<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
-------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 [_]
As of August 11, 1997, there were 10,793,279 shares outstanding of the
--------------- ----------
Registrant's Common Stock, no par value per share.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
Index Page No.
- ----- --------
<S> <C>
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.................................. 14
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 31
SIGNATURES............................................................. 32
EXHIBIT INDEX.......................................................... 33
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ -----------
(unaudited)
(Restated-See Note 2)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,192,000 $ 2,954,000
Accounts receivable, net 2,193,000 5,849,000
Inventories 7,660,000 10,072,000
Other current assets 114,000 1,836,000
------------ ------------
Total current assets 11,159,000 20,711,000
Property, plant and equipment, net 780,000 3,479,000
Other non-current assets 338,000 704,000
------------ ------------
$ 12,277,000 $ 24,894,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Debt in default, due on demand $ 16,774,000 $ 19,052,000
Line of credit borrowings, due on demand - 5,201,000
Current portion of long-term debt 3,014,000 2,527,000
Accounts payable 12,102,000 12,522,000
Accrued liabilities 2,102,000 3,656,000
Deferred revenue 330,000 503,000
Current liabilities of discontinued operations, net 16,838,000 7,265,000
------------ ------------
Total current liabilities 51,160,000 50,726,000
Long-term debt, less current portion 2,961,000 4,782,000
Commitments and Contingencies
Shareholders' Deficit
Common stock, no par value 39,839,000 38,138,000
Accumulated deficit (81,683,000) (68,752,000)
------------ ------------
Total shareholders' deficit (41,844,000) (30,614,000)
------------ ------------
$ 12,277,000 $ 24,894,000
============ ============
</TABLE>
3
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Restated-See Note 2)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
Product sales $ 8,788,000 $ 4,448,000 $ 16,462,000 $ 10,778,000
Other sales 90,000 582,000 90,000 817,000
------------ ------------ ------------ ------------
8,878,000 5,030,000 16,552,000 11,595,000
Cost of goods sold:
Product sales 8,249,000 3,585,000 15,040,000 8,749,000
Other sales 43,000 514,000 43,000 729,000
------------ ------------ ------------ ------------
8,292,000 4,099,000 15,083,000 9,478,000
------------ ------------ ------------ ------------
Gross profit 586,000 931,000 1,469,000 2,117,000
Selling, general and administrative 1,315,000 982,000 2,579,000 1,865,000
Engineering and product development 88,000 154,000 196,000 275,000
------------ ------------ ------------ ------------
Income (loss) from operations (817,000) (205,000) (1,306,000) (23,000)
Other income (expense):
Interest (expense), net (5,000) (10,000) (25,000) (22,000)
Other income, net 106,000 33,000 275,000 82,000
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before provision for income taxes (716,000) (182,000) (1,056,000) (37,000)
Income tax provision (benefit) - (53,000) - 47,000
------------ ------------ ------------ ------------
Income (loss) from continuing operations (716,000) (129,000) (1,056,000) (10,000)
Discontinued operations:
Income (loss) from operations (3,445,000) 739,000 (4,524,000) 1,185,000
Estimated loss on disposal (7,351,000) - (7,351,000) -
------------ ------------ ------------ ------------
Net income (loss) $(11,711,000) $ 610,000 $(12,931,000) $ 1,175,000
============ ============ ============ ============
Weighted average shares used
in per share calculation 10,793,000 5,746,000 9,921,000 5,327,000
============ ============ ============ ============
Net income (loss) per common share:
Continuing operations $ (0.07) $ (0.02) $ (0.10) $ -
Discontinued operations (1.02) 0.13 (1.20) 0.22
------------ ------------ ------------ ------------
Net income (loss) per common share $ (1.09) $ 0.11 $ (1.30) $ 0.22
============ ============ ============ ============
</TABLE>
4
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------------------
1997 1996
(Restated-See Note 2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net cash provided (used) by operating activities of:
Continuing operations $ 689,000 $ (4,116,000)
Discontinued operations 1,955,000
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 2,644,000 (4,116,000)
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of fixed assets (331,000) (6,046,000)
Proceeds from sale of fixed assets
Continuing operations 24,000
Discontinued operations 236,000
Realized loss from forward foreign currency contracts - 215,000
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (71,000) (5,831,000)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in short-term notes payable
Continuing operations - 961,000
Discontinued operations (3,612,000) -
Borrowings under long-term debt and promissory notes
Continuing operations 76,000 10,616,000
Principal payments on long-term debt and promissory notes
Continuing operations (291,000) (334,000)
Discontinued operations (508,000) -
Issuance of common stock - 1,986,000
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (4,335,000) 13,229,000
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (1,762,000) 3,282,000
Cash at beginning of period 2,954,000 2,923,000
- --------------------------------------------------------------------------------------------------------------
Cash at end of period $ 1,192,000 $ 6,205,000
==============================================================================================================
</TABLE>
5
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' DEFICIT
(unaudited)
<TABLE>
<CAPTION>
Common Stock
----------------------------- Accumulated
Shares Amount Deficit Total
------------- ------------ ------------- -------------
(Restated-See (Restated-See
Note 2) Note 2)
<S> <C> <C> <C> <C>
Balance at January 1, 1997 6,991,493 $ 38,138,000 $ (68,752,000) $ (30,614,000)
Issuance of common stock 3,801,786 1,701,000 1,701,000
Net loss (12,931,000) (12,931,000)
- -------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 10,793,279 $ 39,839,000 $ (81,683,000) $ (41,844,000)
=============================================================================================================
</TABLE>
6
<PAGE>
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 June 30, 1997 and for the three and six month periods ended June
30, 1997 and 1996 are unaudited but include all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of financial position and results of
operations of the Company for the interim periods. Certain prior year amounts
have been reclassified to conform to the current year presentation. The
results of operations for the three and six month periods ended June 30, 1997
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, 1996 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. Interest Expense Related to Discontinued Singapore Segment Debt
On March 3, 1997, prior to the release of its operating results for the year
ended December 31, 1996, the Company announced the commencement of the
liquidation of its MPM Singapore Pte. Ltd. ("MPM") subsidiary which had been
the subsidiary through which the Company was developing multilayer packaging
technology pursuant to a licensing agreement with IBM. In addition, on July
10, 1997, the Company announced the commencement of the liquidation of its
MPS Singapore Pte. Ltd. ("MPS") subsidiary that had been manufacturing EPROM,
CERDIP and other pressed ceramic packages.
The total debt pertaining to the MPM and MPS subsidiaries aggregates
approximately $23 million as of June 30, 1997. The estimated interest expense
pertaining to the MPM portion of this debt for the period from January 1,
1997 to June 30, 1997 (the anticipated date of liquidation of MPM at December
31, 1996) was recorded as a charge to discontinued operations as of December
31, 1996. The Company previously accounted for the interest expense of MPS as
a current period expense in its quarterly report ended June 30, 1997.
