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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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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
- ---------------------------------- ------------------------------------
(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
---------------------------
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, 2002, there were outstanding 29,840,746 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 ......................... 4
Condensed Consolidated Statements of Operations ............... 5
Condensed Consolidated Statements of Cash Flows ............... 6
Condensed Consolidated Statement of
Changes in Shareholders' Deficit .......................... 7
Notes to Condensed Consolidated Financial Statements .......... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............. 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk .... 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 26
Item 2. Changes in Securities and Use of Proceeds ...................... 27
Item 3. Defaults upon Senior Securities ................................ 27
Item 4. Submission of Matters to a Vote of Security Holders ............ 27
Item 5. Other Information .............................................. 27
Item 6. Exhibits and Reports on Form 8-K ............................... 27
SIGNATURES .............................................................. 28
3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MELTRONIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
2002 2001
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ASSETS (UNAUDITED)
CURRENT ASSETS
Accounts receivable, net $ 60,000 $ 152,000
Inventories 60,000 100,000
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TOTAL CURRENT ASSETS 120,000 252,000
Property, plant and equipment, net 211,000 278,000
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$ 331,000 $ 530,000
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LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt $ 3,590,000 $ 3,068,000
Line of credit -- 77,000
Accounts payable 3,743,000 3,850,000
Accrued liabilities 1,367,000 1,273,000
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TOTAL CURRENT LIABILITIES 8,700,000 8,268,000
Long-term debt, less current portion -- 261,000
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TOTAL LIABILITIES 8,700,000 8,529,000
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REDEEMABLE PREFERRED STOCK
Series A Convertible Preferred stock, no par value;
liquidation preference of $8,395,000
Authorized shares - 9,362,777
Issued and outstanding - 8,230,780 8,171,000 8,171,000
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COMMITMENTS AND CONTINGENCIES (Notes 3 and 7)
SHAREHOLDERS' DEFICIT
Common stock, no par value:
Authorized shares - 50,000,000
Issued and outstanding - 29,840,746 and 29,521,698,
respectively 47,581,000 47,306,000
Accumulated deficit (64,121,000) (63,476,000)
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Total shareholders' deficit (16,540,000) (16,170,000)
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$ 331,000 $ 530,000
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See accompanying notes to condensed consolidated financial statements.
4
MELTRONIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended March 31,
----------------------------------------
2002 2001
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Net sales $ 489,000 $ 885,000
Cost of goods sold 418,000 755,000
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Gross profit 71,000 130,000
Selling, general and administrative 309,000 584,000
Engineering and product development 78,000 198,000
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Loss from operations (316,000) (652,000)
Other (expense) income:
Interest expense (41,000) (40,000)
Non-cash interest and finance expense (Note 6) (239,000) (148,000)
Other income, net 2,000 --
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Loss from operations before provision for income taxes (594,000) (840,000)
Provision for income taxes (1,000) --
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Net loss (595,000) (840,000)
Dividends attributable to
Series A Convertible Preferred Stock (50,000) (54,000)
Reversal of dividends -- 110,000
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Net loss applicable to common shareholders $ (645,000) $ (784,000)
=================================================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.02) $ (0.05)
=================================================================================================================
See accompanying notes to condensed consolidated financial statements.
5
MELTRONIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31,
---------------------------------------
2002 2001
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NET CASH USED BY OPERATING ACTIVITIES: $ (205,000) $ (698,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements 287,000 825,000
Principal payments on long-term debt,
line of credit and promissory notes (82,000) (290,000)
Issuance of common stock, net -- 163,000
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Net cash provided by financing activities 205,000 698,000
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NET DECREASE IN CASH -- --
CASH AT BEGINNING OF PERIOD -- --
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================================================================================================================
CASH AT END OF PERIOD $ -- $ --
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See accompanying notes to condensed consolidated financial statements.
6
MELTRONIX, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' DEFICIT
(unaudited)
Common Stock Accumulated
Shares Amount Deficit Total
----------------- --------------------- ------------------- --------------------
Balance at January 1, 2002 29,521,698 $47,306,000 $(63,476,000) $(16,170,000)
Notes payable conversion 119,048 10,000 -- 10,000
Beneficial conversion expense -- 239,000 -- 239,000
Issuance of stock for services 200,000 26,000 -- 26,000
Series A Convertible
Preferred Stock dividends -- -- (50,000) (50,000)
Net loss -- -- (595,000) (595,000)
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Balance at March 31, 2002 29,840,746 $47,581,000 $(64,121,000) $(16,540,000)
=============================================================================================================================
See accompanying notes to condensed consolidated financial statements.
7
MELTRONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS - MeltroniX, Inc. ("MeltroniX") is a semiconductor
electronic interconnect solutions company with design, manufacturing and sales
services to support the requirements of electronic systems companies. MeltroniX
develops, manufactures, markets and sells single and multiple chipset
interconnect solutions to customers in the wireless Internet,
telecommunications, broadband communications and other electronics related
industries. MeltroniX was formerly known as Microelectronic Packaging, Inc. and
changed its name to MeltroniX, Inc. in November 1999.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of MeltroniX and its wholly-owned subsidiaries, MeltroniX Solutions,
Inc. ("MeltroniX Solutions"), Microelectronic Packaging America, Inc. ("MPA")
which is dormant and MPI Place Holder, Inc. ("MPI") which is dormant.
BASIS OF PRESENTATION / LIQUIDITY - The accompanying condensed consolidated
financial statements and related notes as of March 31, 2002 and for the three
month periods ended March 31, 2002 and 2001 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, 2002 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, 2001 in the Company's Annual Report on Form 10-K. Readers of this Quarterly
Report on Form 10-QSB are strongly encouraged to review the Company's 2001
Annual Report on Form 10-K.
