<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-19272
------------------------------------
MICRONICS COMPUTERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0132288
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
221 WARREN AVENUE
FREMONT, CALIFORNIA 94539-7085
(510) 651-2300
(Address, including zip code, of registrant's principal
executive offices and registrant's telephone number, including area code)
------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01
------------------------------------
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. [X] Yes [ ] No
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates as of December 16, 1996 was $33,200,307 based on the closing sale
price of such stock on the Nasdaq National Market. At December 16, 1996, there
were 13,979,077 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive proxy statement for its annual meeting of
shareholders to be held February 27, 1997 (the "Proxy Statement") are
incorporated by reference into Part III hereof.
The Exhibit Index is on page 15.
Page 1 of 33 pages
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PART I
ITEM 1. BUSINESS
Micronics Computers, Inc. is a supplier of high-quality, advanced
system boards for high-performance personal computers sold by original
equipment manufacturers ("OEMs"), distributors and value-added resellers
("VARs"). A system board contains the microprocessor (central processing
unit or "CPU"), supporting logic circuitry and memory components that form
the core of a personal computer. The Company's research and development
expertise enables it to introduce new products rapidly in response to
technological advances and changing market requirements. This allows the
Company's customers to deliver leading-edge products to their markets
quickly. The Company's design expertise and manufacturing resources allow it
to reduce product costs while maintaining quality, thereby enabling the
Company and its customers to compete cost effectively. In addition to its
system board products, the Company markets a line of peripherals and its
Nucleus family of "barebones" system products. A barebones system includes a
case, power supply and system board.
In August 1994, the Company acquired Orchid Technology ("Orchid")
by means of a reverse triangular merger between Orchid and a subsidiary of
Micronics formed for the purpose of the acquisition. Orchid designs,
manufactures and markets a line of multimedia products including graphics
accelerators, 3D graphics cards and wavetable sound cards. Since its
acquisition of Orchid, the Company has focused on integrating Orchid's
sound, video and graphics technology onto Micronics motherboards. Orchid
has continued to develop graphics-oriented products and recently introduced
"Righteous 3D." The Company has experienced delays in the completion and
introduction of Righteous 3D and commenced shipment in September 1996.
Volume shipment of Righteous 3D has not yet materialized and there is no
certainty that material volume shipments will occur. The Company believes
that further integration of multimedia technologies onto the system board
will continue to enhance the Company's core system board business.
The Company was incorporated in Delaware in April 1993 as a
successor to a company previously incorporated in California in November
1986. The Company's executive offices are located at 45365 Northport Loop
West, Fremont, California 94539, and its telephone number is (510) 651-2300.
Unless the context otherwise requires, "Micronics" and the "Company" refer
to Micronics Computers, Inc. and its subsidiaries.
BACKGROUND
During the last decade, the personal computer industry has grown
rapidly as technological advances and increased functionality, combined with
lower pricing, have made personal computers essential tools for business
use. An increasingly sophisticated user population is demanding faster, more
powerful and highly reliable personal computers with advanced features at
lower prices. The industry has responded with dramatic technological
advances, with the more widely-accepted advances being adopted as industry
"standards".
By the mid-1980s, the personal computer industry had developed an
industry-standard computer built around an Intel Corporation ("Intel")
microprocessor, using an MS-DOS (IBM-compatible) operating system and an
Industry Standard Architecture ("ISA") 16-bit data bus for controlling the
flow of data through the computer.
During the early 1990s, the PC market underwent a dramatic shift
from character-based DOS programs to Graphical User Interfaces (GUIs). These
new graphics-intensive operating systems and their applications place a much
higher demand on video performance than older DOS programs. Two
industry-standard designs emerged in response to the increased video
performance requirements. The first design, called VL-Bus, was established
by the Video Electronics Standards Association ("VESA") in 1992 and is
characterized by an extremely efficient 32-bit wide data path, operating at
the CPU's memory bus speed, which dramatically increases data throughput
between the CPU and peripheral devices connected to the local bus. The
second design, the Peripheral Component Interconnect ("PCI") local bus,
developed in 1991, is a high-performance 32- or 64-bit-wide data pathway for
communications between the CPU and peripherals. In June of 1992, Intel and
several other computer-industry companies, including Micronics, formed the
PCI Special Interest Group ("SIG") to develop and promote the PCI
specification as an industry standard. The PCI local bus has gained
significant market acceptance as the preferred technology for use with the
Pentium microprocessor and other high performance CPUs.
Driven by technological advances and the demands of the market, the
market has migrated to systems using higher-performance Intel Pentium and
Pentium Pro microprocessors and higher-speed 32-bit data buses. These more
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powerful CPUs are required in order to utilize the full capabilities of new
software technology such as the popular Microsoft Windows 95 operating
system.
With the emergence of industry-standard personal computers, an
opportunity was created for companies that could deliver reliable,
high-quality industry-standard system boards. Personal computer vendors that
purchased pre-tested, field-proven "plug-in" system boards from system board
manufacturers could avoid the heavy investment of time and resources
required to design and manufacture proprietary boards and could focus their
resources on marketing and customer support.
Today, as a result of an increasingly segmented personal computer
market and shorter product life cycles, most personal computer manufacturers
have turned to third parties to supply all or some of the research,
development and manufacturing expertise required to provide the reliable,
high-quality, high-performance, price-competitive products that their
customers demand.
Technological advances and increasingly sophisticated computer
programs have generated demand for add-on enhancement products which allow
the presently installed base and most currently offered personal computers
to utilize more fully certain widely-used business and personal software
applications. These enhancements provide any combination of faster
processing speeds, increased graphics resolution and enhanced sound and
video capabilities.
PRODUCTS
System Boards. Micronics specializes in the design and manufacture
of system boards based on Intel Pentium and Pentium Pro microprocessors. The
Company's line of Pentium system boards gives its customers the flexibility
of choosing the CPU, clock speed, memory configuration, bus architecture and
form factor best suited to their specific needs. Micronics boards are
available with a variety of clock speeds for Pentium and Pentium Pro class
boards and with optional cache memory (memory reserved exclusively for the
CPU) which allows the computer to run more efficiently. The Company's system
boards use PCI architectures for high performance, and ISA and Extended
Industry Standard Architecture ("EISA") buses for input/output flexibility.
In recent years, Micronics system boards have been typically sold without a
CPU or Dynamic Random Access Memory (DRAM).
All of the Company's boards can accommodate multiple peripheral
devices and are designed and tested for compatibility with industry-standard
software and hardware. All are compatible with the major operating systems
and environments, including MS-DOS, OS/2, UNIX, Microsoft Windows 3.1,
Windows 95 and NT, and Novell NetWare. The Company's system boards are
incorporated in high-end personal computers that are used for a variety of
sophisticated end user applications, and segmented into the personal and
corporate desktop product line as well as server class product lines.
Multimedia Products. With the acquisition of Orchid, the Company
also offers a line of multimedia products. These products are sold under
product names such as Kelvin(TM), Fahrenheit(TM), and Righteous(TM). Orchid
develops new and up-coming technology add-in peripheral products before they
become standard features on a system board. The two important reasons why
the industry accepts these add-in products are firstly, until the standards
or features sets are well accepted, this approach of an add-in card is a
lower risk approach to building computer systems and, secondly, initially
the price points of advanced technical features are high and hence the
functions incorporated in these add-in cards are not as widely sold as the
general system board. The latest product to be offered by Orchid is the
Righteous 3D add-in card. This product brings arcade level 3D graphics
functionality to a PC system. A product like this is very attractive to the
PC gaming audience, whereas for non gamers, who do not use their PCs to play
any kind of PC games, it is not a requirement, and hence the approach of an
add-in card lets systems companies and individual users tailor their product
to the users requirement. The Company plans to introduce other products in
the Righteous 3D family. This is a relatively new market segment, and it is
still to be determined if this will be a successful business segment and if
the Company can effectively participate in this market segment.
Nucleus Systems. Nucleus products consist of a system board, power
supply and case (either desktop or tower). Nucleus products are Federal
Communications Commission ("FCC") Class B certified. Obtaining FCC approval
on equivalent products can take as long as three months. Using a Nucleus
product with the FCC pre-certification enables a customer to get its system
product to market faster. In addition, Nucleus products reduce the time and
staffing requirements necessary to source the system board, power supply and
case separately. The Company recently announced a Server Technology
Division. The goal of this division is to define and provide additional
pieces of technology as they relate to Server-class products. The division
will expand on the Nucleus product line by offering Server technology and
barebone (system board, power supply and case) server products.
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SALES, MARKETING AND CUSTOMER SUPPORT
The Company markets its products primarily to original equipment
manufacturers ("OEMs"), distributors and value-added resellers ("VARs") that
assemble complete computer systems for sale to end users, and to certain
distributors and VARs that resell the boards to smaller VARs and dealers. In
the United States, Micronics sells to OEMs through its own sales force and
to distributors and VARs through its own sales force and outside
manufacturers' representatives. Internationally, the Company uses its own
sales force and works with sales agents and distributors. Orchid principally
sells products through regional, national and international distributors,
computer dealers and retail chains. Historically, the Company's business has
been significantly more affected by technology trends than by seasonality.
Distribution. Approximately 57%, 51% and 63% of the Company's net
sales in 1996, 1995 and 1994, respectively, came from sales to OEMs. An OEM
builds computer systems and sells them to end users under its own label.
Sales to VARs (including system integrators such as Electronic Data Systems
(EDS)) and distributors accounted for approximately 35%, 40% and 28% in
1996, 1995 and 1994, respectively, of the Company's net sales. Certain
VARs use the Company's system boards to build IBM-compatible personal
computers that are sold to end users, while other VARs add components to
the boards and resell them to other VARs and dealers. VARs generally do
not sell products under a proprietary label. Sales to customers other than
OEMs, VARs and distributors accounted for the remainder of the Company's net
sales in 1996, 1995 and 1994 and include sales through sales agents and to
other low-volume customers as well as some retail customers for the period
following the acquisition of Orchid through the end of fiscal 1995. Revenue
from sales to distributors is subject to agreements allowing limited rights
of return and price protection. The Company provides reserves for estimated
future returns, exchanges and price protection credits. Actual returns,
exchanges and price protection credits have been within management's
expectations.
