-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QMB1usQiekMtw76tzAprGpF+1H2vjFJB4VVa0iEr33D7AHAJqvRQ4f6rWv3n1+zp O/bCFnFmJLGZxRbIcWGDVA== 0001017062-98-001143.txt : 19980518 0001017062-98-001143.hdr.sgml : 19980518 ACCESSION NUMBER: 0001017062-98-001143 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROELECTRONIC PACKAGING INC /CA/ CENTRAL INDEX KEY: 0000916232 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 943142624 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23562 FILM NUMBER: 98624350 BUSINESS ADDRESS: STREET 1: 9577 CHESAPEAKE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92123 BUSINESS PHONE: 6192927000 MAIL ADDRESS: STREET 1: 9577 CHESAPEAKE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92123 10-Q 1 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 3/31/98 ================================================================================ 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, 1998 -------------- Commission file number 0-23562 ------- MICROELECTRONIC PACKAGING, 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 (619) 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 May 13, 1998, there were outstanding 10,793,279 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........... 12 PART II OTHER INFORMATION Item 1. Legal Proceedings......................................... 26 Item 2. Changes in Securities and Use of Proceeds................. 26 Item 3. Defaults upon Senior Securities........................... 26 Item 4. Submission of Matters to a Vote of Security Holders....... 26 Item 5. Other Information......................................... 27 Item 6. Exhibits and Reports on Form 8-K.......................... 27 SIGNATURES............................................................. 28 EXHIBIT INDEX.......................................................... 29 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------ ASSETS (unaudited) Current assets: Cash $ 932,000 $ 1,296,000 Accounts receivable, net 3,699,000 2,504,000 Inventories 5,237,000 4,230,000 Other current assets 132,000 387,000 - ------------------------------------------------------------------------------------------------------- Total current assets 10,000,000 8,417,000 Property, plant and equipment, net 1,641,000 1,212,000 Other non-current assets 252,000 282,000 - ------------------------------------------------------------------------------------------------------- $ 11,893,000 $ 9,911,000 ======================================================================================================= LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Current portion of long-term debt $ 24,000 $ 22,000 Accounts payable 8,450,000 7,450,000 Accrued liabilities 1,812,000 1,711,000 Deferred revenue 201,000 265,000 Debt of discontinued operations, in default, due on demand 27,151,000 27,151,000 Current liabilities of discontinued operations, net 13,452,000 13,475,000 - ------------------------------------------------------------------------------------------------------- Total current liabilities 51,090,000 50,074,000 Long-term debt, less current portion 64,000 69,000 Commitments and Contingencies Shareholders' Deficit Common stock, no par value 40,033,000 40,016,000 Accumulated deficit (79,294,000) (80,248,000) - ------------------------------------------------------------------------------------------------------- Total shareholders' deficit (39,261,000) (40,232,000) - ------------------------------------------------------------------------------------------------------- $ 11,893,000 $ 9,911,000 =======================================================================================================
3 MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended March 31, ------------------------ 1998 1997 - ------------------------------------------------------------------------------ Net sales $ 7,334,000 $ 7,674,000 Cost of goods sold 5,381,000 6,790,000 - ------------------------------------------------------------------------------ Gross profit 1,953,000 884,000 Selling, general and administrative 776,000 1,264,000 Engineering and product development 272,000 108,000 - ------------------------------------------------------------------------------ Income (loss) from operations 905,000 (488,000) Other income (expense): Interest (expense), net (3,000) (24,000) Other income, net 70,000 169,000 - ------------------------------------------------------------------------------ Income (loss) from continuing operations before provision for income taxes 972,000 (343,000) Provision for income taxes (18,000) - - ------------------------------------------------------------------------------ Income (loss) from continuing operations 954,000 (343,000) Loss from discontinued operations - (876,000) - ------------------------------------------------------------------------------ Net income (loss) $ 954,000 $(1,219,000) ============================================================================== Earnings (loss) per common share: Continuing operations $ 0.09 $ (0.04) Discontinued operations - (0.09) - ------------------------------------------------------------------------------ Net income (loss) per common share $ 0.09 $ (0.13) ============================================================================== Earnings (loss) per common share - assuming dilution: Continuing operations $ 0.08 $ (0.04) Discontinued operations - (0.10) - ------------------------------------------------------------------------------ Net income (loss) per common share $ 0.08 $ (0.13) ==============================================================================
4 MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended March 31, ------------------------ 1998 1997 - ------------------------------------------------------------------------------------- Net cash provided (used) by operating activities of: Continuing operations $ 195,000 $ 2,750,000 Discontinued operations (23,000) 128,000 - ------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 172,000 2,878,000 - ------------------------------------------------------------------------------------- Cash flows from investing activities: Acquisition of fixed assets (546,000) (37,000) Proceeds from sale of fixed assets 13,000 25,000 - ------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (533,000) (12,000) - ------------------------------------------------------------------------------------- Cash flows from financing activities: Decrease in short-term notes payable Continuing operations - (2,310,000) Discontinued operations - (101,000) Borrowings under long-term debt and promissory notes Continuing operations - 34,000 Principal payments on long-term debt and promissory notes Continuing operations (3,000) (467,000) Discontinued operations - (27,000) - ------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (3,000) (2,871,000) - ------------------------------------------------------------------------------------- Net increase (decrease) in cash (364,000) (5,000) Cash at beginning of period 1,296,000 2,954,000 - ------------------------------------------------------------------------------------- Cash at end of period $ 932,000 $ 2,949,000 =====================================================================================
5 MICROELECTRONIC PACKAGING, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT (unaudited)
Common Stock ------------------------ Accumulated Shares Amount Deficit Total ----------- ----------- ------------ ------------ Balance at January 1, 1998 10,793,279 $40,016,000 $(80,248,000) $(40,232,000) Non-employee stock-based - 17,000 - 17,000 compensation Net income 954,000 954,000 - ------------------------------------------------------------------------------- Balance at March 31, 1998 10,793,279 $40,033,000 $(79,294,000) $(39,261,000) ===============================================================================
6 Microelectronic Packaging, Inc. Notes to Condensed Consolidated Financial Statements (unaudited) 1. Quarterly Financial Statements The accompanying condensed consolidated financial statements and related notes as of March 31, 1998 and for the three month periods ended March 31, 1998 and 1997 are unaudited but include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of financial position and results of operations of the Company for the interim periods. Certain prior year amounts have been reclassified to conform to the current year presentation. The results of operations for the three month period ended March 31, 1998 is 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, 1997 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. Copies are available from the Chief Financial Officer of the Company at 9577 Chesapeake Drive, San Diego, California 92123. 2. Inventories Inventories consist of the following:
March 31, 1998 December 31, 1997 -------------- ----------------- (Unaudited) Raw materials.......................... $3,416,000 $2,698,000 Work-in-progress....................... 2,020,000 1,654,000 Finished goods......................... 75,000 131,000 Obsolescence reserve................... (274,000) (244,000) ---------- ---------- $5,237,000 $4,230,000 ========== ==========
3. Effects of Income Taxes The Company believes that it has sufficient losses to offset any taxable income that will be generated in the current year. However, the Company's use of these losses may result in alternative minimum taxes for Federal income tax purposes. As a result, the Company has recorded a provision for income taxes for the three month period ended March 31, 1998 (for anticipated alternative minimum taxes). 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. 7 Notes to Condensed Consolidated Financial Statements (unaudited) ________________________________________________________________________________ 4. Net Income (Loss) Per Share
For the three months ended March 31, 1998 ----------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ----------- Income from continuing operations $ 954,000 Basic EPS Income available to common shareholders 954,000 10,793,279 $ 0.09 ====== Effect of dilutive securities: Stock options -- 1,740,282 Warrants -- -- ----------- ---------- Diluted EPS Income available to common shareholders + assumed conversions $ 954,000 12,533,561 $ 0.08 =========== ========== ======
Options to purchase 275,800 shares and warrants to purchase 1,227,693 shares of common stock at prices ranging from $0.63 to $6.50 were outstanding during the first quarter of 1998 but were not included in the computation of diluted EPS because the options' and warrants' exercise prices were greater than the average market price of the common shares for the quarter then ended. The options and warrants, which expire between August 1998 and March 2008 were still outstanding as of March 31, 1998.