Subsequently, the Company has determined that it is more appropriate to
classify these Singapore operations' financing expenses as estimated loss on
disposal of discontinued operations to be consistent with the method of
reporting used by the Company at December 31, 1996 and to more accurately
reflect the estimated loss on disposal.
Accordingly, the Company is restating its quarterly results for the three
months ended June 30, 1997 to increase its reserves for discontinued
operations by $3,500,000 which represents interest expense related to the
debt from two of the Company's subsidiaries in Singapore. The interest
expense recorded covers the six months ended December 31, 1997 and the
projected applicable interest expense that will be incurred by both MPM and
MPS through the completion of the liquidation (in 1998). The Company believes
that the increase made to its reserves for discontinued operations of
$3,500,000 as of June 30, 1997 will be adequate to satisfy all anticipated
liabilities of those discontinued operations.
The effect of these changes is to decrease the operating loss by $199,000 for
the quarter ended June 30, 1997, and to increase the Company's net loss by
$3,500,000 for the same period.
7
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(unaudited)
<S> <C> <C>
Raw materials............... $4,881,000 $ 5,797,000
Work-in-progress............ 3,239,000 2,977,000
Finished goods.............. 160,000 2,622,000
Obsolescence reserve........ (620,000) (1,324,000)
---------- -----------
$7,660,000 $10,072,000
========== ===========
</TABLE>
4. Effects of Income Taxes
The Company has not recorded provisions for any income taxes for the three
and six month periods ended June 30, 1997, since the Company's domestic and
Singapore operations generated operating losses for both financial reporting
and income tax purposes. A 100% valuation allowance has been provided on the
total deferred income tax assets as they are not more likely than not to be
realized.
The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company
believes that its ability to utilize its current net operating loss and
credit carryforwards in subsequent periods will be subject to annual
limitations.
5. Net Income (Loss) Per Share
The computation of primary net income (loss) per share is based upon the
weighted average number of outstanding common shares during the period plus,
when their effect is dilutive, common stock equivalents from the assumed
exercise of stock options (using the treasury stock method). Fully diluted
net income (loss) per share has not been presented as it is not materially
different from primary net income (loss) per share.
6. 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.
7. Customer Supplied Inventory
The Company's CTM Electronics, Inc. subsidiary purchases 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. This customer
notified the Company recently 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 Financial Statements as of, and for the
three and six month periods ended, June 30, 1997, as if this change had been
put into effect on January 1, 1997.
8
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(unaudited) (Restated - See Note 2)
------------------------------------------------------------------
Historical Pro Forma Pro Forma
June 30, 1997 Adjustments(1) June 30, 1997
------------- --------------- --------------
<S> <C> <C> <C>
Accounts Receivable $ 2,193,000 $ (913,000) $ 1,280,000
Inventories 7,660,000 (4,731,000) 2,929,000
Total current assets 11,159,000 (5,644,000) 5,515,000
Current portion of long-term debt 3,014,000 4,940,000 7,954,000
Accounts payable 12,102,000 (10,584,000) 1,518,000
Total current liabilities 51,160,000 (5,644,000) 45,516,000
</TABLE>
<TABLE>
<CAPTION>
(unaudited) (Restated - See Note 2)
-----------------------------------------------------------------------
Historical Pro Forma
Three Months Ended Pro Forma Three Months Ended
June 30, 1997 Adjustments June 30, 1997
------------------ ---------------- ------------------
<S> <C> <C> <C>
Net sales $ 8,878,000 $(5,060,000) (2) $ 3,818,000
Cost of goods sold 8,292,000 (5,164,000) (3) 3,128,000
Gross profit 586,000 104,000 690,000
Net income (loss) (11,711,000) 104,000 (11,607,000)
------------------ ---------------- ------------------
Net income (loss) per common share $(1.09) $0.01 $(1.08)
================== ================ ==================
</TABLE>
<TABLE>
<CAPTION>
(unaudited) (Restated - See Note 2)
----------------------------------------------------------------------
Historical Pro Forma
Six Months Ended Pro Forma Six Months Ended
June 30, 1997 Adjustments June 30, 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Net sales $ 16,552,000 $(9,748,000) (2) $ 6,804,000
Cost of goods sold 15,083,000 (9,948,000) (3) 5,135,000
Gross profit 1,469,000 200,000 1,669,000
Net income (loss) (12,931,000) 200,000 (12,731,000)
================ ================ =================
Net income (loss) per common share $(1.30) $0.02 $(1.28)
================ ================ =================
</TABLE>
(1) Effect on the balance sheet is the reduced carrying values of accounts
receivable, inventories (both of which reduce total current assets), and
accounts payable. The excess of accounts payable adjustments over
adjustments for accounts receivable and inventory (the "shortfall"),
results in the increase in the current portion of long-term debt. The
Company is currently in the process of negotiating the repayment terms of
this shortfall. There can be no assurance that the customer will extend
any repayment terms, and could declare the shortfall immediately due and
payable. At present, the Company would be unable to repay the shortfall.
9
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
(2) The cost of the die to be provided on consignment will be removed from the
selling price of the multichip modules. 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 multichip modules.
(3) 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 multichip modules.
8. Liquidation of Subsidiary
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 has been a wholly owned subsidiary of the Company
that manufactured primarily pressed ceramic products. DBS exercised its
option to appoint a Receiver and Manager 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 within the next several months. The Company has guaranteed
all of MPS's obligations to DBS. There were approximately $5.3 million of
such loans outstanding as of June 30, 1997, which are included in the caption
"Current liabilities of discontinued operations, net" in the Condensed
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.
The Company has 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 Condensed Consolidated Statement of
Operations for the three and six month periods ended June 30, 1997 and 1996.
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 to generate
revenue as of July 10, 1997.
The Company has also evaluated the net realizable value of the assets of its
MPS subsidiary. The effect of this is to reduce the carrying value of certain
assets as of June 30, 1997, and a charge to "Estimated loss on disposal" on
the Condensed Consolidated Statement of Operations for the three and six
month periods ended June 30, 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 August 11, 1997,
most of the assets of MPM have 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 belonging to 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. The holders of the Transpac debentures
still retain $9.0 million of debt securities issued by MPM which are
guaranteed by the Company. The Company and MPS are in default thereunder.