The accompanying condensed consolidated financial statements have been prepared
assuming MeltroniX will continue as a going concern. During the quarter ended
March 31, 2002, MeltroniX experienced a net loss totaling $595,000 and had
negative cash flows from operations totaling $205,000. In addition, MeltroniX
had a working capital deficit totaling $8,369,000 and a net shareholders'
deficit totaling $16,540,000 at March 31, 2002. Further, MeltroniX has not made
timely payments and was not in compliance with certain debt, lease, and service
agreements and a number of vendors have obtained judgments against MeltroniX.
These conditions raise substantial doubt as to MeltroniX' ability to continue as
a going concern. MeltroniX must significantly 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. There can be no
assurance that any additional financing will be available to MeltroniX on a
timely basis or on acceptable terms or at all. MeltroniX' inability to
accomplish these goals will have a materially adverse effect on MeltroniX'
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.
REVENUE RECOGNITION - We recognize revenue upon the shipment of our products to
our customers, as this is the point in time title transfers. All of our products
are produced from purchase orders to the exact specifications of our customers.
In most cases, our products our usable only by the individual customer for whom
they are produced. In some situations, our customers accept a percentage of
filed product or return the product to us to repair and return to the customer
without reduction in the original billing. Our experience with customer returns
has been immaterial and repairs have been infrequent.
8
MELTRONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CASH AND CASH EQUIVALENTS - MeltroniX considers all highly liquid investments
with original maturities of three months or less when purchased to be cash and
cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost (determined using the
first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost, less accumulated depreciation and amortization. Depreciation is computed
using the straight-line method over estimated useful lives generally ranging
from three to five years. Leasehold improvements and assets under capital leases
are amortized over the shorter of the estimated useful lives of the assets or
the life of the related lease.
LONG-LIVED ASSETS - MeltroniX reviews the carrying amount of its long-lived
assets and identifiable intangible assets for possible impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less
costs to sell.
INCOME TAXES - MeltroniX and its U.S. subsidiaries file consolidated returns for
U.S. federal income tax purposes. For California income tax purposes, the
domestic parent company files on a unitary basis with all subsidiaries.
MeltroniX accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in MeltroniX'
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based upon the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year(s) in which the differences are expected to reverse. This
requires that MeltroniX record a deferred tax asset related to the future income
tax benefits associated with tax loss and credit carryforwards, and certain
temporary differences for which tax benefits have not previously been
recognized. Deferred tax assets are to be reduced by a valuation allowance when
it is more likely than not that a portion or all of the deferred tax asset will
not be realized. In addition, under SFAS 109, the tax benefit associated with
the utilization of operating loss carryforwards is included in the regular
provision for income taxes.
STOCK-BASED COMPENSATION - MeltroniX applies APB Opinion 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock-based compensation plan. Accordingly, no compensation cost is recognized
for its employee stock option plan, unless the exercise price of options granted
is less than fair market value on the date of grant. MeltroniX has adopted the
disclosure provisions SFAS No. 123, "Accounting for Stock-Based Compensation."
MeltroniX applies the provisions of SFAS 123 in accounting for its stock-based
compensation paid to non-employees. Accordingly, the fair value of common stock
options issued to non-employees is estimated at the grant date using the
Black-Scholes option-pricing model, and that estimated value is expensed as the
services are provided.
ENGINEERING AND PRODUCT DEVELOPMENT COST - Engineering and product development
costs are expensed as incurred.
9
MELTRONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount of cash, accounts
receivable, accounts payable, accrued expenses and long-term debt are reasonable
estimates of their fair value because of the short maturity of these items. The
carrying amount of MeltroniX' financial instruments generally approximate their
fair values as of March 31, 2002.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets, including the inventory obsolescence provision, liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK - MeltroniX operates in diversified electronic and
semiconductor business industries and primarily sells to a number of
semiconductor manufacturers electronic equipment manufacturers. MeltroniX
performs ongoing credit evaluations of its customers but does not require
collateral for credit purchases. MeltroniX maintains allowances for potential
credit losses, and such losses have historically been within management's
expectations.
EARNINGS (LOSS) PER SHARE - Earnings (loss) per share is calculated pursuant
SFAS No. 128, "Earnings per Share." Basic earnings (loss) per share ("EPS")
includes no dilution and is computed by dividing income (loss) available to
common shareholders by the weighted average number of shares outstanding during
the period. Diluted earnings (loss) per share reflects the potential dilution of
securities that could share in the earnings of MeltroniX.
COMPREHENSIVE INCOME - Effective in 1998, MeltroniX adopted SFAS No. 130,
Reporting Comprehensive Income. This statement establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income as well as certain items that are reported directly within a separate
component of shareholders' equity and bypass net income. For the periods
presented, MeltroniX has no items of other comprehensive income, as defined by
SFAS No. 130.
NEW ACCOUNTING PRONOUNCEMENTS - In June 2000, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 was
previously amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
which deferred the effective date of SFAS No. 133 to fiscal years commencing
after June 15, 2000. MeltroniX currently does not engage in, nor does it expect
to engage in, derivative or hedging activities and, accordingly, MeltroniX
anticipates there will be no impact to its consolidated financial statements.
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," summarizes the
Securities and Exchange Commission's views on applying generally accepted
accounting principles to revenue recognition in financial statements.
Significant views addressed relate to shipping terms, customer acceptance and
bundled service contracts. Implementation is effective for the first quarter of
fiscal 2001. MeltroniX believes that its current revenue recognition policies
comply with SAB No. 101.
10
MELTRONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation," which addresses certain
accounting issues that arose under the previously established accounting
principles relating to stock-based compensation. The adoption of this
interpretation did not have a material effect on MeltroniX' financial position
or results of operations.
In June 2001, the FASB issued SFAS 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets," which require that the purchase
method of accounting be used for all business combinations initiated after
September 30, 2001 and prohibit the use of the pooling-of-interests method. SFAS
142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. The amortization for goodwill from past business
combinations will cease upon adoption of this Statement on December 31, 2001.
