UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
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 SEPTEMBER 30, 1999
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Commission file number 0-23562
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MELTRONIX, INC.
---------------
(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
- ----------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 292-7000
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Microelectronic Packaging, Inc.
--------------------------------------
(Former name, if changed since last report)
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 November 8, 1999, there were outstanding 10,856,890 shares of the
Registrant's Common Stock, no par value per share.
INDEX PAGE NO.
- ----- --------
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets.......................... 3
Condensed Consolidated Statements of Operations................ 4
Condensed Consolidated Statements of Cash Flows................ 6
Condensed Consolidated Statement of
Changes in Shareholders' Equity (Deficit)...................... 7
Notes to Condensed Consolidated Financial Statements........... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 20
Item 2. Changes in Securities and Use of Proceeds...................... 20
Item 3. Defaults upon Senior Securities................................ 21
Item 4. Submission of Matters to a Vote of Security Holders............ 21
Item 5. Other Information.............................................. 22
Item 6. Exhibits and Reports on Form 8-K............................... 22
SIGNATURE......................................................................... 23
EXHIBIT INDEX..................................................................... 24
2
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
MELTRONIX, INC.
(Formerly Known as Microelectronic Packaging, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
PRO FORMA
SEPTEMBER 30, SEPTEMBER 30, December 31,
1999 1999 1998
- ----------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
(SEE NOTE 6
AND 9)
ASSETS
Current assets:
Cash $ 182,000 $ 182,000 $ 469,000
Accounts receivable, net 1,453,000 1,453,000 1,306,000
Inventories 1,841,000 1,841,000 3,073,000
Other current assets 121,000 433,000 60,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,597,000 3,909,000 4,908,000
Property, plant and equipment, net 1,957,000 1,957,000 1,806,000
Other non-current assets 90,000 90,000 171,000
- ----------------------------------------------------------------------------------------------------------------
$ 5,644,000 $ 5,956,000 $ 6,885,000
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 365,000 $ 365,000 $ 20,000
Accounts payable 4,105,000 4,105,000 4,045,000
Accrued liabilities 1,021,000 872,000 908,000
Debt and accrued interest of discontinued operations,
in default, due on demand -- 28,562,000 27,055,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,491,000 33,904,000 32,028,000
Long-term debt, less current portion 37,000 37,000 49,000
COMMITMENTS AND CONTINGENCIES
SUBSEQUENT EVENT
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, convertible into common stock 9,239,000 -- --
Common stock, no par value 40,283,000 40,177,000 40,143,000
Accumulated deficit (49,406,000) (68,162,000) (65,335,000)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 116,000 (27,985,000) (25,192,000)
- ----------------------------------------------------------------------------------------------------------------
$ 5,644,000 $ 5,956,000 $ 6,885,000
================================================================================================================
3
MELTRONIX, INC.
(Formerly Known as Microelectronic Packaging, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended September 30,
--------------------------------------------
1999 1998
=======================================================================================================
(Restated-Note 2)
Net sales $ 2,031,000 $ 3,739,000
Cost of goods sold 1,742,000 2,806,000
- -------------------------------------------------------------------------------------------------------
Gross profit 289,000 933,000
Selling, general and administrative 499,000 692,000
Engineering and product development 182,000 306,000
- -------------------------------------------------------------------------------------------------------
Income (loss) from operations (392,000) (65,000)
Other income (expense):
Interest (expense), net (509,000) (581,000)
Other income, net - 35,000
- -------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before provision for income taxes (901,000) (611,000)
Provision for income taxes - -
- -------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (901,000) (611,000)
Discontinued Operations:
Estimated gain on disposal - 274,000
- -------------------------------------------------------------------------------------------------------
Net income (loss) $ (901,000) $ (337,000)
=======================================================================================================
Earnings (loss) per common share - basic:
Continuing operations $ (0.08) $ (0.06)
Discontinued operations - 0.03
- -------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ (0.08) $ (0.03)
=======================================================================================================
Earnings (loss) per common share - assuming dilution:
Continuing operations $ (0.08) $ (0.06)
Discontinued operations - 0.03
- -------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ (0.08) $ (0.03)
=======================================================================================================
4
MELTRONIX, INC.
(Formerly Known as Microelectronic Packaging, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Nine Months Ended September 30,
---------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------
(Restated-Note 2)
Net sales $ 5,955,000 $ 16,898,000
Cost of goods sold 5,253,000 12,746,000
- --------------------------------------------------------------------------------------------------------
Gross profit 702,000 4,152,000
Selling, general and administrative 1,546,000 2,402,000
Engineering and product development 552,000 898,000
- --------------------------------------------------------------------------------------------------------
Income (loss) from operations (1,396,000) 852,000
Other income (expense):
Interest (expense), net (1,522,000) (1,739,000)
Other income, net 91,000 85,000
- --------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before provision for income taxes (2,827,000) (802,000)
Provision for income taxes - (18,000)
- --------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (2,827,000) (820,000)
Discontinued Operations:
Estimated gain on disposal - 10,742,000
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ (2,827,000) $ 9,922,000
========================================================================================================
Earnings (loss) per common share - basic:
Continuing operations $ (0.26) $ (0.08)
Discontinued operations - 0.99
- --------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ (0.26) $ 0.91
========================================================================================================
Earnings (loss) per common share - assuming dilution:
Continuing operations $ (0.26) $ (0.07)
Discontinued operations - 0.91
- --------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ (0.26) $ 0.84
========================================================================================================
5
MELTRONIX, INC.
