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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-19272
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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.)
45365 NORTHPORT LOOP WEST
FREMONT, CALIFORNIA 94538 - 6417
(510) 651-2300
(Address, including zip code, of registrant's principal
executive offices and registrant's telephone number, including
area code)
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SECURITIES TO BE 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
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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 12, 1997 was $25,805,254 based on the closing sale
price of such stock on the Nasdaq National Market. At December 12, 1997, there
were 12,902,627 shares of the registrant's common stock outstanding.
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TABLE OF CONTENTS
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PART I
ITEM 1 Business............................................................ 3
ITEM 2 Properties.......................................................... 9
ITEM 3 Legal Proceedings................................................... 9
ITEM 4 Submission of Matters to a Vote of Securities Holders............... 9
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder
Matters............................................................. 9
ITEM 6 Selected Financial Data............................................. 10
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 11
ITEM 7A Quantitative and Qualitative Disclosures About Market Risks......... 15
ITEM 8 Financial Statements and Supplementary Data......................... 15
ITEM 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures................................ 15
PART III
ITEM 10 Directors and Executive Officers of the Registrant.................. 16
ITEM 11 Executive Compensation.............................................. 18
ITEM 12 Security Ownership of Certain Beneficial Owners and Management...... 21
ITEM 13 Certain Relationships and Related Transactions...................... 22
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 23
SIGNATURES .................................................................... 26
CONSOLIDATED FINANCIAL STATEMENTS............................................... 27
SCHEDULE II - Valuation and Qualifying Accounts................................. 42
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Any statements contained herein that are forward-looking involve a number
of risks and uncertainties. In addition to the factors discussed in this Report,
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 the Company's and its competitors' ability to
introduce new products; the 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.
PART I
ITEM 1. BUSINESS
Micronics Computers, Inc. is a supplier of advanced system boards for
high-performance personal computers sold by original equipment manufacturers
("OEMs"), distributors and value-added resellers ("VARs"), graphics accelerator
products and the Nucleus family of "barebones" system products
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 goal is to introduce
new products in response to technological advances and changing market
requirements, thereby allowing the Company's customers to deliver leading-edge
products to their markets. In addition to its system board products, the Company
markets graphics accelerator products and its Nucleus family of "barebones"
system products. A barebones system includes a case, power supply and system
board.
Through its wholly-owned subsidiary, Orchid Technology ("Orchid"),
Micronics designs, manufactures and markets an Orchid multimedia graphics
accelerator add-in card. Orchid's design capabilities in graphics are currently
being integrated onto the system board. 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
94538, 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 1992, Intel and several other computer-industry companies, including
Micronics, formed the
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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 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(R), Pentium(R) Pro and Pentium(R) II, and
AMD-K5(TM) and AMD-K6(TM) microprocessors. The Company's line of 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 AMD 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 the PCI bus for high performance, ISA bus for input/output
flexibility and AGP bus for greater bandwidth capacity, which provides a higher
data transfer rate. Micronics recently introduced the Cyclone system board,
which is designed for the NLX form factor. The NLX form factor provides easy
installation and removal of the system board and better accessibility to
upgradeable components. These advantages will enhance serviceability to reduce
Total Costs of Ownership (TCO). In recent years, Micronics system boards have
been typically sold without a CPU.
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, including computer-aided design ("CAD"), computer-aided
manufacturing ("CAM"), desktop publishing, network file servers, UNIX servers
and software development.
The life of the Company's system board products generally range from three
to nine months. Most of the Company's current system board products are mid- to
end-of-life products. The Company anticipates that its next major product
release will be made concurrent with the introduction by Intel of its BX chip
product upon which the Company's new release is based. Although Intel currently
has announced the release date of its BX chip for mid 1998, there is no
assurance Intel will do so at that time or, if Intel's BX chip is released,
Intel will not also release a system board that either meets the needs of the
Company's customers at a lower price or that is technically superior to the
Company's system board.
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Multimedia Products. The Company, through Orchid, offers graphics boards
that provide accelerated, high-resolution graphics. Micronics' goal is to
develop 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 technology features are high and hence the functions incorporated in
these add-in cards are not as widely sold as the general system boards. The
latest product to be offered by Orchid is the Righteous(TM) 3D add-in card,
introduced in September, 1996. This product brings arcade-level 3D graphics
functionality to a PC system. Such a product is 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, an add-in card lets systems
companies and individual users tailor their product to the users requirement.
The Company plans to introduce in the next fiscal year 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. Sales of the Righteous 3D
add-in card, and other Orchid multimedia products accounted for less than 22% of
the Company's revenue during the last quarter of fiscal year ended September 30,
1997 (referred to in this Report as 1997) and are currently $8.5 million in
absolute dollars during the first quarter of 1998.
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. Sales of
the Nucleus Systems accounted for less than 6% of the Company's revenue during
the last quarter of 1997 and are currently $1.3 million in absolute dollars
during the first quarter of 1998.
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. Multimedia products are principally sold to
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 61%, 57% and 51% of the Company's net sales in
1997, 1996 and 1995, 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 EDS) and distributors accounted for
approximately 29%, 35% and 40% in 1997, 1996 and 1995, respectively, of the
Company's net sales. The increase in OEM sales and the decrease in distribution
sales as a percent of net sales is due to the Company's decline in sales levels
in 1997 as compared to 1996 and 1995, and the consistent sales levels during
these same periods of the Company's largest OEM, Micron Electronics, Inc. The
Company expects OEM sales to decline and distribution sales to increase as a
percent of net sales in fiscal year 1998 due to much lower sales levels to
Micron Electronics, Inc., at least for the first nine months of 1998. 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 1997, 1996 and 1995
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 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.
Micronics' European sales are handled primarily by a subsidiary in the United
Kingdom, as well as through distributors established in other international
markets. In 1997, 1996 and 1995,
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international sales accounted for 15%, 18% and 27%, respectively, of the
Company's net sales. The decrease in international sales in 1996 from 1995 is
due to the Company having no sales to Osborne Computers in 1996, due to
Osborne's bankruptcy. The Company estimates that international sales will
increase as a percent of net sales in 1998 primarily due to increased sales in
the European market. 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 1997, Micron Electronics, Inc., Ingram Micro Inc. and Omni Tech Corp.
combined for approximately 61% of net sales. In 1996 and 1995, three customers
combined for approximately 71% and 47% of the Company's net sales, respectively.
The Company's largest international customer in 1995, Osborne Computers in
Australia, accounted for 11% of the Company's net sales in 1995. The Company did
not have any sales to Osborne in 1996 and 1997. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Net
Sales" and Note 8 of Notes to Consolidated Financial Statements.
The Company is estimating significantly lower sales levels in 1998 to one
of its largest customers, Micron Electronics, Inc. The lower sales level is due
to increased competition in the motherboard industry and inability to gain
customer acceptance of certain of the Company's most recently released products.
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, will have a material adverse effect on
the Company's results of operations.
Backlog. The Company's customers generally order products on an as-needed
basis. Distributors, VARs 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 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 the 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 has enabled 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 1997, 1996 and 1995, research and development
expenses were $5.5 million, $7.4 million and $7.1 million, respectively. See
"Item 7."
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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 primarily in the Company's production facility in
Fremont, California. Volume manufacturing of system boards, including prototype
boards, is performed principally in Taiwan by Orient Semiconductor Electronics
Ltd. ("OSE"). The Company believes a short-term to mid-term material adverse
effect on operations might 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 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. 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. Other than the Intel CPU, which the Company
generally no longer ships with its system board products, 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, due to
the close relationship the Company has with its key suppliers. The Company's
graphics products include certain sole source components such as graphic
controller chips. There have been occasional shortages in the availability of
graphic chips and 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."
The Company has a purchase commitment with one of its suppliers for $12
million in graphics chips. The ultimate value of this commitment to the Company
is dependent on the Company's ability to sell its graphics add-on card in fiscal
1998. It is reasonably possible that the Company may not fulfill its sales
projections for this product and therefore this commitment may have a material
adverse effect on the Company's results of operations. The Company has from
time to time faced a shortage of these core logic chipsets which have put at
risk its relationships with its customers.
COMPETITION
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. 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 price, time-to-market, brand name awareness, engineering
expertise, product reliability and performance, customer support and access to
distribution channels. The Company believes that it currently competes favorably
in many of these areas. The increased participation by Intel in the system board
market over the past four 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 greater financial, technical,
manufacturing and marketing resources, including Intel, will not continue to
increase competition based upon these factors in the future and that this
continued or 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
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chipsets. 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 relevant patents
has 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, 1997, the Company had 122 full-time employees, 37 in
research and development, 28 in operations, 39 in sales, marketing and customer
support and 18 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 material 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,
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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."
ITEM 2. PROPERTIES
The Company's facility includes one building in Fremont, California
totaling approximately 64,000 square feet and houses the principal activities of
Micronics. The Company moved in its entirety to this new location effective
January 1, 1997. The new location address for Micronics Computers, Inc. and
Orchid Technology is 45365 Northport Loop West, Fremont, California 94538-6417.
The main company telephone and fax numbers are telephone: (510) 651-2300 and
fax: (510) 651-5612. Additionally, the Company leases, under operating leases
not considered material to the Company, a sales and service office in the United
Kingdom and an office in Taiwan housing certain sales, and manufacturing support
activities.
ITEM 3. LEGAL PROCEEDINGS
The Internal Revenue Service examinations of the Company's tax returns for
fiscal years 1993 through 1995 have resulted in a preliminary finding that the
Company owes additional taxes and interest amounting to approximately $3.9
million. Although it is reasonably possible the Company may incur a loss upon
conclusion of this claim, the Company believes that adequate tax payments have
been made and accruals recorded for all years, and that this matter will not
have a significant material adverse effect on the Company's financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 the high and low closing sale
prices for the Company's common stock as reported by Nasdaq since the beginning
of fiscal 1996..
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High Low
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<S> <C> <C>
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
October 1 - December 31, 1996 2 7/8 2 5/32
January 1 - March 31, 1997 3 2 1/64
April 1 - June 30, 1997 3 7/8 1 25/32
July 1 - September 30, 1997 3 3/16 1 7/8
</TABLE>
The approximate number of record holders of the Company's Common Stock at
December 4, 1997 was 478, which does not include those who hold in street or
nominee name.
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Micronics has never paid any cash dividends. The Company currently plans
to retain earnings, if any, for use in its business and therefore does not
anticipate paying any cash dividends in the foreseeable future.