For the three months ended March 31, 1997 ----------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ----------- Loss from continuing operations $ (343,000) 9,039,503 $(0.04) Loss from discontinued operations (876,000) (0.09) ----------- ---------- ------ Basic EPS Income available to common shareholders (1,219,000) 9,039,503 $(0.13) ====== Effect of dilutive securities: Stock options -- -- Warrants -- -- =========== ========== Diluted EPS Income available to common shareholders + assumed conversions $(1,219,000) 9,039,503 $(0.13) =========== ========== ======
Options and warrants to purchase shares of common stock which were outstanding during the first quarter of 1997 were not included in the computation of diluted EPS because the options' and warrants' effect on EPS would be anti-dilutive. 5. Commitments and Contingencies The Company is involved in various claims and litigation arising in and outside of the ordinary course of business. In addition, given the current state of the Company and its subsidiaries, numerous creditors and parties to contracts have threatened or initiated litigation to recoup their loans and investments. If these claims are not favorably resolved, they will have a material adverse effect on the Company's financial condition, results of operations and ability to continue as a going-concern. 8 Notes to Condensed Consolidated Financial Statements (unaudited) ________________________________________________________________________________ The Company entered into a lease for new manufacturing facilities and corporate offices. This lease commenced September 1, 1997, and extends to October 31, 2002. Minimum monthly rental payments of $16,000 began on November 1, 1997, with scheduled annual increases of 6% to 7% per year beginning November 1, 1998. 6. Customer Supplied Inventory The Company's CTM Electronics, Inc. subsidiary has purchased certain chips ("die") used in the assembly of multichip modules ("MCM's") sold to one of the Company's significant customers from that same customer. Effective July 25, 1997, this customer notified the Company that it will no longer sell die to the Company and instead is providing the die on consignment. The pro forma presentation below gives effect to this change in operations on selected line items from the Company's Condensed Consolidated Statements of Operations for the three month period ended March 31, 1997, as if this change had been put into effect on January 1, 1997.
Historical Pro Forma Three Months Ended Pro Forma Three Months Ended March 31, 1997 Adjustments March 31, 1997 ------------------ ----------- ------------------ Net sales $ 7,674,000 $(4,656,000)/(1)/ $ 3,018,000 Cost of goods sold 6,790,000 (4,784,000)/(2)/ 2,006,000 Gross profit 884,000 128,000 1,012,000 Net loss $(1,219,000) 128,000 $(1,091,000) =========== =========== =========== Net loss per common share $ (0.13) $ 0.01 $ (0.12) =========== =========== ===========
/(1)/ The cost of the die to be provided on consignment will be removed from the selling price of the MCM's. The amount of the 2% prompt payment discount offered to the customer, which is included in revenues, will be reduced by the lower selling prices for these MCM's. /(2)/ The cost of the die to be provided on consignment will be removed from the cost of goods sold, corresponding to the reduction in selling prices of the MCM's. 7. Discontinued Operations On July 10, 1997, The Development Bank of Singapore Limited, one of the Company's and its subsidiaries largest creditors ("DBS"), appointed a Receiver and Manager to liquidate the assets of Microelectronic Packaging (S) Pte. Ltd. ("MPS"), which is a wholly owned subsidiary of the Company which manufactured primarily pressed ceramics products. DBS exercised its option to appoint a Receiver and Manger under the terms of a Deed of Debenture dated November 27, 1984 (as amended) between DBS and MPS. The Company anticipates that the Receiver and Manager will complete the liquidation of MPS in 1998. The Company has guaranteed all of MPS's obligations to DBS of which approximately $2.6 million was outstanding as of December 31, 1997. These loans are included in the caption "Debt of discontinued operations, in default, due on demand" in the Consolidated Balance Sheet. There can be no assurance that such debt will be fully paid through the liquidation of the assets of MPS. If insufficient, DBS could demand repayment of the shortfall from the Company through the guarantee. The Company does not have adequate resources to repay such debt if the guarantee is called. 9 Notes to Condensed Consolidated Financial Statements (unaudited) ________________________________________________________________________________ The Company recorded the effect of the receivership as of June 30, 1997, and the results of operations of MPS have been classified as "Loss from discontinued operations" on the Consolidated Statement of Operations for the quarter ended March 31, 1997. As a result of the appointment of a Receiver and Manager, MPS is no longer able to manufacture its pressed ceramic products and has ceased generating revenue since July 10, 1997. On March 18, 1997, a Receiver was appointed to handle the liquidation of the multilayer ceramics operations of MPM (S) Pte. Ltd. As of December 31, 1997, essentially all of the assets of MPM had been sold. Final resolution of the remaining liabilities will come only after the liquidation of MPS, since MPS has guaranteed the DBS bank loan and the equipment leases entered into by MPM. The portion of these liabilities remaining after any reduction available from the sale of MPS and MPM assets will then be transferred to MPI, as MPI also guaranteed these loans and leases. As of October 8, 1997, the Company (as guarantor) reached an agreement with MPM's lessor for the repayment of the balance remaining after the sale of the leased equipment, over a five-year term (interest only during the first year, with principal due quarterly thereafter). The loan balance will be reduced by excess funds available from the liquidation of MPS, in the event that any funds are available. The holders of the debentures issued to Transpac and related parties still retain $9.0 million of debt securities issued by MPM which are guaranteed by the Company. The Company and MPM are in default thereunder. The Company's MPC subsidiary was informed in April 1997 that Carborundum Corporation ("Carborundum"), its sole customer, was immediately cancelling the manufacturing and related agreements with MPC as a result of Carborundum's sale of its assets to a third party. On April 5, 1997, a fire at the Company's MPC facility caused damage to the building and certain equipment. The Company is insured against the fire, and believes that it will incur no losses from the fire. The Company has closed the MPC operation and has terminated all of its MPC employees. The Company expects that there will be minimal impact from the disposition of the assets of MPC. Most costs of closure of the MPC operations will be borne by the former customer or the Company's business interruption insurance. The Company has recorded the effect of the closure of this business as of June 30, 1997, and the results of operations of MPC have been classified as "Loss from discontinued operations" in the Consolidated Statement of Operations. Based on the information above, the results of operations for the three month period ended March 31, 1997 has been restated to present MPS, MPC and MPM segments as discontinued operations. Discontinued operations include management's best estimates of the amounts expected to be realized on the sale of its assets associated with these discontinued operations and the expenses to be incurred through the disposal date. The amounts the Company will ultimately realize and incur could differ materially in the near term from the amounts assumed in arriving at the loss on disposal of the discontinued operation. Management anticipates that the foreign operations will be fully dissolved in 1998. The components of "Current liabilities of discontinued operations, net" included in the Condensed Consolidated Balance Sheets are as follows. Consistent with the presentation in Form 10-K for the year ended December 31, 1997, all debt obligations originating in Singapore have been reclassified to the caption "Debt of discontinued operations, in default, due on demand." 10 Notes to Condensed Consolidated Financial Statements (unaudited) ________________________________________________________________________________
March 31, 1998 December 31, 1997 -------------- ----------------- Cash $ 572,000 $ 572,000 Property, net 1,399,000 1,399,000 ------------ ------------ Total restricted assets, held by Receiver 1,971,000 1,971,000 Accounts payable and accrued liabilities (15,423,000) (15,446,000) ------------ ------------ Current liabilities of discontinued operations, net $(13,452,000) $(13,475,000) ============ ============
