<PAGE>
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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 SEPTEMBER 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
incorporation or organization) Identification No.)
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 November 7, 1997, there were 10,793,279 shares outstanding of the
---------------- ----------
Registrant's Common Stock, no par value per share.
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<PAGE>
<TABLE>
<CAPTION>
Index Page No.
- --------- --------
<C> <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>
September 30, December 31,
1997 1996
------------------ ------------------
(unaudited)
(Restated -
See Note 2)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,623,000 $ 2,954,000
Accounts receivable, net 2,708,000 5,849,000
Inventories 3,824,000 10,072,000
Other current assets 131,000 1,836,000
------------ ------------
Total current assets 8,286,000 20,711,000
Property, plant and equipment, net 757,000 3,479,000
Other non-current assets 330,000 704,000
------------ ------------
$ 9,373,000 $ 24,894,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Debt in default, due on demand $ 14,833,000 $ 19,052,000
Line of credit borrowings, due on demand - 5,201,000
Current portion of long-term debt 3,226,000 2,527,000
Accounts payable 8,341,000 12,522,000
Accrued liabilities 3,008,000 3,656,000
Deferred revenue 295,000 503,000
Current liabilities of discontinued operations, net 16,681,000 7,265,000
------------ ------------
Total current liabilities 46,384,000 50,726,000
Long-term debt, less current portion 4,265,000 4,782,000
Commitments and contingencies
Shareholders' deficit:
Common stock, no par value 39,839,000 38,138,000
Accumulated deficit (81,115,000) (68,752,000)
------------ ------------
Total shareholders' deficit (41,276,000) (30,614,000)
------------ ------------
$ 9,373,000 $ 24,894,000
============ ============
</TABLE>
3
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(Restated - See Note 2)
<S> <C> <C> <C> <C>
Net sales:
Product sales $ 5,655,000 $3,030,000 $ 22,117,000 $13,808,000
Other sales - 711,000 90,000 1,527,000
----------- ---------- ------------ -----------
5,655,000 3,741,000 22,207,000 15,335,000
Cost of goods sold:
Product sales 4,019,000 2,570,000 19,059,000 11,319,000
Other sales - 597,000 43,000 1,326,000
----------- ---------- ------------ -----------
4,019,000 3,167,000 19,102,000 12,645,000
----------- ---------- ------------ -----------
Gross profit 1,636,000 574,000 3,105,000 2,690,000
Selling, general and administrative 1,008,000 841,000 3,587,000 2,706,000
Engineering and product development 79,000 148,000 275,000 423,000
----------- ---------- ----------- -----------
Income (loss) from operations 549,000 (415,000) (757,000) (439,000)
Other income (expense):
Interest (expense), net (7,000) (11,000) (32,000) (33,000)
Other income, net 27,000 325,000 301,000 409,000
----------- ---------- ----------- -----------
Income (loss) from continuing
operations before provision for
income taxes 569,000 (101,000) (1,325,000) (63,000)
Provision for income taxes - - - 47,000
----------- ---------- ------------ ------------
Income (loss) from
continuing operations 569,000 (101,000) (488,000) (110,000)
Discontinued operations:
Income (loss) from operations - (621,000) (4,524,000) 563,000
Estimated loss on disposal - - (7,351,000) -
----------- ---------- ------------ -----------
Net income (loss) $ 569,000 $ (722,000) $(12,363,000) $ 453,000
=========== ========== ============ ===========
Weighted average shares used
in per share calculations 10,986,000 5,622,000 10,215,000 5,493,000
=========== ========== ============ ===========
Net income (loss) per common share:
Continuing operations $ 0.05 $ (0.02) $ (0.05) $ (0.02)
Discontinued operations - (0.11) (1.16) 0.10
----------- ---------- ------------ -----------
Net income (loss) per common share $ 0.05 $ (0.13) $ (1.21) $ 0.08
=========== ========== ============ ===========
</TABLE>
4
<PAGE>
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------------
1997 1996
------------------ -----------------
(Restated -
See Note 2)
<S> <C> <C>
Net cash provided (used) by operating activities of:
Continuing operations $ 1,349,000 $(4,203,000)
Discontinued operations 1,882,000 -
----------- -----------
Net cash provided (used) by operating activities 3,231,000 (4,203,000)
----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (396,000) (9,290,000)
Proceeds from sale of fixed assets
Continuing operations 25,000 -
Discontinued operations 236,000 -
Realized gain from forward foreign currency contracts - 318,000
----------- -----------
Net cash provided (used) by investing activities (135,000) (8,972,000)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in short-term notes payable
Continuing operations - (172,000)
Discontinued operations (3,612,000) -
Borrowings under long-term debt and promissory notes
Continuing operations 205,000 12,058,000
Principal payments on long-term debt and promissory notes
Continuing operations (512,000) (1,069,000)
Discontinued operations (508,000) -
Issuance of common stock - 1,994,000
----------- -----------
Net cash provided (used) by financing activities (4,427,000) 12,811,000
