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 SEPTEMBER 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 November 13, 1997, there were 7,819,051 shares of the Registrant's $.001 Par
Value Common Stock outstanding.
Exhibit Index on Page 25
Page 1 of 26
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
9/30/97 12/31/96
(UNAUDITED) (AUDITED)
CURRENT ASSETS
Cash & Cash Equivalents $ 1,315,667 $ 0
Accounts receivable, net of an allowance for
doubtful accounts 9,740,759 6,193,241
Due from others 58,550 0
Inventories, net of reserve 1,776,688 663,882
Prepaid expenses 40,399 33,346
Deferred income taxes 165,200 0
----------- -----------
Total current assets 13,097,263 6,890,469
FURNITURE AND EQUIPMENT 144,286 55,608
OTHER ASSETS 87,960 208,539
INTANGIBLE ASSETS 1,573,850 0
----------- -----------
Total assets $14,903,359 $ 7,154,616
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Book overdraft $ 0 $ 191,742
Lines of credit 7,513,722 5,232,754
Income Taxes Payable 155,590 0
Accounts payable and accrued liabilities 2,008,126 750,053
----------- -----------
Total current liabilities 9,677,438 6,174,549
LONG TERM LIABILITIES
Deferred income taxes 20,000 0
SUBORDINATED DEBT - STOCKHOLDER 0 298,811
STOCKHOLDERS' EQUITY Common stock,
par value .001:
17,000,000 shares authorized,
7,819,051 (September 30) and 5,203,868
(December 31) shares issued and outstanding 7,819 43,400
Receivable from stockholder 0 (151,339)
Additional Paid Capital 5,030,179 0
Retained earnings 167,923 789,195
----------- -----------
Total stockholders' equity 5,205,921 681,256
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,903,359 $ 7,154,616
=========== ===========
See the accompanying notes to these consolidated condensed financial statements
Page 2 of 26
<PAGE>
<TABLE>
MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
NET SALES $ 16,615,046 $ 9,287,327 $ 36,586,973 21,363,012
COST OF SALES 14,707,502 8,126,353 32,700,813 18,691,321
------------ ------------ ------------ ------------
GROSS PROFIT 1,907,544 1,160,974 3,886,160 2,671,691
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,294,731 880,977 2,949,131 1,757,333
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 612,813 279,997 937,029 914,358
OTHER INCOME (EXPENSE)
Other income 896 95,808 19,667 98,238
Other expenses (178,820) (96,913) (432,122) (244,267)
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 434,889 278,892 524,574 768,329
PROVISION (BENEFIT) FOR INCOME TAXES
Current 263,600 9,400 177,171 12,200
Deferred (89,600) 0 (145,200) 0
------------ ------------ ------------ ------------
NET INCOME $ 260,889 $ 269,492 $ 492,603 $ 756,129
============ ============ ============ ============
Net income per share $ .03 $ .05 $ .07 $ .15
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 7,953,985 5,203,868 7,285,046 5,203,868
============ ============ ============ ============
</TABLE>
See the accompanying notes to these consolidated condensed financial statements
Page 3 of 26
<PAGE>
<TABLE>
MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
<CAPTION>
9/30/97 9/30/96
(UNAUDITED) UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 492,603 $ 756,129
Adjustments to reconcile net income
to net cash used in operating activities
Deferred income taxes (145,200 0
Depreciation and amortization 18,160 8,197
Issuance of common stock for services -- 38,400
(Increase) decrease in
Accounts receivable (3,209,295) (1,375,662)
Inventories (1,011,508) (119,792)
Prepaid expenses (7,053) (13,997)
Other assets (32,001) (6,533)
Increase (decrease) in
Accounts payable and accrued liabilities 478,352 44,575
Income Tax Payable 144,710 5,521
----------- -----------
Net cash provided by (used in) operating activities (3,271,232) (663,162)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Beacon, net of cash acquired 513,534 0
Acquisition of Netram, net of cash acquired 381,712 0
Due to others (80,000) 0
Acquisition of furniture and equipment (87,465) (23,678)
Other 151,339 (150,000)
----------- -----------
Net cash provided by (used in) investing activities 879,120 (173,678)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit facility 2,280,968 1,020,409
Increase (decrease) in book overdraft (191,742) 3,869
Distributions to stockholders (626,765) (187,758)
Proceeds from offering 2,983,997
Offering costs and commissions (439,868)
Repayment of stockholder loan (322,297)
Proceeds from stockholder loan 23,486 320
----------- -----------
Net cash provided by financing activities 3,707,779 836,840
----------- -----------
Net change 1,315,667 --
Cash at beginning of period -- --
----------- -----------
Cash at end of period $ 1,315,667 $ --
=========== ===========
</TABLE>
See the accompanying notes to these consolidated condensed financial statements
Page 4 of 26
<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 recorded.