Goodwill and intangible assets acquired in business combinations completed after
September 30, 2001 must comply with the provisions of this Statement. Also,
companies will be required to evaluate all existing goodwill for impairment
within six months of adoption by comparing the fair value of each reporting unit
to its carrying value at the date of adoption. Any transitional impairment
losses will be recognized in the first interim period in the year of adoption
and will be recognized as the effect of a change in accounting principle.
The FASB also issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets," which addresses significant issues relating to the
implementation of SFAS No.121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and develops a single
accounting model, based on the framework established in SFAS No. 121 for
long-lived assets to be disposed of by sale, whether such assets are or are not
deemed to be a business. SFAS No. 144 also modifies the accounting and
disclosure rules for discontinued operations. The standard is effective for
fiscal years beginning after December 15, 2001, and is not expected to have a
material effect on the financial statements.
NOTE 2 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
MARCH 31, December 31,
2002 2001
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(UNAUDITED)
Accounts receivable consist of:
Trade receivables......................................................... $ 75,000 $ 167,000
Allowance for doubtful accounts........................................... (15,000) (15,000)
---------------- ------------------
$ 60,000 $ 152,000
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Inventories consist of:
Raw materials............................................................. $ 70,000 $ 112,000
Obsolescence reserve...................................................... (10,000) (12,000)
---------------- ------------------
$ 60,000 $ 100,000
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11
MELTRONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, December 31,
2002 2001
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(UNAUDITED)
Property, plant and equipment consist of:
Machinery and equipment................................................... $ 2,199,000 $ 2,199,000
Computer and office equipment............................................. 261,000 261,000
Computer software......................................................... 354,000 354,000
Furniture and fixtures.................................................... 47,000 47,000
---------------- ------------------
2,861,000 2,861,000
Accumulated depreciation..................................................... (2,650,000) (2,583,000)
---------------- ------------------
$ 211,000 $ 278,000
================ ==================
Accrued liabilities consist of:
Accrued employee compensation............................................. $ 244,000 $ 202,000
Accrued dividends......................................................... 495,000 445,000
Accrued interest.......................................................... 203,000 167,000
Accrued taxes............................................................. 166,000 166,000
Other..................................................................... 259,000 174,000
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$ 1,367,000 $ 1,372,000
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NOTE 3 - NOTES PAYABLE
In June 2000, Transpac Capital Pte. Ltd., an existing shareholder, and FI
Financial, a shareholder and an entity controlled by James T. Waring loaned
MeltroniX $250,000 each in exchange for a six month secured note bearing
interest at prime plus .75% and 9%, respectively MeltroniX discussed payment
arrangements with Transpac Capital Pte. and negotiated an agreement to extend,
waive or defer all or any part of the principal or interest for an additional
six month period. FI Financial has agreed to extend the due date of its
promissory note for six months. In consideration of each of these loans, the
lenders were each issued warrants to purchase 250,000 shares of common stock
with an exercise price of $1.344 for which MeltroniX recorded a compensation
charge aggregating $398,000. The maturity dates for these obligations were
orally extended to June 14, 2001. There are no further extensions and these
notes are currently due. The note holders have not demanded payment.
In December 2000, MeltroniX entered into three separate loan and stock issuance
agreements aggregating $500,000 with related parties and shareholders. These
agreements are secured, bear interest at 10% and are convertible at any time
through the maturity date of December 2002 into Common Stock of MeltroniX. The
conversion prices range from $.18 to $.32 per share, which represents a 20%
discount on the date of the respective agreement. As a result, MeltroniX
incurred a one-time charge to interest expense aggregating $100,000 as
recognition of the beneficial conversion feature, the offset of which was to
common stock. In addition, each of the agreements contains an Additional Stock
Purchase Right, whereby, the debt holders can purchase additional shares at the
then existing market value on the date of the agreement, which ranges from $.22
to $.41 per share. Under the Additional Stock Purchase Right, the debt holders
are limited in the number of additional shares that can be purchased, such that,
the additional shares purchased can not exceed the number of shares initially
converted from the loan balance.
12
MELTRONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In January 2001, La Jolla Cove Investors, Inc. ("LJCI") and The Norman Litz IRA,
loaned MeltroniX $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 MeltroniX, while the note due to LJCI is
personally guaranteed by directors and officer of MeltroniX. 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 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.
On March 6, 2002, La Jolla Cove Investors, Inc. converted $10,000 of the above
note in exchange for 119,048 shares of common stock.
On February 23, 2001, MeltroniX borrowed an additional $50,000 from James T.
Waring, a director of MeltroniX, 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, MeltroniX borrowed an additional $75,000 from James T. Waring,
a director of MeltroniX, 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, discussed below.
On April 6, 2001, MeltroniX borrowed $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 MeltroniX. In connection with
the promissory note, MeltroniX is to issue 1,000,000 shares of its common stock
as additional consideration for the loan. MeltroniX 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, MeltroniX borrowed an additional $250,000 from Paul H. Neuharth,
Jr, a director of MeltroniX, 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, MeltroniX issued 2,500,000 shares of its common stock as additional
consideration for the loan for which MeltroniX recorded a compensation charge
aggregating $875,000. In December 2001, Paul H. Neuharth, Jr. waived the
accumulated interest on the note for 2001 as additional consideration for the
shares issued. Such interest aggregated to approximately $23,000.
13
MELTRONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In February 2001, MeltroniX 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 MeltroniX an exclusive, non
transferable license for the use of USSC's technology in exchange for a
percentage to be determined of MeltroniX's common stock, and (ii) purchase a
percentage yet to be determined of the common stock of MeltroniX. The expenses
to further develop the technology to a commercially feasible and manufacturable
level are to be born by USSC. Once established, MeltroniX 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 March 31, 2002, MeltroniX has
received an aggregate $1,161,000 from USSC. Since March 31, 2002, MeltroniX has
received an additional $125,000 bringing the total to $1,286,000. 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
MeltroniX and, therefore, there is no assurance that such transactions will be
successfully completed.