10
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
9. Loss of Business
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 minimal losses from the fire. The Company has
closed the MPC operation and has terminated all of its MPC employees. MPC
represented approximately 6% of consolidated net sales of the Company in the
year ended December 31, 1996, and comprised less than 1% of the Company's
consolidated total assets. 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" on the Condensed Consolidated Statement
of Operations for the three and six month periods ended June 30, 1997 and
1996.
10. Discontinued Operations
Based on the information included in Notes 8 and 9, the results of MPS, MPC
and MPM segments have been reported separately as discontinued operations as
of June 30, 1997, and for the three and six month periods then ended.
Consolidated Statements of Operations for the three and six month periods
ended June 30, 1996 have been restated to present MPS, MPC and MPM segments
as discontinued operations. Certain items in the Condensed Consolidated
Balance Sheet as of December 31, 1996 have been restated to conform to the
current period's presentation.
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.
The components of "Current liabilities of discontinued operations, net"
included in the Condensed Consolidated Balance Sheets are as follows (only
MPM was included in net liabilities of discontinued operations as of
December 31, 1997 -- MPS and MPC are included, along with MPM, as of June
30, 1997):
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
-----------------------------------
(unaudited)
(Restated-See
Note 2)
<S> <C> <C>
Cash $ 164,000 $ 391,000
Other current assets
(principally trade receivables and
inventories) $ 1,888,000 $ 225,000
Property, plant and equipment, net 1,713,000 1,500,000
Other non-current assets 308,000 --
Debt in default and
line of credit borrowings, due on demand (5,504,000) (3,298,000)
Accounts payable and accrued expenses (15,407,000) (6,083,000)
-----------------------------------
Current liabilities of
discontinued operations, net $(16,838,000) $ (7,265,000)
===================================
</TABLE>
11
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
The Condensed Consolidated Statements of Operations relating to the discontinued
operations for the three and six month periods ended June 30, 1997 and 1996 are
presented below:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (Restated-See Note 2)
<S> <C> <C> <C> <C>
Net sales $ 3,753,000 $11,093,000 $ 9,972,000 $21,980,000
Costs and expenses 7,198,000 10,122,000 14,088,000 20,345,000
----------- ----------- ----------- -----------
Income (loss) from
discontinued operations $(3,445,000) $ 971,000 $(4,116,000) $ 1,635,000
=========== =========== =========== ===========
</TABLE>
11. Supplemental Information To Condensed Consolidated Statements of Cash Flows
Holders of $1,900,000 of convertible debentures issued in October 1996,
elected to convert their debentures into 3,801,787 shares of Common Stock
during January and February, 1997.
12. New Accounting Standard
In June, 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131). This pronouncement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This
pronouncement is effective for fiscal years and interim periods beginning
after December 15, 1997. The Company has not determined the effect, if any,
of adoption on its financial reporting.
In June, 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes
standards for reporting and display of comprehensive income, which includes
certain items which have historically been excluded from the income
statement, and instead charged directly to equity. The Company has not
incurred any of the specific items addressed in this pronouncement. As a
result, management does not believe that this pronouncement will have any
impact on the Company's financial reporting. This pronouncement is effective
for fiscal years beginning after December 15, 1997.
In February, 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, Disclosure of Information about Capital Structure (SFAS
129). This pronouncement establishes standards for disclosing information
about an entity's capital structure for nonpublic entities which were
previously exempt from certain disclosure requirements. This pronouncement
is effective for fiscal years ending after December 15, 1997. Management
does not believe that this pronouncement will have any effect on the
Company's financial reporting.
In February, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings per Share (SFAS 128). This pronouncement
provides a different method of calculating earnings per share than is
currently used in accordance with APB 15, Earnings per Share. SFAS 128
provides for the calculation of Basic and Diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to
12
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
- --------------------------------------------------------------------------------
common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. This pronouncement is
effective for fiscal years and interim periods ending after December 15,
1997; early adoption is not permitted. The Company has not determined the
effect, if any, of adoption on its EPS computation(s).
13. Going Concern
The accompanying financial statements have been prepared assuming the
Company (including subsidiaries except MPS, MPC and MPM) 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 (direct and guaranteed), the need to
restructure debt which is currently in default, various claims and lawsuits,
the economic dependency upon a limited number of customers and MPS and MPM
being in receivership raise substantial doubts about the Company's ability
to continue as a going concern. The Company currently has $20.0 million of
indebtedness in default and thereby due upon demand ($3.2 million of which
is included in "Current liabilities of discontinued operations, net"), as
well as $4.2 million of line of credit borrowings that are also due upon
demand (all of which are included in "Current liabilities of discontinued
operations, net"). The Company does not possess sufficient cash resources to
repay these obligations, and the Company would be unable to repay these
loans in the event that any demand was made by the Company's creditors.
As a result of the events described above, the new executive management team
is restructuring the Company's remaining operations with the goal of
producing profits and positive cash flow. Management has been successful in
restructuring two of the Company's customer loans (TI and Citibank);
principal will be repaid over three to four years with the commencement of
principal payments deferred until 1998. The Company believes that it may be
able to restructure the majority of its remaining customer loans on similar
terms, although there can be no assurances that the Company will be able to
renegotiate these loans on favorable terms, or at all.
14. 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.
13
<PAGE>
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
Net sales were $8,878,000 for the second quarter and $16,552,000 for the six
months ended June 30, 1997, representing increases of $3,848,000 or 76.5% and
$4,957,000 or 42.8% over net sales for the corresponding periods of 1996. The
increases in net sales during the second quarter and the six months ended June
30, 1997 were primarily attributable to increases of $4,502,000 and $5,960,000
in revenues from the sales of MCM products at the Company's CTM Electronics,
Inc. ("CTM") subsidiary. The increase in sales of MCM's for the second quarter
resulted from a 205.0% increase in the number of units sold over the
corresponding period of 1996, partially offset by a 28.4% decrease in average
selling prices, which was caused by a change in product mix. The increase in
sales of MCM's for the six months ended June 30, 1997 resulted principally from
a 55.7% increase the number of units sold over the corresponding period of 1996.
Average selling prices increased by 2.9%. The increase in net sales by CTM was
partially offset by reductions of $163,000 and $276,000 in revenues from the
Company's Microelectronic Packaging America ("MPA") subsidiary and by reductions
of $492,000 and $727,000 in revenues derived under an equipment and technology
transfer agreement discussed below. The reduction in net sales from MPA came as
a result of the Company's sale of the assets and closure of that business on
September 30, 1996.
Revenues reported in this Quarterly Report on Form 10-Q reflect the
reclassification of revenues from the Company's Singapore subsidiaries for all
periods presented (MPS, MPC and MPM) to "Income (loss) from discontinued
operations" (see Note 10 to Condensed Consolidated Financial Statements). The
Company anticipates a significant reduction in revenues in the future as a
result of a significant customer's decision to provide certain raw materials on
consignment, rather than selling them to the Company as has been done in the
past (see Note 7 to Condensed Consolidated Financial Statements).
