**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

** **

**x****     ****ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**For the fiscal year ended December 31, 2007**

 

**o****      ****TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the transition periodfrom                to**

 

**Commission file number 0-115404**

** **

**MPCCORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **COLORADO**                                                     | ** ** | **84-1577562**                     |
|------------------------------------------------------------------|------------|------------------------------------|
| (State  or other jurisdiction of incorporation or  organization) |       | (IRS  Employer identification No.) |

 

**906 E. Karcher Rd.,Nampa, Idaho 83687**

(Address of principal executive offices)

 

**(208) 893-3434**

(Registrant’s telephone number)

 

Securitiesregistered under Section 12(b) of the Exchange Act:

 

Common Stock,no par value: **American Stock Exchange**

 

Warrants toPurchase Common Stock: **American StockExchange**

 

Securitiesregistered under Section 12(g) of the Exchange Act: **None**

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities ActYes  o    No  x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 orSection 15(d) of the Act. Yes  o    No  x

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  x    No  o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference inPart III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large accelerated filer                        | o      |   | Accelerated filer         | o |
|------------------------------------------------|--------|--------|---------------------------|---|
| Non-accelerated filer                          | o      |   | Smaller reporting company | x |
| (Do  not check if a smaller reporting company) |   |   |

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  x

 

The aggregate market value of theregistrant’s no par common stock, held by non-affiliates of the registrant onJune 29, 2007, the last business day of the registrant’s most recentlycompleted second fiscal quarter, was $18,040,337 (based on the closing salesprice of the registrant’s common stock on that date).

 

As of March 31, 2008, 34,175,886 sharesof the registrant’s no par common stock were issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III ofthis report, to the extent not set forth herein, is incorporated by referencefrom the registrant’s definitive proxy statement relating to the annual meetingof stockholders anticipated to be held in June 2008, which definitiveproxy statement will be filed with the Securities and Exchange Commissionwithin 120 days after the end of the fiscal year to which this reportrelates.

 

 

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**Index**

 
| ** **      | ** **                                                                                                              | **Page**   |
|-----------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| ** **      | **PART I**                                                                                                         | ** ** |
| ** **      | ** **                                                                                                              | ** ** |
| **Item  1**     | **DESCRIPTION OF BUSINESS**                                                                                             | **3**      |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 1A**     | **RISK FACTORS**                                                                                                        | **10**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 2**      | **PROPERTIES**                                                                                                          | **23**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 3**      | **LEGAL PROCEEDINGS**                                                                                                   | **23**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 4**      | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                                | **23**     |
| ** **      | ** **                                                                                                              | ** ** |
| ** **      | **PART II**                                                                                                        | ** ** |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 5**      | **MARKET FOR COMMON  EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**                    | **23**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 6**      | **SELECTED FINANCIAL  DATA**                                                                                            | **24**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 7**      | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**                         | **25**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 7A**     | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                                         | **43**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 8**      | **FINANCIAL STATEMENTS  AND SUPPLEMENTARY DATA**                                                                        | **44**     |
| ** **      | **Report of Independent Registered Public Accounting Firm**                                                             | **45**     |
| ** **      | **Financial Statements**                                                                                                | ** ** |
| ** **      | **Consolidated Balance Sheets as of December 31,  2007 and 2006**                                                  | **46**     |
| ** **      | **Consolidated Statements of Operations for Years Ended  December 31, 2007 and 2006**                              | **47**     |
| ** **      | **Consolidated Statements of Cash Flows for the Years  Ended December 31, 2007 and 2006**                          | **48**     |
| ** **      | **Consolidated Statements of Shareholders’ Equity (Deficit)  for the Years Ended December 31, 2007 and 2006** | **49**     |
| ** **      | Notes to  Consolidated Financial Statements                                                                             | **49**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 9**      | **CHANGES IN  AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**                               | **76**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 9A (T)** | **CONTROLS AND PROCEDURES**                                                                                             | **76**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 9B**     | **OTHER INFORMATION**                                                                                                   | **77**     |
| ** **      | ** **                                                                                                              | ** ** |
| ** **      | **PART III**                                                                                                       | ** ** |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 10**     | **DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**                                                             | **78**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 11**     | **EXECUTIVE  COMPENSATION**                                                                                             | **78**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 12**     | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT, AND RELATED SHAREHOLDER  MATTERS**                      | **78**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 13**     | **CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**                                          | **78**     |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 14**     | **PRINCIPAL  ACCOUNTANT FEES AND SERVICES**                                                                             | **78**     |
| ** **      | ** **                                                                                                              | ** ** |
| ** **      | **PART IV**                                                                                                        | ** ** |
| ** **      | ** **                                                                                                              | ** ** |
| **Item 15**     | **EXHIBITS**                                                                                                            | **78**     |

 

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**A NOTE ABOUT FORWARD-LOOKING STATEMENTS**

 

*The statements, other than statements of historical fact,included in this report are forward-looking statements. Forward-lookingstatements generally can be identified by the use of forward-lookingterminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,”“plan,” “seek,” or “believe, or the negative or other variations thereof. Webelieve that the expectations reflected in such forward-looking statements areaccurate. However, we cannot assure you that such expectations will occur. Ouractual future performance could differ materially from such statements. Theseforward-looking statements are subject to risks and uncertainties that couldcause actual results and events to differ materially. For a detailed discussionof these risks and uncertainties please see the “Risk Factors” section underItem 1A of this Annual Report. These forward-looking statements apply only asof the date of this report; as such, they should not be unduly relied upon forcurrent circumstances. Except as required by law, we are not obligated torelease publicly any revisions to these forward-looking statements that mightreflect events or circumstances occurring after the date of this report orthose that might reflect the occurrence of unanticipated events.*

 

**USE OF CERTAIN TERMS**

 

*Unless the context indicates otherwise, all references to “we”,“our”, or the “Company” refer on a consolidated basis to MPC Corporation and toits wholly-owned subsidiaries, including MPC Computers, LLC (“MPC Computers”)and MPC-Pro, LLC (“MPC-Pro”). Reference to “HyperSpace” refers to HyperSpaceCommunications, Inc. the name of our company prior to our name change toMPC Corporation as noted below.*

 

**PART I**

 

**ITEM 1.    DESCRIPTION OFBUSINESS**

 

***Company Overview***

 

Wewere formed as HyperSpace Communications, Inc. in 2001 as a Colorado-basedcompany and completed an initial public offering in October 2004. Weinitially produced software products that addressed real-time applicationacceleration over wired and wireless networks. In July 2005, we acquired MPC Computers which became a wholly ownedsubsidiary and our primary business.  MPCComputers is an enterprise IT hardware business providing products and servicesto customers in mid-sized business, government agencies and educationorganizations.  During 2006, we relocatedour corporate headquarters from Englewood, Colorado to our manufacturingfacility in Nampa, Idaho. In January 2007, we changed our name to MPCCorporation.

 

OnOctober 1, 2007 (“Closing date”), we purchased, through our wholly-ownedsubsidiary MPC-Pro, from Gateway, Inc. (“Gateway”) and GatewayTechnologies, Inc.  its ProfessionalDivision, the portion of its Consumer Direct Division that marketsbusiness-related products to target businesses with less than 100 employees,and the portion of its Customer Care & Support department thatprovides technical services to customers of the Professional and ConsumerDirect Divisions (collectively, the “Professional Business”).  The Professional Business is primarilyengaged in the sale, resale and marketing of desktop computer systems, laptops,servers, networking gear and other peripherals, and replacement parts toeducational institutions, federal, state and local government entities,value-added resellers and certain other resellers, and small business salesgenerated by Gateway’s internet website and phone centers.

 

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Aspart of the acquisition, we acquired substantially all the assets and employeesof the Professional Business.  Inaddition, we acquired the entire catalog of products and services from theProfessional Business and now make the complete product line available to bothMPC Computers’ and Gateway’s former Professional Business customers.  Thepurchase included customer lists and customer relationships, and the sales,marketing, service and administrative functions supporting the ProfessionalBusiness and approximately $26 million in specified production and supportinventory.  The acquisition included the purchase of all of thecapital stock of Gateway Companies Inc., and the membership interests ofGateway Professional, LLC and Gateway Pro Partners, LLC.  Furthermore, we assumed operation of Gateway’sassembly facility in Nashville, Tennessee. With the completion of the acquisition, we have operations in Idaho,South Dakota and Tennessee.  TheProfessional Business is operated under MPC-Pro.  See Note 3 — “Acquisition of GatewayProfessional Business” under Notes to Consolidated Financial Statements underItem 8 of this Report.

 

Thisacquisition significantly increases the scale of our business as Gateway’sProfessional Business had reported revenue of $895 million in 2006 as comparedto our revenue of $285 million in 2006.  We believe that the increasedscale may enable us to better compete with our larger competitors includingDell, Hewlett-Packard, and Lenovo.  With the purchase of the ProfessionalBusiness we have expanded our enterprise IT hardware business of providingproducts and services to customers in mid-sized businesses, government agenciesand education organizations.  This acquisition has expanded our businessin the education and state/local government markets in particular, resulting ina more balanced customer mix less reliant on the federal governmentbusiness.  In addition, the acquisition has expanded our product line toinclude new products, including a more competitive line of notebook PCs andconvertible tablet PCs.

 

Ourprimary business is providing PC-based products and services to mid-sizedbusinesses, government agencies and education organizations. We manufacture andmarket ClientPro® desktop PCs, TransPort® notebook PCs, NetFRAME® servers andDataFRAMETM storage products.  We alsooffer the Gateway-branded “E-series” of desktops, notebooks, servers andstorage under a one year limited license agreement with Gateway through October 1,2008.  We also provide hardware-related supportservices such as installation, technical support, parts replacement, andrecycling. In addition to PCs, servers, and storage products, we also fulfillour customers’ requirements for third party products produced by other vendors,including peripherals, software and other services.

 

Wewill continue to focus primarily on three markets: federal government,state/local government & education (“SLE”), and mid-size enterprise.This focus enables us to tailor our operating model to better support the needsof these customers for customized products, services and programs. We selldirectly to customers in each of our markets.

 

Weuse a build-to-order manufacturing process that we believe is an efficientmeans to produce customized computing solutions. For example, we currentlycustomize a majority of our product shipments to the public sector byintegrating non-standard, customer-specific software or components. Thisapproach enables us to differentiate our products by providing customizationand PC-related services that assist our customers’ IT departments and reducethe costs of deployment and ongoing maintenance of their computinginfrastructures. We believe that these benefits enable our customers to lowerthe total cost of ownership of their IT investment.

 

Weexperience seasonality in revenue levels between quarters. Our first fiscalquarter of January through March historically has the lowest revenuefor the year, with revenues rising in the second through fourth quarters asgovernment and education customers buy during their seasonally higherpurchasing periods.

 

Ourstock trades on the American Stock Exchange (“Amex”), with the ticker symbolMPZ. Previously, the ticker symbol was HCO. The ticker symbol for our publiclytraded warrants is MPZ.WS.

 

***Strategic Plans and Initiatives***

 

Tocombine our existing operations with the newly acquired Professional Business,we have set forth the following key initiatives:

 

·      Successfully integrate the new ProfessionalBusiness with our existing operations, including:

 

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·                  Effectively combining the management teamsfrom both organizations;

 

·                  Transferring the financial, human resource,procurement, and other data from the Professional Business systems to our ITSystems;

 

·                  Consolidating our product lines and continueongoing research and development activities;

 

·                  Integrating our customer care and supportfunctions;

 

·                  Integrating our administrative and financialfunctions, including the combining of our various licensing and royaltyfunctions;

 

·                  Satisfying and retaining ProfessionalBusiness customers;

 

·                  Carefully managing our liquidity to maximizeour use of funds;

 

·                  Focusing on supplier relationships, reducingprocurement costs due to our larger scale, and improving the utilization ofvendor credit;

 

·                  Utilizing the Gateway brand name until ourlicense to use the name expires in September 2008, while enhancing the MPCComputers brand name in our various markets; and

 

·                  Instituting lower cost operatingmethodologies and practices in our overall operations.

 

Duringthe transition of the Professional Business IT and manufacturing systems fromGateway to MPC Computers’ existing systems in February, 2008, we experiencedmaterial delays in manufacturing and customer deliveries.  In addition, we also experienced systemissues and parts delivery delays in our customer service and support area, causingsome replacement parts to not reach our customers in a timely manner. See “RecentDevelopments” in Item 7 of this Report.

 

***Markets***

 

Wefocus on the federal, state/local government and education markets(collectively called the public sector) and on mid-size enterprise businesses.This focus enables us to tailor our operating model to better support the needsof these customers for customized products, services and programs.

 

Mostof our customers reside within the United States, with greater than 98% of ourproducts and services sold domestically. Additionally, a small percentage ofour sales (less than 10%) are generated from direct marketing resellers such asCDW and PC Connection.

 

*Federal**:* In the federal government market, we selldirectly to government agencies. The federal government in aggregate is one ofthe largest consumers of IT products and services in the United States.  Most federal IT purchases are made throughschedule contracts with the government, such as the General Services Administration(“GSA”), or agency-specific blanket purchase agreements, or BPAs. Our GSASchedule contract for desktops, notebooks and servers is effective through November 2008with three five-year extension options held by the GSA. We are currentlynegotiating with the GSA to include the Gateway-branded products into ourcurrent GSA contract.  Pending thatoutcome, we have received an extension of the GSA contract through August 2008.  Our GSA Schedule contract for third partyperipherals is effective through April 2009.

 

*State/Local Government and Education*: The state/local government and education (“SLE”)market is comprised of state and local governments as well as educationalinstitutions, both public and private. Educational institutions encompass bothelementary education from kindergarten through twelfth grade, along withsecondary educational institutions such as colleges, universities and trade andspecialty schools. Similar to the federal government, the majority ofpurchasing within the SLE market is driven by a contract negotiated either individuallywith specific states or tied to a multi-state contract vehicle similar to theGSA.  In the SLE market, the WesternStates Contracting Alliance (WSCA) information technology hardware contract hasbecome one of the most important procurement vehicles for state governmentpurchasing.  We have a WSCA contract thatextends through August 2009. WSCA and the other state-level contracts donot guarantee revenues and our SLE customers may choose not to continuepurchasing our products.

 

*Mid-size Enterprise*: We define this market as all private, commercial businesses in theU.S. which have 250 to 5,000 employees. We believe that mid-size enterprise customers tend to purchase directlyfrom the manufacturer or 

 

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throughan authorized reseller of PC products and peripherals. In our experience,rarely do mid-size enterprise customers utilize formal purchase agreements orcontracts and pricing is typically negotiated for each specific purchase.Purchasing decisions are typically centralized within the organization’s ITdepartment.

 

***Products***

 

Wedesign, develop, manufacture, market, sell and support a wide range ofcomputing products that are customized to fit our customers’ specific needs.These products include server and storage products, desktop PCs, notebook PCs,and third party products such as printers, monitors and software.  Therecent Gateway Professional Business acquisition has added products to our MPCComputers portfolio across all product categories.  These products are marketed as Gateway Pro.

 

*Serversand Appliances:* TheNetFRAME family delivers a complete server product line, featuring bothrack-mount and pedestal form factors. The product line supports industrystandards and scales from affordable single-processor products to anenterprise-class quad-processor system.  With the acquisition of theProfessional Business, the server portfolio has grown to include additionalserver products that provide more price and performance choices for our customersand includes support for both Intel and AMD architectures.  In 2007, MPCComputers also launched an “application specific server product” (applianceproduct), called MailFRAME.  MailFRAME is a standard server hardwareproduct that contains pre-installed software that performs the function ofemail archiving.  MailFRAME connects to any messaging server (likeMicrosoft Exchange or other) and makes copies of mail messages which can bestored in a separate storage repository.  These archived mail messages canthen be retrieved by end-users completely separate from the messaging server.

 

*Storage:* The DataFRAME family of storage systemsprovides a portfolio of industry standards based storage including NetworkAttached Storage (NAS) and Storage Area Network (SAN) products.  MPCComputers’ approach to delivering storage solutions is through partnering withkey software companies that provide storage software platforms.   MPCComputers then integrates the storage software into standards based hardwareand delivers the combined hardware and software system to customers withcomplete service and support.  The NAS products are based on Microsoft’sWindows Storage Server software which is pre-installed on a number of differentNetFRAME and Gateway server products.  The SAN products include both iSCSI(using Ethernet), Fiber Channel (FC) and Serial Attached Storage (SAS)interfaces and integrate software from FalconStor (FALC), Lefthand Networks andXyratex (XRTX) depending on the DataFRAME or Gateway Pro storage product.

 

*DesktopProducts:*  Weoffer the ClientPro® line of desktop systems which provides stable and reliablesolutions for customers who demand manageable and easy-to-service systems withlong lifecycles.  With the addition of the Professional Business products,the desktop portfolio has grown in size providing customers with more choice inprice, performance and form factors.  Additionally, the ProfessionalBusiness acquisition added a line of display products to the portfolio, makingour desktop offering more complete.  Also included in the Gateway Pro andMPC Computers desktop portfolio, are unique “All-In-One” (AIO) Desktop productsincluding the Profile 6 (originally designed by Gateway) and the ClientPRO 434(originally designed by MPC Computers).   These AIO Desktop productsprovide customers with a desktop solution that is space saving and removes thecable clutter of traditional desktop systems.

 

*NotebookProducts:*  MPCComputers has been marketing a notebook product line under the TransPort®product line brand.  With the acquisition of the Professional Business,the Gateway Pro notebooks have become our primary notebook offering.  TheGateway Pro notebooks address a wide range of business and organizationalneeds, including powerful performance, portability and flexibility.  TheGateway Pro notebook offerings range from highly expandable, full-featureddesktop-replacement models to compact, lightweight “thin and light” models. Also part of the Professional Business portfolio, are both 12” and 14”convertible notebook products which provide both traditional notebookfunctionality as well as a digital pen and/or touch-screen userinterface.  These convertible notebooks provide a swiveling display whichcan flip open similar to traditional notebook and can also lay flat overthe keyboard for operation similar to pen and paper.

 

*ThirdParty Products:*  Manycustomers desire a single point of contact for all of their IT purchases, so weoffer a multitude of competitively-priced software and peripheral products fromleading manufacturers. Products offered include software, monitors, printers,handhelds, notebook accessories, networking and wireless products, memory, 

 

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projectorsand scanners. We offer products from leading manufacturers including Cisco,EMC, IBM, Hewlett Packard, Lexmark, Sony, Samsung and Microsoft.

 

***Customer Service and Support***

 

Customerservice and support, including deployments, warranties and self-maintainerservices, is a core element of our value proposition. The cost of maintainingIT hardware is significant for our customers and we believe we can provideeffective service and support to meet our customer’s needs.

 

*DeploymentServices:* Ourdeployment services are tailored to the needs of our customers. Ranging fromcustom integration of hard drive images to bundling with third party offerings,our deployment offerings are designed to help customers minimize the lifecyclecosts of IT hardware.

 

Ourdeployment services consist of:

 

·                  Asset tagging and reporting,

 

·                  Specialized shipping, storage and delivery,

 

·                  Installation and de-installation,

 

·                  Equipment recycling.

 

Ourproject management personnel work closely with the customer to definedeployment timelines, facility access, scheduling of personnel, specialconsiderations and acceptance criteria.

 

*WarrantySupport:*  MPC Computers/Gateway Pro branded productsare primarily backed by our standard three year warranty to include parts,technical support and on-site service, although standard warranties can rangefrom 90 days to 5 years. We provide phone-based technical support 24 hours aday, seven days a week, 365 days a year. In order to provide the highest levelof service, all our technical support representatives are highly trained andreside in our U.S.-based support centers.

 

Inaddition to phone support, we provide on-site support to our customers.Next-business-day on-site service is offered as a standard service with ourdesktop, server and storage products. Customers may choose from a variety ofon-site service options, ranging from no on-site service to a faster on-siteservice response time as quickly as two hours from dispatch.

 

Extendedwarranties and Service offerings are available up to five years.

 

*Self-MaintainerServices:* Qualifiedcustomers who prefer to utilize their own IT resources to diagnose problems andfulfill break-fix responsibilities can participate in our Self-MaintainerProgram. Through a web interface, customers using this service can quickly viewour technical support knowledge database, look up system configurations byserial number, request replacement parts and download system updates. Customersusing this service may bypass our technical support if they choose.

 

***Product Development***

 

Ourproduct development activities are focused on delivering products thatincorporate technologies and features that are important to our customers. Ourproduct development philosophy is comprised of three key tenets:

 

*Customers drive our designs.*Our direct model allows us to interact withcustomers directly as they manage the many challenges within their ITinfrastructures. Understanding and designing solutions to address thesechallenges is critical to a successful design effort. New products aredeveloped specifically to address unique customer requirements and enable us todifferentiate our products from the competition.

 

*Product development with industry standard components.*Products using non-proprietary,industry-standard components are critical to customers looking to attain themost flexibility during a product’s life cycle. Our products are based onindustry standards so that customers are not forced to a single fulfillmentsource for upgrades or parts replacements during the product’s lifetime.

 

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*Cooperative relationships with key technology companies.*We partner with many key technology companiesto drive high quality and the latest technologies into our system designs. Weco-develop products with leading original design manufacturers, or ODMs, suchas Intel, Samsung and Uniwill. These relationships allow us to leverage thesignificant research and development investments these companies make in theirproducts, affording us the ability to reduce the overall time and cost requiredto bring new products and technologies to market.

 

Ourresearch and development expenses have not been a material part of our overalloperations in the past.  We anticipateonly a modest increase in such expenses as a result of our acquisition of the ProfessionalBusiness.

 

***Sales and Marketing***

 

Wehave dedicated sales teams selling directly into the public sector and mid-sizeenterprise markets. Our sales and marketing efforts are driven by the needs,trends and characteristics of our customers. Our direct sales model providesdirect and continuous feedback from our customers, thereby allowing us todevelop and tailor our products, services and marketing programs for specificcustomer sectors.

 

Wesell our products through a tightly coordinated field sales and internaltelemarketing-based sales model. Field sales personnel are responsible forface-to-face visits with existing customers and new account prospects. Insidesales is responsible for customer support, price quoting and booking orders.Sales personnel are organized by customer market.

 

Wetake a tactical, return-on-investment-driven approach to promoting our brandand message. A significant portion of our marketing budget is dedicated togenerating leads for the sales force. We purchase market research and prospectlists for our target markets, and use techniques such as trade shows, web-basedseminars, white papers and direct mail to acquire new prospects for salespersonnel to contact.

 

***Manufacturing***

 

Weassemble our desktop, mobile, server and storage products in our manufacturingfacilities located in Nampa, Idaho, and Nashville, Tennessee.  Additionally, we have relationships withthird-party original equipment manufacturers that manufacture some of ourlaptop systems to our specifications.  Weutilize a flexible assembly-line architecture and a proprietary tracking andcontrols system to support our build-to-order manufacturing model. We alsooffer customization options including asset management, hard drive imaging andproduct revision control.

 

Inconnection with our purchase of the Professional Business, we initiallyduplicated the Gateway model of fulfilling certain direct ship notebook systemsthrough facilities in China.  Wedetermined that we can reduce our overall production cost by moving thefulfillment of these notebooks into our Nampa, Idaho and Nashville, Tennesseemanufacturing facilities, which was completed in early March of 2008.

 

Additionally,we use “just-in-time” supply chain management techniques to control obsoleteinventory exposure, while maintaining on-hand product supply to satisfycustomer demand. Our supply chain management expertise limits our exposure tothe risk of declining inventory values, while enabling us to quicklyincorporate new technologies into our products and pass along cost savings toour customers.

 

Ourbuild-to-order manufacturing process enables us to customize our products tofit customer needs. Customization options for desktop units includemotherboards, processors, memory, removable media, hard drives, opticaldevices, network cards, video cards, controllers and sound components. Mobilecomputing products and server platforms are customized by installingcustomer-required options into a base unit that is supplied by an originaldesign manufacturer. This flexibility allows us to produce a virtuallylimitless number of unique configurations.

 

Tobuild our systems, we use a high volume of components, nearly all of which weobtain from outside suppliers. We also maintain several single-source supplierrelationships primarily to increase our purchasing power with these suppliers.We currently do not have long-term supply contracts with any of our suppliersthat would require the supplier to supply products to us for any specificperiod or in any specific quantities.

 

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***Intellectual Property***

 

Wehave obtained U.S. federal trademark registration for the word mark “MPC” andthe design mark for the stylized version of our MPC mark. The MPC mark is notcurrently registered outside the U.S. as we do not believe that the establishmentof the MPC mark and logo outside the U.S. is material to our operations. We ownregistrations and pending registration applications for trademarks and servicemarks of our product lines and services in the U.S. and in certain foreigncountries. Currently, we hold a portfolio of 16 U.S. patents and have one U.S.patent application pending. Our U.S. patents expire in years 2008 through 2021.

 

Wehave entered into a variety of intellectual property licensing agreements,including various software licensing agreements. We have entered intononexclusive licensing agreements with Microsoft Corporation for variousoperating system and application software. We have also entered into a one-yearlicense agreement with Gateway for the use of Gateway’s branded “E-Series” ofproducts through October 2008.  Oncethese contracts expire or are terminated, however, there can be no assurancethat we will continue to have access to this licensed intellectual property onappropriate terms and conditions.

 

***Employees***

 

Asof March 1, 2008, we had total employees of 1,162, all of whom were fulltime employees.  Of the total employees,511 are located at the facility in Nampa, Idaho, 359 are located in ourfacility in North Sioux City, North Dakota, 153 are located at our facility inNashville, Tennessee, and the remainder are located in small, regional or homeoffices throughout the U.S. along with one employee located in Taiwan and oneemployee located in Canada. From time to time, we utilize temporary workers inour manufacturing and other operations in order to have flexibility to meetseasonal or other fluctuations in demand. These temporary workers are providedby and employed by third party companies.

 

Webelieve that our human resources are critical to the success and achievement ofour business plan. As a result, hiring and retaining qualified personnel aswell as maintaining good employee relations are crucial to our business. Wehave never experienced a work slowdown or stoppage due to any type oflabor difficulties and we strongly support a diverse workforce. None of ouremployees are represented by a union or covered by a collective bargainingagreement. We believe that the compensation and benefits packages offered toour employees are competitive and that our relations with our employees aregood.

 

***Backlog***

 

Backlog orders believedto be firm at December 31, 2007 and 2006 was $47.7 million and $28.4million, respectively.

 

***Competition***

 

Competitionin the PC industry is highly intense. In 2007, we experienced continueddownward pressure on prices. With many vendors offering highly similar,standards-based products, the market is approaching commodity status,particularly for desktop and notebook PCs. The industry today is characterizedby aggressive pricing by large, well-branded competitors. The level of priceaggressiveness is intensifying, particularly on the low-priced end of themarket. Many of our competitors are significantly larger, better funded andbenefit from stronger brand equity in our target markets. Our most significantcompetitors include Dell, Hewlett Packard and Lenovo.

 

Inrecent years, we have regularly lowered prices in response to competitivemarket pressures in order to attempt to maintain market share and to passthrough reductions in component pricing. We expect these competitive pressuresto continue and that average sale prices in the PC industry will continue todecline.

 

***Available Information***

 

Wemaintain an Internet website at www.mpccorp.com.  All of our reports filed with theU.S. Securities and Exchange Commission (“SEC”) (including annual reportson Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K)are accessible through the Shareholder Information section of our Internetwebsite at

 

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www.mpccorp.com/about/contact/contact.html,free of charge, as soon as reasonably practicable after electronic filing. Thepublic may read and copy any materials that we file with the SEC at the SEC’sPublic Reference Room at 100 F Street, NE, Room 1580,Washington, DC 20549 on official business days during the hours of 10:00 am to3:00 pm. You may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330. The SEC maintains an internet website thatcontains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC at www.sec.gov.Information on our website is not incorporated by reference into this Report.

 

**ITEM 1A.  RISKFACTORS**

 

*Investing in our securities involves a high degree of risk.You should carefully consider the following risk factors, and other informationincluded in or incorporated by reference into this report, including ourfinancial statements and the related notes thereto. Described below are theprincipal risks that we expect to face, however they are not the only risks wemay face. Additional risks and uncertainties that we do not presently knowabout, or have not yet identified, may also adversely affect our business. Ourbusiness, operating results and financial condition could be seriously harmedand you could lose your entire investment by the occurrence of any of thefollowing risks, or by unforeseen risks not listed below.*

 

**Risks Related to the Transition and Integration of theProfessional Business**

 

***We have experienced, and may continue toexperience, difficulties or delays in transitioning and merging the GatewayProfessional Business into our business.***

 

TheGateway Professional Business has historically had approximately three timesthe gross revenue of MPC Corporation. The transition and integration of the Professional Business into ourexisting business has strained personnel and financial resources and created additionalcomplexities that we did not fully anticipate.

 

Duringthe transition of Professional Business IT and manufacturing systems fromGateway to MPC Computers’ systems in February 2008, we experiencedmaterial delays in manufacturing and customer deliveries, which will  result in significantly lower than expectedshipment volumes and revenues in the first quarter of 2008 as compared to thefourth quarter of 2007.  These delays,which have materially impacted our liquidity, limited and stopped production attimes over approximately a three week period at our Nashville manufacturingfacility.  The delays were caused by anumber of issues including, but not limited to, inaccurate bills of materialsfor our manufacturing processes, inventory procurement and routing problemsresulting in parts shortages, and order entry errors by some of our newestsales professionals from the Professional Business that caused some orders tobe delayed in getting to our manufacturing floor.  In addition, prior to the transition, wemoved the manufacture of portable personal computers of the ProfessionalBusiness that had historically been manufactured in China to our Nashvillefacility, causing the transition-related issues we encountered to have a morepronounced effect on our operations. During the transition, we also experienced system issues and partdelivery delays in our customer service and support area, causing somereplacement parts to not reach our customers in a timely manner.

 

Wecannot assure you that all integration issues have been identified and corrected,or that these issues have not damaged certain customer relationships.  Further issues or delays in manufacturing orproviding customer service and support may have a material adverse effect onour operations.

 

***Inability to retain the Professional Businesscustomers could result in lower than anticipated revenues for the combinedcompany.***

 

Weare forecasting the loss of some customers in the Professional Business, and adecline in revenues in 2008 relative to the revenues achieved by MPC Computersand the Gateway Professional Business separately in 2007.  Our inability to retain customers of theProfessional Business could result in lower revenues than originallyanticipated for the combined company at the closing of our acquisition of theProfessional Business.

 

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***Gateway’s warranty and other obligationsassumed by us may exceed those contemplated at the time of the acquisition.***

 

Inconnection with our acquisition of the Professional Business, we assumed all ofthe warranty obligations and certain other obligations, including specifiedenvironmental liabilities, of the Professional Business.  The amount ofthe assumed obligations and timing of related cash flows to fund suchobligations may differ from our estimates and could adversely impact ourlimited ability to fund these obligations and adversely impact our relationshipwith customers and suppliers. While we are indemnified by Gateway for certainpast liabilities of the Professional Business, it is possible that we couldbecome liable for obligations arising out of prior operations of theProfessional Business. We are not indemnified for prior liabilities of theGateway Pro Partners, LLC, and would be responsible for any associatedliabilities.

 

***We determined that we have a materialweakness in our internal control over financial reporting related to theaccounting for the Professional Business, and this material weakness creates areasonable possibility of material misstatements in our financial statements.***

 

Asa publicly traded company we must maintain effective disclosure controls andprocedures and internal control over financial reporting. In connection withthe preparation of our financial statements for the year ended December 31,2007, we determined that we had a material weakness in our internal controlover financial reporting, and therefore determined that our internal controlover financial reporting was not effective with respect to the ProfessionalBusiness, which created a reasonable possibility of material misstatements inour financial statements. This material weakness related to our accounting forthe Professional Business is more fully explained in “Item 9A. Controls andProcedures” of this Report.

 

Inorder to improve and to maintain the effectiveness of our internal control overfinancial reporting and disclosure controls and procedures, significantresources and management oversight will be required. We have begun the processof remediating this material weakness, but this process will take time, and wewill not be able to ascertain whether we have remediated this material weaknessuntil the procedures that we put in place have been working for a sufficientperiod of time for us to determine that they are effective. As a result of thisand similar activities, management’s attention may be diverted from otherbusiness concerns, which could have a material adverse effect on our business,financial condition and results of operations. If we are unable to remediatethis material weakness, or in the future report one or more additional materialweaknesses, there is a reasonable possibility that a material misstatement ofour annual or interim financial statements will not be prevented or detected ona timely basis. This could negatively impact the ability of shareholders torely on previously issued financial statements and could result in arestatement of our financial statements or impact our ability to accuratelyreport financial information on a timely basis, which could adversely affect ourstock price.

 

***Inability to successfully integrate theProfessional Business management team and key employees could adversely affectour financial condition and results of operations.***

 

Ourfuture operations are highly dependent on the successful integration of theProfessional Business management team and key employees.  We may encountervarious issues including an inability to retain critical Professional Businessmanagement team members and key employees, differences in management oroperating philosophy, or difficulties in the timely execution of criticaldirectives that may impact the integration of the Professional Business and/orcombined operations and performance of our company.  If we are unable tointegrate management and key employees, or if we lose Professional Businessmanagement or key employees, it could have a material adverse impact on ourbusiness.

 

***We received only a one-year license of theGateway name, and the loss of the right to use that name could result indecreased sales.***

 

Wereceived only a one-year license to utilize the Gateway name and trademark. Webelieve the Gateway name and trademark offers significantly more brandrecognition than the MPC Computers name and trademark, and the loss of theright to use the Gateway trademark after one year could have a negative impacton sales.

 

***Integrating product lines anddeveloping/continuing research & development activities may proveunsuccessful.***

 

Integratingthe product lines and research and development activities of MPC Computers andthe Professional Business will be critical to the effectiveness and efficiencyof our future operations including sales, procurement,

 

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manufacture,production, and distribution of our products.  If we are not successful inthe timely integration of the product lines, it may adversely impact ourresults of operations and financial condition.

 

**Risks Related to Our Liquidity**

 

***Our liquidity and working capitalconstraints have negatively affected our business and could have a materialaverse effect on our financial position and results of operations.***

 

Weface material constraints with regard to liquidity and working capital thathave and will likely continue to negatively impact our business.  Our liquidity constraints make it difficultfor us to execute on our business plan and continue operations withoutadditional concessions from our creditors, which they may not be willing toprovide. Our liquidity constraints may harm our vendor relationships, and couldcause us to experience credit holds, requirements that we pre-pay for products,and/or a refusal to deliver components or termination of supply arrangements,any of which could have a material adverse effect on our financial conditionand results of operations.  Additionally,our liquidity constraints could impact our ability to retain customers andcustomer contracts, our ability to retain key employees and our ability to fundcapital expenditures.

 

Inconnection with the acquisition of the Professional Business, we encounteredadditional complexities and costs of a significantly larger organization thathave and will continue to strain our limited liquidity and working capital. Thedifficulties we have experienced during our transition from the ProfessionalBusiness IT and manufacturing systems to our systems resulted in significantshipment delays which materially impacted our liquidity.  Our limited liquidity may result in aninability to meet the future financing needs of the larger combined company,which could impact our business strategies including the full integration ofthe Professional Business.

 

Wemay need to raise additional capital to satisfy vendor payment obligations andfund our business if our losses continue and we are not able to satisfy ourobligations with cash generated from operations. There can be no assurance thatwe will be able to secure additional sources of financing on acceptable termsor at all. Even if we do obtain additional funding, the amount of such fundingmay not be sufficient to fully address all of our liquidity constraints. Anyadditional secured debt funding may require approval of Wells Fargo and holdersand holders of our convertible debentures, and such approval may not beforthcoming.   Continuing liquidityconstraints could have a material adverse affect on our business and results ofoperations, and could result in bankruptcy.

 

***If net sales continue to decline and we are unable to further reduceexpenses, we will incur losses and may not have sufficient cash flow and, underthose circumstances, we will need additional capital to continue operations andto execute on our business plan, and such additional capital may not beavailable.***

 

Ona pro forma basis, sales for MPC Corporation and the Professional Business declinedsignificantly in 2006 compared to 2005, and in 2007 compared to 2006.  Due to competitive pressures, we haveexperienced declining revenues and losses since 2005.  We experienced an approximate 22% decline innet sales from 2005 to 2006, from $366.6 million to $285.0 million, and anapproximate 16% decline in net sales from 2006 to 2007, from $285.0 million to$240.8 million.  In addition, under thename HyperSpace Communications, we incurred a net loss of $7.5 million, and MPCincurred a net loss of $21.0 million in 2005. In 2006 and 2007, we incurred netlosses of $58.7 million and $11.5 million, respectively.

 

Additionally,the revenue and segment contribution of Gateway’s Professional business segmentrelating to the Professional Business has been declining.  According to Gateway’s annual report on Form 10-Kfor the fiscal year ended December 31, 2006, the Professional segment hadrevenues of $896 million, $987 million, and $1,114 million, respectively forthe years ended December 31, 2006, 2005 and 2004.  Segment contribution for the Professionalsegment totaled $(6.5) million, $16.9 million, and $58.4 million, respectively,for the years ended December 31, 2006, 2005 and 2004.

 

Ifnet sales continue to decline and we are unable to make further reductions incosts and expenses, or realize synergies from the acquisition of theProfessional Business, we will not be able to fund our operations from cashgenerated by our business. Because of competitive pressures, the impacts of ourliquidity constraints, generally declining average sales prices on many of ourproducts, and other factors, it is possible that our revenues will continue todecline.  If we fail to generatesufficient net sales and cash flow to fund operations, our ability to

 

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increasesales will be severely limited and we will not be able to operate effectivelyunless we are able to obtain additional capital through equity or debtfinancings. Such additional capital may not be available on acceptable terms orat all, which could have a material adverse effect on our financial positionand results of operations.