On January 2, 2002, MeltroniX received an additional $200,000 from LJCI from the
sale of a Convertible Debenture agreement (the "Debenture"). Such Debenture
accrues interest at 9 3/4%, payable monthly in arrears, and expires on January
2, 2004. The Debenture is convertible immediately into the Company's common
stock at $0.057 per share at the option of LJCI. In connection with this
Debenture, the Company has recorded effective interest expense of $200,000 to
account for the beneficial conversion feature. No portion of the Debenture has
been converted to date.
Solana and MeltroniX entered into a letter of agreement in July 2001 and Solana
provided MeltroniX with $150,000 advance. The $150,000 is convertible into
MeltroniX Common Stock at $.20 per share and if the stock is not publicly
tradable within six months of conversion, Solana may tender the stock back to
MeltroniX for an immediate payment of $150,000. The other terms of the letter of
agreement were not fulfilled and are not active terms. The terms of this letter
of agreement are the subject of a signed letter of intent dated April 4, 2002
discussed below.
Solana and MeltroniX entered into a letter of agreement April 4, 2002. Solana
will provide $1.3 million in the form of a convertible note, that will integrate
into the offering described in Meltronix' January 2002 filing of a registration
statement on Form S-2 with the Securities and Exchange Commission, which is
subject to amendment. The $1.3 million convertible note shall have a conversion
price of 25% discount to market. The note shall consist of three transactions:
14
1. $500,000 (in consideration of $150,000 cash discussed in above
paragraph, $150,000 as a fee to Solana for ongoing due diligence and
$200,000 in new funds upon execution of the note. Solana wishes to
convert this amount and take delivery of the restricted stock).
2. Ten days after the delivery of the stock in item #1 above Solana will
provide $300,000 that will be converted to restricted stock.
3. Fifteen days after the delivery of the stock in item #2 Solana will
provide $500,000 that will be converted to restricted stock.
NOTE 4 - EFFECTS OF INCOME TAXES
The Company has recorded a provision only for California minimum corporate taxes
for the three months ended March 31, 2002, 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.
15
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, 2002 and 2001, 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 features of issued notes payable of $239,000. The expense
of $239,000 is a non-cash charge posted to the capital account of the Company
due to the amortization of beneficial conversion features of an aggregate
$700,000 of notes payable issued, $500,000 of which were issued in 2001 and the
remaining note was issued in January 2002. In addition, in connection with the
notes aggregating $500,000, 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 three months ended March 31, 2002, MeltroniX entered into a marketing
service agreement that provides for payment via issuance of shares in lieu of
cash for the services provided.
On March 6, 2002, MeltroniX contracted with Gemini Capital, LLC to provide the
following deliverables for a one-year period to end March 6, 2003:
1. Due diligence and condensed profile report.
2. Introductions and advisement toward broker/dealer relationships.
3. Introductions and advisement toward investment banking relationships.
4. Introductions and advisement toward analysts and institutional
relationships.
5. Best-efforts syndication for financing objectives.
Compensation:
1. The initial payment of 200,000 shares were issued March 6, 2002 creating a
non-cash expense of $26,000.
2. Starting May 1, 2002, Gemini Capital, LLC will receive 100,000 shares
monthly for a period of twelve months. Each monthly issuance will create a
non-cash expense of $13,000.
3. Gemini Capital, LLC agrees to accrue a $5,000 per month cash fee and carry
the balance forward until MeltroniX completes its first round of funding of
an amount in excess of $300,000, or, if mutually acceptable by the parties,
convert the outstanding balance into equity. Subsequent to funding in
excess of $300,000, MeltroniX will pay the monthly $5,000 fee in cash.
The fee for successful introductions resulting in either equity or debt
financing will be 5% of the total amount raised, less the cash fees collected,
and 5% in warrants coverage calculated as follows: gross proceeds to MeltroniX
times 5%, divided by the closing price at the closing date.
16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING MELTRONIX'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 MELTRONIX'S SEC REPORTS, INCLUDING MELTRONIX'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, 2002 and 2001, and should be read in conjunction
with the condensed consolidated financial statements and the accompanying notes
included within this report.
NET SALES were $489,000 and $885,000 for the three months ended March 31, 2002
and 2001, respectively. Net sales decreased $396,000 or 44.7%. The decrease in
net sales is primarily the result of discontinued sales to Microsource, totaling
approximately $315,000 in the first quarter of 2001 and zero in the first
quarter of 2002.
COST OF GOODS SOLD was $418,000 (85.5% of sales) and $755,000 (85.3% of sales)
for the three months ended March 31, 2002 and 2001, respectively. Cost of goods
sold decreased $337,000 or 44.6%. The decrease in cost of goods sold is due to
the decrease in sales volume from customers, offset by some semi-fixed costs
such as depreciation and rent that do not fluctuate with sales volume.
GROSS PROFIT was $71,000 (14.5% of net sales) and $130,000 (14.7% of net sales)
for the three months ended March 31, 2002 and 2001, respectively. Gross profit
decreases $59,000 or 45.4%. The decrease in gross profit is attributable to the
decrease in net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $309,000 (63.2% of sales) and
$584,000 (66.0% of sales) for the three months ended March 31, 2002 and 2001,
respectively. Selling, general and administrative expenses decreased $275,000 or
47.1%. The decrease is due to MeltroniX' downsizing of staff, review and
elimination of expenses, and a conscious effort to minimize purchases.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES were $78,000 (16.0% of sales) and
$198,000 (22.4% of sales) for the three months ended March 31, 2002 and 2001,
respectively. Engineering and product development expenses decreased $120,000 or
60.6%. 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.
INTEREST EXPENSE was $41,000 (8.4% of sales) and $40,000 (4.5% of sales) for the
three months ended March 31, 2002 and 2001, respectively. Interest expense
increased $1,000 or 2.5%. The primary cause of the increase was interest on
additional notes payable.
