40.4% of net sales compared to $21.4
million or 22.5% of net sales in 1998. Improvement in the gross margin is
primarily due to improved productivity from higher volumes shipped and the mix
of parts received during the year from MTI and purchased from parties not
associated with the Component Recovery Agreement. The percentage of product
shipped not subject to the Component Recovery Agreement in 1999 was 18% compared
to 25% in 1998. SG&A and other expenses remained approximately the same year
over year.
On August 2, 1999, the Company acquired 100% of the outstanding stock of
NetLimited, Inc. d.b.a. HostPro, for $21.9 million. The acquisition was
accounted for as a purchase and the Company's results of operations include
those of HostPro since the acquisition date. On September 2, 1999, the Company
acquired the property and equipment of Micron Internet Services, formerly a
division of MTI, for its book value of $2.2 million. The acquisition was
accounted for as a purchase and the Company's results of operations for 1999
were not affected by this transaction.
On February 26, 1998, the Company completed the sale of 90% of its interest
in MCMS, Inc., formerly Micron Custom Manufacturing Services, Inc., a wholly-
owned subsidiary of the Company. In exchange for the 90% interest in MCMS, Inc.,
the Company received $249.2 million in cash. Results of operations of the
Company for 1998 include a pre-tax gain of $156.2 million ($94.5 million or
$0.98 per diluted share, after taxes). The Company's financial statements
include the results of MCMS, Inc.'s operation through the date of sale. Net
sales of MCMS, Inc., in 1998 and 1997 were $141.7 million and $290.0 million,
respectively.
Net Sales
- ---------
The following table summarizes the Company's net sales by operating segment:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
Amount % of Sales Amount % of Sales Amount % of Sales
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
PC Systems $1,239,794 86.2% $1,496,563 86.3% $1,528,304 78.2%
SpecTek Operations 198,035 13.8% 95,146 5.5% 137,511 7.0%
MCMS - 0.0% 141,723 8.2% 289,968 14.8%
---------- ----------- ---------- ----------- ---------- ---------
Total net sales $1,437,829 100.0% $1,733,432 100.0% $1,955,783 100.0%
========== =========== ========== =========== ========== =========
</TABLE>
PC Systems. Net sales of computer systems were 17% lower in 1999 compared to
1998, primarily due to a 12% decrease in average selling prices and slightly
lower unit sales. The decline in average selling prices for the Company's
desktop, notebook, and server system sales, and were 11%, 16%, and 15%
respectively. Lower prices were largely the result of continued industry price
competitiveness and the Company's aggressive pricing strategy designed to gain
entry into key markets. The 2% decrease in unit sales is primarily attributed
to a 3% drop in the Company's desktop computer systems which was partially
offset by a 30% increase in the Company's sale of higher margin server systems.
Unit sales of computer systems were 4% higher in the fourth quarter of fiscal
1999 compared to the third quarter of fiscal 1999. This was due to a 2%
increase in desktop unit sales, an 18% increase in notebook unit sales, and a 3%
increase in server unit sales.
Net sales of computer systems were 2% lower in 1998 compared to 1997
primarily due to a 11% decrease in average selling prices for the Company's
computer systems partially offset by an increase in unit sales and a higher
level of non-system revenue. The decline in average selling prices was primarily
attributable to a 12% decrease in the selling prices for the Company's desktop
computer systems and a 24% decline in selling prices for notebook systems. Lower
prices were largely the result of industry price competitiveness, particularly
for notebook products, and to the Company's efforts to price its products more
in line with its
13
<PAGE>
competition. Unit sales were 5% higher in 1998 compared to 1997, due primarily
to a 49% increase in unit sales of the Company's notebook products. Unit sales
of computer systems were 9% higher in the fourth quarter of fiscal 1998 compared
to the third quarter, primarily due to a 14% increase in desktop unit sales and
a 28% increase in server unit sales, partially offset by a 20% decline in unit
sales of notebooks.
Unit sales of desktop systems were 84% of total unit sales in 1999 compared
to 86% in 1998 and 90% in 1997. Unit sales of notebook systems were 14% of total
unit sales in 1999 compared to 13% and 9% of total PC system sales during 1998
and 1997, respectively. Unit sales of computer systems featuring Intel Celeron
and Pentium III microprocessors represented 15.5% and 15.0%, respectively. In
addition, unit sales of computer systems incorporating Intel Pentium II
microprocessors and Pentium microprocessors with MMX technology represented 66%
and 3%, respectively, of total units sold in 1999, compared to 48% and 47%,
respectively, of total units sold in 1998.
Net sales of PC systems in 1999 were 15% and 13% higher in the commercial
and public sectors, respectively, compared to 1998. These increases were offset
by lower net sales of computer systems in the consumer sector. The growth in
commercial sales was largely attributable to the presence of an expanded sales
force competing for commercial customers. Public sector net sales increased as
the Company improved its position as a GSA supplier, expanded its sales force,
and had continued success in winning new contracts and retaining existing ones.
International sales of PC systems represented 4% of total PC system sales in
1999 compared to 6% in 1998.
Net sales to the public sector represented 31% of total net sales for 1999,
an increase from 23% in both 1998 and 1997. The future level of the Company's
public sales is dependent on the buying practices of governmental entities and
the Company's success in being selected to participate in government contracts.
In particular, during 1999 the Company successfully increased the volume
purchase agreements (VPA's) with the federal government and its agencies. As of
September 2, 1999, the Company had increased the number of VPA's to 106 compared
to 84 in 1998.
SpecTek Operations. Net sales of memory products were 108% higher in 1999
compared to 1998, primarily due to a significant increase in megabits of memory
sold, partially offset by declining average selling prices. Average selling
prices in 1999 were 27% lower compared to 1998, while megabits of memory sold in
1999 were 176% higher compared to 1998. The increase in megabits of memory
products shipped in 1999 compared to 1998 was primarily due to reduced component
test time and product transition to the 64 megabit component from the 16 megabit
component, both resulting in increased throughput from substantially all memory
products. Net sales of memory products were lower in 1998 compared to 1997, due
to a 64% decline in average selling prices, partially offset by a 94% increase
in megabits of memory sold. The SpecTek Operations results of operations are
influenced by a number of factors including pricing for, and availability of,
nonstandard memory components. See "Certain Factors-SpecTek Operations."
MCMS. The Company completed the sale of 90% of its interest in MCMS on
February 26, 1998; accordingly, results of operations of MCMS subsequent to
February 26, 1998 are excluded from the Company's results of operations.
<TABLE>
<CAPTION>
Gross Margin
- --------------------
1999 1998 1997
-------- -------- --------
Amount % of Sales Amount % of Sales Amount % of Sales
-------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
PC Systems $190,282 15.3% $183,155 12.2% $259,473 17.0%
SpecTek Operations 79,963 40.4% 21,401 22.5% 44,876 32.6%
MCMS - 0.0% 17,598 12.4% 33,397 11.5%
-------- -------- --------
Total gross margin $270,245 18.8% $222,154 12.8% $337,746 17.3%
======== ======== ========
</TABLE>
PC Systems. The Company's gross margin on sales of PC systems was $7.1
million or 3.9% higher in 1999 compared to 1998, principally due to lower
component cost from improved asset management and a change in the sales mix
towards higher margin systems, while being partially offset by a decline in
average selling prices. Lower component cost in 1999 resulted from improved
asset management compared to 1998, as evidenced by annualized inventory turns of
81 times. While overall average selling prices for the PC systems products
declined 11.7% in 1999 compared to 1998, unit sales of higher margin servers
increased 29.8% in 1999 compared with 1998.
The Company continues to experience significant pressure on its gross
margins as a result of intense competition in the PC industry and consumer
expectations of more powerful PC systems at lower prices. In addition, the
Company's gross margin percentage will continue to depend in large part on its
ability to effectively manage its inventories of PC system components. See
"Certain Factors--PC Systems--Competition" and "Certain Factors--PC Systems--
Inventory Management."
14
<PAGE>
The Company's gross margin on sales of PC systems was $76.3 million lower
in 1998 compared to 1997. Gross margin for fiscal 1998 was negatively impacted
by a decline in average selling prices of the Company's notebook products. The
gross margin percentage for sale of the Company's PC systems decreased in 1998
compared to 1997 primarily as a result of losses realized from disposition of PC
component inventories. As a result of intense price pressure on notebook
products during fiscal 1998, the Company's gross margins were adversely affected
by significantly lower gross margins realized from sales of the Company's
notebook products. This was offset, however, by a favorable adjustment of
approximately $11.8 million dollars in the fourth quarter of 1998 that related
to revisions of estimates of contingencies for product and process technology
costs for two patent infringement matters based on new information learned by
management in the fourth quarter of 1998.
SpecTek Operations. The gross margin on semiconductor sales was $58.6
million or 273.6% higher in 1999 compared to 1998 principally due to an increase
in megabits shipped and lower average cost per components purchased from sources
other than MTI, while being partially offset by lower average selling prices.
Megabits shipped in 1999 compared to 1998 were up 175.6% due to improved
manufacturing productivity and the transition from the 16 to 64 megabit DRAM and
SDRAM. The average selling price per megabit declined 27% in 1999 compared to
1998. The gross margin percentage realized in 1998 compared to 1997 was lower
primarily because of lower average selling prices. Average selling prices in
1998 were 64% lower compared to 1997. The gross margin for SpecTek Operations
could decline as the result of falling average selling prices and/or an increase
in cost of components. These circumstances could adversely affect the Company's
business, financial position, and results of operations and cash flows. See
"Certain Factors-SpecTek Operations-Pricing of Semiconductor Memory Products."
MCMS. The Company completed the sale of 90% of its interest in MCMS on
February 26, 1998; accordingly, results of operations of MCMS subsequent to
February 26, 1998 are excluded from the Company's results of operations.
<TABLE>
<CAPTION>
Selling, General and Administrative
- -----------------------------------
1999 1998 1997
------------------- ------------------ --------
Amount % Change Amount % Change Amount
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total SG&A expenses $218,970 (23.0%) $284,292 43.4% $198,217
as a % of net sales 15.2% 16.4% 10.1%
</TABLE>
SG&A expense for fiscal 1999 declined $65.3 million compared to fiscal
1998. This decrease is primarily attributable to lower advertising expense, and
lower technical and professional fees. In addition, during February 1998, the
Company reduced its work force by approximately 10%. The Company further reduced
its SG&A cost structure by the sale of its MCMS operation in the second quarter
of fiscal 1998, and the closure its Japanese operation in the second quarter of
fiscal 1999. Internal software expense also decreased as a result of the Company
adopting the provisions of SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," in the first quarter of fiscal
1999. SG&A expense was also lower in 1999 compared to 1998 because of lower bad
debt expense.
SG&A costs were higher in 1998 compared to 1997 primarily due to higher
levels of personnel costs and advertising associated with the Company's PC
operations and higher technical and professional fees primarily associated with
information technology consulting services.
<TABLE>
<CAPTION>
Research and Development
- ------------------------
1999 1998 1997
----------------- ------------------ ------
Amount % Change Amount % Change Amount
------ -------- ------- -------- ------
<S> <C> <C> <C> <C> <C>
Total research and development $4,521 (55.4%) $10,138 5.4% $9,621
as a % of net sales 0.3% 0.6% 0.5%
</TABLE>
Research and development expenses declined 55% in fiscal 1999 compared to
fiscal 1998. The decrease is due to the discontinuance of the advanced
engineering group during the year partially offset by a charge of $1.0 million
for the write-off of purchased in-process research and development related to
the acquisition of HostPro.
HostPro's development efforts centered on customer support and service for
systems, delivered through the Internet. The product is licensed to resellers
and used internally by HostPro. HostPro's in-process technology development is
aimed toward increasing the performance and redundancy of its web hosting
systems. Because the development work conducted by HostPro was tailored to meet
its specific infrastructure requirements and processes, alternative future uses
of these development technologies do not exist. Technological feasibility of
these in-process projects had not been achieved as of the acquisition date, and
significant technological risk remained. The in-process research and development
write-off related to the HostPro acquisition was $1.0 million, and was based
15
<PAGE>
on estimated future revenues of $30 million over the next six years. Management
expects to complete all projects in fiscal 2000. However, to the extent that any
of these projects are delayed or development efforts are unsuccessful, the
impact to the Company's business, financial position, results of operations and
cash flows are expected to be minimal.
The in-process projects are:
. Customer service package. The development efforts are focused on
enabling remote management of accounts and automatic management and
provisioning of web-sites through a customer Extranet. Management
believes this project will be completed by November 1999 and that the
Company will begin to receive benefits at such time.
. Automated utility system. The development of this software package is
for use in monitoring network connections, bandwidth usage and server
status. This proprietary technology is an automated utility programmed
to monitor and respond to trends in server traffic. In addition, this
system will display vital statistics of the server for external
monitoring and maintenance. Management believes this project will be
completed by May 2000 and that the Company will begin to receive
benefits at such time.
. IP routing redundancy program. This network infrastructure design
effort is intended to increase network fault tolerance and will enable
HostPro servers to share storage systems and dynamically allocate
server requests. Management believes this project will be completed by
December 1999, and that the Company will begin to receive benefits at
such time.
For the identified in-process projects, estimated cost to complete
subsequent to the acquisition date was $0.2 million. Based on a combination of
man-months, costs incurred and management's estimate of project completion, the
projects were determined to be 60% complete. HostPro's planned research and
development projects for which no significant efforts have been made were not
included in the valuation.
The key assumptions in determining the incomplete in-process technologies were:
. Discounted cash flows. A discounted cash flows analysis of products
incorporating in-process technology was developed based on
management's estimates of revenue and expenses associated with the
products.
. Selling, General and Administrative. SG&A expenses was forecast based
on historical ratios and industry standards. Projected SG&A expenses
decrease as a percentage of projected revenues due to expected sales
growth with SG&A expenses growth at a slower rate. SG&A expenses were
assumed to remain 25% of projected revenues instead of increasing due
to the significant growth expected for Internet companies during the
next six years.
. Research and Development. Additional research and development costs
were projected based on management's estimate of future costs required
to advance the design of the technology to the point that it met
specific functional and economic requirements.
. Discount Rate. Cash flow streams associated with in-process
technologies were discounted to present value at a rate of return an
investor would require for a project with a risk profile similar to
HostPro. The 25% discount rate for in-process technology reflects the
high-risk profile attributable to this technology.
Research and development expenses were slightly higher in 1998 compared to
1997 primarily as a result of the development activities associated with the
Company's NetFRAME enterprise server operation.
In the fourth quarter of fiscal 1997, the Company acquired all of the
outstanding common stock of NetFRAME for $17.4 million in cash. The acquisition
was accounted for as a purchase and the purchase price was allocated to the net
assets acquired, including identified intangible assets and in-process research
and development, based on their fair values. At the time of the acquisition, the
Company recognized a charge of $3.9 million for the write-off of purchased
in-process research and development.
The fair value of NetFRAME's technology was determined by an independent
appraiser through an analysis using a risk adjusted cash flow model. Estimated
future cash flows derived from the technology or products incorporating the
technology were discounted taking into account risks related to existing and
future markets and assessment of the life expectancy of such technology.
Technology was segregated into that which was determined to be completed (those
currently technologically feasible but that may require adjustments or
relatively minor enhancements) and in process (technologies that require
additional research and development efforts to reach technological feasibility).
The analysis resulted in the allocation of $0.8 million of purchase price to
completed technology, which was capitalized and amortized using the
straight-line method over the estimated useful life of 30 months. In-process
research and development was valued by an independent appraiser using the same
methodology as completed technology. Estimated future cash flows associated with
in-process research and development were discounted considering risks and
uncertainties related to the viability, work required to establish feasibility,
and to the completion of products ultimately to be marketed by the Company. The
analysis resulted in the allocation of $3.9 million of purchase price to
in-process research and development. In management's
16
<PAGE>
opinion, the acquired in-process research and development had not yet reached a
stage where feasibility, delivery or product features were certain at July 18,
1997 and had no alternative future use. As a result, acquired in-process
research and development was charged to expense during the fourth quarter of
fiscal 1997. Additionally, $0.6 million of purchase price was allocated to other
identified intangible assets, which were capitalized and amortized using the
straight-line method over the estimated useful lives of 30 months.
