UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
_____________
Commission file number: 0-22515
MILLENNIUM ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 33-0750730
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
31462 SOUTH COAST HIGHWAY, SUITE 100
LAGUNA BEACH, CALIFORNIA 92677
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 499-0877
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 .....
At July 31, 1997, there were 7,243,051 shares of the Registrant's $.001 Par
Value Common Stock outstanding.
EXHIBIT INDEX ON PAGE 25
-1-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
<TABLE>
MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
6/3 12/31/96
(UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash & Cash Equivalents $ $ 0
Accounts receivable, net of an allowance for
doubtful accounts 3,835,953 6,193,241
Due from others 80,000 0
Inventories, net of reserve 1,059,869 663,882
Prepaid expenses 1,442,321 33,346
Deferred income taxes 66,000 0
----------- ------------
Total current assets 6,484,143 6,890,469
FURNITURE AND EQUIPMENT 103,027 55,608
OTHER ASSETS 134,584 208,539
----------- ------------
TOTAL ASSETS $ 6,721,754 7,154,616
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Book overdraft $ 93,453 $ 191,742
Lines of credit 3,041,652 5,232,754
Accounts payable and accrued liabilities 242,304 750,053
----------- ------------
Total current liabilities 3,377,409 6,174,549
LONG TERM LIABILITIES
Deferred income taxes 10,400 0
Other Long Term Debt 21,070 0
----------- ------------
Total Long Term Debt 31,470 0
SUBORDINATED DEBT - STOCKHOLDER 0 298,811
-2-
<PAGE>
STOCKHOLDERS' EQUITY
Common stock, par value .001:
17,000,000 shares authorized,
7,243,051 (June 30) and 5,203,868 (December 31)
shares issued and outstanding 7,243 43,400
Receivable from stockholder 0 (151,339)
Additional Paid Capital 3,398,599 0
Retained earnings (92,967) 789,195
----------- ------------
Total stockholders' equity 3,312,875 681,256
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,721,754 $ 7,154,616
=========== ============
</TABLE>
See the accompanying notes to these consolidated condensed financial statements
-3-
<PAGE>
<TABLE>
MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
JUNE 30, JUNE 30
----------------------------------------------------------------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
NET SALES $ 7,394,183 $ 6,127,787 $19,971,927 12,075,685
COST OF SALES 6,619,700 5,359,118 17,993,311 10,564,968
--------- --------- ---------- ----------
GROSS PROFIT 774,483 768,669 1,978,616 1,510,717
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 826,466 410,455 1,654,400 876,356
--------- --------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (51,983) 358,214 324,216 634,361
OTHER INCOME (EXPENSE)
Other income 0 (125) 18,771 2,430
Other expenses (102,069) 76,565) (253,302) (147,354)
--------- -------- --------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (154,052) 281,524 89,685 489,437
PROVISION (BENEFIT) FOR INCOME TAXES
Current (91,085) 0 (86,429) 2,800
Deferred 30,000 0 (55,600) 0
--------- -------- -------- --------
NET INCOME $ (92,967) $ 281,524 $ 231,714 $ 486,637
============= =========== =========== ==========
Net income per share $ $ (.01) $ .05 $ .04 $ .09
============= =========== =========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 7,243,051 5,203,868 6,240,359 5,203,868
============= =========== =========== ==========
</TABLE>
See the accompanying notes to these consolidated condensed financial statements
-4-
<PAGE>
<TABLE>
MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
<CAPTION>
6/30/97 6/30/96
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 231,714 $ 486,637
Adjustments to reconcile net income
to net cash used in operating activities
Deferred income taxes (55,600) 0
Depreciation and amortization 10,276 6,132
Issuance of common stock for services 38,400
(Increase) decrease in
Accounts receivable 2,357,288 (72,442)
Inventories (395,987) 174,394
Prepaid expenses (1,408,975) (449,793)
Other assets (78,625) (520)
Increase (decrease) in
Accounts payable and accrued liabilities (622,464) 264,951
Income Tax Payable (10,881) 0
----------- --------
Net cash used in operating activities 26,746 447,759
----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Beacon, net of cash acquired 513,534 0
Due to Other (80,000) 0
Acquisition of furniture and equipment (57,695) (16,841)
Other 151,339 (288,248)
----------- ---------
Net cash provided by (used in) investing activities 527,178 (305,089)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit facility (2,191,102) 4,989
Increase (decrease) in book overdraft (98,289) (147,978)
Distributions to stockholders (533,257)
Proceeds from offering 2,983,997
Offering costs and commissions (437,532)
Repayment of stockholder loan (301,227)
Proceeds from stockholder loan 23,486 319
------------ ---------
Net cash provided by (used in) financing activities (553,924) (142,670)
------------ ---------
NET CHANGE -- --
CASH AT BEGINNING OF PERIOD -- --
------------ ---------
CASH AT END OF PERIOD -- --
============ =========
</TABLE>
See the accompanying notes to these consolidated condensed financial statements
-5-
<PAGE>
MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Organization and Operations
- ---------------------------
Millennium Electronics, Inc., a Nevada corporation (the "Registrant"), is
the successor by merger to Beacon Capital Investment, Inc., a Delaware
corporation ("Beacon"), effective March 31, 1997. The exchange rate in the
reincorporation merger was two and one-half shares of Beacon for one share of
the Registrant. In a substantially concurrent reverse triangular merger,
Millennium Memory, Inc., a California corporation ("MMI"), became a wholly-owned
subsidiary of the Registrant. The Registrant issued 6,779,768 shares of its
common stock in a one-for-one exchange for all of the issued and outstanding
common stock of MMI. The original name of Registrant in Nevada was "Millennium
Holdings, Inc." which was changed upon the mergers to "Millennium Computer,
Inc." and then to "Millennium Electronics, Inc." on April 9, 1997. The
transaction coincided with the closing of a private placement of 1.5 million
shares of MMI for gross proceeds of $3.0 million.