 

***Under our accounts receivable creditfacility, Wells Fargo is not obligated to purchase from us any accounts that itdeems unacceptable in its sole discretion. If we default in our obligations under the facility, Wells Fargo couldexercise several remedies and our assets will be subject to foreclosure.***

 

Ouraccounts receivable credit facility with Wells Fargo, obtained in November 2006,only provides us with liquidity if Wells Fargo elects, in its sole discretion,to purchase accounts receivable from MPC Computers.  Under the facility, MPC Computers may assignto Wells Fargo, and Wells Fargo may purchase from MPC Computers, certain accountsreceivable. Wells Fargo will advance to MPC Computers a percentage of the valueof the purchased accounts.

 

Theaccounts receivable facility provides MPC Computers with liquidity only to theextent that MPC Computers is able to generate accounts receivable from itsoperations, and does not provide for borrowing by MPC Computers against thevalue of its other assets. Additionally, Wells Fargo has the right to requirethat MPC Computers repurchase the purchased accounts in the event MPC Computers’customers do not pay the accounts within specified timeframes, if a materialcustomer dispute arises, or in the event of a default under the facility. WellsFargo has discretion as to the percentage advanced to MPC Computers against anyaccounts. Wells Fargo is not obligated to purchase any accounts from MPCComputers that Wells Fargo deems unacceptable in its sole discretion, and it isnot required to purchase any minimum amount of accounts receivable from MPCComputers. Because of Wells Fargo’s discretion pursuant to the terms of thefacility, and because borrowing is available only against accounts receivablegenerated from MPC Computers’ operations, we cannot assure you of the amount ofliquidity, if any, that will be available to us from Wells Fargo.

 

OnOctober 1, 2007, concurrent with the acquisition of the ProfessionalBusiness, we entered into an agreement to expand our Receivables AdvanceFacility to include the Professional Business. The credit terms of the expandedaccounts receivables facility are substantially the same as the agreementsigned for MPC Computers in November 2006.

 

Theaccounts receivable facility with Wells Fargo is secured by substantially allof our assets.  Additionally, we haveunconditionally agreed to guarantee any and all payment obligations incurredunder the facility.  In the event ofdefaults under the facility, our assets will be subject to foreclosure.Additionally, Wells Fargo has several additional remedies for default,including acceleration of payment obligations and discontinuation of thepurchase of accounts receivable.

 

***We are substantially dependent on the willingness of our suppliers tocontinue to provide credit terms. A decision by suppliers to reduce orterminate credit lines would have a material negative impact on our business.***

 

Dueto our limited liquidity, we have extended payment to many of our supplierssignificantly beyond normal payment terms. We endeavor to maintain strongrelationships with the suppliers, but some suppliers have elected to reduce oreliminate credit terms. In addition, in some instances suppliers have placed uson credit hold, which has delayed delivery of components to our manufacturingfacility while the issues are resolved. We have received notices of defaultfrom suppliers including Microsoft, but are attempting to manage the supplierrelationships to the extent possible within the limits of our liquidityconstraints. We may not be able to continue to do so. Although we have foundadditional sources of liquidity, late payments to suppliers may recur,jeopardizing relationships and causing suppliers to stop working with us or tosell their products to our customers by other channels. Further, recurring latepayments will result in additional credit holds,  If we are unable to satisfy these defaults,it could have a material effect on our operations. If suppliers continue toreduce or eliminate credit terms, we may be unable to continue to obtainnecessary components and services in a timely fashion, or at all, which wouldhave a material adverse affect on our business and our ability to continueoperations.

 

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***Our liquidity constraints have resulted in a delay in delivery ofcomponents to our factory and delivery products to our customers. Delayedorders could negatively impact our relations with our customers and couldresult in cancellation of orders.***

 

Becauseof our liquidity constraints, some of our suppliers have delayed delivery ofcomponents to our facility pending resolution of payment issues. As a result,some of our deliveries to customers have been delayed. Continued delay indelivery of products could negatively impact our customer relationships andresult in decreased sales. Additionally, customers may elect to cancel lateorders.

 

***Mandatory redemption of our convertible Series B Preferred Stockcould have a material impact on our liquidity and cash resources.***

 

Weissued to Gateway 249,171 shares of MPC Corporation Series B PreferredStock convertible into 4,983,416 shares of our common stock. All MPCCorporation Series B Preferred Stock issued to Gateway converts to MPCCorporation common stock upon shareholder approval.  We believe it is probable that shareholderapproval will be obtained.  In the eventshareholder approval is not obtained, all outstanding shares of Series BPreferred Stock shares are to be redeemed by us at 1.5 times the closing priceof our common stock on October 1, 2008 times the number of shares ofcommon stock into which the Series B Preferred Stock is then convertible.  Based on the closing price of our commonstock of $0.63 per share on December 31, 2007, the redemption value wouldbe $4.7 million. If we are unable to generate positive cash flow or obtainadditional capital prior to any such redemption, the

requirementthat we pay cash in connection with such redemption may have a material impacton our liquidity and cash resources.

 

**Risks Related to Our Customers and Markets**

 

***We face intense competition from theleading PC manufacturing companies in the world as well as from other hardwareand information technology service companies. If we are unable to competeeffectively, we may not be able to achieve sufficient market penetration toachieve and sustain profitability.***

 

ThePC industry is highly competitive and is characterized by aggressive pricing byseveral large branded and numerous generic competitors, short product lifecycles, declining year-on-year average sale prices for personal computers andprice sensitivity by customers. Even after the acquisition of the ProfessionalBusiness, our most significant PC hardware competitors, including Dell andHewlett-Packard, have substantially greater market presence and greaterfinancial, technical, sales and marketing, manufacturing, distribution andother resources, longer operating histories, greater name recognition and abroader offering of products and services. Rackable Systems, EMC and NetApp,our primary competitors in the enterprise hardware business, each has greatermarket presence, technical resources and a broader offering of servers andstorage products than we do. Many of our competitors also have greaterresources to acquire and launch new products and technologies, areinternationally based or manufacture offshore and enjoy lower labor costs and havegreater resources to devote to the development, promotion and sale of productsthan we do.  As a result, they are ableto offer products and services that provide significant price or otheradvantages over those offered by us.

 

Wedo not attempt to compete on price alone; rather we compete primarily on thebasis of:

 

·      customerservice, warranty and support;

 

·      featuresand functionality of our products;

 

·      productcustomization;

 

·      productperformance;

 

·      productquality and reliability; and

 

·      maintainingcustomer and supplier relationships.

 

Tothe extent we are unable to compete successfully in any of the foregoingcategories, our revenue and business prospects will be affected adversely. Weexpect competitive pressures to continue into the foreseeable future,particularly as various competitors have from time to time announced intentionsto expand their market share through price reductions.  We have lost sales opportunities due tocompetitors proposing prices at levels that we are unable to match. We expectthat average sales prices for PCs will continue to decline, although this maybe partially offset by an increased mix of higher priced notebook PCs andservers and storage products. If we continue to reduce

 

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PCprices in response to competition, are unable to reduce our overall coststructure at the same rate or greater than our declining average sellingprices, or are unable to diversify into higher margin areas such as storage andservers, we will be unable to maintain or improve gross margins which will alsoaffect liquidity and cash flows.

 

***We have several large customers, includingagencies within the U.S. federal government, which represent a significantportion of our net sales. If we were to lose or experience a substantialdecline in sales to one or more of these customers, our net sales may declinesubstantially.***

 

Historically,MPC Computers has derived a substantial portion of its net sales from variousagencies within the U.S. federal government, as well as state and localgovernment and educational customers. For the fiscal year ended December 31,2007, MPC Computers derived approximately 40% of its net sales from agencies ofthe federal government.

 

Webelieve our purchase of the Professional Business will allow greaterpenetration of our markets, along with an improved balance between our federalgovernment, state and local government, educational and midsize enterprisecustomer base.  We will continue to workto diversify our customer base to mitigate the risks associated with highcustomer concentrations in the federal government market.  There can be no assurance that such effortswill be successful.

 

***Compliance with government contractprovisions is subject to periodic audit, and noncompliance with contract termscould result in contract termination, substantial monetary fines and damages,suspension or debarment from doing business with the government and other civilor criminal liability. Additionally, government contracts are terminable at thegovernment’s convenience or upon default.***

 

Compliancewith government contract provisions is subject to periodic audit. Noncompliancewith such contract provisions and government procurement regulations couldresult in termination of our government contracts, substantial monetary finesor damages, suspension or debarment from doing business with the government andcivil or criminal liability. During the term of any suspension or debarment byany government agency, we could be prohibited from competing for or beingawarded any contract or order. In addition, substantially all of our governmentcontracts are terminable at any time at the government’s convenience or upondefault. Upon termination of a government contract for default, the governmentmay also seek to recover from the defaulting contractor the increased costs ofprocuring the specified goods and services from a different contractor.

 

On December 17,2007, the General Services Administration (GSA) served MPC Computers with asubpoena to provide records regarding sales under our GSA Multiple AwardSchedule contract.  The subpoena relatesto an industry-wide investigation into alleged non-compliance with the TradeAgreements Act.  We are not presentlyaware of any material violations of the Trade Agreements Act.  However, the matter is in the preliminarystages and we cannot predict an outcome at this time. Our non-compliance couldlead to imposition of penalties and termination of the contract.  The termination of the contract could lead toloss of substantial revenues from the federal government.

 

***Our contracts with governmental agenciesmake it difficult to accurately predict our future net sales and governmentcustomers may elect not to continue or extend contracts with us. Additionally,some of our historic subcontractors could elect to sell their products directlyto the government or utilize other partners.***

 

Ourcontracts with the federal, state and local governments do not guarantee anylevel of sales. These contracts merely authorize the sale of our products tovarious agencies within the government and are characterized as indefinitedelivery/indefinite quantity contracts. Accordingly, our customers within thepublic sector may choose not to continue purchasing our products. The uncertaintiesrelated to seasonality of government purchases based on funding, budgetarycycles, future contract performance costs, product life cycles, quantities tobe shipped and delivery dates, among other factors, make it difficult topredict the future sales and profits, if any, which may result from suchcontracts. Furthermore, because we are a prime contractor with the U.S.Government, certain other suppliers act as subcontractors and partner with usto sell their products to the customers. We have been slow in payingsubcontractors in connection with our sales of their products. As a result,these subcontractors could seek to sell directly to such agencies or utilizeother partners.

 

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***Our failure to effectively manage productmigration and increasingly short product life cycles may directly affect thedemand for our products, and could negatively impact our business and resultsof operations.***

 

Ourbusiness model depends on being able to anticipate changing customer demandsand effectively manage the migration from one product to another. Our industryis characterized by rapid changes in technology and customer preferences, whichresult in the frequent introduction of new products, short product life cyclesand continual improvement in product price for performance characteristics.Product migrations present some of the greatest challenges and risks for anytechnology company. We work closely with customers, product and componentsuppliers and other technology developers to evaluate the latest developmentsin products. The success of our product introductions depends on many factorsincluding the availability of new products, access to and rights to useproprietary technology, successful quality control and training of sales andsupport personnel. Furthermore, it is difficult to accurately forecast customerpreferences, demands or market trends or transitions. Even if we are successfulin developing or transitioning to new or enhanced products or techniques, theymay not be accepted by customers or we may not be able to produce them on atimely basis, or at all. Accordingly, if we are unable to effectively manage aproduct migration, our business and results of operations could be negativelyaffected.

 

**Risks Related to Our Operations**

 

***We rely on third party suppliers to providecritical components of our products, some of which are available from only onesource. If our suppliers were unable to meet our demands or fail to deliversupplies because of our inability to meet payment terms, and alternativesources were not available, we could experience manufacturing interruptions,delays or inefficiencies.***

 

Werequire a high volume of quality products and components for our productofferings, substantially all of which we obtain from outside suppliers. Forexample, we rely on Intel for its processors and motherboards and Microsoft forour operating systems and other software on our computer systems. We alsoprocure a number of components from international suppliers, particularly fromAsia, which carries potential political and foreign currency risk. We maintainseveral single-source supplier relationships primarily to increase ourpurchasing power with these suppliers. We may not be able to secure enoughcomponents at reasonable prices or of acceptable quality to build new productsto meet customer demand, which could adversely affect our business andfinancial results. We currently do not have long-term supply contracts with anyof our suppliers that would require them to supply products to us for anyspecific period or in any specific quantities, which could result in shortagesor delays.

 

Additionally,there are significant risks associated with our reliance on these third partysuppliers, including:

 

·                  potential price increases, in particular,those that we may not be able to pass on to our customers;

 

·                  inability to achieve price decreases in ourcomponent costs;

 

·                  inability of suppliers to increase productionand achieve acceptable product yields on a timely basis;

 

·                  delays caused by work stoppages or otherdisruptions related to the transport of components;

 

·                  reduced control over delivery schedules,including unexpected delays and disruptions;

 

·                  reduced control over product quality; and

 

·                  changes in credit terms provided to us.

 

Anyof these factors could curtail, delay or impede our ability to deliver ourproducts and meet customer demand.

 

***The estimated cost of providing a productwarranty is recorded at the time net sales are recognized.  Our warranty-related costs are tied toproduct we have sold historically and represent a large portion of our costsand expenses. If our revenues decline significantly in any year, our ability tocontinue to fund our warranty-related costs is diminished. In addition, if actualfailure rates of our products exceed the estimates, revisions to the estimatedwarranty liability would be required and could negatively affect earnings inthe period that the adjustments are made.***

 

Weprovide warranties with the sale of most of our products.  Over the course of a year, we fund the costof servicing our products covered by warranties through our revenues and thirdparty funding.  If our sales, and

 

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shipmentsof systems, decline significantly during a year, and our base of systemscovered by warranties does not decline in a similar manner, ourwarranty-related costs will grow significantly as a percentage of ourrevenue.  Under these circumstances, thecosts of servicing our warranty portfolio may adversely affect our financialposition, or force us to seek additional capital.

 

Inaddition, the estimated cost of providing a product warranty is recorded at thetime net sales is recognized based on historical experience of costs andfailure rates of the components making up the systems we sell. Estimatedwarranty costs are affected by ongoing product failure rates, specific productclass failures outside of experience and material usage and service deliverycosts incurred in correcting a product failure or in providing customersupport. If actual product failure rates, material usage or service deliverycosts exceed the estimates, revisions to the estimated warranty liability wouldbe required and could negatively affect earnings in the period the adjustmentsare made. Actual financial claims for defects may be larger than expected andaccrued warranty reserves.

 

***If defects are discovered in our productsafter shipment, we could incur additional costs.***

 

Ourproducts may contain undetected defects. Discovery of the defects may occurafter shipment, resulting in a loss of or delay in market acceptance, whichcould reduce our product sales and net sales. In addition, these defects couldresult in claims by customers for damages against us. Any damage claim coulddistract management’s attention from operating our business and, if successful,result in significant losses that might not be covered by our insurance. Evenif such a claim were to prove unsuccessful, it could cause harm to ourreputation and goodwill and could damage our relationship with actual andpotential customers.

 

***Failure of any portion of ourinfrastructure at either of our manufacturing facilities could have a materialadverse effect on our business.***

 

Weare highly dependent on our manufacturing infrastructure to achieve ourbusiness objectives. If we experience a problem that impairs our manufacturinginfrastructure, such as a computer virus, intentional disruption of IT systemsby a third party, a work stoppage, or manufacturing failure, including theoccurrence of a natural disaster which affects our manufacturing facility inNampa, Idaho or our manufacturing facility in Nashville, Tennessee, theresulting disruptions could impede our ability to book or process orders,manufacture and ship in a timely manner or otherwise carry on our business inthe ordinary course. Any such events could cause us to lose significantcustomers or net sales and could require us to incur significant expense toeliminate these problems and address related security concerns.

 

Underour current business plan, we assemble portables at our Nashville, Tennesseefacility that have historically been assembled in China and primarilydrop-shipped to our customers.  Theadditional burden to our Nashville, TN facility would magnify the potentialrisks to our business should any significant adverse event occur.

 

Thelease for our facility in Nampa, which currently houses a portion of ourmanufacturing capacity and a substantial portion of our administrative functions,expires on May 31, 2008.  We arenegotiating to renew the lease with our landlord.  However, we cannot assure you that we will besuccessful on commercially reasonable terms and may need to seek remediesincluding relocation of these functions which could have a material negativeeffect on our financial results.

 

Additionally,we currently operate our Nashville facility on a month-by-month agreement withour landlord.  If the landlord was tobecome uncooperative or seek to terminate our month-to-month arrangement, wewould need to find alternative manufacturing facilities and could result inmaterially negative effects on our financial results.

 

***We intend to reduce our historicaldependence on desktops and focus on portable and enterprise hardware products.  We have not yet fully implemented thisstrategy and we may not be successful. We may not reach profitability if we donot meet our sales expectations or if our product mix and service offerings aresubstantially different than anticipated.***

 

Weintend to reduce our historical dependence on desktops and shift ourdevelopment and sales efforts toward higher margin portables and server andstorage products.  We have not yet fullyimplemented this strategy and we cannot assure you that we will be successfulin making the shift or that any such shift will result in higher margins or

 

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profitability.  If our mix of products and services issubstantially different from what we anticipate in any particular period, ourearnings could be less than expected. If we are unable to increase sales ofhigher margin products, including storage and servers, or if margins continueto decline in the current products we offer, our results of operations andfinancial condition will be adversely affected.

 

***Our inability to properly anticipatecustomer demand or effectively manage our supply chain could result in higheror lower inventory levels that could adversely affect our operating results andour balance sheet.***

 

Bydistributing products directly to our customers and employing “just-in-time”supply chain management techniques, we have historically been able to avoid theneed to maintain high levels of finished goods and component inventory ascompared to other manufacturers who do not sell directly to end users andemploy just-in-time manufacturing techniques. This has minimized costs andallowed us to respond more quickly to changing customer demands, reducing ourexposure to the risk of product obsolescence. However, integration issues withour newly acquired Professional Business, customer concentration, seasonalitywithin our business and changing demands may all result in our inability toproperly anticipate customer demand that could result in excess or insufficientinventory of certain products. As a result of our recent integration challengeswith the Professional Business, our component inventory stock has grownmaterially since December 31, 2007. In addition, we maintain certain component products in inventory. Adecrease in market demand or an increase in supply, among other factors, couldresult in higher finished goods and component inventory levels and a decreasein value of this inventory could have a negative effect on our results ofoperations and our financial position.

 

***If we lose the services of one or moremembers of our executive management team or other key employees, we may not beable to execute our business strategy.***

 

Ourfuture success depends in large part upon the continued service of ourexecutive management team and other key employees. The loss of services of anyone or more members of our executive management team or other key employeescould seriously harm our business. The inability to quickly replace necessarypersonnel with qualified employees could harm our business. It is possible thatour liquidity constraints, or continued declines in sales, may cause ourmanagement and employees to pursue other opportunities and we may not be ableto replace them with qualified employees.

 

***If we are unable to attract and retainqualified personnel, our ability to develop and successfully market ourproducts could be harmed and our growth could be limited.  We rely primarily on our direct sales forceto generate revenues, and may be unable to hire additional qualified salespersonnel in a timely manner or retain our existing sales representatives.***

 

Webelieve that our success depends largely on the talents and efforts of highlyskilled individuals. As a result, our future success is dependent on ourability to identify, attract, retain and motivate highly skilled research anddevelopment, sales and marketing, finance and customer service and supportpersonnel. Any of our current employees may terminate their employment at anytime. The loss of any of our key employees or our inability to attract orretain qualified personnel could delay the development and introduction of, andharm our ability to sell, our products. Competition for hiring individuals withthe skills applicable to our business is intense. We may not be able to hire orretain the personnel necessary to execute our business plan.

 

***You cannot rely on past operating resultsas an indicator of future performance and our future operating results willlikely fluctuate.***

 

Ourpast results should not be relied upon as an indicator of our futureperformance.  Our operating results havevaried greatly in the past and likely will vary in the future depending upon anumber of factors including the successful execution of our new businessstrategies. These initiatives entail entering new markets, developing newproduct and service offerings and pursuing new customers.  Many of these factors are beyond our control.Our revenues, gross margins and operating results may fluctuate significantlydue to, among other things:

 

·                  shortages and delays in delivery of criticalcomponents, including components from foreign suppliers;

 

·                  competition;

 

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·                  ability to timely pay our suppliers;

 

·                  business and economic conditions overall andin our markets;

 

·                  seasonality in the timing and amount oforders we receive from our customers that may be tied to budgetary cycles,product plans or equipment rollout schedules;

 

·                  cancellations or delays of customer productorders, or the loss of a significant customer;

 

·                  an increase in operating expenses;

 

·                  new product announcements or introductions;

 

·                  our ability to develop, introduce and marketnew products and product enhancements on a timely basis, if at all;

 

·                  the sales volume, the timing of componentpurchases for product assembly, product configuration and mix of products;

 

·                  technological changes in the market for ourproducts; and

 

·                  reductions in the average selling prices thatwe are able to charge to our customers due to competition or other factors.

 

Dueto these and other factors, our net sales may not increase or even remain attheir current levels. Because a majority of our operating expenses are fixed inthe short-term, a small variation in our net sales can cause significantvariations in our earnings from quarter to quarter and our operating resultsmay vary significantly in future periods. Therefore, our historical results maynot be a reliable indicator of our future performance.

 

***General economic, business or industry conditionsmay adversely affect our future operating results and financial condition.***

 

Weakeconomic conditions in the United States may adversely affect our productsales. If general economic and industry conditions deteriorate, customers orpotential customers could reduce their technology investments and demand forour products and services could be adversely affected. For example, reductionsin state and local budgets as a result of weak economic conditions haveadversely affected our sales to many customers in the public sector.

 

**Legal and Regulatory Risks**

 

***Claims that we are infringing uponintellectual property rights of third parties could subject us to significantlitigation and licensing expenses, or prevent us from selling ours products.Because of our liquidity constraints, a significant intellectual property claimor litigation could have a material negative impact our business and ability tocontinue operations.***

 

From time to time, othercompanies and individuals assert patent, copyright, trademark or intellectualproperty rights to technologies or marks that are important to the technologyindustry in general or to our business in particular. Intellectual property litigation is verycostly, and any judgments against us with respect to intellectual propertyinfringement could have a material adverse impact on our business.

 

Many of ourcompetitors have significantly larger patent portfolios, which may increase theprobability that claims will be asserted against us and decrease our ability todefend such claims.  Under Gateway’sownership, the Professional Business had significantly more patent licensesthan we do and it is possible that the acquisition of the Professional Businesswill lead to increased intellectual property litigation and claims against us.While we are indemnified by Gateway for prior intellectual propertyinfringement of the Professional Business, we are not indemnified for futureany infringement.

 

Any litigation or otherdispute resolution regarding patents or other intellectual property could betime-consuming and expensive, and divert our management and other key personnelfrom business operations. The complexity of technology and the uncertainty ofintellectual property litigation increase the risks and potential costs associatedwith intellectual property infringement claims. In some cases, we may be able to seek indemnification from suppliers ofallegedly infringing components, but we cannot assure you that suppliers wouldagree to provide indemnification or be financially capable of coveringpotential damages or expenses. Claims of intellectual property infringementmight also require us to enter into license agreements with costly royaltyobligations, payments for past

 

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infringement or otherunfavorable terms. If we are unable to obtain royalty or license agreements onterms acceptable to us then we may be subject to significant damages orinjunctions against the development and sale of certain products.

 

Ifwe or our suppliers are unable to obtain such licenses, we may be forced tomarket products without certain desirable technological features. We could alsoincur substantial costs to redesign these products around other parties’protected technology.  Because of our liquidityconstraints, a significant intellectual property claim or litigation, includinga claim or litigation with Adams, (See Item 3 – “Legal Proceedings”), couldhave a material impact on our ability to maintain the operations of thebusiness.

 

***Our business success may be dependent onour ability to obtain licenses to intellectual property developed by others oncommercially reasonable and competitive terms.***

 

Ourproduct offerings are dependent upon obtaining patent and other intellectualproperty rights from third parties. We may not continue to have access toexisting or new third party technology for use in our products. It may benecessary in the future to seek or renew licenses relating to various aspectsof our products and business methods. However, the necessary licenses may notbe available on acceptable terms and obtaining licenses could be costly. If weor our suppliers are unable to obtain such licenses, we may be forced to marketproducts without certain desirable technological features. We could also incursubstantial costs to redesign our products around other parties’ protectedtechnology. Because of our liquidity constraints, we may not be able to acquirenecessary licenses or pay the costs to redesign our products.

 

***Laws and regulations, including environmental laws, could have amaterial adverse affect on our business.***

 

Productionand marketing of products in certain states may subject us to environmental andother regulations. There is substantial complexity associated with compliancewith regulations, and the costs of implementation are not easily quantifiable.Compliance also necessitates reliance on the representations made by suppliersas to material composition.  While webelieve such representations are accurate, we could face significant costs andliabilities if the representations prove to be inaccurate. Furthermore, we mustrely on our suppliers’ ability to respond to environmental requirements withcompliant products and documentation in a timely manner.

 

Environmental regulations may require us toreengineer our products to utilize components which are more environmentallycompatible and such reengineering and component substitution may result inadditional costs to us. Although we do not anticipate any material adverseeffects based on the nature of our operations and the effect of such laws,there is no assurance that such existing laws or future laws will not have amaterial adverse effect on our financial position or results of operations.

 

**Risks Related to Our Securities**

 

***If we are unable to continue our listing onthe AMEX, the value of your investment could be reduced.***

 

OnOctober 25, 2007, AMEX notified us that it determined that we resolved ourcontinued listing deficiencies.  AMEX’sdetermination based on a review by AMEX of publicly available information,including our press release dated October 1, 2007 regarding theacquisition of the Professional Business, our SEC filings, and othercorrespondence we have provided to the AMEX. Previously, the AMEX issued anotice dated April 13, 2006 that we had failed to satisfy the continuedlisting standards of Section 1003(a)(iv) of the AMEX Company Guidebecause we had sustained losses which were so substantial in relation to ouroverall operations or our existing financial resources, or our financialcondition had become so impaired that it appeared questionable, in the opinionof AMEX, as to whether we would be able to continue operations and/or meet ourobligations as they mature. The October 25, 2007 notice from the AMEX hasindicated that we are subject to provisions of Section 1009(h) of theAMEX Company Guide for a period of twelve months, which provides for the methodof evaluation and appropriate action by the AMEX staff should we fall below thecontinued listing standards during that period. Depending on the circumstances,such action includes truncating procedures related to compliance with thecontinued listing standards or immediately initiating delisting proceedings.  There can be no assurance that we will beable to continue our listing on the AMEX. If we are unable to continue our listing on the AMEX, the value of yourinvestment could be reduced.

 

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***The inability of the company to timelycomply with******the Sarbanes-Oxley Act of 2002******for thecombined business could adversely impact us.***

 

Weare in the process of meeting certain requirements in connection with theimplementation of the provisions of the Sarbanes-Oxley Act of 2002 (“SOX”),including in connection with the Professional Business. We anticipate that wewill be required to comply with SOX for the Professional Business by the end of2008. There can be no assurance that we will timely comply with SOX. Our noncompliance with SOX in a timely manner could adversely affect our business andnegatively impact the value of your investment.

 

***We are required to account for certain ofour convertible debentures as derivative financial instruments, which couldhave a significant positive or negative impact on our future earnings.***

 

Weissued convertible debentures during 2006 that require accounting for certainelements of such debentures as derivative financial instruments. In accordancewith accounting principles generally accepted in the United States, we mustre-measure these financial instruments at each reporting period. Changes in thefair market value of these financial instruments are required to be recognizedin earnings. The calculation of the fair market value of these financialinstruments contains significant management estimates, and as a result apositive or negative impact on our future earnings could be significant.

 

***Gateway owns a significant percentage ofour stock and is able to exercise significant influence over matters subject toshareholder approval.***

 

Aspart of the consideration for the purchase of the Professional Business,Gateway received an approximate 19.9% equity stake in MPC Corporation. Theissuance of these shares to Gateway in connection with the transaction dilutedour existing common shareholders, could possibly negatively impact the marketvalue of the common stock, and makes Gateway the largest holder of our commonstock.  After consummation of the acquisition, Gateway now has influenceover matters requiring shareholder approval, and as such, may approve actionsthat are adverse to your interests or negatively impact the value of yourinvestment. In addition, all MPC Corporation Series B Preferred Stockissued to Gateway converts to MPC Corporation common stock (i) uponshareholder approval by a majority of the MPC Corporation common shareholdersand (ii) at such time as the shares may be converted without causingGateway’s beneficial ownership of MPC Corporation common stock to exceed 19.9%(the “Series B Automatic Conversion Event”).  Under the AssetPurchase Agreement, Gateway agrees to vote in favor of the Series BAutomatic Conversion Event.   In the event shareholder approval isnot obtained by October 1, 2008, all outstanding shares of Series BPreferred Stock are to be redeemed by MPC Corporation at 1.5 times the closingprice times the number of shares of MPC Corporation common stock into which theSeries B Preferred Stock is then convertible.

 

***An active trading market for our securitieshas not developed and the prices of our securities may be volatile.***

 

Anactive sustained trading market for our securities has not yet developed. We donot have any analyst coverage of our securities or any commitments toprovide research coverage. Our stock price has been volatile since our IPO andthe acquisition of MPC Computers in July 2005 that was privately held. Theprice at which our securities trade is likely to be highly volatile and mayfluctuate substantially due to a number of factors including, but not limitedto, those discussed in the other risk factors described above and thefollowing:

 

·                  volatility in stock market prices andvolumes, which is particularly common among smaller capitalized companies;

 

·                  lack of research coverage for companies withsmall public floats;

 

·                  failure to achieve sustainable financialperformance;

 

·                  actual or anticipated fluctuations in ouroperating results;

 

·                  announcements of technological innovations byus or others;

 

·                  entry of new or more powerful competitorsinto our markets or consolidation of existing competitors to create larger,more formidable competitors;

 

·                  terrorist attacks either in the U.S. orabroad;

 

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·                  general stock market conditions; and

 

·                  the general state of the U.S. and worldeconomies.

 

***Any future sales of our common stock maydepress the prices of our securities and negatively affect the value of yourinvestment.***

 

Salesof a substantial number of shares of our common stock into the public market,or the perception that these sales could occur, could adversely affect theprices of our securities or could impair our ability to obtain capital throughan offering of equity securities.

 

Ifany of the holders of our common stock opt to sell large blocks of our commonstock into the public market, it could depress the price of our securities andmake it difficult for us to raise capital through an offering of equitysecurities. In addition, if a significant number of the holders of our publicwarrants exercise their warrants and re-sell the underlying shares of ourcommon stock in a relatively short period of time, the sale of those sharescould depress the market price for our common stock.

 

***Additional acquisitions we make couldresult in dilution to our existing shareholders and could be difficult tointegrate, which could cause difficulties in managing our business, resultingin a decrease in the value of your investment.***

 

Evaluatingacquisition targets is difficult and acquiring other businesses involves risk.Our completion of the acquisition of other businesses would subject us to anumber of risks, including the following:

 

·                  difficulty in integrating the acquiredoperations and retaining acquired personnel;

 

·                  limitations on our ability to retain acquiredsales and distribution channels and customers;

 

·                  diversion of management’s attention anddisruption of our ongoing business; and

 

·                  limitations on our ability to incorporateacquired technology and rights into our product and service offerings andmaintain uniform standards, controls, procedures and policies.

 

Furthermore,we may incur indebtedness or issue equity securities to pay for futureacquisitions. The issuance of equity or convertible debt securities would be dilutiveto our then existing shareholders. We would need approval from Wells Fargounder our credit facility in order to issue additional debt. We are alsoprohibited from incurring additional debt in certain circumstances under our September 2006Convertible Debentures. There can be no assurance we would obtain suchapprovals.

 

***We do not intend to pay dividends and youmay not experience a return on investment without selling your securities.***

 

Wehave never declared or paid, nor do we intend in the foreseeable future todeclare or pay, any cash dividends on our common stock. Since we intend toretain all future earnings to finance the operation and growth of our business,you will likely need to sell your securities in order to realize a return of oron your investment, if any.

 

***Our amended and restated articles ofincorporation and bylaws contain provisions that could delay or prevent achange in control even if the change in control would be beneficial to ourshareholders.***

 

Ouramended and restated articles of incorporation and bylaws contain provisionsthat could delay or prevent a change in control of our company, even onebeneficial to our shareholders. These provisions could limit the price thatinvestors might be willing to pay in the future for shares of our common stock.Among other things, these provisions:

 

**·**                 authorize the issuance of preferred stockthat can be created and issued by the board of directors without priorshareholder approval and deter or prevent a takeover attempt;

 

·                  prohibit shareholder action by writtenconsent, thereby requiring all shareholder actions to be taken at a meeting ofour shareholders;

 

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·                  prohibit cumulative voting in the election ofdirectors, which would otherwise allow less than a majority of shareholders toelect director candidates;

 

·                  provide that our board of directors isdivided into three classes, each serving three-year terms; and

 

·                  establish advance notice requirements fornominations for election to the board of directors or for proposing mattersthat can be acted upon by shareholders at shareholder meetings.

 

**ITEM 2.   PROPERTIES**

 

Wecurrently lease the following facilities, which we believe are suitable andadequate, with sufficient production capabilities, for our current businessneeds:

 
| **Location**                     | ** ** | **Use**                                  | ** ** | **Approximate  Square Footage** | ** ** | **Lease Expiration Date** | ** ** |
|----------------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| 906 E. Karcher Road Nampa, Idaho |       | Sales,  Administration and Manufacturing |       | 340,700                              |       | May 31,  2008                  |       |
| Nashville, Tennessee             |       | Manufacturing                            |       | 94,000                               |       | Month to  month rent                |       |
| North Sioux City, South Dakota   |       | Sales and  Administration                |       | 45,552                               |       | September 2012                 |       |
| Waukesha, Wisconsin              |       | Sales                                    |       | 4,712                                |       | November 30,  2008             |       |
| Oakbrook, Illinois               |       | Sales                                    |       | 1,579                                |       | January 31,  2008              |       |

 

**ITEM 3.   LEGAL PROCEEDINGS**

 

***PhillipAdams & Associates, LLC***

 

We are a defendant in a lawsuit, alleginginfringement of certain patents, relating to floppy disk controllers, owned byPhillip Adams &Associates, LLC. We were added to this suit by an amended complaint filedon May 31, 2005 in the U.S. District Court, District of Utah. We havetendered indemnification demands to certain of our componentsuppliers. Because the case is still in the discovery phase, we are notable to determine the financial impact, if any, arising from an adverse resultin the matter.

 

**Other Matters**

 

We are involved in various other legalproceedings from time to time in the ordinary course of our business. We arenot currently subject to any other legal proceedings that we believe will havea material impact on our business. However, due to the inherent uncertaintiesof the judicial process, we are unable to predict the ultimate outcome orfinancial exposure, if any, with respect to these matters.

 

**ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

Wesubmitted no matters to a vote of our stockholders during the fourth quarter of2007.

 

**PART II**

 
| **ITEM 5.** | **MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND  ISSUER PURCHASES OF EQUITY SECURITIES** |
|-------------|------------------------------------------------------------------------------------------------------|

 

***MarketInformation***

 

Our common stock and warrants to purchase commonstock are listed on the AMEX under the symbol MPZ and MPZ.WS, respectively.

 

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The following table sets forth, for the periodsindicated, the high and low sales prices per share for the common stock asreported by AMEX.

 
| ** **         | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| ** **         | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| **First Quarter**  |       | $        | 1.35       |     | $          | 0.60 |   | $ | 6.05 |   | $ | 3.25 |   |
| **Second Quarter** |       | $        | 2.00       |     | $          | 0.60 |   | $ | 4.29 |   | $ | 0.87 |   |
| **Third Quarter**  |       | $        | 2.00       |     | $          | 0.70 |   | $ | 2.90 |   | $ | 0.91 |   |
| **Fourth Quarter** |       | $        | 1.00       |     | $          | 0.60 |   | $ | 2.30 |   | $ | 0.91 |   |

 

***Holders***

 

The approximate number of holders of record ofour common stock on February 29, 2008 was 557.

 

***Dividends***

 

Except for dividends accrued on our Series APreferred Stock (which were never declared or paid), all of which wereconverted to Common Stock immediately prior to our IPO, we have never declaredor paid dividends on our capital stock. We currently intend to retain futureearnings, if any, for use in our business, and, therefore, we do not anticipatedeclaring or paying any dividends in the foreseeable future. Payments of futuredividends, if any, will be at the discretion of our board of directors aftertaking into account various factors, including our financial condition,operating results, current and anticipated cash needs and plans for expansion.

 

***SecuritiesAuthorized for Issuance under Equity Compensation Plans***

 

We currently maintain two compensation plansthat provide for the issuance of our Common Stock to officers and otheremployees, directors and consultants, 2001 Equity Incentive Plan and the 2004Equity Incentive Plan, each of which have been approved by our shareholders.The following table sets forth information regarding outstanding options andshares reserved for future issuance under the foregoing plans as of December 31,2007:

 

**Equity Compensation Plan Information**

**December 31, 2007**

 
| ** **                                              | ** ** | **(a)**                                    | ** ** | **(b)**                         | ** ** | **(c)**                               | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | ** **                                 | ** ** | **Weighted-**                   | ** ** | **Number of securities**    | ** ** |
| ** **                                              | ** ** | **Number of**                         | ** ** | **average**                     | ** ** | **remaining available for** | ** ** |
| ** **                                              | ** ** | **securities to be issued** | ** ** | **exercise price of** | ** ** | **future issuance under**   | ** ** |
| ** **                                              | ** ** | **upon exercise of**             | ** ** | **outstanding**                 | ** ** | **equity compensation**          | ** ** |
| ** **                                              | ** ** | **outstanding options,**                   | ** ** | **options,**                    | ** ** | **plans (excluding**                  | ** ** |
| ** **                                              | ** ** | **warrants,**                              | ** ** | **warrants,**                   | ** ** | **securities reflected in**           | ** ** |
| **Plan Category**                                       | ** ** | **and rights**                             | ** ** | **and rights**                  | ** ** | **column) (a)**                       | ** ** |
|                                                    |       |                                       |       |                            |       |                                  |       |
| Equity compensation plans approved by  shareholders:    |       |                                       |       |                            |       |                                  |       |
|                                                    |       |                                       |       |                            |       |                                  |       |
| 2001 Equity Incentive Plan                              |       | 422,417                                    |       | $                               | 3.35       |                                  | 194,475    |   |
| 2004 Equity Incentive Plan                              |       | 3,588,016                                  |       | $                               | 1.37       |                                  | 183,503    |   |
|                                                    |       |                                       |       |                            |       |                                  |       |
| Equity compensation plans not approved by  shareholders |       | —                                     |       |                            |       |                                  |       |
|                                                    |       |                                       |       |                            |       |                                  |       |
| Total                                                   |       | 4,010,433                                  |       | $                               | 1.58       |                                  | 377,978    |   |

 

***Saleof Unregistered Securities***

 

None.

