================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
-------------
COMMISSION FILE NUMBER 0-23562
-------
MICROELECTRONIC PACKAGING, INC.
----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3142624
- ----------------------------------------- -----------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
9577 CHESAPEAKE DRIVE, SAN DIEGO, CALIFORNIA 92123
- -------------------------------------------- --------------
(Address of Principal Executive Offices) (ZIP CODE)
Registrant's telephone number, including area code (858) 292-7000
--------------
Indicate by check whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
At August 10, 1999, there were outstanding 10,856,890 shares of the
Registrant's Common Stock, no par value per share.
================================================================================
INDEX PAGE NO.
- ----- --------
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets.......................... 3
Condensed Consolidated Statements of Operations................ 4
Condensed Consolidated Statements of Cash Flows................ 5
Condensed Consolidated Statement of
Changes in Shareholders' Deficit............................... 6
Notes to Condensed Consolidated Financial Statements........... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 19
Item 2. Changes in Securities and Use of Proceeds...................... 19
Item 3. Defaults upon Senior Securities................................ 19
Item 4. Submission of Matters to a Vote of Security Holders............ 19
Item 5. Other Information.............................................. 19
Item 6. Exhibits and Reports on Form 8-K............................... 19
SIGNATURES................................................................ 21
EXHIBIT INDEX............................................................. 22
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31,
1999 1998
- --------------------------------------------------------------------------
ASSETS (unaudited)
Current assets:
Cash $ 140,000 $ 469,000
Accounts receivable, net 1,489,000 1,306,000
Inventories 2,065,000 3,073,000
Other current assets 164,000 60,000
- --------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,858,000 4,908,000
Property, plant and equipment, net 2,051,000 1,806,000
Other non-current assets 117,000 171,000
- --------------------------------------------------------------------------
$ 6,026,000 $ 6,885,000
==========================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 473,000 $ 20,000
Accounts payable 3,883,000 4,045,000
Accrued liabilities 662,000 908,000
Debt and accrued interest of
discontinued operations,
in default, due on demand 28,059,000 27,055,000
- --------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 33,077,000 32,028,000
Long-term debt, less current portion 40,000 49,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, no par value 40,170,000 40,143,000
Accumulated deficit (67,261,000) (65,335,000)
- --------------------------------------------------------------------------
Total shareholders' deficit (27,091,000) (25,192,000)
- --------------------------------------------------------------------------
$ 6,026,000 $ 6,885,000
==========================================================================
3
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
==================================================================================================
Net sales $ 2,182,000 $ 5,825,000 $ 3,924,000 $13,159,000
Cost of goods sold 1,928,000 4,559,000 3,511,000 9,940,000
- --------------------------------------------------------------------------------------------------
Gross profit 254,000 1,266,000 413,000 3,219,000
Selling, general and administrative 501,000 934,000 1,047,000 1,710,000
Engineering and product development 178,000 320,000 370,000 592,000
- --------------------------------------------------------------------------------------------------
Income (loss) from operations (425,000) 12,000 (1,004,000) 917,000
Other income (expense):
Interest (expense), net (507,000) (3,000) (1,013,000) (6,0000)
Other income, net 90,000 220,000 91,000 290,000
- --------------------------------------------------------------------------------------------------
Income (loss)
before provision for income taxes (842,000) 229,000 (1,926,000) 1,201,000
Provision for income taxes -- -- -- (18,000)
- --------------------------------------------------------------------------------------------------
Net income (loss) $ (842,000) $ 229,000 $(1,926,000) $ 1,183,000
==================================================================================================
Net income (loss) per common share - basic $ (0.08) $ 0.02 $ (0.18) $ 0.11
==================================================================================================
Net income (loss) per common share -
assuming dilution $ (0.08) $ 0.02 $ (0.18) $ 0.10
==================================================================================================
4
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended June 30,
-------------------------
1999 1998
===================================================================================
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (212,000) $ 517,000
- -----------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (11,000) (1,024,000)
Proceeds from the sale of fixed assets 10,000
- -----------------------------------------------------------------------------------
Net cash used by investing activities (11,000) (1,014,000)
- -----------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt
and promissory notes (106,000) (21,000)
- -----------------------------------------------------------------------------------
Net cash provided (used) by financing activities (106,000) (21,000)
- -----------------------------------------------------------------------------------
NET DECREASE IN CASH (329,000) (518,000)
CASH AT BEGINNING OF PERIOD 469,000 1,296,000
- -----------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 140,000 $ 778,000
===================================================================================
5
MICROELECTRONIC PACKAGING, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' DEFICIT
(unaudited)
Common Stock
------------------------- Accumulated
Shares Amount Deficit Total
---------- ----------- ------------ ------------
Balance at January 1, 1999 10,856,890 $40,143,000 $(65,335,000) $(25,192,000)
Non-employee stock-based -- --
Compensation 27,000 27,000
Net (loss) -- -- (1,926,000) (1,926,000)
- -----------------------------------------------------------------------------------------
Balance at June 30, 1999 10,856,890 $40,170,000 $(67,261,000) $(27,091,000)
=========================================================================================
6
MICROELECTRONIC PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. QUARTERLY FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements and related
notes as of June 30, 1999 and for the three and six month periods ended
June 30, 1999 and 1998 are unaudited but include all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of financial position and
results of operations of the Company for the interim periods. Certain prior
year amounts have been reclassified to conform to the current year
presentation. The results of operations for the three and six month periods
ended June 30, 1999 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, 1998 in the Company's Annual Report on Form 10-K. Readers of this
Quarterly Report on Form 10-Q are strongly encouraged to review the
Company's Annual Report on Form 10-K. Copies are available from the Chief
Financial Officer of the Company at 9577 Chesapeake Drive, San Diego,
California 92123.