(Formerly Known as Microelectronic Packaging, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended September 30,
--------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 14,000 $ 319,000
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (85,000) (1,086,000)
Proceeds from the sale of fixed assets -- 9,000
- ----------------------------------------------------------------------------------------------------
Net cash used by investing activities (85,000) (1,077,000)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on long-term debt
And promissory notes (216,000) (22,000)
- ----------------------------------------------------------------------------------------------------
Net cash used by financing activities (216,000) (22,000)
- ----------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (287,000) (780,000)
CASH AT BEGINNING OF PERIOD 469,000 1,296,000
- ----------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 182,000 $ 516,000
====================================================================================================
6
MELTRONIX, INC.
(Formerly Known As Microelectronic Packaging, Inc.)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY (DEFICIT)
(unaudited)
Common Stock Accumulated
--------------------------------------
Shares Amount Deficit Total
---------------- ----------------- ------------------- --------------------
Balance at January 1, 10,856,890 $40,143,000 $(65,335,000) $(25,192,000)
1999
Non-employee -- --
stock-based 34,000 34,000
Compensation
Net (loss) -- -- (2,827,000) (2,827,000)
- ---------------------------------------------------------------------------------------------------------------
Balance at September 10,856,890 $40,177,000 $(68,162,000) $(27,985,000)
30, 1999
===============================================================================================================
7
1. QUARTERLY FINANCIAL STATEMENTS
Meltronix, Inc. serves the Advanced Electronic Manufacturing Services (AEMS)
marketplace by providing design, volume manufacturing, and testing
capabilities to high growth industries including internet equipment,
wireless/telecommunication, broadband communication and other electronic
systems and integrated circuits (ICs) manufacturers. Headquartered in San
Diego, Calif., with on-site manufacturing facilities, the company develops,
manufactures, and sells OEM high-density microelectronic assemblies and
services. The Company provides value added solutions to customer and market
requirements by using a combination of high frequency analog, mixed-signal
and high bandwidth digital assembly and design expertise. Meltronix believes
that its advanced assembly experience enables the Company to offer high-
performance, high-speed solutions optimized for specific applications and
customer requirements. The Company further believes that its services
provide significant physical size, thermal, cost, and power advantages for
system OEMs seeking to outsource manufacturing to eliminate the need for
capital investment and to accelerate time-to-market. The Company also
leverages its technology to provide OEM solutions to medical, automated test
equipment (ATE), high-speed computing and military markets. Effective
October 15, 1999, the Company changed its name from Microelectronic
Packaging, Inc.
The Company has increased its backlog by 73% and its customer base by 280% as
of September 30, 1999 compared to September 30, 1998. The Company views the
number of new customers and the increasing backlog as positive indicators
that the Company has reduced its dependence on its single largest customer
and is reducing a downward trend in backlog that occurred during the same
period in 1998. The Company also believes that the increase in backlog is
due to improved relations with existing customers, plus new business from new
customers as a result of both an overall improvement of business conditions
in the semiconductor marketplace and positive results from a new sales and
marketing focus on higher growth markets.
The accompanying condensed consolidated financial statements and related
notes as of September 30, 1999 and for the three and nine month periods ended
September 30, 1999 and 1998 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 periods. Certain prior year
amounts have been reclassified to conform to the current year presentation.
The results of operations for the three and nine month periods ended
September 30, 1999 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, set forth
for the year ended December 31, 1998 in the Company's Annual Report on Form
10-K/A. Copies are available from the Chief Financial Officer of the Company
at 9577 Chesapeake Drive, San Diego, California 92123.
8
2. RESTATEMENT OF ACTIVITIES OF DISCONTINUED OPERATIONS
All accrued interest expense associated with the Company's Subsidiary
Guarantee Obligations (as that term is defined in Note 6 hereof),
approximately $28.6M of debt and accrued interest at September 30, 1999, has
been eliminated as of October 15, 1999 as a result of the Company's
conversion of the debt obligations represented by the Subsidiary Creditor
Obligations (as that term is defined in Note 6 hereof), including all
interest accrued with respect thereto, into shares of the Company's Series A
Convertible Preferred Stock ("Series A Preferred Stock"). See further
discussion in Note 6 hereof.
In August 1999, prior to the conversion of the Subsidiary Creditor
Obligations into Series A Preferred Stock, it was determined that the
$10,226,000 benefit arising from the 1998 deconsolidation of the Company's
discontinued Singapore subsidiaries should be accounted for as a gain rather
than as an improvement/decrease of the Company's accumulated deficit, and the
1997 provision for interest of $3,500,000 accrued with respect to the
Subsidiary Creditor Obligations should be accrued over the period of the debt
as interest expense. Such interest is now reflected as a component of income
(loss) from continuing operations. It was also determined that the recording
of certain items as other income at interim periods in 1998 should be
accounted for as gain (loss) on disposal of discontinued operations.
