<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
Commission file number 0-23562
-------
MICROELECTRONIC PACKAGING, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-3142624
- ----------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9577 Chesapeake Drive, San Diego, California 92123
- -------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 292-7000
--------------
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
At May 13, 1998, there were outstanding 10,793,279 shares of the
------------ ----------
Registrant's Common Stock, no par value per share.
================================================================================
<PAGE>
Index Page No.
- ----- --------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets..................... 3
Condensed Consolidated Statements of Operations........... 4
Condensed Consolidated Statements of Cash Flows........... 5
Condensed Consolidated Statement of
Changes in Shareholders' Deficit........................ 6
Notes to Condensed Consolidated Financial Statements...... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................... 26
Item 2. Changes in Securities and Use of Proceeds................. 26
Item 3. Defaults upon Senior Securities........................... 26
Item 4. Submission of Matters to a Vote of Security Holders....... 26
Item 5. Other Information......................................... 27
Item 6. Exhibits and Reports on Form 8-K.......................... 27
SIGNATURES............................................................. 28
EXHIBIT INDEX.......................................................... 29
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash $ 932,000 $ 1,296,000
Accounts receivable, net 3,699,000 2,504,000
Inventories 5,237,000 4,230,000
Other current assets 132,000 387,000
- -------------------------------------------------------------------------------------------------------
Total current assets 10,000,000 8,417,000
Property, plant and equipment, net 1,641,000 1,212,000
Other non-current assets 252,000 282,000
- -------------------------------------------------------------------------------------------------------
$ 11,893,000 $ 9,911,000
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 24,000 $ 22,000
Accounts payable 8,450,000 7,450,000
Accrued liabilities 1,812,000 1,711,000
Deferred revenue 201,000 265,000
Debt of discontinued operations, in default, due on demand 27,151,000 27,151,000
Current liabilities of discontinued operations, net 13,452,000 13,475,000
- -------------------------------------------------------------------------------------------------------
Total current liabilities 51,090,000 50,074,000
Long-term debt, less current portion 64,000 69,000
Commitments and Contingencies
Shareholders' Deficit
Common stock, no par value 40,033,000 40,016,000
Accumulated deficit (79,294,000) (80,248,000)
- -------------------------------------------------------------------------------------------------------
Total shareholders' deficit (39,261,000) (40,232,000)
- -------------------------------------------------------------------------------------------------------
$ 11,893,000 $ 9,911,000
=======================================================================================================
</TABLE>
3
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 7,334,000 $ 7,674,000
Cost of goods sold 5,381,000 6,790,000
- ------------------------------------------------------------------------------
Gross profit 1,953,000 884,000
Selling, general and administrative 776,000 1,264,000
Engineering and product development 272,000 108,000
- ------------------------------------------------------------------------------
Income (loss) from operations 905,000 (488,000)
Other income (expense):
Interest (expense), net (3,000) (24,000)
Other income, net 70,000 169,000
- ------------------------------------------------------------------------------
Income (loss) from continuing operations
before provision for income taxes 972,000 (343,000)
Provision for income taxes (18,000) -
- ------------------------------------------------------------------------------
Income (loss) from continuing operations 954,000 (343,000)
Loss from discontinued operations - (876,000)
- ------------------------------------------------------------------------------
Net income (loss) $ 954,000 $(1,219,000)
==============================================================================
Earnings (loss) per common share:
Continuing operations $ 0.09 $ (0.04)
Discontinued operations - (0.09)
- ------------------------------------------------------------------------------
Net income (loss) per common share $ 0.09 $ (0.13)
==============================================================================
Earnings (loss) per common share - assuming dilution:
Continuing operations $ 0.08 $ (0.04)
Discontinued operations - (0.10)
- ------------------------------------------------------------------------------
Net income (loss) per common share $ 0.08 $ (0.13)
==============================================================================
</TABLE>
4
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months
ended March 31,
------------------------
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Net cash provided (used) by operating activities of:
Continuing operations $ 195,000 $ 2,750,000
Discontinued operations (23,000) 128,000
- -------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 172,000 2,878,000
- -------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of fixed assets (546,000) (37,000)
Proceeds from sale of fixed assets 13,000 25,000
- -------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (533,000) (12,000)
- -------------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in short-term notes payable
Continuing operations - (2,310,000)
Discontinued operations - (101,000)
Borrowings under long-term debt and promissory notes
Continuing operations - 34,000
Principal payments on long-term debt and promissory notes
Continuing operations (3,000) (467,000)
Discontinued operations - (27,000)
- -------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (3,000) (2,871,000)
- -------------------------------------------------------------------------------------
Net increase (decrease) in cash (364,000) (5,000)
Cash at beginning of period 1,296,000 2,954,000
- -------------------------------------------------------------------------------------
Cash at end of period $ 932,000 $ 2,949,000
=====================================================================================
</TABLE>
5
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' DEFICIT
(unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------ Accumulated
Shares Amount Deficit Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 10,793,279 $40,016,000 $(80,248,000) $(40,232,000)
Non-employee stock-based - 17,000 - 17,000
compensation
Net income 954,000 954,000
- -------------------------------------------------------------------------------
Balance at March 31, 1998 10,793,279 $40,033,000 $(79,294,000) $(39,261,000)
===============================================================================
</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 March 31, 1998 and for the three month periods ended March 31,
1998 and 1997 are unaudited but include all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for
a fair statement of financial position and results of operations of the
Company for the interim periods. Certain prior year amounts have been
reclassified to conform to the current year presentation. The results of
operations for the three month period ended March 31, 1998 is not necessarily
indicative of the operating results to be expected for the full fiscal year.
The information included in this report should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto and
the other information, including risk factors, set forth for the year ended
December 31, 1997 in the Company's Annual Report on Form 10-K. Readers of
this Quarterly Report on Form 10-Q are strongly encouraged to review the
Company's Annual Report on Form 10-K. Copies are available from the Chief
Financial Officer of the Company at 9577 Chesapeake Drive, San Diego,
California 92123.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
Raw materials.......................... $3,416,000 $2,698,000
Work-in-progress....................... 2,020,000 1,654,000
Finished goods......................... 75,000 131,000
Obsolescence reserve................... (274,000) (244,000)
---------- ----------
$5,237,000 $4,230,000
========== ==========
</TABLE>
3. Effects of Income Taxes
The Company believes that it has sufficient losses to offset any taxable
income that will be generated in the current year. However, the Company's
use of these losses may result in alternative minimum taxes for Federal
income tax purposes. As a result, the Company has recorded a provision for
income taxes for the three month period ended March 31, 1998 (for anticipated
alternative minimum taxes).
The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company
believes that its ability to utilize its current net operating loss and
credit carryforwards in subsequent periods will be subject to annual
limitations.
7
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
4. Net Income (Loss) Per Share
<TABLE>
<CAPTION>
For the three months ended March 31, 1998
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
<S> <C> <C> <C>
Income from continuing operations $ 954,000
Basic EPS
Income available to common
shareholders 954,000 10,793,279 $ 0.09
======
Effect of dilutive securities:
Stock options -- 1,740,282
Warrants -- --
----------- ----------
Diluted EPS
Income available to common
shareholders + assumed conversions $ 954,000 12,533,561 $ 0.08
=========== ========== ======
</TABLE>
Options to purchase 275,800 shares and warrants to purchase 1,227,693 shares
of common stock at prices ranging from $0.63 to $6.50 were outstanding during
the first quarter of 1998 but were not included in the computation of diluted
EPS because the options' and warrants' exercise prices were greater than the
average market price of the common shares for the quarter then ended. The
options and warrants, which expire between August 1998 and March 2008 were
still outstanding as of March 31, 1998.
