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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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COMMISSION FILE NUMBER 0-23562
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MELTRONIX, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3142624
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9577 CHESAPEAKE DRIVE, SAN DIEGO, CALIFORNIA 92123
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 292-7000
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Indicate by check 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 March 31, 2001, there were outstanding 16,746,427 shares of the
Registrant's Common Stock, no par value per share.
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INDEX PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets .......................... 3
Condensed Consolidated Statements of Operations ................ 4
Condensed Consolidated Statements of Cash Flows ................ 5
Condensed Consolidated Statement of
Changes in Shareholders' Deficit ........................... 6
Notes to Condensed Consolidated Financial Statements ........... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..... 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 16
Item 2. Changes in Securities and Use of Proceeds ....................... 17
Item 3. Defaults upon Senior Securities ................................. 17
Item 4. Submission of Matters to a Vote of Security Holders ............. 17
Item 5. Other Information ............................................... 17
Item 6. Exhibits and Reports on Form 8-K ................................ 17
SIGNATURES ............................................................... 18
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MELTRONIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
2001 2000
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ASSETS (UNAUDITED)
CURRENT ASSETS
Accounts receivable, net $ 613,000 $ 406,000
Inventories 455,000 418,000
Other current assets -- 22,000
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TOTAL CURRENT ASSETS 1,068,000 846,000
Property, plant and equipment, net 951,000 1,114,000
Other non-current assets 18,000 18,000
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$ 2,037,000 $ 1,978,000
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LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt $ 530,000 $ 573,000
Line of credit 336,000 626,000
Accounts payable 2,798,000 2,905,000
Accrued liabilities 1,327,000 1,372,000
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TOTAL CURRENT LIABILITIES 4,991,000 5,476,000
Long-term debt, less current portion 1,392,000 524,000
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TOTAL LIABILITIES 6,383,000 6,000,000
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Series A Convertible Preferred stock, no par value 8,316,000 9,019,000
Common stock, no par value 44,884,000 43,721,000
Accumulated deficit (57,546,000) (56,762,000)
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Total shareholders' deficit (4,346,000) (4,022,000)
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$ 2,037,000 $ 1,978,000
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3
MELTRONIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended March 31,
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2001 2000
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Net sales $ 885,000 $ 3,351,000
Cost of goods sold 755,000 3,315,000
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Gross profit 130,000 36,000
Selling, general and administrative 584,000 802,000
Engineering and product development 198,000 359,000
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Loss from operations (652,000) (1,125,000)
Other expense:
Interest expense (40,000) (11,000)
Non-cash interest and finance expense (Note 6) (148,000) --
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Loss from operations before provision for income taxes (840,000) (1,136,000)
Provision for income taxes -- --
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Net loss (840,000) (1,136,000)
Dividends attributable to
Series A Convertible Preferred Stock (54,000) (84,000)
Reversal of dividends (Note 7) 110,000 --
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Net loss available to common shareholders $ (784,000) $(1,220,000)
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BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.05) $ (0.11)
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4
MELTRONIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
March 31,
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2001 2000
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NET CASH USED BY OPERATING ACTIVITIES: $(698,000) $(370,000)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets -- (75,000)
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Net cash used by investing activities -- (75,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements 825,000 250,000
Principal payments on long-term debt,
line of credit and promissory notes (290,000) (183,000)
Issuance of common stock, net 163,000 124,000
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Net cash provided by financing activities 698,000 191,000
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NET DECREASE IN CASH -- (254,000)
CASH AT BEGINNING OF PERIOD -- 335,000
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CASH AT END OF PERIOD $ -- $ 81,000
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5
MELTRONIX, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' DEFICIT
(unaudited)
Preferred Stock Common Stock Accumulated
Shares Amount Shares Amount Deficit Total
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Balance at January 1, 2001 9,085,023 $ 9,019,000 13,845,184 $ 43,721,000 $(56,762,000) $ (4,022,000)
Common stock issued -- --
1,418,482 313,000 -- 313,000
Non-employee stock
compensation -- -- -- 68,000 -- 68,000
Beneficial conversion expense
-- -- -- 39,000 -- 39,000
Conversion of debt -- -- 6,000 2,000 -- 2,000
Series A Convertible
Preferred Stock dividends -- -- -- -- (54,000) (54,000)
Reversal of dividends -- -- -- -- 110,000 110,000
Conversion of Series A
preferred stock and
accrued dividends to (708,753) (703,000) 1,476,761 741,000 -- 38,000
common stock
Net (loss) -- -- -- -- (840,000) (840,000)
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Balance at March 31, 2001 8,376,270 $ 8,316,000 16,746,427 $ 44,884,000 $(57,546,000) $ (4,346,000)
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6
MELTRONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - COMPANY OVERVIEW AND BASIS OF PRESENTATION
COMPANY OVERVIEW
MeltroniX, Inc. and its wholly-owned subsidiaries (collectively, the
"Company") provide high density semiconductor interconnect solutions to the OEM
electronics marketplace by offering design, volume manufacturing, and testing
capabilities. The Company targets high growth industries including Internet
equipment, wireless/telecommunication, broadband communication, medical and
other electronic systems and integrated circuits (ICs) manufacturers.