The accompanying condensed consolidated statements of operations for the
three and nine months ended September 30, 1998 have been restated to reflect
(a) deconsolidation as a gain on disposal of discontinued operations
($10,226,000 for nine months ended September 30, 1998); (b) interest on the
Subsidiary Creditor Obligations as interest expense ($576,000 and $1,728,000
for the three and nine months ended September 30, 1998, respectively); (c)
amortization of deferred revenue as gain on disposal of discontinued
operations ($22,000 and $66,000 for the three and nine months ended September
30, 1998, respectively); and (d) collection of an insurance recovery as gain
on disposal of discontinued operations ($252,000 and $449,000 for the three
and nine months ended September 30, 1998, respectively). The effect of these
changes was to decrease income from continuing operations by $850,000 and
$2,243,000 for the three and nine months ended September 30, 1998,
respectively. Net income (loss), which includes discontinued operations,
increased (decreased) by ($576,000) and $8,499,000 for the three and nine
months ended September 30, 1998, respectively. This restatement had no
impact on the reported net income (loss) from operations.
3. INVENTORIES
Inventories consist of the following:
September 30, 1999 December 31, 1998
------------------ -----------------
(UNAUDITED)
Raw materials................................ $1,553,000 $2,203,000
Work-in-progress............................. 1,015,000 1,531,000
Finished goods............................... - 38,000
Obsolescence reserve......................... (727,000) (699,000)
------------------------- -------------------------
$1,841,000 $3,073,000
========================= =========================
9
A substantial portion of the Company's September 30, 1999 inventory,
approximately $1.4 million, was purchased for the Company's largest customer,
Schlumberger. Under the terms of an agreement dated January 15, 1998 between
the Company and Schlumberger ("Schlumberger Agreement"), the Company has been
required, and continues to maintain, certain inventory levels. The
Schlumberger Agreement stipulates that the cost of such inventory will be
paid to the Company in the event Schlumberger terminates its business
relationship with the Company ("Inventory Reimbursement Obligation"). Terms
of the Schlumberger Agreement have been used in determining the carrying
value of the Company's September 30, 1999 inventory. The Schlumberger
Agreement expires in October, 2000. In the event the Company were to become
the subject of a bankruptcy proceeding, and such bankruptcy proceeding were
not dismissed or stayed within thirty days after it commenced, the Inventory
Reimbursement Obligation may not be enforceable against Schlumberger.
4. EFFECTS OF INCOME TAXES
The Company has not recorded provisions for any income taxes for the three
and nine months ended September 30, 1999, 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 subsequent periods will be subject to annual
limitations.
5. COMMITMENTS AND CONTINGENCIES
The Company entered into an operating lease for manufacturing facilities and
corporate offices commencing September 1, 1997, and extending to October 31,
2002. Minimum monthly rental payments of $16,000 began on November 1, 1997,
with scheduled annual increases of 6% to 7% per year beginning November 1,
1998.
The Company also entered into an agreement in 1998 whereby the Company
obtained the use of a piece of test equipment and technical support for such
equipment from a supplier. The agreement calls for minimum annual payments
of $360,000 through 2007, plus the possible acceleration of payments if the
Company obtains new customers with projects that require the use of the
equipment and technical support of the equipment supplier. As of September
30, 1999, the Company has accrued but not paid $82,500 of such minimum annual
payments
10
In 1999, the Company financed the acquisition of certain machinery and
equipment for a total obligation of $549,000. The amounts are payable over
twelve monthly installments of $46,000 each, ending in April and June 2000.
6. SUBSIDIARY CREDITOR OBLIGATIONS
As of October 15, 1999, a majority of the Company's shareholders approved the
conversion into 9,362,777 shares of Series A Preferred Stock, of all
obligations owed by the Company pursuant to all guarantees by the Company of
all debt obligations owed by the Company's Singapore subsidiaries to (a)
Development Bank of Singapore, Ltd.; (b) Transpac Capital Pte. Ltd., Transpac
Industrial Holdings Ltd., Regional Investment Company Ltd., and Natsteel
Equity III Pte. Ltd.; (c) NS Electronics Bangkok Ltd.; (d) Texas Instruments
Singapore Ltd.; (e) STMicroelectronics, Inc. (the creditor position of
STMicroelectronics, Inc., in its entirety, was purchased by and assigned to
FI Financial, LLC) (f) Motorola, Inc. (g) Samsung Corning Co, Ltd.; and (h)
Orix Leasing Singapore Ltd. ("Singapore Creditors"). The Company had entered
into written guarantees of the Singapore Creditor Obligations. Because the
Company's Singapore subsidiaries ceased operations in 1997 and were unable to
pay the Subsidiary Creditor Obligations, the Company became obligated to do
so. The Company's obligation to pay the Singapore Creditor Obligations
pursuant to the Company's guarantees thereof is referred to herein as the
"Company's Subsidiary Guarantee Obligations." The conversion of the
Company's Subsidiary Guarantee Obligations into 9,362,777 shares of Series A
Preferred Stock is referred to herein as the "Debt to Equity Conversion". As
of September 30, 1999, by virtue of the Company's Subsidiary Guarantee
Obligations, the Company was indebted to the Singapore Subsidiary Creditors
in the approximate amount of $28.6 million. The Debt to Equity Conversion,
became effective as of October 15, 1999, and as of that date, the entire
amount (approximately $28.6 million) of the Company's Subsidiary Guarantee
Obligations was eliminated. The result of the Debt to Equity Conversion can
be seen in the Pro Forma September 30, 1999 Balance Sheet included in the
Condensed Consolidated Balance Sheets, which shows that all guaranteed debt
and accrued interest pertaining to discontinued operations, which is
comprised of the Company's Subsidiary Guarantee Obligations in the
approximate amount of $28.6 million, has been completely eliminated.