----------- -----------
Net increase (decrease) in cash (1,331,000) (364,000)
Cash at beginning of period 2,954,000 2,923,000
----------- -----------
Cash at end of period $ 1,623,000 $ 2,559,000
=========== ===========
</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 - (Restated -
See Note 2) See 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 - - (12,363,000) (12,363,000)
---------- ----------- ------------ ------------
Balance at September 30, 1997 10,793,279 $39,839,000 $(81,115,000) $(41,276,000)
========== =========== ============ ============
</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 September 30, 1997 and for the three and nine month periods ended
September 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 nine month periods ended
September 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 and the Quarterly Report on Form 10-Q for quarter
ended June 30, 1997. 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 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 $28 million as of September 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. From July 1, 1997 to September 30, 1997, the Company
accounted for the interest expense for both MPM and MPS as a current period
expense in its quarterly report ended September 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 has restated 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). In addition, for the
quarter ended September 30, 1997, the Company restated its results by
removing approximately $429,000 of interest expense pertaining to the
Singapore operations debt previously recorded as a period expense, which is
included in the $3,500,000 restatement adjustment. For the quarter ended
September 30, 1997 and for all subsequent quarters through the completion of
the liquidation process, payment of interest will be
7
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
recorded, if necessary, as a reduction of the reserve for discontinued
operations. 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 $429,000 for
the quarter ended September 30, 1997, and to increase the Company's net loss
by $3,071,000 for the nine months then ended.
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
Raw materials....................... $2,594,000 $ 5,797,000
Work-in-progress.................... 1,786,000 2,977,000
Finished goods...................... 115,000 2,622,000
Obsolescence reserve................ (671,000) (1,324,000)
---------- -----------
$3,824,000 $10,072,000
========== ===========
</TABLE>
4. Effects of Income Taxes
The Company has not recorded provisions for any income taxes for the three
and nine month periods ended September 30, 1997, since the Company's domestic
and Singapore operations have generated operating losses for both financial
reporting and income tax purposes. A 100% valuation allowance has been
provided on the total deferred income tax assets as they are not more likely
than not to be realized.
The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company
believes that its ability to utilize its current net operating loss and
credit carryforwards in 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.
The Company has 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 begin on
November 1, 1997, with scheduled annual increases of 6% to 7% per year
beginning November 1, 1998.
8
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
7. 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 and nine month periods ended September 30, 1997, as
if this change had been put into effect on January 1, 1997.
<TABLE>
<CAPTION>
======================================================================================================
(unaudited) (Restated - See Note 2)
-------------------------------------------------------------------
Historical Pro Forma
Three Months Ended Pro Forma Three Months Ended
September 30, 1997 Adjustments September 30, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 5,655,000 $ (965,000) (1) $ 4,690,000
Cost of goods sold 4,019,000 (995,000) (2) 3,024,000
Gross profit 1,636,000 30,000 1,666,000
Net income $ 569,000 30,000 $ 599,000
======================================================================================================
Net income per
common share $ 0.05 $ -- $ 0.05
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
======================================================================================================
(unaudited) (Restated - See Note 2)
-------------------------------------------------------------------
Historical Pro Forma
Nine months Ended Pro Forma Nine months Ended
September 30, 1997 Adjustments September 30, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 22,207,000 $(10,626,000) (1) $ 11,581,000
Cost of goods sold 19,102,000 (10,942,000) (2) 8,160,000
Gross profit 3,105,000 316,000 3,421,000
Net income (loss) $(12,363,000) 316,000 $(12,047,000)
======================================================================================================
Net income (loss) per
common share $ (1.21) $ 0.03 $ (1.18)
======================================================================================================
</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.