 

**ITEM 6.   SELECTED FINANCIAL DATA**

 

Disclosuresunder this Item have been excluded pursuant to Item 301(c).

 

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**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITIONS AND RESULTS OF OPERATIONS**

 

*The following discussion and analysis should be read inconjunction with our consolidated financial statements and related notesthereto included elsewhere in this Report and is qualified in its entirety byreference to such financial statements. This discussion containsforward-looking statements that involve risks and uncertainties. Our actualresults could differ materially from those anticipated in the forward-looking statementsas a result of certain factors included in the risks discussed in “Risk Factors”.*

 

**OVERVIEW AND EXECUTIVE SUMMARY**

 

Wewere formed as HyperSpace Communications, Inc. in 2001 as a Colorado-basedcompany, and completed an initial public offering in October 2004. InJuly 2005, we acquired MPC Computers, an enterprise IT hardware businessproviding products and services to customers in mid-sized businesses,government agencies and education organizations.  In January 2007, we changed our name toMPC Corporation.  On October 1,2007, we purchased, through our wholly-owned subsidiary MPC-Pro, from Gatewayand Gateway Technologies, its Professional Division, the portion of theConsumer Direct Division that markets business-related products to targetbusinesses with less than 100 employees, and the portion of the Customer Care &Support department that provides technical services to customers of theProfessional and Consumer Direct Divisions (collectively, the “ProfessionalBusiness”).  This acquisition significantlyincreased the scale of our business as Gateway’s Professional Business hadreported revenue of $895 million in 2006 as compared to our revenue of $285million in 2006.  We believe that the increased scale will enable us tobetter compete with our larger competitors including Dell, HP and Lenovo.

 

Aspart of the acquisition, we acquired substantially all the employees and assetsof the Professional Business.  See Note 3“Acquisition of Gateway Professional Business” in Notes to ConsolidatedFinancial Statements under Item 8 of this Report on Form 10-K.  Weacquired the entire catalog of products and services from the ProfessionalBusiness as well as a portion of Gateway’s Consumer Direct business.  We now make the complete product lineavailable to both MPC Computers and former Gateway customers.  We also assumed operation of Gateway’s finalassembly facility in Nashville, TN. With the completion of the acquisition, wehave operations in Idaho, South Dakota and Tennessee. The Professional Businessis operated under MPC-Pro.

 

Underthe terms of the transaction, we assumed warranty and other specifiedobligations of the Professional Business.  Gateway acquired our commonstock and Series B Preferred Stock constituting an approximate 19.9%equity interest in us.  In addition, we issued to Gateway a promissorynote in the amount of $1.3 million.

 

Whileour business has expanded significantly with the acquisition of theProfessional Business, on a combined basis both MPC Computers’ revenues and theProfessional Business’ revenues have declined in each of the years from 2005 to2007.  We expect this declining trend inrevenue to continue through 2008, driven largely by lower unit volumes anddeclining prices.

 

**RECENTDEVELOPMENTS**

 

Duringthe transition of the Professional Business IT and manufacturing systems fromGateway to MPC Computers’ existing systems in February, 2008, we experiencedmaterial delays in manufacturing and customer deliveries, which we believe willresult in lower than expected shipment volumes and revenues in the firstquarter of 2008 as compared to the fourth quarter of 2007.  These delays have limited and stoppedproduction at times over approximately a three week period at our Nashvillemanufacturing facility.  The delays werecaused by a number of issues, including but not limited to, inaccurate bills ofmaterials for our manufacturing processes, inadequate inventory procurement,routing problems which resulted in parts shortages, and order entry errors byour newest sales professionals from the Professional Business that caused someorders to be delayed in getting to our manufacturing floor.  Prior to the transition, we moved themanufacture of portable personal computers that had historically been manufacturedin China to our Nashville facility, causing the transition-related issues weencountered to have a more pronounced effect on our operations.  During the transition, we also experiencedsystem issues and part delivery delays in our customer service and supportarea, causing some replacement parts to not reach our customers in a timelymanner.  As a result, it is probable thatwe will not retain all of the 

 

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ProfessionalBusiness customers.  Our inability toretain customers of the Professional Business will likely result in lower thananticipated revenues for the combined company. The Professional Businesscustomers may choose to buy products from our competitors rather than us ifthey perceive that our competitors provide better delivery times, higherquality, better service, greater financial strength or other factors.

 

Ourliquidity is highly dependent upon our sales and the advance of cash to us byWells Fargo on the accounts receivable from those sales. The delays in ourmanufacturing during the transition have significantly impacted our shipmentsand sales to our customers.  As a result,the advance of cash from Wells Fargo has significantly declined during thetransition, requiring us to fund a significant portion of our operations fromour limited existing cash reserves. Delays in our manufacturing or service andsupport fulfillment have caused us to prepay for production and service partsat times, or pay to have parts expedited to our plants and depots to alleviatethese shortages.  We also have had somedelays in payments to certain vendors which may impact our ability to obtain ormaintain vender credit.  To the extent weare unable to purchase parts and components on a timely basis in the future, wemay lose orders in backlog and related customers, which could have an adverseand materially negative effect on sales and liquidity.

 

OnApril 14, 2008, we entered into a Manufacturing Services Agreement (the “MSA”)and a Bill of Sale and Transfer Agreement (the “Bill of Sale Agreement”) withFlextronics Computing Sales and Marketing Ltd. (“Flextronics”).  Under the MSA, Flextronics will performprocurement, manufacturing, assembly and testing for MPC Corporation at theFlextronics manufacturing facility in Juarez, Mexico.  Transition of operations from our Nashville,Tennessee manufacturing facilities to Juarez is expected to be completed by December 31,2008 (the “Move Completion Date”).  TheMSA provides for Flextronics to achieve certain cost reduction targets, duringthe first twelve months following the Move Completion Date that are expected toprovide substantial cost savings to MPC Corporation.  In addition, on a one-time basis, Flextronicswill purchase substantially all of our materials and inventory in Nashville.  Under the Bill of Sale Agreement, Flextronicswill purchase manufacturing equipment for $1 million, subject to MPCCorporation’s possible retention of the manufacture of a computing platform.  Further information regarding the MSA and theBill of Sale will be provided in a current report on Form 8-K to be filed nolater than April 18, 2008.

 

***Current Business***

 

Ourprimary business is providing PC-based products and services to mid-sizedbusinesses, government agencies and education organizations.  We use a build-to-order manufacturing processand a direct sales model that we believe is an efficient means to providecustomized computing solutions to our customers. We manufacture and marketClientPro® desktop PCs, TransPort® notebook PCs, NetFRAME® servers and DataFRAMETMstorage products.  In addition, wemanufacture and market the “E-series” of desktops, notebooks, servers andstorage products under a one-year limited license agreement with Gateway. Wealso provide hardware-related support services such as installation, technicalsupport, parts replacement, and recycling. We believe that the quality of ourservice and support differentiates us from our competitors. In addition to PCs,servers, and storage products, we also fulfill our customers’ requirements forthird party products produced by other vendors, including peripherals andsoftware.

 

***Strategic Plans and Other Initiatives***

 

Withthe purchase of the Professional Business we have expanded our enterprise IThardware business of providing products and services to customers in mid-sizedbusinesses, government agencies and education organizations.  Thisacquisition has expanded our business in the education and state/localgovernment markets in particular, resulting in a more balanced product mix thatis less reliant on the federal government business.  The acquisition hasalso expanded our product line, including a more competitive line of notebookPCs and convertible tablet PCs.  Tosuccessfully combine our existing operations with the newly acquiredProfessional Business, we have set forth the following key initiatives:

 

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·                  Successfully integrate the new ProfessionalBusiness with our existing operations, including:

 

·                  Effectively combining the management teamsfrom both organizations;

·                  Transferring the financial, human resource,procurement, and other data from the Professional Business systems to our ITSystems;

·                  Consolidating our product lines and continueongoing research and development activities;

·                  Integrating our customer care and supportfunctions;

·                  Integrating our administrative and financialfunctions, including the combining of our various licensing and royaltyfunctions;

 

·                  Satisfy and retain Professional Businesscustomers;

 

·                  Carefully manage our liquidity to maximizeour use of funds;

 

·                  Focus on supplier relationships, reduceprocurement costs due to our larger scale, and improve the utilization ofvendor credit;

 

·                  Utilize the Gateway brand name until ourlicense to use the name expires in September 2008, while enhancing the MPCComputers  brand name in our variousmarkets; and

 

·                  Institute lower cost operating methodologiesand practices in our overall operations.

 

Inaddition to integrating and maximizing the return from our acquisition of theProfessional Business, we continue to focus on the following:

 

·                  Gross margin improvement initiatives,including the reduction of product returns, freight costs, manufacturing costs,and costs associated with customer evaluation units;

 

·                  Increasing the liquidity in our business andimproving our financial position;

 

·                  Continuing to make our operations more costefficient;

 

·                  Seeking ways to sell and distribute ourproducts more effectively;

 

·                  Penetrating segments of the U.S. federalgovernment where we have historically not made significant sales;

 

·                  Continuing to focus on higher margin businesssuch as servers and storage devices; and

 

·                  Working with our vendors to maintain currentcredit terms and obtain further credit extensions or larger lines of credit.

 

Wecannot give assurance that these initiatives will achieve the intendedresults.  Our failure to achieve theseinitiatives and others could have a material adverse effect on our business andfinancial condition.

 

27

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**RESULTS OF OPERATIONS**

** **

***(In millions)***

** **
| ** **                                                             | ** ** | **Year Ended**  | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|----------------------|------------|------------|------------|
| ** **                                                             | ** ** | **December 31** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **2007 (1)**    | ** ** | **2006**   | ** ** | **% Change** | ** ** |
| * *                                                               | * *   | * *             | * *   | * *   | * *   | * * | * * |
| Revenue                                                                |       | $                    | 364.9      |       | $          | 285.0 | * * | *28.0* | *%* |
| * *                                                               | * *   | * *             | * *   | * *   | * *   | * * | * * |
| Cost of revenue                                                        |       | 316.9                |       | 256.1      | * *   | *23.7* | *%* |
| * *                                                               | * *   | * *             | * *   | * *   | * *   | * * | * * |
| Gross margin                                                           |       | 48.0                 |       | 28.9       | * *   | *66.1* | *%* |
| *Gross margin %*                                                       | * *   | *13.2*               | *%*        | *10.1*     | *%*        | * * | * * |
| * *                                                               | * *   | * *             | * *   | * *   | * *   | * * | * * |
| Operating expenses                                                     | * *   | * *             | * *   | * *   | * *   | * * | * * |
| Research and development expense                                       |       | 2.5                  |       | 3.4        | * *   | *-26.5* | *%* |
| Selling, general and administrative expense                            |       | 55.2                 |       | 40.3       | * *   | *37.0* | *%* |
| Depreciation and amortization                                          |       | 4.6                  |       | 4.7        | * *   | *-2.1* | *%* |
| Impairment of acquired intangibles                                     |       | —               |       | 19.5       |       | — |   |
| Total operating expenses                                               |       | 62.3                 |       | 67.9       | * *   | *-8.2* | *%* |
| *Operating expenses as a % of revenue*                                 | * *   | *17.1*               | *%*        | *23.8*     | *%*        | * * | * * |
| * *                                                               | * *   | * *             | * *   | * *   | * *   | * * | * * |
| Operating loss                                                         |       | (14.3                | )          | (39.0      | *)*        | *-63.3* | *%* |
| *Operating loss as a % of revenue*                                     | * *   | *-3.9*               | *%*        | *-13.7*    | *%*        | * * | * * |
| * *                                                               | * *   | * *             | * *   | * *   | * *   | * * | * * |
| Other (income) expense                                                 | * *   | * *             | * *   | * *   | * *   | * * | * * |
| Interest expense, net                                                  |       | 5.6                  |       | 5.3        |       |   |   |
| Gain on vendor settlements                                             |       | (0.5                 | )          | (2.2       | )          |   |   |
| Change in estimated fair value of  derivative financial instruments    |       | (7.9                 | )          | 4.3        |       |   |   |
| Loss on debt extinguishment                                            |       | —               |       | 10.5       |       |   |   |
| Merger related stock compensation expense                              |       | —               |       | 1.2        |       |   |   |
| Total other (income) expense                                           |       | (2.8                 | )          | 19.1       |       |   |   |
|                                                                   |       |                 |       |       |       |   |   |
| Net loss before cumulative effect of a  change in accounting principle |       | (11.5                | )          | (58.1      | )          |   |   |
|                                                                   |       |                 |       |       |       |   |   |
| Cumulative effect of a change in accounting  principle                 |       | —               |       | 0.6        |       |   |   |
|                                                                   |       |                 |       |       |       |   |   |
| Net loss                                                               |       | $                    | (11.5      | )          | $          | (58.7 | ) |   |   |

 

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(1)          The results of the Professional Business have been consolidatedeffective October 1, 2007, the date the acquisition by MPC Corporationbecame effective, and therefore the results of the Professional Business arenot included for periods prior to October 1, 2007.

 

**FISCAL 2007 COMPARED TO FISCAL 2006**

 

***Revenues***

 

Revenuefor the year ended December 31, 2007 was $364.9 million, an increase of$79.9 million or 28.0% compared to 2006. The increase was due to additional revenue of $124.1 million from theresults of operations of the Professional Business since the October 1,2007, the date of our acquisition of the Professional Business.  The increase in revenue for 2007 waspartially offset by a decline in revenue by MPC Computers of $44.2 million dueto lower sales to our commercial, state/local government, and educationcustomers.  Due to our cash constraints in the second half of 2006, manyof these customers’ orders were delayed and they therefore placed fewer orderswith us during 2007.  Lower revenues from MPC Computers’ commercial,state/local government, and education customers were partially offset by higherrevenues from federal government customers.

 

Revenuefrom MPC Computers has declined from 2005 to 2007.  Revenue from theProfessional Business has also been declining from 2005 to 2007.  While we have recently experienced moderateincreases in sales to federal 

 

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governmentcustomers, it is not certain this improvement in federal government sales willcontinue or whether sales to commercial, state/local government and educationcustomers will decline further.  Economies of scale play an important rolein the PC industry.  Our major competitors have significantly largeroperations and stronger brand recognition than we do, and generally havestronger financial positions.  We believe that our acquisition of theProfessional Business will help us to address our disadvantages in economies ofscale, but there can be no assurance that our downward revenue trend will bereversed.  Based on current trends,revenue for the combined business will be lower in 2008 than 2007 on a pro formabasis.

 

***Gross Margin***

 

Ourgross margin as a percent of revenue for the year ended December 31, 2007was 13.2% as compared to 10.1% for 2006. The improvement in gross margin is dueprincipally to sales of higher margin products, coupled with lower costs forcertain raw materials purchased during the year.  The increase in grossmargin has also resulted from amortization of higher levels of deferredrevenues related to 4-year and 5-year warranties which are now expiring. As a result, during 2007, we recognized a greater amount of the deferredrevenue associated with extended warranty services than in previous periods,which had a favorable impact on our gross margin percentage.  In addition,gross margin for the Professional Business during the fourth quarter of 2007was slightly higher than that of MPC Computers during the year ended December 31,2007, which improved the overall gross margin for 2007.

 

***Research and Development Expense***

 

Researchand development expense for the year ended December 31, 2007 totaled $2.5million, a decline of $0.9 million or 26.5% from the same period in 2006.  We have curtailed our research anddevelopment activities on commodity products such as desktops and notebookswhile focusing on products such as servers and storage products. With theacquisition of the Professional Business, we anticipate a moderate increase inresearch and development activities in future periods.

 

***Selling, General and Administrative Expense(SG&A)***

 

Forthe year ended December 31, 2007, SG&A expenses were $55.2 million, anincrease of $14.9 million or 37.0% from the same period in 2006.  The increase was due to additional SG&Aexpense from the operations of the Professional Business totaling of $16.8million, which included $5.3 million incurred under a Transition ServicesAgreement with Gateway. Services under the Transition Services Agreement weresubstantially completed in February 2008. The increase in SG&A waspartially offset by a $1.9 million decline in expense, primarily resulting fromongoing cost reduction efforts and reduced commissions due to decreased sales.

 

***Depreciation and Amortization***

 

Depreciationand amortization consists of depreciation of purchased fixed assets and thenon-cash amortization of acquired intangibles from our acquisition of MPCComputers in July 2005 and the Professional Business in October 2007.For the year ended December 31, 2007, depreciation and amortizationexpense was $4.6 million, a $0.1 million decrease from the comparable period in2006, which amount included a decrease of $1.7 million for MPC Computersprimarily due to the $19.5 million impairment of acquired intangibles duringthe second quarter of 2006.  The impairment resulted in a lower remainingbalance of acquired intangibles and therefore a reduction of futureamortization expense.  The decline indepreciation and amortization was essentially offset by an increase indepreciation and amortization expense of $1.6 million from the ProfessionalBusiness.

 

***Impairment of Acquired Intangibles***

 

In2006, we were challenged by difficult market trends such as declining averageselling prices and declining margins. Our financial projections in June 2006were updated to reflect such trends. Based on the updated projections at thattime, we determined that acquired intangibles relating to customer relationshipsthat arose at the time of the acquisition of MPC Computers had been impairedprimarily due to the future expected declines in revenue to federal governmentcustomers and other customers. We recognized a non-cash impairment charge of$19.5 million for the year 2006. For the year 2007, we had no furtherindication of impairment of our acquired intangibles.

 

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***Interest Expense, Net***

 

Interestexpense for the year ended December 31, 2007 was $5.6 million, an increaseof $0.3 million from the same period in 2006, principally from largerborrowings on the Wells Fargo Receivables Advance Facility.

 

***Gain on Vendor Settlements***

 

Weentered into settlement agreements with certain vendors whereby we made cashpayments at less than the full amounts due to settle the accounts. For the yearended December 31, 2007, the gain on vendor settlements totaled $0.5million compared to $2.2 million in 2006.

 

***Change in Estimated Fair Value ofDerivative Financial Instruments***

 

On April 24, 2006, we sold convertibledebentures (the Bridge Loan) for an aggregate of $5.0 million and issued 1.37million 5-year warrants to purchase our common stock for $3.12 per share, thefair value of our common stock on the date of the close of the transaction.These debentures plus accrued interest thereon were rolled into a new financing(New Convertible Debentures) on September 6, 2006 for which we received anadditional $4.55 million in cash. In addition, we issued 4.9 million 5-yearwarrants to purchase our common stock for $1.10 per share, which was below thethen current market value per share of our common stock on that date. As aresult of anti-dilution provisions, the conversion price of the Bridge Loanwarrants was reduced to $1.10. We entered into another financing (September 29,2006 Financing) in which we sold $4.9 million of convertible debenturesand issued 2.5 million 5-year warrants to purchase our common stock for $1.10per share, which was below the market value of our common stock on that date.We did not close on most of the funds received in the September 29, 2006financing until October 4, 2006. Additional warrants were issued inconnection with these transactions.

 

These convertible debentures and warrants arederivative financial instruments that are carried at fair value as derivativeliabilities. See Note 9 – “Derivative Warrant Liabilities and ConvertibleDebentures” in Notes to Consolidated Financial Statements in Item 8 of thisReport for more information regarding these financial instruments. Duringthe year ended December 31, 2007, we recognized non-cash income of $7.9million, primarily related to a decline in the fair value of these derivativefinancial instruments as a result of a decrease in the market price of our stockduring 2007.  For the year ended December 31, 2006, we recognizedexpense of $4.3 million related to the initial recognition and subsequentchanges in the fair value of these derivative financial instruments.

 

Significant estimates and assumptions are usedin the determination of the fair values of these derivative financialinstruments. The fair values are determined in part by, and will fluctuatewith, the market value of our stock. If the market price of our stock increasesduring a period, the fair value of the derivatives is expected to increase andwill adversely affect our earnings. A decline in the market price of our stockwill cause a decrease in fair value of the derivatives and have a positiveimpact to earnings. The change in the fair value of these derivative financialinstruments has no impact on our cash flows.

 

During the year ended December 31, 2007, weissued 15,113,913 shares of common stock and 626,546 shares of Series APreferred Stock upon conversion of $13.4 million in face value of convertibledebentures plus accrued interest and penalties and the exercise of 7,545,352million warrants.  We anticipate that the conversion of the debentures andthe exercise of the warrants will reduce the impact of changes in the estimatedfair value of remaining derivative financial instruments on our results ofoperations in future periods.

 

***Loss on Extinguishment of Debt***

 

Forthe year 2006, we recognized a loss of $10.5 million related to theextinguishment of the Bridge Loan as part of the September 6, 2006financing. The loss was due to the fair value of the consideration received bythe investors in exchange for the rollover of the Bridge Loan into the NewConvertible Debentures and Warrants. The loss on extinguishment had no effecton our cash flow.  We had no such transactionin 2007.

 

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***Merger Related Stock Compensation***

 

Mergerrelated stock compensation expense for the year ended December 31, 2006was $1.2 million related to the restricted stock units that had been issued toseveral MPC Computers officers and certain key employees in connection with ouracquisition of MPC Computers.  All related restricted stock units werefully vested in 2006; therefore no such merger related compensation expense wasincurred in 2007.

 

***Cumulative Effect of a Change in AccountingPrinciple***

 

Warrantsissued in connection with financing activities are subject to the provisions ofEmerging Issues Task Force Issue 00-19 (“EITF 00-19”),*Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock.*  In December 2006, FASB issued FASB StaffPosition (“FSP”) No. EITF 00-19-2 (“EITF 00-19-2”),*Accounting for Registration Payment Arrangements*,which changed the way that a contingent obligation under a registration paymentarrangement was recorded. EITF 00-19 describes the criteria under whichwarrants should be classified as either equity or as a liability. If thewarrant is determined to be a liability under the method described in EITF00-19, the liability is fair valued each reporting period with the changesrecorded through earnings in the consolidated statements of operations. Underthe new guidance provided in EITF 00-19-2 the contingent obligation under aregistration payment arrangement should be separately recognized and measuredin accordance with SFAS No. 5,*Accountingfor Contingencies*. We adopted EITF 00-19-2 effective October 1,2006.

 

Uponadoption of EITF 00-19-2, the outstanding warrant liability balance subject tothe provisions of EITF 00-19-2 was $1.3 million. Transition to the provisionsof EITF 00-19-2 resulted in a cumulative effect of a change in accountingprinciple loss of $0.6 million and an adjustment to additional paid in capitalof $1.9 million. The measurement of the contingent liability related toregistration payment arrangements as of December 31, 2006 was nil underthe provisions of FASB 5.

 

***Income taxes***

 

Wemake no provision for income taxes because, since inception, we have not beenprofitable. We have a net operating loss carry-forward available to offsetfuture federal and state income tax expenses to an amount that approximates ouraccumulated deficits. Our net operating loss carry-forward will expire invarying amounts from 2022 to 2027. The utilization of the net operating losscarry-forward as an offset to future taxable income is subject to thelimitations under U.S. federal income tax laws. One such limitation is imposedwhere there is a greater than 50% change in ownership of our company.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We have two principalsources of liquidity:  (i) existing cashand cash equivalents and (ii) our Wells Fargo Receivables AdvanceFacility.  As of December 31, 2007,we had unrestricted cash and cash equivalents of $9.0 million and an additional$9.8 million of restricted cash consisting of $3.5 million held as collateralunder our receivables advance facility and $6.3 million held as collateral foroutstanding letters of credit.

 

We face significantconstraints with respect to our liquidity and working capital that havematerially impacted our business and may to continue to impact ourbusiness.  As of December 31, 2007, we had current assets of $178.8million and current liabilities (exclusive of deferred revenue which is not yetearned) totaling $183.6 million. At December 31, 2007 our shareholder’sequity was nil. Our operations have not generated positive annual cash flowssince our initial public offering in 2004.

 

***Background***

 

Since the acquisition, wehave had insufficient revenues and gross margins to sustain our operations,incurred ongoing operating losses and interest expense on our debt, and haveexpended cash to support financing initiatives.

 

Since inception, we havefinanced our operations through the private placements of equity securities,convertible debt, loans from our founder and other members of our Board ofDirectors, short-term loans, a line of credit and net proceeds of $7.1 millionfrom our IPO. From December 2005 to February 2006, we raisedapproximately $12.6 million, prior to expenses and commissions, through warrantexercises.  In conjunction with theacquisition of the Professional Business from Gateway, we raised $8.3 millionfrom the exercise for cash of $1.10 warrants issued in 

 

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connection with twoprivate placement financings in September 2006 that included the issuanceof convertible debentures.

 

Because our liquidity hasbeen constrained, we have managed our cash position by extending payments tosuppliers, some of whom have placed us on credit hold, reduced credit lines orplaced us on a pre-pay position for their products. On many occasions this hasdelayed delivery of components to our manufacturing facility until paymentswere made. We have also received notices of default, threatened litigation andlitigation from numerous suppliers, but have generally cured the defaults orsettled the amount owed or otherwise managed the supplier relationship.

 

During the quarters endedJune 30, 2006 and September 30, 2006, delivery and credit issues withsuppliers increased compared to prior periods because of late payments, butwere alleviated to a limited extent later in our fourth quarter when wereplaced our Wachovia Credit Facility with the Wells Fargo Receivables AdvanceFacility on November 16, 2006. Initially, the Receivables Advance Facilityprovided approximately $13 million in availability over the Wachovia CreditFacility. In February 2007, we amended the Receivables Advance Facility toobtain additional temporary liquidity as needed subject to the terms of theamendment.

 

Financing under theReceivables Advance Facility is dependent upon our sales volume and relatedreceivables to assign to Wells Fargo. Historically, our sales volume hasbeen lower during the first two quarters of the year and increases during thethird and fourth quarters due to the federal-buying season.  Additionally, the Professional Businesstransition issues discussed above have impeded our sales to ProfessionalBusiness customers.  Periods of lower revenue volume and lower relatedreceivables reduce our assignment of receivables, borrowing capacity, and ourability to cover our operating expenses.

 

**Liquidity**

*(In millions)*

 
| ** **                | ** ** | **Year Ended**   | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **December 31,** | ** ** |
| ** **                | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Cash and cash equivalents |       | $                     | 9.0        |   | $ | 4.8 |   |
| Restricted cash           |       | 9.8                   |       | 4.6 |   |
| Total                     |       | $                     | 18.8       |   | $ | 9.4 |   |

 

**Cash Flow Activity**

*(In millions)*

 
| ** **                   | ** ** | **Year Ended**   | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **December 31,** | ** ** |
| ** **                   | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Net cash provided (used) by: |       |                  |       |   |   |
| Operating activities         |       | $                     | (18.7      | ) | $ | (22.3 | ) |
| Investing activities         |       | (2.6                  | )          | (0.1 | ) |
| Financing activities         |       | 25.5                  |       | 23.3 |   |
| Increase (decrease) in cash  |       | $                     | 4.2        |   | $ | 0.9 |   |

 

·      ***Operating Activities***

 

During the year ended December 31,2007, we used $18.7 million in operating activities consisting of a net loss of$10.4 million as adjusted for $1.1 million of non-cash items.  The non-cash items included depreciation andamortization expense, income from the decrease in the fair value of derivativefinancial instruments, and other non-cash items.  In addition, operating activities used $8.4million from an increase in working capital. During the first three quarters of 2007, our working capital decreased$15.3 million primarily from a decline in accounts receivable resulting fromcollections in receivables and a decline in revenue. During the fourth quarter,our working capital increased $23.7 million principally from anticipated increasesin accounts receivable and payables related to our initial operations of theProfessional Business.  We believeworking capital levels related to the Professional Business have stabilizedsince the October 1, 2007 acquisition date and do not expect futuresignificant increases in working capital related to the initial operations ofthe Professional Business.  However, wedo expect overall working capital to fluctuate in future periods due to thenormal seasonality of our sales and production.

 

During the year ended December 31,2006, we used $22.3 million in operating activities consisting of a net loss of$16.2 million as adjusted for $42.5 million of non-cash items including:depreciation and amortization 

 

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expense, impairment ofintangible assets, loss on extinguishment of debt, expense from the increase infair value of derivative financial instruments, gain of vendor settlements,merger related stock compensation, and other non-cash items. In addition,operating activities used $6.1 million from an increase in working capital,primarily from a decrease in accounts payable and deferred revenue offset by adecrease in prepaid maintenance and warranties.

 

·      ***Investing Activities***

 

During the year ended December 31,2007, investing activities used $1.3 million for purchases of equipment, and$1.2 million for accounting, consulting and advisory costs related to theacquisition of the Professional Business from Gateway.  Our non-cash consideration paid to Gatewayincluded the issuance of 5,602,454 shares of MPC Corporation common stock and249,171 shares of MPC Corporation Series B Preferred Stock valued at $7.1million and $6.3 million, respectively. In addition, we issued a $1.3 million note payable to Gateway.  See Note 3 “Acquisition of GatewayProfessional Business,” in Notes to Consolidated Financial Statements in Item 8of this Report.

 

We had no significantinvesting activities during the year ended December 31, 2006.

 

·      ***Financing Activities***

 

During the year ended December 31,2007, financing activities provided $25.5 million. We received $25.1 million innet borrowings under the Wells Fargo Receivables Advance Facility which wasexpanded in October 2007 to include advances to us from the receivables ofthe Professional Business. We also received $8.3 million from the exercise of7,545,352 warrants to purchase our common stock with an exercise price of $1.10in connection with the acquisition of the Professional Business.  Our restricted cash increased $5.3 millionfrom cash used to collateralize letters of credit and the Wells FargoReceivables Advance Facility.  Inaddition, we made payments of $2.7 million on notes payable during 2007.

 

During the year ended December 31,2006, financing activities provided net cash of $23.3 million.  During the year, we received $34.2 millionfrom the initial funding and subsequent net borrowings under the Wells FargoReceivables Advance Facility as we replaced our prior line with WachoviaCapital Finance Corporation (Western) (“Wachovia”). In addition, we received$13.8 million from the sale of convertible debentures under the Bridge Loan in April 2006and the September 2006 financings. We also received $3.1 million from the exercise of warrants.  We used $22.6 million for repayments on andextinguishment of our prior line of credit with Wachovia. Our restricted cashincreased $4.6 million from cash used to collateralize letters of credit andthe Wells Fargo Receivable Advance Facility.

 

***Liquidityand cash flows for 2008***

 

Although we have raisedadditional funds in connection with the acquisition of the ProfessionalBusiness through the exercise of warrants and the expansion of our facilitywith Wells Fargo, a significant portion was used for working capital requirementsfrom the initial operations of the Professional Business during the fourthquarter of 2007.  As previously discussedunder “Recent Developments” of this Item, during the transition of theProfessional Business IT and manufacturing systems from Gateway to MPCComputers’ existing systems in February, 2008, we experienced material delaysin manufacturing and customer deliveries, which we believe will result in lowerthan expected shipment volumes and revenues in the first quarter of 2008 ascompared to the fourth quarter of 2007. These issues have materially impactedour liquidity. We are currently seeking to expand credit lines with many of ourcurrent vendors, and to obtain credit lines from vendors with whom we have notpreviously done business as a means to continue to fund our operations in thenear term. Certain of these vendors have required letters of credit to securecredit lines.  We are currentlynegotiating with other vendors, and anticipate providing additional letters ofcredit or other forms of credit enhancement to secure credit lines with certainvendors.  In April 2008, we enteredinto the Flextronics agreement and anticipate an increase in liquidity from thesale of our inventory and an increase to our credit line.  Continuing to provide letters of credit orother credit enhancement to vendors constrains our liquidity as we are requiredto cash collateralize the letters of credit or otherwise incur costs to providecredit enhancement and there can be no assurance that we will be successful inobtaining sufficient vendor credit in the future.  Any inability tomaintain adequate liquidity in the future or inability to integrate our ITsystems on a timely

 

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basis may do significantharm to vendor relationships, and could cause us to experience credit holds,require that we pre-pay for products, and/or cause supplier to refuse todeliver components or terminate supply arrangements, any of which could have amaterial adverse effect on our financial condition and results of operations.

 

Other specific issueswhich are relevant to understanding 2008 cash flows include:

 

·      ***Financingactivities***

We expect to fullyutilize available financing under our Wells Fargo Receivables Advance Facilityto the extent possible in 2008.  Inconnection with the Professional Business transition issues in the firstquarter of 2008, we encountered liquidity issues requiring additionalfinancing.  We amended our IntercreditorAgreement to temporarily remove restrictions on our Receivables AdvanceFacility. The restrictions were previously reserved for payment of amounts dueto Gateway, and provided approximately $15 million in funding from theReceivables Advance Facility.  Inaddition, on April 1, 2008, Wells Fargo provided an advance to MPC-Pro inthe amount of $3.5 million (the “MPC-Pro Advance”). The MPC-Pro Advance is tobe repaid by May 31, 2008, and is in addition to other amounts provided tous by Wells Fargo under the terms of our Account Purchase Agreement. We alsoamended the Transition Services Agreement with Gateway to extend the paymentsdue on the payable to Gateway through May, 2008.

 

Our sales are seasonaland typically increase during our second, third and fourth quarters.  We anticipate the increase in sales willrequire additional working capital which we will obtain through TemporaryAdvances under the Receivables Advance Facility allowing us to borrow up toapproximately 98% of our purchased accounts.  The Temporary Advances are of limited duration which may require us toseek other sources of cash.  We arelooking at opportunities to leverage idle assets, such as certain types ofinventory and machinery and equipment and expand or enhance vendor credit wherepossible. We launched initiatives to further improve our margins beginning in January 2008.We are focusing on material costs, returns, freight costs, manufacturing productivityand costs as areas of opportunity to improve our gross margin and operatingmargin, including through our recent agreement signed with Flextronics in April 2008.We continue to be active in cost management and constantly seek ways to run ourbusiness more cost effectively.

 

We do not anticipateproceeds from the exercise of warrants, unless there is a significant increasein the market price of our common stock. We expect some conversions of our Series A Preferred Stock and allof our Series B Preferred Stock to MPC Common Stock during 2008 uponshareholder approval.  The conversionshave no cash flow impact.

 

·      ***Capital expenditures***

Historically, we have nothad material capital expenditures and do not currently anticipate significantcapital expenditures in 2008.

 

·      ***Income taxes***

From our inceptionthrough December 31, 2007, we have generated losses for both financialreporting and tax purposes. As a result, for income tax return, we may utilizeapproximately $36.9 million of net operating loss carryforwards, which begin toexpire in 2022 and are available as late as 2027.  We believe these net operating losscarryforwards are subject to an annual limitation on their use of $967 thousandpursuant to IRC Section 382. However, we have not yet completed our analysis of additionallimitations, if any, resulting from the acquisition of the ProfessionalBusiness and the conversion of debentures and exercise of warrants in2007.  For the year ended December 31,2008, in addition to our loss carryforward limitation, taxable income may bereduced by all losses incurred in 2007 after the October 1, 2007acquisition of the Professional Business.

 

We may need to raise asignificant amount of additional funds to satisfy vendor payment obligationsand fund our business if we do not generate sufficient cash flows fromoperations and losses continue. There can be no assurance that we will be ableto secure additional sources of financing on terms acceptable to us or at all.Even if we do obtain additional funding, the amount of such funding may not besufficient to fully address all of our liquidity constraints. Continuingliquidity constraints could negatively and materially impact our business andresults of operations.

 

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**Capital Resources**

 

***WellsFargo Receivables Advance Facility***

 

On November 16, 2006, we entered into anagreement with Wells Fargo Business Credit, Inc. (“Wells Fargo”) for anaccounts receivable assignment and advance facility (“Receivables Advance Facility”)that replaced our prior line of credit with Wachovia Capital FinanceCorporation (Western).  Under the new facility, as amended in February 2007,we may assign to Wells Fargo, and Wells Fargo may purchase from us, Accounts(as defined in the Receivables Advance Facility). Wells Fargo will advance 90%of the value of the purchased Accounts. Wells Fargo may adjust the advancementpercentage at any time in its commercially reasonable discretion upon priornotice to us.  Wells Fargo will advance an additional 7.5% of the faceamount of currently outstanding Accounts assigned to Wells Fargo, provided thatthe total advance does not exceed 97.5% of the face amount of any Account (the “TemporaryAdvance”), and increase the advance rate on new Accounts assigned to WellsFargo to 98% of the amount of the Accounts for a period of eight weeks (the “SpecialFacility Period”). We must repay the difference between the Advance and theTemporary Advance within four weeks after termination of the Special FacilityPeriod. Failure to repay amounts advanced under the Special Facility wouldconstitute an event of default under the Agreements. At any time when theTemporary Advance has been paid in full for a minimum of 60 days, we mayrequest that the Special Facility be reinstated for another eight week periodwith repayment to be made within four weeks.