2. INVENTORIES
Inventories consist of the following:
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
Raw materials..................... $1,722,000 $2,203,000
Work-in-progress.................. 1,003,000 1,531,000
Finished goods.................... 7,000 38,000
Obsolescence reserve.............. (667,000) (699,000)
----------- -----------
$2,065,000 $3,073,000
=========== ===========
A substantial portion of the Company's June 30, 1999 inventory,
approximately $1.7 million, was purchased for the Company's primary
customer. Under the terms of an agreement dated January 5, 1998 between the
Company and the customer, the Company has been and continues to be required
to maintain certain inventory levels as defined by the agreement. The
agreement stipulates that the cost of such inventory will be paid to the
Company should the customer terminate the business relationship. Terms of
the agreement have been used in determining the carrying value of the
Company's June 30, 1999 inventory. The customer can terminate the agreement
with 120 days notice, the agreement is not enforceable should the company
file bankruptcy, and notice expires in October 2000.
3. EFFECTS OF INCOME TAXES
The Company has not recorded provisions for any income taxes for the three
and six months ended June 30, 1999, since the Company's 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.
7
Notes to Condensed Consolidated Financial Statements (unaudited)
- -------------------------------------------------------------------------------
4. NET INCOME (LOSS) PER SHARE
For the three months ended June 30, 1999
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------------------------------
Loss from continuing operations $(842,000) --
BASIC EPS
Loss available to common shareholders $(842,000) 10,856,890 $(0.08)
========================================
The computation of diluted loss per share excludes the effect of incremental
common shares attributable to the exercise of outstanding common stock options
and warrants because their effect was antidilutive due to losses incurred by the
Company.
For the three months ended June 30, 1998
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Income from continuing operations $229,000 --
BASIC EPS
Income available to common shareholders 229,000 10,793,279 $0.02
=========
Effect of dilutive securities:
Stock options -- 1,408,323
Warrants -- --
======== ==========
DILUTED EPS
Income available to common
shareholders + assumed conversions $229,000 12,201,602 $0.02
======== ========== =======
Options to purchase 55,800 shares and warrants to purchase 1,227,693 shares of
common stock at prices ranging from $1.00 to $6.50 were outstanding during the
second quarter of 1998, but were not included in the computation of diluted EPS
because the options' and warrants' exercise prices were greater than the average
market price of the common shares for the quarter then ended. The options and
warrants, which expire between August 1998 and June 2008 were still outstanding
as of June 30, 1998.
For the six months ended June 30, 1999
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Loss from continuing operations $(1,926,000) --
Basic EPS
Loss available to common shareholders $(1,926,000) 10,856,890 $(0.18)
=========== ========== =========
The computation of diluted loss per share excludes the effect of incremental
common shares attributable to the exercise of outstanding common stock options
and warrants because their effect was antidilutive due to losses by the Company.
8
Notes to Condensed Consolidated Financial Statements (unaudited)
- -------------------------------------------------------------------------------
For the six months ended June 30, 1998
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Income from continuing operations $ 1,183,000
Basic EPS
Income available to common shareholders 1,183,000 10,793,279 $ 0.11
======
Effect of dilutive securities
Stock options -- 1,404,777
Warrants -- --
----------- ----------
Diluted EPS
Income available to common
shareholders + assumed conversions $ 1,183,000 12,201,602 $ 0.10
=========== ========== ======
Options to purchase 55,800 shares and warrants to purchase 1,227,693 shares of
common stock at prices ranging from $1.00 to $6.50 were outstanding during the
first six months of 1998, but were not included in the computation of diluted
EPS because the options' and warrants' exercise prices were greater than the
average market price of the common shares for the six months then ended. The
options and warrants, which expire between August 1998 and June 2008 were still
outstanding as of June 30, 1998.