International Sales. International sales of the Company's products
are handled by the Company's direct sales force, sales agents and
distributors. Orchid's international sales are handled by a subsidiary in
the United Kingdom, as well as through distributors established in other
international markets. In 1996, 1995 and 1994, international sales accounted
for 18%, 27% and 23%, respectively, of the Company's net sales. See Note 11
of Notes to Consolidated Financial Statements.
Customers. Sales to OEMs and other large customers subject the
Company to concentration risks in its customer base. The Company's three
largest customers in 1996, Micron Electronics, Inc. EDS, and IBM combined
for approximately 71% of net sales. In 1995 and 1994, three customers
combined for approximately 50% and 47% of the Company's net sales,
respectively. The Company's largest international customer in 1995, Osborne
Computers in Australia, accounted for 11% and 17% of the Company's net sales
in 1995 and 1994, respectively. The Company did not have any sales to
Osborne in 1996. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Net Sales" and Note 9 of
Notes to Consolidated Financial Statements.
Generally, the Company has no long-term contractual arrangements
with its OEM, VAR and distributor customers concerning purchases of the
Company's products. The Company's customers are in the computer industry,
which is subject to rapid technological change, product obsolescence and
intense price competition. As customers react to variations in demand for
their products and adjust their purchase orders, the Company may be subject
to non-cancelable purchase orders with its suppliers and may recognize
losses or write downs of inventories due primarily to the specialized
nature of certain custom components and declines in market pricing of
components. Order fluctuations and deferrals have had an adverse effect on
the Company's operation in the past, and there can be no assurance that the
Company will not experience such adverse effects in the future. The
factors affecting the computer industry in general, or any of the
Company's major customers in particular, could have a materially adverse
effect on the Company's results of operations.
Backlog. The Company's customers generally order products on an
as-needed basis. Distribution, VAR and retail customers may cancel or
reschedule orders with little or no penalty. As a result, the Company
believes that its backlog at any particular time is generally not indicative
of its future level of sales.
Marketing. The Company's principal marketing activities include
participation in industry trade shows and seminars, limited advertising in
selected trade publications, cooperative advertising programs with major
distributor customers, public relations activities with the trade and
business press, publication of technical articles and distribution of sales
literature and product specifications.
Customer Support. The Company believes that its customer service
and technical support distinguish the Company from many other independent
system board manufacturers. Major customers are contacted on a regular basis
by the Company's sales and support personnel. In addition, the Company
provides engineering assistance and helps its
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customers obtain any required certifications from the FCC. The Company also
offers extensive user documentation and telephone support to assist its
customers in their support of end users. The Company warrants its products
against defects in materials and workmanship, generally from one to three
years from the date of purchase.
RESEARCH AND DEVELOPMENT
The Company believes that its ability to respond quickly to market
demands, technological advances and changes in industry standards is
critical to its success. Consequently, the Company spends substantial sums
on research and development every year and works closely with its customers
in establishing its research and development goals. Strong research and
development also enables the Company to remain price-competitive in more
mature product areas. This flexible development approach has allowed the
Company to take advantage of the initial market for new products and
technologies and remain price-competitive as product prices decrease over
time. During 1996, 1995 and 1994, research and development expenses were
$7.4 million, $7.1 million and $6.4 million, respectively. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Research and Development."
MANUFACTURING
Production. The Company maintains limited in-house manufacturing
capabilities to support its engineering and preproduction manufacturing
efforts and to provide limited quick-turnaround manufacturing. Prototypes of
the Company's products are built in the Company's production facilities in
Fremont, California. Volume manufacturing of system boards is performed
principally in Taiwan by Orient Semiconductor Electronics Ltd. ("OSE"). The
Company believes a short-term material adverse effect on operations would
result if the Company were forced to change suppliers for its system boards.
The Company also uses other domestic and Taiwan-based manufacturers for all
of its graphics, sound and digital video products. The Company's engineering
team works closely with the manufacturers to ensure that new products are
smoothly transferred into volume production. All of the Company's products
are tested after final assembly and before shipment to customers.
Materials. The major components of the Company's system board
products include chipsets, memory components and controller chips.
Additionally, a limited amount of system board shipments include on-board
CPUs. An inability to obtain sufficient quantities of any of these
components at commercially reasonable prices could have a materially adverse
effect on the Company's financial condition and results of operations. To
date, the Company has not experienced any serious difficulty in procuring a
sufficient number of any of these components from available sources. The
Company has no guaranteed supply arrangements, and there can be no assurance
that components will continue to be available or that prices will remain
within an acceptable range. The Company purchases memory components from a
variety of sources. There have been occasional shortages in the availability
of certain memory components, although these shortages have not had a
serious impact on the Company to date. The Company's graphics, sound and
digital video products include certain sole source components such as
graphic controller chips. There can be no assurance that shortages of such
components will not occur in the future which could result in shipping
delays for these peripheral products and could have a material adverse
effect on the Company's business. The lead times required to procure some
components require the Company to order such components based upon estimates
of demand rather than on firm orders. These estimates, when materially
different than actual orders, increase the risk of accumulating excess and
obsolete inventories. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Cost of Sales/Gross Profit."
COMPETITION
The markets in which the Company competes are intensely
competitive. The Company competes with domestic system board manufacturers,
including Intel Corporation ("Intel"), and with several overseas
manufacturers, the majority of which are based in Taiwan. All of the
Company's competitors may have equal or substantially greater financial,
technical, manufacturing and marketing resources than the Company.
Additionally, the Company's line of multimedia products competes with those
from established suppliers of multimedia products such as Creative
Technology, Inc. and Diamond Multimedia Systems. In addition, OEMs that are
currently the Company's customers may choose to produce system boards
in-house. The competitive factors faced by the Company include engineering
expertise, product reliability and performance, customer support and access
to distribution channels. The Company believes that it currently competes
favorably in all of these areas. The increased participation by Intel in the
system board market over the past two years has significantly increased
the competitive environment in which the Company operates, raising the
significance of several competitive factors including price, time-to-market
and brand name awareness. There can be no assurance that companies with
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greater financial, technical, manufacturing and marketing resources,
including Intel, will not increase competition based upon these factors in
the future and that this increased competition will not have further adverse
effects on the Company's business.
The Company faces intense competition from Intel and has seen its
customer base eroded by Intel. Many customers prefer purchasing
motherboards from Intel in order to attain earlier access to Intel
technology as well as to assure availability of products. Intel is the
industry's dominant supplier of microprocessors which is the key to the
products developed by the Company. In addition, the Company relies very
heavily on Intel for its supply of core logic chip-sets. The Company has
from time to time faced a shortage of these core logic chip-sets which
have put at risk its relationships with its customers. The Company's
current customer base is being targeted by Intel and other system board
suppliers and there can be no assurance that the Company will be able to
retain its customer base.
PROPRIETARY RIGHTS
The Company believes that its success depends primarily upon
factors such as its responsiveness to customer needs and changing markets,
the technological competence and innovative skill of its personnel and its
marketing skills, rather than upon patent protection.
As is common in the industry, the Company has from time to time
received, and may in the future receive, communications from third parties
asserting intellectual property rights relating to certain of the Company's
products and technologies. The Company is aware of several patents issued to
third parties that may affect production of its system boards. Licensing of
certain patents have been completed at royalty rates acceptable to the
Company. However, there can be no assurance that the Company will be able to
obtain licenses of any intellectual property rights claimed by third parties
in the future with respect to the Company's products or that any such
licenses can be obtained on terms favorable to the Company. If the Company
is unable to obtain licenses of protected technology, it could be prohibited
from marketing products incorporating that technology. The Company could
also incur substantial costs in redesigning its products or in defending any
legal action taken against it. Should the Company be found to infringe the
proprietary rights of others, the Company could be required to pay damages
to the infringed party.
The "Orchid" name and logo have been registered as a trademark in
the United States, Australia, Japan, New Zealand and France. Additionally, a
number of Orchid's product names have been registered as trademarks in the
United States.
The Company uses the "Micronics" name as a trademark in connection
with all of its products. In order to protect its trademark rights, the
Company uses trademark notifications and relies on its common law trademark
rights and the unfair competition laws in the United States. Since these
protections arise from use of a mark, rather than from its registration, the
Company generally has not registered its trademarks. The Company is aware of
several other companies that use Micronics or similar names as trademarks
(some of which are registered). The Company has not received any notice that
use of its trademarks infringes the trademark rights of any other company.
However, there can be no assurance that the Company will not receive such
notices in the future or that it can continue to use its chosen trademarks.
An inability to continue using these trademarks could have an adverse effect
on the Company's marketing efforts. In addition, if the Company were found
to infringe the trademark rights of third parties, it could incur
substantial costs in changing its trademarks, defending legal actions
brought against it or paying damages to any infringed parties.
FCC REGULATION
The FCC has adopted regulations setting radio frequency emission
standards for computer equipment. All of the Company's products are designed
to enable the computers in which they are used to meet the FCC's Class B
requirements.
EMPLOYEES
At November 30, 1996, the Company had 229 full-time employees, 52
in research and development, 84 in manufacturing, 53 in sales, marketing and
customer support and 40 in administration and finance. The Company's
employees are not covered by any collective bargaining agreements and the
Company has never experienced a work stoppage. The Company believes that its
employee relations are good. Many of the Company's technical employees are
critical to its success. The loss of one or more of these employees could
have a materially adverse effect on the Company's operations.
The Company's management believes that the Company's future will
depend, in part, on its ability to attract and retain qualified technical,
sales, marketing, and management personnel. Such experienced personnel are
in great demand, and the Company must compete for their services with other
firms, many of which have greater financial resources than the Company. In
addition, the Company has witnessed several companies which from time to
time have targeted the Company's employees with very attractive salary and
other compensation offers. There can be no assurance that the Company will
be able to retain its key employees in the face of such competition for
talent. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation."
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ITEM 2. PROPERTIES
The Company's facilities include three buildings in Fremont,
California totaling approximately 148,000 square feet. The Company leases
two of these buildings, totaling approximately 84,000 square feet, under an
operating lease that expires in January 1997. The buildings house the
principal operating activities of the Company. The third building, owned by
the Company and totaling 64,000 square feet, is only partially occupied by
its system integration and RMA departments. Additionally, the Company
leases, under operating leases not considered material to the Company,
sales and service offices in the United Kingdom and Germany and an office
in Taiwan housing certain sales, research and manufacturing support
activities. See Note 6 to Consolidated Financial Statements at
"Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K."