The Company's Common Stock price may be subject to significant volatility.
For any given quarter, a shortfall in the Company's announced revenue or
earnings from the levels expected by the market could have an immediate and
adverse effect on the trading price of the Company's Common Stock. The Company
may not learn of, or be able to confirm, revenue or earnings shortfalls until
late in the quarter or following the end of the quarter. In general, the Company
participates in a very dynamic high technology industry which can result in
significant fluctuations in the Company's Common Stock price at any time.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial information
for each of the last five years ended September 30, 1997. This information
should be read in connection with those consolidated financial statements and
notes thereto.
STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $ 99,276 $ 171,245 $ 234,077 $ 163,635 $ 182,213
Cost of sales 90,820 152,069 214,492 142,544 148,109
--------- --------- --------- --------- ---------
Gross profit 8,456 19,176 19,585 21,091 34,104
Operating expenses:
Research and development 5,492 7,391 7,147 6,378 6,410
Selling and marketing 8,296 9,073 12,953 8,320 7,365
General and administrative . 5,173 6,430 7,098 4,169 4,805
Write off of long-lived assets -- 1,673 -- -- --
Write off of accounts receivable
from Osborne Computers -- -- 11,857 -- --
--------- --------- --------- --------- ---------
Total operating expenses 18,961 24,567 39,055 18,867 18,580
--------- --------- --------- --------- ---------
Income (loss) from operations (10,505) (5,391) (19,470) 2,224 15,524
Interest income 1,189 745 372 606 811
Interest expense -- (247) (776) (39) (6)
Other income (expense), net (473) (486) (183) 815 (163)
--------- --------- --------- --------- ---------
Income (loss) before income taxes (9,789) (5,379) (20,057) 3,606 16,166
Provision (benefit) for income taxes -- 7,909 (7,221) 1,280 6,053
--------- --------- --------- --------- ---------
Net income (loss) $ (9,789) $ (13,288) $ (12,836) $ 2,326 $ 10,113
========= ========= ========= ========= =========
Net income (loss) per common share $ (.70) $ (.96) $ (.95) $ .20 $ .90
========= ========= ========= ========= =========
Common and common equivalent
shares used in computing per
share amounts 14,006 13,805 13,513 11,886 11,297
========= ========= ========= ========= =========
</TABLE>
10
<PAGE> 11
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Cash, cash equivalents and
short-term investments...... $ 23,190 $ 23,064 $ 4,588 $ 20,496 $ 23,655
Working capital................. 29,642 37,767 47,585 61,558 55,349
Total assets.................... 49,649 61,563 93,254 93,740 76,574
Long-term debt.................. -- -- 397 3,264 --
Stockholders' equity............ 34,379 43,888 56,554 67,933 57,595
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained herein, the matters
discussed in this Form 10-K are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended, that involve risks and uncertainties,
including the rate of orders for the Company's products, the timely availability
and acceptance of new products, changes in management of the Company,
difficulties experienced by the Company with respect to hiring and retaining
qualified personnel, the impact of competitive products and pricing, the impact
of the Company's efforts to implement its evolving long-term strategy and the
other risks detailed below including, without limitation, the risks described in
this section labeled "Factors That May Affect Future Results," and the risks
described from time to time in the Company's other reports filed with the
Securities and Exchange Commission. The actual results that the Company achieves
may differ materially from any forward-looking projections due to such risks and
uncertainties. Words such as "believes," "anticipates," "expects," "future,"
"intends," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
The Company's operating results are subject to quarterly and other
fluctuations due to a variety of factors, including the volume and timing of
orders received, potential cancellation or rescheduling of orders, competitive
pressures, availability and cost of component parts and materials from the
Company's suppliers, the adequate forecasting of the mixed product demand due to
production lead times, the timing of new product announcements and introductions
by the Company or its competitors, changes in the mix of products sold, research
and development expenses associated with new product introductions, the timing
and level of development costs, market cyclical nature of the semiconductor
industry and economic conditions generally or in various geographic areas and
the Company's ability to develop new product features.
In recent quarters, the Company has experienced declining net sales and
has incurred net losses as a result of competitive pressures and the effects of
the loss of and slowing order rate from its major OEM and government customers.
The Company's ability to reduce the trend of declining net sales, which have
yielded net losses, is dependent on several factors including increased order
rates for the Company's products, successful and timely development and market
acceptance of the Company's next generation products, the availability of
qualified sales and engineering personnel and successful competition with the
Company's competitors on a price, service and performance basis. Many of these
factors are not within the Company's control, and if order rates for the
Company's products fail to increase, if the Company's next generation products
are not successfully and timely developed and accepted by the Company's
customers, or if the Company cannot successfully compete with its competitors,
many of whom have substantially greater resources than the Company, the
Company's net sales will continue to decline. To the extent that the Company is
unable to offset such sales declines with cost reductions, recurring losses are
likely. The Company cannot at this time foresee when it again will reach
profitability.
11
<PAGE> 12
RESULTS OF OPERATIONS
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. The Company refers to its fiscal year ended September 30, 1997, 1996,
1995 in this Item 7 as "1997", "1996" and "1995," without reference to the fact
that these are fiscal, rather than calendar, years.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES PERCENT INCREASE,
YEAR ENDED SEPTEMBER 30, (DECREASE)
- -------------------------------- --------------------
1997 1996 1995 1997 1996
- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C>
100.0% 100.0% 100.0% Net sales (42)% (27)%
91.5 88.8 91.6 Cost of sales (40) (29)
- ------- -------- -------
8.5 11.2 8.4 Gross profit (56) (2)
Operating expenses:
5.5 4.3 3.1 Research and development (26) 3
8.4 5.3 5.5 Selling and marketing (9) (30)
5.2 3.8 3.0 General and administrative (19) (9)
-- 1.0 -- Write off of long-lived assets * *
Write off of accounts receivable
-- -- 5.1 from Osborne Computers * *
- ------- -------- -------
(10.6) (3.2) (8.3) Loss from operations 95 (72)
0.7 -- (0.3) Interest and other, net * *
- ------- -------- -------
(9.9) (3.2) (8.6) Loss before income taxes 82 (73)
-- 4.6 (3.1) Provision (benefit) for income taxes * *
- ------- -------- -------
(9.9)% (7.8)% (5.5)% Net loss (26)% 4%
======== ======== ========
</TABLE>
* Period-to-period change expressed as a percentage is not meaningful.
NET SALES
Net sales decreased 42% from 1996 to 1997 and 27% from 1995 to 1996, both
primarily the result of 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(R) products. 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 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.
However, the Company's current products are generally mid- to end-of-life
products. Future revenue will depend on the level of sales to existing major
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.
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 material adverse effect on the Company's
results of operations.
COST OF SALES/GROSS PROFIT
The Company's gross margins have fluctuated and will continue to fluctuate
quarterly and annually based upon a variety of factors such as changes in
product mix, average selling prices and other costs associated with reserving
for
12
<PAGE> 13
any excess/obsolete inventories. The Company's gross profit as a percentage of
net sales was 8.5% for 1997, 11.2% for 1996 and 8.4% for 1995. The lower gross
margin in 1997, as compared to 1996, is principally due to the effect of
reducing high levels of inventory accumulated because of late product
introductions during the second half of 1997. During the year, the Company
provided approximately $3.0 million ($2.0 million in the fourth quarter) in
additional inventory reserves to recognize the anticipated losses associated
with the disposal of excess/obsolete inventories. Also, intense price
competition contributed to lower margins in 1997. These increased inventory
reserve costs were partially offset by reduced labor and overhead costs due to
more efficient operations at the Company's headquarters.
The increase in gross margin percentage in 1996 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-or-market inventory writedowns primarily related to price erosion in the
memory component marketplace.
RESEARCH AND DEVELOPMENT
The Company continues to invest in new product development efforts based
on the latest technologies which is essential to developing new products.
Research and development spending totaled $5.5 million for 1997 (5.5% of net
sales), $7.4 million for 1996 (4.3% of net sales) and $7.1 million for 1995
(3.1% of net sales). The decrease in spending of $1.9 million during 1997 as
compared to 1996 is due primarily to lower employee salaries and benefit
expenses associated with lower employee headcount and lower material and
overhead costs incurred in the prototyping of new products introduced in 1997.
The increase in spending during 1996 as compared to 1995 is primarily due to
higher employee costs. The Company expects to spend approximately the same
amount in absolute dollars during 1998 as it did in 1997 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 due to this intense competition.
SELLING AND MARKETING
Selling and marketing expenses for 1997 decreased $0.8 million to $8.3
million (8.4% of net sales) from the 1996 spending of $9.1 million. The nominal
decrease of expenses in 1997 is principally due to the favorable impact of the
closure of two European sales offices for the full year.
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. Cost
savings resulting from consolidating the Orchid and Micronics sales and
marketing activities were realized mostly in the second half of 1996. The
Company anticipates that 1998 spending will continue at the approximate 1997
expense levels.
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 future sales.
GENERAL AND ADMINISTRATIVE
General and administrative spending was $5.2 million, $6.4 million and
$7.1 million for fiscal years 1997, 1996 and 1995, respectively. The decrease of
$1.2 million in 1997 to $5.2 million from 1996 expenses of $6.4 million is due
to the further consolidation of Micronics, Orchid and Microniche functions and
the elimination of costs from operating in a consolidated group rather than
three individual administrative organizations and the impact of the closure of
two European sales offices for the full year. The lower spending in 1996 was the
result of a return to more normal spending
13
<PAGE> 14
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 Company has had several personnel changes in its general and
administrative organization over 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 systems and operating procedures. These changes could have a
negative impact on the Company's administrative activities. The Company expects
to spend approximately the same amount during 1998 as it did in 1997 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, the Company assessed the future
recoverability of the remaining $1.7 million of goodwill. 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., 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 20%
interest in Osborne Australia to Gateway 2000 in November 1996 for $794,000.
INTEREST AND OTHER, NET
Interest income was $1,189,000, $745,000 and $372,000 in 1997, 1996 and
1995, respectively. The increases from 1996 to 1997 and from 1995 to 1996 were
in both periods the result of much higher average cash levels which were
invested. The Company expects future interest income to decline as it uses cash
to fund operations.