Based on the current conversion rate, each share of Series A Preferred Stock
is convertible at the option of the holder thereof into two shares of the
Company's Common Stock. In other words, at the current conversion rate, the
9,362,777 shares of Series A Preferred Stock issued to the Singapore
Subsidiary Creditors is convertible into 18,725,554 shares of the Company's
Common Stock. Since the Singapore Creditors have voting rights equal to the
number of shares of Common Stock into which the Series A Preferred Stock is
convertible, which is 18,725,554 shares of Common Stock at the current
conversion rate, the Singapore Creditors are considered the beneficial owners
of 63.3% of the resulting total of 29,582,444 outstanding shares of Common
Stock of the Company. This percentage of Common Stock could enable the
Singapore Creditors (including FI Financial as the holder of a portion of the
creditor position of STMicroelectronics, Inc.) to collectively exercise
effective control over the business and affairs of the Company. As of October
30, 1999, the Company has no information which would lead it to believe that
the Singapore Creditors intend to act collectively on matters concerning the
business and affairs of the Company.
In addition, each share of Series A Preferred Stock has a 3.5% per annum
cumulative dividend, liquidation preferences, registration rights, and
certain other rights, preferences and privileges senior to the Company's
Common Stock, and voting rights equal to the Common Stock. In the event of
liquidation of the Company, each share of Preferred Stock is entitled to
receive $1.02 per share plus any declared but unpaid dividends before
distribution to any holder of Common Stock.
11
The unaudited Pro Forma September 30, 1999 balance sheet information has been
presented to reflect the Company's financial position, based on the
assumption that the Debt to Equity Conversion had become effective as of
September 30, 1999. The Company has recognized an extraordinary gain of
$18.8 million in October 1999 as a result of the debt conversion.
7. GOING CONCERN
The Company's accompanying financial statements have been prepared assuming
the Company, along with its only operating subsidiary, Meltronix Solutions,
Inc. (prior to November 5, 1999 known as CTM Electronics, Inc.) will continue
as a going concern. As a result of the Debt to Equity Conversion (as further
described in Note 6), as of October 15, 1999 the Company reduced its
accumulated deficit by $18.8 million and it further reduced its working
capital deficit by $28.1M. As of October 15, 1999, after considering the
elimination of the Company's Subsidiary Guaranty Obligations in the
approximate amount of $28.6 million, and the conversion thereof into
9,362,777 shares of Series A Preferred Stock, the Company has an accumulated
deficit of $49.4 million and a working capital deficiency of $1.9 million.
8. FORWARD LOOKING STATEMENTS
These Condensed Consolidated Financial Statements contain forward-looking
statements which involve substantial risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements.
9. SUBSEQUENT EVENTS
As previously mentioned in Note 6, as of October 15, 1999, the Company
obtained approval from a majority of the Company's shareholders to consummate
the Debt to Equity Conversion, which became effective as of that date. The
shareholders also approved the Company changing its name to Meltronix, Inc.
and also approved an increase in the number of shares of Common Stock
authorized for issuance under the Company's 1993 Stock Option/Stock Issuance
Plan, from 4,690,632 shares to 7,000,000 shares.
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve substantial risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in this section and elsewhere in this
Quarterly Report on Form 10-Q.
OVERVIEW
Meltronix, Inc. serves the Advanced Electronic Manufacturing Services (AEMS)
marketplace by providing design, volume manufacturing, and testing capabilities
to high growth industries including internet equipment,
wireless/telecommunication, broadband communication and other electronic systems
and integrated circuits (ICs) manufacturers. Headquartered in San Diego,
California, with on-site manufacturing facilities, the Company develops,
manufactures, and sells OEM high-density microelectronic assemblies and
services. The Company provides value added solutions to customer and market
requirements by using a combination of high frequency analog, mixed-signal and
high bandwidth digital assembly and design expertise. The Company believes its
advanced assembly expertise and experience enables the Company to offer high-
performance, high-speed solutions optimized for specific applications and
customer requirements. The Company further believes its services provide
significant physical size, thermal, cost, and power advantages for system OEMs
seeking to outsource manufacturing to eliminate the need for capital investment
and to accelerate time-to-market. The Company also leverages its technology to
provide OEM solutions to medical, automated test equipment (ATE), high-speed
computing and military markets.
The Company has increased its backlog by 73% and its customer base by 280% as of
September 30, 1999 compared to September 30, 1998. The Company views the number
of new customers and the increasing backlog as positive indicators that the
Company is reducing its dependence on Schlumberger, the Company's largest
customer and has reversed a downward trend in backlog that occurred during the
same period in 1998. The Company also believes the increase in backlog is due
to improved relations with existing customers, plus new business from new
customers as a result of both an overall improvement of business conditions in
the semiconductor marketplace and positive results from a new sales and
marketing focus on higher growth markets.