 

OnOctober 1, 2007, MPC-Pro and Gateway Companies Inc (“GCI”) (which wasacquired by MPC-Pro in connection with the acquisition of the ProfessionalBusiness), each entered into an Account Purchase Agreement with WellsFargo.  Under these agreements, MPC-Pro and GCI may assign to Wells Fargo,and Wells Fargo may purchase from MPC-Pro and GCI, Accounts (as defined in theAgreements). Wells Fargo will advance to MPC-Pro and GCI 90% of the value ofthe purchased Accounts. Wells Fargo may adjust the advancement percentage atany time in its commercially reasonable discretion upon prior notice to MPC-Proand GCI.  In addition, MPC-Pro, Gateway,GCI, and Wells Fargo entered into an Intercreditor Agreement (the “IntercreditorAgreement”). The Intercreditor Agreement provides Gateway with a juniorsecurity interest in accounts receivable generated on or after the October 1,2007 acquisition of the Professional Business, inventory, and all otherproperty of MPC-Pro and GCI as specified in the agreement to secure the paymentof obligations owing to Gateway under the Transition Services Agreement (the “TSAObligations”). Wells Fargo and MPC-Pro agreed to set aside certain accountsreceivable for the payment of the TSA Obligations (the “Gateway BlockedAccounts”).  On March 27, 2008 theIntercreditor Agreement was amended to provide that there will be GatewayBlocked Accounts in up to the following amounts: (i) there will be noGateway Blocked Accounts through April 17, 2008; (ii) on or after April 18,2008, a face amount equal to the obligations owing to Gateway under theTransition Agreement for the applicable week (the “Gateway Weekly PayoffAmounts”) minus $10.0 million; and (iii) on or after May 27, 2008, aface amount equal to the Gateway Weekly Payoff Amounts for the applicable weekminus $5.0 million. The amendment also provides that, if, after June 30,2008, there is a remaining positive balance of the Gateway Weekly PayoffAmounts, Gateway may provide a statement to MPC-Pro indicating the positivebalance, and Wells Fargo will hold but not purchase Gateway Blocked Accountssubmitted to it by MPC-Pro and GCI in a face amount equal to the remainingpositive balance. See Note 3 “Acquisition of Gateway ProfessionalBusiness-Transition Services Agreement,” in Notes to Consolidated FinancialStatements in Item 8 of this report.

 

We will pay fees equal to the Wells Fargo PrimeRate (as defined in the Receivables Advance Facility), plus 0.75% per annum(the “Wells Fargo Discount”) multiplied by the total amount of Accountspurchased and not yet paid by our customers, computed daily. The effective rateat December 31, 2007 was 8%. The minimum monthly fee to be paid inaggregate by MPC Computers affiliates to Wells Fargo is determined bymultiplying the Wells Fargo Discount, by $2.5 million.

 

Wells Fargo has the right to require that we re-purchase the Accountsin the event our customer does not pay the receivable within a timeframespecified under the Receivables Advance Facility, if a material customerdispute arises or in the event of a default under the Receivables AdvanceFacility. The Receivables Advance Facility is subject to customary defaultprovisions. Wells Fargo has discretion under the Receivables Advance Facilityas to the Accounts purchased and the percentage advanced after submission ofthe Account for approval. Wells Fargo is not obligated to buy any Account fromus that Wells Fargo does not deem acceptable in its sole discretion. There isno minimum amount of Accounts to be purchased by Wells Fargo under theReceivables Advance Facility. The facility 

 

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is secured by substantially all of our assets. The Receivables AdvanceFacility is for a term of three (3) years terminating November 14,2009. Early termination fees apply if the Receivables Advance Facility isterminated before the end of its term.  The Receivables Advance Facilityalso provides for a $3.5 million collateral account for the benefit of WellsFargo for repayment of any obligations arising under the Receivables AdvanceFacility

 

OnApril 1, 2008, Wells Fargo provided an advance to MPC-Pro in the amount of$3.5 million (the “MPC-Pro Advance”). The MPC-Pro Advance is to be repaid by May 31,2008, and is in addition to other amounts provided to us by Wells Fargo underthe terms of our Account Purchase Agreements with Wells Fargo. We agreed to payto Wells Fargo an advance fee in the amount of $15 thousand for the MPC-Pro Advance.Interest on the MPC-Pro Advance will be at Wells Fargo Prime Rate plus 1.25%.

 

***New Convertible Debentures and Warrants***

 

On September 6,2006, we entered into a securities purchase agreement with certain existinginvestors and new investors pursuant to which we sold convertible debenturesfor an aggregate of $4.6 million. Additionally, the investors of the April 24,2006 bridge loan exchanged $5 million face value of their convertibledebentures plus accrued interest thereon into the new convertible debenturesand the existing and new investors received 4,924,500 additionalwarrants. The debentures become convertible into shares of common stock ata conversion price of $0.75 per share.  The warrants allow the purchase ofour common stock for $1.10 per share and are for a term of 5 years. Thedebentures accrue interest at 8% per annum after shareholder approval wasobtained in December 2006 and the aggregate principle amount becomes dueand payable September 6, 2009. In the event that the debentures arenot repaid on the maturity date, we will be in default and the debentures willbegin to accrue interest at a rate of 22% per annum or the maximum amountpermitted by law, whichever is less. The debentures contain various customaryevents of default as well as negative covenants that, among other things,prohibit us from incurring additional debt.

 

Both the debentures and the warrants containprovisions limiting conversion and exercise, or issuance of shares in lieu ofinterest, as the case may be, in the event that the holder’s beneficialownership of our common stock would exceed 9.99%.  We concurrently enteredinto a registration rights agreement with the investors that required us toregister all of the common stock issued and underlying the securities sold toinvestors. The registration rights agreement contains customaryindemnification and contribution provisions. We filed the registrationstatement with the SEC on November 8, 2006 and it was declared effectiveon June 28, 2007. Not all of the common stock underlying thedebentures and warrants were registered under the registration statement due toblocker provisions imposed by certain investors on their registerable sharesand from a reduction in the number of shares as required by the SEC. Webelieve we have substantially fulfilled our obligation under the registrationrights agreement and will register the remaining unregistered shares when theblocker provisions are waived by the investors and when allowed by the SEC.

 

On March 5,2007, we obtained amendments and waivers to the registration rights agreementand the debentures. Pursuant to a letter agreement, the majority of theinvestors, including Crestview Capital Master, LLC and Toibb Investment LLCagreed to waive the penalty provisions for not yet having an effectiveregistration statement, and to extend the dates for filing a registrationstatement and all related deadlines, including the date by which the initialregistration statement must be declared effective by the SEC, by 120 days. The investorsin this offering also agreed that no Event of Default is presently deemed tohave occurred under the debentures. The 120-day extension period lapsed,and the registration statement was not declared effective until June 28,2007. For the year ended December 31, 2007, we incurred liquidateddamages of $346 thousand under the registration rights agreement related to thedelay in the effectiveness of our registration statement.

 

We issued toone of the investors additional warrants to purchase up to 360,000 shares ofcommon stock for $1.10 per share. The terms of these warrants are identical tothe warrants issued as part of the financing. The warrants were accounted foras additional consideration given to the investors as part of thefinancing. In connection with this financing, we issued 546,000 warrantswith a 5-year term to the placement agent to purchase our common stock for$1.10 per share.

 

During the yearended December 31, 2007, we issued 8,798,986 shares of common stock and626,546 shares of Series A Preferred Stock upon conversion of $9.8 millionface value of New Convertible Debentures plus accrued 

 

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interest andpenalties and the exercise of 6,652,227 warrants.  See “Series A Preferred Stock” furtherin this Management Discussion and Analysis.

 

***September 29, 2006 Financing***

 

On September 29,2006 we entered into a securities purchase agreement with certain existinginvestors and new investors pursuant to which we agreed to sell convertible debenturesfor an aggregate of $4.9 million. The majority of the transaction closed October 4,2006.  The investors also received an aggregate of 2,468,125 warrants topurchase our common stock. The debentures become convertible into shares ofcommon stock at a conversion price of $0.75 per share. The warrants allow thepurchase of our common stock for $1.10 per share and are for a term of 5 years.The debentures accrue interest at 8% per annum after shareholder approval wasobtained in December 2006 and the aggregate principal amount becomes dueand payable September 29, 2009. In the event that the debentures arenot repaid on the maturity date, we will be in default and the debentures willbegin to accrue interest at a rate of 22% per annum or the maximum amountpermitted by law, whichever is less. The debentures contain various customaryevents of default as well as negative covenants that, among other things,prohibit us from incurring additional debt.

 

Both thedebentures and the warrants contain provisions limiting conversion andexercise, or issuance of shares in lieu of interest, as the case may be, in theevent that the holder’s beneficial ownership of our common stock would exceed9.99%. We concurrently entered into a registration rights agreement with theinvestors that requires us to register all of the common stock issued andunderlying the securities sold to the investors. The registration rightsagreement contains customary indemnification and contribution provisions. Theterms, conditions, features and accounting treatment of these debentures andwarrants are substantially identical to the New Convertible Debentures andWarrants.

 

We filed theregistration statement with the SEC on November 8, 2006, and it wasdeclared effective on June 28, 2007. Not all of the common stockunderlying the debentures and warrants was registered under this registrationstatement due to the large number of shares of common stock to be registeredrelative to the number of shares of our common stock then outstanding.  Inorder to register the shares on a Form S-3, the SEC required that wereduce in the number of shares being registered. We believe we havesubstantially fulfilled our obligations under the registration rights agreementand will register the remaining unregistered shares as required by theregistration rights agreement and as allowed by the SEC.

 

We did notobtain any amendments or waivers from these investors and as a result, as of February 1,2007 we began incurring liquidated damages under the registration rightsagreement at the rate of 1.5% of the aggregate amount invested per month untilthe registration statement was declared effective on June 28,2007. These liquidated damages must be paid in cash, and they accrueinterest at a rate of 18% per annum. We notified the investors that we areunable to pay the interest and will accrue the interest if unpaid to theiraccount. There is no assurance that they will allow us to defer payment ofthe liquidated damages. We accrued $383 thousand in liquidated damages underthe registration rights agreement during the year ended December 31,2007.  Since we have not paid all of the interest or penalties due underthe debentures or the registration rights agreement, a holder could declare thedebentures to be in default and accelerate the debt due under thedebentures.  If this were to happen, the debentures would accrue interestat the rate of 22% per annum. We may be required to pay interest or otherrequired payments in cash rather than stock and could be forced to use ourlimited cash to redeem all or a portion of the outstanding debentures.

 

In connectionwith this financing, we issued 499,867 warrants with a 5-year term to theplacement agent to purchase our common stock for $1.10 per share.

 

During the yearended December 31, 2007, we issued 6,314,927 shares of common stock uponconversion of $3.6 million in face value of debentures from the September 29,2006 Financing plus accrued interest and penalties and the exercise of 893,125warrants.

 

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***Series A Preferred Stock***

 

As a condition to close under the Asset PurchaseAgreement for the acquisition of the Professional Business, we were required tohave raised at least $9.0 million in additional cash and cash equivalentsthrough the conversion of outstanding convertible securities, the exercise ofwarrants or the sale of additional equity securities, as measured relative toour cash and cash equivalents as of the September 4, 2007 date of theAsset Purchase Agreement.  This condition was modified to raising at least$8.0 million under a Letter Agreement dated October 1, 2007 (the “LetterAgreement”) among the parties to the Asset Purchase Agreement.  Insatisfaction of this condition, on October 1, 2007 we raised $8.3 millionfrom the exercise for cash of $1.10 warrants issued in connection with twoprivate placement financings in September 2006 that included the issuanceof convertible debentures.

 

In connection with the obligation under theLetter Agreement, two MPC Corporation investors, Crestview Capital Master LLC (“Crestview”)and Toibb Investment LLC (“Toibb”), intended to exercise their warrants andconvertible debentures, but because of their large holdings, their beneficialownership of our common stock, as defined in Rule 13d-3 as promulgatedunder the Securities Exchange Act of 1934, as amended, could have exceeded9.99%.  As such, on October 1, 2007, we entered into an Amendment No. 1to Convertible Debenture with each of Crestview and Toibb (the “Debenture Amendments”),pursuant to which their respective Convertible Debentures due on September 6,2009 were amended such that the debentures were convertible into shares of Series APreferred Stock.  Additionally, MPC Corporation and both Crestview andToibb agreed that, upon the exercise of their warrants prior to the Closing, wewould issue (i) common stock only to the extent that their beneficialownership reaches 9.99% and (ii) the number of shares of MPC Corporation Series APreferred Stock that will convert into a number of shares of MPC Corporationcommon stock equal to the difference between the number of shares of commonstock such holder would receive if all of such holder’s warrants were exercisedfor our common stock and the number of shares of our common stock such holderactually received in order to avoid exceeding 9.99% beneficial ownership.Additionally, on October 1, 2007, we entered into an amendment to theRegistration Rights Agreement dated as of September 6, 2006 with Crestviewand Toibb such that the registration and other rights applicable to shares ofcommon stock issuable upon conversion of the their debentures apply equally tothe shares of common stock issuable on conversion of the Series APreferred Stock issued pursuant to the Debenture Amendments.

 

In conjunction with the exercise of the $1.10warrants and our obligations under the Letter Agreement, on October 1,2007, 7,545,352 warrants were exercised, $12.1 million in face value ofconvertible debentures were converted plus accrued interest and penaltiesthereon, and we issued 12,912,166 shares of MPC Corporation common stock and626,546 shares of MPC Corporation Series A Preferred Stock. The MPCCorporation Series A Preferred Stock is convertible into 12,530,925 sharesof MPC Corporation common stock.  The MPCCorporation Series A Preferred Stock is participating, non-voting, and hasa liquidation preference equal to $.00000001 per share. Each share of MPCCorporation Series A Preferred Stock will automatically convert to MPCCorporation common stock at such time the conversion would not cause thebeneficial ownership to exceed 9.99% beneficial ownership.

 

***Series B PreferredStock***

 

In connection with the acquisition of theProfessional Business, we issued 5,602,454 shares of MPC Corporation commonstock totaling approximately 19.9% of our outstanding common stock as of theClosing Date, and 249,171 shares of MPC Corporation Series B PreferredStock convertible into 4,983,416 shares of our common stock. All MPCCorporation Series B Preferred Stock issued to Gateway converts to MPCCorporation common stock upon shareholder approval by a majority of the MPCCorporation common shareholders (the “Series B Automatic Conversion Event”).Pursuant to the Asset Purchase Agreement, Gateway shall vote in favor of the Series BAutomatic Conversion Event. In the event the Series B Automatic ConversionEvent does not occur within one year from the Closing Date, all outstandingshares of Series B Preferred Stock shares are to be redeemed by us at 1.5times the closing price times the number of shares of common stock into whichthe Series B Preferred Stock is then convertible. The MPC Corporation Series BPreferred Stock is participating, non-voting, and has a liquidation preferenceequal to $.00000001 per share.

 

On the October 1, 2007 Closing Date, weentered into a Lock-up Agreement and Registration Rights Agreement withGateway.  Under the Lock-Up Agreement,Gateway has agreed that it will not offer, sell, contract to sell, short,pledge or otherwise dispose of any MPC Corporation common stock beneficiallyowned, held or thereafter acquired by Gateway or its affiliates for a period of12 months (the “Restriction Period”), except for Permitted Transfers as definedby the agreement.  The RegistrationRights Agreement provides that following the Restriction Period as set 

 

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forth in the Lock-Up Agreement and upon receiptof a demand request from Gateway, MPC Corporation shall file a registrationstatement with respect to the Registrable Securities, as defined by theagreement, which include the MPC Corporation Shares issued in connection withthe transaction. The Registration Rights Agreement grants Gateway customary andpiggyback rights. The Registration Rights Agreement is subject to anylimitations and conditions set forth in any prior registration rightsagreements entered into by MPC Corporation.

 

***Otheroutstanding warrants***

 

In connection with our2004 initial public offering, we issued 3.6 million warrants. These warrantswere exercisable at $5.50 per share, but have subsequently been adjusted to$3.77 per share in August 2007 due to anti-dilution provisions triggeredfrom convertible debentures and warrants issued by us in September 2006with conversion features at below then current market prices. The warrantsare callable by us at $0.25 per share if our common stock trades at or above$9.50 per share for 20 consecutive days. None of these warrants have yet beenexercised, and we do not anticipate that a material amount of the warrants willbe exercised unless we are able to exercise our call right, which would requireour stock trading price to close at a price of at least $9.50 for 20consecutive trading days. Our stock has never traded above $9.50 per share.

 

**CONTRACTUAL OBLIGATIONS**

 

We are obligated to make future payments undervarious contracts, such as operating leases, royalty and licensing agreementsand unconditional purchase obligations. The following represents ourcontractual obligations and commitments as of December 31, 2007:

 

***(In Millions)***

 
| ** **                          | ** ** | **Year ended December 31** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **<1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 years** | ** ** | **>5 Years** | ** ** |
| Operating leases (1)                |       | $                                         | 4          |   | $ | 2 |   | $ | 1 |   | $ | 1 |   | $ | — |   |
| Notes Payable and Debt              |       | 64                                        |       | 64 |   | — |   | — |   | — |   |
| Convertible Debentures (Face Value) |       | 1                                         |       | 1 |   | — |   | — |   | — |   |
| Estimated purchase obligations (2)  |       | 38                                        |       | 38 |   | — |   | — |   | — |   |
|                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Total contractual cash obligations  |       | $                                         | 107        |   | $ | 105 |   | $ | 1 |   | $ | 1 |   | $ | — |   |

 

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| (1)    |   | We currently lease approximately 340,700  square feet of office and manufacturing space at 906 E. Karcher Road, Nampa,  Idaho, under a lease that expires May 31, 2008. Our corporate  headquarters are located at the Nampa facility. We lease approximately 4,712  square feet of office space in Waukesha, Wisconsin under a lease that expires  Nov 30, 2008. We also lease a regional sales office located in Oakbrook,  Illinois, which is 1,579 square feet and expires January 31, 2008. We  additionally lease 45,552 square feet of office space in North Sioux City,  South Dakota under a lease expiring in September 2012 and lease a 7,870  square foot loading dock expiring on November 27, 2012 also in North  Sioux City.  Rent expense totaled $2.1  million and $2.3 million for the years ended December 31, 2007 and 2006,  respectively. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (2)    |   | We have royalty-bearing license agreements  that allow us to sell certain hardware and software that is protected by  patent, copyright or license. Royalty costs are accrued and included in cost  of goods sold when products are shipped or amortized over the period of benefit  when the license terms are not specifically related to the units shipped.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3)    |   | Purchase orders represent orders placed by us  to purchase goods or services that are generally enforceable, unless  cancelled by us before fulfillment and specify all significant terms,  including: the quantity to be purchased, the price to be paid and the timing  of the purchase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

AtDecember 31, 2007 we had outstanding letters of credit totaling $6.3million expiring at various dates through July 2008. The letters of creditwere fully collateralized with cash on deposit at the issuing bank.

 

Wehave entered into employment agreements with four of our key officers. Theseagreements bear standard employment terms and conditions. The employmentagreements are effective through October 2010 and October

 

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2011and automatically extend for additional one-year terms unless terminated by usor the key officer. In addition, we have 14 employees with severance agreementsand one employee with a retention agreement. The total potential liability for severance under the employmentagreements, severance agreements and retention agreement is $1.8 million.

 

Aspreviously discussed in this Item 7, in connection with the acquisition of theProfessional Business, we issued to Gateway 249,171 shares of MPC Corporation Series BPreferred Stock convertible into 4,983,416 shares of our common stock. All MPCCorporation Series B Preferred Stock to be issued to Gateway converts toMPC Corporation common stock upon shareholder approval of the Series BAutomatic Conversion Event. We believe it is probable that shareholder approvalwill be obtained.  In the eventshareholder approval is not obtained, all outstanding shares of Series BPreferred Stock shares are to be redeemed by us at 1.5 times the closing priceof our common stock on October 1, 2008 times the number of shares ofcommon stock into which the Series B Preferred Stock is thenconvertible.  Based on the closing priceof our common stock of $0.63 per share on December 31, 2007, theredemption value would be $4.7 million.

 

**OFF BALANCE SHEET TRANSACTIONS**

 

Wehave no off balance sheet transactions.

 

**GUARANTEES**

 

Duringour normal course of business, we have made certain indemnities, commitmentsand guarantees under which we may be required to make payments in relation tocertain transactions. These include (i) intellectual property indemnitiesto customers and licensees in connection with the use, sale and/or license ofour products, (ii) indemnities to lessors in connection with our facilityleases for certain claims arising from such facilities or leases, (iii) indemnitiesto vendors and service providers pertaining to claims based on our negligenceor willful misconduct, (iv) indemnities involving the accuracy ofrepresentations in certain contracts, and (v) guarantees to certainvendors and creditors for balances owed. The duration of these indemnities andcommitments in certain cases may be indefinite. The majority of theseindemnities and commitments do not provide for any limitation of the maximumpotential for future payments we could be obligated to make. We have notrecorded any liability for these indemnities and commitments in theaccompanying consolidated financial statements.

 

**NEW ACCOUNTINGPRONOUNCEMENTS**

 

***NewAccounting Standards***

 

InSeptember 2006, the FASB issued SFAS No. 157 *Fair Value Measurement*, which defines fairvalue, establishes a framework for measuring fair value under generallyaccepted accounting principles, and expands disclosure requirements about fairvalue measurements. SFAS 157 applies to other accounting pronouncements thatrequire or permit fair value measurements. The fair value measurement offinancial assets and financial liabilities is effective for us beginning infiscal year 2008.  Two FASB Staff Positions (“FSP”) on this Statementwere subsequently issued.  On February 12, 2007, FSP No. 157-2delayed the effective date of this Statement for non-financial assets and non-financialliabilities that are recognized or disclosed at fair value in the financialstatements on a nonrecurring basis. This FSP is effective for us in fiscalyear 2009. On February 14, 2007, FSP No. 157-1 excluded SFAS No. 13,“*Accounting for Leases,”*andother accounting pronouncements that address fair value measurements forpurposes of lease classification or measurement under SFAS No. 13*.*However, this scope exception does notapply to assets acquired and liabilities assumed in a business combination thatare required to be measured at fair value under SFAS Statement No. 141, *Business Combinations* or SFAS No. 141(R),*Business Combinations*,* *regardless of whether those assetsand liabilities are related to leases.  This FSP is effective uponour initial adoption of SFAS No. 157, which is at the beginning of ourfiscal year 2008. We do not expect SFAS No. 157 to have a material impacton our financial position or results of operations.

 

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assetsand Financial Liabilities - Including an Amendment of FASB Statement 115*.SFAS No. 159 permits companies to choose to measure certain financialinstruments and certain other items at fair value, which are not currentlyrequired to be measured at fair value. The standard requires that unrealizedgains and losses on items for which the fair value 

 

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option has been elected be reported in earningsat each subsequent reporting date. SFAS No. 159 is effective for usbeginning in the first quarter of fiscal year 2008, although earlier adoptionis permitted. We are currently evaluating the impact that SFAS No. 159will have on our consolidated financial statements.

 

In December, 2007, the FASB issued SFAS No. 141(Revised 2007), *Business Combinations*.SFAS No.  141R will significantly change the accounting for businesscombinations. Under SFAS No. 141R, an acquiring entity will berequired to recognize all the assets acquired and liabilities assumed in atransaction at the acquisition-date fair value with limited exceptions.SFAS No. 141R will change the accounting treatment for certainspecific items, including:

 
| · |   | Acquisition costs will be generally expensed  as incurred;                                                                                                                                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                     |
| · |   | Noncontrolling interests (formerly known as  “minority interests” — see SFAS No. 160 discussion below) will be valued  at fair value at the acquisition date;                                                        |
|   |   |                                                                                                                                                                                                                                     |
| · |   | Acquired contingent liabilities will be  recorded at fair value at the acquisition date and subsequently measured at  either the higher of such amount or the amount determined under existing  guidance for non-acquired contingencies; |
|   |   |                                                                                                                                                                                                                                     |
| · |   | In-process research and development will be  recorded at fair value as an indefinite-lived intangible asset at the  acquisition date;                                                                                                    |
|   |   |                                                                                                                                                                                                                                     |
| · |   | Restructuring costs associated with a business  combination will be generally expensed subsequent to the acquisition date;  and                                                                                                          |
|   |   |                                                                                                                                                                                                                                     |
| · |   | Changes in deferred tax asset valuation  allowances and income tax uncertainties after the acquisition date generally  will affect income tax expense.                                                                                   |

 

SFAS No. 141R also includes asubstantial number of new disclosure requirements.  The statement applies prospectively tobusiness combinations for which the acquisition date is on or after January 1,2009.

 

In December, 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in ConsolidatedFinancial Statements - An Amendment of ARB No. 51*. SFAS No. 160establishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160requires the recognition of a noncontrolling interest (minority interest) asequity in the consolidated financial statements and separate from the parent’sequity. The amount of net income attributable to the noncontrolling interestwill be included in consolidated net income on the face of the incomestatement. SFAS No. 160 clarifies that changes in a parent’s ownershipinterest in a subsidiary that do not result in deconsolidation are equitytransactions if the parent retains its controlling financial interest. Inaddition, SFAS No. 160 requires that a parent recognize a gain or loss innet income when a subsidiary is deconsolidated. Such gain or loss will bemeasured using the fair value of the noncontrolling equity investment on thedeconsolidation date.  The statement alsoincludes expanded disclosure requirements regarding the interests of the parentand its noncontrolling interest.   SFAS No. 160is effective for us during the first quarter of 2009.  We currently do not have noncontrollinginterests.

 

***RecentlyAdopted Accounting Standards***

 

In June 2006,the FASB issued FIN No. 48, *Accountingfor Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109*.FIN No. 48 clarifies the criteria for the measurement, recognition andderecognition of income taxes under FASB Statement No. 109, *Accounting for Income Taxes*. It alsorequires additional financial statement disclosures about uncertain taxpositions including classification, interest and penalties. We adopted FIN 48effective January 2007. Because we have not been profitable since ourinitial public offering, we have not realized any deferred tax assets. FIN No. 48did not have a material impact on our financial position or results ofoperations. If our tax status were to change in the future, we would have toreevaluate the impact of FIN No. 48 on our financial position and resultsof operations at that time.

 

**CRITICAL ACCOUNTING POLICES ANDUSE OF ESTIMATES**

 

We prepare our financial statements inconformity with accounting principles generally accepted in the United Statesof America (“GAAP”). The preparation of GAAP financial statements requirescertain estimates, assumptions, and judgments to be made that may affect ourconsolidated statement of financial position and results of operations.Critical accounting estimates are those that are most important and material toour financial condition and results of operations and require management’s mostdifficult, subjective, or complex judgments, often as a 

 

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result of the need to estimate matters that areinherently uncertain. We believe our most critical accounting policies andestimates relate to revenue recognition, including reserves needed for possiblefuture returns and discounts; the carrying value and usefulness of inventoryand related inventory reserves; the timing and amount of future warranty obligations;accounting for derivative financial instruments; and the impairment of acquiredintangible assets. We have discussed the development, selection, and disclosureof our critical accounting policies and use of estimates with the AuditCommittee of our Board of Directors. These critical accounting policies and ourother accounting policies are described in Note 2 of “Notes toConsolidated Financial Statements” included in “Item 7 — FinancialStatements.”

 

***RevenueRecognition***

 

We frequently enter into sales arrangements withcustomers that contain multiple elements or deliverables such as hardware,software, peripherals, and services. Judgments and estimates are critical toensure compliance with GAAP. These judgments relate to the allocation of theproceeds received from an arrangement to the multiple elements, thedetermination of whether any undelivered elements are essential to thefunctionality of the delivered elements, and the appropriate timing of revenuerecognition. We offer extended warranty and service contracts to customers thatextend and/or enhance the technical support, parts, and labor coverage offeredas part of the base warranty included with the product. Revenue from separatelypriced extended warranty and service contracts, for which we are obligated toperform, is recorded as deferred revenue and subsequently recognized over theterm of the contract. The amount recognized on a periodic basis within thisterm is based on management’s best estimate of how it will perform itsobligations in future periods.  This isbased on past historic trends and other factors likely to have a future impacton warranty claims.  The actual rate ofwarranty claims could differ materially from management’s estimates.

 

We record reductions in revenue in the currentperiod for estimated future product returns related to current period sales.Management analyzes historical returns, current trends, changes in customerdemand and acceptance of our products when evaluating the adequacy of the salesreturns allowances in any accounting period. If actual returns exceed estimatedreturns, we would be required to record additional reductions to revenue whichwould affect earnings in the period the adjustments are made.

 

***InventoryValuation***

 

We operate in a business environment subject torapid changes in technology and customer demand. We record write-downs forcomponents and products which have become obsolete or are in excess ofanticipated demand or net realizable value. Historically, these write-downshave primarily related to warranty inventory. We perform an assessment ofinventory each quarter, which includes a review of, among other factors,inventory on hand and forecast requirements, product life cycle (including endof life product) and development plans, component cost trends, product pricingand quality issues. Based on this analysis, we record an adjustment for excessand obsolete inventory. We may be required to record additional write-downs ifactual demand, component costs or product life cycles differ from estimates,which would affect earnings in the period the write-downs are made.

 

***Warranty Liabilities***

 

We record warranty liabilities at the time ofsale for the estimated costs that may be incurred under our standard limitedwarranty. The specific warranty terms and conditions vary depending upon theproduct sold but generally include technical support, parts, and labor over aperiod ranging from 90 days to three years. Factors that affect ourwarranty liability include the number of installed units currently underwarranty, historical and anticipated rates of warranty claims on those units,and the average cost of claims on our installed base to satisfy our warrantyobligation. The anticipated rate of warranty claims is the primary factorimpacting our estimated warranty obligation. The other factors are lesssignificant due to the fact that the average remaining aggregate warrantyperiod of the covered installed base is approximately 12 months, repair partsare generally already in stock or available at pre-determined prices, and laborrates which are fairly predictable and historically have not fluctuatedsignificantly from period to period.  Warranty claims are relatively predictable based on historicalexperience of failure rates. If actual results differ from our estimates, werevise our estimated warranty liabilities to reflect such changes. Eachquarter, we reevaluate our estimates to assess the adequacy of the recordedwarranty liabilities and adjust the amounts as necessary.

 

42

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***DerivativeFinancial Instruments***

 

The accounting for convertible debt withderivative features is highly complex, subject to a number of accountingpronouncements and subject to broad interpretations.  Determination of the treatment of theseconvertible debt instruments is based on current interpretation of the facts,treatment by other companies and discussion with industry experts.  Management is also required to make highlysubjective estimates of future share price volatility, the probability offuture events and effective discount rates. Changes in the fair value of our derivative financial instruments havehad a material impact in our results of operations.  Among other factors, the fair value of ourderivative financial instruments is affected by the market value of our commonstock.  Increases in the market price ofour common stock will adversely impact our financial results.   Declines in the market value of our commonstock will have a positive impact.  Thechanges in the fair value of these derivatives have no impact on our cashflows.

 

***Valuation of AcquiredIntangible Assets***

 

The estimates used by management indetermining the impairment of acquired intangible assets is a criticalaccounting estimate susceptible to change from period to period. It requiresmanagement to make assumptions about future cash flows over future years andutilize an estimated discount rate. Management’s assumptions about future cash flows involve significantjudgment because actual operating levels have fluctuated in the past and maycontinue to do so in the future and economic conditions may change.  Also, the adoption of any new strategic planinherently involves uncertainty.  Asignificant adverse change in our business could result in a future impairmentof the value of our acquired intangible assets.

 

***BusinessCombinations***

 

We account for business combinations underthe purchase accounting method. The cost of an acquired company is assigned tothe tangible and intangible assets purchased and the liabilities assumed on thebasis of their fair values at the date of acquisition. The determination offair values of assets and liabilities acquired requires us to make estimatesand use valuation techniques when market value is not readily available. Anyexcess of purchase price over the fair value of the tangible and net intangibleassets acquired is allocated to goodwill.

 

**ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We are subject to interest rate risk on ourWells Fargo Receivable Assignment Facility. The interest rate is a floating rate based on the prime rate plus0.75%.  If interest rates were to rise wewill be subject to higher interest payments if outstanding balances remainunchanged.

 

Currently most sales are in the United States.All of our foreign sales and purchases of product are denominated in U.S.dollars minimizing its foreign currency risk. All of our internationalsuppliers, mostly from Asia, denominate contracts in US dollars therebyeliminating foreign currency risk. In the future we may not be successful innegotiating most of our international supply agreements in U.S. dollars therebyincreasing our foreign currency risk. Amounts we pay for components frominternational suppliers could be affected by a continued weakening of the U.S.dollar as compared with other foreign currencies. We currently have no foreignexchange contracts, option contracts or other foreign currency hedgingarrangements. Management continues to evaluate the Company’s risk position onan ongoing basis to determine whether foreign exchange hedging strategies mayneed to be employed.

 

43

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**ITEM8. FINANCIAL STATEMENTS**

 
| ** **                                                                                  | ** ** | **Page**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|
| **INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**                                              | ** ** | ** ** | ** ** |
|                                                                                        |       |       |       |
| Report  of Independent Registered Public Accounting Firm                                    |       | 45         |       |
|                                                                                        |       |       |       |
| Consolidated  Balance Sheets as of December 31, 2007 and 2006.                         |       | 46         |       |
|                                                                                        |       |       |       |
| Consolidated Statements of Operations for the Years  Ended December 31, 2007 and 2006. |       | 47         |       |
|                                                                                        |       |       |       |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2007 and 2006. |       | 48         |       |
|                                                                                        |       |       |       |
| Consolidated Statements of Shareholders’ Equity  (Deficit)                             |       | 49         |       |
|                                                                                        |       |       |       |
| Notes to  Consolidated Financial Statements                                                 |       | 49         |       |

 

44

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors andStockholders of MPC Corporation

 

We have audited the accompanyingconsolidated balance sheets of MPC Corporation, and subsidiaries as of December 31,2007 and 2006, and the related consolidated statements of operations, cashflows and stockholders’ equity (deficit) for each of the two years in theperiod ended December 31, 2007. The Company’s management is responsible forthese consolidated financial statements. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement. The Company is not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting.Our audit included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

As discussed in Note 2 to theconsolidated financial statements, in 2006 the Company adopted Statement ofFinancial Accounting Standard No. 123 (revised 2004), *Share-BasedPayment*, effective January 1, 2006. As discussed in Note 9 tothe consolidated financial statements, in 2006 the Company adopted Statement ofFinancial Accounting Standard Staff Position 00-19-2, *Accountingfor Registration Payment Arrangements*, effective October 1,2006. As discussed in Note 2 to the consolidated financial statements, in2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48,*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No.109*.

 

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of MPC Corporation and subsidiaries as of December 31,2007 and 2006, and the results of their operations and cash flows for each ofthe two years in the period ended December 31, 2007 in conformity withaccounting principles generally accepted in the United States of America.