5. COMMITMENTS AND CONTINGENCIES
The Company entered into an operating lease for manufacturing facilities and
corporate offices commencing September 1, 1997, and extending to October 31,
2002. Minimum monthly rental payments of $16,000 began on November 1, 1997,
with scheduled annual increases of 6% to 7% per year beginning November 1,
1998.
The Company also entered into an agreement in 1998 whereby the Company
obtained the use of a piece of test equipment and technical support for such
equipment from a supplier. The agreement calls for minimum annual payments
of $360,000 through 2007, plus the possible acceleration of payments if the
Company obtains new customers with projects that require the use of the
equipment and technical support of the equipment supplier.
In 1999, the Company financed the acquisition of certain machinery and
equipment for a total obligation of $549,000. The amounts are payable over
twelve monthly installments of $46,000 each, ending in April and June 2000.
6. ASIAN CREDITOR LOAN AGREEMENTS GUARANTEED BY MPI
As further described below, and as of the date of this filing, the Company
has signed agreements with each of the eight creditors of the Singapore
subsidiaries which, subject to approval of the Company's shareholders,
proposes to convert and cancel the approximately $28.1 million in debt and
accrued interest owed to those eight creditors, for 9,362,777 shares of the
Series A Convertible Preferred Stock of the Company, which will initially be
convertible into 18,725,554 shares of the Company's Common Stock. A further
description of this conversion is set forth below.
With respect to the Company's subsidiaries in Singapore, all of which ceased
operations in 1997 ("Singapore Subsidiaries"), the Company guaranteed
certain debt obligations of the Singapore Subsidiaries ("Guaranty
Obligations"). During 1998, the Company entered into settlement agreements
("Settlement Agreements") with each of the eight creditors of
9
Notes to Condensed Consolidated Financial Statements (unaudited)
- -------------------------------------------------------------------------------
the Singapore Subsidiaries to whom the Company had a liability under the
Guaranty Obligations ("Singapore Subsidiary Creditors"), pursuant to which
the Company and the Singapore Subsidiary Creditors agreed that the Company
would be released from all of its liabilities under the Guaranty Obligations
in exchange for cash settlement payments in the aggregate amount of
approximately $9.3 million ("Settlement Payments"). The Company was
obligated to pay the entire amount of the Settlement Payments on or about
May 1, 1999 ("Settlement Due Date").
After entering into the Settlement Agreements, the Company determined that
it would not have the ability to pay any portion of the Settlement Payments
by the Settlement Due Date. Therefore, the Company and the Singapore
Subsidiary Creditors negotiated new terms for the settlement of the Guaranty
Obligations, which new settlement terms are set forth in definitive
agreements entered into between the Company and each of the eight Singapore
Subsidiary Creditors during 1999 ("Definitive Agreements"). The Definitive
Agreements provide that the entire amount of the Guaranty Obligations would
be converted into shares of the Company's Series A Preferred Stock ("Debt to
Equity Conversion") upon approval by a majority of the Company's
shareholders. Based upon extension agreements which were signed by the
Singapore Subsidiary Creditors during July 1999, these creditors have agreed
to an extension of the deadline for the Debt to Equity Conversion to August
31, 1999. Each share of Series A Preferred Stock would be convertible into
two shares of the Company's Common Stock, have a 3.5% per annum cumulative
dividend, liquidation preferences, registration rights, and certain other
rights, preferences and privileges senior to the Company's Common Stock.
Upon the effective date of the Debt to Equity Conversion, the entire amount
that would be shown on the Company's accompanying financial statements as
"Debt and accrued interest of discontinued operations, in default, due on
demand ("Discontinued Operations Debt"), the aggregate amount of which is
$28,059,000 as of June 30, 1999, would be converted into shares of the
Company's Series A Preferred Stock or reflected as a gain on the Company's
Statement of Operations. Upon such conversion, the Discontinued Operations
Debt would be reduced to zero.
The Company currently has filed a Consent Solicitation Statement with the
Securities and Exchange Commission ("SEC"). Assuming approval by the SEC,
this Consent Solicitation Statement will be mailed to all shareholders of
the Company in an effort to obtain shareholder approval for the Debt to
Equity Conversion. If the proposal is not approved by the shareholders of
the Company by August 31, 1999, the Company will request an additional
extension of time beyond August 31, 1999 for a reasonable time to enable the
Company to receive shareholder approval. However there is no assurance that
such request for extensions will be granted.