Prior to the mergers, Beacon had no business activity. The Registrant and
MMI (referred to collectively herein as the "Company") continue MMI's business
of manufacturing, through subcontractors, and distributing Dynamic Random Access
Memory ("DRAM") memory upgrade components for personal computers ("PC's"),
laptop and notebook computers, file servers and printers to retailers,
resellers, value added resellers ("VARs"), value added distributors ("VADs"),
original equipment manufacturers ("OEMs"), aggregators and national or regional
distributors.
For accounting purposes, the acquisition by merger was treated as a
recapitalization of MMI (reverse acquisition). MMI is presented as the
continuing entity and the historical financial statements are those of MMI.
Historical stockholders' equity of MMI prior to the merger was retroactively
restated for the equivalent number of shares received in the merger, after
giving effect to the reverse stock split. Due to Beacon's lack of business
activity prior to the merger, no goodwill was being recorded.
-6-
<PAGE>
Summary of Significant Accounting Policies
- ------------------------------------------
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company after the elimination of all material intercompany accounts and
transactions.
INTERIM FINANCIAL INFORMATION
The consolidated interim financial statements included herein have been
prepared by the Registrant, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations.
The consolidated interim financial statements reflect all adjustments
(which include only the normal recurring adjustments) necessary for a fair
presentation of financial position, results of operations and cash flows for
such periods. The results of operations for the six month period ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1997, or any other future periods.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment
net of expected returns. The Company has established programs, under specified
conditions, that enable its customers to return product.
INVENTORIES
Inventories, which are primarily memory chips and computer components, are
stated at the lower of cost (weighted average method) or market.
Lines of Credit
- ---------------
As of June 30, 1997, the Company had a $7,000,000 line of credit (accounts
receivable credit line) expiring September 30, 1998. On the expiration date, the
line will automatically and continuously renew for successive additional terms
of one year unless terminated at the option of the Company or bank on the
anniversary date. The line bears interest at prime plus 3% per annum. The
Company's ability to borrow money under this line of credit agreement is based
upon a percentage of defined accounts receivable. Also, the line is
collateralized by substantially all assets of the Company and guaranteed by the
Registrant's majority stockholder. The debt agreement contains certain
restrictions as to adequate insurance and Company advances and loans, and limits
distributions to stockholders. In addition, the Company is required to make a
credit facility fee payment of $3,500 per quarter in advance; and a $50,000 loan
-7-
<PAGE>
fee is payable on the earlier of the third anniversary date September 1998) or
the date the loan agreement is terminated or terminates by its terms. The
$50,000 loan fee is being accrued monthly over the term of the loan.
The outstanding balance under the line of credit agreement at June 30,
1997 was $3,041,652.
Related Party Transactions
- --------------------------
The Company pays, on behalf of the majority stockholder of the Registrant,
monthly lease payments of approximately $2,160 for two vehicles.
The $150,000 receivable from a stockholder was paid off on April 3, 1997
by the stockholder.
The Company paid off the subordinated debt in the amount of $305,968 on
April 3, 1997 to its majority stockholder.
The Company paid off the commissions payable in the amount of $88,000 on
April 2, 1997 to a stockholder of the Registrant.
Other Significant Transactions
- ------------------------------
The retained earnings of the Company decreased approximately 950% from
$789,195 at 12/31/96 to ($92,967) at 6/30/97 primarily due to closing prior year
and current year thru 3/31/97 retained earnings of the Company into paid in
capital at the time of the merger as the Company converted from an "S"
Corporation to a "C" Corporation, and also due to dividends paid to shareholders
for the purpose of paying income taxes.
In the month of June 1997, there was an additional payment of $100,000
paid to the Company's largest customer at the request of this customer for
additional marketing funds for the coming holiday buying season.
Inventories of the Company increased approximately 60% from $663,882 at
December 31, 1996 to $1,059,869 at June 30, 1997 primarily because the Company
used funds made available to it from the sale of securities to purchase
inventory prior to sale at advantageous prices.
At the end of June 1997, the Company disbursed prepaid funds in the amount
of approximately $1,383,200 to a vendor for inventory to be received and sold in
early July 1997.
