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, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
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 November 13, 1998, there were 8,282,445 shares of the Registrant's $.001 Par
Value Common Stock outstanding.
Exhibit Index on page 30
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TABLE OF CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION..........................................4
Item 1 Financial Statements...........................................4
CONSOLIDATED CONDENSED BALANCE SHEETS..................................4
CONSOLIDATED CONDENSED STATEMENTS OF INCOME............................5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS........................6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS...................7
Organization and Line of Business....................................7
Summary of Significant Accounting Policies.............................7
Principles of Consolidation..........................................7
Cash and Cash Equivalents............................................7
Interim Financial Information........................................7
Inventories..........................................................8
Revenue Recognition..................................................8
Lines of Credit......................................................8
Related Party Transactions...........................................9
Other Significant Transactions......................................10
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operation......................................11
Forward Looking Statements..........................................11
Background..........................................................11
Income as a Percentage of Net Sales.................................12
Results of Operations.................................................13
Three-month period ended September 30, 1998 and 1997..................13
Net Sales...........................................................13
Gross Profit........................................................13
Selling, General and Administrative.................................14
Other Income (Expense), Net.........................................14
Provision for Income Taxes..........................................15
Nine month Period ended September 30, 1998 and 1997 Net Sales.........15
Gross Profit........................................................15
Selling, General and Administrative.................................16
Other Income (Expense), Net.........................................16
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Provision for Income Taxes..........................................17
Liquidity and Capital Resources.....................................17
Factors That May Affect Future Results................................18
Significant Customer Concentration..................................18
Intense Competition.................................................19
Fluctuations in Operating Results...................................20
Dependence on Limited Sources of Supply.............................21
Risks Associated With New Facility..................................22
Inventory Purchasing Policy.........................................22
Management of Operations............................................22
Dependence on Semiconductor and Computer Industries.................23
Requirements for Response to Rapid Technological Change.............23
Dependence on Key Personnel.........................................23
No Assurance of Product Quality, Performance and Reliability........24
Uncertainty Regarding Protection of Proprietary Rights..............24
Environmental Issues................................................25
Recently Issued Accounting Pronouncement............................26
Year 2000...........................................................26
PART II OTHER INFORMATION.............................................28
Item 1 Legal Proceedings.............................................28
Item 2 Changes in Securities.........................................28
Item 3 Defaults Upon Senior Securities...............................28
Item 4 Submission of Matters to a Vote of Security Holders...........28
Item 5 Other Information.............................................28
Item 6 Exhibits and Reports on Form 8-K..............................28
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
MILLENNIUM ELECTRONICS, INC.
AND ITS SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
9/30/98 12/31/97
(Unaudited) (Audited)
ASSETS
Current assets
Cash & Cash Equivalents $ 0 $ 211,273
Accounts receivable, net of an allowance for
doubtful accounts of $1,636,891 and $175,000
respectfully 2,947,258 6,876,495
Stock Subscription Receivable 0 1,494,366
Inventories-net of reserve 1,316,591 1,541,666
Prepaid expenses 75,275 100,139
Income Taxes Receivable 104,924 163,719
Deferred Tax Asset 125,000 125,000
Other current assets 93,197 57,551
----------- -----------
Total current assets 4,662,245 10,570,209
Furniture and equipment, net 481,785 147,675
Other assets 90,313 97,735
Excess cost over fair value of net assets acquired, net of
accumulated amortization of $337,032 and $84,258
respectfully 2,022,163 2,274,937
----------- -----------
Total assets $ 7,256,506 $13,090,556
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Lines of credit $ 2,808,334 $ 4,877,286