Net sales for the three and six month periods ended June 30, 1996 includes
$582,000 and $817,000 of revenues derived under an agreement with a government
factory in Yixing, China. Such revenues have been included in "Other Sales" in
the Condensed Consolidated Statement of Operations. The contract was completed
in the second quarter of 1997 and the last $90,000 of revenues under this
contract were recorded at that time.
COST OF GOODS SOLD
Cost of goods sold were $8,292,000 for the second quarter and $15,083,000 for
the six months ended June 30, 1997, representing increases of $4,193,000 or
102.3% and $5,605,000 or 59.1% over the corresponding periods of 1996. The
increase for the second quarter of 1997 resulted from a $5,011,000 increase in
the cost of goods sold for MCM products by CTM, which was partially offset by a
$348,000 reduction in the cost of goods sold by MPA and by a $471,000 decrease
in "Other
14
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
costs" incurred in connection with the equipment and technology transfer
agreement discussed below. The increase in cost of goods sold by CTM for the
second quarter resulted from a 205.0% increase in the number of units sold over
the corresponding period of 1996, partially offset by a 18.7% decrease in the
average per unit cost of the major components used at CTM. This decrease in
average per unit cost represents a change in product mix, rather than a purchase
price reduction of raw materials. The reduction in cost of goods sold from MPA
came as a result of the Company's sale of the assets and closure of that
business on September 30, 1996.
The increase for the first six months of 1997 results from a $7,059,000 increase
in the cost of goods sold for MCM products by CTM, which was partially offset by
a $768,000 reduction in the cost of goods sold by MPA and by a $686,000 decrease
in "Other costs" incurred in connection with the equipment and technology
transfer agreement discussed below. The increase in cost of goods sold by CTM
for the six months ended June 30, 1997 results from a 55.7% increase in the
number of units shipped, combined with a 25.4% increase in the average per unit
cost of the major components used at CTM.
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 all periods presented (MPS, MPC and MPM) to "Income (loss) from discontinued
operations" (see Note 10 to Condensed Consolidated Financial Statements). The
Company anticipates a significant reduction in cost of goods sold in the future
as a result of a significant customer's decision to provide certain raw
materials on consignment, rather than selling them to the Company as has been
done in the past (see Note 7 to Condensed Consolidated Financial Statements).
Cost of goods sold for the three and six month periods ended June 30, 1996
includes $514,000 and $729,000 of expenses incurred in connection with the
equipment and technology transfer agreement with a government factory in Yixing,
China. Such expenses have been included in "Other Sales" under "Cost of goods
sold" in the Condensed Consolidated Statement of Operations. As discussed
above, the contract was completed during the second quarter of 1997, and the
final $43,000 of expenses under this contract were recorded at that time.
GROSS PROFIT
Gross profit was $586,000 (6.6% of net sales) for the second quarter and
$1,469,000 (8.9% of net sales) for the six months ended June 30, 1997, as
compared to $931,000 (18.5% of net sales) for the second quarter and $2,117,000
(18.3% of net sales) for the six months ended June 30, 1996. The decrease in
gross profits for the second quarter and for the six months ended June 30, 1997
is attributable to a change in mix of products with a higher selling price, but
with much lower margins, thus reducing gross profit in dollars and as a
percentage of sales. With demand increasing on the newer, lower-margin products,
the Company anticipates that the gross profit for the remainder of 1997 will
continue to be at the lower levels experienced during the first half of 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $1,315,000 for the second
quarter and $2,579,000 for the first six months of 1997, representing increases
of $333,000 or 33.9% and $714,000 or 38.3%, respectively, from the comparable
periods of 1996. These increases are primarily caused by additional legal and
consulting fees incurred in connection with the restructuring of the Company's
Singapore and U.S. operations. The Company anticipates selling, general and
administrative expenses to continue at the second quarter's level through the
end of the fiscal year ending December 31, 1997.
15
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 all periods presented (MPS, MPC and MPM) to "Income
(loss) from discontinued operations" (see Note 10 to Condensed Consolidated
Financial Statements).
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were $88,000 for the first quarter
and $196,000 for the first six months of 1997, representing decreases of $66,000
or 42.9% and $79,000 or 28.7% from the corresponding periods of 1996. The
reduction in engineering and product development costs result primarily from the
closure of MPA business on September 30, 1996. The Company anticipates that
engineering and product development expenses will increase over the remainder of
the fiscal year ending December 31, 1997.
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 all periods presented (MPS, MPC and MPM) to "Income
(loss) from discontinued operations" (see Note 10 to Condensed Consolidated
Financial Statements).
INTEREST EXPENSE
Interest expense was $5,000 for the second quarter and $25,000 for the first six
months of 1997, representing a decrease of $5,000 and an increase of $3,000,
respectively, from the corresponding periods of 1996. This caption has been
restated to exclude interest on customer loans that are related to the
discontinued operations of Singapore (see Note 2).
OTHER INCOME
Other income was $106,000 for the second quarter and $275,000 for the first six
months of 1997, as compared to $33,000 and $82,000 for the corresponding periods
of 1996. These increases came as a result of a settlement of a legal dispute.
EFFECTS OF INCOME TAXES
The Company has not recorded provisions for income taxes for the three and six
month periods ended June 30, 1997, since the Company's domestic and Singapore
operations generated operating losses for both financial reporting and income
tax purposes. A 100% valuation allowance has been provided on the total
deferred income tax assets as they are not more likely than not to be realized.
The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company believes
that its ability to utilize its current net operating loss and credit
carryforwards in subsequent periods will be subject to annual limitations.
DISCONTINUED OPERATIONS
The net operating results of the activities of MPM, MPS, MPC and FT for each of
the three and six month periods ended June 30, 1997 and 1996 have been included
as income or 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. Such expenses include $3.5 million of interest
16
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
expense relating to the indebtedness of the discontinued operations through the
expected completion of the liquidation process. 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
The Company's independent certified public accountants have included an
explanatory paragraph in their audit report with respect to the Company's
December 31, 1994, 1995 and 1996 consolidated financial statements related to a
substantial doubt with respect to the Company's ability to continue as a going
concern. There can be no assurance that the Company will operate profitably in
the future and that the Company will not continue to sustain losses. 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 the remainder of 1997. 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, among many factors, 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 has already been required to delay,
scale back and eliminate programs and may be unable to continue as a going
concern.
During the second quarter and first six months of 1997, the Company financed its
operations primarily through cash flows from its operating units. The Company's
principal source of liquidity as of June 30, 1997 consisted of its U.S. cash
balance of $1,192,000.