<TABLE>
<CAPTION>
For the three months ended March 31, 1997
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
<S> <C> <C> <C>
Loss from continuing operations $ (343,000) 9,039,503 $(0.04)
Loss from discontinued operations (876,000) (0.09)
----------- ---------- ------
Basic EPS
Income available to common
shareholders (1,219,000) 9,039,503 $(0.13)
======
Effect of dilutive securities:
Stock options -- --
Warrants -- --
=========== ==========
Diluted EPS
Income available to common
shareholders + assumed conversions $(1,219,000) 9,039,503 $(0.13)
=========== ========== ======
</TABLE>
Options and warrants to purchase shares of common stock which were
outstanding during the first quarter of 1997 were not included in the
computation of diluted EPS because the options' and warrants' effect on EPS
would be anti-dilutive.
5. Commitments and Contingencies
The Company is involved in various claims and litigation arising in and
outside of the ordinary course of business. In addition, given the current
state of the Company and its subsidiaries, numerous creditors and parties to
contracts have threatened or initiated litigation to recoup their loans and
investments. If these claims are not favorably resolved, they will have a
material adverse effect on the Company's financial condition, results of
operations and ability to continue as a going-concern.
8
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
The Company entered into a lease for new manufacturing facilities and
corporate offices. This lease commenced September 1, 1997, and extends to
October 31, 2002. Minimum monthly rental payments of $16,000 began on
November 1, 1997, with scheduled annual increases of 6% to 7% per year
beginning November 1, 1998.
6. Customer Supplied Inventory
The Company's CTM Electronics, Inc. subsidiary has purchased certain chips
("die") used in the assembly of multichip modules ("MCM's") sold to one of
the Company's significant customers from that same customer. Effective July
25, 1997, this customer notified the Company that it will no longer sell die
to the Company and instead is providing the die on consignment. The pro
forma presentation below gives effect to this change in operations on
selected line items from the Company's Condensed Consolidated Statements of
Operations for the three month period ended March 31, 1997, as if this change
had been put into effect on January 1, 1997.
<TABLE>
<CAPTION>
Historical Pro Forma
Three Months Ended Pro Forma Three Months Ended
March 31, 1997 Adjustments March 31, 1997
------------------ ----------- ------------------
<S> <C> <C> <C>
Net sales $ 7,674,000 $(4,656,000)/(1)/ $ 3,018,000
Cost of goods sold 6,790,000 (4,784,000)/(2)/ 2,006,000
Gross profit 884,000 128,000 1,012,000
Net loss $(1,219,000) 128,000 $(1,091,000)
=========== =========== ===========
Net loss per common
share $ (0.13) $ 0.01 $ (0.12)
=========== =========== ===========
</TABLE>
/(1)/ The cost of the die to be provided on consignment will be removed from
the selling price of the MCM's. The amount of the 2% prompt payment
discount offered to the customer, which is included in revenues, will
be reduced by the lower selling prices for these MCM's.
/(2)/ The cost of the die to be provided on consignment will be removed from
the cost of goods sold, corresponding to the reduction in selling
prices of the MCM's.
7. Discontinued Operations
On July 10, 1997, The Development Bank of Singapore Limited, one of the
Company's and its subsidiaries largest creditors ("DBS"), appointed a
Receiver and Manager to liquidate the assets of Microelectronic Packaging (S)
Pte. Ltd. ("MPS"), which is a wholly owned subsidiary of the Company which
manufactured primarily pressed ceramics products. DBS exercised its option
to appoint a Receiver and Manger under the terms of a Deed of Debenture dated
November 27, 1984 (as amended) between DBS and MPS. The Company anticipates
that the Receiver and Manager will complete the liquidation of MPS in 1998.
The Company has guaranteed all of MPS's obligations to DBS of which
approximately $2.6 million was outstanding as of December 31, 1997. These
loans are included in the caption "Debt of discontinued operations, in
default, due on demand" in the Consolidated Balance Sheet. There can be no
assurance that such debt will be fully paid through the liquidation of the
assets of MPS. If insufficient, DBS could demand repayment of the shortfall
from the Company through the guarantee. The Company does not have adequate
resources to repay such debt if the guarantee is called.
9
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
The Company recorded the effect of the receivership as of June 30, 1997, and
the results of operations of MPS have been classified as "Loss from
discontinued operations" on the Consolidated Statement of Operations for the
quarter ended March 31, 1997. As a result of the appointment of a Receiver
and Manager, MPS is no longer able to manufacture its pressed ceramic
products and has ceased generating revenue since July 10, 1997.
On March 18, 1997, a Receiver was appointed to handle the liquidation of the
multilayer ceramics operations of MPM (S) Pte. Ltd. As of December 31, 1997,
essentially all of the assets of MPM had been sold. Final resolution of the
remaining liabilities will come only after the liquidation of MPS, since MPS
has guaranteed the DBS bank loan and the equipment leases entered into by
MPM. The portion of these liabilities remaining after any reduction
available from the sale of MPS and MPM assets will then be transferred to
MPI, as MPI also guaranteed these loans and leases. As of October 8, 1997,
the Company (as guarantor) reached an agreement with MPM's lessor for the
repayment of the balance remaining after the sale of the leased equipment,
over a five-year term (interest only during the first year, with principal
due quarterly thereafter). The loan balance will be reduced by excess funds
available from the liquidation of MPS, in the event that any funds are
available. The holders of the debentures issued to Transpac and related
parties still retain $9.0 million of debt securities issued by MPM which are
guaranteed by the Company. The Company and MPM are in default thereunder.
The Company's MPC subsidiary was informed in April 1997 that Carborundum
Corporation ("Carborundum"), its sole customer, was immediately cancelling
the manufacturing and related agreements with MPC as a result of
Carborundum's sale of its assets to a third party.
On April 5, 1997, a fire at the Company's MPC facility caused damage to the
building and certain equipment. The Company is insured against the fire, and
believes that it will incur no losses from the fire. The Company has closed
the MPC operation and has terminated all of its MPC employees. The Company
expects that there will be minimal impact from the disposition of the assets
of MPC. Most costs of closure of the MPC operations will be borne by the
former customer or the Company's business interruption insurance. The
Company has recorded the effect of the closure of this business as of June
30, 1997, and the results of operations of MPC have been classified as "Loss
from discontinued operations" in the Consolidated Statement of Operations.
Based on the information above, the results of operations for the three month
period ended March 31, 1997 has been restated to present MPS, MPC and MPM
segments as discontinued operations.
Discontinued operations include management's best estimates of the amounts
expected to be realized on the sale of its assets associated with these
discontinued operations and the expenses to be incurred through the disposal
date. The amounts the Company will ultimately realize and incur could differ
materially in the near term from the amounts assumed in arriving at the loss
on disposal of the discontinued operation. Management anticipates that the
foreign operations will be fully dissolved in 1998.
The components of "Current liabilities of discontinued operations, net"
included in the Condensed Consolidated Balance Sheets are as follows.
Consistent with the presentation in Form 10-K for the year ended December 31,
1997, all debt obligations originating in Singapore have been reclassified to
the caption "Debt of discontinued operations, in default, due on demand."
10
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Cash $ 572,000 $ 572,000
Property, net 1,399,000 1,399,000
------------ ------------
Total restricted assets, held by Receiver 1,971,000 1,971,000
Accounts payable and accrued liabilities (15,423,000) (15,446,000)
------------ ------------
Current liabilities of discontinued operations, net $(13,452,000) $(13,475,000)
============ ============
</TABLE>
8. Going Concern
The accompanying financial statements have been prepared assuming the
Company (MPI along with its only operating subsidiary - CTM) will continue
as a going concern. A number of factors, including the Company's history of
significant losses, the debt service costs associated with the Company's
high level of existing indebtedness, the need to restructure debt which is
currently in default, various claims and lawsuits, and the Company's
Singapore operations in receivership and liquidation raise substantial
doubts about the Company's ability to continue as a going concern. As of
March 31, 1998, the Company has an accumulated deficiency of $79.3 million
and a working capital deficiency of $41.1 million, which includes $27.2
million of debt of discontinued operations, due on demand and net current
liabilities of discontinued operations of $13.5 million. The Company does
not possess sufficient cash resources to repay these obligations, and thus
is in default on all of these obligations. The Company would be unable
to repay these loans in the event that such demand was made by the Company's
creditors.