Accounts payable and accrued liabilities 1,914,189 1,317,229
----------- -----------
Total current liabilities 4,722,523 6,194,515
Long Term Liabilities
Deferred income taxes 25,000 25,000
----------- -----------
Stockholders' equity Common stock, par value .001:
25,000,000 shares authorized,
8,282,445 and 8,167,150
shares issued and outstanding 8,283 8,167
Treasury Stock (50,000) 0
Additional Paid Capital 6,926,984 6,575,359
Retained earnings (accumulated deficit) (4,376,284) 287,515
----------- -----------
Total stockholders' equity 2,508,983 6,871,041
----------- -----------
Total liabilities and stockholders' equity 7,256,506 $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)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30 September 30
---------------------------- -----------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 7,136,624 $ 16,615,046 $ 30,048,214 $ 36,586,973
Cost of sales 7,284,053 14,707,502 28,874,195 32,700,813
------------ ------------ ------------ ------------
Gross profit (147,429) 1,907,544 1,174,019 3,886,160
Selling, general and administrative expenses 2,333,909 1,294,731 5,434,401 2,949,131
------------ ------------ ------------ ------------
Income (Loss)from operations (2,481,338) 612,813 (4,260,382) 937,029
------------ ------------ ------------ ------------
Other income (expense)
Other income 1,101 896 1,906 19,667
Other expenses (136,462) (178,820) (405,324) (432,122)
------------ ------------ ------------ ------------
Income (Loss) before provision for income taxes (2,616,699) 434,889 (4,663,800) 524,574
Provision (Benefit) for Income taxes
Current 0 263,600 0 177,171
Deferred 0 (89,600) 0 (145,200)
------------ ------------ ------------ ------------
Net income $ (2,616,699) $ 260,889 $ (4,663,800) $ 492,603
============ ============ ============ ============
Basic earnings (loss) per share (.32) $ .03 (.58) $ .07
============ ============ ============ ============
Diluted earnings (loss) per share (.32) $ .03 (.58) $ .07
============ ============ ============ ============
Weighted average shares outstanding 8,282,445 7,953,985 8,105,550 7,285,046
============ ============ ============ ============
</TABLE>
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 Nine Months Ended September 30
9/30/98 12/31/97
(Unaudited) (Audited)
Cash flows from operating activities
Net income (loss) $ 4,663,800) $ 492,603
Adjustments to reconcile net income (loss)
to net cash used in operating activities
Deferred income taxes 0 (145,200)
Depreciation and amortization 299,028 18,160
(Increase) decrease in
Accounts receivable 3,929,237 (3,209,295)
Inventories 225,075 (1,011,508)
Income tax receivable 58,795 0
Prepaid expenses & other assets (3,360) (39,054)
Increase (decrease) in
Accounts payable and accrued liabilities 596,960 478,352
Income Tax Payable 0 144,708
----------- -----------
Net cash (used in) provided by operating
activities 441,936 (3,271,232)
----------- -----------
Cash flows from investing activities
Acquisition of Beacon, net of cash acquired 0 513,534
Acquisition of NetRam, net of cash acquired 0 381,712
Due to others 0 (80,000)
Acquisition of furniture and equipment (380,364) (87,465)
Repayment (issuance) of note receivable to
stockholder 0 151,339
----------- -----------
Net cash (used in) provided by investing
activities (380,364) 879,120
----------- -----------
Cash flows from financing activities
Net proceeds (payments) from line of credit facility (2,068,952) (2,280,968)
Increase (decrease) in book overdraft 0 (191,742)
Distributions to "S" corporation stockholders 0 (626,765)
Proceeds from Private Placement 1,846,107 2,983,997
Offering Cost and Commissions 0 (439,868)
Proceeds from (payments on) stockholder loan 0 (298,811)
Common stock repurchased (50,000) 0
----------- -----------
Net cash provided by (used in) financing
activities (272,845) 3,707,779
----------- -----------
Net change (211,273) 1,315,667
Cash at beginning of period 211,273 0
----------- -----------
Cash at end of period $ 0 $ 1,315,667
=========== ===========
See the accompanying notes to these consolidated condensed financial statements
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<PAGE>
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. ("MMI" and
together with Registrant, the "Company"), is primarily engaged in the
manufacture and distribution of computers to value added resellers ("VARs"). 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 ("NetRam"), 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.
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<PAGE>
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, 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 "Management's Discussion and Analysis of Financial Condition and
Results 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, price protection, market development funds and
discounts.
Lines of Credit
- ---------------
As of September 30, 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 September 30, 1998, the line bears
interest at the default rate of prime plus 5.0% 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 Company's outstanding loan amount
as of September 30, 1998 exceeds the dollar and percentage limitations of the
loan agreement as a result of a Chapter 7 filing of a major customer, causing
the company to be in an overadvanced position. The Company must pay a fee of
$500 for each day such overadvance remains outstanding, such fee being payable
daily in addition to all other fees and amounts owed.
