<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-Q
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 17932
-----------------------
Micron Electronics, Inc.
------------------------
(Exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or organization: Minnesota
-----------------------
Internal Revenue Service - Employer Identification No. 41-1404301
-----------------------
900 East Karcher Road, Nampa, Idaho 83687
(208) 898-3434
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of outstanding shares of the registrant's common stock as of
April 3, 2000 was 96,559,455.
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
Micron Electronics, Inc.
Consolidated Statements of Income
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
March 2, March 4, March 2, March 4,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 333,760 $ 373,600 $ 686,712 $ 777,097
Cost of goods sold 267,047 310,208 533,279 644,887
--------- --------- --------- ---------
Gross margin 66,713 63,392 153,433 132,210
Selling, general and administrative 60,711 56,150 129,569 108,546
Research and development 557 1,128 1,133 2,579
Other expense, net 1,062 3,865 1,497 3,906
--------- --------- --------- ---------
Operating income 4,383 2,249 21,234 17,179
Interest income, net 3,817 4,531 7,850 8,559
--------- --------- --------- ---------
Income before taxes 8,200 6,780 29,084 25,738
Income tax provision 2,476 2,611 8,740 9,910
--------- --------- --------- ---------
Net income $ 5,724 $ 4,169 $ 20,344 $ 15,828
========= ========= ========= =========
Earnings per share:
Basic $ 0.06 $ 0.04 $ 0.21 $ 0.16
Diluted 0.06 0.04 0.21 0.16
Number of shares used in per share
calculation:
Basic 96,357 96,137 96,318 96,045
Diluted 96,567 97,080 96,490 97,174
Consolidated Statements of Comprehensive Income
For the quarter ended For the six months ended
March 2, March 4, March 2, March 4,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Net income $ 5,724 $ 4,169 $ 20,344 $ 15,828
Foreign currency translation - 345 - (5)
--------- --------- --------- ---------
Comprehensive income $ 5,724 $ 4,514 $ 20,344 $ 15,823
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
Micron Electronics, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except par value amounts)
(Unaudited)
<TABLE>
<CAPTION>
As of March 2, 2000 September 2, 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 196,824 $ 200,950
Liquid investments 109,151 137,528
Receivables, net 144,469 152,658
Inventories 27,778 17,521
Deferred income taxes 13,152 14,819
Other current assets 10,612 20,590
---------- ----------
Total current assets 501,986 544,066
Property, plant and equipment, net 197,627 159,859
Acquired intangibles and goodwill, net 70,854 22,580
Other assets 11,149 7,026
---------- ----------
Total assets $ 781,616 $ 733,531
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 242,820 $ 214,426
Accrued licenses and royalties 9,557 20,231
Current debt 3,189 7,000
---------- ----------
Total current liabilities 255,566 241,657
Long-term debt 2,333 5,001
Deferred income taxes 23,822 11,926
Other liabilities 20,625 16,448
---------- ----------
Total liabilities 302,346 275,032
---------- ----------
Common stock, $0.01 par value, authorized 150.0 million shares;
issued and outstanding 96.4 million and 96.3 million shares,
respectively 964 963
Additional capital 128,378 127,951
Retained earnings 349,928 329,585
---------- ----------
Total shareholders' equity 479,270 458,499
---------- ----------
Total liabilities and shareholders' equity $ 781,616 $ 733,531
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Micron Electronics, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Six months ended March 2, 2000 March 4, 1999
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,344 $ 15,828
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,624 15,928
Provision for (recovery of) doubtful accounts 897 (8)
Changes in operating assets and liabilities, net of acquisitions:
Receivables 7,480 (11,103)
Inventories (10,256) 3,483
Other current assets 10,108 -
Accounts payable and accrued expenses 30,020 23,801
Accrued licenses and royalties (10,674) (3,034)
Deferred income taxes 6,376 2,442
Other (2,459) (617)
--------- ---------
Net cash provided by operating activities 70,460 46,720
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (58,247) (25,287)
Proceeds from sales of property, plant and equipment - 329
Purchases of held to maturity investments (124,319) (77,840)
Acquisitions, net of cash acquired (43,354) -
Proceeds from maturities of investment securities 154,900 46,205
Other 6,368 (904)
--------- ---------
Net cash used for investing activities (64,652) (57,497)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of debt (10,361) (14,369)
Proceeds from issuance of common stock 427 3,998
--------- ---------
Net cash used for financing activities (9,934) (10,371)
--------- ---------
Net decrease in cash and cash equivalents (4,126) (21,148)
Effect of exchange rate changes on cash and cash equivalents - 330
Cash and cash equivalents at beginning of period 200,950 328,537
--------- ---------
Cash and cash equivalents at end of period $ 196,824 $ 307,719
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
1. Unaudited Interim Financial Statements
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly the financial position of Micron
Electronics, Inc. and its subsidiaries (collectively, the "Company") and their
results of operations and cash flows. Operating results for the three and six-
month periods ended March 2, 2000 are not necessarily indicative of the results
that may be expected for the full year. Certain reclassifications, none of which
affects net income, have been made to present the financial statements on a
consistent basis.
This report on Form 10-Q for the second quarter ended March 2, 2000 should
be read in conjunction with the Company's Report on Form 10-K for the fiscal
year ended September 2, 1999. Portions of the accompanying financial statements
are derived from the audited year-end financial statements of the Company dated
September 2, 1999. The Company's fiscal year is a 52 or 53 week period ending on
the Thursday closest to August 31. The 2000 and 1999 fiscal years each contain
52 weeks. As of March 2, 2000, the Company was 61% owned by Micron Technology,
Inc. ("MTI").
Revenue from product sales to customers is generally recognized upon
shipment. A provision for estimated sales returns and discounts is recorded in
the period in which the sales are recognized. Revenue from Internet access and
Web hosting 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.
Recently issued accounting standards include Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," issued in June 1998. SFAS No. 133 requires all
derivatives to 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 fiscal 2001. The Company is currently evaluating the effect
SFAS No. 133 will have on its future results of operations and financial
position.