9
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
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 had been a wholly owned subsidiary of the Company
that manufactured primarily pressed ceramics 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. On
September 26, 1997, a trade creditor of MPS filed a petition to liquidate
MPS, which placed MPS into liquidation with the Court in Singapore. As of
November 7, 1997, the Company has not received any communication from the
Singapore Court which would indicate how long the liquidation process may
take. The Company has guaranteed all of MPS's obligations to DBS.
There were approximately $5.3 million of such loans outstanding as of
September 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 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 nine month periods ended September 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. A charge to "Estimated loss on disposal"
is included on the Condensed Consolidated Statement of Operations for the
three and nine month periods ended September 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 September 30,
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. 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 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.
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.
10
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
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 nine month periods ended September 30, 1997
and 1996.
10. Discontinued Operations
Based on the information included in Notes 8 and 9, the results of
operations of the MPS, MPC and MPM segments have been reported separately as
discontinued operations as of September 30, 1997, and for the three and nine
month periods then ended. Consolidated Statements of Operations for the
three and nine month periods ended September 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 operations.
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, 1996 - MPS and MPC are included, along with MPM, as of
September 30, 1997):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
(Restated -
See Note 2)
<S> <C> <C>
Cash........................................ $ 189,000 $ 391,000
Other current assets........................ 1,903,000 225,000
Property, net............................... 1,713,000 1,500,000
Other non-current assets.................... 308,000 --
Debt in default and line of
credit borrowings, due on demand.......... (5,505,000) (3,298,000)
Accounts payable and accrued liabilities.... (15,289,000) (6,083,000)
------------ -----------
Current liabilities of
discontinued operations, net.............. $(16,681,000) $(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 nine month periods ended September
30, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
(unaudited) (Restated - See Note 2)
<S> <C> <C> <C> <C>
Net sales....................... $ - $8,217,000 $ 9,972,000 $30,197,000
Costs and expenses.............. - 8,838,000 14,496,000 29,634,000
---------- ---------- ----------- -----------
Income (loss) from
discontinued operations......... $ - $ (621,000) $(4,524,000) $ 563,000
========= ========== =========== ===========
</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 3,801,786 shares of Common Stock
during January and February, 1997.
12. New Accounting Standards
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
12
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
________________________________________________________________________________
earnings per share includes no dilution and is computed by dividing income
available to 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 a total of $16.1
million of indebtedness in default and thereby due upon demand ($1.3 million
of which is included in "Current liabilities of discontinued operations,
net"), as well as $4.2 million 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 three of the Company's customer loans (TI, NS Electronics and
Citibank), and the balance of the Orix leases from MPM; 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
For the three months ended September 30, 1997 ("the third quarter"), net sales
were $5,655,000, representing an increase of $1,914,000 or 51.2% over net sales
of $3,741,000 for the third quarter of 1996. The increase in net sales was
primarily attributable to a $2,692,000 increase in revenues from the sale of MCM
products at the Company's CTM Electronics, Inc. ("CTM") subsidiary, partially
offset by a $66,000 reduction in revenues from the Company's Microelectronic
Packaging America ("MPA") subsidiary and a reduction of $711,000 in revenues
derived under the equipment and technology transfer agreement discussed below.
The increase in sales of MCM's for the third quarter resulted from a 310.2%
increase in the number of units sold over the corresponding period of 1996,
partially offset by a 52.1% decrease in average selling prices. The primary
reason for the decrease in average selling prices resulted from CTM's primary
customer deciding, effective July 25, 1997, to provide certain chips ("die") on
consignment, rather than selling them to the Company (see Note 7 to the
Condensed Consolidated Financial Statements). This change ("consigned die") has
resulted in a permanent reduction in selling prices for products sold to this
customer. The balance of the reduction was caused by a change in product mix.