Page 5 of 26
<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 nine month period ended
September 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 September 30, 1997, the Company had a $10,000,000 line of credit
(accounts receivable credit line) expiring September 30, 1999. 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
Company's majority stockholder. The debt agreement contains certain restrictions
as to adequate insurance and Company advances and loans, and limits
Page 6 of 26
<PAGE>
distributions to stockholders. The Company has an additional Inventory Line of
Credit at 25% of finished goods located at 31642 South Pacific Coast Highway,
Laguna Beach, California which have been located on such premises for a period
not to exceed 30 days. 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 fee is
payable on the earlier of the third anniversary date (September 1999) 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 September
30, 1997 was $7,513,722 .
Related Party Transactions
--------------------------
The Company pays, on behalf of the majority stockholder and CEO of the
Registrant, monthly lease payments of approximately $2,160 for two vehicles.
Other Significant Transactions
------------------------------
The retained earnings of the Company decreased approximately 70% from
$789,195 at 12/31/96 to $167,923 at 9/30/97 primarily due to closing prior year
and current year through 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 individual income taxes.
Inventories of the Company increased approximately 168% from $663,882 at
December 31, 1996 to $1,776,688 at September 30, 1997 primarily because the
Company used funds made available from the sale of securities and the credit
line increase to purchase inventory at advantageous prices.
On September 30, 1997, the Company expanded its sales of PC systems with
the acquisition of NETRAM Components, Inc., a California corporation ("Netram").
The Company acquired Netram via merger. In exchange for all of the issued and
outstanding capital stock of Netram, Registrant delivered to the Netram
shareholders 576,000 shares of Registrant's Common Stock (approximately
4.6033966 shares of Registrant's Common Stock for each share of Netram capital
stock) and an aggregate of $120,000. As a result of this transaction, the
Company recorded goodwill in the amount of $1,573,850 and experienced an
increase in both cash and accounts receiveable. Netram manufactures and
distributes PC systems both to wholesale and retail markets.
Page 7 of 26
<PAGE>
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.
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 manufacturing and
selling computer systems which are manufactured on a pre-sold basis and are
primarily sold to the Company's two largest customers.
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
Page 8 of 26
<PAGE>
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 nine month period ended September 30, 1997, the
Company's top ten customers accounted for approximately 80% and 85%,
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 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) :
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 88.5 87.5 89.4 87.5
Gross Profit 11.5 12.5 10.6 12.5
Sales, general & administrative 7.8 9.4 8.0 8.2
Income from operations 3.7 3.1 2.6 4.3
Other income (expense), net (1.1) (.1) (1.1) (.7)
Income before provision for income taxes 2.0 3.0 1.5 3.6
Provision (Benefit) for income taxes 1.0 .1 .2 .1
Net income 1.6 2.9 1.3 3.5
Page 9 of 26
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended September 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 79% from $9,287,327 in the third
quarter period ended September 30, 1996 to $16,615,046 in the third quarter
period ended September 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 the three months ended September 30, 1996 as compared to the
same period in 1997. The Company is also increasing its sales of complete PC
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 65% from $1,160,974 in the third
quarter period ended September 30, 1996 to $1,907,544 in the third quarter
period ended September 30, 1997. Gross margin decreased from 12.5% in the third
quarter period ended September 30, 1996 to 11.5% in the third quarter period
ended September 30, 1997. This decrease in gross margin was principally due to
higher costs related to servicing the Company's largest customer. Sales to this
customer increased as the gross profit from 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 47%
from $880,977 in the third quarter period ended September 30, 1996 to $1,294,731
in the third quarter period ended September 30, 1997. As a percentage of net
sales, general and administrative expenses decreased from 9.4% in the third
quarter period ended September 30, 1996 to 7.8% in the third quarter period
ended September 30, 1997, due to the significant increase in net sales. However,
Page 10 of 26
<PAGE>
the actual dollars spent on selling, general and administrative expenses have
increased. Travel has 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 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 third quarter 1996 to
third quarter 1997. The increase in the hiring of upper management accompanying
the current growth of the company has also increased G&A expenses due to payment
of salaries.