8. Going Concern The accompanying financial statements have been prepared assuming the Company (MPI along with its only operating subsidiary - CTM) will continue as a going concern. A number of factors, including the Company's history of significant losses, the debt service costs associated with the Company's high level of existing indebtedness, the need to restructure debt which is currently in default, various claims and lawsuits, and the Company's Singapore operations in receivership and liquidation raise substantial doubts about the Company's ability to continue as a going concern. As of March 31, 1998, the Company has an accumulated deficiency of $79.3 million and a working capital deficiency of $41.1 million, which includes $27.2 million of debt of discontinued operations, due on demand and net current liabilities of discontinued operations of $13.5 million. The Company does not possess sufficient cash resources to repay these obligations, and thus is in default on all of these obligations. The Company would be unable to repay these loans in the event that such demand was made by the Company's creditors. The Company is currently attempting to renegotiate the terms of the debt obligations of its discontinued Singapore operations. Certain obligations with principal balances totaling approximately $27.2 million have been guaranteed by MPI. Creditors holding over half of such debt have signed definitive, binding agreements, including the Company's largest creditor, and creditors holding an additional 25% of such debt have either signed non- binding written letters of intent or verbally agreed to a settlement of the obligations owed to them. The agreements reached with creditors principally involve MPI paying 30% to 40% of the principal and accrued but unpaid interest owed to each creditor as of December 31, 1997, within six months of formal documents being agreed between the parties. The remaining 60% to 70% would be forgiven by the creditors at the time of the payment of the 30% to 40% portion. There are also other non-cash considerations being provided to certain creditors. The Company intends to attempt to obtain financing for the 30% to 40% portion to be paid by the Company. There can be no assurance that the Company will be successful in its efforts to reduce the non-binding agreements reached with the creditors to binding written agreements. There can also be no assurance that the Company will be successful in its efforts to obtain the financing needed, on acceptable terms, or at all, in order to fulfill its obligations under the agreements reached with creditors. This failure would materially adversely affect the Company's financial condition and ability to continue as a going concern, and could, as is the case with other debt defaults and failure to repay, require that the Company seek bankruptcy protection under Chapter 11 or Chapter 7 of Title 11 of the United States Code for MPI and its U.S. subsidiaries. 9. Forward Looking Statements These Condensed Consolidated Financial Statements contain forward-looking statements which involve substantial risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the effects of debt restructuring. 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve substantial risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section and elsewhere in this Quarterly Report on Form 10-Q. RESULTS OF OPERATIONS Net Sales For the three months ended March 31, 1998, net sales were $7,334,000 as compared to net sales of $7,674,000 for the first quarter of 1997. The Company's CTM Electronics, Inc. subsidiary has purchased certain chips ("die") used in the assembly of multichip modules ("MCM's") sold to one of the Company's significant customers from that same customer (see Note 6 of Notes to Condensed Consolidated Financial Statements). Effective July 25, 1997, this customer notified the Company that it will no longer sell die to the Company and instead is providing the die on consignment. This change ("consigned die") has resulted in a permanent reduction in selling prices for products sold to this customer. Had the consignment policy been in effect as of January 1, 1997, net sales in the first quarter of 1997 would have been $3,018,000 ("proforma net sales"). Thus, net sales actually increased $4,316,000 or 143%. The increase in net sales is primarily due to a 253% increase in MCM units shipped, partially offset by a 23.7% decrease in average selling prices (after removing die cost as discussed above). The primary reason for the decrease in average selling prices resulted from a re-negotiated pricing structure by CTM's most significant customer as well as a change in product mix. Revenues reported in this Quarterly Report on Form 10-Q reflect the reclassification of revenues from the Company's Singapore subsidiaries for the quarter ended March 31, 1997 (MPS, MPC and MPM) to "Loss from discontinued operations" (see Note 7 to Condensed Consolidated Financial Statements). Cost of Goods Sold For the three months ended March 31, 1998, the cost of goods sold was $5,381,000 as compared to $6,790,000 for the first quarter of 1997. After eliminating the die cost from cost of goods sold for the first quarter of 1997 (see "Net Sales" above and Note 6 of Notes to Condensed Consolidated Financial Statements), cost of goods sold would have been $2,006,000. This represents a permanent change to the cost structure of CTM. Thus, cost of goods sold increased $3,375,000 or 168%. The increase in cost of goods sold is primarily due to a 253% increase in MCM units shipped, partially offset by a 24.0% decrease in average per-unit costs (after removing die cost as discussed above). The primary reason for the decrease in average cost per unit sold results from a change in product mix. Cost of goods sold reported in this Quarterly Report on Form 10-Q reflect the reclassification of cost of goods sold from the Company's Singapore subsidiaries for the quarter ended March 31, 1997 (MPS, MPC and MPM) to "Loss from discontinued operations" (see Note 7 to Condensed Consolidated Financial Statements). 12 Gross Profit Gross profit was $1,953,000 (26.6% of net sales) for the first quarter of 1998 as compared to $884,000 (29.3% of proforma net sales) for the first quarter of 1997. The increase in the amount of the gross profit is attributable to the increase in sales discussed above, while the reduction in the gross margin is a result of the reduced selling prices and a change in product mix. Selling, General and Administrative Selling, general and administrative expenses were $776,000 for the first quarter of 1998, representing a decrease of $488,000 or 38.6% from the first quarter of 1997. This decrease is primarily the result of the Company's reduction of the additional legal and consulting fees which had been incurred in connection with the restructuring of the Company's U.S. operations and the winding up of its Singapore operations. The Company anticipates selling, general and administrative expenses, in absolute dollars, to increase from first quarter levels through the end of the fiscal year ending December 31, 1998. Selling, general and administrative expenses reported in this Quarterly Report on Form 10-Q reflect the reclassification of these costs from the Company's Singapore subsidiaries for the first quarter of 1997 (MPS, MPC and MPM) to "Loss from discontinued operations" (see Note 7 to Condensed Consolidated Financial Statements). Engineering and Product Development Engineering and product development expenses were $272,000 for the first quarter representing an increase of $164,000 or 152% from the corresponding period of 1997. The increase in engineering and product development costs result primarily from the increase in the engineering staff employed by the Company which is part of the Company's commitment to improvement in quality and processes in its manufacturing facility. The Company anticipates that engineering and product development expenses, in absolute dollars, will increase over the remainder of the fiscal year ending December 31, 1998. Engineering and product development expenses reported in this Quarterly Report on Form 10-Q reflect the reclassification of these expenses from the Company's Singapore subsidiaries for the first quarter of 1997 (MPS, MPC and MPM) to "Loss from discontinued operations" (see Note 7 to Condensed Consolidated Financial Statements). Interest Expense Interest expense was $3,000 for the first quarter of 1998 as compared to $24,000 for the first quarter of 1997. Interest expense for 1997 included interest on the $2.8 million of convertible debentures issued in October 1996. These debentures were converted into common stock by the end of February 1997, thus no such interest expense was incurred in 1998. This caption has been restated to exclude interest on customer loans that are related to the discontinued operations in Singapore. Other Income Other income was $70,000 for the first quarter of 1998 and $169,000 for the first quarter of 1997. Other income for the first quarter of 1997 included $190,000 received in settlement of a note receivable which had been previously written-off. Effects of Income Taxes The Company believes that it has sufficient losses to offset any taxable income that will be generated in the current year. However, the Company's use of these losses may result in alternative minimum 13 taxes for Federal income tax purposes. As a result, the Company has recorded a provision for income taxes for the three month period ended March 31, 1998 (for anticipated alternative minimum taxes). 