UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the six month period ended: September 30, 1998 Commission File Number: 0-21908 MRS Technology, Inc. (Exact name of registrant as specified in its charter.) Massachusetts 04-2904966 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 Elizabeth Drive, Chelmsford, MA 01824-4112 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (978)250-0450 Former name, former address, and former fiscal year, if changed since last report: Not Applicable Indicated by check mark 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 twelve months (or for such shorter period that the registrant was required to file such reports), and 92) has been subject to such filing requirements for the past 90 days. YES (X) NO ( ) Applicable only to Corporate Issuers Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: Outstanding as of Class: October 19, 1998: - ---------------------------- ----------------- Common Stock, par value $.01 6,858,763 MRS Technology, Inc. FORM 10-Q For the six month period ended September 30, 1998 INDEX PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at September 30, 1998 (Unaudited) and March 31, 1998 Consolidated Statements of Operations for the Three months ended September 30, 1998 and 1997 (Unaudited) Consolidated Statements of Operations for the Six months ended September 30, 1998 and 1997 (Unaudited) Consolidated Statements of Cash Flows for the Six months ended September 30, 1998 and 1997 (Unaudited) Notes to Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II OTHER INFORMATION Item 1. Legal Proceedings Item 3. Default Upon Senior Securities Item 6. Exhibits and Reports on Form 8-K SIGNATURES Part I Financial Information Item 1. Financial Statements MRS Technology, Inc. Consolidated Balance Sheets Assets Sept 30, 1998 Current assets (Unaudited) March 31, 1998 Cash and cash equivalents $ 183,089 $ 1,094,636 Accounts receivable, net 317,447 862,155 Inventories 5,337,618 5,643,432 Deposits 23,189 20,989 Other current assets 56,990 56,076 - -------------------------------------------------------------------- Total current assets 5,918,333 7,677,288 Property and equipment, net 68,255 176,969 Other assets, net 27,494 29,965 - -------------------------------------------------------------------- Total assets $ 6,014,082 $7,884,222 ==================================================================== Current liabilities Accounts payable $ 67,537 $ 723,516 Accrued expenses 76,485 1,187,700 Short-term debt 0 1,000,000 Other liabilities 94,417 140,714 - -------------------------------------------------------------------- Total current liabilities $ 238,439 3,051,930 Liabilities subject to compromise (Note 1) 3,199,508 0 - -------------------------------------------------------------------- Total liabilities $ 3,437,947 3,051,930 Stockholders' equity Common stock, $.01 par value; authorized,20,000,000 shares; issued and outstanding 6,858,763 and 6,838,165 shares respectively 68,588 68,381 Additional paid-in capital 36,511,202 36,487,455 Accumulated deficit (34,003,655) (31,723,544) - -------------------------------------------------------------------- Total stockholders' equity 2,576,135 4,832,292 - -------------------------------------------------------------------- Total liabilities and stockholders' $ 6,014,082 7,884,222 equity ==================================================================== <FN> The accompanying notes are an integral part of the consolidated financial statements. MRS Technology, Inc. Consolidated Statements of Operations (Unaudited) Three months ended Sept. 30, Revenue 1998 1997 Product $ 0 $2,593,116 Service and other 603,588 621,912 --------- --------- Total revenue $ 603,588 3,215,028 Cost of revenue Product 280,610 2,181,723 Service and other 421,497 227,000 --------- --------- Total cost of revenue 702,107 2,408,723 Gross margin (98,519) 806,305 Operating expenses: Research and development 90,529 578,280 Selling, general and administrative 287,635 604,880 --------- --------- Loss from operations (476,683) (376,855) Other Income (expense) 108,741 (6,867) --------- --------- Loss before reorganization items and income tax (367,942) (383,722) Legal fees 112,419 0 --------- --------- Loss before provision for income taxes (480,361) (383,722) - -------------------------------------------------------------------------- Net loss ($480,361) ($383,722) ========================================================================== Net loss per share (0.07) ($0.06) Weighted average number of common shares outstanding (000's) 6,859 6,805 <FN> The accompanying notes are an integral part of the consolidated financial statements. MRS Technology, Inc. Consolidated Statements of Operations (Unaudited) Six months ended Sept. 30, Revenue 1998 1997 Product $ 0 $2,593,116 Service 993,114 1,039,468 --------- --------- Total revenue 993,114 3,632,584 Cost of revenue Product 724,681 2,414,224 Service 774,892 539,200 --------- --------- Total cost of revenue 1,499,573 2,953,424 Gross margin (506,459) 679,160 Operating expenses: Research and development 770,864 1,096,304 Selling, general and administrative 968,754 1,111,082 --------- --------- Loss from operations (2,246,077) (1,528,226) Interest income (expense) 78,388 13,951 ---------- ---------- Loss before reorganization items and Income tax (2,167,689) (1,514,275) Legal Fees 112,419 0 ---------- --------- Loss before provision for income taxes (2,280,108) (1,514,275) - --------------------------------------------------------------------- Net loss ($2,280,108) ($1,514,275) ===================================================================== Net loss per share (0.33) ($0.22) Weighted average number of common shares outstanding (000's) 6,855 6,781 <FN> The accompanying notes are an integral part of the consolidated financial statements. PAGE MRS Technology, Inc. Consolidated Statements of Cash Flows (Unaudited) Six month periods ended Sept. 30, 1998 1997 Cash flows from operating activities Net loss ($2,280,108) ($1,514,628) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 106,330 200,040 Changes in assets and liabilities Accounts receivable 544,708 147,911 Inventories 305,814 (212,392) Deposits and other assets 1,736 (169,777) Accounts payable 184,902 952,383 Accrued expenses (385,093) 68,222 Customer deposits from other 506,250 (832,515) Other current liabilities (46,297) 143,625 - ------------------------------------------------------------------------- Net cash used in operating activities (1,066,608) (1,217,131) Cash flows from investing activities Capital expenditures 0 (28,566) - ------------------------------------------------------------------------- Net cash used in investing activities 0 (28,566) Cash flows from financing activities Net borrowings under line of credit 126,257 0 Proceeds from stock purchases under employee stock purchase plan 18,996 0 Proceeds from employee stock option exercise 4,959 26,662 Principal payments under capital lease obligations 0 (1,447) ----------------------------------------------------------------------- Net cash provided by financing activities 150,212 25,215 Net decrease in cash & equivalents (911,547) (1,220,482) Cash and cash equivalents at beginning of period 1,094,636 3,290,982 Cash and cash equivalents at end of period $ 183,089 $ 2,070,500 ========================================================================= Supplemental cash flow information Interest paid $ 72,349 $50,726 <FN> The accompanying notes are an integral part of the consolidated financial statements. PAGE MRS Technology, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The financial statements for the three month periods ended September 30, 1998 and 1997 are unaudited and include all adjustments which, in the opinion of management, are necessary to present fairly the financial position at September 30, 1998 and the results of operations and cash flows for the periods then ended. All such adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended March 31, 1998. Certain information and footnote disclosures normally included in the financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, although the Company believes the disclosures in these financial statements are adequate to make the information presented not misleading. The Company's financial position, results of operations and cash flows for any interim period are not necessarily indicative of the results for any other interim period or for a full fiscal year. 1. Reorganization under Bankruptcy Proceedings On July 1, 1998, the filing date, the Company filed a voluntary petition under Chapter 11 of U.S.C. Title 11 with the United States Bankruptcy Court for the District of Massachusetts (Western Division)(Case No. 98-44938-JFQ). Since the filing date, the Company has operated its business as a debtor-in-possession subject to the jurisdiction of the Bankruptcy Court. All claims against the Company in existence prior to the filing date have been classified as "liabilities subject to compromise" in the consolidated balance sheet, and are subject to payment only when and as provided for by an order of the bankruptcy court. At September 30, 1998, "liabilities subject to compromise" were comprised of the following: Liabilities Subject to Compromise (In Thousands) Trade accounts payable $ 842 Secured Debt 1,126 Customer Deposits 506 Accrued Expenses 726 ------ $3,200 2. Research and Development Research and product development costs are expensed as incurred. There were no costs recovered under research and development contracts during either of the quarterly periods ending September 30, 1998 or 1997. 