<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 November 30, 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 E. 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
January 14, 2001 was 96,673,262.
1
<PAGE>
PART I. Financial Information
------------------------------
Item 1. Financial Statements
Micron Electronics, Inc.
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal quarter ended November 30, 2000 December 2, 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 404,035 $352,952
Cost of goods sold 342,643 266,232
---------- ------------
Gross margin 61,392 86,720
Selling, general and administrative 61,960 68,626
Research and development 1,237 576
Other expense (income), net 2,458 665
---------- ------------
Operating income (loss) (4,263) 16,853
Loss on equity investments 2,114 -
Gain on sale of investment 4,500 -
Interest income, net 4,129 4,031
---------- ------------
Income before taxes 2,252 20,884
Income tax provision 676 6,264
---------- ------------
Net income $ 1,576 $ 14,620
========== ============
Earnings per share:
Basic $ 0.02 $ 0.15
Diluted 0.02 0.15
Number of shares used in per share calculation:
Basic 96,673 96,279
Diluted 96,822 96,448
</TABLE>
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal quarter ended November 30, 2000 December 2, 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 1,576 $ 14,620
---------- ------------
Comprehensive income $ 1,576 $ 14,620
========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
Micron Electronics, Inc.
Consolidated Balance Sheets
(In thousands, except par value and share amounts)
(Unaudited)
<TABLE>
<CAPTION>
As of November 30, 2000 August 31, 2000
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $164,586 $200,002
Liquid investments 141,759 126,032
Receivables 206,461 233,371
Inventories 44,176 30,529
Deferred income taxes 14,602 13,152
Other current assets 9,618 10,386
-------- --------
Total current assets 581,202 613,472
Property, plant and equipment, net 221,479 211,657
Goodwill and intangibles, net 79,019 83,823
Equity investment 5,361 6,408
Other assets 14,134 8,182
-------- --------
Total assets $901,195 $923,542
======== ========
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $317,490 $345,763
Accrued licenses and royalties 17,500 22,441
Current debt 4,928 3,255
-------- --------
Total current liabilities 339,918 371,459
Long-term debt 5,612 2,175
Deferred income taxes 16,253 16,082
Other liabilities 30,379 27,246
-------- --------
Total liabilities 392,162 416,962
-------- --------
Commitments and contingencies
Common stock, $.01 par value, authorized 150 million shares; issued
and outstanding 96.7 million 967 967
Additional capital 135,363 134,485
Retained earnings 372,703 371,128
-------- --------
Total shareholders' equity 509,033 506,580
-------- --------
Total liabilities and shareholders' equity $901,195 $923,542
======== ========
</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>
Fiscal quarter ended November 30, 2000 December 2, 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,576 $ 14,620
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 15,743 8,120
Provision for doubtful accounts 592 709
Loss on equity investments 2,114 -
Gain on sale of investment (4,500) -
Changes in operating assets and liabilities:
Receivables 26,318 2,971
Inventories (13,647) (5,245)
Other current assets 768 12,647
Accounts payable and accrued expenses (31,075) 12,114
Accrued licenses and royalties (4,941) 681
Deferred income taxes (1,279) 2,284
Other 548 189
-------- --------
Net cash (used in) provided by operating activities (7,783) 49,090
-------- --------
Cash Flows From Investing Activities
Expenditures for property, plant and equipment (26,287) (20,084)
Proceeds from sale of property, plant and equipment 10,258 -
Purchases of held-to-maturity investment securities (56,658) (99,750)
Proceeds from maturities of investment securities 36,000 32,405
Equity investments (1,066) -
Proceeds from sale of investment 4,500 -
Other (378) 3,714
-------- --------
Net cash used in investing activities (33,631) (83,715)
-------- --------
Cash Flows From Financing Activities
Proceeds from borrowings 6,140 -
Repayments of debt (1,032) (8,124)
Proceeds from issuance of common stock 890 348
-------- --------
Net cash provided by (used in) financing activities 5,998 (7,776)
-------- --------
Net decrease in cash and cash equivalents (35,416) (42,401)
Cash and cash equivalents at beginning of period 200,002 200,950
-------- --------
Cash and cash equivalents at end of period $164,586 $158,549
======== ========
Supplemental Disclosures
Income taxes paid, net of amounts recovered $ 7,284 $ 261
Interest paid, net of amounts capitalized 44 35
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
MICRON ELECTRONICS, INC.
Notes to Financial Statements
(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 its results of operations
and cash flows. Operating results for the three-month period ended November 30,
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.
Basis of presentation -- This report on Form 10-Q for the first quarter ended
November 30, 2000, should be read in conjunction with the Company's report on
Form 10-K ("10-K") for the fiscal year ended August 31, 2000. Portions of the
accompanying financial statements are derived from the audited year-end
financial statements contained in the 10-K. The Company's operations are
reported on a fiscal basis, which is a 52 or 53-week period ending on the
Thursday closest to August 31; the years ending August 30, 2001 and August 31,
2000 contain 52 weeks. All references to periods, including annual and
quarterly, are on a fiscal basis. As of November 30, 2000 Micron Technology,
Inc. ("MTI") owned 61% of the Company's outstanding common stock.
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 e-services is
recognized as the services are performed. Set-up fees are deferred and
recognized over the customers expected life. Revenue from service and support
contracts for which we are primarily obligated is recognized over the term of
the contract. Revenue from sales of third party service contracts for which we
are not obligated is recognized at the time of sale.
Recently issued accounting standards -- In June 1998, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
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. SFAS No. 133
was implemented by the Company in the first quarter of 2001. Implementation of
SFAS No. 133 did not have any impact on the Company's results of operations,
financial position and cash flows.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB No. 101") No. 101 "Revenue Recognition in Financial Statements".
SAB No. 101 summarizes certain staff views in applying generally accepted
accounting principles to revenue recognition in financial statements. Adoption
is currently required by the end of 2001, and early adoption is permitted. The
Company is currently evaluating the effect SAB No. 101 may have on its future
results of operations, financial position and cash flows.
2. Receivables
As of November 30, 2000 August 31, 2000
--------------------------------------------------------------------------
Trade receivables $198,276 $220,082
Receivables from affiliates 6,444 8,819
Other 8,084 12,449
Allowance for doubtful accounts (4,672) (6,178)
Allowance for returns and discounts (1,671) (1,801)
-------- --------
$206,461 $233,371
======== ========
5
<PAGE>
MICRON ELECTRONICS, INC.