Interest expense was $0, $247,000 and $776,000 in 1997, 1996 and 1995,
respectively. The lower costs in 1997 and 1996 are the result of no borrowing on
the Company's line of credit during 1996 and 1997 and full repayment in 1996 of
the mortgage which was secured by a building acquired as part of the Orchid
acquisition. 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. The lack of interest expense in 1997 is
likely to continue in 1998 because of the cash and cash equivalents available
for investing and other operating requirements.
Other expense in 1997 and 1996 of $473,000 and $486,000, respectively, is
primarily attributable to the amortization of deferred financing costs and other
financing costs associated with acquiring and maintaining the Company's line of
credit, which expired in September 1997 and was not renewed, along with foreign
currency exchange losses. Other expense in 1995 of $183,000 is principally
foreign currency exchange losses.
14
<PAGE> 15
PROVISION (BENEFIT) FOR INCOME TAXES
The Company recorded no tax expense in 1997. 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% effective tax rate due to
operating losses. See Note 9 to the Consolidated Financial Statements.
INTERNAL REVENUE SERVICE EXAMINATION
The Internal Revenue Service examinations of the Company's tax returns for
the fiscal years 1993 through 1995 have resulted in a preliminary finding that
the Company owes additional taxes and interest amounting to approximately $3.9
million. Although it is reasonably possible the Company may incur a loss upon
conclusion of this claim, management believes that adequate tax payments have
been made and accruals recorded for all years, and that this matter will not
have a significant material adverse effect on the Company's financial condition
or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1997 was $29.6 million, down from $37.8
million and $47.6 million at the end of 1996 and 1995, respectively. Cash, cash
equivalents and short-term investments of $23.2 million increased slightly from
$23.1 million at the end of 1996, the result of the net loss of $9.8 million
offset by a $10.4 million decrease in accounts receivable.
At September 30, 1997, the Company's principal sources of liquidity
included $23.2 of cash, cash equivalents and short-term interest-bearing
financial instruments. See Note 2 to the Consolidated Financial Statements.
Management believes existing cash, cash equivalents and short-term
investments will provide sufficient funds to meet the Company's operating and
capital requirements for at least the next year. The Company does not expect to
generate positive cash flow in the foreseeable future.
On November 24,1997, the Company repurchased on the open market from a
single shareholder approximately 1.2 million shares of its outstanding common
stock for a cash price less than market, or approximately $2.4 million. These
shares have been retired. See Item 13 - Certain Relationships and Related
Transactions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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.
15
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning executive officers and directors of the Company as
of September 30, 1997 is set forth below:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
William Earle Shelander 44 Chairman of the Board of Directors and Chief
Executive Officer
Diane Simon (1) 61 Private Investor
James Timmons (1) 42 Partner, Glenwood Capital and Redwood Partners
Fred Dietrich 59 President
Bill R. Finley 57 Vice President, Finance and Chief Financial
Officer
William Crouch 50 Vice President, Sales and Marketing
Wun-Yann Liao 42 Vice President, Operations
Larry Smith 52 Vice President, Research and Development
</TABLE>
(1) Current member of the Compensation Committee and the Audit Committee.
Mr. Shelander has been the Company's Chairman of the Board and Chief
Executive Officer since September 1997, and has been a director of the Company
since September 1990. Mr. Shelander also serves as a general partner of Palmer
East West Capital, a venture capital firm. From June 1995 to October 1996, he
was Co-President of JAFCO America Ventures, Inc., a venture capital firm and the
United States subsidiary of Japan Associated Finance Co., Ltd., a public company
listed on the Tokyo over-the-counter market. Japan Associated Finance Co., Ltd.
and two investment partnerships affiliated with JAFCO America Ventures, Inc. are
investors in the Company. From October 1988 to June 1995, Mr. Shelander was
General Manager, and from June 1986 to October 1988 he was an Associate, of
JAFCO America Ventures, Inc. He previously served as National Product Manager of
Liquid Air Corporation and was a systems engineer with Union Carbide
Corporation. Mr. Shelander holds a BS in industrial and systems engineering from
the Georgia Institute of Technology, an MSE in chemical engineering from West
Virginia College of Graduate Studies and an MBA from Stanford University.
Ms. Simon has been a director of the Company since February 1997, and is a
private investor. From November 1996 to October 1997, Ms. Simon served as Vice
President Operations and Controller for Lumina Office Products, a
multi-functional office equipment manufacturer. From January 1996 to November
1996, she was Chief Operating Officer of Wood Associates, a promotional
merchandising company. From January 1995 to December 1995, she was Vice
President Operations for Aureal Semiconductor, a developer of semiconductor
devices. From 1981 to January of 1995 she was Vice President Operations of Wyse
Technology, a computer systems and terminal manufacturer. Ms. Simon holds a BA
and an MA from the City University of New York.
Mr. Timmins has been a director of the Company since September 1997, and
has been a partner of Glenwood Capital since September 1991, and a partner of
Redwood Partners since August 1995, both of which are venture buyout firms. Mr.
Timmins holds a BA from the University of Toronto and a MBA from Stanford
University.
Mr. Dietrich has been the Company's President since September 1997. He
continues to hold the position of President and Chief Operating Officer of
Pentad Securities, Inc., an investment company. He has held this position since
1992. Mr. Dietrich holds an AA in business from Chicago City College and an MBA
equivalent from New York Graduate School of Business.
Mr. Finley has been the Company's Vice President, Chief Financial Officer
and Secretary since January 1997. Prior to joining the Company, Mr. Finley was
Chief Financial Officer for Vanguard Automation, Inc., a semiconductor equipment
company in Tucson, Arizona. From January 1992 until November 1994, he was CFO
and President of Ramtek Corporation, a computer peripheral products company. Mr.
Finley holds a BS in business administration from Oregon State University and an
MBA from University of California, Berkeley. He is a CPA.
16
<PAGE> 17
Mr. Crouch has been the Company's Vice President, Sales and Marketing
since August 1996. From April 1995 to May 1996, he was Director, Sales and
Marketing at Fujitsu Microelectronics, Inc. From January 1992 to April 1995, he
was Executive Vice President of Aztech Labs, Inc. Mr. Crouch holds a BA in
economics and communications from the University of Arizona.
Mr. Liao has been Vice President, Operations since July 1996. He continues
to hold the post of President and CEO of Microniche Information Systems, 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.
Mr. Smith has been the Company's Vice President, Engineering since
November 1996. He was Director, Technical Services from August 1996 to November
1996. Prior to joining the Company, Mr. Smith was Software Designer from
November 1995 to August 1996 for Tandem Computers, Inc. and Project Manager from
January 1989 to October 1995 at Wyse Technology. Mr. Smith holds a BS in
electrical engineering from the University of Minnesota.
17
<PAGE> 18
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded, earned or paid for
services rendered in all capacities to the Company and its subsidiaries during
each of the fiscal years 1995, 1996 and 1997 to the Named Officers. This
information includes the dollar values of base salaries, bonus awards, the
number of stock options granted and certain other compensation, if any, whether
paid or deferred. The Company does not grant SARs and has no long-term
compensation benefits other than stock options.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------------
OPTIONS ALL OTHER
BONUS (NO. OF COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) ($)(1) SHARES) ($)(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William E. Shelander (3) 1997 $ 31,615 -- 100,000 $ 43
Chairman of the Board, 1996 22,500 -- -- --
Chief Executive Officer 1995 23,625 -- 30,000 --
William Crouch 1997 $145,000 -- 55,000 $1,359
Vice President 1996 16,731 -- -- 279
Sales and Marketing 1995 -- -- -- --
Bill R. Finley 1997 $ 99,615 -- 65,000 $1,144
Vice President, Finance 1996 -- -- -- --
Chief Financial Officer 1995 -- -- -- --
and Secretary
Wun-Yann Liao 1997 $146,731 -- 15,000 $1,860
Vice President 1996 162,039 -- 50,000 1,541
Operations 1995 141,678 $6,270 10,000 1,362
Larry Smith 1997 $119,327 -- 65,000 $ 754
Vice President 1996 16,058 -- -- 227
Engineering 1995 -- -- -- --
Shanker Munshani 1997 $270,000 -- 75,000 $2,242
Former President, Chief 1996 198,269 -- 100,000 1,656
Executive Officer and 1995 146,154 $8,859 100,000 847
Secretary
</TABLE>
(1) Represents bonuses earned for services rendered during the fiscal year
listed, even if paid after the end of the fiscal year.
(2) Perquisites are excluded as their aggregate value did not meet the
reporting threshold of the lesser of $50,000 or 10% of the individual's
salary plus bonus. Represents insurance premiums paid by the Company with
respect to term life insurance for the benefit of the Named Officers ($206
and $77 for Messrs. Liao and Munshani, respectively, in fiscal 1995; $279,
$376, $227 and $791 and for Messrs. Crouch, Liao, Smith and Munshani,
respectively, in fiscal 1996; $43, $453, $497, $588, and $918 for Messrs.
Shelander, Crouch, Liao, Smith and Munshani, respectively, in fiscal
1997), and Company matching contributions to the Company's 401(k) plan
($1,156 and $770 for Messrs. Liao and Munshani, respectively, in fiscal
1995; $1,165 and $865 for Messrs. Liao and Munshani, respectively, in
fiscal 1996; and $906, $1,144, $1,363, $166, and $1,324 for Messrs.
Crouch, Finley, Liao, Smith, and Munshani, respectively, in fiscal 1997).
(3) Salary includes $27,000, $22,500 and $23,625 in fees paid to Mr. Shelander
as director fees in fiscal 1997, 1996 and 1995 respectively.
18
<PAGE> 19
STOCK OPTIONS AND OPTION GRANTS IN FISCAL 1997
The following table sets forth information concerning option grants during
the fiscal year ended September 30, 1997 to each of the Named Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (1)
--------------------------------------------------- --------------------------
% of Total
Options
Options Granted to Exercise
Granted Employees in Price Expiration
Name (#) (2) Fiscal Year(3) ($/Sh) Date 5% ($) 10% ($)
- ---- ------- -------------- ----------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
William E. Shelander.. 100,000 10.2% $2.44 09/02 $67,344 $148,812
William Crouch........ 55,000 5.6 2.38 - 2.44 12/01 - 03/02 28,180 69,826
Bill R. Finley........ 65,000 6.6 2.44 - 2.48 O1/02 - 03/02 44,395 98,095
Wun-Yann Liao......... 15,000 1.5 2.44 03/02 10,102 22,322
Larry Smith........... 65,000 6.6 2.38 - 2.44 12/01 - 03/02 34,914 84,707
Shanker Munshani...... 75,000 7.7 2.44 03/02 50,508 111,609
</TABLE>
(1) The 5% and 10% assumed rates of annual compound stock price appreciation
are mandated by rules of the SEC and do not represent the Company's
estimate or projection of future Common Stock prices. No value is reported
for options that expired without being exercised.