In connection with one of the Singapore Subsidiary Creditors, the Company
has entered into an agreement with this Singapore Subsidiary Creditor,
pursuant to which all of the rights of such creditor under the Guaranty
Obligations will be assigned to one or more third parties (some of whom are
employees of the Company). All of such third parties have agreed, upon such
assignment, to enter into Conversion Agreements and participate in the Debt
to Equity Conversion on the same terms and conditions as the other Singapore
Subsidiary Creditors ("Creditor Assignment"). The Creditor Assignment will
become effective upon the approval of the Debt to Equity Conversion by the
Company's
10
Notes to Condensed Consolidated Financial Statements (unaudited)
- -------------------------------------------------------------------------------
shareholders. In the event the Company is successful in obtaining
shareholder approval of the Debt to Equity Conversion, the Discontinued
Operations Debt will be eliminated in its entirety and the Company will no
longer have any liabilities under the Guaranty Obligations. In addition, if
the Company is successful in completing the Debt to Equity Conversion, the
equity interests of the Company's existing shareholders will be
substantially diluted and the Singapore Subsidiary Creditors, assuming
conversion of all their Series A Preferred Stock on the closing of the Debt
to Equity Conversion, would own a majority of the outstanding Common Stock
of the Company.
7. GOING CONCERN
The Company's accompanying financial statements have been prepared assuming
the Company (along with its only operating subsidiary, CTM) will continue as
a going concern. A number of factors, including the Company's history of
significant losses, the debt service costs associated with the Guaranty
Obligations and the Company's other debt obligations, and the current
uncertainty regarding whether the Company will successfully complete the
Debt to Equity Conversion, raise substantial doubts about the Company's
ability to continue as a going concern. As of June 30, 1999, the Company has
an accumulated deficit of $67.3 million and a working capital deficiency of
$29.2 million, which includes $28.1 million of liabilities under the
Guaranty Obligations. In the event the Company is not successful in
completing the Debt to Equity Conversion, and any of the Singapore
Subsidiary Creditors demand that the Company pay any portion of the
Settlement Payments or any of the Company's liabilities under the Guaranty
Obligations, the Company would be unable to do so. If the Company fails to
complete the Debt to Equity Conversion, material adverse impacts will occur
with respect to the Company's financial condition and ability to continue as
a going concern. Furthermore, the company believes such failure would be
likely to require the Company and its U.S. subsidiaries to initially seek
bankruptcy protection under Chapter 11 of Title 11 of the United States
Code and there can be no assurance any such bankruptcy proceeding would
remain as a chapter 11 proceeding.
8. FORWARD LOOKING STATEMENTS
These Condensed Consolidated Financial Statements contain forward-looking
statements which involve substantial risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the
effects of debt restructuring.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve substantial risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in this section and elsewhere in this
Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
NET SALES
For the three months ended June 30, 1999, net sales were $2,182,000 as compared
to net sales of $5,825,000 for the second quarter of 1998, resulting in
decreased sales of $3,643,000 or 62%. The decrease in net sales is primarily
the result of decreased shipments to the Company's largest customer. Sales to
this one customer comprised 90% and 91% of total net sales for the second
quarters of 1999 and 1998, respectively. Sales to this customer declined from
$5,039,000 for the second quarter of 1998 to $1,958,000 for the second quarter
of 1999, a decrease of $3,081,000 or 61%. Units shipped to this one customer
declined by 47%, reflecting lower demand from the customer in the second quarter
of 1999 as compared to the second quarter of 1998. Revenue in terms of dollars
declined by more than revenue in terms of units because of a significant shift
in product mix in 1999. Approximately 40% of sales to the Company's largest
customer in 1999 were comprised of the repair and upgrade of multi-chip modules
(MCMs). This repair activity generates only approximately one-fourth of the
dollar revenue as compared to the dollar revenue of newly-built MCMs, thereby
causing a decline in revenue dollars greater than the decline in revenue units.
Such repair activities comprised only approximately 10% of sales for the second
quarter of 1998.
For the six months ended June 30, 1999, net sales were $3,924,000, representing
a decrease of $9,235,000 or 70% over net sales of $13,159,000 for the
corresponding period of 1998. The decrease in net sales is primarily the result
of decreased shipments to the Company's largest customer. Sales to this one
customer comprised 88% and 93% of total net sales for the six month periods
ended June 30, 1999 and 1998, respectively. The dollar value of shipments to
the Company's largest customer declined by 66% for the six month period ended
June 30, 1999 as compared to the same period in 1998. Unit shipments to that
same customer declined by 41% over the same comparative periods. Approximately
40% of sales to the Company's largest customer in the six months ended June 30,
1999 were comprised of the repair and upgrade of MCMs, as compared to less than
10% in the six months ended June 30, 1998. This repair activity caused the
decline in revenue dollars to be greater than the decline in revenue units as
described above.