3. Inventories Inventories consist of the following as of September 30, 1998 and March 31, 1998: (In Thousands) September 30, 1998 March 31, 1998 Work in process $4,545 $4,585 Purchased parts 793 1,058 ------- ------- $5,338 $5,643 4. Net Loss Per Common Share Net loss per share is calculated as follows: Quarter Ended September 30, (In Thousands, except per share amounts) 1998 1997 Net loss ($480,361) ($383,722) Basic and diluted 6,859 6,805 Weighted-average common shares outstanding Net loss per common share (0.07) (0.06) Net loss per share is calculated as follows: Year-to-Date September 30, 1998 1997 Net loss ($2,280) ($1,514) Basic and diluted 6,855 6,781 Weighted-average common shares outstanding Net loss per common share (0.33) (0.22) 5. Litigation The Company's Annual Report on Form 10-K for the year ended March 31, 1998 described a Settlement Agreement on litigation between the Company and Micron Display Technology ("Micron"). The final payment due from Micron under the Settlement Agreement was made on July 31, 1998. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Private Securities Litigation Reform Act of 1995 ("the Act") provides a "safe harbor" for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company desires to take advantage of the "safe harbor" provisions of the Act. Certain information contained herein, particularly the information appearing under the headings "Business Development," "Results of Operations," "Liquidity and Capital Resources" and "Factors Affecting Future Results" are forward-looking. Information regarding certain important factors that could cause actual results of operations or outcomes of other events to differ materially from any such forward-looking statement appear together with such statement, and/or elsewhere herein. The Company assumes no obligation to update the information contained herein. Business Development During the first quarter of fiscal 1999 the Company, under the direction of its new chief executive officer, refocused its marketing efforts towards the High Density Interconnect (HDI) business, specifically, for the high density single chip and multi-chip packaging. The Company sought strategic relationships with customers in the new market in order to gain new orders for its products, in the short-term and market acceptance of its technology in the long term. The Company also attempted to obtain funding for its operations and research and development efforts and to renegotiate the terms of its line of credit. The Company was unable to obtain funding or to negotiate successfully with regard to its line of credit, although it did receive a waiver on complying with certain covenants in the line of credit agreement valid through June 30, 1998. That waiver was not extended and the Company is now in default under its line of credit. On June 30, 1998 the Company reduced its workforce by approximately 80%. On July 1, 1998 the Company filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The petition was filed in the U.S. Bankruptcy Court for the District of Massachusetts (Western Division) in Worcester, MA. The Company retained substantially all of its service organization and is continuing to support the installed base. The Company expects that this will be an important source of revenue in the near term. The Company's plan is to conserve cash while attempting to close transactions for the sale of four machines in inventory and develop new products to market to the HDI segment of the Printed Circuit Board (PCB) manufacturing industry. RESULTS OF OPERATIONS TOTAL REVENUES Revenues (In Thousands) Quarter Ended September 30, 1998 % 1997 % Product $ 0 $2,593 81 Service & other 604 100 622 19 ---- --- ------ --- Total revenues $604 100 $3,215 100 Six Months Ended September 30, 1998 % 1997 % Product $ 0 $2,593 71 Service & other 993 100 1,039 29 ---- --- ------ --- Total revenues $993 100 $3,632 100 There were no product revenues for the quarter and year-to-day ended September 30, 1998. The quarter and year-to-date ended September 30, 1997 reflect the sale of one PanelPrinter. Service revenues for the three and six months ended September 30, 1998 and 1997 were approximately the same. GROSS MARGIN Quarter Ended September 30, Gross Margin (In Thousands) 1998 % 1997 % Product ($281) $411 As % of revenue - 16 Service & other 183 395 As % of revenue 30 64 Total gross margin ($98) (16) $806 25 Six months Ended September 30, 1998 % 1997 % Product ($725) $179 As % of revenue - 7 Service & other 218 500 As % of revenue 22 48 Total gross