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements" in December 1999.
The SAB summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in the financial statements.
Adoption is required by the first quarter of fiscal 2001, and early adoption is
permitted. The Company is currently evaluating the effect this SAB may have on
its revenue recognition practices and results of operations.
2. Receivables
March 2, 2000 September 2, 1999
- ----------------------------------------------------------------------------
Trade receivables $ 133,184 $ 144,996
Receivables from affiliates 5,041 1,435
Income taxes recoverable from MTI 7,085 6,602
Other 5,634 5,974
Allowance for doubtful accounts (4,467) (3,846)
Allowance for returns and discounts (2,008) (2,503)
--------- ---------
$ 144,469 $ 152,658
========= =========
5
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
3. Inventories
March 2, 2000 September 2, 1999
- ------------------------------------------------------------------------------
Raw materials and supplies $ 13,024 $ 5,931
Work in progress 9,319 8,582
Finished goods 5,435 3,008
-------- --------
$ 27,778 $ 17,521
======== ========
4. Property, Plant and Equipment
March 2, 2000 September 2, 1999
- ------------------------------------------------------------------------------
Land $ 1,234 $ 1,234
Buildings 58,489 38,081
Equipment and software 210,702 152,363
Assets in progress 22,886 52,816
-------- --------
293,311 244,494
Less accumulated depreciation and amortization (95,684) (84,635)
-------- --------
$197,627 $159,859
======== ========
5. Acquired Intangibles and Goodwill
March 2, 2000 September 2, 1999
- ------------------------------------------------------------------------------
Acquired intangibles $ 19,300 $ 5,400
Goodwill 54,241 17,386
-------- --------
73,541 22,786
Less accumulated amortization (2,687) (206)
-------- --------
$ 70,854 $ 22,580
======== ========
Amortization expense related to goodwill and acquired intangible assets amounted
to $1.8 million and $2.5 million for the second quarter and first six months of
fiscal 2000, respectively. The Company did not have any amortization expense of
goodwill or acquired intangible assets during the corresponding periods of
fiscal 1999.
6. Accounts Payable and Accrued Expenses
March 2, 2000 September 2, 1999
- ------------------------------------------------------------------------------
Trade accounts payable $155,945 $150,957
Payable to affiliates 53,825 31,055
Salaries, wages and benefits 16,029 16,850
Income taxes payable 1 36
Deferred revenue - current 5,538 3,328
Accrued warranty - current 11,272 10,116
Other 210 2,084
-------- --------
$242,820 $214,426
======== ========
6
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
7. Other Liabilities
March 2, 2000 September 2, 1999
- ------------------------------------------------------------------------------
Accrued stock compensation $ 4,707 $ 3,892
Deferred revenue - long-term 5,658 4,126
Accrued warranty - long-term 2,104 1,542
Other 8,156 6,888
-------- --------
$ 20,625 $ 16,448
======== ========
8. Debt
March 2, 2000 September 2, 1999
- ------------------------------------------------------------------------------
Notes payable in periodic installments
through November 2002, weighted average
interest rate of 8.80% and 7.85%,
respectively $ 3,538 $ 9,722
Capitalized lease obligations payable
in monthly installments through
November, 2002, interest rate of
10.64% and 7.61%, respectively 1,984 2,279
-------- --------
5,522 12,001
Less current portion (3,189) (7,000)
-------- --------
$ 2,333 $ 5,001
======== ========
The Company has an unsecured credit agreement, expiring June 2001, with a
group of financial institutions providing for borrowings totaling $100 million.
As of March 2, 2000, 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.
Certain of the Company's notes payable are collateralized by equipment with a
total cost of $10 million and accumulated depreciation of $8 million as of March
2, 2000. Equipment under capital leases net of accumulated amortization was $2
million as of March 2, 2000.
9. Transactions with Affiliates
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
<S> <C> <C> <C> <C>
March 2, March 4, March 2, March 4,
2000 1999 2000 1999
------- ------- ------- -------
Net sales $ 1,158 $ 1,154 $ 2,751 $ 1,752
Inventory purchases 18,144 11,303 39,187 22,432
Component recovery agreement expenses 31,124 19,707 56,553 35,792
Administrative services and other expenses 88 115 213 229
Sub-lease to MTI 48 - 96 -
Property, plant and equipment purchases 4,840 1,665 5,139 3,535
Property, plant and equipment sales 4,317 - 6,123 -
</TABLE>
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. These
components are used in the Company's SpecTek 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 income. The cost of obtaining such components for the first quarter
of fiscal 2000 was 50.0% of pre-tax income attributable to the sale of such
7
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
components compared to 62.5% for the second and third quarter of fiscal 2000.
The maximum cost payable by the Company to MTI for components for the fourth
quarter of fiscal 2000 is 87.5% of pre-tax income, unless otherwise agreed by
the Company and MTI. The cost to the Company for components obtained from MTI
during fiscal 2001 is not subject to any maximum. The Company recognizes costs
incurred under the Component Recovery Agreement as a component of cost of
goods sold in the consolidated statements of income.
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 have currently agreed 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, as of 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.
10. Income Taxes
The effective income tax rate of 30.0% for the second quarter and first six
months of fiscal 2000 principally reflects the federal statutory rate, net of
the effect of state taxes and the effects of the Company's wholly-owned foreign
sales corporation, tax exempt securities, and federal research and development
credits. The effective tax rate of 38.5% for the second quarter and first six
months of fiscal 1999 principally reflects the federal statutory rate, net of
the effect of state taxes.
11. Earnings Per Share
Basic earnings per share is computed using the weighted average number of
common shares outstanding. Diluted earnings per share is computed using the
weighted average number of common shares outstanding and potential common shares
outstanding. Potential shares result from the assumed exercise of outstanding
stock options. Diluted earnings per share excludes the effect of antidilutive
stock options, aggregating 5 million in the second quarter and first six months
of fiscal 2000 and 1 million in the second quarter and first six months of
fiscal 1999, respectively.