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 September 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 three months ended September 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 September 30, 1997, the
Company recorded a tax provision of $174,000.
Nine Months Ended September 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 71% from $21,363,012 in the nine-month
period ended September 30, 1996 to $36,586,973 in the nine-month period ended
September 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 increasing its sales of complete computer
systems.
Page 11 of 26
<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 45% from $2,671,691 in the
nine-month period ended September 30, 1996 to $3,886,160 in the nine-month
period ended September 30, 1997. Gross margin decreased from 12.5% in the
nine-month period ended September 30, 1996 to 10.6% in the nine-month period
ended September 30, 1997. This decrease in gross margin was principally due to
higher costs related to servicing the Company's 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 68%
from $1,757,333 in the nine-month period ended September 30, 1996 to $2,949,131
in the nine-month period ended September 30, 1997. As a percentage of net sales,
general and administrative expenses decreased from 8.2% in the nine-month period
ended September 30, 1996 to 8.0% in the nine-month period ended September 30,
1997. Selling expenses have decreased 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 lower salary
expense as compared to net sales for the nine month period ended September 30,
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 nine-month period ended September 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 nine months ended September 30,
1997 and 1996 was 6.1% and 1.6% respectively. Prior to March 31, 1997, the
Company was taxed as an "S" corporation which resulted only in a minimal state
Page 12 of 26
<PAGE>
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 nine months ended September 30, 1997, the Company recorded
a tax provision of $31,971. 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 nine-month
periods ended September 30, 1996 and September 30, 1997, the Company used net
cash from operating activities of $663,162 and $3,271,232, respectively. At
September 30, 1997, the Company had a cash balance of approximately $1,315,667
and approximately $2,486,300 available under its principal line of credit. Its
working capital was approximately $3,420,000. 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 second quarter.
The Company's cash balance increased from $0 at 12/31/96 to $1,315,667
at 9/30/97 due to (i) increased sales, (ii) the acquisition of Netram's cash
reserves, and (iii) the negotiation of more favorable payment terms from the
Company's vendors. The change in payment terms from the Company's vendors has
also resulted in an increase in the Company's accounts payable.
In the nine month period ended September 30, 1997, the Company's accounts
receivable increased from $6,193,241 at December 31, 1996 to $9,740,759. This
increase was due to accounts acquired in the acquisition of Netram and the
increase in sales.
The Company has a revolving line of credit of $10,000,000 which is
secured by substantially all of the Company's assets and which expires on
September 30, 1999. 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 September 30,
1997, the Company had approximately $7,513,700 outstanding and $2,486,300 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 $23,700 and $87,500 in the
nine-month periods ended September 30, 1996 and 1997, respectively. Such
expenditures were primarily for office and test equipment. As the Company
continues to grow, these types of capital expenditures will continue to be
necessary.