The Company's space requirement has decreased with the
restructuring and reduction in redundant work force announced in August
1996. The Company will not renew its lease and will move in its entirety
into its owned building effective January 1, 1997. The new address for
Micronics Computers, Inc. and Orchid Technology is 45365 Northport Loop
West, Fremont, California 94538-6417. The main telephone and fax numbers are
telephone: (510) 651-2300 and fax: (510) 651-5612. All internal telephone
numbers will remain the same.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning executive officers of the Company as of
September 30, 1996 who are not also Directors is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------- --- --------------------------------------------
<S> <C> <C>
David J. Nealon 57 Senior Vice President, Worldwide Operations
Wun-Yann Liao 41 Corporate Vice President
</TABLE>
Mr. Nealon had been Senior Vice President of Worldwide Operations
since July, 1996. Previously he was Vice President, Worldwide Operations
since October 1993. From March 1993 to October 1993 he served in a
non-executive officer capacity as Vice President, U.S. Operations. From
January 1992 to January 1993 he served as Vice President, Worldwide
Operations for Commodore Computers, Ltd., a computer company. Mr. Nealon has
also served as Director of Operations for Librex Computers, Ltd., a notebook
computer company, from September 1991 to January 1992, and as Vice
President, Far East Operations for Maxtor Corporation, a disk drive company,
from January 1987 to April 1991. He has also held various management
positions at Shugart Corporation, Memorex and Magnuson Corporation. Mr.
Nealon holds an AAS in production management from Rochester Institute of
Technology. Mr. Nealon left the Company on November 15, 1996.
Mr. Liao has been Corporate Vice President since July, 1996. He
continues to hold the post of President and CEO of Microniche Information
Systems (MIS), a wholly-owned subsidiary. Prior to joining the Company, Mr.
Liao worked as Chief Technologist at Arche Technologies, Inc. He has held
various other programming-related jobs with companies including National
Semiconductor, DSC and American Microsystems, Inc. Mr. Liao holds a BS in
electrical engineering from National Taiwan University and an MS in computer
science from the University of California, Santa Barbara.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market
under the symbol MCRN. The following table sets forth, for the periods
indicated, the high and low closing sale prices for the Company's common
stock as reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C> <C> <C>
October 1 - December 31, 1994 5 1/8 3 3/4
January 1 - March 31, 1995 5 7/8 4 1/2
April 1 - June 30, 1995 5 5/8 4 1/8
July 1 - September 30, 1995 5 1/8 3 5/8
October 1 - December 31, 1995 4 7/8 3 1/4
January 1 - March 31, 1996 4 1/4 2 1/2
April 1 - June 30, 1996 3 3/8 2 1/2
July 1 - September 30, 1996 3 1 7/8
</TABLE>
The approximate number of record holders of the Company's Common
Stock at December 16, 1996 was 386, which does not include those who hold in
street or nominee name.
Micronics has never paid any cash dividends. In addition, the
Company's line of credit agreement prohibits the payment of cash dividends
without the lender's consent. The Company currently plans to retain earnings
for use in its business and therefore does not anticipate paying any cash
dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial
information for each of the five years ended September 30, 1996. This
information should be read in connection with those consolidated financial
statements and notes thereto.
STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $ 171,245 $ 234,077 $ 163,635 $ 182,213 $ 155,030
Cost of sales.......................... 152,069 214,492 142,544 148,109 124,192
----------- ----------- ----------- ----------- -----------
Gross profit........................... 19,176 19,585 21,091 34,104 30,838
Operating expenses:
Research and development........... 7,391 7,147 6,378 6,410 6,801
Selling and marketing.............. 9,073 12,953 8,320 7,365 7,770
General and administrative......... 6,430 7,098 4,169 4,805 4,352
Write off of long-lived assets..... 1,673 -- -- -- --
Write off of accounts receivable
from Osborne Computers........ -- 11,857 -- -- --
----------- ----------- ----------- ----------- ----------
Total operating expenses...... 24,567 39,055 18,867 18,580 18,923
----------- ----------- ----------- ----------- -----------
Income (loss) from operations.......... (5,391) (19,470) 2,224 15,524 11,915
Interest income........................ 745 372 606 811 897
Interest expense....................... (247) (776) (39) (6) (47)
Other income (expense), net............ (486) (183) 815 (163) (156)
----------- ----------- ----------- ----------- ----------
Income (loss) before income taxes...... (5,379) (20,057) 3,606 16,166 12,609
Provision (benefit) for income taxes... 7,909 (7,221) 1,280 6,053 4,439
----------- ---------- ----------- ----------- -----------
Net income (loss)...................... $ (13,288) $ (12,836) $ 2,326 $ 10,113 $ 8,170
=========== ========== =========== =========== ===========
Net income (loss) per common share..... $ (.96) $ (.95) $ .20 $ .90 $ .74
=========== ========== =========== =========== ===========
Common and common equivalent
shares used in computing per
share amounts...................... 13,805 13,513 11,886 11,297 11,022
=========== =========== =========== =========== ===========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments............. $ 21,441 $ 4,588 $ 20,496 $ 23,655 $ 26,829
Working capital........................ 37,767 47,585 61,558 55,349 42,857
Total assets........................... 61,827 93,254 93,740 76,574 56,415
Long-term debt......................... -- 397 3,264 -- --
Stockholders' equity................... 43,888 56,554 67,933 57,595 45,454
</TABLE>
9 of 33
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Any statements contained in this herein that are forward-looking
involve a number of risks and uncertainties. In addition to the factors
discussed above, among the other factors that could cause actual results
to differ materially are the following: the Company's ability to retain
existing and win new OEM business; business conditions and growth in the
personal computer industry and general economy; change in customer order
patterns including timing of delivery; competitive factors, such as
acceptance of new products and price pressures; availability of
third-party component products at reasonable prices; risk of nonpayment of
accounts receivable; risk of inventory obsolescence due to shifts in
market demand; meeting product introduction schedules; changes in the mix
of system boards and Nucleus products; litigation involving intellectual
property and consumer issues; and other factors listed from time-to-time
in the Company's SEC reports.
The percentage of net sales represented by certain line items in the
Company's consolidated statements of operations for the periods indicated,
and the percentage change in those line items from the prior period, are
shown below.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES PERCENT INCREASE,
YEAR ENDED SEPTEMBER 30, (DECREASE)
------------------------------------------- -------------------------
1996 1995 1994 1996 1995
------------ ------------- ------------ --------- ---------
<C> <C> <C> <S> <C> <C>
100.0% 100.0% 100.0% Net sales (27)% 43%
88.8 91.6 87.1 Cost of sales (29) 50
----------- ----------- -----------
11.2 8.4 12.9 Gross profit (2) (7)
Operating expenses:
4.3 3.1 3.9 Research and development 3 12
5.3 5.5 5.1 Selling and marketing (30) 56
3.8 3.0 2.5 General and administrative (9) 70
1.0 -- -- Write off of long-lived assets * *
Write off of accounts receivable
-- 5.1 -- from Osborne Computers * *
----------- ----------- -----------
(3.2) (8.3) 1.4 Income (loss) from operations (72) *
-- (0.3) 0.8 Interest and other, net * *
----------- ----------- -----------
(3.2) (8.6) 2.2 Income (loss) before income taxes (73) *
4.6 (3.1) 0.8 Provision (benefit) for income taxes * *
----------- ----------- -----------
(7.8)% (5.5)% 1.4% Net income (loss) (4)% *
=========== =========== ===========
</TABLE>
* Period-to-period change expressed as a percentage is not meaningful
NET SALES
Net sales decreased 26.8% from 1995 to 1996, primarily the result of
slightly lower unit shipments combined with a decrease in average selling
price (ASP). The decrease in ASP was the result of intense price pressure
and maturation of the Pentium product. In addition, the Company experienced
a shift in sales from the higher ASP Government channel, into which the
higher priced Nucleus system is shipped, to the lower ASP OEM channel, into
which only system boards are shipped.
The increase in net sales of 43.0% from 1994 to 1995 was the result
of higher volume shipments of nucleus systems, mostly to EDS, which had
higher ASP than just the system board; higher ASP's on
system boards as the Company's customers moved from 486-based to
Pentium-based products; more than $10 million in sales of excess and
obsolete product and twelve month's of sales of graphics accelerators,
digital video adapters and sound cards by the Company's wholly owned
subsidiary, Orchid Technology ("Orchid"), which was acquired in August
1994.
The Company attempts to minimize sales price erosion by continually
shifting its product mix to newer products based upon more powerful
microprocessors, higher clock speeds, faster bus architectures and other
advanced features for which the Company can often realize higher prices.
Future revenue will depend on the level of sales to existing major
10 of 33
<PAGE> 11
customers, the ability to sign on new customers, the mix of products
developed and sold by the Company and the Company's ability to maintain
unit prices despite competitive pressures.
Over the past year the Company has noted a shift in the business
model of government contracts as well as lower government spending such as
those experienced due to government shut downs this year. This has had a
negative impact on sales from the government channel. There can be no
assurance that the Company will be able to participate effectively in this
channel in the future.
The Company's customers are in the computer industry, which is
subject to rapid technological change, product obsolescence and intense
price competition. The factors affecting the computer industry in general,
and the Company's major customers in particular, could have a materially
adverse effect on the Company's results of operations.
COST OF SALES/GROSS PROFIT
The Company's gross profit as a percentage of net sales was 11.2% for
1996, 8.4% for 1995 and 12.9% for 1994. The increase in gross margin
percentage from the 1995 level was the result of reduced costs, such as
reserves against excess/obsolete inventory and direct labor, associated
with more efficiently procuring, managing and disposing of inventory. These
savings were partially offset by lower cost-of-market inventory writedowns
primarily related to price erosion in the memory component marketplace. The
lower gross margin in 1995, as compared to 1994, is principally due to the
effect of reducing high levels of inventory accumulated during the year.
The Company provided $9.1 million in additional inventory reserves to
recognize the costs of disposing of excess/obsolete inventories.
Additionally, intense price competition contributed to lower margins in
1995.