In the second quarter of 1998, the Company wrote-off the remaining book
value of capitalized current technologies and other intangible assets as a
result of the consolidation of the Company's NetFRAME enterprise server
operation with its other PC operations and the discontinuance of further
development of future enterprise server technologies.
<TABLE>
<CAPTION>
Other expense (income), net
- ---------------------------
1999 1998 1997
------------------ ------------------ --------
Amount % Change Amount % Change Amount
------ ---------- ------- --------- --------
<S> <C> <C> <C> <C> <C>
Total other expense (income), net $3,533 (69.6%) $11,618 277.4% $(6,550)
</TABLE>
Other expense for fiscal 1999 included $3.5 million associated with the
Company's closure and consolidation of its Micron Electronics Japan operation
into its Nampa operations. The charge includes those costs associated with
employee payroll and severance of $1.3 million for approximately 45 employees,
fixed asset write-downs of $1.0 million, lease obligations of $0.4 million,
pre-committed advertising of $0.2 million, and $0.6 million for other closure
related costs. All remaining liabilities were settled by September 2, 1999. With
the cessation of its Japanese operations, the Company benefited from an
approximately $3.4 million reduction of SG&A expenses in fiscal 1999 compared to
fiscal 1998.
Other expense in fiscal 1998 included $11.1 million ($13.0 million in the
second quarter of fiscal 1998 less a $1.9 million revision of estimates in the
fourth quarter of fiscal 1998) for costs associated with the Company's actions
to realign its PC operations to concentrate on its core markets and customers.
Such actions include the consolidation of the Company's domestic and
international PC operations and the reduction of 10% of its workforce, or
approximately 450 employees, from generally all areas of the Company. The
realignment costs consisted of $6.7 million associated with employee termination
benefits, $1.8 million for the write-down of equipment and leasehold
improvements, $1.0 million in estimated costs for claims related to the
realignment, $0.6 million in aggregate costs associated with vacating a leased
facility in Milpitas, California, two international sales offices and an outlet
store in Minneapolis, Minnesota, $0.7 million for the write-off of current
technologies and $0.3 million for the write-off other intangible assets
(consisting of customer lists, trade names, workforce and distribution and other
contracts) associated with the Company's NetFRAME enterprise servers. As a
result of the realignment, the Company benefited from an approximately $5.0
million reduction of SG&A expenses in fiscal 1999 compared to 1998.
Other expense in 1998 also included $5.2 million for the write-off of
capitalized costs associated with abandoned internal use enterprise software
development projects. The software included an order entry system, an order
configuration tool, and part of a material requirements planning package. The
software was abandoned after the Company concluded such software lacked the
functionality desired by the Company. The Company also recognized a benefit
resulting from a net rebate of $4.4 million associated with a change of
providers of on-site service contracts for the Company's domestic desktop
installed base.
<TABLE>
<CAPTION>
Income Tax Provision
- --------------------
1999 1998 1997
------------------ ------------------ -------
Amount % Change Amount % Change Amount
------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Income tax provision $22,594 (40.8%) $38,151 (33.2%) $57,092
</TABLE>
The provision for income taxes in 1999 reflects the Company's effective tax
rate of 38.2% which reflected the federal statutory rate, the net effect of
state taxes, and the effect of a $1.0 million charge for the write-off of
in-process research and development, which resulted from the Company's
acquisition of HostPro in the fourth quarter. The effective income tax rate in
1998 was 44.3%, reflecting the federal statutory rate, the net effect of state
taxes and the establishment of a $4.1 million valuation allowance for a deferred
tax asset relating to the Company's consolidation of its NetFRAME enterprise
server operations. The effective tax rate in 1997 of 39.5% reflected the federal
statutory rate, the net effect of state taxes, and the effect of a $3.9 million
charge for the write-off of in-process research and development, which resulted
from the Company's acquisition of NetFRAME in the fourth quarter.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 2, 1999, the Company had cash, cash equivalents, and liquid
investments of $338.5 million, representing a decrease of $19.2 million compared
to September 3, 1998. The decrease resulted primarily from the acquisitions
during the year. Principal sources of liquidity in 1999 were $67.1 million from
the Company's operating activities, $3.2 million from sales of property, plant
and equipment, and $4.8 million from the issuance of common stock. Principal
uses of cash in 1999 were property, plant and equipment expenditures of $52.4
million for expansion and capacity improvements of the Company's manufacturing
operations, repayment of debt of $17.8 million and strategic acquisitions in the
Company's e-Services business of $21.3 million, net of cash acquired.
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 September 2, 1999, the Company was eligible to borrow the full
amount under the agreement, but had no borrowings outstanding. Under the
agreement, the Company is subject to certain financial and other covenants
including certain financial ratios and limitations on the amount of dividends
declared or paid by the Company.
At September 2, 1999, the Company had commitments of $5.8 million for
purchases of equipment and $21.6 million for infrastructure software projects.
The Company anticipates making capital expenditures in fiscal 2000 in excess of
$35 million.
The Company expects that its future working capital requirements will
continue to increase. The Company believes that currently available cash, cash
equivalents and liquid investments, cash flows from operations and the Company's
current credit facilities will be sufficient to fund its operations through
fiscal 2000.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires that all derivatives
be recorded as either assets or liabilities in the balance sheet and
marked-to-market on an ongoing basis. SFAS No. 133 applies to all derivatives
including stand-alone instruments, such as forward currency exchange contracts
and interest rate swaps, or embedded derivatives, such as call options contained
in convertible debt investments. Along with the derivatives, the underlying
hedged items are also to be marked-to-market on an ongoing basis. These market
value adjustments are to be included either in the statement of operations or as
a component of comprehensive income, depending on the nature of the transaction.
Implementation of SFAS No. 133 is required for the Company by the first quarter
of 2001. The Company is currently evaluating the effect SFAS 133 will have on
its future results of operations and financial position.
CERTAIN FACTORS
In addition to factors discussed elsewhere in this Form 10-K 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 Operations, 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 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.
18
<PAGE>
Management
The Company has experienced increased complexity of its operations, in
operating and financial information systems and in its scope of operations. The
increased complexity of the Company's operations results from a number of
factors, including the expansion of the Company's Internet and service
offerings. 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. In addition,
during the past year, the Company underwent numerous changes in its management
structure and personnel. 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. There
can be no assurance that the Company's management resources, operating and
financial information systems, 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, financial position,
results of operations and cash flows.
Intellectual Property Matters
It is common in the electronics industry for patent, trademark and other
intellectual property rights claims to be asserted against companies, including
component suppliers and PC manufacturers. Periodically, the Company is made
aware that technology used by the Company may infringe on intellectual property
rights held by others. The Company evaluates all such claims and, if necessary
and appropriate, seeks to obtain licenses for the continued use of such
technology. The Company has accrued a liability and charged operations for the
estimated costs of settlement or adjudication of claims for alleged infringement
as of 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 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, financial position, and results of operations and cash flows.
MTI Ownership of Common Stock of the Company
As of September 2, 1999, MTI owned approximately 63.2% of the Company's
outstanding common stock. In addition, two 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,
financial position, results of operations and cash flows. 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, financial position, results of operations and
cash flows. See "Intellectual Property Matters" and "SpecTek Operations--
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 financing. 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.
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, Internet and computer services 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
19
<PAGE>
adverse effect on the Company's business, financial position, results of
operations and cash flows. 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, financial position, results
of operations and cash flows.
Year 2000
The Year 2000 issue has arisen because many computer hardware and software
systems only use the last two digits in reference to yearly periods. Therefore,
after December 31, 1999, some hardware and software systems may erroneously
read, or attempt to read, "00" as 1900, rather than 2000. Many computer
applications could fail or return erroneous or unpredictable results if not
timely corrected.
State of Readiness
------------------
In 1998, the Company established a Year 2000 project team with
representatives from generally all areas of the Company. The project team is
focusing principally on the following four areas: internal information
technology ("IT") systems; internal non-IT systems including embedded technology
associated with its manufacturing and physical facilities; third parties with
whom the Company has significant business relationships; and the Company's
products.
Generally, the Company's Year 2000 compliance program with respect to its
internal IT and non-IT systems consists of the following phases: (a) inventory -
the identification of systems which may be impacted; (b) assessment - the review
of identified systems for Year 2000 compliance; (c) remediation - the
implementation of corrective action and, if need be, the execution of
contingency plans; and (d) quality assurance testing - the verification of Year
2000 compliance. With respect to IT systems, the Company believes, as of the end
of the fourth quarter of fiscal 1999, that the inventory, assessment, and
remediation phases are essentially complete, and quality assurance testing is
approximately 95% complete. With respect to non-IT systems, the inventory and
assessment phases are essentially complete and the remediation phase is
approximately 97% complete. The remainder of calendar 1999 will be used for
quality assurance testing and the resolution of any unforeseen difficulties.
The Company has developed a process with respect to its assessment of Year
2000 readiness of third parties with whom the Company has significant business
relationships. The Company is focusing its efforts on the business relationships
most critical to its manufacturing operations, customer service and other core
business processes, including key suppliers, vendors, financial institutions and
utility and transportation providers. The process generally involves the
following phases: (a) initial supplier survey; (b) risk assessment; (c)
follow-up supplier review where necessary; and (d) contingency planning where
relevant. As of the end of the fourth quarter of fiscal 1999, the Company had
received formal responses from all of its critical third party providers. Most
of such providers indicated that they expect to address Year 2000 issues in a
timely manner. Risk assessments with respect to third party providers are
essentially complete and as a result, follow-up reviews of the third party
providers were performed where necessary. Third party suppliers that fail to
meet the Company's requirements with respect to Year 2000 issues may be replaced
with other suppliers.
All Micron-branded hardware products support the Year 2000 date and
calculations. All Micron-branded hardware products shipped since August 26,
1996, have BIOS clocks that will automatically roll over to "2000" after
December 31, 1999. Additionally, the Company has made available software
utilities that will cause earlier Micron-branded hardware products to have BIOS
clocks that will recognize the century change. All NetFRAME-branded server
products shipped since March 1995 are either NSTL certified as Year 2000
compliant or self-certified as having Real Time Clock chips and a BIOS that will
process date data correctly on and after January 1, 2000. The Company has a
web-site dedicated to communicating Year 2000 issues to its customers.
Cost to Address Year 2000 Issues
--------------------------------
The estimated costs of the Company's Year 2000 readiness programs with
respect to internal IT and non-IT systems and third party providers are not
expected to be material to the Company's business, financial position, results
of operations and cash flows. As of the end of the fourth quarter of fiscal
1999, the Company had incurred aggregate incremental costs of $2.2 million
related to such readiness programs. The total additional cost to complete such
programs is estimated at $0.25 million to $0.50 million. These estimated costs
do not include costs related to the potential failure of key suppliers to timely
address Year 2000 issues, potential costs related to any customer or other
product liability claims or the cost of internal software and hardware replaced
in the ordinary course of business. The incremental and estimated costs include
allocated costs of the Company's information technology organization incurred in
connection with Year 2000 compliance projects. All estimates are based on
currently known circumstances and various assumptions regarding future events,
and actual costs could differ materially from the estimates.
The Company believes that it has no obligation for any costs incurred by
its customers to address Year 2000 issues. However, the Company recognizes the
potential for claims against it and other manufacturers arising from products
which may not support the century change, and there can be no assurance that
such claims would not have a material adverse effect on the Company's business
or results of operations, financial condition or cash flows. On October 26,
1998, the Company was sued in state court in Canyon County,
20
<PAGE>
Idaho, by Hannah Films, Inc., on behalf of itself and on behalf of an
unidentified and uncertified class of plaintiffs alleging fraud, breach of
implied warranty of merchantability, violation of the Magnuson-Moss Consumer
Protection Act, and violation of the Idaho Consumer Protection Act arising out
of the Year 2000 status of a personal computer sold by the Company to Hannah
Films, Inc., in October 1995. In May 1999, the case was dismissed with
prejudice. The plaintiff has filed a notice of appeal. While there can be no
assurance as to the ultimate disposition of the case, the Company does not
currently believe that the resolution of this matter will have a material
adverse effect on the Company's business, financial position, results of
operations and cash flows.
Year 2000 Contingency Plans
---------------------------
The Company's contingency plan generally contemplates replacement or
alternative sources of those goods and services necessary to the Company's
manufacturing and business operations. Should those necessary goods and services
become unavailable due to a supplier's failure to achieve Year 2000 readiness,
the Company will review, and where appropriate, modify existing contingency
plans to address specific Year 2000 issues as they arise. During the third
quarter of fiscal 1999, the Company's Year 2000 project team advised the
Company's management of critical third-party providers which, based on
information received, have not yet offered full assurance of Year 2000
compliance. The Company expects that development of contingency plans will
continue through calendar 1999.
The discussion above regarding Year 2000 projected completion dates, costs,
risks and other forward-looking statements is based on currently available
information, and is subject to change. Based on currently available information,
the Company does not believe that the most reasonably likely worst case
scenarios with respect to Year 2000 issues are likely to have a material adverse
effect on the Company's business or results of operations, financial condition
or cash flows. However, there can be no assurance that Year 2000 remediation
efforts by the Company or third parties will be completed in a timely and proper
manner, and the failure to do so could have a material adverse effect on the
Company. Additionally, an increase in customer claims with respect to the
Company's products could have a material adverse effect on the Company's
business, financial position, and results of operations and cash flows.
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, financial position, results of operations and cash flows.
PC 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, and 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 a material adverse effect on the Company's business, financial
position, 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,
Corporation, and Gateway 2000, Inc. The Company also competes with PC
manufacturers, such as Apple Computer, Inc., Compaq Computer Corporation,
Hewlett-Packard Company, International Business Machines Corporation, NEC
Corporation and Toshiba Corporation among others. Several of these
manufacturers, which have traditionally sold their products through national and
regional distributors, dealers and value added resellers, and retail stores, now
sell their products through the direct channel. In addition, the Company expects
to face increased competition in the U.S. direct sales market from foreign PC
21
<PAGE>
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 competitive environment for Internet services is similarly intense with
rapid technological changes resulting in pricing pressure in the market for
Internet access, and to a lesser extent other web hosting services. Many of the
competitors in the provision of Internet services have significantly greater
name recognition and larger customer bases than the Company.
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,
financial position, 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 to support this
demand. 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.
The Company has made significant progress in changing its asset management
processes where substantial improvements have been realized with minimal
material shortage impact to customer orders, achieving dramatic growth in
inventory turns, and industry leading "days sale of inventory" ("DSI"). The
Company continues to invest in data systems tools acquisitions to further
enhance sales forecasting and supply/demand planning processes. The Company has
made a large investment in its new manufacturing facilities to further reduce
the risks of having excess inventory or inability to produce customer orders. To
continue its successful improvements, the Company must accurately utilize these
new processes, facilities and tools to improve its 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, financial position, results of
operations and cash flows.
Dependence on Key Sources of Supply
The Company focuses on providing PC systems that feature components and
software incorporating the latest technological developments in the PC industry,
which components are periodically in short supply and are available from sole or
a limited number of suppliers. As a result, the Company has experienced in the
past, and expects to experience in the future, shortages in the components used
in its PC systems. The microprocessors used in the Company's PC systems are
manufactured exclusively by Intel and, from time to time, the Company has been
unable to obtain sufficient quantities of certain Intel microprocessors. In
addition, a significant portion of the RAM components used in the Company's PC
systems are supplied by MTI, and the Company generally relies on MTI to supply
the latest memory densities and configurations available. The Company relies, to
a certain extent, upon its suppliers' abilities to enhance existing products in
a timely and cost-effective manner, to develop new products to meet changing
customer needs and to respond to emerging standards and other technological
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, financial position, results of
operations and cash flows.
The Company's notebook products are currently assembled in part 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 outsourcing arrangements will not
result in quality problems or affect the ability to ship such products on a
timely basis or the flexibility of the Company to respond to changing market
conditions.