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 became payable on the third anniversary date
(September 1998). The Company is negotiating the terms for payment of the loan
fee and the forbearance fee. The $50,000 loan fee is being accrued over the term
of the agreement and the forbearance fee of $25,000 was accrued at the end of
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September 1998. The Company was in violation of its net worth covenant on July
31, 1998 thereby causing a default interest rate of 13.5% to become effective.
An additional $25,000 forbearance fee was also assessed against the Company and
was accrued at September 30, 1998.
As of September 30, 1998, the Company had a $1,000,000 line of credit
(inventory credit line). The Company borrowed an initial amount of $150,000,
which was repaid on March 31, 1997. 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 September 30, 1998 was $2,688,899. The outstanding balance under
the inventory line of credit agreement at September 30, 1998 was $119,435.
Related Party Transactions
- --------------------------
The Company pays, on behalf of the majority stockholder of the Company,
monthly lease payments for one vehicle of approximately $1,433. The automobile
lease expires November 11, 1998 and the Company does not anticipate entering
into another automobile lease for the near term.
The Company paid a consulting fee of $5,000 per month to the firm of Glick
Morganstern for interfacing with the Company's secured financing lender and for
general organizational consulting through July 1998. In August 1998, this fee
was reduced to $3,000 per month. Barry G. Morganstern, a director of the
company, is a founder and principal of Glick Morganstern.
In April 1988, the Company provided a $10,000 loan to Barry G.
Morganstern. The loan is evidenced by a promissory note and bears interest at
1.5% above the prime rate. The Principal under this note is due and payable on
or before April 30, 1999. Accrued interest is payable quarterly in arrears
commencing June 1, 1998, and continuing on the first day of each succeeding
calendar quarter.
In March 1998, the Company provided a $25,000 loan to Daniel Glick, a
former director of the company and a founder and principal of Glick Morganstern.
The loan is evidenced by a promissory note and bears interest at 1.5% above
prime rate. The principal under this note is due and payable on or before
December 31, 1998. Accrued interest is payable quarterly in arrears commencing
June 1, 1998 and continuing on the first day of each succeeding calendar
quarter.
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<PAGE>
The Company's predecessor, Beacon Capital Investment, Inc., entered into a
one-year consulting agreement for capital markets advice with Douglas P. Morris,
a director of the Company (the "Consulting Agreement"). The Company 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
$87,333 as opposed to $100,000 as originally agreed upon pursuant to the
Consulting Agreement.
Other Significant Transactions
- ------------------------------
The Company received notice on November 3, 1998 from a major retail
customer of its decision to seek relief under Chapter 7 of the United States
Bankruptcy Code. This customer's accounts receivable balance at September 30,
1998 was $651,219. A bad debt reserve has been established for this amount in
the quarter ending September 30, 1998. This customer accounted for 10% of the
sales during the third quarter of 1998 and 24% and 20% in the first and second
quarters of 1998, respectively. There were no sales to this customer during
1997.
During the third quarter, the Company experienced a major decrease in
orders from its largest customer as a result of a decision to reduce the
Company's involvement in the retail channel by selectively accepting only higher
margin orders. In the third quarter of 1998, this customer accounted for 8% of
the revenues compared to 20% and 31% in the second and first quarter of 1998,
respectively.
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 the manufacturing to
an outside source. During April and May, the Company experienced production
delays as a result of the start up. In addition, the Company also received a
high level of returns during the second and third quarters of 1998 from quality
problems related to the introduction of a sub-$1,000 computer. The Company
believes the third party contract manufacturer failed to properly test these
units in the fourth quarter 1997 and first quarter 1998.
Each quarter, the Company makes an assessment of its expected tax rate for
the year. During the quarter ended June 30, 1998, the Company determined that it
does not expect to have an income tax liability at the end of the year.
Additionally, there was no way to determine if it was more likely than not that
the Company would be able to use its accumulated net operating losses.
Therefore, for the quarter ended June 30, 1998, the Company elected to reverse
the tax benefit recognized in the first quarter.
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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 Exchange Act of 1934, as amended, and
are subject to the safe harbor provisions 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 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 has also developed, marketed,
assembled, sold and supported a limited range of quality, low-cost basic
computers for home and business. 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 select 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
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<PAGE>
manufactured on a pre-sold basis and were 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. However, in response to a decline in sales,
caused, in part, by the decision a major customer to seek relief under Chapter 7
of the U.S. Bankruptcy Code, the Company has decided to focus on sales to VARs.