RESULTS OF OPERATIONS
NET SALES
For the three months ended September 30, 1999, net sales were $2,031,000 as
compared to net sales of $3,739,000 for the third quarter of 1998, resulting in
decreased sales of $1,708,000 or 46%. The decrease in net sales is primarily
the result of decreased shipments to the Company's largest customer,
Schlumberger. Sales to this customer comprised 78% and 86% of total net sales
for the third quarters of 1999 and 1998, respectively. Sales to this customer
declined from
13
$3,223,000 for the third quarter of 1998 to $1,591,000 for the third quarter of
1999, a decrease of $1,632,000 or 51%. Units shipped to this customer declined
by 39%, reflecting lower demand from this customer in the third quarter of 1999
as compared to the third quarter of 1998. Revenue in terms of dollars declined
by more than revenue in terms of units because of a significant shift in product
mix in 1999. Approximately 35% of sales to Schlumberger in 1999 were comprised
of the repair and upgrade of multi-chip modules (MCMs). This repair activity
generates only approximately one-fourth of the dollar revenue as compared to the
dollar revenue of newly-built MCMs, thereby causing a decline in revenue dollars
greater than the decline in revenue units. By comparison, such repair activities
comprised only approximately 2% of sales for the third quarter of 1998.
For the nine months ended September 30, 1999, net sales were $5,955,000,
representing a decrease of $10,943,000 or 65% from net sales of $16,898,000 for
the corresponding period of 1998. The decrease in net sales is primarily the
result of decreased shipments to the Company's largest customer, Schlumberger.
Sales to this one customer comprised 85% and 87% of total net sales for the nine
months periods ended September 30, 1999 and 1998, respectively. The dollar
value of shipments to Schlumberger declined by 66% for the nine months period
ended September 30, 1999 as compared to the same period in 1998. Unit shipments
to that same customer declined by 41% over the same comparative periods.
Approximately 35% of sales to Schlumberger in the nine months ended September
30, 1999 were comprised of the repair and upgrade of MCMs, as compared to
approximately 5% in the nine months ended September 30, 1998. This repair
activity caused the decline in revenue dollars to be greater than the decline in
revenue units as described above.
CUSTOMER BACKLOG
The Company's backlog increased by 73% as of September 30, 1999 compared to the
same date in 1998, increasing from $2,530,000 to $4,388,000. During the three
month period ending September 30, 1999 the Company experienced an increase in
backlog from $4,293,000 to $4,388,000 which represents an increase of 2%
compared to a decrease of 44% (from $4,488,000 to $2,530,000) for the same three
month period in 1998.
The number of customers contributing to revenue included in the backlog as of
September 30, 1999 increased by 280% compared to the same date in 1998
increasing from a total of 5 to a total of 19. An additional three customers
(for a total of 22) had booked business but no sales had occurred as of the end
of the third quarter of 1999.
COST OF GOODS SOLD
For the three months ended September 30, 1999, the cost of goods sold was
$1,742,000 as compared to $2,806,000 for the third quarter of 1998, a decrease
of 1,064,000 or 38%. The decrease in cost of goods sold is partially due to a
13% decline in total MCM units shipped from 1998 to 1999. The decrease in units
shipped was exacerbated by a 43% decrease in the average selling price of a unit
shipped in 1999 as compared to the corresponding quarter of 1998. The primary
reason for the decrease in average cost per unit sold results from the change in
product mix due to the repair and upgrade activities described above.
14
For the nine months ended September 30, 1999, the cost of goods sold was
$5,253,000, representing a decrease of $7,493,000 or 59% over cost of goods sold
of $12,746,000 for the corresponding period of 1998. The decrease in cost of
goods sold is partially due to a 33% decline in MCM units shipped from 1998 to
1999. The decrease in units shipped was exacerbated by an approximately 49%
decrease in the average selling price of a unit shipped in 1999 as compared to
the corresponding quarter of 1998. The primary reason for the decrease in
average cost per unit sold results from the change in product mix due to the
repair and upgrade activities described above.
GROSS PROFIT
Gross profit was $289,000 (14% of net sales) for the third quarter of 1999 as
compared to $933,000 (25% of net sales) for the third quarter of 1998. The
decrease in gross profit is attributable to the corresponding decrease in net
sales. The decrease in gross profit as a percentage of net sales results from
the change in product mix, as discussed above, as well as from the absorption of
fixed manufacturing costs over lower sales revenue for the 1999 period as
compared to the 1998 period.
Gross profit was $702,000 (12% of net sales) for the nine months ended September
30, 1999 as compared to $4,152,000 (25% of net sales) for the nine months ended
September 30, 1998. The decrease in gross profit as a percentage of net sales is
the result of the change in product mix, as discussed above, as well as the
effect of the absorption of fixed manufacturing costs over lower sales revenue
for the 1999 period as compared to the 1998 period.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $499,000 for the third quarter
of 1999, representing a decrease of $193,000 or 28% from the third quarter of
1998. Selling, general and administrative expenses were $1,546,000 for the nine
months ended September 30, 1999, representing a decrease of $856,000 or 36% from
the comparative period of 1998. The decreases result primarily from reductions
of consulting fees which had been incurred by the Company in 1998, as well as
reductions in staffing commensurate with the lower sales volume activity in
1999.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were $182,000 for the third quarter
of 1999 and $552,000 for the nine months ended September 30, 1999, representing
decreases of $124,000 or 41% and $346,000 or 39% from the corresponding periods
of 1998, respectively. The decreases primarily result from decreased use of
outside consultants in 1999 as compared to 1998.