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.
For the nine months ended September 30, 1997, net sales were $22,207,000,
representing an increase of $6,872,000 or 44.8% over net sales of $15,335,000
for the corresponding period of 1996. The increase in net sales was primarily
attributable to a $8,652,000 increase in revenues from the sale of MCM products
by CTM, partially offset by a reductions of $342,000 in revenues from MPA and
$1,527,000 in revenues derived under the equipment and technology transfer
agreement discussed below. The increase in sales of MCM's for the nine months
ended September 30, 1997 resulted principally from a 108.3% increase in the
number of units sold over the corresponding period of 1996, partially offset by
a 19.4% decrease in average selling prices. Approximately one-half of the
reduction in average selling prices is the result of the change to consigned die
discussed above. The balance of the reduction was caused by a change in product
mix. 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 the Condensed Consolidated Financial Statements).
Net sales for the three and nine month periods ended September 30, 1996 includes
$711,000 and $1,527,000 of revenues derived under an agreement with a government
factory in Yixing, China.
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Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
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
For the third quarter of 1997, cost of goods sold were $4,019,000, representing
an increase of $852,000 or 26.9% over cost of goods sold of $3,167,000 for the
third quarter of 1996. The increase in cost of goods sold resulted from a
$1,741,000 increase in the cost of goods sold for MCM products by CTM, which was
partially offset by a $291,000 reduction in the cost of goods sold by MPA and by
a $597,000 decrease in "Other costs" incurred in connection with the equipment
and technology transfer agreement discussed below. The increase in cost of
goods sold of MCM's for the third quarter resulted from a 310.2% increase in the
number of units sold over the corresponding period of 1996, partially offset by
a 81.2% decrease in the average per unit cost of the major components used in
MCM's. The decrease in the average per unit cost in MCM's is almost entirely
due to the change to consigned die, effective July 25, 1997, discussed under
"Net Sales" (see Note 7 to the Condensed Consolidated Financial Statements).
This represents a permanent change to the cost structure of CTM. 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 reduction in
"Other costs" resulted from the completion of the equipment and technology
transfer agreement (discussed below) during the second quarter of 1997.
For the nine months ended September 30, 1997, cost of goods sold were
$19,102,000, representing an increase of $6,457,000 or 51.1% over cost of goods
sold of $12,645,000 for the corresponding period of 1996. The increase in cost
of goods sold resulted from a $8,799,000 increase in the cost of goods sold for
MCM products by CTM, which was partially offset by a $1,059,000 reduction in the
cost of goods sold by MPA and by a $1,283,000 decrease in "Other costs" incurred
in connection with the equipment and technology transfer agreement discussed
below. The increase in cost of goods sold of MCM's for the nine months ended
September 30, 1997 resulted from a 108.3% increase in the number of units sold
over the corresponding period of 1996, partially offset by a 19.6% decrease in
the average per unit cost of the major components used in MCM's. Approximately
one-half of the decrease in the average per unit cost in MCM's is due to the
change to consigned die, effective July 25, 1997, discussed under "Net Sales"
(see Note 7 to the Condensed Consolidated Financial Statements). The balance of
the reduction was caused by a change in product mix. 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 reduction in "Other costs"
resulted from the completion of the equipment and technology transfer agreement
(discussed below) during the second quarter of 1997.
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).
Cost of goods sold for the three and nine month periods ended September 30, 1996
includes $597,000 and $1,326,000 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.
15
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
Gross Profit
Gross profit was $1,636,000 (28.9% of net sales) for the third quarter of 1997
as compared to $574,000 (15.3% of net sales) for the third quarter of 1996. The
gross profit for the third quarter of 1996 would have been 23.1% without (1) the
lower gross profit (16.0%) on the equipment and technology transfer agreement
and (2) the loss ($225,000) incurred by MPA (both of which will not be recurring
in the future). There were no net sales or cost of goods sold relating to these
two items in the third quarter of 1997. Furthermore, eliminating the cost of
die from both revenues and expenses, gross profit would have been 35.1% for the
third quarter of 1997 and 40.9% for the corresponding period of 1996. This
decrease in gross profit is attributable to a change in product mix to products
with higher selling prices, but having lower margins.