22
<PAGE>
Acquisitions
In the fourth quarter of fiscal 1999, the Company acquired all of the
outstanding common stock of HostPro for approximately $21.9 million and the
property and equipment of MIS, for its book value of approximately $2.2 million.
HostPro is a web and applications hosting provider. The HostPro acquisition was
accounted for as a purchase, and the purchase price was allocated to the net
assets acquired, including identified intangible assets and in-process research
and development, and goodwill based on their fair values as determined by and
independent appraiser. MIS is a provider of dedicated, nationwide dial-up and
broadband Internet access, virtual private networks ("VPN") solutions, and e-
commerce services to small and medium-sized businesses, public organizations and
consumers. The MIS asset purchase was accounted for at historical cost. The
Company is performing an ongoing evaluation regarding the nature and scope of
the operations of HostPro and MIS as well as considering various short and long-
term strategies as to whether and to what extent integration, reconfiguration or
other modifications of the separate businesses is appropriate following the
acquisition. There can be no assurance that the integration, reconfiguration or
other modification, if any, of HostPro or MIS will not have a material adverse
effect on the Company's business, financial position, results of operations and
cash flows. In addition, there can be no assurance the Company will realize the
anticipated benefits associated with the acquisition, including, but not limited
to, retention of key personnel, acceptance of HostPro and MIS e-Services in the
market, technology, intellectual property rights, increased market presence of a
broader e-Services offering and economies of providing certain administrative
support functions.
State Taxation
During the third quarter of fiscal 1997, the Company began to collect and
remit applicable sales or use taxes in nearly all states. In association
therewith, the Company is party to agreements with nearly all states which
generally limit the liability of the Company, if any, for non-remittance of
sales and use taxes prior to such agreements' effective dates. The Company has
previously accrued a liability for the estimated settlement cost of issues
related to sales and use taxes not covered by such agreements. Management
believes the resolution of any matters relating to the non-remittance of sales
or use will not materially effect the business, financial position, results of
operations and cash flows.
SpecTek Operations
- ------------------
Dependence on Component Recovery Agreement with MTI
Effective September 2, 1999, the Company and MTI entered into an amended
and restated Component Recovery Agreement (the "Component Recovery Agreement")
which expires August 30, 2001, unless terminated earlier as described below.
Under the Component Recovery Agreement, MTI is required to offer to the Company
all of the nonstandard memory components produced at MTI's semiconductor
operations. The Component Recovery Agreement provides that the cost of
components obtained from MTI will be negotiated on a quarterly basis, but in no
event will the cost be less than 50% of pre-tax net income. The maximum cost
payable by the Company to MTI for components during fiscal 2000 will be as
follows: first quarter, 50% of pre-tax net income; second quarter, 62.5% of pre-
tax net income; third quarter, 75% of pre-tax net income; and fourth quarter,
87.5% of pre-tax net income. The cost to the Company for components obtained
from MTI during fiscal 2001 is not subject to any maximum amount. There can be
no assurance that the amounts payable by the Company to MTI for components as
contemplated under the Component Recovery Agreement would be more favorable than
the maximum amounts stated in this paragraph. The quarter to quarter increase in
maximum cost to the Company to obtain components from MTI under the Component
Recovery Agreement could have a material adverse effect on the Company's
business, financial position, results of operations and cash flows.
The Component Recovery Agreement also provides that MTI will make
commercially reasonable efforts to obtain for the Company nonstandard memory
components produced by TECH Semiconductor Singapore Pte. Ltd. and KMT
Semiconductor Limited, joint venture companies in which MTI is affiliated. The
Company, MTI and the joint venture companies may agree to utilize a pricing
matrix based on effective yields and worldwide average sales prices in order to
establish prices for the components from the joint venture companies. In such
case, the price paid by the Company for components from the joint ventures will
be determined under the matrix, rather than as a percentage of pre-tax net
income.
Under the Component Recovery Agreement, at the commencement of the second
quarter of fiscal 2000 the Company has an option to require MTI to purchase the
property and equipment of SpecTek Operations for a purchase price equal to net
book value. At the commencement of fiscal 2001, MTI has an option to require the
Company to sell the property and equipment of SpecTek Operations under the same
terms and conditions. Additionally, the Company has an option to require MTI to
purchase, and MTI has the option to require the Company to sell, the assets of
SpecTek Operations at book value if MTI's ownership in the Company falls below
50% or if an unrelated third party acquires more than 30% of the Company. The
Component Recovery Agreement would terminate if MTI purchases the property and
equipment of SpecTek operations pursuant to the exercise of the above described
options.
23
<PAGE>
Historically, during various reporting periods, SpecTek Operations has had
a significant positive impact on the Company's results of operations and cash
flows. The expiration of the Component Recovery Agreement, or the sale of the
property and equipment of SpecTek Operations to MTI, could have a material
adverse effect on the Company's business, financial position, results of
operations and cash flows. A substantial majority of the components used in
SpecTek Operations were obtained from MTI under the former Component Recovery
Agreement. In 1999, 1998 and 1997, the Company obtained 82%, 75%, and 74%,
respectively, of its components from MTI's semiconductor manufacturing
facilities. Additionally, in fiscal 1999, the Company obtained approximately
17.7% of its components from MTI's joint venture affiliates. Many semiconductor
manufacturers other than MTI are reluctant to sell nonstandard memory components
because such components could compete with their full specification memory
components for similar applications. In addition, some manufacturers are
concerned that subsequent testing performed by a recovery operation could reveal
proprietary data regarding manufacturing yields and processes. As a result,
there can be no assurance that the Company would be able to negotiate future
purchases of components on terms acceptable to the Company after expiration of
the Component Recovery Agreement.
Pricing of Memory Products
Pricing for SpecTek Operations' 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 Operations' semiconductor memory products
as industry-wide average selling prices for full specification semiconductor
memory products experienced sharp declines. The Company believes that such
declines in average selling prices of semiconductor memory products were due
primarily to changes in the balance of supply and demand for these commodity
products and changes in relative weakness or strength of certain currencies, and
the Company is unable to predict the impact of semiconductor memory product
market dynamics in future periods. Due to increased market risk associated with
holding purchased memory components in inventory, the Company has experienced in
the past, and may experience in the future, losses from write-downs of memory
component inventories in periods of declining prices. Further declines in
pricing for semiconductor memory products would likely result in declines in
average selling prices of SpecTek Operations' semiconductor memory products,
which could have a material adverse effect on the Company's business, financial
position, 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, SpecTek Operations 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.
Exclusive Sales Representative Agreement
Effective September 2, 1999, the Company and Micron Semiconductor Products,
Inc. ("MSP"), a subsidiary of MTI, entered into an exclusive sales agreement
(the "sales agreement") under which MSP will serve as exclusive sales
representatives for SpecTek Operations' memory products. The failure of MSP to
perform its obligations under the sales agreement, including but not limited to
the sale of all SpecTek Operations' memory products, could have a material
adverse effect on the Company's business, financial position, results of
operations and cash flows.
ITEM 7A. 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 not affected by changes in market interest rates. As of September
2, 1999, approximately 25% of the Company's liquid investments mature within
three months and the remainder within one year. As of September 2, 1999, the
Company believes the reported amounts of liquid investments and debt to be
reasonable approximations of their fair values and has the ability and intent to
hold these instruments to maturity. As a 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. Aggregate
transaction gains and losses included in the determination of net income have
not been material.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements:
Consolidated Statements of Income for the Fiscal Years Ended September 2, 1999,
September 3, 1998 and August 28, 1997 26
Consolidated Statements of Comprehensive Income for the Fiscal Years Ended September 2, 1999,
September 3, 1998 and August 28, 1997 26
Consolidated Balance Sheets as of September 2, 1999 and September 3, 1998 27
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended September 2, 1999,
September 3, 1998 and August 28, 1997 28
Consolidated Statements of Cash Flows for the Fiscal Years Ended September 2, 1999,
September 3, 1998 and August 28, 1997 29
Notes to Consolidated Financial Statements 30
Quarterly Financial Information (Unaudited) 44
Report of Independent Accountants 45
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts for the Fiscal Years Ended September 2, 1999,
September 3, 1998 and August 28, 1997 49
</TABLE>
25
<PAGE>
Micron Electronics, Inc.
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal year ended September 2, 1999 September 3, 1998 August 28, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,437,829 $1,733,432 $1,955,783
Cost of goods sold 1,167,584 1,511,278 1,618,037
---------- ---------- ----------
Gross margin 270,245 222,154 337,746
Selling, general and administrative 218,970 284,292 198,217
Research and development 4,521 10,138 9,621
Other expense (income), net 3,533 11,618 (6,550)
---------- ---------- ----------
Operating income (loss) 43,221 (83,894) 136,458
Gain on sale of MCMS common stock - 156,222 -
Interest income, net 15,897 13,776 7,896
---------- ---------- ----------
Income before taxes 59,118 86,104 144,354
Income tax provision 22,594 38,151 57,092
---------- ---------- ----------
Net income $ 36,524 $ 47,953 $ 87,262
========== ========== ==========
Earnings per share:
Basic $ 0.38 $ 0.50 $ 0.93
Diluted 0.38 0.50 0.92
Number of shares used in per share calculation:
Basic 96,127 95,657 94,118
Diluted 96,633 96,027 94,649
</TABLE>
Consolidated Statements of Comprehensive Income
(Amounts in thousands)
<TABLE>
<CAPTION>
Fiscal year ended September 2, 1999 September 3, 1998 August 28, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 36,524 $ 47,953 $ 87,262
---------- ---------- ----------
Other comprehensive income (loss):
Reclassification adjustment for loss (gain)
included in net income (31) 2,514 -
Foreign currency translation (6) (1,845) (632)
---------- ---------- ----------
(37) 669 (632)
---------- ---------- ----------
Comprehensive income $ 36,487 $ 48,622 $ 86,630
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
Micron Electronics, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except par share amounts)
<TABLE>
<CAPTION>
As of September 2, 1999 September 3, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 200,950 $ 328,537
Liquid investments 137,528 29,204
Receivables 152,658 128,269
Inventories 17,521 30,848
Deferred income taxes 14,819 19,172
Other current assets 20,590 2,432
---------- ----------
Total current assets 544,066 538,462
Property, plant and equipment, net 159,859 147,912
Deferred income taxes - 2,748
Other assets 29,606 3,321
---------- ----------
Total assets $ 733,531 $ 692,443
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses 220,094 $ 214,930
Accrued licenses and royalties 20,231 18,585
Current debt 7,000 16,798
---------- ----------
Total current liabilities 247,325 250,313
Long-term debt 5,001 11,730
Deferred income taxes 11,926 -
Other liabilities 10,780 13,506
---------- ----------
Total liabilities 275,032 275,549
---------- ----------
Commitments and contingencies
Common stock, $.01 par value, authorized 150.0 million shares; issued
and outstanding 96.3 million and 95.9 million shares, respectively 963 959
Additional capital 127,951 122,837
Retained earnings 329,585 293,061
Accumulated other comprehensive income - 37
---------- ----------
Total shareholders' equity 458,499 416,894
---------- ----------
Total liabilities and shareholders' equity $ 733,531 $ 692,443
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
Micron Electronics, Inc.
Consolidated Statements of Shareholders' Equity
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Fiscal year ended September 2, 1999 September 3, 1998 August 28, 1997
Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Balance at beginning of year 95,863 $ 959 95,555 $ 956 92,473 $ 925
Stock sold 184 2 254 2 3,135 31
Purchase and retirement of stock - - (14) - (127) (1)
Stock options 225 2 68 1 74 1
------- -------- ------- -------- ------- --------
Balance at end of year 96,272 $ 963 95,863 $ 959 95,555 $ 956
======= ======== ======= ======== ======= ========
ADDITIONAL CAPITAL
Balance at beginning of year $122,837 $120,108 $ 69,392
Stock sold 1,412 1,912 49,895
Purchase and retirement of stock - (15) (108)
Stock options 3,295 801 713
Tax effect of stock purchase plans 407 31 216
-------- -------- --------
Balance at end of year $127,951 $122,837 $120,108
======== ======== ========
RETAINED EARNINGS
Balance at beginning of year $293,061 $245,139 $158,143
Purchase and retirement of stock - (31) (266)
Net income 36,524 47,953 87,262
-------- -------- --------
Balance at end of year $329,585 $293,061 $245,139
======== ======== ========
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year $ 37 $ (632) $ -
Other comprehensive income (37) 669 (632)
-------- -------- --------
Balance at end of year $ - $ 37 $ (632)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
Micron Electronics, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Fiscal year ended September 2, 1999 September 3, 1998 August 28, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 36,524 $ 47,953 $ 87,262
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 31,883 39,166 35,399
Gain on sale of MCMS common stock - (156,222) -
Write-down of and losses from sales of fixed assets 4,186 8,653 347
Write-off of purchased in-process research and development 1,000 - 3,938
Changes in operating assets and liabilities, net of
the effect
of the sale of MCMS and acquisition transactions:
Receivables (23,367) 51,179 (41,608)
Inventories 13,635 61,050 (37,077)
Other current assets (18,158) 1,328 (1,626)
Deferred income taxes 16,900 6,360 15,797
Accounts payable and accrued expenses 5,345 (44,990) 59,111
Accrued licenses and royalties 1,646 (17,330) 8,793
Other (2,471) 383 (222)
----------- ----------- -----------
Net cash provided by (used for) operating activities 67,123 (2,470) 130,114
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (52,438) (67,290) (105,752)
Proceeds from sales of property, plant and equipment 3,193 6,339 3,913
Purchases of held-to-maturity investment securities (205,294) (52,527) (10,073)
Proceeds from maturities of investment securities 98,391 34,000 -
Proceeds from sale of MCMS, net of MCMS cash - 235,884 -
Acquisitions, net of cash acquired (21,348) - (16,068)
Other (4,530) (2,091) (915)
----------- ----------- -----------
Net cash provided by (used for) investing activities (182,026) 154,315 (128,895)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings - 1,718 21,799
Repayments of debt (17,818) (11,162) (4,874)
Proceeds from issuance of common stock 4,836 2,716 50,640
Purchase and retirement of stock - (46) (375)
Other - (94) (313)
----------- ----------- -----------
Net cash provided by (used for) financing activities (12,982) (6,868) 66,877
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (127,885) 144,977 68,096
Effect of exchange rate changes on cash and cash equivalents 298 (375) -
Cash and cash equivalents at beginning of year 328,537 183,935 115,839
----------- ----------- -----------
Cash and cash equivalents at end of year $ 200,950 $ 328,537 $ 183,935
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Income taxes paid, net of amounts recovered $ 5,237 $ 39,570 $ 50,997
Interest paid, net of amounts capitalized 334 197 776
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands, except per share amounts)
Significant Accounting Policies
Business: Micron Electronics, Inc. and its subsidiaries (collectively, the
"Company"), provide products and services through three distinct segments. The
Company's PC Systems segment manufactures a wide variety of desktop, notebook,
and server systems. In addition, the segment also resells hardware services and
Internet access services provided through third parties. This segment also
includes web and applications hosting, dedicated dial-up, broadband nationwide
Internet access, virtual private networks, and e-commerce services to consumer,
commercial and government customers. The Company also provides memory products
through its SpecTek Operations segment, which specializes in memory component
recovery and markets the products for specific applications. The Company's MCMS
segment primarily reflects activity of the Company's custom manufacturing
business, which was sold on February 26, 1998.
Basis of presentation: The financial statements include the accounts of the
Company. All significant intercompany accounts and transactions have been
eliminated. The Company's fiscal year is the 52 or 53 week period ending on the
Thursday closest to August 31. The fiscal year ended September 2, 1999 contained
52 weeks compared to 53 weeks in fiscal year 1998 and 52 weeks in fiscal year
1997. As of September 2, 1999, the Company was 63.2% owned by Micron Technology,
Inc. ("MTI").
