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 MARCH 31, 1998
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.)
51 Discovery, Irvine, California 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 788-8100
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 May 12, 1998, there were 8,282,445 shares of the Registrant's $.001 Par Value
Common Stock outstanding.
Exhibit Index on page 25
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INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Income 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBIT INDEX 25
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
3/31/98 12/31/97
(Unaudited) (Audited)
Current assets
Cash & Cash Equivalents $ 45,122 $ 211,273
Accounts receivable, net of an allowance for
doubtful accounts of $583,000 and $175,000
respectfully 6,784,345 6,876,495
Stock Subscription Receivable 0 1,494,366
Inventories 1,793,352 1,541,666
Prepaid expenses 134,741 100,139
Income Taxes Receivable 337,719 163,719
Deferred Tax Asset 300,000 125,000
Other current assets 82,050 57,551
------------ ------------
Total current assets 9,477,329 10,570,209
Furniture and equipment, net 273,149 147,675
Other assets 84,385 97,735
Excess cost over fair value of net assets
acquired, net of accumulated amortization
of $168,516 and $84,258 respectfully 2,190,679 2,274,937
------------ ------------
Total assets $ 12,025,542 $ 13,090,556
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Lines of credit $ 3,974,506 $ 4,877,286
Accounts payable and accrued liabilities 1,400,835 1,317,229
------------ ------------
Total current liabilities 5,375,341 6,194,515
Long Term Liabilities
Deferred income taxes 25,000 25,000
------------ ------------
Stockholders' equity
Common stock, par value .001:
17,000,000 shares authorized,
8,282,445 and 8,167,150
shares issued and outstanding 7,988 8,167
Treasury Stock (84,087) 0
Additional Paid Capital 6,927,279 6,575,359
Retained earnings (accumulated deficit) (225,979) 287,515
------------ ------------
Total stockholders' equity 6,625,201 6,871,041
------------ ------------
Total liabilities and
stockholders' equity $ 12,025,542 $ 13,090,556
============ ============
See the accompanying notes to these consolidated condensed financial statements
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MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
March 31, 1998 March 31, 1997
-------------- --------------
Net sales $ 14,128,752 $ 12,577,744
Cost of sales 13,208,686 11,373,611
------------ ------------
Gross profit 920,066 1,204,133
Selling, general and
administrative expenses 1,617,470 827,934
------------ ------------
Income (Loss) from operations (697,404) 376,199
Other income (expense)
Other income 0 18,771
Other expenses (165,090) (151,233)
------------ ------------
Income (Loss) before provision for
income taxes (862,494) 243,737
Provision (Benefit) for Income taxes
Current (174,000) 4,656
Deferred (175,000) (85,600)
------------ ------------
Net income (loss) $ (513,494) $ 324,681
============ ============
Basic earnings (loss)per share $ (0.06) $ 0.06
============ ============
Diluted earnings (loss) per share $ (0.06) $ 0.06
============ ============
Weighted average shares outstanding 8,226,100 5,226,518
============ ============
See the accompanying notes to these consolidated condensed financial statements
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MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
3/31/98 3/31/97
(Unaudited) (Unaudited)
Cash flows from operating activities
Net income (loss) $ (513,494) $ 324,681
Adjustments to reconcile net income (loss)
to net cash used in operating activities
Deferred income taxes (175,000) (85,600)
Depreciation and amortization 108,953 4,451
(Increase) decrease in
Accounts receivable 92,150 (1,090,242)
Inventories (251,686) 40,844
Income tax receivable (174,000) 0
Prepaid expenses & other assets (45,751) (8,024)
Increase (decrease) in
Accounts payable and accrued liabilities 83,606 432,013
----------- -----------
Net cash used in operating activities (875,222) (381,877)
----------- -----------
Cash flows from investing activities
Acquisition of Beacon, net of cash acquired -- 513,534
Acquisition of furniture and equipment (150,169) (9,852)
Repayment (issuance) of note receivable to
stockholder 0 1,339
----------- -----------
Net cash provided by (used in) investing
activities (150,169) 505,021
----------- -----------
Cash flows from financing activities
Net proceeds from line of credit facility (902,780) 1,042,484
Increase (decrease) in book overdraft 0 (191,742)
Distributions to "S" corporation stockholders 0 (533,257)
Proceeds from (payments on) stockholder loan 0 23,486