The Company is currently attempting to renegotiate the terms of the debt
obligations of its discontinued Singapore operations. Certain obligations
with principal balances totaling approximately $27.2 million have been
guaranteed by MPI. Creditors holding over half of such debt have signed
definitive, binding agreements, including the Company's largest creditor,
and creditors holding an additional 25% of such debt have either signed non-
binding written letters of intent or verbally agreed to a settlement of the
obligations owed to them. The agreements reached with creditors principally
involve MPI paying 30% to 40% of the principal and accrued but unpaid
interest owed to each creditor as of December 31, 1997, within six months of
formal documents being agreed between the parties. The remaining 60% to 70%
would be forgiven by the creditors at the time of the payment of the 30% to
40% portion. There are also other non-cash considerations being provided to
certain creditors. The Company intends to attempt to obtain financing for
the 30% to 40% portion to be paid by the Company. There can be no assurance
that the Company will be successful in its efforts to reduce the non-binding
agreements reached with the creditors to binding written agreements. There
can also be no assurance that the Company will be successful in its efforts
to obtain the financing needed, on acceptable terms, or at all, in order to
fulfill its obligations under the agreements reached with creditors. This
failure would materially adversely affect the Company's financial condition
and ability to continue as a going concern, and could, as is the case with
other debt defaults and failure to repay, require that the Company seek
bankruptcy protection under Chapter 11 or Chapter 7 of Title 11 of the
United States Code for MPI and its U.S. subsidiaries.
9. Forward Looking Statements
These Condensed Consolidated Financial Statements contain forward-looking
statements which involve substantial risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the
effects of debt restructuring.
11
<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
For the three months ended March 31, 1998, net sales were $7,334,000 as compared
to net sales of $7,674,000 for the first quarter of 1997. The Company's CTM
Electronics, Inc. subsidiary has purchased certain chips ("die") used in the
assembly of multichip modules ("MCM's") sold to one of the Company's significant
customers from that same customer (see Note 6 of Notes to Condensed Consolidated
Financial Statements). Effective July 25, 1997, this customer notified the
Company that it will no longer sell die to the Company and instead is providing
the die on consignment. This change ("consigned die") has resulted in a
permanent reduction in selling prices for products sold to this customer. Had
the consignment policy been in effect as of January 1, 1997, net sales in the
first quarter of 1997 would have been $3,018,000 ("proforma net sales"). Thus,
net sales actually increased $4,316,000 or 143%. The increase in net sales is
primarily due to a 253% increase in MCM units shipped, partially offset by a
23.7% decrease in average selling prices (after removing die cost as discussed
above). The primary reason for the decrease in average selling prices resulted
from a re-negotiated pricing structure by CTM's most significant customer as
well as a change in product mix.
Revenues reported in this Quarterly Report on Form 10-Q reflect the
reclassification of revenues from the Company's Singapore subsidiaries for the
quarter ended March 31, 1997 (MPS, MPC and MPM) to "Loss from discontinued
operations" (see Note 7 to Condensed Consolidated Financial Statements).
Cost of Goods Sold
For the three months ended March 31, 1998, the cost of goods sold was $5,381,000
as compared to $6,790,000 for the first quarter of 1997. After eliminating the
die cost from cost of goods sold for the first quarter of 1997 (see "Net Sales"
above and Note 6 of Notes to Condensed Consolidated Financial Statements), cost
of goods sold would have been $2,006,000. This represents a permanent change to
the cost structure of CTM. Thus, cost of goods sold increased $3,375,000 or
168%. The increase in cost of goods sold is primarily due to a 253% increase in
MCM units shipped, partially offset by a 24.0% decrease in average per-unit
costs (after removing die cost as discussed above). The primary reason for the
decrease in average cost per unit sold results from a change in product mix.
Cost of goods sold reported in this Quarterly Report on Form 10-Q reflect the
reclassification of cost of goods sold from the Company's Singapore subsidiaries
for the quarter ended March 31, 1997 (MPS, MPC and MPM) to "Loss from
discontinued operations" (see Note 7 to Condensed Consolidated Financial
Statements).
12
<PAGE>
Gross Profit
Gross profit was $1,953,000 (26.6% of net sales) for the first quarter of 1998
as compared to $884,000 (29.3% of proforma net sales) for the first quarter of
1997. The increase in the amount of the gross profit is attributable to the
increase in sales discussed above, while the reduction in the gross margin is a
result of the reduced selling prices and a change in product mix.
Selling, General and Administrative
Selling, general and administrative expenses were $776,000 for the first quarter
of 1998, representing a decrease of $488,000 or 38.6% from the first quarter of
1997. This decrease is primarily the result of the Company's reduction of the
additional legal and consulting fees which had been incurred in connection with
the restructuring of the Company's U.S. operations and the winding up of its
Singapore operations. The Company anticipates selling, general and
administrative expenses, in absolute dollars, to increase from first quarter
levels through the end of the fiscal year ending December 31, 1998.
Selling, general and administrative expenses reported in this Quarterly Report
on Form 10-Q reflect the reclassification of these costs from the Company's
Singapore subsidiaries for the first quarter of 1997 (MPS, MPC and MPM) to "Loss
from discontinued operations" (see Note 7 to Condensed Consolidated Financial
Statements).
Engineering and Product Development
Engineering and product development expenses were $272,000 for the first quarter
representing an increase of $164,000 or 152% from the corresponding period of
1997. The increase in engineering and product development costs result
primarily from the increase in the engineering staff employed by the Company
which is part of the Company's commitment to improvement in quality and
processes in its manufacturing facility. The Company anticipates that
engineering and product development expenses, in absolute dollars, will increase
over the remainder of the fiscal year ending December 31, 1998.
Engineering and product development expenses reported in this Quarterly Report
on Form 10-Q reflect the reclassification of these expenses from the Company's
Singapore subsidiaries for the first quarter of 1997 (MPS, MPC and MPM) to "Loss
from discontinued operations" (see Note 7 to Condensed Consolidated Financial
Statements).
Interest Expense
Interest expense was $3,000 for the first quarter of 1998 as compared to $24,000
for the first quarter of 1997. Interest expense for 1997 included interest on
the $2.8 million of convertible debentures issued in October 1996. These
debentures were converted into common stock by the end of February 1997, thus no
such interest expense was incurred in 1998. This caption has been restated to
exclude interest on customer loans that are related to the discontinued
operations in Singapore.
Other Income
Other income was $70,000 for the first quarter of 1998 and $169,000 for the
first quarter of 1997. Other income for the first quarter of 1997 included
$190,000 received in settlement of a note receivable which had been previously
written-off.
Effects of Income Taxes
The Company believes that it has sufficient losses to offset any taxable income
that will be generated in the current year. However, the Company's use of these
losses may result in alternative minimum
13
<PAGE>
taxes for Federal income tax purposes. As a result, the Company has recorded a
provision for income taxes for the three month period ended March 31, 1998 (for
anticipated alternative minimum taxes).
The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company believes
that its ability to utilize its current net operating loss and credit
carryforwards in subsequent periods will be subject to annual limitations.
Discontinued Operations
The net operating results of the activities of MPM, MPS, MPC and FT for the
three month period ended March 31, 1997 have been included as loss from
discontinued operations on the Condensed Consolidated Statement of Operations.
Amounts recorded as estimated losses on disposal of assets of the discontinued
operations reflect management's best estimates of the amounts expected to be
realized on the sale of the assets associated with these discontinued operations
and the expenses to be incurred through the disposal date. The amounts the
Company will ultimately realize and incur could be materially different from the
amounts assumed in arriving at the loss on disposal of the discontinued
operations.