For the nine months ended September 30, 1997, gross profit was $3,105,000 (14.0%
of net sales) as compared to $2,690,000 (17.5% of net sales) for the
corresponding period of 1996. The gross profit for the nine months ended
September 30, 1996 would have been 23.8% without (1) the lower gross profit
(13.2%) on the equipment and technology transfer agreement and (2) the loss
($717,000) incurred by MPA (both of which will not be recurring in the future).
Net sales and cost of goods sold relating to these two items were negligible in
the nine months ended September 30, 1997. Furthermore, eliminating the cost of
die from both revenues and expenses, gross profit would have been 27.4% for the
nine months ended September 30, 1997 and 46.3% for the corresponding period of
1996. This decrease in gross profit is attributable to a change in product mix
to products with higher selling prices, but having lower margins.
With the combination of increasing demand for newer, lower-margin products, and
the increase in margins which results from the effect of eliminating die cost
from net sales and cost of goods sold (resulting from the change to consigned
die), it is difficult for the Company to predict gross profit levels for the
remainder of 1997 and beyond.
Selling, General and Administrative
Selling, general and administrative expenses were $1,008,000 for the third
quarter and $3,587,000 for the nine months ended September 30, 1997,
representing increases of $167,000 or 19.9% and $881,000 or 32.6%, 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 U.S. operations and the winding up of its
Singapore operations. The Company anticipates selling, general and
administrative expenses, in absolute dollars, to increase year over year through
the end of the fiscal year ending December 31, 1997.
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 $79,000 for the third quarter
and $275,000 for the nine months ended September 30, 1997, representing
decreases of $69,000 or 46.6% and $148,000 or 35.0% 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, in
absolute dollars, will increase over the remainder of the fiscal year ending
December 31, 1997.
16
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
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 $7,000 for the third quarter and $32,000 for the nine
months ended September 30, 1997, representing decreases of $4,000 and $1,000
from the corresponding periods of 1996. This caption has been restated to
exclude interest on customer loans that are related to the discontinued
operations in Singapore (see Note 2).
Other Income
Other income was $27,000 for the third quarter and $301,000 for the nine months
ended September 30, 1997, as compared to $325,000 and $409,000 for the
corresponding periods of 1996. These decreases came as a result of the gain on
the sale of the MPA assets which was recorded in the third quarter of 1996.
Effects of Income Taxes
The Company has not recorded provisions for any income taxes for the three and
nine month periods ended September 30, 1997, since the Company's domestic and
Singapore operations have generated operating losses for both financial
reporting and income tax purposes. A 100% valuation allowance has been provided
on the total deferred income tax assets as they are not more likely than not to
be realized.
The Company believes that it has incurred an ownership change pursuant to
Section 382 of the Internal Revenue Code and, as a result, the Company believes
that its ability to utilize its current net operating loss and credit
carryforwards in 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 nine month periods ended September 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 ont he 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
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 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
17
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
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 third quarter and first nine 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 September 30, 1997 consisted of its U.S.
cash balance of $1,623,000.
The Company is currently in default on substantially all 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$6.2 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. As of July 10,
1997, DBS appointed a Receiver and Manager to dispose of the assets of MPS which
comprise part of DBS's security. The Company anticipates that the disposition of
the MPS assets will partially repay the outstanding borrowings. Should the
liquidation of the 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.
MPS has a $1.0 million loan outstanding with DBS, guaranteed by Samsung Corning
Co. Ltd. ("Samsung"). MPS has not made a payment on this loan since March 1997.
As of September 30, 1997, the balance owing to DBS is $583,000, and is
classified as debt in default, due on demand. On October 15, 1997, DBS made a
claim against Samsung's guarantee. As of November 7, 1997, Samsung has not paid
the balance to DBS, nor have they made any demand upon MPI, which has also
guaranteed the loan.