Proceeds from issuance of common stock 1,846,107 0
Payment of offering costs and commissions 0 (388,217)
Common stock repurchased (84,087) 0
----------- -----------
Net cash provided by (used in)
financing activities 859,240 (47,246)
----------- -----------
Net change (166,151) 75,898
Cash at beginning of period 211,273 --
----------- -----------
Cash at end of period $ 45,122 $ 75,898
=========== ===========
See the accompanying notes to these consolidated condensed financial statements
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MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Organization and Line of Business
- ---------------------------------
Millennium Electronics, Inc. ("MEI" or the "Registrant") was
incorporated in Nevada on February 13, 1997 with the intention of being a
holding company. MEI, through its wholly-owned subsidiary, Millennium Memory,
Inc. (collectively, the "Company"), is engaged in the manufacture and
distribution of computers to resellers. In Addition, the Company is engaged in
manufacturing, through subcontractors, and distribution of Dynamic Random Access
Memory ("DRAM"), memory upgrade components for personal computers, laptops, and
notebook computers, file servers and printers to retailers, resellers, value
added resellers, value added distributors, original equipment manufacturers,
aggregators, and national or regional distributors.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts
of MEI and MMI, including the NetRam division of MMI from the date the agreement
of merger was signed, September 30, 1997, after the elimination of intercompany
accounts and transactions.
Cash and Cash Equivalents
- -------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three months or
less to be cash equivalents.
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 (the "SEC"). 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 three month period ended March
31, 1998 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1998, or any other future periods. See
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"Management's Discussion and Analysis of Financial Condition and Result of
Operations - Factors that May Affect Future Results."
Inventories
- -----------
Inventories, which are primarily memory chips and computer components,
are stated at the lower of cost (weighted average method) or market.
Revenue Recognition
- -------------------
The Company recognizes revenue from product sales at the time of
shipment net of expected returns.
Lines of Credit
- ---------------
As of March 31, 1998, the Company had a $10,000,000 line of credit
(accounts receivable credit line) expiring September 30, 1999. On the expiration
date, the line shall automatically and continuously renew for successive
additional terms of one year unless terminated at the option of the Company or
the lender on the anniversary date. As of March 31, 1998, the line bears
interest at prime plus 1.5% per annum. The Company's ability to borrow money
under this line of credit agreement is based upon a percentage of defined
accounts receivable. In addition, the line is collateralized by substantially
all assets of the Company.
The debt agreement contains certain restrictions and covenants that
prohibit the Company from entering into certain transactions without lender
approval and also 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 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 over the term
of the agreement.
As of March 31, 1998, the Company had a $500,000 line of credit
(inventory credit line). The Company borrowed an initial amount of $150,000,
which was repaid on March 31, 1997. Any additional advances are repaid by
applying 25% of each advance from the accounts receivable credit line. The
Company's ability to borrow money under this line of credit agreement is based
upon a percentage of defined inventories. This line of credit's remaining terms
are identical to the accounts receivable credit line.
The outstanding balance under the accounts receivable line of credit
agreement at March 31, 1998 was $3,974,506. The outstanding balance under the
inventory line of credit agreement at March 31, 1998 was $0.
Related Party Transactions
- --------------------------
The Company pays, on behalf of the majority stockholder of the Company,
monthly lease payments for two vehicles of approximately $2,160.
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The Company pays a consulting fee of $5,000 per month to the firm Glick
Morganstern for interfacing with the Company's secured financing lender and for
general organizational consulting. Daniel H. Glick, a director of the Company,
is a founder and principal of Glick Morganstern.