Headquartered in San Diego, with on-site manufacturing facilities, the Company
develops, manufactures, tests and sells OEM microelectronic semiconductor
assemblies. Capitalizing on what it believes are overall industry trends to
outsource design and manufacturing of electronic systems and integrated
circuits, the Company offers both turnkey manufacturing and kitted subassembly
services featuring value added semiconductor interconnect design and test
capabilities in addition to contract assembly. MeltroniX was incorporated in
California in 1984.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements and
related notes as of March 31, 2001 and for the three month periods ended March
31, 2001 and 2000 are unaudited but include all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair statement of financial position and results of operations of the
Company for the interim period. The results of operations for the three month
period ended March 31, 2001 are not necessarily indicative of the operating
results to be expected for the full fiscal year. The information included in
this report should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto and the other information,
including risk factors, set forth for the year ended December 31, 2000 in the
Company's Annual Report on Form 10-K. Readers of this Quarterly Report on Form
10-Q are strongly encouraged to review the Company's Annual Report on Form 10-K.
7
MELTRONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - LIQUIDITY
During the quarter ended March 31, 2001, the Company experienced a net
loss totaling $840,000 and had negative cash flows from operations for the three
months ended March 31, 2001 totaling $698,000. In addition, the Company had a
working capital deficit totaling $3,923,000, a tangible net worth deficit
totaling $4,346,000 at March 31, 2001 and has not made timely payments and was
not in compliance with certain debt, lease and service agreements. The Company
must improve its profitability and obtain additional sources of liquidity
through debt or equity financing to fund its operations, repay debt now due and
debt about to become due and working capital requirements. There can be no
assurance that any additional financing will be available to the Company on a
timely basis or on acceptable terms or at all. The Company's inability to
accomplish these goals will have a materially adverse effect on the Company's
business, consolidated financial condition and operations.
NOTE 3 - INVENTORIES
Inventories consist of the following:
MARCH 31, December 31,
2001 2000
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(UNAUDITED)
Raw materials $ 417,000 $ 488,000
Work-in-progress 146,000 375,000
Obsolescence reserve (108,000) (445,000)
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$ 455,000 $ 418,000
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NOTE 4 - EFFECTS OF INCOME TAXES
The Company has not recorded provisions for any income taxes for the
three months ended March 31, 2001, since the Company's operations have generated
operating losses for both financial reporting and income tax purposes. A 100%
valuation allowance has been provided on the total deferred income tax assets as
they are not more likely than not to be realized.
The Company believes that it has incurred an ownership change pursuant
to Section 382 of the Internal Revenue Code and, as a result, the Company
believes that its ability to utilize its current net operating loss and credit
carryforwards in current and subsequent periods will be subject to annual
limitations.
8
MELTRONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - NET INCOME (LOSS) PER SHARE
The computation of diluted loss per share for both three month periods
ended March 31, 2001 and 2000, excludes the effect of incremental common shares
attributable to the exercise of outstanding common stock options and warrants
and convertible preferred shares because their effect was antidilutive due to
losses incurred by the Company.