By the end of the first quarter of 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
September 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. No lender to date has either declared
18
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
a default or has exercised any such remedies under these notes. MPS entered into
an Amended Loan and Security Agreement with TI on 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 MPI's guarantee, MPI issued a new note to TI to replace the obligation
owing by MPS on May 13, 1997. As of November 12, 1997, MPI is in compliance with
the terms and conditions of the new note. 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 as of July 11, 1997, and extended the due
date for the principal and interest to September 9, 1997. On September 9, 1997,
MPI paid the accrued interest due and entered into a second Amendment which
extends the due date for the principal to December 8, 1997, with the interest
rate remaining at 6.72%. The Company is currently attempting to renegotiate the
terms and conditions of its notes with SGS-Thomson to waive any current defaults
and to restructure the loan 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$327,000 at September 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. As of
September 30, 1997, MPC had repaid this loan in full.
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. 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. The Company
anticipates that the disposition of the MPM assets may partially repay the
outstanding borrowings. As of June 30, 1997, the balance owing under this
arrangement was approximately $2.6 million. 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.
19
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
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. The Company believes the disposal of MPM's remaining assets
will be insufficient to fully repay these lease obligations, which have been
fully guaranteed by MPI. As of October 8, 1997, MPI reached an agreement with
MPM's lessor to a repayment schedule for the $1.6 million balance remaining as
of September 30, 1997 after the sale of most of the leased equipment. Interest
is due quarterly at 7.5% per annum, with the principal being repaid over a four-
year term which begins September 30, 1998.
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 September
1997. MPI will be required to reimburse DBS for any lease payments made.
At September 30, 1997, the Company also had borrowings of $9.0 million under the
Transpac debentures, which bear interest at 8.5% and are guaranteed by MPI. As
a result of MPI's failure to make the interest payment which was due on December
31, 1996, the Company is in default under the terms of the Debentures. The
Company believes that the disposal of MPM's assets will be fully applied toward
the DBS obligation, leaving no funds available to reduce the balance owing to
Transpac.
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 will 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 September
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. On September 26, 1997, a
trade creditor of MPS filed a petition to liquidate MPS, which placed MPS into
liquidation with the Court in Singapore.
MPI failed to make a principal payment 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. The principal balance owing under this obligation was
$1,250,000 as of September 30, 1997. The Company withheld interest payments of
$57,000 and $58,000 which were due on June 30, 1997 and September 30, 1997, due
to the failure of two of NSEB's affiliates to pay the $2,600,000 currently owed
in trade payables to the Company's MPS subsidiary.
20
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
As of September 30, 1997 the Company also had borrowings of $583,000 under a
note payable to a customer bearing interest at 7.5% per annum, $1.1 million
under mortgage notes bearing interest at rates ranging from 7.5% to 10.75%, and
$307,000 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.
CTM purchases certain chips ("die") used in the assembly of MCM's sold to one of
the Company's significant customers from that same customer. This customer
notified the Company that, effective July 25, 1997, 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 the Condensed Consolidated Financial Statements).
FUTURE OPERATING RESULTS
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 MCM's,
could materially adversely affect the Company's business, financial condition
and results of operations. Sales to one customer, Schlumberger, accounted for
90% of the Company's reported net sales for the nine months ended September 30,
1997 (which are almost entirely MCM sales) and is expected to continue to
account for most 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 a going concern. 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. 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.
Discontinuation of MPS Operations. On July 10, 1997, DBS appointed a Receiver
and Manager for MPS. The appointment of a Receiver and Manager is allowed by
the terms of the loan agreements between MPS
21
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
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. On September
26, 1997, a trade creditor of MPS filed a petition to liquidate MPS, which
placed MPS into liquidation with the Court in Singapore. As of November 7, 1997,
the Company has not received any communication from the Singapore Court which
would indicate how long the liquidation process may take.
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 and 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, 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 will 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 throughout the remainder of
1997 and 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 will require substantial additional financing to fund its
operations 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 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.