The Company's predecessor, Beacon Capital Investment, Inc., entered
into a one year Consulting Agreement with Douglas P. Morris, a director of the
Company. The Company has renewed the Consulting Agreement for the one year
period beginning April 1, 1998. Over the current term of the Consulting
Agreement, the Company will pay Mr. Morris $100,000.
Other Significant Transactions
- ------------------------------
The Company's largest customer found itself in an overstocked position
basically due to market conditions. Because of that, sales to this customer
decreased for the first quarter 1998. As of April 30, 1998, this customer is
producing the historic sales volume and profit margins.
In late April, 1998 the Company relocated to a new 34,000 square foot
facility located in Irvine, California. The facility enables the Company to
perform in-house manufacturing as opposed to subcontracting manufacturing to an
outside source. This move will provide a more accurate inventory control having
all employees and product under the same roof.
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.
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Background
- ----------
The Company manufactures and sells personal computer ("PC") systems and
semiconductor memory products through its wholly-owned subsidiary, MMI. The
Company develops, markets, assembles, sells and supports a wide range of
high-quality, high-performance desktop PC systems as well as a line of network
servers under the NetRam brand name. The Company also develops, markets,
assembles, sells and supports a limited range of quality, low-cost basic
computers for home and business under the Laguna Computer brand name. In
addition, the Company offers a variety of other system components with its PC
systems and network servers, including monitors, modems, audio and video cards,
CD-ROM drives, hard drives, floppy drives and network cards.
The Company also manufactures, through subcontractors, and distributes
DRAM memory upgrade components for 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.
MMI effectively commenced operations in April of 1995 focusing on the
manufacture, through subcontractors, and sale of standard memory modules. In
1997, the Company began manufacturing and selling computer systems, which are
manufactured on a pre-sold basis and are sold primarily to the Company's three
largest customers. In September 1997, the Company expanded its sales of PC
Computer Systems with the acquisition by merger of NetRam Components, Inc., a
California corporation ("NetRam"). Following the merger, NetRam became a
division of MMI. NetRam manufactures and distributes PC computer systems to both
wholesale and retail markets.
For the first quarter ended March 31, 1998 and the full year 1997, the
Company's top ten customers accounted for approximately 83% and 63%,
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 it
expects to increase its sales to both existing and new customers. In the quarter
ended March 31, 1998, and in the full year 1997, the Company's net sales to its
largest customer accounted for approximately 31% and 33%, respectively. The
Company is striving to expand its base to include more than three large
customers. International sales by the Company were minimal for in both periods.
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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
March 31,
-----------------------
1998 1997
Net sales ........................................ 100.0% 100.0%
Cost of sales .................................... 93.5 90.4
Gross Profit ..................................... 6.5 9.6
Sales, general & administrative .................. 11.4 6.6
Income (Loss) from operations .................... (4.9) 3.0
Other income (expense), net ...................... (1.2) (1.1)
Income (Loss) before provision for income taxes .. (6.1) 1.9
Provision (Benefit) for income taxes ............. (2.5) (.7)
Net income (Loss)................................. (3.6) 2.6
Results of Operations
- ---------------------
THREE MONTH PERIOD ENDED MARCH 31, 1998 AND 1997
Net Sales
- ---------
Consolidated net sales for the first quarter of 1998 were $14.1 million
representing an increase of approximately 12% and 29.8%, respectively, over the
first and fourth quarters of 1997. Net sales of computers during the quarter,
stemming from the Company's September 30, 1997 acquisition of NetRam, grew
44.5% to $9.5 million from $6.5 million during the fourth quarter ended December
31, 1997. Memory module and PC card sales declined 62% to $4.6 million from the
comparable 1997 first quarter level of $12.3 million and grew 7.4% over net
sales of $4.3 million from the previous quarter ended December 31, 1997.
Gross Profit
- ------------
Cost of sales includes the costs of computer components, memory chips,
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.