(2) Stock options are granted with an exercise price equal to the fair market
value of the Company's Common Stock on the date of grant. Options
generally become exercisable (a) as to grants made to optionees who have
not yet received an option under the plan and who have been hired by, or
commenced their relationship with, the Company within one year prior to
the grant date of the first such option, as to 25% of the shares subject
to the option on a date one year after the vesting start date specified by
the Board (generally, the hire date), with the remainder to vest in equal
amounts per month over the following three-year period and (b) as to
options granted to all other optionees, in equal amounts per month over
the four-year period commencing with the vesting start date specified by
the Board (generally the date of grant).
(3) The Company granted options to purchase 979,200 shares in fiscal 1997. The
following table sets forth information concerning the number and value of
unexercised stock options held at September 30, 1997 by each of the Named
Officers.
19
<PAGE> 20
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 9/30/97 AT 9/30/97 ($)(1)
ACQUIRED ON VALUE EXERCISABLE EXERCISABLE
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
William E. Shelander -- -- 20,000 110,000 -- --
William Crouch...... -- -- 13,542 41,458 -- --
Bill R. Finley...... -- -- 0 65,000 -- --
Wun-Yann Liao....... -- -- 25,208 49,792 $1,094 $2,658
Larry Smith......... -- -- 13,542 51,458 -- --
Shanker Munshani.... -- -- 125,000 150,000 -- --
</TABLE>
(1) These values have not been and may never be realized. They are based on
the positive spread between the respective exercise prices of outstanding stock
options and the closing price of the Company's Common Stock on September 30,
1997 ($2.25).
20
<PAGE> 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of December 1, 1997
with respect to the beneficial ownership of the Company's Common Stock by: (a)
each stockholder known by the Company to be the beneficial owner of more than 5%
of the Company's Common Stock; (b) each director; (c) each of the Company's
executive officers who earned in excess of $100,000 from the Company during
fiscal 1997, and one highly compensated executive officer who was not serving as
an executive officer at the end of fiscal 1997 (together, the "Named Officers");
and (d) all executive officers and directors as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL
OF BENEFICIAL OWNER OWNERSHIP(1) PERCENT OF CLASS
- ------------------- ----------------- ----------------
<S> <C> <C>
Dimensional Fund Advisors ............ 761,100 5.9%
1299 Ocean Ave., 11th Floor
Santa Monica, CA 90401
Ira Albert ........................... 759,500 5.9%
1304 SW 160th Ave., Ste. 209
Ft. Lauderdale, FL 33326
Capital Technology, Inc. ............. 692,800 5.4%
8314 Pineville Matthews Road
Charlotte, NC 28226
Shanker Munshani (2) ................. 166,281 1.3%
William E. Shelander (3) ............. 58,667 *
William Crouch (4) ................... 17,708 *
Bill R. Finley (5) ................... 14,586 *
Wun-Yann Liao (6) .................... 45,961 *
Larry Smith (7) ...................... 17,708 *
Diane Simon (8) ...................... 5,000 *
James Timmins ........................ -- *
All current officers and directors
as a group (7 persons) (9)............ 159,630 1.2%
</TABLE>
* Less than 1%.
(1) Unless otherwise indicated below, the persons named in the table have sole
voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
(2) Comprised of 19,406 shares owned by Mr. Munshani and 146,875 shares
subject to options exercisable within 60 days after December 1, 1997. Mr.
Munshani is no longer affiliated with the Company.
(3) Comprised of 17,000 shares owned by Mr. Shelander and 41,667 shares
subject to options exercisable within 60 days after December 1, 1997. Mr.
Shelander is an executive officer and a director of the Company.
(4) Represents 17,708 shares subject to options exercisable within 60 days
after December 1, 1997. Mr. Crouch is an executive officer of the Company.
(5) Comprised of 2,086 shares owned by Mr. Finley and 12,500 shares subject to
options exercisable within 60 days after December 1, 1997. Mr. Finley is
an executive officer of the Company.
21
<PAGE> 22
(6) Comprised of 14,815 shares owned by Mr. Liao and 31,146 shares subject to
options exercisable within 60 days after December 1, 1997. Mr. Liao is an
executive officer of the Company.
(7) Represents 17,708 shares subject to options exercisable within 60 days
after December 1, 1997. Mr. Smith is an executive officer of the Company.
(8) Represents 5,000 shares subject to options exercisable within 60 days
after December 1, 1997. Ms. Simon is a director of the Company.
(9) Comprised of 33,901 shares owned and 125,729 shares subject to options
exercisable within 60 days of December 1, 1997, representing the shares
referenced in notes (3), (4), (5), (6), (7) and (8) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On or about November 17, 1997 a principal stockholder of the Company, the
Lindner Fund, sold approximately 200,000 shares of the Company's Common Stock in
the open market. On November 24, 1997, the Company purchased 1,208,900 shares of
its Common Stock from the Lindner Fund in the open market after being contacted
by the Lindner fund's broker with an offer to sell additional shares to the
Company. The Company paid $2.00 per share in cash for the Common Stock held by
the Lindner Fund. The Sales price of the Company's Common Stock in the open
market prior to the sale was $ 2.25 per share, resulting in a purchase by the
Company of the Lindner Fund Common Stock at a price below market and a sale by
the Lindner Fund of its complete holdings of the Company's capital stock.
In September 1997, the Company and Shanker Munshani, the Company's then
current President and Chief Executive Officer, agreed to terminate Mr.
Munshani's employment and his position as a director of the Company. In order to
provide continuity for the Company's management, the Company entered into a
nine-month consulting arrangement pursuant to the terms of a written Consulting
Agreement. Under the Consulting Agreement, Mr. Munshani will be paid $19,166.67
per month for his consulting services not to exceed 10 hours per week during the
nine-month consulting period and will receive COBRA insurance benefits at the
Company's expense. Mr. Munshani's options will continue to vest during the
consulting period. The Consulting Agreement contains a mutual general release
and restates Mr. Munshani's continuing obligation to maintain the
confidentiality of the Company's proprietary and confidential information.
22
<PAGE> 23
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 ..................................................................... 27
Consolidated Balance Sheets as of September 30, 1997 and September 30, 1996 ........................ 28
Consolidated Statements of Operations for the years ended September 30, 1997, September 30, 1996
and September 30, 1995 ...................................................................... 29
Consolidated Statements of Stockholders' Equity for the years ended September 30, 1997,
September 30, 1996 and September 30, 1995 ................................................... 30
Consolidated Statements of Cash Flows for the years ended September 30, 1997, September 30, 1996
and September 30, 1995 ...................................................................... 31
Notes to Consolidated Financial Statements ......................................................... 32
(a) (2) Financial Statement Schedules
The following financial statement schedule of the Registrant is filed as
part of this report:
Schedule II -- Valuation and Qualifying Accounts................................................. 42
</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.
(a) (3) Exhibits
<TABLE>
<CAPTION>
Exhibits
--------
<S> <C>
2.01 Agreement and Plan of Merger between Micronics Computers, Inc.
(a California corporation) and Micronics Computers, Inc. (a
Delaware corporation)
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
2.03 Amendment to Agreement and Plan of Reorganization dated as of
August 1, 1994
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
2.04 Letter Agreement dated August 8, 1994 among Micronics Computers,
Inc., MCI Orchid and Orchid Technology
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
3.01 Certificate of Incorporation
3.02 Bylaws
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
4.02 Registration Rights Agreement dated as of August 19, 1994 among
Micronics Computers, Inc., Le Nhon Bui and Wearnes Technology
(Private) Limited.
10.01* 1989 Stock Option Plan, as amended to date
10.02* Form of Non-Qualified Stock Option Agreement for options granted
prior to January 1, 1990
10.03* Employee Stock Purchase Plan as amended to date
10.04* Form of Indemnification Agreement entered into by the Registrant
with each of its current directors and executive officers
10.05* 1992 Directors Stock Option Plan and related documents
10.06** Shareholder Agreement between Micronics Computers, Inc., (a
Delaware corporation), and Gateway 200, Inc., (a Delaware
corporation) dated as of July 27, 1995, as amended by letter
agreement dated August 2, 1995
10.07** Letter agreement dated August 2, 1995 between Micronics
Computers, Inc., and Gateway 2000, Inc. as amended by letter
agreement Dated September 27, 1995
10.08** Letter of Intent, dated February 25, 1997 between the Company
and Micron Electronics
10.09* Employment Agreement dated March 14, 1997 between the Company
and Shanker Munshani
10.10* Consulting Agreement dated September 8, 1997 between the Company
and Shanker Munshani
11.01 Computation of Net Loss Per Share
23.01 Consent of KPMG Peat Marwick LLP
27.01 Financial Data Schedule
</TABLE>
24
<PAGE> 25
(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
March 31, 1997 and incorporated herein by reference.
(D) Filed as an Exhibit to Form 10-Q Quarterly Report for the quarter ended
December 31, 1995 and incorporated herein by reference.
(E) Filed as an Exhibit to Form 8-K as filed with the Securities and
Exchange Commission on August 29, 1994.
(F) Filed as an Exhibit to Form 8-K as filed with the Securities and
Exchange Commission on August 12, 1993.
(G) Filed as an Exhibit to Form 10-K Annual Report for the year ended
September 30, 1993 and incorporated herein by reference.
(H) Filed as an Exhibit to Form S-1 Registration Statement (File No.
33-40388) and incorporated herein by reference.
(I) Filed as an Exhibit to Form S-8 Registration Statement (File No.
33-47885, as amended) and incorporated herein by reference.
(J) 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,
1997.
25
<PAGE> 26
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.
By: /s/ BILL R. FINLEY Date: December 29, 1997
---------------------------------------- -----------------
Bill R. Finley, Vice President, Finance
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Bill R. Finley, 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.