For the nine months ended September 30, 1998 and the full year 1997, the
Company's top ten customers accounted for approximately 73% and 63%,
respectively, of the Company's net sales. The Company expects these customers to
make up a smaller percentage of its net sales and the composition of the
Company's top ten customers to change in the future. The Company has added a
number of new customers in recent months, and it expects to increase its sales
to VARs. In the quarter ended September 30, 1998, and in the full year 1997, the
Company's net sales to its largest customer accounted for approximately 20% 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
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,
1998 1997 1998 1997
------------------ -----------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 102.1 88.5 96.1 89.4
Gross Profit (2.1) 11.5 3.9 10.6
Sales, general & administrative 32.7 7.8 18.1 8.0
Income (Loss) from operations (34.8) 3.7 (14.2) 2.6
Other income (expense), net (1.9) (1.1) (1.3) (1.1)
Income (Loss) before provision for
income taxes (36.7) 2.6 (15.5) 1.5
Provision (Benefit) for income taxes .0 (1.0) 0 (.2)
Net income (Loss) (36.7) 1.6 (15.5) 1.3
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Results of Operations
- ---------------------
Three-month period ended September 30, 1998 and 1997
- ----------------------------------------------------
Net Sales
- ---------
Consolidated net sales for the third quarter of 1998 were $7.1 million
representing a decrease of approximately 57% over the third quarter of 1997 net
sales of $16.6 million. The reduction in sales is directly related to the
strategic shift from memory sales to computer manufacturing and a continued
decline in memory prices. There is no comparison to third quarter 1997 for
computer sales, since computer sales commenced with the acquisition of NetRam in
the fourth quarter 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 overhead costs associated with testing, warehousing and assembly.
For the quarter ended September 30, 1998, gross profit decreased 103% to
approximately $(147,429) from $1,907,544 in same quarter of 1997. In the same
periods, gross profit as a percentage of net sales decreased to (2.1%) from
11.5%, respectively. The decline in gross profit was primarily related to the
rework and sale of refurbished sub-$1000 computers at below cost, inventory
related adjustments, and the continuing impact from pricing pressures within the
industry. The sub-$1000 computers were originally assembled by a third party
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. The fixed cost associated
with this new facility is also negatively impacting the gross margin due to the
significant decline in the Company's computer manufacturing volume.
Gross profit on computer sales declined to (6.0)% in the third quarter
ended September 30, 1998 from 2.9% in the second quarter ended June 30, 1988 and
5.9% in the first quarter ended March 31, 1998. Factors responsible for the drop
were inventory valuation adjustments which accounted for a decline of 2.3% of
the second quarter 1998 margin and the higher level of returns also previously
discussed. These problems were further exacerbated by the production delays
associated with the start up of in-house manufacturing.
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<PAGE>
Gross profit on memory products declined to 9.1% in the third quarter of
1998 from 11.5% in the third quarter of 1997. The decrease is attributable to a
general decline in memory prices.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses 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 80% to $2,333,909 in the
three-month period ended September 30, 1998 from $1,294,731 in the three-month
period ended September 30, 1997. As a percentage of net sales, selling, general
and administrative expenses increased to 32.7% from 7.8%, respectively, in the
same periods.
The increase in selling, general and administrative expenses are the
result of several factors. First, reserves for doubtful accounts increased from
$175,000 as of December 31, 1997 to $1,636,891 as of September 30, 1998. The
balance in the reserve consists of $651,219 for the Chapter 7 filing of a major
retailer, $707,466 for trade receivables outstanding in excess of 90 days for
disputed receivables relating to returns and price adjustments primarily in the
retail channel, $107,056 for outstanding trade receivables and a note receivable
in the NetRam acquisition, and the balance of $171,150 represents defective
components that are to be returned to the Company upon the Company's issue of
replacement components and computers awaiting evaluation.
In addition, for the three month period ended September 30, 1998, $90,168
of goodwill related to the NetRam acquisition was amortized.
Other expense level increases stem from an increase in upper management to
accompany the growth of the Company, additional legal, accounting and public
relations expenses which result from being a public company and increases in
selling expenses attributable to the shift in emphasis from semiconductor memory
products to PC computers.