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
March 2, March 4, March 2, March 4,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income available to common shareholders $ 5,724 $ 4,169 $20,344 $15,828
======= ======= ======= =======
Common shares outstanding:
Weighted average shares outstanding - basic 96,357 96,137 96,318 96,045
Effect of dilutive stock options 210 943 172 1,129
------- ------- ------- -------
Weighted average shares outstanding - diluted 96,567 97,080 96,490 97,174
======= ======= ======= =======
Earnings per share:
Basic $ 0.06 $ 0.04 $ 0.21 $ 0.16
Diluted 0.06 0.04 0.21 0.16
</TABLE>
8
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
12. Commitments
As of March 2, 2000, the Company had commitments of $24 million for
purchases of equipment and software, and $1 million for construction of
buildings. In addition, the Company is required to make minimum royalty payments
under certain agreements and periodically enters into purchase commitments with
certain suppliers.
13. Contingencies
Periodically, the Company is made aware that technology used by the Company
may infringe on intellectual property rights held by others. The Company has
accrued a liability and charged operations for the estimated costs of settlement
or adjudication of asserted and unasserted claims for alleged infringement prior
to the balance sheet date. Resolution of these claims could have a material
adverse effect on future results of operations and could require changes in the
Company's products or processes.
The Company is involved in other non-intellectual property litigation and
administrative proceedings primarily arising in the normal course of its
business. In the opinion of management, the Company's recovery, if any, or the
Company's liability, if any, under any litigation or administrative proceedings
would not materially affect its financial condition, results of operations or
cash flows.
During the first quarter of fiscal 1997, the Company began to collect and
remit applicable sales or use taxes in nearly all states. In association
therewith, the Company is party to agreements with nearly all states, which
generally limit the liability of the Company, if any, for non-remittance of
sales and use taxes prior to such agreements' effective dates. The Company has
accrued a liability for the estimated settlement costs of issues related to
sales and use taxes not covered by such agreements. Management believes the
resolution of any matters relating to the non-remittance of sales and use taxes
will not materially affect the Company's financial condition or results of
operations.
14. Acquisitions
On December 14, 1999, the Company acquired LightRealm, Inc. ("LightRealm"),
a Kirkland, Washington-based Web and applications hosting and Internet access
company serving small-and medium-size businesses. The Company acquired
LightRealm for approximately $48 million in cash, including expenses. The
acquisition was accounted for as a purchase with the purchase price allocated
to the net assets acquired, including intangible assets, based on their fair
values, and related deferred taxes. Certain of these allocations have been
made on the basis of preliminary information and estimates and are subject to
change upon finalization. The LightRealm purchase agreement provides for an
escrow of $10 million to secure certain obligations and warranties of its
selling shareholders. Under certain circumstances as defined in the stock
purchase agreement, the selling shareholders have the right to exchange their
pro-rata escrow balance for capital stock of the Company's e-services
subsidiary not to exceed an aggregate of 1.75% of the shares issued.
In addition, the Company acquired the outstanding common stock of
NetLimited, d.b.a. HostPro, on August 2, 1999 and acquired the property and
equipment of MTI's Internet service operating division, Micron Internet
Services, on September 2, 1999, and operating results are included in the
statements of operations since the acquisition dates.
9
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
15. 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 PC products, offer Internet access and Web hosting services, and
manufacture 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 FAS 131. The Company's three reportable segments are PC Systems, e-Services
and SpecTek Operations. The primary products of the PC Systems segment include
a wide range of desktop and notebook PC Systems, multiprocessor network servers,
and hardware services. The e-Services segment focuses on Internet access and
Web hosting. The primary products of the SpecTek Operations include DRAM,
SDRAM, and memory modules.
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 between PC Systems and SpecTek Operations. Such
charges are based on estimated costs.
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
March 2, March 4, March 2, March 4,
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales
PC Systems $243,759 $323,471 $503,300 $687,630
e-Services 7,170 - 11,310 -
SpecTek Operations 84,001 50,841 174,019 90,730
-------- -------- -------- --------
Total segment sales 334,930 374,312 688,629 778,360
Elimination of internal net sales (1,170) (712) (1,917) (1,263)
-------- -------- -------- --------
Total consolidated net sales $333,760 $373,600 $686,712 $777,097
======== ======== ======== ========
Operating Income (Loss)
PC Systems $(19,050) $(15,681) $(47,767) $(13,681)
e-Services (6,708) - (8,639)
SpecTek Operations 30,436 17,930 78,466 30,860
-------- -------- -------- --------
Total segment operating income 4,678 2,249 22,060 17,179
Elimination of intersegment income (295) - (826) -
-------- -------- -------- --------
Total segment operating income $ 4,383 $ 2,249 $ 21,234 $ 17,179
======== ======== ======== ========
Capital Expenditures for Property, Plant and Equipment
PC Systems $ 15,694 $ 8,344 $ 31,988 $ 15,438
e-Services 4,225 - 5,365 -
SpecTek Operations 20,092 3,956 22,742 9,849
-------- -------- -------- --------
Total segment capital expenditures $ 40,011 $ 12,300 $ 60,095 $ 25,287
======== ======== ======== ========
</TABLE>
10
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements - Continued
(Tabular amounts in thousands, except per share amounts)
(Unaudited)
16. Subsequent Event
On March 16, 2000, the Company acquired Worldwide Internet Publishing
Company ("WIPC"), a Boca Raton, Florida-based Web hosting company serving small-
and medium-size businesses. The Company acquired all of the outstanding stock of
WIPC for approximately $13 million in cash. The acquisition will be accounted
for using the purchase method of accounting.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
(Tabular amounts in thousands)
Statements contained in this Form 10-Q that are not purely historical are
forward-looking statements and are being provided in reliance upon the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. All
forward-looking statements are made as of the date hereof and are based on
current management expectations and information available to the Company as of
such date. The Company assumes no obligation to update any forward-looking
statement. It is important to note that actual results could differ materially
from historical results or those contemplated in the forward-looking statements.