RESEARCH AND DEVELOPMENT
The Company continues to invest in new product development efforts
based on the latest technologies which are essential to maintaining a
strong product offering . Research and development spending totaled $7.4
million for 1996 (4.3% of net sales), $7.1 million for 1995 (3.1% of net
sales) and $6.4 million for 1994 (3.9% of net sales). The increase in
spending during 1996 as compared to 1995 is primarily due to higher
employee costs. Spending in 1995 was essentially flat as compared to 1994,
after the increased incremental costs of Orchid research and development
are excluded. The Company expects to spend approximately the same amount
during fiscal year 1997 as it did in 1996 on research and development
activities.
Many of the Company's technical employees are critical to its
success. The loss of one or more of these employees could have a materially
adverse effect on the Company's operations. The demand for key technical
employees in the industry and especially in the Silicon Valley has become
very intense. Companies have been luring away key employees with very
attractive offers. The Company has lost, from time to time, some of its
talent to this intense competition, and there can be no assurance that the
Company will be able to hire and retain its key talent on the face of such
intense competition.
SELLING AND MARKETING
Fiscal year 1996 selling and marketing costs decreased $3.9 million
to $9.1 million (5.3% of sales) from the 1995 spending of $13.0 million
(5.5% of sales) primarily the result of consolidating the Micronics and
Orchid sales and marketing activities, including eliminating two European
sales offices. In 1995 selling and marketing spending increased to $13.0
million from $8.3 million in 1994 (5.1% of sales) due principally to higher
selling costs associated with Orchid's retail and distributor channel sales
and foreign sales offices.
The Company has had several personnel changes in its sales and
marketing organization over the course of the year. Some of these changes
have been due to attrition and some due to restructuring. The Company
tries to find the best talent available; however, new employees have a
ramp-up time to understand and learn the Company's products and channels,
in addition to time required to build customer relationships. These
changes could have a negative impact on the Company's sales. The Company's
retail and distribution team for the Americas and the international sales
team underwent almost a complete change during the last 3 months. This
team will require time to establish contacts and build the sales channel.
The Company expects to spend approximately the same amount during fiscal
year 1997 as it did in 1996 on sales and marketing activities.
GENERAL AND ADMINISTRATIVE
General and administrative spending was $6.4 million, $7.1 million
and $4.2 million for fiscal years 1996, 1995 and 1994, respectively. The
lower spending in 1996 is the result of a return to more normal spending
levels than the Company had in 1995 when expenditures for legal and
professional services were approximately $400,000 higher than normal, the
result of activities associated with the Osborne Computers bankruptcy
filing, and a $200,000 increase in the Company's cost of directors and
officers insurance. The higher spending in 1995 of $7.1 million as compared
to the 1994
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<PAGE> 12
costs of $4.2 million includes those costs discussed immediately above and
an incremental increase attributable to Orchid of approximately $1.8 million
including $364,000 of goodwill amortization.
The Company operated for several months of the year without a
permanent Chief Financial Officer (CFO) and is currently without a
controller. The Company has extended an offer to a new CFO and the CFO has
accepted the offer and expects to commence employment in January 1997. This
CFO is expected to assume the responsibilities of the controller, as well,
in the short term. There can be no assurance that qualified personnel will
be available in the short or long term. The gaps between loss of personnel
and the hiring of replacement personnel could have a material impact on the
operation of the Company. The Company expects to spend approximately the
same amount during fiscal year 1997 as it did in 1996 on general and
administrative activities.
WRITE DOWN OF LONG-LIVED ASSET
In August 1994, the Company acquired its wholly owned subsidiary
Orchid Technology. The acquisition was accounted for using the purchase
method which resulted in the Company recognizing approximately $2.4 million
in goodwill. In the fourth quarter of fiscal 1996 and as a part of the
Company's annual planning process, the Company assessed the future
recoverability of the remaining $1.7 million of goodwill. The Company
originally planned to release Righteous 3D in the first or second quarters
of fiscal 1996. The Company experienced delays in the completion and
introduction of Righteous 3D and commenced shipment of this product in the
fourth quarter of fiscal 1996. The Company has not experienced to date the
level of sales expected by management on Righteous 3D. Based upon the risks
associated with changes in the marketplace which include intense pricing
pressure associated with Orchid's multimedia products, frequent changes in
technology and the cost of penetrating the retail sales channel, the Company
determined that the realizability of the remaining goodwill was uncertain
and had become impaired. Accordingly, the Company wrote off the $1.7 million
remaining balance.
WRITE OFF OF ACCOUNTS RECEIVABLE FROM OSBORNE COMPUTERS
In June 1995, Osborne Computers in Australia (Osborne), one of the
Company's then largest customers, entered a voluntary administration, the
Australian equivalent of a Chapter 11 bankruptcy filing in the United
States. In August 1995, the Australian administrator approved the terms of
the acquisition of the business and assets of Osborne by Gateway 2000, Inc.,
a U.S. personal computer manufacturer. This acquisition resulted in 80
percent ownership in the new company, Osborne Gateway 2000 Pty. Ltd.,
("Osborne, Australia") by Gateway 2000 and 20 percent ownership by Micronics
subject to a right to repurchase held by Gateway 2000 at a specified price.
As a result of the administration and the Company's agreement with Gateway
2000, the Company wrote off $11.9 million of accounts receivable from
Osborne in the quarter ended June 30, 1995. The Company sold its interest in
Osborne Australia to Gateway 2000 in November 1996 for $794,000.
INTEREST AND OTHER, NET
Interest income was $745,000, $372,000 and $606,000 in 1996, 1995 and
1994, respectively. The increase from 1995 to 1996 and the decrease from
1994 to 1995 were both the result of much lower average invested funds
during 1995. The Company expects future interest income to decline as it
uses cash to fund operations.
Interest expense was $247,000, $776,000 and $39,000 in 1996, 1995,
1994, respectively. The lower cost in 1996 is the result of no borrowing on
the Company's line of credit during 1996 and full repayment of the mortgage
which was secured by a building acquired as part of the Orchid acquisition.
The Company is currently working on refinancing this building. See Notes 4
and 5 to the Consolidated Financial Statements. The 1995 spending includes a
full year's interest on notes payable described above and interest on
utilization of the Company's line of credit. During 1995 the Company drew up
to $9 million on its line of credit over a period of approximately five
months. Future levels of interest expense are likely to increase to the
extent the Company utilizes all or a portion of its line of credit or
refinances its owned building.
Other expense in 1996 of $486,000 is primarily the amortization of
deferred financing costs and other financing costs associated with acquiring
and maintaining the Company's line of credit along with foreign currency
exchange losses. Other expense in 1995 of $183,000 is principally foreign
currency exchange losses. Other income in 1994 of $815,000 includes a gain
of $840,000 on the disposal of substantially all of the Company's minority
equity interest in Orient Semiconductor Electronics Ltd., a Taiwan based
manufacturer and the Company's principal volume supplier.
PROVISION (BENEFIT) FOR INCOME TAXES
In 1996 the Company recorded tax expense of $7.9 million related
principally to an increase in the valuation allowance associated with
deferred tax assets due to continued operating losses and the uncertainty of
the realization of such assets. In 1995 the Company recognized a tax benefit
of $7.2 million or a 36.0% effective tax rate due to operating losses
compared to an effective tax rate of 35.5% in 1994. The effective rate
increased from 1994 to 1995 due to a decrease in permanent differences
between tax and book income as a percentage of pretax income in 1995,
primarily
12 of 33
<PAGE> 13
primarily resulting from tax-exempt interest income and an increase in the
rate expected to be realized for stated purposes on the Company's deferred
tax assets from 7.5% to 8.0%. These increases were only partially offset by
decreases in the effective rate attributable to recording a partial
valuation allowance and deferred tax assets and a lower rate realized on net
operating loss carrybacks. See Note 10 to the Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1996 was $37.8 million, down from
$47.6 million and $61.8 million at the end of fiscal 1995 and 1994,
respectively. Cash, cash equivalents and short-term investments of $21.4
million increased by $16.8 million from $4.6 million at the end of 1995 due
to decreases in accounts receivable of $15.7 million, inventory of $17.8
million, income taxes receivable of $4.3 million only partially offset by
net losses of $13.3 million and decreases in accounts payable of $14.5
million and current and long-term debt of $3.1 million. During the year, the
Company paid off its long-term debt which consisted of notes payable,
secured by real property, assumed by the Company in the Orchid acquisition.
See Note 4 to the Consolidated Financial Statements.
At September 30, 1996, the Company's principal sources of liquidity
included $21.4 million of cash, cash equivalents and short-term interest-
bearing financial instruments. The Company also has a $20 million secured
line of credit, limited to specified percentages of eligible accounts
receivable. Availability of the line of credit may be reduced to the extent
that sales levels and resulting accounts receivables decline. As of
September 30, 1996, the Company had no borrowings under this line. The line
expires in September 1997 and is subject to certain covenants pertaining to
tangible net worth, working capital and other financial ratios and
prohibits, among other things, the payment of dividends without the
lender's prior consent. These covenants may have a material adverse effect
on the Company to the extent it cannot comply with such covenants. See Note
5 to the Consolidated Financial Statements.
Management believes existing cash, cash equivalents and short-term
investments, together with cash expected to be generated by operations, if
any, and available borrowing capacity, will provide sufficient funds to
meet the Company's operating and capital requirements over the next 12
months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to the Company's Financial Statements and Schedule, and
the report of the independent auditor appears in Part IV of this Form 10-K.
The supplemental financial information required by Item 302 of Regulation
S-K is included in Note 12 of Notes to Consolidated Financial Statements
which appear in Part IV of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors appearing under the captions
"Proposal No. 1-Election of Directors" and "Compliance with Section 16(a)
of the Securities Exchange Act of 1934" contained in the Proxy Statement are
incorporated by reference.
Information regarding executive officers is presented in Part I,
above, under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
from the sections captioned "Executive Compensation", "Report of the
Compensation Committee" and "Comparison of Stockholder Return" contained in
the Proxy Statement.
13 of 33
<PAGE> 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference
from the sections captioned "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
from the section captioned "Certain Transactions" contained in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)(1) Financial Statements
The following financial statements of the Registrant are filed as
part of this report:
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors........................................................................ 19
Consolidated Balance Sheets as of September 30, 1996 and September 30, 1995........................... 20
Consolidated Statements of Operations for the years ended September 30, 1996, September 30, 1995
and September 30, 1994....................................................................... 21
Consolidated Statements of Stockholders' Equity for the years ended September 30, 1996,
September 30, 1995 and September 30, 1994.................................................... 22
Consolidated Statements of Cash Flows for the years ended September 30, 1996, September 30, 1995
and September 30, 1994....................................................................... 23
Notes to Consolidated Financial Statements............................................................ 24
</TABLE>
(a) (2) Financial Statement Schedules
The following financial statement schedule of the Registrant is
filed as part of this report:
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts.............................................. 33
</TABLE>
All other schedules are omitted because they are not applicable or
the required information is shown in the Consolidated Financial Statements
or notes thereto.