NON-CASH INTEREST EXPENSE was $239,000 (48.9% of sales) and $148,000 (16.7% of
sales) for the three months ended March 31, 2002 and 2001, respectively.
Non-cash interest expense increased $91,000 or 61.5%. Non-cash interest and
finance expense represents non-cash charges for beneficial conversion into
Company equity of issued notes payable. The expense of $200,000 is a non-cash
charge posted to the capital account of MeltroniX due to beneficial conversion
features of a $200,000 convertible debenture issued to La Jolla Cove Investors,
Inc. in exchange for cash of $200,000 received by MeltroniX in January 2002. The
17
expense of $39,000 is a non-cash charge posted to the capital account of
MeltroniX due to the beneficial conversion features of an aggregate $500,000 of
notes payable issued in 2001 with an aggregate beneficial conversion expense of
$312,500 being amortized through the maturity date of the notes in December
2002. However, if MeltroniX files a registration statement to register the
underlying securities of the convertible notes payable, MeltroniX will
immediately recognize the unamortized portion of the beneficial conversion
expense. In addition, MeltroniX 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.
PROVISION FOR INCOME TAXES was recorded for the minimum California Franchise
income taxes for the three months ended March 31, 2002, since MeltroniX'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.
MeltroniX believes that it has incurred an ownership change pursuant to Section
382 of the Internal Revenue Code, and, as a result, MeltroniX believes that its
ability to utilize its current net operating loss and credit carryforwards in
subsequent periods will be subject to annual limitations.
DIVIDENDS were $50,000 and $54,000 for the
three months ended March 31, 2002 and 2001, respectively. Dividends decreased
$4,000 or 7.4%. Several Preferred Stock shareholders retroactively declined to
accept dividends on their Preferred Shares resulting in a benefit to MeltroniX
of approximately $110,000 in the first quarter of 2001 and continued benefit in
the form of a lesser continuing charge to dividends in all subsequent periods.
18
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2002, MeltroniX financed its operations
through the issuance of a convertible debenture for $200,000 and the receipt of
an additional $87,000 from United States Semiconductor Corporation. During the
first three months of 2001, operating activities used $205,000. MeltroniX's
sources of liquidity at March 31, 2002 consist of trade accounts receivable of
$60,000 and inventories of $60,000. There can be no assurance that MeltroniX
will be successful in any of its financing activities.
The accompanying condensed consolidated financial statements have been prepared
assuming MeltroniX will continue as a going concern. During the quarter ended
March 31, 2002, MeltroniX had negative cash flows from operations totaling
$205,000. In addition, MeltroniX had a working capital deficit totaling
$8,369,000 at March 31, 2002. Further, MeltroniX has not made timely payments
and was not in compliance with certain debt, lease, and service agreements.
MeltroniX 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
described below. There can be no assurance that any additional financing will be
available to MeltroniX on a timely basis or on acceptable terms or at all.
MeltroniX' inability to accomplish these goals will have a materially adverse
effect on MeltroniX' 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.
Approximately thirty vendors from accounts payable have filed suit against
MeltroniX and received judgements or are in the process of receiving a judgement
for amounts owed to them. The total accounts payable subject to these judgements
is approximately $700,000. MeltroniX has no cash to satisfy these judgements.
UCC filings held by the note holders secure all of the assets of MeltroniX. The
MeltroniX assets are not sufficient to satisfy all of the debt covered by UCC
filings. Operations during the first half of 2002 require continued financing to
cover cash shortfalls. USSC has been willing to discuss the judgements with the
creditors and has negotiated discounts and payment plans dependent on continued
financing. The creditors have been informed that payment of their debts can be
made at a discount only when USSC has financed the MeltroniX operations.
In February 2001, MeltroniX 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 MeltroniX an exclusive, non
transferable license for the use of USSC's technology in exchange for a
percentage to be determined of MeltroniX' common stock, and (ii) purchase a
percentage yet to be determined of the common stock of MeltroniX. The expenses
to further develop the technology to a commercially feasible and manufacturable
level are to be born by USSC. Once established, MeltroniX 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 March 31, 2002 MeltroniX has
received an aggregate $1,161,000 from USSC. Since March 31, 2002 MeltroniX has
received an additional $125,000 bringing the total to $1,286,000. 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
MeltroniX and, therefore, there is no assurance that such transactions will be
successfully completed.
19
Solana and MeltroniX entered into a letter of agreement July 2001 and Solana
provided MeltroniX with $150,000 advance. The $150,000 is convertible into
MeltroniX Common Stock at $.20 per share and if the stock is not publicly
tradable within six months of conversion, Solana may tender the stock back to
MeltroniX for an immediate payment of $150,000. The other terms of the letter of
agreement were not fulfilled and are not active terms. The terms of this letter
of agreement are the subject of a signed letter of intent dated April 4, 2002
discussed below.
Solana and MeltroniX entered into a letter of agreement April 4, 2002. Solana
will provide $1.3 million in the form of a convertible note, that will integrate
into the offering described in Meltronix' January 2002 filing of a registration
statement on Form S-2 with the Securities and Exchange Commission, which is
subject to amendment. The $1.3 million convertible note shall have a conversion
price of 25% discount to market. The note shall consist of three transactions:
1. $500,000 (in consideration of $150,000 cash discussed in above paragraph,
$150,000 as a fee to Solana for ongoing due diligence and $200,000 in new
funds upon execution of the note. Solana wishes to convert this amount and
take delivery of the restricted stock).
2. Ten days after the delivery of the stock in item #1 above Solana will
provide $300,000 that will be converted to restricted stock.
3. Fifteen days after the delivery of the stock in item #2 Solana will provide
$500,000 that will be converted to restricted stock.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements and related footnotes. Our
critical accounting policies are described in Note 1 to the consolidated
financial statements included in Item 8 of our previously filed 2001 Form 10-K.