 

Ehrhardt Keefe Steiner &Hottman PC

 

Denver, CO

April 12, 2008

 

45

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**MPC CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

***(In thousands except share data)***

 
| ** **                                                                                                                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                         | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ASSETS                                                                                                                                             |       |                  |       |   |   |
| Current Assets                                                                                                                                     |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                          |       | $                     | 9,009      |   | $ | 4,839 |   |
| Restricted cash                                                                                                                                    |       | 9,852                 |       | 4,585 |   |
| Accounts receivable, net                                                                                                                           |       | 86,056                |       | 45,643 |   |
| Inventories, net                                                                                                                                   |       | 62,050                |       | 18,189 |   |
| Prepaid maintenance and warranty costs                                                                                                             |       | 10,699                |       | 6,391 |   |
| Other current assets                                                                                                                               |       | 1,146                 |       | 935 |   |
| Total Current Assets                                                                                                                               |       | 178,812               |       | 80,582 |   |
|                                                                                                                                               |       |                  |       |   |   |
| Non-Current Assets                                                                                                                                 |       |                  |       |   |   |
| Property and equipment, net                                                                                                                        |       | 10,697                |       | 4,914 |   |
| Goodwill                                                                                                                                           |       | 45,255                |       | 22,197 |   |
| Acquired intangibles, net                                                                                                                          |       | 28,455                |       | 10,108 |   |
| Long-term portion of prepaid maintenance and warranty costs                                                                                        |       | 1,388                 |       | 844 |   |
| Other assets                                                                                                                                       |       | 1,668                 |       | 3,792 |   |
| Total Non-Current Assets                                                                                                                           |       | 87,463                |       | 41,855 |   |
| TOTAL ASSETS                                                                                                                                       |       | $                     | 266,275    |   | $ | 122,437 |   |
|                                                                                                                                               |       |                  |       |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                          |       |                  |       |   |   |
| Current Liabilities                                                                                                                                |       |                  |       |   |   |
| Accounts payable                                                                                                                                   |       | $                     | 61,079     |   | $ | 32,536 |   |
| Accrued expenses                                                                                                                                   |       | 26,928                |       | 4,354 |   |
| Accrued licenses and royalties                                                                                                                     |       | 5,084                 |       | 1,540 |   |
| Current portion of accrued warranties                                                                                                              |       | 24,700                |       | 2,220 |   |
| Current portion of deferred revenue                                                                                                                |       | 33,357                |       | 15,607 |   |
| Notes payable and debt                                                                                                                             |       | 64,249                |       | 34,834 |   |
| Derivative financial instruments at estimated fair value                                                                                           |       | 1,590                 |       | — |   |
| Total Current Liabilities                                                                                                                          |       | 216,987               |       | 91,091 |   |
|                                                                                                                                               |       |                  |       |   |   |
| Long Term Liabilities                                                                                                                              |       |                  |       |   |   |
| Non-current portion of accrued warranties                                                                                                          |       | 16,491                |       | 2,127 |   |
| Non-current portion of deferred revenue                                                                                                            |       | 25,848                |       | 22,979 |   |
| Derivative warrant liability                                                                                                                       |       | 634                   |       | 6,129 |   |
| Derivative financial instruments at estimated fair value                                                                                           |       | —                |       | 21,234 |   |
| Total Long Term Liabilities                                                                                                                        |       | 42,973                |       | 52,469 |   |
| TOTAL LIABILITIES                                                                                                                                  |       | 259,960               |       | 143,560 |   |
|                                                                                                                                               |       |                  |       |   |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                      |       |                  |       |   |   |
|                                                                                                                                               |       |                  |       |   |   |
| PREFERRED STOCK, Series B, 260,000 shares authorized, 249,171  issued and outstanding                                                         |       | 6,308                 |       | — |   |
|                                                                                                                                               |       |                  |       |   |   |
| SHAREHOLDERS’ EQUITY                                                                                                                          |       |                  |       |   |   |
| Preferred Stock, no par value; 100,000 shares authorized; no shares  issued and outstanding at 2007 and 2006                                       |       | —                |       | — |   |
| Preferred Stock, Series A, 640,000 shares authorized; 626,546  issued and outstanding                                                         |       | 9,008                 |       | — |   |
| Common Stock, no par value, 100,000,000 shares authorized; 33,948,489  and 12,147,438 shares issued and outstanding at 2007 and 2006, respectively |       | 85,029                |       | 61,454 |   |
| Accumulated Deficit                                                                                                                                |       | (94,030               | )          | (82,577 | ) |
| Total Shareholders’ Equity (Deficit)                                                                                                          |       | 7                     |       | (21,123 | ) |
| TOTAL LIABILITIES AND EQUITY                                                                                                                       |       | $                     | 266,275    |   | $ | 122,437 |   |

 

*The accompanying notes are an integral part of theconsolidated financial statements.*

 

46

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**MPC CORPORATION**

**CONSOLIDATED STATEMENTSOF OPERATIONS**

***(In thousands except share data)***

* *
| ** **                                                              | ** ** | **Years Ended**  | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **December 31,** | ** ** |
| ** **                                                              | ** ** | **2007 (1)**          | ** ** | **2006** | ** ** |
|                                                                    |       |                  |       |   |   |
| Revenue                                                                 |       | $                     | 364,972    |   | $ | 284,971 |   |
|                                                                    |       |                  |       |   |   |
| Cost of revenue                                                         |       | 316,935               |       | 256,074 |   |
|                                                                    |       |                  |       |   |   |
| Gross margin                                                            |       | 48,037                |       | 28,897 |   |
|                                                                    |       |                  |       |   |   |
| Operating expenses                                                      |       |                  |       |   |   |
| Research and development expense                                        |       | 2,462                 |       | 3,432 |   |
| Selling, general and administrative expense                             |       | 55,259                |       | 40,336 |   |
| Depreciation and amortization                                           |       | 4,615                 |       | 4,688 |   |
| Impairment of acquired intangibles                                      |       | —                |       | 19,484 |   |
| Total operating expenses                                                |       | 62,336                |       | 67,940 |   |
|                                                                    |       |                  |       |   |   |
| Operating loss                                                          |       | (14,299               | )          | (39,043 | ) |
|                                                                    |       |                  |       |   |   |
| Other (income) expense                                                  |       |                  |       |   |   |
| Interest expense, net                                                   |       | 5,584                 |       | 5,259 |   |
| Gain on vendor settlements                                              |       | (479                  | )          | (2,231 | ) |
| Change in estimated fair value of derivative financial instruments      |       | (7,899                | )          | 4,284 |   |
| Loss (gain) on debt extinguishment                                      |       | (52                   | )          | 10,511 |   |
| Merger related stock compensation expense                               |       | —                |       | 1,261 |   |
| Total other (income) expense, net                                       |       | (2,846                | )          | 19,084 |   |
|                                                                    |       |                  |       |   |   |
| Net loss, before cumulative effect of a change in accounting  principle |       | (11,453               | )          | (58,127 | ) |
|                                                                    |       |                  |       |   |   |
| Cumulative effect of a change in accounting principle - loss            |       | —                |       | 589 |   |
|                                                                    |       |                  |       |   |   |
| Net loss                                                                |       | $                     | (11,453    | ) | $ | (58,716 | ) |
|                                                                    |       |                  |       |   |   |
| Loss per common share:                                                  |       |                  |       |   |   |
| Basic                                                                   |       | $                     | (0.64      | ) | $ | (4.93 | ) |
| Diluted                                                                 |       | $                     | (0.64      | ) | $ | (4.93 | ) |
|                                                                    |       |                  |       |   |   |
| Common shares used to compute loss per share:                           |       |                  |       |   |   |
| Basic                                                                   |       | 17,842                |       | 11,913 |   |
| Diluted                                                                 |       | 17,842                |       | 11,913 |   |

 

----

| (1) |   | The results of the Gateway Professional Business  have been consolidated effective October 1, 2007, the date the  acquisition by MPC Corporation became effective, and therefore the results of  the Professional Business are not included for periods prior to  October 1, 2007. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*The accompanying notes are an integral part of theconsolidated financial statements.*

 

47

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** **

**MPC CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

***(Inthousands)***

 
| ** **                                                                  | ** ** | **Year Ended**  | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                  | ** ** | **December 31** | ** ** |
| ** **                                                                  | ** ** | **2007 (1)**         | ** ** | **2006** | ** ** |
| OPERATING ACTIVITIES                                                        |       |                 |       |   |   |
| Net loss                                                                    |       | $                    | (11,453    | ) | $ | (58,716 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities |       |                 |       |   |   |
| Depreciation                                                                |       | 3,479                |       | 2,942 |   |
| Amortization of acquired intangibles                                        |       | 3,153                |       | 3,426 |   |
| Impairment on intangibles                                                   |       | —               |       | 19,484 |   |
| Amortization of deferred loan costs                                         |       | 572                  |       | 711 |   |
| Change in estimated fair value of derivative financial instruments          |       | (7,899               | )          | 4,284 |   |
| Loss on debt extinguishment                                                 |       | —               |       | 10,511 |   |
| Stock compensation on vesting of RSU’s                                 |       | 595                  |       | 578 |   |
| Cumulative effect of change in accounting principle                         |       | —               |       | 589 |   |
| Merger related stock compensation expense                                   |       | —               |       | 1,261 |   |
| Valuation of warrant exchange                                               |       | —               |       | 767 |   |
| Gain on vendor settlements                                                  |       | (479                 | )          | (2,231 | ) |
| Provision for bad debt                                                      |       | 1,489                |       | (30 | ) |
| Other                                                                       |       | 157                  |       | 194 |   |
| Changes in assets and liabilities                                           |       |                 |       |   |   |
| Accounts receivable                                                         |       | (37,863              | )          | (4,689 | ) |
| Inventory                                                                   |       | (18,422              | )          | 2,885 |   |
| Prepaid maintenance & warranties                                   |       | (4,852               | )          | 11,495 |   |
| Other current assets                                                        |       | (209                 | )          | 366 |   |
| Other non-current assets                                                    |       | 564                  |       | (1,369 | ) |
| Accounts payable and accrued liabilities                                    |       | 49,433               |       | (9,225 | ) |
| Accrued licenses and royalties                                              |       | 3,678                |       | (66 | ) |
| Accrued warranties                                                          |       | (2,283               | )          | (427 | ) |
| Deferred revenue                                                            |       | 1,588                |       | (5,023 | ) |
| Net cash used in operating activities                                       |       | (18,752              | )          | (22,283 | ) |
|                                                                        |       |                 |       |   |   |
| INVESTING ACTIVITIES                                                        |       |                 |       |   |   |
| Purchase of property and equipment                                          |       | (1,316               | )          | (97 | ) |
| Proceeds from the sale of fixed assets                                      |       | —               |       | 17 |   |
| Acquisition costs of the Professional Business                              |       | (1,240               | )          | — |   |
| Net cash used in investing activities                                       |       | (2,556               | )          | (80 | ) |
|                                                                        |       |                 |       |   |   |
| FINANCING ACTIVITIES                                                        |       |                 |       |   |   |
| Net proceeds from sale of debentures                                        |       | —               |       | 13,757 |   |
| Net activity under financing facility                                       |       | 25,070               |       | 34,239 |   |
| Net activity and extinguishment of line of credit                           |       | —               |       | (22,641 | ) |
| Restricted cash related to letters of credit and financing facility         |       | (5,266               | )          | (4,585 | ) |
| Payment of note payable                                                     |       | (2,659               | )          | (253 | ) |
| Payments on capital leases                                                  |       | —               |       | (188 | ) |
| Net proceeds from the exercise of stock options                             |       | 34                   |       | 27 |   |
| Net proceeds from the exercise of warrants                                  |       | 8,299                |       | 3,104 |   |
| Payment of stock issuance costs                                             |       | —               |       | (155 | ) |
| Net cash provided by financing activities                                   |       | 25,478               |       | 23,305 |   |
|                                                                        |       |                 |       |   |   |
| Net cash increase for period                                                |       | 4,170                |       | 942 |   |
|                                                                        |       |                 |       |   |   |
| Cash at beginning of period                                                 |       | 4,839                |       | 3,897 |   |
|                                                                        |       |                 |       |   |   |
| Cash at end of period                                                       |       | $                    | 9,009      |   | $ | 4,839 |   |

 

----

| (1) |   | The results of the Gateway Professional Business  have been consolidated effective October 1, 2007, the date the  acquisition by MPC Corporation became effective, and therefore the results of  the Professional Business are not included for periods prior to  October 1, 2007. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

48

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**MPC CORPORATION**

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY (DEFICIT)**

**FORTHE YEARS ENDED DECEMBER 31, 2007, AND 2006**

***(Inthousands)***

 
| ** **                                                                 | ** ** | ** **                       | ** ** | ** **            | ** ** | ** **      | ** ** | ** **             | ** ** | ** **  | ** ** | **Total**            | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|-----------------|------------|------------------------|------------|-------------|------------|----------------------|------------|
| ** **                                                                 | ** ** | **Preferred Series A** | ** ** | **Common Stock** | ** ** | **Accumulated** | ** ** | **Shareholders’** | ** ** |
| ** **                                                                 | ** ** | **Shares**                       | ** ** | **Amount**            | ** ** | **Shares**      | ** ** | **Amount**             | ** ** | **Deficit** | ** ** | **Equity (Deficit)** | ** ** |
| **Balance  - December 31, 2005**                                      |       |                             |       |                  |       | 10,860          |       | $                      | 51,305     |        | $          | (23,861              | )          | $ | 27,444 |   |
| Common stock issued for  exercise of stock options                         |       |                             |       |                  |       | 9               |       | 27                     |       |        |       | 27                   |       |
| Common stock issued for  exercise of warrants                              |       |                             |       |                  |       | 2               |       | 8                      |       |        |       | 8                    |       |
| Common stock issued for  conversion of notes and interest                  |       |                             |       |                  |       | 124             |       | 384                    |       |        |       | 384                  |       |
| Common stock issued in  warrant exchange                                   |       |                             |       |                  |       | 1,031           |       | 2,943                  |       |        |       | 2,943                |       |
| Issuance of warrants in  connection with warrant exchange                  |       |                             |       |                  |       |            |       | 767                    |       |        |       | 767                  |       |
| Restricted stock units  converted to common shares                         |       |                             |       |                  |       | 96              |       | 252                    |       |        |       | 252                  |       |
| Issuance of warrants on  bridge loan                                       |       |                             |       |                  |       |            |       | 834                    |       |        |       | 834                  |       |
| Issuance of advisory  warrants                                             |       |                             |       |                  |       |            |       | 136                    |       |        |       | 136                  |       |
| Common stock issued in  settlement                                         |       |                             |       |                  |       | 25              |       | 29                     |       |        |       | 29                   |       |
| Stock compensation  expense for restricted stock units                     |       |                             |       |                  |       |            |       | 1,569                  |       |        |       | 1,569                |       |
| Issuance of warrants  for private placement fees                           |       |                             |       |                  |       |            |       | 1,300                  |       |        |       | 1,300                |       |
| Warrants reclassified  from liability to equity                            |       |                             |       |                  |       |            |       | 1,900                  |       |        |       | 1,900                |       |
| Net loss                                                                   |       |                             |       |                  |       |            |       |                   |       | (58,716     | )          | (58,716              | )          |
| **Balance  - December 31, 2006**                                      |       |                             |       |                  |       | 12,147          |       | 61,454                 |       | (82,577     | )          | (21,123              | )          |
| Common stock issued in  acquisition                                        |       |                             |       |                  |       | 5,602           |       | 7,091                  |       |        |       | 7,091                |       |
| Common stock issued for  exercise of stock options                         |       |                             |       |                  |       | 22              |       | 31                     |       |        |       | 31                   |       |
| Common and preferred  stock issued for exercise of warrants                |       | 55                               |       | $                     | 1,639      |            | 6,454      |                   | 9,690      |        |       |                 | 11,329     |   |
| Common and preferred  stock issued for convertible debentures and interest |       | 572                              |       | 7,369                 |       | 8,660           |       | 6,168                  |       |        |       | 13,537               |       |
| Restricted stock units  converted to common shares                         |       |                             |       |                  |       | 1,063           |       |                   |       |        |       | —               |       |
| Stock compensation  expense for restricted stock units                     |       |                             |       |                  |       |            |       | 595                    |       |        |       | 595                  |       |
| Net loss                                                                   |       |                             |       |                  |       |            |       |                   |       | (11,453     | )          | (11,453              | )          |
| **Balance  - December 31, 2007**                                      |       | 627                              |       | $                     | 9,008      |            | 33,948     |                   | $          | 85,029      |       | $                    | (94,030    | ) | $ | 7 |   |

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

**MPC CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

*Theterms “we” “us” and “our” or the “company” as used in this annual report referon a consolidated basis to MPC Corporation and to its wholly-ownedsubsidiaries, including MPC Computers, LLC, (“MPC Computers”) which we acquiredthrough a merger in July of 2005 and MPC-Pro, LLC (“MPC-Pro”) whichacquired the Professional Business from Gateway Inc. on October 1, 2007.*

 

**NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OFPRESENTATION**

 

Wewere formed as HyperSpace Communications, Inc. as a Colorado-basedcompany, and completed an initial public offering in October 2004. In July 2005,we acquired MPC Computers, LLC, or MPC Computers, which became a wholly-ownedsubsidiary and our primary business. MPC Computers is an enterprise IT hardwarebusiness providing products and services to customers in mid-sized businesses,government agencies and education organizations. In January 2007, wechanged our name to MPC Corporation. On October 1, 2007, MPC Corporation,through our wholly-owned subsidiary MPC-Pro, purchased from Gateway Inc. (“Gateway”)and Gateway Technologies Inc., Gateway’s Professional Division, the portion ofGateway’s Consumer Direct Division that markets business-related products, anda portion of the Customer Care & Support department that providestechnical services to customers of the Professional and Consumer DirectDivisions (collectively, the “Professional Business”). The ProfessionalBusiness is primarily engaged in the sale, resale and marketing of desktopcomputer systems, laptops, servers, networking gear and other peripherals, andreplacement parts to educational institutions, government entities (federal,state and local), value-added resellers and certain other resellers, and smallbusiness sales generated by Gateway’s Internet website and phone centers. Thepurchase has substantially increased the size of our business. The acquisitionof the Professional Business is more fully described in Note 3 “Acquisition ofGateway Professional Business.”

 

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Our primary business is providing PC-based products and services tomid-sized businesses, government agencies and education organizations. Wemanufacture and market ClientPro® desktop PCs, TransPort® notebook PCs,NetFRAME® servers and DataFRAMETM storage products. In addition we manufactureand market the “E-series” of desktops, notebooks, servers and storage productsunder a one-year limited license agreement with Gateway.  We also provide hardware-related supportservices such as installation, technical support, parts replacement, andrecycling. In addition to PCs, servers, and storage products, we also fulfillour customers’ requirements for third party products produced by other vendorsincluding printers, monitors and software.

 

We serve the federal government, state/local government &education (“SLE”), and mid-size enterprise markets. This focus enables us totailor our operating model to better support the needs of our customers forcustomized products, services and programs. We sell directly to our customersand use a build-to-order manufacturing process that we believe is an efficientmeans to provide customized computing solutions.

 

The accompanying consolidated financial statements consolidate theaccounts of MPC Corporation and its wholly owned subsidiaries.  Allintercompany accounts and transactions have been eliminated inconsolidation.  References to a fiscal year refer to the calendar year inwhich such fiscal year commences. The fiscal year of MPC Computers ends on theSaturday closest to December 31. The floating fiscal year-end typicallyresults in a 52-week fiscal year, but will occasionally give rise to anadditional week resulting in a 53-week fiscal year.

 

**2.    SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

***Use of Estimates***

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent 

assetsand liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting period. Actual resultscould differ from those estimates.  On anongoing basis, we review our estimates based on information that is currentlyavailable.   Changes in facts andcircumstances may cause us to revise our estimates.

 

***Cash and Cash Equivalents***

 

Cashequivalents consist of short-term investments that have a maturity of threemonths or less at the date of purchase. We had no cash equivalents at December 31, 2007 and 2006.

 

***Restricted cash***

 

Restricted cash at December 31, 2007 and 2006 includes $3.5million and $1.5 million respectively held as collateral under our receivablesfinancing facility, and $6.3 million and $3.1 million respectively held ascollateral for outstanding letters of credit.

 

***Accounts Receivable***

 

Accounts receivable are recorded at the invoiced amount and do not bearinterest.  We maintain an allowance fordoubtful accounts at an amount estimated to be sufficient to provide adequatereserve against losses resulting from collecting less than full payment onreceivables. Overdue accounts are reviewed, and an additional allowance isrecorded when determined necessary to state receivables at an estimatedrealizable value. In judging the adequacy of the allowance for doubtfulaccounts, we consider multiple factors including historical bad debtexperience, the general economic environment, the aging of our receivables, andthe financial condition of the customer. A considerable amount of judgment is required when assessing therealization of receivables, including assessing the probability of collectionand the current creditworthiness of each customer. The allowance for doubtfulaccounts totaled $2.7 million and $1.8 million respectively, as of December 31,2007 and 2006.

 

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***Inventory***

 

Inventoryis stated at the lower of cost or market, with cost determined on an averagecost basis approximating first in first out (FIFO). We regularly evaluate therealizability of our inventory based on a combination of factors including thefollowing: historical usage rates, forecasted sales or usage, estimated serviceperiod, product end-of-life dates, estimated current and future market values,service inventory requirements and new product introductions, as well as otherfactors. If circumstances related to our inventories change, estimates of therealizability of inventory could materially change. At December 31, 2007and 2006, our inventory valuation allowance totaled $12.3 million and $5.2million and was recorded as a reduction of inventory in the consolidatedbalance sheets. Inventory balances, net of valuation allowances, at December 31,2007 and 2006 are:

 

*(In thousands)*

 
| ** **       | ** ** | **December 31,** | ** ** |
|------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2007**              | ** ** | **2006** | ** ** |
|             |       |                  |       |   |   |
| Raw  Materials   |       | $                     | 46,569     |   | $ | 16,092 |   |
| Work in  Process |       | 100                   |       | 236 |   |
| Finished  Goods  |       | 15,381                |       | 1,861 |   |
|             |       |                  |       |   |   |
| Total  Inventory |       | $                     | 62,050     |   | $ | 18,189 |   |

 

***Prepaid Maintenance and Warranty Costs***

 

Prepaidmaintenance and warranty costs include amounts paid to third party softwarevendors, outsourced providers of warranty fulfillment services and technologyinsurance vendors for which the related revenue has been deferred. These costsare recognized ratably with the related revenue.

 

***Business Combinations***

 

We account for businesscombinations under the purchase accounting method. The cost of an acquiredcompany is assigned to the tangible and intangible assets purchased and theliabilities assumed on the basis of their fair values at the date ofacquisition. The determination of fair values of assets and liabilitiesacquired requires us to make estimates and use valuation techniques when marketvalue is not readily available. Any excess of purchase price over the fair valueof the tangible and net intangible assets acquired is allocated to goodwill.

 

***Goodwill***

 

Goodwillrepresents the excess of the purchase consideration over the fair value ofassets acquired less liabilities assumed in a business acquisition. Ouracquisitions of MPC Computers and the Professional Business gave rise togoodwill. We account for goodwill in accordance with Statement of AccountingStandards (“SFAS”) 142, *Goodwill and OtherIntangible Assets*. SFAS 142 requires that goodwill no longer beamortized and that goodwill be tested annually for impairment or morefrequently if events and circumstances warrant. We conduct goodwill impairmenttests annually every October 31 or more frequently if facts andcircumstances indicate such assets may be impaired.  We completed our annual assessment inaccordance with SFAS 142 in 2007 and 2006 and determined that there was noimpairment.

 

***Acquired Intangibles, net***

 

Otherintangible assets are accounted for in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets,* which requires that intangible assets withestimable useful lives be amortized over their estimated useful lives, and bereviewed for impairment when changes in circumstances indicate that theircarrying amounts are in excess of their estimated fair value. Acquiredintangibles are amortized principally using accelerated methods over theirestimated useful lives ranging from 1 to 10 years.

 

***Long-Lived Assets***

 

Equipmentand software are stated at cost. Depreciation is computed using thestraight-line method over the estimated useful lives, primarily three to fiveyears. Additions, improvements and major renewals are capitalized.

 

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Maintenance,repairs and minor renewals are expensed as incurred. Leasehold improvements areamortized over the shorter of the estimated useful life of the asset or thelease term. Equipment held for lease is depreciated over the initial term ofthe lease to the equipment’s estimated residual value.

 

We assess the recoverability of ourlong-lived assets whenever adverse events or changes in circumstances orbusiness climate indicate that expected undiscounted future cash flows relatedto such long-lived assets may not be sufficient to support the net book valueof such assets. If undiscounted cash flows are not sufficient to support therecorded assets, impairment is recognized to reduce the carrying value of thelong-lived assets to their estimated fair value. Cash flow projections aresubject to a degree of uncertainty and are based on management’s estimate offuture performance. Additionally, in conjunction with the review forimpairment, the remaining estimated lives of certain of our long-lived assetsare assessed.

 

***Deferred Revenue***

 

Deferredrevenue includes amounts billed to or received from customers for which revenuehas not been recognized. Deferred revenue results from the sale of enhanced andextended warranties, which are deferred and recognized as the related servicesare provided, which generally range from 3-5 years. Enhanced warrantiesrun concurrent with our standard warranties. Our enhanced/extended warranties are deferred based on guidance providedin Technical Bulletin 90-1, *Accounting forSeparately Priced Extended Warranty and Product Maintenance Contracts*,and are valued based on the list price, net of discounts offered to thecustomer.  Deferred revenue also includesdeferred software maintenance revenues for which we are the primary obligorthat are recognized over the term of the contract, which is generally one year.

 

***Accrued Warranties***

 

Werecord warranty liabilities at the time of sale for the estimated costs thatmay be incurred under its standard limited warranty. The specificwarranty terms and conditions vary depending upon the product sold, butgenerally include technical support, repair parts, labor over a period rangingfrom 90 days to five years. Factors that affect the warranty liabilityinclude the number of installed units currently under warranty, historical andanticipated rates of warranty claims on those units, and cost per claim tosatisfy warranty obligations. We regularly evaluate our estimate to assess theadequacy of our recorded warranty liabilities and adjust the amounts asnecessary. If circumstances change, or a dramatic change in the failure rateswere to occur, the estimate of the warranty accrual could change significantly.

 

***Concentrations***

 

Aconcentration of credit risk may exist with respect to trade receivables,particularly customers within the U.S. Federal Government. We perform ongoingcredit evaluations on a significant number of our customers and collateral fromour customers is generally not required. Seven customers accounted forapproximately 23% of trade receivables as of December 31, 2007 and wereeither agencies of, or resellers to, the federal government.

 

Aconcentration of risk may exist with respect to our suppliers. We purchasecertain products from single sources. In some cases, alternative sources ofsupply are not available. In other instances, we have established a procurementrelationship with a single source if we determine that it makes business sense.In both of these situations, if the supply by a critical single-source supplierwere interrupted or suspended, our ability to ship products in a timely mannerwill be adversely affected. In cases where alternative suppliers are available,the establishment and procurement from these alternative suppliers will resultin delays and losses of sales, which will have an adverse effect on ouroperating results.

 

***Revenue Recognition***

 

****We recognize revenue on hardware and peripherals, net of an allowancefor estimated returns, when persuasive evidence of an arrangement exists,delivery has occurred, the sales price is fixed and determinable, andcollectability is reasonably assured. Delivery is not considered to haveoccurred until both title and risk of loss transfer to the customer, providedthat no significant obligations remain. For FOB destination agreements, which include all sales to the federalgovernment and some sales to state, local and education customers, we defer thecost of product****

**** ****

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**** ****

****revenue for in-transit shipments until the goods are delivered assumingall other revenue recognition criteria have been met.  In-transit product shipments to customers areincluded in inventory.****

 

****Net revenue includes sales of hardware, software and peripherals, andservices (including extended service contracts and professional services).These products and services are sold either separately or as part of amultiple-element arrangement. We allocate revenue from multiple-elementarrangements to the elements based on the relative fair value of each element,which is generally based on the sales price of each element when soldseparately. The allocation of fair value for a multiple-element softwarearrangement is based on vendor specific objective evidence (“VSOE”).****Revenue associated with undelivered elementsis deferred and recorded when delivery occurs. The value of maintenance services on software sales is determined basedon stated renewal rates and a comparison of the stated price of maintenance tosoftware sold in a related transaction. To the extent we do not have VSOE from separate post contract supportsales, we defer the software and the maintenance over the term of theagreement.  Service revenue from softwaremaintenance and support are recognized ratably over the maintenance term, whichin most cases is one year. Term licenses are recognized ratably over the termof the related arrangement.

 

Revenue from extended warranty and service contracts, for which we areobligated to perform, is recorded as deferred revenue and subsequentlyrecognized over the term of the contract or when the service is completed. Inmultiple element arrangements that include extended warranty and servicecontracts, we use the separation guidance provisions of Technical Bulletin 90-1*Accounting for Separately Priced ExtendedWarranty and Product Maintenance Contracts*to determine fair value*. *Revenuefrom sales of third-party extended warranty and service contracts for which weare not obligated to perform is recognized on a net basis at the time of sale.

 

We recorded revenue net of sales taxes.  Such taxes are considered current liabilitiesand included accrued expenses until paid.

 

***ShippingCosts***

 

Shipping and handling costs are included in costof revenue in the accompanying consolidated statements ofoperations for all periods presented.

 

***Royalties***

 

We have royalty-bearing license agreementsallowing us to sell certain hardware and software products and to use certainpatented technology. Royalty costs are accrued and included in cost of revenuewhen the related revenue is recognized or amortized over the period of benefitwhen the license terms are not specifically related to units shipped.

 

***Research******and Development Costs***

 

Research and development costs are expensedas incurred, in accordance with SFAS No. 2, *Accounting for Research and Development Costs.*Research, development, and engineering expenses primarily include payroll andheadcount related costs, contractor fees, infrastructure costs, andadministrative expenses directly related to research and development support.

 

***Income Taxes***

 

We recognize deferred tax assets andliabilities based on the differences between the tax basis of assets andliabilities and their reported amounts in the financial statements that willresult in taxable or deductible amounts in future years. Deferred tax assetsare reduced by a valuation allowance when it is more likely than not that someportion or all of the deferred tax assets will not be realized. We make noprovision for income taxes because, since inception, we have not beenprofitable. We have a net operating loss carry forward available to offsetfuture federal and state income taxes.

 

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***Stock Based Compensation – Stock Options***

 

During the first quarter of fiscal 2006, weadopted the provisions of and accounted for stock-based compensation inaccordance with the SFAS 123R *Share-Based Payments,*which replaced SFAS 123 and supersedes APB 25. Under the fair value recognitionprovisions of this statement, stock-based compensation cost is measured at thegrant date based on the fair value of the award and is recognized as expense ona straight-line basis over the requisite service period, which is the vestingperiod. The valuation provisions of SFAS 123R apply to new grants and to grantsthat were outstanding as of the effective date and are subsequently modified.All of our stock options were vested as of December 31, 2005, and weceased using stock options as a compensation tool.  No stock options were issued during the yearsended December 31, 2006 and 2007.

 

***Stock Based Compensation –Restricted Stock Units***

 

Subsequent to the acquisition of MPCComputers, we began issuing restricted stock units (“RSUs”) as stock basedcompensation to members of our Board of Directors and employees.  We record non-cash compensation expense overthe requisite service period of the RSUs determined by the number of unitsgranted multiplied by the fair market value at the date of grant less anestimate for pre-vesting forfeitures. Compensation expense for RSUs issuedafter the acquisition and merger of MPC Computers is classified on thestatement of operations as operating expense. During the years ended December 31,2007 and 2006, we recorded $595 thousand and $578 thousand respectively, instock compensation expense for RSUs issued subsequent to the acquisition. Aspart of the merger agreement, and pursuant to agreements signed with certainMPC Computers officers and certain key employees, we issued RSUs, which areclassified on the statement of operations as “Other income (expense)” becausethey relate to the MPC Computers merger transaction.   During the year ended December 31,2006, we recorded $1.3 million, in stock compensation expense for RSUs relatedto the merger. Any RSU recipient who receives an award, and who leaves theCompany voluntarily or for cause after the merger and before these RSUs vest,will forfeit such awards.

 

*****Basic andDiluted Income (Loss) Per Share*****

 

We apply the provisions of SFAS No. 128,Earnings Per Share. Basic income (loss) per share is computed by dividing netincome (loss) by the weighted-average number of common shares outstandingduring the period. Diluted income (loss) per share is computed by dividing netincome (loss), as adjusted by the impact of potentially dilutive securities, bythe combination of the weighted average number of common shares outstanding andall potentially dilutive common shares outstanding during the period using thetreasury stock method unless the inclusion of such shares is anti-dilutive. Ourpotentially dilutive securities primarily consist of convertible debentures,stock warrants, restricted stock units, and stock options. For the years ended December 31,2007 and 2006, all potentially dilutive common shares totaling 16,597,041 and39,673,814, respectively, were excluded from the computation of diluted lossper share because inclusion of such shares would have had an anti-dilutiveeffect on diluted loss per share.

 

***Reclassifications***

 

Certainreclassifications have been made to the prior year financial statements toconform to the current year presentation. The most significant was the reclassification of depreciation expense of$1.7 million related to production equipment to cost of revenue fromdepreciation and amortization expense. The reclassification had no impact on the reported net loss for the yearended December 31, 2006.

 

***NewAccounting Pronouncements***

 

***NewAccounting Standards***

 

InSeptember 2006, the FASB issued SFAS No. 157 *Fair Value Measurement*, which defines fairvalue, establishes a framework for measuring fair value under generallyaccepted accounting principles, and expands disclosure requirements about fairvalue measurements. SFAS 157 applies to other accounting pronouncements thatrequire or permit fair value measurements. The fair value measurement offinancial assets and financial liabilities is effective for us beginning infiscal year 2008.  Two FASB Staff Positions (“FSP”) on this Statementwere subsequently issued.  On February 12, 2007, FSP No. 157-2delayed the effective date of this Statement for non-financial assets andnon-financial liabilities that are recognized or disclosed at fair value in thefinancial statements on a nonrecurring basis. This FSP is effective for usin fiscal year 2009. On February 14, 2007, FSP No. 157-1 excludedSFAS No. 13, *Accounting for Leases,*andother accounting pronouncements that address fair value measurements 

 

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forpurposes of lease classification or measurement under SFAS No. 13*.*However, this scope exception does notapply to assets acquired and liabilities assumed in a business combination thatare required to be measured at fair value under SFAS Statement No. 141, *Business Combinations* or SFAS No. 141(R),*Business Combinations*,* *regardless of whether those assetsand liabilities are related to leases.  This FSP is effective uponour initial adoption of SFAS No. 157, which is at the beginning of ourfiscal year 2008. We do not expect SFAS No. 157 to have a material impacton our financial position or results of operations.

 

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assetsand Financial Liabilities - Including an Amendment of FASB Statement 115*.SFAS No. 159 permits companies to choose to measure certain financialinstruments and certain other items at fair value, which are not currentlyrequired to be measured at fair value. The standard requires that unrealizedgains and losses on items for which the fair value option has been elected bereported in earnings at each subsequent reporting date. SFAS No. 159 iseffective for us beginning in the first quarter of fiscal year 2008, althoughearlier adoption is permitted. We are currently evaluating the impact that SFASNo. 159 will have on our consolidated financial statements.

 

In December, 2007, the FASB issued SFAS No. 141(Revised 2007), *Business Combinations*.SFAS No.  141R will significantly change the accounting for businesscombinations. Under SFAS No. 141R, an acquiring entity will berequired to recognize all the assets acquired and liabilities assumed in atransaction at the acquisition-date fair value with limited exceptions.SFAS No. 141R will change the accounting treatment for certainspecific items, including:

 

·                  Acquisitioncosts will be generally expensed as incurred; 

 

·                  Noncontrollinginterests (formerly known as “minority interests” – see SFAS No. 160discussion below) will be valued at fair value at the acquisition date; 

 

·                  Acquiredcontingent liabilities will be recorded at fair value at the acquisition dateand subsequently measured at either the higher of such amount or the amountdetermined under existing guidance for non-acquired contingencies; 

 

·                  In-processresearch and development will be recorded at fair value as an indefinite-livedintangible asset at the acquisition date; 

 

·                  Restructuringcosts associated with a business combination will be generally expensedsubsequent to the acquisition date; and 

 

·                  Changesin deferred tax asset valuation allowances and income tax uncertainties afterthe acquisition date generally will affect income tax expense. 

 

SFAS No. 141R also includes asubstantial number of new disclosure requirements.  The statement applies prospectively tobusiness combinations for which the acquisition date is on or after January 1,2009.

 

In December, 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in Consolidated FinancialStatements - An Amendment of ARB No. 51.*SFAS No. 160establishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160requires the recognition of a noncontrolling interest (minority interest) asequity in the consolidated financial statements and separate from the parent’sequity. The amount of net income attributable to the noncontrolling interestwill be included in consolidated net income on the face of the incomestatement. SFAS No. 160 clarifies that changes in a parent’s ownershipinterest in a subsidiary that do not result in deconsolidation are equitytransactions if the parent retains its controlling financial interest. Inaddition, SFAS No. 160 requires that a parent recognize a gain or loss innet income when a subsidiary is deconsolidated. Such gain or loss will bemeasured using the fair value of the noncontrolling equity investment on thedeconsolidation date. SFAS No. 160 also includes expanded disclosurerequirements regarding the interests of the parent and its noncontrollinginterest.   The statement is effectivefor us during the first quarter of 2009. We currently do not have noncontrolling interests.

 

***RecentlyAdopted Accounting Standards***

 

In June 2006, the FASB issued FIN No. 48,*Accounting for Uncertainty in Income Taxes — AnInterpretation of FASB Statement No. 109*. FIN No. 48clarifies the criteria for the measurement, recognition and derecognition ofincome taxes under FASB Statement No. 109, *Accountingfor Income Taxes*. It also requires additional financial statementdisclosures about uncertain tax positions including classification, interestand penalties. We adopted FIN 48 effective January 2007. Because we havenot been profitable since our initial public offering, we have not realized anydeferred tax assets. FIN No. 48 did not have a material impact on ourfinancial position or results of 

 

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operations. If our tax status were to change inthe future, we would have to reevaluate the impact of FIN No. 48 on ourfinancial position and results of operations at that time.

 

We recognize interest and penalties related touncertain tax positions in interest expense and selling, general andadministrative expense.

 

**3.    ACQUISITION OF GATEWAY PROFESSIONALBUSINESS**

 

Pursuantto an Asset Purchase Agreement dated September 4, 2007, on October 1,2007 (“Closing Date”), MPC Corporation, through our wholly-owned subsidiaryMPC-Pro, purchased from Gateway Inc. (“Gateway”) and Gateway Technologies Inc.,Gateway’s Professional Division, the portion of Gateway’s Consumer DirectDivision that markets business-related products, and a portion of the CustomerCare & Support department that provides technical services tocustomers of the Professional and Consumer Direct Divisions (collectively, the “ProfessionalBusiness”).  The Professional Business is primarily engaged in the sale,resale and marketing of desktop computer systems, laptops, servers, networkinggear and other peripherals, and replacement parts to educational institutions,government entities (federal, state and local), value-added resellers andcertain other resellers, and small business sales generated by Gateway’sInternet website and phone centers. The purchase included specified inventory,customer lists and relationships, trademarks, and the sales, marketing, serviceand administrative functions supporting the Professional Business.  The acquisition included the purchase of all of the capital stock of GatewayCompanies Inc. (“GCI”), and the membership interests of Gateway Professional,LLC and Gateway Pro Partners, LLC.

 

Theacquisition of the Professional Business provides us with the customers,products and employees to better compete at a larger scale in the PC industry.Similar to MPC Computers’ business, the Professional Business targets customersin education, medium-sized business, and government with customized solutionsincluding PCs, peripherals and services. We expect to gain a more balancedportfolio of customer mix with strong positions in federal government,state/local government, K-12 education, higher education, small business andmid-sized businesses. The combined company offers a complete line of PCs andrelated products and services, with particular emphasis in mobile products,all-in-one desktops, servers and storage solutions.

 

Asconsideration, MPC-Pro assumed certain warranty obligations and otherobligations and issued to Gateway a promissory note in the amount of $1.3million. The amount of the promissory note was determined based on the FinalNet Inventory/Liability Statement as defined in the Asset PurchaseAgreement.  The promissory note bearsinterest at a rate of 8% and is repayable by April 1, 2008 in equalbi-monthly installments. In addition, we issued 5,602,454 shares of MPCCorporation common stock totaling approximately 19.9% of our outstanding commonstock as of the Closing Date (the “MPC Corporation Common Shares”), and 249,171shares of MPC Corporation Series B Preferred Stock convertible into4,983,416 shares of our common stock (following approval by the majority of ourshareholders permitting such conversion) (the “Series B AutomaticConversion Event”) representing the difference between (a) 19.9% of ouroutstanding common stock as of the Closing Date on a fully-diluted basis(excluding securities issued to our employees under our current employee equityplans) and (b) the number of shares of the MPC Corporation Common Shares(the MPC Corporation Series B Preferred Shares together with the MPCCorporation Common Shares, the “MPC Corporation Shares”).  In the eventthe Series B Automatic Conversion Event does not occur within one yearfollowing the Closing Date, all outstanding shares of MPC Corporation Series BPreferred Stock must be redeemed by us at 1.5 times the closing price times thenumber of shares of our common stock into which the MPC Corporation Series BPreferred Stock is then convertible.