Liquidity and Capital Resources
During the first quarter of 1998, the Company financed its operations from
operating cash flow. During the first quarter of 1998, operating activities of
continuing operations provided $195,000, while discontinued operations used
$23,000. Investing activities, consisting principally of acquisition of assets
of continuing operations, used $533,000. At March 31, 1998, the Company had a
working capital deficiency of $41,090,000 and an accumulated deficit of
$79,294,000. At March 31, 1998, the Company had outstanding approximately
$27,151,000 of debt from its discontinued operations, which debt has been
guaranteed by MPI, the parent company, and most of which debt is in default and
due on demand.
The Company's sources of liquidity at March 31, 1998 consisted of inventories of
$5,237,000, trade accounts receivable of $3,699,000 and its U.S. cash balance of
$932,000. The Company has no borrowing arrangements available to it.
The Company is currently in default on substantially all of its Singapore-based
debt obligations. It is currently attempting to negotiate settlement agreements
for all of its debt obligations.
At March 31, 1998, the Company had outstanding borrowings due to DBS totaling
$3,955,000, excluding mortgages. The amount outstanding is the remaining
balance of various borrowings made by MPM, MPS and MPC under lines of credit,
overdraft facilities, and an accounts receivable financing line of credit. This
balance remains after the liquidation of assets of MPM and MPS by the receivers
and the application to these debts of the resulting proceeds from those assets
of those entities. All assets of MPM have been liquidated by the receiver of
MPM. Two buildings located in Tuas, Singapore and owned by MPS are still owned
by MPS. These buildings are currently being marketed by the receiver of MPS and
proceeds from the sale of those buildings will be utilized first, to retire the
two mortgages encumbering the properties and any remaining proceeds will be used
to retire these outstanding borrowings. The receiver is additionally attempting
to collect approximately $2,400,000 payable by a former customer of MPS. The
amount has been unpaid since June 1997 and has been fully reserved for by MPS.
If the receiver is successful in collecting all or a portion of this receivable,
the proceeds will be used to retire these borrowings. These amounts are
currently in default, payable upon demand, and bear interest at the bank's prime
rate plus 5%, which is equal to the rate of 13.75% as of March 31, 1998. All of
these amounts are secured by the remaining assets of MPM and MPS and are
guaranteed by MPI.
14
<PAGE>
At March 31, 1998, the Company had borrowings of $9,000,000 under the Transpac
debentures. The debentures bear interest at the rate of 8.5%. As of March 31,
1998, approximately $1,573,000 of accrued interest was due and payable under the
Transpac debentures. The debenture has been fully guaranteed by MPI. The
debentures are currently in default and payable upon demand.
At March 31, 1998, the Company had outstanding a term note due to NS
Electronics, a former customer of MPS, a discontinued Singapore operation. The
note bears interest at 18% per annum.
The balance due under the note is $1,250,000 and approximately $229,000 of
accrued interest was also due and payable as of March 31, 1998. The note has
been fully guaranteed by MPI and is secured by certain assets of the Company.
The note is currently in default and payable upon demand.
At March 31, 1998, the Company had outstanding a term note due to TI, a former
customer of MPS. The note bears interest at the rate of 3.5% per annum. The
balance due under the note is $3,521,000 and approximately $122,000 of accrued
interest was due and payable as of March 31, 1998. The note has been fully
guaranteed by MPI. The note is currently in default and payable upon demand.
At March 31, 1998, the Company had outstanding a term note due to SGS-Thomson
Microelectronics, a former customer of MPS. The note bears interest at the rate
of 7.25% per annum. The balance due under the note is $4,000,000 and
approximately $455,000 of accrued interest was due and payable as of March 31,
1998. The note has been fully guaranteed by MPI and is secured by certain
assets of the Company. The note is currently in default and payable upon
demand.
At March 31, 1998, the Company had outstanding a term note due to Citibank N.A.,
which note is guaranteed by Motorola, a former customer of MPS. The note bears
interest at approximately 7% per annum. The balance due under the note is
$2,000,000 and approximately $257,000 of accrued interest was due and payable as
of March 31, 1998. The note has been guaranteed by MPI and is secured by
certain assets of the Company as well as all shares of CTM and MPA. The note is
currently in default and payable upon demand.
At March 31, 1998, the Company had outstanding an amount due to Samsung Corning.
Samsung Corning had guaranteed a $1,000,000 loan from DBS to MPS. The remaining
balance due to DBS under the loan, approximately $583,000, was paid by Samsung
Corning to DBS in December 1997. The Company has accordingly recorded the
$583,000 as a liability to Samsung Corning, as well as $57,000 of accrued and
unpaid interest as of March 31, 1998. The Company is currently negotiating
settlement of the amount paid by Samsung Corning to DBS.
At March 31, 1998, the Company had outstanding two mortgage notes due to DBS,
secured by two buildings located in Tuas, Singapore and owned by MPS. The
mortgage notes bear interest at 13.75%. The balance due under the mortgage
notes was $1,081,000 as of March 31, 1998. The notes are guaranteed by MPI.
The notes are currently in default and payable upon demand.
At March 31, 1998, the Company had outstanding a deficiency balance from capital
leases due to Orix Leasing totaling $1,601,000. The amount outstanding is the
remaining balance of various lease borrowings made by MPM and MPS. This balance
remains after the liquidation of the leased assets of MPM by Orix Leasing and
the application to these leases of the resulting proceeds from those assets of
those entities. The remaining amount outstanding is represented by a note
issued by MPI at an interest rate of 7.25%. The note is currently in default
and is payable upon demand.
The Company also has various capitalized leases for equipment which was utilized
by its Singapore operations, with a total balance of approximately $160,000 as
March 31, 1998. These lease obligations are in default and is payable upon
demand.
The Company also has various capitalized leases for equipment utilized in the US
operations, with a total balance of approximately $88,000 as March 31, 1998.
These lease obligations are being serviced currently by CTM.
15
<PAGE>
The Company is currently attempting to renegotiate the terms of the debt
obligations of its discontinued Singapore operations. Certain obligations with
principal balances totaling approximately $27.2 million have been guaranteed by
MPI. Creditors holding over half of such debt have signed definitive, binding
agreements, including the Company's largest creditor, and creditors holding an
additional 25% of such debt have either signed non-binding written letters of
intent or verbally agreed to a settlement of the obligations owed to them. The
agreements reached with creditors principally involve MPI paying 30% to 40% of
the principal and accrued but unpaid interest owed to each creditor as of
December 31, 1997, within six months of formal documents being agreed between
the parties. The remaining 60% to 70% would be forgiven by the creditors at the
time of the payment of the 30% to 40% portion. There are also other non-cash
considerations being provided to certain creditors. The Company intends to
attempt to obtain financing for the 30% to 40% portion to be paid by the
Company. There can be no assurance that the Company will be successful in its
efforts to reduce the non-binding agreements reached with the creditors to
binding written agreements. There can also be no assurance that the Company will
be successful in its efforts to obtain the financing needed, on acceptable
terms, in order to fulfill its obligations under the agreements reached with
creditors.
The Company previously purchased raw materials from its principal customer,
Schlumberger. As of July 25, 1997, the material was supplied by the customer on
consignment. As of March 31, 1998, the Company owes to that customer
approximately $4.5 million from purchases previously made before the change to
consignment. The Company is making regular payments to Schlumberger under an
informal repayment plan.
The Company has outstanding indebtedness at March 31, 1998 denominated in
Singapore dollars of approximately Singapore $3,400,000 (U.S. equivalent
$2,144,000). Further, the Company has two buildings, also located in Singapore,
which are mortgaged as security for the Singapore loans and are anticipated to
be sold within the next year. All of the Company's other indebtedness is
denominated in U.S. dollars, and all other Singapore-based assets have been
liquidated by the receiver of MPM or MPS and used to retire outstanding
indebtedness. The Company believes that the value of the buildings located in
Singapore is at least equal to the amount of the Company's debt which is
denominated in Singapore dollars. Accordingly, the Company believes its
exposure to foreign currency rate movements is extremely limited since it has
matched the maturity and approximate amount of assets and liabilities
denominated in the Singapore dollar.