14 of 33
<PAGE> 15
(a) (3) Exhibits
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequential
Exhibits Page Number
-------- -----------
<S> <C> <C>
2.01 Agreement and Plan of Merger between Micronics Computers, Inc.
(a California corporation) and Micronics Computers, Inc.
(a Delaware corporation) (I)
2.02 Agreement and Plan of Reorganization among Micronics Computers, Inc.,
(a Delaware corporation), MCI Orchid, (a California corporation)
and Orchid Technology (a California corporation) dated as of
June 12, 1994, as amended June 21, 1994 (H)
2.03 Amendment to Agreement and Plan of Reorganization dated as
of August 1, 1994 (H)
2.04 Letter Agreement dated August 8, 1994 among Micronics Computers, Inc.,
MCI Orchid and Orchid Technology (H)
2.05 Agreement of Merger of MCI Orchid with and into Orchid
Technology dated August 19, 1994 together with
Certificates of Approval of
Agreement of Merger by MCI Orchid and Orchid Technology (H)
3.01 Certificate of Incorporation (I)
3.02 Bylaws (I)
4.01 Escrow Agreement dated as of August 19, 1994 among Micronics
Computers, Inc., Orchid Technology, Le Nhon Bui, as representative
of the Holders of Orchid and University Bank & Trust Company,
as escrow agent (H)
4.02 Registration Rights Agreement dated as of August 19, 1994 among
Micronics Computers, Inc., Le Nhon Bui and Wearnes Technology
(Private) Limited. (H)
10.01* 1989 Stock Option Plan, as amended to date (N)
10.02* Form of Non-Qualified Stock Option Agreement for options granted prior
to January 1, 1990 (L)
10.03* Employee Stock Purchase Plan as amended to date (B)
10.04* Cash Bonus Plan, as adopted February 12, 1993 (J)
10.05* Profit Sharing Plan, as adopted February 12, 1993 (J)
10.06 Standard Triple Net Industrial Lease dated May 2, 1993, between Paulson
Investments and the Registrant (K)
</TABLE>
15 of 33
<PAGE> 16
<TABLE>
<S> <C> <C>
10.07* Form of Indemnification Agreement entered into by the
Registrant with each of its current directors and
executive officers (J)
10.08* 1992 Directors Stock Option Plan and related documents (M)
10.09* Employment Agreement, dated February 10, 1995, between
the Registrant and Steven P. Kitrosser (E)
10.10 Credit Agreement, dated March 8, 1995, by and between the Registrant
and Union Bank (E)
10.11 Amendment to Credit Agreement, dated June 30, 1995, by and
between the Registrant and Union Bank (F)
10.12 Loan and Security Agreement, among Micronics Computers, Inc.,
Orchid Technology, and Foothill Capital Corporation,
dated as of September 5, 1995 (G)
10.13 Security Agreement between Foothill Capital Corporation and Microniche
Information Systems, Inc., dated as of September 5, 1995 (G)
10.14 General Continuing Guaranty by Microniche Information Systems, Inc.,
in favor of Foothill Capital Corporation dated as of September 5, 1995 (G)
10.15 Lockbox Operating Procedural Agreement among Union Bank, Orchid
Technology and Foothill Capital Corporation, dated as of August 31, 1995 (G)
10.16* Consulting Agreement, dated September 25, 1995, between the Registrant and
Steven P. Kitrosser (D)
10.17** Shareholder Agreement between Micronics Computers Inc., (a Delaware corporation),
and Gateway 2000, Inc. (a Delaware corporation) dated as of July 27, 1995, as
amended by letter agreement dated August 2, 1995. (C)
10.18** Letter agreement dated August 2, 1995 between Micronics Computers, Inc. and
Gateway 2000, Inc. as amended by letter agreement dated September 27, 1995. (C)
11.01 Computation of Net Income (Loss) Per Share (A)
23.01 Consent of KPMG Peat Marwick LLP (A)
27.10 Financial Data Schedule (A)
99.01* Employment and Noncompetition Agreement made on June 12, 1994
and effective on August 19, 1994 among Micronics Computers, Inc.,
Orchid Technology and Le Nhon Bui (B)
99.02* Proprietary Rights and Confidentiality Agreement dated June 12, 1994
between Micronics Computers, Inc. and Le Nhon Bui (B)
</TABLE>
- - ------------------
(A) Filed herewith.
(B) Filed as an Exhibit to Form S-8 Registration Statement (File No.
33-89588) and incorporated herein by reference.
(C) Filed as an Exhibit to Form 10-Q Quarterly Report for the quarter ended
December 31, 1995 and incorporated herein by reference.
(D) Filed as an Exhibit to Form 10-K Annual Report for the year ended
September 30, 1995 and incorporated herein by reference.
(E) Filed as an Exhibit to Form 10-Q Quarterly Report for the quarter ended
March 31, 1995 and incorporated herein by reference.
(F) Filed as an Exhibit to Form 10-Q Quarterly Report for the quarter ended
June 30, 1995 and incorporated herein by reference.
(G) Filed as an Exhibit to Form 8-K as filed with the Securities and Exchange
Commission on September 27, 1995.
16 of 33
<PAGE> 17
(H) Filed as an Exhibit to Form 8-K as filed with the Securities and Exchange
Commission on August 29, 1994.
(I) Filed as an Exhibit to Form 8-K as filed with the Securities and Exchange
Commission on August 12, 1993.
(J) Filed as an Exhibit to Form 10-K Annual Report for the year ended
September 30, 1993 and incorporated herein by reference.
(K) Filed as an Exhibit to Form 10-Q Quarterly Report for the quarter ended
June 30, 1993 and incorporated herein by reference.
(L) Filed as an Exhibit to Form S-1 Registration Statement (File No.
33-40388) and incorporated herein by reference.
(M) Filed as an Exhibit to Form S-8 Registration Statement (File No.
33-47885, as amended) and incorporated herein by reference.
(N) Filed as an Exhibit to Form S-8 Registration Statement (File No.
33-67468) and incorporated herein by reference.
* Indicates an agreement between the registrant and a member of the
registrant's management or an employee benefit plan.
** Confidential treatment has been granted with respect to portions of
this document.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
17 of 33
<PAGE> 18
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Shanker Munshani, his true and lawful
attorney-in-fact and agent with full power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Report on Form 10-K
and to file the same, with all exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intent and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully
do or cause to be done or by virtue hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Micronics Computers, Inc.
<TABLE>
<S> <C>
By: /s/ SHANKER MUNSHANI Date: December 28, 1996
------------------------------------- -----------------
Shanker Munshani, Chief
Executive Officer and
Chief Financial Officer
</TABLE>
Pursuant to requirements of the Securities Exchange Act of 1934,
this report has been signed below on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- - ---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER, PRINCIPAL FINANCIAL
OFFICER AND PRINCIPAL ACCOUNTING OFFICER:
/s/ SHANKER MUNSHANI Chief Executive Officer and 12/28/96
- - ------------------------- Chief Financial Officer
Shanker Munshani
DIRECTORS:
/s/ STEVEN P. KITROSSER Director 12/28/96
- - -------------------------
Steven P. Kitrosser
/s/ WILLIAM SHELANDER Director 12/28/96
- - -------------------------
William Shelander
/s/ SHANKER MUNSHANI Director 12/28/96
- - -------------------------
Shanker Munshani
</TABLE>
18 of 33
<PAGE> 19
Report of Independent Auditors
The Board of Directors and Stockholders
Micronics Computers, Inc.:
We have audited the accompanying consolidated balance sheets of Micronics
Computers, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended September
30, 1996. In connection with our audits of the consolidated financial
statements, we also have audited the consolidated financial statement
schedule. These consolidated financial statements and consolidated financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Micronics Computers, Inc. and subsidiaries as of September 30, 1996 and
1995, and the results of their operations and their cash flows for each of
the years in the three-year period ended September 30, 1996, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG PEAT MARWICK LLP
San Jose, California
December 12, 1996
19 of 33
<PAGE> 20
MICRONICS COMPUTERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1996 1995
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 18,253 $ 4,537
Short-term investments.................................................. 3,188 51
Accounts receivable, net of allowance for doubtful
accounts ($313 in 1996 and $667 in 1995)............................. 20,949 36,622
Inventories............................................................. 9,836 27,674
Income taxes receivable................................................. -- 4,280
Deferred income taxes................................................... -- 8,080
Prepaid expenses and other assets....................................... 3,480 2,050
------------- -------------
Total current assets................................................. 55,706 83,294
Property and equipment, net................................................. 5,298 6,767
Other assets................................................................ 823 3,193
------------- -------------
$ 61,827 $ 93,254
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 11,587 $ 26,058
Other accrued liabilities............................................... 6,352 6,946
Current portion of long-term debt....................................... -- 2,705
------------- -------------
Total current liabilities............................................ 17,939 35,709
Long-term debt.............................................................. -- 397
Deferred income taxes....................................................... -- 594
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized, none outstanding......................................... -- --
Common stock, $.01 par value; 30,000 shares authorized, 13,866
and 13,672 shares outstanding at September 30, 1996
and 1995, respectively............................................... 139 137
Additional paid-in capital.............................................. 32,968 32,677
Retained earnings....................................................... 10,718 24,006
Treasury stock.......................................................... -- (262)
Unrealized gain(loss) on investments.................................... 63 (4)
------------- -------------
Total stockholders' equity........................................... 43,888 56,554
------------- -------------
$ 61,827 $ 93,254
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
20 of 33
<PAGE> 21
MICRONICS COMPUTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales ............................................ $ 171,245 $ 234,077 $ 163,635
Cost of sales......................................... 152,069 214,492 142,544
------------- ------------- -------------
Gross profit.......................................... 19,176 19,585 21,091
Operating expenses:
Research and development.......................... 7,391 7,147 6,378
Selling and marketing............................. 9,073 12,953 8,320
General and administrative........................ 6,430 7,098 4,169
Write off of long-lived assets.................... 1,673 -- --
Write off of accounts receivable
from Osborne Computers..................... -- 11,857 --
------------- ------------- -------------
Total operating expenses....................... 24,567 39,055 18,867
------------- ------------- -------------
Income (loss) from operations......................... (5,391) (19,470) 2,224
Interest income....................................... 745 372 606
Interest expense...................................... (247) (776) (39)
Other income (expense), net........................... (486) (183) 815
------------- ------------- -------------
Income (loss) before income taxes..................... (5,379) (20,057) 3,606
Provision (benefit) for income taxes.................. 7,909 (7,221) 1,280
------------- ------------- -------------
Net income(loss)...................................... $ (13,288) $ (12,836) $ 2,326
============== ============= =============
Net income(loss) per common share..................... $ (.96) $ (.95) $ .20
============== ============= =============
Common and common equivalent shares used in
computing per share amounts....................... 13,805 13,513 11,886