COST OF GOODS SOLD
For the three months ended June 30, 1999, the cost of goods sold was $1,928,000
as compared to $4,559,000 for the second quarter of 1998, a decrease of
2,631,000 or 58%. The decrease in cost of goods sold is partially due to a 41%
decline in total MCM units shipped from 1998 to 1999.
12
The decrease in units shipped was exacerbated by a 33% decrease in the average
selling price of a unit shipped in 1999 as compared to the corresponding quarter
of 1998. The primary reason for the decrease in average cost per unit sold
results from the change in product mix due to the repair and upgrade activities
described above.
For the six months ended June 30, 1999, the cost of goods sold was $3,511,000,
representing a decrease of $6,429,000 or 65% over cost of goods sold of
$9,940,000 for the corresponding period of 1998. The decrease in cost of goods
sold is partially due to a 37% decline in MCM units shipped from 1998 to 1999.
The decrease in units shipped was exacerbated by an approximately 50% decrease
in the average selling price of a unit shipped in 1999 as compared to the
corresponding quarter of 1998. The primary reason for the decrease in average
cost per unit sold results from the change in product mix due to the repair and
upgrade activities described above.
GROSS PROFIT
Gross profit was $254,000 (12% of net sales) for the second quarter of 1999 as
compared to $1,266,000 (22% of net sales) for the second quarter of 1998. The
decrease in gross profit is attributable to the decrease in sales. The decrease
in gross profit as a percentage of net sales is the result of the change in
product mix, as discussed above, as well as the effect of the absorption of
fixed manufacturing costs over lower sales revenue for the 1999 period as
compared to the 1998 period.
Gross profit was $413,000 (11% of net sales) for the six months ended June 30,
1999 as compared to $3,219,000 (24% of net sales) for the six months ended June
30, 1998. The decrease in gross profit as a percentage of net sales is the
result of the change in product mix, as discussed above, as well as the effect
of the absorption of fixed manufacturing costs over lower sales revenue for the
1999 period as compared to the 1998 period.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $501,000 for the second
quarter of 1999, representing a decrease of $433,000 or 46% from the second
quarter of 1998. Selling, general and administrative expenses were $1,047,000
for the six months ended June 30, 1999, representing a decrease of $663,000 or
39% from the comparative period of 1998. The decreases are the result of a
reduction of consulting fees which had been incurred by the Company in 1998, as
well as reductions in staffing commensurate with the lower sales volume activity
in 1999.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were $178,000 for the second
quarter of 1999 and $370,000 for the six months ended June 30, 1999,
representing decreases of $142,000 or 44% and $222,000 or 38% from the
corresponding periods of 1998, respectively. The decreases are primarily
comprised of decreased use of outside consultants in 1999 as compared to 1998.
13
INTEREST EXPENSE
Interest expense was $507,000 for the second quarter of 1999, representing an
increase of $504,000 from the corresponding quarter of 1998. Interest expense
was $1,013,000 for the six months ended June 30, 1999, representing an increase
of $1,007,000 from the same period of 1998. The Company had previously recorded
at June 30, 1997 estimated interest on the Guaranty Obligations through December
31, 1998, as part of the estimated loss on its discontinued operations. Since
the Guaranty Obligations have not yet been paid, the Company initiated the
accrual of interest thereon at the beginning of 1999. The Company has accrued
but not paid this interest. No provision for this interest expense was
necessary in 1998 as the Company had accrued interest expense at June 30, 1997
as part of its discontinued operations. See Note 6 to the accompanying
Condensed Consolidated Financial Statements for an explanation of how the
Company intends to eliminate the Guaranty Obligations and the associated
interest expense.
OTHER INCOME
Other income was $90,000 for the second quarter of 1999, as compared to $220,000
for the second quarter of 1998. Other income was $91,000 for the six months
ended June 30, 1999 as compared to $290,000 for the same period of 1998. Other
income for 1999 is primarily comprised of the estimated collection of a
receivable from 1997. Other income for 1998 was comprised of the amortization
of deferred revenue and the collection of an insurance recovery, both of which
were related to the Company's former Singapore operations, and which were
reclassified to discontinued operations at December 31,1998.