Certain concentrations and use of estimates: Certain components,
subassemblies and software included in the Company's PC systems are obtained
from sole suppliers or a limited number of suppliers. The Company relies, to a
certain extent, upon its suppliers' abilities to enhance existing products in a
timely and cost-effective manner, to develop new products to meet changing
customer needs and to respond to emerging standards and other technological
developments in the PC industry. The Company's reliance on a limited number of
suppliers involves several risks, including the possibility of shortages and/or
increases in costs of components and subassemblies, and the risk of reduced
control over delivery schedules.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from those estimates.
Revenue recognition: Revenue from product sales to customers is generally
recognized upon shipment. A provision for estimated sales returns is recorded in
the period in which the sales are recognized. Revenue from web services is
recognized as the services are performed. Revenue from service and support
contracts for which the Company is primarily obligated is recognized over the
term of the contract. Revenue from sales of third party service contracts for
which the Company is not obligated is recognized at the time of sale.
Earnings per share: The Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 128, "Earnings Per Share" in fiscal 1998. 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.
Comprehensive income: In fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement requires the Company to
disclose accumulated other comprehensive income or loss (excluding net income or
loss) as a separate component of shareholders' equity.
Financial instruments: Cash equivalents include highly liquid short-term
investments with original maturities of three months or less, readily
convertible to known amounts of cash. The amounts reported as cash equivalents,
liquid investments, receivables, other assets, accounts payable and accrued
expenses and debt are considered by the Company to be reasonable approximations
of their fair values, based on information available to management as of
September 2, 1999. The use of different assumptions could have a material effect
on the estimated fair value amounts. The reported fair values do not take into
consideration potential taxes or other expenses that would be incurred in an
actual settlement.
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents, investment
securities and trade accounts receivable. The Company invests its cash in credit
instruments of highly rated financial institutions and performs periodic
evaluations of the credit standing of these financial institutions. The Company,
by policy, limits the concentration of credit exposure by restricting
investments with any single obligor, instrument, or geographic area. A
concentration of credit risk may exist with respect to trade receivables, as
many of the Company's customers are affiliated with the computer,
telecommunications and office automation industries, or are governmental
entities. The Company has a large number of customers on which it performs
ongoing credit evaluations and generally does not require collateral from its
customers. Historically,
30
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
the Company has not experienced significant losses related to receivables from
individual customers or groups of customers in any particular industry or
geographic area.
Inventories: Inventories are stated at the lower of average cost or market.
Property, plant and equipment: Property, plant and equipment, including
software, are stated at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of 5 to 30 years for buildings and 2 to
10 years for equipment and software. Effective September 4, 1998, the Company
revised its estimated useful lives of certain information technology assets,
including enterprise software, enterprise hardware and telecommunications
systems. The original estimated lives of these assets was two and three years,
with the revised lives extended to five years, on a prospective basis, which
more accurately reflects their actual useful lives. For fiscal 1999, the effect
of this change was to reduce depreciation and amortization by $3.9 million ($2.5
million net of tax). The Company adopted Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" in fiscal 1999. SOP 98-1 requires companies to capitalize certain
costs of computer software developed or obtained for internal use, provided that
those costs are not research and development. As a result of adopting SOP 98-1,
the Company capitalized $2.7 million of internal software development costs in
fiscal 1999.
Goodwill and other intangibles: Goodwill and other intangibles
("intangibles") are being amortized on a straight-line basis over the expected
useful lives, not exceeding 10 years. If events occur which could indicate that
impairment of the carrying value of the intangibles has occurred, the Company
will review the intangibles based on the expected future cash flows. Should this
review indicate that the carrying value of the intangibles will not be
recoverable, the carrying value will be reduced to the estimated recoverable
amount.
Product and process technology: Costs related to the conceptual formulation
and design of products and processes are expensed as research and development.
Costs incurred to establish patents and acquire product and process technology
are capitalized. Capitalized costs are amortized using the straight-line method
over the shorter of the estimated useful life of the technology, the patent
term, or the agreement, ranging up to 10 years.
Royalties: The Company has royalty-bearing license agreements that allow it
to sell certain hardware and software and to use certain patented technology.
Royalty costs are accrued and included in cost of goods sold when the sale is
recognized.
Warranty and services: The Company provides currently for the estimated
costs incurred under its warranty and other service programs.
Advertising: Advertising costs are charged to operations as incurred.
Foreign currency: The Company uses the U.S. Dollar as its functional
currency, except for its former operations in Japan and Malaysia. The assets and
liabilities of those operations are translated into U.S. Dollars at exchange
rates in effect at the balance sheet date. Income and expense items are
translated at the average exchange rates prevailing during the period. Aggregate
transaction gains and losses included in the determination of net income are not
material for any period presented.
Recently issued accounting standards: In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires that all derivatives be recorded as either
assets or liabilities in the balance sheet and marked-to-market on an ongoing
basis. SFAS No. 133 applies to all derivatives including stand-alone
instruments, such as forward currency exchange contracts and interest rate
swaps, or embedded derivatives, such as call options contained in convertible
debt investments. Along with the derivatives, the underlying hedged items are
also to be marked-to-market on an ongoing basis. These market value adjustments
are to be included either in the statement of operations or as a component of
comprehensive income, depending on the nature of the transaction. Implementation
of SFAS No. 133 is required for the Company by the first quarter of 2001. The
Company is currently evaluating the effect SFAS 133 will have on its future
results of operations and financial position.
Reclassifications: Certain reclassifications have been made, none of which
affected net income, to present the statements on a consistent basis.
Gain on Sale of MCMS Common Stock
On February 26, 1998, the Company completed the sale of 90% of its interest
in MCMS, Inc. ("MCMS"), formerly Micron Custom Manufacturing Services, Inc. and
a wholly owned subsidiary of the Company. The sale was structured as a re-
capitalization of MCMS (the "Re-capitalization"), whereby Cornerstone Equity
Investors IV, L.P., other investors and certain members of MCMS'
31
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
management, including Robert F. Subia, then a director of the Company, acquired
the 90% interest in MCMS. In exchange for the 90% interest in MCMS, the Company
received $249.2 million in cash. Results of operations in 1998 include a pre-tax
gain of $156.2 million ($94.5 million or $0.98 per diluted share, net of taxes)
realized from the sale. Subsequent to the Re-capitalization of MCMS, the Company
owns a 10% interest in MCMS, which is accounted for by the Company on the cost
basis. Accordingly, results of operations of MCMS subsequent to February 26,
1998 have been excluded from the Company's results of operations.
Acquisitions
On August 2, 1999, the Company acquired all of the outstanding common stock
of NetLimited, Inc., d.b.a. HostPro, for $21.9 million in cash. As part of the
purchase agreement, the purchase price will be increased or decreased by up to
10% depending on the number of subscriber accounts as of February 24, 2000.
HostPro is an Internet content and applications hosting company targeted at
small and medium-sized businesses. The acquisition was accounted for as a
purchase, and the purchase price was allocated to the net assets acquired,
including identified intangible assets and in-process research and development,
based on their fair values. The Company's results of operations for fiscal 1999
include the results of operations of HostPro since the August 2, 1999
acquisition date.
The fair value of HostPro's technology was determined by an independent
appraiser through an analysis using a risk adjusted cash flow model. The
analysis estimated future cash flows derived from the technology or products
incorporating the technology. These cash flows were discounted taking into
account the life expectancy of the technology and risks related to existing and
future markets. Technology was segregated into that which was determined to be
completed (those currently technologically feasible but that may require
adjustments or relatively minor enhancements) and in-process (technologies that
require additional research and development efforts to reach technological
feasibility). Estimated future cash flows associated with in-process research
and development were discounted considering risks and uncertainties related to
the viability, stage of completion, work required to establish feasibility, and
to the completion of products ultimately to be marketed by the Company. The
analysis resulted in the allocation of $1.0 million of purchase price to in-
process research and development. In management's opinion, the acquired in-
process research and development had not yet reached a stage where feasibility,
delivery or product features were certain and had no alternative future use. As
a result, acquired in-process research and development was charged to expense
during the fourth quarter of fiscal 1999.
On September 2, 1999, the Company purchased the property and equipment of
Micron Technology, Inc.'s Internet service operating division, Micron Internet
Services ("MIS"), for $2.2 million in cash. The transaction was accounted for at
historical cost. The assets will be depreciated over their remaining useful
lives. MIS is a provider of dedicated, nationwide dial-up and broadband Internet
access, VPN solutions, and e-commerce services to small and medium sized
business, public organizations and consumers.
A summary of the net assets acquired at the acquisition dates, including
deferred tax effects is as follows:
Asset Fair Value
- -------------------------------------------------------------------------------
In-process research and development $ 1,000
Property and equipment 2,812
Goodwill and other intangibles 22,786
Net current liabilities (401)
Net deferred tax liability (2,127)
----------
$ 24,070
==========
The following unaudited pro forma information reflects the results of the
Company's operations for the years ended September 2, 1999 and September 3, 1998
as if the acquisitions of HostPro and MIS had occurred at the beginning of
fiscal 1999 and at the beginning of fiscal 1998, after giving effect to certain
adjustments, including amortization of acquired technology, depreciation, and
related income tax effects. The pro forma adjustments exclude the effect of the
non-recurring charge of $1 million for purchased in-process research and
development recorded by the Company in fiscal 1999 following consummation of the
acquisition. These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what operating results would have
been had the acquisition actually taken place at the beginning of fiscal 1999 or
at the beginning of fiscal 1998 or operating results which may occur in the
future.
32
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
Unaudited Unaudited
Fiscal year ended September 2, 1999 September 3, 1998
- --------------------------------------------------------------------------------
Net sales $ 1,449,886 $ 1,740,168
Gross margin 281,022 228,458
Net income 34,110 44,898
Earnings per share:
Basic 0.35 0.47
Diluted 0.35 0.47
In the fourth quarter of fiscal 1997, the Company acquired all of the
outstanding common stock of NetFRAME Systems Incorporated ("NetFRAME") for $17.4
million in cash. NetFRAME developed and marketed enterprise-class multiprocessor
servers offering continuous availability and scalability while supporting
industry standard software. The acquisition was accounted for as a purchase, and
the purchase price was allocated to the net assets acquired, including
identified intangible assets and in-process research and development, based on
their fair values. The Company's results of operations for 1997 include the
results of operations of NetFRAME since the July 18, 1997 acquisition date.
The fair value of NetFRAME's technology was determined by an independent
appraiser through an analysis using a risk adjusted cash flow model. The
analysis estimated future cash flows derived from the technology or products
incorporating the technology which were discounted taking into account risks
related to existing and future markets and assessment of the life expectancy of
such technology. Technology was segregated into that which was determined to be
completed (those currently technologically feasible but that may require
adjustments or relatively minor enhancements) and in process (technologies that
require additional research and development efforts to reach technological
feasibility). The analysis resulted in the allocation of $0.8 million of
purchase price to completed technology, which was capitalized and amortized
using the straight-line method over the estimated useful life of 30 months. In-
process research and development was valued by an independent appraiser using
the same methodology as completed technology. Estimated future cash flows
associated with in-process research and development were discounted considering
risks and uncertainties related to the viability, work required to establish
feasibility, and to the completion of products ultimately to be marketed by the
Company. The analysis resulted in the allocation of $3.9 million of purchase
price to in-process research and development. In management's opinion, the
acquired in-process research and development had not yet reached a stage where
feasibility, delivery or product features were certain at July 18, 1997 and had
no alternative future use. As a result, acquired in-process research and
development was charged to expense during the fourth quarter of fiscal 1997.
Additionally, $0.6 million of purchase price was allocated to other identified
intangible assets, which were capitalized and amortized using the straight-line
method over the estimated useful lives of 30 months.
In the second quarter of 1998, the Company wrote-off the remaining book
value of capitalized current technologies and other intangible assets as a
result of the consolidation of the Company's NetFRAME enterprise server
operation with its other PC operations and the discontinuance of further
development of future enterprise server technologies.
Investment Securities
<TABLE>
<CAPTION>
As of September 2, 1999 September 3, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Held to maturity investment securities, at amortized cost:
Commercial paper $ 115,579 $ 70,434
State and local government 80,793 37,425
U.S. Government agency 109,792 205,007
--------- ---------
306,164 312,866
Less cash equivalents (168,636) (283,662)
--------- ---------
Liquid investments $ 137,528 $ 29,204
========= =========
</TABLE>
Securities classified as held-to-maturity have remaining maturities of less
than one year.
33
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
Receivables
<TABLE>
<CAPTION>
As of September 2, 1999 September 3, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables $ 144,996 $ 122,294
Receivables from affiliates 1,435 105
Income taxes recoverable from MTI 6,602 3,068
Other 5,974 10,090
Allowance for doubtful accounts (3,846) (3,709)
Allowance for returns and discounts (2,503) (3,579)
--------- ---------
$ 152,658 $ 128,269
========= =========
Inventories
As of September 2, 1999 September 3, 1998
- ----------------------------------------------------------------------------------------------------------
Raw materials and supplies $ 5,931 $ 16,144
Work in progress 8,582 4,469
Finished goods 3,008 10,235
--------- ---------
$ 17,521 $ 30,848
========= =========
Property, Plant and Equipment
As of September 2, 1999 September 3, 1998
- ----------------------------------------------------------------------------------------------------------
Land $ 1,234 $ 1,234
Buildings 38,081 34,826
Equipment and software 152,363 145,310
Assets in progress 52,816 38,197
--------- ---------
244,494 219,567
Less accumulated depreciation and amortization (84,635) (71,655)
--------- ---------
$ 159,859 $ 147,912
========= =========
</TABLE>
Accounts Payable and Accrued Expenses
<TABLE>
<CAPTION>
As of September 2, 1999 September 3, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $ 150,957 $ 146,124
Payable to affiliates 31,055 20,601
Salaries, wages and benefits 16,850 20,496
Income taxes payable 36 92
Equipment contracts payable - 3,884
Accrued warranty 11,658 17,128
Other 9,538 6,605
--------- ---------
$ 220,094 $ 214,930
========= =========
</TABLE>
34
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
Debt
<TABLE>
<CAPTION>
As of September 2, 1999 September 3, 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes payable in periodic installments through September 2001,
weighted average interest rate of 7.85% and 7.63%, respectively $ 9,722 $ 16,068
Capitalized lease obligations payable in monthly installments through
October 2002, interest rate of 7.61% and 7.28%, respectively 2,279 4,284
Amounts outstanding under revolving loan agreement, due June 1999,
variable interest of 1.34% - 8,176
------- --------
12,001 28,528
Less current portion (7,000) (16,798)
------- --------
$ 5,001 $ 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 September 2, 1999, the Company was eligible to borrow the full
amount under the agreement, but had no borrowings outstanding. Under the
agreement, the Company is subject to certain financial and other covenants
including certain financial ratios and limitations on the amount of dividends
declared or paid by the Company.
The Company's wholly-owned subsidiary, Micron Electronics Japan K.K., had
an unsecured revolving credit facility with a financial institution, expiring
June 1999, providing for borrowings of up to 1.5 billion Japanese yen (US $11.1
million at September 3, 1998). As of September 2, 1999, the Company had paid the
outstanding balance in full and canceled the credit facility.
Certain of the Company's notes payable are collateralized by equipment with
a total cost of $19.2 million and accumulated depreciation of $12.2 million as
of September 2, 1999. Equipment under capital leases net of accumulated
amortization was $0.3 million as of September 2, 1999. Maturities of debt and
future minimum lease payments are as follows:
Notes Capital
Fiscal year Payable Lease
- -------------------------------------------------------------------------------
2000 $4,824 $2,291
2001 4,806 99
2002 92 10
Less interest - (121)
------ ------
$9,722 $2,279
====== ======
Interest income is net of approximately $0.4 million, $0.05 million, $1.1
million of interest expense in 1999, 1998 and 1997, respectively. Construction
period interest of approximately $0.9 million, $2.0 million and $1.0 million was
capitalized in 1999, 1998 and 1997, respectively.