Notes to Financial Statements -- Continued
(In thousands, except per share amounts)
(Unaudited)
3. Inventories
<TABLE>
<CAPTION>
As of November 30, 2000 August 31, 2000
-------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $ 23,775 $ 14,065
Work in progress 14,679 8,403
Finished goods 5,722 8,061
--------- ---------
$ 44,176 $ 30,529
========= =========
</TABLE>
4. Property, Plant and Equipment
<TABLE>
<CAPTION>
As of November 30, 2000 August 31, 2000
-------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,234 $ 1,234
Buildings 68,786 69,371
Equipment and software 230,745 213,722
Assets in progress 45,116 40,938
--------- ---------
345,881 325,265
Less accumulated depreciation and amortization (124,402) (113,608)
--------- ---------
$ 221,479 $ 211,657
========= =========
</TABLE>
5. Acquired Intangibles and Goodwill
<TABLE>
<CAPTION>
As of November 30, 2000 August 31, 2000
-------------------------------------------------------------------------------------------
<S> <C> <C>
Acquired intangibles $ 26,298 $ 26,298
Goodwill 65,147 66,209
--------- ---------
91,445 92,507
Less accumulated amortization (12,426) (8,684)
--------- ---------
$ 79,019 $ 83,823
========= =========
</TABLE>
6. Equity Investment
On April 7, 2000, the Company invested $7 million in Bird on a Wire, Inc.
("BOAW"), a dedicated Web hosting start-up company in exchange for a non-
interest bearing convertible debenture (the "Debenture"). The Debenture is
convertible after April 7, 2003, or upon the occurrence of certain liquidity
events, into common shares that will provide the Company with up to 30% of the
issued and outstanding common shares of BOAW at the conversion date. The
Company accounts for this investment using the equity method of accounting.
On September 1, 2000, the Company entered into a Preferred Stock Purchase
Agreement, under which it acquired a 27% interest in ConnectedSupport, Inc.
("CS"), an on-line provider of PC service and support, in exchange for $1.0
million and certain tangible and intangible property. Scott Bower, who resigned
from his position as Vice President and General Manager of the Company's
subsidiary, Micron Computer Services, Inc., owns a 36% interest in CS, and
serves as its Chief Executive Officer.
BOAW and CS have incurred losses that have been accounted for by the Company as
a reduction in its equity investments. At November 30, 2000, book value of the
BOAW and CS investments were $5 million and $0.3 million, respectively.
6
<PAGE>
MICRON ELECTRONICS, INC.
Notes to Financial Statements -- Continued
(In thousands, except per share amounts)
(Unaudited)
7. Accounts Payable and Accrued Expenses
<TABLE>
<CAPTION>
As of November 30, 2000 August 31, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts payable $171,982 $195,882
Payable to affiliates 103,692 95,798
Salaries, wages and benefits 11,895 19,947
Income taxes payable 761 7,268
Accrued warranty - current 14,293 12,813
Deferred revenue - current 9,768 8,036
Other 5,099 6,019
-------- --------
$317,490 $345,763
======== ========
</TABLE>
8. Other Liabilities
<TABLE>
<CAPTION>
As of November 30, 2000 August 31, 2000
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued stock compensation $ 5,002 $ 5,641
Deferred revenue - long-term 12,183 10,005
Accrued warranty - long term 4,266 3,252
Other 8,928 8,348
-------- --------
$ 30,379 $ 27,246
======== ========
</TABLE>
9. Debt
<TABLE>
<CAPTION>
As of November 30, 2000 August 31, 2000
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes payable in periodic installments through June 2001,
weighted average interest rate of 7.93% and 7.93%, respectively $ 1,397 $ 1,975
Capitalized lease obligations payable in monthly installments through
November 2003, weighted average interest rate of 12.65% and 9.88%,
respectively 9,143 3,455
-------- --------
10,540 5,430
Less current portion (4,928) (3,255)
-------- --------
$ 5,612 $ 2,175
======== ========
</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 November 30, 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 notes payable are collateralized by equipment with a total cost of $10
million and accumulated depreciation of $9 million as of November 30, 2000.
Equipment under capital leases net of accumulated amortization was $9 million as
of November 30, 2000.
10. Transactions with Affiliates
<TABLE>
<CAPTION>
November 30, 2000 December 2, 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 2,653 $ 1,569
Inventory purchases 32,171 21,042
Component recovery agreement expenses 61,160 25,429
Administrative services and other expenses 113 125
</TABLE>
7
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements -Continued
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<S> <C> <C>
Property, plant and equipment purchases 6,242 299
Property, plant and equipment sales 15,126 1,806
</TABLE>
Effective September 2, 1999, the Company entered into an amended and restated
Component Recovery Agreement (the "CRA") with MTI, which expires August 30,
2001. The Company has no expectation that MTI will agree to extend or
renegotiate the CRA at the end of the current term. In addition, MTI currently
has an option to require us to sell to it SpecTek's property and equipment for a
purchase price equal to net book value, and MTI can exercise this purchase
option at any time. The CRA would terminate if MTI purchases the property and
equipment of SpecTek.
Under the CRA, MTI is required to provide us with all of the nonstandard memory
components produced at its semiconductor operations. The CRA also provides that
the cost of components obtained from MTI will be negotiated on a quarterly
basis. The cost of obtaining components in 2000 was 75.0% of pre-tax income
attributable to the sale of such components in the fourth quarter, 62.5% in the
third and second quarters and 50.0% in the first quarter. The cost of obtaining
components under the CRA was 90.0% of pretax income during the first quarter of
2001 and will be 75% of pretax income during the second quarter. The Company
can not assure you of the cost of obtaining components under the CRA during any
subsequent quarter. Any increase in cost to us to obtain components from MTI
under the CRA could have a material adverse effect on our financial condition,
results of operations and cash flows.
The CRA also provides that MTI will make commercially reasonable efforts to
obtain for us nonstandard memory components produced by TECH Semiconductor
Singapore Pte. Ltd. and KMT Semiconductor Ltd., joint venture companies in which
MTI is affiliated. The Company may agree with MTI and the joint venture
companies 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 us for components from
the joint ventures will be determined under the matrix, rather than as a
percentage of pretax income. During the quarter SpecTek purchased approximately
67% of its components from MTI and 33% of its components from the joint venture
companies.
The expiration or termination of the CRA, or the sale of the property and
equipment of SpecTek to MTI, would have a material adverse effect on the
Company's business, financial position, results of operations and cash flows.
Historically, SpecTek has had a significant positive impact on our results of
operations and cash flows. In the first quarter of 2001, SpecTek's net sales
were $118 million and its operating income was $29 million. Virtually all of
the components used by SpecTek are obtained from MTI or joint venture companies
under the CRA. Semiconductor manufacturers other than MTI are reluctant to sell
us 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. Because of the significant impediments to obtaining
alternative sources of supply, it is unlikely that the Company will be able to
continue its SpecTek operations following expiration or termination of the CRA.