We believe our most critical accounting policies include the following.
o REVENUE RECOGNITION. We recognize revenue upon the shipment of our
products to our customers, as this is the point in time title
transfers. All of our products are produced from purchase orders to the
exact specifications of our customers. In most cases, our products are
usable only by the individual customer for whom they are produced. In
some situations, our customers accept a percentage of filled product or
return the product to us to repair and return to the customer without
reduction in the original billing. Our experience with customer returns
has been immaterial and repairs have been infrequent.
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition,"
summarizes the Securities and Exchange Commission's views on applying
generally accepted accounting principles to revenue recognition in
financial statements. Significant views addressed relate to shipping
terms, customer acceptance and bundled service contracts.
Implementation is effective for the first quarter of fiscal 2001,
MeltroniX believes that its current revenue recognition policies comply
with SAB No. 101.
o ACCOUNTING FOR INCOME TAXES. As part of our operations we calculate the
related taxes, or tax benefits resulting from our operations. This
process requires estimation of certain components of the temporary
differences that arise between our results of operations for financial
and income tax reporting purposes. We have recorded a 100% valuation
20
allowance on our deferred tax assets at March 31, 2002 and December 31,
2001. These assets, the largest portion being that attributable to
federal and state net operating loss carryovers, have been reserved due
to the uncertainties related to our ability to generate sufficient
taxable income in future periods.
o STOCK-BASED COMPENSATION. We will, at times issue stock or stock
equivalents as part of a transaction or as compensation for employees,
directors, or vendors and others outside our company. We use the
"intrinsic value" method for recording stock-based compensation for
stock options granted to out employees and directors and the "fair
value" method for recording transactions with vendors and other
outsiders. The determination of fair value requires a certain amount of
judgment and estimation of market value based on the trading value of
our securities, which have experienced low volumes of trading and high
volatility in the stock price. In the fourth quarter of the year ended
December 31, 2001, we canceled all of the existing options previously
granted to our employees.
o NEW ACCOUNTING PRONOUNCEMENTS - In June 2000, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 was previously amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," which
deferred the effective date of SFAS No. 133 to fiscal years commencing
after June 15, 2000. MeltroniX currently does not engage in, nor does
it expect to engage in, derivative or hedging activities and,
accordingly, MeltroniX anticipates there will be no impact to its
consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation,"
which addresses certain accounting issues that arose under the
previously established accounting principles relating to stock-based
compensation. The adoption of this interpretation did not have a
material effect on MeltroniX' financial position or results of
operations.
In June 2001, the FASB issued SFAS 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets," which require
that the purchase method of accounting be used for all business
combinations initiated after September 30, 2001 and prohibit the use of
the pooling-of-interests method. SFAS 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach.
The amortization for goodwill from past business combinations will
cease upon adoption of this Statement on December 31, 2001. Goodwill
and intangible assets acquired in business combinations completed after
September 30, 2001 must comply with the provisions of this Statement.
Also, companies will be required to evaluate all existing goodwill for
impairment within six months of adoption by comparing the fair value of
each reporting unit to its carrying value at the date of adoption. Any
transitional impairment losses will be recognized in the first interim
period in the year of adoption and will be recognized as the effect of
a change in accounting principle.
The FASB also issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses significant issues
relating to the implementation of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," and develops a single accounting model, based on the
framework established in SFAS No. 121 for long-lived assets to be
disposed of by sale, whether such assets are or are not deemed to be a
business. SFAS No. 144 also modifies the accounting and disclosure
rules for discontinued operations. The standard is effective for fiscal
years beginning after December 15, 2001, and is not expected to have a
material effect on the financial statements.
21
FUTURE OPERATING RESULTS
US Semiconductor (USS - a privately held corporation) was formed in 1998 to
leverage a new technology called RHI-NO, under exclusive licenses from Lawrence
Livermore National Laboratories. This technology improves the radiation
tolerance of commercially available semiconductors. Tests at Sandia Labs
indicate it should also improve the speed and power characteristics of most chip
devices, which could open up large commercial applications. The worldwide market
for radiation tolerant semiconductors is estimated to be $1.3 Billion and
growing. Traditional chip suppliers have moved away from space and military
markets, which require radiation hardened solutions. Computer and Internet
production preoccupy the major micro-electronic suppliers today. Current world
events have created an unprecedented urgency for devices to be used in tactical
platforms, commercial and government communications, and surveillance
satellites, as well as ground systems security.
This confluence of MeltroniX manufacturing capabilities and US-Semi's need
for production and marketing skills to rationalize RHI-NO has resulted in truly
extraordinary timed synergy for investors and for the nation. In February of
2001, USS and MeltroniX signed a Letter of Intent (LOI) to purchase 50% of the
stock of MeltroniX. Included in this deal is the granting of exclusive license
for RHI-NO technology. This process is underway as USS continues to raise funds
from private investors to complete the transaction.
The events of September 11th followed by unanimous passage by the U.S.
Senate of a $395 Billion Defense budget October 3, 2001, will accelerate the
demand of improved surveillance and tactical systems and the radiation tolerant
electronic devices to make them work. On September 27, 2001,the MeltroniX Board
announced new management under the leadership of Robert Czajkowski as CEO, and a
new focus on space and military business. The technology is imminent, the
organization is developing, the market is unfolding, and successful exploitation
of these elements is in the hands of experienced, proven management.
Our operating results have fluctuated in the past and may continue to fluctuate
in the future depending upon a variety of factors, including:
o downward pressure in gross margins,
o losses due to low shipping volume,
o delayed market acceptance, if any, of new and enhanced versions of our
products,
o delays, cancellations or reschedulings of orders,
o delays in product development, defects in products,
o changes in the length of the design-to-production cycle,
o relationships with and conditions of customers, subcontractors, and
suppliers,
o receipt of raw materials, including consigned materials,
o customer concentration and
o price competition.