Other Income (Expense), Net
- ---------------------------
Other income (expense), decreased to a net expense of $135,361 in the
three-month period ended September 30, 1998 from a net expense of $177,924 in
the three-month period ended September 30, 1997. As a percentage of sales the
other income (expense) increased to 1.9% from 1.1% in those same periods. The
decrease is primarily related to the lower balances outstanding on the Company's
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<PAGE>
lines of credit, offset, in part, by the increases in interest rates on the
Company's lines of credit. The credit line rate increased from prime plus 3% per
annum in second quarter 1997 to prime plus 5.0% per annum in third quarter 1998.
This increase in rate is part of the line of credit agreement, which establishes
a higher rate for defaulting on a certain minimum net worth covenant. The
Company expects that utilization of its line of credit will increase as sales
increase.
Provision for Income Taxes
- --------------------------
The Company's effective tax rate for the three month period ended
September 30, 1998 and the three month period ended June 30, 1997 was 0% and
40%, respectively. Due to the loss in the nine-month period ended September 30,
1998 and the expectation that the Company will not be profitable for the fiscal
year end 1998, the Company elected to not recognize a tax benefit for the
quarter ended September 30, 1998. 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 changed 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 Statement of Financial Accounting Standards ("SFAS") No. 109.
Nine month Period ended September 30, 1998 and 1997 Net Sales
- -------------------------------------------------------------
Consolidated net sales for the nine-month period of 1998 were $30.1
million representing a decrease of approximately 18% over the nine-month period
of 1997. The reduction in sales is directly related to the strategic shift from
memory sales to computer manufacturing and a continued decline in memory prices.
There is no comparison to 1997 for computer sales, since computer sales
commenced with the acquisition of NetRam in the fourth quarter of 1997.
Gross Profit
- ------------
For the nine-month period ended September 30, 1998, gross profit decreased
70% to approximately $1.2 million from $3.9 million in the nine-month period
ended September 30, 1997. In the same periods, gross profit as a percentage of
net sales decreased to 4.4% from 10.6%, respectively. The retail channel was
employed heavily during the first half of the year as a marketing tool to gain
NetRam brand recognition. The retail channel is characterized by thin margins
resulting from intense competition, discounts, price protection, and high unit
return levels. In August 1998, the company announced a change in strategic
direction of focusing its efforts in the VAR channel and to selectively pursue
the retail channel. The decline in computer gross profit was also impacted
during this period by a failed introduction of a sub-$1,000 computer into the
retail channel due to quality related issues resulting in a higher level of
- 15 -
<PAGE>
product returns and associated rework cost. In April 1998, the Company assumed
inventory and manufacturing control in its new combined headquarters and
manufacturing facility. However, there have been production delays associated
with the start up of in-house manufacturing which have also contributed to a
decline in gross profit. Another factor contributing to the decrease in gross
profit has been a decline in memory prices.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses increased 86% to $5.4 million
in the nine-month period ended September 30, 1998 from $2.9 million in the nine
- -month period ended September 30, 1997. As a percentage of net sales, selling,
general and administrative expenses increased to 18.1% from 8.0%, respectively,
in the same periods.
The increase in selling, general and administrative expenses is the result
of several factors. As previously discussed, reserves for doubtful accounts
increased from $175,000 as of December 31, 1997 to $1,636,891 as of September
30, 1998. See "Three month period ended September 30, 1998 and 1997 - Selling,
General and administrative."
In addition, for the nine-month period ended September 30, 1998, $270,504
of goodwill related to the NetRam acquisition was amortized.
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 which result from being a public company and increases
in selling expenses attributable to the shift in emphasis from semiconductor
memory products to PC computers.
Other Income (Expense), Net
- ---------------------------
Other income (expense) decreased to a net expense of $403,418 in the nine-
month period ended September 30, 1998 from a net expense of $412,455 in the
nine-month period ended September 30, 1997. As a percentage of sales the other
income (expense) increased to 1.3% of sales from 1.1% of sales in those same
periods. As previously discussed, the decrease is primarily related to the lower
balance outstanding on the Company's lines of credit. That decrease is offset,
in part, by the credit line rate increase from prime plus 3% per annum in second
quarter 1997 to prime plus 5.0% per annum in third quarter 1998. This increase
in rate is part of the line of credit agreement, which establishes a higher rate
for defaulting on a certain minimum net worth covenant. See "Three month period
ended September 30, 1998 and 1997 - Other Income (Expense), Net."