Other Expense (Income), Net
Other expense in fiscal 1999 included $3.5 million of costs ($3.9 million
reported in the second quarter of 1999 less a $0.4 million revision in estimate
in the fourth quarter of 1999 as a result of completing the closure) associated
with the Company's closure of its Micron Electronics Japan K.K.'s operation. The
charge includes those costs associated with employee payroll and severance of
$1.3 million for approximately 45 employees, fixed asset write-downs of $1.0
million, lease obligations of $0.4 million, pre-committed advertising of $0.2
million, and $0.6 million for other closure related costs. All of the closure
liabilities had been settled by September 2, 1999.
Other expense, net in fiscal 1998 included $11.1 million of costs ($13.0
million recorded in the second quarter of fiscal 1998 less a $1.9 million
revision in estimate in the fourth quarter of 1998 as a result of completing the
realignment) associated with the Company's actions to realign its PC operations
to concentrate on its core markets and customers. Such actions include the
consolidation of the Company's domestic and international PC operations and the
reduction of 10% of its workforce, or approximately 450 employees, from
generally all areas of the Company. The realignment costs consisted of $6.7
million associated with employee termination benefits, $1.8 million for the
write-down of equipment and leasehold improvements, $1.0 million in
35
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
estimated costs for claims related to the realignment, $0.7 million in aggregate
costs associated with vacating a leased facility in Milpitas, California, two
international sales offices and an outlet store in Minneapolis, Minnesota, $0.6
million for the write-off of current technologies and $0.3 million for the
write-off other intangible assets (consisting of customer lists, trade names,
workforce and distribution and other contracts) associated with the Company's
NetFRAME enterprise servers. The realignment was substantially complete and all
costs incurred by September 3, 1998.
Other expense for 1998 also included $5.2 million for the write-off of
capitalized costs associated with abandoned internal use enterprise software
development projects. The software included an order entry system, an order
configuration tool, and part of a material requirements planning package. The
software was abandoned after the Company concluded such software lacked the
functionality desired by the Company. The Company also recognized a benefit
resulting from a net rebate of $4.4 million associated with a change of
providers of on-site service contracts for the Company's domestic desktop
installed base.
Stock Purchase and Incentive Plans
The Company's 1995 Employee Stock Purchase Plan (the "Plan") allows
eligible employees of the Company to purchase shares of common stock through
payroll deductions. The shares can be purchased for 85% of the lower of the
beginning or ending fair market value of each six month offering period and are
restricted from resale for a period of one year from the date of purchase.
Purchases are limited to 20% of an employee's eligible compensation. A total of
2,500,000 shares are reserved for issuance under the plan, of which
approximately 692,000 shares had been issued as of September 2, 1999. Shares
issued under the Plan during 1999, 1998 and 1997 were approximately 184,000,
237,000 and 135,000, respectively.
In December 1994, ZEOS awarded shares of its common stock to certain of its
employees subject to their continued employment. Compensation expense was
recognized over the vesting period based upon the fair market value of the stock
at the date of award. To satisfy this award, the Company issued approximately
151,000 shares of the Company's common stock in January 1996.
The Company's 1995 Stock Option Plan (the "Option Plan") provides for the
granting of incentive and non-statutory stock options. As of September 2, 1999,
there were 10,000,000 shares of common stock reserved for issuance under the
Option Plan. Exercise prices of the incentive and non-statutory stock options
are 100% of the fair market value of the Company's common stock on the date of
grant. Prior to April 28, 1999 exercise prices of the incentive and non-
statutory stock options were generally issued at 100% and 85%, respectively, of
the fair market value of the Company's common stock on the date of grant. Stock
options granted to employees and executive officers after April 28, 1999
typically have a term of ten years and vest twenty-five percent each year for
four years from the date of grant. Stock options granted to employees and
executive officers prior to April 28, 1999 typically have a term of six years
and vest twenty percent each year for five years from the date of grant.
On March 19, 1998, the Board of Directors approved an option re-pricing
program pursuant to which all employees, except certain executive officers,
could exchange outstanding options under the Option Plan for new options having
an exercise price equal to the average closing price of the Company's common
stock for the five business days preceding April 3, 1998 and having generally
the same terms and conditions, including vesting and expiration terms, as the
options exchanged. The exercise price of the options reissued under the
Company's option re-pricing program is $13.06 per share.
During fiscal 1998, Mr. Joel J. Kocher, the Company's Chief Executive
Officer and Chairman of the Board of Directors, was granted options to purchase
a total of 650,000 shares of the Company's Common Stock. Of these 650,000
options, 500,000 were granted under the Option Plan and 150,000 were granted as
non-plan grants. A total of 250,000 options vest after completion by Mr. Kocher
of seven (7) years of employment with the Company, subject to immediate early
vesting if the Company achieves certain financial criteria relating to
profitability, net revenue, net margin and cash balance increases.
36
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
Option activity is summarized as follows (amounts in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Fiscal Year Ended September 2, 1999 September 3, 1998 August 28, 1997
- -------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of shares price of shares price of shares price
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 5,292 $12.56 3,559 $16.98 1,908 $13.70
Granted 3,713 12.77 5,842 13.20 1,926 19.90
Exercised (218) 12.28 (68) 11.37 (75) 9.49
Terminated or canceled (1,339) 13.21 (4,041) 17.40 (200) 16.52
------ ------ -----
Outstanding at end of year 7,448 12.56 5,292 12.56 3,559 16.98
====== ====== =====
Exercisable at end of year 1,426 12.86 747 13.24 473 14.45
Shares available for future grant under
the Option Plan 2,390 4,764 1,416
</TABLE>
The following table summarizes information about the Company's stock
options outstanding as of September 2, 1999 (amounts in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Number remaining exercise Number exercise
Range of exercise prices of shares life (years) price of shares price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Less than $10.00 1,035 5.96 9.42 219 9.11
$10.01 - $15.00 5,526 5.80 12.35 985 12.47
$15.01 - $20.00 709 5.04 17.25 193 17.60
Greater than $20.00 178 5.43 21.99 29 22.42
----- -----
7,448 1,426
===== =====
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." The Company continues to measure
compensation expense for its stock-based employee compensation using the
intrinsic value method prescribed by APB No. 25, "Accounting for Stock Issued to
Employees."
The fair value of options at date of grant is estimated using the Black-
Scholes options pricing model. The weighted average assumptions and resulting
fair values at date of grant for options granted during 1999, 1998 and 1997
follow:
<TABLE>
<CAPTION>
Stock Option Plan Shares Employee Stock Purchase Plan Shares
----------------------------------- -------------------------------------
1999 1998 1997 1999 1998 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assumptions:
Expected life 3.5 years 3.3 years 3.5 years 0.5 years 0.5 years 0.5 years
Risk-free interest rate 5.0% 5.6% 6.2% 4.5% 5.1% 5.0%
Expected volatility 70.0% 70.0% 70.0% 70.0% 70.0% 70.0%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Weighted average fair values:
Exercise price equal to market price $ 6.88 $ 6.57 $ 10.68 - - -
Exercise price less than market price 8.46 9.25 11.41 $ 4.79 $ 3.78 $ 5.39
</TABLE>
Stock based compensation costs would have reduced pretax income by $10.9
million, $12.1 million, and $6.5 million in 1999, 1998 and 1997, respectively
($6.8 million, $7.3 million, and $4.0 million and $0.07, $0.08, and $0.04 per
diluted share, respectively, net of taxes), if the fair values of all options
granted subsequent to 1995 had been recognized as compensation expense on a
straight-line basis over the vesting period of the grants. The pro forma effect
on net income for 1999, 1998 and 1997 may not be representative of the pro forma
effect on net income in future years because it does not take into consideration
pro forma compensation expense related to grants made prior to the adoption of
SFAS No. 123.
37
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
Retirement Plan
The Company has a 401(k) retirement plan (the "RAM Plan") in which
substantially all employees participate. Under the RAM Plan, which is
administered by MTI, employees may contribute from 2% to 16% of eligible pay to
various savings alternatives. The RAM Plan provides for an annual match by the
Company of the first $1,500 of eligible employee contributions and for
additional contributions by the Company based on the Company's financial
performance. The Company's expense pursuant to the RAM Plan was approximately
$2.2 million, $3.7 million, and $4.3 million in 1999, 1998 and 1997,
respectively.
Transactions With Affiliates
<TABLE>
<CAPTION>
Fiscal year ended September 2, 1999 September 3, 1998 August 28, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 3,742 $18,538 $26,791
Inventory purchases 51,202 34,393 82,337
Component recovery agreement expenses 65,298 27,350 44,534
Administrative services and other expenses 529 1,147 934
Property, plant and equipment purchases 6,634 4,395 930
Property, plant and equipment sales 2,744 5,307 575
Construction management services - - 749
</TABLE>
The above transactions with affiliates include those of MCMS through
February 26, 1998.
During the fourth quarter of fiscal 1999, the Company entered into an
amended and restated Component Recovery Agreement with MTI, effective September
2, 1999. The new agreement has a term of two years and requires MTI to offer to
the Company components used in connection with SpecTek Operations. The cost to
the Company of components obtained from MTI will be negotiated on a quarterly
basis, but in no event will the cost be less than 50% of pre-tax net income
generated from the sale of SpecTek Operations' products derived from such
components. The maximum cost payable by the Company to MTI for components during
fiscal 2000 will be as follows: first quarter, 50% of pre-tax net income; second
quarter, 62.5% of pre-tax net income; third quarter, 75% of pre-tax net income;
and fourth quarter 87.5% of pre-tax net income. The costs to the Company for
components obtained from MTI during fiscal 2001 is not subject to any maximum
amount. Additionally, in fiscal 1999, the Company obtained approximately 17.7%
of its components from MTI's joint venture affiliates. At the commencement of
the second quarter of fiscal 2000 the Company has an option to require MTI to
purchase property and equipment of SpecTek Operations for a purchase price equal
to net book value. At the commencement of fiscal 2001, MTI has an option to
require the Company to sell property and equipment of SpecTek Operations under
the same terms and conditions. Additionally, the Company would have an option to
require MTI to purchase, and MTI would have the option to require the Company to
sell, SpecTek Operations' property and equipment at book value if MTI's
ownership in the Company falls below 50% or if an unrelated third party acquires
more than 30% of the Company. Pursuant to the prior Component Recovery
Agreement, the Company generally paid to MTI, an amount equal to one-half of the
operating income generated by sales of such components
Also during the fourth quarter of fiscal 1999, the Company acquired the
property and equipment of Micron Internet Services, a division of MTI, for $2.2
million.
Commitments
As of September 2, 1999, the Company had commitments of $5.8 million for
equipment purchases and $21.6 million for software infrastructure. In addition,
the Company is required to make minimum royalty payments under certain
agreements and periodically enters into purchase commitments with certain
suppliers.
The Company leases various office and production facilities and certain
other property and equipment, under operating lease agreements expiring through
2004, with renewals thereafter at the option of the Company. Future minimum
lease payments total approximately $3.1 million and are as follows: $1.5 million
in 2000, $1.0 million in 2001, $0.3 million in 2002, and $0.1 million in 2003
and 2004.
Rental expense was approximately $3.8 million, $5.4 million, and $3.6
million in 1999, 1998 and 1997, respectively.
38
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
Income Taxes
The Company was included in the consolidated U.S. federal income tax return
of MTI until June 1996, at which time the Company became a separate taxpayer.
For all periods presented, the provision for income taxes is computed as if the
Company were a separate taxpayer, and consists of the following:
<TABLE>
<CAPTION>
Fiscal year ended September 2, 1999 September 3, 1998 August 28, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. federal $ 5,346 $29,299 $34,722
State 348 2,089 6,573
------- ------- -------
5,694 31,388 41,295
------- ------- -------
Deferred:
U.S. federal 15,398 6,178 13,625
State 1,502 585 2,172
------- ------- -------
16,900 6,763 15,797
------- ------- -------
Income tax provision $22,594 $38,151 $57,092
======= ======= =======
</TABLE>
The tax benefit associated with non-statutory stock options and
disqualifying dispositions by employees of shares issued under the Company's and
MTI's stock plans reduced taxes payable by approximately $0.4 million, $0.03
million, and $0.2 million for 1999, 1998 and 1997, respectively. Such benefits
are credited to additional capital.
A reconciliation between the income tax provision and income tax computed
using the federal statutory rate follows:
<TABLE>
<CAPTION>
Fiscal year ended September 2, 1999 September 3, 1998 August 28, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal income tax at statutory rate $20,691 $30,136 $50,524
State taxes, net of federal benefit and state tax credits 1,777 1,743 4,777
Valuation allowance - 4,139 -
In-process research and development 350 - 1,378
Other (224) 2,133 413
------- ------- -------
Income tax provision $22,594 $38,151 $57,092
======= ======= =======
</TABLE>
39
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
The tax effects of temporary differences and carryforwards that give rise to
the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
As of September 2, 1999 September 3, 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Receivables and other allowances $ 4,827 $ 1,821
Inventories 1,308 2,329
Accrued expenses 7,287 14,407
Investment basis difference 3,361 3,841
Accrued compensation 3,540 3,426
Accrued licenses and royalties 1,595 2,410
Net operating loss carryforwards 5,590 4,982
Other 3,104 1,086
-------- -------
Total deferred tax assets 30,612 34,302
Valuation allowance (4,652) (4,139)
-------- -------
Net deferred tax assets 25,960 30,163
Deferred tax liabilities:
Property, plant and equipment (4,637) (1,374)
Acquired intangibles (2,122)
Deferred patent charges (1,829) (711)
Other (14,479) (6,158)
-------- -------
Total deferred tax liabilities (23,067) (8,243)
-------- -------
Net deferred taxes $ 2,893 $21,920
======== =======
</TABLE>
Deferred tax liabilities of approximately $2.2 million were recorded in
1999 in connection with the acquisition of HostPro. The Company has federal
operating loss carryforwards of $11.7 million (including $10.3 million and $1.4
million as a result of the NetFRAME and HostPro acquisitions, respectively) that
expire beginning in 2006 and apportioned state operating loss carryforwards of
$37.1 million (including $3.9 million as a result of the NetFRAME acquisition)
that expire beginning in 2000. The use of pre-acquisition operating losses and
tax credit carryforwards are subject to limitations imposed by the Internal
Revenue Code. To the extent the amount of NetFRAME's operating loss and tax
credit carryforwards available to offset future taxable income were statutorily
limited, no deferred tax asset was established.
Earnings Per Share
During fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share,"
which changed the standard for computing and presenting earnings per share.
Diluted earnings per share excludes anti-dilutive employee stock options of
approximately 1,189,000, 815,000 and 1,255,000 in fiscal 1999, 1998, and 1997
respectively.
A reconciliation of the income available to common shareholders and number of
common shares outstanding follows:
<TABLE>
<CAPTION>
Fiscal year ended September 2, 1999 September 3, 1998 August 28, 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income available to common shareholders $36,524 $47,953 $87,262
======= ======= =======
Common shares outstanding:
Weighted average shares outstanding - basic 96,127 95,657 94,118
Effect of dilutive stock options 506 370 531
------- ------- -------
Weighted average shares outstanding - diluted 96,633 96,027 94,649
======= ======= =======
Earnings per share:
Basic $ 0.38 $ 0.50 $ 0.93
Diluted 0.38 0.50 0.92
</TABLE>
40
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
Contingencies
Periodically, the Company is made aware that technology used by the Company
may infringe on intellectual property rights held by others. The Company has
accrued a liability and charged operations for the estimated costs of settlement
or adjudication of asserted and unasserted claims for alleged infringement prior
to the balance sheet date. Resolution of these claims could have a material
adverse effect on future results of operations and could require changes in the
Company's products or processes.
During the third quarter of fiscal 1997, the Company began to collect and
remit applicable sales or use taxes in nearly all states. In association
therewith, the Company is party to agreements with nearly all states which
generally limit the liability of the Company, if any, for non-remittance of
sales and use taxes prior to such agreements' effective dates. Management
believes the resolution of any matters relating to the non-remittance of sales
or use taxes prior to the balance sheet date will not have a material adverse
effect on the Company's business, financial position, and results of operations
and cash flows.