For the quarter ended March 31, 1998, gross profit decreased 23.6% to
approximately $920,000 from $1.2 million in same quarter of 1997. In the same
periods, gross profit as a percentage of net sales decreased to 6.5% from 9.6%,
respectively. The decline in gross margin was due primarily to two events.
The first such event was inventory adjustments of $283,800 that includes an
inventory adjustment of approximately $263,000 attributed to shrinkage of
computers and computer components at a third-party contract manufacturer's
location. Without the inventory loss, consolidated gross margin would be 8.5%.
The second factor negatively impacting gross margin was an extraordinary
increase in sales returns of the Company's sub-$1,000 computers. These computers
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were assembled by the aforementioned contract manufacturer and do not appear to
have been properly tested upon final assembly. The Company has now assumed
inventory and manufacturing control in its new combined headquarters and
manufacturing facility.
Gross margin on computer sales declined to 5.9% in the first quarter of
1998 from 15.4% in the fourth quarter ended December 31, 1998. Factors
responsible for the drop were the previously mentioned inventory adjustments
which accounted for a decline of 2.8% of first quarter 1998 margin, the higher
level of returns also previously discussed, and a comparatively unfavorable
sales channel mix. Computers sold through the retail channel accounted for
approximately 75% of first quarter 1998 computer sales compared to approximately
44% in the fourth quarter of 1997. Sales to retailers are at much lower margins
than those experienced through VAR channels.
Gross margin on memory products declined to 7.7% in the first quarter
of 1998 from 13.5% in the first quarter of 1997. The decrease is attributable to
a general decline in memory prices.
Selling, General and Administrative
- -----------------------------------
Selling, 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.
Selling, general and administrative expenses increased 95% to $1,617,470 in the
three month period ended March 31, 1998 from $827,934 in the three month period
ended March 31, 1997. As a percentage of net sales, selling, general and
administrative expenses increased to 11.4% from 6.6%, respectively, in the same
periods. Reserves for doubtful accounts increased from $175,000 as of December
31, 1997 to $583,000 as of March 31, 1998. Of that $408,000 increase,
$344,000 represented a one-time charge against certain receivable accounts.
Omitting that one-time charge in the first quarter of 1998 for the additional
reserves of $344,000, first quarter expenses represent 9.0% of net sales.
Another expense included in the first quarter 1998 expenses that was not present
in last year's first quarter expenses is $84,300 of goodwill amortization
pertaining to the 1997 acquisition of NetRam Computers.
The one-time charge for additional reserves of $344,000 includes
$231,000 pertaining to trade receivables outstanding in excess of 90 days,
$74,000 for warranty claims over 60 days outstanding that represent defective
components that are to be returned to the Company upon the Company's issue of
replacement components, and $39,000 representing demonstration computers used
for evaluation by prospective customers.
Other expense level increases stem from an increase in upper management
to accompany the current growth of the Company, additional legal, accounting and
public relations expenses as a result of being a public company and increases in
selling expenses attributable to the shift in emphasis from semiconductor memory
products to PC computers and relating to promotion and marketing to a wider
geographic area.
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Other Income (Expense), Net
- ---------------------------
Other income (expense), net increased 25% to a net expense of $165,090
in the three month period ended March 31, 1998 from a net expense of $132,462 in
the three month period ended March 31, 1997. The increase is principally due to
additional interest expense incurred as a result of increased borrowing under
the Company's line of credit agreement to fund working capital. The Company
expects that utilization of its line of credit will continue to increase as
sales increase.
Provision for Income Taxes
- --------------------------
The Company's effective tax rate for the three month period ended March
31, 1998 and the three month period ended March 31, 1997 was 40% and (33%),
respectively. The Company was taxed as an "S" corporation prior to March 31,
1997. Effective with the merger of the Company with Beacon Capital Investment,
Inc. on March 31, 1997, the Company lost its "S" corporation status and began to
be taxed as a "C" corporation at which time the Company recorded a deferred tax
asset in the amount of $87,600 in accordance with SFAS No. 109. Due to the loss
in the three month period ended March 31, 1998 there is a tax provision benefit
as the Company expects to generate income for the year ending December 31, 1998.