margin ($507) (51) $679 19 Product Gross Margin as a percent of revenue for the quarter and year-to-date ended September 30, 1998 were negative as there were no product revenues to offset overheads. Product Gross Margin as a percent of revenue for the quarter and year-to-date ended September 30, 1997 were 16% and 7% respectively. Service Gross Margin as a percentage of revenue was 30% for the quarter ended September 30, 1998 compared with 64% for the same quarter in the prior year and was 22% for the year-to-date ending September 30, 1998 compared with 48% for the same period in the prior year. These year-to-year decreases in gross margin are the result of increased costs, including increased facility allocations and the transfer of additional head count expense to service costs, in the current period as compared to the prior year's period. Research & Development (In Thousands) Quarter Ended September 30, 1998 % Change 1997 Research and development $91 (84%) $578 As a % of revenue 15% 18% Six Months Ended September 30, 1998 % Change 1997 Research and development $771 (30%) $1,096 As a % of revenue 78% 30% Research and development costs decreased by 84% for the September 30, 1998 quarter and year-to-date when compared with the same quarter and year-to-date for the prior year due to the workforce reduction on June 30, 1998 which included mostly research and development employees. Selling, General and Administrative (In Thousands) Quarter Ended September 30, 1998 % Change 1997 Selling, general & administrative $288 (52%) $605 As a % of revenue 48% 19% Six Months Ended September 30, 1998 % Change 1997 Selling, general & administrative $ 969 (13%) $1,111 As a % of revenue 98% 31% Selling, general and administrative costs for the current quarter ended September 30, 1998 were down 52% from the same quarter in the prior year, and were down 13% on a year-to-date basis for the periods ending September 30, 1998 and 1997. The decrease in the current quarter from the same quarter in the prior year is a result of sales and marketing and administrative employees included in the June 30, 1998 workforce reduction. On a year-to-date basis, expenses are down for salaries and fringe benefits, but are partially offset by higher Coast Business Credit fees. REORGANIZATION ITEMS The legal fees of $112 thousand are the result of the Chapter 11 filing on July 1, 1998. LIQUIDITY AND CAPITAL RESOURCES The Company had cash and cash equivalents at September 30, 1998 of $183 thousand, a decrease of $912 thousand from March 31, 1998. This decrease was mainly the result of negative cash flows from operations in fiscal 1999 which have resulted from declining sales and, therefore, significant losses from operations. Historically, the Company has required significant working capital to support its research and development efforts and to meet its ongoing production, selling and general and administrative costs. The Company's transition to a new market will require investments to adapt the Company's FPD technology for this new market as well as substantial funding for its ongoing operations until such time as orders from this new market are sufficient to meet its working capital needs. In addition, historically, the Company has funded a substantial portion of its aggregate research and developments costs through contracts with an agency of the U.S. government and other contracts. However, the Company does not expect to continue to funds its research and development efforts through similar contracts in the future. The Company's ability to develop new technologies is dependent upon its ability to fund research and development through working capital and/or other financing alternatives. In the past, the Company has been able to meet its working capital requirements through its existing cash balances and amounts available under its line of credit. However, as a result of its significant net loss in fiscal 1998, the Company was not in compliance with a financially restrictive debt covenant, minimum tangible net worth, as of March 31, 1998. The Company was unable to get funding or to negotiate successfully with regard to its line of credit, although it did receive a waiver on complying with certain covenants in the line of credit agreement valid through June 30, 1998. That waiver was not extended and the Company is now in default under its line of credit. During the first quarter of fiscal 1999 the Company, under the direction of its new chief executive officer, refocused its marketing efforts towards the High Density Interconnect (HDI) business, specifically, for the high density single chip and multi-chip packaging. The Company sought strategic relationships with customers in the new market in