FUTURE OPERATING RESULTS
Status as a Going Concern. The Company's independent certified public
accountants have included an explanatory paragraph in their audit report with
respect to the Company's 1997, 1996 and 1995 consolidated financial statements
related to a substantial doubt with respect to the Company's ability to continue
as a going concern. Absent outside debt or equity financing, and excluding
significant expenditures required for the Company's major projects and assuming
the Company is successful in restructuring its debt, the Company currently
anticipates that cash on hand and anticipated cash flow from operations may be
adequate to fund its operations in the ordinary course throughout 1998. Any
significant increase in planned capital expenditures or other costs or any
decrease in or elimination of anticipated sources of revenue or the inability of
the Company to restructure its debt could cause the Company to restrict its
business and product development efforts. There can be no assurance that the
Company will be successful in restructuring its debt on acceptable terms, or at
all. If adequate revenues are not available, the Company will be unable to
execute its business development efforts and may be unable to continue as a
going concern. There can be no assurance that the Company's future consolidated
financial statements will not include another going concern explanatory
paragraph if the Company is unable to restructure its debt and become
profitable. The factors leading to and the existence of the explanatory
paragraph will have a material adverse effect on the Company's ability to obtain
additional financing.
16
<PAGE>
Risk of Bankruptcy. The Company may need to be reorganized under Chapter 11 of
Title 11 of the United States Code or liquidated under Chapter 7 of Title 11 of
the United States Code. There can be no assurance that if the Company decides
to reorganize under the applicable laws of the United States that such
reorganizational efforts would be successful or that shareholders would receive
any distribution on account of their ownership of shares of the Company's stock.
Similarly, there can be no assurances that if the Company decides to liquidate
under the applicable laws of the United States that such liquidation would
result in the shareholders receiving any distribution on account of their
ownership of shares of the Company's stock. In fact, if the Company were to be
reorganized or liquidated under the applicable laws of the United States, the
bankruptcy laws would require (with limited exceptions) that the creditors of
the Company be paid before any distribution is made to the shareholders.
Future Capital Needs; Need for Additional Financing. The Company's future
capital requirements will depend upon many factors, including the extent and
timing of acceptance of the Company's products in the market, requirements to
restructure and retire its substantial debt, requirements to construct,
transition and maintain existing or new manufacturing facilities, commitments to
third parties to develop, manufacture, license and sell products, the progress
of the Company's research and development efforts, the Company's operating
results and the status of competitive products. If the Company is successful in
restructuring its debt obligations, absent debt or equity financing and
excluding significant expenditures required for the Company's major projects,
the Company anticipates that cash on hand and anticipated cash flow from
operations may be adequate to fund its operations through 1998. There can be no
assurance, however, that the Company will not require additional financing prior
to such date to fund its operations. In addition, the Company may require
substantial additional financing to fund its operations in the ordinary course,
particularly if the Company is unable to restructure its debt obligations.
Furthermore, the Company may require additional financing to fund the
acquisition of selected assets needed in its production facilities. There can
be no assurance that the Company will be able to obtain such additional
financing on terms acceptable to the Company, or at all.
The Company is in breach of substantially all of its debt obligations and is in
default under each of such agreements. If the Company cannot reach an agreement
with its creditors to repay its obligations, the Company will not be able to
continue as a going concern. The Company's high level of outstanding
indebtedness and the numerous restrictive covenants set forth in the agreements
covering this indebtedness and its default position prohibit the Company from
obtaining additional bank lines of credit and from raising funds through the
issuance of debt or other securities without the prior consent of DBS and
Transpac. The Company is currently in default on its guarantee and loan
obligations to DBS as a result of the Company's decision to cease its multilayer
and pressed ceramics operations, and to liquidate the assets of MPM and MPS.
The liquidation of MPM and MPS have also resulted in the Company's default under
a number of other agreements, and certain creditors have informed the Company
they intend to accelerate outstanding payments due to them under various credit
agreements because of such defaults. There can be no assurance that other
creditors of the Company will not also choose to accelerate the Company's debt
obligations and the Company will not able to repay such accelerated obligations
as they become due and immediately payable. If either a sufficient number of
creditors or any of the substantial creditors choose to accelerate payments or
to place MPI or one or more of its subsidiaries under judicial reorganization,
the Company may be forced to seek protection under Chapter 11 of Title 11 of the
United States Code or similar bankruptcy laws of Singapore. If the Company were
to seek additional financing, such additional financing may not be available to
the Company on acceptable terms, or at all. If additional funds are raised by
issuing equity or convertible securities, further dilution to the existing
shareholders will result. Since adequate funds are not currently available, the
Company has been required to delay, scale back or eliminate programs which could
continue to have a material adverse effect on the Company's business,
17
<PAGE>
prospects, financial condition and results of operations. In addition, the
Company has been forced to delay, downsize or eliminate other research and
development, manufacturing, construction or transitioning programs or alliances
or obtain funds through arrangements with third parties pursuant to which the
Company has been forced to relinquish rights to certain of its technologies or
to other assets that the Company would not otherwise relinquish. The delay,
scaling back or elimination of any such programs or the relinquishment of any
such rights could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
Future Operating Results. The Company's operating results have fluctuated
significantly in the past and will continue to fluctuate significantly in the
future depending upon a variety of factors, including foreign currency losses,
corporate and debt restructurings, creditor relationships, conversions of
significant amounts of debt into a significant amount of equity, downward
pressure in gross margins, losses due to low shipping volume, delayed market
acceptance, if any, of new and enhanced versions of the Company's products,
delays, cancellations or reschedulings of orders, delays in product development,
defects in products, integration of acquired businesses, political and economic
instability, natural disasters, outbreaks of hostilities, variations in
manufacturing yields, changes in manufacturing capacity and variations in the
utilization of such capacity, changes in the length of the design-to-production
cycle, relationships with and conditions of customers, subcontractors, and
suppliers, receipt of raw materials, including consigned materials, customer
concentration, price competition, cyclicality in the semiconductor industry and
conditions in the personal computer industries. In addition, operating results
will fluctuate significantly based upon several other factors, including the
Company's ability to attract new customers, changes in pricing by the Company,
its competitors, subcontractors, customers or suppliers, and fluctuations in
manufacturing yields. The absence of significant backlog for an extended period
of time will also limit the Company's ability to plan production and inventory
levels, which could lead to substantial fluctuations in operating results.
Accordingly, the failure to receive anticipated orders or delays in shipments
due, for example, to unanticipated shipment reschedulings or defects or to
cancellations by customers, or to unexpected manufacturing problems may cause
net sales in a particular quarter to fall significantly below the Company's
expectations, which would materially adversely affect the Company's operating
results for such quarter. The impact of these and other factors on the
Company's net sales and operating results in any future period cannot be
forecasted with certainty. In addition, the significant fixed overhead costs at
the Company's facilities, the need for continued expenditures for research and
development, capital equipment and other commitments of the Company, among other
factors, will make it difficult for the Company to reduce its expenses in a
particular period if the Company's sales goals for such period are not met. A
large portion of the Company's operating expenses are fixed and are difficult to
reduce or modify should revenues not meet the Company's expectations, thus
magnifying the material adverse impact of any such revenue shortfall.
Accordingly, there can be no assurance that the Company will not incur losses in
the future or that such losses will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Repayment of Debt Obligations by MPM and MPS. As of March 31, 1998, MPM and MPS
had combined outstanding borrowings of approximately $27,151,000. Most of the
assets of MPM and MPS have been liquidated by receivers appointed by DBS. The
Company currently anticipates that the remaining proceeds from the liquidation
of assets will be insufficient to fully repay its outstanding debt. Since the
borrowings have been guaranteed by MPI, the Company is currently attempting to
negotiate more favorable terms for the repayment of the remaining indebtedness.
The failure of the Company to obtain favorable repayment terms would materially
adversely affect the Company's financial condition and the ability of the
Company to continue as a going concern.