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has used funds generated from
borrowings to support its operations, finance inventory and acquire capital
equipment. In the three month period ended March 31, 1998 and the three month
period ended March 31, 1997, the Company used cash from operating activities of
$875,222 and $381,877, respectively. As of March 31, 1998, the Company had
$6,025,494 available under its principal line of credit, and working capital of
$4,101,988.
The Company has a revolving line of credit of $10,000,000 expiring on
September 30, 1999 that is secured by substantially all of the Company's assets.
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. As of March 31, 1998, the outstanding
balance under the accounts receivable line of credit was $3,974,500. 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 and prohibit the Company from
engaging in certain transactions without lender approval.
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Capital expenditures totaled $150,169 for the three month period ended
March 31, 1998. The expenditures were primarily for office, test, warehousing
and assembly equipment resulting from the Company's move to its new headquarters
and manufacturing facility in late April, 1998. The Company expects to make
associated capital expenditures of an aggregate of approximately $200,000 in
1998.
Although the Company may in the future seek additional funding to
accelerate the Company's expansion, the Company believes that the 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
- ----------------------------------
During the years ended December 31, 1996, 1997, and in the three month
period ended March 31, 1998 the Company had two major customers which accounted
for approximately 50%, 42% and 49% of the Company's net sales during those
periods, respectively. The amounts due from these major customers on December
31, 1996 and 1997 and on March 31, 1998 amounted to approximately $4,785,000,
$5,335,000, and $3,000,728, respectively. The Company's ten largest customers
accounted for 80%, 63%, and 83% of net sales in 1996, 1997, and the three month
period ended March 31, 1998, respectively. The Company expects to continue to be
dependent upon those customers for a significant percentage of its 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 loss of a major
customer or any reduction in orders by any such customer could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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
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
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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. 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., Dell Computer Corporation,
Gateway 2000, 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 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
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<PAGE>
accumulation by the customer (such as occurred in the second quarter of 1997
and the first quarter of 1998), 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 coverage.
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 memory products have declined in the past and
the Company expects that prices will decline in the future. The decline in
selling price may not be offset by increased unit sales volumes of existing
memory products or the introduction and sale of new semiconductor memory
products in quantities sufficient to compensate for any declines in selling
prices because there can be no assurance that the Company will be able to
increase unit sales volumes of its semiconductor memory products, introduce and
sell new semiconductor memory products or reduce its cost per unit.
The Company expects to increase sales of PC systems. Except for sales
to retailers, the margins associated with the sale of the Company's PC systems
are higher than those associated with the Company's semiconductor memory
products. Accordingly, the Company's ability to maintain or increase net sales
will be, in part, dependent upon its ability to transition from primarily
selling semiconductor memory products to primarily selling PC systems. Declining
selling prices of its PC systems 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 or increase the unit sales volume of its PC
systems. There can be no assurance that the Company will be able to successfully
change its focus from selling semiconductor memory products to selling PC
systems, reduce its cost per units of its PC products or increase the unit sales
volumes of its PC systems.
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 the
period-to-period comparisons of the Company's financial results should not be
relied upon as indications of future performance. Due to the foregoing factors,
-15-
<PAGE>
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 modules and PC computer products. The electronics industry
has experienced shortages in semiconductor memory devices and computer
components, including DRAM. Shortages may occur in the future or supplies could
be available only with increased lead times. 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
impede the Company's ability to respond quickly to changes in demand, 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.
Risks Associated With New Facility
- ----------------------------------
The Company began operations at its new facility in late April, 1998.