EFFECTS OF INCOME TAXES
The Company has not recorded provisions for any income taxes for the three and
six months ended June 30, 1999, since the Company's 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.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1999, operating activities of continuing
operations used $212,000. The source of the Company's cash flow during this
period was principally the liquidation of inventory. Investing activities,
consisting principally of the acquisition of fixed assets of continuing
operations, used $11,000. At June 30, 1999, the Company had a working capital
deficiency of $29,219,000 and an accumulated deficit of $67,261,000. At June 30,
1999, the Company had outstanding approximately $28,059,000 of principal and
accrued interest under the Guaranty Obligations.
14
The Company's sources of available liquidity at June 30, 1999 consisted of
inventories of $2,065,000, trade accounts receivable of $1,489,000 and its cash
balance of $140,000. The Company has no borrowing arrangements available to it.
As indicated in Note 6 to the Condensed Consolidated Financial Statements, the
Company has renegotiated its settlement of the Guaranty Obligations, pursuant to
which settlement all liabilities and accrued interest under the Guaranty
Obligations would be converted into 9,362,777 shares of the Company's Series A
Preferred Stock. If the Conversion Agreements are not all finalized, or if the
Company's shareholders do not approve the Debt to Equity Conversion, the entire
liability of $28,059,000 under the Guaranty Obligations, which is currently in
default, will be immediately due and payable.
FUTURE OPERATING RESULTS
Status as a Going Concern. The Company's independent certified public
accountants have included an explanatory paragraph in their audit report with
respect to the Company's 1998, 1997, 1996 and 1995 consolidated financial
statements related to a substantial doubt with respect to the Company's ability
to continue as a going concern. Absent outside debt or equity financing, and
excluding significant expenditures required for the Company's major projects and
assuming the Company is successful in restructuring its liability under the
Guaranty Obligations, 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 1999 and 2000. In the event the Company is not
successful in completing the Debt to Equity Conversion, and any of the Singapore
Subsidiary Creditors demand that the Company pay any portion of the Settlement
Payments or any of the Company's liabilities under the Guaranty Obligations, the
Company would be unable to do so. If the Company fails to complete the Debt to
Equity Conversion, material adverse impacts will occur with respect to the
Company's financial condition and ability to continue as a going concern.
Furthermore, the Company believes such failure would be likely to require the
Company and its U.S. subsidiaries to initially seek bankruptcy protection under
Chapter 11 of Title 11 of the United States Code and there can be no assurance
any such bankruptcy proceeding would remain as a Chapter 11 proceeding. Further,
any significant increase in planned capital expenditures or other costs or any
decrease in or elimination of anticipated sources of revenue could cause the
Company to restrict its business and product development efforts. If adequate
revenues are not available, the Company will be unable to execute its business
development efforts and may be unable to continue as a going concern. There can
be no assurance that the Company's future consolidated financial statements will
not include another going concern explanatory paragraph if the Company is unable
to restructure its liability under the Guaranty Obligations and become
profitable. The factors leading to and the existence of the explanatory
paragraph will have a material adverse effect on the Company's ability to obtain
additional financing.
Risk of Bankruptcy. If the Company is not able to restructure its liabilities
under the Guaranty Obligations, the Company believes it will initially file for
reorganization under Chapter 11 of Title 11 of the United States Code or if a
Chapter 11 bankruptcy cannot be completed, the company may be liquidated under
Chapter 7 of Title 11 of the United States Code. There can be no assurance that
if the Company decides to reorganize under the applicable laws of the United
States that such reorganizational efforts would be successful or that
shareholders would receive any distribution on account of their ownership of
shares of the Company's stock. Similarly, there can be no assurances that if the
Company decides to liquidate under the applicable laws of the United States that
such liquidation would result in the shareholders receiving any distribution on
account of their ownership of shares of the Company's stock. In fact, if the
Company were to be reorganized or liquidated under the applicable laws of the
United
15
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.
Certain Obligations of MPS. In connection with Microelectronic Packaging (S)
Pte. Ltd. ("MPS") borrowing from Citibank N.A., Motorola guaranteed (and
subsequently satisfied MPS' obligation) $2.2 million in borrowings from
Citibank N.A. 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 Electronics, Inc. ("CTM") and Microelectronic
Packaging America ("MPA"). While in default, Motorola may have the right to vote
and give consents with respect to all of the issued and outstanding capital of
MPS, CTM and MPA. As a result, during the continuation of any such event of
default, MPI may be unable to control at the shareholder level the direction of
the subsidiaries that generate substantially all of the Company's revenues and
hold substantially all of the Company's assets. Any such loss of control would
have a material adverse effect on the Company's business, prospects, financial
condition, results of operations and status as an ongoing concern and could
force the Company to seek protection under what it believes would initially be
Chapter 11 of Title 11 of the United States Code or similar bankruptcy laws of
Singapore however there can be no assurance it would remain a Chapter 11. The
other Asian debt agreements contain numerous restrictions and events of default
that have been triggered by the aforementioned actions and would, if they became
effective and operative, materially adversely affect the Company's business,
prospects, results of operations, condition and status as an ongoing concern and
could force the Company to seek protection under what it believes would
initially be Chapter 11 of Title 11 of the United States Code or similar
bankruptcy laws of Singapore however there can be no assurance it would remain a
Chapter 11.