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. Discontinued Operations The net operating results of the activities of MPM, MPS, MPC and FT for the three month period ended March 31, 1997 have been included as loss from discontinued operations on the Condensed Consolidated Statement of Operations. Amounts recorded as estimated losses on disposal of assets of the discontinued operations reflect management's best estimates of the amounts expected to be realized on the sale of the assets associated with these discontinued operations and the expenses to be incurred through the disposal date. The amounts the Company will ultimately realize and incur could be materially different from the amounts assumed in arriving at the loss on disposal of the discontinued operations. Liquidity and Capital Resources During the first quarter of 1998, the Company financed its operations from operating cash flow. During the first quarter of 1998, operating activities of continuing operations provided $195,000, while discontinued operations used $23,000. Investing activities, consisting principally of acquisition of assets of continuing operations, used $533,000. At March 31, 1998, the Company had a working capital deficiency of $41,090,000 and an accumulated deficit of $79,294,000. At March 31, 1998, the Company had outstanding approximately $27,151,000 of debt from its discontinued operations, which debt has been guaranteed by MPI, the parent company, and most of which debt is in default and due on demand. The Company's sources of liquidity at March 31, 1998 consisted of inventories of $5,237,000, trade accounts receivable of $3,699,000 and its U.S. cash balance of $932,000. The Company has no borrowing arrangements available to it. The Company is currently in default on substantially all of its Singapore-based debt obligations. It is currently attempting to negotiate settlement agreements for all of its debt obligations. At March 31, 1998, the Company had outstanding borrowings due to DBS totaling $3,955,000, excluding mortgages. The amount outstanding is the remaining balance of various borrowings made by MPM, MPS and MPC under lines of credit, overdraft facilities, and an accounts receivable financing line of credit. This balance remains after the liquidation of assets of MPM and MPS by the receivers and the application to these debts of the resulting proceeds from those assets of those entities. All assets of MPM have been liquidated by the receiver of MPM. Two buildings located in Tuas, Singapore and owned by MPS are still owned by MPS. These buildings are currently being marketed by the receiver of MPS and proceeds from the sale of those buildings will be utilized first, to retire the two mortgages encumbering the properties and any remaining proceeds will be used to retire these outstanding borrowings. The receiver is additionally attempting to collect approximately $2,400,000 payable by a former customer of MPS. The amount has been unpaid since June 1997 and has been fully reserved for by MPS. If the receiver is successful in collecting all or a portion of this receivable, the proceeds will be used to retire these borrowings. These amounts are currently in default, payable upon demand, and bear interest at the bank's prime rate plus 5%, which is equal to the rate of 13.75% as of March 31, 1998. All of these amounts are secured by the remaining assets of MPM and MPS and are guaranteed by MPI. 14 At March 31, 1998, the Company had borrowings of $9,000,000 under the Transpac debentures. The debentures bear interest at the rate of 8.5%. As of March 31, 1998, approximately $1,573,000 of accrued interest was due and payable under the Transpac debentures. The debenture has been fully guaranteed by MPI. The debentures are currently in default and payable upon demand. At March 31, 1998, the Company had outstanding a term note due to NS Electronics, a former customer of MPS, a discontinued Singapore operation. The note bears interest at 18% per annum. The balance due under the note is $1,250,000 and approximately $229,000 of accrued interest was also due and payable as of March 31, 1998. The note has been fully guaranteed by MPI and is secured by certain assets of the Company. The note is currently in default and payable upon demand. At March 31, 1998, the Company had outstanding a term note due to TI, a former customer of MPS. The note bears interest at the rate of 3.5% per annum. The balance due under the note is $3,521,000 and approximately $122,000 of accrued interest was due and payable as of March 31, 1998. The note has been fully guaranteed by MPI. The note is currently in default and payable upon demand. At March 31, 1998, the Company had outstanding a term note due to SGS-Thomson Microelectronics, a former customer of MPS. The note bears interest at the rate of 7.25% per annum. The balance due under the note is $4,000,000 and approximately $455,000 of accrued interest was due and payable as of March 31, 1998. The note has been fully guaranteed by MPI and is secured by certain assets of the Company. The note is currently in default and payable upon demand. At March 31, 1998, the Company had outstanding a term note due to Citibank N.A., which note is guaranteed by Motorola, a former customer of MPS. The note bears interest at approximately 7% per annum. The balance due under the note is $2,000,000 and approximately $257,000 of accrued interest was due and payable as of March 31, 1998. The note has been guaranteed by MPI and is secured by certain assets of the Company as well as all shares of CTM and MPA. The note is currently in default and payable upon demand. At March 31, 1998, the Company had outstanding an amount due to Samsung Corning. Samsung Corning had guaranteed a $1,000,000 loan from DBS to MPS. The remaining balance due to DBS under the loan, approximately $583,000, was paid by Samsung Corning to DBS in December 1997. The Company has accordingly recorded the $583,000 as a liability to Samsung Corning, as well as $57,000 of accrued and unpaid interest as of March 31, 1998. The Company is currently negotiating settlement of the amount paid by Samsung Corning to DBS. At March 31, 1998, the Company had outstanding two mortgage notes due to DBS, secured by two buildings located in Tuas, Singapore and owned by MPS. The mortgage notes bear interest at 13.75%. The balance due under the mortgage notes was $1,081,000 as of March 31, 1998. The notes are guaranteed by MPI. The notes are currently in default and payable upon demand. At March 31, 1998, the Company had outstanding a deficiency balance from capital leases due to Orix Leasing totaling $1,601,000. The amount outstanding is the remaining balance of various lease borrowings made by MPM and MPS. This balance remains after the liquidation of the leased assets of MPM by Orix Leasing and the application to these leases of the resulting proceeds from those assets of those entities. The remaining amount outstanding is represented by a note issued by MPI at an interest rate of 7.25%. The note is currently in default and is payable upon demand. The Company also has various capitalized leases for equipment which was utilized by its Singapore operations, with a total balance of approximately $160,000 as March 31, 1998. These lease obligations are in default and is payable upon demand. The Company also has various capitalized leases for equipment utilized in the US operations, with a total balance of approximately $88,000 as March 31, 1998. These lease obligations are being serviced currently by CTM. 15 The Company is currently attempting to renegotiate the terms of the debt obligations of its discontinued Singapore operations. Certain obligations with principal balances totaling approximately $27.2 million have been guaranteed by MPI. Creditors holding over half of such debt have signed definitive, binding agreements, including the Company's largest creditor, and creditors holding an additional 25% of such debt have either signed non-binding written letters of intent or verbally agreed to a settlement of the obligations owed to them. The agreements reached with creditors principally involve MPI paying 30% to 40% of the principal and accrued but unpaid interest owed to each creditor as of December 31, 1997, within six months of formal documents being agreed between the parties. The remaining 60% to 70% would be forgiven by the creditors at the time of the payment of the 30% to 40% portion. There are also other non-cash considerations being provided to certain creditors. The Company intends to attempt to obtain financing for the 30% to 40% portion to be paid by the Company. There can be no assurance that the Company will be successful in its efforts to reduce the non-binding agreements reached with the creditors to binding written agreements. There can also be no assurance that the Company will be successful in its efforts to obtain the financing needed, on acceptable terms, in order to fulfill its obligations under the agreements reached with creditors. The Company previously purchased raw materials from its principal customer, Schlumberger. As of July 25, 1997, the material was supplied by the customer on consignment. As of March 31, 1998, the Company owes to that customer approximately $4.5 million from purchases previously made before the change to consignment. The Company is making regular payments to Schlumberger under an informal repayment plan. The Company has outstanding indebtedness at March 31, 1998 denominated in Singapore dollars of approximately Singapore $3,400,000 (U.S. equivalent $2,144,000). Further, the Company has two buildings, also located in Singapore, which are mortgaged as security for the Singapore loans and are anticipated to be sold within the next year. All of the Company's other indebtedness is denominated in U.S. dollars, and all other Singapore-based assets have been liquidated by the receiver of MPM or MPS and used to retire outstanding indebtedness. The Company believes that the value of the buildings located in Singapore is at least equal to the amount of the Company's debt which is denominated in Singapore dollars. Accordingly, the Company believes its exposure to foreign currency rate movements is extremely limited since it has matched the maturity and approximate amount of assets and liabilities denominated in the Singapore dollar. FUTURE OPERATING RESULTS Status as a Going Concern. The Company's independent certified public accountants have included an explanatory paragraph in their audit report with respect to the Company's 1997, 1996 and 1995 consolidated financial statements related to a substantial doubt with respect to the Company's ability to continue as a going concern. Absent outside debt or equity financing, and excluding significant expenditures required for the Company's major projects and assuming the Company is successful in restructuring its debt, the Company currently anticipates that cash on hand and anticipated cash flow from operations may be adequate to fund its operations in the ordinary course throughout 1998. Any significant increase in planned capital expenditures or other costs or any decrease in or elimination of anticipated sources of revenue or the inability of the Company to restructure its debt could cause the Company to restrict its business and product development efforts. There can be no assurance that the Company will be successful in restructuring its debt on acceptable terms, or at all. If adequate revenues are not available, the Company will be unable to execute its business development efforts and may be unable to continue as a going concern. There can be no assurance that the Company's future consolidated financial statements will not include another going concern explanatory paragraph if the Company is unable to restructure its debt and become profitable. The factors leading to and the existence of the explanatory paragraph will have a material adverse effect on the Company's ability to obtain additional financing. 