The Company's largest customer found itself in an overstocked position due
to market conditions. As a result, sales to this customer were zero for the
second quarter 1997. This in turn reduced the level of the Company's outstanding
accounts receivable from that at December 31, 1996. As of July 31, 1997, this
customer is producing its historic sales volume and profit margins.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
---------------------------------------------------------------
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial
statements of the Company included in this Form 10-Q.
-8-
<PAGE>
Forward Looking Statements
- --------------------------
The statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations include "forward looking"
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
and are subject to the safe harbor created by those sections. The actual future
results of the Company could differ materially from those projected in the
forward looking information. For a discussion of certain factors that could
cause actual results to differ materially from those projected by the forward
looking information see "Factors That May Affect Future Results" herein.
Background
- ----------
The Company manufactures, through subcontractors, and distributes DRAM
memory upgrade components for PC's, laptop and notebook computers, file servers
and printers to retailers, resellers, VARs, VADs, OEMs, aggregators and national
or regional distributors. In addition, the Company is also selling computer
systems which are purchased on a pre-sold basis and are primarily sold to the
Company's largest customer as part of servicing this customer.
MMI effectively commenced operations in April of 1995 focusing on the
manufacture, through subcontractors, and sale of standard memory modules to
retailers, resellers, VARs, VADs, OEM's, aggregators, and national and regional
distributors. Standard memory modules implement industry standard specifications
and are designed to be incorporated into a wide variety of electronic equipment.
The Company's net sales and gross profits have increased substantially over the
last two years.
The demand for memory upgrades in digital electronic systems has grown
dramatically over the last several years. The factors which have contributed to
the increasing demand for memory devices include the expanding unit sales of
personal computers in the business and consumer market segments; the
proliferation of increasingly complex personal computer software; and the
increasing performance requirements of workstations, servers and networking and
telecommunications equipment.
The Company purchases memory chips in the domestic spot market and from
overseas trading companies which have direct allocations from chip
manufacturers. The Company also purchases directly from chip manufacturers.
Once memory chips have been purchased, the Company sends the chips to a
subcontractor which builds and tests the finished goods memory product. After
the Company receives the assembled memory boards from the subcontractor, the
Company retests the boards and adds a unique Company warranty label to each
product. For the most part, memory products are pre-sold before the chips are
purchased and assembled into memory boards.
In 1996 and in the six month period ended June 30, 1997, the Company's top
ten customers accounted for approximately 80% and 90%, respectively, of the
Company's net sales. While the Company expects to continue to be dependent upon
these customers for a significant percentage of its net sales, the composition
of the Company's top ten customers may change in the future. The Company has
added a number of new customers in recent months, and its strategy is to
increase its sales to both existing and new customers. The percentage of the
Company's net sales represented by the Company's largest customer in recent
-9-
<PAGE>
months has been on a decline while sales to new and existing customers has been
on an incline. International sales by the Company were minimal in both periods.
Income as a Percentage of Net Sales
- -----------------------------------
The following table sets forth certain condensed statements of income data
of the Company expressed as a percentage of net sales (unaudited):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales .................................... 89.5 87.5 90.1 87.5
Gross Profit ..................................... 10.5 12.5 9.9 12.5
Sales, general & administrative .................. 11.2 6.7 8.3 7.3
Income (Loss) from operations .................... (.7) 5.8 1.6 5.2
Other income (expense), net ...................... (1.4) (1.2) (1.2) (1.2)
Income (Loss) before provision for income taxes... (2.1) 4.6 .4 4.0
Provision (Benefit) for income taxes ............. ( .8) .0 (.7) .0
Net income (Loss)................................. (1.3) 4.6 1.1 4.0
</TABLE>
RESULTS OF OPERATIONS
- ---------------------
Three Months ended June 30, 1997 and 1996
- -----------------------------------------
NET SALES
Net sales consist of sales of memory modules and PC cards less returns and
discounts.
Net sales increased approximately 21% from approximately $6,127,800 in the
second quarter period ended June 30, 1996 to approximately $7,394,200 in the
second quarter period ended June 30, 1997. The increase was primarily due to an
increase in sales of memory products to both existing and new customers. The
Company's sales of PC cards to both new and existing customers also increased
significantly from period to period. The Company is also expanding its product
line to include sales of complete computer systems.
-10-
<PAGE>
GROSS PROFIT
Cost of sales includes the costs of memory chips, computer components ,and
other components and materials purchased by the Company for its products, as
well as subcontractor charges and overhead costs associated with testing and
manufacturing.
Gross profit increased approximately 1% from approximately $768,700 in the
second quarter period ended June 30, 1996 to approximately $774,500 in the
second quarter period ended June 30, 1997. Gross margin decreased from 12.5% in
the second quarter period ended June 30, 1996 to 10.5% in the second quarter
period ended June 30, 1997. This decrease in gross margin was principally due to
higher costs related to servicing the largest customer. Sales to the largest
customer increased as the gross profit for that same customer decreased.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative costs include all personnel costs,
including salaries, commissions, performance-based bonuses and employee
benefits, the costs of advertising, promotions and trade shows, and rental costs
and other support costs, including utilities, insurance and professional fees.
