10QSB 1 meltronix_10q-033102.txt ================================================================================ 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 -------------------------- COMMISSION FILE NUMBER 0-23562 -------------------------- 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 --------------------------- 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. ================================================================================ INDEX PAGE NO. ----- -------- 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 ---------------------------------------------------------------------------------------------------------------------- ASSETS (UNAUDITED) CURRENT ASSETS Accounts receivable, net $ 60,000 $ 152,000 Inventories 60,000 100,000 ---------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 120,000 252,000 Property, plant and equipment, net 211,000 278,000 ---------------------------------------------------------------------------------------------------------------------- $ 331,000 $ 530,000 ====================================================================================================================== 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 ---------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 8,700,000 8,268,000 Long-term debt, less current portion -- 261,000 ---------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 8,700,000 8,529,000 ---------------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------------- 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) ---------------------------------------------------------------------------------------------------------------------- Total shareholders' deficit (16,540,000) (16,170,000) ---------------------------------------------------------------------------------------------------------------------- $ 331,000 $ 530,000 ====================================================================================================================== See accompanying notes to condensed consolidated financial statements.
4 MELTRONIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended March 31, ---------------------------------------- 2002 2001 ----------------------------------------------------------------------------------------------------------------- Net sales $ 489,000 $ 885,000 Cost of goods sold 418,000 755,000 ----------------------------------------------------------------------------------------------------------------- Gross profit 71,000 130,000 Selling, general and administrative 309,000 584,000 Engineering and product development 78,000 198,000 ----------------------------------------------------------------------------------------------------------------- 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 -- ----------------------------------------------------------------------------------------------------------------- Loss from operations before provision for income taxes (594,000) (840,000) Provision for income taxes (1,000) -- ----------------------------------------------------------------------------------------------------------------- Net loss (595,000) (840,000) Dividends attributable to Series A Convertible Preferred Stock (50,000) (54,000) Reversal of dividends -- 110,000 ----------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------- NET CASH USED BY OPERATING ACTIVITIES: $ (205,000) $ (698,000) ---------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 205,000 698,000 ---------------------------------------------------------------------------------------------------------------- NET DECREASE IN CASH -- -- CASH AT BEGINNING OF PERIOD -- -- ---------------------------------------------------------------------------------------------------------------- ================================================================================================================ CASH AT END OF PERIOD $ -- $ -- ================================================================================================================ 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) ----------------------------------------------------------------------------------------------------------------------------- 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 ------------------------------------------------------------------------------------------------------------------------ (UNAUDITED) Accounts receivable consist of: Trade receivables......................................................... $ 75,000 $ 167,000 Allowance for doubtful accounts........................................... (15,000) (15,000) ---------------- ------------------ $ 60,000 $ 152,000 ================ ================== Inventories consist of: Raw materials............................................................. $ 70,000 $ 112,000 Obsolescence reserve...................................................... (10,000) (12,000) ---------------- ------------------ $ 60,000 $ 100,000 ======================================================================================================================== 11 MELTRONIX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, December 31, 2002 2001 ------------------------------------------------------------------------------------------------------------------------ (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 ---------------- ------------------ $ 1,367,000 $ 1,372,000 ========================================================================================================================
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 27 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