The CRA also provides that MTI will purchase, and lease back to SpecTek,
equipment as is reasonably appropriate for SpecTek to perform its component
recovery operations. MTI purchased equipment at net book value in the amount of
$35 million from SpecTek in 2000 and $10 million in the first quarter of 2001.
In accordance with the CRA, SpecTek has leased equipment back from MTI and has
made $2 million of related lease payments during the first quarter of 2001.
Effective September 2, 1999, the Company entered into an exclusive Sales
Representative Agreement with Micron Semiconductor Products, Inc., ("MSP") a
subsidiary of MTI, under which MSP will serve as exclusive sales representative
for SpecTek memory products.
11. Income Taxes
The effective income tax rate for the three months ended November 30, 2000 and
December 2, 1999 was 30%, principally reflecting the federal statutory rate, the
net effect of state taxes, the effect of tax-exempt foreign trade income, and
non-deductible goodwill amortization.
12. Earnings Per Share
8
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements -- Continued
(In thousands, except per share amounts)
(Unaudited)
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 equivalent
shares outstanding. Potential common equivalent shares result from the assumed
exercise of dilutive outstanding stock options. Diluted earnings per share
exclude the effect of antidilutive stock options, aggregating 6.6 million and
5.3 million in the first quarters of 2001 and 2000 respectively. A
reconciliation of the income available to common shareholders and number of
common shares outstanding follows:
9
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements -- Continued
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal quarter ended November 30, 2000 December 2, 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Net income available to common shareholders $ 1,576 $14,620
======= =======
Common shares outstanding:
Weighted average shares outstanding - basic 96,673 96,279
Effect of dilutive stock options 149 169
------- -------
Weighted average shares outstanding - diluted 96,822 96,448
======= =======
Earnings per share:
Basic $ 0.02 $ 0.15
Diluted 0.02 0.15
</TABLE>
13. Commitments
As of November 30, 2000, the Company had commitments of $8 million for equipment
purchases and $20 million for software infrastructure. In addition, the Company
is required to make minimum royalty payments under certain agreements and
periodically enter into purchase commitments with certain suppliers.
14. Contingencies
The Company is defending a consumer class action lawsuit filed in the Federal
District Court of Minnesota based on the alleged sale of defective computers.
No class has been certified in the case. The case involves a claim that the
Company sold computer products with a defect that may cause errors when
information is written to a floppy disk. Substantially similar lawsuits have
been filed against other major computer manufacturers. The case is currently in
the early stages of discovery, and we are therefore unable to estimate total
expenses, possible loss or range of loss that may ultimately be connected with
the matter.
During the third quarter of 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
its liability, if any, for non-remittance of sales and use taxes prior to such
agreements' effective dates. The Company 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 its business, financial
position, and results of operations and cash flows.
Periodically, the Company is made aware that technology it uses 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 currently a party to various other 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.
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 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 its reportable segments. SFAS 131 also requires disclosures about
products and services, geographic areas, and major customers.
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 eliminations primarily reflect
administrative service charges and equipment sales between PC Systems, HostPro
and SpecTek. Service charges are based on estimated costs and equipment sales
are based on cost plus five percent.
10
<PAGE>
Micron Electronics, Inc.
Notes to Financial Statements -- Continued
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal quarter ended November 30, 2000 December 2, 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales
PC Systems $274,958 $259,541
HostPro 13,525 4,140
SpecTek 117,988 90,017
-------- --------
Total segment sales 406,471 353,698
Elimination of intersegment sales (2,436) (746)
-------- --------
Total consolidated net sales $404,035 $352,952
======== ========
Operating Income (Loss)
PC Systems $(17,229) $(28,717)
HostPro (15,638) (1,931)
SpecTek 28,963 48,029
-------- --------
Total segment operating income (loss) (3,904) 17,381
Elimination of intersegment income (359) (528)
-------- --------
Total segment operating income (loss) $ (4,263) $ 16,853
======== ========
Capital Expenditures on Property, Plant and Equipment
PC Systems $ 7,045 $ 16,294
HostPro 7,127 1,140
SpecTek 12,115 2,650
-------- --------
Total segment capital expenditures $ 26,287 $ 20,084
======== ========
</TABLE>
16. Gain on Sale of Investment
On September 29, 2000, the Company sold its remaining 10% interest in MCMS, Inc.
("MCMS") for a net gain of $4.5 million which is shown in the statement of
income as gain on sale on investment. MCMS was formerly a wholly owned
subsidiary, of which 90% was sold in September 1998.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
(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
November 30, 2000, December 2, 1999 or August 30,2000, unless otherwise
indicated. All tabular dollar amounts are stated in thousands.
Overview
Micron Electronics, Inc. and its subsidiaries (collectively the "Company") is a
computing company which provides computer products and services, Internet
offerings, Web hosting and business-to-business e-commerce applications for
small-and medium-sized businesses, government, education and retail markets.
Under the brands micronpc.com, NetFRAME, VelocityNet Direct ("VND"), HostPro and
SpecTek, we offer a wide range of innovative products, services and support.
Our three business segments are PC Systems, HostPro and SpecTek. Our PC Systems
business develops, markets, manufactures, sells and supports a wide range of
high performance desktop and notebook systems and network servers under the
micronpc.com and NetFRAME brand names and sells, resells, and supports a variety
of additional peripherals, software and services. HostPro, a Web hosting
business, offers a range of business-to-business Internet products and services,
including turnkey e-commerce solutions, Web and applications hosting, colocation
and connectivity services. SpecTek processes and markets various grades of
memory products in either component or module form for specific applications.
Our operations are reported on a fiscal basis, which is a 52 or 53-week period
ending on the Thursday closest to August 31. All references contained herein
including annual and quarterly periods are on a fiscal basis.
The Company was formed through the April 7, 1995 merger of three businesses:
Micron Computer, Inc., Micron Custom Manufacturing Services, Inc., and ZEOS
International, Ltd. As of November 30, 2000, Micron Technology, Inc. ("MTI")
owned 61% of our outstanding common stock.