In July 1999, the Company and Motorola signed a definitive agreement which calls
for the conversion of all the Company's liabilities to Motorola under the
Guaranty Obligations into shares of the Company's Series A Preferred Stock, as
explained in Note 6 to the accompanying Condensed Consolidated Financial
Statements. There can be no assurance that the Company will be successful in
its efforts to obtain Shareholder approval to complete this Debt to Equity
Conversion Agreement.
Reliance on Schlumberger. Sales to one customer, Schlumberger, accounted for
90% of the Company's net sales in the second quarter of 1999 and is expected to
continue to account for most of the Company's net sales in 1999. Under the
agreement between Schlumberger and the Company entered into in January 1998, the
Company is obligated to provide Schlumberger with its requirements for MCM
product. Given the Company's anticipated continued reliance on its MCM business
as a large percentage of overall net sales, the failure to meet Schlumberger's
requirements will materially adversely affect the Company's ability to continue
as a going concern. In addition, under the terms of the agreement, Schlumberger
is entitled to request repricing of the Company's products. Schlumberger has
requested repricing on several occasions in the past. Such repricing in the
future may result in the Company being unable to produce the products made for
Schlumberger with an adequate operating profit, and the Company may be unable to
compete with the prices of other vendors who supply the same or similar products
to Schlumberger. The failure to satisfy the terms of the agreement, or the
failure of the Company to achieve an operating profit under the contract, would
have a material adverse impact on the Company's business, financial condition,
and results of operation.
16
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in less than one year,
computer systems and/or software used by many companies may need to be upgraded
to comply with such "Year 2000" requirements. Significant uncertainty exists in
the software industry and in other industries concerning the potential effects
associated with such compliance. Although the Company currently offers products
that are designed to be Year 2000 compliant, there can be no assurance that the
Company's products and the software products used by the Company contain all
necessary date code changes. As of June 30, 1999, the Company has partially
completed an analysis of its readiness for compliance with the Year 2000 change.
Its assessment of its manufacturing systems and company products reveals that no
known Year 2000 issues currently exist either in the products, their raw
materials, or their relationship as components to larger systems produced by its
customers; its financial systems software has been upgraded to a newer
replacement system, and which system is Year 2000 compliant; documentation
systems that currently use fixed dating are Year 2000 compliant, while those
that require revision dating are currently under review; and approximately 50%
of the Company's computing hardware systems have been upgraded to be Year 2000
compliant. The Company's costs to become Year 2000 compliant as of June 30,
1999 have been $235,000 for computer software and $48,000 for computer hardware.
The Company has not yet completed its analysis of its readiness for compliance
with the Year 2000 change. Based upon the partial analysis described above, the
Company believes its exposure to Year 2000 risks is limited because the majority
of the Company's recordkeeping systems are new and compliant and have been
installed within the last two years. The Company utilizes no custom-programmed
"legacy" software or hardware systems known to need Year 2000 upgrading or
conversion. The Company believes it should be fully compliant with its Year
2000 issues by the end of the third quarter of 1999 when it believes it will
have completed due diligence of its internal systems and supplier compliance
requirements, as well as completed the remaining 50% of its computing hardware
upgrades needed. However, there can be no assurance that conditions or events
may occur during the course of the completion of this analysis which will have
an adverse impact on the Company's readiness for compliance with the Year 2000
change. In addition, the Company cannot be certain that its suppliers, service
providers and customers will be Year 2000 compliant. The failure of these
companies to be fully compliant could create critical cash shortages to the
Company due to the inability of customers to send payments to the Company. In
addition, any product shortages from suppliers, or service shutdowns from the
Company's utility or communications providers could potentially shut down the
Company's manufacturing operations, thereby causing a material adverse impact on
the Company's operations and liquidity.
The Company believes that the purchasing patterns of customers and potential
customers and the performance of vendors may be affected by Year 2000 issues in
a variety of ways. Many companies are expending significant resources to
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase products such as
those offered by the Company or the inability to render services or provide
supplies to the Company. Year 2000 issues may cause other companies to
accelerate purchases, thereby causing an increase in short-term demand and a
consequent
17
decrease in long-term demand for software products, and disruption of supply
patterns. Additionally, Year 2000 issues could cause a significant number of
companies, including current Company customers and vendors, to spend significant
resources upgrading their internal systems, and as a result consider switching
to other systems or suppliers. Any of the foregoing could result in a material
adverse effect on the Company's business, operating results and financial
condition.