order to gain new orders for its products, in the short-term and market acceptance of its technology in the long term. The Company also attempted to obtain funding for its operations and research and development efforts and to renegotiate the terms of its line of credit. On June 30, 1998 the Company reduced its work force by approximately 80%. On July 1, 1998 the Company filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The petition was filed in the U.S. Bankruptcy Court for the District of Massachusetts (Western Division) in Worcester, MA. The Company retained substantially all of its service organization and is continuing to support the installed base. The Company expects that this will be an important source of revenue in the near term. The Company's plan is to conserve cash while attempting to close transactions for the sale of four machines in inventory and develop new products to market to the HDI segment of the Printed Circuit Board (PCB) manufacturing industry. Factors Affecting Future Results In addition to the risks discussed in "Business Developments" and "Liquidity and Capital Resources" above, the ability of the Company to attain the financial or other results that may be planned, forecasted or projected from time to time is subject to a number of factors, including the ability to obtain new orders, the timing of recording the related revenue, the ability to develop and manufacture new products, the ability to respond to competitive technology and pricing pressures, adequate availability of major components. PanelPrinters and optional equipment generally have ranged in price from $1.1 to $2.7 million. Any delay in revenue recognition or cancellation of an order would adversely affect the Company's results of operations, cash flows, or both. Fluctuations in product revenues, and consequently quarterly and annual net income or loss, are largely related to revenue recognition on sales of PanelPrinter units. In addition, the process for turning prospects into firm purchase commitments and subsequently selling the systems is often lengthy. Year 2000 Computer Systems Compliance Concerns have been widely expressed regarding the inability of certain computer programs to process date information beyond year 1999. These concerns focus on the impact of the Year 2000 problem on business operations and the potential costs associated with identifying and addressing the problem. The Company is in the process of evaluating and taking steps to deal with the potential impact of this problem in areas under its control, in particular its products, its administrative and business systems, and its sources of supply. Based on its review to date, the Company believes that its own products are "Year 2000 compliant". The Company is in the process of upgrading its business systems. The upgrade will enable proper processing of transactions relating to the Year 2000 and beyond. The Company has also undertaken a program to survey suppliers to determine the status and schedule for their Year 2000 compliance. Where it is believed that a particular supplier's situation poses unacceptable risks, the Company plans to identify an alternative source. Costs incurred in the compliance effort will be expensed as incurred. While the Company's Year 2000 compliance evaluation is not yet complete, the Company does not foresee a material impact on its business, operating results or financial position from the Year 2000 problem. The Company cannot, of course, predict the nature or materiality of the impact on its operations or operating results of noncompliance by parties outside its control. PART II - OTHER INFORMATION Item 1. Legal Proceedings On July 1, 1998 the Company filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The petition was filed in the U.S. Bankruptcy Court for the District of Massachusetts (Western Division) in Worcester, MA. The case number is #98-44938-JFQ. Item 3. Default Upon Senior Securities The Company has a line of credit with Coast Business Credit in the amount of $4 million. The Company is in default of its tangible net worth covenent. The amount of principle and interest due as of September 30, 1998 is $1,126,257. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 27. Financial Data Schedule b. Reports on Form 8-K Form 8-K. July 1, 1998 Form 8-K. August 19, 1998 Form 8-K. September 24, 1998 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, authorized officers. MRS Technology, Inc. Date: October 30, 1998 /s/Carl P. Herrmann Carl P. Herrmann President, CEO and Director (Principal Executive Officer) Date: October 30, 1998 /s/ Patricia F. DiIanni Patricia F. DiIanni Vice President, Treasurer, Chief Financial Officer (Principal Financial Officer)