============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
21 of 33
<PAGE> 22
MICRONICS COMPUTERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
COMMON STOCK PAID-IN RETAINED TREASURY GAIN/(LOSS)
SHARES AMOUNT CAPITAL EARNINGS STOCK ON INVESTMENTS TOTAL
--------- -------- ----------- ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1993...... 11,275 113 22,966 34,516 -- -- 57,595
Stock issued under option
plans...................... 40 -- 101 -- -- -- 101
Stock issued under employee
stock purchase plans....... 120 1 483 -- -- -- 484
Income tax benefit from
employee stock plans....... -- -- 33 -- -- -- 33
Stock issued in connection
with acquisition of
subsidiary................. 1,759 18 7,376 -- -- -- 7,394
Net income..................... -- -- -- 2,326 -- -- 2,326
--------- -------- ----------- ----------- ----------- -------------- -----------
Balances at September 30, 1994...... 13,194 132 30,959 36,842 -- -- 67,933
Stock issued under option
plans...................... 372 4 1,002 -- -- -- 1,006
Stock issued under employee
stock purchase plans....... 156 1 544 -- -- -- 545
Income tax benefit from
employee stock plans....... -- -- 172 -- -- -- 172
Stock repurchased.............. (50) -- -- -- (262) -- (262)
Unrealized loss on investments. -- -- -- -- -- (4) (4)
Net loss....................... -- -- -- (12,836) -- -- (12,836)
--------- -------- ----------- ----------- ----------- -------------- ----------
Balances at September 30, 1995...... 13,672 $ 137 $ 32,677 $ 24,006 $ (262) $ (4) $ 56,554
--------- -------- ----------- ----------- ---------- -------------- ----------
Stock issued under option
plans...................... 3 -- 8 -- -- -- 8
Stock issued under employee
stock purchase plans....... 191 2 283 -- 262 -- 547
Unrealized gain on investments. -- -- -- -- -- 67 67
Net loss....................... -- -- -- (13,288) -- -- (13,288)
--------- -------- ----------- ----------- ---------- -------------- -----------
Balances at September 30, 1996...... 13,866 $ 139 $ 32,968 $ 10,718 $ -- $ 63 $ 43,888
========= ======== =========== =========== =========== ============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
22 of 33
<PAGE> 23
MICRONICS COMPUTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ (13,288) $ (12,836) $ 2,326
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Write down of long-lived asset............................... 1,673 -- --
Depreciation and amortization................................ 1,710 2,369 1,069
Loss on sale of property and equipment....................... 152 -- --
Deferred taxes............................................... 7,690 (3,951) 904
Gain (loss) on sales of marketable securities
and short-term investments, net......................... -- 263 (840)
Realized gain on investments................................. -- -- 110
Income tax benefit from employee stock plans................. -- 172 33
Changes in operating assets and liabilities:
Accounts receivable..................................... 15,673 (1,929) (6,418)
Inventories............................................. 17,838 (4,932) 4,448
Income taxes receivable................................. 4,280 (3,707) 944
Prepaid expenses and other assets....................... (1,430) (260) 88
Accounts payable........................................ (14,471) 9,870 (452)
Other accrued liabilities............................... (594) 720 (603)
Income taxes payable.................................... -- -- (777)
------------- ------------- -------------
Net cash provided by (used in) operating activities.............. 19,233 (14,221) 832
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments.............................. (3,570) (1,000) (12,295)
Maturities or sales of short-term investments.................... 500 12,753 19,578
Sales of marketable securities................................... -- -- 1,068
Purchases of property and equipment.............................. (481) (1,231) (1,029)
Cash acquired in connection with acquisition of subsidiary....... -- -- 96
Other............................................................ 165 (1,124) (147)
------------- ------------- -------------
Net cash provided by (used in) investing activities.............. (3,386) 9,398 7,271
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings.............................. -- 10,462 --
Repayment of short-term borrowings............................... -- (9,976) (4,832)
Repayments of debt principal..................................... (2,686) (291) (3)
Proceeds from issuance of common stock, net...................... 555 1,551 585
Repurchase of common stock....................................... -- (262) --
------------- ------------- -------------
Net cash provided by (used in) financing activities.............. (2,131) 1,484 (4,250)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 13,716 (3,339) 3,853
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................ 4,537 7,876 4,023
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............................. 18,253 $ 4,537 $ 7,876
============= ============= =============
Cash payments for:
Interest......................................................... $ 251 $ 776 $ 38
Income taxes..................................................... -- 527 1,180
Non-cash investing and financing activities:
Net assets acquired in connection with
acquisition of subsidiaries.................................. -- -- 7,901
Assumption of mortgage related to sale of
French subsidiary facility................................... 416 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
23 of 33
<PAGE> 24
MICRONICS COMPUTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial
statements include the Company and its wholly owned subsidiaries after
eliminating all significant intercompany accounts and transactions.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: Cash and cash
equivalents include money market funds and investment securities with
maturities of 90 days or less at the date of acquisition. The Company is
exposed to credit risk in the event of default by the financial
institutions or issuers of the investments to the extent of amounts
recorded on the consolidated balance sheets.
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily investments and trade
receivables. The Company's investment policy requires cash investments to
be placed with high credit quality counterparties and to limit the amount
of credit from any financial institution or direct issuer.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," effective October 1, 1994. SFAS No. 115 requires entities to
classify investments in debt and equity securities with readily determined
fair values as "held-to-maturity," "available-for-sale," or "trading," and
establishes accounting and reporting requirements for each classification.
In accordance with SFAS No. 115, the Company has classified all securities
held as available-for-sale securities. Such securities are reported at fair
value with unrealized gains or losses, net of related tax effect, excluded
from earnings and reported as a separate component of stockholders' equity
until realized. A decline in the market value of any available-for-sale
investment below cost that is deemed other than temporary results in a
reduction in the carrying amount to fair value with the impairment charged
to earnings. Interest income is recorded using the effective interest
method, with associated premium or discount amortized to interest income.
Realized gains and losses from the sale of investments are determined on
the trade date based on the specific identification method.
INVENTORIES: Inventories are stated at the lower of cost
(first-in, first-out method) or market. The Company periodically reviews
its inventories for potential slow-moving or obsolete items and writes down
specific items to net realizable value as appropriate.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at
cost and are depreciated using the straight-line method over the estimated
useful lives of the assets, which range from three to seven years for
personal property and equipment and 31.5 years for real property. Leasehold
improvements are amortized using the straight-line method over the
estimated useful lives of the improvements or the respective lease terms,
if shorter.
WARRANTY: The Company provides for the estimated future cost of
warranty repair or replacement.
INTANGIBLE ASSETS: Intangible assets include goodwill, recorded
in connection with the acquisition of Orchid Technology, and deferred
financing costs related to the Company's line of credit, the latter being
amortized over the life of the related line of credit agreement. In the
fourth quarter of fiscal 1996 and as part of the Company's annual planning
process, the Company evaluated the recoverability of the remaining
goodwill resulting from the acquisition of Orchid Technology. As part of
this evaluation, the Company considered the historical delays in product
release associated principally with Righteous 3D, Orchid's primary product,
and the level of sales experienced since the fourth quarter of fiscal 1996
introduction of Righteous 3D. Based upon the risks associated with changes
in the marketplace, including continued intense pricing pressures
associated with Orchid's multimedia products, frequent changes in
technology and the cost ofpenetrating the retail sales channel, the
Company determined that the realizability, based upon discounted cash
flows, of the remaining goodwill was uncertain and had become impaired.
Accordingly, the Company wrote off the $1.7 million remaining goodwill
balance. Prior to this determination, goodwill was being amortized over a
five-year period.
EMPLOYEE STOCK PLANS: The Company accounts for its stock option
plan in accordance with provisions of the Accounting Principles Board's
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employee." In
1995, the Financial Accounting Standards Board released SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 123 provides an
alternative to APB 25 and is effective for fiscal years beginning after
December 15, 1995. The Company intends to continue to account for its
employee stock plan in accordance with the provisions of APB 25.
Accordingly, SFAS No. 123 will not have any impact on the Company's
reported financial position or results of operation.
24 of 33
<PAGE> 25
REVENUE RECOGNITION: Revenue is recognized at the time of
shipment. Revenue from sales to distributors is subject to agreements
allowing limited rights of return and price protection. The Company
provides reserves for estimated future returns, exchanges and price
protection credits.
NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) per common
share has been computed based on the weighted average number of common and
common equivalent shares outstanding. Common equivalent shares result from
the assumed exercise of outstanding stock options that have a dilutive
effect when applying the treasury stock method.
INCOME TAXES: The Company records income taxes using an asset and
liability approach that results in the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that
have been recognized in the Company's consolidated financial statements or
tax returns. In estimating future tax consequences, all expected future
events other than enactment of changes in tax laws or rates are considered,
including the uncertainty in realizing future tax benefits. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
USE OF ESTIMATES: The preparation of these consolidated
financial statements required the useof certain estimates by management
in determining the Company's financial position and results of operations.
Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION: The functional currency of the
Company's foreign operations is the U.S. dollar. Financial statements are
translated into U.S. dollars using the exchange rates at each balance
sheet date for assets and liabilities and a weighted average exchange rate
for each period for revenues, expenses, gains and losses. Foreign exchange
gains and losses are not material in any of the periods presented.