Forward-looking statements involve a number of risks and uncertainties, and
include trend information. Factors that could cause actual results to differ
materially include, but are not limited to, those identified in "Certain
Factors" and in other Company filings with the Securities and Exchange
Commission. All quarterly references are to the Company's fiscal periods ended
March 2, 2000, September 2, 1999 or March 4, 1999, unless otherwise indicated.
All tabular dollar amounts are stated in thousands.
Overview
Micron Electronics, Inc. and its subsidiaries (hereinafter referred to
collectively as "Micron" or the "Company") is a leading provider of personal
computers, business Internet offerings, Web hosting and business-to-business e-
commerce applications for small-and medium-size businesses, government and
education markets. Under the micronpc.com, HostPro, Micron Internet Services
and SpecTek brands, the Company offers a wide range of innovative products,
services and support. The Company's three reportable segments are PC Systems,
e-Services and SpecTek Operations. The primary products of the PC Systems
segment include a wide range of desktop and notebook PC Systems, multiprocessor
network servers, and hardware services. The e-Services segment focuses on
Internet access and Web hosting through HostPro and Micron Internet Services.
The primary products of the SpecTek Operations segment include DRAM, SDRAM, and
memory modules.
The Company expects to continue its expansion and acquisition strategy to
increase its e-Services capabilities. 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. On December
14, 1999 the Company acquired LightRealm, Inc., a Web and applications hosting
and Internet access company. Subsequent to quarter end, the Company acquired
Worldwide Internet Publishing Company, a Web hosting company. See "Subsequent
Event."
The Company recently announced that it is in the process of engaging an
investment banker to assist in evaluating alternatives for unlocking the value
of its e-services business. However, there can be no assurance that any
available alternatives will be pursued. Additionally, there can be no assurance
that pursuit of such alternatives would have a positive effect on the Company's
financial position or stock price or that the Company's e-Services business
would obtain any particular valuation. Stock prices for companies in the
industry are subject to significant fluctuation. Further, the Company's e-
Services business is subject to a wide variety of other risks and uncertainties.
See "Certain Factors - Internet Services."
In October 1999 the Company announced a new initiative called "Subscription
Computing". This strategic initiative is designed around four core computing
pillars: Web hosting, e-commerce, connectivity, and computer hardware and
desktop management. Subscription Computing, or "computing on demand," allows
customers to choose from an extensive menu of e-Services and hardware products
and services, upgrading the "subscriptions" as they grow their businesses.
Subsequent to quarter end the Company announced a strategic initiative with
Best Buy Co., Inc. to install direct-to-the-manufacturer kiosks in Best Buy's
357 U.S. retail stores in 39 states. This agreement is intended to complement
the Company's direct PC sales force and leverage the Company's supply chain
efficiencies. However, there can be no assurance that this initiative will have
a material positive impact on the Company's financial position or results of
operations.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations-Continued
- -----------------------
(Tabular amounts in thousands)
Results of Operations
Net income for the second quarter of fiscal 2000 was $6 million, or $0.06
per diluted share, on net sales of $334 million compared to net income of $4
million, or $0.04 per diluted share, on net sales of $374 million for the second
quarter of fiscal 1999. Net income for the first six months of fiscal 2000 was
$20 million, or $0.21 per diluted share, on net sales of $687 million compared
to net income of $16 million, or $0.16 per diluted share, on net sales of $777
million for the first six months of fiscal 1999.
Net Sales
- ----------
The following table summarizes the Company's net sales by operating
segment:
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
March 2, March 4, March 2, March 4,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PC Systems $242,589 72.7% $323,471 86.6% $501,383 73.0% $687,630 88.5%
e-Services 7,170 2.1% - - 11,310 1.6% - -
SpecTek Operations 84,001 25.2% 50,129 13.4% 174,019 25.3% 89,467 11.5%
-------- ----- -------- ----- -------- ----- -------- -----
Total net sales $333,760 100.0% $373,600 100.0% $686,712 100.0% $777,097 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
PC Systems
In the second quarter of fiscal 2000, net sales of the Company's PC Systems
decreased 25% from the second quarter of fiscal 1999. This decrease was due to
a 36% decline in consumer and commercial sales resulting in a decrease in the
shipment of notebook and desktop units of 30% and 28%, respectively. A planned
transition to a new notebook supplier in the second quarter of fiscal 2000 was
the primary cause of the decrease in notebook sales, and a lack of a desktop
appliance PC to meet competitive market requirements and generally sluggish
commercial PC demand were primary causes of the decrease in shipments of
commercial desktop products. Sales of PC Systems were 27% lower in the first
six months of fiscal 2000 compared to the first six months of fiscal 1999. This
decrease was due to a 36% decline in consumer and commercial sales resulting in
a decrease in the shipment of notebook and desktop units of 38% and 25%,
respectively. Supply issues encountered in the first fiscal quarter of 2000 and
the planned transition to a new notebook supplier in the second quarter of
fiscal 2000 contributed to the decline in sales.