The Company is currently a party to various legal actions arising out of the
normal course of business, none of which is expected to have a material adverse
effect on the Company's business, financial position, results of operations and
cash flows.
Operating Segment and Geographic Information
The Company adopted Statement of Financial Accounting Standards (SFAS) 131,
"Disclosures about Segments of an Enterprise and Related Information" in fiscal
1999. SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a
Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas, and
major customers.
The Company's predominant operations are to market, design, develop and
manufacture personal computer systems and services and SpecTek memory products.
The Company's reportable segments have been determined based on the nature of
its operations, products offered to customers and information used by the Chief
Operating Decision Maker as defined by SFAS 131. For 1999, the Company's two
reportable segments are PC Systems and SpecTek Operations. The PC Systems
segment's primary products include a wide range of desktop and notebook PC
systems, multiprocessor network servers, hardware services and e-Services. The
SpecTek Operations segment's primary products include DRAM's, SDRAM's, and
memory modules. The MCMS segment primarily reflects activity of the Company's
custom manufacturing business which was sold on February 26, 1998.
The accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies. Segment operating results are
measured based on operating income (loss). The elimination of internal net sales
primarily reflects charges from the PC system segment to SpecTek Operations and
MCMS for computers and administrative services. Such charges are based on
estimated costs.
41
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal year ended September 2, 1999 September 3, 1998 August 28, 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales
PC Systems $1,239,795 $1,497,339 $1,529,248
SpecTek Operations 200,496 95,366 139,427
MCMS - 145,682 292,379
---------- ---------- ----------
Total segment sales 1,440,291 1,738,387 1,961,054
Elimination of internal net sales (2,462) (4,955) (5,271)
---------- ---------- ----------
Total consolidated net sales $1,437,829 $1,733,432 $1,955,783
========== ========== ==========
Operating Income (Loss)
PC Systems $ (32,369) $ (107,952) $ 76,172
SpecTek Memory Products 75,683 14,287 39,449
MCMS - 10,663 20,837
---------- ---------- ----------
Total segment operating income (loss) 43,314 (83,002) 136,458
Elimination of intersegment income (loss) (93) (892) -
---------- ---------- ----------
Total segment operating income (loss) $ 43,221 $ (83,894) $ 136,458
========== ========== ==========
Capital Expenditures on Property, Plant and Equipment
PC Systems $ 42,966 $ 29,705 $ 66,116
SpecTek Operations 9,472 26,881 15,909
MCMS - 10,704 23,727
---------- ---------- ----------
Total segment capital expenditures $ 52,438 $ 67,290 $ 105,752
========== ========== ==========
Depreciation and Amortization
PC Systems $ 14,698 $ 19,035 $ 12,158
SpecTek Operations 17,185 14,831 14,419
MCMS - 5,300 8,822
---------- ---------- ----------
Total segment depreciation and amortization $ 31,883 $ 39,166 $ 35,399
========== ========== ==========
Net Sales by Geographic Area
(based on customer location)
United States $1,267,251 $1,581,626 $1,817,608
Non-US 173,040 156,761 143,446
---------- ---------- ----------
Totals $1,440,291 $1,738,387 $1,961,054
========== ========== ==========
</TABLE>
Major Customers
The Company's PC Systems Segment received approximately $260.9 million, $258.9
million and $250.5 million in net revenue for fiscal years 1999, 1998 and 1997,
respectively, from a single external customer, the federal government.
42
<PAGE>
Micron Electronics, Inc.
Notes to Consolidated Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
As of September 2, 1999 September 3, 1998 August 28, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Assets
PC Systems $587,987 $561,525 $518,243
SpecTek Operations 156,490 130,918 115,241
MCMS - - 124,862
-------- -------- --------
Total segment assets 744,477 692,443 758,346
Intersegment eliminations (10,946) - -
-------- -------- --------
Total consolidated assets $733,531 $692,443 $758,346
======== ======== ========
Property, Plant and Equipment by Geographic Area
United States $159,847 $146,880 $185,959
Non-US 12 1,032 5,577
-------- -------- --------
Totals $159,859 $147,912 $191,536
======== ======== ========
</TABLE>
43
<PAGE>
Micron Electronics, Inc.
Quarterly Financial Information (Unaudited)
(Tabular amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Net sales $333,067 $327,665 $373,600 $403,496
Gross margin 76,618 61,418 63,392 68,818
Net income 13,715 6,981 4,169 11,659
Earnings per share:
Basic .14 .07 .04 .12
Diluted .14 .07 .04 .12
1998
Net sales $339,022 $340,760 $494,760 $558,890
Gross margin 75,179 65,303 4,458 77,214
Net income 16,195 5,928 24,765 1,065
Earnings per share:
Basic 0.17 0.06 0.26 0.01
Diluted 0.17 0.06 0.26 0.01
</TABLE>
Results of operations in the fourth quarter of fiscal 1998 were favorably
affected by $14.7 million ($8.9 million or $0.09 per diluted share, net of
taxes), including a benefit to cost of goods sold of $11.8 million related to
revisions of estimates for certain contingencies for product and process
technology costs for two patent infringement matters based on new information
learned by management in the fourth quarter of 1998 and $2.9 million for other
revisions in estimates, including a $1.9 million reduction of the charge
recorded in the second quarter of fiscal 1998 related to the Company's
realignment of its PC operations (see below).
In the second quarter of fiscal 1998, the Company completed the sale of 90%
of its interest in MCMS, Inc. Results of operations in the second quarter of
fiscal 1998 include a pre-tax gain of $156.2 million ($94.5 million or $0.99
per diluted share, after taxes) realized from the sale. Results of the
operations for the second quarter of fiscal 1998 also include significant
operating losses from the Company's PC operation. Selling prices for the
Company's notebook products in the second quarter of fiscal 1998 decreased to a
level below the Company's cost. In addition, the Company wrote down the value
of notebook PC inventories that the Company purchased as a result of an overly
aggressive forecast. In February 1998, the Company announced it had taken
several actions to realign the Company to concentrate on its core markets and
customers, including the consolidation of its domestic and international
operations and the reduction of approximately 10% of it workforce. Results of
operations in the second quarter of fiscal 1998 include a pre-tax charge of
$13.0 million ($7.9 million or $0.08 per diluted share, net of taxes) for
employee severance costs and other costs to consolidate the Company's PC
operations. In the fourth quarter of fiscal 1998, the actions related to this
realignment were substantially complete, and the estimated costs were reduced by
$1.9 million
44
<PAGE>
Micron Electronics, Inc.
Report of Independent Accountants
The Shareholders and Board of Directors
Micron Electronics, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Micron Electronics, Inc. and its subsidiaries at September 2, 1999
and September 3, 1998, and the results of their operations and their cash flows
for each of the three years in the period ended September 2, 1999, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boise, Idaho
September 27, 1999
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information concerning the Registrant's executive officers and
directors is included under the caption "Officers and Directors of the
Registrant" included in PART I, Item 1 of this report. Other information
required by Items 10, 11, 12 and 13 will be contained in the registrant's Proxy
Statement which will be filed with the Securities and Exchange Commission within
120 days after September 2, 1999, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following are filed as a part of this report:
Financial statements and financial statement schedules--see "Item 8.
Financial Statements and Supplementary Data."
Exhibit Description
------- ----------------------------------------------------------------
2.1 Agreement of Merger, dated as of October 30, 1994, as amended by
the first amendment thereto, dated as of December 13, 1994,
by and among ZEOS, MCI and MCMS (1)
2.2 Articles of Merger, dated April 7, 1995, by and among ZEOS, MCI
and MCMS (2)
3.1 Articles of Incorporation of Registrant, as amended (3)
3.2 Bylaws of the Registrant, as amended (5)
10.35 1995 Stock Option Plan, as amended
10.36 1995 Employee Stock Purchase Plan, as amended
10.38 Form of Indemnification Agreement between the Registrant and its
officers and directors (4)
10.39 Form of Six-Month Termination Agreements for certain officers of
the Registrant (4)
10.42 Amended and Restated Component Recovery Agreement, dated
effective September 2, 1999, between the Company and Micron
Technology, Inc. (11)
10.44 Form of Twelve-Month Termination Agreements for certain officers
of the Registrant (5)
10.45 Form of Two-Year Termination Agreements for certain officers of
the Registrant (5)
10.47 Form of Employment and Noncompete Agreement, with 12-month
termination provision, for certain officers of the
Registrant (6)
10.48 Form of Employment and Noncompete Agreement, with 6-month
termination provision, for certain officers of the
Registrant (6)
10.49 Addendum to Severance Agreement, dated January 23, 1998, by and
between the Company and T. Erik Oaas (6)
10.50 Addendum to Severance Agreement, dated January 12, 1998, by and
between the Company and Gregory D. Stevenson (6)
10.52 Employment Offer, dated January 10, 1998, to Joel J. Kocher (6)
10.53 Credit Agreement, dated June 10, 1998, between the Company and
certain financial institutions named therein (7)
10.54 Agent's Resignation and Appointment Agreement, dated August 28,
1998, between the Company and certain financial institutions
named therein (8)
46
<PAGE>
Exhibit Description
------- -----------------------------------------------------------------
10.55 Assignment and Assumption Agreement, dated September 1, 1998,
between the Company and certain financial institutions named
therein (8)
10.56 Form of Employment, Severance and Noncompete Agreement for
Certain Officers of the Registrant (8)
10.58 Micron Electronics, Inc. Management and Executive Incentive Plan
(9)
10.59 Amendment No. 1 to Credit Agreement, dated November 5, 1998,
between certain subsidiaries of the Company and certain
financial institutions named therein (9)
10.60 Guaranty Agreement, dated November 5, 1998, between certain
subsidiaries of the Company and certain financial
institutions named therein (9)
10.63 Employment Offer, dated March 17, 1999 to Jill D. Smith (10)
10.64 Employment, Severance, and Noncompete Agreement, dated March 22,
1999, between the Company and Jill D. Smith (10)
10.65 Exclusive Sales Representative Agreement effective September 2,
1999, between Micron Electronics, Inc. and Micron
Semiconductor Products, Inc. (11)
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
__________
(1) Incorporated by reference to Registration Statement on Form S-4
(File No. 33-90212), as declared effective on March 13, 1995
(2) Incorporated by reference to Current Report on Form 8-K, dated
April 7, 1995
(3) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended April 1, 1995
(4) Incorporated by reference to Annual Report on Form 10-K, as
amended, for the fiscal year ended August 31, 1995
(5) Incorporated by reference to Annual Report on Form 10-K, as
amended, for the fiscal year ended August 28, 1997
(6) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended February 26, 1998
(7) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended May 28, 1998
(8) Incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended September 3, 1998
(9) Incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended September 3, 1998
(10) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended December 3, 1998
(11) Incorporated by reference to Quarterly Report on Form 10-Q for
the fiscal quarter ended June 3, 1999
(12) Incorporated by reference to Current Report on Form 8-K, dated
September 2, 1999
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K, dated September 2, 1999, announcing
the Company had entered into an Amended and Restated Component Recovery
Agreement with Micron Technology, Inc., and an Exclusive Sales Representative
Agreement with Micron Semiconductor Products, Inc., a subsidiary of Micron
Technology, Inc.
Additions, GoBook, Millennia Max, Millennia MicroTower, MPower,
PowerXchange, and TransPort Trek are trademarks of the Company. ClientPro,
Millennia, NetFRAME, Net.Now!, SpecTek, TransPort, Vetix and ZEOS are registered
trademarks of the Company. Pentium is a registered trademark and MMX is a
trademark of Intel Corporation. Microsoft, Windows and Windows NT are registered
trademarks of Microsoft Corporation. All other product names appearing herein
are for identification purposes only and may be trademarks of their respective
companies
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of Nampa,
State of Idaho, on the 1st day of October, 1999.
Micron Electronics, Inc.
/s/ James R. Stewart
--------------------------------------------
James R. Stewart
----------------
Executive Vice President,
Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Nampa,
State of Idaho, on the 1st day of October, 1999.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------ ----- ----
<S> <C> <C>
/s/ Joel J. Kocher Chairman of the Board, President, Chief Operating October 8, 1999
- ------------------------ Officer and Chief Executive Officer (Principal
(Joel J. Kocher) Executive Officer)
/s/ Robert Lee Director October 8, 1999
- ------------------------
(Robert Lee)
/s/ Steven R. Appleton Director October 8, 1999
- ------------------------
(Steven R. Appleton)
/s/ Robert A. Lothrop Director October 8, 1999
- ------------------------
(Robert A. Lothrop)
/s/ John B. Balousek Director October 8, 1999
- ------------------------
(John B. Balousek)
</TABLE>
48
<PAGE>
Schedule II
Micron Electronics, Inc.
Valuation and Qualifying Accounts
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal year ended September 2, 1999 September 3, 1998 August 28,1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at beginning of year $ 3,709 $ 7,556 8,221
Additions charged to expense 2,715 4,273 1,032
Reductions and write-offs (2,578) (7,662) (3,381)
Sale of MCMS, Inc. - (458) 1,684
------- ------- -------
Balance at end of year $ 3,846 $ 3,709 $ 7,556
======= ======= =======
DEFERRED TAX ASSET VALUATION ALLOWANCE
Balance at beginning of year $ 4,139 $ - -
Additions charged to expense - 4,139 -
Additions from acquisitions 513 - -
------- ------- -------
Balance at end of year $ 4,652 $ 4,139 -
======= ======= =======
</TABLE>
49
<PAGE>
EXHIBIT 10.35
MICRON ELECTRONICS, INC.
1995 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are:
--------------------
. to attract, motivate and retain experienced and qualified personnel
for positions of substantial responsibility,
. to provide additional incentive to Employees and Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory
Stock Options, as determined by the Administrator at the time of grant.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock option plans under Minnesota corporate and securities
laws and the Code.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Change in Control" means (i) the acquisition by any person or
-----------------
entity of securities of Micron Electronics, Inc. such that such person or
entity, directly, indirectly or beneficially, acting alone or in concert, (A)
owns or controls more of the combined voting power of all classes of voting
securities of Micron Electronics, Inc. than does Micron Technology, Inc. and (B)
owns or controls more than twenty percent (20%) of the combined voting power of
all classes of voting securities of Micron Electronics, Inc.; or (ii) the
acquisition by any person or entity, directly, indirectly or beneficially,
acting alone or in concert, of more than thirty-five percent (35%) of the common
stock of Micron Technology, Inc. outstanding at any time.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means one or more Committees appointed by the Board
---------
in accordance with Section 4 of the Plan.
(g) "Common Stock" means the Common Stock of the Company.
------------
(h) "Company" means Micron Electronics, Inc., a Minnesota
-------
corporation.
<PAGE>
(i) "Consultant" means any person, including an advisor, engaged by
----------
the Company or a Parent or Subsidiary to render services and who is compensated
for such services. The term "Consultant" shall not include: (1) directors who
are paid only a director's fee by the Company or who are not compensated by the
Company for their services as Directors; or (2) individuals who (a) provide
services to the Company that directly or indirectly promote or maintain a market
for the Company's Common Stock, or (b) act as a conduit for distributing the
Company's Common Stock to the general public.
(j) "Continuous Status as an Employee or Consultant" means that the
----------------------------------------------
employment or consulting relationship with the Company, any Parent, or
Subsidiary, is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered interrupted in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other personal leave approved by an authorized representative of
the Company. For purposes of Incentive Stock Options, no such leave may exceed
90 days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option.
(k) "Director" means a member of the Board.
--------
(l) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(m) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. Neither
service as a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(o) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the Nasdaq
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, the Fair Market Value of a Share of
Common Stock shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such exchange or system (or the
exchange with the greatest volume of trading in the Common Stock) on the last
market trading day prior to the day of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the over-the-counter market
or is regularly quoted by a recognized securities dealer, but selling prices are
not reported, the Fair Market Value of a Share of Common Stock shall be the mean
between the high bid and low asked prices for the Common Stock on the last
market trading day prior to the day of
2
<PAGE>
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(p) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(q) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(r) "Notice of Grant" means a written notice evidencing certain terms
---------------
and conditions of an individual Option grant. The Notice of Grant is subject to
the terms and conditions of the Option Agreement.