NOTE 2. SHORT-TERM INVESTMENTS
The debt securities in the following table have contractual
maturities of one year or less. All securities in the table below are
classified as short-term investments on the consolidated balance sheet. The
fair value and unrealized gains and losses at September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
U.S. agency securities.................... 498 1 -- 499
Corporate debt securities................. 2,627 26 -- 2,653
Equity securities......................... -- 36 -- 36
-------------- ------------- -------------- -------------
$ 3,125 $ 63 $ -- $ 3,188
============== ============= ============== =============
</TABLE>
The fair value and unrealized losses at September 30, 1995
are as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
U.S. agency securities.................... 500 -- 6 494
Equity securities......................... 41 -- 1 40
-------------- ------------- -------------- -------------
$ 541 $ -- $ 7 $ 534
============== ============= ============== =============
</TABLE>
At September 30, 1995, the Company had entered into a reverse
repurchase agreement of a U.S. agency security. A liability of
approximately $486,000 on this agreement has been recorded as a decrease
to short-term investments in the accompanying consolidated financial
statements.
25 of 33
<PAGE> 26
NOTE 3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------
1996 1995
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials......................................... $ 6,497 $ 18,626
Work-in-process....................................... 1,053 4,173
Finished goods........................................ 2,286 4,875
------------- -------------
$ 9,836 $ 27,674
============= =============
Property and equipment:
Land.................................................. $ 825 $ 946
Buildings............................................. 2,788 3,207
Machinery and equipment............................... 2,212 2,153
Computer equipment.................................... 2,928 2,733
Furniture and fixtures................................ 997 823
Leasehold improvements................................ 963 938
------------- -------------
10,713 10,800
Less accumulated depreciation and
amortization........................................ (5,415) (4,033)
------------- -------------
$ 5,298 $ 6,767
============= =============
Other accrued liabilities:
Accrued compensation.................................. $ 949 $ 1,403
Distributor-related reserves.......................... 1,276 2,067
Accrued warranty...................................... 2,149 1,434
Other................................................. 1,978 2,042
------------- -------------
$ 6,352 $ 6,946
============= =============
</TABLE>
NOTE 4. ACQUISITION OF ORCHID TECHNOLOGY
In August 1994, the Company acquired Orchid Technology ("Orchid")
in exchange for approximately 1,759,000 shares of the Company's common
stock and the assumption of outstanding options (valued at $7,003,000 and
$391,000, respectively, as of the acquisition date), and acquisition costs
of approximately $507,000. Orchid designs, manufactures and markets a wide
range of multimedia technology including graphics accelerators, digital
video adapters and sound cards. The acquisition was accounted for by the
purchase method and, accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed based upon their estimated fair
market values at the acquisition date. The excess of the purchase price
over the fair market value of the net tangible assets acquired was
approximately $2,390,000 and that amount has been classified as goodwill
and is included in other assets in the accompanying consolidated financial
statements for September 30, 1995 (see Note 1). Operating results of
Orchid have been included with the Company's operating results beginning
as of the acquisition date.
26 of 33
<PAGE> 27
NOTE 5. LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1996 1995
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Mortgage note payable, secured by land and building, bearing interest at
9.97%, payable in monthly installments of $25,500, with a final
payment of $2,648,000 paid in September 1996............................ $ -- $ 2,681
Mortgage note payable, secured by land and building, bearing interest at
10.6%, payable in monthly installments of $4,600, maturing
in July 2006, assumed by a third party in conjunction with the
closure of Orchid France................................................ -- 421
------------- --------------
-- 3,102
Less current portion of long-term debt..................................... -- (2,705)
------------- --------------
$ -- $ 397
============= ==============
</TABLE>
The Company has a $20,000,000 line of credit expiring in
September 1997. Borrowings under the line of credit are limited to
specified percentages of eligible accounts receivable and are
collateralized by a lien on substantially all assets of the Company.
Borrowings bear interest at a variable rate (10.25% at September 30, 1996)
based on the prime rate of a reference bank. There is a commitment fee of
0.5% per annum on the average daily unused portion of the line of credit.
Borrowing availability under the line of credit is reduced by advances and
letters of credit. At September 30, 1996, the Company had no advances and
no letters of credit outstanding. The line of credit agreement includes
covenants pertaining to tangible net worth, working capital and other
financial ratios and prohibits, among other things, the payment of
dividends without the lender's prior consent. The Company was in compliance
with such covenants as of September 30, 1996.
NOTE 6. COMMITMENTS
The Company leases its principal facilities under a
noncancellable operating lease expiring in 1997. This lease requires the
Company to pay property taxes, insurance and a portion of the normal
maintenance costs. Future minimum rental payments under the lease as of
September 30, 1996 are $260,000. The Company does not intend to renew this
lease and intends to relocate to an owned facility.
Rent expense, including executory costs, was approximately
$934,000, $854,000, and $873,000 in 1996, 1995 and 1994, respectively.
NOTE 7. STOCKHOLDERS' EQUITY
OPTION PLANS: Under the terms of the 1989 Stock Option Plan (the
"1989 Plan"), options may be granted to employees, consultants, advisors
and independent contractors. Options are granted under the 1989 Plan with
an exercise price not less than the fair market value of the Company's
common stock at the date of grant. The options generally vest ratably over
four to five years and terminate after five to six years.
Under the terms of the 1992 Directors Stock Option Plan (the
"1992 Plan"), stock options are granted to directors of the Company who are
not also employees, independent contractors or consultants to the Company.
Options are granted under the 1992 Plan with an exercise price equal to the
fair market value of the Company's common stock at the date of grant. The
options vest ratably over three years and terminate after five years.
27 of 33
<PAGE> 28
Pursuant to the Orchid merger agreement, outstanding employee
options to purchase Orchid common stock were assumed by the Company (the
"Assumed Orchid Options") and such options may be exercised to purchase
common stock of the Company. Accordingly, 320,084 shares of the Company's
common stock were reserved for issuance upon the exercise of Assumed Orchid
Options. These options generally vest ratably over four years and terminate
six years after their original grant dates.
Following is a summary of stock option activity for 1989 Plan
options, 1992 Plan options and Assumed Orchid Options during 1994, 1995 and
1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------
AGGREGATE
EXERCISE PRICE
NUMBER PRICE PER SHARE
----------- ----------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balances at September 30, 1993........................... 1,209 5,617 .30 - 6.56
Options granted........................................ 152 838 4.13 - 6.19
Options assumed........................................ 320 942 1.46 - 6.09
Options exercised...................................... (40) (101) .30 - 5.00
Options cancelled...................................... (128) (687) .30 - 6.56
----------- -----------
Balances at September 30, 1994........................... 1,513 6,609 .75 - 6.50
Options granted........................................ 604 2,480 3.75 - 5.63
Options exercised...................................... (372) (1,006) .75 - 5.00
Options cancelled...................................... (422) (1,981) .75 - 6.50
----------- -----------
Balances at September 30, 1995........................... 1,323 $ 6,102 1.46 - 6.13
Options granted........................................ 797 2,351 2.16 - 4.00
Options exercised...................................... (2) (3) 1.46 - 1.46
Options cancelled...................................... (891) (3,760) 1.46 - 6.13
------------ ------------
Balances at September 30, 1996........................... 1,227 $ 4,690 2.16 - 6.13
=========== ===========
</TABLE>
At September 30, 1996, approximately 818,000 and 225,000 shares
of common stock remained available for grant under the 1989 Plan and the
1992 Plan, respectively. At September 30, 1996, approximately 608,000
options were exercisable and approximately 2,270,000 shares of common stock
were reserved for future issuance.
STOCK PURCHASE PLAN: In February 1995, the Company's employee
stock purchase plan was amended, increasing the number of shares available
for issuance under the plan from 500,000 shares to 900,000 shares. At
September 30, 1996, approximately 659,000 shares had been issued to date
and approximately 241,000 shares were reserved for future issuance under
the plan.
NOTE 8. SUPPLIER RELATIONSHIP
The principal volume supplier of the Company's products is Orient
Semiconductor Electronics Ltd. ("OSE"), a manufacturer in Taiwan. Purchases
from OSE were approximately $50,255,000, $66,015,000, and $46,159,000 in
1996, 1995 and 1994, respectively. The Company believes a short-term
material adverse effect on operations would result if the Company was
forced to change suppliers for its system boards. During 1994, the Company
disposed of substantially all of its minority equity interest in OSE. The
resulting gain of $840,000 from the disposition of that minority equity
interest is included in other income in 1994.
28 of 33
<PAGE> 29
NOTE 9. BUSINESS RISKS AND MAJOR CUSTOMERS
The Company sells its products primarily to original equipment
manufacturers, distributors and value-added resellers that assemble
complete computer systems for sale to end users, and to certain
distributors and VARs that resell the boards to smaller VARs and dealers.
Sales to OEMs and other large customers subject the Company to
concentration credit in its customer base. The Company's customers are in
the computer industry, which is subject to rapid technological change,
product obsolescence and intense price competition. The factors affecting
the computer industry in general, or any of the Company's major customers
in particular, could have a materially adverse effect on the Company's
results of operations.
The following table summarizes the annual percentage contribution
to net revenues by customers when sales to such customers exceed 10% of net
revenues and the related accounts receivable from these customers as a
percentage of total accounts receivable:
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES PERCENTAGE OF ACCTS. RECEIVABLE
YEAR ENDED SEPTEMBER 30, AT SEPTEMBER 30,
1996 1995 1994 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Customer A........................... 39% 22% 7% 32% 17%
Customer B........................... 16% 17% 5% 14% 26%
Customer C........................... 16% 8% 5% 16% 5%
Customer D........................... 0% 11% 17% -- 1%
Customer E........................... 0% 3% 23% -- --
</TABLE>
In June 1995, Osborne Computers (Osborne) in Australia, one of
the Company's largest customers reflected as Customer D above, entered a
voluntary administration, the Australian equivalent of a Chapter 11
bankruptcy filing in the United States. In August 1995, the Australian
administrator approved the terms of the acquisition of the business and
assets of Osborne by Gateway 2000, Inc., a U.S. personal computer
manufacturer. This acquisition resulted in 80 percent ownership in the new
company, Osborne Gateway 2000 Pty. Ltd. (Osborne Gateway 2000), by Gateway
2000 and 20 percent ownership by the Company subject to a right to
repurchase held by Gateway 2000 at a specified price. As a result, the
Company wrote off $11.9 million of accounts receivable from Osborne in the
quarter ended June 30 1995, and recorded its ownership interest in Osborne
Gateway 2000 at a minimum realizable value of $750,000 reflecting the value
of a put option for the sale of the Company's 20% interest in Osborne
Gateway 2000 to Gateway 2000. This investment is included in other assets
in the accompanying consolidated balance sheet. Subsequent to September 30,
1996, the put option was exercised resulting in the realization of the
recorded asset. From the date of the acquisition through September 30,
1995, the Company recorded sales of $344,000 to Osborne Gateway 2000 Pty.