Sales, general and administrative expenses increased approximately 101%
from approximately $410,500 in the second quarter period ended June 30, 1996 to
approximately $826,500 in the second quarter period ended June 30, 1997. As a
percentage of net sales, general and administrative expenses increased from 6.7%
in the second quarter period ended June 30, 1996 to 11.2% in the second quarter
period ended June 30, 1997. Selling expenses have increased primarily due to a
change in the Sales Force compensation structure, effective May 1, 1997, from
commissions paid on Gross Profit to established salaries. This change produced a
higher salary expense as compared to net sales for the months of May and June
1997. Travel has also affected the increase in selling expenses due to marketing
a wider area for potential growth. The G&A expenses have primarily increased in
areas relating to public relations to promote and grow business. The Company
has also incurred additional costs as a result of it being a public company.
Officer salary has also affected the G&A expenses due to the majority
stockholder and CEO not taking a salary in 1996, as compared to taking a salary
monthly in 1997, which creates an increase in officer salary when comparing
first quarter 1996 to first quarter 1997.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income, less
interest expense. Interest expense is attributable to the Company's utilization
of its lines of credit. The Company's use of its principal line of credit
increased in the three-month period ended June 30, 1997 from the corresponding
period in the prior year. That increase was used to fund increased inventory and
receivables as a result of increased sales. The Company expects that its
utilization of its principal line of credit will increase as its sales increase.
Accordingly, the Company expects interest expenses to increase in the future.
-11-
<PAGE>
PROVISION (BENEFIT) FOR INCOME TAXES
The Company's effective tax rate for the three months ended June 30, 1997
and 1996 was 40% and 0% respectively. Prior to March 31, 1997, the Company was
taxed as an "S" corporation which resulted only in a minimal state tax and no
federal income tax. For the three months ended June 30, 1997, the Company
recorded a tax benefit of approximately $61,000 as the Company expects operating
profits in the latter half of 1997 to more than offset the operational loss
incurred during the second quarter.
Six Months Ended June 30, 1997 and 1996
- ---------------------------------------
NET SALES
Net sales consist of sales of memory modules and PC cards less returns and
discounts.
Net sales increased approximately 65% from approximately $12,075,700 in
the six-month period ended June 30, 1996 to approximately $19,971,900 in the
six-month period ended June 30, 1997. The increase was primarily due to an
increase in sales of memory products to both existing and new customers. The
Company's sales of PC cards to both new and existing customers also increased
significantly from period to period. The Company is also expanding its product
line to include sales of complete computer systems.
GROSS PROFIT
Cost of sales includes the costs of memory chips, computer components and
other components and materials purchased by the Company for its products, as
well as subcontractor charges and overhead costs associated with testing and
manufacturing.
Gross profit increased approximately 31% from approximately $1,510,700 in
the six-month period ended June 30, 1996 to approximately $1,978,600 in the
six-month period ended June 30, 1997. Gross margin decreased from 12.5% in the
six-month period ended June 30, 1996 to 9.9% in the six-month period ended
June 30, 1997. This decrease in gross margin was principally due to higher costs
related to servicing the largest customer. Sales to the largest customer
increased as the gross profit for that same customer decreased.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative costs include all personnel costs,
including salaries, commissions, performance-based bonuses and employee
benefits, the costs of advertising, promotions and trade shows, and rental costs
and other support costs, including utilities, insurance and professional fees.
-12-
<PAGE>
Sales, general and administrative expenses increased approximately 89%
from approximately $876,400 in the six-month period ended June 30, 1996 to
approximately $1,654,400 in the six-month period ended June 30, 1997. As a
percentage of net sales, general and administrative expenses increased from 7.3%
in the six-month period ended June 30, 1996 to 8.3% in the six-month period
ended June 30, 1997. Selling expenses have increased primarily due to a change
in the Sales Force compensation structure, effective May 1, 1997, from
commissions paid on Gross Profit to established salaries. This change produced a
higher salary expense as compared to net sales for the months of May and June
1997. Travel has also affected the increase in selling expenses due to marketing
a wider area for potential growth. The G&A expenses have primarily increased in
areas relating to public relations to promote and grow business. The Company has
also incurred additional costs as a result of it being a public company. Officer
salary has also affected the G&A expenses due to the majority stockholder and
CEO of the Company not taking a salary in 1996, as compared to taking a salary
monthly in 1997, which creates an increase in officer salary when comparing
first quarter 1996 to first quarter 1997.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income, less
interest expense. Interest expense is attributable to the Company's utilization
of its lines of credit. The Company's use of its principal line of credit
increased in the six-month period ended June 30, 1997 from the corresponding
period in the prior year. That increase was used to fund increased inventory and
receivables as a result of increased sales. The Company expects that its
utilization of its principal line of credit will increase as its sales increase.
Accordingly, the Company expects interest expenses to increase in the future.