22
In addition, operating results may fluctuate based upon several other factors,
including our ability to retain present management and to attract new customers,
changes in pricing by MeltroniX, its competitors, subcontractors, customers or
suppliers, and fluctuations in manufacturing yields. The absence of significant
backlog for an extended period of time will also limit our ability to plan
production and inventory levels, which could lead to fluctuations in operating
results. Accordingly, the failure to receive anticipated orders or delays in
shipments due, for example, to unanticipated shipment reschedulings or defects
or to cancellations by customers, or to unexpected manufacturing problems may
cause net sales in a particular quarter to fall significantly below our
expectations, which would materially adversely affect our operating results for
such quarter. The impact of these and other factors on our net sales and
operating results in any future period cannot be forecasted with certainty. In
addition, fixed overhead costs, the need for continued expenditures for research
and development, capital equipment and other commitments, among other factors,
will make it difficult to reduce our expenses in a particular period if sales
goals for such period are not met. A large portion of operating expenses are
fixed and are difficult to reduce or modify should revenues not meet
expectations, thus magnifying the material adverse impact of any such revenue
shortfall. Accordingly, there can be no assurance that we will not incur losses
in the future or that such losses will not have a material adverse effect on our
business, financial condition and results of operations.
DEPENDENCE ON THE CONTINUED GROWTH IN THE WIRELESS TELECOMMUNICATIONS, INTERNET
EQUIPMENT AND HIGH BANDWIDTH COMMUNICATIONS MARKETS. Our new business strategy
is to target the wireless telecommunications, internet equipment and high
bandwidth communications industries to sell chip level integration, interconnect
services and developing proprietary products. These industries have experienced
dramatic growth. If the rate of growth slows or capital investments in one or
more of these markets is reduced, or other factors adversely affect these
industries, it could materially affect the business, financial condition, and
results of operations.
VARIABILITY OF CUSTOMER REQUIREMENTS AND OPERATING RESULTS. Electronics
manufacturing service providers must provide increasingly rapid product
turnaround for their customers. We may not be able to obtain firm, long-term
purchase commitments from our customers. Customers may cancel their orders,
change production quantities, or delay production for a number of reasons.
Cancellations, reductions, or delays by a significant customer, or by a group of
customers would materially affect the business, financial condition and results.
Other factors, in addition to the short-term nature of our customer's
commitments, may contribute to fluctuations in results of operations, including
those discussed herein under Future Operating Results. We make significant
decisions, including the level of business we seek and accept, production
schedules, component procurement commitments, personnel needs and another
resource requirements, based upon the estimates of customer requirements. The
short-term nature of our customers' commitments and the possibility of rapid
changes in the demand for their products reduce our ability to estimate
accurately future customer requirements. Customers may occasionally require
rapid increases in production, which can stress our capacity and reduce margins.
Although we have increased our manufacturing capacity, there can be no assurance
we will have the capacity to meet the demands of customers. Because many of the
costs are relatively fixed, a reduction in customer demand can adversely affect
the gross margins and operating income.
EXPANDED PRODUCT LINE AND CUSTOMER BASE COULD CAUSE PROBLEMS MANAGING SUCH
GROWTH. Failure to manage the increased number of customers and expanded
products in new industries such as wireless telecommunications, internet
equipment and high bandwidth communications could materially adversely affect
the business, financial conditions and results of the operations. Our ability to
compete effectively and to manage future growth will depend on our ability to
implement and improve operating and financial systems on a timely basis for all
of our product lines. MeltroniX can give no assurance we will be able to manage
our future growth effectively.
23
TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION; UNCERTAINTY OF
MARKET ACCEPTANCE AND EMERGING MARKETS. The markets are subject to technological
change and new product introductions and enhancements. Customers require
products embodying increasingly advanced electronics interconnection technology.
We must anticipate changes in technology and define, develop and manufacture or
acquire new products that meet our customers' need. If we don't act in response
to changes in technology, our business will be materially adversely affected.
There can be no assurance that MeltroniX will not encounter technical or other
difficulties that could in the future delays. New product introductions by
competitors could cause a decline in sales or loss of market acceptance of our
products. Even if MeltroniX develops and introduces new products, such products
must gain market acceptance and significant sales in order for us to achieve our
growth objectives. Furthermore, we must develop business relationships with and
supply products to customers whose end-user products achieve and sustain market
penetration. Our financial performance will depend in significant part on the
continued development of new and emerging markets such as the market for single
and multiple chipset interconnect solutions. MeltroniX cannot predict with any
certainty any growth rate and potential size of emerging markets. Accordingly,
there can be no assurance that emerging markets targeted by us will develop or
that our products will achieve market acceptance in such markets.
COMPETITIVE INDUSTRY; PRICE COMPETITION. The electronic interconnection
technology industry is intensely competitive. MeltroniX experiences intense
competition worldwide from a number of manufacturers, including Maxtek
Components Corporation, Natel Engineering, VLSI Packaging, Raytheon Electronic
Systems, Flextronics, Advanced Packaging Technology of America and HEI Inc. We
face competition from certain of our customers that have the internal capability
to produce products competitive with our products and may face competition from
new market entrants in the future. In addition, corporations with which we have
agreements are conducting independent research and development efforts in areas
that are or may be competitive. New product introductions by our competitors
could cause a decline in sales or loss of market acceptance. MeltroniX is also
experiencing price competition, which may materially adversely affect our
business, financial condition and results of operations. We believe that to
remain competitive in the future we will need to continue to develop new
products and to invest financial resources in new product development.
SOLE OR LIMITED SOURCES OF SUPPLY. As is common in our industry, certain raw
materials essential for manufacture are obtained from a sole supplier or a
limited group of suppliers. There are a limited number of qualified suppliers of
laminate substrates and die that are of critical importance to the production.
In the manufacturing process, we may utilize consigned materials supplied by
certain of our customers. Our reliance on sole or a limited group of suppliers
and certain customers for consigned materials involves several risks, including
a potential inability to obtain an adequate supply of required materials and
reduced control over the price, timely delivery, and quality of raw materials.