The Company is currently in default on most of its debt obligations and numerous
trade and other creditors are requesting repayment of their amounts due.
On July 10, 1997, DBS appointed a Receiver and Manager to liquidate the assets
of MPS. On March 1, 1997, the Board of Directors of the Company voted to
liquidate MPM. As a result, the credit facilities discussed below are no longer
available to MPS and MPM. In addition, all production and sales of products by
MPS ceased as of July 10, 1997, all employees were terminated, and the Receiver
and Manager commenced the liquidation of MPS assets.
MPS had a S$9.5 million (US$6.6 million) borrowing arrangement with DBS,
guaranteed by MPI, consisting of a working capital line of credit facility and
an overdraft facility. Borrowings under this arrangement are due on demand and
are secured by substantially all of the assets of MPS. Borrowings under the
working capital line and the overdraft facility bear interest at the Singapore
prime rate plus 1/2% and 3/4%, respectively. At June 30, 1997, MPS had
outstanding borrowings under this arrangement of US$1.6 million. Any proceeds
received upon sale of the MPS assets will be used to repay this loan.
As of March 31, 1997, MPS had failed to make timely principal payments under its
loan obligations to TI, SGS-Thomson and a note to Citibank N.A. guaranteed by
Motorola. The principal outstanding under these loans on June 30, 1997 totaled
$9.8 million, with interest rates ranging from 3.5% to 7.25%. Remedies
available to the note holders include acceleration of the principal balance of
the notes, attachment and/or foreclosure of assets of MPS, CTM, MPA and MPI
pledged as security, and perfection of guarantees issued by MPI. The Company is
in regular communication with all lenders regarding the restructure. No lender
to date has either declared a default or has exercised any such remedies under
these notes. MPS entered into an Amended Loan and Security Agreement with TI on
17
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
April 2, 1997 pursuant to which TI agreed to (i) waive its right to pursue a
default remedy under the original loan agreement, (ii) a lower interest rate of
3.5% per annum on the outstanding balance and (iii) a revised (and extended)
payment schedule for the outstanding balance owed by MPS. Due to the financial
condition of MPS, and based on the guarantee by MPI on this loan, on May 13,
1997, MPI purchased the debt of MPS from TI, on substantially the same terms and
conditions as the MPS note referred to above. On May 13, 1997, MPI issued a
promissory note to Citicorp USA, Inc. ("Citicorp") to replace the note between
MPS and Citibank, N.A., Singapore Branch, referred to above. This note bore
interest at 6.75% per annum and principal and interest were due on July 11,
1997. MPI and Citicorp entered into an Amendment on July 11, 1997, which
reduced the interest rate to 6.72% per annum beginning on the date of the
Amendment, and extended the due date for the principal and interest to September
9, 1997. The Company is currently attempting to renegotiate the terms and
conditions of its notes with SGS- to waive any current defaults and to
restructure the note to provide more favorable terms to the Company. There can
be no assurance that the Company will be successful in this negotiation or that
SGS-Thomson will not avail itself of the remedies available, which include
acceleration of the principal balance of the notes, attachment and/or
foreclosure of assets of MPS pledged as security, and perfection of guarantee
issued by MPI. To date, SGS-Thomson has not declared a default nor has
exercised any such remedies under its note.
MPC had a S$500,000 (US$350,000 at June 30, 1997) borrowing arrangement with
DBS, guaranteed by both MPI and MPS, consisting of a working capital line and an
overdraft facility. Borrowings under this arrangement are also due on demand
and are secured by all of the assets of MPC. Borrowings under the working
capital line of credit facility and the overdraft facility bear interest at the
Singapore prime rate plus 1/2% and 3/4% respectively. MPC was notified by DBS on
April 16, 1997 that this banking facility was canceled. At June 30, 1997, MPC
had outstanding borrowings under this arrangement of $5,000.
MPM had a $3.5 million borrowing facility with DBS, which is guaranteed by both
MPI and MPS. This facility consisted of a $3.2 million short-term advance
facility and a $300,000 import/export bills facility. Advances under this
credit facility are secured by substantially all of the assets of MPM and bear
interest at the bank's prime lending rate plus 2.5%. This facility
automatically terminates in the event of the termination of the Company's
technology transfer agreement with IBM. At June 30, 1997, MPM had outstanding
borrowings under this arrangement of approximately $2.6 million. DBS has
appointed a Receiver and Manager to dispose of the assets of MPM which comprise
part of DBS's security. The Company anticipates that the disposition of the MPM
assets will partially repay the outstanding borrowings. The Company anticipates
that the liquidation of assets by the Receiver and Manager for MPS may provide
sufficient funds for this obligation to be repaid through the MPS guarantee.
Should the liquidation of MPM and MPS assets be insufficient to repay the
balance outstanding under this agreement, MPI will be required to pay the
balance under a guarantee by MPI. The Company will attempt to negotiate
favorable repayment terms. The failure by the Company to obtain favorable
repayment terms will materially adversely affect the Company's prospects and
financial condition and ability to continue as a going concern.
At June 30, 1997, the Company also had borrowings of $9.0 million under the
Transpac Debenture, $1.9 million under notes payable to various customers
bearing interest at rates ranging from 7.5% to 18.0%, $1.1 million under
mortgage notes bearing interest at rates ranging from 7.5% to 10.75%, and $2.3
million under capital lease obligations, consisting of various machinery and
equipment financing agreements, bearing interest at 4% to 11.9%. Borrowings
under the above arrangements are secured by substantially all of the assets of
the Company.
18
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Company informed DBS in March 1997 that MPM would be unable to repay its
borrowings with DBS as part of the liquidation of MPM. On April 10, 1997, DBS
sent to MPS a written demand for payment of the entire $3,298,000 currently due
under the MPM loan. In addition to demanding payment, DBS imposed the default
interest rate (an additional 3%) on the outstanding debt. Since MPM has
insufficient resources to repay DBS, with the agreement of the Company, DBS has
appointed a Receiver and Manager to dispose of the assets of MPM which comprise
part of DBS's security. MPM has additionally ceased lease payments due in
February 1997 to lessors for certain equipment in the MPM facility, and the
lessors have declared the leases to be in default. MPM owes approximately $1.9
million on these equipment leases. The Company believes that the disposal of
MPM's assets will not be sufficient to repay the debt obligations due to DBS.
The Company believes the disposal of assets will be insufficient to fully repay
the lease obligations of MPM and its indebtedness to Transpac. These obligations
have been fully guaranteed by MPI. The Company is currently attempting to
negotiate repayment terms with these creditors for the anticipated shortfall.