PROVISION (BENEFIT) FOR INCOME TAXES
The Company's effective tax rate for the six months ended June 30, 1997
and 1996 was 158% and 1% respectively. Prior to March 31, 1997, the Company was
taxed as an "S" corporation which resulted only in a minimal state tax and no
federal income tax. As a result of the Company converting from an "S"
corporation to a "C" corporation on March 31, 1997, the Company recognized a tax
benefit of $85,600 resulting from the establishment of a net deferred
tax asset at that date. For the three months ended June 30, 1997, the Company
recorded a tax benefit of approximately $61,000 as the Company expects operating
profits in the latter half of 1997 to more than offset the operational loss
incurred during the second quarter. The Company expects that its effective tax
rate in the future to be approximately 40%.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has used funds generated primarily from
operations and certain borrowings to support its operations, acquire capital
equipment and finance inventory and accounts receivable. In the six-month
periods ended June 30, 1996 and June 30, 1997, the Company generated cash from
operating activities of approximately $447,800 and $26,700, respectively. At
June 30, 1997, the Company had a negative cash balance of approximately
($93,000) and approximately $3,958,300 available under its principal line of
credit. Its working capital was approximately $3,107,000. The increase in
working capital is primarily due to the proceeds from the $3,000,000 private
placement which closed at the beginning of the quarter.
-13-
<PAGE>
The Company has a revolving line of credit of $7,000,000 which is secured
by substantially all of the Company's assets and which expires on September 30,
1998. On the expiration date the line will automatically and continuously renew
for successive additional terms of one year unless terminated at the option of
the Company or the bank on the anniversary date. Amounts available for borrowing
under the Company's existing line of credit are limited to the lower of the
commitment amount or a borrowing base amount calculated based on certain levels
of inventory and accounts receivable. At June 30, 1997, the Company had
approximately $3,041,700 outstanding and $3,958,300 was available for borrowing
under its principal line of credit. Financial covenants set forth in the
Company's line of credit agreement prohibit the Company from paying dividends
where the payment of such dividends would reduce the Company's net worth below
certain levels. The line of credit is personally guaranteed by the Registrant's
principal stockholder.
Capital expenditures totaled approximately $16,800 and $57,700 in the
six-month periods ended June 30, 1996 and 1997, respectively. Such expenditures
were primarily for office and test equipment. The Company intends to spend
approximately $30,000 on similar capital expenditures in the remaining quarters
of 1997.
From time to time, the Company evaluates acquisitions of businesses,
products or technologies that complement the business of the Company. The
Company was a party to a nonbinding letter of intent to acquire the business of
Netram Components, Inc. Although the letter of intent expired on July 22, 1997,
without the parties entering into a definitive agreement, negotiations between
the parties are continuing. The terms of the proposed transaction, and the
likelihood of its consummation, are uncertain. Any such transactions, if
consummated, may use a portion of working capital or require the issuance of
equity.
The Company believes that the net proceeds from the private placement
offering, together with existing funds, anticipated cash flow from operations
and amounts available under its existing lines of credit will be sufficient to
meet its working capital and capital expenditure requirements for the next
12 months.
Factors That May Affect Future Results
- --------------------------------------
The Company's business, financial condition and results of operations may
be impacted by a number of factors including, without limitation, the factors
discussed below.
SIGNIFICANT CUSTOMER CONCENTRATION
A single customer accounted for 50%, and 53% of the Company's total sales
in 1996 and in the six months ended June 30, 1997, respectively. At December
1996, and at June 30, 1997 the amounts due from this major customer amounted to
approximately $4,785,000, and $1,123,800, respectively. The Company's ten
largest customers accounted for 80% and 90% of total sales in those periods. The
Company expects to continue to be dependent upon those customers for a
significant percentage of its total sales. However, there can be no assurance
that such customers will continue to utilize the Company's products at current
-14-
<PAGE>
levels, if at all. The Company intends to use a portion of the proceeds of the
private placement to expand its customer base. However, there can be no
assurance that it will be successful in doing so. The loss of a major customer
or any reduction in orders by any such customer would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's financial results will depend in significant part upon the success
of its customers' products.
The Company generally has no firm long-term volume commitments from its
customers and generally enters into individual purchase orders with its
customers. The Company has experienced cancellations of orders and fluctuations
in order levels from period to period and expects it will continue to experience
such cancellations and fluctuations in the future. In addition, customer
purchase orders may be canceled and order volume levels can be changed, canceled
or delayed with limited or no penalties. The replacement of canceled, delayed or
reduced purchase orders with new business cannot be assured. Moreover, the
Company's business, financial condition and results of operations will depend in
significant part upon its ability to obtain orders from new customers, as well
as the financial condition and success of its customers, its customers' products
and the general economy. The factors affecting any of the Company's major
customers or their customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTENSE COMPETITION
The memory module industry is intensely competitive. The memory module
manufacturing market is comprised of a large number of competitive companies,
several of which have achieved a substantial share of their respective markets.