Results Of Operations
Net income for the first quarter of 2001 was $2 million, or $0.02 per diluted
share, on net sales of $404 million, compared to net income of $15 million, or
$0.15 per diluted share, on net sales of $353 million for the first quarter of
2000. The following table sets forth, for the periods indicated, certain data
derived from our consolidated statement of income:
<TABLE>
<CAPTION>
2001 2000
--------------------- --------------------
Amount % of Sales Amount % of Sales
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Net sales $404,035 100.0% $352,952 100%
Gross margin 61,392 15.2% 86,720 24.6%
Selling, general and
administrative expenses 61,960 15.3% 68,626 19.4%
Research and development 1,237 0.3% 576 0.2%
Other expense (income), net 2,458 0.6% 665 0.2%
-------- --------
Operating income (loss) (4,263) (1.1)% 16,853 4.8%
Loss on equity investments 2,114 0.5% - -
Gain on sale of investment 4,500 1.1% - -
Interest income, net 4,129 1.0% 4,031 1.1%
Income tax provision 676 0.2% 6,264 1.8%
-------- --------
Net income $ 1,576 0.4% $ 14,620 4.1%
======== ========
</TABLE>
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations -- Continued
--------------------------
(In thousands)
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations -- Continued
--------------------------
(In thousands)
Net Sales
The following table summarizes our net sales by operating segment:
<TABLE>
<CAPTION>
First Quarter
-------------------------------------------
2001 2000
-------------------- --------------------
Amount % of Sales Amount % of Sales
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
PC Systems $273,383 67.7% $258,795 73.3%
HostPro 13,525 3.3% 4,140 1.2%
SpecTek 117,127 29.0% 90,017 25.5%
-------- ----- -------- -----
Total net sales $404,035 100.0% $352,952 100.0%
======== ===== ======== =====
</TABLE>
PC Systems -- Net sales of systems were up 6% in the first quarter of 2001
compared to the first quarter of 2000 primarily due to higher overall desktop
(up 31%) and notebook (up 9%) shipments partially offset by a 17% decline in
overall average selling prices. A major factor in the average selling price
decline is the mix impact of increased sales through our VelocityNet Direct
program ("VND"), a retail-direct business model that focuses on providing PC
systems to customers via strategic retail partners. VND was launched in the
third quarter of 2000 and has experienced continued growth in the first quarter
of 2001 with sales increasing 4% over the fourth quarter of 2000. Desktop
average selling prices were down 18% in the first quarter of 2001 compared to
the first quarter of 2000, and server prices were down 10%. Notebook prices,
however, were up 4% this quarter compared to the first quarter of 2000. We
continued to experience pressure on sales prices as a result of industry-wide
price competitiveness compounded by lower average selling prices in the retail-
direct channel through our VND program.
System unit shipments for the first quarter of 2001 increased 27% compared to
the first quarter of 2000. These increases were primarily due to our VND
program sales and an 18% increase in sales to government agencies. Desktop
shipments as a percentage of total shipments remained relatively stable at 89%
of total unit sales in the first quarter of 2001 compared to 86% in the first
quarter of 2000. Notebook shipments represented 10% of overall net unit sales
in the first quarter of 2001 compared to 12% in the first quarter of 2000.
Server shipments represented 1% of overall net unit sales in the first quarter
of 2001 compared to 2% in the first quarter of 2000.
HostPro -- We reported our initial full quarter of HostPro operations in the
first quarter of 2000. Net sales in the first quarter of 2001 have increased to
$14 million, compared to $4 million in the first quarter of 2000, primarily due
to acquisitions and expansion of our data center operations. HostPro has
focused its drive into higher-end hosting with the number of dedicated, managed
and unmanaged servers in excess of 1,120 at the end of the first quarter of
2001. HostPro maintained over 120,000 paid hosted Web sites, 64,500 paid hosting
accounts and 39,000 Internet access accounts at the end of the first quarter of
2001 compared to 15,980 paid hosted Web sites, 17,069 paid hosting accounts and
28,000 Internet access accounts at the end of the first quarter of 2000. Organic
year on year growth of hosting accounts was 75%, while hosting revenue grew by
81%.
SpecTek -- Net sales of semiconductor memory products were 30% higher in the
first quarter of 2001 compared to the first quarter of 2000 primarily due to a
235% increase in megabits of memory shipped offset by a 60% decrease in average
selling prices. Megabits shipped in the first quarter of 2001 compared to the
same quarter in 2000 increased as a result of the transition to the 128-megabit
component from the 64-megabit component and additional capacity. This
transition reduced component test time and increased throughput for
substantially all memory products.
Net sales of semiconductor memory products were 43% lower in the first quarter
of 2001 compared to the fourth quarter of 2000 primarily due to a 34% decrease
in megabits of memory shipped and a 14% decrease in average selling prices.
Historically, SpecTek has 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--Pricing
of memory products may fluctuate".
14
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations -- Continued
--------------------------
(In thousands)
Gross Margin
The following table summarizes our gross margin by operating segment:
<TABLE>
<CAPTION>
First Quarter
------------------------------------------
2001 2000
------------------- -------------------
Amount % of Sales Amount % of Sales
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
PC Systems $27,760 10.1% $35,982 13.9%
HostPro 3,076 23.5% 1,297 31.3%
SpecTek 30,556 26.1% 49,442 54.9%
------- -------
Total gross margin $61,392 15.2% $86,720 24.6%
======= =======
</TABLE>
PC Systems -- Gross margin of our PC Systems segment decreased $8 million in the
first quarter of 2001 compared to the first quarter of 2000; as a percentage of
net sales, gross margin decreased 3.8%. The decline is largely due to a shift
in our sales mix from higher margin commercial and small-business PC systems to
lower margin retail-direct VND and Government PC systems. We continue to
experience significant pressure on our gross margins as a result of intense
competition in the personal computer industry and an industry-wide slowdown in
holiday and back-to-school retail sales. Despite these trends, VND margins have
been improving and are now approaching our 8.0% target for the business.
Due to the industry-wide slowdown in holiday retail sales during the fourth
quarter, many companies in the personal computer industry have excess inventory.
In order to reduce inventory, these companies have begun reducing prices on PC
systems. As a result, we expect continued pricing pressure in the second
quarter of 2001
HostPro -- Gross margin of our HostPro segment increased $2 million in the first
quarter of 2001 compared to the first quarter of 2000; as a percentage of net
sales, gross margin decreased 8.6%. The increase in gross margin dollars,
compared to the first quarter of 2000, is primarily due to acquisitions and
expansion of our data center operations. The decline in gross margin percentage
was due to increased fixed costs of sales related to the expansion of data
center operations completed in the last half of 2000. HostPro's cost of sales
primarily represents telecommunication expense, 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 -- Gross margin of our SpecTek segment decreased $19 million in the
first quarter of 2001 compared to the first quarter of 2000; as a percentage of
net sales, gross margin decreased 29.0%. The decrease is primarily due to the
higher cost of obtaining components from MTI and a 60% reduction in average
selling prices partially offset by a 235% increase in megabits shipped. In the
first quarter of 2001, the cost to obtain components from MTI pursuant to the
CRA was 90% of pre-tax income attributable to the sale of such components
compared to 50% in the first quarter of 2000. The cost to obtain the components
in the second quarter of 2001 will be 75% pursuant to the CRA.