- 16 -
<PAGE>
Provision for Income Taxes
- --------------------------
The Company's effective tax rates for the nine-month period ended
September 30, 1998 and the nine-month period ended September 30, 1997 were 0%
and 6%, 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 changed 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 nine-month period ended September 30, 1998 and
the expectation that the Company will not be profitable for the fiscal year end
1998, the Company elected to not recognize a tax benefit for the year.
Liquidity and Capital Resources
- -------------------------------
For the nine-month period ended September 30, 1998 accounts receivable
declined by $3,929,238 to $2,947,258 due to the increase in reserves, as
previously discussed, and the decline in net sales.
Since its inception, the Company has used funds generated from borrowings
to support its operations, finance inventory and acquire capital equipment. In
the nine-month period ended September 30, 1998 and the nine-month period ended
September 30, 1997, the Company generated cash from operating activities of
$441,936 and used $3,271,232, respectively. In the nine-month period ended
September 30, 1998, the Company decreased its accounts receivable and inventory
in connection with the decline in sales. In contrast, in the nine-month period
ended September 30, 1997, the Company increased its accounts receivable and
inventory in connection with the increase in sales.
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 lender 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 September 30, 1998, the outstanding
balance under the accounts receivable line of credit and inventory line of
credit was $2,808,334. 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. As of September 30, 1998 the Company had $2,487,005 available under
- 17 -
<PAGE>
its principal line of credit and was overadvanced on its available credit line
by $321,329. The Company has worked out an arrangement with its lender to
eliminate the overadvanced position during the fourth quarter.
Capital expenditures totaled $380,364 and $87,465 in the nine-month
periods ended September 30, 1998 and 1997, respectively. 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 is in the process of seeking additional funding to support
working capital needs in support of the Company's operations. Current cash flow
from operations and the amounts available under its existing lines of credit may
not be sufficient to meet its working capital and capital expenditure
requirements for the next twelve 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 and 1997, and in the nine-month
period September 30, 1998, the Company had two major customers which accounted
for approximately 50%, 42% and 40% of the Company's net sales during those
periods, respectively. A third major customer was added in 1998 which accounted
for approximately 18% of the Company's net sales. On November 3, 1998, this
customer notified the Company of its intention to liquidate under Chapter 7. The
amounts due from these major customers on December 31, 1996 and 1997 and on
September 30, 1998 amounted to approximately $4,785,000, $5,335,000, and
$2,243,000, respectively. The Company's ten largest customers accounted for 80%,
63%, and 73% of net sales in 1996 and 1997, and the nine-month period ended
September 30, 1998, respectively. In keeping with the Company's strategy of
withdrawal from the retail channel and focusing on VARs, the Company is reducing
and intends to continue to reduce sales to these customers.
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
- 18 -
<PAGE>
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 PC 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 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). 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, and 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.
- 19 -
<PAGE>
Fluctuations in Operating Results
- ---------------------------------
The Company's results of operations and gross margins have in the past
fluctuated significantly and may in the future continue to fluctuate
significantly from period to period. The primary factors that have affected and
may affect in the future the Company's results of operations include the
inability to procure required components, adverse changes in the mix of products
sold by the Company, fluctuating market demand for and declines in the selling
prices of the Company's products, market acceptance of new products and enhanced
versions of the Company's products, delays in the introduction of new products
and enhancements to existing products, manufacturing inefficiencies associated
with the start up of new product introductions, the timing of new product
announcements and releases by the Company or its competitors, the timing of
significant orders, patterns of spending by customers, delays, cancellations or
rescheduling of orders due to customer financial difficulties or other events,
inventory obsolescence, including the reduction in value of the Company's
inventories due to unexpected price declines, unexpected product returns,
pricing adjustments and disputes, defective components, the Chapter 7 filing of
a major customer, start-up costs and delays related to bringing assembly
"in-house" rather than relying on sub-contractors and cycles in the Company's
targeted markets. Other factors which may affect the Company's results of
operations in the future include the loss of a principal customer or the short
term loss of a customer due to product inventory accumulation by the customer
(such as occurred in the second quarter of 1997 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
- 20 -
<PAGE>
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 and PC systems to retailers to primarily selling
PC systems to VARs. Declining selling prices of its PC systems to retailers have
had a material adverse effect on the Company's gross margins. There can be no
assurance that the Company will be able to successfully change its focus from
selling semiconductor memory products and PC systems to retailers to selling PC
systems to VARs, 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.