16 Risk of Bankruptcy. The Company may need to be reorganized under Chapter 11 of Title 11 of the United States Code or liquidated under Chapter 7 of Title 11 of the United States Code. There can be no assurance that if the Company decides to reorganize under the applicable laws of the United States that such reorganizational efforts would be successful or that shareholders would receive any distribution on account of their ownership of shares of the Company's stock. Similarly, there can be no assurances that if the Company decides to liquidate under the applicable laws of the United States that such liquidation would result in the shareholders receiving any distribution on account of their ownership of shares of the Company's stock. In fact, if the Company were to be reorganized or liquidated under the applicable laws of the United States, the bankruptcy laws would require (with limited exceptions) that the creditors of the Company be paid before any distribution is made to the shareholders. Future Capital Needs; Need for Additional Financing. The Company's future capital requirements will depend upon many factors, including the extent and timing of acceptance of the Company's products in the market, requirements to restructure and retire its substantial debt, requirements to construct, transition and maintain existing or new manufacturing facilities, commitments to third parties to develop, manufacture, license and sell products, the progress of the Company's research and development efforts, the Company's operating results and the status of competitive products. If the Company is successful in restructuring its debt obligations, absent debt or equity financing and excluding significant expenditures required for the Company's major projects, the Company anticipates that cash on hand and anticipated cash flow from operations may be adequate to fund its operations through 1998. There can be no assurance, however, that the Company will not require additional financing prior to such date to fund its operations. In addition, the Company may require substantial additional financing to fund its operations in the ordinary course, particularly if the Company is unable to restructure its debt obligations. Furthermore, the Company may require additional financing to fund the acquisition of selected assets needed in its production facilities. There can be no assurance that the Company will be able to obtain such additional financing on terms acceptable to the Company, or at all. The Company is in breach of substantially all of its debt obligations and is in default under each of such agreements. If the Company cannot reach an agreement with its creditors to repay its obligations, the Company will not be able to continue as a going concern. The Company's high level of outstanding indebtedness and the numerous restrictive covenants set forth in the agreements covering this indebtedness and its default position prohibit the Company from obtaining additional bank lines of credit and from raising funds through the issuance of debt or other securities without the prior consent of DBS and Transpac. The Company is currently in default on its guarantee and loan obligations to DBS as a result of the Company's decision to cease its multilayer and pressed ceramics operations, and to liquidate the assets of MPM and MPS. The liquidation of MPM and MPS have also resulted in the Company's default under a number of other agreements, and certain creditors have informed the Company they intend to accelerate outstanding payments due to them under various credit agreements because of such defaults. There can be no assurance that other creditors of the Company will not also choose to accelerate the Company's debt obligations and the Company will not able to repay such accelerated obligations as they become due and immediately payable. If either a sufficient number of creditors or any of the substantial creditors choose to accelerate payments or to place MPI or one or more of its subsidiaries under judicial reorganization, the Company may be forced to seek protection under Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of Singapore. If the Company were to seek additional financing, such additional financing may not be available to the Company on acceptable terms, or at all. If additional funds are raised by issuing equity or convertible securities, further dilution to the existing shareholders will result. Since adequate funds are not currently available, the Company has been required to delay, scale back or eliminate programs which could continue to have a material adverse effect on the Company's business, 17 prospects, financial condition and results of operations. In addition, the Company has been forced to delay, downsize or eliminate other research and development, manufacturing, construction or transitioning programs or alliances or obtain funds through arrangements with third parties pursuant to which the Company has been forced to relinquish rights to certain of its technologies or to other assets that the Company would not otherwise relinquish. The delay, scaling back or elimination of any such programs or the relinquishment of any such rights could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. Future Operating Results. The Company's operating results have fluctuated significantly in the past and will continue to fluctuate significantly in the future depending upon a variety of factors, including foreign currency losses, corporate and debt restructurings, creditor relationships, conversions of significant amounts of debt into a significant amount of equity, downward pressure in gross margins, losses due to low shipping volume, delayed market acceptance, if any, of new and enhanced versions of the Company's products, delays, cancellations or reschedulings of orders, delays in product development, defects in products, integration of acquired businesses, political and economic instability, natural disasters, outbreaks of hostilities, variations in manufacturing yields, changes in manufacturing capacity and variations in the utilization of such capacity, changes in the length of the design-to-production cycle, relationships with and conditions of customers, subcontractors, and suppliers, receipt of raw materials, including consigned materials, customer concentration, price competition, cyclicality in the semiconductor industry and conditions in the personal computer industries. In addition, operating results will fluctuate significantly based upon several other factors, including the Company's ability to attract new customers, changes in pricing by the Company, 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 the Company's ability to plan production and inventory levels, which could lead to substantial 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 the Company's expectations, which would materially adversely affect the Company's operating results for such quarter. The impact of these and other factors on the Company's net sales and operating results in any future period cannot be forecasted with certainty. In addition, the significant fixed overhead costs at the Company's facilities, the need for continued expenditures for research and development, capital equipment and other commitments of the Company, among other factors, will make it difficult for the Company to reduce its expenses in a particular period if the Company's sales goals for such period are not met. A large portion of the Company's operating expenses are fixed and are difficult to reduce or modify should revenues not meet the Company's expectations, thus magnifying the material adverse impact of any such revenue shortfall. Accordingly, there can be no assurance that the Company will not incur losses in the future or that such losses will not have a material adverse effect on the Company's business, financial condition and results of operations. Repayment of Debt Obligations by MPM and MPS. As of March 31, 1998, MPM and MPS had combined outstanding borrowings of approximately $27,151,000. Most of the assets of MPM and MPS have been liquidated by receivers appointed by DBS. The Company currently anticipates that the remaining proceeds from the liquidation of assets will be insufficient to fully repay its outstanding debt. Since the borrowings have been guaranteed by MPI, the Company is currently attempting to negotiate more favorable terms for the repayment of the remaining indebtedness. The failure of the Company to obtain favorable repayment terms would materially adversely affect the Company's financial condition and the ability of the Company to continue as a going concern. 