22
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
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 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 during the next twelve months, 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. 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 and other parties 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. There can be no assurance
that other creditors of the Company will not 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 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
23
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
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 repay 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 MPM had equipment lease obligations totaling $1.9
million. MPM failed to make lease payments due in February 1997, and the lessor
declared the leases to be in default. The Company believes the disposal of
MPM's remaining assets will be insufficient to fully repay these lease
obligations, which have been fully guaranteed by MPI. As of October 8, 1997,
MPI reached an agreement with MPM's lessor to a repayment schedule for the $1.6
million balance remaining as of September 30, 1997 after the sale of most of the
leased equipment. Interest is due quarterly at 7.5% per annum, with the
principal being repaid over a four-year term which begins September 30, 1998.
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.
The Company is currently in default under the Transpac debentures due to the
non-payment of interest when due. Should Transpac elect to pursue MPI's
guarantee, MPI would be unable to repay the principal or interest due. This
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.
24
<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 September 1997.
MPI will be required to reimburse DBS for any lease payments made.
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. On September 26, 1997, a trade creditor of MPS filed a petition to
liquidate MPS, which placed MPS into liquidation with the Court in Singapore. 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 September 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. As previously discussed, one of these
loans ($3.5 million) has been successfully renegotiated by MPI, and a second
loan ($2.2 million) has been converted into a short-term note pending
finalization of a four to five year repayment schedule. 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 all of the Company's revenues and hold 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. 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
25
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
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 $27.8 million in debt obligations as of September
30, 1997. On September 30, 1997, the Company had a total shareholders' deficit
of approximately $41.3 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. The Company has a significant number of assets
located in Singapore, which will likely be liquidated in Singapore dollars. A
substantial portion of the debt obligations in Singapore are also denominated in
the Singapore dollar. Any deficiency balances remaining which are guaranteed by
MPI will be repaid with United States 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 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.
26
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
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 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 supplier 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 supplier 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 MCM's.
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 MCM's, 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
27
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
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 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.
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,
28
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
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.
In September 1997, an employee of the Company's CTM subsidiary was found pouring
a chemical (10 gallons, which had been diluted with water) into a storm drain
behind CTM's San Diego manufacturing facility. The County of San Diego
conducted an investigation which resulted in a requirement that the Company
perform the following: (1) show technically that the material can safely be
dumped in the sewer system; (2) present a training program for all employees
that handle hazardous materials; and (3) develop a business policy statement
regarding the management of hazardous materials. The Company has met the
County's requirements noted above. As of November 12, 1997, the County has not
imposed, nor has it indicated that it will impose any fines or penalties for
this incident.
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, 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
29
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
________________________________________________________________________________
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 principal 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 of $11.9 million. As of September 30, 1997, the
Company had a working capital deficiency of $38.1 million, which included debt
obligations which are in default and due on demand of $14.8 million, the current
portion of long-term debt of $3.2 million, plus the net current liabilities of
discontinued operations of $16.7 million (this latter figure includes $4.2
million line of credit borrowings which are due on demand and $1.2 million of
debt obligations which are in default and thus, due on demand).
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. 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.
30
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended
September 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
----------- -----------
<S> <C>
10.101(1) Amendment dated July 11, 1997 to that certain Promissory
Note dated May 13, 1997 between Microelectronic Packaging
America (borrower) and Citicorp USA, Inc. (lender).
10.102(1) Standard Lease By and Between John Hancock Mutual Life
Insurance Company, as Lessor, and Microelectronic
Packaging, Inc., as Lessee, dated September 2, 1997.
10.103(1) Second Amendment dated September 9, 1997 to that certain
Promissory Note dated May 13, 1997, as amended by
Amendment dated July 11, 1997, between Microelectronic
Packaging America (borrower) and Citicorp USA, Inc.
(lender).
10.104(1) Employment agreement dated October 6, 1997, between
Microelectronic Packaging, Inc. and Andrew Wrobel.
10.105(1) Agreement dated October 8, 1197 between ORIX Leasing
Singapore Limited and Microelectronic Packaging, Inc.
11.1 Computation of Net Income (Loss) per Common Share
27.1 Financial Data Schedule
</TABLE>
- ---------------
(1) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1997, filed with the
Securities and Exchange Commission on November 12, 1997.