INTEREST EXPENSE
As indicated in Note 2 to the Condensed Consolidated Financial Statements, all
interest expense associated with the Company's Subsidiary Guarantee Obligations
(approximately $28.6 million of debt and accrued interest as of September 30,
1999), has been eliminated as of
15
October 15, 1999 as a result of the Debt to Equity Conversion. See further
discussion in Note 6.
Interest expense was $509,000 ($502,000 of which related to the Company's
Subsidiary Guarantee Obligations that have been eliminated) for the third
quarter of 1999, representing a decrease of $72,000 from the corresponding
quarter of 1998. Interest expense was $1,522,000 for the nine months ended
September 30, 1999, representing a decrease of $217,000 from the same period of
1998. The majority of the interest expense recorded for all periods presented
is interest accrued on the Company's Subsidiary Guarantee Obligations, all of
which has now been eliminated by virtue of the Debt to Equity Conversion. The
amount of interest recorded on the Guaranty Obligations declined from the 1998
periods to the corresponding 1999 periods. One portion of the Guaranty
Obligations, due to Development Bank of Singapore (DBS), declined in 1998 due to
a change in estimate and the sale of property held as security by DBS and the
corresponding reduction in the amount of debt due to DBS. This debt reduction
resulted in a lesser amount of interest accrued in 1999 as compared to 1998.
OTHER INCOME
Other income was $0 for the third quarter of 1999, as compared to $35,000 for
the third quarter of 1998. Other income was $91,000 for the nine months ended
September 30, 1999 as compared to $85,000 for the same period of 1998. Other
income for 1999 is primarily comprised of the recovery of an asset written off
in 1997.
EFFECTS OF INCOME TAXES
The Company has not recorded provisions for any income taxes for the three and
nine months ended September 30, 1999, because 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 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.
DISCONTINUED OPERATIONS
For the nine month period ended September 30, 1998, the Company recorded a gain
of $10.2 million to reduce the Current Liabilities of Discontinued Operations,
net and improve/decrease the accumulated deficit by the same amount. This gain
resulted from the Company's decision to not consolidate the assets and
liabilities of the Company's operations which were not guaranteed by the
Company. The discontinued operations are MPM, MPS, MPC and Furnace Tech.
In addition to the $10.2 million gain referred to above, the three and nine
month periods ended September 30, 1998 included other results from the Company's
discontinued Singapore operations, which activities did not occur in 1999. In
1998, the Company also recorded $449,000 relating to the partial settlement of
an insurance claim for a fire at the Company's MPC
16
facility in April 1997. The 1998 amount also includes $66,000 relating to the
amortization of deferred revenue from the Company's MPS operation in Singapore.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Company's Debt to Equity Conversion as further described in
Note 6, effective as of October 15, 1999 the Company's working capital
deficiency has been reduced from approximately $30 million to $1.9 million, and
its accumulated deficit has been reduced from approximately $68.2 million to
$49.4 million.
During the nine months ended September 30, 1999, operating activities of
continuing operations used $287,000. The principal source of the Company's cash
flow during this period was principally the liquidation of inventory. Investing
activities, consisting principally of the acquisition of fixed assets of
continuing operations, used $85,000. At September 30, 1999, the Company had
outstanding approximately $28.6 million of principal and accrued interest
pursuant to the Company's Subsidiary Guarantee Obligations, however those
obligations were eliminated effective as of October 15, 1999.
The Company's sources of available liquidity at September 30, 1999 consisted of
inventories of $1,841,000, trade accounts receivable of $1,453,000 and its cash
balance of $182,000. The Company has no borrowing arrangements available to it
at the present time.
FUTURE OPERATING RESULTS
Status as a Going Concern. The Company currently anticipates that cash on hand
and anticipated cash flow from operations may be adequate to fund its operations
in the ordinary course throughout 1999 and 2000. The Company will consider
obtaining outside debt or equity financing if such funds are needed to finance
future growth. However, there is no assurance the Company will be in a position
to obtain such funds if they are required. If additional funds are required but
do not become available to the Company, any significant increase in planned
capital expenditures or other costs or any decrease in or elimination of
anticipated sources of revenue could cause the Company to restrict its business
and product development efforts.
The Company's independent certified public accountants included an explanatory
paragraph in their audit report with respect to the Company's 1998 consolidated
financial statements related to a substantial doubt with respect to the
Company's ability to continue as a going concern, due primarily to the risks
created by the Company's Subsidiary Guarantee Obligations. As has been
previously explained, the Company's Subsidiary Guarantee Obligations were
completely eliminated as of October 15, 1999.
Reliance on Schlumberger. Sales to one customer, Schlumberger, accounted for
78% of the Company's net sales in the third quarter of 1999 compared to 86% for
the third quarter of 1998 and is expected to continue to account for most of the
Company's net sales in 1999. Under the Schlumberger Agreement, the Company is
obligated to provide Schlumberger's requirements for MCM products. The Company
has significantly expanded the number of customers it now
17
serves but given the Company's anticipated continued reliance on its MCM
business as a large percentage of overall net sales for the balance of 1999, the
failure to meet Schlumberger's requirements will materially adversely affect the
Company's ability to continue as a going concern until the revenue from new
customers reduces the current dependence on Schlumberger. Under the terms of the
Schlumberger Agreement, Schlumberger is entitled to request repricing of the
Company's products. Schlumberger has requested repricing on several occasions in
the past. Such repricing in the future may result in the Company being unable to
produce the products made for Schlumberger with an adequate operating profit.