There can be no assurance that the Company will maintain or increase its
current level of net sales 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, it is likely
that in some future quarter, as in the current 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
- 21 -
<PAGE>
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 has expanded its business to include
the process of assembling its PC systems. Manufacturing and other problems which
occur in connection with the commencement, expansion and integration of
operations at this facility, have had a material adverse affect on the Company's
results of operations and financial condition.
Inventory Purchasing Policy
- ---------------------------
The Company's current policy is to purchase its inventory only if it has
been pre-sold. 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 Operations
- ------------------------
The Company has significantly expanded its operations since its inception.
Management of current operations has resulted in a significant strain on the
Company's personnel. The Company's ability to manage operations will depend upon
improving 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 or that the Company will develop such improvements to such
systems, procedures and controls. Any failure to improve 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.
- 22 -
<PAGE>
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 over-capacity. 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, 1997 and the first
half of 1998, 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 have a material adverse affect on 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, and 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
contributions of its senior management and sales personnel. Of such persons,
only Mr. Troy D. Barnes, the Company's Chief Executive Officer, has a written
employment agreement 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. Competition for key personnel is intense; and there can be no
- 23 -
<PAGE>
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 key positions, and it may be increasingly
difficult for the Company to hire such persons over time. The Company's current
losses may increase the difficulty in hiring key personnel. 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 have a material
adverse affect on 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 six months ended June 30, 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.
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 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
- 24 -
<PAGE>
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 on 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 have a material adverse affect
on the Company's business, financial condition and results of operations,
regardless of the outcome of the litigation.
Environmental Issues
- --------------------
The Company's operations are not currently impacted significantly by
federal, state, local and foreign environmental protection laws and regulations.
However, changes in environmental laws and regulations and in the Company's
business could subject the Company to significant compliance expenses,
production suspensions or delay, restrictions on expansion, the acquisition of
costly equipment or other liabilities.
- 25 -
<PAGE>
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 a material affect on the Company's financial statements.
Year 2000
- ---------
The Company has only made a preliminary assessment of Year 2000 issues
relating to its internal software. 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 its internal software is Year 2000 compliant. 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. Although
the Company has not made a formal inquiry, 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 significant 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.
- 26 -
<PAGE>
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.
Although the Company believes that it will not suffer any material adverse
effects as a result of Year 2000 issues, it has only made a preliminary
assessment of the problem as it relates to its internal software. 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.
- 27 -
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
The Company's outstanding loan amount under its accounts receivable
line of credit as of September 30, 1998 exceeds the dollar and
percentage limitations of the loan agreement as a result of a
Chapter 7 filing of a major customer, causing the Company to be in
an overadvanced position. As of September 30, 1998 the Company had
$2,487,005 available under its principal line of credit and was
overadvanced on its available credit line by $321,329.
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
-------------------
None.
- 28 -
<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 13, 1998 MILLENNIUM ELECTRONICS, INC.
By: /s/ Kenneth W. Gerstner
--------------------------
Kenneth W. Gerstner, C.M.A.
Chief Financial Officer
- 29 -
<PAGE>
EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
27 Financial Data Schedule 31
- 30 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,584,149
<ALLOWANCES> 1,636,891
<INVENTORY> 1,316,591
<CURRENT-ASSETS> 4,662,245
<PP&E> 579,583
<DEPRECIATION> 97,797
<TOTAL-ASSETS> 7,256,506
<CURRENT-LIABILITIES> 4,722,523
<BONDS> 0
0
0
<COMMON> 8,283
<OTHER-SE> 6,876,984
<TOTAL-LIABILITY-AND-EQUITY> 7,256,506
<SALES> 30,048,214
<TOTAL-REVENUES> 30,048,214
<CGS> 28,874,195
<TOTAL-COSTS> 28,874,195
<OTHER-EXPENSES> 5,434,401
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 405,324
<INCOME-PRETAX> (4,663,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,663,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,663,800)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
</TABLE>