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>
/s/ WILLIAM SHELANDER Chairman of the Board, 12/29/97
- ------------------------------ Chief Executive Officer
William Shelander and Director (Principal Executive Officer)
/s/ BILL R. FINLEY Vice President, Finance and 12/29/97
- ------------------------------ Chief Financial Officer (Principal Financial
Bill R. Finley Officer and Principal Accounting Officer)
/s/ DIANE SIMONS Director 12/29/97
- ------------------------------
Diane Simons
/s/ JIM TIMMINS Director 12/29/97
- ------------------------------
Jim Timmins
</TABLE>
26
<PAGE> 27
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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1997, 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
November 7, 1997, except as to Note 12
which is November 24, 1997
27
<PAGE> 28
MICRONICS COMPUTERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $22,690 $19,876
Short-term investments ............................................... 500 3,188
Accounts receivable, net of allowance for doubtful
accounts ($755 in 1997 and $313 in 1996) .......................... 10,325 20,685
Inventories .......................................................... 9,853 9,836
Prepaid expenses and other assets .................................... 1,544 1,857
------- -------
Total current assets .............................................. 44,912 55,442
Property and equipment, net ............................................ 4,698 5,298
Other assets ........................................................... 39 823
------- -------
$49,649 $61,563
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 8,304 $11,587
Other accrued liabilities ............................................ 6,966 6,088
------- -------
Total current liabilities ......................................... 15,270 17,675
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, 14,079
and 13,866 shares outstanding at September 30, 1997
and 1996, respectively ............................................ 142 139
Additional paid-in capital ............................................. 33,308 32,968
Retained earnings ...................................................... 929 10,718
Unrealized gain on investments ......................................... -- 63
------- -------
Total stockholders' equity ........................................ 34,379 43,888
------- -------
$49,649 $61,563
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 29
MICRONICS COMPUTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales .................................... $ 99,276 $ 171,245 $ 234,077
Cost of sales ................................ 90,820 152,069 214,492
--------- --------- ---------
Gross profit ................................. 8,456 19,176 19,585
Operating expenses:
Research and development ................... 5,492 7,391 7,147
Selling and marketing ...................... 8,296 9,073 12,953
General and administrative ................. 5,173 6,430 7,098
Write off of long-lived assets ............. -- 1,673 --
Write off of accounts receivable
from Osborne Computers ............... -- -- 11,857
--------- --------- ---------
Total operating expenses ................ 18,961 24,567 39,055
--------- --------- ---------
Loss from operations ......................... (10,505) (5,391) (19,470)
Interest income .............................. 1,189 745 372
Interest expense ............................. -- (247) (776)
Other (expense), net ......................... (473) (486) (183)
--------- --------- ---------
Loss before income taxes ..................... (9,789) (5,379) (20,057)
Provision (benefit) for income taxes ......... -- 7,909 (7,221)
--------- --------- ---------
Net loss ..................................... $ (9,789) $ (13,288) $ (12,836)
========= ========= =========
Net loss per common share .................... $ (.70) $ (.96) $ (.95)
========= ========= =========
Common and common equivalent shares used in
computing per share amounts ................ 14,006 13,805 13,513
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
MICRONICS COMPUTERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
COMMON STOCK PAID-IN RETAINED TREASURY GAIN (LOSS) ON
SHARES AMOUNT CAPITAL EARNINGS STOCK INVESTMENTS TOTAL
-------- -------- -------- ---------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Stock issued under option
plans .................... 4 -- 11 -- -- -- 11
Stock issued under employee
stock purchase plans ..... 209 3 329 -- -- -- 332
Unrealized loss on investments -- -- -- -- -- (63)
(63)
Net loss ..................... -- -- -- (9,789) -- -- (9,789)
-------- -------- -------- -------- -------- -------- --------
Balances at September 30, 1997 ... 14,079 $ 142 $ 33,308 $ 929 $ -- $ -- $ 34,379
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
MICRONICS COMPUTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................... $ (9,789) $(13,288) $(12,836)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Write down of long-lived asset ................ -- 1,673 --
Depreciation and amortization ................. 1,010 1,710 2,369
Loss on disposal of property and equipment .... 144 152 --
Deferred taxes ................................ -- 7,690 (3,951)
Gain on exercise of put option with Osborne
Gateway .................................... (44) -- --
Gain on sales of marketable securities
and short-term investments, net ............ -- -- 263
Income tax benefit from employee stock plans .. -- -- 172
Changes in operating assets and liabilities:
Accounts receivable ........................ 10,360 15,937 (1,929)
Inventories ................................ (17) 17,838 (4,932)
Income taxes receivable .................... -- 4,280 (3,707)
Prepaid expenses and other assets .......... 313 193 (260)
Accounts payable ........................... (3,283) (14,471) 9,870
Other accrued liabilities .................. 878 (858) 720
-------- -------- --------
Net cash provided by (used in) operating activities ... (428) 20,856 (14,221)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments ............... (1,002) (3,570) (1,000)
Maturities or sales of short-term investments ..... 3,627 500 12,753
Purchases of property and equipment, net .......... (554) (481) (1,231)
Proceeds from exercise of put option .............. 794 -- --
Other assets ...................................... 34 165 (1,124)
-------- -------- --------
Net cash provided by (used in) investing activities 2,899 (3,386) 9,398
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings ............... -- -- 10,462
Repayment of short-term borrowings ................ -- -- (9,976)
Repayments of debt principal ...................... -- (2,686) (291)
Proceeds from issuance of common stock, net ....... 343 555 1,551
Repurchase of common stock ........................ -- -- (262)
-------- -------- --------
Net cash provided by (used in) financing activities 343 (2,131) 1,484
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .. 2,814 15,339 (3,339)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........ 19,876 4,537 7,876
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR .............. 22,690 $ 19,876 $ 4,537
======== ======== ========
Cash payments for:
Interest .......................................... $ -- $ 251 $ 776
Income taxes ...................................... -- -- 527
Non-cash investing and financing activities:
Assumption of mortgage related to sale of
French subsidiary facility ................ -- 416 --
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
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.
In recent quarters, the Company has experienced declining net sales and
has incurred net losses as a result of competitive pressures and the effects of
the loss of and slowing order rate from its major OEM and government customers.
The Company's ability to reduce the trend of declining net sales, which have
yielded net losses, is dependent on several factors including increased order
rates for the Company's products, successful and timely development and market
acceptance of the Company's next generation products, the availability of
qualified sales and engineering personnel and successful competition with the
Company's competitors on a price, service and performance basis. Many of these
factors are not within the Company's control, and if order rates for the
Company's products fail to increase, if the Company's next generation products
are not successfully and timely developed and accepted by the Company's
customers, or if the Company cannot successfully compete with its competitors,
many of whom have substantially greater resources than the Company, the
Company's net sales will continue to decline. To the extent that the Company is
unable to offset such sales declines with cost reductions, recurring losses are
likely. The Company cannot at this time foresee when it again will reach
profitability. Management believes, however, that its available cash reserves
are sufficient to meet its working capital requirements and anticipated level of
operations for at least the next 12 months.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of the Company's cash,
cash equivalents, accounts receivable, and accounts payable approximates their
carrying value due to the relatively short maturity of these items. The fair
value of the Company's short-term investments is determined based on quoted
market prices.
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 when the related reserve is recognized. To date actual
warranty cost has been within management's estimates.
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, which expired and was not
renewed in September 1997. In the fourth quarter of
32
<PAGE> 33
fiscal 1996 and as part of the Company's annual planning process, the Company
evaluated the recoverability of goodwill resulting from the acquisition of
Orchid Technology. 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. See Note 4 to the Consolidated Financial Statements.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF:
The Company evaluates the recoverability of its long-lived assets pursuant to
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of." Accordingly, the Company evaluates its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
EMPLOYEE STOCK PLANS: The Company accounts for its stock option plans and
its employee stock purchase plan in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. During fiscal 1997, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Under SFAS No. 123, the Company must
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in fiscal 1996 and 1997 and in future years as
if the fair value-based method defined in SFAS No. 123 had been applied.
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 and commitments
associated with cooperative advertising programs when the related revenue is
recognized.
NET LOSS PER COMMON SHARE: Net loss per common share has been computed
based on the weighted average number of common and common equivalent shares
outstanding.
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 financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION: The functional currency of the Company's
foreign operations is the U.S. dollar. Foreign 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.
RECENT ACCOUNTING PRONOUNCEMENTS: In February 1997, the Financial
Accounting Standards Board issued SFAS No. 128, "Earnings per Share." SFAS No.
128 requires the presentation of basic earnings per share (EPS) and, for
companies with complex capital structures, diluted EPS. SFAS No. 128 is
effective for annual and interim periods ending after December 15, 1997. If the
Company continues to incur losses, the Company expects that basic EPS will be
the same as primary earnings per share as presented in the accompanying
consolidated financial statements and that diluted EPS will be the same as fully
diluted earnings per share.
RECLASSIFICATIONS: Certain accounts in previous years have been
reclassified to conform to the 1997 financial statement presentation.
33
<PAGE> 34
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, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Corporate debt securities......... $ 500 $ -- $ -- $ 500
----------- ----------- ----------- ----------
$ 500 $ -- $ -- $ 500
=========== =========== =========== ==========
</TABLE>
The fair value and unrealized losses at September 30, 1996 are as follows
(in thousands):
<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>
NOTE 3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Inventories:
Raw materials................................ $ 4,085 $ 6,497
Work-in-process.............................. 1,285 1,053
Finished goods............................... 4,483 2,286
---------- ----------
$ 9,853 $ 9,836
========== ==========
Property and equipment:
Land......................................... $ 825 $ 825
Buildings.................................... 2,700 2,788
Machinery and equipment...................... 2,125 2,212
Computer equipment........................... 2,975 2,928
Furniture and fixtures....................... 1,313 997
Leasehold improvements....................... -- 963
---------- ----------
9,938 10,713
Less accumulated depreciation and
amortization............................... (5,240) (5,415)
----------- ----------
$ 4,698 $ 5,298
========== ==========
Other accrued liabilities:
Accrued compensation......................... $ 859 $ 949
Distributor-related reserves................. 1,528 1,276
Accrued warranty............................. 1,919 2,149
Other........................................ 2,660 1,714
---------- ----------
$ 6,966 $ 6,088
========== ==========
</TABLE>
34
<PAGE> 35
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 currently manufactures and markets a multimedia
graphics card accelerator. The acquisition was accounted for using 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
was classified as goodwill and included in other assets in the accompanying
consolidated financial statements for September 30, 1995. Based upon the risks
associated with changes in the current marketplace, the Company wrote down the
remaining balance at September 30, 1996. Operating results of Orchid have been
consolidated with the Company's operating results beginning as of the
acquisition date.