Sales to governmental entities increased 14% during the second fiscal
quarter of 2000 compared to the second fiscal quarter of 1999 primarily due to
the sale of software licenses in the amount of $14 million. Sales to
governmental entities decreased 7% in the first six months of fiscal 2000
compared to the first six months of fiscal 1999, reflecting increased pricing
competition and lower than usual purchases by federal government agencies. Sales
to governmental entities decreased 21% from the first to the second quarter of
fiscal 2000, reflecting seasonally lower government PC sales. The level of the
Company's government sales is dependent on buying practices of government
entities and the level of these sales may vary from quarter to quarter.
e-Services
Revenue in the e-Services segment was $7 million and $11 million for the
second quarter and first six months of fiscal 2000, respectively. The first
quarter of fiscal 2000 was the first full quarter of operations of this
business. Revenue increased 73% from the first to the second quarter of fiscal
2000, due to a 33% increase in average revenue per hosting account, quarterly
hosting account growth of 104% and an increase of 24% in Internet access
accounts. Adjusting for the LightRealm acquisition, quarterly hosting account
growth for existing properties increased 30%. The Company had 34,900 paid
hosting accounts, more than 34,000 Internet access accounts, over 75,000 paid
hosted Web sites, and 234 dedicated and server accounts at the end of the second
quarter of fiscal 2000.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations-Continued
- -----------------------
(Tabular amounts in thousands)
SpecTek Operations
Net sales of semiconductor memory products were 68% higher in the second
quarter of fiscal 2000 compared to the second quarter of fiscal 1999 primarily
due to a 147% increase in megabits of memory shipped offset by a 33% decrease in
average selling prices. Net sales of semiconductor memory products were 95%
higher in the first six months of fiscal 2000 compared to the first six months
of fiscal 1999, due primarily to a 116% increase in megabits of memory shipped
offset by an 11% decrease in average selling prices. The increase in megabits
of memory shipped in fiscal 2000 compared to fiscal 1999 was primarily due to
product transition to the 64-megabit component from the 16-megabit component,
resulting in increased throughput for substantially all memory products.
Historically, the SpecTek Operations have experienced significant volatility in
product prices, and further volatility in prices for future sales of these
products is anticipated. SpecTek's results of operations are influenced by a
number of factors including pricing for nonstandard semiconductor memory
components and the availability of those components. See "Certain Factors--
SpecTek Operations--Pricing of Memory Products."
<TABLE>
<CAPTION>
Gross Margin
- ------------
For the quarter ended For the six months ended
March 2, March 4, March 2, March 4,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PC Systems $32,480 13.4% $44,479 13.8% $ 68,461 13.7% $ 98,984 14.4%
e-Services 2,358 32.9% - - 3,655 32.3% - -
SpecTek memory products 31,875 37.9% 18,913 37.7% 81,317 46.7% 33,226 37.1%
------- ------- -------- --------
Total gross margin $66,713 20.0% $63,392 17.0% $153,433 22.3% $132,210 17.0%
======= ======= ======== ========
</TABLE>
PC Systems
Gross margin as a percent to sales from the Company's PC operations has
remained relatively flat compared to the second quarter and first six months of
fiscal 1999. The Company continues to experience pricing pressure on sales to
government entities and fierce pricing competition in the consumer and
commercial markets. Additionally, the product sales mix during the first six
months of fiscal 2000 has been unfavorable due to the reduced shipments of
notebook products, which typically contribute higher gross margin percentages.
Lower PC sales volume also pressured gross margin during the first six months of
fiscal 2000.
The Company expects to continue to experience significant gross margin
pressure on sales of its PC products as a result of intense competition in the
PC industry and customer demands for more powerful PC Systems at lower prices.
In addition, the Company's gross margin percentage will continue to depend in
large part on its ability to effectively forecast demand and manage its
inventories of PC components. See ''Certain Factors--PC Systems-- Competition''
and ''Certain Factors--PC Systems--Inventory Management.''
e-Services
The gross margin of the Company's e-Services increased 82% from the first
to the second quarter of fiscal 2000, primarily as a result of the acquisition
of LightRealm, Inc., and 2% as a percentage of sales. Cost of sales for e-
Services primarily represents telecommunications expenses, maintenance and
depreciation of data center and related telecommunication and Web hosting
equipment, salary and benefits for data center and support personnel, and the
cost of hardware sold.
SpecTek Operations
The gross margin realized by the Company's SpecTek Operations was 69%
higher in the second fiscal quarter of 2000 compared to the second fiscal
quarter of 1999 due to a 147% increase in megabits shipped offset by the 33%
decrease in average selling prices. The gross margin was 145% higher in the
first six months of fiscal 2000 compared to fiscal 1999 due to a 116% increase
in megabits shipped offset by an 11% decrease in average selling prices. The
Company has experienced significant volatility in selling prices and expects
average selling prices for its SpecTek Operations products to continue to
exhibit significant volatility. As a result, the gross margin for the Company's
SpecTek Operations could decline and adversely affect the Company's business,
results of operations and cash flows.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations-Continued
- -----------------------
(Tabular amounts in thousands)
Additionally, under the Component Recovery Agreement, the maximum cost to the
Company to obtain components from MTI increases from quarter to quarter during
the term and will likely be significantly higher than historical costs, which
could have a material adverse effect on the Company's results of operations,
including gross margin. The cost of obtaining such components during the first
quarter was 50.0% of pre-tax income attributable to the sale of such components
compared to 62.5% for the second and third quarters of fiscal 2000. The maximum
cost payable by the Company to MTI for components in the fourth quarter of
fiscal 2000 is 87.5% of pre-tax income, unless otherwise agreed by the Company
and MTI. See "Certain Factors--SpecTek Operations--Dependence on Component
Recovery Agreement with MTI."
<TABLE>
<CAPTION>
Operating Expenses
- ------------------
For the quarter ended For the six months ended
March 2, March 4, March 2, March 4,
2000 Change 1999 2000 Change 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Selling, general and administrative $60,771 8.2% 56,150 $129,569 19.4% $108,546
Research and development 557 (50.6)% 1,128 1,133 (56.1)% 2,579
Other expense (income), net 1,062 (72.5)% 3,865 1,497 (61.7)% 3,906
</TABLE>
Selling, general and administrative expenses as a percentage of net sales
for the second quarter and first six months of fiscal 2000 were 18% and 19%,
respectively compared to 15% and 14% for the second quarter and first six months
of fiscal 1999. The increase in costs primarily relate to marketing and
advertising costs associated with a major launch of Subscription Computing and
increased levels of personnel, technical and professional fees, and other
expenses related to newly acquired subsidiaries.
Research and development expenses as a percentage of net sales for the
second quarter and first six months of fiscal 2000 were 0.2%, compared to 0.3%
for the second quarter and first six months of 1999. The decrease is primarily
the result of a discontinuance of certain research and development activities.