Page 13 of 26
<PAGE>
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 40% of the Company's total sales
in 1996 and in the nine months ended September 30, 1997, respectively. At
December 1996, and at September 30, 1997, the amounts due from this major
customer amounted to approximately $4,785,000, and $3,489,557, respectively. The
Company's ten largest customers accounted for 80% and 85% 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 levels, if at all. The Company is attempting 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 and personal computer industries are intensely
competitive. The memory module and personal computer manufacturing markets are
comprised of a large number of competitive companies, several of which have
achieved a substantial share of their respective markets. Certain of the
Page 14 of 26
<PAGE>
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. In the PC
manufacturing market, the Company competes against PC manufacturers that
maintain captive PC systems production capabilities, including but not limited
to companies such as Compaq Computer Corporation, Packard Bell NEC, Inc., and
Hewlett-Packard Company. 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.
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
Page 15 of 26
<PAGE>
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, 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 unit sales volumes,
introduce and sell new products or reduce its cost per unit.
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.
Page 16 of 26
<PAGE>
Dependence on Limited Sources of Supply
---------------------------------------
The Company depends on third party manufacturers to produce certain of
the Company's memory modules and PC computer products. The electronics industry
has experienced shortages in semiconductor memory devices and computer
components, 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, increase prices and 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 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
Page 17 of 26
<PAGE>
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
semiconductor 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.
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 Messrs. Troy D.
Barnes, the Company's Chief Executive Officer, Douglas P. Morris, its Vice
President of Capital Markets, Steven Weinberg, its Executive Vice President,
John Torres, the President of its Netram Division, and Terry Tonini, the Vice
President of Retail Marketing of its Netram Division, 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
Page 18 of 26
<PAGE>
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.
The Company has filed applications with the United States Patent and Trademark
Office for registration of the mark and logo "MILLENNIUM Memory, Inc." and the
mark "NETRAM." There is no assurance that registration of the marks 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
Page 19 of 26
<PAGE>
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.
Difficulties Inherent In The Acquisition Of Or Merger With Other Entities
- -------------------------------------------------------------------------
Acquisitions and mergers involve numerous risks including difficulties in
the assimilation of the operations, technologies and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or limited direct prior
experience and where competitors in such markets have stronger market positions,
and the potential loss of key employees of the acquired company. Achieving the
anticipated benefits of the Netram merger will depend in part upon whether the
integration of businesses is accomplished in an efficient and effective manner,
and there can be no assurance that this will occur. The successful combination
of companies in the high technology industry may be more difficult to accomplish
than in other industries. The combination of companies requires, among other
things, integration of the companies' respective product offerings and
Page 20 of 26
<PAGE>
coordination of their sales and marketing and research and development efforts.
There can be no assurance that such integration will be accomplished smoothly
or successfully. The integration of certain operations following the Netram
merger will require the dedication of management resources that may distract
attention from the day-to-day business of the combined company. The inability
of management to successfully integrate the operations of Netram could have a
material adverse effect on the business and results of operations of the
Company.
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.
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.
Page 21 of 26
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
On September 12, 1997, Common Stock Purchase Warrants to purchase
560,220 shares at $3.125 per share which were to expire on September 30, 1997
were extended to December 15, 1997.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
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 current report on
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.
On October 10, 1997, the Registrant filed with the SEC a current report
on Form 8-K dated September 12, 1997 to report (i) the extension of the exercise
period of certain options and the Common Stock Purchase Warrants originally
issued by the Registrant's predecessor from September 30, 1997 to December 15,
1997 and (ii) the acquisition of NETRAM Components, Inc. by the Registrant. The
financial statements of the business acquired, prepared pursuant to Rule 3-05 of
the Regulation S-X, and the pro forma financial information required pursuant to
Article 11 of Regulation S-X were not filed on October 10, 1997 with the current
Page 22 of 26
<PAGE>
report on Form 8-K, but will be filed by an amendment within sixty days
following the filing date of the current report.
Page 23 of 26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 14, 1997
MILLENNIUM ELECTRONICS, INC.
By: /s/ Troy D. Barnes
------------------------------
Troy D. Barnes
President, Chief Executive Officer
and Chief Financial Officer
Page 24 of 26
<PAGE>
EXHIBIT INDEX
Exhibit Page
- ------ ----
Financial Data Schedule 26
Page 25 of 26
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<ALLOWANCES> 413,000
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