Ltd. at terms similar to those of unrelated parties.
The markets in which the Company competes are intensely
competitive. The Company competes with domestic system board manufacturers,
including Intel Corporation, and with Taiwanese and other overseas
manufacturers. All of the Company's competitors may have equal or
substantially greater financial, technical, manufacturing and marketing
resources than the Company.
29 of 33
<PAGE> 30
NOTE 10. INCOME TAXES
Income (loss) before income taxes and the provision (benefit) for
income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
1996 1995 1994
-------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes:
United States...................................... $ (3,522) $ (20,399) $ 3,528
Foreign............................................ (1,857) 342 78
-------------- ------------- -------------
$ (5,379) $ (20,057) $ 3,606
=============== ============= =============
Provision (benefit) for income taxes:
Current:
Federal......................................... $ -- $ (3,570) $ 423
State........................................... -- -- 143
Foreign......................................... 29 128 28
-------------- ------------- -------------
Total current................................ 29 (3,442) 594
-------------- ------------- -------------
Deferred:
Federal......................................... 6,220 (3,011) 641
State........................................... 1,660 (940) 12
-------------- ------------- -------------
Total deferred............................... 7,880 (3,951) 653
-------------- ------------- -------------
Charge in lieu of taxes
attributable to employee stock plans............ -- 172 33
-------------- ------------- -------------
$ 7,909 $ (7,221) $ 1,280
============== ============= =============
</TABLE>
The tax effects of temporary differences that give rise to significant
components of the deferred tax assets and liability are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------
1996 1995
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Inventory and other reserves.............................. $ 2,141 $ 3,515
State taxes............................................... -- --
Net operating loss carryforwards.......................... 5,442 3,693
Capital loss carryforward................................. 428 427
Depreciation differences on property and equipment........ 808 204
Accrued vacation.......................................... 145 214
Other..................................................... 601 658
--------------- ---------------
9,565 8,711
Less valuation allowance.................................. (9,565) (427)
--------------- ---------------
Deferred tax asset........................................ -- 8,284
Deferred tax liability:
State taxes............................................... -- (594)
--------------- ---------------
Deferred tax liability.................................... -- (594)
--------------- ---------------
Net deferred tax asset....................................... $ -- $ 7,690
=============== ===============
</TABLE>
At September 30, 1996, the Company established a full valuation
allowance against its deferred tax assets, resulting in an additional income
tax expense of approximately $7.9 million. Prior to September 30, 1996, the
Company believed that, based upon available objective evidence, it was more
likely than not that its deferred tax asset would be realized. The factors
considered by management in concluding that it was more likely than not
that its deferred tax asset would be realized included prior income,
consistent profits, and carryback potential to realize deferred tax assets.
As of September 30, 1996, the Company believes that due to the Company's
recent history of losses, combined with changing price pressures and market
conditions, the uncertainty regarding the realizability of its deferred tax
assets is to the point where it is now more likely than not that the
deferred tax assets will not be realized.
30 of 33
<PAGE> 31
The provision (benefit) for income taxes differs from the amount
computed by applying the statutory federal income tax rate at 34% to income
before income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed expected tax..................................... $ (1,829) $ (7,012) $ 1,226
State taxes (benefit), net of federal benefit............. -- (611) 104
Tax-exempt interest....................................... (73) (73) (101)
Increase in deferred tax valuation allowance.............. 9,138 427 --
Goodwill write off........................................ 586 -- --
Other ................................................... 87 48 51
------------- ------------- -------------
$ 7,909 $ (7,221) $ 1,280
============= ============= =============
</TABLE>
At September 30, 1996, the Company had net operating loss
carryforwards of approximately $10,300,000 for federal income tax purposes,
which expire in the year 2011, and $11,600,000 for state income tax
purposes, which expire in 1996 through 2002, subject to certain
limitations. The Company had foreign net operating loss carryforwards of
approximately $3,500,000.
NOTE 11. SEGMENT INFORMATION
The Company operates in one segment, the design, manufacture and
marketing of personal computer products. Net sales by geographic region are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1996 1995 1994
-------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
United States and Canada.............................. $ 140,662 $ 169,917 $ 125,496
Asia/Pacific.......................................... 12,833 41,756 31,631
Europe ............................................... 17,750 22,404 6,508
-------------- ------------- -------------
$ 171,245 $ 234,077 $ 163,635
============= ============= =============
</TABLE>
31 of 33
<PAGE> 32
NOTE 12. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
The table below presents unaudited quarterly data for 1996 and
1995. Management believes this information reflects all adjustments
necessary for a fair presentation of the quarterly data. The operating
results for any quarter presented are not necessarily indicative of the
results that may be expected for future periods.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER(3)
-------- ------------- ------------- ------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales............................... $ 60,215 $ 40,652 $ 29,783 $ 40,595
Gross profit............................ 7,517 4,029 3,697 3,933
Income (loss) from operations........... 1,600 (1,246) (2,175) (3,570)
Net income (loss)....................... 929 (916) (1,909) (11,392)
Net income (loss)per common and
common equivalent share................ $ .07 $ (.07) $ (.14) $ (.82)
Common stock prices:(1)
High................................ 4 7/8 4 1/4 3 3/8 3
Low................................. 3 1/4 2 1/2 2 1/2 1 7/8
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER(2) QUARTER
--------- ------------- ------------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales............................... $ 58,813 $ 53,578 $ 53,840 $ 67,846
Gross profit (loss)..................... 9,184 6,520 (4,085) 7,966
Income (loss) from operations........... 2,187 28 (23,229) 1,544
Net income (loss)....................... 1,407 80 (15,160) 837
Net income (loss)per common and
common equivalent share................ $ .10 $ .01 $ (1.11) $ .06
Common stock prices:(1)
High................................ 5 1/8 5 7/8 5 5/8 5 1/8
Low................................. 3 3/4 4 1/2 4 1/8 3 5/8
</TABLE>
(1) The Company's common stock is traded on the Nasdaq National Market under
the symbol MCRN. The prices shown above are the high and low closing sale
prices during each quarter for the Company's common stock as reported by
Nasdaq.
(2) Included in the results of operations for the quarter ended June 30, 1995
are a one-time charge of $11.9 million reflecting the write off of
receivables from Osborne Computers and a $9.1 million provision for
reserves against inventories.
(3) Included in the net loss for the quarter ended September 30, 1996 are the
write down of $1.7 million related to remaining goodwill from the
acquisition of Orchid Technology and an increase in valuation allowance
for deferred tax asset of $7.9 million with respect to the uncertainty of
realizing future deferred tax assets (see Notes 4 and 10).
32 of 33
<PAGE> 33
SCHEDULE II
MICRONICS COMPUTERS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1996 1995(1) 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance at beginning of year $ 667 $ 657 $ 424
Additions from acquisition of subsidiary -- -- 138
Charged to bad debt expense 201 290 124
Write offs charged to allowance (555) (280) (29)
-------------- ------------- -------------
$ 313 $ 667 $ 657
============= ============= =============
</TABLE>
(1) In addition, the Company recorded a charge of $11.9 million directly to
operating expenses reflecting the write off of receivables from Osborne
Computers (see Note 9 of Notes to Consolidated Financial Statements).
EXHIBITS
33 of 33
<PAGE> 1
Exhibit 11.01
MICRONICS COMPUTERS, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
PRIMARY
Net income (loss)............................................ $ (13,288) $ (12,836) $ 2,326
------------- ------------- -------------
Average shares outstanding................................... 13,805 13,513 11,652
Options ..................................................... -- -- 234
------------- ------------- -------------
Total common stock and common stock
equivalents.............................................. 13,805 13,513 11,886
------------- ------------- -------------
Net income (loss) per common share........................... (.96) (.95) .20
FULLY DILUTED
Net income (loss)............................................ $ (13,288) $ (12,836) $ 2,326
------------- ------------- -------------
Average shares outstanding................................... 13,805 13,513 11,652
Options ..................................................... -- -- 234
------------- ------------- -------------
Total common stock and common stock
equivalents.............................................. 13,805 13,513 11,886
------------- ------------- -------------
Net income (loss) per common share........................... (.96) (.95) .20
------------- ------------- -------------
</TABLE>
<PAGE> 1
Exhibit 23.01
Consent of Independent Auditors
The Board of Directors
Micronics Computers, Inc.
We consent to incorporation by reference in the registration statements (Nos.
33-89588, 33-83880, 33-67468, 33-47885, and 33-42048) on Form S-8 of Micronics
Computers, Inc. of our report dated December 12, 1996, relating to the
consolidated balance sheets of Micronics Computers, Inc. and subsidiaries as of
September 30, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 1996 and related schedule, which report
appears in the September 30, 1996 annual report on Form 10-K of Micronics
Computers, Inc.
/s/ KPMG Peat Marwick LLP
San Jose, California
December 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000874737
<NAME> MICRONICS COMPUTERS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 18,253
<SECURITIES> 3,188
<RECEIVABLES> 20,949
<ALLOWANCES> 313
<INVENTORY> 9,836
<CURRENT-ASSETS> 55,706
<PP&E> 10,713
<DEPRECIATION> 5,415
<TOTAL-ASSETS> 61,827
<CURRENT-LIABILITIES> 17,939
<BONDS> 0
0
0
<COMMON> 139
<OTHER-SE> 43,749
<TOTAL-LIABILITY-AND-EQUITY> 61,827
<SALES> 171,245
<TOTAL-REVENUES> 171,245
<CGS> 152,069
<TOTAL-COSTS> 152,069
<OTHER-EXPENSES> 486
<LOSS-PROVISION> 201
<INTEREST-EXPENSE> 247
<INCOME-PRETAX> (5,379)
<INCOME-TAX> 7,909
<INCOME-CONTINUING> (13,288)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,288)
<EPS-PRIMARY> (.96)
<EPS-DILUTED> (.96)
</TABLE>