NOTE 5. LONG-TERM DEBT AND LINE OF CREDIT
The Company had no long-term debt at September 30, 1997 and September 30,
1996.
The Company had a $20,000,000 line of credit which expired in September
1997. Borrowings under the line of credit were limited to specified percentages
of eligible accounts receivable and were collateralized by a lien on
substantially all assets of the Company. Borrowings bore interest at a variable
rate (10.25% at September 30, 1996) based on the prime rate of a reference bank.
There was 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 was
reduced by advances and letters of credit. The line of credit agreement included
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. At September 30, 1997 and 1996, the Company had no advances
and no letters of credit outstanding. The line of credit was not renewed in
September 1997 at the option of the Company.
NOTE 6. 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. Options issued to nonemployees have not
been material in any of the years presented.
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.
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.
35
<PAGE> 36
The Company adopted the disclosure requirements of SFAS No. 123 effective
with the 1997 consolidated financial statements but elected to continue to
measure compensation expense related to its stock plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense for the plans has been
recognized in the accompanying consolidated financial statements. If
compensation expense had been determined based on the estimated fair value of
options and purchase rights granted in 1997 and 1996, consistent with the
methodology in SFAS No. 123, the effect on the Company's 1997 and 1996 net loss
and loss per share would have been increased to the pro forma amounts as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1997 1996
---------- ---------
<S> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net loss:
As reported.................................. $ (9,789) $ (13,288)
Pro forma.................................... (10,317) (13,577)
---------- ---------
Loss per share:
As reported.................................. $ (.70) $ (.96)
Pro forma.................................... (.74) (.98)
---------- ---------
</TABLE>
Pro forma net loss reflects only options and purchase rights granted in
1997 and 1996. Therefore, the pro forma amounts shown above may not be
representative of the pro forma effect on reported net income in the future.
The fair values of the options and purchase rights granted were estimated
on the date of their grant using the Black-Scholes option-pricing model based on
the following weighted average assumptions:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1997 1996
-------- --------
<S> <C> <C>
Weighted average risk free rate................ 5.38%-6.27% 5.41%-5.80%
Expected life of options (years)............... 3.5 3.5
Expected life of purchase rights (months)...... 3 3
Volatility..................................... 73% 73%
Dividend yield................................. 0 0
</TABLE>
36
<PAGE> 37
Stock option activity during the periods indicated is set forth below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year ................ 1,226,689 $ 3.82 1,322,951 $ 4.61 1,513,212 $ 4.37
Granted ............................ 979,200 2.41 796,550 2.95 604,150 4.11
Exercised .......................... (4,312) 2.25 (2,347) 1.50 (372,078) 2.70
Forfeited .......................... (1,014,633) 3.64 (890,465) 4.22 (422,333) 4.69
--------- -------- --------- -------- --------- --------
Outstanding at year end ............ 1,186,944 $ 2.82 1,226,689 $ 3.82 1,322,951 $ 4.61
========= ======== ========= ======== ========= ========
Options exercisable at year end .... 277,052 $ 3.47 608,258 $ 4.44 664,193 $ 4.67
Weighted average fair value
of options granted during the year $ 1.35 $ 1.59
</TABLE>
Stock options outstanding at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Exercise prices: Outstanding Contractural Life Price Outstanding Price
- ---------------- ----------- ----------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
From $2.00 to $2.81 846,173 5.48 $ 2.40 97,348 $ 2.33
From $3.25 to $4.75 45,000 5.06 2.96 10,938 3.05
From $5.00 to $6.09 295,771 3.69 4.01 168,767 4.15
--------- -------
From $2.00 to $6.09 1,186,944 5.02 $ 2.82 277,052 $ 3.47
========= =======
</TABLE>
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,
1997, approximately 867,000 shares had been issued to date and approximately
33,000 shares were reserved for future issuance under the plan. The
weighted-average fair values of purchase rights granted in fiscal 1997 and 1996
were $.79 and $1.10, respectively.
NOTE 7. 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 $36,161,000, $50,255,000 and $66,015,000 in 1997, 1996
and 1995, respectively. The Company believes a short-term to mid-term material
adverse effect on operations would result if the Company was forced to change
suppliers for its system boards.
37
<PAGE> 38
NOTE 8. BUSINESS RISKS AND MAJOR CUSTOMERS
The Company sells its products primarily to original equipment
manufacturers, 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 Company's product to smaller VARs and dealers. Sales to
OEMs and other large customers subject the Company to a concentration of credit
risk 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 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.
The following table summarizes the annual percentage contribution to net
revenues by customers if sales to such customers exceed 10% of net revenues in
any year presented and the amounts due 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,
1997 1996 1995 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Customer A..................... 53% 39% 22% 32% 32%
Customer B..................... 3% 16% 17% -- 14%
Customer C..................... 4% 16% 8% -- 16%
Customer D..................... 0% 0% 11% -- --
</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., by Gateway
2000 and 20 percent ownership by the Company subject to a right to repurchase
held by Gateway 2000 at a specified price (put option). 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. 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 Company exercised its right of
repurchase and sold its 20 percent ownership to Gateway 2000 for $794,000 in
October, 1996. The Company recognized a gain on the sale of $44,000.
38
<PAGE> 39
\NOTE 9. INCOME TAXES
Loss before income taxes and the provision (benefit) for income taxes
consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Loss before income taxes:
United States .................................. $(12,294) $ (3,522) $(20,399)
Foreign ........................................ 2,505 (1,857) 342
-------- -------- --------
$ (9,789) $ (5,379) $(20,057)
======== ======== ========
Provision (benefit) for income taxes:
Current:
Federal ..................................... $ -- $ -- $ (3,570)
State ....................................... -- -- --
Foreign ..................................... -- 29 128
-------- -------- --------
Total current .............................. -- 29 (3,442)
-------- -------- --------
Deferred:
Federal ..................................... -- 6,220 (3,011)
State ....................................... -- 1,660 (940)
-------- -------- --------
Total deferred ............................. -- 7,880 (3,951)
-------- -------- --------
Charge in lieu of taxes
attributable to employee stock plans ........ -- -- 172
-------- -------- --------
$ -- $ 7,909 $ (7,221)
======== ======== ========
</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,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Inventory and other reserves ..................................................... $ 3,296 $ 2,141
Net operating loss carryforwards ................................................. 8,407 5,442
Capital loss carryforward ........................................................ 427 428
Depreciation differences on property and equipment ............................... 94 808
Accrued vacation ................................................................. 99 145
Other ............................................................................ 538 601
-------- --------
12,861 9,565
Less valuation allowance ......................................................... (12,861) (9,565)
-------- --------
Net deferred tax asset .............................................................. $ -- $ --
======== ========
</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 historical profits, and carryback
potential to realize deferred tax assets. As of September 30, 1996, the Company
believed that due to the Company's then recent history of losses, combined with
changing price pressures and market conditions, the uncertainty regarding the
realizability of its deferred tax assets was to the point where it was more
likely than not that the deferred tax assets would not be realized. Recurring
losses in fiscal 1997 continue to indicate that it is more likely than not that
the deferred tax assets would not be realized. Accordingly, a full valuation
allowance continues to be recorded.
39
<PAGE> 40
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,
----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Computed expected tax........................... $ (3,328) $ (1,829) $ (7,012)
State taxes (benefit), net of federal benefit... -- -- (611)
Tax-exempt interest............................. -- (73) (73)
Deferred tax valuation allowance................ 3,296 9,138 427
Goodwill write off.............................. -- 586 --
Other........................................... 32 87 48
----------- ----------- -----------
$ -- $ 7,909 $ (7,221)
=========== =========== ===========
</TABLE>
At September 30, 1997, the Company had net operating loss carryforwards of
approximately $20,300,000 for federal income tax purposes, which expire in the
year 2011, and $15,093,000 for state income tax purposes, which expire in 1998
through 2002, subject to certain limitations. The Company had foreign net
operating loss carryforwards of approximately $1,028,000.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Internal Revenue Service examinations of the Company's tax returns for
years 1993 through 1995 have resulted in a preliminary finding that the Company
owes additional taxes and interest amounting to approximately $3.9 million.
Although it is reasonably possible the Company may incur a loss upon conclusion
of this claim, the Company believes that adequate tax payments have been made
and accruals recorded for all years and that this matter will when resolved not
have a significant material adverse effect on the Company's financial condition
or results of operations.
The Company is party to various legal actions which arose in the normal
course of business. In the opinion of management and its legal advisors, the
ultimate disposition of these matters will not have a material adverse effect on
the financial condition or results of operations of the Company.
The Company has a purchase commitment with one of its suppliers for $12
million in graphics chips. The ultimate value of this commitment to the Company
is dependent on the Company's ability to sell its graphics add-on card in fiscal
1998. It is reasonably possible that the Company may not fulfill its sales
projections for this product and therefore this commitment may have a material
adverse effect on the Company's results of operations.
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,
----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
United States and Canada.................... $ 84,107 $ 140,662 $ 169,917
Asia/Pacific................................ 3,536 12,833 41,756
Europe...................................... 11,633 17,750 22,404
----------- ----------- -----------
$ 99,276 $ 171,245 $ 234,077
=========== =========== ===========
</TABLE>
40
<PAGE> 41
NOTE 12. SUBSEQUENT EVENT
On November 24,1997, the Company repurchased from a single shareholder
approximately 1.2 million shares of its outstanding common stock for a cash
price less than market, or approximately $2.4 million. These shares have been
retired.
NOTE 13. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
The table below presents unaudited quarterly data for 1997 and 1996.
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
1997 QUARTER QUARTER QUARTER QUARTER(2)
---- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales........................ $ 36,188 $ 24,282 $ 22,274 $ 16,532
Gross profit (loss).............. 4,685 2,128 2,104 (461)
Income (loss) from operations.... 10 (3,008) (2,995) (4,512)
Net income (loss)................ 166 (2,664) (2,933) (4,358)
Net income (loss) per common and
common equivalent share........ $ .01 $ (.19) $ (.21) $ (.31)
Common stock prices:(1)
High......................... 2 7/8 3 3 7/8 3 3/16
Low.......................... 1 9/16 2 1/64 1 25/32 1 7/8
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER(3)
---- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales........................ $ 60,215 $ 40,652 $ 29,783 $ 40,595
Gross profit (loss).............. 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>
(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) Includes provision of approximately $2.0 million in additional inventory
reserves to recognize the anticipated loss associated with the disposal
of excess/obsolete inventory.
