10-Q 1 meltronix_10q-033101.txt ================================================================================ 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 MARCH 31, 2001 ------------------- 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, 2001, there were outstanding 16,746,427 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 .......................... 3 Condensed Consolidated Statements of Operations ................ 4 Condensed Consolidated Statements of Cash Flows ................ 5 Condensed Consolidated Statement of Changes in Shareholders' Deficit ........................... 6 Notes to Condensed Consolidated Financial Statements ........... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk ..... 15 PART II OTHER INFORMATION Item 1. Legal Proceedings ............................................... 16 Item 2. Changes in Securities and Use of Proceeds ....................... 17 Item 3. Defaults upon Senior Securities ................................. 17 Item 4. Submission of Matters to a Vote of Security Holders ............. 17 Item 5. Other Information ............................................... 17 Item 6. Exhibits and Reports on Form 8-K ................................ 17 SIGNATURES ............................................................... 18 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS MELTRONIX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS

~~INDEX~~MARCH ~~PAGE~~31, ~~NO.~~December ~~-----~~31, ~~--------~~2001 ~~PART~~2000 I===================================================================================== ~~FINANCIAL~~ASSETS ~~INFORMATION~~(UNAUDITED) ~~Item~~CURRENT 1.ASSETS ~~Financial~~Accounts ~~Statements:~~receivable, ~~Condensed~~net ~~Consolidated~~$ ~~Balance~~613,000 ~~Sheets~~$ ~~....................................~~406,000 3Inventories ~~Condensed~~455,000 ~~Consolidated~~418,000 ~~Statements~~Other ofcurrent ~~Operations~~assets ~~..........................~~-- 422,000 ~~Condensed~~------------------------------------------------------------------------------------- ~~Consolidated~~TOTAL ~~Statements~~CURRENT ofASSETS ~~Cash~~1,068,000 ~~Flows~~846,000 ~~..........................~~Property, 5plant ~~Condensed~~and ~~Consolidated~~equipment, ~~Statement~~net of951,000 ~~Changes~~1,114,000 inOther ~~Shareholders'~~non-current ~~Deficit~~assets ~~.....................................~~18,000 618,000 ~~Notes~~------------------------------------------------------------------------------------- to$ ~~Condensed~~2,037,000 ~~Consolidated~~$ ~~Financial~~1,978,000 ~~Statements~~===================================================================================== ~~.....................~~LIABILITIES 7AND ~~Item 2. Management~~SHAREHOLDERS's ~~Discussion~~DEFICIT ~~and~~CURRENT ~~Analysis~~LIABILITIES ofCurrent ~~Financial~~portion ~~Condition and Results~~ of ~~Operations~~long-term ~~........................~~debt 9$ ~~Item~~530,000 3.$ ~~Quantitative~~573,000 ~~and~~Line ~~Qualitative~~of ~~Disclosures~~credit ~~About~~336,000 ~~Market~~626,000 ~~Risk~~Accounts ~~...............~~payable 132,798,000 ~~PART~~2,905,000 IIAccrued ~~OTHER~~liabilities ~~INFORMATION~~1,327,000 ~~Item~~ 1.,372,000 ~~Legal~~------------------------------------------------------------------------------------- ~~Proceedings~~TOTAL ~~.........................................................~~CURRENT 14LIABILITIES ~~Item~~4,991,000 2.5,476,000 ~~Changes~~Long-term indebt, ~~Securities~~less ~~and~~current ~~Use~~portion of1,392,000 ~~Proceeds~~524,000 ~~.................................~~------------------------------------------------------------------------------------- 15TOTAL ~~Item~~LIABILITIES 3.6,383,000 ~~Defaults~~6,000,000 ~~upon~~------------------------------------------------------------------------------------- ~~Senior~~COMMITMENTS ~~Securities~~AND ~~...........................................~~CONTINGENCIES 15SHAREHOLDERS' ~~Item~~DEFICIT 4.Series ~~Submission~~A ofConvertible ~~Matters~~Preferred tostock, ano ~~Vote~~par ofvalue ~~Security~~8,316,000 ~~Holders~~9,019,000 ~~.......................~~Common 15stock, ~~Item~~no 5.par ~~Other~~value ~~Information~~44,884,000 ~~.........................................................~~43,721,000 16Accumulated ~~Item~~deficit 6.(57,546,000) ~~Exhibits~~(56,762,000) ~~and~~------------------------------------------------------------------------------------- ~~Reports~~Total onshareholders' ~~Form~~deficit 8(4,346,000) (4,022,000) -K------------------------------------------------------------------------------------ ~~..........................................~~$ 162,037,000 ~~SIGNATURES~~$ ~~.....................................................................................~~1,978,000 17=====================================================================================