ITEM 3 - QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company has no derivative financial instruments.
The Company has outstanding indebtedness at June 30, 1999 to DBS denominated in
Singapore dollars of approximately Singapore $737,000 (U.S. equivalent
$445,000). All of the Company's other indebtedness is denominated in U.S.
dollars, and all other Singapore-based assets have been liquidated by the
receiver of MPM or MPS and used to retire outstanding indebtedness.
Accordingly, the Company believes its exposure to foreign currency rate
movements is limited.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K.
None.
The Exhibits filed as part of this report are listed below.
Exhibit No. Description
----------- -----------
10.81 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between Transpac Capital and the
Company dated June 30, 1999.
10.82 Debt Conversion and Mutual Settlement and Release
Agreement between Motorola, Inc. and the Company dated
June 3, 1999.
10.83 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between Motorola, Inc. and the
Company dated June 30, 1999.
10.84 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between Texas Instruments
Incorporated and the Company dated June 30, 1999.
10.85 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between ORIX Leasing and the Company
dated June 30, 1999.
19
10.86 Debt Conversion and Mutual Settlement and Release
Agreement between The Development Bank of Singapore
Limited and the Company dated April 30, 1999.
10.87 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between The Development Bank of
Singapore Limited and the Company dated June 30, 1999.
10.88 Nonbinding Letter Agreement between Samsung Corning Co.,
Ltd. and the Company.
10.89 Debt Conversion and Mutual Settlement and Release
Agreement between Samsung Corning Co., Ltd. and the
Company dated May 3, 1999.
10.90 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between Samsung Corning Co., Ltd.
and the Company dated June 30, 1999.
10.91 Debt Conversion and Mutual Settlement and Release
Agreement between NS Electronics Bangkok (1993), Ltd. and
the Company and the Company dated May 3, 1999.
10.92 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between NS Electronics Bangkok
(1993), Ltd. and the Company dated June 30, 1999.
10.93 Debt Conversion and Mutual Settlement and Release
Agreement between FI Financial, LLC and the Company dated
June 10, 1999.
10.94 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between FI Financial, LLC and the
Company dated June 30, 1999.
10.95 Nonbinding Letter Agreement between STMicroelectronics,
Inc. and the Company dated April 14, 1999.
27.1 Financial Data Schedule
20
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: August 12, 1999 By: /s/ Denis J. Trafecanty
--------------- --------------------------------------
Denis J. Trafecanty
Senior Vice President,
Chief Financial Officer and Secretary
21
EXHIBIT INDEX
Number Description
------ -----------
10.81 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between Transpac Capital and the
Company dated June 30, 1999.
10.82 Debt Conversion and Mutual Settlement and Release
Agreement between Motorola, Inc. and the Company dated
June 3, 1999.
10.83 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between Motorola, Inc. and the
Company dated June 30, 1999.
10.84 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between Texas Instruments
Incorporated and the Company dated June 30, 1999.
10.85 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between ORIX Leasing and the Company
dated June 30, 1999.
10.86 Debt Conversion and Mutual Settlement and Release
Agreement between The Development Bank of Singapore
Limited and the Company dated April 30, 1999.
10.87 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between The Development Bank of
Singapore Limited and the Company dated June 30, 1999.
10.88 Nonbinding Letter Agreement between Samsung Corning Co.,
Ltd. and the Company.
10.89 Debt Conversion and Mutual Settlement and Release
Agreement between Samsung Corning Co., Ltd. and the
Company dated May 3, 1999.
10.90 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between Samsung Corning Co., Ltd.
and the Company dated June 30, 1999.
10.91 Debt Conversion and Mutual Settlement and Release
Agreement between NS Electronics Bangkok (1993), Ltd. and
the Company dated May 3, 1999.
10.92 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between NS Electronics Bangkok
(1993), Ltd. and the Company dated June 30, 1999.
10.93 Debt Conversion and Mutual Settlement and Release
Agreement between FI Financial, LLC and the Company dated
June 10, 1999.
10.94 First Amendment to Debt Conversion and Mutual Settlement
and Release Agreement between FI Financial, LLC and the
Company dated June 30, 1999.
10.95 Nonbinding Letter Agreement between STMicroelectronics,
Inc. and the Company dated April 14, 1999.
22
27.1 Financial Data Schedule
23