(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 tax benefits (see Notes 4 and 10).
41
<PAGE> 42
SCHEDULE II
MICRONICS COMPUTERS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1997 1996 1995(1)
---------- ----------- -----------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance at beginning of year $ 313 $ 667 $ 657
Charged to bad debt expense 666 201 290
Writeoffs charged to allowance (224) (555) (280)
---------- ----------- -----------
$ 755 $ 313 $ 667
========== =========== ===========
</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 8 of Notes to Consolidated Financial Statements).
42
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C> <C>
2.01 Agreement and Plan of Merger between Micronics Computers, Inc.
(a California corporation) and Micronics Computers, Inc. (a
Delaware corporation) (F)
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 (E)
2.03 Amendment to Agreement and Plan of Reorganization dated as of
August 1, 1994 (E)
2.04 Letter Agreement dated August 8, 1994 among Micronics Computers,
Inc., MCI Orchid and Orchid Technology (E)
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 (E)
3.01 Certificate of Incorporation (F)
3.02 Bylaws (F)
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 (E)
4.02 Registration Rights Agreement dated as of August 19, 1994 among
Micronics Computers, Inc., Le Nhon Bui and Wearnes Technology
(Private) Limited. (E)
10.01* 1989 Stock Option Plan, as amended to date (J)
10.02* Form of Non-Qualified Stock Option Agreement for options granted
prior to January 1, 1990 (H)
10.03* Employee Stock Purchase Plan as amended to date (B)
10.04* Form of Indemnification Agreement entered into by the Registrant
with each of its current directors and executive officers (G)
10.05* 1992 Directors Stock Option Plan and related documents (I)
10.06** Shareholder Agreement between Micronics Computers, Inc., (a
Delaware corporation), and Gateway 200, Inc., (a Delaware
corporation) dated as of July 27, 1995, as amended by letter
agreement dated August 2, 1995 (D)
10.07** Letter agreement dated August 2, 1995 between Micronics
Computers, Inc., and Gateway 2000, Inc. as amended by letter
agreement Dated September 27, 1995 (D)
10.08** Letter of Intent, dated February 25, 1997 between the Company
and Micron Electronics (C)
10.09* Employment Agreement dated March 14, 1997 between the Company
and Shanker Munshani (C)
10.10* Consulting Agreement dated September 8, 1997 between the Company
and Shanker Munshani (A)
11.01 Computation of Net Loss Per Share (A)
23.01 Consent of KPMG Peat Marwick LLP (A)
27.01 Financial Data Schedule (A)
</TABLE>
<PAGE> 44
(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
March 31, 1997 and incorporated herein by reference.
(D) Filed as an Exhibit to Form 10-Q Quarterly Report for the quarter ended
December 31, 1995 and incorporated herein by reference.
(E) Filed as an Exhibit to Form 8-K as filed with the Securities and
Exchange Commission on August 29, 1994.
(F) Filed as an Exhibit to Form 8-K as filed with the Securities and
Exchange Commission on August 12, 1993.
(G) Filed as an Exhibit to Form 10-K Annual Report for the year ended
September 30, 1993 and incorporated herein by reference.
(H) Filed as an Exhibit to Form S-1 Registration Statement (File No.
33-40388) and incorporated herein by reference.
(I) Filed as an Exhibit to Form S-8 Registration Statement (File No.
33-47885, as amended) and incorporated herein by reference.
(J) 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,
1997.
<PAGE> 1
Exhibit 10.10
MICRONICS COMPUTERS, INC.
CONSULTING AGREEMENT
This Agreement is entered into on September 5, 1997, by and between
Micronics Computers, Inc., a Delaware corporation ("Micronics"), and Shanker
Munshani ("Munshani").
A. Munshani is an officer, director and employee of Micronics and has
notified Micronics that he intends to terminate his relationship as an
officer, director and employee.
B. The parties to this Agreement desire to terminate Munshani's Employment
Agreement, dated March 14, 1997 (the "Employment Agreement"), to provide
for a consulting arrangement acceptable to both, to preserve the
goodwill which exists between them and to enter into a mutual general
release.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises set forth below, the parties hereto agree as follows.
1. STATUS AS OFFICER, DIRECTOR AND EMPLOYEE. Munshani and the Company
hereby agree that Munshani's term as a director of the Company will terminate on
September 7, 1997 and his term as an officer and employee of the Company will
terminate on September 7, 1997 (the "Termination Date"). The parties agree that
the Employment Agreement is hereby terminated and is replaced with this
Agreement.
2. FUTURE CONSULTING RELATIONSHIP.
2.1 CONSULTING AGREEMENT. Commencing on the Termination Date,
Munshani will hold himself available to provide consulting services to Micronics
until the close of business on June 14, 1998 (the "Consulting Period").
Consulting services will be provided during the Consulting Period, upon the
request of Micronics, for no more than ten (10) hours per week (any period
shorter than one week will include a proportionate number of hours) at such
times and places as are mutually convenient to Munshani and Micronics. However,
Munshani's services will be performed at times and places that do not reasonably
conflict with Munshani's responsibilities to his then current employer.
Munshani's duties as a consultant will be to perform management service and to
help transition relationships and knowledge of Micronics' business directly to
other representatives of Micronics identified by the Micronics Board of
Directors.
2.1.1 Termination by Munshani. Munshani, in his sole
discretion, may terminate this consulting arrangement prior to the end of the
Consulting Period at any time upon giving the Company written notice.
2.1.2 Termination by the Company. The Company, in its
sole discretion, may terminate this consulting arrangement prior to the end of
the Consulting Period, but only for "Good Cause," by giving written notice of
such termination to Munshani. "Good Cause" shall mean (a) habitual neglect or
malfeasance of duty after 90 days notice during which
<PAGE> 2
Micronics Computers, Inc.
Consulting Agreement
Munshani shall have an opportunity to cure such defect, (b) dishonesty, (c)
conviction of a felony, (d) failure to cure or cease repeated or a serious
violation or violations of the Company's written rules, or of the directions of
the Board of Directors of Micronics, after 90 days notice during which Munshani
shall have an opportunity to cure such defect (e) repeated or a serious
violation of the Company's Insider Trading Policy, or (f) material or repeated
breach of this Agreement, or of the Proprietary Rights and Confidentiality
Agreement, dated November 12, 1994, between the Company and Munshani (the
"Confidentiality Agreement").
2.2 INDEPENDENT CONTRACTOR. Munshani's services as a consultant
will be performed as an independent contractor with the customary and usual
independence associated therewith, and he will not be deemed an employee or
agent of Micronics or have the authority to bind, or to enter into any contract
on behalf of, Micronics, unless expressly authorized in writing to do so. In
accordance with such status as a consultant, Munshani agrees to be responsible
for payment of all income, social security and other taxes incurred in
connection with payments to him under the consulting arrangement described under
the provisions of this Section 2. However, Micronics will aid Munshani, at his
request, in obtaining forms necessary to calculate the estimated tax and file
the relevant tax estimate forms for federal and California tax purposes.
2.3 CONSULTING COMPENSATION. In return for Munshani's
availability and requested services, and while the Consulting Period continues,
Micronics will pay to Munshani $19,166.67 on the 5th day of each calendar month
commencing with October 5, 1997 (with any period shorter than one month to
include a proportionate amount of the monthly compensation). Such amounts will
be paid as earned and will be hand delivered or mailed on the payment date to
Munshani at his address set forth on the signature page to this Agreement. No
additional payments will be due for hours actually worked.
3. TRANSITIONAL PROVISIONS.
3.1 EFFECTIVE DATE OF TERMINATION. Munshani acknowledges that his
employment with Micronics terminates on the Termination Date. Except as set
forth in Sections 1 and 2 of this Agreement, Munshani has no further obligation
or right to provide services to Micronics and Micronics will have no further
right or obligation to engage his services at any time in the future.
3.2 COMPENSATION. Compensation earned by Munshani as an employee,
officer and director, consisting of all salary and accrued but unused vacation
pay through the Termination Date, is to be paid to him on or before the end of
the day on September 10, 1997, subject to applicable payroll and tax withholding
deductions.
3.3 EXPENSES. If Munshani has personally incurred any reasonable
and necessary business expenses on behalf of Micronics, such amounts will be
reimbursed on or before September 10, 1997 against Munshani's delivery to
Micronics of an expense reimbursement request, substantiated by receipts.
Expenses incurred by Munshani during the Consulting Period must be pre-approved
by Micronics.
2
<PAGE> 3
Micronics Computers, Inc.
Consulting Agreement
3.4 BENEFITS; COBRA RIGHTS. Munshani's current employee benefits
will continue to be provided by Micronics through the Termination Date. Medical
or disability insurance coverage provided to Micronics employees generally will
be continued for Munshani and his immediate family, under COBRA, and any life
insurance coverage that is currently carried by Micronics for Munshani and that
can be continued for a non-employee, until the Consulting Period expires or is
terminated, at Micronics' expense. After that date, Micronics has a continuing
obligation to make available to Munshani any medical or disability insurance
coverage, at Munshani's expense, under policies Micronics carries for its
employees generally.
3.5 OPTIONS. Munshani has been granted five stock options for the
purchase of shares of Micronics' Common Stock as follows:
<TABLE>
<CAPTION>
Date of Grant Number of Shares Exercise Price Per Share
------------- ---------------- ------------------------
<S> <C> <C>
11/14/94 50,000 $4.75
08/01/95 50,000 $4.00
11/30/95 50,000 $3.375
01/17/96 50,000 $3.375
03/31/97 75,000 $2.4375
</TABLE>
Since Munshani will continue to provide substantial services to the Company
after the Termination Date, such options will continue to vest during the
Consulting Period in accordance with their terms, but will terminate 30 days
after termination or expiration of such period. Such options may be exercised,
to the extent they are vested prior to the time they terminate; however Munshani
understands that the exercise of any "Incentive Stock Option" that is exercised
90 days or more after the Termination Date will constitute the exercise of a
"Non-qualified Stock Option" with different tax effects. Except for the options
currently issued to Munshani that are described above, he has no right to
purchase from Micronics, directly or indirectly, any Micronics capital stock and
holds no option, warrant or other right to acquire any such capital stock.