18 MPM is obligated, pursuant to its real property lease in Singapore with Jurong Town Corporation ("JTC"), to return the facilities which it has been leasing to their original state before returning the facilities to JTC. Returning the facilities to their original state would require the expenditure of a substantial amount of money. There can be no assurance that JTC will not enforce this lease provision. If MPM were forced to return the facilities to their original state, such actions could materially adversely affect any plans to restructure MPM's debt obligations. Adverse Impact of MPM and MPS Liquidations on MPI. MPM and MPS are currently being liquidated under the laws of Singapore. The liquidation of the assets of MPM and MPS are expected to generate proceeds that total less than the outstanding obligations of those entities guaranteed by MPI. If such shortfall occurs, MPI may be forced to repay any outstanding debt because of its role as guarantor of such debts. If MPI were unable to repay these debts, the Company may be forced to seek bankruptcy protection under Chapter 11 or Chapter 7 of Title 11 of the United States Code or similar bankruptcy laws of Singapore for MPI and its subsidiaries. Certain Obligations of MPS. At March 31, 1998, MPS had outstanding borrowings of approximately $3,955,000 with DBS and had borrowed an aggregate of approximately $11,354,000 from a consortium of customers to fund its purchase of certain CERDIP manufacturing and alumina powder equipment from Samsung Corning. All such amounts are in default. If any lender were to accelerate the principal due as one of their remedies, such accelerations will materially adversely affect the Company's ability to continue as an ongoing concern and may force the Company to seek bankruptcy protection under Chapter 7 or Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of Singapore. As a part of the Consortium, Motorola guaranteed MPS' repayment of $2.0 million in borrowings from a certain bank lender. Under the terms of the agreement relating to Motorola's guarantee, MPI granted Motorola a security interest in all of the issued and outstanding capital stock of MPS, CTM and MPA. While in default, Motorola may have the right to vote and give consents with respect to all of the issued and outstanding capital of MPS, CTM and MPA. As a result, during the continuation of any such event of default, MPI may be unable to control at the shareholder level the direction of the subsidiaries that generate substantially all of the Company's revenues and hold substantially all of the Company's assets. Any such loss of control would have a material adverse effect on the Company's business, prospects, financial condition, results of operations and status as an ongoing concern and could force the Company to seek protection under Chapter 7 or Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of Singapore. The agreements covering the Transpac Financing, including the convertible debenture and MPI's guarantee of such MPM indebtedness, contain numerous restrictions and events of default that have been triggered by the aforementioned actions and would, if they became effective and operative, materially adversely affect the Company's business, prospects, results of operations, condition and status as an ongoing concern and could force the Company to seek protection under Chapter 7 or Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of Singapore. High Leverage. The Company is highly leveraged and has substantial debt service requirements. The Company has $51,154,000 in liabilities as of March 31, 1998. On March 31, 1998, the Company had a total shareholders' deficit of approximately $39,261,000. The Company's ability to meet its debt service requirements will be dependent upon the Company's future performance, which will be subject to financial, business and other factors affecting the operation of the Company, many of which are beyond its control and on the willingness of the Company's creditors to participate in restructuring the Company's debt. There can be no assurance that the Company will be able to meet the capital requirements described above or, if the Company is able to meet such requirements, that the terms available will be favorable to the Company. See "Liquidity and Capital Resources". 19 Highly Competitive Industry; Significant Price Competition. The electronic interconnection technology industry is intensely competitive. The Company experiences intense competition worldwide from a number of manufacturers, including Maxtek Components Corporation, VLSI Packaging, Raytheon Electronic Systems, Hewlett-Packard Company, Advanced Packaging Technology of America and MicroModule Systems, all of which have substantially greater financial resources and production, marketing and other capabilities than the Company with which to develop, manufacture, market and sell their products. The Company faces competition from certain of its customers that have the internal capability to produce products competitive with the Company's products and may face competition from new market entrants in the future. In addition, corporations with which the Company has agreements are conducting independent research and development efforts in areas which are or may be competitive with the Company. The Company expects its competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved performance characteristics. New product introductions by the Company's competitors could cause a significant decline in sales or loss of market acceptance of the Company's existing products which could materially adversely affect the Company's business, financial condition and results of operations. The Company is also experiencing significant price competition, which may materially adversely affect the Company's business, financial condition and results of operations. The Company believes that to remain competitive in the future it will need to continue to develop new products and to invest significant financial resources in new product development. There can be no assurance that such new products will be developed or that sales of such new products will be achieved. There can be no assurance that the Company will be able to compete successfully in the future. Reliance on Schlumberger. Sales to one customer, Schlumberger, accounted for 88% of the Company's net sales in the first quarter of 1998 and is expected to continue to account for a significant part of the Company's net sales. Under the agreement between Schlumberger and the Company entered into in January 1998, the Company is obligated to provide Schlumberger with its requirements for MCM product. Given the Company's anticipated continued reliance on its MCM business as a percentage of overall net sales, the failure to meet Schlumberger's requirements will materially adversely affect the Company's ability to continue as an ongoing concern. In addition, under the terms of the agreement, Schlumberger is entitled to request repricing of the Company's products. Schlumberger has requested repricing for the second quarter of 1998. Such repricing in the future may result in the Company being unable to produce the products made for Schlumberger with an adequate operating profit, and the Company may be unable to compete with the prices of other vendors who supply the same or similar products to Schlumberger. The failure to satisfy the terms of the agreement, or the failure of the Company to achieve an operating profit under the contract, would have a material adverse impact on the Company's business, financial condition, and results of operation. Significant Customer Concentration. Historically, the Company has sold its products to a very limited number of customers. Any reduction in orders by any of these customers, including reductions due to market, economic or competitive conditions in the semiconductor, personal computer or electronic industries or in other industries that manufacture products utilizing semiconductors or MCMs, could materially adversely affect the Company's business, financial condition and results of operations. The supply agreements with certain of the Company's customers do not obligate them to purchase products from the Company. The Company's ability to increase its sales in the future will also depend in part upon its ability to obtain orders from new customers. There can be no assurance that the Company's sales will increase in the future or that the Company will be able to retain existing customers or to attract new ones. Failure to develop new customer relationships could materially adversely affect each such subsidiary's results of operations and would materially adversely affect the Company's business, financial condition and results of operations. 20 Dependence on Semiconductor and Personal Computer Industries. The financial performance of the Company is dependent in large part upon the current and anticipated market demand for semiconductors and products such as personal computers that incorporate semiconductors. The semiconductor industry is highly cyclical and historically has experienced recurring periods of oversupply The Company believes that the markets for new generations of semiconductors will also be subject to similar fluctuations. The semiconductor industry is currently experiencing rapid growth but lately has demonstrated a slowdown in demand. There can be no assurance that such growth will return and that the slowdown will not continue. A reduced rate of growth in the demand for semiconductor component parts due, for example, to competitive factors, technological change or otherwise, may materially adversely affect the markets for the Company's products. From time to time, the personal computer industry, like the semiconductor industry, has experienced significant downturns, often in connection with, or in anticipation of, declines in general economic conditions. Accordingly, any factor adversely affecting the semiconductor or the personal computer industry or particular segments within the semiconductor or personal computer industry may materially adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company's net sales and results of operations will not be materially adversely affected if downturns or slowdowns in the semiconductor, personal computer industry or other industries utilizing the Company's products continue or again occur in the future. Technological Change; Importance of Timely Product Introduction; Uncertainty of Market Acceptance and Emerging Markets. The markets for the Company's products are subject to technological change and new product introductions and enhancements. Customers in the Company's markets require products embodying