18
<PAGE>
MPM is obligated, pursuant to its real property lease in Singapore with Jurong
Town Corporation ("JTC"), to return the facilities which it has been leasing to
their original state before returning the facilities to JTC. Returning the
facilities to their original state would require the expenditure of a
substantial amount of money. There can be no assurance that JTC will not
enforce this lease provision. If MPM were forced to return the facilities to
their original state, such actions could materially adversely affect any plans
to restructure MPM's debt obligations.
Adverse Impact of MPM and MPS Liquidations on MPI. MPM and MPS are currently
being liquidated under the laws of Singapore. The liquidation of the assets of
MPM and MPS are expected to generate proceeds that total less than the
outstanding obligations of those entities guaranteed by MPI. If such shortfall
occurs, MPI may be forced to repay any outstanding debt because of its role as
guarantor of such debts. If MPI were unable to repay these debts, the Company
may be forced to seek bankruptcy protection under Chapter 11 or Chapter 7 of
Title 11 of the United States Code or similar bankruptcy laws of Singapore for
MPI and its subsidiaries.
Certain Obligations of MPS. At March 31, 1998, MPS had outstanding borrowings
of approximately $3,955,000 with DBS and had borrowed an aggregate of
approximately $11,354,000 from a consortium of customers to fund its purchase of
certain CERDIP manufacturing and alumina powder equipment from Samsung Corning.
All such amounts are in default. If any lender were to accelerate the principal
due as one of their remedies, such accelerations will materially adversely
affect the Company's ability to continue as an ongoing concern and may force the
Company to seek bankruptcy protection under Chapter 7 or Chapter 11 of Title 11
of the United States Code or similar bankruptcy laws of Singapore. As a part of
the Consortium, Motorola guaranteed MPS' repayment of $2.0 million in borrowings
from a certain bank lender. Under the terms of the agreement relating to
Motorola's guarantee, MPI granted Motorola a security interest in all of the
issued and outstanding capital stock of MPS, CTM and MPA. While in default,
Motorola may have the right to vote and give consents with respect to all of the
issued and outstanding capital of MPS, CTM and MPA. As a result, during the
continuation of any such event of default, MPI may be unable to control at the
shareholder level the direction of the subsidiaries that generate substantially
all of the Company's revenues and hold substantially all of the Company's
assets. Any such loss of control would have a material adverse effect on the
Company's business, prospects, financial condition, results of operations and
status as an ongoing concern and could force the Company to seek protection
under Chapter 7 or Chapter 11 of Title 11 of the United States Code or similar
bankruptcy laws of Singapore. The agreements covering the Transpac Financing,
including the convertible debenture and MPI's guarantee of such MPM
indebtedness, contain numerous restrictions and events of default that have been
triggered by the aforementioned actions and would, if they became effective and
operative, materially adversely affect the Company's business, prospects,
results of operations, condition and status as an ongoing concern and could
force the Company to seek protection under Chapter 7 or Chapter 11 of Title 11
of the United States Code or similar bankruptcy laws of Singapore.
High Leverage. The Company is highly leveraged and has substantial debt service
requirements. The Company has $51,154,000 in liabilities as of March 31, 1998.
On March 31, 1998, the Company had a total shareholders' deficit of
approximately $39,261,000. The Company's ability to meet its debt service
requirements will be dependent upon the Company's future performance, which will
be subject to financial, business and other factors affecting the operation of
the Company, many of which are beyond its control and on the willingness of the
Company's creditors to participate in restructuring the Company's debt. There
can be no assurance that the Company will be able to meet the capital
requirements described above or, if the Company is able to meet such
requirements, that the terms available will be favorable to the Company. See
"Liquidity and Capital Resources".
19
<PAGE>
Highly Competitive Industry; Significant Price Competition. The electronic
interconnection technology industry is intensely competitive. The Company
experiences intense competition worldwide from a number of manufacturers,
including Maxtek Components Corporation, VLSI Packaging, Raytheon Electronic
Systems, Hewlett-Packard Company, Advanced Packaging Technology of America and
MicroModule Systems, all of which have substantially greater financial resources
and production, marketing and other capabilities than the Company with which to
develop, manufacture, market and sell their products. The Company faces
competition from certain of its customers that have the internal capability to
produce products competitive with the Company's products and may face
competition from new market entrants in the future. In addition, corporations
with which the Company has agreements are conducting independent research and
development efforts in areas which are or may be competitive with the Company.
The Company expects its competitors to continue to improve the performance of
their current products and to introduce new products or new technologies that
provide improved performance characteristics. New product introductions by the
Company's competitors could cause a significant decline in sales or loss of
market acceptance of the Company's existing products which could materially
adversely affect the Company's business, financial condition and results of
operations. The Company is also experiencing significant price competition,
which may materially adversely affect the Company's business, financial
condition and results of operations. The Company believes that to remain
competitive in the future it will need to continue to develop new products and
to invest significant financial resources in new product development. There can
be no assurance that such new products will be developed or that sales of such
new products will be achieved. There can be no assurance that the Company will
be able to compete successfully in the future.
Reliance on Schlumberger. Sales to one customer, Schlumberger, accounted for
88% of the Company's net sales in the first quarter of 1998 and is expected to
continue to account for a significant part of the Company's net sales. Under
the agreement between Schlumberger and the Company entered into in January 1998,
the Company is obligated to provide Schlumberger with its requirements for MCM
product. Given the Company's anticipated continued reliance on its MCM business
as a percentage of overall net sales, the failure to meet Schlumberger's
requirements will materially adversely affect the Company's ability to continue
as an ongoing concern. In addition, under the terms of the agreement,
Schlumberger is entitled to request repricing of the Company's products.
Schlumberger has requested repricing for the second quarter of 1998. Such
repricing in the future may result in the Company being unable to produce the
products made for Schlumberger with an adequate operating profit, and the
Company may be unable to compete with the prices of other vendors who supply the
same or similar products to Schlumberger. The failure to satisfy the terms of
the agreement, or the failure of the Company to achieve an operating profit
under the contract, would have a material adverse impact on the Company's
business, financial condition, and results of operation.
Significant Customer Concentration. Historically, the Company has sold its
products to a very limited number of customers. Any reduction in orders by any
of these customers, including reductions due to market, economic or competitive
conditions in the semiconductor, personal computer or electronic industries or
in other industries that manufacture products utilizing semiconductors or MCMs,
could materially adversely affect the Company's business, financial condition
and results of operations. The supply agreements with certain of the Company's
customers do not obligate them to purchase products from the Company. The
Company's ability to increase its sales in the future will also depend in part
upon its ability to obtain orders from new customers. There can be no assurance
that the Company's sales will increase in the future or that the Company will be
able to retain existing customers or to attract new ones. Failure to develop
new customer relationships could materially adversely affect each such
subsidiary's results of operations and would materially adversely affect the
Company's business, financial condition and results of operations.
20
<PAGE>
Dependence on Semiconductor and Personal Computer Industries. The financial
performance of the Company is dependent in large part upon the current and
anticipated market demand for semiconductors and products such as personal
computers that incorporate semiconductors. The semiconductor industry is highly
cyclical and historically has experienced recurring periods of oversupply The
Company believes that the markets for new generations of semiconductors will
also be subject to similar fluctuations. The semiconductor industry is
currently experiencing rapid growth but lately has demonstrated a slowdown in
demand. There can be no assurance that such growth will return and that the
slowdown will not continue. A reduced rate of growth in the demand for
semiconductor component parts due, for example, to competitive factors,
technological change or otherwise, may materially adversely affect the markets
for the Company's products. From time to time, the personal computer industry,
like the semiconductor industry, has experienced significant downturns, often in
connection with, or in anticipation of, declines in general economic conditions.
Accordingly, any factor adversely affecting the semiconductor or the personal
computer industry or particular segments within the semiconductor or personal
computer industry may materially adversely affect the Company's business,
financial condition and results of operations. There can be no assurance that
the Company's net sales and results of operations will not be materially
adversely affected if downturns or slowdowns in the semiconductor, personal
computer industry or other industries utilizing the Company's products continue
or again occur in the future.