Historically, SpecTek has experienced significant volatility in selling prices
and expects average selling prices for its memory products to continue to
exhibit significant volatility. As a result, SpecTek's gross margin could
decline and adversely affect our financial condition, results of operations and
cash flows. The CRA provides that the cost of components obtained from MTI will
be negotiated on a quarterly basis. We can not provide you assurance regarding
the cost of components during any subsequent quarter. Additionally, we have no
expectation that MTI will agree to extend or renegotiate the CRA at the end of
its current term, which expires on August 30, 2001. See "Certain Factors --
SpecTek Operations -- We depend on the component recovery agreement with MTI"
and "Certain Factors -- SpecTek-- Pricing of memory products may fluctuate".
Selling, General and Administrative
Consolidated selling, general and administrative expenses ("SG&A") for the first
quarter of 2001 decreased $7 million or 10% compared to the first quarter of
2000. The decrease was primarily due to the net impact of a $21 million
reduction in the PC Systems segment that was partially offset by a $14 million
increase in the HostPro segment. The decrease in PC Systems was principally
due to lower costs for marketing, customer support and IT spending partially
offset by $1.0 million of costs related to the consolidation of the Minnesota
sales call center in the first quarter of 2001. The increase in HostPro SG&A
resulted from the acquisitions of LightRealm, Inc. ("LightRealm") and Worldwide
International Publishing Corporation ("WIPC"), in the second and third quarters,
respectively, of 2000 and the general build-up of infrastructure during 2000.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations -- Continued
--------------------------
(In thousands)
Research and Development
Consolidated research and development ("R&D") expenses increased in the first
quarter of 2001 compared to the first quarter of 2000. This was due to higher
spending in each of our three business segments in the first quarter of 2001.
The expenses incurred by SpecTek primarily consist of costs related to the
development of patents. R&D expenses in the PC Systems segment relate to
development and engineering for the next generation of desktop, notebook, and
server platforms. R&D expenses in the HostPro segment are due to development of
systems for customer support and service.
Other expense (income), net
Consolidated other expense increased in the first quarter of 2001 compared to
the first quarter of 2000 primarily due to increased amortization of goodwill
associated with the acquisitions in our HostPro business and a $0.3 million
write-off of fixed assets formerly utilized at the Minnesota sales call center.
The amount of goodwill and related amortization expense is expected to increase
as we continue to execute our acquisition strategy. See "Certain Factors --
General -- Our acquisition and investment strategy for HostPro involves certain
risks."
Income Tax Provision
The effective income tax rate for the three months ended November 30, 2000 and
December 2, 1999 was 30%, principally reflecting the federal statutory rate, the
net effect of state taxes, the effect of tax-exempt foreign trade income, and
non-deductible goodwill amortization
Liquidity and Capital Resources
As of November 30, 2000 we had cash, cash equivalents and liquid investments of
$306 million, representing a decrease of $20 million compared to August 31,
2000. Principal sources of liquidity in the first quarter of 2001 were $36
million of proceeds from maturing investments, $26 million from decreases in
receivables, and $10 million of proceeds from the sale of equipment.
Principal uses of cash in the first quarter of 2001 were $57 million of
purchases of held to maturity investments, $30 million of decreases in accounts
payable and accrued expenses, $26 million for purchases of property, plant and
equipment, and $14 million of increases in inventory. Pursuant to the CRA 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. Purchases by SpecTek
accounted for $12 million of our consolidated purchases of property, plant and
equipment in the first quarter of 2001. We anticipate a substantial portion of
the property, plant, and equipment expenditures by SpecTek will be purchased by
MTI under the arrangement. As of November 30, 2000 approximately $10 million of
this amount had been purchased by MTI at net book value.
Historically SpecTek has been a principal source of liquidity for the Company.
See "Certain Factors - SpecTek - We depend on the component recovery agreement
with MTI."
We have an unsecured credit agreement, expiring June 10, 2001, with a group of
financial institutions providing for borrowings totaling $100 million. As of
November 30, 2000 we were eligible to borrow the full amount under the
agreement, but had no borrowings outstanding. Under the agreement, we are
subject to certain financial and other covenants including certain financial
ratios and limitations on the amount of dividends we can declare or pay.
At November 30, 2000, we had commitments of $5 million related to capital
expenditures for the expansion and upgrading of facilities and equipment and $20
million for infrastructure software projects. Excluding acquisitions and fixed
assets purchased by SpecTek, we anticipate making capital expenditures in excess
of $70 million during 2001.
We expect our future working capital requirements to increase and believe that
currently available cash and cash equivalents, liquid investments, cash flows
from operations, current credit facilities and equipment financings will be
sufficient to fund our operations for the next twelve months.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). 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,
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations -- Continued
--------------------------
(In thousands)
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. SFAS No. 133 was implemented by the Company in
the first quarter of 2001. Implementation of SFAS No. 133 did not have any
impact on the Company's results of operations, financial position and cash
flows.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB No. 101") No. 101 "Revenue Recognition in Financial Statements".
SAB No. 101 summarizes certain staff views in applying generally accepted
accounting principles to revenue recognition in financial statements. Adoption
is currently required by the end of 2001, and early adoption is permitted. The
Company is currently evaluating the effect SAB No. 101 may have on its future
results of operations, financial position and cash flows.
Certain Factors
You should carefully consider the following factors and all other information
contained in this Form 10-K before you make any investment decisions with
respect to our securities. The risks and uncertainties we describe below are
not the only risks we face. If any of the adverse events described in the
following factors actually occur or we do not accomplish necessary events or
objectives described in the factors, our business, financial condition and
operating results could be materially and adversely affected, the trading price
of our common stock could decline and you could lose all or part of your
investment.
General
Our operating results and stock price may fluctuate. Our past operating results
have been, and our 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. These factors include, but are not limited to:
. industry competition;
. our ability to accurately forecast demand and selling prices for our
products;
. fluctuating market pricing for personal computers, Web hosting and
Internet access services and semiconductor memory products;
. seasonal cycles common in the personal computer industry and seasonal
government purchasing cycles;
. inventory obsolescence;
. our 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 SpecTek;
. critical component availability;
. the timing of our new product introductions and those of our
competitors and
. global market and economic conditions
As a result, our operating results for any particular period are not necessarily
indicative of the results that may occur in any future period. The trading
price of our common stock is subject to significant fluctuations due to general
market conditions, our financial performance and that of our competitors,
announcements of technological innovations, new commercial products or new
strategies by our competitors, component availability and pricing, and other
factors.