increasingly advanced electronics interconnection technology. Accordingly, the Company must anticipate changes in technology and define, develop and manufacture or acquire new products that meet its customers' needs on a timely basis. The Company anticipates that technological changes could cause the Company's net sales to decline in the future. There can be no assurance that the Company will be able to identify, develop, manufacture, market, support or acquire new products successfully, that any such new products will gain market acceptance, or that the Company will be able to respond effectively to technological changes. If the Company is unable for technological or other reasons to develop products in a timely manner in response to changes in technology, the Company's business, financial condition and results of operations will be materially adversely affected. There can be no assurance that the Company will not encounter technical or other difficulties that could in the future delay the introduction of new products or product enhancements. In addition, new product introductions by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's products, which could materially adversely affect the Company's business, financial condition and results of operations. Even if the Company develops and introduces new products, such products must gain market acceptance and significant sales in order for the Company to achieve its growth objectives. Furthermore, it is essential that the Company develop business relationships with and supply products to customers whose end-user products achieve and sustain market penetration. There can be no assurance that the Company's products will achieve widespread market acceptance or that the Company will successfully develop such customer relationships. Failure by the Company to develop products that gain widespread market acceptance and significant sales or to develop relationships with customers whose end-user products achieve and sustain market penetration will materially adversely affect the Company's business, financial condition and results of operations. The Company's financial performance will depend in significant part on the continued development of new and emerging markets such as the market for MCMs. The Company is unable to predict with any certainty any growth rate and potential size of emerging markets. Accordingly, there can be no assurance that emerging markets targeted by the Company, such as the market for MCMs, will develop or that the Company's products will achieve market acceptance in such markets. The failure of emerging markets targeted by the Company to develop or the failure by the Company's products to achieve acceptance in such markets could materially adversely affect the Company's business, financial condition and results of operations. 21 Sole or Limited Sources of Supply. Certain raw materials essential for the manufacture of the Company's products 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 which are of critical importance to the production of the Company's MCM products. In the manufacturing process, the Company also utilizes consigned materials supplied by certain of its customers. The Company's 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. There can be no assurance that problems with respect to yield and quality of such materials and timeliness of deliveries will not continue to occur. Disruption or termination of these sources could delay shipments of the Company's products and could have a material adverse effect on the Company's business, financial condition and operating results. Such delays could also damage relationships with current and prospective customers, including customers that supply consigned materials. Product Quality and Reliability; Need to Increase Production. The Company's customers establish demanding and time-consuming specifications for quality and reliability that must be met by the Company's products. From initial customer contact to actual qualification for production, which may take as long as three years, the Company typically expends significant resources. Although the Company has generally met its customers' quality and reliability product specifications, the Company has in the past experienced and is currently experiencing difficulties in meeting some of these standards. Although the Company has addressed past concerns and has resolved a number of quality and reliability problems, there can be no assurance that such problems will not continue or recur in the future. If such problems did continue or recur, the Company could experience delays in shipments, increased costs, delays in or cancellation of orders and product returns, any of which would have a material adverse effect on the Company's business, financial condition or results of operations. The manufacture of the Company's products is complex and subject to a wide variety of factors, including the level of contaminants in the manufacturing environment and the materials used and the performance of personnel and equipment. The Company has in the past experienced lower than anticipated production yields and written off defective inventory as a result of such factors. The Company must also successfully increase production to support anticipated sales volumes. There can be no assurance that the Company will be able to do so or that it will not experience problems in increasing production in the future. The Company's failure to adequately increase production or to maintain high quality production standards would have a material adverse effect on the Company's business, financial condition and results of operations. Expansion of Operations. In order to be competitive, the Company must implement a variety of systems, procedures and controls. The Company expects its operating expenses to continue to increase. If orders received by the Company do not result in sales or if the Company is unable to sustain net sales at anticipated levels, the Company's operating results will be materially adversely affected until operating expenses can be reduced. The Company's expansion will also continue to cause a significant strain on the Company's management, financial and other resources. If the Company is to grow, it must expand its accounting and other internal management systems, and there can be no assurance that the Company will be successful in effecting such expansion. Any failure to expand these areas in an efficient manner at a pace consistent with the Company's business could have a material adverse effect on the Company's results of operations. Moreover, there can be no assurance that net sales will increase or remain at or above recent levels or that the Company's systems, procedures and controls will be adequate to support the Company's operations. The Company's financial performance will depend in part on its ability to continue to improve its systems, procedures and controls. 22 Intellectual Property Matters. Although the Company attempts to protect its intellectual property rights through patents, trade secrets and other measures, it believes that its financial performance will depend more upon the innovation, technological expertise, manufacturing efficiency and marketing and sales abilities of its employees. There can be no assurance that others will not independently develop similar proprietary information and techniques or gain access to the Company's intellectual property rights or disclose such technology or that the Company can meaningfully protect its intellectual property rights. There can be no assurance that any patent owned by the Company will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications will be issued with the scope of the claims sought by the Company, if at all. Furthermore, there can be no assurance that others will not develop similar products, duplicate the Company's products or design around the patents owned by the Company, or that third parties will not assert intellectual property infringement claims against the Company. In addition there can be no assurance that foreign intellectual property laws will protect the Company's intellectual property rights. Environmental Regulations. The Company is 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 the Company's products. The Company believes that it is currently in compliance in all material respects with such regulations and that it has obtained all necessary environmental permits to conduct its business. Nevertheless, the failure to comply with current or future regulations could result in the imposition of substantial fines on the Company, suspension of production, alteration of its manufacturing processes or cessation of operations. Compliance with such regulations could require the Company to acquire expensive remediation equipment or to incur substantial expenses. Any failure by the Company to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject the Company to significant liabilities, including joint and several liability under certain statutes. The imposition of such liabilities could materially adversely affect the Company's business, financial condition or results of operations. The Company has been notified by the United States Environmental Protection Agency that it considers the Company 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. Growth Strategy Through Acquisitions. As part of its growth strategy, the Company has in the past sought and may in the future continue to seek to increase sales and achieve growth through the acquisition of comparable or complementary businesses or technologies. The implementation of this strategy will depend on many factors, including the availability of acquisitions at attractive prices and the ability of the Company to make acquisitions, the integration of acquired businesses into existing operations, the expansion of the Company's customer base and the availability of required capital. Acquisitions by the Company may result in dilutive