(s) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "Option" means a stock option granted pursuant to the Plan.
------
(u) "Option Agreement" means a written agreement between the Company
----------------
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the Plan.
(v) "Option Exchange Program" means a program whereby outstanding
-----------------------
options are surrendered in exchange for options with a lower exercise price.
(w) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(x) "Optionee" means an Employee, Consultant or Outside Director who
--------
holds an outstanding Option.
(y) "Outside Director" means a member of the Board who is not an
----------------
Employee of the Company, Micron Technology, Inc., or any Subsidiary of the
Company or Micron Technology, Inc.
(z) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(aa) "Plan" means this 1995 Stock Option Plan.
----
(bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(cc) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
3
<PAGE>
(dd) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code. In the case of an
Option that is not intended to qualify as an Incentive Stock Option, the term
"Subsidiary" shall also include any other entity in which the Company, or any
Parent or Subsidiary of the Company, has a significant ownership interest.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 10,000,000 Shares. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been exercised
in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated); provided,
--------
however, that Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. If permitted by Rule 16b-3,
------------------------------
the Plan may be administered by different bodies with respect to (i) Directors,
(ii) Officers who are not Directors, and (iii) Employees who are neither
Directors nor Officers.
(ii) Administration With Respect to Employees Subject to Section
-----------------------------------------------------------
16(b). With respect to Option grants made to Employees who are also Officers or
- -----
Directors subject to Section 16(b) of the Exchange Act, the Plan shall be
administered by (A) the Board, if the Board may administer the Plan in
compliance with the rules governing a plan intended to qualify as a
discretionary plan under Rule 16b-3, or (B) a committee designated by the Board
to administer the Plan, which committee shall be constituted to comply with the
rules governing a plan intended to qualify as a discretionary plan under Rule
16b-3. Once appointed, such committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members, remove
members (with or without cause) and substitute new members, fill vacancies
(however caused), and remove all members of the Committee and thereafter
directly administer the Plan, all to the extent permitted by the rules governing
a plan intended to qualify as a discretionary plan under Rule 16b-3.
(iii) Administration With Respect to Other Persons. With respect
--------------------------------------------
to Option grants made to Employees or Consultants who are neither Directors nor
Officers of the Company, the Plan shall be administered by (A) the Board or (B)
a committee or committees designated by the Board, which committee shall be
constituted to satisfy Applicable Laws. Once appointed, such Board may increase
the size of the Committee and appoint additional members, remove members (with
or without cause) and substitute new members, fill vacancies (however caused),
and remove all members of the Committee and thereafter directly administer the
Plan, all to the extent permitted by Applicable Laws.
4
<PAGE>
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(o) of the Plan;
(ii) to select the Consultants and Employees to whom Options
may be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend, and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option (subject to Section 14(c)
of the Plan), including the discretionary authority to extend the post-
termination exercisability period of Options longer than is otherwise provided
for in the Plan;
(xi) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option previously
granted by the Administrator;
(xii) to institute an Option Exchange Program; and
5
<PAGE>
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations, and interpretations shall be final and binding on all
Optionees and any other holders of Options.
5. Eligibility. Nonstatutory Stock Options may be granted to Employees,
-----------
Consultants and Outside Directors. Incentive Stock Options may be granted only
to Employees. If otherwise eligible, an Employee or Consultant who has been
granted an Option may be granted additional Options.
6. Limitations.
-----------
(a) Each Option shall be designated in the Notice of Grant as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of Shares subject to an Optionee's Incentive Stock Options granted by the
Company or any Parent or Subsidiary, which become exercisable for the first time
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares shall be determined as of the time of grant.
(b) Neither the Plan nor any Option shall confer upon an Optionee any
right with respect to continuing the Optionee's employment or consulting
relationship with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such employment or
consulting relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options to
Employees:
(i) No Employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 250,000 Shares; provided, however, that
in the fiscal year in which an employee commences employment with the Company,
options granted to such employee shall be limited to 500,000 Shares in such
fiscal year. The purchase price per Share payable by an Optionee upon exercise
of each Option intended to qualify under Section 162(m) of the Code shall be
equal to the fair market value of the Company's Common Stock on the date of
grant.
(ii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 11.
(iii) If an Option is canceled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 11), the canceled Option will be counted against the limit
set forth in Section 6(c)(i). For this purpose, if the exercise price of an
Option is reduced, the transaction will be treated as a cancellation of the
Option and the grant of a new Option.
6
<PAGE>
(d) The following limitations shall apply to grants of Options to
Outside Directors:
(i) Each Outside Director shall receive a formula Nonstatutory
Stock Option (a "Formula Option") as of the Effective Date with respect to
10,000 shares of Common Stock, as shall each Outside Director later appointed or
elected to the Board (with the grant made as of the date of his or her first
election or appointment). Each Outside Director serving on the Board as of the
date immediately following each annual meeting of the Company's shareholders
shall receive a Formula Option as of the date of that meeting with respect to
3,000 shares of Common Stock. The Exercise Price for Formula Options shall be
the Fair Market Value of the Common Stock on the date of grant.
(ii) Unless the Administrator specifies otherwise, each Formula
Option shall become exercisable as to 100% of the covered shares as of the date
of grant. To the extent that a Formula Option is not immediately exercisable, a
Formula Option shall become exercisable in accordance with the terms of section
9(c) of the Plan upon the Outside Director's Disability and in accordance with
the terms of section 9(d) of the Plan upon the Outside Director's death. Unless
the Administrator specifies otherwise, Options shall be granted for a term of
six years. Options shall be forfeited to the extent they are not then
exercisable if an Outside Director resigns, is removed or fails to be reelected
or reappointed as a Director. Options shall terminate within 30 days of an
Outside Director's resignation, removal, or failure to be reelected or
reappointed as a Director.
7. Term of Option. The term of each Option shall be stated in the Notice
--------------
of Grant; provided, however, that in the case of an Incentive Stock Option, the
term shall be ten (10) years from the date of grant or such shorter term as may
be provided in the Notice of Grant. Moreover, in the case of an Incentive Stock
Option granted to an Optionee who, at the time Incentive Stock Option is
granted, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the term of
the Incentive Stock Option shall be five (5) years from the date of grant or
such shorter term as may be provided in the Notice of Grant.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of grant.
7
<PAGE>
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. The per Share exercise
price of Nonstatutory Stock Options intended to qualify under Section 162(m) of
the Code shall be no less than 100% of the Fair Market Value per Share on the
date of grant.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised. In doing so, the Administrator may specify that an
Option may not be exercised until the completion of a service period.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
8
<PAGE>
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the stock
certificate evidencing such Shares is issued (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
stock certificate, either in book entry form or in certificate form, promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the Shares are
issued, except as provided in Section 11 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Employment or Consulting Relationship. Upon
----------------------------------------------------
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within such period of time as is specified in the
Notice of Grant, and only to the extent that the Optionee was entitled to
exercise it as the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant). In
the absence of a specified time in the Notice of Grant, the Option shall remain
exercisable for 30 days following the Optionee's termination of Continuous
Status as an Employee or Consultant. If, at the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(c) Disability of Optionee. In the event that an Optionee's
----------------------
Continuous Status as an Employee or Consultant terminates as a result of the
Optionee's Disability, the Optionee may exercise his or her Option at any time
within twelve (12) months from the date of such termination, but only to the
extent that the Optionee was entitled to exercise it at the date of such
termination (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant). If, at the date of termination,
the Optionee does not exercise his or her entire Option, the Shares covered by
the unexercisable portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option with respect
9
<PAGE>
to the shares covered by the exercisable portion of the Option within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If, after death,
the Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Rule 16b-3. Options granted to individuals subject to Section 16
----------
of the Exchange Act must comply with the applicable provisions of Rule 16b-3 and
shall contain such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16 of the Exchange
Act with respect to Plan transactions.
(f) Suspension. Any Optionee who is also a participant in the
----------
Retirement at Micron or Micron Electronics Retirement at Micron Section 401(k)
Plan (each a "RAM Plan" and together the "RAM Plans") and who requests and
receives a hardship distribution from any RAM Plan, is prohibited from making,
and must suspend, for a period of twelve (12) months thereafter, his or her
elective contributions and employee contributions including, without limitation
to the foregoing, the exercise of any Option granted from the date of receipt by
that employee of the hardship distribution from any RAM Plan.
10. Non-Transferability of Options. An Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization, Dissolution, Merger, or
-------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of issued shares of Common Stock which
have been authorized for issuance under the Plan but as to which no Options have
yet been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock or any other increase or decrease in the
number of shares of Common Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding, and conclusive. Except as
10
<PAGE>
expressly provided herein, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of its
sole discretion in such instances, declare that any Option shall terminate as of
a date fixed by the Board and give each Optionee the right to exercise his or
her Option as to all or any part of the Optioned stock, including Shares as to
which the Option would not otherwise be exercisable.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, other than in either such case, a Change in Control, each
outstanding Option may be assumed or an equivalent option or right may be
substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In lieu of such assumption or substitution, or in the
event the successor corporation does not assume the Option or substitute an
equivalent option or right, the Administrator may provide for the Optionee to
have the right to exercise the Option as to all or a portion of the Optioned
Stock, including Shares as to which it would not otherwise be exercisable. If
the Administrator makes an Option exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Administrator shall
notify the Optionee that the Option shall be fully exercisable for a period of
thirty (30) days from the date of such notice, and the Option will terminate
upon the expiration of such period. For the purposes of this paragraph, the
Option shall be considered assumed if, following the merger or sale of assets,
the option or right confers the right to purchase, for each Share of Optioned
Stock subject to the Option immediately prior to the merger or sale of assets,
the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets was not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
(d) Change in Control. In the event of a Change in Control, the
-----------------
unexercised portion of the Option shall become immediately exercisable, to the
extent such acceleration does not disqualify the Plan, or cause an Incentive
Stock Option to be treated as a Nonstatutory Stock Option without the consent of
the Optionee.
12. Date of Grant. The date of grant of an Option shall be, for all
-------------
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
11
<PAGE>
13. Term of Plan. Subject to Section 18 of the Plan, the Plan shall become
------------
effective upon the earlier to occur of its adoption by the Board or its approval
by the shareholders of the Company as described in Section 18 of the Plan. It
shall continue in effect for a term of ten (10) years from the effective date
unless terminated earlier under Section 14 of the Plan.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend, or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Rule 16b-3 or with Section 422 of the Code (or any successor rule or
statute or other applicable law, rule, or regulation, including the requirements
of any exchange or quotation system on which the Common Stock is listed or
quoted). Such shareholder approval, if required, shall be obtained in such a
manner and to such a degree as is required by the applicable law, rule, or
regulation.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension, or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, Applicable Laws,
and the requirements of any stock exchange or quotation system upon which the
Shares may then be listed or quoted, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
16. Liability of Company.
--------------------
(a) Inability to Obtain Authority. The inability of the Company to
-----------------------------
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
12
<PAGE>
(b) Grants Exceeding Allotted Shares. If the Optioned Stock covered
--------------------------------
by an Option exceeds, as of the date of grant, the number of Shares which may be
issued under the Plan without additional shareholder approval, such Option shall
be void with respect to such excess Optioned Stock, unless shareholder approval
of an amendment sufficiently increasing the number of shares subject to the Plan
is timely obtained in accordance with Section 14(b) of the Plan.
17. Reservation of Shares. The Company, during the term of this Plan, will
---------------------
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the manner and to the degree required under applicable federal and Minnesota
law.
13
<PAGE>
EXHIBIT 10.36
MICRON ELECTRONICS, INC.
1995 EMPLOYEE STOCK PURCHASE PLAN
The following constitutes the provisions of the 1995 Employee Stock
Purchase Plan of Micron Electronics, Inc. as amended:
1. Purpose. The purpose of the ESP Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the ESP Plan qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as
amended. The provisions of the ESP Plan shall, accordingly, be construed so as
to extend and limit participation in a manner consistent with the requirements
of that section of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean Micron Electronics, Inc., a Minnesota
-------
corporation, and subject to Section 21 below, its successors and assigns and any
of its Designated Subsidiaries.
(e) "Compensation" with respect to any Employee means such
------------
Employee's wages, salaries, fees for professional services and other amounts
received for personal services actually rendered in the course of employment
with the Company or its Designated Subsidiaries to the extent that the amounts
are includible in gross income (including, but not limited to, commissions paid
to salesmen, compensation for services on the basis of a percentage of profits,
tips, and bonuses).
Compensation shall exclude (a)(1) contributions made by the
employer to a plan of deferred compensation to the extent that, the
contributions are not includible in the gross income of the Employee for the
taxable year in which contributed, (2) employer contributions made on behalf of
an Employee to a simplified employee pension plan described in Code Section
408(k) to the extent such contributions are excludable from the Employee's gross
income, (3) any distributions from a plan of deferred compensation; (b) amounts
realized from the exercise of a non-statutory stock option, or when restricted
stock (or property) held by an Employee either becomes freely transferable or is
no longer subject to substantial risk of forfeiture; (c) amounts realized from
the sale, exchange or other disposition of stock acquired under a qualified
stock option; (d) other amounts which receive special tax benefits, such as
premiums
<PAGE>
for group-term life insurance (but only to the extent that the premiums are not
includible in the gross income of the employee), or contributions made by the
employer (whether or not under a salary reduction agreement) towards the
purchase of any annuity contract described in Code Section 403(b) (whether or
not the contributions are actually excludable from the Employee's gross income);
(e) reimbursements or other expense allowances; (f) fringe benefits (cash and
noncash); (g) moving expenses; and (h) welfare benefits.
(f) "Continuous Status as an Employee" shall mean the absence of any
--------------------------------
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
agreed to in writing by the Company, provided that such leave is for a period of
not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
(g) "Designated Subsidiaries" shall mean the Subsidiaries which have
-----------------------
been designated by the Board from time to time in its sole discretion as
eligible to participate in the ESP Plan.
(h) "Employee" shall mean any person, including an officer, whose
--------
customary employment on a continuous basis is more than twenty (20) hours per
week and more than five (5) months in a calendar year by the Company.
(i) "Enrollment Date" shall mean the first day of each Offering
---------------
Period.
(j) "Exercise Date" shall mean the last day of each Offering Period.
-------------
(k) "Offering Period" shall mean a period of six (6) months.
---------------
(l) "ESP Plan" shall mean this Employee Stock Purchase Plan.
--------
(m) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
3. Eligibility.
-----------
(a) Any Employee as defined in Section 2 who has been continuously
employed by the Company, Micron Technology, Inc. ("MTI") or any subsidiary of
MTI for at least one (1) consecutive month and who shall be employed by the
Company on a given Enrollment Date shall be eligible to participate in the ESP
Plan.
(b) Any provisions of the ESP Plan to the contrary notwithstanding, no
Employee shall be granted an option under the ESP Plan (i) if, immediately after
the
2
<PAGE>
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 425(d) of the Code) would own stock and/or
hold outstanding options to purchase stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Company or of any subsidiary of the Company, or (ii) which permits his rights to
purchase stock under all employee stock purchase plans (described in Section 423
of the Code) of the Company and its subsidiaries to accrue at a rate which
exceeds twenty-five thousand dollars ($25,000) of fair market value of such
stock (determined at the time such option is granted) for a calendar year in
which such option is outstanding at any time.