 

Onthe October 1, 2007 Closing Date, we entered into a Lock-up Agreement andRegistration Rights Agreement with Gateway. Under the Lock-Up Agreement, Gateway has agreed that it will not offer,sell, contract to sell, short, pledge or otherwise dispose of any MPCCorporation common stock beneficially owned, held or thereafter acquired byGateway or its affiliates for a period of 12 months (the “Restriction Period”),except for Permitted Transfers as defined by the agreement.  The Registration Rights Agreement providesthat following the Restriction Period as set forth in the Lock-Up Agreement andupon receipt of a demand request from Gateway, MPC Corporation shall file aregistration statement with respect to the Registrable Securities, as definedby the agreement, which include the MPC Corporation Shares issued in connectionwith the transaction. The Registration Rights Agreement grants Gatewaycustomary and piggyback rights. The Registration Rights Agreement is subject toany limitations and conditions set forth in any prior registration rightsagreements entered into by MPC Corporation.

 

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Asa condition to close under the Asset Purchase Agreement but not as part of theconsideration to Gateway, MPC Corporation was to have raised at least $9.0million in additional cash and cash equivalents through the conversion ofoutstanding convertible securities, the exercise of warrants or the sale ofadditional equity securities, as measured relative to MPC Corporation cash andcash equivalents as of the September 4, 2007 date of the Asset PurchaseAgreement.  This condition was modified to raising at least $8.0 millionunder a Letter Agreement dated October 1, 2007 (the “Letter Agreement”)among the parties to the Asset Purchase Agreement.  In satisfaction ofthis condition, on October 1, 2007 we raised $8.3 million from theexercise for cash of $1.10 warrants issued in connection with two privateplacement financings in September 2006 that included the issuance ofconvertible debentures.

 

Inconjunction with the exercise of the $1.10 warrants and our obligations underthe Letter Agreement, on October 1, 2007, 7,545,352 warrants wereexercised, $12.1 million in face value of convertible debentures were convertedplus accrued interest and penalties thereon, and we issued 12,912,166 shares ofMPC Corporation common stock and 626,546 shares of MPC Corporation Series APreferred Stock. The MPC Corporation Series A Preferred Stock isconvertible into 12,530,925 shares of MPC Corporation common stock.  See Note 9 “Derivative Warrant Liabilitiesand Convertible Debentures,” Note 10 “Series B Preferred Stock” and Note11 “Stockholders’ Equity (Deficit)- Series A Preferred Stock”.

 

***Transition Services Agreement***

 

OnOctober 1, 2007, MPC-Pro entered into a Transition Services Agreement (“TSA”)with Gateway.  Under the TSA (as amendedon October 26, 2007, February 20, 2008 and March 27, 2008),Gateway provides accounting, human resource, manufacturing, procurement,marketing, information technology, and other specified services (collectively, “theServices”). Gateway also undertakes certain buy/sell activities related tocomponents on behalf of MPC-Pro in the course of providing the Services, whichincludes procuring components from component suppliers, selling of suchcomponents to original design manufacturers (“ODMs”) for the manufacture offinished goods that are ordered from the ODMs by Gateway, and the subsequentselling of such finished goods to MPC-Pro (the “Buy/Sell Activity”). Asconsideration for the Services and the Buy/Sell Activity, MPC-Pro will payGateway a total of $6.5 million payable in eight bi-weekly installments of $724thousand commencing on the second Friday after the Closing Date, (ii) onepayment of $806 thousand due on the fourth Friday after the Closing Date, (iii) sixbi-weekly installments of $765 thousand due on the sixth, eighth, tenth,fourteen and sixteenth Friday after the Closing Date and (iv) one paymentof $382 thousand due on the seventeenth Friday after the Closing Date. Inaddition, the TSA provides that if any Extended Services are provided byGateway after the Expiration Date (as defined by the agreement), MPC-Pro willpay Gateway $100 thousand for each week or part thereof, payable on the Fridayof every week such Extended Services are performed through February 2008and $20 thousand for each week thereafter.  Additionally, MPC-Pro must reimburse Gateway for all componentspurchased by Gateway, plus a percentage markup of (i) one-half percentduring the second eight-week period following close, (ii) one percentduring the second eight-week period, and (iii) two percent thereafter.MPC-Pro will also reimburse Gateway for all software license fees paid in thecourse of providing the Services and expenses incurred in the Buy/Sell Activityat the rates specified in the TSA. The TSA will continue in effect from October 1,2007 until the latest expiration date specified by the TSA for the Services,generally for 17 weeks, unless the TSA or any Service provided is earlierterminated by MPC-Pro.   Payment forinventory and component purchases made by Gateway on behalf of MPC-Pro isgenerally due in 30 days after invoice date.

 

Asof March 27, 2008, the outstanding balance payable to Gateway for Buy/Sellactivity and Extended Services was $12.6 million. On March 27, 2008, theTSA was amended to provide, that the outstanding balance be paid $325 thousandper week for four weeks beginning March 28, 2008 and $1.0 million per weekuntil the outstanding balance is paid in full. The amendment also provides that $2.3 million owed by MPC-Pro to Gatewayfor inventory purchases shall be paid, without interest, on Net 60 terms.

 

***Purchase Price Allocation***

 

Inaccordance with SFAS 141 *“Business Combinations”,*weallocated the purchase price of the acquisition to the tangible andidentifiable intangible assets acquired and liabilities assumed based on theirestimated fair values.  The excesspurchase price over those estimated fair values is recorded as goodwill.  We have assigned $21.5 million toidentifiable intangible assets, consisting of customer relationships andtrademarks totaling $20.0 million and $1.5 

 

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million,respectively. The customer relationships and trademarks are being amortizedover their estimated lives of 10 years and 1 year respectively.  Factors that contributed to the recognitionof goodwill included acquiring a talented workforce and cost savingsopportunities.  MPC Corporation andGateway have agreed to elect to treat the acquisition of the ProfessionalBusiness as an asset purchase by MPC-Pro for income tax purposes.  Thebook to tax differences from acquisition gave rise to deferred tax assets,primarily from deferred revenue.   However, these deferred tax assetsdid not satisfy the realization criteria under SFAS 109 *Accountingfor Income Taxes,* primarily due to our history of operating losses.Accordingly, a full valuation allowance has been recorded against the acquireddeferred tax assets. The acquisition was accounted for by the purchase method,and, accordingly, results of operations are included in the consolidatedfinancial statements from the October 1, 2007 date of acquisition.  The purchase price allocation is preliminary.

 

*(In thousands)*

**Allocationof Purchase Price**

 
| Inventory                              |       | $          | 25,438     |   |
|----------------------------------------|------------|------------|------------|--------|
| Other  Current Assets                  |       | 4,290      |       |
| Goodwill                               |       | 23,058     |       |
| Intangibles                            |       | 21,500     |       |
| Property and  Equipment                |       | 8,003      |       |
| Total Assets  Acquired                 |       | 82,289     |       |
| ** **                             | ** ** | ** ** | ** ** |
| Current  Portion                       |       |       |       |
| Warranties                             |       | (22,413    | )          |
| Deferred Revenue                       |       | (11,852    | )          |
| Other  Current Liabilities             |       | (8,200     | )          |
| Long Term                              |       |       |       |
| Warranties                             |       | (16,714    | )          |
| Deferred Revenue                       |       | (7,178     | )          |
| **Total  Purchase Price**              |       | $          | 15,932     |   |
| ** **                             | ** ** | ** ** | ** ** |
| **Total  Purchase Price consists of:** | ** ** | ** ** | ** ** |
| Common Stock                           |       | $          | 7,091      |   |
| Series B  Preferred Stock         |       | 6,308      |       |
| Note Payable                           |       | 1,293      |       |
| Acquisition  Costs                     |       | 1,240      |       |
| **Total  Consideration**               |       | $          | 15,932     |   |

 

TheMPC Corporation Common shares and MPC Corporation Series B Preferred Stockissued to Gateway were valued at $7.1 million and $6.3 million, respectively,based on volume-weighted average of MPC Corporation’s closing common stockprice of $1.2657 per share over a six business day period, from August 30,2007 through September 7, 2007. Such period included two business daysprior to the date of the Asset Purchase Agreement on September 4, 2007 andtwo business days after our September 5, 2007 announcement of thetransaction. The MPC Corporation Series B Preferred Stock was valued basedon the common-equivalent number of shares that would be issued following the Series BAutomatic Conversion Event. See Note 10 “Series B Preferred Stock”

 

Historically,the acquired Professional Business was comprised of components of the Gatewaybusiness and was not operated as a standalone business unit. Gateway did notallocate assets and liabilities to its segments or components. In addition,certain indirect costs, including general corporate overhead expenses, interestand income taxes had not been historically identified and accounted for in thefinancial records of the components comprising the Professional Business.Consequently, full separate financial statements did not exist. Pursuant to aletter dated August 30, 2007 from the Securities and Exchange Commission(the “SEC”), the SEC stated that the requirement for pro forma statements ofoperations would be waived if those presentations would require forward-lookinginformation in order to meaningfully present the effects of the acquisition.Management concluded that a meaningful presentation of the pro forma effects ofthe acquisition upon the statements of operations cannot be provided sinceforward-looking information would be required in the preparation of suchinformation.  Forward-looking informationregarding the revenues and expenses of the Professional Business as reorganizedunder the corporate structure and management of MPC Corporation was filed withthe SEC as Exhibit 99.3 to a Current Report on Form 8-K/A on December 10,2007.

 

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**4.    PROPERTY AND EQUIPMENT**

 

Property and equipment consist of thefollowing:

 

*(In thousands)*

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                           |       |                  |       |   |   |
| Computer  Equipment            |       | $                     | 2,063      |   | $ | 937 |   |
| Leasehold  Improvements        |       | 1,138                 |       | 184 |   |
| Production Equipment           |       | 10,559                |       | 5,276 |   |
| Office  Equipment              |       | 1,012                 |       | 1,003 |   |
| Software                       |       | 3,472                 |       | 1,876 |   |
|                           |       | 18,244                |       | 9,276 |   |
| Less  Accumulated Depreciation |       | (7,547                | )          | (4,362 | ) |
|                           |       |                  |       |   |   |
|                           |       | $                     | 10,697     |   | $ | 4,914 |   |

 

Depreciation expense associated with propertyand equipment totaled to $3.5 million and $2.9 million for the years ended December 31,2007 and 2006, respectively.

 

**5.    ACQUIRED INTANGIBLE ASSETS**

 

Acquired intangible assets consist of thefollowing:

* *

*(In thousands)*

* *
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Gross  carrying amount:                          |       |                  |       |   |   |
| Customer relationships                           |       | $                     | 51,950     |   | $ | 31,950 |   |
| Non-compete                                      |       | 90                    |       | 90 |   |
| Trademarks and tradenames                        |       | 3,780                 |       | 2,280 |   |
|                                             |       | 55,820                |       | 34,320 |   |
|                                             |       |                  |       |   |   |
| Accumulated  amortization                        |       |                  |       |   |   |
| Customer relationships                           |       | $                     | 7,278      |   | $ | 4,619 |   |
| Non-compete                                      |       | 67                    |       | 39 |   |
| Trademarks and tradenames                        |       | 536                   |       | 70 |   |
|                                             |       | 7,881                 |       | 4,728 |   |
|                                             |       |                  |       |   |   |
| Accumulated  Impairment Charges                  |       |                  |       |   |   |
| Customer relationships                           |       | 19,484                |       | 19,484 |   |
|                                             |       |                  |       |   |   |
| Net acquired  intangible assets                  |       | $                     | 28,455     |   | $ | 10,108 |   |
|                                             |       |                  |       |   |   |
| Aggregate  amortization expense                  |       | $                     | 3,153      |   | $ | 3,426 |   |
|                                             |       |                  |       |   |   |
| Estimated  amortization expense for years ended: |       |                  |       |   |   |
| December 31, 2008                           |       | $                     | 8,908      |   |   |   |
| December 31, 2009                           |       | 5,510                 |       |   |   |
| December 31, 2010                           |       | 3,936                 |       |   |   |
| December 31, 2011                           |       | 2,837                 |       |   |   |
| December 31, 2012                           |       | 2,062                 |       |   |   |
| Thereafter                                       |       | 5,202                 |       |   |   |
|                                             |       | $                     | 28,455     |   |   |   |

 

During June, of 2006 we updated our financialprojections.  Based on the thoseprojections, we determined that acquired intangible assets related to customerrelationships that were acquired with the acquisition of MPC Computers had beenimpaired primarily due to the future expected declines in revenue and grossprofit from federal government customers and other customers.  We recognized a non-cash impairment charge of$19.5 million related to our customer relationship intangible assets during thesecond quarter of 2006.  The estimatedremaining life of our acquired MPC Computers customer relationship intangibleassets was reduced from 14 years to 9 years. The Professional Business customer relationship intangible assets andtrademarks acquired of $20.0 million and $1.5 

 

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million respectively, are amortized over 10years and 1 year respectively.   Allintangibles are amortized using accelerated methods to approximate theestimated benefits received from such assets, except for the trademark acquiredfor the Professional Business, which is amortized on a straight-line basis.

 

**6.    ACCRUED WARRANTIES**

 

We accrue for warranty liabilities at the timeof the sale for estimated costs that may be incurred under our standard limitedwarranty. Changes in our aggregate accrued warranties are presented in thefollowing table:

 

*(In thousands)*

 
| ** **                                                          | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                          | ** ** | ** **                        |
|                                                                | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Accrued  warranties at beginning of the period                      |       | $                                 | 4,347      |   | $ | 4,775 |   |
| Present value of accrued warranty liability  assumed in acquisition |       | 39,127                            |       | — |   |
| Cost accrued  for new warranties                                    |       | 7,479                             |       | 3,330 |   |
| Service  obligation honored                                         |       | (9,901                            | )          | (3,930 | ) |
| Accretion of  interest under purchase accounting                    |       | 139                               |       | 172 |   |
| Accrued  warranties at the end of the period                        |       | $                                 | 41,191     |   | $ | 4,347 |   |

 

**7.    DEFERRED REVENUE**

 

We offer our customers an option of extendedor enhanced warranties.  Deferred revenueresults from amounts billed to or received from customers for which thewarranty revenue is deferred and recognized as the related services are provided,which generally range from 3-5 years. Deferred revenue also includes deferred software maintenance revenuesthat are recognized over the term of the contract, which is generally one year.  A schedule of our deferred revenue, includingchanges in deferred revenue from extended and enhanced warranties is asfollows:

 

*(In thousands**)*

 
| ** **                                                                      | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                      | ** ** | ** **                        |
| ** **                                                                      | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Deferred  revenue for extended and enhanced warranties, beginning of the period |       | $                                 | 32,417     |   | $ | 25,649 |   |
| Deferred  revenue for extended and enhanced warranties assumed in acquisition   |       | 19,031                            |       | — |   |
| Additions to  deferred revenue for new extended and enhanced warranties sold    |       | 11,948                            |       | 15,148 |   |
| Revenue  recognized for extended and enhanced warranties                        |       | (15,223                           | )          | (8,380 | ) |
| Deferred  revenue for extended and enhanced warranties, end of the period       |       | 48,173                            |       | 32,417 |   |
| Deferred  software maintenance revenue, end of the period                       |       | 11,032                            |       | 6,169 |   |
| Total  deferred revenue                                                         |       | $                                 | 59,205     |   | $ | 38,586 |   |

 

**8.    NOTES PAYABLE AND DEBT**

 

Notes payable and debt consist of the following:

** **

*(In thousands)*

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Wells Fargo  Receivables Advance Facility |       | $                     | 59,914     |   | $ | 34,164 |   |
| Debt  Incurred in Acquisition             |       | 279                   |       | 370 |   |
| Convertible  Bridge Loans                 |       | 300                   |       | 300 |   |
| Payable to  Gateway                       |       | 862                   |       | — |   |
| Payable to  Lessor                        |       | 844                   |       | — |   |
| Payable to  TPV                           |       | 1,176                 |       | — |   |
| Payable to  Wacom Technology Corporation  |       | 874                   |       | — |   |
| Total Notes  Payable and Debt             |       | $                     | 64,249     |   | $ | 34,834 |   |

 

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***WellsFargo Receivables Advance Facility***

 

On November 16, 2006, we entered into anagreement with Wells Fargo Business Credit, Inc. (“Wells Fargo”) for anaccounts receivable assignment and advance facility (“Receivables AdvanceFacility”) that replaced our prior line of credit with Wachovia Capital FinanceCorporation (Western).  Under the new facility, as amended in February 2007,we may assign to Wells Fargo, and Wells Fargo may purchase from us, Accounts(as defined in the Receivables Advance Facility). Wells Fargo will advance 90%of the value of the purchased Accounts. Wells Fargo may adjust the advancementpercentage at any time in its commercially reasonable discretion upon priornotice to us.  Wells Fargo will advance an additional 7.5% of the faceamount of currently outstanding Accounts assigned to Wells Fargo, provided thatthe total advance does not exceed 97.5% of the face amount of any Account (the “TemporaryAdvance”), and increase the advance rate on new Accounts assigned to WellsFargo to 98% of the amount of the Accounts for a period of eight weeks (the “SpecialFacility Period”). We must repay the difference between the Advance and theTemporary Advance within four weeks after termination of the Special FacilityPeriod. Failure to repay amounts advanced under the Special Facility wouldconstitute an event of default under the Agreements. At any time when theTemporary Advance has been paid in full for a minimum of 60 days, we mayrequest that the Special Facility be reinstated for another eight week periodwith repayment to be made within four weeks.

 

OnOctober 1, 2007, MPC-Pro and GCI (which was acquired by MPC-Pro inconnection with the acquisition of the Professional Business), each enteredinto an Account Purchase Agreement with Wells Fargo.  Under theseagreements, MPC-Pro and GCI may assign to Wells Fargo, and Wells Fargo maypurchase from MPC-Pro and GCI, Accounts (as defined in the Agreements). WellsFargo will advance to MPC-Pro and GCI 90% of the value of the purchased Accounts.Wells Fargo may adjust the advancement percentage at any time in itscommercially reasonable discretion upon prior notice to MPC-Pro and GCI. Inaddition, MPC-Pro, Gateway, GCI and Wells Fargo entered into an IntercreditorAgreement (the “Intercreditor Agreement”). The Intercreditor Agreement providesGateway with a junior security interest in accounts receivable generated on orafter the October 1, 2007 acquisition of the Professional Business,inventory, and all other property of MPC-Pro and GCI as specified in theagreement to secure the payment of obligations owing to Gateway under theTransition Services Agreement (the “TSA Obligations”). Wells Fargo and MPC-Proagreed to set aside certain accounts receivable for the payment of the TSAObligations (the “Gateway Blocked Accounts”). On March 27, 2008 the Intercreditor Agreement was amended toprovide that there will be Gateway Blocked Accounts in up to the followingamounts: (i) there will be no Gateway Blocked Accounts through April 17,2008; (ii) on or after April 18, 2008, a face amount equal to theobligations owing to Gateway under the Transition Agreement for the applicableweek (the “Gateway Weekly Payoff Amounts”) minus $10.0 million; and (iii) onor after May 27, 2008, a face amount equal to the Gateway Weekly PayoffAmounts for the applicable week minus $5.0 million. The amendment also providesthat, if, after June 30, 2008, there is a remaining positive balance ofthe Gateway Weekly Payoff Amounts, Gateway may provide a statement to MPC-Proindicating the positive balance, and Wells Fargo will hold but not purchaseGateway Blocked Accounts submitted to it by MPC-Pro and GCI in a face amountequal to the remaining positive balance. See Note 3 “Acquisition of Gateway Professional Business-Transition ServicesAgreement.”

 

We will pay fees equal to the Wells Fargo PrimeRate (as defined in the Receivables Advance Facility), plus 0.75% per annum(the “Wells Fargo Discount”) multiplied by the total amount of Accountspurchased and not yet paid by our customers, computed daily. The effective rateat December 31, 2007 was 8%. The minimum monthly fee to be paid inaggregate by MPC Corporation affiliates to Wells Fargo is determined bymultiplying the Wells Fargo Discount, by $2.5 million.

 

Wells Fargo has the right to require that were-purchase the Accounts in the event our customer does not pay the receivablewithin a timeframe specified under the Receivables Advance Facility, if amaterial customer dispute arises or in the event of a default under the ReceivablesAdvance Facility. The Receivables Advance Facility is subject to customarydefault provisions. Wells Fargo has discretion under the Receivables AdvanceFacility as to the Accounts purchased and the percentage advanced aftersubmission of the Account for approval. Wells Fargo is not obligated to buy anyAccount from us that Wells Fargo does not deem acceptable in its solediscretion. There is no minimum amount of Accounts to be purchased by WellsFargo under the Receivables Advance Facility. The facility is secured bysubstantially all of our assets. The Receivables Advance Facility is for a termof three (3) years terminating November 14, 2009. Early terminationfees apply if the Receivables Advance Facility is terminated before the end ofits term.  The Receivables Advance Facility also provides for a $3.5million collateral account for the benefit of Wells Fargo for repayment of anyobligations arising under the Receivables Advance Facility.

 

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On April 1, 2008, Wells Fargo provided anadvance to MPC-Pro in the amount of $3.5 million (the “MPC-Pro Advance”). TheMPC-Pro Advance is to be repaid by May 31, 2008, and is in addition toother amounts provided to us by Wells Fargo under the terms of our AccountPurchase Agreements with Wells Fargo. We agreed to pay to Wells Fargo anadvance fee in the amount of $15 thousand for the MPC-Pro Advance. Interest onthe MPC-Pro Advance will be at Wells Fargo Prime Rate plus 1.25%.

 

***Note Payable to Gateway***

 

On December 6, 2007, MPC-Pro entered intoan unsecured promissory note payable to Gateway (the “Promissory Note”) in theamount of $1.3 million as part of the consideration for the acquisition of theProfessional Business.  The PromissoryNote was executed pursuant to the Asset Purchase Agreement which contemplatedthe parties executing the Promissory Note at a point in the future when theprincipal amount had been determined. The Promissory Note is dated effective October 1,2007, which was the closing date of the transaction under the Asset PurchaseAgreement. The principal amount of the Promissory Note was calculated pursuantto terms set forth in the Asset Purchase Agreement.  The principal amount is due in three equalbi-monthly installments plus interest at 8% per annum beginning December 1,2007 and ending on April 1, 2008. In the case of overdue payments ofprincipal and/or interest on the Promissory Note, MPC-Pro must pay interest, ondemand by Gateway, at a rate equal 12% per annum.

 

***Debt Incurred in Acquisition***

 

Debt incurred in connection with the acquisitionof MPC Computers of $370 thousand was due July 25, 2006, including anyunpaid interest, which is accrued at 5% per annum.  There is no assurance that we will besuccessful in renegotiating the terms of these notes. The holders have theright, at any time prior to payment, to convert all or any part of the thenoutstanding balance of principal and interest under these notes into shares ofcommon stock at the conversion price of $3.00 per share, which was determinedat the date of issuance. The common stock underlying these notes is covered bya registration rights agreement.  We filed the registration statement withthe SEC on November 8, 2006 and it was declared effective on June 28,2007.  During the year ended December 31,2007, we repaid and settled $91 thousand of the debt and related interest andrecognized a gain of $52 thousand as we settled for less than the amountsdue.  During the first quarter of 2008,we made further payments and settlements with the holders.  As of March 28, 2008, $104 thousandremains outstanding to one holder who is the Chief Financial Officer of MPCCorporation.

 

***Convertible Bridge Loans***

 

Convertible Bridge Loans were issued prior toour IPO. The outstanding amount was due April 2006, including any unpaidinterest which is accrued at 12% per annum. The holder has the right, at anytime prior to repayment, to convert all or any part of the then outstandingbalance of principal and interest under these notes into shares of common stockat the conversion price of $3.50 per share. The notes include detachablewarrants for purchase of common stock. The value of the warrants was recordedas interest expense in 2004. All of our assets at MPC Corporation collateralizethe notes. These notes have registration rights. In May 2006, we repaidprincipal and interest to one note holder. There are two remaining note holderswho have not yet been repaid. We are in default of the repayment terms on thesenotes, and the default interest provision of 18% has been accruing on thesenotes since April 15, 2006. We have been in discussions with these noteholders about an extension to repay the amounts due. There is no assurance thatwe will be successful in renegotiating the terms of these notes.

 

Warrants and convertible debt issued inconnection with financing activities are subject to the provisions of EmergingIssues Task Force (“EITF”) Issue 00-19: Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock. EITF00-19 provides that derivatives should be classified as either equity or aliability. If the derivative is determined to be a liability, the liability isfair valued each reporting period with the changes recorded to the consolidatedbalance sheet and consolidated statement of operations. In regard to theconvertible debt set out above, we determined that the embedded conversionoption qualified as equity under EITF 00-19 and would not be subject tobifurcation from the host instrument.

 

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***Payable to Lessor***

 

MPC Computers is a party to a commercial leasewith Micron Technology dated April 30, 2001 (as amended, the “Lease”)under which we lease our primary manufacturing facility in Nampa, Idaho. AFifth Amendment to the Lease deferred our rent payment obligations due or tobecome due between January 16, 2006 and May 31, 2007, withoutincurring late charges, provided that we pay base rent and other amounts (the “ExtendedRent Obligation”) under the Lease at any time before May 31, 2007. The total amount of the Extended Rent Obligation payable on May 31, 2007was $2.5 million and had been recorded as an accrued liability. We had paidonly $500 thousand of the Extended Rent by May 31, 2007.

 

On July 2, 2007, MPC Computers entered intoa Sixth Amendment to the Lease of this manufacturing facility. The SixthAmendment to Lease provides that MPC Computers will pay the balance of theExtended Rent Obligation in twelve equal monthly installments in the amount of$174 thousand, including interest at the annual rate of 12%. If any installmentis not made, MPC Computers will incur a late charge of 5% of the amount of suchinstallment, and interest shall increase to an annual default rate of 18%. TheSixth Amendment also provides that MPC Computers will pay the full amount ofthe Extended Rent Obligation in the event equity investment funds are receivedin an amount that exceeds $12.0 million. Additionally, if MPC Computersunrestricted cash and cash equivalents balance, combined with available linesof credit, exceeds $5.0 million at any time after January 1, 2008, themonthly installment amount increases to $348 thousand until the total ExtendedRent Obligation is paid in full. In addition to making the Extended RentObligation payments, MPC Computers is obligated to pay current rent and allother Lease obligations as they become due and payable, including propertytaxes per the terms of the Lease.

 

***Payable to TPV***

 

On June 30, 2007, we entered into a settlementagreement with TPV International (USA), Inc. and Top Victory Electronics(FUJIANG) Co., Ltd (collectively “TPV”).  See Note 15, “Commitments andContingencies.”  Under the agreement we agreed to pay TPV $2.1 millionover a period of twelve months with interest at 8%.  The agreementprovides for monthly payments of $120 thousand for six months and $254 thousandthereafter. The settlement amount had been previously recorded as accountspayable.  The payable to TPV was fullyrepaid on February 1. 2008.

 

***Payable to Wacom***

 

In August 2007,we settled a case with Wacom Technology Corporation (“Wacom”). SeeNote 15, “Commitments and Contingencies.” We agreed to pay Wacom $1.2 millionin payments of $100 thousand per month beginning September, 2007 plus interestof 5%.

 

**9.    DERIVATIVE WARRANT LIABILITIES ANDCONVERTIBLE DEBENTURES**

 

Derivative warrant liabilities and convertibledebentures consist of the following:

 
| ** **                              | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Derivative Warrants**    | ** ** | **Convertible Debentures** | ** ** |
| **(In thousands)**                 | ** ** | **Fair Value**             | ** ** | **Fair Value** | ** ** | **Face Value** | ** ** |
|                                    |       |                            |       |   |   |   |   |
| New Convertible Debentures and Warrants |       | $                               | 1          |   | $ | 42 |   | $ | — |   |
| September 29, 2006 Financing       |       | 633                             |       | 1,548 |   | 1,353 |   |
|                                    |       | $                               | 634        |   | $ | 1,590 |   | $ | 1,353 |   |

 
| ** **                              | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Derivative Warrants**    | ** ** | **Convertible Debentures** | ** ** |
| **(In thousands)**                 | ** ** | **Fair Value**             | ** ** | **Fair Value** | ** ** | **Face Value** | ** ** |
|                                    |       |                            |       |   |   |   |   |   |   |   |
| New Convertible Debentures and Warrants |       | $                               | 3,123      |   | $ | 14,114 |   | $ | 9,849 |   |
| September 29, 2006 Financing       |       | 3,006                           |       | 7,120 |   | 4,936 |   |
|                                    |       | $                               | 6,129      |   | $ | 21,234 |   | $ | 14,785 |   |

 

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***Bridge Loan***

 

On April 24, 2006, we entered into aSecurities Purchase Agreement with certain existing investors pursuant to whichwe sold convertible debentures for an aggregate of $5.0 million. The investorsalso received an aggregate of 1,370,000 5-year warrants to purchase our no parvalue common stock for $3.12 per share, the fair market value of our commonstock on the day the transaction closed. In connection with the BridgeLoan we issued 64,103 shares of common stock as payment of an origination feeto the investors.

 

The convertible debentures accrued interest at10% per annum and the $5.0 million aggregate principal amount was originallyscheduled to become due and payable July 24, 2006. We prepaid interestexpense through July 24, 2006 with 40,064 shares of common stock at thetime of the closing. On July 24, 2006, the maturity date on thesedebentures was extended to August 24, 2006 in return for an increase tothe effective interest rate to 12%, payable in cash, for the period July 24,2006 to August 24, 2006.

 

These convertible notes were hybrid financialinstruments that embody certain features that meet the definition of derivativefinancial instruments and require bifurcation under SFAS No. 133Accounting for Derivative Financial Instruments. These embedded derivativeswere required to be combined into one compound derivative financial instrumentand carried at fair value as derivative liabilities.  We early adopted and applied the provisionsof SFAS 155 Accounting for Certain Hybrid Instruments which permits fair valueremeasurement for any hybrid instrument (on an instrument-by-instrument basis)that contains an embedded derivative that would otherwise have to bebifurcated. Under SFAS 155, the entire hybrid instrument was initially recordedat fair value and subsequent changes in fair value were recognized in earnings.As noted below, the debentures were rolled into a new financing for NewConvertible Debentures and Warrants on September 6, 2006. EITF 96-19Debtor’s Accounting for a Modification or Exchange of Debt Instruments providesthat an exchange or modification that substantively modifies future cash flows(defined as over 10%) requires treatment as an extinguishment of debt and wasapplicable for this transaction. The difference between the carrying value ofthe Bridge Loan debentures at extinguishment of $4.7 million and the fair valueof the new September 6, 2006 financing totaling $15.2 million resulted ina loss on extinguishment of the Bridge Loan of $10.5 million.

 

In December 2006, FASB issued FASB StaffPosition (“FSP”) No. EITF 00-19-2 (“EITF 00-19-2”), Accounting forRegistration Payment Arrangements which changed the way that a contingentobligation under a registration payment arrangement was recorded. EITF 00-19-2provides that the contingent obligation under a registration paymentarrangement should be separately recognized and measured in accordance withSFAS No. 5, Accounting for Contingencies. For registration paymentarrangements and financial instruments subject to those arrangements that wereentered into prior to the issuance of EITF 00-19-2, this was effective forfinancial statements issued for fiscal years beginning after December 15,2006 and interim periods within those fiscal years. We adopted EITF 00-19-2effective October 1, 2006. Upon adoption of EITF 00-19-2, the outstandingwarrant liability balance associated with the detachable warrants was $1.3million. Transition to the provisions of EITF 00-19-2 resulted in a change inaccounting principle loss of $589 thousand and an adjustment to additional paidin capital of $1.9 million. The measurement of the contingent liability relatedto registration payment arrangements as of December 31, 2006 was nil underthe provisions of FASB 5.

 

During the year ended December 31, 2007,the 1,370,000 5-year warrants were exercised for which we received $1.5million.

 

***NewConvertible Debentures and Warrants***

 

On September 6, 2006, we entered into asecurities purchase agreement with certain existing investors and new investorspursuant to which we sold convertible debentures for an aggregate of $4.6million. Additionally, the investors of the April 24, 2006 Bridge Loanexchanged $5.0 million face value of their convertible debentures plus $226thousand of accrued interest thereon into the New Convertible Debentures andthe existing and new investors received 4,924,500 warrants. The debenturesbecome convertible into shares of common stock at a conversion price of $0.75per share. The warrants allow the purchase of our common stock for $1.10per share and are for a term of 5 years. The debentures accrue interest at 8%per annum after shareholder approval was obtained in December 2006. The aggregate principal amount becomes due and payable September 6,2009. In the event that the debentures are not repaid on the maturitydate, we will be in default and the debentures will begin to accrue interest ata rate of 22% per annum or the maximum amount permitted by law, whichever isless. The debentures contain various customary events of default as well asnegative covenants that, among other things, prohibit us from incurringadditional debt.

 

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Because the conversion price for the debenturesand the exercise price for the warrants was below market value at the time ofissuance and below the exercise and/or conversion price for certain previouslyissued warrants and convertible securities, anti-dilution rights of varioussecurity holders were triggered and resulted in the downward adjustment of theexercise and/or conversion price for various security holders, including theholders of our publicly traded warrants. See Note 10 – “Shareholders’Equity.”

 

Both the debentures and the warrants containprovisions limiting conversion and exercise, or issuance of shares in lieu ofinterest, as the case may be, in the event that the holder’s beneficialownership of our common stock would exceed 9.99%.  We concurrently enteredinto a registration rights agreement with the investors that required us toregister all of the common stock issued and underlying the securities sold toinvestors. The registration rights agreement contains customaryindemnification and contribution provisions. We filed the registrationstatement with the SEC on November 8, 2006 and it was declared effectiveon June 28, 2007. Not all of the common stock underlying thedebentures and warrants were registered under the registration statement due toblocker provisions imposed by certain investors on their registerable sharesand from a reduction in the number of shares as required by the SEC. Webelieve we have substantially fulfilled our obligation under the registrationrights agreement and will register the remaining unregistered shares when theblocker provisions are waived by the investors and when allowed by the SEC.

 

On March 5, 2007, we obtained amendmentsand waivers to the registration rights agreement and the debentures. Pursuantto a letter agreement, the majority of the investors, including Crestview CapitalMaster, LLC (“Crestview”) and Toibb Investment LLC (“Toibb”) agreed to waivethe penalty provisions for not yet having an effective registration statement,and to extend the dates for filing a registration statement and all relateddeadlines, including the date by which the initial registration statement mustbe declared effective by the SEC, by 120 days. The investors in this offeringalso agreed that no Event of Default is presently deemed to have occurred underthe debentures. The 120-day extension period lapsed, and the registrationstatement was not declared effective until June 28, 2007. For theyear ended December 31, 2007, we incurred liquidated damages of $346thousand under the registration rights agreement related to the delay in theeffectiveness of our registration statement.

 

On October 1, 2007, we entered into anAmendment No. 1 to the Convertible Debenture with each of Crestview andToibb pursuant to which their respective Convertible Debentures wereconvertible into Series A Preferred Stock. See Note 11 “Shareholders’ Equity – Series A Preferred Stock”.

 

We issued to one of the investors additionalwarrants to purchase up to 360,000 shares of common stock for $1.10 per share.The terms of these warrants are identical to the warrants issued as part of thefinancing. The warrants were accounted for as additional consideration given tothe investors as part of the financing. In connection with this financing,we issued 546,000 warrants with a 5-year term to the placement agent to purchaseour common stock for $1.10 per share.

 

The New Convertible Debentures are hybridfinancial instruments that embody certain features that met the definition ofderivative financial instruments and required bifurcation under SFAS No. 133. Embedded derivatives that require bifurcation are required to be combined intoone compound derivative financial instrument and carried at fair value asderivative liabilities. The 4,924,500 of detachable warrants, and relatedanti-dilution protection features were evaluated as freestanding derivativefinancial instruments under EITF 00-19, which provides the guidelines forequity classification. The warrants did not possess all of the conditions forequity classification due to the registration rights that require the deliveryof registered shares, and did not provide for a mechanism for settlement shouldwe be unable to deliver registered shares; in these instances, net-cashsettlement is presumed. As such, the detachable warrants were required to becarried as liabilities at fair value. The warrants issued to the placementagent possessed all of the conditions for equity classification and weretherefore classified as equity.

 

We applied the provisions of SFAS 155 for theNew Convertible Debentures and Warrants as a hybrid instrument that contains anembedded derivative that would otherwise have to be bifurcated. The entirehybrid instrument was therefore initially recorded at fair value and subsequentchanges in fair value were recognized in earnings.

 

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In determining the fair value of ourfreestanding derivative financial instruments we assumed an expiration term of3.67 years, a volatility of 87.01% and interest rate of 3.45%. Theestimated fair value of these derivative instruments at December 31, 2007and December 31, 2006 are as follows:

 
| ** **              | ** ** | **Fair Value** | ** ** | **Fair Value**  | ** ** | ** ** | ** ** |
|-------------------------|------------|---------------------|------------|----------------------|------------|------------|------------|
| **(In thousands)** | ** ** | **of Debt**    | ** ** | **of Warrants** | ** ** | **Total**  | ** ** |
|                    |       |                |       |                 |       |       |       |
| December 31, 2007  |       | $                   | 42         |                 | $          | 1          |       | $ | 43 |   |
|                    |       |                |       |                 |       |       |       |
| December 31, 2006  |       | $                   | 14,114     |                 | $          | 3,123      |       | $ | 17,237 |   |

 

During the year ended December 31, 2007, weissued 8,798,986 shares of common stock and 626,546 shares of Series APreferred Stock upon conversion of $9.8 million face value of New ConvertibleDebentures plus accrued interest and penalties, and the exercise of 6,652,227warrants.  See Note 11 – “Shareholders’Equity (Deficit) Series A Preferred Stock.”

 

***September 29, 2006 Financing***

 

On September 29, 2006 we entered into asecurities purchase agreement with certain existing investors and new investorspursuant to which we agreed to sell convertible debentures for an aggregate of$4.9 million. The majority of the transaction closed October 4,2006.  The investors also received an aggregate of 2,468,125 warrants topurchase our common stock. The debentures become convertible into shares ofcommon stock at a conversion price of $0.75 per share. The warrants allow thepurchase of our common stock for $1.10 per share and are for a term of 5 years.The debentures accrue interest at 8% per annum after shareholder approval wasobtained in December 2006 and the aggregate principal amount becomes dueand payable September 29, 2009. In the event that the debentures arenot repaid on the maturity date, we will be in default and the debentures willbegin to accrue interest at a rate of 22% per annum or the maximum amountpermitted by law, whichever is less. The debentures contain various customaryevents of default as well as negative covenants that, among other things,prohibit us from incurring additional debt.