The failure to satisfy the requirements of the Schlumberger Agreement, or the
failure of the Company to achieve an operating profit under such agreement,
would have a material adverse impact on the Company's business, financial
condition, and results of operation.
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in less than one year,
computer systems and/or software used by many companies may need to be upgraded
to comply with such "Year 2000" requirements. Significant uncertainty exists in
the software industry and in other industries concerning the potential effects
associated with such compliance. Although the Company currently offers products
that are designed to be Year 2000 compliant, there can be no assurance that the
Company's products and the software products used by the Company contain all
necessary date code changes. As of September 30, 1999, the Company has
completed an analysis of its readiness for compliance with the Year 2000 change.
Its assessment of its manufacturing systems and company products reveals that no
known Year 2000 issues currently exist either in the products, their raw
materials, or their relationship as components to larger systems produced by its
customers; its financial systems software has been upgraded to a newer
replacement system, and which system is Year 2000 compliant; documentation
systems are Year 2000 compliant; and the majority of the Company's computing
hardware systems have been upgraded to be Year 2000 compliant. The Company's
costs to become Year 2000 compliant as of September30, 1999 have been $235,000
for computer software and $48,000 for computer hardware.
The Company has completed its analysis of its readiness for compliance with the
Year 2000 change. Based upon the analysis described above, the Company believes
its exposure to Year 2000 risks is limited because the majority of the Company's
recordkeeping systems are new and compliant and have been installed within the
last two years. The Company utilizes no custom-programmed "legacy" software or
hardware systems known to need Year 2000 upgrading or conversion. The Company
believes it is compliant with its Year 2000 issues. However, there can be no
assurance that conditions or events may occur during the remainder of 1999 which
will have an adverse impact on the Company's readiness for compliance with the
Year 2000 change. In addition, the Company cannot be certain that its
suppliers, service providers and customers will be Year 2000 compliant. The
failure of these companies to be fully compliant could create critical cash
shortages to the Company due to the inability of customers to send payments to
the Company. In addition, any product shortages from suppliers, or service
shutdowns from the Company's utility or communications providers could
potentially shut down the Company's manufacturing operations, thereby causing a
material adverse impact on the Company's operations and liquidity.
18
The Company believes that the purchasing patterns of customers and potential
customers and the performance of vendors may be affected by Year 2000 issues in
a variety of ways. Many companies are expending significant resources to
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase products such as
those offered by the Company or the inability to render services or provide
supplies to the Company. Year 2000 issues may cause other companies to
accelerate purchases, thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for software products, and disruption of
supply patterns. Additionally, Year 2000 issues could cause a significant
number of companies, including current Company customers and vendors, to spend
significant resources upgrading their internal systems, and as a result consider
switching to other systems or suppliers. Any of the foregoing could result in a
material adverse effect on the Company's business, operating results and
financial condition.
ITEM 3 - QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company has no derivative financial instruments.
The Company has outstanding indebtedness at September 30, 1999 to Development
Bank of Singapore, Ltd. denominated in Singapore dollars of approximately
Singapore $737,000 (U.S. equivalent $445,000). All of the Company's other
indebtedness is denominated in U.S. dollars, and all other Singapore-based
assets have been liquidated by the receiver of MPM or MPS and used to retire
outstanding indebtedness. Accordingly, the Company believes its exposure to
foreign currency rate movements is limited. The outstanding indebtedness
denominated in Singapore dollars was cancelled by the holder of the debt on
October 15, 1999, in exchange for the issuance of shares of the Company's Series
A Preferred Stock.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective October 15, 1999, the Company issued 9,362,777 shares of Series
A Preferred Stock to the Singapore Subsidiary Creditors in exchange for
the cancellation of approximately $28.6 million of outstanding debt
related to the Company's discontinued operations in Singapore, referred to
herein as the Company's Subsidiary Guarantee Obligations. The Company
relied upon the exemptions provided by Section 4(2) of the Securities Act
and Regulation D and Rule 701 for this transaction. Standard legends were
placed on the Preferred Stock certificates. Each share of Series A
Preferred Stock is currently convertible into two shares of the Company's
Common Stock at any time at
19
the option of the holder. The holder of each share of Series A Preferred
Stock has the right to cast one vote for each share of Common Stock into
which the Series A Preferred Stock could be converted.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on August 18,
1999. The following items were voted upon by the shareholders with all
items being approved.
Votes
Against or Votes
Matter Submitted to Shareholders Votes For Withheld Abstained
- -----------------------------------------------------------------------------------------------------------------------------
(1) Election of the following persons as Directors to hold
office until the next Annual Meeting or until their
successors are elected and qualified:
Andrew K. Wrobel 8,221,058 71,295
Anthony J. A. Bryan 8,221,674 70,679
Frank L. Howland 8,221,674 70,679
Wong Lin Hong 8,221,674 70,679
Waldemar Heeb 8,221,058 71,295
James T. Waring, Esq. 8,221,674 70,679
(2) Ratification of BDO Seidman, LLP as the Company's 8,327,353 18,296 11,900
independent accountants for the fiscal year ending
December 31, 1999.
The following items were submitted to Shareholders of record on August 31,
1999 for their approval, pursuant to a written consent solicitation
approved by the Board of Directors of the Company, which was mailed to
Shareholders on or about September 21, 1999. No meeting of Shareholders
was held. All of the items subject to the written consent were approved
by the Shareholders as of October 15, 1999.