The failure by the Company to obtain favorable repayment terms will materially
adversely affect the Company's prospects and financial condition and ability to
continue as a going concern.
In addition, the Company anticipates that the liquidation of MPM will not
provide sufficient resources to repay the trade creditors of MPM. Indebtedness
to IBM for equipment rental totaling $704,000 is a direct obligation of MPI, and
accordingly would not be discharged by the liquidation of MPM. Additionally,
certain vendors of MPM provided goods or services to MPM under purchase orders
issued by MPS. Under Singapore law, these obligations, totaling $2.3 million
may also be deemed obligations of MPS and may not be discharged by the
liquidation of MPM. The Company has reflected these anticipated obligations in
its Condensed Consolidated Balance Sheets as of December 31, 1996 and June 30,
1997.
The financial resources of MPS are insufficient for it to repay the MPM trade
creditors. DBS informed the Company on July 10, 1997, that it appointed a
Receiver and Manager to liquidate the assets of MPS. As a result of the
appointment of a Receiver and Manager, MPS is unable to manufacture its pressed
ceramic products and has ceased to generate revenue.
MPI failed to make timely principal payments under a note with NSEB which was
due in January, 1997. In March 1997, the Company entered into an Amended Loan
and Security Agreement and a Second Secured Promissory Note with NSEB pursuant
to which NSEB agreed to waive any breach of the covenants, terms and conditions
of the original Loan and Security Agreement and the original Secured Promissory
Note (both dated May 30, 1995) and agreed to a revised payment schedule. The
interest rate on the outstanding balance, however, was raised from 14% per annum
to 18% per annum. As of June 30, 1997, the Company withheld payment of a $56,000
interest payment due on June 30, 1997, due to NSEB's failure to pay the
Company's MPS subsidiary the $2,600,000 currently owed in trade payables.
The Company's CTM Electronics, Inc. subsidiary purchases certain chips ("die")
used in the assembly of multichip modules sold to one of the Company's
significant customers from that same customer. This customer notified the
Company recently that it will no longer sell die to the Company and instead is
providing the die on consignment. This change will result in a significant
reduction in revenues and cost of goods sold (see Note 7 to Condensed
Consolidated Financial Statements).
FUTURE OPERATING RESULTS
Discontinuation of MPS Operations. On July 10, 1997, the Company was informed
by DBS, the principal secured creditor of MPS, that it appointed a Receiver and
Manager for MPS. The
19
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
appointment of a Receiver and Manager is allowed by the terms of the loan
agreements between MPS and DBS, since MPS is in default of certain covenants
under loans granted by DBS to MPS. The Receiver and Manager has commenced the
liquidation of the assets of MPS, which has caused the cessation of MPS's
operations and sales.
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 December 31, 1994, 1995 and 1996 consolidated financial
statements related to a substantial doubt with respect to the Company's ability
to continue as a going concern. There can be no assurance that the Company will
operate profitably in the future and that the Company will not continue to
sustain significant losses. 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 the remainder of 1997. 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,
among many factors, 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 will be required to delay, scale back or eliminate
programs 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 continue to have a material adverse
effect on the Company's ability to obtain additional financing.
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.
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 design 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 the remainder of 1997.
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
20
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
facilities and to complete certain programs. 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 DBS line of credit that was available to MPS, which is guaranteed by MPI,
contains numerous restrictive covenants on the ability of such subsidiary to
provide funds to MPI or to other subsidiaries and on the use of proceeds. The
credit facilities at MPC and MPM and the Transpac agreements also contain
similar restrictions. The Company is in breach of each of such agreements and
is in default under each of such agreements. The MPC S$500,000 (US$350,000 as
of June 30, 1997) borrowing arrangement with DBS has a balance of $5,000 as of
June 30, 1997. The MPM $3.5 million borrowing facility with DBS has been
declared in default, DBS has appointed a Receiver and Manager to liquidate MPM's
assets, which liquidation is anticipated to be completed by the end of 1997, and
DBS had called upon MPS to repay the MPM borrowing under MPS's guarantee. DBS
has also appointed a Receiver and Manager for MPS. The Company has been
negotiating with Transpac regarding the possible conversion of its indebtedness
into equity of the Company. 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, Transpac and other
creditors and Receivers and Managers for the liquidated estates. The Company is
currently in default on its guarantees and loan obligations to DBS as a result
of the Company's decision to cease its multilayer operations and to liquidate
MPM's assets. The liquidation of MPM and MPS has 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 be 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 under judicial reorganization, the Company
may be forced to seek protection under Chapter 11 of Title 11 of the United
States Code. If the Company were to seek additional financing, it is not likely
that additional financing will 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 and eliminate programs, which could continue to have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. In addition, the Company has been forced to
delay, downsize or eliminate other design and development, manufacturing,
construction or transitioning programs or alliances and 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.
Possible Future Adverse 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
corporate and debt restructurings, creditor relationships, conversions of
significant amounts of debt into a significant amount of equity, downward
pressure in gross margins, continued 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, political and economic instability, natural
disasters, outbreaks of
21
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 and its competitors, subcontractors, customers or
suppliers. 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, chip defects,
customer difficulties, 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 design 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
continue to sustain losses in the future or that such losses will not have a
material adverse effect on the Company's business, properties, financial
condition and results of operations.
Repayment of Debt Obligations by MPM. As of December 31, 1996, MPM had
outstanding borrowings of approximately $3,298,000 under its borrowing
arrangement with DBS. MPM informed DBS in March 1997 that it would be unable to
repay its outstanding debts. DBS subsequently accelerated the entire amount of
the borrowings currently due and appointed a Receiver and Manager for MPM to
liquidate MPM's assets, which were pledged to DBS as security. The subsequent
liquidation of most of MPM's assets has reduced the outstanding balance to
approximately $2,663,000 as of June 30, 1997. The Company currently anticipates
that the proceeds from the liquidation of MPM's assets will not be sufficient to
repay the debt obligations due to DBS. The Company also believes the disposal of
assets will be insufficient to fully repay the lease obligations of MPM and its
indebtedness to Transpac. Since these borrowings have been fully guaranteed by
MPI, the Company is currently attempting to negotiate repayment terms with these
creditors for the anticipated shortfall. The failure by the Company to obtain
favorable repayment terms will materially adversely affect the Company's
prospects and financial condition and ability to continue as a going concern.
As of December 31, 1996 and June 30, 1997, MPM had equipment lease obligations
totaling $1.9 million, principally with one lessor. MPM failed to make lease
payments due in February 1997, and the lessors have declared the leases to be in
default. The lessors have commenced the liquidation of the leased equipment.