 

Both the debentures and the warrants containprovisions limiting conversion and exercise, or issuance of shares in lieu ofinterest, as the case may be, in the event that the holder’s beneficialownership of our common stock would exceed 9.99%. We concurrently entered intoa registration rights agreement with the investors that requires us to registerall of the common stock issued and underlying the securities sold to theinvestors. The registration rights agreement contains customary indemnificationand contribution provisions. The terms, conditions, features and accountingtreatment of these debentures and warrants are substantially identical to theNew Convertible Debentures and Warrants.

 

We filed the registration statement with the SECon November 8, 2006, and it was declared effective on June 28,2007. Not all of the common stock underlying the debentures and warrantswas registered under this registration statement due to the large number ofshares of common stock to be registered relative to the number of shares of ourcommon stock then outstanding.  In order to register the shares on a Form S-3,the SEC required that we reduce in the number of shares beingregistered. We believe we have substantially fulfilled our obligationsunder the registration rights agreement and will register the remainingunregistered shares as required by the registration rights agreement and asallowed by the SEC.

 

We did not obtain any amendments or waivers fromthese investors and as a result, as of February 1, 2007, we began incurringliquidated damages under the registration rights agreement at the rate of 1.5%of the aggregate amount invested per month until the registration statement wasdeclared effective on June 28, 2007. These liquidated damages must bepaid in cash, and they accrue interest at a rate of 18% per annum. Wenotified the investors that we are unable to pay the interest and will accruethe interest if unpaid to their account. There is no assurance that theywill allow us to defer payment of the liquidated damages. We accrued $383thousand in liquidated damages under the registration rights agreement duringthe year ended December 30, 2007.  Since we have not paid all of theinterest or penalties due under the debentures or the registration rightsagreement, a holder could declare the debentures to be in default andaccelerate the debt due under the debentures.  If this were to happen, thedebentures would accrue interest at the rate of 22% per annum. We may berequired to pay interest or other required payments

 

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in cash rather than stock and could be forced touse our limited cash to redeem all or a portion of the outstanding debentures.

 

In connection with this financing, we issued499,867 warrants with a 5-year term to the placement agent to purchase ourcommon stock for $1.10 per share.

 

In determining the fair value of ourfreestanding derivative financial instruments we assumed an expiration term of3.75 years, a volatility of 89.34% and an interest rate of 3.45%.  Theestimated probability of a dilutive financing transaction occurring is based onmanagement’s estimate of such a transaction in the future. The estimatedfair value of these derivative instruments at December 31, 2007 and December 31,2006 are as follows:

 
| ** **              | ** ** | **Fair Value** | ** ** | **Fair Value**  | ** ** | ** ** | ** ** |
|-------------------------|------------|---------------------|------------|----------------------|------------|------------|------------|
| **(In thousands)** | ** ** | **of Debt**    | ** ** | **of Warrants** | ** ** | **Total**  | ** ** |
|                    |       |                |       |                 |       |       |       |
| December 31, 2007  |       | $                   | 1,548      |                 | $          | 633        |       | $ | 2,181 |   |
|                    |       |                |       |                 |       |       |       |
| December 31, 2006  |       | $                   | 7,120      |                 | $          | 3,006      |       | $ | 10,126 |   |

 

Duringthe year ended December 31, 2007, we issued 6,314,927 shares of commonstock upon conversion of $3.6 million in face value of debentures from the September 29,2006 Financing plus accrued interest and penalties and the exercise of 893,125warrants.

 

**10.    SERIES B PREFERRED STOCK**

 

In connection withthe acquisition of the Professional Business, we issued 5,602,454 shares of MPCCorporation common stock totaling approximately 19.9% of our outstanding commonstock as of the Closing Date, and 249,171 shares of MPC Corporation Series BPreferred Stock convertible into 4,983,416 shares of our common stock. All MPCCorporation Series B Preferred Stock issued to Gateway converts to MPCCorporation common stock upon shareholder approval by a majority of the MPCCorporation common shareholders (the “Series B Automatic Conversion Event”).As a condition of the Asset Purchase Agreement, Gateway shall vote in favor ofthe Series B Automatic Conversion Event. In the event shareholder approvalis not obtained, all outstanding shares of Series B Preferred Stock sharesare to be redeemed by MPC Corporation at 1.5 times the closing price times thenumber of shares of our common stock into which the Series B PreferredStock is then convertible. The MPC Corporation Series B Preferred Stock isparticipating, non-voting, and has a liquidation preference equal to $.00000001per share.

 

In accountingand valuing for the Series B Preferred Stock, we considered the guidanceof EITF D-98 *Classification and Measurement of RedeemableSecurities.* Under the terms of the Asset Purchase Agreement, Gatewayhas agreed to vote in favor of the conversion of the Series B PreferredStock. In addition, our management will vote in favor of the conversion andbelieves that, based on discussions with our significant investors, they willalso vote in favor of the conversion. Management also believes that the cashredemption of the Series B Preferred Stock would be a significantfinancial strain to our company and be detrimental to our shareholders’investment. Based on these factors, we believe it is very unlikely thatshareholder approval of the conversion of the Series B Preferred Stock tocommon stock will not be obtained and shares redeemed in cash. Other featuresof the Series B Preferred Stock, such as the liquidation preference, wereconsidered de minimis in the assessment of the value of the stock.  Therefore, in accordance with EITF D-98, the Series BPreferred Stock is recorded and carried at its fair value at initial date ofissue.  In the event the Series BConversion Event is not approved and it becomes probable that the Series BPreferred Stock will be redeemed in cash, we will recognize changes inredemption value immediately as they occur and adjust the carrying value of theSeries B Preferred Stock to equal the redemption value at the end of eachreporting period.

 

The MPCCorporation Common shares and MPC Corporation Series B Preferred Stockissued to Gateway were valued at $7.1 million and $6.3 million, respectively,based on volume-weighted average of MPC Corporation’s closing common stockprice of $1.2657 per share over a six business day period, from August 30,2007 through September 7, 2007. Such period included two business daysprior to the date of the Asset Purchase Agreement on September 4, 2007 andtwo business days after our September 5, 2007 announcement of the transaction.The MPC

 

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Corporation Series BPreferred Stock was valued based on the common-equivalent number of shares thatwould be issued following the Series B Automatic Conversion Event.

 

**11.*   *****SHAREHOLDERS’ EQUITY (DEFICIT)**

 

***Series APreferred Stock***

 

As a condition to close under the Asset PurchaseAgreement for the acquisition of the Professional Business, MPC Corporation wasto have raised at least $9.0 million in additional cash and cash equivalentsthrough the conversion of outstanding convertible securities, the exercise ofwarrants or the sale of additional equity securities, as measured relative toour cash and cash equivalents as of the September 4, 2007 date of theAsset Purchase Agreement.  This condition was modified to raising at least$8.0 million under a Letter Agreement dated October 1, 2007 (the “LetterAgreement”) among the parties to the Asset Purchase Agreement.  Insatisfaction of this condition, on October 1, 2007 we raised $8.3 millionfrom the exercise for cash of $1.10 warrants issued in connection with twoprivate placement financings in September 2006 that included the issuanceof convertible debentures.

 

In connection with the obligation under theLetter Agreement, two MPC Corporation investors, Crestview and Toibb, intendedto exercise their warrants and convertible debentures, but because of theirlarge holdings, their beneficial ownership of our common stock, as defined in Rule 13d-3as promulgated under the Securities Exchange Act of 1934, as amended, couldhave exceeded 9.99%.  As such, on October 1, 2007, we entered into anAmendment No. 1 to Convertible Debenture with each of Crestview and Toibb(the “Debenture Amendments”), pursuant to which their respective ConvertibleDebentures due on September 6, 2009 were amended such that the debentureswere convertible into shares of Series A Preferred Stock. Additionally, MPC Corporation and both Crestview and Toibb agreed that, uponthe exercise of their warrants prior to the Closing, we would issue (i) commonstock only to the extent that their beneficial ownership reaches 9.99% and (ii) thenumber of shares of MPC Corporation Series A Preferred Stock that willconvert into a number of shares of MPC Corporation common stock equal to thedifference between the number of shares of common stock such holder wouldreceive if all of such holder’s warrants were exercised for our common stockand the number of shares of our common stock such holder actually received inorder to avoid exceeding 9.99% beneficial ownership. Additionally, on October 1,2007, we entered into an amendment to the Registration Rights Agreement datedas of September 6, 2006 with Crestview and Toibb such that the registrationand other rights applicable to shares of common stock issuable upon conversionof their debentures apply equally to the shares of common stock issuable onconversion of the Series A Preferred Stock issued pursuant to theDebenture Amendments.

 

In conjunction with the exercise of the $1.10warrants and our obligations under the Letter Agreement, on October 1,2007, 7,545,352 warrants were exercised, $11.0 million in face value ofconvertible debentures were converted plus accrued interest and penalties thereon,and we issued 12,912,166 shares of MPC Corporation common stock and 626,546shares of MPC Corporation Series A Preferred Stock. The MPC Corporation Series APreferred Stock is convertible into 12,530,925 shares of MPC Corporation commonstock.  The MPC Corporation Series APreferred Stock is participating, non-voting, and has a liquidation preferenceequal to $.00000001 per share. Each share of MPC Corporation Series APreferred Stock will automatically convert to MPC Corporation common stock atsuch time the conversion would not cause the beneficial ownership to exceed9.99% beneficial ownership.

 

***StockOptions and Restricted Stock Units***

 

In September 2001, we established anIncentive Plan Stock Option Plan (“2001 Plan”) under which stock options weregranted with vesting periods ranging from one to two years with terms of notmore than 10 years and exercise prices equal to the fair market value of thestock at date of grant. A total of 1,428,571 shares of common stock wereauthorized for issuance under this plan. In July 2004, our Board ofDirectors and shareholders voted to provide that not more than 871,619 optionsbe issued under the 2001 plan and also voted to create the 2004 EquityIncentive Plan (“2004 Plan”) our Board and shareholders voted to increase theshares available for issuance under the 2004 plan to 5,000,000 shares.

 

The following table presents the activity forstock options outstanding under the 2001 and 2004 Plans:

 

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| ** **                                | ** ** | ** **               | ** ** | ** **               | ** ** | ** **           | ** ** | **Weighted** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|--------------------------|------------|----------------------|------------|--------------|------------|
| ** **                                | ** ** | **Employee**             | ** ** | **Employee Non-**   | ** ** | **Third Party** | ** ** | **Average**  | ** ** |
| ** **                                | ** ** | **Incentive Stock** | ** ** | **Qualified Stock** | ** ** | **Consultant**       | ** ** | **Exercise** | ** ** |
| ** **                                | ** ** | **Options**              | ** ** | **Options**              | ** ** | **Options**          | ** ** | **Price**    | ** ** |
| Outstanding – December 31, 2005 |       | 339,573                  |       | 207,928                  |       | 65,501               |       | $            | 3.53       |   |
| Granted                                   |       | —                   |       | 90,000                   |       | —               |       | $            | 1.38       |   |
| Forfeited/Cancelled                       |       | (39,571                  | )          | (101,143                 | )          | —               |       | $            | 3.34       |   |
| Exercised                                 |       | (5,300                   | )          | —                   |       | (3,571               | )          | $            | 3.06       |   |
| Outstanding - December 31, 2006      |       | 294,702                  |       | 196,785                  |       | 61,930               |       | $            | 3.25       |   |
| Granted                                   |       | —                   |       | —                   |       | —               |       | —       |       |
| Forfeited/Canceled                        |       | —                   |       | —                   |       | (21,000              | )          | $            | 5.50       |   |
| Exercised                                 |       | —                   |       | (22,400                  | )          | —               |       | $            | 1.38       |   |
| Outstanding - December 31, 2007      |       | 294,702                  |       | 174,385                  |       | 40,930               |       | $            | 3.21       |   |

 

The following table presents the composition ofoptions outstanding and exercisable:

 
| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Number**                   | ** ** | **Price**                    | ** ** | **Life** | ** ** | **Number** | ** ** | **Price** | ** ** |
| At December 31, 2006                   |       |                         |       |                         |       |   |   |   |   |   |   |
| $1.38  to $3.50                             |       | 492,417                      |       | $                            | 2.93       |   | 5.44 |   | 492,417 |   | $ | 2.93 |   |
| $4.46  to $6.26                             |       | 61,000                       |       | $                            | 5.56       |   | 4.64 |   | 61,000 |   | $ | 5.56 |   |
|                                        |       | 553,417                      |       | $                            | 3.22       |   | 5.35 |   | 553,417 |   | $ | 3.22 |   |
|                                        |       |                         |       |                         |       |   |   |   |   |   |   |
| At December 31, 2007                   |       |                         |       |                         |       |   |   |   |   |   |   |
| $1.38  to $3.50                             |       | 470,017                      |       | $                            | 3.00       |   | 4.57 |   | 470,017 |   | $ | 3.00 |   |
| $4.46  to $6.26                             |       | 40,000                       |       | $                            | 4.82       |   | 5.64 |   | 40,000 |   | $ | 4.82 |   |
|                                        |       | 510,017                      |       | $                            | 3.21       |   | 4.65 |   | 510,017 |   | $ | 3.21 |   |

 

The following table presents the activity for restrictedstock units outstanding under the 2004 Plan:

 
| ** **                           | ** ** | **# of Restricted** | ** ** | **Weighted**         | ** ** |
|--------------------------------------|------------|-------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **Stock Units**          | ** ** | **Average**          | ** ** |
| ** **                           | ** ** | **Granted**                   | ** ** | **Stock Price** | ** ** |
| Outstanding - December 31, 2005 |       | 1,305,290                     |       | $                    | 6.15       |   |
| Granted                              |       | 566,901                       |       | $                    | 3.40       |   |
| Forfeited/Cancelled                  |       | (167,836                      | )          | $                    | 4.50       |   |
| Exercised                            |       | (110,935                      | )          | $                    | 6.18       |   |
| Outstanding - December 31, 2006 |       | 1,593,420                     |       | $                    | 5.34       |   |
| Granted                              |       | 3,134,193                     |       | $                    | 0.94       |   |
| Forfeited/Cancelled                  |       | (132,051                      | )          | $                    | 2.71       |   |
| Exercised                            |       | (1,095,146                    | )          | $                    | 5.83       |   |
| Outstanding - December 31, 2007 |       | 3,500,416                     |       | $                    | 1.34       |   |

 

**Warrants – Common Stock**

 

We issued 3,600,000 warrants in connection withour 2004 initial public offering.  Thesewarrants were exercisable at $5.50 per share, but have subsequently beenadjusted to $3.77 per share in August 2007 due to anti-dilution provisionstriggered from convertible debentures and warrants issued by us in September 2006with conversion features at below then current market prices. The warrantsare callable by us at $0.25 per share if our common stock trades at or above$9.50 per share for 20 consecutive days. None of these warrants have yet beenexercised, and we do not anticipate that a material amount of the warrants willbe exercised unless we are able to exercise our call right, which would requireour stock trading price to close at a price of at least $9.50 for 20consecutive trading days. Our stock has never traded above $9.50 pershare.  These warrants expire October 1,2009.

 

In January and February 2006, holdersof certain warrants, issued in connection with the acquisition of MPCCorporation transferred warrants to various other individuals and entities whothen exercised those warrants and purchased from us an aggregate of 1,032,267shares of its common stock at a price of $3.00 per share, for gross proceeds ofapproximately $3.1 million before commissions and other transactionexpenses.  Concurrent with thesetransactions, we issued 344,089 new ten-year warrants to the original warrantholders at a purchase price of $5.50

 

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per share. We recorded an imputed non-cash interest expense of $767 thousand in thefirst quarter of 2006 based on the Black-Scholes valuation of the warrantsissued.

 

The following table presents the activity forwarrants outstanding on our Common Stock:

 
| ** **                         | ** ** | **Number of** | ** ** | **Weighted Average** | ** ** |
|------------------------------------|------------|--------------------|------------|---------------------------|------------|
| ** **                         | ** ** | **Warrants**       | ** ** | **Exercise Price**   | ** ** |
| Outstanding December 31, 2005 |       | 7,700,209          |       | $                         | 5.02       |   |
| Issued                             |       | 10,632,581         |       | $                         | 1.25       |   |
| Forfeited/Cancelled                |       | (1,032,267         | )          | $                         | 3.00       |   |
| Exercised                          |       | (2,143             | )          | $                         | 3.50       |   |
| Outstanding December 31, 2006 |       | 17,298,380         |       | $                         | 2.82       |   |
| Issued                             |       | —             |       | —                    |       |
| Forfeited/Cancelled                |       | —             |       | —                    |       |
| Exercised                          |       | (7,545,352         | )          | $                         | 1.10       |   |
| Outstanding December 31, 2007 |       | 9,753,028          |       | $                         | 3.04       |   |

 

All of the outstanding warrants are exercisableand have a weighted average remaining contractual life of 4.28 years as of December 31,2007.  The weighted average exerciseprice at December 31, 2007 reflects the August 2007 repricing ofcertain warrants from $5.50 per share to $3.77 as discussed above.

 

***Warrants- Units***

 

As part of our IPO, we issued 90,000 warrants topurchase units (one share and two ordinary share warrants) to underwriters at$9.08 per unit. The underwriters must also pay $0.001 per unit for thewarrants. These warrants are exercisable until October 1, 2009. Thesewarrants on units are not included in the above table.

 

**12.    RELATED PARTY TRANSACTIONS**

 

Inconnection with acquisition of the Professional Business, on October 1,2007, MPC-Pro entered into a Transition Services Agreement (the “TSA”) withGateway.  In 2007, MPC-Pro paid Gateway $5.3 million for accounting,human resource, manufacturing, procurement, marketing, information technology,and other specified services under the terms of the TSA.   Under theTSA, Gateway also undertook certain buy/sell activities related to componentson behalf of MPC, which includes procuring components from component suppliers,selling of such components to original design manufacturers (“ODMs”) formanufacture of finished goods that are ordered from ODMs by Gateway, andthe subsequent selling of such finished goods to MPC-Pro (the “Buy/SellActivity”).  In addition to the Buy/Sell activity under theTSA, MPC-Pro acquired certain additional component inventory fromGateway.  In 2007, payments to Gateway under the Buy/Sell Activity andpurchases of such component inventory totaled $57.1 million.  At December 31, 2007 we had accountspayable and accrued expenses to Gateway totaling $20.7 million and $3.8million, respectively, related to the Buy/Sell activity and purchases ofinventory and related services.

 

Inconnection with the acquisition of the Professional Business, MPC-Proissued to Gateway a promissory note in the amount of $1.3 million(the “Promissory Note”).    During 2007, MPC-Pro paid toGateway $18 thousand of interest and $431 thousand of principal to Gatewayunder the Promissory Note.  The payableto Gateway was $862 thousand at December 31, 2007.

 

During2007, MPC-Pro provided certain manufacturing services to Gateway, andcharged Gateway $6.0 million for such services. At December 31, 2007, the receivable from Gateway for such serviceswas $3.2 million.

 

MPC-Proleases from Gateway 45,552 square feet of office space in North Sioux City,South Dakota.  During 2007, MPC-Pro paidGateway lease payments totaling $154 thousand.

 

Weare indebted to Curtis Akey, our chief financial officer, under the terms of apromissory note dated April 13, 2007 for services provided prior to hisemployment with us.  As of December 31, 2007, the outstanding balance

 

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underthe promissory note was $104 thousand, which amount is currently due andpayable.  See Note 8 “Notes Payable andDebt-Debt Incurred in Acquisition.”

 

**13.    INCOME TAXES**

 

Through 2007, we have generated losses for bothfinancial reporting and tax purposes. As a result, for income tax returnreporting purposes, we may utilize approximately $36.9 million of net operatingloss carryforwards, which begin to expire in 2022 and are available as late as2027.  We believe these net operatingloss carryforwards are subject to an annual limitation on their use of $967thousand pursuant to Internal Revenue Code Section 382.  However, we have not yet completed ouranalysis of additional limitations, if any, resulting from the acquisition ofthe Professional Business and the conversion of our debentures and the exerciseof our warrants during 2007.

 

We have determined that $40.2 million and $24.9million of deferred tax assets as of December 31, 2007 and 2006,respectively, did not satisfy the realization criteria under accountingprinciples generally accepted in the United States of America as set forth inSFAS 109, primarily due to our history of operating losses. Accordingly, avaluation allowance has been recorded against our deferred tax assets.  Should management conclude that thesedeferred tax assets are, at least in part, realizable, the valuation allowancewill be reversed to the extent of such realizability.

 

InJune 2006, the FASB issued FIN No. 48, *Accountingfor Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109.*FIN No. 48 clarifies the criteria for the measurement, recognition andderecognition of income taxes under FASB Statement No. 109, Accounting forIncome Taxes. It also requires additional financial statement disclosures aboutuncertain tax positions including classification, interest and penalties. Weadopted FIN No. 48 effective January 2007. Because we have not beenprofitable since our initial public offering, we have not realized any deferredtax assets. FIN No. 48 did not have a material impact on our financialposition or results of operations. If our tax status were to change in thefuture, we would have to reevaluate the impact of FIN No. 48 on ourfinancial position and results of operations at that time.

 

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Thesignificant components of the net deferred tax asset at December 31, 2007and 2006 consist of the following:

** **

*(In thousands)*

 
| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| **Deferred Tax Assets**                  | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **Current Deferred Tax Assets**                    |       |                  |       |   |   |
| Allowance for Doubtful Accounts                    |       | $                     | 1,162      |   | $ | 1,231 |   |
| Inventory                                          |       | 4,879                 |       | 1,990 |   |
| Accrued Payroll and Benefits                       |       | 755                   |       | — |   |
| Accrued Expenses                                   |       | —                |       | 236 |   |
| Accrued Warranty                                   |       | 2,715                 |       | — |   |
| Deferred Revenue                                   |       | 4,714                 |       | — |   |
| Other                                              |       | 98                    |       | 259 |   |
| Valuation Allowance                                |       | (14,242               | )          | (3,716 | ) |
| **Total Current Deferred Tax Assets**              |       | 81                    |       | — |   |
|                                               |       |                  |       |   |   |
| **Current Deferred Tax Liabilities**               |       |                  |       |   |   |
| Other                                              |       | (81                   | )          | — |   |
| **Total Current Deferred Tax Liabilities**         |       | (81                   | )          | — |   |
|                                               |       |                  |       |   |   |
| **Non-current Deferred Tax Assets**                |       |                  |       |   |   |
| Accrued Warranty                                   |       | 773                   |       | 834 |   |
| Deferred Revenue                                   |       | 9,155                 |       | 11,989 |   |
| Stock Based Compensation                           |       | 2,245                 |       | 2,399 |   |
| Net Operating Loss                                 |       | 14,026                |       | 8,106 |   |
| Other                                              |       | 220                   |       | 11 |   |
| Valuation Allowance                                |       | (25,978               | )          | (21,170 | ) |
| **Total Net Deferred Tax Assets**                  |       | 443                   |       | 2,169 |   |
|                                               |       |                  |       |   |   |
| **Non-current Deferred Tax Liabilities**           |       |                  |       |   |   |
| Property, Plant and Equipment                      |       | (438                  | )          | (1,436 | ) |
| Intangible Assets                                  |       | —                |       | (729 | ) |
| Derivative Financial Instruments                   |       | —                |       | — |   |
| Other                                              |       | (4                    | )          | (4 | ) |
| **Total Deferred Tax Liabilities**                 |       | (443                  | )          | (2,169 | ) |
|                                               |       |                  |       |   |   |
| **Net Deferred Tax Asset &  Liabilities** |       | $                     | —     |   | $ | — |   |

 

Income tax expenses differed from the amounts computed by applying theU.S. Federal and State income tax rates to loss before income taxes as a resultof the following:

 
| ** **                                                      | ** ** | **Years Ended**  | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **December 31,** | ** ** |
| **Rate Reconciliation - expense (benefit)** | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                                            |       |                  |       |   |   |
| Federal income tax at statutory rate                            |       | (35.0                 | )%         | (35.0 | )% |
| State income taxes, net of federal benefit                      |       | (3.4                  | )%         | (3.2 | )% |
| Change in valuation allowance                                   |       | 70.8                  | %          | 27.6 | % |
| Loss on extinguishment of debt                                  |       | 0.0                   | %          | 6.8 | % |
| Derivative financial instrument expense                         |       | (24.1                 | )%         | 2.7 | % |
| Other                                                           |       | (8.3                  | )%         | 1.1 | % |
|                                                            |       | 0.0                   | %          | 0.0 | % |

 

**14.    SEGMENT INFORMATION**

 

 Ourprimary business is a computer manufacturing company. We direct sell computerproducts and services to mid-sized businesses, government agencies and education organizations. Our primary productsinclude a wide range of innovative products, services and support. Our primaryproducts include desktop and notebook systems, multiprocessor network servers,and hardware services.  We also providehardware-related support services such as installation, technical support,parts replacement, and recycling. In addition to PCs, servers, and storageproducts, 

 

72

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we also fulfill ourcustomers’ requirements for third party products produced by other vendorsincluding printers, monitors and software. The geographic region served by us is almost entirely in the UnitedStates.

 

All of our operationsshare similar economic characteristics. The nature of our products and services, production processes, class ofcustomer, and method of distribution are all similar in nature.  Our environment involves the operation of atwo plants with no separate identifiable assets by market or services. We use acommon workforce to produce or service our products. Our operations andproduction are conducted at the two facilities and each have a production linewith a common workforce to produce various computer products for our customers.We direct sell to the U.S. federal government, state and local governments, educationalinstitutions and mid-sized commercial businesses that have similarcharacteristics.  The distribution tothese customers is very similar in nature. Furthermore, the types of information and internal reports used bymanagement to monitor performance, evaluate results of operations, allocateresources, and otherwise manage the business support a single reportablesegment. Accordingly, based on these similarities, we have concluded ouroperations may be aggregated into one reportable segment.

 

For the years ended December 31,2007 and 2006 revenues earned directly or indirectly from agencies of the U.S.federal government accounted for approximately 40% and 39%, respectively, oftotal revenues.  It is impractical for usto provide product and service revenues.

 

**15.    COMMITMENTS AND CONTINGENCIES**

 

***ContractualObligations***

 

We are obligated tomake future payments under various contracts, such as operating leases, royaltyand licensing agreements and unconditional purchase obligations. The followingrepresents our contractual commitments as of December 31, 2007:

 

***(In Thousands)***

 
| ** **                          | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                  | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** |
| Operating leases (1)                |       | $                                          | 3,659      |   | $ | 1,373 |   | $ | 605 |   | $ | 614 |   | $ | 600 |   | $ | 467 |   | $ | — |   |
| Royalty/licensing agreements (2)    |       | 15                                         |       | 15 |   | — |   | — |   | — |   | — |   | — |   |
| Notes Payable and Debt              |       | 64,249                                     |       | 64,249 |   | — |   | — |   | — |   | — |   | — |   |
| Convertible Debentures (Face Value) |       | 1,353                                      |       | 1,353 |   | — |   | — |   | — |   | — |   | — |   |
| Estimated purchase obligations (3)  |       | 37,608                                     |       | 37,608 |   | — |   | — |   | — |   | — |   | — |   |
| Other obligations                   |       | 200                                        |       | 90 |   | 55 |   | 55 |   | — |   | — |   | — |   |
| Total contractual cash obligations  |       | $                                          | 107,084    |   | $ | 104,688 |   | $ | 660 |   | $ | 669 |   | $ | 600 |   | $ | 467 |   | $ | — |   |

 

----

| (1)    |   | We currently lease approximately 340,700 square feet of office and  manufacturing space at 906 E. Karcher Road, Nampa, Idaho, under a lease that  expires May 31, 2008. Our corporate headquarters are located at the  Nampa facility. We lease approximately 4,712 square feet of office space in  Waukesha, Wisconsin under a lease that expires Nov 30, 2008. We also lease a  regional sales office located in Oakbrook, Illinois, which is 1,579 square  feet and expires January 31, 2008. We additionally lease 45,552 square  feet of office space in North Sioux City, South Dakota under a lease expiring  in September 2012 and lease a 7,870 square foot loading dock expiring on  November 27, 2012 also in North Sioux City. Rent expense totaled $2.1  million and $2.3 million for the years ended December 31, 2007 and 2006,  respectively. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (2)    |   | We have royalty-bearing license agreements that allow us to sell  certain hardware and software that is protected by patent, copyright or  license. Royalty costs are accrued and included in cost of goods sold when  products are shipped or amortized over the period of benefit when the license  terms are not specifically related to the units shipped.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (3)    |   | Purchase orders represent orders placed by us to purchase goods or  services that are generally enforceable, unless cancelled by us before  fulfillment and specify all significant terms, including: the quantity to be  purchased, the price to be paid and the timing of the purchase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

At December 31, 2007 we had outstanding letters of credit totaling$6.3 million expiring at various dates through July 2008. The letters ofcredit were fully collateralized with cash on deposit at the issuing bank.

 

73

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We have entered into employment agreements with four of our keyofficers. These agreements bear standard employment terms and conditions. Theemployment agreements are effective through October 2010 and October 2011and automatically extend for additional one-year terms unless terminated by usor the key officer. In addition, we have 14 employees with severance agreementsand one employee with a retention agreement. The total potential liability for severance under the employmentagreements, severance agreements and retention agreement is $1.8 million.

 

Inconnection with the acquisition of the Professional Business, we issued toGateway 249,171 shares of MPC Corporation Series B Preferred Stockconvertible into 4,983,416 shares of our common stock. All MPC Corporation Series BPreferred Stock to be issued to Gateway converts to MPC Corporation commonstock upon shareholder approval of the Series B Automatic ConversionEvent. We believe it is probable that shareholder approval will beobtained.  In the event shareholderapproval is not obtained, all outstanding shares of Series B PreferredStock shares are to be redeemed by us at 1.5 times the closing price of ourcommon stock on October 1, 2008 times the number of shares of common stockinto which the Series B Preferred Stock is then convertible.  Based on the closing price of our commonstock of $0.63 per share on December 31, 2007, the redemption value wouldbe $4.7 million.

 

***Litigation***

 

***PhillipAdams & Associates, LLC***

 

We are a defendant in a lawsuit, alleging infringement of certainpatents, relating to floppy disk controllers, owned by Phillip Adams &Associates, LLC. We were added to this suit by an amended complaint filedon May 31, 2005 in the U.S. District Court, District of Utah. We havetendered indemnification demands to certain of our componentsuppliers. Because the case is still in the discovery phase, we are notable to determine the financial impact, if any, arising from an adverse resultin the matter.

 

***BinghamMcCutchen, LLP***

 

We were a defendant in a lawsuit filed by a law firm seeking damagesfor unpaid legal services. Bingham McCutchen alleged that approximately$530 thousand was owed for services rendered. The suit was filed on orabout December 20, 2006 in the District Court of the 3rd Judicial Court ofthe State of Idaho, Canyon County. The matter was settled on July 11,2007 with a payment to Bingham in the amount of $225 thousand.

 

***TPVInternational (USA), Inc. and Top Victory Electronics (FUJIANG) Co., Ltd.***

 

We were a defendant in a lawsuit filed by TPV International (USA), Inc.and Top Victory Electronics (FUJIANG) Co., Ltd. filed in the 98th JudicialCourt of Travis County, Texas, alleging that we failed to pay invoices forcomputer equipment.  In June 2007, we settled the case by agreeing topay $2.1 million over a period of 12 months with interest accruing at 8%.

 

***WacomTechnology Corporation***

 

We were a defendant in a lawsuit filed by Wacom TechnologyCorporation. This suit was filed on March 6, 2007 in the U.S.District Court, District of Idaho alleging that we have failed to pay invoicesfor computer equipment in the amount of a $1.2 million.  In August 2007,we settled the case by agreeing to pay the full $1.2 million in monthlypayments of $100 thousand per month beginning September 2007 plus interestaccruing at 5%.

 

***OtherMatters***

 

On December 17,2007, the General Services Administration (GSA) served MPC Computers with asubpoena to provide records regarding sales under our GSA Multiple AwardSchedule contract.  The subpoena relatesto an industry-wide investigation into alleged non-compliance with the TradeAgreements Act.  We are not presentlyaware of any material violations of the Trade Agreements Act.  However, the matter is in the preliminarystages and we cannot predict an outcome at this time. Our non-compliance couldlead to imposition of penalties and 

 

74

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termination of thecontract.  The termination of thecontract could lead to loss of substantial revenues from the federalgovernment.

 

We are involved in various other legal proceedings from time to time inthe ordinary course of our business. We are not currently subject to any otherlegal proceedings that we believe will have a material impact on our business.However, due to the inherent uncertainties of the judicial process, we areunable to predict the ultimate outcome or financial exposure, if any, withrespect to these matters.

 

**16.    SUPPLEMENTAL CASH FLOW INFORMATION**

 

Cashpaid for interest for the years ended December 31, 2007 and 2006 was $3.9million and $2.4 million, respectively.

 

Nocash was paid for income taxes for the years ended December 31, 2007 and 2006.

 

***Year ended December 31, 2007***

 

Thefollowing presents the assets acquired and liabilities assumed relating to ouracquisition of the Gateway Professional Business. See Note 3 *“*Acquisition of Gateway Professional Business.*”*

 

*(In thousands)*

 
| Inventory                 |   | $       | 25,438 |   |
|---------------------------|--------|---------|--------|--------|
| Other Current Assets      |   | 4,290   |   |
| Goodwill                  |   | 23,058  |   |
| Intangibles               |   | 21,500  |   |
| Property and Equipment    |   | 8,003   |   |
| Warranties                |   | (39,127 | )      |
| Deferred Revenues         |   | (19,030 | )      |
| Other Current Liabilities |   | (8,200  | )      |
|                      |   | $       | 15,932 |   |

 

Inconnection with the acquisition, we issued 5,602,454 shares of common stockvalued at $7.1 million and 249,171 shares of Series B Preferred Stockvalued at $6.3 million.

 

Weissued 8,660,189 shares of common stock and 571,966 shares of Series APreferred Stock valued at $9.7 million and $1.6 million, respectively from theconversion of debentures and accrued interest.

 

Weissued 6,453,744 shares of common stock and 54,580 shares of Series APreferred Stock from the exercise of 7,545,352 warrants and received proceedsof $8.3 million.  The derivative warrantliability was reduced by $3.0 million.

 

***Yearended December 31, 2006***

 

We settled an outstanding dispute with a vendorin exchange for a cash payment of $240 thousand during the year ended December 31,2006.

 

Supplemental disclosure of non-cash activity:

 

During the year ended December 31, 2006,$325 thousand of common stock was issued for interest and origination fees on a$5.0 million bridge loan.

 

During the year ended December 31, 2006,$56 thousand of notes payable and interest was converted to common stock at aprice of $3.00 per share.

 

During the year ended December 31, 2006, $4thousand of common stock was surrendered by a former director upon hisresignation.

 

75

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**17.    SUBSEQUENT EVENTS**

 

OnApril 14, 2008, we entered into a Manufacturing Services Agreement (the “MSA”)and a Bill of Sale and Transfer Agreement (the “Bill of Sale Agreement”) withFlextronics Computing Sales and Marketing Ltd. (“Flextronics”).  Under the MSA, Flextronics will performprocurement, manufacturing, assembly and testing for MPC Corporation at theFlextronics manufacturing facility in Juarez, Mexico.  Transition of operations from our Nashville,Tennessee manufacturing facilities to Juarez is expected to be completed by December 31,2008 (the “Move Completion Date”).  TheMSA provides for Flextronics to achieve certain cost reduction targets, duringthe first twelve months following the Move Completion Date that are expected toprovide substantial cost savings to MPC Corporation.  In addition, on a one-time basis, Flextronicswill purchase substantially all of our materials and inventory in Nashville.Under the Bill of Sale Agreement, Flextronics will purchase manufacturingequipment for $1 million, subject to MPC Corporation’s possible retention ofthe manufacture of a computing platform.

 
| **ITEM 9.** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING****AND FINANCIAL DISCLOSURE** |
|-------------|---------------------------------------------------------------------------------------------|

 

None.

 

**ITEM 9A  (T).    CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controlsand Procedures**

 

Our management, including our CEO and our CFO,as of December 31, 2007, the end of the period covered by this AnnualReport on Form 10-K, evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the ExchangeAct)).   Based on their evaluation, our CEO and CFO have concludedthat our disclosure controls and procedures are effective to provide reasonableassurance that information required to be disclosed by us in reports that wefile or submit under the Exchange Act is (i) recorded, processed,summarized, and reported within the time periods specified in SEC rules andforms, and (ii) accumulated and communicated to management, including ourCEO and CFO, as appropriate to allow timely decisions regarding requireddisclosure.

 

**Management’s Annual Report onInternal Control Over Financial Reporting**

 

Our management is responsible for establishingand maintaining adequate internal control over financial reporting (as definedin Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed under the supervisionof our CEO and CFO, and effected by our Board of Directors, management andother personnel, to provide reasonable assurance regarding the reliability ofour financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles.Internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

76

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Management assessed our internal control overfinancial reporting as of December 31, 2007 based on criteria establishedin Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”). Management’s assessmentincluded evaluation and testing of the design and operating effectiveness ofkey financial reporting controls, process documentation, accounting policies,and our overall control environment. In reliance on the guidance set forth inQuestion 3 of a “Frequently Asked Questions” interpretive release issued by thestaff of the Securities and Exchange Commission’s Office of the ChiefAccountant and the Division of Corporation Finance in June 2004 (andrevised on October 6, 2004), management determined that it would excludethe Professional Business, which was acquired from Gateway, Inc. on October 1,2007, from the scope of its assessment of internal control over financialreporting as of December 31, 2007.  The reason for its exclusion isthat the Professional Business was acquired by the company in a purchasebusiness combination that was completed on October 1, 2007, and it was notpossible for management to conduct an assessment of the Professional Businessunit’s internal control over financial reporting in the period between the datethe combination was completed and the date of management’s assessment. Total assets and total revenues of the Professional Business constituted approximately32% and 34%, respectively, of the consolidated financial statement amounts asof and for the year ended December 31, 2007.