Consents Against
or Withheld
Matter Submitted to Shareholders Consents For Abstained
- -------------------------------------------------------------------------------------------------------------------------
(1) Conversion of $28.06 million in debt in Series A
Convertible Preferred Stock of the Company and
amendment of creditor warrant. 5,671,055 63,636 8,100
(2) Issuance of Series A Convertible Preferred Stock to
11 employees, officers, directors and third parties in
exchange for their payment of a creditor claim. 5,573,630 150,036 19,125
(3) Amendments to the Company's 1993 Stock Option/Stock
Issuance Plan. 5,441,885 283,692 17,214
20
(4) Grant of options to purchase 3,721,827 shares to
Company employees, officers and directors pursuant to
1993 Stock Option/Stock Issuance Plan. 5,448,035 265,556 29,200
(5) Certificate of Amendment of the Amended and Restated
Articles of Incorporation to authorize the issuance of
the Series A Convertible Preferred Stock to the
creditors, employees, officers and directors. 5,644,955 78,636 19,200
(6) Amendment to the Amended and Restated Articles of
Incorporation to change the Company's name to
Meltronix, Inc. 5,638,305 95,872 8,614
ITEM 5. OTHER INFORMATION
As of October 15, 1999, a majority of the Company's shareholders approved
the conversion into 9,362,777 shares of Series A Preferred Stock, of all
obligations owed by the Company pursuant to all guarantees by the Company
of all debt obligations owed by the Company's Singapore subsidiaries to
(a) Development Bank of Singapore, Ltd.; (b) Transpac Capital Pte. Ltd.,
Transpac Industrial Holdings Ltd., Regional Investment Company Ltd., and
Natsteel Equity III Pte. Ltd.; (c) NS Electronics Bangkok Ltd.; (d) Texas
Instruments Singapore Ltd.; (e) STMicroelectronics, Inc. (the creditor
position of STMicroelectronics, Inc., in its entirety, was purchased by
and assigned to FI Financial, LLC) (f) Motorola, Inc. (g) Samsung Corning
Co, Ltd.; and (h) Orix Leasing Singapore Ltd. ("Singapore Creditors"). The
Company had entered into written guarantees of the Singapore Creditor
Obligations. Because the Company's Singapore subsidiaries ceased
operations in 1997 and were unable to pay the Subsidiary Creditor
Obligations, the Company became obligated to do so. The Company's
obligation to pay the Singapore Creditor Obligations pursuant to the
Company's guarantees thereof is referred to herein as the "Company's
Subsidiary Guarantee Obligations." The conversion of the Company's
Subsidiary Guarantee Obligations into 9,362,777 shares of Series A
Preferred Stock is referred to herein as the "Debt to Equity Conversion".
As of September 30, 1999, by virtue of the Company's Subsidiary Guarantee
Obligations, the Company was indebted to the Singapore Subsidiary
Creditors in the approximate amount of $28.6 million. The Debt to Equity
Conversion became effective as of October 15, 1999, and as of that date,
the entire amount (approximately $28.6 million) of the Company's
Subsidiary Guarantee Obligations was eliminated. The result of the Debt to
Equity Conversion can be seen in the Pro Forma September 30, 1999 Balance
Sheet included in the Condensed Consolidated Balance Sheets, which shows
that all guaranteed debt and accrued interest pertaining to discontinued
operations, which is comprised of the Company's Subsidiary Guarantee
Obligations in the approximate amount of $28.6 million, has been
completely eliminated.
Based on the current conversion rate, each share of Series A Preferred
Stock is convertible at the option of the holder thereof into two shares
of the Company's Common Stock. In other words, at the current conversion
rate, the 9,362,777 shares of Series A Preferred Stock issued to the
Singapore Subsidiary Creditors is convertible into 18,725,554 shares of
the Company's Common Stock. Since the Singapore Creditors have voting
rights equal to the number of shares of Common Stock into which the Series
A Preferred Stock is convertible, which is 18,725,554 shares of Common
Stock at the current conversion rate, the Singapore Creditors are
considered the beneficial owners of 63.3% of the resulting total of
29,582,444 outstanding shares of Common Stock of the Company. This
percentage of Common Stock could enable the Singapore Creditors (including
FI Financial as the holder of a portion of the creditor position of
STMicroelectronics, Inc.) to collectively exercise effective control over
the business and affairs of the Company. As of October 30, 1999, the
Company has no information which would lead it to believe that the
Singapore Creditors intend to act collectively on matters concerning the
business and affairs of the Company.
In addition, each share of Series A Preferred Stock has a 3.5% per annum
cumulative dividend, liquidation preferences, registration rights, and
certain other rights, preferences and privileges senior to the Company's
Common Stock, and voting rights equal to the Common Stock. In the event of
liquidation of the Company, each share of Preferred Stock is entitled to
receive $1.02 per share plus any declared but unpaid dividends before
distribution to any holder of Common Stock.
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
----------- -----------
27.1 Financial Data Schedule
21
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: November 15, 1999 By: /s/ Denis J. Trafecanty
----------------- -----------------------
Denis J. Trafecanty
Senior Vice President,
Chief Financial Officer and Secretary
22
EXHIBIT INDEX
Number Description
- ------ -----------
27.1 Financial Data Schedule
23