However, the Company believes that the proceeds therefrom will be insufficient
to fully repay the lease obligations. Since the lease obligations have been
guaranteed by MPI, the Company is currently attempting to negotiate terms with
the lessors for the anticipated remaining indebtedness. The failure by the
Company to obtain favorable repayment terms would materially adversely affect
the Company's financial condition and ability to continue as an ongoing concern.
MPM is also currently in possession of certain inventory that MPM had ordered
from IBM. IBM has not yet been paid for such inventory. The outstanding debt
from the inventory is less than $150,000.
22
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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
approximately $800,000. 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 or pay the overdue lease payments, such actions could materially
adversely affect any plans to restructure MPM's debt obligations. MPM is
currently delinquent on lease payments due under the real property lease. DBS
has guaranteed the payment of MPM's lease obligation to JTC through June 1997.
MPI will be required to reimburse DBS for any lease payments made.
In addition, the Company is attempting to convert the Transpac debentures into
equity of the Company. The conversion, if successful, would significantly
dilute any earnings per share amounts and significantly dilute the ownership
interests of MPI's current shareholders. If the Company is unsuccessful in
converting the debentures into equity, the Company would not be able to repay
the amounts outstanding under the debentures as required by its guarantee. 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 failures to repay, require that the Company seek bankruptcy
protection under Chapter 11 or Chapter 7 of Title 11 of the United States Code.
Adverse Impact of MPM Liquidation on MPS. Approximately $2.3 million of invoices
from MPM's trade creditors were incurred under purchase orders issued by MPS.
Under Singapore law, MPS may be liable for these invoices. The Company currently
anticipates that the proceeds from the liquidation of MPM and MPS assets will be
insufficient to fully repay these MPM invoices. DBS, as the primary secured
creditor of MPS, has informed the Company that it has elected to appoint a
Receiver and Manager over MPS. The Receiver and Manager appointed by DBS has
commenced the liquidation of MPS's assets currently pledged as security to DBS.
As a result, MPS is unable to continue its operations. Additionally, if the
liquidation of MPS assets generates proceeds less than the outstanding
obligations due, MPI may be forced to repay certain outstanding debts 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.
Repayment of Bank Obligations by MPS. At June 30, 1997, MPS had outstanding
borrowings of approximately $1.6 million with DBS and had borrowed an aggregate
of approximately $10.4 million from a consortium of customers (the "Consortium")
to fund its purchase of certain CERDIP manufacturing and alumina powder
equipment from Samsung Corning. MPM's defaults on its obligations under its DBS
facility agreement has resulted in a demand by DBS that MPS pay MPM's
outstanding debts. DBS's action may have resulted in defaults under MPS's loan
agreements pursuant to which it borrowed funds from the Consortium, among other
lenders. 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. 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.
Since MPS has defaulted under its obligations to this bank lender and so long as
such event of default continues, 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 (the "Subsidiary Voting Rights"). 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
23
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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. 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.
High Leverage. The Company is highly leveraged and has substantial debt service
requirements. The Company has $34.6 million in debt obligations as of June 30,
1997. On June 30, 1997, the Company had a total shareholders' deficit of
approximately $38.3 million. 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 depend 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.
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, 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.
Foreign Currency Fluctuations. Although the Company's sales are denominated in
United States dollars, a substantial portion of the Company's Singapore
operating expenditures were made in other currencies, namely Japanese yen and
Singapore dollars. As a result, the Company's operating results have been and
may continue to be materially adversely affected by changes in the United States
dollar relative to these currencies. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Any appreciation of such
currencies relative to the United States dollar would result in exchange losses
for the Company and could have the effect of increasing the outstanding
24
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
balance of certain obligations which are denominated in Singapore dollars
(which are guaranteed by MPI). Accordingly, such effects have had and will
continue to have a material adverse effect upon the business, financial
condition and results of operations of the Company.
Significant Customer Concentration. Historically, the Company has sold its
products to a very limited number of customers. Recently, certain of the
Company's key customers have decreased or terminated (in the case of SGS-
Thomson) their product purchase orders with the Company. Any further 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 MCM's, could materially adversely affect the
Company's business, financial condition and results of operations. Sales to one
customer, Schlumberger, accounted for 29% of the Company's net sales in 1996 and
is expected to continue to account for a majority of the Company's MCM sales. In
light of the termination of all of the Company's business operations in
Singapore, the Company's continued increasing reliance on its MCM business for
substantially all of its overall net sales, the failure to meet Schlumberger's
requirements will materially adversely affect the Company's ability to continue
as an ongoing concern. 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. There can also be no
assurance that the Company's CTM subsidiary will be able to diversify or enhance
its customer base. Failure to develop new customer relationships could
materially adversely affect the Company's business, financial condition and
results of operations.
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 has lately demonstrated a slowdown in demand. There can be no
assurance that such growth will return and that the slowdown will not continue.
A continued 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. There can be no
25
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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. The Company relies heavily on one suppler for certain
chips ("die") used in the assembly of its MCM's. The manufacturer of these die
has not been able to maintain a consistent supply of die meeting the customer's
quality specifications, nor has this manufacturer been able to predict with any
accuracy its ability to deliver die. Since these die are engineered by and
custom-produced for the Company's customer, the Company is not in a position to
seek other sources of supply. The Company has been working diligently with its
customer and the customer's suppler to seek a resolution to this issue. Failure
by the Company to develop products that gain widespread market acceptance and
significant sales, to develop relationships with customers whose end-user
products achieve and sustain market penetration, or to favorably resolve the die
availability problem, 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.
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. In addition, there are a limited number of qualified
suppliers of laminate substrates 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.
26
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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
recent 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.
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.
27
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Litigation is becoming necessary to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity of and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has not conducted any patent searches or obtained an
opinion of counsel with respect to its proprietary rights. Although no claims
or litigation related to any intellectual property matter are currently pending
against the Company, there can be no assurance that infringement or invalidity
claims by third parties or claims for indemnification resulting from
infringement claims will not be asserted in the future or that such assertions,
if proven to be true, will not materially adversely affect the Company's
business, financial condition and results of operations. If any claims or
actions are asserted against the Company, the Company may seek to obtain a
license under a third party's intellectual property rights. There can be no
assurance, however, that a license will be available under reasonable terms or
at all. In addition, the Company could decide to litigate such claims, which
could be extremely expensive and time-consuming and could materially adversely
affect the Company's business, financial condition and results of operations.
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 to 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.
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 will be successful in
attracting or retaining such personnel. The loss of any key employee,
28
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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.