3 MELTRONIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

~~SEPTEMBER~~Three ~~30,~~months ~~December~~ended March 31, ~~2000 1999~~ ---------------------------- 2001 2000 ======================================================================================== Net sales $ 885,000 $ 3,351,000 Cost of goods sold 755,000 3,315,000 ---------------------------------------------------------------------------------------- ~~ASSETS~~Gross ~~Current~~profit ~~assets: Cash $ 326~~130,000 ~~$ 335~~36,000 ~~Accounts receivable~~Selling, ~~net~~general ~~1,501,000~~and ~~1,708,000~~administrative ~~Inventories 1~~584,~~890,~~000 2802,~~318,~~000 ~~Other~~Engineering ~~current~~and ~~assets~~product 17development 198,000 95359,000 ----------------------------------------------------------------------------------------~~-------------------------~~ ~~TOTAL~~Loss ~~CURRENT~~from ~~ASSETS~~operations 3(652,~~734,~~000) 4(1,~~456~~125,000) ~~Property,~~Other ~~plant~~expense: ~~and~~Interest ~~equipment,~~expense ~~net 1~~(40,~~418,~~000) 1(11,~~830,~~000) ~~Note~~Non-cash ~~receivable~~interest ~~10,000~~and --finance ~~Other~~expense ~~non-current~~(Note ~~assets~~6) 26(148,000) ~~63,000~~ -- ----------------------------------------------------------------------------------------~~-----------------------~~ $Loss ~~5,188,000~~from $operations ~~6,349,000~~before ~~=================================================================================================================~~provision ~~LIABILITIES~~for ~~AND~~income ~~SHAREHOLDERS'~~taxes ~~DEFICIT Current liabilities: Bank credit line $ 369~~(840,000) ~~$ -- Current portion of long-term debt 594~~(1,~~000 279~~136,000) ~~Accounts~~Provision ~~payable~~for ~~3,802,000~~income ~~2,935,000~~taxes ~~Accrued liabilities 1,160,000 869,000~~ -- -- ----------------------------------------------------------------------------------------~~---------------------~~ ~~TOTAL~~Net ~~CURRENT~~loss ~~LIABILITIES 5~~(840,~~925,~~000) 4(1,~~083~~136,000) ~~Long-term~~Dividends ~~payables~~attributable ~~76,000~~to ~~2,133,000 Long-term debt, less current portion 30,000 47,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' DEFICIT~~ Series A Convertible Preferred ~~stock,~~Stock ~~no par value 9~~(54,~~295,~~000) 9(84,~~295,~~000) ~~Common~~Reversal ~~stock,~~of nodividends ~~par~~(Note ~~value~~7) 42110,~~493,~~000 ~~40,269,000~~-- ~~Accumulated~~======================================================================================== ~~deficit~~Net ~~(52,631,000)~~loss ~~(49,478,000)~~available ~~-----------------------------------------------------------------------------------------------------------------~~to ~~Total~~common shareholders' ~~deficit~~$ (~~843~~784,000) ~~86,000 -----------------------------------------------------------------------------------------------------------------~~ $ 5(1,~~188~~220,000) ~~$ 6,349,000~~ ======================================================================================== BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.05) $ (0.11) ========================================================================================

4 MELTRONIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three months ended March 31, ----------------------- 2001 2000 ================================================================================ NET CASH USED BY OPERATING ACTIVITIES: $(698,000) $(370,000) -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of fixed assets -- (75,000) -------------------------------------------------------------------------------- Net cash used by investing activities -- (75,000) -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under debt agreements 825,000 250,000 Principal payments on long-term debt, line of credit and promissory notes (290,000) (183,000) Issuance of common stock, net 163,000 124,000 -------------------------------------------------------------------------------- Net cash provided by financing activities 698,000 191,000 -------------------------------------------------------------------------------- NET DECREASE IN CASH -- (254,000) CASH AT BEGINNING OF PERIOD -- 335,000 -------------------------------------------------------------------------------- CASH AT END OF PERIOD $ -- $ 81,000 ================================================================================ 5 MELTRONIX, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT (unaudited)