Other expense as a percentage of net sales for the second quarter and first
six months of fiscal 2000 were 0.3% and 0.2%, respectively, compared to 1.0% and
0.5% for the second quarter and first six months of 1999. The decrease as a
percentage of sales over the second quarter and first six months of fiscal 1999
is primarily attributable to expenses incurred to consolidate the Micron
Electronics Japan operation into the Company's Nampa operation during the second
quarter of 1999. Other expense in fiscal 2000 is composed primarily of
amortization of goodwill associated with the e-Services acquisitions. The
amount of goodwill and related amortization expense is expected to increase as
the Company continues to execute its acquisition strategy. See "Certain Factors
- -- e-Services -- Acquisitions -- General Acquisition Risk."
Income Tax Provision
The annual effective tax rate was 30.0% in the second quarter and first
six months of fiscal 2000, compared to 38.5% in the second quarter and first six
months of fiscal 1999. The decrease is principally due to benefits received from
the Company's tax-exempt securities, foreign sales corporation and federal
research and development credits.
Liquidity and Capital Resources
As of March 2, 2000, the Company had cash, cash equivalents and liquid
investments of $306 million, representing a decrease of $33 million compared to
September 2, 1999. Principal sources of liquidity for the first six months of
fiscal 2000 were cash flows from operations of $70 million, which were derived
primarily from SpecTek Operations, and proceeds from maturing investments of
$155 million. Principal uses of cash in the first six months of fiscal 2000
were purchases of held to maturity investments of $124 million, property, plant
and equipment expenditures of $58 million and the purchase of LightRealm of $48
million. Pursuant to the Company's Amended and Restated Component Recovery
Agreement with MTI effective September 2, 1999, and subject to certain
conditions, MTI will purchase and lease back to SpecTek equipment as is
reasonably appropriate for SpecTek to perform its component recovery operations.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations-Continued
- -----------------------
(Tabular amounts in thousands)
SpecTek Operations accounted for $23 million of the Company's purchases of
property, plant and equipment in the first six months of fiscal 2000, all of
which property, plant, and equipment is anticipated to be purchased by MTI
under the agreement. As of March 2, 2000, $4 million of this amount had been
purchased by MTI.
The Company has an unsecured credit agreement, expiring June 2001, with a
group of financial institutions providing for borrowings totaling $100 million.
As of March 2, 2000, 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 March 2, 2000, the Company had commitments of $25 million related to
capital expenditures for the expansion and upgrading of facilities and
equipment. The Company anticipates capital expenditures for the expansion and
upgrading of facilities and equipment in fiscal 2000 will be in excess of $145
million, of which $75 million relates to SpecTek Operations and is anticipated
to be purchased by MTI under the Component Recovery Agreement. The Company
expects its future working capital requirements to increase. The Company has
employed cash resources in its e-Services acquisition strategy, and it expects
to continue to do so in the future. The Company believes that currently
available cash and cash equivalents, liquid investments, cash flows from
operations, current credit facilities and equipment financing will be sufficient
to fund its operations for the next six months.
Recently Issued Accounting Pronouncements
Recently issued accounting standards include Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," issued in June 1998. SFAS No. 133 requires all
derivatives to 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
No. 133 will have on its results of operations and financial position.
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements" in December 1999.
The SAB summarizes certain staff views in applying generally accepted accounting
principles to revenue recognition in the financial statements. Adoption is
required by the first quarter of fiscal 2001, and early adoption is permitted.
The Company is currently evaluating the effect this SAB may have on its revenue
recognition practices and results of operations.
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations-Continued
- -----------------------
(Tabular amounts in thousands)
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 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
PC's 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 its
competitors, announcements of technological innovations, new commercial products
or new strategies by competitors, component availability and pricing, and other
factors.
Management
The Company has experienced increased complexity of its operations,
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, the acquisition of Internet service providers and the Company's new
strategic initiative with Best Buy Co., Inc. This increased complexity has
resulted in new and increased responsibilities for the Company's management and
has placed, and continues to place, significant demands upon the Company's
management, operating and financial information systems and other resources and
systems. The Company continues to consider various expansion alternatives,
including expansion of facilities, acquisition or establishment of facilities in
new geographic regions and certain strategic relationships. 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 the technology it uses 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
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations-Continued
- -----------------------
(Tabular amounts in thousands)
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, results of operations and cash flows.
Subscription Computing Initiative
In October 1999, the Company announced a new initiative called
"Subscription Computing." This strategic initiative is designed around four core
computing pillars: Web hosting, e-commerce, connectivity and computer hardware
and desktop management. Subscription Computing, or "computing on demand," allows
customers to choose from an extensive menu of e-services and hardware products
and services, upgrading the "subscriptions" as they grow their businesses. The
Company delivers the personalized computing solutions on a single monthly bill.
The introduction of Subscription Computing increases the complexity of the
Company's PC operations and may place a significant strain on operating,
financial and managerial resources. There can be no assurance that the Company's
resources will be adequate to support this initiative.
MTI Ownership of Common Stock of the Company
As of March 2, 2000, MTI owned approximately 61% 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 adverse effect on the Company's business,
financial position, results of operations and cash flows. There can be no
assurance that the Company will be able to retain 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 Company did not experience any disruption to its business operations
resulting from the transition to the year 2000. During the first three months
of the calendar year 2000, the Company did not encounter significant issues
related to its transactions with customers and suppliers. The Company is
continuing to monitor both its internal systems and transactions with customers
and suppliers for any indication of Year 2000 related problems.