NOTE 6 - CONVERTIBLE DEBT AND RELATED FINANCE CHARGES
Non-cash interest and finance expense represents non-cash charges for
beneficial conversion into Company equity of newly issued notes payable of
$39,000, and non-cash charges for 250,000 shares of common stock issued to
officers/directors valued at $109,000 in exchange for personal guarantees on
notes payable. The expense of $39,000 is a non-cash charge posted to the capital
account of the Company due to the beneficial conversion features of $500,000 of
notes payable issued in the quarter resulting in total beneficial conversion
expense of $312,500 to be amortized through the maturity date of the notes in
December 2002. However, if the Company files a registration statement to
register the underlying securities of the convertible notes payable, the Company
will immediately recognize the unamortized portion of the beneficial conversion
expense. In addition, the Company has granted stock options that are conditional
upon conversion of the notes by the holders. At such time the notes become
convertible, the stock options will be valued at the then existing fair market
value under the Black-Scholes model of valuing stock options.
NOTE 7 - EQUITY TRANSACTIONS
During the quarter ended March 31, 2001, several Preferred Stock
shareholders have retroactively declined to accept dividends on their Preferred
Shares resulting in a benefit to the Company of approximately $110,000 in the
first quarter of 2001.
9
MELTRONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - SUBSEQUENT EVENTS
On April 6, 2001, the Company borrowed an additional $200,000 from LJCI
under a secured promissory note with interest at 9%, due and payable on April 6,
2002 and guaranteed by certain officers/directors of the Company. In connection
with the promissory note, the Company is to issue 1,000,000 shares of its common
stock as additional consideration for the loan. The Company has further agreed
to prepare and file a registration statement within 60 days and use its best
efforts to effect such registration statement to register the 1,000,000 shares
and those underlying the previously issued convertible note payable.
On May 1, 2001, the Company borrowed an additional $250,000 from Paul
H. Neuharth, Jr, a director of the Company, under a promissory note with
interest at 14%, due and payable on the earlier of May 1, 2002 or from proceeds
of equity investments cumulating over $1 million after May 1, 2001. In
connection with the promissory note, the Company is to issue 2,500,000 shares of
its common stock as additional consideration for the loan.
On May 11, 2001, the Company entered into a Security Agreement with
Primary Funding Corporation ("PFC"), whereby the Company may, from time to time,
sell, transfer and assign accounts receivable to PFC at a discount not to exceed
20%. No such transactions have occurred through the date of this filing.
On May 11, 2001, PFC entered into three separate intercreditor
agreements with three of the Company's creditors, whereby the creditors have
subordinated and assigned their priority interests in the inventory and accounts
receivable of the Company.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING
THE COMPANY'S ANTICIPATED FUTURE REVENUES AND EARNINGS, ADEQUACY OF FUTURE CASH
FLOW AND RELATED MATTERS. THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT
LIMITED TO, STATEMENTS CONTAINING THE WORDS "EXPECT", "BELIEVE", "WILL", "MAY",
"SHOULD", "PROJECT", "ESTIMATE", AND LIKE EXPRESSIONS, AND THE NEGATIVE THEREOF.
THESE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE STATEMENTS, INCLUDING COMPETITION, AS WELL
AS THOSE RISKS DESCRIBED IN THE COMPANY'S SEC REPORTS, INCLUDING THE COMPANY'S
FORM 10-K FILED PURSUANT TO THE SECURITIES AND EXCHANGE ACT OF 1934.
The following discussion and analysis compares the results of
operations for the fiscal quarter ended March 31, 2001 and 2000, and should be
read in conjunction with the condensed consolidated financial statements and the
accompanying notes included within this report.
For the three months ended March 31, 2001, net sales were $885,000 as
compared to net sales of $3,351,000 for the first quarter of 2000, resulting in
decreased sales of $2,466,000 or 74%. The decrease in net sales is primarily the
result of decreased sales to Schlumberger, totaling approximately $242,000 in
2001 and $2.2 million in 2000, a decrease of approximately $2.0 million. In
2000, a one-time sale of raw materials was made to Schlumberger ($940,000) at
cost. Sales to Schlumberger comprised 28% and 65% of total net sales for the
three months ended March 31, 2001 and 2000, respectively. Although the Company
has profitable sales orders it is hampered in production due to a lack of
financing to buy the materials needed to produce product. Those products that
are produced have an acceptable gross profit margin and current customers will
accept increased production. The Company's focus therefore is on increasing
production of the orders already received.
At March 31, 2001 backlog was $6,146,000 compared to $7,101,000 at
March 31,2000, a decrease of 14%. The decrease in backlog is due to
discontinuance of a high volume low margin product line partially offset by
increased business with customers added as a result of the Company focus on
wireless, telecommunications, internet equipment, digital imaging, and other
high technology electronic market segments.