This facility requires the expenditure of significant management resources. In
addition to the usual risk of establishing a new manufacturing facility, such as
installation of equipment, implementation of systems, procedures and controls
and the hiring and training of qualified personnel, there are additional risks
associated with this facility. The Company is expanding its business to include
the process of assembling its PC systems. There can be no assurance that the
Company will not experience delays and other start-up difficulties or that
once the facility is fully operational that it will produce high quality and low
cost memory modules and PC systems. Manufacturing and other problems which occur
in connection with the commencement, expansion and integration of operations at
this facility could materially adversely affect the Company's results of
operations and financial condition.
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
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
-16-
<PAGE>
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.
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 anticipatory 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, while the non-anticipatory purchasing policy
exposes the Company to the risk that it will either not be able to receive
inventory in a timely manner or will have to pay a higher price for such
inventory. 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. The
Company is scheduled to become ISO 9000 certified by the end of 1998. There can
be no assurance that significant problems in those areas will not occur or that
the Company will attain such certification. 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
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
-17-
<PAGE>
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.
The Company's Laguna product line is directed towards a segment of the
personal computer market which is characterized by even greater competition than
that segment in which the Company's NetRam line competes. There are
correspondingly greater market pressures on the pricing and margins of the
Laguna product line. While the competition in the higher-end segment of the
personal computer market to which the NetRam product line caters is currently
less, there can be no assurance that the competition will remain less and that
there will be less downward pressure on prices of the NetRam products than there
currently is on the Laguna products.
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 five, including
Mr. Troy D. Barnes, the Company's Chief Executive Officer, have written
employment agreements with the Company. The Company's future operating results
-18-
<PAGE>
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.
For the quarter ended March 31, 1998, the Company experienced significant
quality problems. While the Company believes that it has resolved those problems
by assuming the tasks of assembling its PC systems, there can be no assurance
that such problems will not occur in the future with respect to the quality,
performance, reliability and delivery of the Company's semiconductor memory or
PC products. If such problems occur, the Company could experience increased
costs associated with such products, delays in or cancellations or rescheduling
of orders or shipments of semiconductor memory or PC products, 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.
In addition, the Company's management has had no experience managing
the assembly of its PC systems. Although management has overseen the work
performed by the subcontractors who have historically assembled the Company's PC
systems and has hired consultants to assist them during the transition to
internal assembly of the PC systems, there can be no assurance that management's
lack of experience will not result in an increase in problems with PC systems
product quality and returns of PC systems. If such problems occur, the Company
could experience increased costs associated with the PC systems, delays in or
cancellations or rescheduling of orders or shipments of PC systems, 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
including its trademarks and trade secrets through a variety of measures,
including federal trademark applications and non-disclosure agreements. There
can be no assurance, however, that such measures will provide adequate
protection for the Company's intellectual property, that disputes with respect
to the ownership of its intellectual property rights will not arise, that the
Company's trade secrets or proprietary technology will not otherwise become
-19-
<PAGE>
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. 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 two trademark applications with the United
States Patent and Trademark Office for the "MILLENNIUM MEMORY, INC." mark and
logo. In addition, in connection with the acquisition of NetRam, the Company was
assigned the federal trademark application for registration of the "NETRAM" mark
and logo. There is no assurance that registration of these marks and logos will
be unopposed or granted even if not opposed. The word "MILLENNIUM," the word
"RAM" and the ram's head design are employed by other companies involved in the
manufacture and/or sale of computer products, which may reduce the likelihood
that trademark registrations 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
intellectual property rights. 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 alleging infringement of third party
intellectual property rights. There can be no assurance that third parties will
not in the future pursue claims against the Company with respect to the alleged
infringement of third party intellectual property rights. Litigation may be
necessary to protect the Company's intellectual property rights, to determine
the validity of and scope of the proprietary rights of others, or to defend
against third party claims of invalidity. 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 for third party 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 for third party technology or marks used by the
Company could cause the Company to incur substantial liabilities and to suspend
the manufacture of the products utilizing the invention or bearing a disputed
mark. 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
-20-
<PAGE>
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
- ----------------------------------------
SFAS No. 130, "Reporting Comprehensive Income," issued by the Financial
Accounting Standards Board ("FASB") is effective for financial statements with
fiscal years beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company does not
believe the adoption of SFAS No. 130 will have a material impact on its
financial position or results of operations.
The FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective
for fiscal years beginning after December 15, 1997. Management believes that
SFAS No. 131 will not have an effect on the Company's financial statements.
Year 2000
- ---------
The Company has not made a formal assessment of Year 2000 issues.
Generally, "Year 2000 issues" refers to problems that may arise due to the
inability of some computer software to distinguish between the early part of the
present century and the early part of the next because the software only uses
two digits to identify the year. Thus, 2001 would be indistinguishable from
1901. The Company believes that there are three possible ways that it could be
impacted by this problem. First, the Company's internal software could fail. If
the Company's software should fail it might disrupt accounting, inventory
control, order processing and similar tasks. Although it has not made an
assessment of its software, the Company does not believe that its internal
software is susceptible to Year 2000 problems. The Company believes that even if
its software should fail, remediation would not create a material expense.
The second concern posed by Year 2000 issues is the impact that such
software failure would have on the Company's suppliers and customers. The
Company does not believe that either its suppliers or customers could not
continue to conduct business even in the face of Year 2000 problems. In
addition, the Company believes that its customers and suppliers are sufficiently
sophisticated computer users that they will not experience problems, either by
remediation or because they are already using software which can make the
distinction between centuries. In the event that either its suppliers or
customers should experience software failure, the Company believes that the
impact of either eventuality would not be material to the Company.
The third possible threat posed to the Company by Year 2000 issues is
one of a general downturn in the economy due to software failures.
-21-
<PAGE>
Although the Company believes that it will not suffer any material
adverse effects as a result of Year 2000 issues, it has not made a formal
assessment of the problem. In the event that the Company, its suppliers or
customers experience a software failure such a failure could have a material
adverse impact on the Company's business financial condition and results of
operations. Similarly, if the economy as a whole should be adversely impacted by
Year 2000 problems, it could have a material adverse effect on the Company's
business, financial condition and results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
On March 25, 1998, the Company completed a private offering of up to
824,220 shares of its common stock to be issued upon the exercise of certain
warrants ("Warrants") and options ("Options") originally granted by the
Company's predecessor, Beacon Capital Investment, Inc. Each Warrant and Option
entitled the holder thereof (each a "Holder," and, collectively, the "Holders")
to purchase one share of the Company's common stock at a price of $3.125 per
share. Of the 560,220 outstanding Warrants and the 264,000 outstanding Options,
the Holders of 403,184 Warrants and 181,805 Options exercised their Warrants or
Options for an aggregate consideration of $1,828,099.74. An aggregate of 584,989
shares of the Company's common stock were issued. Any Warrant or Option which
was not exercised was canceled.
The offering was made under the exemption from the registration
requirements of the Securities Act of 19933, as amended, set forth in Rule 506
of Regulation D promulgated by the Securities and Exchange Commission. The
Company provided each purchaser with the information required under paragraph
(b)(2) of Rule 502 of Regulation D prior to the sale. The Company has made the
required filing under Rule 503 of Regulation D. All but six of the Holders who
purchased shares of the Company's common stock were accredited investors as
defined in Rule 501 of Regulation D and each of those six represented to the
Company that they had such knowledge and experience in financial and business
matters that they were capable of evaluating the merits and risks of the
investment.
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 January 14, 1998, the Registrant filed with the SEC a current report
on Form 8-K dated December 29, 1997 to report the extension of the exercise
period of certain options and the Common Stock Purchase Warrants originally
issued by the Registrant's predecessor from December 31, 1997 to January 31,
1998.
-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: May 15, 1998 MILLENNIUM ELECTRONICS, INC.
By: /s/ Philip A. Harvey
--------------------------------
Philip A. Harvey
Chief Financial Officer
-24-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
27 Financial Data Schedule 26
-25-
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