Nasdaq Electronic Bulletin Board Listing Requirements. The Company was delisted
from the Nasdaq National Market on March 13, 1997, at which date the Company's
Common Stock began trading on the Nasdaq Electronic Bulletin Board. The Company
will be subject to continuing requirements to be listed on the Nasdaq Electronic
Bulletin Board. There can be no assurance that the Company can continue to meet
such requirements. The price and liquidity of the Common Stock may be
materially adversely affected if the Company is unable to meet such requirements
in the future. There can be no assurance that the Company will be able to
requalify for listing on the Nasdaq National Market.
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,
relationships with creditors, 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.
Net Operating Loss. The Company's decision to discontinue its multilayer
ceramic operations was the factor contributing to its 1996 net loss of $41.8
million. The Company has incurred further losses in the liquidation of its
pressed ceramic operations and on June 30, 1997, the Company had a working
capital deficiency of $40.0 million, which included debt obligations which are
in default and due on demand of $16.8 million, the current portion of long-term
debt of $3.0 million, plus the net current liabilities of discontinued
operations of $16.8 million (this latter figure includes $4.2 million line of
credit borrowings which are due on demand and $3.5 million of accrued interest
relating to the indebtedness of the discontinued operations through the expected
completion of the liquidation process).
Risk of Limitation of Use of Net Operating Loss Carryforwards. As of December
31, 1996, the Company had net operating loss carryforwards of approximately
$11,840,000 for federal income tax purposes, which may be utilized through 2000
to 2011, and approximately $836,000 for state income tax purposes, which may be
utilized through 2000 to 2011 (subject to certain limitations). As of December
31, 1996, the Company's deferred tax assets, consisting primarily of the net
operating loss carryforwards, have been fully reserved since the assets are not
more likely than not realizable. The conversion of the $2.8 million of
convertible debentures issued in October, 1996 and certain other equity
transactions resulted in an "ownership change" as defined in Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"). As a result, the
Company's use of its net operating loss carryforwards to offset taxable income
in any post-change period is subject to certain specified annual limitations.
There can be no assurance as to the specific amount of the net operating loss
carryforwards, if any, available in any post-change year since the calculation
is based upon fact dependent formula.
29
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
June 30, 1997:
Report on Form 8-K dated July 10, 1997 was filed with the Securities
and Exchange Commission on July 18, 1997, to report that The
Development Bank of Singapore appointed a Receiver and Manager to
liquidate the assets of Microelectronic Packaging (S) Pte. Ltd., which
is a wholly owned subsidiary of the registrant, on July 10, 1997.
The Exhibits filed as part of this report are listed below.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.98(2) Loan and Security Agreement dated May 13, 1997 between
the Company and Texas Instruments Singapore (Pte)
Limited.(1)
10.99(2) Promissory Note dated May 13, 1997, between the Company
and Citicorp USA, Inc.
10.100(2) Amendment (to Promissory Note) dated July 11, 1997,
between the Company and Citicorp USA, Inc.
11.1 Computation of Net Income (Loss) per Common Share
27.1 Financial Data Schedule
</TABLE>
(1) Confidential treatment has been requested for portions of this document.
Redacted provisions are indicated by the use of "[**]" in place of the
redacted text or information.
(2) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, filed with the Securities
and Exchange Commission on August 14, 1997.
30
<PAGE>
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: April 8, 1998 By: /s/ DENIS J. TRAFECANTY
------------- ----------------------------------------
Denis J. Trafecanty
Senior Vice President
Chief Financial Officer
31
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<C> <S>
10.98(2) Loan and Security Agreement Dated May 13, 1997, between the Company
and Texas Instruments (Pte) Limited.(1)
10.99(2) Promissory Note dated May 13, 1997, between the Company and Citicorp
USA, Inc.
10.100(2) Amendment (to Promissory Note) dated July 11, 1997, between the
Company and Citicorp USA, Inc.
11.1 Computation of Net Income (Loss) per Common Share
27.1 Financial Data Schedule
</TABLE>
(1) Confidential treatment has been requested for portions of this document.
Redacted provisions are indicated by the use of "[**]" in place of the
redacted text or information.
(2) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, filed with the Securities
and Exchange Commission on August 14, 1997.
32
<PAGE>
EXHIBIT 11.1
MICROELECTRONIC PACKAGING, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------- ------------
(Restated - (Restated -
See Note 2) See Note 2)
------------ ------------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME (LOSS) PER SHARE:
Net income (loss) $(11,711,000) $ 610,000 $(12,931,000) $ 1,175,000
============ =========== ============ ============
Weighted average shares outstanding:
Shares outstanding from beginning of period 10,793,279 5,508,813 6,991,493 4,660,093
Conversion of $1.9 million of debentures
into 3,801,786 shares of common stock - - 2,929,742 -
Issuance of 842,058 shares of Transpac - - - 448,789
Common equivalents - options to directors,
officers and employees, net of treasury shares - 236,833 - 218,235
------------ ----------- ------------ ------------
Weighted average common and
common equivalent shares outstanding 10,793,279 5,745,646 9,921,235 5,327,117
============ =========== ============ ============
Primary net income (loss) per common share $ (1.09) $ 0.11 $ (1.30) $ 0.22
============ =========== ============ ============
FULLY DILUTED NET INCOME (LOSS) PER SHARE:
Net income (loss) $(11,711,000) $ 610,000 $(12,931,000) $ 1,175,000
============ =========== ============ ============
Weighted average shares outstanding:
Shares outstanding from beginning of period 10,793,279 5,508,813 6,991,493 4,660,093
Conversion of $1.9 million of debentures
into 3,801,786 shares of common stock - - 2,929,742
Issuance of 842,058 shares to Transpac - - - 448,789
Common equivalents - options to directors,
officers and employees, net of treasury shares - 255,467 - 255,467
------------ ----------- ------------ ------------
Weighted average common and
common equivalent shares outstanding 10,793,279 5,764,280 9,921,235 5,364,349
============ =========== ============ ============
Fully diluted net income (loss) per common share $ (1.09) $ 0.11 $ (1.30) $ 0.22
============ =========== ============ ============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AS OF JUNE 30, 1997 AND THE STATEMENTS OF OPERATIONS, CASH FLOWS AND
SHAREHOLDERS EQUITY FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,192
<SECURITIES> 0
<RECEIVABLES> 2,193
<ALLOWANCES> 0
<INVENTORY> 7,660
<CURRENT-ASSETS> 11,159
<PP&E> 780
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,277
<CURRENT-LIABILITIES> 51,160
<BONDS> 2,961
0
0
<COMMON> 39,839
<OTHER-SE> (81,683)
<TOTAL-LIABILITY-AND-EQUITY> 12,277
<SALES> 16,462
<TOTAL-REVENUES> 16,552
<CGS> 15,040
<TOTAL-COSTS> 15,083
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> (1,056)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,056)
<DISCONTINUED> (11,875)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,931)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
</TABLE>