For the three months ended March 31, 2001, the cost of goods sold was
$755,000 as compared to $3,315,000 for the three months ended March 31, 2000, a
decrease of $2,560,000 or 77%. The decrease in cost of goods sold is due to the
decrease in sales volume from customers offset by higher gross profit margins on
the product sold. In addition, in 2000 the cost of goods sold includes the value
of the $940,000 of raw material sold to Schlumberger at cost.
Gross profit was $130,000 (15% of net sales) for the first quarter of
2001 as compared to gross profit of $36,000 (1% of net sales) for the first
quarter of 2000. The increase in gross profit is attributable to sale of
products with higher gross profit margins, a decreased reliance on the
development of new products and the related extra costs, and a change in
allocation of overhead costs due to the reduction in manufacturing personnel.
11
Selling, general and administrative expenses were $584,000 for the
first quarter of 2001, representing a decrease of $218,000 or 27% from the first
quarter of 2000. The decrease is due to the Company's downsizing of staff,
review and elimination of expenses, and a conscious effort to minimize
purchases.
Engineering and product development expenses were $198,000 for the
first quarter of 2001, representing a decrease of $161,000 or 45% from the
corresponding quarter of 2000. The decrease is primarily comprised of staff
downsizing and completion of process and products development costs that were
necessary to bring new technology expertise for BGA, flip chip, fine pitch wire
bonding, and other semiconductor interconnect technologies begun in 2000.
Interest expense was $40,000 for the first quarter of 2001,
representing an increase of $29,000 from the corresponding quarter of 2000. The
primary cause of the increase was interest on additional notes payable.
Non-cash interest and finance expense represents non-cash charges for
beneficial conversion into Company equity of newly issued notes payable of
$39,000, and non-cash charges for 250,000 shares of common stock issued to
officers/directors valued at $109,000 in exchange for personal guarantees on
notes payable. The expense of $39,000 is a non-cash charge posted to the capital
account of the Company due to the beneficial conversion features of $500,000 of
notes payable issued in the quarter resulting in total beneficial conversion
expense of $312,500 to be amortized through the maturity date of the notes in
December 2002. However, if the Company files a registration statement to
register the underlying securities of the convertible notes payable, the Company
will immediately recognize the unamortized portion of the beneficial conversion
expense. In addition, the Company has granted stock options that are conditional
upon conversion of the notes by the holders. At such time the notes become
convertible, the stock options will be valued at the then existing fair market
value under the Black-Scholes model of valuing stock options.
The Company has not recorded provisions for any income taxes for the
three months ended March 31, 2001, since the Company's operations have generated
operating losses for both financial reporting and income tax purposes. A 100%
valuation allowance has been provided on the total deferred income tax assets,
as they are not more likely than not to be realized.
Several Preferred Stock shareholders have retroactively declined to
accept dividends on their Preferred Shares resulting in a benefit to the Company
of approximately $110,000 in the first quarter of 2001.
The Company believes that it has incurred an ownership change pursuant
to Section 382 of the Internal Revenue Code, and, as a result, the Company
believes that its ability to utilize its current net operating loss and credit
carryforwards in subsequent periods will be subject to annual limitations.
12
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2001, the Company financed its
operations through notes payable from one of its directors ($125,000) and from 2
outside investors ($500,000), the execution of warrants ($3,000) as well as the
issuance of common stock under the employee stock option program ($160,000).
During the first three months of 2001, operating activities used $698,000. The
Company's sources of liquidity at March 31, 2001 consist of inventories of
$455,000 and trade accounts receivable of $613,000. The Company successfully
negotiated the replacement of the Silicon Valley Bank line of credit with a new
line of credit with Primary Funding and is continuing to pursue equity
financing. There can be no assurance that the Company will be successful in any
of its financing activities.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. During the quarter ended
March 31, 2001, the Company had negative cash flows from operations totaling
$698,000. In addition, the Company had a working capital deficit totaling
$3,498,000 at March 31, 2001. Further, the Company has not made timely payments
and was not in compliance with certain debt, lease, and service agreements. The
Company must improve its profitability and obtain additional sources of
liquidity through debt or equity financing to fund its operations, repay debt
currently due and debt about to become due as well as its general working
capital requirements. Management is currently monitoring its expenses in an
effort to improve the effectiveness and efficiency of its available resources to
assist in improving its profitability. Management is also currently exploring
various debt and equity funding sources including and in addition to those with
La Jolla Cove Investors, Inc. and United States Semiconductor Corporation, as
described below. There can be no assurance that any additional financing will be
available to the Company on a timely basis or on acceptable terms or at all. The
Company's inability to accomplish these goals will have a materially adverse
effect on the Company's business, consolidated financial condition and
operations. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
In July 2000, the Company entered into an Account Receivable Financing
Agreement with Silicon Valley Bank ("Bank Credit Line") which was paid off May
23, 2001 and the line terminated. The Agreement was secured by all of the assets
of the Company, and the Company could borrow up to $1,500,000 in total limited
to 70% of account receivable acceptable to the bank. As of March 31, 2001,
approximately $336,000 was outstanding under the agreement. On May 23, 2001 the
Silicon Valley Bank received full payment of approximately $115,000 from Primary
Funding to pay off the credit line.