4. Offering Periods. The ESP Plan shall be implemented by consecutive
----------------
Offering Periods with the first Offering Period commencing on or about July 1,
1995, and ending on December 31, 1995. Thereafter, Offering Periods shall
commence on January 1 and July 1 of each year, and continue thereafter until
terminated in accordance with Section 20 hereof. Subject to the shareholder
approval requirements of Section 20, the Board of Directors of the Company shall
have the power to change the duration of offering periods with respect to future
offerings if such change is announced at least fifteen (15) days prior to the
scheduled beginning of the first offering period to be affected.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the ESP Plan
by completing an ESP Plan Agreement authorizing payroll deductions and filing it
with the Company's Stock Administration office at least ten (10) business days
prior to the applicable Enrollment Date, unless a different time for filing the
ESP Plan Agreement is set by the Board for all eligible Employees with respect
to a given Offering Period.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 11.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her ESP Plan
Agreement, he or she shall elect to have payroll deductions made on each payday
during the Offering Period at a rate that is not less than one percent (1%) and
not greater than twenty percent (20%) of the Compensation, and the aggregate of
such payroll deductions during the Offering Period shall not exceed twenty
percent (20%) of his or her aggregate Compensation during said Offering Period.
(b) All payroll deductions made by a participant shall be
credited to his or her account under the ESP Plan. A participant may not make
any additional payments into such account.
3
<PAGE>
(c) A participant may discontinue his or her participation in the ESP
Plan as provided in Section 11, or may decrease, but not increase, the rate of
payroll deductions during the Offering Period (within the limits of Section
6(a)) by completing or filing with the Company's a new ESP Plan Agreement
authorizing a change in payroll deduction rate. The change in rate shall be
effective with the first full payroll period following ten (10) business days
after the Company's receipt of the new ESP Plan Agreement. A participant's ESP
Plan Agreement shall remain in effect for successive Offering Periods unless
revised as provided herein or terminated as provided in Section 11.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased to 0% at such time during any Offering
Period which is scheduled to end during the current calendar year that the
aggregate of all payroll deductions accumulated with respect to such Offering
Period and any other Offering Period ending within the same calendar year equal
$21,250. Payroll deductions shall recommence at the rate provided in such
participant's ESP Plan Agreement at the beginning of the first Offering Period
which is scheduled to end in the following calendar year, unless terminated by
the participant as provided in Section 11.
(e) A participant in this ESP Plan, who is also a participant in the
Retirement at Micron or Micron Electronics Retirement at Micron Section 401(k)
Plan (each a "RAM Plan" and together the "RAM Plans") and who requests and
receives a hardship distribution from any RAM Plan, is prohibited from making,
and must suspend, for a period of twelve (12) months thereafter, his or her
elective contributions and employee contributions including, without limitation
to the foregoing, any payroll deduction made pursuant to the terms of this ESP
Plan from the date of receipt by that employee of the hardship distribution from
any RAM Plan.
7. Grant of Option.
---------------
(a) On the Enrollment Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Exercise Date during such Offering Period up to a number of
shares of the Company's Common Stock determined by dividing such Employee's
payroll deductions accumulated prior to such Exercise Date and retained in the
participant's account as of the Exercise Date by the lower of (i) eighty-five
percent (85%) of the fair market value of a share of the Company's Common Stock
on the Enrollment Date or (ii) eighty-five percent (85%) of the fair market
value of a share of the Company's Common Stock on the Exercise Date; provided
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 13 hereof. Exercise of the option shall occur as provided in Section 8,
unless the participant has withdrawn pursuant to Section 11, and shall expire on
the last day of the Offering Period. Fair market value or a share of the
Company's Common Stock shall be determined as provided in Section 7(b) herein.
4
<PAGE>
Notwithstanding anything to the contrary set forth herein, the maximum number of
shares which any Employee may purchase on any Exercise Date shall not exceed
5,000 shares.
(b) The option price per share of the shares offered in a given
Offering Period shall be the lower of: (i) 85% of the fair market value of a
share of the Common Stock of the Company on the Enrollment Date; or (ii) 85% of
the fair market value of a share of the Common Stock of the Company on the
Exercise Date. The fair market value of the Company's Common Stock on a given
date shall be determined by the Board in its discretion; provided, however, that
effective for Offering Periods beginning on and after July 1, 1999, where there
is a public market for the Common Stock the fair market value per share shall be
the closing sales price on the Nasdaq National Market on the last market trading
day preceding such date, as reported in The Wall Street Journal.
8. Exercise of Option. Unless a participant withdraws from the ESP Plan
------------------
as provided in Section 11, his or her option for the purchase of shares will be
exercised automatically on the Exercise Date of the Offering Period, and the
maximum number of full shares subject to option will be purchased for him or her
at the applicable option price with the accumulated payroll deductions in his
account. The shares purchased upon exercise of an option hereunder shall be
deemed to be transferred to the participant on the Exercise Date. During his or
her lifetime, a participant's option to purchase shares hereunder is exercisable
only by such participant.
9. Restrictions on Transfer of Shares. Shares purchased upon exercise of
----------------------------------
a participant's option may not be transferred by the participant for a period of
one (1) year from the Exercise Date. This transfer restriction shall be earlier
terminated in the event of a participant's permanent disability or death, or
upon the involuntary transfer of the shares due to divorce, judicial declaration
of insolvency or bankruptcy or other form of involuntary transfer.
10. Delivery. Immediately following the Exercise Date of each Offering
--------
Period, unless a participant requests the issuance of a certificate representing
the participant's shares, the Company shall promptly record the participant's
full shares in book entry form. Upon request from a participant, or upon the
involuntary transfer of a participant's shares, the Company shall arrange for
the delivery to the participant of a certificate representing the full shares
purchased. Certificates issued which are subject to the transfer restriction
shall bear a legend in a conspicuous place referencing the restriction. Any cash
remaining to the credit of a participant's account under the ESP Plan after a
purchase by the participant of shares at the termination of each Offering
Period, which is insufficient to purchase a full share of Common Stock, shall be
returned to said participant or retained in the participant's account for the
subsequent Offering Period, as determined by the Company as to all participants
for a given Offering Period.
5
<PAGE>
11. Withdrawal; Termination of Employment.
-------------------------------------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to such participant's account under the ESP Plan at any time
prior to the Exercise Date of the Offering Period by completing an ESP Plan
Agreement indicating the participant's desire to withdraw from the ESP Plan and
delivering it to the Company's Stock Administration Office. All of the
participant's payroll deductions credited to his or her account will be paid to
him or her promptly after receipt of the ESP Plan Agreement and the
participant's option for the current Offering Period will be automatically
terminated, and no further payroll deductions for the purchase of shares will be
made during the Offering Period. If a participant withdraws from an Offering
Period, payroll deductions will not resume at the beginning of the succeeding
Offering Period unless the participant delivers to the Company a new ESP Plan
Agreement as described in Section 5(a).
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Exercise Date of the Offering Period for any reason,
including retirement or death, the payroll deductions credited to such
participant's account will be returned to him or her or, in the case of his or
her death, to the person or persons entitled thereto under Section 15, and such
participant's option will be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the Employee is a participant, he or she will be deemed
to have elected to withdraw from the ESP Plan and the payroll deductions
credited to his or her account will be returned to him or her and the option
terminated.
(d) A participant's withdrawal from an Offering Period will not have
any effect upon his or her eligibility to participate in a succeeding Offering
Period or in any similar ESP Plan which may hereafter be adopted by the Company.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the ESP Plan.
13. Stock.
-----
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the ESP Plan shall be 2,500,000 shares,
subject to adjustment upon changes in capitalization of the Company as provided
in Section 19. If the total number of shares which would otherwise be subject
to options granted pursuant to Section 7(a) hereof on the Enrollment Date of an
Offering Period exceeds the number of shares then available under the ESP Plan
(after deduction of all shares for which options have been exercised or are then
outstanding), the Company shall make a pro rata allocation of the shares
remaining available for option grant in as
6
<PAGE>
uniform a manner as shall be practicable and as it shall determine to be
equitable. In such event, the Company shall give written notice of such
reduction of the number of shares subject to the option to each participant
affected thereby and shall similarly reduce the rate of payroll deductions, if
necessary.
(b) The participant will have no interest or voting right in shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the ESP Plan will
be registered in the name of the participant or, if requested by the
participant, in the name of the participant and his or her spouse.
14. Administration. The ESP Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The administration,
interpretation or application of the ESP Plan by the Board or its committee
shall be final, conclusive and binding upon all participants. Members of the
Board who are eligible Employees are permitted to participate in the ESP Plan,
provided that:
(a) Members of the Board who are eligible to participate in the ESP
Plan may not vote on any matter affecting the administration of the ESP Plan or
the grant of any option pursuant to the ESP Plan.
(b) If a Committee is established to administer the ESP Plan, no
member of the Board who is eligible to participate in the ESP Plan may be a
member of the Committee.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the ESP Plan in the event of such participant's death subsequent to the end of
the Offering Period but prior to delivery to him of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the ESP Plan in the
event of such participant's death prior to the Exercise Date of the Offering
Period.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the ESP Plan who is
living at the time of such participant's death, the Company shall deliver such
shares and/or cash to the executor or administrator of the estate of the
participant, or if no such executor or administrator has been appointed (to the
knowledge of the Company), the Company, in its discretion, may deliver such
shares and/or cash to the spouse or to any one or more dependents or relatives
of the participant, or if no spouse, dependent or relative is known to the
Company, then to such other person as the Company may designate.
7
<PAGE>
16. Transferability of Rights. Neither payroll deductions credited to a
-------------------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the ESP Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 11.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the ESP Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual statements of accounts will be maintained for each
-------
participant in the ESP Plan. Statements of account will be given to
participating Employees; on no less than an annual basis, promptly following the
Exercise Date, which statements will set forth the amounts of payroll
deductions, the per share purchase price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization. Subject to any required
------------------------------------------
action by the shareholders of the Company, the number of shares of Common Stock
covered by each option under the ESP Plan which has not yet been exercised and
the number of shares of Common Stock which have been authorized for issuance
under the ESP Plan but have not yet been placed under option (collectively, the
"Reserves"), as well as the price per share of Common Stock covered by each
option under the ESP Plan which has not yet been exercised, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of shares of its outstanding Common Stock, and
in the event of the Company being consolidated with or merged into any other
corporation.
8
<PAGE>
20. Amendment or Termination. The Board of Directors of the Company may at
------------------------
any time terminate or amend the ESP Plan. Except as provided in Section 19, no
such termination can affect options previously granted, nor may an amendment
make any change in any option theretofore granted which adversely affects the
rights of any participant, nor may an amendment be made without prior approval
of the shareholders of the Company (obtained in the manner described in Section
23) if such amendment would:
(a) Increase the number of shares that may be issued under the ESP
Plan;
(b) Change the designation of the employees (or class of employees)
eligible for participation in the ESP Plan; or
(c) Materially increase the benefits which may accrue to participants
under the ESP Plan.
21. Dissolution, Merger or Asset Sale. In the event of the proposed
---------------------------------
dissolution or liquidation of the Company, the Offering Period will terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board. In the event of a proposed sale of all or substantially
all of the assets of the Company, or the Merger of the Company with or into
another corporation, each option under the ESP Plan shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Board determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
to shorten the Offering Periods then in progress by setting a new Exercise Date
(the "New Exercise Date"). If the Board shortens the Offering Periods then in
progress in lieu of assumption or substitution in the event of a merger or sale
of assets, the Board shall notify each participant in writing, at least ten (10)
business days prior to the New Exercise Date, that the Exercise Date for his
option has been changed to the New Exercise Date and that his option will be
exercised automatically on the New Exercise Date, unless prior to such date he
has withdrawn from the Offering Period as provided in Section 11 hereof. For
purposes of this paragraph, an option granted under the ESP Plan shall be deemed
to be assumed if, following the sale of assets or merger, the option confers the
right to purchase, for each share of Common Stock subject to the option
immediately prior to the sale of assets or merger, the consideration (whether
stock, cash or other securities or property) received in the sale of assets or
merger by holders of Common Stock for each share of Common Stock held on the
effective date of the transaction (and if such holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding shares of Common Stock); provided, however, that if such
consideration received in the sale of assets or merger was not solely common
stock of the successor corporation or its parent (as defined in Section 424(e)
of the Code), the Board may, with the consent of the successor corporation,
provide for the consideration to be received upon exercise of the option to be
solely common stock of the successor
9
<PAGE>
corporation or its parent equal in fair market value to the per share
consideration received by holders of Common Stock and the sale of assets or
merger.
22. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the ESP Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof. Unless
changed by the Company, all such Notices or other communications shall be
directed to the Company's Stock Administration Department.
23. Shareholder Approval. Continuance of the ESP Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve months before or after
the date the ESP Plan is adopted. If such shareholder approval is obtained at a
duly held shareholders' meeting, it may be obtained by the affirmative vote of
the holders of a majority of the shares of the Company present or represented
and entitled to vote thereon, which approval shall be (i) solicited
substantially in accordance with Section 14(a) of the Securities Act of 1934, as
amended (the "Act") and the rules and regulations promulgated thereunder, or
(ii) solicited after the Company has furnished in writing to the holders
entitled to vote substantially the same information concerning the ESP Plan as
that which would be required by the rules and regulations in effect under
Section 14(a) of the Act at the time such information is furnished.
In the case of shareholder approval by written consent, it must be
obtained by the unanimous written consent of all shareholders of the Company, or
by written consent of a smaller percentage of shareholders but only if the Board
determines, on the basis of advice of the Company's legal counsel, that the
written consent of such a smaller percentage of shareholders will comply with
all applicable laws and will not adversely affect the qualifications of the ESP
Plan under Section 423 of the Code.
24. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, and the Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange or national
market system upon which the shares may then be listed, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
10
<PAGE>
25. Term of ESP Plan. The ESP Plan shall become effective upon the earlier
----------------
to occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 23. It shall continue in
effect for a term of ten (10) years unless sooner terminated under Section 20.
11
<PAGE>
Exhibit 21
Micron Electronics, Inc.
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
State (or jurisdiction) Percentage
in which Ownership
Name Incorporated by Registrant
- -------------------------------------------------- ----------------------- --------------
<S> <C> <C>
MEI California, Inc. California 100%
Micron Electronics (H.K.) Limited Hong Kong 100%
Micron Electronics Japan K.K. Japan 100%
Micron Overseas Trading, Inc. Barbados 100%
Micron PC, Inc. Delaware 100%
Micron Commercial Computer Systems, Inc. Delaware 100%
Micron Government Computer Systems, Inc. Delaware 100%
Micron Computer Services, Inc. Delaware 100%
SpecTek Products, LLC Delaware 100%
Micron Electronics International, Inc. Delaware 100%
Micron Computer of Canada, Inc. Canada 100%
Micron PC Web Services, Inc. Delaware 100%
NetLimited, Inc., d.b.a. HostPro California 100%
Micron Internet Services, Inc. Delaware 100%
Micron Electronics Asia-Pacific Holdings, Inc. B.V.I. 100%
Micron Electronics Asia-Pacific Operations, Inc. B.V.I. 100%
Micron Electronics Asia-Pacific Trading, Ltd. Hong Kong 100%
</TABLE>
50
<PAGE>
Exhibit 23
Micron Electronics, Inc.
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statement
of Micron Electronics, Inc. on Form S-3 (File No. 333-14035) and on Form S-8
(File No. 33-63701) of our report, dated September 27, 1999, relating to the
consolidated financial statements and financial statement schedule, which
appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Boise, Idaho
September 27, 1999
51
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-02-1999
<PERIOD-START> SEP-04-1998
<PERIOD-END> SEP-02-1999
<CASH> 200,950
<SECURITIES> 137,528
<RECEIVABLES> 159,007
<ALLOWANCES> 6,349
<INVENTORY> 17,521
<CURRENT-ASSETS> 544,066
<PP&E> 244,494
<DEPRECIATION> 84,635
<TOTAL-ASSETS> 733,531
<CURRENT-LIABILITIES> 247,325
<BONDS> 0
0
0
<COMMON> 963
<OTHER-SE> 457,536
<TOTAL-LIABILITY-AND-EQUITY> 733,531
<SALES> 1,437,829
<TOTAL-REVENUES> 1,437,829
<CGS> 1,167,584
<TOTAL-COSTS> 1,394,608
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (15,897)
<INCOME-PRETAX> 59,118
<INCOME-TAX> 22,594
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,524
<EPS-BASIC> 0.38
<EPS-DILUTED> 0.38
</TABLE>