Our management faces increased demands. We have experienced increased
complexity in our operations, in operating and financial information systems and
in our scope of operations. This increased complexity of our operations results
from a number of factors, including the introduction of our VND program, a
retail-direct business model that focuses on providing PC systems to customers
via strategic retail partners, and the expansion of our Web hosting services
capabilities through acquisitions and investments. This increased complexity
has resulted in new and increased responsibilities for our management. It has
placed, and continues to place,
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations -- Continued
--------------------------
(In thousands)
significant demands upon our management, operating and financial information
systems and other resources and systems. In addition, during the past year, we
underwent numerous changes in our management structure and personnel. We
continue to consider various expansion alternatives, including expansion of
facilities, acquisition or establishment of facilities in new geographic regions
and certain strategic relationships. We can not assure you that our management
resources, operating and financial information systems, other resources and
systems will be adequate to support our existing or future operations. If this
should occur, there could be a material adverse effect on our business,
financial position, results of operations and cash flows.
Our acquisition and investment strategy for HostPro involves certain risks. As
part of our strategy to grow the HostPro business, we have made a number of
acquisitions and investments and expect to continue this strategy. We are
required to record material goodwill and other intangible assets in the likely
event the purchase price of the acquired businesses exceeds the fair value of
the net assets acquired. This has resulted in significant amortization charges
that may increase in future periods as we continue our acquisition strategy.
The acquired businesses may not achieve the revenues and earnings anticipated by
us. As a result there could be a material adverse effect on our future
financial condition and results of operations. We can not assure you of the
timing or size of future acquisitions, or the effect that any future
acquisitions may have on our operating results. Further we cannot assure you
that suitable acquisition targets will be available under terms acceptable to us
or that we will have the liquidity to complete all acquisitions or investments.
We may be subject to intellectual property claims. It is common in our industry
for patent, trademark and other intellectual property rights claims to be
asserted against companies, including component suppliers and PC manufacturers.
Periodically, we are made aware that technology used by us may infringe on
intellectual property rights held by others. We evaluate all such claims and,
if necessary and appropriate, seek to obtain licenses for the continued use of
such technology. We have accrued a liability and charged operations for the
estimated costs of settlement or adjudication of claims for alleged infringement
as of the respective dates of the balance sheets included in this report. We
would be at a competitive disadvantage if we were unable to obtain such licenses
upon terms at least as favorable as those experienced by our competitors. We
have entered into several intellectual property license agreements, and as a
majority-owned subsidiary of MTI, are licensed under certain license agreements
between MTI and third parties. Our rights under license agreements between MTI
and third parties may terminate in the event that we are 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 we or our suppliers are unable to obtain licenses necessary
to use intellectual property in our products or processes, we may be forced to
market products without certain technological features or software, discontinue
sales of certain of our products and/or defend legal actions taken against us
relating to allegedly protected technology. There could be a material adverse
effect on our business, financial position, and results of operations and cash
flows if we can not obtain licenses to use certain technology or we are
determined in a lawsuit to have infringed on the intellectual property rights of
third parties.
MTI is our controlling shareholder. As of November 30 2000, MTI owned
approximately 61% of our outstanding common stock. In addition, two of our five
directors 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
our outstanding common stock, MTI will have the ability to control matters
requiring shareholder approval, including the election of directors, and
potentially could control our management and corporate policies. Termination or
modification of certain of our arrangements with MTI resulting in terms less
favorable to us could adversely affect our business, financial position, results
of operations and cash flows. In the event that MTI's ownership of us were to
decrease below certain levels, certain arrangements may be terminated by MTI,
which could have a material adverse effect on our business, financial position,
results of operations and cash flows. See "We may be subject to intellectual
property claims" and "We depend on the component recovery agreement with MTI."
The level of MTI's ownership of our common stock may limit our ability to
complete future equity financing. In addition, the sale on the open market of
substantial amounts of shares of our common stock currently held by MTI could
adversely affect the prevailing market price of our common stock. MTI's ability
to sell shares of our common stock, 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.
We depend heavily on our key personnel. Our future success will depend, in
part, on our ability to attract and retain key management, technical and sales
and marketing personnel. We attempt to enhance our management and technical
expertise by recruiting qualified individuals who possess desired skills and
experience in certain targeted areas. We experience strong competition for such
personnel in the personal computer, Web hosting, and semiconductor industries
and have lost some senior management and sales personnel to competitors. Our
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 our business, financial
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations -- Continued
--------------------------
(In thousands)
position, results of operations and cash flows. We can not assure you that we
will not lose key personnel or that the loss of any key personnel will not have
a material adverse effect on our business, financial position, results of
operations and cash flows.
We are subject to a variety of government regulations. We are 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 us to comply with such
regulations in the past, present or future could subject us to liabilities
and/or the suspension of our operations. If this occurs, there could be a
material adverse effect on our business, financial position, results of
operations and cash flows.
We may have additional liabilities for sales and use taxes. During the third
quarter of 1997, we began to collect and remit applicable sales or use taxes in
nearly all states. We are party to agreements with nearly all states, which
generally limit our liability, if any, for non-remittance of sales and use taxes
prior to such agreements' effective dates. We have previously accrued a
liability for the estimated settlement cost of issues related to sales and use
taxes not covered by such agreements. Our management believes the resolution of
any matters relating to the non-remittance of sales or use taxes will not
materially affect our business, financial position, results of operations and
cash flows.
PC Systems
We face intense competition. The personal computer 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. As a
result of PC industry standards, we and our competitors use many of the same
components, typically from the same set of suppliers, which limits our ability
to technologically and functionally differentiate our products. Many of our 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 we do. We face significant challenges of scale
compared to our larger competitors. Our competitors may benefit from component
volume purchasing, economies of scale, and product and process technology
license arrangements that are more favorable in terms of pricing and
availability than our arrangements. In addition, we may be at a relative cost
disadvantage to certain of our competitors as a result of our U.S. dollar
denominated purchases of PC components during periods of relative weakening of
the U.S. dollar. Our failure to compete effectively in the marketplace could
have a material adverse effect on our business, financial position, results of
operations and cash flows.
We compete with a number of personal computer manufacturers, which sell their
products primarily through direct channels, including Dell Computer Corporation
and Gateway, Inc. We also compete with personal computer manufacturers such as
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. These
manufacturers also compete with our retail sales under the VND program. In
addition, we expect to face increased competition from foreign PC suppliers and
from foreign and domestic suppliers of personal computer products that decide to
implement, or devote additional resources to, a direct sales or retail-direct
sales strategy. In order to gain an increased share of the United States
personal computer 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.