 

Based on this assessment, management hasconcluded that our internal control over financial reporting, excluding theProfessional Business, was effective as of December 31, 2007. During itsassessment, management did not identify any material weakness in our internalcontrol over financial reporting.

 

However, in connection with the ProfessionalBusiness, the process of extracting information necessary to prepare financialstatements was highly manual, complex, and time consuming due to theintegration of four distinct reporting systems. In addition, certain keyaccounts were not reconciled at year end, which lead to a current materialweakness with respect to the ProfessionalBusiness.   Integration of separate businesses andreporting systems is sometimes difficult and time consumingand we  have therefore commenced a number of efforts toremediate the material weakness with respect to the Professional Businessso that our combined business will have adequate internal controlsover financial reporting.  These efforts include the migration ofdata and processes to one financial reporting system, redeployment of staff tounfulfilled tasks, and  enhanced training and review procedures of accountreconciliations.

 

We communicated the results of management’sassessment to the Audit Committee of our Board of Directors including theidentification of the material weakness with respect to the ProfessionalBusiness.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect all misstatements.Also, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate due to changes inconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

 

This annual report does not include anattestation report of the company’s registered public accounting firm regardinginternal control over financial reporting.  Management’s report was notsubject to attestation by the company’s registered public accounting firmpursuant to temporary rules of the SEC that permit the company to provideonly management’s report in this annual report.

 

**Changes in Internal Control overFinancial Reporting**

 

Except for  integration andchanges on which we are working to address the materialweakness  with respect to the Professional Business noted above,there were no changes in our internal control over financial reporting duringthe quarter ended December 31, 2007 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**ITEM 9B.    OTHER INFORMATION**

 

None

 

77

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**PART III**

 

**ITEM10.  DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE**

 

Theinformation called for by this Item will be set forth under the caption “Directors”and “Executive Officers” in our definitive proxy statement for our annualmeeting of stockholders, to be filed not later than April 30, 2008, and isincorporated herein by this reference.

 

Wehave adopted a code of ethics that applies to our Chairman, Chief ExecutiveOfficer, Chief Operating Officer, Chief Financial Officer; principal accountingofficer and controller (as well as persons performing similar functions).  The code of ethics can be found on ourwebsite at www.mpccorp.com under Investor Relations.  Any amendments to or waivers from a provisionof this code of ethics will be posted on our Internet website.

 

**ITEM11.  EXECUTIVE COMPENSATION**

 

Theinformation called for by this Item will be set forth in our definitive proxystatement for our annual meeting of stockholders, to be filed not later than April 30,2008, and is incorporated herein by this reference.

 

**ITEM12.  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS**

 

Theinformation called for by this Item will be set forth in our definitive proxystatement for our annual meeting of stockholders, to be filed not later than April 30,2008, and is incorporated herein by this reference.

 

**ITEM13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE.**

 

Theinformation called for by this Item will be set forth under the caption “CertainRelationships and Related Transactions” in our definitive proxy statement forour annual meeting of stockholders, to be filed not later than April 30,2008, and is incorporated herein by this reference.

 

**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

The information called for by this Item will beset forth under the caption “Principal Accountant Fees and Services” in ourdefinitive proxy statement for our annual meeting of stockholders, to be filednot later than April 30, 2008, and is incorporated herein by thisreference.

 

**PART IV**

 

**ITEM15.  EXHIBITS**

** **
| ** **  | ** ** | **EXHIBIT**** ****INDEX**                                                                                                                                                                |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                    |
| **Exhibit** | ** ** | ** **                                                                                                                                                                                    |
| **Number**  | ** ** | **Description of Document**                                                                                                                                                                   |
| 2.1         |       | Agreement and Plan of Merger, dated as of March 20, 2005 by and  among the Registrant, Spud Acquisition Corp., GTG PC Holdings, LLC and  GTG-Micron Holding Company, LLC, as amended (1) |
|        |       |                                                                                                                                                                                          |
| 2.2         |       | Securities  Purchase Agreement dated April 24, 2006 (2)                                                                                                                                  |
|        |       |                                                                                                                                                                                          |
| 2.3         |       | Securities  Purchase Agreement dated September 6, 2006 (3)                                                                                                                               |
|        |       |                                                                                                                                                                                          |
| 2.4         |       | Securities Purchase  Agreement dated September 29, 2006 (4)                                                                                                                              |
|        |       |                                                                                                                                                                                          |
| 2.5         |       | Asset Purchase  Agreement dated September 4, 2007 (23)                                                                                                                                   |

 

78

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| 3.1    |   | Amended and Restated Articles of Incorporation of the Registrant, as  amended (5)                                                                                                            |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                         |
| 3.2    |   | Amended and Restated Bylaws of the Registrant, as amended (19)                                                                                                                               |
|   |   |                                                                                                                                                                                         |
| 4.1    |   | Specimen common stock certificate (6)                                                                                                                                                        |
|   |   |                                                                                                                                                                                         |
| 4.2    |   | Form of Representative’s Option Agreement for Units (7)                                                                                                                            |
|   |   |                                                                                                                                                                                         |
| 4.3    |   | Form of Warrant Agreement (7)                                                                                                                                                           |
|   |   |                                                                                                                                                                                         |
| 4.4    |   | Form of Warrant (8)                                                                                                                                                                     |
|   |   |                                                                                                                                                                                         |
| 4.5    |   | 2001 Equity Incentive Plan (9)                                                                                                                                                               |
|   |   |                                                                                                                                                                                         |
| 4.6    |   | 2004 Equity Incentive Plan (10)                                                                                                                                                              |
|   |   |                                                                                                                                                                                         |
| 4.7    |   | Form of Convertible Debenture entered into in connection with  Securities Purchase Agreement dated April 24, 2006 (2)                                                         |
|   |   |                                                                                                                                                                                         |
| 4.8    |   | Form of Warrant entered into in connection with Securities  Purchase Agreement dated April 24, 2006 (2)                                                                       |
|   |   |                                                                                                                                                                                         |
| 4.9    |   | Registration Rights Agreement dated April 24, 2006 entered into  in connection with Securities Purchase Agreement dated April 24, 2006 (2)                                    |
|   |   |                                                                                                                                                                                         |
| 4.10   |   | Form of Lock-up Agreement entered into in connection with  Securities Purchase Agreement dated April 24, 2006 (2)                                                             |
|   |   |                                                                                                                                                                                         |
| 4.11   |   | Registration Rights Agreement dated July 25, 2005, as amended  December 6, 2006 (11)                                                                                               |
|   |   |                                                                                                                                                                                         |
| 4.12   |   | Form of $1.10 Warrant (12)                                                                                                                                                              |
|   |   |                                                                                                                                                                                         |
| 4.13   |   | Form of $1.60 Warrant (12)                                                                                                                                                              |
|   |   |                                                                                                                                                                                         |
| 4.14   |   | Form of Convertible Debenture entered into in connection with  Securities Purchase Agreement dated September 6, 2006 (3)                                                      |
|   |   |                                                                                                                                                                                         |
| 4.15   |   | Form of Warrant entered into in connection with Securities  Purchase Agreement dated September 6, 2006 (3)                                                                    |
|   |   |                                                                                                                                                                                         |
| 4.16   |   | Registration Rights Agreement entered into in connection with  Securities Purchase Agreement dated September 6, 2006 (24)                                                          |
|   |   |                                                                                                                                                                                         |
| 4.17   |   | Form of Lock-up Agreement entered into in connection with  Securities Purchase Agreement dated September 6, 2006 (3)                                                          |
|   |   |                                                                                                                                                                                         |
| 4.18   |   | Form of Convertible Debenture entered into in connection with  Securities Purchase Agreement dated September 29, 2006 (4)                                                     |
|   |   |                                                                                                                                                                                         |
| 4.19   |   | Form of Warrant entered into in connection with Securities  Purchase Agreement dated September 29, 2006 (4)                                                                   |
|   |   |                                                                                                                                                                                         |
| 4.20   |   | Registration Rights Agreement entered into in connection with  Securities Purchase Agreement dated September 29, 2006 (4)                                                          |
|   |   |                                                                                                                                                                                         |
| 4.21   |   | Form of Letter Agreement amending and waiving provisions of the  Registration Rights Agreement dated September 6, 2006 and Convertible Debentures  due September 6, 2009 (21) |
|   |   |                                                                                                                                                                                         |
| 4.22   |   | Lock-up Agreement dated October 1, 2007 by and between the  Company and Gateway, Inc. (5)                                                                                          |
|   |   |                                                                                                                                                                                         |
| 4.23   |   | Registration Rights Agreement dated October 1, 2007 by and  between the Company and Gateway, Inc. (5)                                                                              |
|   |   |                                                                                                                                                                                         |
| 4.24   |   | Amendment No. 1 to Convertible Debenture dated as of  October 1, 2007 by and between the Company and Crestview Capital Master  LLC (5)                                             |

 

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| 4.25   |   | Amendment No. 1 to Convertible Debenture dated as of October 1,  2007 by and between the Company and Toibb Investment LLC (5)                                                                                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                  |
| 9.1    |   | Form of Voting Agreement entered into in connection with the  Securities Purchase Agreement dated September 6, 2006 (3)                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.1   |   | Form of Employment Memorandum for certain MPC Computers Officers  (13)                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.2   |   | Form of Indemnity Agreement with each Director and certain  Officers (13)                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.3   |   | Management Incentive Plan (14)                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.4   |   | Commercial Lease with Micron Technology Inc., dated April 30,  2001, as amended (22)                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.5   |   | Account Purchase Agreement dated November 16, 2006 between Wells  Fargo and MPC Computers, LLC (18)                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.6   |   | Account Purchase Agreement dated November 16, 2006 between Wells  Fargo and MPC-G, LLC (18)                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.7   |   | Account Purchase Agreement dated November 16, 2006 between Wells  Fargo and MPC Solution Sales, LLC (18)                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.8   |   | Cross-Collateral and Cross Default Agreement dated November 16,  2006 (18)                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.9   |   | Guaranty by Corporation dated November 16, 2006 by HyperSpace  Communications, Inc. for the benefit of Wells Fargo Bank. (18)                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.10  |   | Guaranty by Corporation dated November 16, 2006 by HyperSpace  Communications, Inc. for the benefit of Wells Fargo Bank. (18)                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.11  |   | Guaranty by Corporation dated November 16, 2006 by HyperSpace  Communications, Inc. for the benefit of Wells Fargo Bank. (18)                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.12  |   | Transition Services Agreement dated as of October 1, 2007 among  MPC PRO, LLC and Gateway, Inc., as amended (26)                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.13  |   | Intercreditor Agreement dated as of October 1, 2007 by and among  Wells Fargo Bank, National Association acting through its Wells Fargo  Business Credit operating division, Gateway, Inc., Gateway  Companies, Inc. and MPC-Pro, LLC, as amended (27) |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.14  |   | Account Purchase Agreement dated as of October 1, 2007 between  Wells Fargo Bank, National Association, acting through its Wells Fargo  Business Credit operating division, and MPC-Pro, LLC (5)                                                                 |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.15  |   | Account Purchase Agreement dated as of October 1, 2007 between  Wells Fargo Bank, National Association, acting through its Wells Fargo Business  Credit operating division, and Gateway Companies, Inc. (5)                                                 |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.16  |   | Guaranty by Corporation dated as of October 1, 2007, by and  between MPC Corporation for the benefit of Wells Fargo Bank, National  Association through its operating Division Wells Fargo Business Credit (5)                                                   |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.17  |   | Guaranty by Corporation dated as of October 1, 2007, by and  between MPC Corporation for the benefit of Wells Fargo Bank, National  Association through its operating Division Wells Fargo Business Credit (5)                                                   |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.18  |   | Second Amendment to Account Purchase Agreement dated as of  October 1, 2007 by and between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC  Computers, LLC (5)                          |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.19  |   | Second Amendment to Account Purchase Agreement dated as of  October 1, 2007 by and between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC-G,  LLC (5)                                       |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.20  |   | Second Amendment to Account Purchase Agreement dated as of  October 1, 2007 by and between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC  Solutions Sales LLC** **(5)                 |

 

80

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| 10.21  |   | Cross-Collateral and Cross Default Agreements dated as of  October 1, 2007 by and among Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC  Computers, LLC, MPC-G, LLC, MPC Solutions Sales, LLC, Gateway Companies, Inc.  and MPC-Pro, LLC (5) |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.22  |   | Lease dated September 4, 2007 by and between Gateway, Inc.  and MPC-PRO, LLC (5)                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.23  |   | Letter Agreement dated October 1, 2007 by and between MPC  Corporation, MPC-PRO, LLC, Gateway Technologies Inc. and Gateway, Inc.  (5)                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.24  |   | Limited License of Gateway’s Rights dated October 1, 2007 by and  between the Company and Gateway, Inc. (5)                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.25  |   | Executive Employment Agreement between MPC Corporation and John Yeros  dated as of October 15, 2007 (25)                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.26  |   | Executive Employment Agreement between MPC Corporation and Jeffrey E.  Fillmore dated as of October 15, 2007 (25)                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.27  |   | Executive Employment Agreement between MPC Corporation and Curtis  Akey dated as of October 15, 2007 (25)                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.28  |   | Executive Employment Agreement between MPC Corporation and Ross Ely  dated as of October 15, 2007 (25)                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.29  |   | Promissory Note entered into as of December 6, 2007, and  effective as of October 1, 2007, among MPC-Pro, LLC, Gateway, Inc.,  and MPC Corporation (28)                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.30  |   | Services Agreement dated as of December 5, 2007 among MPC  Computers, LLC and Flextronics Computing Sales and Marketing Ltd. (29)                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 21.1   |   | List of Subsidiaries (20)                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 23.1*  |   | Consent  of Ehrhardt Keefe Steiner & Hottman PC (Independent Registered  Public Accounting Firm)                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 31.1*  |   | Certification of the Chairman and Chief Executive Officer of MPC  Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 31.2*  |   | Certification of the Chief Financial Officer of MPC Corporation pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 32.1** |   | Certification of the Chairman and Chief Executive Officer of MPC  Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 32.2** |   | Certification of the Chief Financial Officer of MPC Corporation  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            |

 

----

|                                                                                                                                                                                                                                                                                                        | * Filed herewith       |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|--------|
|                                                                                                                                                                                                                                                                                                        | ** Furnished herewith. |   |
|                                                                                                                                                                                                                                                                                                        |                   |   |
| (1) Incorporated by reference to Exhibit 2.1 to the  Registrant’s Current Report on Form 8-K/A, filed with the Securities and  Exchange Commission on March 25, 2005 and on Registrant’s Current Report  on Form 8-K, filed on May 16, 2005 and July 12, 2005. |
|                                                                                                                                                                                                                                                                                                        |
| (2) Incorporated by reference to Exhibits 2.1, 4.1, 4.2, 4.3,  and 4.4 respectively, on Registrant’s Current Report on Form 8-K, filed  with the Securities and Exchange Commission on April 28, 2006.                                                                                  |
|                                                                                                                                                                                                                                                                                                        |
| (3) Incorporated by reference to Exhibits 2.1, 4.1, 4.2, 4.3,  4.4, and 99.2 respectively, on Registrant’s Current Report on Form 8-K,  filed with the Securities and Exchange Commission on September 11, 2006.                                                                        |
|                                                                                                                                                                                                                                                                                                        |
| (4) Incorporated by reference to Exhibits 2.1, 4.1, 4.2, and 4.3  respectively, on Registrant’s Current Report on Form 8-K, filed with the  Securities and Exchange Commission on October 5, 2006.                                                                                      |
|                                                                                                                                                                                                                                                                                                        |
| (5) Incorporated by reference to Exhibit 3.1, 4.1, 4.2,  4.3, 4.4, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 10.9, 10.10, 10.11, 10.12, and  10.13, respectively, on Registrant’s Quarterly Report on Form 10-Q filed  with the Securities and Exchange Commission on November 14, 2007. |
|                                                                                                                                                                                                                                                                                                             |                        |        |

 

81

----

 
| (6) Incorporated by reference to Exhibit 4.1 to Amendment No. 3  to the Registrant’s Registration Statement on Form  SB-2/A, filed with  the Securities and Exchange Commission on July 23, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (7) Incorporated by reference to Exhibit 4.7 and 4.8,  respectively, to Post-Effective Amendment No. 1 to the Registrant’s  Registration Statement on Form SB-2, filed with the Securities and  Exchange Commission on October 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (8) Incorporated by reference to Exhibit 4.9 to Amendment No. 7  to the Registrant’s Registration Statement on Form SB-2, filed with the  Securities and Exchange Commission on September 24, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (9) Incorporated by reference to Exhibit 99.1 to the  Registrant’s Registration Statement on Form S-8, filed with the  Securities and Exchange Commission on July 25, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (10) Incorporated by reference to Exhibit 99.2 on Form S-8,  filed with the Securities and Exchange Commission on July 25, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (11) Incorporated by reference to Exhibits 99.1 and 99.2 on Registrant’s  Current Report on Form 8-K, filed with the Securities and Exchange  Commission on December 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (12) Incorporated by reference to Exhibits 4.1 and 4.2 respectively,  on Registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on December 15, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (13) Incorporated by reference to Exhibit 10.4 and 10.5 on  Registrant’s Quarterly Report on Form 10-QSB filed with the Securities  and Exchange Commission on November 14, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (14) Incorporated by reference to Exhibit 10.3 on Registrant’s  Annual Report on Form 10-KSB, filed with the Securities and Exchange  Commission on March 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (18) Incorporated by reference to Exhibit 99.1, 99.2, 99.3,  99.4, 99.5, 99.6, and 99.7, respectively, on Registrant’s Current Report on Form 8-K,  filed with the Securities and Exchange Commission on November 22, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (19) Incorporated by reference to Exhibit 3.1 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on March 29, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (20) Incorporated by reference to Exhibit 21.1 on Registrant’s  Annual Report on Form 10-KSB/A Amendment No. 1 filed with the  Securities and Exchange Commission on April 6, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (21) Incorporated by reference to Exhibit 4.21 on Registrant’s  Annual Report on Form 10-KSB/A Amendment No. 1 filed with the  Securities and Exchange Commission on April 6, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (22) Incorporated by reference to 10.4 on Registrant’s Annual Report  on Form 10-KSB, filed with the Securities and Exchange Commission on March 31,  2006 Exhibit 99.1 on Registrant’s Current Report on Form 8-K filed  with the Security and Exchange Commission on July 10, 2006 and****Exhibit 99.1 on Registrant’s Current Report on Form 8-K,  filed with the Securities and Exchange Commission on July 3, 2007                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (23) Incorporated by reference to Exhibit 2.1 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on September 6, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (24) Incorporated by reference to Exhibit 4.3 on Registrant’s  Current Report on Form 8-K, filed with the Securities and Exchange  Commission on September 11, 2006 and Exhibit 4.5 on Registrant’s  Quarterly Report on Form 10-Q filed with the Securities and Exchange  Commission on November 14, 2007.                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (25) Incorporated by reference to Exhibits 99.1 through 99.4 on  Registrant’s Current Report on Form 8-K filed with the Securities and  Exchange Commission on October 19, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (26) Incorporated by reference to Exhibit 10.1 on Registrant’s  Quarterly Report on Form 10-Q filed with the Securities and Exchange  Commission on November 14, 2007, Exhibit 99.1 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on October 31, 2007, Exhibit 99.1 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on December 6, 2007, and Exhibit 10.1 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on February 26, 2008. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (27) Incorporated by reference to Exhibit 10.1 on Registrant’s  Quarterly Report on Form 10-Q filed with the Securities and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

82

----

 
| Exchange Commission on November 14, 2007 and Exhibit 10.2  on Registrant’s Current Report on Form 8-K filed with the Securities and  Exchange Commission on February 26, 2008. |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                    |
| (28) Incorporated by reference to Exhibit 99.1 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on December 10, 2007.                 |
|                                                                                                                                                                                                    |
| (29) Incorporated by reference to Exhibit 99.1 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on December 6, 2007.                  |

 

83

----

 

**SIGNATURES**

 

In accordance with Section 13or 15(d) of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 
| ** **                | **MPC Corporation**                  |
|---------------------------|--------------------------------------|
|                      |                                 |
|                      |                                 |
| Date: April 14, 2008 | /s/ John P. Yeros                    |
|                      | John P. Yeros                        |
|                      | Chairman and Chief Executive Officer |

 

In accordance withthe Exchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| **Signature**       | ** ** | **Title**                       | ** ** | **Date**            |
|---------------------|------------|---------------------------------|------------|---------------------|
| ** **          | ** ** | ** **                      | ** ** | ** **          |
|                |       | Chief Executive Officer,        |       |                |
| /s/ John Yeros      |       | Chairman and Director           |       | April 14, 2008 |
| John P. Yeros       |       | (Principal Executive  Officer)  |       |                |
|                |       |                            |       |                |
|                |       | Chief Financial Officer         |       |                |
| /s/ Curtis Akey     |       | (Principal Financial  Officer)  |       | April 14, 2008 |
| Curtis Akey         |       |                            |       |                |
|                |       |                            |       |                |
|                |       | Controller                      |       |                |
| /s/ Michael Profic  |       | (Principal Accounting  Officer) |       | April 14, 2008 |
| Michael Profic      |       |                            |       |                |
| ** **          | ** ** | ** **                      | ** ** | ** **          |
| /s/ David A. Young  |       | Director                        |       | April 14, 2008 |
| David A. Young      |       |                            |       |                |
|                |       |                            |       |                |
| /s/ Eric D. Murphy  |       | Director                        |       | April 14, 2008 |
| Eric D. Murphy      |       |                            |       |                |
|                |       |                            |       |                |
| /s/ Kent L. Swanson |       | Director                        |       | April 14, 2008 |
| Kent L. Swanson     |       |                            |       |                |

 

84

----

 

**EXHIBIT** **INDEX**

 
| **Exhibit********Number** | ** ** | **Description of Document**                                                                                                                                                                   |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                       |       | Agreement and Plan of Merger, dated as of March 20, 2005 by and  among the Registrant, Spud Acquisition Corp., GTG PC Holdings, LLC and  GTG-Micron Holding Company, LLC, as amended (1) |
|                      |       |                                                                                                                                                                                          |
| 2.2                       |       | Securities  Purchase Agreement dated April 24, 2006 (2)                                                                                                                                  |
|                      |       |                                                                                                                                                                                          |
| 2.3                       |       | Securities  Purchase Agreement dated September 6, 2006 (3)                                                                                                                               |
|                      |       |                                                                                                                                                                                          |
| 2.4                       |       | Securities  Purchase Agreement dated September 29, 2006 (4)                                                                                                                              |
|                      |       |                                                                                                                                                                                          |
| 2.5                       |       | Asset Purchase  Agreement dated September 4, 2007 (23)                                                                                                                                   |
|                      |       |                                                                                                                                                                                          |
| 3.1                       |       | Amended and Restated Articles of Incorporation of the Registrant, as  amended (5)                                                                                                             |
|                      |       |                                                                                                                                                                                          |
| 3.2                       |       | Amended and Restated Bylaws of the Registrant, as amended (19)                                                                                                                                |
|                      |       |                                                                                                                                                                                          |
| 4.1                       |       | Specimen common stock certificate (6)                                                                                                                                                         |
|                      |       |                                                                                                                                                                                          |
| 4.2                       |       | Form of Representative’s Option Agreement for Units (7)                                                                                                                             |
|                      |       |                                                                                                                                                                                          |
| 4.3                       |       | Form of Warrant Agreement (7)                                                                                                                                                            |
|                      |       |                                                                                                                                                                                          |
| 4.4                       |       | Form of Warrant (8)                                                                                                                                                                      |
|                      |       |                                                                                                                                                                                          |
| 4.5                       |       | 2001 Equity Incentive Plan (9)                                                                                                                                                                |
|                      |       |                                                                                                                                                                                          |
| 4.6                       |       | 2004 Equity Incentive Plan (10)                                                                                                                                                               |
|                      |       |                                                                                                                                                                                          |
| 4.7                       |       | Form of Convertible Debenture entered into in connection with  Securities Purchase Agreement dated April 24, 2006 (2)                                                               |
|                      |       |                                                                                                                                                                                          |
| 4.8                       |       | Form of Warrant entered into in connection with Securities  Purchase Agreement dated April 24, 2006 (2)                                                                             |
|                      |       |                                                                                                                                                                                          |
| 4.9                       |       | Registration Rights Agreement dated April 24, 2006 entered into  in connection with Securities Purchase Agreement dated April 24, 2006  (2)                                         |
|                      |       |                                                                                                                                                                                          |
| 4.10                      |       | Form of Lock-up Agreement entered into in connection with  Securities Purchase Agreement dated April 24, 2006 (2)                                                                   |
|                      |       |                                                                                                                                                                                          |
| 4.11                      |       | Registration Rights Agreement dated July 25, 2005, as amended  December 6, 2006 (11)                                                                                                |
|                      |       |                                                                                                                                                                                          |
| 4.12                      |       | Form of $1.10 Warrant (12)                                                                                                                                                               |
|                      |       |                                                                                                                                                                                          |
| 4.13                      |       | Form of $1.60 Warrant (12)                                                                                                                                                               |
|                      |       |                                                                                                                                                                                          |
| 4.14                      |       | Form of Convertible Debenture entered into in connection with  Securities Purchase Agreement dated September 6, 2006 (3)                                                            |
|                      |       |                                                                                                                                                                                          |
| 4.15                      |       | Form of Warrant entered into in connection with Securities  Purchase Agreement dated September 6, 2006 (3)                                                                          |
|                      |       |                                                                                                                                                                                          |
| 4.16                      |       | Registration Rights Agreement entered into in connection with  Securities Purchase Agreement dated September 6, 2006 (24)                                                                |
|                      |       |                                                                                                                                                                                          |
| 4.17                      |       | Form of Lock-up Agreement entered into in connection with  Securities Purchase Agreement dated September 6, 2006 (3)                                                                |

 

85

----

 
| 4.18   |   | Form of Convertible Debenture entered into in connection with  Securities Purchase Agreement dated September 29, 2006 (4)                                                                                                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                  |
| 4.19   |   | Form of Warrant entered into in connection with Securities  Purchase Agreement dated September 29, 2006 (4)                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                  |
| 4.20   |   | Registration Rights Agreement entered into in connection with  Securities Purchase Agreement dated September 29, 2006 (4)                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                  |
| 4.21   |   | Form of Letter Agreement amending and waiving provisions of the  Registration Rights Agreement dated September 6, 2006 and Convertible  Debentures due September 6, 2009 (21)                                                                          |
|   |   |                                                                                                                                                                                                                                                                  |
| 4.22   |   | Lock-up Agreement dated October 1, 2007 by and between the  Company and Gateway, Inc. (5)                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                  |
| 4.23   |   | Registration Rights Agreement dated October 1, 2007 by and  between the Company and Gateway, Inc. (5)                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                  |
| 4.24   |   | Amendment No. 1 to Convertible Debenture dated as of  October 1, 2007 by and between the Company and Crestview Capital Master  LLC (5)                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                  |
| 4.25   |   | Amendment No. 1 to Convertible Debenture dated as of  October 1, 2007 by and between the Company and Toibb Investment LLC (5)                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                  |
| 9.1    |   | Form of Voting Agreement entered into in connection with the  Securities Purchase Agreement dated September 6, 2006 (3)                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.1   |   | Form of Employment Memorandum for certain MPC Computers Officers  (13)                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.2   |   | Form of Indemnity Agreement with each Director and certain  Officers (13)                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.3   |   | Management Incentive Plan (14)                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.4   |   | Commercial Lease with Micron Technology Inc., dated April 30,  2001, as amended (22)                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.5   |   | Account Purchase Agreement dated November 16, 2006 between Wells  Fargo and MPC Computers, LLC (18)                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.6   |   | Account Purchase Agreement dated November 16, 2006 between Wells  Fargo and MPC-G, LLC (18)                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.7   |   | Account Purchase Agreement dated November 16, 2006 between Wells  Fargo and MPC Solution Sales, LLC (18)                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.8   |   | Cross-Collateral and Cross Default Agreement dated November 16,  2006 (18)                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.9   |   | Guaranty by Corporation dated November 16, 2006 by HyperSpace  Communications, Inc. for the benefit of Wells Fargo Bank. (18)                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.10  |   | Guaranty by Corporation dated November 16, 2006 by HyperSpace  Communications, Inc. for the benefit of Wells Fargo Bank. (18)                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.11  |   | Guaranty by Corporation dated November 16, 2006 by HyperSpace  Communications, Inc. for the benefit of Wells Fargo Bank. (18)                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.12  |   | Transition Services Agreement dated as of October 1, 2007 among  MPC PRO, LLC and Gateway, Inc., as amended (26)                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.13  |   | Intercreditor Agreement dated as of October 1, 2007 by and among  Wells Fargo Bank, National Association acting through its Wells Fargo  Business Credit operating division, Gateway, Inc., Gateway  Companies, Inc. and MPC-Pro, LLC, as amended (27) |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.14  |   | Account Purchase Agreement dated as of October 1, 2007 between  Wells Fargo Bank, National Association, acting through its Wells Fargo  Business Credit operating division, and MPC-Pro, LLC (5)                                                                 |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.15  |   | Account Purchase Agreement dated as of October 1, 2007 between  Wells Fargo Bank, National Association, acting through its Wells Fargo  Business Credit operating division, and Gateway Companies, Inc. (5)                                                 |

 

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| 10.16  |   | Guaranty by Corporation dated as of October 1, 2007, by and  between MPC Corporation for the benefit of Wells Fargo Bank, National  Association through its operating Division Wells Fargo Business Credit (5)                                                                                                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.17  |   | Guaranty by Corporation dated as of October 1, 2007, by and  between MPC Corporation for the benefit of Wells Fargo Bank, National  Association through its operating Division Wells Fargo Business Credit (5)                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.18  |   | Second Amendment to Account Purchase Agreement dated as of  October 1, 2007 by and between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC  Computers, LLC (5)                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.19  |   | Second Amendment to Account Purchase Agreement dated as of  October 1, 2007 by and between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC-G,  LLC (5)                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.20  |   | Second Amendment to Account Purchase Agreement dated as of  October 1, 2007 by and between Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC  Solutions Sales LLC (5)                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.21  |   | Cross-Collateral and Cross Default Agreements dated as of  October 1, 2007 by and among Wells Fargo Bank, National Association,  acting through its Wells Fargo Business Credit operating division, and MPC  Computers, LLC, MPC-G, LLC, MPC Solutions Sales, LLC, Gateway  Companies, Inc. and MPC-Pro, LLC (5) |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.22  |   | Lease dated September 4, 2007 by and between Gateway, Inc.  and MPC-PRO, LLC (5)                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.23  |   | Letter Agreement dated October 1, 2007 by and between MPC  Corporation, MPC-PRO, LLC, Gateway Technologies Inc. and Gateway, Inc.  (5)                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.24  |   | Limited License of Gateway’s Rights dated October 1, 2007 by and  between the Company and Gateway, Inc. (5)                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.25  |   | Executive Employment Agreement between MPC Corporation and John Yeros  dated as of October 15, 2007 (25)                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.26  |   | Executive Employment Agreement between MPC Corporation and Jeffrey E.  Fillmore dated as of October 15, 2007 (25)                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.27  |   | Executive Employment Agreement between MPC Corporation and Curtis  Akey dated as of October 15, 2007 (25)                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.28  |   | Executive Employment Agreement between MPC Corporation and Ross Ely  dated as of October 15, 2007 (25)                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.29  |   | Promissory Note entered into as of December 6, 2007, and  effective as of October 1, 2007, among MPC-Pro, LLC, Gateway, Inc.,  and MPC Corporation (28)                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.30  |   | Services Agreement dated as of December 5, 2007 among MPC  Computers, LLC and Flextronics Computing Sales and Marketing Ltd. (29)                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 21.1   |   | List of Subsidiaries (20)                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 23.1*  |   | Consent  of Ehrhardt Keefe Steiner & Hottman PC (Independent Registered  Public Accounting Firm)                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 31.1*  |   | Certification of the Chairman and Chief Executive Officer of MPC  Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 31.2*  |   | Certification of the Chief Financial Officer of MPC Corporation  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 32.1** |   | Certification of the Chairman and Chief Executive Officer of MPC  Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 32.2** |   | Certification of the Chief Financial Officer of MPC Corporation  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            |

 

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* Filed herewith

** Furnished herewith.

 

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| (1) Incorporated by reference to Exhibit 2.1 to the  Registrant’s Current Report on Form 8-K/A, filed with the Securities and  Exchange Commission on March 25, 2005 and on Registrant’s Current Report  on Form 8-K, filed on May 16, 2005 and July 12, 2005.                                                                                                                                                                      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (2) Incorporated by reference to Exhibits 2.1, 4.1, 4.2, 4.3,  and 4.4 respectively, on Registrant’s Current Report on Form 8-K, filed  with the Securities and Exchange Commission on April 28, 2006.                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (3) Incorporated by reference to Exhibits 2.1, 4.1, 4.2, 4.3,  4.4, and 99.2 respectively, on Registrant’s Current Report on Form 8-K,  filed with the Securities and Exchange Commission on September 11, 2006.                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (4) Incorporated by reference to Exhibits 2.1, 4.1, 4.2, and 4.3  respectively, on Registrant’s Current Report on Form 8-K, filed with the  Securities and Exchange Commission on October 5, 2006.                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (5) Incorporated by reference to Exhibit 3.1, 4.1, 4.2,  4.3, 4.4, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 10.9, 10.10, 10.11, 10.12, and  10.13, respectively, on Registrant’s Quarterly Report on Form 10-Q filed  with the Securities and Exchange Commission on November 14, 2007.                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (6) Incorporated by reference to Exhibit 4.1 to Amendment  No. 3 to the Registrant’s Registration Statement on Form  SB-2/A,  filed with the Securities and Exchange Commission on July 23, 2004.                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (7) Incorporated by reference to Exhibit 4.7 and 4.8,  respectively, to Post-Effective Amendment No. 1 to the Registrant’s  Registration Statement on Form SB-2, filed with the Securities and  Exchange Commission on October 1, 2004.                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (8) Incorporated by reference to Exhibit 4.9 to Amendment  No. 7 to the Registrant’s Registration Statement on Form SB-2, filed  with the Securities and Exchange Commission on September 24, 2004.                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (9) Incorporated by reference to Exhibit 99.1 to the  Registrant’s Registration Statement on Form S-8, filed with the  Securities and Exchange Commission on July 25, 2005.                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (10) Incorporated by reference to Exhibit 99.2 on  Form S-8, filed with the Securities and Exchange Commission on July 25,  2005                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (11) Incorporated by reference to Exhibits 99.1 and 99.2 on  Registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on December 12, 2005.                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (12) Incorporated by reference to Exhibits 4.1 and 4.2 respectively,  on Registrant’s Current Report on Form 8-K, filed with the Securities  and Exchange Commission on December 15, 2006.                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (13) Incorporated by reference to Exhibit 10.4 and 10.5 on  Registrant’s Quarterly Report on Form 10-QSB filed with the Securities  and Exchange Commission on November 14, 2005.                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (14) Incorporated by reference to Exhibit 10.3 on Registrant’s  Annual Report on Form 10-KSB, filed with the Securities and Exchange  Commission on March 31, 2006.                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (18) Incorporated by reference to Exhibit 99.1, 99.2, 99.3,  99.4, 99.5, 99.6, and 99.7, respectively, on Registrant’s Current Report on  Form 8-K, filed with the Securities and Exchange Commission on  November 22, 2006.                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (19) Incorporated by reference to Exhibit 3.1 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on March 29, 2007.                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (20) Incorporated by reference to Exhibit 21.1 on Registrant’s  Annual Report on Form 10-KSB/A Amendment No. 1 filed with the  Securities and Exchange Commission on April 6, 2007.                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (21) Incorporated by reference to Exhibit 4.21 on Registrant’s  Annual Report on Form 10-KSB/A Amendment No. 1 filed with the  Securities and Exchange Commission on April 6, 2007.                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |
| (22) Incorporated by reference to 10.4 on Registrant’s Annual Report  on Form 10-KSB, filed with the Securities and Exchange Commission on  March 31, 2006 Exhibit 99.1 on Registrant’s Current Report on  Form 8-K filed with the Security and Exchange Commission on  July 10, 2006 and****Exhibit 99.1  on Registrant’s Current Report on Form 8-K, filed with the Securities  and Exchange Commission on July 3, 2007 |

 

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| (23) Incorporated by reference to Exhibit 2.1 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on September 6, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| (24) Incorporated by reference to Exhibit 4.3 on Registrant’s  Current Report on Form 8-K, filed with the Securities and Exchange  Commission on September 11, 2006 and Exhibit 4.5 on Registrant’s  Quarterly Report on Form 10-Q filed with the Securities and Exchange  Commission on November 14, 2007.                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| (25) Incorporated by reference to Exhibits 99.1 through 99.4 on  Registrant’s Current Report on Form 8-K filed with the Securities and  Exchange Commission on October 19, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| (26) Incorporated by reference to Exhibit 10.1 on Registrant’s  Quarterly Report on Form 10-Q filed with the Securities and Exchange  Commission on November 14, 2007, Exhibit 99.1 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on October 31, 2007, Exhibit 99.1 on Registrant’s Current  Report on Form 8-K filed with the Securities and Exchange Commission on  December 6, 2007, and Exhibit 10.1 on Registrant’s Current Report  on Form 8-K filed with the Securities and Exchange Commission on  February 26, 2008. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| (27) Incorporated by reference to Exhibit 10.1 on Registrant’s  Quarterly Report on Form 10-Q filed with the Securities and Exchange  Commission on November 14, 2007 and Exhibit 10.2 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on February 26, 2008.                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| (28) Incorporated by reference to Exhibit 99.1 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on December 10, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |
| (29) Incorporated by reference to Exhibit 99.1 on Registrant’s  Current Report on Form 8-K filed with the Securities and Exchange  Commission on December 6, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

89

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