3.6 RETURN OF PROPERTY. As of the end of the Consulting Period,
or sooner at the request of Micronics, Munshani represents and agrees that he
will return to Micronics all credit cards, computer hardware, back-up tapes,
computer listings, customer lists, supplier lists, financial information, office
and other keys and all other tangible property or intangible property on a
tangible media belonging to Micronics that are in his possession, custody or
control and that Munshani has not relinquished, nor will relinquish, custody or
control of any such property to any third party or parties.
3.7 CONFIDENTIALITY; INSIDER TRADING POLICY. Munshani
acknowledges that as an officer and employee of Micronics, Munshani has a
fiduciary obligation to keep confidential and not use any confidential, trade
secret or proprietary information of Micronics, except as necessary to perform
his duties with Micronics. He also acknowledges that, except as permitted above,
the terms of the Confidentiality Agreement that will be deemed a part of this
Agreement, require him to continue to keep confidential and not use any such
information he has received during his employment, or will receive while serving
as a consultant, and to avoid certain unfair business practices, such as
solicitation of Micronics' employees. The existence of this Agreement and its
terms and conditions will be deemed the confidential information of Micronics.
3
<PAGE> 4
Micronics Computers, Inc.
Consulting Agreement
Finally, Munshani acknowledges that, Munshani is obligated to comply with the
Company's Insider Trading Policy as in effect from time to time through the end
of the Consulting Period.
3.8 PRESERVATION OF RELATIONSHIP. In order to preserve the
goodwill which currently exists among the parties to this Agreement, neither
Munshani nor Micronics shall, in any way, directly or indirectly, publicly or
privately, malign, denigrate or disparage the other, or any of the other's
associates, employees or staff, and all parties shall respond to inquiries
regarding Munshani's departure by indicating that Munshani left Micronics as his
sole choice to pursue other interests in a mutually agreeable and amicable
manner.
4. GENERAL RELEASE.
4.1 GENERAL RELEASE. Micronics on the one hand, and Munshani on
the other hand, on behalf of themselves, and their respective representatives,
heirs, executors, attorneys, partners, officers, directors, agents, successors,
assigns, shareholders and employees (collectively, "Affiliates"), hereby forever
mutually release and discharge each other, and their respective Affiliates, of
and from any and all causes of action, suits, debts, liens, agreements,
liabilities, claims, demands, losses, damages, costs or expenses, including
without limitation, court costs and attorneys' fees, that either may have
against the other as of the date hereof, whether known or unknown. However
nothing contained in this Section 4 shall release or terminate (a) the
continuing obligations of the parties under that certain Indemnification
Agreement dated November 4, 1994 between Micronics and Munshani, (b) the
continuing obligations of Micronics and Munshani under the Confidentiality
Agreement, (c) the consequences of any actions of Munshani that may constitute a
misdemeanor or a felony nor (d) the continuing obligations of Micronics and
Munshani under this Agreement.
4.2 AGE DISCRIMINATION WAIVER. Munshani acknowledges that his
release set forth in this Section 4 waives any rights he may have under the Age
Discrimination in Employment Act of 1967 and related laws, that his release is
knowing and voluntary, that he may take 21 days to consider this Agreement
(which can be waived by earlier execution of this Agreement), and that he has
been advised to consult with an attorney prior to executing this Agreement.
Munshani further acknowledges that he understands he may revoke this Agreement
within seven days after his execution of it and that the provisions in this
Agreement, if not revoked in writing within the seven-day period, will be
effective at the end of that time.
4.3 EXTENT OF RELEASE. This release extends to claims which the
parties do not know or suspect to exist in their favor, which if known by them
would have materially affected their decision to enter into this release. Each
of the parties acknowledges that he or it is familiar with Section 1542 of the
Civil Code of the State of California, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
In connection with this release, each of the parties expressly waives and
relinquishes any right or benefit which he or it has or may have under Section
1542 of the Civil Code, or any other statute
4
<PAGE> 5
Micronics Computers, Inc.
Consulting Agreement
or legal principle with a similar effect. In connection with such waiver and
relinquishment, the parties hereto acknowledge that, after executing this
Agreement, they may discover claims or facts in addition to, or different from,
those that they now know or believe to exist with respect to the subject matter
of this mutual release, but that it is their intention to settle and release all
of the claims, matters and differences known or unknown, suspected or
unsuspected, which now may exist or previously may have existed between them,
except as specifically provided in this Section 4. The releases given in this
Section 4 shall remain in effect as full and complete mutual releases
notwithstanding the discovery or existence of any such additional or different
claim or fact.
5. GENERAL PROVISIONS.
5.1 ARBITRATION. Munshani and the Company shall submit to
binding arbitration in any controversy or claim arising out of, or relating to,
this Agreement or any breach hereof, provided, however, that the Company retains
its right to, and shall not be prohibited, limited or in any other way
restricted from, seeking or obtaining equitable relief from a court having
jurisdiction over the parties. Such arbitration shall be conducted in accordance
with the Rules of the American Arbitration Association in effect at that time,
and judgment upon the determination or award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. Costs of the arbitration will
be borne equally by both parties; provided that each party will bear the fees
and costs of its own legal counsel.
5.2 CONSTRUCTION OF AGREEMENT. This Agreement shall be construed
as a whole and in accordance with its fair meaning. This Agreement has been
negotiated by the parties hereto, and its language shall not be construed for or
against any party due to any rule of construction, nor will the terms of this
Agreement be deemed a precedent or practice, or continuation of any precedent or
practice, respecting any officer, director or employee of Micronics.
(a) If any word, clause or provision of this Agreement is
held to be unenforceable for any reason, it shall be adjusted to cause such
provision to be enforceable, to the extent possible in accordance with the
intent of the parties of this Agreement. In such case, all other words, clauses
or provisions of this Agreement shall be deemed valid and enforceable.
(b) The captions to sections of this Agreement have been
inserted for identification and reference purposes only and shall not be used to
construe or interpret this Agreement.
(c) Nothing in this Agreement, express or implied, is
intended to confer upon any person, other than the parties to this Agreement and
their permitted successors and assigns, any rights or remedies under, or by
reason of, this Agreement.
5.3 NOTICES. Any and all notices or other communications required
or permitted by this Agreement to be given or delivered to any party hereto
shall be given in writing and shall be deemed effectively given upon personal
delivery or upon deposit in the U.S. Post Office, certified mail, return receipt
requested, with postage and fees prepaid, addressed to the receiving
5
<PAGE> 6
Micronics Computers, Inc.
Consulting Agreement
party at such party's address shown below his or its signature below or at such
other address as such party may hereafter designate by 10 days' advance written
notice to the other party.
5.4 ENTIRE AGREEMENT. This Agreement constitutes and contains the
entire agreement of the parties with respect to its subject matter. This
Agreement supersedes and terminates any and all prior negotiations,
correspondence, understandings, agreements, duties or obligations among the
parties respecting such subject matter.
5.5 AMENDMENT AND WAIVER. Any term of this Agreement may be
amended and observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the parties. Waiver of any term
or condition of this Agreement by any party shall not be construed as a waiver
of any subsequent breach or failure of the same term or condition or a waiver of
any other term or condition of this Agreement. The failure of any party at any
time to require performance by any other party of any provision of this
Agreement shall not affect the right of any such party to require performance of
such provision or any other provision of this Agreement.
5.6 SUCCESSOR AND ASSIGNS; ASSIGNMENT. The provisions of this
Agreement shall inure to the benefit of, and shall be binding upon, the
successors and assigns of the parties to this Agreement, including, without
limitation, any party to a merger or consolidation with Micronics. This
Agreement may not be assigned by Munshani, without the prior written consent of
Micronics, which consent shall not be unreasonably withheld or delayed.
5.7 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, excluding
that body of law relating to conflict of laws.
5.8 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
MICRONICS COMPUTERS, INC.
By: /s/ William E. Shelander /s/ Shanker Munshani
---------------------------------------- -------------------------------
Wm. E. Shelander, Authorized Signatory SHANKER MUNSHANI
Address: 45365 Northport Loop West Address: 3367 Woodside Terrace
Fremont, CA 94538 Fremont, CA 94539
Attn: Chief Executive Officer
6
<PAGE> 1
Exhibit 11.01
MICRONICS COMPUTERS, INC.
COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1997 1996 1995
--------------------------- ---------
<S> <C> <C> <C>
PRIMARY
Net loss $ (9,789) $(13,288) $(12,836)
-------- -------- --------
Average shares outstanding 14,006 13,805 13,513
Options -- -- --
-------- -------- --------
Total common stock and
common stock equivalents 14,006 13,805 13,513
-------- -------- --------
Net loss per common share. (.70) (.96) (.95)
FULLY DILUTED
Net loss $ (9,789) $(13,288) $(12,836)
-------- -------- --------
Average shares outstanding 14,006 13,805 13,513
Options -- -- --
-------- -------- --------
Total common stock and
common stock equivalents 14,006 13,805 13,513
-------- -------- --------
Net loss per common share . (.70) (.96) (.95)
-------- -------- --------
</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 November 7, 1997, except as to
Note 12 which is as of November 24, 1997, relating to the consolidated balance
sheets of Micronics Computers, Inc. and subsidiaries as of September 30, 1997
and 1996, 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, 1997 and related schedule, which report appears in the September
30, 1997 annual report on Form 10-K of Micronics Computers, Inc.
/s/ KPMG Peat Marwick LLP
San Jose, California
December 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MICRONICS
COMPUTERS SEP 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 22,690
<SECURITIES> 500
<RECEIVABLES> 11,080
<ALLOWANCES> 755
<INVENTORY> 9,853
<CURRENT-ASSETS> 44,912
<PP&E> 9,938
<DEPRECIATION> 5,240
<TOTAL-ASSETS> 49,649
<CURRENT-LIABILITIES> 15,270
<BONDS> 0
0
0
<COMMON> 142
<OTHER-SE> 34,237
<TOTAL-LIABILITY-AND-EQUITY> 49,649
<SALES> 99,276
<TOTAL-REVENUES> 99,276
<CGS> 90,820
<TOTAL-COSTS> 90,820
<OTHER-EXPENSES> 18,245
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,789)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,789)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,789)
<EPS-PRIMARY> (.70)
<EPS-DILUTED> (.70)
</TABLE>