Technological Change; Importance of Timely Product Introduction; Uncertainty of
Market Acceptance and Emerging Markets. The markets for the Company's products
are subject to technological change and new product introductions and
enhancements. Customers in the Company's markets require products embodying
increasingly advanced electronics interconnection technology. Accordingly, the
Company must anticipate changes in technology and define, develop and
manufacture or acquire new products that meet its customers' needs on a timely
basis. The Company anticipates that technological changes could cause the
Company's net sales to decline in the future. There can be no assurance that
the Company will be able to identify, develop, manufacture, market, support or
acquire new products successfully, that any such new products will gain market
acceptance, or that the Company will be able to respond effectively to
technological changes. If the Company is unable for technological or other
reasons to develop products in a timely manner in response to changes in
technology, the Company's business, financial condition and results of
operations will be materially adversely affected. There can be no assurance
that the Company will not encounter technical or other difficulties that could
in the future delay the introduction of new products or product enhancements.
In addition, new product introductions by the Company's competitors could cause
a decline in sales or loss of market acceptance of the Company's products, which
could materially adversely affect the Company's business, financial condition
and results of operations. Even if the Company develops and introduces new
products, such products must gain market acceptance and significant sales in
order for the Company to achieve its growth objectives. Furthermore, it is
essential that the Company develop business relationships with and supply
products to customers whose end-user products achieve and sustain market
penetration. There can be no assurance that the Company's products will achieve
widespread market acceptance or that the Company will successfully develop such
customer relationships. Failure by the Company to develop products that gain
widespread market acceptance and significant sales or to develop relationships
with customers whose end-user products achieve and sustain market penetration
will materially adversely affect the Company's business, financial condition and
results of operations. The Company's financial performance will depend in
significant part on the continued development of new and emerging markets such
as the market for MCMs. The Company is unable to predict with any certainty any
growth rate and potential size of emerging markets. Accordingly, there can be
no assurance that emerging markets targeted by the Company, such as the market
for MCMs, will develop or that the Company's products will achieve market
acceptance in such markets. The failure of emerging markets targeted by the
Company to develop or the failure by the Company's products to achieve
acceptance in such markets could materially adversely affect the Company's
business, financial condition and results of operations.
21
<PAGE>
Sole or Limited Sources of Supply. Certain raw materials essential for the
manufacture of the Company's products are obtained from a sole supplier or a
limited group of suppliers. There are a limited number of qualified suppliers
of laminate substrates and die which are of critical importance to the
production of the Company's MCM products. In the manufacturing process, the
Company also utilizes consigned materials supplied by certain of its customers.
The Company's reliance on sole or a limited group of suppliers and certain
customers for consigned materials involves several risks, including a potential
inability to obtain an adequate supply of required materials and reduced control
over the price, timely delivery, and quality of raw materials. There can be no
assurance that problems with respect to yield and quality of such materials and
timeliness of deliveries will not continue to occur. Disruption or termination
of these sources could delay shipments of the Company's products and could have
a material adverse effect on the Company's business, financial condition and
operating results. Such delays could also damage relationships with current and
prospective customers, including customers that supply consigned materials.
Product Quality and Reliability; Need to Increase Production. The Company's
customers establish demanding and time-consuming specifications for quality and
reliability that must be met by the Company's products. From initial customer
contact to actual qualification for production, which may take as long as three
years, the Company typically expends significant resources. Although the
Company has generally met its customers' quality and reliability product
specifications, the Company has in the past experienced and is currently
experiencing difficulties in meeting some of these standards. Although the
Company has addressed past concerns and has resolved a number of quality and
reliability problems, there can be no assurance that such problems will not
continue or recur in the future. If such problems did continue or recur, the
Company could experience delays in shipments, increased costs, delays in or
cancellation of orders and product returns, any of which would have a material
adverse effect on the Company's business, financial condition or results of
operations. The manufacture of the Company's products is complex and subject to
a wide variety of factors, including the level of contaminants in the
manufacturing environment and the materials used and the performance of
personnel and equipment. The Company has in the past experienced lower than
anticipated production yields and written off defective inventory as a result of
such factors. The Company must also successfully increase production to support
anticipated sales volumes. There can be no assurance that the Company will be
able to do so or that it will not experience problems in increasing production
in the future. The Company's failure to adequately increase production or to
maintain high quality production standards would have a material adverse effect
on the Company's business, financial condition and results of operations.
Expansion of Operations. In order to be competitive, the Company must implement
a variety of systems, procedures and controls. The Company expects its
operating expenses to continue to increase. If orders received by the Company
do not result in sales or if the Company is unable to sustain net sales at
anticipated levels, the Company's operating results will be materially adversely
affected until operating expenses can be reduced. The Company's expansion will
also continue to cause a significant strain on the Company's management,
financial and other resources. If the Company is to grow, it must expand its
accounting and other internal management systems, and there can be no assurance
that the Company will be successful in effecting such expansion. Any failure to
expand these areas in an efficient manner at a pace consistent with the
Company's business could have a material adverse effect on the Company's results
of operations. Moreover, there can be no assurance that net sales will increase
or remain at or above recent levels or that the Company's systems, procedures
and controls will be adequate to support the Company's operations. The
Company's financial performance will depend in part on its ability to continue
to improve its systems, procedures and controls.
22
<PAGE>
Intellectual Property Matters. Although the Company attempts to protect its
intellectual property rights through patents, trade secrets and other measures,
it believes that its financial performance will depend more upon the innovation,
technological expertise, manufacturing efficiency and marketing and sales
abilities of its employees. There can be no assurance that others will not
independently develop similar proprietary information and techniques or gain
access to the Company's intellectual property rights or disclose such technology
or that the Company can meaningfully protect its intellectual property rights.
There can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. Furthermore, there can be no assurance
that others will not develop similar products, duplicate the Company's products
or design around the patents owned by the Company, or that third parties will
not assert intellectual property infringement claims against the Company. In
addition there can be no assurance that foreign intellectual property laws will
protect the Company's intellectual property rights.
Environmental Regulations. The Company is subject to a variety of local, state,
federal and foreign governmental regulations relating to the storage, discharge,
handling, emission, generation, manufacture and disposal of toxic or other
hazardous substances used to manufacture the Company's products. The Company
believes that it is currently in compliance in all material respects with such
regulations and that it has obtained all necessary environmental permits to
conduct its business. Nevertheless, the failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes or
cessation of operations. Compliance with such regulations could require the
Company to acquire expensive remediation equipment or to incur substantial
expenses. Any failure by the Company to control the use, disposal, removal or
storage of, or to adequately restrict the discharge of, or assist in the cleanup
of, hazardous or toxic substances, could subject the Company to significant
liabilities, including joint and several liability under certain statutes. The
imposition of such liabilities could materially adversely affect the Company's
business, financial condition or results of operations. The Company has been
notified by the United States Environmental Protection Agency that it considers
the Company to be a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986.
Growth Strategy Through Acquisitions. As part of its growth strategy, the
Company has in the past sought and may in the future continue to seek to
increase sales and achieve growth through the acquisition of comparable or
complementary businesses or technologies. The implementation of this strategy
will depend on many factors, including the availability of acquisitions at
attractive prices and the ability of the Company to make acquisitions, the
integration of acquired businesses into existing operations, the expansion of
the Company's customer base and the availability of required capital.
Acquisitions by the Company may result in dilutive issuances of equity
securities, and in the incurrence of debt and the amortization of goodwill and
other intangible assets that could adversely affect the Company's profitability.
Any inability to control and manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will successfully expand
or that growth and expansion will result in profitability or that the Company's
growth plans through acquisitions will not be inhibited by the Company's current
lack of resources.