We believe that the rate of growth in worldwide sales of personal computers,
particularly in the United States, where we sell a substantial majority of our
systems, has declined and may remain below the growth rates experienced in
recent years. Industry forecasts project generally decreasing growth rates in
personal computer sales. Any general decline in demand or decline in the rate
of increase in demand for systems could increase price competition and could
have a material adverse effect on our business, financial position, results of
operations and cash flows.
We are experiencing pricing pressures. Due to the industry-wide slowdown in
holiday retail sales during the fourth quarter, many competitors in the personal
computer industry have excess inventory. In order to reduce inventory, these
competitors have begun reducing prices on PC systems. As a result, we expect
continued pricing pressure in the second quarter of 2001
We may not effectively manage our inventory. Our ability to compete
successfully in the personal computer market in the future will depend in large
part on our ability to accurately forecast demand for our products and
effectively manage our inventories to support this demand. Our PC Systems
operations focus on the direct sale of assemble-to-order systems that feature
components incorporating the latest technological developments in the personal
computer industry. We have experienced in the past, and could experience in
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations -- Continued
--------------------------
(In thousands)
the future, excess inventories and inventory obsolescence. This could result
from, among other things, our inaccuracy in forecasting demand for our products,
the typically longer lead times associated with notebook product supply, the
fast pace of technological developments in the personal computer industry and
the short product life cycles of personal computer systems and components. In
addition, because high volumes of quality components are required for the
manufacture of our systems, we have experienced in the past, and expect 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 our ability to ship products
on schedule or at expected gross margins. We invest in data systems tools to
further enhance sales forecasting and supply/demand planning processes. We have
made a large investment in our new manufacturing facilities to further reduce
the risks of having excess inventory or inability to produce customer orders. To
continue to improve, we must accurately utilize these new processes, facilities
and tools to forecast demand for our personal computer products and obtain
adequate, but not excessive, supplies of components to meet actual demand. Our
failure to manage our inventories effectively could result in excess
inventories, inventory obsolescence, component shortages and untimely shipment
of products. Any of these matters could have a material adverse effect on our
business, financial position, results of operations and cash flows.
We depend on key sources of supply. We focus on providing systems that feature
components and software incorporating the latest technological developments.
These components are periodically in short supply and are available from sole or
a limited number of suppliers. As a result, we have experienced in the past,
and expect to experience in the future, shortages in the components used in our
systems. Intel has been our predominant provider of microprocessors used in our
systems. From time to time, we have been unable to obtain sufficient quantities
of certain Intel microprocessors. In addition, a significant portion of the RAM
components used in our systems is supplied by MTI, and we generally rely on MTI
to supply the latest memory densities and configurations available. We rely, to
a certain extent, upon our 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 personal computer industry. Our reliance on a limited
number of suppliers and on a strategy of incorporating the latest technological
developments into our 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 our business, financial position, results of operations and cash
flows.
Our notebook products are currently assembled in part by third-party
manufacturers. These outsourcing arrangements and any future outsourcing
arrangements that we may enter into may reduce the direct control we have over
certain components and the assembly of such products. We can not assure you
that the outsourcing arrangements will not result in quality problems or affect
our ability to ship such products on a timely basis or our flexibility to
respond to changing market conditions.
Our exposure to seasonality could increase. In the event our VND sales expand
relative to our other system sales, we could experience an increase in the
seasonality of our business and financial results could become dependent on our
retail business fluctuations.
HostPro
Our HostPro segment faces intense competition. The market for Web hosting and
Internet access is extremely competitive. 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 our
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 of our competitors have greater market presence, brand recognition, network
capacity, customer bases and financial resources than we do. A large number of
companies including Interland, Inc., Verio, Inc., and Concentric Network
Corporation, a NEXTLINK Company, offer e-services similar to those provided by
us. Large diversified companies such as Intel Corporation, Dell Computer
Corporation, International Business Machines Corporation, and AT&T Corporation
have entered or indicated their intent to enter into the e-services market,
which will intensify the competition. We compete 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
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations -- Continued
--------------------------
(In thousands)
related services. In addition to possessing large existing customer bases, many
of these companies have greater network coverage, market presence and financial
resources than we do. 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 our ability to compete effectively
and may result in pricing pressures that would adversely affect our financial
condition, results of operations and cash flows.
We may face difficulties and certain risks related to our acquisitions. Since
1999 we have made a number of acquisitions that may have an adverse impact on us
due to difficulties related to the integration of the acquired operations. The
key integration difficulties may include the loss of key employees and the
failure to successfully integrate acquired operations, equipment, facilities,
services and networks. These difficulties could adversely affect our financial
condition, results of operations and cash flows. In addition, there can be no
assurance we will realize the anticipated benefits associated with these
acquisitions, including, but not limited to, intellectual property rights,
increased market presence of a broader e-services offering, and economies of
consolidating certain administrative support functions.
We depend on our suppliers and sources of supply. We rely on other companies
to supply certain key components of our network infrastructure, the quantity and
quality of which is only available from limited sources. We also rely on
providers of data communication facilities and network capacity in addition to
local carriers all of whom are oftentimes our competitors. We can not assure
you that we will be able to obtain the necessary services on a cost-effective
basis and within the time frame we require on an ongoing basis, which may have
an adverse affect on our business, financial condition, results of operations
and cash flows.
We depend on our ability to expand HostPro's infrastructure capacity. The
success of HostPro is dependent upon our ability to expand its infrastructure
capacity, equipment and support services at a competitive cost. We may require
substantial financial, operational and managerial resources to expand our
network infrastructure to accommodate new customer growth. We may also need to
enter into additional agreements with providers of infrastructure capacity and
equipment and support services. We can not assure you that we will be able to
obtain agreements with acceptable terms or that we will be able to make the
necessary network infrastructure modifications to meet our customer's growing
demands and changes evolving within the industry.
We are subject to changes in technology and industry standards. The Web
hosting and Internet access 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 our future success. We can not assure you
that we will be successful in accomplishing these tasks. In addition, we can
not assure you those services or technologies developed by others will not
render our services or technology noncompetitive or obsolete.
We are vulnerable to network failure. Our network, and other networks that
provide services to us, are vulnerable to damage or cessation of operations from
earthquakes, severe storms, power loss, fire, telecommunications failures and
other similar events. Our networks are designed to minimize the risk of such
system failures. However, we can not assure you that we will not experience
network failures or a complete network shutdown.
Network security breaches could affect HostPro. 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 our results of operations. Security
measures such as limiting physical and network access to routers are in place.
However, we can not assure you that we can offer our customers complete
protection from computer viruses, break-ins and other related problems.