31
<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
32
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<C> <S>
10.101(1) Amendment dated July 11, 1997 to that certain Promissory Note dated
May 13, 1997 between Microelectronic Packaging America (borrower)
and Citicorp USA, Inc. (lender).
10.102(1) Standard Lease By and Between John Hancock Mutual Life Insurance
Company, as Lessor, and Microelectronic Packaging, Inc., as Lessee,
dated September 2, 1997.
10.103(1) Second Amendment dated September 9, 1997 to that certain Promissory
Note dated May 13, 1997, as amended by Amendment dated July 11,
1997, between Microelectronic Packaging America (borrower) and
Citicorp USA, Inc. (lender).
10.104(1) Employment agreement dated October 6, 1997, between Microelectronic
Packaging, Inc. and Andrew Wrobel.
10.105(1) Agreement dated October 8, 1197 between ORIX Leasing Singapore
Limited and Microelectronic Packaging, Inc.
11.1 Computation of Net Income (Loss) per Common Share
27.1 Financial Data Schedule
</TABLE>
- ------------
(1) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1997, filed with the
Securities and Exchange Commission on November 12, 1997.
33
<PAGE>
EXHIBIT 11.1
MICROELECTRONIC PACKAGING, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME (LOSS) PER SHARE:
Net income (loss) $ 569,000 $ (722,000) $(12,363,000) $ 453,000
=========== ========== ============ ==========
Weighted average shares outstanding:
Shares outstanding from beginning of period 10,793,000 5,559,000 6,991,000 4,660,000
Conversion of $1.9 million of debentures
into 3,801,786 shares of common stock 3,224,000
Sale of 842,058 shares to Transpac 581,000
Other shares issued during the period 63,000 46,097
Common equivalents - options to directors,
officers and employees, net of treasury
shares 193,000 206,000
----------- ---------- ------------ ----------
Weighted average common and common
equivalent shares outstanding 10,986,000 5,622,000 10,215,000 5,493,000
=========== ========== ============ ==========
Primary net income (loss) per common share $ 0.05 $ (0.13) $ (1.21) $ 0.08
=========== ========== ============ ==========
FULLY DILUTED NET INCOME (LOSS) PER SHARE:
Net income (loss) $ 569,000 $ (722,000) $(12,363,000) $ 453,000
=========== ========== ============ ==========
Weighted average shares outstanding:
Shares outstanding from beginning of period 10,793,279 5,559,000 6,991,493 4,660,093
Conversion of $1.9 million of debentures
into 3,801,786 shares of common stock 3,224,000
Sale of 842,058 shares to Transpac 581,000
Other shares issued during the period 63,000 46,097
Common equivalents - options to directors,
officers and employees, net of treasury
shares 246,441 208,000
----------- ---------- ----------- ----------
Weighted average common and common
equivalent shares outstanding 11,039,720 5,622,000 10,215,000 5,495,000
=========== ========== =========== ==========
Fully diluted net income (loss) per common
share $ 0.05 $ (0.13) $ (1.21) $ 0.08
=========== ========== =========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from balance
sheet as of September 30, 1997 and the statements of operations, cash flows and
shareholders equity for the period ended September 30, 1997 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,623
<SECURITIES> 0
<RECEIVABLES> 2,708
<ALLOWANCES> 0
<INVENTORY> 3,824
<CURRENT-ASSETS> 8,286
<PP&E> 757
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,373
<CURRENT-LIABILITIES> 46,384
<BONDS> 4,265
0
0
<COMMON> 39,839
<OTHER-SE> (81,115)
<TOTAL-LIABILITY-AND-EQUITY> 9,373
<SALES> 22,117
<TOTAL-REVENUES> 22,207
<CGS> 19,059
<TOTAL-COSTS> 19,102
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> (488)
<INCOME-TAX> 0
<INCOME-CONTINUING> (488)
<DISCONTINUED> (11,875)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,363)
<EPS-PRIMARY> (1.21)
<EPS-DILUTED> (1.21)
</TABLE>