As of the end of the first six months of fiscal 2000, the Company incurred
aggregate incremental costs of $2.3 million related to Year 2000 readiness
programs with respect to internal IT and non-IT systems and third party
providers. The incremental costs include allocated costs of the Company's
information technology organization incurred in connection with Year 2000
compliance projects. The Company does not anticipate incurring any further
costs related to Year 2000 readiness programs. This estimate, however, does
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations-Continued
- -----------------------
(Tabular amounts in thousands)
not include potential costs related to any customer or other product liability
claims. On October 26, 1998, the Company was sued in state court in Canyon
County, Idaho, by Hannah Films, Inc., on behalf of itself and on behalf of an
unidentified and uncertified class of plaintiffs alleging fraud, breach of
implied warranty of merchantability, violation of the Magnuson-Moss Consumer
Protection Act, and violation of the Idaho Consumer Protection Act arising out
of the Year 2000 status of a personal computer sold by the Company to Hannah
Films, Inc., in October 1995. In May 1999, the case was dismissed with
prejudice. The plaintiff has filed a notice of appeal. While there can be no
assurance as to the ultimate disposition of the case, the Company does not
currently believe that the resolution of this matter will have a material
adverse effect on the Company's business, financial position, 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.
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 affect the Company's business, financial position,
and results of operations.
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 products have historically
benefited from increased name recognition and market acceptance of the Company's
PC products, 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 suppliers and from
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations-Continued
- -----------------------
(Tabular amounts in thousands)
foreign and domestic suppliers of PC products that decide to implement, or
devote additional resources to a direct sales strategy. In order to gain an
increased share of the United States PC direct sales market, these competitors
may effect a pricing strategy that is more aggressive than the current pricing
in the direct sales market or may have pricing strategies influenced by
relative fluctuations in the U.S. dollar compared to other currencies. The
Company's strategic initiative with Best Buy Co., Inc. will face significant
competition from both direct and retail competitors.
The Company believes that the rate of growth in worldwide sales of PC
products, particularly in the United States, where the Company sells a
substantial majority of its PC products, 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 products 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 inaccurate forecasting of
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 products and components. In
addition, because high volumes of quality components are required for the
manufacture of the Company's PC products, 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 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. To continue its asset management 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. Exclusively Intel Corporation manufactures the
microprocessors currently used in the Company's PC systems, 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
also relies, to a certain extent, upon component suppliers concentrated in
specific geographic areas. The Company's supply of notebook computer parts was
disrupted in the aftermath of the Taiwan earthquake in September 1999. While
the earthquake-related supply issues appear to have been essentially resolved,
there is no assurance that sales of products affected by such events in the
future will immediately, or ever, return to levels achieved prior to the event.
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
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations- Continued
- ------------------------
(Tabular amounts in thousands)
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.
e-Services
- ----------
Competition
The market for Internet access and Web hosting is extremely competitive. Some
of the primary competitive factors in this industry include having a recognized
and trusted brand name; maintaining a secure reliable national network with
sufficient capacity to support continued growth; maintaining Internet system
engineering and technical expertise; introducing new products and services in a
timely manner; maintaining sufficient financial resources; providing excellent
customer care through prompt and capable technical support and offering
competitive prices. As the growth of Internet usage increases, competition is
expected to intensify. Some of the Company's current and prospective
competitors include national, regional and local Internet service providers;
cable television companies; direct broadcast satellite and wireless
communications providers; on-line service providers; Web hosting providers;
global, national, and regional long distance companies and local exchange
telecommunications companies.
Many competitors have greater market presence, brand recognition, network
capacity and financial resources than the Company. A large number of companies
including Verio Inc. and Concentric Network Corporation offer e-services similar
to those provided by the Company. Large diversified companies such as Intel
Corporation, International Business Machines Corporation, and AT&T Corporation
have indicated their intent to enter into the e-services market, which will
intensify the competition. The Company competes with major long distance
companies who offer Internet access services, and the recent federal regulation
of the telecommunications industry has created more opportunities for local
carriers thereby further increasing competition. In addition, major cable
companies and other alternative service providers such as those companies
utilizing wireless terrestrial and satellite based service technologies have
announced plans to offer Internet access and related services. In addition to
possessing large existing customer bases, many of these companies have greater
network coverage, market presence and financial resources than the Company.
These companies also possess the ability to bundle Internet access with basic
local and long distance telecommunications services. This bundling may have an
adverse effect on the Company's ability to compete effectively and may result in
pricing pressures that would adversely affect its business, financial condition,
results of operations and cash flows.
Acquisitions
In the fourth quarter of fiscal 1999, the Company acquired all of the
outstanding common stock of HostPro for approximately $22 million in cash and
the property and equipment of MIS, a division of MTI, for its book value of
approximately $2 million in cash. On December 14, 1999 the Company acquired
LightRealm for approximately $48 million in cash. In March 2000, the Company
acquired WIPC for approximately $13 million. - See "Subsequent Event." There
can be no assurance that the integration, reconfiguration or other modification,
if any, of HostPro, MIS, LightRealm or WIPC will not have a material adverse
effect on the operations of such entities or 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 acquisitions, including, but not limited to, retention of key
personnel, intellectual property rights, increased market presence of a broader
e-services offering and economies of consolidating certain administrative
support functions.
General Acquisition Risk
------------------------
The Company expects to continue its expansion and acquisition strategy.
Material goodwill and other intangible assets could be required to be recorded
in the likely event the purchase price of the acquired businesses exceeds the
fair value of the net assets acquired. This could result in significant
amortization charges in future periods. The acquired businesses may not achieve
the revenues and earnings anticipated by the Company. As a result there could
be a material adverse effect on the Company's future results of operations and
financial condition. The Company can not assure the timing or size of future
acquisitions, or the effect that any future acquisitions may have on its
operating results.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations-Continued
- -----------------------
(Tabular amounts in thousands)
Key Integration Risks
---------------------
In the integration of acquired operations, the Company faces certain key
risks. The difficulties experienced may have an adverse impact on the Company.
The key integration difficulties may include the loss of key employees and the
failure to integrate successfully acquired operations, equipment, facilities,
services and networks. These difficulties could adversely affect the Company's
financial position, results of operations and cash flows. There can be no
assurances that the Company will realize any benefits from the acquired
operations.