Although we attempt to limit contractually our liability in such cases, the
occurrence of these problems may result in claims against us. These claims,
regardless of their outcome, could result in costly litigation and adversely
affect our 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 our customer growth rate, financial condition, results of
operations and cash flows.
SpecTek
We depend on the component recovery agreement with MTI. Effective September 2,
1999, the Company entered into an amended and restated Component Recovery
Agreement (the "CRA") with MTI, which expires August 30, 2001. The Company has
no expectation that MTI will agree to extend or renegotiate the CRA at the end
of the current term. In addition, MTI currently has an option to require us to
sell to it SpecTek's property and equipment for a purchase price equal to net
book value, and MTI can exercise this purchase option at any time. The CRA
would terminate if MTI purchases the property and equipment of SpecTek.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations -- Continued
--------------------------
(In thousands)
Under the CRA, MTI is required to provide us with all of the nonstandard memory
components produced at its semiconductor operations. The CRA also provides that
the cost of components obtained from MTI will be negotiated on a quarterly
basis. The cost of obtaining components in 2000 was 75.0% of pre-tax income
attributable to the sale of such components in the fourth quarter, 62.5% in the
third and second quarters and 50.0% in the first quarter. The cost of obtaining
components under the CRA was 90.0% of pretax income during the first quarter of
2001 and will be 75% of pretax income during the second quarter. The Company
can not assure you of the cost of obtaining components under the CRA during any
subsequent quarter. Any increase in cost to us to obtain components from MTI
under the CRA could have a material adverse effect on our financial condition,
results of operations and cash flows.
The CRA also provides that MTI will make commercially reasonable efforts to
obtain for us nonstandard memory components produced by TECH Semiconductor
Singapore Pte. Ltd. and KMT Semiconductor Ltd., joint venture companies in which
MTI is affiliated. The Company may agree with MTI and the joint venture
companies 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 us for components from
the joint ventures will be determined under the matrix, rather than as a
percentage of pretax income. During the quarter SpecTek purchased approximately
67% of its components from MTI and 33% of its components from the joint venture
companies.
The expiration or termination of the CRA, or the sale of the property and
equipment of SpecTek to MTI, would have a material adverse effect on the
Company's business, financial position, results of operations and cash flows.
Historically, SpecTek has had a significant positive impact on our results of
operations and cash flows. In the first quarter of 2001, SpecTek's net sales
were $118 million and its operating income was $29 million. Virtually all of
the components used by SpecTek are obtained from MTI or joint venture companies
under the CRA. Semiconductor manufacturers other than MTI are reluctant to sell
us 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. Because of the significant impediments to obtaining
alternative sources of supply, it is unlikely that the Company will be able to
continue its SpecTek operations following expiration or termination of the CRA.
The CRA also provides that MTI will purchase, and lease back to SpecTek,
equipment as is reasonably appropriate for SpecTek to perform its component
recovery operations. MTI purchased equipment at net book value in the amount of
$35 million from SpecTek in 2000 and $10 million in the first quarter of 2001.
In accordance with the CRA, SpecTek has leased equipment back from MTI and has
made $2 million of related lease payments during the first quarter of 2001.
Pricing of memory products may fluctuate. Pricing for semiconductor memory
products fluctuates, to a large degree, based on industry-wide pricing for
semiconductor memory products. Historically, we have experienced significant
volatility in the average selling prices of our SpecTek memory products.
Management believes that volatility in the average selling prices of
semiconductor memory products was due primarily to changes in the balance of
supply and demand for these commodity products and changes in relative weakness
or strength of certain currencies. We are unable to predict the impact of
semiconductor memory market-dynamics in future periods. Further declines in
pricing for semiconductor memory products would likely result in declines in
average selling prices of our SpecTek memory products. If this occurs, there
could be a material adverse effect on our 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 the transition to
new products, relatively short product life cycles and volatile market
conditions. During periods of product transition, SpecTek 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 we are unable to effectively transition to new
products in a timely fashion.
We may be adversely affected by failure to perform under an Exclusive Sales
Representative Agreement. Effective September 2, 1999, we entered into an
exclusive sales agreement (the "sales agreement") with Micron Semiconductor
Products, Inc. ("MSP"), a subsidiary of MTI, under which MSP will serve as
exclusive sales representatives for SpecTek memory products. The failure of MSP
to perform its obligations under the sales agreement, including but not limited
to the sale of all SpecTek memory products, could have a material adverse effect
on our business, financial position, results of operations and cash flows.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
Substantially all of our cash equivalents, liquid investments and a majority of
our debt are at fixed interest rates, and therefore the fair value of these
instruments is affected by changes in market interest rates. As of November 30,
2000, management 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, management believes that
the market risk arising from its holdings of financial instruments is minimal.
We use the U.S. Dollar as our functional currency. Aggregate transaction gains
and losses included in the determination of net income have not been material.
23
<PAGE>
PART II. OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Shareholders
The Company's 2000 Annual Meeting of Shareholders was held on November 20,
2000 at the Nampa Civic Center, Nampa, Idaho. At the meeting, the following
items were submitted to a vote of the shareholders. At the meeting,
96,662,670 shares were entitled to vote.
(1) The following nominees for Directors were elected. Each person elected as
Director will serve until the next meeting of shareholders or until such
person's successor is elected and qualified.
Name of Nominee Votes Cast For Withhold Authority
------------------------- -------------- ------------------
Steven R. Appleton 89,305,270 303,147
Joel J. Kocher 89,243,842 364,575
Robert A. Lothrop 89,301,577 306,840
Robert Lee 89,302,030 306,387
John B. Balousek 89,304,165 304,252
(2) The ratification of the appointment of PricewaterhouseCoopers LLP as
independent public accountants of the Company for the fiscal year ending
August 30, 2001 was approved with 89,497,561 votes in favor, 75,730 votes
against, and 35,126 abstentions.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following are filed as a part of this report:
Exhibit Description
------- ---------------------------------------------------------------
10.75 Letter Agreement - Separation of Employment for Jill D. Smith
(COO), dated October 20, 2000
10.76 Amendment Number 1 To Amended And Restated Component Recovery
Agreement, dated November 16, 2000, Between the Company and MTI
27 Financial Data Schedule
24
<PAGE>
NetFRAME, VelocityNet Direct, ZEOS and SpecTek are registered trademarks of the
Company. All other product names appearing herein are for identification
purposes only and may be trademarks of their respective companies.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Micron Electronics, Inc.
----------------------------------
(Registrant)
Dated: January 14, 2001
/s/ James R. Stewart
----------------------------------
James R. Stewart, Senior Vice President Finance
Chief Financial Officer (Principal Financial and
Accounting Officer)
25