Certain of the Company's competitors in each of these markets have substantially
greater financial, marketing, technical, distribution and other resources,
greater name recognition, lower cost structures and larger customer bases than
the Company. In the OEM memory module market, the Company competes against
semiconductor manufacturers that maintain captive memory module production
capabilities, including Celestica (a division of IBM), Integrated Device
Technology, Inc., Micron Electronics, Inc. (a subsidiary of Micron Technology
Inc.), and Multichip Technology, Inc. (a division of Cypress Semiconductor
Corporation). The Company also competes with independent memory module
manufacturers, including PNY Electronics, Inc. In the computer systems
reseller market for memory modules, the Company primarily competes with Kingston
Technology, Inc., SMART Modular Technologies, Viking Technology, Inc. and Vision
Tek. The Company faces competition from current and prospective customers that
evaluate the Company's capabilities against the merits of manufacturing products
internally. In addition, the Company competes and expects to continue to compete
with certain of its suppliers. Those suppliers may have the ability to
manufacture competitive products at lower costs than the Company as a result of
their integration. The Company also faces and may face competition from new and
emerging companies that have recently entered or may in the future enter the
markets which the Company serves. To be competitive, the Company must continue
to produce products promptly, maintain quality levels, offer flexible delivery
schedules, deliver finished products on a reliable basis and compete favorably
on the basis of price. In addition, increased competitive pressure has led in
the past and may continue to lead to intensified price competition, resulting in
lower prices and gross margins, which could have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to compete successfully in the
future.
-15-
<PAGE>
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations and gross margins have in the past
fluctuated significantly and may in the future continue to fluctuate
significantly from period to period. The primary factors that have affected and
may affect in the future the Company's results of operations include the
inability to procure required components, adverse changes in the mix of products
sold by the Company, fluctuating market demand for, and declines in the selling
prices of, the Company's products, market acceptance of new products and
enhanced versions of the Company's products, delays in the introduction of new
products and enhancements to existing products, manufacturing inefficiencies
associated with the start up of new product introductions, the timing of new
product announcements and releases by the Company or its competitors, the timing
of significant orders, patterns of spending by customers, delays, cancellations
or rescheduling of orders due to customer financial difficulties or other
events, inventory obsolescence, including the reduction in value of the
Company's inventories due to unexpected price declines, unexpected product
returns, and cycles in the Company's targeted markets. Other factors which may
affect the Company's results of operations in the future include the loss of a
principal customer or the short term loss of a customer due to product inventory
accumulation by the customer (such as occurred in the second quarter of 1997),
the ability to volume produce products and meet customer requirements, the
timing of expenditures in anticipation of increased sales, and regulatory
changes.
In addition, operating results in future periods may be impacted by
general economic conditions and various competitive factors, including
price-based competition and competition from other parties employing competing
technologies. The Company's operating results could also be affected in any
given period by business interruptions or costs associated with an earthquake,
fire, theft or other similar events outside the control of the Company, which
events may not be fully covered by applicable insurance coverages.
The Company's gross margins have varied and will continue to vary
significantly based on a variety of factors, including the mix of products sold
and the manufacturing services provided, the channels through which the
Company's products are sold, declines in selling prices, the level of
manufacturing efficiencies achieved and pricing by competitors or suppliers. The
selling prices of the Company's existing products have declined in the past and
the Company expects that prices will decline in the future. Accordingly, the
Company's ability to maintain or increase net sales will be highly dependent
upon its ability to increase unit sales volumes of existing products and to
introduce and sell new products in quantities sufficient to compensate for the
anticipated declines in selling prices. Declining selling prices may also have a
material adverse effect on the Company's gross margins unless the Company is
able to reduce its cost per unit to offset declines in selling prices. There can
be no assurance that the Company will be able to increase units sales volumes,
introduce and sell new products or reduce its cost per unit.
-16-
<PAGE>
The Company's results of operations may also be affected by inflation and
the value of the United States dollar due to the fact that the Company purchases
components from foreign suppliers. Fluctuations in the value of the United
States dollar in relation to foreign currencies could increase the cost of
certain components for the Company's products and could also make the price of
the Company's products in foreign countries more expensive compared to the price
of other companies' products denominated in other currencies.
There can be no assurance that the Company will maintain its current level
of net sales or rate of growth for any period in the future. Accordingly, there
can be no assurance that the Company will be able to be profitable or that it
will not sustain losses in future periods. The Company believes that
period-to-period comparisons of the Company's financial results are not
necessarily meaningful and should not be relied upon as indications of future
performance. Due to the foregoing factors, it is likely that in some future
quarter the Company's operating results will be below the expectations of public
market analysts and investors.
DEPENDENCE ON LIMITED SOURCES OF SUPPLY
The Company depends on third party manufacturers to produce certain of the
Company's memory module products. The electronics industry has experienced
shortages in semiconductor memory devices, including DRAM. The Company generally
has no written agreements with its suppliers. The inability to continue to
obtain sufficient supplies of components as required, or to develop alternative
sources if required, could cause delays, disruptions or reductions in product
shipments which could damage relationships with current or prospective
customers, could increase prices and could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will receive adequate supplies on a timely basis
in the future despite the strong relationships with its current suppliers.
INVENTORY PURCHASING POLICY
The Company's current policy is to purchase 75% of its inventory only if
it has been pre-sold; the balance is generally purchased at reduced prices in
anticipation of future sales. Such purchases will expose the Company to the risk
that it will not be able to use such components before they become obsolete and
to adverse fluctuations in the price of such components and of the products the
Company sells. Accordingly, there can be no assurance that the Company's
purchasing policy will be profitable.