Dependence on Key Personnel. The Company's financial performance depends in
part upon its ability to attract and retain qualified management, technical, and
sales and support personnel for its operations. Competition for such personnel
is intense, and there can be no assurance that the Company
23
<PAGE>
will be successful in attracting or retaining such personnel. The loss of any
key employee, the failure of any key employee to perform in his current position
or the Company's inability to attract and retain skilled employees, as needed,
could materially adversely affect the Company's business, financial condition
and results of operations.
Volatility of Stock Price. The Company believes that factors such as
announcements of developments related to the Company's business, fluctuations in
the Company's financial results, general conditions or developments in the
semiconductor and personal computer industry and the general economy, sales of
the Company's Common Stock into the marketplace, the ability of the Company to
sell its stock on an exchange or over-the-counter, an outbreak of hostilities,
natural disasters, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in the Company's
relationships with its customers and suppliers, or a shortfall or changes in
revenue, gross margins or earnings or other financial results from analysts'
expectations could cause the price of the Company's Common Stock to fluctuate,
perhaps substantially. In recent years the stock market in general, and the
market for shares of small capitalization stocks in particular, including the
Company, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. There can be no
assurance that the market price of the Company's Common Stock will not continue
to experience significant fluctuations in the future, including fluctuations
that are unrelated to the Company's performance.
Recurring net operating losses. The Company's decision to discontinue its
multilayer ceramic operations was the primary factor contributing to its 1996
net loss of $41,842,000. The decision by the principal secured creditors of the
Company's pressed ceramic operations to liquidate that operation's assets was
the primary factor contributing to the 1997 net loss of $11,496,000, as well as
additional loss provisions made in 1997 relating to the discontinuance of the
multilayer ceramic operations. At March 31, 1998, the Company had a working
capital deficiency of $41,090,000 and an accumulated deficit of $79,294,000.
The Company had outstanding at March 31, 1998 approximately $27,151,000 of debt
from its discontinued operations, which debt has been guaranteed by MPI, the
parent company, and most of which debt is in default and due on demand.
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in less than two
years, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists in the software industry and in other industries concerning the potential
effects associated with such compliance. Although the Company currently offers
products that are designed to be Year 2000 compliant, there can be no assurance
that the Company's products and the software products used by the Company
contain all necessary date code changes. In addition, the Company has not
comprehensively tested all of its internal software systems, or the third-party
software it uses in its business, for Year 2000 problems. Year 2000 problems in
the Company's internal software, or in the software of third parties that the
Company uses in its business, could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company believes that the purchasing patterns of customers and potential
customers and the performance of vendors may be affected by Year 2000 issues in
a variety of ways. Many companies are expending significant resources to
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase products such as
those offered by the Company or the inability to render services or provide
supplies to the Company. Year 2000 issues may cause other companies to
accelerate purchases, thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for software products, and
24
<PAGE>
disruption of supply patterns. Additionally, Year 2000 issues could cause a
significant number of companies, including current Company customers and
vendors, to spend significant resources upgrading their internal systems, and as
a result consider switching to other systems or suppliers. Any of the foregoing
could result in a material adverse effect on the Company's business, operating
results and financial condition.
25
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Due to the closure of the Company's Singapore operations, various
creditors have instituted legal actions against the Company and its
subsidiaries in order to recover amounts due. In addition, numerous
other creditors and parties to contracts have threatened or initiated
litigation to recoup their loans and/or investments. These claims will
not be fully satisfied through the liquidation of assets in Singapore.
If these claims are not favorably resolved, they will have a material
adverse effect on the Company's financial condition, results of
operations and ability to continue as a going concern because the
Company has guaranteed substantially all of these debts.
Item 2. Changes in Securities and Use of Proceeds
On March 23, 1998, the Company filed its Amended and Restated Articles
of Incorporation with the state of California. See Item 4.
Item 3. Defaults upon Senior Securities
As of March 31, 1998, the Company and its subsidiaries were in default
on most of their debt obligations, which total $27.2 million due to non-
payment of principal or interest payments due. The amount above includes
MPM's $9.0 million in debentures owing to Transpac, which are in default
under the terms of the debentures in part due to non-payment of interest
which was due on December 31, 1996. The repayment of the debentures and
other debt in default have been guaranteed by MPI.
Item 4. Submission of Matters to a Vote of Security Holders
The following items were submitted to Shareholders of record on December
31, 1997 for their approval, pursuant to a written consent solicitation
approved by the Board of Directors of the Company, which was mailed to
Shareholders on or about January 9, 1998. No meeting of Shareholders was
held. Both of the items subject to the written consent were approved by
the Shareholders as of March 10, 1998.
<TABLE>
<CAPTION>
Consents
Against or Broker Non-
Matter Submitted to Shareholders Consents For Withheld Abstained Votes
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase in the Company's authorized but
unissued shares of capital stock to consist
of 35,000,000 additional shares of
Common Stock for a total of 50,000,000
shares of Common Stock 9,307,750 564,978 71,802 --
Increase in the Company's authorized but
unissued shares of capital stock to consist
of 10,000,000 shares of undesignated
Preferred Stock 6,528,673 718,239 238,492 2,571,551
</TABLE>
26
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended
March 31, 1998:
Report on Form 8-K dated March 18, 1998 was filed with the Securities
and Exchange Commission on March 23, 1998, to report that the Company
had issued a press release in connection with the restatement of its
previously reported financial statements for the quarters ended June
30, 1997 and September 30, 1997.
The Exhibits filed as part of this report are listed below.
Exhibit No. Description
----------- -----------
3.1 (1) Amended and Restated Articles of Incorporation of
the Company filed March 23, 1998
10.75 (1)+ Agreement among Schlumberger Technologies, Inc. ATE
Division and Microelectronic Packaging, Inc. and CTM
Electronics, Inc. effective January 5, 1998.
27.1 Financial Data Schedule
___________
(1) Incorporated by reference from an exhibit filed with the
Company's Annual Report on Form 10-K for the 1997 fiscal year
filed with the Securities and Exchange Commission.
+ Confidential Treatment has been granted for the deleted portions
of this document.
27
<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: May 14, 1998 By: /s/ DENIS J. TRAFECANTY
----------------- ----------------------------
Denis J. Trafecanty
Senior Vice President,
Chief Financial Officer and Secretary
28
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
3.1 (1) Amended and Restated Articles of Incorporation of the Company
filed March 23, 1998.
10.75 (1)+ Agreement among Schlumberger Technologies, Inc. ATE Division and
Microelectronic Packaging, Inc. and CTM Electronics, Inc.
effective January 5, 1998.
27.1 Financial Data Schedule
____________
(1) Incorporated by reference from an exhibit filed with the
Company's Annual Report on Form 10-K for the 1997 fiscal year
filed with the Securities and Exchange Commission.
+ Confidential Treatment has been granted for the deleted portions
of this document.
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AS OF MARCH 31, 1998 AND THE STATEMENTS OF OPERATIONS, CASH FLOWS AND
SHAREHOLDERS EQUITY FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 932 1,296
<SECURITIES> 0 0
<RECEIVABLES> 3,699 2,504
<ALLOWANCES> 0 0
<INVENTORY> 5,237 4,230
<CURRENT-ASSETS> 10,000 8,417
<PP&E> 1,641 1,212
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 11,893 9,911
<CURRENT-LIABILITIES> 51,090 50,074
<BONDS> 64 69
0 0
0 0
<COMMON> 40,033 40,016
<OTHER-SE> (79,294) (80,248)
<TOTAL-LIABILITY-AND-EQUITY> 11,893 9,911
<SALES> 7,334 7,674
<TOTAL-REVENUES> 7,334 7,674
<CGS> 5,381 6,790
<TOTAL-COSTS> 5,381 6,790
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3 0
<INCOME-PRETAX> 972 (343)
<INCOME-TAX> 18 0
<INCOME-CONTINUING> 954 (343)
<DISCONTINUED> 0 (876)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 954 (1,219)
<EPS-PRIMARY> 0.09 (0.13)
<EPS-DILUTED> 0.08 (0.13)
</TABLE>