Dependence on Suppliers and Sources of Supply
The Company relies on other companies to supply certain key components of its
network infrastructure, the quantity and quality of which is only available from
limited sources. The Company also relies on providers of data communication
facilities and network capacity in addition to local carriers all of whom are
oftentimes its competitors. The Company can not assure that it will be able to
obtain the necessary services on a cost-effective basis and within the time
frame it requires on an ongoing basis, which may have an adverse affect on its
business, financial condition, results of operations and cash flows.
Infrastructure Dependence
The success of the Company's e-Services is dependent upon its ability to
expand its infrastructure capacity, equipment and support services at a
competitive cost. The Company may require substantial financial, operational
and managerial resources to expand its network infrastructure to accommodate new
customer growth. It may also be necessary to enter into additional agreements
with providers of infrastructure capacity and equipment and support services.
The Company can not assure that it will be able to obtain agreements with
acceptable terms or that it will be able to make the necessary network
infrastructure modifications to meet its customer's growing demands and changes
evolving within the industry.
Changes In Technology and Industry Standards
The Internet access and Web hosting industry is subject to rapid changes in
technology, changes in customer needs, and the evolution of industry standards.
The ability to effectively advance technical expertise, develop new products
compatible with emerging technology, and adapt to customers changing needs all
in a cost-effective manner is essential for future success. The Company can not
assure that it will be successful in accomplishing these tasks. In addition,
the Company can not assure those services or technologies developed by others
will not render its services or technology noncompetitive or obsolete.
Network Failure
The Company's network, and other networks that provide services to the
Company, are vulnerable to damage or cessation of operations from earthquakes,
severe storms, power loss, fire, telecommunications failures and other similar
events. The Company's networks are designed to minimize the risk of such system
failures. However, the Company can not assure that it will not experience
network failures or even a complete network shutdown.
Network Security Breaches
Security problems represent an ongoing threat to public and private data
networks. Addressing these problems caused by computer viruses, break-ins or
other problems caused by third parties could have a material adverse effect upon
the Company's results of operations. Security measures such as limiting
physical and network access to routers are in place. However, the Company can
not assure that it can offer its customers complete protection from computer
viruses, break-ins and other related problems. Although the Company attempts to
limit contractually its liability in such cases, the occurrence of these
problems may result in claims against the Company. These claims, regardless of
their outcome, could result in costly litigation and adversely affect the
Company's business and reputation. In addition, the ability to obtain and
retain customers may be compromised by an inability to provide secure
transmission of information over the Internet. These issues could have an
adverse impact on the Company's customer growth rate, financial condition,
results of operations and cash flows.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations-Continued
- -----------------------
(Tabular amounts in thousands)
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.
Virtually all of the components used in the Company's SpecTek Operation are
obtained from MTI or affiliates of MTI under the Component Recovery Agreement.
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 income. During the first
quarter of fiscal 2000, the cost of obtaining such components was 50% of pre-tax
income attributable to the sale of such components. The cost of obtaining such
components for the second quarter of fiscal 2000 and the negotiated rate for the
third fiscal quarter is 62.5% of pre-tax income attributable to the sale of such
components. Under the Component Recovery Agreement, the maximum costs payable
by the Company to MTI for components during the fourth quarter of fiscal 2000 is
87.5% of pre-tax income, unless otherwise agreed by the Company and MTI. 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 will be more favorable than the maximum amounts stated in
this paragraph. Any 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 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 have currently agreed 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 have 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. In addition, a substantial majority of the
components used in the SpecTek Operations were obtained from MTI under the
former Component Recovery Agreement. In the second quarter of fiscal 2000, the
Company obtained approximately 71% of its components from MTI's semiconductor
manufacturing facilities and an additional 29% 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.
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations-Continued
- -----------------------
(Tabular amounts in thousands)
Pricing of Memory Products
Pricing for SpecTek Operations' semiconductor memory products fluctuate, to a
large degree, based on industry-wide pricing for semiconductor memory products.
The average selling prices of its SpecTek Operations' semiconductor memory
products have varied as industry-wide average selling prices for full
specification semiconductor memory products experienced significant fluctuation.
The Company believes that the inconsistency in the average selling prices of
semiconductor memory products are 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. The Company is unable to predict the impact
of semiconductor memory product market dynamics in future periods. Due to the
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 for semiconductor memory products
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.
24
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
The Company has limited exposure to financial market risks, including changes
in interest rates. At March 2, 2000, the Company had $205 million in short-term
investments. These short-term investments consist of fixed rate investments in
debt obligations of highly rated entities with maturities of one year or less.
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.
25
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) The following are filed as a part of this report:
Exhibit Description
------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the quarter
ended March 2, 2000.
NetFRAME and SpecTek are registered trademarks of the Company. All other
product names appearing herein are for identification purposes only and may be
trademarks of their respective companies.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICRON ELECTRONICS, INC.
------------------------
(Registrant)
Dated: April 14, 2000
/s/ James R. Stewart
---------------------
James R. Stewart, Senior Vice President Finance
Chief Financial Officer (Principal Financial and
Accounting Officer)
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED ON ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-03-1999
<PERIOD-END> MAR-02-2000
<CASH> 196,824
<SECURITIES> 109,151
<RECEIVABLES> 150,945
<ALLOWANCES> 6,476
<INVENTORY> 27,778
<CURRENT-ASSETS> 501,986
<PP&E> 293,311
<DEPRECIATION> 95,684
<TOTAL-ASSETS> 781,616
<CURRENT-LIABILITIES> 255,566
<BONDS> 0
0
0
<COMMON> 964
<OTHER-SE> 478,306
<TOTAL-LIABILITY-AND-EQUITY> 781,616
<SALES> 686,712
<TOTAL-REVENUES> 686,712
<CGS> 533,279
<TOTAL-COSTS> 665,478
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7,850)
<INCOME-PRETAX> 29,084
<INCOME-TAX> 8,740
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,344
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.21
</TABLE>