In January 2001, La Jolla Cove Investors, Inc. ("LJCI") and The Norman
Litz IRA, loaned the Company $250,000 each in exchange for a two-year
convertible note bearing interest at 10%, payable monthly. The convertible note
due to The Norman Litz IRA is secured by the assets of the Company, while the
note due to LJCI is personally guaranteed by directors and officer of the
Company. The conversion prices of the notes are equal to (a) $.20 per share, if
the principal amounts are converted within one-year of the effective date, or
(b) the lesser of $.20 per share or 80% of the lowest market price (as defined)
during the 45 days prior to the conversion, if the principal amounts are
converted after one-year and prior to maturity. In addition, each of the
13
agreements contains an Additional Stock Purchase Right, whereby, the debt
holders can purchase additional shares at the lesser of $.20 per share or 80% of
the lowest market price (as defined) during the 45 days prior to note
conversion. Under the Additional Stock Purchase Right, the debt holders are
limited in the number of additional shares that can be purchased, such that, (a)
the additional shares purchased can not exceed 50% of the number of shares
initially converted from the loan balance, and (b) the debt holders can not own
more than 10%, individually, of the then outstanding shares of Common Stock.
In February 2001, the Company executed a letter of intent with United
States Semiconductor Corporation ("USSC") for a proposed transaction, which, if
consummated, would provide that USSC will (i) grant the Company an exclusive,
non transferable license for the use of USSC's technology in exchange for a
percentage to be determined of the Company's common stock, and (ii) purchase a
percentage yet to be determined of the common stock of the Company. The expenses
to further develop the technology to a commercially feasible and manufacturable
level are to be born by USSC. Once established, the Company is to manufacture
the developed products and, upon sale, will be obligated to pay USSC a royalty,
the amount of which has yet to be agreed upon. As of May 22, 2001 the Company
has received $250,000 from USSC. Management is continuing its discussion with
USSC in anticipation of executing a definitive agreement. The consummation of
the transactions contemplated by the letter of intent are subject to a number of
conditions that are outside the control of the Company and, therefore, there is
no assurance that such transactions will be successfully completed.
On February 23, 2001, the Company borrowed an additional $50,000 from
James T. Waring, a director of the Company, under a secured promissory note with
interest at 10%, due and payable in full in one lump sum not later than the
earliest to occur of either May 23, 2002 or the date of the closing of the stock
purchase transaction between MeltroniX and USSC.
On March 9, 2001, the Company borrowed an additional $75,000 from James
T. Waring, a director of the Company, under a secured promissory note with
interest at 10%, due and payable in full in one lump sum not later than the
earliest to occur of either June 9, 2002 or the date as of which MeltroniX has
received a cumulative amount of $1,075,000 in connection with the stock purchase
transaction between MeltroniX and USSC.
On April 6, 2001, the Company borrowed an additional $200,000 from LJCI
under a secured promissory note with interest at 9%, due and payable on April 6,
2002 and guaranteed by certain officers/directors of the Company. In connection
with the promissory note, the Company is to issue 1,000,000 shares of its common
stock as additional consideration for the loan. The Company has further agreed
to prepare and file a registration statement within 60 days and use its best
efforts to effect such registration statement to register the 1,000,000 shares
and those underlying the previously issued convertible note payable.
On May 1, 2001, the Company borrowed an additional $250,000 from Paul
H. Neuharth, Jr, a director of the Company, under a promissory note with
interest at 14%, due and payable on the earlier of May 1, 2002 or from proceeds
of equity investments cumulating over $1 million after May 1, 2001. In
connection with the promissory note, the Company is to issue 2,500,000 shares of
its common stock as additional consideration for the loan.