Disruption or termination of these sources could delay shipments of our products
and could have a material adverse effect on our business, financial condition
and operating results.
FUTURE CAPITAL NEEDS; NEED FOR ADDITIONAL FINANCING. MeltroniX anticipates that
cash on hand and anticipated cash flow from operations will assist in funding
its capital needs for 2002. Management is also currently exploring various debt
and equity funding sources. There can be no assurance that MeltroniX will be
able to obtain such additional financing on terms acceptable to us.
DEPENDENCE ON KEY PERSONNEL. MeltroniX' financial performance depends in part
upon our ability to attract and retain qualified management, technical, and
sales and support personnel for our operations. Competition for such personnel
is intense, and there can be no assurance that MeltroniX will be successful in
attracting or retaining such personnel. The loss of any key employee, the
24
failure of any key employee to perform in his current position or MeltroniX'
inability to attract and retain skilled employees, as needed, could materially
adversely affect MeltroniX' business, financial condition and results of
operations.
INTELLECTUAL PROPERTY MATTERS. Although MeltroniX attempts to protect its
intellectual property rights through patents, trade secrets and other measures,
we believe our financial performance will depend more upon the innovation,
technological expertise, manufacturing efficiency and marketing and sales
abilities of our employees.
ENVIRONMENTAL REGULATIONS. We are subject to a variety of local, state, federal
and foreign governmental regulations relating to the storage, discharge,
handling, emission, generation, manufacture and disposal of toxic or other
hazardous substances used to manufacture our products. We believe we are
currently in compliance in all material respects with such regulations and has
obtained all necessary environmental permits to conduct its business.
Nevertheless, failure to comply with current or future regulations could result
in the imposition of substantial fines against us, suspension of production,
alteration of our manufacturing processes or cessation of operations. We have
been notified by the United States Environmental Protection Agency that it
considers us to be a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986. See "Legal
Proceedings."
NASDAQ LISTING REQUIREMENTS. MeltroniX' Common Stock is trading on the OTC
Bulletin Board. MeltroniX may in the future be subject to continuing
requirements to be listed on the OTC Bulletin Board. There can be no assurance
that we could continue to meet such requirements. The price and liquidity of
MeltroniX Common Stock may be materially adversely affected if we are unable to
meet such requirements in the future. There can be no assurance that MeltroniX
will be able to qualify for listing on the NASDAQ National or SmallCap Market.
DISCLOSURES RELATING TO LOW PRICED STOCKS; RESTRICTIONS ON RESALE OF LOW PRICE
STOCKS AND ON BROKER-DEAL SALE; POSSIBLE ADVERSE EFFECT OF "PENNY STOCK" RULES
ON LIQUIDITY FOR MELTRONIX' SECURITIES. Transactions in MeltroniX' securities
are subject to Rule 15g-9 under the Exchange Act, which imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and "accredited investors" (generally,
individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
$200,000 or $300,000 together with their spouses). For transactions covered by
this Rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to the sale. Consequently, this Rule may affect the ability of
broker-dealers to sell MeltroniX' securities, and may affect the ability of
purchasers in this offering to sell any of the securities acquired in the
secondary market.
VOLATILITY OF STOCK PRICE. The stock market in general has recently experienced
extreme price and volume fluctuations that have affected the market prices of
technology companies. Such fluctuations have often been unrelated to or
disproportionately impacted by the operating performance of such companies.
Factors such as actual or anticipated operating results, announcements of
technological innovations, new products or new contracts by MeltroniX, our
competitors or their customers, or events affecting other companies in the
electronics, wireless communications, internet, or high bandwidth communications
industries, and general market conditions may have a significant effect on the
market price of the Common Stock.
ITEM 3 - QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
None
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1995, the United States Environmental Protection Agency ("EPA") issued
written notice to all known generators of hazardous waste shipped to a Whittier,
California treatment facility. The EPA notice indicated that these generators
(including MeltroniX) were potentially 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
the site. In response to the EPA notice, MeltroniX 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, MeltroniX
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, MeltroniX and other named
generators have provided certain funding to test the soil and groundwater at
this site, which testing is currently ongoing. Although the cost incurred by
MeltroniX 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 currently unable to estimate the possible cost of this suit, as
the cost of clean up has not been determined. Therefore, there can be no
assurance 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
MeltroniX' business, financial condition, results of operations or cash flows.
On October 18, 2000, MeltroniX 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 MeltroniX 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 MeltroniX and H.J. Meyers,
Co. MeltroniX 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.
Approximately thirty vendors from accounts payable have filed suit against
MeltroniX and received judgements or are in the process of receiving a judgement
for amounts owed to them. The total accounts payable subject to these judgements
is approximately $700,000. MeltroniX has no cash to satisfy these judgements.
UCC filings held by the note holders secure all of the assets of MeltroniX. The
MeltroniX assets are not sufficient to satisfy all of the debt covered by UCC
filings. Operations during the first half of 2002 require continued financing to
cover cash shortfalls. USSC has been willing to discuss the judgements with the
creditors and has negotiated discounts and payment plans dependent on continued
financing. The creditors have been informed that payment of their debts can be
made at a discount only when USSC has financed the MeltroniX operations.
MeltroniX is involved in various other claims arising in the ordinary course of
business. None of these other claims, in the opinion of management, is expected
to have a material adverse impact on the financial position, cash flows or
overall trends in the results of operations of MeltroniX.
26
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
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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 13, 2002 By: /s/ Robert M. Czajkowski
----------------- ----------------------------------------
Robert M. Czajkowski
President and Chief Executive Officer,
Director
Date: May 13, 2002 By: /s/ Randal D. Siville
----------------- ----------------------------------------
Randal D. Siville
Vice President of Finance,
Chief Financial Officer and Assistant
Secretary (Principal Financial and
Accounting Officer)
28