MANAGEMENT OF GROWTH; EXPANSION OF OPERATIONS
The Company has significantly expanded its operations since its inception.
Projected future growth will significantly increase the responsibility of
existing management which may place a significant strain on the Company's
limited personnel, management and other resources. The Company's ability to
manage future growth will depend upon continued expansion of its accounting and
other internal management systems, procedures and controls. There can be no
assurance that significant problems in those areas will not occur. Any failure
-17-
<PAGE>
to expand those systems, procedures and controls in an efficient manner and at a
pace consistent with the Company's business could have a material adverse effect
on the Company's business, financial condition and results of operations.
In connection with the Company's recent growth, the Company's operating
expenses have increased significantly and the Company anticipates that operating
expenses will continue to increase significantly in the future. Should the
Company increase its expenditures in anticipation of a future level of sales
that does not materialize, the Company's business, financial condition and
results of operations would thereby be subject to material adverse effects.
Certain customers have required and may continue to require accelerated delivery
schedules which have placed and may continue to place an excessive burden on the
Company's resources. In order to achieve anticipated sales levels and
profitability, the Company will continue to be required to manage its assets and
operations efficiently. In addition, should the Company expand geographically,
it may experience certain inefficiencies from management of geographically
dispersed facilities.
DEPENDENCE ON SEMICONDUCTOR AND COMPUTER INDUSTRIES
The semiconductor industry has been characterized by cyclical market
conditions. The industry has experienced significant economic downturns at
various times, characterized by diminished product demand, accelerated erosion
of average selling prices and production overcapacity. As a result of
overproduction and lower than anticipated sales of Windows 95(R), in 1996 the
price of DRAM declined by as much as 80% from the beginning of the year,
resulting in much lower profit per memory unit. During 1996 and 1997, there were
significant declines in DRAM and SRAM semiconductor prices and declines in Flash
semiconductor prices. Price declines can have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
the Company may experience substantial period-to-period fluctuations in future
operating results due to general industry conditions or events occurring in the
general economy. From time to time, the computer industry, like the semi-
conductor industry, has experienced significant downturns, often in connection
with, or in anticipation of, declines in general economic conditions.
Accordingly, any factor adversely affecting the semiconductor or computer
industries or particular segments within the semiconductor or computer
industries, such as the market for memory products, could materially adversely
affect the Company's sales and results of operations.
REQUIREMENTS FOR RESPONSE TO RAPID TECHNOLOGICAL CHANGE
The semiconductor and computer industries are subject to rapid
technological change, short product life cycles, frequent new product
introductions and enhancements, changes in end-user requirements and evolving
industry standards. The Company's ability to be competitive in these markets
will depend in significant part upon its ability to provide technologically
advanced products, maintain quality levels, offer flexible delivery schedules,
deliver finished products on a reliable basis and compete favorably on the basis
of price.
-18-
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in significant part upon the
continued contributions of its senior management and sales personnel, many of
whom would be difficult to replace. Of such persons only the Company's Chief
Executive Officer, Mr. Troy D. Barnes, its Vice President of Capital Markets,
Douglas P. Morris, and its Executive Vice President, Steven Weinberg, have
written employment agreements with the Company. The Company's future operating
results also depend in significant part upon its ability to attract and retain
qualified management, manufacturing and quality assurance, engineering,
marketing, and sales personnel. The Company is actively recruiting such
personnel. However, competition for such personnel is intense; and there can be
no assurance that the Company will be successful in attracting or retaining such
personnel now or in the future. There may be only a limited number of persons
with the requisite skills to serve in such positions, and it may be increasingly
difficult for the Company to hire such persons over time. The loss of any key
employee, the failure of any key employee to perform in his or her current
position, the Company's inability to attract and retain skilled employees as
needed or the inability of the officers and key employees of the Company to
expand, train and manage the Company's employee base could materially adversely
affect the Company's business, financial condition and results of operations.
NO ASSURANCE OF PRODUCT QUALITY, PERFORMANCE AND RELIABILITY
The Company expects that its customers will continue to establish
demanding specifications for quality, performance, reliability and delivery. In
the past, the Company has not experienced significant quality problems, in part
because the manufacturers of memory modules sold by the Company have accepted
responsibility for any product returns. However, there can be no assurance that
problems will not occur in the future with respect to the quality, performance,
reliability and delivery of the Company's products. If such problems occur, the
Company could experience increased costs, delays in or cancellations or
reschedulings of orders or shipments, delays in collecting accounts receivable
and increases in product returns and discounts, any of which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
UNCERTAINTY REGARDING PROTECTION OF PROPRIETARY RIGHTS
The Company attempts to protect its intellectual property rights through
trademarks, trade secrets and a variety of other measures, including
non-disclosure agreements. There can be no assurance, however, that such
measures will provide adequate protection for the Company's trade secrets or
other proprietary information, that disputes with respect to the ownership of
its intellectual property rights will not arise, that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors or that the Company can otherwise meaningfully protect its
intellectual property rights. There can be no assurance that third parties will
not assert intellectual property infringement claims against the Company. In
addition, there can be no assurance that foreign intellectual property laws will
adequately protect the Company's intellectual property rights abroad. The
failure of the Company to protect its proprietary rights could have a material
adverse effect on its business, financial condition and results of operations.