14
On May 11, 2001, the Company entered into a Security Agreement with
Primary Funding Corporation ("PFC"), whereby the Company may, from time to time,
sell, transfer and assign accounts to PFC at a discount not to exceed 20%. No
such transactions have occurred through the date of this filing.
On May 11, 2001, PFC entered into three separate intercreditor
agreements with three of the Company's creditors, whereby the creditors have
subordinated and assigned their priority interests in the inventory and accounts
of the Company.
FUTURE OPERATING RESULTS
CUSTOMER CONCENTRATION. The Company has diversified its customer base
during the quarter and dependence on sales to one customer, Schlumberger, was
reduced to 28% of the Company's net sales in the first quarter of 2001 as
compared to 65% for 2000. The Company anticipates that reliance on this customer
should continue to diminish in 2001 due to the expected increased sales to other
customers.
ITEM 3 - QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
None
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1995, the United States Environmental Protection Agency ("EPA")
issues written notice to all known generators of hazardous waste shipped to a
Whittier California treatment facility. The EPAS notice indicated that these
generators (including the Company) were potentially the responsible parties
under the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986
("CERCLA"). The notice requires all of the generators of this waste to take
immediate actions to contain and prevent any further release of hazardous
substances at this site. In response to the EPA notice, the Company and
approximately 100 of the other named generators provided the necessary funding
to effect the removal and destruction of the hazardous wastes stored at this
site. At present, the Company believes its percentage of responsibility for this
site is less than one half of one percent; and that percentage is expected to
decrease substantially, as additional generators are determined. In addition,
the Company along with other generators has provided certain funding to test the
soil and ground water at this site, which testing is currently ongoing. Although
the cost incurred by the Company to date of removing and destroying the
hazardous waste stored at this facility was not significant, this effort does
not address the cleanup of potential soil and/or ground-water contamination
present at this site. Management is unable to estimate the possible cost of this
suit at this time, as the cost of clean up has not been determined. There can be
no assurance, therefore, that the costs and expenses associated with this action
will not increase in the future to a level that would have a material adverse
effect upon the Company's business, financial condition, results of operations
or cash flows.
Two of the Company's former consultants and directors, Lewis Solomon
and Gary Stein ("Plaintiffs"), filed a lawsuit on December 18, 1998 in the state
of New York against the Company and its major customer, Schlumberger. The former
consultants' services were terminated in July 1998. Mr. Solomon resigned from
the Board of Directors in August 1998; Mr. Stein resigned in December of the
same year. In the complaint, Plaintiffs charged that the Company failed to pay
them for alleged consulting services, expense reimbursements and other forms of
compensation aggregating $101,250. Further, Plaintiffs alleged they were
wrongfully terminated as consultants and seek damages to be determined at trial.
The Company believed that Plaintiffs' claims were without merit and made
substantial counterclaims against Plaintiffs. In March 2001, the matter was
settled whereby the Company agreed to pay $50,000 in the form of 120,482 shares
of common stock. The number of shares to be issued was based on the average of
the high bid and low ask market price of $.414 per share as of January 10, 2001.
On October 18, 2000, the Company was notified by the United States
Bankruptcy Court that Lucien A. Morin, II, as Chapter 7 Trustee of H. J. Meyers
& Co., Inc. is seeking from the Company 1,000,000 common stock purchase warrants
with a term of five years from November 19, 1997, an exercise price of $1.00 per
share, and certain registration rights, under a contract between the Company and
H.J. Meyers & Co. The Company has responded that H. J. Meyers & Co. failed to
fulfill its obligations under the contract, which was cancelled in August 1998,
and that as a result no warrants are due.
16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K.
None.
The Exhibits filed as part of this report are listed below.
Exhibit No. Description
----------- ------------------------------------------------------
None
17
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 thereunto duly authorized.
MELTRONIX, INC.
---------------
(Registrant)
Date:May 24, 2001 By: /s/ Andrew K. Wrobel
---------------- ---------------------------------------------------
Andrew K. Wrobel
Chairman of the Board of Directors of the Company
President and Chief Executive Officer, Director
Date:May 24, 2001 By: /s/ Randal D. Siville
---------------- ---------------------------------------------------
Randal D. Siville
Vice President of Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
18