~~Three~~Preferred ~~months~~Stock ~~ended~~Common ~~September~~Stock ~~30,~~Accumulated ~~Nine~~Shares ~~months~~Amount ~~ended~~Shares ~~September~~Amount ~~30,~~Deficit ~~--------------------------------~~Total ~~-------------------------------~~==================================================================================================== ~~2000~~Balance ~~1999~~at ~~2000~~January ~~1999~~1, ~~-------------------------------------------------------------------------------------------------------------------------------~~2001 ~~Net~~9,085,023 ~~sales~~ $ 49,~~009~~019,000 13,845,184 $ 243,~~031~~721,000 $ 10(56,~~735~~762,000) $ 5(4,~~955~~022,000) ~~Cost~~Common ofstock ~~goods~~issued ~~sold~~-- ~~3,487,000~~-- 1,~~742~~418,~~000~~482 9313,~~612,~~000 5-- 313,~~253,~~000 Non-employee stock compensation -- -- --~~-------------------------------------------------------------------------------------------------------------------------~~ ~~Gross profit 522~~68,000 ~~289,000~~-- 168,~~123,~~000 ~~702,000~~Beneficial ~~Selling,~~conversion ~~general~~expense ~~and~~-- ~~administrative~~-- ~~878,000~~-- ~~499~~39,000 ~~2,727,000~~-- 139,~~546,~~000 ~~Engineering~~Conversion ~~and~~of ~~product~~debt ~~development~~-- ~~262,000~~-- ~~182~~6,000 ~~943~~2,000 ~~552,000~~ --~~------------------------------------------------------------------------------------------------------------------------------~~ ~~Loss from operations (618~~2,000) ~~(392,000)~~Series ~~(2,547,000)~~A ~~(1,396,000)~~Convertible ~~Other~~Preferred ~~income~~Stock ~~(expense):~~dividends ~~Interest~~-- ~~(expense),~~-- ~~net~~-- ~~(222,000)~~-- (~~509~~54,000) (~~358~~54,000) ~~(1,522,000)~~Reversal ~~Other~~of ~~income,~~dividends ~~net~~-- -- -- 3-- 110,000 91110,000 ~~--------------------------------------------------------------------------------------------------------------------------------~~Conversion ~~Loss~~of ~~from~~Series ~~operations~~A ~~before~~preferred ~~provision~~stock ~~for~~and ~~income~~accrued ~~taxes~~dividends to (~~840~~708,~~000~~753) (~~901~~703,000) (21,~~902~~476,761 741,000) (2-- 38,~~827,~~000) ~~Provision~~common ~~for~~stock ~~income~~Net ~~taxes~~(loss) - - - - -- --~~----------------------------------------------------------------------------------------------------------------------------~~ ~~Net loss~~ (840,000) (~~901~~840,000) ~~(2,902,000) (2,827,000) Dividends attributable to Series A Estimated gain on disposal convertible Preferred Stock 84,000~~ - ~~251,000~~ - ---------------------------------------------------------------------------------------------------------------------------------- ~~Net~~Balance ~~loss~~at ~~available~~March to31, ~~common~~2001 ~~shareholders~~8,376,270 $ ~~(924~~8,316,000) 16,746,427 $ ~~(901~~44,884,000) $ (357,~~153~~546,000) $ (24,~~827~~346,000) ================================================================================================================================ ~~BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.07) $ (0.08) $ (0.27) $ (0.26)~~ ====~~============================================================================================================================~~

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

Nine months ended September 30, --------------------------------------------- 2000 1999 ---------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: $ (1,708,000) $ 14,000 ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of fixed assets (98,000) (85,000) ---------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (98,000) (85,000) ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under debt agreements 1,119,000 -- Principal payments on long-term debt and promissory notes (258,000) (216,000) Proceeds from issuance of common stock, net 936,000 -- ---------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 1,797,000 (216,000) ---------------------------------------------------------------------------------------------------------------------- NET DECREASE IN CASH (9,000) (287,000) CASH AT BEGINNING OF PERIOD 335,000 469,000 ---------------------------------------------------------------------------------------------------------------------- CASH AT END OF PERIOD $ 326,000 $ 182,000 ======================================================================================================================

Preferred Stock Common Stock Accumulated Shares Amount Shares Amount Deficit Total ---------------------------------------------------------------------------------------------- Balance at January 1, 2000 9,362,777 $9,295,000 10,860,223 $40,269,000 $(49,478,000) $86,000 Common Stock Issued on Exercise of Stock Options -- -- 1,001,104 422,000 -- 422,000 Non-employee stock-based Compensation -- -- -- 535,000 -- 535,000 Debt Converted to Equity -- -- 542,109 753,000 -- 753,000 Private Placement -- -- 342,333 514,000 -- 514,000 Dividends on preferred stock (251,000) (251,000) Net (loss) -- -- -- -- (2,902,000) (2,902,000) ------------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 2000 9,362,777 $9,295,000 12,745,769 $42,493,000 $(52,631,000) $(843,000) ==============================================================================================================================

SEPTEMBER 30, 2000 December 31, 1999 ------------------ ------------------- Raw materials ................................. $ 1,187,000 $ 1,728,000 Work-in-progress .............................. 939,000 1,057,000 Obsolescence reserve .......................... (236,000) (467,000) ------------------ ------------------- $ 1,890,000 $ 2,318,000 ================== ===================

Total Shares For Withheld Authority Voted % Votes % Votes % Andrew K. Wrobel 15,804,129 52.2% 15,796,659 52.2% - 0.0% Abigail A. Barrow 15,804,129 52.2% 15,796,659 52.2% - 0.0% Anthony J. A. Bryan 15,804,129 52.2% 15,796,659 52.2% - 0.0% Frank Howland 15,804,129 52.2% 15,796,659 52.2% - 0.0%

Exhibit No. Description ----------- ----------- 27.1 Financial Data Schedule

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