-19-
<PAGE>
The Company has filed applications with the United States Patent and Trademark
Office for registration of the mark and logo "MILLENNIUM Memory, Inc." There is
no assurance that registration of the mark and logo will be unopposed or granted
even if not opposed. Indeed, the distinctive word "MILLENNIUM" is currently
employed by several other companies involved in the manufacture and/or sale of
computer products and some of those companies have obtained or applied for
trademarks prior to the Company's application or first use of the name
"MILLENNIUM." Such prior use and filing reduces further the likelihood that
trademark registration will be issued to the Company.
In the semiconductor and computer industries, it is typical for companies
to receive notices from time to time alleging infringement of patents or other
intellectual property rights of others. While there is currently no pending
intellectual property litigation involving the Company, the Company may from
time to time in the future be notified of claims that it may be infringing
patents, copyrights or other intellectual property rights owned by third
parties. There can be no assurance that such third parties will not in the
future pursue claims against the Company with respect to the alleged
infringement of patents, copyrights or other intellectual property rights owned
by third parties. In addition, litigation may be necessary to protect the
Company's intellectual property rights and trade secrets, to determine the
validity of and scope of the proprietary rights of others or to defend against
third party claims of invalidity. Any litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to use or
ownership claims of third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future. If any claims or actions
are asserted against the Company, the Company may seek to obtain a license under
a third party's intellectual property rights. There can be no assurance,
however, that a license will be available under reasonable terms or at all. The
failure to obtain a license under a patent or intellectual property right from a
third party for technology used by the Company could cause the Company to incur
substantial liabilities and to suspend the manufacture of the products utilizing
the invention. In addition, should the Company decide to litigate such claims,
such litigation could be extremely expensive and time consuming and could
materially adversely affect the Company's business, financial condition and
results of operations, regardless of the outcome of the litigation.
ENVIRONMENTAL ISSUES
The Company's operations are not currently impacted significantly by
federal, state, local and foreign environmental protection laws and regulations.
However, changes in environmental laws and regulations and in the Company's
business could subject the Company to significant compliance expenses,
production suspensions or delay, restrictions on expansion, the acquisition of
costly equipment or other liabilities.
-20-
<PAGE>
Recently Issued Accounting Pronouncement
- ----------------------------------------
The Financial Accounting Standards Board issued a Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share," which is
effective for financial statements issued for periods ending after December 31,
1997. SFAS No. 128 requires public companies to present basic earnings per
share and, if applicable, diluted earnings per share, instead of primary and
fully diluted earnings per share. The Company has not yet determined the effect
of adopting SFAS No. 128.
-21-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
On March 17, 1997, Common Stock Purchase Warrants to purchase 588,231
shares at $3.125 per share which were to expire on June 30, 1997 were extended
to September 30, 1997.
In April of 1997, options to purchase an aggregate of 700,000 shares of
Common Stock were issued pursuant to the Company's new incentive stock option
plan to the Executive Vice President of the Company at an exercise price of
$3.00 per share. Seventy thousand (70,000) of such shares vested immediately.
Six hundred thirty thousand (630,000) of such shares vest in 36 equal monthly
installments beginning May 1, 1998. The options were issued under the exemption
from registration provided by Section 4(2) of the Act in that they did not
involve a public offering.
Due the Company's failure to achieve pre-tax earnings of $220,000 in the
second quarter, options to purchase an aggregate of 65,048 shares of Common
Stock were not issued to employees of the Company pursuant to the 1996-1997
Stock Incentive Plan. In addition, an aggregate of 130,098 shares of Common
Stock issued to employees, directors and consultants of the Company and held in
a performance escrow will be canceled after the third quarter based on the
second quarter pre-tax earnings.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
-22-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On July 1, 1997, the Registrant filed with the SEC a Form 8-K dated June
23, 1997 to report that the Common Stock Purchase Warrants sold in Beacon's
initial public offering which were to expire on June 30, 1997 were extended to
September 30, 1997.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 13, 1997
MILLENNIUM ELECTRONICS, INC.
By: /s/ Troy D. Barnes
----------------------------------
Troy D. Barnes
President, Chief Executive Officer
and Chief Financial Officer
-24-
<PAGE>
EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
27 Financial Data Schedule 26
-25-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,001,513
<ALLOWANCES> 165,560
<INVENTORY> 1,059,869
<CURRENT-ASSETS> 6,484,143
<PP&E> 135,834
<DEPRECIATION> 32,807
<TOTAL-ASSETS> 6,721,754
<CURRENT-LIABILITIES> 3,377,409
<BONDS> 0
0
0
<COMMON> 7,243
<OTHER-SE> 3,305,632
<TOTAL-LIABILITY-AND-EQUITY> 6,721,754
<SALES> 19,971,927
<TOTAL-REVENUES> 19,971,927
<CGS> 17,993,311
<TOTAL-COSTS> 19,647,711
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253,302
<INCOME-PRETAX> 89,685
<INCOME-TAX> (142,029)
<INCOME-CONTINUING> 231,714
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 231,714
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