issuances of equity securities, and in the incurrence of debt and the amortization of goodwill and other intangible assets that could adversely affect the Company's profitability. Any inability to control and manage growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will successfully expand or that growth and expansion will result in profitability or that the Company's growth plans through acquisitions will not be inhibited by the Company's current lack of resources. Dependence on Key Personnel. The Company's financial performance depends in part upon its ability to attract and retain qualified management, technical, and sales and support personnel for its operations. Competition for such personnel is intense, and there can be no assurance that the Company 23 will be successful in attracting or retaining such personnel. The loss of any key employee, the failure of any key employee to perform in his current position or the Company's inability to attract and retain skilled employees, as needed, could materially adversely affect the Company's business, financial condition and results of operations. Volatility of Stock Price. The Company believes that factors such as announcements of developments related to the Company's business, fluctuations in the Company's financial results, general conditions or developments in the semiconductor and personal computer industry and the general economy, sales of the Company's Common Stock into the marketplace, the ability of the Company to sell its stock on an exchange or over-the-counter, an outbreak of hostilities, natural disasters, announcements of technological innovations or new products or enhancements by the Company or its competitors, developments in the Company's relationships with its customers and suppliers, or a shortfall or changes in revenue, gross margins or earnings or other financial results from analysts' expectations could cause the price of the Company's Common Stock to fluctuate, perhaps substantially. In recent years the stock market in general, and the market for shares of small capitalization stocks in particular, including the Company, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. There can be no assurance that the market price of the Company's Common Stock will not continue to experience significant fluctuations in the future, including fluctuations that are unrelated to the Company's performance. Recurring net operating losses. The Company's decision to discontinue its multilayer ceramic operations was the primary factor contributing to its 1996 net loss of $41,842,000. The decision by the principal secured creditors of the Company's pressed ceramic operations to liquidate that operation's assets was the primary factor contributing to the 1997 net loss of $11,496,000, as well as additional loss provisions made in 1997 relating to the discontinuance of the multilayer ceramic operations. At March 31, 1998, the Company had a working capital deficiency of $41,090,000 and an accumulated deficit of $79,294,000. The Company had outstanding at March 31, 1998 approximately $27,151,000 of debt from its discontinued operations, which debt has been guaranteed by MPI, the parent company, and most of which debt is in default and due on demand. Year 2000 Compliance. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry and in other industries concerning the potential effects associated with such compliance. Although the Company currently offers products that are designed to be Year 2000 compliant, there can be no assurance that the Company's products and the software products used by the Company contain all necessary date code changes. In addition, the Company has not comprehensively tested all of its internal software systems, or the third-party software it uses in its business, for Year 2000 problems. Year 2000 problems in the Company's internal software, or in the software of third parties that the Company uses in its business, could have a material adverse effect on the Company's business, operating results and financial condition. The Company believes that the purchasing patterns of customers and potential customers and the performance of vendors may be affected by Year 2000 issues in a variety of ways. Many companies are expending significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase products such as those offered by the Company or the inability to render services or provide supplies to the Company. Year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for software products, and 24 disruption of supply patterns. Additionally, Year 2000 issues could cause a significant number of companies, including current Company customers and vendors, to spend significant resources upgrading their internal systems, and as a result consider switching to other systems or suppliers. Any of the foregoing could result in a material adverse effect on the Company's business, operating results and financial condition. 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings Due to the closure of the Company's Singapore operations, various creditors have instituted legal actions against the Company and its subsidiaries in order to recover amounts due. In addition, numerous other creditors and parties to contracts have threatened or initiated litigation to recoup their loans and/or investments. These claims will not be fully satisfied through the liquidation of assets in Singapore. If these claims are not favorably resolved, they will have a material adverse effect on the Company's financial condition, results of operations and ability to continue as a going concern because the Company has guaranteed substantially all of these debts. Item 2. Changes in Securities and Use of Proceeds On March 23, 1998, the Company filed its Amended and Restated Articles of Incorporation with the state of California. See Item 4. Item 3. Defaults upon Senior Securities As of March 31, 1998, the Company and its subsidiaries were in default on most of their debt obligations, which total $27.2 million due to non- payment of principal or interest payments due. The amount above includes MPM's $9.0 million in debentures owing to Transpac, which are in default under the terms of the debentures in part due to non-payment of interest which was due on December 31, 1996. The repayment of the debentures and other debt in default have been guaranteed by MPI. Item 4. Submission of Matters to a Vote of Security Holders The following items were submitted to Shareholders of record on December 31, 1997 for their approval, pursuant to a written consent solicitation approved by the Board of Directors of the Company, which was mailed to Shareholders on or about January 9, 1998. No meeting of Shareholders was held. Both of the items subject to the written consent were approved by the Shareholders as of March 10, 1998.
Consents Against or Broker Non- Matter Submitted to Shareholders Consents For Withheld Abstained Votes ----------------------------------------------------------------------------------------------------------------------- Increase in the Company's authorized but unissued shares of capital stock to consist of 35,000,000 additional shares of Common Stock for a total of 50,000,000 shares of Common Stock 9,307,750 564,978 71,802 -- Increase in the Company's authorized but unissued shares of capital stock to consist of 10,000,000 shares of undesignated Preferred Stock 6,528,673 718,239 238,492 2,571,551
26 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K The following report on Form 8-K was filed during the quarter ended March 31, 1998: Report on Form 8-K dated March 18, 1998 was filed with the Securities and Exchange Commission on March 23, 1998, to report that the Company had issued a press release in connection with the restatement of its previously reported financial statements for the quarters ended June 30, 1997 and September 30, 1997. The Exhibits filed as part of this report are listed below. Exhibit No. Description ----------- ----------- 3.1 (1) Amended and Restated Articles of Incorporation of the Company filed March 23, 1998 10.75 (1)+ Agreement among Schlumberger Technologies, Inc. ATE Division and Microelectronic Packaging, Inc. and CTM Electronics, Inc. effective January 5, 1998. 27.1 Financial Data Schedule ___________ (1) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K for the 1997 fiscal year filed with the Securities and Exchange Commission. + Confidential Treatment has been granted for the deleted portions of this document. 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. MICROELECTRONIC PACKAGING, INC. ------------------------------- (Registrant) Date: May 14, 1998 By: /s/ DENIS J. TRAFECANTY ----------------- ---------------------------- Denis J. Trafecanty Senior Vice President, Chief Financial Officer and Secretary 28 EXHIBIT INDEX Number Description ------ ----------- 3.1 (1) Amended and Restated Articles of Incorporation of the Company filed March 23, 1998. 10.75 (1)+ Agreement among Schlumberger Technologies, Inc. ATE Division and Microelectronic Packaging, Inc. and CTM Electronics, Inc. effective January 5, 1998. 27.1 Financial Data Schedule ____________ (1) Incorporated by reference from an exhibit filed with the Company's Annual Report on Form 10-K for the 1997 fiscal year filed with the Securities and Exchange Commission. + Confidential Treatment has been granted for the deleted portions of this document. 29
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET AS OF MARCH 31, 1998 AND THE STATEMENTS OF OPERATIONS, CASH FLOWS AND SHAREHOLDERS EQUITY FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 MAR-31-1998 MAR-31-1997 932 1,296 0 0 3,699 2,504 0 0 5,237 4,230 10,000 8,417 1,641 1,212 0 0 11,893 9,911 51,090 50,074 64 69 0 0 0 0 40,033 40,016 (79,294) (80,248) 11,893 9,911 7,334 7,674 7,334 7,674 5,381 6,790 5,381 6,790 0 0 0 0 3 0 972 (343) 18 0 954 (343) 0 (876) 0 0 0 0 954 (1,219) 0.09 (0.13) 0.08 (0.13)
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